MANUFACTURERS INVESTMENT TRUST
73 Tremont Street, Boston, Massachusetts 02108
Manufacturers Investment Trust (the "Trust") is an open-end management
investment company, commonly known as a mutual fund, which is sold without a
sales charge. Shares of the Trust are not offered directly to the public but are
sold only to insurance companies and their separate accounts as the underlying
investment medium for variable contracts and, in the case of Series III shares,
to certain qualified plans and other permitted entities. The Trust provides a
range of investment objectives through 80 separate investment portfolios, 73 of
which are described in this prospectus. The names of those portfolios are as
follows:
SCIENCE & TECHNOLOGY TRUST
PACIFIC RIM TRUST
(formerly, Pacific Rim Emerging Markets Trust)
HEALTH SCIENCES TRUST
EMERGING GROWTH TRUST
AGGRESSIVE GROWTH TRUST
EMERGING SMALL COMPANY TRUST
SMALL COMPANY BLEND TRUST
SMALL COMPANY TRUST
DYNAMIC GROWTH TRUST
MID CAP STOCK TRUST
NATURAL RESOURCES TRUST
ALL CAP GROWTH TRUST
STRATEGIC OPPORTUNITIES TRUST
FINANCIAL SERVICES TRUST
INTERNATIONAL STOCK TRUST
OVERSEAS TRUST
INTERNATIONAL SMALL CAP TRUST
INTERNATIONAL VALUE TRUST
QUANTITATIVE MID CAP TRUST
MID CAP CORE TRUST
GLOBAL TRUST
(formerly Global Equity Trust)
STRATEGIC GROWTH TRUST
CAPITAL APPRECIATION TRUST
U.S. GLOBAL LEADERS GROWTH TRUST
QUANTITATIVE ALL CAP TRUST
ALL CAP CORE TRUST
LARGE CAP GROWTH TRUST
BLUE CHIP GROWTH TRUST
U.S. LARGE CAP TRUST
CORE EQUITY TRUST
STRATEGIC VALUE TRUST
LARGE CAP VALUE TRUST
CLASSIC VALUE TRUST
UTILITIES TRUST
REAL ESTATE SECURITIES TRUST
SMALL CAP OPPORTUNITIES TRUST
SMALL COMPANY VALUE TRUST
SPECIAL VALUE TRUST
MID CAP VALUE TRUST
VALUE TRUST
ALL CAP VALUE TRUST
EQUITY INDEX TRUST
FUNDAMENTAL VALUE TRUST
GROWTH & INCOME TRUST
GREAT COMPANIES -- AMERICA TRUST*
QUANTITATIVE VALUE TRUST
EQUITY-INCOME TRUST
INCOME & VALUE TRUST
GLOBAL ALLOCATION TRUST
HIGH YIELD TRUST
STRATEGIC BOND TRUST
STRATEGIC INCOME TRUST
GLOBAL BOND TRUST
DIVERSIFIED BOND TRUST
INVESTMENT QUALITY BOND TRUST
TOTAL RETURN TRUST
REAL RETURN BOND TRUST
U.S. GOVERNMENT SECURITIES TRUST
MONEY MARKET TRUST
SMALL CAP INDEX TRUST
INTERNATIONAL INDEX TRUST
MID CAP INDEX TRUST
TOTAL STOCK MARKET INDEX TRUST
500 INDEX TRUST
LIFESTYLE AGGRESSIVE 1000 TRUST
LIFESTYLE GROWTH 820 TRUST
LIFESTYLE BALANCED 640 TRUST
LIFESTYLE MODERATE 460 TRUST
LIFESTYLE CONSERVATIVE 280 TRUST
AMERICAN GROWTH TRUST
AMERICAN INTERNATIONAL TRUST
AMERICAN BLUE CHIP INCOME AND GROWTH TRUST
AMERICAN GROWTH-INCOME TRUST
*Not Currently Available for Sale
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. NO PERSON, INCLUDING ANY DEALER OR SALESPERSON, HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, UNLESS THE
INFORMATION OR REPRESENTATION IS SET FORTH IN THIS PROSPECTUS. IF ANY SUCH
INFORMATION OR REPRESENTATION IS GIVEN, IT SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE TRUST, THE ADVISER OR ANY SUBADVISERS TO THE TRUST OR THE
PRINCIPAL UNDERWRITER OF THE CONTRACTS. THIS PROSPECTUS IS NOT AN OFFER TO SELL
SHARES OF THE TRUST IN ANY STATE WHERE SUCH OFFER OR SALE WOULD BE PROHIBITED.
The date of this Prospectus is May 1, 2004
MANUFACTURERS INVESTMENT TRUST
TABLE OF CONTENTS
<Table>
PORTFOLIO DESCRIPTIONS:
INVESTMENT OBJECTIVES AND STRATEGIES, RISKS,
PERFORMANCE, EXPENSES AND FINANCIAL HIGHLIGHTS.............. 1
Science & Technology Trust........................... 13
Pacific Rim Trust (formerly, Pacific Rim Emerging
Markets Trust)...................................... 14
Health Sciences Trust................................ 16
Emerging Growth Trust................................ 18
Aggressive Growth Trust.............................. 19
Emerging Small Company Trust......................... 21
Small Company Blend Trust............................ 22
Small Company Trust.................................. 24
Dynamic Growth Trust................................. 25
Mid Cap Stock Trust.................................. 26
Natural Resources Trust.............................. 28
All Cap Growth Trust................................. 29
Strategic Opportunities Trust........................ 31
Financial Services Trust............................. 32
International Stock Trust............................ 33
Overseas Trust....................................... 36
International Small Cap Trust........................ 37
International Value Trust............................ 39
Quantitative Mid Cap Trust........................... 40
Mid Cap Core Trust................................... 41
Global Trust (formerly, Global Equity Trust)......... 42
Strategic Growth Trust............................... 44
Capital Appreciation Trust........................... 45
U.S. Global Leaders Growth Trust..................... 47
Quantitative All Cap Trust........................... 48
All Cap Core Trust................................... 49
Large Cap Growth Trust............................... 51
Blue Chip Growth Trust............................... 52
U.S. Large Cap Trust................................. 54
Core Equity Trust.................................... 56
Strategic Value Trust................................ 57
Large Cap Value Trust................................ 58
Classic Value Trust.................................. 60
Utilities Trust...................................... 61
Real Estate Securities Trust......................... 63
Small Cap Opportunities Trust........................ 66
Small Company Value Trust............................ 67
Special Value Trust.................................. 68
Mid Cap Value Trust.................................. 69
Value Trust.......................................... 71
All Cap Value Trust.................................. 72
Equity Index Trust................................... 73
Fundamental Value Trust.............................. 75
Growth & Income Trust................................ 77
Great Companies -- America Trust..................... 78
Quantitative Value Trust............................. 80
Equity-Income Trust.................................. 81
Income & Value Trust................................. 83
Global Allocation Trust.............................. 85
High Yield Trust..................................... 87
Strategic Bond Trust................................. 88
Strategic Income Trust............................... 91
Global Bond Trust.................................... 92
Diversified Bond Trust............................... 94
</Table>
<Table>
Investment Quality Bond Trust........................ 95
Total Return Trust................................... 97
Real Return Bond Trust............................... 99
U.S. Government Securities Trust..................... 101
Money Market Trust................................... 103
The Index Trusts..................................... 104
The Lifestyle Trusts................................. 109
American Growth Trust................................ 114
American International Trust......................... 115
American Blue Chip Income and Growth Trust........... 115
American Growth-Income Trust......................... 116
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS' INVESTMENTS.... 120
Risks of Investing in Certain Types of Securities...... 120
Additional Investment Policies......................... 125
Hedging and Other Strategic Transactions............... 127
MANAGEMENT OF THE TRUST..................................... 128
Advisory Arrangements.................................. 128
Subadvisory Arrangements............................... 134
MULTIPLE CLASS PRICING; RULE 12B-1 PLANS.................... 134
GENERAL INFORMATION......................................... 135
Taxes.................................................. 135
Dividends.............................................. 136
Purchase and Redemption of Shares...................... 136
Disruptive Short Term Trading.......................... 137
Purchasers of Shares of the Trust...................... 137
FINANCIAL HIGHLIGHTS........................................ 138
Additional Information................................. 173
</Table>
PORTFOLIO DESCRIPTIONS:
INVESTMENT OBJECTIVES AND STRATEGIES, RISKS,
PERFORMANCE AND FINANCIAL HIGHLIGHTS
The Trust is a series trust which currently has 80 separate investment
portfolios, 73 of which are described in this prospectus. The investment
objectives, principal investment strategies and principal risks of the
portfolios are set forth in the portfolio descriptions below, together with
performance information and financial highlights for each portfolio.
Manufacturers Securities Services, LLC is the investment adviser to the Trust,
and each portfolio has its own subadviser.
INVESTMENT OBJECTIVES AND STRATEGIES
Each portfolio has a stated investment objective which it pursues through
separate investment strategies or policies and which may only be changed with
the approval of the shareholders of the portfolio. There can be no assurance
that the portfolio will achieve its investment objective. The differences in
objectives and policies among the portfolios can be expected to affect the
return of each portfolio and the degree of market and financial risk to which
each portfolio is subject. Additional information about the portfolios'
investment policies is set forth under "Additional Investment Policies."
Temporary Defensive Investing. Except as otherwise stated below in the
description of a particular portfolio, during unusual or unsettled market
conditions, for purposes of meeting redemption requests, or pending investment
of its assets, each portfolio may invest all or a portion of its assets in cash
and securities that are highly liquid, including (a) high quality money market
instruments such as short-term U.S. government obligations, commercial paper,
repurchase agreements or other cash equivalents and (b) securities of other
investment companies that are money market funds. In the case of portfolios
investing extensively in foreign securities, these investments may be
denominated in either U.S. or non-U.S. dollars and may include debt of foreign
corporations and governments and debt of supranational organizations. To the
extent a portfolio is in a defensive position, its ability to achieve its
investment objective will be limited.
Use of Hedging and Other Strategic Transactions. Except as otherwise
stated below in the description of a particular portfolio, each portfolio is
authorized to use all of the various investment strategies referred to under
"Hedging and Other Strategic Transactions."
More complete descriptions of the money market instruments and certain
other instruments in which certain portfolios of the Trust may invest and of the
options, futures, currency and other derivative transactions that certain
portfolios may engage in are set forth in the Statement of Additional
Information. A more complete description of the debt security ratings used by
the Trust assigned by Moody's or Standard & Poor's is included in Appendix I in
the Statement of Additional Information.
RISKS OF INVESTING IN EACH PORTFOLIO
Certain risks of investing in each portfolio are set forth in the portfolio
descriptions. If these risks materialize, an investor could lose money in the
portfolio. The risks of investing in the following types of securities, as well
as the definition of a non-diversified portfolio and the risks associated with
such a portfolio, are more fully described below under "Risks of Investing in
Certain Types of Securities."
<Table>
-- Non-Diversified Portfolios -- Investment Company Securities
-- Equity Securities -- Exchange Traded Funds (ETFs)
-- Fixed Income Securities -- Stripped Securities
-- Investment Grade Fixed Income Securities -- Mortgage-Backed and Asset-Backed Securities
in the Lowest Rating Category -- Securities Linked to the Real Estate Market
-- Lower Rated Fixed Income Securities -- Industry or Sector Investing
-- Small and Medium Size Companies -- IPOs ("Initial Public Offerings")
-- Foreign Securities
</Table>
An investment in any of the portfolios is not a deposit of any bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
Portfolio Turnover. Unless otherwise noted in the description a portfolio,
each portfolio anticipates that its annual portfolio turnover rate will exceed
100%. A high portfolio turnover rate generally involves correspondingly greater
brokerage commission expenses, which must be borne directly by the portfolio.
The portfolio turnover rate of each of the Trust's portfolios may vary from year
to year, as well as within a year. Portfolio turnover rates are set forth in the
Financial Highlights included in each portfolio description. See also "Portfolio
Turnover" in the Statement of Additional Information.
1
PERFORMANCE INFORMATION FOR EACH PORTFOLIO
Each portfolio description contains a bar chart and a performance table
which provide some indication of the risks of investing in each portfolio of the
Trust.
Bar Chart. The bar chart shows changes in the performance of Series I
shares (formerly referred to as Class A shares) of each portfolio from year to
year over a ten-year period. The performance of Series II shares (formerly
referred to as Class B shares) and Series III shares (also referred to as "Class
R shares") of each portfolio would be lower due to the higher Rule 12b-1 fees.
Portfolios with less than ten years of performance history show performance from
the inception date of the portfolio.
Performance Table. The table compares each portfolio's one, five and ten
year average annual returns as of December 31, 2003 for each series of shares to
those of a broad measure, and in some cases to an index, of market performance.
If the period since inception of the portfolio is less than one year, the
performance shown will be the actual total return rather than an annualized
total return.
Performance information in the Bar Chart and the Performance Table reflects
all fees charged to each portfolio such as advisory fees and all portfolio
expenses. None of the portfolios charges a sales load or a surrender fee. The
performance information does not reflect fees and expenses of any variable
insurance contract or qualified plan which may use the Trust as its underlying
investment medium. If such fees and expenses had been reflected, performance
would be lower.
FEES AND EXPENSES FOR EACH PORTFOLIO
The table below describes the fees and expenses for each class of shares of
each portfolio of the Trust offered through this Prospectus. None of the
portfolios charge a sales load or surrender fee. The fees and expenses do not
reflect the fees and expenses of any variable insurance contract or qualified
plan which may use the Trust as its underlying investment medium. In the case of
variable insurance contracts, such fees and expenses are listed in the
prospectus for the variable insurance contract.
TRUST ANNUAL EXPENSES
(as a percentage of a portfolio's average net assets for the fiscal year ended
December 31, 2003)
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT
TRUST PORTFOLIO FEES 12B-1 FEES OTHER EXPENSES TOTAL TRUST ANNUAL EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
SERIES SERIES SERIES SERIES I & SERIES SERIES SERIES SERIES
I II III SERIES II III(G+) I II III(+)
- ---------------------------------------------------------------------------------------------------------------------------------
Science & Technology 0.95%(C) 0.15% 0.35% 0.50% 0.09% 0.09% 1.19% 1.39% 1.54%
- ---------------------------------------------------------------------------------------------------------------------------------
Pacific Rim 0.70% 0.15% 0.35% 0.50% 0.43% 0.43% 1.28% 1.48% 1.63%
- ---------------------------------------------------------------------------------------------------------------------------------
Health Sciences 0.95%(C) 0.15% 0.35% 0.50% 0.13% 0.14% 1.23% 1.43% 1.59%
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging Growth 0.70% 0.15% 0.35% 0.50% 1.69% 1.69% 2.54%(E) 2.74%(E) 2.89%
- ---------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth 0.85% 0.15% 0.35% 0.50% 0.09% 0.09% 1.09% 1.29% 1.44%
- ---------------------------------------------------------------------------------------------------------------------------------
Emerging Small Company 0.90% 0.15% 0.35% 0.50% 0.06% 0.06% 1.11% 1.31% 1.46%
- ---------------------------------------------------------------------------------------------------------------------------------
Small Company Blend 0.90% 0.15% 0.35% N/A 0.10% N/A 1.15% 1.35% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Small Company 0.95% 0.15% 0.35% N/A 0.12%(A) N/A 1.22% 1.42% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Dynamic Growth 0.85% 0.15% 0.35% N/A 0.09% N/A 1.09% 1.29% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Stock 0.77% 0.15% 0.35% 0.50% 0.07% 0.07% 0.99% 1.19% 1.34%
- ---------------------------------------------------------------------------------------------------------------------------------
Natural Resources 0.92% 0.15% 0.35% 0.50% 0.14% 0.14% 1.21% 1.41% 1.56%
- ---------------------------------------------------------------------------------------------------------------------------------
All Cap Growth 0.80% 0.15% 0.35% 0.50% 0.06% 0.06% 1.01% 1.21% 1.36%
- ---------------------------------------------------------------------------------------------------------------------------------
Strategic Opportunities 0.70% 0.15% 0.35% N/A 0.08% N/A 0.93% 1.13% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Services 0.79% 0.15% 0.35% 0.50% 0.11% 0.11% 1.05% 1.25% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
International Stock 0.85% 0.15% 0.35% 0.50% 0.17% 0.17% 1.17% 1.37% 1.52%
- ---------------------------------------------------------------------------------------------------------------------------------
Overseas 0.80% 0.15% 0.35% 0.50% 0.18% 0.18% 1.13% 1.33% 1.48%
- ---------------------------------------------------------------------------------------------------------------------------------
International Small Cap 0.93% 0.15% 0.35% 0.50% 0.24% 0.24% 1.32% 1.52% 1.67%
- ---------------------------------------------------------------------------------------------------------------------------------
International Value 0.81%(F) 0.15% 0.35% 0.50% 0.17% 0.17% 1.13% 1.33% 1.48%
- ---------------------------------------------------------------------------------------------------------------------------------
Quantitative Mid Cap 0.65% 0.15% 0.35% N/A 0.10% N/A 0.90% 1.10% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Mid Cap Core 0.82% 0.15% 0.35% 0.50% 0.24% 0.24% 1.21% 1.41% 1.56%
- ---------------------------------------------------------------------------------------------------------------------------------
Global 0.75%(F) 0.15% 0.35% 0.50% 0.15% 0.15% 1.05% 1.25% 1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
2
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT
TRUST PORTFOLIO FEES 12B-1 FEES OTHER EXPENSES TOTAL TRUST ANNUAL EXPENSES
- --------------------------------------------------------------------------------------------------------------------------------
SERIES SERIES SERIES SERIES I & SERIES SERIES SERIES SERIES
I II III SERIES II III(G) I II III+
- --------------------------------------------------------------------------------------------------------------------------------
Strategic Growth 0.75% 0.15% 0.35% 0.50% 0.09% 0.09% 0.99% 1.19% 1.34%
- --------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation 0.75% 0.15% 0.35% 0.50% 0.09% 0.09% 0.99% 1.19% 1.34%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Global Leaders Growth 0.61% 0.15% 0.35% N/A 0.14%(A) N/A 0.90% 1.10% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Quantitative All Cap 0.65% 0.15% 0.35% 0.50% 1.79% 1.79% 2.59%(E) 2.79%(E) 2.94%
- --------------------------------------------------------------------------------------------------------------------------------
All Cap Core 0.70% 0.15% 0.35% N/A 0.08% N/A 0.93% 1.13% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Large Cap Growth 0.75% 0.15% 0.35% N/A 0.07% N/A 0.97% 1.17% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 0.72%(C) 0.15% 0.35% 0.50% 0.05% 0.05% 0.92% 1.12% 1.27%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Large Cap 0.73% 0.15% 0.35% 0.50% 0.05% 0.05% 0.93% 1.13% 1.28%
- --------------------------------------------------------------------------------------------------------------------------------
Core Equity 0.75% 0.15% 0.35% N/A 0.12%(A) N/A 1.02% 1.22% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Strategic Value 0.75% 0.15% 0.35% 0.50% 0.14% 0.14% 1.04% 1.24% 1.39%
- --------------------------------------------------------------------------------------------------------------------------------
Classic Value 0.78% 0.15% 0.35% N/A 0.10%(A) N/A 1.03% 1.23% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Large Cap Value 0.75% 0.15% 0.35% N/A 1.96% N/A 2.86%(E) 3.06%(E) N/A
- --------------------------------------------------------------------------------------------------------------------------------
Utilities 0.75% 0.15% 0.35% 0.50% 0.41% 0.41% 1.31% 1.51% 1.66%
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate Securities 0.60% 0.15% 0.35% 0.50% 0.05% 0.06% 0.80% 1.00% 1.16%
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities 0.90% 0.15% 0.35% 0.50% 0.18% 0.18% 1.23% 1.43% 1.58%
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Value 0.90%(C) 0.15% 0.35% 0.50% 0.06% 0.06% 1.11% 1.31% 1.46%
- --------------------------------------------------------------------------------------------------------------------------------
Special Value 0.90% 0.15% 0.35% 0.50% 0.59% 0.59% 1.64%(E) 1.84%(E) 1.99%
- --------------------------------------------------------------------------------------------------------------------------------
Mid Cap Value 0.78% 0.15% 0.35% 0.50% 0.06% 0.06% 0.99% 1.19% 1.34%
- --------------------------------------------------------------------------------------------------------------------------------
Value 0.65% 0.15% 0.35% N/A 0.07% N/A 0.87% 1.07% N/A
- --------------------------------------------------------------------------------------------------------------------------------
All Cap Value 0.75% 0.15% 0.35% 0.50% 0.08% 0.08% 0.98% 1.18% 1.33%
- --------------------------------------------------------------------------------------------------------------------------------
Equity Index 0.25% N/A N/A N/A 0.25% N/A 0.50%(E) N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Fundamental Value 0.76% 0.15% 0.35% 0.50% 0.06% 0.06% 0.97% 1.17% 1.32%
- --------------------------------------------------------------------------------------------------------------------------------
Growth & Income 0.55% 0.15% 0.35% 0.50% 0.05% 0.05% 0.75% 0.95% 1.10%
- --------------------------------------------------------------------------------------------------------------------------------
Great Companies -- America 0.75% N/A 0.35% N/A 2.04% N/A N/A 3.14%(E) N/A
- --------------------------------------------------------------------------------------------------------------------------------
Quantitative Value 0.60% 0.15% 0.35% N/A 0.11%(A) N/A 0.86% 1.06% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Equity-Income 0.72%(C) 0.15% 0.35% 0.50% 0.05% 0.05% 0.92% 1.12% 1.27%
- --------------------------------------------------------------------------------------------------------------------------------
Income & Value 0.65% 0.15% 0.35% N/A 0.07% N/A 0.87% 1.07% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Global Allocation 0.75% 0.15% 0.35% N/A 0.32% N/A 1.22% 1.42% N/A
- --------------------------------------------------------------------------------------------------------------------------------
High Yield 0.61% 0.15% 0.35% 0.50% 0.06% 0.06% 0.82% 1.02% 1.17%
- --------------------------------------------------------------------------------------------------------------------------------
Strategic Bond 0.62% 0.15% 0.35% 0.50% 0.09% 0.09% 0.86% 1.06% 1.21%
- --------------------------------------------------------------------------------------------------------------------------------
Strategic Income 0.63% 0.15% 0.35% N/A 0.18%(A) N/A 0.96% 1.16% N/A
- --------------------------------------------------------------------------------------------------------------------------------
Global Bond 0.60% 0.15% 0.35% 0.50% 0.16% 0.16% 0.91% 1.11% 1.26%
- --------------------------------------------------------------------------------------------------------------------------------
Diversified Bond 0.60% 0.15% 0.35% 0.50% 0.08% 0.08% 0.83% 1.03% 1.18%
- --------------------------------------------------------------------------------------------------------------------------------
Investment Quality Bond 0.50% 0.15% 0.35% 0.50% 0.10% 0.11% 0.75% 0.95% 1.11%
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 0.60% 0.15% 0.35% 0.50% 0.07% 0.13% 0.82% 1.02% 1.23%
- --------------------------------------------------------------------------------------------------------------------------------
Real Return Bond 0.60% 0.15% 0.35% 0.50% 0.08% 0.08% 0.83% 1.03% 1.18%
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 0.51% 0.15% 0.35% 0.50% 0.07% 0.09% 0.73% 0.93% 1.10%
- --------------------------------------------------------------------------------------------------------------------------------
Money Market 0.35% 0.15% 0.35% 0.50% 0.05% 0.50% 0.55% 0.75% 1.35%
- --------------------------------------------------------------------------------------------------------------------------------
Small Cap Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93%
- --------------------------------------------------------------------------------------------------------------------------------
International Index 0.40% 0.15% 0.35% 0.50% 0.07% 0.07% 0.62%(D) 0.82%(D) 0.97%
- --------------------------------------------------------------------------------------------------------------------------------
Mid Cap Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93%
- --------------------------------------------------------------------------------------------------------------------------------
Total Stock Market Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93%
- --------------------------------------------------------------------------------------------------------------------------------
500 Index 0.38% 0.15% 0.35% 0.50% 0.04% 0.04% 0.57% 0.77% 0.92%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
3
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
TOTAL TRUST
MANAGEMENT OTHER ANNUAL
TRUST PORTFOLIO FEES 12B-1 FEES EXPENSES(B) EXPENSES(B)
- -------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 Trust -- Series I 0.06% N/A 1.07% 1.13%
Lifestyle Aggressive 1000 Trust -- Series II
- -------------------------------------------------------------------------------------------------------
Lifestyle Growth 820 Trust -- Series I 0.05% N/A 1.00% 1.05%
Lifestyle Growth 820 Trust -- Series II
- -------------------------------------------------------------------------------------------------------
Lifestyle Balanced 640 Trust -- Series I 0.05% N/A 0.94% 0.99%
Lifestyle Balanced 640 Trust -- Series II
- -------------------------------------------------------------------------------------------------------
Lifestyle Moderate 460 Trust -- Series I 0.05% N/A 0.91% 0.96%
Lifestyle Moderate 460 Trust -- Series II
- -------------------------------------------------------------------------------------------------------
Lifestyle Conservative 280 Trust -- Series I 0.06% N/A 0.85% 0.91%
Lifestyle Conservative 280 Trust -- Series II
- -------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 Trust -- Series III 0.06% 0.15% 1.07%+ 1.28%+
- -------------------------------------------------------------------------------------------------------
Lifestyle Growth 820 Trust -- Series III 0.05% 0.15% 1.00%+ 1.20%+
- -------------------------------------------------------------------------------------------------------
Lifestyle Balanced 640 Trust -- Series III 0.05% 0.15% 0.95%+ 1.15%+
- -------------------------------------------------------------------------------------------------------
Lifestyle Moderate 460 Trust -- Series III 0.05% 0.15% 0.91%+ 1.11%+
- -------------------------------------------------------------------------------------------------------
Lifestyle Conservative 280 Trust -- Series III 0.06% 0.15% 0.89% 1.10%+
- -------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES 12B-1 FEES EXPENSES ANNUAL EXPENSES
- ------------------------------------------------------------------------------------------------------
SERIES SERIES SERIES I & SERIES SERIES
I II SERIES II I II
- ------------------------------------------------------------------------------------------------------
American Growth Trust(H) 0.37% 0.60% 0.75% 0.05% 1.02% 1.17%
- ------------------------------------------------------------------------------------------------------
American International Trust(H) 0.57% 0.60% 0.75% 0.10% 1.27% 1.42%
- ------------------------------------------------------------------------------------------------------
American Blue Chip Income and Growth 0.50% 0.60% 0.75% 0.05% 1.15% 1.30%
Trust(H)
- ------------------------------------------------------------------------------------------------------
American Growth-Income Trust(H) 0.33% 0.60% 0.75% 0.04% 0.97% 1.12%
- ------------------------------------------------------------------------------------------------------
</Table>
+Commencement of operations -- September 5, 2003. Based on estimates for the
current fiscal year as operating results are for a period of less than 6 months.
(A)Based on estimates for the current fiscal year.
(B)"Other Expenses" reflects the expenses of the Underlying Portfolios as well
as the expenses of the Lifestyle Trust. The Adviser is currently paying a
portion of the expenses of each Lifestyle Trust. This voluntary expense
reimbursement may be terminated at any time. The expenses above do not reflect
this expense reimbursement.
(C)The Adviser has voluntarily agreed to waive a portion of its advisory fee for
the Science & Technology Trust, Health Sciences Trust, Small Company Value
Trust, the Blue Chip Growth Trust and the Equity-Income Trust. The waiver is
based on the combined assets of these portfolios once they exceed specified
amounts, the fee reduction is increased.
The fee reductions are applied to the advisory fees of each of the five
portfolios. This voluntary fee waiver may be terminated at any time by the
Adviser. If such advisory fee waiver were reflected, it is estimated that the
advisory fees for these portfolios would have been as follows:
<Table>
Science & Technology Trust.................................. 0.92%
Health Sciences Trust....................................... 0.93%
Small Company Value Trust................................... 0.59%
Blue Chip Growth Trust...................................... 0.70%
Equity-Income Trust......................................... 0.69%
</Table>
(D)MSS has voluntarily agreed to pay expenses of each Index Trust (excluding the
advisory fee) that exceed the following amounts: 0.050% in the case of the
International Index Trust and 500 Index Trust and 0.075% in the case of the
Small Cap
4
Index Trust, the Mid Cap Index Trust and Total Stock Market Index Trust. If such
expense reimbursement were reflected, it is estimated that "Other Expenses" and
"Total Trust Annual Expenses would be as follows:
SERIES I
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
International Index Trust........................... 0.05% 0.60%
</Table>
SERIES II
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
International Index Trust........................... 0.05% 0.80%
</Table>
SERIES III
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
International Index Trust........................... 0.05% 0.95%
</Table>
It is estimated that the expense reimbursement will not be effective during the
year end December 31, 2004 for the Small Cap Index Trust, the Mid Cap Index
Trust, the Total Stock Market Index Trust and the 500 Index Trust. The expense
reimbursement may be terminated at any time by MSS.
(E)For all portfolios except the Lifestyle Trusts, the Adviser reduces its
advisory fee or reimburses the portfolio if the total of all expenses (excluding
advisory fees, Rule 12b-1 fees, taxes, portfolio brokerage commissions,
interest, litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the portfolio's business) exceed
certain annual rates. In the case of the Emerging Growth Trust, Quantitative All
Cap Trust, Large Cap Value Trust, Special Value Trust, Equity Index Trust, and
Great Companies -- America Trust, the Adviser reimbursed the portfolio for
certain expenses for the year ended December 31, 2003. If such expense
reimbursement were reflected, it is estimated that "Other Expenses" and "Total
Trust Annual Expenses" would be:
SERIES I
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
Emerging Growth Trust............................... 0.50% 1.35%
Quantitative All Cap Trust.......................... 0.50% 1.30%
Large Cap Value Trust............................... 0.50% 1.40%
Special Value Trust................................. 0.50% 1.55%
Equity Index Trust.................................. 0.15% 0.40%
</Table>
SERIES II
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
Emerging Growth Trust............................... 0.50% 1.55%
Quantitative All Cap Trust.......................... 0.50% 1.50%
Large Cap Value Trust............................... 0.50% 1.60%
Special Value Trust................................. 0.50% 1.75%
Great Companies -- America Trust.................... 0.50% 1.60%
</Table>
These voluntary expense reimbursements may be terminated at any time.
(F)Effective December 9, 2003, due to a decrease in the subadvisory fees for the
Global Trust and the International Value Trust, the Adviser voluntarily agreed
to waive its advisory fees so that the amount retained by the Adviser after
payment of the subadvisory fees for each such portfolio does not exceed 0.35% of
the portfolio's average net assets. For the year ended December 31, 2003, the
effective annual advisory fee for the Global Trust and the International Value
Trust was 0.75% and 0.81%, respectively. Had the lower subadvisory fees and this
fee waiver been in effect for the year ended December 31, 2003, the effective
annual advisory fee would have been 0.70% for the Global Trust and 0.70% for the
International Value Trust. These advisory fee waivers may be rescinded at any
time.
5
(G)The Adviser has voluntarily agreed to reimburse certain "Other Expenses" of
Series III shares. This voluntary expense reimbursement may be terminated at any
time. The expenses reflected in the table above are absent reimbursement. If
such expense reimbursement were reflected, it is estimated that "Other Expenses"
and "Total Trust Annual Expenses" would be:
SERIES III
<Table>
<Caption>
TOTAL TRUST
OTHER EXPENSES ANNUAL EXPENSES
-------------- ---------------
Science & Technology................................ 0.06% 1.51%
Pacific Rim......................................... 0.43% 1.63%
Health Sciences..................................... 0.11% 1.56%
Emerging Growth..................................... 0.50% 1.70%
Emerging Small Company.............................. 0.06% 1.46%
Mid Cap Stock....................................... 0.07% 1.34%
Natural Resources................................... 0.14% 1.56%
Financial Services.................................. 0.11% 1.40%
International Small Cap............................. 0.16% 1.59%
Global.............................................. 0.15% 1.40%
Strategic Growth.................................... 0.09% 1.34%
Quantitative All Cap................................ 0.50% 1.65%
Blue Chip Growth.................................... 0.03% 1.25%
Utilities........................................... 0.41% 1.66%
Real Estate Securities.............................. 0.05% 1.15%
Special Value....................................... 0.50% 1.90%
Mid Cap Value....................................... 0.06% 1.34%
All Cap Value....................................... 0.08% 1.33%
Fundamental Value................................... 0.06% 1.32%
Growth & Income..................................... 0.05% 1.10%
Equity-Income....................................... 0.02% 1.24%
High Yield.......................................... 0.06% 1.17%
Strategic Bond...................................... 0.09% 1.21%
Global Bond......................................... 0.16% 1.26%
Investment Quality Bond............................. 0.10% 1.10%
Total Return........................................ 0.07% 1.17%
Real Return Bond.................................... 0.08% 1.18%
U.S. Government Securities.......................... 0.07% 1.08%
Money Market........................................ 0.05% 0.90%
Small Cap Index..................................... 0.05% 0.93%
International Index................................. 0.05% 0.95%
Mid Cap Index....................................... 0.05% 0.93%
Total Stock Market Index............................ 0.05% 0.93%
500 Index........................................... 0.04% 0.92%
Lifestyle Aggressive 1000 Trust III................. 1.07% 1.27%
Lifestyle Growth 820 Trust III...................... 1.00% 1.20%
Lifestyle Balanced 640 Trust III.................... 0.94% 1.14%
Lifestyle Moderate 460 Trust III.................... 0.91% 1.11%
Lifestyle Conservative 280 Trust III................ 0.85% 1.06%
</Table>
(H)Reflects the aggregate annual operating expenses of each portfolio and its
corresponding master fund. In the case of the American Blue Chip Income and
Growth Trust, during the year ended December 31, 2003, Capital Research and
6
Management Company (the adviser to the American Blue Chip Income and Growth
Trust) voluntarily reduced investment advisory fees to rates provided by the
amended agreement effective January 1, 2004. If such fee waiver had been
reflected, the advisory fee would be 0.48% and Total Trust Annual Expenses would
be 1.13% for Series I and 1.28% for Series II.
EXAMPLE OF EXPENSES FOR EACH PORTFOLIO
The Example is intended to help an investor compare the cost of investing
in each Portfolio with the cost of investing in other mutual funds. The Example
assumes that $10,000 is invested in the Portfolio for the times periods
indicated and then all the shares are redeemed at the end of those periods. The
Example also assumes that the investment has a 5% return each year, that the
Portfolio's operating expenses remain the same and that no voluntary expense
reimbursements are reflected. The Example does not reflect the expenses of any
variable insurance contract or qualified plan that may use the Trust as its
underlying investment medium. If such expenses were reflected, the expense
amounts indicated would be higher. Although a particular investor's actual
expenses may be higher or lower, based on these assumptions the expenses would
be:
SERIES I SHARES
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Science & Technology $121 $378 $654 $1,443
- -----------------------------------------------------------------------------------------------------------------------
Pacific Rim 130 406 702 1,545
- -----------------------------------------------------------------------------------------------------------------------
Health Sciences 125 390 676 1,489
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth 257 791 1,350 2,875
- -----------------------------------------------------------------------------------------------------------------------
Aggressive Growth 111 347 601 1,329
- -----------------------------------------------------------------------------------------------------------------------
Emerging Small Company 113 353 612 1,352
- -----------------------------------------------------------------------------------------------------------------------
Small Company Blend 117 365 633 1,398
- -----------------------------------------------------------------------------------------------------------------------
Small Company 124 387 670 1,477
- -----------------------------------------------------------------------------------------------------------------------
Dynamic Growth 111 347 601 1,329
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Stock 101 315 547 1,213
- -----------------------------------------------------------------------------------------------------------------------
Natural Resources 123 384 665 1,466
- -----------------------------------------------------------------------------------------------------------------------
All Cap Growth 103 322 558 1,236
- -----------------------------------------------------------------------------------------------------------------------
Strategic Opportunities 95 296 515 1,143
- -----------------------------------------------------------------------------------------------------------------------
Financial Services 107 334 579 1,283
- -----------------------------------------------------------------------------------------------------------------------
International Stock 119 372 644 1,420
- -----------------------------------------------------------------------------------------------------------------------
Overseas 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
International Small Cap 134 418 723 1,590
- -----------------------------------------------------------------------------------------------------------------------
International Value 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Mid Cap 92 287 498 1,108
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Core 123 384 665 1,466
- -----------------------------------------------------------------------------------------------------------------------
Global 107 334 579 1,283
- -----------------------------------------------------------------------------------------------------------------------
Strategic Growth 101 315 547 1,213
- -----------------------------------------------------------------------------------------------------------------------
Capital Appreciation 101 315 547 1,213
- -----------------------------------------------------------------------------------------------------------------------
U.S. Global Leaders Growth 92 287 498 1,108
- -----------------------------------------------------------------------------------------------------------------------
Quantitative All Cap 262 805 1,375 2,925
- -----------------------------------------------------------------------------------------------------------------------
All Cap Core 95 296 515 1,143
- -----------------------------------------------------------------------------------------------------------------------
Large Cap Growth 99 309 536 1,190
- -----------------------------------------------------------------------------------------------------------------------
</Table>
7
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Blue Chip Growth $94 $293 $509 $1,131
- -----------------------------------------------------------------------------------------------------------------------
U.S. Large Cap 95 296 515 1,143
- -----------------------------------------------------------------------------------------------------------------------
Core Equity 104 325 563 1,248
- -----------------------------------------------------------------------------------------------------------------------
Strategic Value 106 331 574 1,271
- -----------------------------------------------------------------------------------------------------------------------
Classic Value 105 328 569 1,259
- -----------------------------------------------------------------------------------------------------------------------
Large Cap Value 289 886 1,508 3,185
- -----------------------------------------------------------------------------------------------------------------------
Utilities 133 415 718 1,579
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Securities 82 255 444 990
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities 125 390 676 1,489
- -----------------------------------------------------------------------------------------------------------------------
Small Company Value 113 353 612 1,352
- -----------------------------------------------------------------------------------------------------------------------
Special Value 167 517 892 1,944
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Value 101 315 547 1,213
- -----------------------------------------------------------------------------------------------------------------------
Value 89 278 482 1,073
- -----------------------------------------------------------------------------------------------------------------------
All Cap Value 100 312 542 1,201
- -----------------------------------------------------------------------------------------------------------------------
Equity Index 51 160 280 628
- -----------------------------------------------------------------------------------------------------------------------
Fundamental Value 99 309 536 1,190
- -----------------------------------------------------------------------------------------------------------------------
Growth & Income 77 240 417 930
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Value 88 274 477 1,061
- -----------------------------------------------------------------------------------------------------------------------
Equity-Income 94 293 509 1,131
- -----------------------------------------------------------------------------------------------------------------------
Income & Value 89 278 482 1,073
- -----------------------------------------------------------------------------------------------------------------------
Global Allocation 124 387 670 1,477
- -----------------------------------------------------------------------------------------------------------------------
High Yield 84 262 455 1,014
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond 88 274 477 1,061
- -----------------------------------------------------------------------------------------------------------------------
Strategic Income 98 306 531 1,178
- -----------------------------------------------------------------------------------------------------------------------
Global Bond 93 290 504 1,120
- -----------------------------------------------------------------------------------------------------------------------
Diversified Bond 85 265 460 1,025
- -----------------------------------------------------------------------------------------------------------------------
Investment Quality Bond 77 240 417 930
- -----------------------------------------------------------------------------------------------------------------------
Total Return 84 262 455 1,014
- -----------------------------------------------------------------------------------------------------------------------
Real Return Bond 85 265 460 1,025
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 75 233 406 906
- -----------------------------------------------------------------------------------------------------------------------
Money Market 56 176 307 689
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Index 59 186 324 726
- -----------------------------------------------------------------------------------------------------------------------
International Index 63 199 346 774
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Index 59 186 324 726
- -----------------------------------------------------------------------------------------------------------------------
Total Stock Market Index 59 186 324 726
- -----------------------------------------------------------------------------------------------------------------------
500 Index 58 183 318 714
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Growth 820 107 334 579 1,283
- -----------------------------------------------------------------------------------------------------------------------
</Table>
8
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Balanced 640 $101 $315 $547 $1,213
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Moderate 460 98 306 531 1,178
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Conservative 280 93 290 504 1,120
- -----------------------------------------------------------------------------------------------------------------------
American Growth 104 325 564 1,249
- -----------------------------------------------------------------------------------------------------------------------
American International 129 403 698 1,535
- -----------------------------------------------------------------------------------------------------------------------
American Blue Chip Income and Growth 117 366 634 1,399
- -----------------------------------------------------------------------------------------------------------------------
American Growth-Income 99 309 537 1,191
- -----------------------------------------------------------------------------------------------------------------------
</Table>
SERIES II SHARES
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Science & Technology $142 $440 $761 $1,669
- -----------------------------------------------------------------------------------------------------------------------
Pacific Rim 151 468 808 1,768
- -----------------------------------------------------------------------------------------------------------------------
Health Sciences 146 452 782 1,713
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth 277 850 1,450 3,070
- -----------------------------------------------------------------------------------------------------------------------
Aggressive Growth 131 409 708 1,556
- -----------------------------------------------------------------------------------------------------------------------
Emerging Small Company 133 415 718 1,579
- -----------------------------------------------------------------------------------------------------------------------
Small Company Blend 137 428 739 1,624
- -----------------------------------------------------------------------------------------------------------------------
Small Company 145 449 776 1,702
- -----------------------------------------------------------------------------------------------------------------------
Dynamic Growth 131 409 708 1,556
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Stock 121 378 654 1,443
- -----------------------------------------------------------------------------------------------------------------------
Natural Resources 144 446 771 1,691
- -----------------------------------------------------------------------------------------------------------------------
All Cap Growth 123 384 665 1,466
- -----------------------------------------------------------------------------------------------------------------------
Strategic Opportunities 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
Financial Services 127 397 686 1,511
- -----------------------------------------------------------------------------------------------------------------------
International Stock 139 434 750 1,646
- -----------------------------------------------------------------------------------------------------------------------
Overseas 135 421 729 1,601
- -----------------------------------------------------------------------------------------------------------------------
International Small Cap 155 480 829 1,813
- -----------------------------------------------------------------------------------------------------------------------
International Value 135 421 729 1,601
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Mid Cap 112 350 606 1,340
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Core 144 446 771 1,691
- -----------------------------------------------------------------------------------------------------------------------
Global 127 397 686 1,511
- -----------------------------------------------------------------------------------------------------------------------
Strategic Growth 121 378 654 1,443
- -----------------------------------------------------------------------------------------------------------------------
Capital Appreciation 121 378 654 1,443
- -----------------------------------------------------------------------------------------------------------------------
U.S. Global Leaders Growth 112 350 606 1,340
- -----------------------------------------------------------------------------------------------------------------------
Quantitative All Cap 282 865 1,474 3,119
- -----------------------------------------------------------------------------------------------------------------------
All Cap Core 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
Large Cap Growth 119 372 644 1,420
- -----------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 114 356 617 1,363
- -----------------------------------------------------------------------------------------------------------------------
</Table>
9
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
U.S. Large Cap $115 $359 $622 $1,375
- -----------------------------------------------------------------------------------------------------------------------
Core Equity 124 387 670 1,477
- -----------------------------------------------------------------------------------------------------------------------
Strategic Value 126 393 681 1,500
- -----------------------------------------------------------------------------------------------------------------------
Classic Value 125 390 676 1,489
- -----------------------------------------------------------------------------------------------------------------------
Large Cap Value 309 945 1,606 3,374
- -----------------------------------------------------------------------------------------------------------------------
Utilities 154 477 824 1,802
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Securities 102 318 552 1,225
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities 146 452 782 1,713
- -----------------------------------------------------------------------------------------------------------------------
Small Company Value 133 415 718 1,579
- -----------------------------------------------------------------------------------------------------------------------
Special Value 187 579 995 2,159
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Value 121 378 654 1,443
- -----------------------------------------------------------------------------------------------------------------------
Value 109 340 590 1,306
- -----------------------------------------------------------------------------------------------------------------------
All Cap Value 120 375 649 1,432
- -----------------------------------------------------------------------------------------------------------------------
Fundamental Value 119 372 644 1,420
- -----------------------------------------------------------------------------------------------------------------------
Growth & Income 97 303 525 1,166
- -----------------------------------------------------------------------------------------------------------------------
Great Companies -- America 317 969 1,645 3,448
- -----------------------------------------------------------------------------------------------------------------------
Quantitative Value 108 337 585 1,294
- -----------------------------------------------------------------------------------------------------------------------
Equity-Income 114 356 617 1,363
- -----------------------------------------------------------------------------------------------------------------------
Income & Value 109 340 590 1,306
- -----------------------------------------------------------------------------------------------------------------------
Global Allocation 145 449 776 1,702
- -----------------------------------------------------------------------------------------------------------------------
High Yield 104 325 563 1,248
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond 108 337 585 1,294
- -----------------------------------------------------------------------------------------------------------------------
Strategic Income 118 368 638 1,409
- -----------------------------------------------------------------------------------------------------------------------
Global Bond 113 353 612 1,352
- -----------------------------------------------------------------------------------------------------------------------
Diversified Bond 105 328 569 1,259
- -----------------------------------------------------------------------------------------------------------------------
Investment Quality Bond 97 303 525 1,166
- -----------------------------------------------------------------------------------------------------------------------
Total Return 104 325 563 1,248
- -----------------------------------------------------------------------------------------------------------------------
Real Return Bond 105 328 569 1,259
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 95 296 515 1,143
- -----------------------------------------------------------------------------------------------------------------------
Money Market 77 240 417 930
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Index 80 249 433 966
- -----------------------------------------------------------------------------------------------------------------------
International Index 84 262 455 1,014
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Index 80 249 433 966
- -----------------------------------------------------------------------------------------------------------------------
Total Stock Market Index 80 249 433 966
- -----------------------------------------------------------------------------------------------------------------------
500 Index 79 246 428 954
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 115 359 622 1,375
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Growth 820 107 334 579 1,283
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Balanced 640 101 315 547 1,213
- -----------------------------------------------------------------------------------------------------------------------
</Table>
10
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Moderate 460 $98 $306 $531 $1,178
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Conservative 280 93 290 504 1,120
- -----------------------------------------------------------------------------------------------------------------------
American Growth 119 372 644 1,422
- -----------------------------------------------------------------------------------------------------------------------
American International 145 450 777 1,703
- -----------------------------------------------------------------------------------------------------------------------
American Blue Chip Income and Growth 133 413 714 1,569
- -----------------------------------------------------------------------------------------------------------------------
American Growth-Income 114 356 618 1,365
- -----------------------------------------------------------------------------------------------------------------------
</Table>
SERIES III SHARES
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Science & Technology $157 $486 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Pacific Rim 166 514 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Health Sciences 162 502 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth 292 895 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Aggressive Growth 147 456 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Emerging Small Company 149 462 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Stock 136 425 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Natural Resources 159 493 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
All Cap Growth 138 431 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Financial Services 143 443 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
International Stock 155 480 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Overseas 151 468 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
International Small Cap 170 526 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
International Value 151 468 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Core 159 493 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Global 143 443 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Strategic Growth 136 425 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Capital Appreciation 136 425 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Quantitative All Cap 297 910 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Blue Chip Growth 129 403 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
U.S. Large Cap 130 406 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Strategic Value 142 440 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Utilities 169 523 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Securities 118 368 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Opportunities 161 499 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Small Company Value 149 462 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Special Value 202 624 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Value 136 425 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
All Cap Value 135 421 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</Table>
11
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------------------------------------------------------------------
Fundamental Value $134 $418 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Growth & Income 112 350 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Equity-Income 129 403 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
High Yield 119 372 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond 123 384 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Global Bond 128 400 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Diversified Bond 120 375 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Investment Quality Bond 113 353 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Total Return 125 390 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Real Return Bond 120 375 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 112 350 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Money Market 137 428 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Small Cap Index 95 296 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
International Index 99 309 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Mid Cap Index 95 296 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Total Stock Market Index 95 296 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
500 Index 94 293 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 130 406 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Growth 820 122 381 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Balanced 640 117 365 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Moderate 460 113 353 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Lifestyle Conservative 260 112 350 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</Table>
12
SCIENCE & TECHNOLOGY TRUST
SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price")
INVESTMENT OBJECTIVE: To seek long-term growth of capital. Current income is
incidental to the portfolio's objective.
INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks of
science and technology companies.
The Science & Technology Trust invests, under normal market conditions, at
least 80% of its net assets (plus any borrowings for investment purposes) in the
common stocks of companies expected to benefit from the development,
advancement, and/or use of science and technology. Some industries likely to be
represented in the portfolio include:
<Table>
-- Computers including hardware, software -- life sciences and health care, including
and electronic components pharmaceuticals, medical devices, and
-- telecommunications biotechnology
-- media and information services -- chemicals and synthetic materials
-- environmental services -- defense and aerospace
-- e-commerce
</Table>
While most of the portfolio's assets are invested in U.S. common stocks,
the Science & Technology Trust may also purchase other types of securities,
including U.S. and non U.S. dollar denominated foreign securities, convertible
stocks and bonds, and warrants in keeping with its objectives.
Stock selection for the portfolio generally reflects a growth approach
based on an assessment of a company's fundamental prospects for above-average
earnings, rather than on a company's size. As a result, portfolio holdings can
range from securities of small companies developing new technologies to
securities of blue chip firms with established track records of developing and
marketing technological advances. The portfolio may also invest in companies
that are expected to benefit from technological advances even if they are not
directly involved in research and development. The portfolio may invest in
suitable technology companies through initial public offerings.
The portfolio holds a certain portion of its assets in money market
reserves which can consist of shares of the T. Rowe Price Reserve Investment
Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
The portfolio may sell securities for a variety of reasons such as to
secure gains, limit losses or redeploy assets into more promising opportunities.
Use of Hedging and Other Strategic Transactions
The Science & Technology Trust may also engage in a variety of investment
practices, such as buying and selling futures and options. The portfolio may
invest up to 10% of its total assets in hybrid instruments. Hybrid instruments
are a type of high-risk derivative which can combine the characteristics of
securities, futures and options.
In pursuing its investment objective, the portfolio's management has the
discretion to purchase some securities that do not meet its normal investment
criteria, as described above, when it perceives an unusual opportunity for gain.
These special situations might arise when the portfolio's management believes a
security could increase in value for a variety of reasons including a change in
management, an extraordinary corporate event, or a temporary imbalance in the
supply of or demand for the securities.
The Science & Technology Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions" below.
Principal Risks of Investing in this Portfolio
-- The portfolio is subject to the risks of industry or sector investing
since it invests primarily in science and technology sectors, including
Internet-related investments. The products and services of companies in
the science and technology sectors may not prove commercially successful
or may become obsolete quickly, and a portfolio of these securities may be
riskier or more volatile in price than one that invests in more market
sectors. The risks of industry or sector investing, and the specific risks
of investing in Internet-related, telecommunications, and health sciences
companies, are set forth below under "Risks of Investing in Certain Types
of Securities."
-- The portfolio invests extensively in equity securities, including
securities of small or unseasoned companies (less than 3 years operating
experience) and newly public companies. The portfolio may also invest up
to 30% of its assets in foreign securities. The risks of investing in
these securities are set forth below under "Risks of Investing in Certain
Types of Securities."
13
-- Due to the portfolio's emphasis on science and technology sectors,
including Internet-related investments, an investment in the portfolio
should be considered extremely risky even as compared to other portfolios
that invest primarily in the securities of small companies. Investing in
the portfolio alone cannot provide a balanced investment program.
Performance(A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 47.1% (for the
quarter ended 12/1998) and the lowest return was -40.30% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
10.7% 43.3% 95.5% -34.1% -41.3% -40.8% 50.4%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Science & Technology Trust Series I 50.39% -7.19% 1.27% 01/01/1997
Series II 50.46% N/A -5.00% 01/28/2002
Series III N/A N/A 7.73% 09/05/2003
Lipper Science and Technology Avg. Funds
Classification(A) 51.98% -2.73% 5.97%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Since June 1, 2000, a portion of the Science & Technology Trust expenses was
reimbursed. If such expenses had not been reimbursed, returns would be lower.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(D)As of January 16, 2002, Michael Sola took over management responsibilities of
the Science & Technology Trust.
SUBADVISER AND PORTFOLIO MANAGERS
T. Rowe Price manages the Science & Technology Trust. T. Rowe Price, whose
address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937
by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded
financial services holding company, owns 100% of the stock of T. Rowe Price. As
of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion
for over eight million individual and institutional investor accounts.
The portfolio is managed by an investment advisory committee chaired by:
-- Michael F. Sola (since January 2002). Mr. Sola, who joined T. Rowe
Price in 1995 as a technology analyst, is a Vice President of T. Rowe
Price and has been managing investments since 1997. He is a Chartered
Financial Analyst.
The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing the
portfolio's investment program.
PACIFIC RIM TRUST
(Formerly, Pacific Rim Emerging Markets Trust)
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.)")
INVESTMENT OBJECTIVE: To achieve long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks and
equity-related securities of companies in countries
located in the Pacific Rim region. Current income from
dividends and interest will not be an important
consideration in the selection of portfolio securities.
The countries of the Pacific Rim region are:
-- Australia
-- China
-- India
-- Indonesia
-- Hong Kong
-- Japan
-- Malaysia
-- New Zealand
-- Pakistan
-- Philippines
-- Singapore
-- South Korea
-- Taiwan
-- Thailand
14
The Pacific Rim Trust, under normal conditions, invests at least 80% of its
net assets (plus any borrowings for investment purposes) in common stocks and
equity-related securities of established, larger-capitalization non-U.S.
companies located in the Pacific Rim region that have attractive long-term
prospects for growth of capital. Equity-related securities in which the
portfolio may invest include: (i) preferred stocks, (ii) warrants and (iii)
securities convertible into or exchangeable for common stocks. The Portfolio may
also invest up to 20% of its assets in countries outside the Pacific Rim region.
MFC Global (U.S.A.)'s decision to invest in a particular country or
particular region will be based upon its evaluation of political, economic and
market trends in the country or region and throughout the world. MFC Global
(U.S.A.) will shift investments among countries and the world's capital markets
in accordance with its ongoing analyses of trends and developments affecting
such markets and securities.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Pacific Rim Trust may invest all or a portion of
its assets in non-convertible, fixed income securities and cash and cash
equivalents. These investments may be denominated in either U.S. or non-U.S.
dollars. These securities may include debt of corporations, foreign governments
and supranational organizations. To the extent the portfolio is in a defensive
position, the ability to achieve its investment objective will be limited.
Use of Hedging and Other Strategic Transactions
The Pacific Rim Trust may also purchase and sell the following
equity-related financial instruments:
-- exchange-listed call and put options on equity indices,
-- over-the-counter ("OTC") and exchange-listed equity index futures,
-- OTC and exchange-listed call and put options on currencies in the
portfolio, and
-- OTC foreign currency futures contracts on currencies in the
portfolio.
A call option gives the holder the right to buy shares of the underlying
security at a fixed price before a specified date in the future. A put option
gives the holder the right to sell a specified number of shares of the
underlying security at a particular price within a specified time period. See
"Hedging and Other Strategic Transactions" for further information on these
investment strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities and may invest up to
100% of its assets in foreign securities, including securities of
companies in emerging market countries. The risks of investing in these
securities are set forth below under "Risks of Investing in Certain Types
of Securities."
-- Since the portfolio concentrates its investments in the Pacific Rim
region, the portfolio will be affected by economic and political events in
this area.
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 24.41% (for the
quarter ended 12/1998) and the lowest return was -26.12% (for the quarter ended
12/1997).
- --------------------------------------------------------------------------------
<Table>
11.3% 9.8% -34.1% -4.6% 62.9% -24.4% -18.6% -12.5% 40.4%
1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Pacific Rim Trust
Series I 40.37% 4.30% -1.15% 10/04/1994
Series II 40.17% N/A 11.44% 01/28/2002
Series III N/A N/A 10.75% 09/05/2003
MSCI Pacific Index(B) 38.98% 2.12% -2.60%
MSCI AC Pacific Free Index(B, C) 36.51% 2.18% -2.88%
</Table>
15
(A)On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust.
Performance presented for this portfolio is based upon the performance of the
respective predecessor Manulife Series Fund, Inc. portfolio for periods prior to
December 31, 1996.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)The MSCI AC Pacific Free Index was added in 2003 to move accurately reflect
the investment objective of the portfolio.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) manages the Pacific Rim Trust. MFC is a corporation
subject to the laws of Canada. Its principal business at the present time is to
provide investment management services to the portfolios of the Trust for which
it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary
of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the
holding company of The Manufacturers Life Insurance Company and its
subsidiaries, including Elliott & Page Limited and Manulife Fund Direct (Hong
Kong) Limited, collectively known as Manulife Financial. The address of MFC
Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The portfolio managers are:
-- Samantha Ho (since June, 2000). Ms. Ho joined MFC Global in 2000.
Prior to joining MFC Global, she was a senior portfolio manager at
SEB Investment Management where she served from 1994 to 2000. Prior
to that, she was an investment analyst at Jardine Fleming. She is a
Chartered Financial Analyst.
-- Seton Lor (since June, 2000). Mr. Lor joined MFC Global in 2000.
Prior to joining MFC Global , he was Director of Balanced Investments
at AXA Investment Managers in Hong Kong where he served from 1996 to
2000.
HEALTH SCIENCES TRUST
SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of its net assets (plus any borrowings for
investment purposes) in common stocks of companies
engaged in the research, development, production, or
distribution of products or services related to health
care, medicine, or the life sciences (collectively termed
"health sciences").
While the portfolio may invest in companies of any size, the majority of
its assets are expected to be invested in large-and mid-capitalization
companies.
T. Rowe Price's portfolio managers divide the health sciences sector into
four main areas: pharmaceuticals, health care services companies, products and
devices providers, and biotechnology firms. Their allocation among these four
areas will vary depending on the relative potential within each area and the
outlook for the overall health sciences sector. While most assets will be
invested in U.S. common stocks, the portfolio may purchase other securities,
including foreign securities, futures, and options in keeping with its
objective.
In managing the Health Sciences Trust, T. Rowe Price uses a fundamental,
bottom-up analysis that seeks to identify high quality companies and the most
compelling investment opportunities. In general, the portfolio will follow a
growth investment strategy, seeking companies whose earnings are expected to
grow faster than inflation and the economy in general. When stock valuations
seem unusually high, however, a "value" approach, which gives preference to
seemingly undervalued companies, may be emphasized.
The Health Sciences Trust may invest in futures and options, which could
subject the portfolio to additional volatility and losses.
The Health Sciences Trust may invest up to 35% of its total assets in
foreign securities (including emerging market securities) and may have exposure
to foreign currencies through its investment in these securities, its direct
holdings of foreign currencies or through its use of foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date.
In pursuing its investment objective, the portfolio's management has the
discretion to purchase some securities that do not meet its normal investment
criteria, as described above, when it perceives an unusual opportunity for gain.
These special situations might arise when the portfolio's management believes a
security could increase in value for a variety of reasons
16
including a change in management, an extraordinary corporate event, or a
temporary imbalance in the supply of or demand for the securities.
The Health Sciences Trust holds a certain portion of its assets in money
market reserves which can consist of shares of the T. Rowe Price Reserve
Investment Fund (or any other internal T. Rowe Price money market fund) as well
as U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less.
The portfolio may sell securities for a variety of reasons such as to
secure gains, limit losses or redeploy assets into more promising opportunities.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio concentrates its investments (invests more than 25% of its
total assets) in securities of companies in the health sciences sector, a
comparatively narrow segment of the economy, and therefore may experience
greater volatility than funds investing in a broader range of industries.
The portfolio may invest a considerable portion of assets in the same
business, such as pharmaceuticals, or in related businesses such as
hospital management and managed care. Moreover, companies in this segment
are subject to the additional risks of increased competition within the
health care industry, changes in legislation or government regulations,
reductions in government funding, product liability or other litigation
and the obsolescence of popular products. The risks of investing in the
health sciences sector are set forth below under "Risks of Investing in
Certain Types of Securities". Investing in the portfolio alone cannot
provide a balanced investment program.
-- The portfolio may invest a significant portion of its assets in
derivatives, such as futures and options. The risks of investing in these
instruments are set forth under "Hedging and Other Strategic
Transactions."
-- The portfolio may invest in foreign securities (including emerging market
securities). The risks of investing in these securities are set forth
below under "Risks of Investing in Certain Types of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risk of Investing in Certain Types of Securities."
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 18.13% (for the
quarter ended 6/2003) and the lowest return was -15.78% (for the quarter ended
6/2002).
- --------------------------------------------------------------------------------
<Table>
-27.2% 36.2%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Health Sciences Trust
Series I 36.22% 2.69% 04/30/2001
Series II 35.91% 1.95% 01/28/2002
Series III N/A 5.93% 09/05/2003
Lipper Health/Biotechnology Avg. Funds
Classification(A) 28.99% -2.79%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
T. Rowe Price manages the Health Sciences Trust. T. Rowe Price, whose
address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937
by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded
17
financial services holding company, owns 100% of the stock of T. Rowe Price. As
of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion
for over eight million individual and institutional investor accounts.
The portfolio is managed by an investment advisory committee chaired by:
-- Kris H. Jenner, M.D., D. Phil (since May, 2001). Dr. Jenner, who
joined T. Rowe Price in 1997, is a Vice-President of T. Rowe Price
and has been managing investments since 1998. From 1995 -- 1997 he
was a post-doctoral fellow at the Brigham and Women's Hospital,
Harvard Medical School.
-- The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing
the portfolio's investment program.
EMERGING GROWTH TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited. ("MFC GLOBAL
(U.S.A.)")
INVESTMENT OBJECTIVE: To seek superior long-term rates of return through
capital appreciation.
INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by
investing, under normal circumstances, primarily in high
quality securities (those with a proven track record of
performance and/or growth) and convertible instruments of
small-cap U.S. companies.
Stocks of publicly traded companies -- and mutual funds that hold these
stocks -- can be classified by the companies' market value, or capitalization.
Market capitalization is defined according to Morningstar U.S. as follows: Based
on a universe of the 5000 largest stocks in the U.S., the top 5% of the universe
are large cap, the next 15% mid cap, and the bottom 80% are classified as small
cap.
The portfolio will focus on purchasing high quality securities of small-cap
U.S. companies whose growth prospects are better than average because they have
a unique product or a technology/service edge or an expanding market share.
MFC Global (U.S.A.) focuses on a universe of approximately 1000 leading
emerging growth stocks (those with growth prospects that are expected to be
better than average) derived through a host of considerations including: size,
fundamental analysis, balance sheet and market share analysis, company and
industry growth prospectus and management interviews. The management team then
uses a proprietary, quantitative system to rank stocks based on a variety of
financial measures. Top-ranked stocks meeting both fundamental and quantitative
criteria will be considered for the portfolio.
The Emerging Growth Trust may invest to a limited extent in foreign
securities and may have exposure to foreign currencies through its investment in
these securities, its direct holdings of foreign currencies or through its use
of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of a foreign currency at a future date. Investments in foreign
securities may include depositary receipts.
The Emerging Growth Trust may also invest to a limited extent in fixed
income securities including money market instruments.
The Trust may invest in or use the following derivatives for hedging
purposes in a manner consistent with the investment objectives of the Trust and
as permitted by applicable securities legislation: S&P Depository Receipts and
Russell 2000 Growth i shares (or similar types of exchange traded funds). Such
use would include the hedging of significant cash flows into or out of the
Trust.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities, especially small and
mid-cap securities. The risks of investing in equity securities are set
forth below under "Risks of Investing in Certain Types of Securities."
-- The portfolio may invest to a limited extent in foreign securities. The
risks of investing in these securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest to a limited extent in fixed income securities.
The risks of investing in these securities are set forth below under
"Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in May,
2003.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its
principal business at the present time is to provide investment management
services to the portfolios listed above. MFC Global (U.S.A.) is an indirect
wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in
Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance
Company and its subsidiaries, including Elliott & Page Limited and Manulife
Asset
18
Management (Hong Kong) Limited (formerly Manulife Funds Direct (Hong Kong)
Limited), collectively known as Manulife Financial. The address of MFC Global
(U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The Portfolio Managers are:
-- Robert Lutzko (since May, 2003). Mr. Lutzko joined MFC Global in
September of 1995. He is Vice President and Senior Portfolio Manager
of U.S. Equities at MFC Global. Prior to joining MFC Global in 1995,
Mr. Lutzko was Portfolio Manager U.S. Equities, managing both U.S.
Large-Cap and Small-Cap investments at the Workers Compensation
Board's Investment Management division. Mr. Lutzko holds the
Chartered Financial Analyst designation and is a graduate of Sheridan
College (Computer Science).
-- Luciano Orengo (since May, 2003). Mr. Orengo joined MFC Global in
June of 2001. He is a Senior Research Analyst of U.S. Equities at MFC
Global. Prior to joining MFC Global in 2001, Mr. Orengo was a
Research Analyst at the Canadian Shareowner Association. Luciano
holds the Chartered Financial Analyst designation and has his Masters
in Economics from McGill University.
-- Niall Brown (since May, 2003). Mr. Brown joined MFC Global
Investment Management Limited in January of 2003. He is a Portfolio
Manager of Small Cap and Global Equities at MFC Global. Prior to
joining MFC Global in 2003, Mr. Brown was Vice President of U.S.
Equities at TD Asset Management. Niall holds the Chartered Financial
Analyst designation and has his Honours BA in Political Science
(International Relations) from the University of Toronto.
AGGRESSIVE GROWTH TRUST
SUBADVISER: A I M Capital Management, Inc. ("AIM")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests principally in common stocks, of
companies which in the opinion of AIM are expected to
achieve earnings growth over time at a rate in excess of
15% per year.
The portfolio's assets are principally invested in common stocks of
companies which in the opinion of AIM are expected to achieve earnings growth
over time at a rate in excess of 15% per year. Many of these companies are in
the small and medium-sized growth categories. AIM's portfolio managers focus on
companies that are likely to benefit from new or innovative products, services
or processes that should enhance such companies' prospects for future growth in
earnings. As a result of this policy, the market prices of many of the
securities purchased and held by the portfolio may fluctuate widely. Any income
received from securities held by the portfolio will be incidental.
Aggressive Growth Trust's portfolio is primarily comprised of securities of
two basic categories of companies:
-- "core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have
excellent prospects for outstanding future growth, and
-- "earnings acceleration" companies which AIM believes are currently
enjoying a dramatic increase in profits.
The Aggressive Growth Trust's strategy does not preclude investment in
large, seasoned companies which in the judgment of AIM possess superior
potential returns similar to companies with formative growth profiles. The
portfolio may also invest in established smaller companies (under $500 million
in market capitalization) which offer exceptional value based upon substantially
above average earnings growth potential relative to market value.
The Aggressive Growth Trust may invest in non-equity securities, such as
corporate bonds or U.S. Government obligations during periods when, in the
opinion of AIM, prevailing market, financial, or economic conditions warrant, as
well as when such holdings are advisable in light of a change in circumstances
of a particular company or within a particular industry.
The portfolio may invest up to 25% of its total assets in foreign
securities. American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs") and other securities representing underlying securities of
foreign issuers are treated as foreign securities and included in this 25%
limitation.
Use of Hedging and Other Strategic Transactions
Aggressive Growth Trust may:
-- purchase and sell stock index futures contracts,
-- purchase options on stock index futures as a hedge against changes in
market conditions,
-- purchase and sell futures contracts and purchase related options in
order to hedge the value of its portfolio against changes in market
conditions,
-- write (sell) covered call options (up to 25% of the value of the
portfolio's net assets),
-- enter into foreign exchange transactions to hedge against possible
variations in foreign exchange rates between currencies of countries
in which the portfolio is invested including: the direct purchase or
sale of foreign currency, the purchase or sale of options on futures
contracts with respect to foreign currency, the purchase or sale of
forward contracts, exchange traded futures contracts and options of
futures contracts.
19
See "Hedging and Other Strategic Transactions" for further information on
these investment strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities with emphasis on
medium and small sized growth companies. The risks of investing in equity
securities and small and medium sized companies are set forth below under
"Risks of Investing in Certain Types of Securities."
-- The portfolio may invest up to 25% of its assets in foreign securities.
The risks of investing in foreign securities are set forth below under
"Risks of Investing in Certain Types of Securities." Since the portfolio
will only invest at most 25% of its assets in foreign securities, the
risks associated with foreign securities will not affect the portfolio as
much as a portfolio that invests more of its assets in foreign securities.
-- The portfolio may invest in internet related companies. The risks of
investing in these companies is set forth below under "Risks of Investing
in Certain Types of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 32.25% (for the
quarter ended 12/1998) and the lowest return was -24.73% (for the quarter ended
9/1998).
- --------------------------------------------------------------------------------
<Table>
0% 4.3% 33% 3% -26% -25% 33.9%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Aggressive Growth Trust
Series I 33.87% 0.37% 0.87% 01/01/1997
Series II 33.57% N/A 1.40% 01/28/2002
Series III N/A N/A 6.58% 09/05/2003
Russell 2000 Growth Index(B) 48.54% 0.86% 2.56%
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISERS AND PORTFOLIO MANAGERS
AIM Capital Management, Inc. ("AIM") manages the Aggressive Growth Trust.
AIM is an indirect wholly owned subsidiary of A I M Management Group Inc., whose
principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas
77046. A I M Management Group, Inc. founded in 1976, is a holding company
engaged in the financial services business and is a wholly owned subsidiary of
AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are an independent investment
management group engaged in institutional investment management and retail
mutual fund businesses in the United States, Europe and the Pacific Region.
AIM, and/or its affiliates is the investment adviser for mutual funds,
separately managed accounts, such as corporate and municipal pension plans,
charitable institutions and private individuals.
The portfolio is managed by the following two portfolios managers:
-- Karl Farmer (since May, 2003). Mr. Farmer has been associated with
AIM and/or its affiliates since 1998. Prior to 1998, Mr. Farmer was a
pension actuary with William M. Merer, Inc., focusing on retirement
plans and other benefit programs.
-- Jay K. Rushkin (lead manager) (since December, 2000). Mr. Rushin is
portfolio manager for several of the AIM funds including the AIM
Aggressive Growth Fund. He has been associated with AIM and/or its
affiliates since 1998. From 1996 to 1998, he was an associate equity
analyst for Prudential Securities.
20
EMERGING SMALL COMPANY TRUST
SUBADVISER: Franklin Advisers, Inc. ("Franklin")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of the portfolio's total assets in common stock
equity securities of companies with market
capitalizations that approximately match the range of
capitalizations of the Russell 2000 Growth Index.
The Emerging Small Company Trust invests, under normal market conditions,
at least 80% of its net assets (plus any borrowings for investment purposes) in
common stock equity securities of companies with market capitalizations that
approximately match the range of capitalization of the Russell 2000 Growth Index
("small cap stocks") at the time of purchase. The securities of small cap
companies are traded on the New York Stock Exchange, the American Stock Exchange
and in the over-the-counter market. Equity securities also include preferred
stocks, securities convertible into common stocks, and warrants for the purchase
of common stocks.
The portfolio may also invest up to 20% (measured at the time of purchase)
of its total assets in any combination of the following if the investment
presents a favorable investment opportunity consistent with the portfolio's
investment goal:
-- equity securities of larger capitalization companies which Franklin
believes have the potential for strong growth potential, and
-- relatively well-known, larger companies in mature industries which
Franklin believes have the potential for capital appreciation.
Franklin will choose small cap companies that it believes are positioned
for above average growth in revenues, earnings or assets. Franklin looks for
companies it believes have distinct and sustainable competitive advantages, such
as a particular marketing or product niche, proven technology and industry
leadership. Franklin uses a disciplined "bottom-up" approach to stock selection,
blending fundamental and quantitative analysis. Franklin diversifies the
portfolio's assets across many industries, and from time to time may invest
substantially in certain sectors, including electronic technology and technology
services. Small companies often pay no dividends, and current income is not a
factor in the selection of stocks.
The portfolio may invest up to 5% of its total assets in corporate debt
securities that Franklin believes have the potential for capital appreciation as
a result of improvements in the creditworthiness of the issuer. Debt securities
may include bonds, notes and debentures. The portfolio may invest in both rated
and unrated debt securities. The portfolio will only purchase securities rated
"B" or above by Moody's or Standard & Poor's (or comparable unrated securities).
The portfolio will not invest more than 5% of its total assets in non-investment
grade securities (rated lower than "BBB" by Standard & Poor's or "Baa" by
Moody's or comparable unrated securities). The receipt of income from debt
securities is incidental to the portfolio's investment goal of capital growth.
The portfolio may invest up to 25% of its total assets in foreign
securities, including those of developing or undeveloped markets, and sponsored
or unsponsored American, European and Global Depositary Receipts. The portfolio
currently intends to limit its investments in foreign securities to 10% of its
total assets.
The portfolio may also invest up to 10% of its total assets in real estate
investment trusts ("REITS"). See "Real Estate Securities Trust" below for a
discussion of REITS and the risks of investing in these trusts.
Use of Hedging and Other Strategic Transactions
The Emerging Small Company Trust may:
-- write (sell) covered put and call options and may buy put and call
options on securities and securities indices, and
-- buy and sell futures and options on futures with respect to
securities, indices and currencies.
See "Hedging and Other Strategic Transactions" for further information on
these investment strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in small cap equity securities. The risks
of investing in equity securities and the risks of investing in small cap
(small and medium size companies) securities are set forth below under
"Risks of Investing in Certain Types of Securities."
-- The portfolio may invest in internet related companies. The risks of
investing in these companies is set forth below under "Risks of Investing
in Certain Types of Securities."
21
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 59.08% (for the
quarter ended 12/1999) and the lowest return was -26.19% (for the quarter ended
3/2001).
- --------------------------------------------------------------------------------
<Table>
17.1% 0.1% 73.5% -4.3% -22.2% -29.2% 39.7%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Emerging Small Company
Trust
Series I 39.73% 5.02% 5.94% 01/01/1997
Series II 39.48% N/A 1.21% 01/28/2002
Series III N/A N/A 7.60% 09/05/2003
Russell 2000 Growth Index(B) 48.54% 0.86% 2.56%
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISERS AND PORTFOLIO MANAGERS
Franklin Advisers, Inc. manages the Emerging Small Company Trust. Franklin
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc., referred to
as Franklin(R) Templeton(R) Investments, -- located at One Franklin Parkway, San
Mateo, California, 94403. Through its subsidiaries, Franklin(R) Templeton(R)
provides global and domestic investment management, shareholder, custody and
distribution services to the Franklin, Templeton, Mutual Series and Fiduciary
products, high net-worth and institutional accounts, as well as separate account
management services.
Today, Franklin Templeton is a major force in the mutual fund industry.
The portfolio is managed by the following portfolio management team:
-- Michael McCarthy (since May, 1999). Mr. McCarthy joined Franklin
Templeton Investments in 1992 and is currently a Senior Vice
President and Director of Equity Research. He is a Chartered
Financial Analyst (CFA).
-- Edward Jamieson (since May, 1999). Mr. Jamieson joined Franklin
Templeton Investments in 1987 and is currently an Executive Vice
President and Chief Investment Officer of the Franklin Equity Group.
-- Aidan O'Connell (since May, 1999). Mr. O'Connell joined Franklin
Templeton Investments in 1998 and is currently a Vice President.
Before joining Franklin Templeton, Mr. O'Connell was a research
associate and a corporate finance associate at Hambrecht & Quist. He
is a Chartered Financial Analysist (CFA).
SMALL COMPANY BLEND TRUST
SUBADVISER: Capital Guardian Trust Company ("CGTC")
INVESTMENT OBJECTIVE: To seek long-term growth of capital and income.
Generation of current dividends will be a secondary
consideration.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in equity and equity-related securities of
companies with market capitalizations that approximately
match the range of capitalization of the Russell 2000
Index at the time of purchase.
The Small Company Blend Trust invests at least 80% its net assets (plus any
borrowings for investment purposes), under normal market conditions, in equity
and equity-related securities of companies with market capitalizations that
approximately match the range of capitalization of the Russell 2000 Index
("small cap stocks") at the time of purchase. The market capitalizations within
the Russell 2000 Index will vary but as of June 30, 2002, were $1.3 billion and
below. In
22
determining market capitalization, CGTC may consider the value of shares which
are publicly traded. The portfolio may hold ADRs and other U.S. registered
securities of foreign issuers which are denominated in U.S. dollars.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Small Company Blend Trust may invest all or a
portion of its assets in bonds, cash and cash equivalents. To the extent the
portfolio is in a defensive position, the ability to achieve its investment
objective will be limited.
Use of Hedging and Other Strategic Transactions
The Small Company Blend Trust is currently authorized to use all of the
investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the portfolio.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities, especially
securities of small or unseasoned companies (less than 3 years operating
experience). The risks of investing in equity securities and small or
unseasoned companies are set forth below under "Risks of Investing in
Certain Types of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 26.94% (for the
quarter ended 12/2001) and the lowest return was -25.88% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-19.7% -2.3% -25.6% 39.7%
2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Small Company Blend Trust
Series I 39.71% 1.02% 05/01/1999
Series II 39.63% 3.38% 01/28/2002
Russell 2000 Index(A) 47.25% 6.97%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
SUBADVISERS AND PORTFOLIO MANAGERS
CGTC manages the Small Company Blend Trust. CGTC is located at 333 South
Hope Street, Los Angeles, California 90071. CGTC is a wholly-owned subsidiary of
Capital Group International, Inc. which itself is a wholly-owned subsidiary of
The Capital Group Companies, Inc. CGTC has been providing investment management
services since 1968 and manages approximately $146 billion of assets as of
December 31, 2003.
The portfolio is managed by the following portfolio managers. In addition,
a portion of the portfolio is managed by individual members of the research
team.
-- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice
President and portfolio manager for CGTC. He joined the Capital Group
organization in 1987.
-- James S. Kang (since May, 1999). Mr. Kang is Senior Vice President
for Capital International Research Inc. He joined the Capital Group
organization in 1988.
-- Robert G. Kirby (since May, 1999). Mr. Kirby is a Senior Partner of
The Capital Group Partners L.P. and Chairman Emeritus and a portfolio
manager of CGTC. He joined the Capital Group organization in 1965.
-- Karen A. Miller (since May, 2000). Ms. Miller is a Senior Vice
President of Capital International Research, Inc. She joined the
Capital Group organization in 1990.
23
-- Lawrence R. Solomon (since May, 2000). Mr. Solomon is a Senior Vice
President of Capital International Research, Inc. He also serves as a
Director of Capital Management Services, Inc. Mr. Solomon joined the
Capital Group organization in 1985.
-- Kathryn M. Peters (since September, 2002). Ms. Peters is a Vice
President and U.S. small-capitalization Portfolio Manager for Capital
International Research, Inc. She also serves as a Director of Capital
Management Services, Inc. Ms. Peters joined the Capital Group
organization in 2001. Prior to joining Capital Guardian, Ms. Peters
was employed as a portfolio manager at Montgomery Asset Management,
LLC.
SMALL COMPANY TRUST
SUBADVISER: American Century Investment Management, Inc. ("American Century")
INVESTMENT OBJECTIVE: To seek long-term capital growth.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in equity securities of smaller-capitalization
U.S. companies. The subadviser uses quantitative,
computer-driven models to construct the portfolio of
stocks for the Small Company Trust.
Under normal market conditions, at least 80% of the portfolio will consist
of stocks of companies that, at the time of investment, have market
capitalization not greater than that of the largest company in the S&P Small Cap
600 Index. (The market cap range of this index as of December 31, 2003 was $60
million to $4.87 billion.) If the companies in which the portfolio invests are
successful, these companies may grow into medium- and larger-sized companies. In
addition, if the portfolio managers determine that the availability of
small-sized companies in which to invest is not adequate to meet the portfolio's
investment needs, the subadviser may invest up to 20% of the portfolio's assets
in medium- and larger-sized companies.
The portfolio's investment strategy utilizes quantitative management
techniques in a two-step process that draws heavily on computer technology. In
the first step, the subadviser ranks stocks, primarily smaller companies, from
most attractive to least attractive. This is determined by using a computer
model that combines measures of a stock's value, as well as measure of its
growth potential. To measure value, the subadviser uses ratios of stock
price-to-book value and stock price-to-cash flow, among others. To measure
growth, the subadviser uses the rate of growth of a company's earnings and
changes in its earnings estimates, as well as other factors.
In the second step, the subadviser uses a technique called portfolio
optimization. In portfolio optimization, the subadviser uses a computer to build
a portfolio of stocks from the ranking described above that the subadviser
believes will provide the optimal balance between risk and expected return. The
goal is to create a portfolio that provides better returns than its benchmark
without taking on significant additional risk.
The subadviser does not attempt to time the market. Instead, under normal
market conditions, the subadviser intends to keep the portfolio fully invested
in stocks regardless of the movement of the stock prices generally. When the
subadvisers believes it is prudent, the portfolio may invest a portion of its
assets in convertible debt securities, equity-equivalent securities, foreign
securities, short-term securities, nonleverage futures contracts and other
similar securities. Futures contracts, a type of derivative security, can help
the portfolio's cash assets remain liquid while performing more like stocks.
The portfolio may invest in IPOs (initial public offerings). For the risks
associated with IPOs, see "Additional Information about the Portfolios'
Investments -- Risks of Investing in Certain Types of Securities -- IPOs." The
portfolio is authorized to use each of the investment strategies listed under
"Additional Investment Policies" including, without limitation, investing in
U.S. government securities and entering into short sales. The portfolio may also
purchase securities of other investment companies, including exchange traded
funds, and cash and cash equivalents.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities, especially
securities of small or unseasoned companies (less than 3 years operating
experience). The risks of investing in equity securities and small or
unseasoned companies are set forth below under "Risks of Investing in
Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
The portfolio's performance may be affected by investments in initial
public offerings (IPOs). The impact of IPOs on a portfolio's performance depends
on the strength of the IPO market and the size of the portfolio. IPOs may have
less impact on a fund's performance as its assets grow.
24
SUBADVISERS AND PORTFOLIO MANAGERS
American Century manages the Small Company Trust. American Century is
located at 4500 Main Street, Kansas City, Missouri 64111. American Century is
controlled by James E. Stowers Jr., the Chairman of American Century Companies,
Inc. American Century has been providing investment management services since
1958.
The portfolio is managed by the following portfolio managers.
-- John Schniedwind (since May, 2004). Mr. Schniedwind is the Chief
Investment Officer -- Quantitative Equity for American Century. He
joined American Century in 1982. He has degrees from Purdue
University and an MBA in finance from the University of
California -- Berkeley. He is a CFA charterholder.
-- William Martin (since May, 2004). Mr. Martin is a Senior Vice
President and Senior Portfolio Manager for American Century. He
joined American Century in 1989. He has a degree from the University
of Illinois. He is a CFA charterholder.
-- Wilhelmine von Turk (since May, 2004). Ms. von Turk is a Portfolio
Manager for American Century. She joined American Century in 2000.
She has a bachelor of arts from Wellesley College and a Ph.D in
statistics from the University of California -- Berkeley. She is a
CFA charterholder.
-- Thomas P. Vaiana (since May, 2004). Mr. Vaiana is a Portfolio
Manager for American Century. He joined American Century in 1997. He
has a bachelor's degree in business finance from California State
University.
-- Zili Zhang (since May, 2004). Mr. Zhang is a Vice President and
Portfolio Manager/Director of Quantitative Research for American
Century. He joined American Century in 1997. He has a bachelor's
degree in physics from University of Science and Technology of China
and a Ph.D in theoretical physics from the University of Texas at
Austin.
DYNAMIC GROWTH TRUST
SUBADVISER: Deutsche Asset Management, Inc. ("DeAM")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests primarily in stocks and other
equity securities of medium-sized U.S. companies with
strong growth potential.
Under normal circumstances, the portfolio invests the majority of its
assets in the stock and other securities with equity characteristics of U.S.
companies with market capitalizations, at the time of purchase, within the
market capitalization range of the S&P Mid-Cap 400 Index. DeAM believes these
companies contain the greatest concentration of businesses with significant
growth prospects.
DeAM focuses on individual security selection rather than industry
selection. DeAM uses an active process which combines financial analysis with
company visits to evaluate management and strategies.
The portfolio may invest in convertible securities when it is more
advantageous than investing in a company's common stock. The portfolio may also
invest up to 20% of its assets in stocks and other securities of companies based
outside the U.S. Under normal conditions this tactic will not comprise a major
element of its strategy.
Investment Process. Company research lies at the heart of DeAM's
investment process. DeAM uses a "bottom-up" approach to picking securities. This
approach focuses on individual stock selection rather than industry selection.
-- DeAM focuses on undervalued stocks with fast-growing earnings and
superior near-to-intermediate term performance potential.
-- DeAM emphasizes individual selection of medium-sized stocks across
all economic sectors, early in their growth cycles and with the
potential to be the blue chips of the future.
-- DeAM generally seeks companies with leading or dominant position in
their niche markets, a high rate of return on invested capital and
the ability to finance a major part of future growth from internal
sources.
-- DeAM screens within the market capitalization range of the S&P
Mid-Cap 400 Index for medium-sized companies with growth and
profitability.
Temporary Defensive Position. The portfolio may from time to time adopt a
temporary defensive position in response to extraordinary adverse political,
economic or stock market events. DeAM may invest up to 100% of the portfolio's
assets in the common stock of larger companies, in fixed-income securities, or
short-term money market securities. To the extent DeAM adopts such a position
and over the course of its duration, the portfolio may not meet its goal of
long-term capital growth.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities including those of
small companies. The risks of investing in equity securities and small
companies are set forth below under "Risks of Investing in Certain Types
of Securities."
25
-- The portfolio may invest in foreign securities. The risks of investing in
foreign securities are set forth below under "Risks of Investing in
Certain Types of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risk of Investing in Certain Types of Securities."
-- The portfolio may invest in internet related companies. The risks of
investing in these companies is set forth below under "Risks of Investing
in Certain Types of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 16.05% (for the
quarter ended 6/2003) and the lowest return was -32.20% (for the quarter ended
12/2000).
- --------------------------------------------------------------------------------
<Table>
-40.2% -28.4% 29.0%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Dynamic Growth Trust
Series I 29.03% -24.73% 05/01/2000
Series II 29.12% -0.12% 01/28/2002
Russell Midcap Growth Index(A) 42.71% -10.44%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
(C)As of November 25, 2002, DeAM took over management responsibilities of the
Dynamic Growth Trust.
SUBADVISER AND PORTFOLIO MANAGERS
DeAM located at 280 Park Avenue, New York, New York 10017, is an indirect
wholly-owned subsidiary of Deutsche Bank AG, an international commercial and
investment banking group. Deutsche Bank AG is a major banking institution that
is engaged in a wide range of financial services, including investment
management, mutual fund, retail, private and commercial banking, investment
banking and insurance.
DeAM provides a full range of investment advisory services to retail and
institutional clients.
The Portfolio Manager is:
-- Audrey M. T. Jones, CFA. Managing Director, Deutsche Asset
Management, and Lead Manager of the portfolio.
- Joined the investment advisor in 1986.
- Portfolio manager with a primary focus on the credit sensitive,
communication services, energy, process industries and transportation
sectors.
- 30 years of investment industry experience.
- BBA from Pace University Lubin School of Business.
MID CAP STOCK TRUST
SUBADVISER: Wellington Management Company, LLP ("Wellington Management")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities of
mid-sized companies with significant capital appreciation
potential.
Wellington Management seeks to achieve the Trust's objective by investing,
under normal market conditions, at least 80% of the portfolio's net assets (plus
any borrowings for investment purposes) in equity securities of medium-sized
companies with significant capital appreciation potential. The Trust tends to
invest in companies whose capitalization is similar to the market capitalization
of companies in the Russell Mid Cap Index.
26
Wellington Management's investment approach while based primarily on
proprietary fundamental analysis, may also be shaped by secular and industry
themes. Fundamental analysis involves the assessment of a company through such
factors as its business environment, management, balance sheet, income
statement, anticipated earnings, revenues and other related measures of value.
In analyzing companies for investment, Wellington Management looks for, among
other things, a strong balance sheet, strong earnings growth, attractive
industry dynamics, strong competitive advantages (e.g., great management teams),
and attractive relative value within the context of a security's primary trading
market. Securities are sold when the investment has achieved its intended
purpose, or because it is no longer considered attractive. The Mid Cap Stock
Trust may invest up to 10% of its assets in foreign securities.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- To the extent that the portfolio emphasizes a mid-capitalization growth
style, the portfolio may underperform in markets that favor other styles.
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 20.74% (for the
quarter ended 12/2001) and the lowest return was -23.64% (for the quarter ended
3/2001).
- --------------------------------------------------------------------------------
<Table>
-4.0% -11.0% -22.6% 42.3%
2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Mid Cap Stock Trust
Series I 42.33% -1.10% 05/01/1999
Series II 41.97% 5.69% 01/28/2002
Series III N/A 10.42% 09/05/2003
Russell Midcap Growth Index(A) 42.71% 0.46%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Wellington Management Company, LLP, a Massachusetts limited liability
partnership, is a professional investment counseling firm with its principal
business offices located at 75 State Street, Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided investment
services to investment companies, employee benefit plans, endowments,
foundations and other institutions since 1928. The managing partners of
Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R.
Ryan.
The Portfolio Manager is:
-- Michael Carmen (since April, 2000). Mr. Carmen, Senior Vice
President of Wellington Management, joined Wellington Management in
1999 as an equity portfolio manager. Prior to joining Wellington
Management, Mr. Carmen was an equity portfolio manager at Kobrick
Funds (1997-1999), State Street Research and Management (1992-1996,
1997) and Montgomery Asset Management (1996). He is a Chartered
Financial Analyst.
27
NATURAL RESOURCES TRUST
SUBADVISER: Wellington Management Company, LLP ("Wellington Management")
INVESTMENT OBJECTIVE: To seek long-term total return.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in equity and equity-related securities of
natural resource-related companies worldwide.
Under normal market conditions, the portfolio will invest at least 80% of
its net assets (plus any borrowings for investment purposes) in equity and
equity-related securities of natural resource-related companies worldwide.
Natural resource-related companies include companies that own or develop energy,
metals, forest products and other natural resources, or supply goods and
services to such companies. The portfolio seeks to invest in companies that are
expected to benefit from rising demand for natural resources and natural
resource-based products and services. The portfolio invests in four major areas:
1) energy, 2) metals and mining, 3) forest products and 4) other natural
resource-based companies which are described below.
Energy. The energy sector includes companies engaged in exploration,
extraction, servicing, processing, distribution and transportation of oil,
natural gas and other energy sources.
Metals and Mining. The metals and mining sector includes companies engaged
in exploration, mining, processing, fabrication, marketing or distribution of
precious and non-precious metals and minerals.
Forest Products. The forest products sector includes timber, pulp and
paper product companies.
Other Natural Resources-Based Companies. The other natural resources area
consists of companies engaged in producing, processing and distributing
agricultural products, fertilizer, and miscellaneous raw materials.
The portfolio's "normal" allocation across the natural resources
sub-sectors is approximately:
-- 60% -- Energy and energy related
-- 30% -- Metals and mining
-- 10% -- Forest products, miscellaneous commodities companies, and
non-ferrous metals.
The "normal" sub-sector allocation reflects Wellington Management's view on
availability and relative attractiveness of investment opportunities within the
natural resources sector. The portfolio's sector allocation might differ
significantly from this "normal" allocation at any specific point in time.
Wellington Management uses a value-based approach to invest in a broad
range of natural resources sectors. Wellington Management utilizes a moderate
rotation among sectors in conjunction with bottom-up stock selection. Under
normal market conditions, the portfolio is fully invested.
Natural resources companies often operate in countries that are different
from the country in which their securities trade. Country allocation is
primarily a result of the sector and security selection; however, a key element
of Wellington Management's analysis is understanding the economic and political
dynamics of each of these countries. The portfolio may invest without limitation
in foreign securities. The portfolio utilizes currency hedging to protect the
value of the portfolio's assets when Wellington Management deems it advisable to
do so.
Wellington Management utilizes fundamental research to identify companies
with the best growth prospects and relative values. A large number of companies
worldwide in the relevant sub-sectors are monitored and stocks are added or
deleted from the portfolio on the basis of relative attractiveness. Wellington
Management uses a variety of tools such as income statement and balance sheet
analysis, cash flow projections and asset value calculations to analyze
companies. Particularly in the oil and gas industry, specific accounting issues
play an important role.
Benchmark. The custom natural resources benchmark will consist of: 60%
MSCI World Energy Sources and Equipment & Services, 30% MSCI World Metals and
Mining and 10% MSCI World Forest Products & Paper.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity and equity-related securities.
The risks of investing in equity securities are set forth below under
"Risks of Investing in Certain Types of Securities."
-- The portfolio invests in natural resource related companies which involves
special risks. For example, these companies may be affected by
international political and economic developments, energy conservation,
success of exploration projects, tax and other government regulations.
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio is nondiversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risks of Investing in Certain Types of Securities."
28
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Wellington Management Company, LLP, a Massachusetts limited liability
partnership, is a professional investment counseling firm with its principal
business offices located at 75 State Street, Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided investment
services to investment companies, employee benefit plans, endowments,
foundations and other institutions since 1928. The managing partners of
Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R.
Ryan.
The Portfolio Manager is:
-- James A. Bevilacqua (since May, 2003). Mr. Bevilacqua, Senior Vice
President and Equity Portfolio Manager of Wellington Management,
joined the firm in 1994. Mr. Bevilacqua is responsible for managing
energy and natural resource portfolios for institutional investors
worldwide. Jim received both a BS (1988) and an MS (1989) in
Aeronautics and Astronautics from the Massachusetts Institute of
Technology, and an MBA from Stanford Graduate School of Business
(1994).
ALL CAP GROWTH TRUST
SUBADVISER: A I M Capital Management, Inc. ("AIM")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The portfolio seeks to achieve this investment objective
by investing its assets, under normal market conditions,
principally in common stocks of companies that the
portfolio managers believe likely to benefit from new or
innovative products, services or processes as well as
those that have experienced above-average, long-term
growth in earnings and have excellent prospects for
future growth. Any income received from securities held
by the portfolio will be incidental.
The All Cap Growth Trust's portfolio is primarily comprised of securities
of two basic categories of companies:
-- "core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have
excellent prospects for outstanding future growth, and
-- "earnings acceleration" companies which AIM believes are currently
enjoying a dramatic increase in profits.
The All Cap Growth Trust may also purchase the common stocks of foreign
companies. It is not anticipated, however, that foreign securities will
constitute more than 20% of the value of the portfolio. American Depository
Receipts ("ADRs") and European Depositary Receipts ("EDRs") and other securities
representing underlying securities of foreign issuers are treated as foreign
securities and included in this 20% limitation.
Use of Hedging and Other Strategic Transactions
The All Cap Growth Trust may:
-- purchase and sell stock index futures contracts,
-- purchase options on stock index futures as a hedge against changes in
market conditions,
-- purchase and sell futures contracts and purchase related options in
order to hedge the value of its portfolio against changes in market
conditions,
-- write (sell) covered call options (up to 25% of the value of the
portfolio's net assets),
-- foreign exchange transactions to hedge against possible variations in
foreign exchange rates between currencies of countries in which the
portfolio is invested including: the direct purchase of sale of
foreign currency, the purchase or sale of options on futures contract
with respect to foreign currency, the purchase or sale of forward
contracts, exchange traded futures contracts and options of futures
contracts.
See "Hedging and Other Strategic Transactions" for further information on
these investment strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest up to 20% of its assets in foreign securities.
The risks of investing in foreign securities are set forth below under
"Risks of Investing in Certain Types of Securities." Since the portfolio
will only invest at most 20% of its assets in foreign securities, the
risks associated with foreign securities will not affect the portfolio as
much as a portfolio that invests more of its assets in foreign securities.
29
The portfolio may invest in internet related companies. The risks of
investing in these companies is set forth below under "Risks of Investing in
Certain Types of Securities."
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 36.09% (for the
quarter ended 12/1999) and the lowest return was -23.20% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
15.3% 28.3% 44.7% -10.8% -23.8% -24.4% 29.2%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
All Cap Growth Trust
Series I 29.24% -0.79% 5.50% 03/04/1996
Series II 28.99% N/A -0.43% 01/28/2002
Series III N/A N/A 6.90% 09/05/2003
Russell 3000 Growth Index(B) 30.97% -4.69% 6.06%
Combined Index(B, C) 30.97% -3.41% 3.91%
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)The Combined Index is a blend of the Russell Mid Cap Growth Index since
inception until November 30, 1999, and the performance of the Russell 3000
Growth Index from December 1, 1999 and thereafter. The Combined Index was
prepared by the adviser using Ibbotson Associates Software and Data. The Russell
3000 Growth Index was added to reflect a change in investment policy effective
December 1, 1999. The Combined Index was added to provide a more accurate
comparison of performance.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
A I M Capital Management, Inc., ("AIM"). AIM manages the All Cap Growth
Trust. AIM is an indirect wholly owned subsidiary of AIM Management Group Inc.,
whose principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas
77046. AIM Management Group, Inc. founded in 1976, is a holding company engaged
in the financial services business and is a wholly owned subsidiary of AMVESCAP
PLC. AMVESCAP PLC and its subsidiaries are an independent investment management
group engaged in institutional investment management and retail mutual fund
businesses in the United States, Europe and the Pacific Region.
AIM, and/or its affiliates is the investment adviser for mutual funds,
separately managed accounts, such as corporate and municipal pension plans,
charitable institutions and private individuals.
The Portfolio Managers are:
-- Christian A. Costanzo (since May, 2003). Ms. Costanzo has been
associated with AIM/and or its affiliates since 1995.
-- Robert J. Lloyd (since May, 2003). Mr. Lloyd has been associated
with AIM/and or its affiliates since 2000. From 1997 to 2000, he was
a trader for American Electric Power.
-- Bryan A. Unterhalter (since August, 2003). Mr. Unterhalter has been
associated with AIM/and or its affiliates since 1997. Mr. Unerhlater
began his investment career in 1995 as an equity trader with First
Interstate Bank.
-- Kenneth A. Zschappel (since May, 1999). Mr. Zschappel is assistant
vice president and senior portfolio manager of AIM. He is involved in
managing several of the AIM funds, including the AIM Aggressive
Growth Fund and the AIM Constellation Fund. Mr. Zschappel has been
associated with AIM and/or its affiliates since 1990.
30
STRATEGIC OPPORTUNITIES TRUST
SUBADVISER: Fidelity Management & Research Company ("FMR")
INVESTMENT OBJECTIVE: To seek growth of capital. Although current income is a
secondary objective, growth of income may accompany
growth of capital.
INVESTMENT STRATEGIES: The portfolio normally invests primarily in common
stocks. Investments may include securities of domestic
and foreign issuers, and growth or value stocks or a
combination of both.
FMR normally invests the portfolio's assets primarily in common stocks.
FMR may invest the portfolio's assets in securities of foreign issuers in
addition to securities of domestic issuers.
FMR is not constrained by any particular investment style. At any given
time, FMR may tend to buy "growth" stocks or "value" stocks, or a combination of
both types. In buying and selling securities for the portfolio, FMR relies on
fundamental analysis of each issuer and its potential for success in light of
its current financial condition, its industry position, and economic and market
conditions. Factors considered include growth potential, earnings estimates, and
management.
FMR may use various techniques, such as buying and selling futures
contracts and exchange traded funds, to increase or decrease the portfolio's
exposure to changing security prices or other factors that affect security
values. If FMR's strategies do not work as intended, the portfolio may not
achieve its objective.
Temporary Defensive Investing
The portfolio reserves the right to invest without limitation in preferred
stocks and investment-grade debt instruments for temporary, defensive purposes.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may also invest in foreign securities. The risks of
investing in foreign securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 27.76% (for the
quarter ended 3/1987) and the lowest return was -27.33% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-0.5% 42.8% 20.1% 19.3% 9.4% 27.8% -6.4% -15.3% -38.8% 25.8%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Strategic Opportunities Trust
Series I 25.84% -4.82% 5.69% N/A 06/18/1985
Series II 25.61% N/A N/A -10.34% 01/28/2002
S&P 500(A) 28.70% -0.57% 11.06% N/A
Combined Index(B) 28.70% 3.14% 10.01% N/A
</Table>
(A)Effective November 1, 2002, the portfolio's performance is compared against
the Standard & Poor's 500 (S&P 500) Index, rather than the Russell 3000 Index,
due to changes in the portfolio's investment policies which resulted in a change
to the portfolio's benchmark.
(B)The Combined Index represents the performance of the Russell Midcap Index
from inception to April 30, 2001 and the Russell 3000 Index from May 1, 2001
through October 2002, and the performance of the S&P 500 Index thereafter. The
Combined Index was prepared by the Advisor using Ibbotson Associates Software
and Data.
(C)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
(D)Current subadviser assignment became effective December 13, 1991.
31
SUBADVISER AND PORTFOLIO MANAGERS
Fidelity Management & Research Company ("FMR") has served as the
portfolio's subadviser since May 1, 2001 when it assumed responsibility from
Fidelity Management Trust Company as subadviser to the portfolio listed above.
FMR Corp., organized in 1972, is the ultimate parent company of FMR. As of
December 31, 2003, FMR and its affiliate, FMR Co., Inc, had approximately $799
billion in discretionary assets under management. The address of FMR Corp. is 82
Devonshire Street, Boston, Massachusetts 02109.
Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for
the portfolio. FMRC will be primarily responsible for choosing investments for
the portfolio. FMRC is a wholly-owned subsidiary of FMR.
The Portfolio Manager is:
-- Jason Weiner (since April, 2003). Mr. Weiner is vice president and
portfolio manager for FMRC. Since joining FMR in 1991 and FMRC in
2001, Mr. Weiner has worked as a research analyst and manager.
FINANCIAL SERVICES TRUST
SUBADVISER: Davis Advisors ("Davis")
INVESTMENT OBJECTIVE: To seek growth of capital.
INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks of
financial services companies. During normal market
conditions, at least 80% of the portfolio's net assets
(plus any borrowings for investment purposes) are
invested in companies that are principally engaged in
financial services. A company is "principally engaged" in
financial services if it owns financial services-related
assets constituting at least 50% of the value of its
total assets, or if at least 50% of its revenues are
derived from its provision of financial services.
Companies in the financial services industry include commercial banks,
industrial banks, savings institutions, finance companies, diversified financial
services companies, investment banking firms, securities brokerage houses,
investment advisory companies, leasing companies, insurance companies and
companies providing similar services. The portfolio may also invest in other
equity securities and in foreign and fixed income securities.
Davis uses the Davis investment philosophy in managing the Financial
Services Trust's portfolio. The Davis investment philosophy stresses a
back-to-basics approach, using extensive research to select common stocks of
quality overlooked growth companies at value prices and holding such securities
for the long-term. Davis looks for banking and financial services companies with
sustainable growth rates selling at modest price-earnings multiples that it
believes will expand as other investors recognize the company's true worth.
Davis believes that if a sustainable growth rate is combined with a gradually
expanding multiple, these rates compound and can generate above-average returns.
Davis searches for companies possessing several of the following characteristics
that it believes foster sustainable long-term growth, minimize risk and enhance
the potential for superior long-term returns:
<Table>
-- First-class management -- Proven record as an acquirer
-- Management ownership -- Strong balance sheet
-- Strong returns on capital -- Competitive products or services
-- Lean expense structure -- Successful international operations
-- Dominant or growing market share in a -- Innovation
growing market
</Table>
The portfolio may engage in active and frequent trading to achieve its
principal investment strategies which will increase transaction costs.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Financial Services Trust may place any portion of
its assets in:
-- money market instruments (which include commercial paper,
certificates of deposit, bankers' acceptances and other obligations
of domestic and foreign banks, repurchase agreements, nonconvertible
debt securities and short term obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities);
-- securities of other investment companies (or companies exempted under
Section 3(c)(7) of the 1940 Act) that primarily invest in temporary
defensive investments, subject to limitations under the 1940 Act.;
and
-- cash.
When the portfolio is in a defensive position or awaiting investment of its
assets, the ability to achieve its investment objective will be limited.
32
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio concentrates its investments in securities of companies
engaged in the financial services industries, a comparatively narrow
segment of the economy, and may therefore experience greater volatility
than funds investing in a broader range of industries. Moreover, a
portfolio which concentrates its investments in a particular sector is
particularly susceptible to the impact of market, economic, regulatory and
other factors affecting that sector. The risks of investing in the banking
and financial services industries are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 20.96% (for the
quarter ended 06/2003) and the lowest return was -15.36% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-17.9% 33.6%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Financial Services Trust
Series I 33.58% 0.78% 04/30/2001
Series II 33.40% 5.48% 01/28/2002
Series III N/A 12.85% 09/05/2003
Lipper Financial Services Avg. Funds Classification(A) 32.35% 5.62%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Davis Advisors ("Davis") was organized in 1969 and serves as the investment
adviser for all of the Davis Funds, other mutual funds and other institutional
clients. The sole general partner of Davis is Davis Investments, LLC, which is
controlled by Christopher C. Davis. Davis is located at 2949 East Elvira Road,
Suite 101, Tucson, Arizona 85706.
The Portfolio Managers are:
-- Christopher C. Davis (since May, 2001). Mr. Davis, Chairman and
Chief Executive Officer of Davis and a director and Chief Executive
Officer, president or vice president of each of the Davis Funds, is
co-portfolio manager of the Fundamental Value Trust and the Financial
Services Trust. He has served as a portfolio manager with Davis since
1995.
-- Kenneth Charles Feinberg (since May, 2001). Mr. Feinberg is
co-portfolio manager of the Fundamental Value Trust and the Financial
Services Trust. Since joining Davis in 1992, he has co-managed other
equity funds advised by Davis and has also served as a research
analyst.
INTERNATIONAL STOCK TRUST
SUBADVISER: Deutsche Asset Management Investment Services Ltd ("DeAMIS")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: Under normal market conditions, the portfolio invests at
least 80% of its net assets (plus any borrowing for
investment purposes) in common stocks. The portfolio
primarily invests in the countries that make up the MSCI
EAFE Index.
Under normal market conditions, the International Stock Trust invests at
least 80% of its net assets (plus any borrowings for investment purposes) in
common stocks. The portfolio primarily invests in the countries that make up the
33
MSCI EAFE Index. The MSCI EAFE Index tracks stocks in Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. At least 50% of the portfolio's assets will
be invested in securities that are represented in the MSCI EAFE Index. However,
the portfolio may invest up to 50% of its total assets in non-Index securities
of companies located in the countries that make up the Index.
The MSCI EAFE Index has a median market capitalization of over $2.8
billion. Under normal market conditions, the portfolio invests in securities of
issuers with a minimum market capitalization of $500 million.
Strategy. DeAMIS seeks to identify a focused list of approximately 30 to
40 companies that offer, in DeAMIS's opinion, the greatest upside potential on a
rolling 12 month view. DeAMIS uses an entirely bottom-up approach, with no
active allocation between countries, regions or industries.
Investment Process. DeAMIS begins with a broad universe of equity
securities of issuers located in the countries that make up the MSCI EAFE Index.
The universe includes all securities in the Index and a large number of
securities not included in the Index but whose issuers are located in the
countries that make up the Index.
Research is conducted by 15 global sector research teams in addition to 5
local research teams. These analysts are based in DeAMIS's worldwide offices but
are connected by a systematic valuation approach, encapsulated in CFROI
(cashflow return on investment). Focusing on CFROI enables DeAMIS to attempt to
remove the distortions found in traditional accounting methods and enables the
analyst to focus on the true worth of the company. Teams of analysts identify
those companies with high and sustainable return on capital and long-term
prospects for growth. The most important part of our investment process is the
company meeting schedule.
Each global sector analyst ranks their stocks relative to their own sector.
Stocks are ranked on a relative expected return and the level of conviction.
Based on fundamental research, DeAMIS sets a target price objective (DeAMIS's
opinion of the intrinsic value of the security) for each security and rank the
securities based on these target price objectives. DeAMIS applies a strict buy
and sell strategy. The top 30 to 40 stocks in the ranking are purchased for the
portfolio. Stocks are sold when they meet their target price objectives or when
DeAMIS revised price objectives downward. In implementing this strategy, the
portfolio may experience a high portfolio turnover rate.
Other Investments. The portfolio may also invest up to 20% of its assets
in cash equivalents, U.S. investments grade fixed income securities and U.S.
stocks and other equity securities.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
The portfolio is currently authorized to use all of the various investment
strategies referred to under "Hedging and Other Strategic Transactions."
TEMPORARY DEFENSIVE INVESTING
DeAMIS may from time to time adopt a temporary defensive position in
response to extraordinary adverse political, economic or stock market events.
DeAMIS could place up to 100% of the portfolio's asset in U.S. or
foreign-government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent DeAMIS might
adopt such a position and over the course of its duration, the portfolio may not
meet its goal of capital appreciation.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in foreign equity securities including
securities of companies in emerging markets. This and other risks of
investing in foreign securities and equity securities are set forth below
under "Risks of Investing in Certain Types of Securities." Because the
portfolio may invest in foreign securities in emerging markets, an
investment in the portfolio will be riskier than a portfolio that only
invests in developed foreign countries. To the extent the portfolio uses
futures and options, it is exposed to additional volatility and potential
losses.
Performance (A,B,C,D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
34
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 23.58% (for the
quarter ended 12/1999) and the lowest return was -22.22% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
1.4% 14.9% 29.7% -16.6% -21.5% -21.7% 30.3%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
International Stock Trust Series I 30.27% -2.83% 0.13% 01/01/1997
Series II 30.26% N/A -0.72% 01/28/2002
Series III N/A N/A 15.08% 09/05/2003
MSCI EAFE Index(B) 39.17% 0.26% 3.17%
</Table>
(A)From June 1, 2000 until November 25, 2002, a portion of the International
Stock Trust expenses were reimbursed. If such expenses had not been reimbursed,
returns would be lower.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(D)Effective November 25, 2002, DeAMIS became the subadviser to the
International Stock Trust. Performance reflects results prior to this change.
SUBADVISER AND PORTFOLIO MANAGERS
DeAMIS located at One Appold Street, London, England, is an indirect
wholly-owned subsidiary of Deutsche Bank AG which is described above.
DeAMIS provides a full range of investment advisory services to retail and
institutional clients and as of September 30, 2002 had total assets under
management of approximately $6 billion.
The portfolio managers are:
-- Alexander Tedder. Managing Director, Deutsche Asset Management, and
Lead Manager of the portfolio.
- Joined the investment advisor in 1994. Prior to that, was a European
analyst and representative for Schroders.
- 13 years of investment industry experience.
- Fluent in German, French, Italian and Spanish.
- Masters in Economics and Business Administration from Freiburg
University.
-- Marc Slenderbroek, Director, Deutsche Asset Management, and
Co-Manager of the portfolio.
- Portfolio manager for EAFE Equities; London.
- Joined Deutsche Investment Management Americas Inc. (formerly Zurich
Scudder Investments, Inc.) in 1994 after five years of experience as
equity analyst at Kleinwort Benson Securities and at Enskilda
Securities.
- Fluent in English, Dutch, German, Swedish and Norwegian.
- MA from University of Leiden, Netherlands.
-- Clare Gray, Director, Deutsche Asset Management and Co-Manager of the
portfolio.
- Joined the investment advisor in 1993.
- Ten years of investment industry experience.
- Chartered Financial Analyst.
- BS, Cornell University.
-- Stuart Kirk, Associate Director, Deutsche Asset Management, and
Co-Manager of the portfolio.
- Joined the investment advisor in 1995.
- Seven years of investment industry experience.
- Asia-Pacific analyst.
- MA from Cambridge University.
35
OVERSEAS TRUST
SUBADVISER: Fidelity Management & Research Company ("FMR")
INVESTMENT OBJECTIVE: To seek growth of capital.
INVESTMENT STRATEGIES: The portfolio normally invests at least 80% of its net
assets in non-U.S. securities (primarily common stocks).
FMR relies on fundamental analysis of each issuer and may
also invest across different countries and regions.
FMR normally invests at least 80% of the portfolio's assets in non-U.S.
securities. FMR normally invests the portfolio's assets primarily in common
stocks.
The portfolio normally diversifies its investments across different
countries and regions. In allocating the portfolio's investments across
countries and regions, FMR will consider the size of the market in each country
and region relative to the size of the international market as a whole.
In buying and selling securities for the portfolio, FMR relies on
fundamental analysis of each issuer and its potential for success in light of
its current financial condition, its industry position, and economic and market
conditions. Factors include growth potential, earnings estimates, and
management.
FMR may use various techniques, such as buying and selling futures
contracts and exchange traded funds, to increase or decrease the portfolio's
exposure to changing security prices or other factors that affect security
values. If FMR's strategies do not work as intended, the portfolio may not
achieve its objective.
Temporary Defensive Investing
The portfolio reserves the right to invest without limitation in preferred
stocks and investment-grade debt instruments for temporary, defensive purposes.
Country or Geographic Region
FMR considers non-U.S. securities to include investments that are tied to a
particular country or region outside the U.S. FMR considers a number of factors
to determine whether an investment is tied to a particular country or region
including: the source of government guarantees (if any); the primary trading
market; the issuer's domicile, sources of revenue, and location of assets;
whether the investment is included in an index representative of a particular
country or region; and whether the investment is exposed to the economic
fortunes and risks of a particular country or region.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in foreign equity securities. The risks of
investing in equity securities and in foreign securities are set forth
below under "Risks of Investing in Certain Types of Securities."
Performance(A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 25.75% (for the
quarter ended 12/1999) and the lowest return was -21.38% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
7% 12.6% -0.1% 8% 40.5% -18.7% -21.1% -21.4% 43.8%
1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Overseas Trust
Series I 43.83% 0.36% 3.18% 01/09/1995
Series II 43.71% N/A 8.54% 01/28/2002
Series III N/A N/A 16.14% 09/05/2003
MSCI EAFE Index(B) 39.17% 0.26% 4.42%
</Table>
36
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
FMR has served as the portfolio's subadviser since May 1, 2001 when it
assumed responsibility from Fidelity Management Trust Company as subadviser to
the portfolio listed above. FMR Corp., organized in 1972, is the ultimate parent
company of FMR. As of December 31, 2003, FMR and its affiliate, FMR Co., Inc,
had approximately $799 billion in discretionary assets under management. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for
the portfolio listed above. FMRC will be primarily responsible for choosing
investments for the portfolio. FMRC is a wholly-owned subsidiary of FMR.
The Portfolio Manager is:
-- Richard R. Mace, Jr. (since May, 1999). Mr. Mace joined FMR in 1987,
FMRC in 2001 and has worked as an analyst and manager. Mr. Mace also
manages Fidelity Overseas and Advisor Overseas Fund.
INTERNATIONAL SMALL CAP TRUST
SUBADVISER: Templeton Investment Counsel, LLC ("Templeton")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The Portfolio invests primarily in the common stock of
smaller companies outside the U.S.
Under normal market conditions, the portfolio will invest at least 80% of
its net assets (plus any borrowings for investment purposes) in securities
issued by foreign companies which have total stock market capitalizations or
annual revenues of $2 billion or less ("small company securities").
The portfolio may invest in small company securities in emerging markets.
In some emerging markets, the Portfolio may invest in companies that qualify as
smaller companies but that still are among the largest in the market. The
Portfolio may also invest a portion of its assets in the equity securities of
larger foreign companies.
An equity security, or stock, represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common stocks, preferred stocks and convertible securities
are examples of equity securities. Convertible securities have characteristics
of both debt securities (which is generally the form in which they are first
issued) and equity securities (which are what they can be converted into).
The Portfolio may invest more than 25% of its assets in the securities of
issuers located in any one country. At least 65% of the portfolio's total assets
are normally invested in foreign securities representing a minimum of three
countries (other than the United States).
When choosing equity investments for this Portfolio, the manager applies a
"bottom up", value-oriented, long-term approach, focusing on the market price of
a company's securities relative to the manager's evaluation of the company's
long-term earnings, asset value and cash flow potential. The manager also
considers a company's price/earnings ratio, profit margins and liquidation
value.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in foreign securities, especially
securities of small companies. The risks of investing in foreign
securities, equity securities and small companies are set forth below
under "Risks of Investing in Certain Types of Securities."
-- Because the portfolio invests primarily in foreign securities, which are
generally riskier investments than U.S. securities investing in this
portfolio is riskier than investing in a portfolio that invests primarily
in U.S. small companies.
-- The portfolio invest in value stocks. A value stock may not increase in
price, as anticipated by the subadviser, if other investors fail to
recognize the company's value and bid up the price or invest in markets
favoring faster-growing companies.
37
Performance(A, B, C, D, E)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 58.65% (for the
quarter ended 12/1999) and the lowest return was -22.36% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
0.8% 11.9% 84.9% -29.2% -31.1% -16.7% 54.7%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
International Small Cap Trust
Series I 54.73% 3.10% 4.71% 03/04/1996
Series II 54.52% N/A 13.76% 01/28/2002
Series III N/A N/A 14.74% 09/05/2003
MSCI World ex-US Index(A) 40.01% 0.77% 3.89%
Combined Index(A, C) 54.10% 2.72% 5.17%
Citigroup Global ex-US
<$2 billion Index(A, D) 59.20% 8.71% 4.07%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)The Combined Index was added to more accurately reflect the investment
objective of the International Small Cap Trust. The Combined Index is a blend of
the MSCI World ex US Index from inception through May 31, 2003 and the Citigroup
Global ex US <$2 billion Index from June 1, 2003 and thereafter.
(D)The Citigroup Global ex US <$2 billion Index was added to more accurately
reflect the investment objective of the International Small Cap Trust.
(E)Current subadviser assignment became effective May 5, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Templeton, located at 500 East Broward Blvd., Suite 2100, Ft. Lauderdale,
FL 33394, has been in the business of providing investment advisory services
since 1954. As of December 31, 2003, Templeton and its affiliates manage over
$301 billion in assets. Templeton Investment Counsel, LLC is an indirect wholly
owned subsidiary of Franklin Resources, Inc.
The portfolio is managed by the following two portfolio managers:
-- Tucker Scott (since May, 2003). Mr. Scott joined Templeton in 1996
and is currently a Senior Vice President. He is a Chartered Financial
Analyst (CFA).
-- Cindy Sweeting (since May, 2003). Ms. Sweeting joined the Templeton
in 1997 and is currently an Executive Vice President and Director of
Research. She is a Chartered Financial Analyst (CFA).
-- Simon Rudolph (since May 2004). Mr. Rudolph joined Templeton in 1997
and is currently an Executive Vice President. He is a Chartered
Accountant (ACA) and a member of the Institute of Chartered
Accountants of England and Wales.
38
INTERNATIONAL VALUE TRUST
SUBADVISER: Templeton Investment Counsel, LLC ("Templeton")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in equity securities of companies located
outside the U.S., including in emerging markets.
Equity securities generally entitle the holder to participate in a
company's general operating results. These include common stocks and preferred
stocks. The portfolio also invests in American, European and Global Depositary
Receipts, which are certificates typically issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or
domestic company. Depending upon current market conditions, the portfolio
generally invests up to 25% of its total assets in debt securities of companies
and governments located anywhere in the world. Debt securities represent an
obligation of the issuer to repay a loan of money to it, and generally provide
for the payment of interest. Debt securities include bonds, notes and
debentures.
Templeton's investment philosophy is "bottom-up," value-oriented, and
long-term. In choosing equity investments, Templeton will focus on the market
price of a company's securities relative to its evaluation of the company's
long-term earnings, asset value and cash flow potential. A company's historical
value measure, including price/earnings ratio, profit margins and liquidation
value, will also be considered.
Use of Hedging and Other Strategic Transactions
The International Value Trust does not currently intend to use any of the
investment strategies referred to under "Hedging and Other Strategic
Transactions."
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities of companies located
outside the United States. The risks of investing in equity securities and
in foreign securities are set forth below under "Risks of Investing in
Certain Types of Securities."
-- The portfolio may invest up to 25% of its assets in debt (fixed income)
securities including foreign debt securities. The risks of investing in
fixed income securities and in foreign securities is set forth below under
"Risks of Investing in Certain Types of Securities." Because the portfolio
has a 25% limit on debt securities, these risks will not affect the
portfolio to the same degree as the risks of foreign equity securities.
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 24.18% (for the
quarter ended 6/2003) and the lowest return was -23.56% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-6.5% -10.0% -17.8% 44.9%
2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
International Value Trust
Series I 44.86% 0.86% 05/01/1999
Series II 44.52% 10.56% 01/28/2002
Series III N/A 14.27% 09/05/2003
MSCI EAFE Index(A) 39.17% -0.89%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
39
SUBADVISER AND PORTFOLIO MANAGERS
Templeton, located at 500 East Broward Blvd., Suite 2100, Ft. Lauderdale,
FL 33394, has been in the business of providing investment advisory services
since 1954. As of December 31, 2003, Templeton and its affiliates manage over
$336 billion in assets. Templeton Investment Counsel, LLC is an indirect wholly
owned subsidiary of Franklin Resources, Inc.
The Portfolio Managers are:
Lead Portfolio Manager
-- Tucker Scott (since May, 1999). Mr. Scott joined Templeton in 1996
and is currently Senior Vice President. Prior to joining Franklin
Templeton, Mr. Scott worked at Aeltus Investment Management. He is a
Chartered Financial Analyst (CFA) Charter holder.
The following individual has secondary portfolio management responsibilities:
-- Cindy L. Sweeting (since 2003). Ms. Sweeting joined Templeton in
1997 and is currently an Executive Vice President and Director of
Research. She is a Chartered Financial Analyst (CFA) Charter holder.
-- Antonio T. Docal (since 2003). Mr. Docal joined Templeton in 2001
and is currently a Senior Vice President. He is a Chartered Financial
Analyst (CFA) Charter holder.
QUANTITATIVE MID CAP TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.")
INVESTMENT OBJECTIVE: To seek long-term capital growth.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of its net assets (plus any borrowings for
investment purposes) in U.S. mid-cap stocks, convertible
preferred stocks, convertible bonds and warrants. The
portfolio may also invest up to 20% of its assets in
large-cap stocks, convertible preferred stocks,
convertible bonds and warrants in an effort to reduce
overall portfolio volatility and increase performance.
Stocks of publicly traded companies -- and mutual funds that hold these
stocks -- can be classified by the companies' market value, or capitalization.
Market capitalization is defined according to Morningstar U.S. as follows: Based
on a universe of the 5000 largest stocks in the U.S., the top 5% of the universe
are large cap, the next 15% mid cap, and the bottom 80% are classified as small
cap. Using this definition, as of 3/31/02, the largest company in the mid-cap
universe was about $10 billion and the smallest about $1 billion.
MFC Global ("U.S.A.") uses a bottom-up, as opposed to a top-down,
investment style in managing the portfolio. This means that securities are
selected based upon fundamental analysis performed by the portfolio manager and
MFC Global ("U.S.A.")'s equity research analysts. The equity research analysts
use fundamental analysis to identify mid-cap and large-cap securities with
strong industry position, leading market share, proven management and a strong
balance sheet. The analysts then rank all such securities based on financial
attributes (including earnings, growth and momentum) using quantitative
analysis. Securities at the top of this ranking may be purchased by the
portfolio.
The Quantitative Mid Cap Trust may invest in foreign securities and may
have exposure to foreign currencies through its investment in these securities,
its direct holdings of foreign currencies or through its use of foreign currency
exchange contract for the purchase or sale of a fixed quantity of a foreign
currency at a future date. Investments in foreign securities may include
depositary receipts.
The Quantitative Mid Cap Trust may also invest to a limited extent in fixed
income securities including money market instruments.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities, especially mid-cap
equity securities. The risks of investing in equity securities are set
forth below under "Risks of Investing in Certain Types of
Securities -- Equity Securities" and "Risks of Investing in Certain Types
of Securities -- Small and Medium Size Companies."
-- The portfolio may invest in foreign securities (including emerging market
securities). The risks of investing in these securities are set forth
under "Risks of Investing in Certain Types of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
40
The bar chart reflect the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 14.96% (for the
quarter ended 6/2003) and the lowest return was -23.63% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-22.7% 38.5%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Quantitative Mid Cap Trust
Series I 38.53% -4.90% 04/30/2001
Series II 38.32% 4.40% 01/28/2002
S&P Mid Cap 400 Index(B) 35.61% 5.83%
</Table>
(A)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
(B)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since the information
for this index is only provided as of a month end.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its
principal business at the present time is to provide investment management
services to the portfolios listed above. MFC Global (U.S.A.) is an indirect
wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in
Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance
Company and its subsidiaries, including Elliott & Page Limited and Manulife
Funds Direct (Hong Kong) Limited, collectively known as Manulife Financial. The
address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario,
Canada M4W 1E5.
The Portfolio Managers are:
-- Mark Schmeer (since May, 2001). Mr. Schmeer joined MFC Global in
1996. He is Vice President and Managing Director of North American
Equities at Manulife Financial. Prior to 1996, Mr. Schmeer was Vice
President of Sun Life Investment Management, where he served from
1993 to 1996. He is a Chartered Financial Analyst, and graduated from
Boston College with an MA in Economics.
-- Rhonda Chang (since May, 2001). Ms. Chang joined MFC Global in 1996.
She is Assistant Vice President and Portfolio Manager of U.S.
Equities at Manulife Financial. Prior to joining Manulife Financial
in 1994, Ms. Chang was an investment analyst with AIG Global
Investors. She is a Chartered Financial Analyst and graduated from
York University with an MBA.
MID CAP CORE TRUST
SUBADVISER: A I M Capital Management, Inc. ("AIM")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by
investing, normally, at least 80% of its assets in equity
securities, including convertible securities, of
mid-capitalization companies.
The portfolio considers a company to be a mid-capitalization company if it
has a market capitalization, at the time of purchase, within the range of the
largest and smallest capitalized companies included in the Russell Midcap Index
during the most recent 11-month period (based on month-end data) plus the most
recent data during the current month. The Russell Midcap Index measure the
performance of the 800 companies with the lowest market capitalization in the
Russell 1000 Index. The Russell 1000 Index is a widely recognized, unmanaged
index of common stocks of the 1000 largest companies in the Russell 3000 Index,
which measure the performance of the 3000 largest U.S. companies based on total
market capitalization. The companies in the Russell Midcap Index are considered
representative of medium-sized companies. As of March 26, 2003, the market cap
range of the Russell Midcap Index was $650 million to $11 billion.
In complying with the 80% investment requirement, the portfolio's
investments may include synthetic instruments. Synthetic instruments are
investment that have economic characteristics similar to the portfolio's direct
investments. The portfolio may invest up to 20% of it assets in equity
securities of companies in other market capitalization ranges. The portfolio may
also invest up to 20% of its assets in investment-grade debt securities. The
portfolio may invest up to 25% of its total assets in foreign securities. For
risk management or cash management purposes, the portfolio may hold a portion of
its assets in cash or cash equivalents, including shares of money market funds*.
Any percentage limitations with respect to assets of the portfolio are applied
at the time of purchase.
41
In selecting investments, the portfolio managers seek to identify those
companies that are, in their view, undervalued relative to current or projected
earnings, or the current market value of assets owned by the company. The
primary emphasis of the portfolio managers' search for undervalued equity
securities is in four categories: (1) out-of-favor cyclical growth; (2)
established growth companies that are undervalued compared to historical
relative valuation parameters; (3) companies where there is early but tangible
evidence of improving prospects which are not yet reflected in the value of the
companies' equity securities; and (4) companies whose equity securities are
selling at prices that do not yet reflect the current market value of their
assets. The portfolio managers consider whether to sell a particular security
when any of these factors materially change.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio invests in mid-cap companies. The risks of investing in
mid-cap companies are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio may invest up to 25% of its assets in foreign securities.
The risks of investing in these securities are set forth below under
"Risks of Investing in Certain Types of Securities."
-- The portfolio may invest up to 20% of its assets in investment-grade debt
securities. The risks of investing in these securities are set forth below
under "Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
A I M Capital Management, Inc., ("AIM"). AIM manages the Aggressive Growth
Trust and the All Cap Growth Trust. AIM is an indirect wholly owned subsidiary
of A I M Management Group Inc., whose principal business address is 11 Greenway
Plaza, Suite 100, Houston, Texas 77046. A I M Management Group, Inc. founded in
1976, is a holding company engaged in the financial services business and is a
wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are
an independent investment management group engaged in institutional investment
management and retail mutual fund businesses in the United States, Europe and
the Pacific Region.
AIM, and/or its affiliates is the investment adviser for mutual funds,
separately managed accounts, such as corporate and municipal pension plans,
charitable institutions and private individuals.
The Portfolio Managers are:
-- Ronald S. Sloan (Lead Manager) (since May, 2003). Mr. Sloan is a
Senior Portfolio Manager at AIM. Mr. Sloan joined AIM in 1998. From
1993 to 1998, he was President of Verissimo Research & Management,
Inc.
GLOBAL TRUST (FORMERLY, GLOBAL EQUITY TRUST)
SUBADVISER: Templeton Global Advisors Limited ("Templeton Global").
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: Under normal market conditions, the portfolio invests at
least 80% of its net assets (plus any borrowings for
investment purposes) in the equity securities of
companies located anywhere in the world, including
emerging markets. At least 65% of its total assets will
be invested in issuers located in at least three
different countries (including the U.S.).
Equity securities include common stocks and preferred stocks. The portfolio
also invests in American, European and Global Depositary Receipts. These are
certificates issued typically by a bank or trust company that give their holders
the right to receive securities issued by a foreign or domestic company. The
portfolio, from time to time, may have significant investments in one or more
countries or in particular sectors such as technology (including computer
hardware and software, electronics, and telecommunications) and financial
institutions.
Depending upon current market conditions, the portfolio generally invests a
portion of its total assets in debt securities of companies and governments
located anywhere in the world. Debt securities represent the obligation of the
issuer to repay a loan of money to it, and generally pay interest to the holder.
Bonds, notes and debentures are examples of debt securities.
The portfolio may use swap agreements as a derivative strategy to protect
its assets, implement a cash or tax management strategy or enhance its returns.
The portfolio may invest up to 5% of its total assets in swap agreements. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest
42
factor. Please see "Hedging and Other Strategic Transactions -- Swaps, Caps,
Floors and Collars in the Statement of Additional Information for further
information.
When choosing equity investments for the portfolio, the subadviser applies
a "bottom-up," value-oriented, long-term approach, focusing on the market price
of a company's securities relative to the subadviser's evaluation of the
company's long-term earnings, asset value and cash flow potential. The
subadviser also considers and analyzes various measure related to stock
valuation, such as a company's price/cash flow ratio, price/earnings ratio,
profit margins and liquidation value.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Global Trust may invest primarily in cash, cash
equivalents, money market securities or other short-term debt securities. When
the portfolio is in a defensive position or awaiting investment of its assets,
the ability to achieve its investment objective will be limited.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio will invest in foreign securities (including emerging market
securities). The risks of investing in these securities are set forth
below under "Risks of Investing in Certain Types of Securities."
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 17.83% (for the
quarter ended 6/2003) and the lowest return was -16.96% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
1.7% 7.7% 12.6% 20.8% 12.2% 3.7% 12.2% -16.1% -19.1% 27.5%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Global Trust Series I 27.46% 0.12% 5.34% N/A 03/18/1988
Series II 27.23% N/A N/A 5.18% 01/28/2002
Series III N/A N/A N/A 9.07% 09/05/2003
MSCI World Index 33.76% -0.39% 7.58% N/A
</Table>
(A)Effective October 1, 1996, April 30, 2001 and December 9, 2003, the portfolio
changed its subadviser. Performance reflects results prior to this change.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Templeton Global, located at Box N-7759, Nassau, Bahamas has been in the
business of providing investment advisory services since 1954. As of December
31, 2003, Templeton and its affiliates manage over $301 billion in assets.
Templeton Global is an indirect wholly owned subsidiary of Franklin Resources,
Inc.
The portfolio's lead portfolio manager is:
-- Jeffrey A. Everett (since December, 2003). Mr. Everett joined the
Templeton in 1989 and is currently President of Templeton Global
Advisors Limited and a Chief Investment Officer -- Retail for the
Templeton Global Equity Group. He is a Chartered Financial Analyst
(CFA).
The following individuals have secondary portfolio management
responsibilities:
-- Murdo Murchison (since December, 2003). Mr. Murchinson joined the
Templeton in 1993 and is currently Executive Vice President of
Templeton Global Advisors Limited. He is a Chartered Financial
Analyst (CFA).
43
-- Lisa Myers (since December, 2003). Ms. Myers joined Templeton in
1996 and is currently Vice President of Templeton Global Advisors
Limited. She is a Chartered Financial Analyst (CFA).
STRATEGIC GROWTH TRUST
SUBADVISER: Massachusetts Financial Services Company ("MFS")
INVESTMENT OBJECTIVE: To seek capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 65% of its total assets in common stocks and
related securities (such as preferred stocks, bonds,
warrants or rights convertible into stock and depositary
receipts for these securities) of companies which MFS
believes offer superior prospects for growth. Equity
securities may be listed on a securities exchange or
traded in the over-the-counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented portfolios (such as the Strategic Growth Trust)
that it advises. This means that securities are selected based upon fundamental
analysis (such as an analysis of earnings, cash flows, competitive position and
managements' abilities) performed by the portfolio manager of the portfolio and
MFS' large group of equity research analysts.
In managing the portfolio, MFS seeks to purchase securities of companies
which MFS considers well-run and poised for growth. MFS look particularly for
companies which demonstrate:
-- a strong franchise, strong cash flows and a recurring revenue stream
-- a solid industry position, where there is potential for high profit
margins -- substantial barriers to new entry in the industry
-- a strong management team with a clearly defined strategy
-- a catalyst which may accelerate growth
The portfolio may invest in foreign securities, including depositary
receipts, dollar denominated foreign debt securities and emerging market
securities, through which it may have exposure to foreign currencies.
The Strategic Growth may also invest to a limited extent in: (a) fixed
income securities, (c) U.S. Government Securities, (d) variable and floating
rate obligations, (e) zero coupon bonds, deferred interest bonds and PIK bonds,
(f) investment companies, (g) restricted securities, (h) short sales and short
sales against the box, (i) indexed securities. These investment techniques and
practices are described further in the prospectus under "Additional Investment
Policies and Transactions" and in the Statement of Additional Information.
The portfolio may engage in active and frequent trading to achieve its
principal investment strategies which will increase transaction costs.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio invests extensively in the securities of companies which the
subadviser believes are poised for growth. The price of such securities in
certain economic, political or market conditions may fall to a greater
extent than a decline in the overall equity markets (e.g., as represented
by the Standard and Poor's Composite 500 Index).
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth under "Risks of Investing in Certain Types
of Securities."
-- The portfolio may invest in securities traded in the over-the-counter
markets which involves risks in addition to those associated with
transaction in securities traded on exchanges. OTC listed companies may
have limited product lines, markets or financial resources. Many OTC
stocks trade less frequently and in smaller volume than exchange-listed
stocks. The value of these stocks may be more volatile than
exchange-listed stocks, and the portfolio may experience difficulty in
establishing or closing out positions in these stocks at prevailing market
prices.
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
44
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 19.39% (for the
quarter ended 12/2001) and the lowest return was -23.91% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-28.0% 26.9%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Strategic Growth Trust Series I 26.86% -7.81% 04/30/2001
Series II 26.61% -2.68% 01/28/2002
Series III N/A 4.36% 09/05/2003
Russell 1000 Growth Index(B) 29.75% -6.51%
</Table>
(A)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(B)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since the information
for this index is only provided as of a month end.
SUBADVISER AND PORTFOLIO MANAGERS
Massachusetts Financial Services Company ("MFS") is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund,
Massachusetts Investors Trust. MFS is an indirect subsidiary of Sun Life
Assurance Company of Canada (an insurance company). MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
The Portfolio Manager is:
-- S. Irfan Ali (since May, 2001). Mr. Ali is a Senior Vice President
of MFS and has been employed by MFS since 1993. Mr. Ali has managed
the MFS Strategic Growth Fund since 1999.
CAPITAL APPRECIATION TRUST
SUBADVISER: Jennison Associates LLC ("Jennison")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests at least 65% of the portfolio's
total assets in equity-related securities of companies
that exceed $1 billion in market capitalization and that
Jennison believes have above-average growth prospects.
These companies are generally medium- to
large-capitalization companies.
Jennison follows a highly disciplined investment selection and management
process that seeks to identify companies that show superior absolute and
relative earnings growth and also are attractively valued. Jennison looks for
companies that experience some or all of the following: (i) above average
revenue and earnings per share growth, (ii) strong market position, (iii)
improving profitability and distinctive attributes such as unique marketing
ability, (iv) strong research and development and productive new product flow
and (v) financial strength. Such companies generally trade at high prices
relative to their current earnings. Earnings predictability and confidence in
earnings forecasts are important parts of the selection process.
Securities in which the Capital Appreciation Trust invests have
historically been more volatile than the S&P 500 Index. Also, companies that
have an earnings growth rate higher than that of the average S&P 500 company
tend to reinvest their earnings rather than distribute them. Therefore, the
portfolio is not likely to receive significant dividend income on its portfolio
securities.
In addition to common stocks, nonconvertible preferred stock and
convertible securities, equity-related securities in which the Capital
Appreciation Trust invests include: (i) American Depository Receipts (ADRs);
(ii) warrants and rights that can be exercised to obtain stock; (iii)
investments in various types of business ventures, including partnerships and
joint ventures; (iv) real estate investment trusts (REITS) and similar
securities. (Convertible securities are securities -- like bonds, corporate
notes and preferred stocks -- that the portfolio can convert into the company's
common stock or some other equity security.)
The Capital Appreciation Trust may invest up to 35% of its total assets in
equity-related securities of companies that are undergoing changes in management
or product or changes in marketing dynamics that have not yet been reflected in
45
reported earnings (but are expected to affect earnings in the intermediate
term.) These securities often are not widely known and favorably valued.
In addition to the principal strategies discussed above, the Capital
Appreciation Trust may also use the following investment strategies to attempt
to increase the portfolio's return or protect its assets if market conditions
warrant:
1. The portfolio may invest up to 35% of its total assets in equity-related
securities of companies that are undergoing changes in management or
product or changes in marketing dynamics that have not yet been
reflected in reported earnings (but are expected to affect earnings in
the intermediate term.) These securities often are not widely known and
favorably valued.
2. The portfolio may make short sales of a security including short sales
"against the box."
3. The portfolio may invest up to 20% of the portfolio's total asset in
foreign equity securities. (For purposes of this 20% limit, ADRs and
other similar receipts or shares are not considered to be foreign
securities.)
4. The portfolio may invest in U.S. government securities issued or
guaranteed by the U.S. government or by an agency or instrumentality of
the U.S. government.
5. The portfolio may invest in mortgage-related securities issued or
guaranteed by U.S. governmental entities, including collateralized
mortgage obligations, multi-class pass through securities and stripped
mortgage backed securities.
6. The portfolio may invest in fixed-income securities rated
investment-grade (Baa or higher by Moody's Investor Service, Inc. or BBB
or higher by Standard & Poor's Ratings Group or the equivalent rating by
another rating service.) These include corporate debt and other debt
obligations of U.S. and foreign issuers. The portfolio may invest in
obligations that are not rated, but that the Jennison believes are of
comparable quality to these obligations.
7. The portfolio may invest in repurchase agreements.
Jennison considers selling or reducing a stock position when, in the
opinion of the investment adviser, the stock has experienced a fundamental
disappointment in earnings, it has reached an intermediate price objective and
its outlook no longer seems sufficiently promising, a relatively more attractive
stock emerges or the stock has experienced adverse price movement.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 16.38% (for the
quarter ended 12/2001) and the lowest return was -19.64% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-18.4% -30.6% 29.5%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Capital Appreciation Trust Series I 29.47% -13.02% 11/01/2000
Series II 29.35% -4.30% 01/28/2002
Series III N/A 5.51% 09/05/2003
Russell 1000 Growth Index(A) 29.75% -14.24%
</Table>
(A)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
46
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)Since November, 2000 a portion of the Capital Appreciation Trust expenses
were reimbursed. If such expenses had not been reimbursed, returns would be
lower.
SUBADVISER AND PORTFOLIO MANAGERS
Jennison, 466 Lexington Avenue, New York, New York 10017, is a Delaware
limited liability company and has been in the investment advisory business since
1969 (includes its predecessor, Jennison Associates Capital Corp.). Jennison is
a direct, wholly-owned subsidiary of Prudential Investment Management, Inc.,
which is a direct, wholly-owned subsidiary of Prudential Asset Management
Holding Company, which is a direct, wholly-owned subsidiary of Prudential
Financial, Inc. As of December 31, 2003, Jennison had approximately $59 billion
in assets under management.
The Portfolio Managers are:
-- Kathleen A. McCarragher (since November, 2000). Ms. McCarragher
joined Jennison in 1998 and is a Director and Executive Vice
President at Jennison. She is also Jennison's Head of Growth Equity.
Prior to joining Jennison, she was employed at Weiss, Peck & Greer
L.L.C. as a managing director and director of large cap growth
equities for six years. Ms McCarragher received her B.B.A. degree
from the University of Wisconsin and her M.B.A. from Harvard
University.
-- Michael A. Del Balso (since November, 2000). Mr. Del Balso joined
Jennison in 1972 and is currently a Director and Executive Vice
President at Jennison. He is also Jennison's Director of Research for
Growth Equity. Mr. Del Baslo is a graduate of Yale University and
received his M.B.A. from Columbia University. He is a member of The
New York Society of Security Analysts, Inc.
-- Spiros Segalas (since November, 2000). Mr. Segalas was a founding
member of Jennison in 1969 and is currently a Director, President and
Chief Investment Officer at Jennison. He received his B.A. from
Princeton University and is a member of The New York Society of
Security Analysts, Inc.
U.S. GLOBAL LEADERS GROWTH TRUST
SUBADVISER: Sustainable Growth Advisers, L.P. ("SGA")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in common stocks of "U.S. Global Leaders."
Under normal market conditions, at least 80% of the portfolio's assets will
be invested in stocks of companies the subadviser regards as U.S. Global
Leaders. The subadviser consider U.S. Global Leaders to be U.S. companies with
multi-national operations that typically exhibit the following sustainable
growth characteristics:
-- Hold leading market share of their relevant industries that result in
high profit margins and high investment returns.
-- Supply consumable products or services so that their revenue streams
are recurring.
The subadvisers seek to indentify companies with superior long-term
earnings prospects and to continue to own them as long as the subadvisers
believe they will continue to enjoy favorable prospectus for capital growth and
are not overvalued in the marketplace.
As a result of its investment strategy, the portfolio typically invests in
large capitalization companies (companies in the capitalization range of the
Standard & Poor's 500 Index).
The portfolio may invest in other types of equities and foreign stocks.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio's management strategy has a significant influence on
portfolio performance. Large capitalization stocks as a group could fall
out of favor with the market, causing the portfolio to underperform
investments that focus on small- or medium capitalization stocks.
-- The portfolio focuses on growth stocks, which could underperform value
stocks.
-- The portfolio may invest in multinational companies which may have
substantial international operations. The risks of investing in foreign
securities are set forth below under "Risks of Investing in Certain Types
of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risks of Investing in Certain Types of Securities."
47
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
SUBADVISERS AND PORTFOLIO MANAGERS
SGA manages the U.S. Global Leader Growth Trust. SGA is located at 1285
Avenue of the Americas, 35th Floor, New York, NY 10019. SGA was founded in July,
2003 and is controlled by its founders, George P. Fraise, Gordon M. Marchand and
Robert L. Rohn, who are also the portfolio managers of the portfolio.
The portfolio is managed by the following portfolio managers.
-- George P. Fraise (since May, 2004). Mr. Fraise is a principal of
SGA. From 2000-2003, Mr. Fraise was executive vice president of
Yeager, Wood & Marshall, Inc. From 1997 to 2000, Mr. Fraise was a
portfolio manager at Scudder Kemper Investments.
-- Gordon M. Marchand (since May, 2004). Mr. Marchand is a principal of
SGA. From 1984-2003, Mr. Marchand was chief financial and operating
officer of Yeager, Wood & Marshall, Inc.
-- Robert L. Rohn (since May, 2004). Mr. Rohn is a principal of SGA.
From 1992 to 2003, Mr. Rohn was an Analyst and Portfolio Manager at
W.P. Stewart & Co. ("W.P. Stewart") and held positions of Chairman of
the Board and Chief Executive Officer of W.P. Stewart Inc., W.P.
Stewart's core U.S. investment business, and served as Chairman of
the W.P. Stewart Inc.'s Management Committee.
QUANTITATIVE ALL CAP TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited. ("MFC GLOBAL
(U.S.A.)")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by
investing, under normal circumstances, primarily in
equity securities of U.S. companies. The portfolio will
generally focus on equity securities of U.S. companies
across the three market capitalization ranges of large,
mid and small.
MFC Global ("U.S.A.") ranks stocks based on financial attributes, including
earnings, valuation, growth and momentum using quantitative analysis.
(Quantitative Analysis is the process of determining the value of a security by
examining its numerical, measurable characteristics such as revenues, price,
earnings, valuation and growth and by performing statistical and numerical
analysis on this characteristic data.) The management team will then use
fundamental analysis to identify large, mid and small cap companies with strong
industry position, leading market share, proven management and strong
financials. Stocks meeting both fundamental and quantitative analysis will be
considered for the portfolio.
The Quantitative All Cap Trust may invest to a limited extent in foreign
securities and may have exposure to foreign currencies through its investment in
these securities, its direct holdings of foreign currencies or through its use
of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of a foreign currency at a future date. Investments in foreign
securities may include depositary receipts.
The Quantitative All Cap Trust may also invest to a limited extent in fixed
income securities including money market instruments.
The portfolio may invest in or use the following derivatives for hedging
purposes in a manner consistent with the investment objectives of the Fund and
as permitted by applicable securities legislation: buying futures and S&P
Depository Receipts. Such use would include the hedging of significant cash
flows into or out of the portfolio.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest to a limited extent in foreign securities. The
risks of investing in these securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest to a limited extent in fixed income securities.
The risks of investing in these securities are set forth below under
"Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
48
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its
principal business at the present time is to provide investment management
services to the portfolios listed above. MFC Global (U.S.A.) is an indirect
wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in
Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance
Company and its subsidiaries, including Elliott & Page Limited and Manulife
Asset Management (Hong Kong) Limited (formerly known as Manulife Funds Direct
(Hong Kong) Limited, collectively known as Manulife Financial. The address of
MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The Portfolio Managers are:
-- Mark Schmeer (since May, 2003). Mr. Schmeer joined MFC Global in
August of 1995. He is Vice President and Managing Director of North
American Equities at MFC Global. Prior to August of 1995, Mr. Schmeer
was Vice President of Sun Life Investment Management, where he served
from 1993 to August 1995. He holds the Chartered Financial Analyst
designation, and graduated from Boston College with an MA in
Economics.
-- Harpreet Singh (since May, 2003). Mr. Singh joined MFC Global in
August of 2000. He is Assistant Vice President and Portfolio Manager
of U.S. Equities at MFC Global. Prior to joining MFC Global in 2000,
Mr. Singh was Quantitative Analyst at Standish, Ayer & Wood Inc. Mr.
Singh graduated with an MBA from Bentley College and a B. Tech
(Chemical Engineering) from Indian Institute of Technology.
-- Chris Hensen (since May, 2003). Mr. Hensen joined MFC Global in July
of 1995. He is Assistant Vice President and Portfolio Manager of U.S.
Equities at MFC Global. Mr. Hensen holds the Chartered Financial
Analyst designation and is a graduate of York University with a BBA
and an MBA.
-- Rhonda Chang (since May, 2003). Ms. Chang joined MFC Global in 1994
as research analyst with the U.S. equity team and was promoted to
portfolio manager in 1996. She is now Assistant Vice President and
Senior Portfolio Manager of U.S. Equities at MFC Global. Prior to
joining MFC Global in 1994, Ms. Chang was an investment analyst with
AIG Global Investors. She holds the Chartered Financial Analyst
designation and graduated from York University with an MBA.
-- Robert Lutzko (since May, 2003). Mr. Lutzko joined MFC Global in
September of 1995. He is Vice President and Senior Portfolio Manager
of U.S. Equities at MFC Global. Prior to joining MFC Global in 1995,
Mr. Lutzko was Portfolio Manager U.S. Equities, managing both U.S.
Large-Cap and Small-Cap investments at the Workers Compensation
Board's Investment Management division. Mr. Lutzko holds the
Chartered Financial Analyst designation and is a graduate of Sheridan
College (Computer Science).
-- Brett Hryb (since May, 2003). Mr. Hryb joined MFC Global in March of
1993. He is a Portfolio Manager of U.S. Equities at MFC Global. Mr.
Hyrb holds the Chartered Financial Analyst designation and is a
graduate of McMaster University (B.Comm).
ALL CAP CORE TRUST (FORMERLY, GROWTH TRUST)
SUBADVISER: Deutsche Asset Management, Inc. ("DeAM")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests in common stocks and other equity
securities within all asset classes (small, mid and large
cap) primarily those within the Russell 3000 Index.
The portfolio may invest in all types of equity securities including common
stocks, preferred stocks and preferred and preference stocks, convertible
securities and depositary receipts for such securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized markets.
The portfolio may also invest in U.S. Government securities and up to 5% of
its assets in foreign securities.
Investment Philosophy. DeAM pursues an actively managed, quantitative
investment process. DeAM's investment philosophy is based on three central
tenets:
-- Securities have an intrinsic value from which they deviate over time.
DeAM believes that the best way to measure a security's fair vale is
relative to its peers within its own industry.
-- Finding attractive companies with long-term potential requires a
consideration of both growth and value attributes. Technical analysis
further enhances the stock selection process, helping to identify
timely market opportunities.
-- Quantitative investment models provide an improved framework for
selecting mispriced stocks in an unbiased, consistent and repeatable
manner.
Quantitative Investment Approach. DeAM blends fundamental equity analysis
and quantitative investment theory into a disciplined and systematic process.
This technique minimizes subjectivity and allows the team to analyze the
broadest possible universe of stocks. DeAM's proprietary U.S. stock evaluation
model, the Quantitative Investment Model (the "Model"), incorporates valuation
and growth investment parameters and is used to select securities. DeAM believes
that combining techniques used by fundamental value investors with extensive
growth and earnings analysis minimizes investment style bias and ultimately
produces a "pure" stock selection process that seeks to add value in any market
49
environment. DeAM also incorporates technical analysis to capture short-term
price changes and market responsiveness to new information.
By applying a rigorous portfolio construction process, the team targets
excess return levels similar to traditional managers, while holding a
significantly more diversified basket of stocks. Non-linear market impact
assumptions are also incorporated into the process to maximize the trade-off
between the anticipated pickup from trading and the costs associated with making
these trades.
Portfolio Construction and Quantitative Risk Management. DeAM extensively
screens the Russell 3000 universe using multiple investment parameters to
identify what DeAM believes are the most and least attractive securities.
Expected returns are generated for each stock relative to its own industry.
Securities are then selected based on expected returns, risk control constraints
and anticipated transaction costs.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 23.59% (for the
quarter ended 12/1999) and the lowest return was -24.41% (for the quarter ended
3/2001).
- --------------------------------------------------------------------------------
<Table>
25.4% 24.0% 37.2% -27.3% -21.4% -25.2% 31.5%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
All Cap Core Trust
Series I 31.54% -5.05% 3.84% 07/15/1996
Series II 31.26% N/A 0.19% 01/28/2002
Russell 3000 Index(B) 31.06% 0.37% 9.42%
Combined Index(B, C) 31.06% -4.67% 7.10%
</Table>
(A)Effective November 25, 2002, the portfolio changed its subadviser.
Performance reflects results prior to these changes.
(B)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(C)The Combined Index was added to more accurately reflect the investment
objective of the All Cap Core Trust. The Combined Index is a blend of the
Russell 1000 Growth Index from inception through December 31, 2002 and the
Russell 3000 Index from January 1, 2003 and thereafter.
(D)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
DeAM, located at 280 Park Avenue, New York, New York 10017, is an indirect
wholly-owned subsidiary of Deutsche Bank AG, an international commercial and
investment banking group. Deutsche Bank AG is a major banking institution that
is engaged in a wide range of financial services, including investment
management, mutual fund, retail, private and commercial banking, investment
banking and insurance.
DeAM provides a full range of investment advisory services to retail and
institutional clients.
50
The portfolio managers are as follows:
-- Janet Campagna. Managing Director, DeAM and portfolio manager
- Joined the investment advisor in 1999.
- Head of DeAM's Advance Research and Quantitative Strategies Group
- Overseas $250 billion in global asset allocation assets
-- Robert Wang. Managing Director, DeAM and portfolio manager
- Joined the investment advisor in 1995.
- Senior Portfolio Manager for the Multi-Asset Class Quantitative
Strategies Group
- Overseas $2.4 billion in global quantitative equity assets
LARGE CAP GROWTH TRUST
SUBADVISER: Fidelity Management & Research Company ("FMR")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: FMR normally invests at least 80% the portfolio's assets
in securities (primarily common stocks) of companies with
large market capitalizations. Portfolio securities are
selected based on the fundamental analysis of each
issuer. Investments may include domestic and foreign
issuers, and growth or value stocks or a combination of
both.
FMR normally invests at least 80% of the portfolio's assets in securities
of companies with large market capitalizations. FMR normally invests the
portfolio's assets primarily in common stock. Although a universal definition of
large market capitalization companies does not exist, for purposes of this
portfolio, FMR generally defines large market capitalization companies as those
whose market capitalization is similar to the market capitalization of companies
in the S&P 500(R) Index or the Russell 1000(R) Index. A company's market
capitalization is based on its current market capitalization or its market
capitalization at the time of the portfolio's investment. Companies whose
capitalization is below this level after purchase continue to be considered to
have a large market capitalization for purposes of the 80% policy. The size of
the companies in each index changes with market conditions and the composition
of each index.
FMR may invest the portfolio's assets in securities of foreign issuers in
addition to securities of domestic issuers.
FMR is not constrained by any particular investment style. At any given
time, FMR may tend to buy "growth" stocks or "value" stocks, or a combination of
both types. In buying and selling securities for the portfolio, FMR relies on
fundamental analysis of each issuer and its potential for success in light of
its current financial condition, its industry position, and economic and market
conditions. Factors considered include growth potential, earnings estimates and
management.
FMR may use various techniques, such as buying and selling futures
contracts and exchange traded funds, to increase or decrease the portfolio's
exposure to changing security prices or other factors that affect security
values. If FMR's strategies do not work as intended, the portfolio may not
achieve its objective.
Temporary Defensive Investing
The portfolio reserves the right to invest without limitation in preferred
stocks and investment-grade debt instruments for temporary, defensive purposes.
Use of Hedging and Other Strategic Transactions
The Large Cap Growth Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions."
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
The portfolio may invest in foreign securities. The risks of investing in
foreign securities are set forth below under "Risks of Investing in Certain
Types of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
51
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 20.83% (for the
quarter ended 12/1999) and the lowest return was -18.72% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-0.7% 22.8% 13.0% 19.1% 19.1% 25.3% -14.2% -17.8% -22.8% 25.3%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Large Cap Growth Trust
Series I 25.33% -3.11% 5.26% N/A 08/03/1989
Series II 25.24% N/A N/A -2.50% 01/28/2002
Russell 1000 Growth Index 29.75% -5.11% 9.21% N/A
Combined Index(B) 29.75% -5.26% 4.21% N/A
</Table>
(A)Effective May 1, 1999, the portfolio changed its investment objective.
Performance includes results prior to these changes.
(B)The Combined Index is comprised of 47.5% of the return of the Wilshire 5000
Index, 20% of the MSCI EAFE Index, 15% of the Lehman Brothers Aggregate Bond
Index, 10% of the 90 Day T-Bill, and 7.5% of the Merrill Lynch High Yield Index
since inception and 100% return of the Russell 1000 Growth Index thereafter. The
Combined Index was prepared by the adviser using Ibbotson Associates Software
and Data.
(C)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
FMR has served as the portfolio's subadviser since May 1, 2001 when it
assumed responsibility from Fidelity Management Trust Company as subadviser to
the portfolio listed above. FMR Corp., organized in 1972, is the ultimate parent
company of FMR. As of December 31, 2003, FMR and its affiliate, FMR Co., Inc,
had approximately $799 billion in discretionary assets under management. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for
the portfolio listed above. FMRC will be primarily responsible for choosing
investments for the portfolio. FMRC is a wholly owned subsidiary of FMR.
The Portfolio Manager is:
-- Karen Firestone (since May, 1999). Ms. Firestone joined FMR 1983,
FMRC in 2001 and has worked as an analyst and manager. Ms. Firestone
also manages Fidelity Advisor Large Cap Fund.
BLUE CHIP GROWTH TRUST
SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price")
INVESTMENT OBJECTIVE: To provide long-term growth of capital. Current income is
a secondary objective.
INVESTMENT STRATEGIES: The portfolio invests at least 80% of its net assets in
the common stocks of large and medium-sized blue chip
growth companies. These are firms that in T. Rowe Price's
view, are well established in their industries and have
the potential for above-average earnings growth.
In identifying blue chip companies, T. Rowe Price generally considers the
following characteristics:
Leading market positions. Blue chip companies often have leading market
positions that are expected to be maintained or enhanced over time. Strong
positions, particularly in growing industries, can give a company pricing
flexibility as well as the potential for good unit sales. These factors, in
turn, can lead to higher earnings growth and greater share price appreciation.
Seasoned management teams. Seasoned management teams with a track record
of providing superior financial results are important for a company's long-term
growth prospects. T. Rowe Price analysts will evaluate the depth and breadth of
a company's management experience.
Strong financial fundamentals. Companies should demonstrate faster
earnings growth than their competitors and the market in general; high profit
margins relative to competitors; strong cash flow; a healthy balance sheet with
relatively low debt; and a high return on equity with a comparatively low
dividend payout ratio.
T. Rowe Price evaluates the growth prospects of companies and the
industries in which they operate. T. Rowe Price seeks to identify companies with
strong market franchises in industries that appear to be strategically poised
for long-term growth. This investment approach reflects T. Rowe Price's belief
that the combination of solid company fundamentals (with
52
emphasis on the potential for above-average growth in earnings or operating cash
flow) along with a positive industry outlook will ultimately reward investors
with strong investment performance. Some of the companies T. Rowe Price targets
will have good prospects for dividend growth.
While most of the assets of the portfolio are invested in U.S. common
stocks. However, the portfolio may also purchase other types of securities,
including, (i) U.S. and non-U.S. dollar denominated foreign securities (up to
20% of its total assets) including ADRs, (ii) convertible stocks, warrants and
bonds, and (iii) futures and options. Investments in convertible securities,
preferred stocks and debt securities are limited to 25% of total assets.
The Blue Chip Growth Trust may invest in debt securities of any type
without regard to quality or rating. Such securities would be issued by
companies which meet the investment criteria for the portfolio but may include
non-investment grade debt securities (junk bonds). The portfolio will not
purchase a non-investment-grade debt security if, immediately after such
purchase, the portfolio would have more than 5% of its total assets invested in
such securities.
The portfolio holds a certain portion of its assets in money market
reserves which can consist of shares of the T. Rowe Price Reserve Investment
Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
The portfolio may sell securities for a variety of reasons such as to
secure gains, limit losses or redeploy assets into more promising opportunities.
Use of Hedging and Other Strategic Transactions
The Blue Chip Growth Trust may also engage in a variety of investment
management practices, such as buying and selling futures and options and is
currently authorized to use all of the various investment strategies referred to
under "Hedging and Other Strategic Transactions." The portfolio may invest up to
10% of its total assets in hybrid instruments, which are a type of high-risk
derivative which can combine the characteristics of securities, futures and
options. The Statement of Additional Information contains a description of these
strategies and of certain risks associated therewith.
In pursuing its investment objective, the portfolio's management has the
discretion to purchase some securities that do not meet its normal investment
criteria, as described above, when it perceives an unusual opportunity for gain.
These special situations might arise when the portfolio's management believes a
security could increase in value for a variety of reasons including a change in
management, an extraordinary corporate event, or a temporary imbalance in the
supply of or demand for the securities.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities and to a limited
extent in fixed income securities. The risks of investing in equity
securities and fixed income securities are set forth below under "Risks of
Investing in Certain Types of Securities." Since the portfolio will only
invest to a limited extent in fixed income securities, the risks
associated with fixed income securities will not affect the portfolio as
much as a portfolio that invests more of its assets in fixed income
securities.
-- During periods when growth stocks are not in favor with other investors,
the portfolio may not perform as well as a portfolio that invests in value
stocks that can cushion share prices in a down market.
-- The portfolio may invest up to 20% of its assets in foreign securities.
The risks of investing in foreign securities are set forth below under
"Risks of Investing in Certain Types of Securities." Since the portfolio
will only invest up to 20% of its assets in foreign securities, the risks
associated with foreign securities will not affect the portfolio as much
as a portfolio that invests more of its assets in foreign securities.
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
53
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 24.8% (for the
quarter ended 12/1998) and the lowest return was -17.09% (for the quarter ended
3/2001).
- --------------------------------------------------------------------------------
<Table>
-4.8% 26.5% 25.9% 26.9% 28.5% 19.4% -2.8% -14.6% -24.3% 29.2%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Blue Chip Growth Trust
Series I 29.17% -0.60% 9.15% N/A 12/11/1992
Series II 29.02% N/A N/A -0.48% 01/28/2002
Series III N/A N/A N/A 7.80% 09/05/2003
S&P 500 Index(C) 28.70% -0.57% 11.06% N/A
Russell 1000 Growth 29.75% -5.11% 9.21% N/A
</Table>
(A)Effective October 1, 1996, the portfolio changed its subadviser. Performance
reflects results prior to this change.
(B)Since June 1, 2000, a portion of the Blue Chip Growth Trust expenses were
reimbursed. If such expenses had not been reimbursed, returns would be lower.
(C)This index was added to more accurately reflect the investment objective of
the Trust.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
T. Rowe Price manages the Blue Chip Growth Trust. T. Rowe Price, whose
address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937
by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded
financial services holding company, owns 100% of the stock of T. Rowe Price. As
of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion
for over eight million individual and institutional investor accounts.
The portfolio is managed by an investment advisory committee chaired by:
-- Larry J. Puglia (since October, 1996). Mr. Puglia, who joined T.
Rowe Price in 1990, is a Vice President of T. Rowe Price and has been
managing investments since 1993. He is a Chartered Financial Analyst
and a Certified Public Accountant.
The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing the
portfolio's investment program.
U.S. LARGE CAP TRUST (FORMERLY, U.S. LARGE CAP VALUE TRUST)
SUBADVISER: Capital Guardian Trust Company ("CGTC")
INVESTMENT OBJECTIVE: To seek long-term growth of capital and income.
INVESTMENT STRATEGIES: The portfolio invests at least 80% of its net assets
(plus any borrowings for investment purposes), under
normal market conditions, in equity and equity-related
securities of companies with market capitalization
greater than $500 million at the time of purchase. In
selecting investments, greater consideration is given to
potential appreciation and future dividends than to
current income.
The portfolio may hold ADRs and other U.S. registered securities of foreign
issuers which are denominated in U.S. dollars.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the U.S. Large Cap Value Trust may invest all or a
portion of its assets in preferred stocks, bonds, cash and cash equivalents. To
the extent the portfolio is in a defensive position, the ability to achieve its
investment objective will be limited.
Use of Hedging and Other Strategic Transactions
The U.S. Large Cap Trust is currently authorized to use all of the
investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the portfolio.
54
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities, including securities
of medium sized companies. The risks of investing in equity securities and
medium sized companies are set forth below under "Risks of Investing in
Certain Types of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 18.70% (for the
quarter ended 12/2003) and the lowest return was -20.15% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
2.8% -2.5% -25.2% 37.1%
2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
U.S. Large Cap Trust
Series I 37.06% 1.16% 05/01/1999
Series II 36.68% 2.26% 01/28/2002
Series III N/A 9.56% 09/05/2003
S&P 500 Index(A) 28.70% -2.44%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
CGTC is located at 333 South Hope Street, Los Angeles, California 90071.
CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which
itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC
has been providing investment management services since 1968 and manages
approximately $146 billion of assets as of December 31, 2003.
The Portfolio Managers are:
-- Terry Berkemeier (since May, 1999). Mr. Berkemeier is a Vice
President and portfolio manager for CGTC. He joined the Capital Group
organization in 1992.
-- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice
President and portfolio manager for CGTC. He joined the Capital Group
organization in 1987.
-- David I. Fisher (since May, 1999). Mr. Fisher is Chairman of the
Board of Capital Guardian Trust Company. He joined the Capital Group
organization in 1969.
-- Theodore R. Samuels (since May, 1999). Mr. Samuels is a Senior Vice
President and a Director for CGTC. He joined the Capital Group
organization in 1981.
-- Eugene P. Stein (since May, 1999). Mr. Stein is Executive Vice
President and a Director. He joined the Capital Group organization in
1972.
-- Karen A. Miller (since May, 2000). Ms. Miller is a Senior Vice
President of Capital International Research, Inc. She joined the
Capital Group organization in 1990.
-- Alan J. Wilson (since May, 2000). Mr. Wilson is Vice President of
Capital International Research, Inc. Mr. Wilson joined the Capital
Group organization in 1991.
A portion of the portfolio is managed by individual members of the research
team.
55
CORE EQUITY TRUST
SUBADVISER: Legg Mason Funds Management, Inc. ("Legg Mason")
INVESTMENT OBJECTIVE: To seek long-term capital growth.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in equity securities that, in the subadviser's
opinion, offer the potential for capital growth. The
subadviser seeks to purchase securities at large
discounts to the subadviser's assessment of their
intrinsic value.
The portfolio invests, under normal market conditions, primarily in equity
securities that, in the subadviser's opinion, offer the potential for capital
growth. The subadviser seeks to purchase securities at large discounts to the
subadviser's assessment of their intrinsic value. Intrinsic value, according to
the subadviser, is the value of the company measured, to different extents
depending on the type of company, on factors such as, but not limited to, the
discounted value of its projected future free cash flows, the company's ability
to earn returns on capital in excess of its cost of capital, private market
values of similar companies and the costs to replicate the business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, may also be considered. Securities may be undervalued due to, among
other things, uncertainty arising from the limited availability of accurate
information, economic growth and change, changes in competitive conditions,
technological change, investor overreaction to negative news or events, and
changes in government policy or geopolitical dynamics. The subadviser takes a
long-term approach to investing, generally characterized by long holding periods
and annual portfolio turnover of less than 50%. The portfolio generally invests
in companies with market capitalizations greater than $5 billion, but may invest
in companies of any size.
The subadviser may decide to sell securities given a variety of
circumstances, such as when a security no longer appears to the subadviser to
offer the potential for long-term growth of capital, when an investment
opportunity arises that the subadviser believes is more compelling, or to
realize gains or limit potential losses.
The portfolio may also invest in debt securities of companies having one or
more of the above characteristics. The portfolio may invest up to 25% of its
total assets in long-term debt securities. Up to 10% of its total assets may be
invested in debt securities rated below investment grade, commonly known as
"junk bonds."
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest in fixed income securities, including
non-investment grade fixed income securities. The risks of investing in
fixed income securities are set forth below under "Risks of Investing in
Certain Types of Securities."
-- The subadviser's approach to investing involves the risk that stocks
purchased by the subadviser, which the subadviser believes to be
undervalued at the time of purchase, may remain undervalued for a
significant time period. The subadviser may concentrate much of the
portfolio's investments in certain industries, and will, therefore, be
more susceptible to factors adversely affecting issuers within that
industry than would a more diversified portfolio of securities.
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
SUBADVISERS AND PORTFOLIO MANAGERS
Legg Mason manages the Core Equity Trust. Legg Mason traces its history to
1982, is a subsidiary of Legg Mason, Inc., a financial services holding company,
and is located at 100 Light Street, Baltimore, Maryland 21202. Legg Mason serves
as the investment manager or adviser for several domestic and offshore equity
mutual funds.
Legg Mason's investment team is led by Bill Miller, its Chief Investment
Officer. Mr. Miller is the creator of LMFM's investment process and has served
as a portfolio manager with LMFM since 1982. Mary Chris Gay serves as the
portfolio manager of the Core Equity Trust. She has managed or co-managed other
equity funds advised by LMFM since 1998 and has also served as a research
analyst.
56
STRATEGIC VALUE TRUST (FORMERLY, CAPITAL OPPORTUNITIES TRUST)
SUBADVISER: Massachusetts Financial Services Company ("MFS")
INVESTMENT OBJECTIVE: To seek capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 65% of its net assets in common stocks and related
securities, such as preferred stock, convertible
securities and depositary receipts, of companies which
MFS believes are undervalued in the market relative to
their long term potential.
The equity securities of the companies invested in by the portfolio may be
undervalued because:
-- They are temporarily out of favor in the market due to:
-- a decline in the market
-- Poor economic conditions
-- Developments that have affected or may affect the issuer of the
securities or the issuer's industry; or
-- The market has overlooked them.
Undervalued equity securities generally have low price-to-book,
price-to-sales and/or price-to-earnings ratios. The fund's investments may
include securities listed on a securities exchange or traded in the
over-the-counter markets.
The fund also invests in other types of securities, such as fixed income
securities, including lower rated securities commonly referred to as junk bonds,
and warrants, when relative value make such purchases attractive.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented portfolios (such as the Strategic Value Trust) that
it advises. This means that securities are selected based upon fundamental
analysis (such as an analysis of earnings, cash flows, competitive position and
management abilities) performed by the portfolio manager of the portfolio and
MFS' large group of equity research analysts.
The Strategic Value Trust may invest in foreign securities (including
emerging market securities) and may have exposure to foreign currencies. The
Strategic Value Trust may engage in short sales as described under "Additional
Investment Policies -- Short Sales."
The Strategic Value Trust may engage in active and frequent trading to
achieve its principal investment strategies which will increase transaction
costs.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Strategic Value Trust may place any portion of
its assets in:
-- money market instruments (which include commercial paper,
certificates of deposit, bankers' acceptances and other obligations
of domestic and foreign banks, nonconvertible debt securities and
short term obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities), and
-- cash.
When the portfolio is in a defensive position or awaiting investment of its
assets, the ability to achieve its investment objective will be limited.
Use of Hedging and Other Strategic Transactions
The Strategic Value Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions".
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio invests in value stocks. A value stock may not increase in
price, as anticipated by the subadviser, if other investors fail to
recognize the company's value and bid up the price or invest in markets
favoring faster-growing companies.
-- The portfolio may invest in foreign securities (including emerging market
securities). The risks of investing in these securities are set forth
under "Risks of Investing in Certain Types of Securities."
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
57
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 19.83% (for the
quarter ended 6/2003) and the lowest return was -23.66% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-27.2% 28.8%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Strategic Value Trust
Series I 28.78% -7.90% 04/30/2001
Series II 28.68% -1.31% 01/28/2002
Series III N/A 6.48% 09/05/2003
Russell 1000 Value Index(B, C) 30.03% 1.85%
S&P 500 Index(B) 28.70% -2.69%
</Table>
(A)Effective May 1, 2003, the portfolio changed its investment policies.
(B)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since the information
for this index is only provided as of a month end.
(C)The index was added to more accurately reflect the current strategy of the
manager.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund, Massachusetts Investors Trust. MFS is a
subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which
in turn is an indirect wholly owned subsidiary of Sun Life Financial Services of
Canada, Inc. (a diversified financial services organization). MFS is located at
500 Boylston Street, Boston, Massachusetts 02116.
The Portfolio Manager is:
-- Kenneth Enright (since November, 2002; in May, 2003, Mr. Enright
became the sole portfolio manager of the fund). Mr. Enright is the
current portfolio manager of the MFS Strategic Value retail mutual
fund. He is a Senior Vice President at MFS and has been employed by
MFS since 1986.
LARGE CAP VALUE TRUST
SUBADVISER: FUND ASSET MANAGEMENT, L.P. (doing business as "Mercury Advisors")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio will seek to achieve this objective by
investing in a diversified portfolio of equity securities
of large cap companies located in the U.S. The portfolio
will seek to outperform the Russell 1000 Value Index by
investing in equity securities that the subadviser
believes are selling at below normal valuations. The
Russell 1000 Value Index, a subset of the Russell 1000
Index, consists of those Russell 1000 companies with
lower price-to-book ratios and lower forecasted growth
values.
The portfolio seeks to achieve its investment objective by investing at
least 80% of its net assets in common stocks of large cap companies the
subadviser selects from among those that are, at the time of purchase, included
in the Russell 1000 Index. As of March 27, 2003, the capitalization range of the
Russell 1000 Index as $650 million to $240 billion.
In selecting securities for the portfolio, the subadviser uses a
proprietary model that employs three filters in its initial screens: (1)
earnings momentum (which is an evaluation of what it believes to be the issuer's
prospects for future earnings per share based on the growth and sustainability
of earnings over previous periods); (2) earnings surprise (which analyzes an
issuer's reported earnings as opposed to those that were anticipated); and (3)
valuations based on price-to-earnings and a dividend discount model. The
subadviser looks for strong relative earnings growth, preferring growth based on
increased productivity and sales to growth resulting from the company's simply
revising its pricing structure. A company's stock price
58
relative to its earnings and book value is also examined. If the subadviser
believes that a company is overvalued, the company will not be considered as an
investment for the portfolio.
After the initial screening is done, the subadviser relies on fundamental
analysis, using both internal and external research, to optimize its
quantitative model to choose companies the subadviser believes have strong,
sustainable earnings growth with current momentum at attractive price
valuations.
Because the portfolio will not hold all the stocks in the Russell 1000
Value Index and because a portfolio's investments may be allocated in amounts
that vary from the proportional weightings of the various stocks in that index,
the portfolio is not an "index" fund. In seeking to outperform the relevant
benchmark, however, the subadviser reviews potential investments using certain
criteria that are based on the securities in the relevant index. These criteria
currently include the following:
-- Relative price to earnings and price to book ratios
-- Weighted median market capitalization of the portfolio
-- Allocation among the economic sectors of the portfolio as compared to
the applicable index
-- Weighted individual stocks within the applicable index.
The portfolio may invest up to 10% of its assets in securities of companies
organized under the laws of countries other than the United States that are
traded on foreign securities exchanges or in the foreign over-the-counter
markets, including securities of foreign issuers that are represented by
American Depositary Receipts ("ADRs"). Securities of foreign issuers that are
represented by ADRs or that are listed on a U.S. securities exchange or traded
in the U.S. over-the-counter markets are considered "foreign securities" for the
purpose of the portfolio's investment allocations. The portfolio anticipates
that it would generally limit its foreign securities investment to ADRs of
issuers in developed countries.
The portfolio may invest in investment grade convertible securities,
preferred stocks, illiquid securities, and U.S. Government debt securities
(i.e., securities that are direct obligations of the U.S. Government). There are
no restrictions on the maturity of the debt securities in which a portfolio may
invest.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio invest in value stocks. A value stock may not increase in
price, as anticipated by the subadviser, if other investors fail to
recognize the company's value and bid up the price or invest in markets
favoring faster-growing companies.
-- The portfolio may invest in debt securities. The risks of investing in
debt securities are set forth below under "Risks of Investing in Certain
Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Mercury Advisors, a wholly owned subsidiary of Merrill Lynch & Co., Inc.,
and its advisory affiliates constitute one of the world's largest asset
management firms overseeing client assets in over 70 countries around the globe.
The Portfolio Managers for the Large Cap Value strategy are:
-- Senior Portfolio Manager Bob Doll
Senior Portfolio Manager Bob Doll, President and Chief Investment Officer
of Merrill Lynch Investment Managers, joined Merrill Lynch Investment Managers
in 1999 and heads the Merrill Lynch Large Cap Value Fund team. Mr. Doll received
bachelor's degrees in accounting and economics from Lehigh University and an MBA
from The Wharton School of the University of Pennsylvania. He is a CFA(R)
charterholder and a Certified Public Accountant.
-- Milind Sharma
In addition to Mr. Doll, the investment team includes Quantitative Analyst
Milind Sharma, who received a bachelor's degree from Vassar College and
completed the Honors Moderations Program at Oxford University. He holds master's
degrees in computational finance and applied mathematics from Carnegie Mellon
University.
The team has a combined 28 years of investment experience.
59
CLASSIC VALUE TRUST
SUBADVISER: Pzena Investment Management, LLC. ("Pzena")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of its net assets in domestic equity
securities. The portfolio may invest in securities of
foreign issuers, but will generally limit such
investments to American Depositary Receipts (ADRs) and
foreign securities listed and traded on a U.S. Exchange
or the NASDAQ market.
In managing the portfolio, Pzena seeks to identify companies that it
believes are currently undervalued relative to the market, based on estimated
future earnings and cash flow. These companies generally have market values at
valuation ratios, such as price-to-book, below market average, as defined by the
S&P 500 Index.
In choosing individual securities, Pzena screens a universe of the 500
largest U.S. listed companies to construct a portfolio of approximately 30 to 40
stocks that Pzena believes generally have the following characteristics:
-- cheap on the basis of current price to estimated normal level of
earnings
-- current earnings below normal levels
-- a sound plan to restore earnings to normal
-- a sustainable business advantage.
Using fundamental research and a proprietary computer model, Pzena ranks
these companies from the cheapest to the most expensive on the basis of current
share price to Pzena's estimate of normal long-term earnings power. Pzena's
management team then focuses its research efforts on companies in the most
undervalued 20% of the universe. After performing rigorous in-depth analysis
that typically culminates in discussions with senior company management, Pzena
refines its earnings model and makes its final investment decision.
Before investing, Pzena considers the value of an entire business relative
to its price. Pzena views itself as a long-term business investor, rather than a
stock buyer. This systematic process is intended to ensure that the portfolio's
investments avoids the emotional inputs that can lead to overvalued securities.
Pzena approaches sell decisions from the same disciplined framework. The
subadviser automatically sells a security when it reaches fair value (i.e., the
price fairly reflects the normal earnings power and the stock falls to the mid
point in Pzena's ranking system. Pzena also will generally sells a security when
there are more attractive opportunities or there is a change in company
fundamentals.
Pzena seeks to maintain a fully invested portfolio (generally at least 90%
invested), but does not try to make investment decisions based on short-term
trends in the stock market. Therefore, if attractively priced stocks cannot be
found, the portfolio's cash levels will increase. To the extent the portfolio's
cash levels increase, its ability to achieve its investment objective will be
limited.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio's management strategy has a significant influence on
portfolio performance. Large capitalization stocks as a group could fall
out of favor with the market, causing the portfolio to underperform
investments that focus on small- or medium capitalization stocks.
-- The portfolio focuses on value stocks, which could underperform growth
stocks.
-- The portfolio may invest in foreign securities. The risks of investing in
foreign securities are set forth below under "Risks of Investing in
Certain Types of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
SUBADVISERS AND PORTFOLIO MANAGERS
Pzena is located at 120 West 45th Street, 34th Floor, New York, New York
10036. Established in 1995, Pzena is an investment advisor to high net worth
individuals, pension plans, foundations, endowments, mutual funds and other
institutional accounts. As of December 31, 2003, the majority of Pzena was owned
by the firm's five managing principals: Richard S. Pzena (President and Chief
Executive Officer), John P. Goetz (Managing Principal, Research), Bill Lipsey
(Managing Principal, Marketing and Client Services), Amy Jones (Managing
Principal, Operations and Administration) and Rama Krishna (Managing Principal,
Large Cap Value). In addition, nine additional employees owned interests in the
60
firm as of January 1, 2004. Mr. Pzena has ownership interests in excess of 25%
and is therefore deemed a control person of Pzena. As of January 31, 2004, Pzena
had approximately $6.03 billion in assets under management.
The investment team primarily responsible for overseeing the portfolio's
investments are:
Richard S. Pzena (since May, 2004). Managing Principal, Chief Executive
Officer and Founder of Pzena. Rich has worked in investment management
since 1986; has been with Pzena since 1995, and has managed assets in the
Fund since inception. Education: B.S. and M.B.A., The Wharton School of the
University of Pennsylvania.
John P. Goetz (since May, 2004). Managing Principal, Research. John has
worked in investment management since 1996; has been with Pzena since 1996,
and has managed assets in the Fund since inception. Education: B.A. Wheaton
College; M.B.A., Kellogg School, Northwestern University.
A. Rama Krishna (since May, 2004). Managing Principal, Large Cap Portfolio
Manager. Rama has worked in the investment business since 1987 and
investment management since 1993; has been with Pzena since 2003 and has
managed assets in the Fund since inception. Education: B.A. St. Stephen's
College, The University of Delhi; MBA and M.A. University of Michigan, Ann
Arbor.
UTILITIES TRUST
SUBADVISER: Massachusetts Financial Services Company ("MFS")
INVESTMENT OBJECTIVE: To seek capital growth and current income (income above
that available from a portfolio invested entirely in
equity securities).
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of its net assets in securities of companies in
the utilities industry. Securities in the utilities
industry may include equity and debt securities of
domestic and foreign companies.
MFS considers a company to be in the utilities industry if, at the time of
investment, MFS determines that a substantial portion (i.e., at least 50%) of
the company's assets or revenues are derived from one or more utilities.
Securities in which the portfolio invests are not selected based upon what
sector of the utilities industry a company is in (i.e., electric, gas
telecommunications) or upon a company's geographic region.
Equity Investments. The portfolio may invest in equity securities,
including common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts. MFS uses a bottom-up, as opposed
to a top-down, investment style in managing the equity-oriented funds (including
the equity portion of the fund) it advises. This means that securities are
selected based upon fundamental analysis (such as an analysis of earnings, cash
flows, competitive position and management's abilities) performed by the
portfolio manager of the portfolio and MFS' large group of equity research
analysts. In performing this analysis and selecting securities for the
portfolio, MFS places particular emphasis on each of the following factors:
-- the current regulatory environment;
-- the strength of the company's management team; and
-- the company's growth prospects and valuation relative to its
long-term potential.
Equity securities may be listed on a securities exchange or traded in the
over-the-counter markets.
As noted above, the portfolio's investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security generally
provides:
-- a fixed income stream, and
-- the opportunity, through its conversion feature, to participate in an
increase in the market price of the underlying common stock.
Fixed Income Investments. The portfolio invests in the following fixed
income securities:
-- corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including up to 20% of its total
assets lower rated bonds, commonly known as junk bonds (see "Other
Risks of Investing -- Lower Rated Fixed Income Securities" for
further information on these securities.)
-- mortgage-back securities and asset-back securities, (see "Other Risks
of Investing -- Asset Back Securities/ Mortgage Backed Securities"
for further information on these securities.)
-- U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed
by, the U.S. government or one of its agencies or instrumentalities.
In selecting fixed income investments for the portfolio, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return outlook
for various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS'
61
fixed income oriented funds (including the fixed income portion of the fund) as
a tool in making or adjusting the fund's asset allocations to these various
segments of the fixed income markets. In assessing the credit quality of fixed
income securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit analysis.
Foreign Securities. The portfolio may invest up to 35% of its total assets
in foreign securities (including emerging markets securities, Brady bonds and
depositary receipts) such as:
-- Equity securities of foreign companies in the utilities industry,
-- Fixed income securities of foreign companies in the utilities
industry,
-- Fixed income securities issued by foreign governments.
The portfolio may have exposure to foreign currencies through its
investments in foreign securities, its direct holdings of foreign currencies, or
through its use of foreign currency exchange contracts for the purchase or sale
of a fixed quantity of a foreign currency at a future date.
General. The Utilities Trust may also invest to a limited extent in: (a)
municipal bonds, (b) variable and floating rate obligations, (c) zero coupon
bonds, deferred interest bonds and PIK bonds, (d) investment companies, (e)
restricted securities and (f) indexed/structured securities. These investment
techniques and practices are described further in the prospectus under
"Additional Investment Policies and Transactions" and in the Statement of
Additional Information.
The Utilities Trust may engage in active and frequent trading to achieve
its principal investment strategies which will increase transaction costs.
Use of Hedging and Other Strategic Transactions
The Utilities Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions" (except swaps and related derivative instruments).
Principal Risks of Investing in this Portfolio
-- The portfolio's investment performance will be closely tied to the
performance of utility companies. Many utility companies, especially
electric and gas and other energy related utility companies, are subject
to various uncertainties, including:
-- risks of increases in fuel and other operating costs;
-- restrictions on operations and increased costs and delays as a result of
environmental and nuclear safety regulations;
-- coping with the general effects of energy conservation;
-- technological innovations which may render existing plans, equipment or
products obsolete;
-- the potential impact of natural or man-made disasters;
-- difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions;
-- the high cost of obtaining financing during periods of inflation;
-- difficulties of the capital markets in absorbing utility debt and equity
securities; and
-- increased competition.
Furthermore, there are uncertainties resulting from certain
telecommunications companies' diversification into new domestic and
international businesses as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
active operating profits of the enterprise. Because utility companies are faced
with the same obstacles, issues and regulatory burdens, their securities may
react similarly and more in unison to these or other market conditions. These
price movements may have a larger impact on the portfolio than on a portfolio
with a more broadly diversified portfolio.
-- The value of utility company securities may decline because governmental
regulation controlling the utilities industry can change. This regulation
may prevent or delay the utility company from passing along cost increases
to its customers. Furthermore, regulatory authorities may not grant future
rate increases. Any increases granted may not be adequate to permit the
payment of dividends on common stocks.
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risk of Investing in Certain Types of Securities."
-- The portfolio invests in equity securities. The risks of investing in
equity securities are set forth below under "Risks of Investing in Certain
Types of Securities."
62
-- The portfolio may invest in fixed income securities include, including
non-investment grade fixed income securities, mortgage-backed and
asset-backed securities and collateralized mortgage obligations. The risks
of investing in these securities are set forth below under "Risks of
Investing in Certain Securities."
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth under "Risks of Investing in Certain Types
of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract which may use the Trust as its underlying investment
medium. If such fees and expenses had been reflected, performance would be
lower. The past performance of any portfolio is not necessarily an indication of
how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 19.87% (for the
quarter ended 6/2003) and the lowest return was -17.95% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-23.5% 34.5%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Utilities Trust
Series I 34.53% -9.36% 04/30/2001
Series II 34.25% 4.41% 01/28/2002
Series III N/A 11.20% 09/05/2003
S&P Utilities Index(A) 26.26% -16.15%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since the information
for this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund, Massachusetts Investors Trust. MFS is an
indirect subsidiary of Sun Life Assurance Company of Canada (an insurance
company). MFS is located at 500 Boylston Street, Boston, Massachusetts 02116.
The Portfolio Manager is:
-- Maura A. Shaughnessy (since May, 2001). Ms. Shaughnessy is a Senior
Vice President of MFS and has been employed by MFS since 1991. Ms.
Shaughnessy has managed the MFS Capital Opportunities Fund since 1999
and the MFS Utilities Fund since 1992.
REAL ESTATE SECURITIES TRUST
SUBADVISER: Deutsche Asset Management, Inc ("DeAM")
INVESTMENT OBJECTIVE: To seek to achieve a combination of long-term capital
appreciation and current income.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of net assets (plus any borrowings for
investment purposes) in equity securities of real estate
investment trusts ("REITS") and real estate companies.
Equity securities include common stock preferred stock
and securities convertible into common stock.
A company is considered to be a real estate company if, in the opinion of
DeAM, at least 50% of its revenues or 50% of the market value of its assets at
the time its securities are purchased by the portfolio are attributed to the
ownership, construction, management or sale of real estate.
DeAM looks for real estate securities it believes will provide superior
returns to the portfolio, and attempts to focus on companies with the potential
for stock price appreciation and a record of paying dividends.
63
To find these issuers, DeAM tracks economic conditions and real estate
market performance in major metropolitan areas and analyzes performance of
various property types within those regions. To perform this analysis, it uses
information from a nationwide network of real estate professionals to evaluate
the holdings of real estate companies and REITs in which the portfolio may
invest. Its analysis also includes the companies' management structure,
financial structure and business strategy. The goal of these analyses is to
determine which of the issuers DeAM believes will be the most profitable to the
portfolio. DeAM also considers the effect of the real estate securities markets
in general when making investment decisions. DeAM does not attempt to time the
market.
Description of REITs. A REIT invest primarily in income-producing real
estate or makes loans to persons involved in the real estate industry.
Some REITs, called equity REITs, buy real estate and pay investors income
from the rents received from the real estate owned by the REIT and from any
profits on the sale of its properties. Other REITs, called mortgage REITs, lend
money to building developers and other real estate companies and pay investors
income from the interest paid on those loans. There are also hybrid REITs which
engage in both owning real estate and making loans.
If a REIT meets certain requirements, it is not taxed on the income it
distributes to its investors.
The portfolio may realize some short-term gains or losses if DeAM chooses
to sell a security because it believes that one or more of the following is
true:
-- A security is not fulfilling its investment purpose;
-- A security has reached its optimum valuation; or
-- A particular company or general economic conditions have changed.
Based on its recent practices, DeAM expects that the portfolio's assets
will be invested primarily in equity REITs. In changing market conditions, the
portfolio may invest in other types of REITs.
Other Investments. When DeAM believes that it is prudent, the portfolio
may invest a portion of its assets in other types of securities. These
securities may include convertible securities, short-term securities, bonds,
notes, securities of companies not principally engaged in the real estate
industry, non-leveraged stock index futures contracts and other similar
securities. (Stock index futures contracts, can help the portfolio's cash assets
remain liquid while performing more like stocks.)
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Real Estate Securities Trust may place all or a
portion of its assets in liquid, high grade fixed income securities such as
money market instruments, certificates of deposit, commercial paper, short-term
corporate debt securities, variable rate demand notes, governments securities
and repurchase agreements. To the extent the portfolio is in a defensive
position, the ability to achieve its investment objective will be limited.
Principal Risks of Investing in this Portfolio
-- Investing in REITs and real estate related securities involves the risks
associated with real estate investing, such as declines in real estate
values, deterioration in general and local economic conditions and
increases in interest rates. Any such developments could negatively affect
the securities held by the portfolio and the value of the portfolio may
decline. Additional risks associated with investing in securities linked
to the real estate market is set forth under "Risks of Investing in
Certain Types of Securities."
-- REITs and real estate related securities are also subject to the risks
associated with financial building projects such as failure of borrowers
to repay loans, management skills, heavy cash flow dependency and
increases in operating and building expenses. Problems which affect the
building projects could negatively affect the securities held by the
portfolio and the value of the portfolio may decline.
-- Shares of REITs may trade less frequently and, therefore, are subject to
more erratic price movements than securities of larger issuers.
-- The portfolio may invest in equity securities. The risks of investing in
equity securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio may invest up to 10% of its total assets in securities of
foreign real estate companies. The risks associated with investing in
foreign securities are set forth under "Risk of Investing in Certain Types
of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risk of Investing in Certain Types of Securities."
64
Performance (A,B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 21.09% (for the
quarter ended 3/1991) and the lowest return was -11.18% (for the quarter ended
9/1990).
- --------------------------------------------------------------------------------
<Table>
-2.8% 15.1% 34.7% 18.4% -16.4% -8% 25.7% 3.2% 2.6% 39.2%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Real Estate Securities Trust Series I 39.15% 11.23% 9.77% N/A 04/30/1987
Series II 38.93% N/A N/A 43.17% 01/28/2002
Series III N/A N/A N/A 10.49% 09/05/2003
Wilshire Real Estate Securities Index 37.06% 14.50% 11.90% N/A
</Table>
(A)On November 25, 2002, the portfolio changed its subadviser. Performance
reflects results prior to this change. On December 31, 1996, Manulife Series
Fund, Inc. merged with the Trust. Performance presented for this portfolio is
based upon the performance of the respective predecessor Manulife Series Fund,
Inc. portfolio for periods prior to December 31, 1996.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Deutsche Asset Management, Inc. ("DeAM") , located at 280 Park Avenue, New
York, New York 10017, is an indirect wholly-owned subsidiary of Deutsche Bank
AG, an international commercial and investment banking group. Deutsche Bank AG
is a major banking institution that is engaged in a wide range of financial
services, including investment management, mutual fund, retail, private and
commercial banking, investment banking and insurance. DeAM provides a full range
of investment advisory services to retail and institutional clients.
The portfolio managers are:
-- Karen J. Knudson. Principal, Deutsche Asset Management
-- Joined the investment advisor in 1995.
-- More than 20 years of investment industry experience.
-- MBA, University of California at Berkeley
-- John F. Robertson. Vice President, Deutsche Asset Management
-- Joined the investment advisor in 1996.
-- Prior to 1996, Assistant Vice President for Lincoln Investment
Management responsible for REIT research
-- Charter Financial Analyst
-- Jerry W. Ehlinger. Managing Director, Deutsche Asset Management
-- Joined the Deutsche Asset Management in 2004. Previously, a senior
vice president with Heitman Real Estate Management.
-- Over six years of investment experience
-- Mark D. Zeisloft. Vice President, Deutsche Asset Management
-- Joined the investment advisor in 1996.
-- Over twelve years of investment experience
-- MBA, University of Chicago
65
SMALL CAP OPPORTUNITIES TRUST
SUBADVISER: Munder Capital Management ("Munder")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The portfolio seeks this objective by investing, under
normal circumstances, at least 80% of its assets (plus
any borrowings for investment purposes) in equity
securities of small-capitalization companies.
Small-capitalization companies are those companies with market
capitalizations within the range of the companies in the Russell 2000 Index.
The portfolio attempts to provide potentially higher returns than a
portfolio that invests primarily in larger, more established companies. Since
small companies are generally not as well known to investors or have less of an
investor following than larger companies, they may provide higher returns due to
inefficiencies in the marketplace.
The portfolio will usually invest in equity securities of companies that
the subadviser believes can be purchased at a price significantly below its
inherent value. A company's equity securities may be undervalued because the
company is temporarily overlooked or out of favor due to general economic
conditions, a market decline, industry conditions or developments affecting the
particular company.
In addition to valuation, the subadviser considers these factors, among
others in choosing companies:
-- A stable or improving earnings records;
-- Sound finances;
-- Above-average growth prospectus;
-- Participation in a fast growing industry;
-- Strategic niche position in a specialized market; and
-- Adequate capitalization.
The portfolio may write covered call options during especially volatile
markets and also invest in equity securities of larger capitalization companies.
Even though a portfolio will receive the option premium to help protect it
against loss, a call option sold by the portfolio will expose the portfolio
during the term of the option to possible loss of the opportunity to sell the
underlying security or instrument with a gain.
The portfolio may engage in short-term trading of portfolio securities.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities especially of small
cap companies . The risks of investing in equity securities, including
those of small companies are set forth below under "Risks of Investing in
Certain Types of Securities."
-- The portfolio invest in value stocks. A value stock may not increase in
price, as anticipated by the subadviser, if other investors fail to
recognize the company's value and bid up the price or invest in markets
favoring faster-growing companies.
-- The portfolio may engage in short-term trading. A high portfolio turnover
rate (100% or more) could produce trading costs and taxable distributions,
which would detract from the portfolio's performance.
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Munder manages the Small Cap Opportunities Trust. Munder, with offices at
480 Pierce Street, Birmingham, Michigan 48009, currently serves as investment
adviser to the Munder Funds, acts as sub-adviser for a number of private-label
mutual funds and provides separate account advisory services for institutional
accounts and high net worth individuals.
A committee of Munder investment personnel manages the portfolio.
66
SMALL COMPANY VALUE TRUST
SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price")
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The portfolio invests primarily in small companies whose
common stocks are believed to be undervalued. Under
normal market conditions, the portfolio will invest at
least 80% of its net assets (plus any borrowings for
investment purposes) in companies with market
capitalizations that do not exceed the maximum market
capitalization of any security in the Russell 2000 Index
at the time of purchase. Market capitalizations of
companies in the Russell Index change over time, however,
the portfolio will not sell a stock just because a
company has grown to a market capitalization outside the
range of the Russell 20000. The portfolio may
occasionally purchase companies with a market cap above
the range.
Reflecting a value approach to investing, the Small Company Value Trust
will seek the stocks of companies whose current stock prices do not appear to
adequately reflect their underlying value as measured by assets, earnings, cash
flow, or business franchises. T. Rowe Price's in-house research team seeks to
identify companies that appear to be undervalued by various measures, and may be
temporarily out of favor, but have good prospects for capital appreciation. In
selecting investments, they generally look for some of the following factors:
-- Low price/earnings, price/book value or price/cash flow ratios
relative to the S&P 500, the company's peers or its own historic
norm;
-- Low stock price relative to a company's underlying asset values;
-- Above-average dividend yield relative to a company's peers or its own
historic norm;
-- A plan to improve the business through restructuring; or
-- A sound balance sheet and other positive financial characteristics.
While most assets will be invested in U.S. common stocks, the portfolio may
purchase other securities, including foreign securities (up to 20% of it's total
assets), futures, and options.
The portfolio holds a certain portion of its assets in money market
reserves which can consist of shares of the T. Rowe Price Reserve Investment
Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
The portfolio may sell securities for a variety of reasons, such as to
secure gains, limit losses or redeploy assets into more promising opportunities.
Use of Hedging and Other Strategic Transactions
The Small Company Value Trust may also engage in a variety of investment
practices, such as buying and selling futures and options. The portfolio may
invest up to 10% of its total assets in hybrid instruments. Hybrid instruments
are a type of high-risk derivative which can combine the characteristics of
securities, futures and options.
In pursuing its investment objective, the portfolio's management has the
discretion to purchase some securities that do not meet its normal investment
criteria, as described above, when it perceives an unusual opportunity for gain.
These special situations might arise when the portfolio's management believes a
security could increase in value for a variety of reasons including a change in
management, an extraordinary corporate event, or a temporary imbalance in the
supply of or demand for the securities.
The Small Company Value Trust is currently authorized to use all of the
various investment strategies referred to under "Hedging and Other Strategic
Transactions" below.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio invests primarily in securities of small companies. The
risks of investing in these securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio employs a value approach. This approach carries the risk
that the market will not recognize a security's intrinsic value for a long
time, or that a stock judged to be undervalued may actually be
appropriately priced.
-- The portfolio may invest in foreign securities (including emerging market
securities). The risks of investing in these securities are set forth
below under "Risks of Investing in Certain Types of Securities."
67
Performance(A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 16.97% (for the
quarter ended 6/2003) and the lowest return was -18.31% (for the quarter ended
9/1998).
- --------------------------------------------------------------------------------
<Table>
-4.7% 8% 5.9% 6.5% -5.9% 33.7%
1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Small Company Value Trust Series I 33.66% 8.91% 5.47% 10/01/1997
Series II 33.56% N/A 12.37% 01/28/2002
Series III N/A N/A 7.33% 09/05/2003
Russell 2000 Value Index(B) 46.03% 12.28% 8.83%
</Table>
(A)Effective April 30, 2001, the portfolio changed its subadviser. Performance
reflects results prior to this change.
(B)The return of the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of month end.
(C)Since January 1, 2001, a portion of the Small Company Value Trust's expenses
were reimburse. If such expenses had not been reimbursed returns would be lower.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
T. Rowe Price manages the Small Company Value Trust. T. Rowe Price, whose
address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937
by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded
financial services holding company, owns 100% of the stock of T. Rowe Price. As
of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion
for over eight million individual and institutional investor accounts.
The portfolio is managed by an investment advisory committee chaired by:
-- Preston G. Athey (since May, 2001). Mr. Athey, who joined T. Rowe
Price in 1978, is a Vice President of T. Rowe Price and has been
managing investments since 1982. He is a Chartered Financial Analyst.
The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing the
portfolio's investment program.
SPECIAL VALUE TRUST
SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM")
INVESTMENT OBJECTIVE: To seek long-term capital growth.
INVESTMENT STRATEGIES: Under normal circumstances, the portfolio invests at
least 80% of the value of its net assets (plus any
borrowings for investment purposes) in common stocks and
other equity securities of smaller capitalized U.S.
companies. Smaller capitalized companies are those whose
market capitalization at the time of investment is no
greater than the market capitalization of companies in
the Russell 2000 Value Index. The size of companies in
the index changes with market conditions and the
composition of the index. Equity securities include
exchange traded and over-the-counter common stocks and
preferred shares, debt securities convertible into equity
securities and warrants and rights relating to equity
securities.
SaBAM emphasizes individual security selection while spreading the
portfolio's investments among industries and sectors. SaBAM uses both
quantitative and fundamental methods to identify stocks of smaller
capitalization companies it believes have the best prospects for outperforming
its competition. (Quantitative methods are screening mechanisms to identify
potential investments and include review of: (a) stock yields, (b) stock prices,
(c) cash flow and (d) rankings.)
68
SaBAM uses quantitative parameters to select a universe of smaller
capitalized companies that fit the portfolio's general investment criteria.
(Quantitative parameter are the values used to evaluate investments.) In
selecting individual securities from within this range, SaBAM looks for "value"
attributes, such as:
-- Low stock price relative to earnings, book value and cash flow
-- High return on invested capital
The subadviser also uses quantitative methods to identify catalysts and
trends that might influence the portfolio's industry or sector focus, or the
subadviser's individual security selection.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio invests primarily in stocks of smaller capitalized
companies. The risks of investing in small cap companies are set forth
below under "Risks of Investing in Certain Types of Securities."
-- The portfolio invest in value stocks. A value stock may not increase in
price, as anticipated by SaBAM, if other investors fail to recognize the
company's value and bid up the price or invest in markets favoring
faster-growing companies.
Performance
Performance is not provided since the portfolio commenced operations in May,
2003.
SUBADVISER AND PORTFOLIO MANAGERS
SaBAM was established in 1987 and, together with affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and
equity investment services to individuals and institutional clients throughout
the world. SaBAM's principal address is 399 Park Avenue, New York, New York
10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses
provide abroad range of financial services, asset management, banking and
consumer finance, credit and charge cards, insurance investments, investment
banking and trading -- and use diverse channels to make them available to
consumer and corporate customers around the world.
The Portfolio Managers are:
-- Peter J. Hable -- Managing Director
21 years of securities business experience
Employed by Citigroup or its predecessor firms since 1983
BS in Economics from Southern Methodist University
MBA from Wharton School of Finance
-- Thomas B. Driscoll -- Director
Employed by Citigroup or its predecessor firms since 1996
8 years investment experience
Member of the Security Analysts of San Francisco
BA from Drew University
MBA from the University of California, Davis
MID CAP VALUE TRUST
SUBADVISER: Lord, Abbett & Co. LLC ("Lord Abbett")
INVESTMENT OBJECTIVE: To seek capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities
which it believes to be undervalued in the marketplace.
Under normal market conditions, at least 80% of the
portfolio's net assets (plus any borrowings for
investment purposes) will consist of investments in
mid-sized companies, with market capitalizations of
approximately $500 million to $10 billion.
Lord Abbett uses a value approach in managing the Mid Cap Value Trust. It
generally tries to identify stocks of companies that have the potential for
significant market appreciation due to growing recognition of improvement in
their financial results or increasing anticipation of such improvement. In
trying to identify these companies, Lord Abbett looks for such factors as:
<Table>
-- Changes in economic and financial -- Price increases for the company's products
environment or services
-- New or improved products or services -- Changes in management or company structure
-- Improved efficiencies resulting from new -- Changes in government regulations,
technologies or changes in distribution political climate or competitive conditions
-- New or rapidly expanding markets
</Table>
69
The Mid Cap Value Trust may invest up to 10% of its assets in foreign
securities and may have exposure to foreign currencies through its investment in
these securities, its direct holdings of foreign currencies or through its use
of foreign currency exchange contract for the purchase or sale of a fixed
quantity of a foreign currency at a future date. Lord Abbett does not consider
ADRs and securities of companies domiciled outside the U.S. but that are traded
in the United States to be "foreign Securities". Accordingly, such investments
are not subject to the 10% limitation on foreign securities.
Temporary Defensive Investments
At times the Mid Cap Value Trust may take a temporary defensive position by
investing some or all of its assets in short-term fixed income securities. Such
securities may be used to attempt to avoid losses in response to adverse market,
economic, political or other conditions, to invest uncommitted cash balances, or
to maintain liquidity to meet shareholder redemptions. These securities include:
obligations of the U.S. Government and its agencies and instrumentalities,
commercial paper, bank certificates of deposit, bankers' acceptances, and
repurchase agreements collateralized by cash and obligations of the U.S.
Government and its agencies and instrumentalities. These investments could
reduce the benefit from any upswing in the market and prevent the Mid Cap Value
Trust from achieving its investment objective.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio employs a value approach. This approach carries the risk
that the market will not recognize a security's intrinsic value for a long
time, or that a stock judged to be undervalued may actually be
appropriately priced.
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth under "Risks of Investing in Certain Types
of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 15.35% (for the
quarter ended 12/2003) and the lowest return was -14.75% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-10.1% 25.4%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Mid Cap Value
Series I 25.36% 6.39% 04/30/2001
Series II 25.14% 8.14% 01/28/2002
Series III N/A 9.49% 09/05/2003
Russell Midcap Value Index(A) 38.07% 8.87%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since the information
for this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Lord Abbett was founded in 1929 and manages one of America's oldest mutual
fund complexes. Lord Abbett is located at 90 Hudson Street, Jersey City, New
Jersey 07302-3973.
The Portfolio Managers are:
-- Lord Abbett uses a team of investment managers and analysts acting
together to manage the portfolio's investments. Edward K. von der
Linde heads the team and the other senior members are Eileen Banko,
Howard Hansen and David Builder. Mr. Von der Linde, Partner and
Investment Manager, joined Lord Abbett in 1988. Mr. Von der Linde has
been in the investment business since 1985. Ms. Banko, Equity analyst
joined Lord Abbett in 1990. Mr. Hansen, Investment Manager, joined
Lord Abbett in 1994. Mr. Builder, Equity Analyst, joined Lord Abbett
in 1998 from Bear Stearns where he served as equity analyst.
70
VALUE TRUST
SUBADVISER: Van Kampen Investments
INVESTMENT OBJECTIVE: To realize an above-average total return over a market
cycle of three to five years, consistent with reasonable
risk.
INVESTMENT STRATEGIES: The portfolio seeks to attain this objective by investing
primarily in equity securities of companies with
capitalizations similar to the market capitalization of
companies in the Russell Midcap Value Index.
Under normal circumstances, the Value Trust invests at least 65% of its
total assets in equity securities. These primarily include common stocks, but
may also include preferred stocks, convertible securities, rights, warrants, and
ADR's. The Value Trust may invest without limit in ADRs and may invest up to 5%
of its total assets in foreign equities excluding ADRs.
Van Kampen's approach is to select equity securities which are believed to
be undervalued relative to the stock market in general as measured by the
Russell Midcap Value Index. Generally, medium market capitalization companies
will consist primarily of those that Van Kampen believes are selling below their
intrinsic value and offer the opportunity for growth of capital. The portfolio
emphasizes a "value" style of investing focusing on those companies with strong
fundamentals, consistent track records, growth prospectus, and attractive
valuations. Van Kampen may favor securities of companies that are undervalued
industries. Van Kampen may purchase stocks that do not pay dividends. Van Kampen
may also invest the portfolio's assets in companies with smaller or larger
market capitalizations.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Value Trust may place all or a portion of its
assets in fixed income securities, and cash and cash equivalents. To the extent
the portfolio is in a defensive position, the ability to achieve its investment
objective will be limited.
Principal Risks of Investing in this Portfolio
-- The price of the securities purchased by the portfolio will increase if
other investors in the stock market subsequently believe that the
securities are undervalued and are willing to pay a higher price for them.
If other investors in the stock market continue indefinitely to undervalue
these securities, or if in fact these securities are not undervalued, the
value of the portfolio may decline.
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The Value Trust invests primarily in securities of small or medium sized
value companies. This market sector may underperform relative to other
sectors. During an overall stock market decline, stock prices of small or
mid-sized companies often fluctuate more than the stock prices of larger
companies. The risks of investing in small or medium sized companies are
set forth under "Risks of Investing in Certain Types of Securities" above.
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 20.39% (for the
quarter ended 6/2003) and the lowest return was -23.40% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
22.1% -1.7% -2.8% 24.6% 3.4% -22.8% 38.8%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Value Trust
Series I 38.76% 6.05% 7.05% 01/01/1997
Series II 38.60% N/A 4.21% 01/28/2002
Russell Mid Cap Value Index(A) 38.07% 8.73% 11.52%
</Table>
71
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
(C)Current Subadvisor assignment became effective May 1, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Morgan Stanley Investment Management Inc. ("MSIM"), which does business in
certain instances using the name "Van Kampen", has its principal offices at 1221
Avenue of the Americas, New York, New York. MSIM conducts a worldwide portfolio
management business and provides a broad range of portfolio management services
to customers in the United States and abroad. Morgan Stanley is the direct
parent of MSIM. MSIM also does business in certain instances using the name
"Miller Anderson." Prior to May 1, 2003, Miller Anderson was listed as the
subadviser to the Value Trust.
The portfolio is managed by Van Kampen's Equity Income team. Current
members of the Equity Income team are: James Gilligan, a Managing Director of
Van Kampen, James O. Roeder, an Executive Director of Van Kampen, Thomas
Bastian, a Vice President of Van Kampen, Sergio Marcheli, a Vice President of
Van Kampen, and Vincent Vizachero, an Associate of Van Kampen. The composition
of the team may change without notice from time to time.
ALL CAP VALUE TRUST
SUBADVISER: Lord, Abbett & Co. LLC ("Lord Abbett")
INVESTMENT OBJECTIVE: To seek capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities of
U.S. and multinational companies that Lord Abbett
believes are undervalued in all capitalization ranges.
Under normal circumstances, the portfolio will invest at
least 50% of its net assets in equity securities of
large, seasoned companies with market capitalizations of
at least $5 billion at the time of purchase. Equity
securities may include common stocks, preferred stock,
convertible securities, warrants, and similar
instruments. These are companies that appear underpriced
according to certain financial measurements of their
intrinsic worth or business prospects (such as
price-to-earnings or price to-book ratios).
In selecting investments, Lord Abbett attempts to invest in securities
selling at reasonable prices in relation to its assessment of their potential
value. While there is the risk that an investment may never reach what Lord
Abbett thinks is its full value, or may go down in value, Lord Abbett's emphasis
on large, seasoned company value stocks may limit the portfolio's downside risk.
This is because value stocks are believed to be underpriced, and large, seasoned
company stocks tend to be issued by more established companies and less volatile
than mid-sized or small company stock. Although small companies may present
greater risks than larger companies, they also may present higher potential for
attractive long-term returns. Lord Abbett generally sells a stock when it thinks
it seems less likely to benefit from the current market and economic
environment, shows deteriorating fundamentals, or has reached Lord Abbett's
valuation target.
The All Cap Value Trust may investment up to 10% of its net assets in
foreign equity securities. Lord Abbett does not consider ADRs and securities of
companies domiciled outside the U.S. but that are traded in the United States to
be "foreign securities." Accordingly, such investments are not subject to the
10% limitation on foreign securities.
Temporary Defensive Investments
At times the All Cap Value Trust may take a temporary defensive position by
investing some or all of its assets in short-term fixed income securities. Such
securities may be used to attempt to avoid losses in response to adverse market,
economic, political or other conditions, to invest uncommitted cash balances, or
to maintain liquidity to meet shareholder redemptions. These securities include:
obligations of the U.S. Government and its agencies and instrumentalities,
commercial paper, bank certificates of deposit, bankers' acceptances, and
repurchase agreements collateralized by cash and obligations of the U.S.
Government and its agencies and instrumentalities. These investments could
reduce the benefit from any upswing in the market and prevent the All Cap Value
Trust from achieving its investment objective.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio employs a value approach. This approach carries the risk
that the market will not recognize a security's intrinsic value for a long
time, or that a stock judged to be undervalued may actually be
appropriately priced.
72
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio may invest in the securities of small and medium sized
companies. The risks of investing in these securities are set forth below
under "Risks of Investing in Certain Types of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 18.09% (for the
quarter ended 12/2001) and the lowest return was -23.92% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-27.8% 38.4%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
All Cap Value Trust
Series I 38.36% 0.28% 04/30/2001
Series II 38.16% 0.00% 01/28/2002
Series III N/A 11.03% 09/05/2003
Russell 3000 Value Index(A) 31.14% 2.66%
</Table>
(A)The Return under "Life of Portfolio" is calculated from the month end closest
to the inception date of the portfolio since information for this index is only
provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)Current subadvisor assignment became effective May 1, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Lord Abbett was founded in 1929 and manages one of America's oldest mutual
fund complexes. Lord Abbett is located at 90 Hudson Street, Jersey City, New
Jersey 07302-3973.
The Portfolio Managers are:
-- Lord Abbett uses a team of investment managers and analysts acting
together to manager the portfolio's investments. Robert G. Morris
heads the team and the other senior members are Robert P. Fetch,
David G. Builder, Daniel H. Frascarelli, Howard Hansen, and Gerard S.
E. Heffernan. Mr. Morris, Partner and Director of Equity Investments,
joined Lord Abbett in 1991. Mr. Fetch, Partner and Small-Cap Value
Senior Investment Manager, joined Lord Abbett in l995. Mr. Builder,
Equity Analyst on the Mid-Cap Value Team, joined Lord Abbett in 1998
from Bear Stearns where he served as an Equity Analyst. Mr.
Frascarelli, Partner and Investment Manager, joined Lord Abbett in
1990. Mr. Hansen, Partner and Investment Manager, joined Lord Abbett
in 1995. Mr. Heffernan, Research Analyst on the Small-Cap Value team,
joined Lord Abbett in 1998 from CL Capital Management where he served
as Portfolio Manager and Equity Research Analyst.
EQUITY INDEX TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.)")
INVESTMENT OBJECTIVE: To approximate the aggregate total return of publicly
traded common stocks which are included in the S&P
Composite Stock Price Index (the "S&P 500 Index").
INVESTMENT STRATEGIES: The portfolio invests in the equity securities of a
diversified group of U.S. companies. The portfolio is not
actively managed; rather MFC Global (U.S.A.) tries to
duplicate the performance of the S&P 500 Index by
investing the portfolio's assets in the common stocks
that are included in the S&P 500 Index in approximately
the proportion of their respective market value
weightings in the S&P 500 Index.
The portfolio uses the S&P 500 Index as its standard performance comparison
because the S&P 500 Index (i) represents more than 70% of the total market value
of all publicly traded common stocks in the U.S. and (ii) is widely viewed among
investors as representative of the performance of publicly traded common stocks
in the U.S.
73
The S&P 500 Index is an unmanaged index composed of 500 selected common
stocks, over 95% of which are listed on the New York Stock Exchange. The
performance of the S&P 500 Index is based on changes in the prices of stocks
comprising the S&P 500 Index and assumes the reinvestment of all dividends paid
on such stocks. Taxes, brokerage commissions and other fees are disregarded in
computing the level of the S&P 500 Index. Standard & Poor's(1) selects the
stocks to be included in the S&P 500 Index on a proprietary basis but does
incorporate such factors as the market capitalization and trading activity of
each stock and its adequacy as representative of stocks in a particular industry
group. Stocks in the S&P 500 Index are weighted according to their market
capitalization (i.e., the number of shares outstanding multiplied by the stock's
current price).
Since MFC Global (U.S.A.) attempts to match the performance of the S&P 500
Index, the adverse financial situation of a company will not result in its
elimination from the portfolio unless, of course, the company in question is
removed from the S&P 500 Index. Conversely, the projected superior financial
performance of a company would not normally lead to an increase in the
portfolio's holdings of the company.
Under normal circumstances, the net assets of the Equity Index Trust will
be invested in any combination of the following investments:
-- representative common stocks
-- Standard & Poor's Stock Index Futures Contracts ("S&P 500 Futures
Contracts"), and
-- Standard & Poor's Depository Receipts(R).
(1)"Standard & Poor's(R)," "S&P 500(R)," "S&P(R)," "Standard & Poor's 500(R)"
and "500" are trademarks of McGraw-Hill, Inc.
With regard to the portion of the Equity Index Trust invested in common
stocks, the method used to select investments for the portfolio involves
investing in common stocks in approximately the order of their respective market
value weightings in the S&P 500 Index, beginning with those having the highest
weightings. For diversification purposes, the portfolio can purchase stocks with
smaller weightings in order to represent other sectors of the S&P 500 Index.
There is no minimum or maximum number of stocks included in the S&P 500
Index which the Equity Index Trust must hold. Under normal circumstances, it is
expected that the portion of the portfolio invested in stocks would be between
300 and 500 different stocks included in the S&P 500 Index. The portfolio may
compensate for the omission of a stock that is included in the S&P 500 Index, or
for purchasing stocks in other than the same proportion that they are
represented in the S&P 500 Index, by purchasing stocks that are believed by MFC
Global (U.S.A.) to have characteristics that correspond to those of the omitted
stocks.
Tracking error is measured by the difference between the total return for
the S&P 500 Index and the total return for the portfolio after deductions of
fees and expenses. All tracking error deviations are reviewed to determine the
effectiveness of investment policies and techniques. Tracking error is reviewed
at least weekly and more frequently if such a review is indicated by significant
cash balance changes, market conditions or changes in the composition of the S&P
500 Index. If deviation accuracy is not maintained, the Equity Index Trust will
rebalance its composition by selecting securities which, in the opinion of MFC
Global (U.S.A.), will provide a more representative sampling of the
capitalization of the securities in the S&P 500 Index as a whole or a more
representative sampling of the sector diversification in the S&P 500 Index.
The portfolio may also invest in short-term debt securities to maintain
liquidity or pending investment in stocks or S&P 500 Futures Contracts.
Standard & Poor's licenses certain trademarks and trade names to the Trust
but disclaims any responsibility or liability to the Trust and its shareholders.
See Appendix II in the Statement of Additional Information for such disclaimer.
Use of Hedging and Other Strategic Transactions
The Equity Index Trust may invest in S&P 500 Futures Contracts. A more
complete description of this investment strategy appears under "Hedging and
Other Strategic Transactions" below in this Prospectus and in the Statement of
Additional Information.
Principal Risks of Investing in this Portfolio
-- An investment in the Equity Index Trust involves risks similar to the
risks of investing directly in the equity securities included in the S&P
500 Index. The risks of investing in equity securities are set forth below
under "Risks of Investing in Certain Types of Securities."
-- Since the portfolio is not actively managed, if the S&P 500 Index does not
perform well, MFC Global (U.S.A.) will not have the ability to transfer
portfolio assets into other investments.
74
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 21.22% (for the
quarter ended 12/1998) and the lowest return was -17.39% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
33.5% 28.6% 20.6% -9.3% -12.3% -22.3% 28.3%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Equity Index Trust Series I 28.29% -0.88% 8.39% 02/14/1996
S&P 500 Index(B) 28.70% -0.57% 9.03%
</Table>
(A)On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust.
Performance presented for this portfolio is based upon the performance of the
respective predecessor Manulife Series Fund, Inc. portfolio for periods prior to
December 31, 1996.
(B)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(C)During the periods shown in the chart, a portion of the Equity Index Trust's
expenses were reimbursed. If such expenses had not been reimbursed, returns
would be lower.
(D)The Equity Index Trust does not offer Series II shares or Series III shares.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its
principal business at the present time is to provide investment management
services to the portfolios listed above. MFC Global (U.S.A.) is an indirect
wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in
Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance
Company and its subsidiaries, including Elliott & Page Limited and Manulife
Funds Direct (Hong Kong) Limited, collectively known as Manulife Financial. The
address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario,
Canada M4W 1E5.
The Portfolio Managers are:
-- Martin Ayow (since May, 2000). Mr. Ayow joined MFC Global in 2000
and is Assistant Vice President and Senior Portfolio Manager for
Manulife Financial. He has been managing and hedging fixed income and
equity exposures for Manulife Financial using financial derivatives
since 1994. Prior to joining Manulife Financial, Mr. Ayow was Senior
Treasury Officer at the Ontario Hydro Treasury Division. He is a
Chartered Financial Analyst and graduated from the University of
Toronto with an MBA.
-- Ram Brahmachari (since December, 2000). Mr. Brahmachari joined MFC
Global in 2000. He is a Senior Analyst on the team responsible for
the management of the equity index portfolios at Manulife Financial.
Prior to joining Manulife, Financial, Mr. Brahmachari was employed as
an analyst at Nortel. He is a Chartered Financial Analyst and
graduated from the University of Victoria with an MBA.
FUNDAMENTAL VALUE TRUST
SUBADVISER: Davis Advisors ("Davis")
INVESTMENT OBJECTIVE: To seek growth of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in common stocks of U.S. companies with market
capitalizations of at least $10 billion. The portfolio
may also invest in companies with smaller
capitalizations.
Davis uses the Davis investment philosophy in managing the Fundamental
Value Trust's portfolio. The Davis investment philosophy stresses a
back-to-basics approach, using extensive research to select common stocks of
quality overlooked growth companies at value prices and holding such securities
for the long-term. Davis looks for companies with
75
sustainable growth rates selling at modest price-earnings multiples that it
believes will expand as other investors recognize the company's true worth.
Davis believes that if a sustainable growth rate is combined with a gradually
expanding multiple, these rates compound and can generate above-average returns.
Davis searches for companies possessing several of the following characteristics
that it believes foster sustainable long-term growth, minimize risk and enhance
the potential for superior long-term returns:
<Table>
-- First-class management -- Proven record as an acquirer
-- Management ownership -- Strong balance sheet
-- Strong returns on capital -- Competitive products or services
-- Lean expense structure -- Successful international operations
-- Dominant or growing market share in a -- Innovation
growing market
</Table>
The Fundamental Value Trust may also invest to a limited extent in foreign
securities and fixed income securities.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Fundamental Value Trust may place any portion of
its assets in:
-- money market instruments (which include commercial paper,
certificates of deposit, bankers' acceptances and other obligations
of domestic and foreign banks, repurchase agreements, nonconvertible
debt securities and short term obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities);
-- securities of other investment companies (or companies exempted under
Section 3(c)(7) of the 1940 Act) that primarily invest in temporary
defensive investments, subject to limitations under the 1940 Act; and
-- cash.
When the portfolio is in a defensive position or awaiting investment of its
assets, the ability to achieve its investment objective will be limited.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 17.39% (for the
quarter ended 6/2003) and the lowest return was -13.77% (for the quarter ended
9/2001).
- --------------------------------------------------------------------------------
<Table>
-16.2% 29.8%
2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Fundamental Value Trust
Series I 29.83% 0.78% 04/30/2001
Series II 29.57% 5.47% 01/28/2002
Series III N/A 12.68% 09/05/2003
S&P 500 Index(A) 28.70% -2.69%
Russell 1000 Value Index(A) 30.03% 1.85%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
76
SUBADVISER AND PORTFOLIO MANAGERS
Davis was organized in 1969 and serves as the investment adviser for all of
the Davis Funds, other mutual funds and other institutional clients. The sole
general partner of Davis is Davis Investments, LLC, which is controlled by
Christopher C. Davis. Davis is located at 2949 East Elvira Road, Suite 101,
Tucson, Arizona 85706.
The Portfolio Managers are:
-- Christopher C. Davis (since May, 2001). Mr. Davis, Chairman and
Chief Executive Officer of Davis and a director and Chief Executive
Officer, president or vice president of each of the Davis Funds, is
co-portfolio manager of the Fundamental Value Trust and the Financial
Services Trust. He has served as a portfolio manager with Davis since
1995.
-- Kenneth Charles Feinberg (since May, 2001). Mr. Feinberg is
co-portfolio manager of the Fundamental Value Trust and the Financial
Services Trust. Since joining Davis in 1992, he has co-managed other
equity funds advised by Davis and has also served as a research
analyst.
GROWTH & INCOME TRUST
SUBADVISER: Wellington Management Company, LLP ("Wellington Management")
INVESTMENT OBJECTIVE: To seek long-term growth of capital and income consistent
with prudent investment risk.
INVESTMENT STRATEGIES: The portfolio invests primarily in a diversified
portfolio of common stocks of U.S. issuers which
Wellington Management believes are of high quality.
Wellington Management believes that high quality is evidenced by:
-- a leadership position within an industry,
-- a strong or improving balance sheet,
-- relatively high return on equity,
-- steady or increasing dividend payout, and
-- strong management skills.
The Growth & Income Trust's investments primarily emphasize dividend-paying
stocks of larger companies. The portfolio may also invest in securities
convertible into or which carry the right to buy common stocks. These securities
include those convertible securities issued in the Euromarket, preferred stocks
and debt securities.
Wellington Management selects portfolio investments on the basis of
fundamental analysis, which it utilizes to identify those securities that
provide the potential for long-term growth of capital and income. Fundamental
analysis involves assessing a company and its business environment, management,
balance sheet, income statement, anticipated earnings and revenues, and other
related measures of value. When selecting securities of issuers domiciled
outside of the United States, Wellington Management also monitors and evaluates
the economic and political climate and the principal securities markets of the
country in which each company is located. Securities are sold when the
investment has achieved its intended purpose, or because it is no longer
considered attractive.
The Growth & Income Trust invests primarily in securities listed on
national securities exchanges, but from time to time it may also purchase
securities traded in the over-the-counter market. The Growth & Income Trust may
also invest up to 20% of its assets in foreign securities. The risks of
investing in foreign securities are set forth above under "Risks of Investing in
Certain Types of Securities." Since the portfolio will only invest at most 20%
of its assets in foreign securities, the risks associated with foreign
securities will not affect the portfolio as much as a portfolio that invests
more of its assets in foreign securities.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Growth & Income Trust may invest up to 100% of
its assets in securities which are authorized for purchase by the Investment
Quality Bond Trust (excluding non-investment grade securities) or the Money
Market Trust. To the extent the portfolio is in a defensive position, the
ability to achieve its investment objective will be limited.
Use of Hedging and Other Strategic Transactions
The Growth & Income Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently anticipated that any of these
strategies will be used to a significant degree by the portfolio.
77
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- Because the portfolio invests primarily in high quality equity securities,
it may underperform portfolios invested in more speculative growth
securities when these securities are in favor in the market.
Performance (A)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 20.16% (for the
quarter ended 12/1998) and the lowest return was -17.43% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
2.9% 29.2% 22.8% 32.8% 26.5% 18.9% -7.1% -11.3% -24.3% 26.5%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Growth & Income Trust
Series I 26.45% -1.27% 9.91% N/A 04/23/1991
Series II 26.41% N/A N/A -2.44% 01/28/2002
Series III N/A N/A N/A 7.82% 09/05/2003
S&P 500 Index 28.70% -0.57% 11.06% N/A
</Table>
(A)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Wellington Management Company, LLP, a Massachusetts limited liability
partnership, is a professional investment counseling firm with its principal
business offices located at 75 State Street, Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided investment
services to investment companies, employee benefit plans, endowments,
foundations and other institutions since 1928. The managing partners of
Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R.
Ryan.
The Portfolio Manager is:
-- Matthew E. Megargel (since February, 1992). Mr. Megargel, Senior
Vice President of Wellington Management, joined Wellington Management
in 1983 as a research analyst and took on additional responsibilities
as a portfolio manager in 1988. In 1991, he became solely a portfolio
manager with Wellington Management. He is a Chartered Financial
Analyst.
GREAT COMPANIES -- AMERICA(SM) TRUST
(Not Available for Sale)
SUBADVISER: Great Companies, L.L.C.
INVESTMENT OBJECTIVE: To seek long-term growth of capital.
INVESTMENT STRATEGIES: The subadviser seeks to achieve this objective by
investing principally in large-cap stocks.
The Portfolio's subadviser, Great Companies, L.L.C. ("Great Companies")
seeks to invest in common stocks of large, established, U.S.-based companies.
Stocks for this portfolio are selected by Great Companies from a group of
companies that it has identified, in its opinion, as being "great companies."
To be considered a "great company" by the subadviser, the subadviser will
initially determine if a company meets the following criteria:
-- have a market cap in excess of $15 billion;
-- be highly regard by management experts;
-- be incorporated in the U.S.;
78
-- be publicly traded;
-- be engaged in what the subadviser considers to be "terrific
businesses" (i.e., businesses which, in the opinion of the
subadviser, have low labor costs, high return on invested capital and
are not subject to commoditization);
-- have a "protective barrier" such as superior business franchises;
have been in business for at least 50 years and survived the founder;
-- consider employees to be the company's most valuable asset;
-- have, in the subadviser's opinion, "world class management" (i.e.,
management which, in the opinion of the subadviser, have the
confidences of their boards, have the long term interest of
shareholders as a priority, provide a clear strategic vision for
their company and seek to manage under high ethical standards);
-- deliver outstanding return to shareholders;
-- be a global company (as defined by the subadviser); and,
-- be in an innovation-driven company that, in the subadviser's opinion,
can convert changes into opportunities.
The subadviser seeks common stocks that have outstanding shareholder
returns (defined as having outperformed the portfolio's benchmark over a set
period of time). The subadviser will use the S&P 500 as the performance
benchmark for the portfolio.
Companies identified by the subadviser for inclusion in the portfolio may
fall outside of the initial screening process. The final selection of companies
identified by the stock selection process and the addition of such companies to
the portfolio, is at the sole discretion of the subadviser, irrespective of the
stock screening process or methods used.
To determine how to allocate fund assets among the "great companies" the
subadviser has identified, the subadviser uses Intrinsic Value. Intrinsic Value
is the discounted value of the cash that can be take out of a business during
its remaining life. It is an estimate rather than a precise figure, and changes
when interest rates move or when forecasts of future cash flows are revised.
Principal Risks of Investing in this Portfolio
-- Equity Securities. The portfolio invests primarily in equity securities.
The risks of investing in equity securities are set forth below under
"Risks of Investing in Certain Types of Securities."
-- Nondiversified. The portfolio is nondiversified. The definition of a
non-diversified portfolio and the risks associated with such a portfolio
are set forth below under "Risks of Investing in Certain Types of
Securities."
-- Intrinsic Value Strategy. The subadviser uses Intrinsic Value to allocate
the portfolio's assets. If the subadviser's determination of a company's
intrinsic value is not correct (or is subsequently revised) performance
may be lower. Intrinsic Value is an estimate rather than a precise figure
and changes when interest rates move or forecasts of future cash flows are
revised.
-- Proprietary forms of research may not be effective and may cause overall
returns to be lower than if other forms of research are used.
Performance
Performance is not provided since the portfolio commenced operations in
July, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
Great Companies, located at 635 Court Street, Suite 100, Clearwater,
Florida 33756, is a 30% owned indirect subsidiary of AUSA Holding Company. AUSA
is wholly-owned by Transamerica Holding Company, which is wholly-owned by AEGON
USA, Inc. (AEGON USA), a financial services holding company whose primary
emphasis is on life and health insurance, and annuity and investment products.
AEGON USA is a wholly-owned indirect subsidiary of AEGON N.V., a Netherlands
corporation and publicly traded international insurance group.
The Portfolio Managers are:
-- Jim Huguet (since July, 2003). Mr. Huguet has served as Co-CEO,
Manager, and Chief Investment Officer of Great Companies since May
2000. Mr. Huguet was born in 1944 and received both a bachelor's and
a master's degree from Louisiana State University. He founded and
operated a sales and business consulting firm, NEO, Inc., from 1982
until 1994. From 1994 until 1998, Mr. Huguet served as Executive Vice
President of Information Resources Inc. From 1998 to May 2000, Mr.
Huguet served as Director and President of Great Companies, Inc., an
investment advisory firm registered with the State of Connecticut. In
May 2000, Mr. Huguet, together with Mr. Kenney and Money Services,
Inc., formed Great Companies, LLC.
-- Gerry Bollman, CFA (since July, 2003). Mr. Bollman has served as
Executive Vice President and Portfolio Manager since May 2000. Mr.
Bollman was born in 1942 and received a bachelor's degree in business
administration from the University of Oregon. He also completed the
Program for Management Development at Harvard University. From 1983
until 1995, Mr. Bollman was Executive Vice President and portfolio
manager for Continental Asset Management Corporation in New York
City, and was responsible for all equity and venture capital
portfolios
79
for that firm. From 1995 to May 2001, Mr. Bollman founded and served
as Chairman and Managing Member of Intrinsic Value Associates, LLC, a
Chatham, New Jersey based consulting firm that provided portfolio
management services and Intrinsic Value advice to Great Companies,
Inc and then to Great Companies, LLC. Mr. Bollman also served as
executive vice president of Great Companies, Inc., an investment
advisory firm registered with the State of Connecticut, from 1999
until May 2000.
-- Matt Stephani, CFA, CPA (since July, 2003). Senior Vice President
has served as Co-Portfolio Manager since May 2001. He is responsible
for analysis of both domestic and foreign securities for Great
Companies. Mr. Stephani was born in 1970 and received a B.S. and
Masters in Accounting concurrently from Brigham Young University.
From 1995 to May 2001, Mr. Stephani served as Accounting Manager for
Deloitte & Touche in Wilton Connecticut. Mr. Stephani currently holds
a CPA and CFA License.
QUANTITATIVE VALUE TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.)")
INVESTMENT OBJECTIVE: To seek long-term capital appreciation.
INVESTMENT STRATEGIES: The subadviser seeks to obtain this objective by
investing primarily in large-cap U.S. securities with the
potential for long-term growth of capital.
The portfolio invests primarily in large-cap U.S. securities with the
potential for long-term growth of capital. The subadviser uses both qualitative
and quantitative analysis to determine the best investment values, emphasizing
securities that may have been undervalued by the market.
Qualitative analysis may include company visits and management interviews
while quantitative analysis may include evaluations of financial data,
assessment of market share and industry position, and factors such as
price-to-earnings ratios, dividend yield, and earnings growth.
The portfolio may also hold fixed income securities (including cash and
cash equivalents) and foreign securities from time to time.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest in securities that the subadviser believes have
been undervalued by the market. The price of these securities will
increase if other investors in the stock market subsequently believe that
the securities are undervalued and are willing to pay a higher price for
them. If other investors in the stock market continue indefinitely to
undervalue these securities, or if in fact these securities are not
undervalued, the value of the portfolio may decline.
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
SUBADVISERS AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) manages the Quantitative Value Trust. MFC is a
corporation subject to the laws of Canada. Its principal business at the present
time is to provide investment management services to the portfolios of the Trust
for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned
subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada.
MFC is the holding company of The Manufacturers Life Insurance Company and its
subsidiaries, including Elliott & Page Limited and Manulife Fund Direct (Hong
Kong) Limited, collectively known as Manulife Financial. The address of MFC
Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The portfolio is managed by the following portfolio managers:
-- Mark Schmeer (since May, 2004). Mr. Schmeer joined MFC Global in
1996. He is Vice President and Managing Director of North American
Equities at Manulife Financial. Prior to 1996, Mr. Schmeer was Vice
President of Sun Life Investment Management, where he served from
1993 to 1996. He is a Chartered Financial Analyst, and graduated from
Boston College with an MA in Economics.
-- Harpreet Singh (since May, 2004). Mr. Singh joined MFC Global in
August of 2000. He is Assistant Vice President and Portfolio Manager
of U.S. Equities at MFC Global. Prior to joining MFC Global in 2000,
Mr. Singh was Quantitative Analyst at Standish, Ayer & Wood Inc. Mr.
Singh graduated with an MBA from Bentley College and a B. Tech
(Chemical Engineering) from Indian Institute of Technology.
-- Chris Hensen (since May, 2004). Mr. Hensen joined MFC Global in July
of 1995. He is Assistant Vice President and Portfolio Manager of U.S.
Equities at MFC Global. Mr. Hensen holds the Chartered Financial
Analyst designation and is a graduate of York University with a BBA
and an MBA.
80
-- Brett Hryb (since May, 2004). Mr. Hryb joined MFC Global in March of
1993. He is a Portfolio Manager of U.S. Equities at MFC Global. Mr.
Hyrb holds the Chartered Financial Analyst designation and is a
graduate of McMaster University (B.Comm).
EQUITY-INCOME TRUST
SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price")
INVESTMENT OBJECTIVE: To provide substantial dividend income and also long-term
capital appreciation.
INVESTMENT STRATEGIES: The portfolio invests, under normal circumstances, at
least 80% of the portfolio's total assets in equity
securities, with 65% in common stocks of well-established
companies paying above-average dividends.
T. Rowe Price believes that income can contribute significantly to total
return over time and expects the portfolio's yield to exceed that of the S&P 500
Index. Dividends can also help reduce the portfolio's volatility during periods
of market turbulence and help offset losses when stock prices are falling.
The Equity-Income Trust employs a "value" approach and invests in stocks
and other securities that appear to be temporarily undervalued by various
measures and may be temporarily out of favor, but have good prospects for
capital appreciation and dividend growth. Value investors seek to buy a stock
(or other security) when its price is low in relation to what they believe to be
its real worth or future prospects. By identifying companies whose stocks are
currently out of favor, value investors hope to realize significant appreciation
as other investors recognize a stock's intrinsic value. Finding undervalued
stocks requires considerable research to identify the particular stocks, to
analyze each company's underlying financial condition and prospects, and to
assess the likelihood that a stock's underlying value will be recognized by the
market and reflected in its price.
The Equity-Income Trust will generally consider companies with the
following characteristics:
-- established operating histories;
-- above-average dividend yield relative to the S&P 500 Index;
-- low price/earnings ratios relative to the S&P 500 Index;
-- sound balance sheets and other financial characteristics; and
-- low stock price relative to a company's underlying value, as measured
by assets, cash flow or business franchises.
The Equity-Income Trust may also purchase other types of securities in
keeping with its objective, including:
-- U.S. and non-U.S. dollar denominated foreign securities including
ADRs (up to 25% of total assets);
-- preferred stocks;
-- convertible stocks, bonds, and warrants; and
-- futures and options.
The portfolio may invest in fixed income securities without regard to
quality or rating, including up to 10% in non-investment grade ("junk bonds")
fixed income securities. The risks of investing in fixed income securities are
set forth above under "Risks of Investing in Certain Types of Securities." Since
the portfolio invests primarily in equity securities, the risks associated with
fixed income securities will not affect the portfolio as much as a portfolio
that invests more of its assets in fixed income securities.
The portfolio holds a certain portion of its assets in money market
reserves which can consist of shares of the T. Rowe Price Reserve Investment
Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or less.
The portfolio may sell securities for a variety of reasons such as to
secure gains, limit losses or redeploy assets into more promising opportunities.
Use of Hedging and Other Strategic Transactions
The Equity-Income Trust may also engage in a variety of investment
management practices, such as buying and selling futures and options. The
portfolio may invest up to 10% of its total assets in hybrid instruments. Hybrid
instruments are a type of high-risk derivative which can combine the
characteristics of securities, futures and options. Such securities may bear
interest or pay dividends at below market (or even relatively nominal) rates.
The Statement of Additional Information contains more complete description of
such instruments and the risks associated therewith.
In pursuing its investment objective, the portfolio's management has the
discretion to purchase some securities that do not meet its normal investment
criteria, as described above, when it perceives an unusual opportunity for gain.
These special situations might arise when the portfolio's management believes a
security could increase in value for a variety of reasons
81
including a change in management, an extraordinary corporate event, or a
temporary imbalance in the supply of or demand for the securities.
The Equity-Income Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions."
Principal Risks of Investing in this Portfolio
-- The portfolio's emphasis on stocks of established companies paying high
dividends, and its potential investments in fixed income securities, may
limit its potential appreciation in a broad market advance. The
portfolio's value approach carries the risk that the market will not
recognize a security's intrinsic value for a long time, or that a stock
judged to be undervalued may actually be appropriately priced.
-- The portfolio invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest up to 25% of its assets in foreign securities.
The risks of investing in foreign securities are set forth below under
"Risks of Investing in Certain Types of Securities." Since the portfolio
will only invest up to 25% of its assets in foreign securities, the risks
associated with foreign securities will not affect the portfolio as much
as a portfolio that invests more of its assets in foreign securities.
Performance (A, B, C, D)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 16.68% (for the
quarter ended 6/2003) and the lowest return was -17.40% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
0.8% 23.7% 19.9% 29.7% 9.2% 3.4% 13% 1.3% -13.3% 25.6%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Equity-Income Trust
Series I 25.57% 5.20% 10.56% 02/19/1993
Series II 25.40% N/A 4.68% 01/28/2002
Series III N/A N/A 9.81% 09/05/2003
Russell 1000 Value Index(C) 30.03% 3.56% 11.88%
</Table>
(A)Effective October 1, 1996, the portfolio changed its subadviser. Performance
reflects results prior to this change.
(B)Since June 1, 2000, a portion of the Equity-Income Trust expenses were
reimbursed. If such expenses had not been reimbursed, returns would be lower.
(C)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of a month end.
(D)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
T. Rowe Price manages the Equity Income Trust. T. Rowe Price, whose address
is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the
late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded
financial services holding company, owns 100% of the stock of T. Rowe Price. As
of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion
for over eight million individual and institutional investor accounts.
The portfolio is managed by an investment advisory committee chaired by:
-- Brian C. Rogers (since October, 1996). Mr. Rogers, who joined T.
Rowe Price in 1982, is a Vice President of T. Rowe Price and has been
managing investments since 1983. He is a Chartered Financial Analyst.
The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing the
portfolio's investment program.
82
INCOME & VALUE TRUST
SUBADVISER: Capital Guardian Trust Company ("CGTC")
INVESTMENT OBJECTIVE: To seek the balanced accomplishment of (a) conservation
of principal and (b) long-term growth of capital and
income.
INVESTMENT STRATEGIES: The portfolio invests its assets in both equity and fixed
income securities. CGTC has full discretion to determine
the allocation of assets between equity and fixed income
securities. Generally, between 25% and 75% of the
portfolio's assets will be invested in fixed income
securities unless CGTC determines that some other
proportion would better serve the portfolio's investment
objective.
Fixed Income Securities. At least 80% of the fixed income portion of the
portfolio will consist of the following:
-- securities rated "Baa" or better at the time of purchase by Moody's
or "BBB" by Standard & Poor's or deemed by CGTC to be of equivalent
investment quality including mortgage-related and asset-backed
securities (see "Other Risks of Investing" below for a description of
these securities);
-- non-U.S. dollar fixed income securities (up to 15% of the portfolio's
assets including up to 5% in emerging market fixed income
securities);
-- securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
-- cash or cash equivalents including commercial bank obligations and
commercial paper.
Fixed-income securities may include ADRs, Yankee Bonds and Eurodollar
instruments which are U.S. dollar denominated and non-U.S. dollar fixed income
securities subject to the limits set forth above.
Equity Securities. Equity securities shall be traded on national
securities exchanges, NASDAQ or in other national OTC markets and may include
ADRs and other U.S. registered securities of foreign issuers which are
denominated in U.S. dollars.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Income & Value Trust may invest all or a portion
of its assets in fixed income securities, cash and cash equivalents. To the
extent the portfolio is in a defensive position, the ability to achieve its
investment objective will be limited.
Use of Hedging and Other Strategic Transactions
The Income & Value Trust is currently authorized to use all of the
investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the portfolio.
Principal Risks of Investing in this Portfolio
-- The portfolio invests in equity securities. The risks of investing in
equity securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio invests in fixed income securities, including those rated
below investment grade. The risks of investing in these securities are set
forth below under "Risks of Investing in Certain Types of Securities."
-- The portfolio invests in fixed income securities from foreign and emerging
markets. The risks of investing in foreign securities and emerging market
securities are set forth below under "Risk of Investing in Certain Types
of Securities."
-- The portfolio may invest in mortgage-backed and other asset-backed
securities. Investing in these securities subjects the portfolio to
prepayment risk. Prepayments of underlying mortgages or pools of assets
result in a loss of anticipated interest payments and all or part of any
premium paid for the security. Therefore, the portfolio could make less
money than expected or could lose money. Mortgage prepayments generally
increase with falling interest rates and decrease with rising interest
rates.
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
83
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 13.68% (for the
quarter ended 6/2003) and the lowest return was -13.70% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-1.6% 20.7% 10% 15.3% 15.1% 8.5% 4.9% 1% -15.9% 26.5%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Income & Value Trust Series I 26.48% 4.11% 7.87% N/A 08/03/1989
Series II 26.29% N/A N/A 3.87% 01/28/2002
S&P 500 Index 28.70% -0.57% 11.06% N/A
Citigroup Broad Investment Grade Bond Index 4.20% 6.62% 6.96% N/A
60% S&P 500/40% Citigroup Broad Investment Grade Bond
Index 18.53% 2.67% 9.75% N/A
Combined Index(B) 18.53% 2.35% 7.81% N/A
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)The Combined Index represents 32.5% of the return of the Wilshire 5000 Index,
10% of the MSCI EAFE Index, 40% of the Lehman Brothers Aggregate Bond Index, 10%
of the 90 Day T-Bill, and 7.5% of the Merrill Lynch High Yield Index through
April 30, 1999, and 60% of the return of the S&P 500 Index and 40% of the return
of the Citigroup Broad Investment Grade Bond Index from May 1, 1999 and
thereafter. The Combined Index was prepared by the adviser using Ibbotson
Associates Software and Data. The Combined Index was added to provide a more
accurate comparison of performance.
(C)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
CGTC is located at 333 South Hope Street, Los Angeles, California 90071.
CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which
itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC
has been providing investment management services since 1968 and manages
approximately $146 billion of assets as of December 31, 2003.
The Portfolio Managers are:
-- Alan J. Wilson (since January, 1999). Mr. Wilson is Vice President
of Capital International Research, Inc. Mr. Wilson joined the Capital
Group organization in 1991.
-- Michael D. Locke (since December 2001). Mr. Locke is Vice President
of Capital Research Company with portfolio specialist and research
responsibilities for mortgage- and asset-backed securities and
derivatives. He joined the Capital Group organization in 1996.
-- Christine C. Cronin (since December 2001). Ms. Cronin is a Vice
President of Capital Research Company with portfolio specialist
responsibility for investment grade corporate bonds, and research
responsibility for the airline, cruise, food, and financial services
industries. She joined the Capital Group organization in 1997.
-- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice
President and portfolio manager for CGTC. He joined the Capital Group
organization in 1987.
-- David I. Fisher (since May, 1999). Mr. Fisher is Chairman of the
Board of Capital Guardian Trust Company. He joined the Capital Group
organization in 1969.
-- James R. Mulally (since May, 1999). Mr. Mulally is Senior Vice
President, a Director, and Chairman of the Fixed Income Investment
Sub-Committee for CGTC. He joined the Capital Group organization in
1980.
-- Theodore R. Samuels (since May, 1999). Mr. Samuels is a Senior Vice
President and a Director for CGTC. He joined the Capital Group
organization in 1981.
-- Eugene P. Stein (since May, 1999). Mr. Stein is Executive Vice
President and a Director. He joined the Capital Group organization in
1972.
-- Terry Berkemeier (since July, 1999). Mr. Berkemeier is a Vice
President and portfolio manager for CGTC. He joined the Capital Group
organization in 1992.
-- Karen A. Miller (since December, 2000). Ms. Miller is a Senior Vice
President of Capital International Research, Inc. She joined the
Capital Group organization in 1990.
A portion of the portfolio is managed by individual members of the research
team.
84
GLOBAL ALLOCATION TRUST (FORMERLY, TACTICAL ALLOCATION TRUST)
SUBADVISER: UBS Global Asset Management
INVESTMENT OBJECTIVE: To seek total return, consisting of long-term capital
appreciation and current income.
INVESTMENT STRATEGIES: The portfolio invests in equity and fixed income
securities of issuers located within and outside the U.S.
Under normal circumstances, the portfolio will allocate
its assets between fixed income securities and equity
securities.
Investments in fixed income securities may include debt securities of
governments throughout the world (including the U.S.), their agencies and
instrumentalities, debt securities of corporations, mortgage-backed securities
and asset-backed securities. Investment in equity securities may include common
stock and preferred stock. The portfolio may invest in certain issuers by
investing in other open-end investment companies, including investment companies
advised by the subadviser, to the extent permitted by applicable law. In
addition, the portfolio attempts to generate positive returns through
sophisticated currency management techniques. These decisions are integrated
with analysis of global market and economic conditions. The portfolio may (but
is not required to) use forward currency contracts, options, futures and other
derivatives as part of its investment strategy or to help manage portfolio
risks.
The portfolio is a multi-asset portfolio and invests in each of the major
asset classes: U.S. fixed income, U.S. equities, international fixed income and
international equities, based upon the subadviser's assessment of prevailing
market conditions in the U.S. and abroad.
Within the equity portion of the portfolio, the subadviser selects
securities whose fundamental values it believes are greater than their market
prices. In this context, the fundamental value of a given security is the
subadviser's assessment of what a security is worth. The subadviser bases its
estimates of value upon economic, industry and company analysis, as well as upon
a company's management team, competitive advantage and core competencies. The
subadviser then compares its assessment of a security's value against the
prevailing market prices, with the aim of constructing a portfolio of stocks
with attractive relative price/value characteristics.
For each security under analysis, the fundamental value estimate is
compared to the company's current market price to ascertain whether a valuation
anomaly exists. A stock with a market price below the estimated intrinsic or
fundamental value would be considered a candidate for inclusion in the
portfolio. The comparison between price and intrinsic or fundamental value
allows comparisons across industries and countries.
In selecting fixed income securities, the subadviser uses an internally
developed valuation model that quantifies return expectations for all major bond
markets, domestic and foreign. The model employs a qualitative credit review
process that assesses the ways in which macroeconomic forces (such as inflation,
risk premiums and interest rates) may affect industry trends. Against the output
of this model, the subadviser considers the viability of specific debt
securities compared to certain qualitative factors, such as management strength,
market position, competitive environment and financial flexibility, as well as
certain quantitative factors, such as historical operating results, calculation
of credit ratios, and expected future outlook. These securities will have an
initial maturity of more than one year and will generally be of investment-grade
quality and possess a minimum rating of BBB by S&P or Baa by Moody's, or, if
unrated, determined to be of comparable quality by the subadviser.
The subadviser's fixed income strategy combines judgments about the
absolute value of the fixed income universe and the relative value of issuer
sectors, maturity intervals, duration of securities, quality and coupon segments
and specific circumstances facing the issuers of fixed income securities.
Duration management involves adjusting the sensitivity to interest rates of the
holdings within a country. The subadviser manages duration by choosing a
maturity mix that provides opportunity for appreciation while also limiting
interest rate risks.
The portfolio's risk is carefully monitored with consideration given to the
risk generated by individual positions, sector, country and currency views.
The portfolio may invest in cash or cash equivalent instruments, including
shares of an affiliated investment company. When market conditions warrant, the
portfolio may make substantial temporary defensive investments in cash
equivalents, which may affect the portfolio's ability to pursue its investment
objective. The subadviser actively manages the portfolio. As such, increased
portfolio turnover may result in higher costs for brokerage commissions,
transaction costs and taxable gains.
Principal Risks of Investing in this Portfolio
-- The portfolio may invest in equity securities. The risks of investing in
equity securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio may invest in fixed income securities. The risks of
investing in fixed income securities are set forth below under "Risk of
Investing in Certain Types of Securities."
85
-- The portfolio may invest in foreign securities, including emerging market
securities. The risks of investing in foreign securities and emerging
market securities are set forth below under "Risk of Investing in Certain
Types of Securities."
-- The subadviser allocates the portfolio's assets among several asset
categories. The risks associated with asset allocation include the risk
that the portfolio may allocate assets to an asset category that
underperforms other asset categories. For example, the portfolio may be
overweighted in equity securities when the stock market is falling and the
fixed income market is rising.
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 14.38% (for the
quarter ended 6/2003) and the lowest return was -17.65% (for the quarter ended
9/2002).
- --------------------------------------------------------------------------------
<Table>
-13.4% -23.2% 26.4%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Global Allocation Trust
Series I 26.43% -5.45% 05/01/2000
Series II 26.47% -0.90% 01/28/2002
S&P 500 Index(A) 28.70% -5.61%
Global Securities Market Index(A, B) 26.48% 0.73%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)The Global Securities Markets Index was added to more accurately reflect the
investment objective of the Global Allocation Trust, and is an unmanaged index
compiled by UBS Global Asset Management. It is currently constructed as follows:
40% Russell 3000 Index, 22% MSCI World ex-USA (free) Index, 21% Citigroup Broad
Investment Grade (BIG) Bond Index, 9% Citigroup World Government Bond non-US
Index, 3% Merrill Lynch High Yield Cash Pay Index, 3% MSCI Emerging Free Markets
Index and 2% J.P. Morgan EMBI Global Index.
(C)Series II performance will be lower than Series I performance due to the
higher Rule 12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
UBS Global Asset Management (Americas) Inc., One North Wacker Drive,
Chicago, Illinois, 60606, is an indirect wholly owned asset management
subsidiary of UBS AG and a member of the UBS Global Asset Management Division.
UBS AG, with headquarters in Zurich, Switzerland, is an internationally
diversified organization with operations in many areas of the financial services
industry.
Investment decisions for the portfolio are made by an investment management
team at the subadviser. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases.
86
HIGH YIELD TRUST
SUBADVISER: Salomon Brothers Asset Management Inc. ("SaBAM")
INVESTMENT OBJECTIVE: To realize an above-average total return over a market
cycle of three to five years, consistent with reasonable
risk.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of it's net assets (plus any borrowings for
investment purposes) in high yield securities, including
corporate bonds, preferred stocks, U.S. Government
securities, mortgage-backed securities, loan assignments
or participations and convertible securities which have
the following ratings (or, if unrated, are considered by
SaBAM to be of equivalent quality):
<Table>
<Caption>
CORPORATE BONDS, PREFERRED STOCKS AND CONVERTIBLE SECURITIES
RATING AGENCY
----------------------------------------------------------------------------
Moody's Ba through C
Standard & Poor's BB through D
</Table>
Securities rated less than "Baa" by Moody's or "BBB" by Standard & Poor's
are classified as non-investment grade securities and are commonly referred to
as "junk bonds." The Portfolio may also invest in investment grade securities.
The High Yield Trust may invest in foreign bonds and other fixed income
securities denominated in foreign currencies, where, in the opinion of SaBAM,
the combination of current yield and currency value offer attractive expected
returns. Foreign securities in which the portfolio may invest include emerging
market securities. SaBAM may utilize futures, swaps and other derivatives in
managing the portfolio.
The High Yield Trust may invest in fixed-and floating-rate loans, which
investments generally will be in the form of loan participations and assignments
of such loans.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in non-investment grade fixed income
securities. The risks of investing in these types of securities are set
forth below under "Risks of Investing in Certain Types of Securities."
-- The portfolio may invest its assets in foreign securities including
securities of companies in emerging markets. The risks of investing in
foreign securities are set forth below under "Risks of Investing in
Foreign Securities." Because the portfolio may invest up to 100% of its
assets in foreign securities, which are generally riskier investments in
U.S. securities, investing in this portfolio is riskier than investing in
a portfolio that invests primarily in U.S. high yield fixed income
securities.
-- The portfolio may invest in mortgage-backed securities. Investing in
mortgage-backed securities subjects the portfolio to prepayment risk.
Prepayments of underlying mortgages result in a loss of anticipated
interest payments and all or part of any premium paid for the security.
Therefore, the portfolio could make less money than expected or could lose
money. Mortgage prepayments generally increase with falling interest rates
and decrease with rising interest rates.
87
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 7.94% (for the
quarter ended 6/2003) and the lowest return was -6.52% (for the quarter ended
9/1998).
- --------------------------------------------------------------------------------
<Table>
12.7% 2.8% 8% -9% -5.5% -6.7% 24.2%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
High Yield Trust
Series I 24.15% 1.49% 3.21% 01/01/1997
Series II 23.91% N/A 7.36% 01/28/2002
Series III N/A N/A 8.03% 09/05/2003
Citigroup High Yield Index(A) 30.62% 5.41% 6.23%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)Current subadvisor assignment became effective May 1, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
SaBAM was established in 1987 and, together with affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and
equity investment services to individuals and institutional clients throughout
the world. SaBAM's principal address is 399 Park Avenue, New York, New York
10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses
provide a broad range of financial services -- asset management, banking and
consumer finance, credit and charge cards, insurance investments, investment
banking and trading -- and use diverse channels to make them available to
consumer and corporate customers around the world.
The Portfolio is managed by the Salomon Brothers Asset Management Fixed
Income Team. Current members of the team include Peter Wilby, CFA, Managing
Director, Beth Semmel, CFA, Managing Director, Thomas Flanagan, CFA, Managing
Director and James Craige, CFA, Managing Director. John Madden, Vice President
serves as the portfolio specialist for the global high yield team.
STRATEGIC BOND TRUST
SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM")
INVESTMENT OBJECTIVE: To seek a high level of total return consistent with
preservation of capital.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 80% of it's net assets (plus any borrowings for
investment purposes) in fixed income securities.
The portfolio's assets may be allocated among the following five sectors of
the fixed income market listed below:
(a) U.S. government obligations,
(b) investment grade domestic corporate fixed income securities,
(c) below investment grade or non-investment grade high yield corporate
fixed income securities,
(d) mortgage-backed and asset-backed securities and
(e) investment grade and below investment grade or non-investment grade
high yield international fixed income securities.
88
The portfolio invests in fixed income securities across a range of credit
qualities and may invest a substantial portion of its assets in obligations
rated below investment grade by a recognized rating agency, or, if unrated, of
equivalent quality as determined by SaBAM. Below investment grade securities are
commonly referred to as "junk bonds".
SaBAM will determine the amount of assets to be allocated to each type of
security based on its assessment of the maximum level of total return that can
be achieved from a portfolio which is invested in these securities without
incurring undue risks to principal value. The allocation decisions are based on
SaBAM's analysis of current economic and market conditions and the relative
risks and opportunities presented in these markets.
In making this determination, SaBAM relies in part on quantitative
analytical techniques that measure relative risks and opportunities of each type
of security. SaBAM also relies on its own assessment of economic and market
conditions both on a global and local (country) basis. SaBAM considers economic
factors including current and projected levels of growth and inflation, balance
of payment status and monetary policy. The allocation of assets to international
debt securities is further influenced by current and expected currency
relationships and political and sovereign factors. The portfolio's assets may
not always be allocated to the highest yielding securities if SaBAM believes
that such investments would impair the portfolio's ability to preserve
shareholder capital. SaBAM will continuously review this allocation of assets
and make such adjustments as it deems appropriate. The portfolio does not plan
to establish a minimum or a maximum percentage of the assets which it will
invest in any particular type of fixed income security.
The types and characteristics of the U.S. government obligations,
mortgage-backed and asset-backed securities, investment grade corporate fixed
income securities and investment grade international fixed income securities
purchased by the Strategic Bond Trust are set forth in the discussion of
investment objectives and policies for the Investment Quality Bond, U.S.
Government Securities and Global Bond Trusts, and in the section entitled "Other
Instruments" in the Statement of Additional Information. The types and
characteristics of the money market securities purchased by the portfolio are
set forth in the discussion of investment objectives of the Money Market Trust.
Potential investors should review these other discussions in considering an
investment in shares of the Strategic Bond Trust. The Strategic Bond Trust may
invest without limitation in high yield domestic and foreign fixed income
securities and up to 100% of the Strategic Bond Trust's assets may be invested
in foreign securities. SaBAM has discretion to select the range of maturities of
the various fixed income securities in which the portfolio invests. Such
maturities may vary substantially from time to time depending on economic and
market conditions.
The high yield sovereign fixed income securities in which the Strategic
Bond Trust may invest are U.S. dollar-denominated and non-dollar-denominated
fixed income securities issued or guaranteed by governments or governmental
entities of developing and emerging countries. SaBAM expects that these
countries will consist primarily of those which have issued or have announced
plans to issue Brady Bonds, but the portfolio is not limited to investing in the
debt of such countries. Brady Bonds are debt securities issued under the
framework of the Brady Plan.
Although SaBAM does not anticipate investing in excess of 75% of the
portfolio's assets in domestic and developing country fixed income securities
that are rated below investment grade, the portfolio may invest a greater
percentage in such securities when, in the opinion of the SaBAM, the yield
available from such securities outweighs their additional risks. By investing a
portion of the portfolio's assets in securities rated below investment grade, as
well as through investments in mortgage-backed securities and international debt
securities, as described below, SaBAM seeks to provide investors with a higher
yield than a high-quality domestic corporate bond fund with less risk than a
fund that invests principally in securities rated below investment grade.
Certain of the debt securities in which the portfolio may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's or Standard & Poor's
(i.e., rated "C" by Moody's or "CCC" or lower by Standard & Poor's).
In light of the risks associated with investing in high yield corporate and
sovereign debt securities, SaBAM considers various factors in evaluating the
credit worthiness of an issue. These factors will typically include:
<Table>
<Caption>
CORPORATE DEBT SECURITIES SOVEREIGN DEBT INSTRUMENTS
- ------------------------------------------------------------------------------------------------
-- issuer's financial condition -- economic and political conditions within
-- issuer's sensitivity to economic the issuer's country
conditions and trends -- issuer's external and overall Debt levels,
-- issuer's operating history and its ability to pay principal and interest
-- experience and track record of the when due
issuer's management -- issuer's access to capital markets and
other sources of funding
-- issuer's debt service payment history
</Table>
SaBAM also reviews the ratings, if any, assigned to a security by any
recognized rating agencies, although its judgment as to the quality of a debt
security may differ from that suggested by the rating published by a rating
service. The portfolio's ability to achieve its investment objective may be more
dependent on SaBAM's credit analysis than would be the case if it invested in
higher quality debt securities.
89
The portfolio may invest in fixed-and floating-rate loans, which
investments generally will be in the form of loan participations and assignments
of such loans.
Use of Hedging and Other Strategic Transactions
The Strategic Bond Trust is currently authorized to use all of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." With the exception of currency transactions, however, it is not
presently anticipated that any of these strategies will be used to a significant
degree by the portfolio.
Principal Risks of Investing in this Portfolio
-- Whether the portfolio achieves its investment objective is significantly
dependent on the ability of SaBAM to allocate the portfolio effectively
among the different investment categories. If SaBAM does not correctly
assess the returns that can be achieved from a particular category of
assets, the returns for the portfolio could be volatile and the value of
the portfolio may decline.
-- The portfolio invests substantially all of its assets in fixed income
securities, including a significant amount in non-investment grade fixed
income securities. The risks of investing in fixed income securities is
set forth below under "Risks of Investing in Certain Types of Securities."
-- The portfolio may invest up to 100% of its assets in foreign securities
including securities of companies in emerging markets. Investing in
foreign securities increases the risk of investing in the portfolio.
However, the ability of the portfolio to spread its investments among the
fixed income markets in a number of different countries may reduce the
overall level of market risk of the portfolio to the extent it may reduce
the portfolio's exposure to a single market. The risks of investing in
foreign securities are set forth below under "Risks of Investing in
Foreign Securities."
-- The portfolio may invest in mortgage-backed securities. Investing in
mortgage-backed securities subjects the portfolio to prepayment risk.
Prepayments of underlying mortgages result in a loss of anticipated
interest payments and all or part of any premium paid for the security.
Therefore, the value of the portfolio may decline. Mortgage prepayments
generally increase with falling interest rates and decrease with rising
interest rates.
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 9.55% (for the
quarter ended 6/1995) and the lowest return was -4.04% (for the quarter ended
3/1994).
- --------------------------------------------------------------------------------
<Table>
-6% 19.2% 14.7% 11% 1.3% 2% 7.3% 6.2% 9% 13.1%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Strategic Bond Trust
Series I 13.11% 7.53% 7.58% 02/19/1993
Series II 12.93% N/A 10.54% 01/28/2002
Series III N/A N/A 5.01% 09/05/2003
Lehman Brothers Aggregate Bond Index(A) 4.11% 6.62% 6.95%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
SaBAM was established in 1987 and, together with affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and
equity investment services to individuals and institutional clients throughout
the world. SaBAM's principal address is 399 Park Avenue, New York, New York
10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses
provide a broad range of financial services -- asset management, banking and
consumer finance,
90
credit and charge cards, insurance investments, investment banking and
trading -- and use diverse channels to make them available to consumer and
corporate customers around the world.
In connection with SaBAM's service as subadviser to the Strategic Bond
Trust, SaBAM's affiliate, Citigroup Asset Management Limited ("CAM Limited"),
whose principal address is Citigroup Centre, Canada Square, London, E14 5LB,
England, provides certain advisory services to SaBAM with regard to currency
transactions and investments in non-dollar denominated debt securities for the
benefit of the portfolio. CAM Limited is compensated by SaBAM at no additional
expense to the portfolio.
The Portfolio Manager is:
-- Roger Lavan (since February, 1993). Mr. Lavan joined SaBAM in 1990
and is a Managing Director in the fixed income department. He is a
Portfolio Manager responsible for SaBAM's investment company and
institutional portfolios which invest primarily in mortgage-backed
and U.S. government debt securities. He is a Chartered Financial
Analyst.
Assisted by:
-- David Scott (since January, 1995). Mr. Scott is Managing Director
and a Senior Portfolio Manager with Citigroup Limited in London with
primary responsibility for managing long-term global bond portfolios.
He also plays an integral role in developing strategy. Mr. Scott
manages currency transactions and investments in non-dollar
denominated securities for the Strategic Bond Trust.
-- Peter Wilby (since February, 1993). Mr. Wilby, who joined SaBAM in
1989, is a Managing Director and Senior Portfolio Manager responsible
for investment company and institutional portfolio investments in
high yield U.S. corporate debt securities and high yield foreign
sovereign debt securities. He is a Chartered Financial Analyst and a
Certified Public Accountant.
STRATEGIC INCOME TRUST
SUBADVISER: John Hancock Advisers ("John Hancock")
INVESTMENT OBJECTIVE: To seek a high level of current income.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions,
primarily in foreign government and corporate debt
securities from developed and emerging markets; U.S.
Government and agency securities; and U.S. high yield
bonds.
The portfolio invests, under normal market conditions, primarily in the
following types of securities:
-- foreign government and corporate debt securities from developed and
emerging markets;
-- U.S. Government and agency securities; and
-- U.S. high yield bonds.
The portfolios may also invest in preferred stock and other types of debt
securities, including domestic corporate debt securities and mortgage-backed
securities.
Although the portfolio invests in securities rates as low as CC/Ca and
their unrated equivalents, it generally intends to keep its average credit
quality in the investment-grade (AAA to BBB). There is no limit on the
portfolio's average maturity.
In managing the portfolio, the subadviser allocates assets among the three
major sectors based on analysis of economic factors such as projected
international interest rate movements, industry cycles and political trends.
However, the subadviser may invest up to 100% of the portfolio's assets in any
one sector.
Within each sector, the subadviser looks for securities that are
appropriate for the overall portfolio in terms of yield, credit quality,
structure and industry distribution. In selecting securities, relative yields
and risk/reward ratios are the primary considerations.
The portfolio may use certain higher-risk investments, including
derivatives (investments whose value is based on indexes, securities or
currencies) and restricted or illiquid securities. In addition, the portfolio
may invest up to 10% of net assets in U.S. or foreign stocks.
The portfolio may trade securities actively, which could increase its
transaction costs (thus lowering performance).
Principal Risks of Investing in this Portfolio
-- The portfolio invests in fixed income securities, including non-investment
grade fixed income securities. The risks of investing in these types of
securities are set forth below under "Risks of Investing in Certain Types
of Securities."
-- The portfolio may invest in foreign securities. The risks of investing in
foreign securities are set forth below under "Risks of Investing in
Certain Types of Securities."
91
-- The portfolio may invest up to 10% of its assets in equity securities. The
risks of investing in equity securities are set forth below under "Risks
of Investing in Certain Types of Securities."
-- The portfolio may invest in derivatives. The risks of investing in
derivatives is set forth below under "Risks of Investing in Certain Types
of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2004.
SUBADVISERS AND PORTFOLIO MANAGERS
John Hancock manages the Strategic Income Trust. John Hancock is located
101 Huntington Avenue, Boston, MA 02199-7603. John Hancock was founded in 1968
and is a wholly owned subsidiary of John Hancock Financial Services, Inc.
The portfolio is managed by the following portfolio managers.
Frederick L. Cavanaugh, Jr. (since May, 2004). Mr. Cavanaugh joined John
Hancock in 1986 and is a Senior Vice President.
Daniel S. Janis, III (since May, 2004). Mr. Janis joined John Hancock in
1999 and is a Vice President. From 1997 to 1999, Mr. Janis was a senior risk
manager at BankBoston.
GLOBAL BOND TRUST
SUBADVISER: Pacific Investment Management Company LLC ("PIMCO")
INVESTMENT OBJECTIVE: To seek to realize maximum total return, consistent with
preservation of capital and prudent investment
management.
INVESTMENT STRATEGIES: PIMCO seeks to achieve this investment objective by
investing, under normal market conditions, at least 80%
of the portfolio's net assets (plus any borrowings for
investment purposes) in fixed income securities. These
fixed income securities include fixed income securities
denominated in major foreign currencies and in U.S.
dollars. The portfolio may also invest in baskets of
foreign currencies (such as the euro), and the U.S.
dollar.
These securities may be represented by futures contracts (including related
options) with respect to such securities, and options on such securities, when
PIMCO deems it appropriate to do so. Depending on PIMCO's current opinion as to
the proper allocation of assets among domestic and foreign issuers, investments
in the securities of issuers located outside the United States will normally
vary between 25% and 75% of the portfolio's assets. The portfolio may invest up
to 10% of its assets in fixed income securities that are rated below investment
grade but rated "B" or higher by Moody's or Standard & Poor's (or, if unrated,
determined by PIMCO to be of comparable quality). The average portfolio duration
of the Global Bond Trust will normally vary within a three to seven year time
frame. (Duration is a measure of the expected life of a fixed income security on
a present value basis.)
In selecting securities for the portfolio, PIMCO utilizes economic
forecasting, interest rate anticipation, credit and call risk analysis, foreign
currency exchange rate forecasting, and other security selection techniques. The
proportion of the Global Bond Trust's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on PIMCO's outlook for the U.S. and foreign economies, the
financial markets, and other factors.
The types of fixed income securities in which the Global Bond Trust may
invest include the following securities which unless otherwise noted may be
issued by domestic or foreign issuers and may be denominated in U.S. dollars or
foreign currencies:
-- securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
-- corporate debt securities, including convertible securities and
corporate commercial paper;
-- mortgage-backed and other asset-backed securities;
-- inflation-indexed bonds issued by both governments and corporations;
-- structured notes, including hybrid or "indexed" securities,
-- event-linked bonds;
-- loan participations;
-- delayed funding loan and revolving credit facilities;
-- bank certificates of deposit, fixed time deposits and bankers'
acceptances;
-- debt securities issued by states or local governments and their
agencies, authorities and other instrumentalities;
-- repurchase agreements and reverse repurchase agreements;
-- obligations of foreign governments or their subdivisions, agencies
and instrumentalities; and
-- obligations of international agencies or supranational entities.
92
Fixed-income securities may have fixed, variable, or floating rates of
interest, including rates of interest that vary inversely at a multiple of a
designated or floating rate, or that vary according to change in relative values
of currencies.
Use of Hedging and Other Strategic Transactions
Global Bond Trust may:
-- purchase and sell options on domestic and foreign securities,
securities indexes and currencies,
-- purchase and sell futures and options on futures,
-- purchase and sell currency or securities on a forward basis,
-- enter into interest rate, index, equity, credit default swaps and
currency rate swap agreements.
The Global Bond Trust may use the above-mentioned strategies to obtain
market exposure to the securities in which the portfolio primarily invests and
to hedge currency risk. See "Hedging and Other Strategic Transactions" for
further information on these investment strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests in foreign fixed income securities. The risks of
investing in fixed income securities and in foreign securities are set
forth below under "Risks of Investing in Certain Types of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risk of Investing in Certain Types of Securities."
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 10.64% (for the
quarter ended 6/2002) and the lowest return was -4.81% (for the quarter ended
3/1999).
- --------------------------------------------------------------------------------
<Table>
-5.8% 23.2% 13% 3% 7.6% -6.7% 1.7% 0.5% 20.1% 15.4%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Global Bond Trust
Series I 15.40% 5.75% 6.75% N/A 03/18/1988
Series II 15.25% N/A N/A 18.90% 01/28/2002
Series III N/A N/A N/A 11.81% 09/05/2003
JP Morgan Global Unhedged
Bond Index 14.53% 5.67% 6.87% N/A
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660
serves as sub-advisor to the Trust portfolios listed above. PIMCO is an
investment counseling firm founded in 1971. PIMCO is a Delaware limited
liability company and is a majority-owned subsidiary of Allianz Dresdner Asset
Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO
Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors
and executive management of PIMCO. ADAM LP was organized as a limited
partnership under Delaware law in 1987. ADAM LP's sole general partner is
Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited
company with three members, ADAM U.S. Holding LLC, the managing member, which is
a Delaware limited liability company, Pacific Life Insurance Company and Pacific
Asset Management LLC, a Delaware limited liability company. The sole member of
ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC.
Allianz Dresdner Asset Management of America LLC has two members, Allianz of
America, Inc., a Delaware corporation which owns a 99.9% non-managing interest
and Allianz Dresdner Asset Management of America Holding Inc., a Delaware
corporation which owns a 0.01% managing interest. Allianz Dresdner Asset
Management of America Holding Inc. is a wholly-owned subsidiary of
93
Allianz Dresdner Asset Management Aktiengesellschaft, which is wholly owned by
Allianz Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is
wholly-owned by Allianz AG. Pacific Asset Management LLC is a wholly-owned
subsidiary of Pacific Life Insurance Company, a wholly-owned subsidiary of
Pacific Mutual Holding Company. Allianz AG indirectly holds a controlling
interest in Allianz Dresdner Asset Management of America L.P. Allianz AG is a
European-based, multinational insurance and financial services holding company.
Pacific Life Insurance Company owns an indirect minority equity interest in
Allianz Dresdner Asset Management of America L.P. and is a California-based
insurance company. PIMCO had approximately $373.8 billion of assets under
management as of December 31, 2003.
The Portfolio Manager is:
-- Sudi Mariappa (since May, 2003). Mr. Mariappa is a Managing Director
and head of global portfolio management with responsibility for
overseeing PIMCO's global portfolio management efforts. Prior to
joining PIMCO, he served as Managing director for Merrill Lynch in
Tokyo as manager of JGB and Swap Derivative Trading. Mr. Mariappa
holds both a bachelor's degree in chemical engineering and a MBA from
Cornell University.
DIVERSIFIED BOND TRUST
SUBADVISER: Capital Guardian Trust Company ("CGTC")
INVESTMENT OBJECTIVE: To seek high total return as is consistent with the
conservation of capital.
INVESTMENT STRATEGIES: The portfolio invests its assets in fixed income
securities.
CGTC seeks to achieve this investment objective by investing, under normal
market conditions, at least 80% of the portfolio's net assets (plus any
borrowings for investment purposes) in fixed income securities. Securities that
the portfolio may invest in include one or a combination of the following
categories:
-- fixed income securities rated at the time of purchase "Baa" or better
by Moody's or "BBB" or better by Standard & Poor's or fixed income
securities not rated by Moody's or Standard & Poor's deemed by CGTC
to be of equivalent investment quality;
-- up to 20% of the portfolio's assets in non-U.S. dollar fixed income
securities including up to 5% in emerging market fixed income
securities*;
-- securities issued or guaranteed by the U.S. Government, the Canadian
Government or its Provinces, or their respective agencies and
instrumentalities;
-- interest bearing short-term investments, such as commercial paper,
bankers' acceptances, bank certificates of deposit and other cash
equivalents, and cash.
The remaining 20% of the portfolio's assets may be invested in other fixed
income securities, including securities rated below investment grade ratings
described above. Fixed-income securities may include ADRs, Yankee Bonds,
Eurodollar instruments which are U.S. dollar denominated and non-U.S. dollar
fixed income securities subject to the limits set forth above.
All portfolio investment percentages described above are measured at the
time of purchase of a security for the portfolio.
Use of Hedging and Other Strategic Transactions
The Diversified Bond Trust is currently authorized to use all of the
investment strategies referred to under "Hedging and Other Strategic
Transactions." However, it is not presently contemplated that any of these
strategies will be used to a significant degree by the portfolio.
Principal Risks of Investing in this Portfolio
-- The portfolio invests in fixed income securities, including those rated
below investment grade. The risks of investing in these types of
securities are set forth below under "Risks of Investing in Certain Types
of Securities.
-- The portfolio invests in fixed income securities from foreign and emerging
markets. The risks of investing in foreign securities and emerging market
securities are set forth below under "Risk of Investing in Certain Types
of Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
94
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 6.17% (for the
quarter ended 3/1991) and the lowest return was -6.26% (for the quarter ended
9/1990).
- --------------------------------------------------------------------------------
<Table>
-1.8% 18.1% 7% 11.4% 10.7% 0.7% 10.3% 7.1% 7.6% 4.6%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Diversified Bond Trust Series I 4.60% 6.02% 7.44% N/A 08/03/1989
Series II 4.59% N/A N/A 6.11% 01/28/2002
Series III N/A N/A N/A 3.04% 09/05/2003
Citigroup Broad Investment Grade Bond Index 4.20% 6.62% 6.96% N/A
Combined Index(C) 4.20% 7.13% 8.46% N/A
</Table>
(A)Effective May 1, 1999, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)The Combined Index represents 20% of the return of the Wilshire 5000 Index,
5% of the MSCI EAFE Index, 50% of the Lehman Brothers Aggregate Bond Index, 25%
of the 90 Day T-Bill through April 30, 1999, and 100% of the return of the
Citigroup Broad Investment Grade Bond Index from May 1, 1999 and thereafter. The
Combined Index was prepared by the advisor using Ibbotson Associates Software &
Data.
SUBADVISER AND PORTFOLIO MANAGERS
CGTC is located at 333 South Hope Street, Los Angeles, California 90071.
CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which
itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC
has been providing investment management services since 1968 and manages
approximately $146 billion of assets as of December 31, 2003.
The Portfolio Managers are:
-- James R. Mulally (since May, 1999). Mr. Mulally is Senior Vice
President, a Director, and Chairman of the Fixed Income Investment
Sub-Committee for CGTC. He joined the Capital Group organization in
1980.
-- Michael D. Locke (since December 2001). Mr. Locke is Vice President
of Capital Research Company with portfolio specialist and research
responsibilities for mortgage- and asset-backed securities and
derivatives. He joined the Capital Group organization in 1996.
-- Christine C. Cronin (since December 2001). Ms. Cronin is a Vice
President of Capital Research Company with portfolio specialist
responsibility for investment grade corporate bonds, and research
responsibility for the airline, cruise, food, and financial services
industries. She joined the Capital Group organization in 1997.
A portion of the portfolio is managed by individual members of the research
team.
INVESTMENT QUALITY BOND TRUST
SUBADVISER: Wellington Management Company, LLP ("Wellington Management")
INVESTMENT OBJECTIVE: To provide a high level of current income consistent with
the maintenance of principal and liquidity.
INVESTMENT STRATEGIES: Wellington Management seeks to achieve the portfolio's
objective by investing, under normal market conditions,
at least 80% of the portfolio's net assets (plus any
borrowings for investment purposes) in investment grade
bonds. The portfolio will tend to focus on corporate
bonds and U.S. government bonds with intermediate to
longer term maturities.
Wellington Management's investment decisions derive from a three-pronged
analysis, including:
-- sector analysis,
-- credit research, and
-- call protection.
Sector analysis focuses on the differences in yields among security types,
issuers, and industry sectors. Credit research focuses on both quantitative and
qualitative criteria established by Wellington Management, such as call protec-
95
tion (payment guarantees), an issuer's industry, operating and financial
profiles, business strategy, management quality, and projected financial and
business conditions. Individual purchase and sale decisions are made on the
basis of relative value and the contribution of a security to the desired
characteristics of the overall portfolio. Factors considered include:
-- relative valuation of available alternatives,
-- impact on portfolio yield, quality and liquidity, and
-- impact on portfolio maturity and sector weights.
Wellington Management attempts to maintain a high, steady and possibly
growing income stream.
At least 80% of the Investment Quality Bond Trust's assets are invested in
bonds and debentures, including:
-- marketable investment grade debt securities of U.S. and foreign
issuers (payable in U.S. dollars) rated at the time of purchase "Baa"
or higher by Moody's or "BBB" or higher by Standard & Poor's (or, if
unrated, of comparable quality as determined by Wellington
Management), including privately placed debt securities, asset-backed
securities and commercial mortgage-backed securities;
-- securities issued or guaranteed as to principal or interest by the
U.S. Government or its agencies or instrumentalities, including
mortgage-backed securities (described below under "Other Risks of
Investing"); and
-- cash and cash equivalent securities which are authorized for purchase
by the Money Market Trust.
-- up to 20% of the portfolio's assets in non-U.S. dollar fixed income
securities including up to 5% emerging market fixed income
securities.
The balance (no more than 20%) of the Investment Quality Bond Trust's
assets may be invested in below investment grade bonds and other securities
including privately placed debt securities and commercial mortgage-backed
securities:
-- U.S. and foreign debt securities rated "Ba" or lower by Moody's or
"BB" or lower by Standard & Poor's (and unrated securities of
comparable quality as determined by Wellington Management),
-- preferred stocks,
-- convertible securities (including those issued in the Euromarket),
-- securities carrying warrants to purchase equity securities, and
-- non-U.S. dollar fixed income securities subject to the 20% limit set
forth above.
In pursuing its investment objective, the Investment Quality Bond Trust may
invest up to 20% of its assets in U.S. and foreign high yield (high risk)
corporate and government debt securities (commonly known as "junk bonds"). These
instruments are rated "Ba" or below by Moody's or "BB" or below by Standard &
Poor's (or, if unrated, are deemed of comparable quality as determined by
Wellington Management). The high yield sovereign debt securities in which the
portfolio will invest are described above under "Strategic Bond Trust." No
minimum rating standard is required for a purchase of high yield securities by
the portfolio. While the Investment Quality Bond Trust may only invest up to 20%
of its assets in securities rated in these rating categories at the time of
investment, it is not required to dispose of bonds that may be downgraded after
purchase, even though such downgrade may cause the portfolio to exceed this 20%
maximum.
The risks of investing in foreign securities are set forth above under
"Risks of Investing in Certain Types of Securities." Since the portfolio will,
at most, invest 20% of its assets in foreign securities, the risks associated
with foreign securities will not affect the portfolio as much as a portfolio
that invests more of its assets in foreign securities.
Special Risks
The Investment Quality Bond Trust will be subject to certain risks as a
result of its ability to invest up to 20% in foreign securities. The principal
risks of investing in the Investment Quality Bond Trust are described in the
"Risk/Return Summary" in the beginning of this Prospectus.
Principal Risks of Investing in this Portfolio
-- The portfolio invests substantially all of its assets in fixed income
securities, including non-investment grade fixed income securities.
Because the portfolio invests in fixed income securities with intermediate
to longer-term maturities, the portfolio will be more sensitive to
interest rate changes than a portfolio that invests in fixed income
securities with shorter maturities. The risks of investing in these types
of securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio may invest in fixed income securities in foreign and
emerging markets. The risks of investing in foreign and emerging market
securities are set forth under "Risks of Investing in Certain Types of
Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
96
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 6.57% (for the
quarter ended 9/1991) and the lowest return was -6.06% (for the quarter ended
3/1990).
- --------------------------------------------------------------------------------
<Table>
-4.6% 19.5% 2.6% 9.8% 8.7% -1.8% 9.4% 7.3% 9.9% 7.3%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Investment Quality
Bond Trust
Series I 7.32% 6.35% 6.62% N/A 06/18/1985
Series II 7.24% N/A N/A 16.91% 01/28/2002
Series III N/A N/A N/A 4.14% 09/05/2003
Lehman Brothers Aggregate Bond Index 4.11% 6.62% 6.95% N/A
Combined Index(B) 5.00% 6.69% 7.08% N/A
</Table>
(A)Effective April 23, 1991, the portfolio changed its subadviser and investment
objective. Performance reflects results prior to these changes.
(B)The Combined Benchmark is comprised of 50% of the return of the Lehman
Brothers Government Bond Index and 50% of the return of the Lehman Brothers
Credit Bond Index. The Combined Benchmark was prepared by the Adviser using
Ibbotson Associates Software and Data.
(C)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
Wellington Management Company, LLP, a Massachusetts limited liability
partnership, is a professional investment counseling firm with its principal
business offices located at 75 State Street, Boston, Massachusetts 02109.
Wellington Management and its predecessor organizations have provided investment
services to investment companies, employee benefit plans, endowments,
foundations and other institutions since 1928. The managing partners of
Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R.
Ryan.
The Portfolio Manager is:
-- Thomas L. Pappas (since March, 1994). Mr. Pappas, Senior Vice
President of Wellington Management, has been a portfolio manager with
Wellington Management since 1987. He is a Chartered Financial
Analyst.
TOTAL RETURN TRUST
SUBADVISER: Pacific Investment Management Company LLC ("PIMCO")
INVESTMENT OBJECTIVE: To seek to realize maximum total return, consistent with
preservation of capital and prudent investment
management.
INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at
least 65% of the portfolio's assets in a diversified
portfolio of fixed income securities of varying
maturities. The average portfolio duration of the Total
Return Trust will normally vary within a three to six
year time frame based on PIMCO's forecast for interest
rates. (Duration is a measure of the expected life of a
fixed income security on a present value basis.)
The portfolio may invest up to 10% of its assets in fixed income securities
that are rated below investment grade but rated "B" or higher by Moody's or
Standard & Poor's (or if unrated, determined by PIMCO to be of comparable
quality). The portfolio may also invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which PIMCO believes to be relatively undervalued.
In selecting securities for the portfolio, PIMCO utilizes economic
forecasting, interest rate anticipation, credit and call risk analysis, foreign
currency exchange rate forecasting, and other security selection techniques. The
proportion of the Total Return Trust's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on PIMCO's outlook for the U.S. and foreign economies, the
financial markets, and other factors.
97
The types of fixed income securities in which the Total Return Trust may
invest include the following securities which unless otherwise noted may be
issued by domestic or foreign issuers and may be denominated in U.S. dollars or
foreign currencies:
-- securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
-- corporate debt securities, including convertible securities and
corporate commercial paper;
-- mortgage-backed and other asset-backed securities;
-- inflation-indexed bonds issued by both governments and corporations;
-- structured notes, including hybrid or "indexed" securities,
-- event-linked bonds;
-- loan participations;
-- delayed funding loan and revolving credit facilities;
-- bank certificates of deposit, fixed time deposits and bankers'
acceptances;
-- debt securities issued by states or local governments and their
agencies, authorities and other instrumentalities;
-- repurchase agreements and reverse repurchase agreements;
-- obligations of foreign governments or their subdivisions, agencies
and instrumentalities; and
-- obligations of international agencies or supranational entities.
Fixed-income securities may have fixed, variable, or floating rates of
interest, including rates of interest that vary inversely at a multiple of a
designated or floating rate, or that vary according to change in relative values
of currencies.
Temporary Defensive Investing
To meet redemption requests or pending investment of its assets or during
unusual market conditions, the Total Return Trust may invest all or a portion of
its assets in repurchase agreements, cash and cash equivalents. To the extent
the portfolio is in a defensive position, the ability to achieve its investment
objective will be limited.
Use of Hedging and Other Strategic Transactions
Total Return Trust may:
-- purchase and sell options on domestic and foreign securities,
securities indexes and currencies,
-- purchase and sell futures and options on futures,
-- purchase and sell currency or securities on a forward basis,
-- enter into interest rate, index, equity, credit default swaps and
currency rate swap agreements.
The Total Return Trust may use the above-mentioned strategies to obtain
market exposure to the securities in which the portfolio primarily invests and
to hedge currency risk. As a non-fundamental operating policy, PIMCO normally
intends to use foreign currency-related strategic transactions in an effort to
hedge foreign currency risk with respect to at least 75% of the assets of the
portfolio denominated in currencies other than the U.S. dollar. See "Hedging and
Other Strategic Transactions" for further information on these investment
strategies.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in fixed income securities. The risks of
investing in fixed income securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may also invest in foreign securities. The risks of
investing in foreign securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance(A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
98
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 6.43% (for the
quarter ended 09/2001) and the lowest return was -0.50% (for the quarter ended
6/2001).
- --------------------------------------------------------------------------------
<Table>
10.5% 8.3% 9.5% 5.0%
2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Total Return Trust
Series I 5.02% 6.92% 05/01/1999
Series II 4.87% 6.92% 01/28/2002
Series III N/A 3.35% 09/05/2003
Lehman Brothers Aggregate Bond Index(A) 4.11% 7.15%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
the index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660
serves as sub-advisor to the Trust portfolios listed above. PIMCO is an
investment counseling firm founded in 1971. PIMCO is a Delaware limited
liability company and is a majority-owned subsidiary of Allianz Dresdner Asset
Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO
Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors
and executive management of PIMCO. ADAM LP was organized as a limited
partnership under Delaware law in 1987. ADAM LP's sole general partner is
Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited
company with three members, ADAM U.S. Holding LLC, the managing member, which is
a Delaware limited liability company, Pacific Life Insurance Company and Pacific
Asset Management LLC, a Delaware limited liability company. The sole member of
ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC.
Allianz Dresdner Asset Management of America LLC has two members, Allianz of
America, Inc., a Delaware corporation which owns a 99.9% non-managing interest
and Allianz Dresdner Asset Management of America Holding Inc., a Delaware
corporation which owns a 0.01% managing interest. Allianz Dresdner Asset
Management of America Holding Inc. is a wholly-owned subsidiary of Allianz
Dresdner Asset Management Aktiengesellschaft, which is wholly owned by Allianz
Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is wholly-owned by
Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific
Life Insurance Company, a wholly-owned subsidiary of Pacific Mutual Holding
Company. Allianz AG indirectly holds a controlling interest in Allianz Dresdner
Asset Management of America L.P. Allianz AG is a European-based, multinational
insurance and financial services holding company. Pacific Life Insurance Company
owns an indirect minority equity interest in Allianz Dresdner Asset Management
of America L.P. and is a California-based insurance company. PIMCO had
approximately $373.8 billion of assets under management as of December 31, 2003.
The Portfolio Manager is:
-- William H. Gross (since May, 1999). Mr. Gross is a Managing
Director, Chief Investment Officer and founding partner of PIMCO. He
is also a Chartered Financial Analyst. Mr. Gross has been with PIMCO
for more than 32 years.
REAL RETURN BOND TRUST
SUBADVISER: Pacific Investment Management Company LLC ("PIMCO")
INVESTMENT OBJECTIVE: To seek maximum real return, consistent with preservation
of real capital and prudent investment management
INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by investing
under normal circumstances at least 80% of its net assets
(plus borrowings for investment purposes) in
inflation-indexed bonds of varying maturities issued by
the U.S. and non-U.S. governments, their agencies or
instrumentalities, and corporations.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities that are structured to provide protection against inflation. The
value of the bond's principal or the interest income paid on the bond is
adjusted to track changes in an official inflation measure. The U.S. Treasury
uses the Consumer Price Index for Urban Consumers as the inflation measure.
99
Inflation-indexed bonds issued by a foreign government are generally adjusted to
reflect a comparable inflation index, calculated by that government. "Real
return" equal total return less the estimated cost of inflation, which is
typically measured by the change in an official inflation measure.
Portfolio Duration of Fund. The average portfolio duration of this fund
normally varies within two year (plus or minus) of the duration of the Lehman
Global Real: U.S. TIPS Index.
Credit Quality. The portfolio invests primarily in investment grade
securities, but may invest up to 10% of its total assets in high yield
securities ("junk bonds") rate B or higher by Moody's or S&P, or, if unrated,
determined by PIMCO to be of comparable quality.
Foreign Securities. The portfolio may also invest up to 20% of its total
assets in securities denominated in foreign currencies, and may invest beyond
this limit in U.S. dollar denominated securities of foreign issuers. The
portfolio will normally hedge at least 75% of its exposure to foreign currency
to reduce the risk of loss due to fluctuations in currency exchange rates.
Use of Hedging and Other Strategic Transactions. The portfolio is
authorized to use all of the various investment strategies referred to under
"Hedging and Other Strategic Transactions." The portfolio may invest all of its
assets in derivative instruments, such as option, futures contracts or swap
agreement, or in mortgage or asset backed securities. The portfolio may also
lend its portfolio securities to brokers, dealers and other financial
institutions to earn income. The portfolio may, without limitation, seek to
obtain market exposure to the securities in which it primarily invests by
entering into a series of purchase and sale contract or by using other
investment techniques (such as buy backs or dollar rolls).
Nondiversified Status. The portfolio is non-diversified, which means that
it may concentrate its assets in a smaller number of issuers than a diversified
portfolio.
Principal Risks of Investing in this Portfolio
-- The portfolio invests primarily in fixed income securities. The risks of
investing in fixed income securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The portfolio may invest in foreign securities. The risks of investing in
these securities are set forth below under "Risks of Investing in Certain
Types of Securities."
-- The portfolio is non-diversified. The definition of a non-diversified
portfolio and the risks associated with such a portfolio are set forth
below under "Risks of Investing in Certain Types of Securities."
-- The portfolio may invest in derivatives. The risks of investing in
derivatives is set forth below under "Hedging and Other Strategic
Transactions."
-- The portfolio may invest up to 10% of its total assets in high yield
securities ("junk bonds"). The risks of investing in these securities is
set forth below under "Hedging and Other Strategic Transactions."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
SUBADVISER AND PORTFOLIO MANAGERS
PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660
serves as sub-advisor to the Trust portfolios listed above. PIMCO is an
investment counseling firm founded in 1971. PIMCO is a Delaware limited
liability company and is a majority-owned subsidiary of Allianz Dresdner Asset
Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO
Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors
and executive management of PIMCO. ADAM LP was organized as a limited
partnership under Delaware law in 1987. ADAM LP's sole general partner is
Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited
company with three members, ADAM U.S. Holding LLC, the managing member, which is
a Delaware limited liability company, Pacific Life Insurance Company and Pacific
Asset Management LLC, a Delaware limited liability company. The sole member of
ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC.
Allianz Dresdner Asset Management of America LLC has two members, Allianz of
America, Inc., a Delaware corporation which owns a 99.9% non-managing interest
and Allianz Dresdner Asset Management of America Holding Inc., a Delaware
corporation which owns a 0.01% managing interest. Allianz Dresdner Asset
Management of America Holding Inc. is a wholly-owned subsidiary of Allianz
Dresdner Asset Management Aktiengesellschaft, which is wholly owned by Allianz
Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is wholly-owned by
Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific
Life Insurance Company, a wholly-owned subsidiary of Pacific Mutual Holding
Company. Allianz AG indirectly holds a controlling interest in Allianz Dresdner
Asset Management of America L.P. Allianz AG is a European-based, multinational
insurance and financial services holding company. Pacific Life Insurance Company
owns an indirect minority equity interest in Allianz Dresdner Asset Management
of America L.P. and is a California-based insurance company. PIMCO had
approximately $373.8 billion of assets under management as of December 31, 2003.
100
The Portfolio Manager is:
-- John B. Brynjolfsson (since May, 2003). Mr. Brynjolfsson is a
Managing Director of PIMCO, portfolio manager and head of the PIMCO
Real Return Bond Fund. He is co-author of Inflation-Protection Bonds
and co-editor of The Handbook of Inflation-Indexed Bonds. He joined
the firm in 1989, having been previously associated with Charles
River Associates and JP Morgan Securities. Mr. Brynjolfsson has 15
years of investment experience and holds a bachelor's degree in
Physics and Mathematics from Columbia College and an MBA in Finance
and Economics from the MIT Sloan School of Management.
U.S. GOVERNMENT SECURITIES TRUST
SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM")
INVESTMENT OBJECTIVE: To obtain a high level of current income consistent with
preservation of capital and maintenance of liquidity.
INVESTMENT STRATEGIES: The portfolio invests a substantial portion of its assets
in debt obligations and mortgage-backed securities issued
or guaranteed by the U.S. government, its agencies or
instrumentalities and derivative securities such as
collateralized mortgage obligations backed by such
securities and futures contracts. The portfolio may also
invest a portion of its assets in the types of securities
in which the Investment Quality Bond Trust may invest.
SaBAM seeks to attain this objective by investing, under normal market
conditions, at least 80% of the portfolio's net assets (plus any borrowings for
investment purposes) in debt obligations and mortgage-backed securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities and
derivative securities including:
-- mortgage-backed securities guaranteed by the Government National
Mortgage Association that are supported by the full faith and credit
of the U.S. government and which are the "modified pass-through" type
of mortgage-backed security ("GNMA Certificates"). Such securities
entitle the holder to receive all interest and principal payments due
whether or not payments are actually made on the underlying
mortgages;
-- U.S. Treasury obligations (including repurchase agreements
collateralized by U.S. Treasury obligations) (U.S. Treasury
obligations are supported by the full faith and credit of the U.S.
government);
-- obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government which are backed by their own credit and may not
be backed by the full faith and credit of the U.S. Government
(including repurchase agreements collateralized by these
obligations);
-- mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by their
own credit but not the full faith and credit of the U.S. Government,
such as the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association; and
-- futures contracts or financial instruments and indices.
-- collateralized mortgage obligations issued by private issuers for
which the underlying mortgage-backed securities serving as collateral
are backed (i) by the credit alone of the U.S. Government agency or
instrumentality which issues or guarantees the mortgage-backed
securities, or (ii) by the full faith and credit of the U.S.
Government.
As noted above, the portfolio may invest not only in U.S. government
securities that are backed by the full faith and credit of the U.S. government,
such as GNMA Certificates and U.S. Treasury obligations, but also in U.S.
Government securities that are backed only by their own credit and not the full
faith and credit of the U.S. government (such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation).
The U.S. Government Securities Trust must comply with diversification
requirements established pursuant to the Code for investments of separate
accounts funding contracts. Under these requirements, the value of the assets of
the portfolio are subject to the following restrictions:
-- no more than 55% of the value of the portfolio's assets may be
represented by any one investment;
-- no more than 70% of the value of the portfolio's assets may be
represented by any two investments;
-- no more than 80% of the value of the portfolio's assets may be
represented by any three investments; and
-- no more than 90% of the value of the portfolio's assets may be
represented by any four investments.
To determine the portfolio's compliance with the requirements above, all
securities of the same issuer are treated as a single investment and each U.S.
Government agency or instrumentality is treated as a separate issuer. As a
result of these requirements, the U.S. Government Securities Trust may not
invest more than 55% of the value of its assets in GNMA Certificates or in
securities issued or guaranteed by any other single U.S. Government agency or
instrumentality.
Mortgage-Backed Securities
See "Other Risks of Investing" for a description of mortgage-backed
securities and the risks associated with investing in them.
101
Use of Hedging and Other Strategic Transactions
The U.S. Government Securities Trust is currently authorized to use only
certain of the various investment strategies referred to under "Hedging and
Other Strategic Transactions." Specifically, the U.S. Government Securities
Trust may:
-- write covered call options and put options on securities and purchase
call and put options on securities,
-- write covered call and put options on securities indices and purchase
call and put options on securities indices,
-- enter into futures contracts on financial instruments and indices,
and
-- write and purchase put and call options on such futures contracts.
Principal Risks of Investing in this Portfolio
-- While the portfolio invests a substantial portion of its assets in
securities which are guaranteed as to principal and interest by the U.S.
Government or one of its agencies or instrumentalities, the market value
of the portfolio could still decline due to interest rate changes. When
interest rates decline, the market value of the portion of the portfolio
invested at higher yields can be expected to rise. Conversely, when
interest rates rise, the market value of a portfolio invested at lower
yields can be expected to decline. Fixed-income securities with longer
maturities are generally more sensitive to interest rate changes than
those with shorter maturities.
-- Investing in mortgage backed securities subjects the portfolio to
prepayment risk. Prepayment of underlying mortgages result in a loss of
anticipated interest payments and all or part of any premium paid for the
security. Therefore, the portfolio could make less money than expected or
could lose money. Mortgage prepayments generally increase with falling
interest rates and decrease with rising interest rates.
Performance (A, B)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 5.4% (for the
quarter ended 6/1995) and the lowest return was - 2.02% (for the quarter ended
3/1992).
- --------------------------------------------------------------------------------
<Table>
-1.2% 15.6% 3.4% 8.5% 7.5% -0.2% 10.9% 7% 8% 1.7%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
U.S. Government Securities Trust Series I 1.73% 5.40% 5.99% N/A 03/18/1988
Series II 1.59% N/A N/A 4.68% 01/28/2002
Series III N/A N/A N/A 2.26% 09/05/2003
Citigroup
1-10 Year
Treasury Index 2.12% 5.95% 6.20% N/A
</Table>
(A)Effective December 13, 1991, the portfolio changed its subadviser and its
investment objective. Performance reflects results prior to these changes.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
SaBAM was established in 1987 and, together with affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and
equity investment services to individuals and institutional clients throughout
the world. SaBAM's principal address is 399 Park Avenue, New York, New York
10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses
provide a broad range of financial services -- asset management, banking and
consumer finance, credit and charge cards, insurance investments, investment
banking and trading -- and use diverse channels to make them available to
consumer and corporate customers around the world.
The Portfolio Manager is:
-- Roger Lavan (since February, 1993). Mr. Lavan joined SaBAM in 1990
and is a Managing Director in the fixed income department. He is a
Portfolio Manager responsible for SaBAM's investment company and
institutional portfolios, which invest primarily in mortgage-backed
and U.S. government debt securities. He is a Chartered Financial
Analyst.
102
MONEY MARKET TRUST
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.)")
INVESTMENT OBJECTIVE: To obtain maximum current income consistent with
preservation of principal and liquidity.
INVESTMENT STRATEGIES: The portfolio invests in high quality, U.S. dollar
denominated money market instruments.
MFC Global (U.S.A.) may invest the portfolio's assets in high quality, U.S.
dollar denominated money market instruments of the following types:
-- obligations issued or guaranteed as to principal and interest by the
U.S. Government, or any agency or authority controlled or supervised
by and acting as an instrumentality of the U.S. Government pursuant
to authority granted by Congress ("U.S. Government Securities"), or
obligations of foreign governments including those issued or
guaranteed as to principal or interest by the Government of Canada,
the government of any province of Canada, or any Canadian or
provincial Crown agency (any foreign obligation acquired by the
portfolio must be payable in U.S. dollars);
-- certificates of deposit, bank notes, time deposits, Eurodollars,
Yankee obligations and bankers' acceptances of U.S. banks, foreign
branches of U.S. banks, foreign banks and U.S. savings and loan
associations which at the date of investment have capital, surplus
and undivided profits as of the date of their most recent published
financial statements in excess of $100,000,000 (or less than
$100,000,000 if the principal amount of such bank obligations is
insured by the Federal Deposit Insurance Corporation or the Saving
Association Insurance Fund);
-- commercial paper which at the date of investment is rated (or
guaranteed by a company whose commercial paper is rated) within the
two highest rating categories by any NRSRO (such as "P-1" or "P-2" by
Moody's or "A-1" or "A-2" by Standard & Poor's) or, if not rated, is
issued by a company which MFC acting pursuant to guidelines
established by the Trust's Board of Trustees, has determined to be of
minimal credit risk and comparable quality;
-- corporate obligations maturing in 397 days or less which at the date
of investment are rated within the two highest rating categories by
any NRSRO (such as "Aa" or higher by Moody's or "AA" or higher by
Standard & Poor's);
-- short-term obligations issued by state and local governmental
issuers;
-- securities that have been structured to be eligible money market
instruments such as participation interests in special purpose trusts
that meet the quality and maturity requirements in whole or in part
due to features for credit enhancement or for shortening effective
maturity; and
-- repurchase agreements with respect to any of the foregoing
obligations.
Commercial paper may include variable amount master demand notes, which are
obligations that permit investment of fluctuating amounts at varying rates of
interest. Such notes are direct lending arrangements between the Money Market
Trust and the note issuer. MFC Global (U.S.A.) monitors the creditworthiness of
the note issuer and its earning power and cash flow. MFC Global (U.S.A.) will
also consider situations in which all holders of such notes would redeem at the
same time. Variable amount master demand notes are redeemable on demand.
All of the Money Market Trust's investments will mature in 397 days or less
and the portfolio maintains a dollar-weighted average portfolio maturity of 90
days or less. By limiting the maturity of its investments, the Money Market
Trust seeks to lessen the changes in the value of its assets caused by
fluctuations in short-term interest rates. In addition, the Money Market Trust
invests only in securities which the Trust's Board of Trustees determine to
present minimal credit risks and which at the time of purchase are "eligible
securities" as defined by Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Money Market Trust also intends to maintain, to
the extent practicable, a constant per share net asset value of $10.00. There is
no assurance that the portfolio will be able to do so.
The Money Market Trust may invest up to 20% of its assets in any of the
U.S. dollar denominated foreign securities described above. The Money Market
Trust is not authorized to enter into mortgage dollar rolls or warrants.
Use of Hedging and Other Strategic Transactions
The Money Market Trust is not authorized to use any of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions."
Principal Risks of Investing in this Portfolio
-- An investment in the Money Market Trust is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government agency.
Although the Money Market Trust seeks to preserve the value of a
shareholder's investment at $10.00 per share, it is possible to lose money
by investing in this portfolio. For example, the portfolio could lose
money if a security purchased by the portfolio is downgraded and the
portfolio must sell the security at less than the cost of the security.
-- The portfolio may invest up to 20% of its assets in U.S. dollar
denominated foreign securities which increases the risk of investing in
the portfolio as described below under "Risks of Investing in Certain
Types of Securities." Since the portfolio only invests in U.S. dollar
denominated securities, it will not be subject to the exchange rate risks
described in this section.
103
Performance (A)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return was 2.19% (for the
quarter ended 6/1989) and the lowest return was 0.12% (for the quarter ended
12/2003).
- --------------------------------------------------------------------------------
<Table>
3.8% 5.6% 5.1% 5.2% 5.0% 4.6% 5.9% 3.6% 1.2% 0.6%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Ten Life of Date First
Year Years Years Portfolio Available
Money Market Trust Series I 0.58% 3.14% 4.04% N/A 06/18/1985
Series II 0.38% N/A N/A 0.66% 01/28/2002
Series III N/A N/A N/A 0.04% 09/05/2003
Citigroup U.S. 90 Day T-Bill 1.07% 3.50% 4.30% N/A
</Table>
(A)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
The 7-day yield of the Money Market Trust as of December 31, 2003 was
0.45%, 0.25% and 0.10% for Series I, Series II and Series III, respectively.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its
principal business at the present time is to provide investment management
services to the portfolios listed above. MFC Global (U.S.A.) is an indirect
wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in
Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance
Company and its subsidiaries, collectively known as Manulife Financial. The
address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario,
Canada M4W 1E5.
THE INDEX TRUSTS
There are five Index Trusts -- International Index, Small Cap Index, Mid
Cap Index, Total Stock Market Index, and 500 Index (the "Index Trusts") -- each
with its own investment objective and policy. The Index Trusts differ from the
actively managed portfolios described in this prospectus. Actively managed
portfolios seek to outperform their respective indices through research and
analysis. Over time, their performance may differ significantly from their
respective indices. Index portfolios, however, seek to mirror the performance of
their target indices, minimizing performance differences over time.
An index is an unmanaged group of securities whose overall performance is
used as an investment benchmark. Indices may track broad investment markets,
such as the global equity market, or more narrow investment markets, such as the
U.S. small cap equity market. Each Index Trust attempts to match the performance
of a particular index by: (a) holding all, or a representative sample, of the
securities that comprise the index and/or (b) by holding securities (which may
or may not be included in the index) that MFC believes as a group will behave in
a manner similar to the index. However, an index portfolio has operating
expenses and transaction costs, while a market index does not. Therefore, an
Index Trust, while it attempts to track its target index closely, typically will
be unable to match the performance of the index exactly.
104
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
MARKET CAP OF INDEX AS OF
PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGY* FEBRUARY 27, 2004
- ----------------------------------------------------------------------------------------------------------
Small Cap Index To seek to approximate the Invests, under normal $20 million to $2.7 billion
aggregate total return of a market conditions, at least
small cap U.S. domestic 80% of its net assets (plus
equity market index any borrowings for
investment purposes) in (a)
the common stocks that are
included in the Russell
2000 Index and (b)
securities (which may or
may not be included in the
Russell 2000 Index) that
MFC believes as a group
will behave in a manner
similar to the index.
International* To seek to approximate the Invests, under normal $16 million to $178.7
Index aggregate total return of a market conditions, at least billion
foreign equity market index 80% of its net assets (plus
any borrowings for
investment purposes) 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.
Mid Cap Index To seek to approximate the Invests, under normal $456 million to $11 billion
aggregate total return of a market conditions, at least
mid cap U.S. domestic 80% of its net assets (plus
equity market index any borrowings for
investment purposes) in (a)
the common stocks that are
included in the S&P 400
Index and (b) securities
(which may or may not be
included in the S&P 400
Index) that MFC believes as
a group will behave in a
manner similar to the
index.
Total Stock Market To seek to approximate the Invests, under normal Less than $1 million to
Index aggregate total return of a market conditions, at least $326.5 billion
broad U.S. domestic equity 80% of its net assets (plus
market index any borrowings for
investment purposes) in (a)
the common stocks that are
included in the Wilshire
5000 Index and (b)
securities (which may or
may not be included in the
Wilshire 5000 Index) that
MFC believes as a group
will behave in a manner
similar to the index.
</Table>
105
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
MARKET CAP OF INDEX AS OF
PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGY* FEBRUARY 27, 2004
- ----------------------------------------------------------------------------------------------------------
500 Index To seek to approximate the Invests, under normal $867 million to $326.5
aggregate total return of a market conditions, at least billion
broad U.S. domestic equity 80% of its net assets (plus
market index any borrowings for
investment purposes) in (a)
the common stocks that are
included in the S&P 500
Index and (b) securities
(which may or may not be
included in the S&P 500
Index) that MFC believes as
a group will behave in a
manner similar to the
index.
</Table>
*Subject to shareholder approval, the International Index Trust will merge with
the International Equity Index Trust, a series of John Hancock Variable Series
Trust I, immediately after the close of business on June 18, 2004.
*"Standard & Poor's(R)," "S&P 500(R)," "Standard & Poor's 500(R)," and "Standard
& Poor's 400(R)" are trademarks of The McGraw-Hill Companies, Inc. "Russell
1000(R)," "Russell 2000(R)," "Russell 2000(R) Growth," "Russell 3000(R)" and
"Russell Midcap(R)" are trademarks of Frank Russell Company. "Wilshire 5000(R)"
is a trademark of Wilshire Associates. "Morgan Stanley European Australian Far
East Free(R)," "EAFE(R)" and "MSCI(R)" are trademarks of Morgan Stanley & Co.
Incorporated. None of the Index Trusts are sponsored, endorsed, managed,
advised, sold or promoted by any of these companies, and none of these companies
make any representation regarding the advisability of investing in the Trust.
Use of Hedging and Other Strategic Transactions
The Small Cap Index Trust, International Index Trust, and Total Stock
Market may invest in Futures Contacts. A more complete description of this
investment strategy appears under "Hedging and Other Strategic Transactions"
below in this Prospectus and in the Statement of Additional Information.
The Mid Cap Index Trust and 500 Index Trust may invest in Futures Contracts
and Depository Receipts. A more complete description of this investment strategy
appears under "Hedging and Other Strategic Transactions" below in this
Prospectus and in the Statement of Additional Information.
Principal Risks of Investing in the Index Trusts
Risks Applicable to All of the Index Trusts
-- Since each of the Index Trusts are not actively managed, each Index
Trust will generally reflect the performance of the index its
attempts to track even in markets when this index does not perform
well.
Risks Applicable to the International Index Trust
-- An investment in the International Index Trust involves risks similar
to the risks of investing directly in the foreign securities in the
MSCI EAFE Index. The risks of investing in foreign securities are set
forth below under "Risks of Investing in Certain Types of
Securities."
Risks Applicable to the Small Cap Index Trust
-- An investment in the Small Cap Index Trust involves risks similar to
the risks of investing directly in the equity securities included in
the Russell 2000 Index which are primarily small and mid cap
securities. The risks of investing in equity securities and the risks
of investing in small and mid cap securities (small and medium
companies) are set forth below under "Risks of Investing in Certain
Types of Securities."
Risks Applicable to the Mid Cap Index Trust
-- An investment in the Mid Cap Index Trust involves risks similar to
the risks of investing directly in the equity securities included in
the Mid Cap Index. The risks of investing in equity securities and
Mid Cap securities (medium size companies) are set forth below under
"Risks of Investing in Certain Types of Securities."
106
Risks Applicable to the Total Stock Market Index Trust
-- An investment in the Total Stock Market Index Trust involves risks
similar to the risks of investing directly in the equity securities
included in the Wilshire 5000 Index. The risks of investing in equity
securities are set forth below under "Risks of Investing in Certain
Types of Securities."
Risks Applicable to the 500 Index Trust
-- An investment in the 500 Index Trust involves risks similar to the
risks of investing directly in the equity securities included in the
S&P 500 Index. The risks of investing in equity securities are set
forth below under "Risks of Investing in Certain Types of
Securities."
Performance (A, B, C)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return and the lowest
quarterly return for each Index Trust was as follows:
<Table>
<Caption>
HIGHEST QUARTERLY RETURN QUARTER LOWEST QUARTERLY RETURN QUARTER
Small Cap Index 22.77% 6/2003 -21.83% 9/2002
International Index 18.15% 6/2003 -20.02% 9/2002
Mid Cap Index 17.71% 12/2001 -16.75% 9/2002
Total Stock Market Index 16.26% 6/2003 -16.74% 9/2002
500 Index 15.32% 6/2003 -17.43% 9/2002
</Table>
SMALL CAP INDEX TRUST
- --------------------------------------------------------------------------------
<Table>
1.5% -21.5% 45.8%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Small Cap Index Trust
Series I 45.79% 2.32% 05/01/2000
Series II 45.33% 8.15% 01/28/2002
Series III N/A 8.75% 09/05/2003
Russell 2000 Index(A) 47.25% 4.04%
</Table>
INTERNATIONAL INDEX TRUST
- --------------------------------------------------------------------------------
<Table>
-22.4% -17.2% 32.2%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
International Index Trust
Series I 32.18% -7.00% 05/01/2000
Series II 32.12% 7.25% 01/28/2002
Series III N/A 15.57% 09/05/2003
MSCI EAFE Index(A) 39.17% -4.64%
</Table>
107
MID CAP INDEX TRUST
- --------------------------------------------------------------------------------
<Table>
-1.7% -15.2% 34.6%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Mid Cap Index Trust
Series I 34.57% 5.14% 05/01/2000
Series II 34.32% 7.05% 01/28/2002
Series III N/A 9.39% 09/05/2003
S&P MidCap 400 Index(A) 35.61% 6.16%
</Table>
TOTAL STOCK MARKET INDEX TRUST
- --------------------------------------------------------------------------------
<Table>
-11.4% -21.3% 30.5%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
Total Stock Market Index Trust
Series I 30.54% -5.30% 05/01/2000
Series II 30.31% 1.94% 01/28/2002
Series III N/A 8.62% 09/05/2003
Wilshire 5000 Index(A) 31.64% -4.65%
</Table>
500 INDEX TRUST
- --------------------------------------------------------------------------------
<Table>
-12.4% -22.5% 28.0%
2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Life of Date First
Year Portfolio Available
500 Index Trust
Series I 28.01% -6.36% 05/01/2000
Series II 27.76% 0.09% 01/28/2002
Series III N/A 8.57% 09/05/2003
S&P 500 Index(A) 28.70% -5.61%
</Table>
(A)The return for the index under "Life of Portfolio" is calculated from the
month end closest to the inception date of the portfolio since information for
this index is only provided as of a month end.
(B)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series II performance will be lower than
Series I performance due to the higher Rule 12b-1 fee. Series III performance
will be lower than Series I and Series II performance due to the higher Rule
12b-1 fee.
(C)Since III May 2000, certain expenses of each of the Index Trusts (except the
500 Index Trust) were reimbursed. If such expenses had not been reimbursed,
returns would be lower.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) manages each Index Trust. MFC Global (U.S.A.) is a
corporation subject to the laws of Canada. Its principal business at the present
time is to provide investment management services to the portfolios of the Trust
for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned
subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada.
MFC is the holding company of The Manufacturers Life Insurance Company and its
subsidiaries, collectively known as Manulife Financial. The address of MFC
Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The Portfolio Managers are:
-- Narayan Ramani (since 2003). Mr. Ramani joined MFC Global in 1998,
has a MBA from York University, a PH.D from the University of
Brunswick, and is a Chartered Financial Analyst.
108
-- Carson Jen (since 2003). Mr. Brahmachari joined MFC Global in 1997,
has a MBA from the University of Western Ontario, a BA Science
(engineering) from the University of Toronto, and has a Certified
Management Accounting designation.
THE LIFESTYLE TRUSTS
SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global
(U.S.A.)")
There are five Lifestyle Trusts (each of which is a fund of
funds) -- Aggressive 1000, Growth 820, Balanced 640, Moderate 460 and
Conservative 280. The Lifestyle Trusts differ from the portfolios previously
described in that each Lifestyle Trust invests in a number of the other
portfolios of the Trust which invest primarily in either equity securities or
fixed income securities, as applicable ("Underlying Portfolios"). Each Lifestyle
Trust has a target percentage allocation between the two types of Underlying
Portfolios (fixed income and equity).
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGIES
- ------------------------------------------------------------------------------------------------------------
Lifestyle Aggressive 1000 Long-term growth of capital. Current The portfolio invests 100% of its
income is not a consideration. assets in Underlying Portfolios which
invest primarily in equity securities.
Lifestyle Growth 820 Long-term growth of capital. Current The portfolio invests approximately 20%
income is also a consideration. of its assets in Underlying Portfolios
which invest primarily in fixed income
securities and approximately 80% in
Underlying Portfolios which invest
primarily in equity securities.
Lifestyle Balanced 640 A balance between a high level of The portfolio invests approximately 40%
current income and growth of capital, of its assets in Underlying Portfolio
with a greater emphasis on growth of which invest primarily in fixed income
capital. securities and approximately 60% in
Underlying Portfolios which invest
primarily in equity securities.
Lifestyle Moderate 460 A balance between a high level of The portfolio invests approximately 60%
current income and growth of capital, of its assets in Underlying Portfolios
with a greater emphasis on income. which invest primarily in fixed income
securities and approximately 40% in
Underlying Portfolios which invest
primarily in equity securities.
Lifestyle Conservative 280 A high level of current income with The portfolio invests approximately 80%
some consideration given to growth of of its assets in Underlying Portfolios
capital. which invest primarily in fixed income
securities and approximately 20% in
Underlying Portfolio which invest
primarily in equity securities.
- ------------------------------------------------------------------------------------------------------------
</Table>
ADDITIONAL INFORMATION ON INVESTMENT STRATEGIES
The Lifestyle Trusts seek to provide a variety of comprehensive investment
programs designed for differing investment orientations. Each program is
implemented by means of selected long-term investment allocations among the
Underlying Portfolios.
The portfolios eligible for purchase by the Lifestyle Trusts consist of all
of the non-Lifestyle Trusts except the American Growth Trust, American
International Trust, American Blue Chip Income and Growth Trust and American
Growth-
109
Income Trust. The Underlying Portfolios are grouped according to whether they
invest primarily in fixed income securities or equity securities. The Underlying
Portfolios investing primarily in fixed income securities are the:
<Table>
-- High Yield Trust -- Investment Quality Bond Trust
-- Strategic Bond Trust -- Diversified Bond Trust
-- Global Bond Trust -- U.S. Government Securities Trust
-- Total Return Trust -- Strategic Income Trust
-- Real Return Bond Trust -- Money Market Trust
</Table>
The other Underlying Portfolios invest primarily in equity securities.
Because substantially all of the securities in which the Lifestyle Trusts may
invest are Underlying Portfolios, each of the Lifestyle Trusts is
non-diversified for purposes of the 1940 Act.
Variations in the target percentage allocations between the two types of
Underlying Portfolios (fixed income and equity) are permitted up to 10% in
either direction. For example, based on its investment allocation of
approximately 80% of assets in fixed income securities and 20% of assets in
equity securities, the Lifestyle Conservative 280 Trust may have a fixed income/
equity allocation of 10%/90% or 30%/70%. Variations beyond the permissible
deviation range of 10% are not permitted. However, in light of market or
economic conditions, MFC Global (U.S.A.) may determine that the normal
percentage limitations should be exceeded to protect the portfolio or to achieve
the portfolio's objective.
Within the prescribed percentage allocations, MFC Global (U.S.A.) selects
the percentage levels to be maintained in specific portfolios. On each valuation
day, the assets of each Lifestyle Trust are rebalanced to maintain the selected
percentage level. MFC Global (U.S.A.) may from time to time adjust the percent
of assets invested in any specific portfolios held by a Lifestyle Trust. Such
adjustments may be made to increase or decrease the Lifestyle Trust's holdings
of particular assets classes, such as common stocks of foreign issuers, or to
adjust portfolio quality or the duration of fixed income securities. Adjustments
may also be made to increase or reduce the percent of the Lifestyle Trust's
assets subject to the management of a particular subadviser. In addition,
changes may be made to reflect fundamental changes in the investment
environment.
The proceeds from the sale of each class of shares of a Lifestyle Trust are
invested in shares of the same class of shares of the Underlying Portfolios. All
of the outstanding shares of all the classes of shares of a Lifestyle Trust,
however, have the same proportional interest in all the classes of shares of the
Underlying Portfolios held by the Lifestyle Trust (which means, for example,
investors in Series I shares of a Lifestyle Trust have an interest not only in
the Series I shares but also in the Series II and Series III shares of the
Underlying Portfolios held by that Lifestyle Trust). Therefore, Series I
shareholders may be able to realize lower aggregate expenses by investing
directly in Series I shares of the Underlying Portfolios of a Lifestyle Trust
instead of in the Lifestyle Trust itself. However, a shareholder who chooses to
invest directly in the Underlying Portfolios would not receive the asset
allocation services provided by MFC Global (U.S.A.).
Temporary Defensive Investing
Although substantially all of the assets of the Lifestyle Trusts will be
invested in shares of the Underlying Portfolios, the Lifestyle Trusts may invest
up to 100% of their assets in cash or money market instruments of the type in
which the Money Market Trust is authorized to invest for the purpose of:
-- meeting redemption requests,
-- making other anticipated cash payments, or
-- protecting the portfolio in the event MFC Global (U.S.A.) determines
that market or economic conditions warrant a defensive posture.
To the extent a Lifestyle Trust is in a defensive position, the ability to
achieve its investment objective will be limited.
Use of Hedging and Other Strategic Transactions.
The Lifestyle Trusts are not authorized to use any of the various
investment strategies referred to under "Hedging and Other Strategic
Transactions." The Lifestyle Trusts are not authorized to purchase warrants or
indexed/structured securities or enter into mortgage dollar rolls.
Principal Risks of Investing in the Lifestyle Trusts
The Lifestyle Trusts are ranked in order of risk. The Lifestyle Aggressive
1000 portfolio is the riskiest of the Lifestyle portfolios since it invests 100%
of its assets in Underlying Portfolios which invest primarily in equity
securities. The Lifestyle Conservative 280 portfolio is the least risky of the
Lifestyle Trusts since it invests approximately 80% of its assets in
110
Underlying Portfolios which invest primarily in fixed income securities. Each
Lifestyle Trust is subject to the same risks as the Underlying Portfolios in
which it invests. The principal risks of investing in each of the Lifestyle
Trusts are:
-- To the extent a Lifestyle Trust invests in Underlying Portfolios that
invest primarily in equity securities, the portfolio will be subject
to the risks of investing in equity securities. The risks of
investing in these securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- To the extent a Lifestyle Trust invests in Underlying Portfolios that
invest primarily in fixed income securities, the portfolio will be
subject to the risks of investing in fixed income securities. Some of
the fixed income portfolios may invest in non-investment grade
securities. The risks of investing in fixed income securities,
including non-investment grade securities, are set forth below under
"Risks of Investing in Certain Types of Securities."
-- To the extent a Lifestyle Trust invests in Underlying Portfolios that
invest in foreign securities, the portfolio will be subject to the
risks of investing in foreign securities. These risks are set forth
below under "Risks of Investing in Certain Types of Securities."
-- Each of the Lifestyle Trust is a non-diversified portfolio so that it
may invest substantially all of its assets in other portfolios of the
Trust. Since a non-diversified portfolio may invest a high percentage
of its assets in the securities of a small number of companies, a
non-diversified portfolio may be affected more than a diversified
portfolio by a change in the financial condition of any of these
companies or by the financial markets' assessment of any of these
companies. In the case of the Lifestyle Trusts, this risk is greatly
reduced since each Lifestyle Trust invests its assets in other
portfolios of the Trust which have diverse holdings. See "Risks of
Investing in Certain Types of Securities" for a complete definition
of a non-diversified portfolio.
Performance(A, B, C, D, E, F, G, H, I)
The performance information below does not reflect fees and expenses of any
variable insurance contract or qualified plan which may use the Trust as its
underlying investment medium. If such fees and expenses had been reflected,
performance would be lower. The past performance of any portfolio is not
necessarily an indication of how a portfolio will perform in the future.
The bar chart reflects the performance of Series I shares. During the time
period shown in the bar chart, the highest quarterly return and the lowest
quarterly return for each Lifestyle Trust was as follows:
<Table>
<Caption>
HIGHEST QUARTERLY RETURN QUARTER LOWEST QUARTERLY RETURN QUARTER
Lifestyle Aggressive 18.07% 06/2003 -18.84% 9/2002
Lifestyle Growth 14.90% 06/2003 -14.50% 9/2002
Lifestyle Balanced 11.64% 06/2003 -10.36% 9/1998
Lifestyle Moderate 8.71% 06/2003 -5.57% 9/2002
Lifestyle Conservative 6.12% 12/2002 -1.61% 9/2002
</Table>
LIFESTYLE AGGRESSIVE 1000 TRUST
- --------------------------------------------------------------------------------
<Table>
10.9% 4.9% 14.6% -5.1% -13.7% -20.7% 34.9%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Lifestyle Aggressive 1000 Series I 34.91% 0.04% 2.20% 01/07/1997
Series II 34.91% N/A 4.87% 01/28/2002
Series III N/A N/A 11.53% 09/05/2003
Russell 2000 Index(A) 47.25% 7.13% 7.72%
Russell 3000 Index(A, H) 31.06% 0.37% 7.57%
Lifestyle Aggressive Policy(A, B) 38.89% 2.40% 6.69%
</Table>
111
LIFESTYLE GROWTH 820 TRUST
- --------------------------------------------------------------------------------
<Table>
13.8% 6.2% 16.6% -3.1% -9.0% -15.8% 29.6%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Lifestyle Growth 820
Series I 29.55% 2.24% 4.39% 01/07/1997
Series II 29.44% N/A 5.45% 01/28/2002
Series III N/A N/A 10.12% 09/05/2003
S&P 500 Index(A) 28.70% -0.57% 7.57%
Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49%
Lifestyle Growth Policy(A, C) 33.38% 2.86% 7.02%
</Table>
LIFESTYLE BALANCED 640 TRUST
- --------------------------------------------------------------------------------
<Table>
14.1% 5.7% 12.4% 2.5% -4.7% -10.0% 24.0%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Lifestyle Balanced 640 Series I 23.97% 4.15% 5.75% 01/07/1997
Series II 23.97% N/A 6.33% 01/28/2002
Series III N/A N/A 8.56% 09/05/2003
S&P 500 Index(A) 28.70% -0.57% 7.57%
Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49%
Lifestyle Balanced Policy(A,D) 26.09% 3.98% 7.18%
</Table>
LIFESTYLE MODERATE 460 TRUST
- --------------------------------------------------------------------------------
<Table>
13.7% 9.8% 7.9% 4.3% -1.1% -4.1% 17.8%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Lifestyle Moderate 460 Series I 17.83% 4.69% 6.67% 01/07/1997
Series II 17.83% N/A 6.72% 01/28/2002
Series III N/A N/A 6.76% 09/05/2003
S&P 500 Index(A) 28.70% -0.57% 7.57%
Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49%
Lifestyle Moderate Policy(A, E) 18.75% 4.81% 6.97%
</Table>
LIFESTYLE CONSERVATIVE 280 TRUST
- --------------------------------------------------------------------------------
<Table>
12.2% 10.2% 4.2% 7.6% 3.3% 1.8% 11.5%
1997 1998 1999 2000 2001 2002 2003
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
One Five Life of Date First
Year Years Portfolio Available
Lifestyle Conservative 280 Series I 11.47% 5.62% 7.20% 01/07/1997
Series II 11.46% N/A 6.78% 01/28/2002
Series III N/A N/A 5.33% 09/05/2003
Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49%
Lifestyle Conservative
Policy(A, F) 10.75% 5.39% 6.51%
</Table>
112
(A)All since inception returns for the indices begin on the month-end closest to
the actual inception date of the trust.
(B)The Lifestyle Aggressive Policy is a blend of returns (41% Russell 1000
Index, 27% Russell 2000 Index, and 32% MSCI EAFE Index). The Lifestyle
Aggressive Policy was prepared by the advisor using Ibbotson Associates Software
and Data.
(C)The Lifestyle Growth Policy is a blend of returns (42% Russell 1000 Index,
17% Russell 2000 Index, 21% MSCI EAFE Index, 3% Lehman Brothers IT
Government/Credit Bond Index, 3% Lehman Brothers 1-3 Year Government Index, 2%
Lehman Brothers LT Government/Credit Bond Index, 12% Salomon Brothers High Yield
Bond Index). The Lifestyle Growth Policy was prepared by the adviser using
Ibbotson Associates Software and Data.
(D)The Lifestyle Balanced Policy is a blend of returns (35% Russell 1000 Index,
4% Russell 2000 Index, 14% MSCI EAFE, 6% Lehman Brothers IT Government/Credit
Bond Index, 4% Lehman Brothers LT Government/Credit Bond Index, 9% Lehman
Brothers 1-3 Year Government Index, 16% Salomon Brothers High Yield Index, 7%
NAREIT Index, and 5% of the 3-month T-Bill). The Lifestyle Balanced Policy was
prepared by the adviser using Ibbotson Associates Software and Data.
(E)The Lifestyle Moderate Policy is a blend of returns (22% Russell 1000 Index,
1% Russell 2000 Index, 10% MSCI EAFE Index, 14% Lehman Brothers IT
Government/Credit Bond Index, 6% Lehman Brothers LT Government/Credit Bond
Index, 17% Lehman Brothers 1-3 Year Government Index, 8% Salomon Brothers
3-month T-Bill, 15% Salomon Brothers High Yield Index, and 7% NAREIT Index). The
Lifestyle Moderate Policy was prepared by the adviser using Ibbotson Associates
Software and Data.
(F)The Lifestyle Conservative Policy is a blend of returns (10% Russell 1000
Index, 5% MSCI EAFE Index, 2% Lehman Brothers LT Government/Credit Bond Index,
30% Lehman Brothers 1-3 Year Government Index, 15% of the 3-month T-Bill, 8%
Salomon Brothers High Yield Index and 5% NAREIT Index). The Lifestyle
Conservative Policy was prepared by the adviser using Ibbotson Associates
Software and Data.
(G)During the time periods shown below, a portion of the Lifestyle Trust's
expenses were reimbursed. If such expenses had not been reimbursed, returns
would be lower. This voluntary expense reimbursement may be terminated at any
time.
(H)The Russell 3000 Index was added to more accurately reflect the investment
objective of the Trust.
(I)Series III shares were first offered September 5, 2003. The performance for
Series III is aggregate total return. Series III performance will be lower than
Series I and Series II performance due to the 0.15% Rule 12b-1 fee.
SUBADVISER AND PORTFOLIO MANAGERS
MFC Global (U.S.A.) manages each Lifestyle Trust. MFC Global (U.S.A.) is a
corporation subject to the laws of Canada. Its principal business at the present
time is to provide investment management services to the portfolios of the Trust
for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned
subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada.
MFC is the holding company of The Manufacturers Life Insurance Company and its
subsidiaries, collectively known as Manulife Financial. The address of MFC
Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
A committee of MFC Global (U.S.A.) investment personnel manages each
Lifestyle Trust.
Deutsche Asset Management, Inc. provides subadvisory consulting services to
MFC Global (U.S.A.) in its management of the Lifestyle Trusts.
113
AMERICAN GROWTH TRUST
AMERICAN INTERNATIONAL TRUST
AMERICAN GROWTH-INCOME TRUST
AMERICAN BLUE CHIP INCOME AND GROWTH TRUST
MASTER-FEEDER STRUCTURE
The American Growth Trust, American International Trust, American
Growth-Income Trust and American Blue Chip Income and Growth Trust each operate
as a "feeder fund" which means that the portfolio does not buy investment
securities directly. Instead, it invests in a "master fund" which in turn
purchases investment securities. Each portfolio has the same investment
objective and limitations as its master fund. Each master fund is a series of
American Funds Insurance Series ("American Funds"). Each portfolio's master fund
is listed below:
<Table>
<Caption>
TRUST FEEDER FUND AMERICAN FUND MASTER FUND
American Growth Trust Growth Fund (Class 2 shares)
American International Trust International Fund (Class 2 shares)
American Growth-Income Trust Growth-Income Fund (Class 2 shares)
American Blue Chip Income and Growth Trust Blue Chip Income and Growth Fund (Class 2 shares)
</Table>
THE PROSPECTUS FOR THE AMERICAN FUND MASTER FUND IS DELIVERED TOGETHER WITH THIS
PROSPECTUS.
Series I shares of these portfolios are only available for sale to separate
accounts that are used to support variable life insurance policies issued by The
Manufacturers Life Insurance Company (U.S.A.) or The Manufacturers Life
Insurance Company of New York.
INVESTMENT OBJECTIVES AND STRATEGIES
Each portfolio has a stated investment objective which is the same as the
objective of the master fund in which it invests. Each master fund pursues this
objective through separate investment strategies or policies. There can be no
assurance that the portfolio or the master fund will achieve its investment
objective. The differences in objectives and policies among the master funds can
be expected to affect the return of each portfolio and the degree of market and
financial risk to which each portfolio is subject. Additional information about
the portfolios' and master funds' investment policies is set forth below under
"Additional Information about the Portfolios' Investments -- Additional
Investment Policies." The investment objective of each portfolio is
nonfundamental (i.e., the objective may be changed without the approval of
shareholders).
More complete descriptions of certain other instruments in which the
portfolios may invest are set forth in the Statement of Additional Information.
AMERICAN GROWTH TRUST
ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC")
INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow
INVESTMENT STRATEGIES: The American Growth Trust invests all of its assets in
the master fund, Class 2 shares of the Growth Fund, a
series of American Funds Insurance Series. The Growth
Fund invests primarily in common stocks of companies that
appear to offer superior opportunities for growth of
capital. The Growth Fund may also invest up to 15% of its
assets in equity securities of issuers domiciled outside
the U.S. and Canada and not included in the S&P 500
Composite Index.
TEMPORARY DEFENSIVE INVESTING
The Growth Fund may also hold cash or money market instruments. The size of
the funds' cash position will vary and will depend on various factors, including
market conditions and purchases and redemptions of fund shares. A larger cash
position could detract from the achievement of a fund's objective in a period of
rising market prices; conversely, it would reduce a fund's magnitude of loss in
the event of a general downturn and provide liquidity to make additional
investments or to meet redemptions.
PRINCIPAL RISKS OF INVESTING IN THIS PORTFOLIO
-- The Growth Fund invests primarily in equity securities. The risks of
investing in equity securities are set forth below under "Risks of
Investing in Certain Types of Securities."
-- The Growth Fund may invest in foreign securities. The risks of investing
in foreign securities are set forth below under "Risks of Investing in
Certain Types of Securities."
114
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
AMERICAN INTERNATIONAL TRUST
ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC")
INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow
INVESTMENT STRATEGIES: The American International Trust invests all of its
assets in the master fund, Class 2 shares of the
International Fund, a series of American Funds Insurance
Series. The International Fund invests primarily in
common stocks of companies located outside the United
States.
TEMPORARY DEFENSIVE INVESTING
The International Fund may also hold cash or money market instruments. The
size of the funds' cash position will vary and will depend on various factors,
including market conditions and purchases and redemptions of fund shares. A
larger cash position could detract from the achievement of a fund's objective in
a period of rising market prices; conversely, it would reduce a fund's magnitude
of loss in the event of a general downturn and provide liquidity to make
additional investments or to meet redemptions.
Principal Risks of Investing in this Portfolio
-- The International Fund invests primarily in foreign equity securities. The
risks of investing in equity securities and foreign securities are set
forth below under "Risks of Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
AMERICAN BLUE CHIP INCOME AND GROWTH TRUST
ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC")
INVESTMENT OBJECTIVE: To seek to produce income exceeding the average yield on
U.S. stock generally (as represented by the average yield
on the Standard & Poor's 500 Composite Index) and to
provide an opportunity for growth of principal consistent
with sound common stock investing.
INVESTMENT STRATEGIES: The American Blue Chip Income and Growth Trust invests
all of its assets in the master fund, Class 2 shares of
the Blue Chip Income and Growth Fund, a series of
American Funds Insurance Series. The Blue Chip Income and
Growth Fund invests primarily in common stocks of larger,
more established companies based in the U.S. with market
capitalizations of $4 billion and above. The fund may
also invest up to 10% of its assets in common stocks of
larger, non-U.S. companies, so long as they are listed or
traded in the U.S. The fund will invest, under normal
market conditions, at least 90% of its assets in equity
securities.
Temporary Defensive Investing
The Blue Chip Income and Growth Fund may also hold cash or money market
instruments. The size of the funds' cash position will vary and will depend on
various factors, including market conditions and purchases and redemptions of
fund shares. A larger cash position could detract from the achievement of a
fund's objective in a period of rising market prices; conversely, it would
reduce a fund's magnitude of loss in the event of a general downturn and provide
liquidity to make additional investments or to meet redemptions.
Principal Risks of Investing in this Portfolio
-- The Blue Chip Income and Growth Fund invests primarily in equity
securities. The risks of investing in equity securities are set forth
below under "Risks of Investing in Certain Types of Securities."
-- The Blue Chip Income and Growth Fund may invest in foreign securities. The
risks of investing in foreign securities are set forth below under "Risks
of Investing in Certain Types of Securities."
115
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
AMERICAN GROWTH-INCOME TRUST
ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC")
INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow and to
provide the shareholder with income over time
INVESTMENT STRATEGIES: The American Growth-Income Trust invests all of its
assets in the master fund, Class 2 shares of the
Growth -- Income Fund, a series of American Funds
Insurance Series. The Growth -- Income Fund invests
primarily in common stocks or other securities which
demonstrate the potential for appreciation and/or
dividends. The fund may invest a portion of its assets in
securities of issuers domiciled outside the U.S. and not
included in the Standard & Poor's 500 composite Index.
Temporary Defensive Investing
The Growth -- Income Fund may also hold cash or money market instruments.
The size of the funds' cash position will vary and will depend on various
factors, including market conditions and purchases and redemptions of fund
shares. A larger cash position could detract from the achievement of a fund's
objective in a period of rising market prices; conversely, it would reduce a
fund's magnitude of loss in the event of a general downturn and provide
liquidity to make additional investments or to meet redemptions.
Principal Risks of Investing in this Portfolio
-- The Growth -- Income Fund invests primarily in equity securities. The
risks of investing in equity securities are set forth below under "Risks
of Investing in Certain Types of Securities."
-- The Growth -- Income Fund may invest in foreign securities. The risks of
investing in foreign securities are set forth below under "Risks of
Investing in Certain Types of Securities."
Performance
Performance is not provided since the portfolio commenced operations in
May, 2003.
ADDITIONAL INFORMATION ABOUT
AMERICAN GROWTH TRUST, AMERICAN INTERNATIONAL TRUST, AMERICAN GROWTH-INCOME
TRUST,
AMERICAN BLUE CHIP INCOME AND GROWTH TRUST AND EACH MASTER FUNDS' INVESTMENT
REPURCHASE AGREEMENTS
Each of the portfolios may enter into repurchase agreements. Information
regarding repurchase agreements is set forth under "Additional Information about
the Portfolios' Investments -- Repurchase Agreements."
ADDITIONAL INVESTMENT POLICIES
Additional investment policies of the master funds are set forth in the
statement of additional information of the master fund which is available upon
request.
ADVISORY ARRANGEMENTS
The portfolios do not have an investment adviser.
Capital Research and Management Company ("CRMC"), an experienced investment
management organization founded in 1931, serves as investment adviser to each
American Fund master fund and to other mutual funds, including those in The
American Funds Group. Capital Research Management Company, a wholly owned
subsidiary of The Capital Group Companies, Inc., is headquartered at 333 South
Hope Street, Los Angeles, CA 90071. Capital Research Management Company manages
the investment portfolio and business affairs of each American Fund master fund.
116
The total management fee paid by each master fund, as a percentage of
average net assets, for the fiscal year ended December 31, 2003 is as follows:
<Table>
Growth Fund........................................ 0.370%
International Fund................................. 0.570%
Blue Chip Income and Growth Fund................... 0.480%
Growth-Income Fund................................. 0.330%
</Table>
Capital Research and Management Company uses a system of multiple portfolio
counselors in managing mutual fund assets. Under this system, the portfolio of a
fund is divided into segments which are managed by individual counselors.
Counselors decide how their respective segments will be invested, within the
limits provided by a fund's objective(s) and policies and by Capital Research
and Management Company's investment committee. In addition, Capital Research and
Management Company's research professionals may make investment decisions with
respect to a portion of a fund's portfolio.
The primary portfolio counselors for the Growth Fund are listed below.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE YEARS OF EXPERIENCE AS
AN INVESTMENT PROFESSIONAL
------------------------------------
YEARS OF EXPERIENCE AS ------------------------------------
PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH
PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT
(FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS
- -------------------------------------------------------------------------------------------------------------------
Donald D. O'Neal (President Senior Vice 13 Years (plus 4 years 19 19
and Trustee) President, Capital prior experience as a
Research and research professional for
Management Company the fund)
- -------------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice 10 Years (plus 5 years 33 33
President and prior experience as a
Director, Capital research professional for
Research and the fund)
Management Company
- -------------------------------------------------------------------------------------------------------------------
J. Blair Frank Vice President, 4 Years (plus 3 years 9 10
Capital Research prior experience as a
Company research professional for
the fund)
- -------------------------------------------------------------------------------------------------------------------
Donnalisa Barnum Senior Vice Growth Fund -- 1 year 17 23
President, Capital
Research Company
- -------------------------------------------------------------------------------------------------------------------
Ronald B. Morrow Senior Vice Growth Fund -- 1 year 7 36
President, Capital (plus 5 years prior
Research Company experience as a research
professional for the
fund)
- -------------------------------------------------------------------------------------------------------------------
</Table>
117
The primary portfolio counselors for the International Fund are listed
below.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE YEARS OF EXPERIENCE AS
AN INVESTMENT PROFESSIONAL
------------------------------------
YEARS OF EXPERIENCE AS ------------------------------------
PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH
PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT
(FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS
- -------------------------------------------------------------------------------------------------------------------
Robert W. Lovelace (Vice President and 10 Years 19 19
President) Director, Capital
Research Company
- -------------------------------------------------------------------------------------------------------------------
Alwyn Heong Senior Vice 8 Years 12 16
President, Capital
Research Company
- -------------------------------------------------------------------------------------------------------------------
Nick J. Grace Senior Vice Global Growth Fund -- 2 10 14
President and years (plus 4 years prior
Director, Capital experience as a research
Research Company professional for the
fund)
International Fund --
less than one year (plus
7 years prior experience
as a research
professional for the
fund)
- -------------------------------------------------------------------------------------------------------------------
</Table>
The primary portfolio counselors for the Blue Chip Income and Growth Fund
are listed below.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE YEARS OF EXPERIENCE AS
AN INVESTMENT PROFESSIONAL
------------------------------------
YEARS OF EXPERIENCE AS ------------------------------------
PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH
PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT
(FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS
- -------------------------------------------------------------------------------------------------------------------
James K. Dunton, Chairman Senior Vice 3 Years (since the fund 42 42
of the Board and Principal President and began operations)
Executive Officer Director, Capital
Research and
Management Company
- -------------------------------------------------------------------------------------------------------------------
Alan N Berro, Vice Senior Vice 3 Years (since the fund 13 18
President President, Capital began operations)
Research Company
- -------------------------------------------------------------------------------------------------------------------
C. Ross Sappenfield Vice President and 3 Years (since the fund 12 12
Director, Capital began operations)
Research Company
- -------------------------------------------------------------------------------------------------------------------
</Table>
118
The primary portfolio counselors for the Growth -- Income Fund are listed
below.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
APPROXIMATE YEARS OF EXPERIENCE AS
AN INVESTMENT PROFESSIONAL
------------------------------------
YEARS OF EXPERIENCE AS ------------------------------------
PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH
PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT
(FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS
- -------------------------------------------------------------------------------------------------------------------
James K. Dunton, Chairman Senior Vice 20 Years (since the fund 42 42
of the Board and Principal President and began operations
Executive Officer Director, Capital
Research and
Management Company
- -------------------------------------------------------------------------------------------------------------------
Alan N. Berro, Vice Senior Vice 8 Years (plus 4 years 13 18
President President, Capital prior experience as a
Research Company research professional for
the fund)
- -------------------------------------------------------------------------------------------------------------------
Claudia P. Huntington, Vice Senior Vice 10 Years (plus 5 years 29 31
President President, Capital prior experience as a
Research and research professional for
Management Company the fund)
- -------------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice 14 Years (plus 1 year 29 32
President and prior experience as a
Director, Capital research professional for
Research and the fund)
Management Company
- -------------------------------------------------------------------------------------------------------------------
C. Ross Sappenfield Vice President and 5 Years 12 12
Director, Capital
Research Company
- -------------------------------------------------------------------------------------------------------------------
</Table>
GENERAL INFORMATION
MASTER-FEEDER STRUCTURE
Each master fund may have other shareholders, each of whom will pay their
proportionate share of the master fund's expenses. Each of the American Growth
Trust, American International Trust, American Blue Chip Income and Growth Trust
and American Growth-Income Trust each has the right to switch master funds or
decide to manage its assets directly at any time the Trust Board of Trustees
decides it is in the best interest of a portfolio to do so.
119
ADDITIONAL INFORMATION ABOUT
THE PORTFOLIOS' INVESTMENTS
RISKS OF INVESTING IN CERTAIN TYPES OF SECURITIES
The risks of investing in certain types of securities are described below.
The value of an individual security or a particular type of security can be more
volatile than the market as a whole and can perform differently than the value
of the market as a whole.
NON-DIVERSIFIED PORTFOLIOS
Definition of Non-Diversified. Any portfolio that is non-diversified is
limited as to the percentage of its assets that may be invested in any one
issuer, and as to the percentage of the outstanding voting securities of such
issuer that may be owned, only by the portfolio's own investment restrictions
and the diversification requirements of the Internal Revenue Code (the "Code").
In contrast, a diversified portfolio may not invest more than five percent of
its total assets in the securities, or own more than ten percent of the
outstanding voting securities, of any one issuer.
Risks. Since a non-diversified portfolio may invest a high percentage of
its assets in the securities of a small number of companies, a non-diversified
portfolio may be affected more than a diversified portfolio by a change in the
financial condition of any of these companies or by the financial markets'
assessment of any of these companies.
EQUITY SECURITIES
Equity securities include common, preferred and convertible preferred
stocks and securities the values of which are tied to the price of stocks, such
as rights, warrants and convertible debt securities. Common and preferred stocks
represent equity ownership in a company. Stock markets are volatile. The price
of equity securities will fluctuate and can decline and reduce the value of a
portfolio investing in equities. The price of equity securities fluctuates based
on changes in a company's financial condition and overall market and economic
conditions. The value of equity securities purchased by a portfolio could
decline if the financial condition of the companies the portfolio is invested in
decline or if overall market and economic conditions deteriorate. Even
portfolios that invest in high quality or "blue chip" equity securities or
securities of established companies with large market capitalizations (which
generally have strong financial characteristics) can be negatively impacted by
poor overall market and economic conditions. Companies with large market
capitalizations may also have less growth potential than smaller companies and
may be able to react less quickly to change in the marketplace.
FIXED INCOME SECURITIES
Fixed income securities are generally subject to two principal types of
risks: (a) interest rate risk and (b) credit quality risk.
Interest Rate Risk. Fixed income securities are affected by changes in
interest rates. When interest rates decline, the market value of the fixed
income securities generally can be expected to rise. Conversely, when interest
rates rise, the market value of fixed income securities generally can be
expected to decline.
Credit Quality Risk. Fixed income securities are subject to the risk that
the issuer of the security will not repay all or a portion of the principal
borrowed and will not make all interest payments. If the credit quality of a
fixed income security deteriorates after a portfolio has purchased the security,
the market value of the security may decrease and lead to a decrease in the
value of the portfolio's investments. Portfolios that may invest in lower rated
fixed income securities are riskier than portfolios that may invest in higher
rated fixed income securities. Additional information on the risks of investing
in investment grade fixed income securities in the lowest rating category and
lower rated fixed income securities is set forth below.
INVESTMENT GRADE FIXED INCOME SECURITIES IN THE LOWEST RATING CATEGORY
Investment grade fixed income securities in the lowest rating category
(rated "Baa" by Moody's or "BBB" by Standard & Poor's and comparable unrated
securities) involve a higher degree of risk than fixed income securities in the
higher rating categories. While such securities are considered investment grade
quality and are deemed to have adequate capacity for payment of principal and
interest, such securities lack outstanding investment characteristics and have
speculative characteristics as well. For example, changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
120
LOWER RATED FIXED INCOME SECURITIES
Lower rated fixed income securities are defined as securities rated below
investment grade (rated "Ba" and below by Moody's and "BB" and below by Standard
& Poor's). The principal risks of investing in these securities are as follows:
General Risks
-- Risk to Principal and Income. Investing in lower rated fixed income
securities is considered speculative. While these securities generally
provide greater income potential than investments in higher rated
securities, there is a greater risk that principal and interest payments
will not be made. Issuers of these securities may even go into default or
become bankrupt.
-- Price Volatility. The price of lower rated fixed income securities may be
more volatile than securities in the higher rating categories. This
volatility may increase during periods of economic uncertainty or change.
The price of these securities is affected more than higher rated fixed
income securities by the market's perception of their credit quality
especially during times of adverse publicity. In the past, economic
downturns or an increase in interest rates have, at times, caused more
defaults by issuers of these securities and may do so in the future.
Economic downturns and increases in interest rates have an even greater
affect on highly leveraged issuers of these securities.
-- Liquidity. The market for lower rated fixed income securities may have
more limited trading than the market for investment grade fixed income
securities. Therefore, it may be more difficult to sell these securities
and these securities may have to be sold at prices below their market
value in order to meet redemption requests or to respond to changes in
market conditions.
-- Dependence on Subadviser's Own Credit Analysis. While a subadviser to a
portfolio may rely on ratings by established credit rating agencies, it
will also supplement such ratings with its own independent review of the
credit quality of the issuer. Therefore, the assessment of the credit risk
of lower rated fixed income securities is more dependent on the
subadviser's evaluation than the assessment of the credit risk of higher
rated securities.
Additional Risks Regarding Lower Rated Corporate Fixed Income Securities
Lower rated corporate debt securities (and comparable unrated securities)
tend to be more sensitive to individual corporate developments and changes in
economics conditions than higher-rated corporate fixed income securities.
Issuers of lower rated corporate debt securities may also be highly leveraged,
increasing the risk that principal and income will not be repaid.
Additional Risks Regarding Lower Rated Foreign Government Fixed Income
Securities
Lower rated foreign government fixed income securities are subject to the
risks of investing in emerging market countries described below under "Foreign
Securities." In addition, the ability and willingness of a foreign government to
make payments on debt when due may be affected by the prevailing economic and
political conditions within the country. Emerging market countries may
experience high inflation, interest rates and unemployment as well as exchange
rate trade difficulties and political uncertainty or instability. These factors
increase the risk that a foreign government will not make payments when due.
SMALL AND MEDIUM SIZE COMPANIES
Small or Unseasoned Companies
-- Survival of Small or Unseasoned Companies. Companies that are small or
unseasoned (less than 3 years of operating history) are more likely than
larger or established companies to fail or not to accomplish their goals.
As a result, the value of their securities could decline significantly.
These companies are less likely to survive since they are often dependent
upon a small number of products, may have limited financial resources and
a small management group.
-- Changes in Earnings and Business Prospects. Small or unseasoned companies
often have a greater degree of change in earnings and business prospects
than larger or established companies, resulting in more volatility in the
price of their securities.
-- Liquidity. The securities of small or unseasoned companies may have
limited marketability. This factor could cause the value of a portfolio's
investments to decrease if it needs to sell such securities when there are
few interested buyers.
-- Impact of Buying or Selling Shares. Small or unseasoned companies usually
have fewer outstanding shares than larger or established companies.
Therefore, it may be more difficult to buy or sell large amounts of these
shares without unfavorably impacting the price of the security.
-- Publicly Available Information. There may be less publicly available
information about small or unseasoned companies. Therefore, when making a
decision to purchase a security for a portfolio, a subadviser may not be
aware of problems associated with the company issuing the security.
121
Medium Size Companies
-- Investments in the securities of medium sized companies present risks
similar to those associated with small or unseasoned companies although to
a lesser degree due to the larger size of the companies.
FOREIGN SECURITIES
The principal risks of investing in foreign securities are set forth below.
As noted below, many of these risks are greater in the case of investments in
emerging market countries.
-- Currency Fluctuations. Investments in foreign securities may cause a
portfolio to lose money when converting investments from foreign
currencies into U.S. dollars. A portfolio may attempt to lock in an
exchange rate by purchasing a foreign currency exchange contract prior to
the settlement of an investment in a foreign security. However, it may not
always be successful in doing so and the portfolio could still lose money.
-- Political and Economic Conditions. Investments in foreign securities
subject a portfolio to the political or economic conditions of the foreign
country. These conditions could cause portfolio investments to lose value
if these conditions deteriorate for any reason. This risk increases in the
case of emerging market countries which are more likely to be politically
unstable. Political instability could cause the value of any investment in
the securities of an issuer based in a foreign country to decrease or
could prevent or delay the portfolio from selling its investment and
taking the money out of the country.
-- Removal of Proceeds of Investments from a Foreign Country. Foreign
countries, especially emerging market countries, often have currency
controls or restrictions which may prevent or delay a portfolio from
taking money out of the country or may impose additional taxes on money
removed from the country. Therefore, a portfolio could lose money if it is
not permitted to remove capital from the country or if there is a delay in
taking the assets out of the country, since the value of the assets could
decline during this period or the exchange rate to convert the assets into
U.S. dollars could worsen.
-- Nationalization of Assets. Investments in foreign securities subject a
portfolio to the risk that the company issuing the security may be
nationalized. If the company is nationalized, the value of the company's
securities could decrease in value or even become worthless.
-- Settlement of Sales. Foreign countries, especially emerging market
countries, may also have problems associated with settlement of sales.
Such problems could cause the portfolio to suffer a loss if a security to
be sold declines in value while settlement of the sale is delayed.
-- Investor Protection Standards. Foreign countries, especially emerging
market countries, may have less stringent investor protection and
disclosure standards than the U.S. Therefore, when making a decision to
purchase a security for a portfolio, a subadviser may not be aware of
problems associated with the company issuing the security and may not
enjoy the same legal rights as those provided in the U.S.
INVESTMENT COMPANY SECURITIES
Certain of the portfolios may invest in securities of other investment
companies. The total return on such investments will be reduced by the operating
expenses and fees of such other investment companies, including advisory fees.
Investments in closed end funds may involve the payment of substantial premiums
above the value of such investment companies' portfolio securities.
EXCHANGE TRADED FUNDS (ETFS)
These are a type of investment company bought and sold on a securities
exchange. An ETF represents a fixed portfolio of securities designed to track a
particular market index. A portfolio could purchase an ETF to temporarily gain
exposure to a portion of the U.S. or a foreign market while awaiting purchase of
underlying securities. The risks of owning an ETF generally reflect the risks of
owning the underlying securities they are designed to track, although lack of
liquidity in an ETF could result in it being more volatile and ETFs have
management fees which increase their costs.
STRIPPED SECURITIES
Stripped securities are the separate income or principal components of a
debt security. The risks associated with stripped securities are similar to
those of other debt securities, although stripped securities may be more
volatile, and the value of certain types of stripped securities may move in the
same direction as interest rates. U.S. Treasury securities that have been
stripped by a Federal Reserve Bank are obligations issued by the U.S. Treasury.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-Backed Securities. Mortgage-backed securities represent
participating interests in pools of residential mortgage loans which are
guaranteed by the U.S. Government, its agencies or instrumentalities. However,
the guarantee of these types of securities relates to the principal and interest
payments and not the market value of such securities. In
122
addition, the guarantee only relates to the mortgage-backed securities held by
the portfolio and not the purchase of shares of the portfolio.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Such securities differ from
conventional debt securities which provide for the periodic payment of interest
in fixed amounts (usually semiannually) with principal payments at maturity or
on specified dates. Mortgage-backed securities provide periodic payments which
are, in effect, a "pass-through" of the interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans. A mortgage-backed security will mature when all the mortgages in
the pool mature or are prepaid. Therefore, mortgage-backed securities do not
have a fixed maturity, and their expected maturities may vary when interest
rates raise or fall.
When interest rates fall, homeowners are more likely to prepay their
mortgage loans. An increased rate of prepayments on the portfolio's
mortgage-backed securities will result in an unforeseen loss of interest income
to the portfolio as the portfolio may be required to reinvest assets at a lower
interest rate. Because prepayments increase when interest rates fall, the prices
of mortgaged-backed securities do not increase as much as other fixed income
securities when interest rates fall.
When interest rates rise, homeowners are less likely to prepay their
mortgages loans. A decreased rate of prepayments lengthen the expected maturity
of a mortgage-backed security. Therefore, the prices of mortgage-backed
securities may decrease more than prices of other fixed income securities when
interest rates rise.
The yield of mortgage-backed securities is based on the average life of the
underlying pool of mortgage loans. The actual life of any particular pool may be
shortened by unscheduled or early payments of principal and interest. Principal
prepayments may result from the sale of the underlying property or the
refinancing or foreclosure of underlying mortgages. The occurrence of
prepayments is affected by a wide range of economic, demographic and social
factors and, accordingly, it is not possible to accurately predict the average
life of a particular pool. The actual prepayment experience of a pool of
mortgage loans may cause the yield realized by the portfolio to differ from the
yield calculated on the basis of the average life of the pool. In addition, if
the portfolio purchases mortgage-backed securities at a premium, the premium may
be lost in the event of early prepayment which may result in a loss to the
portfolio.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments are likely to decline.
Monthly interest payments received by the portfolio have a compounding effect
which will increase the yield to shareholders as compared to debt obligations
that pay interest semiannually. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. Also, although the value of debt securities may
increase as interest rates decline, the value of these pass-through type of
securities may not increase as much due to their prepayment feature.
Collateralized Mortgage Obligations. The portfolio may invest in
mortgage-backed securities called collateralized mortgage obligations (CMOs).
CMOs are issued in separate classes with different stated maturities. As the
mortgage pool experiences prepayments, the pool pays off investors in classes
with shorter maturities first. By investing in CMOs, the portfolio may manage
the prepayment risk of mortgage-backed securities. However, prepayments may
cause the actual maturity of a CMO to be substantially shorter than its stated
maturity.
Asset-Backed Securities. Asset-backed securities include interests in
pools of debt securities, commercial or consumer loans, or other receivables.
The value of these securities depends on many factors, including changes in
interest rates, the availability of information concerning the pool and its
structure, the credit quality of the underlying assets, the market's perception
of the servicer of the pool, and any credit enhancement provided. In addition,
asset-backed securities have prepayment risks similar to mortgage-backed
securities.
SECURITIES LINKED TO THE REAL ESTATE MARKET
Investing in securities of companies in the real estate industry subjects a
portfolio to the risks associated with the direct ownership of real estate.
These risks include:
<Table>
-- Declines in the value of real estate; -- Change in zoning laws;
-- Risks related to general and local -- Losses due to costs resulting from the
economic conditions; clean-up of environmental problems;
-- Possible lack of availability of mortgage -- Liability to third parties for damages
funds; resulting from environmental problems;
-- Overbuilding; -- Casualty or condemnation losses;
-- Extended vacancies of properties; -- Limitations on rents;
-- Increased competition; -- Changes in neighborhood values and the
-- Increases in property taxes and operating appeal of properties to tenants; and
expenses; -- Changes in interest rates.
</Table>
123
Therefore, for a portfolio investing a substantial amount of its assets in
securities of companies in the real estate industry, the value of the
portfolio's shares may change at different rates compared to the value of shares
of a portfolio with investments in a mix of different industries.
Securities of companies in the real estate industry include REITs including
Equity REITs and Mortgage REITs. Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidations. In addition, Equity and Mortgage
REITs could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
form registration under the 1940 Act. The above factors may also adversely
affect a borrower's or a lessee's ability to meet its obligations to the REIT.
In the event of a default by a borrower or lessee, the REIT may experience
delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
In addition, even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. See "Small
and Medium Size Companies" above for a discussion of the risks associated with
invests in these companies.
INDUSTRY OR SECTOR INVESTING
When a portfolio's investments are concentrated in a particular industry or
sector of the economy, they are not as diversified as the investments of most
mutual funds and are far less diversified than the broad securities markets.
This means that concentrated portfolios tend to be more volatile than other
mutual funds, and the values of their investments tend to go up and down more
rapidly. In addition, a portfolio which invests in a particular industry or
sector is particularly susceptible to the impact of market, economic, regulatory
and others factors affecting that industry or sector.
Internet-Related Investments. The value of companies engaged in
Internet-related activities, which is a developing industry, is particularly
vulnerable to (a) rapidly changing technology, (b) extensive government
regulation and (c) relatively high risk of obsolescence caused by scientific and
technological advances. In addition, companies engaged in Internet-related
activities are difficult to value and many have high share prices relative to
their earnings which they may not be able to maintain over the long-term.
Moreover, many Internet companies are not yet profitable and will need
additional financing to continue their operations. There is no guarantee that
such financing will be available when needed. Since many internet companies are
start-up companies, the risks associated with investing in small companies are
heightened for these companies. Any portfolio that invests a significant portion
of its assets in Internet-related companies should be considered extremely risky
even as compared to other portfolios that invest primarily in small company
securities.
Financial Services Industry. A portfolio investing principally in
securities of companies in the financial services industry is particularly
vulnerable to events affecting that industry. Companies in the financial
services industry include commercial and industrial banks, savings and loan
associations and their holding companies, consumer and industrial finance
companies, diversified financial services companies, investment banking,
securities brokerage and investment advisory companies, leasing companies and
insurance companies.
Banking. Commercial banks (including "money center" regional and community
banks), savings and loan associations and holding companies of the foregoing are
especially subject to adverse effects of volatile interest rates, concentrations
of loans in particular industries (such as real estate or energy) and
significant competition. The profitability of these businesses is to a
significant degree dependent upon the availability and cost of capital funds.
Economic conditions in the real estate market may have a particularly strong
effect on certain banks and savings associations. Commercial banks and savings
associations are subject to extensive federal and, in many instances, state
regulation. Neither such extensive regulation nor the federal insurance of
deposits ensures the solvency or profitability of companies in this industry,
and there is no assurance against losses in securities issued by such companies.
Insurance. Insurance companies are particularly subject to government
regulation and rate setting, potential anti-trust and tax law changes, and
industry-wide pricing and competition cycles. Property and casualty insurance
companies may also be affected by weather and other catastrophes. Life and
health insurance companies may be affected by mortality and morbidity rates,
including the effects of epidemics. Individual insurance companies may be
exposed to reserve inadequacies, problems in investment portfolios (for example,
due to real estate or "junk" bond holdings) and failures of reinsurance
carriers.
Other Financial Services Companies. Many of the investment considerations
discussed in connection with banks and insurance also apply to financial
services companies. These companies are all subject to extensive regulation,
rapid business changes, volatile performance dependent upon the availability and
cost of capital and prevailing interest rates and significant competition.
General economic conditions significantly affect these companies. Credit and
other losses resulting from the financial difficulty of borrowers or other third
parties have a potentially adverse effect on companies in this industry.
124
Investment banking, securities brokerage and investment advisory companies are
particularly subject to government regulation and the risks inherent in
securities trading and underwriting activities.
Telecommunications. Companies in the telecommunications sector are subject
to the additional risks of rapid obsolescence, lack of standardization or
compatibility with existing technologies, an unfavorable regulatory environment,
and a dependency on patent and copyright protection. The prices of the
securities of companies in the telecommunications sector may fluctuate widely
due to both federal and state regulations governing rates of return and services
that may be offered, fierce competition for market share, and competitive
challenges in the U.S. from foreign competitors engaged in strategic joint
ventures with U.S. companies, and in foreign markets from both U.S. and foreign
competitors. In addition, recent industry consolidation trends may lead to
increased regulation of telecommunications companies in their primary markets.
Health Sciences. Companies in this sector are subject to the additional
risks of increased competition within the health care industry, changes in
legislation or government regulations, reductions in government funding, product
liability or other litigation and the obsolescence of popular products. The
prices of the securities of heath sciences companies may fluctuate widely due to
government regulation and approval of their products and services, which may
have a significant effect on their price and availability. In addition, the
types of products or services produced or provided by these companies may
quickly become obsolete. Moreover, liability for products that are later alleged
to be harmful or unsafe may be substantial and may have a significant impact on
a company's market value or share price.
IPOS ("INITIAL PUBLIC OFFERINGS")
Certain portfolios may invest a portion of their assets in shares of
initial public offerings ("IPOs"). IPOs may have a magnified impact on the
performance of a portfolio with a small asset base. The impact of IPOs on a
portfolio's performance likely will decrease as the portfolio's asset size
increases, which could reduce the portfolio's returns. IPOs may not be
consistently available to a portfolio for investing, particularly as the
portfolio's asset base grows. IPO shares frequently are volatile in price due to
the absence of a prior public market, the small number of shares available for
trading and limited information about the issuer. Therefore, a portfolio may
hold IPO shares for a very short period of time. This may increase the turnover
of a portfolio and may lead to increased expenses for a portfolio, such as
commissions and transaction costs. In addition, IPO shares can experience an
immediate drop in value if the demand for the securities does not continue to
support the offering price.
------------------
Additional risks of investing in the types of securities mentioned above
are contained in the Statement of Additional Information.
ADDITIONAL INVESTMENT POLICIES
Subject to certain restrictions and except as noted below, each of the
portfolios of the Trust may use the following investment strategies and purchase
the following types of securities. Except in the case of repurchase agreements,
the disclosure below does not apply to the American Growth Trust, American
International Trust, American Growth-Income Trust and American Blue Chip Income
and Growth Trust. The investment strategies of the underlying master funds for
each of these portfolios are set for in the master fund prospectus (the
"American Funds Insurance Series" prospectus) which accompanies this prospectus.
LENDING OF PORTFOLIO SECURITIES
Each portfolio may lend its securities so long as such loans do not
represent more than 33 1/3% of a portfolio's total assets. As collateral for the
lent securities, the borrower gives the lending portfolio collateral equal to at
least 100% of the value of the lent securities. The collateral may consist of
cash, cash equivalents or securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities. The borrower must also agree to increase
the collateral if the value of the lent securities increases. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS")
In order to help ensure the availability of suitable securities, each of
the portfolios may purchase debt or equity securities on a "when-issued" or on a
"forward delivery" basis. These terms mean that the obligations will be
delivered to the portfolio at a future date, which may be a month or more after
the date of commitment. While awaiting delivery of the obligations purchased on
such bases, a portfolio will maintain on its record liquid assets consisting of
cash or high quality debt securities equal to the amount of the commitments to
purchase when-issued or forward delivery securities. At the time delivery is
made, the value of when-issued or forward delivery securities may be more or
less than the transaction price, and the yields then available in the market may
be higher than those obtained in the transaction.
125
U.S. GOVERNMENT SECURITIES
Certain of the portfolios may invest in U.S. government securities issued
or guaranteed by the U.S. government or by an agency or instrumentality of the
U.S. government. Not all U.S. government securities are backed by the full faith
and credit of the United States. Some are supported only by the credit of the
issuing agency or instrumentality which depends entirely on its own resources to
repay the debt. U.S. government securities that are backed by the full faith and
credit of the United States include U.S. Treasuries and mortgage-backed
securities guaranteed by the Government National Mortgage Association.
Securities that are only supported by the credit of the issuing agency or
instrumentality include the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Banks ("FHLBs") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
REPURCHASE AGREEMENTS
Each of the portfolios may enter into repurchase agreements. Repurchase
agreements involve the acquisition by a portfolio of debt securities subject to
an agreement to resell them at an agreed-upon price. The arrangement is in
economic effect a loan collateralized by securities. The portfolio's risk in a
repurchase transaction is limited to the ability of the seller to pay the
agreed-upon sum on the delivery date. In the event of bankruptcy or other
default by the seller, the instrument purchased may decline in value, interest
payable on the instrument may be lost and there may be possible delays and
expense in liquidating the instrument. Securities subject to repurchase
agreements will be valued every business day and additional collateral will be
requested if necessary so that the value of the collateral is at least equal to
the value of the repurchased obligation, including the interest accrued thereon.
REVERSE REPURCHASE AGREEMENTS
Each portfolio of the Trust may enter into "reverse" repurchase agreements.
Under a reverse repurchase agreement, a portfolio may sell a debt security and
agree to repurchase it at an agreed upon time and at an agreed upon price. The
portfolio will maintain on its records liquid assets such as cash, Treasury
bills or other U.S. Government Securities having an aggregate value equal to the
amount of such commitment to repurchase including accrued interest, until
payment is made. While a reverse repurchase agreement may be considered a form
of leveraging and may, therefore, increase fluctuations in a portfolio's net
asset value per share, each portfolio will cover the transaction as described
above.
FOREIGN REPURCHASE AGREEMENTS
Certain Trust portfolios may enter into foreign repurchase agreements.
Foreign repurchase agreements may be less well secured than U.S. repurchase
agreements, and may be denominated in foreign currencies. They also may involve
greater risk of loss if the counterparty defaults. Some counterparties in these
transactions may be less creditworthy than those in U.S. markets.
MORTGAGE DOLLAR ROLLS
Unless otherwise explicitly prohibited in the description of a portfolio,
each portfolio of the Trust may enter into mortgage dollar rolls. Under a
mortgage dollar roll, a portfolio sells mortgage-backed securities for delivery
in the future (generally within 30 days) and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date.
At the time a portfolio enters into a mortgage dollar roll, it will
maintain on its records liquid assets such as cash, U.S. Government Securities
equal in value to its obligations in respect of dollar rolls, and accordingly,
such dollar rolls will not be considered borrowings.
A portfolio may only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash or cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Dollar roll transactions involve the risk
that the market value of the securities sold by the portfolio may decline below
the repurchase price of those securities. While a mortgage dollar roll may be
considered a form of leveraging, and may, therefore, increase fluctuations in a
portfolio's net asset value per share, each portfolio will cover the transaction
as described above.
WARRANTS
Unless otherwise explicitly prohibited in the description of a portfolio,
each portfolio of the Trust may, subject to certain restrictions, purchase
warrants, including warrants traded independently of the underlying securities.
Warrants are rights to purchase securities at specific prices valid for a
specific period of time. Their prices do not necessarily move parallel to the
prices of the underlying securities, and warrant holders receive no dividends
and have no voting rights or rights with respect to the assets of an issuer.
Warrants cease to have value if not exercised prior to the expiration date.
126
ILLIQUID SECURITIES
Each portfolio of the Trust is precluded from investing in excess of 15% of
its net assets in securities that are not readily marketable, except that the
Money Market Trust may not invest in excess of 10% of its net assets in such
securities. Investment in illiquid securities involves the risk that, because of
the lack of consistent market demand for such securities, the Trust may be
forced to sell them at a discount from the last offer price.
INDEXED/STRUCTURED SECURITIES
Unless otherwise explicitly prohibited in the description of a portfolio,
each of the portfolios may invest in indexed/structured securities. These
securities are typically short- to intermediate-term debt securities whose value
at maturity or interest rate is linked to currencies, interest rates, equity
securities, indices, commodity prices or other financial indicators. Such
securities may be positively or negatively indexed (i.e., their value may
increase or decrease if the reference index or instrument appreciates).
Index/structured securities may have return characteristics similar to direct
investments in the underlying instruments. A portfolio bears the market risk of
an investment in the underlying instruments, as well as the credit risk of the
issuer.
SHORT SALES
Certain of the portfolios may make short sales of securities. This means a
portfolio may sell a security that it does not own in anticipation of a decline
in the market value of the security. The portfolio generally borrows the
security to deliver to the buyer in a short sale. The portfolio must then buy
the security at its market price when the borrowed security must be returned to
the lender. Short sales involve costs and risk. The portfolio must pay the
lender interest on the security it borrows, and the portfolio will lose money if
the price of the security increases between the time of the short sale and the
date when the portfolio replaces the borrowed security. Certain of the
portfolios may also make short sales "against the box." In a short sale against
the box, at the time of sale, the portfolio owns or has the right to acquire the
identical security, or one equivalent in kind or amount, at no additional cost.
Until a portfolio closes its short position or replaces a borrowed
security, the portfolio will (i) segregate with its custodian cash or other
liquid assets at such a level that the amount segregated plus the amount
deposited with the lender as collateral will equal the current market value of
the security sold short or (ii) otherwise cover its short position.
LOAN PARTICIPATIONS
Certain of the portfolios may invest in fixed-and floating-rate loans,
which investments generally will be in the form of loan participations and
assignments of such loans. Participations and assignments involve special types
of risks, including credit risk, interest rate risk, liquidity risk, and the
risks of being a lender. If a portfolio purchases a participation, it may only
be able to enforce its rights through the lender and may assume the credit risk
of the lender in addition to the borrower.
------------------
These investment strategies and securities are described further in the
Statement of Additional Information.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
Individual portfolios may be authorized to use a variety of investment
strategies. These strategies will be used primarily for hedging purposes,
including hedging various market risks (such as interest rates, currency
exchange rates and broad or specific market movements) and managing the
effective maturity or duration of debt instruments held by the portfolio.
Hedging refers to protecting against possible changes in the market value of
securities a portfolio already owns or plans to buy or protecting unrealized
gains in the portfolio. These strategies may also be used to gain exposure to a
particular securities market. The hedging and other strategic transactions which
may be used are described below:
-- exchange-listed and over-the-counter put and call options on
securities, financial futures contracts and fixed income indices and
other financial instruments,
-- financial futures contracts (including stock index futures),
-- interest rate transactions*, and
-- currency transactions**
127
Collectively, these transactions are referred to in this Prospectus as "Hedging
and Other Strategic Transactions." The description in this Prospectus of each
portfolio (including the introductory description under "Investment Objectives
and Strategies") indicates which, if any, of these types of transactions may be
used by the portfolio.
* A portfolio's interest rate transactions may take the form of swaps, caps,
floors and collars.
**A portfolio's currency transactions may take the form of currency forward
contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.
Hedging and Other Strategic Transactions may be used for the following
purposes:
-- to attempt to protect against possible changes in the market value of
securities held or to be purchased by a portfolio resulting from
securities markets or currency exchange rate fluctuations,
-- to protect a portfolio's unrealized gains in the value of its
securities,
-- to facilitate the sale of a portfolio's securities for investment
purposes,
-- to manage the effective maturity or duration of a portfolio's
securities or
-- to establish a position in the derivatives markets as a substitute
for purchasing or selling securities in a particular market.
-- to increase exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another.
The ability of a portfolio to utilize Hedging and Other Strategic Transactions
successfully will depend in part on its Subadviser's ability to predict
pertinent market movements, which cannot be assured. The skills required to
successfully utilize Hedging and Other Strategic Transactions are different from
those needed to select a portfolio's securities. While a Subadviser will only
use Hedging and Other Strategic Transactions in a portfolio primarily for
hedging purposes or to gain exposure to a particular securities market., if the
transaction is not successful it could result in a loss to the portfolio. These
transactions may also increase the volatility of a portfolio and may involve a
small investment of cash relative to the magnitude of the risks assumed. The
potential loss from the use of futures can exceed a fund's initial investment in
such contracts. In addition, these transactions could result in a loss to the
portfolio if the counterparty to the transaction does not perform as promised. A
detailed discussion of various Hedging and Other Strategic Transactions,
including applicable regulations of the CFTC and the requirement to segregate
assets with respect to these transactions, appears in the Statement of
Additional Information.
MANAGEMENT OF THE TRUST
ADVISORY ARRANGEMENTS
Manufacturers Securities Services, LLC (the "Adviser") is the adviser to
the Trust. The Adviser is a Delaware limited liability company whose principal
offices are located at 73 Tremont Street, Boston, Massachusetts 02108. The
Adviser is registered as an investment adviser under the Investment Advisers Act
of 1940, as amended.
The Adviser administers the business and affairs of the Trust. The Adviser
also selects, contracts with and compensates Subadvisers to manage the
investment and reinvestment of the assets of all portfolios of the Trust. The
Adviser does not itself manage any of the Trust portfolio assets but has
ultimate responsibility to oversee the Subadvisers. In this connection, the
Adviser (i) monitors the compliance of the Subadvisers with the investment
objectives and related policies of each portfolio, (ii) reviews the performance
of the Subadvisers and (iii) reports periodically on such performance to the
Trustees of the Trust.
The Trust has received an order from the SEC permitting the Adviser to
appoint a Subadviser or change the terms of a subadvisory agreement pursuant to
an agreement that is not approved by shareholders. The Trust, therefore, is able
to change Subadvisers or the fees paid to Subadvisers from time to time without
the expense and delays associated with obtaining shareholder approval of the
change. This order does not, however, permit the Adviser to appoint a Subadviser
that is an affiliate of the Adviser or the Trust (other than by reason of
serving as Subadviser to a portfolio) (an "Affiliated Subadviser") or to change
a subadvisory fee of an Affiliated Subadviser without the approval of
shareholders. Currently, MFC Global Investment Management (U.S.A.) Limited is an
Affiliated Subadviser.
As compensation for its services, the Adviser receives a fee from the Trust
computed separately for each portfolio. The fee for each portfolio is stated as
an annual percentage of the current value of the net assets of the portfolio.
The fee, which is accrued daily and payable daily, is calculated for each day by
multiplying the daily equivalent of the annual percentage
128
prescribed for a portfolio by the value of the net assets of the portfolio at
the close of business on the previous business day of the Trust.
The following table presents a schedule of the management fees each
portfolio currently is obligated to pay the Adviser as a percentage of average
annual net assets. For information on the advisory fee for the underlying master
fund for each of the American Growth Trust, American International Trust,
American Growth-Income Trust and American Blue Chip Income and Growth Trust
please refer to the master fund prospectus (the American Funds Insurance Series
prospectus) which accompanies this prospectus as well as the disclosure
regarding these four portfolios set forth above under "Fees and Expenses for
Each Portfolio."
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $50 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER
PORTFOLIO $50 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION
- --------- ----------- --------------- ---------------- ---------------- -----------
Science & Technology................ 0.950% 0.950% 0.950% 0.900% 0.900%
Pacific Rim (formerly, Pacific Rim
Emerging Markets)................. 0.700% 0.700% 0.700% 0.600% 0.600%
Health Sciences..................... 0.950% 0.950% 0.950% 0.900% 0.900%
Emerging Growth..................... 0.700% 0.700% 0.700% 0.700% 0.700%
Aggressive Growth................... 0.850% 0.850% 0.850% 0.800% 0.800%
Emerging Small Company.............. 0.900% 0.900% 0.900% 0.870% 0.850%
Small Company Blend................. 0.900% 0.900% 0.900% 0.900% 0.900%
Dynamic Growth...................... 0.850% 0.850% 0.850% 0.800% 0.800%
Mid Cap Stock....................... 0.775% 0.775% 0.750% 0.725% 0.725%
Natural Resources................... 0.950% 0.900% 0.900% 0.900% 0.900%
All Cap Growth...................... 0.800% 0.800% 0.800% 0.750% 0.750%
Strategic Opportunities............. 0.700% 0.700% 0.700% 0.700% 0.700%
International Stock................. 0.850% 0.850% 0.850% 0.800% 0.800%
Overseas............................ 0.800% 0.800% 0.800% 0.800% 0.800%
International Small Cap............. 0.950% 0.950% 0.850% 0.750% 0.750%
International Value................. 0.850% 0.850% 0.750% 0.700% 0.700%
Quantitative Mid Cap................ 0.650% 0.650% 0.550% 0.550% 0.550%
Quantitative All Cap................ 0.650% 0.600% 0.600% 0.600% 0.600%
All Cap Core (formerly, Growth)..... 0.700% 0.700% 0.700% 0.650% 0.650%
Quantitative Equity................. 0.600% 0.600% 0.600% 0.550% 0.500%
Blue Chip Growth.................... 0.725% 0.725% 0.725% 0.725% 0.700%
U.S. Large Cap (formerly,
U.S. Large Cap Value)............. 0.725% 0.725% 0.725% 0.725% 0.700%
Real Estate Securities.............. 0.600% 0.600% 0.600% 0.600% 0.600%
Small Cap Opportunities............. 0.900% 0.900% 0.900% 0.850% 0.850%
Small Company Value................. 0.900% 0.900% 0.900% 0.900% 0.900%
Special Value....................... 0.900% 0.900% 0.900% 0.850% 0.850%
Mid Cap Value....................... 0.800% 0.800% 0.750% 0.725% 0.725%
Value............................... 0.650% 0.650% 0.625% 0.550% 0.550%
Equity Index........................ 0.250% 0.250% 0.250% 0.250% 0.250%
Growth & Income..................... 0.600% 0.600% 0.600% 0.550% 0.500%
Great Companies -- America.......... 0.750% 0.750% 0.750% 0.700% 0.700%
Equity-Income....................... 0.725% 0.725% 0.725% 0.725% 0.700%
Income & Value...................... 0.650% 0.650% 0.650% 0.650% 0.650%
Balanced............................ 0.600% 0.550% 0.500% 0.500% 0.500%
Global Allocation (formerly,
Tactical Allocation).............. 0.750% 0.750% 0.750% 0.700% 0.700%
</Table>
129
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $50 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER
PORTFOLIO $50 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION
- --------- ----------- --------------- ---------------- ---------------- -----------
High Yield.......................... 0.625% 0.625% 0.625% 0.550% 0.550%
Strategic Bond...................... 0.625% 0.625% 0.625% 0.550% 0.550%
Global Bond......................... 0.600% 0.600% 0.600% 0.600% 0.600%
Diversified Bond.................... 0.600% 0.600% 0.600% 0.600% 0.600%
Investment Quality Bond............. 0.500% 0.500% 0.500% 0.450% 0.450%
Total Return........................ 0.600% 0.600% 0.600% 0.600% 0.600%
Real Return Bond.................... 0.600% 0.600% 0.600% 0.600% 0.600%
U.S. Government Securities.......... 0.550% 0.550% 0.550% 0.450% 0.450%
Money Market........................ 0.350% 0.350% 0.350% 0.350% 0.350%
Small Cap Index..................... 0.375% 0.375% 0.375% 0.375% 0.375%
International Index................. 0.400% 0.400% 0.400% 0.400% 0.400%
Mid Cap Index....................... 0.375% 0.375% 0.375% 0.375% 0.375%
Total Stock Market.................. 0.375% 0.375% 0.375% 0.375% 0.375%
500 Index........................... 0.375% 0.375% 0.375% 0.375% 0.375%
Small-Mid Cap....................... 0.950% 0.950% 0.950% 0.950% 0.950%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $50 MILLION AND $250 MILLION AND $500 MILLION AND EXCESS OVER
PORTFOLIO $50 MILLION $250 MILLION $500 MILLION $1 BILLION $1 BILLION
- --------- ----------- --------------- ---------------- ---------------- -----------
International Equity Select......... 0.900% 0.900% 0.850% 0.800% 0.800%
Global Equity Select................ 0.900% 0.900% 0.850% 0.800% 0.800%
Financial Services.................. 0.800% 0.750% 0.750% 0.700% 0.700%
Fundamental Value................... 0.800% 0.750% 0.750% 0.700% 0.700%
All Cap Value....................... 0.750% 0.750% 0.700% 0.650% 0.650%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $100 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER
PORTFOLIO $100 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION
- --------- ------------ ---------------- ---------------- ---------------- -----------
Small-Mid Cap Growth............... 0.800% 0.750% 0.750% 0.750% 0.750%
Select Growth...................... 0.800% 0.750% 0.750% 0.750% 0.750%
Core Value......................... 0.800% 0.750% 0.750% 0.750% 0.750%
Lifestyle Aggressive 1000.......... 0.075% 0.050% 0.050% 0.050% 0.050%
Lifestyle Growth 820............... 0.075% 0.050% 0.050% 0.050% 0.050%
Lifestyle Balanced 640............. 0.075% 0.050% 0.050% 0.050% 0.050%
Lifestyle Moderate 460............. 0.075% 0.050% 0.050% 0.050% 0.050%
Lifestyle Conservative 280......... 0.075% 0.050% 0.050% 0.050% 0.050%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN
FIRST $50 MILLION AND $100 MILLION AND EXCESS OVER
PORTFOLIO $50 MILLION $100 MILLION $250 MILLION $250 MILLION
- --------- ----------- --------------- ---------------- ------------
High Grade Bond................... 0.600% 0.550% 0.500% 0.450%
</Table>
<Table>
<Caption>
FIRST EXCESS OVER
PORTFOLIO $300 MILLION $300 MILLION
- --------- ------------ ------------
Capital Appreciation............. 0.750% 0.700%
</Table>
<Table>
<Caption>
FIRST EXCESS OVER
PORTFOLIO $1 BILLION $1 BILLION
- --------- ---------- -----------
Global (formerly, Global
Equity)........................ 0.750% 0.700%
</Table>
130
<Table>
<Caption>
FIRST EXCESS OVER
PORTFOLIO $750 MILLION $750 MILLION
- --------- ------------ ------------
Large Cap Growth................. 0.750% 0.700%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $300 MILLION AND $600 MILLION AND $900 MILLION AND EXCESS OVER
PORTFOLIO $300 MILLION $600 MILLION $900 MILLION $1.5 BILLION $1.5 BILLION
- --------- ------------ ---------------- ---------------- ---------------- ------------
Strategic Growth................. 0.750% 0.725% 0.700% 0.675% 0.600%
Strategic Value (formerly,
Capital Opportunities)......... 0.750% 0.725% 0.700% 0.675% 0.600%
Utilities........................ 0.750% 0.725% 0.700% 0.675% 0.600%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN BETWEEN
FIRST $10 MILLION AND $50 MILLION AND $200 MILLION AND EXCESS OVER
PORTFOLIO $10 MILLION $50 MILLION $200 MILLION $500 MILLION $500 MILLION
- --------- ----------- --------------- --------------- ---------------- ------------
Mid Cap Core..................... 0.850% 0.800% 0.775% 0.750% 0.725%
</Table>
<Table>
<Caption>
BETWEEN BETWEEN
FIRST $100 MILLION AND $300 MILLION AND EXCESS OVER
PORTFOLIO $100 MILLION $300 MILLION $500 MILLION $500 MILLION
- --------- ------------ ---------------- ---------------- ------------
Large Cap Value.................. 0.750% 0.750% 0.725% 0.700%
</Table>
<Table>
<Caption>
BETWEEN
FIRST $500 MILLION EXCESS OVER
PORTFOLIO $500 MILLION AND $1 BILLION $1 BILLION
- --------- ------------ -------------- -----------
U.S. Global Leaders Growth....... 0.6125% 0.575% 0.575%
Classic Value.................... 0.775% 0.7325% 0.700%
Quantitative Value............... 0.600% 0.550% 0.500%
Strategic Income................. 0.625% 0.550% 0.550%
</Table>
<Table>
<Caption>
FIRST EXCESS OVER
PORTFOLIO $125 MILLION $125 MILLION
- --------- ------------ ------------
Small Company.................... 0.950% 0.900%
</Table>
<Table>
<Caption>
FIRST EXCESS OVER
PORTFOLIO $350 MILLION $350 MILLION
- --------- ------------ ------------
Core Equity...................... 0.750% 0.650%
</Table>
The following table presents the investment advisory fee paid by each
portfolio of the Trust for the year ended December 31, 2003.
<Table>
<Caption>
ADVISORY FEE AS A
PORTFOLIO DOLLAR AMOUNT
- --------- -----------------
Science & Technology Trust.................................. $ 4,681,446
Pacific Rim Trust (formerly Pacific Rim Emerging Markets
Trust).................................................... 429,130
Health Sciences Trust....................................... 1,092,397
Emerging Growth Trust....................................... 25,370
Aggressive Growth Trust..................................... 2,206,081
Emerging Small Company Trust................................ 3,373,559
Small Company Blend Trust................................... 1,426,321
Dynamic Growth Trust........................................ 1,127,166
Mid Cap Stock Trust......................................... 2,065,374
Natural Resources Trust..................................... 689,622
All Cap Growth Trust........................................ 4,162,214
Strategic Opportunities Trust............................... 3,670,593
Financial Services Trust.................................... 515,197
International Stock Trust................................... 2,614,274
Overseas Trust.............................................. 2,941,631
International Small Cap Trust............................... 1,862,419
</Table>
131
<Table>
<Caption>
ADVISORY FEE AS A
PORTFOLIO DOLLAR AMOUNT
- --------- -----------------
International Value Trust................................... 2,527,140
Quantitative Mid Cap Trust.................................. 614,214
Mid Cap Core Trust.......................................... 180,602
Global Trust (formerly, Global Equity Trust)................ 2,708,494
Strategic Growth Trust...................................... 1,488,580
Capital Appreciation Trust.................................. 1,114,821
Quantitative All Cap Trust.................................. 15,620
All Cap Core Trust.......................................... 1,746,290
Large Cap Growth Trust...................................... 3,321,396
Quantitative Equity Trust................................... 1,507,407
Blue Chip Growth Trust...................................... 9,155,555
U.S. Large Cap Trust........................................ 3,463,143
Strategic Value Trust....................................... 666,775
Large Cap Value Trust....................................... 35,746
Utilities Trust............................................. 298,813
Real Estate Securities Trust................................ 2,765,858
Small Cap Opportunities Trust............................... 258,418
Small Company Value Trust................................... 3,737,802
Special Value Trust......................................... 71,496
Mid Cap Value Trust......................................... 2,831,730
Value Trust................................................. 1,628,789
All Cap Value Trust......................................... 1,175,734
Equity Index Trust.......................................... 185,625
Fundamental Value Trust..................................... 3,165,632
Growth & Income Trust....................................... 8,314,092
Great Companies -- America.................................. 7,159
Equity-Income Trust......................................... 9,193,136
Income & Value Trust........................................ 3,432,039
Balanced Trust.............................................. 826,923
Global Allocation Trust..................................... 498,796
High Yield Trust............................................ 3,904,182
Strategic Bond Trust........................................ 3,254,319
Global Bond Trust........................................... 1,481,608
Diversified Bond Trust...................................... 2,209,424
Investment Quality Bond Trust............................... 2,581,493
Total Return Trust.......................................... 8,627,857
Real Return Bond Trust...................................... 801,605
U.S. Government Securities Trust............................ 4,213,924
Money Market Trust.......................................... 5,235,724
Small Cap Index Trust....................................... 402,004
International Index Trust................................... 288,461
Mid Cap Index Trust......................................... 489,790
Total Stock Market Index Trust.............................. 405,708
500 Index Trust............................................. 3,290,414
Lifestyle Aggressive 1000 Trust............................. 180,863
Lifestyle Growth 820 Trust.................................. 650,210
Lifestyle Balanced 640 Trust................................ 747,831
Lifestyle Moderate 460 Trust................................ 302,152
Lifestyle Conservative 260 Trust............................ 220,906
</Table>
132
<Table>
<Caption>
ADVISORY FEE AS A
PORTFOLIO DOLLAR AMOUNT
- --------- -----------------
Small-Mid Cap Growth Trust.................................. 17,676
Small-Mid Cap Trust......................................... 1,019,650
International Equity Select Trust........................... 719,514
Select Growth Trust......................................... 20,260
Global Equity Select Trust.................................. 24,336
Core Value Trust............................................ 22,738
High Grade Bond Trust....................................... 716,128
Total for all Portfolios.................................... $141,649,396
</Table>
Advisory Fee Waivers
Science & Technology, Health Sciences, Small Company Value, Blue Chip
Growth and Equity-Income Trusts. The Adviser has voluntarily agreed to waive a
portion of its advisory fee for the Science & Technology Trust, Health Sciences
Trust, Small Company Value Trust, Blue Chip Growth Trust and Equity-Income
Trust. Once the combined assets exceed specified amounts, the fee reduction is
increased. The percentage fee reduction for each asset level is as follows:
<Table>
<Caption>
COMBINED ASSET LEVELS FEE REDUCTION
- --------------------- -------------------
(AS A PERCENTAGE OF
THE ADVISORY FEE)
First $750 million.......................................... 0.00%
Between $750 million and $1.5 billion....................... 5.0%
Between $1.5 billion and $3.0 billion....................... 7.5%
Over $3.0 billion........................................... 10%
</Table>
The fee reductions are applied to the advisory fees of each of the five
portfolios. This voluntary fee waiver may be terminated at any time by the
Adviser.
Global and International Value Trusts. Effective December 9, 2003, due to
a decrease in the subadvisory fees for the Global Trust and the International
Value Trust, the Adviser voluntarily agreed to waive its advisory fees so that
the amount retained by the Adviser after payment of the subadvisory fees for
each such portfolio does not exceed 0.35% of the portfolio's average net assets.
These advisory fee waivers may be terminated at any time.
Expense Reimbursement.
All Portfolios Except the Lifestyle Trusts. Advisory fees are reduced or
the Adviser reimburses the Trust if the total of all expenses (excluding
advisory fees, Rule 12b-1 fees, taxes, portfolio brokerage commissions,
interest, litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's business) applicable
to a portfolio exceeds the annual rate specified below of the average annual net
assets of the portfolio:
- 0.10% in the case of the Small-Mid Cap Growth Trust, Small-Mid Cap
Trust, Select Growth Trust, Core Value Trust
- 0.15% in the case of the Equity Index Trust, International Equity Select
Trust, Global Equity Select Trust
- 0.050% in the case of the International Index Trust and the 500 Index
Trust,
- 0.075% in the case of the Small Cap Index Trust, the Mid Cap Index Trust
and the Total Stock Market Index Trust,
- 0.75% in the case of the International Small Cap, Global, Global Bond,
International Value, Overseas, International Stock and Pacific Rim
Trusts,
- 0.50% in the case of all other portfolios except the Lifestyle Trusts.
Lifestyle Trusts. If total expenses of a Lifestyle Trust (absent
reimbursement) exceed 0.075%, the Adviser will reduce the advisory fee or
reimburse expenses of that Lifestyle Trust by an amount such that total expenses
of the Lifestyle Trust equal 0.075%. If the total expenses of a Lifestyle Trust
(absent reimbursement) are equal to or less than 0.075%, then no expenses will
be reimbursed by the Adviser. (For purposes of the expense reimbursement total
expenses of a Lifestyle Trust includes the advisory fee but excludes (a) the
expenses of the Underlying Portfolios, (b) taxes, (c) portfolio brokerage, (d)
interest, (e) litigation, (f) Rule 12b-1 fees, (g) transfer agency fees, blue
sky fees and (f) indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business.)
These expense limitations will continue in effect unless otherwise
terminated by the Adviser upon notice to the Trust. These voluntary expense
reimbursements may be terminated at any time.
133
SUBADVISORY ARRANGEMENTS
Under the terms of each of the Subadvisory Agreements, the Subadviser
manages the assets of the assigned portfolios, subject to the supervision of the
Adviser and the Trustees of the Trust. The Subadviser formulates a continuous
investment program for each such portfolio consistent with its investment
objectives and policies outlined in this Prospectus. Each Subadviser regularly
reports to the Adviser and the Trustees of the Trust with respect to the
implementation of such programs.
MULTICLASS PRICING; RULE 12B-1 PLANS
MULTIPLE CLASSES OF SHARES
The Trust may issue three classes of shares, Series I shares (formerly
referred to as Class A shares), Series II shares (formerly referred to as Class
B shares) and Series III (also referred to as "Class R 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. Only certain "Qualified Plans" and certain permitted
entities may invest in Series III shares. For this purpose, a "Qualified Plan"
includes: (i) a plan described in Section 401(a) of the Code; (ii) an annuity
plan described in 403(a) of the Code; (iii) an annuity contract described in
Section 403(b) of the Code, including a custodial account described in Section
403(b)(7) of the Code; (iv) an individual retirement account described in
Section 408(a) of the Code; (v) an individual retirement annuity described in
Section 408(b) of the Code; (vi) a governmental plan within the meaning of
Section 414(d) of the Code; (vii) an eligible deferred compensation plan
described in Section 457(b) of the Code; (viii) a simplified employee pension
described in Section 408(k) of the Code; (ix) a plan described in Section
501(c)(18) of the Code; and (x) any other trust, plan, account, contract, or
annuity that the Internal Revenue Service has determined to be within the scope
of Section 1.817-5(f)(3)(iii) of the Income Tax Regulations.
RULE 12B-1 PLANS OF EACH CLASS
Series I shares of each portfolio are subject to a Rule 12b-1 fee of .15%
of Series I share average daily net assets except as follows:
-- Equity Index Trust and the Lifestyle Trusts are not subject to a Rule
12b-1 fee.
-- American Growth Trust, American International Trust, American
Growth-Income Trust and American Blue Chip Income and Growth Trust
are subject to a Rule 12b-1 fee of .35%. In addition, each master
fund pays a Rule 12b-1 fee of .25% of average annual net assets of
the master fund.
Series II shares of each portfolio are subject to a Rule 12b-1 fee of up to
..35% of Series II share average daily net assets except as follows:
-- Equity Index Trust and the Lifestyle Trusts are not subject to a Rule
12b-1 fee.
-- American Growth Trust, American International Trust, American
Growth-Income Trust and American Blue Chip Income and Growth Trust
are subject to a Rule 12b-1 fee of .50%. In addition, each master
fund pays a Rule 12b-1 fee of .25% of average annual net assets of
the master fund.
Series III shares of each portfolio are subject to a Rule 12b-1 fee of up
to .50% of Series III share average daily net assets (.15% in the case of the
Lifestyle Trusts) except as follows:
-- Equity Index Trust, American Growth Trust, American International
Trust, American Growth-Income Trust and American Blue Chip Income and
Growth Trust do not offer Series III shares.
-- The Lifestyle Trusts are subject to a Rule 12b-1 fee of .15%.
Rule 12b-1 fees will be paid to the Trust's Distributor, Manufacturers
Financial Securities LLC, or any successor thereto.
To the extent consistent with applicable laws, regulations and rules, the
Distributor may 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 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 Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
134
Without limiting the foregoing, the Distributor may pay all or part of the
Rule 12b-1 fees from a portfolio to one or more affiliated and unaffiliated
insurance companies that have issued variable insurance contracts for which the
portfolio 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 are made to insurance
companies affiliated with the Trust's investment adviser and Distributor.
However, payments may be made to nonaffiliated insurance companies in the
future.
Rule 12b-1 fees are paid out of a portfolio's assets on an ongoing basis.
Therefore, these fees will increase the cost of an investment in a portfolio and
may, over time, be greater than other types of sales charges.
GENERAL INFORMATION
TAXES
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
DIVERSIFICATION REQUIREMENTS APPLICABLE TO INSURANCE COMPANY SEPARATE ACCOUNTS
The Trust intends to take the steps necessary to qualify each portfolio as
a regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code") and believes that each portfolio will so qualify. As a result of
qualifying as a regulated investment company, each portfolio will not be subject
to U.S. Federal income tax on its net investment income and net capital gain
that it distributes to its shareholders in each taxable year provided that it
distributes to its shareholders at least 90% of its net investment income for
such taxable year. Net investment income is defined as investment company
taxable income, as that term is defined in the Code, determined without regard
to the deduction for dividends paid and excluding net capital gains. Net capital
gain is defined as the excess of its net realized long-term capital gain over
its net realized short-term capital loss. Each portfolio is subject to a
nondeductible 4% excise tax calculated as a percentage of certain undistributed
amounts of ordinary income and capital gain net income. To the extent possible,
each portfolio intends to make sufficient distributions to avoid the application
of both corporate income and excise taxes.
Because the Trust complies with the ownership restrictions of Treas. Reg.
Section 1.817-5(f) and Rev. Rule 81-225 (no direct ownership by the public),
each insurance company separate account will be treated as owning its
proportionate share of the assets of any portfolio in which it invests, provided
that the portfolio qualifies as a regulated investment company. Therefore, each
portfolio intends to meet the additional diversification requirements that are
applicable to insurance company separate accounts under Subchapter L of the
Code. These requirements generally provide that no more than 55% of the value of
the assets of a portfolio 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. For these purposes, all securities of the
same issuer are treated as a single investment and each United States government
agency or instrumentality is treated as a separate issuer.
If a portfolio failed to qualify as a regulated investment company, owners
of contracts based on the portfolio:
-- would be treated as owning shares of the portfolio (rather than their
proportionate share of the assets of such portfolio) for purposes of
the diversification requirements under Subchapter L of the Code, and
as a result might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral, and
-- the portfolio would incur regular corporate federal income tax on its
taxable income for that year and be subject to certain distribution
requirements upon requalification.
In addition, if a portfolio failed to comply with the diversification
requirements of the regulations under Subchapter L of the Code, owners of
contracts based on the portfolio might be taxed on the investment earnings under
their contracts and thereby lose the benefit of tax deferral. Accordingly,
compliance with the above rules is carefully monitored by the Adviser and the
Subadvisers and it is intended that the portfolios will comply with these rules
as they exist or as they may be modified from time to time. Compliance with the
tax requirements described above may result in a reduction in the return under a
portfolio, since, to comply with the above rules, the investments utilized (and
the time at which such investments are entered into and closed out) may be
different from what the Subadvisers might otherwise believe to be desirable.
FOREIGN INVESTMENTS
Portfolios investing in foreign securities or currencies may be required to
pay withholding or other taxes to foreign governments. Foreign tax withholding
from dividends and interest, if any, is generally imposed at a rate between 10%
and 35%. The investment yield of any portfolio that invests in foreign
securities or currencies will be reduced by these foreign taxes. The foreign tax
credit, if any, allowable with respect to such foreign taxes will not benefit
owners of variable annuity or variable life insurance contracts who allocate
investments to a portfolio of the Trust.
135
TAX IMPLICATIONS FOR INSURANCE CONTRACTS WITH INVESTMENTS ALLOCATED TO THE TRUST
For information regarding the tax implications for the purchaser of a
variable annuity or life insurance contract who allocates investments to a
portfolio of the Trust, please refer to the prospectus for the contract.
------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisors. The Code and Regulations are subject to change,
possibly with retroactive effect. See "Additional Information Concerning Taxes"
in the Statement of Additional Information for additional information on taxes.
DIVIDENDS
The Trust intends to declare as dividends substantially all of the net
investment income, if any, of each portfolio. Dividends from the net investment
income and the net capital gain, if any, for each portfolio except the Money
Market Trust will be declared not less frequently than annually and reinvested
in additional full and fractional shares of that portfolio or paid in cash.
Dividends from net investment income and net capital gain, if any, for the Money
Market Trust will be declared and reinvested, or paid in cash, daily.
PURCHASE AND REDEMPTION OF SHARES
Shares of each portfolio of the Trust are offered continuously, without
sales charge, at a price equal to their net asset value. The Trust sells its
shares directly without the use of any underwriter. Shares of each portfolio of
the Trust are sold and redeemed at their net asset value next computed after a
purchase payment or redemption request is received by the shareholder from the
contract owner or after any other purchase or redemption order is received by
the Trust. 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 after receipt of a
proper notice of redemption. However, the Trust may suspend the right of
redemption or postpone the date of payment beyond seven days during any period
when:
-- trading on the New York Stock Exchange is restricted, as determined
by the SEC, or such Exchange is closed for other than weekends and
holidays;
-- an emergency exists, as determined by the SEC, as a result of which
disposal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Trust fairly
to determine the value of its net assets; or
-- the SEC by order so permits for the protection of security holders of
the Trust.
Calculation of Net Asset Value
The net asset value of the shares of each portfolio is determined once
daily as of the close of day-time trading of the New York Stock Exchange, Monday
through Friday, except that no determination is required on:
(i) days on which changes in the value of such portfolio's portfolio
securities will not materially affect the current net asset value of the
shares of the portfolio,
(ii) days during which no shares of such portfolio are tendered for
redemption and no order to purchase or sell such shares is received by the
Trust, or
(iii) the following business holidays or the days on which such
holidays are observed by the New York Stock Exchange: New Year's Day,
Martin Luther King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset values per share of all portfolios, except the Money Market
Trust, are computed by:
(i) adding the sum of the value of the securities held by each
portfolio plus any cash or other assets it holds,
(ii) subtracting all its liabilities, and
(iii) dividing the result by the total number of shares outstanding of
that portfolio at such time.
Securities held by each of the portfolios, except securities held by the Money
Market and Lifestyle Trusts and money market instruments with remaining
maturities of 60 days or less, 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 Trustees or their designee although the
actual calculations may be made by persons acting pursuant to the direction of
the Trustees.
All instruments held by the Money Market Trust and money market instruments
with a remaining maturity of 60 days or less held by the other portfolios are
valued on an amortized cost basis. Underlying Portfolio shares held by the
Lifestyle Trust are valued at their net asset value.
Generally, 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 trading of the New York Stock
Exchange. The values
136
of such securities used in computing the net asset value of a portfolio'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 New York Stock Exchange and would
therefore not be reflected in the computation of a portfolio's net asset value.
In such event, these securities will then be valued at their fair value as
determined in good faith by the Trustees or their designee. Fair value pricing
in these circumstances will help ensure that shareholders buying and selling
shares on this date receive a price that accurately reflects the value of the
securities as of the close of the New York Stock Exchange as opposed to a price
that reflects values of securities which are no longer accurate. Fair value
pricing in these circumstances will also help ensure that aggressive traders are
not able to purchase shares of a portfolio at a deflated price that reflects
stale security valuations and then immediately sell these shares at a gain.
DISRUPTIVE SHORT TERM TRADING
None of the Trust portfolios are designed for short-term investing since
such activity may increase portfolio transaction costs and be disruptive to
management of a portfolio (affecting a subadviser's ability to effectively
manage a portfolio in accordance with its investment objective and policies).
The Board of Trustees of the Trust as adopted the following policy regarding
short-term investing in the Trust:
Management of the Trust will monitor purchases and redemptions of Trust
shares. If management of the Trust becomes aware of short-term trading that it
believes, in its sole discretion, is significantly disrupting (or may
potentially significantly disrupt) management of a portfolio or materially
increasing portfolio transaction costs ("Disruptive Short-Term Trading"), the
Trust may impose restrictions on such trading. Since shares of the Trust are
sold primarily to separate accounts of affiliated insurance companies, the
Trust's participation agreement with such insurance companies requires the
insurance companies to impose trading restrictions on its contract owners if
requested by the Trust. In addition, since trading in shares of Series I and
Series II of the Trust is effected through the insurance company separate
accounts and not directly through the Trust, the Trust's participation agreement
also provides that each insurance company may impose restrictions on transfers
in addition to those requested by the Trust.
Currently, Series III shares of the Trust are sold directly to qualified
retirement plans. In the case of Series III shares, the Trust restricts
transfers to two per month per account. (For purposes of this restriction, all
transfers made during the period from the opening of trading each day the net
asset value of the shares are determined (usually 9 a.m.) to the close of
trading that day (the close of day-time trading of the New York Stock Exchange
(usually 4 p.m.)) are considered one transfer.) Shareholders may, however,
transfer to the Money Market Trust even if the two transfer per month limit has
been reached if 100% of the assets in an account are transferred to the Money
Market Trust. If such a transfer to the Money Market Trust is made, for a 30 day
period after such transfer, no subsequent transfers from the Money Market Trust
to another portfolio of the Trust may be made. This restriction is applied
uniformly to all participants in qualified retirement plans. The Trust also
reserves the right to take other actions to restrict trading as noted below.
Actions that the Trust or the insurance companies may take to restrict
Disruptive Short-Term Trading include, but are not limited to:
-- restricting the number of transfers made during a defined period,
-- restricting the dollar amount of transfers,
-- restricting the method used to submit transfers (e.g., requiring
transfer requests to be submitted in writing via U.S. mail), and
-- restricting transfers into and out of certain Trust portfolios.
Investors in the Trust should note that while the Trust seeks to identify
and prevent Disruptive Short-Term Trading, it is not always possible to do so.
Therefore, no assurance can be given that the Trust will successfully impose
restrictions on all Disruptive Short-Term Trading. If the Trust is unsuccessful
in restricting Disruptive Short-Term Trading, the portfolios may incur higher
brokerage costs, may maintain higher cash levels (limiting their ability to
achieve their investment objective) and may be exposed to dilution with respect
to interests held for long-term investment.
PURCHASERS OF SHARES OF THE TRUST
Shares of the Trust may be sold to insurance company separate accounts for
both variable annuity and variable life insurance contracts and to certain
qualified pension and retirement plans ("Qualified Plans"). Due to differences
in tax treatments and other considerations, the interests of various contract
owners participating in the Trust and the interests of Qualified Plans investing
the Trust may conflict. The Board of Trustees of the Trust will monitor events
in order to identify the existence of any material irreconcilable conflicts and
determine what action, if any, should be taken in response to any such conflict.
137
FINANCIAL HIGHLIGHTS
The financial highlights table included with each portfolio description is
intended to help investors understand the financial performance of the portfolio
for the past five years (or since inception in the case of a portfolio in
operation for less than five years. Certain information reflects financial
results for a single share of a Trust portfolio. The total returns presented in
the table represent the rate that an investor would have earned (or lost) on an
investment in a particular Trust portfolio (assuming reinvestment of all
dividends and distributions). The financial statements of the Trust as of
December 31, 2003, have been audited by PricewaterhouseCoopers LLP, independent
accountants. The report of PricewaterhouseCoopers LLP is included, along with
the Trust's financial statements, in the Trust's annual report which has been
incorporated by reference into the Statement of Additional Information and is
available upon request.
The performance information included in the "Financial Highlights" does not
reflect fees and expenses of any variable insurance contract or qualified plan
which may use the Trust as its underlying investment medium. If such fees and
expenses had been reflected, performance would be lower.
138
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SCIENCE & TECHNOLOGY TRUST
---------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
-------------------------------------------------------- -------------------------- -----------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003*
-------------------------------------------------------- DECEMBER 31, TO TO
2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.60 $ 12.83 $ 23.24 $ 36.17 $ 19.52 $ 7.59 $ 12.61 $ 10.61
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.07) (0.08) (0.13) (0.24) (0.06) (0.10) (0.08) (0.03)
Net realized
and unrealized
gain
(loss) on
investments and
foreign
currency
transactions 3.90 (5.15) (9.36) (11.77) 19.43 3.93 (4.94) 0.85
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Total from
investment
operations 3.83 (5.23) (9.49) (12.01) 19.37 3.83 (5.02) 0.82
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Less distributions:
- ----------------------------------
Distributions
from capital
gains - - (0.92) (0.92) (2.72) - - -
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Total
distributions - - (0.92) (0.92) (2.72) - - -
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
NET ASSET VALUE, END
OF PERIOD $ 11.43 $ 7.60 $ 12.83 $ 23.24 $ 36.17 $ 11.42 $ 7.59 $ 11.43
======== ======== ========== ========== ======== ============ =========== ===========
TOTAL RETURN(B) 50.39% (40.76%) (41.25%) (34.06%) 99.49% 50.46% (39.81%)+ 7.73%+
Net assets, end of
period (000's) $557,623 $358,553 $729,587 $1,262,181 $1,144,454 $65,613 $11,064 $6
Ratio of expenses to
average net assets 1.19%& 1.17% 1.16% 1.15% 1.16% 1.39%& 1.37%(A) 15.13%(A)
Ratio of expenses to
average net assets
after expense
reductions 1.16%& 1.15% 1.15% 1.14% 1.16% 1.36%& 1.35%(A) 1.51%(A)
Ratio of net
investment income
(loss) to average net
assets (0.79%) (0.87%) (0.80%) (0.73%) (0.40%) (0.99%) (1.07%)(A) (1.00%)(A)
Portfolio turnover
rate 56%++ 59% 144% 133% 113% 56%++ 59% 56%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
PACIFIC RIM EMERGING MARKETS TRUST
---------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
-------------------------------------------------------- -------------------------- -----------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003*
-------------------------------------------------------- DECEMBER 31, TO TO
2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 5.81 $ 6.65 $ 8.20 $ 10.88 $ 6.83 $ 5.81 $ 6.63 $ 7.35
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.05 0.02 0.02 0.06 0.09 0.03 (0.02) (0.02)
Net realized
and unrealized
gain
(loss) on
investments and
foreign
currency
transactions 2.29 (0.85) (1.54) (2.70) 4.17 2.30 (0.79) 0.81
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Total from
investment
operations 2.34 (0.83) (1.52) (2.64) 4.26 2.33 (0.81) 0.79
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Less distributions:
- -------------------
Dividends from
net investment
income (0.01) (0.01) (0.03) (0.04) (0.21) (0.02) (0.01) -
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
Total
distributions (0.01) (0.01) (0.03) (0.04) (0.21) (0.02) (0.01) -
-------- -------- ---------- ---------- -------- ------------ ----------- -----------
NET ASSET VALUE, END
OF PERIOD $ 8.14 $ 5.81 $ 6.65 $ 8.20 $ 10.88 $ 8.12 $ 5.81 $ 8.14
======== ======== ========== ========== ======== ============ =========== ===========
TOTAL RETURN(C) 40.37% (12.53%) (18.57%) (24.37%) 62.87% 40.17% (12.27%)+ 10.75%+
Net assets, end of
period (000's) $66,612 $45,937 $55,981 $83,370 $94,753 $19,594 $4,287 $3
Ratio of expenses to
average net assets 1.28% 1.23% 1.23% 1.03% 1.11% 1.48% 1.43%(A) 22.22%(A)
Ratio of expenses to
average net assets
after expense
reductions 1.28% 1.23% 1.23% 1.03% 1.11% 1.48% 1.43%(A) 1.63%(A)
Ratio of net
investment income
(loss) to average net
assets 0.80% 0.24% 0.32% 0.61% 0.90% 0.38% (0.28%)(A) (0.74%)(A)
Portfolio turnover
rate 57% 28% 76% 55% 42% 57% 28% 57%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
& The ratios of operating expenses excluding costs incurred in connection with
the reorganization before and after expense reductions were 1.18% and 1.15%
for Series I and 1.38% and 1.35% for Series II, respectively.
++ The portfolio turnover rate does not include the assets acquired in the
merger.
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001 and 2000 for Series I,
for the year ended 2003 and the period ended December 31, 2002 for Series II
and for the period ended December 31, 2003 for Series III would have been
lower, had operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
139
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
HEALTH SCIENCES TRUST
-------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------- --------------------------- ------------
YEARS ENDED
DECEMBER 31, 4/30/2001* YEAR END 1/28/2002* 9/05/2003*
------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.83 $ 13.54 $ 12.50 $ 9.83 $ 12.90 $ 12.64
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.10) (0.08) (0.07) (0.12) (0.09) (0.05)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 3.66 (3.60) 1.11 3.65 (2.95) 0.80
-------- -------- -------- -------- -------- --------
Total from
investment
operations 3.56 (3.68) 1.04 3.53 (3.04) 0.75
-------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Distributions
from capital
gains - (0.03) - - (0.03) -
-------- -------- -------- -------- -------- --------
Total
distributions - (0.03) - - (0.03) -
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END
OF PERIOD $ 13.39 $ 9.83 $ 13.54 $ 13.36 $ 9.83 $ 13.39
======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 36.22% (27.24%) 8.32%+ 35.91% (23.63%)+ 5.93%+
Net assets, end of
period (000's) $100,829 $62,075 $51,568 $53,916 $15,924 $37
Ratio of expenses to
average net assets 1.23% 1.25% 1.45%(A) 1.43% 1.45%(A) 10.76%(A)
Ratio of expenses to
average net assets
after expense
reductions 1.21% 1.23% 1.44%(A) 1.41% 1.43%(A) 1.56%(A)
Ratio of net
investment income
(loss) to average net
assets (0.82%) (0.74%) (0.76%)(A) (1.04%) (1.02%)(A) (1.31%)(A)
Portfolio turnover
rate 44% 55% 81% 44% 55% 44%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
EMERGING GROWTH TRUST
------------------------------------------
SERIES I SERIES II SERIES III
------------ ------------ ------------
5/5/2003* 5/5/2003* 9/5/2003*
TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 15.61
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.09) (0.11) 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.95 3.95 0.74
-------- -------- -------
Total from investment operations 3.86 3.84 0.75
-------- -------- -------
Less distributions:
- -------------------
Dividends from net investment income (0.61) (0.61) (0.61)
-------- -------- -------
Total distributions (0.61) (0.61) (0.61)
-------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 15.75 $ 15.73 $ 15.75
======== ======== =======
TOTAL RETURN(C) 30.84%+ 30.68%+ 4.77%+
Net assets, end of period (000's) $3,178 $6,080 - ##
Ratio of expenses to average net assets 2.54%(A) 2.74%(A) 354.65%(A)
Ratio of expenses to average net assets after expense
reductions 1.35%(A) 1.55%(A) 1.70%(A)
Ratio of net investment income (loss) to average net assets (0.89%)(A) (1.08%)(A) 0.19%(A)
Portfolio turnover rate 183% 183% 183%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002 and the period ended
December 31, 2001 for Series I, for the year ended 2003 and the period
ended December 31, 2002 for Series II and for the period ended December 31,
2003 for Series III would have been lower, had operating expenses not been
reduced.
(C) The total return for the period ended December 31, 2003 for Series I,
Series II and Series III would have been lower, had operating expenses not
been reduced.
140
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
AGGRESSIVE GROWTH TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.92 $ 13.22 $ 17.86 $ 17.34 $ 13.04 $ 9.92 $ 12.90 $ 12.46
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.09) (0.09) (0.11) (0.12) (0.06) (0.12) (0.12) (0.01)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 3.45 (3.21) (4.53) 0.64 4.36 3.45 (2.86) 0.83
-------- -------- -------- -------- -------- -------- ------- -------
Total from
investment
operations 3.36 (3.30) (4.64) 0.52 4.30 3.33 (2.98) 0.82
-------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END
OF PERIOD $ 13.28 $ 9.92 $ 13.22 $ 17.86 $ 17.34 $ 13.25 $ 9.92 $ 13.28
======== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN 33.87% (24.96%) (25.98%) 3.00% 32.98% 33.57% (23.1%)+ 6.58%+
Net assets, end of
period (000's) $261,138 $225,798 $309,746 $416,643 $135,503 $40,267 $17,322 -##
Ratio of expenses to
average net assets 1.09% 1.09% 1.07% 1.07% 1.15% 1.29% 1.29%(A) 1.44%(A)
Ratio of net
investment income
(loss) to average net
assets (0.81%) (0.80%) (0.73%) (0.61%) (0.59%) (1.03%) (1.27%)(A) (0.25%)(A)
Portfolio turnover
rate 71% 104% 96% 70% 161% 71% 104% 71%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
EMERGING SMALL COMPANY TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 18.45 $ 26.06 $ 35.02 $ 40.74 $ 23.82 $ 18.44 $ 25.13 $ 23.96
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.12) (0.12) (0.08) (0.02) (0.09) (0.18) (0.11) (0.08)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 7.45 (7.49) (7.75) (1.33) 17.35 7.46 (6.58) 1.90
-------- -------- -------- -------- -------- -------- ------- -------
Total from
investment
operations 7.33 (7.61) (7.83) (1.35) 17.26 7.28 (6.69) 1.82
-------- -------- -------- -------- -------- -------- ------- -------
Less distributions:
- -------------------
Distributions
from capital
gains - - (1.13) (4.37) (0.34) - - -
-------- -------- -------- -------- -------- -------- ------- -------
Total
distributions - - (1.13) (4.37) (0.34) - - -
-------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE, END
OF PERIOD $25.78 $18.45 $26.06 $35.02 $40.74 $25.72 $18.44 $25.78
======== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN(B) 39.73% (29.20%) (22.24%) (4.30%) 73.53% 39.48% (26.62%)+ 7.60%+
Net assets, end of
period (000's) $401,433 $293,594 $447,673 $573,471 $453,152 $82,836 $17,791 $1
Ratio of expenses to
average net assets 1.11% 1.12% 1.12% 1.10% 1.12% 1.31% 1.32%(A) 20.19%(A)
Ratio of expenses to
average net assets
after expense
reductions 1.11% 1.12% 1.12% 1.10% 1.12% 1.31% 1.32%(A) 1.46%(A)
Ratio of net
investment income
(loss) to average net
assets (0.58%) (0.57%) (0.30%) (0.04%) (0.35%) (0.82%) (0.63%)(A) (0.98%)(A)
Portfolio turnover
rate 51% 35% 48% 23% 136% 51% 35% 51%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
## Amount is less than $1,000
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
141
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SMALL COMPANY BLEND TRUST
----------------------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------------------- ---------------------------
YEAR
YEARS ENDED DECEMBER 31, 05/01/1999* ENDED 1/28/2002*
-------------------------------------------------- TO DECEMBER 31, TO
2003-- 2002-- 2001-- 2000-- 12/31/1999 2003-- 12/31/2002--
------------------ -------- -------- ------- ----------- ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.16 $ 10.98 $ 11.31 $ 15.76 $ 12.50 $ 8.15 $ 10.69
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) (0.01) - # 0.03 - # (0.01) (0.03) 0.01
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 3.25 (2.80) (0.30) (3.11) 3.58 3.26 (2.53)
-------- -------- -------- ------- ------- ------- -------
Total from investment
operations 3.24 (2.80) (0.27) (3.11) 3.57 3.23 (2.52)
-------- -------- -------- ------- ------- ------- -------
Less distributions:
- -------------------
Dividends from net
investment income - (0.02) - - - - (0.02)
Distributions from capital
gains - - (0.06) (1.34) (0.31) - -
-------- -------- -------- ------- ------- ------- -------
Total distributions - (0.02) (0.06) (1.34) (0.31) - (0.02)
-------- -------- -------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.40 $ 8.16 $ 10.98 $ 11.31 $ 15.76 $ 11.38 $ 8.15
======== ======== ======== ======= ======= ======= =======
TOTAL RETURN 39.71% (25.55%) (2.31%) (19.74%) 28.56%+ 39.63% (23.63%)+
Net assets, end of period (000's) $150,801 $106,357 $161,250 $95,123 $53,514 $59,724 $16,014
Ratio of expenses to average net
assets 1.15% 1.15% 1.17% 1.19% 1.30%(A) 1.35% 1.35%(A)
Ratio of net investment income
(loss) to average net assets (0.08%) (0.04%) 0.29% (0.01%) (0.12%)(A) (0.29%) 0.12%(A)
Portfolio turnover rate 37% 48% 39% 49% 28% 37% 48%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
DYNAMIC GROWTH TRUST
------------------------------------------------------------------------------------
SERIES I SERIES II
------------------------------------------------------ ---------------------------
YEAR
YEARS ENDED DECEMBER 31, 5/1/2000* ENDED 1/28/2002*
--------------------------------------- TO DECEMBER 31, TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002--
------------------ ------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.41 $ 4.76 $ 7.98 $ 12.50 $ 3.40 $ 4.40
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.03) (0.02) (0.02) 0.02 (0.03) (0.03)
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 1.02 (1.33) (3.19) (4.54) 1.02 (0.97)
-------- ------- -------- -------- ------- ------
Total from investment operations 0.99 (1.35) (3.21) (4.52) 0.99 (1.00)
-------- ------- -------- -------- ------- ------
Less distributions:
- -------------------
Dividends from net investment income - - (0.01) - - -
-------- ------- -------- -------- ------- ------
Total distributions - - (0.01) - - -
-------- ------- -------- -------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 4.40 $ 3.41 $ 4.76 $ 7.98 $ 4.39 $ 3.40
======== ======= ======== ======== ======= ======
TOTAL RETURN 29.03% (28.36%) (40.24%) (36.16%)+ 29.12% (22.73%)+
Net assets, end of period (000's) $140,190 $63,745 $132,709 $135,758 $41,792 $4,242
Ratio of expenses to average net assets 1.09%@ 1.10% 1.08% 1.07%(A) 1.29%@ 1.30%(A)
Ratio of net investment income (loss) to
average net assets (0.68%) (0.55%) (0.43%) 0.35%(A) (0.88%) (0.81%)(A)
Portfolio turnover rate 133%++ 165% 180% 80% 133%++ 165%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
@ The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were 1.08% for
Series I and 1.28% for Series II.
++ The portfolio turnover rate does not include the assets acquired in the
merger.
142
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
MID CAP STOCK TRUST
--------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------- -------------------------- -----------
YEAR ENDED
YEARS ENDED DECEMBER 31, 05/01/1999* DECEMBER 31, 1/28/2002* 9/05/2003*
----------------------------------------- TO ------------ TO TO
2003@ 2002@ 2001@ 2000@ 12/31/1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- -------- -------- ----------- ------------ ----------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.34 $ 10.77 $ 12.10 $ 12.60 $ 12.50 $ 8.34 $ 10.64 $ 10.75
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.05) (0.05) (0.04) (0.01) (0.01) (0.08) (0.05) (0.04)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 3.58 (2.38) (1.29) (0.49) 0.11 3.58 (2.25) 1.16
-------- -------- -------- -------- -------- ------------ ----------- -----------
Total from
investment
operations 3.53 (2.43) (1.33) (0.50) 0.10 3.50 (2.30) 1.12
-------- -------- -------- -------- -------- ------------ ----------- -----------
NET ASSET VALUE, END
OF PERIOD $ 11.87 $ 8.34 $ 10.77 $ 12.10 $ 12.60 $ 11.84 $ 8.34 $ 11.87
======== ======== ======== ======== ======== ============ =========== ===========
TOTAL RETURN(B) 42.33% (22.56%) (10.99%) (3.97%) 0.80%+ 41.97% (21.62%)+ 10.42%+
Net assets, end of
period (000's) $260,191 $186,950 $153,732 $122,350 $99,504 $116,299 $31,611 $6
Ratio of expenses to
average net assets 0.99% 1.00% 1.00% 1.00% 1.03%(A) 1.19% 1.20%(A) 39.49%(A)
Ratio of expenses to
average net assets
after expense
reductions 0.99% 1.00% 1.00% 1.00% 1.03%(A) 1.19% 1.20%(A) 1.34%(A)
Ratio of net
investment income
(loss) to average net
assets (0.55%) (0.53%) (0.36%) (0.11%) (0.15%)(A) (0.75%) (0.70%)(A) (1.05%)(A)
Portfolio turnover
rate 132% 128% 170% 300% 36% 132% 128% 132%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
NATURAL RESOURCES TRUST
---------------------------------------
SERIES I SERIES II SERIES III
----------- ----------- -----------
05/05/2003* 05/05/2003* 09/05/2003*
TO TO TO
12/31/2003@ 12/31/2003@ 12/31/2003@
----------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.72
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.05 0.02 (0.01)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 5.45 5.46 3.29
-------- -------- --------
Total from investment operations 5.50 5.48 3.28
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 18.00 $ 17.98 $ 18.00
======== ======== ========
TOTAL RETURN(B) 44.00%+ 43.84%+ 22.28%+
Net assets, end of period (000's) $90,099 $74,882 $2
Ratio of expenses to average net assets 1.21%(A) 1.41%(A) 45.65%(A)
Ratio of expenses to average net assets after
expense reductions 1.21%(A) 1.41%(A) 1.56%(A)
Ratio of net investment income (loss) to
average net assets 0.54%(A) 0.23%(A) (0.20%)(A)
Portfolio turnover rate 23% 23% 23%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
143
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ALL CAP GROWTH TRUST
-----------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- -------------------------- -----------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 09/05/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- -------- -------- -------- ------------ ----------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.15 $ 14.75 $ 20.65 $ 24.89 $ 19.77 $ 11.14 $ 14.49 $ 13.48
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.05) (0.06) (0.06) (0.09) (0.08) (0.07) (0.06) (0.03)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 3.31 (3.54) (4.81) (2.32) 7.87 3.30 (3.29) 0.96
-------- -------- -------- -------- -------- ------------ ----------- -----------
Total from
investment
operations 3.26 (3.60) (4.87) (2.41) 7.79 3.23 (3.35) 0.93
-------- -------- -------- -------- -------- ------------ ----------- -----------
Less distributions:
- -------------------
Distributions
from capital
gains - - (1.03) (1.83) (2.67) - - -
-------- -------- -------- -------- -------- ------------ ----------- -----------
Total
distributions - - (1.03) (1.83) (2.67) - - -
-------- -------- -------- -------- -------- ------------ ----------- -----------
NET ASSET VALUE, END
OF PERIOD $ 14.41 $ 11.15 $ 14.75 $ 20.65 $ 24.89 $ 14.37 $ 11.14 $ 14.41
======== ======== ======== ======== ======== ============ =========== ===========
TOTAL RETURN 29.24% (24.41%) (23.77%) (10.79%) 44.69% 28.99% (23.12%)+ 6.90%+
Net assets, end of
period (000's) $520,181 $456,752 $637,879 $873,214 $662,674 $87,300 $24,896 $2
Ratio of expenses to
average net assets 1.01% 1.02% 1.01% 1.00% 1.03% 1.21% 1.22%(A) 1.36%(A)
Ratio of net
investment income
(loss) to average net
assets (0.38%) (0.43%) (0.39%) (0.37%) (0.46%) (0.58%) (0.54%)(A) (0.61%)(A)
Portfolio turnover
rate 58% 80% 69% 103% 193% 58% 80% 58%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
STRATEGIC OPPORTUNITIES TRUST
---------------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------------- --------------------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002*
---------------------------------------------------------- DECEMBER 31, TO
2003@ 2002@ 2001@ 2000@ 1999@ 2003@ 12/31/2002@
-------- -------- ---------- ---------- ---------- ------------ -----------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 7.74 $ 12.64 $ 17.52 $ 21.90 $ 19.48 $ 7.73 $ 11.99
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.01 (0.03) (0.02) 0.08 0.07 (0.01) -#
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 1.99 (4.87) (2.47) (1.20) 4.75 1.99 (4.26)
-------- -------- ---------- ---------- ---------- ------------ -----------
Total from
investment
operations 2.00 (4.90) (2.49) (1.12) 4.82 1.98 (4.26)
-------- -------- ---------- ---------- ---------- ------------ -----------
Less distributions:
- -------------------
Dividends from net
investment income - - (0.08) (0.07) (0.09) - -
Distributions from
capital gains - - (2.31) (3.19) (2.31) - -
-------- -------- ---------- ---------- ---------- ------------ -----------
Total distributions - - (2.39) (3.26) (2.40) - -
-------- -------- ---------- ---------- ---------- ------------ -----------
NET ASSET VALUE, END OF
PERIOD $ 9.74 $ 7.74 $ 12.64 $ 17.52 $ 21.90 $ 9.71 $ 7.73
======== ======== ========== ========== ========== ============ ===========
TOTAL RETURN 25.84% (38.77%) (15.25%) (6.37%) 27.75% 25.61% (35.53%)+
Net assets, end of period
(000's) $533,891 $513,567 $1,057,285 $1,425,677 $1,673,228 $22,968 $9,181
Ratio of expenses to
average net assets 0.93% 0.92% 0.91% 0.90% 0.88% 1.13% 1.12%(A)
Ratio of net investment
income (loss) to average
net assets 0.10% (0.28%) (0.12%) 0.41% 0.34% (0.13%) 0.02%(A)
Portfolio turnover rate 185% 229% 260% 165% 129% 185% 229%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
144
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Financial Services Trust
---------------------------------------------------------------------------------------------------
Series I Series II Series III
------------------------------------------------------ --------------------------- ------------
Years Ended
December 31, 4/30/2001* YEAR ENDED 1/28/2002* 9/05/2003*
--------------------------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
------------------ ------------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.55 $ 11.63 $ 12.50 $ 9.54 $ 11.48 $ 11.28
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.06 0.03 0.01 0.04 0.03 0.04
Net realized and
unrealized gain
(loss) on investments
and foreign currency
transactions 3.14 (2.11) (0.88) 3.14 (1.97) 1.41
------------------ ------------------ -------- -------- -------- --------
Total from investment
operations 3.20 (2.08) (0.87) 3.18 (1.94) 1.45
------------------ ------------------ -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.02) -# -# (0.03) -# -
------------------ ------------------ -------- -------- -------- --------
Total distributions (0.02) -# -# (0.03) -# -
------------------ ------------------ -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 12.73 $ 9.55 $ 11.63 $ 12.69 $ 9.54 $ 12.73
================== ================== ======== ======== ======== ========
TOTAL RETURN(B) 33.58% (17.88%) (6.93%)+ 33.40% (16.90%)+ 12.85%+
Net assets, end of period
(000's) $52,467 $37,132 $24,840 $36,337 $12,138 -##
Ratio of expenses to average
net assets 1.05% 1.07% 1.21%(A) 1.25% 1.27%(A) 186.33%(A)
Ratio of expenses to average
net assets after expense
reductions 1.05% 1.07% 1.21%(A) 1.25% 1.27%(A) 1.40%(A)
Ratio of net investment
income (loss) to average net
assets 0.58% 0.31% 0.08%(A) 0.37% 0.37%(A) 0.97%(A)
Portfolio turnover rate 25% 34% 53% 25% 34% 25%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
INTERNATIONAL STOCK TRUST
-----------------------------------------------------------------------------
SERIES I SERIES II
-------------------------------------------------------------- ------------
YEAR
YEARS ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- DECEMBER 31,
2003-- 2002-- 2001-- 2000-- 1999 2003--
---------- ---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.48 $ 9.59 $ 12.81 $ 15.43 $ 12.98 $ 7.48
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.08 0.07 0.04 0.01 0.08 0.05
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 2.17 (2.14) (2.75) (2.56) 3.76 2.20
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations 2.25 (2.07) (2.71) (2.55) 3.84 2.25
---------- ---------- ---------- ---------- ---------- ----------
Less distributions:
- -------------------
Dividends from net investment income (0.04) (0.04) (0.02) - (0.07) (0.05)
Distributions from capital gains - - (0.49) (0.07) (1.32) -
---------- ---------- ---------- ---------- ---------- ----------
Total Distributions (0.04) (0.04) (0.51) (0.07) (1.39) (0.05)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.69 $ 7.48 $ 9.59 $ 12.81 $ 15.43 $ 9.68
========== ========== ========== ========== ========== ==========
TOTAL RETURN(C) 30.27% (21.69%) (21.54%) (16.57%) 29.71% 30.26%
Net assets, end of period (000's) $289,227 $246,794 $265,353 $298,054 $231,729 $99,529
Ratio of expenses to average net assets 1.17% 1.18% 1.22% 1.24% 1.25% 1.37%
Ratio of expenses to average net assets
after expense reductions 1.17% 1.17% 1.21% 1.23% 1.25% 1.37%
Ratio of net investment income (loss)
to average net assets 1.07% 0.77% 0.42% 0.10% 0.58% 0.65%
Portfolio turnover rate 159% 78% 31% 39% 39% 159%
<Caption>
INTERNATIONAL STOCK TRUST
---------------------------
SERIES II SERIES III
------------ ------------
1/28/2002* 9/05/2003*
TO TO
12/31/2002-- 12/31/2003--
------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $ 8.42
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.01) (0.02)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (2.39) 1.29
---------- --------
Total from investment operations (2.40) 1.27
---------- --------
Less distributions:
- -------------------
Dividends from net investment income (0.04) -
Distributions from capital gains - -
---------- --------
Total Distributions (0.04) -
---------- --------
NET ASSET VALUE, END OF PERIOD $ 7.48 $ 9.69
========== ========
TOTAL RETURN(C) (24.29%)+ 15.08%+
Net assets, end of period (000's) $32,674 $2
Ratio of expenses to average net assets 1.38%(A) 1.52%(A)
Ratio of expenses to average net assets
after expense reductions 1.37%(A) 1.52%(A)
Ratio of net investment income (loss)
to average net assets (0.20%)(A) (0.58%)(A)
Portfolio turnover rate 78% 159%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
(C) The total return for the years ended 2002, 2001 and 2000 for Series I and
for the period ended December 31, 2002 for Series II would have been lower,
had operating expenses not been reduced.
145
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
OVERSEAS TRUST
--------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------- --------------------------- ------------
YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003*
------------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
--------- --------- --------- --------- --------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 6.69 $ 8.56 $ 11.91 $ 15.92 $ 11.33 $ 6.69 $ 8.25 $ 8.24
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.04 0.03 0.07 0.05 0.08 0.01 (0.02) (0.02)
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 2.87 (1.86) (2.47) (2.84) 4.51 2.89 (1.50) 1.35
-------- --------- --------- --------- --------- ----------- -------- --------
Total from
investment
operations 2.91 (1.83) (2.40) (2.79) 4.59 2.90 (1.52) 1.33
-------- --------- --------- --------- --------- ----------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.03) (0.04) (0.03) (0.13) - (0.04) (0.04) -
Distributions from
capital gains - - (0.92) (1.09) - - - -
-------- --------- --------- --------- --------- ----------- -------- --------
Total distributions (0.03) (0.04) (0.95) (1.22) - (0.04) (0.04) -
-------- --------- --------- --------- --------- ----------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 9.57 $ 6.69 $ 8.56 $ 11.91 $ 15.92 $ 9.55 $ 6.69 $ 9.57
======== ========= ========= ========= ========= =========== ======== ========
TOTAL RETURN 43.83% (21.44%) (21.10%) (18.72%) 40.51% 43.71% (18.49%)+ 16.14%+
Net assets, end of period
(000's) $364,179 $298,843 $428,911 $488,582 $404,223 $96,010 $27,680 $5
Ratio of expenses to
average net assets 1.13% 1.10% 1.10% 1.15% 1.21% 1.33% 1.30%(A) 1.48%(A)
Ratio of net investment
income (loss) to average
net assets 0.51% 0.37% 0.76% 0.40% 0.73% 0.19% (0.24%)(A) (0.67%)(A)
Portfolio turnover rate 103% 81% 100% 142% 147% 103% 81% 103%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
INTERNATIONAL SMALL CAP TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.41 $ 11.30 $ 16.40 $ 28.16 $ 15.28 $ 9.41 $ 11.35 $ 12.69
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.08 (0.04) -# (0.15) (0.07) 0.05 (0.07) (0.01)
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 5.07 (1.85) (5.10) (6.33) 13.00 5.08 (1.87) 1.88
-------- -------- -------- -------- -------- ------- -------- --------
Total from
investment
operations 5.15 (1.89) (5.10) (6.48) 12.93 5.13 (1.94) 1.87
-------- -------- -------- -------- -------- ------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income - - - - (0.05) - - -
Distributions from
capital gains - - - (5.28) - - - -
-------- -------- -------- -------- -------- ------- -------- --------
Total distributions - - - (5.28) (0.05) - - -
-------- -------- -------- -------- -------- ------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 14.56 $ 9.41 $ 11.30 $ 16.40 $ 28.16 $ 14.54 $ 9.41 $ 14.56
======== ======== ======== ======== ======== ======= ======== ========
TOTAL RETURN(B) 54.73% (16.73%) (31.10%) (29.16%) 84.92% 54.52% (17.09%)+ 14.74%+
Net assets, end of period
(000's) $245,603 $100,006 $146,451 $257,406 $239,961 $73,655 $4,848 $9
Ratio of expenses to
average net assets 1.32% 1.57% 1.60% 1.54% 1.37% 1.52% 1.77%(A) 15.64%(A)
Ratio of expenses to
average net assets after
expense reductions 1.32% 1.57% 1.60% 1.54% 1.37% 1.52% 1.77%(A) 1.59%(A)
Ratio of net investment
income (loss) to average
net assets 0.66% (0.40)% (0.01)% (0.67)% (0.41)% 0.41% (0.73%)(A) (0.19%)(A)
Portfolio turnover rate 140% 501% 721% 529% 309% 140% 501% 140%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
146
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
INTERNATIONAL VALUE TRUST
--------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------- -------------------------- -----------
YEAR
YEARS ENDED DECEMBER 31, 05/01/1999* ENDED 1/28/2002* 9/05/2003*
----------------------------------------- TO DECEMBER 31, TO TO
2003@ 2002@ 2001@ 2000@ 12/31/1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- -------- -------- ----------- ------------ ----------- -----------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.60 $ 10.54 $ 12.06 $ 12.98 $ 12.50 $ 8.60 $ 10.31 $ 10.79
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.21 0.14 0.14 0.20 0.08 0.18 0.01 0.01
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 3.60 (2.01) (1.34) (1.04) 0.40 3.60 (1.65) 1.53
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 3.81 (1.87) (1.20) (0.84) 0.48 3.78 (1.64) 1.54
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
- -------------------
Dividends from net
investment income (0.08) (0.07) (0.12) (0.05) - (0.09) (0.07) -
Distributions from
capital gains - - (0.20) (0.03) - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.08) (0.07) (0.32) (0.08) - (0.09) (0.07) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 12.33 $ 8.60 $ 10.54 $ 12.06 $ 12.98 $ 12.29 $ 8.60 $ 12.33
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 44.86% (17.84%) (9.97%) (6.46%) 3.84%+ 44.52% (16.00%)+ 14.27%+
Net assets, end of period
(000's) $267,454 $228,882 $208,230 $158,511 $100,970 $138,365 $50,353 $1
Ratio of expenses to average
net assets 1.13% 1.12% 1.15% 1.18% 1.23%(A) 1.33% 1.32%(A) 1.48%(A)
Ratio of expenses to average
net assets after expense
reductions 1.12% 1.12% 1.15% 1.18% 1.23%(A) 1.32% 1.32%(A) 1.47%(A)
Ratio of net investment
income (loss) to average net
assets 2.18% 1.45% 1.32% 1.63% 1.27%(A) 1.78% 0.09%(A) 0.28%(A)
Portfolio turnover rate 51% 26% 33% 41% 4% 51% 26% 51%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
QUANTITATIVE MID CAP TRUST
------------------------------------------------------------------------
SERIES I SERIES II
------------------------------------------ ---------------------------
YEARS ENDED DECEMBER 31, 4/30/2001* YEAR ENDED 1/28/2002*
--------------------------- TO DECEMBER 31, TO
2003@ 2002@ 12/31/2001@ 2003@ 12/31/2002@
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.89 $ 10.20 $ 12.50 $ 7.88 $ 10.03
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.01) (0.01) - # (0.03) (0.02)
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 3.05 (2.30) (2.30) 3.05 (2.13)
-------- -------- -------- -------- --------
Total from investment operations 3.04 (2.31) (2.30) 3.02 (2.15)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.93 $ 7.89 $ 10.20 $ 10.90 $ 7.88
======== ======== ======== ======== ========
TOTAL RETURN 38.53% (22.65%) (18.40)%+ 38.32% (21.44%)+
Net assets, end of period (000's) $110,382 $78,053 $99,546 $7,286 $2,208
Ratio of expenses to average net assets 0.90% 0.90% 0.90%(A) 1.10% 1.10%(A)
Ratio of net investment Income (loss) to
average net assets (0.10%) (0.07%) (0.07%)(A) (0.30%) (0.31%)(A)
Portfolio turnover rate 107% 273% 320% 107% 273%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the year ended 2003 for Series I and Series II and for
the period ended December 31, 2003 for Series III would have been lower,
had operating expenses not been reduced.
147
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
MID CAP CORE TRUST
---------------------------------------
SERIES I SERIES II SERIES III
----------- ----------- -----------
5/05/2003* 5/05/2003* 9/05/2003*
TO TO TO
12/31/2003@ 12/31/2003@ 12/31/2003@
----------- ----------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.47
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.01) (0.03) 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 2.83 2.83 0.81
-------- -------- --------
Total from investment operations 2.82 2.80 0.85
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.32 $ 15.30 $ 15.32
======== ======== ========
TOTAL RETURN 22.56%+ 22.40%+ 5.87%+
Net assets, end of period (000's) $19,539 $29,798 - ##
Ratio of expenses to average net assets 1.21%(A) 1.41%(A) 1.56%(A)
Ratio of net investment income (loss) to average net
assets (0.08%)(A) (0.27%)(A) 0.76%(A)
Portfolio turnover rate 22% 22% 22%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
GLOBAL EQUITY TRUST
----------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------------- -------------------------- -----------
1/28/2002* 9/05/2003*
YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------- ------------ TO TO
2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@
-------- -------- -------- -------- ------- ------------ ----------- -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.39 $ 13.00 $ 18.48 $ 18.79 $ 20.38 $ 10.39 $ 12.72 $ 12.02
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.10 0.08 0.12 0.25 0.23 0.08 0.05 0.06
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 2.72 (2.54) (2.78) 1.78 0.38 2.71 (2.23) 1.03
-------- -------- -------- -------- ------- ------------ ----------- -----------
Total from
investment
operations 2.82 (2.46) (2.66) 2.03 0.61 2.79 (2.18) 1.09
-------- -------- -------- -------- ------- ------------ ----------- -----------
Less distributions:
- -------------------
Dividends from
net investment
income (0.10) (0.15) (0.40) (0.35) (0.13) (0.11) (0.15) -
Distributions
from capital
gains - - (2.42) (1.99) (2.07) - - -
-------- -------- -------- -------- ------- ------------ ----------- -----------
Total
distributions (0.10) (0.15) (2.82) (2.34) (2.20) (0.11) (0.15) -
-------- -------- -------- -------- ------- ------------ ----------- -----------
NET ASSET VALUE, END
OF PERIOD $ 13.11 $ 10.39 $ 13.00 $ 18.48 $ 18.79 $ 13.07 $ 10.39 $ 13.11
======== ======== ======== ======== ======= ============ =========== ===========
TOTAL RETURN(B) 27.46% (19.11%) (16.09%) 12.19% 3.66% 27.23% (17.33%)+ 9.07%+
Net assets, end of
period (000's) $363,134 $347,619 $528,027 $725,419 $837,728 $19,672 $8,503 - ##
Ratio of expenses to
average net assets 1.05% 1.04% 1.01% 1.02% 1.06% 1.25% 1.24%(A) 345.59%(A)
Ratio of expenses to
average net assets
after expense
reductions 1.05% 1.04% 1.01% 1.02% 1.06% 1.25% 1.24%(A) 1.40%(A)
Ratio of net
investment income
(loss) to average net
assets 0.93% 0.72% 0.81% 1.44% 1.14% 0.68% 0.55%(A) 1.38%(A)
Portfolio turnover
rate 149% 92% 156% 43% 43% 149% 92% 149%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
148
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
STRATEGIC GROWTH TRUST
-----------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
-------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR
----------------------------- 4/30/2001* ENDED 1/28/2002* 9/05/2003*
TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
------------------ -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 7.93 $ 11.02 $ 12.50 $ 7.93 $ 10.58 $ 9.64
Income from investment
operations:
- ----------------------------------
Net investment
income (loss) (0.01) (0.02) (0.01) (0.03) (0.02) (0.01)
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 2.14 (3.07) (1.47) 2.14 (2.63) 0.43
-------- -------- -------- -------- -------- --------
Total from
investment
operations 2.13 (3.09) (1.48) 2.11 (2.65) 0.42
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 10.06 $ 7.93 $ 11.02 $ 10.04 $ 7.93 $ 10.06
======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 26.86% (28.04%) (11.84%)+ 26.61% (25.05%)+ 4.36%+
Net assets, end of period
(000's) $175,020 $132,098 $91,393 $86,609 $25,425 $2
Ratio of expenses to
average net assets 0.99% 1.01% 1.10%(A) 1.19% 1.21%(A) 52.48%(A)
Ratio of expenses to
average net assets after
expense reductions 0.99% 1.01% 1.10%(A) 1.19% 1.21%(A) 1.34%(A)
Ratio of net investment
income (loss) to average
net assets (0.09%) (0.22%) (0.19%)(A) (0.29%) (0.23%)(A) (0.18%)(A)
Portfolio turnover rate 77% 91% 107% 77% 91% 77%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
CAPITAL APPRECIATION TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 11/1/2000* YEAR ENDED 1/28/2002* 9/05/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 6.21 $ 8.95 $ 10.97 $ 12.50 $ 6.20 $ 8.73 $ 7.62
Income from investment
operations:
- ----------------------
Net investment
income (loss) (0.01) (0.01) (0.02) - # (0.03) (0.02) (0.01)
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 1.84 (2.73) (2.00) (1.53) 1.85 (2.51) 0.43
-------- -------- -------- -------- -------- -------- --------
Total from
investment
operations 1.83 (2.74) (2.02) (1.53) 1.82 (2.53) 0.42
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END
OF PERIOD $ 8.04 $ 6.21 $ 8.95 $ 10.97 $ 8.02 $ 6.20 $ 8.04
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 29.47% (30.61%) (18.41%) (12.24%)+ 29.35% (28.98%)+ 5.51%+
Net assets, end of
period (000's) $120,859 $100,415 $40,202 $5,280 $72,208 $22,698 $2
Ratio of expenses to
average net assets 0.99% 1.05% 1.20% 1.60%(A) 1.19% 1.25%(A) 1.34%(A)
Ratio of expenses to
average net assets
after expense
reductions 0.99% 1.05% 1.20% 1.40%(A) 1.19% 1.25%(A) 1.34%(A)
Ratio of net
investment income
(loss) to average net
assets (0.13%) (0.14%) (0.22%) (0.21%)(A) (0.35%) (0.27%)(A) (0.38%)(A)
Portfolio turnover
rate 71% 67% 102% 143% 71% 67% 71%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
(C) The total return for the period ended December 31, 2000 for Series I would
have been lower, had operating expenses not been reduced.
149
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
QUANTITATIVE ALL CAP TRUST
---------------------------------------------------
SERIES I SERIES II SERIES III
--------------- --------------- ---------------
5/05/2003* 5/05/2003* 9/05/2003*
TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003--
--------------- --------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.08
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.02 - # 0.06
Net realized and unrealized gain
(loss) on
investments and foreign currency
transactions 3.04 3.05 1.41
-------- -------- -------
Total from investment operations 3.06 3.05 1.47
-------- -------- -------
Less distributions:
- --------------------
Dividends from net investment income (0.51) (0.50) (0.50)
-------- -------- -------
Total distributions (0.51) (0.50) (0.50)
-------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 15.05 $ 15.05 $ 15.05
======== ======== =======
TOTAL RETURN(B) 24.49%+ 24.38%+ 10.42%+
Net assets, end of period (000's) $2,141 $2,542 - ##
Ratio of expenses to average net assets 2.59%(A) 2.81%(A) 347.32%(A)
Ratio of expenses to average net assets
after expense reductions 1.30%(A) 1.50%(A) 1.65%(A)
Ratio of net investment income (loss) to
average net assets 0.18%(A) (0.02%)(A) 1.30%(A)
Portfolio turnover rate 96% 96% 96%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
ALL CAP CORE TRUST (FORMERLY, GROWTH TRUST)
----------------------------------------------------------------------------------
SERIES II
SERIES I ---------------------------
---------------------------------------------------- YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002*
---------------------------------------------------- DECEMBER 31, TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002--
-------- -------- -------- -------- -------- ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.43 $ 13.95 $ 17.74 $ 26.88 $ 20.50 $ 10.43 $ 13.64
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.06 (0.02) (0.06) (0.06) (0.04) 0.03 (0.02)
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 3.23 (3.50) (3.73) (6.47) 7.46 3.23 (3.19)
-------- -------- -------- -------- -------- -------- --------
Total from investment operations 3.29 (3.52) (3.79) (6.53) 7.42 3.26 (3.21)
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment income - - - - (0.05) - -
Distribution from capital gains - - - (2.61) (0.99) - -
-------- -------- -------- -------- -------- -------- --------
Total distributions - - - (2.61) (1.04) - -
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.72 $ 10.43 $ 13.95 $ 17.74 $ 26.88 $ 13.69 $ 10.43
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 31.54% (25.23%) (21.36%) (27.29%) 37.20% 31.26% (23.53%)+
Net assets, end of period (000's) $264,170 $243,484 $494,523 $637,194 $642,948 $10,246 $4,296
Ratio of expenses to average net assets 0.93% 0.91% 0.91% 0.90% 0.90% 1.13% 1.11%(A)
Ratio of net investment income (loss) to
average net assets 0.49% (0.20%) (0.41%) (0.26%) (0.18%) 0.29% (0.19%)(A)
Portfolio turnover rate 183% 153% 121% 147% 156% 183% 153%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series I, Series
II and Series III would have been lower, had operating expenses not been
reduced.
150
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LARGE CAP GROWTH TRUST
---------------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------------- --------------------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002*
---------------------------------------------------------- DECEMBER 31, TO
2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@
-------- -------- ---------- ---------- ---------- ------------ -----------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.61 $ 9.89 $ 12.58 $ 17.23 $ 15.26 $ 7.60 $ 9.79
Income from investment
operations:
- ----------------------
Net investment
income (loss) 0.03 0.02 0.03 (0.01) 0.06 0.01 0.02
Net realized
and unrealized
gain (loss) on
investments and
foreign
currency
transactions 1.89 (2.27) (2.25) (2.03) 3.52 1.90 (2.18)
-------- -------- ---------- ---------- ---------- ------------ -----------
Total from
investment
operations 1.92 (2.25) (2.22) (2.04) 3.58 1.91 (2.16)
-------- -------- ---------- ---------- ---------- ------------ -----------
Less distributions:
- -------------------
Dividends from
net investment
income (0.02) (0.03) - (0.04) (0.23) (0.03) (0.03)
Distributions
from capital
gains - - (0.47) (2.57) (1.38) - -
-------- -------- ---------- ---------- ---------- ------------ -----------
Total
distributions (0.02) (0.03) (0.47) (2.61) (1.61) (0.03) (0.03)
-------- -------- ---------- ---------- ---------- ------------ -----------
NET ASSET VALUE, END
OF PERIOD $ 9.51 $ 7.61 $ 9.89 $ 12.58 $ 17.23 $ 9.48 $ 7.60
======== ======== ========== ========== ========== ============ ===========
TOTAL RETURN 25.33% (22.83%) (17.81%) (14.24%) 25.28% 25.24% (22.15%)+
Net assets, end of
period (000's) $414,672 $370,765 $496,049 $541,693 $402,585 $85,866 $31,496
Ratio of expenses to
average net assets 0.97% 0.98% 0.95% 0.94% 0.94% 1.17% 1.18%(A)
Ratio of net
investment income
(loss) to average net
assets 0.31% 0.26% 0.30% (0.01%) 0.45% 0.12% 0.27%(A)
Portfolio turnover
rate 62% 92% 123% 92% 164% 62% 92%
</Table>
@ Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
151
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
BLUE CHIP GROWTH TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.99 $ 15.83 $ 20.13 $ 21.64 $ 18.92 $ 11.98 $ 15.53 $ 14.36
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.02 0.01 - # (0.02) 0.01 - # - # 0.01
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 3.48 (3.85) (2.97) (0.50) 3.58 3.47 (3.55) 1.11
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 3.50 (3.84) (2.97) (0.52) 3.59 3.47 (3.55) 1.12
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.01) - - (0.01) (0.05) (0.02) - -
Distributions from
capital gains - - (1.33) (0.98) (0.82) - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.01) - (1.33) (0.99) (0.87) (0.02) - -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.48 $ 11.99 $ 15.83 $ 20.13 $ 21.64 $ 15.43 $ 11.98 $ 15.48
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (B) 29.17% (24.26%) (14.61%) (2.76%) 19.43% 29.02% (22.86%)+ 7.80%+
Net assets, end of period
(000's) $1,290,525 $1,092,775 $1,633,194 $1,999,039 $1,734,233 $204,653 $61,375 $6
Ratio of expenses to average
net assets 0.92% 0.93% 0.93% 0.92% 0.94% 1.12% 1.13%(A) 19.68%(A)
Ratio of expenses to average
net assets after expense
reductions 0.90% 0.91% 0.92% 0.91% 0.94% 1.10% 1.11%(A) 1.25%(A)
Ratio of net investment income
(loss) to average net assets 0.15% 0.05% 0.00% (0.07%) 0.06% (0.03%) (0.01%)(A) 0.12%(A)
Portfolio turnover rate 35% 39% 48% 48% 42% 35% 39% 35%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
U.S. LARGE CAP TRUST (FORMERLY, U.S. LARGE CAP VALUE TRUST)
------------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------- ---------------------------- -------------
YEARS ENDED DECEMBER 31, 05/01/1999* YEAR ENDED 1/28/2002* 9/05/2003*
----------------------------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 12/31/1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- ----------- ------------ ------------- -------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.41 $ 12.61 $ 13.09 $ 12.84 $ 12.50 $ 9.41 $ 12.35 $11.72
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.05 0.05 0.04 0.07 0.04 0.02 0.03 0.01
Net realized and
unrealized gain
(loss) on investments
and foreign currency
transactions 3.42 (3.22) (0.38) 0.29 0.30 3.41 (2.94) 1.11
-------- -------- -------- -------- -------- -------- ------- ------
Total from investment
operations 3.47 (3.17) (0.34) 0.36 0.34 3.43 (2.91) 1.12
-------- -------- -------- -------- -------- -------- ------- ------
Less distributions:
- -------------------
Dividends from net
investment income (0.04) (0.03) (0.05) (0.03) - (0.05) (0.03) -
Distributions from
capital gains - - (0.09) (0.08) - - - -
-------- -------- -------- -------- -------- -------- ------- ------
Total distributions (0.04) (0.03) (0.14) (0.11) - (0.05) (0.03) -
-------- -------- -------- -------- -------- -------- ------- ------
NET ASSET VALUE, END OF
PERIOD $ 12.84 $ 9.41 $ 12.61 $ 13.09 $ 12.84 $ 12.79 $ 9.41 $12.84
======== ======== ======== ======== ======== ======== ======= ======
TOTAL RETURN 37.06% (25.18%) (2.54%) 2.78% 2.72%+ 36.68% (23.61%)+ 9.56%+
Net assets, end of period
(000's) $413,803 $382,248 $518,621 $435,395 $210,725 $143,409 $59,287 $1
Ratio of expenses to average
net assets 0.93% 0.94% 0.93% 0.93% 0.94%(A) 1.13% 1.14%(A) 1.28%(A)
Ratio of net investment
income (loss) to average net
assets 0.43% 0.43% 0.32% 0.53% 0.64%(A) 0.21% 0.35%(A) 0.34%(A)
Portfolio turnover rate 34% 42% 38% 31% 30% 34% 42% 34%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for
Series I, for the year ended 2003 and the period ended December 31, 2002 for
Series II and for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
152
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
STRATEGIC VALUE TRUST
(FORMERLY, CAPITAL OPPORTUNITIES TRUST)
---------------------------------------------------------------------------------
SERIES I SERIES II
----------------------------------- ---------------------------- SERIES III
YEARS ENDED YEAR ------------
DECEMBER 31, 4/31/2001* ENDED 1/28/2002* 9/05/2003*
------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- ------------- ------------ ------------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.79 $ 10.70 $ 12.50 $ 7.78 $ 10.27 $ 9.42
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.06 - # (0.02) 0.05 - # 0.03
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 2.18 (2.91) (1.78) 2.18 (2.49) 0.58
-------- -------- -------- -------- -------- --------
Total from investment operations 2.24 (2.91) (1.80) 2.23 (2.49) 0.61
-------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment income - # - - (0.01) - -
Total distributions - # - - (0.01) - -
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.03 $ 7.79 $ 10.70 $ 10.00 $ 7.78 $ 10.03
======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 28.78% (27.20%) (14.4%)+ 28.68% (24.25%)+ 6.48%+
Net assets, end of period (000's) $95,602 $34,153 $33,428 $47,466 $5,904 $1
Ratio of expenses to average net assets 1.04% 1.14% 1.46%(A) 1.24% 1.34%(A) 1.39%(A)
Ratio of expenses to average net assets after
expense reductions 1.04% 1.14% 1.40%(A) 1.24% 1.34%(A) 1.39%(A)
Ratio of net investment income (loss) to
average net assets 0.69% 0.04% (0.27%)(A) 0.55% 0.04%(A) 0.93%(A)
Portfolio turnover rate 62% 109% 86% 62% 109% 62%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
LARGE CAP VALUE TRUST
----------------------------
SERIES I SERIES II
------------- ------------
5/05/2003* 5/05/2003*
TO TO
12/31/2003-- 12/31/2003--
------------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50
Income from investment operations:
- ----------------------------------
Net investment income (loss) -# (0.03)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.46 3.47
-------- --------
Total from investment operations 3.46 3.44
-------- --------
Less distributions:
- -------------------
Dividends from net investment income (0.30) (0.30)
-------- --------
Total distributions (0.30) (0.30)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 15.66 $ 15.64
======== ========
TOTAL RETURN(C) 27.65%+ 27.49%+
Net assets, end of period (000's) $6,203 $7,977
Ratio of expenses to average net assets 2.86%(A) 3.06%(A)
Ratio of expenses to average net assets after
expense reductions 1.40%(A) 1.60%(A)
Ratio of net investment income (loss) to average
net assets (0.02%)(A) (0.27%)(A)
Portfolio turnover rate 105% 105%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2001 for Series I would
have been lower, had operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series I and
Series II would have been lower, had operating expenses not been reduced.
153
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
UTILITIES TRUST
-------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------- --------------------------- ------------
YEARS ENDED
DECEMBER 31, 4/30/2001* YEAR ENDED 1/28/2002* 9/05/2003*
------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.11 $ 9.29 $ 12.50 $ 7.10 $ 8.77 $ 8.48
Income from investment
operations:
- ----------------------------------
Net investment
income (loss) 0.13 0.15 0.07 0.11 0.12 0.07
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 2.29 (2.33) (3.23) 2.29 (1.79) 0.88
-------- -------- -------- -------- -------- --------
Total from
investment
operations 2.42 (2.18) (3.16) 2.40 (1.67) 0.95
======== ======== ======== ======== ======== ========
Less distributions:
- -------------------
Dividends from net
investment income (0.10) -# (0.05) (0.11) -# -
-------- -------- -------- -------- -------- --------
Total
distributions (0.10) -# (0.05) (0.11) -# -
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 9.43 $ 7.11 $ 9.29 $ 9.39 $ 7.10 $ 9.43
======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 34.53% (23.46%) (25.3%)+ 34.25% (19.04%)+ 11.20%+
Net assets, end of period
(000's) $34,440 $20,607 $18,260 $20,494 $6,540 -##
Ratio of expenses to
average net assets 1.31% 1.28% 1.51%(A) 1.51% 1.48%(A) 347.24%(A)
Ratio of expenses to
average net assets after
expense reductions 1.31% 1.28% 1.40%(A) 1.51% 1.48%(A) 1.66%(A)
Ratio of net investment
income (loss) to average
net assets 1.64% 1.99% 1.07%(A) 1.36% 1.83%(A) 2.39%(A)
Portfolio turnover rate 131% 89% 81% 131% 89% 131%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
REAL ESTATE SECURITIES TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 15.44 $ 15.52 $ 15.57 $ 12.89 $ 14.76 $ 15.43 $ 15.44 $ 18.87
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.69 0.83 0.75 0.67 0.78 0.60 0.85 0.12
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 5.20 (0.38) (0.30) 2.53 (1.94) 5.25 (0.33) 1.86
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 5.89 0.45 0.45 3.20 (1.16) 5.85 0.52 1.98
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.48) (0.53) (0.50) (0.52) (0.71) (0.49) (0.53) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.48) (0.53) (0.50) (0.52) (0.71) (0.49) (0.53) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 15.44 $ 15.52 $ 15.57 $ 12.89 $ 20.79 $ 15.43 $ 20.85
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 39.15% 2.58% 3.15% 25.71% (8.00%) 38.93% 3.05%+ 10.49%+
Net assets, end of period
(000's) $447,860 $303,070 $220,919 $257,641 $196,756 $168,405 $48,749 $21
Ratio of expenses to average
net assets 0.80% 0.84% 0.83% 0.76% 0.77% 1.00% 1.04%(A) 11.07%(A)
Ratio of expenses to average
net assets after expense
reductions 0.80% 0.84% 0.83% 0.76% 0.77% 1.00% 1.04%(A) 1.15%(A)
Ratio of net investment income
(loss) to average net assets 3.93% 5.28% 4.96% 4.89% 5.88% 3.33% 6.03%(A) 1.94%(A)
Portfolio turnover rate 30% 74% 116% 147% 201% 30% 74% 30%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
## Amount is less than $1,000.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2001 for Series I and for
the period ended December 31, 2003 for Series III would have been lower, had
operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
154
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SMALL CAP OPPORTUNITIES TRUST
------------------------------------------
SERIES I SERIES II SERIES III
------------ ------------ ------------
5/05/2003* 5/05/2003* 9/5/2003*
TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.85
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.10 0.02 0.08
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 4.90 4.96 2.57
-------- -------- --------
Total from investment operations 5.00 4.98 2.65
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 17.50 $ 17.48 $ 17.50
======== ======== ========
TOTAL RETURN 40.00%+ 39.84%+ 17.85%+
Net assets, end of period (000's) $35,587 $33,352 $1
Ratio of expenses to average net assets 1.23%(A) 1.43%(A) 1.58%(A)
Ratio of net investment income (loss) to average net assets 0.33%(A) 0.23%(A) 1.49%(A)
Portfolio turnover rate 17% 17% 17%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
SMALL COMPANY VALUE TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.90 $ 13.80 $ 12.98 $ 12.27 $ 11.37 $ 12.89 $ 13.83 $ 15.97
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.04 0.08 0.09 0.04 0.02 0.01 0.13 0.02
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 4.28 (0.88) 0.76 0.69 0.89 4.29 (0.97) 1.15
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 4.32 (0.80) 0.85 0.73 0.91 4.30 (0.84) 1.17
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.06) (0.04) (0.03) (0.02) (0.01) (0.07) (0.04) -
Distributions from
capital gains (0.02) (0.06) - - - (0.02) (0.06) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.08) (0.10) (0.03) (0.02) (0.01) (0.09) (0.10) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 17.14 $ 12.90 $ 13.80 $ 12.98 $ 12.27 $ 17.10 $ 12.89 $ 17.14
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (B) 33.66% (5.93)% 6.54% 5.93% 8.00% 33.56% (6.20%)+ 7.33%+
Net assets, end of period
(000's) $385,926 $305,338 $213,046 $115,982 $89,167 $147,770 $50,843 -##
Ratio of expenses to average
net assets 1.11% 1.12% 1.16% 1.24% 1.22% 1.31% 1.32%(A) 1.46%(A)
Ratio of expenses to average
net assets after expense
reductions 1.11% 1.11% 1.15% 1.24% 1.22% 1.31% 1.31%(A) 1.46%(A)
Ratio of net investment income
(loss) to average net assets 0.26% 0.61% 0.72% 0.35% 0.15% 0.06% 1.12%(A) 0.39%(A)
Portfolio turnover rate 14% 19% 119% 178% 142% 14% 19% 14%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
## Amount is less than $1,000
(A) Annualized
(B) The total return for the years ended 2002 and 2001 for Series I and for the
period ended December 31, 2002 for Series II would have been lower, had
operating expenses not been reduced.
155
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SPECIAL VALUE TRUST
------------------------------------------
SERIES I SERIES II SERIES III
------------ ------------ ------------
5/05/2003* 5/05/2003* 9/05/2003*
TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.65
Income from investment operations:
- ----------------------------------
Net investment income (loss) (0.04) (0.06) 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 3.36 3.36 1.16
-------- -------- --------
Total from investment operations 3.32 3.30 1.17
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.82 $ 15.80 $ 15.82
======== ======== ========
TOTAL RETURN(B) 26.56%+ 26.40%+ 7.99%+
Net assets, end of period (000's) $10,896 $6,749 -##
Ratio of expenses to average net assets 1.64%(A) 1.84%(A) 208.58%(A)
Ratio of expenses to average net assets after expense
reductions 1.55%(A) 1.75%(A) 1.90%(A)
Ratio of net investment income (loss) to average net
assets (0.44%)(A) (0.68%)(A) 0.27%(A)
Portfolio turnover rate 26% 26% 26%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
MID CAP VALUE TRUST
-------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------- --------------------------- ------------
YEARS ENDED YEAR
DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003*
------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74 $ 13.06 $ 12.50 $ 11.74 $ 12.63 $ 13.38
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.09 0.11 0.06 0.07 0.09 0.01
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 2.87 (1.43) 0.53 2.86 (0.98) 1.26
-------- -------- ------- -------- -------- --------
Total from investment operations 2.96 (1.32) 0.59 2.93 (0.89) 1.27
-------- -------- ------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment income (0.05) - (0.03) (0.05) - -
Total distributions (0.05) - (0.03) (0.05) - -
-------- -------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 14.65 $ 11.74 $ 13.06 $ 14.62 $ 11.74 $ 14.65
======== ======== ======= ======== ======== ========
TOTAL RETURN(C) 25.36% (10.11%) 4.72%+ 25.14% (7.05%)+ 9.49%+
Net assets, end of period (000's) $283,432 $269,345 $80,737 $171,216 $71,096 $2
Ratio of expenses to average net assets 0.99% 1.02% 1.15%(A) 1.19% 1.22%(A) 42.62%(A)
Ratio of expenses to average net assets after
expense reductions 0.99% 1.02% 1.15%(A) 1.19% 1.22%(A) 1.34%(A)
Ratio of net investment income (loss) to average
net assets 0.76% 0.92% 0.75%(A) 0.54% 0.83%(A) 0.14%(A)
Portfolio turnover rate 34% 24% 23% 34% 24% 34%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series I,
Series II and Series III would have been lower, had operating expenses not
been reduced.
(C) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
156
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
VALUE TRUST
----------------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------------- ---------------------------
YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002*
---------------------------------------------------------- DECEMBER 31, TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002--
-------- ----------- ----------- -------- -------- ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.49 $ 16.47 $ 16.48 $ 13.23 $ 14.06 $ 12.48 $ 16.26
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.10 0.14 0.15 0.14 0.20 0.06 0.12
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 4.67 (3.82) 0.40 3.11 (0.59) 4.68 (3.60)
-------- -------- ------- -------- -------- -------- --------
Total from investment operations 4.77 (3.68) 0.55 3.25 (0.39) 4.74 (3.48)
-------- -------- ------- -------- -------- -------- --------
Less distributions:
- ----------------------------------
Dividends from net investment
income (0.17) (0.12) (0.11) - (0.20) (0.18) (0.12)
Distributions from capital gains - (0.18) (0.45) - (0.24) - (0.18)
-------- -------- ------- -------- -------- -------- --------
Total distributions (0.17) (0.30) (0.56) - (0.44) (0.18) (0.30)
-------- -------- ------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 17.09 $ 12.49 $ 16.47 $ 16.48 $ 13.23 $ 17.04 $ 12.48
======== ======== ======= ======== ======== ======== ========
TOTAL RETURN 38.76% (22.80%) 3.42% 24.57% (2.79%) 38.60% (21.87%)+
Net assets, end of period (000's) $272,292 $238,370 $360,027 $189,245 $146,279 $ 28,744 $ 11,473
Ratio of expenses to average net assets 0.87% 0.86% 0.86% 0.86% 0.87% 1.07% 1.06%(A)
Ratio of net investment income (loss)
to average net assets 0.71% 0.94% 0.92% 1.05% 1.12% 0.44% 1.02%(A)
Portfolio turnover rate 186% 52% 27% 65% 54% 186% 52%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
ALL CAP VALUE TRUST
----------------------------------------------------------------------------------
SERIES I SERIES II
------------------------------------- --------------------------- SERIES III
YEARS ENDED YEAR ------------
DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003*
---------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- ----------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.10 $ 12.61 $ 12.50 $ 9.09 $ 12.56 $ 11.33
Income from investment operations:
- ----------------------------------
Net investment income
(loss) 0.07 0.02 - # 0.05 - # 0.01
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 3.42 (3.53) 0.11 3.41 (3.47) 1.24
-------- -------- ------- -------- -------- --------
Total from investment
operations 3.49 (3.51) 0.11 3.46 (3.47) 1.25
-------- -------- ------- -------- -------- --------
Less distributions:
- ----------------------------------
Dividends from net
investment income (0.01) - # - # (0.01) - # -
-------- -------- ------- -------- -------- --------
Total distributions (0.01) - # - # (0.01) - # -
-------- -------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.58 $ 9.10 $ 12.61 $ 12.54 $ 9.09 $ 12.58
======== ======== ======= ======== ======== ========
TOTAL RETURN(B) 38.36% (27.83%) 0.90%+ 38.16% (27.63%)+ 11.03%+
Net assets, end of period (000's) $183,743 $ 32,237 $20,877 $101,429 $ 7,204 $ 4
Ratio of expenses to average net
assets 0.98% 1.15% 1.42%(A) 1.18% 1.35%(A) 20.92%(A)
Ratio of expenses to average net
assets after expense reductions 0.98% 1.15% 1.42%(A) 1.18% 1.34%(A) 1.33%(A)
Ratio of net investment income
(loss) to average net assets 0.64% 0.15% 0.05%(A) 0.44% 0.04%(A) 0.32%(A)
Portfolio turnover rate 52% 31% 194% 52% 31% 52%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
157
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
EQUITY INDEX TRUST
----------------------------------------------------
SERIES I
----------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2003-- 2002-- 2001-- 2000-- 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.77 $ 14.00 $ 16.40 $ 18.13 $ 15.43
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.16 0.15 0.14 0.16 0.17
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 2.84 (3.24) (2.14) (1.84) 3.00
-------- -------- -------- -------- --------
Total from investment operations 3.00 (3.09) (2.00) (1.68) 3.17
-------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment income (0.17) (0.14) (0.16) - (0.17)
Distributions from capital gains - - (0.24) (0.05) (0.30)
-------- -------- -------- -------- --------
Total distributions (0.17) (0.14) (0.40) (0.05) (0.47)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.60 $ 10.77 $ 14.00 $ 16.40 $ 18.13
======== ======== ======== ======== ========
TOTAL RETURN(B) 28.29% (22.30%) (12.26%) (9.29%) 20.58%
Net assets, end of period (000's) $81,536 $73,082 $103,007 $114,154 $114,775
Ratio of expenses to average net assets 0.50% 0.41% 0.41% 0.40% 0.41%
Ratio of expenses to average net assets after expense
reductions 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income (loss) to average net assets 1.38% 1.21% 0.97% 0.91% 1.17%
Portfolio turnover rate 2% 4% 4% 8% 10%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
FUNDAMENTAL VALUE TRUST
-------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------- --------------------------- ------------
YEARS ENDED YEAR
DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003*
------------------- TO DECEMBER 31, TO TO
2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.82 $ 11.73 $ 12.50 $ 9.82 $ 11.48 $ 11.28
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.08 0.07 0.03 0.06 0.07 0.02
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 2.84 (1.97) (0.80) 2.83 (1.72) 1.41
-------- -------- -------- -------- -------- --------
Total from investment operations 2.92 (1.90) (0.77) 2.89 (1.65) 1.43
-------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment income (0.03) (0.01) - (0.03) (0.01) -
-------- -------- -------- -------- -------- --------
Total distributions (0.03) (0.01) - (0.03) (0.01) -
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.71 $ 9.82 $ 11.73 $ 12.68 $ 9.82 $ 12.71
======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 29.83% (16.20%) (6.16%)+ 29.57% (14.46%)+ 12.68%+
Net assets, end of period (000's) $355,263 $269,250 $111,590 $203,168 $65,174 $9
Ratio of expenses to average net assets 0.97% 0.98% 1.07%(A) 1.17% 1.18%(A) 15.43%(A)
Ratio of expenses to average net assets after
expense reductions 0.97% 0.98% 1.07%(A) 1.17% 1.18%(A) 1.32%(A)
Ratio of net investment income (loss) to average
net assets 0.78% 0.71% 0.45%(A) 0.59% 0.75%(A) 0.55%(A)
Portfolio turnover rate 12% 19% 16% 12% 19% 12%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for
Series I would have been lower, had operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
158
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
GROWTH & INCOME TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------- --------------------------- SERIES III
YEAR ------------
YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/05/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 17.40 $ 23.91 $ 28.54 $ 32.67 $ 28.43 $ 17.39 $ 23.43 $ 20.21
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.17 0.16 0.12 0.10 0.17 0.13 0.12 0.04
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 4.41 (5.80) (3.32) (2.21) 5.12 4.41 (5.29) 1.54
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 4.58 (5.64) (3.20) (2.11) 5.29 4.54 (5.17) 1.58
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.19) (0.12) (0.11) (0.18) (0.19) (0.21) (0.12) -
Distributions from
capital gains - (0.75) (1.32) (1.84) (0.86) - (0.75) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.19) (0.87) (1.43) (2.02) (1.05) (0.21) (0.87) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 21.79 $ 17.40 $ 23.91 $ 28.54 $ 32.67 $ 21.72 $ 17.39 $ 21.79
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 26.45% (24.33%) (11.28%) (7.12%) 18.87% 26.41% (22.83%)+ 7.82%+
Net assets, end of period
(000's) $1,553,119 $1,436,309 $2,387,718 $2,914,338 $3,187,220 $114,785 $39,491 $1
Ratio of expenses to average
net assets 0.75% 0.75% 0.80% 0.79% 0.80% 0.95% 0.95%(A) 57.22%(A)
Ratio of expenses to average
net assets after expense
reductions 0.75% 0.75% 0.80% 0.79% 0.80% 0.95% 0.95%(A) 1.10%(A)
Ratio of net investment income
(loss) to average net assets 0.92% 0.79% 0.48% 0.33% 0.63% 0.69% 0.77%(A) 0.67%(A)
Portfolio turnover rate 39% 40% 24% 32% 19% 39% 40% 39%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
GREAT
COMPANIES
AMERICA
------------
SERIES II
------------
08/04/2003*
TO
12/31/2003--
------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50
Income from investment operations:
- ----------------------------------
Net investment income (loss) -#
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 1.51
--------
Total from investment operations 1.51
--------
Less distributions:
- -------------------
Dividends from net investment income (0.01)
--------
Total distributions (0.01)
--------
NET ASSET VALUE, END OF PERIOD $ 14.00
========
TOTAL RETURN(C) 12.07%+
Net assets, end of period (000's) $2,796
Ratio of expenses to average net assets 3.14%(A)
Ratio of expenses to average net assets
after expense reductions 1.60%(A)
Ratio of net investment income (loss) to
average net assets (0.02%)(A)
Portfolio turnover rate 5%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series II would
have been lower, had operating expenses not been reduced.
159
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
EQUITY-INCOME TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.62 $ 15.13 $ 16.83 $ 17.05 $ 17.78 $ 12.61 $ 15.05 $ 13.86
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.23 0.22 0.22 0.30 0.35 0.21 0.21 0.07
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 2.85 (2.13) (0.06) 1.63 0.25 2.84 (2.05) 1.29
-------- -------- -------- -------- -------- ------------ -------- --------
Total from investment
operations 3.08 (1.91) 0.16 1.93 0.60 3.05 (1.84) 1.36
-------- -------- -------- -------- -------- ------------ -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.22) (0.19) (0.29) (0.34) (0.37) (0.23) (0.19) -
Distributions from
capital gains (0.26) (0.41) (1.57) (1.81) (0.96) (0.26) (0.41) -
-------- -------- -------- -------- -------- ------------ -------- --------
Total distributions (0.48) (0.60) (1.86) (2.15) (1.33) (0.49) (0.60) -
-------- -------- -------- -------- -------- ------------ -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.22 $ 12.62 $ 15.13 $ 16.83 $ 17.05 $ 15.17 $ 12.61 $ 15.22
======== ======== ======== ======== ======== ============ ======== ========
TOTAL RETURN(B) 25.57% (13.28%) 1.29% 12.99% 3.40% 25.40% (12.89%)+ 9.81%+
Net assets, end of period
(000's) $1,277,187 $1,015,246 $1,147,075 $965,675 $1,011,260 $314,184 $87,245 $8
Ratio of expenses to average
net assets 0.92% 0.93% 0.93% 0.92% 0.91% 1.12% 1.13%(A) 14.85%(A)
Ratio of expenses to average
net assets after expense
reductions 0.89% 0.91% 0.91% 0.91% 0.91% 1.09% 1.11%(A) 1.24%(A)
Ratio of net investment income
(loss) to average net assets 1.73% 1.58% 1.45% 1.94% 1.83% 1.55% 1.83%(A) 1.57%(A)
Portfolio turnover rate 15% 18% 19% 34% 30% 15% 18% 15%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
INCOME & VALUE TRUST
----------------------------------------------------------------------------------
SERIES I SERIES II
---------------------------------------------------- ---------------------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002*
---------------------------------------------------- DECEMBER 31, TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002--
-------- -------- -------- -------- -------- ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.36 $ 10.13 $ 10.56 $ 12.91 $ 13.36 $ 8.35 $ 10.01
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.13 0.17 0.19 0.27 0.32 0.11 0.12
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 2.04 (1.76) (0.11) 0.33 0.77 2.04 (1.60)
-------- -------- -------- -------- -------- ------------ --------
Total from investment operations 2.17 (1.59) 0.08 0.60 1.09 2.15 (1.48)
-------- -------- -------- -------- -------- ------------ --------
Less distributions:
- -------------------
Dividends from net investment income (0.18) (0.18) (0.28) (0.33) (0.40) (0.19) (0.18)
Distributions from capital gains - - (0.23) (2.62) (1.14) - -
-------- -------- -------- -------- -------- ------------ --------
Total distributions (0.18) (0.18) (0.51) (2.95) (1.54) (0.19) (0.18)
-------- -------- -------- -------- -------- ------------ --------
NET ASSET VALUE, END OF PERIOD $ 10.35 $ 8.36 $ 10.13 $ 10.56 $ 12.91 $ 10.31 $ 8.35
======== ======== ======== ======== ======== ============ ========
TOTAL RETURN 26.48% (15.93%) 0.98% 4.94% 8.52% 26.29% (15.02%)+
Net assets, end of period (000's) $521,949 $448,524 $561,623 $546,311 $639,824 $80,776 $22,839
Ratio of expenses to average net assets 0.87% 0.88% 0.87% 0.86% 0.86% 1.07% 1.08%(A)
Ratio of net investment income (loss) to
average net assets 1.45% 1.90% 1.90% 2.46% 2.39% 1.19% 1.55%(A)
Portfolio turnover rate 91% 61% 70% 51% 165% 91% 61%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001 and 2000 for Series I,
for the year ended 2003 and the period ended December 31, 2002 for Series II
and for the period ended for December 31, 2003 for Series III would have
been lower, had operating expenses not been reduced.
160
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
GLOBAL ALLOCATION TRUST
(FORMERLY, TACTICAL ALLOCATION TRUST)
---------------------------------------------------------------------------------
SERIES I SERIES II
--------------------------------------------------- ---------------------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002*
------------------------------------ TO DECEMBER 31, TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002--
---------- ---------- ---------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 7.71 $ 10.04 $ 11.67 $ 12.50 $ 7.70 $ 9.91
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.06 0.04 0.01 0.15 0.04 0.04
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 1.97 (2.37) (1.57) (0.55) 1.99 (2.25)
---------- ---------- ---------- -------- -------- --------
Total from investment
operations 2.03 (2.33) (1.56) (0.40) 2.03 (2.21)
---------- ---------- ---------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.04) - # (0.01) (0.15) (0.05) - #
Distributions from
capital gains - - (0.06) (0.28) - -
---------- ---------- ---------- -------- -------- --------
Total distributions (0.04) - # (0.07) (0.43) (0.05) - #
---------- ---------- ---------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.70 $ 7.71 $ 10.04 $ 11.67 $ 9.68 $ 7.70
========== ========== ========== ======== ======== ========
TOTAL RETURN 26.43% (23.21%) (13.38%) (3.20%)+ 26.47% (22.30%)+
Net assets, end of period
(000's) $64,143 $57,408 $73,714 $43,263 $18,820 $5,364
Ratio of expenses to average
net assets 1.22% 1.18% 1.30% 1.33%(A) 1.42% 1.38%(A)
Ratio of net investment income
(loss) to average net assets 0.74% 0.44% 0.11% 1.74%(A) 0.49% 0.51%(A)
Portfolio turnover rate 147% 18% 25% 133% 147% 18%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
# Amount is less than $.01 per share.
(A) Annualized
161
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
HIGH YIELD TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.50 $ 9.88 $ 11.65 $ 12.83 $ 12.92 $ 8.49 $ 9.95 $ 9.21
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.69 0.75 1.06 1.26 1.14 0.68 0.47 0.22
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 1.28 (1.37) (1.64) (2.40) (0.12) 1.27 (1.17) 0.52
-------- -------- -------- -------- -------- ------------ -------- --------
Total from investment
operations 1.97 (0.62) (0.58) (1.14) 1.02 1.95 (0.70) 0.74
-------- -------- -------- -------- -------- ------------ -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.52) (0.76) (1.19) (0.04) (1.11) (0.53) (0.76) -
-------- -------- -------- -------- -------- ------------ -------- --------
Total distributions (0.52) (0.76) (1.19) (0.04) (1.11) (0.53) (0.76) -
-------- -------- -------- -------- -------- ------------ -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.95 $ 8.50 $ 9.88 $ 11.65 $ 12.83 $ 9.91 $ 8.49 $ 9.95
======== ======== ======== ======== ======== ============ ======== ========
TOTAL RETURN(B) 24.15% (6.65%) (5.48%) (8.97%) 8.00% 23.91% (7.42%)+ 8.03%+
Net assets, end of period
(000's) $621,277 $336,640 $323,309 $238,207 $241,054 $295,865 $50,127 $16
Ratio of expenses to average
net assets 0.82% 0.84% 0.84% 0.84% 0.84% 1.02% 1.04%(A) 11.65%(A)
Ratio of expenses to average
net assets after expense
reductions 0.82% 0.84% 0.84% 0.84% 0.84% 1.02% 1.04%(A) 1.17%(A)
Ratio of net investment income
(loss) to average net assets 7.56% 8.55% 10.10% 10.15% 8.59% 7.38% 6.18%(A) 7.15%(A)
Portfolio turnover rate 75% 53% 64% 57% 62% 75% 53% 75%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
STRATEGIC BOND TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.89 $ 10.74 $ 10.92 $ 11.14 $ 11.72 $ 10.88 $ 10.88 $ 11.17
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.56 0.71 0.73 0.87 1.00 0.51 0.60 0.15
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.82 0.21 (0.07) (0.11) (0.75) 0.85 0.17 0.41
-------- -------- -------- -------- -------- ------------ -------- --------
Total from investment
operations 1.38 0.92 0.66 0.76 0.25 1.36 0.77 0.56
-------- -------- -------- -------- -------- ------------ -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.54) (0.77) (0.84) (0.98) (0.83) (0.55) (0.77) -
-------- -------- -------- -------- -------- ------------ -------- --------
Total distributions (0.54) (0.77) (0.84) (0.98) (0.83) (0.55) (0.77) -
-------- -------- -------- -------- -------- ------------ -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.73 $ 10.89 $ 10.74 $ 10.92 $ 11.14 $ 11.69 $ 10.88 $ 11.73
======== ======== ======== ======== ======== ============ ======== ========
TOTAL RETURN(B) 13.11% 8.96% 6.24% 7.28% 2.22% 12.93% 7.46%+ 5.01%+
Net assets, end of period
(000's) $456,192 $406,972 $302,499 $333,293 $368,380 $151,218 $42,538 $13
Ratio of expenses to average
net assets 0.86% 0.86% 0.86% 0.87% 0.87% 1.06% 1.06%(A) 12.56%(A)
Ratio of expenses to average
net assets after expense
reductions 0.86% 0.86% 0.86% 0.87% 0.87% 1.06% 1.06%(A) 1.21%(A)
Ratio of net investment income
(loss) to average net assets 4.96% 6.78% 6.85% 8.15% 8.15% 4.56% 6.18%(A) 4.11%(A)
Portfolio turnover rate 80% 86% 85% 175% 107% 80% 86% 80%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
162
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
GLOBAL BOND TRUST
-----------------------------------------------------------------------------
SERIES I SERIES II
-------------------------------------------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED
-------------------------------------------------------------- DECEMBER 31,
2003-- 2002-- 2001-- 2000-- 1999 2003--
---------- ---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 13.79 $ 11.48 $ 11.42 $ 11.60 $ 13.73 $ 13.77
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.39 0.40 0.38 0.51 0.67 0.33
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 1.67 1.91 (0.32) (0.33) (1.55) 1.70
---------- ---------- ---------- ---------- ---------- --------
Total from investment
operations 2.06 2.31 0.06 0.18 (0.88) 2.03
---------- ---------- ---------- ---------- ---------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.51) - - (0.36) (1.25) (0.51)
---------- ---------- ---------- ---------- ---------- --------
Total distributions (0.51) - - (0.36) (1.25) (0.51)
---------- ---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD $ 15.34 $ 13.79 $ 11.48 $ 11.42 $ 11.60 $ 15.29
========== ========== ========== ========== ========== ========
TOTAL RETURN(B) 15.40% 20.12% 0.53% 1.68% (6.67%) 15.25%
Net assets, end of period
(000's) $195,165 $181,728 $96,534 $116,370 $145,992 $64,400
Ratio of expenses to average net
assets 0.91% 0.92% 1.02% 1.00% 0.98% 1.11%
Ratio of expenses to average net
assets after expense reductions 0.91% 0.92% 1.02% 1.00% 0.98% 1.11%
Ratio of net investment income
(loss) to average net assets 2.75% 3.20% 3.29% 4.61% 4.38% 2.33%
Portfolio turnover rate 338% 439% 527% 644% 471% 338%
<Caption>
GLOBAL BOND TRUST
---------------------------
SERIES II SERIES III
------------ ------------
1/28/2002* 9/5/2003*
TO TO
12/31/2002-- 12/31/2003--
------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 11.36 $ 13.72
Income from investment
operations:
- --------------------------------
Net investment income
(loss) 0.37 0.02
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 2.04 1.60
-------- --------
Total from investment
operations 2.41 1.62
-------- --------
Less distributions:
- -------------------
Dividends from net
investment income - -
-------- --------
Total distributions - -
-------- --------
NET ASSET VALUE, END OF PERIOD $ 13.77 $ 15.34
======== ========
TOTAL RETURN(B) 21.21%+ 11.81%+
Net assets, end of period
(000's) $21,820 $5
Ratio of expenses to average net
assets 1.12%(A) 18.10%(A)
Ratio of expenses to average net
assets after expense reductions 1.12%(A) 1.26%(A)
Ratio of net investment income
(loss) to average net assets 3.07%(A) 0.53%(A)
Portfolio turnover rate 439% 338%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
DIVERSIFIED BOND TRUST
-----------------------------------------------------------------------------
SERIES I SERIES II
-------------------------------------------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED
-------------------------------------------------------------- DECEMBER 31,
2003-- 2002-- 2001-- 2000-- 1999 2003--
---------- ---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.89 $ 10.59 $ 10.47 $ 10.82 $ 11.83 $ 10.88
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.40 0.53 0.57 0.66 0.56 0.35
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 0.09 0.24 0.14 0.34 (0.46) 0.13
---------- ---------- ---------- ---------- ---------- -------
Total from investment
operations 0.49 0.77 0.71 1.00 0.10 0.48
---------- ---------- ---------- ---------- ---------- -------
Less distributions:
- -------------------
Dividends from net
investment income (0.52) (0.47) (0.59) (0.58) (0.49) (0.52)
Distributions from
capital gains - - - (0.77) (0.62) -
---------- ---------- ---------- ---------- ---------- -------
Total distributions (0.52) (0.47) (0.59) (1.35) (1.11) (0.52)
---------- ---------- ---------- ---------- ---------- -------
NET ASSET VALUE, END OF PERIOD $ 10.86 $ 10.89 $ 10.59 $ 10.47 $ 10.82 $ 10.84
========== ========== ========== ========== ========== =======
TOTAL RETURN 4.60% 7.61% 7.09% 10.32% 0.72% 4.59%
Net assets, end of period
(000's) $296,041 $329,804 $286,742 $212,462 $218,868 $57,909
Ratio of expenses to average net
assets 0.83% 0.82% 0.82% 0.81% 0.84% 1.03%
Ratio of net investment income
(loss) to average net assets 3.69% 5.03% 5.40% 6.50% 5.18% 3.31%
Portfolio turnover rate 193% 83% 140% 76% 173% 193%
<Caption>
DIVERSIFIED BOND TRUST
---------------------------
SERIES II SERIES III
------------ ------------
1/28/2002* 9/5/2003*
TO TO
12/31/2002-- 12/31/2003--
------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $10.62 $10.54
Income from investment
operations:
- --------------------------------
Net investment income
(loss) 0.44 0.08
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 0.29 0.24
------ ------
Total from investment
operations 0.73 0.32
------ ------
Less distributions:
- -------------------
Dividends from net
investment income (0.47) -
Distributions from
capital gains - -
------ ------
Total distributions (0.47) -
------ ------
NET ASSET VALUE, END OF PERIOD $10.88 $10.86
====== ======
TOTAL RETURN 7.21%+ 3.04%+
Net assets, end of period
(000's) $25,249 $5
Ratio of expenses to average net
assets 1.02%(A) 1.18%(A)
Ratio of net investment income
(loss) to average net assets 4.52%(A) 2.30%(A)
Portfolio turnover rate 83% 193%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
163
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
INVESTMENT QUALITY BOND TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 12.33 $ 11.85 $ 11.74 $ 11.60 $ 12.46 $ 12.32 $ 11.94 $12.08
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.61 0.67 0.74 0.79 0.81 0.57 0.56 0.17
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.26 0.45 0.09 0.24 (1.02) 0.29 0.46 0.33
-------- -------- -------- -------- -------- ------- ------- ------
Total from investment
operations 0.87 1.12 0.83 1.03 (0.21) 0.86 1.02 0.50
-------- -------- -------- -------- -------- ------- ------- ------
Less distributions:
- ----------------------------------
Dividends from net
investment income (0.62) (0.64) (0.72) (0.89) (0.65) (0.63) (0.64) -
-------- -------- -------- -------- -------- ------- ------- ------
Total distributions (0.62) (0.64) (0.72) (0.89) (0.65) (0.63) (0.64) -
-------- -------- -------- -------- -------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD $ 12.58 $ 12.33 $ 11.85 $ 11.74 $ 11.60 $ 12.55 $ 12.32 $12.58
======== ======== ======== ======== ======== ======= ======= ======
TOTAL RETURN(B) 7.32% 9.94% 7.33% 9.40% (1.79)% 7.24% 9.02%+ 4.14%+
Net assets, end of period
(000's) $399,189 $469,334 $407,652 $282,725 $288,594 $84,928 $38,021 $22
Ratio of expenses to average
net assets 0.75% 0.74% 0.74% 0.73% 0.77% 0.95% 0.94%(A) 11.06%(A)
Ratio of expenses to average
net assets after expense
reductions 0.75% 0.74% 0.74% 0.73% 0.77% 0.95% 0.94%(A) 1.10%(A)
Ratio of net investment income
(loss) to average net assets 4.93% 5.71% 6.28% 6.95% 6.79% 4.64% 5.07%(A) 4.31%(A)
Portfolio turnover rate 59% 46% 50% 35% 36% 59% 46% 59%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
TOTAL RETURN TRUST
--------------------------------------------------------------------------
SERIES I SERIES II
--------------------------------------------- ------------
YEARS ENDED DECEMBER 31, 05/01/1999* YEAR ENDED
--------------------------------------------- TO DECEMBER 31,
2003-- 2002-- 2001-- 2000-- 12/31/1999 2003--
---------- ---------- -------- -------- ----------- ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.43 $ 13.88 $ 13.33 $ 12.37 $ 12.50 $ 14.42
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.35 0.49 0.61 0.79 0.35 0.31
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.35 0.78 0.51 0.48 (0.48) 0.37
---------- ---------- -------- -------- -------- --------
Total from investment
operations 0.70 1.27 1.12 1.27 (0.13) 0.68
---------- ---------- -------- -------- -------- --------
Less distributions:
- ----------------------------------
Dividends from net investment
income (0.77) (0.42) (0.57) (0.31) - (0.78)
Distributions from capital
gains (0.15) (0.30) - - - (0.15)
---------- ---------- -------- -------- -------- --------
Total distributions (0.92) (0.72) (0.57) (0.31) - (0.93)
---------- ---------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 14.21 $ 14.43 $ 13.88 $ 13.33 $ 12.37 $ 14.17
========== ========== ======== ======== ======== ========
TOTAL RETURN(B) 5.02% 9.52% 8.28% 10.49% (1.04%)+ 4.87%
Net assets, end of period (000's) $1,036,128 $1,072,629 $736,472 $387,647 $240,016 $491,176
Ratio of expenses to average net
assets 0.82% 0.81% 0.83% 0.84% 0.84%(A) 1.02%
Ratio of expenses to average net
assets after expense reductions 0.82% 0.81% 0.83% 0.84% 0.84%(A) 1.02%
Ratio of net investment income
(loss) to average net assets 2.48% 3.53% 4.52% 6.23% 5.72%(A) 2.15%
Portfolio turnover rate 285% 381% 439% 551% 95% 285%
<Caption>
TOTAL RETURN TRUST
---------------------------
SERIES II SERIES III
------------ ------------
1/28/2002* 9/5/2003*
TO TO
12/31/2002-- 12/31/2003--
------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.00 $13.75
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.36 0.08
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.78 0.38
-------- ------
Total from investment
operations 1.14 0.46
-------- ------
Less distributions:
- ----------------------------------
Dividends from net investment
income (0.42) -
Distributions from capital
gains (0.30) -
-------- ------
Total distributions (0.72) -
-------- ------
NET ASSET VALUE, END OF PERIOD $ 14.42 $14.21
======== ======
TOTAL RETURN(B) 8.51%+ 3.35%+
Net assets, end of period (000's) $218,354 $337
Ratio of expenses to average net
assets 1.01%(A) 7.92%(A)
Ratio of expenses to average net
assets after expense reductions 1.01%(A) 1.17%(A)
Ratio of net investment income
(loss) to average net assets 2.78%(A) 1.74%(A)
Portfolio turnover rate 381% 285%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
164
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
REAL RETURN BOND TRUST
------------------------------------------
SERIES I SERIES II SERIES III
------------ ------------ ------------
5/05/2003* 5/05/2003* 9/5/2003*
TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 12.41
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.08 0.06 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.53 0.54 0.69
------- ------- -------
Total from investment operations 0.61 0.60 0.70
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 13.11 $ 13.10 $ 13.11
======= ======= =======
TOTAL RETURN(B) 4.88%+ 4.80%+ 5.64%+
Net assets, end of period (000's) $137,432 $142,254 $8
Ratio of expenses to average net assets 0.83%(A) 1.03%(A) 14.88%(A)
Ratio of expenses to average net assets after expense
reductions 0.83%(A) 1.03%(A) 1.18%(A)
Ratio of net investment income (loss) to average net assets 1.00%(A) 0.67%(A) 0.20%(A)
Portfolio turnover rate 574% 574% 574%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
U.S. GOVERNMENT SECURITIES TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.22 $ 13.72 $ 13.57 $ 13.24 $ 13.82 $ 14.21 $ 13.77 $ 13.70
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.21 0.54 0.69 0.85 0.74 0.18 0.39 0.03
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.03 0.52 0.23 0.50 (0.77) 0.04 0.61 0.28
-------- -------- -------- -------- -------- ------------ ------- -------
Total from investment
operations 0.24 1.06 0.92 1.35 (0.03) 0.22 1.00 0.31
-------- -------- -------- -------- -------- ------------ ------- -------
Less distributions:
- -------------------
Dividends from net
investment income (0.45) (0.56) (0.77) (1.02) (0.55) (0.46) (0.56) -
-------- -------- -------- -------- -------- ------------ ------- -------
Total distributions (0.45) (0.56) (0.77) (1.02) (0.55) (0.46) (0.56) -
-------- -------- -------- -------- -------- ------------ ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.01 $ 14.22 $ 13.72 $ 13.57 $ 13.24 $ 13.97 $ 14.21 $ 14.01
======== ======== ======== ======== ======== ============ ======= =======
TOTAL RETURN(B) 1.73% 7.99% 7.03% 10.87% (0.23%) 1.59% 7.53%+ 2.26%+
Net assets, end of period
(000's) $524,845 $707,709 $558,392 $333,163 $363,269 $207,778 $128,200 $106
Ratio of expenses to average
net assets 0.73% 0.74% 0.71% 0.72% 0.72% 0.93% 0.94%(A) 8.13%(A)
Ratio of expenses to average
net assets after expense
reductions 0.73% 0.74% 0.71% 0.72% 0.72% 0.93% 0.94%(A) 1.08%(A)
Ratio of net investment income
(loss) to average net assets 1.52% 3.88% 5.10% 6.56% 6.03% 1.28% 3.04%(A) 0.82%(A)
Portfolio turnover rate 97% 19% 41% 58% 40% 97% 19% 97%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
165
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
MONEY MARKET TRUST
-------------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------- YEAR ENDED 1/28/2002* 9/5/2003*
DECEMBER 31, TO TO
2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- -------- -------- ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income from investment
operations:
- ----------------------------------
Net investment income
(loss) 0.06 0.12 0.34 0.57 0.45 0.04 0.08 -#
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0.06 0.12 0.34 0.57 0.45 0.04 0.08 -#
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.06) (0.12) (0.34) (0.57) (0.45) (0.04) (0.08) -#
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.06) (0.12) (0.34) (0.57) (0.45) (0.04) (0.08) -#
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 0.58% 1.18% 3.59% 5.88% 4.60% 0.38% 0.89%+ 0.04%+
Net assets, end of period
(000's) $1,037,112 $1,415,874 $1,484,694 $950,155 $1,084,859 $183,428 $201,613 $2,152
Ratio of expenses to average
net assets 0.55% 0.55% 0.55% 0.54% 0.55% 0.75% 0.75%(A) 8.15%(A)
Ratio of expenses to average
net assets after expense
reductions 0.55% 0.55% 0.55% 0.54% 0.55% 0.75% 0.75%(A) 0.90%(A)
Ratio of net investment income
(loss) to average net assets 0.59% 1.17% 3.38% 5.71% 4.54% 0.38% 0.91%(A) 0.14%(A)
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
SMALL CAP INDEX TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.78 $ 11.28 $ 11.29 $ 12.50 $ 8.78 $ 11.07 $ 11.77
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.06 0.10 0.20 0.46 0.04 0.07 0.01
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 3.96 (2.52) (0.03) (1.26) 3.94 (2.28) 1.02
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 4.02 (2.42) 0.17 (0.80) 3.98 (2.21) 1.03
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income - (0.08) (0.18) (0.41) - (0.08) -
-------- -------- -------- -------- -------- -------- --------
Total distributions - (0.08) (0.18) (0.41) - (0.08) -
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.80 $ 8.78 $ 11.28 $ 11.29 $ 12.76 $ 8.78 $ 12.80
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 45.79% (21.47%) 1.50% (6.38%)+ 45.33% (19.95%)+ 8.75%+
Net assets, end of period (000's) $136,719 $59,161 $50,280 $34,825 $38,350 $9,714 $6
Ratio of expenses to average net
assets 0.58% 0.59% 0.60% 0.65%(A) 0.78% 0.79%(A) 16.49%(A)
Ratio of expenses to average net
assets after expense reductions 0.58% 0.59% 0.60% 0.60%(A) 0.78% 0.79%(A) 0.93%(A)
Ratio of net investment income (loss)
to average net assets 0.61% 1.05% 1.87% 5.63%(A) 0.39% 0.87%(A) 0.18%(A)
Portfolio turnover rate 36% 57% 32% 1% 36% 57% 36%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
166
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
INTERNATIONAL INDEX TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.96 $ 8.52 $ 11.11 $ 12.50 $ 6.96 $ 8.15 $ 7.96
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.13 0.12 0.12 0.09 0.12 0.05 -#
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 2.11 (1.58) (2.61) (1.32) 2.11 (1.14) 1.24
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 2.24 (1.46) (2.49) (1.23) 2.23 (1.09) 1.24
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income (0.12) (0.10) (0.10) (0.16) (0.11) (0.10) (0.13)
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.12) (0.10) (0.10) (0.16) (0.11) (0.10) (0.13)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.08 $ 6.96 $ 8.52 $ 11.11 $ 9.08 $ 6.96 $ 9.07
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 32.18% (17.15%) (22.41%) (9.84%)+ 32.12% (13.35%)+ 15.57%+
Net assets, end of period (000's) $82,197 $50,675 $49,673 $49,180 $17,176 $5,338 $3
Ratio of expenses to average net
assets 0.62% 0.62% 0.62% 0.65%(A) 0.82% 0.82%(A) 78.84%(A)
Ratio of expenses to average net
assets after expense reductions 0.60% 0.60% 0.60% 0.60%(A) 0.80% 0.80%(A) 0.95%(A)
Ratio of net investment income (loss)
to average net assets 1.75% 1.57% 1.25% 1.17%(A) 1.57% 0.81%(A) 0.17%(A)
Portfolio turnover rate 13% 7% 12% 8% 13% 7% 13%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
MID CAP INDEX TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.82 $ 12.82 $ 13.11 $ 12.50 $ 10.81 $ 12.80 $ 13.31
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.08 0.07 0.11 0.10 0.05 0.05 0.04
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 3.66 (2.01) (0.32) 0.77 3.66 (1.98) 1.21
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 3.74 (1.94) (0.21) 0.87 3.71 (1.93) 1.25
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income - (0.06) (0.08) (0.08) - (0.06) -
Distributions from capital
gains - - - (0.18) - - -
-------- -------- -------- -------- -------- -------- --------
Total distributions - (0.06) (0.08) (0.26) - (0.06) -
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 14.56 $ 10.82 $ 12.82 $ 13.11 $ 14.52 $ 10.81 $ 14.56
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 34.57% (15.16%) (1.73%) 7.15%+ 34.32% (15.07%)+ 9.39%+
Net assets, end of period (000's) $145,255 $87,282 $58,197 $32,007 $42,657 $12,810 -##
Ratio of expenses to average net
assets 0.58% 0.58% 0.60% 0.69%(A) 0.78% 0.78%(A) 128.76%(A)
Ratio of expenses to average net
assets after expense reductions 0.58% 0.58% 0.60% 0.60%(A) 0.78% 0.78%(A) 0.93%(A)
Ratio of net investment income (loss)
to average net assets 0.62% 0.58% 0.85% 1.17%(A) 0.42% 0.42%(A) 0.88%(A)
Portfolio turnover rate 8% 20% 19% 49% 8% 20% 8%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
## Amount is less than $1,000
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001 and the period ended
December 31, 2000 for Series I, for the year ended 2003 and the period ended
December 31, 2002 for Series II and for the period ended December 31, 2003
for Series III would have been lower, had operating expenses not been
reduced.
(C) The total return for the period ended December 31, 2000 for Series I and for
the period ended December 31, 2003 for Series III would have been lower, had
operating expenses not been reduced.
167
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
TOTAL STOCK MARKET INDEX TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.63 $ 9.79 $ 11.14 $ 12.50 $ 7.62 $ 9.67 $ 9.17
Income from investment operations:
- ----------------------------------
Net investment income (loss) 0.09 0.08 0.09 0.08 0.07 0.07 0.03
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 2.24 (2.16) (1.36) (1.33) 2.24 (2.04) 0.76
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 2.33 (2.08) (1.27) (1.25) 2.31 (1.97) 0.79
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income - (0.08) (0.08) (0.06) - (0.08) -
Distributions from capital
gains - - - (0.05) - - -
-------- -------- -------- -------- -------- -------- --------
Total distributions - (0.08) (0.08) (0.11) - (0.08) -
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96 $ 7.63 $ 9.79 $ 11.14 $ 9.93 $ 7.62 $ 9.96
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 30.54% (21.29%) (11.41%) (10.04%)+ 30.31% (20.36%)+ 8.62%+
Net assets, end of period (000's) $133,964 $59,970 $73,657 $56,390 $29,972 $6,163 $1
Ratio of expenses to average net
assets 0.58% 0.59% 0.59% 0.62%(A) 0.78% 0.79%(A) 122.81%(A)
Ratio of expenses to average net
assets after expense reductions 0.58% 0.59% 0.59% 0.60%(A) 0.78% 0.79%(A) 0.93%(A)
Ratio of net investment income (loss)
to average net assets 1.05% 0.96% 0.93% 0.93%(A) 0.86% 0.98%(A) 0.96%(A)
Portfolio turnover rate 6% 4% 5% 16% 6% 4% 6%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
500 INDEX TRUST
------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
--------------------------------------------- --------------------------- ------------
YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------ TO DECEMBER 31, TO TO
2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003--
-------- -------- -------- ------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.60 $ 9.81 $ 11.28 $ 12.50 $ 7.59 $ 9.68 $ 8.87
Income from investment operations:
- -------------------
Net investment income (loss) 0.10 0.09 0.09 0.09 0.09 0.08 0.03
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 2.01 (2.30) (1.48) (1.29) 1.99 (2.17) 0.73
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations 2.11 (2.21) (1.39) (1.20) 2.08 (2.09) 0.76
-------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income (0.08) -# (0.08) (0.02) (0.08) -# -
-------- -------- -------- -------- -------- -------- --------
Total distributions (0.08) -# (0.08) (0.02) (0.08) -# -
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.63 $ 7.60 $ 9.81 $ 11.28 $ 9.59 $ 7.59 $ 9.63
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 28.01% (22.53%) (12.37%) (9.57%)+ 27.76% (21.59%)+ 8.57%+
Net assets, end of period (000's) $980,366 $678,414 $772,559 $680,264 $115,826 $38,267 $16
Ratio of expenses to average net
assets 0.57% 0.57% 0.57% 0.55%(A) 0.77% 0.77%(A) 11.12%(A)
Ratio of expenses to average net
assets after expense reductions 0.57% 0.57% 0.57% 0.55%(A) 0.77% 0.77%(A) 0.92%(A)
Ratio of net investment income (loss)
to average net assets 1.22% 1.05% 0.84% 1.08%(A) 1.02% 1.12%(A) 1.09%(A)
Portfolio turnover rate 1% 6% 1% 6% 1% 6% 1%
</Table>
- -- Net investment income has been calculated using the average shares method.
* Commencement of operations
# Amount is less than $.01 per share.
+ Not Annualized
(A) Annualized
(B) The total return for the period ended December 31, 2000 for Series I and for
the period ended December 31, 2003 for Series III would have been lower, had
operating expenses not been reduced.
(C) The total return for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
168
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIFESTYLE AGGRESSIVE 1000 TRUST
---------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- ------------------------- ----------
YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003
-------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 8.14 $ 10.34 $ 13.09 $ 14.54 $ 13.39 $ 8.14 $ 10.09 $ 9.80
Income from investment
operations:
- ----------------------------
Net investment income
(loss)** 0.02 0.04 0.04 0.05 0.08 0.02 0.04 0.00
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 2.81 (2.16) (1.84) (0.78) 1.77 2.81 (1.91) 1.13
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 2.83 (2.12) (1.80) (0.73) 1.85 2.83 (1.87) 1.13
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.02) (0.04) (0.04) (0.05) (0.08) (0.02) (0.04) -
Distributions from
capital gains - - (0.53) (0.67) (0.62) - - -
Return of capital (0.02) (0.04) (0.38) - - (0.02) (0.04) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.04) (0.08) (0.95) (0.72) (0.70) (0.04) (0.08) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 10.93 $ 8.14 $ 10.34 $ 13.09 $ 14.54 $ 10.93 $ 8.14 $ 10.93
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 34.91% (20.71%) (13.67%) (5.11%) 14.61% 34.91% (18.74%)+ 11.53%+
Net assets, end of period
(000's) $327,927 $185,893 $187,473 $148,693 $93,073 $157,764 $27,099 $7
Ratio of expenses to average
net assets*** 0.079% 0.10% 0.10% 0.075% 0.03% 0.079% 0.10%(A) 21.50%(A)
Ratio of expenses to average
net assets after expense
reductions*** 0.075% 0.075% 0.075% 0.05% 0.03% 0.075% 0.075%(A) 0.225%(A)
Ratio of net investment
income (loss) to average net
assets** 0.23% 0.33% 0.29% 0.33% 0.64% 0.11% (0.05%)(A) (0.13%)(A)
Portfolio turnover rate 53% 90% 82% 104% 136% 53% 90% 53%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIFESTYLE GROWTH 820 TRUST
---------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- ------------------------- ----------
YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003
-------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.28 $ 11.25 $ 13.59 $ 15.18 $ 13.78 $ 9.28 $ 11.06 $ 10.77
Income from investment
operations:
- ----------------------------
Net investment income
(loss)** 0.09 0.14 0.18 0.13 0.23 0.09 0.14 -
Net realized and
unrealized gain
(loss) on investments
and foreign currency
transactions 2.61 (1.89) (1.43) (0.57) 1.94 2.60 (1.70) 1.09
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 2.70 (1.75) (1.25) (0.44) 2.17 2.69 (1.56) 1.09
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.09) (0.14) (0.18) (0.13) (0.23) (0.09) (0.14) -
Distributions from
capital gains (0.01) (0.02) (0.59) (1.02) (0.54) (0.01) (0.02) -
Return of capital (0.02) (0.06) (0.32) - - (0.02) (0.06) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.12) (0.22) (1.09) (1.15) (0.77) (0.12) (0.22) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 11.86 $ 9.28 $ 11.25 $ 13.59 $ 15.18 $ 11.85 $ 9.28 $ 11.86
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(C) 29.55% (15.84%) (8.97%) (3.05%) 16.56% 29.44% (14.4%)+ 10.12%+
Net assets, end of period
(000's) $1,223,950 $765,561 $726,548 $545,106 $414,257 $651,730 $120,949 $15
Ratio of expenses to average
net assets*** 0.071% 0.09% 0.09% 0.06% 0.04% 0.071% 0.09%(A) 19.95%(A)
Ratio of expenses to average
net assets after expense
reductions*** 0.071% 0.075% 0.075% 0.05% 0.04% 0.071% 0.075%(A) 0.221%(A)
Ratio of net investment
income (loss) to average net
assets** 0.84% 1.24% 1.33% 0.94% 1.73% 0.53% (0.01%)(A) (0.14%)(A)
Portfolio turnover rate 55% 117% 84% 102% 127% 55% 117% 55%
</Table>
* Commencement of operations
** Recognition of net investment income by the Portfolio is affected by the
timing of the declaration of dividends by the underlying investment
companies in which the Portfolio invests.
*** Does not include expenses of the investment companies in which the Portfolio
invests.
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for
Series I, for the year ended 2003 and the period ended December 31, 2002 for
Series II and for the period ended December 31, 2003 for Series III would
have been lower, had operating expenses not been reduced.
(C) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I,
for the year ended 2003 and the period ended December 31, 2002 for Series II
and for the period ended December 31, 2003 for Series III would have been
lower, had operating expenses not been reduced.
169
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIFESTYLE BALANCED 640 TRUST
-----------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------ ------------------------- ----------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------------------------------ DECEMBER 31, TO TO
2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003
---------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 10.30 $ 11.82 $ 13.53 $ 14.24 $ 13.49 $ 10.30 $ 11.72 $ 11.45
Income from investment
operations:
- ----------------------
Net investment
income (loss)** 0.19 0.29 0.35 0.26 0.39 0.19 0.29 -
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 2.22 (1.43) (1.02) 0.06 1.20 2.22 (1.33) 0.98
---------- -------- -------- -------- -------- ------------ ---------- ----------
Total from
investment
operations 2.41 (1.14) (0.67) 0.32 1.59 2.41 (1.04) 0.98
---------- -------- -------- -------- -------- ------------ ---------- ----------
Less distributions:
- -------------------
Dividends from net
investment income (0.19) (0.29) (0.35) (0.26) (0.39) (0.19) (0.29) -
Distributions from
capital gains (0.05) (0.04) (0.69) (0.77) (0.45) (0.05) (0.04) -
Return of capital (0.04) (0.05) - - - (0.04) (0.05) -
---------- -------- -------- -------- -------- ------------ ---------- ----------
Total distributions (0.28) (0.38) (1.04) (1.03) (0.84) (0.28) (0.38) -
---------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, END OF
PERIOD $12.43 $10.30 $11.82 $13.53 $14.24 $12.43 $10.30 $12.43
========== ======== ======== ======== ======== ============ ========== ==========
TOTAL RETURN(B) 23.97% (9.95%) (4.71%) 2.45% 12.42% 23.97% (9.18%)+ 8.56%+
Net assets, end of period
(000's) $1,330,925 $859,857 $745,215 $545,718 $416,706 $740,011 $164,273 $46
Ratio of expenses to
average net assets*** 0.070% 0.09% 0.09% 0.06% 0.03% 0.070% 0.09%(A) 8.35%(A)
Ratio of expenses to
average net assets after
expense reductions*** 0.070% 0.075% 0.075% 0.05% 0.03% 0.070% 0.075%(A) 0.220%(A)
Ratio of net investment
income (loss) to average
net assets** 1.59% 2.48% 2.47% 1.87% 2.93% 1.11% 0.07%(A) (0.22%)(A)
Portfolio turnover rate 55% 114% 71% 85% 126% 55% 114% 55%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIFESTYLE MODERATE 460 TRUST
-----------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
------------------------------------------------------ ------------------------- ----------
YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003*
------------------------------------------------------ DECEMBER 31, TO TO
2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003
---------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 11.22 $ 12.11 $ 13.01 $ 14.13 $ 13.91 $ 11.22 $ 12.07 $ 11.98
Income from investment
operations:
- ----------------------
Net investment
income (loss) ** 0.27 0.40 0.45 0.58 0.41 0.27 0.40 -
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 1.67 (0.88) (0.61) (0.07) 0.65 1.67 (0.84) 0.81
---------- -------- -------- -------- -------- ------------ ---------- ----------
Total from
investment
operations 1.94 (0.48) (0.16) 0.51 1.06 1.94 (0.44) 0.81
---------- -------- -------- -------- -------- ------------ ---------- ----------
Less distributions:
- -------------------
Dividends from net
investment income (0.27) (0.40) (0.45) (0.58) (0.41) (0.27) (0.40) -
Distributions from
capital gains (0.06) - (0.10) (1.05) (0.43) (0.06) - -
Return of capital (0.04) (0.01) (0.19) - - (0.04) (0.01) -
---------- -------- -------- -------- -------- ------------ ---------- ----------
Total
distributions (0.37) (0.41) (0.74) (1.63) (0.84) (0.37) (0.41) -
---------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, END OF
PERIOD $ 12.79 $ 11.22 $ 12.11 $ 13.01 $ 14.13 $ 12.79 $ 11.22 $ 12.79
========== ======== ======== ======== ======== ============ ========== ==========
TOTAL RETURN(C) 17.83% (4.07%) (1.09%) 4.26% 7.89% 17.83% (3.77%)+ 6.76%+
Net assets, end of period
(000's) $461,743 $325,608 $245,499 $182,038 $167,500 $285,665 $74,241 $3
Ratio of expenses to
average net assets*** 0.075% 0.09% 0.10% 0.075% 0.04% 0.075% 0.09%(A) 44.71%(A)
Ratio of expenses to
average net assets after
expense reductions*** 0.075% 0.075% 0.075% 0.05% 0.04% 0.075% 0.075%(A) 0.225%(A)
Ratio of net investment
income (loss) to average
net assets** 2.15% 3.17% 3.23% 4.37% 2.92% 1.58% 0.19%(A) (0.14%)(A)
Portfolio turnover rate 46% 113% 84% 86% 109% 46% 113% 46%
</Table>
* Commencement of operations
** Recognition of net investment income by the Portfolio is affected by the
timing of the declaration of dividends by the underlying investment
companies in which the Portfolio invests.
*** Does not include expenses of the investment companies in which the Portfolio
invests.
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I,
for the year ended 2003 and the period ended December 31, 2002 for Series II
and for the period ended December 31, 2003 for Series III would have been
lower, had operating expenses not been reduced.
(C) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I,
for the period ended December 31, 2002 for Series II and for the period
ended December 31, 2003 for Series III would have been lower, had operating
expenses not been reduced.
170
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
LIFESTYLE CONSERVATIVE 280 TRUST
---------------------------------------------------------------------------------------------
SERIES I SERIES II SERIES III
---------------------------------------------------- ------------------------- ----------
YEAR
YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003*
---------------------------------------------------- DECEMBER 31, TO TO
2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003
-------- -------- -------- -------- -------- ------------ ---------- ----------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 12.72 $ 12.94 $ 13.17 $ 13.15 $ 13.53 $ 12.72 $ 12.93 $ 12.95
Income from investment
operations:
- ----------------------
Net investment
income (loss)** 0.38 0.39 0.55 0.51 0.60 0.38 0.39 -
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 1.03 (0.16) (0.14) 0.41 (0.05) 1.03 (0.15) 0.69
-------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations 1.41 0.23 0.41 0.92 0.55 1.41 0.24 0.69
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividends from net
investment income (0.39) (0.39) (0.55) (0.51) (0.60) (0.39) (0.39) -
Distributions from
capital gains (0.10) (0.04) (0.09) (0.39) (0.33) (0.10) (0.04) -
Return of capital - (0.02) - - - - (0.02) -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.49) (0.45) (0.64) (0.90) (0.93) (0.49) (0.45) -
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD $ 13.64 $ 12.72 $ 12.94 $ 13.17 $ 13.15 $ 13.64 $ 12.72 $ 13.64
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(B) 11.47% 1.80% 3.30% 7.62% 4.21% 11.46% 1.83%+ 5.33%+
Net assets, end of period
(000's) $299,278 $250,656 $174,041 $105,627 $106,435 $153,654 $47,697 $101
Ratio of expenses to
average net assets*** 0.079% 0.09% 0.10% 0.08% 0.03% 0.079% 0.09%(A) 8.73%(A)
Ratio of expenses to
average net assets after
expense reductions*** 0.075% 0.075% 0.075% 0.05% 0.03% 0.075% 0.075%(A) 0.225%(A)
Ratio of net investment
income (loss) to average
net assets** 2.89% 2.62% 3.82% 4.00% 4.40% 2.21% 0.25%(A) (0.22%)(A)
Portfolio turnover rate 40% 69% 38% 53% 93% 40% 69% 40%
</Table>
- --------------------------------------------------------------------------------
* Commencement of operations
** Recognition of net investment income by the Portfolio is affected by the
timing of the declaration of dividends by the underlying investment
companies in which the Portfolio invests.
*** Does not include expenses of the investment companies in which the
Portfolio invests.
+ Not Annualized
(A) Annualized
(B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for
Series I, for the year ended 2003 and the period ended December 31, 2002
for Series II and for the period ended December 31, 2003 for Series III
would have been lower, had operating expenses not been reduced.
171
MANUFACTURERS INVESTMENT TRUST
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<Table>
<Caption>
AMERICAN INTERNATIONAL
AMERICAN GROWTH TRUST TRUST
--------------------------- ---------------------------
SERIES I SERIES II SERIES I SERIES II
------------ ------------ ------------ ------------
07/09/2003* 05/05/2003* 07/09/2003* 05/05/2003*
TO TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $13.94 $ 12.50 $13.78 $ 12.50
Income from investment operations:
- ----------------------------------
Net investment Income (loss)** - # - # 0.16 0.14
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.48 2.91 2.74 4.02
------ -------- ------ --------
Total from investment operations 1.48 2.91 2.90 4.16
------ -------- ------ --------
NET ASSET VALUE, END OF PERIOD $15.42 $ 15.41 $16.68 $ 16.66
====== ======== ====== ========
TOTAL RETURN 10.62%+ 23.28%+ 21.04%+ 33.28%+
Net assets, end of period (000's) $3,389 $269,774 $2,590 $178,069
Ratio of expenses to average net assets*** 0.38%(A) 0.53%(A) 0.39%(A) 0.54%(A)
Ratio of net investment income (loss) to average net
assets** 0.04%(A) (0.23%)(A) 3.34%(A) 2.01%(A)
Portfolio turnover rate 1% 1% 22% 22%
</Table>
- --------------------------------------------------------------------------------
<Table>
<Caption>
AMERICAN BLUE CHIP AMERICAN GROWTH-INCOME
INCOME AND GROWTH TRUST TRUST
--------------------------- ---------------------------
SERIES I SERIES II SERIES I SERIES II
------------ ------------ ------------ ------------
07/09/2003* 05/05/2003* 07/09/2003* 05/05/2003*
TO TO TO TO
12/31/2003-- 12/31/2003-- 12/31/2003-- 12/31/2003--
------------ ------------ ------------ ------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.66 $ 12.50 $ 13.78 $ 12.50
Income from investment operations:
- ----------------------------------
Net investment income (loss)** - # - # 0.10 0.09
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.80 2.94 1.67 2.94
-------- -------- -------- --------
Total from investment operations 1.80 2.94 1.77 3.03
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 15.46 $ 15.44 $ 15.55 $ 15.53
======== ======== ======== ========
TOTAL RETURN 13.18%+ 23.52%+ 12.84%+ 24.24%+
Net assets, end of period (000's) $1,282 $180,792 $1,223 $182,259
Ratio of expenses to average net assets*** 0.39%(A) 0.54%(A) 0.38%(A) 0.53%(A)
Ratio of net investment income (loss) to average net
assets** (0.39%)(A) (0.54%)(A) 3.66%(A) 2.08%(A)
Portfolio turnover rate - ## - ## 2% 2%
</Table>
- -- Net investment income has been calculated using the SEC method.
* Commencement of operations
** Recognition of net investment income by the Portfolio is affected by the
timing of the declaration of dividends by the underlying investment
companies in which the Portfolio invests.
*** Does not include expenses of the investment companies in which the
Portfolio invests.
# Amount is less than $.01 per share.
## Amount is less than 1%.
+ Not Annualized
(A) Annualized
172
ADDITIONAL INFORMATION
Additional information about the Trust's investments is available in the
Trust's annual and semi-annual reports to shareholders. The Trust's annual
report contains a discussion of the market conditions and investment strategies
that significantly affected the Trust's performance during its last fiscal year.
Additional information about the Trust is also contained in the Statement
of Additional Information dated the same date as this Prospectus. The Statement
of Additional Information is incorporated by reference into this Prospectus. The
annual and semi-annual reports, the Statement of Additional Information and
other information about the Trust are available upon request and without charge
by writing the Trust at 73 Tremont Street, Boston, MA 02108 or calling the Trust
at (800) 344-1029. Shareholder inquiries should also be directed to this address
and phone number.
Information about the Trust (including the Statement of Additional
Information) can be reviewed and copied at the SEC's Public Reference Room in
Washington D.C. Information on the operation of the Public Reference Room may be
obtained by calling the Securities and Exchange Commission ("SEC") at
1-202-942-8090. Reports and other information about the Trust are available on
the SEC's Internet site at http://www.sec.gov and copies of this information may
be obtained, upon payment of a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public
Reference Section in Washington D.C. 20549-0102.
The Trust's Investment Company and 1933 Act File Numbers are 811-4146 and
2-94157
MIT.PRO5/2004
173