Annual Report
for John Hancock Variable Series Trust I
December 31, 2003
[LOGO] John Hancock
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Not FDIC Insured Not Bank Guaranteed May Lose Value
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Not a Deposit Not Insured by Any Federal Government Agency
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Inception: August 31, 1999
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Fundamental Value Fund
Wellington Management Company, LLP C. Duckworth/M. Cillan
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.. In 2003, the Fund returned 28.70% underperforming its benchmark, the
Russell 1000 Value Index.
.. The Fund underperformed its benchmark due to unfavorable sector allocation
decisions. Despite a modest allocation, cash was the biggest detractor to
relative returns, followed by an underweight to information technology.
Security selection modestly aided performance, most notably in industrials.
.. The Fund's exposure to financials was the largest contributor to absolute
performance, followed by consumer discretionary. The biggest detractor to
absolute returns was the Fund's exposure to the telecommunication services
sector; all other sectors had positive absolute returns.
.. The top and bottom contributors to absolute returns came from a variety of
sectors. The biggest contributors to performance were Citigroup, Merrill
Lynch & Co., and Altria Group. The main detractors included Schering Plough
and Qwest.
.. The manager's strategy is to combine the firm's research analysts' best
ideas within the large-cap value universe using a bottom-up stock selection
process. The Fund is broadly diversified across sectors and industries with
sector weights closely aligned with the benchmark to minimize
industry-specific risk.
[CHART]
Line Chart
Historical Fund Return
$10,000
Investment made 8/31/99
(Fund Inception Date)
Fundamental Value Russell 1000(R) Value Index
----------------- ---------------------------
8/31/1999 $10,000.00 $10,000.00
9/30/1999 9,787.13 9,650.00
10/31/1999 10,352.08 10,205.84
11/30/1999 10,294.94 10,126.23
12/31/1999 10,472.48 10,174.84
1/31/2000 10,030.71 9,843.14
2/29/2000 9,613.85 9,111.80
3/31/2000 10,829.48 10,223.43
4/30/2000 10,444.72 10,104.84
5/31/2000 10,607.42 10,210.94
6/30/2000 10,217.67 9,744.30
7/31/2000 10,451.75 9,866.11
8/31/2000 11,178.92 10,414.66
9/30/2000 11,404.89 10,510.48
10/31/2000 11,709.97 10,769.04
11/30/2000 11,229.41 10,369.50
12/31/2000 11,877.02 10,889.02
1/31/2001 11,882.92 10,931.48
2/28/2001 11,470.78 10,627.59
3/31/2001 11,162.22 10,252.43
4/30/2001 11,708.70 10,754.80
5/31/2001 11,919.45 10,996.79
6/30/2001 11,613.28 10,752.66
7/31/2001 11,579.16 10,730.08
8/31/2001 11,157.46 10,299.80
9/30/2001 10,311.48 9,574.70
10/31/2001 10,346.72 9,492.35
11/30/2001 10,818.25 10,043.86
12/31/2001 11,046.47 10,279.89
1/31/2002 10,817.55 10,200.73
2/28/2002 10,739.67 10,217.06
3/31/2002 11,193.96 10,700.32
4/30/2002 10,597.18 10,333.30
5/31/2002 10,620.01 10,384.97
6/30/2002 10,028.91 9,788.87
7/31/2002 9,158.25 8,878.51
8/31/2002 9,208.92 8,945.98
9/30/2002 8,286.11 7,951.19
10/31/2002 8,954.90 8,540.37
11/30/2002 9,498.46 9,078.42
12/31/2002 9,124.39 8,684.41
1/31/2003 8,863.88 8,474.25
2/28/2003 8,633.45 8,247.99
3/31/2003 8,625.30 8,262.01
4/30/2003 9,361.97 8,989.07
5/31/2003 9,984.56 9,569.76
6/30/2003 10,138.80 9,689.38
7/31/2003 10,189.21 9,833.75
8/31/2003 10,399.33 9,987.16
9/30/2003 10,258.10 9,889.28
10/31/2003 10,902.39 10,494.51
11/30/2003 11,036.90 10,637.23
12/31/2003 11,742.64 11,292.49
Value on 12/31/03:
- ------------------
$11,743 Fundamental Value Fund
$11,292 Russell 1000(R) Value Index
MORNINGSTAR CATEGORY+:
.. Large Value
MORNINGSTAR RISK+:
.. Below Average
(VL/VUL)
.. Below Average (VA)
MORNINGSTAR RATING+:
.. ***(VL/VUL)
.. ***(VA)
TOP TEN HOLDINGS (as of December 31, 2003)
% of
Assets
------
Citigroup, Inc. 5.4%
Bank One Corp. 3.6%
Bank of America Corp. 3.5%
Total Fina SA 2.8%
BP Amoco plc. 2.8%
Time Warner, Inc. 2.4%
Golden West Financial Corp. 2.2%
Altria Group, Inc. 2.2%
MBIA, Inc. 2.1%
UnionBanCal Corp. 2.0%
AVERAGE ANNUAL TOTAL RETURNS*
Fundamental Russell 1000(R)
Value Fund Value Index
----------- --------------
1 Year 28.70% 30.03%
3 Years -0.38 1.22
Since Inception (8/31/99) 3.77 2.84
SECTOR/INDUSTRY ALLOCATION (as of December 31, 2003)
% of
Assets
------
Financials 34.83%
Consumer Discretionary 11.11%
Energy 10.56%
Industrials 7.80%
Information Technology 7.45%
Consumer Staples 7.02%
Utilities 6.11%
Materials 5.79%
Telecommunication
Services 5.33%
Health Care 4.01%
* Total returns are for the period ended December 31, 2003. Returns represent
past performance, assume reinvestment of all distributions and are not
indicative of future performance. Investment returns and principal value of
fund shares will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost. The performance of the fund on this page
is reported net of Trust level charges (i.e. investment management fees and
operating expenses). It does not reflect expense and charges of the
applicable separate accounts and variable products, all of which vary to a
considerable extent and are described in your product prospectus.
Performance would be lower if expenses and charges of the separate accounts
and products were reflected.
+ Source: MorningStar, Inc. Data as of 12/31/03. VL represents Variable Life
subaccounts, VUL represents Variable Universal Life subaccounts and VA
represents Variable Annuity subaccounts Hancock VL/VUL subaccounts were
rated against 538 VL/VUL subaccounts and 1,013 VA subaccounts in the
Morningstar Large Value category. This represents the Morningstar 3 year
rating.
STATEMENT OF ASSETS AND LIABILITIES
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
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(000's Omitted)
ASSETS
Long term investments at cost (including $2,464 of
securities loaned (Note B))...................................... $114,490
Net unrealized appreciation of investments.......................... 21,232
Short-term investments at value..................................... 5,079
--------
Total investments............................................. 140,801
Receivable for:
Investments sold................................................. 362
Fund shares sold................................................. 52
Dividends........................................................ 218
Futures contracts variation margin............................... 5
Other assets..................................................... 5
--------
Total assets........................................................ 141,443
--------
LIABILITIES
Payables for:
Investments purchased............................................ 188
Collateral for securities on loan................................ 2,398
Other liabilities................................................ 2
--------
Total liabilities................................................... 2,588
--------
Net assets.......................................................... $138,855
========
Shares of beneficial interest outstanding........................... 12,600
--------
Net asset value per share........................................... $ 11.02
========
Composition of net assets:
Capital paid-in.................................................. $143,991
Accumulated net realized loss on investments,
futures and foreign currency transactions..................... (26,425)
Net unrealized appreciation of:
Investments................................................... 21,232
Futures....................................................... 57
--------
Net assets.......................................................... $138,855
========
STATEMENT OF OPERATIONS
JOHN HANCOCK VARIABLE SERIES TRUST I
For the Year Ended December 31, 2003
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(000's Omitted)
INVESTMENT INCOME
Interest....................................................... $ 51
Dividends...................................................... 2,767
Securities lending............................................. 6
-------
Total investment income.............................................. 2,824
-------
EXPENSES
Investment advisory fee........................................ 965
Auditors fees.................................................. 17
Custodian fees................................................. 81
Legal fees..................................................... 9
Printing & mailing fees........................................ 10
Trustees' fees................................................. 4
Other fees..................................................... 5
-------
Total expenses....................................................... 1,091
Less expenses reimbursed....................................... (8)
Less custodian expense reduction offset by
commission recapture arrangement (Note C)................... (10)
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Net expenses......................................................... 1,073
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Net investment income................................................ 1,751
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REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments.................................................... (3,838)
Financial futures contracts.................................... 135
Foreign currency transactions.................................. 1
Change in unrealized appreciation on:
Investments.................................................... 32,759
Futures........................................................ 161
-------
Net realized and unrealized gain..................................... 29,218
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Net increase in net assets resulting from
operations........................................................ $30,969
=======
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
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(000's Omitted)
Year Ended Year Ended
December 31, December 31,
2003 2002
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income ............................................... $ 1,751 $ 1,794
Net realized loss ................................................... (3,702) (20,300)
Change in net unrealized appreciation (depreciation) ................ 32,920 (10,611)
-------- --------
Net increase (decrease) in net assets resulting from operations... 30,969 (29,117)
Distributions to shareholders from:
Net investment income ............................................... (1,730) (1,766)
Realized gains ...................................................... (135) (28)
-------- --------
Decrease in net assets resulting from distributions .............. (1,865) (1,794)
From fund share transactions:
Proceeds from shares sold ........................................... 32,368 39,206
Distributions reinvested ............................................ 1,865 1,794
Payment for shares redeemed ......................................... (45,584) (50,697)
-------- --------
Decrease in net assets from fund share transactions .............. (11,351) (9,697)
-------- --------
NET INCREASE (DECREASE) IN NET ASSETS .................................. 17,753 (40,608)
NET ASSETS
Beginning of Period ................................................. 121,102 161,710
-------- --------
End of Period ....................................................... $138,855 $121,102
======== ========
Analysis of fund share transactions:
Sold ................................................................ 3,382 3,997
Reinvested .......................................................... 197 190
Redeemed ............................................................ (4,906) (5,425)
-------- --------
Net decrease in fund shares outstanding ................................ (1,327) (1,238)
======== ========
See notes to financial statements.
FINANCIAL HIGHLIGHTS
JOHN HANCOCK VARIABLE SERIES TRUST I
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Selected data for each share of beneficial interest outstanding throughout the
period indicated:
Fundamental Value Fund
-------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------
Period from
August 31, to
December 31,
2003 2002 2001 2000 1999(g)
-------- -------- -------- ------- -------------
Net Assets Value at Beginning of Period............ $ 8.70 $ 10.66 $ 11.57 $ 10.42 $10.00
Income from Investment Operations:
Net Investment Income........................... 0.14 0.12 0.10 0.09 0.03
Net Realized and Unrealized Gain (Loss) on
Investments(a).............................. 2.33 (1.96) (0.91) 1.30 0.45
-------- -------- -------- ------- ------
Total From Investment Operations................ 2.47 (1.84) (0.81) 1.39 0.48
Less Distributions:
Distribution from Net Investment Income......... (0.14) (0.12) (0.10) (0.10) (0.03)
Distribution from Net Realized Gains on
Investments ................................. (0.01) (0.08) (0.02)
Distribution from Excess of Net Investment
Income/Gains................................. (i) (0.06) (0.01)
-------- -------- -------- ------- ------
Total Distributions............................. (0.15) (0.12) (0.10) (0.24) (0.06)
-------- -------- -------- ------- ------
Net Assets Value at End of Period.................. $ 11.02 $ 8.70 $ 10.66 $ 11.57 $10.42
======== ======== ======== ======= ======
Total Investment Return(b)......................... 28.70% (17.40)% (6.99)% 13.41% 4.72%(c)
Ratios/Supplemental Data:
Ratio of Operating Expenses to Average Net
Assets....................................... 0.89%(e)(h) 0.85% 0.99%(e) 1.05%(e) 1.05%(d)(e)
Ratio of Net Investment Income to Average Net
Assets....................................... 1.44% 1.26% 0.91% 0.97% 0.94%(d)
Portfolio Turnover Rate......................... 69.21% 82.22% 85.20%(f) 86.97% 23.03%(c)
Net Assets End of Period (000s Omitted)............ $138,855 $121,102 $161,710 $15,728 $6,101
(a) The amount shown at this caption for each share outstanding throughout the
year may not accord with the change in the aggregate gains and losses in
the portfolio securities for the year because of the timing of the
purchases and withdrawals of the shares in relation to the fluctuating
market values of the portfolio.
(b) The performance does not reflect expenses and charges of the applicable
separate accounts and variable products, all of which vary to a
considerable extent and are described in your product's prospectus.
(c) Not annualized.
(d) Annualized.
(e) Expense ratio is net of expense reimbursements. Had such reimbursements not
been made the expense ratio would have been .90%, 1.20%, 1.36%, and 1.42%
for the years ended December 31, 2003, 2001, 2000, and 1999, respectively.
(f) Excludes merger activity.
(g) Commencement of investment operations.
(h) The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
(i) Amount is less than $0.01.
SCHEDULE OF INVESTMENTS
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
FUNDAMENTAL VALUE FUND
Market
Name of Issuer Shares Value
-------------- ------- -------
(000's)
COMMON STOCK
Aerospace & Defense - 1.1%
General Dynamics Corp. * ................................ 17,100 $ 1,546
Air Freight & Couriers - 0.5%
Fedex Corp. ............................................. 9,700 655
Airlines - 0.4%
Continental Airlines, Inc. - Cl. B * .................... 32,800 534
Auto Components - 1.9%
Dana Corp. .............................................. 17,900 329
Johnson Controls, Inc. .................................. 5,100 592
Lear Corp. * ............................................ 28,500 1,748
-------
2,669
Banks - 14.3%
Bank of America Corp. * ................................. 58,500 4,705
Bank One Corp. * ........................................ 105,600 4,814
Comerica, Inc. .......................................... 19,800 1,110
Commerce Bancshares, Inc. ............................... 18,959 929
FirstMerit Corp. ........................................ 27,700 747
Golden West Financial Corp. * ........................... 29,000 2,993
Hibernia Corp. - Cl. A .................................. 20,600 484
UBS AG .................................................. 20,200 1,374
UnionBanCal Corp. ....................................... 46,600 2,681
-------
19,837
Beverages - 0.7%
Constellation Brands, Inc. - Cl. A * .................... 28,700 945
Building Products - 0.8%
Masco Corp. ............................................. 40,300 1,105
Chemicals - 2.9%
Dow Chemical Co. * ...................................... 29,600 1,230
E.I. du Pont de Nemours & Co. * ......................... 33,600 1,542
Rohm & Haas Co. ......................................... 30,500 1,303
-------
4,075
Commercial Services & Supplies - 1.0%
Alliance Data Systems Corp. * ........................... 800 22
Cendant Corp. * ......................................... 64,100 1,428
-------
1,450
Communications Equipment - 1.1%
Brocade Communications Systems, Inc. * .................. 26,400 153
Corning, Inc. * ......................................... 52,900 552
Motorola, Inc. .......................................... 58,100 817
-------
1,522
Computers & Peripherals - 3.7%
Hewlett-Packard Co. * ................................... 112,957 2,595
International Business Machines Corp. ................... 17,000 1,575
Maxtor Corp. * .......................................... 84,800 941
-------
5,111
Diversified Financials - 11.0%
Capital One Financial Corp. ............................. 8,500 521
Citigroup, Inc. * ....................................... 150,266 $ 7,294
Countrywide Credit Industries, Inc. * ................... 12,666 961
Franklin Resources, Inc. * .............................. 16,500 859
Goldman Sachs Group, Inc. ............................... 12,200 1,204
Legg Mason, Inc. * ...................................... 16,600 1,281
Merrill Lynch & Co., Inc. * ............................. 39,400 2,311
Morgan Stanley, Dean Witter, Discover & Co. ............. 14,400 833
-------
15,264
Diversified Telecommunication Services - 5.2%
AT&T Corp. * ............................................ 51,900 1,054
Citizens Communications Co. * ........................... 103,900 1,290
Qwest Communications International, Inc. ................ 335,800 1,451
Sprint Corp. * .......................................... 48,800 801
Verizon Communications * ................................ 75,200 2,638
-------
7,234
Electric Utilities - 4.5%
Cinergy Corp. * ......................................... 27,900 1,083
Exelon Corp. * .......................................... 38,312 2,542
PG & E Corp. * .......................................... 33,800 939
Pinnacle West Capital Corp. * ........................... 17,400 696
TXU Corp. ............................................... 43,200 1,025
-------
6,285
Electric/Gas - 0.7%
Dominion Resources, Inc. ................................ 15,800 1,008
Electrical Equipment - 1.7%
American Power Conversion ............................... 57,300 1,401
United Technologies Corp. * ............................. 10,500 995
-------
2,396
Electronic Equipment & Instruments - 0.2%
Thermo Electron Corp. * ................................. 12,300 310
Energy Equipment & Services - 0.5%
Halliburton Co. * ....................................... 24,700 642
Food & Drug Retailing - 0.8%
SuperValu, Inc. * ....................................... 37,200 1,064
Food Products - 1.5%
General Mills, Inc. * ................................... 21,100 956
Kraft Foods, Inc. - Cl. A ............................... 35,200 1,134
-------
2,090
Gas Utilities - 0.7%
El Paso Corp ............................................ 54,600 447
Kinder Morgan, Inc. * ................................... 9,300 550
-------
997
Health Care Providers & Services - 0.8%
McKesson HBOC, Inc ...................................... 33,100 1,064
Household Products - 0.5%
Procter & Gamble Co. * .................................. 6,900 689
SCHEDULE OF INVESTMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
FUNDAMENTAL VALUE FUND
Market
Name of Issuer Shares Value
-------------- ------- --------
(000's)
COMMON STOCK - Continued
Insurance - 5.4%
American International Group, Inc. * ................... 15,250 $ 1,011
Marsh & McLennan Cos., Inc. * .......................... 23,400 1,121
MBIA, Inc. * ........................................... 48,950 2,899
St. Paul Cos., Inc. .................................... 39,200 1,554
XL Capital, Ltd. - Cl. A * ............................. 11,100 861
--------
7,446
Internet Software & Services - 0.3%
VeriSign, Inc. * ....................................... 26,700 435
Machinery - 1.6%
Caterpillar, Inc. * .................................... 10,000 830
Deere & Co. * .......................................... 7,100 462
ITT Industries, Inc. * ................................. 12,200 905
--------
2,197
Media - 6.8%
Comcast Corp. - Cl. A .................................. 47,400 1,494
Gannett Co., Inc. * .................................... 12,300 1,097
Interactive Corp. ...................................... 17,600 597
Liberty Media Corp. - Ser. A * ......................... 134,100 1,594
Sirius Satellite Radio, Inc. * ......................... 432,200 1,366
Time Warner, Inc. * .................................... 182,100 3,276
--------
9,424
Metals & Mining - 1.1%
Alcoa, Inc. * .......................................... 39,400 1,497
Multiline Retail - 1.1%
Big Lots, Inc. * ....................................... 53,600 762
Federated Department Stores, Inc. * .................... 16,000 754
--------
1,516
Office Electronics - 0.7%
Xerox Corp. * .......................................... 70,900 978
Oil & Gas - 9.9%
BP Amoco plc - ADR ..................................... 77,400 3,820
ChevronTexaco Corp. * .................................. 23,700 2,047
Conoco Phillips ........................................ 20,185 1,324
Exxon Mobil Corp. * .................................... 65,300 2,677
Total Fina SA - ADR .................................... 41,300 3,821
--------
13,689
Paper & Forest Products - 1.6%
Bowater, Inc. .......................................... 32,200 1,491
Weyerhaeuser Co. ....................................... 12,400 794
--------
2,285
Personal Products - 1.3%
Alberto-Culver Co. - Cl. B * ........................... 8,500 536
Gillette Co. ........................................... 33,100 1,216
--------
1,752
Pharmaceuticals - 3.1%
Abbott Laboratories * .................................. 19,100 890
Eli Lilly & Co. * ...................................... 17,200 $ 1,210
King Pharmaceuticals, Inc. * ........................... 41,300 630
Medco Health Solutions, Inc. * ......................... 13,700 466
Schering-Plough Corp. * ................................ 67,600 1,175
--------
4,371
Real Estate Investment Trust - 2.3%
General Growth Properties .............................. 59,100 1,640
Kimco Realty Corp. ..................................... 34,650 1,551
--------
3,191
Road & Rail - 0.5%
Canadian National Railway Co. .......................... 11,500 728
Semiconductor Equipment & Products - 1.3%
Fairchild Semiconductor Corp. - Cl. A * ................ 43,000 1,074
Novellus Systems, Inc. * ............................... 15,800 664
--------
1,738
Specialty Retail - 0.7%
Foot Locker, Inc. * .................................... 38,700 907
Textiles & Apparel - 0.4%
Reebok International, Ltd. * ........................... 14,400 566
Tobacco - 2.1%
Altria Group, Inc. ..................................... 54,800 2,982
U.S. Government Agencies - 1.1%
Federal Home Loan Mortgage Corp. ....................... 26,200 1,528
--------
TOTAL COMMON STOCK- ................................. 97.8% 135,722
Par
Value
------
(000's)
INVESTMENT COMPANIES HELD
AS COLLATERAL ON LOANED
SECURITIES - 1.7%
State Street Navigator Securities Lending
Portfolio ........................................... $ 2,398 2,398
SCHEDULE OF INVESTMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
FUNDAMENTAL VALUE FUND
Par Market
Name of Issuer Value Value
-------------- ------- --------
(000's) (000's)
SHORT-TERM INVESTMENTS
Investment in joint trading account
(Note B) - 1.8%
1.061% due 01/02/04 ................................... $2,466 $ 2,466
U.S. Treasury - Bills - 0.1%
0.895% due 01/08/04 ................................... 25 25
0.91% due 03/04/04 .................................... 25 25
0.93% due 02/05/04 .................................... 30 30
0.935% due 02/12/04 ................................... 35 35
0.94% due 01/22/04 .................................... 100 100
--------
TOTAL SHORT-TERM
INVESTMENTS- .................................... 1.9% 2,681
------ --------
TOTAL INVESTMENTS- ................................. 101.4% 140,801
Payables, less cash and receivables- .................. (1.4)% (1,946)
------ --------
NET ASSETS- .................................. 100.0% $138,855
====== ========
* Non-income producing security.
ADR-American Depository Receipts.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
(000's Omitted)
NOTE A--ORGANIZATION
John Hancock Fundamental Value Fund (the "Fund") is a diversified series of
John Hancock Variable Series Trust I (the "Trust"), an open-end investment
management company registered under the Investment Company Act of 1940. The
Trust is organized as a Massachusetts business trust and consists of thirty
different funds as of December 31, 2003. The results of this Fund are included
in this report. The results of the other Funds in the Trust are presented under
separate cover. The Trust may add or delete Funds in the future to accommodate
various investment objectives. The Trust has issued shares of beneficial
interest exclusively to John Hancock Variable Life Account U ("JHVLAU"), John
Hancock Variable Life Account V ("JHVLAV"), John Hancock Variable Life Account S
("JHVLAS"), and John Hancock Variable Annuity Account I ("JHVAAI") to fund
policies and contracts issued by the John Hancock Variable Life Insurance
Company ("JHVLICO"), and to John Hancock Variable Annuity Account U ("JHVAAU"),
John Hancock Variable Annuity Account V ("JHVAAV"), John Hancock Variable Life
Account UV ("JHVLAUV"), John Hancock Variable Annuity Account H ("JHVAAH"), and
John Hancock Variable Annuity Account JF ("JHVAAJF") to fund contracts and
policies issued by John Hancock Life Insurance Company ("John Hancock" or
"JHLICO"), to John Hancock Variable Life Account PPM-1 ("PPM-1"), and to John
Hancock Variable Life Account PPM-2 ("PPM-2").
NOTE B--ACCOUNTING POLICIES
Valuation of investments: Common stocks and other such securities traded on
national exchanges are normally valued on the basis of closing prices.
Securities traded in the over-the-counter market and securities with no sales on
the day of valuation are normally valued at their last available bid price.
Short-term investments, with a maturity not to exceed 60 days, are valued
at amortized cost, which approximates market value.
Investment securities for which no current market quotations are readily
available, including certain foreign securities, when held by the Fund, are
valued at fair value as determined in good faith by the Board of Trustees.
Investment security transactions are recorded on the date of purchase or sale.
Repurchase agreements: The Fund may enter into repurchase agreements which
are contracts under which the Fund would acquire a security for a relatively
short period (usually not more than 7 days) subject to the obligation of the
seller to repurchase and the Fund to resell such security at a fixed time and
price (representing the Fund's cost plus interest). The Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in United States Government Securities. The underlying
securities, which represent the collateral of the agreement, must be marked to
market daily to ensure that each repurchase agreement is fully collateralized at
all times. The Fund will not invest more than 10% of its net assets in
repurchase agreements maturing in more than 7 days.
Joint trading account: Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the order permits the Fund to pool daily
uninvested cash balances into a joint account for the purpose of investing the
cash balances in short-term repurchase agreements, commercial paper and other
short-term investments which in no event will have a maturity in excess of 7
days. Joint account holdings as of December 31, 2003 are as follows:
Name of Issuer Market Value
- -------------- ------------
Alpine Securitization Corp., 1.12%, due 01/07/04 $29,995
Alpine Securitization Corp., 1.12%, due 01/06/04 19,998
Barclays US Fund, 1.10%, due 01/05/04 29,997
Cargill Asia Pacific, 1.06%, due 01/02/04 20,000
Cargill Asia Pacific, 1.05%, due 01/02/04 25,000
Danske Corp., 1.07%, due 01/05/04 49,996
Greenwich CPL Holding Funding, 0.95%, due 01/02/04 17,654
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
(000's Omitted)
NOTE B--ACCOUNTING POLICIES--Continued
Name of Issuer Market Value
- -------------- ------------
Merrill Lynch & Co., Inc., 1.04%, due 01/05/04 $ 18,838
Merrill Lynch & Co., Inc., 1.05%, due 01/06/04 31,156
Mortgage Int. Networking, 0.98%, due 01/02/04 50,000
Three Pillars Funding Corp., 1.08%, due 01/06/04 49,994
UBS Finance LLC, 1.02%, due 01/02/04 3,917
UBS Finance LLC, 1.05%, due 01/02/04 4,088
UBS Finance LLC, 0.96%, due 01/02/04 35,000
--------
Joint Trading Account Totals $385,633
========
Expenses: Expenses directly attributable to the Fund are charged to the
Fund. Expenses not directly attributed to the Fund are allocated on the basis of
relative net assets of the Fund.
Bank borrowings: The Fund is permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption requests
that otherwise might require the untimely disposition of securities. The Fund
has entered into syndicated line of credit agreements with State Street Bank and
Trust Company ("SSBT"), the Trust's record keeper and custodian and the Bank of
New York. These agreements enable the Fund to participate in an unsecured line
of credit, which permits borrowings up to $125 and $75 million, respectively.
Interest is charged to the Fund, based on its borrowing. In addition, a
commitment fee is charged to the Fund based on the average daily unused portion
of the line of credit and is allocated among the participating Funds in the
Trust. Interest expense paid under the line of credit is included under the
caption "Other fees" in the Statement of Operations.
The Fund had borrowings under the line of credit during the year ended
December 31, 2003 as follows:
Average Daily Loan Balance
During the Period for which Weighted Average
Loans were Outstanding Interest Rate Interest Expense
- --------------------------- ---------------- ----------------
$ 838 1.75% $--
Securities lending: The Fund has entered into an agreement with SSBT to
lend its securities to certain qualified brokers who pay the Fund's negotiated
lender fees. This loan is collateralized at all times with cash or securities
with a market value at least equal to the market value of the securities on
loan. Cash collateral is invested in a short-term instrument. As with other
extensions of credit, the Fund may bear the risk of delay of the loaned
securities in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. At December 31, 2003, the market
value of the securities loaned and the market value of the collateral for the
Fund was as follows:
Value of Securities Loaned Value of Collateral
- -------------------------- -------------------
$2,464 $2,398
Financial futures contracts: The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin". Each day, the
futures contract is valued at the official settlement price of the Chicago Board
of Trade or U.S. commodities exchange. Daily adjustments, called variation
margin, arising from this "mark to market", are recorded by the Fund as
unrealized gains or losses.
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
(000's Omitted)
NOTE B--ACCOUNTING POLICIES--Continued
When the contracts are closed, the Fund recognizes a gain or a loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange. At December 31, 2003, open financial
futures contracts for the Fund were as follows:
Open Expiration Unrealized
Contracts Position Month Appreciation
--------- -------- ---------- ------------
S&P Mini 500 Index Futures 22 Long March 04 $26
S&P 500 Index Futures 3 Long March 04 31
---
$57
===
At December 31, 2003, the Fund had deposited $215 in segregated accounts to
cover initial margin requirements on open financial futures contracts.
Forward foreign currency contracts: The Fund may use forward foreign
currency contracts to facilitate transactions in foreign securities and to
manage the Fund's currency exposure. Contracts to buy generally are used to
acquire exposure to foreign currencies, while contracts to sell are used to
hedge the Fund's investments against currency fluctuations. Neither type of
forward foreign currency transaction will eliminate fluctuations in the prices
of the Fund's securities or prevent loss if the price of such securities should
decline. The U.S. dollar value of a forward foreign currency contract is
determined using forward exchange rates supplied by a quotation service.
Realized gain (loss) on the purchases and sales of forward foreign currency
contracts is recognized on settlement date. At December 31, 2003, the Fund had
no open forward foreign currency contracts.
Federal income taxes: The Fund intends to comply with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to
shareholders. Therefore, no federal income tax provision is required.
As of December 31, 2003, the Fund had approximate net tax basis capital
loss carryforwards, which may be applied against any net taxable gains, as
follows: $406, $18,314 and $5,972 which expire in 2009, 2010 and 2011,
respectively.
In addition, from the period November 1, 2003 through December 31, 2003,
the Fund incurred no net realized capital losses.
Dividends, Interest and Distributions: Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Dividend
income for the Fund is shown net of foreign taxes withheld of $13. Realized
gains and losses from security transactions are determined on the basis of
identified cost.
Dividends of net investment income will be declared and distributed monthly
by the Fund. The Fund will distribute all of its net realized capital gains
annually, at the end of its fiscal year.
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
(000's Omitted)
NOTE B--ACCOUNTING POLICIES--Continued
Estimates: The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE C--INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
On February 5, 2003, the Board of Trustees of the Trust renewed its
Investment Advisory Agreement with John Hancock. For its services, John Hancock
receives monthly compensation at the following rate on an annual basis of the
Fund's net assets:
Between Between
$25 Million and $50 Million and Excess Over
First $25 Million $50 Million $100 Million $100 Million
- ----------------- --------------- --------------- ------------
0.95% 0.85% 0.75% 0.65%
In the event that normal operating expenses of the Fund, exclusive of
investment advisory fees, taxes, interest, brokerage commissions and
extraordinary expenses, shall exceed 0.10% of the Fund's daily net asset value,
John Hancock and JHVLICO will reimburse the Fund for such excess. Accordingly,
for the year ended December 31, 2003, the reimbursements paid from John Hancock
and JHVLICO were $8 to the Fund.
The Fund entered into a commission recapture program, which enables it to
pay some of its operational expenses by recouping a portion of the commissions
it pays to a broker that is not a related party of the Fund. Expenses paid
through this program may include costs of custodial, transfer agency or
accounting services. The impact of this arrangement was a reduction of $10.
John Hancock has entered into a Sub-Advisory Agreement with Wellington
Management Company LLP, with respect to the Fund. Wellington Management Company
LLP is an affiliate of John Hancock, and under its supervision, is responsible
for the day-to-day investment management of the Fund.
Signator Investors, Inc., a wholly owned subsidiary of John Hancock is the
principal underwriter and transfer agent of the Trust. Certain officers and
trustees of the Trust are officers and directors of JHVLICO, JHVLAU, JHVLAV,
JHVLAS, JHVAAI, JHVLAUV, JHVAAV, JHVAAU, JHVAAH, JHVAAJF, PPM-1, and PPM-2, and
some are also officers of John Hancock. Fees for independent trustees are paid
by the Trust.
NOTE D--INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding
short-term securities and obligations of the U.S. government, for the Fund for
the year ended December 31, 2003 were as follows:
Purchases Sales and Maturities
- --------- --------------------
$82,347 $94,347
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
(000's Omitted)
NOTE D--INVESTMENT TRANSACTIONS--Continued
The identified cost of investments owned by the Fund (including earned
discount on corporate short-term notes, commercial paper and collateral for
securities lending) and their respective gross unrealized appreciation and
depreciation for Federal income tax purposes at December 31, 2003 were as
follows:
Identified Unrealized Unrealized Net Unrealized
Cost Appreciation Depreciation Appreciation
- ---------- ------------ ------------ --------------
$121,238 $21,179 $(1,616) $19,563
Distribution of Income and Gains: Distributions of net investment income,
if any, are made at least annually. Net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed, and, therefore, will be distributed to
shareholders at least annually. Earnings and profits distributed to shareholders
on redemption of fund shares may be utilized by the Fund, to the extent
permissible, as part of the Fund's dividends-paid deduction on its federal
income tax returns.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations. As a result, net investment income (loss) and net realized gain
(loss) on investment transactions for a reporting period may differ
significantly from distributions during such period. These differences primarily
relate to certain securities sold at a loss and to certain distributions
received from investments in Real Estate Investment Trusts. Additionally, as a
result, net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
At December 31, 2003, the Fund's components of distributable earnings on a
tax basis were as follows:
Undistributed Undistributed
Ordinary Net Long-Term Capital Loss Net Unrealized
Income Capital Gain Carryforwards Appreciation
- ------------- ------------- ------------- --------------
$-- $-- $24,693 $19,563
In addition, the tax character of distributions paid by the Fund are
summarized as follows:
Distributions from Distributions from Return
Year Ordinary Income Long-Term Capital Gain of Capital
- ---- ------------------ ---------------------- ----------
2003 $1,729 $-- $136
2002 1,766 -- 28
NOTE E--BOARD OF TRUSTEES AND OFFICERS OF THE TRUST (UNAUDITED)
The Board of Trustees of the Trust is responsible for overall management of
the Trust. The Board may exercise all powers of the Trust, except those powers
which are conferred solely upon or reserved to the shareholders. The Trust's
Statement of Additional Information (SAI) includes additional information about
the Trustees and is available without charge, upon request, by calling toll-free
at 1-800-576-2227.
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
NOTE E--BOARD OF TRUSTEES AND OFFICERS OF THE TRUST (UNAUDITED)--Continued
The following table provides information about the members of the Board of
Trustees and the officers of the Trust:
Disinterested Trustees
Positions Held Principal Occupation(s)
Name, Address and Age With Trust During Past Five Years
- -------------------------------- -------------- ----------------------------
Elizabeth G. Cook (age 66) Trustee Expressive Arts Therapist,
c/o John Hancock Variable Series Dana Farber Cancer
Trust I Institute; President, The
John Hancock Place Advertising Club of Greater
Boston, Massachusetts 02117 Boston
Diane C. Kessler (age 57) Trustee Executive Director,
c/o John Hancock Variable Series Massachusetts Council of
Trust I Churches
John Hancock Place
Boston, Massachusetts 02117
Robert Verdonck (age 58) Trustee President and Chief
c/o John Hancock Variable Series Executive Officer, East
Trust I Boston Savings Bank
John Hancock Place
Boston, Massachusetts 02117
Hassell H. McClellan (age 58) Trustee Associate Professor and
c/o John Hancock Variable Series Graduate Dean, The Graduate
Trust I School of the Wallace G.
John Hancock Place Carroll School of
Boston, Massachusetts 02117 Management, Boston College
Trustees Affiliated with the Trust and Officers of the Trust
Positions Held Principal Occupation(s)
Name, Address and Age With Trust During Past Five Years
- -------------------------------- -------------- -------------------------------
Michele G. Van Leer* (age 46) Chairman and Senior Vice President, Product
John Hancock Place Trustee Management, John Hancock Life
Boston, Massachusetts 02117 Insurance Company; Vice
Chairman, President & Director,
John Hancock Variable Life
Insurance Company
NOTES TO FINANCIAL STATEMENTS--Continued
JOHN HANCOCK VARIABLE SERIES TRUST I
December 31, 2003
- --------------------------------------------------------------------------------
NOTE E--BOARD OF TRUSTEES AND OFFICERS OF THE TRUST (UNAUDITED--Continued
Trustee Affiliated with the Trust and Officers of the Trust--Continued
Positions Held Principal Occupation(s)
Name, Address and Age With Trust During Past Five Years
- ------------------------------ ---------------------------- -----------------------------------
Kathleen F. Driscoll* (age 47) Vice Chairman, President Senior Vice President, Signator
John Hancock Place and Trustee Brokerage, John Hancock Life
Boston, Massachusetts 02117 Insurance Company; Vice President
Corporate Communications, John
Hancock Life Insurance Company
Jude A. Curtis (age 45) Compliance Officer Vice President and Chief Investment
John Hancock Place Compliance Officer, John Hancock
Boston, Massachusetts 02117 Life Insurance Company; formerly
Second Vice President and Counsel,
Office of Business Conduct; John
Hancock Life Insurance Company;
formerly a Partner at Hale and Dorr
LLP (law firm)
Janet Wang (age 35) Assistant Compliance Officer Compliance Specialist, John
John Hancock Place Hancock Life Insurance Company
Boston, Massachusetts 02117
Raymond F. Skiba (age 58) Treasurer Director of Fund Operations, John
John Hancock Place Hancock Life Insurance Company
Boston, Massachusetts 02117
Gladys C. Millan (age 57) Assistant Treasurer Manager of Fund Operations, John
John Hancock Place Hancock Life Insurance Company
Boston, Massachusetts 02117
Karen Q. Visconti (age 50) Secretary Director, Product & Market
John Hancock Place Management, John Hancock Life
Boston, Massachusetts 02117 Insurance Company
Arnold R. Bergman (age 53) Assistant Secretary Senior Counsel, Law Department,
John Hancock Place John Hancock Life Insurance
Boston, Massachusetts 02117 company; formerly Vice President,
General Counsel and Secretary, First
Variable Life Insurance Company
*Trustee who is an "interested person" as defined in the 1940 Act, due to
her position with John Hancock Life Insurance Company (or its affiliates), the
ultimate controlling parent of the investment advisor.
Because the Trust does not hold regular annual shareholders meetings, each
Trustee holds office for an indefinite term until his successor is duly elected
and qualified or until he dies, retires, resigns, is removed or becomes
disqualified. None of the Trustees is a director of other complexes except noted
above.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Contractowners, Policyholders, and
Board of Trustees of
John Hancock Variable Series Trust I
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Fundamental Value Fund (a
portfolio included in the series of John Hancock Variable Series Trust I {the
"Trust"}) as of December 31, 2003, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 2003, by correspondence with the custodian and brokers,
or by other appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fundamental Value Fund of John Hancock Variable Series Trust I at December 31,
2003, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 2004
Officers and Trustees Investment Adviser
Michele G. Van Leer, John Hancock Life Insurance Company
Chairman of the Board of Trustees John Hancock Place
Kathleen F. Driscoll, P.O. Box 111
President and Vice Chairman Boston, MA 02117
of the Board of Trustees
Elizabeth G. Cook, Trustee
Reverend Diane C. Kessler, Trustee
Hassell H. McClellan, Trustee Independent Auditors
Robert F. Verdonck, Trustee Ernst & Young LLP
Karen Q. Visconti, Secretary 200 Clarendon Street
Arnold R. Bergman, Assistant Secretary Boston, MA 02116
Raymond F. Skiba, Treasurer
Gladys C. Millan, Assistant Treasurer
Ronald J. Bocage, Chief Legal Officer
Jude A. Curtis, Compliance Officer
Janet Wang, Assistant Compliance Officer
Sub-Investment Advisers
Capital Guardian Trust Company Pacific Investment Management Company LLC
Los Angeles, CA 90071 Newport Beach, CA 92660
Declaration Management & Research LLC RREEF America LLC
McLean, VA 22102 Chicago, IL 60611
Fidelity Management & Research Company SSgA Funds Management, Inc.
Boston, MA 02109 Boston, MA 02110
Goldman Sachs Asset Management, LP Standish Mellon Asset
New York, NY 10005 Management Company LLC
Pittsburgh, PA 15258
Independence Investment LLC T. Rowe Price Associates, Inc.
Boston, MA 02109 Baltimore, MD 21202
John Hancock Advisers, LLC T. Rowe Price International, Inc.
Boston, MA 02199 Baltimore, MD 21202
Morgan Stanley Investment Management Inc. Wellington Management Company, LLP
New York, NY 10020 Boston, MA 02109
The John Hancock Variable Series Trust I consists of funds used as investment
options for various John Hancock variable life and variable annuity contracts.
Investors are not able to invest directly in the John Hancock Variable Series
Trust I.
If the total investment return for any fund for any given year appears unusually
high, the return may be attributable to unusually favorable market conditions
which will probably not be sustainable. For instance, a high total investment
return may reflect participation in IPOs, "hot" industries (e.g.,
internet-related companies), private placements, and/or leveraging investment
techniques during the period indicated. There is no assurance that any of those
methods, or any other investment technique will continue to have the same impact
on the fund's total investment returns.
All of the funds (except bond funds and equity index funds) may participate in
initial public offerings (IPOs). Under certain market conditions, such
participation could significantly improve a fund's total investment return.
There is no assurance that such market conditions will continue and provide the
same favorable impact on future investment returns.
Please refer to the prospectus for your product for additional information about
the investment options available. Variable life insurance and variable annuities
are sold by prospectus. These reports may be used as sales literature when
preceeded or accompanied by the funds' prospectus, which detail charges,
investment objectives, and operating policies.
Insurance products are issued by John Hancock Life Insurance Company, or John
Hancock Variable Life Insurance Company* (*not licensed in New York), Boston, MA
02117. Securities products are distributed by Signator Investors, Inc., Member
NASD, SIPC, 197 Clarendon Street, Boston, MA 02116.
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