Securities Act Registration No. 333-114139
U.S. Securities and Exchange Commission
Washington, D.C. 20549
----------
Form N-14
Registration Statement Under the Securities Act of 1933
[X] Pre-Effective Amendment No. 1 [_] Post Effective Amendment No. _____
(Check appropriate box or boxes)
----------
John Hancock Variable Series Trust I
(Exact Name of Registrant as Specified in Declaration of Trust)
197 Clarendon Street
Boston, Massachusetts 02117
(Address of Principal Executive Officer)
Registrant's Telephone Number: (713) 214-1456
Name and address of Agent for Services: Copy to:
ARNOLD R. BERGMAN, ESQUIRE THOMAS C. LAUERMAN, ESQUIRE
John Hancock Life Insurance Company Foley & Lardner LLP
197 Clarendon Street Washington, D.C. 20036
Boston, MA 02117
----------
Approximate Date of Proposed Public Offering: As soon as practicable after the
registration statement becomes effective under the Securities Act of 1933.
Pursuant to Rule 429 under the Act, the prospectus in this registration
statement also relates to the Registrant's currently effective registration
statement on Form N-1A, File No. 33-2081. No filing fee is due in reliance on
Section 24(f) of the Act.
================================================================================
MANUFACTURERS INVESTMENT TRUST
73 Tremont Street
Boston, Massachusetts 02108
May 18, 2004
Dear Variable Annuity and Variable Life Contract Owners:
A Special Meeting of Shareholders of Manufacturers Investment Trust ("MIT")
will be held at 73 Tremont Street, Boston, Massachusetts 02108, on June 18,
2004 at 10:00 a.m., Boston Time to consider the proposed reorganization of the
International Index Trust, a separate series of MIT, into the International
Equity Index Fund, a separate series of the John Hancock Variable Series Trust
I ("JHVST") (the "Reorganization"). The proposed Reorganization is described in
detail in the enclosed Proxy Statement/Prospectus and briefly summarized in the
questions and answers attached to this letter.
As a result of the Reorganization, shareholders whose assets are invested in
the International Index Trust will be able to pursue substantially similar
investment objectives and policies in the context of a larger fund which has
shown better prospects for growth and demonstrated stronger performance in
tracking its target indices. The Boards of Trustees of MIT and JHVST have
unanimously approved the proposed Reorganization.
Although you are not a shareholder of MIT, contract values under your
variable annuity or variable life contracts issued by The Manufacturers Life
Insurance Company (U.S.A.) ("Manulife U.S.A.") or The Manufacturers Life
Insurance Company of New York ("Manulife New York") are invested in shares of
one or more of the separate series of MIT, including the International Index
Trust, through subaccounts of separate accounts established by these companies
for that purpose. Since the value of your contract depends in part on the
investment performance of the shares of the International Index Trust, you have
the right to instruct Manulife U.S.A. or Manulife New York, as appropriate, how
such shares attributable to your contract are voted.
Enclosed you will find a Notice of Special Meeting of Shareholders, a Proxy
Statement/Prospectus of MIT and JHVST, and a Voting Instructions Form for the
shares of the International Index Trust attributable to your contract as of
April 27, 2004, the record date for the meeting. We encourage you to read these
materials in their entirety before giving voting instructions. Also enclosed
for additional information is the current prospectus of JHVST. In order for
shares to be voted at the meeting based on your instructions, we urge you to
complete and mail your Voting Instructions Form in the attached postage-paid
envelope, allowing sufficient time for its receipt by June 17, 2004.
The Board of Trustees of MIT unanimously recommends that you approve the
Reorganization.
If you have any questions regarding the proposed Reorganization, please call
the appropriate toll-free number below:
--For Manulife U.S.A. variable annuity contracts: (800) 344-1029
--For Manulife U.S.A. variable life contracts: (800) 827-4546
--For Manulife New York variable annuity contracts: (800) 551-2078
--For Manulife New York variable life contracts: (888) 267-7784
Sincerely,
[SIGNATURE TO COME]
Andrew Corselli
Secretary
Manufacturers Investment Trust
1
QUESTIONS AND ANSWERS
Q: What is the Reorganization?
A: Under the Reorganization proposal, all the assets, subject to all the
liabilities, of MIT's International Index Trust (the "Acquired Fund") will
be transferred to JHVST's International Equity Index Fund (the "Acquiring
Fund") in exchange for shares of the Acquiring Fund. As a result of the
Reorganization, each shareholder of the Acquired Fund will receive that
number of shares of the Acquiring Fund equal in value at the time of the
exchange to the value of the shareholder's shares of the Acquired Fund at
that time, and the Acquired Fund will be liquidated and terminate. The
holders of Series I and Series II shares of the Acquired Fund will receive,
respectively, Series I and Series II shares of the Acquiring Fund. If
approved by shareholders, the Reorganization is expected to take place after
the close of business on June 18, 2004.
Q: What are the reasons for the Reorganization?
A: The Reorganization is intended to provide a means by which contract owners
participating in the Acquired Fund, in combination with the Acquiring Fund,
may pursue substantially similar investment objectives and policies in the
context of a larger fund which has shown better prospects for growth and
demonstrated stronger performance in tracking its target indices.
Q: What differences will there be if the Reorganization is approved?
A: There will be very significant differences. Although both the Acquired and
Acquiring Funds are international index funds and thus have substantially
similar investment objectives, strategies and risks, the Acquiring Fund has
a different target index (the MSCI ACWI ex US Index) than the Acquired Fund
(the MSCI EAFE Index), is a series of JHVST rather than of MIT and has a
different investment adviser, a different subadviser and different portfolio
managers than the Acquired Fund. In addition, the total annual fund
operating expenses of the Acquiring Fund are expected to be somewhat higher
than those of the Acquired Fund.
Q: Will the Reorganization affect my contract value? Will there be any tax
implications?
A: Your contract value will be the same immediately after as immediately before
the Reorganization. In addition, the Reorganization is expected to be
tax-free for federal income tax purposes, and the Funds will obtain an
opinion from counsel to this effect. The Reorganization will not result in
individual contract owners recognizing any gain or loss for federal income
tax purposes.
Q: Will I incur any fee in connection with the Reorganization?
A: You will not incur directly any fee in connection with the Reorganization.
However, the expenses of the Reorganization are being paid by the Acquired
Fund and the Acquiring Fund in equal parts, and contract owners
participating in these Funds will therefore bear indirectly their
proportionate shares of such expenses.
Q: How do I give voting instructions?
A: Follow two simple steps:
FIRST: Read the attached Proxy Statement/Prospectus.
SECOND: Complete the enclosed Voting Instruction Form and return it in the
enclosed postage-paid envelope.
Q: Do my voting instructions make a difference?
A: Whether you are a large or small investor, your voting instructions are
important. You are urged to participate in this process to ensure that
Manulife U.S.A. and Manulife New York represent your wishes in casting votes
at the shareholders meeting. The Board of Trustees of MIT has voted
unanimously in favor of the Reorganization, and your approval is needed to
implement the Reorganization.
2
MANUFACTURERS INVESTMENT TRUST
73 Tremont Street
Boston, Massachusetts 02108
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of the International Index Trust
of Manufacturers Investment Trust:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of the International Index Trust of Manufacturers Investment Trust
("MIT") will be held at 73 Tremont Street, Boston, Massachusetts 02108, on June
18, 2004 at 10:00 a.m., Boston Time. A Proxy Statement/Prospectus which
provides information about the purposes of the Meeting is included with this
notice. The Meeting will be held for the following purposes:
Proposal 1Approval of Agreement and Plan of Reorganization (the "Plan")
providing for the acquisition of all of the assets, subject to all of
the liabilities, of the International Index Trust (the "Acquired
Fund"), a separate series of MIT, by and in exchange for Series I and
Series II shares of the International Equity Index Fund (the
"Acquiring Fund"), a separate series of the John Hancock Variable
Series Trust I ("JHVST").
Any other business that may properly come before the Meeting.
The Board of Trustees of MIT recommends that shareholders vote FOR Proposal
1.
Approval of the Plan under Proposal 1 will require the affirmative vote of
the holders of at least a "Majority of the Outstanding Voting Securities" (as
defined in the accompanying Proxy Statement/Prospectus) of the Acquired Fund.
By approving the Plan, shareholders of the Acquired Fund will be deemed to have
waived certain of MIT's investment limitations insofar as they might be deemed
to apply to the transactions contemplated by the Plan.
Each shareholder of record at the close of business on April 27, 2004 is
entitled to receive notice of and to vote at the Meeting.
Sincerely yours,
[SIGNATURE TO COME]
Andrew Corselli
Secretary
May 18, 2004
Boston, Massachusetts
3
MANUFACTURERS INVESTMENT JOHN HANCOCK VARIABLE
TRUST SERIES TRUST I
73 Tremont Street 197 Clarendon Street
Boston, Massachusetts Boston, Massachusetts
02108 02117
("MIT") ("JHVST")
-----------------
PROXY STATEMENT/PROSPECTUS
Relating to the Acquisition of All of the Assets, Subject to All of the
Liabilities, of the MIT International Index Trust by and in Exchange for Series
I and Series II Shares of the JHVST International Equity Index Fund
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Trustees of Manufacturers Investment Trust ("MIT")
(sometimes referred to herein as the "MIT Board") of proxies to be used at a
special meeting of the shareholders of its International Index Trust to be held
at 73 Tremont Street, Boston, Massachusetts 02108, on June 18, 2004, at 10:00
a.m., Boston Time (the "Meeting").
At the Meeting, shareholders of the International Index Trust will be asked
to consider and approve a proposed Agreement and Plan of Reorganization (the
"Plan") pursuant to which all the assets, subject to all the liabilities, of
the International Index Trust (the "Acquired Fund"), a separate series of MIT,
will be transferred to the International Equity Index Fund (the "Acquiring
Fund"), a separate series of the John Hancock Variable Series Trust I
("JHVST"), in exchange for shares of the Acquiring Fund. As a result of the
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund equal in value at the time of the exchange to
the value of the shareholder's shares of the Acquired Fund at such time, and
the Acquired Fund will be liquidated and terminate. The holders of Series I and
Series II shares of the Acquired Fund will receive, respectively, Series I and
Series II shares of the Acquiring Fund. If approved by shareholders of the
Acquired Fund, the Reorganization is expected to occur after the close of
business on June 18, 2004. The terms and conditions of the Reorganization are
more fully described in this Proxy Statement/Prospectus and in the form of the
Agreement and Plan of Reorganization attached hereto as Exhibit A.
This Proxy Statement/Prospectus contains information shareholders should
know before voting on the proposed Reorganization. Please read it carefully and
retain it for future reference. The following documents have been filed with
the Securities and Exchange Commission ("SEC") and are incorporated by
reference into this Proxy Statement/Prospectus:
--The Prospectus of A copy of the JHVST
JHVST (relating to the Prospectus accompanies
Acquiring Fund) dated this Proxy
May 1, 2004 (the "JHVST Statement/Prospectus.
Prospectus").
--The Statement of Copies of this document
Additional Information are available at no
of JHVST dated May 1, charge by writing to
2004 relating to this JHVST at the above
Proxy address or by calling
Statement/Prospectus this toll free number:
(the "Statement of 800-576-2227.
Additional Information").
--The Prospectus of MIT Copies of the MIT
(relating to the Prospectus are available
Acquired Fund) dated May at no charge by writing
1, 2004 (the "MIT to MIT at the above
Prospectus"). address or by calling
the appropriate toll
free number listed below.
Shareholders who have questions about the Reorganization or this Proxy
Statement/Prospectus may call the appropriate toll-free number listed below:
--(800) 344-1029 (The Manufacturers Life Insurance Company (U.S.A.)
variable annuity contracts)
--(800) 827-4546 (The Manufacturers Life Insurance Company (U.S.A.)
variable life contracts)
--(800) 551-2078 (The Manufacturers Life Insurance Company of New York
variable annuity contracts)
--(888) 267-7784 (The Manufacturers Life Insurance Company of New York
variable life contracts).
4
Each of MIT and JHVST is subject to the informational requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940 Act and
files reports, proxy materials and other information with the SEC. Such
reports, proxy materials and other information may be inspected at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials may also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates, or at no charge from the EDGAR database on the
SEC's website: "www.sec.gov."
The SEC has not approved or disapproved these securities or passed upon the
accuracy or adequacy of this Proxy Statement/Prospectus. Any representation to
the contrary is a criminal offense.
The date of this Proxy Statement/Prospectus is May 18, 2004.
5
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
Page
----
Introduction................................................................................................. 7
Proposal 1 Approval of Agreement and Plan of Reorganization providing for the acquisition of all of the
assets, subject to all of the liabilities, of the MIT International Index Trust by and in exchange
for Series I and Series II shares of the JHVST International Equity Index Fund.................... 7
Summary...................................................................................................... 8
Overview of Proposed Reorganization.................................................................... 8
Comparison of Acquired and Acquiring Funds............................................................. 8
Important Considerations............................................................................... 11
Comparison of Principal Investment Risks............................................................... 11
Fees and Expenses of the Funds......................................................................... 12
Performance.................................................................................................. 15
Multiple Classes of Shares................................................................................... 15
Rule 12b-1 Fees.............................................................................................. 16
Dividends and Distributions.................................................................................. 16
Purchase and Redemption of Shares............................................................................ 17
Massachusetts Business Trusts................................................................................ 18
Additional Information About the Funds....................................................................... 18
Information About the Reorganization......................................................................... 19
Agreement and Plan of Reorganization................................................................... 19
Reasons for the Reorganization......................................................................... 20
Description of the Securities to be Issued............................................................. 21
Federal Income Tax Consequences........................................................................ 21
Capitalization......................................................................................... 22
Voting Information........................................................................................... 23
Ownership of Shares of the Funds............................................................................. 25
Financial Statements......................................................................................... 26
Legal Matters................................................................................................ 26
Other Information............................................................................................ 26
Exhibit A--Agreement and Plan of Reorganization.............................................................. 27
Appendix A--The Acquired Fund: Management's Discussion of Fund Performance................................... A-1
Appendix B--The Acquiring Fund: Management's Discussion of Fund Performance.................................. B-1
6
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Trustees of MIT of proxies to be used at a special
meeting of shareholders of its International Index Trust to be held at 73
Tremont Street, Boston, Massachusetts 02108, on June 18, 2004, at 10:00 a.m.,
Boston Time (the "Meeting"). The purpose of the Meeting is to consider the
proposed Reorganization providing for the transfer of all the assets, subject
to all the liabilities, of MIT's International Index Trust (the "Acquired
Fund") to JHVST's International Equity Index Fund (the "Acquiring Fund") in
exchange for Series I and Series II shares of the Acquiring Fund. All
shareholders of record of the Acquired Fund at the close of business on April
27, 2004 (the "Record Date") are entitled to one vote for each share of
beneficial interest of the Acquired Fund held.
MIT and JHVST. Each of MIT and JHVST is a Massachusetts business trust which
is a no-load open-end investment company, commonly known as a mutual fund,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). MIT currently offers 80 separate series, including the Acquired Fund
(the "MIT Funds"), and JHVST currently offers 30 separate series, including the
Acquiring Fund (the "JHVST Funds"). The shares of the MIT Funds and the JHVST
Funds are not sold directly to the public but generally only to insurance
companies and their separate accounts as the underlying investment media for
variable annuity and variable life insurance contracts ("variable contracts")
issued by the insurance companies, certain entities affiliated with the
insurance companies, and trustees of qualified pension and retirement plans.
See "Voting Information" and "Ownership of Shares of the Funds" below.
Investment Management. Manufacturers Securities Services, LLC ("MSS") serves
as investment adviser for MIT and for each MIT Fund that has an adviser. As
adviser, MSS administers the business and affairs of MIT and selects, contracts
with and compensates subadvisers which manage the investment and reinvestment
of the assets of the MIT Funds. MSS does not itself manage any of MIT's
portfolio assets but has ultimate responsibility to oversee the subadvisers. In
this connection, MSS (i) monitors the compliance of the subadvisers with the
investment objectives and related policies of the MIT Funds, (ii) reviews the
performance of the subadvisers and (iii) reports periodically on such
performance to the MIT Board. The ultimate parent of MSS is Manulife Financial
Corporation ("MFC"), the holding company of The Manufacturers Life Insurance
Company ("Manulife"), a Canadian stock life insurance company, and its
subsidiaries, collectively known as Manulife Financial.
The investment adviser for the JHVST Funds is John Hancock Life Insurance
Company ("JHLICO"). In this capacity, JHLICO recommends subadvisers for the
JHVST Funds and oversees and evaluates the subadvisers performance. Each
subadviser has discretion to purchase and sell securities for the JHVST Fund
that it manages. While each subadviser employs its own investment approach in
managing a JHVST Fund, it must also adhere to the Fund's investment goals,
strategies and restrictions. JHLICO is a wholly owned subsidiary of John
Hancock Financial Services, Inc. ("John Hancock"). As the result of a merger
between John Hancock and MFC that became effective on April 28, 2004, John
Hancock is an indirect wholly owned subsidiary of MFC.
MSS and JHLICO are registered as investment advisers under the Investment
Advisers Act of 1940 (the "Advisers Act"). Each of the subadvisers to the MIT
Funds and the JHVST Funds is also registered as an investment adviser under the
Advisers Act or is exempt from such registration.
PROPOSAL 1
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR
THE ACQUISITION OF ALL OF THE ASSETS, SUBJECT TO ALL OF THE LIABILITIES,
OF THE MIT INTERNATIONAL INDEX TRUST BY AND IN EXCHANGE FOR SERIES I AND SERIES
II SHARES OF THE JHVST INTERNATIONAL EQUITY INDEX FUND
7
SUMMARY
The following is a summary of more complete information appearing later in
or incorporated by reference into this Proxy Statement/Prospectus. Shareholders
should read the entire Proxy Statement/Prospectus carefully.
Overview of Proposed Reorganization
At its meeting held on April 1-2, 2004, the MIT Board, including all the
Trustees who are not "interested persons" (as defined in the 1940 Act) of MIT
(the "Independent Trustees"), approved an Agreement and Plan of Reorganization
(the "Plan") providing for: (a) the transfer of all of the assets, subject to
all of the liabilities, of the MIT International Index Trust (the "Acquired
Fund") to the JHVST International Equity Index Fund (the "Acquiring Fund") in
exchange for Series I and Series II shares of the Acquiring Fund; (b) the
distribution to shareholders of the Acquired Fund of such Acquiring Fund
shares; and (c) the liquidation and termination of the Acquired Fund (the
"Reorganization").
As a result of the Reorganization, each shareholder of the Acquired Fund
will become a shareholder of the Acquiring Fund. The total value of all shares
of the Acquiring Fund issued in the Reorganization will equal the total value
of the net assets of the Acquired Fund. The number of full and fractional
shares of the Acquiring Fund received by a shareholder of the Acquired Fund
will be equal in value to the value of that shareholder's shares of the
Acquired Fund as of the close of regularly scheduled trading on the New York
Stock Exchange on the closing date of the Reorganization (the "Exchange Date").
Holders of Series I and Series II shares of the Acquired Fund will receive,
respectively, Series I and Series II shares of the Acquiring Fund. The
Effective Time of the Reorganization is expected to occur after the close of
business on June 18, 2004 or on such later date as may be determined by MIT and
JHVST.
The consummation of the Reorganization is contingent on the satisfaction of
the conditions described below under "Information About the
Reorganization--Agreement and Plan of Reorganization."
Comparison of Acquired and Acquiring Funds
MIT International Index Trust JHVST International Equity Index Fund
(Acquired Fund) (Acquiring Fund)
----------------------------- -------------------------------------
Business A separate series of MIT. A separate series of JHVST.
Approximate $99,376,000.* $159,036,000.
Net Assets
as of 12/31/03: *Includes "seed capital" that was withdrawn
in February and April 2004. See
"Capitalization" below.
Investment Manufacturers Securities Services, LLC John Hancock Life Insurance Company
Adviser: ("MSS"). ("JHLICO").
Investment MFC Global Investment Management SSgA Funds Management, Inc. ("SSgA").
Subadviser and (U.S.A.) Limited ("MFC Global"). MFC SSgA became the subadviser to the
Portfolio Global is an affiliate of MSS and JHLICO. Acquiring Fund effective March 29, 2004.
Managers:
The portfolio managers are: The SsgA portfolio management is overseen
by:
Carson Jen (since January 2003) James Francis, CFA (since March 2004)
--Assistant Vice President of MFC Global --Principal of SSgA
8
MIT International Index Trust JHVST International Equity Index Fund
(Acquired Fund) (Acquiring Fund)
----------------------------- -------------------------------------
--Joined MFC Global in 1997 --Joined SSgA in 1987
Narayan Ramani, CFA (since Jeffery Beach (since March 2004)
November 2003) --Principal of SSgA
--Joined MFC Global in 1998 --Joined SSgA in 1986
Investment Seeks to approximate the aggregate total Seeks to track the performance of a broad-
Objective: return of a foreign equity market index. The based equity index of foreign companies in
index that the Acquired Fund uses for this developed and, to a lesser extent, emerging
purpose is the Morgan Stanley Capital markets. The index that the Acquiring Fund
International Europe Australia, Far East uses for this purpose is the Morgan Stanley
("MSCI EAFE") Index. The MSCI EAFE Capital International All Country World
Index is a well-known unmanaged Excluding U.S. ("MSCI ACWI ex US")
international stock index that includes Index. The MSCI ACWI ex US Index is a
companies representative of the market well-known unmanaged international stock
structure of developed countries in Europe index that includes companies in a broad
and the Pacific Region. The different range of developed countries (excluding the
countries that comprise the MSCI EAFE U.S.) and (to a lesser extent) emerging
Index are represented in the index market countries. The different countries that
approximately in proportion to their comprise the MSCI ACWI ex US Index are
respective market capitalizations. represented in the index approximately in
proportion to their respective market
capitalizations.
Principal Invests under normal market conditions at Normally invests more than 80% of its assets
Investment least 80% of its net assets (plus any in securities listed in the MSCI ACWI ex US
Strategy: borrowings for investment purposes) in (a) Index. Prior to November 1, 2003, the Fund
securities included in the MSCI EAFE Index normally invested more than 80% of its assets
and (b) securities (which may or may not be in securities listed in the Morgan Stanley
included in the MSCI EAFE Index) that the Capital International Europe, Australia, Far
subadviser believes as a group will behave in East Gross Domestic Product ("MSCI EAFE
a manner similar to the index. GDP") Index, and was managed relative to a
composite of 90% MSCI EAFE GDP Index
and 10% Morgan Stanley Capital International
Emerging Markets Free ("MSCI EMF")
Index. The MSCI EAFE GDP Index is a well-
known unmanaged stock index that includes
companies representative of the developed
countries in Europe and the Pacific region.
The different countries that comprise the
MSCI EAFE GDP Index are represented in the
index approximately in proportion to their
respective gross domestic products. The MSCI
EMF index is a well-known unmanaged stock
index that includes companies representative
of emerging or developing markets.
Other The subadviser attempts to match the The Fund is managed relative to the MSCI
Investment performance of the MSCI EAFE Index by ACWI ex US Index. The subadviser employs
Strategies: holding all or a representative sample of the a passive management strategy by normally
9
MIT International Index Trust JHVST International Equity Index Fund
(Acquired Fund) (Acquiring Fund)
----------------------------- -------------------------------------
securities that comprise the index or by investing in all stocks in the MSCI ACWI ex
holding securities (which may or may not be US Index. The manager normally invests in
included in the index) that the subadviser each stock in approximately the same
believes as a group will behave in a manner proportion as represented in the index. The
similar to the index. manager seeks to replicate, as closely as
possible, the aggregate characteristics and
country diversification of the index. The
composition of the index changes from time
to time, and the subadviser reflects those
changes as soon as practical.
Hedging and The Fund is authorized to invest in futures The Fund is normally fully invested. The
Other Strategies: contracts. The Fund's general pratice, subadviser may invest in stock index
however, has been to use futures contracts derivatives to maintain market exposure and
solely to maintain market exposure and manage cash flow. Although the Fund may
manage cash flows. employ foreign currency hedging techniques,
it normally maintains the currency exposure
of the underlying equity investments. The
Fund's general practice has been to use
derivative instruments solely to maintain
market exposure and manage cash flows.
Other Securities of foreign issuers in which the The Fund may invest in other types of
Securities: Fund may invest include American securities that are not primary investment
Depositary Receipts (ADRs), Global vehicles, for example: ADRs, GDRs, EDRs,
Depositary Receipts (GDRs) and European certain Exchange Traded Funds (EFTs), cash
Depositary Receipts (EDRs). Depositary equivalents and certain derivatives such as
receipts are certificates, typically issued by a stock index futures.
bank or trust company, that give their holders
the right to receive securities issued by a
foreign or domestic company.
Temporary In abnormal market conditions, the Fund may In abnormal market conditions, the Fund may
Defensive invest all or a portion of its assets in cash and take temporary defensive measures--such as
Investing: securities that are highly liquid, including (a) holding large amounts of cash and cash
money market instruments such as short-term equivalents--that are inconsistent with the
U.S. government obligations, commercial Fund's primary investment strategy. In taking
paper and repurchase agreements; and (b) those measures, the Fund may not achieve its
securities of other investment companies that investment goal.
are money market funds. To the extent the
Fund is in a defensive position, its ability to
achieve its investment objective will be
limited.
Distribution The distributor for both the shares of the Acquired Fund and the Series I and Series II shares
of the Acquiring Fund is Manufacturers Financial Securities, LLC. The proposed
Reorganization will not result in any material change in the services provided with respect to
the distribution of such shares.
10
Important Considerations
The investment objectives, policies and risks of the Acquired and Acquiring
Funds are substantially similar. Both Funds are index funds, which seek to
mirror the performance of their target indices, and both Funds are
international index funds which invest principally in foreign equity
securities. The two Funds differ in that they have different target indices.
The MSCI EAFE Index, which is the target index for the Acquired Fund, includes
companies in the developed Europe and Pacific Regions, while the broader target
index for the Acquiring Fund, the MSCI ACWI ex US Index, includes primarily
companies in a broad range of developed countries and, to a lesser extent,
emerging market countries. In addition, while the Acquiring Fund will normally
invest substantially all of its assets in companies which are included in its
target index, the Acquired Fund, with respect to some portion of its assets,
may invest in companies which are not included in its target index but which
its subadviser believes as a group will behave in a manner similar to that
index. In other words, the Acquired Fund may seek to approximate the aggregate
total return of its target index in part through investments in companies that
are not included in that index.
The investment objectives and strategies of the Acquired Fund and the
Acquiring Fund are more fully described in, respectively, the MIT Prospectus
and the JHVST Prospectus, which are incorporated herein by reference. See
"Additional Information About the Funds" below.
No gain or loss will be recognized by the Acquired Fund or the Acquiring
Fund, or by shareholders of the Acquired Fund, for federal income tax purposes
as a result of the Reorganization. For further information about the tax
consequences of the Reorganization, see "Information about the
Reorganization--Federal Income Tax Consequences," below.
The Reorganization will not result in any material change in procedures for
the purchase and redemption of shares of the Funds or in rights under
contracts, and related procedures, regarding transfers of contract values.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, you should consider the
amount and character of investment risk involved in the respective investment
objective and strategies of the Acquiring and Acquired Funds. Since both Funds
are international index funds, they have substantially similar risks. These are
described below, with certain differences noted.
MIT International Index Trust JHVST International Equity Index Fund
(Acquired Fund) (Acquiring Fund)
----------------------------- -------------------------------------
Risks of The Funds invest in foreign securities, which pose special risks due to: limited government
Investing in regulation (including less stringent investor protection and disclosure standards), lack of public
Foreign information, exposure to possible economic, political and social instability,foreign currency
Securities rate fluctuations, and possible nationalization of a company's assets. Factors such as lack of
liquidity, foreign ownership limits and restrictions on removing currency also pose special
risks, and there may be problems, such as delays, associated with the settlement of securities
transactions. All foreign securities have some degree of foreign risk. However, to the extent the
Funds invest in emerging market countries, they will have a significantly higher degree of
foreign risk than if they invested exclusively in developed or newly-industrialized countries.
The Fund's target index includes companies The Fund's target index includes companies
representative of the market structure of in a broad range of developed countries
developed countries in the Europe and (excluding the U.S.) and, to a lesser extent,
Pacific Regions. emerging markets. Because emerging
markets are included, the Fund may have
greater exposure to the risks of investing in
such markets.
11
MIT International Index Trust JHVST International Equity Index Fund
(Acquired Fund) (Acquiring Fund)
----------------------------- -------------------------------------
Index The Funds generally will reflect the performance of their target indices, even when the target
Management indices do not perform well. In addition, fund transaction expenses, and the size and timing of
Risk cash flows, may result in performance being different than that of the target index.
The subadviser's selection of securities both The subadviser's selection of securities may
inside and outside the target index may cause not be fully representative of the Fund's target
the Fund's portfolio to track its target index index from time to time, particularly when the
less closely. composition of the index changes.
Stock The value of the Funds' portfolio securities may go down in response to overall stock or bond
Market market movements. Markets tend to move in cycles, with periods of rising prices and periods of
Risk: falling prices. The value of equity securities purchased by the Funds could decline if the financial
condition of the companies the Funds invest in decline or if overall market and economic
conditions deteriorate.
Index The subadvisers and their strategies may fail to produce the intended results. Each Fund could
Subadviser underperform its peers or lose money if its subadviser's investment strategy does not perform as
Risk: expected.
The subadviser may be incorrect in selecting
for investment companies that are not included
in but that the subadviser believes as a group
will behave in a manner similar to the target
index.
Other Each Fund may use certain types of derivative instruments that can produce disproportionate
Risks: gains or losses. Both the Acquired Fund and the Acquiring Fund can and do use financial futures
contracts (including stock index futures) to maintain market exposure and to manage cash flow.
The Acquiring Fund may also purchase or sell additional types of derivatives that the Acquired
Fund would not use, such as options and swaps, as part of its foreign currency hedging
techniques. In practice, however, the Acquiring Fund is not expected to exercise this authority in
any manner that would expose the Acquiring Fund to materially greater risk from derivatives than
that to which the Acquired Fund might be exposed.
Derivatives are generally considered more risky than direct investments and, in a down market,
derivatives could become harder to value or sell at a fair price.
The risks of investing in the Acquiring Fund are more fully described in the
JHVST Prospectus and the Statement of Additional Information, which are
incorporated herein by reference. The risks of investing in the Acquired Fund
are more fully described in the MIT Prospectus, which is also incorporated
herein by reference. See "Additional Information About the Funds," below.
Fees and Expenses of the Funds
The table which follows sets forth: (i) the ratios of expenses to average
net assets of the Series I and Series II shares of the Acquired Fund for the
year ended December 31, 2003, (ii) the estimated expenses for the current year
of the Series I and Series II shares of the Acquiring Fund, which were first
offered on May 1, 2004, and (iii) the pro forma expense ratios of the Series I
and Series II shares of the Acquiring Fund assuming that the Reorganization,
including the issuance of Series I and Series II shares in connection
therewith, had occurred at the commencement of the year ended December 31,
2003, and based upon the fee arrangements that will be in place upon the
consummation of the Reorganization. As shown below, giving effect to the
voluntary expense reimbursement described in note A to the table, the expense
ratios of the Acquiring Fund are expected to be 0.02% higher than those of the
Acquired Fund. Accordingly, shareholder approval of the Reorganization is
12
expected to result in somewhat higher expenses for shareholders after the
Reorganization. The expense ratios below and the expense examples which follow
do not reflect the fees and expenses of any variable contract that may use MIT
or JHVST as its underlying investment medium. If such fees and expenses were
reflected, the expense ratios and shareholder expenses figures would be higher.
Annual Fund Operating Expenses
(As a Percentage of Average Daily Net Assets)
--------------------------------------------------------------
JHVST International JHVST International
Equity Index Fund Equity Index Fund
MIT International (Acquiring Fund) (Acquiring Fund)
Index Trust (Estimated Expenses Pro Forma
(Acquired Fund) for the Current Year) (Assuming Reorganization)
----------------- ----------------- ------------------
Series I Series II Series I Series II Series I Series II
-------- --------- -------- --------- -------- ---------
Management Fee...................... 0.40% 0.40% 0.17% 0.17% 0.16% 0.16%
Distribution and Service (12b-1) Fee 0.15% 0.35% 0.40% 0.60% 0.40% 0.60%
Other Expenses...................... 0.07%/A/ 0.07%/A/ 0.05%/B/ 0.05%/B/ 0.06%/C/ 0.06%/C/
---- ---- ---- ---- ---- ----
Total Fund Annual Expenses.......... 0.62%/A/ 0.82%/A/ 0.62% 0.82% 0.62% 0.82%
- --------
/A/ MSS has voluntarily agreed to pay expenses of the Acquired Fund (excluding
management fees and 12b-1 fees) that exceed 0.05%. If such expense
reimbursement were reflected in the table, "Other Expenses" for both
Series I shares and Series II shares would be 0.05%, and "Total Fund
Annual Expenses" for Series I shares and Series II shares would be,
respectively, 0.60% and 0.80%. This expense reimbursement may be
terminated by MSS at any time.
/B/ Other Expenses are based on estimated amounts for the current year. These
estimated expenses reflect (i) the discontinuance of JHLICO's agreement to
reimburse the Acquiring Fund for "other expenses" in 2003 that exceeded
0.10% of the Fund's average daily net assets and (ii) a reduction
amounting to 0.20% in the custodial fees of the Acquiring Fund that became
effective April 1, 2004.
/C/ Other Expenses reflect the discontinuance of JHLICO's expense
reimbursement and the reduction in custodial fees described in note/B/.
Examples: The following examples are intended to help shareholders compare
the costs of investing in the Series I and Series II shares of the Acquired and
Acquiring Funds. The example assumes that a shareholder invests $10,000 in the
particular Fund for the time periods indicated and redeems all of the shares at
the end of those periods. The example also assumes that a shareholder's
investment has a 5% return each year and that each Fund's operating expense
levels remain the same as those set forth in the expense table above.
JHVST International JHVST International
Equity Index Fund Equity Index Fund
MIT International (Acquiring Fund) (Acquiring Fund)
Index Trust (Estimated Expenses for Pro Forma
(Acquired Fund) the Current Year) (Assuming Reorganization)
------------------ ----------------------- -------------------------
Series I Series II Series I Series II Series I Series II
-------- --------- -------- --------- -------- ---------
One Year... $ 63 $ 84 $ 63 $ 84 $ 63 $ 84
Three Years $199 $ 262 $199 $ 262 $199 $ 262
Five Years. $346 $ 455 $346 $ 455 $346 $ 455
Ten Years.. $774 $1,014 $774 $1,014 $774 $1,014
The examples assumes reinvestment of all dividends and distributions. The
examples should not be considered a representation of future expenses of the
Acquired or Acquiring Fund. Actual expenses may be greater or less than those
shown. There can be no assurance that the foregoing pro forma expense ratios
would have been the actual expense ratios for the Acquiring Fund had the
Reorganization been consummated when assumed above, or that the pro forma
expense ratios reflect the actual expense ratios that will be incurred by the
Acquiring Fund if the Reorganization is consummated. The purpose of these
tables is to assist shareholders in understanding the expenses an investor in
the Funds will bear.
13
Investment Management Fees
Investment management fees as a percentage of average daily net assets.
MIT International Index Trust
(Acquired Fund)...................... 0.40% on all assets.
JHVST International Equity Index Fund
(Acquiring Fund)..................... 0.18% on the first $100 million;
0.15% on the next $ 100 million; and
0.11% on excess over $200 million.
MFC Global Investment Management (U.S.A.) Limited ("MFC Global") serves as
the subadviser to the Acquired Fund and is responsible for managing the
investment and reinvestment of the assets of the Acquired Fund. MFC Global
formulates a continuous investment program for the Acquired Fund consistent
with its investment objective and policies and implements the program by
purchases and sales of securities. As compensation for its services, MFC Global
receives a fee from MSS stated as an annual percentage of the current value of
the net assets of the Acquired Fund. This fee is paid by MSS out of the
management fee it receives for the Acquired Fund and is not an additional
charge to the Acquired Fund. MFC Global is an indirect, wholly-owned subsidiary
of MFC.
SSgA Funds Management, Inc. ("SSgA") serves as the subadviser to the
Acquiring Fund and has primary responsibility for making investment decisions
for the Acquiring Fund's investment portfolios and placing orders with brokers
and dealers to implement those decisions. SSgA receives compensation for these
services from JHLICO, and the Acquiring Fund pays no sub-management fees over
and above the management fees it pays to JHLICO. SSgA succeeded Independence
Investments LLC as subadviser to the Acquiring Fund effective March 29, 2004.
SSgA is a wholly-owned subsidiary of State Street Corporation, a publicly held
bank holding corporation.
14
Performance
The following table sets forth, for the one-year period ended December 31,
2003 and the other periods indicated: (i) the annualized total return of the
Series I and Series II shares of the Acquired Fund; (ii) the annualized total
return of the NAV shares of the Acquiring Fund; and (iii) the pro forma
annualized return for Series I and Series II shares of the Acquiring Fund,
assuming that the Acquiring Fund, which commenced offering Series I and Series
II on May 1, 2004 and will issue such shares in connection with the
Reorganization, had shares of such classes outstanding during 2003 and the
other periods indicated with the same fee arrangements that will be in place
upon the consummation of the Reorganization. The performance information in the
table does not reflect fees and expenses of any variable contract which may use
MIT or JHVST as its underlying investment medium. If such fees and expenses had
been reflected, performance would be lower. The performance of each of the
Funds in relation to its target index or indices is further discussed below in,
respectively, Appendices A and B ("The Acquired Fund/The Acquiring Fund:
Management's Discussion of Fund Performance") to this Proxy Statement/
Prospectus.
Life Date
One Five Ten of First
Fund/A/ Year Years Years Fund Available
- ------ ----- ----- ----- ----- ---------
MIT International Index Trust
(Acquired Fund)--Series I.................. 32.18% NA NA (7.00)% 5/01/2000
--Series II/B C/............... 32.12% NA NA 7.25% 1/28/2002
JHVST International Equity Index Fund/D/
(Acquiring Fund)--NAV...................... 41.99% 0.74% 2.80% 5.58% 5/02/1988
(Pro forma)--Series I...................... 41.59% 0.34% 2.40% 5.18% 5/01/2004
(Pro forma)--Series II/C/.................. 41.39% 0.14% 2.20% 4.98% 5/01/2004
- --------
/A/ Total Return shown would have been lower had operating expenses not been
reduced by expense reimbursement arrangements between each Fund and its
investment advisor,
/B/ Series II shares of the Acquired Fund were first offered January 28, 2002.
/C/ For both the Acquired and Acquiring Funds, Series II performance will be
lower than Series I performance due to a higher 12b-1 fee.
/D/ From May 1998 through March 28, 2004, the subadviser to the Acquiring Fund
was Independence Investment LLC. On November 1, 2003, the Acquiring Fund's
benchmark was changed from a composite of 90% MSCI EAFE GDP Index, a
primarily gross domestic product-weighted index, and 10% MSCI EMF Index,
to a market capitalization-weighted index, the Morgan Stanley Capital
International All Country World Free Excluding U.S. Index. Subsequently,
the latter index's name was changed to the Morgan Stanley Capital
International All Country Excluding U.S. ("MSCI ACWI ex US") Index.
Multiple Classes of Shares
MIT is authorized to issue three classes of shares for the Acquired Fund and
the other MIT Funds: Series I shares (formerly referred to as Class A shares),
Series II shares (formerly referred to as Class B shares) and Series III
shares. Series I, Series II and Series III shares are the same except for
differences in class expenses, including different Rule 12b-1 fees.See "Rule
12b-1 Fees" below. The Acquired Fund currently has outstanding only Series I
and Series II shares.
JHVST is authorized to issue three classes of shares for the Acquiring Fund:
NAV shares, Series I shares and Series II shares. NAV shares, Series I shares
and Series II shares are the same except for differences in class expenses,
including 12b-1 fees for the Series I and Series II shares. See "Rule 12b-1
Fees" below. The Acquiring Fund commenced offering I and Series II shares on
May 1, 2004 and will issue shares of such in connection with the Reorganization.
All shares of each of the Acquired Fund and the Acquiring Fund have equal
voting rights and are voted in the aggregate, and not by class, except that
shares of each class have exclusive voting rights on any matter
15
submitted to shareholders that relates solely to the arrangement of that class
and have separate voting rights when any matter is submitted to shareholders in
which the interests of one class differ from the interests of any other class
or when voting by class is otherwise required by law.
Rule 12b-1 Fees
Each of MIT and JHVST has adopted a Distribution Plan under Rule 12b-1 under
the 1940 Act (each, a "12b-1 Plan") for the Series I and Series II shares of,
respectively, the Acquired Fund and the Acquiring Fund. As described below, the
Rule 12b-1 fees for the Acquiring Fund are higher than those for the Acquired
Fund. Accordingly, if shareholders of the Acquired Fund approve the
Reorganization, they will incur higher 12b-1 fees following the Reorganization.
With respect to the Acquired Fund: Series I shares are subject to a Rule
12b-1 fee of up to .15% of Series I share average daily net assets, and Series
II shares are subject to a Rule 12b-1 fee of up to .35% of Series II share
average daily net assets.
With respect to the Acquiring Fund: Series I shares are subject to a Rule
12b-1 fee of up to .40% of Series I share average daily net assets, and Series
II shares are subject to a Rule 12b-1 fee of up to .60% of Series II share
average daily net assets.
Under both the MIT and JHVST 12b-1 Plans, the Rule 12b-1 fees are paid to
Manufacturers Financial Securities, LLC (the "Distributor"), which serves as
the distributor both of shares of the MIT Funds, including the Acquired Fund,
and of the Series I and Series II shares of the Acquiring Fund. To the extent
consistent with applicable laws, regulations and rules, the Distributor may,
under both 12b-1 Plans, use Rule 12b-1 fees: (i) for any expenses relating to
the distribution of the shares of the class; (ii) for any expenses relating to
shareholder or administrative services for holders of the shares of the class
(or owners of variable contracts funded in insurance company separate accounts
that invest in the shares of the class) and (iii) for the payment of "service
fees" that come within Rule 2830(d)(5) of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD"). Without limiting the
foregoing, the Distributor may pay all or part of the Rule 12b-1 fees from a
Fund to one or more affiliated and unaffiliated insurance companies that have
issued variable insurance contracts for which the Fund serves as an investment
vehicle as compensation for providing some or all of the types of services
described in the preceding sentence; this provision, however, does not obligate
the Distributor to make any payments of Rule 12b-1 fees and does not limit the
use that the Distributor may make of the Rule 12b-1 fees it receives.
Currently, all such payments relating to Series I and Series II shares of the
Acquired Fund and the Acquiring Fund are made to insurance companies affiliated
with MSS and the Distributor. However, payments may be made to unaffiliated
insurance companies in the future.
The JHVST 12b-1 Plan provides that if only part of any of the above-listed
activities or expenses (or of any other expenses or activities) is intended to
result in sales of (or services to) a class of the Acquiring Fund's shares, the
Distributor may make a reasonable apportionment thereof, so as to apply Rule
12b-1 fees borne by that class to the portion of such activities or expenses
that pertains to the distribution of (or services to) that class.
Rule 12b-1 fees are paid out of a Fund's assets on an ongoing basis.
Therefore, these fees will increase the cost of an investment in a Fund and
may, over time, be greater than other types of sales charges.
Dividends and Distributions
The dividends and distributions procedures with respect to the Acquired and
Acquiring Funds are substantially similar. MIT and JHVST declare as dividends
substantially all of the net investment income, if any, of, the respective
Funds. Dividends from the net investment income and the net capital gain, if
any, for the Acquired Fund are declared by MIT not less frequently than
annually and reinvested in additional full and
16
fractional shares of the Acquired Fund at net asset value or paid in cash.
JHVST declares and pays dividends monthly and declares capital gains
distributions annually. JHVST automatically reinvests such dividends and
distributions in additional full and fractional shares of the Acquiring Fund at
net asset value.
Purchase and Redemption of Shares
The purchase and redemption procedures with respect to shares of the
Acquired and Acquiring Funds are substantially the same. Series I and Series II
shares of both Funds are offered continuously, without sales charge, and are
sold and redeemed at their net asset value next computed after a purchase
payment or redemption request is received from a contract owner. Depending upon
the net asset value at that time, the amount paid upon redemption may be more
or less than the cost of the shares redeemed. Payment for shares redeemed will
generally be made within seven days. However, both MIT and JHVST may suspend
the right of redemption or postpone the date of payment beyond seven days under
certain circumstances as permitted by applicable law and regulations.
Redemptions are normally made in cash, but JHVST 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.
Calculation of Net Asset Value. The net asset values of the shares of the
Acquired and Acquiring Funds are determined once daily as of the close of the
regular trading session of the New York Stock Exchange (the "Exchange") on each
business day of the Funds. The Exchange generally closes at 4:00 p.m. Eastern
Time.
The net asset value per share of each share class of each Fund is computed
by: (i) adding the sum of the
value of the portfolio securities held by the Fund, plus any cash or other
assets it holds, attributable to the class, (ii) subtracting all its
liabilities attributable to the class, and (iii) dividing the result by the
total number of shares outstanding of the class at such time.
Securities held by each of the Funds, except money market instruments with
remaining maturities of 60 days or less, which are valued on an amortized cost
basis, are valued at their market value, if market quotations are readily
available. Otherwise, such securities are valued at fair value as determined in
good faith by the MIT Board or its designee, in the case of the Acquired Fund,
or by or under the direction of the Board of Trustees of JHVST (sometimes
referred to herein as the "JHVST Board") in the case of the Acquiring Fund.
Generally, with respect to the Acquired Fund, trading (i) in non-U.S.
securities, (ii) U.S. Government Securities and (iii) money market instruments
is substantially completed each day at various times prior to the close of
regular trading of the Exchange. The values of such securities used in
computing the net asset value of the Acquired Fund's shares are generally
determined as of such times. Occasionally, events which affect the values of
such securities may occur between the times at which they are generally
determined and the close of the Exchange and would therefore not be reflected
in the computation of the Fund's net asset value. In such event, these
securities will then be valued at their fair value as determined in good faith
by the MIT's Board or its designee.
With respect to the Acquiring Fund, 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 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 Exchange business day and may take place
on days which are not business days in New York. JHVST calculates net asset
value per share as of the close of regular trading on the 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
17
Acquiring 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 Acquiring Fund's net asset value is calculated,
such securities may be valued at fair value by or under the direction of the
JHVST Board.
Massachusetts Business Trusts
As stated above, each of MIT and JHVST is a Massachusetts business trust. As
such, each is governed by the terms of its Declaration of Trust. Shareholders
of MIT and JHVST have substantially similar voting and other rights. Neither
MIT nor JHVST is required to hold an annual meeting of shareholders.
Under Massachusetts law, shareholders of MIT and JHVST could, under certain
circumstances, be held personally liable for the obligations of these
respective business trusts. However, the Declarations of Trust of MIT and JHVST
contain express disclaimers of shareholder liability for acts or obligations of
the business trusts and require that notices of such disclaimers be given in
each agreement, obligation, or instrument entered into or executed by the
Trustees or any officers of the business trusts. The Declarations of Trust also
provide for indemnification, out of the property of JHVST in the case of JHVST
and out of the property of a particular MIT Fund in the case of MIT, for all
losses and expenses of any shareholder held personally liable for the
obligations of, respectively, JHVST or such MIT Fund. Both MIT and JHVST
consider the risk of a shareholder incurring financial loss on account of
shareholder liability to be remote.
Additional Information About the Funds
The following table shows where in the MIT Prospectus and the JHVST
Prospectus additional information about, respectively, the Acquired Fund and
the Acquiring Fund may be found.
Heading or Caption in Prospectus
-------------------------------------------------------------------------------
Type of Information MIT Prospectus JHVST Prospectus
- ----------------------- -------------------------------------- ----------------------------------------
Investment Objective Investment Objective; Investment Goal and Strategy.
and Policies: Strategies; Additional Investment
Policies; Hedging and Other Strategic
Transactions.
Portfolio Management: Subadviser and Portfolio Managers; Subadviser; Fund Managers.
Advisory Arrangements; Subadvisory
Arrangements.
Expenses: Fees and Expenses for Each Portfolio. Fees and Expenses of the Fund.
Risks: Principal Risks; Risks of Investing in Main Risks.
Certain Types of Securities.
Taxes: Taxes. Dividends and Taxes.
Dividends and Dividends. Dividends and Taxes.
Distributions:
Purchase and Redemption Purchase and Redemption of Shares. Investment in Shares of the Funds; Share
of Shares: Price.
Financial Highlights: Financial Highlights. Financial Highlights.
18
INFORMATION ABOUT THE REORGANIZATION
Agreement and Plan of Reorganization
The following summary of the Plan is qualified in its entirety by reference
to the form of the Plan attached hereto as Exhibit A. The Plan provides that
the Acquiring Fund will acquire all of the assets, subject to all of the
liabilities, of the Acquired Fund in exchange for shares of the Acquiring Fund.
Subject to the satisfaction of the conditions described below, the acquisition
will take place after the close of business on June 18, 2004 or on such later
date as may be determined by MIT and JHVST (the "Exchange Date"). The net asset
value per share of the Series I and Series II shares of the Acquired Fund and
the Acquiring Fund will be determined by dividing each Fund's assets, less
liabilities, attributable to each share class, by the total number of
outstanding shares of that class. The assets of each Fund will be valued in
accordance with the valuation practices of that Fund.
The number of full and fractional shares of the Acquiring Fund received by a
shareholder of the Acquired Fund will be equal in value to the value of the
shareholder's full and fractional shares of the Acquired Fund as of the close
of regularly scheduled trading on the New York Stock Exchange on the Exchange
Date. As of the Effective Time of the Reorganization, the Acquired Fund will
liquidate and distribute pro rata to its shareholders of record as of the close
of regularly scheduled trading on the New York Stock Exchange on the Exchange
Date the shares of the Acquiring Fund received by the Acquired Fund in the
Reorganization. The holders of Series I and Series II shares of the Acquired
Fund will receive, respectively, Series I and Series II shares of the Acquiring
Fund. Such liquidation and distribution will be accomplished by the
establishment of accounts on the share records of the Acquiring Fund in the
names of the shareholders of the Acquired Fund, each account representing the
respective pro rata number of shares of the Acquiring Fund due the shareholder.
After such distribution, MIT will take all necessary steps under Massachusetts
law, its Declaration of Trust and any other applicable law to effect a complete
dissolution of the Acquired Fund.
The MIT Board has determined that the interests of shareholders of and
contract owners whose contract values are invested in shares of the Acquired
Fund will not be diluted as a result of the Reorganization and that
participation in the Reorganization is in the best interests of the Acquired
Fund and such shareholders and contract owners. Similarly, the JHVST Board has
determined the Reorganization is in the best interests of the Acquiring Fund
and of its shareholders and contract owners whose contract values are invested
in shares of the Acquiring Fund and that the interests of such shareholders and
contract owners will not be diluted as a result of the Reorganization.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including that the affirmative vote of the holders of at
least a Majority of the Outstanding Voting Securities (as defined under "Voting
Information" below) of the Acquired Fund entitled to vote approve the
Reorganization. The Plan may be terminated and the Reorganization abandoned at
any time prior to the Effective Time of the Reorganization by mutual agreement
of MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring
Fund, and by MIT on behalf of the Acquired Fund or JHVST on behalf of the
Acquiring Fund in the event of: (i) a breach by the other party or such Fund of
any material representation, warranty, covenant or agreement in the Plan to be
performed prior to the Effective Time of the Reorganization; (ii) a failure by
the other party or such Fund to fulfill a material condition precedent to the
obligations of the terminating party which has not been waived by the
terminating party; or (iii) a resolution by the MIT Board or the JHVST Board,
upon a determination made in good faith, that proceeding with the Plan is not
in the best interests of, respectively, the Acquired Fund, its shareholders and
contract owners whose contracts are funded by shares of the Acquired Fund or
the Acquiring Fund, its shareholders and contract owners whose contracts are
funded by shares of the Acquiring Fund. The Plan provides that MIT on behalf of
the Acquired Fund and JHVST on behalf of the Acquiring Fund may waive
compliance with any of the covenants or conditions made therein for the benefit
of the waiving party, except for certain conditions regarding the receipt of
regulatory approvals.
Certain of the existing investment limitations of the Acquired Fund that
require shareholder approval for amendment prohibit the Acquired Fund from
engaging in activities such as investing more than a stated
19
percentage of its assets in an issuer's securities. By approving the Plan, the
shareholders of the Acquired Fund will be deemed to have agreed to waive any
such limitations solely insofar as they might be deemed to apply to the
Reorganization.
The expenses of the Reorganization (other than any registration fees payable
for the registration of shares of the Acquiring Fund in connection with the
Reorganization, which will be payable by the Acquiring Fund) will be borne by
the Acquired Fund and the Acquiring Fund in equal shares. See "Voting
Information" below.
If the Plan is not approved by the shareholders of the Acquired Fund or is
not consummated for any other reason, the MIT Board will consider other
possible courses of action. See "Voting Information." The MIT Board, including
all the independent trustees, recommends that shareholders approve the plan
under proposal 1.
Reasons for the Reorganization
The principal purpose of the Reorganization is to provide a means by which
shareholders of and contract owners participating in the Acquired Fund, in
combination with the Acquiring Fund, may pursue substantially similar
investment objectives and policies in the context of a larger fund which has
shown better prospects for growth and demonstrated stronger performance in
tracking its target indices.
In determining whether to approve the Reorganization and recommend its
approval to shareholders, the MIT Board (including the Independent Trustees
(with the advice and assistance of independent legal counsel)), made an inquiry
into a number of matters and considered the following factors, among others:
(1) the compatibility of the investment objectives, policies and restrictions
of the Acquired and Acquiring Funds; (2) the current and historical performance
of the Acquired and Acquiring Funds; (3) the advantages to the Acquired Fund of
investing in a larger asset pool with potentially greater diversification; (4)
the possible benefits of a larger asset base to portfolio management of the
Acquiring Fund; (5) expense ratios and available information regarding the fees
and expenses of the Acquired and Acquiring Funds (historical and pro forma), as
well as of similar funds; (6) the investment experience, expertise and
resources of the respective subadvisers to the Acquired and Acquiring Funds;
(7) the terms and conditions of the Reorganization and whether the
Reorganization would result in dilution of shareholder or contract owner
interests; (8) any direct and indirect costs to be incurred by the Acquired and
Acquiring Funds as a result of the Reorganization; (8) the tax consequences of
the Reorganization; and (9) possible alternatives to the Reorganization.
In reaching the decision to recommend approval of the Reorganization, the
MIT Board concluded that the participation of the Acquired Fund in the
Reorganization is in the best interests of the Acquired Fund, as well as the
best interests of its shareholders and participating contract owners, and that
the interests of existing shareholders and contract owners will not be diluted
as a result of the Reorganization. The MIT Board's conclusion was based on a
number of factors, including the following:
1. The investment objective, strategies and risks of the Acquiring Fund are
substantially similar to those of the Acquired Fund and will afford
shareholders of the Acquired Fund continuity of investment objectives
and expectations.
2. As indicated by its historic performance and ability to attract
investors, the Acquiring Fund has better prospects for growth than the
Acquired Fund.
3. The Acquiring Fund has historically out-performed the Acquired Fund in
more closely tracking its target indices.
4. The somewhat higher expense ratios of the Acquiring Fund than the
Acquired Fund (giving effect to certain voluntary expense
reimbursements) were viewed in light of the competitive level of the
advisory fees and the prospects for growth of the Acquiring Fund.
20
5. The Reorganization will permit shareholders of the Acquired Fund to
pursue their investment goals in the context of a larger fund
immediately following consummation of the Reorganization. It is
anticipated that the combined Acquired and Acquiring Funds should
enhance the ability of portfolio managers in structuring the portfolio
to be representative of the Acquiring Fund's target index.
Description of the Securities to be Issued
Shareholders of the Acquired Fund will receive Series I or Series II shares
of the Acquiring Fund in accordance with the procedures set forth in the Plan
as described above. Each such share when issued will be fully paid and
non-assessable (except as noted under "Summary--Massachusetts Business Trusts,"
above) and will have no preemptive, exchange or similar rights. Such shares do
not have cumulative voting rights.
The shares of beneficial interest of JHVST currently are divided into 30
series, each corresponding to one of the JHVST Funds. JHVST has the right to
establish additional series and issue additional shares without the consent of
its shareholders.
If the holders of variable contracts show minimal interest in a JHVST Fund,
the JHVST Board, by majority vote, may eliminate that Fund or substitute shares
of another investment company. Any such action by the JHVST Board would be
subject to compliance with any requirements for governmental approvals or
exemptions or for shareholder approval. The holders of variable contracts
participating in any such Fund will be notified in writing of JHVST's intention
to eliminate such Fund and given 30 days to transfer amounts from such Fund to
other JHVST Funds without incurring any transaction fee. Amounts not
transferred or withdrawn would automatically be transferred, at the discretion
of the Fund's management.
As discussed above, the Acquiring Fund issues three classes of shares: NAV
shares, Series I shares and Series II shares. Additional classes may be offered
in the future. The Acquiring Fund commenced offering Series I and Series II
shares on May 1, 2004 and will issue shares of such classes in connection with
the Reorganization. The relative rights and preferences of the three classes
are prescribed in, among other things, a plan that JHVST has adopted under Rule
18f-3 (the "Rule 18f-3 Plan") under the 1940 Act.
Each issued and outstanding share of the Acquiring Fund is entitled to
participate equally as provided in the Rule 18f-3 Plan in dividends and
distributions declared with respect to the Acquiring Fund and, upon liquidation
or dissolution, in the net assets of the Fund remaining after satisfaction of
outstanding liabilities.
Expenses of the Acquiring Fund are borne by NAV, Series I and Series II
shares based on the net assets of
the Fund attributable to shares of each class. Notwithstanding the foregoing,
"class expenses" will be allocated to each class. "Class expenses" for the
Acquiring Fund include the 12b-1 fees paid with respect to a class and any
other expenses which are properly allocable to a particular class under the
terms of the Rule 18f-3 Plan.
Federal Income Tax Consequences
As a condition to the consummation of the Reorganization, each of MIT and
JHVST will have received, in form and substance satisfactory to each, an
opinion from Dykema Gossett PLLC, tax counsel to MIT in connection with the
Reorganization, to the effect that, based on the facts and assumptions stated
therein, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a)(1) of the Code
with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss
will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer
of all of the assets and liabilities, if any, of the Acquired Fund to the
Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain
or loss will be recognized by shareholders of the Acquired Fund upon the
exchange of such Fund's shares solely for shares of the Acquiring Fund; (4) the
holding period and tax basis of the shares of the Acquiring Fund received by
each holder of shares of the Acquired Fund pursuant to the Reorganization will
be the same as the holding period and tax basis of the shares of the Acquired
Fund held by the shareholder (provided the shares of
21
the Acquired Fund were held as a capital asset on the date of the
Reorganization) immediately prior to the Reorganization; and (5) the holding
period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the Reorganization.
Capitalization
The following table shows the capitalization of the Acquired Fund and the
Acquiring Fund as of December 31, 2003, and the pro forma combined
capitalization of the Acquiring Fund as if the Reorganization had occurred as
of that date. As of December 31, 2003, the Acquired Fund had outstanding three
classes of shares: Series I, Series II and Series III shares; at the date of
this proxy statement and at the time of the Reorganization, it will have
outstanding only two classes of shares: Series I and Series II shares. As of
December 31, 2003, the Acquiring Fund had outstanding only one class of shares:
NAV shares; it commenced offering Series I and Series II shares on May 1, 2004
and will issue shares of such classes in connection with the Reorganization.
Net Assets Net Asset Shares
Fund (000's Omitted) Value Per Share Outstanding
- ---- --------------- --------------- -----------
MIT International Index Trust
(Acquired Fund)
--Series I shares................. $ 82,197 $ 9.08 9,056,146
--Series II shares................ 17,176 9.08 1,891,609
--Series III shares/A/............ 3 9.07 374
JHVST International Equity Index Fund
(Acquiring Fund)
--NAV shares...................... 159,036 13.82 11,508,157
--Series I shares................. -- -- --
--Series II shares................ -- -- --
Pro Forma/B/
JHVST International Equity Index Fund
(Acquiring Fund)
--NAV shares...................... 159,036 13.82 11,508,157
--Series I shares................. 82,197 13.82 5,947,684
--Series II shares................ 17,176 13.82 1,242,867
- --------
/A/ The Series III shares were all redeemed prior to the record date for The
Special Meeting of Shareholders to vote on the Reorganization.
/B/ The pro-forma figures for net assets and net asset values per share do not
reflect expenses of the Reorganization estimated to be $75,000 for each of
the Funds; and the pro-forma figures for net assets do not reflect
Manulife U.S.A.'s withdrawal, in February and April 2004, of seed capital
in the amount of $34,477,450 at December 31, 2003 from the Acquired Fund.
22
VOTING INFORMATION
Shareholders. MIT sells its shares not directly to the public but generally
only to insurance companies and their separate accounts as the underlying
investment media for variable contracts, certain entities affiliated with the
insurance companies and, with respect to certain MIT Funds, trustees of
qualified pension and retirement plans. Only shares of a particular MIT Fund
are entitled to vote on matters which affect only the interests of that Fund.
As of the Record Date for the Special Meeting of Shareholders, the shares of
the Acquired Fund were legally owned by The Manufacturers Life Insurance
Company (U.S.A.) ("Manulife U.S.A") and The Manufacturers Life Insurance
Company of New York ("Manulife New York"). Each of Manulife U.S.A. and Manulife
New York is an indirect, wholly-owned subsidiary of The Manufacturers Life
Insurance Company ("Manulife"). MFC is the holding company of Manulife and its
subsidiaries, collectively known as Manulife Financial. The principal offices
of Manulife Financial are located at 200 Bloor Street East, Toronto, Ontario,
Canada M4W1E5.
Manulife U.S.A. is a stock life insurance company originally organized under
the laws of Pennsylvania and redomesticated under the laws of Michigan. Its
principal address is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
Manulife New York is a stock life insurance company organized under the laws of
New York whose principal address is 100 Summit Lake Drive, Second Floor,
Valhalla, New York 10595. Each of Manulife U.S.A. and Manulife New York holds
shares of MIT Funds directly and attributable to variable contracts in their
separate accounts. Such separate accounts include separate accounts registered
under the 1940 Act as well as unregistered separate accounts.
Shareholder Voting. Manulife U.S.A. and Manulife New York have the right to
vote upon matters that may be voted upon at a special shareholders' meeting.
These companies will vote all shares of the MIT Funds issued to them in
proportion to the timely instructions received from contract owners
participating in the separate accounts described above which are registered
under the 1940 Act. Manulife U.S.A. and Manulife New York, in connection with
their solicitation of voting instructions, are furnishing this Proxy
Statement/Prospectus to the owners of variable contracts participating in
registered separate accounts holding shares of the Acquired Fund to be voted at
the Meeting.
Voting instructions (proxies) may be revoked at any time prior to the voting
of the shares represented thereby by: (i) mailing written instructions
addressed to the Secretary of MIT at 73 Tremont Street, Boston, Massachusetts
02108, or (ii) signing and returning a new proxy, in each case if received by
MIT by June 17, 2004. All valid proxies will be voted in accordance with
specifications thereon, or in the absence of specifications, for approval of
Proposal 1.
Quorum; Definition of a Majority of Outstanding Voting
Securities. Shareholders of record at the close of business on April 27, 2004
(the "Record Date") will be entitled to vote at the Meeting or any adjournment
of the Meeting. The holders of 30% of the shares outstanding of the Acquired
Fund at the close of business on that date present in person or by proxy will
constitute a quorum for the Meeting; however, a majority of the outstanding
voting securities of the Acquired Fund entitled to vote at the close of
business on that date is required to approve the Proposal, except as noted
herein. As used in this Proxy Statement/Prospectus, the vote of a "Majority of
the Outstanding Voting Securities" means the affirmative vote of the lesser of:
(1)67% or more of the voting securities of MIT or an MIT Fund, as applicable,
present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of MIT or an MIT Fund, as applicable, are present in
person or by proxy or
(2)more than 50% of the outstanding voting securities of MIT or an MIT Fund, as
applicable.
Shareholders are entitled to one vote for each Series I and Series II share
held and fractional votes for fractional shares held. No shares have cumulative
voting rights.
23
In the event the necessary quorum to transact business or the vote required
to approve the Reorganization under Proposal 1 is not obtained at the Meeting,
the persons named as proxies may propose one or more adjournments of the
Meeting in accordance with applicable law to permit further solicitation of
proxies. Any such adjournment as to a matter will require the affirmative vote
of the holders of a majority of MIT's (or the relevant MIT Fund's) shares cast
at the Meeting. The persons named as proxies will vote for or against any
adjournment in their discretion.
Abstentions. Abstentions are counted as shares eligible to vote at the
Meeting in determining whether a quorum is present, but do not count as votes
cast with respect to a Proposal. Under the 1940 Act, the affirmative vote
necessary to approve a matter under consideration may be determined with
reference to a percentage of votes present at the Meeting, which would have the
effect of treating abstentions as if they were votes against a proposal.
Cost of Preparation and Distribution of Proxy Materials. The cost of the
preparation and distribution of these proxy materials will be borne by the
Acquired Fund and the Acquiring Fund in equal shares. In addition to the
solicitation of proxies by the use of the mails, proxies may be solicited by
officers and employees of MIT, MIT's investment adviser, MSS, or its agents or
affiliates, personally or by telephone. Brokerage houses, banks and other
fiduciaries may be requested by the Funds to forward soliciting materials to
their principals and to obtain authorization for the execution of proxies. For
those services, they will be reimbursed by the Funds for their out-of-pocket
expenses.
Fund Voting. Series I and Series II shares of the Acquired Fund will vote
in the aggregate and not by class on the matters to be presented at the Meeting.
24
OWNERSHIP OF SHARES OF THE FUNDS
Acquired Fund. As of the Record Date, the Acquired Fund's shares
outstanding and eligible to vote and the percentage thereof owned by Manulife
U.S.A. and Manulife New York are stated below:
Percentage Percentage
of Shares of Shares
Number of Held by held by
Outstanding Manulife Manulife
Acquired Fund Shares U.S.A. New York
------------- ----------- ---------- ----------
MIT International Index Trust 8,328,014 94.03% 5.97%
As of the Record Date, Trustees and officers of MIT, in the aggregate,
beneficially owned or had the right to provide voting instructions for less
than 1% of the outstanding shares of the Acquired Fund. As of the Record Date,
no variable contract owner beneficially owned 5% or more of the outstanding
shares of the Acquired Fund.
Acquiring Fund. As with shares of the MIT Funds, shares of the JHVST Funds
are not sold directly to the public but generally only to insurance companies
and their separate accounts as the underlying investment media for variable
contracts. As of the Record Date, the shares of the Acquiring Fund were legally
owned by John Hancock Life Insurance Company ("JHLICO"), a Massachusetts life
insurance company having its principal offices at 200 Clarendon Street, Boston,
Massachusetts 02117, and John Hancock Variable Life Insurance Company
("JHVLICO"), a Massachusetts life insurance company having its principal
offices at 197 Clarendon Street, Boston, Massachusetts 02117. The percentage
ownership of the outstanding shares of the Acquiring Fund as of the Record Date
by JHLICO and JHVLICO is stated below:
Percentage Percentage
Number of of Shares of Shares
Outstanding held by held by
Acquiring Fund Shares JHLICO JHVLICO
-------------- ----------- ---------- ----------
JHVST International Equity
Index Fund................ 11,804,916 25.22% 74.78%
As of the Record Date, no variable contract owner beneficially owned 5% or
more of the outstanding shares of the Acquiring Fund, and fewer than 1% of the
outstanding shares of the Acquiring Fund were attributable to variable
contracts owned by Trustees or officers of JHVST.
25
FINANCIAL STATEMENTS
The financial highlights of the Acquired Fund for the fiscal year ended
December 31, 2003 incorporated by reference into this Proxy
Statement/Prospectus, and the financial statements of MIT for the fiscal year
ended December 31, 2003 incorporated by reference into the related Statement of
Additional Information, have been so incorporated by reference in reliance on
the report of PricewaterhouseCoopers, LLP, independent accountants.
The financial highlights of the Acquiring Fund for the fiscal year ended
December 31, 2003 incorporated by reference into this Proxy
Statement/Prospectus, and the financial statements of JHVST for the fiscal year
ended December 31, 2003 incorporated by reference into the related Statement of
Additional Information, have been so incorporated by reference in reliance on
the report of Ernst & Young LLP, independent auditors.
The performance information included in the financial highlights of the
Funds does not reflect fees and expenses of any variable insurance contract
which may use MIT or JHVST as its underlying investment medium. If such fees
and expenses had been reflected, performance would be lower.
LEGAL MATTERS
Certain matters concerning the issuance of shares of the Acquiring Fund will
be passed upon by Ronald J. Bocage, Esq., Vice President and Counsel, JHLICO,
P.O. Box 111, Boston, Massachusetts 02117. Certain tax consequences of the
Reorganization will be passed upon by Dykema Gossett PLLC, 39577 Woodward
Avenue, Suite 300, Bloomfield Hills, Michigan 48304.
OTHER MATTERS
The MIT Board does not know of any matters to be presented at the Meeting
other than those mentioned in this Proxy Statement/Prospectus. If any other
matters properly come before the Meeting, the shares represented by proxies
will be voted in accordance with the best judgment of the person or persons
voting the proxies.
MIT is not required to hold annual meetings of shareholders and, therefore,
it cannot be determined when the next meeting of shareholders will be held.
Shareholder proposals to be presented at any future meeting of shareholders of
MIT must be received by MIT a reasonable time before its solicitation of
proxies for that meeting in order for such proposals to be considered for
inclusion in the proxy materials related to that meeting.
BY ORDER OF THE BOARD OF TRUSTEES OF MIT
May 18, 2004
Boston, Massachusetts
It is important that proxies be returned promptly. Therefore, shareholders who
do not expect to attend the meeting in person are urged to complete, sign, date
and return the Voting Instruction card in the enclosed envelope.
26
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Plan") is made this 28th day
of April, 2004, by and between Manufacturers Investment Trust ("MIT"), a
Massachusetts business trust with its principal place of business at 73 Tremont
Street, Boston, Massachusetts 02108, on behalf of its separate series, the
International Index Trust (the "Acquired Fund"), and John Hancock Variable
Series Trust I ("JHVST"), a Massachusetts business trust with its principal
place of business at John Hancock Place, P.O. Box 111, Boston, Massachusetts
02117, on behalf of its separate series, the International Equity Index Fund
(the "Acquiring Fund"). The Acquired Fund and the Acquiring Fund are sometimes
referred to herein collectively as the "Funds" and individually as a "Fund."
WHEREAS, the respective Boards of Trustees of MIT and JHVST have determined
that the transfer of all of the assets and liabilities of the Acquired Fund to
the Acquiring Fund is in the best interests of that Board's respective Fund, as
well as the best interests of shareholders and owners of variable life and
annuity contracts funded by shares of such Fund, and that the interests of
existing shareholders and contract owners participating in such Fund would not
be diluted as a result of this transaction;
WHEREAS, MIT and JHVST intend to provide for the reorganization of the
Acquired Fund (the "Reorganization") through the acquisition by the Acquiring
Fund of all of the assets, subject to all of the liabilities, of the Acquired
Fund in exchange for Series I and Series II shares of beneficial interest of
the Acquiring Fund (the "Acquiring Fund Shares"), the liquidation of the
Acquired Fund and the distribution to Acquired Fund shareholders of the
Acquiring Fund Shares;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
MIT and JHVST agree as follows:
1. Transfer of Assets of the Acquired Fund in Exchange for the Acquiring Fund
Shares and Liquidation of the Acquired Fund
(a) Plan of Reorganization.
(i) As of the Effective Time of the Reorganization (as defined in
Section 1(b)(i) hereof), MIT, on behalf of the Acquired Fund, will
convey, transfer and deliver to the Acquired Fund all of the then
existing assets of the Acquired Fund (consisting, without limitation, of
portfolio securities and instruments, dividend and interest receivables,
cash and other assets). In consideration thereof, JHVST, on behalf of
the Acquiring Fund, will (A) assume and pay, to the extent that they
exist on or after the Effective Time of the Reorganization, all of the
obligations and liabilities of the Acquired Fund and (B) issue and
deliver to the Acquired Fund that number of full and fractional Series I
and Series II shares of the Acquiring Fund as determined in Section 1(c)
hereof. Any Series I and Series II shares of capital stock (if any) of
the Acquired Fund ("Acquired Fund Shares") held in the treasury of MIT
at the Effective Time of the Reorganization shall thereupon be retired.
Such transactions shall take place on the date provided for in Section
1(b) hereof (the "Exchange Date"). All computations for the Acquired
Fund and the Acquiring Fund shall be performed by State Street Bank and
Trust Company (the "Custodian"), as custodian and pricing agent for the
Acquired Fund and the Acquiring Fund, subject to the control and
direction of each Fund and its Board and in accordance with the usual
pricing and valuation procedures of the respective Funds. The parties
agree to communicate with one another sufficiently in advance concerning
the nature and manner of valuation of all their respective assets and
liabilities that any material differences in the value ascribed by each
Fund to any assets or liabilities that the Acquiring Fund would assume
in the Reorganization can be reconciled prior to the Exchange Date. The
parties agree to attempt in good faith to reconcile any such material
differences. In the absence of such reconciliation, the determination of
the Custodian shall be conclusive and binding on all parties in interest.
27
(ii) As of the Effective Time of the Reorganization, the Acquired
Fund will liquidate and distribute pro rata to its shareholders of
record ("Acquired Fund shareholders") as of the Effective Time of the
Reorganization the Acquiring Fund Shares received by the Acquired Fund
pursuant to Section 1(a)(i) in actual or constructive exchange for the
shares of the Acquired Fund held by the Acquired Fund shareholders. The
holders of Series I and Series II shares of the Acquired Fund will
receive, respectively, Series I and Series II shares of the Acquiring
Fund. Such liquidation and distribution will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of
the Acquired Fund on the books of the Acquiring Fund to open accounts on
the share records of the Acquiring Fund in the names of the Acquired
Fund shareholders and representing the respective pro-rata number of the
Acquiring Fund Shares due such shareholders. The Acquiring Fund will not
issue certificates representing the Acquiring Fund Shares in connection
with such exchange.
(iii) As soon as practicable after the Effective Time of the
Reorganization, MIT shall take all the necessary steps under
Massachusetts law, its Declaration of Trust and any other applicable law
to effect a complete dissolution of the Acquired Fund. Any reporting of
the Acquired Fund, including but not limited to the responsibility for
filing of reports with the Securities and Exchange Commission (the
"Commission"), other regulatory reports and tax returns, is and shall
remain the responsibility of MIT.
(b) Exchange Date and Effective Time of the Reorganization.
(i) Subject to the satisfaction of the conditions to the
Reorganization specified in this Plan, the Reorganization shall occur as
of the close of regularly scheduled trading on the New York Stock
Exchange (the "Effective Time of the Reorganization") on the day (the
"Exchange Date") which is the later of (A) the final adjournment of the
meeting of the holders of Acquired Fund Shares at which this Plan will
be considered, (B) immediately after the close of business on June 18,
2004 and (C) such later day as MIT and JHVST may determine.
(ii) All acts taking place on the Exchange Date shall be deemed to
take place simultaneously as of the Effective Time of the Reorganization
unless otherwise provided.
(iii) In the event that on the proposed Exchange Date (A) the New
York Stock Exchange shall be closed to trading or trading thereon shall
be restricted, or (B) trading or the reporting of trading on said
Exchange or elsewhere shall be disrupted so that accurate valuation of
the net assets of the Acquiring Fund or the Acquired Fund is
impracticable, the Exchange Date shall be postponed until the first
business day after the day when trading shall have been fully resumed
and reporting shall have been restored.
(iv) On the Exchange Date, portfolio securities of the Acquired Fund
that are not held in book-entry form shall be transferred by the
Custodian to the account of the Acquiring Fund duly endorsed in proper
form for transfer, in such condition as to constitute good delivery
thereof in accordance with the custom of brokers, and shall be
accompanied by all necessary federal and state stock transfer stamps or
a check for the appropriate purchase price thereof; portfolio securities
held of record by the Custodian in book-entry form on behalf of the
Acquired Fund shall be delivered to the Acquiring Fund by the
Custodian's recording the transfer of beneficial ownership thereof on
its records; and cash delivered shall be in the form of currency or by
the Custodian's crediting the Acquiring Fund's account maintained with
the Custodian with immediately available funds.
(c) Valuation.
(i) The net asset value per share of the Series I and Series II
shares of the Acquiring Fund and the net value of the assets of the
Acquired Fund to be transferred in exchange for such Series I and Series
II shares shall be determined as of the Effective Time of the
Reorganization. The net asset value per share of the Series I and Series
II shares of the Acquiring Fund shall be computed by the Custodian in
the manner set forth in JHVST's Declaration of Trust or By-laws and then
current prospectus and statement of additional information and shall be
computed to not less than four decimal places. The net value of the
assets of the Acquired Fund to be transferred shall be computed by the
Custodian by
28
calculating the value of the assets of the Acquired Fund and by
subtracting therefrom the amount of the liabilities assigned and
transferred to the Acquiring Fund, said assets and liabilities to be
valued in the manner set forth in MIT's Declaration of Trust or By-laws
and then current prospectus and statement of additional information.
(ii) The number of Series I and Series II shares of the Acquiring
Fund to be issued (including fractional shares, if any) by the Acquiring
Fund in exchange for the Acquired Fund's assets shall be determined by
dividing the net value of the assets of the Acquired Fund attributable
to shares of each class and to be transferred by the net asset value per
shares of the Series I and Series II shares of the Acquiring Fund, both
as determined in accordance with Section 1(c)(i).
(iii) All computations of value shall be made by the Custodian in the
manner set forth in paragraphs (a)(i) and (c)(i) above.
2. Representations and Warranties of JHVST on Behalf of the Acquiring Fund
JHVST on behalf of the Acquiring Fund represents and warrants as follows:
(a) Organization, Existence, etc. JHVST is a business trust that is duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and has the power to carry on its business as
it is now being conducted. The Acquiring Fund is a validly existing series
of shares of such business trust representing interests in a separate
portfolio thereof under the laws of Massachusetts. Each of the Acquiring
Fund and JHVST has all necessary federal, state and local authorization to
own all of its properties and assets and to carry on its business as now
being conducted.
(b) Registration as Investment Company. JHVST is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end
investment company of the management type; such registration has not been
revoked or rescinded and is in full force and effect.
(c) Current Offering Documents. The current prospectus of JHVST dated
May 1, 2003 and the current statement of additional information of JHVST
dated May 1, 2003, each as supplemented or amended and as may be further
supplemented or amended, included in JHVST's registration statement on Form
N-1A filed with the Commission, comply in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities
Act") and the Act and do not contain an untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) Capitalization. JHVST has an unlimited number of authorized shares
of beneficial interest of which as of April 27, 2004 there were outstanding
the following numbers of shares of the Acquiring Fund: 11,804,916 NAV
shares. All of the outstanding shares of JHVST have been duly authorized and
are validly issued, fully paid and non-assessable (recognizing that under
Massachusetts law, shareholders of a JHVST series could, under certain
circumstances, be held personally liable for the obligations of JHVST).
Because JHVST is an open-end investment company engaged in the continuous
offering and redemption of its shares, the number of outstanding shares may
change prior to the Effective Time of the Reorganization. All of the issued
and outstanding shares of the Acquiring Fund have been offered and sold in
compliance in all material respects with applicable registration
requirements of the Securities Act and any applicable state securities laws.
(e) Financial Statements. The financial statements of JHVST for the
fiscal year ended December 31, 2003, which have been audited by Ernst &
Young LLP, fairly present the financial position of the Acquiring Fund as of
the dates thereof and the respective results of operations and changes in
net assets for each of the periods indicated in accordance with generally
accepted accounting principles ("GAAP").
(f) Shares to be Issued Upon Reorganization. The Acquiring Fund Shares
to be issued in connection with the Reorganization will be duly authorized
and upon consummation of the Reorganization will be validly issued, fully
paid and non-assessable (except as disclosed in JHVST's prospectus and
recognizing
29
that under Massachusetts law, shareholders of a JHVST series could, under
certain circumstances, be held personally liable for the obligations of such
series).
(g) Authority Relative to this Plan. JHVST, on behalf of the Acquiring
Fund, has the power to enter into this Plan and to carry out its obligations
hereunder. The execution and delivery of this Plan and the consummation of
the transactions contemplated hereby have been duly authorized by JHVST's
Board of Trustees and no other proceedings by JHVST other than those
contemplated under this Plan are necessary to authorize its officers to
effectuate this Plan and the transactions contemplated hereby. JHVST is not
a party to or obligated under any provision of its Declaration of Trust or
By-laws, or under any indenture or contract provision or any other
commitment or obligation, or subject to any order or decree, which would be
violated by or which would prevent its execution and performance of this
Plan in accordance with its terms.
(h) Liabilities. There are no liabilities of the Acquiring Fund, whether
actual or contingent and whether or not determined or determinable, other
than liabilities disclosed or provided for in JHVST's Financial Statements
with respect to the Acquiring Fund and liabilities incurred in the ordinary
course of business subsequent to December 31, 2003 or otherwise previously
disclosed to and accepted by MIT with respect to the Acquiring Fund, none of
which has been materially adverse to the business, assets or results of
operations of the Acquiring Fund.
(i) No Material Adverse Change. Since December 31, 2003, there has been
no material adverse change in the financial condition, results of
operations, business, properties or assets of the Acquiring Fund, other than
those occurring in the ordinary course of business (for these purposes, a
decline in net asset value and a decline in net assets due to redemptions do
not constitute a material adverse change).
(j) Litigation. There are no claims, actions, suits or proceedings
pending or, to the knowledge of JHVST, threatened which would adversely
affect JHVST or the Acquiring Fund's assets or business or which would
prevent or hinder consummation of the transactions contemplated hereby,
there are no facts which would form the basis for the institution of
administrative proceedings against JHVST or the Acquiring Fund and, to the
knowledge of JHVST, there are no regulatory investigations of JHVST or the
Acquiring Fund, pending or threatened, other than routine inspections and
audits.
(k) Contracts. No default exists under any material contract or other
commitment to which JHVST, on behalf of the Acquiring Fund, is subject.
(l) Taxes. All federal and other income tax returns of JHVST with
respect to the Acquiring Fund required to be filed by JHVST with respect to
the Acquiring Fund have been filed for all taxable years to and including
December 31, 2003, and all taxes payable pursuant to such returns have been
paid. To the knowledge of JHVST, no such return is under audit and no
assessment has been asserted in respect of any such return. All federal and
other taxes owed by JHVST with respect to the Acquiring Fund have been paid
so far as due. JHVST and the Acquiring Fund currently are, at all times
since their inception have been, and will continue to be up until and at the
Exchange Date, in compliance with Section 817(h)(1) of the Internal Revenue
Code of 1986, as amended (the "Code"), and Treas. Reg. Section 1.817-5, as
if those provisions applied directly to that Fund relating to the
diversification requirements for variable annuity, endowment and life
insurance contracts. The Acquiring Fund's shares are (and since its
inception have been) held only by (a) insurance company "segregated asset
accounts" within the meaning of Treas. Reg. Section 1.817-5(e) and (b) other
purchasers of the kind specified in Treas. Reg. Section 1.817-5(f)(3) as
from time to time in effect. The Acquiring Fund is, and at all times since
its inception has been, qualified as a "regulated investment company" under
subchapter M of the Code.
(m) No Approvals Required. Except for the Registration Statement (as
defined in Section 4(a) hereof) and the approval of the Acquired Fund's
shareholders (referred to in Section 6(a) hereof), no consents, approvals,
authorizations, registrations or exemptions under federal or state laws are
necessary for the consummation by JHVST of the Reorganization, except such
as have been obtained as of the date hereof.
(n) At the time the Registration Statement becomes effective, the
Registration Statement, except as to information relating to the Acquired
Fund that is provided or approved by MIT pursuant to Section 5(c)
30
hereof, (i) will comply in all material respects with the provisions of the
Securities Act and the rules and regulations of the Commission thereunder
(the "Regulations") and (ii) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and at the time
the Registration Statement becomes effective, at the time of the Acquired
Fund shareholders' meeting referred to in Section 5(a) hereof, and at the
Effective Time of the Reorganization, the proxy statement/prospectus (the
"Prospectus") and statement of additional information (the "Statement of
Additional Information") included therein, as amended or supplemented by any
amendments or supplements filed by JHVST, will not contain an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
3. Representations and Warranties of MIT on Behalf of the Acquired Fund
MIT on behalf of the Acquired Fund represents and warrants as follows:
(a) Organization, Existence, etc. MIT is a business trust that is duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts and has the power to carry on its business as
it is now being conducted. The Acquired Fund is a validly existing series of
shares of such business trust representing interests in a separate portfolio
thereof under the laws of Massachusetts. Each of the Acquired Fund and MIT
has all necessary federal, state and local authorization to own all of its
properties and assets and to carry on its business as now being conducted.
(b) Registration as Investment Company. MIT is registered under the Act
as an open-end investment company of the management type; such registration
has not been revoked or rescinded and is in full force and effect.
(c) Current Offering Documents. The current prospectus of MIT dated May
1, 2003 and the current statement of additional information of MIT dated May
1, 2003, each as supplemented or amended and as may be further supplemented
or amended, included in MIT's registration statement on Form N-1A filed with
the Commission, comply in all material respects with the requirements of the
Securities Act and the Act and do not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Capitalization. MIT has an unlimited number of authorized shares of
beneficial interest of which as of April 27, 2004 there were outstanding the
following numbers of shares of the Acquired Fund : 6,081,524 Series I shares
and 2,246,490 Series II shares, and no shares of such Fund were held in the
treasury of MIT. All of the outstanding shares of MIT have been duly
authorized and are validly issued, fully paid and non-assessable (except as
disclosed in MIT's prospectus and recognizing that under Massachusetts law,
shareholders of an MIT series could, under certain circumstances, be held
personally liable for the obligations of such MIT series). Because MIT is an
open-end investment company engaged in the continuous offering and
redemption of its shares, the number of outstanding shares may change prior
to the Effective Time of the Reorganization. All such shares will, at the
Exchange Date, be held in book-entry form by shareholders of record of the
Acquired Fund as set forth on the books and records of MIT in the amounts
set forth therein, and as set forth in any list of shareholders of record
provided to the Acquiring Fund for purposes of the Reorganization, and no
such shareholders of record will have any preemptive rights to purchase any
Acquired Fund Shares, and the Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any Acquired
Fund Shares (other than any existing dividend reinvestment plans of the
Acquired Fund or as set forth in this Plan), nor are there outstanding any
securities convertible into any shares of the Acquired Fund (except pursuant
to any existing exchange privileges described in the current prospectus and
statement of additional information of MIT). All of the Acquired Fund's
issued and outstanding shares have been offered and sold in compliance in
all material respects with applicable registration requirements of the
Securities Act and any applicable state securities laws.
31
(e) Financial Statements. The financial statements of MIT for the fiscal
year ended December 31, 2003, which have been audited by
PriceWaterhouseCoopers LLP, fairly present the financial position of the
Acquired Fund as of the dates thereof and the respective results of
operations and changes in net assets for each of the periods indicated in
accordance with GAAP.
(f) Authority Relative to this Plan. MIT, on behalf of the Acquired
Fund, has the power to enter into this Plan and to carry out its obligations
hereunder. The execution and delivery of this Plan and the consummation of
the transactions contemplated hereby have been duly authorized by MIT's
Board of Trustees and no other proceedings by MIT other than those
contemplated under this Plan are necessary to authorize its officers to
effectuate this Plan and the transactions contemplated hereby. MIT is not a
party to or obligated under any provision of its Declaration of Trust or
By-laws, or under any indenture or contract provision or any other
commitment or obligation, or subject to any order or decree, which would be
violated by or which would prevent its execution and performance of this
Plan in accordance with its terms.
(g) Liabilities. There are no liabilities of the Acquired Fund, whether
actual or contingent and whether or not determined or determinable, other
than liabilities disclosed or provided for in MIT's Financial Statements
with respect to the Acquired Fund and liabilities incurred in the ordinary
course of business subsequent to December 31, 2003 or otherwise previously
disclosed to and accepted by JHVST with respect to the Acquired Fund, none
of which has been materially adverse to the business, assets or results of
operations of the Acquired Fund.
(h) No Material Adverse Change. Since December 31, 2003, there has been
no material adverse change in the financial condition, results of
operations, business, properties or assets of the Acquired Fund, other than
those occurring in the ordinary course of business (for these purposes, a
decline in net asset value and a decline in net assets due to redemptions do
not constitute a material adverse change).
(i) Litigation. There are no claims, actions, suits or proceedings
pending or, to the knowledge of MIT, threatened which would adversely affect
MIT or the Acquired Fund's assets or business or which would prevent or
hinder consummation of the transactions contemplated hereby, there are no
facts which would form the basis for the institution of administrative
proceedings against MIT or the Acquired Fund and, to the knowledge of MIT,
there are no regulatory investigations of MIT or the Acquired Fund, pending
or threatened, other than routine inspections and audits.
(j) Contracts. MIT, on behalf of the Acquired Fund, is not subject to
any contracts or other commitments (other than this Plan) which will not be
terminated with respect to the Acquired Fund without liability to MIT or the
Acquired Fund as of or prior to the Effective Time of the Reorganization.
(k) Taxes. All federal and other income tax returns of MIT with respect
to the Acquired Fund required to be filed by MIT with respect to the
Acquired Fund have been filed for all taxable years to and including
December 31, 2003, and all taxes payable pursuant to such returns have been
paid. To the knowledge of MIT, no such return is under audit and no
assessment has been asserted in respect of any such return. All federal and
other taxes owed by MIT with respect to the Acquired Fund have been paid so
far as due. MIT and the Acquired Fund currently are, at all times since
their inception have been, and will continue to be up until and at the
Exchange Date, in compliance with Section 817(h)(1) of the Code and Treas.
Reg. Section 1.817-5, as if those provisions applied directly to that Fund
relating to the diversification requirements for variable annuity, endowment
and life insurance contracts. The Acquired Fund's shares are (and since its
inception have been) held only by (a) insurance company "segregated asset
accounts" within the meaning of Treas. Reg. Section 1.817-5(e) and (b) other
purchasers of the kind specified in Treas. Reg. Section 1.817-5(f)(3) as
from time to time in effect. The Acquired Fund is, and at all times since
its inception has been, qualified as a "regulated investment company" under
subchapter M of the Code.
(l) No Approvals Required. Except for the Registration Statement (as
defined in Section 4(a) hereof) and the approval of the Acquired Fund's
shareholders referred to in Section 6(a) hereof, no consents, approvals,
authorizations, registrations or exemptions under federal or state laws are
necessary for the consummation by MIT of the Reorganization, except such as
have been obtained as of the date hereof.
32
(m) At the time the Registration Statement becomes effective, the
Registration Statement, insofar as it relates to the Acquired Fund, (i) will
comply in all material respects with the provisions of the Securities Act
and the Regulations and (ii) will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and at the time
the Registration Statement becomes effective, at the time of the Acquired
Fund's shareholders' meeting referred to in Section 5(a) and at the
Effective Time of the Reorganization, the Prospectus and Statement of
Additional Information, as amended or supplemented by any amendments or
supplements filed by JHVST, insofar as they relate to the Acquired Fund,
will not contain an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection shall apply only
to statements in or omissions from the Registration Statement, Prospectus or
Statement of Additional Information made in reliance upon and in conformity
with information furnished or approved by MIT for use in the Registration
Statement, Prospectus or Statement of Additional Information as provided in
Section 5(c).
4. Covenants of JHVST on Behalf of the Acquiring Fund
JHVST on behalf of the Acquiring Fund covenants to the following:
(a) Registration Statement. On behalf of the Acquiring Fund, JHVST shall
file with the Commission a Registration Statement on Form N-14 (the
"Registration Statement") under the Securities Act relating to the Acquiring
Fund Shares issuable hereunder and the proxy statement of the Acquired Fund
relating to the meeting of the Acquired Fund's shareholders referred to in
Section 5(a) herein.
(b) Cooperation in Effecting Reorganization. JHVST agrees to use all
reasonable efforts to effectuate the Reorganization, to continue in
operation thereafter, and to obtain any necessary regulatory approvals for
the Reorganization. JHVST shall furnish such data and information relating
to the Acquiring Fund as shall be reasonably requested for inclusion in the
information to be furnished to the Acquired Fund shareholders in connection
with the meeting of the Acquired Funds' shareholders for the purpose of
acting upon this Plan and the transactions contemplated herein.
(c) Operations in the Ordinary Course. Except as otherwise contemplated
by this Plan, JHVST with respect to the Acquiring Fund shall conduct its
business in the ordinary course until the consummation of the
Reorganization, it being understood that such ordinary course of business
will include the declaration and payment of customary dividends and
distributions.
5. Covenants of MIT on Behalf of the Acquired Fund
MIT on behalf of the Acquired Fund covenants to the following:
(a) Meeting of the Acquired Fund's Shareholders. MIT shall call and hold
a meeting of the shareholders of the Acquired Fund for the purpose of acting
upon this Plan and the transactions contemplated herein.
(b) Portfolio Securities. With respect to the assets to be transferred
in accordance with Section 1(a), the Acquired Fund's assets shall consist of
all property and assets of any nature whatsoever, including, without
limitation, all cash, cash equivalents, securities, claims and receivables
(including dividend and interest receivables) owned, and any deferred or
prepaid expenses shown as an asset on MIT's books. At least five (5)
business days prior to the Exchange Date, the Acquired Fund will provide
MIT, for the benefit of the Acquiring Fund, with a list of its assets and a
list of its stated liabilities. The Acquired Fund shall have the right to
sell any of the securities or other assets shown on the list of assets prior
to the Exchange Date but will not, without the prior approval of JHVST, on
behalf of the Acquiring Fund, acquire any additional securities other than
securities which the Acquiring Fund is permitted to purchase, pursuant to
its investment objective and policies or otherwise (taking into
consideration its own portfolio composition as of
33
such date). In the event that the Acquired Fund holds any investments that
the Acquiring Fund would not be permitted to hold, the Acquired Fund will
dispose of such securities prior to the Exchange Date to the extent
practicable and to the extent that its shareholders would not be materially
affected in an adverse manner by such a disposition. In addition, MIT will
prepare and deliver, immediately prior to the Effective Time of the
Reorganization, a Statement of Assets and Liabilities of the Acquired Fund,
prepared in accordance with GAAP (the "Schedule"), which Schedule shall be
certified by the principal accounting officer of the Acquired Fund. All
securities to be listed in the Schedule as of the Effective Time of the
Reorganization will be owned by the Acquired Fund free and clear of any
liens, claims, charges, options and encumbrances, except as indicated in the
Schedule and as accepted by JHVST, and, except as so indicated and accepted,
none of such securities is or, after the Reorganization as contemplated
hereby, will be subject to any restrictions, legal or contractual, on the
disposition thereof (including restrictions as to the public offering or
sale thereof under the Securities Act) and, except as so indicated and
accepted, all such securities are or will be readily marketable.
(c) Registration Statement. In connection with the preparation of the
Registration Statement, MIT will cooperate with JHVST and will furnish to
JHVST the information relating to the Acquired Fund required by the
Securities Act and the Regulations to be set forth in the Registration
Statement (including the Prospectus and Statement of Additional Information).
(d) Cooperation in Effecting Reorganization. MIT agrees to use all
reasonable efforts to effectuate the Reorganization and to obtain any
necessary regulatory approvals for the Reorganization.
(e) Operations in the Ordinary Course. Except as otherwise contemplated
by this Plan, MIT with respect to the Acquired Fund shall conduct its
business in the ordinary course until the consummation of the
Reorganization, it being understood that such ordinary course of business
will include the declaration and payment of customary dividends and
distributions.
(f) Statement of Earnings and Profits. As promptly as practicable, but
in any case within 60 days after the Exchange Date, MIT on behalf of the
Acquired Fund, shall prepare a statement of the earnings and profits of the
Acquired Fund for federal income tax purposes, and of any capital loss
carryovers and other items that the Acquiring Fund will succeed to and take
into account as a result of Section 381 of the Code. Such statement will be
certified by the principal accounting officer of the Acquired Fund.
6. Conditions Precedent to Obligations of MIT on Behalf of the Acquired Fund
The obligations of MIT on behalf the Acquired Fund with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) Approval by the Acquired Fund's Shareholders. This Plan and the
transactions contemplated by the Reorganization shall have been approved by
the requisite vote of the shares of the Acquired Fund entitled to vote on
the matter ("Acquired Fund Shareholder Approval").
(b) Covenants, Warranties and Representations. JHVST shall have complied
with each of its covenants contained herein, each of the representations and
warranties contained herein shall be true in all material respects as of the
Effective Time of the Reorganization (except as otherwise contemplated
herein), and there shall have been no material adverse change (as described
in Section 2(i)) in the financial condition, results of operations,
business, properties or assets of the Acquiring Fund since December 31, 2003.
(c) JHVST on behalf of the Acquiring Fund shall have delivered to MIT on
behalf of the Acquired Fund a certificate executed in its name by JHVST's
principal accounting officer, in form and substance satisfactory to MIT on
behalf of the Acquired Fund and dated as of the Exchange Date, to the effect
that the representations and warranties of JHVST on behalf of the Acquiring
Fund made in the Plan are true and correct at and as of the Exchange Date,
except as may be affected by the transactions contemplated by the Plan.
34
(d) Regulatory Approval. The Registration Statement shall have been
declared effective by the Commission and no stop orders under the Securities
Act pertaining thereto shall have been issued and all other approvals,
registrations, and exemptions under federal and state laws considered to be
necessary shall have been obtained (collectively, the "Regulatory
Approvals").
(e) Tax Opinion. MIT shall have received the opinion of Dykema Gossett
PLLC, dated on or before the Effective Time of the Reorganization, addressed
to and in form and substance satisfactory to MIT and JHVST, as to certain of
the federal income tax consequences under the Code of the Reorganization
insofar as it relates to the Acquired Fund and the Acquiring Fund. For
purposes of rendering its opinion, Dykema Gossett PLLC may rely exclusively
and without independent verification, as to factual matters, on the
statements made in the Plan, the Prospectus and Statement of Additional
Information, and on such other written representations as, respectively, the
President or Treasurer of MIT and the President or Treasurer of JHVST, will
have verified as of the Effective Time of the Reorganization. The opinion
will be to the effect that, based on the facts and assumptions stated
therein, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a)(1) of the
Code with respect to the Acquired Fund and the Acquiring Fund; (2) no gain
or loss will be recognized by the Acquired Fund or the Acquiring Fund upon
the transfer of all of the assets and liabilities, if any, of the Acquired
Fund to the Acquiring Fund solely in exchange for shares of the Acquiring
Fund; (3) no gain or loss will be recognized by shareholders of the Acquired
Fund upon the exchange of such Fund's shares solely for shares of the
corresponding Acquiring Fund; (4) the holding period and tax basis of the
shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the Reorganization will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the
shareholder (provided the shares of the Acquired Fund were held as a capital
asset on the date of the Reorganization) immediately prior to the
Reorganization; and (5) the holding period and tax basis of the assets of
the Acquired Fund acquired by the Acquiring Fund will be the same as the
holding period and tax basis of those assets to the Acquired Fund
immediately prior to the Reorganization.
7. Conditions Precedent to Obligations of JHVST on Behalf of the Acquiring Fund
The obligations of JHVST on behalf of the Acquiring Fund with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) Approval by the Acquired Fund's Shareholders. The Acquired Fund
Shareholder Approval shall have been obtained.
(b) Covenants, Warranties and Representations. MIT shall have complied
with each of its covenants contained herein, each of the representations and
warranties contained herein shall be true in all material respects as of the
Effective Time of the Reorganization (except as otherwise contemplated
herein), and there shall have been no material adverse change (as described
in Section 3(h) in the financial condition, results of operations, business,
properties or assets of the Acquired Fund since December 31, 2003.
(c) MIT on behalf of the Acquired Fund shall have delivered to JHVST on
behalf of the Acquiring Fund a certificate executed in its name by MIT's
principal accounting officer, in form and substance satisfactory to JHVST on
behalf of the Acquiring Fund and dated as of the Exchange Date, to the
effect that the representations and warranties of MIT on behalf of the
Acquired Fund made in the Plan are true and correct at and as of the
Exchange Date, except as may be affected by the transactions contemplated by
the Plan.
(d) Portfolio Securities. All securities to be acquired by the Acquiring
Fund in the Reorganization shall have been approved for acquisition by the
investment adviser (or, at the discretion of such investment adviser, by the
subadviser) for the Acquiring Fund as consistent with its investment
policies.
(e) Regulatory Approval. The Regulatory Approvals shall have been
obtained.
(e) Distribution of Income and Gains. MIT on behalf of the Acquired Fund
shall have distributed to the shareholders of the Acquired Fund, in a
distribution or distributions qualifying for the deduction for
35
dividends paid under Section 561 of the Code, all of its investment company
taxable income (without regard to the deductions for dividends paid) as
defined in Section 852(b)(2) of the Code (determined without regard to
Section 852(b)(2)(D) of the Code) for its taxable year ending on the
Exchange Date, all of the excess of (i) its interest income excludable from
gross income under Section 103(a) of the Code over (ii) its deductions
disallowed under Sections 265 and 171(a)(2) of the Code for its taxable year
ending on the Exchange Date, and all of its net capital gain as such term is
used in Section 852(b)(3) of the Code, after reduction by any capital loss
carryforward, for its taxable year ending on the Exchange Date.
(f) Tax Opinion. JHVST shall have received the opinion of Dykema Gossett
PLLC, dated on or before the Effective Time of the Reorganization, addressed
to and in form and substance satisfactory to MIT and JHVST, as to certain of
the federal income tax consequences under the Code of the Reorganization
insofar as it relates to the Acquired Fund and the Acquiring Fund. For
purposes of rendering its opinion, Dykema Gossett PLLC may rely exclusively
and without independent verification, as to factual matters, on the
statements made in the Plan, the Prospectus and Statement of Additional
Information, and on such other written representations as, respectively, the
President or Treasurer of MIT and the President or Treasurer of JHVST, will
have verified as of the Effective Time of the Reorganization. The opinion
will be to the effect that, based on the facts and assumptions stated
therein, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a)(1) of the
Code with respect to the Acquired Fund and the Acquiring Fund; (2) no gain
or loss will be recognized by the Acquired Fund or the Acquiring Fund upon
the transfer of all of the assets and liabilities, if any, of the Acquired
Fund to the Acquiring Fund solely in exchange for shares of the Acquiring
Fund; (3) no gain or loss will be recognized by shareholders of the Acquired
Fund upon the exchange of such Fund's shares solely for shares of the
corresponding Acquiring Fund; (4) the holding period and tax basis of the
shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the Reorganization will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the
shareholder (provided the shares of the Acquired Fund were held as a capital
asset on the date of the Reorganization) immediately prior to the
Reorganization; and (5) the holding period and tax basis of the assets of
the Acquired Fund acquired by the Acquiring Fund will be the same as the
holding period and tax basis of those assets to the Acquired Fund
immediately prior to the Reorganization.
8. Amendments; Terminations; No Survival of Covenants, Warranties and
Representations
(a) Amendments. MIT and JHVST may, by an instrument in writing
authorized by their respective Boards of Trustees, amend this Plan at any
time before or after approval hereof by the shareholders of the Acquired
Fund, but after such approval, no amendment shall be made which
substantially changes the terms hereof.
(b) Waivers. At any time prior to the Effective Time of the
Reorganization, each of MIT, on behalf of the Acquired Fund, and JHVST, on
behalf of the Acquiring Fund, may by written instrument signed by it (i)
waive any inaccuracies in the representations and warranties made to it and
such Fund contained herein and (ii) waive compliance with any of the
covenants or conditions made for its benefit and the benefit of such Fund
contained herein, except that conditions set forth in Sections 6(c) and 7(d)
may not be waived.
(c) Termination. This Plan may be terminated by the mutual agreement of
MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund
at any time prior to the Effective Time of the Reorganization. In addition,
either party may at its option, at any time prior to the Effective Time of
the Reorganization, whether before or after approval of this Plan by the
shareholders of the Acquired Fund, without liability on the part of any
party hereto, its Trustees, officers or shareholders, terminate this Plan:
(i) because of a breach by the other of any material representation,
warranty, covenant or agreement contained herein or to be performed
prior to the Effective Time of the Reorganization;
(ii) because of a material condition herein expressed to be precedent
to the obligations of the terminating party which has not been fulfilled
and has not been waived by the terminating party;
36
(iii) by resolution of the Board of Trustees of MIT if it should
determine in good faith that proceeding with this Plan is not in the
best interests of the Acquired Fund, its shareholders and contract
owners whose contracts are funded by shares of the Acquired Fund; or
(iv) by resolution of the Board of Trustees of JHVST if it should
determine in good faith that proceeding with this Plan is not in the
best interests of the Acquiring Fund, its shareholders and contract
owners whose contracts are funded by shares of the Acquiring Fund.
(d) Unless MIT on behalf of the Acquired Fund and JHVST on behalf of the
Acquiring Fund shall otherwise determine by written instrument, this Plan
shall terminate without liability as of the close of business on September
1, 2004 if the Effective Time of the Reorganization is not on or prior to
such date.
(e) Survival. No representations, warranties or covenants in or pursuant
to this Plan, except for the provisions of Section 5(f) and Section 9 of
this Plan, shall survive the Reorganization.
9. Expenses
The expenses of the Reorganization will be borne by the Acquired Fund and
the Acquiring Fund, with each Fund bearing one-half of the total expenses. Such
expenses include, without limitation, (i) expenses incurred in connection with
the entering into and the carrying out of the provisions of this Plan; (ii)
expenses associated with the preparation and filing of the Registration
Statement (other than any registration fees payable to the Commission in
respect of the registration of the Acquiring Fund Shares registered thereby,
which shall be payable by the Acquiring Fund); (iii) fees and expenses of
preparing and filing such forms as are necessary under any applicable state
securities laws in connection with the Reorganization; (iv) postage; (v)
printing; (vi) accounting fees; (vii) legal fees and (viii) solicitation costs
relating to the Reorganization.
10. Reliance
All covenants and agreements made under this Plan shall be deemed to have
been material and relied upon by MIT on behalf of the Acquired Fund and JHVST
on behalf of the Acquiring Fund notwithstanding any investigation made by such
party or on its behalf.
11. Headings; Counterparts; Governing Law; Assignment
(a) The section and paragraph headings contained in this Plan are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
(b) This Plan may be executed in any number of counterparts, each of
which shall be deemed an original.
(c) This Plan shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
(d) This Plan shall bind and inure to the benefit of MIT, the Acquired
Fund, JHVST and the Acquiring Fund and their respective successors and
assigns, but no assignment or transfer hereof or of any rights or
obligations hereunder shall be made by either party without the written
consent of the other party. Nothing herein expressed or implied is intended
or shall be construed to confer upon or give any person, firm or
corporation, other than the parties hereto and their respective successors
and assigns, any rights or remedies under or by reason of this Plan.
(e) All persons dealing with MIT or JHVST must look solely to the
property of MIT or JHVST, respectively, for the enforcement of any claims
against MIT or JHVST, as none of the Trustees, officers, agents or
shareholders of MIT or JHVST assumes any personal liability for obligations
entered into on behalf of MIT or JHVST, respectively. No series of MIT or
JHVST shall be liable for claims against, respectively, any other series of
MIT or JHVST.
37
IN WITNESS WHEREOF, the undersigned have executed this Plan as of the date
first above written.
MANUFACTURERS INVESTMENT TRUST on
behalf of the Acquired Fund
BY: /s/ James D. Gallagher
-----------------------------
Name: James D. Gallagher
Title: President
JOHN HANCOCK VARIABLE SERIES TRUST
I on behalf of the Acquiring Fund
BY: /s/ Michele G. Van Leer
-----------------------------
Name: Michele G. Van Leer
Title: Chairman and Chief Executive
Officer
38
APPENDIX A
THE ACQUIRED FUND:
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The following discussion sets forth information regarding the performance of
the Acquired Fund for the period ended December 31, 2003. There are several
ways to evaluate a fund's historical performance. One can look at the total
percentage change in value, the average annual percentage change or the growth
of a hypothetical $10,000 investment. With respect to all performance
information presented, it is important to understand that past performance does
not guarantee future results. return and principal fluctuate, and shares, when
redeemed, may be worth more or less than their original cost.
Performance Table. The following performance table for the Acquired Fund
shows two types of total return information: Cumulative and Average Annual
Total Returns. A Cumulative Total Return is an expression of a fund's total
change in share value in percentage terms over a set period of time--one, five
and ten years (or since the fund's inception if less than the applicable
period). An Average Annual Total Return takes the fund's cumulative total
return for a time period greater than one year and shows what would have
happened if the fund had performed at a constant rate each year. The table
shows all cumulative and average annual total returns, net of fees and expenses
of MIT, but do not reflect the insurance (separate account) expenses (including
a possible contingent deferred sales charge) of the variable annuity and
variable life products that invest in MIT. If these were included, performance
would be lower.
Graph--Change in value of $10,000 investment and comparative indices. The
following performance graph for the Acquired Fund shows the change in value of
a $10,000 investment over the life of the Fund. The Fund's performance is
compared with the performance of one or more broad-based securities indices as
a "benchmark." All performance information includes the reinvestment of
dividends and capital gain distributions, as well as the deduction of ongoing
management fees and the Fund's operating expenses. The benchmark used for
comparison is unmanaged and includes reinvestment of dividends and capital
gains distributions, if any, but does not reflect any fees or expenses.
Portfolio Manager's commentary. Following the performance table and graph
for the Acquired Fund is a commentary by the portfolio manager regarding the
Fund's performance during the period ended December 31, 2003. The views
expressed are those of the portfolio manager as of that date and are subject to
change based on market and other conditions. Information about the Fund's
holdings, asset allocation or country diversification is historical and is no
indication of future portfolio composition, which will vary.
"MSCI" and "EAFE" are trademarks of Morgan Stanley & Co. Incorporated.
The following information regarding the Acquired Fund was included in MIT's
Annual Report to Shareholders for 2003.
International Index Trust ("Acquired Fund")
A-1
International Index Trust
("ACQUIRED FUND")
Investment Objective To achieve the approximate aggregate total return of a foreign equity
& Policies: market index by attempting to track the performance of the Morgan
Stanley Europe Australasia Far East Free Index (the MSCI EAFE Index).
The portfolio invests at least 80% of its net assets in (a) the
common stocks that are included in the MSCI EAFE Index and (b)
securities (which may or may not be included in the MSCI EAFE Index)
that MFC believes as a group will behave in a manner similar to the
index.
Subadviser: MFC Global Investment Management (U.S.A.) Limited
Portfolio Managers: Carson Jen and Narayan Ramani
Inception Date: May 1, 2000
Change in Value of $10,000 Investment and Comparative Indices
[CHART]
International Index Trust Series I MSCI EAFE Index
---------------------------------- ---------------
Apr. 2000 10,000 10,000
9,784 9,715
Jun. 2000 10,112 10,097
9,704 9,675
9,776 9,761
Sep. 2000 9,320 9,288
9,080 9,071
8,712 8,732
Dec. 2000 9,016 9,045
9,000 9,040
8,318 8,363
Mar. 2001 7,726 7,810
8,294 8,357
7,994 8,069
Jun. 2001 7,686 7,742
7,531 7,602
7,345 7,411
Sep. 2001 6,598 6,662
6,752 6,832
6,963 7,085
Dec. 2001 6,996 7,127
6,610 6,749
6,667 6,796
Mar. 2002 7,037 7,167
7,053 7,219
7,136 7,317
Jun. 2002 6,848 7,029
6,175 6,335
6,142 6,322
Sep. 2002 5,477 5,645
5,756 5,949
6,011 6,220
Dec. 2002 5,796 6,011
5,546 5,760
5,396 5,629
Mar. 2003 5,280 5,522
5,780 6,070
6,097 6,443
Jun. 2003 6,238 6,603
6,355 6,764
6,497 6,928
Sep. 2003 6,671 7,143
7,038 7,589
7,180 7,759
Dec. 2003 7,662 8,365
Performance Table**
Average Annual Total Return Cumulative Total Return
Since Since
Periods Ended December 31, 2003 1 Year Inception Inception
MSCI EAFE Index 39.17% -4.64% -16.35%
International Index Trust Series I 32.18% -7.00% -23.38%
International Index Trust Series II+++ 32.12% 7.25% 14.48%
International Index Trust Series III*** 15.57%
+++Series II inception date: January 28, 2002
**Performance does not reflect any insurance related charges. If these charges
were reflected, performance would be lower. Past performance does not
predict future results. Total return would have been lower had operating
expenses not been reduced.
***Series III inception date: September 5, 2003.
Portfolio Manager's Commentary
Performance: For the year 2003, the International Index Trust Series I returned
+32.18%, underperforming the +39.17% return of the MSCI EAFE Index.
Environment: All of the MSCI EAFE Index sectors were in the positive territory
for 2003. Information Technology was the best performer, followed by
Industrials, Materials and Financials, all of which returned high double-digit
gains. Energy, Consumer Staples and Utilities were the worst performing sectors.
Likewise, most countries in the Index had gains for 2003. Greece was the best
performing country, gaining about 67% in value. Sweden, Spain, Germany, New
Zealand and Denmark also had high double-digit gains. Finland was the worst
performer, followed by the Netherlands.
MSCI rebalanced its EAFE Index in May and again in November. The rebalancing
resulted in no significant country or sector weight changes.
Outlook: In 2003, the European Central Bank cut its benchmark interest rate
from 2.75% to 2.0% in June. Similarly, the Bank of England cut its rate from
4.0% to 3.5% in July. A corporate profit recovery is underway in Japan, driven
in part through sales growth but largely due to the effects of restructuring.
A-2
APPENDIX B
THE ACQUIRING FUND:
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
During 2003, the subadviser to the Acquiring Fund was Independence
Investment LLC. SSgA Fund Management, Inc. ("SSgA") succeeded Independent
Investment LLC as subadviser effective March 29, 2004.
The following information regarding the Acquiring Fund appeared in the
Acquiring Fund's Annual Report to Shareholders for 2003.
B-1
Inception: May 2, 1988
INTERNATIONAL EQUITY INDEX FUND
Portfolio Manager:
INDEPENDENCE INVESTMENT LLC
D. Nolan
.. In 2003, the Fund returned 41.99%, underperforming its customized benchmark.
.. On November 1st, the Fund's benchmark was changed from a primarily GDP
weighted benchmark to a market capitalization weighted benchmark (the MSCI
All Country World Free ex-US Index). This index provides broad exposure to
both developed and emerging market equities.
.. The Fund's investment objective is to track the long-term performance of
broad-based equity indices of foreign companies in developed and emerging
markets as measured by the MSCI All Country World Free ex-US Index.
.. The manager seeks to track the performance of its benchmark by investing in
a representative sample of issues selected through proprietary quantitative
techniques. Issues are selected to best match the risk characteristics of
the index, including country and sector exposures.
[CHART]
12/31/1993 10,000.00 10,000.00
1/31/1994 13,320.64 14,421.38
2/28/1994 13,165.42 14,383.89
3/31/1994 12,478.86 13,766.82
4/29/1994 12,713.92 14,354.66
5/31/1994 12,862.54 14,275.71
6/30/1994 12,530.95 14,481.28
7/29/1994 12,819.11 14,623.20
8/31/1994 13,412.54 14,972.69
9/30/1994 13,133.71 14,504.05
10/31/1994 13,396.96 14,989.93
11/30/1994 12,520.14 14,273.41
12/30/1994 12,401.68 14,366.19
1/31/1995 11,708.88 13,817.40
2/28/1995 11,908.32 13,781.48
3/31/1995 12,340.79 14,645.58
4/28/1995 12,712.55 15,200.64
5/31/1995 12,972.79 15,022.80
6/30/1995 12,847.88 14,762.90
7/31/1995 13,561.39 15,685.58
8/31/1995 13,175.93 15,091.10
9/29/1995 13,362.66 15,389.90
10/31/1995 13,130.99 14,980.53
11/30/1995 13,191.91 15,401.48
12/29/1995 13,395.71 16,025.24
1/31/1996 13,606.81 16,094.15
2/29/1996 13,761.02 16,152.09
3/29/1996 13,892.48 16,499.36
4/30/1996 14,407.05 16,982.79
5/31/1996 14,260.73 16,673.71
6/28/1996 14,292.36 16,772.08
7/31/1996 13,686.10 16,285.69
8/30/1996 13,793.59 16,324.78
9/30/1996 14,051.46 16,762.28
10/31/1996 13,964.56 16,594.66
11/29/1996 14,589.37 17,258.44
12/31/1996 14,626.33 17,040.99
1/31/1997 14,373.63 16,447.96
2/28/1997 14,427.57 16,721.00
3/31/1997 14,159.30 16,786.21
4/30/1997 14,260.03 16,878.53
5/30/1997 15,461.21 17,980.70
6/30/1997 16,261.79 18,976.83
7/31/1997 16,773.41 19,288.05
8/29/1997 14,945.68 17,851.09
9/30/1997 16,026.08 18,854.32
10/31/1997 13,854.46 17,410.08
11/28/1997 13,849.83 17,235.98
12/31/1997 13,891.23 17,391.11
1/31/1998 13,901.32 18,191.10
2/27/1998 14,968.54 19,362.60
3/31/1998 15,575.41 19,962.84
4/30/1998 15,991.94 20,124.54
5/29/1998 16,086.96 20,414.34
6/30/1998 16,281.99 20,610.31
7/31/1998 16,414.69 20,884.43
8/31/1998 14,326.78 18,138.13
9/30/1998 13,881.02 17,637.52
10/30/1998 15,383.40 19,605.86
11/30/1998 16,129.04 20,627.33
12/31/1998 16,783.26 21,462.74
1/29/1999 16,820.14 21,490.64
2/26/1999 16,250.77 20,820.13
3/31/1999 17,103.05 21,921.51
4/30/1999 17,757.57 22,807.14
5/28/1999 16,897.58 21,616.61
6/30/1999 17,768.81 22,708.25
7/30/1999 18,185.56 23,273.68
8/31/1999 18,351.79 23,436.60
9/30/1999 18,481.01 23,724.87
10/29/1999 19,100.24 24,514.91
11/30/1999 19,943.20 25,529.83
12/31/1999 21,964.24 28,090.47
1/31/2000 20,675.58 26,714.03
2/29/2000 21,380.17 27,641.01
3/31/2000 21,956.62 28,398.37
4/28/2000 20,545.20 26,566.68
5/31/2000 20,148.57 25,929.08
6/30/2000 20,856.49 27,041.44
7/31/2000 19,865.47 25,683.96
8/31/2000 20,057.16 25,956.21
9/29/2000 19,086.01 24,648.01
10/31/2000 18,456.28 23,839.56
11/30/2000 17,652.71 22,776.31
12/31/2000 18,138.35 23,336.61
1/31/2001 18,503.20 23,852.35
2/28/2001 17,218.76 22,230.39
3/30/2001 16,015.75 20,729.84
4/30/2001 17,113.36 22,068.99
5/31/2001 16,571.05 21,395.88
6/30/2001 16,002.68 20,636.33
7/31/2001 15,594.05 20,097.72
8/31/2001 15,226.40 19,599.30
9/28/2001 13,458.20 17,345.38
10/31/2001 13,786.89 17,815.44
11/30/2001 14,416.76 18,597.54
12/31/2001 14,456.93 18,664.49
1/31/2002 13,771.57 17,796.59
2/28/2002 13,950.25 17,983.45
3/29/2002 14,793.86 18,994.12
4/30/2002 14,910.47 19,233.45
5/31/2002 15,106.58 19,562.34
6/28/2002 14,514.59 18,773.98
7/31/2002 13,088.04 16,894.70
8/31/2002 13,076.08 16,909.91
9/28/2002 11,585.10 14,970.34
10/31/2002 12,027.79 15,627.54
11/30/2002 12,663.02 16,460.49
12/31/2002 12,261.97 15,937.04
1/31/2003 8,991.13 11,630.86
2/28/2003 8,818.76 11,404.06
3/29/2003 8,574.05 11,074.48
4/30/2003 9,388.30 12,148.71
5/31/2003 9,962.63 12,948.09
6/28/2003 10,329.08 13,427.17
7/31/2003 10,636.48 13,872.95
8/31/2003 11,017.53 14,357.12
9/28/2003 11,316.09 14,767.73
10/31/2003 12,005.35 15,758.65
11/30/2003 12,268.41 16,102.18
12/31/2003 13,181.59 17,330.78
MORNINGSTAR CATEGORY+:
.. Foreign Large Blend
MORNINGSTAR RISK+:
.. Average (VL/VUL)
.. Average (VA)
MORNINGSTAR RATING+:
.. (VL/VUL)
.. (VA)
TOP TEN HOLDINGS (as of December 31, 2003)
% of
Assets
BP Amoco plc 2.1%
Vodafone AirTouch plc 1.9%
HSBC Holdings plc 1.9%
GlaxoSmithKline plc 1.5%
Total Fina SA 1.5%
Royal Dutch Petroleum Co. 1.4%
Novartis AG 1.2%
Nestle SA 1.1%
Toyota Motor Corp. 1.0%
Nokia Oyj 1.0%
AVERAGE ANNUAL TOTAL RETURNS*
International International Equity
Equity Index Fund Index Benchmark(1)
----------------- --------------------
1 Year 41.99% 44.57%
3 Years -1.36 -0.43
5 Years 0.74 1.43
10 Years 2.80 5.65
DIVERSIFICATION BY REGION AND COUNTRY(3)
(as of December 31, 2003)
% of % of
Assets Assets
Europe (excluding U.K.) 38.4% Emerging Markets 6.4%
United Kingdom (U.K.) 22.3% Canada 5.0%
Japan 18.5% United States 2.7%
Pacific Basin (excluding Japan) 6.8%
DIVERSIFICATION BY REGION(4)
Developed Markets 91%
Emerging Markets 9%
(1)The International Equity Benchmark represents the MSCI EAFE from May 1988 to
April 1998 and then MSCI EAFE GDP weighted from May 1998 to June 1999 and
then 90% MSCI EAFE GDP/10% MSCI Emerging Markets Free from July 1999 to
October 2003 and now the MSCI All Country World Free excluding U.S. from
November 2003 to present.
* Total returns are for the period ended December 31, 2003. Returns represent
past performance, assume reinvestment of all distributions, and are not
indicative of future performance. Investment returns and principal value of
fund shares will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost. The performance of the fund on this page is
reported net of Trust level charges (i.e. investment management fees and
operating expenses). It does not reflect expense and charges of the
applicable separate accounts and variable products, all of which vary to a
considerable extent and are described in your product prospectus. There are
special risks associated with international investing, including currency
fluctuations, political and economic instability, foreign taxation and
different accounting standards, as outlined in the current prospectus.
Performance would be lower if expenses and charges of the separate accounts
and products were reflected.
+ Source: MorningStar, Inc. Data as of 12/31/03. VL represents Variable Life
subaccounts, VUL represents Variable Universal Life subaccounts and VA
represents Variable Annuity subaccounts Hancock. VL/VUL subaccounts were
rated against 367 VL/VUL subaccounts and 570 VA subaccounts in the
Morningstar Foreign Large Blend category. This represents the Morningstar 3
year rating.
(3)Calculations based upon country in which security is traded (listed).
(4)Calculations based upon country in which security is domiciled.
THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.)]
[THE MANUFACTURERS LIFE INSURANCE COMPANY OF NEW YORK]
VOTING INSTRUCTIONS FORM
Voting pursuant to these instructions will be as specified. If no
specification is made as to an item, voting will be for such item. A voting
instruction form is provided for the International Index Trust in which your
contract values were invested as of April 27, 2004. Please sign, date and return
the voting instruction form in the enclosed postage-paid envelope.
Voting instructions must be received by June 17, 2004 to be voted at the
Meeting to be held on June 18, 2004.
International Index Trust
These voting instructions are solicited by [The Manufacturers Life
Insurance Company (U.S.A.)] [The Manufacturers Life Insurance Company of New
York] in connection with a solicitation of proxies by the Board of Trustees of
Manufacturers Investment Trust.
The undersigned hereby instructs [The Manufacturers Life Insurance Company
(U.S.A.)] [The Manufacturers Life Insurance Company of New York] to vote the
shares of Manufacturers Investment Trust (the "Trust") attributable to his or
her variable annuity or variable life contract at the Special Meeting of
Shareholders to be held at 73 Tremont Street, Boston, Massachusetts 02108 at
10:00 a.m., Boston time, June 18, 2004, and any adjournments thereof, as
indicated below.
Date: _____________, 2004
Please sign in box below:
If a contract is held jointly, each contract owner should sign. If only one
signs, his or her signature will be binding. If the contract owner is a
corporation, the President or a Vice President should sign in his or her own
name, indicating title. If the contract owner is a partnership, a partner should
sign in his or her own name, indicating that he or she is a "Partner." If the
contract owner is a trust, the trustee should sign in his or her own name,
indicating that he or she is a "Trustee."
- -------------------------------------------
Signature(s), Title(s), if applicable
Indicate your vote below by filling in the appropriate boxes
using blue or black ink or a number 2 pencil.
Please do not use fine point pens.
- ------------------------------------------------
This voting instructions form, if properly executed, will be voted in the
manner directed by the contract owner. If no direction is made, this voting
instructions form will be voted "For" all proposals. Please refer to the Proxy
Statement/Prospectus for a discussion of the proposals.
For Against Abstain
1. Approval of Agreement and Plan of
Reorganization. [_] [_] [_]
2. To transact such other business as may
properly come before the Meeting.
- ------------------------------------------------
Please mark your Voting Instructions Form, date and sign it on the reverse
side, and return it promptly in the accompanying envelope which requires no
postage if mailed in the United States.
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
JOHN HANCOCK
VARIABLE SERIES TRUST I
197 Clarendon Street
Boston, Massachusetts 02117
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 18, 2004
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Proxy Statement/Prospectus dated May 18, 2004
for the Special Meeting of Shareholders of the International Index Trust, a
separate series of the Manufacturers Investment Trust ("MIT"), to be held on
June 18, 2004. The Proxy Statement/Prospectus describes the proposed
reorganization providing for the transfer of all of the assets and liabilities
of the MIT International Index Trust to, and in exchange for Series I and Series
II shares of, the International Equity Index Fund, a separate series of the John
Hancock Variable Series Trust I ("JHVST"). A copy of the Proxy
Statement/Prospectus may be obtained without charge by writing to JHVST at the
address above or by calling toll free (800) 576-2227.
This Statement of Additional Information incorporates by reference the
following documents (or designated portions thereof) that accompany it and have
been filed with the Securities and Exchange Commission (SEC):
(1) The financial statements of the International Equity Index Fund of JHVST
appearing in its Annual Report to Shareholders for the year ended December 31,
2003, and the report of Ernst & Young LLP, independent auditors, appearing
therein; and
(2) The financial statements of MIT appearing in its Annual Report to
Shareholders for the year ended December 31, 2003, and the report of
PricewaterhouseCoopers, LLP, independent accountants, appearing therein.
TABLE OF CONTENTS
Statement of Additional Information of JHVST, dated May 1, 2004.
MIT International Index Trust and JHVST International Equity Index Fund Pro
Forma Financial Statements
Pro Forma Combining Statement of Assets and
Liabilities -- December 31, 2003 (Unaudited)
Pro Forma Combining Statement of Operations -- For the
Year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio
Investments -- December 31, 2003 (Unaudited)
Notes to Pro Forma Financial Statements (Unaudited)
JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2004
This Statement of Additional Information (sometimes referred to herein as
the "SAI") 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, 2004. 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 thirty 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.
TABLE OF CONTENTS
Page in this
Statement of
Additional
Information
------------
A. What Is the Trust?..................................................4
B. The Trust's Business History........................................4
C. The Funds' Investment Activities and Their Risks....................5
1. Investing in Money Market Instruments..........................5
2. Investing in Other Fixed Income Obligations....................6
3. Investing in Equity Securities.................................7
4. Investing in Real Estate Securities............................8
5. Investing in Foreign Securities................................9
6. Techniques and Instruments for Managing Currency
Exposure......................................................10
7. Reallocating a Fund's Assets Among Asset Classes..............12
8. Adopting a Temporary Defensive Strategy.......................12
9. Investing With an Index-Based Objective.......................12
10. Investing on a Non-Diversified Basis..........................14
11. Using Options.................................................14
12. Using Options on Securities...................................16
13. Using Financial Futures Contracts, Options on Such
Contracts and Options on Stock Indexes........................17
14. Using "Swaps," "Caps," "Floors," and "Collars"................20
15. Investing In Other Investment Companies.......................22
16. Purchasing "When Issued" Securities and Forward
Commitments...................................................23
17. Short-Term Trading............................................23
18. Entering Into Repurchase Agreements...........................23
19. Participating in Joint Trading Accounts.......................24
20. Lending of Fund Securities....................................24
21. Using Reverse Repurchase Agreements and Mortgage
"Dollar Rolls"................................................24
22. Investing in Rule 144A Securities, Section 4(2)
Commercial Paper and Illiquid Securities......................25
23. Investing in Preferred Stock, Convertible Securities
and Warrants..................................................25
24. Investing in Initial Public Offerings ("Ipos")................25
D. The Funds' Fundamental Investment Restrictions.....................25
E. Board of Trustees and Officers of the Trust........................27
F. Investment Advisory Arrangements...................................30
1. The Trust's Investment Advisory Arrangements With John
Hancock.......................................................30
2. The Trust's Arrangements With Subadvisers.....................32
3. Dollar Amounts of Advisory Fees, Subadvisory Fees, and
Expense Reimbursements........................................36
4. Basis of Trustee Approval of Continuance of Advisory
Arrangements..................................................37
G. Arrangements With Other Service Providers..........................42
1. Underwriting and Indemnity Agreement..........................42
2. Custody of the Trust's Assets.................................42
3. Subadministration Agreement With State Street Bank............42
4. Independent Auditors..........................................42
5. Distribution of Series I and Series II shares.................43
H. Portfolio Transactions and Brokerage Allocation....................44
I. Codes of Ethics....................................................48
J. Features of the Trust's Shares.....................................48
2
K. Shareholder Meetings and Voting Rights.............................49
L. Sales and Redemptions of Fund Shares...............................50
M. Computing the Funds' Net Asset Value...............................51
N. Taxes..............................................................52
O. Information About Fund Performance.................................52
P. Legal Matters......................................................53
Q. Reports to Contractholders.........................................53
Appendix A - Corporate Bond Ratings.....................................54
Appendix B - Proxy Voting Policies and Procedures.......................56
3
A. WHAT IS THE TRUST?
John Hancock Variable Series Trust I (the "Trust"), and each of the Funds
of the Trust, is an open-end management investment company. With the exception
of the Real Estate Equity, Health Sciences, Financial Services 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").
NAV 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 H, 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; and John Hancock Variable Life Account UV to support variable life
insurance policies issued by John Hancock. It is anticipated that, in the
future, Trust shares may be sold to other separate investment accounts of
JHVLICO and John Hancock and to separate investment accounts of other insurance
companies (which may or may not be affiliated with John Hancock). Each of these
separate investment accounts is hereinafter referred to as a "John Hancock
Separate Account."
Because the John Hancock Separate Accounts currently own all of the Trust's
NAV shares, those Separate Accounts (or John Hancock and JHVLICO) may be deemed
to control the Trust. John Hancock and JHVLICO, in turn, are both directly or
indirectly controlled by John Hancock Financial Services, Inc., a
publicly-traded holding company. The Trust issues a separate series of NAV
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.
Series I and Series II shares of the Trust serve as the underlying
investment medium for sums invested in variable contracts issued by:
- The Manufacturers Life Insurance Company of New York ("Manulife
NewYork"), formerly First North American Life Assurance Company, a New York
stock life insurance company that is a wholly owned subsidiary of Manufacturers
USA. Manulife New York's corporate offices are located at 100 Summit Lake Drive,
Second Floor, Valhalla, New York 10595.
- The Manufacturers Life Insurance Company (U.S.A.) ("Manufacturers USA"),
a stock life insurance company organized under the laws of Pennsylvania and
redomesticiated under the laws of Michigan. Manufacturers USA is an indirect
wholly owned subsidiary of Manulife Financial Corporation and is located at 200
Bloor Street in Toronto, Canada, M4W 1E5.
Manulife New York and Manufacturers USA hold Series I or Series II shares
attributable to variable contracts in their respective separate accounts.
Series I and Series II shares of the Trust may be used for other purposes
in the future, such as funding annuity contracts issued by other insurance
companies.
NAV, Series I and Series II shares are not offered directly to, and may not
be purchased directly by, members of the public.
B. 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:
4
Year of
Current Fund Name Prior Name(s) Change
- -------------------------- --------------------------- -------
Active Bond Sovereign Bond 2000
Bond 1996
Earnings Growth Multi Cap Growth 2003
Mid Cap Growth 2002
Fundamental Growth Fundamental Mid Cap Growth 2000
Fundamental Value Large/Mid Cap Value 2002
Fundamental Value B Large Cap Value CORE/SM/ 2004
Global Bond Strategic Bond 1999
Growth & Income Stock 1996
International Equity Index International Equities 1998
International 1995
Global 1994
Large Cap Growth Select Stock 1996
Aggressive Stock 1994
Large Cap Growth B Large Cap Aggressive Growth 2004
Managed Total Return 1994
Mid Cap Growth Small/Mid Cap Growth 2004
Diversified Mid Cap Growth 1999
Special Opportunities 1998
Mid Cap Value B Small/Mid Cap CORE/SM/ 2004
Overseas Equity Global Balanced 2003
International Balanced 2000
Overseas Equity B International Opportunities 2004
Overseas Equity C Emerging Markets Equity 2004
Short-Term Bond Short-Term U.S. Government 1998
Small Cap Emerging Growth Small Cap Equity 2003
Small Cap Value 2000
Small Cap Value Small/Mid Cap Value 2001
C. THE FUNDS' INVESTMENT ACTIVITIES AND THEIR 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
5
instruments generally do not carry significant risks of loss, but do have some
credit and interest rate risk. 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
a. Overview: The following Funds invest primarily in non-money market fixed
income (i.e., "debt") securities: the Short-Term Bond, Bond Index, Total Return
Bond, Active Bond, High Yield Bond and Global Bond Funds. The Managed Fund can
vary its holdings of these securities within a broad range and the Financial
Industries Fund may have a modest exposure in these securities from time to
time. The other Funds may also invest in non-money market debt to a limited
extent from time to time.
Various types of risk associated with these securities are discussed in the
balance of this Section 2.
b. 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.
c. 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 debt
securities, including money market securities, may have some exposure to credit
risk.
Even some U.S. Government obligations have a degree of credit risk. "U.S.
Government obligations" are bills, certificates of indebtedness, notes and bonds
issued or guaranteed as to principal or interest by the United States or by
agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government and established under the authority
granted by Congress. Some obligations of U.S. Government 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.
d. 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 interest rates or 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 high 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.
6
Past experience may not provide an accurate indication of future
performance of high yield securities, especially during periods of economic
recession. 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, the ability of issuers of
lower-rated debt to service their payment obligations, meet projected goals, or
obtain additional financing may be impaired. In some cases, 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.
All Funds that invest in debt securities (other than the Money Market Fund)
may at times have some exposure to high yield securities. The High Yield Bond
Fund invests primarily in these securities. The only other Fund most likely to
invest a significant portion of its assets in high yield securities is the
Active Bond Fund. The Managed, Total Return Bond, Short-Term Bond and Global
Bond 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, but could end up holding high yield
securities if downgraded to below investment graded after already having been
purchased for the Fund.
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.
e. 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 securities, asset backed securities, other public bond debt securities
and 144A securities that a Fund might own are exposed to this risk. U.S.
Government securities typically 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 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 Managed,
Total Return Bond, Short-Term Bond, Bond Index, Active Bond, High Yield Bond and
Global Bond Funds.
f. 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, Total Return Bond, Short-Term Bond, Bond Index,
Active Bond, High Yield Bond and Global Bond Funds. However, all Funds that
invest in debt securities may at times have some exposure to this risk.
3. Investing in Equity Securities
a. Overview: All of the Funds intend to invest to some degree in common
stock or other equity securities, except for the Short-Term Bond, Bond Index,
and Money Market Funds. All Equity, Sector and International/Global Equity Funds
may invest in equity securities and are expected to make such securities their
primary investment. The Managed Fund invests a substantial portion of its assets
in equity securities, but also invests a substantial amount of its assets in
debt obligations. The Active Bond, Total Return Bond, Global Bond and High Yield
Bond Funds will invest in equity securities only to a limited extent and will
invest primarily in debt obligations.
General risks of investing in equity securities are discussed in the
balance of this Section 3.
b. 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 risk associated with equity
securities also tend 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
7
values may fluctuate in response to the activities of an individual company or
in response to general market, interest rate, and/or economic conditions.
c. Market capitalization risk: One 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 the 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 generally 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 relatively inexperienced managers. Investments in such companies can be
both more volatile and more speculative. These securities may have limited
marketability and are subject to more abrupt or erratic market movements than
securities of larger companies or the market in general.
The U.S. equity securities of the Equity Index, Fundamental Growth, Large
Cap Value, Large Cap Growth, Large Cap Growth B and Earnings Growth 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 U.S. equity securities of the Growth & Income, Fundamental Value,
Fundamental Value B and Managed 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 U.S. equity securities of the Mid Cap Value, Mid Cap Value B and Mid
Cap Growth Funds are generally expected to represent primarily mid cap issuers.
The Fund also may invest in the equity securities of companies that qualify as
small cap issuers and, to a lesser extent, in the equity securities of companies
that qualify as large cap issuers.
The U.S. equity securities of the Small Cap Emerging Growth, Small Cap
Growth and Small Cap Value Funds are generally expected to represent primarily
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 Real Estate Equity, Health Sciences and Financial Industries Funds have
broad latitude to invest in companies of any size, depending on the market
capitalization of the respective sectors covered by those Funds.
Three capitalization levels are currently used by the Trust for non-U.S.
equities: large, medium ("mid"), and small. The following capitalization ranges
are used by the International Equity Index Fund, Overseas Equity Fund, Overseas
Equity B Fund and Overseas Equity C Funds:
. Large cap: Companies having a capitalization greater than $5 billion
. Mid cap: Companies having a capitalization between $1 billion and $5
billion
. Small cap: Companies having a capitalization less than $1 billion
The non-U.S. equity securities of the International Equity Index, Overseas
Equity, Overseas Equity B and Overseas Equity C Funds are generally expected to
represent primarily non-U.S. companies that qualify as large cap issuers. These
Funds also may invest in the equity securities of non-U.S. companies that
qualify as mid and small cap issuers.
4. Investing in Real Estate Securities
a. Overview: 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.
8
In addition to the Real Estate Equity Fund, all of the other Funds 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 or interests in real estate.
b. 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
a. Overview: 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"), Global Depositary Receipts
("GDRs") or other U.S. dollar denominated securities representing underlying
shares of foreign securities. ADRs, EDRs, GDRs 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. GDRs are receipts issued in two or more markets by banks or
depositaries which evidence a similar ownership arrangement. Generally, ADRs are
designed for use in U.S. securities markets, EDRs for use in European securities
markets, and GDRs for use in multiple securities markets.
Investments in debt securities issued by foreign issuers may be made in
foreign-denominated debt instruments or in the form of U.S. dollar denominated
debt securities issued by foreign issuers and publicly traded in the United
States ("Yankees") or in Europe ("Eurobonds").
The International Equity Index Fund invests primarily in foreign
securities, including foreign-denominated securities. The Health Sciences,
Overseas Equity, Overseas Equity B, Overseas Equity C and Global Bond Funds
invest a significant portion of their assets in foreign securities, including
foreign-denominated securities. To a lesser extent, the Large Cap Value,
Earnings Growth, Mid Cap Value, Mid Cap Value B, Small Cap Emerging Growth,
Small Cap Growth, Real Estate Equity, Financial Industries, Managed, and High
Yield Bond Funds may also invest in foreign securities, and all of these Funds
excluding Earnings Growth may invest in foreign-denominated securities.
Funds investing in equity securities may also invest in ADRs and other U.S.
dollar denominated foreign securities. Funds investing in debt securities may
also invest in foreign debt securities denominated in U.S. dollars (i.e.,
Yankees and Eurobonds).
Risks of investing in foreign securities are discussed in the paragraphs
that follow:
b. 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 Section 6. below.
9
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.
c. 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.
d. 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.
e. 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.
f. 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 likely for
investments in emerging markets, or other underdeveloped or developing
countries.
6. Techniques and Instruments for Managing Currency Exposure
a. General considerations and risks: 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. In general, however, the more foreign securities a given
Fund invests in, the greater its currency management activities are likely to
be. The foreign currency management techniques and instruments discussed below
do not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. A Fund may use certain types of
these instruments in currency management strategies that expose that Fund 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 the Fund to greater risks of loss and
greater volatility than it otherwise would experience. 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.
b. Techniques for managing currency exposure: The Funds may employ one or
more of the following techniques for managing currency exposure:
(i) Transaction 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, a Fund may use one
or more of the instruments described in Section 6.c. below for transaction
hedging.
(ii) Portfolio hedging: A Fund may use one or more of the instruments
described below to reduce its 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 in, exposed to or traded in that currency. This
is called "portfolio hedging." A Fund generally will 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
10
of establishing the hedge) of securities held by that Fund which are denominated
in, exposed to or traded primarily in that particular foreign currency but may
do so for purposes of transactions involving "proxy" currency or "cross
hedging."
(iii) "Proxy" currency: For purposes of transaction hedging or portfolio
hedging, the Funds may use instruments 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.
(iv) Cross hedging: The Funds may use additional techniques when their
subadvisers believe that the currency of a particular country may suffer a
significant decline against the U.S. dollar or against another currency. In that
case, a Fund may use an instrument that, in effect, simultaneously establishes
for the Fund (1) a "short" position in an amount of foreign currency
approximating the value of some or all of that Fund's securities denominated in,
traded in, or exposed to such foreign currency and (2) a corresponding "long"
position in U.S. dollars or another currency. The "long" position might be 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. This is called "cross
hedging".
(v) Other: To otherwise adjust the currency exposure of their portfolios,
the Funds may also enter into contracts that, in effect, simultaneously
establish for the Fund (1) a "short" position in an amount of U.S. dollars, or
other appropriate currency, and (2) a corresponding "long" position in an amount
of foreign currency corresponding to the value of some of the Fund's securities.
c. Instruments for managing currency exposure: In furtherance of the
above-described techniques for managing currency exposure, the Funds may use one
or more of the following instruments:
(i) Forward exchange contracts (and related asset segregation
requirements): In a forward exchange contract, a Fund purchases or sells a
specific amount of foreign currency, at a price and time (which may be any fixed
number of days in the future) set in the contract. A Fund's obligation to
deliver an amount of a currency under a forward contract must at all times be
"covered" by the Fund's (a) owning at least that amount of investments
denominated or primarily traded in such currency that are not segregated to
support any other Fund obligation or (b) having a contractual right to acquire
that amount of such investments or such amount of currency at a price no greater
than the amount the Fund will receive on settlement of the forward contract; or,
alternatively, the relevant subadviser, subject to any oversight and any
directions given by John Hancock, will (c) cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that are
not segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit for that forward contract, at all times at least
equals the amount of the Fund's obligation on that forward contract; provided
that, as to any forward contract on any currency that settles on a "net" basis,
a Fund may, for hedging purposes of clause (c), consider its "obligation" to be
the net amount it owes under that contract that is not covered as provided in
clauses (a) and (b) of this sentence.
(ii) Options on currencies (and related asset segregation requirements): A
Fund may purchase and write put and call options on foreign currencies. 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 11. and
12. below with respect to put and call options on securities.
A Fund's obligation to deliver an amount of currency upon exercise of a
call option written by the Fund must at all times be "covered" by the Fund's (a)
owning at least that amount of investments denominated or primarily traded in
such currency that are not segregated to support any other Fund obligation or
(b) having a contractual right to acquire such investments or such amount of
currency at a price no greater than the amount the Fund will receive upon
exercise of the option; or the relevant subadviser, subject to any oversight and
any directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that are
not segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit with respect to that option, at all times at
least equals the value of the currency that the Fund is obligated to deliver
under the option and that is not covered as provided in clause (a) or (b) of
this sentence.
In connection with any currency put option written by a Fund, the relevant
subadviser, subject to any oversight and any directions given by John Hancock,
will cause the Fund's custodian to segregate (or will segregate by "earmarking"
on Fund records that the sub-adviser maintains) cash or other assets it
determines to be liquid that are not segregated to support any other obligation
of the Fund and that, together with any margin the Fund has on deposit with
respect to such option, at all times at least equals the amount the Fund is
obligated to pay upon exercise of the option.
11
(iii) Currency futures contracts (and options thereon): A Fund may use
currency futures contracts and options thereon to manage currency exposure. The
characteristics and risks of such futures and options transactions are similar
to those discussed in Sections 11, 12, and 13. 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
13.c.(ix) below.
(iv) Other derivative instruments: A Fund may use certain "swaps," "caps,"
"floors," and "collars" to manage currency exposure. The characteristics and
risks of such "derivative" transactions, as discussed in Section 14 below, are
generally also applicable when such instruments are used for currency management
purposes.
7. 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 Fund tends 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 Managed Fund.
8. 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. For example, the Earnings
Growth Fund reserves the right to invest without limitation in preferred stock
and investment-grade debt instruments for temporary, defensive purposes. 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 and normal level of assets, cash and cash equivalents. For most
"actively managed" funds, (i.e., Funds that do not invest with an index-based
objective), this level is 10% or less, except in abnormal market conditions,
when the level can be higher.
The Funds are limited only by their fundamental investment restrictions 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.
9. 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 "actively managed" Funds
that, during normal market conditions, maintain a higher level of cash or cash
equivalents and, during periods of abnormal market conditions, are more likely
to adopt a defensive investment posture 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
12
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 Aggregate Bond Indexes: The Lehman Brothers Aggregate
Bond Index (the "Aggregate Bond Index") is intended to measure the performance
of the domestic, investment grade, fixed-rate investment grade debt market
including government and corporate securities, agency mortgage pass-through
securities, commercial mortgage-backed securities and asset-backed securities.
The Aggregate Bond Index covers those securities in the Lehman Brothers
Government/Credit Index (the "Government/Credit 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
Government/Credit Index is composed of (1) all public obligations of the U.S.
Government, its agencies and instrumentalities (excluding "flower" bonds and
pass-through issues, such as GNMA certificates) and (2) all publicly issued,
fixed-rate, non-convertible, investment grade, U.S. dollar-denominated,
SEC-registered obligations of domestic corporations, foreign governments and
supranational organizations.
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 securities in the index generally have at least $200 million par amount
outstanding and at least 1 year remaining to maturity.
All non-government issues in the Aggregate Bond Index are rated at least
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("Standard & Poor's") or, if unrated by Moody's or Stanard &
Poor's, BBB by Fitch, Inc. ("Fitch") .
All securities in 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 Aggregate Bond Index in no way implies an opinion
of Lehman Brothers, Inc. as to its attractiveness or appropriateness as an
investment.
The MSCI All Country World Excluding U.S. Index: The MSCI All Country World
Excluding U.S. Index is a market capitalization weighted index composed of
companies representative of the market structure of developed and emerging
market
13
countries in the Americas (excluding the United States), Europe/Middle East, and
Asia/Pacific Regions. It excludes closed markets and those shares in otherwise
free markets that are not purchasable by foreigners.
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 All Country World Excluding U.S. 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 All Country World Excluding U.S.
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 All Country World Excluding U.S Index. MSCI is
not responsible for and has not participated in the determination of the prices
or amounts of insurance products supported by the Trust or the timing of the
issuance and sale of such products, or in the determination or calculation of
the equations by which such products are convertible into cash. MSCI has no
obligation or liability to owners of the Trust or of the insurance products
supported by the Trust in connection with the administration, marketing or
trading of any Fund of the Trust.
ALTHOUGH MSCI OBTAINS INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF THE
TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA
INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED
WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
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.
10. Investing on a Non-Diversified Basis
TheReal Estate Equity, Health Sciences Financial Industries 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.
11. Using Options
a. Overview: 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,
financial futures contracts and rights under swap agreements ("swap options").
This Section 11. discusses certain characteristics and risks that are generally
common to all of these types of options. The Funds' use of specific types is
further discussed in Section 6. above and Sections 12 and 14. below, including
characteristics and risks peculiar to those types of options.
b. 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"). In a "call"
swap option, the Fund (or other purchaser) has the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or
otherwise modify an existing swap agreement or to shorten, extend, cancel or
otherwise modify an existing swap agreement at some designated future time on
specified terms. 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)
14
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 (i.e., "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.
c. 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, or change the terms of the underlying swap
agreement under a swap option, 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 or, under a swap option, if more
favorable terms for swap agreements were available than those under the option).
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 purchase price by an amount greater than any
commissions payable by the Fund on the purchase and 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 and, with respect to swap options, because the swaps market is a
relatively new market and identical options may not be available.
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.
Depending on the terms of the particular swap option, a Fund will generally
incur a greater degree of risk when it sells ("writes") a swap option than it
will incur when it purchases a swap option because the Fund will become
obligated according to the terms of the underlying swap agreement upon exercise
of the option by the purchaser.
d. Writing call 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.
Call options written by Funds can also be considered to be "covered" to the
extent that the Fund's liabilities under these options are fully offset by its
rights under call options on the same subject owned by the Fund. 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."
To the extent that an option written by a Fund is not fully covered by
assets that are very similar to the option's subject, the Fund's sub-adviser
will segregate or "earmark" on the Fund's records cash or amounts it otherwise
determines to be liquid in an amount equal to the Fund's exposure under the
option. This procedure for each type of option written by the Fund is described
more specifically in the portion of this Part C that describes the writing of
that type of option.
15
Although a Fund may own an underlying swap agreement when it writes a swap
option, its liabilities under the swap option would not be fully offset by the
swap agreement. This is because the swap option will change the terms of the
underlining swap agreement when the purchaser exercises the option.
e. 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. These terms do not strictly apply to
swap options because that type of option changes the terms of the underlying
swap agreement, as discussed above in Section C.11.b.
If a Fund purchases a put option, its maximum potential loss would equal
the purchase price (plus any commissions thereon). If the Fund actually owns at
least the amount of whatever assets are the subject of the option, the option is
sometimes referred to as a "protective" put 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.
On the other hand, if a Fund sells (writes) a put option, the Fund could
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
f. 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.
g. Liquidity risk: The Funds intend to write and purchase options (other
than swap options) only if the subadviser believes that adequate liquidity
exists to close out open positions. 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.
h. Using options traded over-the-counter or on foreign exchanges: A Fund
may use options on securities and options on indexes that are traded
"over-the-counter" or on foreign exchanges. A Fund may use such options in any
manner and to the same extent that it would be permitted to use such options
that were traded on domestic exchanges. The 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.
i. Asset segregation requirements for options written by a Fund: When a
Fund writes an option, it is generally required that (a) that option be fully
covered by the Fund's ownership of the same type of assets that are the subject
- -to the option (or a right to acquire such assets) or (b) to the extent not so
covered, that the Fund set aside cash or liquid securities to support the Fund's
obligations under the option it has written.
Except for swap options, the asset segregation requirements for each type
of option that a Fund may write are described in the portion of this part C that
more specifically describes that type of option. For swap options written by a
Fund, the asset segregation requirements are described in Section 14.f. below.
12. Using Options on Securities (and related asset segregation requirements)
a. Options on securities generally: A Fund may purchase or write (sell) put
and call options on securities of a type that the Fund could invest in directly.
If a Fund writes a call option, it will at all times, own (a) an amount of
the securities subject to the option that are not segregated to support any
other obligation of the Fund and/or a (b) a call option on the same securities
at an exercise price that is not higher than that of the call option written by
the Fund; or, alternatively, the relevant subadviser, subject to oversight and
any directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the subadviser
maintains) cash or other assets it determines to be liquid that are not
segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit with respect to the option it has written, at all
times at least
16
equals the amount of the Fund's obligation under the option that is not
"covered" as provided by clause (a) or (b) of this sentence. For this purpose,
the amount of the obligation is deemed to be (i) the value of the securities
that are the subject of the option or (ii) the amount by which the exercise
price on any option the Fund has to acquire such securities exceeds the exercise
price on the option the Fund has written on such securities.
A Fund's obligation to make a payment upon the exercise of a put option on
securities written by the Fund will at all times be fully covered by the Fund's
owning a put option on the same securities at an exercise price that is no less
than the amount the Fund must pay upon exercise of the put it has written; or,
alternatively, the relevant subadviser, subject to oversight and any directions
given by John Hancock, will cause the Fund's custodian to segregate (or will
segregate by "earmarking" on Fund records that the subadviser maintains) cash or
other assets it determines to be liquid that are not segregated to support any
other Fund obligation and that, together with any margin the Fund has on deposit
with respect to the put option it has written, at all times at least equals the
amount of the Fund's obligation upon exercise of the put option that is not
covered as provided in the first part of this sentence.
b. Straddles: A straddle is a strategy that consists of a simultaneous call
option and put option on the same underlying security with each such option
having the same exercise price. The combination is usually sold (written) as a
unit, but each "leg" (i.e., the put option or the call option) may be exercised
separately by the purchaser of the straddle.
A Fund may purchase or write straddles. When a Fund writes a straddle, the
relevant sub-adviser will cause the Fund's custodian to segregate (or will
segregate by "earmarking" on Fund records that the sub-adviser maintains) the
same amount (if any) of cash or other assets it determines to be liquid as it
would do if the Fund had written only the leg of the straddle that is "in the
money." For example, if the value of the underlying security is higher than the
exercise price of the straddle (i.e., the exercise price of the put and call
option), a written straddle will be covered by the Fund in the same manner as it
would for a written call option. Conversely, when the value of the underlying
security is lower than the exercise price of the straddle, a written straddle
will be covered by the Fund in the same manner as it would for a written put
option.
Similarly, if a Fund writes a put and call option on the same security, but
each leg has a different exercise price, and if the exercise price of the put
does not exceed that of the call, the segregation (or earmarking") requirement
will be the same as it would be if the Fund had written only the leg of the
strategy that is "in-the-money." If both options are "out-of-the-money," the
segregation (or earmarking") requirement will be the same as it would be if the
Fund had written only the leg of the transaction that represents the higher
potential liability of the Fund.
Because a straddle consists of two options, the commissions and other
transaction costs of assuming and liquidating the position may be relatively
high.
13. Using Financial Futures Contracts, Options on Such Contracts and Options on
Stock Indexes
a. Overview: The Funds may, in varying degrees, use financial futures
contracts, options on such futures and options on stock indexes. This Section 13
discusses certain characteristics and risks that generally pertain to these
instruments, as well as the Funds' specific uses of these instruments and
specific risks related to those uses.
b. General characteristics and risks: The general characteristics and risks
of financial futures, options on such contracts and options on stock indexes are
discussed in the following subsections.
(i) 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.
17
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.
(ii) 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
purchase 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 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.
(iii) 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.
(iv) 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.
(v) 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.
18
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. 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.
(vi) Asset segregation requirement for certain futures and options
positions: The relevant subadviser, subject to oversight and any directions
given by John Hancock, will cause the Fund's custodian to segregate (or
will segregate by "earmarking" on Fund records that the subadviser
maintains) cash or other assets it determines to be liquid that are not
segregated to support any other obligations of the Fund and that at all
times at least equals (a) the sum of the purchase prices of all of the
Fund's open futures purchase positions, plus (b) 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 (c) the
exercise price of all outstanding put options on futures contracts written
by the Fund, plus (d) the current value of securities underlying any
futures contracts with respect to which the Fund has outstanding call
options that it has written, minus (e) the amount of margin deposits with
respect to all of such contracts.
(c) Specific uses of financial futures, options thereon, and stock index
options: All Funds, except the Money Market Fund, may use exchange-traded
financial futures contracts, options thereon, and 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 their investment
portfolios. Therefore, it should not be assumed that any particular Fund will
ever necessarily use any of these strategies to a significant extent.
(i) Hedging with financial futures contracts against market
changes, and risks thereon: A Fund may use financial futures contracts, and
options thereon, 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 it owns, a 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 it
holds, a Fund may enter into interest rate futures sale contracts.
(ii) Establishing market exposure and managing cash flow with
financial futures contracts and options thereon: A Fund may purchase and
sell stock index and interest rate futures, and options thereon, to
maintain market exposure and manage cash flows. Purchasing futures
contracts, and options thereon, could enable a Fund to take the approximate
economic equivalent of a substantial position in bonds or equity
securities, although there is no assurance that this goal can be achieved.
(iii) Managing foreign currency exposure with foreign currency
futures contracts: A Fund may use foreign currency futures contracts, and
options thereon, to the same extent and in the same manner as it is
authorized to use forward foreign exchange contracts in Section 6. above.
(iv) Risks of hedging type strategies: If, after a Fund establishes
a hedge position, the value of the securities or currency 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
19
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.
(v) Writing index options (and related asset segregation
requirements): A Fund may write put and call options on indexes composed of
securities in which the Fund may invest. A Fund's obligation to make a
payment upon the exercise of a put or call option on an index written by
the Fund will at all times be fully covered by (a) in the case of a put
option, the Fund's owning a put option on the same index at an exercise
price not lower than that of the option written by the Fund, or (b) in the
case of a call option, the Fund's owning a call option on the same index at
an exercise price not higher than that of the option written by the Fund;
or, alternatively, the relevant subadviser, subject to oversight and any
directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that
are not segregated to support any other Fund obligation and that, together
with any margin the Fund has on deposit with respect to the option it has
written, at all times at least equals the amount of the Fund's obligation
upon exercise of the option it has written that is not covered as provided
in clause (a) or (b) of this sentence For this purpose, the amount of the
obligation (i) with respect to a put option is the exercise price of the
option or the amount by which that exercise price exceeds that of a put
option that the Fund owns on the same index and (ii) with respect to a call
option is the current value of the index underlying the option or the
amount by which the exercise price of the option written by the Fund
exceeds that of a call option that the Fund owns on the same index.
(vi) Purchasing index options. A Fund 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 this type, however, would have to be consistent with the
Fund's investment objective. Also, each Fund is subject to the limitation
on certain futures and options transactions described in Section 13.c.(ix).
(vii) Using futures contracts and options on futures contracts: A
Fund 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 a Fund
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 assets on deposit as margin to secure options on futures contracts that
are not used for bona fide hedging purposes plus the amount of premiums
paid by a Fund for such options is (pursuant to the limitations set forth
below) limited to 5% of the Fund's net assets.
(viii) Risks of potentially more aggressive options and futures
strategies: To the extent that a Fund exercises its broad authority to
enter into options and futures transactions for purposes that are not
solely for hedging-type purposes or that otherwise may be for more
speculative purposes, it may incur greater risks than another Fund that
limits its strategy to hedging-type transactions.
(ix) Limitations on the Funds' exposure to certain futures and
option transactions: No Fund may purchase, sell or write futures contracts
or options thereon other than for "bona fide" 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 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.
14. Using "Swaps," "Caps," "Floors," and "Collars"
a. Overview: The nature and risks of these types of transactions are
discussed in the paragraphs that follow.
b. 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.
20
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.
c. Interest rate caps, floors and collars: The purchaser of an interest
rate cap or floor, upon payment of a fee, has the right to receive payments (and
the seller of the cap is obligated to make payments) to the extent a specified
interest rate exceeds (in the case of a cap) or is less than (in the case of a
floor) a specified level over a specified period of time or at specified dates.
The purchaser of an interest rate collar, upon payment of a fee, has the right
to receive payments (and the seller of the collar is obligated to make payments)
to the extent that a specified interest rate falls outside an agreed upon range
over a specified period of time or at specified dates.
d. Currency, credit default, 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.
A Fund may sell or purchase credit default swap contracts for investment
purposes when consistent with its investment goal and strategy. A Fund may also
purchase credit default swap contracts in order to hedge against the risk of
default of debt securities held in its portfolio. In a credit default swap
contract, the seller would be required to pay the par (or other agreed-upon)
value of a referenced debt obligation to the purchaser in the event of a default
by a third party, such as a U.S. or foreign corporate issuer, on the debt
obligation, In return, the seller would receive a periodic stream of payments
over the term of the contract provided that no event of default has occurred. If
no default occurs, the seller would keep the stream of payments and would have
no payment obligations.
e. Certain risks: 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. As a seller of a credit default swap
contract, a Fund would be subject to investment exposure on the notional amount
of the swap. As a purchaser of a credit default swap contract, a Fund would only
receive income in the event of an actual default by the issuer of the underlying
obligation (as opposed to a credit downgrade or other indication of financial
instability), and the investment could expire without value.
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. Typically, 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, to protect against the risk of default on debt obligations, 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, credit risk and other applicable factors, the
investment performance of a Fund might 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
21
determinations will govern whether the instrument will be deemed within the
Fund's 15% restriction on investments in securities that are not readily
marketable.
For purposes of applying the Funds' investment policies and restrictions
(as stated in the prospectus and this Statement of Additional Information, swap
agreements are generally valued by the Funds at market value. In the case of a
credit default swap sold by a Fund (i.e., where the Fund is selling credit
default protection), however, the Fund will generally value the swap at its
notional amount. The manner in which certain securities or other instruments are
valued by the Funds for purposes of applying investment policies and
restrictions may differ from the manner in which those investments are valued by
other types of investors.
f. Segregation requirements for these derivatives: The relevant subadviser
of each Fund, subject to oversight and any directions given by John Hancock,
will cause the Fund's custodian to segregate (or will segregate by "earmarking"
on Fund records that the subadviser maintains) cash or other assets it
determines to be liquid that are not then segregated to cover any other Fund
obligation and that, together with any margin the Fund has deposited in
connection with its outstanding swaps, caps, floors, and collars, at all times
at least equals the amount of the Fund's obligations under these instruments.
For a credit default swap sold by a Fund (i.e., where the Fund is "selling"
credit default protection), the Fund's "obligation" will be considered to be the
entire notional amount (i.e., the dollar amount of protection provided), for
this purpose. For all swap agreements that are not credit default swaps written
by the Fund, the Fund's obligation for this purpose will depend on the nature of
the swap's settlement terms. If the swap settles on a "net" basis, the Fund's
obligation will be accrued daily (and offset against any amounts owed to the
Fund) on the transaction, and the Fund's "obligation" for asset segregation
purposes will be deemed to be any accrued but unpaid net amounts owed to the
other party to the swap transaction. If the swap does not provide for such "net"
settlement procedures, the Fund's asset segregation requirement will be for the
full accrued amount of the Fund's obligation.
If a Fund writes a swap option, the asset segregation requirement will be
substantially the same as for the swap rights that are the subject of the
option. Thus, the Fund will generally segregate assets to the same extent and
manner as it would do (as described in the immediately preceding paragraph), if
it had already assumed the swap position it is required to assume upon exercise
of the swap option the Fund has written.
15. Investing in Other Investment Companies
a. Overview: 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. 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. 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.
b. Investing in passive foreign investment companies: 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. A Fund 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 International Equity Index Fund is more likely than other Funds to
invest in closed-end investment companies known as "country funds" or passive
foreign investment companies. (A "closed end" company is one whose shares can
generally be disposed of only in market transactions, as opposed to redemptions.
An "open end" company is one whose shares are freely redeemable.)
c. Investing in exchange traded funds: All Funds (other than the Money
Market Fund) may invest in certain forms of Exchange Traded Funds ("ETFs"),
provided such investment is consistent with the Fund's investment objectives.
ETFs are registered open-end investment companies (or investment companies that
are exempt from registration) whose shares can be bought and sold on various
exchanges in the same way as stocks. ETFs may be used for several reasons,
including but not limited to: facilitating the handling of cash flows or
trading, or reducing transaction costs. There are various forms of ETFs, but the
ones that are most commonly used at the current time are iShares/sm/ (formerly
called World Equity Benchmark Shares or "WEBS") and SPDRs (Standard and Poor's
Depository Receipts).
(i) Investing in iShares/sm/: iShares/sm/ are shares of an open-end
investment company that invests substantially all of its assets in
securities included in various indices. iShares/sm/ are listed on the AMEX
and were initially offered to the public in 1996. The market prices of
iShares/sm/ are expected to fluctuate in accordance with both changes in
the NAVs of their underlying indices and supply and demand of iShares/sm/
on the AMEX. To date, iShares/sm/ have traded at relatively modest
discounts and premiums to the NAVs. However, iShares/sm/ have a limited
operating history and information is lacking regarding the actual
performance and trading liquidity of iShares/sm/ for extended periods or
over complete market cycles. In
22
addition, there is no assurance that the requirements of the AMEX necessary
to maintain the listing of iShares/sm/ will continue to be met or will
remain unchanged. In the event substantial market or other disruptions
affecting iShares/sm/ should occur in the future, the liquidity and value
of a Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, a Fund could be required to reconsider the
use of iShares/sm/ as part of its investment strategy.
(ii) Investing in 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.
d. 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.
Nor are the Large Cap Value, Small Cap Value, and International Opportunities
Funds charged any investment management fees for investments in money market
funds managed by their subadvisers.
16. Purchasing "When Issued" Securities and Forward Commitments
a. Overview: All 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.
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.
b. Asset segregation requirement for these transactions. The relevant
subadviser of each Fund, subject to oversight and any directions given by John
Hancock, will cause the Fund's custodian to segregate (or will segregate by
"earmarking" on Fund records that the sub-adviser maintains) cash or other
assets it determines to be liquid that are not then segregated to cover any
other obligation to the Fund and that, together with any margin the Fund has
deposited in connection with when-issued securities and forward commitments, at
least equals the purchase price under each of the Fund's then outstanding when
issued and forward commitments.
17. 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. 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.
18. 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, with "primary dealers" in U.S.
Government securities or with other dealers and banks who meet a subadviser's
credit standards.
No 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% (10% in the case of the Money Market Fund) 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, co-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
23
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).
19. 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 18.
above, or in other money market instruments. The joint trading account was
established pursuant to an order of the SEC and all of the Funds (except the
Large Cap Growth, Large Cap Growth B, Fundamental Growth, Earnings Growth, Total
Return Bond and Money Market Funds) regularly participate in it.
Each Fund is also free to participate in any similar joint trading account
that its subadviser operates for mutual fund assets managed by it. These other
joint trading accounts would be operated pursuant to their own SEC exemptive
orders The Total Return Bond Fund and the portion of the Active Bond Fund
sub-managed by Pacific Investment Management Company LLC regularly participates
in such other joint trading accounts.
Whenever a subadviser operates a non-John Hancock joint trading account,
the subadviser is responsible for ensuring that all repurchase agreements
acquired through these accounts are at all times fully collateralized.
20. 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 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.
21. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls"
a. Overview: A Fund may enter into reverse repurchase agreements to
facilitate portfolio liquidity, or in 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.
A Fund 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 financial
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 generally
associated with financial leverage.
24
b. Asset segregation requirements for reverse repurchase agreements and
mortgage dollar rolls: The relevant subadviser of each Fund, subject to
oversight and any directions given by John Hancock, will cause the Fund's
custodian to segregate (or will segregate by "earmarking" on Fund records that
the sub-adviser maintains) cash or other assets it determines to be liquid that
are not segregated to support any other Fund obligation and that at all times at
least equals the amount of the Fund's obligations under outstanding mortgage
dollar rolls and reverse repurchase agreements.
22. Investing in Rule 144A Securities, Section 4(2) Commercial Paper and
Illiquid Securities
A Fund may purchase unregistered securities that are eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the Securities Act
of 1933. A Fund may also purchase commercial paper that is offered in reliance
on the exemption in Section 4(c) of that Act. Case-by-case determinations are
made whether each issue of Rule 144A securities or Section 4(2) commercial paper
owned by a Fund is an illiquid security.
Each Fund may purchase illiquid Rule 144A securities, illiquid Section 4(2)
commercial paper 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% (10% in the case
of the Money Market Fund) of the Fund's net assets.
23. Investing in Preferred Stock, Convertible Securities and Warrants
Investments may be made in debt or preferred equity securities and those
convertible into, or exchangeable for, equity securities. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than nonconvertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of
shares of common stock at a specified price anytime during the life of the
warrants (generally, two or more years).
24. Investing in Initial Public Offerings ("IPOs")
Almost all Funds of the Trust have the ability to invest in IPOs. IPO
investments may be more volatile than other types of investments and a Fund's
investments in IPOs may be subject to more erratic price movements than the
overall equity market. IPOs could have a substantial impact on performance,
either positive or negative, particularly on a fund with a small asset base. The
actual effect of IPOs on performance depends on a variety of factors, including
the number of IPOs the Fund invests in, whether and to what extent a security
purchased in an IPO appreciates in value, and the asset base of the Fund. There
is no guarantee that a Fund's investments in IPOs, if any, will continue to have
a similar impact on the Fund's performance in the future.
D. 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.
The Trust's current fundamental investment restrictions are as follows:
1. REAL ESTATE. No Fund will purchase or sell real estate. This restriction does
not prevent (a) a Fund from acquiring real estate as a result of ownership of
those securities or other instruments in which the Fund is permitted to invest;
(b) a Fund from investing in securities that are secured by real estate or
interests therein; (c) a Fund from investing in issuers that invest, deal, or
otherwise engage in transactions in real estate or interests therein; or (d) the
Real Estate Equity Fund from making any type of investment that it is otherwise
permitted to make.
25
2. LOANS. No Fund will make loans, except that this restriction does not prevent
a Fund from (a) making loans through the acquisition of obligations in which the
Fund may invest consistent with its objective and investment policies; (b)
lending portfolio securities; or (c) making loans to other Funds or investment
companies managed or sponsored by an investment adviser to the Fund or by any
company controlling, controlled by, or under common control with such investment
adviser.
3. COMMODITIES. No Fund will purchase or sell physical commodities, except that
a Fund may sell physical commodities acquired as a result of ownership of those
securities or other instruments in which a Fund is permitted to invest.
4. UNDERWRITING. No Fund will engage in the underwriting of securities of other
issuers. This restriction will not prevent a Fund from disposing of its
portfolio securities regardless of its status as an underwriter under any
federal or state securities laws.
5. BORROWING. No Fund will borrow money, except that this restriction will not
prevent a Fund from borrowing (a) from banks for any purpose, provided that
immediately after any such borrowing there is an asset coverage of at least 300%
for all borrowings of the Fund as required under Section 18(f)(1) of the
Investment Company Act (subject to any amendments to, regulations under, or
exemptions from Section 18(f)(1) of the Investment Company Act); (b) for
temporary purposes only, provided that loans for temporary purposes do not
exceed 5% of the value of the total assets of the Fund as of the time when each
such loan is made; or (c) from another fund, or from a related entity of another
fund, pursuant to any amendments to, regulations under, exemptions from or
interpretations of the Investment Company Act./1/
6. SENIOR SECURITIES. No Fund will issue senior securities, except as permitted
under Section 18(f) of the Investment Company Act, any amendments thereto, any
regulations thereunder, or any applicable exceptions therefrom.
7. INDUSTRY CONCENTRATION. The Equity Index, Large Cap Value, Large Cap Growth,
Large Cap Growth B, Earnings Growth, Fundamental Value, Fundamental Value B,
Fundamental Growth, Mid Cap Value, Mid Cap Value B, Mid Cap Growth, Small Cap
Value, Small Cap Growth, Small Cap Emerging Growth, International Equity Index,
Overseas Equity, Overseas Equity B, Overseas Equity C, Short-Term Bond, Bond
Index, Active Bond, Total Return Bond, High Yield Bond, and Global 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 Fund's investments in such industry would exceed 25% of its total assets
taken at market value. This restriction does not limit the Money Market Fund's
investments in instruments issued by domestic banks (or by a foreign branch of a
domestic bank, but only if the domestic bank is unconditionally liable in the
event that the foreign branch fails to honor the instrument). For the purpose of
determining industry concentration, 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
- ----------
/1/ All of the Funds also operate under a non-fundamental policy that, if
borrowings by a Fund ever exceed 5% of its total assets, that Fund will make no
new investments until it has paid down its borrowings to below 5%.
26
E. 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 Board has
three standing committees, which are discussed below.
The Governance Committee of the Board consists of the Trust's four
independent Trustees: Ms. Cook, Ms. Kessler, Mr. Verdonck and Mr. McClellan. The
Governance Committee assists the Board of Trustees by considering and making
recommendations on such matters as the Board's structure, composition, manner of
operations, and effectiveness; and the compensation and continuing education of
independent Trustees. This committee also gives particular consideration to
certain matters that involve actual or potential conflicts of interest between
the Trust and its service providers. The terms of the Trust's advisory
agreements are one important example of this. This committee met four times in
2002.
The Nominating Committee of the Board also consists of the Trust's four
independent Trustees. This committee is responsible for the selection and
nomination of candidates to be independent Trustees. Although the Nominating
Committee may receive input from John Hancock in this regard, the committee
controls the selection and nominating process. The extent of this committee's
activities in a given year will vary somewhat, depending on how many vacancies
for the office of independent trustee need to be filled. The Nominating
Committee did not meet during 2002.
The Audit Committee of the Board consists of the following independent
Trustees: Ms. Cook, Mr. McClellan and Mr. Verdonck. The Audit Committee assists
the Board in fulfilling its oversight responsibilities relating to the quality
and objectivity of financial reporting, the effectiveness and efficiency of
operations (including internal controls), and compliance with applicable laws
and regulations. Among other things, the Audit Committee seeks to maintain good
communication among the Trustees, the Trust's independent auditors and the
Trust's management. Each year, the committee evaluates and makes a
recommendation to the Board of Trustees as to the independent auditors to be
retained by the Trust to audit the Trust's financial statements. The committee
also reviews with such auditors the scope of the audit to be performed and the
results of such audit. The Audit Committee met three times during 2002.
Each of the above-described committees has authority to retain, at the
Trust's expense, legal counsel and such other experts as the committee deems
advisable to help discharge its functions.
The following table provides information about the members of the Board of
Trustees and the officers of the Trust:
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Interested Trustees/*/:
Michele G. Van Leer Chairman and Indefinite Senior Vice President, Product 30 None
(age 46) Trustee (Commenced Management, John Hancock Life
John Hancock Place September, 1998) Insurance Company; President and
Boston, Massachusetts 02117 Director John Hancock Variable
Life Insurance Company
Kathleen F. Driscoll Vice Chairman, Indefinite Senior Vice President, Signator 30 None
(age 47) President and (Commenced Brokerage Development, John
John Hancock Place Trustee June, 2001) Hancock Life Insurance Company,
Boston, Massachusetts 02117 Vice President, Corporate
Communications, John Hancock
Life Insurance Company
- ----------
* Ms. Van Leer and Ms. Driscoll are the only Trustees who are "interested
persons" as defined in the Investment Company Act.
27
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Independent Trustees:
Elizabeth G. Cook Trustee Indefinite Expressive Arts Therapist, Dana 30 None
(age 66) (Commenced Farber Cancer Institute;
c/o John Hancock Variable April, 1993) President, The Advertising Club
Series Trust I, of Greater Boston
John Hancock Place,
Boston, Massachusetts 02117
Diane C. Kessler Trustee Indefinite Executive Director, Massachusetts 30 None
(age 57) (Commenced Council of Churches
c/o John Hancock Variable April, 1999)
Series Trust I,
John Hancock Place,
Boston, Massachusetts 02117
Robert F. Verdonck Trustee Indefinite President and Chief Executive 30 None
(age 58) (Commenced Officer, East Boston Savings Bank
c/o John Hancock Variable April, 1999)
Series Trust I,
John Hancock Place,
Boston, Massachusetts 02117
Hassell H. McClellan Trustee Indefinite Associate Professor, The Graduate 30 None
(age 58) (Commenced School of the Wallace E. Carroll
c/o John Hancock Variable February, 2001) School of Management, Boston
Series Trust I, College
John Hancock Place,
Boston, Massachusetts 02117
28
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Other Officers
Chief Legal
Ronald J. Bocage Officer Indefinite Vice President & Counsel, John N/A N/A
(age 58) (Commenced Hancock Life Insurance Company
John Hancock Place June, 2003)
Boston,
Massachusetts 02117
Jude A. Curtis Compliance Indefinite Second Vice President and Chief N/A N/A
(age 45) Officer (Commenced Investment Compliance Officer,
John Hancock Place June, 2000) John Hancock Life Insurance
Boston, Company; formerly Second Vice
Massachusetts 02117 President and Counsel, Office of
Business Conduct; John Hancock
Life Insurance Company; formerly
a Partner at Hale and Dorr LLP
(law firm)
Raymond F. Skiba Treasurer Indefinite Director of Fund Operations, N/A N/A
(age 58) (Commenced John Hancock Life Insurance
John Hancock Place February, 1986) Company
Boston, Massachusetts 02117
Gladys C. Millan Assistant Indefinite Manager of Fund Operations, N/A N/A
(age 57) Treasurer (Commenced John Hancock Life Insurance
John Hancock Place March, 2003) Company
Boston, Massachusetts 02117
Karen Q. Visconti Secretary Indefinite Director, Product & Market N/A N/A
(age 50) (Commenced Management, John Hancock Life
John Hancock Place August, 1999) Insurance Company
Boston, Massachusetts 02117
Arnold R. Bergman Assistant Indefinite Senior Counsel, Law Department, N/A N/A
(age 53) Secretary (Commenced John Hancock Life Insurance
John Hancock Place, December, 1999) company; formerly Vice President,
Boston, Massachusetts 02117 General Counsel and Secretary,
First Variable Life Insurance
Company
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.
29
The names and range of each Trustee's interest in any Fund as of December
31, 2003 are set forth in the table below
Dollar Range of Dollar Range of Interest
Name of Trustee Interest in Any Fund in All Funds
- --------------------- -------------------- ------------------------
Interested Trustees:
Michele G. Van Leer 0 0
Kathleen F. Driscoll 0 0
Independent Trustees:
Elizabeth G. Cook $50,000-$100,000 $50,000-$100,000
Diane C. Kessler $10,000-$50,000 $10,000-$50,000
Robert F. Verdonck $1,000-$10,000 $1,000-$10,000
Hassell H. McClellan 0 0
Compensation paid by the Trust to its current disinterested Trustees during
2003 was as follows:
Ms. Cook $ 77,000
Ms. Kessler $ 69,000
Mr. Verdonck $ 77,000
Mr. McClellan $ 73,000
The Trust paid no compensation to any other officer or Trustee. The
Trustees' fees are allocated among the Trust's Funds in proportion to their
relative net assets. The average aggregate net assets for all of the Funds
totaled approximately $10.3 billion for the year 2003.
F. INVESTMENT ADVISORY ARRANGEMENTS
1. 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
Funds pursuant to several investment advisory agreements. The Trust is party to
each of these investment advisory agreements with John Hancock.
The Trust currently pays John Hancock investment advisory fees at the
following rates:
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Equity Index .15% on the first $75 million; .14% on the next $50
million; .13% above $125 million
Large Cap Value .75%
Large Cap Growth .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Large Cap Growth B .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Earnings Growth 1.00% on the first $100 million; .90% above $100
million
Growth & Income .71% on the first $150 million; .69% on the next
$150 million; .67% above $300 million
Fundamental Value .95% on the first $25 million; .85% on the next $25
million; .75% on the next $50 million; 65% above
$100 million
Fundamental Value B .95% on the first $25 million; .85% on the next $25
million; .75% on the next $50 million; .65% above
$100 million
Fundamental Growth .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Mid Cap Value 1.05% on the first $100 million; 1.00% above $100
million
Mid Cap Value B 1.05% on the first $100 million; 1.00% above $100
million
30
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Mid Cap Growth 1.00% on the first $50 million; .95% on the next
$150 million; .90% above $200 million
Small Cap Value .95%
Small Cap Emerging Growth 1.05% on the first $100 million; and 1.00% above
$100 million
Small Cap Growth 1.05% on the first $100 million; and 1.00% above
$100 million
International Equity Index .18% on the first $100 million; .15% on the next
$100 million; .11% above $200 million
Overseas Equity 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Overseas Equity B 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Overseas Equity C 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Real Estate Equity 1.10% on the first $50 million; 1.00% on the next
$50 million; .90% on the next $100 million; .80%
above $200 million
Health Sciences 1.00% on the first $250 million; .95% above $250
million
Financial Industries 0.80%
Managed .74% on the first $500 million; .68% on the next
$500 million; .65% above $1 billion
Short-Term Bond .60%
Bond Index .15% on the first $100 million; .13% on the next
$150 million; .11% above $250 million
Active Bond .70% on the first $100 million; .65% on the next
$150 million; .61% on the next $250 million; .58%
on the next $500 million; .55% above $1 billion
Total Return Bond .70% on the first $250 million; .68% on the next
$250 million; and .65% above $500 million
High Yield Bond .80% on the first $100 million; .70% above $100
million
Global Bond .85% on the first $150 million; .80% on the next
$150 million; .75% on the next $200 million; .70%
above $500 million
Money Market .25%
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.
31
2. The Trust's Arrangements With Subadvisers
Set forth below are the names of the Funds' subadvisers and certain persons
who may control them.
Subadviser's
Controlling General Nature of Control
Subadviser and the Funds It Manages Person Basis of Control Person's Business
-------------------------------------- ---------------- -------------------------------------- --------------------------
1. Independence Investment LLC (Large Cap John Hancock Indirectly owns 100% of the Financial services holding
Growth, Large Cap Growth B, Financial subadviser company
Fundamental Growth, Managed, Growth & Services
Income and Short-Term Bond Funds) Inc.("JHFS")*
John Hancock Indirectly owns 100% of the subadviser Life insurance and other
Life Insurance financial services
Company provided directly or
through subsidiaries
2. John Hancock Advisers, LLC (Financial Same as 1.
Industries and Active Bond Funds) above.*
3. Declaration Research & Management LLC Same as 1.
(Active Bond Fund) above.*
4. SSgA Funds Management, Inc. (Equity State Street Owns 100% of the subadviser Financial services holding
Index and International Equity Index Corporation company
Funds)
5. T. Rowe Price Associates, Inc. (Large T. Rowe Price Owns 100% of the subadviser Publicly traded financial
Cap Value, Growth & Income, Mid Cap Group, Inc. services holding company
Value, Mid Cap Value B and Small Cap
Value Funds)
6. Morgan Stanley Investment Management Morgan Stanley Directly owns 100% of voting stock Publicly traded financial
Inc.** (Real Estate Equity Fund) services company
7. Standish Mellon Asset Management Mellon Financial Indirectly owns 100% of the Bank holding company
Company LLC (Bond Index Fund) Corporation subadviser through Standish Mellon
Asset Management Holdings LLC (sole
owner of subadviser)
8. Wellington Management Company, LLP Executive Executive Committee Investment management
(Fundamental Value, Fundamental Value Committee
B, Mid Cap Growth, Small Cap Value, consisting of
Small Cap Emerging Growth, Small Cap nine of the
Growth, Health Sciences, High Yield firm's partners
Bond and Money Market Funds)
9. Capital Guardian Trust Company The Capital The subadviser is an indirect wholly Financial services holding
(Managed, Overseas Equity, Overseas Group Companies owned subsidiary of CGCI company
Equity B, Overseas Equity C and Global Inc. ("CGCI")
Bond Funds)
10. Pacific Investment Management Company Allianz AG Subadviser is a majority-owned Allianz AG is a
LLC(Active Bond and Total Return Bond subsidiary of Allianz Dresdner Asset European-based
Funds) Pacific Life Management of America L.P., ("ADAM multinational insurance
Insurance LP"). Allianz Aktiengesellschaft and financial services
Company ("Allianz AG") is the indirect holding company.
majority owner of ADAM
32
Subadviser's
Controlling General Nature of Control
Subadviser and the Funds It Manages Person Basis of Control Person's Business
-------------------------------------- ---------------- -------------------------------------- --------------------------
LP. Pacific Life Insurance Company Pacific Life Insurance
owns an indirect minority equity Company is a
interest in ADAM LP. California-based insurance
company.
11. RREEF America LLC(Real Estate Equity Deutsche Bank AG The subadviser is a wholly owned European-based,
Fund) subsidiary multinational insurance
and financial services
holding company.
12. Fidelity Management & Research Company FMR Corp. FMR has entered into a sub-subadvisory
("FMR") (Earnings Growth Fund) agreement with FMR Co., Inc. (FMRC)
pursuant to which FMRC has primary
responsibility for choosing
investments for the Earnings Growth
Fund. FMR Corp., organized in 1972, is
the ultimate parent company of FMR and
FMRC. The voting common stock of FMR
Corp. is divided into two classes.
Class B is held predominantly by
members of the Edward C. Johnson 3d
family and is entitled to 49% of the
vote on any matter acted upon by the
voting common stock. The Johnson
family group and all other Class B
shareholders have entered into a
shareholders' voting agreement under
which all Class B shares will be voted
in accordance with the majority vote
of Class B shares. Under the
Investment Company Act of 1940,
control of a company is presumed where
one individual or group of individuals
owns more than 25% of the voting stock
of that company. Therefore, through
their ownership of voting common stock
and the execution of the shareholders'
voting agreement, members of the
Johnson family may be deemed, under
the 1940 Act, to form a controlling
group with respect to FMR Corp.
- ----------
* In April, 2004, JHFS was merged with a subsidiary of Manulife Financial
Corporation, a publicly-traded, multinational insurance and financial services
holding corporation organized under the laws of Canada. As a consequence of this
merger, the ultimate parent of John Hancock Life Insurance Company, Independence
Investment LLC, John Hancock Advisers, LLC and Declaration Management & Research
Company is now Manulife Financial Corporation.
**Morgan Stanley Investment Management Inc. does business in certain instances
(including in its role as Subadviser to the Real Estate Equity Fund) under the
name "Van Kampen."
33
Set forth below are the sub-advisory fees that John Hancock pays the subadvisers
for each Fund. The below fees are paid by John Hancock and not by the Funds.
Subadvisory Fees Payable by John Hancock, as a
Fund Percentage of Each Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Equity Index .05% on the first $50 million; .04% on the next $50
million; .02% on the next $300 million; and .01%
above $400 million
Large Cap Value* .40% on the first $500 million; and .35% above $500
million
Large Cap Growth .30% on the first $500 million; .2625% on the next
$500 million; and .225% above $1 billion
Large Cap Growth B .30% on the first $500 million; .2625% on the next
$500 million; and .225% above $1 billion
Earnings Growth .45% on the first $250 million; .42% on the next
$500 million; and .38% above $750 million
Growth & Income* Assets managed by T. Rowe Price Associates: .40% on
the first $500 million and .35% above $500 million
Assets managed by Independence Investment,
LLC: .1875%
Fundamental Value .40% on the first $100 million; and .30% above $100
million
Fundamental Value B .40% on the first $100 million; and .30% above $100
million
Fundamental Growth .30% on the first $500 million; .2625% on the next
$500 million and .225% above $1 billion
Mid Cap Value* .60% on the first $50 million and .50% on all
assets once assets exceed $50 million
Mid Cap Value B* .60% on the first $50 million and .50% on all
assets once assets exceed $50 million
Mid Cap Growth .50% on the first $50 million; .45% on the next
$150 million and .40% above $200 million
Small Cap Value* Assets managed by T. Rowe Price: .60% on the first
$500 million and .55% above $500 million
Assets managed by Wellington Management: .65% on
the first $100 million and .60% above $100 million
Small Cap Emerging Growth .65% on the first $100 million and .60% above $100
million
Small Cap Growth .65% on the first $100 million and .60% above $100
million
International Equity Index .10% on the first $100 million and .08% above $100
million
Overseas Equity .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
Overseas Equity B .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
34
Subadvisory Fees Payable by John Hancock, as a
Fund Percentage of Each Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Overseas Equity C .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
Real Estate Equity Assets managed by RREEF America L.L.C.: .45%
Assets managed by Van Kampen: .65% on the first $50
million; .55% on the next $50 million; .50% on the
next $100 million and .40% above $200 million
Health Sciences .65% on the first $50 million; .55% on the next $50
million and .45% above $100 million
Financial Industries .70% on the first $50 million; .60% on the next $50
million; .50% on the next $100 million and .40%
above $200 million
Managed "Growth style" portion of assets managed by
Independence Investment LLC: .30% on the first $500
million; .2625% on the next $500 million and .2250%
above $1 billion "Fixed income" portion of assets
managed by Independence Investment LLC: .15% of
first $100 million; .125% on the next $150 million
and .10% above $250 million
Assets managed by Capital Guardian Trust Company:
.475% on the first $150 million; .425% on the next
$150 million; .325% on the next $200 million and
.275% above $500 million
Short-Term Bond .15% on the first $100 million; .125% on the next
$150 million and .10% above $250 million
Bond Index .07% on the first $100 million; .06% on the next
$150 million; .03% on the next $250 million and
.01% above $500 million
Active Bond Assets managed by John Hancock Advisers, LLC: .25%
on the first $100 million; .20% on the next $150
million; .16% on the next $250 million; .125% on
the next $500 million and .10% above $1 billion
Assets managed by Declaration Management & Research
LLC: .15% on the first $100 million; .125% on the
next $150 million and .10% above $250 million
Assets managed by PIMCO: .25%
Total Return Bond .25%
High Yield Bond .40%
Global Bond .375% on the first $300 million; .30% on the next
$200 million and .275% above $500 million
Money Market 0.075% on the first $500 million and .02% above
$500 million
*T. Rowe Price has voluntarily agreed to waive a portion of the sub-advisory fee
it receives from John Hancock Life Insurance Company for services to the Fund
shown. Effective December 15, 2003, the sub-investment advisory fee reduction is
5% based on the combined levels of Trust assets managed by T. Rowe Price.
35
3. 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 sub-advisory fees that John Hancock paid to sub-advisers
for the past three years:
Fund Investment Adviser Sub-advisers*
- ------------------------------ ---------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
---------- ---------- ---------- --------- --------- ---------
Equity Index.................. 733,990 670,965 638,853 119,929 115,079 184,656
Large Cap Value............... 2,241,923 1,958,804 1,654,981 1,195,700 1,044,702 892,337
Large Cap Growth.............. 4,348,351 2,906,241 3,319,872 1,620,859 1,810,686 2,489,889
Large Cap Growth B............ 235,226 278,349 272,132 149,444 198,066 193,921
Fundamental Growth............ 201,763 252,723 327,064 109,424 140,403 181,703
Earnings Growth............... 1,665,904 1,797,191 2,410,233 816,176 992,875 1,535,019
Growth & Income............... 12,774,424 14,166,639 18,378,237 4,392,251 4,940,873 6,378,814
Fundamental Value............. 965,198 1,098,084 342,746 489,507 588,303 208,657
Fundamental Value B........... 332,454 366,083 278,769 177,263 193,677 148,487
Mid Cap Value................. 86,810 -- -- 47,350 -- --
Mid Cap Value B............... 695,383 393,262 218,743 380,385 274,096 164,053
Mid Cap Growth................ 1,675,614 1,516,336 1,403,338 805,828 731,448 848,219
Small Cap Value............... 1,379,413 1,179,436 559,231 897,919 744,902 353,196
Small Cap Emerging Growth..... 658,792 539,384 619,083 422,462 389,543 459,131
Small Cap Growth.............. 1,380,249 1,548,512 1,533,746 657,282 737,409 937,017
International Equity Index.... 214,055 197,047 261,569 147,658 136,337 179,380
Overseas Equity............... 377,034 305,288 291,727 233,400 188,986 187,638
Overseas Equity B............. 1,136,004 988,252 844,115 582,864 512,504 547,558
Overseas Equity C............. 660,775 557,164 364,553 417,729 353,418 272,023
Real Estate Equity............ 1,929,064 1,796,693 1,556,143 880,122 758,395
Health Sciences............... 275,079 276,778 163,858 164,329 152,224 90,120
Financial Industries.......... 320,139 -- -- 273,662 -- --
Managed....................... 13,323,272 15,022,416 18,129,438 5,757,563 6,384,611 7,509,704
Short-Term Bond............... 1,533,284 1,151,717 468,356 411,536 364,685 225,303
Bond Index.................... 314,757 248,866 135,751 146,042 115,631 66,937
Active Bond................... 6,383,947 5,841,345 5,236,730 1,888,848 1,519,340 1,389,019
Total Return Bond............. 149,662 -- -- 53,448 -- --
High Yield Bond............... 633,292 463,989 260,006 334,340 260,997 175,704
Global Bond................... 817,465 492,904 518,629 378,269 231,954 239,893
Money Market.................. 2,065,570 1,966,939 1,319,703 440,297 454,983 650,891
- ----------
Paying these fees to the sub-advisers is solely the responsibility of John
Hancock and not the Trust.
Under the current investment advisory agreements for each Fund (other
than the current investment advisory agreements for the International Equity
Index, Overseas Equity, Overseas Equity B, Overseas Equity C, Health Sciences
and Global Bond Funds), 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% of that Fund's average daily net assets, John Hancock
will reimburse that Fund in an amount equal to such excess. Reimbursements for
the past three years under the investment advisory agreements then in effect for
each Fund have been as follows:
Fund 2003 2002 2001
- ------------------------------ ---------- ---------- ----------
Large Cap Growth B............ 676 5,454 29,164
Fundamental Growth............ 0 45,456 67,599
Fundamental Value............. 7,589 -- 79,742
Fundamental Value B........... 42,131 63,635 10,830
Earning Growth 41,846 -- --
Mid Cap Value................. 21,663 -- --
Mid Cap Value B............... 27,357 70,763 68,521
Mid Cap Growth................ -- 13,182 --
36
Fund 2003 2002 2001
- ------------------------------ ---------- ---------- ----------
Small Cap Value............... 11,621 1,730 16,492
Small Cap Emerging Growth..... 62,221 23,494 7,794
Small Cap Growth.............. 85,659 -- 50,542
International Equity Index.... 188,545 201,707 202,794
Overseas Equity............... 86,658 87,685 58,591
Overseas Equity B............. 207,499 468,798 165,435
Overseas Equity C............. 285,751 684,568 733,661
Health Sciences............... 41,196 76,501 13,968
Bond Index.................... 10,617 52,752 --
High Yield Bond............... 38,226 32,972 38,330
Global Bond................... 30,617 37,417 2,284
4. Basis of Trustee Approval of Advisory Arrangements
The Trust's Board of Trustees ("Board"), at a meeting on February 11, 2004,
approved the continuance of all of the Trust's investment management agreements
("advisory agreements") as in effect at that time with John Hancock and the
continuance of all of the Trust's definitive sub-investment management
agreements ("sub-advisory agreements") In the process, the Board evaluated,
among other things, written and oral information provided by John Hancock in
response to a request of the Trustees. In addition, the Board's Trust Governance
Committee, composed exclusively of the Board's independent Trustees, met prior
to the Board meeting on February 10, 2004 and evaluated written information
provided in advance to the Board by John Hancock.
During the year, the Board devotes a substantial portion of five of its six
regularly scheduled meetings to an ongoing review and evaluation of John Hancock
and the subadvisers. This ongoing process is based primarily on written and oral
reports by John Hancock, in-person and written presentations by the Trust's
subadvisers on a rotating basis, and answers to questions addressed by the
Trustees to representatives of John Hancock and the subadvisers. In this
connection, the Trustees receive information from John Hancock regarding John
Hancock's performance of its functions, including monitoring and evaluation of
each subadviser which includes, among other things, review of certain filings
made with the SEC and written procedures and other materials submitted to John
Hancock and the basis of compensation paid to portfolio managers. This
information relates to such matters as the nature, scope and quality of the
services provided by the subadvisers to the Trust, and includes, among other
things, (i) the investment performance of each subadviser, (ii) any
recommendation by John Hancock to terminate, replace or add a subadviser, and
(iii) any recommendation by John Hancock to change any advisory or sub-advisory
fee.
The Trust Governance Committee schedules four meetings a year pursuant to a
Charter that empowers the Committee to meet separately from management in
connection with consideration of the advisory and sub-advisory agreements. The
Charter also empowers the Committee, in any case it deems advisable, to retain
special counsel or other experts or consultants, at the expense of the Trust or
any Fund, to further the interests of the Trust.
The Board generally schedules its meeting in February of each year to
consider whether or not to approve generally continuing the advisory and
sub-advisory agreements for another year. The Board considers, as applicable,
factors bearing on the nature, scope, quality, cost and profitability of the
services provided to the Trust under these agreements, with a view toward making
a business judgment whether each agreement, including the fee, is, under all of
the circumstances, in the best interest of the Trust.
In approving the above-mentioned agreement continuances at their February
11, 2004 meeting, the Trustees considered various factors, and, in their
business judgment, reached various conclusions, principally including the
following:
. The Trustees reviewed the nature and scope of the various management and
administrative services that John Hancock provides to the Trust,
including, among other things, John Hancock's functions in overseeing,
monitoring and reporting on each of the Trust's subadvisers. The
Trustees also reviewed the nature and scope of the portfolio management
services that the subadvisers provide to the various Funds.
. The Trustees assessed the quality of John Hancock's services and each
subadviser's services, on such bases as investment performance and
expense experience for each Fund, on both an absolute basis and a
comparative basis (against benchmarks, Morningstar ratings, certain
investment performance data of similar funds prepared at John Hancock's
request by an unaffiliated company, and certain investment performance
data of comparable John Hancock-sponsored publicly available Funds) over
current and multi-year periods. Given that similar funds may allocate
other operating expenses (non-advisory fees) differently between the
fund and its adviser than does a Fund of the Trust, the Trustees
concluded that a comparison of
37
aggregate fees and expenses can be more meaningful than comparison of
advisory fees only and/or comparison of other operating expenses only.
. The Trustees reviewed schedules of the advisory fee and sub-advisory
fee(s) for each Fund and concluded that most of the Funds have
breakpoints that can pass along a portion of any economies of scale to
the contract owners. The Trustees will consider instituting or
accentuating breakpoints for each Fund or seeking a fee reduction if the
Fund's assets continue to increase and further economies of scale
result.
. The Trustees considered the above-mentioned analysis of similar fund
advisory fee and expense data. Based on that analysis, the Trustees
concluded that, while comparative data are not to be relied on
exclusively, the aggregate advisory fees and other expenses of each Fund
are within the range paid by similar funds. More specifically, the
Trustees concluded that eight of the Funds (27%) had aggregate expenses
more than ten basis points lower than, and 22 Funds (73%) had aggregate
expenses within ten basis points (plus or minus) of, the average fund
expense ratio in the appropriate Morningstar peer group. The Trustees
also considered the fact that John Hancock has undertaken to reimburse
the Funds for certain operating expenses in excess of a stated rate and
that, for 2003, John Hancock reimbursed 18 of the Funds pursuant to this
undertaking.
. The Trustees also considered the fact that John Hancock has undertaken
to bear certain expenses that the Trust otherwise would be required to
absorb, including, for example, the cost of distributing annual Trust
prospectuses to existing contract owners and providing Trust Statements
of Additional Information upon request of contract owners.
. The Trustees considered that, in addition to the advisory fees received
by John Hancock from the Trust, the Insurers derive benefits by having
the Trust serve as the underlying funding medium for variable insurance
products offered by the Insurers, which are subject to fees and charges
payable to the Insurers. In this regard, the Trustees considered
representations from John Hancock that (i) those fees and charges, in
the aggregate, are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Insurers,
(ii) those fees and charges do not duplicate fees and expenses paid by
the Trust, and (iii) the advisory fees make no specific allowance to
provide monies to finance distribution of either Trust shares or
variable insurance products (although John Hancock may use profits
realized from the advisory fees for any lawful purpose). While the
Trustees are not responsible for the fees and charges deducted by the
Insurers under the variable insurance products funded through the Trust,
the Trustees concluded that, under all the circumstances, any such
benefits to John Hancock did not appear to be inconsistent with the best
interest of each Fund.
. The Trustees considered that, in addition to the sub-advisory fees
received by subadvisers from John Hancock, subadvisers in some cases
receive benefits through soft dollar arrangements by which brokers
provide research and certain other services to subadvisers in return for
being allocated Trust "brokerage" transactions. The Trustees considered:
(i) information provided by John Hancock (both in connection with the
February 11, 2004 meeting and on a periodic basis) about the extent and
nature of such practice by each Fund as applicable; (ii) representations
of subadvisers regarding the appropriateness of their practices and
(iii) the ongoing assessment and reports by an unaffiliated company of
the degree to which each Fund is receiving "best execution." Under all
the circumstances, the Trustees concluded that each Fund's practices in
this regard did not appear to be inconsistent with the best interest of
the Fund.
. The Trustees also reviewed any practices by a Fund of directing
portfolio transactions to a broker-dealer affiliated with the Fund's
sub-adviser, as well as data comparing each Fund's portfolio "turnover"
rate to that of other comparable funds.
. The Trustees considered John Hancock's representation that John Hancock
had not entered into any material business arrangement with a
sub-adviser, including the involvement of any sub-adviser in the
distribution of the Trust's shares (or John Hancock's related variable
insurance products); made "revenue sharing" payments to distributors;
instructed sub-advisers to direct Trust brokerage transactions to
broker-dealers to incentivize or reward sales; or received "soft dollar"
benefits in the form of distribution services.
. The Trustees considered certain information from John Hancock about the
overall profitability to John Hancock and its affiliates of the variable
insurance products funded through the Trust, including certain
information about profits to John Hancock from serving as the Trust's
primary investment adviser and data regarding John Hancock's
profitability targets from particular variable insurance products. They
also considered information they had received from John Hancock about
the difficulties of quantifying the cost and profitability of the
advisory function separately from the aggregate cost and profitability
of all of the functions performed by John Hancock and its affiliates to
develop, offer, and maintain the products, including the cost of
processing orders for the purchase and redemption of Trust shares. The
Trustees concluded that, particularly in view of the interdependence of
the Fund and the variable insurance products that it supports, the
aggregate profitability information the Trustees had received was
appropriate for purposes of their deliberations.
38
. The Trustees considered the fact that: (i) John Hancock pays the
sub-advisory fees to the subadvisers; (ii) John Hancock and a Fund
generally have a common interest in negotiating the sub-advisory fees
downward; (iii) in some cases, John Hancock has succeeded in negotiating
a sub-advisory fee rate that is less than the average rate that a
subadviser charges to similar funds; and (iv) the subadvisers have less
influence over the management of their respective Funds than a primary
adviser to a retail mutual fund normally would (including any influence
with respect to the level of their sub-advisory fees). In light of,
among other things, the particular characteristics of the
adviser/subadviser relationship, the Trustees concluded that the
profitability information mentioned above concerning the Insurers was
appropriate for purposes of their deliberations over continuation of
both the advisory and sub-advisory agreements.
. The Trustees also considered the amount of "spread" between the
investment advisory fee paid by each Fund to John Hancock and the amount
of sub-advisory fees that John Hancock, in turn, pays with respect to
that Fund. The Trustees considered how much spread for each Fund and
sub-adviser compared to John Hancock's overall objectives for such
spreads and the reasons for any discrepancies.
. The Trustees considered introducing performance-based advisory and
sub-advisory fees, particularly with regard to the Funds that had been
underperforming their benchmarks (although not necessarily
underperforming their peers). The Trustees, however, decided not to
pursue performance-based fees at this time, based on John Hancock's
concern that such fees could lead to management practices that would not
be in the best interests of contract owners.
In addition to approving the continuance of the advisory and sub-advisory
agreements at their February 11, 2004 meeting, the Trustees have recently taken
the additional actions described in numbered paragraphs 1.-13.,below that would
affect the advisory and sub-advisory arrangements as in effect on or after the
date of this Statement of Additional Information. In taking such additional
actions,, the Trustees, as a fundamental matter, followed essentially the same
process, and considered essentially the same various factors, as described
above, regarding the Trustees' general continuation of the then current
agreements. Moreover, the Trustees considered, for each applicable Fund, written
recommendations and rationales of John Hancock, based on such factors as
comparisons of recommended subadvisers with existing subadvisers and optional
subadvisers and due diligence reviews. In addition, the Trustees considered
various factors, and, in their business judgment, reached various conclusions
related to the specific facts and circumstances of each agreement, principally
including those explained below.
1. The Fundamental Growth Fund. At its December 10, 2003 meeting, the Board
approved the removal of Putnam Investment Management, LLC ("Putnam") as the
sub-adviser for this Fund and its replacement by Independence Investment LLC
("Independence"). John Hancock recommended that Putnam be terminated based on
(i) concerns that Putnam's reputation and stability would be adversely impacted
by recent allegations of improper trading practices by its personnel, loss of
certain significant accounts and assets under management, and the turnover of
key investment personnel; and (ii) a desire for improved investment performance
for the Fund. The Trustees were influenced by the fact that Independence would
manage the Fund substantially in the manner that it had already been managing
the Trust's Large Cap Growth Fund, and they concluded that this was the best
option available for the Fund at this time. At its meeting on March 24, 2004,
the Board also approved a reduction in the investment advisory fee of the
Fundamental Growth Fund to make it equivalent to that paid by the Large Cap
Growth Fund. The Trustees were influenced by the fact that, because these two
Funds are being managed in substantially the same manner, it is appropriate for
the fee structure to be the same.
2. Large Cap Growth B Fund (formerly, the Large Cap Aggressive Growth Fund).
At its December 10, 2003 meeting, the Board approved the removal of Janus
Capital Management, LLC ("Janus") as the sub-adviser for this Fund and its
replacement by Independence. John Hancock recommended that Janus be terminated
based on concerns that Janus' reputation and stability would be adversely
impacted by recent allegations of improper trading practices by its personnel
and turnover of key investment personnel, including a chief investment officer.
The Trustees were influenced by the fact that Independence would manage the Fund
substantially in the manner that it had already been managing the Trust's Large
Cap Growth Fund, and they concluded that this was the best option available for
the Fund at this time. At its meeting on March 24, 2004, the Board also approved
a reduction in the investment advisory fee for the Large Cap Growth B Fund to
make it equivalent to that paid by the Large Cap Growth Fund. The Trustees were
influenced by the fact that, because the two Funds are being managed in
substantially the same manner, it is appropriate for the fee structures to be
the same.
3. Overseas Equity B Fund (formerly, the International Opportunities Fund). At
its December 10, 2003 meeting, the Board approved (a) the termination of this
Fund's sub-adviser and its replacement by Capital Guardian Trust Company
("Capital Guardian") and (b) elimination of John Hancock's contractual
obligation to reimburse the Fund for certain operating expenses in excess of
..10% per annum. In approving Capital Guardian as the Fund's new sub-adviser, the
Trustees were influenced by the fact that Capital Guardian would manage the Fund
in the manner that it already had been managing the Trust's Overseas Equity
Fund, and they believed that retention of Capital Guardian would increase the
potential for improved investment performance by the Fund. The Trustees approved
elimination of the above-mentioned .10% cap partially in recognition that an
international fund such as this
39
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund and partially in recognition that, because Capital
Guardian's sub-advisory fee would be higher than that of the previous
sub-adviser, John Hancock would be retaining a reduced "spread" from the
advisory fees that it receives from the Fund.
4. Overseas Equity C Fund (formerly the Emerging Markets Equity Fund). At its
December 10, 2003 meeting, the Board approved: (a) the termination of this
Fund's sub-adviser and its replacement by Capital Guardian, (b) a reduction in
the advisory fee paid by the Fund to John Hancock, and (c) elimination of John
Hancock's contractual obligation to reimburse the Fund for certain operating
expenses in excess of .10% per annum. In approving Capital Guardian, as the
Fund's new sub-adviser, the Trustees were influenced by the fact that Capital
Guardian would manage the Fund in the manner that it had already been managing
the Trust's Overseas Equity Fund. The Trustees believed that this would increase
the potential for improved investment performance by the Fund, as well as
significantly reduce the high operating expenses that had resulted from the
Fund's historic policy of investing primarily in emerging markets. In that
connection, Capital Guardian's sub-advisory fee is substantially less than that
of the prior sub-manager and the Trustees believed it was appropriate for John
Hancock's advisory fee likewise to be substantially reduced. Furthermore, the
Trustees approved elimination of the above-mentioned .10% cap partially in
recognition of the reduction in the advisory fee and partially in recognition
that an international fund such as this necessarily tends to have higher
ordinary operating expenses than an otherwise similar purely domestic fund.
5. Overseas Equity Fund. At its December 10, 2003 meeting, the Board approved
(a) an increase in the advisory fee paid by this Fund to John Hancock and (b)
the elimination of John Hancock's contractual obligation to reimburse the Fund
for certain operating expenses in excess of .10% per annum. The Trustees
approved this partially in recognition that an international fund such as this
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund. More broadly, however, these changes resulted from
the Trustees' consideration of information presented by John Hancock to the
effect that the fee structure of this Fund, coupled with the expense "cap," did
not afford John Hancock a sufficient level of compensation to allow John Hancock
to continue to support the fund on a long term basis as it had in the past. The
Trustees' actions at the December 10, 2003 meeting were intended to address this
problem. The same is true of subsequent action the Board took (at its February
11, 2004 meeting) approving a reduction in the fees paid to the sub-adviser of
this Fund. In the case of such latter action, the Trustees also took into
consideration a representation that the quality or quantity of sub-advisory
services to the Fund would not be reduced as a consequence of the fee reduction.
6. International Equity Index Fund. At its December 10, 2003 meeting, the
Board approved (a) the termination of this Fund's sub-adviser and its
replacement by SSgA Funds Management, Inc. ("SSgA") and (b) the elimination of
John Hancock's contractual obligation to reimburse the Fund for certain
operating expenses in excess of .10% per annum. A change in sub-advisers was
necessary, because the prior sub-adviser was terminating its business of
managing international equity index funds. The board approved SSgA primarily
based on its confidence in SSgA's capabilities, SSgA's willingness to accept a
significantly lower sub-advisory fee than the prior sub-adviser, and the Board's
belief that the "spread" retained by John Hancock would still not be
unreasonably large. The Trustees approved elimination of the .10% expense cap
partially in recognition that an international fund such as this necessarily
tends to have higher ordinary operating expenses than an otherwise purely
domestic fund and partially in recognition of the fact that this expense cap was
preventing John Hancock from retaining a sufficient amount of compensation to
make its relationship with this Fund economically viable.
7. Global Bond Fund. At its December 10, 2003 meeting, the Board approved the
elimination of John Hancock's contractual obligation to reimburse the Fund for
certain operating expenses in excess of .10% per annum. The Trustees approved
this partially in recognition that an international fund such as this
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund and partially in recognition of the fact that
eliminating this expense "cap" would not currently have a substantial impact on
the Fund's overall expense ratio.
8. Health Sciences Fund. As its December 10, 2003 meeting, the Board approved
the elimination of John Hancock's contractual obligation to reimburse the Fund
for certain operating expenses in excess of .10% per annum. The Trustees
approved this partially in recognition that doing so would enable John Hancock
to retain an amount of compensation from this Fund that would be more likely to
result in continued strong support for the Fund by John Hancock, while still not
being excessive.
9. Fundamental Value B Fund (formerly the Large Cap Value CORE Fund). At its
December 10, 2003 meeting, the Board approved the termination of this Fund's
sub-adviser and its replacement by Wellington Management Company, LLP
("Wellington Management"). The Trustees were influenced by the fact that
Wellington Management would manage the Fund in the manner that it already had
been managing the Trust's Fundamental Value Fund, and the Trustees believed that
this strategy (implemented by Wellington Management) would be more attractive to
prospective investors. At its February 11, 2004 meeting, however, the Board also
approved an increase in the management fee paid to John Hancock by this Fund to
make it equivalent to that paid by the Fundamental Value Fund. The Trustees were
influenced by the fact that, because these two Funds are being managed in
substantially the same manner, it is appropriate for their fee structure to be
the same.
40
10. Growth & Income Fund. At its December 10, 2003 meeting, the Board approved
the removal of Putnam as the sub-adviser for a portion of the Growth & Income
Fund's assets, and its replacement by T. Rowe Price Associates, Inc. ("T. Rowe
Price"). John Hancock recommended that Putnam be terminated based on (i)
concerns that Putnam's reputation and stability would be adversely impacted by
recent allegations of improper trading practices by its personnel, loss of
certain significant accounts and assets under management, and turnover of key
investment personnel. The Trustees had confidence in T. Rowe Price's ability to
effectively manage a portion of this Fund and were also mindful of certain
advantages of establishing a broader relationship with T. Rowe Price.
Specifically, this change helped to make the Trust's relationship with T. Rowe
Price sufficiently large that T. Rowe Price would voluntarily reduce all of its
sub-advisory fees with the Trust by 5%. Although such a reduction will not
directly benefit the affected Funds of the Trust, it should help to ease upward
pressure on advisory fee rates.
11. Mid Cap Value B Fund (formerly the Small/Mid Cap CORE Fund). At its
December 10, 2003 meeting, the Board approved the termination of this Fund's
sub-adviser and its replacement by T. Rowe Price. The Trustees were influenced
by the fact that T. Rowe Price would manage the fund in the same manner as it
already had been managing the Trust's Mid Cap Value Fund, and the Trustees
believed that this strategy (implemented by T. Rowe Price) would be more
attractive to prospective investors.
12. Managed Fund. At its meeting on February 11, 2004, the Board approved a
reduction in the sub-advisory fee for the fixed income portion of this Fund that
is sub-advised by Independence. The Trustees were influenced by their
understanding that the reduction in this fee would not result in any reduction
in the quality or amount of services being furnished by Independence.
13. Small Cap Fund. At its February 11, 2004 meeting, the Board approved the
removal of this Fund's sub-adviser and its replacement by Wellington Management.
The Trustees were influenced by the fact that Wellington Management would manage
the Fund substantially in the manner that it had already been managing the
Trust's Small Cap Emerging Growth Fund, and the Trustees believed that this is
the best option available to this Fund at this time. Although Wellington
Management will receive a higher sub-advisory fee from John Hancock than did its
predecessor, John Hancock has not increased its advisory fee for this Fund. In
fact John Hancock has reduced its advisory fee somewhat (which was also approved
by the Board at the February 11, 2004 meeting). The Board took all of these
factors into account in approving the changes, as well as the fact that the new
fee structure would be identical to that for the Trust's existing Small Cap
Emerging Growth Fund.
In connection with their deliberations, the Board and the Trust Governance
Committee received legal advice from outside counsel to the Trust regarding the
standards and methodology of evaluation articulated by the SEC, the courts and
the industry for mutual funds selling shares to the public and the applicability
of those standards and that methodology to mutual funds - like the Trust -
selling shares to life insurance company separate accounts. Such legal counsel,
through its representation of John Hancock on certain matters in which the Trust
does not have a direct interest, is also familiar with the Insurers' variable
insurance products and separate accounts funded through the Trust. The Trustees
considered advice of such legal counsel that mutual funds selling shares to life
insurance companies differed, in certain respects, from mutual funds selling
shares to the public and that, consequently, the standards and methodology of
evaluation developed for the latter did not necessarily apply to the former in
all respects. The Trustees considered, for example, the fact that SEC rules
would permit John Hancock to "veto" Trustee or contract owner proposals for an
adviser other than John Hancock under specified circumstances and that the 1940
Act would permit John Hancock to seek SEC approval to substitute another mutual
fund for the Trust if the Trustees were to select an adviser other than John
Hancock.
The Trustees also took into account the fact that John Hancock affords
contract owners the privilege of instructing John Hancock how to vote the Trust
shares held by John Hancock and that, pursuant to the process, the contract
owners would have the opportunity to vote on, among other things, any increased
advisory fees or elimination of expense caps
The foregoing discussion of the material factors considered and conclusions
reached by the Trustees is not intended to be all-inclusive. The Trustees
reviewed a large variety of factors and considered a significant amount of
information, including information received on an ongoing basis at meetings of
the Board, the Trust Governance Committee, and the Audit Committee and
otherwise. In view of the broad scope and variety of these factors and
information, the Board did not find it practicable to, and did not, make
specific assessments of, quantify, or otherwise assign relative weights to the
specific factors considered in reaching the Board's conclusions and
determinations to approve the continuance of the Trust's advisory agreement and
each sub-advisory agreement. The approval determinations were made on the basis
of each Trustee's business judgment after consideration of all of the factors
taken as a whole, though individual Trustees may have given different weights to
different factors and assigned various degrees of materiality to various
conclusions.
As a result of their consideration, the Trustees, in the exercise of their
business judgment, gave the approvals discussed above as being in the best
interest of each Fund to which it relates.
41
G. ARRANGEMENTS WITH OTHER SERVICE PROVIDERS TO THE TRUST
1. Underwriting and Indemnity Agreement
Pursuant to an Underwriting and Indemnity Agreement, Signator Investors,
Inc. ("Signator") serves as the Trust's principal underwriter for NAV shares,
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 NAV 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.
2. 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 of an 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 assets to the total net assets of the Trust; miscellaneous transaction
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 charges; special service fees for activities of a non-recurring
nature; and reimbursement of specified out-of-pocket expenses.
Foreign securities are generally held through subcustodian banks and
depositories around the world with whom State Street Bank has relationships. In
some cases, Funds whose securities are held in this manner may be exposed to
greater risks of loss. This is because the soundness of such foreign entities,
as well as foreign regulatory practices and procedures, may provide less
protection to security holders than is available in the U.S.
In certain circumstances, brokers may have access to assets that a Fund
posts as "margin" in connection with futures and options transactions. In the
event of a broker's insolvency or bankruptcy, a Fund could experience a delay or
incur costs in recovering such assets or might recover less than the full amount
due. Also the value of such assets could decline by the time the Trust could
effect such recovery.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts held through a given broker, it will be
entitled immediately to receive from the broker the net amount of such gains.
The Trust will request payment of such amounts promptly after notification by
the broker that such amounts are due. Thereupon, these assets will be deposited
in the Trust's general or segregated account with its primary custodian, as
appropriate.
3. 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 $1,333.
4. 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.
42
5. Distribution of Series I and Series II Shares
The Board of Trustees of the Trust have approved a plan (the "12b-1Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"). Under the 12b-1 Plan, Series I shares and Series II shares of the
International Equity Index Fund are subject to Rule 12b-1fees as specified in a
Distribution Agreement between the Trust and Manulife Financial Services LLC
(the "Series Distributor"). Under that agreement, Series I shares are subject to
a Rule 12b-1 fee up to an annual rate of .40% of Series I share average daily
net assets and Series II shares are subject to a Rule 12b-1 fee up to an annual
rate of .60% of Series II share average daily net assets.
These Rule 12b-1 fees are paid to the Series Distributor. To the extent
consistent with applicable laws, regulations and rules, the Series Distributor
may use Rule 12b-1 fees:
.. for any expenses relating to the distribution of the shares of the class,
including, but not limited to, compensation to and expenses of employees of
the Series Distributor or an affiliated insurer, including overhead and
telephone expenses, who engage in the distribution of that class of that
Fund's shares in connection with the distribution of variable annuity or
variable life insurance contracts ("Contracts") under which that class of
that Fund's shares is an investment option; printing and distributing Fund
prospectuses, statements of additional information and reports to prospective
investors (through Contracts) in that class of that Fund's shares;
compensation to financial intermediaries and broker-dealers to pay or
reimburse them for their services or expenses in connection with the
distribution of Contracts under which that class of that Fund's shares is an
investment option; expenses relating to the development, preparation,
printing, mailing and publication of advertisements, sales literature and
other promotional materials describing and/or relating to that class of that
Fund's shares or Contracts under which that class of that Fund's shares is an
investment option; expenses of holding seminars and sales meetings designed
to promote the distribution (through Contracts) of that class of that Fund's
shares; expenses of obtaining information from and providing explanations to
owners (or potential owners) of Contracts under which that class of that
Fund's shares is an investment option, regarding that Fund's investment
objectives and policies and other information about the Fund, including the
performance of the Fund; expenses of training sales personnel regarding that
class of that Fund's shares; and expenses of compensating sales personnel in
connection with the allocation of cash values and premiums under Contracts to
that class of that Fund's shares,
.. for any expenses relating to shareholder or administrative services for
holders of the shares of the class (or owners of Contracts funded in
insurance company separate accounts that invest in the shares of the class)
and
.. for the payment of "service fees" that come within Rule 2830(d)(5) of the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
Currently, the "service fee" component of the Rule 12b-1 fees for both
Series I and Series II shares is .25% of average daily net assets. Any such
"service fee" is paid to the Series Distributor which then may reallocate all or
a portion of the service fee to one or more affiliated or unaffiliated parties
which have agreed to provide to beneficial owners of Series I and Series II
shares those services encompassed by the term "personal service and/or the
maintenance of shareholder accounts" as defined in Rule 2830(d)(5) of the Rules
of Fair Practice of the NASD.
Without limiting the foregoing, the Series Distributor may pay allor part
of the Rule 12b-1 fees from the International Equity Index Fund to one or more
affiliated and unaffiliated insurance companies that have issued variable
insurance contracts for which the International Equity Index Fund serves as an
investment vehicle as compensation for providing some or all of the types of
services described in the preceding paragraph; this provision, however, does not
obligate the Series Distributor to make any such payments of Rule 12b-1 fees and
does not limit the use that the Series Distributor may make of the Rule 12b-1
fees it receives to such payments. Currently, all such payments are made to
insurance companies affiliated with the Trust's Adviser and with the Series
Distributor. However, payments may be made to nonaffiliated insurance companies
in the future.
The 12b-1 Plan provides that if only part of any of the above-listed
activities or expenses (or of any other expenses or activities) is intended to
result in sales of (or services to) a class of a Fund's shares, the Series
Distributor may make a reasonable apportionment thereof, so as to apply Rule
12b-1 Fees borne by that class of that Fund's shares to the portion of such
activities or expenses that pertains to the distribution of (or services to)
that class of that Fund's shares. The 12b-1 Plan may not be amended to increase
materially the amount to be spent by the International Equity Index Fund without
such shareholder approval as is required by Rule12b-1 under the 1940 Act (the
"Rule"). All material amendments of the 12b-1 Plan must be approved in the
manner described in the Rule. The 12b-1Plan shall continue in effect (i) with
respect to the International Equity Index Fund only so long as the 12b-1 Plan is
specifically approved for that Fund at least annually as provided in the Rule
and (ii) only while (a) a majority of the Trustees are not interested persons
(as defined in the 1940 Act) of the Trust, (b) incumbent disinterested Trustees
select and nominate any new disinterested Trustees of the Trust and (c) any
person who acts as legal counsel for the disinterested Trustees is an
independent legal counsel. The 12b-1Plan may be terminated with respect tothe
International Equity Index Fund at any time as provided in the Rule.
43
During the fiscal year ended December 31, 2003, the 12b-1 Plan was not in
effect and no amounts were paid thereunder.
H. 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:
Fund 2003 2002 2001
- ----------------------------------- ------------ ------------ ------------
Equity Index....................... $ 74,513 $ 80,181 $ 96,080
Large Cap Value.................... 149,385 154,981 164,776
Large Cap Growth................... 1,188,313 1,554,313 1,042,938
Large Cap Growth B................. 49,709 68,300 64,914
Fundamental Growth................. 62,156 92,268 56,725
Earnings Growth.................... 681,069 769,172 483,126
Growth & Income.................... 3,919,445 4,372,752 4,394,341
Fundamental Value.................. 240,593 335,531 635,553
Fundamental Value B................ 2,212 16,030 40,010
Mid Cap Value...................... 38,191 -- --
Mid Cap Value B.................... 12,113 59,967 33,593
Mid Cap Growth..................... 749,750 735,675 362,533
Small Cap Value.................... 210,163 219,255 130,951
Small Cap Emerging Growth.......... 832,863 138,317 89,478
Small Cap Growth................... 859,559 562,914 268,016
International Equity Index......... 62,171 41,487 43,092
Overseas Equity.................... 94,860 40,104 21,248
Overseas Equity B.................. 180,968 217,451 128,826
Overseas Equity C.................. 155,441 166,769 158,236
Real Estate Equity................. 210,473 199,488 171,319
Health Sciences.................... 88,578 59,794 28,279
Financial Industries............... 39,219 -- --
Managed............................ 2,681,322 3,177,479 2,387,899
Bond Index......................... 1,141 836 3,312
Active Bond........................ 2,005 399 0
Total Return Bond.................. 0 -- --
High Yield Bond.................... 0 642 88
Global Bond........................ 43 0 0
How Brokers and Dealers are Selected
Orders for the purchase and sale of Fund portfolio investments are placed
by the respective subadvisers to the Funds. The subadvisers use their best
efforts to obtain best available price (including brokerage commissions and
other transaction costs) and most favorable execution for all transactions. The
subadvisers select brokers and dealers to execute Fund portfolio transactions
primarily on the basis of their execution capability and trading expertise.
Consideration is also given to such factors as the price of the security, the
rate of the commission, the size and difficulty of the order, the
confidentiality of trades, the reliability, integrity, financial condition, and
operational capabilities of competing brokers or dealers, and the brokerage and
research services which they provide. Applicability of specific criteria will
vary depending on the nature of the transaction, the market in which it is
effected, and the extent to which it is possible to select from among multiple
brokers or dealers capable of effecting the transaction.
It is not the policy of the subadvisers to seek the lowest available
commission if, in their reasonable judgment, there is a material risk that the
total cost or proceeds from the transaction might be less favorable than may be
obtainable elsewhere.
44
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. Costs which are allocable to non-research purposes will be paid
directly by the subadviser.
Research and statistical services furnished by brokers and dealers handling
the Funds' transactions may be used by the subadvisers for the benefit of all of
the accounts managed by them and not all of such research and statistical
services may be used by the subadvisers in connection with the Funds.
Relationship Between Brokerage Commissions and Research and Statistical Services
Furnished by Brokers and Dealers
When the subadvisers reasonably determine that more than one broker or
dealer can offer the brokerage and execution services needed to obtain best
available price and most favorable execution, consideration may be given to
selecting the brokers or dealers who supply research and statistical services to
the subadvisers. In receiving these services, which are designed to augment the
subadvisers' own internal research capabilities, the subadvisers comply with
Section 28(e) of the Securities Exchange Act of 1934. This means that the
subadvisers' traders for the Funds, on the basis of their experience and
judgment, evaluate the overall reasonableness of any broker's commissions in
light of all of the brokerage and research services the broker provides. If the
trader for a Fund concludes that the commission rate is reasonable, and the
other requirements of Section 28(e) are met, the law protects the subadviser
from any legal liability that might otherwise result from causing the Fund to
pay the broker a commission in excess of what another broker would have charged.
The subadvisers of the Funds will not at any time make a commitment
pursuant to an agreement with a broker because of research services provided.
The subadvisers do, however, have internal procedures that seek to direct
certain amounts to broker-dealers that provide research and statistical services
of a type covered by Section 28(e). These internal procedures do not mandate
that any amount of business be directed to any broker-dealer, and in no event
will a broker-dealer be used unless the subadviser believes that the
broker-dealer also will provide the best available price and most favorable
execution, as discussed above. During 2003, the amount of transactions, of each
Fund directed to brokers who are included in these internal arrangements, and
the related amounts of commission were as follows:
Dollar Amount Dollar Amount
Fund of Transactions of Commissions
- ---------------------------------------- --------------- --------------
Large Cap Value......................... $ 6,485,360 $ 11,141
Large Cap Growth........................ 179,232,159 262,988
Large Cap Growth B...................... 893,361 1,186
Fundamental Growth...................... 12,564,997 24,911
Earnings Growth......................... 252,228,282 66,116
Growth & Income......................... 499,297,059 969,234
Fundamental Value....................... 24,329,160 19,555
Mid Cap Value........................... 512,445 1,397
Small Cap Emerging Growth 13,344,345 8,449
Mid Cap Growth.......................... 45,929,832 54,016
Small Cap Value......................... 3,225,124 3,045
Small Cap Growth........................ 53,501,488 147,095
International Equity Index.............. 81,101,379 8,142
Overseas Equity B....................... 2,500,393 4,505
Overseas Equity C....................... $ 4,691,880 $ 5,808
Real Estate Equity...................... 95,858 11,843
Health Sciences......................... 532,893,201 7,300
45
Dollar Amount Dollar Amount
Fund of Transactions of Commissions
- ---------------------------------------- --------------- --------------
Financial Industries.................... 8,121,589 9,119
Managed................................. 338,422,269 548,196
Bond Index.............................. 5,843,847 1,141
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.
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'
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 share prices which are
approximately averaged.
The subadvisers' allocation policies recognize that no rigid formula will
always lead to a fair and reasonable result, and that a degree of flexibility to
adjust to specific circumstances is necessary. Therefore, under certain
circumstances, allocation on a basis other than strictly pro rata or based on
order size is permitted if it is believed that such allocation is fair and
reasonable.
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.
46
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:
Amount of Commissions Paid by
Fund
--------------------------------
Nature of Broker's
Name of Affiliated Affiliation with Fund's
Fund Broker Subadviser 2003 2002 2001
- ------------------- ---------------------- --------------------------- --------- --------- --------
Equity Index Lattice Wholly-owned subsidiary of $ 55,870 $ 0 $ 0
subadviser's parent
Large Cap Growth B Sanford Bernstein & Wholly-owned subsidiary of 0 405 0
Co. former subadviser's parent
Fundamental Value B Goldman, Sachs & Co. Dual operating division of 828 1,400 0
former subadviser's parent
Fundamental Value B Spear, Leeds & Kellog. Dual operating division of 138 236 3,141
parent of former subadviser
Mid Cap Value B Goldman, Sachs & Co. Dual operating division of 3,473 1,430 0
parent of former subadviser
Mid Cap Value B Spear, Leeds & Kellog Dual operating division of 1,514 1,355 0
parent of former subadviser
Overseas Equity C Morgan Stanley Asia Wholly-owned subsidiary of 0 254 163
Limited former subadviser's parent
Overseas Equity C JM Morgan Stanley Wholly-owned subsidiary of 0 70 162
Securities Private former subadviser's parent
Ltd.
Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 746 429 2,120
Securities former subadviser's parent
Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 0 1,049 0
International Limited former subadviser's parent
For 2003, the total dollar amount of such transactions through affiliated
brokers as a percentage of all brokerage-type transactions was 5.36% for the
Equity Index Fund, 0.67% for the Fundamental Value B Fund, 1.19% for the Mid Cap
Value B Fund, and 0.32% for the Overseas Equity C Fund. For 2002, the total
dollar amount of such transactions through affiliated brokers as a percentage of
all brokerage-type transactions was 2.91% for the Mid Cap Value B Fund, 1.09%
for the Overseas Equity C Fund, 0.32% for the International Equity Fund, 0.09%
for the Large Cap Growth B Fund, and 0.01% for the Fundamental Value B Fund. For
2001, the total dollar amount of such transactions through affiliated brokers as
a percentage of all brokerage-type transactions was 3.92% for the International
Equity Fund, and 1.54% for the Overseas Equity C Fund.
Directed Brokerage
From time to time the Trust may, on behalf of one or more Funds, request
that John Hancock and the subadvisers also consider what are commonly referred
to as "directed brokerage arrangements." Under such arrangements, a
broker-dealer will rebate a portion of the brokerage commission it receives from
(or on behalf of) a Fund and will apply that rebate to pay certain operating
expenses that the Fund would otherwise pay directly. The Trust may condition its
requests by requiring that subadvisers effect transactions with broker-dealers
participating in such arrangements only if the subadviser believes that the
broker-dealer will provide the best overall combination of price and execution
(i.e., "best execution") for those transactions. While the Trust believes that
overall this practice will benefit the Funds, in some cases the subadvisers may
be unable to obtain volume discounts, and commissions charged under directed
brokerage arrangements may be higher than those available from certain sources
not involving such arrangements. In addition, directed brokerage arrangements
may also result in a loss of the possible advantage from aggregation of orders
for several clients of a subadviser as a single transaction for the purchase or
sale of a particular security, and, in an effort to achieve orderly execution of
transactions, directed brokerage transactions may be delayed until execution of
other orders have been completed. John Hancock will monitor directed brokerage
transactions to help ensure that they are in the best interest of the affected
Funds and their shareholders.
47
The Trust has entered into a directed brokerage arrangement with State
Street Global Markets, LLC ("SSGM"), an affiliate of the Custodian, under which
a Fund will receive a credit on a trade-by-trade basis for part of the brokerage
commission paid with respect to brokerage transactions directed by the Fund's
subadviser(s) to a broker/dealer within SSGM's network of broker/dealers. SSGM
will then apply the credit against other expenses of the Fund, including the
Fund's share of the Custodian's fee. Under this arrangement, subadvisers will be
instructed to use a broker-dealer participating in the arrangement only if the
subadviser believes that the broker-dealer will provide the "best execution" for
the transaction in question.
Transition Services
From time to time, John Hancock and the Trust may engage State Street
Global Markets ("SSGM"), a division of State Street Bank, as a trading advisor
in connection with the restructuring of the Fund's custody account maintained by
the Custody Division of State Steet Bank. Such restructuring may be required,
for example, when a Fund retains a new subadviser or when two Funds merge. As a
trading advisor, SSGM provides consulting services concerning the most cost
efficient and effective manner in which (1) Trust-identified securities in the
custody account can be liquidated, and (2) Trust-identified securities can be
acquired for the custody account. These services include, in part, reviewing the
portfolio, analyzing transaction volumes and the number of securities positions
in the restructuring, and examining potential trading costs including a review
of using off-exchange trading networks, and effecting trades of the
Trust-identified securities to be disposed or acquired. In the course of
providing these services, SSGM may become aware that one or more of the
collective funds or client accounts that State Street Bank manages (the "State
Street Accounts") either have demand for certain of the securities contained in
the Fund's custody account or have available for sale certain securities which
are component securities of the investment portfolio that Trust (on behalf of
the affected Fund) has directed SSGM to construct. In such event, SSGM may, in
its capacity as manager of the State Street Accounts and consistent with its
obligations to the State Street Accounts, extend to the affected Fund either an
offer to purchase from the custody account a specific list of securities or to
sell to the custody account a specific list of securities on behalf of the State
Street Accounts. In such an event, the Trust (on behalf of the affected Fund),
but not SSGM, has the authority and responsibility to determine whether to
accept such an offer on behalf of the Fund's custody account.
I. CODES OF ETHICS
Employees of John Hancock Life Insurance Company, the Trust, and the
subadvisers 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 subadvisers
to the various Funds of the Trust ("Subadvisers' 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 subadvisers to the Funds and the interests of
the Funds. These Codes do not generally 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 to compliance
personnel of broker confirmations and quarterly reporting of personal securities
transactions. Additional restrictions may 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 Trustees from investing in securities that may be held by the
Trust; however, the Variable Series Trust Code of Ethics does regulate the
personal securities transactions of unaffiliated Trustees of the Trust,
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, have approved the Variable Series Trust
Codes of Ethics and the Subadvisers' Codes of Ethics and are required to approve
any material changes to the Variable Series Trust Code of Ethics as well as to
the Subadvisers' Codes of Ethics. The Trustees also provide continuing oversight
of personal investment policies and annually evaluate the implementation and
effectiveness of the Codes. The Codes are on public file with, and are available
from, the Securities and Exchange Commission.
J. FEATURES OF THE TRUST'S SHARES
The shares of beneficial interest of the Trust currently are divided into
30 series, each corresponding to one of the Trust's 30 Funds. The Trust has the
right to establish additional series and issue additional shares without the
consent of its shareholders. Each series may issue four classes of shares: NAV
shares (this is the initial class of shares issued by each Fund), Series I
shares, Series II shares and Series III shares. Currently, the International
Equity Index Fund is the only series ("Fund") of the Trust that issues the
Series II or Series III class of shares. (Each class of shares is the same
except for differences in class expenses, including different Rule 12b-1 fees,
and voting rights.) Series III shares are not currently offered.
48
If the holders of variable annuity contracts and variable life insurance
policies show minimal interest in any Fund, the Trust's Board of Trustees, by
majority vote, may eliminate the Fund or substitute shares of another investment
company. Any such action by the Board would be subject to compliance with any
requirements for governmental approvals or exemptions or for shareholder
approval. The holders of variable annuity contracts and variable life insurance
policies participating in any such Fund will be notified in writing of the
Trust's intention to eliminate the Fund and given 30 days to transfer amounts
from such Fund to other Funds without incurring any transaction fee. Amounts not
transferred or withdrawn would automatically be transferred, at the discretion
of the Fund's management.
The assets received by the Trust for the issuance or sale of shares of each
Fund and all income, earnings, profits, and proceeds thereof are specifically
allocated to that Fund. They constitute the underlying assets of each Fund, are
segregated on the books of the Trust, and are to be charged with the expenses of
such Fund. Any assets which are not clearly allocable to a particular Fund or
Funds are allocated in a manner determined by the Board of Trustees. Accrued
liabilities which are not clearly allocable to one or more Funds would generally
be allocated among the Funds in proportion to their relative net assets before
adjustment for such unallocated liabilities.
Each issued and outstanding share in a Fund is entitled to participate
equally in dividends and distributions declared with respect to such Fund and in
the net assets of such Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities.
A dividend from the net investment income of the Money Market Fund will be
declared and distributed daily. Dividends from net investment income of the
other Funds will be declared and distributed monthly. The Trust will distribute
all of its net realized capital gains annually. Dividends and capital gains
distributions will normally be reinvested in additional full or fractional
shares of the Fund to which they relate and will be appropriately credited to
investment performance under the variable life insurance policies and variable
annuity contracts participating in that Fund.
The shares of each Fund, when issued, will be fully paid and
non-assessable, and will have no preference, preemptive, exchange or similar
rights. Shares do not have cumulative voting rights.
K. 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 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.
49
Voting of Series I and Series II Shares. Manulife New York and
Manufacturers USA have the right to vote Series I and Series II shares upon
matters that may be voted upon at any Trust shareholders' meeting with respect
to the International Equity Index Fund. These companies will vote all Series I
and Series II shares of the International Equity Index Fund of the Trust issued
to such companies in proportion to the timely voting instructions received from
owners of the contracts participating in separate accounts of such insurance
companies registered under the 1940 Act ("Contract Owner Instructions"). Each
entity votes the shares it owns in proportion to Contract Owner Instructions.
L. 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" to
currently available funds have been as follows:
"Seed Money" NAV
Shares Purchased Date of
Fund by John Hancock Purchase
- --------------------------------------------- ---------------- ----------
Large Cap Growth B 10,000,000 8/31/99
Fundamental Value............................ 5,000,000 8/31/99
Fundamental Value B.......................... 5,000,000 8/31/99
Fundamental Growth........................... 5,000,000 8/31/99
Mid Cap Value................................ 5,000,000 4/30/03
Mid Cap Value B.............................. 5,000,000 5/1/98
Small Cap Value.............................. 5,000,000 8/31/99
Health Sciences.............................. 20,000,000 5/1/01
Financial Industries......................... 200,000 4/29/03
International Opportunities.................. 15,000,000 5/1/96
Overseas Equity.............................. 20,000,000 5/1/96
Overseas Equity C............................ 10,000,000 5/1/98
Bond Index................................... 25,000,000 5/1/98
Total Return Bond............................ 25,000,000 4/30/03
High Yield Bond.............................. 10,000,000 5/1/98
John Hancock (or its affiliate) may redeem these NAV 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.
As of December 31, 2003, only the following Funds still have seed money
that has not been withdrawn: Mid Cap Value Fund, Overseas Equity Fund, Overseas
Equity C Fund (then known as the "Emerging Markets Equity Fund"), Health
Sciences Fund and Total Return Bond Fund.
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.
50
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.
M. COMPUTING THE FUNDS' NET ASSET VALUE
Each Fund determines its net asset value per share once daily as of the
close of the customary trading session of the New York Stock Exchange
("Exchange") on each business day of the Fund. The Exchange generally closes at
4:00 p.m. Eastern Standard Time. However, ETFs and certain derivative
instruments may be valued using prices as late as 4:15 p.m. Eastern Standard
Time. In the event the Exchange closes at any time other than 4:00 p.m. Eastern
Standard Time on a particular day, each Fund will determine its net asset value
per share as of the close of the Exchange on that day.
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 $1. There can be no assurance, however, that the Fund will at
all times be able to maintain a constant $1 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 $1 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 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.
51
N. 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 or 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 any three investments and no more than 90% by
any 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, and meet certain distribution requirements they will not owe any
income taxes. On the other hand, if a Fund fails to qualify under Subchapter M,
or fails to distribute a sufficient amount of income or gains 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 most 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 the insurance
company issuing the variable annuity contract or a variable life insurance
policy any taxes withheld by foreign taxing jurisdictions on foreign source
income. Such an election will result in additional taxable income and income tax
to the insurance company. The amount of additional income tax, however, may be
more than offset by credits for the foreign taxes withheld, which are also
passed through.
O. INFORMATION ABOUT FUND PERFORMANCE
How Money Market Fund Yields Are Calculated
The Money Market Fund may advertise investment performance figures,
including its current yield and its effective yield.
The Money Market Fund's yield is its current investment income, expressed
in annualized terms. The current yield is based on a specified
seven-calendar-day period. It is computed by (1) determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, (2)
dividing the net change in account value by the value of the account at the
beginning of the base period to get the base period return, then (3) multiplying
the base period return by 52.15 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculations include the value of additional shares purchased with any
dividends paid on the original share and the value of dividends declared on both
the original share and any such additional shares. The capital changes excluded
from the calculation are realized capital gains and losses from the sale of
securities and unrealized appreciation and depreciation.
Compound (effective) yield for the Fund will be computed by dividing the
seven-day annualized yield (determined as above) by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
The Fund's yield will fluctuate depending upon market conditions, the type,
quality, and maturity of the instruments in the Fund, and its expenses.
52
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.
P. LEGAL MATTERS
The law firm of Foley & Lardner of Washington, D.C., advises the Trust on
certain legal matters relating to the Federal securities laws.
Q. 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.
53
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.
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
54
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.
Fitch Inc. describes its ratings for corporate bonds as follows:
AAA -- Highest credit quality. 'AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA -- Very high credit quality. 'AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A -- High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for
higher ratings.
BBB -- Good credit quality. 'BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
BB -- Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B -- Highly speculative. 'B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic environment.
CCC, C, C -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of
some kind appears probable. 'C' ratings signal imminent default.
DDD, DD, D -- Default. Securities are not meeting current obligations and
are extremely speculative. ~DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, 'DD' indicates expected recovery of 50%-90% of
such outstanding, and 'D' the lowest recovery potential, i.e. below 50%.
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
rating category or to categories below 'CCC'.
55
APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
The following pages of this appendix contain information on proxy voting
polices, guidelines and procedures of the Trust and, with respect to its
services to the Trust, John Hancock. After that, this appendix contains
information on the proxy voting polices, guidelines and procedures of the
following subadvisers:
- --------------------------------------------------------------------------------
Subadviser Appendix Page
- --------------------------------------------------------------------------------
Independence Investment LLC B - 5
- --------------------------------------------------------------------------------
John Hancock Advisers, LLC B - 7
- --------------------------------------------------------------------------------
Declaration Management & Research Company B - 11
- --------------------------------------------------------------------------------
SSgA Funds Management, Inc. B - 13
- --------------------------------------------------------------------------------
T. Rowe Price Associates, Inc. B - 18
- --------------------------------------------------------------------------------
Morgan Stanley Investment Management Inc. B - 20
- --------------------------------------------------------------------------------
Standish Mellon Asset Management Company LLC B - 25
- --------------------------------------------------------------------------------
Wellington Management Company, LLP B - 26
- --------------------------------------------------------------------------------
Capital Guardian Trust Company B - 27
- --------------------------------------------------------------------------------
Pacific Investment Management Company LLC B - 30
- --------------------------------------------------------------------------------
RREEF America L.L.C. B - 36
- --------------------------------------------------------------------------------
Fidelity Management & Research Company B - 42
- --------------------------------------------------------------------------------
B - 1
JOHN HANCOCK VARIABLE SERIES TRUST I
PROXY VOTING POLICIES AND PROCEDURES
I. BACKGROUND
On January 23, 2003, the Securities and Exchange Commission ("SEC")
adopted a final rule regarding the Disclosure of Proxy Voting Policies and
Proxy Voting Records by Registered Management Investment Companies (the
"IC Proxy Voting Rule"). The IC Proxy Voting Rule requires that a
registered management investment company (1) disclose the policies and
procedures that it uses to determine how it votes proxies relating to
portfolio securities, and (2) file its complete proxy voting record on an
annual basis with the SEC on Form N-PX, and make this record available to
shareholders.
On January 23, 2003, the SEC also adopted a final rule regarding Proxy
Voting by Investment Advisers (the "IA Proxy Voting Rule" or Rule
206(4)-6). The IA Proxy Voting Rule requires, among other things, that an
investment adviser that exercises voting authority over client securities
adopt policies and procedures reasonably designed to ensure the adviser
votes proxies in the best interest of clients and that the adviser
maintains certain records relating to proxy voting.
These Policies and Procedures (the "JHVST Proxy Voting Procedures") govern
the exercise of voting authority with respect to portfolio securities of
the John Hancock Variable Series Trust I (the "Trust" or "JHVST"),
disclosures required by the IC Proxy Voting Rules, and the related matters
set forth below.
II. DELEGATION OF VOTING AUTHORITY WITH RESPECT TO PORTFOLIO SECURITIES TO
SUB-INVESTMENT MANAGERS
The Trust has delegated voting authority with respect to portfolio
securities to the sub-investment managers in the Sub-Investment Management
Agreements among the Trust, John Hancock and the sub-investment managers.
Consistent with this delegation, each sub-investment manager is
responsible for the following:
A. Adopting and implementing written policies and procedures in
accordance with Rule 206(4)-6 reasonably designed to ensure that the
sub-investment manager votes portfolio securities in the best interest
of shareholders of the JHVST Fund (or a sleeve of the Fund) holding
those portfolio securities. Those procedures should also address
material conflicts that may arise between on one hand, the interest of
the Fund (a sleeve of the Fund) shareholders, and on the other hand,
the interest of the Fund's investment adviser, principal underwriter
or any affiliated person of the fund, its investment adviser, or its
principal underwriter;
B. Exercising voting authority with respect to portfolio securities;
C. Providing John Hancock Life Insurance Company ("John Hancock") with a
copy and a description of the sub-investment manager's proxy voting
procedures and any amendment or revisions to those procedures or the
description;
D. Providing John Hancock with a written record, in accordance with
instructions provided by John Hancock, of how the sub-investment
manager exercised votes with respect to portfolio securities; and
E. Providing an annual report regarding proxy voting according to
instructions provided by John Hancock.
John Hancock, the JHVST's investment adviser, will not have voting
authority with respect to portfolio securities, but will have the
responsibilities set forth below.
III. DISCLOSURES
John Hancock will be responsible for making the following disclosures on
behalf of the Trust:
A. Description of Proxy Voting Policies and Procedures in Registration
Statements: All registration statements and post-effective amendments
that are annual updates to effective registrations statements, filed
on or after July 1, 2003, will include a copy of, or a description of,
the JHVST Proxy Voting Procedures and the proxy voting procedures of
all sub-investment managers.
B - 2
IV. DISCLOSURES - continued
B. Availability of the Description of Policies and Procedures: All
shareholder annual and semi-annual reports transmitted after the
disclosure in Section III.A. is made, will disclose that shareholders
may obtain a copy of a description of the Trust's proxy voting
policies and procedures by the following methods:
1. Upon request and without charge, by calling a specified toll-free
(or collect) telephone number, or
2. On the SEC's website at http://www.sec.gov.
C. Availability of Fund's Proxy Voting Record: All initial registration
statements and post-effective amendments that are annual updates to
effective registration statements, filed on or after August 31, 2004,
as well as all shareholder reports filed after August 31, 2004, will
disclose that a shareholder may obtain a copy of the Trust's actual
proxy voting record on Form N-PX by the following methods:
1. Upon request and without charge, by calling a specified toll-free
(or collect) telephone number, or
2. On the SEC's website at http://www.sec.gov.
D. Requests for Information: If John Hancock receives a request for
information as provided in Section III.B. or III.C., John Hancock will
respond to the request within three business days of receipt of the
request, by first class mail or other means designed to ensure equally
prompt delivery.
V. PREPARATION AND FILING OF FORM N-PX
John Hancock will be responsible for filing Form N-PX on behalf of the
Trust, as required by Rule 30b1-4 under the Investment Company Act of
1940. The sub-investment mangers are responsible for providing to John
Hancock the information required to be filed in the Form N-PX at a time
designated by and in a format acceptable to John Hancock.
VI. ANNUAL REPORT ON PROXY VOTING
On an annual basis, John Hancock will prepare a summary report regarding
the sub-investment managers' proxy voting policies and procedures and
proxy voting activity with respect to portfolio securities for
presentation to and consideration by the Trustees. The sub-investment
managers will provide information reasonably requested by John Hancock for
this annual report.
VI. AMENDMENTS TO SUB-INVESTMENT MANAGER PROXY VOTING POLICIES AND PROCEDURES
Each sub-investment manager will provide to John Hancock a copy of, and a
description of, its proxy voting policies and procedures. If a
sub-investment manager amends or otherwise revises its proxy voting
policies and procedures, the sub-investment manager will provide a copy to
John Hancock of its amended or revised proxy voting policies and
procedures (and any revisions to its description of those policies and
procedures) by no later than ten (10) business days after the effective
date of the amendment or revision.
VII. RECORDKEEPING
A. Each sub-investment manager shall maintain the books and records
relating to proxy voting required under Rule 204-2 that it has for a
period of not less than five years from the end of the fiscal year
during which the last entry was made on the record, the first two
years in an appropriate office of the sub-investment manager. These
records include:
1. The sub-investment manager's proxy voting policies and procedures
(and any amendments or revisions);
2. Proxy statements that the sub-investment manager receives
regarding portfolio securities;
3. Records of each vote cast by the sub-investment manager; and
4. Any document prepared by the sub-investment manager that was
material to making a decision on how to vote with respect to
portfolio securities, or that memorialized a decision to vote.
B. John Hancock shall maintain the books and records relating to proxy
voting required under Rule 204-2 that it has for a period of not less
than five years from the end of the fiscal year during which the last
entry was made on the record, the first two years in an appropriate
office of John Hancock. These records include:
1. The JHVST Proxy Voting Procedures (and any amendments or
revisions); and
2. A copy of each written request for information on proxy voting by
a shareholder, and a copy of any written response.
B - 3
VIII. MISCELLANEOUS
A. Any sub-investment manager of a JHVST Fund that invests exclusively in
non-voting securities is not required to comply with these JHVST Proxy
Voting Procedures with respect to that Fund, except that the
sub-investment manager will be required to provide a certification to
John Hancock that the Fund invests exclusively in non-voting
securities.
B. The Trust participates in a securities lending program. Nothing in
these Procedures should be interpreted as requiring that a
sub-investment manager exercise voting authority with respect to a
portfolio security that is out on loan at the time.
C. Each sub-investment manager is obligated to provide to John Hancock
promptly and without charge, any record or information regarding proxy
voting reasonably requested by John Hancock.
D. The fact that one JHVST fund or one sleeve of a JHVST fund votes a
proxy one way and another JHVST fund or another sleeve of the JHVST
fund votes the same proxy another way or does not vote the proxy will
not, by itself, constitute a material conflict of interest.
(Effective: July 1, 2003)
B - 4
INDEPENDENCE INVESTMENT LLC
("Independence")
PROXY VOTING POLICIES AND PROCEDURES
At Independence, we recognize that many decisions regarding proxy voting may
affect the value of a client's account, and, therefore, should be resolved based
on in-depth analysis and careful consideration. The following proxy voting
policy sets forth both our principles and our process for voting proxies on
securities held in client accounts where Independence has discretion to vote the
proxies.
General Principles
- ------------------
In order to set a framework within which proxy questions should be considered
and voted, the following general principles should be applied:
1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies for
a client's account should be exercised keeping in mind a fiduciary's duty
to use its best efforts to preserve or enhance the value of the client's
account. We should vote on proxy questions with the goal of fostering the
interests of the client (or the participants and beneficiaries in the case
of an ERISA account).
2) Proxy questions should be considered within the individual circumstances of
the issuer. It is possible that individual circumstances might mean that a
given proxy question could be voted differently than what is generally done
in other cases.
3) If a proxy question clearly has the capability of affecting the economic
value of the issuer's stock, the question should be voted in a way that
attempts to preserve, or give the opportunity for enhancement of, the
stock's economic value.
4) In certain circumstances, even though a proposal might appear to be
beneficial or detrimental in the short term, our analysis will conclude
that over the long term greater value may be realized by voting in a
different manner.
5) It is our general policy that when we are given authority to vote proxies
for a client's account, we must be authorized to vote all proxies for the
account in our discretion. We do not generally accept partial voting
authority nor do we generally accept instructions from clients on how to
vote on specific issues, except in the case of registered investment
companies and, in limited instances, certain clients such as labor unions
may direct us to vote proxies in accordance with a specific set of
guidelines or recommendations appropriate to their circumstances, in which
case we will not have voting discretion but will vote in accordance with
the client's direction. Other clients may wish to retain proxy voting
authority and vote their own proxies if necessary in order to satisfy their
individual social, environmental or other goals.
We maintain a set of proxy voting guidelines that describe in greater detail how
we generally vote specific issues for our clients. While it is not an exhaustive
list, it is intended to serve as the foundation on which we make most of our
proxy voting decisions. The guidelines are available to clients upon request. We
will from time to time review this proxy voting policy and our guidelines and
may adopt changes from time to time. Clients may contact the Compliance Office
by calling 617-228-8603 or via e-mail at compliance@independence.com for a copy
of our current guidelines or to obtain a record of how we voted the proxies for
their account.
Process
- -------
At Independence, the fundamental analysts are responsible for performing
research on the companies in which we invest. The same analysts are generally
responsible for decisions regarding proxy voting, as they are the most familiar
with company-specific issues. Portfolio managers also provide input when
appropriate.
We currently use Institutional Shareholders Services, Inc. ("ISS") to monitor
and complete the proxy voting process for our equity portfolio holdings. ISS is
responsible for ascertaining that proxies are received, voted and sent back on a
timely basis, as well as maintaining all of the proxy voting records with
respect to our clients' holdings. Each day our proxy administrator sends ISS our
complete list of portfolio holdings. ISS notifies us of shareholder meetings and
provides us with an electronic platform on which to vote the proxies. ISS also
provides us with an analysis of proxy issues and recommendations for voting,
based on criteria that we have approved. Our analysts will consider ISS's
recommendations, but voting will be based upon our own analysis. Our analysts
direct the manner in which proxies are to be voted, and ISS completes the voting
process.
We may abstain from voting a client proxy if we conclude that the effect on the
client's economic interests or the value of the portfolio holding is
indeterminable or insignificant. We may also abstain from voting a client proxy
for cost reasons (e.g., costs associated with
B - 5
voting proxies of non-U.S. securities). In accordance with our fiduciary duties,
we weigh the costs and benefits of voting proxy proposals relating to foreign
securities and make an informed decision with respect to whether voting a given
proxy proposal is prudent. Our decision takes into account the effect that the
vote of our client, either by itself or together with other votes, is expected
to have on the value of our client's investment and whether this expected effect
would outweigh the cost of voting.
II. Conflicts of Interest
---------------------
We manage the assets of various public and private company clients, and invest
in the equity securities of certain public companies on behalf of our
clients./2/ We recognize that the potential for conflicts of interest could
arise in situations where we have discretion to vote client proxies and where we
have material business relationships/3/ or material personal/family
relationships/4/ with these issuers (or with a potential target or acquirer, in
the case of proxy vote in connection with a takeover). To address these
potential conflicts we have established a Proxy Voting Committee ("the
Committee"). The Committee consists of the Head of US Equities, the Head of
Fundamental Research and the members of the Compliance Office. The Committee
will use reasonable efforts to determine whether a potential conflict may exist,
including maintaining a list of clients with whom we have a material business
relationship, and requiring analysts to screen the proxies identified by ISS
against such list and to bring such conflicts, and any other conflicts of which
they are aware, to the attention of the Committee. However, a potential conflict
shall be deemed to exist only if one or more of the members of the Committee, or
the analyst responsible for voting the proxy, actually knows of the potential
conflict. The Committee will work with the analyst assigned to the specific
security to oversee the proxy voting process for securities where we believe we
may have potential conflicts.
The Committee will meet to decide how to vote the proxy of any security with
respect to which we have identified a potential conflict. The Committee will
consider the analyst's recommendation, make a decision on how to vote the proxy
and document the Committee's rationale for its decision.
Independence is a wholly owned subsidiary of John Hancock Life Insurance
Company, which is a wholly owned subsidiary of John Hancock Financial Services,
Inc. ("JHFS"), a public company. It is our general policy not to acquire or hold
JHFS stock on behalf of our clients. However, in the event that a client were to
hold JHFS stock in a portfolio which we manage, and we were responsible for
voting a JHFS proxy on behalf of the client, the Committee would decide on how
to vote the JHFS proxy. The Committee would, in most cases, base its proxy
voting decision according to the guidance provided by ISS. The Committee will
document the rationale for its decision.
It is Independence's policy not to accept any input from any other person or
entity, including its affiliates when voting proxies for any security. In the
event that an Independence employee was contacted by any affiliate, or any other
person or entity, other than ISS or through standard materials available to all
shareholders, with a recommendation on how to vote a specific proxy, the event
would be reported to the Compliance Office and would be documented. The
Committee would then decide how to vote the proxy in question and would document
the rationale for its decision.
If there is controversy or uncertainty about how any particular proxy question
should be voted, or if an analyst or a Committee member believes that he or she
has been pressured to vote in a certain way, he or she will consult with the
Committee or with a member of the Compliance Office, and a decision will be made
whether to refer the proxy to the Committee for voting. Final decisions on proxy
voting will ultimately be made with the goal of enhancing the value of our
clients' investments.
Adopted 8/03
- ----------
/2/ It is Independence's general policy not to invest in private securities such
as Rule 144A securities. If a portfolio were to hold a private security,
however, and a proxy needed to be voted, we would vote in accordance with our
established proxy voting policy including our process for voting securities
where a conflict of interest was present.
/3/ For purposes of this proxy voting policy, a "material business relationship"
is considered to arise in the event a client has contributed more than 5% of
Independence's annual revenues for the most recent fiscal year or is reasonably
expected to contribute this amount for the current fiscal year.
/4/ For purposes of this proxy voting policy, a "material personal/family
relationship" is one that would be reasonably likely to influence how we vote
proxies. To identify any such relationships, the Proxy Voting Committee will
obtain information on a regular basis about (i) personal and/or family
relationships between any Independence employee who is involved in the proxy
voting process (e.g., analyst, portfolio manager, and/or members of the Proxy
Voting Committee, as applicable) or senior executives, and directors or senior
executives of issuers for which the adviser may vote proxies, and (ii) personal
and/or immediate family investments of such employees in issuers which exceed 5%
of the outstanding stock of the issuers.
B - 6
JOHN HANCOCK ADVISERS, LLC
SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES
We believe in placing our clients' interests first. Before we invest in a
particular stock or bond, our team of portfolio managers and research analysts
look closely at the company by examining its earnings history, its management
team and its place in the market. Once we invest, we monitor all our clients'
holdings, to ensure that they maintain their potential to produce results for
investors.
As part of our active investment management strategy, we keep a close eye on
each company we invest in. Routinely, companies issue proxies by which they ask
investors like us to vote for or against a change, such as a new management
team, a new business procedure or an acquisition. We base our decisions on how
to vote these proxies with the goal of maximizing the value of our clients'
investments.
Currently, John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management
Corporation ("Sovereign") manage open-end funds, closed-end funds and portfolios
for institutions and high-net-worth investors. Occasionally, we utilize the
expertise of an outside asset manager by means of a subadvisory agreement. In
all cases, JHA or Sovereign makes the final decision as to how to vote our
clients' proxies. There is one exception, however, and that pertains to our
international accounts. The investment management team for international
investments votes the proxies for the accounts they manage. Unless voting is
specifically retained by the named fiduciary of the client, JHA and Sovereign
will vote proxies for ERISA clients.
In order to ensure a consistent, balanced approach across all our investment
teams, we have established a proxy oversight group comprised of associates from
our investment, operations and legal teams. The group has developed a set of
policies and procedures that detail the standards for how JHA and Sovereign vote
proxies. The guidelines of JHA have been approved and adopted by each fund
client's board of trustees who have voted to delegate proxy voting authority to
their investment adviser, JHA. JHA and Sovereign's other clients have granted us
the authority to vote proxies in our advisory contracts or comparable documents.
JHA and Sovereign have hired a third party proxy voting service which has been
instructed to vote all proxies in accordance with our established guidelines
except as otherwise instructed.
In evaluating proxy issues, our proxy oversight group may consider information
from many sources, including the portfolio manager, management of a company
presenting a proposal, shareholder groups, and independent proxy research
services. Proxies for securities on loan through securities lending programs
will generally not be voted, however a decision may be made to recall a security
for voting purposes if the issue is material.
Below are the guidelines we adhere to when voting proxies. Please keep in mind
that these are purely guidelines. Our actual votes will be driven by the
particular circumstances of each proxy. From time to time votes may ultimately
be cast on a case-by-case basis, taking into consideration relevant facts and
circumstances at the time of the vote. Decisions on these matters (case-by-case,
abstention, recall) will normally be made by a portfolio manager under the
supervision of the chief investment officer and the proxy oversight group. We
may abstain from voting a proxy if we conclude that the effect on our clients'
economic interests or the value of the portfolio holding is indeterminable or
insignificant.
PROXY VOTING GUIDELINES
Board of Directors
------------------
We believe good corporate governance evolves from an independent board.
We support the election of uncontested director nominees, but will withhold
our vote for any nominee attending less than 75% of the board and committee
meetings during the previous fiscal year. Contested elections will be
considered on a case by case basis by the proxy oversight group, taking
into account the nominee's qualifications. We will support management's
ability to set the size of the board of directors and to fill vacancies
without shareholder approval but will not support a board that has fewer
than 3 directors or allows for the removal of a director without cause.
We will support declassification of a board and block efforts to adopt a
classified board structure. This structure typically divides the board into
classes with each class serving a staggered term.
In addition, we support proposals for board indemnification and limitation
of director liability, as long as they are consistent with corporate law
and shareholders' interests. We believe that this is necessary to attract
qualified board members.
B - 7
Selection of Auditors
---------------------
We believe an independent audit committee can best determine an auditor's
qualifications.
We will vote for management proposals to ratify the board's selection of
auditors, and for proposals to increase the independence of audit
committees.
Capitalization
--------------
We will vote for a proposal to increase or decrease authorized common or
preferred stock and the issuance of common stock, but will vote against a
proposal to issue or convert preferred or multiple classes of stock if the
board has unlimited rights to set the terms and conditions of the shares,
or if the shares have voting rights inferior or superior to those of other
shareholders.
In addition, we will support a management proposal to: create or restore
preemptive rights; approve a stock repurchase program; approve a stock
split or reverse stock split; and, approve the issuance or exercise of
stock warrants
Acquisitions, mergers and corporate restructuring
-------------------------------------------------
Proposals to merge with or acquire another company will be voted on a
case-by-case basis, as will proposals for recapitalization, restructuring,
leveraged buyout, sale of assets, bankruptcy or liquidation. We will vote
against a reincorporation proposal if it would reduce shareholder rights.
We will vote against a management proposal to ratify or adopt a poison pill
or to establish a supermajority voting provision to approve a merger or
other business combination. We would however support a management proposal
to opt out of a state takeover statutory provision, to spin-off certain
operations or divisions and to establish a fair price provision.
Corporate Structure and Shareholder Rights
------------------------------------------
In general, we support proposals that foster good corporate governance
procedures and that provide shareholders with voting power equal to their
equity interest in the company.
To preserve shareholder rights, we will vote against a management proposal
to restrict shareholders' right to: call a special meeting and to eliminate
a shareholders' right to act by written consent. In addition, we will not
support a management proposal to adopt a supermajority vote requirement to
change certain by-law or charter provisions or a non-technical amendment to
by-laws or a charter that reduces shareholder rights.
Equity-based compensation
-------------------------
Equity-based compensation is designed to attract, retain and motivate
talented executives and independent directors, but should not be so
significant as to materially dilute shareholders' interests.
We will vote against the adoption or amendment of a stock option plan if
the:
. The compensation committee is not fully independent
. plan dilution is more than 10% of outstanding common stock,
. company allows or has allowed the re-pricing or replacement of
underwater options in the past three fiscal years (or the exchange of
underwater options) without shareholder approval.
. if the option is not premium priced or indexed, or does not vest based
on future performance
With respect to the adoption or amendment of employee stock purchase plans
or a stock award plan, we will vote against management if:
. the plan allows stock to be purchased at less than 85% of fair market
value;
. this plan dilutes outstanding common equity greater than 10%
. all stock purchase plans, including the proposed plan, exceed 15% of
outstanding common equity
. if the potential dilution from all company plans is more than 85%
With respect to director stock incentive/option plans, we will vote against
management if:
. the minimum vesting period for options or time lapsing restricted
stock is les than one year
. if the potential dilution for all company plans is more than 85%
B - 8
Other Business
--------------
For routine business matters which are the subject of many proxy related
questions, we will vote with management proposals to:
. change the company name;
. approve other business;
. adjourn meetings;
. make technical amendments to the by-laws or charters;
. approve financial statements;
. approve an employment agreement or contract.
Shareholder Proposals
---------------------
Shareholders are permitted per SEC regulations to submit proposals for
inclusion in a company's proxy statement. We will generally vote against
shareholder proposals and in accordance with the recommendation of
management except as follows where we will vote for proposals:
. calling for shareholder ratification of auditors;
. calling for auditors to attend annual meetings;
. seeking to increase board independence;
. requiring minimum stock ownership by directors;
. seeking to create a nominating committee or to increase the
independence of the nominating committee;
. seeking to increase the independence of the audit committee.
Corporate and social policy issues
----------------------------------
We believe that "ordinary business matters" are primarily the
responsibility of management and should be approved solely by the
corporation's board of directors.
Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. We
generally vote against business practice proposals and abstain on social
policy issues, though we may make exceptions in certain instances where we
believe a proposal has substantial economic implications.
PROXY VOTING PROCEDURES
The role of the proxy voting service
------------------------------------
JHA and Sovereign Asset Management Corporation ("Sovereign") have hired a
proxy voting service to assist with the voting of client proxies. The proxy
service coordinates with client custodians to ensure that proxies are
received for securities held in client accounts and acted on in a timely
manner. The proxy service votes all proxies received in accordance with the
proxy voting guidelines established and adopted by JHA and Sovereign. When
it is unclear how to apply a particular proxy voting guideline or when a
particular proposal is not covered by the guidelines, the proxy voting
service will contact the proxy oversight group coordinator for a
resolution.
The role of the proxy oversight group and coordinator
-----------------------------------------------------
The coordinator will interact directly with the proxy voting service to
resolve any issues the proxy voting service brings to the attention of JHA
or Sovereign. When a question arises regarding how a proxy should be voted
the coordinator contacts the firm's investment professionals and the proxy
oversight group for a resolution. In addition the coordinator ensures that
the proxy voting service receives responses in a timely manner. Also, the
coordinator is responsible for identifying whether, when a voting issue
arises, there is a potential conflict of interest situation and then
escalating the issue to the firm's Executive Committee. For securities out
on loan as part of a securities lending program, if a decision is made to
vote a proxy, the coordinator will manage the return/recall of the
securities so the proxy can be voted.
The role of mutual fund trustees
--------------------------------
The boards of trustees of our mutual fund clients have reviewed and adopted
the proxy voting guidelines of the funds' investment adviser, JHA. The
trustees will periodically review the proxy voting guidelines and suggest
changes they deem advisable.
B - 9
Conflicts of interest
---------------------
Conflicts of interest are resolved in the best interest of clients.
With respect to potential conflicts of interest, proxies will be voted in
accordance with JHA's or Sovereign's predetermined policies. If application
of the predetermined policy is unclear or does not address a particular
proposal, a special internal review by the JHA Executive Committee or
Sovereign Executive Committee will determine the vote. After voting, a
report will be made to the client (in the case of an investment company, to
the fund's board of trustees), if requested. An example of a conflict of
interest created with respect to a proxy solicitation is when JHA or
Sovereign must vote the proxies of companies that they provide investment
advice to or are currently seeking to provide investment advice to, such as
to pension plans.
B - 10
DECLARATION MANAGEMENT & RESEARCH LLC
("Declaration")
PROXY VOTING POLICY AND PROCEDURES
Declaration is a fixed income manager and the securities we purchase for client
accounts are predominantly fixed income securities. Accordingly, we are seldom
if ever called upon to vote equity securities on our clients' behalf. However,
in the event we were granted the discretion to vote proxies for a client's
account and an occasion arose where an equity security needed to be voted, we
would follow the following proxy voting policy in carrying out our
responsibilities to that client.
I. GENERAL PRINCIPLES
In order to set a framework within which proxy questions should be
considered and voted, the following general principles should be applied:
1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies
for a client's account should be exercised keeping in mind a
fiduciary's duty to use its best efforts to preserve or enhance the
value of the client's account. We should vote on proxy questions with
the goal of fostering the interests of the client (or the participants
and beneficiaries in the case of an ERISA account).
2) Proxy questions should be considered within the individual
circumstances of the issuer. It is possible that individual
circumstances might mean that a given proxy question could be voted
differently than what is generally done in other cases.
3) If a proxy question clearly has the capability of affecting the
economic value of the issuer's stock, the question should be voted in a
way that attempts to preserve, or give the opportunity for enhancement
of, the stock's economic value.
4) In certain circumstances, even though a proposal might appear to be
beneficial or detrimental in the short term, our analysis will conclude
that over the long term greater value may be realized by voting in a
different manner.
5) It is our policy that when we are given authority to vote proxies for a
client's account, we must be authorized to vote all proxies for the
account in our discretion. We do not accept partial voting authority
nor do we accept instructions from clients on how to vote on specific
issues, except in the case of registered investment companies. Clients
may wish to retain proxy voting authority and vote their own proxies if
necessary in order to satisfy their individual social, environmental or
other goals.
Since we cannot currently anticipate circumstances in which Declaration
would be called upon to vote an equity security for a client's account, it
is difficult to specify in advance how we would vote on particular
questions. For routine matters, we would expect to vote in accordance with
the recommendation of the issuer's management. For all other matters, we
would decide how to vote on a case-by-case basis considering the relevant
circumstances of the issuer.
We will from time to time review this proxy voting policy and procedures
and may adopt changes from time to time. Clients may contact Carole Parker,
our Compliance Officer, by calling 703-749-8240 or via e-mail at
cparker@declaration.com to obtain a record of how we voted the proxies for
their account.
II. PROCESS
At Declaration, the investment research analysts are responsible for
performing research on the companies in which we invest. The same analysts
would be responsible for decisions regarding proxy voting, as they would be
the most familiar with company-specific issues. Portfolio managers may also
provide input when appropriate. Proxy voting mechanics are the
responsibility of the analyst.
We may abstain from voting a client proxy if we conclude that the effect on
the client's economic interests or the value of the portfolio holding is
indeterminable or insignificant. We may also abstain from voting a client
proxy for cost reasons (e.g., costs associated with voting proxies of
non-U.S. securities). In accordance with our fiduciary duties, we would
weigh the costs and benefits of voting proxy proposals relating to foreign
securities and make an informed decision with respect to whether voting a
given proxy proposal is prudent. Our decision would take into account the
effect that the vote of our client, either by itself or together with other
votes, was expected to have on the value of our client's investment and
whether this expected effect would outweigh the cost of voting.
B - 11
II. PROCESS - continued
We will maintain the records required to be maintained by us with respect
to proxies in accordance with the requirements of the Investment Advisers
Act of 1940 and, with respect to our registered investment company clients,
the Investment Company Act of 1940. We may, but need not, maintain proxy
statements that we receive regarding client securities to the extent that
such proxy statements are available on the SEC's Edgar system. We may also
rely upon a third party to maintain certain records required to be
maintained by the Advisors Act or the Investment Company Act.
III. CONFLICTS OF INTEREST
We manage the assets of various public and private company clients, and may
invest in the securities of certain of these companies on behalf of our
clients. As noted above, we invest principally in fixed income securities
with respect to which proxies are not required to be voted. However, in the
event we were to be granted the discretion to vote proxies by a client, and
an equity security were to be held in that client's portfolio with respect
to which a vote was required, we would be responsible for voting proxies
for that security.
We recognize that the potential for conflicts of interest could arise in
situations where we have discretion to vote client proxies and where we
have material business relationships or material personal/family
relationships/5/ with an issuer (or with a potential target or acquirer, in
the case of a proxy vote in connection with a takeover). To address these
potential conflicts we have established a Proxy Voting Committee (the
"Committee"). The Committee consists of the President, the Senior Vice
President - Director of Portfolio Management, and the Compliance Officer.
The Committee will use reasonable efforts to determine whether a potential
conflict may exist, including screening proxies against a list of clients
with whom we have a material business relationship. However, a potential
conflict shall be deemed to exist only if one or more of the members of the
Committee actually know of the potential conflict. The Committee will work
with the analyst assigned to the specific security to oversee the proxy
voting process for securities where we believe we may have potential
conflicts.
The Committee will meet to decide how to vote the proxy of any security
with respect to which we have identified a potential conflict. The
Committee will consider the analyst's recommendation, make a decision on
how to vote the proxy and document the Committee's rationale for its
decision.
Declaration is a wholly owned subsidiary of John Hancock Life Insurance
Company, which is a wholly owned subsidiary of John Hancock Financial
Services, Inc. ("JHFS"), a public company. It is our general policy not to
acquire or hold JHFS stock on behalf of our clients. However, in the event
that a client were to hold JHFS stock in a portfolio which we managed, and
we were responsible for voting a JHFS proxy on behalf of the client, the
Committee would decide how to vote the JHFS proxy in a manner that it
believes will maximize shareholder value. The Committee will document the
rationale for its decision.
It is Declaration's policy not to accept any input from any other person or
entity, including its affiliates, when voting proxies for any security. In
the event that a Declaration employee was contacted by any affiliate or any
other person or entity, other than by means of standard materials available
to all shareholders, with a recommendation on how to vote a specific proxy,
the event would be reported to the Compliance Officer and would be
documented. The Committee would then decide how to vote the proxy in
question and would document the rationale for its decision. If there is
controversy or uncertainty about how any particular proxy question should
be voted, or if an analyst or a Committee member believes that he or she
has been pressured to vote in a certain way, he or she will consult with
the Committee or with the Compliance Officer, and a decision will be made
whether to refer the proxy to the Committee for voting. Final decisions on
proxy voting will ultimately be made with the goal of enhancing the value
of our clients' investments.
Adopted 07/03
- ----------
/5/For purposes of this proxy voting policy, a "material personal/family
relationship" is one that would be reasonably likely to influence how we vote
proxies. To identify any such relationships, the Proxy Voting Committee will in
connection with each proxy vote obtain information about (1) personal and/or
family relationships between any Declaration employee involved in the proxy vote
(e.g., analyst, portfolio manager and/or members of the Proxy Voting Committee,
as applicable), and directors or senior executives of the issuer, and (ii)
personal and/or immediate family investments of such employees in issuers which
exceed 5% of the outstanding stock of the issuer.
B - 12
SSgA FUNDS MANAGEMENT, INC.
PROXY VOTING POLICIES AND PROCEDURES
INTRODUCTION
SSgA Funds Management, Inc. ("FM") seeks to vote proxies in the best interests
of its clients. In the ordinary course, this entails voting proxies in a way
which FM believes will maximize the monetary value of each portfolio's holdings.
FM takes the view that this will benefit our direct clients (e.g. investment
funds) and, indirectly, the ultimate owners and beneficiaries of those clients
(e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street
Global Advisors (SSgA) Investment Committee. The SSgA Investment Committee
reviews and approves amendments to the FM Proxy Voting Policy and delegates
authority to vote in accordance with this policy to Proxy Voting Services. FM
retains the final authority and responsibility for voting. In addition to voting
proxies, FM:
1) describes its proxy voting procedures to its clients in Part II of its
Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM
voted the client's proxies;
4) matches proxies received with holdings as of record date;
5) reconciles holdings as of record date and rectifies any discrepancies;
6) generally applies its proxy voting policy consistently and keeps
records of votes for each client;
7) documents the reason(s) for voting for all non-routine items; and
8) keeps records of such proxy voting available for inspection by the
client or governmental agencies.
PROCESS
The SSgA FM Principal -- Manager of Corporate Actions is responsible for
monitoring corporate actions. As stated above, oversight of the proxy
voting process is the responsibility of the SSgA Investment Committee,
which retains oversight responsibility for all investment activities of all
State Street Corporation investment firms.
In order to facilitate our proxy voting process, FM retains a firm with
expertise in the proxy voting and corporate governance fields to assist in
the due diligence process. The Manager of Corporate Actions is responsible,
working with this firm, for ensuring that proxies are submitted in a timely
manner.
All proxies received on behalf of FM clients are forwarded to our proxy
voting firm. If (i) the request falls within one of the guidelines listed
below, and (ii) there are no special circumstances relating to that company
or proxy which come to our attention (as discussed below), the proxy is
voted according to our guidelines.
However, from time to time, proxy votes will be solicited which (i) involve
special circumstances and require additional research and discussion or
(ii) are not directly addressed by our policies. These proxies are
identified through a number of methods, including but not limited to
notification from our third party proxy voting specialist, concerns of
clients, review by internal proxy specialists, and questions from
consultants.
In instances of special circumstances or issues not directly addressed by
our policies, the Chairman of the Investment Committee is consulted for a
determination of the proxy vote. The first determination is whether there
is a material conflict of interest between the interests of our client and
those of FM. If the Manager of Corporate Actions and the Chairman of the
Investment Committee determine that there is a material conflict, the
process detailed below under "Potential Conflicts" is followed. If there is
no material conflict, we examine each of the issuer's proposals in detail
in seeking to determine what vote would be in the best interests of our
clients. At this point, the Chairman of the Investment Committee makes a
voting decision based on maximizing the monetary value of each portfolios'
holdings. However, the Chairman of the Investment Committee may determine
that a proxy involves the consideration of particularly significant issues
and present the proxy to the entire Investment Committee for a decision on
voting the proxy.
FM also endeavors to show sensitivity to local market practices when voting
proxies of non-U.S. issuers.
B - 13
VOTING
For most issues and in most circumstances, we abide by the following
general guidelines. However, as discussed above, in certain circumstances,
we may determine that it would be in the best interests of our clients to
deviate from these guidelines.
MANAGEMENT PROPOSALS
I. FM votes in support of management on the following ballot items, which
are fairly common management sponsored initiatives.
. Elections of directors who do not appear to have been remiss in the
performance of their oversight responsibilities
. Approval of auditors
. Directors' and auditors' compensation
. Directors' liability and indemnification
. Discharge of board members and auditors
. Financial statements and allocation of income
. Dividend payouts that are greater than or equal to country and
industry standards
. Authorization of share repurchase programs
. General updating of or corrective amendments to charter
. Change in Corporation Name
. Elimination of cumulative voting
II. FM votes in support of management on the following items, which have
potentially substantial financial or best-interest impact:
. Capitalization changes which eliminate other classes of stock and
voting rights
. Changes in capitalization authorization for stock splits, stock
dividends, and other specified needs which are no more than 50% of
the existing authorization for U.S. companies and no more than 100%
of existing authorization for non-U.S. companies
. Elimination of pre-emptive rights for share issuance of less than a
given percentage (country specific - ranging from 5% to 20%) of the
outstanding shares
. Elimination of "poison pill" rights
. Stock purchase plans with an exercise price of not less that 85% of
fair market value
. Stock option plans which are incentive based and not excessive
. Other stock-based plans which are appropriately structured
. Reductions in super-majority vote requirements
. Adoption of anti-"greenmail" provisions
III. FM votes against management on the following items, which have
potentially substantial financial or best interest impact:
. Capitalization changes that add "blank check" classes of stock or
classes that dilute the voting interests of existing shareholders
. Changes in capitalization authorization where management does not
offer an appropriate rationale or which are contrary to the best
interest of existing shareholders
. Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter appropriate tender offers and other offers
. Amendments to bylaws which would require super-majority shareholder
votes to pass or repeal certain provisions
. Elimination of Shareholders' Right to Call Special Meetings
. Establishment of classified boards of directors
. Reincorporation in a state which has more stringent anti-takeover
and related provisions
. Shareholder rights plans that allow the board of directors to block
appropriate offers to shareholders or which trigger provisions
preventing legitimate offers from proceeding
. Excessive compensation
. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements which benefit
management and would be costly to shareholders if triggered
. Adjournment of Meeting to Solicit Additional Votes
B - 14
. "Other business as properly comes before the meeting" proposals
which extend "blank check" powers to those acting as proxy
. Proposals requesting re-election of insiders or affiliated
directors who serve on audit, compensation, and nominating
committees.
IV. FM evaluates Mergers and Acquisitions on a case-by-case basis.
Consistent with our proxy policy, we support management in seeking to
achieve their objectives for shareholders. However, in all cases, FM
uses its discretion in order to maximize shareholder value. FM,
generally votes, as follows:
. Against offers with potentially damaging consequences for minority
shareholders because of illiquid stock, especially in some non-US
markets
. For offers that concur with index calculators treatment and our
ability to meet our clients return objectives for passive funds
. Against offers when there are prospects for an enhanced bid or
other bidders
. For proposals to restructure or liquidate closed end investment
funds in which the secondary market price is substantially lower
than the net asset value
SHAREHOLDER PROPOSALS
Traditionally, shareholder proposals have been used to encourage management
and other shareholders to address socio-political issues. FM believes that
it is inappropriate to use client assets to attempt to affect such issues.
Thus, we examine shareholder proposals primarily to determine their
economic impact on shareholders.
I. FM votes in support of shareholders on the following ballot items,
which are fairly common shareholder-sponsored initiatives:
. Requirements that auditors attend the annual meeting of
shareholders
. Establishment of an annual election of the board of directors
. Mandates requiring a majority of independent directors on the Board
of Directors and the audit, nominating, and compensation committees
. Mandates that amendments to bylaws or charters have shareholder
approval
. Mandates that shareholder-rights plans be put to a vote or repealed
. Establishment of confidential voting
. Expansions to reporting of financial or compensation-related
information, within reason
. Repeals of various anti-takeover related provisions
. Reduction or elimination of super-majority vote requirements
. Repeals or prohibitions of "greenmail" provisions
. "Opting-out" of business combination provisions
. Proposals requiring the disclosure of executive retirement benefits
if the issuer does not have an independent compensation committee
II. In light of recent events surrounding corporate auditors and taking
into account corporate governance provisions released by the SEC,
NYSE, and NASDAQ, FM votes in support of shareholders on the following
ballot items, which are fairly common shareholder-sponsored
initiatives:
. Disclosure of Auditor and Consulting relationships when the same or
related entities are conducting both activities
. Establishment of selection committee responsible for the final
approval of significant management consultant contract awards where
existing firms are already acting in an auditing function
. Mandates that Audit, Compensation and Nominating Committee members
should all be independent directors
. Mandates giving the Audit Committee the sole responsibility for the
selection and dismissal of the auditing firm and any subsequent
result of audits are reported to the audit committee
B - 15
III. FM votes against shareholders on the following initiatives, which are
fairly common shareholder-sponsored initiatives:
. Limits to tenure of directors
. Requirements that candidates for directorships own large amounts of
stock before being eligible to be elected
. Restoration of cumulative voting in the election of directors
. Requirements that the company provide costly, duplicative, or
redundant reports; or reports of a non-business nature
. Restrictions related to social, political, or special interest
issues which affect the ability of the company to do business or be
competitive and which have significant financial or best-interest
impact
. Proposals which require inappropriate endorsements or corporate
actions
. Requiring the company to expense stock options unless already
mandated by FASB (or similar body) under regulations that supply a
common valuation model.
. Proposal asking companies to adopt full tenure holding periods for
their executives.
. Proposals requiring the disclosure of executive retirement benefits
if the issuer has an independent compensation committee
SHAREHOLDER ACTIVISM
We at FM agree entirely with the United States Department of Labor's
position that "where proxy voting decisions may have an effect on the
economic value of the plan's underlying investment, plan fiduciaries should
make proxy voting decisions with a view to enhancing the value of the
shares of stock" (IB 94-2). Our proxy voting policy and procedures are
designed to ensure that our clients receive the best possible returns on
their investments. We meet directly with corporation representatives and
participate in conference calls and third-party inquiries in order to
ensure our processes are as fully informed as possible.
Through our membership in the Council of Institutional Investors as well as
our contact with corporate pension plans, public funds, and unions, we are
also able to communicate extensively with other shareholders regarding
events and issues relevant to individual corporations, general industry,
and current shareholder concerns.
In addition, FM monitors "target" lists of underperforming companies
prepared by various shareholder groups, including: California Public
Employee Retirement System, The City of New York - Office of the
Comptroller, International Brotherhood of Teamsters, and Council of
Institutional Investors. Companies, so identified, receive an individual,
systematic review by the Corporate Governance Subcommittee of SSgA's
Investment Committee.
As an active shareholder, FM's role is to ensure that corporate policies
serve the best interests of the corporation's investor-owners. Though we do
not seek involvement in the day-to-day operations of an organization, we
recognize the need for conscientious oversight of and input into management
decisions that may affect a company's value. To that end, our monitoring of
corporate management and industry events is substantially more detailed
than that of the typical voter. We have demonstrated our willingness to
vote against management-sponsored initiatives and to support shareholder
proposals when appropriate. To date we have not filed proposals or
initiated letter-writing or other campaigns, but have used our active
participation in the corporate governance process--especially the proxy
voting process--as the most effective means by which to communicate our and
our clients' legitimate shareholder concerns. Should an issue arise in
conjunction with a specific corporation that cannot be satisfactorily
resolved through these means, we shall consider other approaches.
Through the consistent, conscientious execution of our responsibilities as
both fiduciary and shareholder, FM is able to promote the best interests of
its fellow shareholders and its clients. The SSgA Funds Management, Inc.
Proxy Voting Policy provides for this active, informed participation in the
management of those corporations in which we hold shares.
POTENTIAL CONFLICTS
As discussed above under Process, from time to time, FM will review a proxy
which presents a potential material conflict. For example, FM or its
affiliates may provide services to a company whose management is soliciting
proxies, or to another entity which is a proponent of a particular proxy
proposal. Another example could arise when FM has business or other
relationships with participants involved in proxy contests, such as a
candidate for a corporate directorship.
As a fiduciary to its clients, FM takes these potential conflicts very
seriously. While FM's only goal in addressing any such potential conflict
is to ensure that proxy votes are cast in the clients' best interests and
are not affected by FM's potential conflict, there are a number of courses
FM may take. The final decision as to which course to follow shall be made
by the Investment Committee.
When the matter falls clearly within one of the proposals enumerated above,
casting a vote which simply follows FM's pre-determined policy would
eliminate FM's discretion on the particular issue and hence avoid the
conflict.
B - 16
In other cases, where the matter presents a potential material conflict and
is not clearly within one of the enumerated proposals, or is of such a
nature that FM believes more active involvement is necessary, the Chairman
of the Investment Committee shall present the proxy to the Investment
Committee, who will follow one of two courses of action. First, FM may
employ the services of a third party, wholly independent of FM, its
affiliates and those parties involved in the proxy issue, to determine the
appropriate vote.
Second, in certain situations the Investment Committee may determine that
the employment of a third party is unfeasible, impractical or unnecessary.
In such situations, the Investment Committee shall make a decision as to
the voting of the proxy. The basis for the voting decision, including the
basis for the determination that the decision is in the best interests of
FM's clients, shall be formalized in writing as a part of the minutes to
the Investment Committee. As stated above, which action is appropriate in
any given scenario would be the decision of the Investment Committee in
carrying out its duty to ensure that the proxies are voted in the clients',
and not FM's, best interests.
RECORDKEEPING
In accordance with applicable law, FM shall retain the following documents
for not less than five years from the end of the year in which the proxies
were voted, the first two years in FM's office:
1) FM's Proxy Voting Policy and any additional procedures created pursuant
to such Policy;
2) a copy of each proxy statement FM receives regarding securities held by
its clients (note: this requirement may be satisfied by a third party
who has agreed in writing to do so or by obtaining a copy of the proxy
statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be
satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its
voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the
client, for information on how FM voted the client's proxies.
DISCLOSURE OF CLIENT VOTING INFORMATION
Any client who wishes to receive information on how its proxies were voted
should contact its FM client service officer.
B - 17
T. ROWE PRICE ASSOCIATES, INC.
("T. Rowe Price")
PROXY VOTING PROCESS AND POLICIES
T. Rowe Price Associates, Inc. (and T. Rowe Price International, Inc.) recognize
and adhere to the principle that one of the privileges of owning stock in a
company is the right to vote on issues submitted to shareholder vote--such as
election of directors and important matters affecting a company's structure and
operations. As an investment adviser with a fiduciary responsibility to its
clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is
owned by the investment companies that it sponsors and serves as investment
adviser. T. Rowe Price also is involved in the proxy process on behalf of its
institutional and private counsel clients who have requested such service. For
those private counsel clients who have not delegated their voting responsibility
but who request advice, T. Rowe Price makes recommendations regarding proxy
voting.
Proxy Administration
- --------------------
The T. Rowe Price Proxy Committee develops our firm's positions on all major
corporate issues, creates guidelines, and oversees the voting process. The Proxy
Committee, composed of portfolio managers, investment operations managers, and
internal legal counsel, analyzes proxy policies based on whether they would
adversely affect shareholders' interests and make a company less attractive to
own. In evaluating proxy policies each year, the Proxy Committee relies upon our
own fundamental research, independent research provided by third parties, and
information presented by company managements and shareholder groups.
Once the Proxy Committee establishes its recommendations, they are distributed
to the firm's portfolio managers as voting guidelines. Ultimately, the portfolio
manager votes on the proxy proposals of companies in his or her portfolio. When
portfolio managers cast votes that are counter to the Proxy Committee's
guidelines, they are required to document their reasons in writing to the Proxy
Committee. Annually, the Proxy Committee reviews T. Rowe Price's proxy voting
process, policies, and voting records.
T. Rowe Price has retained Institutional Shareholder Services, an expert in the
proxy voting and corporate governance area, to provide proxy advisory and voting
services. These services include in-depth research, analysis, and voting
recommendations as well as vote execution, reporting, auditing and consulting
assistance for the handling of proxy voting responsibility and corporate
governance-related efforts. While the Proxy Committee relies upon ISS research
in establishing T. Rowe Price's voting guidelines--many of which are consistent
with ISS positions--T. Rowe Price may deviate from ISS recommendations on
general policy issues or specific proxy proposals.
Fiduciary Considerations
- ------------------------
T. Rowe Price's decisions with respect to proxy issues are made in light of the
anticipated impact of the issue on the desirability of investing in the
portfolio company. Proxies are voted solely in the interests of the client,
Price Fund shareholders or, where employee benefit plan assets are involved, in
the interests of plan participants and beneficiaries. Practicalities involved
with international investing may make it impossible at times, and at other times
disadvantageous, to vote proxies in every instance.
Consideration Given Management Recommendations
- ----------------------------------------------
When determining whether to invest in a particular company, one of the key
factors T. Rowe Price considers is the quality and depth of its management. As a
result, T. Rowe Price believes that recommendations of management on most issues
should be given weight in determining how proxy issues should be voted.
T. Rowe Price Voting Policies
- -----------------------------
Specific voting guidelines have been established by the Proxy Committee for
recurring issues that appear on proxies, which are available to clients upon
request. The following is a summary of the more significant T. Rowe Price
policies:
Election of Directors
T. Rowe Price generally supports slates with a majority of independent directors
and nominating committees chaired by an independent board member. We withhold
votes for inside directors serving on compensation and audit committees and for
directors who miss more than one-fourth of the scheduled board meetings.
Executive Compensation
Our goal is to assure that a company's equity-based compensation plan is aligned
with shareholders' long-term interests. While we evaluate most plans on a
case-by-case basis, T. Rowe Price generally opposes compensation packages that
provide what we view as excessive awards to a few senior executives or that
contain excessively dilutive stock option plans. We base our review on criteria
such as the costs associated with the plan, plan features, dilution to
shareholders and comparability to plans in the company's peer group. We
generally oppose plans that give a company the ability to reprice options.
B - 18
Anti-takeover and Corporate Governance Issues
T. Rowe Price generally opposes anti-takeover measures and other proposals
designed to limit the ability of shareholders to act on possible transactions.
When voting on corporate governance proposals, we will consider the dilutive
impact to shareholders and the effect on shareholder rights.
Social and Corporate Responsibility Issues
T. Rowe Price generally votes with a company's management on social issues
unless they have substantial economic implications for the company's business
and operations that have not been adequately addressed by management.
Monitoring and Resolving Conflicts of Interest
- ----------------------------------------------
The Proxy Committee is also responsible for monitoring and resolving possible
material conflicts between the interests of T. Rowe Price and those of its
clients with respect to proxy voting. Since our voting guidelines are
pre-determined by the Proxy Committee using recommendations from ISS, an
independent third party, application of the T. Rowe Price guidelines to vote
clients' proxies should in most instances adequately address any possible
conflicts of interest. However, for proxy votes inconsistent with T. Rowe Price
guidelines, the Proxy Committee reviews all such proxy votes in order to
determine whether the portfolio manager's voting rationale appears reasonable.
The Proxy Committee also assesses whether any business or other relationships
between T. Rowe Price and a portfolio company could have influenced an
inconsistent vote on that company's proxy. Issues raising possible conflicts of
interest are referred to designated members of the Proxy Committee for immediate
resolution.
B - 19
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
("MSIM")
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction - MSIM's policies and procedures for voting proxies with respect to
securities held in the accounts of clients applies to those MSIM entities that
provide discretionary Investment Management services and for which a MSIM entity
has the authority to vote their proxies. The policies and procedures and general
guidelines in this section will be reviewed and, as necessary, updated
periodically to address new or revised proxy voting issues. The MSIM entities
covered by these policies and procedures currently include the following: Morgan
Stanley Investment Advisors Inc., Morgan Stanley Alternative Investment
Partners, L.P., Morgan Stanley AIP GP LP, Morgan Stanley Investment Management
Inc., Morgan Stanley Investment Group Inc., Morgan Stanley Investment Management
Limited, Morgan Stanley Investment Management Company, Morgan Stanley Asset &
Investment Trust Management Co., Limited, Morgan Stanley Investment Management
Private Limited, Morgan Stanley Investments LP, Van Kampen Investment Advisory
Corp., Van Kampen Asset Management Inc., and Van Kampen Advisors Inc. (each a
"MSIM Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so it would be inconsistent with applicable laws or
regulations or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services - To assist the MSIM Affiliates in their responsibility
for voting proxies and the overall global proxy voting process, Institutional
Shareholder Services ("ISS") and the Investor Responsibility Research Center
("IRRC") have been retained as experts in the proxy voting and corporate
governance area. ISS and IRRC are independent advisers that specialize in
providing a variety of fiduciary-level proxy-related services to institutional
investment managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
Voting Proxies for certain Non-US Companies - While the proxy voting process is
well established in the United States and other developed markets with a number
of tools and services available to assist an investment manager, voting proxies
of non-US companies located in certain jurisdictions, particularly emerging
markets, may involve a number of problems that may restrict or prevent a MSIM
Affiliate's ability to vote such proxies. These problems include, but are not
limited to: (i) proxy statements and ballots being written in a language other
than English; (ii) untimely and/or inadequate notice of shareholder meetings;
(iii) restrictions on the ability of holders outside the issuer's jurisdiction
of organization to exercise votes; (iv) requirements to vote proxies in person,
(v) the imposition of restrictions on the sale of the securities for a period of
time in proximity to the shareholder meeting; and (vi) requirements to provide
local agents with power of attorney to facilitate the MSIM Affiliate's voting
instructions. As a result, clients' non-U.S. proxies will be voted on a best
efforts basis only, consistent with the Client Proxy Standard. ISS has been
retained to provide assistance to the MSIM Affiliates in connection with voting
their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
B - 20
III. GUIDELINES
A. Management Proposals
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
. Selection or ratification of auditors.
. Approval of financial statements, director and auditor reports.
. Election of Directors.
. Limiting Directors' liability and broadening indemnification of
Directors.
. Requirement that a certain percentage (up to 66 2/3%) of its
Board's members be comprised of independent and unaffiliated
Directors.
. Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
. Recommendations to set retirement ages or require specific levels
of stock ownership by Directors.
. General updating/corrective amendments to the charter.
. Elimination of cumulative voting.
. Elimination of preemptive rights.
. Provisions for confidential voting and independent tabulation of
voting results.
. Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
Capitalization changes
----------------------
. Capitalization changes that eliminate other classes of stock and
voting rights.
. Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i)
a clear and legitimate business purpose is stated; (ii) the number
of shares requested is reasonable in relation to the purpose for
which authorization is requested; and (iii) the authorization does
not exceed 100% of shares currently authorized and at least 30% of
the new authorization will be outstanding.
. Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
. Proposals for share repurchase plans.
. Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
. Proposals to effect stock splits.
. Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in
the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
Compensation
------------
. Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
. Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
. Establishment of Employee Stock Option Plans and other employee
ownership plans.
Anti-Takeover Matters
---------------------
. Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
. Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of
shareholders.
B - 21
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
. Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing
shareholders.
. Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting
rights.
. Creation of "blank check" preferred stock.
. Changes in capitalization by 100% or more.
. Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
. Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
. Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee:
Corporate Transactions
----------------------
. Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates' research and
analysis, based on, among other things, MSIM internal
company-specific knowledge.
. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
. Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
. Executive/Director stock option plans. Generally, stock option
plans should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the
issued capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
Anti-Takeover Provisions
------------------------
. Proposals requiring shareholder ratification of poison pills.
. Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter the appropriate tender offers and other offers.
B. Shareholder Proposals
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
. Requiring auditors to attend the annual meeting of shareholders.
. Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
. Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
. Confidential voting.
. Reduction or elimination of supermajority vote requirements.
B - 22
B. Shareholder Proposals - continued
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
. Proposals that limit tenure of directors.
. Proposals to limit golden parachutes.
. Proposals requiring directors to own large amounts of stock to be
eligible for election.
. Restoring cumulative voting in the election of directors.
. Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
. Proposals that limit retirement benefits or executive compensation.
. Requiring shareholder approval for bylaw or charter amendments.
. Requiring shareholder approval for shareholder rights plan or
poison pill.
. Requiring shareholder approval of golden parachutes.
. Elimination of certain anti-takeover related provisions.
. Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
. Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
. Restrictions related to social, political or special interest
issues that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
. Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. Proxy Review Committee
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM
will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines
(as expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been
provided in Sections I, II and III above. Split votes will
generally not be approved within a single Global Investor Group
team. The
B - 23
Committee may take into account ISS recommendations and the
research provided by IRRC as well as any other relevant
information they may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with
respect to, the conflict(s) in question ("Special Committee").
The Special Committee may request the assistance of the Law and
Compliance Departments and will have sole discretion to cast a
vote. In addition to the research provided by ISS and IRRC, the
Special Committee may request analysis from MSIM Affiliate
investment professionals and outside sources to the extent it
deems appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions,
which documentation will be maintained by the Committee and the
Special Committee, or their designee(s) for a period of at least
6 years. To the extent these decisions relate to a security held
by a MSIM U.S. registered investment company, the Committee and
Special Committee, or their designee(s), will report their
decisions to each applicable Board of Trustees/Directors of those
investment companies at each Board's next regularly Scheduled
Board meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during the
most recently ended calendar quarter immediately preceding the
Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
B - 24
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
("SMAC")
SUMMARY OF PROXY VOTING POLICY AND PROCEDURES
SMAC, through its participation on Mellon's Proxy Policy Committee, has adopted
a Proxy Voting Policy, related procedures, and voting guidelines which are
applied to those client accounts over which it has been delegated the authority
to vote proxies. In voting proxies, SMAC seeks to act solely in the best
financial and economic interest of the applicable client. SMAC will carefully
review proposals that would limit shareholder control or could affect the value
of a client's investment. SMAC generally will oppose proposals designed to
insulate an issuer's management unnecessarily from the wishes of a majority of
shareholders. SMAC will generally support proposals designed to provide
management with short-term insulation from outside influences so as to enable
them to bargain effectively with potential suitors and otherwise achieve
long-term goals. On questions of social responsibility where economic
performance does not appear to be an issue, SMAC will attempt to ensure that
management reasonably responds to the social issues.
All proxy voting proposals are reviewed, categorized, analyzed and voted in
accordance with written guidelines in effect from time to time. These proxy
voting guidelines are based on research and recommendations provided by internal
resources and third party vendors. The guidelines are reviewed periodically and
updated as necessary to reflect new issues and any changes in our policies on
specific issues. Items that can be categorized will be voted in accordance with
any applicable guidelines or referred to the Proxy Policy Committee, if the
applicable guidelines so require. Proposals that cannot be categorized under the
guidelines will be referred to the Proxy Policy Committee for discussion and
vote. Additionally, the Proxy Policy Committee may review any proposal where it
has identified a particular company, industry or issue for special scrutiny.
With regard to voting proxies of foreign companies, SMAC weighs the cost of
voting and potential inability to sell the shares, against the benefit of voting
the shares, to determine whether or not to vote.
SMAC recognizes its duty to vote proxies in the best interests of its clients.
SMAC seeks to avoid material conflicts of interest through the establishment of
the Proxy Policy Committee, which applies detailed, pre-determined proxy voting
guidelines in an objective and consistent manner across client accounts, based
on internal and external research and recommendations provided by a third party
vendor, and without consideration of any client relationship factors. Further,
SMAC and its affiliates engage a third party as an independent fiduciary to vote
all proxies for Mellon Financial Corporation securities and affiliated mutual
fund securities
SMAC will furnish a copy of its Proxy Voting Policy, any related procedures, and
its voting guidelines to each advisory client upon request. Upon request, SMAC
will also disclose to an advisory client the proxy voting history for its
account after the votes have been recorded.
Approved 6/6/2003
B - 25
WELLINGTON MANAGEMENT COMPANY LLP
("Wellington Management")
SUMMBARY OF PROXY VOTING POLICIES AND PROCEDURES
The Funds have granted to Wellington Management the authority to vote proxies on
their behalf with respect to the assets managed by Wellington Management.
Wellington Management votes proxies in what it believes are the best economic
interests of its clients and in accordance with its Proxy Policies and
Procedures. Wellington Management's Proxy Committee is responsible for the
review and oversight of the firm's Proxy Policies and Procedures. The Proxy
Group within Wellington Management's Corporate Operations Department is
responsible for the day-to-day administration of the proxy voting process.
Although Wellington Management may utilize the services of various external
resources in analyzing proxy issues and has established its own Proxy Guidelines
setting forth general guidelines for voting proxies, Wellington Management
personnel analyze all proxies and vote proxies based on our assessment of the
merits of each proposal. The identified portfolio managers have the authority to
determine the final vote for securities held in Funds for which they serve as
the designated manager, unless such party is determined to have a material
conflict of interest related to that proxy vote.
Wellington Management maintains procedures designed to identify and address
material conflicts of interest in voting proxies. The Proxy Committee sets
standards for identifying material conflicts based on client, vendor and lender
relationships. Proxy votes for which Wellington Management identifies a material
conflict are reviewed by designated members of the Proxy Committee or by the
entire Committee in some cases to resolve the conflict and direct the vote.
Wellington Management may be unable to vote or may determine not to vote a proxy
on behalf of the Funds due to securities lending, share blocking and
re-registration requirements, lack of adequate information, untimely receipt of
proxy materials, immaterial impact of the vote, and/or excessive costs.
B - 26
CAPITAL GUARDIAN TRUST COMPANY
("CGTC")
PROXY VOTING POLICY AND PROCEDURES
POLICY
CGTC provides investment management services to clients that include, among
others, corporate and public pension plans, foundations and endowments and
unaffiliated registered investment companies. CGTC's Personal Investment
Management Division ("PIM") provides investment management and fiduciary
services, including trust and estate administration, primarily to high
net-worth individuals and families. CGTC considers proxy voting an
important part of those management services, and as such, CGTC seeks to
vote the proxies of securities held by clients in accounts for which it has
proxy voting authority in the best interest of those clients. The
procedures that govern this activity are reasonably designed to ensure that
proxies are voted in the best interest of CGTC's clients.
Fiduciary Responsibility and Long-term Shareholder Value
--------------------------------------------------------
CGTC's fiduciary obligation to manage its accounts in the best interest of
its clients extends to proxy voting. When voting proxies, CGTC considers
those factors which would affect the value of its clients' investment and
acts solely in the interest of, and for the exclusive purpose of providing
benefits to, its clients. As required by ERISA, CGTC votes proxies solely
in the interest of the participants and beneficiaries of retirement plans
and does not subordinate the interest of participants and beneficiaries in
their retirement income to unrelated objectives.
CGTC believes the best interests of clients are served by voting proxies in
a way that maximizes long-term shareholder value. Therefore, the investment
professionals responsible for voting proxies have the discretion to make
the best decision given the individual facts and circumstances of each
issue. Proxy issues are evaluated on their merits and considered in the
context of the analyst's knowledge of a company, its current management,
management's past record, and CGTC's general position on the issue. In
addition, many proxy issues are reviewed and voted on by a proxy voting
committee comprised primarily of investment professionals, bringing a wide
range of experience and views to bear on each decision.
As the management of a portfolio company is responsible for its day to day
operations, CGTC believes that management, subject to the oversight of its
board of directors, is often in the best position to make decisions that
serve the interests of shareholders. However, CGTC votes against management
on proposals where it perceives a conflict may exist between management and
client interests, such as those that may insulate management or diminish
shareholder rights. CGTC also votes against management in other cases where
the facts and circumstances indicate that the proposal is not in its
clients' best interests.
Special Review
--------------
From time to time CGTC may vote a) on proxies of portfolio companies that
are also clients of CGTC or its affiliates, b) on shareholder proposals
submitted by clients, or c) on proxies for which clients have publicly
supported or actively solicited CGTC or its affiliates to support a
particular position. When voting these proxies, CGTC analyzes the issues on
their merits and does not consider any client relationship in a way that
interferes with its responsibility to vote proxies in the best interest of
its clients. The CGTC Special Review Committee reviews certain of these
proxy decisions for improper influences on the decision-making process and
takes appropriate action, if necessary.
PROCEDURES
Proxy Review Process
--------------------
Associates in CGTC's proxy voting department, along with compliance
associates from the legal department, are responsible for coordinating the
voting of proxies. These associates work with outside proxy voting service
providers and custodian banks and are responsible for coordinating and
documenting the internal review of proxies.
The proxy voting department reviews each proxy ballot for standard and
non-standard items. Standard proxy items are typically voted with
management unless the research analyst who follows the company or a member
of an investment or proxy voting committee requests additional review.
Standard items currently include the uncontested election of directors,
ratifying auditors, adopting reports and accounts, setting dividends and
allocating profits for the prior year and certain other administrative
items.
All other items are sent by the proxy voting department to the research
analyst who follows the company. The analyst reviews the proxy statement
and makes a recommendation about how to vote on the issues based on his or
her in-depth knowledge of the
B - 27
company. Recommendations to vote with management on certain limited issues
are voted accordingly. All other non-standard issues receive further
consideration by a proxy voting committee, which reviews the issue and the
analyst's recommendation, and decides how to vote. A proxy voting committee
may escalate to the full investment committee(s) those issues for which it
believes a broader review is warranted. Four proxy voting committees
specialize in regional mandates and review the proxies of portfolio
companies within their mandates. The proxy voting committees are comprised
primarily of members of CGTC's and its affiliates' investment committees
and their activity is subject to oversight by those committees.
For securities held only in PIM accounts, non-standard items are sent to
those associates to whom the CGTC Investment Committee has delegated the
review and voting of proxies. These associates may forward certain
proposals to the appropriate investment committee for discussion and a
formal vote if they believe a broader review is warranted.
CGTC seeks to vote all of its clients' proxies. In certain circumstances,
CGTC may decide not to vote a proxy because the costs of voting outweigh
the benefits to its clients (e.g., when voting could lead to share blocking
where CGTC wishes to retain flexibility to trade shares). In addition,
proxies with respect to securities on loan through client directed lending
programs are not available to CGTC to vote and therefore are not voted.
Proxy Voting Guidelines
-----------------------
CGTC has developed proxy voting guidelines that reflect its general
position and practice on various issues. To preserve the ability of
decision makers to make the best decision in each case, these guidelines
are intended only to provide context and are not intended to dictate how
the issue must be voted. The guidelines are reviewed and updated as
necessary, but at least annually, by the appropriate proxy voting and
investment committees.
CGTC's general positions related to corporate governance, capital
structure, stock option and compensation plans and social and corporate
responsibility issues are reflected below.
. Corporate governance. CGTC supports strong corporate governance
practices. It generally votes against proposals that serve as
anti-takeover devices or diminish shareholder rights, such as poison
pill plans and supermajority vote requirements, and generally supports
proposals that encourage responsiveness to shareholders, such as
initiatives to declassify the board. Mergers and acquisitions,
reincorporations and other corporate restructurings are considered on a
case-by-case basis, based on the investment merits of the proposal.
. Capital structure. CGTC generally supports increases to capital stock
for legitimate financing needs. It generally does not support changes in
capital stock that can be used as anti-takeover devices, such as the
creation of or increase in blank-check preferred stock or of a dual
class capital structure with different voting rights.
. Stock option compensation plans. CGTC supports the concept of
stock-related compensation plans as a way to align employee and
shareholder interests. However, plans that include features which
undermine the connection between employee and shareholder interests
generally are not supported. CGTC considers the following factors when
voting on proposals related to new plans or changes to existing plans:
the exercise price of the options, the size of the overall plan and/or
the size of the increase, the historical dilution rate, whether the plan
permits option repricing, the duration of the plan, and the needs of the
company. Additionally, CGTC supports option expensing in theory and will
generally support shareholder proposals on option expensing if such
proposal language is non-binding and does not require the company to
adopt a specific expensing methodology.
. Social and corporate responsibility. CGTC votes on these issues based on
the potential impact to the value of its clients' investment in the
portfolio company.
Special Review Procedures
-------------------------
If a research analyst has a personal conflict in making a voting
recommendation on a proxy issue, he or she must disclose such conflict,
along with his or her recommendation. If a member of the proxy voting
committee has a personal conflict in voting the proxy, he or she must
disclose such conflict to the appropriate proxy voting committee and must
not vote on the issue.
Clients representing 0.0025 or more of assets under investment management
across all affiliates owned by The Capital Group Companies, Inc. (CGTC's
parent company), are deemed to be "Interested Clients". Each proxy is
reviewed to determine whether the portfolio company, a proponent of a
shareholder proposal, or a known supporter of a particular proposal is an
Interested Client. If the voting decision for a proxy involving an
Interested Client is against such client, then it is presumed that there
was no undue influence in favor of the Interested Client. If the decision
is in favor of the Interested Client, then the decision, the rationale for
such decision, information about the client relationship and all other
relevant information is reviewed by the Special Review Committee ("SRC").
The SRC determines whether the decision was in the best interest of CGTC's
clients and may
B - 28
accept or override the decision, or determine another course of action. The
SRC is comprised of senior representatives from CGTC's and its affiliates'
investment and legal groups and does not include representatives from the
marketing department.
Any other proxy will be referred to the SRC if facts or circumstances
warrant further review.
CGTC's Proxy Voting Record
--------------------------
Upon client request, CGTC will provide reports of its proxy voting record
as it relates to the securities held in the client's account(s) for which
CGTC has proxy voting authority.
Annual Assessment
-----------------
CGTC will conduct an annual assessment of this proxy voting policy and
related procedures.
Effective Date
--------------
This policy is effective as of August 1, 2003.
B - 29
PACIFIC INVESTMENT MANAGEMENT COMPANY LLC
("PIMCO")
PROXY VOTING POLICIES AND PROCEDURES
The following are general proxy voting policies and procedures ("Policies and
Procedures") adopted by Pacific Investment Management Company LLC ("PIMCO"), an
investment adviser registered under the Investment Advisers Act of 1940, as
amended ("Advisers Act")./6/ PIMCO serves as the investment adviser to a wide
range of domestic and international clients, including investment companies
registered under the Investment Company Act of 1940, as amended ("1940 Act") and
separate investment accounts for other clients./7/ These Policies and Procedures
are adopted to ensure compliance with Rule 206(4)-6 under the Advisers Act,
other applicable fiduciary obligations of PIMCO and the applicable rules and
regulations of the Securities and Exchange Commission ("SEC") and
interpretations of its staff. In addition to SEC requirements governing
advisers, PIMCO's Policies and Procedures reflect the long-standing fiduciary
standards and responsibilities applicable to investment advisers with respect to
accounts subject to the Employee Retirement Income Security Act of 1974
("ERISA"), as set forth in the Department of Labor's rules and regulations./8/
PIMCO will implement these Policies and Procedures for each of its respective
clients as required under applicable law, unless expressly directed by a client
in writing to refrain from voting that client's proxies. PIMCO's authority to
vote proxies on behalf of its clients is established by its advisory contracts,
comparable documents or by an overall delegation of discretionary authority over
its client's assets. Recognizing that proxy voting is a rare event in the realm
of fixed income investing and is typically limited to solicitation of consent to
changes in features of debt securities, these Policies and Procedures also apply
to any voting rights and/or consent rights of PIMCO, on behalf of its clients,
with respect to debt securities, including but not limited to, plans of
reorganization, and waivers and consents under applicable indentures./9/
Set forth below are PIMCO's Policies and Procedures with respect to any voting
or consent rights of advisory clients over which PIMCO has discretionary voting
authority. These Policies and Procedures may be revised from time to time.
General Statements of Policy
- ----------------------------
These Policies and Procedures are designed and implemented in a manner
reasonably expected to ensure that voting and consent rights are exercised in
the best interests of PIMCO's clients. Each proxy is voted on a case-by-case
basis taking into consideration any relevant contractual obligations as well as
other relevant facts and circumstances.
PIMCO may abstain from voting a client proxy under the following circumstances:
(1) when the economic effect on shareholders' interests or the value of the
portfolio holding is indeterminable or insignificant; or (2) when the cost of
voting the proxies outweighs the benefits.
Conflicts of Interest
- ---------------------
PIMCO seeks to resolve any material conflicts of interest by voting in good
faith in the best interest of its clients. If a material conflict of interest
should arise, PIMCO will seek to resolve such conflict in the client's best
interest by pursuing any one of the following courses of action:
1. convening an ad-hoc committee to assess and resolve the conflict;/10/
2. voting in accordance with the instructions/consent of a client after
providing notice of and disclosing the conflict to that client;
3. voting the proxy in accordance with the recommendation of an
independent third-party service provider;
4. suggesting that the client engage another party to determine how the
proxies should be voted;
5. delegating the vote to an independent third-party service provider; or
6. voting in accordance with the factors discussed in these Policies and
Procedures.
PIMCO will document the process of resolving any identified material conflict of
interest.
- ----------
/6/ These Policies and Procedures are adopted by PIMCO pursuant to Rule
206(4)-6 under the Advisers Act, effective August 6, 2003. See Proxy Voting by
Investment Advisers, IA Release No. 2106 (January 31, 2003).
/7/ These Policies and Procedures address proxy voting considerations under
U.S. law and regulations and do not address the laws or requirements of other
jurisdictions.
/8/ Department of Labor Bulletin 94-2, 29 C.F.R. 2509.94-2 (July 29, 1994). If
a client is subject to ERISA, PIMCO will be responsible for voting proxies with
respect to the client's account, unless the client has expressly retained the
right and obligation to vote the proxies, and provided prior written notice to
PIMCO of this retention.
/9/ For purposes of these Policies and Procedures, proxy voting includes any
voting rights, consent rights or other voting authority of PIMCO on behalf of
its clients.
/10/ Any committee must be comprised of personnel who have no direct interest in
the outcome of the potential conflict.
B - 30
Reporting Requirements and the Availability of Proxy Voting Records
- -------------------------------------------------------------------
Except to the extent required by applicable law or otherwise approved by PIMCO,
PIMCO will not disclose to third parties how it voted a proxy on behalf of a
client. However, upon request from an appropriately authorized individual, PIMCO
will disclose to its clients or the entity delegating the voting authority to
PIMCO for such clients (e.g., trustees or consultants retained by the client),
how PIMCO voted such client's proxy. In addition, PIMCO provides its clients
with a copy of these Policies and Procedures or a concise summary of these
Policies and Procedures: (i) in Part II of Form ADV; (ii) together with a
periodic account statement in a separate mailing; or (iii) any other means as
determined by PIMCO. The summary will state that these Policies and Procedures
are available upon request and will inform clients that information about how
PIMCO voted that client's proxies is available upon request.
PIMCO Record Keeping
- --------------------
PIMCO or its agent maintains proxy voting records as required by Rule 204-2(c)
of the Advisers Act. These records include: (1) a copy of all proxy voting
policies and procedures; (2) proxy statements (or other disclosures accompanying
requests for client consent) received regarding client securities (which may be
satisfied by relying on obtaining a copy of a proxy statement from the SEC's
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system or a third
party provided that the third party undertakes to provide a copy promptly upon
request); (3) a record of each vote cast by PIMCO on behalf of a client; (4) a
copy of any document created by PIMCO that was material to making a decision on
how to vote proxies on behalf of a client or that memorializes the basis for
that decision; and (5) a copy of each written client request for proxy voting
records and any written response from PIMCO to any (written or oral) client
request for such records. Additionally, PIMCO or its agent maintains any
documentation related to an identified material conflict of interest.
Proxy voting books and records are maintained by PIMCO or its agent in an easily
accessible place for a period of five years from the end of the fiscal year
during which the last entry was made on such record, the first two years in the
offices of PIMCO or its agent.
Review and Oversight
- --------------------
PIMCO's proxy voting procedures are described below. PIMCO's Compliance Group
will provide for the supervision and periodic review, no less than on a
quarterly basis, of its proxy voting activities and the implementation of these
Policies and Procedures. Because PIMCO has contracted with State Street
Investment Manager Solutions, LLC ("IMS West") to perform portfolio accounting,
securities processing and settlement processing on behalf of PIMCO, certain of
the following procedures involve IMS West in administering and implementing the
proxy voting process. IMS West will review and monitor the proxy voting process
to ensure that proxies are voted on a timely basis.
1. Transmit Proxy to PIMCO. IMS West will forward to PIMCO's Middle
Office Group each proxy received from registered owners of record (e.g.,
custodian bank or other third party service providers).
2. Conflicts of Interest. PIMCO's Middle Office Group will review each
proxy to determine whether there may be a material conflict between PIMCO and
its client. As part of this review, the group will determine whether the issuer
of the security or proponent of the proposal is a client of PIMCO, or if a
client has actively solicited PIMCO to support a particular position. If no
conflict exists, this group will forward each proxy to the appropriate portfolio
manager for consideration. However, if a conflict does exist, PIMCO's Middle
Office Group will seek to resolve any such conflict in accordance with these
Policies and Procedures.
3. Vote. The portfolio manager will review the information, will vote the
proxy in accordance with these Policies and Procedures and will return the voted
proxy to PIMCO's Middle Office Group.
4. Review. PIMCO's Middle Office Group will review each proxy that was
submitted to and completed by the appropriate portfolio manager. PIMCO's Middle
Office Group will forward the voted proxy back to IMS West with the portfolio
manager's decision as to how it should be voted.
5. Transmittal to Third Parties. IMS West will document the portfolio
manager's decision for each proxy received from PIMCO's Middle Office Group in a
format designated by the custodian bank or other third party service provider.
IMS West will maintain a log of all corporate actions, including proxy voting,
which indicates, among other things, the date the notice was received and
verified, PIMCO's response, the date and time the custodian bank or other third
party service provider was notified, the expiration date and any action taken.
6. Information Barriers. Certain entities controlling, controlled by, or
under common control with PIMCO ("Affiliates") may be engaged in banking,
investment advisory, broker-dealer and investment banking activities. PIMCO
personnel and PIMCO's agents are prohibited from disclosing information
regarding PIMCO's voting intentions to any Affiliate. Any PIMCO personnel
involved in the proxy voting process who are contacted by an Affiliate regarding
the manner in which PIMCO or its delegate intend to vote on a specific issue
must terminate the contact and notify the Compliance Group immediately.
Categories of Proxy Voting Issues
- ---------------------------------
In general, PIMCO reviews and considers corporate governance issues related to
proxy matters and generally supports proposals that foster good corporate
governance practices. PIMCO considers each proposal on a case-by-case basis,
taking into consideration various factors and all relevant facts and
circumstances at the time of the vote. PIMCO may vote proxies as recommended by
management on routine matters related to the operation of the issuer and on
matters not expected to have a significant economic impact on the issuer and/or
shareholders, because PIMCO believes the recommendations by the issuer generally
are in shareholders'
B - 31
best interests, and therefore in the best economic interest of PIMCO's clients.
The following is a non-exhaustive list of issues that may be included in proxy
materials submitted to clients of PIMCO, and a non-exhaustive list of factors
that PIMCO may consider in determining how to vote the client's proxies.
Board of Directors
1. Independence. PIMCO may consider the following factors when voting on
director independence issues: (i) majority requirements for the board
and the audit, nominating, compensation and/or other board committees;
and (ii) whether the issuer adheres to and/or is subject to legal and
regulatory requirements.
2. Director Tenure and Retirement. PIMCO may consider the following
factors when voting on limiting the term of outside directors: (i) the
introduction of new viewpoints on the board; (ii) a reasonable
retirement age for the outside directors; and (iii) the impact on the
board's stability and continuity.
3. Nominations in Elections. PIMCO may consider the following factors
when voting on uncontested elections: (i) composition of the board;
(ii) nominee availability and attendance at meetings; (iii) any
investment made by the nominee in the issuer; and (iv) long-term
corporate performance and the price of the issuer's securities.
4. Separation of Chairman and CEO Positions. PIMCO may consider the
following factors when voting on proposals requiring that the
positions of chairman of the board and the chief executive officer not
be filled by the same person: (i) any potential conflict of interest
with respect to the board's ability to review and oversee management's
actions; and (ii) any potential effect on the issuer's productivity
and efficiency.
5. D&O Indemnification and Liability Protection. PIMCO may consider the
following factors when voting on proposals that include director and
officer indemnification and liability protection: (i) indemnifying
directors for conduct in the normal course of business; (ii) limiting
liability for monetary damages for violating the duty of care; (iii)
expanding coverage beyond legal expenses to acts that represent more
serious violations of fiduciary obligation than carelessness (e.g.
negligence); and (iv) providing expanded coverage in cases where a
director's legal defense was unsuccessful if the director was found to
have acted in good faith and in a manner that he or she reasonably
believed was in the best interests of the company.
6. Stock Ownership. PIMCO may consider the following factors when voting
on proposals on mandatory share ownership requirements for directors:
(i) the benefits of additional vested interest in the issuer's stock;
(ii) the ability of a director to fulfill his duties to the issuer
regardless of the extent of his stock ownership; and (iii) the impact
of limiting the number of persons qualified to be directors.
Proxy Contests and Proxy Contest Defenses
1. Contested Director Nominations. PIMCO may consider the following
factors when voting on proposals for director nominees in a contested
election: (i) background and reason for the proxy contest; (ii)
qualifications of the director nominees; (iii) management's track
record; (iv) the issuer's long-term financial performance within its
industry; (v) assessment of what each side is offering shareholders;
(vi) the likelihood that the proposed objectives and goals can be met;
and (vii) stock ownership positions of the director nominees.
2. Reimbursement for Proxy Solicitation Expenses. PIMCO may consider the
following factors when voting on reimbursement for proxy solicitation
expenses: (i) identity of the persons who will pay the expenses; (ii)
estimated total cost of solicitation; (iii) total expenditures to
date; (iv) fees to be paid to proxy solicitation firms; and (v) when
applicable, terms of a proxy contest settlement.
3. Ability to Alter the Size of the Board by Shareholders. PIMCO may
consider whether the proposal seeks to fix the size of the board
and/or require shareholder approval to alter the size of the board.
4. Ability to Remove Directors by Shareholders. PIMCO may consider
whether the proposal allows shareholders to remove directors with or
without cause and/or allow shareholders to elect directors and fill
board vacancies.
5. Cumulative Voting. PIMCO may consider the following factors when
voting on cumulative voting proposals: (i) the ability of significant
stockholders to elect a director of their choosing; (ii) the ability
of minority shareholders to concentrate their support in favor of a
director(s) of their choosing; and (iii) any potential limitation
placed on the director's ability to work for all shareholders.
6. Supermajority Shareholder Requirements. PIMCO may consider all
relevant factors, including but not limited to limiting the ability of
shareholders to effect change when voting on supermajority
requirements to approve an issuer's charter or bylaws, or to approve a
merger or other significant business combination that would require a
level of voting approval in excess of a simple majority.
B - 32
Tender Offer Defenses
1. Classified Boards. PIMCO may consider the following factors when
voting on classified boards: (i) providing continuity to the issuer;
(ii) promoting long-term planning for the issuer; and (iii) guarding
against unsolicited takeovers.
2. Poison Pills. PIMCO may consider the following factors when voting on
poison pills: (i) supporting proposals to require a shareholder vote
on other shareholder rights plans; (ii) ratifying or redeeming a
poison pill in the interest of protecting the value of the issuer; and
(iii) other alternatives to prevent a takeover at a price clearly
below the true value of the issuer.
3. Fair Price Provisions. PIMCO may consider the following factors when
voting on proposals with respect to fair price provisions: (i) the
vote required to approve the proposed acquisition; (ii) the vote
required to repeal the fair price provision; (iii) the mechanism for
determining fair price; and (iv) whether these provisions are bundled
with other anti-takeover measures (e.g., supermajority voting
requirements) that may entrench management and discourage attractive
tender offers.
Capital Structure
1. Stock Authorizations. PIMCO may consider the following factors to help
distinguish between legitimate proposals to authorize increases in
common stock for expansion and other corporate purchases and those
proposals designed primarily as an anti-takeover device: (i) the
purpose and need for the stock increase; (ii) the percentage increase
with respect to the authorization currently in place; (iii) voting
rights of the stock; and (iv) overall capitalization structure of the
issuer.
2. Issuance of Preferred Stock. PIMCO may consider the following factors
when voting on the issuance of preferred stock:
(i) whether the new class of preferred stock has unspecified voting,
conversion, dividend distribution, and other rights;
(ii) whether the issuer expressly states that the stock will not be
used as a takeover defense or carry superior voting rights;
(iii) whether the issuer specifies the voting, dividend, conversion,
and other rights of such stock and the terms of the preferred stock
appear reasonable; and
(iv) whether the stated purpose is to raise capital or make
acquisitions in the normal course of business.
3. Stock Splits. PIMCO may consider the following factors when voting on
stock splits: (i) the percentage increase in the number of shares with
respect to the issuer's existing authorized shares; and (ii) the
industry that the issuer is in and the issuer's performance in that
industry.
4. Reversed Stock Splits. PIMCO may consider the following factors when
voting on reverse stock splits: (i) the percentage increase in the
shares with respect to the issuer's existing authorized stock; and
(ii) issues related to delisting the issuer's stock.
Executive and Director Compensation
1. Stock Option Plans. PIMCO may consider the following factors when
voting on stock option plans: (i) whether the stock option plan
expressly permits the repricing of options; (ii) whether the plan
could result in earnings dilution of greater than a specified
percentage of shares outstanding; (iii) whether the plan has an option
exercise price below the market price on the day of the grant; (iv)
whether the proposal relates to an amendment to extend the term of
options for persons leaving the firm voluntarily or for cause; and (v)
whether the stock option plan has certain other embedded features.
2. Director Compensation. PIMCO may consider the following factors when
voting on director compensation: (i) whether director shares are at
the same market risk as those of the issuer's shareholders; and (ii)
how stock option programs for outside directors compare with the
standards of internal stock option programs.
3. Golden and Tin Parachutes. PIMCO may consider the following factors
when voting on golden and/or tin parachutes: (i) whether they will be
submitted for shareholder approval; and (ii) the employees covered by
the plan and the quality of management.
State of Incorporation
State Takeover Statutes. PIMCO may consider the following factors when
voting on proposals to opt out of a state takeover statute: (i) the
power the statute vests with the issuer's board; (ii) the potential of
the statute to stifle bids; and (iii) the potential for the statute to
empower the board to negotiate a better deal for shareholders.
Mergers and Restructurings
1. Mergers and Acquisitions. PIMCO may consider the following factors
when voting on a merger and/or acquisition: (i) anticipated financial
and operating benefits as a result of the merger or acquisition; (ii)
offer price; (iii) prospects of the combined companies; (iv) how the
deal was negotiated; and (v) changes in corporate governance and the
potential impact on shareholder rights. PIMCO may also consider what
impact the merger or acquisition may have on groups/organizations
other than the issuer's shareholders.
2. Corporate Restructurings. With respect to a proxy proposal that
includes a spin-off, PIMCO may consider the tax and regulatory
advantages, planned use of sale proceeds, market focus, and managerial
incentives. With respect to a proxy proposal that includes an asset
sale, PIMCO may consider the impact on the balance sheet or working
capital and the value received for the asset. With respect to a proxy
proposal that includes a liquidation, PIMCO may consider management's
efforts to pursue alternatives, the appraisal value of assets, and the
compensation plan for executives managing the liquidation.
B - 33
Investment Company Proxies
For a client that is invested in an investment company, PIMCO votes each
proxy of the investment company on a case-by-case basis and takes all
reasonable steps to ensure that proxies are voted consistent with all
applicable investment policies of the client and in accordance with any
resolutions or other instructions approved by authorized persons of the
client.
For a client that is invested in an investment company that is advised by
PIMCO or its affiliates, if there is a conflict of interest which may be
presented when voting for the client (e.g., a proposal to approve a
contract between PIMCO and the investment company), PIMCO will resolve the
conflict by doing any one of the following: (i) voting in accordance with
the instructions/consent of the client after providing notice of and
disclosing the conflict to that client; (ii) voting the proxy in accordance
with the recommendation of an independent third-party service provider; or
(iii) delegating the vote to an independent third-party service provider.
1. Election of Directors or Trustees. PIMCO may consider the following
factors when voting on the director or trustee nominees of a mutual
fund: (i) board structure, director independence and qualifications,
and compensation paid by the fund and the family of funds; (ii)
availability and attendance at board and committee meetings; (iii)
investments made by the nominees in the fund; and (iv) the fund's
performance.
2. Converting Closed-end Fund to Open-end Fund. PIMCO may consider the
following factors when voting on converting a closed-end fund to an
open-end fund: (i) past performance as a closed-end fund; (ii) the
market in which the fund invests; (iii) measures taken by the board to
address any discount of the fund's shares; (iv) past shareholder
activism; (v) board activity; and (vi) votes on related proposals.
3. Proxy Contests. PIMCO may consider the following factors related to a
proxy contest: (i) past performance of the fund; (ii) the market in
which the fund invests; (iii) measures taken by the board to address
past shareholder activism; (iv) board activity; and (v) votes on
related proposals.
4. Investment Advisory Agreements. PIMCO may consider the following
factors related to approval of an investment advisory agreement: (i)
proposed and current fee arrangements/schedules; (ii) fund
category/investment objective; (iii) performance benchmarks; (iv)
share price performance as compared with peers; and (v) the magnitude
of any fee increase and the reasons for such fee increase.
5. Policies Established in Accordance with the 1940 Act. PIMCO may
consider the following factors: (i) the extent to which the proposed
changes fundamentally alter the investment focus of the fund and
comply with SEC interpretation; (ii) potential competitiveness; (iii)
regulatory developments; and (iv) current and potential returns and
risks.
6. Changing a Fundamental Restriction to a Non-fundamental Restriction.
PIMCO may consider the following when voting on a proposal to change a
fundamental restriction to a non-fundamental restriction: (i) reasons
given by the board and management for the change; and (ii) the
projected impact of the change on the fund's portfolio.
7. Distribution Agreements. PIMCO may consider the following when voting
on a proposal to approve a distribution agreement: (i) fees charged to
comparably sized funds with similar investment objectives; (ii) the
distributor's reputation and past performance; and (iii)
competitiveness of the fund among other similar funds in the industry.
8. Names Rule Proposals. PIMCO may consider the following factors when
voting on a proposal to change a fund name, consistent with Rule 35d-1
of the 1940 Act: (i) whether the fund invests a minimum of 80% of its
assets in the type of investments suggested by the proposed name; (ii)
the political and economic changes in the target market; and (iii)
current asset composition.
9. Disposition of Assets/Termination/Liquidation. PIMCO may consider the
following when voting on a proposal to dispose of fund assets,
terminate, or liquidate the fund: (i) strategies employed to salvage
the fund; (ii) the fund's past performance; and (iii) the terms of the
liquidation.
10. Changes to Charter Documents. PIMCO may consider the following when
voting on a proposal to change a fund's charter documents: (i) degree
of change implied by the proposal; (ii) efficiencies that could
result; (iii) state of incorporation; and (iv) regulatory standards
and implications.
11. Changing the Domicile of a Fund. PIMCO may consider the following when
voting on a proposal to change the domicile of a fund: (i) regulations
of both states; (ii) required fundamental policies of both states; and
(iii) the increased flexibility available.
12. Change in Fund's Subclassification. PIMCO may consider the following
when voting on a change in a fund's subclassification from diversified
to non-diversified or to permit concentration in an industry: (i)
potential competitiveness; (ii) current and potential returns; (iii)
risk of concentration; and (iv) consolidation in the target industry.
B - 34
Distressed and Defaulted Securities
1. Waivers and Consents. PIMCO may consider the following when
determining whether to support a waiver or consent to changes in
provisions of indentures governing debt securities which are held on
behalf of clients: (i) likelihood that the granting of such waiver or
consent will potentially increase recovery to clients; (ii) potential
for avoiding cross-defaults under other agreements; and (iii)
likelihood that deferral of default will give the obligor an
opportunity to improve its business operations.
2. Voting on Chapter 11 Plans of Liquidation or Reorganization. PIMCO may
consider the following when determining whether to vote for or against
a Chapter 11 plan in a case pending with respect to an obligor under
debt securities which are held on behalf of clients: (i) other
alternatives to the proposed plan; (ii) whether clients are treated
appropriately and in accordance with applicable law with respect to
their distributions; (iii) whether the vote is likely to increase or
decrease recoveries to clients.
Miscellaneous Provisions
1. Such Other Business. Proxy ballots sometimes contain a proposal
granting the board authority to "transact such other business as may
properly come before the meeting." PIMCO may consider the following
factors when developing a position on proxy ballots that contain a
proposal granting the board authority to "transact such other business
as may properly come before the meeting": (i) whether the board is
limited in what actions it may legally take within such authority; and
(ii) PIMCO's responsibility to consider actions before supporting
them.
2. Equal Access. PIMCO may consider the following factors when voting on
equal access: (i) the opportunity for significant company shareholders
to evaluate and propose voting recommendations on proxy proposals and
director nominees, and to nominate candidates to the board; and (ii)
the added complexity and burden of providing shareholders with access
to proxy materials.
3. Charitable Contributions. PIMCO may consider the following factors
when voting on charitable contributions: (i) the potential benefits to
shareholders; and (ii) the potential impact on the issuer's resources
that could have been used to increase shareholder value.
4. Special Interest Issues. PIMCO may consider the following factors when
voting on special interest issues: (i) the long-term benefit to
shareholders of promoting corporate accountability and responsibility
on social issues; (ii) management's responsibility with respect to
special interest issues; (iii) any economic costs and restrictions on
management; (iv) a client's instruction to vote proxies in a specific
manner and/or in a manner different from these Policies and
Procedures; and (v) the responsibility to vote proxies for the
greatest long-term shareholder value.
B - 35
RREEF AMERICA L.L.C.
("RREEF")
PROXY VOTING POLICY AND GUIDELINES
PROXY VOTING POLICY
RREEF, as a federally registered investment adviser, often has voting power with
respect to securities in client accounts. When RREEF has proxy voting power with
respect to securities in a client's account, it owes certain fiduciary duties
with respect to the voting of proxies. These fiduciary duties include (a) the
duty of care which requires RREEF to monitor corporate events and to vote the
proxies and (b) the duty of loyalty which requires RREEF to vote proxies in a
manner consistent with the best interests of the client and to put the client's
interests before RREEF's own interests. In keeping with its fiduciary duties,
RREEF has adopted and implemented this Proxy Voting Policy which sets forth
RREEF's policies and procedures designed to ensure that RREEF votes each
client's securities in the best interest of the client.
Notwithstanding anything in this Proxy Voting Policy, RREEF places priority on
investment returns over corporate governance correctness. Accordingly, when
economic considerations or extraordinary circumstances warrant, RREEF may make
exceptions to this Proxy Voting Policy.
I. PROXY VOTING DECISIONS
RREEF portfolio management teams will monitor corporate actions, make proxy
voting decisions, describe the basis on which a proxy voting decision is made if
the decision is inconsistent with the Proxy Voting Guidelines (see Section V
below), and be responsible for ensuring that proxies are submitted in a timely
manner. Specifically, each analyst is responsible for making a voting
recommendation on each proposal in such analyst's sector. Each analyst will
communicate his or her voting recommendations in hardcopy or via e-mail to the
portfolio manager. The portfolio manager will review the recommendations and
inform the analyst, the sector portfolio manager and the group's executive
assistant whether the recommendation has been approved. The executive assistant
will then coordinate the vote for each proxy.
As a general rule, RREEF will vote all proxies relating to a particular proposal
the same way for all client accounts holding the security in accordance with
RREEF's Proxy Proposal Guidelines (see Section V below), unless a client
specifically instructs RREEF in writing to vote such client's securities
otherwise. When making proxy voting decisions, RREEF may seek advice or
assistance from third party consultants, such as proxy voting services (e.g.,
Institutional Shareholder Services) or legal counsel.
II. CONFLICTS OF INTEREST
RREEF has adopted a Code of Ethics, Insider Trading Policy, and other compliance
policies and procedures to preserve the independence of its investment advice to
its clients. In addition, RREEF's affiliates, including Deutsche Bank AG,
Deutsche Bank Americas and Deutsche Asset Management ("DeAM"), have adopted
certain policies and procedures (including, among others, Deutsche Bank
Americas/DeAM Confidential, Material, Non-Public Information, Chinese Walls,
Insider Trading Policy) to preserve the independence of investment managers and
to address various conflicts of interest. Nonetheless, from time to time, a
proxy proposal may still involve a conflict between the interests of RREEF's
client and the interests of RREEF or an affiliated person of RREEF. For example,
a conflict may arise if RREEF client accounts held securities issued by a
company when that company (or its affiliate or pension plan) was also RREEF's
client. As another example, a conflict may arise if RREEF client accounts held
securities issued by a company with which a RREEF affiliate has significant
investment banking business.
RREEF securities personnel who are aware of any actual or apparent conflict of
interest relevant to, or any attempt to improperly influence, how RREEF votes
client proxies has a duty to inform the Compliance Officer, or a designee, of
such situation, including any relevant details. In the case of a person
participating in the deliberation on a specific vote, such information should be
conveyed before engaging in any activities or participating in any discussion
relating to such vote. No retaliatory action will be taken against any person
for reporting, in good faith, an actual or apparent conflict.
RREEF personnel responsible for voting client proxies should consult with the
Compliance Officer, who may consult with legal counsel if necessary, to
determine whether a material conflict appears to exist with respect to a given
proxy proposal. The Compliance Officer may also consult the Proxy Voting Working
Group of Deutsche Asset Management when a material conflict situation arises.
When a material conflict appears to exist and cannot be adequately addressed or
resolved by RREEF's other policies and procedures (including RREEF's Proxy
Voting Guidelines attached as an Appendix to this Proxy Voting Policy), or its
structural
B - 36
independence from its affiliates, the following procedures will be followed:
. Before voting proxies for clients affected by the conflict, RREEF will
(a) disclose the nature of the conflict to such clients; (b) inform
such clients how RREEF plans to vote the proxies; and (c) give each
such client the opportunity, by a certain date, to waive the conflict
or to instruct RREEF how to vote the proxies affected by the conflict.
. If a client instructs RREEF how to vote proxies affected by the
conflict, RREEF will vote such proxies in accordance with such
client's instructions. If a client waives the conflict or does not
respond in a timely manner, RREEF will vote such proxies as previously
disclosed to the client in accordance with this Proxy Voting Policy.
. RREEF will take such other action as may be deemed necessary or
appropriate, including, without limitation, recusing certain persons
from the proxy vote at issue.
Nothing in these procedures is intended to revoke RREEF's voting power with
respect to proxies relating to proposals that do not pose a material conflict.
III. DISCLOSURES TO CLIENTS
Upon a client's request, RREEF will furnish, without charge, to the requesting
client (a) a copy of this Proxy Voting Policy or (b) information about how RREEF
voted with respect to such client's securities. Except as otherwise directed by
a client or required by law, RREEF will maintain the confidentiality of how it
plans to vote or has voted proxies relating to such client's securities.
RREEF will disclose to its clients, in its written disclosure statement on Part
II of Form ADV or elsewhere (as deemed necessary or appropriate):
. How clients may obtain information from RREEF about how RREEF voted
with respect to their securities; and
. A descriptive summary of RREEF's proxy voting policies and procedures
as well as how a client may request a copy of this Proxy Voting
Policy.
IV. BOOKS AND RECORDS RELATING TO PROXIES
In connection with voting proxies and this Proxy Voting Policy, RREEF shall
maintain (in hardcopy or electronic form) such books and records as may be
required by applicable law, rules or regulations, including:
. RREEF's policies and procedures relating to voting proxies;
. A copy of each proxy statement that RREEF receives regarding clients'
securities, provided that RREEF may rely on (a) a third party to make
and retain, on RREEF's behalf, pursuant to a written undertaking, a
copy of proxy statements or (b) obtaining a copy of proxy statements
from the SEC's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system;
. A record of each vote cast by RREEF on behalf of clients, provided
that RREEF may rely on a third party to make and retain, on RREEF's
behalf, pursuant to a written undertaking, records of votes cast;
. Copies of any documents created by RREEF that were material to making
a decision on how to vote proxies on behalf of a client or that
memorialize the basis for that decision; and
. A record of each written client request for proxy voting information
and a copy of any written response by RREEF to any written or oral
client request for information on how RREEF voted proxies on behalf of
the requesting client.
Such books and records shall be maintained and preserved in an easily accessible
place for a period of not less than five years from the end of the fiscal year
during which the last entry was made on such record, the first two years in an
appropriate RREEF office.
V. PROXY VOTING GUIDELINES
The Proxy Voting Guidelines beginning on the next page sets forth how RREEF
generally votes proxies with respect to certain proxy proposals that arise
frequently. The Proxy Voting Guidelines are not intended to address every proxy
proposal that may arise, and RREEF will evaluate on a case-by-case basis any
proxy proposals not addressed in the Proxy Voting Guidelines. RREEF reserves the
right to depart from the Proxy Voting Guidelines when RREEF believes that it is
in the client's best interest to do so. Furthermore, instead of voting a proxy,
RREEF may, as it deems in the client's interest, (a) intentionally refrain from
voting a proxy or (b) sell the security. In addition, RREEF's proxy voting
guidelines may be superceded by proxy voting policies or guidelines submitted by
the client.
B - 37
PROXY VOTING GUIDELINES
A. Board of Directors
1. Voting on Director Nominees in Uncontested Elections. RREEF America
L.L.C. ("RREEF") votes on a case-by-case basis ballots for director
nominees, considering such factors as RREEF may deem relevant,
including, among others:
. nominee's background qualifications, such as education and
experience;
. nominee's independence;
. nominee's financial expertise;
. composition of board and committees;
. nominee's attendance at board and committee meetings during the
past two years;
. nominee's investment in the company;
. whether a retired CEO sits on the board;
. whether the chairman is also serving as CEO; and
. long-term corporate performance record relative to a market
index.
In cases of significant votes and when information is readily
available, RREEF may also consider additional factors, such as:
. corporate governance provisions and takeover activity;
. whether the board is staggered;
. board decisions regarding executive pay;
. director compensation;
. number of other board seats held by nominee; and
. interlocking directorships.
2. Chairman and CEO as Different Persons. Generally, RREEF votes for
proposals that would require the positions of chairman and CEO to be
held by different persons.
3. Majority or Supermajority of Independent Directors. RREEF votes for
proposals to require that the board be comprised of a majority or
supermajority of independent directors.
4. Stock Ownership Requirements. RREEF evaluates on a case-by-case basis
shareholder proposals to require directors to own a minimum amount of
company stock in order to qualify as a director or to remain on the
board.
5. Term of Office. RREEF evaluates on a case-by-case basis shareholder
proposals to limit the tenure of outside directors.
6. Director and Officer Indemnification and Liability Protection. RREEF
evaluates on a case-by-case basis proposals concerning director and
officer indemnification and liability protection.
7. Charitable Contributions. RREEF votes on a case-by-case basis
shareholder proposals to eliminate, direct or otherwise restrict
charitable contributions.
B. Proxy Contests
1. Voting for Director Nominees in Contested Elections. RREEF evaluates
on a case-by-case basis votes in a contested election of directors,
considering such factors as RREEF may deem relevant, including, among
others:
. long-term financial performance of the target company relative to
its industry;
. management's track record;
. background to the proxy contest;
. qualifications of director nominees (both slates);
. evaluation of what each side is offering shareholders as well as
the likelihood that the proposed objectives and goals can be met;
and
. stock ownership positions.
2. Reimburse Proxy Solicitation Expenses. RREEF evaluates on a
case-by-case basis decisions to provide full reimbursement for
dissidents waging a proxy contest. In cases where RREEF recommends
voting in favor of dissidents, RREEF generally votes for reimbursing
proxy solicitation expenses.
B - 38
C. Outside Auditors
When considering proposals involving outside auditors, RREEF considers such
factors as RREEF may deem relevant, including, among other, (a) whether an
auditor lacks independence due to a financial interest in or association
with the company or otherwise, including the amount and type of non-audit
fees received by the auditor; (b) whether the outside auditor has ever
rendered an opinion that does not fairly present the company's financial
position; and (c) whether the company's internal controls appear to be
ineffective due to guidance provided by the outside auditor.
1. Ratifying Auditors. RREEF evaluates on a case-by-case basis proposals
to ratify outside auditors.
2. Changing Auditors. RREEF evaluates on a case-by-case basis proposals
to change outside auditors.
D. Proxy Contest Defenses
1. Board Structure: Staggered vs. Annual Elections.
. RREEF votes against proposals to classify the board.
. RREEF votes for proposals to repeal classified boards and to elect all
directors annually.
2. Shareholder Ability to Remove Directors.
. RREEF votes against proposals that provide that directors may be
removed only for cause.
. RREEF votes for proposals to restore shareholder ability to remove
directors with or without cause.
. RREEF votes against proposals that provide that only continuing
directors may elect replacements to fill board vacancies.
. RREEF votes for proposals that permit shareholders to elect directors
to fill board vacancies.
3. Shareholder Ability to Call Special Meetings.
. RREEF votes against proposals to restrict or prohibit shareholder
ability to call special meetings.
. RREEF votes for proposals that remove restrictions on the right of
shareholders to act independently of management.
4. Shareholder Ability to Act by Written Consent.
. RREEF votes against proposals to restrict or prohibit shareholder
ability to take action by written consent.
. RREEF votes for proposals to allow or make easier shareholder action
by written consent.
5. Shareholder Ability to Alter the Size of the Board.
. RREEF votes for proposals that seek to fix the size of the board.
. RREEF votes against proposals that give management the ability to
alter the size of the board without shareholder approval.
E. Tender Offer Defenses
1. Poison Pills.
. RREEF votes for shareholder proposals that ask a company to submit its
poison pill for shareholder ratification.
. RREEF reviews on a case-by-case basis shareholder proposals to redeem
a company's poison pill.
. RREEF reviews on a case-by-case basis management proposals to ratify a
poison pill.
2. Supermajority Shareholder Vote Requirement to Amend the Charter or
Bylaws.
. RREEF votes against management proposals to require a supermajority
shareholder vote to approve charter and bylaw amendments.
. RREEF votes for shareholder proposals to lower supermajority
shareholder vote requirements for charter and bylaw amendments.
3. Supermajority Shareholder Vote Requirement to Approve Mergers.
. RREEF votes against management proposals to require a supermajority
shareholder vote to approve mergers and other significant business
combinations.
. RREEF votes for shareholder proposals to lower supermajority
shareholder vote requirements for mergers and other significant
business combinations.
B - 39
F. Capital Structure
1. Common Stock Authorization.
. RREEF reviews on a case-by-case basis proposals to increase the number
of shares of common stock authorized for issue.
2. Multiple Class Structures.
. RREEF reviews on a case-by-case basis proposals to create multiple
class capital structures to increase the number of shares issued,
taking into account, among other things, whether the total number of
shares is proportionately reduced.
3. Reverse Stock Splits.
. RREEF reviews on a case-by-case basis proposals to implement a reverse
stock split.
4. Blank Check Preferred Authorization.
. RREEF votes on a case-by-case basis proposals to create blank check
preferred stock in cases when the company expressly states that the
stock will not be used as a takeover defense or carry superior voting
rights.
. RREEF reviews on a case-by-case basis proposals that would authorize
the creation of new classes of preferred stock with unspecified
voting, conversion, dividend and distribution, and other rights.
. RREEF reviews on a case-by-case basis proposals to increase the number
of authorized blank check preferred shares.
5. Shareholder Proposals Regarding Blank Check Preferred Stock.
. RREEF votes for shareholder proposals to have blank check preferred
stock placements, other than those shares issued for the purpose of
raising capital or making acquisitions in the normal course of
business, submitted for shareholder ratification.
6. Adjust Par Value of Common Stock.
. RREEF votes for management proposals to reduce the par value of common
stock.
7. Preemptive Rights.
. RREEF reviews on a case-by-case basis proposals to create or abolish
preemptive rights. In evaluating proposals on preemptive rights, RREEF
looks at the size of a company and the characteristics of its
shareholder base.
8. Debt Restructurings.
. RREEF reviews on a case-by-case basis proposals to increase common
and/or preferred shares and to issue shares as part of a debt
restructuring plan.
9. Share Repurchase Programs.
. RREEF votes on a case-by-case basis proposals to institute open-market
share repurchase plans in which all shareholders may participate on
equal terms, taking into account, among other things, whether the
share repurchase program appears to be for anti-takeover purposes.
H. Equity Compensation
In general, RREEF votes on a case-by-case basis on equity compensation
plans (e.g., stock option plans, golden parachutes and employee stock
ownership plans, 401(k) employee benefit plans, etc.) with the view that
viable compensation programs reward the creation of stockholder wealth by
having a high payout sensitivity to increases in shareholder value.
Notwithstanding the preceding sentence, as a general rule, RREEF believes
that all outstanding options plus new options issued cannot be greater than
10% of the fully diluted number of shares, and RREEF will generally vote
against proposals to establish equity compensation plans that exceed such
10% threshold.
In addition, as a general policy, RREEF will vote against option plans that
contain so-called "evergreen" formulae.
In general, RREEF considers on a case-by-case basis proposals to make
material amendments (e.g., increase in the number of options, repricing,
expansion of plan participants, etc.) to equity compensation plans.
B - 40
I. State of Incorporation
1. Voting on State Takeover Statutes.
. RREEF reviews on a case-by-case basis proposals to opt in or out of
state takeover statutes (including control share acquisition statutes,
control share cash-out statutes, freezeout provisions, fair price
provisions, stakeholder laws, poison pill endorsements, severance pay
and labor contract provisions, anti-greenmail provisions, and
disgorgement provisions).
2. Voting on Reincorporation Proposals.
. RREEF reviews proposals to change a company's state or country of
incorporation on a case-by-case basis.
J. Mergers and Corporate Restructurings
1. Mergers and Acquisitions.
RREEF votes on mergers and acquisitions on a case-by-case basis,
considering such factors as RREEF may deem relevant.
2. Corporate Restructuring.
. RREEF votes on corporate restructuring proposals (including minority
squeeze-outs, leveraged buyouts, spin-offs, liquidations, and asset
sales) on a case-by-case basis.
3. Spin-offs.
. RREEF votes on spin-offs on a case-by-case basis depending on the tax
and regulatory advantages, planned use of sale proceeds, market focus,
and managerial incentives.
4. Asset Sales.
. RREEF votes on asset sales on a case-by-case basis after considering
the impact on the balance sheet/working capital, value received for
the asset, and potential elimination of diseconomies.
5. Liquidations.
. RREEF votes on liquidations on a case-by-case basis after reviewing
management's efforts to pursue other alternatives, appraisal value of
assets, and the compensation plan for executives managing the
liquidation.
6. Appraisal Rights.
. RREEF votes for proposals to restore, or provide shareholders with,
rights of appraisal.
7. Changing Corporate Name.
. RREEF votes for changing the corporate name.
K. Social And Environmental Issues
In general, RREEF abstains from voting on shareholder social and
environmental proposals, on the basis that their impact on share value can
rarely be anticipated with any high degree of confidence.
Effective Date for Proxy Voting Policy and Guidelines: As of August 6, 2003
B - 41
FIDELITY MANAGEMENT& RESEARCH COMPANY
("FMR")
PROXY VOTING GUIDELINES FOR FUNDS SUB-ADVISED BY FMR CO.
The following Proxy Voting Guidelines were established in consultation with
Fidelity Management & Research Company, the subadviser to the Earnings Growth
Fund. These guidelines are reviewed periodically by FMR and by non-interested
trustees of Fidelity's Boards of Trustees and, accordingly, are subject to
change. The guidelines are current as of March, 2004.
I. General Principles
A. Except as set forth herein, portfolio securities should generally be
voted in favor of incumbent directors and in favor of routine
management proposals. In general, FMR will oppose shareholder
proposals that do not appear reasonably likely to enhance the
economic returns or profitability of the portfolio company or to
maximize shareholder value.
B. Non-routine proposals covered by the following guidelines should
generally be voted in accordance with the guidelines.
C. Non-routine proposals not covered by the following guidelines or
other special circumstances should be evaluated by the appropriate
FMR analyst or portfolio manager, subject to review by the President
or General Counsel of FMR or the General Counsel of FMR Corp. A
significant pattern of such non-routine proposals or other special
circumstances should be referred to the Operations Committee or its
designee.
II. Portfolio shares should generally be voted against anti-takeover
proposals, including:
A. Fair Price Amendments, except those that consider only a two year
price history and are not accompanied by other anti-takeover
measures.
B. Classified Boards. FMR will generally vote in favor of proposals to
declassify a board of directors. FMR will consider voting against
such a proposal if the issuer's Articles of Incorporation or
applicable statute includes a provision whereby a majority of
directors may be removed at any time, with or without cause, by
written consent, or other reasonable procedures, by a majority of
shareholders entitled to vote for the election of directors.
C. Authorization of "Blank Check" Preferred Stock.
D. Golden Parachutes:
1. Accelerated options and/or employment contracts that will
result in a lump sum payment of more than three times annual
compensation (salary and bonus) in the event of termination.
2. Compensation contracts for outside directors.
3. Tin Parachutes that cover a group beyond officers and directors
and permit employees to voluntarily terminate employment and
receive payment.
4. Adoption of a Golden or Tin Parachute will result in our
withholding authority in the concurrent or next following vote
on the election of directors.
E. Supermajority Provisions.
F. Poison Pills:
1. Introduction of a Poison Pill without shareholder approval will
result in FMR withholding authority in the concurrent or next
following vote on the election of directors. In addition,
extension of an existing Poison Pill or the adoption of a new
Poison Pill without shareholder approval upon the expiration of
an existing Pill will result in FMR withholding authority in
the concurrent or next following vote on the election of
directors.
2. FMR will consider not withholding its authority on the election
of directors if (a) the board has adopted a Poison Pill with a
sunset provision; (b) the Pill is linked to a business strategy
that will result in greater value for the shareholders; (c) the
term is less than 5 years; and (d) shareholder approval is
required to reinstate the expired Pill. In addition, the Funds
will consider not withholding authority on the election of
directors if company management indicates that the
B - 42
board is willing to strongly consider seeking shareholder
ratification of, or adding a sunset provision meeting the above
conditions to, an existing Pill. In such a case, if the company
does not take appropriate action prior to the next annual
shareholder meeting, the Funds would withhold their vote from
the election of directors at that next meeting.
3. FMR will generally withhold authority on the election of
directors if a company refuses, upon request by FMR, to amend a
Poison Pill Plan to allow the Fidelity funds to hold an
aggregate position of up to 20% of a company's total voting
securities and of any class of voting securities. On a
case-by-case basis, FMR may determine not to withhold authority
on the election of directors if a company's Poison Pill Plan,
although imposing an aggregate ownership position limit of less
than 20%, in the judgment of FMR provides the funds with
sufficient investment flexibility.
4. Portfolio shares will be voted for shareholder proposals
requiring or recommending that shareholders be given an
opportunity to vote on the adoption of poison pills.
5. If shareholders are requested to approve adoption of a Poison
Pill plan, the Funds will, in general, consider voting in favor
of the Poison Pill plan if: (a) the board has adopted a Poison
Pill with a sunset provision; (b) the Pill is determined to be
linked to a business strategy that will result in greater value
for the shareholders; (c) the term is generally not longer than
5 years; (d) shareholder approval is required to reinstate an
expired Pill; (e) the Pill contains a provision suspending its
application, by shareholder referendum, in the event a
potential acquirer announces a bona fide offer, made for all
outstanding shares; and (f) the Pill allows the Fidelity funds
to hold an aggregate position of up to 20% of a company's total
voting securities and of any class of voting securities. On a
case-by-case basis, FMR may determine to vote in favor of a
company's Poison Pill Plan if the Plan, although imposing an
aggregate ownership position limit of less than 20%, in the
judgment of FMR provides the funds with sufficient investment
flexibility.
G. Elimination of, or limitation on, shareholder rights (e.g., action
by written consent, ability to call meetings, or remove directors).
H. Transfer of authority from shareholders to directors.
I. Reincorporation in another state (when accompanied by anti-takeover
provisions).
III. Stock Option Plans
A. Stock Option plans should be evaluated on a case-by-case basis.
Portfolio shares should generally be voted against Stock Option Plan
adoptions or amendments to authorize additional shares if:
1. The dilution effect of the shares authorized under the plan,
plus the shares reserved for issuance pursuant to all other
stock plans, is greater than 10%. However, for companies with
a smaller market capitalization, the dilution effect may not be
greater than 15%. If the plan fails this test, the dilution
effect may be evaluated relative to any unusual factor
involving the company.
2. The offering price of options is less than 100% of fair market
value on the date of grant, except that the offering price may
be as low as 85% of fair market value if the discount is
expressly granted in lieu of salary or cash bonus.
3. The Board may, without shareholder approval, (i) materially
increase the benefits accruing to participants under the plan,
(ii) materially increase the number of securities which may be
issued under the plan, or (iii) materially modify the
requirements for participation in the plan.
4. The granting of options to non-employee directors is subject to
management discretion, the plan is administered by a
compensation committee not comprised entirely of non-employee
directors or the plan is administered by a board of directors
not comprised of a majority of non-employee directors, versus
non-discretionary grants specified by the plan's terms.
5. However, a modest number of shares may be available for grant
to employees and non-employee directors without complying with
Guidelines 2, 3 and 4 immediately above if such shares meet
both of two conditions:
a. They are granted by a compensation committee composed
entirely of independent directors.
b. They are limited to 5% (large capitalization company) and
10% (small capitalization company) of the shares authorized
for grant under the plan.
B - 43
6. The plan's terms allow repricing of underwater options, or the
Board/Committee has repriced options outstanding under the plan
in the past 2 years. However, option repricing may be
acceptable if all of the following conditions, as specified by
the plan's express terms, or board resolution, are met:
a. The repricing is authorized by a compensation committee
composed entirely of independent directors to fulfill a
legitimate corporate purpose such as retention of a key
employee;
b. The repricing is rarely used and then only to maintain
option value due to extreme circumstances beyond
management's control; and
c. The repricing is limited to no more than 5% (large
capitalization company) or 10% (small capitalization
company) of the shares currently authorized for grant under
the plan.
7. Furthermore, if a compensation committee composed entirely of
independent directors determines that options need to be
granted to employees other than the company's executive
officers, that no shares are currently available for such
options under the company's existing plans, and that such
options need to be granted before the company's next
shareholder meeting, then the company may reprice options in an
amount not to exceed an additional 5% or 10%, as applicable, if
such company seeks authorization of at least that amount at the
very next shareholders' meeting.
8. For purposes of this Guideline III, a large capitalization
company generally means a company in the Russell 1000; the
small capitalization company category generally includes all
companies outside the Russell 1000.
B. FMR will generally withhold its authority on the election of
directors if, within the last year and without shareholder approval,
the company's board of directors or compensation committee has
repriced outstanding options held by officers or directors which,
together with all other options repriced under the same stock option
plan (whether held by officers, directors or other employees) exceed
5% (for a large capitalization company) or 10% (for a small
capitalization company) of the shares authorized for grant under the
plan.
C. Proposals to reprice outstanding stock options should be evaluated
on a case-by-case basis. FMR will consider supporting a management
proposal to reprice outstanding options based upon whether the
proposed repricing is consistent with the interests of shareholders,
taking into account such factors as:
1. Whether the repricing proposal excludes senior management and
directors;
2. Whether the options proposed to be repriced exceeded FMR's
dilution thresholds when initially granted;
3. Whether the repricing proposal is value neutral to shareholders
based upon an acceptable options pricing model;
4. The company's relative performance compared to other companies
within the relevant industry or industries;
5. Economic and other conditions affecting the relevant industry
or industries in which the company competes; and
6. Any other facts or circumstances relevant to determining
whether a repricing proposal is consistent with the interests
of shareholders.
IV. Restricted Stock Awards ("RSA") should be evaluated on a case-by-case
basis. Portfolio shares should generally be voted against RSA adoptions
or amendments to authorize additional shares if:
A. The dilution effect of the shares authorized under the plan, plus
the shares reserved for issuance pursuant to all other stock plans,
is greater than 10%. However, for companies with a smaller market
capitalization, the dilution effect may not be greater than 15%. If
the plan fails this test, the dilution effect may be evaluated
relative to any unusual factor involving the company.
B. The Board may materially alter the RSA without shareholder approval,
including a provision that allows the Board to lapse or waive
restrictions at its discretion.
C. The granting of RSAs to non-employee directors is subject to
management discretion, versus non-discretionary grants specified by
the plan's terms.
B - 44
D. The restriction period is less than 3 years. RSAs with a restriction
period of less than 3 years but at least 1 year are acceptable if
the RSA is performance based.
E. However, a modest number of shares may be available for grant to
employees and non-employee directors without complying with
Guidelines B, C and D immediately above if such shares meet both of
two conditions:
1. They are granted by a compensation committee composed entirely
of independent directors.
2. They are limited to 5% (large capitalization company) and 10%
(small capitalization company) of the shares authorized for
grant under the plan.
F. For purposes of this Guideline IV, a large capitalization company
generally means a company in the Russell 1000; the small
capitalization company category generally includes all companies
outside the Russell 1000.
G. Proposals to grant restricted stock in exchange for options should
be evaluated on a case-by-case basis. FMR will consider supporting a
management proposal to grant restricted stock awards in exchange for
options based upon whether the proposed exchange is consistent with
the interests of shareholders, taking into account such factors as:
1. Whether the restricted stock award exchange proposal excludes
senior management and directors;
2. Whether the options proposed to be exchanged exceeded FMR's
dilution thresholds when initially granted;
3. Whether the restricted stock award exchange proposal is value
neutral to shareholders based upon an acceptable stock award
pricing model;
4. The company's relative performance compared to other companies
within the relevant industry or industries;
5. Economic and other conditions affecting the relevant industry
or industries in which the company competes; and
6. Any other facts or circumstances relevant to determining
whether a restricted stock award exchange proposal is
consistent with the interests of shareholders.
V. Other Stock-Related Plans should be evaluated on a case-by-case basis:
A. Omnibus Stock Plans - vote against entire plan if one or more
component violates any of the criteria in parts III or IV above,
except if the component is de minimus. In the case of an omnibus
stock plan, the 5% and 10% limits in Guidelines III and IV will be
measured against the total number of shares under all components of
such plan.
B. Employee Stock Purchase Plans - vote against if the plan violates
any of the criteria in parts III and IV above, except that the
minimum stock purchase price may be equal to or greater than 85% of
the stock's fair market value if the plan constitutes a reasonable
effort to encourage broad based participation in the company's
equity. In the case of non-U.S. company stock purchase plans, the
minimum stock purchase price may be equal to the prevailing "best
practices," as articulated by the research or recommendations of the
relevant proxy research or corporate governance services, provided
that the minimum stock purchase price must be at least 75% of the
stock's fair market value.
C. Stock Awards (other than stock options and RSAs) - generally vote
against unless they are identified as being granted to
officers/directors in lieu of salary or cash bonus, subject to
number of shares being reasonable.
VI. Unusual Increases in Common Stock:
A. An increase of up to 3 times outstanding and scheduled to be issued,
including stock options, is acceptable; any increase in excess of 3
times would be voted against except in the case of real estate
investment trusts, where an increase of 5 times is, in general,
acceptable.
B. Measured as follows: requested increased authorization plus stock
authorized to be issued under Poison Pill divided by current stock
outstanding plus any stock scheduled to be issued (not including
Poison Pill authority). (If the result is greater than 3, Portfolio
shares should be voted against.)
B - 45
VII. Portfolio shares should, in general, be voted against the introduction of
new classes of Stock with Differential Voting Rights.
VIII. With regard to Cumulative Voting Rights, Portfolio shares should be voted
in favor of introduction or against elimination on a case-by-case basis
where this is determined to enhance Portfolio interests as minority
shareholders.
IX. Greenmail - Portfolio shares should be voted for anti-greenmail proposals
so long as they are not part of anti-takeover provisions.
X. Portfolio shares should be voted in favor of charter by-law amendments
expanding the Indemnification of Directors and/or limiting their
liability for Breaches of Care.
A. Portfolio shares should be voted against such proposals if FMR is
otherwise dissatisfied with the performance of management or the
proposal is accompanied by anti-takeover measures.
XI. Portfolio shares should be voted in favor of proposals to adopt
Confidential Voting and Independent Vote Tabulation practices.
XII. Portfolio shares should be voted in favor of proposed amendments to a
company's certificate of incorporation or by-laws that enable the company
to Opt Out of the Control Shares Acquisition Statutes.
XIII. Employee Stock Ownership Plans ("ESOPs") should be evaluated on a
case-by-case basis. Portfolio shares should usually be voted for
non-leveraged ESOPs. For leveraged ESOPs, FMR may examine the company's
state of incorporation, existence of supermajority vote rules in the
charter, number of shares authorized for the ESOP, and number of shares
held by insiders. FMR may also examine where the ESOP shares are
purchased and the dilution effect of the purchase. Portfolio shares
should be voted against leveraged ESOPs if all outstanding loans are due
immediately upon change in control.
XIV. Voting of shares in securities of any U.S. banking organization shall be
conducted in a manner consistent with conditions that may be specified by
the Federal Reserve Board for a determination under federal banking law
that no Fund or group of Funds has acquired control of such banking
organization.
XV. Avoidance of Potential Conflicts of Interest
Voting of shares shall be conducted in a manner consistent with the best
interests of mutual fund shareholders as follows: (i) securities of a
portfolio company shall be voted solely in a manner consistent with the
Proxy Voting Guidelines; and (ii) voting shall be done without regard to
any other Fidelity Companies' relationship, business or otherwise, with
that portfolio company.
FMR applies the following policies and follows the procedures set forth
below:
A. FMR has placed responsibility for the Funds' proxy voting in the FMR
Legal Department.
B. The FMR Legal Department votes proxies according to the Proxy Voting
Guidelines that are approved by the Funds' Board of Trustees.
C. The FMR Legal Department consults with the appropriate analysts or
portfolio managers regarding the voting decisions of non-routine
proposals that are not addressed by the Proxy Voting Guidelines.
Each of the President or General Counsel of FMR or the General
Counsel of FMR Corp is authorized to take a final decision.
D. When a Fidelity Fund invests in an underlying fund in reliance on
any one of Sections 12(d)(1)(E), (F) or (G) of the Investment
Company Act of 1940, as amended, or to the extent disclosed in the
Fund's registration statement, FMR will use pass through voting or
echo voting procedures.
XVI. Executive Compensation
FMR will consider withholding authority for the election of directors and
voting against management proposals on stock-based compensation plans or
other compensation plans based on whether the proposals are consistent
with the interests of shareholders, taking into account such factors as:
(i) whether the company has an independent compensation committee; and
(ii) whether the compensation committee has authority to engage
independent compensation consultants.
XVII. Portfolio shares should generally be voted against shareholder proposals
calling for or recommending the appointment of a non-executive or
independent chairperson. However, FMR will consider supporting such
proposals in limited cases if, based
B - 46
upon particular facts and circumstances, appointment of a non-executive
or independent chairperson appears likely to further the interests of
shareholders and to promote effective oversight of management by the
board of directors.
XVIII. Auditors
A. Portfolio shares should generally be voted against shareholder
proposals calling for or recommending periodic rotation of a
portfolio company's auditor. FMR will consider voting for such
proposals in limited cases if, based upon particular facts and
circumstances, a company's board of directors and audit committee
appear to have clearly failed to exercise reasonable business
judgment in the selection of the company's auditor.
B. Portfolio shares should generally be voted against shareholder
proposals calling for or recommending the prohibition or limitation
of the performance of non-audit services by a portfolio company's
auditor. Portfolio shares should also generally be voted against
shareholder proposals calling for or recommending removal of a
company's auditor due to, among other reasons, the performance of
non-audit work by the auditor. FMR will consider voting for such
proposals in limited cases if, based upon particular facts and
circumstances, a company's board of directors and audit committee
appear to have clearly failed to exercise reasonable business
judgment in the oversight of the performance of the auditor of audit
or non-audit services for the company.
XIX. Incorporation or Reincorporation in Another State or Country
Portfolio shares should generally be voted against shareholder proposals
calling for or recommending that a portfolio company reincorporate in the
United States and voted in favor of management proposals to reincorporate
in a jurisdiction outside the United States if (i) it is lawful under
United States, state and other applicable law for the company to be
incorporated under the laws of the relevant foreign jurisdiction and to
conduct its business and (ii) reincorporating or maintaining a domicile
in the United States would likely give rise to adverse tax or other
economic consequences detrimental to the interests of the company and its
shareholders. However, FMR will consider supporting such shareholder
proposals and opposing such management proposals in limited cases if,
based upon particular facts and circumstances, reincorporating in or
maintaining a domicile in the relevant foreign jurisdiction gives rise to
significant risks or other potential adverse consequences that appear
reasonably likely to be detrimental to the interests of the company or
its shareholders.
B - 47
MIT International Index Trust and JHVST International
Equity Index Fund Pro Forma Financial Statements
The Pro Forma Combining Statement of Operations set out below provides
information about the impact of the proposed Reorganization by indicating how
the Reorganization might have affected the Funds' results of operations if the
Reorganization had been consummated as of December 31, 2002. The Pro Forma
Combining Statement of Assets and Liabilities and Pro Forma Combining Schedule
of Portfolio Investments show how the Reorganization might have affected the
Funds' assets and liabilities if it had been consummated as of December 31,
2003. In each case the combined results give effect to the pro-forma adjustments
described in the related footnotes.
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
(Unaudited)
(000's Omitted)
VST MIT
International International Pro forma
Equity Index Index Trust Adjustment Combined
---------------------------------------------------------
Assets:
Investments in securities, at value $ 167,180 $ 108,882 $ 276,062
(Cost: Acquired Fund - $110,150
Acquiring Fund - $142,128)
Foreign currency at value 47 17 64
(Cost: Acquired Fund - $17
Acquiring Fund - $47)
Receivable for:
Investments sold 1 4 5
Fund shares sold 80 94 174
Income receivable 242 88 330
(Net of withholding taxes or: Acquired Fund - $8
Acquiring Fund - $ -)
Futures contracts variation margin 9 5 14
Forward foreign currency exchange
contracts sold 74 74
Foreign tax withholding reclaims 22 22
Other assets 6 1 7
---------------------------------------------------------
Total assets 167,639 109,113 276,752
---------------------------------------------------------
LIABILITIES
Payables for:
Collateral for securities on loan 8,571 9,718 18,289
Due to adviser 1 1
Forward foreign currency exchange
contracts purchased 12 12
Other liabilities 20 18 38
----------- ----------- -----------
Total liabilities 8,603 9,737 18,340
Net assets $ 159,036 $ 99,376 $ 258,412
=========== =========== ===========
Composition of net assets:
Capital paid-in $ 169,313 $ 105,444 $ 274,757
Accumulated net realized loss on investments,
futures and foreign currency transactions (22,996) (4,586) (27,582)
Undistributed net investment loss (421) (415) (836)
Net unrealized appreciation (depreciation) of:
Investments 13,002 (1,268) 11,734
Futures 79 195 274
Translation of assets and liabilities in foreign currencies 59 6 65
----------- ----------- -----------
Net assets $ 159,036 $ 99,376 $ 258,412D
=========== =========== ===========
Outstanding Shares:
NAV Shares 11,508,157 11,508,157
Series I Shares - A 5,947,684 5,947,684
Series II Shares - B 1,242,867 1,242,867
Series I Shares - MIT International Index Trust - A 9,056,146
Series II Shares - MIT International Index Trust - B 1,891,609
Series III Shares - MIT International Index Trust - C 374 (374) -
Net asset value per share:
NAV Shares $ 13.82 $ 13.82
Series I Shares - A - 13.82
Series II Shares - B - 13.82
Series I Shares - MIT International Index Trust - A,D $ 9.08
Series II Shares - MIT International Index Trust - B,D 9.08
A - Series I of the Acquired Fund are exchanged for Series I of the Acquiring
Fund upon consummation of the reorganization. Initial per share values of Series
I shares are presumed to equal that of NAV Shares.
B - Series II of the Acquired Fund are exchanged for Series II of the Acquiring
Fund upon consummation of the reorganization. Initial per share values of Series
II shares are presumed to equal that of NAV Shares.
C - The Series III shares were all redeemed prior to the record date for The
Special Meeting of Shareholders to vote on the reorganization.
D - The pro forma figures for net assets and net asset values per share do not
reflect Manulife U.S.A.'s withdrawal, in February and April 2004, of seed
capital in the amount of $34,477,450 at December 31, 2003 from the Acquired
Fund.
The accompanying notes are an integral part of the financial statements.
PRO FORMA COMBINING STATEMENT OF OPERATIONS
December 31, 2003
(Unaudited)
(000's Omitted)
VST International MIT International Pro forma
Equity Index Index Trust Adjustments Combined
---------------------------------------------------------------
Investment Income:
Interest $ 57 $ 100 $ $ 157
Dividends 2,738 1,739 4,477
Securities lending 146 41 187
Less Foreign taxes withheld (182) (182)
------------ ----------- --------
Total investment income 2,941 1,698 4,639
Expenses:
Investment advisory fee 214 288 (231) A 271
Custodian fees 253 18 (244) B 27
Fund administration fees 8 (8) B -
Audit & Legal fees 25 15 (10) B 30
Printing & mailing fees 10 6 (3) B 13
Registration and filing fees 1 (1) B -
Trustees' fees 4 1 5
Other fees 10 2 (1) B 11
Distribution fee for Series I 91 152 C 243
Distribution fee for Series II 40 29 C 69
------------ ----------- --------- --------
Total expenses 516 470 669 D
Less expenses reimbursed (189) (15) --
------------ ----------- --------- --------
Net expenses 327 455 (317) 669
------------ ----------- --------
Net investment income 2,614 1,243 3,972
------------ ----------- --------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on:
Investments (7,135) (133) (7,268)
Financial futures contracts 282 1,406 1,688
Foreign currency transactions 516 (277) 239
Change in unrealized appreciation
(depreciation) on:
Investments 50,873 21,167 72,040
Futures 171 193 364
Translation of assets and
liabilities in foreign currencies (4) (9) (13)
------------ ----------- --------
Net realized and unrealized gain 44,703 22,347 67,050
------------ ----------- --------
Net increase in net assets
resulting from operations $ 47,317 $ 23,590 $ 71,201
============ =========== ========
Pro Forma Adjustments:
(A) Adjustment to reflect the change in advisory fees upon reorganization.
(B) Adjustment to reflect the reduction in the custodian agreement fees
and elimination of duplicate expenses upon reorganization.
(C) Adjustment to reflect the increase in 12b-1 fees associated with the
proposed merger.
(D) Adjustment has not been made to reflect estimated one-time proxy,
legal and other expenses of the reorganization in the pro-forma
Statement of Operations. These estimated expenses are $75,000 for each
Fund.
The accompanying notes are an integral part of the financial statements.
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2003 (Unaudited)
The Schedule of Investments is a complete list of all the securities owned by
the V.S.T. International Equity Index and the MIT International Index Trust,
combined on December 31, 2003.
-------------------------------------------------------------------------------------
VST INTERNATIONAL EQUITY INDEX MIT INTERNATIONAL INDEX TRUST PRO FORMA COMBINED
-------------------------------------------------------------------------------------
MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE
Name of Issuer SHARES (000'S SHARES OR (000'S SHARES OR (000'S
OMITTED) PAR VALUE OMITTED) PAR VALUE OMITTED)
-------------------------------------------------------------------------------------
COMMON STOCK
Australia - 3.9% #
Alumina, Ltd. * 19,300 95 13,123 65 32,423 160
Amcor, Ltd. * 10,060 63 10,060 63
AMP, Ltd. 50,472 190 17,632 66 68,104 256
Ansell, Ltd. * 11,800 57 2,243 11 14,043 68
Aristocrat Leisure, Ltd. * 2,388 3 2,388 3
Austrailia Gas Light Company, Ltd. * 5,101 43 5,101 43
Australia and New Zealand Bank Group Ltd. * 20,981 279 20,981 279
Australian Stock Exchange, Ltd. * 1,311 17 1,311 17
BHP Steel * 33,357 141 9,229 39 42,586 180
Boral, Ltd. * 6,916 26 6,916 26
Brambles Industries, Ltd. * (a) 11,480 46 11,480 46
Broken Hill Proprietary Co., Ltd. * 78,691 722 43,744 401 122,435 1,123
Centro Props Group * 6,710 20 6,710 20
CFS Gandel Retail Trust * 13,880 14 13,880 14
Coca-Cola Amatil, Ltd. * 5,717 27 5,717 27
Cochlear, Ltd. * 563 9 563 9
Coles Myer, Ltd. * 23,600 134 12,639 72 36,239 206
Commonwealth Bank of Australia 27,670 614 14,641 325 42,311 939
Commonwealth Property Office Fund * 16,430 14 16,430 14
Computershare, Ltd. * 4,926 12 4,926 12
CSL, Ltd. * 2,600 35 1,843 25 4,443 60
CSR, Ltd. 65,000 91 9,889 14 74,889 105
David Jones, Ltd. * 2,251 2 2,251 2
Deutsche Office Trust * 14,906 12 14,906 12
Foster's Brewing Group, Ltd. * 39,000 132 25,387 86 64,387 218
The accompanying notes are an integral part of the financial statements.
Futuris Corp., Ltd. * 6,834 8 6,834 8
General Property Trust 168,892 380 22,880 51 191,772 431
Harvey Norman Holding, Ltd. * 5,707 13 5,707 13
HHG plc * 50,472 36 50,472 36
Iluka Resources, Ltd. * 2,500 8 2,500 8
Investa Property Group * 15,352 23 15,352 23
James Hardie Industries NV * 5,490 28 5,490 28
John Fairfax Holdings, Ltd. * 10,236 27 10,236 27
Leighton Holdings * 1,493 13 1,493 13
Lend Lease Corp. 10,600 80 4,246 32 14,846 112
Lion Nathan, Ltd. * 3,000 14 3,000 14
Macquarie Bank, Ltd. * 2,499 67 2,499 67
Macquarie Goodman * 15,874 20 15,874 20
Macquarie Infrastructure Group * 21,866 56 21,866 56
Mayne Nickless, Ltd. * 8,985 22 8,985 22
Mirvac Group * 7,935 26 7,935 26
National Australia Bank, Ltd. 31,556 712 17,545 396 49,101 1,108
Newcrest Mining, Ltd. * 3,890 38 3,890 38
News Corp., Ltd. 31,113 281 17,031 154 48,144 435
NRMA Insurance Group, Ltd. * 20,058 64 20,058 64
OneSteel, Ltd. 37,275 57 5,172 8 42,447 65
Orica, Ltd. 8,400 88 3,066 32 11,466 120
Origin Energy, Ltd. * 8,130 29 8,130 29
PaperlinkX, Ltd. * 4,733 18 4,733 18
Patrick Corp., Ltd. * 1,769 19 1,769 19
Publishing & Broadcasting, Ltd. * 1,585 15 1,585 15
QBE Insurance Group, Ltd. * 30,618 244 7,711 62 38,329 306
Rinker Group Ltd. 18,000 89 10,937 54 28,937 143
Rio Tinto, Ltd. 5,600 157 3,619 101 9,219 258
Santos, Ltd. * 39,200 203 6,535 34 45,735 237
Sonic Healthcare, Ltd. * 2,854 15 2,854 15
Sons Of Gwalia, Ltd. * 670 2 670 2
Southcorp, Ltd. * 6,901 14 6,901 14
Stockland 56,157 221 13,903 55 70,060 276
Suncorp-Metway, Ltd. * 6,181 58 6,181 58
Tab, Ltd. * 5,702 20 5,702 20
Tabcorp Holdings, Ltd. 16,400 139 4,739 40 21,139 179
Telstra Corp. * 43,000 156 25,507 93 68,507 249
Toll Holdings, Ltd. * 2,546 16 2,546 16
Transurban Group * 5,224 18 5,224 18
The accompanying notes are an integral part of the financial statements.
Wesfarmers, Ltd. * 4,374 87 4,374 87
Westfield Holdings, Ltd. * 5,050 53 5,050 53
Westfield Trust 142,560 382 25,433 68 167,993 450
Westpac Banking Corp., Ltd. * 31,200 376 20,984 253 52,184 629
WMC Resorces, Ltd. * 19,300 82 13,039 55 32,339 137
Woodside Petroleum, Ltd. * 5,389 60 5,389 60
Woolworths, Ltd. * 16,300 145 11,903 106 28,203 251
------- -------- --------
6,039 4,136 10,175
Austria - 0.2% #
Bank Austria Creditanstalt * 2,049 105 469 24 2,518 129
Bohler Uddeholm AG 1,600 108 43 3 1,643 111
BWT AG 2,000 37 2,000 37
Erste Bank AG * 658 81 359 44 1,017 125
Flughafen Wien AG 2,178 102 119 5 2,297 107
Immofinanz Immobiien Anlage AG * 3,481 28 3,481 28
Mayr-Melnhof Karton AG * 68 8 68 8
Oesterreichische Elektrizitaets AG, Class A * 70 8 70 8
OMV AG * 154 23 154 23
RHI AG * (a) 94 2 94 2
Telekom Austria AG * 2,323 29 2,323 29
VA Technologie AG * 71 2 71 2
Voestalpine AG * 284 12 284 12
Wienerberger Baustoffindustrie AG * 300 8 300 8
------- -------- --------
433 196 629
Belgium - 1.0% #
Agfa Gevaert NV * 1,360 39 1,360 39
Barco NV * 120 11 120 11
Bekaert NV 890 57 198 13 1,088 70
Cofinimmo SA * 40 5 40 5
Colruyt NV 970 93 190 18 1,160 111
Compagnie Maritime Belge SA 521 42 42 3 563 45
D' Ieteren SA 390 80 31 6 421 86
Delhaize SA 2,855 147 828 43 3,683 190
DEXIA * 7,205 124 7,439 128 14,644 252
Electrabel SA 254 80 348 109 602 189
Exmar SA * 521 22 521 22
Fortis * 13,470 271 11,983 241 25,453 512
GPE Bruxelles LAM 2,388 134 795 45 3,183 179
The accompanying notes are an integral part of the financial statements.
Interbew 5,301 141 1,734 46 7,035 187
KBC Bancassurance Holding NV 2,540 119 1,091 51 3,631 170
Mobistar SA * 249 14 249 14
NV Union Miniere SA 1,461 102 204 14 1,665 116
Omega Pharma SA * 277 9 277 9
Solvay SA 1,215 105 744 64 1,959 169
UCB SA * 3,900 147 1,078 41 4,978 188
-------- -------- --------
1,664 900 2,564
Brazil - 0.0% #
Aracruz Celulose SA - ADR * 1,500 55 1,500 55
Canada - 3.0% #
Abitibi Consolidated, Inc. * 9,699 78 9,699 78
Alcan Aluminum, Ltd. 5,575 261 5,575 261
ATI Technologies, Inc. 5,104 77 5,104 77
Bank of Montreal 8,151 337 8,151 337
Bank Nova Scotia Halifax * 8,445 430 8,445 430
Barrick Gold Corp. 9,441 214 9,441 214
BCE, Inc. 5,282 118 5,282 118
Biovail Corp. * 2,999 65 2,999 65
Bombardier, Inc. - Cl.B * 27,549 117 27,549 117
Brascan Corp. - Cl. A 3,244 100 3,244 100
Brookfield Properties Corp. * 3,034 88 3,034 88
Canadian National Railway Co. 3,587 228 3,587 228
Canadian Natural Resources, Ltd. 2,759 139 2,759 139
Canadian Pacific Railway 4,175 118 4,175 118
Canadian Tire, Ltd. - Cl.A * 2,230 68 2,230 68
Canadian Imperial Bank of Commerce 6,082 301 6,082 301
Celestica, Inc. * 4,634 70 4,634 70
Cognos, Inc. * 1,996 61 1,996 61
CP Ships, Ltd. Common 3,706 77 3,706 77
Dofasco, Inc. 2,944 82 2,944 82
Enbridge, Inc. 2,600 108 2,600 108
Encana Corp. 8,422 332 8,422 332
Fairmont Hotels Resorts, Inc. 2,964 81 2,964 81
Goldcorp, Inc. 4,202 67 4,202 67
Great West Lifeco, Inc. 2,299 81 2,299 81
Husky Energy, Inc. 4,971 90 4,971 90
Imperial Oil, Ltd. 2,992 133 2,992 133
The accompanying notes are an integral part of the financial statements.
Inco, Ltd. * 3,788 151 3,788 151
Investors Group, Inc. * 3,075 74 3,075 74
Loblaw Co., Ltd. 2,200 114 2,200 114
Magna International, Inc. 1,687 136 1,687 136
MDS, Inc. * 4,378 68 4,378 68
Molson Cos., Ltd. 2,729 76 2,729 76
National Bank of Canada 3,571 119 3,571 119
Nexen, Inc. 3,127 114 3,127 114
Noranda, Inc. 6,028 96 6,028 96
Nortel Networks Corp. 70,287 299 70,287 299
Petro Canada 4,246 210 4,246 210
Placer Dome, Inc. 7,841 141 7,841 141
Potash Corp. of Saskatchewan, Inc. * 1,128 98 1,128 98
Power Corp. Canada 3,014 113 3,014 113
Power Financial Corp. 2,532 97 2,532 97
Royal Bank of Canada 10,639 509 10,639 509
Shaw Communications, Inc. 5,140 80 5,140 80
Shell Canada, Ltd. 2,271 108 2,271 108
Sun Life Financial, Inc. * 10,490 262 10,490 262
Suncor Energy , Inc. 8,607 216 8,607 216
Talisman Energy, Inc. 2,702 154 2,702 154
Teck Cominco, Ltd. 5,191 88 5,191 88
Thomson Corp. 4,493 164 4,493 164
Transalta Corp. 4,891 70 4,891 70
TransCanada Corp. 8,180 176 8,180 176
Weston George, Ltd. 1,156 93 1,156 93
-------- --------
7,747 7,747
Czech Republic - 0.1% #
Ceske Energeticke Zavody AS 21,600 123 21,600 123
Komercni Banka AS * 900 85 900 85
-------- --------
208 208
Denmark - 0.6% #
A P Moller- Maersk A/S * 16 115 13 94 29 209
AS Det Ostasiatiske Kompagni * - 213 9 213 9
Bang & Olufsen AS - B Series * - 100 4 100 4
Carlsberg AS, B Shares * - 300 14 300 14
Coloplast AS, Class B * - 125 11 125 11
Danisco AS 3,050 136 550 25 3,600 161
The accompanying notes are an integral part of the financial statements.
Danske Bank 8,587 201 5,900 138 14,487 339
DSV * - 200 9 200 9
FLS Industries AS, B Shares * - 200 2 200 2
GN Store Nord AS * - 2,323 15 2,323 15
Group 4 Falck * - 800 16 800 16
H. Lundbeck AS * - 938 16 938 16
ISS AS 1,650 81 500 25 2,150 106
Kobenhavn Lufthavne * - 70 8 70 8
NEG Micon AS * - 200 3 200 3
NKT Holding * - 100 2 100 2
Novo Nordisk AS 3,148 128 2,977 121 6,125 249
Novozymes AS 4,450 162 626 23 5,076 185
Tele Danmark AS 4,150 150 1,650 59 5,800 209
Topdanmark AS * - 300 16 300 16
Vestas Wind Systems AS 2,500 41 1,268 21 3,768 62
William Demant Holdings * - 300 10 300 10
-------- ------ --------
1,014 641 1,655
Finland -1.3% #
Amer Group, Ltd. * 300 13 300 13
Asko Oyj * 300 9 300 9
Elisa Corporation * 1,650 22 1,650 22
Fortum Corp. * 4,000 41 4,000 41
KCI Konecranes Oyj * 200 7 200 7
Kesko Oyj * 700 12 700 12
Kone Corp. * 420 24 420 24
Metra Oyj, B Shares * 400 8 400 8
Metso Oyj * 1,300 16 1,300 16
Nokia Oyj * 91,721 1,584 55,955 967 147,676 2,551
Nokian Renkaat Oyj * - 100 7 100 7
Orion, Series B * - 500 11 500 11
Outokumpu Oyj * - 1,100 15 1,100 15
Pohjola Group PLC * - 200 5 200 5
Rautaruukki Oyj * - 800 6 800 6
Sampo Insurance Co. plc 4,700 49 3,200 33 7,900 82
Stora Enso Oyj * 7,903 106 7,259 98 15,162 204
Tietoenator Oyj 1,338 37 901 25 2,239 62
UPM-Kymmene Corp. 7,900 150 6,100 116 14,000 266
-------- ------ --------
1,926 1,435 3,361
The accompanying notes are an integral part of the financial statements.
France - 8.3% #
Accor SA 4,483 203 2,180 99 6,663 302
Air France * - 917 14 917 14
Air Liquide 1,412 249 1,168 206 2,580 455
Air Liquide SA * - 580 102 580 102
Alcatel 23,577 303 14,207 183 37,784 486
Alstom * 3,692 6 3,692 6
Alstom * 2,424 - 2,424 -
Alstom Subscription * 122 - 122 -
Altran Technologies SA * 6,277 81 6,277 81
Areclor 7,731 135 7,731 135
Atos Origin SA * - 273 17 273 17
Autoroutes du Sud de la France * - 841 28 841 28
Aventis SA * 12,657 836 7,916 523 20,573 1,359
AXA * 27,474 587 16,448 352 43,922 939
BNP Paribas * 13,566 853 9,484 597 23,050 1,450
Bouygues SA * 3,607 126 2,331 81 5,938 207
Business Objects 1,259 44 803 28 2,062 72
Caisse Nationale du Credit Agricole * - 4,214 101 4,214 101
Cap Gemini SA * 1,627 72 1,247 55 2,874 127
Carrefour SA * 11,330 621 6,676 366 18,006 987
Casino Guichard-Perrachon SA 1,045 102 432 42 1,477 144
CIE De St. Gobain * 6,517 319 3,652 179 10,169 498
Club Mediterranee SA 838 31 101 4 939 35
Cnp Assurances * (a) - 400 21 400 21
Dassault Systemes SA * 1,995 91 649 30 2,644 121
EADS, Inc. 5,569 132 3,288 78 8,857 210
Essilor International 2,365 122 1,106 57 3,471 179
France Telecom 20,955 598 12,603 360 33,558 958
Gecina * - 179 26 179 26
Groupe Danone * 1,748 285 1,435 234 3,183 519
Hermes International * - 100 19 100 19
Imerys SA * - 94 20 94 20
Klepierre * - 250 15 250 15
Lafarge * - 494 44 494 44
Lafarge SA * 2,579 229 1,944 173 4,523 402
Lagardere SCA 3,125 180 1,433 83 4,558 263
L'Oreal SA 6,925 567 3,948 323 10,873 890
LVMH * (Louis Vuitton Moet Hennessy) 4,273 311 2,853 207 7,126 518
Michelin 3,462 159 1,624 74 5,086 233
The accompanying notes are an integral part of the financial statements.
Pechiney SA, Class A * - 729 45 729 45
Pernod Ricard 1,045 116 611 68 1,656 184
Peugoet SA 1,567 80 2,099 107 3,666 187
Pinault-Printemps-Redoute SA * 1,465 142 794 77 2,259 219
Publicis Groupe SA * 2,645 86 1,161 37 3,806 123
Renault 3,207 221 1,992 137 5,199 358
Sagem SA 731 78 239 26 970 104
Sanofi-Synthelabo SA * 7,657 576 4,269 321 11,926 897
Schneider SA * 4,580 299 2,406 157 6,986 456
Societe BIC SA 1,234 57 357 16 1,591 73
Societe Generale * 5,636 497 3,829 338 9,465 835
Societe Television Francaise 4,028 140 1,417 49 5,445 189
Sodexho Alliance * - 1,097 33 1,097 33
STMicroelectronics * 10,712 290 6,821 185 17,533 475
SUEZ 15,282 307 9,349 188 24,631 495
Technip SA * - 207 22 207 22
Thomson CFS 1,747 59 839 28 2,586 87
Thomson Multimedia * 2,834 60 2,761 59 5,595 119
Total Fina SA - Cl.B * 12,377 2,299 7,509 1,394 19,886 3,693
Unibail SA 1,797 168 458 43 2,255 211
Valeo SA 1,489 60 867 35 2,356 95
Veolia Environnement * - 2,814 76 2,814 76
Vinci SA * - 803 66 803 66
Vivendi Universal SA * - 10,617 258 10,617 258
Wanadoo * - 4,344 35 4,344 35
Zodiac SA * - 463 13 463 13
------- ------- -------
12,771 8,560 21,331
Germany - 5.8% #
Adidas-Salomon AG 1,005 114 539 61 1,544 175
Aixtron AG * 607 4 607 4
Allianz AG * 4,706 593 3,353 423 8,059 1,016
Altana AG 1,460 88 842 51 2,302 139
BASF AG 12,086 679 6,322 355 18,408 1,034
Bayer AG * 11,401 333 7,649 224 19,050 557
Bayerische Vereinsbank AG * 6,678 154 4,240 98 10,918 252
Beiersdorf AG * 302 37 302 37
Celesio AG * 374 18 374 18
Commerzbank AG 8,364 164 5,044 99 13,408 263
Continental AG 2,656 101 1,361 52 4,017 153
The accompanying notes are an integral part of the financial statements.
DaimlerChrysler AG * 15,055 702 10,026 467 25,081 1,169
Deutsche Bank AG * 9,067 750 6,108 506 15,175 1,256
Deutsche Boerse AG 2,010 110 1,233 67 3,243 177
Deutsche Post AG 7,129 147 4,561 94 11,690 241
Deutsche Telekom AG * 37,337 683 29,354 537 66,691 1,220
Douglas Holding AG * 330 9 330 9
E.ON AG 9,846 642 7,257 473 17,103 1,115
Epcos AG * 574 13 574 13
Fresenius Medical Care AG 1,209 86 396 28 1,605 114
Heidelbergcement AG * 499 21 499 21
Henkel Kgaa-Vorzug * 685 54 685 54
Hypo Real Estate 3,568 89 1,492 37 5,060 126
Infineon Technologies AG * 8,538 118 5,447 76 13,985 194
Karstadt Quelle AG * 510 13 510 13
Linde AG 1,694 91 981 53 2,675 144
Lufthansa AG 4,687 78 2,285 38 6,972 116
MAN AG 2,695 82 1,194 36 3,889 118
Merck & Company, Inc. * 544 23 544 23
Metro AG 2,786 123 1,690 74 4,476 197
MLP AG * 659 13 659 13
Muenchener Rueckversicherungs-Gesellschaft AG * 2,643 320 1,737 210 4,380 530
ProSieben Sat.1 Media AG * 832 14 832 14
Puma AG 463 82 184 32 647 114
RWE AG 6,823 270 4,879 193 11,702 463
SAP AG * 3,683 618 2,387 400 6,070 1,018
Schering AG * 3,162 160 1,929 98 5,091 258
Siemens AG * 16,196 1,296 9,338 747 25,534 2,043
Suedzucker AG * 550 10 550 10
Thyssen Krupp AG * 6,252 123 3,702 73 9,954 196
Tui AG 3,781 79 1,512 31 5,293 110
Volkswagen AG 3,711 206 2,610 145 6,321 351
WCM Beteilgungs & Grundbesitz AG * 1,700 2 1,700 2
Wella AG * 163 14 163 14
------- ------- --------
9,081 6,023 15,104
Greece - 0.4% #
Alpha Bank * 1,900 57 1,900 57
Attica Enterprises Holding SA * 700 4 700 4
Bank of Piraeus 8,434 101 1,600 19 10,034 120
Commercial Bank of Greece 3,706 93 700 18 4,406 111
The accompanying notes are an integral part of the financial statements.
Duty Free Shops * 270 5 270 5
EFG Eurobank 8,088 156 2,210 43 10,298 199
Folli-Follie SA * 100 3 100 3
Greek Organization of Football Prognostics * 1,790 26 1,790 26
Hellenic Bottling Co. SA 5,160 108 810 17 5,970 125
Hellenic Petroleum SA * 1,200 11 1,200 11
Hellenic Technodomiki Tev SA * 500 3 500 3
Hellenic Telecommunications Organization SA * 3,040 40 3,040 40
Intracom SA 5,252 36 1,100 7 6,352 43
National Bank Of Greece * 2,162 56 2,162 56
Public Power Corp. * 1,180 29 1,180 29
Techniki Olympiaki SA * 600 3 600 3
Titan Cement Co. SA 2,217 91 340 14 2,557 105
Viohalco * 1,130 7 1,130 7
Vodafone Panafon SA * 15,869 123 2,000 16 17,869 139
------ ----- ------
708 378 1,086
Hong Kong - 1.5% # 0 -
ASM Pacific Technology, Ltd. * 0 2,000 9 2,000 9
Bank of East Asia * 0 16,000 49 16,000 49
Beijing Datang Power Generation Co., Ltd. 263,000 188 - 263,000 188
BOC Hong Kong Holdings, Ltd. * 0 30,000 57 30,000 57
Cathay Pacific Airways 20,000 38 12,000 23 32,000 61
Cheung Kong Holdings, Ltd. * 0 18,000 143 18,000 143
Cheung Kong Infrastructure Holdings, Ltd. * 0 6,000 13 6,000 13
China Southern Airlines Co. Ltd * 207,000 89 - 207,000 89
China Telecom, Ltd. * 16,199 50 - 16,199 50
CLP Holdings, Ltd. 42,100 200 20,900 99 63,000 299
Esprit Holdings, Ltd. * 0 7,500 25 7,500 25
Giordano International, Ltd. * 0 20,000 9 20,000 9
Guangshen Railway Co., Ltd. * 499,000 141 - 499,000 141
Hang Lung Properties, Ltd. * 0 13,000 17 13,000 17
Hang Seng Bank, Ltd. * 25,000 328 9,000 118 34,000 446
Henderson Land Development Co., Ltd. * 22,000 97 8,000 35 30,000 132
Hong Kong & China Gas Company, Ltd. * 0 42,490 65 42,490 65
Hong Kong Electric Holdings, Ltd. * 0 16,500 65 16,500 65
Hong Kong Exchange & Clearing, Ltd. * 0 12,000 26 12,000 26
Hopewell Highway * 0 700 - 700 -
Hopewell Holdings, Ltd. * 0 7,000 11 7,000 11
HSBC Holdings plc 4,900 77 - 4,900 77
The accompanying notes are an integral part of the financial statements.
Hutchison Whampoa, Ltd. * 41,500 305 24,800 182 66,300 487
Hysan Development Company, Ltd. * 0 6,000 9 6,000 9
Island Cable Communications * 6,200 1 1,200 - 7,400 1
Johnson Electric Holdings, Ltd. * 33,000 42 18,000 23 51,000 65
Legend Holdings * 122,000 52 - 122,000 52
Li & Fung, Ltd. * 36,000 62 18,000 31 54,000 93
MTR Corp. * 0 15,500 21 15,500 21
New World Development Co., Ltd. 48,000 39 19,000 15 67,000 54
PCCW, Ltd. 31,876 21 36,984 24 68,860 45
Shangri-La Asia, Ltd. * 0 12,000 11 12,000 11
Sino Land Company, Ltd. * 0 16,000 9 16,000 9
Smartone Telecommunications Holdings, Ltd. * 0 5,000 5 5,000 5
South China Morning Post, Ltd. * 0 10,000 4 10,000 4
Sun Hung Kai Properties, Ltd. * 46,000 379 15,000 124 61,000 503
Swire Pacific, Ltd. - Cl. A * 23,500 145 11,000 68 34,500 213
Techtronic Industries Company, Ltd. * 0 5,500 15 5,500 15
Television Broadcast, Ltd. * 0 3,000 15 3,000 15
Texwinca Holdings, Ltd. * 0 8,000 6 8,000 6
Wharf Holdings, Ltd. 62,000 172 14,000 39 76,000 211
----------- ----------- ----------
2,426 1,365 3,791
Hungary - 0.1% #
Gedeon Richter * 900 106 900 106
Mol Magyar Olaj-es Gazipari 3,600 109 3,600 109
OTP Bank 10,900 140 10,900 140
----------- ----------
355 355
Ireland - 0.6% # 0 -
Allied Irish Banks PLC - London * - 6,345 101 6,345 101
Allied Irish Banks plc * 8,467 135 3,649 58 12,116 193
Bank of Ireland 17,060 233 10,930 149 27,990 382
Bank of Ireland - London * - 405 6 405 6
CRH PLC - London * - 4,171 85 4,171 85
CRH plc * 9,000 185 1,944 40 10,944 225
DCC PLC * - 400 5 400 5
DCC PLC-GBP * - 627 9 627 9
Elan Corp. 5,813 40 4,143 29 9,956 69
Fyffes * - 4,000 8 4,000 8
Grafton Group * - 2,000 14 2,000 14
The accompanying notes are an integral part of the financial statements.
Greencore Group * - 1,069 5 1,069 5
Greencore Group PLC * - 1,300 6 1,300 6
Independent News & Media * - 6,463 15 6,463 15
Independent News & Media PLC * - 520 1 520 1
Irish Life & Permanent plc 4,553 73 3,142 51 7,695 124
Kerry Group * - 800 15 800 15
Kerry Group plc 5,800 109 815 15 6,615 124
Ryanair Holdings 4,845 40 - 4,845 40
Ryanair Holdings PLC * - 1,939 16 1,939 16
Waterford Wedgewood * - 700 - 700 -
Waterford Wedgewood PLC * - 8,769 2 8,769 2
----------- ---------- ----------
815 630 1,445
Israel - 0.2% #
Bank Hapoalim 43,700 108 43,700 108
Bezeq Israeli Telecommunication Corp., Ltd. 23,600 27 23,600 27
IDB Holding Corp., Ltd. 5,100 100 5,100 100
Koor Industries, Ltd. * 83 3 83 3
Makteshim-Agan Industries, Ltd. 26,900 101 26,900 101
Teva pharmaceutical Industries, Ltd. * 5,200 296 5,200 296
----------- ----------
635 635
Italy - 3.2% #
Alleanza Assicurazioni * 9,339 102 5,390 59 14,729 161
Assicurazioni Generali * 15,818 418 11,175 296 26,993 714
Autogrill SpA 5,723 82 1,307 19 7,030 101
Banca Fideuram 15,000 89 3,445 20 18,445 109
Banca Intesa SpA 76,966 301 41,262 161 118,228 462
Banca Intesa SPA - Non convertible * - 11,151 32 11,151 32
Banca Nazionale del Lavoro 41,580 99 17,775 42 59,355 141
Banca Popolare di Milano 18,100 118 4,533 30 22,633 148
BCA Di Roma * 31,073 91 14,103 41 45,176 132
BCE Pop Unite 7,459 135 - 7,459 135
BCP Pop Veron 8,371 142 4,267 72 12,638 214
Benetton Group SPA * - 631 7 631 7
Bulgari SPA * - 1,750 16 1,750 16
Enel SpA * 30,057 204 28,367 193 58,424 397
ENI * 52,773 995 30,411 573 83,184 1,568
Fiat SPA - DI RISP (Non Convertible) * - 680 3 680 3
Fiat SpA * 13,040 100 4,217 32 17,257 132
The accompanying notes are an integral part of the financial statements.
Finecogroup SPA * - 17,785 12 17,785 12
Finmeccanica SA 145,025 113 68,235 53 213,260 166
Gruppo Editoriale L'Espresso SPA * - 1,900 12 1,900 12
Italcementi SPA * - 854 11 854 11
Luxottica Group 4,176 72 1,621 28 5,797 100
Mediaset SpA * 13,210 157 6,979 83 20,189 240
Mediobanca SpA 11,141 121 5,396 58 16,537 179
Mediolanum SPA * - 2,775 22 2,775 22
Mondadori (Arnoldo) Editore SPA * - 1,400 13 1,400 13
Monte Paschi Siena 29,322 93 12,639 40 41,961 133
Parmalat Finanziaria SPA * - 4,047 1 4,047 1
Pirelli & Co SPA * - 20,319 21 20,319 21
Riunione Adriatica di Sicorta SpA 5,255 89 3,513 60 8,768 149
San Paolo-IMI SpA 7,083 92 11,816 154 18,899 246
Seat Pagine Gialle * 80,911 77 38,084 36 118,995 113
Snam Rete Gas SPA * - 10,081 43 10,081 43
Snia SPA * - 3,000 7 3,000 7
Telecom Italia 168,243 498 84,977 252 253,220 750
Telecom Italia 98,642 201 74,975 153 173,617 354
Telecom Italia Media * - 14,446 7 14,446 7
Telecom Italia Mobile SpA 69,129 375 44,093 239 113,222 614
Tiscali SPA * - 2,417 17 2,417 17
UniCredito Italiano SpA * 64,732 349 44,136 238 108,868 587
---------- ---------- ----------
5,113 3,156 8,269
Japan - 18.2% # 0 -
Acom Co., Ltd. * 2,300 104 840 38 3,140 142
Aderans Company, Ltd. * - 400 6 400 6
Advantest 2,000 159 800 63 2,800 222
Aeon Credit Service Company, Ltd. * - 300 13 300 13
Aiful Corp. * 1,000 73 500 37 1,500 110
Ajinomoto Co., Inc. 12,000 138 6,000 69 18,000 207
All Nippon Airways Company, Ltd. * - 5,000 12 5,000 12
Alps Electric Co. 6,000 88 2,000 29 8,000 117
Amada Company, Ltd. * - 3,000 16 3,000 16
Anritsu Corp. * - 1,000 7 1,000 7
Aoyama Trading Company * - 600 12 600 12
Ariake Japan Company, Ltd. * - 200 6 200 6
Asahi Breweries, Ltd. 13,000 119 4,500 41 17,500 160
Asahi Chemical Industry Co., Ltd. 26,000 141 14,000 76 40,000 217
The accompanying notes are an integral part of the financial statements.
Asahi Glass Co., Ltd. 18,000 148 9,000 74 27,000 222
ASATSU-DK, Inc. * - 300 8 300 8
Ashikaga Financial Group, Inc. * - 9,000 - 9,000 -
Autobacs Seven Company * - 400 9 400 9
Bandai Company * - 800 20 800 20
Bank of Yokohama, Ltd. * 23,000 107 11,000 51 34,000 158
Bellsystem24, Inc. * - 30 6 30 6
Benesse Corp. * - 800 20 800 20
Bridgestone Corp. 13,000 175 8,000 108 21,000 283
Canon, Inc. * 13,000 606 10,000 466 23,000 1,072
Capcom Company, Ltd. * - 300 4 300 4
Casio Computer Co. 9,000 95 2,000 21 11,000 116
Central Glass Company * - 2,000 13 2,000 13
Central Japan Railway Co. 13 112 11 95 24 207
Chiba Bank, Ltd. 16,000 66 7,000 29 23,000 95
Chichibu Onoda Cement * - 10,000 28 10,000 28
Chubu Electric Power 10,100 211 7,300 152 17,400 363
Chugai Pharmaceutical Co., Ltd. 7,600 109 3,200 46 10,800 155
Citizen Watch Co., Ltd. 10,000 92 3,000 28 13,000 120
Coca-Cola West Japan Company, Ltd. * - 400 8 400 8
Comsys Holdings * 5,000 32 1,000 6 6,000 38
Credit Saison Co., Ltd. 3,600 81 1,600 36 5,200 117
CSK Corp. * 2,100 76 700 25 2,800 101
Daicel Chemical Industries, Ltd. * - 3,000 12 3,000 12
Daido Life Insurance 25 74 14 42 39 116
Daiei, Inc. * - 2,000 4 2,000 4
Dai-Ichi Pharmaceutical Co., Ltd. 7,000 126 2,800 50 9,800 176
Daikin Industries, Ltd. 5,000 116 2,000 46 7,000 162
Daimaru, Inc. * - 3,000 17 3,000 17
Dainippon Ink & Chemicals, Inc. * - 8,000 15 8,000 15
Dai-Nippon Printng Co., Ltd. 13,000 183 7,000 98 20,000 281
Dainippon Screen Manufacturing Company, Ltd. * - 2,000 14 2,000 14
Daito Trust Construction Co., Ltd. 2,300 68 1,100 33 3,400 101
Daiwa Bank Holdings 92,000 116 53,000 67 145,000 183
Daiwa House Industry Co., Ltd. 10,000 106 5,000 53 15,000 159
Daiwa Securities Group, Inc. 2,900 20 14,000 95 16,900 115
Denki Kagaku Kogyo Kabushiki Kaisha * - 5,000 16 5,000 16
Denso Corp. 8,400 165 5,700 112 14,100 277
Dentsu, Inc. * - 3 15 3 15
Dowa Mining Company, Ltd. * - 3,000 16 3,000 16
The accompanying notes are an integral part of the financial statements.
East Japan Railway Co. 60 283 40 189 100 472
Ebara Corp. * - 3,000 13 3,000 13
Eisai Company * 4,900 132 2,600 70 7,500 202
Familymart Company, Ltd. * - 800 18 800 18
Fanuc, Ltd. * 2,400 144 1,400 84 3,800 228
Fast Retailing Co. 1,100 67 600 36 1,700 103
Fuji Electric Holdings * - 7,000 15 7,000 15
Fuji Photo Film Company, Ltd. * 9,000 291 5,000 162 14,000 453
Fuji Television Network, Inc. * - 3 16 3 16
Fujikura, Ltd. * - 4,000 24 4,000 24
Fujisawa Pharmeceutical Co., Ltd. * 7,000 149 3,000 64 10,000 213
Fujitsu, Ltd. * 33,000 195 19,000 112 52,000 307
Furukawa Electric Company, Ltd. * - 7,000 23 7,000 23
Gunma Bank * - 4,000 18 4,000 18
Gunze, Ltd. 14,000 63 2,000 9 16,000 72
Hankyu Department Stores * - 2,000 13 2,000 13
Hino Motors, Ltd. * - 3,000 21 3,000 21
Hirose Electric Co., Ltd. * 1,100 126 300 34 1,400 160
Hitachi Cable, Ltd. * - 2,000 8 2,000 8
Hitachi Chemical * - 1,300 22 1,300 22
Hitachi Software Engineering Company, Ltd. * - 300 8 300 8
Hitachi, Ltd. 54,000 326 33,000 199 87,000 525
Hokugin Financial * - 10,000 14 10,000 14
Honda Motor Co. 14,300 635 9,100 404 23,400 1,039
House Food Corp. * - 800 9 800 9
Hoya Corp. * 200 18 1,300 119 1,500 137
Isetan Company, Ltd. * - 1,800 20 1,800 20
Ishihara Sangyo * (a) - 4,000 8 4,000 8
Ishikawajima Harima Heavy Industries Company, Ltd. * - 12,000 17 12,000 17
Itochu Corp. 34,000 112 16,000 53 50,000 165
Itochu Techno-Science Corp. * - 300 9 300 9
ITOEN, Ltd. * - 300 13 300 13
Ito-Yokado Co., Ltd. * 7,000 220 4,000 126 11,000 346
Jafco Company, Ltd. * - 300 24 300 24
Japan Airlines System Corp. * - 8,000 21 8,000 21
Japan Real Estate Investment * - 3 19 3 19
Japan Tobacco, Inc. 21 154 8 59 29 213
JFE Holdings, Inc. * 8,800 240 5,400 147 14,200 387
JGC Corp. * - 2,000 21 2,000 21
Joyo Bank, Ltd. 29,000 95 8,000 26 37,000 121
The accompanying notes are an integral part of the financial statements.
JSR Corp. 4,000 89 2,000 45 6,000 134
Jusco Co., Ltd. 4,800 161 2,700 90 7,500 251
Kajima Corp. 25,000 81 10,000 32 35,000 113
Kaken Pharmaceutical Company, Ltd. * - 1,000 5 1,000 5
Kamigumi Company * - 3,000 21 3,000 21
Kanebo * - 3,000 3 3,000 3
Kaneka Corp. * - 3,000 22 3,000 22
Kansai Electric Power Co., Inc. 800 14 7,900 138 8,700 152
KAO Corp. 10,000 203 6,000 122 16,000 325
Katokichi Company * - 500 8 500 8
Kawasaki Heavy Industries, Ltd. * - 13,000 16 13,000 16
Kawasaki Kisen 23,000 114 5,000 25 28,000 139
Keihin Electric Express Railway Co., Ltd. 17,000 100 5,000 29 22,000 129
Keio Teito Electric Railway 14,000 73 6,000 31 20,000 104
Keyence Corp. 700 148 400 84 1,100 232
Kikkoman Corp. * - 1,000 7 1,000 7
Kinden Corp. * - 2,000 9 2,000 9
Kinki Nippon Railway 33,000 99 17,000 51 50,000 150
Kirin Brewery Co. * 14,000 119 8,000 68 22,000 187
Kokuyo Company, Ltd. * - 600 7 600 7
Komatsu 28,000 178 11,000 70 39,000 248
Komori Corp. * - 1,000 15 1,000 15
Konami Co., Ltd. 3,000 87 1,000 29 4,000 116
Konica Corp. 11,000 148 4,500 61 15,500 209
Koyo Seiko Company * - 1,000 10 1,000 10
Kubota Corp. * 25,000 103 11,000 45 36,000 148
Kuraray Co., Ltd. 10,000 84 4,000 34 14,000 118
Kurita Water Industries, Ltd. * - 1,000 12 1,000 12
Kyocera Corp. * 3,300 220 1,900 127 5,200 347
Kyowa Hakko Kogyo * - 4,000 25 4,000 25
Kyushu Electric Power 6,300 108 4,700 81 11,000 189
Lawson 1,600 55 700 24 2,300 79
Mabuchi Motor Co. * 900 69 300 23 1,200 92
Makita Corp. * - 1,000 10 1,000 10
Marubeni Corp. 38,000 73 15,000 29 53,000 102
Marui Co., Ltd. * 10,000 126 4,000 50 14,000 176
Matsumotokiyoshi Co * - 200 4 200 4
Matsumotokiyoshi Company, Ltd. * - 200 4 200 4
Matsushita Electric Industrial Co. * 27,000 374 24,000 332 51,000 706
Matsushita Electric Works 10,000 90 5,000 45 15,000 135
The accompanying notes are an integral part of the financial statements.
Meiji Milk Product * - 2,000 9 2,000 9
Meiji Seika Kaisha, Ltd. * - 3,000 12 3,000 12
Meitec Corp. * - 400 15 400 15
Millea Holdings, Inc. * 23 301 17 222 40 523
Minebea Co., Ltd. 12,000 61 4,000 20 16,000 81
Mitsubishi Chemical Corp. 43,000 112 19,000 49 62,000 161
Mitsubishi Corp. 3,000 32 12,000 127 15,000 159
Mitsubishi Electric Corp. 43,000 179 20,000 83 63,000 262
Mitsubishi Estate Co., Ltd. * 19,000 180 11,000 104 30,000 284
Mitsubishi Gas Chemical Company, Inc. * - 4,000 14 4,000 14
Mitsubishi Heavy Industries, Ltd. * 58,000 161 33,000 92 91,000 253
Mitsubishi Logistc Corp. * - 1,000 8 1,000 8
Mitsubishi Materials Corp. * - 11,000 17 11,000 17
Mitsubishi Paper Company * - 2,000 3 2,000 3
Mitsubishi Rayon Company, Ltd. * - 6,000 23 6,000 23
Mitsubishi Tokyo Finance 73 570 47 367 120 937
Mitsui & Co., Ltd. 1,000 8 14,000 113 15,000 121
Mitsui Engineering & Shipbuilding Company, Ltd. * - 8,000 13 8,000 13
Mitsui Fudosan Co., Ltd. * 15,000 136 8,000 72 23,000 208
Mitsui Marine & Fire Insurance Co., Ltd. 23,000 189 15,000 123 38,000 312
Mitsui Mining & Smelting Co., Ltd. * 17,000 71 6,000 25 23,000 96
Mitsui OSK Lines, Ltd. 24,000 117 9,000 44 33,000 161
Mitsui Petrochemical Co. 18,000 105 6,000 35 24,000 140
Mitsui Trust Holdings 17,000 95 6,000 34 23,000 129
Mitsukoshi, Ltd. * - 3,000 12 3,000 12
Mitsumi Electric Company, Ltd. * - 900 10 900 10
Mizuho Financial GB * 110 334 56 170 166 504
Murata Manufacturing Co., Ltd. * 4,600 249 2,600 141 7,200 390
Namco, Ltd. * - 400 11 400 11
NEC Corp. * 29,000 214 17,000 125 46,000 339
Net One Systems Company, Ltd. * - 2 15 2 15
NGK Insulators, Ltd. * - 3,000 22 3,000 22
NGK Spark Plug Company * - 2,000 16 2,000 16
Nichii Gakkan Company * - 200 11 200 11
Nichirei Corp. * - 3,000 10 3,000 10
Nidec Corp. * 900 86 400 38 1,300 124
Nikko Securities Co., Ltd. * 28,000 156 15,000 84 43,000 240
Nikon Corp. 8,000 121 3,000 45 11,000 166
Nintendo Corp., Ltd. 2,100 196 1,200 112 3,300 308
Nippon Building Fund 11 71 2 13 13 84
The accompanying notes are an integral part of the financial statements.
Nippon Express Co., Ltd. 22,000 104 9,000 43 31,000 147
Nippon Kayaku Company, Ltd. * - 2,000 10 2,000 10
Nippon Meat Packer * - 2,000 20 2,000 20
Nippon Mining Holdings, Inc. * - 6,000 21 6,000 21
Nippon Oil Corp. 36,000 183 15,000 76 51,000 259
Nippon Sanso Corp. * - 2,000 8 2,000 8
Nippon Sheet Glass * - 5,000 15 5,000 15
Nippon Shokubai Company, Ltd. * - 2,000 15 2,000 15
Nippon Steel Co. 19,000 41 63,000 135 82,000 176
Nippon Telegraph & Telephone Corp. * 95 458 61 294 156 752
Nippon Unipac Holding, Co. 27 139 10 52 37 191
Nippon Yusen Kabushiki Kaisha 27,000 122 11,000 50 38,000 172
Nishimatsu Construction Company, Ltd. * - 3,000 10 3,000 10
Nissan Chemical Industries, Ltd. * - 2,000 18 2,000 18
Nissan Motor Acceptance Corp. 45,700 522 29,000 331 74,700 853
Nisshin Flour Mill * - 2,000 18 2,000 18
Nisshinbo Industries, Inc. * - 2,000 11 2,000 11
Nissin Food Products * - 1,000 25 1,000 25
Nitto Denko Corp. * 3,200 170 1,800 96 5,000 266
Nomura Research Institute, Ltd. * - 300 29 300 29
Nomura Securities Co., Ltd. * 33,000 562 21,000 358 54,000 920
Noritake Company * - 1,000 4 1,000 4
NSK, Ltd. * - 5,000 18 5,000 18
NTN Corp. 13,000 62 5,000 24 18,000 86
NTT Data Corp. 33 125 15 57 48 182
NTT Mobile Communications Network, Inc. * 317 719 205 465 522 1,184
Obayashi Corp. 16,000 72 7,000 31 23,000 103
OBIC Co., Ltd. * - 100 20 100 20
Oji Paper Co. 17,000 110 9,000 58 26,000 168
Oki Electric Industry Co. * 16,000 63 6,000 23 22,000 86
Okumura Corp. * - 2,000 9 2,000 9
Olympus Optical Co. * 6,000 130 2,000 43 8,000 173
Omron Corp. 5,000 102 2,400 49 7,400 151
Onward Kashiyama Company, Ltd. * - 1,000 12 1,000 12
Oracle Corp. * - 400 21 400 21
Oriental Land Co., Ltd. 2,000 123 600 37 2,600 160
Orix Corp. * 2,100 174 1,000 83 3,100 257
Osaka Gas Co. 42,000 114 24,000 65 66,000 179
Pioneer Corp. * 5,000 138 1,800 50 6,800 188
Promise Co., Ltd. * 2,600 113 1,050 46 3,650 159
The accompanying notes are an integral part of the financial statements.
Q.P. Corp. * - 1,500 12 1,500 12
Ricoh Co., Ltd. 13,000 257 7,000 138 20,000 395
Rohm Co., Ltd. * 2,100 246 1,200 141 3,300 387
Saizeriya Company, Ltd. * - 200 2 200 2
Sanden Corp. * - 1,000 6 1,000 6
Sankyo Co., Ltd. * 7,700 145 4,200 79 11,900 224
Sankyo Company * - 500 16 500 16
Sanyo Electric Co. * 32,000 167 18,000 94 50,000 261
Sapporo Holdings * - 4,000 11 4,000 11
Secom Company, Ltd. * 4,500 168 2,500 93 7,000 261
SEGA Enterprises * - 1,300 12 1,300 12
Seiko Epson Corp. * - 700 33 700 33
Seino Transportation * - 2,000 17 2,000 17
Sekisui Chemical Company, Ltd. * - 5,000 25 5,000 25
Sekisui House, Ltd. * 13,000 134 6,000 62 19,000 196
Seven-Eleven Japan * 8,000 243 5,000 152 13,000 395
Sharp Corp. 18,000 284 10,000 158 28,000 442
Shimachu Company, Ltd. * - 600 12 600 12
Shimamura Company * - 300 20 300 20
Shimano, Inc. * - 800 17 800 17
Shimizu Corp. * - 6,000 23 6,000 23
Shin-Etsu Chemical Co. * 6,600 270 4,200 172 10,800 442
Shionogi & Co., Ltd. * 8,000 149 3,000 56 11,000 205
Shiseido Co., Ltd. * 8,000 97 4,000 49 12,000 146
Shizuoka Bank, Ltd. 13,000 96 7,000 52 20,000 148
Showa Denko KK * - 11,000 25 11,000 25
Showa Shell Sekiyu * - 1,400 11 1,400 11
Skylark Company * - 1,000 17 1,000 17
SMC Corp. * 1,400 174 600 75 2,000 249
Snow Brand Milk * - 1,000 3 1,000 3
Softbank Corp. 3,900 119 2,400 73 6,300 192
Sony Corp. * 16,400 568 10,200 353 26,600 921
Stanley Electric 3,800 74 1,700 33 5,500 107
Sumitomo Bakelite Company, Ltd. * - 2,000 13 2,000 13
Sumitomo Chemical Co. 26,000 107 13,000 54 39,000 161
Sumitomo Corp. * 20,000 149 8,000 60 28,000 209
Sumitomo Electric Industries 15,000 134 7,000 63 22,000 197
Sumitomo Heavy Industries, Ltd. * - 6,000 14 6,000 14
Sumitomo Metal Industries 102,000 101 39,000 39 141,000 140
Sumitomo Metal Mining Co. 17,000 126 6,000 45 23,000 171
The accompanying notes are an integral part of the financial statements.
Sumitomo Mitsui GR 71 378 44 235 115 613
Sumitomo Osaka Cement Company, Ltd. * - 4,000 8 4,000 8
Sumitomo Realty & Development 8,000 70 4,000 35 12,000 105
Sumitomo Trust & Banking 23,000 135 11,000 65 34,000 200
Suruga Bank * - 2,000 13 2,000 13
Suzuken Company, Ltd. * - 500 16 500 16
Taisei Corp. 20,000 73 9,000 33 29,000 106
Taisho Pharmaceutical Co., Ltd. * 5,000 89 2,000 36 7,000 125
Taiyo Yuden Company * - 1,000 13 1,000 13
Takara Holdings * - 2,000 19 2,000 19
Takashimaya Co. * 9,000 64 3,000 21 12,000 85
Takeda Chemical Industries * 15,100 599 9,800 389 24,900 988
Takefuji Corp. * 2,020 94 740 35 2,760 129
Takuma Company * - 1,000 5 1,000 5
TDK Corp. * 2,400 173 1,300 94 3,700 267
Teijin, Ltd. 25,000 74 9,000 26 34,000 100
Teikoku Oil Company * - 2,000 10 2,000 10
Terumo Corp. * 5,200 99 1,900 36 7,100 135
The 77th Bank, Ltd. * - 4,000 23 4,000 23
The Bank of Fukuoka, Ltd. 20,000 84 6,000 25 26,000 109
THK Company, Ltd. * - 1,100 22 1,100 22
TIS, Inc. * - 400 14 400 14
Tobu Railway Co., Ltd. 22,000 79 9,000 32 31,000 111
Toda Corp. * - 2,000 6 2,000 6
Toho Company * - 1,500 19 1,500 19
Tohoku Electric Power 6,700 111 5,000 83 11,700 194
Tokyo Broadcasting Company * - 400 6 400 6
Tokyo Electric Power 19,700 432 13,400 294 33,100 726
Tokyo Electron, Ltd. * 3,100 236 1,700 129 4,800 365
Tokyo Gas Co. 47,000 168 29,000 103 76,000 271
Tokyo Style Co. 6,000 65 1,000 11 7,000 76
Tokyu Corp. * 26,000 133 11,000 56 37,000 189
Tonengeneral Sekiyu 8,000 66 3,000 25 11,000 91
Toppan Printing Co. * 16,000 167 6,000 62 22,000 229
Toray Industries, Inc. * 33,000 138 14,000 59 47,000 197
Toshiba Corp. * 54,000 205 32,000 121 86,000 326
Toshiba Corp. * - 5,000 17 5,000 17
Tostem Corp. 6,000 116 3,000 58 9,000 174
Toto, Ltd. 8,000 68 4,000 34 12,000 102
Toyo Seikan Kaisha * - 2,000 28 2,000 28
The accompanying notes are an integral part of the financial statements.
Toyo Suisan Kaisha * - 1,000 11 1,000 11
Toyobo Co. 32,000 70 7,000 15 39,000 85
Toyoda Gosei * - 600 17 600 17
Toyota Industries Corp. * - 1,900 40 1,900 40
Toyota Motor Corp. * 48,300 1,632 31,600 1,068 79,900 2,700
Trend Micro, Inc. * - 1,000 27 1,000 27
UBE Industries * - 9,000 18 9,000 18
UFJ Holdings, Inc. * 67 322 41 197 108 519
UNI Charm Corp. * - 500 25 500 25
UNY Company, Ltd. * - 2,000 21 2,000 21
Ushio, Inc. 3,000 50 1,000 17 4,000 67
Uss Co., Ltd. * - 220 16 220 16
Wacoal Corp. * 8,000 66 1,000 8 9,000 74
West Japan Railway 25 98 13 51 38 149
World Company * - 400 13 400 13
Yakult Honsha Company * - 1,000 16 1,000 16
Yamada Denki Co. 2,300 77 900 30 3,200 107
Yamaha Corp. 3,800 75 1,800 35 5,600 110
Yamaha Motor Company, Ltd. * - 1,000 11 1,000 11
Yamanouchi Pharmaceutical Co., Ltd. * 6,200 193 3,600 112 9,800 305
Yamato Transport Co., Ltd. 12,000 141 5,000 59 17,000 200
Yamazaki Baking Company * - 2,000 17 2,000 17
Yasuda F & M Insurance 15,000 123 9,000 74 24,000 197
Yokogawa Electric 8,000 116 2,000 29 10,000 145
----------- ----------- -----------
28,649 18,275 46,924
Luxembourg - 0.0% #
Areclor * 3,986 69 3,986 69
Malaysia - 0.3% # 0 -
Berjaya Sports Toto Berhad 39,000 42 39,000 42
Commerce Asset Holdings * 44,000 48 44,000 48
Gamuda Berhad 22,000 37 22,000 37
IJM Corporation Berhad 19,000 23 19,000 23
IJM Plantations 7,600 2 7,600 2
Malayan Banking Berhad * 66,000 168 66,000 168
Malaysia International Shipping Berhad 27,000 82 27,000 82
Public Bank Berhad 91,250 74 91,250 74
Resorts World Berhad * 21,000 56 21,000 56
Sime Darby Berhad * 68,000 93 68,000 93
The accompanying notes are an integral part of the financial statements.
Telekom Malaysia Berhad 40,000 88 40,000 88
Tenaga Nasional Berhad 28,000 70 28,000 70
YTL Corp., Berhad 76,460 87 76,460 87
----------- -----------
870 870
Mexico - 0.4% #
America Movil SA de CV -Ser. L * 162,000 223 162,000 223
Cemex SA de CV * 24,000 125 24,000 125
Cifra SA de CV - Ser. V * 30,000 86 30,000 86
Fomento Economico Mexicano SA de CV * 20,000 74 20,000 74
GF BBVA Bancomer - Ser. B 70,000 60 70,000 60
Grupo Carso SA de CV - Ser. A1 * 16,000 56 16,000 56
Grupo Modelo SA de CV - Ser. C * 34,000 81 34,000 81
Grupo Televisa SA 54,000 108 54,000 108
Kimberly-Clark de Mexico SA de CV * 22,000 56 22,000 56
Nuevo Grupo Mexico 18,000 46 18,000 46
Telephonos de Mexico SA - Ser. L 63,031 104 63,031 104
U.S. Commercial Corp. - Ser. B1 16,000 7 16,000 7
----------- -----------
1,026 1,026
Netherlands - 4.2% #
ABN Amro Holding NV * 27,165 635 17,885 418 45,050 1,053
Aegon NV * 27,787 411 15,715 232 43,502 643
Akzo Nobel NV * 5,304 205 3,156 122 8,460 327
ASM Lithography Holding NV 5,100 101 5,335 106 10,435 207
Corio NV * - 500 19 500 19
Dsm NV * - 900 44 900 44
Elsevier NV * 22,877 284 7,276 90 30,153 374
Euronext * - 1,117 28 1,117 28
Getronics NV * - 1,907 4 1,907 4
Hagemeyer NV * - 849 2 849 2
Heineken NV * 2,968 113 2,273 87 5,241 200
IHC Caland NV * - 371 20 371 20
ING Groep NV 31,865 742 20,437 476 52,302 1,218
Koninklijke (Royal) KPN NV * - 933 13 933 13
Koninklijke (Royal) Philips Electronics NV * 22,807 665 15,348 448 38,155 1,113
Koninklijke Ahold NV * - 7,596 58 7,596 58
Koninklijke KPN NV * 36,643 283 24,664 190 61,307 473
Numico Kon NV * - 1,731 48 1,731 48
Oce-Van Der Grinten * - 972 15 972 15
The accompanying notes are an integral part of the financial statements.
Qiagen NV * - 1,475 18 1,475 18
Rodamco Europe NV * - 500 29 500 29
Royal Dutch Petroleum Co. * 40,573 2,137 24,306 1,280 64,879 3,417
TNT Post Group NV 5,610 131 3,914 92 9,524 223
Unilever NV * 10,965 716 6,663 435 17,628 1,151
Vedior NV * - 992 16 992 16
VNU NV * - 2,606 82 2,606 82
Wereldhave NV * - 257 19 257 19
Wolters Kluwer NV * 4,000 62 3,127 49 7,127 111
----------- ----------- -----------
6,485 4,440 10,925
New Zealand - 0.3% #
Auckland International Airport, Ltd. * - 2,732 12 2,732 12
Carter Holt Harvey, Ltd. 37,800 47 9,831 12 47,631 59
Contact Energy Limited 40,900 144 3,264 11 44,164 155
Fisher & Paykel AP 28,996 73 3,080 8 32,076 81
Fisher & Paykel Industries, Inc. 8,443 70 863 7 9,306 77
Fletcher Building 31,200 87 5,215 14 36,415 101
Fletcher Challenge Forests * - 967 1 967 1
Independent Newspapers, Ltd. * - 2,005 7 2,005 7
NGC Holdings Ltd. * - 1,971 3 1,971 3
Sky City Entertainment Group, Ltd. * - 4,544 14 4,544 14
Sky Network Television, Ltd. * - 1,125 4 1,125 4
Telecom Corp. of New Zealand, Ltd. * - 22,717 80 22,717 80
The Warehouse Group, Ltd. 29,000 97 1,694 6 30,694 103
Tower Ltd. * - 4,813 4 4,813 4
----------- ----------- -----------
518 183 701
Norway - 0.5% #
Aker Kvaerner 380 7 230 4 610 11
Den Norske Bank 18,760 125 8,929 60 27,689 185
Elkem ASA 700 21 - 700 21
Frontline, Ltd. * - 400 10 400 10
Merkantildata ASA 9,800 8 - 9,800 8
Nera ASA * - 700 2 700 2
Norsk Hydro ASA 84 5 1,700 105 1,784 110
Norske Skogindustrier ASA * 5,100 97 1,350 26 6,450 123
Opticom AS 160 2 - 160 2
Orkla SA * - 2,300 51 2,300 51
Schibsted ASA * - 600 10 600 10
The accompanying notes are an integral part of the financial statements.
Smedvig * 3,600 27 100 1 3,700 28
Smedvig ASA * 4,600 29 200 1 4,800 30
Statoil ASA * 8,908 100 5,000 56 13,908 156
Storebrand ASA 16,140 105 2,200 14 18,340 119
Tandberg ASA 3,920 29 1,400 10 5,320 39
Telenor AS * 22,160 145 8,300 54 30,460 199
Tomra Systems ASA 10,000 60 2,300 14 12,300 74
----------- ----------- -----------
760 418 1,178
Philippines - 0.1% #
Ayala Land, Inc. * 410,460 45 410,460 45
Metro Bank & Trust 65,450 32 65,450 32
Philippine Long Distance Telephone Co. * 3,200 56 3,200 56
SM Prime Holdings, Inc. 48,000 6 48,000 6
----------- -----------
139 139
Portugal - 0.3% #
Banco Comercial Portgues SA 62,300 139 22,491 50 84,791 189
Banco Espirito Santo SA * - 1,272 21 1,272 21
BPI-SGPS SA 33,590 123 4,613 17 38,203 140
Brisa Auto Estrada * - 3,395 23 3,395 23
Cimpor-Cimentos De Portugal, SA * - 2,540 13 2,540 13
Electricidade De Portugal * - 20,775 55 20,775 55
Jeronimo Martins, SGPS * - 185 2 185 2
Part Multimedia SGPS 4,439 86 522 10 4,961 96
Portugal Telecom * - 10,896 110 10,896 110
Sonae SGPS SA 87,600 73 13,165 11 100,765 84
----------- ----------- -----------
421 312 733
Singapore - 0.7% #
Allgreen Properties, Ltd. * - 7,000 5 7,000 5
CapitaLand, Ltd. * - 12,000 11 12,000 11
Chartered Semiconductor Manufacturing 12,000 12 12,000 12 24,000 24
City Developments, Ltd. 15,000 53 5,000 18 20,000 71
Comfortdelgro Corp * - 16,000 8 16,000 8
Creative Technology, Ltd. * - 450 5 450 5
Cycle & Carriage, Ltd. 8,766 30 1,000 3 9,766 33
Datacraft Asia, Ltd. * - 4,000 5 4,000 5
DBS Group Holdings, Ltd. * 17,000 147 13,000 113 30,000 260
Fraser & Neave, Ltd. * - 1,620 12 1,620 12
The accompanying notes are an integral part of the financial statements.
Guocoland, Ltd. * - 2,000 1 2,000 1
Haw Par Value Corp. , Ltd. 26,876 71 1,490 4 28,366 75
Hotel Properties, Ltd. * - 3,000 2 3,000 2
Keppel Corp., Ltd. * - 6,000 22 6,000 22
Keppel Land, Ltd. * - 3,000 3 3,000 3
NatSteel, Ltd. * - 1,000 1 1,000 1
Neptune Orient Lines, Ltd. 14,000 18 12,000 15 26,000 33
Oversea-Chinese Banking Corp., Ltd. 39,000 278 12,000 85 51,000 363
OverSeas Union Enterprises, Ltd. * - 1,000 4 1,000 4
Parkway Holdings, Ltd. * - 6,000 3 6,000 3
SembCorp Industries, Ltd. * - 9,000 7 9,000 7
SembCorp Logistics, Ltd. * - 5,000 6 5,000 6
SembCorp Marine, Ltd. * - 2,000 1 2,000 1
Singapore Airlines, Ltd. * - 7,000 46 7,000 46
Singapore Exchange, Ltd. * - 8,000 8 8,000 8
Singapore Land, Ltd. * - 1,000 2 1,000 2
Singapore Post Ltd. * - 14,000 6 14,000 6
Singapore Press Holdings, Ltd. * - 4,000 45 4,000 45
Singapore Technologies Engineering, Ltd. * - 15,000 18 15,000 18
Singapore Telecommunications, Ltd. * 101,000 116 73,000 84 174,000 200
SMRT Corporation Ltd. * - 12,000 4 12,000 4
ST Assembly Test Services, Ltd. * - 4,000 5 4,000 5
United Overseas Bank * 42,448 330 14,000 109 56,448 439
United Overseas Land, Ltd. * - 3,000 3 3,000 3
Venture Corp., Ltd. * - 3,000 35 3,000 35
Wing Tai Holdings * - 4,000 2 4,000 2
----------- ----------- -----------
1,055 713 1,768
South Africa - 0.9% #
Anglo American Platinum Corp., Ltd. * 1,200 52 1,200 52
Anglo American plc * 30,000 641 30,000 641
Anglogold * 3,100 145 3,100 145
Barlow, Ltd. * 7,400 78 7,400 78
Dimension Data Holdings plc 79,483 53 79,483 53
FirstRand, Ltd. 94,300 126 94,300 126
Foschini, Ltd. 37,100 109 37,100 109
Gold Fields Mining * 9,600 137 9,600 137
Impala Platinum Holdings, Ltd. 1,000 87 1,000 87
Imperial Holdings, Ltd. 10,091 101 10,091 101
Investec Ltd. 3,051 58 3,051 58
The accompanying notes are an integral part of the financial statements.
Liberty Life Association of Africa, Ltd. 10,300 83 10,300 83
M-Cell, Ltd. 8,400 36 8,400 36
Nampak, Ltd. 25,500 50 25,500 50
Nedcor, Ltd. * 4,300 40 4,300 40
Sappi, Ltd. * 5,700 78 5,700 78
Sasol, Ltd. * 11,800 168 11,800 168
South African Breweries plc 6,000 61 6,000 61
Standard Bank Investment Corp., Ltd. 18,000 105 18,000 105
------- -------
2,208 2,208
South Korea - 0.9% #
Hyundai Motor Co., Ltd. 3,560 151 3,560 151
KIA Motors Corp. 3,310 30 3,310 30
Kookmin Bank * 6,399 240 6,399 240
Korea Electric Power Corp. * 7,430 133 7,430 133
Korea Telecom Corp. 1,040 39 1,040 39
Korea Telecom Freetel 2,980 48 2,980 48
LG Chemical 2,035 94 2,035 94
LG Electronics, Inc. 1,931 95 1,931 95
LG Investment & Securities Co., Ltd. * 2,460 17 2,460 17
Pohang Iron & Steel Co., Ltd. 1,323 181 1,323 181
Samsung Corp. 6,120 51 6,120 51
Samsung Display Devices Co. 1,000 118 1,000 118
Samsung Electro-Mechanics Co. 1,460 48 1,460 48
Samsung Electronics * 2,159 817 2,159 817
Samsung Fire & Marine Insurance 942 54 942 54
Samsung Securities Co., Ltd. 2,470 53 2,470 53
Shinhan Financial 6,930 111 6,930 111
SK Telecom Co., Ltd. * 820 137 820 137
------- -------
2,417 2,417
Spain - 3.2% #
Abertis Infrastructuras SA * 6,287 95 2,536 38 8,823 133
Acciona SA * - 363 22 363 22
Acerinox SA 1,752 82 559 26 2,311 108
ACS, Actividades de Construccion y Servicios, SA 4,229 206 1,127 55 5,356 261
Aguas De Barcelona * - 695 10 695 10
Altadis SA, Series A * 6,360 180 3,147 89 9,507 269
Amadeus Global Travel 5,240 34 3,055 20 8,295 54
Antena 3 Television SA * - 177 8 177 8
The accompanying notes are an integral part of the financial statements.
Banco Bilbao Vizcaya SA * 49,959 689 35,328 487 85,287 1,176
Banco Popular Espanol SA 3,070 183 1,846 110 4,916 293
Banco Santander Central Hispano SA * 71,715 848 50,119 593 121,834 1,441
Corporacion Mapfre SA * - 1,026 15 1,026 15
Endesa SA * 15,465 297 10,443 201 25,908 498
Fomento de Construcciones y Contratas SA 1,400 52 578 21 1,978 73
Gas Natural SDG SA * 6,400 150 2,413 56 8,813 206
Grupo Ferrovial SA * 2,312 81 752 26 3,064 107
Iberdrola SA 13,874 274 8,906 176 22,780 450
Iberia Lineas Aereas de Espana SA * - 5,566 16 5,566 16
Inditex 6,292 128 2,499 51 8,791 179
Indra Sistemas SA 6,236 80 1,300 17 7,536 97
NH Hoteles SA * 7,422 85 768 9 8,190 94
Promotora de Informaciones SA * - 897 13 897 13
Repsol SA * 17,332 338 10,683 208 28,015 546
Telefonica Publicidad e Informacion SA * - 1,733 9 1,733 9
Telefonica SA * 82,822 1,215 54,865 805 137,687 2,020
TelePizza SA * - 1,211 2 1,211 2
Union Electrica Fenosa SA 4,900 92 2,249 42 7,149 134
Vallehermoso SA 4,915 74 1,116 17 6,031 91
Zeltia SA * - 1,784 13 1,784 13
------- ------- -------
5,183 3,155 8,338
Sweden - 1.8% #
Alfa Laval AB * - 900 14 900 14
Assa Abloy AB * - 3,400 40 3,400 40
Atlas Copco AB-A Shares * - 1,300 47 1,300 47
Atlas Copco AB-B Shares * - 800 26 800 26
Axfood AB * - 300 7 300 7
Billerud Aktibolag * - 600 9 600 9
Castellum AB * - 400 9 400 9
Drott AB 5,400 103 900 17 6,300 120
Electrolux AB * 4,900 108 3,500 77 8,400 185
Eniro AB * - 2,200 21 2,200 21
Gambro AB, B Shares * - 1,100 9 1,100 9
Getinge Ab * - 1,600 15 1,600 15
Hennes & Mauritz AB * 14,223 338 5,525 131 19,748 469
Hoganas AB, B Shares * - 300 6 300 6
Holmen AB * - 600 21 600 21
Incentive AB, Series A * - 1,900 16 1,900 16
The accompanying notes are an integral part of the financial statements.
Modern Time Group AB, B Shares * - 550 12 550 12
NetCom Systems, Inc. 1,732 92 1,150 61 2,882 153
Nobel Biocare Holding AG * - 100 10 100 10
Nordic Baltic Holding AB 59,137 444 27,500 206 86,637 650
OM Hex AB - 750 9 750 9
Sandvik AB * 4,350 150 2,600 90 6,950 240
SAS AB * - 1,200 11 1,200 11
Securitas AB * 11,000 148 3,400 46 14,400 194
Skand Enskilda Banken 10,200 150 5,600 83 15,800 233
Skandia Forsakrings AB 13,900 51 10,100 37 24,000 88
Skanska AB 11,000 97 4,300 38 15,300 135
SKF AB-A Shares * - 200 8 200 8
SKF AB-B Shares * - 1,000 39 1,000 39
SSAB Svenskt Stal AB, Series A * - 600 11 600 11
SSAB Svenskt Stal AB, Series B * - 200 3 200 3
Svenska Cellulosa AB 3,100 127 2,300 94 5,400 221
Svenska Handelsbanken AB, B Shares * - 600 12 600 12
Svenska Handelsbanken, Inc. 9,300 190 6,400 131 15,700 321
Swedish Match AB * - 4,000 41 4,000 41
Telefonaktiebolaget LM Ericsson AB 246,500 442 172,700 310 419,200 752
Telia AB 30,044 157 18,900 99 48,944 256
Trelleborg AB * - 800 13 800 13
Volvo AB, A Shares * - 1,100 32 1,100 32
Volvo AB, B Shares * 5,750 176 2,700 83 8,450 259
WM Data AB, B shares * - 2,000 4 2,000 4
------- ------- -------
2,773 1,948 4,721
Switzerland - 6.2% #
ABB, Ltd. 21,138 107 20,155 102 41,293 209
Adecco SA * 2,733 176 1,537 99 4,270 275
Ciba Specialty Chemicals AG * 1,667 129 805 62 2,472 191
Clariant AG * - 1,531 23 1,531 23
Credit Suisse Group * 21,266 778 13,867 507 35,133 1,285
Geberit AG * - 40 20 40 20
Givaudan 224 116 88 46 312 162
Holcim * 3,096 144 1,590 74 4,686 218
Kudelski SA * - 405 13 405 13
Kuoni Reisen Holding AG * - 34 11 34 11
Logitech International SA * - 513 22 513 22
Lonza Group AG 1,604 92 520 30 2,124 122
The accompanying notes are an integral part of the financial statements.
Nestle SA * 6,988 1,745 4,709 1,176 11,697 2,921
Novartis AG 41,256 1,872 27,769 1,260 69,025 3,132
Richemont 10,552 253 6,071 146 16,623 399
Roche Holdings AG 746 103 367 51 1,113 154
Roche Holdings AG * 11,960 1,206 8,195 826 20,155 2,032
Schindler Holding AG * - 63 15 63 15
Serono SA 156 111 81 58 237 169
SGS Holdings 119 75 50 31 169 106
Sulzer AG * - 38 10 38 10
Swatch Group 1,021 123 394 47 1,415 170
Swatch Group AG * - 573 14 573 14
Swiss Reinsurance Co. * 5,579 377 3,738 252 9,317 629
Swisscom AG * 541 178 306 101 847 279
Syngenta AG 2,037 137 1,226 83 3,263 220
Synthes-Stratec, Inc. 109 108 50 50 159 158
Tecan Group AG * - 79 4 79 4
UBS AG * 20,534 1,406 13,770 943 34,304 2,349
Unaxis Holding AG * - 130 18 130 18
Valora Holding AG 321 80 46 12 367 92
Zurich Finance 2,571 370 1,671 240 4,242 610
------ -------- -------
9,686 6,346 16,032
Taiwan - 0.6% #
Acer Communicaton 22,800 28 22,800 28
Acer, Inc. 44,963 67 44,963 67
Advanced Semiconductor Engineering, Inc. 64,900 67 64,900 67
Arima Computer 49,500 18 49,500 18
Asustek Computer 20,250 45 20,250 45
AU Optronics Corp. 55,650 65 55,650 65
China Dev Fin Holding 144,203 71 144,203 71
China Trust Finance 79,920 80 79,920 80
CMC Magnetics Corp. 51,600 40 51,600 40
Compal Electronics, Inc. 44,160 60 44,160 60
Formosa Chemical & Fibre 32,054 54 32,054 54
Formosa Plastic 52,956 87 52,956 87
Hon Hai Precision Insustry Co., Ltd. 20,700 81 20,700 81
Kinpo Electronics 69,608 40 69,608 40
Lite on Technology 48,056 51 48,056 51
Macronix International Co., Ltd. 59,400 13 59,400 13
Micro Star International 9,176 14 9,176 14
The accompanying notes are an integral part of the financial statements.
Nan Ya Plastic Corp. 83,824 121 83,824 121
Quanta Computer, Inc. 16,445 40 16,445 40
Realtek Semiconductor Corp. 10,920 19 10,920 19
Ritek Corp. 45,000 28 45,000 28
Siliconware Precision 44,000 45 44,000 45
Taiwan Semiconductor 173,880 325 173,880 325
Tatung 100,000 25 100,000 25
United Microelectronics Corp. 83,525 72 83,525 72
Via Technologies Inc. 14,090 18 14,090 18
Winbond Electronic 69,000 33 69,000 33
--------- -----
1,607 1,607
Thailand - 0.2% #
Advanced Information Services 65,700 140 65,700 140
PTT Exploration & Production Public Co., Ltd. 22,200 150 22,200 150
Siam Cement Co. 31,600 220 31,600 220
--------- -----
510 510
Turkey - 0.1% #
Arcelik AS 6,490,550 36 6,490,550 36
Turkiye Is Bankasi ######### 285 70,216,241 285
--------- -----
321 321
United Kingdom - 21.9% #
3i Group PLC * 11,775 130 7,072 78 18,847 208
Aegis Group PLC * - 13,367 23 13,367 23
Aggreko PLC * - 3,035 8 3,035 8
Alliance Unichem 7,717 71 2,952 27 10,669 98
AMEC PLC * - 3,798 18 3,798 18
Amvescap plc * 13,224 96 7,939 58 21,163 154
ARM Holdings PLC * - 11,849 27 11,849 27
Association British Ports 11,901 95 3,613 29 15,514 124
AstraZeneca Group PLC * 30,224 1,446 19,917 953 50,141 2,399
Barclays 110,773 985 76,452 680 187,225 1,665
Barratt Developments * - 3,002 29 3,002 29
BBA Group PLC * - 5,542 25 5,542 25
BG Group plc 64,498 330 41,085 210 105,583 540
BICC PLC * - 5,099 20 5,099 20
Billiton plc 44,847 391 28,788 251 73,635 642
BOC Group plc * 17,596 268 5,760 88 23,356 356
The accompanying notes are an integral part of the financial statements.
Boots Group 15,100 186 9,129 113 24,229 299
BP Amoco plc 410,567 3,320 257,874 2,085 668,441 5,405
BPB 12,089 75 6,111 38 18,200 113
Brambles Industries 22,730 83 8,380 30 31,110 113
British Aerospace plc 57,462 173 35,757 107 93,219 280
British Airport Authority plc 21,926 194 12,429 110 34,355 304
British Airways * - 6,466 27 6,466 27
British American Tobacco plc * 29,280 402 18,433 253 47,713 655
British Land Co. plc 9,000 94 5,721 60 14,721 154
British Sky Broadcast plc 23,449 294 14,667 184 38,116 478
BT Group 153,664 516 100,873 339 254,537 855
Bunzl 12,430 95 5,477 42 17,907 137
Cable & Wireless plc * 48,728 116 27,996 67 76,724 183
Cadbury Schweppes plc * 37,586 275 23,980 176 61,566 451
Canary Wharf Group PLC * - 5,703 27 5,703 27
Capita Group plc 17,669 77 8,112 35 25,781 112
Carlton Communications PLC * 13,900 57 7,353 30 21,253 87
Carnival plc 3,303 133 1,813 73 5,116 206
Cattles PLC * - 3,600 21 3,600 21
Celltech Group PLC * - 3,348 23 3,348 23
Centrica plc 76,232 287 49,380 186 125,612 473
CGU plc 37,687 330 26,273 230 63,960 560
Close Brothers Group PLC * - 1,520 20 1,520 20
Cobham PLC * - 1,279 27 1,279 27
Compass Group plc * 39,189 266 25,420 172 64,609 438
Daily Mail & General Trust 7,508 88 3,372 40 10,880 128
Davis Service 11,677 78 2,454 16 14,131 94
De Lousiana Rue PLC * - 1,732 9 1,732 9
Diageo plc * 53,890 707 36,167 474 90,057 1,181
Dixons Group plc 42,741 106 22,056 55 64,797 161
Electrocomponents plc * 12,098 70 5,197 30 17,295 100
EMAP plc * 6,164 94 3,071 47 9,235 141
EMI Group plc 9,000 26 8,998 25 17,998 51
Enterprise Inns PLC * 5,116 93 2,048 37 7,164 130
Exel * 7,462 98 3,413 45 10,875 143
Firstgroup 12,870 63 5,028 25 17,898 88
FKI PLC * - 7,192 14 7,192 14
Friends Provident Ethical Investment Trust * - 19,556 46 19,556 46
George Wimpey PLC * - 4,233 28 4,233 28
GKN * 17,633 84 8,575 41 26,208 125
The accompanying notes are an integral part of the financial statements.
GlaxoSmithKline plc * 104,018 2,377 69,551 1,589 173,569 3,966
Granada Compass PLC * 57,831 126 32,121 70 89,952 196
Great Portland Estates PLC * - 2,022 8 2,022 8
Hammerson plc 8,028 93 3,372 39 11,400 132
Hanson Building Materials * 8,990 66 7,856 58 16,846 124
Hanson PLC * - 387 3 387 3
Hays plc * 41,349 89 19,215 41 60,564 130
HBOS * 65,987 852 44,752 578 110,739 1,430
HHG Plc * 17,632 13 17,632 13
Hilton Group plc * 27,700 111 18,792 75 46,492 186
HSBC Holdings plc 182,550 2,861 126,924 1,989 309,474 4,850
IMI 11,248 68 3,852 23 15,100 91
Imperial Chemical Industries plc * 26,199 93 13,726 49 39,925 142
Imperial Tobacco Group plc 13,917 273 8,486 167 22,403 440
Intercontinental Hampshire 15,693 148 7,279 69 22,972 217
Invensys PLC * - 37,344 12 37,344 12
J Sainsbury plc 28,966 162 16,844 94 45,810 256
Johnson Matthey 5,434 95 2,543 45 7,977 140
Kelda Group plc 10,845 91 4,576 38 15,421 129
Kesa Electricals PLC * - 6,582 30 6,582 30
Kidde PLC * - 10,723 20 10,723 20
Kingfisher * 42,693 212 24,891 124 67,584 336
Land Securities SGP 7,350 130 5,449 96 12,799 226
Legal & General Group plc 105,588 189 75,519 135 181,107 324
Liberty National 6,968 85 2,800 34 9,768 119
Lloyds TSB Group PLC 118,179 945 65,085 520 183,264 1,465
Logica plc * 16,105 74 8,713 40 24,818 114
Manitoba Group 5,609 146 3,213 84 8,822 230
Marks & Spencer * 42,777 221 26,272 136 69,049 357
MFI Furniture Group * - 6,400 17 6,400 17
Misys plc 13,522 51 6,675 25 20,197 76
Mitchells & Butler 5,981 24 5,962 24 11,943 48
National Grid Group * 53,002 379 35,753 255 88,755 634
National Power PLC 14,200 31 13,485 30 27,685 61
Next Group 6,142 123 3,228 65 9,370 188
Novar PLC * - 4,484 11 4,484 11
Nycomed Amersham plc 14,138 193 8,148 111 22,286 304
Pearson PLC 15,605 173 9,283 103 24,888 276
Peninsular & Oriental Steam Navigation Co. 18,718 77 8,260 34 26,978 111
Persimmon PLC * - 3,308 32 3,308 32
The accompanying notes are an integral part of the financial statements.
Pilkington PLC * - 11,203 19 11,203 19
Provident Financial 6,656 77 2,957 34 9,613 111
Prudential Corp. 34,647 292 23,352 197 57,999 489
Rank Group PLC 25,300 126 6,786 34 32,086 160
Reckitt Benckiser 11,385 257 7,008 158 18,393 415
Reed International plc 44,446 371 14,719 123 59,165 494
Rentokil Initial plc 39,081 133 21,573 73 60,654 206
Reuters Group plc 29,157 122 16,417 69 45,574 191
Rexam 11,775 90 6,280 48 18,055 138
Rio Tinto plc 18,738 516 12,426 342 31,164 858
RMC Group plc 6,457 80 2,981 37 9,438 117
Rolls Royce Group 30,599 97 15,792 50 46,391 147
Royal & Sun Alliance Insurance Group 60,060 95 33,221 52 93,281 147
Royal Bank of Scotland Group 48,532 1,426 32,593 958 81,125 2,384
Safeway plc 23,118 117 12,614 64 35,732 181
Schroders PLC * - 1,626 18 1,626 18
Scottish & Newcastle 18,779 127 9,340 63 28,119 190
Scottish and Southern Energy 16,614 200 9,965 120 26,579 320
Scottish Power plc 34,695 231 21,568 143 56,263 374
Securicor * - 5,150 9 5,150 9
Serco Group PLC * - 4,450 14 4,450 14
Severn Trent 8,253 110 4,138 55 12,391 165
Shell Transport & Trading Co. plc 189,806 1,408 112,828 837 302,634 2,245
Signet Group 42,561 78 19,627 36 62,188 114
Slough Estates Finance plc 8,000 63 4,788 38 12,788 101
Smith & Nephew 19,151 160 10,791 90 29,942 250
Smiths Group 11,076 131 6,513 77 17,589 208
South African Breweries plc 15,790 163 9,259 96 25,049 259
SSL International PLC * - 2,478 15 2,478 15
Stagecoach Holdings PLC * - 11,469 16 11,469 16
Tate & Lyle 12,545 70 4,898 27 17,443 97
Taylor Woodrow 17,488 83 6,527 31 24,015 114
Tesco plc 127,371 586 85,336 393 212,707 979
The Berkeley Group PLC * - 1,243 19 1,243 19
The Great Universal Stores plc 19,002 262 11,775 163 30,777 425
The Sage Group plc 15,700 49 14,258 45 29,958 94
Tomkins plc 18,702 89 9,260 44 27,962 133
Unilever plc 49,648 462 32,221 300 81,869 762
United Business Media 8,630 75 3,864 34 12,494 109
United Utilities plc 10,400 92 6,616 59 17,016 151
The accompanying notes are an integral part of the financial statements.
United Utilities PLC, Class A * - 3,432 19 3,432 19
Vodafone AirTouch plc 1,203,067 2,974 795,070 1,966 1,998,137 4,940
Whitbread 7,465 96 3,452 44 10,917 140
William Hill PLC * - 4,885 37 4,885 37
Wolseley 11,481 162 6,819 96 18,300 258
WPP Group plc 22,552 221 13,730 134 36,282 355
Yell Group PLC * - 5,218 28 5,218 28
-------- -------- --------
34,541 22,141 56,682
United States - 1.6% #
Bajaj Auto, Ltd. - GDR 5,900 143 - 5,900 143
Banco Bradesco - ADR 2,918 77 - 2,918 77
Banco Itau SA - ADR 3,960 197 - 3,960 197
Banco Santander Chile - ADR 2,900 69 - 2,900 69
Brasil Telecom Participacoes S.A. 2,426 91 - 2,426 91
Carnival Corp. 180 7 - 180 7
Centrais Electricas Brasileirias SA - ADR Cl.B * 12,874 101 - 12,874 101
Check Point Software Technologies, Ltd. * 4,200 71 - 4,200 71
Companhia De Bebidas ADR 6,850 175 - 6,850 175
Companhia Energetica de Minas Gerias - ADR 7,701 141 - 7,701 141
Companhia Vale do Rio Doce 3,700 189 - 3,700 189
Compania Cervecerias Unidas SA - ADR * 900 19 - 900 19
Compania de Telecomunicaciones de Chile SA * 2,500 37 - 2,500 37
EIH, Ltd. - GDR 6,700 44 - 6,700 44
Embotelladora Andina SA - ADR * 6,100 64 - 6,100 64
Empresa Nacional de Electricidad SA - ADR * 10,100 118 - 10,100 118
Enersis SA - ADR * 28,447 209 - 28,447 209
Gen-Probe, Inc. * - 344 13 344 13
Grasim Industries, Ltd. - GDR 7,100 156 - 7,100 156
Great Eastern Shipping Co. - GDR 9,020 152 - 9,020 152
Hindalco Industries, Ltd. - GDR 4,900 151 - 4,900 151
Huaneng Power International, Inc. - ADR * 400 28 - 400 28
ITC, Ltd. - GDR 5,900 130 - 5,900 130
Lukoil Holding - ADR* 2,700 251 - 2,700 251
Mahindra & Mahindra, Ltd. * 16,500 141 - 16,500 141
Petroleo Brasileiro SA * 5,500 160 - 5,500 160
Petroleo Brasileiro SA - ADR* 6,800 180 - 6,800 180
Ranbaxy Laboratories, Ltd. - GDR 6,560 167 - 6,560 167
Reliance Industries, Ltd. - GDR 11,000 276 - 11,000 276
Surgutneftegaz - ADR 11,581 337 - 11,581 337
The accompanying notes are an integral part of the financial statements.
Tatneft - ADR 2,400 55 - 2,400 55
Unified Energy Systems Russia - ADR 6,700 187 - 6,700 187
--------- ---------- ---------
4,123 13 4,136
--------- ---------- ---------
TOTAL COMMON STOCK # 154,282 85,433 239,715
PREFERRED STOCK
Australia - 0.2% #
News Corp., Ltd. 53,728 404 23,372 176 77,100 580
Germany - 0.2% #
Fresenius Medical Care AG * - 325 16 325 16
Henkel KGAA 1,112 87 1,112 87
Porsche AG 195 116 90 53 285 169
RWE AG * - 408 14 408 14
Volkswagen AG 2,462 89 1,226 45 3,688 134
--------- ---------- ---------
292 128 420
Italy - 0.0% #
Fiat SPA - PRIV EUR * 849 4 849 4
New Zealand - 0.0% #
Fletcher Challenge * 1,940 2 1,940 2
South Korea - 0.0% #
Samsung Electronics 550 113 550 113
--------- ---------- ---------
TOTAL PREFERRED STOCK # 809 310 1,119
WARRANTS
Mexico - 0.0% #
Cemex SA
expire 12/21/04 (Cost $1) 2,000 1 2,000 1
--------- ---------
TOTAL WARRANTS # 1 1
RIGHTS
Germany - 0.0% #
Muenchener Ruckversage
expires 11/10/03 (Cost $0) 4,360 38 4,360 38
The accompanying notes are an integral part of the financial statements.
Thailand - 0.0% #
TelecomAsia
expires 04/30/08 (Cost $0) 35,747 - 35,747 -
--------- ---------- ---------
TOTAL RIGHTS # 38 38
PAR VALUE PAR VALUE PAR VALUE
(000'S (000'S (000'S
OMITTED) OMITTED) OMITTED)
COLLATERAL ON LOANED SECURITIES - 7.1%
State Street Navigator Securities Lending
Portfolio $ 8,571 8,571 9,718 9,718 18,289 18,289
SHORT TERM INVESTMENTS
Investment in joint trading account
1.061% due 01/02/04 2,955 2,955 2,955 2,955
Federal National Mortgage
Association Discount Notes,
1.05% due 01/07/2004 2,300 2,300 2,300 2,300
1.06% due 02/18/2004 6,700 6,690 6,700 6,690
U.S Treasury Bills
0.00% due 01/22/2004 500 500 500 500
0.99% due 03/11/2004 524 524 524 524
--------- ---------- ---------
TOTAL SHORT TERM INVESTMENTS # 3,479 9,490 12,969
REPURCHASE AGREEMENTS #
Repurchase Agreement with State Street
Corp. dated 12/31/2003 at 0.70%, to be
repurchased at $3,931,153 on 01/02/2004,
col1ateralized by $281,000 U.S. Treasury
Bonds, 8.50% due 02/15/2020 (valued at
$4,013,031, including interest)
TOTAL REPURCHASE AGREEMENTS # 3,931 3,931 3,931 3,931
---------- ---------
3,931 3,931
TOTAL INVESTMENTS AT MARKET # 167,180 108,882 276,062
TOTAL INVESTMENTS AT COST 142,128 110,150 252,278
The accompanying notes are an integral part of the financial statements.
Payables, less cash and receivables # (8,144) (9,506) (17,650)
--- --------- ---------- ---------
NET ASSETS # 159,036 99,376 258,412
=== ========= ========== =========
* Non-income producing security.
ADR-American Depository Receipt.
GDR-Global Depository Receipt.
The accompanying notes are an integral part of the financial statements.
MIT INTERNATIONAL INDEX TRUST AND JHVST INTERNATIONAL EQUITY INDEX FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF COMBINATION. The Pro Forma Combining Schedule of Portfolio
Investments, Statement of Assets and Liabilities and Statement of Operations
reflect the accounts of the John Hancock Variable Series Trust I International
Equity Index Fund ("JHVST International Equity Index Fund") one of thirty
investment funds offered by the John Hancock Variable Series Trust I ("JHVST")
and the International Index Trust ("MIT International Index Trust"), one of
seventy-six investment Portfolios offered by the Manufacturers Investment Trust
("MIT") at and for the year ended December 31, 2003. These statements have
been derived from the books and records of each Portfolio utilized in
calculating daily net asset value at December 31, 2003.
The pro forma statements reflect the proposed transfer of the assets and
liabilities of the MIT International Index Trust in exchange for Series I and
Series II shares of the JHVST International Equity Index Fund. Under generally
accepted accounting principles in the United States of America ("GAAP"), JHVST
International Equity Index Fund will be the surviving entity for accounting
purposes. The pro forma financial statements have been adjusted to reflect the
anticipated fee arrangements for the surviving entity.
The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets
and Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements of MIT and JHVST International Equity Index
Fund incorporated by reference in the Statement of Additional Information.
Series I and II Class shares of the MIT International Index Trust and Series I
and Series II Class shares of the JHVST International Equity Index Fund are
presently offered only to: Separate Accounts A, H,I, L, M, N and to certain
unregistered separate accounts of The Manufacturers Life Insurance Company
(U.S.A.) ("Manulife USA") and to Separate Accounts A and B and to certain
unregistered separate accounts of The Manufacturers Life Insurance Company of
New York ("Manulife New York"). Manulife USA and Manulife New York are indirect
wholly owned subsidiaries of The Manufacturers Life Insurance Company
("Manulife"), which in turn is a wholly owned subsidiary of Manulife Financial
Corporation, a publicly traded company. Manulife Financial Corporation and its
subsidiaries are known collectively as "Manulife Financial". Manulife New York
is a wholly owned subsidiary of Manulife USA.
NAV Class shares of the JHVST International Equity Index Fund are presently
offered only 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 I and JF to support
variable annuity contracts issued by JHVLICO; John Hancock Variable Annuity
Accounts H, U, and V to support variable annuity contracts issued by John
Hancock Life Insurance Company ("John Hancock") and John Hancock Life Account UV
to support variable life insurance policies issued by John Hancock and certain
unregistered separate accounts of JHVLICO and John Hancock. John Hancock and
JHVLICO are indirect wholly owned subsidiaries of Manulife Financial
Corporation.
The JHVST International Equity Index Fund currently offers three classes of
shares: NAV, Series I and Series II. Series I and Series II shares are the same,
except for differences in class expenses with respect to the Portfolio's
distribution plan. NAV shares, which will not be issued as part of the Agreement
and Plan of Reorganization, do not assess 12b-1 expense fees.
The MIT International Index Trust currently offers two classes of shares. Series
I, and Series II shares are the same, except for differences in class expenses
with respect to the Portfolio's distribution plan.
Pro Forma Adjustments:
(A) Adjustment to reflect the change in advisory fees upon reorganization.
(B) Adjustment to reflect the reduction in the custodian agreement fees and
elimination of duplicate expenses upon reorganization.
(C) Adjustment to reflect the increase in 12b-1 fees associated with the
proposed merger.
(D) Adjustment has not been made to reflect estimated one-time proxy, legal and
other expenses of the reorganization in the pro-forma Statement of
Operations. These estimated expenses are $75,000 for each Fund.
2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed in
the preparation of the financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results may differ from these estimates.
SECURITY VALUATION. Each Portfolio determines its net asset value per share once
daily as of the close of the customary trading session of the New York Stock
Exchange ("Exchange") on each business day of the Portfolio. The Exchange
generally closes at 4:00 p.m. Eastern Standard Time. However, exchange-traded
funds and certain derivative instruments may be valued using prices as late as
4:15 p.m. Eastern Standard Time. In the event the Exchange closes at any time
other than 4:00 p.m. Eastern Standard Time on a particular day, each Fund will
determine its net asset value per share as of the close of the Exchange on that
day.
Short-term investments with a remaining maturity of 60 days or less 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.
Securities and 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 or 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 for the applicable Portfolio.
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 Portfolios calculate 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 for
the applicable Portfolio.
Occasionally, events that affect the values of such securities may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange. In such event, these securities will then be valued at their
fair value as determined in good faith under consistently applied procedures
established by and under the general supervision of the Board of Trustees for
the applicable Portfolio.
FEDERAL INCOME TAXES. Each Portfolio intends to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code and to
distribute substantially all of its taxable income to shareholders. Therefore no
federal income tax provision is required. Each Portfolio is treated as a
separate taxpayer for federal income tax purposes.
PART C
OTHER INFORMATION
Item 15. Indemnification
In response to this item and the requirements of Rule 484 under the
Securities Act of 1933, Registrant incorporates by reference herein its response
to item 25 in Post-Effective Amendment No. 37 to Form N-1A (File No. 33-2081)
filed on May 1, 2003.
Item 16. Exhibits
(1)(a) Declaration of Trust of John Hancock Variable Series Trust I, dated
February 21, 1988, incorporated by reference herein to Pre-Effective Amendment
No. 2 to Form N-14 (File No. 333-47686) filed on December 6, 2000.
(1)(b) Amendment dated May 2, 2003 to the Declaration of Trust,
incorporated by reference herein to Post-Effective Amendment No. 38 to Form N-1A
(File No. 33-2081), filed on June 3, 2003.
(1)(c) Amendments dated September 24 and March 24, 2004 to the Declaration
of Trust, included in the initial filing of this registration statement on April
1, 2004.
(2) By-Laws of John Hancock Variable Series Trust I, adopted April 12,
1988, and amended and restated as of September 18, 2002, incorporated by
reference herein to Post-Effective Amendment No. 37 to Form N-1A (File No.
33-2081) filed on May 1, 2003.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization (included as exhibit A to the
proxy statement/prospectus filed as part of this Registration Statement).
(5) Not Applicable.
(6)(a) Investment Management Agreement by and between John Hancock
Variable Series Trust I and John Hancock Life Insurance Company dated April 12,
1988 relating to the Real Estate Equity Fund and the International Equity Index
(formerly "International Equities," formerly "International," originally
"Special Opportunities") Fund, incorporated by reference herein to
Post-Effective Amendment No. 3 to Form N-1A (File No. 33-2081) filed on April,
12 1988.
(6)(b) Amendment No. 1 dated May 1, 1997 to Investment Management
Agreement by and between John Hancock Variable Series Trust I and John Hancock
Life Insurance Company dated April 12, 1988, incorporated by reference herein,
to Post-Effective Amendment No. 16 to Form N-1A (File No. 33-2081) filed on May
1, 1997.
(6)(c) Amendment No. 2 dated May 1, 1998 to Investment Management
Agreement by and between John Hancock Variable Series Trust I and John Hancock
Life Insurance Company dated April 12, 1988 relating to the International Equity
Index Fund, incorporated by reference
herein to Post-Effective Amendment No. 19 to Form N-1A (File No. 33-2081) filed
on May 1, 1998.
(6)(d) Amendment No. 3 dated April 23, 1999 to Investment Management
Agreement by and between John Hancock Variable Series Trust I and John Hancock
Life Insurance Company dated April 12, 1988, incorporated by reference herein to
Post-Effective Amendment No. 33 to Form N-1A (File No. 33-2081 ) filed on April
12, 2002.
(6)(e) Supplement dated June 1, 2004 to Investment Management Agreement by
and between John Hancock Variable Series Trust and John Hancock Life Insurance
Company dated April 12, 1988, included in the initial filing of this
registration statement on April 1, 2004.
(6)(f) Amendment No. 5 dated May 1, 2004 to Investment Management
Agreement by and between John Hancock Variable Series Trust and John Hancock
Life Insurance Company dated April 12, 1988 (filed herewith).
(6)(g) Sub-Investment Management Agreement, dated as of March 29, 2004,
among John Hancock Variable Series Trust I, SSgA Funds Management, Inc., and
John Hancock Life Insurance Company relating to the International Equity Index
Fund, included in the initial filing of this registration statement on April 1,
2004.
(7)(a) Amended and Restated Underwriting and Indemnity Agreement among
John Hancock Variable Series Trust I, Signator Investors, Inc., and John Hancock
Life Insurance Company, dated March 24, 2004, included in the initial filing of
this registration statement on April 1, 2004.
(7)(b) Distribution Agreement dated May 1, 2004, between John Hancock
Variable Series Trust and Manufacturers Financial Securities, LLC (filed
herewith).
(8) Not Applicable.
(9)(a) Custodian Agreement between John Hancock Variable Series Trust I
and State Street Bank and Trust Company, dated January 30, 1995, incorporated by
reference herein to Post-Effective Amendment No. 10 to Form N-1A (File No.
33-2081) filed on March 2, 1995.
(9)(b) Form of Amendment, dated as of April 10, 2003, to Custodian
Agreement dated January 30, 1995, as amended, between John Hancock Variable
Series Trust I and State Street Bank and Trust Company, incorporated by
reference herein to Post-Effective Amendment No. 38 to Form N-1A (File No.
33-2081) filed on June 3, 2003.
(9)(c) Form of Amendment, dated as of April 30, 2004, to Custodian
Agreement dated January 30, 1995, as amended, between John Hancock Variable
Series Trust I and State Street Bank and Trust Company (filed herewith).
(10)(a) Rule 12b-1 Plan dated March 24, 2004 for Series I and II shares,
included in the initial filing of this registration statement on April 1, 2004.
(10)(b) Rule 18f-3 Plan dated February 11, 2004, included in the initial
filing of this registration statement on April 1, 2004.
(10)(c) Amendment dated March 24, 2004 to Rule 18f-3 Plan dated February
11, 2004, included in the initial filing of this registration statement on April
1, 2004.
(11) Opinion and consent of Ronald J. Bocage, Esq. as to legality of
securities for International Equity Index Fund (filed herewith).
(12) Form of Opinion of Dykema Gossett PLLC on tax matters (filed
herewith).
(13) Not Applicable.
(14)(a) Consent of Dykema Gossett PLLC (filed herewith).
(14)(b) Consent of Ernst & Young LLP (filed herewith).
(14)(c) Consent of PricewaterhouseCoopers, LLP (filed herewith).
(15) Not Applicable.
(16) Powers of Attorney for Elizabeth G. Cook, Kathleen F. Driscoll, Diane
C. Kessler, Michele G. Van Leer, Hassell H. McClellan, and Robert F. Verdonck,
included in the initial filing of this registration statement on April 1, 2004.
(17)(a) Prospectus of the International Equity Index Fund of the John
Hancock Variable Series Trust I dated May 1, 2004 (filed herewith).
(17)(b) Prospectus of Manufacturers Investment Trust dated May 1, 2004
(filed herewith).
(17)(c) Annual Report of the International Equity Index Fund of John
Hancock Variable Series Trust I for the year ended December 31, 2003, included
in the initial filing of this registration statement on April 1, 2004.
(17)(d) Annual Report of Manufacturers Investment Trust for the year ended
December 31, 2003, included in the initial filing of this registration statement
on April 1, 2004.
(17)(e) Form of Participation Agreement between John Hancock Variable
Series Trust I, John Hancock Life Insurance Company, and John Hancock Variable
Life Insurance company, included in the initial filing of this registration
statement on April 1, 2004.
(17)(f) Participation Agreement between John Hancock Variable Series Trust
I, The Manufacturers Life Insurance Company (U.S.A.), and The Manufacturers Life
Insurance Company of New York, Incorporated by reference herein to
Post-Effective Amendment No. 42 to Form N-1A (File No 33-2081) filed on April
29, 2004.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR
230.145c], the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, this registration statement has been
signed on behalf of the Registrant, in the City of Boston and the Commonwealth
of Massachusetts, on the 12th day of May, 2004.
JOHN HANCOCK VARIABLE SERIES TRUST I
By: /s/ Michele Van Leer
---------------------------------
Name: Michele G. Van Leer
Title: Chairman of the Board of
Trustees
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the date indicated.
SIGNATURE DATE
By: /s/ Raymond F. Skiba
--------------------------------- May 12, 2004
Raymond F. Skiba
Treasurer (Principal Financial
and Accounting Officer)
By: /s/ Michele Van Leer
--------------------------------- May 12, 2004
Michele G. Van Leer
Chairman of the Board of Trustees
(Principal Executive Officer)
For herself and as attorney-in-fact for:
Elizabeth G. Cook, Trustee
Diane C. Kessler, Trustee
Robert F. Verdonck, Trustee
Hassell H. McClellan, Trustee
Kathleen F. Driscoll, Trustee