Securities Act Registration No. 333-117467
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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[X] Pre-Effective [_] Post-Effective
Amendment No. 2 Amendment No.
(Check appropriate box or boxes)
John Hancock Variable Series Trust I
(Exact Name of Registrant as Specified in Declaration of Trust)
197 Clarendon Street
Boston, Massachusetts 02117
(Address of Principal Executive Offices)
Registrant's Telephone Number: (617) 572-9196
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Name and Address of
Agent for Service: Copy to:
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ARNOLD R. BERGMAN, THOMAS C. LAUERMAN,
ESQUIRE ESQUIRE
John Hancock Life Foley & Lardner LLP
Insurance Company
197 Clarendon Street 3000 K Street, N.W.
Boston, MA 02117 Suite 500
Washington, D.C. 20007
Approximate Date of Proposed Public Offering: As soon as practicable after
this registration statement becomes effective under the Securities Act of 1933.
Pursuant to Rule 429 under the Act, the prospectus in this registration
statement also relates to registrant's currently effective registration
statement on Form N-1A, File No. 33-2081. No filing fee is due, in reliance on
Section 24(f) of the Act.
The title of the securities being registered is "shares of beneficial
interest."
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Important Information
[LOGO] John Hancock September 10, 2004
Dear Contract or Certificate Owner:
I am writing to ask for your vote on important matters concerning your
investment in certain funds within your John Hancock variable annuity or
variable life insurance contract.
Your funds' trustees are proposing the merger of certain funds of the John
Hancock Variable Series Trust I (the "Acquired Funds") into certain other very
similar funds of the Trust (the "Acquiring Funds"). Each Acquired Fund is
essentially identical to the Acquiring Fund into which it will merge, except
for the respective sizes of the two Funds.
These transactions are described in the enclosed proxy materials and
summarized in the questions and answers on the following pages.
The Board of Trustees considered the following matters, among others, in
approving each proposal:
The main purpose of combining the funds is to enable them to be managed
more effectively and efficiently. In most cases, the Acquired Fund has
failed to grow large enough to be operated as economically and as
effectively as is desirable on a long-term basis.
The combination of each Acquired Fund with its corresponding Acquiring
Fund will not result in any increase in the total fees and other
expenses borne by any shareholder. In fact, on a continuing basis,
shareholders can expect to benefit from lower overall expenses than if
the two funds remained separate. Combining the funds will not result in
any dilution of the value of your interest or that of any shareholder of
either fund.
The investment objectives and policies of each Acquired Fund are the
same as those of its corresponding Acquiring Fund. Each Acquired Fund
also is currently managed in the same way and by the same sub-investment
adviser as its corresponding Acquiring Fund.
Each merger proposal has been unanimously approved by the funds' Board of
Trustees, who believe the mergers will benefit you. This includes all of the
trustees who are independent of John Hancock. The enclosed combined proxy
statement and prospectus contains further explanation and important details of
the reorganizations, which I strongly encourage you to read before voting.
YOUR VOTE MAKES A DIFFERENCE!
No matter what size your investment may be, your vote is important. Please
read the enclosed materials, and complete, sign and return the enclosed voting
instruction (proxy) ballot(s) to us immediately. Your prompt response will help
avoid the need for additional mailings. For your convenience, we have provided
a postage-paid envelope. If you have any questions or need additional
information, please contact your Investment Professional or call a John Hancock
Service Representative at 1-800-824-0335, Monday through Friday between 8:00
A.M. and 8:00 P.M. Eastern Time. I thank you for your prompt vote on this
matter.
Sincerely,
/s/ Michele G. Van Leer
Michele G. Van Leer
Chairman
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.
Q&A FUND MERGER PROXY
Q: What are the changes being proposed?
A: Generally, these proposals would merge similar funds to create combined
funds that will have significantly more assets and offer a greater
opportunity for future growth.
Specifically, the trustees of your fund(s) are proposing the following
mergers:
Acquired Fund Acquiring Fund
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PROPOSAL 1 Fundamental Growth Large Cap Growth
PROPOSAL 2 Large Cap Growth B (formerly Large Cap Growth
Large Cap Aggressive Growth)
PROPOSAL 3 Fundamental Value B (formerly Fundamental Value
Large Cap Value CORE/SM/)
PROPOSAL 4 Mid Cap Value Mid Cap Value B (formerly
Small/Mid Cap CORE/SM/)
PROPOSAL 5 Small Cap Growth Small Cap Emerging Growth
PROPOSAL 6 Overseas Equity Overseas Equity B (formerly
International Opportunities)
PROPOSAL 7 Overseas Equity C (formerly Overseas Equity B
Emerging Markets Equity)
Q: Will these changes affect the value of my contract? Will there be any tax
implications?
A: No. There will be no impact on the value of your investment in your variable
life insurance or variable annuity contract, and there are no tax
implications (no Form 1099R will be generated).
Q: Will the transactions count towards the 12 free transfers allowed per
contract year?
A: No, a merger transfer will be free and it will not count toward your
allowable 12 free transfers per year.
Q: What if I do not want to have any amounts I have in an Acquired Fund
transferred to the proposed Acquiring Fund?
A: Prior to the merger, you may contact an Annuity Service Representative at
[1-800-732-5543] or a Life Service Representative at [1-800-732-5543],
Monday through Friday between 8:00 A.M. - 7:00 P.M. Eastern time and request
a transfer to another investment option or Fixed Account (if available in
your state). Please consult your Investment Professional prior to
reallocating your assets.
Q: How do I vote?
A: Follow two simple steps:
STEP 1:First, read the sections of the accompanying proxy statement/prospectus
that apply to your fund(s).
STEP 2:Second, complete the enclosed voting card for each of your funds and
return it in the enclosed postage-paid envelope. If you have more than
one card, you need to complete, sign, and mail each one.
Q: Does my vote make a difference?
A: Whether you are a large or small investor, your vote is important, and we
urge you to participate in this process to ensure that your wishes are
represented when votes are cast at the shareholder meeting. The funds' Board
of Trustees voted unanimously to recommend these changes, and your approval
is needed to implement the changes.
FUNDAMENTAL GROWTH FUND
LARGE CAP GROWTH B FUND/1/
FUNDAMENTAL VALUE B FUND/2/
MID CAP VALUE FUND
SMALL CAP GROWTH
OVERSEAS EQUITY FUND
OVERSEAS EQUITY C FUND/3/
(each a separate investment "Fund" of John Hancock Variable Series Trust I)
197 Clarendon Street, Boston, MA 02117
TOLL FREE NUMBER: 1-800-732-5443
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR OCTOBER 15, 2004
This is the formal agenda for each Fund's shareholders meeting. It tells
what matters will be voted on and the time and place of the meeting. You are
receiving this notice because you own a variable annuity or variable life
insurance contract or certificate that was participating in one or more of the
above-listed Funds as of the record date for the meeting. The insurance company
that issued your contract or certificate will vote the Fund shares attributable
to your contract or certificate in accordance with your instructions.
To the shareholders of each Fund:
A shareholder meeting for your Fund will be held at 197 Clarendon Street,
Boston, Massachusetts on Friday, October 15, 2004 at 11:00 a.m., Eastern Time,
to consider the following:
1. A proposal to combine the Fundamental Growth Fund with the Large Cap
Growth Fund of John Hancock Variable Series Trust I. Shareholders in the
Fundamental Growth Fund would receive Large Cap Growth Fund shares
having the same value as their prior Fundamental Growth Fund shares. The
Funds' Board of Trustees recommends that shareholders vote FOR this
proposal.
2. A proposal to combine the Large Cap Growth B Fund with the Large Cap
Growth Fund of John Hancock Variable Series Trust I. Shareholders in the
Large Cap Growth B Fund would receive Large Cap Growth Fund shares
having the same value as their prior Large Cap Growth B Fund shares. The
Funds' Board of Trustees recommends that shareholders vote FOR this
proposal.
3. A proposal to combine the Fundamental Value B Fund with the Fundamental
Value Fund of John Hancock Variable Series Trust I. Shareholders in the
Fundamental Value B Fund would receive Fundamental Value Fund shares
having the same value as their prior Fundamental Value B Fund shares.
The Funds' Board of Trustees recommends that shareholders vote FOR this
proposal.
4. A proposal to combine the Mid Cap Value Fund with the Mid Cap Value B
Fund of John Hancock Variable Series Trust I. Shareholders in the Mid
Cap Value Fund would receive Mid Cap Value B Fund shares having the same
value as their prior Mid Cap Value Fund shares. The Funds' Board of
Trustees recommends that shareholders vote FOR this proposal.
5. A proposal to combine the Small Cap Growth Fund with the Small Cap
Emerging Growth Fund of John Hancock Variable Series Trust I.
Shareholders in the Small Cap Growth Fund would receive Small Cap
Emerging Growth Fund shares having the same value as their prior Small
Cap Growth Fund shares. The Funds' Board of Trustees recommends that
shareholders vote FOR this proposal.
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/1/ Known as the Large Cap Aggressive Growth Fund prior to December 15, 2003.
/2/ Known as the Large Cap Value CORE/SM/ Fund prior to May 1, 2004.
/3/ Known as the Emerging Markets Equity Fund prior to May 1, 2004.
6. A proposal to combine the Overseas Equity Fund with the Overseas Equity
B Fund of John Hancock Variable Series Trust I. Shareholders in the
Overseas Equity Fund would receive Overseas Equity B Fund shares having
the same value as their prior Overseas Equity Fund shares. The Funds'
Board of Trustees recommends that shareholders vote FOR this proposal.
7. A proposal to combine the Overseas Equity C Fund with the Overseas
Equity B Fund of John Hancock Variable Series Trust. Shareholders in the
Overseas Equity C Fund would receive Overseas Equity B Fund shares
having the same value as their prior Overseas Equity C Fund shares. The
Funds' Board of Trustees recommends that shareholders vote FOR this
proposal.
8. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on August 24, 2004 are
entitled to vote at the meeting and any related follow-up meetings
(adjournments).
Whether or not you expect to attend the meeting, please complete and return
the enclosed proxy card (voting instruction card). If contract and certificate
owners do not return their proxies in sufficient numbers, your Fund could incur
the cost of extra solicitations.
By order of the Board of Trustees,
/s/ Michele G. Van Leer
Michele G. Van Leer
Chairman, Board of Trustees
2
FUNDAMENTAL GROWTH FUND
LARGE CAP GROWTH B FUND/1/
FUNDAMENTAL VALUE B FUND/2/
MID CAP VALUE FUND
SMALL CAP GROWTH FUND
OVERSEAS EQUITY FUND
OVERSEAS EQUITY C FUND/3/
(each an "Acquired Fund" and a separate investment fund of John Hancock
Variable Series Trust I)
197 Clarendon Street, Boston, MA 02117,
TOLL FREE NUMBER: 1-800-732-5443
LARGE CAP GROWTH FUND
FUNDAMENTAL VALUE FUND
MID CAP VALUE B FUND/4/
SMALL CAP EMERGING GROWTH FUND
OVERSEAS EQUITY B FUND/5/
(each an "Acquiring Fund" and a separate investment fund of John Hancock
Variable Series Trust I)
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated: September 10, 2004
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/1/ Known as the Large Cap Aggressive Growth Fund prior to December 15, 2003.
/2/ Known as the Large Cap Value CORE/SM/ Fund prior to May 1, 2004.
/3/ Known as the Emerging Markets Equity Fund prior to May 1, 2004.
/4/ Known as the Small/Mid Cap CORE/SM/ Fund prior to May 1, 2004.
/5/ Known as the International Opportunities Fund prior to May 1, 2004.
1
Shareholders in an Acquired Fund on the record date of the meeting can vote
for the Proposal relating to that Fund as follows:
FUND PROPOSAL
---- -------------
Fundamental Growth...................... 1
Large Cap Growth B...................... 2
Fundamental Value B..................... 3
Mid Cap Value........................... 4
Small Cap Growth........................ 5
Overseas Equity......................... 6
Overseas Equity C....................... 7
This Proxy Statement/Prospectus contains information that a shareholder of
an Acquired Fund should know before voting. Please read it and retain it for
future reference.
How to Get More Information:
The Trust is a series-type open-end management investment company, and has
filed with the Securities and Exchange Commission (the "SEC") a Statement of
Additional Information, dated September 10, 2004, relating to the proposed
combination of the Acquired and Acquiring Funds. The Statement of Additional
Information is incorporated by reference into this Proxy Statement/Prospectus.
A prospectus for the Acquired Funds, dated May 1, 2004 (the "Acquired Fund
Prospectus"), also is on file with the SEC and is incorporated into this Proxy
Statement/Prospectus by reference. You can request a free copy of either of
these documents, using the address or toll-free number shown on the front cover
of this Proxy Statement/Prospectus.
The SEC maintains a web site at http://www.sec.gov where you can also find
the Acquired Fund Prospectus and Statement of Additional Information mentioned
above, as well as other information about the Acquired and Acquiring Funds.
The Securities and Exchange Commission has not approved or disapproved the
securities described in this Proxy Statement/Prospectus, and has not passed on
the accuracy or the adequacy of this Proxy Statement/Prospectus. Anyone who
tells you otherwise is committing a federal crime.
2
CONTENTS OF THIS PROXY STATEMENT/PROSPECTUS
Page No.
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Proposal 1: Combination of the Fundamental Growth Fund and the Large Cap Growth Fund....... 4
Proposal 2: Combination of the Large Cap Growth B Fund and the Large Cap Growth Fund....... 9
Proposal 3: Combination of the Fundamental Value B Fund and the Fundamental Value Fund..... 14
Proposal 4: Combination of the Mid Cap Value Fund and the Mid Cap Value B Fund............. 20
Proposal 5: Combination of the Small Cap Growth Fund and the Small Cap Emerging Growth Fund 26
Proposal 6: Combination of the Overseas Equity Fund and the Overseas Equity B Fund......... 31
Proposal 7: Combination of the Overseas Equity C Fund and the Overseas Equity B Fund....... 36
Voting Procedures and Conduct of the Shareholders' Meeting................................. 41
Capitalization of the Funds................................................................ 43
Distribution of Fund Shares................................................................ 45
Net Asset and Share Valuations............................................................. 45
Agreement and Plan of Reorganization....................................................... 45
Information Filed with the Securities and Exchange Commission.............................. 46
Appendix A - Basic Information About Each Acquiring Fund................................... A-1
Appendix B - Financial Highlights for Each Acquiring Fund.................................. B-1
Appendix C - Share Ownership Information................................................... C-1
3
PROPOSAL 1: COMBINATION OF FUNDAMENTAL GROWTH FUND (the "Acquired Fund") AND
LARGE CAP GROWTH FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Fundamental Growth Fund (the "Acquired Fund") and the Large Cap Growth
Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of large capitalization stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' portfolio manager may be unsuccessful in making
investment choices that achieve their desired results; and the risk that
the Funds' performance could be more volatile than that of funds which
invest in a larger number of issuers. (Please refer to the material for
the Large Cap Growth Fund in Appendix A at the end of this Proxy
Statement/Prospectus for additional information about these and other
risks, which are substantially the same for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
Fundamental Large Cap (Assuming
Growth Growth Combination
Fund Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ --------------- ---------------- ----------------
Distribution or Service (12b-1) Fees None None None
Investment Management Fees.......... .80%/2/ .80% .79%
Other Expenses...................... .10 .06 .06
Total Annual Fund Operating Expenses .90 .86 .85
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year.
/2/ Restated to reflect a reduction in the rate of investment management fee
approved by the Board of Trustees in March 2004.
4
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Fundamental Growth Fund)...... $102 $318 $552 $1,225
The Acquiring Fund (Large Cap Growth Fund)....... 88 274 477 1,061
Pro-Forma of Acquired and Acquiring Fund Combined 87 271 471 1,049
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $65,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $25 million of assets, while the Acquiring Fund had
approximately $608 million.
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
5
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquiring Fund. Information about this
performance is set forth in Appendixes A and B at the end of this Proxy
Statement/Prospectus. The Acquired Fund's performance record was less
relevant to the Board, for two reasons. First, almost all of that
performance was achieved by sub-advisers that have since been replaced
and that used somewhat different investment programs from that which is
currently in place. Second, because the investment program and
sub-adviser of the two Funds are now the same, the future performance of
the two Funds should not differ, except to the extent that the Acquired
Fund cannot be managed as efficiently and effectively due to its smaller
size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of December 15, 2003, upon John Hancock's recommendation, changes were
made in the Acquired Fund's investment program. Most importantly, Putnam
Investment Management, LLC was replaced as the Fund's sub-adviser.
Also as of December 15, 2003, the Trustees, consistent with a recommendation
of John Hancock, appointed Independence Investment LLC ("Independence
Investment") to take over as the sub-adviser to the Acquired Fund. At the same
meeting, the Trustees also approved a new sub-investment management agreement
for the Fund with Independence Investment on an interim basis, pending
shareholder approval. Shareholders of the Acquired Fund gave such approval at a
special meeting held on March 18, 2004.
Since taking over as the Acquired Fund's sub-adviser, Independence
Investment has sought to manage the Acquired Fund in the same way as it manages
Large Cap Growth Fund.
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales of
additional shares. Because, as discussed above, the Acquired Fund is now
substantially similar to the Large Cap Growth Fund, it is possible to combine
these two funds without disrupting their investment programs or incurring any
additional brokerage commissions or other portfolio "turnover" costs. As a
result of the combination, Acquired Fund shareholders will be part of a
significantly larger Fund that can be operated more economically and
effectively.
6
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. Acquired Fund shareholders would directly benefit from
this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both invest primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
Independence Investment uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
7
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: .80% per annum of the
first $500,000,000 of the Fund's average daily net assets; .75% of the next
$500,000,000; and .70% of any additional amounts. The Acquired Fund currently
has less than $35,000,000 of assets, while the combined assets of the Acquired
Fund and the Acquiring fund will exceed $600,000,000. Therefore, the effective
fee rate will be lower for Acquired Fund shareholders after the combination.
In the investment management agreements of both the Acquiring and Acquired
Funds, John Hancock has committed to reimburse each Fund for most of its
operating expenses (other than investment management fees) in excess of .10%
per annum of the Fund's average daily net assets.
Independence Investment serves as sub-adviser for each Fund. In this
capacity Independence Investment has primary responsibility for making
investment decisions for the Funds' investment portfolios and placing orders
with brokers and dealers to implement those decisions.
Independence Investment receives its compensation from John Hancock, and the
Funds pay no sub-management fees over and above the management fee they pay to
John Hancock. Independence Investment receives sub-management fees from John
Hancock at the following rates for both the Acquiring and the Acquired Fund:
..30% per annum of the first $500,000,000 of the Fund's average daily net
assets; .2625% of the next $500,000,000; and .225% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund; (3) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of such Fund's shares
solely for shares of the Acquiring Fund; (4) the holding period and tax basis
of the shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the combination will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the shareholder
(provided the shares of the Acquired Fund were held as a capital asset on the
date of the combination) immediately prior to the combination; and (5) the
holding period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the combination.
8
PROPOSAL 2: COMBINATION OF LARGE CAP GROWTH B FUND (the "Acquired Fund") AND
LARGE CAP GROWTH FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Large Cap Growth B Fund (the "Acquired Fund") and the Large Cap Growth
Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of large capitalization stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' portfolio manager may be unsuccessful in making
investment choices that achieve their desired results; and the risk that
the Fund's performance could be more volatile than that of funds which
invest in a larger number of issuers. (Please refer to the material for
the Large Cap Growth Fund in Appendix A at the end of this Proxy
Statement/Prospectus for additional information about these and other
risks, which are substantially the same for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
(Assuming
Large Cap Growth Large Cap Growth Combination
B Fund Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ ---------------- ---------------- ----------------
Distribution or Service (12b-1) Fees None None None
Investment Management Fees.......... .80%/2/ .80% .79%
Other Expenses...................... .10 .06 .06
Total Annual Fund Operating Expenses .90 .86 .85
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year.
/2/ Restated to reflect a reduction in the rate of investment management fee
approved by the Board of Trustees in March 2004.
9
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Large Cap Growth B Fund)...... $101 $315 $547 $1,213
The Acquiring Fund (Large Cap Growth Fund)....... 88 274 477 1,061
Pro-Forma of Acquired and Acquiring Fund Combined 87 271 471 1,049
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $65,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $31 million of assets, while the Acquiring Fund had
approximately $608 million.
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
10
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquiring Fund. Information about this
performance is set forth in Appendixes A and B at the end of this Proxy
Statement/Prospectus. The Acquired Fund's performance record was less
relevant to the Board, for two reasons. First, almost all of that
performance was achieved by sub-advisers that have since been replaced
and that used somewhat different investment programs from that which is
currently in place. Second, because the investment program and
sub-adviser of the two Funds are now the same, the future performance of
the two Funds should not differ, except to the extent that the Acquired
Fund cannot be managed as efficiently and effectively due to its smaller
size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of December 15, 2003, upon John Hancock's recommendation, changes were
made in the Acquired Fund's investment program. Most importantly, Janus Capital
Management, LLC was replaced as the Fund's sub-adviser.
Also as of December 15, 2003, the Trustees, consistent with a recommendation
of John Hancock, appointed Independence Investment LLC ("Independence
Investment") to take over as the sub-adviser to the Acquired Fund. At the same
meeting, the Trustees also approved a new sub-investment management agreement
for the Fund with Independence Investment on an interim basis, pending
shareholder approval. Shareholders of the Acquired Fund gave such approval at a
special meeting held on March 18, 2004.
Since taking over as the Acquired Fund's sub-adviser, Independence
Investment has sought to manage the Acquired Fund in the same way as it manages
Large Cap Growth Fund. To reflect this new approach, the Acquired Fund was
renamed "Large Cap Growth B Fund." (Prior to that time, it had been named the
Large Cap Aggressive Growth Fund.)
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales of
additional shares. Because, as discussed above, the Acquired Fund is now
substantially similar to the Large Cap Growth Fund, it is possible to combine
these two funds without disrupting their investment programs or incurring any
additional brokerage commissions or other portfolio "turnover" costs. As a
result of the combination, Acquired Fund shareholders will be part of a
significantly larger Fund that can be operated more economically and
effectively.
11
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. Acquired Fund shareholders would directly benefit from
this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both invest primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
Independence Investment uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
12
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: .80% per annum of the
first $500,000,000 of the Fund's average daily net assets; .75% of the next
$500,000,000; and .70% of any additional amounts. The Acquired Fund currently
has less than $35,000,000 of assets, while the combined assets of the Acquired
Fund and the Acquiring fund will exceed $600,000,000. Therefore, the effective
fee rate will be lower for Acquired Fund shareholders after the combination.
In the investment management agreements of both the Acquiring and Acquired
Funds, John Hancock has committed to reimburse each Fund for most of its
operating expenses (other than investment management fees) in excess of .10%
per annum of the Fund's average daily net assets.
Independence Investment serves as sub-adviser for each Fund. In this
capacity Independence Investment has primary responsibility for making
investment decisions for the Funds' investment portfolios and placing orders
with brokers and dealers to implement those decisions.
Independence Investment receives its compensation from John Hancock, and the
Funds pay no sub-management fees over and above the management fee they pay to
John Hancock. Independence Investment receives sub-management fees from John
Hancock at the following rates for both the Acquiring and the Acquired Fund:
..30% per annum of the first $500,000,000 of the Fund's average daily net
assets; .2625% of the next $500,000,000; and .225% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund; (3) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of such Fund's shares
solely for shares of the Acquiring Fund; (4) the holding period and tax basis
of the shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the combination will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the shareholder
(provided the shares of the Acquired Fund were held as a capital asset on the
date of the combination) immediately prior to the combination; and (5) the
holding period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the combination.
13
PROPOSAL 3: COMBINATION OF FUNDAMENTAL VALUE B FUND (the "Acquired Fund") AND
FUNDAMENTAL VALUE FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Fundamental Value B Fund (the "Acquired Fund") and the Fundamental Value
Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of large capitalization stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' "value" approach to stock selection could underperform
other approaches; and the risk that the Funds' portfolio manager may be
unsuccessful in making investment choices that achieve their desired
results. (Please refer to the material for the Fundamental Value Fund in
Appendix A at the end of this Proxy Statement/Prospectus for additional
information about these and other risks, which are substantially the same
for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
(Assuming
Fundamental Value Fundamental Value Combination
B Fund Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ ----------------- ----------------- ----------------
Distribution or Service (12b-1) Fees................ None None None
Investment Management Fees.......................... .91%/2/ .79% .76%
Other Expenses (Before Expense Reimbursement)....... .19 .11 .12
Total Annual Fund Operating Expenses (Before Expense
Reimbursement).................................... 1.10 .90 .88
Expense Reimbursement/3/............................ (.09) (.01) (.02)
Net Annual Fund Operating Expenses.................. 1.01 .89 .86
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year.
14
/2/ Restated to reflect an increase in the rate of investment management fee
approved by shareholders in March 2004.
/3/ The expense reimbursement is pursuant to a commitment in each Fund's
investment management agreement that John Hancock will reimburse the Fund
for most Other Expenses that exceed .10% per annum. Each agreement will
remain in effect until May 1, 2005 and may be renewed each year thereafter
by the Trust.
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Fundamental Value B Fund)..... $112 $350 $606 $1,340
The Acquiring Fund (Fundamental Value Fund)...... 92 287 498 1,108
Pro-Forma of Acquired and Acquiring Fund Combined 90 281 488 1,084
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $70,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $56 million of assets, while the Acquiring Fund had
approximately $141 million.
15
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquiring Fund. Information about this
performance is set forth in Appendixes A and B at the end of this Proxy
Statement/Prospectus. The Acquired Fund's performance record was less
relevant to the Board, for two reasons. First, almost all of that
performance was achieved by a sub-adviser that has since been replaced
and that used a somewhat different investment program from that which is
currently in place. Second, because the investment program and
sub-adviser of the two Funds are now the same, the future performance of
the two Funds should not differ, except to the extent that the Acquired
Fund cannot be managed as efficiently and effectively due to its smaller
size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of May 1, 2004, upon John Hancock's recommendation, changes were made in
the Acquired Fund's investment program. Most importantly, Goldman Sachs Asset
Management, LLP was replaced as the Fund's sub-adviser.
Also as of May 1, 2004, the Trustees, consistent with a recommendation of
John Hancock, appointed Wellington Management Company, LLP ("Wellington
Management") to take over as the sub-adviser to the Acquired Fund.
Since taking over as the Acquired Fund's sub-adviser, Wellington Management
has sought to manage the Acquired Fund in the same way as it manages
Fundamental Value Fund. To reflect this new approach, the Acquired Fund was
renamed the "Fundamental Value B Fund." (Prior to that time, it had been named
the Large Cap Value CORE/SM/ Fund.)
Finally, John Hancock proposed an increase in the rate of investment
management fees paid by the Acquired Fund, so that the fee schedule of the
Acquired Fund would be the same as that of the Acquiring Fund. That rate
increase was approved by the Acquired Fund's shareholders on March 18, 2004,
and has now gone into effect.
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
16
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales of
additional shares. Because, as discussed above, the Acquired Fund is now
substantially similar to the Fundamental Value Fund, it is possible to combine
these two funds without disrupting their investment programs or incurring any
additional brokerage commissions or other portfolio "turnover" costs. As a
result of the combination, Acquired Fund shareholders will be part of a
significantly larger Fund that can be operated more economically and
effectively.
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. The combined Funds are more likely at some time in the
future to have other operating expenses of less than the .10% level above which
John Hancock currently reimburses the Funds. Acquired Fund shareholders would
directly benefit from this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both invest primarily in a diversified mix of common stocks of
large-sized U.S. companies that are believed to offer favorable prospects for
increasing dividends and growth in capital.
Wellington Management uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
17
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: .95% per annum of the
first $25,000,000 of the Fund's average daily net assets; .85% of the next
$25,000,000; .75% of the next $50 million; and .65% of any additional amounts.
The Acquired Fund currently has less than $60,000,000 of assets, while the
combined assets of the Acquired Fund and the Acquiring fund will approach
$200,000,000. Therefore, the effective fee rate will be lower for Acquired Fund
shareholders after the combination.
In the investment management agreements of both the Acquiring and Acquired
Funds, John Hancock has committed to reimburse each Fund for most of its
operating expenses (other than investment management fees) in excess of .10%
per annum of the Fund's average daily net assets.
Wellington Management serves as sub-adviser for each Fund. In this capacity
Wellington Management has primary responsibility for making investment
decisions for the Funds' investment portfolios and placing orders with brokers
and dealers to implement those decisions.
Wellington Management receives its compensation from John Hancock, and the
Funds pay no sub-management fees over and above the management fee they pay to
John Hancock. Wellington Management receives sub-management fees from John
Hancock at the following rates for both the Acquiring and the Acquired Fund:
..40% per annum of the first $100,000,000 of the Fund's average daily net assets
and .30% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring
18
Fund solely in exchange for shares of the Acquiring Fund; (3) no gain or loss
will be recognized by shareholders of the Acquired Fund upon the exchange of
such Fund's shares solely for shares of the Acquiring Fund; (4) the holding
period and tax basis of the shares of the Acquiring Fund received by each
holder of shares of the Acquired Fund pursuant to the combination will be the
same as the holding period and tax basis of the shares of the Acquired Fund
held by the shareholder (provided the shares of the Acquired Fund were held as
a capital asset on the date of the combination) immediately prior to the
combination; and (5) the holding period and tax basis of the assets of the
Acquired Fund acquired by the Acquiring Fund will be the same as the holding
period and tax basis of those assets to the Acquired Fund immediately prior to
the combination.
19
PROPOSAL 4: COMBINATION OF MID CAP VALUE FUND (the "Acquired Fund") AND MID CAP
VALUE B FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Mid Cap Value Fund (the "Acquired Fund") and the Mid Cap Value B Fund
(the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of "mid cap" stocks in which the Funds invest
could perform less well than other types of investments; the risk that
the Funds' "value" approach to stock selection could underperform other
approaches; the risk that the Funds' portfolio manager may be
unsuccessful in making investment choices that achieve their desired
results; and the risk that the Funds' performance could be more volatile
than that of other funds, to the extent the Funds' investments are more
concentrated in certain market sectors or in particular securities.
(Please refer to the material for the Mid Cap Value B Fund in Appendix A
at the end of this Proxy Statement/Prospectus for additional information
about these and other risks, which are substantially the same for both
Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
(Assuming
Mid Cap Value Mid Cap Value Combination
Fund B Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ --------------- ---------------- ----------------
Distribution or Service (12b-1) Fees................ None None None
Investment Management Fees.......................... 1.05%/2/ 1.05% 1.05%
Other Expenses (Before Expense Reimbursement)....... .37 .14 .15
Total Annual Fund Operating Expenses (Before Expense
Reimbursement).................................... 1.42 1.19 1.20
Expense Reimbursement/3/............................ (.27) (.04) (.05)
Net Annual Fund Operating Expenses.................. 1.15 1.15 1.15
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year.
20
/2/ Restated to reflect a reduction in the rate of investment management fee
approved by the Board of Trustees in March 2004.
/3/ The expense reimbursement is pursuant to a commitment in each Fund's
investment management agreement that John Hancock will reimburse the Fund
for most Other Expenses that exceed .10% per annum. Each agreement will
remain in effect until May 1, 2005 and may be renewed each year thereafter
by the Trust.
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Mid Cap Value Fund)........... $150 $465 $803 $1,757
The Acquiring Fund (Mid Cap Value B Fund)........ 121 378 654 1,443
Pro-Forma of Acquired and Acquiring Fund Combined 122 381 660 1,455
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $60,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund. Also, under the
Acquiring Fund's investment management agreement with John Hancock, John
Hancock reimburses the Fund when certain expenses (which would include expenses
of the combination) exceed .10% per annum. It is possible that all or part of
the expenses of the combination will be reimbursed to the Fund under this
arrangement.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
21
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $31 million of assets, while the Acquiring Fund had
approximately $98 million.
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquired Fund. The Acquiring Fund's
performance record was less relevant to the Board, for two reasons.
First, almost all of that performance was achieved by a sub-adviser that
has since been replaced and that used a somewhat different investment
program from that which is currently in place. Second, because the
investment program and sub-adviser of the two Funds are now the same, the
future performance of the two Funds should not differ, except to the
extent that the Acquired Fund cannot be managed as efficiently and
effectively due to its smaller size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of May 1, 2004, upon John Hancock's recommendation, changes were made in
the Acquiring Fund's investment program. Most importantly, Goldman Sachs Asset
Management, LLP was replaced as the Fund's sub-adviser.
Also as of May 1, 2004, the Trustees, consistent with a recommendation of
John Hancock, appointed T. Rowe Price Associates, Inc. ("T. Rowe") to take over
as the sub-adviser to the Acquiring Fund.
Since taking over as the Acquiring Fund's sub-adviser, T. Rowe has sought to
manage the Acquiring Fund in the same way as it manages Mid Cap Value Fund. To
reflect this new approach, the Acquiring Fund was renamed the "Mid Cap Value B
Fund." (Prior to that time, it had been named the Small/Mid Cap CORE/SM/ Fund.)
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales
22
of additional shares. Because, as discussed above, the Acquiring Fund is now
substantially similar to the Acquired Fund, it is possible to combine these two
funds without disrupting their investment programs or incurring any additional
brokerage commissions or other portfolio "turnover" costs. As a result of the
combination, Acquired Fund shareholders will be part of a significantly larger
Fund that can be operated more economically and effectively.
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. The combined Funds are more likely at some time in the
future to have other operating expenses of less than the .10% level above which
John Hancock currently reimburses the Funds. Acquired Fund shareholders would
directly benefit from this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both invest primarily in a diversified mix of common stocks of
mid-sized U.S. companies that are believed to be undervalued by various
measures and offer good prospects for capital appreciation.
T. Rowe uses substantially the same personnel and analytical techniques in
managing each of these Funds.
At the date of this Proxy Statement/Prospectus, these Funds normally invest
at least 80% (usually higher) of their assets in companies with market
capitalizations that are within the range of capitalizations of companies in
the Russell Mid Cap(TM) Value Index or the Russell Mid Cap(TM) Index. It is
expected that, for both Funds, the S&P Mid Cap 400 Index will replace the
Russell Mid Cap(TM) Index as one of the indices that the Funds use for this
purpose. This will give the Funds more latitude to invest in smaller companies,
because the lower end of capitalizations in the S&P Mid Cap 400 Index ($351
million at May 31, 2004) is lower than that of the Russell Mid Cap(TM) Index
($534 million at May 31, 2004). This change, therefore, could increase the
Funds' exposure to the risks of investing in smaller companies.
23
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: 1.05% per annum of the
first $25,000,000 of the Fund's average daily net assets and 1.00% of any
additional amounts. The Acquired Fund currently has less than $35,000,000 of
assets, while the combined assets of the Acquired Fund and the Acquiring fund
will be well over $100,000,000. Therefore, the effective fee rate will be lower
for Acquired Fund shareholders after the combination.
In the investment management agreements of both the Acquiring and Acquired
Funds, John Hancock has committed to reimburse each Fund for most of its
operating expenses (other than investment management fees) in excess of .10%
per annum of the Fund's average daily net assets.
T. Rowe serves as sub-adviser for each Fund. In this capacity T. Rowe has
primary responsibility for making investment decisions for the Funds'
investment portfolios and placing orders with brokers and dealers to implement
those decisions.
T. Rowe receives its compensation from John Hancock, and the Funds pay no
sub-management fees over and above the management fee they pay to John Hancock.
T. Rowe receives sub-management fees from John Hancock at the following rates
for both the Acquiring and the Acquired Fund: .60% per annum of the first
$50,000,000 of the Fund's average daily net asset and .50% of all of the Fund's
net assets once such assets exceed $100,000,000.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to
24
the Acquired Fund and the Acquiring Fund; (2) no gain or loss will be
recognized by the Acquired Fund or the Acquiring Fund upon the transfer of all
of the assets and liabilities, if any, of the Acquired Fund to the Acquiring
Fund solely in exchange for shares of the Acquiring Fund; (3) no gain or loss
will be recognized by shareholders of the Acquired Fund upon the exchange of
such Fund's shares solely for shares of the Acquiring Fund; (4) the holding
period and tax basis of the shares of the Acquiring Fund received by each
holder of shares of the Acquired Fund pursuant to the combination will be the
same as the holding period and tax basis of the shares of the Acquired Fund
held by the shareholder (provided the shares of the Acquired Fund were held as
a capital asset on the date of the combination) immediately prior to the
combination; and (5) the holding period and tax basis of the assets of the
Acquired Fund acquired by the Acquiring Fund will be the same as the holding
period and tax basis of those assets to the Acquired Fund immediately prior to
the combination.
25
PROPOSAL 5: COMBINATION OF SMALL CAP GROWTH FUND (the "Acquired Fund") AND
SMALL CAP EMERGING GROWTH FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Small Cap Growth Fund (the "Acquired Fund") and the Small Cap Emerging
Growth Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of small capitalization stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' "growth" approach to stock selection could underperform
other approaches; the risk that the Funds' portfolio manager may be
unsuccessful in making investment choices that achieve their desired
results; and the risk that the Funds' performance could be more volatile
than that of other funds, to the extent the Funds' investments are
concentrated in certain market segments or in particular stocks. (Please
refer to the material for the Small Cap Emerging Growth Fund in Appendix
A at the end of this Proxy Statement/Prospectus for additional
information about these and other risks, which are substantially the same
for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
Small Cap Small Cap (Assuming
Growth Emerging Combination
Fund Growth Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ --------------- ---------------- ----------------
Distribution or Service (12b-1) Fees................ None None None
Investment Management Fees.......................... 1.04%/2/ 1.05%/4/ 1.02%
Other Expenses (Before Expense Reimbursement)....... .17 .20 .17
Total Annual Fund Operating Expenses (Before Expense
Reimbursement).................................... 1.21 1.25 1.19
Expense Reimbursement/3/............................ (.07) (.10) (.07)
Net Annual Fund Operating Expenses.................. 1.14 1.15 1.12
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year.
26
/2/ Restated to reflect a decrease in the rate of investment management fee
approved by the Board of Trustees in February 2004.
/3/ The expense reimbursement is pursuant to a commitment in each Fund's
investment management agreement that John Hancock will reimburse the Fund
for most Other Expenses that exceed .10% per annum. Each agreement will
remain in effect until May 1, 2005 and may be renewed each year thereafter
by the Trust.
/4/ Restated to reflect an increase in the rate of investment management fee,
effective May 1, 2003.
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Small Cap Growth Fund).......... $124 $387 $670 $1,477
The Acquiring Fund (Small Cap Emerging Growth Fund) 127 397 686 1,511
Pro-Forma of Acquired and Acquiring Fund Combined.. 121 378 654 1,443
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $155,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund. Also, under the
Acquiring Fund's investment management agreement with John Hancock, John
Hancock reimburses the Fund when certain expenses (which would include expenses
of the combination) exceed .10% per annum. It is likely that the expenses of
the combination will be reimbursed to the Fund under this arrangement.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
27
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $144 million of assets, while the Acquiring Fund had
approximately $74 million.
. The fact that a single larger Fund would have a larger asset base to
defray Fund costs and would be better able to manage typical cash inflows
and outflows without disruption.
. The fact that a combination with the Acquiring Fund would permit the
shareholders of the Acquired Fund to continue to have the same investment
program, as well as the expected future benefits of lower fee and expense
levels and more effective management.
. The performance record of the Acquiring Fund. Information about this
performance is set forth in Appendixes A and B at the end of this Proxy
Statement/Prospectus. The Acquired Fund's performance record was less
relevant to the Board, for two reasons. First, almost all of that
performance was achieved by a sub-adviser that has since been replaced
and that used a somewhat different investment program from that which is
currently in place. Second, because the investment program and
sub-adviser of the two Funds are now the same, the future performance of
the two Funds should not differ, except to the extent that the Acquired
Fund can be managed more efficiently and effectively due to its larger
size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of May 1, 2004, upon John Hancock's recommendation, changes were made in
the Acquired Fund's investment program. Most importantly, JH Advisers, LLC was
replaced as the Fund's sub-adviser.
Also as of May 1, 2004, the Trustees, consistent with a recommendation of
John Hancock, appointed Wellington Management Company, LLP ("Wellington
Management") to take over as the sub-adviser to the Acquired Fund.
Since taking over as the Acquired Fund's sub-adviser, Wellington Management
has sought to manage the Acquired Fund in the same way as it manages the Small
Cap Emerging Growth Fund.
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
Because, as discussed above, the Acquired Fund is now substantially similar
to the Small Cap Emerging Growth Fund, it is possible to combine these two
funds without disrupting their investment programs or incurring any additional
brokerage commissions or other portfolio "turnover" costs. As a result of the
combination, Acquired Fund shareholders will be part of a significantly larger
Fund that can be operated more economically and effectively.
28
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. The combined Funds are more likely at some time in the
future to have other operating expenses of less than the .10% level above which
John Hancock currently reimburses the Funds. Acquired Fund shareholders would
directly benefit from this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both invest primarily in common stocks of small U.S. companies that
are believed to offer above average potential for growth in revenues and
earnings.
Wellington Management uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
29
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: 1.05% per annum of the
first $100,000,000 and 1.00% of any additional amounts. The Acquired Fund
currently has approximately $145,000,000 of assets, while the combined assets
of the Acquired Fund and the Acquiring fund will exceed $200,000,000.
Therefore, the effective fee rate will be lower for Acquired Fund shareholders
after the combination.
In the investment management agreements of both the Acquiring and Acquired
Funds, John Hancock has committed to reimburse each Fund for most of its
operating expenses (other than investment management fees) in excess of .10%
per annum of the Fund's average daily net assets.
Wellington Management serves as sub-adviser for each Fund. In this capacity
Wellington Management has primary responsibility for making investment
decisions for the Funds' investment portfolios and placing orders with brokers
and dealers to implement those decisions.
Wellington Management receives its compensation from John Hancock, and the
Funds pay no sub-management fees over and above the management fee they pay to
John Hancock. Wellington Management receives sub-management fees from John
Hancock at the following rates for both the Acquiring and the Acquired Fund:
..65% per annum of the first $100,000,000 of the Fund's average daily net assets
and .60% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund; (3) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of such Fund's shares
solely for shares of the Acquiring Fund; (4) the holding period and tax basis
of the shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the combination will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the shareholder
(provided the shares of the Acquired Fund were held as a capital asset on the
date of the combination) immediately prior to the combination; and (5) the
holding period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the combination.
30
PROPOSAL 6: COMBINATION OF OVERSEAS EQUITY FUND (the "Acquired Fund") AND
OVERSEAS EQUITY B FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Overseas Equity Fund (the "Acquired Fund") and the Overseas Equity B
Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of large and "mid cap" stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' portfolio manager may be unsuccessful in making
investment choices that achieve their desired results; and risks of
investing in foreign securities, such as limited government regulation of
foreign markets and issuers, lack of public information about foreign
issuers, economic, political and social instability in foreign countries,
and foreign currency rate fluctuations. Many of these risks are magnified
to the extent that the Funds invest in emerging market countries. (Please
refer to the material for the Overseas Equity B Fund in Appendix A at the
end of this Proxy Statement/Prospectus for additional information about
these and other risks, which are substantially the same for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
(Assuming
Overseas Equity Overseas Equity Combination
Fund B Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ --------------- ---------------- ----------------
Distribution or Service (12b-1) Fees None None None
Investment Management Fees.......... 1.23%/2/ 1.13% 1.11%
Other Expenses...................... .34 .31 .29
Total Annual Fund Operating Expenses 1.57 1.44/3/ 1.40
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year. The information presented has
been restated to reflect discontinuance of John Hancock's obligation to
reimburse the Funds for most Other Expenses in excess of .10% of average
net assets per annum. Such discontinuance was approved by the shareholders
of both the Acquired and Acquiring Funds in March 2004.
/2/ Restated to reflect an increase in the rate of investment management fee
approved by shareholders in March 2004.
/3/ Restated to reflect the termination, as of May 1, 2004, of an arrangement
where John Hancock would reimburse most of the Fund's Other Expenses in
excess of .10% per annum.
31
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Overseas Equity Fund)......... $160 $496 $855 $1,867
The Acquiring Fund (Overseas Equity B Fund)...... 147 456 787 1,724
Pro-Forma of Acquired and Acquiring Fund Combined 138 431 745 1,635
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $70,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $58 million of assets, while the Acquiring Fund had
approximately $127 million.
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
32
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquired Fund. The Acquiring Fund's
performance record was less relevant to the Board, for two reasons.
First, almost all of that performance was achieved by a sub-adviser that
has since been replaced and that used a somewhat different investment
program from that which is currently in place. Second, because the
investment program and sub-adviser of the two Funds are now the same, the
future performance of the two Funds should not differ, except to the
extent that the Acquired Fund cannot be managed as efficiently and
effectively due to its smaller size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of May 1, 2004, upon John Hancock's recommendation, changes were made in
the Acquiring Fund's investment program. Most importantly, T. Rowe Price
International, Inc. was replaced as the Fund's sub-adviser.
Also as of May 1, 2004, the Trustees, consistent with a recommendation of
John Hancock, appointed Capital Guardian Trust Company ("Capital Guardian") to
take over as the sub-adviser to the Acquiring Fund.
Since taking over as the Acquiring Fund's sub-adviser, Capital Guardian has
sought to manage the Acquiring Fund in the same way as it manages the Overseas
Equity Fund. To reflect this new approach, the Acquiring Fund was renamed the
"Overseas Equity B Fund." (Prior to that time, it had been named the
International Opportunities Fund.)
Finally, John Hancock proposed an increase in the rate of investment
management fees paid by the Acquired Fund, so that the fee schedule of the
Acquired Fund would be the same as that of the Acquiring Fund. John Hancock
also proposed to terminate the provision in its investment management
agreements with the Acquired Fund and the Acquiring Fund that required John
Hancock to reimburse each Fund to the extent that certain Fund operating
expenses (not including investment management fees) exceeded .10% per annum.
These proposals were approved by the shareholders of the respective Funds on
March 18, 2004 and have now gone into effect.
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales of
additional shares. Because, as discussed above, the Acquiring Fund is now
substantially similar to the Acquired Fund, it is possible to combine these two
funds without disrupting their investment programs or incurring substantial
additional brokerage commissions or other portfolio "turnover" costs. As a
result of the
33
combination, Acquired Fund shareholders will be part of a significantly larger
Fund that can be operated more economically and effectively.
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. Acquired Fund shareholders would directly benefit from
this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both normally invest at least 80% of their assets in equity
securities of companies outside the U.S., in a diversified mix of large
established and medium-sized foreign companies located primarily in developed
countries and in emerging markets to a lesser extent.
Capital Guardian uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each Fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information referred to on the
front cover page of this Proxy Statement/Prospectus. A "fundamental" investment
restriction is one that cannot be changed without approval of the Fund's
shareholders.
34
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: 1.30% per annum of the
first $20,000,000 of the Fund's average daily net assets; 1.15% of the next
$30,000,000; and 1.05% of any additional amounts. The Acquired Fund currently
has less than $60,000,000 of assets, while the combined assets of the Acquired
Fund and the Acquiring fund will be well over $150,000,000. Therefore, the
effective fee rate will be lower for Acquired Fund shareholders after the
combination.
Capital Guardian serves as sub-adviser for each Fund. In this capacity
Capital Guardian has primary responsibility for making investment decisions for
the Funds' investment portfolios and placing orders with brokers and dealers to
implement those decisions.
Capital Guardian receives its compensation from John Hancock, and the Funds
pay no sub-management fees over and above the management fee they pay to John
Hancock. Capital Guardian receives sub-management fees from John Hancock at the
following rates for both the Acquiring and the Acquired Fund: .60% per annum of
the first $300,000,000 of the Fund's average daily net assets; .45% of the next
$200,000,000; and 40% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund; (3) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of such Fund's shares
solely for shares of the Acquiring Fund; (4) the holding period and tax basis
of the shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the combination will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the shareholder
(provided the shares of the Acquired Fund were held as a capital asset on the
date of the combination) immediately prior to the combination; and (5) the
holding period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the combination.
35
PROPOSAL 7: COMBINATION OF OVERSEAS EQUITY C FUND (the "Acquired Fund") AND
OVERSEAS EQUITY B FUND (the "Acquiring Fund")
Synopsis of the Proposed Combination
The Overseas Equity C Fund (the "Acquired Fund") and the Overseas Equity B
Fund (the "Acquiring Fund") are very similar Funds:
. Each is a separate investment fund of John Hancock Variable Series Trust
I (the "Trust"), which is a Massachusetts Business Trust;
. Each shares the same investment goals, policies and strategies;
. Each has the same investment adviser and (for day-to-day portfolio
management) the same sub-adviser, who manages the Funds in substantially
the same manner; and
. Each is subject to substantially the same risks. These include primarily
the risk that the type of large and "mid cap" stocks in which the Funds
invest could perform less well than other types of investments; the risk
that the Funds' portfolio manager may be unsuccessful in making
investment choices that achieve their desired results; and risks of
investing in foreign securities, such as limited government regulation of
foreign markets and issuers, lack of public information about foreign
issuers, economic, political and social instability in foreign countries,
and foreign currency rate fluctuations. Many of these risks are magnified
to the extent that the Funds invest in emerging market countries. (Please
refer to the material for the Overseas Equity B Fund in Appendix A at the
end of this Proxy Statement/Prospectus for additional information about
these and other risks, which are substantially the same for both Funds.)
Because these two Funds are so similar, the main purpose of combining them
is to enable the Funds to be managed more effectively and efficiently. In
particular, the Acquired Fund has not grown large enough to be operated as
effectively and efficiently as is desirable on a long-term basis. Nor does the
Acquired Fund have prospects for increased growth for the foreseeable future.
The combination of the Acquired Fund and the Acquiring Fund will not result
in any increase in the total fees and expenses borne by any shareholder. In
fact, shareholders can expect to benefit from lower rates of fees and expenses
than if the two Funds remained separate. Combining the Funds will not result in
any dilution of the value of your interest or that of any shareholder of either
Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
Fees and Expenses
The following table shows each Fund's fees and expenses for the twelve
months ended December 31, 2003, as well as on a "pro-forma" basis as if the
combination had occurred at the beginning of that period.
Pro-Forma
(Assuming
Overseas Equity Overseas Equity Combination
C Fund B Fund of Acquired and
Type of Fee or Expense/1/ (Acquired Fund) (Acquiring Fund) Acquiring Funds)
- ------------------------ --------------- ---------------- ----------------
Distribution or Service (12b-1) Fees None None None
Investment Management Fees.......... 1.21%/2/ 1.13% 1.11%
Other Expenses...................... .75 .31 .30
Total Annual Fund Operating Expenses 1.96 1.44/3/ 1.41
- --------
/1/ The fees and expenses shown are expressed as an annual percentage of the
Fund's average daily net assets for the year. The information presented
has been restated to reflect discontinuance of John Hancock's obligation
to reimburse the Funds for most Other Expenses in excess of .10% of
average net assets per annum. Such discontinuance was approved by the
shareholders of both the Acquired and Acquiring Funds in March 2004.
/2/ Restated to reflect a decrease in the rate of investment management fee
approved by shareholders in March 2004.
/3/ Restated to reflect the termination, as of May 1, 2004, of an arrangement
where John Hancock would reimburse most of the Fund's Other Expenses in
excess of .10% per annum.
36
The following examples are intended to help you compare the cost of
investing in the Acquired Fund with the cost of investing in the Acquiring
Fund. The examples assume that Fund expenses continue at the rates shown in the
table above. The examples assume that a shareholder invests $10,000 in each
alternative for the time periods indicated and then redeems all of the
shareholder's shares at the end of those periods. The examples also assume that
the shareholder's investment has a 5% return each year. (The examples do not
reflect the fees and expenses associated with variable annuity and variable
life insurance contracts for which the Funds serve as investment vehicles.)
Although your actual returns may be higher or lower, based on these assumptions
your cost would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Acquired Fund (Overseas Equity C Fund)....... $199 $615 $1,057 $2,285
The Acquiring Fund (Overseas Equity B Fund)...... 147 456 787 1,724
Pro-Forma of Acquired and Acquiring Fund Combined 144 446 771 1,691
Terms of Proposed Combination
In the combination, the Acquiring Fund will acquire all of the Acquired
Fund's assets and assume all of its liabilities. Also, the Acquiring Fund will
issue its shares in place of all then outstanding shares of the Acquired Fund.
The combination has been structured as a tax-free reorganization. Therefore,
the combination will have no direct or indirect tax consequences for you.
All of the expenses relating to the combination (estimated to be $80,000)
are being borne by the Acquiring Fund. Accordingly, such expenses will not have
any material impact for participants in the Acquired Fund.
The combination will take place at the Funds' regular net asset values per
share. This means that the value of each shareholder's account after the
combination will be exactly the same as if the combination had not occurred.
Information about calculation of net asset values and per share values appears
under "Net Asset and Share Valuations." Nor will there be any change in the
rates of any charges the insurance company imposes under your contract or
certificate.
The Trust's Board of Trustees has unanimously approved and recommends the
combination of the Funds as being in the best interests of the Acquired Fund
and its shareholders.
Board Consideration of the Combination
The Trust's Board of Trustees has determined that combining the Acquired
Fund with the Acquiring Fund is in the best interests of the Acquired Fund and
its shareholders, and the Board of Trustees unanimously recommends approval of
the combination by the shareholders of the Acquired Fund at the meeting.
The Trustees considered this matter at a Board meeting held on June 23,
2004. The factors relevant to the Trustees' conclusions included the following:
. The fact that the Acquired Fund and the Acquiring Fund are now identical,
except that, at the time of the Board meeting, the Acquired Fund had
approximately $73 million of assets, while the Acquiring Fund had
approximately $127 million.
. The fact that, due to its relatively small size, the Acquired Fund is
less economic to operate, and there are no reasonable prospects for the
Acquired Fund, by itself, to remedy this. In particular, a larger Fund
37
would have a larger asset base to defray Fund costs and would be better
able to manage typical cash inflows and outflows without disruption.
. The fact that a combination with the Acquiring Fund would address these
problems in a way that permits the shareholders of the Acquired Fund to
continue to have the same investment program, as well as the expected
future benefits of lower fee and expense levels and more effective
management.
. The performance record of the Acquired Fund. The Acquiring Fund's
performance record was less relevant to the Board, for two reasons.
First, almost all of that performance was achieved by sub-advisers that
have since been replaced and that used somewhat different investment
programs from that which is currently in place. Second, because the
investment program and sub-adviser of the two Funds are now the same, the
future performance of the two Funds should not differ, except to the
extent that the Acquired Fund cannot be managed as efficiently and
effectively due to its smaller size.
. The fact that you will not suffer any tax consequences, dilution or other
disadvantages from the proposed combination.
. The fact that any advantage resulting to the Funds' investment manager or
sub-investment manager from the combination will not be at the expense of
either Fund or owners participating in that Fund.
Reasons for Combining the Funds
Recent Developments
As of May 1, 2004, upon John Hancock's recommendation, changes were made in
the Acquired Fund's investment program. Most importantly, Morgan Stanley
Investment Management, Inc. was replaced as the Fund's sub-adviser.
Also as of May 1, 2004, the Trustees, consistent with a recommendation of
John Hancock, appointed Capital Guardian Trust Company ("Capital Guardian") to
take over as the sub-adviser to the Acquired Fund.
Since taking over as the Acquired Fund's sub-adviser, Capital Guardian has
sought to manage the Acquired Fund in the same way as it has also been managing
both the Acquiring Fund and the Trust's Overseas Equity Fund. To reflect this
new approach, the Acquired Fund was renamed the "Overseas Equity C Fund."
(Prior to that time, it had been named the Emerging Markets Equity Fund.)
Finally, John Hancock proposed an decrease in the rate of investment
management fees paid by the Acquired Fund, so that the fee schedule of the
Acquired Fund would be the same as that of the Acquiring Fund. John Hancock
also proposed to terminate the provision in its investment management
agreements with the Acquired Fund and the Acquiring Fund that required John
Hancock to reimburse each Fund to the extent that certain Fund operating
expenses (not including investment management fees) exceeded .10% per annum.
These proposals were approved by the shareholders of the respective Funds on
March 18, 2004 and have now gone into effect.
Because the Acquired Fund and the Acquiring Fund are now substantially
identical (except for their relative sizes), John Hancock and its affiliate
(John Hancock Variable Life Insurance Company) have stopped offering the
Acquired Fund as an investment option under newly-issued variable life
insurance and variable annuity contracts. This means that the Acquired Fund has
no practical means of increasing sales of its shares. See "Distribution of Fund
Shares."
Potential Benefits from Combining the Funds
The proposed combination addresses the problem that the Acquired Fund is
currently too small to be operated as efficiently and effectively as is
desirable and has poor prospects for increasing its size through sales
38
of additional shares. Because, as discussed above, the Acquiring Fund is now
substantially similar to the Acquired Fund, it is possible to combine these two
funds without disrupting their investment programs or incurring substantial
additional brokerage commissions or other portfolio "turnover" costs. As a
result of the combination, Acquired Fund shareholders will be part of a
significantly larger Fund that can be operated more economically and
effectively.
A larger size can permit a Fund to negotiate lower prices for certain items.
For example, the investment management fees that the Funds pay to John Hancock
are subject to automatic reductions (commonly referred to as "break points") as
a Fund's assets increase. Thus, once the Acquired Fund's assets are added to
those of the Acquiring Fund, the percentage of such assets paid as investment
management fees will be lower than the rate that the Acquired Fund would have
paid on its assets alone. The Acquired Fund's shareholders will directly
benefit from such cost reductions.
Combining the Funds will also make available certain efficiencies that are
expected to reduce the rate of other operating expenses below what the Acquired
Fund alone would pay. Acquired Fund shareholders would directly benefit from
this.
Similarly, with more assets to invest, the combined Funds should in some
cases be able to negotiate prices and commission rates on portfolio
transactions that are more favorable than the Acquired Fund alone could achieve.
In addition, it is more difficult to achieve what the sub-adviser regards as
an optimal level of diversification for investments of the Acquired Fund than
would be the case for the combined Funds. This is because the Acquired Fund has
a much smaller amount of assets than the combined Funds will have.
Further Comparison of the Acquiring Fund and the Acquired Fund
Investment Goals
The Acquiring Fund and the Acquired Fund share the same investment goal:
long-term capital appreciation.
The investment goal of both Funds is "non-fundamental," which means that it
may be changed by the Board of Trustees without shareholder approval.
Investment Strategies
The investment strategies for the Acquiring Fund and the Acquired Fund are
identical. Both normally invest at least 80% of their assets in equity
securities of companies outside the U.S., in a diversified mix of large
established and medium-sized foreign companies located primarily in developed
countries and in emerging markets to a lesser extent.
Capital Guardian uses substantially the same personnel and analytical
techniques in managing each of these Funds.
For additional details about the Funds' investment strategies (which are the
same for both Funds), please refer to the discussion of the Acquiring Fund in
Appendix A at the end of this Proxy Statement/Prospectus.
Fundamental Investment Restrictions
The investment restrictions adopted by each fund as "fundamental" are set
forth under the caption "The Funds' Fundamental Investment Restrictions" in
Attachment 1 to the Statement of Additional Information
39
referred to on the front cover page of this Proxy Statement/Prospectus. A
"fundamental" investment restriction is one that cannot be changed without
approval of the Fund's shareholders.
The fundamental investment restrictions of the Acquired Fund are identical
to those of the Acquiring Fund.
Investment Advisory Services
John Hancock serves as investment adviser to both the Acquired Fund and the
Acquiring Fund. In this capacity, John Hancock advises each Fund in connection
with policy decisions; administers the Funds' day-to-day operations; provides
the Funds with personnel, office space, equipment and supplies; maintains Fund
records; and supervises the activities of the Funds' sub-adviser and other
service providers.
The Acquired Fund and the Acquiring Fund each pay investment management fees
to John Hancock pursuant to the following fee schedule: 1.30% per annum of the
first $20,000,000 of the Fund's average daily net assets; 1.15% of the next
$30,000,000; and 1.05% of any additional amounts. The Acquired Fund currently
has less than $60,000,000 of assets, while the combined assets of the Acquired
Fund and the Acquiring fund will be well over $150,000,000. Therefore, the
effective fee rate will be lower for Acquired Fund shareholders after the
combination.
Capital Guardian serves as sub-adviser for each Fund. In this capacity
Capital Guardian has primary responsibility for making investment decisions for
the Funds' investment portfolios and placing orders with brokers and dealers to
implement those decisions.
Capital Guardian receives its compensation from John Hancock, and the Funds
pay no sub-management fees over and above the management fee they pay to John
Hancock. Capital Guardian receives sub-management fees from John Hancock at the
following rates for both the Acquiring and the Acquired Fund: .60% per annum of
the first $300,000,000 of the Fund's average daily net assets; .45% of the next
$200,000,000; and 40% of any additional amounts.
Tax Considerations
The tax treatment of two Funds is identical. Both seek to qualify as
regulated investment companies under sub-chapter M of the Internal Revenue Code
(the "Code"). This means that neither Fund expects to pay any federal income
taxes. You should refer to the prospectus for your variable annuity or variable
life insurance contract or certificate for a discussion of the tax consequences
of that contract or certificate for you.
It is a condition precedent to combining the Funds that the Trust, on behalf
of both the Acquired and the Acquiring Funds shall have received an opinion
from Foley & Lardner LLP, special counsel to the Trust, to the effect that,
based on the facts and assumptions stated therein, for federal income tax
purposes: (1) the combination will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and
the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of all of the assets and liabilities,
if any, of the Acquired Fund to the Acquiring Fund solely in exchange for
shares of the Acquiring Fund; (3) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of such Fund's shares
solely for shares of the Acquiring Fund; (4) the holding period and tax basis
of the shares of the Acquiring Fund received by each holder of shares of the
Acquired Fund pursuant to the combination will be the same as the holding
period and tax basis of the shares of the Acquired Fund held by the shareholder
(provided the shares of the Acquired Fund were held as a capital asset on the
date of the combination) immediately prior to the combination; and (5) the
holding period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the combination.
40
VOTING PROCEDURES AND CONDUCT
OF THE SHAREHOLDERS' MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of voting instructions by the management of John Hancock Variable
Series Trust I (the "Trust") for use at the Special Meeting of Shareholders of
the Trust's seven "Acquired Funds" discussed in this Proxy
Statement/Prospectus. The meeting will be held at the offices of John Hancock
Life Insurance Company ("John Hancock"), 197 Clarendon Street, Boston,
Massachusetts 02117, on October 15, 2004 at 11:00 A.M. Boston time.
Solicitation of Voting Instructions (i.e., "Proxies")
This solicitation is being made of all shares of the Acquired Funds that are
attributable to variable annuity or variable life insurance contracts (together
with any certificates of interest thereunder, "Contracts") that are supported
by John Hancock Variable Life Accounts U, V, UV or S or John Hancock Variable
Annuity Accounts U, V, JF, H and I (collectively, the "Accounts").
Each Acquiring Fund has agreed to bear the costs of each combination to
which it is a party, which would include any costs of soliciting voting
instructions. (The estimated amounts of such costs are set out above in the
discussion of each Proposal.) In addition, regular employees of John Hancock
may solicit voting instructions in person or by telephone; such employees will
not be compensated for such services.
Voting Instructions
John Hancock and its affiliate, John Hancock Variable Life Insurance Company
(the "Insurance Company"), through the Accounts, legally own all of the Trust's
shares. Nevertheless, the Insurance Company will vote all of such shares in
accordance with instructions given by Contract owners, as discussed below. For
this purpose, the owner of a variable annuity contract during the period after
annuity payments have commenced is the annuitant.
Any authorized voting instructions will also be valid for any adjournment of
the meeting and will be revocable only at the direction of the Contract owner
executing them. If insufficient affirmative votes are obtained to approve any
matter, the meeting may be adjourned to permit the solicitation of additional
votes. Shares will be voted for any such adjournment in the discretion of the
applicable insurance company. Whether a Proposal is approved depends upon
whether a sufficient number of votes are cast for the Proposal. Accordingly, an
instruction to abstain from voting on any proposal has the same practical
effect as an instruction to vote against that Proposal.
Any person giving voting instructions may revoke them at any time prior to
their exercise by submitting a superseding voting instruction form or a notice
of revocation to the Trust. In addition, although mere attendance at the
meeting will not revoke voting instructions, a Contract owner present at the
meeting may withdraw his/her voting instruction form and vote in person. The
Insurance Companies will vote each Acquired Fund's shares in accordance with
all properly executed and unrevoked voting instructions received in time for
the meeting.
The Insurance Companies will vote the shares of an Acquired Fund held in
their respective Accounts that are attributable to Contracts in accordance with
the voting instructions received from the owners of those Contracts. An
Account's shares in the Acquired Fund that are not attributable to Contracts or
for which no timely voting instructions are received will be represented and
voted by the Insurance Companies in the same proportion as the voting
instructions that are received from all owners of Contracts participating in
the Fund through that Account. (Acquired Fund shares that are not attributable
to Contracts include, for example, any shares purchased with contributions made
as "seed money" to the Fund by an Insurance Company.)
41
Please refer to Appendix C to this Proxy Statement/Prospectus if you wish
additional information about the number of shares of the Acquired Fund that are
outstanding or that are attributable to an Insurance Company (rather than to
Contract owners).
Required Vote
In order for the shareholders to approve one of the Proposals in this Proxy
Statement/Prospectus, the Proposal must receive the favorable vote of more than
50% of the outstanding shares of the relevant Acquired Fund, or, if less, 67%
or more of that Fund's shares present or represented at the meeting.
Shareholders and Contract owners do not have any rights of dissent and
appraisal.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE AND
RETURN THE ENCLOSED FORM OF VOTING INSTRUCTIONS. YOU MAY STILL VOTE IN PERSON
IF YOU ATTEND THE MEETING.
42
CAPITALIZATION OF THE FUNDS
As to each Proposal, the following tables set forth as of December 31, 2003:
(i) the capitalization of the Acquired Fund, (ii) the capitalization of the
Acquiring Fund, and (iii) the pro forma capitalization of the Acquired Fund as
adjusted to give effect to the combination of the two Funds:
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Fundamental Growth) (Large Cap Growth) Adjustments/1/ Two Funds
PROPOSAL 1 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 26,057 $624,401 $ 65 $650,393
Shares Outstanding/3/.... 3,653 44,736 5 46,598
Net Asset Value Per Share $ 7.13 $ 13.96 $13.96 $ 13.96
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Large Cap Growth B) (Large Cap Growth) Adjustments/1/ Two Funds
PROPOSAL 2 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 30,919 $624,401 $ 65 $655,255
Shares Outstanding/3/.... 4,863 44,736 5 46,946
Net Asset Value Per Share $ 6.36 $ 13.96 $13.96 $ 13.96
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Fundamental Value B) (Fundamental Value) Adjustments/1/ Two Funds
PROPOSAL 3 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 53,034 $138,855 $ 70 $191,819
Shares Outstanding/3/.... 5,435 12,600 6 17,407
Net Asset Value Per Share $ 9.76 $ 11.02 $11.02 $ 11.02
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Mid Cap Value) (Mid Cap Value B) Adjustments/1/ Two Funds
PROPOSAL 4 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 24,490 $ 93,902 $ 60 $118,332
Shares Outstanding/3/.... 1,854 8,555 5 10,780
Net Asset Value Per Share $ 13.21 $ 10.98 $10.98 $ 10.98
Acquiring Fund Pro-Forma Assuming
Acquired Fund (Small Cap Pro Forma Combination of the
(Small Cap Growth) Emerging Growth) Adjustments/1/ Two Funds
PROPOSAL 5 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $149,277 $ 86,579 $ 155 $235,701
Shares Outstanding....... 14,349 10,684 19 29,094
Net Asset Value Per Share $ 10.40 $ 8.10 $ 8.10 $ 8.10
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Overseas Equity) (Overseas Equity B) Adjustments/1/ Two Funds/2/
PROPOSAL 6 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 49,176 $125,965 $ 70 $175,071
Shares Outstanding/3/.... 4,718 12,787 7 17,772
Net Asset Value Per Share $ 10.42 $ 9.85 $ 9.85 $ 9.85
Pro-Forma Assuming
Acquired Fund Acquiring Fund Pro Forma Combination of the
(Overseas Equity C) (Overseas Equity B) Adjustments/1/ Two Funds/2/
PROPOSAL 7 --------------------- ------------------- ------------- ------------------
Net Assets/3/............ $ 64,673 $125,965 $ 80 $190,558
Shares Outstanding/3/.... 7,263 12,787 8 19,345
Net Asset Value Per Share $ 8.90 $ 9.85 $ 9.85 $ 9.85
- --------
/1/ Includes the estimated amount of non-recurring expenses of the combination.
/2/ Does not include the effect of the following payments that were made to
satisfy redemption of shares originally acquired to provide "seed capital"
to the Fund: approximately $7 million from the Overseas Equity Fund in
July 2004 and approximately $11 million from the Overseas Equity C Fund in
July 2004.
/3/ In thousands.
43
The Large Cap Growth Fund is the Acquiring Fund in both Proposals 1 and 2.
Giving effect to both proposals, the pro-forma net assets (in thousands) would
be $681,247, the pro-forma shares outstanding (in thousands) would be 48,800,
and the pro-forma net asset value per share would be $13.96.
Similarly, the Overseas Equity B Fund is the Acquiring Fund in both
Proposals 6 and 7 above. Giving effect to both proposals, the pro-forma net
assets (in thousands) would be $239,664, the pro-forma shares outstanding (in
thousands) would be 24,331, and the pro-forma net asset value per share would
be $9.85.
44
DISTRIBUTION OF FUND SHARES
The shares of each of the Acquired and Acquiring Funds are identical shares
of beneficial interest in the Trust, except that each represents an interest in
a different investment portfolio (series) of the Trust.
Each Fund currently sells its shares exclusively to separate investment
accounts of the Insurance Companies to support variable annuity contracts and
variable life insurance contracts (and any certificates thereunder) issued by
those companies. These Accounts buy or redeem shares of the Fund based on (1) a
Contract owner's instruction to invest or receive back monies under a Contract
(such as making a premium payment or surrendering a Contract) and (2) the
operation of a Contract (such as deduction of Contract fees and charges).
Therefore, the "distribution" (marketing) of shares of both the Acquired
Funds and the Acquiring Funds is highly dependent on the efforts and
willingness of the Insurance Companies to promote the offer and sale of the
Funds as investment options under variable annuity and variable life insurance
contracts they issue.
Any dividends or distributions that either Fund pays on its shares are
automatically reinvested in additional shares and thus enhance the value of
Contracts invested in these Funds.
NET ASSET AND SHARE VALUATIONS
Each Fund sells and buys back its shares at the net asset value per share
("NAV") next computed after receipt by an Account of a Contract owner's
instructions. Each Fund calculates its NAV:
. by dividing its net assets by the number of its outstanding shares,
. once daily as of the close of regular trading on the New York Stock
Exchange (generally at 4 p.m., New York City time) on each day the
Exchange is open,
The Funds can be expected to hold securities primarily listed on foreign
exchanges that trade on weekends or other days when the Trust does not
calculate NAV. Consequently, NAV may change on days when Contract owners will
not be able to instruct an Account to buy or redeem Fund shares.
The Funds value their securities based on market quotations, amortized cost,
valuations of independent pricing services, or fair value determined in
accordance with procedures approved by the Trust's Trustees. A Fund may value
securities at fair value where, for example, market quotations are not readily
available, or the value of securities has been materially affected after the
closing of a foreign market.
AGREEMENT AND PLAN OF REORGANIZATION
To implement each proposed combination, the Funds have entered into an
Agreement and Plan of Reorganization (the "Plan") that sets forth the terms and
conditions of the combination. The Plan can be terminated at any time as to any
combination by mutual agreement of the parties. Also, the Plan provides that
each combination is subject to a prior condition that the shareholders of the
Acquired Fund in that combination approve the transaction.
45
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
This Proxy Statement/Prospectus and the related Statement of Additional
Information do not contain all the information set forth in the registration
statements and the exhibits relating thereto and annual reports that the Trust
has filed with the SEC pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940.
The Trust and each of its investment portfolios, including each Acquired
Fund and each Acquiring Fund, are subject to the informational requirements of
the Investment Company Act of 1940 and in accordance therewith file reports and
other information with the SEC. Reports, proxy statements, registration
statements and other information filed by those entities (including the Trust's
Form N-14 Registration Statement of which this Proxy Statement/Prospectus is a
part) may be inspected without charge and copied at the prescribed rates at the
SEC's Offices at 450 Fifth Street, NW, Washington, DC 20549. The SEC also
maintains a web site at http://www.sec.gov where these materials are available
in electronic format as part of the SEC's "EDGAR" database.
46
APPENDIX A - Basic Information About Each Acquiring Fund
Basic information about each Acquiring Fund appears below beginning on the
following pages:
Acquiring Fund Page
-------------- ----
Large Cap Growth......... A-2
Fundamental Value........ A-4
Mid Cap Value B.......... A-6
Small Cap Emerging Growth A-8
Overseas Equity B........ A-10
Large Cap Growth Fund
GOAL AND STRATEGY
This is a large cap stock fund with a growth emphasis that seeks long-term
capital appreciation.
The Fund invests primarily in a diversified mix of common stocks of large
established U.S. companies that are believed to offer above-average potential
for growth in revenues and earnings.
The manager selects stocks using a combination of proprietary equity research
and quantitative tools. Stocks are purchased that have improving fundamentals
and attractive valuations. The manager seeks to maintain risk and sector
characteristics similar to the Russell 1000(R) Growth Index.
The Fund normally invests in 75 to 160 stocks, and at least 80% of its assets
in large cap companies. For the purpose of this Fund, "large cap companies" are
those with market capitalizations that are within the range of capitalization
of companies represented in the Russell 1000(R) Index or the Russell 1000(R)
Growth Index. At year end 2003, the market capitalizations of the companies in
these indices ranged from $695 million to $310 billion. The Fund normally has
10% or less (usually lower) of its assets in cash and cash equivalents. The
Fund may invest in initial public offerings (IPOs).
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: U.S. dollar denominated foreign securities, certain
Exchange Traded Funds (ETFs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Independence Investment LLC
53 State Street
Boston, Massachusetts 02109
Owned by John Hancock
Managing since 1982
Managing Fund and its predecessor since March, 1986
Managed approximately $11.5 billion in assets at the end of 2003
FUND MANAGERS
Management by investment team overseen by:
Paul F. McManus, Jr.
- ---------------------
Executive Vice President of subadviser
Joined subadviser in 1982
PAST PERFORMANCE
The bar chart shows how the performance of the Fund's NAV shares has varied
from year to year, while the table shows performance over time (along with a
broad-based market index for reference). This information may help provide an
indication of the Fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- ------ ------ ------ ------ ------ ----- ------ ------- ------- -------
- -0.98% 31.64% 18.27% 30.89% 39.51% 24.07% -17.89% -17.54% -27.82% 25.62%
Best quarter: up 27.79% fourth quarter 1998 Worst quarter: down 21.05% first
quarter 2001
Average annual total returns -- for periods ending 12/31/2003
Fund Index
1 year 25.62% 29.75%
5 years -5.30% -5.11%
10 years 7.93% 9.21%
Index: Russell 1000(R) Growth Index
2
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall
market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "large cap" approach
carries the risk that in certain markets large cap stocks will underperform
small cap and mid cap stocks.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
Initial Public Offering Risk: The Fund has the ability to invest in initial
public offerings (IPOs) and a significant portion of the Fund's return may at
times be attributable to its investment in IPOs. IPOs could have a substantial
impact on performance, either positive or negative, particularly on a fund with
a small asset base. Also, the Fund's investments in IPOs may be subject to more
erratic price movements than the overall equity market.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that
brokerage commissions and other transaction costs will have on the fund's
performance. Any turnover rate in excess of 100% is considered relatively high.
In the future, the Fund's turnover rate may be greater than 100%.
3
Fundamental Value Fund
GOAL AND STRATEGY
This is a large cap stock fund with a value emphasis that seeks long-term
capital appreciation.
The Fund invests primarily in a diversified mix of common stocks of large-sized
U.S. companies that are believed to offer favorable prospects for increasing
dividends and growth in capital.
The manager employs a value approach in selecting stocks, using proprietary
equity research to identify stocks having distinct value characteristics based
on industry-specific valuation criteria.
The manager screens the investable universe for:
.. stocks in the Russell 1000(R) Value Index, or
.. stocks with dividend yields greater than the Russell 1000(R) Index, or
.. stocks with price/book ratios lower than the Russell 1000(R) Index.
The Fund's assets are allocated to industry-specific sub-portfolios that are
each managed by an industry analyst. The manager oversees the Fund to maintain
capitalization and sector weights similar to the Russell 1000(R) Value Index.
The Fund normally invests in 90 to 130 stocks with at least 80% (usually
higher) of its assets in companies with market capitalizations that are within
the range of capitalizations of companies in the Russell 1000(R) Value Index or
the Russell 1000(R) Index. At year end 2003, the market capitalizations of the
companies in these indices ranged from $695 million to $ 310 billion. The Fund
normally has 10% or less (usually lower) of its assets in cash and cash
equivalents. The Fund may invest in initial public offerings (IPOs).
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: U.S. dollar denominated foreign securities, certain
Exchange Traded Funds (ETFs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessors, since 1928
Managing Fund since August, 1999
Managed approximately $394 billion
in assets at the end of 2003
FUND MANAGERS
Management by Global Research Team coordinated by:
Cheryl M. Duckworth, CFA
- ---------------------
Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The bar chart shows how the performance of the Fund's NAV shares has varied
from year to year, while the table shows performance over time (along with a
broad-based market index for reference). This information may help provide an
indication of the Fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar year
[CHART]
2000 2001 2002 2003
- ------ ------- ------- ------
13.41% -6.99% -17.40% 28.70%
Best quarter: up 17.55% second quarter 2003 Worst quarter: down 17.38% third
quarter 2002
Average annual total returns -- for periods ending 12/31/2003*
Fund Index
1 year 28.70% 30.03%
Life of fund 3.77% 2.84%
Index: Russell 1000(R) Value Index
* Began operations on August 31, 1999.
4
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall
market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "large cap" approach
carries the risk that large cap stocks will underperform smaller cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
Initial Public Offering Risk: The Fund has the ability to invest in initial
public offerings (IPOs) and a significant portion of the Fund's return may at
times be attributable to its investment in IPOs. IPOs could have a substantial
impact on performance, either positive or negative, particularly on a fund with
a small asset base. Also, the Fund's investments in IPOs may be subject to more
erratic price movements than the overall equity market.
5
Mid Cap Value B Fund
(formerly "Small/Mid Cap CORE SM Fund")
GOAL AND STRATEGY
This is a mid cap stock fund with a value emphasis that seeks long-term capital
appreciation.
The Fund invests primarily in a diversified mix of common stocks of mid-sized
U.S. companies that are believed to be undervalued by various measures and
offer good prospects for capital appreciation.
The manager employs a value approach in selecting stocks using proprietary
fundamental equity research. The manager generally looks for companies with:
.. Low stock price relative to assets, earnings, cash flow or business franchise
value.
.. Attractive operating margins and significant cash flow generation.
.. Sound balance sheet and other positive financial characteristics.
.. Significant stock ownership by management.
The Fund's sector exposures are broadly diversified but are primarily a result
of stock selection and therefore may vary significantly from its benchmark. The
Fund normally invests in 75 to 140 stocks with at least 80% (usually higher) of
its assets in companies with market capitalizations that are within the range
of capitalizations of companies in the Russell Mid Cap/TM/ Value Index or the
Russell Mid Cap/TM/ Index. At year end 2003, the market capitalizations of the
companies in these indices ranged from $695 million to
$17 billion. The Fund normally has 10% or less (usually lower) of its assets in
cash and cash equivalents. The Fund may invest in initial public offerings
(IPOs).
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: U.S. dollar denominated foreign securities, certain
Exchange Traded Funds (ETFs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Managing since 1937
Managing Fund since May, 2004
Managed approximately $190 billion
in assets at the end of 2003
Past Performance information set forth
herein does not reflect T. Rowe Price
Associates, Inc. services to the Fund.
FUND MANAGERS
Management by Investment
Advisory Committee overseen by
David J. Wallack
- ---------------------
Vice President of subadviser
Joined subadviser in 1990
PAST PERFORMANCE
The bar chart shows how the performance of the Fund's NAV shares has varied
from year to year, while the table shows performance over time (along with
broad-based market indexes for reference). This information may help provide an
indication of the Fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1999 2000 2001 2002 2003
- ------ ----- ----- ------- ------
20.54% 4.63% 0.53% -15.19% 45.15%
Best quarter: up 21.36% second quarter 2003 Worst quarter: down 20.01% fourth
quarter 1998
Average annual total returns -- for periods ending 12/31/2003*
Fund Index 1 Index 2 Index 3**
1 year 45.15% 45.51% 38.07% 45.51%
5 years 9.31% 9.40% 8.73% 9.40%
Life of fund 6.21% 6.40% 6.91% 6.40%
Index 1: Russell 2500(TM) Index
Index 2: Russell Mid Cap(TM) Value Index
Index 3: A composite index combining the performance of the following indices
over the periods indicated: Russell 2500(TM) Index (inception through April
2004) and Russell Mid Cap(TM) Value Index (effective May, 2004)
* Began operations on May 1, 1998.
** John Hancock believes Index 3 is a more suitable index against which to
measure the Fund's performance for the period shown because it more closely
matches the Fund's investment strategy during that period.
6
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall
market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "value" approach carries the risk that in certain markets "value" stocks
will underperform "growth" stocks. Also, the Fund's "mid cap" approach carries
the risk that in certain markets mid cap stocks will underperform small or
large cap stocks.
Mid Cap Stock Risk: The Fund's investment in mid-sized companies may be
subject to more erratic price movements than investment in larger established
companies.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
Initial Public Offering Risk: The Fund has the ability to invest in initial
public offerings (IPOs) and a significant portion of the Fund's return may at
times be attributable to its investment in IPOs. IPOs could have a substantial
impact on performance, either positive or negative, particularly on a fund with
a small asset base. Also, the Fund's investments in IPOs may be subject to more
erratic price movements than the overall equity market.
7
Small Cap Emerging Growth Fund
GOAL AND STRATEGY
This is a small cap stock fund with a growth emphasis that seeks long-term
capital appreciation.
The Fund invests primarily in the common stocks of small U.S. companies that
are believed to offer above-average potential for growth in revenues and
earnings.
The manager selects stocks using a combination of initial quantitative screens
and in-depth proprietary equity research. Quantitative screening seeks to
narrow the list of small capitalization companies and to identify a group of
companies with strong revenue growth and accelerating earnings. Fundamental
equity research seeks to identify individual companies from that group with a
higher potential for earnings growth and capital appreciation.
The manager looks for companies based on a combination of criteria including:
.. Above average and sustainable revenue growth;
.. Improving market share and strong financial trends;
.. Superior management with significant equity ownership; and
.. Attractive valuation relative to its earnings growth outlook.
The Fund is likely to experience periods of high turnover in portfolio
securities because the manager frequently adjusts the selection of companies
and/or their position size based on these criteria. The Fund's sector exposures
are broadly diversified but are primarily a result of stock selection and
therefore may vary significantly from the benchmark.
The Fund normally invests in 50 to 120 stocks, and at least 80% of its assets
in small cap companies. For the purpose of this Fund, "small cap companies" are
those with market capitalizations that are within the range of capitalization
of companies represented in the Russell 2000(R) Growth Index or the Russell
2000(R) Index. At year end 2003, the market capitalizations of the companies in
these indices ranged from $42 million to $2 billion. The Fund normally has 10%
or less (usually lower) of its assets in cash and cash equivalents. The Fund
may invest in initial public offerings (IPOs).
The Fund may purchase other types of securities that are not primary investment
vehicles, for example: U.S. dollar denominated foreign securities, certain
Exchange Traded Funds (ETFs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Wellington Management Company, LLP
75 State Street
Boston, Massachusetts 02109
Managing, with predecessor, since 1928
Managing Fund since May, 2003
Managed approximately $394 billion
in assets at year-end 2003
FUND MANAGER
Steven C. Angeli, CFA
- ---------------------
Senior Vice President of subadviser
Joined subadviser in 1994
PAST PERFORMANCE
The bar chart shows how the performance of the Fund's NAV shares has varied
from year to year, while the table shows performance over time (along with a
broad-based market index for reference). This information may help provide an
indication of the Fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1998 1999 2000 2001 2002 2003
- ------ ------ ------ ------ ------ ------- ------
25.57% -5.96% -3.43% -8.89% -3.78% -28.21% 48.83%
Best quarter: up
26.90% fourth quarter 2001 Worst quarter: down 27.11% third quarter 2001
Average annual total returns -- for periods ending 12/31/2003*
Fund Index 1 Index 2 Index 3**
1 year 48.83% 48.54% 47.25% 47.62%
5 years -1.99% 0.86% 7.13% 5.51%
Life of fund 2.17% 2.02% 7.74% 8.16%
Index 1: Russell 2000(R) Growth Index
Index 2: Russell 2000(R) Index
Index 3: A composite index combining the performance of the following indices
over the periods indicated: Russell 2000(R) Value Index (from inception through
October, 2000); Russell 2000(R) Index (November, 2000 through April, 2003); and
Russell 2000(R) Growth Index (effective May, 2003)
* Began operations on May 1, 1996.
** John Hancock believes Index 3 is a more suitable index against which to
measure the fund's performance because it more closely matches the fund's
changes in investment strategy since inception.
8
MAIN RISKS
Primary
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall
market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "growth" approach carries the risk that in certain markets "growth"
stocks will underperform "value" stocks. Also, the Fund's "small cap" approach
carries the risk that in certain markets small cap stocks will underperform mid
cap and large cap stocks.
Small Cap Stock Risk: The Fund's investment in smaller sized companies may be
subject to more erratic price movements than investment in large established
companies.
Concentration Risk: The Fund's investment in securities of a smaller number of
issuers could produce more volatile performance relative to funds that invest
in a larger number of issuers. The more concentrated a fund's holdings are, the
more likely it is a specific security's poor performance will hurt the fund
significantly.
Turnover Risk: In general, the greater the volume of buying and selling by a
fund (i.e., the higher its "turnover rate"), the greater the impact that
brokerage commissions and other transaction costs will have on the fund's
performance. Any turnover in excess of 100% is considered relatively high.
Normally, the Fund's turnover rate will be greater than 100%.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing
currency also pose special risks. All foreign securities have some degree of
foreign risk. However, to the extent the Fund invests in emerging market
countries, it will have a significantly higher degree of foreign risk than if
it invested exclusively in developed or newly-industrialized countries.
Initial Public Offering Risk: The Fund has the ability to invest in initial
public offerings (IPOs) and a significant portion of the Fund's return may at
times be attributable to its investment in IPOs. IPOs could have a substantial
impact on performance, either positive or negative, particularly on a fund with
a small asset base. Also, the Fund's investments in IPOs may be subject to more
erratic price movements than the overall equity market.
9
Overseas Equity B Fund
(formerly "International Opportunities Fund")
GOAL AND STRATEGY
This is an international stock fund that seeks long-term capital appreciation.
The Fund normally invests at least 80% of its assets in equity securities of
companies outside the U.S., in a diversified mix of large established and
medium-sized foreign companies located primarily in developed countries and in
emerging markets to a lesser extent.
The manager selects stocks using proprietary fundamental research to identify
companies that are believed to be:
.. Undervalued (i.e., with current stock price below long-term value); and
.. Asset rich with strong balance sheets and able to generate internal cash
flows to meet capital needs.
The manager employs a research intensive approach using extensive field
research and direct company contact to determine the fundamental value of a
company. A company's future prospects are determined from analyzing a company's
management, financial strength, products, markets, competitors, and future
earnings and dividends.
The Fund is managed using a multiple portfolio manager system in which the Fund
is divided into segments that are each managed by individual portfolio managers
and/or research analysts. The Fund is normally broadly diversified since its
exposures reflect the aggregate decisions of the multiple portfolio managers
and research analysts managing the Fund.
The Fund's country and regional exposures are primarily a result of stock
selection and therefore may vary significantly from the benchmark.
The Fund invests in at least 3 different countries other than the U.S., but
normally invests in 15 to 50 countries.
The Fund will invest no more than 15% of its assets in emerging market stocks.
The Fund normally invests in 150 to 300 stocks and normally has 10% or less
(usually lower) of its assets in cash and cash equivalents. The Fund may invest
in initial public offerings (IPOs).
The manager may use derivatives, such as futures and forwards, to implement
foreign currency management strategies. Currency management strategies are
primarily used for hedging purposes and to protect against anticipated changes
in foreign currency exchange rates.
The Fund also may purchase other types of securities that are not primary
investment vehicles, for example: American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), European Depositary Receipts (EDRs), certain
Exchange Traded Funds (ETFs), and certain derivatives (investments whose value
is based on indices or other securities).
In abnormal market conditions, the Fund may take temporary defensive
measures--such as holding unusually large amounts of cash and cash
equivalents--that are inconsistent with the Fund's primary investment strategy.
In taking those measures, the Fund may not achieve its investment goal.
- --------------------------------------------------------------------------------
SUBADVISER
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Managing since 1968
Managing Fund since May, 2004
Managed approximately $146 billion
in assets at year-end 2003
Past Performance information set forth
herein does not reflect Capital Guardian Trust Company ("Capital Guardian")
services to the Fund.
FUND MANAGERS
Team managed by:
9 Portfolio Managers
- ---------------------
Average 22 years with Capital Guardian
Average 25 years industry experience
Equity Research Team
- ---------------------
32 research analysts
Average 8 years with Capital Guardian
Average 13 years industry experience
See Appendix A for more details.
PAST PERFORMANCE
The bar chart shows how the performance of the Fund's NAV shares has varied
from year to year, while the table shows performance over time (along with
broad-based market indexes for reference). This information may help provide an
indication of the Fund's risks and potential rewards. All figures assume
dividend reinvestment. Past performance does not indicate future results. The
performance figures below do not reflect the deduction of fees and charges
payable under the variable contracts. Such fees and charges would cause the
investment returns under the contracts to be less than that shown below.
Year-by-year total returns -- calendar years
[CHART]
1997 1998 1999 2000 2001 2002 2003
- ----- ------ ------ ------- ------- ------- ------
1.95% 15.92% 34.01% -16.36% -20.93% -18.22% 32.36%
Best quarter: up 24.44% fourth quarter 1999 Worst quarter: down 22.07% third
quarter 2002
Average annual total returns -- for periods ending 12/31/2003*
Fund Index 1 Index 2 Index 3**
1 year 32.36% 41.41% 39.17% 41.41%
5 years -0.83% 1.55% 0.26% 1.55%
Life of fund 2.51% 3.11% 2.94% 3.11%
Index 1: MSCI All Country World ex-U.S. Index
Index 2: MSCI EAFE Index (after April, 2004)
Index 3: A composite index combining the performance of the following indices
over the periods indicated: MSCI All Country World ex-US (from inception
through April 2004); MSCI EAFE (after April, 2004)
* Began operations on May 1, 1996.
** John Hancock believes Index 3 is a more suitable index against which to
measure the Fund's performance because it more closely matches the Fund's
investment strategy.
10
MAIN RISKS
Primary
Foreign Risk: The Fund's foreign securities will pose special risks, due to
limited government regulation, lack of public information, economic, political
and social instability and foreign currency rate fluctuations. Factors such as
lack of liquidity, foreign ownership limits and restrictions on removing
currency also pose special risks. All foreign securities have some degree of
foreign risk. However, to the extent the Fund invests in emerging market
countries, it will have a significantly higher degree of foreign risk than if
it invested exclusively in developed or newly-industrialized countries.
Market Risk: The value of the securities in the Fund may go down in response
to overall stock or bond market movements. Markets tend to move in cycles, with
periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the Fund's investments are concentrated
in certain sectors, the Fund's performance could be worse than the overall
market.
Manager Risk: The manager and its strategy may fail to produce the intended
results. The Fund could underperform its peers or lose money if the manager's
investment strategy does not perform as expected.
Investment Category Risk: The returns of the Fund's specific equity investment
category may lag the returns of the overall stock market. For example, the
Fund's "large/mid cap" approach carries the risk that in certain markets
large/mid cap stocks will underperform small cap stocks.
Secondary
Derivatives Risk: Certain derivative instruments (such as options, futures and
swaps) can produce disproportionate gains or losses. They are generally
considered more risky than direct investments. Also, in a down market,
derivatives could become harder to value or sell at a fair price.
Initial Public Offering Risk: The Fund has the ability to invest in initial
public offerings (IPOs) and a significant portion of the Fund's return may at
times be attributable to its investment in IPOs. IPOs could have a substantial
impact on performance, either positive or negative, particularly on a fund with
a small asset base. Also, the Fund's investments in IPOs may be subject to more
erratic price movements than the overall equity market.
11
APPENDIX B - Financial Highlights for Each Acquiring Fund
Financial highlights for each Acquiring Fund appear below beginning on the
following pages:
Acquiring Fund Page
-------------- ----
Large Cap Growth................................................. B-2
Fundamental Value................................................ B-2
Mid Cap Value B.................................................. B-2
Small Cap Emerging Growth........................................ B-2
Overseas Equity B................................................ B-2
The financial highlights on the following pages detail the historical
performance of each Acquiring Fund, including total return information for the
past 5 years (or such shorter period as the Fund has been in operation). The
"total returns" shown represent the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). Certain information reflects financial results for a single
Fund share. The "Total Investment Return" shown for each fund does not reflect
the expenses and charges of the applicable separate accounts and variable
contracts. Those expenses and charges vary considerably from contract to
contract and are described in the variable contract prospectus. Had these been
included, the "Total Investment Return" shown in the Table would be lower. The
financial highlights have been audited by Ernst & Young LLP, independent
registered public accounting firm, whose report (along with each Acquired
Fund's financial statements) are included in each Acquired Fund's annual
report, which is available upon request.
- --------------------------------------------------------------------------------
Income from Investment Operations
---------------------------------------
Net Realized
Net Asset Net and Total
Value at Investment Unrealized From
Beginning Income Gain (Loss) Investment
of Period Gain (Loss) on Investments(a) Operations
--------- ----------- ----------------- ----------
Large Cap Growth Fund
- ---------------------
Year Ended December 31,
2003.................................. 11.18 0.06 2.80 2.86
2002.................................. 15.54 0.04 (4.36) (4.32)
2001.................................. 18.89 0.04 (3.36) (3.32)
2000.................................. 27.33 0.03 (4.89) (4.86)
1999.................................. 26.19 0.09 6.03 6.12
- -------------------------------------------------------------------------------------------
Fundamental Value Fund
- ----------------------
Year Ended December 31,
2003.................................. 8.70 0.14 2.33 2.47
2002.................................. 10.66 0.12 (1.96) (1.84)
2001.................................. 11.57 0.10 (0.91) (0.81)
2000.................................. 10.42 0.09 1.30 1.39
Period from August 31, to December
31, 1999 (commencement of investment
operations)........................... 10.00 0.03 0.45 0.48
- -------------------------------------------------------------------------------------------
Mid Cap Value B Fund (formerly
"Small/Mid Cap CORE Fund")
--------------------------
Year Ended December 31,
2003.................................. 8.28 0.04 3.69 3.73
2002.................................. 9.82 0.04 (1.54) (1.50)
2001.................................. 9.82 0.05 -- 0.05
2000.................................. 9.82 0.05 0.39 0.44
1999.................................. 9.02 0.02 1.77 1.79
- -------------------------------------------------------------------------------------------
Small Cap Emerging Growth Fund
- ------------------------------
Year Ended December 31,
2003.................................. $ 6.30 $(0.03) $ 3.07 $ 3.04
2002.................................. 8.79 0.01 (2.49) (2.48)
2001.................................. 9.14 0.01 (0.35) (0.34)
2000.................................. 10.92 0.14 (1.13) (0.99)
1999.................................. 11.59 0.09 (0.50) (0.41)
The Fund entered into new sub-advisory agreements with Capital Guardian Trust Company
during the year 2000 and with Wellington Management Company during the year 2003.
- -------------------------------------------------------------------------------------------
Overseas Equity B Fund (formerly,
"International Opportunities Fund")
-----------------------------------
Year Ended December 31,
2003.................................. 7.56 0.08 2.34 2.42
2002.................................. 9.30 0.07 (1.75) (1.68)
2001.................................. 11.85 0.06 (2.53) (2.47)
2000.................................. 15.17 0.07 (2.57) (2.50)
1999.................................. 12.21 0.10 3.95 4.05
The Fund entered into a new sub-advisory agreement with T. Rowe Price International, Inc.
during the year 2000.
- -------------------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
Less Distributions
- ---------------------------------------------------------------------------------- --------------
Distribution
Distribution From Net Distribution in Distribution Net Assets
From Net Realized Excess of From Value at Total Net Assets
Investment Gains on Net Investment Capital Total Capital End Investment End of Period
Income Investments Income/Gains Paid-in Distributions Contributions of Period Return (000s Omitted)
- ------------ ------------ --------------- ------------ ------------- ------------- ---------- ---------- --------------
(0.06) (0.02) -- -- (0.08) -- 13.96 25.62% 624,401
(0.04) -- -- -- (0.04) -- 11.18 (27.82)% 496,628
(0.03) -- -- -- (0.03) -- 15.54 (17.54)% 770,915
(0.04) (2.69) (0.78) (0.07) (3.58) -- 18.89 (17.89)% 1,146,787
(0.09) (4.89) -- -- (4.98) -- 27.33 24.07% 1,382,473
- ---------------------------------------------------------------------------------------------------------------------------
(0.14) (0.01) -- -- (0.15) -- 11.02 28.70% 138,855
(0.12) -- -- (h) -- (0.12) -- 8.70 (17.40)% 121,102
(0.10) -- -- -- (0.10) -- 10.66 (6.99)% 161,710
(0.10) (0.08) (0.06) -- (0.24) -- 11.57 13.41% 15,728
(0.03) (0.02) (0.01) -- (0.06) -- 10.42 4.72%* 6,101
- ---------------------------------------------------------------------------------------------------------------------------
(0.04) (0.99) -- -- (1.03) -- 10.98 45.15% 93,902
(0.04) -- -- -- (0.04) -- 8.28 (15.19)% 48,143
(0.05) -- -- -- (0.05) -- 9.82 0.53% 46,446
(0.05) (0.32) (0.05) (0.02) (0.44) -- 9.82 4.63% 21,636
(0.03) (0.96) -- -- (0.99) -- 9.82 20.54% 8,248
- ---------------------------------------------------------------------------------------------------------------------------
$(0.01) $(1.23) $ -- $ -- $(1.24) $ -- $ 8.10 48.83% $ 86,579
(0.01) -- -- -- (0.01) -- 6.30 (28.21)% 50,327
(0.01) -- -- -- (0.01) -- 8.79 (3.78)% 71,193
(0.15) (0.14) (0.20) (0.30) (0.79) -- 9.14 (8.89)% 70,031
(0.07) (0.01) (0.18) -- (0.26) -- 10.92 (3.43)% 68,900
- ---------------------------------------------------------------------------------------------------------------------------
(0.13) -- -- -- (0.13) -- 9.85 32.36% 125.965
(0.06) -- -- -- (0.06) -- 7.56 (18.22)% 87,278
(0.05) -- -- (0.03) (0.08) -- 9.30 (20.93)% 83,591
(0.06) (0.62) (0.05) (0.09) (0.82) -- 11.85 (16.36)%(b) 120,034
(0.11) (0.94) (0.04) -- (1.09) -- 15.17 34.01% 79,794
- ---------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------
Net
Operating Investment
Expenses to Income (Loss) Portfolio
Average to Average Turnover
Net Assets Net Assets Rate
- ----------- ------------- ---------
0.86%(c) 0.51% 99.47%(b)
0.55% 0.33% 95.04%
0.41% 0.23% 63.96%
0.46% 0.10% 89.30%
0.39% 0.33% 37.42%
- ----------------------------------------
0.89%(c)(d) 1.44% 69.21%
0.85% 1.26% 82.22%
0.99%(d) 0.91% 85.20%(b)
1.05%(d) 0.97% 86.97%
1.05%(d)** 0.94%** 23.03%*
- ----------------------------------------
1.15%(e) 0.45% 125.00%
0.96%(e) 0.50% 125.11%
0.90%(e) 0.52% 96.88%
0.90%(e) 0.56% 94.78%
0.94%(e) 0.30% 109.12%
- ----------------------------------------
1.11%(c)(f) 0.59% 235.48%
1.00%(f) 0.19% 45.03%
1.00%(f) 0.06% 60.73%
0.92%(f) 1.25% 189.57%
0.95%(f) 0.78% 117.33%
- ----------------------------------------
1.23%(g) 0.95% 40.85%
1.24%(g) 0.69% 78.14%(b)
1.00%(g) 0.64% 33.31%
0.93%(g) 0.47% 37.92%(b)
1.02%(g) 0.77% 34.02%
- ----------------------------------------
(a) The amount shown at this caption for each Fund 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 fund shares in relation to the fluctuating
market values of the portfolio.
(b) Excludes merger activity.
(c) The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset arrangements.
(d) Expense ratio is net of expense reimbursements. Had such reimbursements not
been made, the annual 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.
(e) Expense ratio is net of expense reimbursements. Had such reimbursements not
been made, the annual expense ratio would have been 1.19%, 1.12%, 1.15%,
1.23%, and 2.24% for the years ended December 31, 2003, 2002, 2001, 2000,
and 1999, respectively.
(f) Expense ratio is net of expense reimbursements. Had such reimbursements not
been made, the annual expense ratio would have been 1.21%, 1.04%, 1.02%,
.95% and .96% for the years ended December 31, 2003, 2002, 2001, 2000 and
1999, respectively.
(g) Expense ratio is net of expense reimbursements. Had such reimbursements not
been made, the annual expense ratio would have been 1.44%, 1.55%, 1.16%,
1.09% and 1.15% for the years ended December 31, 2003, 2002, 2001, 2000 and
1999, respectively.
(h) Amount less than $0.01.
* Not annualized.
** Annualized.
3
APPENDIX C - Share Ownership Information
As of the close of business on August 24, 2004 (the record date for the
shareholders meeting), there were the following Acquired Fund shares
outstanding:
Name of Fund Number of Shares
------------ ----------------
Fundamental Growth 3,487,223
Large Cap Growth B 4,733,914
Fundamental Value B 5,590,208
Mid Cap Value 2,787,435
Small Cap Growth 13,404,405
Overseas Equity 4,995,490
Overseas Equity C 6,097,022
Each share is entitled to one vote, and fractional votes will be counted.
The number of a Fund's shares attributable to each owner of a variable life
insurance contract or certificate ("VLI Contract") is determined by dividing,
as of the record date of the shareholders meeting, the VLI Contract's cash (or
account) value (less any outstanding indebtedness) in the applicable Account
subaccount corresponding to that Fund by the net asset value of one share of
that Fund as of that same date. The number of a Fund's shares attributable to
each owner of a variable annuity contract or certificate ("VA Contract") is
determined by dividing, as of the record date of the meeting, the value of the
"accumulation shares" under the VA Contract (or, for each Contract under which
annuity payments have commenced, the amount of the Contract's reserves) in the
applicable Account subaccount by the net asset value of one share of that Fund
as of that same date.
As of the close of business on August 24, 2004, John Hancock and JHVLICO had
in the aggregate the following numbers of Acquired Fund shares representing
their contributions and other amounts in the Accounts that are in excess of the
amounts attributable to their outstanding Contracts.
Percentage of Total
Name of Fund Number of Shares Shares Outstanding
- ------------ ---------------- ------------------
Fundamental Growth 0 0
Large Cap Growth B 0 0
Fundamental Value B 0 0
Mid Cap Value 518,778 18.61%
Small Cap Growth 0 0
Overseas Equity 0 0
Overseas Equity C 0 0
No Contract owner had voting authority over as much as 5% of any of the
above-listed Funds' shares as of the record date. Nor did the Trust's officers
and Trustees, collectively, have such authority over as much as 1% of any
Fund's shares.
VOTING INSTRUCTION FORM
PLEASE SIGN, DATE AND RETURN ALL VOTING
INSTRUCTION FORMS RECEIVED IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
THESE VOTING INSTRUCTIONS
ARE SOLICITED BY THE TRUSTEES FOR THE
SPECIAL MEETING OF SHAREHOLDERS ON
FRIDAY, OCTOBER 15, 2004 - 11:00 A.M. EASTERN TIME,
197 CLARENDON STREET, BOSTON, MASSACHUSETTS
[FUND NAME PRINTS HERE]
JOHN HANCOCK VARIABLE SERIES TRUST I
Special Meeting of Shareholders
To Be Held on October 15, 2004
A Special Meeting of Shareholders of the John Hancock Variable Series Trust I
(the "Trust") for the Fund shown above will be held at the office of John
Hancock Life Insurance Company ("John Hancock"), 197 Clarendon Street, Boston,
Massachusetts, (telephone 1-800-732-5543) at 11:00 a.m. Eastern Time, on Friday,
October 15, 2004. By signing and dating below, you instruct the record holder
to, and such record holder will, vote the shares attributable to your variable
life insurance of variable annuity contract as marked or, if not marked, to vote
"FOR" the applicable proposal on the reverse side of this form, and to use its
discretion to vote on any other matter incident to the conduct of the Special
Meeting. If you do not intend to personally attend the Special Meeting, please
complete, detach and mail this form in the enclosed envelope at once.
The record owner is hereby instructed to vote the shares of the above-named Fund
that are attributable to the undersigned's contract at the Special Meeting of
Shareholders and at any adjournment thereof.
Date , 2004
----------------
PLEASE BE SURE TO SIGN AND DATE THIS CARD
----------------------------------------------------------
Signature(s) of Shareholders(s) (Sign on the box)
NOTE: Signature(s) should agree with the name(s) printed hereon. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
name as such. If a corporation, please sign in full corporate name by president
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
Please fill in box(es) as shown using black or blue ink or number 2 pencil.
PLEASE DO NOT USE FINE POINT PENS. [X]
VOTING INSTRUCTION FORM
PLEASE SIGN, DATE AND RETURN ALL VOTING
INSTRUCTION FORMS RECEIVED IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
THESE VOTING INSTRUCTIONS
ARE SOLICITED BY THE TRUSTEES FOR THE
SPECIAL MEETING OF SHAREHOLDERS ON
FRIDAY, OCTOBER 15, 2004 - 11:00 A.M. EASTERN TIME,
197 CLARENDON STREET, BOSTON, MASSACHUSETTS
If this card is executed, but you give no direction, the shares will be voted
"FOR" the applicable proposal.
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- --------------------------------------------------------------------------------
1. FUNDAMENTAL GROWTH FUND only: To approve the [ ] [ ] [ ]
combination of the Fundamental Growth Fund and
the Large Cap Growth Fund.
- --------------------------------------------------------------------------------
2. LARGE CAP GROWTH B FUND only: To approve the [ ] [ ] [ ]
combination of the Large Cap Growth B Fund and
the Large Cap Growth Fund.
- --------------------------------------------------------------------------------
3. FUNDAMENTAL VALUE B FUND only: To approve the [ ] [ ] [ ]
combination of the Fundamental Value B Fund and
the Fundamental Value Fund.
- --------------------------------------------------------------------------------
4. MID CAP VALUE FUND only: To approve the [ ] [ ] [ ]
combination of the Mid Cap Value Fund and the Mid
Cap Value B Fund.
- --------------------------------------------------------------------------------
5. SMALL CAP GROWTH FUND only: To approve the [ ] [ ] [ ]
combination of the Small Cap Growth Fund and the
Small Cap Emerging Growth Fund.
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
6. OVERSEAS EQUITY FUND only: To approve the [ ] [ ] [ ]
combination of the Overseas Equity Fund and the
Overseas Equity B Fund.
- --------------------------------------------------------------------------------
7. OVERSEAS EQUITY C FUND only: To approve the [ ] [ ] [ ]
combination of the Overseas Equity C Fund and the
Overseas Equity B Fund.
- --------------------------------------------------------------------------------
PLEASE DO NOT FORGET TO SIGN AND DATE THE REVERSE SIDE OF THIS CARD.
3
FUNDAMENTAL GROWTH FUND
LARGE CAP GROWTH B FUND/1/
FUNDAMENTAL VALUE B FUND/2/
MID CAP VALUE FUND
SMALL CAP GROWTH
OVERSEAS EQUITY FUND
OVERSEAS EQUITY C FUND/3/
(each an "Acquired Fund" and a separate investment fund of John Hancock
Variable Series Trust I)
197 Clarendon Street, Boston, MA 02117
TOLL FREE NUMBER: 1-800-732-5443
LARGE CAP GROWTH FUND
FUNDAMENTAL VALUE FUND
MID CAP VALUE B FUND/4/
SMALL CAP EMERGING GROWTH FUND
OVERSEAS EQUITY B FUND/5/
(each an "Acquiring Fund" and a separate investment fund of John Hancock
Variable Series Trust I)
STATEMENT OF ADDITIONAL INFORMATION
Dated: September 10, 2004
This Statement of Additional Information ("SAI") is not a prospectus, but
you should read it in conjunction with the Combined Proxy Statement and
Prospectus dated September 10, 2004 of the above-listed Acquired Funds and
Acquiring Funds, for use in connection with the Special Meeting of
Shareholders of the Acquired Funds, to be held on October 15, 2004. The
Acquired Funds and the Acquiring Funds are separate investment funds
(series) of John Hancock Variable Series Trust I (the "Trust").
----------
/1/ Known as the Large Cap Aggressive Growth Fund prior to December
15, 2003.
/2/ Known as the Large Cap Value CORESM Fund prior to May 1, 2004.
/3/ Known as the Emerging Markets Equity Fund prior to May 1, 2004.
/4/ Known as the Small/Mid Cap CORESM Fund prior to May 1, 2004.
/5/ Known as the International Opportunities Fund prior to May 1,
2004.
For a free copy of the Combined Proxy Statement and Prospectus, please
contact the Trust at the address or phone number shown above.
This Statement of Additional Information incorporates by reference the
Financial Statements of the Acquired Funds and the Acquiring Funds
appearing in such Funds' annual reports to shareholders for the year ended
December 31, 2003 and the related reports of Ernst & Young LLP, independent
auditors, appearing therein.
This Statement of Additional Information also comprises the following
additional documents:
Attachment 1. Statement of Additional Information for the Trust dated
May 1, 2004.
Attachment 2. The following pro forma financial statements for the
combination of the Fundamental Value B Fund and the
Fundamental Value Fund of the Trust:
Pro Forma Combining Statements of Assets and Liabilities
-- December 31, 2003 (Unaudited)
Pro Forma Combining Statements of Operation -- For the
year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio Investments
-- December 31, 2003 (Unaudited)
Attachment 3. The following pro forma financial statements for the
combination of the Mid Cap Value Fund and the Mid Cap
Value B Fund of the Trust:
Pro Forma Combining Statements of Assets and Liabilities
-- December 31, 2003 (Unaudited)
Pro Forma Combining Statements of Operations -- For the
Year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio Investments --
December 31, 2003 (Unaudited)
Attachment 4. The following pro forma financial statements for the
combination of the Small Cap Growth Fund and the Small
Cap Emerging Growth Fund of the Trust:
Pro Forma Combining Statements of Assets and Liabilities
-- December 31, 2003 (Unaudited)
Pro Forma Combining Statements of Operations -- For the
Year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio Investments
-- December 31, 2003 (Unaudited)
Attachment 5. The following pro forma financial statements for the
combination of the Overseas Equity Fund and the Overseas
Equity B Fund of the Trust:
Pro Forma Combining Statements of Assets and Liabilities
-- December 31, 2003 (Unaudited)
Pro Forma Combining Statements of Operations -- For the
Year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio Investments --
December 31, 2003 (Unaudited)
Attachment 6. The following pro form financial statements for the
combination of the Overseas Equity C Fund and the
Overseas Equity B Fund:
Pro Forma Combining Statements of Assets and Liabilities
-- December 31, 2003 (Unaudited)
Pro Forma Combining Statements of Operations -- For the
Year Ended December 31, 2003 (Unaudited)
Pro Forma Combining Schedule of Portfolio Investments
-- December 31, 2003 (Unaudited)
Attachment 7: Notes to the pro forma financial statements referenced
as Attachments 2-6 above.
JOHN HANCOCK
VARIABLE SERIES TRUST I
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2004
This Statement of Additional Information (sometimes referred to herein as
the "SAI") is not a prospectus. It is intended that this Statement of Additional
Information be read in conjunction with the Prospectus of John Hancock Variable
Series Trust I, dated May 1, 2004. A copy of the Prospectus may be obtained from
John Hancock Variable Series Trust I, John Hancock Place, P.O. Box 111, Boston,
Massachusetts 02117, telephone number 1-800-REAL LIFE.
This Statement of Additional Information relates to thirty of the Trust's
current "Funds."
The Trust's Financial Statements and Investment Performance Information
The Trust's financial statements appearing in its Annual Report to contract
holders and the report of Ernst & Young LLP, independent auditors of the Trust,
which appears therein, are incorporated by reference into this Statement of
Additional Information. The information about the total investment returns
achieved by the Trust's various Funds, is also incorporated herein by reference.
No other portions of the Annual Report are incorporated by reference. A free
copy of the Annual Report to contract holders may be obtained by writing to the
address or calling the number above.
TABLE OF CONTENTS
Page in this
Statement of
Additional
Information
------------
A. What Is the Trust?..................................................4
B. The Trust's Business History........................................4
C. The Funds' Investment Activities and Their Risks....................5
1. Investing in Money Market Instruments..........................5
2. Investing in Other Fixed Income Obligations....................6
3. Investing in Equity Securities.................................7
4. Investing in Real Estate Securities............................8
5. Investing in Foreign Securities................................9
6. Techniques and Instruments for Managing Currency
Exposure......................................................10
7. Reallocating a Fund's Assets Among Asset Classes..............12
8. Adopting a Temporary Defensive Strategy.......................12
9. Investing With an Index-Based Objective.......................12
10. Investing on a Non-Diversified Basis..........................14
11. Using Options.................................................14
12. Using Options on Securities...................................16
13. Using Financial Futures Contracts, Options on Such
Contracts and Options on Stock Indexes........................17
14. Using "Swaps," "Caps," "Floors," and "Collars"................20
15. Investing In Other Investment Companies.......................22
16. Purchasing "When Issued" Securities and Forward
Commitments...................................................23
17. Short-Term Trading............................................23
18. Entering Into Repurchase Agreements...........................23
19. Participating in Joint Trading Accounts.......................24
20. Lending of Fund Securities....................................24
21. Using Reverse Repurchase Agreements and Mortgage
"Dollar Rolls"................................................24
22. Investing in Rule 144A Securities, Section 4(2)
Commercial Paper and Illiquid Securities......................25
23. Investing in Preferred Stock, Convertible Securities
and Warrants..................................................25
24. Investing in Initial Public Offerings ("Ipos")................25
D. The Funds' Fundamental Investment Restrictions.....................25
E. Board of Trustees and Officers of the Trust........................27
F. Investment Advisory Arrangements...................................30
1. The Trust's Investment Advisory Arrangements With John
Hancock.......................................................30
2. The Trust's Arrangements With Subadvisers.....................32
3. Dollar Amounts of Advisory Fees, Subadvisory Fees, and
Expense Reimbursements........................................36
4. Basis of Trustee Approval of Continuance of Advisory
Arrangements..................................................37
G. Arrangements With Other Service Providers..........................42
1. Underwriting and Indemnity Agreement..........................42
2. Custody of the Trust's Assets.................................42
3. Subadministration Agreement With State Street Bank............42
4. Independent Auditors..........................................42
5. Distribution of Series I and Series II shares.................43
H. Portfolio Transactions and Brokerage Allocation....................44
I. Codes of Ethics....................................................48
J. Features of the Trust's Shares.....................................48
2
K. Shareholder Meetings and Voting Rights.............................49
L. Sales and Redemptions of Fund Shares...............................50
M. Computing the Funds' Net Asset Value...............................51
N. Taxes..............................................................52
O. Information About Fund Performance.................................52
P. Legal Matters......................................................53
Q. Reports to Contractholders.........................................53
Appendix A - Corporate Bond Ratings.....................................54
Appendix B - Proxy Voting Policies and Procedures.......................56
3
A. WHAT IS THE TRUST?
John Hancock Variable Series Trust I (the "Trust"), and each of the Funds
of the Trust, is an open-end management investment company. With the exception
of the Real Estate Equity, Health Sciences, Financial Services and Global Bond
Funds, each of the Funds is a "diversified" Fund within the meaning of the
Investment Company Act of 1940 (the "Investment Company Act").
NAV shares of the Trust are currently sold to John Hancock Variable Life
Accounts U, V, and S to support variable life insurance policies issued by John
Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock Variable
Annuity Accounts H, U, and V to support variable annuity contracts issued by
John Hancock Life Insurance Company ("John Hancock"); John Hancock Variable
Annuity Accounts I and JF to support variable annuity contracts issued by
JHVLICO; and John Hancock Variable Life Account UV to support variable life
insurance policies issued by John Hancock. It is anticipated that, in the
future, Trust shares may be sold to other separate investment accounts of
JHVLICO and John Hancock and to separate investment accounts of other insurance
companies (which may or may not be affiliated with John Hancock). Each of these
separate investment accounts is hereinafter referred to as a "John Hancock
Separate Account."
Because the John Hancock Separate Accounts currently own all of the Trust's
NAV shares, those Separate Accounts (or John Hancock and JHVLICO) may be deemed
to control the Trust. John Hancock and JHVLICO, in turn, are both directly or
indirectly controlled by John Hancock Financial Services, Inc., a
publicly-traded holding company. The Trust issues a separate series of NAV
shares of beneficial interest for each Fund. Each share issued with respect to a
Fund has a pro rata interest in the net assets of that Fund. The assets of each
Fund are charged with the liabilities of that Fund and a proportionate share of
the general liabilities of the Trust.
Series I and Series II shares of the Trust serve as the underlying
investment medium for sums invested in variable contracts issued by:
- The Manufacturers Life Insurance Company of New York ("Manulife
NewYork"), formerly First North American Life Assurance Company, a New York
stock life insurance company that is a wholly owned subsidiary of Manufacturers
USA. Manulife New York's corporate offices are located at 100 Summit Lake Drive,
Second Floor, Valhalla, New York 10595.
- The Manufacturers Life Insurance Company (U.S.A.) ("Manufacturers USA"),
a stock life insurance company organized under the laws of Pennsylvania and
redomesticiated under the laws of Michigan. Manufacturers USA is an indirect
wholly owned subsidiary of Manulife Financial Corporation and is located at 200
Bloor Street in Toronto, Canada, M4W 1E5.
Manulife New York and Manufacturers USA hold Series I or Series II shares
attributable to variable contracts in their respective separate accounts.
Series I and Series II shares of the Trust may be used for other purposes
in the future, such as funding annuity contracts issued by other insurance
companies.
NAV, Series I and Series II shares are not offered directly to, and may not
be purchased directly by, members of the public.
B. THE TRUST'S BUSINESS HISTORY
The Trust is, in part, a successor to three Separate Accounts of JHVLICO,
as well as the six Separate Accounts of John Hancock described below. On March
28, 1986, all of the investment assets and related liabilities of the Variable
Life Stock, Bond, and Money Market Accounts were transferred to what are now the
Growth & Income, Active Bond and Money Market Funds of the Trust, respectively,
in exchange for shares of those Funds.
On February 20, 1987, all of the investment assets and related liabilities
of six Variable Annuity Stock, Bond and Money Market Accounts were transferred
to what are now the Growth & Income, Active Bond and Money Market Funds of the
Trust, respectively, in exchange for shares of these Funds. The Trust itself was
incorporated on September 23, 1985, under the laws of the State of Maryland and
was reorganized as a Massachusetts business trust effective April 29, 1988.
Over the years, several Funds have been re-named as follows:
4
Year of
Current Fund Name Prior Name(s) Change
- -------------------------- --------------------------- -------
Active Bond Sovereign Bond 2000
Bond 1996
Earnings Growth Multi Cap Growth 2003
Mid Cap Growth 2002
Fundamental Growth Fundamental Mid Cap Growth 2000
Fundamental Value Large/Mid Cap Value 2002
Fundamental Value B Large Cap Value CORE/SM/ 2004
Global Bond Strategic Bond 1999
Growth & Income Stock 1996
International Equity Index International Equities 1998
International 1995
Global 1994
Large Cap Growth Select Stock 1996
Aggressive Stock 1994
Large Cap Growth B Large Cap Aggressive Growth 2004
Managed Total Return 1994
Mid Cap Growth Small/Mid Cap Growth 2004
Diversified Mid Cap Growth 1999
Special Opportunities 1998
Mid Cap Value B Small/Mid Cap CORE/SM/ 2004
Overseas Equity Global Balanced 2003
International Balanced 2000
Overseas Equity B International Opportunities 2004
Overseas Equity C Emerging Markets Equity 2004
Short-Term Bond Short-Term U.S. Government 1998
Small Cap Emerging Growth Small Cap Equity 2003
Small Cap Value 2000
Small Cap Value Small/Mid Cap Value 2001
C. THE FUNDS' INVESTMENT ACTIVITIES AND THEIR RISKS
1. Investing in Money Market Instruments
The Money Market Fund invests exclusively in "money market" instruments;
all the other Funds may invest in these instruments to some extent. These are
high quality, short-term fixed income obligations. Because of their nature,
money market
5
instruments generally do not carry significant risks of loss, but do have some
credit and interest rate risk. The principal risk is that a Fund's return on
money market instruments will be less than it would have earned on a riskier
investment.
2. Investing in Other Fixed Income Obligations
a. Overview: The following Funds invest primarily in non-money market fixed
income (i.e., "debt") securities: the Short-Term Bond, Bond Index, Total Return
Bond, Active Bond, High Yield Bond and Global Bond Funds. The Managed Fund can
vary its holdings of these securities within a broad range and the Financial
Industries Fund may have a modest exposure in these securities from time to
time. The other Funds may also invest in non-money market debt to a limited
extent from time to time.
Various types of risk associated with these securities are discussed in the
balance of this Section 2.
b. Interest rate risk: In general, debt securities with longer maturities
than money market instruments have exposure to interest rate risk. Changes in
generally prevailing market interest rates alter a debt security's market value
and introduce volatility into the rate of return of a Fund that invests in such
securities. When prevailing interest rates go up, the market value of debt
securities tends to go down and vice versa. This sensitivity of the market value
of a debt security to changes in interest rates is generally related to the
"duration" of the instrument. The market value of a shorter-term fixed income
security is generally less sensitive to interest rate moves than that of a
longer-term security. For example, the interest rate risk of the Short-Term Bond
Fund, although moderate, is below that of traditional intermediate or long-term
bond portfolios.
c. Credit risk: The value of a fixed income security may also change as a
result of market perceptions regarding its credit risk: i.e., the ability of the
borrower to repay its debts. The market value of a fixed income security can
fall when the market perceives the borrower to be less credit worthy.
Conversely, the market value of a fixed income security can increase due to its
borrower being perceived as financially stronger. All Funds that invest in debt
securities, including money market securities, may have some exposure to credit
risk.
Even some U.S. Government obligations have a degree of credit risk. "U.S.
Government obligations" are bills, certificates of indebtedness, notes and bonds
issued or guaranteed as to principal or interest by the United States or by
agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government and established under the authority
granted by Congress. Some obligations of U.S. Government agencies, authorities,
and other instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others by the right of the issuer to borrow from the Treasury;
and others only by the credit of the issuing agency, authority, or other
instrumentality. These latter types of obligations, therefore, do have a degree
of credit risk. U.S. Government obligations are used most in the Bond Index,
Active Bond, and Global Bond Funds. All of the other Funds may also invest in
U.S. Government obligations to some extent.
Securities having one of the four highest rating categories for debt
securities as defined by Moody's Investors Services, Inc. (Aaa, Aa, A, or Baa)
or Standard and Poor's Corporation (AAA, AA, A, or BBB) or, if unrated,
determined to be of comparable quality by the subadviser, are referred to as
"investment grade." The meanings of such ratings are set forth in Appendix A to
this Statement of Additional Information. Lower-rated bonds have more credit
risk than higher rated bonds.
d. Risk of lower-quality instruments: High-yield bonds (or "junk" bonds)
are debt securities rated below "investment grade" as defined above. The value
of these lower rated securities generally is more subject to credit risk than is
the case for higher rated securities, and their values tend to respond more to
changes in interest rates or changes in market perceptions regarding their
credit risk.
Investments in companies issuing high yield securities are considered to be
more speculative than higher quality instruments. As such, these securities
typically pay a higher interest rate than investment grade securities.
Issuers of high yield securities are typically in weak financial health,
and their ability to pay back principal and interest on the bonds they issue is
uncertain. Some of these issuers may be in default or bankruptcy. Compared with
issuers of investment-grade bonds, they are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they do
encounter them.
High yield bond markets may react strongly to adverse news about an issuer
or the economy, or to the perception or expectations of adverse news. These debt
securities may also have less liquid markets than higher rated securities.
Judgment plays a greater role in valuing high yield securities than in the
case of other securities for which more extensive quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by a Fund to value its
portfolio securities, and the ability of the Fund to dispose of its lower-rated
bonds.
6
Past experience may not provide an accurate indication of future
performance of high yield securities, especially during periods of economic
recession. The market prices of high yield securities may decline significantly
in periods of general economic difficulty, which may follow periods of rising
interest rates. During an economic downturn, the ability of issuers of
lower-rated debt to service their payment obligations, meet projected goals, or
obtain additional financing may be impaired. In some cases, a Fund may find it
necessary, at its own expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders, if it determines this to be in the
interest of Fund investors.
All Funds that invest in debt securities (other than the Money Market Fund)
may at times have some exposure to high yield securities. The High Yield Bond
Fund invests primarily in these securities. The only other Fund most likely to
invest a significant portion of its assets in high yield securities is the
Active Bond Fund. The Managed, Total Return Bond, Short-Term Bond and Global
Bond Funds may also invest in high yield securities to some extent. In contrast,
the Bond Index Fund will not invest in debt securities that are not at least
investment grade at the time of purchase, but could end up holding high yield
securities if downgraded to below investment graded after already having been
purchased for the Fund.
Although not customarily referred to as "high yield" securities or "junk
bonds," debt securities that fall in the lowest rating within the investment
grade category are considered medium grade securities that have some speculative
characteristics. Accordingly, to a lesser degree, they may present the same
risks discussed above with respect to high yield securities.
The considerations discussed above for lower-rated debt securities also are
applicable to lower quality unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit standing.
Unrated debt instruments are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers.
e. Prepayment/Call risk: Prepayment risk is the risk that the obligor on a
debt security may repay or "call" the debt before it is due. Most mortgage
backed securities, asset backed securities, other public bond debt securities
and 144A securities that a Fund might own are exposed to this risk. U.S.
Government securities typically have minimal exposure to this risk.
Prepayment/call is most likely to occur when interest rates have declined and a
borrower can refinance the debt at a lower interest rate level. Generally, a
Fund reinvests the proceeds resulting from prepayments in a lower yielding
instrument. This results in a decrease in the Fund's current yield. The values
of securities that are subject to prepayment/call risk also tend to increase
less in response to declining interest rates and decrease more in response to
increasing interest rates than would the value of otherwise similar securities
that do not have prepayment or "call" features.
All Funds that invest in debt securities may at times have some exposure to
prepayment/call risk. The Funds most likely to invest a significant portion of
their assets in debt securities with prepayment/call features are the Managed,
Total Return Bond, Short-Term Bond, Bond Index, Active Bond, High Yield Bond and
Global Bond Funds.
f. Risks of "zero coupon" instruments: All of the Funds may, in varying
degrees, invest in debt instruments that provide for payment of interest at the
maturity date of the instrument (or payment of interest in the form of
additional securities), rather than payment of interest in cash periodically
over the life of the instrument. The values of such instruments tend to respond
more to changes in interest rates than do otherwise comparable debt obligations
that provide for periodic interest payments. The Funds most likely to invest a
significant amount of their assets in instruments that are subject to this
volatility risk are the Managed, Total Return Bond, Short-Term Bond, Bond Index,
Active Bond, High Yield Bond and Global Bond Funds. However, all Funds that
invest in debt securities may at times have some exposure to this risk.
3. Investing in Equity Securities
a. Overview: All of the Funds intend to invest to some degree in common
stock or other equity securities, except for the Short-Term Bond, Bond Index,
and Money Market Funds. All Equity, Sector and International/Global Equity Funds
may invest in equity securities and are expected to make such securities their
primary investment. The Managed Fund invests a substantial portion of its assets
in equity securities, but also invests a substantial amount of its assets in
debt obligations. The Active Bond, Total Return Bond, Global Bond and High Yield
Bond Funds will invest in equity securities only to a limited extent and will
invest primarily in debt obligations.
General risks of investing in equity securities are discussed in the
balance of this Section 3.
b. Equity risk: Investments in common stock or other equity securities
historically have offered a higher rate of return than money market instruments
or longer term debt securities. However, the risk associated with equity
securities also tend to be higher, because the investment performance of equity
securities depends upon factors which are difficult to predict. The fundamental
risk associated with any equity portfolio is the risk that the value of the
investments it holds might decrease in value. Equity security
7
values may fluctuate in response to the activities of an individual company or
in response to general market, interest rate, and/or economic conditions.
c. Market capitalization risk: One indication of the relative risk of a
common stock investment is the size of the company, which is typically defined
by reference to its "market capitalization." Market capitalization is computed
by multiplying the current market price of a share of the company's stock by the
total number of its shares outstanding.
Investing in larger capitalization companies generally involves a lesser
degree of risk than investing in smaller capitalization companies. Conversely,
investing in the equity securities of smaller companies generally involves
greater risks and potential rewards than investing in larger, more established
companies. Small capitalization companies, in particular, often have limited
product lines, markets or financial resources, and they may depend upon a small
group of relatively inexperienced managers. Investments in such companies can be
both more volatile and more speculative. These securities may have limited
marketability and are subject to more abrupt or erratic market movements than
securities of larger companies or the market in general.
The U.S. equity securities of the Equity Index, Fundamental Growth, Large
Cap Value, Large Cap Growth, Large Cap Growth B and Earnings Growth Funds are
generally expected to represent primarily companies that qualify as large cap
issuers. These Funds also may invest in the equity securities of companies that
qualify as small and mid cap issuers.
The U.S. equity securities of the Growth & Income, Fundamental Value,
Fundamental Value B and Managed Funds are generally expected to represent
primarily large and mid cap issuers. These Funds also may invest in the equity
securities of companies that qualify as small cap issuers.
The U.S. equity securities of the Mid Cap Value, Mid Cap Value B and Mid
Cap Growth Funds are generally expected to represent primarily mid cap issuers.
The Fund also may invest in the equity securities of companies that qualify as
small cap issuers and, to a lesser extent, in the equity securities of companies
that qualify as large cap issuers.
The U.S. equity securities of the Small Cap Emerging Growth, Small Cap
Growth and Small Cap Value Funds are generally expected to represent primarily
companies that qualify as small cap issuers. Although these Funds also may
invest significant amounts in the equity securities of companies that qualify as
mid cap issuers, it is expected that they would rarely invest in the equity
securities of companies that qualify only as large cap issuers.
The Real Estate Equity, Health Sciences and Financial Industries Funds have
broad latitude to invest in companies of any size, depending on the market
capitalization of the respective sectors covered by those Funds.
Three capitalization levels are currently used by the Trust for non-U.S.
equities: large, medium ("mid"), and small. The following capitalization ranges
are used by the International Equity Index Fund, Overseas Equity Fund, Overseas
Equity B Fund and Overseas Equity C Funds:
. Large cap: Companies having a capitalization greater than $5 billion
. Mid cap: Companies having a capitalization between $1 billion and $5
billion
. Small cap: Companies having a capitalization less than $1 billion
The non-U.S. equity securities of the International Equity Index, Overseas
Equity, Overseas Equity B and Overseas Equity C Funds are generally expected to
represent primarily non-U.S. companies that qualify as large cap issuers. These
Funds also may invest in the equity securities of non-U.S. companies that
qualify as mid and small cap issuers.
4. Investing in Real Estate Securities
a. Overview: The Real Estate Equity Fund invests primarily in companies
with activities related to the real estate industry, such as real estate
investment trusts ("REITs") that own commercial and multifamily residential real
estate, real estate operating companies ("REOCs") that derive the majority of
their revenue, income or asset value from real estate and other companies
engaged in non-real estate businesses but whose real estate holdings are
significant in relation to the market value of their common stock.
The securities purchased will be principally common stock (and securities
convertible into or with rights to purchase common stock) but a portion of the
Fund may be invested in preferred stock. The Fund may also invest in commercial
mortgage securities (debt obligations secured by commercial property),
collateralized mortgage obligations (mortgage pass through securities secured by
commercial mortgage pools) and master limited partnerships from time to time,
but does not do so on the date of this Statement of Additional Information.
8
In addition to the Real Estate Equity Fund, all of the other Funds may have
some exposure to real estate risks through investments in companies engaged in
real estate related businesses or investments in debt instruments secured by
real estate or interests in real estate.
b. Risks of real estate securities: Generally speaking, real estate
securities may be affected by risks similar to those resulting from the direct
ownership of real estate, as well as by market risks due to changes in interest
rates and by the overall volatility of the equity markets. The market value of
shares in equity real estate investment trusts and commercial property
companies, in particular, is heavily dependent upon the value of their
underlying properties. Overbuilding, declines in local or regional economic
conditions, financial difficulties on the part of major tenants and increases in
real estate taxes and operating expenses all could decrease the value of the
real estate investments.
5. Investing in Foreign Securities
a. Overview: Investments in foreign securities may be made in a
foreign-denominated security, or in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs") or other U.S. dollar denominated securities representing underlying
shares of foreign securities. ADRs, EDRs, GDRs and other securities representing
underlying shares of foreign securities may not necessarily be denominated in
the same currency as the securities into which they may be converted, but rather
in the currency of the market in which they are traded. ADRs are receipts,
typically issued by an American bank or trust company, which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe by banks or depositories which evidence a similar ownership
arrangement. GDRs are receipts issued in two or more markets by banks or
depositaries which evidence a similar ownership arrangement. Generally, ADRs are
designed for use in U.S. securities markets, EDRs for use in European securities
markets, and GDRs for use in multiple securities markets.
Investments in debt securities issued by foreign issuers may be made in
foreign-denominated debt instruments or in the form of U.S. dollar denominated
debt securities issued by foreign issuers and publicly traded in the United
States ("Yankees") or in Europe ("Eurobonds").
The International Equity Index Fund invests primarily in foreign
securities, including foreign-denominated securities. The Health Sciences,
Overseas Equity, Overseas Equity B, Overseas Equity C and Global Bond Funds
invest a significant portion of their assets in foreign securities, including
foreign-denominated securities. To a lesser extent, the Large Cap Value,
Earnings Growth, Mid Cap Value, Mid Cap Value B, Small Cap Emerging Growth,
Small Cap Growth, Real Estate Equity, Financial Industries, Managed, and High
Yield Bond Funds may also invest in foreign securities, and all of these Funds
excluding Earnings Growth may invest in foreign-denominated securities.
Funds investing in equity securities may also invest in ADRs and other U.S.
dollar denominated foreign securities. Funds investing in debt securities may
also invest in foreign debt securities denominated in U.S. dollars (i.e.,
Yankees and Eurobonds).
Risks of investing in foreign securities are discussed in the paragraphs
that follow:
b. Currency risks: When a Fund buys foreign-issued securities, it usually
must pay for those securities in the local currency. Therefore, the Fund must
convert funds into the local currency to the extent necessary for this purpose.
Similarly, when a Fund sells a foreign security, it may receive payment in the
local currency. Therefore, if the Fund does not wish to continue to hold that
currency, it must enter into a transaction disposing of it.
In these ways, therefore, a Fund may temporarily hold foreign currency in
order to facilitate the purchase and sale of foreign securities. This exposes
the fund to the risk that the foreign currency's value could, while the Fund was
temporarily holding that currency, decline relative to the U.S. dollar. This
could result in a loss to the Fund, because the Fund's assets and shares are
valued in U.S. dollars. On the other hand, the Fund could experience gains if
the foreign currency's value, relative to the U.S. dollar, increases during the
period when the Fund holds that currency.
More fundamentally, however, because the Fund values its assets and shares
in U.S. dollars, the Fund's gains and/or losses on investments that are
denominated or traded in foreign currencies will depend in part on changes in
the value of that currency relative to the U.S. dollar. This exposes the Fund to
the risk of loss if that foreign currency loses value, as well as the
possibility of gains if that currency gains value, relative to the U.S. dollar.
The Funds may (but are not required to) employ certain strategies to limit
their risks or otherwise manage their exposure to foreign currencies. Such
currency management techniques, as well as the risks that those techniques
themselves present, are discussed in Section 6. below.
9
Also, a risk exists that a foreign country may have or implement
restrictions on transactions in its currency that prevent a Fund from
effectively managing or reducing its exposure to that currency, even after the
Fund has disposed of any securities denominated or traded in that currency.
c. Political and economic risk: Foreign securities often are subject to
heightened political and economic risks, particularly in emerging markets or
other underdeveloped or developing countries, which may have relatively unstable
governments and economies based on only a few industries. Foreign governments
may take over the assets or operations of a company, may impose additional
taxes, or may place limits on the removal of the Fund's assets from that
country. However, investments in foreign securities also offer the opportunity
to diversify holdings and to invest in economies whose growth may outpace that
of the United States.
d. Regulatory risk: Generally, there is less government supervision of
foreign markets. Foreign issuers generally are not subject to uniform
accounting, auditing, and financial reporting standards and practices applicable
to domestic issuers. There may be less publicly available information about
foreign issuers than domestic issuers. These risks may be greater in emerging
markets or other underdeveloped or developing countries.
e. Market risk: Foreign securities markets, particularly those of emerging
markets or other underdeveloped or developing countries, may be less liquid and
more volatile than domestic markets. Certain markets may require payment for
securities a Fund purchases before delivery of these securities to the Fund, and
delays may be encountered in settling securities transactions. In some foreign
markets, there may be limited protection against failures by other parties to
complete their transactions with a Fund. There may be limited legal recourse
against an issuer in the event of a default on a debt instrument held by a Fund.
f. Transaction costs: Transaction costs of buying and selling foreign
securities, including brokerage, tax, and custody costs, are generally higher
than those involved in domestic transactions. This is particularly likely for
investments in emerging markets, or other underdeveloped or developing
countries.
6. Techniques and Instruments for Managing Currency Exposure
a. General considerations and risks: The Funds are not obligated to try to
hedge against any change in the value of any currency. Even if a Fund wished to
do so, there is no assurance that market conditions would be such as to make
such hedging possible. In general, however, the more foreign securities a given
Fund invests in, the greater its currency management activities are likely to
be. The foreign currency management techniques and instruments discussed below
do not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. A Fund may use certain types of
these instruments in currency management strategies that expose that Fund to
currencies other than the U.S. dollar. Although this would not be done for the
purpose of "leveraging" the Fund's overall exposure to fluctuations in currency
values, such strategies could expose the Fund to greater risks of loss and
greater volatility than it otherwise would experience. Moreover, even where a
Fund establishes positions designed to manage its foreign currency exposure,
there is no assurance that this will be beneficial to the Fund. Such positions
may cause a Fund to forego gains that it otherwise could have achieved or incur
costs and losses that it would not otherwise have incurred. (In general the cost
to the Funds of engaging in foreign currency management transactions varies with
such factors as the currency involved, the type and duration of the instrument
being used for this purpose, and the market conditions then prevailing.) It is
entirely possible, therefore, that any effort to manage a Fund's currency
exposure could have a negative effect on the Fund's investment performance.
b. Techniques for managing currency exposure: The Funds may employ one or
more of the following techniques for managing currency exposure:
(i) Transaction hedging: When a Fund anticipates having to purchase or
sell a foreign currency to facilitate a foreign securities transaction, it may
wish to "lock in" the current exchange rate for that currency (vis-a-vis the
U.S. dollar) and thus avoid (in whole or in part) exposure to further changes in
that rate that could occur prior to when the purchase or sale proceeds are
actually paid. This is called "transaction hedging."
A Fund can do transaction hedging by purchasing or selling foreign
currencies in the "spot" (i.e., cash) market. Alternatively, a Fund may use one
or more of the instruments described in Section 6.c. below for transaction
hedging.
(ii) Portfolio hedging: A Fund may use one or more of the instruments
described below to reduce its exposure to changes (relative to the U.S. dollar)
in the value of a foreign currency during a period of time when the Fund owns
securities that are denominated in, exposed to or traded in that currency. This
is called "portfolio hedging." A Fund generally will not engage in portfolio
hedging with respect to the currency of a particular country to an extent
greater than the aggregate market value (at the time
10
of establishing the hedge) of securities held by that Fund which are denominated
in, exposed to or traded primarily in that particular foreign currency but may
do so for purposes of transactions involving "proxy" currency or "cross
hedging."
(iii) "Proxy" currency: For purposes of transaction hedging or portfolio
hedging, the Funds may use instruments on a "proxy" currency, instead of the
currency being hedged. A proxy currency is one that the subadviser believes will
bear a close relationship to the currency being hedged and believes will
approximately equal the performance of such currency relative to the U.S.
dollar. Nevertheless, changes in the value of the currency being hedged may not
correspond to changes in the value of the proxy currency as expected, which
could result in the currency hedge being more favorable or less favorable to the
Fund than the subadviser had expected.
(iv) Cross hedging: The Funds may use additional techniques when their
subadvisers believe that the currency of a particular country may suffer a
significant decline against the U.S. dollar or against another currency. In that
case, a Fund may use an instrument that, in effect, simultaneously establishes
for the Fund (1) a "short" position in an amount of foreign currency
approximating the value of some or all of that Fund's securities denominated in,
traded in, or exposed to such foreign currency and (2) a corresponding "long"
position in U.S. dollars or another currency. The "long" position might be a
currency other than U.S. dollars, for example, if such other currency is
believed to be undervalued or necessary to bring the Fund's overall exposure to
various currencies into a more desirable balance. This is called "cross
hedging".
(v) Other: To otherwise adjust the currency exposure of their portfolios,
the Funds may also enter into contracts that, in effect, simultaneously
establish for the Fund (1) a "short" position in an amount of U.S. dollars, or
other appropriate currency, and (2) a corresponding "long" position in an amount
of foreign currency corresponding to the value of some of the Fund's securities.
c. Instruments for managing currency exposure: In furtherance of the
above-described techniques for managing currency exposure, the Funds may use one
or more of the following instruments:
(i) Forward exchange contracts (and related asset segregation
requirements): In a forward exchange contract, a Fund purchases or sells a
specific amount of foreign currency, at a price and time (which may be any fixed
number of days in the future) set in the contract. A Fund's obligation to
deliver an amount of a currency under a forward contract must at all times be
"covered" by the Fund's (a) owning at least that amount of investments
denominated or primarily traded in such currency that are not segregated to
support any other Fund obligation or (b) having a contractual right to acquire
that amount of such investments or such amount of currency at a price no greater
than the amount the Fund will receive on settlement of the forward contract; or,
alternatively, the relevant subadviser, subject to any oversight and any
directions given by John Hancock, will (c) cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that are
not segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit for that forward contract, at all times at least
equals the amount of the Fund's obligation on that forward contract; provided
that, as to any forward contract on any currency that settles on a "net" basis,
a Fund may, for hedging purposes of clause (c), consider its "obligation" to be
the net amount it owes under that contract that is not covered as provided in
clauses (a) and (b) of this sentence.
(ii) Options on currencies (and related asset segregation requirements): A
Fund may purchase and write put and call options on foreign currencies. This
could include options traded on U.S. and foreign exchanges, as well as those
traded in "over-the-counter" markets. The characteristics and risks of these
currency option transactions are similar to those discussed in Sections 11. and
12. below with respect to put and call options on securities.
A Fund's obligation to deliver an amount of currency upon exercise of a
call option written by the Fund must at all times be "covered" by the Fund's (a)
owning at least that amount of investments denominated or primarily traded in
such currency that are not segregated to support any other Fund obligation or
(b) having a contractual right to acquire such investments or such amount of
currency at a price no greater than the amount the Fund will receive upon
exercise of the option; or the relevant subadviser, subject to any oversight and
any directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that are
not segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit with respect to that option, at all times at
least equals the value of the currency that the Fund is obligated to deliver
under the option and that is not covered as provided in clause (a) or (b) of
this sentence.
In connection with any currency put option written by a Fund, the relevant
subadviser, subject to any oversight and any directions given by John Hancock,
will cause the Fund's custodian to segregate (or will segregate by "earmarking"
on Fund records that the sub-adviser maintains) cash or other assets it
determines to be liquid that are not segregated to support any other obligation
of the Fund and that, together with any margin the Fund has on deposit with
respect to such option, at all times at least equals the amount the Fund is
obligated to pay upon exercise of the option.
11
(iii) Currency futures contracts (and options thereon): A Fund may use
currency futures contracts and options thereon to manage currency exposure. The
characteristics and risks of such futures and options transactions are similar
to those discussed in Sections 11, 12, and 13. below for other transactions in
futures contracts and options thereon. All transactions in currency futures and
options thereon also would be subject to the applicable limitations in Section
13.c.(ix) below.
(iv) Other derivative instruments: A Fund may use certain "swaps," "caps,"
"floors," and "collars" to manage currency exposure. The characteristics and
risks of such "derivative" transactions, as discussed in Section 14 below, are
generally also applicable when such instruments are used for currency management
purposes.
7. Reallocating a Fund's Assets Among Asset Classes
The continual reallocation of assets among the major asset classes (e.g.,
stocks, bonds, and cash) involves the risk that the subadviser may reduce the
Fund's holdings in an asset class whose value increases unexpectedly, or may
increase the Fund's holdings in an asset class just prior to that asset class
experiencing a loss of value. The Managed Fund tends to exercise broad
discretion in reallocating assets across asset classes. The Global Bond Fund
intends to exercise discretion to reallocate assets across domestic and
international asset classes.
All of the other Funds, with the exception of the Money Market Fund,
generally allow the subadviser some latitude to allocate across asset classes.
Nevertheless, this latitude is expected to be exercised to a lesser degree than
in the Managed Fund.
8. Adopting a Temporary Defensive Strategy
All of the Funds, except the Money Market Fund, may (but are not required
to) adopt a defensive investment posture if the subadviser believes the
investment environment for the Fund is negative. For example, the Earnings
Growth Fund reserves the right to invest without limitation in preferred stock
and investment-grade debt instruments for temporary, defensive purposes. Such a
defensive posture would involve reallocating some or all of a Fund's assets in a
manner different from that contemplated by its primary investment objective and
strategies and normal level of assets, cash and cash equivalents. For most
"actively managed" funds, (i.e., Funds that do not invest with an index-based
objective), this level is 10% or less, except in abnormal market conditions,
when the level can be higher.
The Funds are limited only by their fundamental investment restrictions as
to the types of investments they could use temporarily for defensive purposes.
Thus, for example, a small cap equity Fund might temporarily invest in stocks of
larger cap companies or in high quality, short term debt securities. A bond Fund
might shorten maturities or tighten its investment quality parameters. An
international Fund might, for example, limit the countries it would invest in or
temporarily invest only in high quality, short-term debt securities in the
United States.
There can be no assurance that the transaction costs and lost investment
opportunities will not outweigh any benefits to a Fund that attempts to adopt a
defensive strategy.
9. Investing With an Index-Based Objective
The Equity Index, International Equity Index, and Bond Index Funds expect
to invest substantially all of their assets in equity or debt securities within
their investment objectives and policies at all times. Accordingly, these Funds
may carry more risk in times of declining markets than "actively managed" Funds
that, during normal market conditions, maintain a higher level of cash or cash
equivalents and, during periods of abnormal market conditions, are more likely
to adopt a defensive investment posture by reallocating their assets in a manner
different from that contemplated by their primary investment objective and
strategies.
Investments in the Equity Index, International Equity Index, and Bond Index
Funds each involve the risk that the Fund will be unable to match the
performance of its corresponding target index. Each Fund's ability to do so is
affected by (a) the size and timing of cash flows into and out of that Fund, (b)
the level of the Fund's expenses, including commissions and "spreads," on its
portfolio transactions, other portfolio management expenses, and other operating
expenses, and (c) the degree of success of the techniques employed by the Fund's
subadviser. Further, if the size of a Fund limits the number of issues that the
Fund can purchase, or that size is relatively small in relation to cash flows,
there is a greater possibility that the Fund may be unable to match the
performance of the corresponding target index.
The S&P 500 Index: The S&P 500 is an index that is constructed by the
Standard & Poor's Corporation ("Standard & Poor's" or "S&P"), which chooses
stocks on the basis of market values and industry diversification. Most of the
largest 500 companies listed on U.S. stock exchanges are included in the index.
Additional stocks that are not among the 500 largest stocks, by market value,
may be included in the S&P 500 for diversification purposes. The index is
capitalization weighted -- that is, stocks with
12
a larger capitalization (shares outstanding times current price) have a greater
weight in the index. Selection of a stock for inclusion in the S&P 500 Index in
no way implies an opinion by S&P as to its attractiveness as an investment.
The Trust and the insurance products supported by the Trust are not
sponsored, endorsed, sold or promoted by Standard & Poor's. Standard & Poor's
makes no representation or warranty, express or implied, to the owners of the
insurance products supported by the Trust or to any member of the public
regarding the advisability of investing in the Trust or such insurance products.
Standard & Poor's only relationship to the Trust is the licensing of Standard &
Poor's "marks" and the S&P 500 Index, which is determined, composed and
calculated by Standard & Poor's without regard to the Fund or the Trust.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of McGraw-Hill, Inc. and have been licensed for use by the
Trust. In determining, composing, or calculating the S&P 500 Index, S&P has no
obligation to take into consideration the needs of the Trust or those of the
owners of the insurance products supported by the Trust. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the insurance products supported by the Trust or the timing of the issuance or
sale of such products or in the determination or calculation of the equations by
which such products are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing, or trading of such
products.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE PRODUCTS
SUPPORTED BY THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Lehman Brothers Aggregate Bond Indexes: The Lehman Brothers Aggregate
Bond Index (the "Aggregate Bond Index") is intended to measure the performance
of the domestic, investment grade, fixed-rate investment grade debt market
including government and corporate securities, agency mortgage pass-through
securities, commercial mortgage-backed securities and asset-backed securities.
The Aggregate Bond Index covers those securities in the Lehman Brothers
Government/Credit Index (the "Government/Credit Index"), plus those covered by
the Lehman Mortgage-Backed Securities Index ("MBS Index"), the Lehman Commercial
Mortgage-Backed Securities (ERISA Eligible) Index ("CMBS (ERISA Eligible)
Index"), and the Lehman Asset-Backed Securities Index ("ABS Index"). The
Government/Credit Index is composed of (1) all public obligations of the U.S.
Government, its agencies and instrumentalities (excluding "flower" bonds and
pass-through issues, such as GNMA certificates) and (2) all publicly issued,
fixed-rate, non-convertible, investment grade, U.S. dollar-denominated,
SEC-registered obligations of domestic corporations, foreign governments and
supranational organizations.
The MBS Index covers fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association, the Federal Home Loan Mortgage
Association, and the Federal National Mortgage Association. The CMBS (ERISA
Eligible) Index covers ERISA-Eligible CMBS securities. The ABS Index covers
several subsectors -- including credit and charge cards, auto, utilities and
home equity loans -- and includes pass-through, "bullet," and controlled
amortization structures.
All securities in the index generally have at least $200 million par amount
outstanding and at least 1 year remaining to maturity.
All non-government issues in the Aggregate Bond Index are rated at least
Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("Standard & Poor's") or, if unrated by Moody's or Stanard &
Poor's, BBB by Fitch, Inc. ("Fitch") .
All securities in the Aggregate Bond Index issued by non-U.S. entities are
denominated in U.S. dollars.
Lehman Brothers, Inc. is neither a sponsor of nor in any other way
affiliated with the Trust or the insurance products supported by the Trust.
Inclusion of a security in the Aggregate Bond Index in no way implies an opinion
of Lehman Brothers, Inc. as to its attractiveness or appropriateness as an
investment.
The MSCI All Country World Excluding U.S. Index: The MSCI All Country World
Excluding U.S. Index is a market capitalization weighted index composed of
companies representative of the market structure of developed and emerging
market
13
countries in the Americas (excluding the United States), Europe/Middle East, and
Asia/Pacific Regions. It excludes closed markets and those shares in otherwise
free markets that are not purchasable by foreigners.
The Trust and the insurance products supported by the Trust are not
sponsored, endorsed, sold or promoted by Morgan Stanley Capital International
("MSCI"). MSCI makes no representation or warranty, express or implied, to the
owners of the Trust, or any member of the public regarding the advisability of
investing in funds generally or in the Trust or any Fund particularly, or the
ability of the MSCI All Country World Excluding U.S. Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service
marks and trade names of MSCI and of the MSCI All Country World Excluding U.S.
Index, which is determined, composed and calculated by MSCI without regard to
the Trust. "Morgan Stanley Capital International" is a service mark of Morgan
Stanley & Co., Incorporated, that has been licensed for use by the Trust.
MSCI has no obligation to take the needs of the Trust or the owners of
insurance products supported by the Trust into consideration in determining,
composing or calculating the MSCI All Country World Excluding U.S Index. MSCI is
not responsible for and has not participated in the determination of the prices
or amounts of insurance products supported by the Trust or the timing of the
issuance and sale of such products, or in the determination or calculation of
the equations by which such products are convertible into cash. MSCI has no
obligation or liability to owners of the Trust or of the insurance products
supported by the Trust in connection with the administration, marketing or
trading of any Fund of the Trust.
ALTHOUGH MSCI OBTAINS INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF THE
TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA
INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED
WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT,
SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS)
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
10. Investing on a Non-Diversified Basis
TheReal Estate Equity, Health Sciences Financial Industries and Global Bond
Funds are "non-diversified Funds." Non-diversified Funds are less restricted in
the extent to which they may invest more than 5% of their assets in any issuer
or purchase more than 10% of the voting securities of any issuer. Because a
relatively high percentage of a non-diversified Fund's assets may be invested in
the obligations of a single issuer or a limited number of issuers, the value of
that Fund's shares may be more volatile and more susceptible to any single
economic, political, or regulatory event, or to credit and market risks
associated with a single issuer, than would the shares of a diversified Fund.
11. Using Options
a. Overview: The Funds may, in varying degrees, use options on the
following (which, for simplicity, may be referred to as the "subject" of an
option): currencies, securities, equity indexes, interest rate indexes,
financial futures contracts and rights under swap agreements ("swap options").
This Section 11. discusses certain characteristics and risks that are generally
common to all of these types of options. The Funds' use of specific types is
further discussed in Section 6. above and Sections 12 and 14. below, including
characteristics and risks peculiar to those types of options.
b. Purchasing "call" options: If a Fund (or anyone else) "purchases" a
"call" option, it pays a purchase price (often called a "premium") plus, in most
cases, a commission to the broker through whom the purchase was made. In return
the Fund (or other purchaser) has the right (but not the obligation), at or
before a specified future time (called the "expiration date"), to acquire a
specified amount of the option's subject (or the economic equivalent thereof) at
a specified price (called the "strike price" or "exercise price"). In a "call"
swap option, the Fund (or other purchaser) has the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or
otherwise modify an existing swap agreement or to shorten, extend, cancel or
otherwise modify an existing swap agreement at some designated future time on
specified terms. If the purchaser of an option decides to exercise this right,
we say the option has been "exercised." If an option is never exercised before
its expiration date, it expires unexercised.
A Fund (or other purchasers of a call option) may profit in one of two
ways. First, the Fund may be able to exercise the call option at a date when the
value of the option's subject exceeds the purchase price of the option
(including any brokerage commission)
14
plus the exercise price. Whether the Fund will be able to do this depends on how
favorable those prices were and how the value of the option's subject has
changed since the option was purchased.
Secondly, a Fund may profit from purchasing an option if the Fund is able
to sell the option (unexercised) at a profit sometime before its expiration
date. (As a practical matter, such a sale would generally be accomplished by
having the Fund sell (i.e., "write") an option identical to the option it owns,
thereby "netting out" the Fund's exposure to the position.) Whether such a
profit will be possible, of course depends on whether the then market price for
the option (less any commission payable on the sale) exceeds the option's
purchase price (including any related commission). In this regard, one of the
general risks of purchasing options is that, for a variety of reasons, the
market price of an option usually does not vary in the same way or to the same
extent as the value of the option's subject varies. Therefore, a Fund can lose
money purchasing a call option, even if the value of the option's subject
increases.
The basic risk in purchasing an option is that, if the Fund never exercises
or sells the option at a profit, the Fund will lose the entire purchase price of
the option (plus any related commissions). That is the maximum amount the Fund
could lose, however.
c. Selling or "writing" call options: Selling an option is commonly
referred to as "writing" an option. If the Fund (or anyone else) sells
("writes") a call option, it receives the premium (less any commission) paid by
the option's purchaser and has the obligation to sell the option's subject to
the purchaser at the exercise price, or change the terms of the underlying swap
agreement under a swap option, if the purchaser exercises the option before it
expires.
The Fund can make a profit writing a call option if the purchaser fails to
exercise the option (which usually would happen only if the value of the
option's subject were below the exercise price or, under a swap option, if more
favorable terms for swap agreements were available than those under the option).
In this case, the option's purchase price (net of any commissions) would be a
profit to the Fund.
Alternatively, a Fund could profit from writing a call option if it is able
to subsequently purchase an identical option that would close out the Fund's
position at a profit. This could be done only if the market price of the option
then exceeded the Fund's purchase price by an amount greater than any
commissions payable by the Fund on the purchase and sale transactions. There is
a risk, however, that a Fund may be unable to do this, even if the value of the
call option's subject has declined. This is because, as noted above, the value
of an option does not vary in identical fashion to the value of the option's
subject and, with respect to swap options, because the swaps market is a
relatively new market and identical options may not be available.
The risk of writing a call option is that, if the value of the option's
subject exceeds the option's exercise price, the option is almost sure to be
exercised. In that case, the Fund will suffer a loss to the extent that the
premium it received for writing the option (net of any commissions), plus the
exercise price it receives are less than the value of the option's subject at
the time of exercise. Therefore, the higher the value of the option's subject
rises, the greater the Fund's potential loss on an option it has written. A Fund
could cut off its further exposure in such a case by purchasing an identical
call option that would close out its position. The Fund would, however, probably
realize a loss on the transaction, because the purchase price it would have to
pay for that call option would probably have increased to reflect the increasing
value of the option's subject.
Depending on the terms of the particular swap option, a Fund will generally
incur a greater degree of risk when it sells ("writes") a swap option than it
will incur when it purchases a swap option because the Fund will become
obligated according to the terms of the underlying swap agreement upon exercise
of the option by the purchaser.
d. Writing call options on a "covered" basis. One way for a Fund to limit
its risk exposure on call options it has written is to "cover." A call option
may be considered "covered" if, as long as the option is outstanding, the writer
(seller) of the option owns assets that are identical to, or have the same or
similar investment characteristics to, the option's subject. In such a case, if
the value of the option's subject increases, the losses that the Fund will incur
on the call option it has written will tend to be offset by gains that Fund
earns on the assets it is holding to "cover" the option.
Call options written by Funds can also be considered to be "covered" to the
extent that the Fund's liabilities under these options are fully offset by its
rights under call options on the same subject owned by the Fund. Naturally, the
more similar the assets held by the fund are to the option's subject, the more
assurance the Fund will have that its losses on call options it has written will
be "covered."
To the extent that an option written by a Fund is not fully covered by
assets that are very similar to the option's subject, the Fund's sub-adviser
will segregate or "earmark" on the Fund's records cash or amounts it otherwise
determines to be liquid in an amount equal to the Fund's exposure under the
option. This procedure for each type of option written by the Fund is described
more specifically in the portion of this Part C that describes the writing of
that type of option.
15
Although a Fund may own an underlying swap agreement when it writes a swap
option, its liabilities under the swap option would not be fully offset by the
swap agreement. This is because the swap option will change the terms of the
underlining swap agreement when the purchaser exercises the option.
e. Purchasing and selling (writing) "put" options: A "put" option is the
same as a call option, except that a Fund (or any other person) that purchases a
put option, by paying the purchase price ("premium") has the right to sell
(rather than buy) the option's subject for a stated exercise ("strike") price.
Conversely, the seller (writer) of a put option receives the premium (net of any
commissions) but has the obligation to purchase the option's subject at its
exercise price if the option is exercised. These terms do not strictly apply to
swap options because that type of option changes the terms of the underlying
swap agreement, as discussed above in Section C.11.b.
If a Fund purchases a put option, its maximum potential loss would equal
the purchase price (plus any commissions thereon). If the Fund actually owns at
least the amount of whatever assets are the subject of the option, the option is
sometimes referred to as a "protective" put option. If the market value of such
underlying securities remains above the option's exercise price, the Fund will,
in effect, lose the premium it has paid for the option. The Fund, however,
avoids the risk of loss on the underlying securities, to the extent that the
market value of the underlying securities falls below the exercise price of the
put option.
On the other hand, if a Fund sells (writes) a put option, the Fund could
experience continuing losses while the option is outstanding, to the extent that
the value of the subject of the option continues to decline. If the subject lost
its value entirely, the Fund's maximum loss would equal the exercise price less
the premium (net of any commissions) that the Fund received initially for
writing the option. Because of this risk exposure, a Fund that writes a put
option may seek to "cover" that option with other assets that it owns
f. Accounting for options: The value of any option that the Fund has
purchased, and the amount of the Fund's obligation under any outstanding option
it has written, will vary as market prices change. These variations are
reflected daily in the Fund's calculation of its net asset value, so that such
value always reflects the estimated impact of current market conditions on all
of the Fund's option positions.
g. Liquidity risk: The Funds intend to write and purchase options (other
than swap options) only if the subadviser believes that adequate liquidity
exists to close out open positions. If for any reason a Fund cannot, however,
close out its open option position when deemed advisable, the Fund's investment
performance could be adversely affected.
h. Using options traded over-the-counter or on foreign exchanges: A Fund
may use options on securities and options on indexes that are traded
"over-the-counter" or on foreign exchanges. A Fund may use such options in any
manner and to the same extent that it would be permitted to use such options
that were traded on domestic exchanges. The Funds will treat over-the-counter
options they have purchased and assets used to cover over-the-counter options
they have written as illiquid securities. However, with respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the formula
price.
i. Asset segregation requirements for options written by a Fund: When a
Fund writes an option, it is generally required that (a) that option be fully
covered by the Fund's ownership of the same type of assets that are the subject
- -to the option (or a right to acquire such assets) or (b) to the extent not so
covered, that the Fund set aside cash or liquid securities to support the Fund's
obligations under the option it has written.
Except for swap options, the asset segregation requirements for each type
of option that a Fund may write are described in the portion of this part C that
more specifically describes that type of option. For swap options written by a
Fund, the asset segregation requirements are described in Section 14.f. below.
12. Using Options on Securities (and related asset segregation requirements)
a. Options on securities generally: A Fund may purchase or write (sell) put
and call options on securities of a type that the Fund could invest in directly.
If a Fund writes a call option, it will at all times, own (a) an amount of
the securities subject to the option that are not segregated to support any
other obligation of the Fund and/or a (b) a call option on the same securities
at an exercise price that is not higher than that of the call option written by
the Fund; or, alternatively, the relevant subadviser, subject to oversight and
any directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the subadviser
maintains) cash or other assets it determines to be liquid that are not
segregated to support any other Fund obligation and that, together with any
margin the Fund has on deposit with respect to the option it has written, at all
times at least
16
equals the amount of the Fund's obligation under the option that is not
"covered" as provided by clause (a) or (b) of this sentence. For this purpose,
the amount of the obligation is deemed to be (i) the value of the securities
that are the subject of the option or (ii) the amount by which the exercise
price on any option the Fund has to acquire such securities exceeds the exercise
price on the option the Fund has written on such securities.
A Fund's obligation to make a payment upon the exercise of a put option on
securities written by the Fund will at all times be fully covered by the Fund's
owning a put option on the same securities at an exercise price that is no less
than the amount the Fund must pay upon exercise of the put it has written; or,
alternatively, the relevant subadviser, subject to oversight and any directions
given by John Hancock, will cause the Fund's custodian to segregate (or will
segregate by "earmarking" on Fund records that the subadviser maintains) cash or
other assets it determines to be liquid that are not segregated to support any
other Fund obligation and that, together with any margin the Fund has on deposit
with respect to the put option it has written, at all times at least equals the
amount of the Fund's obligation upon exercise of the put option that is not
covered as provided in the first part of this sentence.
b. Straddles: A straddle is a strategy that consists of a simultaneous call
option and put option on the same underlying security with each such option
having the same exercise price. The combination is usually sold (written) as a
unit, but each "leg" (i.e., the put option or the call option) may be exercised
separately by the purchaser of the straddle.
A Fund may purchase or write straddles. When a Fund writes a straddle, the
relevant sub-adviser will cause the Fund's custodian to segregate (or will
segregate by "earmarking" on Fund records that the sub-adviser maintains) the
same amount (if any) of cash or other assets it determines to be liquid as it
would do if the Fund had written only the leg of the straddle that is "in the
money." For example, if the value of the underlying security is higher than the
exercise price of the straddle (i.e., the exercise price of the put and call
option), a written straddle will be covered by the Fund in the same manner as it
would for a written call option. Conversely, when the value of the underlying
security is lower than the exercise price of the straddle, a written straddle
will be covered by the Fund in the same manner as it would for a written put
option.
Similarly, if a Fund writes a put and call option on the same security, but
each leg has a different exercise price, and if the exercise price of the put
does not exceed that of the call, the segregation (or earmarking") requirement
will be the same as it would be if the Fund had written only the leg of the
strategy that is "in-the-money." If both options are "out-of-the-money," the
segregation (or earmarking") requirement will be the same as it would be if the
Fund had written only the leg of the transaction that represents the higher
potential liability of the Fund.
Because a straddle consists of two options, the commissions and other
transaction costs of assuming and liquidating the position may be relatively
high.
13. Using Financial Futures Contracts, Options on Such Contracts and Options on
Stock Indexes
a. Overview: The Funds may, in varying degrees, use financial futures
contracts, options on such futures and options on stock indexes. This Section 13
discusses certain characteristics and risks that generally pertain to these
instruments, as well as the Funds' specific uses of these instruments and
specific risks related to those uses.
b. General characteristics and risks: The general characteristics and risks
of financial futures, options on such contracts and options on stock indexes are
discussed in the following subsections.
(i) Financial futures contracts: Financial futures contracts consist
of interest rate futures contracts, stock index futures contracts, and
currency futures contracts.
An interest rate futures contract is a contract to buy or sell
specified debt securities at a future time for a fixed price. A public
market currently exists for interest rate futures contracts on United
States Treasury Bills, United States Treasury Notes, bank certificates of
deposit, and various other domestic or foreign instruments and indexes.
Stock index futures contracts bind purchaser and seller to delivery at
a future date specified in the contract of a cash amount equal to a
multiple of the difference between the value of a specified stock index on
that date and settlement price specified by the contract. That is, the
seller of the futures contract must pay and the purchaser would receive a
multiple of any excess of the value of the index over the settlement price,
and the purchaser must pay and the seller would receive a multiple of any
excess of the settlement price over the value of the index. A public market
currently exists for stock index futures contracts based on the Standard &
Poor's 500 Stock Index, the Standard & Poor's Midcap Index, the New York
Stock Exchange Composite Index, the Value Line Stock Index, and various
other domestic or foreign indexes.
17
A currency futures contract is a contract to buy or sell a specified
amount of another currency at a future time for a fixed price.
(ii) Options on financial futures contracts: The writer of an option
on a financial futures contract agrees to assume a position in such
financial futures contract having a specified price, if the purchaser
exercises the option and thereby assumes the opposite position in the
financial futures contract. If the option purchaser would assume the sale
side of the futures contract upon exercise of the option, the option is
commonly called a "put" option. If the option writer would assume the
purchase side, it is commonly called a "call" option. As with other types
of options, the party that writes the option receives a premium for doing
so, and the party that purchases an option pays a premium therefor.
However, there is no exercise (or strike) price, as such. Rather, if the
value of the futures contract moves against the writer of the option, so
that the option is (or is likely to be) exercised, the option writer, in
effect, has the obligation to pay those losses.
More specifically, an option written by a Fund on a financial futures
contract requires the Fund to pay any amount by which the fluctuating price
of the underlying debt instrument or index exceeds (in the case of a call
option) or is less than (in the case of a put option) the price specified
in the futures contract to which the option relates. Therefore, if the
price of the debt instrument or stock index on which the futures contract
is based increases (in the case of a call option written by a Fund) or
decreases (in the case of a put option written by a Fund), the Fund may
incur losses that exceed the amount of the premium received by the Fund for
writing the option.
(iii) Stock index options: After payment of a specified premium at the
time a stock index option is entered into, the purchaser of a stock index
call option obtains the right to receive a sum of money upon exercise of
the option equal to a multiple of the excess of a specified stock index on
the exercise date over the exercise or "strike" price specified by the
option. The purchaser of a put option obtains the right to receive a sum of
money upon exercise of the option equal to a multiple of any excess of the
strike price over the stock index. The writer of a call or put stock index
option receives a premium, but has the obligation, upon exercise of the
option, to pay a multiple of the difference between the index and the
strike price. Thus, if the price of the stock index on which an index
option is based increases (in the case of a call option written by a Fund)
or decreases (in the case of a put option written by a Fund), the Fund may
incur losses that exceed the premium it received for writing the option.
Stock indexes for which options are currently traded include the
Standard & Poor's 100 and Standard & Poor's 500 Indexes.
(iv) Margin requirements for futures and options: When futures
contracts are traded, both buyer and seller are required to post an initial
margin of cash or U.S. Treasury Bills equaling as much as 5 to 10 percent
or more of the contract settlement price. The nature of the margin
requirements in futures transactions differs from traditional margin
payments made in securities transactions in that margins for futures
contracts do not involve the borrowing of funds by the customer to finance
the transaction. Instead, a customer's margin on a futures contract
represents a good faith deposit securing the customer's contractual
obligations under the futures contract. If the market moves against the
Trust, so that a Fund has a net loss on its outstanding futures contracts
for a given day, the Fund generally will be required to post additional
margin to that extent. The margin deposit is returned, assuming the Trust's
obligations have been met, when the futures contract is terminated.
Similar margin requirements will apply in connection with any
transactions in which a Fund writes any options. This includes options on
indexes and futures contracts, as well as other types of options.
(v) Certain risks: Financial futures, options thereon, and stock
index options, if used by a Fund, will in most cases be based on securities
or stock indexes the components of which are not identical to the portfolio
securities owned or intended to be acquired by the Fund and in connection
with which such instruments are used. Furthermore, due to supply and demand
imbalances and other market factors, the price movements of financial
futures, options thereon, and stock index options do not necessarily
correspond exactly to the price movements of the securities, currencies, or
stock index on which such instruments are based. These factors increase the
difficulty of implementing a successful strategy using futures and options
contracts.
The Funds generally will not take delivery of debt instruments
pursuant to purchasing an interest rate futures contract, nor make a
delivery of debt instruments pursuant to selling an interest rate futures
contract. Nor will the Funds necessarily take delivery of or deliver
currencies in connection with currency futures contracts. Instead, a Fund
will more typically close out such futures positions by entering into
closing futures contract transactions. Similarly, a Fund may wish to close
out an option on a futures contract or an option on an index by entering
into an offsetting position in those instruments.
18
Generally speaking, entering into closing transactions such as
described immediately above would not affect gains and losses of the Fund
resulting from market action prior to such closing transactions. Moreover,
there is a risk that, at the time a Fund wishes to enter into such a
closing transaction, trading in futures or options could be interrupted,
for example, because of supply and demand imbalances arising from a lack of
either buyers or sellers. The futures and options exchanges also may
suspend trading after the price has risen or fallen more than the maximum
amount specified by the exchange. Exercise of options could also be
restricted or delayed because of regulatory restrictions or other factors.
Although the subadvisers will seek to avoid situations where these factors
would be likely to cause a problem for the Trust, in some cases they could
adversely affect particular Fund transactions in these instruments.
(vi) Asset segregation requirement for certain futures and options
positions: The relevant subadviser, subject to oversight and any directions
given by John Hancock, will cause the Fund's custodian to segregate (or
will segregate by "earmarking" on Fund records that the subadviser
maintains) cash or other assets it determines to be liquid that are not
segregated to support any other obligations of the Fund and that at all
times at least equals (a) the sum of the purchase prices of all of the
Fund's open futures purchase positions, plus (b) the current value of the
securities underlying all of the Fund's open futures sales positions that
are maintained for purposes other than bona fide hedging, plus (c) the
exercise price of all outstanding put options on futures contracts written
by the Fund, plus (d) the current value of securities underlying any
futures contracts with respect to which the Fund has outstanding call
options that it has written, minus (e) the amount of margin deposits with
respect to all of such contracts.
(c) Specific uses of financial futures, options thereon, and stock index
options: All Funds, except the Money Market Fund, may use exchange-traded
financial futures contracts, options thereon, and exchange-traded put or call
options on stock indexes, for the purposes discussed below. It should be
emphasized that none of the Funds is required to use any of these strategies,
and doing so is not a principal investment strategy of any of their investment
portfolios. Therefore, it should not be assumed that any particular Fund will
ever necessarily use any of these strategies to a significant extent.
(i) Hedging with financial futures contracts against market
changes, and risks thereon: A Fund may use financial futures contracts, and
options thereon, as a hedge to protect against possible changes in interest
rates and security prices.
Thus, for example, to hedge against the possibility that interest
rates or other factors may result in a general decline in prices of equity
securities of a type it owns, a Fund may sell stock index futures
contracts. Similarly, to hedge against the possibility that increases in
interest rates may adversely affect the market values of debt securities it
holds, a Fund may enter into interest rate futures sale contracts.
(ii) Establishing market exposure and managing cash flow with
financial futures contracts and options thereon: A Fund may purchase and
sell stock index and interest rate futures, and options thereon, to
maintain market exposure and manage cash flows. Purchasing futures
contracts, and options thereon, could enable a Fund to take the approximate
economic equivalent of a substantial position in bonds or equity
securities, although there is no assurance that this goal can be achieved.
(iii) Managing foreign currency exposure with foreign currency
futures contracts: A Fund may use foreign currency futures contracts, and
options thereon, to the same extent and in the same manner as it is
authorized to use forward foreign exchange contracts in Section 6. above.
(iv) Risks of hedging type strategies: If, after a Fund establishes
a hedge position, the value of the securities or currency being hedged
moves in the opposite direction from that anticipated, the Fund as a whole
will perform less well than it would have had it not entered into the
futures or option transaction.
The success of the Funds in using hedging-type techniques depends,
among other things, on the subadviser's ability to predict the direction
and volatility of price movements in the futures or options markets, as
well as the securities markets and, in some cases, currency markets, and on
the subadviser's ability to select the proper type, time and duration of
option or futures contracts. Certain of the subadvisers have limited
experience in utilizing these hedging-type techniques, and there can be no
assurance that these techniques will produce their intended result.
The prices of the futures and options contracts used for hedging-type
strategies may not vary as contemplated in relation to changes in the price
of the securities or currencies being hedged. Accordingly, there is a risk
that transactions in these instruments, if used by a Fund, may not in fact
offset the impact of adverse market developments in the manner or to the
extent contemplated or that such transactions may result in losses to the
Fund which would not be offset by gains with
19
respect to corresponding portfolio securities owned or to be purchased by
that Fund. Hedging-type transactions also may be more, rather than less,
favorable to a Fund than originally anticipated.
(v) Writing index options (and related asset segregation
requirements): A Fund may write put and call options on indexes composed of
securities in which the Fund may invest. A Fund's obligation to make a
payment upon the exercise of a put or call option on an index written by
the Fund will at all times be fully covered by (a) in the case of a put
option, the Fund's owning a put option on the same index at an exercise
price not lower than that of the option written by the Fund, or (b) in the
case of a call option, the Fund's owning a call option on the same index at
an exercise price not higher than that of the option written by the Fund;
or, alternatively, the relevant subadviser, subject to oversight and any
directions given by John Hancock, will cause the Fund's custodian to
segregate (or will segregate by "earmarking" on Fund records that the
sub-adviser maintains) cash or other assets it determines to be liquid that
are not segregated to support any other Fund obligation and that, together
with any margin the Fund has on deposit with respect to the option it has
written, at all times at least equals the amount of the Fund's obligation
upon exercise of the option it has written that is not covered as provided
in clause (a) or (b) of this sentence For this purpose, the amount of the
obligation (i) with respect to a put option is the exercise price of the
option or the amount by which that exercise price exceeds that of a put
option that the Fund owns on the same index and (ii) with respect to a call
option is the current value of the index underlying the option or the
amount by which the exercise price of the option written by the Fund
exceeds that of a call option that the Fund owns on the same index.
(vi) Purchasing index options. A Fund may purchase put and call
options on indexes composed of securities in which the Fund may invest,
without specific restriction on the circumstances of such purchases. Option
purchases of this type, however, would have to be consistent with the
Fund's investment objective. Also, each Fund is subject to the limitation
on certain futures and options transactions described in Section 13.c.(ix).
(vii) Using futures contracts and options on futures contracts: A
Fund may use futures contracts on securities or on market indexes, and
options on such futures contracts, without specific restriction on the
purposes of such transactions. Nevertheless, such transactions would have
to be consistent with the Fund's investment objective.
There is no specific overall limit on the amount of the assets a Fund
may devote to financial futures contracts and options thereon, even if such
contracts are not limited to hedging-type transactions. Nevertheless
(except through the purchase of options, as discussed below) the Funds will
not use these techniques for purpose of "leveraging" the Fund's exposure to
the securities underlying any futures contract or option thereon or its
exposure to foreign currencies. Although this limitation does not apply to
options on futures contracts that are purchased by a Fund, the total amount
of assets on deposit as margin to secure options on futures contracts that
are not used for bona fide hedging purposes plus the amount of premiums
paid by a Fund for such options is (pursuant to the limitations set forth
below) limited to 5% of the Fund's net assets.
(viii) Risks of potentially more aggressive options and futures
strategies: To the extent that a Fund exercises its broad authority to
enter into options and futures transactions for purposes that are not
solely for hedging-type purposes or that otherwise may be for more
speculative purposes, it may incur greater risks than another Fund that
limits its strategy to hedging-type transactions.
(ix) Limitations on the Funds' exposure to certain futures and
option transactions: No Fund may purchase, sell or write futures contracts
or options thereon other than for "bona fide" hedging purposes (as defined
by the U.S. Commodity Futures Trading Commission) if immediately thereafter
the Fund's initial margin deposits on such outstanding non-hedging futures
and options positions, plus the amount of premiums paid by the Fund for
such outstanding non-hedging options on futures contracts, exceeds 5% of
the market value of the Fund's net assets. For the purpose of this
calculation, any amount by which an option is "in the money" at the time of
its purchase is excluded from the premium paid therefor.
Nor will any Fund consider as "hedging" any transaction that is
intended to leverage the Fund's investment exposure to the type of security
being hedged or to leverage the Fund's currency exposure.
14. Using "Swaps," "Caps," "Floors," and "Collars"
a. Overview: The nature and risks of these types of transactions are
discussed in the paragraphs that follow.
b. Interest rate swaps: In a typical interest rate swap agreement, one
party agrees to make payments equal to a floating interest rate on a specified
amount (the "notional amount") in return for payments equal to a fixed interest
rate on the same amount for a specified period. If a swap agreement provides for
payments in different currencies, the parties might agree to exchange the
notional amount as well.
20
Provided the contract so permits, a Fund will usually enter into swaps on a
"net" basis: that is, the two payment streams are netted out in a cash
settlement on the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments.
c. Interest rate caps, floors and collars: The purchaser of an interest
rate cap or floor, upon payment of a fee, has the right to receive payments (and
the seller of the cap is obligated to make payments) to the extent a specified
interest rate exceeds (in the case of a cap) or is less than (in the case of a
floor) a specified level over a specified period of time or at specified dates.
The purchaser of an interest rate collar, upon payment of a fee, has the right
to receive payments (and the seller of the collar is obligated to make payments)
to the extent that a specified interest rate falls outside an agreed upon range
over a specified period of time or at specified dates.
d. Currency, credit default, index and equity swaps, caps, floors and
collars: Currency, index, and equity swaps, caps, floors, and collars are
similar to those for interest rates described in the two preceding paragraphs
above, except that, rather than being determined by variations in specified
interest rates, the obligations of the parties are determined by variations in a
specified currency, interest rate index, or equity index, as the case may be.
A Fund may sell or purchase credit default swap contracts for investment
purposes when consistent with its investment goal and strategy. A Fund may also
purchase credit default swap contracts in order to hedge against the risk of
default of debt securities held in its portfolio. In a credit default swap
contract, the seller would be required to pay the par (or other agreed-upon)
value of a referenced debt obligation to the purchaser in the event of a default
by a third party, such as a U.S. or foreign corporate issuer, on the debt
obligation, In return, the seller would receive a periodic stream of payments
over the term of the contract provided that no event of default has occurred. If
no default occurs, the seller would keep the stream of payments and would have
no payment obligations.
e. Certain risks: The amount of a Fund's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Fund's potential loss if it sells a cap, floor or collar. If a Fund buys a
cap, floor or collar, however, the Fund's potential loss is limited to the
amount of the fee that it has paid. As a seller of a credit default swap
contract, a Fund would be subject to investment exposure on the notional amount
of the swap. As a purchaser of a credit default swap contract, a Fund would only
receive income in the event of an actual default by the issuer of the underlying
obligation (as opposed to a credit downgrade or other indication of financial
instability), and the investment could expire without value.
Swaps, caps, floors and collars tend to be more volatile than many other
types of investments. Nevertheless, a Fund will use these techniques only as a
risk management tool and not for purposes of leveraging the Fund's market
exposure or its exposure to changing interest rates, security values or currency
values. Typically, a Fund will use these transactions only to preserve a return
or spread on a particular investment or portion of its investments, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date, to protect against the risk of default on debt obligations, or
to gain exposure to certain markets in the most economical way possible. Nor
will a Fund sell interest rate caps, floors or collars if it does not own
securities providing the interest that the Fund may be required to pay under
such derivative instruments. Finally, of course, a Fund may use these derivative
instruments only in ways that are consistent with its investment objective.
The use of swaps, caps, floors and collars involves investment techniques
and risks different from those associated with other portfolio security
transactions. If the subadviser is incorrect in its forecasts of market values,
interest rates, currency rates, credit risk and other applicable factors, the
investment performance of a Fund might be less favorable than if these
techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there
is a heightened risk that the other party to certain of these instruments will
not perform its obligations to the Fund. None of the Funds will enter into any
swap, cap, floor, or collar, unless the other party to the transaction is deemed
creditworthy by the subadviser.
There also is a risk that a Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its investment under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to the Fund. In recent years, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swaps, caps, floors and collars will be determined by the
subadviser based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
instrument (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment). Such
21
determinations will govern whether the instrument will be deemed within the
Fund's 15% restriction on investments in securities that are not readily
marketable.
For purposes of applying the Funds' investment policies and restrictions
(as stated in the prospectus and this Statement of Additional Information, swap
agreements are generally valued by the Funds at market value. In the case of a
credit default swap sold by a Fund (i.e., where the Fund is selling credit
default protection), however, the Fund will generally value the swap at its
notional amount. The manner in which certain securities or other instruments are
valued by the Funds for purposes of applying investment policies and
restrictions may differ from the manner in which those investments are valued by
other types of investors.
f. Segregation requirements for these derivatives: The relevant subadviser
of each Fund, subject to oversight and any directions given by John Hancock,
will cause the Fund's custodian to segregate (or will segregate by "earmarking"
on Fund records that the subadviser maintains) cash or other assets it
determines to be liquid that are not then segregated to cover any other Fund
obligation and that, together with any margin the Fund has deposited in
connection with its outstanding swaps, caps, floors, and collars, at all times
at least equals the amount of the Fund's obligations under these instruments.
For a credit default swap sold by a Fund (i.e., where the Fund is "selling"
credit default protection), the Fund's "obligation" will be considered to be the
entire notional amount (i.e., the dollar amount of protection provided), for
this purpose. For all swap agreements that are not credit default swaps written
by the Fund, the Fund's obligation for this purpose will depend on the nature of
the swap's settlement terms. If the swap settles on a "net" basis, the Fund's
obligation will be accrued daily (and offset against any amounts owed to the
Fund) on the transaction, and the Fund's "obligation" for asset segregation
purposes will be deemed to be any accrued but unpaid net amounts owed to the
other party to the swap transaction. If the swap does not provide for such "net"
settlement procedures, the Fund's asset segregation requirement will be for the
full accrued amount of the Fund's obligation.
If a Fund writes a swap option, the asset segregation requirement will be
substantially the same as for the swap rights that are the subject of the
option. Thus, the Fund will generally segregate assets to the same extent and
manner as it would do (as described in the immediately preceding paragraph), if
it had already assumed the swap position it is required to assume upon exercise
of the swap option the Fund has written.
15. Investing in Other Investment Companies
a. Overview: Each Fund may invest up to 10% of its total assets in shares
of other investment companies investing exclusively in securities in which that
Fund may otherwise invest. Such investments may involve the payment of
substantial premiums above the net asset value of those investment companies'
portfolio securities and are subject to limitations under the Investment Company
Act of 1940. As a shareholder in an investment company, a Fund would bear its
ratable share of that investment company's expenses, including advisory and
administration fees, except as specifically stated otherwise in the paragraphs
that follow.
b. Investing in passive foreign investment companies: Because of
restrictions on direct investment by U.S. entities in certain countries, other
investment companies may provide the most practical (or only) way for a Fund to
invest in certain markets. A Fund may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company," regardless of whether such "passive foreign investment company" makes
distributions to the Fund.
The International Equity Index Fund is more likely than other Funds to
invest in closed-end investment companies known as "country funds" or passive
foreign investment companies. (A "closed end" company is one whose shares can
generally be disposed of only in market transactions, as opposed to redemptions.
An "open end" company is one whose shares are freely redeemable.)
c. Investing in exchange traded funds: All Funds (other than the Money
Market Fund) may invest in certain forms of Exchange Traded Funds ("ETFs"),
provided such investment is consistent with the Fund's investment objectives.
ETFs are registered open-end investment companies (or investment companies that
are exempt from registration) whose shares can be bought and sold on various
exchanges in the same way as stocks. ETFs may be used for several reasons,
including but not limited to: facilitating the handling of cash flows or
trading, or reducing transaction costs. There are various forms of ETFs, but the
ones that are most commonly used at the current time are iShares/sm/ (formerly
called World Equity Benchmark Shares or "WEBS") and SPDRs (Standard and Poor's
Depository Receipts).
(i) Investing in iShares/sm/: iShares/sm/ are shares of an open-end
investment company that invests substantially all of its assets in
securities included in various indices. iShares/sm/ are listed on the AMEX
and were initially offered to the public in 1996. The market prices of
iShares/sm/ are expected to fluctuate in accordance with both changes in
the NAVs of their underlying indices and supply and demand of iShares/sm/
on the AMEX. To date, iShares/sm/ have traded at relatively modest
discounts and premiums to the NAVs. However, iShares/sm/ have a limited
operating history and information is lacking regarding the actual
performance and trading liquidity of iShares/sm/ for extended periods or
over complete market cycles. In
22
addition, there is no assurance that the requirements of the AMEX necessary
to maintain the listing of iShares/sm/ will continue to be met or will
remain unchanged. In the event substantial market or other disruptions
affecting iShares/sm/ should occur in the future, the liquidity and value
of a Fund's shares could also be substantially and adversely affected. If
such disruptions were to occur, a Fund could be required to reconsider the
use of iShares/sm/ as part of its investment strategy.
(ii) Investing in SPDRs: SPDRs are American Stock Exchange-traded
securities that represent ownership in the SPDR Trust, a trust which has
been established to accumulate and hold a portfolio of common stocks that
is intended to track the price performance and dividend yield of the S&P
500. This trust is a regulated investment company that is sponsored by a
subsidiary of the American Stock Exchange.
d. Investing in money market fund shares: A Fund may also invest in money
market funds managed by its subadviser in reliance upon an exemptive order
received by its subadviser from the SEC. Such exemptive orders may permit funds
managed by the subadviser to invest in money market funds managed by it, to an
extent in excess of amounts otherwise permitted by the Investment Company Act.
Nor are the Large Cap Value, Small Cap Value, and International Opportunities
Funds charged any investment management fees for investments in money market
funds managed by their subadvisers.
16. Purchasing "When Issued" Securities and Forward Commitments
a. Overview: All Funds may purchase securities on a when issued or delayed
delivery basis. When such transactions are negotiated, the price of such
securities is fixed at the time of commitment, but delivery and payment for the
securities may take place a month or more after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuations, and no
interest accrues to the purchaser during this period.
In addition, these Funds may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments"), because new issues of securities are typically offered to
investors on that basis. Forward commitments involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date. This risk
is in addition to the risk of decline in value of the Fund's other assets.
Although a Fund will enter into such contracts with the intention of acquiring
the securities, the Fund may dispose of a commitment prior to settlement if its
subadviser deems it appropriate to do so.
b. Asset segregation requirement for these transactions. The relevant
subadviser of each Fund, subject to oversight and any directions given by John
Hancock, will cause the Fund's custodian to segregate (or will segregate by
"earmarking" on Fund records that the sub-adviser maintains) cash or other
assets it determines to be liquid that are not then segregated to cover any
other obligation to the Fund and that, together with any margin the Fund has
deposited in connection with when-issued securities and forward commitments, at
least equals the purchase price under each of the Fund's then outstanding when
issued and forward commitments.
17. Short-Term Trading
All Funds can use short-term trading of securities as a means of managing
their portfolios to achieve their investment objectives. As used herein,
"short-term trading" means the purchase and subsequent sale of a security after
it has been held for a relatively brief period of time. A Fund may engage in
short-term trading to the extent that the subadviser believes the transactions,
net of costs (including commissions, if any), will benefit the Fund. Generally
speaking, short-term trading can be expected to generate expenses for a Fund
that would not be incurred by a Fund that did not engage in that practice.
18. Entering Into Repurchase Agreements
All of the Funds may enter into repurchase agreements.
A repurchase agreement is a contract under which a Fund would acquire a
security for a relatively short period (e.g., 7 days), subject to the seller's
obligation to repurchase the security at a fixed time and price (representing
the Fund's cost plus interest). Repurchase agreements will be entered into only
with member banks of the Federal Reserve System, with "primary dealers" in U.S.
Government securities or with other dealers and banks who meet a subadviser's
credit standards.
No Fund will invest in repurchase agreements maturing in more than 7 days
if that investment, together with any other investments deemed "illiquid," would
exceed 15% (10% in the case of the Money Market Fund) of the Fund's net assets.
Each Fund has a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian, co-custodian, or sub-custodian, either physically or in book-entry
form, and that the collateral must be marked-to-market daily to ensure that each
repurchase agreement is fully "collateralized" at all times. In the event of a
bankruptcy or
23
other default by a seller of a repurchase agreement, however, the Fund could
experience delays in liquidating the underlying securities and could experience
losses (including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period, and
expenses of enforcing its rights).
19. Participating in Joint Trading Accounts
John Hancock has established a "joint trading account" that all Funds, in
the discretion of their subadvisers, can use to invest relatively small amounts
of cash on a more favorable basis than they could do individually. John Hancock
is responsible for investing the aggregate cash balances in the joint trading
account into one or more repurchase agreements, as described in Section 18.
above, or in other money market instruments. The joint trading account was
established pursuant to an order of the SEC and all of the Funds (except the
Large Cap Growth, Large Cap Growth B, Fundamental Growth, Earnings Growth, Total
Return Bond and Money Market Funds) regularly participate in it.
Each Fund is also free to participate in any similar joint trading account
that its subadviser operates for mutual fund assets managed by it. These other
joint trading accounts would be operated pursuant to their own SEC exemptive
orders The Total Return Bond Fund and the portion of the Active Bond Fund
sub-managed by Pacific Investment Management Company LLC regularly participates
in such other joint trading accounts.
Whenever a subadviser operates a non-John Hancock joint trading account,
the subadviser is responsible for ensuring that all repurchase agreements
acquired through these accounts are at all times fully collateralized.
20. Lending of Fund Securities
In order to generate additional income, all Funds may, and most do, lend
securities from their portfolios to brokers, dealers and financial institutions
such as banks and trust companies. Such loans will be secured by collateral
consisting of cash or U.S. Government securities, which will be maintained in an
amount equal to at least 100% of the current market value of the loaned
securities. During the period of the loan, the Fund receives the income (if any)
on the loaned securities, as well as additional compensation for making the
loan. Cash collateral may be invested in short-term securities, which will
increase the current income of the Fund. Such loans will be terminable by the
Fund at any time. The Fund will have the right to regain record ownership of
loaned securities in order to exercise rights of a holder thereof including
receiving interest or other distributions or exercising voting rights. The Fund
may pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans.
Lending of portfolio securities involves a risk of failure by the borrower
to return the loaned securities, in which event the Fund may incur a loss.
However, most of the Funds' loans of securities are pursuant to an arrangement
with State Street Bank & Trust Company, the Trust's primary custodian. Under
these arrangements, State Street Bank & Trust Company guarantees the Trust
against any loss or damages that any Fund incurs as a result of the borrower
failing to return the Fund's securities in accordance with the terms of the
loan. No Fund will lend portfolio securities having a total value in excess of
33 1/3% of its total assets.
21. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls"
a. Overview: A Fund may enter into reverse repurchase agreements to
facilitate portfolio liquidity, or in arbitrage transactions (discussed below).
In a reverse repurchase agreement, the Fund sells a security and enters into an
agreement to repurchase the security at a specified future date, but at a lower
price. The Fund generally retains the right to interest and principal payments
on the security, as well as use of the proceeds while the repurchase agreement
is outstanding.
A Fund may enter into mortgage dollar rolls, in which the Fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to purchase substantially similar securities at a specified future
date and price. While the Fund foregoes principal and interest paid on the
mortgage-backed securities during the "roll" period, the Fund is compensated by
the difference between the current sale price and the lower price for the future
purchase as well as by any return earned on the proceeds of the initial sale.
The mortgage dollar rolls and reverse repurchase agreements entered into by
a Fund may be used as arbitrage transactions in which the Fund will maintain an
offsetting position in investment-grade debt obligations or repurchase
agreements that mature on or before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions could be considered to involve financial
leverage. However, since such securities or repurchase agreements will be high
quality and will mature on or before the settlement date of the mortgage dollar
roll or reverse repurchase agreement, the Trust does not believe that such
arbitrage transactions present the risks to the Fund that are generally
associated with financial leverage.
24
b. Asset segregation requirements for reverse repurchase agreements and
mortgage dollar rolls: The relevant subadviser of each Fund, subject to
oversight and any directions given by John Hancock, will cause the Fund's
custodian to segregate (or will segregate by "earmarking" on Fund records that
the sub-adviser maintains) cash or other assets it determines to be liquid that
are not segregated to support any other Fund obligation and that at all times at
least equals the amount of the Fund's obligations under outstanding mortgage
dollar rolls and reverse repurchase agreements.
22. Investing in Rule 144A Securities, Section 4(2) Commercial Paper and
Illiquid Securities
A Fund may purchase unregistered securities that are eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the Securities Act
of 1933. A Fund may also purchase commercial paper that is offered in reliance
on the exemption in Section 4(c) of that Act. Case-by-case determinations are
made whether each issue of Rule 144A securities or Section 4(2) commercial paper
owned by a Fund is an illiquid security.
Each Fund may purchase illiquid Rule 144A securities, illiquid Section 4(2)
commercial paper or other illiquid assets if, and only if, the total of all the
Fund's illiquid assets would not thereby be made to exceed 15% (10% in the case
of the Money Market Fund) of the Fund's net assets.
23. Investing in Preferred Stock, Convertible Securities and Warrants
Investments may be made in debt or preferred equity securities and those
convertible into, or exchangeable for, equity securities. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than nonconvertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of
shares of common stock at a specified price anytime during the life of the
warrants (generally, two or more years).
24. Investing in Initial Public Offerings ("IPOs")
Almost all Funds of the Trust have the ability to invest in IPOs. IPO
investments may be more volatile than other types of investments and a Fund's
investments in IPOs may be subject to more erratic price movements than the
overall equity market. IPOs could have a substantial impact on performance,
either positive or negative, particularly on a fund with a small asset base. The
actual effect of IPOs on performance depends on a variety of factors, including
the number of IPOs the Fund invests in, whether and to what extent a security
purchased in an IPO appreciates in value, and the asset base of the Fund. There
is no guarantee that a Fund's investments in IPOs, if any, will continue to have
a similar impact on the Fund's performance in the future.
D. THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS
The Funds' investment objectives and strategies may, in general, be changed
without the approval of shareholders.
In a few cases, however, the Investment Company Act requires such approval.
In addition, the Trust has adopted as "fundamental" the below-listed
restrictions relating to the investment of each Fund's assets. That these
restrictions are "fundamental" policies means that they may not be changed for
any Fund without the approval of a majority of the outstanding voting shares of
each affected Fund. (The term "majority of the outstanding voting shares" means
the lesser of (1) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (2) more than 50% of the
outstanding shares.)
To the extent the Trust's prospectus or this Statement of Additional
Information anywhere sets forth investment restrictions more restrictive than
the fundamental restrictions described below, the more restrictive limitation
controls; but any such more restrictive limitation may be changed without any
shareholder approval, subject to the below fundamental restrictions.
The Trust's current fundamental investment restrictions are as follows:
1. REAL ESTATE. No Fund will purchase or sell real estate. This restriction does
not prevent (a) a Fund from acquiring real estate as a result of ownership of
those securities or other instruments in which the Fund is permitted to invest;
(b) a Fund from investing in securities that are secured by real estate or
interests therein; (c) a Fund from investing in issuers that invest, deal, or
otherwise engage in transactions in real estate or interests therein; or (d) the
Real Estate Equity Fund from making any type of investment that it is otherwise
permitted to make.
25
2. LOANS. No Fund will make loans, except that this restriction does not prevent
a Fund from (a) making loans through the acquisition of obligations in which the
Fund may invest consistent with its objective and investment policies; (b)
lending portfolio securities; or (c) making loans to other Funds or investment
companies managed or sponsored by an investment adviser to the Fund or by any
company controlling, controlled by, or under common control with such investment
adviser.
3. COMMODITIES. No Fund will purchase or sell physical commodities, except that
a Fund may sell physical commodities acquired as a result of ownership of those
securities or other instruments in which a Fund is permitted to invest.
4. UNDERWRITING. No Fund will engage in the underwriting of securities of other
issuers. This restriction will not prevent a Fund from disposing of its
portfolio securities regardless of its status as an underwriter under any
federal or state securities laws.
5. BORROWING. No Fund will borrow money, except that this restriction will not
prevent a Fund from borrowing (a) from banks for any purpose, provided that
immediately after any such borrowing there is an asset coverage of at least 300%
for all borrowings of the Fund as required under Section 18(f)(1) of the
Investment Company Act (subject to any amendments to, regulations under, or
exemptions from Section 18(f)(1) of the Investment Company Act); (b) for
temporary purposes only, provided that loans for temporary purposes do not
exceed 5% of the value of the total assets of the Fund as of the time when each
such loan is made; or (c) from another fund, or from a related entity of another
fund, pursuant to any amendments to, regulations under, exemptions from or
interpretations of the Investment Company Act./1/
6. SENIOR SECURITIES. No Fund will issue senior securities, except as permitted
under Section 18(f) of the Investment Company Act, any amendments thereto, any
regulations thereunder, or any applicable exceptions therefrom.
7. INDUSTRY CONCENTRATION. The Equity Index, Large Cap Value, Large Cap Growth,
Large Cap Growth B, Earnings Growth, Fundamental Value, Fundamental Value B,
Fundamental Growth, Mid Cap Value, Mid Cap Value B, Mid Cap Growth, Small Cap
Value, Small Cap Growth, Small Cap Emerging Growth, International Equity Index,
Overseas Equity, Overseas Equity B, Overseas Equity C, Short-Term Bond, Bond
Index, Active Bond, Total Return Bond, High Yield Bond, and Global Bond Funds
will not purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
the Fund's investments in such industry would exceed 25% of its total assets
taken at market value. This restriction does not limit the Money Market Fund's
investments in instruments issued by domestic banks (or by a foreign branch of a
domestic bank, but only if the domestic bank is unconditionally liable in the
event that the foreign branch fails to honor the instrument). For the purpose of
determining industry concentration, telephone, water, gas and electric public
utilities are each regarded as separate industries, and wholly-owned finance
companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their parent. In
conformity with its understanding of current interpretations of the Investment
Company Act by the staff of the SEC, the Trust, as a non-fundamental policy,
interprets this limitation not to apply to securities issued by the Federal
government, or state and local governments within the U.S., or political
subdivisions thereof; but this exception does not apply to securities of foreign
government entities. If these interpretations change, however, the Trust may
modify its practices to conform to such changes
- ----------
/1/ All of the Funds also operate under a non-fundamental policy that, if
borrowings by a Fund ever exceed 5% of its total assets, that Fund will make no
new investments until it has paid down its borrowings to below 5%.
26
E. BOARD OF TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for overall management of
the Trust. The Board may exercise all powers of the Trust, except those powers
which are conferred solely upon or reserved to the shareholders. The Board has
three standing committees, which are discussed below.
The Governance Committee of the Board consists of the Trust's four
independent Trustees: Ms. Cook, Ms. Kessler, Mr. Verdonck and Mr. McClellan. The
Governance Committee assists the Board of Trustees by considering and making
recommendations on such matters as the Board's structure, composition, manner of
operations, and effectiveness; and the compensation and continuing education of
independent Trustees. This committee also gives particular consideration to
certain matters that involve actual or potential conflicts of interest between
the Trust and its service providers. The terms of the Trust's advisory
agreements are one important example of this. This committee met four times in
2002.
The Nominating Committee of the Board also consists of the Trust's four
independent Trustees. This committee is responsible for the selection and
nomination of candidates to be independent Trustees. Although the Nominating
Committee may receive input from John Hancock in this regard, the committee
controls the selection and nominating process. The extent of this committee's
activities in a given year will vary somewhat, depending on how many vacancies
for the office of independent trustee need to be filled. The Nominating
Committee did not meet during 2002.
The Audit Committee of the Board consists of the following independent
Trustees: Ms. Cook, Mr. McClellan and Mr. Verdonck. The Audit Committee assists
the Board in fulfilling its oversight responsibilities relating to the quality
and objectivity of financial reporting, the effectiveness and efficiency of
operations (including internal controls), and compliance with applicable laws
and regulations. Among other things, the Audit Committee seeks to maintain good
communication among the Trustees, the Trust's independent auditors and the
Trust's management. Each year, the committee evaluates and makes a
recommendation to the Board of Trustees as to the independent auditors to be
retained by the Trust to audit the Trust's financial statements. The committee
also reviews with such auditors the scope of the audit to be performed and the
results of such audit. The Audit Committee met three times during 2002.
Each of the above-described committees has authority to retain, at the
Trust's expense, legal counsel and such other experts as the committee deems
advisable to help discharge its functions.
The following table provides information about the members of the Board of
Trustees and the officers of the Trust:
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Interested Trustees/*/:
Michele G. Van Leer Chairman and Indefinite Senior Vice President, Product 30 None
(age 46) Trustee (Commenced Management, John Hancock Life
John Hancock Place September, 1998) Insurance Company; President and
Boston, Massachusetts 02117 Director John Hancock Variable
Life Insurance Company
Kathleen F. Driscoll Vice Chairman, Indefinite Senior Vice President, Signator 30 None
(age 47) President and (Commenced Brokerage Development, John
John Hancock Place Trustee June, 2001) Hancock Life Insurance Company,
Boston, Massachusetts 02117 Vice President, Corporate
Communications, John Hancock
Life Insurance Company
- ----------
* Ms. Van Leer and Ms. Driscoll are the only Trustees who are "interested
persons" as defined in the Investment Company Act.
27
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Independent Trustees:
Elizabeth G. Cook Trustee Indefinite Expressive Arts Therapist, Dana 30 None
(age 66) (Commenced Farber Cancer Institute;
c/o John Hancock Variable April, 1993) President, The Advertising Club
Series Trust I, of Greater Boston
John Hancock Place,
Boston, Massachusetts 02117
Diane C. Kessler Trustee Indefinite Executive Director, Massachusetts 30 None
(age 57) (Commenced Council of Churches
c/o John Hancock Variable April, 1999)
Series Trust I,
John Hancock Place,
Boston, Massachusetts 02117
Robert F. Verdonck Trustee Indefinite President and Chief Executive 30 None
(age 58) (Commenced Officer, East Boston Savings Bank
c/o John Hancock Variable April, 1999)
Series Trust I,
John Hancock Place,
Boston, Massachusetts 02117
Hassell H. McClellan Trustee Indefinite Associate Professor, The Graduate 30 None
(age 58) (Commenced School of the Wallace E. Carroll
c/o John Hancock Variable February, 2001) School of Management, Boston
Series Trust I, College
John Hancock Place,
Boston, Massachusetts 02117
28
Number of Other
the Trust's Directorships
Position Principal Occupation Funds Overseen Held by
Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees
- --------------------------- --------------- ---------------- --------------------------------- -------------- -------------
Other Officers
Chief Legal
Ronald J. Bocage Officer Indefinite Vice President & Counsel, John N/A N/A
(age 58) (Commenced Hancock Life Insurance Company
John Hancock Place June, 2003)
Boston,
Massachusetts 02117
Jude A. Curtis Compliance Indefinite Second Vice President and Chief N/A N/A
(age 45) Officer (Commenced Investment Compliance Officer,
John Hancock Place June, 2000) John Hancock Life Insurance
Boston, Company; formerly Second Vice
Massachusetts 02117 President and Counsel, Office of
Business Conduct; John Hancock
Life Insurance Company; formerly
a Partner at Hale and Dorr LLP
(law firm)
Raymond F. Skiba Treasurer Indefinite Director of Fund Operations, N/A N/A
(age 58) (Commenced John Hancock Life Insurance
John Hancock Place February, 1986) Company
Boston, Massachusetts 02117
Gladys C. Millan Assistant Indefinite Manager of Fund Operations, N/A N/A
(age 57) Treasurer (Commenced John Hancock Life Insurance
John Hancock Place March, 2003) Company
Boston, Massachusetts 02117
Karen Q. Visconti Secretary Indefinite Director, Product & Market N/A N/A
(age 50) (Commenced Management, John Hancock Life
John Hancock Place August, 1999) Insurance Company
Boston, Massachusetts 02117
Arnold R. Bergman Assistant Indefinite Senior Counsel, Law Department, N/A N/A
(age 53) Secretary (Commenced John Hancock Life Insurance
John Hancock Place, December, 1999) company; formerly Vice President,
Boston, Massachusetts 02117 General Counsel and Secretary,
First Variable Life Insurance
Company
Certain members of the Trust's Board of Trustees may own either variable
annuity contracts or variable life insurance policies that are supported by one
of the Separate Accounts and, in that sense, have an interest in shares of the
Trust.
29
The names and range of each Trustee's interest in any Fund as of December
31, 2003 are set forth in the table below
Dollar Range of Dollar Range of Interest
Name of Trustee Interest in Any Fund in All Funds
- --------------------- -------------------- ------------------------
Interested Trustees:
Michele G. Van Leer 0 0
Kathleen F. Driscoll 0 0
Independent Trustees:
Elizabeth G. Cook $50,000-$100,000 $50,000-$100,000
Diane C. Kessler $10,000-$50,000 $10,000-$50,000
Robert F. Verdonck $1,000-$10,000 $1,000-$10,000
Hassell H. McClellan 0 0
Compensation paid by the Trust to its current disinterested Trustees during
2003 was as follows:
Ms. Cook $ 77,000
Ms. Kessler $ 69,000
Mr. Verdonck $ 77,000
Mr. McClellan $ 73,000
The Trust paid no compensation to any other officer or Trustee. The
Trustees' fees are allocated among the Trust's Funds in proportion to their
relative net assets. The average aggregate net assets for all of the Funds
totaled approximately $10.3 billion for the year 2003.
F. INVESTMENT ADVISORY ARRANGEMENTS
1. The Trust's Investment Advisory Arrangements With John Hancock
John Hancock, the Trust's investment adviser, is a Massachusetts
corporation. Until February 1, 2000, John Hancock was a mutual life insurance
company. Now, it is a subsidiary of John Hancock Financial Services, Inc., a
publicly-traded holding company. John Hancock provides advisory services to the
Funds pursuant to several investment advisory agreements. The Trust is party to
each of these investment advisory agreements with John Hancock.
The Trust currently pays John Hancock investment advisory fees at the
following rates:
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Equity Index .15% on the first $75 million; .14% on the next $50
million; .13% above $125 million
Large Cap Value .75%
Large Cap Growth .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Large Cap Growth B .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Earnings Growth 1.00% on the first $100 million; .90% above $100
million
Growth & Income .71% on the first $150 million; .69% on the next
$150 million; .67% above $300 million
Fundamental Value .95% on the first $25 million; .85% on the next $25
million; .75% on the next $50 million; 65% above
$100 million
Fundamental Value B .95% on the first $25 million; .85% on the next $25
million; .75% on the next $50 million; .65% above
$100 million
Fundamental Growth .80% on the first $500 million; .75% on the next
$500 million; .70% above $1 billion
Mid Cap Value 1.05% on the first $100 million; 1.00% above $100
million
Mid Cap Value B 1.05% on the first $100 million; 1.00% above $100
million
30
John Hancock's Investment Advisory Fee
as an Annual Percentage of Each Portion
Fund of the Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Mid Cap Growth 1.00% on the first $50 million; .95% on the next
$150 million; .90% above $200 million
Small Cap Value .95%
Small Cap Emerging Growth 1.05% on the first $100 million; and 1.00% above
$100 million
Small Cap Growth 1.05% on the first $100 million; and 1.00% above
$100 million
International Equity Index .18% on the first $100 million; .15% on the next
$100 million; .11% above $200 million
Overseas Equity 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Overseas Equity B 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Overseas Equity C 1.30% on the first $20 million; 1.15% on the next
$30 million; 1.05% above $50 million
Real Estate Equity 1.10% on the first $50 million; 1.00% on the next
$50 million; .90% on the next $100 million; .80%
above $200 million
Health Sciences 1.00% on the first $250 million; .95% above $250
million
Financial Industries 0.80%
Managed .74% on the first $500 million; .68% on the next
$500 million; .65% above $1 billion
Short-Term Bond .60%
Bond Index .15% on the first $100 million; .13% on the next
$150 million; .11% above $250 million
Active Bond .70% on the first $100 million; .65% on the next
$150 million; .61% on the next $250 million; .58%
on the next $500 million; .55% above $1 billion
Total Return Bond .70% on the first $250 million; .68% on the next
$250 million; and .65% above $500 million
High Yield Bond .80% on the first $100 million; .70% above $100
million
Global Bond .85% on the first $150 million; .80% on the next
$150 million; .75% on the next $200 million; .70%
above $500 million
Money Market .25%
Under its investment advisory agreements with the Trust, John Hancock
advises the Trust in connection with policy and strategy decisions; provides
administration of much of the Trust's day-to-day operations; serves as the
Trust's transfer agent and dividend disbursing agent; prepares the Trust's
financial statements; maintains records required by the Investment Company Act
of 1940; and supervises activities of the subadvisers (discussed below) and of
other service providers to the Trust. John Hancock also provides the Trust with
office space, supplies and other facilities required for the business of the
Trust. John Hancock pays the compensation of Trust officers and employees and
the expenses of clerical services relating to the administration of the Trust.
To the extent that any administrative or legal services for the Trust are
provided by John Hancock's Law Department, however, John Hancock charges the
Trust separately, and the Trust pays such charges in accordance with the terms
of the investment advisory agreements.
All other expenses not expressly assumed by John Hancock under the
investment advisory agreements are paid by the Trust. These include, but are not
limited to, the Trust's taxes (if any); custodian fees; auditing fees; brokerage
commissions; advisory fees; the compensation of Trustees who are not affiliated
with John Hancock; the Trust's fidelity bond coverage; the costs of printing and
distributing annual and semi-annual reports and voting materials to holders of
variable annuity contracts and variable life insurance policies that participate
in the Trust; tabulating votes; fees for certain accounting, valuation, and
compliance services; legal fees; SEC registration costs; proxy costs; costs of
organizing any new Funds; and other expenses related to the Trust's operations.
31
2. The Trust's Arrangements With Subadvisers
Set forth below are the names of the Funds' subadvisers and certain persons
who may control them.
Subadviser's
Controlling General Nature of Control
Subadviser and the Funds It Manages Person Basis of Control Person's Business
-------------------------------------- ---------------- -------------------------------------- --------------------------
1. Independence Investment LLC (Large Cap John Hancock Indirectly owns 100% of the Financial services holding
Growth, Large Cap Growth B, Financial subadviser company
Fundamental Growth, Managed, Growth & Services
Income and Short-Term Bond Funds) Inc.("JHFS")*
John Hancock Indirectly owns 100% of the subadviser Life insurance and other
Life Insurance financial services
Company provided directly or
through subsidiaries
2. John Hancock Advisers, LLC (Financial Same as 1.
Industries and Active Bond Funds) above.*
3. Declaration Research & Management LLC Same as 1.
(Active Bond Fund) above.*
4. SSgA Funds Management, Inc. (Equity State Street Owns 100% of the subadviser Financial services holding
Index and International Equity Index Corporation company
Funds)
5. T. Rowe Price Associates, Inc. (Large T. Rowe Price Owns 100% of the subadviser Publicly traded financial
Cap Value, Growth & Income, Mid Cap Group, Inc. services holding company
Value, Mid Cap Value B and Small Cap
Value Funds)
6. Morgan Stanley Investment Management Morgan Stanley Directly owns 100% of voting stock Publicly traded financial
Inc.** (Real Estate Equity Fund) services company
7. Standish Mellon Asset Management Mellon Financial Indirectly owns 100% of the Bank holding company
Company LLC (Bond Index Fund) Corporation subadviser through Standish Mellon
Asset Management Holdings LLC (sole
owner of subadviser)
8. Wellington Management Company, LLP Executive Executive Committee Investment management
(Fundamental Value, Fundamental Value Committee
B, Mid Cap Growth, Small Cap Value, consisting of
Small Cap Emerging Growth, Small Cap nine of the
Growth, Health Sciences, High Yield firm's partners
Bond and Money Market Funds)
9. Capital Guardian Trust Company The Capital The subadviser is an indirect wholly Financial services holding
(Managed, Overseas Equity, Overseas Group Companies owned subsidiary of CGCI company
Equity B, Overseas Equity C and Global Inc. ("CGCI")
Bond Funds)
10. Pacific Investment Management Company Allianz AG Subadviser is a majority-owned Allianz AG is a
LLC(Active Bond and Total Return Bond subsidiary of Allianz Dresdner Asset European-based
Funds) Pacific Life Management of America L.P., ("ADAM multinational insurance
Insurance LP"). Allianz Aktiengesellschaft and financial services
Company ("Allianz AG") is the indirect holding company.
majority owner of ADAM
32
Subadviser's
Controlling General Nature of Control
Subadviser and the Funds It Manages Person Basis of Control Person's Business
-------------------------------------- ---------------- -------------------------------------- --------------------------
LP. Pacific Life Insurance Company Pacific Life Insurance
owns an indirect minority equity Company is a
interest in ADAM LP. California-based insurance
company.
11. RREEF America LLC(Real Estate Equity Deutsche Bank AG The subadviser is a wholly owned European-based,
Fund) subsidiary multinational insurance
and financial services
holding company.
12. Fidelity Management & Research Company FMR Corp. FMR has entered into a sub-subadvisory
("FMR") (Earnings Growth Fund) agreement with FMR Co., Inc. (FMRC)
pursuant to which FMRC has primary
responsibility for choosing
investments for the Earnings Growth
Fund. FMR Corp., organized in 1972, is
the ultimate parent company of FMR and
FMRC. The voting common stock of FMR
Corp. is divided into two classes.
Class B is held predominantly by
members of the Edward C. Johnson 3d
family and is entitled to 49% of the
vote on any matter acted upon by the
voting common stock. The Johnson
family group and all other Class B
shareholders have entered into a
shareholders' voting agreement under
which all Class B shares will be voted
in accordance with the majority vote
of Class B shares. Under the
Investment Company Act of 1940,
control of a company is presumed where
one individual or group of individuals
owns more than 25% of the voting stock
of that company. Therefore, through
their ownership of voting common stock
and the execution of the shareholders'
voting agreement, members of the
Johnson family may be deemed, under
the 1940 Act, to form a controlling
group with respect to FMR Corp.
- ----------
* In April, 2004, JHFS was merged with a subsidiary of Manulife Financial
Corporation, a publicly-traded, multinational insurance and financial services
holding corporation organized under the laws of Canada. As a consequence of this
merger, the ultimate parent of John Hancock Life Insurance Company, Independence
Investment LLC, John Hancock Advisers, LLC and Declaration Management & Research
Company is now Manulife Financial Corporation.
**Morgan Stanley Investment Management Inc. does business in certain instances
(including in its role as Subadviser to the Real Estate Equity Fund) under the
name "Van Kampen."
33
Set forth below are the sub-advisory fees that John Hancock pays the subadvisers
for each Fund. The below fees are paid by John Hancock and not by the Funds.
Subadvisory Fees Payable by John Hancock, as a
Fund Percentage of Each Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Equity Index .05% on the first $50 million; .04% on the next $50
million; .02% on the next $300 million; and .01%
above $400 million
Large Cap Value* .40% on the first $500 million; and .35% above $500
million
Large Cap Growth .30% on the first $500 million; .2625% on the next
$500 million; and .225% above $1 billion
Large Cap Growth B .30% on the first $500 million; .2625% on the next
$500 million; and .225% above $1 billion
Earnings Growth .45% on the first $250 million; .42% on the next
$500 million; and .38% above $750 million
Growth & Income* Assets managed by T. Rowe Price Associates: .40% on
the first $500 million and .35% above $500 million
Assets managed by Independence Investment,
LLC: .1875%
Fundamental Value .40% on the first $100 million; and .30% above $100
million
Fundamental Value B .40% on the first $100 million; and .30% above $100
million
Fundamental Growth .30% on the first $500 million; .2625% on the next
$500 million and .225% above $1 billion
Mid Cap Value* .60% on the first $50 million and .50% on all
assets once assets exceed $50 million
Mid Cap Value B* .60% on the first $50 million and .50% on all
assets once assets exceed $50 million
Mid Cap Growth .50% on the first $50 million; .45% on the next
$150 million and .40% above $200 million
Small Cap Value* Assets managed by T. Rowe Price: .60% on the first
$500 million and .55% above $500 million
Assets managed by Wellington Management: .65% on
the first $100 million and .60% above $100 million
Small Cap Emerging Growth .65% on the first $100 million and .60% above $100
million
Small Cap Growth .65% on the first $100 million and .60% above $100
million
International Equity Index .10% on the first $100 million and .08% above $100
million
Overseas Equity .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
Overseas Equity B .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
34
Subadvisory Fees Payable by John Hancock, as a
Fund Percentage of Each Fund's Average Daily Net Assets
- -------------------------- ---------------------------------------------------
Overseas Equity C .60% on the first $300 million; .45% on the next
$200 million and .40% above $500 million
Real Estate Equity Assets managed by RREEF America L.L.C.: .45%
Assets managed by Van Kampen: .65% on the first $50
million; .55% on the next $50 million; .50% on the
next $100 million and .40% above $200 million
Health Sciences .65% on the first $50 million; .55% on the next $50
million and .45% above $100 million
Financial Industries .70% on the first $50 million; .60% on the next $50
million; .50% on the next $100 million and .40%
above $200 million
Managed "Growth style" portion of assets managed by
Independence Investment LLC: .30% on the first $500
million; .2625% on the next $500 million and .2250%
above $1 billion "Fixed income" portion of assets
managed by Independence Investment LLC: .15% of
first $100 million; .125% on the next $150 million
and .10% above $250 million
Assets managed by Capital Guardian Trust Company:
.475% on the first $150 million; .425% on the next
$150 million; .325% on the next $200 million and
.275% above $500 million
Short-Term Bond .15% on the first $100 million; .125% on the next
$150 million and .10% above $250 million
Bond Index .07% on the first $100 million; .06% on the next
$150 million; .03% on the next $250 million and
.01% above $500 million
Active Bond Assets managed by John Hancock Advisers, LLC: .25%
on the first $100 million; .20% on the next $150
million; .16% on the next $250 million; .125% on
the next $500 million and .10% above $1 billion
Assets managed by Declaration Management & Research
LLC: .15% on the first $100 million; .125% on the
next $150 million and .10% above $250 million
Assets managed by PIMCO: .25%
Total Return Bond .25%
High Yield Bond .40%
Global Bond .375% on the first $300 million; .30% on the next
$200 million and .275% above $500 million
Money Market 0.075% on the first $500 million and .02% above
$500 million
*T. Rowe Price has voluntarily agreed to waive a portion of the sub-advisory fee
it receives from John Hancock Life Insurance Company for services to the Fund
shown. Effective December 15, 2003, the sub-investment advisory fee reduction is
5% based on the combined levels of Trust assets managed by T. Rowe Price.
35
3. Dollar Amounts of Advisory Fees, Subadvisory Fees, and Expense
Reimbursements
Set out below are the dollar amounts of advisory fees that the Trust paid
to John Hancock and the sub-advisory fees that John Hancock paid to sub-advisers
for the past three years:
Fund Investment Adviser Sub-advisers*
- ------------------------------ ---------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
---------- ---------- ---------- --------- --------- ---------
Equity Index.................. 733,990 670,965 638,853 119,929 115,079 184,656
Large Cap Value............... 2,241,923 1,958,804 1,654,981 1,195,700 1,044,702 892,337
Large Cap Growth.............. 4,348,351 2,906,241 3,319,872 1,620,859 1,810,686 2,489,889
Large Cap Growth B............ 235,226 278,349 272,132 149,444 198,066 193,921
Fundamental Growth............ 201,763 252,723 327,064 109,424 140,403 181,703
Earnings Growth............... 1,665,904 1,797,191 2,410,233 816,176 992,875 1,535,019
Growth & Income............... 12,774,424 14,166,639 18,378,237 4,392,251 4,940,873 6,378,814
Fundamental Value............. 965,198 1,098,084 342,746 489,507 588,303 208,657
Fundamental Value B........... 332,454 366,083 278,769 177,263 193,677 148,487
Mid Cap Value................. 86,810 -- -- 47,350 -- --
Mid Cap Value B............... 695,383 393,262 218,743 380,385 274,096 164,053
Mid Cap Growth................ 1,675,614 1,516,336 1,403,338 805,828 731,448 848,219
Small Cap Value............... 1,379,413 1,179,436 559,231 897,919 744,902 353,196
Small Cap Emerging Growth..... 658,792 539,384 619,083 422,462 389,543 459,131
Small Cap Growth.............. 1,380,249 1,548,512 1,533,746 657,282 737,409 937,017
International Equity Index.... 214,055 197,047 261,569 147,658 136,337 179,380
Overseas Equity............... 377,034 305,288 291,727 233,400 188,986 187,638
Overseas Equity B............. 1,136,004 988,252 844,115 582,864 512,504 547,558
Overseas Equity C............. 660,775 557,164 364,553 417,729 353,418 272,023
Real Estate Equity............ 1,929,064 1,796,693 1,556,143 880,122 758,395
Health Sciences............... 275,079 276,778 163,858 164,329 152,224 90,120
Financial Industries.......... 320,139 -- -- 273,662 -- --
Managed....................... 13,323,272 15,022,416 18,129,438 5,757,563 6,384,611 7,509,704
Short-Term Bond............... 1,533,284 1,151,717 468,356 411,536 364,685 225,303
Bond Index.................... 314,757 248,866 135,751 146,042 115,631 66,937
Active Bond................... 6,383,947 5,841,345 5,236,730 1,888,848 1,519,340 1,389,019
Total Return Bond............. 149,662 -- -- 53,448 -- --
High Yield Bond............... 633,292 463,989 260,006 334,340 260,997 175,704
Global Bond................... 817,465 492,904 518,629 378,269 231,954 239,893
Money Market.................. 2,065,570 1,966,939 1,319,703 440,297 454,983 650,891
- ----------
Paying these fees to the sub-advisers is solely the responsibility of John
Hancock and not the Trust.
Under the current investment advisory agreements for each Fund (other
than the current investment advisory agreements for the International Equity
Index, Overseas Equity, Overseas Equity B, Overseas Equity C, Health Sciences
and Global Bond Funds), for any fiscal year in which the normal operating costs
and expenses of any Fund, exclusive of the investment advisory fee, interest,
brokerage commissions, taxes and extraordinary expenses outside the control of
John Hancock exceed 0.10% of that Fund's average daily net assets, John Hancock
will reimburse that Fund in an amount equal to such excess. Reimbursements for
the past three years under the investment advisory agreements then in effect for
each Fund have been as follows:
Fund 2003 2002 2001
- ------------------------------ ---------- ---------- ----------
Large Cap Growth B............ 676 5,454 29,164
Fundamental Growth............ 0 45,456 67,599
Fundamental Value............. 7,589 -- 79,742
Fundamental Value B........... 42,131 63,635 10,830
Earning Growth 41,846 -- --
Mid Cap Value................. 21,663 -- --
Mid Cap Value B............... 27,357 70,763 68,521
Mid Cap Growth................ -- 13,182 --
36
Fund 2003 2002 2001
- ------------------------------ ---------- ---------- ----------
Small Cap Value............... 11,621 1,730 16,492
Small Cap Emerging Growth..... 62,221 23,494 7,794
Small Cap Growth.............. 85,659 -- 50,542
International Equity Index.... 188,545 201,707 202,794
Overseas Equity............... 86,658 87,685 58,591
Overseas Equity B............. 207,499 468,798 165,435
Overseas Equity C............. 285,751 684,568 733,661
Health Sciences............... 41,196 76,501 13,968
Bond Index.................... 10,617 52,752 --
High Yield Bond............... 38,226 32,972 38,330
Global Bond................... 30,617 37,417 2,284
4. Basis of Trustee Approval of Advisory Arrangements
The Trust's Board of Trustees ("Board"), at a meeting on February 11, 2004,
approved the continuance of all of the Trust's investment management agreements
("advisory agreements") as in effect at that time with John Hancock and the
continuance of all of the Trust's definitive sub-investment management
agreements ("sub-advisory agreements") In the process, the Board evaluated,
among other things, written and oral information provided by John Hancock in
response to a request of the Trustees. In addition, the Board's Trust Governance
Committee, composed exclusively of the Board's independent Trustees, met prior
to the Board meeting on February 10, 2004 and evaluated written information
provided in advance to the Board by John Hancock.
During the year, the Board devotes a substantial portion of five of its six
regularly scheduled meetings to an ongoing review and evaluation of John Hancock
and the subadvisers. This ongoing process is based primarily on written and oral
reports by John Hancock, in-person and written presentations by the Trust's
subadvisers on a rotating basis, and answers to questions addressed by the
Trustees to representatives of John Hancock and the subadvisers. In this
connection, the Trustees receive information from John Hancock regarding John
Hancock's performance of its functions, including monitoring and evaluation of
each subadviser which includes, among other things, review of certain filings
made with the SEC and written procedures and other materials submitted to John
Hancock and the basis of compensation paid to portfolio managers. This
information relates to such matters as the nature, scope and quality of the
services provided by the subadvisers to the Trust, and includes, among other
things, (i) the investment performance of each subadviser, (ii) any
recommendation by John Hancock to terminate, replace or add a subadviser, and
(iii) any recommendation by John Hancock to change any advisory or sub-advisory
fee.
The Trust Governance Committee schedules four meetings a year pursuant to a
Charter that empowers the Committee to meet separately from management in
connection with consideration of the advisory and sub-advisory agreements. The
Charter also empowers the Committee, in any case it deems advisable, to retain
special counsel or other experts or consultants, at the expense of the Trust or
any Fund, to further the interests of the Trust.
The Board generally schedules its meeting in February of each year to
consider whether or not to approve generally continuing the advisory and
sub-advisory agreements for another year. The Board considers, as applicable,
factors bearing on the nature, scope, quality, cost and profitability of the
services provided to the Trust under these agreements, with a view toward making
a business judgment whether each agreement, including the fee, is, under all of
the circumstances, in the best interest of the Trust.
In approving the above-mentioned agreement continuances at their February
11, 2004 meeting, the Trustees considered various factors, and, in their
business judgment, reached various conclusions, principally including the
following:
. The Trustees reviewed the nature and scope of the various management and
administrative services that John Hancock provides to the Trust,
including, among other things, John Hancock's functions in overseeing,
monitoring and reporting on each of the Trust's subadvisers. The
Trustees also reviewed the nature and scope of the portfolio management
services that the subadvisers provide to the various Funds.
. The Trustees assessed the quality of John Hancock's services and each
subadviser's services, on such bases as investment performance and
expense experience for each Fund, on both an absolute basis and a
comparative basis (against benchmarks, Morningstar ratings, certain
investment performance data of similar funds prepared at John Hancock's
request by an unaffiliated company, and certain investment performance
data of comparable John Hancock-sponsored publicly available Funds) over
current and multi-year periods. Given that similar funds may allocate
other operating expenses (non-advisory fees) differently between the
fund and its adviser than does a Fund of the Trust, the Trustees
concluded that a comparison of
37
aggregate fees and expenses can be more meaningful than comparison of
advisory fees only and/or comparison of other operating expenses only.
. The Trustees reviewed schedules of the advisory fee and sub-advisory
fee(s) for each Fund and concluded that most of the Funds have
breakpoints that can pass along a portion of any economies of scale to
the contract owners. The Trustees will consider instituting or
accentuating breakpoints for each Fund or seeking a fee reduction if the
Fund's assets continue to increase and further economies of scale
result.
. The Trustees considered the above-mentioned analysis of similar fund
advisory fee and expense data. Based on that analysis, the Trustees
concluded that, while comparative data are not to be relied on
exclusively, the aggregate advisory fees and other expenses of each Fund
are within the range paid by similar funds. More specifically, the
Trustees concluded that eight of the Funds (27%) had aggregate expenses
more than ten basis points lower than, and 22 Funds (73%) had aggregate
expenses within ten basis points (plus or minus) of, the average fund
expense ratio in the appropriate Morningstar peer group. The Trustees
also considered the fact that John Hancock has undertaken to reimburse
the Funds for certain operating expenses in excess of a stated rate and
that, for 2003, John Hancock reimbursed 18 of the Funds pursuant to this
undertaking.
. The Trustees also considered the fact that John Hancock has undertaken
to bear certain expenses that the Trust otherwise would be required to
absorb, including, for example, the cost of distributing annual Trust
prospectuses to existing contract owners and providing Trust Statements
of Additional Information upon request of contract owners.
. The Trustees considered that, in addition to the advisory fees received
by John Hancock from the Trust, the Insurers derive benefits by having
the Trust serve as the underlying funding medium for variable insurance
products offered by the Insurers, which are subject to fees and charges
payable to the Insurers. In this regard, the Trustees considered
representations from John Hancock that (i) those fees and charges, in
the aggregate, are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Insurers,
(ii) those fees and charges do not duplicate fees and expenses paid by
the Trust, and (iii) the advisory fees make no specific allowance to
provide monies to finance distribution of either Trust shares or
variable insurance products (although John Hancock may use profits
realized from the advisory fees for any lawful purpose). While the
Trustees are not responsible for the fees and charges deducted by the
Insurers under the variable insurance products funded through the Trust,
the Trustees concluded that, under all the circumstances, any such
benefits to John Hancock did not appear to be inconsistent with the best
interest of each Fund.
. The Trustees considered that, in addition to the sub-advisory fees
received by subadvisers from John Hancock, subadvisers in some cases
receive benefits through soft dollar arrangements by which brokers
provide research and certain other services to subadvisers in return for
being allocated Trust "brokerage" transactions. The Trustees considered:
(i) information provided by John Hancock (both in connection with the
February 11, 2004 meeting and on a periodic basis) about the extent and
nature of such practice by each Fund as applicable; (ii) representations
of subadvisers regarding the appropriateness of their practices and
(iii) the ongoing assessment and reports by an unaffiliated company of
the degree to which each Fund is receiving "best execution." Under all
the circumstances, the Trustees concluded that each Fund's practices in
this regard did not appear to be inconsistent with the best interest of
the Fund.
. The Trustees also reviewed any practices by a Fund of directing
portfolio transactions to a broker-dealer affiliated with the Fund's
sub-adviser, as well as data comparing each Fund's portfolio "turnover"
rate to that of other comparable funds.
. The Trustees considered John Hancock's representation that John Hancock
had not entered into any material business arrangement with a
sub-adviser, including the involvement of any sub-adviser in the
distribution of the Trust's shares (or John Hancock's related variable
insurance products); made "revenue sharing" payments to distributors;
instructed sub-advisers to direct Trust brokerage transactions to
broker-dealers to incentivize or reward sales; or received "soft dollar"
benefits in the form of distribution services.
. The Trustees considered certain information from John Hancock about the
overall profitability to John Hancock and its affiliates of the variable
insurance products funded through the Trust, including certain
information about profits to John Hancock from serving as the Trust's
primary investment adviser and data regarding John Hancock's
profitability targets from particular variable insurance products. They
also considered information they had received from John Hancock about
the difficulties of quantifying the cost and profitability of the
advisory function separately from the aggregate cost and profitability
of all of the functions performed by John Hancock and its affiliates to
develop, offer, and maintain the products, including the cost of
processing orders for the purchase and redemption of Trust shares. The
Trustees concluded that, particularly in view of the interdependence of
the Fund and the variable insurance products that it supports, the
aggregate profitability information the Trustees had received was
appropriate for purposes of their deliberations.
38
. The Trustees considered the fact that: (i) John Hancock pays the
sub-advisory fees to the subadvisers; (ii) John Hancock and a Fund
generally have a common interest in negotiating the sub-advisory fees
downward; (iii) in some cases, John Hancock has succeeded in negotiating
a sub-advisory fee rate that is less than the average rate that a
subadviser charges to similar funds; and (iv) the subadvisers have less
influence over the management of their respective Funds than a primary
adviser to a retail mutual fund normally would (including any influence
with respect to the level of their sub-advisory fees). In light of,
among other things, the particular characteristics of the
adviser/subadviser relationship, the Trustees concluded that the
profitability information mentioned above concerning the Insurers was
appropriate for purposes of their deliberations over continuation of
both the advisory and sub-advisory agreements.
. The Trustees also considered the amount of "spread" between the
investment advisory fee paid by each Fund to John Hancock and the amount
of sub-advisory fees that John Hancock, in turn, pays with respect to
that Fund. The Trustees considered how much spread for each Fund and
sub-adviser compared to John Hancock's overall objectives for such
spreads and the reasons for any discrepancies.
. The Trustees considered introducing performance-based advisory and
sub-advisory fees, particularly with regard to the Funds that had been
underperforming their benchmarks (although not necessarily
underperforming their peers). The Trustees, however, decided not to
pursue performance-based fees at this time, based on John Hancock's
concern that such fees could lead to management practices that would not
be in the best interests of contract owners.
In addition to approving the continuance of the advisory and sub-advisory
agreements at their February 11, 2004 meeting, the Trustees have recently taken
the additional actions described in numbered paragraphs 1.-13.,below that would
affect the advisory and sub-advisory arrangements as in effect on or after the
date of this Statement of Additional Information. In taking such additional
actions,, the Trustees, as a fundamental matter, followed essentially the same
process, and considered essentially the same various factors, as described
above, regarding the Trustees' general continuation of the then current
agreements. Moreover, the Trustees considered, for each applicable Fund, written
recommendations and rationales of John Hancock, based on such factors as
comparisons of recommended subadvisers with existing subadvisers and optional
subadvisers and due diligence reviews. In addition, the Trustees considered
various factors, and, in their business judgment, reached various conclusions
related to the specific facts and circumstances of each agreement, principally
including those explained below.
1. The Fundamental Growth Fund. At its December 10, 2003 meeting, the Board
approved the removal of Putnam Investment Management, LLC ("Putnam") as the
sub-adviser for this Fund and its replacement by Independence Investment LLC
("Independence"). John Hancock recommended that Putnam be terminated based on
(i) concerns that Putnam's reputation and stability would be adversely impacted
by recent allegations of improper trading practices by its personnel, loss of
certain significant accounts and assets under management, and the turnover of
key investment personnel; and (ii) a desire for improved investment performance
for the Fund. The Trustees were influenced by the fact that Independence would
manage the Fund substantially in the manner that it had already been managing
the Trust's Large Cap Growth Fund, and they concluded that this was the best
option available for the Fund at this time. At its meeting on March 24, 2004,
the Board also approved a reduction in the investment advisory fee of the
Fundamental Growth Fund to make it equivalent to that paid by the Large Cap
Growth Fund. The Trustees were influenced by the fact that, because these two
Funds are being managed in substantially the same manner, it is appropriate for
the fee structure to be the same.
2. Large Cap Growth B Fund (formerly, the Large Cap Aggressive Growth Fund).
At its December 10, 2003 meeting, the Board approved the removal of Janus
Capital Management, LLC ("Janus") as the sub-adviser for this Fund and its
replacement by Independence. John Hancock recommended that Janus be terminated
based on concerns that Janus' reputation and stability would be adversely
impacted by recent allegations of improper trading practices by its personnel
and turnover of key investment personnel, including a chief investment officer.
The Trustees were influenced by the fact that Independence would manage the Fund
substantially in the manner that it had already been managing the Trust's Large
Cap Growth Fund, and they concluded that this was the best option available for
the Fund at this time. At its meeting on March 24, 2004, the Board also approved
a reduction in the investment advisory fee for the Large Cap Growth B Fund to
make it equivalent to that paid by the Large Cap Growth Fund. The Trustees were
influenced by the fact that, because the two Funds are being managed in
substantially the same manner, it is appropriate for the fee structures to be
the same.
3. Overseas Equity B Fund (formerly, the International Opportunities Fund). At
its December 10, 2003 meeting, the Board approved (a) the termination of this
Fund's sub-adviser and its replacement by Capital Guardian Trust Company
("Capital Guardian") and (b) elimination of John Hancock's contractual
obligation to reimburse the Fund for certain operating expenses in excess of
..10% per annum. In approving Capital Guardian as the Fund's new sub-adviser, the
Trustees were influenced by the fact that Capital Guardian would manage the Fund
in the manner that it already had been managing the Trust's Overseas Equity
Fund, and they believed that retention of Capital Guardian would increase the
potential for improved investment performance by the Fund. The Trustees approved
elimination of the above-mentioned .10% cap partially in recognition that an
international fund such as this
39
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund and partially in recognition that, because Capital
Guardian's sub-advisory fee would be higher than that of the previous
sub-adviser, John Hancock would be retaining a reduced "spread" from the
advisory fees that it receives from the Fund.
4. Overseas Equity C Fund (formerly the Emerging Markets Equity Fund). At its
December 10, 2003 meeting, the Board approved: (a) the termination of this
Fund's sub-adviser and its replacement by Capital Guardian, (b) a reduction in
the advisory fee paid by the Fund to John Hancock, and (c) elimination of John
Hancock's contractual obligation to reimburse the Fund for certain operating
expenses in excess of .10% per annum. In approving Capital Guardian, as the
Fund's new sub-adviser, the Trustees were influenced by the fact that Capital
Guardian would manage the Fund in the manner that it had already been managing
the Trust's Overseas Equity Fund. The Trustees believed that this would increase
the potential for improved investment performance by the Fund, as well as
significantly reduce the high operating expenses that had resulted from the
Fund's historic policy of investing primarily in emerging markets. In that
connection, Capital Guardian's sub-advisory fee is substantially less than that
of the prior sub-manager and the Trustees believed it was appropriate for John
Hancock's advisory fee likewise to be substantially reduced. Furthermore, the
Trustees approved elimination of the above-mentioned .10% cap partially in
recognition of the reduction in the advisory fee and partially in recognition
that an international fund such as this necessarily tends to have higher
ordinary operating expenses than an otherwise similar purely domestic fund.
5. Overseas Equity Fund. At its December 10, 2003 meeting, the Board approved
(a) an increase in the advisory fee paid by this Fund to John Hancock and (b)
the elimination of John Hancock's contractual obligation to reimburse the Fund
for certain operating expenses in excess of .10% per annum. The Trustees
approved this partially in recognition that an international fund such as this
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund. More broadly, however, these changes resulted from
the Trustees' consideration of information presented by John Hancock to the
effect that the fee structure of this Fund, coupled with the expense "cap," did
not afford John Hancock a sufficient level of compensation to allow John Hancock
to continue to support the fund on a long term basis as it had in the past. The
Trustees' actions at the December 10, 2003 meeting were intended to address this
problem. The same is true of subsequent action the Board took (at its February
11, 2004 meeting) approving a reduction in the fees paid to the sub-adviser of
this Fund. In the case of such latter action, the Trustees also took into
consideration a representation that the quality or quantity of sub-advisory
services to the Fund would not be reduced as a consequence of the fee reduction.
6. International Equity Index Fund. At its December 10, 2003 meeting, the
Board approved (a) the termination of this Fund's sub-adviser and its
replacement by SSgA Funds Management, Inc. ("SSgA") and (b) the elimination of
John Hancock's contractual obligation to reimburse the Fund for certain
operating expenses in excess of .10% per annum. A change in sub-advisers was
necessary, because the prior sub-adviser was terminating its business of
managing international equity index funds. The board approved SSgA primarily
based on its confidence in SSgA's capabilities, SSgA's willingness to accept a
significantly lower sub-advisory fee than the prior sub-adviser, and the Board's
belief that the "spread" retained by John Hancock would still not be
unreasonably large. The Trustees approved elimination of the .10% expense cap
partially in recognition that an international fund such as this necessarily
tends to have higher ordinary operating expenses than an otherwise purely
domestic fund and partially in recognition of the fact that this expense cap was
preventing John Hancock from retaining a sufficient amount of compensation to
make its relationship with this Fund economically viable.
7. Global Bond Fund. At its December 10, 2003 meeting, the Board approved the
elimination of John Hancock's contractual obligation to reimburse the Fund for
certain operating expenses in excess of .10% per annum. The Trustees approved
this partially in recognition that an international fund such as this
necessarily tends to have higher ordinary operating expenses than an otherwise
similar purely domestic fund and partially in recognition of the fact that
eliminating this expense "cap" would not currently have a substantial impact on
the Fund's overall expense ratio.
8. Health Sciences Fund. As its December 10, 2003 meeting, the Board approved
the elimination of John Hancock's contractual obligation to reimburse the Fund
for certain operating expenses in excess of .10% per annum. The Trustees
approved this partially in recognition that doing so would enable John Hancock
to retain an amount of compensation from this Fund that would be more likely to
result in continued strong support for the Fund by John Hancock, while still not
being excessive.
9. Fundamental Value B Fund (formerly the Large Cap Value CORE Fund). At its
December 10, 2003 meeting, the Board approved the termination of this Fund's
sub-adviser and its replacement by Wellington Management Company, LLP
("Wellington Management"). The Trustees were influenced by the fact that
Wellington Management would manage the Fund in the manner that it already had
been managing the Trust's Fundamental Value Fund, and the Trustees believed that
this strategy (implemented by Wellington Management) would be more attractive to
prospective investors. At its February 11, 2004 meeting, however, the Board also
approved an increase in the management fee paid to John Hancock by this Fund to
make it equivalent to that paid by the Fundamental Value Fund. The Trustees were
influenced by the fact that, because these two Funds are being managed in
substantially the same manner, it is appropriate for their fee structure to be
the same.
40
10. Growth & Income Fund. At its December 10, 2003 meeting, the Board approved
the removal of Putnam as the sub-adviser for a portion of the Growth & Income
Fund's assets, and its replacement by T. Rowe Price Associates, Inc. ("T. Rowe
Price"). John Hancock recommended that Putnam be terminated based on (i)
concerns that Putnam's reputation and stability would be adversely impacted by
recent allegations of improper trading practices by its personnel, loss of
certain significant accounts and assets under management, and turnover of key
investment personnel. The Trustees had confidence in T. Rowe Price's ability to
effectively manage a portion of this Fund and were also mindful of certain
advantages of establishing a broader relationship with T. Rowe Price.
Specifically, this change helped to make the Trust's relationship with T. Rowe
Price sufficiently large that T. Rowe Price would voluntarily reduce all of its
sub-advisory fees with the Trust by 5%. Although such a reduction will not
directly benefit the affected Funds of the Trust, it should help to ease upward
pressure on advisory fee rates.
11. Mid Cap Value B Fund (formerly the Small/Mid Cap CORE Fund). At its
December 10, 2003 meeting, the Board approved the termination of this Fund's
sub-adviser and its replacement by T. Rowe Price. The Trustees were influenced
by the fact that T. Rowe Price would manage the fund in the same manner as it
already had been managing the Trust's Mid Cap Value Fund, and the Trustees
believed that this strategy (implemented by T. Rowe Price) would be more
attractive to prospective investors.
12. Managed Fund. At its meeting on February 11, 2004, the Board approved a
reduction in the sub-advisory fee for the fixed income portion of this Fund that
is sub-advised by Independence. The Trustees were influenced by their
understanding that the reduction in this fee would not result in any reduction
in the quality or amount of services being furnished by Independence.
13. Small Cap Fund. At its February 11, 2004 meeting, the Board approved the
removal of this Fund's sub-adviser and its replacement by Wellington Management.
The Trustees were influenced by the fact that Wellington Management would manage
the Fund substantially in the manner that it had already been managing the
Trust's Small Cap Emerging Growth Fund, and the Trustees believed that this is
the best option available to this Fund at this time. Although Wellington
Management will receive a higher sub-advisory fee from John Hancock than did its
predecessor, John Hancock has not increased its advisory fee for this Fund. In
fact John Hancock has reduced its advisory fee somewhat (which was also approved
by the Board at the February 11, 2004 meeting). The Board took all of these
factors into account in approving the changes, as well as the fact that the new
fee structure would be identical to that for the Trust's existing Small Cap
Emerging Growth Fund.
In connection with their deliberations, the Board and the Trust Governance
Committee received legal advice from outside counsel to the Trust regarding the
standards and methodology of evaluation articulated by the SEC, the courts and
the industry for mutual funds selling shares to the public and the applicability
of those standards and that methodology to mutual funds - like the Trust -
selling shares to life insurance company separate accounts. Such legal counsel,
through its representation of John Hancock on certain matters in which the Trust
does not have a direct interest, is also familiar with the Insurers' variable
insurance products and separate accounts funded through the Trust. The Trustees
considered advice of such legal counsel that mutual funds selling shares to life
insurance companies differed, in certain respects, from mutual funds selling
shares to the public and that, consequently, the standards and methodology of
evaluation developed for the latter did not necessarily apply to the former in
all respects. The Trustees considered, for example, the fact that SEC rules
would permit John Hancock to "veto" Trustee or contract owner proposals for an
adviser other than John Hancock under specified circumstances and that the 1940
Act would permit John Hancock to seek SEC approval to substitute another mutual
fund for the Trust if the Trustees were to select an adviser other than John
Hancock.
The Trustees also took into account the fact that John Hancock affords
contract owners the privilege of instructing John Hancock how to vote the Trust
shares held by John Hancock and that, pursuant to the process, the contract
owners would have the opportunity to vote on, among other things, any increased
advisory fees or elimination of expense caps
The foregoing discussion of the material factors considered and conclusions
reached by the Trustees is not intended to be all-inclusive. The Trustees
reviewed a large variety of factors and considered a significant amount of
information, including information received on an ongoing basis at meetings of
the Board, the Trust Governance Committee, and the Audit Committee and
otherwise. In view of the broad scope and variety of these factors and
information, the Board did not find it practicable to, and did not, make
specific assessments of, quantify, or otherwise assign relative weights to the
specific factors considered in reaching the Board's conclusions and
determinations to approve the continuance of the Trust's advisory agreement and
each sub-advisory agreement. The approval determinations were made on the basis
of each Trustee's business judgment after consideration of all of the factors
taken as a whole, though individual Trustees may have given different weights to
different factors and assigned various degrees of materiality to various
conclusions.
As a result of their consideration, the Trustees, in the exercise of their
business judgment, gave the approvals discussed above as being in the best
interest of each Fund to which it relates.
41
G. ARRANGEMENTS WITH OTHER SERVICE PROVIDERS TO THE TRUST
1. Underwriting and Indemnity Agreement
Pursuant to an Underwriting and Indemnity Agreement, Signator Investors,
Inc. ("Signator") serves as the Trust's principal underwriter for NAV shares,
and John Hancock provides certain indemnities to the Trust and its Trustees.
Neither Signator nor John Hancock receives any additional compensation from the
Trust for the services and indemnities they provide pursuant to the Underwriting
and Indemnity Agreement. The offering of the Trust's NAV shares through Signator
is a continuous offering on a "best efforts" basis. Signator is a wholly-owned
subsidiary of John Hancock and is located at 197 Clarendon Street, Boston, MA
02117.
2. Custody of the Trust's Assets
State Street Bank and Trust Company ("State Street Bank") is the primary
custodian of the assets of all Funds. State Street Bank's principal business
address is 225 Franklin Street, Boston MA 02110. The primary custodian's duties
include safeguarding and controlling the Trust's cash and investments, handling
the receipt and delivery of securities, and collecting interest and dividends on
the Trust's investments. Fund securities purchased in the United States are
maintained in the custody of State Street Bank, although such securities may be
deposited in the book-entry system of the Federal Reserve System, with
Depository Trust Company, or with other qualified domestic book-entry systems or
depositories. Also, pursuant to its agreement with the Trust, State Street Bank
provides certain accounting and recordkeeping services to the Trust and
generally values the Trust's assets by computing each Fund's net asset value
each day. The Trust compensates State Street Bank for these functions through
the payment of an annual custody asset fee of .01% of the total net assets of
the Trust, allocated to each Fund based on the percentage of that Fund's total
net assets to the total net assets of the Trust; miscellaneous transaction
charges ranging from $7.00 to $25.00; global asset and transaction fees that
vary by the country in which a Fund's assets are held or traded; a monthly
accounting fee charge that is allocated to each Fund based on the percentage of
that Fund's total net assets to the total net assets of the Trust; valuation and
monthly quote charges; special service fees for activities of a non-recurring
nature; and reimbursement of specified out-of-pocket expenses.
Foreign securities are generally held through subcustodian banks and
depositories around the world with whom State Street Bank has relationships. In
some cases, Funds whose securities are held in this manner may be exposed to
greater risks of loss. This is because the soundness of such foreign entities,
as well as foreign regulatory practices and procedures, may provide less
protection to security holders than is available in the U.S.
In certain circumstances, brokers may have access to assets that a Fund
posts as "margin" in connection with futures and options transactions. In the
event of a broker's insolvency or bankruptcy, a Fund could experience a delay or
incur costs in recovering such assets or might recover less than the full amount
due. Also the value of such assets could decline by the time the Trust could
effect such recovery.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts held through a given broker, it will be
entitled immediately to receive from the broker the net amount of such gains.
The Trust will request payment of such amounts promptly after notification by
the broker that such amounts are due. Thereupon, these assets will be deposited
in the Trust's general or segregated account with its primary custodian, as
appropriate.
3. Subadministration Agreement With State Street Bank
Pursuant to a Subadministration agreement, with the Trust, State Street
Bank also provides assistance to John Hancock and the subadvisers in computing
total return information for the Trust and in monitoring each Fund's compliance
with the Fund's investment objectives and restrictions, as well as compliance
with certain other applicable legal requirements. The Trust compensates State
Street Bank for these services through payment of an annual fee that accrues
daily and is billed monthly in arrears. The annual fee is based on the average
net assets of the Trust and is 0.012% of the first $1 billion of average net
assets, 0.0075% of the next $1 of average net assets, and 0.0025% of average net
assets after that. Each Fund is allocated the greater of a minimum monthly Fund
fee or the basis point annual fee, based on the pro-rata total net asset value
of that Fund. The minimum monthly Fund fee is $1,333.
4. Independent Auditors
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, are the
independent auditors of the Trust. Ernst & Young audits the financial statements
of the Trust, prepares the Trust's tax returns, and renders other advice to the
Trust concerning accounting and tax matters. Ernst & Young also meets
periodically with the Trust's Board and with the Audit Committee of the Board to
discuss matters within the scope of Ernst & Young's activities with respect to
the Trust.
42
5. Distribution of Series I and Series II Shares
The Board of Trustees of the Trust have approved a plan (the "12b-1Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"). Under the 12b-1 Plan, Series I shares and Series II shares of the
International Equity Index Fund are subject to Rule 12b-1fees as specified in a
Distribution Agreement between the Trust and Manulife Financial Services LLC
(the "Series Distributor"). Under that agreement, Series I shares are subject to
a Rule 12b-1 fee up to an annual rate of .40% of Series I share average daily
net assets and Series II shares are subject to a Rule 12b-1 fee up to an annual
rate of .60% of Series II share average daily net assets.
These Rule 12b-1 fees are paid to the Series Distributor. To the extent
consistent with applicable laws, regulations and rules, the Series Distributor
may use Rule 12b-1 fees:
.. for any expenses relating to the distribution of the shares of the class,
including, but not limited to, compensation to and expenses of employees of
the Series Distributor or an affiliated insurer, including overhead and
telephone expenses, who engage in the distribution of that class of that
Fund's shares in connection with the distribution of variable annuity or
variable life insurance contracts ("Contracts") under which that class of
that Fund's shares is an investment option; printing and distributing Fund
prospectuses, statements of additional information and reports to prospective
investors (through Contracts) in that class of that Fund's shares;
compensation to financial intermediaries and broker-dealers to pay or
reimburse them for their services or expenses in connection with the
distribution of Contracts under which that class of that Fund's shares is an
investment option; expenses relating to the development, preparation,
printing, mailing and publication of advertisements, sales literature and
other promotional materials describing and/or relating to that class of that
Fund's shares or Contracts under which that class of that Fund's shares is an
investment option; expenses of holding seminars and sales meetings designed
to promote the distribution (through Contracts) of that class of that Fund's
shares; expenses of obtaining information from and providing explanations to
owners (or potential owners) of Contracts under which that class of that
Fund's shares is an investment option, regarding that Fund's investment
objectives and policies and other information about the Fund, including the
performance of the Fund; expenses of training sales personnel regarding that
class of that Fund's shares; and expenses of compensating sales personnel in
connection with the allocation of cash values and premiums under Contracts to
that class of that Fund's shares,
.. for any expenses relating to shareholder or administrative services for
holders of the shares of the class (or owners of Contracts funded in
insurance company separate accounts that invest in the shares of the class)
and
.. for the payment of "service fees" that come within Rule 2830(d)(5) of the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc.
Currently, the "service fee" component of the Rule 12b-1 fees for both
Series I and Series II shares is .25% of average daily net assets. Any such
"service fee" is paid to the Series Distributor which then may reallocate all or
a portion of the service fee to one or more affiliated or unaffiliated parties
which have agreed to provide to beneficial owners of Series I and Series II
shares those services encompassed by the term "personal service and/or the
maintenance of shareholder accounts" as defined in Rule 2830(d)(5) of the Rules
of Fair Practice of the NASD.
Without limiting the foregoing, the Series Distributor may pay allor part
of the Rule 12b-1 fees from the International Equity Index Fund to one or more
affiliated and unaffiliated insurance companies that have issued variable
insurance contracts for which the International Equity Index Fund serves as an
investment vehicle as compensation for providing some or all of the types of
services described in the preceding paragraph; this provision, however, does not
obligate the Series Distributor to make any such payments of Rule 12b-1 fees and
does not limit the use that the Series Distributor may make of the Rule 12b-1
fees it receives to such payments. Currently, all such payments are made to
insurance companies affiliated with the Trust's Adviser and with the Series
Distributor. However, payments may be made to nonaffiliated insurance companies
in the future.
The 12b-1 Plan provides that if only part of any of the above-listed
activities or expenses (or of any other expenses or activities) is intended to
result in sales of (or services to) a class of a Fund's shares, the Series
Distributor may make a reasonable apportionment thereof, so as to apply Rule
12b-1 Fees borne by that class of that Fund's shares to the portion of such
activities or expenses that pertains to the distribution of (or services to)
that class of that Fund's shares. The 12b-1 Plan may not be amended to increase
materially the amount to be spent by the International Equity Index Fund without
such shareholder approval as is required by Rule12b-1 under the 1940 Act (the
"Rule"). All material amendments of the 12b-1 Plan must be approved in the
manner described in the Rule. The 12b-1Plan shall continue in effect (i) with
respect to the International Equity Index Fund only so long as the 12b-1 Plan is
specifically approved for that Fund at least annually as provided in the Rule
and (ii) only while (a) a majority of the Trustees are not interested persons
(as defined in the 1940 Act) of the Trust, (b) incumbent disinterested Trustees
select and nominate any new disinterested Trustees of the Trust and (c) any
person who acts as legal counsel for the disinterested Trustees is an
independent legal counsel. The 12b-1Plan may be terminated with respect tothe
International Equity Index Fund at any time as provided in the Rule.
43
During the fiscal year ended December 31, 2003, the 12b-1 Plan was not in
effect and no amounts were paid thereunder.
H. PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Funds pay brokers' commissions, transfer taxes, and other fees relating
to their specific portfolio transactions. (Investments in debt securities are,
however, generally traded on a "net" basis through issuers or dealers acting for
their own account as principals and not as brokers. Therefore, no brokerage
commissions are payable on most such transactions, although the price to the
Trust usually reflects a dealer "spread" or "mark-up.")
Amounts of Brokerage Paid
Brokerage commissions paid by the Funds were as follows for the past three
years:
Fund 2003 2002 2001
- ----------------------------------- ------------ ------------ ------------
Equity Index....................... $ 74,513 $ 80,181 $ 96,080
Large Cap Value.................... 149,385 154,981 164,776
Large Cap Growth................... 1,188,313 1,554,313 1,042,938
Large Cap Growth B................. 49,709 68,300 64,914
Fundamental Growth................. 62,156 92,268 56,725
Earnings Growth.................... 681,069 769,172 483,126
Growth & Income.................... 3,919,445 4,372,752 4,394,341
Fundamental Value.................. 240,593 335,531 635,553
Fundamental Value B................ 2,212 16,030 40,010
Mid Cap Value...................... 38,191 -- --
Mid Cap Value B.................... 12,113 59,967 33,593
Mid Cap Growth..................... 749,750 735,675 362,533
Small Cap Value.................... 210,163 219,255 130,951
Small Cap Emerging Growth.......... 832,863 138,317 89,478
Small Cap Growth................... 859,559 562,914 268,016
International Equity Index......... 62,171 41,487 43,092
Overseas Equity.................... 94,860 40,104 21,248
Overseas Equity B.................. 180,968 217,451 128,826
Overseas Equity C.................. 155,441 166,769 158,236
Real Estate Equity................. 210,473 199,488 171,319
Health Sciences.................... 88,578 59,794 28,279
Financial Industries............... 39,219 -- --
Managed............................ 2,681,322 3,177,479 2,387,899
Bond Index......................... 1,141 836 3,312
Active Bond........................ 2,005 399 0
Total Return Bond.................. 0 -- --
High Yield Bond.................... 0 642 88
Global Bond........................ 43 0 0
How Brokers and Dealers are Selected
Orders for the purchase and sale of Fund portfolio investments are placed
by the respective subadvisers to the Funds. The subadvisers use their best
efforts to obtain best available price (including brokerage commissions and
other transaction costs) and most favorable execution for all transactions. The
subadvisers select brokers and dealers to execute Fund portfolio transactions
primarily on the basis of their execution capability and trading expertise.
Consideration is also given to such factors as the price of the security, the
rate of the commission, the size and difficulty of the order, the
confidentiality of trades, the reliability, integrity, financial condition, and
operational capabilities of competing brokers or dealers, and the brokerage and
research services which they provide. Applicability of specific criteria will
vary depending on the nature of the transaction, the market in which it is
effected, and the extent to which it is possible to select from among multiple
brokers or dealers capable of effecting the transaction.
It is not the policy of the subadvisers to seek the lowest available
commission if, in their reasonable judgment, there is a material risk that the
total cost or proceeds from the transaction might be less favorable than may be
obtainable elsewhere.
44
Research and Statistical Services Furnished by Brokers and Dealers
Research and statistical assistance typically furnished by brokers or
dealers includes analysts' reports on companies and industries, market
forecasts, and economic analyses. Brokers or dealers may also provide reports on
pertinent federal and state legislative developments and changes in accounting
practices; direct access by telephone or meetings with leading research analysts
throughout the financial community, corporate management personnel, industry
experts, leading economists and government officials; comparative performance
and evaluation and technical performance measurement services; portfolio
optimization software; availability of economic advice; quotation services; and
services from recognized experts on investment matters of particular interest to
the subadviser. In addition, the foregoing services may comprise the use of or
be delivered by computer systems whose software and hardware components may be
provided to the subadviser as part of the services. In any case in which the
foregoing systems can be used for both research and non-research purposes, the
subadviser makes an appropriate allocation of those uses and will permit brokers
and dealers to provide only the portion of the systems to be used for research
services. Costs which are allocable to non-research purposes will be paid
directly by the subadviser.
Research and statistical services furnished by brokers and dealers handling
the Funds' transactions may be used by the subadvisers for the benefit of all of
the accounts managed by them and not all of such research and statistical
services may be used by the subadvisers in connection with the Funds.
Relationship Between Brokerage Commissions and Research and Statistical Services
Furnished by Brokers and Dealers
When the subadvisers reasonably determine that more than one broker or
dealer can offer the brokerage and execution services needed to obtain best
available price and most favorable execution, consideration may be given to
selecting the brokers or dealers who supply research and statistical services to
the subadvisers. In receiving these services, which are designed to augment the
subadvisers' own internal research capabilities, the subadvisers comply with
Section 28(e) of the Securities Exchange Act of 1934. This means that the
subadvisers' traders for the Funds, on the basis of their experience and
judgment, evaluate the overall reasonableness of any broker's commissions in
light of all of the brokerage and research services the broker provides. If the
trader for a Fund concludes that the commission rate is reasonable, and the
other requirements of Section 28(e) are met, the law protects the subadviser
from any legal liability that might otherwise result from causing the Fund to
pay the broker a commission in excess of what another broker would have charged.
The subadvisers of the Funds will not at any time make a commitment
pursuant to an agreement with a broker because of research services provided.
The subadvisers do, however, have internal procedures that seek to direct
certain amounts to broker-dealers that provide research and statistical services
of a type covered by Section 28(e). These internal procedures do not mandate
that any amount of business be directed to any broker-dealer, and in no event
will a broker-dealer be used unless the subadviser believes that the
broker-dealer also will provide the best available price and most favorable
execution, as discussed above. During 2003, the amount of transactions, of each
Fund directed to brokers who are included in these internal arrangements, and
the related amounts of commission were as follows:
Dollar Amount Dollar Amount
Fund of Transactions of Commissions
- ---------------------------------------- --------------- --------------
Large Cap Value......................... $ 6,485,360 $ 11,141
Large Cap Growth........................ 179,232,159 262,988
Large Cap Growth B...................... 893,361 1,186
Fundamental Growth...................... 12,564,997 24,911
Earnings Growth......................... 252,228,282 66,116
Growth & Income......................... 499,297,059 969,234
Fundamental Value....................... 24,329,160 19,555
Mid Cap Value........................... 512,445 1,397
Small Cap Emerging Growth 13,344,345 8,449
Mid Cap Growth.......................... 45,929,832 54,016
Small Cap Value......................... 3,225,124 3,045
Small Cap Growth........................ 53,501,488 147,095
International Equity Index.............. 81,101,379 8,142
Overseas Equity B....................... 2,500,393 4,505
Overseas Equity C....................... $ 4,691,880 $ 5,808
Real Estate Equity...................... 95,858 11,843
Health Sciences......................... 532,893,201 7,300
45
Dollar Amount Dollar Amount
Fund of Transactions of Commissions
- ---------------------------------------- --------------- --------------
Financial Industries.................... 8,121,589 9,119
Managed................................. 338,422,269 548,196
Bond Index.............................. 5,843,847 1,141
Evaluations of the overall reasonableness of any broker's commissions are
made by the subadvisers' traders for the Funds on the basis of their experience
and judgment. To the extent permitted by Section 28(e) of the Securities
Exchange Act of 1934, such traders are authorized to pay a brokerage commission
on a particular transaction in excess of what another broker might have charged
in recognition of the value of the broker's brokerage or research services.
Brokerage Transactions in Foreign Markets
Brokerage transactions in securities of companies domiciled in countries
other than the United States are anticipated to be normally conducted on the
stock exchanges or other markets of those countries in which the particular
security is traded. Fixed commissions on foreign stock exchange transactions are
generally higher than negotiated commissions available in the United States.
Moreover, there is generally less government supervision and regulation of
foreign stock exchanges and broker-dealers than in the United States. Settlement
periods in non-U.S. markets may differ from the normal settlement period in the
United States.
Simultaneous Transactions with Other Accounts
The subadvisers also perform investment advisory services for a number of
other accounts and clients, none of which is given preference over the Trust in
allocating investment opportunities. When opportunities occur which are
consistent with the investment objective of more than one account, it is the
policy of each subadviser to avoid favoring any one account over another.
Accordingly, investment opportunities in such cases are allocated in a manner
deemed equitable by the subadvisers to the particular accounts involved. The
allocation may be based, for example, on such factors as the accounts'
respective investment objectives and then current investment and cash positions.
Subject to these requirements, Trust orders may be combined with orders of other
accounts or clients advised by any of the subadvisers at share prices which are
approximately averaged.
The subadvisers' allocation policies recognize that no rigid formula will
always lead to a fair and reasonable result, and that a degree of flexibility to
adjust to specific circumstances is necessary. Therefore, under certain
circumstances, allocation on a basis other than strictly pro rata or based on
order size is permitted if it is believed that such allocation is fair and
reasonable.
Use of Brokers Who are Affiliated With a Subadviser
A Fund may place portfolio transactions through certain brokers who are
affiliated with the Fund's subadviser. The Trust has implemented special
procedures governing the circumstances of these transactions. In addition to
complying with any applicable provisions of the Trust's procedures, these
transactions must comply with all applicable legal requirements, including,
where applicable, Rule 17e-1 under the Investment Company Act. Among other
things, that rule requires the commissions or other compensation paid to the
affiliated broker to be reasonable and fair compared to those in similar
transactions between unrelated parties.
46
Set forth below is information about transactions by each Fund with
affiliated brokers in reliance on Rule 17e-1 for each of the past three years:
Amount of Commissions Paid by
Fund
--------------------------------
Nature of Broker's
Name of Affiliated Affiliation with Fund's
Fund Broker Subadviser 2003 2002 2001
- ------------------- ---------------------- --------------------------- --------- --------- --------
Equity Index Lattice Wholly-owned subsidiary of $ 55,870 $ 0 $ 0
subadviser's parent
Large Cap Growth B Sanford Bernstein & Wholly-owned subsidiary of 0 405 0
Co. former subadviser's parent
Fundamental Value B Goldman, Sachs & Co. Dual operating division of 828 1,400 0
former subadviser's parent
Fundamental Value B Spear, Leeds & Kellog. Dual operating division of 138 236 3,141
parent of former subadviser
Mid Cap Value B Goldman, Sachs & Co. Dual operating division of 3,473 1,430 0
parent of former subadviser
Mid Cap Value B Spear, Leeds & Kellog Dual operating division of 1,514 1,355 0
parent of former subadviser
Overseas Equity C Morgan Stanley Asia Wholly-owned subsidiary of 0 254 163
Limited former subadviser's parent
Overseas Equity C JM Morgan Stanley Wholly-owned subsidiary of 0 70 162
Securities Private former subadviser's parent
Ltd.
Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 746 429 2,120
Securities former subadviser's parent
Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 0 1,049 0
International Limited former subadviser's parent
For 2003, the total dollar amount of such transactions through affiliated
brokers as a percentage of all brokerage-type transactions was 5.36% for the
Equity Index Fund, 0.67% for the Fundamental Value B Fund, 1.19% for the Mid Cap
Value B Fund, and 0.32% for the Overseas Equity C Fund. For 2002, the total
dollar amount of such transactions through affiliated brokers as a percentage of
all brokerage-type transactions was 2.91% for the Mid Cap Value B Fund, 1.09%
for the Overseas Equity C Fund, 0.32% for the International Equity Fund, 0.09%
for the Large Cap Growth B Fund, and 0.01% for the Fundamental Value B Fund. For
2001, the total dollar amount of such transactions through affiliated brokers as
a percentage of all brokerage-type transactions was 3.92% for the International
Equity Fund, and 1.54% for the Overseas Equity C Fund.
Directed Brokerage
From time to time the Trust may, on behalf of one or more Funds, request
that John Hancock and the subadvisers also consider what are commonly referred
to as "directed brokerage arrangements." Under such arrangements, a
broker-dealer will rebate a portion of the brokerage commission it receives from
(or on behalf of) a Fund and will apply that rebate to pay certain operating
expenses that the Fund would otherwise pay directly. The Trust may condition its
requests by requiring that subadvisers effect transactions with broker-dealers
participating in such arrangements only if the subadviser believes that the
broker-dealer will provide the best overall combination of price and execution
(i.e., "best execution") for those transactions. While the Trust believes that
overall this practice will benefit the Funds, in some cases the subadvisers may
be unable to obtain volume discounts, and commissions charged under directed
brokerage arrangements may be higher than those available from certain sources
not involving such arrangements. In addition, directed brokerage arrangements
may also result in a loss of the possible advantage from aggregation of orders
for several clients of a subadviser as a single transaction for the purchase or
sale of a particular security, and, in an effort to achieve orderly execution of
transactions, directed brokerage transactions may be delayed until execution of
other orders have been completed. John Hancock will monitor directed brokerage
transactions to help ensure that they are in the best interest of the affected
Funds and their shareholders.
47
The Trust has entered into a directed brokerage arrangement with State
Street Global Markets, LLC ("SSGM"), an affiliate of the Custodian, under which
a Fund will receive a credit on a trade-by-trade basis for part of the brokerage
commission paid with respect to brokerage transactions directed by the Fund's
subadviser(s) to a broker/dealer within SSGM's network of broker/dealers. SSGM
will then apply the credit against other expenses of the Fund, including the
Fund's share of the Custodian's fee. Under this arrangement, subadvisers will be
instructed to use a broker-dealer participating in the arrangement only if the
subadviser believes that the broker-dealer will provide the "best execution" for
the transaction in question.
Transition Services
From time to time, John Hancock and the Trust may engage State Street
Global Markets ("SSGM"), a division of State Street Bank, as a trading advisor
in connection with the restructuring of the Fund's custody account maintained by
the Custody Division of State Steet Bank. Such restructuring may be required,
for example, when a Fund retains a new subadviser or when two Funds merge. As a
trading advisor, SSGM provides consulting services concerning the most cost
efficient and effective manner in which (1) Trust-identified securities in the
custody account can be liquidated, and (2) Trust-identified securities can be
acquired for the custody account. These services include, in part, reviewing the
portfolio, analyzing transaction volumes and the number of securities positions
in the restructuring, and examining potential trading costs including a review
of using off-exchange trading networks, and effecting trades of the
Trust-identified securities to be disposed or acquired. In the course of
providing these services, SSGM may become aware that one or more of the
collective funds or client accounts that State Street Bank manages (the "State
Street Accounts") either have demand for certain of the securities contained in
the Fund's custody account or have available for sale certain securities which
are component securities of the investment portfolio that Trust (on behalf of
the affected Fund) has directed SSGM to construct. In such event, SSGM may, in
its capacity as manager of the State Street Accounts and consistent with its
obligations to the State Street Accounts, extend to the affected Fund either an
offer to purchase from the custody account a specific list of securities or to
sell to the custody account a specific list of securities on behalf of the State
Street Accounts. In such an event, the Trust (on behalf of the affected Fund),
but not SSGM, has the authority and responsibility to determine whether to
accept such an offer on behalf of the Fund's custody account.
I. CODES OF ETHICS
Employees of John Hancock Life Insurance Company, the Trust, and the
subadvisers to the Trust and officers and Trustees of the Trust are subject to
restrictions on engaging in personal securities transactions. These restrictions
are set forth in the John Hancock Insider Information Policy and Procedures, the
Variable Series Trust Code of Ethics, and the Codes of Ethics of the subadvisers
to the various Funds of the Trust ("Subadvisers' Codes of Ethics"), (combined,
"Codes"). The Codes, in accordance with rule 17j-1 of the Investment Company Act
of 1940, as amended, contain provisions and requirements designed to identify
and address certain conflicts of interest between personal investment activities
of employees of the adviser and subadvisers to the Funds and the interests of
the Funds. These Codes do not generally prohibit personnel from investing in
securities that may be purchased or held by the Funds within the Trust. However,
the Codes, consistent with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing and requirements established by
rule 17j-1, among other things, prohibit personal securities investments without
pre-clearance for certain employees, impose time periods during which personal
transactions may not be made in certain securities by employees with access to
investment information, and require the timely submission to compliance
personnel of broker confirmations and quarterly reporting of personal securities
transactions. Additional restrictions may apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process. The
Variable Series Trust Code of Ethics incorporates and applies its restrictions
to officers and Trustees of the Trust who are affiliated with John Hancock Life
Insurance Company. The Variable Series Trust Code of Ethics does not prohibit
unaffiliated Trustees from investing in securities that may be held by the
Trust; however, the Variable Series Trust Code of Ethics does regulate the
personal securities transactions of unaffiliated Trustees of the Trust,
including limiting the time periods during which they may personally buy and
sell certain securities about which they may receive information. The Trust's
Trustees, in compliance with rule 17j-1, have approved the Variable Series Trust
Codes of Ethics and the Subadvisers' Codes of Ethics and are required to approve
any material changes to the Variable Series Trust Code of Ethics as well as to
the Subadvisers' Codes of Ethics. The Trustees also provide continuing oversight
of personal investment policies and annually evaluate the implementation and
effectiveness of the Codes. The Codes are on public file with, and are available
from, the Securities and Exchange Commission.
J. FEATURES OF THE TRUST'S SHARES
The shares of beneficial interest of the Trust currently are divided into
30 series, each corresponding to one of the Trust's 30 Funds. The Trust has the
right to establish additional series and issue additional shares without the
consent of its shareholders. Each series may issue four classes of shares: NAV
shares (this is the initial class of shares issued by each Fund), Series I
shares, Series II shares and Series III shares. Currently, the International
Equity Index Fund is the only series ("Fund") of the Trust that issues the
Series II or Series III class of shares. (Each class of shares is the same
except for differences in class expenses, including different Rule 12b-1 fees,
and voting rights.) Series III shares are not currently offered.
48
If the holders of variable annuity contracts and variable life insurance
policies show minimal interest in any Fund, the Trust's Board of Trustees, by
majority vote, may eliminate the Fund or substitute shares of another investment
company. Any such action by the Board would be subject to compliance with any
requirements for governmental approvals or exemptions or for shareholder
approval. The holders of variable annuity contracts and variable life insurance
policies participating in any such Fund will be notified in writing of the
Trust's intention to eliminate the Fund and given 30 days to transfer amounts
from such Fund to other Funds without incurring any transaction fee. Amounts not
transferred or withdrawn would automatically be transferred, at the discretion
of the Fund's management.
The assets received by the Trust for the issuance or sale of shares of each
Fund and all income, earnings, profits, and proceeds thereof are specifically
allocated to that Fund. They constitute the underlying assets of each Fund, are
segregated on the books of the Trust, and are to be charged with the expenses of
such Fund. Any assets which are not clearly allocable to a particular Fund or
Funds are allocated in a manner determined by the Board of Trustees. Accrued
liabilities which are not clearly allocable to one or more Funds would generally
be allocated among the Funds in proportion to their relative net assets before
adjustment for such unallocated liabilities.
Each issued and outstanding share in a Fund is entitled to participate
equally in dividends and distributions declared with respect to such Fund and in
the net assets of such Fund upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities.
A dividend from the net investment income of the Money Market Fund will be
declared and distributed daily. Dividends from net investment income of the
other Funds will be declared and distributed monthly. The Trust will distribute
all of its net realized capital gains annually. Dividends and capital gains
distributions will normally be reinvested in additional full or fractional
shares of the Fund to which they relate and will be appropriately credited to
investment performance under the variable life insurance policies and variable
annuity contracts participating in that Fund.
The shares of each Fund, when issued, will be fully paid and
non-assessable, and will have no preference, preemptive, exchange or similar
rights. Shares do not have cumulative voting rights.
K. SHAREHOLDER MEETINGS AND VOTING RIGHTS
Under the Trust's Declaration of Trust, the Trust is not required to hold
an annual shareholders' meeting. Normally, for example, there will be no
shareholders meetings for the purpose of electing Trustees.
In addition, it is expected that the Trustees generally will elect their
own successors and appoint Trustees to fill any vacancy, so long as, after
filling the vacancy, at least two-thirds of the Trustees then in office have
been elected by the shareholders.
Notwithstanding the above, if at any time less than a majority of Trustees
in office have been elected by the shareholders, the Trustees must call a
special shareholders' meeting promptly. Also the Trustees will promptly call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Trustee or all of the Trustees, if requested in writing to do so by
holders of 10% or more of the outstanding shares. In this regard, whenever ten
or more shareholders who have been such for at least six months and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the outstanding shares, whichever is less, apply to the Trustees in
writing stating that they wish to communicate with other shareholders with a
view to obtaining signatures to a request for a shareholders' meeting, for
consideration of the removal of any or all of the Trustees and accompanied by
the material which they wish to transmit, the Trustees will within five business
days after receipt either afford to such applicants access to the Trust's
shareholder list or inform such applicants as to the approximate number of
shareholders of record, and the approximate cost of mailing the material. If the
Trustees elect the latter, the Trustees, upon written request of such
applicants, accompanied by the material to be mailed and the reasonable expenses
of mailing, shall promptly mail such material to all shareholders of record,
unless within five business days the Trustees shall mail to such applicants and
file with the SEC, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Trustees to the effect that, in
their opinion, either such material is misleading or in violation of applicable
law and specifying the basis of such opinion.
At any shareholders' meeting, all shares of the Trust of whatever class are
entitled to one vote, and the votes of all classes are cast on an aggregate
basis, except on matters where the interests of the Funds differ. Where the
interests of the Funds differ, the voting is on a Fund-by-Fund basis. Approval
or disapproval by the shareholders in one Fund on such a matter would not
generally be a prerequisite of approval or disapproval by shareholders in
another Fund; and shareholders in a Fund not affected by a matter generally
would not be entitled to vote on that matter. Examples of matters which would
require a Fund-by-Fund vote are changes in the fundamental investment policy of
a particular Fund and approval of investment management or sub-investment
management agreements.
49
Voting of Series I and Series II Shares. Manulife New York and
Manufacturers USA have the right to vote Series I and Series II shares upon
matters that may be voted upon at any Trust shareholders' meeting with respect
to the International Equity Index Fund. These companies will vote all Series I
and Series II shares of the International Equity Index Fund of the Trust issued
to such companies in proportion to the timely voting instructions received from
owners of the contracts participating in separate accounts of such insurance
companies registered under the 1940 Act ("Contract Owner Instructions"). Each
entity votes the shares it owns in proportion to Contract Owner Instructions.
L. SALES AND REDEMPTIONS OF FUND SHARES
"Seed Money" Shares
Typically, when a new Fund is added to the Trust, John Hancock (or one of
its affiliates) initially purchases a substantial amount of that Fund's shares
to provide the new fund with a reasonable asset base with which to commence
operations. For example, the most recent such contributions of "seed money" to
currently available funds have been as follows:
"Seed Money" NAV
Shares Purchased Date of
Fund by John Hancock Purchase
- --------------------------------------------- ---------------- ----------
Large Cap Growth B 10,000,000 8/31/99
Fundamental Value............................ 5,000,000 8/31/99
Fundamental Value B.......................... 5,000,000 8/31/99
Fundamental Growth........................... 5,000,000 8/31/99
Mid Cap Value................................ 5,000,000 4/30/03
Mid Cap Value B.............................. 5,000,000 5/1/98
Small Cap Value.............................. 5,000,000 8/31/99
Health Sciences.............................. 20,000,000 5/1/01
Financial Industries......................... 200,000 4/29/03
International Opportunities.................. 15,000,000 5/1/96
Overseas Equity.............................. 20,000,000 5/1/96
Overseas Equity C............................ 10,000,000 5/1/98
Bond Index................................... 25,000,000 5/1/98
Total Return Bond............................ 25,000,000 4/30/03
High Yield Bond.............................. 10,000,000 5/1/98
John Hancock (or its affiliate) may redeem these NAV shares (and thus
withdraw its seed money investment) at some time. However, before withdrawing
any part of their interests in any Fund, John Hancock (or its affiliate) will
consider any possible adverse impact the withdrawal might have on that Fund.
Purchases and redemptions of seed money shares are made at the applicable
Fund's net asset value per share (with no additions or deductions for charges)
next computed after the purchase or redemption order is placed.
As of December 31, 2003, only the following Funds still have seed money
that has not been withdrawn: Mid Cap Value Fund, Overseas Equity Fund, Overseas
Equity C Fund (then known as the "Emerging Markets Equity Fund"), Health
Sciences Fund and Total Return Bond Fund.
Shares Sold and Redeemed In Connection With Transactions Under Variable Annuity
Contracts and Variable Life Insurance Policies
Fund shares are sold at their net asset value as next determined after
receipt of net premiums by the Separate Account, without the addition of any
selling commission or sales load.
Shares are redeemed at their net asset value as next determined after
receipt of net surrender requests by the Separate Account. No fee is charged on
redemption. Redemption payments will usually be paid within seven days after
receipt of the redemption request, except that the right of redemption may be
suspended or payments postponed whenever permitted by applicable law and
regulations. Redemptions are normally made in cash, but the Trust reserves the
right, at its discretion, to make full or partial payment by assignment to the
appropriate Separate Account of portfolio securities at their value used in
determining the redemption price. In such cases, the Separate Account would
incur brokerage costs should it wish to liquidate these portfolio securities.
50
Trust shares are also sold and redeemed as a result of transfer requests,
loans, loan repayments, and similar Separate Account transactions, in each case
without any sales load or commission or at the net asset value per share
computed for the day as of which such Separate Account transactions are
effected.
M. COMPUTING THE FUNDS' NET ASSET VALUE
Each Fund determines its net asset value per share once daily as of the
close of the customary trading session of the New York Stock Exchange
("Exchange") on each business day of the Fund. The Exchange generally closes at
4:00 p.m. Eastern Standard Time. However, ETFs and certain derivative
instruments may be valued using prices as late as 4:15 p.m. Eastern Standard
Time. In the event the Exchange closes at any time other than 4:00 p.m. Eastern
Standard Time on a particular day, each Fund will determine its net asset value
per share as of the close of the Exchange on that day.
The net asset value per share of each Fund is determined by adding the
value of all portfolio securities and other assets, deducting all portfolio
liabilities, and dividing by the number of outstanding shares. All Trust
expenses will be accrued daily for this purpose.
Short-term investments with a remaining maturity of 60 days or less, and
all investments of the Money Market Fund, are valued at "amortized cost," which
approximates market value. This involves valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates. While this
method provides certainty in valuation, it may result in periods during which
the value of an instrument, as determined by amortized cost, is higher or lower
than the price the Fund would receive upon the sale of the instrument.
The Board of Trustees has established procedures designed to stabilize the
Money Market Fund's price per share, as computed for the purpose of sales and
redemptions, at $1. There can be no assurance, however, that the Fund will at
all times be able to maintain a constant $1 net asset value per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's net asset value, calculated by using
available market quotations, deviates from $1 per share and, if so, whether such
deviation may result in material dilution, or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of Trustees will take such corrective action as it regards as
necessary and appropriate. Such action may cause losses or gains to be recorded
for the Fund, including decreases or increases in the Fund's net asset value per
share.
Securities and call and put options that are listed on a stock exchange are
normally valued at the closing sales price. If there were no sales during the
day, they are normally valued at the last previous sale or bid price reported,
as are equity securities that are traded in the over-the-counter market.
Non-exchange traded debt securities (other than certain short-term
investments) are valued on the basis of valuations furnished by a pricing
service which uses electronic data processing techniques, without exclusive
reliance upon quoted prices.
Any other security for which market quotations are not readily available,
and any other property for which valuation is not otherwise available, is valued
at fair value as determined in good faith by, or under the direction of, the
Board of Trustees.
Financial futures contracts, options thereon and options on stock indexes
are valued at the last trade price of the day. In the absence of a trade on a
given day, the value generally is used which is established by the exchange on
which the instrument is traded.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day on which the New York Stock Exchange is open. The values
of such securities used in computing net asset value per share are normally
determined as of such times. Trading of these securities may not take place on
every New York Stock Exchange business day and may take place on days which are
not business days in New York. The Trust calculates net asset value per share as
of the close of regular trading on the New York Stock Exchange on each day on
which that exchange is open. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of many of the Funds'
securities used in such calculation. If events affecting the value of such
securities occur between the time when their price is determined and the time as
of which the Fund's net asset value is calculated, such securities may be valued
at fair value by or under the direction of the Board of Trustees.
51
N. TAXES
The Trust intends that each Fund qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code ("Code"). This requires that
each Fund comply with certain requirements as to the nature of its income and
amounts of dividends and other distributions it pays. Also, in order to qualify
under Subchapter M, at the end of each quarter of a Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets must be represented by cash
and cash items, U.S. Government securities, securities of other regulated
investment companies, and other securities, with such other securities limited,
in respect of any one issuer, to an amount that does not exceed 10% of the
voting securities of such issuer or 5% of the value of the Fund's total assets;
and (ii) not more than 25% of the value of its assets may be invested in the
securities (other than U.S. Government securities and securities of other RICs)
of any one issuer or two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades or businesses.
The Trust also intends that each Fund comply with certain other
diversification requirements, promulgated under Section 817(h) of the Code.
Under these requirements, no more than 55% of the total value of the assets of
each Fund may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments and no more than 90% by
any four investments. Generally, for these purposes, all securities of the same
issuer are treated as one investment. In the context of U.S. Government
securities (including any security that is issued, guaranteed or insured by the
United States or an instrumentality of the United States), each U.S. Government
agency or instrumentality is treated as a separate issuer.
Assuming the Funds qualify as regulated investment companies under
Subchapter M, and meet certain distribution requirements they will not owe any
income taxes. On the other hand, if a Fund fails to qualify under Subchapter M,
or fails to distribute a sufficient amount of income or gains it may incur
income tax liabilities, which will negatively affect its investment performance.
Also, qualification under Subchapter M, as well as compliance with the
Section 817(h) diversification requirements, (among other things) are necessary
to secure the tax treatment intended for most holders of variable annuity
contracts and variable life insurance policies that are supported by the Trust.
Therefore, any such failure to qualify under Subchapter M or to meet the
diversification standards under Section 817(h) could have serious adverse
consequences for such investors.
For a discussion of these and other tax implications of owning a variable
annuity contract or a variable life insurance policy for which the Fund serves
as the investment medium, please refer to the Prospectus for such contract or
policy attached at the front of this Prospectus.
Those Funds that invest substantial amounts of their assets in foreign
securities may be able to make an election to pass through to the insurance
company issuing the variable annuity contract or a variable life insurance
policy any taxes withheld by foreign taxing jurisdictions on foreign source
income. Such an election will result in additional taxable income and income tax
to the insurance company. The amount of additional income tax, however, may be
more than offset by credits for the foreign taxes withheld, which are also
passed through.
O. INFORMATION ABOUT FUND PERFORMANCE
How Money Market Fund Yields Are Calculated
The Money Market Fund may advertise investment performance figures,
including its current yield and its effective yield.
The Money Market Fund's yield is its current investment income, expressed
in annualized terms. The current yield is based on a specified
seven-calendar-day period. It is computed by (1) determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period, (2)
dividing the net change in account value by the value of the account at the
beginning of the base period to get the base period return, then (3) multiplying
the base period return by 52.15 (365 divided by 7). The resulting yield figure
is carried to the nearest hundredth of one percent.
The calculations include the value of additional shares purchased with any
dividends paid on the original share and the value of dividends declared on both
the original share and any such additional shares. The capital changes excluded
from the calculation are realized capital gains and losses from the sale of
securities and unrealized appreciation and depreciation.
Compound (effective) yield for the Fund will be computed by dividing the
seven-day annualized yield (determined as above) by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
The Fund's yield will fluctuate depending upon market conditions, the type,
quality, and maturity of the instruments in the Fund, and its expenses.
52
Charges Under Variable Life Insurance and Variable Annuity Policies
Yield and total return quotations do not reflect any charges imposed on any
Separate Account or otherwise imposed pursuant to the variable life insurance
policies and variable annuity contracts that are supported by the Funds. (Those
charges are discussed in the prospectus for such policies or contracts.)
Therefore, the yield or total return of any Fund is not comparable to that of a
publicly available fund. Nor should yield or total return quotations be
considered representative of the Fund's yield or total return in any future
period.
P. LEGAL MATTERS
The law firm of Foley & Lardner of Washington, D.C., advises the Trust on
certain legal matters relating to the Federal securities laws.
Q. REPORTS TO CONTRACTHOLDERS
Annual and semi-annual reports containing financial statements of the
Trust, as well as any materials soliciting voting instructions for Trust shares,
will be sent to variable life insurance and annuity contractowners having an
interest in the Trust.
53
APPENDIX A
CORPORATE BOND RATINGS
Moody's Investors Service, Inc. describes its ratings for corporate bonds
as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protection elements
may be of greater amplitude, or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba have speculative elements and their future cannot
be considered as well assured. The protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both good and bad
times over the future. Bonds in this class are characterized by uncertainty of
position.
Bonds which are rated B generally lack characteristics of a desirable
investment; assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca are speculative in a high degree. They are often
in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds. They can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's Corporation describes its ratings for corporate bonds as
follows:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances,
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC, C -- Bonds rated in these categories are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of
54
speculation and C the highest degree of speculation. While this debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C1 -- This rating is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in default and payment of interest and/or repayment
of principal is in arrears.
Fitch Inc. describes its ratings for corporate bonds as follows:
AAA -- Highest credit quality. 'AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA -- Very high credit quality. 'AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A -- High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for
higher ratings.
BBB -- Good credit quality. 'BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
BB -- Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B -- Highly speculative. 'B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic environment.
CCC, C, C -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of
some kind appears probable. 'C' ratings signal imminent default.
DDD, DD, D -- Default. Securities are not meeting current obligations and
are extremely speculative. ~DDD' designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, 'DD' indicates expected recovery of 50%-90% of
such outstanding, and 'D' the lowest recovery potential, i.e. below 50%.
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
rating category or to categories below 'CCC'.
55
APPENDIX B
PROXY VOTING POLICIES AND PROCEDURES
The following pages of this appendix contain information on proxy voting
polices, guidelines and procedures of the Trust and, with respect to its
services to the Trust, John Hancock. After that, this appendix contains
information on the proxy voting polices, guidelines and procedures of the
following subadvisers:
- --------------------------------------------------------------------------------
Subadviser Appendix Page
- --------------------------------------------------------------------------------
Independence Investment LLC B - 5
- --------------------------------------------------------------------------------
John Hancock Advisers, LLC B - 7
- --------------------------------------------------------------------------------
Declaration Management & Research Company B - 11
- --------------------------------------------------------------------------------
SSgA Funds Management, Inc. B - 13
- --------------------------------------------------------------------------------
T. Rowe Price Associates, Inc. B - 18
- --------------------------------------------------------------------------------
Morgan Stanley Investment Management Inc. B - 20
- --------------------------------------------------------------------------------
Standish Mellon Asset Management Company LLC B - 25
- --------------------------------------------------------------------------------
Wellington Management Company, LLP B - 26
- --------------------------------------------------------------------------------
Capital Guardian Trust Company B - 27
- --------------------------------------------------------------------------------
Pacific Investment Management Company LLC B - 30
- --------------------------------------------------------------------------------
RREEF America L.L.C. B - 36
- --------------------------------------------------------------------------------
Fidelity Management & Research Company B - 42
- --------------------------------------------------------------------------------
B - 1
JOHN HANCOCK VARIABLE SERIES TRUST I
PROXY VOTING POLICIES AND PROCEDURES
I. BACKGROUND
On January 23, 2003, the Securities and Exchange Commission ("SEC")
adopted a final rule regarding the Disclosure of Proxy Voting Policies and
Proxy Voting Records by Registered Management Investment Companies (the
"IC Proxy Voting Rule"). The IC Proxy Voting Rule requires that a
registered management investment company (1) disclose the policies and
procedures that it uses to determine how it votes proxies relating to
portfolio securities, and (2) file its complete proxy voting record on an
annual basis with the SEC on Form N-PX, and make this record available to
shareholders.
On January 23, 2003, the SEC also adopted a final rule regarding Proxy
Voting by Investment Advisers (the "IA Proxy Voting Rule" or Rule
206(4)-6). The IA Proxy Voting Rule requires, among other things, that an
investment adviser that exercises voting authority over client securities
adopt policies and procedures reasonably designed to ensure the adviser
votes proxies in the best interest of clients and that the adviser
maintains certain records relating to proxy voting.
These Policies and Procedures (the "JHVST Proxy Voting Procedures") govern
the exercise of voting authority with respect to portfolio securities of
the John Hancock Variable Series Trust I (the "Trust" or "JHVST"),
disclosures required by the IC Proxy Voting Rules, and the related matters
set forth below.
II. DELEGATION OF VOTING AUTHORITY WITH RESPECT TO PORTFOLIO SECURITIES TO
SUB-INVESTMENT MANAGERS
The Trust has delegated voting authority with respect to portfolio
securities to the sub-investment managers in the Sub-Investment Management
Agreements among the Trust, John Hancock and the sub-investment managers.
Consistent with this delegation, each sub-investment manager is
responsible for the following:
A. Adopting and implementing written policies and procedures in
accordance with Rule 206(4)-6 reasonably designed to ensure that the
sub-investment manager votes portfolio securities in the best interest
of shareholders of the JHVST Fund (or a sleeve of the Fund) holding
those portfolio securities. Those procedures should also address
material conflicts that may arise between on one hand, the interest of
the Fund (a sleeve of the Fund) shareholders, and on the other hand,
the interest of the Fund's investment adviser, principal underwriter
or any affiliated person of the fund, its investment adviser, or its
principal underwriter;
B. Exercising voting authority with respect to portfolio securities;
C. Providing John Hancock Life Insurance Company ("John Hancock") with a
copy and a description of the sub-investment manager's proxy voting
procedures and any amendment or revisions to those procedures or the
description;
D. Providing John Hancock with a written record, in accordance with
instructions provided by John Hancock, of how the sub-investment
manager exercised votes with respect to portfolio securities; and
E. Providing an annual report regarding proxy voting according to
instructions provided by John Hancock.
John Hancock, the JHVST's investment adviser, will not have voting
authority with respect to portfolio securities, but will have the
responsibilities set forth below.
III. DISCLOSURES
John Hancock will be responsible for making the following disclosures on
behalf of the Trust:
A. Description of Proxy Voting Policies and Procedures in Registration
Statements: All registration statements and post-effective amendments
that are annual updates to effective registrations statements, filed
on or after July 1, 2003, will include a copy of, or a description of,
the JHVST Proxy Voting Procedures and the proxy voting procedures of
all sub-investment managers.
B - 2
IV. DISCLOSURES - continued
B. Availability of the Description of Policies and Procedures: All
shareholder annual and semi-annual reports transmitted after the
disclosure in Section III.A. is made, will disclose that shareholders
may obtain a copy of a description of the Trust's proxy voting
policies and procedures by the following methods:
1. Upon request and without charge, by calling a specified toll-free
(or collect) telephone number, or
2. On the SEC's website at http://www.sec.gov.
C. Availability of Fund's Proxy Voting Record: All initial registration
statements and post-effective amendments that are annual updates to
effective registration statements, filed on or after August 31, 2004,
as well as all shareholder reports filed after August 31, 2004, will
disclose that a shareholder may obtain a copy of the Trust's actual
proxy voting record on Form N-PX by the following methods:
1. Upon request and without charge, by calling a specified toll-free
(or collect) telephone number, or
2. On the SEC's website at http://www.sec.gov.
D. Requests for Information: If John Hancock receives a request for
information as provided in Section III.B. or III.C., John Hancock will
respond to the request within three business days of receipt of the
request, by first class mail or other means designed to ensure equally
prompt delivery.
V. PREPARATION AND FILING OF FORM N-PX
John Hancock will be responsible for filing Form N-PX on behalf of the
Trust, as required by Rule 30b1-4 under the Investment Company Act of
1940. The sub-investment mangers are responsible for providing to John
Hancock the information required to be filed in the Form N-PX at a time
designated by and in a format acceptable to John Hancock.
VI. ANNUAL REPORT ON PROXY VOTING
On an annual basis, John Hancock will prepare a summary report regarding
the sub-investment managers' proxy voting policies and procedures and
proxy voting activity with respect to portfolio securities for
presentation to and consideration by the Trustees. The sub-investment
managers will provide information reasonably requested by John Hancock for
this annual report.
VI. AMENDMENTS TO SUB-INVESTMENT MANAGER PROXY VOTING POLICIES AND PROCEDURES
Each sub-investment manager will provide to John Hancock a copy of, and a
description of, its proxy voting policies and procedures. If a
sub-investment manager amends or otherwise revises its proxy voting
policies and procedures, the sub-investment manager will provide a copy to
John Hancock of its amended or revised proxy voting policies and
procedures (and any revisions to its description of those policies and
procedures) by no later than ten (10) business days after the effective
date of the amendment or revision.
VII. RECORDKEEPING
A. Each sub-investment manager shall maintain the books and records
relating to proxy voting required under Rule 204-2 that it has for a
period of not less than five years from the end of the fiscal year
during which the last entry was made on the record, the first two
years in an appropriate office of the sub-investment manager. These
records include:
1. The sub-investment manager's proxy voting policies and procedures
(and any amendments or revisions);
2. Proxy statements that the sub-investment manager receives
regarding portfolio securities;
3. Records of each vote cast by the sub-investment manager; and
4. Any document prepared by the sub-investment manager that was
material to making a decision on how to vote with respect to
portfolio securities, or that memorialized a decision to vote.
B. John Hancock shall maintain the books and records relating to proxy
voting required under Rule 204-2 that it has for a period of not less
than five years from the end of the fiscal year during which the last
entry was made on the record, the first two years in an appropriate
office of John Hancock. These records include:
1. The JHVST Proxy Voting Procedures (and any amendments or
revisions); and
2. A copy of each written request for information on proxy voting by
a shareholder, and a copy of any written response.
B - 3
VIII. MISCELLANEOUS
A. Any sub-investment manager of a JHVST Fund that invests exclusively in
non-voting securities is not required to comply with these JHVST Proxy
Voting Procedures with respect to that Fund, except that the
sub-investment manager will be required to provide a certification to
John Hancock that the Fund invests exclusively in non-voting
securities.
B. The Trust participates in a securities lending program. Nothing in
these Procedures should be interpreted as requiring that a
sub-investment manager exercise voting authority with respect to a
portfolio security that is out on loan at the time.
C. Each sub-investment manager is obligated to provide to John Hancock
promptly and without charge, any record or information regarding proxy
voting reasonably requested by John Hancock.
D. The fact that one JHVST fund or one sleeve of a JHVST fund votes a
proxy one way and another JHVST fund or another sleeve of the JHVST
fund votes the same proxy another way or does not vote the proxy will
not, by itself, constitute a material conflict of interest.
(Effective: July 1, 2003)
B - 4
INDEPENDENCE INVESTMENT LLC
("Independence")
PROXY VOTING POLICIES AND PROCEDURES
At Independence, we recognize that many decisions regarding proxy voting may
affect the value of a client's account, and, therefore, should be resolved based
on in-depth analysis and careful consideration. The following proxy voting
policy sets forth both our principles and our process for voting proxies on
securities held in client accounts where Independence has discretion to vote the
proxies.
General Principles
- ------------------
In order to set a framework within which proxy questions should be considered
and voted, the following general principles should be applied:
1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies for
a client's account should be exercised keeping in mind a fiduciary's duty
to use its best efforts to preserve or enhance the value of the client's
account. We should vote on proxy questions with the goal of fostering the
interests of the client (or the participants and beneficiaries in the case
of an ERISA account).
2) Proxy questions should be considered within the individual circumstances of
the issuer. It is possible that individual circumstances might mean that a
given proxy question could be voted differently than what is generally done
in other cases.
3) If a proxy question clearly has the capability of affecting the economic
value of the issuer's stock, the question should be voted in a way that
attempts to preserve, or give the opportunity for enhancement of, the
stock's economic value.
4) In certain circumstances, even though a proposal might appear to be
beneficial or detrimental in the short term, our analysis will conclude
that over the long term greater value may be realized by voting in a
different manner.
5) It is our general policy that when we are given authority to vote proxies
for a client's account, we must be authorized to vote all proxies for the
account in our discretion. We do not generally accept partial voting
authority nor do we generally accept instructions from clients on how to
vote on specific issues, except in the case of registered investment
companies and, in limited instances, certain clients such as labor unions
may direct us to vote proxies in accordance with a specific set of
guidelines or recommendations appropriate to their circumstances, in which
case we will not have voting discretion but will vote in accordance with
the client's direction. Other clients may wish to retain proxy voting
authority and vote their own proxies if necessary in order to satisfy their
individual social, environmental or other goals.
We maintain a set of proxy voting guidelines that describe in greater detail how
we generally vote specific issues for our clients. While it is not an exhaustive
list, it is intended to serve as the foundation on which we make most of our
proxy voting decisions. The guidelines are available to clients upon request. We
will from time to time review this proxy voting policy and our guidelines and
may adopt changes from time to time. Clients may contact the Compliance Office
by calling 617-228-8603 or via e-mail at compliance@independence.com for a copy
of our current guidelines or to obtain a record of how we voted the proxies for
their account.
Process
- -------
At Independence, the fundamental analysts are responsible for performing
research on the companies in which we invest. The same analysts are generally
responsible for decisions regarding proxy voting, as they are the most familiar
with company-specific issues. Portfolio managers also provide input when
appropriate.
We currently use Institutional Shareholders Services, Inc. ("ISS") to monitor
and complete the proxy voting process for our equity portfolio holdings. ISS is
responsible for ascertaining that proxies are received, voted and sent back on a
timely basis, as well as maintaining all of the proxy voting records with
respect to our clients' holdings. Each day our proxy administrator sends ISS our
complete list of portfolio holdings. ISS notifies us of shareholder meetings and
provides us with an electronic platform on which to vote the proxies. ISS also
provides us with an analysis of proxy issues and recommendations for voting,
based on criteria that we have approved. Our analysts will consider ISS's
recommendations, but voting will be based upon our own analysis. Our analysts
direct the manner in which proxies are to be voted, and ISS completes the voting
process.
We may abstain from voting a client proxy if we conclude that the effect on the
client's economic interests or the value of the portfolio holding is
indeterminable or insignificant. We may also abstain from voting a client proxy
for cost reasons (e.g., costs associated with
B - 5
voting proxies of non-U.S. securities). In accordance with our fiduciary duties,
we weigh the costs and benefits of voting proxy proposals relating to foreign
securities and make an informed decision with respect to whether voting a given
proxy proposal is prudent. Our decision takes into account the effect that the
vote of our client, either by itself or together with other votes, is expected
to have on the value of our client's investment and whether this expected effect
would outweigh the cost of voting.
II. Conflicts of Interest
---------------------
We manage the assets of various public and private company clients, and invest
in the equity securities of certain public companies on behalf of our
clients./2/ We recognize that the potential for conflicts of interest could
arise in situations where we have discretion to vote client proxies and where we
have material business relationships/3/ or material personal/family
relationships/4/ with these issuers (or with a potential target or acquirer, in
the case of proxy vote in connection with a takeover). To address these
potential conflicts we have established a Proxy Voting Committee ("the
Committee"). The Committee consists of the Head of US Equities, the Head of
Fundamental Research and the members of the Compliance Office. The Committee
will use reasonable efforts to determine whether a potential conflict may exist,
including maintaining a list of clients with whom we have a material business
relationship, and requiring analysts to screen the proxies identified by ISS
against such list and to bring such conflicts, and any other conflicts of which
they are aware, to the attention of the Committee. However, a potential conflict
shall be deemed to exist only if one or more of the members of the Committee, or
the analyst responsible for voting the proxy, actually knows of the potential
conflict. The Committee will work with the analyst assigned to the specific
security to oversee the proxy voting process for securities where we believe we
may have potential conflicts.
The Committee will meet to decide how to vote the proxy of any security with
respect to which we have identified a potential conflict. The Committee will
consider the analyst's recommendation, make a decision on how to vote the proxy
and document the Committee's rationale for its decision.
Independence is a wholly owned subsidiary of John Hancock Life Insurance
Company, which is a wholly owned subsidiary of John Hancock Financial Services,
Inc. ("JHFS"), a public company. It is our general policy not to acquire or hold
JHFS stock on behalf of our clients. However, in the event that a client were to
hold JHFS stock in a portfolio which we manage, and we were responsible for
voting a JHFS proxy on behalf of the client, the Committee would decide on how
to vote the JHFS proxy. The Committee would, in most cases, base its proxy
voting decision according to the guidance provided by ISS. The Committee will
document the rationale for its decision.
It is Independence's policy not to accept any input from any other person or
entity, including its affiliates when voting proxies for any security. In the
event that an Independence employee was contacted by any affiliate, or any other
person or entity, other than ISS or through standard materials available to all
shareholders, with a recommendation on how to vote a specific proxy, the event
would be reported to the Compliance Office and would be documented. The
Committee would then decide how to vote the proxy in question and would document
the rationale for its decision.
If there is controversy or uncertainty about how any particular proxy question
should be voted, or if an analyst or a Committee member believes that he or she
has been pressured to vote in a certain way, he or she will consult with the
Committee or with a member of the Compliance Office, and a decision will be made
whether to refer the proxy to the Committee for voting. Final decisions on proxy
voting will ultimately be made with the goal of enhancing the value of our
clients' investments.
Adopted 8/03
- ----------
/2/ It is Independence's general policy not to invest in private securities such
as Rule 144A securities. If a portfolio were to hold a private security,
however, and a proxy needed to be voted, we would vote in accordance with our
established proxy voting policy including our process for voting securities
where a conflict of interest was present.
/3/ For purposes of this proxy voting policy, a "material business relationship"
is considered to arise in the event a client has contributed more than 5% of
Independence's annual revenues for the most recent fiscal year or is reasonably
expected to contribute this amount for the current fiscal year.
/4/ For purposes of this proxy voting policy, a "material personal/family
relationship" is one that would be reasonably likely to influence how we vote
proxies. To identify any such relationships, the Proxy Voting Committee will
obtain information on a regular basis about (i) personal and/or family
relationships between any Independence employee who is involved in the proxy
voting process (e.g., analyst, portfolio manager, and/or members of the Proxy
Voting Committee, as applicable) or senior executives, and directors or senior
executives of issuers for which the adviser may vote proxies, and (ii) personal
and/or immediate family investments of such employees in issuers which exceed 5%
of the outstanding stock of the issuers.
B - 6
JOHN HANCOCK ADVISERS, LLC
SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES
We believe in placing our clients' interests first. Before we invest in a
particular stock or bond, our team of portfolio managers and research analysts
look closely at the company by examining its earnings history, its management
team and its place in the market. Once we invest, we monitor all our clients'
holdings, to ensure that they maintain their potential to produce results for
investors.
As part of our active investment management strategy, we keep a close eye on
each company we invest in. Routinely, companies issue proxies by which they ask
investors like us to vote for or against a change, such as a new management
team, a new business procedure or an acquisition. We base our decisions on how
to vote these proxies with the goal of maximizing the value of our clients'
investments.
Currently, John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management
Corporation ("Sovereign") manage open-end funds, closed-end funds and portfolios
for institutions and high-net-worth investors. Occasionally, we utilize the
expertise of an outside asset manager by means of a subadvisory agreement. In
all cases, JHA or Sovereign makes the final decision as to how to vote our
clients' proxies. There is one exception, however, and that pertains to our
international accounts. The investment management team for international
investments votes the proxies for the accounts they manage. Unless voting is
specifically retained by the named fiduciary of the client, JHA and Sovereign
will vote proxies for ERISA clients.
In order to ensure a consistent, balanced approach across all our investment
teams, we have established a proxy oversight group comprised of associates from
our investment, operations and legal teams. The group has developed a set of
policies and procedures that detail the standards for how JHA and Sovereign vote
proxies. The guidelines of JHA have been approved and adopted by each fund
client's board of trustees who have voted to delegate proxy voting authority to
their investment adviser, JHA. JHA and Sovereign's other clients have granted us
the authority to vote proxies in our advisory contracts or comparable documents.
JHA and Sovereign have hired a third party proxy voting service which has been
instructed to vote all proxies in accordance with our established guidelines
except as otherwise instructed.
In evaluating proxy issues, our proxy oversight group may consider information
from many sources, including the portfolio manager, management of a company
presenting a proposal, shareholder groups, and independent proxy research
services. Proxies for securities on loan through securities lending programs
will generally not be voted, however a decision may be made to recall a security
for voting purposes if the issue is material.
Below are the guidelines we adhere to when voting proxies. Please keep in mind
that these are purely guidelines. Our actual votes will be driven by the
particular circumstances of each proxy. From time to time votes may ultimately
be cast on a case-by-case basis, taking into consideration relevant facts and
circumstances at the time of the vote. Decisions on these matters (case-by-case,
abstention, recall) will normally be made by a portfolio manager under the
supervision of the chief investment officer and the proxy oversight group. We
may abstain from voting a proxy if we conclude that the effect on our clients'
economic interests or the value of the portfolio holding is indeterminable or
insignificant.
PROXY VOTING GUIDELINES
Board of Directors
------------------
We believe good corporate governance evolves from an independent board.
We support the election of uncontested director nominees, but will withhold
our vote for any nominee attending less than 75% of the board and committee
meetings during the previous fiscal year. Contested elections will be
considered on a case by case basis by the proxy oversight group, taking
into account the nominee's qualifications. We will support management's
ability to set the size of the board of directors and to fill vacancies
without shareholder approval but will not support a board that has fewer
than 3 directors or allows for the removal of a director without cause.
We will support declassification of a board and block efforts to adopt a
classified board structure. This structure typically divides the board into
classes with each class serving a staggered term.
In addition, we support proposals for board indemnification and limitation
of director liability, as long as they are consistent with corporate law
and shareholders' interests. We believe that this is necessary to attract
qualified board members.
B - 7
Selection of Auditors
---------------------
We believe an independent audit committee can best determine an auditor's
qualifications.
We will vote for management proposals to ratify the board's selection of
auditors, and for proposals to increase the independence of audit
committees.
Capitalization
--------------
We will vote for a proposal to increase or decrease authorized common or
preferred stock and the issuance of common stock, but will vote against a
proposal to issue or convert preferred or multiple classes of stock if the
board has unlimited rights to set the terms and conditions of the shares,
or if the shares have voting rights inferior or superior to those of other
shareholders.
In addition, we will support a management proposal to: create or restore
preemptive rights; approve a stock repurchase program; approve a stock
split or reverse stock split; and, approve the issuance or exercise of
stock warrants
Acquisitions, mergers and corporate restructuring
-------------------------------------------------
Proposals to merge with or acquire another company will be voted on a
case-by-case basis, as will proposals for recapitalization, restructuring,
leveraged buyout, sale of assets, bankruptcy or liquidation. We will vote
against a reincorporation proposal if it would reduce shareholder rights.
We will vote against a management proposal to ratify or adopt a poison pill
or to establish a supermajority voting provision to approve a merger or
other business combination. We would however support a management proposal
to opt out of a state takeover statutory provision, to spin-off certain
operations or divisions and to establish a fair price provision.
Corporate Structure and Shareholder Rights
------------------------------------------
In general, we support proposals that foster good corporate governance
procedures and that provide shareholders with voting power equal to their
equity interest in the company.
To preserve shareholder rights, we will vote against a management proposal
to restrict shareholders' right to: call a special meeting and to eliminate
a shareholders' right to act by written consent. In addition, we will not
support a management proposal to adopt a supermajority vote requirement to
change certain by-law or charter provisions or a non-technical amendment to
by-laws or a charter that reduces shareholder rights.
Equity-based compensation
-------------------------
Equity-based compensation is designed to attract, retain and motivate
talented executives and independent directors, but should not be so
significant as to materially dilute shareholders' interests.
We will vote against the adoption or amendment of a stock option plan if
the:
. The compensation committee is not fully independent
. plan dilution is more than 10% of outstanding common stock,
. company allows or has allowed the re-pricing or replacement of
underwater options in the past three fiscal years (or the exchange of
underwater options) without shareholder approval.
. if the option is not premium priced or indexed, or does not vest based
on future performance
With respect to the adoption or amendment of employee stock purchase plans
or a stock award plan, we will vote against management if:
. the plan allows stock to be purchased at less than 85% of fair market
value;
. this plan dilutes outstanding common equity greater than 10%
. all stock purchase plans, including the proposed plan, exceed 15% of
outstanding common equity
. if the potential dilution from all company plans is more than 85%
With respect to director stock incentive/option plans, we will vote against
management if:
. the minimum vesting period for options or time lapsing restricted
stock is les than one year
. if the potential dilution for all company plans is more than 85%
B - 8
Other Business
--------------
For routine business matters which are the subject of many proxy related
questions, we will vote with management proposals to:
. change the company name;
. approve other business;
. adjourn meetings;
. make technical amendments to the by-laws or charters;
. approve financial statements;
. approve an employment agreement or contract.
Shareholder Proposals
---------------------
Shareholders are permitted per SEC regulations to submit proposals for
inclusion in a company's proxy statement. We will generally vote against
shareholder proposals and in accordance with the recommendation of
management except as follows where we will vote for proposals:
. calling for shareholder ratification of auditors;
. calling for auditors to attend annual meetings;
. seeking to increase board independence;
. requiring minimum stock ownership by directors;
. seeking to create a nominating committee or to increase the
independence of the nominating committee;
. seeking to increase the independence of the audit committee.
Corporate and social policy issues
----------------------------------
We believe that "ordinary business matters" are primarily the
responsibility of management and should be approved solely by the
corporation's board of directors.
Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. We
generally vote against business practice proposals and abstain on social
policy issues, though we may make exceptions in certain instances where we
believe a proposal has substantial economic implications.
PROXY VOTING PROCEDURES
The role of the proxy voting service
------------------------------------
JHA and Sovereign Asset Management Corporation ("Sovereign") have hired a
proxy voting service to assist with the voting of client proxies. The proxy
service coordinates with client custodians to ensure that proxies are
received for securities held in client accounts and acted on in a timely
manner. The proxy service votes all proxies received in accordance with the
proxy voting guidelines established and adopted by JHA and Sovereign. When
it is unclear how to apply a particular proxy voting guideline or when a
particular proposal is not covered by the guidelines, the proxy voting
service will contact the proxy oversight group coordinator for a
resolution.
The role of the proxy oversight group and coordinator
-----------------------------------------------------
The coordinator will interact directly with the proxy voting service to
resolve any issues the proxy voting service brings to the attention of JHA
or Sovereign. When a question arises regarding how a proxy should be voted
the coordinator contacts the firm's investment professionals and the proxy
oversight group for a resolution. In addition the coordinator ensures that
the proxy voting service receives responses in a timely manner. Also, the
coordinator is responsible for identifying whether, when a voting issue
arises, there is a potential conflict of interest situation and then
escalating the issue to the firm's Executive Committee. For securities out
on loan as part of a securities lending program, if a decision is made to
vote a proxy, the coordinator will manage the return/recall of the
securities so the proxy can be voted.
The role of mutual fund trustees
--------------------------------
The boards of trustees of our mutual fund clients have reviewed and adopted
the proxy voting guidelines of the funds' investment adviser, JHA. The
trustees will periodically review the proxy voting guidelines and suggest
changes they deem advisable.
B - 9
Conflicts of interest
---------------------
Conflicts of interest are resolved in the best interest of clients.
With respect to potential conflicts of interest, proxies will be voted in
accordance with JHA's or Sovereign's predetermined policies. If application
of the predetermined policy is unclear or does not address a particular
proposal, a special internal review by the JHA Executive Committee or
Sovereign Executive Committee will determine the vote. After voting, a
report will be made to the client (in the case of an investment company, to
the fund's board of trustees), if requested. An example of a conflict of
interest created with respect to a proxy solicitation is when JHA or
Sovereign must vote the proxies of companies that they provide investment
advice to or are currently seeking to provide investment advice to, such as
to pension plans.
B - 10
DECLARATION MANAGEMENT & RESEARCH LLC
("Declaration")
PROXY VOTING POLICY AND PROCEDURES
Declaration is a fixed income manager and the securities we purchase for client
accounts are predominantly fixed income securities. Accordingly, we are seldom
if ever called upon to vote equity securities on our clients' behalf. However,
in the event we were granted the discretion to vote proxies for a client's
account and an occasion arose where an equity security needed to be voted, we
would follow the following proxy voting policy in carrying out our
responsibilities to that client.
I. GENERAL PRINCIPLES
In order to set a framework within which proxy questions should be
considered and voted, the following general principles should be applied:
1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies
for a client's account should be exercised keeping in mind a
fiduciary's duty to use its best efforts to preserve or enhance the
value of the client's account. We should vote on proxy questions with
the goal of fostering the interests of the client (or the participants
and beneficiaries in the case of an ERISA account).
2) Proxy questions should be considered within the individual
circumstances of the issuer. It is possible that individual
circumstances might mean that a given proxy question could be voted
differently than what is generally done in other cases.
3) If a proxy question clearly has the capability of affecting the
economic value of the issuer's stock, the question should be voted in a
way that attempts to preserve, or give the opportunity for enhancement
of, the stock's economic value.
4) In certain circumstances, even though a proposal might appear to be
beneficial or detrimental in the short term, our analysis will conclude
that over the long term greater value may be realized by voting in a
different manner.
5) It is our policy that when we are given authority to vote proxies for a
client's account, we must be authorized to vote all proxies for the
account in our discretion. We do not accept partial voting authority
nor do we accept instructions from clients on how to vote on specific
issues, except in the case of registered investment companies. Clients
may wish to retain proxy voting authority and vote their own proxies if
necessary in order to satisfy their individual social, environmental or
other goals.
Since we cannot currently anticipate circumstances in which Declaration
would be called upon to vote an equity security for a client's account, it
is difficult to specify in advance how we would vote on particular
questions. For routine matters, we would expect to vote in accordance with
the recommendation of the issuer's management. For all other matters, we
would decide how to vote on a case-by-case basis considering the relevant
circumstances of the issuer.
We will from time to time review this proxy voting policy and procedures
and may adopt changes from time to time. Clients may contact Carole Parker,
our Compliance Officer, by calling 703-749-8240 or via e-mail at
cparker@declaration.com to obtain a record of how we voted the proxies for
their account.
II. PROCESS
At Declaration, the investment research analysts are responsible for
performing research on the companies in which we invest. The same analysts
would be responsible for decisions regarding proxy voting, as they would be
the most familiar with company-specific issues. Portfolio managers may also
provide input when appropriate. Proxy voting mechanics are the
responsibility of the analyst.
We may abstain from voting a client proxy if we conclude that the effect on
the client's economic interests or the value of the portfolio holding is
indeterminable or insignificant. We may also abstain from voting a client
proxy for cost reasons (e.g., costs associated with voting proxies of
non-U.S. securities). In accordance with our fiduciary duties, we would
weigh the costs and benefits of voting proxy proposals relating to foreign
securities and make an informed decision with respect to whether voting a
given proxy proposal is prudent. Our decision would take into account the
effect that the vote of our client, either by itself or together with other
votes, was expected to have on the value of our client's investment and
whether this expected effect would outweigh the cost of voting.
B - 11
II. PROCESS - continued
We will maintain the records required to be maintained by us with respect
to proxies in accordance with the requirements of the Investment Advisers
Act of 1940 and, with respect to our registered investment company clients,
the Investment Company Act of 1940. We may, but need not, maintain proxy
statements that we receive regarding client securities to the extent that
such proxy statements are available on the SEC's Edgar system. We may also
rely upon a third party to maintain certain records required to be
maintained by the Advisors Act or the Investment Company Act.
III. CONFLICTS OF INTEREST
We manage the assets of various public and private company clients, and may
invest in the securities of certain of these companies on behalf of our
clients. As noted above, we invest principally in fixed income securities
with respect to which proxies are not required to be voted. However, in the
event we were to be granted the discretion to vote proxies by a client, and
an equity security were to be held in that client's portfolio with respect
to which a vote was required, we would be responsible for voting proxies
for that security.
We recognize that the potential for conflicts of interest could arise in
situations where we have discretion to vote client proxies and where we
have material business relationships or material personal/family
relationships/5/ with an issuer (or with a potential target or acquirer, in
the case of a proxy vote in connection with a takeover). To address these
potential conflicts we have established a Proxy Voting Committee (the
"Committee"). The Committee consists of the President, the Senior Vice
President - Director of Portfolio Management, and the Compliance Officer.
The Committee will use reasonable efforts to determine whether a potential
conflict may exist, including screening proxies against a list of clients
with whom we have a material business relationship. However, a potential
conflict shall be deemed to exist only if one or more of the members of the
Committee actually know of the potential conflict. The Committee will work
with the analyst assigned to the specific security to oversee the proxy
voting process for securities where we believe we may have potential
conflicts.
The Committee will meet to decide how to vote the proxy of any security
with respect to which we have identified a potential conflict. The
Committee will consider the analyst's recommendation, make a decision on
how to vote the proxy and document the Committee's rationale for its
decision.
Declaration is a wholly owned subsidiary of John Hancock Life Insurance
Company, which is a wholly owned subsidiary of John Hancock Financial
Services, Inc. ("JHFS"), a public company. It is our general policy not to
acquire or hold JHFS stock on behalf of our clients. However, in the event
that a client were to hold JHFS stock in a portfolio which we managed, and
we were responsible for voting a JHFS proxy on behalf of the client, the
Committee would decide how to vote the JHFS proxy in a manner that it
believes will maximize shareholder value. The Committee will document the
rationale for its decision.
It is Declaration's policy not to accept any input from any other person or
entity, including its affiliates, when voting proxies for any security. In
the event that a Declaration employee was contacted by any affiliate or any
other person or entity, other than by means of standard materials available
to all shareholders, with a recommendation on how to vote a specific proxy,
the event would be reported to the Compliance Officer and would be
documented. The Committee would then decide how to vote the proxy in
question and would document the rationale for its decision. If there is
controversy or uncertainty about how any particular proxy question should
be voted, or if an analyst or a Committee member believes that he or she
has been pressured to vote in a certain way, he or she will consult with
the Committee or with the Compliance Officer, and a decision will be made
whether to refer the proxy to the Committee for voting. Final decisions on
proxy voting will ultimately be made with the goal of enhancing the value
of our clients' investments.
Adopted 07/03
- ----------
/5/For purposes of this proxy voting policy, a "material personal/family
relationship" is one that would be reasonably likely to influence how we vote
proxies. To identify any such relationships, the Proxy Voting Committee will in
connection with each proxy vote obtain information about (1) personal and/or
family relationships between any Declaration employee involved in the proxy vote
(e.g., analyst, portfolio manager and/or members of the Proxy Voting Committee,
as applicable), and directors or senior executives of the issuer, and (ii)
personal and/or immediate family investments of such employees in issuers which
exceed 5% of the outstanding stock of the issuer.
B - 12
SSgA FUNDS MANAGEMENT, INC.
PROXY VOTING POLICIES AND PROCEDURES
INTRODUCTION
SSgA Funds Management, Inc. ("FM") seeks to vote proxies in the best interests
of its clients. In the ordinary course, this entails voting proxies in a way
which FM believes will maximize the monetary value of each portfolio's holdings.
FM takes the view that this will benefit our direct clients (e.g. investment
funds) and, indirectly, the ultimate owners and beneficiaries of those clients
(e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street
Global Advisors (SSgA) Investment Committee. The SSgA Investment Committee
reviews and approves amendments to the FM Proxy Voting Policy and delegates
authority to vote in accordance with this policy to Proxy Voting Services. FM
retains the final authority and responsibility for voting. In addition to voting
proxies, FM:
1) describes its proxy voting procedures to its clients in Part II of its
Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM
voted the client's proxies;
4) matches proxies received with holdings as of record date;
5) reconciles holdings as of record date and rectifies any discrepancies;
6) generally applies its proxy voting policy consistently and keeps
records of votes for each client;
7) documents the reason(s) for voting for all non-routine items; and
8) keeps records of such proxy voting available for inspection by the
client or governmental agencies.
PROCESS
The SSgA FM Principal -- Manager of Corporate Actions is responsible for
monitoring corporate actions. As stated above, oversight of the proxy
voting process is the responsibility of the SSgA Investment Committee,
which retains oversight responsibility for all investment activities of all
State Street Corporation investment firms.
In order to facilitate our proxy voting process, FM retains a firm with
expertise in the proxy voting and corporate governance fields to assist in
the due diligence process. The Manager of Corporate Actions is responsible,
working with this firm, for ensuring that proxies are submitted in a timely
manner.
All proxies received on behalf of FM clients are forwarded to our proxy
voting firm. If (i) the request falls within one of the guidelines listed
below, and (ii) there are no special circumstances relating to that company
or proxy which come to our attention (as discussed below), the proxy is
voted according to our guidelines.
However, from time to time, proxy votes will be solicited which (i) involve
special circumstances and require additional research and discussion or
(ii) are not directly addressed by our policies. These proxies are
identified through a number of methods, including but not limited to
notification from our third party proxy voting specialist, concerns of
clients, review by internal proxy specialists, and questions from
consultants.
In instances of special circumstances or issues not directly addressed by
our policies, the Chairman of the Investment Committee is consulted for a
determination of the proxy vote. The first determination is whether there
is a material conflict of interest between the interests of our client and
those of FM. If the Manager of Corporate Actions and the Chairman of the
Investment Committee determine that there is a material conflict, the
process detailed below under "Potential Conflicts" is followed. If there is
no material conflict, we examine each of the issuer's proposals in detail
in seeking to determine what vote would be in the best interests of our
clients. At this point, the Chairman of the Investment Committee makes a
voting decision based on maximizing the monetary value of each portfolios'
holdings. However, the Chairman of the Investment Committee may determine
that a proxy involves the consideration of particularly significant issues
and present the proxy to the entire Investment Committee for a decision on
voting the proxy.
FM also endeavors to show sensitivity to local market practices when voting
proxies of non-U.S. issuers.
B - 13
VOTING
For most issues and in most circumstances, we abide by the following
general guidelines. However, as discussed above, in certain circumstances,
we may determine that it would be in the best interests of our clients to
deviate from these guidelines.
MANAGEMENT PROPOSALS
I. FM votes in support of management on the following ballot items, which
are fairly common management sponsored initiatives.
. Elections of directors who do not appear to have been remiss in the
performance of their oversight responsibilities
. Approval of auditors
. Directors' and auditors' compensation
. Directors' liability and indemnification
. Discharge of board members and auditors
. Financial statements and allocation of income
. Dividend payouts that are greater than or equal to country and
industry standards
. Authorization of share repurchase programs
. General updating of or corrective amendments to charter
. Change in Corporation Name
. Elimination of cumulative voting
II. FM votes in support of management on the following items, which have
potentially substantial financial or best-interest impact:
. Capitalization changes which eliminate other classes of stock and
voting rights
. Changes in capitalization authorization for stock splits, stock
dividends, and other specified needs which are no more than 50% of
the existing authorization for U.S. companies and no more than 100%
of existing authorization for non-U.S. companies
. Elimination of pre-emptive rights for share issuance of less than a
given percentage (country specific - ranging from 5% to 20%) of the
outstanding shares
. Elimination of "poison pill" rights
. Stock purchase plans with an exercise price of not less that 85% of
fair market value
. Stock option plans which are incentive based and not excessive
. Other stock-based plans which are appropriately structured
. Reductions in super-majority vote requirements
. Adoption of anti-"greenmail" provisions
III. FM votes against management on the following items, which have
potentially substantial financial or best interest impact:
. Capitalization changes that add "blank check" classes of stock or
classes that dilute the voting interests of existing shareholders
. Changes in capitalization authorization where management does not
offer an appropriate rationale or which are contrary to the best
interest of existing shareholders
. Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter appropriate tender offers and other offers
. Amendments to bylaws which would require super-majority shareholder
votes to pass or repeal certain provisions
. Elimination of Shareholders' Right to Call Special Meetings
. Establishment of classified boards of directors
. Reincorporation in a state which has more stringent anti-takeover
and related provisions
. Shareholder rights plans that allow the board of directors to block
appropriate offers to shareholders or which trigger provisions
preventing legitimate offers from proceeding
. Excessive compensation
. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements which benefit
management and would be costly to shareholders if triggered
. Adjournment of Meeting to Solicit Additional Votes
B - 14
. "Other business as properly comes before the meeting" proposals
which extend "blank check" powers to those acting as proxy
. Proposals requesting re-election of insiders or affiliated
directors who serve on audit, compensation, and nominating
committees.
IV. FM evaluates Mergers and Acquisitions on a case-by-case basis.
Consistent with our proxy policy, we support management in seeking to
achieve their objectives for shareholders. However, in all cases, FM
uses its discretion in order to maximize shareholder value. FM,
generally votes, as follows:
. Against offers with potentially damaging consequences for minority
shareholders because of illiquid stock, especially in some non-US
markets
. For offers that concur with index calculators treatment and our
ability to meet our clients return objectives for passive funds
. Against offers when there are prospects for an enhanced bid or
other bidders
. For proposals to restructure or liquidate closed end investment
funds in which the secondary market price is substantially lower
than the net asset value
SHAREHOLDER PROPOSALS
Traditionally, shareholder proposals have been used to encourage management
and other shareholders to address socio-political issues. FM believes that
it is inappropriate to use client assets to attempt to affect such issues.
Thus, we examine shareholder proposals primarily to determine their
economic impact on shareholders.
I. FM votes in support of shareholders on the following ballot items,
which are fairly common shareholder-sponsored initiatives:
. Requirements that auditors attend the annual meeting of
shareholders
. Establishment of an annual election of the board of directors
. Mandates requiring a majority of independent directors on the Board
of Directors and the audit, nominating, and compensation committees
. Mandates that amendments to bylaws or charters have shareholder
approval
. Mandates that shareholder-rights plans be put to a vote or repealed
. Establishment of confidential voting
. Expansions to reporting of financial or compensation-related
information, within reason
. Repeals of various anti-takeover related provisions
. Reduction or elimination of super-majority vote requirements
. Repeals or prohibitions of "greenmail" provisions
. "Opting-out" of business combination provisions
. Proposals requiring the disclosure of executive retirement benefits
if the issuer does not have an independent compensation committee
II. In light of recent events surrounding corporate auditors and taking
into account corporate governance provisions released by the SEC,
NYSE, and NASDAQ, FM votes in support of shareholders on the following
ballot items, which are fairly common shareholder-sponsored
initiatives:
. Disclosure of Auditor and Consulting relationships when the same or
related entities are conducting both activities
. Establishment of selection committee responsible for the final
approval of significant management consultant contract awards where
existing firms are already acting in an auditing function
. Mandates that Audit, Compensation and Nominating Committee members
should all be independent directors
. Mandates giving the Audit Committee the sole responsibility for the
selection and dismissal of the auditing firm and any subsequent
result of audits are reported to the audit committee
B - 15
III. FM votes against shareholders on the following initiatives, which are
fairly common shareholder-sponsored initiatives:
. Limits to tenure of directors
. Requirements that candidates for directorships own large amounts of
stock before being eligible to be elected
. Restoration of cumulative voting in the election of directors
. Requirements that the company provide costly, duplicative, or
redundant reports; or reports of a non-business nature
. Restrictions related to social, political, or special interest
issues which affect the ability of the company to do business or be
competitive and which have significant financial or best-interest
impact
. Proposals which require inappropriate endorsements or corporate
actions
. Requiring the company to expense stock options unless already
mandated by FASB (or similar body) under regulations that supply a
common valuation model.
. Proposal asking companies to adopt full tenure holding periods for
their executives.
. Proposals requiring the disclosure of executive retirement benefits
if the issuer has an independent compensation committee
SHAREHOLDER ACTIVISM
We at FM agree entirely with the United States Department of Labor's
position that "where proxy voting decisions may have an effect on the
economic value of the plan's underlying investment, plan fiduciaries should
make proxy voting decisions with a view to enhancing the value of the
shares of stock" (IB 94-2). Our proxy voting policy and procedures are
designed to ensure that our clients receive the best possible returns on
their investments. We meet directly with corporation representatives and
participate in conference calls and third-party inquiries in order to
ensure our processes are as fully informed as possible.
Through our membership in the Council of Institutional Investors as well as
our contact with corporate pension plans, public funds, and unions, we are
also able to communicate extensively with other shareholders regarding
events and issues relevant to individual corporations, general industry,
and current shareholder concerns.
In addition, FM monitors "target" lists of underperforming companies
prepared by various shareholder groups, including: California Public
Employee Retirement System, The City of New York - Office of the
Comptroller, International Brotherhood of Teamsters, and Council of
Institutional Investors. Companies, so identified, receive an individual,
systematic review by the Corporate Governance Subcommittee of SSgA's
Investment Committee.
As an active shareholder, FM's role is to ensure that corporate policies
serve the best interests of the corporation's investor-owners. Though we do
not seek involvement in the day-to-day operations of an organization, we
recognize the need for conscientious oversight of and input into management
decisions that may affect a company's value. To that end, our monitoring of
corporate management and industry events is substantially more detailed
than that of the typical voter. We have demonstrated our willingness to
vote against management-sponsored initiatives and to support shareholder
proposals when appropriate. To date we have not filed proposals or
initiated letter-writing or other campaigns, but have used our active
participation in the corporate governance process--especially the proxy
voting process--as the most effective means by which to communicate our and
our clients' legitimate shareholder concerns. Should an issue arise in
conjunction with a specific corporation that cannot be satisfactorily
resolved through these means, we shall consider other approaches.
Through the consistent, conscientious execution of our responsibilities as
both fiduciary and shareholder, FM is able to promote the best interests of
its fellow shareholders and its clients. The SSgA Funds Management, Inc.
Proxy Voting Policy provides for this active, informed participation in the
management of those corporations in which we hold shares.
POTENTIAL CONFLICTS
As discussed above under Process, from time to time, FM will review a proxy
which presents a potential material conflict. For example, FM or its
affiliates may provide services to a company whose management is soliciting
proxies, or to another entity which is a proponent of a particular proxy
proposal. Another example could arise when FM has business or other
relationships with participants involved in proxy contests, such as a
candidate for a corporate directorship.
As a fiduciary to its clients, FM takes these potential conflicts very
seriously. While FM's only goal in addressing any such potential conflict
is to ensure that proxy votes are cast in the clients' best interests and
are not affected by FM's potential conflict, there are a number of courses
FM may take. The final decision as to which course to follow shall be made
by the Investment Committee.
When the matter falls clearly within one of the proposals enumerated above,
casting a vote which simply follows FM's pre-determined policy would
eliminate FM's discretion on the particular issue and hence avoid the
conflict.
B - 16
In other cases, where the matter presents a potential material conflict and
is not clearly within one of the enumerated proposals, or is of such a
nature that FM believes more active involvement is necessary, the Chairman
of the Investment Committee shall present the proxy to the Investment
Committee, who will follow one of two courses of action. First, FM may
employ the services of a third party, wholly independent of FM, its
affiliates and those parties involved in the proxy issue, to determine the
appropriate vote.
Second, in certain situations the Investment Committee may determine that
the employment of a third party is unfeasible, impractical or unnecessary.
In such situations, the Investment Committee shall make a decision as to
the voting of the proxy. The basis for the voting decision, including the
basis for the determination that the decision is in the best interests of
FM's clients, shall be formalized in writing as a part of the minutes to
the Investment Committee. As stated above, which action is appropriate in
any given scenario would be the decision of the Investment Committee in
carrying out its duty to ensure that the proxies are voted in the clients',
and not FM's, best interests.
RECORDKEEPING
In accordance with applicable law, FM shall retain the following documents
for not less than five years from the end of the year in which the proxies
were voted, the first two years in FM's office:
1) FM's Proxy Voting Policy and any additional procedures created pursuant
to such Policy;
2) a copy of each proxy statement FM receives regarding securities held by
its clients (note: this requirement may be satisfied by a third party
who has agreed in writing to do so or by obtaining a copy of the proxy
statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be
satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its
voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the
client, for information on how FM voted the client's proxies.
DISCLOSURE OF CLIENT VOTING INFORMATION
Any client who wishes to receive information on how its proxies were voted
should contact its FM client service officer.
B - 17
T. ROWE PRICE ASSOCIATES, INC.
("T. Rowe Price")
PROXY VOTING PROCESS AND POLICIES
T. Rowe Price Associates, Inc. (and T. Rowe Price International, Inc.) recognize
and adhere to the principle that one of the privileges of owning stock in a
company is the right to vote on issues submitted to shareholder vote--such as
election of directors and important matters affecting a company's structure and
operations. As an investment adviser with a fiduciary responsibility to its
clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is
owned by the investment companies that it sponsors and serves as investment
adviser. T. Rowe Price also is involved in the proxy process on behalf of its
institutional and private counsel clients who have requested such service. For
those private counsel clients who have not delegated their voting responsibility
but who request advice, T. Rowe Price makes recommendations regarding proxy
voting.
Proxy Administration
- --------------------
The T. Rowe Price Proxy Committee develops our firm's positions on all major
corporate issues, creates guidelines, and oversees the voting process. The Proxy
Committee, composed of portfolio managers, investment operations managers, and
internal legal counsel, analyzes proxy policies based on whether they would
adversely affect shareholders' interests and make a company less attractive to
own. In evaluating proxy policies each year, the Proxy Committee relies upon our
own fundamental research, independent research provided by third parties, and
information presented by company managements and shareholder groups.
Once the Proxy Committee establishes its recommendations, they are distributed
to the firm's portfolio managers as voting guidelines. Ultimately, the portfolio
manager votes on the proxy proposals of companies in his or her portfolio. When
portfolio managers cast votes that are counter to the Proxy Committee's
guidelines, they are required to document their reasons in writing to the Proxy
Committee. Annually, the Proxy Committee reviews T. Rowe Price's proxy voting
process, policies, and voting records.
T. Rowe Price has retained Institutional Shareholder Services, an expert in the
proxy voting and corporate governance area, to provide proxy advisory and voting
services. These services include in-depth research, analysis, and voting
recommendations as well as vote execution, reporting, auditing and consulting
assistance for the handling of proxy voting responsibility and corporate
governance-related efforts. While the Proxy Committee relies upon ISS research
in establishing T. Rowe Price's voting guidelines--many of which are consistent
with ISS positions--T. Rowe Price may deviate from ISS recommendations on
general policy issues or specific proxy proposals.
Fiduciary Considerations
- ------------------------
T. Rowe Price's decisions with respect to proxy issues are made in light of the
anticipated impact of the issue on the desirability of investing in the
portfolio company. Proxies are voted solely in the interests of the client,
Price Fund shareholders or, where employee benefit plan assets are involved, in
the interests of plan participants and beneficiaries. Practicalities involved
with international investing may make it impossible at times, and at other times
disadvantageous, to vote proxies in every instance.
Consideration Given Management Recommendations
- ----------------------------------------------
When determining whether to invest in a particular company, one of the key
factors T. Rowe Price considers is the quality and depth of its management. As a
result, T. Rowe Price believes that recommendations of management on most issues
should be given weight in determining how proxy issues should be voted.
T. Rowe Price Voting Policies
- -----------------------------
Specific voting guidelines have been established by the Proxy Committee for
recurring issues that appear on proxies, which are available to clients upon
request. The following is a summary of the more significant T. Rowe Price
policies:
Election of Directors
T. Rowe Price generally supports slates with a majority of independent directors
and nominating committees chaired by an independent board member. We withhold
votes for inside directors serving on compensation and audit committees and for
directors who miss more than one-fourth of the scheduled board meetings.
Executive Compensation
Our goal is to assure that a company's equity-based compensation plan is aligned
with shareholders' long-term interests. While we evaluate most plans on a
case-by-case basis, T. Rowe Price generally opposes compensation packages that
provide what we view as excessive awards to a few senior executives or that
contain excessively dilutive stock option plans. We base our review on criteria
such as the costs associated with the plan, plan features, dilution to
shareholders and comparability to plans in the company's peer group. We
generally oppose plans that give a company the ability to reprice options.
B - 18
Anti-takeover and Corporate Governance Issues
T. Rowe Price generally opposes anti-takeover measures and other proposals
designed to limit the ability of shareholders to act on possible transactions.
When voting on corporate governance proposals, we will consider the dilutive
impact to shareholders and the effect on shareholder rights.
Social and Corporate Responsibility Issues
T. Rowe Price generally votes with a company's management on social issues
unless they have substantial economic implications for the company's business
and operations that have not been adequately addressed by management.
Monitoring and Resolving Conflicts of Interest
- ----------------------------------------------
The Proxy Committee is also responsible for monitoring and resolving possible
material conflicts between the interests of T. Rowe Price and those of its
clients with respect to proxy voting. Since our voting guidelines are
pre-determined by the Proxy Committee using recommendations from ISS, an
independent third party, application of the T. Rowe Price guidelines to vote
clients' proxies should in most instances adequately address any possible
conflicts of interest. However, for proxy votes inconsistent with T. Rowe Price
guidelines, the Proxy Committee reviews all such proxy votes in order to
determine whether the portfolio manager's voting rationale appears reasonable.
The Proxy Committee also assesses whether any business or other relationships
between T. Rowe Price and a portfolio company could have influenced an
inconsistent vote on that company's proxy. Issues raising possible conflicts of
interest are referred to designated members of the Proxy Committee for immediate
resolution.
B - 19
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
("MSIM")
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction - MSIM's policies and procedures for voting proxies with respect to
securities held in the accounts of clients applies to those MSIM entities that
provide discretionary Investment Management services and for which a MSIM entity
has the authority to vote their proxies. The policies and procedures and general
guidelines in this section will be reviewed and, as necessary, updated
periodically to address new or revised proxy voting issues. The MSIM entities
covered by these policies and procedures currently include the following: Morgan
Stanley Investment Advisors Inc., Morgan Stanley Alternative Investment
Partners, L.P., Morgan Stanley AIP GP LP, Morgan Stanley Investment Management
Inc., Morgan Stanley Investment Group Inc., Morgan Stanley Investment Management
Limited, Morgan Stanley Investment Management Company, Morgan Stanley Asset &
Investment Trust Management Co., Limited, Morgan Stanley Investment Management
Private Limited, Morgan Stanley Investments LP, Van Kampen Investment Advisory
Corp., Van Kampen Asset Management Inc., and Van Kampen Advisors Inc. (each a
"MSIM Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so it would be inconsistent with applicable laws or
regulations or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services - To assist the MSIM Affiliates in their responsibility
for voting proxies and the overall global proxy voting process, Institutional
Shareholder Services ("ISS") and the Investor Responsibility Research Center
("IRRC") have been retained as experts in the proxy voting and corporate
governance area. ISS and IRRC are independent advisers that specialize in
providing a variety of fiduciary-level proxy-related services to institutional
investment managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
Voting Proxies for certain Non-US Companies - While the proxy voting process is
well established in the United States and other developed markets with a number
of tools and services available to assist an investment manager, voting proxies
of non-US companies located in certain jurisdictions, particularly emerging
markets, may involve a number of problems that may restrict or prevent a MSIM
Affiliate's ability to vote such proxies. These problems include, but are not
limited to: (i) proxy statements and ballots being written in a language other
than English; (ii) untimely and/or inadequate notice of shareholder meetings;
(iii) restrictions on the ability of holders outside the issuer's jurisdiction
of organization to exercise votes; (iv) requirements to vote proxies in person,
(v) the imposition of restrictions on the sale of the securities for a period of
time in proximity to the shareholder meeting; and (vi) requirements to provide
local agents with power of attorney to facilitate the MSIM Affiliate's voting
instructions. As a result, clients' non-U.S. proxies will be voted on a best
efforts basis only, consistent with the Client Proxy Standard. ISS has been
retained to provide assistance to the MSIM Affiliates in connection with voting
their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
B - 20
III. GUIDELINES
A. Management Proposals
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
. Selection or ratification of auditors.
. Approval of financial statements, director and auditor reports.
. Election of Directors.
. Limiting Directors' liability and broadening indemnification of
Directors.
. Requirement that a certain percentage (up to 66 2/3%) of its
Board's members be comprised of independent and unaffiliated
Directors.
. Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
. Recommendations to set retirement ages or require specific levels
of stock ownership by Directors.
. General updating/corrective amendments to the charter.
. Elimination of cumulative voting.
. Elimination of preemptive rights.
. Provisions for confidential voting and independent tabulation of
voting results.
. Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
Capitalization changes
----------------------
. Capitalization changes that eliminate other classes of stock and
voting rights.
. Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i)
a clear and legitimate business purpose is stated; (ii) the number
of shares requested is reasonable in relation to the purpose for
which authorization is requested; and (iii) the authorization does
not exceed 100% of shares currently authorized and at least 30% of
the new authorization will be outstanding.
. Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
. Proposals for share repurchase plans.
. Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
. Proposals to effect stock splits.
. Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in
the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
Compensation
------------
. Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
. Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
. Establishment of Employee Stock Option Plans and other employee
ownership plans.
Anti-Takeover Matters
---------------------
. Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
. Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of
shareholders.
B - 21
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
. Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing
shareholders.
. Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting
rights.
. Creation of "blank check" preferred stock.
. Changes in capitalization by 100% or more.
. Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
. Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
. Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee:
Corporate Transactions
----------------------
. Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates' research and
analysis, based on, among other things, MSIM internal
company-specific knowledge.
. Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
. Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
. Executive/Director stock option plans. Generally, stock option
plans should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the
issued capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
Anti-Takeover Provisions
------------------------
. Proposals requiring shareholder ratification of poison pills.
. Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter the appropriate tender offers and other offers.
B. Shareholder Proposals
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
. Requiring auditors to attend the annual meeting of shareholders.
. Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
. Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
. Confidential voting.
. Reduction or elimination of supermajority vote requirements.
B - 22
B. Shareholder Proposals - continued
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
. Proposals that limit tenure of directors.
. Proposals to limit golden parachutes.
. Proposals requiring directors to own large amounts of stock to be
eligible for election.
. Restoring cumulative voting in the election of directors.
. Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
. Proposals that limit retirement benefits or executive compensation.
. Requiring shareholder approval for bylaw or charter amendments.
. Requiring shareholder approval for shareholder rights plan or
poison pill.
. Requiring shareholder approval of golden parachutes.
. Elimination of certain anti-takeover related provisions.
. Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
. Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
. Restrictions related to social, political or special interest
issues that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
. Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. Proxy Review Committee
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM
will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines
(as expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been
provided in Sections I, II and III above. Split votes will
generally not be approved within a single Global Investor Group
team. The
B - 23
Committee may take into account ISS recommendations and the
research provided by IRRC as well as any other relevant
information they may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with
respect to, the conflict(s) in question ("Special Committee").
The Special Committee may request the assistance of the Law and
Compliance Departments and will have sole discretion to cast a
vote. In addition to the research provided by ISS and IRRC, the
Special Committee may request analysis from MSIM Affiliate
investment professionals and outside sources to the extent it
deems appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions,
which documentation will be maintained by the Committee and the
Special Committee, or their designee(s) for a period of at least
6 years. To the extent these decisions relate to a security held
by a MSIM U.S. registered investment company, the Committee and
Special Committee, or their designee(s), will report their
decisions to each applicable Board of Trustees/Directors of those
investment companies at each Board's next regularly Scheduled
Board meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during the
most recently ended calendar quarter immediately preceding the
Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
B - 24
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
("SMAC")
SUMMARY OF PROXY VOTING POLICY AND PROCEDURES
SMAC, through its participation on Mellon's Proxy Policy Committee, has adopted
a Proxy Voting Policy, related procedures, and voting guidelines which are
applied to those client accounts over which it has been delegated the authority
to vote proxies. In voting proxies, SMAC seeks to act solely in the best
financial and economic interest of the applicable client. SMAC will carefully
review proposals that would limit shareholder control or could affect the value
of a client's investment. SMAC generally will oppose proposals designed to
insulate an issuer's management unnecessarily from the wishes of a majority of
shareholders. SMAC will generally support proposals designed to provide
management with short-term insulation from outside influences so as to enable
them to bargain effectively with potential suitors and otherwise achieve
long-term goals. On questions of social responsibility where economic
performance does not appear to be an issue, SMAC will attempt to ensure that
management reasonably responds to the social issues.
All proxy voting proposals are reviewed, categorized, analyzed and voted in
accordance with written guidelines in effect from time to time. These proxy
voting guidelines are based on research and recommendations provided by internal
resources and third party vendors. The guidelines are reviewed periodically and
updated as necessary to reflect new issues and any changes in our policies on
specific issues. Items that can be categorized will be voted in accordance with
any applicable guidelines or referred to the Proxy Policy Committee, if the
applicable guidelines so require. Proposals that cannot be categorized under the
guidelines will be referred to the Proxy Policy Committee for discussion and
vote. Additionally, the Proxy Policy Committee may review any proposal where it
has identified a particular company, industry or issue for special scrutiny.
With regard to voting proxies of foreign companies, SMAC weighs the cost of
voting and potential inability to sell the shares, against the benefit of voting
the shares, to determine whether or not to vote.
SMAC recognizes its duty to vote proxies in the best interests of its clients.
SMAC seeks to avoid material conflicts of interest through the establishment of
the Proxy Policy Committee, which applies detailed, pre-determined proxy voting
guidelines in an objective and consistent manner across client accounts, based
on internal and external research and recommendations provided by a third party
vendor, and without consideration of any client relationship factors. Further,
SMAC and its affiliates engage a third party as an independent fiduciary to vote
all proxies for Mellon Financial Corporation securities and affiliated mutual
fund securities
SMAC will furnish a copy of its Proxy Voting Policy, any related procedures, and
its voting guidelines to each advisory client upon request. Upon request, SMAC
will also disclose to an advisory client the proxy voting history for its
account after the votes have been recorded.
Approved 6/6/2003
B - 25
WELLINGTON MANAGEMENT COMPANY LLP
("Wellington Management")
SUMMBARY OF PROXY VOTING POLICIES AND PROCEDURES
The Funds have granted to Wellington Management the authority to vote proxies on
their behalf with respect to the assets managed by Wellington Management.
Wellington Management votes proxies in what it believes are the best economic
interests of its clients and in accordance with its Proxy Policies and
Procedures. Wellington Management's Proxy Committee is responsible for the
review and oversight of the firm's Proxy Policies and Procedures. The Proxy
Group within Wellington Management's Corporate Operations Department is
responsible for the day-to-day administration of the proxy voting process.
Although Wellington Management may utilize the services of various external
resources in analyzing proxy issues and has established its own Proxy Guidelines
setting forth general guidelines for voting proxies, Wellington Management
personnel analyze all proxies and vote proxies based on our assessment of the
merits of each proposal. The identified portfolio managers have the authority to
determine the final vote for securities held in Funds for which they serve as
the designated manager, unless such party is determined to have a material
conflict of interest related to that proxy vote.
Wellington Management maintains procedures designed to identify and address
material conflicts of interest in voting proxies. The Proxy Committee sets
standards for identifying material conflicts based on client, vendor and lender
relationships. Proxy votes for which Wellington Management identifies a material
conflict are reviewed by designated members of the Proxy Committee or by the
entire Committee in some cases to resolve the conflict and direct the vote.
Wellington Management may be unable to vote or may determine not to vote a proxy
on behalf of the Funds due to securities lending, share blocking and
re-registration requirements, lack of adequate information, untimely receipt of
proxy materials, immaterial impact of the vote, and/or excessive costs.
B - 26
CAPITAL GUARDIAN TRUST COMPANY
("CGTC")
PROXY VOTING POLICY AND PROCEDURES
POLICY
CGTC provides investment management services to clients that include, among
others, corporate and public pension plans, foundations and endowments and
unaffiliated registered investment companies. CGTC's Personal Investment
Management Division ("PIM") provides investment management and fiduciary
services, including trust and estate administration, primarily to high
net-worth individuals and families. CGTC considers proxy voting an
important part of those management services, and as such, CGTC seeks to
vote the proxies of securities held by clients in accounts for which it has
proxy voting authority in the best interest of those clients. The
procedures that govern this activity are reasonably designed to ensure that
proxies are voted in the best interest of CGTC's clients.
Fiduciary Responsibility and Long-term Shareholder Value
--------------------------------------------------------
CGTC's fiduciary obligation to manage its accounts in the best interest of
its clients extends to proxy voting. When voting proxies, CGTC considers
those factors which would affect the value of its clients' investment and
acts solely in the interest of, and for the exclusive purpose of providing
benefits to, its clients. As required by ERISA, CGTC votes proxies solely
in the interest of the participants and beneficiaries of retirement plans
and does not subordinate the interest of participants and beneficiaries in
their retirement income to unrelated objectives.
CGTC believes the best interests of clients are served by voting proxies in
a way that maximizes long-term shareholder value. Therefore, the investment
professionals responsible for voting proxies have the discretion to make
the best decision given the individual facts and circumstances of each
issue. Proxy issues are evaluated on their merits and considered in the
context of the analyst's knowledge of a company, its current management,
management's past record, and CGTC's general position on the issue. In
addition, many proxy issues are reviewed and voted on by a proxy voting
committee comprised primarily of investment professionals, bringing a wide
range of experience and views to bear on each decision.
As the management of a portfolio company is responsible for its day to day
operations, CGTC believes that management, subject to the oversight of its
board of directors, is often in the best position to make decisions that
serve the interests of shareholders. However, CGTC votes against management
on proposals where it perceives a conflict may exist between management and
client interests, such as those that may insulate management or diminish
shareholder rights. CGTC also votes against management in other cases where
the facts and circumstances indicate that the proposal is not in its
clients' best interests.
Special Review
--------------
From time to time CGTC may vote a) on proxies of portfolio companies that
are also clients of CGTC or its affiliates, b) on shareholder proposals
submitted by clients, or c) on proxies for which clients have publicly
supported or actively solicited CGTC or its affiliates to support a
particular position. When voting these proxies, CGTC analyzes the issues on
their merits and does not consider any client relationship in a way that
interferes with its responsibility to vote proxies in the best interest of
its clients. The CGTC Special Review Committee reviews certain of these
proxy decisions for improper influences on the decision-making process and
takes appropriate action, if necessary.
PROCEDURES
Proxy Review Process
--------------------
Associates in CGTC's proxy voting department, along with compliance
associates from the legal department, are responsible for coordinating the
voting of proxies. These associates work with outside proxy voting service
providers and custodian banks and are responsible for coordinating and
documenting the internal review of proxies.
The proxy voting department reviews each proxy ballot for standard and
non-standard items. Standard proxy items are typically voted with
management unless the research analyst who follows the company or a member
of an investment or proxy voting committee requests additional review.
Standard items currently include the uncontested election of directors,
ratifying auditors, adopting reports and accounts, setting dividends and
allocating profits for the prior year and certain other administrative
items.
All other items are sent by the proxy voting department to the research
analyst who follows the company. The analyst reviews the proxy statement
and makes a recommendation about how to vote on the issues based on his or
her in-depth knowledge of the
B - 27
company. Recommendations to vote with management on certain limited issues
are voted accordingly. All other non-standard issues receive further
consideration by a proxy voting committee, which reviews the issue and the
analyst's recommendation, and decides how to vote. A proxy voting committee
may escalate to the full investment committee(s) those issues for which it
believes a broader review is warranted. Four proxy voting committees
specialize in regional mandates and review the proxies of portfolio
companies within their mandates. The proxy voting committees are comprised
primarily of members of CGTC's and its affiliates' investment committees
and their activity is subject to oversight by those committees.
For securities held only in PIM accounts, non-standard items are sent to
those associates to whom the CGTC Investment Committee has delegated the
review and voting of proxies. These associates may forward certain
proposals to the appropriate investment committee for discussion and a
formal vote if they believe a broader review is warranted.
CGTC seeks to vote all of its clients' proxies. In certain circumstances,
CGTC may decide not to vote a proxy because the costs of voting outweigh
the benefits to its clients (e.g., when voting could lead to share blocking
where CGTC wishes to retain flexibility to trade shares). In addition,
proxies with respect to securities on loan through client directed lending
programs are not available to CGTC to vote and therefore are not voted.
Proxy Voting Guidelines
-----------------------
CGTC has developed proxy voting guidelines that reflect its general
position and practice on various issues. To preserve the ability of
decision makers to make the best decision in each case, these guidelines
are intended only to provide context and are not intended to dictate how
the issue must be voted. The guidelines are reviewed and updated as
necessary, but at least annually, by the appropriate proxy voting and
investment committees.
CGTC's general positions related to corporate governance, capital
structure, stock option and compensation plans and social and corporate
responsibility issues are reflected below.
. Corporate governance. CGTC supports strong corporate governance
practices. It generally votes against proposals that serve as
anti-takeover devices or diminish shareholder rights, such as poison
pill plans and supermajority vote requirements, and generally supports
proposals that encourage responsiveness to shareholders, such as
initiatives to declassify the board. Mergers and acquisitions,
reincorporations and other corporate restructurings are considered on a
case-by-case basis, based on the investment merits of the proposal.
. Capital structure. CGTC generally supports increases to capital stock
for legitimate financing needs. It generally does not support changes in
capital stock that can be used as anti-takeover devices, such as the
creation of or increase in blank-check preferred stock or of a dual
class capital structure with different voting rights.
. Stock option compensation plans. CGTC supports the concept of
stock-related compensation plans as a way to align employee and
shareholder interests. However, plans that include features which
undermine the connection between employee and shareholder interests
generally are not supported. CGTC considers the following factors when
voting on proposals related to new plans or changes to existing plans:
the exercise price of the options, the size of the overall plan and/or
the size of the increase, the historical dilution rate, whether the plan
permits option repricing, the duration of the plan, and the needs of the
company. Additionally, CGTC supports option expensing in theory and will
generally support shareholder proposals on option expensing if such
proposal language is non-binding and does not require the company to
adopt a specific expensing methodology.
. Social and corporate responsibility. CGTC votes on these issues based on
the potential impact to the value of its clients' investment in the
portfolio company.
Special Review Procedures
-------------------------
If a research analyst has a personal conflict in making a voting
recommendation on a proxy issue, he or she must disclose such conflict,
along with his or her recommendation. If a member of the proxy voting
committee has a personal conflict in voting the proxy, he or she must
disclose such conflict to the appropriate proxy voting committee and must
not vote on the issue.
Clients representing 0.0025 or more of assets under investment management
across all affiliates owned by The Capital Group Companies, Inc. (CGTC's
parent company), are deemed to be "Interested Clients". Each proxy is
reviewed to determine whether the portfolio company, a proponent of a
shareholder proposal, or a known supporter of a particular proposal is an
Interested Client. If the voting decision for a proxy involving an
Interested Client is against such client, then it is presumed that there
was no undue influence in favor of the Interested Client. If the decision
is in favor of the Interested Client, then the decision, the rationale for
such decision, information about the client relationship and all other
relevant information is reviewed by the Special Review Committee ("SRC").
The SRC determines whether the decision was in the best interest of CGTC's
clients and may
B - 28
accept or override the decision, or determine another course of action. The
SRC is comprised of senior representatives from CGTC's and its affiliates'
investment and legal groups and does not include representatives from the
marketing department.
Any other proxy will be referred to the SRC if facts or circumstances
warrant further review.
CGTC's Proxy Voting Record
--------------------------
Upon client request, CGTC will provide reports of its proxy voting record
as it relates to the securities held in the client's account(s) for which
CGTC has proxy voting authority.
Annual Assessment
-----------------
CGTC will conduct an annual assessment of this proxy voting policy and
related procedures.
Effective Date
--------------
This policy is effective as of August 1, 2003.
B - 29
PACIFIC INVESTMENT MANAGEMENT COMPANY LLC
("PIMCO")
PROXY VOTING POLICIES AND PROCEDURES
The following are general proxy voting policies and procedures ("Policies and
Procedures") adopted by Pacific Investment Management Company LLC ("PIMCO"), an
investment adviser registered under the Investment Advisers Act of 1940, as
amended ("Advisers Act")./6/ PIMCO serves as the investment adviser to a wide
range of domestic and international clients, including investment companies
registered under the Investment Company Act of 1940, as amended ("1940 Act") and
separate investment accounts for other clients./7/ These Policies and Procedures
are adopted to ensure compliance with Rule 206(4)-6 under the Advisers Act,
other applicable fiduciary obligations of PIMCO and the applicable rules and
regulations of the Securities and Exchange Commission ("SEC") and
interpretations of its staff. In addition to SEC requirements governing
advisers, PIMCO's Policies and Procedures reflect the long-standing fiduciary
standards and responsibilities applicable to investment advisers with respect to
accounts subject to the Employee Retirement Income Security Act of 1974
("ERISA"), as set forth in the Department of Labor's rules and regulations./8/
PIMCO will implement these Policies and Procedures for each of its respective
clients as required under applicable law, unless expressly directed by a client
in writing to refrain from voting that client's proxies. PIMCO's authority to
vote proxies on behalf of its clients is established by its advisory contracts,
comparable documents or by an overall delegation of discretionary authority over
its client's assets. Recognizing that proxy voting is a rare event in the realm
of fixed income investing and is typically limited to solicitation of consent to
changes in features of debt securities, these Policies and Procedures also apply
to any voting rights and/or consent rights of PIMCO, on behalf of its clients,
with respect to debt securities, including but not limited to, plans of
reorganization, and waivers and consents under applicable indentures./9/
Set forth below are PIMCO's Policies and Procedures with respect to any voting
or consent rights of advisory clients over which PIMCO has discretionary voting
authority. These Policies and Procedures may be revised from time to time.
General Statements of Policy
- ----------------------------
These Policies and Procedures are designed and implemented in a manner
reasonably expected to ensure that voting and consent rights are exercised in
the best interests of PIMCO's clients. Each proxy is voted on a case-by-case
basis taking into consideration any relevant contractual obligations as well as
other relevant facts and circumstances.
PIMCO may abstain from voting a client proxy under the following circumstances:
(1) when the economic effect on shareholders' interests or the value of the
portfolio holding is indeterminable or insignificant; or (2) when the cost of
voting the proxies outweighs the benefits.
Conflicts of Interest
- ---------------------
PIMCO seeks to resolve any material conflicts of interest by voting in good
faith in the best interest of its clients. If a material conflict of interest
should arise, PIMCO will seek to resolve such conflict in the client's best
interest by pursuing any one of the following courses of action:
1. convening an ad-hoc committee to assess and resolve the conflict;/10/
2. voting in accordance with the instructions/consent of a client after
providing notice of and disclosing the conflict to that client;
3. voting the proxy in accordance with the recommendation of an
independent third-party service provider;
4. suggesting that the client engage another party to determine how the
proxies should be voted;
5. delegating the vote to an independent third-party service provider; or
6. voting in accordance with the factors discussed in these Policies and
Procedures.
PIMCO will document the process of resolving any identified material conflict of
interest.
- ----------
/6/ These Policies and Procedures are adopted by PIMCO pursuant to Rule
206(4)-6 under the Advisers Act, effective August 6, 2003. See Proxy Voting by
Investment Advisers, IA Release No. 2106 (January 31, 2003).
/7/ These Policies and Procedures address proxy voting considerations under
U.S. law and regulations and do not address the laws or requirements of other
jurisdictions.
/8/ Department of Labor Bulletin 94-2, 29 C.F.R. 2509.94-2 (July 29, 1994). If
a client is subject to ERISA, PIMCO will be responsible for voting proxies with
respect to the client's account, unless the client has expressly retained the
right and obligation to vote the proxies, and provided prior written notice to
PIMCO of this retention.
/9/ For purposes of these Policies and Procedures, proxy voting includes any
voting rights, consent rights or other voting authority of PIMCO on behalf of
its clients.
/10/ Any committee must be comprised of personnel who have no direct interest in
the outcome of the potential conflict.
B - 30
Reporting Requirements and the Availability of Proxy Voting Records
- -------------------------------------------------------------------
Except to the extent required by applicable law or otherwise approved by PIMCO,
PIMCO will not disclose to third parties how it voted a proxy on behalf of a
client. However, upon request from an appropriately authorized individual, PIMCO
will disclose to its clients or the entity delegating the voting authority to
PIMCO for such clients (e.g., trustees or consultants retained by the client),
how PIMCO voted such client's proxy. In addition, PIMCO provides its clients
with a copy of these Policies and Procedures or a concise summary of these
Policies and Procedures: (i) in Part II of Form ADV; (ii) together with a
periodic account statement in a separate mailing; or (iii) any other means as
determined by PIMCO. The summary will state that these Policies and Procedures
are available upon request and will inform clients that information about how
PIMCO voted that client's proxies is available upon request.
PIMCO Record Keeping
- --------------------
PIMCO or its agent maintains proxy voting records as required by Rule 204-2(c)
of the Advisers Act. These records include: (1) a copy of all proxy voting
policies and procedures; (2) proxy statements (or other disclosures accompanying
requests for client consent) received regarding client securities (which may be
satisfied by relying on obtaining a copy of a proxy statement from the SEC's
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system or a third
party provided that the third party undertakes to provide a copy promptly upon
request); (3) a record of each vote cast by PIMCO on behalf of a client; (4) a
copy of any document created by PIMCO that was material to making a decision on
how to vote proxies on behalf of a client or that memorializes the basis for
that decision; and (5) a copy of each written client request for proxy voting
records and any written response from PIMCO to any (written or oral) client
request for such records. Additionally, PIMCO or its agent maintains any
documentation related to an identified material conflict of interest.
Proxy voting books and records are maintained by PIMCO or its agent in an easily
accessible place for a period of five years from the end of the fiscal year
during which the last entry was made on such record, the first two years in the
offices of PIMCO or its agent.
Review and Oversight
- --------------------
PIMCO's proxy voting procedures are described below. PIMCO's Compliance Group
will provide for the supervision and periodic review, no less than on a
quarterly basis, of its proxy voting activities and the implementation of these
Policies and Procedures. Because PIMCO has contracted with State Street
Investment Manager Solutions, LLC ("IMS West") to perform portfolio accounting,
securities processing and settlement processing on behalf of PIMCO, certain of
the following procedures involve IMS West in administering and implementing the
proxy voting process. IMS West will review and monitor the proxy voting process
to ensure that proxies are voted on a timely basis.
1. Transmit Proxy to PIMCO. IMS West will forward to PIMCO's Middle
Office Group each proxy received from registered owners of record (e.g.,
custodian bank or other third party service providers).
2. Conflicts of Interest. PIMCO's Middle Office Group will review each
proxy to determine whether there may be a material conflict between PIMCO and
its client. As part of this review, the group will determine whether the issuer
of the security or proponent of the proposal is a client of PIMCO, or if a
client has actively solicited PIMCO to support a particular position. If no
conflict exists, this group will forward each proxy to the appropriate portfolio
manager for consideration. However, if a conflict does exist, PIMCO's Middle
Office Group will seek to resolve any such conflict in accordance with these
Policies and Procedures.
3. Vote. The portfolio manager will review the information, will vote the
proxy in accordance with these Policies and Procedures and will return the voted
proxy to PIMCO's Middle Office Group.
4. Review. PIMCO's Middle Office Group will review each proxy that was
submitted to and completed by the appropriate portfolio manager. PIMCO's Middle
Office Group will forward the voted proxy back to IMS West with the portfolio
manager's decision as to how it should be voted.
5. Transmittal to Third Parties. IMS West will document the portfolio
manager's decision for each proxy received from PIMCO's Middle Office Group in a
format designated by the custodian bank or other third party service provider.
IMS West will maintain a log of all corporate actions, including proxy voting,
which indicates, among other things, the date the notice was received and
verified, PIMCO's response, the date and time the custodian bank or other third
party service provider was notified, the expiration date and any action taken.
6. Information Barriers. Certain entities controlling, controlled by, or
under common control with PIMCO ("Affiliates") may be engaged in banking,
investment advisory, broker-dealer and investment banking activities. PIMCO
personnel and PIMCO's agents are prohibited from disclosing information
regarding PIMCO's voting intentions to any Affiliate. Any PIMCO personnel
involved in the proxy voting process who are contacted by an Affiliate regarding
the manner in which PIMCO or its delegate intend to vote on a specific issue
must terminate the contact and notify the Compliance Group immediately.
Categories of Proxy Voting Issues
- ---------------------------------
In general, PIMCO reviews and considers corporate governance issues related to
proxy matters and generally supports proposals that foster good corporate
governance practices. PIMCO considers each proposal on a case-by-case basis,
taking into consideration various factors and all relevant facts and
circumstances at the time of the vote. PIMCO may vote proxies as recommended by
management on routine matters related to the operation of the issuer and on
matters not expected to have a significant economic impact on the issuer and/or
shareholders, because PIMCO believes the recommendations by the issuer generally
are in shareholders'
B - 31
best interests, and therefore in the best economic interest of PIMCO's clients.
The following is a non-exhaustive list of issues that may be included in proxy
materials submitted to clients of PIMCO, and a non-exhaustive list of factors
that PIMCO may consider in determining how to vote the client's proxies.
Board of Directors
1. Independence. PIMCO may consider the following factors when voting on
director independence issues: (i) majority requirements for the board
and the audit, nominating, compensation and/or other board committees;
and (ii) whether the issuer adheres to and/or is subject to legal and
regulatory requirements.
2. Director Tenure and Retirement. PIMCO may consider the following
factors when voting on limiting the term of outside directors: (i) the
introduction of new viewpoints on the board; (ii) a reasonable
retirement age for the outside directors; and (iii) the impact on the
board's stability and continuity.
3. Nominations in Elections. PIMCO may consider the following factors
when voting on uncontested elections: (i) composition of the board;
(ii) nominee availability and attendance at meetings; (iii) any
investment made by the nominee in the issuer; and (iv) long-term
corporate performance and the price of the issuer's securities.
4. Separation of Chairman and CEO Positions. PIMCO may consider the
following factors when voting on proposals requiring that the
positions of chairman of the board and the chief executive officer not
be filled by the same person: (i) any potential conflict of interest
with respect to the board's ability to review and oversee management's
actions; and (ii) any potential effect on the issuer's productivity
and efficiency.
5. D&O Indemnification and Liability Protection. PIMCO may consider the
following factors when voting on proposals that include director and
officer indemnification and liability protection: (i) indemnifying
directors for conduct in the normal course of business; (ii) limiting
liability for monetary damages for violating the duty of care; (iii)
expanding coverage beyond legal expenses to acts that represent more
serious violations of fiduciary obligation than carelessness (e.g.
negligence); and (iv) providing expanded coverage in cases where a
director's legal defense was unsuccessful if the director was found to
have acted in good faith and in a manner that he or she reasonably
believed was in the best interests of the company.
6. Stock Ownership. PIMCO may consider the following factors when voting
on proposals on mandatory share ownership requirements for directors:
(i) the benefits of additional vested interest in the issuer's stock;
(ii) the ability of a director to fulfill his duties to the issuer
regardless of the extent of his stock ownership; and (iii) the impact
of limiting the number of persons qualified to be directors.
Proxy Contests and Proxy Contest Defenses
1. Contested Director Nominations. PIMCO may consider the following
factors when voting on proposals for director nominees in a contested
election: (i) background and reason for the proxy contest; (ii)
qualifications of the director nominees; (iii) management's track
record; (iv) the issuer's long-term financial performance within its
industry; (v) assessment of what each side is offering shareholders;
(vi) the likelihood that the proposed objectives and goals can be met;
and (vii) stock ownership positions of the director nominees.
2. Reimbursement for Proxy Solicitation Expenses. PIMCO may consider the
following factors when voting on reimbursement for proxy solicitation
expenses: (i) identity of the persons who will pay the expenses; (ii)
estimated total cost of solicitation; (iii) total expenditures to
date; (iv) fees to be paid to proxy solicitation firms; and (v) when
applicable, terms of a proxy contest settlement.
3. Ability to Alter the Size of the Board by Shareholders. PIMCO may
consider whether the proposal seeks to fix the size of the board
and/or require shareholder approval to alter the size of the board.
4. Ability to Remove Directors by Shareholders. PIMCO may consider
whether the proposal allows shareholders to remove directors with or
without cause and/or allow shareholders to elect directors and fill
board vacancies.
5. Cumulative Voting. PIMCO may consider the following factors when
voting on cumulative voting proposals: (i) the ability of significant
stockholders to elect a director of their choosing; (ii) the ability
of minority shareholders to concentrate their support in favor of a
director(s) of their choosing; and (iii) any potential limitation
placed on the director's ability to work for all shareholders.
6. Supermajority Shareholder Requirements. PIMCO may consider all
relevant factors, including but not limited to limiting the ability of
shareholders to effect change when voting on supermajority
requirements to approve an issuer's charter or bylaws, or to approve a
merger or other significant business combination that would require a
level of voting approval in excess of a simple majority.
B - 32
Tender Offer Defenses
1. Classified Boards. PIMCO may consider the following factors when
voting on classified boards: (i) providing continuity to the issuer;
(ii) promoting long-term planning for the issuer; and (iii) guarding
against unsolicited takeovers.
2. Poison Pills. PIMCO may consider the following factors when voting on
poison pills: (i) supporting proposals to require a shareholder vote
on other shareholder rights plans; (ii) ratifying or redeeming a
poison pill in the interest of protecting the value of the issuer; and
(iii) other alternatives to prevent a takeover at a price clearly
below the true value of the issuer.
3. Fair Price Provisions. PIMCO may consider the following factors when
voting on proposals with respect to fair price provisions: (i) the
vote required to approve the proposed acquisition; (ii) the vote
required to repeal the fair price provision; (iii) the mechanism for
determining fair price; and (iv) whether these provisions are bundled
with other anti-takeover measures (e.g., supermajority voting
requirements) that may entrench management and discourage attractive
tender offers.
Capital Structure
1. Stock Authorizations. PIMCO may consider the following factors to help
distinguish between legitimate proposals to authorize increases in
common stock for expansion and other corporate purchases and those
proposals designed primarily as an anti-takeover device: (i) the
purpose and need for the stock increase; (ii) the percentage increase
with respect to the authorization currently in place; (iii) voting
rights of the stock; and (iv) overall capitalization structure of the
issuer.
2. Issuance of Preferred Stock. PIMCO may consider the following factors
when voting on the issuance of preferred stock:
(i) whether the new class of preferred stock has unspecified voting,
conversion, dividend distribution, and other rights;
(ii) whether the issuer expressly states that the stock will not be
used as a takeover defense or carry superior voting rights;
(iii) whether the issuer specifies the voting, dividend, conversion,
and other rights of such stock and the terms of the preferred stock
appear reasonable; and
(iv) whether the stated purpose is to raise capital or make
acquisitions in the normal course of business.
3. Stock Splits. PIMCO may consider the following factors when voting on
stock splits: (i) the percentage increase in the number of shares with
respect to the issuer's existing authorized shares; and (ii) the
industry that the issuer is in and the issuer's performance in that
industry.
4. Reversed Stock Splits. PIMCO may consider the following factors when
voting on reverse stock splits: (i) the percentage increase in the
shares with respect to the issuer's existing authorized stock; and
(ii) issues related to delisting the issuer's stock.
Executive and Director Compensation
1. Stock Option Plans. PIMCO may consider the following factors when
voting on stock option plans: (i) whether the stock option plan
expressly permits the repricing of options; (ii) whether the plan
could result in earnings dilution of greater than a specified
percentage of shares outstanding; (iii) whether the plan has an option
exercise price below the market price on the day of the grant; (iv)
whether the proposal relates to an amendment to extend the term of
options for persons leaving the firm voluntarily or for cause; and (v)
whether the stock option plan has certain other embedded features.
2. Director Compensation. PIMCO may consider the following factors when
voting on director compensation: (i) whether director shares are at
the same market risk as those of the issuer's shareholders; and (ii)
how stock option programs for outside directors compare with the
standards of internal stock option programs.
3. Golden and Tin Parachutes. PIMCO may consider the following factors
when voting on golden and/or tin parachutes: (i) whether they will be
submitted for shareholder approval; and (ii) the employees covered by
the plan and the quality of management.
State of Incorporation
State Takeover Statutes. PIMCO may consider the following factors when
voting on proposals to opt out of a state takeover statute: (i) the
power the statute vests with the issuer's board; (ii) the potential of
the statute to stifle bids; and (iii) the potential for the statute to
empower the board to negotiate a better deal for shareholders.
Mergers and Restructurings
1. Mergers and Acquisitions. PIMCO may consider the following factors
when voting on a merger and/or acquisition: (i) anticipated financial
and operating benefits as a result of the merger or acquisition; (ii)
offer price; (iii) prospects of the combined companies; (iv) how the
deal was negotiated; and (v) changes in corporate governance and the
potential impact on shareholder rights. PIMCO may also consider what
impact the merger or acquisition may have on groups/organizations
other than the issuer's shareholders.
2. Corporate Restructurings. With respect to a proxy proposal that
includes a spin-off, PIMCO may consider the tax and regulatory
advantages, planned use of sale proceeds, market focus, and managerial
incentives. With respect to a proxy proposal that includes an asset
sale, PIMCO may consider the impact on the balance sheet or working
capital and the value received for the asset. With respect to a proxy
proposal that includes a liquidation, PIMCO may consider management's
efforts to pursue alternatives, the appraisal value of assets, and the
compensation plan for executives managing the liquidation.
B - 33
Investment Company Proxies
For a client that is invested in an investment company, PIMCO votes each
proxy of the investment company on a case-by-case basis and takes all
reasonable steps to ensure that proxies are voted consistent with all
applicable investment policies of the client and in accordance with any
resolutions or other instructions approved by authorized persons of the
client.
For a client that is invested in an investment company that is advised by
PIMCO or its affiliates, if there is a conflict of interest which may be
presented when voting for the client (e.g., a proposal to approve a
contract between PIMCO and the investment company), PIMCO will resolve the
conflict by doing any one of the following: (i) voting in accordance with
the instructions/consent of the client after providing notice of and
disclosing the conflict to that client; (ii) voting the proxy in accordance
with the recommendation of an independent third-party service provider; or
(iii) delegating the vote to an independent third-party service provider.
1. Election of Directors or Trustees. PIMCO may consider the following
factors when voting on the director or trustee nominees of a mutual
fund: (i) board structure, director independence and qualifications,
and compensation paid by the fund and the family of funds; (ii)
availability and attendance at board and committee meetings; (iii)
investments made by the nominees in the fund; and (iv) the fund's
performance.
2. Converting Closed-end Fund to Open-end Fund. PIMCO may consider the
following factors when voting on converting a closed-end fund to an
open-end fund: (i) past performance as a closed-end fund; (ii) the
market in which the fund invests; (iii) measures taken by the board to
address any discount of the fund's shares; (iv) past shareholder
activism; (v) board activity; and (vi) votes on related proposals.
3. Proxy Contests. PIMCO may consider the following factors related to a
proxy contest: (i) past performance of the fund; (ii) the market in
which the fund invests; (iii) measures taken by the board to address
past shareholder activism; (iv) board activity; and (v) votes on
related proposals.
4. Investment Advisory Agreements. PIMCO may consider the following
factors related to approval of an investment advisory agreement: (i)
proposed and current fee arrangements/schedules; (ii) fund
category/investment objective; (iii) performance benchmarks; (iv)
share price performance as compared with peers; and (v) the magnitude
of any fee increase and the reasons for such fee increase.
5. Policies Established in Accordance with the 1940 Act. PIMCO may
consider the following factors: (i) the extent to which the proposed
changes fundamentally alter the investment focus of the fund and
comply with SEC interpretation; (ii) potential competitiveness; (iii)
regulatory developments; and (iv) current and potential returns and
risks.
6. Changing a Fundamental Restriction to a Non-fundamental Restriction.
PIMCO may consider the following when voting on a proposal to change a
fundamental restriction to a non-fundamental restriction: (i) reasons
given by the board and management for the change; and (ii) the
projected impact of the change on the fund's portfolio.
7. Distribution Agreements. PIMCO may consider the following when voting
on a proposal to approve a distribution agreement: (i) fees charged to
comparably sized funds with similar investment objectives; (ii) the
distributor's reputation and past performance; and (iii)
competitiveness of the fund among other similar funds in the industry.
8. Names Rule Proposals. PIMCO may consider the following factors when
voting on a proposal to change a fund name, consistent with Rule 35d-1
of the 1940 Act: (i) whether the fund invests a minimum of 80% of its
assets in the type of investments suggested by the proposed name; (ii)
the political and economic changes in the target market; and (iii)
current asset composition.
9. Disposition of Assets/Termination/Liquidation. PIMCO may consider the
following when voting on a proposal to dispose of fund assets,
terminate, or liquidate the fund: (i) strategies employed to salvage
the fund; (ii) the fund's past performance; and (iii) the terms of the
liquidation.
10. Changes to Charter Documents. PIMCO may consider the following when
voting on a proposal to change a fund's charter documents: (i) degree
of change implied by the proposal; (ii) efficiencies that could
result; (iii) state of incorporation; and (iv) regulatory standards
and implications.
11. Changing the Domicile of a Fund. PIMCO may consider the following when
voting on a proposal to change the domicile of a fund: (i) regulations
of both states; (ii) required fundamental policies of both states; and
(iii) the increased flexibility available.
12. Change in Fund's Subclassification. PIMCO may consider the following
when voting on a change in a fund's subclassification from diversified
to non-diversified or to permit concentration in an industry: (i)
potential competitiveness; (ii) current and potential returns; (iii)
risk of concentration; and (iv) consolidation in the target industry.
B - 34
Distressed and Defaulted Securities
1. Waivers and Consents. PIMCO may consider the following when
determining whether to support a waiver or consent to changes in
provisions of indentures governing debt securities which are held on
behalf of clients: (i) likelihood that the granting of such waiver or
consent will potentially increase recovery to clients; (ii) potential
for avoiding cross-defaults under other agreements; and (iii)
likelihood that deferral of default will give the obligor an
opportunity to improve its business operations.
2. Voting on Chapter 11 Plans of Liquidation or Reorganization. PIMCO may
consider the following when determining whether to vote for or against
a Chapter 11 plan in a case pending with respect to an obligor under
debt securities which are held on behalf of clients: (i) other
alternatives to the proposed plan; (ii) whether clients are treated
appropriately and in accordance with applicable law with respect to
their distributions; (iii) whether the vote is likely to increase or
decrease recoveries to clients.
Miscellaneous Provisions
1. Such Other Business. Proxy ballots sometimes contain a proposal
granting the board authority to "transact such other business as may
properly come before the meeting." PIMCO may consider the following
factors when developing a position on proxy ballots that contain a
proposal granting the board authority to "transact such other business
as may properly come before the meeting": (i) whether the board is
limited in what actions it may legally take within such authority; and
(ii) PIMCO's responsibility to consider actions before supporting
them.
2. Equal Access. PIMCO may consider the following factors when voting on
equal access: (i) the opportunity for significant company shareholders
to evaluate and propose voting recommendations on proxy proposals and
director nominees, and to nominate candidates to the board; and (ii)
the added complexity and burden of providing shareholders with access
to proxy materials.
3. Charitable Contributions. PIMCO may consider the following factors
when voting on charitable contributions: (i) the potential benefits to
shareholders; and (ii) the potential impact on the issuer's resources
that could have been used to increase shareholder value.
4. Special Interest Issues. PIMCO may consider the following factors when
voting on special interest issues: (i) the long-term benefit to
shareholders of promoting corporate accountability and responsibility
on social issues; (ii) management's responsibility with respect to
special interest issues; (iii) any economic costs and restrictions on
management; (iv) a client's instruction to vote proxies in a specific
manner and/or in a manner different from these Policies and
Procedures; and (v) the responsibility to vote proxies for the
greatest long-term shareholder value.
B - 35
RREEF AMERICA L.L.C.
("RREEF")
PROXY VOTING POLICY AND GUIDELINES
PROXY VOTING POLICY
RREEF, as a federally registered investment adviser, often has voting power with
respect to securities in client accounts. When RREEF has proxy voting power with
respect to securities in a client's account, it owes certain fiduciary duties
with respect to the voting of proxies. These fiduciary duties include (a) the
duty of care which requires RREEF to monitor corporate events and to vote the
proxies and (b) the duty of loyalty which requires RREEF to vote proxies in a
manner consistent with the best interests of the client and to put the client's
interests before RREEF's own interests. In keeping with its fiduciary duties,
RREEF has adopted and implemented this Proxy Voting Policy which sets forth
RREEF's policies and procedures designed to ensure that RREEF votes each
client's securities in the best interest of the client.
Notwithstanding anything in this Proxy Voting Policy, RREEF places priority on
investment returns over corporate governance correctness. Accordingly, when
economic considerations or extraordinary circumstances warrant, RREEF may make
exceptions to this Proxy Voting Policy.
I. PROXY VOTING DECISIONS
RREEF portfolio management teams will monitor corporate actions, make proxy
voting decisions, describe the basis on which a proxy voting decision is made if
the decision is inconsistent with the Proxy Voting Guidelines (see Section V
below), and be responsible for ensuring that proxies are submitted in a timely
manner. Specifically, each analyst is responsible for making a voting
recommendation on each proposal in such analyst's sector. Each analyst will
communicate his or her voting recommendations in hardcopy or via e-mail to the
portfolio manager. The portfolio manager will review the recommendations and
inform the analyst, the sector portfolio manager and the group's executive
assistant whether the recommendation has been approved. The executive assistant
will then coordinate the vote for each proxy.
As a general rule, RREEF will vote all proxies relating to a particular proposal
the same way for all client accounts holding the security in accordance with
RREEF's Proxy Proposal Guidelines (see Section V below), unless a client
specifically instructs RREEF in writing to vote such client's securities
otherwise. When making proxy voting decisions, RREEF may seek advice or
assistance from third party consultants, such as proxy voting services (e.g.,
Institutional Shareholder Services) or legal counsel.
II. CONFLICTS OF INTEREST
RREEF has adopted a Code of Ethics, Insider Trading Policy, and other compliance
policies and procedures to preserve the independence of its investment advice to
its clients. In addition, RREEF's affiliates, including Deutsche Bank AG,
Deutsche Bank Americas and Deutsche Asset Management ("DeAM"), have adopted
certain policies and procedures (including, among others, Deutsche Bank
Americas/DeAM Confidential, Material, Non-Public Information, Chinese Walls,
Insider Trading Policy) to preserve the independence of investment managers and
to address various conflicts of interest. Nonetheless, from time to time, a
proxy proposal may still involve a conflict between the interests of RREEF's
client and the interests of RREEF or an affiliated person of RREEF. For example,
a conflict may arise if RREEF client accounts held securities issued by a
company when that company (or its affiliate or pension plan) was also RREEF's
client. As another example, a conflict may arise if RREEF client accounts held
securities issued by a company with which a RREEF affiliate has significant
investment banking business.
RREEF securities personnel who are aware of any actual or apparent conflict of
interest relevant to, or any attempt to improperly influence, how RREEF votes
client proxies has a duty to inform the Compliance Officer, or a designee, of
such situation, including any relevant details. In the case of a person
participating in the deliberation on a specific vote, such information should be
conveyed before engaging in any activities or participating in any discussion
relating to such vote. No retaliatory action will be taken against any person
for reporting, in good faith, an actual or apparent conflict.
RREEF personnel responsible for voting client proxies should consult with the
Compliance Officer, who may consult with legal counsel if necessary, to
determine whether a material conflict appears to exist with respect to a given
proxy proposal. The Compliance Officer may also consult the Proxy Voting Working
Group of Deutsche Asset Management when a material conflict situation arises.
When a material conflict appears to exist and cannot be adequately addressed or
resolved by RREEF's other policies and procedures (including RREEF's Proxy
Voting Guidelines attached as an Appendix to this Proxy Voting Policy), or its
structural
B - 36
independence from its affiliates, the following procedures will be followed:
. Before voting proxies for clients affected by the conflict, RREEF will
(a) disclose the nature of the conflict to such clients; (b) inform
such clients how RREEF plans to vote the proxies; and (c) give each
such client the opportunity, by a certain date, to waive the conflict
or to instruct RREEF how to vote the proxies affected by the conflict.
. If a client instructs RREEF how to vote proxies affected by the
conflict, RREEF will vote such proxies in accordance with such
client's instructions. If a client waives the conflict or does not
respond in a timely manner, RREEF will vote such proxies as previously
disclosed to the client in accordance with this Proxy Voting Policy.
. RREEF will take such other action as may be deemed necessary or
appropriate, including, without limitation, recusing certain persons
from the proxy vote at issue.
Nothing in these procedures is intended to revoke RREEF's voting power with
respect to proxies relating to proposals that do not pose a material conflict.
III. DISCLOSURES TO CLIENTS
Upon a client's request, RREEF will furnish, without charge, to the requesting
client (a) a copy of this Proxy Voting Policy or (b) information about how RREEF
voted with respect to such client's securities. Except as otherwise directed by
a client or required by law, RREEF will maintain the confidentiality of how it
plans to vote or has voted proxies relating to such client's securities.
RREEF will disclose to its clients, in its written disclosure statement on Part
II of Form ADV or elsewhere (as deemed necessary or appropriate):
. How clients may obtain information from RREEF about how RREEF voted
with respect to their securities; and
. A descriptive summary of RREEF's proxy voting policies and procedures
as well as how a client may request a copy of this Proxy Voting
Policy.
IV. BOOKS AND RECORDS RELATING TO PROXIES
In connection with voting proxies and this Proxy Voting Policy, RREEF shall
maintain (in hardcopy or electronic form) such books and records as may be
required by applicable law, rules or regulations, including:
. RREEF's policies and procedures relating to voting proxies;
. A copy of each proxy statement that RREEF receives regarding clients'
securities, provided that RREEF may rely on (a) a third party to make
and retain, on RREEF's behalf, pursuant to a written undertaking, a
copy of proxy statements or (b) obtaining a copy of proxy statements
from the SEC's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system;
. A record of each vote cast by RREEF on behalf of clients, provided
that RREEF may rely on a third party to make and retain, on RREEF's
behalf, pursuant to a written undertaking, records of votes cast;
. Copies of any documents created by RREEF that were material to making
a decision on how to vote proxies on behalf of a client or that
memorialize the basis for that decision; and
. A record of each written client request for proxy voting information
and a copy of any written response by RREEF to any written or oral
client request for information on how RREEF voted proxies on behalf of
the requesting client.
Such books and records shall be maintained and preserved in an easily accessible
place for a period of not less than five years from the end of the fiscal year
during which the last entry was made on such record, the first two years in an
appropriate RREEF office.
V. PROXY VOTING GUIDELINES
The Proxy Voting Guidelines beginning on the next page sets forth how RREEF
generally votes proxies with respect to certain proxy proposals that arise
frequently. The Proxy Voting Guidelines are not intended to address every proxy
proposal that may arise, and RREEF will evaluate on a case-by-case basis any
proxy proposals not addressed in the Proxy Voting Guidelines. RREEF reserves the
right to depart from the Proxy Voting Guidelines when RREEF believes that it is
in the client's best interest to do so. Furthermore, instead of voting a proxy,
RREEF may, as it deems in the client's interest, (a) intentionally refrain from
voting a proxy or (b) sell the security. In addition, RREEF's proxy voting
guidelines may be superceded by proxy voting policies or guidelines submitted by
the client.
B - 37
PROXY VOTING GUIDELINES
A. Board of Directors
1. Voting on Director Nominees in Uncontested Elections. RREEF America
L.L.C. ("RREEF") votes on a case-by-case basis ballots for director
nominees, considering such factors as RREEF may deem relevant,
including, among others:
. nominee's background qualifications, such as education and
experience;
. nominee's independence;
. nominee's financial expertise;
. composition of board and committees;
. nominee's attendance at board and committee meetings during the
past two years;
. nominee's investment in the company;
. whether a retired CEO sits on the board;
. whether the chairman is also serving as CEO; and
. long-term corporate performance record relative to a market
index.
In cases of significant votes and when information is readily
available, RREEF may also consider additional factors, such as:
. corporate governance provisions and takeover activity;
. whether the board is staggered;
. board decisions regarding executive pay;
. director compensation;
. number of other board seats held by nominee; and
. interlocking directorships.
2. Chairman and CEO as Different Persons. Generally, RREEF votes for
proposals that would require the positions of chairman and CEO to be
held by different persons.
3. Majority or Supermajority of Independent Directors. RREEF votes for
proposals to require that the board be comprised of a majority or
supermajority of independent directors.
4. Stock Ownership Requirements. RREEF evaluates on a case-by-case basis
shareholder proposals to require directors to own a minimum amount of
company stock in order to qualify as a director or to remain on the
board.
5. Term of Office. RREEF evaluates on a case-by-case basis shareholder
proposals to limit the tenure of outside directors.
6. Director and Officer Indemnification and Liability Protection. RREEF
evaluates on a case-by-case basis proposals concerning director and
officer indemnification and liability protection.
7. Charitable Contributions. RREEF votes on a case-by-case basis
shareholder proposals to eliminate, direct or otherwise restrict
charitable contributions.
B. Proxy Contests
1. Voting for Director Nominees in Contested Elections. RREEF evaluates
on a case-by-case basis votes in a contested election of directors,
considering such factors as RREEF may deem relevant, including, among
others:
. long-term financial performance of the target company relative to
its industry;
. management's track record;
. background to the proxy contest;
. qualifications of director nominees (both slates);
. evaluation of what each side is offering shareholders as well as
the likelihood that the proposed objectives and goals can be met;
and
. stock ownership positions.
2. Reimburse Proxy Solicitation Expenses. RREEF evaluates on a
case-by-case basis decisions to provide full reimbursement for
dissidents waging a proxy contest. In cases where RREEF recommends
voting in favor of dissidents, RREEF generally votes for reimbursing
proxy solicitation expenses.
B - 38
C. Outside Auditors
When considering proposals involving outside auditors, RREEF considers such
factors as RREEF may deem relevant, including, among other, (a) whether an
auditor lacks independence due to a financial interest in or association
with the company or otherwise, including the amount and type of non-audit
fees received by the auditor; (b) whether the outside auditor has ever
rendered an opinion that does not fairly present the company's financial
position; and (c) whether the company's internal controls appear to be
ineffective due to guidance provided by the outside auditor.
1. Ratifying Auditors. RREEF evaluates on a case-by-case basis proposals
to ratify outside auditors.
2. Changing Auditors. RREEF evaluates on a case-by-case basis proposals
to change outside auditors.
D. Proxy Contest Defenses
1. Board Structure: Staggered vs. Annual Elections.
. RREEF votes against proposals to classify the board.
. RREEF votes for proposals to repeal classified boards and to elect all
directors annually.
2. Shareholder Ability to Remove Directors.
. RREEF votes against proposals that provide that directors may be
removed only for cause.
. RREEF votes for proposals to restore shareholder ability to remove
directors with or without cause.
. RREEF votes against proposals that provide that only continuing
directors may elect replacements to fill board vacancies.
. RREEF votes for proposals that permit shareholders to elect directors
to fill board vacancies.
3. Shareholder Ability to Call Special Meetings.
. RREEF votes against proposals to restrict or prohibit shareholder
ability to call special meetings.
. RREEF votes for proposals that remove restrictions on the right of
shareholders to act independently of management.
4. Shareholder Ability to Act by Written Consent.
. RREEF votes against proposals to restrict or prohibit shareholder
ability to take action by written consent.
. RREEF votes for proposals to allow or make easier shareholder action
by written consent.
5. Shareholder Ability to Alter the Size of the Board.
. RREEF votes for proposals that seek to fix the size of the board.
. RREEF votes against proposals that give management the ability to
alter the size of the board without shareholder approval.
E. Tender Offer Defenses
1. Poison Pills.
. RREEF votes for shareholder proposals that ask a company to submit its
poison pill for shareholder ratification.
. RREEF reviews on a case-by-case basis shareholder proposals to redeem
a company's poison pill.
. RREEF reviews on a case-by-case basis management proposals to ratify a
poison pill.
2. Supermajority Shareholder Vote Requirement to Amend the Charter or
Bylaws.
. RREEF votes against management proposals to require a supermajority
shareholder vote to approve charter and bylaw amendments.
. RREEF votes for shareholder proposals to lower supermajority
shareholder vote requirements for charter and bylaw amendments.
3. Supermajority Shareholder Vote Requirement to Approve Mergers.
. RREEF votes against management proposals to require a supermajority
shareholder vote to approve mergers and other significant business
combinations.
. RREEF votes for shareholder proposals to lower supermajority
shareholder vote requirements for mergers and other significant
business combinations.
B - 39
F. Capital Structure
1. Common Stock Authorization.
. RREEF reviews on a case-by-case basis proposals to increase the number
of shares of common stock authorized for issue.
2. Multiple Class Structures.
. RREEF reviews on a case-by-case basis proposals to create multiple
class capital structures to increase the number of shares issued,
taking into account, among other things, whether the total number of
shares is proportionately reduced.
3. Reverse Stock Splits.
. RREEF reviews on a case-by-case basis proposals to implement a reverse
stock split.
4. Blank Check Preferred Authorization.
. RREEF votes on a case-by-case basis proposals to create blank check
preferred stock in cases when the company expressly states that the
stock will not be used as a takeover defense or carry superior voting
rights.
. RREEF reviews on a case-by-case basis proposals that would authorize
the creation of new classes of preferred stock with unspecified
voting, conversion, dividend and distribution, and other rights.
. RREEF reviews on a case-by-case basis proposals to increase the number
of authorized blank check preferred shares.
5. Shareholder Proposals Regarding Blank Check Preferred Stock.
. RREEF votes for shareholder proposals to have blank check preferred
stock placements, other than those shares issued for the purpose of
raising capital or making acquisitions in the normal course of
business, submitted for shareholder ratification.
6. Adjust Par Value of Common Stock.
. RREEF votes for management proposals to reduce the par value of common
stock.
7. Preemptive Rights.
. RREEF reviews on a case-by-case basis proposals to create or abolish
preemptive rights. In evaluating proposals on preemptive rights, RREEF
looks at the size of a company and the characteristics of its
shareholder base.
8. Debt Restructurings.
. RREEF reviews on a case-by-case basis proposals to increase common
and/or preferred shares and to issue shares as part of a debt
restructuring plan.
9. Share Repurchase Programs.
. RREEF votes on a case-by-case basis proposals to institute open-market
share repurchase plans in which all shareholders may participate on
equal terms, taking into account, among other things, whether the
share repurchase program appears to be for anti-takeover purposes.
H. Equity Compensation
In general, RREEF votes on a case-by-case basis on equity compensation
plans (e.g., stock option plans, golden parachutes and employee stock
ownership plans, 401(k) employee benefit plans, etc.) with the view that
viable compensation programs reward the creation of stockholder wealth by
having a high payout sensitivity to increases in shareholder value.
Notwithstanding the preceding sentence, as a general rule, RREEF believes
that all outstanding options plus new options issued cannot be greater than
10% of the fully diluted number of shares, and RREEF will generally vote
against proposals to establish equity compensation plans that exceed such
10% threshold.
In addition, as a general policy, RREEF will vote against option plans that
contain so-called "evergreen" formulae.
In general, RREEF considers on a case-by-case basis proposals to make
material amendments (e.g., increase in the number of options, repricing,
expansion of plan participants, etc.) to equity compensation plans.
B - 40
I. State of Incorporation
1. Voting on State Takeover Statutes.
. RREEF reviews on a case-by-case basis proposals to opt in or out of
state takeover statutes (including control share acquisition statutes,
control share cash-out statutes, freezeout provisions, fair price
provisions, stakeholder laws, poison pill endorsements, severance pay
and labor contract provisions, anti-greenmail provisions, and
disgorgement provisions).
2. Voting on Reincorporation Proposals.
. RREEF reviews proposals to change a company's state or country of
incorporation on a case-by-case basis.
J. Mergers and Corporate Restructurings
1. Mergers and Acquisitions.
RREEF votes on mergers and acquisitions on a case-by-case basis,
considering such factors as RREEF may deem relevant.
2. Corporate Restructuring.
. RREEF votes on corporate restructuring proposals (including minority
squeeze-outs, leveraged buyouts, spin-offs, liquidations, and asset
sales) on a case-by-case basis.
3. Spin-offs.
. RREEF votes on spin-offs on a case-by-case basis depending on the tax
and regulatory advantages, planned use of sale proceeds, market focus,
and managerial incentives.
4. Asset Sales.
. RREEF votes on asset sales on a case-by-case basis after considering
the impact on the balance sheet/working capital, value received for
the asset, and potential elimination of diseconomies.
5. Liquidations.
. RREEF votes on liquidations on a case-by-case basis after reviewing
management's efforts to pursue other alternatives, appraisal value of
assets, and the compensation plan for executives managing the
liquidation.
6. Appraisal Rights.
. RREEF votes for proposals to restore, or provide shareholders with,
rights of appraisal.
7. Changing Corporate Name.
. RREEF votes for changing the corporate name.
K. Social And Environmental Issues
In general, RREEF abstains from voting on shareholder social and
environmental proposals, on the basis that their impact on share value can
rarely be anticipated with any high degree of confidence.
Effective Date for Proxy Voting Policy and Guidelines: As of August 6, 2003
B - 41
FIDELITY MANAGEMENT& RESEARCH COMPANY
("FMR")
PROXY VOTING GUIDELINES FOR FUNDS SUB-ADVISED BY FMR CO.
The following Proxy Voting Guidelines were established in consultation with
Fidelity Management & Research Company, the subadviser to the Earnings Growth
Fund. These guidelines are reviewed periodically by FMR and by non-interested
trustees of Fidelity's Boards of Trustees and, accordingly, are subject to
change. The guidelines are current as of March, 2004.
I. General Principles
A. Except as set forth herein, portfolio securities should generally be
voted in favor of incumbent directors and in favor of routine
management proposals. In general, FMR will oppose shareholder
proposals that do not appear reasonably likely to enhance the
economic returns or profitability of the portfolio company or to
maximize shareholder value.
B. Non-routine proposals covered by the following guidelines should
generally be voted in accordance with the guidelines.
C. Non-routine proposals not covered by the following guidelines or
other special circumstances should be evaluated by the appropriate
FMR analyst or portfolio manager, subject to review by the President
or General Counsel of FMR or the General Counsel of FMR Corp. A
significant pattern of such non-routine proposals or other special
circumstances should be referred to the Operations Committee or its
designee.
II. Portfolio shares should generally be voted against anti-takeover
proposals, including:
A. Fair Price Amendments, except those that consider only a two year
price history and are not accompanied by other anti-takeover
measures.
B. Classified Boards. FMR will generally vote in favor of proposals to
declassify a board of directors. FMR will consider voting against
such a proposal if the issuer's Articles of Incorporation or
applicable statute includes a provision whereby a majority of
directors may be removed at any time, with or without cause, by
written consent, or other reasonable procedures, by a majority of
shareholders entitled to vote for the election of directors.
C. Authorization of "Blank Check" Preferred Stock.
D. Golden Parachutes:
1. Accelerated options and/or employment contracts that will
result in a lump sum payment of more than three times annual
compensation (salary and bonus) in the event of termination.
2. Compensation contracts for outside directors.
3. Tin Parachutes that cover a group beyond officers and directors
and permit employees to voluntarily terminate employment and
receive payment.
4. Adoption of a Golden or Tin Parachute will result in our
withholding authority in the concurrent or next following vote
on the election of directors.
E. Supermajority Provisions.
F. Poison Pills:
1. Introduction of a Poison Pill without shareholder approval will
result in FMR withholding authority in the concurrent or next
following vote on the election of directors. In addition,
extension of an existing Poison Pill or the adoption of a new
Poison Pill without shareholder approval upon the expiration of
an existing Pill will result in FMR withholding authority in
the concurrent or next following vote on the election of
directors.
2. FMR will consider not withholding its authority on the election
of directors if (a) the board has adopted a Poison Pill with a
sunset provision; (b) the Pill is linked to a business strategy
that will result in greater value for the shareholders; (c) the
term is less than 5 years; and (d) shareholder approval is
required to reinstate the expired Pill. In addition, the Funds
will consider not withholding authority on the election of
directors if company management indicates that the
B - 42
board is willing to strongly consider seeking shareholder
ratification of, or adding a sunset provision meeting the above
conditions to, an existing Pill. In such a case, if the company
does not take appropriate action prior to the next annual
shareholder meeting, the Funds would withhold their vote from
the election of directors at that next meeting.
3. FMR will generally withhold authority on the election of
directors if a company refuses, upon request by FMR, to amend a
Poison Pill Plan to allow the Fidelity funds to hold an
aggregate position of up to 20% of a company's total voting
securities and of any class of voting securities. On a
case-by-case basis, FMR may determine not to withhold authority
on the election of directors if a company's Poison Pill Plan,
although imposing an aggregate ownership position limit of less
than 20%, in the judgment of FMR provides the funds with
sufficient investment flexibility.
4. Portfolio shares will be voted for shareholder proposals
requiring or recommending that shareholders be given an
opportunity to vote on the adoption of poison pills.
5. If shareholders are requested to approve adoption of a Poison
Pill plan, the Funds will, in general, consider voting in favor
of the Poison Pill plan if: (a) the board has adopted a Poison
Pill with a sunset provision; (b) the Pill is determined to be
linked to a business strategy that will result in greater value
for the shareholders; (c) the term is generally not longer than
5 years; (d) shareholder approval is required to reinstate an
expired Pill; (e) the Pill contains a provision suspending its
application, by shareholder referendum, in the event a
potential acquirer announces a bona fide offer, made for all
outstanding shares; and (f) the Pill allows the Fidelity funds
to hold an aggregate position of up to 20% of a company's total
voting securities and of any class of voting securities. On a
case-by-case basis, FMR may determine to vote in favor of a
company's Poison Pill Plan if the Plan, although imposing an
aggregate ownership position limit of less than 20%, in the
judgment of FMR provides the funds with sufficient investment
flexibility.
G. Elimination of, or limitation on, shareholder rights (e.g., action
by written consent, ability to call meetings, or remove directors).
H. Transfer of authority from shareholders to directors.
I. Reincorporation in another state (when accompanied by anti-takeover
provisions).
III. Stock Option Plans
A. Stock Option plans should be evaluated on a case-by-case basis.
Portfolio shares should generally be voted against Stock Option Plan
adoptions or amendments to authorize additional shares if:
1. The dilution effect of the shares authorized under the plan,
plus the shares reserved for issuance pursuant to all other
stock plans, is greater than 10%. However, for companies with
a smaller market capitalization, the dilution effect may not be
greater than 15%. If the plan fails this test, the dilution
effect may be evaluated relative to any unusual factor
involving the company.
2. The offering price of options is less than 100% of fair market
value on the date of grant, except that the offering price may
be as low as 85% of fair market value if the discount is
expressly granted in lieu of salary or cash bonus.
3. The Board may, without shareholder approval, (i) materially
increase the benefits accruing to participants under the plan,
(ii) materially increase the number of securities which may be
issued under the plan, or (iii) materially modify the
requirements for participation in the plan.
4. The granting of options to non-employee directors is subject to
management discretion, the plan is administered by a
compensation committee not comprised entirely of non-employee
directors or the plan is administered by a board of directors
not comprised of a majority of non-employee directors, versus
non-discretionary grants specified by the plan's terms.
5. However, a modest number of shares may be available for grant
to employees and non-employee directors without complying with
Guidelines 2, 3 and 4 immediately above if such shares meet
both of two conditions:
a. They are granted by a compensation committee composed
entirely of independent directors.
b. They are limited to 5% (large capitalization company) and
10% (small capitalization company) of the shares authorized
for grant under the plan.
B - 43
6. The plan's terms allow repricing of underwater options, or the
Board/Committee has repriced options outstanding under the plan
in the past 2 years. However, option repricing may be
acceptable if all of the following conditions, as specified by
the plan's express terms, or board resolution, are met:
a. The repricing is authorized by a compensation committee
composed entirely of independent directors to fulfill a
legitimate corporate purpose such as retention of a key
employee;
b. The repricing is rarely used and then only to maintain
option value due to extreme circumstances beyond
management's control; and
c. The repricing is limited to no more than 5% (large
capitalization company) or 10% (small capitalization
company) of the shares currently authorized for grant under
the plan.
7. Furthermore, if a compensation committee composed entirely of
independent directors determines that options need to be
granted to employees other than the company's executive
officers, that no shares are currently available for such
options under the company's existing plans, and that such
options need to be granted before the company's next
shareholder meeting, then the company may reprice options in an
amount not to exceed an additional 5% or 10%, as applicable, if
such company seeks authorization of at least that amount at the
very next shareholders' meeting.
8. For purposes of this Guideline III, a large capitalization
company generally means a company in the Russell 1000; the
small capitalization company category generally includes all
companies outside the Russell 1000.
B. FMR will generally withhold its authority on the election of
directors if, within the last year and without shareholder approval,
the company's board of directors or compensation committee has
repriced outstanding options held by officers or directors which,
together with all other options repriced under the same stock option
plan (whether held by officers, directors or other employees) exceed
5% (for a large capitalization company) or 10% (for a small
capitalization company) of the shares authorized for grant under the
plan.
C. Proposals to reprice outstanding stock options should be evaluated
on a case-by-case basis. FMR will consider supporting a management
proposal to reprice outstanding options based upon whether the
proposed repricing is consistent with the interests of shareholders,
taking into account such factors as:
1. Whether the repricing proposal excludes senior management and
directors;
2. Whether the options proposed to be repriced exceeded FMR's
dilution thresholds when initially granted;
3. Whether the repricing proposal is value neutral to shareholders
based upon an acceptable options pricing model;
4. The company's relative performance compared to other companies
within the relevant industry or industries;
5. Economic and other conditions affecting the relevant industry
or industries in which the company competes; and
6. Any other facts or circumstances relevant to determining
whether a repricing proposal is consistent with the interests
of shareholders.
IV. Restricted Stock Awards ("RSA") should be evaluated on a case-by-case
basis. Portfolio shares should generally be voted against RSA adoptions
or amendments to authorize additional shares if:
A. The dilution effect of the shares authorized under the plan, plus
the shares reserved for issuance pursuant to all other stock plans,
is greater than 10%. However, for companies with a smaller market
capitalization, the dilution effect may not be greater than 15%. If
the plan fails this test, the dilution effect may be evaluated
relative to any unusual factor involving the company.
B. The Board may materially alter the RSA without shareholder approval,
including a provision that allows the Board to lapse or waive
restrictions at its discretion.
C. The granting of RSAs to non-employee directors is subject to
management discretion, versus non-discretionary grants specified by
the plan's terms.
B - 44
D. The restriction period is less than 3 years. RSAs with a restriction
period of less than 3 years but at least 1 year are acceptable if
the RSA is performance based.
E. However, a modest number of shares may be available for grant to
employees and non-employee directors without complying with
Guidelines B, C and D immediately above if such shares meet both of
two conditions:
1. They are granted by a compensation committee composed entirely
of independent directors.
2. They are limited to 5% (large capitalization company) and 10%
(small capitalization company) of the shares authorized for
grant under the plan.
F. For purposes of this Guideline IV, a large capitalization company
generally means a company in the Russell 1000; the small
capitalization company category generally includes all companies
outside the Russell 1000.
G. Proposals to grant restricted stock in exchange for options should
be evaluated on a case-by-case basis. FMR will consider supporting a
management proposal to grant restricted stock awards in exchange for
options based upon whether the proposed exchange is consistent with
the interests of shareholders, taking into account such factors as:
1. Whether the restricted stock award exchange proposal excludes
senior management and directors;
2. Whether the options proposed to be exchanged exceeded FMR's
dilution thresholds when initially granted;
3. Whether the restricted stock award exchange proposal is value
neutral to shareholders based upon an acceptable stock award
pricing model;
4. The company's relative performance compared to other companies
within the relevant industry or industries;
5. Economic and other conditions affecting the relevant industry
or industries in which the company competes; and
6. Any other facts or circumstances relevant to determining
whether a restricted stock award exchange proposal is
consistent with the interests of shareholders.
V. Other Stock-Related Plans should be evaluated on a case-by-case basis:
A. Omnibus Stock Plans - vote against entire plan if one or more
component violates any of the criteria in parts III or IV above,
except if the component is de minimus. In the case of an omnibus
stock plan, the 5% and 10% limits in Guidelines III and IV will be
measured against the total number of shares under all components of
such plan.
B. Employee Stock Purchase Plans - vote against if the plan violates
any of the criteria in parts III and IV above, except that the
minimum stock purchase price may be equal to or greater than 85% of
the stock's fair market value if the plan constitutes a reasonable
effort to encourage broad based participation in the company's
equity. In the case of non-U.S. company stock purchase plans, the
minimum stock purchase price may be equal to the prevailing "best
practices," as articulated by the research or recommendations of the
relevant proxy research or corporate governance services, provided
that the minimum stock purchase price must be at least 75% of the
stock's fair market value.
C. Stock Awards (other than stock options and RSAs) - generally vote
against unless they are identified as being granted to
officers/directors in lieu of salary or cash bonus, subject to
number of shares being reasonable.
VI. Unusual Increases in Common Stock:
A. An increase of up to 3 times outstanding and scheduled to be issued,
including stock options, is acceptable; any increase in excess of 3
times would be voted against except in the case of real estate
investment trusts, where an increase of 5 times is, in general,
acceptable.
B. Measured as follows: requested increased authorization plus stock
authorized to be issued under Poison Pill divided by current stock
outstanding plus any stock scheduled to be issued (not including
Poison Pill authority). (If the result is greater than 3, Portfolio
shares should be voted against.)
B - 45
VII. Portfolio shares should, in general, be voted against the introduction of
new classes of Stock with Differential Voting Rights.
VIII. With regard to Cumulative Voting Rights, Portfolio shares should be voted
in favor of introduction or against elimination on a case-by-case basis
where this is determined to enhance Portfolio interests as minority
shareholders.
IX. Greenmail - Portfolio shares should be voted for anti-greenmail proposals
so long as they are not part of anti-takeover provisions.
X. Portfolio shares should be voted in favor of charter by-law amendments
expanding the Indemnification of Directors and/or limiting their
liability for Breaches of Care.
A. Portfolio shares should be voted against such proposals if FMR is
otherwise dissatisfied with the performance of management or the
proposal is accompanied by anti-takeover measures.
XI. Portfolio shares should be voted in favor of proposals to adopt
Confidential Voting and Independent Vote Tabulation practices.
XII. Portfolio shares should be voted in favor of proposed amendments to a
company's certificate of incorporation or by-laws that enable the company
to Opt Out of the Control Shares Acquisition Statutes.
XIII. Employee Stock Ownership Plans ("ESOPs") should be evaluated on a
case-by-case basis. Portfolio shares should usually be voted for
non-leveraged ESOPs. For leveraged ESOPs, FMR may examine the company's
state of incorporation, existence of supermajority vote rules in the
charter, number of shares authorized for the ESOP, and number of shares
held by insiders. FMR may also examine where the ESOP shares are
purchased and the dilution effect of the purchase. Portfolio shares
should be voted against leveraged ESOPs if all outstanding loans are due
immediately upon change in control.
XIV. Voting of shares in securities of any U.S. banking organization shall be
conducted in a manner consistent with conditions that may be specified by
the Federal Reserve Board for a determination under federal banking law
that no Fund or group of Funds has acquired control of such banking
organization.
XV. Avoidance of Potential Conflicts of Interest
Voting of shares shall be conducted in a manner consistent with the best
interests of mutual fund shareholders as follows: (i) securities of a
portfolio company shall be voted solely in a manner consistent with the
Proxy Voting Guidelines; and (ii) voting shall be done without regard to
any other Fidelity Companies' relationship, business or otherwise, with
that portfolio company.
FMR applies the following policies and follows the procedures set forth
below:
A. FMR has placed responsibility for the Funds' proxy voting in the FMR
Legal Department.
B. The FMR Legal Department votes proxies according to the Proxy Voting
Guidelines that are approved by the Funds' Board of Trustees.
C. The FMR Legal Department consults with the appropriate analysts or
portfolio managers regarding the voting decisions of non-routine
proposals that are not addressed by the Proxy Voting Guidelines.
Each of the President or General Counsel of FMR or the General
Counsel of FMR Corp is authorized to take a final decision.
D. When a Fidelity Fund invests in an underlying fund in reliance on
any one of Sections 12(d)(1)(E), (F) or (G) of the Investment
Company Act of 1940, as amended, or to the extent disclosed in the
Fund's registration statement, FMR will use pass through voting or
echo voting procedures.
XVI. Executive Compensation
FMR will consider withholding authority for the election of directors and
voting against management proposals on stock-based compensation plans or
other compensation plans based on whether the proposals are consistent
with the interests of shareholders, taking into account such factors as:
(i) whether the company has an independent compensation committee; and
(ii) whether the compensation committee has authority to engage
independent compensation consultants.
XVII. Portfolio shares should generally be voted against shareholder proposals
calling for or recommending the appointment of a non-executive or
independent chairperson. However, FMR will consider supporting such
proposals in limited cases if, based
B - 46
upon particular facts and circumstances, appointment of a non-executive
or independent chairperson appears likely to further the interests of
shareholders and to promote effective oversight of management by the
board of directors.
XVIII. Auditors
A. Portfolio shares should generally be voted against shareholder
proposals calling for or recommending periodic rotation of a
portfolio company's auditor. FMR will consider voting for such
proposals in limited cases if, based upon particular facts and
circumstances, a company's board of directors and audit committee
appear to have clearly failed to exercise reasonable business
judgment in the selection of the company's auditor.
B. Portfolio shares should generally be voted against shareholder
proposals calling for or recommending the prohibition or limitation
of the performance of non-audit services by a portfolio company's
auditor. Portfolio shares should also generally be voted against
shareholder proposals calling for or recommending removal of a
company's auditor due to, among other reasons, the performance of
non-audit work by the auditor. FMR will consider voting for such
proposals in limited cases if, based upon particular facts and
circumstances, a company's board of directors and audit committee
appear to have clearly failed to exercise reasonable business
judgment in the oversight of the performance of the auditor of audit
or non-audit services for the company.
XIX. Incorporation or Reincorporation in Another State or Country
Portfolio shares should generally be voted against shareholder proposals
calling for or recommending that a portfolio company reincorporate in the
United States and voted in favor of management proposals to reincorporate
in a jurisdiction outside the United States if (i) it is lawful under
United States, state and other applicable law for the company to be
incorporated under the laws of the relevant foreign jurisdiction and to
conduct its business and (ii) reincorporating or maintaining a domicile
in the United States would likely give rise to adverse tax or other
economic consequences detrimental to the interests of the company and its
shareholders. However, FMR will consider supporting such shareholder
proposals and opposing such management proposals in limited cases if,
based upon particular facts and circumstances, reincorporating in or
maintaining a domicile in the relevant foreign jurisdiction gives rise to
significant risks or other potential adverse consequences that appear
reasonably likely to be detrimental to the interests of the company or
its shareholders.
B - 47
JOHN HANCOCK VARIABLE SERIES TRUST I -FUNDAMENTAL VALUE B FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - FUNDAMENTAL VALUE FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES - December 31, 2003
(Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Fundamental
Fundamental Fundamental Value Fund
Value B Value Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -----------
ASSETS
Long term investments at cost (including $2,464 of $46,628 $114,490 $161,118
securities loaned in the Fundamental Value Fund)
Net unrealized appreciation of investments 6,036 21,232 27,268
Short-term investments at value 300 5,079 5,379
------- -------- --------
Total investments 52,964 140,801 193,765
Cash 12 -- 12
Receivable for:
Investments sold -- 362 362
Fund shares sold -- 52 52
Dividends 66 218 284
Futures contracts variation margin 1 5 6
Other assets -- 5 5
------- -------- --------
Total assets 53,043 141,443 194,486
------- -------- --------
LIABILITIES
Payables for:
Investments purchased -- 188 188
Fund shares purchased 6 -- 6
Collateral for securities on loan -- 2,398 2,398
Merger expenses $ 70 B 70
Other liabilities 3 2 5
------- -------- ----- --------
Total liabilities 9 2,588 70 2,667
------- -------- ----- --------
Net assets $53,034 $138,855 $ 70 $191,819
======= ======== ===== ========
Shares of beneficial interest outstanding 5,435 12,600 (628) A 17,407
------- -------- --------
Net asset value per share $9.76 $11.02 $ 11.02
======= ======== ========
Composition of net assets:
Capital paid-in $53,788 $143,991 $ (70) B $197,709
Accumulated net realized gain (loss) on investments,
futures and foreign currency transactions (6,791) (26,425) (33,216)
Net unrealized appreciation of:
Investments: 6,036 21,232 27,268
Futures 1 57 58
------- -------- ----- --------
Net assets $53,034 $138,855 $ (70) $191,819
======= ======== ===== ========
A Shares of the Acquired Fund are exchanged for the Acquiring Fund Upon
Consumation of the reorganization. Includes 5 thousand shares as adjustment
for merger expenses.
B Estimated amount of merger recurring expenses of the reorganization.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -FUNDAMENTAL VALUE B FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - FUNDAMENTAL VALUE FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Fundamental
Fundamental Fundamental Value Fund
Value B Value Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -----------
INVESTMENT INCOME:
Interest $ 18 $ 51 $ 69
Dividends 968 2,767 3,735
Securities lending -- 6 6
------- ------- -------
Total income 986 2,824 $ 3,810
------- ------- -------
EXPENSES:
Investment advisory fee 332 965 (45)A 1,252
Auditors fees 6 17 23
Custodian fees 71 81 (15)B 137
Legal fees 3 9 12
Printing & mailing fees 4 10 14
Trustees' fees 1 4 5
Other fees 1 5 6
------- ------- ---- -------
Total expenses 418 1,091 (60) 1,449 C
Less expenses reimbursed (42) (8) (50)
Less custodian expense reduction offset by
commission recapture arrangement -- (10) (10)
------- ------- ---- -------
Net expenses 376 1,073 (60) 1,389
------- ------- ---- -------
Net investment income 610 1,751 60 2,421
------- ------- ---- -------
REALIZED AND UNREALIZED GAIN
Net realized gain (loss) on:
Investments 460 (3,838) (3,378)
Financial futures contracts 63 135 198
Foreign currency transactions -- 1 1
Change in unrealized appreciation (depreciation) on:
Investments 10,555 32,759 43,314
Futures 1 161 162
------- ------- ---- --------
Net realized and unrealized gain 11,079 29,218 -- 40,297
------- ------- ---- --------
Net increase (decrease) in net assets
resulting from operations $11,689 $30,969 $ 60 $42,718
======= ======= ==== =======
A Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
B Decreases reflect the elimination of duplicate expense achieved by merging
the funds.
C One time transaction fees relating directly to the fund merger were not
considered in the proforma statement of operations. Estimated one time
transaction fees are $70,000.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I - FUNDAMENTAL VALUE B (formerly Large Cap
Value CORE)
JOHN HANCOCK VARIABLE SERIES TRUST I - FUNDAMENTAL VALUE
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - December 31, 2003
(Unaudited)
(showing percentage of combined pro forma total value of investments)
- --------------------------------------------------------------------------------
Fundamental Fundamental Fundamental Fundamental
Value B Value Proforma Value B Value Proforma
Fund Fund Combined Name of Issuer Fund Fund Combined
- ----------- ----------- --------- -------------------------------------------- ----------- ----------- --------
Shares/Par Value Market Value (000's)
- ------------------------------------- ------------------------------------
COMMON STOCK
Aerospace & Defense - 0.9%
2,900 2,900 Boeing Co. * $ 122 $ 122
17,100 17,100 General Dynamics Corp. * $ 1,546 1,546
1,100 1,100 Northrop Grumman Corp. 105 105
------- -------
21,100 1,773
Air Freight and Couriers - 0.3%
9,700 9,700 Fedex Corp. 655 655
------- -------
9,700 655
Airlines - 0.3%
32,800 32,800 Continental Airlines, Inc. - Cl. B * 534 534
2,600 2,600 Southwest Airlines Co. 42 42
------- -------
35,400 576
Auto Components - 1.5%
17,900 17,900 Dana Corp. 329 329
17,600 17,600 Delphi Automotive Systems Corp. * 180 180
5,100 5,100 Johnson Controls, Inc. 592 592
28,500 28,500 Lear Corp. * 1,748 1,748
------- -------
69,100 2,849
Automobiles - 0.8%
46,200 46,200 Ford Motor Co. 739 739
14,400 14,400 General Motors Corp. * 769 769
------- -------
60,600 1,508
Banks - 14.4%
3,100 3,100 Bank Hawaii Corp. 131 131
20,210 58,500 78,710 Bank of America Corp. * 1,625 4,705 6,330
6,000 105,600 111,600 Bank One Corp. * 274 4,814 5,088
6,100 6,100 Charter One Financial, Inc. 211 211
4,300 19,800 24,100 Comerica, Inc. 241 1,110 1,351
18,959 18,959 Commerce Bancshares, Inc. 929 929
27,700 27,700 FirstMerit Corp. 747 747
5,900 5,900 FleetBoston Financial Corp. 258 258
29,000 29,000 Golden West Financial Corp. * 2,993 2,993
20,600 20,600 Hibernia Corp. - Cl. A 484 484
34,000 34,000 JP Morgan Chase & Co. 1,249 1,249
16,100 16,100 National City Corp. * 546 546
1,100 1,100 Popular, Inc. 49 49
12,200 12,200 Regions Financial Corp. 454 454
6,600 6,600 Silicon Valley Bancshares * 238 238
14,800 14,800 SouthTrust Corp. * 484 484
4,800 4,800 Suntrust Banks, Inc. * 343 343
20,200 20,200 UBS AG 1,374 1,374
2,600 46,600 49,200 UnionBanCal Corp. 150 2,681 2,831
13,900 13,900 US Bancorp * 414 414
22,700 22,700 Wachovia Corp. * 1,058 1,058
-------
521,369 27,562
Beverages - 0.5%
28,700 28,700 Constellation Brands, Inc. - Cl. A * 945 945
------- -------
28,700 945
Biotechnology - 0.4%
6,600 6,600 Amgen, Inc. * 408 408
1,600 1,600 Genetech, Inc. * 150 150
3,700 3,700 Gilead Sciences, Inc. * 215 215
------- -------
11,900 773
Building Products - 0.6%
40,300 40,300 Masco Corp. 1,105 1,105
2,700 2,700 York International Corp. 99 99
------- -------
43,000 1,204
Chemicals - 2.7%
12,600 29,600 42,200 Dow Chemical Co. * 524 1,230 1,754
33,600 33,600 E.I. du Pont de Nemours & Co. * 1,542 1,542
20,500 20,500 Monsanto Co. 590 590
30,500 30,500 Rohm & Haas Co. 1,303 1,303
------- -------
126,800 5,189
Commercial Services & Supplies - 1.3%
800 800 Alliance Data Systems Corp. * 22 22
64,100 64,100 Cendant Corp. * 1,428 1,428
5,500 5,500 IMS Health, Inc. * 137 137
4,600 4,600 ITT Educational Services, Inc. * 216 216
4,800 4,800 Republic Services, Inc. - Cl. A * 123 123
18,500 18,500 Waste Management, Inc. * 547 547
------- -------
98,300 2,473
Communications Equipment - 1.1%
9,000 9,000 Advanced Fibre Communications, Inc. * 181 181
33,900 33,900 Avaya, Inc. * 439 439
26,400 26,400 Brocade Communications Systems, Inc. * 153 153
52,900 52,900 Corning, Inc. * 552 552
58,100 58,100 Motorola, Inc. 817 817
1,800 1,800 Scientific-Atlanta, Inc. * 49 49
------- ------
182,100 2,191
Computers & Peripherals - 3.2%
7,242 112,957 120,199 Hewlett-Packard Co. * 166 2,595 2,761
14,800 14,800 Intel Corp. 477 477
2,500 17,000 19,500 International Business Machines Corp. 232 1,575 1,807
84,800 84,800 Maxtor Corp. * 941 941
1,200 1,200 SanDisk Corp. * 73 73
------- ------
240,499 6,059
Containers & Packaging - 0.1%
7,400 7,400 Owens-Illinois, Inc. * 88 88
2,300 2,300 Sealed Air Corp. * 125 125
------- ------
9,700 213
Credit Card - 0.1%
7,900 7,900 MBNA Corp. * 196 196
------- ------
7,900 196
Diversified Financials - 11.0%
3,600 3,600 AmeriCredit Corp. * 57 57
8,500 8,500 Capital One Financial Corp. 521 521
15,800 15,800 CIT Group, Inc. * 568 568
40,300 150,266 190,566 Citigroup, Inc. * 1,956 7,294 9,250
12,666 12,666 Countrywide Credit Industries, Inc. * 961 961
10,350 10,350 Doral Financial Corp. 334 334
16,500 16,500 Franklin Resources, Inc. * 859 859
22,300 22,300 Friedman Billings Ramsey Group - Cl. A 515 515
12,200 12,200 Goldman Sachs Group, Inc. 1,204 1,204
16,600 16,600 Legg Mason, Inc. * 1,281 1,281
4,600 4,600 Lehman Brothers Holdings, Inc. 355 355
3,300 39,400 42,700 Merrill Lynch & Co., Inc. * 194 2,311 2,505
8,500 8,500 Moody's Corp. * 515 515
900 14,400 15,300 Morgan Stanley, Dean Witter, Discover & Co. 52 833 885
2,200 2,200 Nationwide Financial Services - Cl. A 73 73
3,800 3,800 Nuveen Investments, Inc. - Cl. A 101 101
13,700 13,700 Washington Mutual, Inc. * 550 550
9,500 9,500 Wells Fargo & Co. * 559 559
------- ------
409,382 21,093
Diversified Telecommunication Services
- 5.3%
51,900 51,900 AT&T Corp. * 1,054 1,054
34,800 34,800 BellSouth Corp. 985 985
5,000 5,000 CenturyTel, Inc. 163 163
103,900 103,900 Citizens Communications Co. * 1,290 1,290
335,800 335,800 Qwest Communications International, Inc. 1,451 1,451
26,400 26,400 SBC Communications, Inc. * 688 688
41,300 48,800 90,100 Sprint Corp. * 678 801 1,479
12,000 75,200 87,200 Verizon Communications * 421 2,638 3,059
------- ------
735,100 10,169
Electric Utilities - 4.4%
27,900 27,900 Cinergy Corp. * 1,083 1,083
6,700 6,700 Constellation Energy Group, Inc. * 263 263
26,600 26,600 Edison International * 583 583
10,500 10,500 Entergy Corp. * 600 600
8,900 38,312 47,212 Exelon Corp. * 591 2,542 3,133
800 800 FPL Group, Inc. 52 52
33,800 33,800 PG & E Corp. * 939 939
17,400 17,400 Pinnacle West Capital Corp. * 696 696
1,400 1,400 PPL Corp. 61 61
43,200 43,200 TXU Corp. 1,025 1,025
------- ------
215,512 8,435
Electric/Gas - 0.6%
15,800 15,800 Dominion Resources, Inc. 1,008 1,008
11,600 11,600 Northeast Utilities 234 234
------- ------
27,400 1,242
Electrical Equipment - 1.2%
57,300 57,300 American Power Conversion 1,401 1,401
10,500 10,500 United Technologies Corp. * 995 995
------- ------
67,800 2,396
Electronic Equipment & Instruments - 0.6%
2,400 2,400 Agilent Technologies, Inc. * 70 70
11,400 11,400 Avnet, Inc. 247 247
800 800 Harman International Industries, Inc. * 59 59
5,000 5,000 Ingram Micro, Inc. - Cl. A * 80 80
26,800 26,800 Sanmina Corp. * 338 338
12,300 12,300 Thermo Electron Corp. * 310 310
------- ------
58,700 1,104
Energy Equipment & Services - 0.7%
5,500 24,700 30,200 Halliburton Co. * 143 642 785
21,100 21,100 Transocean Sedco Forex, Inc. * 507 507
------
51,300 1,292
Finance - 0.1%
2,400 2,400 A.G. Edwards, Inc. * 87 87
------- ------
2,400 87
Food & Drug Retailing - 0.7%
2,000 2,000 CVS Corp. 72 72
37,200 37,200 SuperValu, Inc. * 1,064 1,064
4,700 4,700 Sysco Corp. * 175 175
------- ------
43,900 1,311
Food Products - 2.0%
38,800 38,800 Archer Daniels Midland Co. * 590 590
21,100 21,100 General Mills, Inc. * 956 956
18,500 35,200 53,700 Kraft Foods, Inc. - Cl. A 596 1,134 1,730
36,900 36,900 Tyson Foods, Inc. - Cl. A 489 489
------- ------
150,500 3,765
Gas Utilities - 0.5%
54,600 54,600 El Paso Corp. 447 447
9,300 9,300 Kinder Morgan, Inc. * 550 550
------- ------
63,900 997
Health Care Equipment & Supplies - 0.4%
4,400 4,400 Guidant Corp. 265 265
7,400 7,400 Zimmer Holdings, Inc. * 521 521
------- ------
11,800 786
Health Care Providers & Services - 0.7%
8,900 8,900 Humana, Inc. * 203 203
33,100 33,100 McKesson HBOC, Inc. 1,064 1,064
------- ------
42,000 1,267
Household Products - 0.6%
4,300 6,900 11,200 Procter & Gamble Co. * 430 689 1,119
------- ------
11,200 1,119
Insurance - 6.9%
3,115 15,250 18,365 American International Group, Inc. * 207 1,011 1,218
1,100 1,100 American National Insurance Co. 93 93
4,500 4,500 Chubb Corp. * 307 307
5,100 5,100 Loews Corp. * 252 252
23,400 23,400 Marsh & McLennan Cos., Inc. * 1,121 1,121
9,900 48,950 58,850 MBIA, Inc. * 586 2,899 3,485
16,700 16,700 Metlife, Inc. * 562 562
17,600 17,600 Principal Financial Group. * 582 582
17,700 17,700 Prudential Financial, Inc. * 739 739
39,200 39,200 St. Paul Cos., Inc. 1,554 1,554
8,428 8,428 Travelers Property Casualty Corp. - Cl. B 143 143
11,100 11,100 XL Capital, Ltd. - Cl. A * 861 861
------- ------
222,043 10,917
Internet Software & Services -0.2%
26,700 26,700 VeriSign, Inc. * 435 435
------- ------
26,700 435
IT Consulting & Services - 0.4%
19,600 19,600 Accenture, Ltd. - Cl. A * 516 516
4,000 4,000 Computer Sciences Corp. * 177 177
------- ------
23,600 693
Machinery - 1.2%
3,200 3,200 AGCO Corp. 65 65
1,000 10,000 11,000 Caterpillar, Inc. * 83 830 913
7,100 7,100 Deere & Co. * 462 462
12,200 12,200 ITT Industries, Inc. * 905 905
------- ------
33,500 2,345
Marine - 0.0%
1,700 1,700 Overseas Shipholding Group, Inc. 58 58
------- ------
1,700 58
Media - 7.0%
11,763 47,400 59,163 Comcast Corp. - Cl. A 386 1,494 1,880
11,300 11,300 Cox Radio, Inc. - Cl. A * 285 285
18,800 18,800 Fox Entertainment Group, Inc. - Cl. A * 548 548
12,300 12,300 Gannett Co., Inc. * 1,097 1,097
15,100 15,100 Hearst-Argyle Television, Inc. * 416 416
17,600 17,600 Interactive Corp. 597 597
134,100 134,100 Liberty Media Corp. - Ser. A * 1,594 1,594
5,700 5,700 Panamsat Corp. * 123 123
432,200 432,200 Sirius Satellite Radio, Inc. * 1,366 1,366
5,000 5,000 The Walt Disney Co. * 117 117
63,300 182,100 245,400 Time Warner, Inc. * 1,139 3,276 4,415
21,200 21,200 Viacom, Inc. - Cl. B * 941 941
--------- --------
977,863 13,379
Metals & Mining - 0.9%
39,400 39,400 Alcoa, Inc. * 1,497 1,497
3,000 3,000 Carpenter Technology Corp. * 89 89
3,000 3,000 Freeport-McMoran Copper & Gold, Inc. - 126 126
Cl. B
--------
1,712
---------
45,400
Multiline Retail - 1.2%
53,600 53,600 Big Lots, Inc. * 762 762
3,500 16,000 19,500 Federated Department Stores, Inc. * 165 754 919
26,900 26,900 Saks, Inc. * 404 404
6,700 6,700 Sears, Roebuck & Co. * 305 305
--------- --------
106,700 2,390
Office Electronics - 0.5%
70,900 70,900 Xerox Corp. * 978 978
--------- --------
70,900 978
Oil & Gas - 9.9%
4,100 4,100 Anadarko Petroleum Corp. * 209 209
77,400 77,400 BP Amoco plc - ADR 3,820 3,820
1,500 1,500 Burlington Resources, Inc. * 83 83
4,435 23,700 28,135 ChevronTexaco Corp. * 383 2,047 2,430
20,185 20,185 Conoco Phillips 1,324 1,324
6,100 6,100 Devon Energy Corp. * 349 349
54,200 65,300 119,500 Exxon Mobil Corp. * 2,222 2,677 4,899
18,900 18,900 Marathon Oil Corp. * 625 625
8,900 8,900 Occidental Petroleum Corp. * 376 376
10,800 10,800 Sunoco, Inc. * 553 553
41,300 41,300 Total Fina SA - ADR 3,821 3,821
12,400 12,400 Valero Energy Corp. 575 575
--------- --------
491,020 19,064
Paper & Forest Products - 1.5%
13,700 13,700 Boise Cascade Corp. * 450 450
32,200 32,200 Bowater, Inc. 1,491 1,491
7,300 7,300 Georgia-Pacific Corp. * 224 224
12,400 12,400 Weyerhaeuser Co. 794 794
--------- --------
65,600 2,959
Personal Products - 1.4%
8,500 8,500 Alberto-Culver Co. - Cl. B * 536 536
6,100 6,100 Avon Products, Inc. 412 412
13,600 33,100 46,700 Gillette Co. 499 1,216 1,715
--------- --------
61,300 2,663
Pharmaceuticals - 2.7%
19,100 19,100 Abbott Laboratories * 890 890
8,600 8,600 American Pharmaceutical Partners, Inc * 289 289
17,200 17,200 Eli Lilly & Co. * 1,210 1,210
11,200 11,200 Endo Pharmaceuticals Holdings * 216 216
3,900 3,900 Johnson & Johnson 201 201
41,300 41,300 King Pharmaceuticals, Inc. * 630 630
470 13,700 14,170 Medco Health Solutions, Inc. * 16 466 482
1,100 1,100 Merck & Co., Inc. * 51 51
67,600 67,600 Schering-Plough Corp. * 1,175 1,175
--------- --------
184,170 5,144
Real Estate Investment Trust - 2.2%
22,000 22,000 Equity Office Properties Trust * 630 630
59,100 59,100 General Growth Properties 1,640 1,640
16,000 16,000 HRPT Properties Trust 161 161
34,650 34,650 Kimco Realty Corp. 1,551 1,551
6,500 6,500 Mack-Cali Realty LP * 271 271
--------- --------
138,250 4,253
Real Estate Operations - 0.1%
5,400 5,400 LNR Property Corp. 267 267
--------
267
Road & Rail - 0.5%
11,500 11,500 Canadian National Railway Co. 728 728
4,200 4,200 Union Pacific Corp. 292 292
--------- --------
21,100 1,020
Semiconductor Equipment & Products - 0.9%
43,000 43,000 Fairchild Semiconductor Corp. - Cl. A * 1,074 1,074
9,500 9,500 LSI Logic Corp. * 84 84
15,800 15,800 Novellus Systems, Inc. * 664 664
--------- --------
68,300 1,822
Software - 0.4%
12,200 12,200 Adobe Systems, Inc. 480 480
8,800 8,800 BMC Software, Inc. * 164 164
2,600 2,600 Computer Associates International, Inc. 71 71
2,500 2,500 Jack Henry & Associates, Inc. 51 51
--------- --------
26,100 766
Specialty Retail - 0.9%
25,200 25,200 AutoNation, Inc. * 463 463
3,100 3,100 Blockbuster, Inc. - Cl. A 56 56
38,700 38,700 Foot Locker, Inc. * 907 907
8,300 8,300 Staples, Inc. * 226 226
--------- --------
75,300 1,652
Textiles & Apparel - 0.5%
8,600 8,600 Coach, Inc. * 325 325
14,400 14,400 Reebok International, Ltd. * 566 566
--------- --------
23,000 891
Tobacco - 1.8%
5,700 54,800 60,500 Altria Group, Inc. 310 2,982 3,292
3,300 3,300 R.J. Reynolds Tobacco Holdings, Inc. 192 192
--------- --------
63,800 3,484
U.S. Government Agencies - 0.8%
1,500 26,200 27,700 Federal Home Loan Mortgage Corp. 88 1,528 1,616
--------- --------
27,700 1,616
Wireless Telecommunications Services - 0.3%
36,400 36,400 AT&T Wireless Group * 291 291
10,100 10,100 United States Cellular Corp. * 358 358
- ------------------------------------- ------------------------------------
46,500 649
1,642,613 4,373,195 6,015,808 TOTAL COMMON STOCK (Cost $161,118) - 98.2% $52,664 $135,722 188,386
INVESTMENT COMPANIES HELD AS COLLATERAL ON
LOANED SECURITIES (Cost $2,398) - 1.2%
$ 2,398 2,398 State Street Navigator Securities Lending
Portfolio $ 2,398 $ 2,398
SHORT-TERM INVESTMENTS
U.S. Treasury - Bills - 0.1%
25 25 0.895% due 01/08/04 25 25
25 25 0.91% due 03/04/04 25 25
30 30 0.93% due 02/05/04 30 30
35 35 0.935% due 02/12/04 35 35
100 100 0.94% due 01/22/04 100 100
$ 300 2466 2,766 Investment in joint repurchase agreement
with Goldman Sachs % Co., 0.995%
due 01/02/04 $ 300 2,466 2,766
------------------------------------
TOTAL SHORT TERM INVESTMENTS (Cost $2,981) - 1.6% $ 300 $ 2,681 $ 2,981
TOTAL INVESTMENTS
(Cost $166,497) - 101.0% $52,964 $140,801 $193,765
Payables less Cash and Receivables - (1.0)% 70 (1,946) (1,876)
------------------------------------
NET ASSETS- 100.0% $53,034 $138,855 $191,889
====================================
* Non-income producing security.
See notes to financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -MID CAP VALUE FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - MID CAP VALUE B FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES - December 31, 2003
(Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Mid Cap
Mid Cap Mid Cap Value B Fund
Value Value B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- ------------
ASSETS
Long term investments at cost (including $11,397 of securities $20,418 $ 77,628 $ 98,046
loaned in the Mid Cap Value B Fund)
Net unrealized appreciation of investments 2,918 14,928 17,846
Short-term investments at value 1,081 13,035 14,116
------- -------- --------
Total investments 24,417 105,591 130,008
Cash -- 83 83
Futures Segregation -- 84 84
Receivable for:
Investments sold 86 -- 86
Fund shares sold 18 -- 18
Dividends 29 78 107
------- -------- --------
Total assets 24,550 105,836 130,386
------- -------- --------
LIABILITIES
Payables for:
Investments purchased 58 -- 58
Fund shares purchased -- 77 77
Futures contracts variation margin -- 20 20
Collateral for securities on loan -- 11,835 11,835
Merger expenses 60 B 60
Other liabilities 2 2 4
------- -------- ---- --------
Total liabilities 60 11,934 60 12,064
------- -------- ---- --------
Net assets $24,490 $ 93,902 $(60) $118,332
======= ======== ==== ========
Shares of beneficial interest outstanding 1,854 8,555 371 A 10,780
------- -------- --------
Net asset value per share $ 13.21 $ 10.98 $ 10.98
======= ======== ========
Composition of net assets:
Capital paid-in $21,513 $ 79,046 $(60)B $100,499
Accumulated net realized gain (loss) on investments, futures
and foreign currency transactions 56 (118) (62)
Undistributed net investment income 3 -- 3
Net unrealized appreciation of:
Investments: 2,918 14,928 17,846
Futures -- 46 46
------- -------- ---- --------
Net assets $24,490 $ 93,902 $(60) $118,332
======= ======== ==== ========
A Shares of the Acquired Fund are exchanged for the Acquiring Fund Upon
Consumation of the reorganization. Includes 5 thousand shares as
adjustment for merger expenses.
B Estimated amount of non-recurring expenses of the reorganization.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -MID CAP VALUE FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - MID CAP VALUE B FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Mid Cap
Mid Cap Mid Cap Value B Fund
Value Value B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- ------------
INVESTMENT INCOME:
Interest $ 8 $ 17 $ 25
Dividends 131 976 1,107
Securities lending -- 66 66
------ ------- -------
Total income 139 1,059 $ 1,198
------ ------- -------
EXPENSES:
Investment advisory fee 87 695 (59) A 723
Auditors fees 1 8 9
Custodian fees 28 72 (20) B 80
Legal fees -- 4 4
Printing & mailing fees 1 5 6
Trustees' fees -- 2 2
Other fees -- 2 2
------ ------- ---- -------
Total expenses 117 788 (79) 826 C
Less expenses reimbursed (22) (27) (49)
Less custodian expense reduction offset by
commission recapture arrangement (1) -- (1)
------ ------- ---- -------
Net expenses 94 761 (79) 776
------ ------- ---- -------
Net investment income 45 298 79 422
------ ------- ---- -------
REALIZED AND UNREALIZED GAIN
Net realized gain (loss) on:
Investments 816 7,364 8,180
Financial futures contracts -- 413 413
Change in unrealized appreciation (depreciation) on:
Investments 2,918 18,452 21,370
Futures -- 48 48
------ ------- ---- -------
Net realized and unrealized gain 3,734 26,277 -- 30,011
------ ------- ---- -------
Net increase (decrease) in net assets
resulting from operations $3,779 $26,575 $ 79 $30,433
====== ======= ==== =======
A Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
B Decreases reflect the elimination of duplicate expense achieved by merging
the funds.
C One time transaction fees relating directly to the fund merger were not
considered in the proforma statement of operations. Estimated one time
transaction fees are $60,000.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I - MID CAP VALUE FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - MID CAP VALUE B (Formerly Small/Mid Cap
Core Fund)
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - December 31, 2003
(Unaudited)
(showing percentage of combined pro forma total value of investments)
- --------------------------------------------------------------------------------
Mid Cap Mid Cap Mid Cap Mid Cap
Value Fund Value B Proforma Value Fund Value B Proforma
Fund Fund Combined Name of Issuer Fund Fund Combined
- ---------- ------- -------- --------------------------------------------- ---------- -------- --------
Shares/Par Value Market Value (000's)
- ------------------------------- -------------------------------
COMMON STOCK
Aerospace & Defense - 1.4%
13,000 13,000 Curtiss Wright Corp. $ 585 $ 585
7,200 7,200 Engineered Support Systems, Inc. * 396 396
2,800 2,800 Esterline Technologies Corp. * 75 75
4,000 4,000 Kaman Corp. - Cl. A 51 51
8,600 8,600 Raytheon Co. * 259 259
7,000 7,000 Rockwell Collins, Inc. * 210 210
2,000 2,000 Sequa Corp. - Cl. A 98 98
--------
1,674
Airlines -0.3%
7,900 7,900 Alaska Air Group, Inc. * 216 216
6,700 6,700 America West Holdings Corp. - Cl. B * 83 83
--------
299
Air Freight & Couriers - 0.2%
7,700 7,700 CNF Transportation, Inc. * 261 261
--------
261
Auto Components - 0.5%
11,500 11,500 Autoliv, Inc. 433 433
6,300 6,300 Dura Automotive Systems, Inc. * 81 81
12,500 12,500 Goodyear Tire & Rubber Co. * 98 98
--------
612
Automobiles - 0.2%
9,400 9,400 Lithia Motors, Inc. - Cl. A * 237 237
--------
237
Banks - 6.2%
7,550 7,550 Associated Banc-Corp. 322 322
3,175 3,175 BancorpSouth, Inc. 75 75
32,800 32,800 Bank Hawaii Corp. 1,384 1,384
5,600 5,600 Brookline Bancorp, Inc. 86 86
4,600 4,600 Charter One Financial, Inc. 159 159
5,100 5,100 Citizens Banking Corp. * 167 167
1,400 1,400 City National Corp. 87 87
4,725 6,173 10,898 Commerce Bancshares, Inc. 232 303 535
1,700 1,700 Community Bank Systems, Inc. * 83 83
4,600 4,600 Corus Bankshares, Inc. 145 145
1,200 1,200 First Citizens BancShares, Inc. - Cl. A 146 146
19,300 19,300 Flagstar Bancorp, Inc. 413 413
1,550 1,550 Hancock Holding Co. 84 84
14,700 14,700 Hibernia Corp. - Cl. A 345 345
11,000 11,000 Huntington Bancshares, Inc. * 247 0 247
2,200 2,200 Independence Community Bank Corp. 79 79
5,900 5,900 IndyMac Mortgage Holdings, Inc. 176 176
2,200 2,200 International Bancshares Corp. 104 104
4,800 4,800 National Commerce Financial Corp. 131 131
5,600 5,600 Northern Trust Corp. 260 260
600 600 Omega Financial Corp. 23 23
7,080 7,080 PFF Bancorp, Inc. * 257 257
6,800 6,800 R& G Financial Corp. - Cl. B 271 271
35,700 35,700 Silicon Valley Bancshares * 1,288 1,288
8,000 8,000 Synovus Financial Corp. * 231 231
1,300 1,300 TCF Financial Corp. 67 67
1,750 1,750 Texas Regional Bancshares, Inc. 65 65
3,200 3,200 Trustmark Corp. 94 94
1,900 1,900 United Community Financial Corp. 22 22
--------
7,346
Biotechnology - 3.3%
32,900 32,900 Affymetrix, Inc. * 810 810
6,400 6,400 Applera Corp. - Celera Genomics Group * 89 89
2,500 2,500 Biogen IDEC, Inc. * 92 92
17,700 17,700 Gene Logic, Inc. * 92 92
7,800 7,800 General Probe, Inc. * 284 284
14,300 14,300 IDEXX Laboratories, Inc. * 662 662
3,000 3,000 Invitrogen Corp. * 210 210
10,200 10,200 MedImmune, Inc. * 259 259
13,900 13,900 Neurocrine Biosciences, Inc. * 758 758
4,900 4,900 Protein Design Labs, Inc. * 88 88
9,500 9,500 Vertex Pharmaceuticals, Inc. * 97 97
22,300 22,300 Vicuron Pharmaceuticals, Inc. * 416 416
--------
3,857
Building Products - 1.1%
19,300 19,300 Griffon Corp. * 391 391
8,300 8,300 Lennox International, Inc. 139 139
6,900 6,900 Universal Forest Products, Inc. 222 222
13,300 13,300 USG Corp. 220 220
7,900 7,900 York International Corp. 291 291
--------
1,263
Chemicals - 0.7%
4,500 4,500 Arch Chemicals, Inc. 115 115
4,200 4,200 Central Garden & Pet Co. 118 118
10,700 10,700 Great Lakes Chemical Corp. 291 291
13,600 13,600 IMC Global, Inc. 135 135
2,300 2,300 Lubrizol Corp. 75 75
18,800 18,800 PolyOne Corp. 120 120
--------
854
Commercial Services & Supplies - 8.1%
20,000 20,000 Arbitron, Inc. * 834 834
2,600 2,600 CDI Corp. * 85 85
9,600 9,600 Ceridian Corp. * 201 201
3,000 3,000 Consolidated Graphics, Inc. * 95 95
54,900 54,900 Convergys Corp. * 959 959
27,500 27,500 CSG Systems International, Inc. * 343 343
20,100 20,100 Decode Genetics, Inc. 165 165
22,200 22,200 Deluxe Corp. * 918 918
4,800 4,800 Equifax, Inc. * 118 118
7,400 7,400 Factset Research Systems, Inc. 283 283
9,600 9,600 Gabelli Asset Management, Inc. - Cl. A * 382 382
3,800 3,800 Hewitt Associates, Inc. * 114 114
11,500 11,500 Ikon Office Solutions, Inc. * 136 136
23,000 23,000 ITT Educational Services, Inc. * 1,080 1,080
3,300 3,300 Manpower, Inc. * 155 155
4,400 4,400 Memberworks, Inc. 120 120
28,100 28,100 MPS Group, Inc. * 263 263
2,800 2,800 NCO Group, Inc. * 64 64
14,900 14,900 Pre-Paid Legal Services, Inc. * 389 389
5,000 5,000 Ruddick Corp. 89 89
3,000 3,000 Standard Register Co. 50 50
2,200 2,200 StarTek, Inc. * 90 90
6,400 6,400 Steelcase, Inc. - Cl. A 92 92
12,000 12,000 TeleTech Holdings, Inc. * 136 136
17,000 17,000 The Bisys Group, Inc. * 253 253
4,900 4,900 Unifirst Corp. 116 116
28,200 28,200 United Stationers, Inc. * 1,154 1,154
4,700 4,700 Ventana Medical Systems, Inc. 185 185
7,400 7,400 Viad Corp. 185 185
15,500 15,500 Watsco, Inc. 352 352
8,000 8,000 West Corp. * 186 186
--------
9,592
Communications Equipment - 3.5%
22,000 22,000 Advanced Fibre Communications, Inc. * 443 443
42,200 42,200 Aspect Communications Corp. * 665 665
31,100 31,100 Audiovox Corp. - Cl. A * 399 399
76,200 76,200 Avaya, Inc. * 986 986
16,600 16,600 Brocade Communications Systems, Inc. * 96 96
20,700 20,700 Computer Network Technology * 197 197
24,500 24,500 Metro One Telecom, Inc. * 64 64
4,600 4,600 Omnicell, Inc. 75 75
8,900 8,900 Plantronics, Inc. * 291 291
27,300 27,300 Scientific-Atlanta, Inc. * 745 745
18,200 18,200 Tellabs, Inc. * 153 153
--------
4,114
Computers & Peripherals - 1.9%
3,600 3,600 Electronics for Imaging, Inc. 94 94
18,200 18,200 Gateway, Inc. * 84 84
18,200 18,200 InFocus Corp. * 176 176
15,300 15,300 Maxtor Corp. * 170 170
14,700 14,700 NCR Corp. * 570 570
20,200 20,200 Safeguard Scientifics, Inc. * 81 81
12,100 12,100 SanDisk Corp. * 740 740
11,700 11,700 Storage Technology Corp. * 301 301
--------
2,216
Construction & Engineering - 0.8%
5,000 5,000 CCC Information Services Group * 85 85
21,900 21,900 Quanta Services, Inc. * 160 160
20,700 20,700 ServiceMaster Co. 241 241
26,400 26,400 Spherion Corporation * 258 258
7,300 7,300 Washington Group International, Inc. * 248 248
--------
992
Construction Materials - 1.0%
9,100 9,100 AMCOL International Corp. 185 185
1,800 1,800 Carlisle Cos., Inc. 109 109
2,300 2,300 Charles River Associates, Inc. * 74 74
4,500 4,500 Nucor Corp. 252 252
5,400 5,400 Teledyne Technologies, Inc. * 102 102
11,300 11,300 USEC, Inc. 95 95
7,700 7,700 WSFS Financial Corp. * 345 345
--------
1,162
Containers & Packaging - 0.3%
8,800 8,800 Chesapeake Corp. 233 233
13,600 13,600 Owens-Illinois, Inc. * 162 162
--------
395
Distributors - 0.5%
28,500 28,500 Handleman Co. * 585 585
--------
585
Diversified Financials - 3.5%
33,200 33,200 AmeriCredit Corp. * 529 529
11,300 11,300 BlackRock, Inc. * 600 600
24,600 24,600 Doral Financial Corp. 794 794
10,300 10,300 Friedman Billings Ramsey Group - Cl. A 238 238
12,100 12,100 Janus Capgroup, Inc. 199 199
18,300 9,000 27,300 LaBranche & Co., Inc. * 213 105 318
25,400 25,400 New Century Financial Corp. 1,008 1,008
2,000 2,000 Novastar Financial, Inc. 86 86
13,600 13,600 Nuveen Investments, Inc. - Cl. A 362 362
--------
4,134
Diversified Telecommunication
Services - 1.5%
9,600 9,600 AT&T Corp. * 195 195
2,100 2,100 Commonwealth Telephone Enterprises, Inc. 79 79
11,400 11,400 Crown Castle International Corp. * 126 126
25,500 25,500 IDT Corp. * 565 565
53,000 53,000 Qwest Communications International, Inc. 229 229
19,900 19,900 Sprint PCS * 112 112
43,500 43,500 Time Warner Telecom, Inc. - Cl. A * 440 440
--------
1,746
Electric Utilities - 2.1%
18,100 18,100 Avista Corp. 328 328
14,200 14,200 CMS Energy Corp. * 121 121
5,300 5,300 Duquesne Light Holdings, Inc. 97 97
3,100 3,100 Edison International * 68 68
14,800 6,700 21,500 El Paso Electric Co. * 198 89 287
11,000 11,000 Firstenergy Corp. * 387 387
2,600 2,600 Great Plains Energy, Inc. 83 83
6,500 6,500 Pinnacle West Capital Corp. * 260 260
1,600 1,600 PNM Resources, Inc. 45 45
3,700 3,700 Puget Energy, Inc. 88 88
10,200 10,200 Teco Energy, Inc. * 147 147
11,400 11,400 TXU Corp. 270 270
7,605 7,605 Unisource Energy Corp. 188 188
7,300 7,300 Xcel Energy, Inc. 124 124
--------
2,493
Electric/Gas - 1.2%
69,800 69,800 Northeast Utilities 1,408 1,408
-----
1,408
Electrical Equipment - 0.5%
1,600 1,600 The Genlyte Corp. * 93 93
1,800 1,800 Harris Corp. 69 69
2,300 2,300 Littelfuse, Inc. * 66 66
14,000 14,000 Molex, Inc. - CL A 414 414
--------
642
Electronic Equipment &
Instruments - 3.2%
5,800 5,800 Agilent Technologies, Inc. * 170 170
12,900 12,900 Anixter International, Inc. * 334 334
48,100 48,100 Artesyn Technologies, Inc. 410 410
45,344 45,344 Avnet, Inc. 982 982
16,500 16,500 AVX Corp. 274 274
3,200 3,200 Belden, Inc. * 67 67
13,900 13,900 Cypress Semiconductor Corp. * 297 297
1,500 1,500 Franklin Electric Co., Inc. 91 91
1,400 1,400 Harman International Industries, Inc. * 104 104
5,300 5,300 Methode Electronics, Inc. - Cl. A 65 65
5,300 5,300 PerkinElmer, Inc. * 90 90
69,000 69,000 Sanmina Corp. * 870 870
--------
3,754
Energy Equipment & Services - 1.2%
9,000 9,000 Baker Hughes, Inc. * 289 289
11,000 11,000 Hanover Compressor Co. 123 123
4,500 4,500 Tetra Technologies, Inc. * 109 109
15,600 15,600 Universal Compression Holdings, Inc. * 408 408
43,600 43,600 Veritas DGC, Inc. * 457 457
--------
1,386
Food & Drug Retailing - 1.6%
44,300 44,300 Charming Shoppes, Inc. * 239 239
7,500 7,500 Longs Drug Stores Corp. 186 186
9,900 9,900 Nash Finch Co. 221 221
8,300 8,300 Pathmark Stores, Inc. * 63 63
32,700 32,700 SuperValu, Inc. * 935 935
12,300 12,300 The Great Atlantic & Pacific Tea Co.,
Inc. * 103 103
15,300 15,300 Winn-Dixie Stores, Inc. * 152 152
--------
1,899
Food Products - 1.9%
17,400 17,400 Archer Daniels Midland Co. * 265 265
8,000 8,000 Campbell Soup Co. * 214 214
7,800 7,800 ConAgra, Inc. 206 206
6,200 6,200 Flowers Foods, Inc. * 160 160
6,700 6,700 H.J. Heinz Co. 244 244
9,800 9,800 Pilgrims Pride Corp. - Cl. B 160 160
2,700 2,700 Potash Corp. of Saskatchewan, Inc. 234 234
6,700 6,700 Ralcorp Holdings, Inc. * 210 210
19,700 19,700 USANA Health Sciences 603 603
--------
2,296
Gas Utilities - 0.1%
4,900 4,900 Southwest Gas Corp. 110 110
--------
110
Health Care Equipment & Supplies - 1.2%
15,600 15,600 Advanced Medium Optics, Inc. * 307 307
13,300 13,300 Alaris Medical, Inc. * 202 202
3,100 3,100 Amerisource Bergen Corp. * 174 174
9,600 9,600 Cytyc Corp. * 132 132
8,300 8,300 Dade Behring Holdings, Inc. 297 297
2,600 2,600 Guidant Corp. 156 156
4,400 4,400 Haemonetics Corp. * 105 105
4,200 4,200 Neighborcare, Inc. * 83 83
--------
1,456
Health Care Providers & Services - 3.4%
2,000 2,000 Aetna US Healthcare, Inc. * 135 135
9,000 9,000 Apria Healthcare Group, Inc. * 256 256
21,900 21,900 eResearch Technology, Inc. * 557 557
37,400 37,400 Humana, Inc. * 855 855
6,000 6,000 Kindred Healthcare, Inc. * 312 312
Laboratory Corporation of America
2,900 2,900 Holdings * 107 107
6,300 6,300 Lincare Holdings, Inc. * 189 189
2,900 2,900 Manor Care, Inc. * 100 100
20,800 20,800 Select Medium Corp. * 339 339
10,800 10,800 Tenet Healthcare Corp. * 174 174
91,400 91,400 U.S. Oncology, Inc. * 983 983
--------
4,007
Home Equity Loan - 0.4%
23,800 23,800 CompuCredit Corp. * 506 506
--------
506
Hotels, Restaurants & Leisure - 1.3%
8,200 8,200 CBRL Group, Inc. * 314 314
15,700 15,700 Choice Hotels, Inc. 553 553
6,500 6,500 Dave & Busters, Inc. 82 82
2,900 2,900 P.F. Chang's China Bistro, Inc. * 148 148
7,000 7,000 Papa John's International, Inc. * 234 234
12,400 12,400 Park Place Entertainment Corp. * 134 134
4,200 4,200 Ryan's Family Steak Houses, Inc. * 64 64
--------
1,529
Household Durables - 1.0%
9,500 9,500 Herman Miller, Inc. * 231 231
13,200 13,200 Newell Rubbermaid, Inc. 300 300
1,350 1,350 NVR, Inc. * 629 629
--------
1,160
Industrial Conglomerates - 0.5%
12,900 12,900 Enpro Industries, Inc. * 180 180
23,500 23,500 Regal Entertainment Group - Cl. A 482 482
--------
662
Insurance - 4.4%
7,400 7,400 American Financial Group, Inc. 196 196
3,500 3,500 American Medical Security Group, Inc. * 78 78
1,000 1,000 American National Insurance Co. 84 84
2,300 2,300 Amerus Group Co. * 80 80
3,100 3,100 Cincinnati Financial Corp. * 130 130
9,900 9,900 Conseco, Inc. 216 216
2,500 2,500 Hartford Financial Services Group, Inc. * 148 148
25,000 25,000 LandAmerica Financial Group, Inc. 1,307 1,307
6,600 6,600 Loews Corp. * 326 326
900 900 National Western Life Insurance Co. * 139 139
11,800 11,800 Ohio Casualty Corp. * 205 205
5,300 8,900 14,200 Protective Life Corp. 179 301 480
8,600 8,600 Safeco Corp. * 335 335
19,100 19,100 Stewart Information Services Corp. * 775 775
7,000 7,000 St. Paul Cos., Inc. 277 277
1,800 1,800 The Midland Co. 43 43
12,200 12,200 Travelers Property Casualty Corp. - Cl. A 205 205
10,000 10,000 UnumProvident Corp. * 158 158
--------
5,182
Internet & Catalog Retail - 0.1%
7,300 7,300 Priceline.com, Inc. * 131 131
--------
131
Internet Software & Services - 1.0%
23,900 23,900 EarthLink, Inc. * 239 239
6,100 6,100 eCollege.com * 113 113
19,700 19,700 Internet Security System, Inc. * 371 371
2,600 2,600 J2 Global Communications, Inc. * 64 64
23,000 23,000 United Online, Inc. * 386 386
--------
1,173
IT Consulting & Services - 0.4%
18,100 18,100 BearingPoint, Inc. * 183 183
12,000 12,000 UNOVA, Inc. * 275 275
--------
458
Leisure Equipment & Products - 0.5%
3,600 3,600 Arctic Cat, Inc. 89 89
5,400 5,400 Brunswick Corp. * 172 172
4,100 4,100 Eastman Kodak Co. * 105 105
4,800 4,800 Hasbro, Inc. * 102 102
5,600 5,600 K2, Inc. 85 85
--------
553
Machinery - 1.7%
13,400 13,400 Applied Industrial Technologies, Inc. 320 320
3,600 3,600 Briggs & Stratton Corp. 242 242
9,400 9,400 Cummins Engine Co., Inc. 460 460
25,200 25,200 Grant Prideco, Inc. * 328 328
2,500 2,500 Joy Global, Inc. 65 65
5,900 5,900 NACCO Industries, Inc. - Cl. A 528 528
1,200 1,200 Stewart & Stevenson Services, Inc. 17 17
--------
1,960
Marine - 0.2%
5,300 5,300 Overseas Shipholding Group, Inc. 180 180
--------
180
Media - 4.5%
2,700 2,700 Advo, Inc. * 86 86
14,000 14,000 Cablevision Systems Corp. - Cl. A * 327 327
5,200 31,400 36,600 Cox Radio, Inc. - Cl. A * 131 792 923
5,900 5,900 Dow Jones & Co., Inc. * 294 294
38,200 38,200 Hearst-Argyle Television, Inc. * 1,053 1,053
9,900 9,900 Insight Communications Company, Inc. * 102 102
7,000 7,000 Lamar Advertising Co. * 261 261
1,600 1,600 McClatchy Newspapers, Inc. - Cl. A 110 110
3,400 3,400 Meredith Corp. * 166 166
2,600 2,600 Netflix Common, Inc. 142 142
4,000 4,000 New York Times Co. - Cl. A * 191 191
16,800 16,800 Pearson plc - ADR 188 188
11,100 11,100 Pulitzer, Inc. 600 600
10,900 10,900 Reuters Group plc - ADR 277 277
9,600 9,600 Scholastic Corp. * 327 327
266 266 Washington Post Co. - Cl. B 211 211
World Wrestling Federation
9,400 9,400 Entertainment, Inc. * 123 123
--------
5,381
Metals & Mining - 1.6%
10,400 10,400 Carpenter Technology Corp. * 307 307
16,500 16,500 Coeur D'Alene Mines Corp. 95 95
7,600 7,600 Commercial Metals Co. 231 231
16,600 16,600 Meridian Gold, Inc. * 243 243
9,300 9,300 Noranda, Inc. 147 147
3,000 3,000 Reliance Steel & Aluminum Co. * 100 100
17,300 17,300 Ryerson Tull, Inc. 198 198
9,600 9,600 Schnitzer Steel Industries, Inc. - Cl. A 581 581
--------
1,902
Multi - Utilities - 0.5%
15,500 15,500 Duke Energy Co. 317 317
11,200 11,200 NiSource, Inc. * 246 246
563
Multiline Retail - 2.8%
9,100 9,100 Big Lots, Inc. * 129 129
6,200 6,200 Costco Wholesale Corp. 231 231
12,600 12,600 Dillard's, Inc. - Cl. A * 207 207
15,000 15,000 Footstar, Inc. * 58 58
19,600 19,600 Insight Enterprises, Inc. * 368 368
62,600 62,600 Saks, Inc. * 942 942
33,500 33,500 Shopko Stores, Inc. * 511 511
21,300 21,300 Stage Stores, Inc. * 594 594
5,900 5,900 Zale Corp. * 314 314
--------
3,354
Oil & Gas - 4.5%
6,400 6,400 Amerada Hess Corp. * 340 340
5,300 5,300 BG plc - ADR 138 138
25,700 25,700 Diamond Offshore Drilling, Inc. * 527 527
10,500 10,500 Houston Exploration Co. * 383 383
5,200 5,200 Kerr-McGee Corp. * 242 242
7,400 7,400 Marathon Oil Corp. * 245 245
6,700 6,700 NRG Energy, Inc. * 147 147
4,200 4,200 Oneok, Inc. 93 93
13,275 13,275 Patina Oil & Gas Corp. 650 650
2,700 2,700 Stone Energy Corp. * 115 115
29,400 29,400 Sunoco, Inc. * 1,504 1,504
49,800 49,800 Tesoro Petroleum Corp. * 725 725
17,700 17,700 Vintage Petroleum, Inc. 213 213
--------
5,322
Paper & Forest Products - 1.2%
24,000 24,000 Boise Cascade Corp. * 789 789
2,500 2,500 Bowater, Inc. 116 116
6,600 6,600 MeadWestvaco Corp. * 196 196
8,400 8,400 Potlatch Corp. 292 292
--------
1,393
Personal Products - 0.5%
26,300 26,300 Nu Skin Enterprises, Inc. - Cl. A * 450 450
6,000 6,000 Perrigo Co. * 94 94
--------
544
Pharmaceuticals - 2.6%
18,650 18,650 American Pharmaceutical Partners, Inc * 627 627
3,700 3,700 Andrx Corp. * 89 89
17,800 17,800 Endo Pharmaceuticals Holdings * 343 343
18,000 18,000 Enzon, Inc. * 216 216
14,300 14,300 King Pharmaceuticals, Inc. * 218 218
29,400 29,400 Kos Pharmaceuticals, Inc. * 1,265 1,265
3,550 3,550 LANNETT Co., Inc. * 60 60
4,700 4,700 Pharmaceutical Resources, Inc. * 306 306
--------
3,124
Real Estate Investment Trust - 4.2%
2,100 2,100 AMLI Residential Properties Trust 56 56
5,400 5,400 Apartment Investment & Management Co. 186 186
35,400 35,400 Arden Realty Group, Inc. 1,074 1,074
2,900 2,900 CarrAmerica Realty Corp. 86 86
4,900 4,900 Commercial Net Lease Realty, Inc. 87 87
6,700 6,700 Entertainment Properties Trust 233 233
8,500 8,500 FelCor Lodging Trust, Inc. 94 94
4,600 4,600 Glenborough Realty Trust, Inc. 92 92
4,300 4,300 Healthcare Realty Trust, Inc. 154 154
133,400 133,400 HRPT Properties Trust 1,346 1,346
10,500 10,500 LTC Properties 155 155
20,400 20,400 Mack-Cali Realty LP * 849 849
5,000 5,000 National Health, Inc. 124 124
2,200 2,200 PAN Pacific Retail Properties, Inc. 105 105
2,400 2,400 Reckson Associates Realty Corp. 59 59
2,100 2,100 Regency Centers Corp. 84 84
12,100 12,100 Senior Housing Trust 208 208
--------
4,992
Real Estate Operations - 0.9%
53,700 53,700 La Quinta Corp. - Cl. B 344 344
10,400 10,400 LNR Property Corp. 515 515
4,300 4,300 Redwood Trust, Inc. 219 219
--------
1,078
Road & Rail - 1.1%
2,900 2,900 Florida East Coast Industries, Inc. 96 96
17,600 17,600 Hunt Jersey Transport Services, Inc. 475 475
1,600 1,600 Landstar Systems, Inc. * 61 61
1,700 15,000 16,700 Ryder System, Inc. 58 512 570
4,800 4,800 Werner Enterprises, Inc. * 94 94
--------
1,296
Semiconductor Equipment & Products - 2.0%
5,900 5,900 Amkor Technologies, Inc. * 107 107
29,600 29,600 Atmel Corp. * 178 178
2,200 2,200 International Rectifier Corp. * 109 109
85,800 85,800 LSI Logic Corp. * 761 761
23,000 23,000 Photronics, Inc. * 458 458
16,600 16,600 Silicon Laboratories, Inc. * 718 718
--------
2,331
Software - 2.9%
10,800 10,800 Ascential Software Corp. 280 280
18,500 18,500 BMC Software, Inc. * 345 345
11,200 11,200 Cadence Design Systems, Inc. * 201 201
12,100 12,100 FileNet Corp. * 328 328
13,600 13,600 Group 1 Software, Inc. 240 240
13,100 13,100 Gtech Holdings Corp. 648 648
14,300 14,300 Keane, Inc. * 209 209
7,050 7,050 Kronos, Inc. * 279 279
14,800 14,800 Network Associates, Inc. * 223 223
7,100 7,100 QAD, Inc. * 87 87
11,500 11,500 SeaChange International, Inc. 177 177
4,100 4,100 Sohu.com, Inc. 123 123
6,200 6,200 Sybase, Inc. * 128 128
20,300 20,300 Tradestation Group, Inc. 180 180
--------
3,448
Specialty Retail - 2.4%
33,400 33,400 Blockbuster, Inc. - Cl. A 599 599
4,800 4,800 Brookstone, Inc. * 102 102
4,900 4,900 Gap, Inc. 114 114
2,100 2,100 Hughes Supply, Inc. 104 104
2,700 2,700 KMart Holding Corp. 64 64
9,900 9,900 Movie Gallery, Inc. * 185 185
25,900 25,900 Petco Animal Supplies, Inc. * 789 789
14,000 14,000 Select Comfort Corp. * 347 347
4,800 4,800 Sonic Automotive, Inc. - Cl. A * 110 110
13,900 13,900 The Finish Line - Cl. A * 417 417
--------
2,831
Textiles & Apparel - 0.6%
2,700 2,700 Brown Shoe Co., Inc. * 103 103
9,400 9,400 K-Swiss, Inc. - Cl. A 226 226
20,500 45,000 65,500 Unifi, Inc. * 132 290 422
--------
751
Tobacco - 1.1%
23,400 23,400 R.J. Reynolds Tobacco Holdings, Inc. 1,361 1,361
--------
1,361
Trading Companies & Distributors - 0.2%
4,700 4,700 ACETO Corp. 120 120
1,900 1,900 CDW Corp. 110 110
--------
230
Wireless Telecommunications Services - 1.4%
4,900 10,800 15,700 Telephone and Data Systems, Inc. 306 676 982
19,100 19,100 United States Cellular Corp. * 678 678
------- -------- --------
1,660
TOTAL COMMON STOCK (Cost $98,004) - 97.9% $23,289 $ 92,556 115,845
PUBLICLY-TRADED BONDS
Electric Utilities - 0.0%
Xcel Energy, Inc. - Sr. Notes 144A (a)
7 7 7.5% due 11/21/07 $ 11 11
--------
11
Wireless Telecommunications Services - 0.0%
United States Cellular Corp. - Notes
75 75 0.0% due 06/15/15 36 36
------- --------
36
TOTAL PUBLICLY-TRADED BONDS (Cost $42) - 0.0% 47 47
------- --------
INVESTMENT COMPANIES HELD
AS COLLATERAL ON LOANED
SECURITIES (Cost $11,825) - 10.0%
State Street Navigator Securities
11,835 11,835 Lending Portfolio $ 11,835 11,835
------- -------- --------
$ 11,835 11,835
SHORT-TERM INVESTMENTS
1,200 1,200 Investment in joint repurchase agreement with 1,200 1,200
Goldman Sachs & Co., 0.995% due 01/02/04
Investment in joint trading account
1,081 1,081 1.061% due 01/02/04 1,081 1,081
------- -------- --------
TOTAL SHORT TERM INVESTMENTS (Cost $2,281) - 1.9% 1,081 1,200 2,281
TOTAL INVESTMENTS (Cost $112,162) - 109.8% 24,417 105,591 130,008
Payables, less cash and receivables - (9.8)% 73 (11,689) (11,616)
------- -------- --------
NET ASSETS - 100.0% $24,490 $ 93,902 $118,392
* Non-income producing security.
See notes to financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -SMALL CAP GROWTH FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - SMALL CAP EMERGING GROWTH FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES - December 31, 2003
(Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Small Cap
Small Cap Emerging
Small Cap Emerging Growth Fund
Growth Growth Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -----------
ASSETS
Long term investments at cost (including $37,349 and $19,013
of securities loaned in the Small Cap Growth Fund and
the Small Cap Emerging Growth Fund, respectively) $119,666 $ 71,940 $ 191,606
Net unrealized appreciation of investments 24,996 13,871 38,867
Short-term investments at value 44,354 20,806 65,160
-------- -------- ---------
Total investments 189,016 106,617 295,633
Receivable for:
Investments sold 142 1,508 1,650
Dividends 44 -- 44
-------- -------- ---------
Total assets 189,202 108,125 297,327
-------- -------- ---------
LIABILITIES
Payables for:
Investments purchased -- 568 568
Fund shares purchased 1,098 1,301 2,399
Collateral for securities on loan 38,799 19,675 58,474
Merger expenses 155 B 155
Other liabilities 28 2 30
-------- -------- ------ ---------
Total liabilities 39,925 21,546 155 61,626
-------- -------- ------ ---------
Net assets $149,277 $ 86,579 $ (155) $ 235,701
======== ======== ====== =========
Shares of beneficial interest outstanding 14,349 10,684 $4,061 A 29,094
-------- -------- ---------
Net asset value per share $ 10.40 $ 8.10 $ 8.10
======== ======== =========
Composition of net assets:
Capital paid-in $223,754 $ 94,993 $ (155)B $ 318,592
Accumulated net realized gain (loss) on investments,
futures and foreign currency transactions (99,473) (22,285) (121,758)
Net unrealized appreciation of:
Investments: 24,996 13,871 38,867
-------- -------- ------
Net assets $149,277 $ 86,579 $ (155) $ 235,701
======== ======== ====== =========
A Shares of the Acquired Fund are exchanged for the Acquiring Fund upon
consumation of the reorganization. Includes 19 thousand shares as
adjustment for merger expenses.
B Estimated amount of non-recurring expenses of the reorganization.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -SMALL CAP GROWTH FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - SMALL CAP EMERGING GROWTH FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Small Cap
Small Cap Emerging
Small Cap Emerging Growth Fund
Growth Growth Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -----------
INVESTMENT INCOME:
Interest $ 57 $ 47 $ 104
Dividends 252 253 505
Securities lending 64 34 98
------- ------- --------
Total income 373 334 $ 707
------- ------- --------
EXPENSES:
Investment advisory fee 1,380 659 (28) A 2,011
Auditors fees 19 8 27
Custodian fees 124 89 (20) B 193
Legal fees 20 4 24
Printing & mailing fees 50 22 (3) B 69
Trustees' fees 4 2 6
Other fees 6 2 8
------- ------- ---- --------
Total expenses 1,603 786 (51) 2,338 C
Less expenses reimbursed (86) (62) (148)
Less custodian expense reduction offset by
commission recapture arrangement -- (6) (6)
------- ------- ---- --------
Net expenses 1,517 718 (51) 2,184
------- ------- ---- --------
Net investment income (1,144) (384) 51 (1,477)
------- ------- ---- --------
REALIZED AND UNREALIZED GAIN
Net realized gain (loss) on investments (6,450) (4,652) (11,102)
Change in unrealized appreciation (depreciation) on
investments 40,426 32,639 73,065
------- ------- ---- --------
Net realized and unrealized gain 33,976 27,987 61,963
------- ------- ---- --------
Net increase (decrease) in net assets
resulting from operations $32,832 $27,603 $ 51 $ 60,486
======= ======= ==== ========
A Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
B Decreases reflect the elimination of duplicate expenses achieved by merging
the funds.
C One time transaction fees relating directly to the fund merger were not
considered in the proforma statement of operations. Estimated one time
transaction fees are $155,000.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I - SMALL CAP GROWTH
JOHN HANCOCK VARIABLE SERIES TRUST I - SMALL CAP EMERGING GROWTH
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - December 31, 2003
(Unaudited)
(showing percentage of combined pro forma total value of investments)
- --------------------------------------------------------------------------------
Small Cap Small Cap
Small Emerging Small Emerging
Cap Growth Growth Proforma Cap Growth Growth Proforma
Fund Fund Combined Name of Issuer Fund Fund Combined
- ---------- --------- ---------- --------------------------------------------------- ---------- --------- --------
Shares/Par Value Market Value (000's)
- ----------------------------------- ---------------------------------
COMMON STOCK
Aerospace & Defense - 1.2%
29,750 29,750 Engineered Support Systems, Inc. * $ 1,638 $ 1,638
22,700 22,700 Moog, Inc. - Cl. A * $ 1,121 1,121
---------- --------
52,450 2,759
Air Freight & Couriers - 1.6%
39,250 34,550 73,800 Forward Air Corp. * 1,079 950 2,029
44,250 44,250 United Technologies Worldwide, Inc. 1,679 1,679
---------- --------
118,050 3,708
Airlines - 1.6%
102,200 102,200 Airtran Holdings, Inc. * 1,216 1,216
51,850 51,850 America West Holdings Corp. - Cl. B * 643 643
91,990 91,990 AMR Corp. * 1,191 1,191
26,270 26,270 Arkansas Best Corp. 825 825
---------- --------
272,310 3,875
Automobiles - 0.9%
23,850 23,850 Borg-Warner Automotive, Inc. 2,029 2,029
---------- --------
23,850 2,029
Banks - 3.7%
29,770 29,770 Amcore Financial, Inc. 804 804
32,800 32,800 East West Bancorp, Inc. * 1,761 1,761
40,400 40,400 First Niagara Financial Group, Inc. 602 602
12,750 12,750 Hancock Holding Co. 696 696
35,384 35,384 New North Nova Corp. Pennsylvania * 1,254 1,254
32,700 32,700 Southwest Bancorporation of Texas, Inc. * 1,271 1,271
28,480 28,480 Texas Regional Bancshares, Inc. 1,054 1,054
32,650 32,650 UCBH Holdings, Inc. 1,272 1,272
---------- --------
244,934 8,714
Biotechnology - 4.9%
58,000 58,000 Abgenix, Inc. * 723 723
67,120 67,120 Alkermes, Inc. * 906 906
66,750 34,590 101,340 Ciphergen Biosystems, Inc. * 750 389 1,139
21,900 21,900 CV Therapeutics, Inc. * 321 321
60,047 60,047 Exelixis, Inc. * 425 425
90,500 90,500 General Probe, Inc. * 3,301 3,301
72,500 72,500 ILEX Oncology, Inc. * 1,541 1,541
22,610 22,610 Kosan Biosciences, Inc. * 223 223
19,020 19,020 Telik, Inc. * 437 437
397,900 397,900 Xoma, Ltd. * 2,626 2,626
---------- --------
910,937 11,642
Chemicals - 0.6%
64,000 64,000 Airgas, Inc. * 1,375 1,375
---------- --------
64,000 1,375
Commercial Services & Supplies - 7.4%
27,300 27,300 Corporate Executive Board Co. * 1,274 1,274
96,750 96,750 DiamondCluster, Inc. * 987 987
47,200 47,200 Factset Research Systems, Inc. 1,804 1,804
26,970 26,970 Gevity HR, Inc. * 600 600
15,900 15,900 Global Payments, Inc. 749 749
29,840 29,840 LEGC Corp. 683 683
20,540 20,540 MDC Holdings, Inc. 1,325 1,325
66,260 66,260 MPS Group, Inc. * 619 619
46,950 46,950 Overnite Corp. * 1,068 1,068
34,440 34,440 Sirva, Inc. * 673 673
30,250 30,250 Stericycle, Inc. * 1,413 1,413
6,210 6,210 Strayer Education, Inc. 676 676
73,200 73,200 The Bisys Group, Inc. * 1,089 1,089
6,600 6,600 Universal Technical Institute, Inc. * 198 198
12,220 12,220 University of Phoenix Online * 842 842
88,850 88,850 Visx, Inc. * 2,057 2,057
36,250 629,480 Waste Connections, Inc. * 1,369 1,369
---------- --------
17,426
Communications Equipment - 4.5%
54,100 54,100 Advanced Fibre Communications, Inc. * 1,090 1,090
132,330 132,330 American Tower Corp. - Cl. A 1,432 1,432
93,600 93,600 Foundry Networks, Inc. * 2,561 2,561
112,650 112,650 McData Corp. * 1,074 1,074
35,410 35,410 Plantronics, Inc. * 1,156 1,156
34,290 34,290 Polycom, Inc. * 669 669
129,750 129,750 Remec, Inc. 1,091 1,091
93,600 93,600 Tekelec, Inc. * 1,455 1,455
---------- --------
685,730 10,528
Computers & Peripherals - 2.6%
65,700 65,700 Digital River, Inc. * 1,452 1,452
1,730 1,730 Dot Hill Systems Corp. * 26 26
47,960 47,960 Overland Storage, Inc. * 902 902
63,900 63,900 ScanSource, Inc. * 2,915 2,915
101,610 101,610 Tumbleweed Communications Corp. * 851 851
---------- --------
280,900 6,146
Construction & Engineering - 0.8%
50,040 50,040 Navigant Consulting, Inc. * 944 944
26,170 34,290 Washington Group International, Inc. * 889 889
---------- --------
84,330 1,833
Diversified Financials - 1.6%
40,850 15,170 56,020 Affiliated Managers Group, Inc. * 2,843 1,056 3,899
---------- --------
56,020 3,899
Diversified Telecommunication Services - 1.4%
181,800 121,580 303,380 Crown Castle International Corp. * 2,005 1,341 3,346
---------- --------
303,380 3,346
Electrical Equipment - 0.4%
75,010 75,010 Techtronic Industries, Ltd. - ADR 1,041 1,041
---------- --------
75,010 1,041
Electronic Equipment & Instruments - 3.4%
10,950 10,950 Advanced Energy Industries, Inc. * 285 285
55,280 55,280 Asyst Technologies, Inc. * 959 959
127,050 127,050 Caliper Technologies Corp. * 836 836
7,700 7,700 Checkpoint Systems, Inc. 146 146
119,600 119,600 Imax Corp. * 946 946
82,600 82,600 Itron, Inc. * 1,516 1,516
11,050 11,050 Ixia * 129 129
202,680 202,680 ON Semiconductor Corp. * 1,307 1,307
49,700 49,700 Trimble Navigation, Ltd. 1,851 1,851
---------- --------
666,610 7,975
Energy Equipment & Services - 1.2%
45,000 45,000 Hydril Co. * 1,077 1,077
59,340 59,340 Quantum Fuel Technologies * 477 477
83,750 83,750 West Hampshire Energy Services, Inc. * 1,357 1,357
---------- --------
188,090 2,911
Finance - 0.4%
1,900 1,900 Nelnet, Inc. - Cl. A * 43 43
77,210 77,210 United Holdings Corp. 1,008 1,008
---------- --------
79,110 1,051
Food Products - 0.7%
36,490 36,490 Peets Coffee & Tea, Inc. * 635 635
107,140 107,140 Sunopta, Inc. * 989 989
---------- --------
143,630 1,624
Health Care Equipment & Supplies - 5.5%
38,630 38,630 Abaxis, Inc. 700 700
26,924 26,924 Advanced Neuromodulation Systems 1,238 1,238
65,600 65,600 American Medical Systems Holdings * 1,430 1,430
32,640 32,640 DJ Orthopedics, Inc. * 875 875
27,450 27,450 Integra Lifesciences Corp. * 786 786
59,950 59,950 Kyphon, Inc. * 1,489 1,489
53,008 53,008 Merit Medical Systems, Inc. * 1,180 1,180
27,890 27,890 Orthofix International * 1,366 1,366
25,350 17,650 43,000 Respironics, Inc. * 1,143 796 1,939
31,490 31,490 Wilson Greatbatch Technologies, Inc. * 1,331 1,331
17,410 17,410 Zoll Medical Corp. * 608 608
---------- --------
423,992 12,942
Health Care Providers & Services - 3.4%
37,600 37,600 Advisory Co. * 1,313 1,313
18,250 18,250 Amsurg Corp. 691 691
221,290 221,290 Beverly Enterprises, Inc. * 1,901 1,901
35,175 35,175 eResearch Technology, Inc. * 894 894
25,100 25,100 Genesis Healthcare Corp. * 572 572
35,415 35,415 Odyssey Healthcare, Inc. * 1,036 1,036
28,900 28,900 Psychiatric Solutions, Inc. * 604 604
22,450 22,450 Renal Care Group, Inc. * 925 925
---------- --------
424,180 7,936
Hotels, Restaurants & Leisure - 4.2%
57,461 51,450 108,911 Cumulus Media, Inc. - Cl. A * 1,264 1,132 2,396
67,400 67,400 Panera Bread Co. - Cl. A * 2,665 2,665
32,150 25,830 57,980 Rare Hospitality International, Inc. * 786 632 1,418
45,050 45,050 Redeemable Robingourmet Burgers, Inc. 1,371 1,371
70,150 70,150 Scientific Games Corp. - Sr. Notes 1,193 1,193
32,850 32,850 Wynn Resorts, Ltd. * 920 920
---------- --------
382,341 9,963
Insurance - 2.0%
33,000 29,540 62,540 Arch Capital Group, Ltd. * 1,315 1,177 2,492
100,660 100,660 Healthextras, Inc. * 1,349 1,349
31,660 31,660 Platinum Underwriters Holdings 950 950
-----
194,860 4,791
Internet Software & Services - 3.8%
55,746 55,746 Avocent Corp. * 2,036 2,036
123,750 123,750 Digital Insight Corp. * 3,082 3,082
50,800 50,800 Embarcadero Technologies, Inc. * 810 810
33,350 33,350 Packeteer, Inc. * 566 566
63,770 63,770 WebMethods, Inc. * 584 584
65,400 65,400 Websense, Inc. * 1,912 1,912
---------- --------
392,816 8,990
IT Consulting & Services - 0.4%
153,920 153,920 Sapient Corp. 862 862
---------- --------
153,920 862
Machinery - 1.6%
28,000 28,000 Clarcor, Inc. * 1,235 1,235
28,100 28,100 ESCO Technologies, Inc. * 1,226 1,226
31,000 31,000 Graco, Inc. * 1,243 1,243
---------- --------
87,100 3,704
Media - 2.8%
8,000 8,000 Getty Images, Inc. * 401 401
59,990 59,990 GrayTelevision, Inc. 907 907
8,800 8,800 Interactive Data Corp. * 146 146
30,810 30,810 Lin TV Corp. - Cl. A * 795 795
71,500 71,500 Macrovision Corp. * 1,615 1,615
561,060 561,060 Sirius Satellite Radio, Inc. * 1,773 1,773
126,700 126,700 Tivo, Inc. * 938 938
---------- --------
866,860 6,575
Multiline Retail - 2.2%
66,600 66,600 Cost Plus, Inc. * 2,731 2,731
22,700 22,700 Freds, Inc. 703 703
48,580 48,580 Insight Enterprises, Inc. * 914 914
38,474 38,474 Pacific Sunwear of California, Inc. * 812 812
---------- --------
176,354 5,160
Oil & Gas - 3.2%
47,210 47,210 Arch Coal, Inc. 1,472 1,472
27,570 27,570 Cabot Oil & Gas Corp. - Cl. A 809 809
30,200 30,200 Evergreen Resources, Inc. * 982 982
37,240 37,240 Fuelcell Energy, Inc. 484 484
28,800 28,800 OMI Corp. SHS 257 257
26,295 26,295 Patina Oil & Gas Corp. 1,288 1,288
79,150 79,150 Remington Oil & Gas Corp. * 1,558 1,558
40,200 40,200 Whiting Petroleum Corp. * 740 740
---------- --------
316,665 7,590
Pharmaceuticals - 6.2%
37,560 37,560 Atherogenics, Inc. * 562 562
105,650 105,650 Atrix Labs, Inc. * 2,540 2,540
13,950 13,950 Eon Labs, Inc. * 711 711
39,650 39,650 Esperion Therapeutics * 1,372 1,372
78,150 78,150 Impax Laboratories, Inc. * 1,124 1,124
114,150 34,980 149,130 Medicinesco 3,363 1,030 4,393
29,800 29,800 NPS Pharmaceuticals, Inc. * 916 916
96,050 96,050 OSI Pharmaceuticals, Inc. * 3,094 3,094
---------- --------
549,940 14,712
Road & Rail - 1.4%
28,020 28,020 Old Dominion Freight Lines, Inc. * 955 955
26,000 26,000 Quality Distribution, Inc. Florida * 508 508
48,000 48,000 Yellow Roadway Corp. * 1,736 1,736
---------- --------
102,020 3,199
Semiconductor Equipment & Products - 7.5%
82,630 82,630 Aeroflex, Inc. * 966 966
113,700 30,920 144,620 Artisan Components, Inc. 2,331 634 2,965
64,630 64,630 Ase Test, Ltd. * 968 968
21,500 21,500 Atmi, Inc. * 498 498
113,280 113,280 Chippac, Inc. - Cl. A * 860 860
253,250 253,250 Conexant Systems, Inc. * 1,259 1,259
70,800 70,800 FEI Co. * 1,593 1,593
42,010 42,010 Genesis Microchip, Inc. * 758 758
135,350 135,350 LTX Corp. * 2,034 2,034
95,530 95,530 MEMC Electronic Materials, Inc. * 919 919
27,790 27,790 Microsemi Corp. * 683 683
38,120 38,120 Pericom Semiconductor Corp. * 406 406
64,760 64,760 Pixelworks, Inc. * 715 715
50,300 26,540 76,840 Semtech Corp. * 1,143 603 1,746
154,300 154,300 Skyworks Solutions, Inc. 1,342 1,342
---------- --------
1,385,410 17,712
Software - 7.7%
62,400 62,400 Agile Software Corp. 618 618
137,900 137,900 Autodesk, Inc. * 3,390 3,390
35,100 35,100 Barra, Inc. 1,246 1,246
39,700 39,700 Borland Software Corp. * 386 386
8,400 8,400 EPIQ Systems, Inc. * 144 144
59,550 59,550 Hyperion Solutions Corp. * 1,795 1,795
147,450 147,450 Informatica Corp. 1,519 1,519
3,800 3,800 Kronos, Inc. * 150 150
64,700 64,700 Macromedia, Inc. * 1,154 1,154
58,200 58,200 Network Associates, Inc. * 875 875
700 700 Open Solutions, Inc. * 12 12
63,100 63,100 Progress Software Corp. * 1,291 1,291
74,190 74,190 Red Hat, Inc. * 1,392 1,392
4,200 25,890 30,090 Safenet, Inc. * 129 797 926
38,100 38,100 Skillsoftpub Co., Ltd. - ADR * 330 330
53,350 53,350 Tradestation Group, Inc. 473 473
24,350 24,350 Transaction Systems Architects, Inc. - Cl. A* 551 551
89,200 89,200 Verint Systems, Inc. * 2,012 2,012
---------- --------
990,280 18,264
Specialty Retail - 6.0%
41,700 36,880 78,580 AC Moore Arts & Crafts, Inc. * 803 710 1,513
76,500 76,500 Aeropostale * 2,098 2,098
24,700 24,700 AnnTaylor Stores Corp. 963 963
31,750 10,270 42,020 Dicks Sporting Goods, Inc. 1,545 500 2,045
70,800 95,830 166,630 Hollywood Entertainment Corp. * 973 1,318 2,291
90,673 90,673 Hot Topic, Inc. * 2,671 2,671
69,700 69,700 Select Comfort Corp. * 1,726 1,726
25,970 25,970 Sharper Image Corp. * 848 848
---------- --------
574,773 14,155
Textiles & Apparel - 0.9%
33,480 33,480 K-Swiss, Inc. - Cl. A 806 806
69,400 69,400 Quiksilver, Inc. * 1,230 1,230
--------- --------- ---------- --------- -------- --------
102,880 2,036
6,596,617 5,434,725 12,031,342 TOTAL COMMON STOCK (Cost $191,606) - 97.7% 144,662 85,811 230,473
INVESTMENT COMPANIES HELD
AS COLLATERAL ON LOANED
SECURITIES (Cost $58,474) - 24.8%
38,799 19675 58,474 State Street Navigator Securities Lending Portfolio 38,799 19,675 58,474
--------- --------- ---------- --------- -------- --------
SHORT-TERM INVESTMENTS (Cost $6,686) - 2.8%
Investment in joint trading account
5,555 1,131 6,686 1.061% due 01/02/04 5,555 1,131 6,686
--------- --------- ---------- --------- -------- --------
126.6% 123.1% TOTAL INVESTMENTS (Cost $256,766) - 125.3% 189,016 106,617 295,633
-26.6% -23.1% Payables, less cash and receivables - (25.3)% (39,739) (20,038) (59,777)
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
100% 100% NET ASSETS- 100.0% 149,277 86,579 235,856
========= ========= ========= ======== ========
* Non-income producing security.
ADR-American Depository Receipts.
See notes to financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -OVERSEAS EQUITY FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES - December 31, 2003
(Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Overseas
Overseas Overseas Equity B Fund
Equity Equity B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -------------
ASSETS
Long term investments at cost (including $16,314
of securities loaned in the Overseas Equity B Fund) $37,218 $103,565 $140,783
Net unrealized appreciation of investments 9,647 20,261 29,908
Short-term investments at value 2,977 18,586 21,563
------- -------- --------
Total investments 49,842 142,412 192,254
Cash 22 38 60
Foreign currency (Cost of $42 and $989 in the Overseas Equity
Fund and the Overseas Equity B Fund, respectively) 42 987 1,029
Receivable for:
Investments sold 232 -- 232
Fund shares sold 84 -- 84
Interest 2 -- 2
Dividends 41 199 240
Unrealized appreciation in forward currency contracts 27 -- 27
Other assets 6 7 13
------- -------- --------
Total assets 50,298 143,643 193,941
------- -------- --------
LIABILITIES
Payables for:
Investments purchased 1,058 -- 1,058
Fund shares purchased -- 504 504
Unrealized depreciation in forward currency contracts 61 -- 61
Merger expenses 70 C 70
Collateral for securities on loan -- 16,998 16,998
Other liabilities 3 176 179
------- -------- ---- --------
Total liabilities 1,122 17,678 70 18,870
------- -------- ---- --------
Net assets B $49,176 $125,965 $(70) $175,071
======= ======== ==== ========
Shares of beneficial interest outstanding 4,718 12,787 267 A 17,772
------- -------- --------
Net asset value per share $ 10.42 $ 9.85 $ 9.85
======= ======== ========
Composition of net assets:
Capital paid-in $43,341 $154,114 $(70)C $197,385
Accumulated net realized gain (loss) on investments, futures
and foreign currency transactions (3,773) (48,243) (52,016)
Undistributed net investment loss (5) -- (5)
Net unrealized appreciation of:
Investments 9,647 20,261 29,908
Translation of assets and liabilities in foreign currencies (34) (167) (201)
------- -------- ---- --------
Net assets $49,176 $125,965 $(70) $176,071
======= ======== ==== ========
A Shares of the Acquired Fund are exchanged for the Acquiring Fund Upon
Consumation of the reorganization. Inculdes 7 thousand shares as adjustment
for merger expenses.
B The proforma figures for the net assets and net asset value per share do
not reflect the withdrawal of seed money capital in July, 2004, in the
amount of approximately $7 million from the Acquired Fund.
C Estimated amount of non-recurring expenses of the reorganization.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -OVERSEAS EQUITY FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Overseas
Overseas Overseas Equity B Fund
Equity Equity B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- --------------
INVESTMENT INCOME:
Interest $ 157 $ 25 $ 182
Dividends 556 2,093 2,649
Securities lending -- 78 78
------- ------- -------
Total income 713 2,196 $ 2,909
------- ------- -------
EXPENSES:
Investment advisory fee 377 1,136 (77) A 1,436
Auditors fees 5 13 18
Custodian fees 110 265 (59) B 316
Legal fees 2 6 8
Printing & mailing fees 3 9 12
Trustees' fees 1 3 4
Other fees 2 12 14
------- ------- ----- -------
Total expenses 500 1,444 (136) 1,808 C
Less expenses reimbursed (87) (207) (294)
Less custodian expense reduction offset by
commission recapture arrangement (1) -- (1)
------- ------- ----- -------
Net expenses 412 1,237 (136) 1,513
------- ------- ----- -------
Net investment income 301 959 136 1,396
------- ------- ----- -------
REALIZED AND UNREALIZED GAIN
Net realized gain (loss) on:
Investments (450) (5,347) (5,797)
Foreign currency transactions 941 258 1,199
Change in unrealized appreciation (depreciation) on:
Investments 11,946 35,626 47,572
Translation of assets and liabilities in
foreign currencies (73) (170) (243)
------- ------- ----- -------
Net realized and unrealized gain 12,364 30,367 -- 42,731
------- ------- ----- -------
Net increase (decrease) in net assets
resulting from operations $12,665 $31,326 $ 136 $44,127
======= ======= ===== =======
A Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
B Decreases reflect the elimination of duplicate expense achieved by merging
the funds.
C One time transaction fees relating directly to the fund merger were not
considered in the proforma statement of operations. Estimated one time
transaction fees are $70,000.
The accompanying notes are an integral part of the financial statement.
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B (formerly International
Opportunities)
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - December 31, 2003
(Unaudited)
(showing percentage of combined pro forma total value of investments)
- --------------------------------------------------------------------------------
Overseas Overseas Overseas Overseas
Equity Equity B Proforma Equity Equity B Proforma
Fund Fund Combined Name of Issuer Fund Fund Combined
- -------- --------- --------- -------------------------------------------------- -------- -------- --------
Shares/Par Value Market Value (000's)
- -------------------------------- ------------------------------
COMMON STOCK
Australia - 1.4%
3,400 3,400 Amcor, Ltd. (BE) $ 21 $ 21
13,127 13,127 Australia & New Zealand Banking Group, Ltd. (JP) 175 175
16,000 16,000 Brambles Industries, Ltd. (BO) 64 64
82,482 82,482 Broken Hill Proprietary Co., Ltd. * (BF) 757 757
38,000 38,000 Coles Myer, Ltd. * (JF) 216 216
55,900 55,900 Foster's Brewing Group, Ltd. (JG) 189 189
8,800 8,800 National Australia Bank, Ltd. (JP) 198 198
8,719 8,719 News Corp., Ltd. (JA) 79 79
20,400 20,400 QBE Insurance Group, Ltd. (JR) 163 163
7,400 7,400 Wesfarmers (BL) 148 148
7,000 7,000 Westpac Banking Corp., Ltd. (JP) 84 84
33,000 33,000 WMC Resources, Ltd. (BB) 140 140
31,000 31,000 WMC, Ltd. (BF) 153 153
14,000 14,000 Woolworth's, Ltd. (JF) 124 124
--------- --------
339,228 2,511
Austria - 0.0%
400 400 Erste Bank (JP) 49 49
--------- --------
400 49
Belgium - 0.4%
29,450 29,450 DEXIA * (JP) 507 507
5,110 5,110 Fortis * (JR) 103 103
3,008 3,008 UCB SA * (JO) 113 113
--------- --------
37,568 723
Canada - 3.1%
17,900 17,900 Abitibi Consolidated, Inc. (BG) 144 144
2,800 18,632 21,432 Alcan Aluminum, Ltd. (BF) 131 873 1,004
9,800 9,800 Bank Nova Scotia Halifax - Bills * (FD) 499 499
10,400 10,400 BCE, Inc. (J1) 233 233
69,500 69,500 Bombardier, Inc. - Cl. B (BH) 294 294
1,900 1,900 Great West Lifeco, Inc. (JR) 67 67
3,500 39,100 42,600 Inco, Ltd. (BF) 140 1,563 1,703
2,200 2,200 Manulife Financial Corp. (JR) 71 71
16,280 16,280 Royal Bank of Canada (JP) 778 778
6,400 6,400 Suncor Energy , Inc. (BB) 161 161
12,800 12,800 TELUS Corp. (J1) 240 240
5,500 5,500 Thomson Corp. (BZ) 200 200
--------- --------
216,712 5,394
Denmark - 0.5%
3,600 16,980 20,580 Novo Nordisk AS (JO) 146 691 837
800 800 Tele Danmark AS (J1) 29 29
--------- --------
21,380 866
Finland - 1.1%
17,900 86,112 104,012 Nokia Oyj (JW) 309 1,487 1,796
7,100 7,100 UPM-Kymmene Corp. (BG) 136 136
--------- --------
111,112 1,932
France - 12.8%
4,900 4,900 Accor SA (BZ) 222 222
1,900 1,900 Air Liquide (BC) 335 335
29,300 29,300 AXA * (JR) 626 626
12,300 28,802 41,102 BNP Paribas (JP) 773 1,812 2,585
11,100 11,100 Bouygues SA (J2) 388 388
34,309 34,309 Caisse National Credit Agricole (JP) 818 818
2,500 2,500 Carrefour SA (JF) 137 137
11,972 11,972 CIE De St. Gobain * (BI) 585 585
3,100 3,100 Essilor International (JL) 160 160
8,800 37,300 46,100 France Telecom (J1) 251 1,065 1,316
2,000 950 2,950 Groupe Danone (JH) 326 155 481
4,125 4,125 Hermes International * (BY) 797 797
2,700 6,364 9,064 L'Oreal SA (JK) 221 521 742
970 970 Lafarge SA * (BD) 86 86
10,612 10,612 LVMH * (Louis Vuitton Moet Hennessy) (BY) 772 772
1,733 1,733 Pinault-Printemps-Redoute SA * (JD) 167 167
6,600 2,331 8,931 Renault (BV) 455 161 616
13,081 13,081 Rhone-Poulenc SA * (JO) 864 864
20,500 20,009 40,509 Sanofi-Synthelabo SA (JO) 1,542 1,505 3,047
3,200 10,780 13,980 Schneider SA (BK) 209 705 914
1,200 4,102 5,302 Societe Generale - Cl. A (JP) 106 362 468
35,576 Societe Television Francaise (JA) 1,247 1,247
19,034 19,034 Sodexho Alliance SA * (BZ) 573 573
3,100 11,756 14,856 STMicroelectronics (J0) 84 318 402
12,500 12,500 Thomson Multimedia * (JY) 266 266
17,353 17,353 Total Fina SA - Cl. B * (BB) 3,223 3,223
18,400 6,713 25,113 Vivendi Universal SA (JA) 447 163 610
--------- --------
421,972 22,447
Germany - 2.8%
2,700 2,728 5,428 Allianz AG (JR) 340 344 684
3,915 3,915 Bayer AG * (JL) 115 115
3,400 3,400 Bayerische Motoren Werke AG (BV) 157 157
8,572 8,572 Bayerische Vereinsbank AG * (JP) 198 198
7,700 7,700 DaimlerChrysler AG (BV) 359 359
3,800 8,835 12,635 Deutsche Bank AG (JP) 315 731 1,046
1,122 1,122 Deutsche Boerse AG (JQ) 61 61
3,545 3,545 E.On AG (J3) 231 231
4,373 4,373 Gehe AG * (JM) 212 212
2,143 2,143 Hypo Real Estate (JP) 53 53
7,300 7,300 Infineon Technologies AG (J0) 101 101
2,828 2,828 Muenchener Rueckversicherungs-Gesellschaft AG (JR) 343 343
2,759 2,759 Rhoen-Klinikum AG * (JM) 155 155
1,300 1,660 2,960 SAP AG (JV) 218 279 497
6,200 1,952 8,152 Siemens AG (BL) 496 156 652
5,500 76,832 Thyssen Krupp AG (BF) 109 109
--------- --------
153,664 4,973
Hong Kong - 1.7%
18,000 37,000 55,000 Cheung Kong Holdings, Ltd. (JS) 142 293 435
311,000 311,000 China Life Insurance Co., Ltd. * (JR) 254 254
223,000 223,000 China Telecom, Ltd. * (J2) 684 684
110,000 110,000 Hang Lung Properties (JS) 141 141
6,200 6,200 Hang Seng Bank, Ltd. (JP) 81 81
126,000 126,000 Hong Kong & China Gas Co., Ltd. (J4) 192 192
14,800 14,800 HSBC Holdings plc (JP) 234 234
10,000 10,000 Hutchison Whampoa, Ltd. (BL) 73 73
44,000 44,000 Johnson Electric Holdings, Ltd. (BK) 56 56
116,000 116,000 Li & Fung, Ltd. (BO) 199 199
11,000 52,000 63,000 Sun Hung Kai Properties, Ltd. (JS) 91 429 520
17,000 1,232,664 Swire Pacific, Ltd. - Cl. A (JQ) 105 105
--------- --------
2,311,664 2,974
Hungary - 0.4%
5,680 5,680 Gedeon Richter * (JO) 668 668
--------- --------
5,680 668
India - 1.9%
68,000 68,000 HDFC Bank Ltd. * (JP) 548 548
168,940 168,940 Hindustan Lever Ltd. (JJ) 760 760
3,954 3,954 Infosys Technologies, Ltd. * (JU) 484 484
96,000 96,000 Maruti Udyog (BO) 794 794
212,600 336,894 Zee Telefilms Ltd. (JA) 701 701
--------- --------
673,788 3,287
Italy - 3.3%
49,920 49,920 Alleanza Assicurazioni * (JR) 546 546
3,100 3,100 Assicurazioni Generali (JR) 82 82
60,327 60,327 Banca Intesa SpA (JP) 236 236
13,000 13,000 BCP Pop Veron (JP) 220 220
14,200 71,172 85,372 ENI * (BB) 268 1,342 1,610
17,601 17,601 Mediaset SpA * (JA) 209 209
22,795 22,795 Mediolanum SpA * (JQ) 179 179
316,563 316,563 Telecom Italia (J1) 772 772
115,070 115,070 Telecom Italia Mobile SpA (J2) 625 625
17,400 233,893 251,293 UniCredito Italiano SpA (JP) 94 1,261 1,355
--------- --------
1,608,829 5,834
Japan - 16.9%
2,000 2,000 Advantest (J0) 159 159
1,600 1,600 Aiful Corp. (JQ) 117 117
4,000 13,000 17,000 Canon, Inc. (JZ) 186 605 791
14,900 14,900 Credit Saison Co., Ltd. (JQ) 337 337
10,000 17,000 27,000 Dai-Nippon Printng Co., Ltd. (BO) 140 239 379
11,100 11,100 Daito Trust Construction Co., Ltd. (BJ) 329 329
9,000 36,000 45,000 Daiwa House Industry Co., Ltd. (BW) 96 383 479
12,000 70,000 82,000 Daiwa Securities Group, Inc. (JQ) 82 476 558
13,200 13,200 Denso Corp. (BU) 260 260
3,200 3,500 6,700 Fanuc, Ltd. (BM) 192 210 402
3,000 3,000 Fuji Photo Film (BX) 97 97
44 44 Fuji Television Network, Inc. (JA) 238 238
18,100 18,100 Fujisawa Pharmaceutical Co., Ltd. * (JO) 386 386
2,700 2,700 Funai Electric Co. (JY) 371 371
2,100 2,100 Hirose Electric Co., Ltd. (JY) 241 241
2,000 14,900 16,900 Honda Motor Co. (BV) 89 662 751
2,400 2,500 4,900 Hoya Corp. (JY) 220 230 450
52,000 52,000 Japan Airlines (BQ) 137 137
264 264 Japan Telecom Co. * (J1) 707 707
13,000 13,000 Jusco Co., Ltd. (JD) 436 436
9,700 9,700 Kansai Electric Power Co., Inc. (J3) 170 170
1,300 1,300 Keyence Corp. (JY) 274 274
25,000 25,000 Kirin Brewery Co. * (JG) 213 213
2,600 2,600 Kyocera Corp. * (JY) 173 173
29,500 29,500 Marui Co., Ltd. * (JD) 372 372
15 15 Millea Holdings, Inc. (JR) 196 196
23,000 34,000 57,000 Mitsubishi Corp. (BN) 244 360 604
27,000 49,000 76,000 Mitsubishi Estate Co., Ltd. (JS) 256 465 721
33,000 54,000 87,000 Mitsubishi Heavy Industries, Ltd. (BM) 92 150 242
33,000 33,000 Mitsubishi Motor (BV) 67 67
17,000 95,000 112,000 Mitsui Fudosan Co., Ltd. (JS) 154 858 1,012
33,000 33,000 Mitsui Marine & Fire Insurance Co., Ltd. (JR) 271 271
53,000 53,000 Mitsui Trust Holdings (JP) 296 296
2,700 2,700 Murata Manufacturing Co., Ltd. (JY) 146 146
73,000 13,000 86,000 NEC Corp. (JX) 538 96 634
900 900 Nidec Corp. (JY) 86 86
23,000 23,000 Nikko Securities Co., Ltd. (JQ) 128 128
5,000 5,000 Nikon Corp. (J0) 75 75
1,300 1,300 Nintendo Corp., Ltd. (BW) 121 121
62,000 62,000 Nippon Steel Co. (BF) 133 133
66 66 Nippon Telegraph & Telephone Corp. * (J1) 318 318
36,000 23,300 59,300 Nissan Motor Acceptance Corp. (BV) 411 266 677
4,900 4,900 Nitto Denko Corp. (BK) 261 261
11,000 78,000 89,000 Nomura Securities Co., Ltd. (JQ) 187 1,329 1,516
328 328 NTT Mobile Communications Network, Inc. * (J2) 744 744
36,000 36,000 Oji Paper Co. (BG) 233 233
39,000 39,000 Oki Electric Industry Co. * (J1) 153 153
Japan - Continued
3,500 1,700 5,200 Orix Corp. (JQ) 289 141 430
6,000 6,000 Ricoh Co., Ltd. (JZ) 118 118
2,600 4,900 7,500 Rohm Co., Ltd. (J0) 305 574 879
12,000 12,000 Sankyo Co., Ltd. (JO) 226 226
26,500 26,500 Secom Co. * (BO) 989 989
21,000 32,000 53,000 Sekisui House, Ltd. (BW) 217 331 548
26,000 26,000 Seven-Eleven Japan * (JF) 789 789
1,400 1,400 Shimamura Co., Ltd. (JE) 95 95
2,600 7,900 10,500 Shin-Etsu Chemical Co. (BC) 106 323 429
18,000 18,000 Shionogi & Co., Ltd. (JO) 335 335
1,500 2,900 4,400 SMC Corp. (BM) 187 361 548
1,000 1,000 Softbank Corp. (JT) 31 31
6,600 6,600 Sony Corp. * (JY) 229 229
39,000 39,000 Sumitomo Chemical Co. (BC) 161 161
16,000 16,000 Sumitomo Corp. (BO) 119 119
6,000 6,000 Sumitomo Forestry Co. (BG) 51 51
270,000 270,000 Sumitomo Metal Industries (BF) 267 267
127 127 Sumitomo Mitsui GR (JP) 677 677
23,000 22,000 45,000 Suzuki Motor Corp. (BV) 340 326 666
9,000 9,000 Taiyo Yuden Co., Ltd. (JY) 118 118
3,900 3,900 Takeda Chemical Industries * (BC) 155 155
71,000 71,000 Teijin, Ltd. (BC) 209 209
7,500 7,500 Tokyo Electron, Ltd. (J0) 570 570
14,000 14,000 Toray Industries, Inc. (BC) 59 59
6,000 6,000 Tostem Corp. (BI) 116 116
7,100 7,100 Toyoda Gosei (BU) 205 205
7,300 16,200 23,500 Toyota Motor Corp. (BV) 247 547 794
157 157 UFJ Holdings, Inc. * (JP) 755 755
16,000 16,000 Uniden Corp. * (JW) 294 294
20 20 Yahoo Japan Corp. (JT) 269 269
3,000 18,400 21,400 Yamanouchi Pharmaceutical Co., Ltd. (JO) 93 572 665
7,000 17,000 24,000 Yamato Transport Co., Ltd. (BP) 82 200 282
12,000 12,000 Yasuda F & M Insurance (JR) 99 99
--------- --------
2,031,921 29,638
Luxembourg - 0.0%
3,830 3,830 Society Europeenne des Satellites (JA) 39 39
--------- --------
3,830 39
Malaysia - 0.9%
269,000 269,000 Astro All Asia Net * (JA) 313 313
848,700 848,700 Magnum Corp. Berhad * (BZ) 621 621
218,800 218,800 Resorts World Berhad * (BZ) 581 581
--------- --------
1,336,500 1,515
Mexico - 0.9%
195,000 195,000 Cifra SA de CV - Ser. V * (JD) 556 556
91,500 91,500 Fomento Economico Mexicano SA de CV * (JG) 338 338
708,000 708,000 GF BBVA Bancomer - Ser. B (JP) 605 605
--------- --------
994,500 1,499
Netherlands - 5.6%
30,148 30,148 ABN Amro Holding NV (JP) 705 705
13,763 13,763 Aegon NV (JR) 203 203
1,250 1,250 Akzo Nobel NV * (BC) 48 48
4,500 31,890 36,390 ASM Lithography Holding NV (J0) 89 632 721
13,200 19,940 33,140 Elsevier NV (JA) 164 248 412
8,410 8,410 Fortis * (JR) 169 169
900 900 Heineken Holding (JG) 31 31
16,300 16,300 Heineken NV (JG) 620 620
17,447 51,650 69,097 ING Groep NV (JQ) 406 1,203 1,609
3,600 37,381 40,981 Koninklijke (Royal) Philips Electronics NV (JY) 105 1,090 1,195
57,900 82,400 140,300 Koninklijke KPN NV (JY) 446 635 1,081
2,900 19,315 22,215 Koninklijke Numica NV (JY) 80 533 613
22,800 7,020 29,820 Royal Dutch Petroleum Co. (BB) 1,201 370 1,571
3,800 3,800 TNT Post Group NV (BP) 89 89
6,327 10,457 16,784 VNU NV (JA) 200 330 530
15,295 15,295 Wolters Kluwer NV * (JA) 239 239
--------- --------
478,593 9,836
New Zealand - 0.0%
436 436 Telecom Corp. of New Zealand, Ltd. (J1) 1 1
--------- --------
436 1
0 Norway - 0.7%
16,000 16,000 Den Norske Bank (JP) 107 107
7,025 7,025 Norsk Hydro ASA (BL) 433 433
2,700 2,700 Norske Skogindustrier ASA - Cl. A (BG) 51 51
16,850 16,850 Orkla ASA * (JH) 377 377
25,400 42,575 Statoil ASA (BB) 285 285
--------- --------
1,253
Singapore - 0.8%
4,000 4,000 DBS Group Holdings, Ltd. (JP) 35 35
56,000 56,000 Hong Kong Land Holdings, Ltd. (JS) 95 95
197,000 197,000 Mobile One * (J1) 174 174
75,000 75,000 Singapore Technology Engineering, Ltd. (BH) 90 90
117,000 117,000 Singapore Telecommunications, Ltd. (J1) 135 135
6,000 96,072 102,072 United Overseas Bank, Ltd. (JP) 47 747 794
9,000 9,000 Venture Manufacturing, Ltd. (JY) 106 106
--------- --------
560,072 1,429
South Africa - 0.7%
28,900 28,900 Anglo American plc * (BF) 618 618
3,220 3,220 Impala Platinum Holdings, Ltd. (BF) 279 279
245,170 245,170 Sanlam, Ltd. (JR) 322 322
--------- --------
277,290 1,219
South Korea - 1.2%
2,960 2,960 Samsung Electronics * (JY) 1,121 1,121
5,600 5,600 SK Telecom Co., Ltd. * (J2) 935 935
--------- --------
8,560 2,056
Spain - 3.0%
138 138 Antena 3 TV * (JA) 6 6
39,800 61,710 101,510 Banco Bilbao Vizcaya SA (JP) 549 852 1,401
66,720 66,720 Banco Santander Central Hispano SA * (JP) 789 789
27,112 27,112 Endesa SA * (J3) 521 521
18,110 18,110 Gas Natural SDG SA * (J4) 423 423
14,300 22,500 36,800 Inditex (JE) 290 457 747
6,200 10,841 17,041 Repsol SA (BB) 121 211 332
30,853 40,912 71,765 Telefonica SA (J1) 453 600 1,053
--------- --------
339,196 5,272
Sweden - 2.7%
20,200 20,200 Assa Abloy (BI) 240 240
16,200 16,200 AstraZeneca Group plc (BO) 789 789
20,910 20,910 Electrolux AB - Ser. B * (BW) 459 459
18,100 18,100 ForeningsSparbanken AB (JP) 356 356
28,920 28,920 Hennes & Mauritz AB * (JE) 688 688
50,920 50,920 Nordic Baltic Holding AB (JP) 382 382
2,500 3,220 5,720 Sandvik AB (BM) 86 111 197
96,328 96,328 Securitas AB * (BO) 1,299 1,299
6,000 6,000 Svenska Handelsbanken, Inc. (JP) 123 123
120,435 120,435 Telefonaktiebolaget LM Ericsson AB (JW) 216 216
--------- --------
383,733 4,749
Switzerland - 6.7%
22,218 22,218 ABB, Ltd. (BK) 112 112
25,900 25,900 Adecco SA * (BO) 1,664 1,664
4,063 23,500 27,563 Credit Suisse Group (JP) 149 860 1,009
8,391 8,391 Holcim (BD) 391 391
2,309 9,715 12,024 Nestle SA (JH) 577 2,426 3,003
18,678 18,678 Novartis AG (JO) 848 848
20,336 20,336 Richemont (JQ) 488 488
3,033 6,300 9,333 Roche Holdings AG (JO) 306 635 941
134 134 Serono SA (JN) 95 95
8,404 8,404 Swiss Reinsurance Co. (JR) 567 567
1,581 1,581 Swisscom AG (J1) 521 521
126 126 Synthes-Stratec, Inc. (JL) 125 125
5,628 22,566 154,688 UBS AG (JP) 385 1,545 1,930
--------- --------
309,376 11,694
Taiwan - 1.3%
363,361 363,361 Advantech Co., Ltd. (JY) 626 626
622,680 622,680 China Trust Finance (JP) 626 626
52,150 52,150 Media Tekin Corp. (J0) 490 490
300,700 300,700 Taiwan Semiconductor * (J0) 562 562
--------- --------
1,648,267 2,304
Thailand - 1.4%
378,400 378,400 Bangkok Bank * (JP) 1,041 1,041
129,000 129,000 Siam Commercial Bank * (JP) 179 179
857,000 857,000 Siam Commercial Bank Public Co. * (JP) 1,200 1,200
--------- --------
1,364,400 2,420
United Kingdom - 19.0%
20,668 20,668 Abbey National First Capital BV (JP) 196 196
4,400 4,400 Anglo American plc (BF) 95 95
14,000 14,000 Arm Holdings plc (J0) 32 32
11,100 25,738 36,838 AstraZeneca Group plc (JO) 531 1,231 1,762
7,832 7,832 Autonomy Corp. plc * (JV) 33 33
30,200 30,200 Barclays (JP) 269 269
92,100 41,973 134,073 BG Group plc (BB) 471 215 686
62,655 62,655 Billiton plc (BF) 546 546
75,367 75,367 BP Amoco plc (BB) 609 609
20,000 20,000 British Aerospace plc (BH) 60 60
18,063 18,063 British Sky Broadcast plc (JA) 227 227
38,846 38,846 Cadbury Schweppes plc * (JH) 284 284
24,100 24,100 Capita Group plc (FB) 105 105
4,948 4,948 Carnival plc (BZ) 199 199
21,612 21,612 Celltech Group plc * (JN) 146 146
39,500 102,400 141,900 Centrica plc (J4) 149 386 535
255,530 255,530 Compass Group plc * (BZ) 1,733 1,733
7,900 7,900 CRH (BD) 162 162
20,240 20,240 David S. Smith Holdings PLC (BE) 59 59
13,000 54,307 67,307 Diageo plc (JG) 170 713 883
82,780 82,780 Electrocomponents plc * (JY) 480 480
24,490 24,490 Friends Provident plc * (BL) 58 58
1,000 1,000 Gazprom Oao * (BB) 26 26
6,800 6,800 GKN * (BU) 32 32
162,381 162,381 GlaxoSmithKline plc * (JO) 3,710 3,710
31,250 31,250 Granada Compass plc * (JA) 68 68
149,431 149,431 Hays plc * (BZ) 320 320
24,800 24,800 HBOS (JP) 320 320
22,000 22,000 Hilton Group plc * (BZ) 88 88
29,900 29,900 HSBC Holdings plc (JP) 469 469
28,166 28,166 Kesa Electricals (JE) 129 129
276,453 276,453 Kingfisher * (JE) 1,374 1,374
30,600 30,600 National Grid Group (JY) 219 219
29,800 29,800 Pearson plc (JA) 331 331
11,700 11,700 Prudential Corp. (JR) 99 99
3,800 7,616 11,416 Reckitt Benckiser (JJ) 86 172 258
111,935 111,935 Reed International plc (JA) 934 934
3,400 56,255 59,655 Rio Tinto plc (BF) 94 1,549 1,643
20,400 89,256 109,656 Royal Bank of Scotland Group (JP) 599 2,623 3,222
161,736 161,736 Shell Transport & Trading Co. plc * (BB) 1,200 1,200
14,600 14,600 Smith & Nephew (JL) 122 122
9,900 9,900 Smiths Group (BL) 117 117
21,300 20,800 42,100 Standard Chartered plc (JP) 351 343 694
234,930 234,930 Tesco plc * (JF) 1,081 1,081
101,626 101,626 Tomkins plc (BL) 485 485
50,900 83,368 134,268 Unilever plc (JK) 473 775 1,248
16,593 16,593 United Business Media (JA) 145 145
485,538 1,347,214 1,832,752 Vodafone AirTouch plc (J2) 1,200 3,331 4,531
6,600 6,600 Wolseley (BN) 93 93
59,828 59,828 Woolsworths Group * (BL) 47 47
106,830 106,830 WPP Group plc * (JA) 1,046 1,046
10,900 10,900 Xstrata (BF) 122 122
--------- --------
4,943,355 33,332
United States - 5.7%
2,400 18,600 21,000 America Movil SA de CV - ADR Ser. L (J2) 66 508 574
5,000 5,000 AstraZeneca Group Plc - ADR (JO) 242 242
11,675 11,675 Check Point Software Technologies, Ltd. * (JT) 196 196
27,300 27,300 Companhia De Bebidas ADR (JG) 696 696
1,800 11,469 13,269 Companhia Vale Do Rio Doce - ADR (BF) 105 591 696
Compania Brasileira de Distribuicao Grupo Pao
de
11,200 11,200 Acucar - ADR (JF) 282 282
2,000 2,000 DBS Group Holdings, Ltd. - ADR 144A (a) 17 17
0 (JP)
Embraer - Empresa Brasileira de Aeronautica
SA *
18,394 18,394 (BH) 644 644
7,110 7,110 Lukoil Holding - ADR * (BB) 661 661
5,600 5,600 Mobile Systems - ADR * (J2) 464 464
4,500 4,500 Nokia Oyj - ADR (JW) 77 77
31,592 31,592 Petroleo Brasileiro SA - ADR (BB) 837 837
15,799 15,799 POSCO - ADR (BF) 537 537
2,000 2,000 Royal Dutch Petroleum Co. (BB) 105 105
2,850 2,850 Samsung Electronics - 144A (a) (JY) 536 536
3,200 3,200 Sap Aktiengesellschaft - ADR (JV) 133 133
3,500 3,500 Sony Corp. (JY) 121 121
5,200 5,200 STMicroelectronics NV (J0) 140 140
48,864 48,864 Taiwan Semiconductor Manufacturing Co., Ltd.
- ADR (J0) 500 500
6,725 6,725 Telefonica SA * (J1) 297 297
1,700 1,700 Telefonos de Mexico SA - ADR (J1) 56 56
3,490 3,490 Teva Pharmaceutical Industries, Ltd. - ADR *
(JO) 198 198
10,400 10,400 The Thomson Corp. (JA) 377 377
23,200 23,200 Turkcell Iletisim Hizmetleri AS - ADR (J2) 616 616
17,100 17,100 Vodafone Group plc (J1) 428 428
300 10,283 10,583 Yukos Corp. - ADR (BB) 13 432 445
------- -------- --------
9,875
--------
TOTAL COMMON STOCK (Cost $140,089) - 96.9% 46,608 123,181 169,789
PREFERRED STOCK (Cost $498) - 0.4%
Australia
85,749 85,749 New Corporation Limited (JA) 645 645
--------
645
PUBLICLY-TRADED BONDS
Supra National
SMFG Finance (FB)
12,000 2.25% due 07/11/05 204 204
6,000 2.25% due 07/11/05 53 53
------- -------- --------
TOTAL PUBLICLY-TRADED BONDS (Cost $196) - 0.2% 257 257
INVESTMENT COMPANIES HELD
AS COLLATERAL ON LOANED
16,998 16,998 SECURITIES (Cost $16,998) - 9.7% 16,998 16,998
SHORT-TERM INVESTMENTS
200 200 Euro Time Deposit 252 252
1.75% due 01/02/04
Investment in joint trading account
2,977 1,336 4,313 1.061% due 01/02/04 2,977 1,336 4,313
------- -------- --------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,565) - 2.6% 2,977 1,588 4,565
TOTAL INVESTMENTS (Cost $162,347) - 109.8% 49,842 142,412 192,254
Payables, less cash and receivables - (9.8)% (666) (16,447) (17,113)
------- -------- --------
NET ASSETS - 100.0% $49,176 $125,965 $175,141
======= ======== ========
(a) Pursuant to Rule 144A under the Securities Act of 1933, these securities
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. At December 31, 2003, securities aggregated
$553 or 1.1% of net assets of the Portfolio.
ADR-American Depository Receipts.
GDR-Global Depository Receipts.
*Non-income producing securities
See notes to financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -OVERSEAS EQUITY C FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B FUND
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES - December 31, 2003
(Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Overseas
Overseas Overseas Equity B Fund
Equity C Equity B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -------------
ASSETS
Long term investments at cost (including $16,314
of securities loaned in the Overseas Equity B Fund) $ 47,315 $103,565 $150,880
Net unrealized appreciation of investments 16,144 20,261 36,405
Short-term investments at value 1,205 18,586 19,791
-------- -------- --------
Total investments 64,664 142,412 207,076
Cash 1 38 39
Foreign currency (Cost of $261 and $989 in the Overseas
Equity C Fund and the Overseas Equity B Fund,
respectively) 266 987 1,253
Receivable for:
Investments sold 72 -- 72
Dividends 222 199 421
Other assets -- 7 7
-------- -------- --------
Total assets 65,225 143,643 208,868
-------- -------- --------
LIABILITIES
Payables for:
Investments purchased 8 -- 8
Fund shares purchased 230 504 734
Collateral for securities on loan -- 16,998 16,998
Merger expenses 80 C 80
Other liabilities 314 176 490
-------- -------- ----- --------
Total liabilities 552 17,678 80 18,310
-------- -------- ----- --------
Net assets B $ 64,673 $125,965 $ (80) $190,558
======== ======== ===== ========
Shares of beneficial interest outstanding 7,263 12,787 (705) A 19,345
-------- -------- --------
Net asset value per share $ 8.90 $ 9.85 $9.85
======== ======== ========
Composition of net assets:
Capital paid-in $ 65,342 $154,114 $ (80)C $219,376
Accumulated net realized gain (loss) on investments,
futures and foreign currency transactions (16,376) (48,243) (64,619)
Undistributed net investment loss (134) -- (134)
Net unrealized appreciation of:
Investments 16,144 20,261 36,405
Translation of assets and liabilities in foreign
currencies (303) (167) (470)
-------- -------- ----- --------
Net assets $ 64,673 $125,965 $ (80) $190,558
======== ======== ===== ========
A Shares of the Acquired Fund are exchanged for the Acquiring Fund Upon
Consumation of the reorganization. Includes 5 thousand shares as adjustment
for merger expenses.
B The proforma figures for the net assets and net asset value per share do
not reflect the withdrawal of seed money capital in July, 2004, in the
amount of approximately $10 million from the Acquired Fund.
C Estimated amount of non-recurring expenses of the reorganization.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I -OVERSEAS EQUITY C FUND
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B FUND
PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (Unaudited) (000's Omitted)
- --------------------------------------------------------------------------------
Overseas
Overseas Overseas Equity B Fund
Equity C Equity B Pro Forma Pro Forma
Fund (Acquired) Fund (Acquiring) Adjustments Combined
--------------- ---------------- ----------- -------------
INVESTMENT INCOME:
Interest $ 21 $ 25 $ 46
Dividends 1,249 2,093 3,342
Securities lending -- 78 78
------- ------- -------
Total income 1,270 2,196 $ 3,466
------- ------- -------
EXPENSES:
Investment advisory fee 661 1,136 (304)A 1,493
Auditors fees 6 13 19
Custodian fees 308 265 (235)B 338
Legal fees 3 6 9
Printing & mailing fees 3 9 12
Trustees' fees 1 3 4
Other fees 9 12 21
------- ------- ----- -------
Total expenses 991 1,444 (539) 1,896
Less expenses reimbursed (286) (207) (493)
------- ------- ----- -------
Net expenses 705 1,237 (539) 1,403
------- ------- ----- -------
Net investment income 565 959 539 2,063 C
------- ------- ----- -------
REALIZED AND UNREALIZED GAIN
Net realized gain (loss) on:
Investments 2,193 (5,347) (3,154)
Foreign currency transactions 586 258 844
Change in unrealized appreciation (depreciation) on:
Investments 18,424 35,626 54,050
Translation of assets and liabilities in
foreign currencies (311) (170) (481)
------- ------- ----- -------
Net realized and unrealized gain 20,892 30,367 -- 51,259
------- ------- ----- -------
Net increase (decrease) in net assets
resulting from operations $21,457 $31,326 $ 539 $53,322
======= ======= ===== =======
A Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
B Decreases reflect the elimination of duplicate expense achieved by merging
the funds.
C One time transaction fees relating directly to the fund merger were not
considered in the proforma statement of operations. Estimated one time
transaction fees are $80,000.
The accompanying notes are an integral part of the financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY C (formerly Emerging
Markets Equity)
JOHN HANCOCK VARIABLE SERIES TRUST I - OVERSEAS EQUITY B (formerly International
Opportunities)
PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS - December 31, 2003
(Unaudited)
(showing percentage of combined pro forma total value of investments)
- --------------------------------------------------------------------------------
Overseas Overseas Overseas Overseas
Equity C Equity B Proforma Equity C Equity B Proforma
Fund Fund Combined Name of Issuer Fund Fund Combined
- ------------- ---------- ------------- --------------------------------------------------- -------- -------- --------
Shares/Par Value Market Value (000's)
- ------------------------------------------ ------------------------------
COMMON STOCK
Australia - 0.5%
82,482 82,482 Broken Hill Proprietary Co., Ltd. * (BF) 757 757
38,000 38,000 Coles Myer, Ltd. * (JF) 216 216
-------
120,482 973
Belgium - 0.4%
29,450 29,450 DEXIA * (JP) 507 507
5,110 5,110 Fortis * (JR) 103 103
3,008 3,008 UCB SA * (JQ) 113 113
-------
37,568 723
Brazil - 0.2%
9,100 9,100 Aracruz Celulose SA - ADR * (BG) 334 334
-------
9,100 334
Canada - 1.9%
18,632 18,632 Alcan Aluminum, Ltd. (BF) 873 873
9,800 9,800 Bank Nova Scotia Halifax - Bills * (FD) 499 499
39,100 39,100 Inco, Ltd. * (BF) 1,563 1,563
16,280 16,280 Royal Bank of Canada (JP) 778 778
-------
83,812 3,713
Denmark - 0.4%
16,980 16,980 Novo Nordisk AS (JO) 691 691
-------
16,980 691
Egypt - 0.3%
25,130 25,130 Egypt Mobile Phone * (J2) 308 308
20,144 20,144 Orascom Construction Industries * (BJ) 238 238
-------
45,274 546
Finland - 0.8%
86,112 86,112 Nokia Oyj * (JW) 1,487 1,487
-------
86,112 1,487
France- 8.8%
29,300 29,300 AXA * (JR) 626 626
28,802 28,802 BNP Paribas * (JP) 1,812 1,812
34,309 34,309 Caisse National Credit Agricole (JP) 818 818
11,972 11,972 CIE De St. Gobain * (BI) 585 585
37,300 37,300 France Telecom * (J1) 1,065 1,065
950 950 Groupe Danone * (JH) 155 155
4,125 4,125 Hermes International * (BY) 797 797
6,364 6,364 L'Oreal SA * (JK) 521 521
970 970 Lafarge SA * (BD) 86 86
10,612 10,612 LVMH * (Louis Vuitton Moet Hennessy) (BY) 772 772
1,733 1,733 Pinault-Printemps-Redoute SA * (JD) 167 167
2,331 2,331 Renault (BV) 161 161
13,081 13,081 Rhone-Poulenc SA * (JO) 864 864
20,009 20,009 Sanofi-Synthelabo SA * (JO) 1,505 1,505
10,780 10,780 Schneider SA * (BK) 705 705
4,102 4,102 Societe Generale - Cl. A * (JP) 362 362
35,756 35,756 Societe Television Francaise (JA) 1,247 1,247
19,034 19,034 Sodexho Alliance SA * (BZ) 573 573
11,756 11,756 STMicroelectronics * (J0) 318 318
12,500 12,500 Thomson Multimedia * (JY) 266 266
17,353 17,353 Total Fina SA - Cl. B * (BB) 3,223 3,223
6,713 6,713 Vivendi Universal SA * (JA) 163 163
-------
16,791
Germany - 1.3%
2,728 2,728 Allianz AG * (JR) 344 344
3,915 3,915 Bayer AG * (JL) 115 115
8,572 8,572 Bayerische Vereinsbank AG * (JP) 198 198
8,835 8,835 Deutsche Bank AG * (JP) 731 731
3,545 3,545 E. On AG (J3) 231 231
4,373 4,373 Gehe AG * (JM) 212 212
2,143 2,143 Hypo Real Estate (JP) 53 53
2,759 2,759 Rhoen-Klinikum AG * (JM) 155 155
1,660 1,660 SAP AG * (JV) 279 279
1,952 1,952 Siemens AG * (BL) 156 156
-------
2,474
Hong Kong - 3.4%
418,000 418,000 ASIA Aluminum Holdings, Ltd. (BI) 83 83
589,000 589,000 Avichina Industry * (BV) 125 125
99,000 99,000 BYD Co. (BL) 261 261
37,000 37,000 Cheung Kong Holdings, Ltd. * (JS) 293 293
438,000 311,000 749,000 China Life Insurance Co., Ltd. * (JR) 358 254 612
98,000 98,000 China Merchants Holdings International Co., Ltd. *
(BL) 129 129
768,000 768,000 China Oilfield Series * (BB) 272 272
520,000 520,000 China Petroleum (BB) 233 233
160,000 160,000 China Res Holdings (FB) 74 74
322,000 322,000 China Shipping Development * (BR) 236 236
356,000 223,000 579,000 China Telecom Corp. * (J2) 146 684 830
162,000 162,000 China Unicom, Ltd. (J2) 151 151
436,000 436,000 CNOOC, Ltd. * (BB) 856 856
233,000 233,000 Fountain Set Holdings (BY) 159 159
121,000 121,000 Grande Holdings (BW) 155 155
126,000 126,000 Hong Kong & China Gas Co., Ltd. (J4) 192 192
301,000 301,000 Hopewell Highway * (BT) 171 171
14,800 14,800 HSBC Holdings plc (JP) 234 234
144,000 144,000 Huaneng Power International * (J3) 249 249
89,000 89,000 Kingboard Chemical (JY) 137 137
125,000 125,000 Lianhua Supermarket * (JF) 132 132
72,000 72,000 Moulin International Holding * (JL) 48 48
216,000 216,000 Norstar Founders * (BU) 70 70
274,000 274,000 PetroChina Company, Ltd. (BB) 157 157
174,000 174,000 PICC Property & Casualty (JR) 78 78
755,000 755,000 Shougang Concord (BF) 111 111
52,000 52,000 Sun Hung Kai Properties, Ltd. * (JS) 429 429
92,000 92,000 Victory City International (BY) 40 40
63,000 63,000 Wumart Stores, Inc. * (JD) 62 62
-------
7,788,800 6,579
Hungary - 0.6%
3,503 5,680 9,183 Gedeon Richter * (JO) 412 668 1,080
-------
9,183 1,080
India - 3.7%
31,450 31,450 Bharat Heavy Electricals, Ltd. (BK) 351 351
19,051 19,051 Colgate Palmolive Co. * (JK) 67 67
14,092 14,092 Container Corp. of India, Ltd. (BJ) 206 206
7,000 7,000 GlaxoSmithKline Pharmaceuticals (JO) 88 88
25,250 25,250 Gujarat Ambuja Cements Ltd. (BD) 169 169
68,000 68,000 HDFC Bank Ltd. * (JP) 548 548
16,950 16,950 Hero Honda Motors, Ltd. (BV) 167 167
4,850 4,850 Hindlaco Industries (BD) 150 150
29,700 168,940 198,640 Hindustan Lever Ltd. (JJ) 134 760 894
14,000 14,000 Hindustan Petroleum Corp., Ltd. (BB) 135 135
10,639 10,639 Indialnfo, Ltd. (JA) 0
103,000 103,000 Indiana Development Bank (JQ) 141 141
3,109 3,954 7,063 Infosys Technologies, Ltd. * (JU) 380 484 864
6,500 6,500 ITC, Ltd. (JI) 141 141
96,000 96,000 Maruti Udyog (BO) 794 794
705,000 705,000 Morgan Stanley Group (JQ) 261 261
10,750 10,750 Oil & Natural Gas (BB) 189 189
8,660 8,660 Ranbaxy Laboratories, Ltd. (JO) 209 209
16,300 16,300 Reliance Industries, Inc. * (BC) 205 205
19,600 19,600 State Bank of India (JP) 263 263
129,000 129,000 Steel Author India * (BF) 145 145
20,000 20,000 Tata Ironsteel (BF) 195 195
27,400 27,400 Tata Engineering and Locomotive Co., Ltd. (BD) 272 272
212,600 212,600 Zee Telefilms Ltd. (JA) 701 701
-------
1,771,795 7,155
Indonesia - 1.1%
650,961 650,961 Astra International (BV) 386 386
430,500 430,500 Bank Central (JP) 170 170
989,500 989,500 Bank Mandiri (JP) 117 117
1,029,000 1,029,000 Bank Rakyat * (JP) 153 153
3,842,000 3,842,000 Bumi Resources Tbk (BB) 228 228
256,500 256,500 HM Sampoerna (JI) 136 136
593,000 593,000 Indocement Tunggal * (BD) 150 150
518,000 518,000 Ramayana Lestari * (JD) 268 268
491,000 491,000 Telekomunikasi Indiana - Ser. B (J1) 394 394
-------
8,800,461 2,002
Italy - 2.8%
49,920 49,920 Alleanza Assicurazioni * (JR) 546 546
60,327 60,327 Banca Intesa SpA (JP) 236 236
13,000 13,000 BCP Pop Veron (JP) 220 220
71,172 71,172 ENI * (BB) 1,342 1,342
17,601 17,601 Mediaset SpA * (JA) 209 209
22,795 22,795 Mediolanum SpA * (JQ) 179 179
316,563 316,563 Telecom Italia (J1) 772 772
115,070 115,070 Telecom Italia Mobile SpA (J2) 625 625
233,893 233,893 UniCredito Italiano SpA * (JP) 1,261 1,261
-------
900,341 5,390
Japan - 10.4%
13,000 13,000 Canon, Inc. * (JZ) 605 605
14,900 14,900 Credit Saison Co., Ltd. (JQ) 337 337
17,000 17,000 Dai-Nippon Printng Co., Ltd. (BO) 239 239
11,100 11,100 Daito Trust Construction Co., Ltd. (BJ) 329 329
36,000 36,000 Daiwa House Industry Co., Ltd. (BW) 383 383
70,000 70,000 Daiwa Securities Group, Inc. (JQ) 476 476
13,200 13,200 Denso Corp. (BU) 260 260
3,500 3,500 Fanuc, Ltd. (BM) 210 210
44 44 Fuji Television Network, Inc. (JA) 238 238
18,100 18,100 Fujisawa Pharmeceutical Co., Ltd. * (JO) 386 386
2,700 2,700 Funai Electric Co. (JY) 371 371
14,900 14,900 Honda Motor Co. * (BV) 662 662
2,500 2,500 Hoya Corp. * (JY) 230 230
264 264 Japan Telecom Co. * (J1) 707 707
1,300 1,300 Keyence Corp. (JY) 274 274
25,000 25,000 Kirin Brewery Co. * (JG) 213 213
2,600 2,600 Kyocera Corp. * (JY) 173 173
29,500 29,500 Marui Co., Ltd. * (JD) 372 372
34,000 34,000 Mitsubishi Corp. (BN) 360 360
49,000 49,000 Mitsubishi Estate Co., Ltd. * (JS) 465 465
54,000 54,000 Mitsubishi Heavy Industries, Ltd. * (BM) 150 150
95,000 95,000 Mitsui Fudosan Co., Ltd. * (JS) 858 858
53,000 53,000 Mitsui Trust Holdings (JP) 296 296
13,000 13,000 NEC Corp. * (JX) 96 96
66 66 Nippon Telegraph & Telephone Corp. * (J1) 318 318
23,300 23,300 Nissan Motor Acceptance Corp. (BV) 266 266
78,000 78,000 Nomura Securities Co., Ltd. * (JQ) 1,329 1,329
328 328 NTT Mobile Communications Network, Inc. * (J2) 744 744
36,000 36,000 Oji Paper Co. (BG) 233 233
39,000 39,000 Oki Electric Industry Co. * (J1) 153 153
1,700 1,700 Orix Corp. * (JQ) 141 141
4,900 4,900 Rohm Co., Ltd. * (J0) 574 574
26,500 26,500 Secom Co. * (BO) 989 989
32,000 32,000 Sekisui House, Ltd. * (BW) 331 331
26,000 26,000 Seven-Eleven Japan * (JF) 789 789
7,900 7,900 Shin-Etsu Chemical Co. * (BC) 323 323
2,900 2,900 SMC Corp. * (BM) 361 361
6,600 6,600 Sony Corp. * (JY) 229 229
16,000 16,000 Sumitomo Corp. * (BO) 119 119
270,000 270,000 Sumitomo Metal Industries (BF) 267 267
127 127 Sumitomo Mitsui GR (JP) 677 677
22,000 22,000 Suzuki Motor Corp. * (BV) 326 326
3,900 3,900 Takeda Chemical Industries * (BC) 155 155
71,000 71,000 Teijin, Ltd. (BC) 209 209
7,100 7,100 Toyoda Gosei (BU) 205 205
16,200 16,200 Toyota Motor Corp. * (BV) 547 547
157 157 UFJ Holdings, Inc. * (JP) 755 755
16,000 16,000 Uniden Corp. * (JW) 294 294
18,400 18,400 Yamanouchi Pharmaceutical Co., Ltd. * (JO) 572 572
17,000 17,000 Yamato Transport Co., Ltd. (BP) 200 200
-------
1,316,686 19,796
Luxembourg - 0.0%
3,830 3,830 Society Europeenne des Satellites (JA) 39 39
-------
3,830 39
Jordan - 0.1%
300 300 Arab Bank (JP) 129 129
-------
300 129
Malaysia - 1.2%
269,000 269,000 Astro All Asia Net * (JA) 313 313
102,000 102,000 Commerce Asset Holdings * (JP) 110 110
259,000 848,700 1,107,700 Magnum Corp. Berhad * (BZ) 189 621 810
55,900 55,900 Malayan Banking Berhad * (JP) 142 142
51,000 218,800 269,800 Resorts World Berhad * (BZ) 136 581 717
168,499 168,499 SP Setia (JS) 155 155
81,000 81,000 YTL Corp., Berhad (J3) 92 92
-------
2,053,899 2,339
Mexico - 1.3%
125,472 195,100 320,572 Cifra SA de CV - Ser. V * (JD) 358 556 914
91,500 91,500 Fomento Economico Mexicano SA de CV * (JG) 338 338
372,861 708,000 1,080,861 GF BBVA Bancomer - Ser. B (JP) 319 605 924
81,706 81,706 Wal-Mart de Mexico SA de CV - Ser. C * (JD) 218 218
-------
1,574,639 2,394
Netherlands - 2.9%
1,250 1,250 Akzo Nobel NV * (BC) 48 48
31,890 31,890 ASM Lithography Holding NV (J0) 632 632
19,940 19,940 Elsevier NV * (JA) 248 248
8,410 8,410 Fortis * (JR) 169 169
51,650 51,650 ING Groep NV (JQ) 1,203 1,203
37,381 37,381 Koninklijke * (Royal) Philips Electronics NV (JY) 1,090 1,090
82,400 82,400 Koninklijke KPN NV * (JY) 635 635
19,315 19,315 Koninklijke Numica NV * (JY) 533 533
7,020 7,020 Royal Dutch Petroleum Co. * (BB) 370 370
10,457 10,457 VNU NV * (JA) 330 330
15,295 15,295 Wolters Kluwer NV * (JA) 239 239
-------
285,008 5,497
Norway - 0.2%
16,850 16,850 Orkla ASA * (JH) 377 377
-------
16,850 377
Singapore - 0.6%
197,000 197,000 Mobile One * (J1) 174 174
453,000 453,000 TPV Technology (JX) 240 240
96,072 96,072 United Overseas Bank, Ltd. * (JP) 747 747
-------
746,072 1,161
South Africa - 5.1%
33,800 33,800 ABSA Group, Ltd. * (JP) 213 213
315,000 315,000 African Bank Investments, Ltd. * (JP) 444 444
146,600 146,600 African Life Assured (JR) 335 335
5,200 5,200 Anglo American Platinum Corp., Ltd. * (BF) 227 227
84,827 28,900 113,727 Anglo American plc * (BF) 1,813 618 2,431
9,100 9,100 Anglogold * (BF) 427 427
10,100 10,100 Edgars Consolidated Stores * (JE) 193 193
451,698 451,698 FirstRand, Ltd. (JP) 602 602
34,400 34,400 Gold Fields Mining * (BF) 491 491
5,612 5,612 Harmony Gold Mining * (BF) 91 91
6,128 3,220 9,348 Impala Platinum Holdings, Ltd. (BF) 531 279 810
164,210 164,210 M-Cell, Ltd. (J2) 698 698
41,100 41,100 Massmart * (JF) 187 187
30,000 30,000 Naspers, Ltd. - N Shares (BZ) 186 186
500 500 Pretoria Portland Cement (BD) 11 11
245,170 245,170 Sanlam, Ltd. (JR) 322 322
137,300 137,300 Shoprite Holdings, Ltd. (JF) 192 192
160,613 160,613 Standard Bank Investment Corp., Ltd. (JP) 941 941
108,000 108,000 Steinhoff International Holdings (BW) 124 124
72,100 72,100 Telkom Group, Ltd. (J1) 748 748
-------
2,093,578 9,673
South Korea - 6.4%
11,140 11,140 Cheil Industries (BY) 162 162
35,860 35,860 Daewoo Shipbuilding & Marine * (BM) 460 460
22,290 22,290 Daishin Securities * (JQ) 327 327
31,650 31,650 Good Morning Securities Co., Ltd. (JQ) 146 146
24,870 24,870 Handsome Corp. (BY) 253 253
33,190 33,190 Hankook Tire Co., Ltd. (BU) 251 251
6,530 6,530 Honam Petrochemical (BC) 337 337
15,260 15,260 Hyundai Department Store * (JE) 498 498
15,690 15,690 Hyundai Mobis (BM) 844 844
8,140 8,140 Kookmin Bank * (JP) 305 305
14,130 14,130 KT & G Corp. * (JI) 246 246
5,810 5,810 LG Card (JQ) 15 15
25,600 25,600 LG Investment & Securities Co., Ltd. * (JQ) 178 178
500 500 Pohang Iron & Steel Co., Ltd. (BF) 68 68
15,000 15,000 Samsung Display Devices Co. (JY) 1,769 1,769
8,750 2,960 11,710 Samsung Electronics * (JY) 3,312 1,121 4,433
12,440 12,440 Shinhan Financial (JP) 199 199
1,700 5,600 7,300 SK Telecom Co., Ltd. * (J2) 284 935 1,219
7,460 7,460 STX Corp. (BM) 57 57
16,510 16,510 STX Shipbuilding * (BR) 220 220
2,940 2,940 Tongyang Cement Co. (BI) 216 216
-------
324,020 12,203
Spain - 2.0%
138 138 Antena 3 TV * (JA) 6 6
61,710 61,710 Banco Bilbao Vizcaya SA * (JP) 852 852
66,720 66,720 Banco Santander Central Hispano SA * (JP) 789 789
27,112 27,112 Endesa SA * (J3) 521 521
18,110 18,110 Gas Natural SDG SA * (J4) 423 423
22,500 22,500 Inditex (JE) 457 457
10,841 10,841 Repsol SA * (BB) 211 211
40,912 40,912 Telefonica SA * (J1) 600 600
-------
248,043 3,859
Sweden - 1.7%
20,910 20,910 Electrolux AB - Ser. B * (BW) 459 459
28,920 28,920 Hennes & Mauritz AB * (JE) 688 688
50,920 50,920 Nordic Baltic Holding AB (JP) 382 382
3,220 3,220 Sandvik AB (BM) 111 111
96,328 96,328 Securitas AB * (BO) 1,299 1,299
120,435 120,435 Telefonaktiebolaget LM Ericsson AB (JW) 216 216
-------
320,733 3,155
Switzerland - 3.7%
25,900 25,900 Adecco SA * (BO) 1,664 1,664
23,500 23,500 Credit Suisse Group * (JP) 860 860
9,715 9,715 Nestle SA * (JH) 2,426 2,426
6,300 6,300 Roche Holdings AG * (JO) 635 635
22,566 22,566 UBS AG * (JP) 1,545 1,545
-------
87,981 7,130
Taiwan - 4.7%
122,466 122,466 Acer, Inc. * (JX) 182 182
363,361 363,361 Advantech Co., Ltd. (JY) 626 626
70,000 70,000 Asia Optical Co., Inc. (JL) 483 483
30,000 30,000 Catcher Technology Co., Ltd. (JY) 108 108
360,109 622,680 982,789 China Trust Finance (JP) 362 626 988
194,000 194,000 CTCI Corp. (BJ) 157 157
31,000 31,000 Cyberlink Corp. (JV) 128 128
255,655 255,655 Eva Airways (BQ) 104 104
354,540 354,540 Evergreen Marine Corp. (BR) 309 309
282,000 282,000 Fubon Financial HL (JQ) 270 270
12,000 12,000 Grand Hall Enterprises (BO) 56 56
119,680 119,680 Hon Hai Precision Insustry Co., Ltd. - Cl. G * (JY) 471 471
56,000 56,000 Infortrend Technologies (JT) 184 184
58,000 58,000 Kaulin Manufacturing (BO) 84 84
26,450 26,450 Largan Precision Co. (BL) 257 257
50,000 52,150 102,150 Media Tekin Corp. (J0) 470 490 960
151,180 151,180 Nan Ya Plastic Corp. (BC) 218 218
48,500 48,500 Novatek Microelect * (J0) 137 137
216,695 216,695 Phoenixtec Power (J3) 254 254
11,150 11,150 Pihsiang Machinery (JL) 39 39
623,680 623,680 Polaris Securities (JQ) 292 292
9,792 9,792 Richtek Technologies * (J0) 53 53
59,000 59,000 Sunplus Technology * (J0) 110 110
216,000 216,000 Taishin Financial (JP) 160 160
222,000 222,000 Taiwan Cellular Corp. (J2) 193 193
768,060 768,060 Taiwan Cement (BD) 378 378
192,800 192,800 Taiwan Navigation (BO) 128 128
99,114 300,700 399,814 Taiwan Semiconductor * (J0) 185 562 747
81,000 81,000 Waffer Technology (BF) 247 247
343,000 343,000 Ya Hsing Indiana Co. * (JY) 444 444
233,236 233,236 Yuanta Core Pacific (JQ) 139 139
46,000 46,000 Zyxel Communication (JW) 96 96
-------
6,681,998 9,002
Thailand - 3.2%
880,800 880,800 Asian Property Development (JS) 120 120
290,000 378,400 668,400 Bangkok Bank Co., Ltd. * (JP) 842 1,041 1,883
27,800 27,800 Banpu Co. (BF) 81 81
11,000 11,000 BEC World Public Co., Ltd. (JA) 68 68
104,000 104,000 Italian-Thai Development Public Co., Ltd. (BD) 310 310
166,200 166,200 Kasikornbank plc (JP) 273 273
993,800 993,800 Land & Houses (BJ) 318 318
47,500 47,500 MBK PCL (JS) 43 43
52,400 52,400 PTT Public Co. (BB) 211 211
64,900 64,900 Ratchaburi Electric (J3) 74 74
45,300 45,300 Seven Eleven * (JE) 64 64
73,600 73,600 Siam Cement Co. * (BD) 472 472
129,000 129,000 Siam Commercian Bank * (JP) 179 179
149,800 857,000 1,006,800 Siam Commercial Bank Public Co. * (JP) 210 1,200 1,410
140,800 140,800 Sino Thai Engineering * (BJ) 59 59
94,000 94,000 Thai Airways International plc (BQ) 113 113
188,100 188,100 Thai Farmers Bank Public Co., Ltd. * (JP) 332 332
52,100 52,100 Thai Olefin Public * (BC) 58 58
14,300 14,300 Thai Plastic & Chemical Public Co., Ltd. (BC) 71 71
-------
4,760,800 6,139
Turkey - 2.0%
68,890,305 68,890,305 Akbank TAS * (JP) 360 360
107,330,825 107,330,825 Akcansa Cimento SA (BD) 307 307
58,868,750 58,868,750 Arcelik AS (BW) 327 327
9,803,129 9,803,129 Enka Insaat (BL) 255 255
5,505,000 5,505,000 Ford Otomotiv (BV) 37 37
114,886,700 114,886,700 Hurriyet Gazete * (JA) 409 409
4,096,000 4,096,000 Migros Turk TAS (JF) 59 59
93,221,269 93,221,269 Tofas Otomobil (BV) 206 206
64,478,650 64,478,650 Trakya * (BI) 142 142
39,719,000 39,719,000 Turkcell Iletisim Hizmetleri AS (J2) 396 396
177,759,700 177,759,700 Turkiye Garanti Bankasi AS * (JP) 519 519
158,340,512 158,340,512 Turkiye Is Bankasi - Cl. C * (JP) 643 643
102,596,000 102,596,000 Yapi ve Kredi Bankasi AS * (JP) 212 212
-------
3,872
United Kingdom - 14.2%
20,668 20,668 Abbey National First Capital BV (JP) 196 196
23,420 23,420 Anglo American plc (BF) 505 505
25,738 25,738 AstraZeneca Group plc * (JO) 1,231 1,231
7,832 7,832 Autonomy Corp. plc * (JV) 33 33
41,973 41,973 BG Group plc * (BB) 215 215
75,367 75,367 BP Amoco plc (BB) 609 609
18,063 18,063 British Sky Broadcast plc (JA) 227 227
38,846 38,846 Cadbury Schweppes plc * (JH) 284 284
24,100 24,100 Capita Group plc (FB) 105 105
4,948 4,948 Carnival plc (BZ) 199 199
21,612 21,612 Celltech Group plc * (JN) 146 146
102,400 102,400 Centrica plc (J4) 386 386
255,530 255,530 Compass Group plc * (BZ) 1,733 1,733
20,240 20,240 David S. Smith Holdings PLC (BE) 59 59
54,307 54,307 Diageo plc * (JG) 713 713
82,780 82,780 Electrocomponents plc * (JY) 480 480
24,490 24,490 Friends Provident plc * (BL) 58 58
16,500 1,000 17,500 Gazprom Oao * (BB) 427 26 453
6,800 6,800 GKN * (BU) 32 32
162,381 162,381 GlaxoSmithKline plc * (JO) 3,710 3,710
31,250 31,250 Granada Compass plc * (JA) 68 68
149,431 149,431 Hays plc * (BO) 320 320
22,000 22,000 Hilton Group plc * (BZ) 88 88
28,166 28,166 Kesa Electricals (JE) 129 129
276,453 276,453 Kingfisher * (JE) 1,374 1,374
7,616 7,616 Reckitt Benckiser * (JJ) 172 172
111,935 111,935 Reed International plc (JA) 934 934
56,255 56,255 Rio Tinto plc * (BF) 1,549 1,549
89,256 89,256 Royal Bank of Scotland Group * (JP) 2,623 2,623
161,736 161,736 Shell Transport & Trading Co. plc * (BB) 1,200 1,200
20,800 20,800 Standard Chartered plc * (JP) 343 343
234,930 234,930 Tesco plc * (JF) 1,081 1,081
101,626 101,626 Tomkins plc (BL) 485 485
83,368 83,368 Unilever plc * (JK) 775 775
16,593 16,593 United Business Media (JA) 145 145
1,347,214 1,347,214 Vodafone AirTouch plc (J2) 3,331 3,331
59,828 59,828 Woolworths Group * (BL) 47 47
106,830 106,830 WPP Group plc * (JA) 1,046 1,046
------
3,934,282 27,084
United States - 11.5%
21,340 21,340 Advanced Semiconductor Engineering, Inc. (JY) 108 108
47,233 18,600 65,833 America Movil SA de CV - ADR Ser.L (J2) 1,291 508 1,799
6,039 6,039 Banco Bradesco - ADR (JP) 160 160
8,594 8,594 Banco Itau SA - ADR * (JP) 419 419
12,400 12,400 Cemex SA de CV - ADR * (BD) 325 325
36,512 11,675 48,187 Check Point Software Technologies, Ltd. * (JT) 614 196 810
4,600 4,600 Coca-Cola Co. - ADR (JG) 98 98
30,723 27,300 58,023 Companhia De Bebidas ADR (JG) 784 696 1,480
9,700 9,700 Companhia Energetica de Minas Gerias - ADR (J3) 177 177
4,300 4,300 Companhia Siderurgica Nacional SA - ADR * (BF) 230 230
15,547 11,469 27,016 Companhia Vale do Rio Doce - ADR (BF) 793 591 1,384
3,600 3,600 Companhia Vale Do Rio Doce - ADR (BF) 211 211
10,056 10,056 Compania Anonima Nacional Telefonos De
Venezuela - 153 153
Compania Brasileira de Distribuicao Grupo Pao
de
8,100 11,200 19,300 Acucar - ADR (JF) 204 282 486
15,500 15,500 Compania de Minas Buenaventura SA - ADR * (BF) 438 438
7,073 7,073 ECI Telecommunications, Ltd. * (JW) 41 41
18,394 18,394 Embraer - Empresa Brasileira de
Aeronautica SA * (BH) 644 644
8,930 8,930 Grupo Aeroportuario Sur - ADR * (BT) 157 157
6,600 6,600 Grupo Financiero BBVA Bancomer, SA de CV * (JP) 113 113
10,000 10,000 Grupo Televisa SA - GDR * (JA) 399 399
1,200 1,200 Harmony Gold Mining, Ltd. (BF) 19 19
23,700 23,700 JSC Norilsk Nickel - ADR (BF) 1,544 1,544
10,754 7,110 17,864 Lukoil Holding - ADR * (BB) 1,000 661 1,661
2,634 2,634 Magyar Tavkozlesi - ADR * (J1) 49 49
1 1 Marvell Technology Group, Ltd. * (J0) 0
4,100 5,600 9,700 Mobile Systems - ADR * (J2) 339 464 803
3,000 3,000 Mobile Telesystems OJSC - GDR 238 238
4,200 4,200 OAO Gazprom - ADR * (BL) 109 109
10,110 10,110 Orascom Construction Industries - GDR (BJ) 195 195
25,641 25,641 Petroleo Brasileiro SA * (BB) 750 750
33,828 31,592 65,420 Petroleo Brasileiro SA - ADR (BB) 896 837 1,733
15,799 15,799 POSCO - ADR (BF) 537 537
37,064 37,064 Surgutneftegaz - ADR (BB) 1,103 1,103
6,725 6,725 Telefonica SA * (J1) 297 297
30,480 30,480 Telefonos de Mexico SA - ADR (J1) 1,007 1,007
6,200 6,200 Telesp Celular Participacoes SA - ADR * (J2) 41 41
2,600 2,600 Telkom SA Ltd. - ADR * (J1) 110 110
4,100 4,100 Tenaris SA - ADR (BA) 137 137
3,490 3,490 Teva Pharmaceutical Industries,
Ltd. - ADR * (JO) 198 198
23,200 23,200 Turkcell Iletisim Hizmetleri AS - ADR (J2) 616 616
11,200 11,200 Unibanco - Uniao de Bancos Brasileiros
SA - GDR * (JP) 279 279
9,100 9,100 Votorantim Celulose e Papel SA - ADR (BG) 285 285
3,016 3,016 Wal-Mart de Mexico SA de CV - ADR (JD) 86 86
2,096 10,283 12,379 Yukos Corp. - ADR * (BB) 88 432 520
------ ------- -------
694,308 21,949
1,035,755,263 14,913,846 1,050,669,109 # TOTAL COMMON STOCK (Cost $149,645) - 97.4% 62,555 123,181 185,736
PREFERRED STOCK
Australia - 0.3%
85,749 85,749 News Corp., Ltd. (JA) 645 645
-------
645
Brazil - 0.3%
21,960,000 21,960,000 Banco Bradesco SA (JP) 115 115
359,000 359,000 BCO Itau Holdings Financeira (JP) 36 36
8,489,503 8,489,503 Companhia Energetica de Minas Gerais (J3) 155 155
83,929,111 83,929,111 Telesp Celular Participacoes SA (J2) 220 220
-------
526
South Korea - 0.2%
5,840 5,840 Daishin Securities (JQ) 42 42
1,630 1,630 Samsung Electronics (JY) 336 336
------ ------- -------
378
TOTAL PREFERRED STOCK (Cost $1,235) - 0.8% 904 645 1,549
INVESTMENT COMPANIES HELD
AS COLLATERAL ON LOANED
SECURITIES (Cost $16,998) - 8.9%
16,998 16,998 State Street Navigator Securities
Lending Portfolio 16,998 16,998
SHORT-TERM INVESTMENTS
Euro Time Deposit
200 200 1.75% due 01/02/04 252 252
Investment in joint trading account
1,205 1,336 2,541 1.061% due 01/02/04 1,205 1,336 2,541
------ ------- -------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,794) - 1.5% 1,205 1,588 2,793
TOTAL INVESTMENTS (Cost $170,672) - 108.6% 64,664 142,412 207,076
Payables less cash and receivables - (8.6)% 9 (16,447) (16,438)
------ ------- -------
NET ASSETS - 100.0% 64,673 125,965 190,638
* Non-income producing security.
ADR American Depository Receipt GDR-Global Depository
Receipt.
(a) Pursuant to Rule 144A under the Securities Act of 1933,
these securities may be resold in transactions exempt
from registration, normally to qualified institutional
buyers. At December 31, 2003, securities aggregated
$238 or 0.4% of net assets of the Portfolio.
See notes to financial statements.
JOHN HANCOCK VARIABLE SERIES TRUST I
Notes to Pro Forma Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF COMBINATION. The Pro Forma Combining Schedule of Portfolio
Investments, Statement of Assets and Liabilities and Statement of Operations
reflect the combination of certain Funds of the John Hancock Variable Series
Trust I (the JHVST); specifically, Fundamental Value B merging in to Fundamental
Value, Mid Cap Value merging in to Mid Cap Value B, Overseas Equity merging in
to Overseas Equity B, Overseas Equity C merging in to Overseas Equity B, Small
Cap Growth merging in to Small Cap Emerging Growth at and for the year ended
December 31, 2003. These statements have been derived from the books and records
of each Fund utilized in calculating daily net asset value at December 31, 2003.
The Pro Forma statements reflect the proposed transfer of the assets and
liabilities of Fundamental Value B for the shares of Fundamental Value, Mid Cap
Value for the shares of Mid Cap Value B, Overseas Equity for the shares of
Overseas Equity B, Overseas Equity C for the shares of Overseas Equity B, Small
Cap Growth for the shares of Small Cap Emerging Growth. Under generally accepted
accounting principles in the United States of America ("GAAP"), JHVST
Fundamental Value, Mid Cap Value B, Overseas Equity B and Small Cap Emerging
Growth Funds will be the surviving entities for accounting purposes. The Pro
Forma financial statements have been adjusted to reflect the anticipated fee
arrangements for the surviving entity and do not reflect the expenses of each of
these Portfolios in carrying out their obligations under the Agreement and Plan
of Reorganization.
The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets
and Liabilities and Statement of Operations should be read in conjunction with
the historical financial statements and financial highlights of Fundamental
Value and Fundamental Value B, Mid Cap Value B and Mid Cap Value, Overseas
Equity B and Overseas Equity, Overseas Equity B and Overseas Equity C, Small Cap
Emerging Growth and Small Cap Growth Funds, incorporated by reference in the
Statement of Additional Information.
The shares of the JHVST Fundamental Value, Mid Cap Value B, Overseas Equity B
and Small Cap Emerging Growth Funds are presently offered only to John Hancock
Variable Life Accounts U, V, and S to support variable life insurance policies
issued by John Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock
Variable Annuity Accounts I and JF to support variable annuity contracts issued
by JHVLICO; John Hancock Variable Annuity Accounts H, U, and V to support
variable annuity contracts issued by John Hancock Life Insurance Company ("John
Hancock") and John Hancock Life Account UV to support variable life insurance
policies issued by John Hancock and certain unregistered separate accounts of
JHVLICO and John Hancock. John Hancock and JHVLICO are indirect, wholly-owned
subsidiaries of Manulife Financial Corporation.
Pro Forma Adjustments:
(A) Adjustment to reflect the impact of the combination of assets upon the
advisory fee agreement.
(B) Adjustment to reflect the reduction in the custodian agreement fees,
elimination of duplicate expenses upon reorganization, and estimated
one-time proxy, legal and other expences of the reorganization.
2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed by
the Trust in the preparation of the financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results may differ from these estimates.
Security Valuation. Each Fund determines its net asset value per share once
daily as of the close of the customary trading session of the New York Stock
Exchange ("Exchange") on each business day of the Fund. The Exchange generally
closes at 4:00 p.m. Eastern Standard Time. However, ETFs and certain derivative
instruments may be valued using prices as late as 4:15 p.m. Eastern Standard
Time. In the event the Exchange closes at any time other than 4:00 p.m. Eastern
Standard Time on a particular day, each Fund will determine its net asset value
per share as of the close of the Exchange on that day.
Short-term investments with a remaining maturity of 60 days or less are valued
at "amortized cost," which approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates. While this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by amortized
cost, is higher or lower than the price the Fund would receive upon the sale of
the instrument.
Non-exchange traded debt securities (other than certain short-term investments)
are valued on the basis of valuations furnished by a pricing service which uses
electronic data processing techniques, without exclusive reliance upon quoted
prices.
Any other security for which market quotations are not readily available, any
other property for which valuation is not otherwise available, is valued at fair
value as determined in good faith by, or under the direction of, the Board of
Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day on which the New York Stock Exchange is open. The values
of such securities used in computing net asset value per share are normally
determined as of such times. Trading of these securities may not take place on
every New York Stock Exchange business day and may take place on days which are
not business days in New York. The Trust calculates net asset value per share as
of the close of regular trading on the New York Stock Exchange on each day on
which that exchange is open. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of many of the Funds'
securities used in such calculation. If events affecting the value of such
securities occur between the time when their price is determined and the time as
of which the Fund's net asset value is calculated, such securities may be valued
at fair value by or under the direction of the Board of Trustees.
Occasionally, events that affect the values of such securities may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange. In such event, these securities will then be valued at their
fair value as determined in good faith under consistently applied procedures
established by and under the general supervision of the Board of Trustees.
Federal Income Taxes. The Funds intends to qualify as a regulated investment
companies under Subchapter M of the Internal Revenue Code ("Code") and to
distribute substantially all of their taxable income to shareholders. Therefore
no federal income tax provision is required. Each Fund of the Trust is treated
as a separate taxpayer for federal income tax purposes.
As of December 31, 2003 the Funds' capital loss carryforwards, and the years of
expiration thereof, were as follows:
Fund 2006 2007 2008 2009 2010 2011
---- ---- ------ ------- ------- ------- -------
Fundamental Value B $ -- $ -- $ -- $ 491 $ 5,508 $ 616
Fundamental Value -- -- -- 406 18,314 5,972
Mid Cap Value -- -- -- -- -- --
Mid Cap Value B -- -- -- -- -- --
Small Cap Growth -- 2,089 10,299 43,738 35,469 7,507
Small Cap Emerging Growth -- -- -- 11,459 2,741 7,997
Overseas Equity -- -- -- 478 2,241 1,032
Overseas Equity B 266 2,070 2,540 9,656 12,511 11,857
Overseas Equity C -- -- -- 12,716 3,211 --
Overseas Equity B 266 2,070 2,540 9,656 12,511 11,857
The ability of the surviving fund to use certain of the above losses following
the reorganization maybe limited under sections 382 through 384 of the Code.
PART C
OTHER INFORMATION
Items 15. Indemnification
In response to this item and the requirements of Rule 484 under the
Securities Act of 1933, Registrant incorporates by reference herein
its response to item 24 in Post-Effective Amendment No. 42 to Form
N-1A (File No. 33-2081) filed on May 1,2004.
Item 16. Exhibits
(1)(a) Declaration of Trust of John Hancock Variable Series Trust
I, dated February 21, 1988, incorporated herein by
reference to Pre-Effective Amendment No. 2 to Form N-14
(File No. 333-47686) filed on December 6, 2000.
(1)(b) Amendment dated May 2, 2003 to the Declaration of Trust,
incorporated herein by reference to Post-Effective
Amendment No. 38 to Form N-1A (File No. 33-2081), filed on
June 3, 2003.
(1)(c) Amendments dated September 24 and March 24, 2004 to the
Declaration of Trust, incorporated herein by reference to
Form N-14 (File No. 333-114139) filed on April 1, 2004.
(2) By-Laws of John Hancock Variable Series Trust I, adopted
April 12, 1988, and amended and restated as of September
18, 2002, incorporated herein by reference to
Post-Effective Amendment No. 37 to Form N-1A (File No.
33-2081) filed on May 1, 2003.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization (filed herewith).
(5) Not Applicable.
(6)(a)(i) Investment Management Agreement by and between John
Hancock Variable Series Trust I and John Hancock Life
Insurance Company, dated April 12, 1988, relating to
(inter alia) the Large Cap Growth Fund, incorporated
herein by reference to Post-Effective Amendment No. 4 to
Form N-1A (File No. 33-2081) filed in April 1989.
(ii) Amendment No. 1 to said Agreement, incorporated herein by
reference to Post-Effective Amendment No. 16 to Form N-1A
(File No. 33-2081) filed on May 1, 1997.
(iii) Amendment Nos. 2 and 3 to said Agreement, incorporated
herein by reference from Post-Effective Amendment No. 33
to Form N-1A (File No. 33-2081) filed on April 12, 2002.
(iv) Amendment No. 4 to said Agreement, incorporated herein by
reference to Post-Effective Amendment No. 39 to Form N-1A
(File No. 33-2081) filed on January 16, 2004.
(v) Supplement to said Agreement, incorporated herein by
reference to Form N-14 (File No. 114130) filed on April 1,
2004.
(6)(b)(i) Investment Management Agreement by and between John
Hancock Variable Series Trust I and John Hancock Life
Insurance Company, dated March 14, 1996, relating to
(inter alia) the Small Cap Emerging Growth and Overseas
Equity B Funds, incorporated herein by reference to
Post-Effective Amendment No. 13 to Form N-1A (File No.
33-2081) filed on April 30, 1996.
(ii) Amendment No. 1 to said Agreement, incorporated herein by
reference to Post-Effective Amendment No. 16 to Form N-1A
(File No. 33-2081) filed on May 1, 1997.
(iii) Amendment No. 4, 5 and 7 to said Agreement, incorporated
herein by reference to Post-Effective Amendment No. 33 to
Form N-1A (File No. 33-2081) filed on April 12, 2002.
(iv) Amendment No. 8 to said Agreement, incorporated herein by
reference to Form N-SAR (File Nos. 33-2081 and 811-04490),
filed on February 25, 2004.
(v) Form of Amendment No. 9 to said Agreement, incorporated
herein by reference to Post Effective Amendment No. 42 to
Form N-1A (File No. 33-2081) filed on April 29, 2004.
(6)(c)(i) Investment Management Agreement by and between John
Hancock Variable Series Trust I and John Hancock Life
Insurance Company, dated April 14, 1998, relating to
(inter alia) the Mid Cap Value B Fund, incorporated herein
by reference to Post-Effective Amendment No. 19 to Form
N-1A (File No. 33-2081) filed on May 1, 1998.
(ii) Amendment No. 1 to said Agreement, incorporated by
reference to Post Effective Amendment No. 33 to Form
N-1A (File No. 33-2081) filed on April 12, 2002.
(iii) Amendment No. 3, incorporated herein by reference to
Post-Effective Amendment No. 39 to Form N-1A (File
No. 33-2081) filed on January 16, 2004.
(iv) Form of Amendment No. 4 to said Agreement, incorporated
herein by reference to Post Effective Amendment No. 42 to
Form N-1A (File No. 33-2081) filed on April 29, 2004.
(6)(d)(i) Investment Management Agreement by and between John
Hancock Variable Series Trust I and John Hancock Life
Insurance Company dated July 28, 1999 relating to (inter
alia) the Fundamental Value Fund, incorporated herein by
reference to Post-Effective Amendment No. 33 to Form N-1A
(File No. 33-2081) filed on April 12, 2002.
(ii) Form of Amendment No. 4 to said Agreement, incorporated
herein by reference to Post Effective Amendment No. 42 to
Form N-1A (File No. 33-2081) filed on April 29, 2004.
(6)(e) Form of Sub-Investment Management Agreement dated May 1,
2004 with Capital Guardian Trust Company relating to
(inter alia) the Overseas Equity B Fund, incorporated
herein by reference to Post Effective Amendment No. 42
to Form N-1A (File No. 33-2081) filed on April 29, 2004.
5
(6)(f) Sub-Investment Management Agreement, dated May 1, 2004
with T. Rowe Price Associates, Inc. relating to the Mid
Cap Value B Fund, incorporated herein by reference to
Post-Effective Amendment No. 42 to Form N-1A (File No.
33-2081) filed on April 29, 2004.
(6)(g)(i) Sub-Investment Management Agreement dated August 12, 1999
with Wellington Management Company, LLP relating to the
Fundamental Value Fund, incorporated herein by reference
to Post-Effective Amendment No. 33 to Form N-1A (File No.
33-2081) filed on April 12, 2002.
(6)(g)(ii) Amendments dated July 1, 2002, March 12, 2003 and July 1,
2003 to said Agreement, incorporated herein by reference
to Post-Effective Amendment No. 39 to Form N-1A (File No.
33-2081) filed on January 16, 2004.
(6)(h)(i) Sub-Investment Management Agreement, dated April 29, 1998
with Independence Investment Associates, Inc. relating to
the Large Cap Growth Fund, incorporated by reference from
Post-Effective Amendment No. 42 to Form N-1A (File No.
33-2081) filed on April 29, 2004.
(ii) Amendment to said Agreement, incorporated herein by
reference to Post-Effective Amendment No. 39 to Form N-1A
(File No. 33-2081) filed on January 16, 2004.
(6)(i) Sub-Investment Management Agreement with Wellington
Management Company, LLP relating to the Small Cap Emerging
Growth Fund, incorporated herein by reference to
Post-Effective Amendment No. 37 to Form N-1A (File No.
33-2081) filed on May 1, 2003.
(7)(a) Underwriting and Indemnity Agreement among John Hancock
Variable Series Trust I, Signator Investors) formerly
known as "John Hancock Distributors, Inc."), and John
Hancock Life Insurance Company (formerly know as "John
Hancock Mutual Life Insurance Company"), incorporated
herein by reference to Post-Effective Amendment No. 14 to
Form N-1A (File No. 33-2081) filed on February 28, 1997.
(7)(b) Amendment to said Agreement, incorporated herein by
reference to Form N-14 (File No. 333-114139) filed April
1, 2004.
(8) Not Applicable.
(9)(a) Custodian Agreement between John Hancock Variable Series
Trust I and State Street Bank & Trust Company,
incorporated herein by reference from Post-Effective
Amendment No. 10 to Form N-1A (File No. 33-2081) filed
March 2, 1995.
(9)(b) Form of Amendment, dated as of April 30, 2003 to said
Agreement, incorporated by reference to Post-Effective
Amendment No. 38 to Form N-1A (File No. 33-2081) filed on
June 3, 2003.
(9)(c) Form of Amendment, dated as of April 30, 2004, to said
Agreement, incorporated by reference to Post-Effective
Amendment No. 42 to Form N-1A (File No. 33-2087) filed on
April 29, 2004.
(10) Not Applicable.
(11) Opinion and Consent of Ronald J. Bocage, Esq. as
to legality of securities to be issued pursuant hereto
(filed on August 2, 2004, as part of Pre-Effective
Amendment No. 1 to this Registration Statement).
6
(12) Form of Opinion of Foley & Lardner LLP as to Federal
Income Tax Matters (filed herewith).
(13) Not Applicable.
(14)(a) Consent of Ernst & Young LLP (filed on August 2, 2004 as
part of Pre-Effective Amendment No. 1 to this Registration
Statement).
(14)(b) Consent of Foley & Lardner LLP (filed herewith).
(15) Not Applicable.
(16) Powers of Attorney for Elizabeth G. Cook, Diane C.
Kessler, Michele G. Van Leer, Hassell H. McClellan, and
Robert F. Verdonck (filed on August 2, 2004, as part of
Pre-Effective Amendment No. 1 to this Registration
Statement).
(17)(a) Prospectus of Acquired Funds dated May 1, 2004 (filed on
July 19, 2004 with the initial filing of this Registration
Statement).
(17)(b) Annual Report to Shareholders of the Fundamental Growth
Fund for the year ended December 31, 2003 (filed on July
19, 2004 with the initial filing of this Registration
Statement).
(17)(c) Annual Report to Shareholders of the Large Cap Growth B
Fund (formerly known as the Large Cap Aggressive Growth
Fund) for the year ended December 31, 2003 (filed on July
19, 2004 with the initial filing of this Registration
Statement).
(17)(d) Annual Report to Shareholders of the Fundamental Value B
Fund (formerly known as the Large Cap Value COREsm Fund)
for the year ended December 31, 2003 (filed on July 19,
2004 with the initial filing of this Registration
Statement).
(17)(e) Annual Report to Shareholders of the Mid Cap Value Fund
for the year ended December 31, 2003 (filed on July 19,
2004 with the initial filing of this Registration
Statement).
(17)(f) Annual Report of Shareholders of the Small Cap Growth Fund
for the year ended December 31, 2003 (filed on July 19,
2004 with the initial filing of this Registration
Statement).
(17)(g) Annual Report to Shareholders of Overseas Equity Fund for
the year ended December 31, 2003 (filed on July 19, 2004
with the initial filing of this Registration Statement).
(17)(h) Annual Report to Shareholders of the Overseas Equity C
Fund (formerly known as the Emerging Markets Equity Fund)
for the year ended December 31, 2003 (filed on July 19,
2004 with the initial filing of this Registration
Statement).
(17)(i) Annual Report to Shareholders of the Large Cap Growth Fund
for the year ended December 31, 2003 (filed on July 19,
2004 with the initial filing of this Registration
Statement).
(17)(j) Annual Report to Shareholders of the Fundamental Value
Fund for the year ended December 31, 2003 (filed on July
19, 2004 with the initial filing of this Registration
Statement).
(17)(k) Annual Report to Shareholders of the Mid Cap Value B Fund
(formerly known as the Small/Mid Cap COREsm Fund) for the
year ended December 31, 2003 (filed on July 19, 2004 with
the initial filing of this Registration Statement).
(17)(l) Annual Report to Shareholders of the Small Cap Emerging
Growth Fund for the year ended December 31, 2003 (filed
on July 19, 2004 with the initial filing of this
Registration Statement).
(17)(m) Annual Report to Shareholders of the Overseas Equity B
Fund (formerly known as the International Opportunities
Fund) for the year ended December 31, 2003 (filed on July
19, 2004 with the initial filing of this Registration
Statement).
7
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any
public reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by any person
or party who is deemed to be an underwriter within the meaning of Rule
145(c) of the Securities Act [17 C.F.R. 230.145c], the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a part of an
amendment is effective, and that, in determining any liability under the
1933 Act, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
8
SIGNATURES
As required by the Securities Act of 1933, this amendment has been signed on
behalf of the Registrant, in the City of Boston and the Commonwealth of
Massachusetts, on the __ day of August, 2004.
JOHN HANCOCK VARIABLE SERIES TRUST I
By: /s/ Michele Van Leer
---------------------------------
Name: Michele G. Van Leer
Title: Chairman of the Board of Trustees
As required by the Securities Act of 1933, this amendment has been signed by the
following persons in the capacities and on the date indicated.
SIGNATURE
By: /s/ Raymond F. Skiba August 27, 2004
--------------------
Raymond F. Skiba
Treasurer (Principal Financial
And Accounting Officer)
By: /s/ Michele Van Leer August 27, 2004
--------------------
Michele G. Van Leer
Chairman of the Board of Trustees
(Principal Executive Officer)
For herself and as attorney-in-fact for:
Elizabeth G. Cook, Trustee
Diane C. Kessler, Trustee
Robert F. Verdonck, Trustee
Hassell H. McClellan, Trustee
9