-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJ9XzyYo5PcQqkfZPNm44ZnN9l548jjlEBAVwlJGFtXntvlZORt8/fltJi3Yn6iP q/6DAEFhiZRfhKrAAzNQOg== 0001193125-04-086316.txt : 20040512 0001193125-04-086316.hdr.sgml : 20040512 20040512165159 ACCESSION NUMBER: 0001193125-04-086316 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20040512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN VARIABLE SERIES TRUST I CENTRAL INDEX KEY: 0000785303 IRS NUMBER: 042889957 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-114139 FILM NUMBER: 04799913 BUSINESS ADDRESS: STREET 1: 200 CLARENDON ST STREET 2: P O BOX 111 CITY: BOSTON STATE: MA ZIP: 02117-0111 BUSINESS PHONE: 6175729687 MAIL ADDRESS: STREET 1: 200 CLARENDON ST STREET 2: PO BOX 111 CITY: BOSTON STATE: MA ZIP: 02117-0111 FORMER COMPANY: FORMER CONFORMED NAME: HANCOCK JOHN VARIABLE SERIES FUND I INC DATE OF NAME CHANGE: 19880502 N-14/A 1 dn14a.txt JOHN HANCOCK PRE-EFFECTIVE AMENDMENT NO.1 Securities Act Registration No. 333-114139 U.S. Securities and Exchange Commission Washington, D.C. 20549 ---------- Form N-14 Registration Statement Under the Securities Act of 1933 [X] Pre-Effective Amendment No. 1 [_] Post Effective Amendment No. _____ (Check appropriate box or boxes) ---------- John Hancock Variable Series Trust I (Exact Name of Registrant as Specified in Declaration of Trust) 197 Clarendon Street Boston, Massachusetts 02117 (Address of Principal Executive Officer) Registrant's Telephone Number: (713) 214-1456 Name and address of Agent for Services: Copy to: ARNOLD R. BERGMAN, ESQUIRE THOMAS C. LAUERMAN, ESQUIRE John Hancock Life Insurance Company Foley & Lardner LLP 197 Clarendon Street Washington, D.C. 20036 Boston, MA 02117 ---------- Approximate Date of Proposed Public Offering: As soon as practicable after the registration statement becomes effective under the Securities Act of 1933. Pursuant to Rule 429 under the Act, the prospectus in this registration statement also relates to the Registrant's currently effective registration statement on Form N-1A, File No. 33-2081. No filing fee is due in reliance on Section 24(f) of the Act. ================================================================================ MANUFACTURERS INVESTMENT TRUST 73 Tremont Street Boston, Massachusetts 02108 May 18, 2004 Dear Variable Annuity and Variable Life Contract Owners: A Special Meeting of Shareholders of Manufacturers Investment Trust ("MIT") will be held at 73 Tremont Street, Boston, Massachusetts 02108, on June 18, 2004 at 10:00 a.m., Boston Time to consider the proposed reorganization of the International Index Trust, a separate series of MIT, into the International Equity Index Fund, a separate series of the John Hancock Variable Series Trust I ("JHVST") (the "Reorganization"). The proposed Reorganization is described in detail in the enclosed Proxy Statement/Prospectus and briefly summarized in the questions and answers attached to this letter. As a result of the Reorganization, shareholders whose assets are invested in the International Index Trust will be able to pursue substantially similar investment objectives and policies in the context of a larger fund which has shown better prospects for growth and demonstrated stronger performance in tracking its target indices. The Boards of Trustees of MIT and JHVST have unanimously approved the proposed Reorganization. Although you are not a shareholder of MIT, contract values under your variable annuity or variable life contracts issued by The Manufacturers Life Insurance Company (U.S.A.) ("Manulife U.S.A.") or The Manufacturers Life Insurance Company of New York ("Manulife New York") are invested in shares of one or more of the separate series of MIT, including the International Index Trust, through subaccounts of separate accounts established by these companies for that purpose. Since the value of your contract depends in part on the investment performance of the shares of the International Index Trust, you have the right to instruct Manulife U.S.A. or Manulife New York, as appropriate, how such shares attributable to your contract are voted. Enclosed you will find a Notice of Special Meeting of Shareholders, a Proxy Statement/Prospectus of MIT and JHVST, and a Voting Instructions Form for the shares of the International Index Trust attributable to your contract as of April 27, 2004, the record date for the meeting. We encourage you to read these materials in their entirety before giving voting instructions. Also enclosed for additional information is the current prospectus of JHVST. In order for shares to be voted at the meeting based on your instructions, we urge you to complete and mail your Voting Instructions Form in the attached postage-paid envelope, allowing sufficient time for its receipt by June 17, 2004. The Board of Trustees of MIT unanimously recommends that you approve the Reorganization. If you have any questions regarding the proposed Reorganization, please call the appropriate toll-free number below: --For Manulife U.S.A. variable annuity contracts: (800) 344-1029 --For Manulife U.S.A. variable life contracts: (800) 827-4546 --For Manulife New York variable annuity contracts: (800) 551-2078 --For Manulife New York variable life contracts: (888) 267-7784
Sincerely, [SIGNATURE TO COME] Andrew Corselli Secretary Manufacturers Investment Trust 1 QUESTIONS AND ANSWERS Q: What is the Reorganization? A: Under the Reorganization proposal, all the assets, subject to all the liabilities, of MIT's International Index Trust (the "Acquired Fund") will be transferred to JHVST's International Equity Index Fund (the "Acquiring Fund") in exchange for shares of the Acquiring Fund. As a result of the Reorganization, each shareholder of the Acquired Fund will receive that number of shares of the Acquiring Fund equal in value at the time of the exchange to the value of the shareholder's shares of the Acquired Fund at that time, and the Acquired Fund will be liquidated and terminate. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. If approved by shareholders, the Reorganization is expected to take place after the close of business on June 18, 2004. Q: What are the reasons for the Reorganization? A: The Reorganization is intended to provide a means by which contract owners participating in the Acquired Fund, in combination with the Acquiring Fund, may pursue substantially similar investment objectives and policies in the context of a larger fund which has shown better prospects for growth and demonstrated stronger performance in tracking its target indices. Q: What differences will there be if the Reorganization is approved? A: There will be very significant differences. Although both the Acquired and Acquiring Funds are international index funds and thus have substantially similar investment objectives, strategies and risks, the Acquiring Fund has a different target index (the MSCI ACWI ex US Index) than the Acquired Fund (the MSCI EAFE Index), is a series of JHVST rather than of MIT and has a different investment adviser, a different subadviser and different portfolio managers than the Acquired Fund. In addition, the total annual fund operating expenses of the Acquiring Fund are expected to be somewhat higher than those of the Acquired Fund. Q: Will the Reorganization affect my contract value? Will there be any tax implications? A: Your contract value will be the same immediately after as immediately before the Reorganization. In addition, the Reorganization is expected to be tax-free for federal income tax purposes, and the Funds will obtain an opinion from counsel to this effect. The Reorganization will not result in individual contract owners recognizing any gain or loss for federal income tax purposes. Q: Will I incur any fee in connection with the Reorganization? A: You will not incur directly any fee in connection with the Reorganization. However, the expenses of the Reorganization are being paid by the Acquired Fund and the Acquiring Fund in equal parts, and contract owners participating in these Funds will therefore bear indirectly their proportionate shares of such expenses. Q: How do I give voting instructions? A: Follow two simple steps: FIRST: Read the attached Proxy Statement/Prospectus. SECOND: Complete the enclosed Voting Instruction Form and return it in the enclosed postage-paid envelope. Q: Do my voting instructions make a difference? A: Whether you are a large or small investor, your voting instructions are important. You are urged to participate in this process to ensure that Manulife U.S.A. and Manulife New York represent your wishes in casting votes at the shareholders meeting. The Board of Trustees of MIT has voted unanimously in favor of the Reorganization, and your approval is needed to implement the Reorganization. 2 MANUFACTURERS INVESTMENT TRUST 73 Tremont Street Boston, Massachusetts 02108 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To the Shareholders of the International Index Trust of Manufacturers Investment Trust: Notice is hereby given that a Special Meeting of Shareholders (the "Meeting") of the International Index Trust of Manufacturers Investment Trust ("MIT") will be held at 73 Tremont Street, Boston, Massachusetts 02108, on June 18, 2004 at 10:00 a.m., Boston Time. A Proxy Statement/Prospectus which provides information about the purposes of the Meeting is included with this notice. The Meeting will be held for the following purposes: Proposal 1Approval of Agreement and Plan of Reorganization (the "Plan") providing for the acquisition of all of the assets, subject to all of the liabilities, of the International Index Trust (the "Acquired Fund"), a separate series of MIT, by and in exchange for Series I and Series II shares of the International Equity Index Fund (the "Acquiring Fund"), a separate series of the John Hancock Variable Series Trust I ("JHVST"). Any other business that may properly come before the Meeting. The Board of Trustees of MIT recommends that shareholders vote FOR Proposal 1. Approval of the Plan under Proposal 1 will require the affirmative vote of the holders of at least a "Majority of the Outstanding Voting Securities" (as defined in the accompanying Proxy Statement/Prospectus) of the Acquired Fund. By approving the Plan, shareholders of the Acquired Fund will be deemed to have waived certain of MIT's investment limitations insofar as they might be deemed to apply to the transactions contemplated by the Plan. Each shareholder of record at the close of business on April 27, 2004 is entitled to receive notice of and to vote at the Meeting. Sincerely yours, [SIGNATURE TO COME] Andrew Corselli Secretary May 18, 2004 Boston, Massachusetts 3 MANUFACTURERS INVESTMENT JOHN HANCOCK VARIABLE TRUST SERIES TRUST I 73 Tremont Street 197 Clarendon Street Boston, Massachusetts Boston, Massachusetts 02108 02117 ("MIT") ("JHVST") ----------------- PROXY STATEMENT/PROSPECTUS Relating to the Acquisition of All of the Assets, Subject to All of the Liabilities, of the MIT International Index Trust by and in Exchange for Series I and Series II Shares of the JHVST International Equity Index Fund This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Trustees of Manufacturers Investment Trust ("MIT") (sometimes referred to herein as the "MIT Board") of proxies to be used at a special meeting of the shareholders of its International Index Trust to be held at 73 Tremont Street, Boston, Massachusetts 02108, on June 18, 2004, at 10:00 a.m., Boston Time (the "Meeting"). At the Meeting, shareholders of the International Index Trust will be asked to consider and approve a proposed Agreement and Plan of Reorganization (the "Plan") pursuant to which all the assets, subject to all the liabilities, of the International Index Trust (the "Acquired Fund"), a separate series of MIT, will be transferred to the International Equity Index Fund (the "Acquiring Fund"), a separate series of the John Hancock Variable Series Trust I ("JHVST"), in exchange for shares of the Acquiring Fund. As a result of the Reorganization, each shareholder of the Acquired Fund will receive that number of shares of the Acquiring Fund equal in value at the time of the exchange to the value of the shareholder's shares of the Acquired Fund at such time, and the Acquired Fund will be liquidated and terminate. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. If approved by shareholders of the Acquired Fund, the Reorganization is expected to occur after the close of business on June 18, 2004. The terms and conditions of the Reorganization are more fully described in this Proxy Statement/Prospectus and in the form of the Agreement and Plan of Reorganization attached hereto as Exhibit A. This Proxy Statement/Prospectus contains information shareholders should know before voting on the proposed Reorganization. Please read it carefully and retain it for future reference. The following documents have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference into this Proxy Statement/Prospectus: --The Prospectus of A copy of the JHVST JHVST (relating to the Prospectus accompanies Acquiring Fund) dated this Proxy May 1, 2004 (the "JHVST Statement/Prospectus. Prospectus"). --The Statement of Copies of this document Additional Information are available at no of JHVST dated May 1, charge by writing to 2004 relating to this JHVST at the above Proxy address or by calling Statement/Prospectus this toll free number: (the "Statement of 800-576-2227. Additional Information"). --The Prospectus of MIT Copies of the MIT (relating to the Prospectus are available Acquired Fund) dated May at no charge by writing 1, 2004 (the "MIT to MIT at the above Prospectus"). address or by calling the appropriate toll free number listed below. Shareholders who have questions about the Reorganization or this Proxy Statement/Prospectus may call the appropriate toll-free number listed below: --(800) 344-1029 (The Manufacturers Life Insurance Company (U.S.A.) variable annuity contracts) --(800) 827-4546 (The Manufacturers Life Insurance Company (U.S.A.) variable life contracts) --(800) 551-2078 (The Manufacturers Life Insurance Company of New York variable annuity contracts) --(888) 267-7784 (The Manufacturers Life Insurance Company of New York variable life contracts). 4 Each of MIT and JHVST is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 Act and files reports, proxy materials and other information with the SEC. Such reports, proxy materials and other information may be inspected at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials may also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or at no charge from the EDGAR database on the SEC's website: "www.sec.gov." The SEC has not approved or disapproved these securities or passed upon the accuracy or adequacy of this Proxy Statement/Prospectus. Any representation to the contrary is a criminal offense. The date of this Proxy Statement/Prospectus is May 18, 2004. 5 PROXY STATEMENT/PROSPECTUS TABLE OF CONTENTS
Page ---- Introduction................................................................................................. 7 Proposal 1 Approval of Agreement and Plan of Reorganization providing for the acquisition of all of the assets, subject to all of the liabilities, of the MIT International Index Trust by and in exchange for Series I and Series II shares of the JHVST International Equity Index Fund.................... 7 Summary...................................................................................................... 8 Overview of Proposed Reorganization.................................................................... 8 Comparison of Acquired and Acquiring Funds............................................................. 8 Important Considerations............................................................................... 11 Comparison of Principal Investment Risks............................................................... 11 Fees and Expenses of the Funds......................................................................... 12 Performance.................................................................................................. 15 Multiple Classes of Shares................................................................................... 15 Rule 12b-1 Fees.............................................................................................. 16 Dividends and Distributions.................................................................................. 16 Purchase and Redemption of Shares............................................................................ 17 Massachusetts Business Trusts................................................................................ 18 Additional Information About the Funds....................................................................... 18 Information About the Reorganization......................................................................... 19 Agreement and Plan of Reorganization................................................................... 19 Reasons for the Reorganization......................................................................... 20 Description of the Securities to be Issued............................................................. 21 Federal Income Tax Consequences........................................................................ 21 Capitalization......................................................................................... 22 Voting Information........................................................................................... 23 Ownership of Shares of the Funds............................................................................. 25 Financial Statements......................................................................................... 26 Legal Matters................................................................................................ 26 Other Information............................................................................................ 26 Exhibit A--Agreement and Plan of Reorganization.............................................................. 27 Appendix A--The Acquired Fund: Management's Discussion of Fund Performance................................... A-1 Appendix B--The Acquiring Fund: Management's Discussion of Fund Performance.................................. B-1
6 INTRODUCTION This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Trustees of MIT of proxies to be used at a special meeting of shareholders of its International Index Trust to be held at 73 Tremont Street, Boston, Massachusetts 02108, on June 18, 2004, at 10:00 a.m., Boston Time (the "Meeting"). The purpose of the Meeting is to consider the proposed Reorganization providing for the transfer of all the assets, subject to all the liabilities, of MIT's International Index Trust (the "Acquired Fund") to JHVST's International Equity Index Fund (the "Acquiring Fund") in exchange for Series I and Series II shares of the Acquiring Fund. All shareholders of record of the Acquired Fund at the close of business on April 27, 2004 (the "Record Date") are entitled to one vote for each share of beneficial interest of the Acquired Fund held. MIT and JHVST. Each of MIT and JHVST is a Massachusetts business trust which is a no-load open-end investment company, commonly known as a mutual fund, registered under the Investment Company Act of 1940, as amended (the "1940 Act"). MIT currently offers 80 separate series, including the Acquired Fund (the "MIT Funds"), and JHVST currently offers 30 separate series, including the Acquiring Fund (the "JHVST Funds"). The shares of the MIT Funds and the JHVST Funds are not sold directly to the public but generally only to insurance companies and their separate accounts as the underlying investment media for variable annuity and variable life insurance contracts ("variable contracts") issued by the insurance companies, certain entities affiliated with the insurance companies, and trustees of qualified pension and retirement plans. See "Voting Information" and "Ownership of Shares of the Funds" below. Investment Management. Manufacturers Securities Services, LLC ("MSS") serves as investment adviser for MIT and for each MIT Fund that has an adviser. As adviser, MSS administers the business and affairs of MIT and selects, contracts with and compensates subadvisers which manage the investment and reinvestment of the assets of the MIT Funds. MSS does not itself manage any of MIT's portfolio assets but has ultimate responsibility to oversee the subadvisers. In this connection, MSS (i) monitors the compliance of the subadvisers with the investment objectives and related policies of the MIT Funds, (ii) reviews the performance of the subadvisers and (iii) reports periodically on such performance to the MIT Board. The ultimate parent of MSS is Manulife Financial Corporation ("MFC"), the holding company of The Manufacturers Life Insurance Company ("Manulife"), a Canadian stock life insurance company, and its subsidiaries, collectively known as Manulife Financial. The investment adviser for the JHVST Funds is John Hancock Life Insurance Company ("JHLICO"). In this capacity, JHLICO recommends subadvisers for the JHVST Funds and oversees and evaluates the subadvisers performance. Each subadviser has discretion to purchase and sell securities for the JHVST Fund that it manages. While each subadviser employs its own investment approach in managing a JHVST Fund, it must also adhere to the Fund's investment goals, strategies and restrictions. JHLICO is a wholly owned subsidiary of John Hancock Financial Services, Inc. ("John Hancock"). As the result of a merger between John Hancock and MFC that became effective on April 28, 2004, John Hancock is an indirect wholly owned subsidiary of MFC. MSS and JHLICO are registered as investment advisers under the Investment Advisers Act of 1940 (the "Advisers Act"). Each of the subadvisers to the MIT Funds and the JHVST Funds is also registered as an investment adviser under the Advisers Act or is exempt from such registration. PROPOSAL 1 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE ACQUISITION OF ALL OF THE ASSETS, SUBJECT TO ALL OF THE LIABILITIES, OF THE MIT INTERNATIONAL INDEX TRUST BY AND IN EXCHANGE FOR SERIES I AND SERIES II SHARES OF THE JHVST INTERNATIONAL EQUITY INDEX FUND 7 SUMMARY The following is a summary of more complete information appearing later in or incorporated by reference into this Proxy Statement/Prospectus. Shareholders should read the entire Proxy Statement/Prospectus carefully. Overview of Proposed Reorganization At its meeting held on April 1-2, 2004, the MIT Board, including all the Trustees who are not "interested persons" (as defined in the 1940 Act) of MIT (the "Independent Trustees"), approved an Agreement and Plan of Reorganization (the "Plan") providing for: (a) the transfer of all of the assets, subject to all of the liabilities, of the MIT International Index Trust (the "Acquired Fund") to the JHVST International Equity Index Fund (the "Acquiring Fund") in exchange for Series I and Series II shares of the Acquiring Fund; (b) the distribution to shareholders of the Acquired Fund of such Acquiring Fund shares; and (c) the liquidation and termination of the Acquired Fund (the "Reorganization"). As a result of the Reorganization, each shareholder of the Acquired Fund will become a shareholder of the Acquiring Fund. The total value of all shares of the Acquiring Fund issued in the Reorganization will equal the total value of the net assets of the Acquired Fund. The number of full and fractional shares of the Acquiring Fund received by a shareholder of the Acquired Fund will be equal in value to the value of that shareholder's shares of the Acquired Fund as of the close of regularly scheduled trading on the New York Stock Exchange on the closing date of the Reorganization (the "Exchange Date"). Holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. The Effective Time of the Reorganization is expected to occur after the close of business on June 18, 2004 or on such later date as may be determined by MIT and JHVST. The consummation of the Reorganization is contingent on the satisfaction of the conditions described below under "Information About the Reorganization--Agreement and Plan of Reorganization." Comparison of Acquired and Acquiring Funds
MIT International Index Trust JHVST International Equity Index Fund (Acquired Fund) (Acquiring Fund) ----------------------------- ------------------------------------- Business A separate series of MIT. A separate series of JHVST. Approximate $99,376,000.* $159,036,000. Net Assets as of 12/31/03: *Includes "seed capital" that was withdrawn in February and April 2004. See "Capitalization" below. Investment Manufacturers Securities Services, LLC John Hancock Life Insurance Company Adviser: ("MSS"). ("JHLICO"). Investment MFC Global Investment Management SSgA Funds Management, Inc. ("SSgA"). Subadviser and (U.S.A.) Limited ("MFC Global"). MFC SSgA became the subadviser to the Portfolio Global is an affiliate of MSS and JHLICO. Acquiring Fund effective March 29, 2004. Managers: The portfolio managers are: The SsgA portfolio management is overseen by: Carson Jen (since January 2003) James Francis, CFA (since March 2004) --Assistant Vice President of MFC Global --Principal of SSgA
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MIT International Index Trust JHVST International Equity Index Fund (Acquired Fund) (Acquiring Fund) ----------------------------- ------------------------------------- --Joined MFC Global in 1997 --Joined SSgA in 1987 Narayan Ramani, CFA (since Jeffery Beach (since March 2004) November 2003) --Principal of SSgA --Joined MFC Global in 1998 --Joined SSgA in 1986 Investment Seeks to approximate the aggregate total Seeks to track the performance of a broad- Objective: return of a foreign equity market index. The based equity index of foreign companies in index that the Acquired Fund uses for this developed and, to a lesser extent, emerging purpose is the Morgan Stanley Capital markets. The index that the Acquiring Fund International Europe Australia, Far East uses for this purpose is the Morgan Stanley ("MSCI EAFE") Index. The MSCI EAFE Capital International All Country World Index is a well-known unmanaged Excluding U.S. ("MSCI ACWI ex US") international stock index that includes Index. The MSCI ACWI ex US Index is a companies representative of the market well-known unmanaged international stock structure of developed countries in Europe index that includes companies in a broad and the Pacific Region. The different range of developed countries (excluding the countries that comprise the MSCI EAFE U.S.) and (to a lesser extent) emerging Index are represented in the index market countries. The different countries that approximately in proportion to their comprise the MSCI ACWI ex US Index are respective market capitalizations. represented in the index approximately in proportion to their respective market capitalizations. Principal Invests under normal market conditions at Normally invests more than 80% of its assets Investment least 80% of its net assets (plus any in securities listed in the MSCI ACWI ex US Strategy: borrowings for investment purposes) in (a) Index. Prior to November 1, 2003, the Fund securities included in the MSCI EAFE Index normally invested more than 80% of its assets and (b) securities (which may or may not be in securities listed in the Morgan Stanley included in the MSCI EAFE Index) that the Capital International Europe, Australia, Far subadviser believes as a group will behave in East Gross Domestic Product ("MSCI EAFE a manner similar to the index. GDP") Index, and was managed relative to a composite of 90% MSCI EAFE GDP Index and 10% Morgan Stanley Capital International Emerging Markets Free ("MSCI EMF") Index. The MSCI EAFE GDP Index is a well- known unmanaged stock index that includes companies representative of the developed countries in Europe and the Pacific region. The different countries that comprise the MSCI EAFE GDP Index are represented in the index approximately in proportion to their respective gross domestic products. The MSCI EMF index is a well-known unmanaged stock index that includes companies representative of emerging or developing markets. Other The subadviser attempts to match the The Fund is managed relative to the MSCI Investment performance of the MSCI EAFE Index by ACWI ex US Index. The subadviser employs Strategies: holding all or a representative sample of the a passive management strategy by normally
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MIT International Index Trust JHVST International Equity Index Fund (Acquired Fund) (Acquiring Fund) ----------------------------- ------------------------------------- securities that comprise the index or by investing in all stocks in the MSCI ACWI ex holding securities (which may or may not be US Index. The manager normally invests in included in the index) that the subadviser each stock in approximately the same believes as a group will behave in a manner proportion as represented in the index. The similar to the index. manager seeks to replicate, as closely as possible, the aggregate characteristics and country diversification of the index. The composition of the index changes from time to time, and the subadviser reflects those changes as soon as practical. Hedging and The Fund is authorized to invest in futures The Fund is normally fully invested. The Other Strategies: contracts. The Fund's general pratice, subadviser may invest in stock index however, has been to use futures contracts derivatives to maintain market exposure and solely to maintain market exposure and manage cash flow. Although the Fund may manage cash flows. employ foreign currency hedging techniques, it normally maintains the currency exposure of the underlying equity investments. The Fund's general practice has been to use derivative instruments solely to maintain market exposure and manage cash flows. Other Securities of foreign issuers in which the The Fund may invest in other types of Securities: Fund may invest include American securities that are not primary investment Depositary Receipts (ADRs), Global vehicles, for example: ADRs, GDRs, EDRs, Depositary Receipts (GDRs) and European certain Exchange Traded Funds (EFTs), cash Depositary Receipts (EDRs). Depositary equivalents and certain derivatives such as receipts are certificates, typically issued by a stock index futures. bank or trust company, that give their holders the right to receive securities issued by a foreign or domestic company. Temporary In abnormal market conditions, the Fund may In abnormal market conditions, the Fund may Defensive invest all or a portion of its assets in cash and take temporary defensive measures--such as Investing: securities that are highly liquid, including (a) holding large amounts of cash and cash money market instruments such as short-term equivalents--that are inconsistent with the U.S. government obligations, commercial Fund's primary investment strategy. In taking paper and repurchase agreements; and (b) those measures, the Fund may not achieve its securities of other investment companies that investment goal. are money market funds. To the extent the Fund is in a defensive position, its ability to achieve its investment objective will be limited. Distribution The distributor for both the shares of the Acquired Fund and the Series I and Series II shares of the Acquiring Fund is Manufacturers Financial Securities, LLC. The proposed Reorganization will not result in any material change in the services provided with respect to the distribution of such shares.
10 Important Considerations The investment objectives, policies and risks of the Acquired and Acquiring Funds are substantially similar. Both Funds are index funds, which seek to mirror the performance of their target indices, and both Funds are international index funds which invest principally in foreign equity securities. The two Funds differ in that they have different target indices. The MSCI EAFE Index, which is the target index for the Acquired Fund, includes companies in the developed Europe and Pacific Regions, while the broader target index for the Acquiring Fund, the MSCI ACWI ex US Index, includes primarily companies in a broad range of developed countries and, to a lesser extent, emerging market countries. In addition, while the Acquiring Fund will normally invest substantially all of its assets in companies which are included in its target index, the Acquired Fund, with respect to some portion of its assets, may invest in companies which are not included in its target index but which its subadviser believes as a group will behave in a manner similar to that index. In other words, the Acquired Fund may seek to approximate the aggregate total return of its target index in part through investments in companies that are not included in that index. The investment objectives and strategies of the Acquired Fund and the Acquiring Fund are more fully described in, respectively, the MIT Prospectus and the JHVST Prospectus, which are incorporated herein by reference. See "Additional Information About the Funds" below. No gain or loss will be recognized by the Acquired Fund or the Acquiring Fund, or by shareholders of the Acquired Fund, for federal income tax purposes as a result of the Reorganization. For further information about the tax consequences of the Reorganization, see "Information about the Reorganization--Federal Income Tax Consequences," below. The Reorganization will not result in any material change in procedures for the purchase and redemption of shares of the Funds or in rights under contracts, and related procedures, regarding transfers of contract values. Comparison of Principal Investment Risks In deciding whether to approve the Reorganization, you should consider the amount and character of investment risk involved in the respective investment objective and strategies of the Acquiring and Acquired Funds. Since both Funds are international index funds, they have substantially similar risks. These are described below, with certain differences noted.
MIT International Index Trust JHVST International Equity Index Fund (Acquired Fund) (Acquiring Fund) ----------------------------- ------------------------------------- Risks of The Funds invest in foreign securities, which pose special risks due to: limited government Investing in regulation (including less stringent investor protection and disclosure standards), lack of public Foreign information, exposure to possible economic, political and social instability,foreign currency Securities rate fluctuations, and possible nationalization of a company's assets. Factors such as lack of liquidity, foreign ownership limits and restrictions on removing currency also pose special risks, and there may be problems, such as delays, associated with the settlement of securities transactions. All foreign securities have some degree of foreign risk. However, to the extent the Funds invest in emerging market countries, they will have a significantly higher degree of foreign risk than if they invested exclusively in developed or newly-industrialized countries. The Fund's target index includes companies The Fund's target index includes companies representative of the market structure of in a broad range of developed countries developed countries in the Europe and (excluding the U.S.) and, to a lesser extent, Pacific Regions. emerging markets. Because emerging markets are included, the Fund may have greater exposure to the risks of investing in such markets.
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MIT International Index Trust JHVST International Equity Index Fund (Acquired Fund) (Acquiring Fund) ----------------------------- ------------------------------------- Index The Funds generally will reflect the performance of their target indices, even when the target Management indices do not perform well. In addition, fund transaction expenses, and the size and timing of Risk cash flows, may result in performance being different than that of the target index. The subadviser's selection of securities both The subadviser's selection of securities may inside and outside the target index may cause not be fully representative of the Fund's target the Fund's portfolio to track its target index index from time to time, particularly when the less closely. composition of the index changes. Stock The value of the Funds' portfolio securities may go down in response to overall stock or bond Market market movements. Markets tend to move in cycles, with periods of rising prices and periods of Risk: falling prices. The value of equity securities purchased by the Funds could decline if the financial condition of the companies the Funds invest in decline or if overall market and economic conditions deteriorate. Index The subadvisers and their strategies may fail to produce the intended results. Each Fund could Subadviser underperform its peers or lose money if its subadviser's investment strategy does not perform as Risk: expected. The subadviser may be incorrect in selecting for investment companies that are not included in but that the subadviser believes as a group will behave in a manner similar to the target index. Other Each Fund may use certain types of derivative instruments that can produce disproportionate Risks: gains or losses. Both the Acquired Fund and the Acquiring Fund can and do use financial futures contracts (including stock index futures) to maintain market exposure and to manage cash flow. The Acquiring Fund may also purchase or sell additional types of derivatives that the Acquired Fund would not use, such as options and swaps, as part of its foreign currency hedging techniques. In practice, however, the Acquiring Fund is not expected to exercise this authority in any manner that would expose the Acquiring Fund to materially greater risk from derivatives than that to which the Acquired Fund might be exposed. Derivatives are generally considered more risky than direct investments and, in a down market, derivatives could become harder to value or sell at a fair price.
The risks of investing in the Acquiring Fund are more fully described in the JHVST Prospectus and the Statement of Additional Information, which are incorporated herein by reference. The risks of investing in the Acquired Fund are more fully described in the MIT Prospectus, which is also incorporated herein by reference. See "Additional Information About the Funds," below. Fees and Expenses of the Funds The table which follows sets forth: (i) the ratios of expenses to average net assets of the Series I and Series II shares of the Acquired Fund for the year ended December 31, 2003, (ii) the estimated expenses for the current year of the Series I and Series II shares of the Acquiring Fund, which were first offered on May 1, 2004, and (iii) the pro forma expense ratios of the Series I and Series II shares of the Acquiring Fund assuming that the Reorganization, including the issuance of Series I and Series II shares in connection therewith, had occurred at the commencement of the year ended December 31, 2003, and based upon the fee arrangements that will be in place upon the consummation of the Reorganization. As shown below, giving effect to the voluntary expense reimbursement described in note A to the table, the expense ratios of the Acquiring Fund are expected to be 0.02% higher than those of the Acquired Fund. Accordingly, shareholder approval of the Reorganization is 12 expected to result in somewhat higher expenses for shareholders after the Reorganization. The expense ratios below and the expense examples which follow do not reflect the fees and expenses of any variable contract that may use MIT or JHVST as its underlying investment medium. If such fees and expenses were reflected, the expense ratios and shareholder expenses figures would be higher.
Annual Fund Operating Expenses (As a Percentage of Average Daily Net Assets) -------------------------------------------------------------- JHVST International JHVST International Equity Index Fund Equity Index Fund MIT International (Acquiring Fund) (Acquiring Fund) Index Trust (Estimated Expenses Pro Forma (Acquired Fund) for the Current Year) (Assuming Reorganization) ----------------- ----------------- ------------------ Series I Series II Series I Series II Series I Series II -------- --------- -------- --------- -------- --------- Management Fee...................... 0.40% 0.40% 0.17% 0.17% 0.16% 0.16% Distribution and Service (12b-1) Fee 0.15% 0.35% 0.40% 0.60% 0.40% 0.60% Other Expenses...................... 0.07%/A/ 0.07%/A/ 0.05%/B/ 0.05%/B/ 0.06%/C/ 0.06%/C/ ---- ---- ---- ---- ---- ---- Total Fund Annual Expenses.......... 0.62%/A/ 0.82%/A/ 0.62% 0.82% 0.62% 0.82%
- -------- /A/ MSS has voluntarily agreed to pay expenses of the Acquired Fund (excluding management fees and 12b-1 fees) that exceed 0.05%. If such expense reimbursement were reflected in the table, "Other Expenses" for both Series I shares and Series II shares would be 0.05%, and "Total Fund Annual Expenses" for Series I shares and Series II shares would be, respectively, 0.60% and 0.80%. This expense reimbursement may be terminated by MSS at any time. /B/ Other Expenses are based on estimated amounts for the current year. These estimated expenses reflect (i) the discontinuance of JHLICO's agreement to reimburse the Acquiring Fund for "other expenses" in 2003 that exceeded 0.10% of the Fund's average daily net assets and (ii) a reduction amounting to 0.20% in the custodial fees of the Acquiring Fund that became effective April 1, 2004. /C/ Other Expenses reflect the discontinuance of JHLICO's expense reimbursement and the reduction in custodial fees described in note/B/. Examples: The following examples are intended to help shareholders compare the costs of investing in the Series I and Series II shares of the Acquired and Acquiring Funds. The example assumes that a shareholder invests $10,000 in the particular Fund for the time periods indicated and redeems all of the shares at the end of those periods. The example also assumes that a shareholder's investment has a 5% return each year and that each Fund's operating expense levels remain the same as those set forth in the expense table above.
JHVST International JHVST International Equity Index Fund Equity Index Fund MIT International (Acquiring Fund) (Acquiring Fund) Index Trust (Estimated Expenses for Pro Forma (Acquired Fund) the Current Year) (Assuming Reorganization) ------------------ ----------------------- ------------------------- Series I Series II Series I Series II Series I Series II -------- --------- -------- --------- -------- --------- One Year... $ 63 $ 84 $ 63 $ 84 $ 63 $ 84 Three Years $199 $ 262 $199 $ 262 $199 $ 262 Five Years. $346 $ 455 $346 $ 455 $346 $ 455 Ten Years.. $774 $1,014 $774 $1,014 $774 $1,014
The examples assumes reinvestment of all dividends and distributions. The examples should not be considered a representation of future expenses of the Acquired or Acquiring Fund. Actual expenses may be greater or less than those shown. There can be no assurance that the foregoing pro forma expense ratios would have been the actual expense ratios for the Acquiring Fund had the Reorganization been consummated when assumed above, or that the pro forma expense ratios reflect the actual expense ratios that will be incurred by the Acquiring Fund if the Reorganization is consummated. The purpose of these tables is to assist shareholders in understanding the expenses an investor in the Funds will bear. 13 Investment Management Fees
Investment management fees as a percentage of average daily net assets. MIT International Index Trust (Acquired Fund)...................... 0.40% on all assets. JHVST International Equity Index Fund (Acquiring Fund)..................... 0.18% on the first $100 million; 0.15% on the next $ 100 million; and 0.11% on excess over $200 million.
MFC Global Investment Management (U.S.A.) Limited ("MFC Global") serves as the subadviser to the Acquired Fund and is responsible for managing the investment and reinvestment of the assets of the Acquired Fund. MFC Global formulates a continuous investment program for the Acquired Fund consistent with its investment objective and policies and implements the program by purchases and sales of securities. As compensation for its services, MFC Global receives a fee from MSS stated as an annual percentage of the current value of the net assets of the Acquired Fund. This fee is paid by MSS out of the management fee it receives for the Acquired Fund and is not an additional charge to the Acquired Fund. MFC Global is an indirect, wholly-owned subsidiary of MFC. SSgA Funds Management, Inc. ("SSgA") serves as the subadviser to the Acquiring Fund and has primary responsibility for making investment decisions for the Acquiring Fund's investment portfolios and placing orders with brokers and dealers to implement those decisions. SSgA receives compensation for these services from JHLICO, and the Acquiring Fund pays no sub-management fees over and above the management fees it pays to JHLICO. SSgA succeeded Independence Investments LLC as subadviser to the Acquiring Fund effective March 29, 2004. SSgA is a wholly-owned subsidiary of State Street Corporation, a publicly held bank holding corporation. 14 Performance The following table sets forth, for the one-year period ended December 31, 2003 and the other periods indicated: (i) the annualized total return of the Series I and Series II shares of the Acquired Fund; (ii) the annualized total return of the NAV shares of the Acquiring Fund; and (iii) the pro forma annualized return for Series I and Series II shares of the Acquiring Fund, assuming that the Acquiring Fund, which commenced offering Series I and Series II on May 1, 2004 and will issue such shares in connection with the Reorganization, had shares of such classes outstanding during 2003 and the other periods indicated with the same fee arrangements that will be in place upon the consummation of the Reorganization. The performance information in the table does not reflect fees and expenses of any variable contract which may use MIT or JHVST as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The performance of each of the Funds in relation to its target index or indices is further discussed below in, respectively, Appendices A and B ("The Acquired Fund/The Acquiring Fund: Management's Discussion of Fund Performance") to this Proxy Statement/ Prospectus.
Life Date One Five Ten of First Fund/A/ Year Years Years Fund Available - ------ ----- ----- ----- ----- --------- MIT International Index Trust (Acquired Fund)--Series I.................. 32.18% NA NA (7.00)% 5/01/2000 --Series II/B C/............... 32.12% NA NA 7.25% 1/28/2002 JHVST International Equity Index Fund/D/ (Acquiring Fund)--NAV...................... 41.99% 0.74% 2.80% 5.58% 5/02/1988 (Pro forma)--Series I...................... 41.59% 0.34% 2.40% 5.18% 5/01/2004 (Pro forma)--Series II/C/.................. 41.39% 0.14% 2.20% 4.98% 5/01/2004
- -------- /A/ Total Return shown would have been lower had operating expenses not been reduced by expense reimbursement arrangements between each Fund and its investment advisor, /B/ Series II shares of the Acquired Fund were first offered January 28, 2002. /C/ For both the Acquired and Acquiring Funds, Series II performance will be lower than Series I performance due to a higher 12b-1 fee. /D/ From May 1998 through March 28, 2004, the subadviser to the Acquiring Fund was Independence Investment LLC. On November 1, 2003, the Acquiring Fund's benchmark was changed from a composite of 90% MSCI EAFE GDP Index, a primarily gross domestic product-weighted index, and 10% MSCI EMF Index, to a market capitalization-weighted index, the Morgan Stanley Capital International All Country World Free Excluding U.S. Index. Subsequently, the latter index's name was changed to the Morgan Stanley Capital International All Country Excluding U.S. ("MSCI ACWI ex US") Index. Multiple Classes of Shares MIT is authorized to issue three classes of shares for the Acquired Fund and the other MIT Funds: Series I shares (formerly referred to as Class A shares), Series II shares (formerly referred to as Class B shares) and Series III shares. Series I, Series II and Series III shares are the same except for differences in class expenses, including different Rule 12b-1 fees.See "Rule 12b-1 Fees" below. The Acquired Fund currently has outstanding only Series I and Series II shares. JHVST is authorized to issue three classes of shares for the Acquiring Fund: NAV shares, Series I shares and Series II shares. NAV shares, Series I shares and Series II shares are the same except for differences in class expenses, including 12b-1 fees for the Series I and Series II shares. See "Rule 12b-1 Fees" below. The Acquiring Fund commenced offering I and Series II shares on May 1, 2004 and will issue shares of such in connection with the Reorganization. All shares of each of the Acquired Fund and the Acquiring Fund have equal voting rights and are voted in the aggregate, and not by class, except that shares of each class have exclusive voting rights on any matter 15 submitted to shareholders that relates solely to the arrangement of that class and have separate voting rights when any matter is submitted to shareholders in which the interests of one class differ from the interests of any other class or when voting by class is otherwise required by law. Rule 12b-1 Fees Each of MIT and JHVST has adopted a Distribution Plan under Rule 12b-1 under the 1940 Act (each, a "12b-1 Plan") for the Series I and Series II shares of, respectively, the Acquired Fund and the Acquiring Fund. As described below, the Rule 12b-1 fees for the Acquiring Fund are higher than those for the Acquired Fund. Accordingly, if shareholders of the Acquired Fund approve the Reorganization, they will incur higher 12b-1 fees following the Reorganization. With respect to the Acquired Fund: Series I shares are subject to a Rule 12b-1 fee of up to .15% of Series I share average daily net assets, and Series II shares are subject to a Rule 12b-1 fee of up to .35% of Series II share average daily net assets. With respect to the Acquiring Fund: Series I shares are subject to a Rule 12b-1 fee of up to .40% of Series I share average daily net assets, and Series II shares are subject to a Rule 12b-1 fee of up to .60% of Series II share average daily net assets. Under both the MIT and JHVST 12b-1 Plans, the Rule 12b-1 fees are paid to Manufacturers Financial Securities, LLC (the "Distributor"), which serves as the distributor both of shares of the MIT Funds, including the Acquired Fund, and of the Series I and Series II shares of the Acquiring Fund. To the extent consistent with applicable laws, regulations and rules, the Distributor may, under both 12b-1 Plans, use Rule 12b-1 fees: (i) for any expenses relating to the distribution of the shares of the class; (ii) for any expenses relating to shareholder or administrative services for holders of the shares of the class (or owners of variable contracts funded in insurance company separate accounts that invest in the shares of the class) and (iii) for the payment of "service fees" that come within Rule 2830(d)(5) of the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD"). Without limiting the foregoing, the Distributor may pay all or part of the Rule 12b-1 fees from a Fund to one or more affiliated and unaffiliated insurance companies that have issued variable insurance contracts for which the Fund serves as an investment vehicle as compensation for providing some or all of the types of services described in the preceding sentence; this provision, however, does not obligate the Distributor to make any payments of Rule 12b-1 fees and does not limit the use that the Distributor may make of the Rule 12b-1 fees it receives. Currently, all such payments relating to Series I and Series II shares of the Acquired Fund and the Acquiring Fund are made to insurance companies affiliated with MSS and the Distributor. However, payments may be made to unaffiliated insurance companies in the future. The JHVST 12b-1 Plan provides that if only part of any of the above-listed activities or expenses (or of any other expenses or activities) is intended to result in sales of (or services to) a class of the Acquiring Fund's shares, the Distributor may make a reasonable apportionment thereof, so as to apply Rule 12b-1 fees borne by that class to the portion of such activities or expenses that pertains to the distribution of (or services to) that class. Rule 12b-1 fees are paid out of a Fund's assets on an ongoing basis. Therefore, these fees will increase the cost of an investment in a Fund and may, over time, be greater than other types of sales charges. Dividends and Distributions The dividends and distributions procedures with respect to the Acquired and Acquiring Funds are substantially similar. MIT and JHVST declare as dividends substantially all of the net investment income, if any, of, the respective Funds. Dividends from the net investment income and the net capital gain, if any, for the Acquired Fund are declared by MIT not less frequently than annually and reinvested in additional full and 16 fractional shares of the Acquired Fund at net asset value or paid in cash. JHVST declares and pays dividends monthly and declares capital gains distributions annually. JHVST automatically reinvests such dividends and distributions in additional full and fractional shares of the Acquiring Fund at net asset value. Purchase and Redemption of Shares The purchase and redemption procedures with respect to shares of the Acquired and Acquiring Funds are substantially the same. Series I and Series II shares of both Funds are offered continuously, without sales charge, and are sold and redeemed at their net asset value next computed after a purchase payment or redemption request is received from a contract owner. Depending upon the net asset value at that time, the amount paid upon redemption may be more or less than the cost of the shares redeemed. Payment for shares redeemed will generally be made within seven days. However, both MIT and JHVST may suspend the right of redemption or postpone the date of payment beyond seven days under certain circumstances as permitted by applicable law and regulations. Redemptions are normally made in cash, but JHVST reserves the right, at its discretion, to make full or partial payment by assignment to the appropriate separate account of portfolio securities at their value used in determining the redemption price. In such cases, the separate account would incur brokerage costs should it wish to liquidate these portfolio securities. Calculation of Net Asset Value. The net asset values of the shares of the Acquired and Acquiring Funds are determined once daily as of the close of the regular trading session of the New York Stock Exchange (the "Exchange") on each business day of the Funds. The Exchange generally closes at 4:00 p.m. Eastern Time. The net asset value per share of each share class of each Fund is computed by: (i) adding the sum of the value of the portfolio securities held by the Fund, plus any cash or other assets it holds, attributable to the class, (ii) subtracting all its liabilities attributable to the class, and (iii) dividing the result by the total number of shares outstanding of the class at such time. Securities held by each of the Funds, except money market instruments with remaining maturities of 60 days or less, which are valued on an amortized cost basis, are valued at their market value, if market quotations are readily available. Otherwise, such securities are valued at fair value as determined in good faith by the MIT Board or its designee, in the case of the Acquired Fund, or by or under the direction of the Board of Trustees of JHVST (sometimes referred to herein as the "JHVST Board") in the case of the Acquiring Fund. Generally, with respect to the Acquired Fund, trading (i) in non-U.S. securities, (ii) U.S. Government Securities and (iii) money market instruments is substantially completed each day at various times prior to the close of regular trading of the Exchange. The values of such securities used in computing the net asset value of the Acquired Fund's shares are generally determined as of such times. Occasionally, events which affect the values of such securities may occur between the times at which they are generally determined and the close of the Exchange and would therefore not be reflected in the computation of the Fund's net asset value. In such event, these securities will then be valued at their fair value as determined in good faith by the MIT's Board or its designee. With respect to the Acquiring Fund, trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day on which the Exchange is open. The values of such securities used in computing net asset value per share are normally determined as of such times. Trading of these securities may not take place on every Exchange business day and may take place on days which are not business days in New York. JHVST calculates net asset value per share as of the close of regular trading on the Exchange on each day on which that exchange is open. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the 17 Acquiring Funds' securities used in such calculation. If events affecting the value of such securities occur between the time when their price is determined and the time as of which the Acquiring Fund's net asset value is calculated, such securities may be valued at fair value by or under the direction of the JHVST Board. Massachusetts Business Trusts As stated above, each of MIT and JHVST is a Massachusetts business trust. As such, each is governed by the terms of its Declaration of Trust. Shareholders of MIT and JHVST have substantially similar voting and other rights. Neither MIT nor JHVST is required to hold an annual meeting of shareholders. Under Massachusetts law, shareholders of MIT and JHVST could, under certain circumstances, be held personally liable for the obligations of these respective business trusts. However, the Declarations of Trust of MIT and JHVST contain express disclaimers of shareholder liability for acts or obligations of the business trusts and require that notices of such disclaimers be given in each agreement, obligation, or instrument entered into or executed by the Trustees or any officers of the business trusts. The Declarations of Trust also provide for indemnification, out of the property of JHVST in the case of JHVST and out of the property of a particular MIT Fund in the case of MIT, for all losses and expenses of any shareholder held personally liable for the obligations of, respectively, JHVST or such MIT Fund. Both MIT and JHVST consider the risk of a shareholder incurring financial loss on account of shareholder liability to be remote. Additional Information About the Funds The following table shows where in the MIT Prospectus and the JHVST Prospectus additional information about, respectively, the Acquired Fund and the Acquiring Fund may be found.
Heading or Caption in Prospectus ------------------------------------------------------------------------------- Type of Information MIT Prospectus JHVST Prospectus - ----------------------- -------------------------------------- ---------------------------------------- Investment Objective Investment Objective; Investment Goal and Strategy. and Policies: Strategies; Additional Investment Policies; Hedging and Other Strategic Transactions. Portfolio Management: Subadviser and Portfolio Managers; Subadviser; Fund Managers. Advisory Arrangements; Subadvisory Arrangements. Expenses: Fees and Expenses for Each Portfolio. Fees and Expenses of the Fund. Risks: Principal Risks; Risks of Investing in Main Risks. Certain Types of Securities. Taxes: Taxes. Dividends and Taxes. Dividends and Dividends. Dividends and Taxes. Distributions: Purchase and Redemption Purchase and Redemption of Shares. Investment in Shares of the Funds; Share of Shares: Price. Financial Highlights: Financial Highlights. Financial Highlights.
18 INFORMATION ABOUT THE REORGANIZATION Agreement and Plan of Reorganization The following summary of the Plan is qualified in its entirety by reference to the form of the Plan attached hereto as Exhibit A. The Plan provides that the Acquiring Fund will acquire all of the assets, subject to all of the liabilities, of the Acquired Fund in exchange for shares of the Acquiring Fund. Subject to the satisfaction of the conditions described below, the acquisition will take place after the close of business on June 18, 2004 or on such later date as may be determined by MIT and JHVST (the "Exchange Date"). The net asset value per share of the Series I and Series II shares of the Acquired Fund and the Acquiring Fund will be determined by dividing each Fund's assets, less liabilities, attributable to each share class, by the total number of outstanding shares of that class. The assets of each Fund will be valued in accordance with the valuation practices of that Fund. The number of full and fractional shares of the Acquiring Fund received by a shareholder of the Acquired Fund will be equal in value to the value of the shareholder's full and fractional shares of the Acquired Fund as of the close of regularly scheduled trading on the New York Stock Exchange on the Exchange Date. As of the Effective Time of the Reorganization, the Acquired Fund will liquidate and distribute pro rata to its shareholders of record as of the close of regularly scheduled trading on the New York Stock Exchange on the Exchange Date the shares of the Acquiring Fund received by the Acquired Fund in the Reorganization. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. Such liquidation and distribution will be accomplished by the establishment of accounts on the share records of the Acquiring Fund in the names of the shareholders of the Acquired Fund, each account representing the respective pro rata number of shares of the Acquiring Fund due the shareholder. After such distribution, MIT will take all necessary steps under Massachusetts law, its Declaration of Trust and any other applicable law to effect a complete dissolution of the Acquired Fund. The MIT Board has determined that the interests of shareholders of and contract owners whose contract values are invested in shares of the Acquired Fund will not be diluted as a result of the Reorganization and that participation in the Reorganization is in the best interests of the Acquired Fund and such shareholders and contract owners. Similarly, the JHVST Board has determined the Reorganization is in the best interests of the Acquiring Fund and of its shareholders and contract owners whose contract values are invested in shares of the Acquiring Fund and that the interests of such shareholders and contract owners will not be diluted as a result of the Reorganization. The consummation of the Reorganization is subject to the conditions set forth in the Plan, including that the affirmative vote of the holders of at least a Majority of the Outstanding Voting Securities (as defined under "Voting Information" below) of the Acquired Fund entitled to vote approve the Reorganization. The Plan may be terminated and the Reorganization abandoned at any time prior to the Effective Time of the Reorganization by mutual agreement of MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund, and by MIT on behalf of the Acquired Fund or JHVST on behalf of the Acquiring Fund in the event of: (i) a breach by the other party or such Fund of any material representation, warranty, covenant or agreement in the Plan to be performed prior to the Effective Time of the Reorganization; (ii) a failure by the other party or such Fund to fulfill a material condition precedent to the obligations of the terminating party which has not been waived by the terminating party; or (iii) a resolution by the MIT Board or the JHVST Board, upon a determination made in good faith, that proceeding with the Plan is not in the best interests of, respectively, the Acquired Fund, its shareholders and contract owners whose contracts are funded by shares of the Acquired Fund or the Acquiring Fund, its shareholders and contract owners whose contracts are funded by shares of the Acquiring Fund. The Plan provides that MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund may waive compliance with any of the covenants or conditions made therein for the benefit of the waiving party, except for certain conditions regarding the receipt of regulatory approvals. Certain of the existing investment limitations of the Acquired Fund that require shareholder approval for amendment prohibit the Acquired Fund from engaging in activities such as investing more than a stated 19 percentage of its assets in an issuer's securities. By approving the Plan, the shareholders of the Acquired Fund will be deemed to have agreed to waive any such limitations solely insofar as they might be deemed to apply to the Reorganization. The expenses of the Reorganization (other than any registration fees payable for the registration of shares of the Acquiring Fund in connection with the Reorganization, which will be payable by the Acquiring Fund) will be borne by the Acquired Fund and the Acquiring Fund in equal shares. See "Voting Information" below. If the Plan is not approved by the shareholders of the Acquired Fund or is not consummated for any other reason, the MIT Board will consider other possible courses of action. See "Voting Information." The MIT Board, including all the independent trustees, recommends that shareholders approve the plan under proposal 1. Reasons for the Reorganization The principal purpose of the Reorganization is to provide a means by which shareholders of and contract owners participating in the Acquired Fund, in combination with the Acquiring Fund, may pursue substantially similar investment objectives and policies in the context of a larger fund which has shown better prospects for growth and demonstrated stronger performance in tracking its target indices. In determining whether to approve the Reorganization and recommend its approval to shareholders, the MIT Board (including the Independent Trustees (with the advice and assistance of independent legal counsel)), made an inquiry into a number of matters and considered the following factors, among others: (1) the compatibility of the investment objectives, policies and restrictions of the Acquired and Acquiring Funds; (2) the current and historical performance of the Acquired and Acquiring Funds; (3) the advantages to the Acquired Fund of investing in a larger asset pool with potentially greater diversification; (4) the possible benefits of a larger asset base to portfolio management of the Acquiring Fund; (5) expense ratios and available information regarding the fees and expenses of the Acquired and Acquiring Funds (historical and pro forma), as well as of similar funds; (6) the investment experience, expertise and resources of the respective subadvisers to the Acquired and Acquiring Funds; (7) the terms and conditions of the Reorganization and whether the Reorganization would result in dilution of shareholder or contract owner interests; (8) any direct and indirect costs to be incurred by the Acquired and Acquiring Funds as a result of the Reorganization; (8) the tax consequences of the Reorganization; and (9) possible alternatives to the Reorganization. In reaching the decision to recommend approval of the Reorganization, the MIT Board concluded that the participation of the Acquired Fund in the Reorganization is in the best interests of the Acquired Fund, as well as the best interests of its shareholders and participating contract owners, and that the interests of existing shareholders and contract owners will not be diluted as a result of the Reorganization. The MIT Board's conclusion was based on a number of factors, including the following: 1. The investment objective, strategies and risks of the Acquiring Fund are substantially similar to those of the Acquired Fund and will afford shareholders of the Acquired Fund continuity of investment objectives and expectations. 2. As indicated by its historic performance and ability to attract investors, the Acquiring Fund has better prospects for growth than the Acquired Fund. 3. The Acquiring Fund has historically out-performed the Acquired Fund in more closely tracking its target indices. 4. The somewhat higher expense ratios of the Acquiring Fund than the Acquired Fund (giving effect to certain voluntary expense reimbursements) were viewed in light of the competitive level of the advisory fees and the prospects for growth of the Acquiring Fund. 20 5. The Reorganization will permit shareholders of the Acquired Fund to pursue their investment goals in the context of a larger fund immediately following consummation of the Reorganization. It is anticipated that the combined Acquired and Acquiring Funds should enhance the ability of portfolio managers in structuring the portfolio to be representative of the Acquiring Fund's target index. Description of the Securities to be Issued Shareholders of the Acquired Fund will receive Series I or Series II shares of the Acquiring Fund in accordance with the procedures set forth in the Plan as described above. Each such share when issued will be fully paid and non-assessable (except as noted under "Summary--Massachusetts Business Trusts," above) and will have no preemptive, exchange or similar rights. Such shares do not have cumulative voting rights. The shares of beneficial interest of JHVST currently are divided into 30 series, each corresponding to one of the JHVST Funds. JHVST has the right to establish additional series and issue additional shares without the consent of its shareholders. If the holders of variable contracts show minimal interest in a JHVST Fund, the JHVST Board, by majority vote, may eliminate that Fund or substitute shares of another investment company. Any such action by the JHVST Board would be subject to compliance with any requirements for governmental approvals or exemptions or for shareholder approval. The holders of variable contracts participating in any such Fund will be notified in writing of JHVST's intention to eliminate such Fund and given 30 days to transfer amounts from such Fund to other JHVST Funds without incurring any transaction fee. Amounts not transferred or withdrawn would automatically be transferred, at the discretion of the Fund's management. As discussed above, the Acquiring Fund issues three classes of shares: NAV shares, Series I shares and Series II shares. Additional classes may be offered in the future. The Acquiring Fund commenced offering Series I and Series II shares on May 1, 2004 and will issue shares of such classes in connection with the Reorganization. The relative rights and preferences of the three classes are prescribed in, among other things, a plan that JHVST has adopted under Rule 18f-3 (the "Rule 18f-3 Plan") under the 1940 Act. Each issued and outstanding share of the Acquiring Fund is entitled to participate equally as provided in the Rule 18f-3 Plan in dividends and distributions declared with respect to the Acquiring Fund and, upon liquidation or dissolution, in the net assets of the Fund remaining after satisfaction of outstanding liabilities. Expenses of the Acquiring Fund are borne by NAV, Series I and Series II shares based on the net assets of the Fund attributable to shares of each class. Notwithstanding the foregoing, "class expenses" will be allocated to each class. "Class expenses" for the Acquiring Fund include the 12b-1 fees paid with respect to a class and any other expenses which are properly allocable to a particular class under the terms of the Rule 18f-3 Plan. Federal Income Tax Consequences As a condition to the consummation of the Reorganization, each of MIT and JHVST will have received, in form and substance satisfactory to each, an opinion from Dykema Gossett PLLC, tax counsel to MIT in connection with the Reorganization, to the effect that, based on the facts and assumptions stated therein, for federal income tax purposes: (1) the Reorganization will constitute a reorganization within the meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer of all of the assets and liabilities, if any, of the Acquired Fund to the Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain or loss will be recognized by shareholders of the Acquired Fund upon the exchange of such Fund's shares solely for shares of the Acquiring Fund; (4) the holding period and tax basis of the shares of the Acquiring Fund received by each holder of shares of the Acquired Fund pursuant to the Reorganization will be the same as the holding period and tax basis of the shares of the Acquired Fund held by the shareholder (provided the shares of 21 the Acquired Fund were held as a capital asset on the date of the Reorganization) immediately prior to the Reorganization; and (5) the holding period and tax basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be the same as the holding period and tax basis of those assets to the Acquired Fund immediately prior to the Reorganization. Capitalization The following table shows the capitalization of the Acquired Fund and the Acquiring Fund as of December 31, 2003, and the pro forma combined capitalization of the Acquiring Fund as if the Reorganization had occurred as of that date. As of December 31, 2003, the Acquired Fund had outstanding three classes of shares: Series I, Series II and Series III shares; at the date of this proxy statement and at the time of the Reorganization, it will have outstanding only two classes of shares: Series I and Series II shares. As of December 31, 2003, the Acquiring Fund had outstanding only one class of shares: NAV shares; it commenced offering Series I and Series II shares on May 1, 2004 and will issue shares of such classes in connection with the Reorganization.
Net Assets Net Asset Shares Fund (000's Omitted) Value Per Share Outstanding - ---- --------------- --------------- ----------- MIT International Index Trust (Acquired Fund) --Series I shares................. $ 82,197 $ 9.08 9,056,146 --Series II shares................ 17,176 9.08 1,891,609 --Series III shares/A/............ 3 9.07 374 JHVST International Equity Index Fund (Acquiring Fund) --NAV shares...................... 159,036 13.82 11,508,157 --Series I shares................. -- -- -- --Series II shares................ -- -- -- Pro Forma/B/ JHVST International Equity Index Fund (Acquiring Fund) --NAV shares...................... 159,036 13.82 11,508,157 --Series I shares................. 82,197 13.82 5,947,684 --Series II shares................ 17,176 13.82 1,242,867
- -------- /A/ The Series III shares were all redeemed prior to the record date for The Special Meeting of Shareholders to vote on the Reorganization. /B/ The pro-forma figures for net assets and net asset values per share do not reflect expenses of the Reorganization estimated to be $75,000 for each of the Funds; and the pro-forma figures for net assets do not reflect Manulife U.S.A.'s withdrawal, in February and April 2004, of seed capital in the amount of $34,477,450 at December 31, 2003 from the Acquired Fund. 22 VOTING INFORMATION Shareholders. MIT sells its shares not directly to the public but generally only to insurance companies and their separate accounts as the underlying investment media for variable contracts, certain entities affiliated with the insurance companies and, with respect to certain MIT Funds, trustees of qualified pension and retirement plans. Only shares of a particular MIT Fund are entitled to vote on matters which affect only the interests of that Fund. As of the Record Date for the Special Meeting of Shareholders, the shares of the Acquired Fund were legally owned by The Manufacturers Life Insurance Company (U.S.A.) ("Manulife U.S.A") and The Manufacturers Life Insurance Company of New York ("Manulife New York"). Each of Manulife U.S.A. and Manulife New York is an indirect, wholly-owned subsidiary of The Manufacturers Life Insurance Company ("Manulife"). MFC is the holding company of Manulife and its subsidiaries, collectively known as Manulife Financial. The principal offices of Manulife Financial are located at 200 Bloor Street East, Toronto, Ontario, Canada M4W1E5. Manulife U.S.A. is a stock life insurance company originally organized under the laws of Pennsylvania and redomesticated under the laws of Michigan. Its principal address is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. Manulife New York is a stock life insurance company organized under the laws of New York whose principal address is 100 Summit Lake Drive, Second Floor, Valhalla, New York 10595. Each of Manulife U.S.A. and Manulife New York holds shares of MIT Funds directly and attributable to variable contracts in their separate accounts. Such separate accounts include separate accounts registered under the 1940 Act as well as unregistered separate accounts. Shareholder Voting. Manulife U.S.A. and Manulife New York have the right to vote upon matters that may be voted upon at a special shareholders' meeting. These companies will vote all shares of the MIT Funds issued to them in proportion to the timely instructions received from contract owners participating in the separate accounts described above which are registered under the 1940 Act. Manulife U.S.A. and Manulife New York, in connection with their solicitation of voting instructions, are furnishing this Proxy Statement/Prospectus to the owners of variable contracts participating in registered separate accounts holding shares of the Acquired Fund to be voted at the Meeting. Voting instructions (proxies) may be revoked at any time prior to the voting of the shares represented thereby by: (i) mailing written instructions addressed to the Secretary of MIT at 73 Tremont Street, Boston, Massachusetts 02108, or (ii) signing and returning a new proxy, in each case if received by MIT by June 17, 2004. All valid proxies will be voted in accordance with specifications thereon, or in the absence of specifications, for approval of Proposal 1. Quorum; Definition of a Majority of Outstanding Voting Securities. Shareholders of record at the close of business on April 27, 2004 (the "Record Date") will be entitled to vote at the Meeting or any adjournment of the Meeting. The holders of 30% of the shares outstanding of the Acquired Fund at the close of business on that date present in person or by proxy will constitute a quorum for the Meeting; however, a majority of the outstanding voting securities of the Acquired Fund entitled to vote at the close of business on that date is required to approve the Proposal, except as noted herein. As used in this Proxy Statement/Prospectus, the vote of a "Majority of the Outstanding Voting Securities" means the affirmative vote of the lesser of: (1)67% or more of the voting securities of MIT or an MIT Fund, as applicable, present at the Meeting, if the holders of more than 50% of the outstanding voting securities of MIT or an MIT Fund, as applicable, are present in person or by proxy or (2)more than 50% of the outstanding voting securities of MIT or an MIT Fund, as applicable. Shareholders are entitled to one vote for each Series I and Series II share held and fractional votes for fractional shares held. No shares have cumulative voting rights. 23 In the event the necessary quorum to transact business or the vote required to approve the Reorganization under Proposal 1 is not obtained at the Meeting, the persons named as proxies may propose one or more adjournments of the Meeting in accordance with applicable law to permit further solicitation of proxies. Any such adjournment as to a matter will require the affirmative vote of the holders of a majority of MIT's (or the relevant MIT Fund's) shares cast at the Meeting. The persons named as proxies will vote for or against any adjournment in their discretion. Abstentions. Abstentions are counted as shares eligible to vote at the Meeting in determining whether a quorum is present, but do not count as votes cast with respect to a Proposal. Under the 1940 Act, the affirmative vote necessary to approve a matter under consideration may be determined with reference to a percentage of votes present at the Meeting, which would have the effect of treating abstentions as if they were votes against a proposal. Cost of Preparation and Distribution of Proxy Materials. The cost of the preparation and distribution of these proxy materials will be borne by the Acquired Fund and the Acquiring Fund in equal shares. In addition to the solicitation of proxies by the use of the mails, proxies may be solicited by officers and employees of MIT, MIT's investment adviser, MSS, or its agents or affiliates, personally or by telephone. Brokerage houses, banks and other fiduciaries may be requested by the Funds to forward soliciting materials to their principals and to obtain authorization for the execution of proxies. For those services, they will be reimbursed by the Funds for their out-of-pocket expenses. Fund Voting. Series I and Series II shares of the Acquired Fund will vote in the aggregate and not by class on the matters to be presented at the Meeting. 24 OWNERSHIP OF SHARES OF THE FUNDS Acquired Fund. As of the Record Date, the Acquired Fund's shares outstanding and eligible to vote and the percentage thereof owned by Manulife U.S.A. and Manulife New York are stated below:
Percentage Percentage of Shares of Shares Number of Held by held by Outstanding Manulife Manulife Acquired Fund Shares U.S.A. New York ------------- ----------- ---------- ---------- MIT International Index Trust 8,328,014 94.03% 5.97%
As of the Record Date, Trustees and officers of MIT, in the aggregate, beneficially owned or had the right to provide voting instructions for less than 1% of the outstanding shares of the Acquired Fund. As of the Record Date, no variable contract owner beneficially owned 5% or more of the outstanding shares of the Acquired Fund. Acquiring Fund. As with shares of the MIT Funds, shares of the JHVST Funds are not sold directly to the public but generally only to insurance companies and their separate accounts as the underlying investment media for variable contracts. As of the Record Date, the shares of the Acquiring Fund were legally owned by John Hancock Life Insurance Company ("JHLICO"), a Massachusetts life insurance company having its principal offices at 200 Clarendon Street, Boston, Massachusetts 02117, and John Hancock Variable Life Insurance Company ("JHVLICO"), a Massachusetts life insurance company having its principal offices at 197 Clarendon Street, Boston, Massachusetts 02117. The percentage ownership of the outstanding shares of the Acquiring Fund as of the Record Date by JHLICO and JHVLICO is stated below:
Percentage Percentage Number of of Shares of Shares Outstanding held by held by Acquiring Fund Shares JHLICO JHVLICO -------------- ----------- ---------- ---------- JHVST International Equity Index Fund................ 11,804,916 25.22% 74.78%
As of the Record Date, no variable contract owner beneficially owned 5% or more of the outstanding shares of the Acquiring Fund, and fewer than 1% of the outstanding shares of the Acquiring Fund were attributable to variable contracts owned by Trustees or officers of JHVST. 25 FINANCIAL STATEMENTS The financial highlights of the Acquired Fund for the fiscal year ended December 31, 2003 incorporated by reference into this Proxy Statement/Prospectus, and the financial statements of MIT for the fiscal year ended December 31, 2003 incorporated by reference into the related Statement of Additional Information, have been so incorporated by reference in reliance on the report of PricewaterhouseCoopers, LLP, independent accountants. The financial highlights of the Acquiring Fund for the fiscal year ended December 31, 2003 incorporated by reference into this Proxy Statement/Prospectus, and the financial statements of JHVST for the fiscal year ended December 31, 2003 incorporated by reference into the related Statement of Additional Information, have been so incorporated by reference in reliance on the report of Ernst & Young LLP, independent auditors. The performance information included in the financial highlights of the Funds does not reflect fees and expenses of any variable insurance contract which may use MIT or JHVST as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. LEGAL MATTERS Certain matters concerning the issuance of shares of the Acquiring Fund will be passed upon by Ronald J. Bocage, Esq., Vice President and Counsel, JHLICO, P.O. Box 111, Boston, Massachusetts 02117. Certain tax consequences of the Reorganization will be passed upon by Dykema Gossett PLLC, 39577 Woodward Avenue, Suite 300, Bloomfield Hills, Michigan 48304. OTHER MATTERS The MIT Board does not know of any matters to be presented at the Meeting other than those mentioned in this Proxy Statement/Prospectus. If any other matters properly come before the Meeting, the shares represented by proxies will be voted in accordance with the best judgment of the person or persons voting the proxies. MIT is not required to hold annual meetings of shareholders and, therefore, it cannot be determined when the next meeting of shareholders will be held. Shareholder proposals to be presented at any future meeting of shareholders of MIT must be received by MIT a reasonable time before its solicitation of proxies for that meeting in order for such proposals to be considered for inclusion in the proxy materials related to that meeting. BY ORDER OF THE BOARD OF TRUSTEES OF MIT May 18, 2004 Boston, Massachusetts It is important that proxies be returned promptly. Therefore, shareholders who do not expect to attend the meeting in person are urged to complete, sign, date and return the Voting Instruction card in the enclosed envelope. 26 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Plan") is made this 28th day of April, 2004, by and between Manufacturers Investment Trust ("MIT"), a Massachusetts business trust with its principal place of business at 73 Tremont Street, Boston, Massachusetts 02108, on behalf of its separate series, the International Index Trust (the "Acquired Fund"), and John Hancock Variable Series Trust I ("JHVST"), a Massachusetts business trust with its principal place of business at John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, on behalf of its separate series, the International Equity Index Fund (the "Acquiring Fund"). The Acquired Fund and the Acquiring Fund are sometimes referred to herein collectively as the "Funds" and individually as a "Fund." WHEREAS, the respective Boards of Trustees of MIT and JHVST have determined that the transfer of all of the assets and liabilities of the Acquired Fund to the Acquiring Fund is in the best interests of that Board's respective Fund, as well as the best interests of shareholders and owners of variable life and annuity contracts funded by shares of such Fund, and that the interests of existing shareholders and contract owners participating in such Fund would not be diluted as a result of this transaction; WHEREAS, MIT and JHVST intend to provide for the reorganization of the Acquired Fund (the "Reorganization") through the acquisition by the Acquiring Fund of all of the assets, subject to all of the liabilities, of the Acquired Fund in exchange for Series I and Series II shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund Shares"), the liquidation of the Acquired Fund and the distribution to Acquired Fund shareholders of the Acquiring Fund Shares; NOW, THEREFORE, in consideration of the mutual promises herein contained, MIT and JHVST agree as follows: 1. Transfer of Assets of the Acquired Fund in Exchange for the Acquiring Fund Shares and Liquidation of the Acquired Fund (a) Plan of Reorganization. (i) As of the Effective Time of the Reorganization (as defined in Section 1(b)(i) hereof), MIT, on behalf of the Acquired Fund, will convey, transfer and deliver to the Acquired Fund all of the then existing assets of the Acquired Fund (consisting, without limitation, of portfolio securities and instruments, dividend and interest receivables, cash and other assets). In consideration thereof, JHVST, on behalf of the Acquiring Fund, will (A) assume and pay, to the extent that they exist on or after the Effective Time of the Reorganization, all of the obligations and liabilities of the Acquired Fund and (B) issue and deliver to the Acquired Fund that number of full and fractional Series I and Series II shares of the Acquiring Fund as determined in Section 1(c) hereof. Any Series I and Series II shares of capital stock (if any) of the Acquired Fund ("Acquired Fund Shares") held in the treasury of MIT at the Effective Time of the Reorganization shall thereupon be retired. Such transactions shall take place on the date provided for in Section 1(b) hereof (the "Exchange Date"). All computations for the Acquired Fund and the Acquiring Fund shall be performed by State Street Bank and Trust Company (the "Custodian"), as custodian and pricing agent for the Acquired Fund and the Acquiring Fund, subject to the control and direction of each Fund and its Board and in accordance with the usual pricing and valuation procedures of the respective Funds. The parties agree to communicate with one another sufficiently in advance concerning the nature and manner of valuation of all their respective assets and liabilities that any material differences in the value ascribed by each Fund to any assets or liabilities that the Acquiring Fund would assume in the Reorganization can be reconciled prior to the Exchange Date. The parties agree to attempt in good faith to reconcile any such material differences. In the absence of such reconciliation, the determination of the Custodian shall be conclusive and binding on all parties in interest. 27 (ii) As of the Effective Time of the Reorganization, the Acquired Fund will liquidate and distribute pro rata to its shareholders of record ("Acquired Fund shareholders") as of the Effective Time of the Reorganization the Acquiring Fund Shares received by the Acquired Fund pursuant to Section 1(a)(i) in actual or constructive exchange for the shares of the Acquired Fund held by the Acquired Fund shareholders. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. Such liquidation and distribution will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund shareholders and representing the respective pro-rata number of the Acquiring Fund Shares due such shareholders. The Acquiring Fund will not issue certificates representing the Acquiring Fund Shares in connection with such exchange. (iii) As soon as practicable after the Effective Time of the Reorganization, MIT shall take all the necessary steps under Massachusetts law, its Declaration of Trust and any other applicable law to effect a complete dissolution of the Acquired Fund. Any reporting of the Acquired Fund, including but not limited to the responsibility for filing of reports with the Securities and Exchange Commission (the "Commission"), other regulatory reports and tax returns, is and shall remain the responsibility of MIT. (b) Exchange Date and Effective Time of the Reorganization. (i) Subject to the satisfaction of the conditions to the Reorganization specified in this Plan, the Reorganization shall occur as of the close of regularly scheduled trading on the New York Stock Exchange (the "Effective Time of the Reorganization") on the day (the "Exchange Date") which is the later of (A) the final adjournment of the meeting of the holders of Acquired Fund Shares at which this Plan will be considered, (B) immediately after the close of business on June 18, 2004 and (C) such later day as MIT and JHVST may determine. (ii) All acts taking place on the Exchange Date shall be deemed to take place simultaneously as of the Effective Time of the Reorganization unless otherwise provided. (iii) In the event that on the proposed Exchange Date (A) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted, or (B) trading or the reporting of trading on said Exchange or elsewhere shall be disrupted so that accurate valuation of the net assets of the Acquiring Fund or the Acquired Fund is impracticable, the Exchange Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored. (iv) On the Exchange Date, portfolio securities of the Acquired Fund that are not held in book-entry form shall be transferred by the Custodian to the account of the Acquiring Fund duly endorsed in proper form for transfer, in such condition as to constitute good delivery thereof in accordance with the custom of brokers, and shall be accompanied by all necessary federal and state stock transfer stamps or a check for the appropriate purchase price thereof; portfolio securities held of record by the Custodian in book-entry form on behalf of the Acquired Fund shall be delivered to the Acquiring Fund by the Custodian's recording the transfer of beneficial ownership thereof on its records; and cash delivered shall be in the form of currency or by the Custodian's crediting the Acquiring Fund's account maintained with the Custodian with immediately available funds. (c) Valuation. (i) The net asset value per share of the Series I and Series II shares of the Acquiring Fund and the net value of the assets of the Acquired Fund to be transferred in exchange for such Series I and Series II shares shall be determined as of the Effective Time of the Reorganization. The net asset value per share of the Series I and Series II shares of the Acquiring Fund shall be computed by the Custodian in the manner set forth in JHVST's Declaration of Trust or By-laws and then current prospectus and statement of additional information and shall be computed to not less than four decimal places. The net value of the assets of the Acquired Fund to be transferred shall be computed by the Custodian by 28 calculating the value of the assets of the Acquired Fund and by subtracting therefrom the amount of the liabilities assigned and transferred to the Acquiring Fund, said assets and liabilities to be valued in the manner set forth in MIT's Declaration of Trust or By-laws and then current prospectus and statement of additional information. (ii) The number of Series I and Series II shares of the Acquiring Fund to be issued (including fractional shares, if any) by the Acquiring Fund in exchange for the Acquired Fund's assets shall be determined by dividing the net value of the assets of the Acquired Fund attributable to shares of each class and to be transferred by the net asset value per shares of the Series I and Series II shares of the Acquiring Fund, both as determined in accordance with Section 1(c)(i). (iii) All computations of value shall be made by the Custodian in the manner set forth in paragraphs (a)(i) and (c)(i) above. 2. Representations and Warranties of JHVST on Behalf of the Acquiring Fund JHVST on behalf of the Acquiring Fund represents and warrants as follows: (a) Organization, Existence, etc. JHVST is a business trust that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the power to carry on its business as it is now being conducted. The Acquiring Fund is a validly existing series of shares of such business trust representing interests in a separate portfolio thereof under the laws of Massachusetts. Each of the Acquiring Fund and JHVST has all necessary federal, state and local authorization to own all of its properties and assets and to carry on its business as now being conducted. (b) Registration as Investment Company. JHVST is registered under the Investment Company Act of 1940, as amended (the "Act") as an open-end investment company of the management type; such registration has not been revoked or rescinded and is in full force and effect. (c) Current Offering Documents. The current prospectus of JHVST dated May 1, 2003 and the current statement of additional information of JHVST dated May 1, 2003, each as supplemented or amended and as may be further supplemented or amended, included in JHVST's registration statement on Form N-1A filed with the Commission, comply in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act") and the Act and do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Capitalization. JHVST has an unlimited number of authorized shares of beneficial interest of which as of April 27, 2004 there were outstanding the following numbers of shares of the Acquiring Fund: 11,804,916 NAV shares. All of the outstanding shares of JHVST have been duly authorized and are validly issued, fully paid and non-assessable (recognizing that under Massachusetts law, shareholders of a JHVST series could, under certain circumstances, be held personally liable for the obligations of JHVST). Because JHVST is an open-end investment company engaged in the continuous offering and redemption of its shares, the number of outstanding shares may change prior to the Effective Time of the Reorganization. All of the issued and outstanding shares of the Acquiring Fund have been offered and sold in compliance in all material respects with applicable registration requirements of the Securities Act and any applicable state securities laws. (e) Financial Statements. The financial statements of JHVST for the fiscal year ended December 31, 2003, which have been audited by Ernst & Young LLP, fairly present the financial position of the Acquiring Fund as of the dates thereof and the respective results of operations and changes in net assets for each of the periods indicated in accordance with generally accepted accounting principles ("GAAP"). (f) Shares to be Issued Upon Reorganization. The Acquiring Fund Shares to be issued in connection with the Reorganization will be duly authorized and upon consummation of the Reorganization will be validly issued, fully paid and non-assessable (except as disclosed in JHVST's prospectus and recognizing 29 that under Massachusetts law, shareholders of a JHVST series could, under certain circumstances, be held personally liable for the obligations of such series). (g) Authority Relative to this Plan. JHVST, on behalf of the Acquiring Fund, has the power to enter into this Plan and to carry out its obligations hereunder. The execution and delivery of this Plan and the consummation of the transactions contemplated hereby have been duly authorized by JHVST's Board of Trustees and no other proceedings by JHVST other than those contemplated under this Plan are necessary to authorize its officers to effectuate this Plan and the transactions contemplated hereby. JHVST is not a party to or obligated under any provision of its Declaration of Trust or By-laws, or under any indenture or contract provision or any other commitment or obligation, or subject to any order or decree, which would be violated by or which would prevent its execution and performance of this Plan in accordance with its terms. (h) Liabilities. There are no liabilities of the Acquiring Fund, whether actual or contingent and whether or not determined or determinable, other than liabilities disclosed or provided for in JHVST's Financial Statements with respect to the Acquiring Fund and liabilities incurred in the ordinary course of business subsequent to December 31, 2003 or otherwise previously disclosed to and accepted by MIT with respect to the Acquiring Fund, none of which has been materially adverse to the business, assets or results of operations of the Acquiring Fund. (i) No Material Adverse Change. Since December 31, 2003, there has been no material adverse change in the financial condition, results of operations, business, properties or assets of the Acquiring Fund, other than those occurring in the ordinary course of business (for these purposes, a decline in net asset value and a decline in net assets due to redemptions do not constitute a material adverse change). (j) Litigation. There are no claims, actions, suits or proceedings pending or, to the knowledge of JHVST, threatened which would adversely affect JHVST or the Acquiring Fund's assets or business or which would prevent or hinder consummation of the transactions contemplated hereby, there are no facts which would form the basis for the institution of administrative proceedings against JHVST or the Acquiring Fund and, to the knowledge of JHVST, there are no regulatory investigations of JHVST or the Acquiring Fund, pending or threatened, other than routine inspections and audits. (k) Contracts. No default exists under any material contract or other commitment to which JHVST, on behalf of the Acquiring Fund, is subject. (l) Taxes. All federal and other income tax returns of JHVST with respect to the Acquiring Fund required to be filed by JHVST with respect to the Acquiring Fund have been filed for all taxable years to and including December 31, 2003, and all taxes payable pursuant to such returns have been paid. To the knowledge of JHVST, no such return is under audit and no assessment has been asserted in respect of any such return. All federal and other taxes owed by JHVST with respect to the Acquiring Fund have been paid so far as due. JHVST and the Acquiring Fund currently are, at all times since their inception have been, and will continue to be up until and at the Exchange Date, in compliance with Section 817(h)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), and Treas. Reg. Section 1.817-5, as if those provisions applied directly to that Fund relating to the diversification requirements for variable annuity, endowment and life insurance contracts. The Acquiring Fund's shares are (and since its inception have been) held only by (a) insurance company "segregated asset accounts" within the meaning of Treas. Reg. Section 1.817-5(e) and (b) other purchasers of the kind specified in Treas. Reg. Section 1.817-5(f)(3) as from time to time in effect. The Acquiring Fund is, and at all times since its inception has been, qualified as a "regulated investment company" under subchapter M of the Code. (m) No Approvals Required. Except for the Registration Statement (as defined in Section 4(a) hereof) and the approval of the Acquired Fund's shareholders (referred to in Section 6(a) hereof), no consents, approvals, authorizations, registrations or exemptions under federal or state laws are necessary for the consummation by JHVST of the Reorganization, except such as have been obtained as of the date hereof. (n) At the time the Registration Statement becomes effective, the Registration Statement, except as to information relating to the Acquired Fund that is provided or approved by MIT pursuant to Section 5(c) 30 hereof, (i) will comply in all material respects with the provisions of the Securities Act and the rules and regulations of the Commission thereunder (the "Regulations") and (ii) will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time the Registration Statement becomes effective, at the time of the Acquired Fund shareholders' meeting referred to in Section 5(a) hereof, and at the Effective Time of the Reorganization, the proxy statement/prospectus (the "Prospectus") and statement of additional information (the "Statement of Additional Information") included therein, as amended or supplemented by any amendments or supplements filed by JHVST, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Representations and Warranties of MIT on Behalf of the Acquired Fund MIT on behalf of the Acquired Fund represents and warrants as follows: (a) Organization, Existence, etc. MIT is a business trust that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the power to carry on its business as it is now being conducted. The Acquired Fund is a validly existing series of shares of such business trust representing interests in a separate portfolio thereof under the laws of Massachusetts. Each of the Acquired Fund and MIT has all necessary federal, state and local authorization to own all of its properties and assets and to carry on its business as now being conducted. (b) Registration as Investment Company. MIT is registered under the Act as an open-end investment company of the management type; such registration has not been revoked or rescinded and is in full force and effect. (c) Current Offering Documents. The current prospectus of MIT dated May 1, 2003 and the current statement of additional information of MIT dated May 1, 2003, each as supplemented or amended and as may be further supplemented or amended, included in MIT's registration statement on Form N-1A filed with the Commission, comply in all material respects with the requirements of the Securities Act and the Act and do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Capitalization. MIT has an unlimited number of authorized shares of beneficial interest of which as of April 27, 2004 there were outstanding the following numbers of shares of the Acquired Fund : 6,081,524 Series I shares and 2,246,490 Series II shares, and no shares of such Fund were held in the treasury of MIT. All of the outstanding shares of MIT have been duly authorized and are validly issued, fully paid and non-assessable (except as disclosed in MIT's prospectus and recognizing that under Massachusetts law, shareholders of an MIT series could, under certain circumstances, be held personally liable for the obligations of such MIT series). Because MIT is an open-end investment company engaged in the continuous offering and redemption of its shares, the number of outstanding shares may change prior to the Effective Time of the Reorganization. All such shares will, at the Exchange Date, be held in book-entry form by shareholders of record of the Acquired Fund as set forth on the books and records of MIT in the amounts set forth therein, and as set forth in any list of shareholders of record provided to the Acquiring Fund for purposes of the Reorganization, and no such shareholders of record will have any preemptive rights to purchase any Acquired Fund Shares, and the Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any Acquired Fund Shares (other than any existing dividend reinvestment plans of the Acquired Fund or as set forth in this Plan), nor are there outstanding any securities convertible into any shares of the Acquired Fund (except pursuant to any existing exchange privileges described in the current prospectus and statement of additional information of MIT). All of the Acquired Fund's issued and outstanding shares have been offered and sold in compliance in all material respects with applicable registration requirements of the Securities Act and any applicable state securities laws. 31 (e) Financial Statements. The financial statements of MIT for the fiscal year ended December 31, 2003, which have been audited by PriceWaterhouseCoopers LLP, fairly present the financial position of the Acquired Fund as of the dates thereof and the respective results of operations and changes in net assets for each of the periods indicated in accordance with GAAP. (f) Authority Relative to this Plan. MIT, on behalf of the Acquired Fund, has the power to enter into this Plan and to carry out its obligations hereunder. The execution and delivery of this Plan and the consummation of the transactions contemplated hereby have been duly authorized by MIT's Board of Trustees and no other proceedings by MIT other than those contemplated under this Plan are necessary to authorize its officers to effectuate this Plan and the transactions contemplated hereby. MIT is not a party to or obligated under any provision of its Declaration of Trust or By-laws, or under any indenture or contract provision or any other commitment or obligation, or subject to any order or decree, which would be violated by or which would prevent its execution and performance of this Plan in accordance with its terms. (g) Liabilities. There are no liabilities of the Acquired Fund, whether actual or contingent and whether or not determined or determinable, other than liabilities disclosed or provided for in MIT's Financial Statements with respect to the Acquired Fund and liabilities incurred in the ordinary course of business subsequent to December 31, 2003 or otherwise previously disclosed to and accepted by JHVST with respect to the Acquired Fund, none of which has been materially adverse to the business, assets or results of operations of the Acquired Fund. (h) No Material Adverse Change. Since December 31, 2003, there has been no material adverse change in the financial condition, results of operations, business, properties or assets of the Acquired Fund, other than those occurring in the ordinary course of business (for these purposes, a decline in net asset value and a decline in net assets due to redemptions do not constitute a material adverse change). (i) Litigation. There are no claims, actions, suits or proceedings pending or, to the knowledge of MIT, threatened which would adversely affect MIT or the Acquired Fund's assets or business or which would prevent or hinder consummation of the transactions contemplated hereby, there are no facts which would form the basis for the institution of administrative proceedings against MIT or the Acquired Fund and, to the knowledge of MIT, there are no regulatory investigations of MIT or the Acquired Fund, pending or threatened, other than routine inspections and audits. (j) Contracts. MIT, on behalf of the Acquired Fund, is not subject to any contracts or other commitments (other than this Plan) which will not be terminated with respect to the Acquired Fund without liability to MIT or the Acquired Fund as of or prior to the Effective Time of the Reorganization. (k) Taxes. All federal and other income tax returns of MIT with respect to the Acquired Fund required to be filed by MIT with respect to the Acquired Fund have been filed for all taxable years to and including December 31, 2003, and all taxes payable pursuant to such returns have been paid. To the knowledge of MIT, no such return is under audit and no assessment has been asserted in respect of any such return. All federal and other taxes owed by MIT with respect to the Acquired Fund have been paid so far as due. MIT and the Acquired Fund currently are, at all times since their inception have been, and will continue to be up until and at the Exchange Date, in compliance with Section 817(h)(1) of the Code and Treas. Reg. Section 1.817-5, as if those provisions applied directly to that Fund relating to the diversification requirements for variable annuity, endowment and life insurance contracts. The Acquired Fund's shares are (and since its inception have been) held only by (a) insurance company "segregated asset accounts" within the meaning of Treas. Reg. Section 1.817-5(e) and (b) other purchasers of the kind specified in Treas. Reg. Section 1.817-5(f)(3) as from time to time in effect. The Acquired Fund is, and at all times since its inception has been, qualified as a "regulated investment company" under subchapter M of the Code. (l) No Approvals Required. Except for the Registration Statement (as defined in Section 4(a) hereof) and the approval of the Acquired Fund's shareholders referred to in Section 6(a) hereof, no consents, approvals, authorizations, registrations or exemptions under federal or state laws are necessary for the consummation by MIT of the Reorganization, except such as have been obtained as of the date hereof. 32 (m) At the time the Registration Statement becomes effective, the Registration Statement, insofar as it relates to the Acquired Fund, (i) will comply in all material respects with the provisions of the Securities Act and the Regulations and (ii) will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at the time the Registration Statement becomes effective, at the time of the Acquired Fund's shareholders' meeting referred to in Section 5(a) and at the Effective Time of the Reorganization, the Prospectus and Statement of Additional Information, as amended or supplemented by any amendments or supplements filed by JHVST, insofar as they relate to the Acquired Fund, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the Registration Statement, Prospectus or Statement of Additional Information made in reliance upon and in conformity with information furnished or approved by MIT for use in the Registration Statement, Prospectus or Statement of Additional Information as provided in Section 5(c). 4. Covenants of JHVST on Behalf of the Acquiring Fund JHVST on behalf of the Acquiring Fund covenants to the following: (a) Registration Statement. On behalf of the Acquiring Fund, JHVST shall file with the Commission a Registration Statement on Form N-14 (the "Registration Statement") under the Securities Act relating to the Acquiring Fund Shares issuable hereunder and the proxy statement of the Acquired Fund relating to the meeting of the Acquired Fund's shareholders referred to in Section 5(a) herein. (b) Cooperation in Effecting Reorganization. JHVST agrees to use all reasonable efforts to effectuate the Reorganization, to continue in operation thereafter, and to obtain any necessary regulatory approvals for the Reorganization. JHVST shall furnish such data and information relating to the Acquiring Fund as shall be reasonably requested for inclusion in the information to be furnished to the Acquired Fund shareholders in connection with the meeting of the Acquired Funds' shareholders for the purpose of acting upon this Plan and the transactions contemplated herein. (c) Operations in the Ordinary Course. Except as otherwise contemplated by this Plan, JHVST with respect to the Acquiring Fund shall conduct its business in the ordinary course until the consummation of the Reorganization, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and distributions. 5. Covenants of MIT on Behalf of the Acquired Fund MIT on behalf of the Acquired Fund covenants to the following: (a) Meeting of the Acquired Fund's Shareholders. MIT shall call and hold a meeting of the shareholders of the Acquired Fund for the purpose of acting upon this Plan and the transactions contemplated herein. (b) Portfolio Securities. With respect to the assets to be transferred in accordance with Section 1(a), the Acquired Fund's assets shall consist of all property and assets of any nature whatsoever, including, without limitation, all cash, cash equivalents, securities, claims and receivables (including dividend and interest receivables) owned, and any deferred or prepaid expenses shown as an asset on MIT's books. At least five (5) business days prior to the Exchange Date, the Acquired Fund will provide MIT, for the benefit of the Acquiring Fund, with a list of its assets and a list of its stated liabilities. The Acquired Fund shall have the right to sell any of the securities or other assets shown on the list of assets prior to the Exchange Date but will not, without the prior approval of JHVST, on behalf of the Acquiring Fund, acquire any additional securities other than securities which the Acquiring Fund is permitted to purchase, pursuant to its investment objective and policies or otherwise (taking into consideration its own portfolio composition as of 33 such date). In the event that the Acquired Fund holds any investments that the Acquiring Fund would not be permitted to hold, the Acquired Fund will dispose of such securities prior to the Exchange Date to the extent practicable and to the extent that its shareholders would not be materially affected in an adverse manner by such a disposition. In addition, MIT will prepare and deliver, immediately prior to the Effective Time of the Reorganization, a Statement of Assets and Liabilities of the Acquired Fund, prepared in accordance with GAAP (the "Schedule"), which Schedule shall be certified by the principal accounting officer of the Acquired Fund. All securities to be listed in the Schedule as of the Effective Time of the Reorganization will be owned by the Acquired Fund free and clear of any liens, claims, charges, options and encumbrances, except as indicated in the Schedule and as accepted by JHVST, and, except as so indicated and accepted, none of such securities is or, after the Reorganization as contemplated hereby, will be subject to any restrictions, legal or contractual, on the disposition thereof (including restrictions as to the public offering or sale thereof under the Securities Act) and, except as so indicated and accepted, all such securities are or will be readily marketable. (c) Registration Statement. In connection with the preparation of the Registration Statement, MIT will cooperate with JHVST and will furnish to JHVST the information relating to the Acquired Fund required by the Securities Act and the Regulations to be set forth in the Registration Statement (including the Prospectus and Statement of Additional Information). (d) Cooperation in Effecting Reorganization. MIT agrees to use all reasonable efforts to effectuate the Reorganization and to obtain any necessary regulatory approvals for the Reorganization. (e) Operations in the Ordinary Course. Except as otherwise contemplated by this Plan, MIT with respect to the Acquired Fund shall conduct its business in the ordinary course until the consummation of the Reorganization, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and distributions. (f) Statement of Earnings and Profits. As promptly as practicable, but in any case within 60 days after the Exchange Date, MIT on behalf of the Acquired Fund, shall prepare a statement of the earnings and profits of the Acquired Fund for federal income tax purposes, and of any capital loss carryovers and other items that the Acquiring Fund will succeed to and take into account as a result of Section 381 of the Code. Such statement will be certified by the principal accounting officer of the Acquired Fund. 6. Conditions Precedent to Obligations of MIT on Behalf of the Acquired Fund The obligations of MIT on behalf the Acquired Fund with respect to the consummation of the Reorganization are subject to the satisfaction of the following conditions: (a) Approval by the Acquired Fund's Shareholders. This Plan and the transactions contemplated by the Reorganization shall have been approved by the requisite vote of the shares of the Acquired Fund entitled to vote on the matter ("Acquired Fund Shareholder Approval"). (b) Covenants, Warranties and Representations. JHVST shall have complied with each of its covenants contained herein, each of the representations and warranties contained herein shall be true in all material respects as of the Effective Time of the Reorganization (except as otherwise contemplated herein), and there shall have been no material adverse change (as described in Section 2(i)) in the financial condition, results of operations, business, properties or assets of the Acquiring Fund since December 31, 2003. (c) JHVST on behalf of the Acquiring Fund shall have delivered to MIT on behalf of the Acquired Fund a certificate executed in its name by JHVST's principal accounting officer, in form and substance satisfactory to MIT on behalf of the Acquired Fund and dated as of the Exchange Date, to the effect that the representations and warranties of JHVST on behalf of the Acquiring Fund made in the Plan are true and correct at and as of the Exchange Date, except as may be affected by the transactions contemplated by the Plan. 34 (d) Regulatory Approval. The Registration Statement shall have been declared effective by the Commission and no stop orders under the Securities Act pertaining thereto shall have been issued and all other approvals, registrations, and exemptions under federal and state laws considered to be necessary shall have been obtained (collectively, the "Regulatory Approvals"). (e) Tax Opinion. MIT shall have received the opinion of Dykema Gossett PLLC, dated on or before the Effective Time of the Reorganization, addressed to and in form and substance satisfactory to MIT and JHVST, as to certain of the federal income tax consequences under the Code of the Reorganization insofar as it relates to the Acquired Fund and the Acquiring Fund. For purposes of rendering its opinion, Dykema Gossett PLLC may rely exclusively and without independent verification, as to factual matters, on the statements made in the Plan, the Prospectus and Statement of Additional Information, and on such other written representations as, respectively, the President or Treasurer of MIT and the President or Treasurer of JHVST, will have verified as of the Effective Time of the Reorganization. The opinion will be to the effect that, based on the facts and assumptions stated therein, for federal income tax purposes: (1) the Reorganization will constitute a reorganization within the meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer of all of the assets and liabilities, if any, of the Acquired Fund to the Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain or loss will be recognized by shareholders of the Acquired Fund upon the exchange of such Fund's shares solely for shares of the corresponding Acquiring Fund; (4) the holding period and tax basis of the shares of the Acquiring Fund received by each holder of shares of the Acquired Fund pursuant to the Reorganization will be the same as the holding period and tax basis of the shares of the Acquired Fund held by the shareholder (provided the shares of the Acquired Fund were held as a capital asset on the date of the Reorganization) immediately prior to the Reorganization; and (5) the holding period and tax basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be the same as the holding period and tax basis of those assets to the Acquired Fund immediately prior to the Reorganization. 7. Conditions Precedent to Obligations of JHVST on Behalf of the Acquiring Fund The obligations of JHVST on behalf of the Acquiring Fund with respect to the consummation of the Reorganization are subject to the satisfaction of the following conditions: (a) Approval by the Acquired Fund's Shareholders. The Acquired Fund Shareholder Approval shall have been obtained. (b) Covenants, Warranties and Representations. MIT shall have complied with each of its covenants contained herein, each of the representations and warranties contained herein shall be true in all material respects as of the Effective Time of the Reorganization (except as otherwise contemplated herein), and there shall have been no material adverse change (as described in Section 3(h) in the financial condition, results of operations, business, properties or assets of the Acquired Fund since December 31, 2003. (c) MIT on behalf of the Acquired Fund shall have delivered to JHVST on behalf of the Acquiring Fund a certificate executed in its name by MIT's principal accounting officer, in form and substance satisfactory to JHVST on behalf of the Acquiring Fund and dated as of the Exchange Date, to the effect that the representations and warranties of MIT on behalf of the Acquired Fund made in the Plan are true and correct at and as of the Exchange Date, except as may be affected by the transactions contemplated by the Plan. (d) Portfolio Securities. All securities to be acquired by the Acquiring Fund in the Reorganization shall have been approved for acquisition by the investment adviser (or, at the discretion of such investment adviser, by the subadviser) for the Acquiring Fund as consistent with its investment policies. (e) Regulatory Approval. The Regulatory Approvals shall have been obtained. (e) Distribution of Income and Gains. MIT on behalf of the Acquired Fund shall have distributed to the shareholders of the Acquired Fund, in a distribution or distributions qualifying for the deduction for 35 dividends paid under Section 561 of the Code, all of its investment company taxable income (without regard to the deductions for dividends paid) as defined in Section 852(b)(2) of the Code (determined without regard to Section 852(b)(2)(D) of the Code) for its taxable year ending on the Exchange Date, all of the excess of (i) its interest income excludable from gross income under Section 103(a) of the Code over (ii) its deductions disallowed under Sections 265 and 171(a)(2) of the Code for its taxable year ending on the Exchange Date, and all of its net capital gain as such term is used in Section 852(b)(3) of the Code, after reduction by any capital loss carryforward, for its taxable year ending on the Exchange Date. (f) Tax Opinion. JHVST shall have received the opinion of Dykema Gossett PLLC, dated on or before the Effective Time of the Reorganization, addressed to and in form and substance satisfactory to MIT and JHVST, as to certain of the federal income tax consequences under the Code of the Reorganization insofar as it relates to the Acquired Fund and the Acquiring Fund. For purposes of rendering its opinion, Dykema Gossett PLLC may rely exclusively and without independent verification, as to factual matters, on the statements made in the Plan, the Prospectus and Statement of Additional Information, and on such other written representations as, respectively, the President or Treasurer of MIT and the President or Treasurer of JHVST, will have verified as of the Effective Time of the Reorganization. The opinion will be to the effect that, based on the facts and assumptions stated therein, for federal income tax purposes: (1) the Reorganization will constitute a reorganization within the meaning of Section 368(a)(1) of the Code with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer of all of the assets and liabilities, if any, of the Acquired Fund to the Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain or loss will be recognized by shareholders of the Acquired Fund upon the exchange of such Fund's shares solely for shares of the corresponding Acquiring Fund; (4) the holding period and tax basis of the shares of the Acquiring Fund received by each holder of shares of the Acquired Fund pursuant to the Reorganization will be the same as the holding period and tax basis of the shares of the Acquired Fund held by the shareholder (provided the shares of the Acquired Fund were held as a capital asset on the date of the Reorganization) immediately prior to the Reorganization; and (5) the holding period and tax basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be the same as the holding period and tax basis of those assets to the Acquired Fund immediately prior to the Reorganization. 8. Amendments; Terminations; No Survival of Covenants, Warranties and Representations (a) Amendments. MIT and JHVST may, by an instrument in writing authorized by their respective Boards of Trustees, amend this Plan at any time before or after approval hereof by the shareholders of the Acquired Fund, but after such approval, no amendment shall be made which substantially changes the terms hereof. (b) Waivers. At any time prior to the Effective Time of the Reorganization, each of MIT, on behalf of the Acquired Fund, and JHVST, on behalf of the Acquiring Fund, may by written instrument signed by it (i) waive any inaccuracies in the representations and warranties made to it and such Fund contained herein and (ii) waive compliance with any of the covenants or conditions made for its benefit and the benefit of such Fund contained herein, except that conditions set forth in Sections 6(c) and 7(d) may not be waived. (c) Termination. This Plan may be terminated by the mutual agreement of MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund at any time prior to the Effective Time of the Reorganization. In addition, either party may at its option, at any time prior to the Effective Time of the Reorganization, whether before or after approval of this Plan by the shareholders of the Acquired Fund, without liability on the part of any party hereto, its Trustees, officers or shareholders, terminate this Plan: (i) because of a breach by the other of any material representation, warranty, covenant or agreement contained herein or to be performed prior to the Effective Time of the Reorganization; (ii) because of a material condition herein expressed to be precedent to the obligations of the terminating party which has not been fulfilled and has not been waived by the terminating party; 36 (iii) by resolution of the Board of Trustees of MIT if it should determine in good faith that proceeding with this Plan is not in the best interests of the Acquired Fund, its shareholders and contract owners whose contracts are funded by shares of the Acquired Fund; or (iv) by resolution of the Board of Trustees of JHVST if it should determine in good faith that proceeding with this Plan is not in the best interests of the Acquiring Fund, its shareholders and contract owners whose contracts are funded by shares of the Acquiring Fund. (d) Unless MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund shall otherwise determine by written instrument, this Plan shall terminate without liability as of the close of business on September 1, 2004 if the Effective Time of the Reorganization is not on or prior to such date. (e) Survival. No representations, warranties or covenants in or pursuant to this Plan, except for the provisions of Section 5(f) and Section 9 of this Plan, shall survive the Reorganization. 9. Expenses The expenses of the Reorganization will be borne by the Acquired Fund and the Acquiring Fund, with each Fund bearing one-half of the total expenses. Such expenses include, without limitation, (i) expenses incurred in connection with the entering into and the carrying out of the provisions of this Plan; (ii) expenses associated with the preparation and filing of the Registration Statement (other than any registration fees payable to the Commission in respect of the registration of the Acquiring Fund Shares registered thereby, which shall be payable by the Acquiring Fund); (iii) fees and expenses of preparing and filing such forms as are necessary under any applicable state securities laws in connection with the Reorganization; (iv) postage; (v) printing; (vi) accounting fees; (vii) legal fees and (viii) solicitation costs relating to the Reorganization. 10. Reliance All covenants and agreements made under this Plan shall be deemed to have been material and relied upon by MIT on behalf of the Acquired Fund and JHVST on behalf of the Acquiring Fund notwithstanding any investigation made by such party or on its behalf. 11. Headings; Counterparts; Governing Law; Assignment (a) The section and paragraph headings contained in this Plan are for reference purposes only and shall not affect in any way the meaning or interpretation of this Plan. (b) This Plan may be executed in any number of counterparts, each of which shall be deemed an original. (c) This Plan shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Plan shall bind and inure to the benefit of MIT, the Acquired Fund, JHVST and the Acquiring Fund and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by either party without the written consent of the other party. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Plan. (e) All persons dealing with MIT or JHVST must look solely to the property of MIT or JHVST, respectively, for the enforcement of any claims against MIT or JHVST, as none of the Trustees, officers, agents or shareholders of MIT or JHVST assumes any personal liability for obligations entered into on behalf of MIT or JHVST, respectively. No series of MIT or JHVST shall be liable for claims against, respectively, any other series of MIT or JHVST. 37 IN WITNESS WHEREOF, the undersigned have executed this Plan as of the date first above written. MANUFACTURERS INVESTMENT TRUST on behalf of the Acquired Fund BY: /s/ James D. Gallagher ----------------------------- Name: James D. Gallagher Title: President JOHN HANCOCK VARIABLE SERIES TRUST I on behalf of the Acquiring Fund BY: /s/ Michele G. Van Leer ----------------------------- Name: Michele G. Van Leer Title: Chairman and Chief Executive Officer 38 APPENDIX A THE ACQUIRED FUND: MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE The following discussion sets forth information regarding the performance of the Acquired Fund for the period ended December 31, 2003. There are several ways to evaluate a fund's historical performance. One can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. With respect to all performance information presented, it is important to understand that past performance does not guarantee future results. return and principal fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Performance Table. The following performance table for the Acquired Fund shows two types of total return information: Cumulative and Average Annual Total Returns. A Cumulative Total Return is an expression of a fund's total change in share value in percentage terms over a set period of time--one, five and ten years (or since the fund's inception if less than the applicable period). An Average Annual Total Return takes the fund's cumulative total return for a time period greater than one year and shows what would have happened if the fund had performed at a constant rate each year. The table shows all cumulative and average annual total returns, net of fees and expenses of MIT, but do not reflect the insurance (separate account) expenses (including a possible contingent deferred sales charge) of the variable annuity and variable life products that invest in MIT. If these were included, performance would be lower. Graph--Change in value of $10,000 investment and comparative indices. The following performance graph for the Acquired Fund shows the change in value of a $10,000 investment over the life of the Fund. The Fund's performance is compared with the performance of one or more broad-based securities indices as a "benchmark." All performance information includes the reinvestment of dividends and capital gain distributions, as well as the deduction of ongoing management fees and the Fund's operating expenses. The benchmark used for comparison is unmanaged and includes reinvestment of dividends and capital gains distributions, if any, but does not reflect any fees or expenses. Portfolio Manager's commentary. Following the performance table and graph for the Acquired Fund is a commentary by the portfolio manager regarding the Fund's performance during the period ended December 31, 2003. The views expressed are those of the portfolio manager as of that date and are subject to change based on market and other conditions. Information about the Fund's holdings, asset allocation or country diversification is historical and is no indication of future portfolio composition, which will vary. "MSCI" and "EAFE" are trademarks of Morgan Stanley & Co. Incorporated. The following information regarding the Acquired Fund was included in MIT's Annual Report to Shareholders for 2003. International Index Trust ("Acquired Fund") A-1 International Index Trust ("ACQUIRED FUND") Investment Objective To achieve the approximate aggregate total return of a foreign equity & Policies: market index by attempting to track the performance of the Morgan Stanley Europe Australasia Far East Free Index (the MSCI EAFE Index). The portfolio invests at least 80% of its net assets in (a) the common stocks that are included in the MSCI EAFE Index and (b) securities (which may or may not be included in the MSCI EAFE Index) that MFC believes as a group will behave in a manner similar to the index. Subadviser: MFC Global Investment Management (U.S.A.) Limited Portfolio Managers: Carson Jen and Narayan Ramani Inception Date: May 1, 2000
Change in Value of $10,000 Investment and Comparative Indices [CHART] International Index Trust Series I MSCI EAFE Index ---------------------------------- --------------- Apr. 2000 10,000 10,000 9,784 9,715 Jun. 2000 10,112 10,097 9,704 9,675 9,776 9,761 Sep. 2000 9,320 9,288 9,080 9,071 8,712 8,732 Dec. 2000 9,016 9,045 9,000 9,040 8,318 8,363 Mar. 2001 7,726 7,810 8,294 8,357 7,994 8,069 Jun. 2001 7,686 7,742 7,531 7,602 7,345 7,411 Sep. 2001 6,598 6,662 6,752 6,832 6,963 7,085 Dec. 2001 6,996 7,127 6,610 6,749 6,667 6,796 Mar. 2002 7,037 7,167 7,053 7,219 7,136 7,317 Jun. 2002 6,848 7,029 6,175 6,335 6,142 6,322 Sep. 2002 5,477 5,645 5,756 5,949 6,011 6,220 Dec. 2002 5,796 6,011 5,546 5,760 5,396 5,629 Mar. 2003 5,280 5,522 5,780 6,070 6,097 6,443 Jun. 2003 6,238 6,603 6,355 6,764 6,497 6,928 Sep. 2003 6,671 7,143 7,038 7,589 7,180 7,759 Dec. 2003 7,662 8,365 Performance Table** Average Annual Total Return Cumulative Total Return Since Since Periods Ended December 31, 2003 1 Year Inception Inception MSCI EAFE Index 39.17% -4.64% -16.35% International Index Trust Series I 32.18% -7.00% -23.38% International Index Trust Series II+++ 32.12% 7.25% 14.48% International Index Trust Series III*** 15.57%
+++Series II inception date: January 28, 2002 **Performance does not reflect any insurance related charges. If these charges were reflected, performance would be lower. Past performance does not predict future results. Total return would have been lower had operating expenses not been reduced. ***Series III inception date: September 5, 2003. Portfolio Manager's Commentary Performance: For the year 2003, the International Index Trust Series I returned +32.18%, underperforming the +39.17% return of the MSCI EAFE Index. Environment: All of the MSCI EAFE Index sectors were in the positive territory for 2003. Information Technology was the best performer, followed by Industrials, Materials and Financials, all of which returned high double-digit gains. Energy, Consumer Staples and Utilities were the worst performing sectors. Likewise, most countries in the Index had gains for 2003. Greece was the best performing country, gaining about 67% in value. Sweden, Spain, Germany, New Zealand and Denmark also had high double-digit gains. Finland was the worst performer, followed by the Netherlands. MSCI rebalanced its EAFE Index in May and again in November. The rebalancing resulted in no significant country or sector weight changes. Outlook: In 2003, the European Central Bank cut its benchmark interest rate from 2.75% to 2.0% in June. Similarly, the Bank of England cut its rate from 4.0% to 3.5% in July. A corporate profit recovery is underway in Japan, driven in part through sales growth but largely due to the effects of restructuring. A-2 APPENDIX B THE ACQUIRING FUND: MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE During 2003, the subadviser to the Acquiring Fund was Independence Investment LLC. SSgA Fund Management, Inc. ("SSgA") succeeded Independent Investment LLC as subadviser effective March 29, 2004. The following information regarding the Acquiring Fund appeared in the Acquiring Fund's Annual Report to Shareholders for 2003. B-1 Inception: May 2, 1988 INTERNATIONAL EQUITY INDEX FUND Portfolio Manager: INDEPENDENCE INVESTMENT LLC D. Nolan .. In 2003, the Fund returned 41.99%, underperforming its customized benchmark. .. On November 1st, the Fund's benchmark was changed from a primarily GDP weighted benchmark to a market capitalization weighted benchmark (the MSCI All Country World Free ex-US Index). This index provides broad exposure to both developed and emerging market equities. .. The Fund's investment objective is to track the long-term performance of broad-based equity indices of foreign companies in developed and emerging markets as measured by the MSCI All Country World Free ex-US Index. .. The manager seeks to track the performance of its benchmark by investing in a representative sample of issues selected through proprietary quantitative techniques. Issues are selected to best match the risk characteristics of the index, including country and sector exposures. [CHART] 12/31/1993 10,000.00 10,000.00 1/31/1994 13,320.64 14,421.38 2/28/1994 13,165.42 14,383.89 3/31/1994 12,478.86 13,766.82 4/29/1994 12,713.92 14,354.66 5/31/1994 12,862.54 14,275.71 6/30/1994 12,530.95 14,481.28 7/29/1994 12,819.11 14,623.20 8/31/1994 13,412.54 14,972.69 9/30/1994 13,133.71 14,504.05 10/31/1994 13,396.96 14,989.93 11/30/1994 12,520.14 14,273.41 12/30/1994 12,401.68 14,366.19 1/31/1995 11,708.88 13,817.40 2/28/1995 11,908.32 13,781.48 3/31/1995 12,340.79 14,645.58 4/28/1995 12,712.55 15,200.64 5/31/1995 12,972.79 15,022.80 6/30/1995 12,847.88 14,762.90 7/31/1995 13,561.39 15,685.58 8/31/1995 13,175.93 15,091.10 9/29/1995 13,362.66 15,389.90 10/31/1995 13,130.99 14,980.53 11/30/1995 13,191.91 15,401.48 12/29/1995 13,395.71 16,025.24 1/31/1996 13,606.81 16,094.15 2/29/1996 13,761.02 16,152.09 3/29/1996 13,892.48 16,499.36 4/30/1996 14,407.05 16,982.79 5/31/1996 14,260.73 16,673.71 6/28/1996 14,292.36 16,772.08 7/31/1996 13,686.10 16,285.69 8/30/1996 13,793.59 16,324.78 9/30/1996 14,051.46 16,762.28 10/31/1996 13,964.56 16,594.66 11/29/1996 14,589.37 17,258.44 12/31/1996 14,626.33 17,040.99 1/31/1997 14,373.63 16,447.96 2/28/1997 14,427.57 16,721.00 3/31/1997 14,159.30 16,786.21 4/30/1997 14,260.03 16,878.53 5/30/1997 15,461.21 17,980.70 6/30/1997 16,261.79 18,976.83 7/31/1997 16,773.41 19,288.05 8/29/1997 14,945.68 17,851.09 9/30/1997 16,026.08 18,854.32 10/31/1997 13,854.46 17,410.08 11/28/1997 13,849.83 17,235.98 12/31/1997 13,891.23 17,391.11 1/31/1998 13,901.32 18,191.10 2/27/1998 14,968.54 19,362.60 3/31/1998 15,575.41 19,962.84 4/30/1998 15,991.94 20,124.54 5/29/1998 16,086.96 20,414.34 6/30/1998 16,281.99 20,610.31 7/31/1998 16,414.69 20,884.43 8/31/1998 14,326.78 18,138.13 9/30/1998 13,881.02 17,637.52 10/30/1998 15,383.40 19,605.86 11/30/1998 16,129.04 20,627.33 12/31/1998 16,783.26 21,462.74 1/29/1999 16,820.14 21,490.64 2/26/1999 16,250.77 20,820.13 3/31/1999 17,103.05 21,921.51 4/30/1999 17,757.57 22,807.14 5/28/1999 16,897.58 21,616.61 6/30/1999 17,768.81 22,708.25 7/30/1999 18,185.56 23,273.68 8/31/1999 18,351.79 23,436.60 9/30/1999 18,481.01 23,724.87 10/29/1999 19,100.24 24,514.91 11/30/1999 19,943.20 25,529.83 12/31/1999 21,964.24 28,090.47 1/31/2000 20,675.58 26,714.03 2/29/2000 21,380.17 27,641.01 3/31/2000 21,956.62 28,398.37 4/28/2000 20,545.20 26,566.68 5/31/2000 20,148.57 25,929.08 6/30/2000 20,856.49 27,041.44 7/31/2000 19,865.47 25,683.96 8/31/2000 20,057.16 25,956.21 9/29/2000 19,086.01 24,648.01 10/31/2000 18,456.28 23,839.56 11/30/2000 17,652.71 22,776.31 12/31/2000 18,138.35 23,336.61 1/31/2001 18,503.20 23,852.35 2/28/2001 17,218.76 22,230.39 3/30/2001 16,015.75 20,729.84 4/30/2001 17,113.36 22,068.99 5/31/2001 16,571.05 21,395.88 6/30/2001 16,002.68 20,636.33 7/31/2001 15,594.05 20,097.72 8/31/2001 15,226.40 19,599.30 9/28/2001 13,458.20 17,345.38 10/31/2001 13,786.89 17,815.44 11/30/2001 14,416.76 18,597.54 12/31/2001 14,456.93 18,664.49 1/31/2002 13,771.57 17,796.59 2/28/2002 13,950.25 17,983.45 3/29/2002 14,793.86 18,994.12 4/30/2002 14,910.47 19,233.45 5/31/2002 15,106.58 19,562.34 6/28/2002 14,514.59 18,773.98 7/31/2002 13,088.04 16,894.70 8/31/2002 13,076.08 16,909.91 9/28/2002 11,585.10 14,970.34 10/31/2002 12,027.79 15,627.54 11/30/2002 12,663.02 16,460.49 12/31/2002 12,261.97 15,937.04 1/31/2003 8,991.13 11,630.86 2/28/2003 8,818.76 11,404.06 3/29/2003 8,574.05 11,074.48 4/30/2003 9,388.30 12,148.71 5/31/2003 9,962.63 12,948.09 6/28/2003 10,329.08 13,427.17 7/31/2003 10,636.48 13,872.95 8/31/2003 11,017.53 14,357.12 9/28/2003 11,316.09 14,767.73 10/31/2003 12,005.35 15,758.65 11/30/2003 12,268.41 16,102.18 12/31/2003 13,181.59 17,330.78 MORNINGSTAR CATEGORY+: .. Foreign Large Blend MORNINGSTAR RISK+: .. Average (VL/VUL) .. Average (VA) MORNINGSTAR RATING+: .. (VL/VUL) .. (VA) TOP TEN HOLDINGS (as of December 31, 2003)
% of Assets BP Amoco plc 2.1% Vodafone AirTouch plc 1.9% HSBC Holdings plc 1.9% GlaxoSmithKline plc 1.5% Total Fina SA 1.5% Royal Dutch Petroleum Co. 1.4% Novartis AG 1.2% Nestle SA 1.1% Toyota Motor Corp. 1.0% Nokia Oyj 1.0%
AVERAGE ANNUAL TOTAL RETURNS*
International International Equity Equity Index Fund Index Benchmark(1) ----------------- -------------------- 1 Year 41.99% 44.57% 3 Years -1.36 -0.43 5 Years 0.74 1.43 10 Years 2.80 5.65
DIVERSIFICATION BY REGION AND COUNTRY(3) (as of December 31, 2003)
% of % of Assets Assets Europe (excluding U.K.) 38.4% Emerging Markets 6.4% United Kingdom (U.K.) 22.3% Canada 5.0% Japan 18.5% United States 2.7% Pacific Basin (excluding Japan) 6.8% DIVERSIFICATION BY REGION(4) Developed Markets 91% Emerging Markets 9%
(1)The International Equity Benchmark represents the MSCI EAFE from May 1988 to April 1998 and then MSCI EAFE GDP weighted from May 1998 to June 1999 and then 90% MSCI EAFE GDP/10% MSCI Emerging Markets Free from July 1999 to October 2003 and now the MSCI All Country World Free excluding U.S. from November 2003 to present. * Total returns are for the period ended December 31, 2003. Returns represent past performance, assume reinvestment of all distributions, and are not indicative of future performance. Investment returns and principal value of fund shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. The performance of the fund on this page is reported net of Trust level charges (i.e. investment management fees and operating expenses). It does not reflect expense and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product prospectus. There are special risks associated with international investing, including currency fluctuations, political and economic instability, foreign taxation and different accounting standards, as outlined in the current prospectus. Performance would be lower if expenses and charges of the separate accounts and products were reflected. + Source: MorningStar, Inc. Data as of 12/31/03. VL represents Variable Life subaccounts, VUL represents Variable Universal Life subaccounts and VA represents Variable Annuity subaccounts Hancock. VL/VUL subaccounts were rated against 367 VL/VUL subaccounts and 570 VA subaccounts in the Morningstar Foreign Large Blend category. This represents the Morningstar 3 year rating. (3)Calculations based upon country in which security is traded (listed). (4)Calculations based upon country in which security is domiciled. THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.)] [THE MANUFACTURERS LIFE INSURANCE COMPANY OF NEW YORK] VOTING INSTRUCTIONS FORM Voting pursuant to these instructions will be as specified. If no specification is made as to an item, voting will be for such item. A voting instruction form is provided for the International Index Trust in which your contract values were invested as of April 27, 2004. Please sign, date and return the voting instruction form in the enclosed postage-paid envelope. Voting instructions must be received by June 17, 2004 to be voted at the Meeting to be held on June 18, 2004. International Index Trust These voting instructions are solicited by [The Manufacturers Life Insurance Company (U.S.A.)] [The Manufacturers Life Insurance Company of New York] in connection with a solicitation of proxies by the Board of Trustees of Manufacturers Investment Trust. The undersigned hereby instructs [The Manufacturers Life Insurance Company (U.S.A.)] [The Manufacturers Life Insurance Company of New York] to vote the shares of Manufacturers Investment Trust (the "Trust") attributable to his or her variable annuity or variable life contract at the Special Meeting of Shareholders to be held at 73 Tremont Street, Boston, Massachusetts 02108 at 10:00 a.m., Boston time, June 18, 2004, and any adjournments thereof, as indicated below. Date: _____________, 2004 Please sign in box below: If a contract is held jointly, each contract owner should sign. If only one signs, his or her signature will be binding. If the contract owner is a corporation, the President or a Vice President should sign in his or her own name, indicating title. If the contract owner is a partnership, a partner should sign in his or her own name, indicating that he or she is a "Partner." If the contract owner is a trust, the trustee should sign in his or her own name, indicating that he or she is a "Trustee." - ------------------------------------------- Signature(s), Title(s), if applicable Indicate your vote below by filling in the appropriate boxes using blue or black ink or a number 2 pencil. Please do not use fine point pens. - ------------------------------------------------ This voting instructions form, if properly executed, will be voted in the manner directed by the contract owner. If no direction is made, this voting instructions form will be voted "For" all proposals. Please refer to the Proxy Statement/Prospectus for a discussion of the proposals. For Against Abstain 1. Approval of Agreement and Plan of Reorganization. [_] [_] [_] 2. To transact such other business as may properly come before the Meeting. - ------------------------------------------------ Please mark your Voting Instructions Form, date and sign it on the reverse side, and return it promptly in the accompanying envelope which requires no postage if mailed in the United States. PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION JOHN HANCOCK VARIABLE SERIES TRUST I 197 Clarendon Street Boston, Massachusetts 02117 STATEMENT OF ADDITIONAL INFORMATION Dated: May 18, 2004 This Statement of Additional Information is not a prospectus but should be read in conjunction with the Proxy Statement/Prospectus dated May 18, 2004 for the Special Meeting of Shareholders of the International Index Trust, a separate series of the Manufacturers Investment Trust ("MIT"), to be held on June 18, 2004. The Proxy Statement/Prospectus describes the proposed reorganization providing for the transfer of all of the assets and liabilities of the MIT International Index Trust to, and in exchange for Series I and Series II shares of, the International Equity Index Fund, a separate series of the John Hancock Variable Series Trust I ("JHVST"). A copy of the Proxy Statement/Prospectus may be obtained without charge by writing to JHVST at the address above or by calling toll free (800) 576-2227. This Statement of Additional Information incorporates by reference the following documents (or designated portions thereof) that accompany it and have been filed with the Securities and Exchange Commission (SEC): (1) The financial statements of the International Equity Index Fund of JHVST appearing in its Annual Report to Shareholders for the year ended December 31, 2003, and the report of Ernst & Young LLP, independent auditors, appearing therein; and (2) The financial statements of MIT appearing in its Annual Report to Shareholders for the year ended December 31, 2003, and the report of PricewaterhouseCoopers, LLP, independent accountants, appearing therein. TABLE OF CONTENTS Statement of Additional Information of JHVST, dated May 1, 2004. MIT International Index Trust and JHVST International Equity Index Fund Pro Forma Financial Statements Pro Forma Combining Statement of Assets and Liabilities -- December 31, 2003 (Unaudited) Pro Forma Combining Statement of Operations -- For the Year Ended December 31, 2003 (Unaudited) Pro Forma Combining Schedule of Portfolio Investments -- December 31, 2003 (Unaudited) Notes to Pro Forma Financial Statements (Unaudited) JOHN HANCOCK VARIABLE SERIES TRUST I STATEMENT OF ADDITIONAL INFORMATION May 1, 2004 This Statement of Additional Information (sometimes referred to herein as the "SAI") is not a prospectus. It is intended that this Statement of Additional Information be read in conjunction with the Prospectus of John Hancock Variable Series Trust I, dated May 1, 2004. A copy of the Prospectus may be obtained from John Hancock Variable Series Trust I, John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, telephone number 1-800-REAL LIFE. This Statement of Additional Information relates to thirty of the Trust's current "Funds." The Trust's Financial Statements and Investment Performance Information The Trust's financial statements appearing in its Annual Report to contract holders and the report of Ernst & Young LLP, independent auditors of the Trust, which appears therein, are incorporated by reference into this Statement of Additional Information. The information about the total investment returns achieved by the Trust's various Funds, is also incorporated herein by reference. No other portions of the Annual Report are incorporated by reference. A free copy of the Annual Report to contract holders may be obtained by writing to the address or calling the number above. TABLE OF CONTENTS Page in this Statement of Additional Information ------------ A. What Is the Trust?..................................................4 B. The Trust's Business History........................................4 C. The Funds' Investment Activities and Their Risks....................5 1. Investing in Money Market Instruments..........................5 2. Investing in Other Fixed Income Obligations....................6 3. Investing in Equity Securities.................................7 4. Investing in Real Estate Securities............................8 5. Investing in Foreign Securities................................9 6. Techniques and Instruments for Managing Currency Exposure......................................................10 7. Reallocating a Fund's Assets Among Asset Classes..............12 8. Adopting a Temporary Defensive Strategy.......................12 9. Investing With an Index-Based Objective.......................12 10. Investing on a Non-Diversified Basis..........................14 11. Using Options.................................................14 12. Using Options on Securities...................................16 13. Using Financial Futures Contracts, Options on Such Contracts and Options on Stock Indexes........................17 14. Using "Swaps," "Caps," "Floors," and "Collars"................20 15. Investing In Other Investment Companies.......................22 16. Purchasing "When Issued" Securities and Forward Commitments...................................................23 17. Short-Term Trading............................................23 18. Entering Into Repurchase Agreements...........................23 19. Participating in Joint Trading Accounts.......................24 20. Lending of Fund Securities....................................24 21. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls"................................................24 22. Investing in Rule 144A Securities, Section 4(2) Commercial Paper and Illiquid Securities......................25 23. Investing in Preferred Stock, Convertible Securities and Warrants..................................................25 24. Investing in Initial Public Offerings ("Ipos")................25 D. The Funds' Fundamental Investment Restrictions.....................25 E. Board of Trustees and Officers of the Trust........................27 F. Investment Advisory Arrangements...................................30 1. The Trust's Investment Advisory Arrangements With John Hancock.......................................................30 2. The Trust's Arrangements With Subadvisers.....................32 3. Dollar Amounts of Advisory Fees, Subadvisory Fees, and Expense Reimbursements........................................36 4. Basis of Trustee Approval of Continuance of Advisory Arrangements..................................................37 G. Arrangements With Other Service Providers..........................42 1. Underwriting and Indemnity Agreement..........................42 2. Custody of the Trust's Assets.................................42 3. Subadministration Agreement With State Street Bank............42 4. Independent Auditors..........................................42 5. Distribution of Series I and Series II shares.................43 H. Portfolio Transactions and Brokerage Allocation....................44 I. Codes of Ethics....................................................48 J. Features of the Trust's Shares.....................................48 2 K. Shareholder Meetings and Voting Rights.............................49 L. Sales and Redemptions of Fund Shares...............................50 M. Computing the Funds' Net Asset Value...............................51 N. Taxes..............................................................52 O. Information About Fund Performance.................................52 P. Legal Matters......................................................53 Q. Reports to Contractholders.........................................53 Appendix A - Corporate Bond Ratings.....................................54 Appendix B - Proxy Voting Policies and Procedures.......................56 3 A. WHAT IS THE TRUST? John Hancock Variable Series Trust I (the "Trust"), and each of the Funds of the Trust, is an open-end management investment company. With the exception of the Real Estate Equity, Health Sciences, Financial Services and Global Bond Funds, each of the Funds is a "diversified" Fund within the meaning of the Investment Company Act of 1940 (the "Investment Company Act"). NAV shares of the Trust are currently sold to John Hancock Variable Life Accounts U, V, and S to support variable life insurance policies issued by John Hancock Variable Life Insurance Company ("JHVLICO"); John Hancock Variable Annuity Accounts H, U, and V to support variable annuity contracts issued by John Hancock Life Insurance Company ("John Hancock"); John Hancock Variable Annuity Accounts I and JF to support variable annuity contracts issued by JHVLICO; and John Hancock Variable Life Account UV to support variable life insurance policies issued by John Hancock. It is anticipated that, in the future, Trust shares may be sold to other separate investment accounts of JHVLICO and John Hancock and to separate investment accounts of other insurance companies (which may or may not be affiliated with John Hancock). Each of these separate investment accounts is hereinafter referred to as a "John Hancock Separate Account." Because the John Hancock Separate Accounts currently own all of the Trust's NAV shares, those Separate Accounts (or John Hancock and JHVLICO) may be deemed to control the Trust. John Hancock and JHVLICO, in turn, are both directly or indirectly controlled by John Hancock Financial Services, Inc., a publicly-traded holding company. The Trust issues a separate series of NAV shares of beneficial interest for each Fund. Each share issued with respect to a Fund has a pro rata interest in the net assets of that Fund. The assets of each Fund are charged with the liabilities of that Fund and a proportionate share of the general liabilities of the Trust. Series I and Series II shares of the Trust serve as the underlying investment medium for sums invested in variable contracts issued by: - The Manufacturers Life Insurance Company of New York ("Manulife NewYork"), formerly First North American Life Assurance Company, a New York stock life insurance company that is a wholly owned subsidiary of Manufacturers USA. Manulife New York's corporate offices are located at 100 Summit Lake Drive, Second Floor, Valhalla, New York 10595. - The Manufacturers Life Insurance Company (U.S.A.) ("Manufacturers USA"), a stock life insurance company organized under the laws of Pennsylvania and redomesticiated under the laws of Michigan. Manufacturers USA is an indirect wholly owned subsidiary of Manulife Financial Corporation and is located at 200 Bloor Street in Toronto, Canada, M4W 1E5. Manulife New York and Manufacturers USA hold Series I or Series II shares attributable to variable contracts in their respective separate accounts. Series I and Series II shares of the Trust may be used for other purposes in the future, such as funding annuity contracts issued by other insurance companies. NAV, Series I and Series II shares are not offered directly to, and may not be purchased directly by, members of the public. B. THE TRUST'S BUSINESS HISTORY The Trust is, in part, a successor to three Separate Accounts of JHVLICO, as well as the six Separate Accounts of John Hancock described below. On March 28, 1986, all of the investment assets and related liabilities of the Variable Life Stock, Bond, and Money Market Accounts were transferred to what are now the Growth & Income, Active Bond and Money Market Funds of the Trust, respectively, in exchange for shares of those Funds. On February 20, 1987, all of the investment assets and related liabilities of six Variable Annuity Stock, Bond and Money Market Accounts were transferred to what are now the Growth & Income, Active Bond and Money Market Funds of the Trust, respectively, in exchange for shares of these Funds. The Trust itself was incorporated on September 23, 1985, under the laws of the State of Maryland and was reorganized as a Massachusetts business trust effective April 29, 1988. Over the years, several Funds have been re-named as follows: 4 Year of Current Fund Name Prior Name(s) Change - -------------------------- --------------------------- ------- Active Bond Sovereign Bond 2000 Bond 1996 Earnings Growth Multi Cap Growth 2003 Mid Cap Growth 2002 Fundamental Growth Fundamental Mid Cap Growth 2000 Fundamental Value Large/Mid Cap Value 2002 Fundamental Value B Large Cap Value CORE/SM/ 2004 Global Bond Strategic Bond 1999 Growth & Income Stock 1996 International Equity Index International Equities 1998 International 1995 Global 1994 Large Cap Growth Select Stock 1996 Aggressive Stock 1994 Large Cap Growth B Large Cap Aggressive Growth 2004 Managed Total Return 1994 Mid Cap Growth Small/Mid Cap Growth 2004 Diversified Mid Cap Growth 1999 Special Opportunities 1998 Mid Cap Value B Small/Mid Cap CORE/SM/ 2004 Overseas Equity Global Balanced 2003 International Balanced 2000 Overseas Equity B International Opportunities 2004 Overseas Equity C Emerging Markets Equity 2004 Short-Term Bond Short-Term U.S. Government 1998 Small Cap Emerging Growth Small Cap Equity 2003 Small Cap Value 2000 Small Cap Value Small/Mid Cap Value 2001 C. THE FUNDS' INVESTMENT ACTIVITIES AND THEIR RISKS 1. Investing in Money Market Instruments The Money Market Fund invests exclusively in "money market" instruments; all the other Funds may invest in these instruments to some extent. These are high quality, short-term fixed income obligations. Because of their nature, money market 5 instruments generally do not carry significant risks of loss, but do have some credit and interest rate risk. The principal risk is that a Fund's return on money market instruments will be less than it would have earned on a riskier investment. 2. Investing in Other Fixed Income Obligations a. Overview: The following Funds invest primarily in non-money market fixed income (i.e., "debt") securities: the Short-Term Bond, Bond Index, Total Return Bond, Active Bond, High Yield Bond and Global Bond Funds. The Managed Fund can vary its holdings of these securities within a broad range and the Financial Industries Fund may have a modest exposure in these securities from time to time. The other Funds may also invest in non-money market debt to a limited extent from time to time. Various types of risk associated with these securities are discussed in the balance of this Section 2. b. Interest rate risk: In general, debt securities with longer maturities than money market instruments have exposure to interest rate risk. Changes in generally prevailing market interest rates alter a debt security's market value and introduce volatility into the rate of return of a Fund that invests in such securities. When prevailing interest rates go up, the market value of debt securities tends to go down and vice versa. This sensitivity of the market value of a debt security to changes in interest rates is generally related to the "duration" of the instrument. The market value of a shorter-term fixed income security is generally less sensitive to interest rate moves than that of a longer-term security. For example, the interest rate risk of the Short-Term Bond Fund, although moderate, is below that of traditional intermediate or long-term bond portfolios. c. Credit risk: The value of a fixed income security may also change as a result of market perceptions regarding its credit risk: i.e., the ability of the borrower to repay its debts. The market value of a fixed income security can fall when the market perceives the borrower to be less credit worthy. Conversely, the market value of a fixed income security can increase due to its borrower being perceived as financially stronger. All Funds that invest in debt securities, including money market securities, may have some exposure to credit risk. Even some U.S. Government obligations have a degree of credit risk. "U.S. Government obligations" are bills, certificates of indebtedness, notes and bonds issued or guaranteed as to principal or interest by the United States or by agencies or authorities controlled or supervised by and acting as instrumentalities of the U.S. Government and established under the authority granted by Congress. Some obligations of U.S. Government agencies, authorities, and other instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the Treasury; and others only by the credit of the issuing agency, authority, or other instrumentality. These latter types of obligations, therefore, do have a degree of credit risk. U.S. Government obligations are used most in the Bond Index, Active Bond, and Global Bond Funds. All of the other Funds may also invest in U.S. Government obligations to some extent. Securities having one of the four highest rating categories for debt securities as defined by Moody's Investors Services, Inc. (Aaa, Aa, A, or Baa) or Standard and Poor's Corporation (AAA, AA, A, or BBB) or, if unrated, determined to be of comparable quality by the subadviser, are referred to as "investment grade." The meanings of such ratings are set forth in Appendix A to this Statement of Additional Information. Lower-rated bonds have more credit risk than higher rated bonds. d. Risk of lower-quality instruments: High-yield bonds (or "junk" bonds) are debt securities rated below "investment grade" as defined above. The value of these lower rated securities generally is more subject to credit risk than is the case for higher rated securities, and their values tend to respond more to changes in interest rates or changes in market perceptions regarding their credit risk. Investments in companies issuing high yield securities are considered to be more speculative than higher quality instruments. As such, these securities typically pay a higher interest rate than investment grade securities. Issuers of high yield securities are typically in weak financial health, and their ability to pay back principal and interest on the bonds they issue is uncertain. Some of these issuers may be in default or bankruptcy. Compared with issuers of investment-grade bonds, they are more likely to encounter financial difficulties and to be materially affected by these difficulties when they do encounter them. High yield bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectations of adverse news. These debt securities may also have less liquid markets than higher rated securities. Judgment plays a greater role in valuing high yield securities than in the case of other securities for which more extensive quotations and last-sale information are available. Adverse publicity and changing investor perceptions may affect the ability of outside pricing services used by a Fund to value its portfolio securities, and the ability of the Fund to dispose of its lower-rated bonds. 6 Past experience may not provide an accurate indication of future performance of high yield securities, especially during periods of economic recession. The market prices of high yield securities may decline significantly in periods of general economic difficulty, which may follow periods of rising interest rates. During an economic downturn, the ability of issuers of lower-rated debt to service their payment obligations, meet projected goals, or obtain additional financing may be impaired. In some cases, a Fund may find it necessary, at its own expense or in conjunction with others, to pursue litigation or otherwise exercise its rights as a security holder to seek to protect the interests of security holders, if it determines this to be in the interest of Fund investors. All Funds that invest in debt securities (other than the Money Market Fund) may at times have some exposure to high yield securities. The High Yield Bond Fund invests primarily in these securities. The only other Fund most likely to invest a significant portion of its assets in high yield securities is the Active Bond Fund. The Managed, Total Return Bond, Short-Term Bond and Global Bond Funds may also invest in high yield securities to some extent. In contrast, the Bond Index Fund will not invest in debt securities that are not at least investment grade at the time of purchase, but could end up holding high yield securities if downgraded to below investment graded after already having been purchased for the Fund. Although not customarily referred to as "high yield" securities or "junk bonds," debt securities that fall in the lowest rating within the investment grade category are considered medium grade securities that have some speculative characteristics. Accordingly, to a lesser degree, they may present the same risks discussed above with respect to high yield securities. The considerations discussed above for lower-rated debt securities also are applicable to lower quality unrated debt instruments of all types, including loans and other direct indebtedness of businesses with poor credit standing. Unrated debt instruments are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. e. Prepayment/Call risk: Prepayment risk is the risk that the obligor on a debt security may repay or "call" the debt before it is due. Most mortgage backed securities, asset backed securities, other public bond debt securities and 144A securities that a Fund might own are exposed to this risk. U.S. Government securities typically have minimal exposure to this risk. Prepayment/call is most likely to occur when interest rates have declined and a borrower can refinance the debt at a lower interest rate level. Generally, a Fund reinvests the proceeds resulting from prepayments in a lower yielding instrument. This results in a decrease in the Fund's current yield. The values of securities that are subject to prepayment/call risk also tend to increase less in response to declining interest rates and decrease more in response to increasing interest rates than would the value of otherwise similar securities that do not have prepayment or "call" features. All Funds that invest in debt securities may at times have some exposure to prepayment/call risk. The Funds most likely to invest a significant portion of their assets in debt securities with prepayment/call features are the Managed, Total Return Bond, Short-Term Bond, Bond Index, Active Bond, High Yield Bond and Global Bond Funds. f. Risks of "zero coupon" instruments: All of the Funds may, in varying degrees, invest in debt instruments that provide for payment of interest at the maturity date of the instrument (or payment of interest in the form of additional securities), rather than payment of interest in cash periodically over the life of the instrument. The values of such instruments tend to respond more to changes in interest rates than do otherwise comparable debt obligations that provide for periodic interest payments. The Funds most likely to invest a significant amount of their assets in instruments that are subject to this volatility risk are the Managed, Total Return Bond, Short-Term Bond, Bond Index, Active Bond, High Yield Bond and Global Bond Funds. However, all Funds that invest in debt securities may at times have some exposure to this risk. 3. Investing in Equity Securities a. Overview: All of the Funds intend to invest to some degree in common stock or other equity securities, except for the Short-Term Bond, Bond Index, and Money Market Funds. All Equity, Sector and International/Global Equity Funds may invest in equity securities and are expected to make such securities their primary investment. The Managed Fund invests a substantial portion of its assets in equity securities, but also invests a substantial amount of its assets in debt obligations. The Active Bond, Total Return Bond, Global Bond and High Yield Bond Funds will invest in equity securities only to a limited extent and will invest primarily in debt obligations. General risks of investing in equity securities are discussed in the balance of this Section 3. b. Equity risk: Investments in common stock or other equity securities historically have offered a higher rate of return than money market instruments or longer term debt securities. However, the risk associated with equity securities also tend to be higher, because the investment performance of equity securities depends upon factors which are difficult to predict. The fundamental risk associated with any equity portfolio is the risk that the value of the investments it holds might decrease in value. Equity security 7 values may fluctuate in response to the activities of an individual company or in response to general market, interest rate, and/or economic conditions. c. Market capitalization risk: One indication of the relative risk of a common stock investment is the size of the company, which is typically defined by reference to its "market capitalization." Market capitalization is computed by multiplying the current market price of a share of the company's stock by the total number of its shares outstanding. Investing in larger capitalization companies generally involves a lesser degree of risk than investing in smaller capitalization companies. Conversely, investing in the equity securities of smaller companies generally involves greater risks and potential rewards than investing in larger, more established companies. Small capitalization companies, in particular, often have limited product lines, markets or financial resources, and they may depend upon a small group of relatively inexperienced managers. Investments in such companies can be both more volatile and more speculative. These securities may have limited marketability and are subject to more abrupt or erratic market movements than securities of larger companies or the market in general. The U.S. equity securities of the Equity Index, Fundamental Growth, Large Cap Value, Large Cap Growth, Large Cap Growth B and Earnings Growth Funds are generally expected to represent primarily companies that qualify as large cap issuers. These Funds also may invest in the equity securities of companies that qualify as small and mid cap issuers. The U.S. equity securities of the Growth & Income, Fundamental Value, Fundamental Value B and Managed Funds are generally expected to represent primarily large and mid cap issuers. These Funds also may invest in the equity securities of companies that qualify as small cap issuers. The U.S. equity securities of the Mid Cap Value, Mid Cap Value B and Mid Cap Growth Funds are generally expected to represent primarily mid cap issuers. The Fund also may invest in the equity securities of companies that qualify as small cap issuers and, to a lesser extent, in the equity securities of companies that qualify as large cap issuers. The U.S. equity securities of the Small Cap Emerging Growth, Small Cap Growth and Small Cap Value Funds are generally expected to represent primarily companies that qualify as small cap issuers. Although these Funds also may invest significant amounts in the equity securities of companies that qualify as mid cap issuers, it is expected that they would rarely invest in the equity securities of companies that qualify only as large cap issuers. The Real Estate Equity, Health Sciences and Financial Industries Funds have broad latitude to invest in companies of any size, depending on the market capitalization of the respective sectors covered by those Funds. Three capitalization levels are currently used by the Trust for non-U.S. equities: large, medium ("mid"), and small. The following capitalization ranges are used by the International Equity Index Fund, Overseas Equity Fund, Overseas Equity B Fund and Overseas Equity C Funds: . Large cap: Companies having a capitalization greater than $5 billion . Mid cap: Companies having a capitalization between $1 billion and $5 billion . Small cap: Companies having a capitalization less than $1 billion The non-U.S. equity securities of the International Equity Index, Overseas Equity, Overseas Equity B and Overseas Equity C Funds are generally expected to represent primarily non-U.S. companies that qualify as large cap issuers. These Funds also may invest in the equity securities of non-U.S. companies that qualify as mid and small cap issuers. 4. Investing in Real Estate Securities a. Overview: The Real Estate Equity Fund invests primarily in companies with activities related to the real estate industry, such as real estate investment trusts ("REITs") that own commercial and multifamily residential real estate, real estate operating companies ("REOCs") that derive the majority of their revenue, income or asset value from real estate and other companies engaged in non-real estate businesses but whose real estate holdings are significant in relation to the market value of their common stock. The securities purchased will be principally common stock (and securities convertible into or with rights to purchase common stock) but a portion of the Fund may be invested in preferred stock. The Fund may also invest in commercial mortgage securities (debt obligations secured by commercial property), collateralized mortgage obligations (mortgage pass through securities secured by commercial mortgage pools) and master limited partnerships from time to time, but does not do so on the date of this Statement of Additional Information. 8 In addition to the Real Estate Equity Fund, all of the other Funds may have some exposure to real estate risks through investments in companies engaged in real estate related businesses or investments in debt instruments secured by real estate or interests in real estate. b. Risks of real estate securities: Generally speaking, real estate securities may be affected by risks similar to those resulting from the direct ownership of real estate, as well as by market risks due to changes in interest rates and by the overall volatility of the equity markets. The market value of shares in equity real estate investment trusts and commercial property companies, in particular, is heavily dependent upon the value of their underlying properties. Overbuilding, declines in local or regional economic conditions, financial difficulties on the part of major tenants and increases in real estate taxes and operating expenses all could decrease the value of the real estate investments. 5. Investing in Foreign Securities a. Overview: Investments in foreign securities may be made in a foreign-denominated security, or in the form of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") or other U.S. dollar denominated securities representing underlying shares of foreign securities. ADRs, EDRs, GDRs and other securities representing underlying shares of foreign securities may not necessarily be denominated in the same currency as the securities into which they may be converted, but rather in the currency of the market in which they are traded. ADRs are receipts, typically issued by an American bank or trust company, which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe by banks or depositories which evidence a similar ownership arrangement. GDRs are receipts issued in two or more markets by banks or depositaries which evidence a similar ownership arrangement. Generally, ADRs are designed for use in U.S. securities markets, EDRs for use in European securities markets, and GDRs for use in multiple securities markets. Investments in debt securities issued by foreign issuers may be made in foreign-denominated debt instruments or in the form of U.S. dollar denominated debt securities issued by foreign issuers and publicly traded in the United States ("Yankees") or in Europe ("Eurobonds"). The International Equity Index Fund invests primarily in foreign securities, including foreign-denominated securities. The Health Sciences, Overseas Equity, Overseas Equity B, Overseas Equity C and Global Bond Funds invest a significant portion of their assets in foreign securities, including foreign-denominated securities. To a lesser extent, the Large Cap Value, Earnings Growth, Mid Cap Value, Mid Cap Value B, Small Cap Emerging Growth, Small Cap Growth, Real Estate Equity, Financial Industries, Managed, and High Yield Bond Funds may also invest in foreign securities, and all of these Funds excluding Earnings Growth may invest in foreign-denominated securities. Funds investing in equity securities may also invest in ADRs and other U.S. dollar denominated foreign securities. Funds investing in debt securities may also invest in foreign debt securities denominated in U.S. dollars (i.e., Yankees and Eurobonds). Risks of investing in foreign securities are discussed in the paragraphs that follow: b. Currency risks: When a Fund buys foreign-issued securities, it usually must pay for those securities in the local currency. Therefore, the Fund must convert funds into the local currency to the extent necessary for this purpose. Similarly, when a Fund sells a foreign security, it may receive payment in the local currency. Therefore, if the Fund does not wish to continue to hold that currency, it must enter into a transaction disposing of it. In these ways, therefore, a Fund may temporarily hold foreign currency in order to facilitate the purchase and sale of foreign securities. This exposes the fund to the risk that the foreign currency's value could, while the Fund was temporarily holding that currency, decline relative to the U.S. dollar. This could result in a loss to the Fund, because the Fund's assets and shares are valued in U.S. dollars. On the other hand, the Fund could experience gains if the foreign currency's value, relative to the U.S. dollar, increases during the period when the Fund holds that currency. More fundamentally, however, because the Fund values its assets and shares in U.S. dollars, the Fund's gains and/or losses on investments that are denominated or traded in foreign currencies will depend in part on changes in the value of that currency relative to the U.S. dollar. This exposes the Fund to the risk of loss if that foreign currency loses value, as well as the possibility of gains if that currency gains value, relative to the U.S. dollar. The Funds may (but are not required to) employ certain strategies to limit their risks or otherwise manage their exposure to foreign currencies. Such currency management techniques, as well as the risks that those techniques themselves present, are discussed in Section 6. below. 9 Also, a risk exists that a foreign country may have or implement restrictions on transactions in its currency that prevent a Fund from effectively managing or reducing its exposure to that currency, even after the Fund has disposed of any securities denominated or traded in that currency. c. Political and economic risk: Foreign securities often are subject to heightened political and economic risks, particularly in emerging markets or other underdeveloped or developing countries, which may have relatively unstable governments and economies based on only a few industries. Foreign governments may take over the assets or operations of a company, may impose additional taxes, or may place limits on the removal of the Fund's assets from that country. However, investments in foreign securities also offer the opportunity to diversify holdings and to invest in economies whose growth may outpace that of the United States. d. Regulatory risk: Generally, there is less government supervision of foreign markets. Foreign issuers generally are not subject to uniform accounting, auditing, and financial reporting standards and practices applicable to domestic issuers. There may be less publicly available information about foreign issuers than domestic issuers. These risks may be greater in emerging markets or other underdeveloped or developing countries. e. Market risk: Foreign securities markets, particularly those of emerging markets or other underdeveloped or developing countries, may be less liquid and more volatile than domestic markets. Certain markets may require payment for securities a Fund purchases before delivery of these securities to the Fund, and delays may be encountered in settling securities transactions. In some foreign markets, there may be limited protection against failures by other parties to complete their transactions with a Fund. There may be limited legal recourse against an issuer in the event of a default on a debt instrument held by a Fund. f. Transaction costs: Transaction costs of buying and selling foreign securities, including brokerage, tax, and custody costs, are generally higher than those involved in domestic transactions. This is particularly likely for investments in emerging markets, or other underdeveloped or developing countries. 6. Techniques and Instruments for Managing Currency Exposure a. General considerations and risks: The Funds are not obligated to try to hedge against any change in the value of any currency. Even if a Fund wished to do so, there is no assurance that market conditions would be such as to make such hedging possible. In general, however, the more foreign securities a given Fund invests in, the greater its currency management activities are likely to be. The foreign currency management techniques and instruments discussed below do not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. A Fund may use certain types of these instruments in currency management strategies that expose that Fund to currencies other than the U.S. dollar. Although this would not be done for the purpose of "leveraging" the Fund's overall exposure to fluctuations in currency values, such strategies could expose the Fund to greater risks of loss and greater volatility than it otherwise would experience. Moreover, even where a Fund establishes positions designed to manage its foreign currency exposure, there is no assurance that this will be beneficial to the Fund. Such positions may cause a Fund to forego gains that it otherwise could have achieved or incur costs and losses that it would not otherwise have incurred. (In general the cost to the Funds of engaging in foreign currency management transactions varies with such factors as the currency involved, the type and duration of the instrument being used for this purpose, and the market conditions then prevailing.) It is entirely possible, therefore, that any effort to manage a Fund's currency exposure could have a negative effect on the Fund's investment performance. b. Techniques for managing currency exposure: The Funds may employ one or more of the following techniques for managing currency exposure: (i) Transaction hedging: When a Fund anticipates having to purchase or sell a foreign currency to facilitate a foreign securities transaction, it may wish to "lock in" the current exchange rate for that currency (vis-a-vis the U.S. dollar) and thus avoid (in whole or in part) exposure to further changes in that rate that could occur prior to when the purchase or sale proceeds are actually paid. This is called "transaction hedging." A Fund can do transaction hedging by purchasing or selling foreign currencies in the "spot" (i.e., cash) market. Alternatively, a Fund may use one or more of the instruments described in Section 6.c. below for transaction hedging. (ii) Portfolio hedging: A Fund may use one or more of the instruments described below to reduce its exposure to changes (relative to the U.S. dollar) in the value of a foreign currency during a period of time when the Fund owns securities that are denominated in, exposed to or traded in that currency. This is called "portfolio hedging." A Fund generally will not engage in portfolio hedging with respect to the currency of a particular country to an extent greater than the aggregate market value (at the time 10 of establishing the hedge) of securities held by that Fund which are denominated in, exposed to or traded primarily in that particular foreign currency but may do so for purposes of transactions involving "proxy" currency or "cross hedging." (iii) "Proxy" currency: For purposes of transaction hedging or portfolio hedging, the Funds may use instruments on a "proxy" currency, instead of the currency being hedged. A proxy currency is one that the subadviser believes will bear a close relationship to the currency being hedged and believes will approximately equal the performance of such currency relative to the U.S. dollar. Nevertheless, changes in the value of the currency being hedged may not correspond to changes in the value of the proxy currency as expected, which could result in the currency hedge being more favorable or less favorable to the Fund than the subadviser had expected. (iv) Cross hedging: The Funds may use additional techniques when their subadvisers believe that the currency of a particular country may suffer a significant decline against the U.S. dollar or against another currency. In that case, a Fund may use an instrument that, in effect, simultaneously establishes for the Fund (1) a "short" position in an amount of foreign currency approximating the value of some or all of that Fund's securities denominated in, traded in, or exposed to such foreign currency and (2) a corresponding "long" position in U.S. dollars or another currency. The "long" position might be a currency other than U.S. dollars, for example, if such other currency is believed to be undervalued or necessary to bring the Fund's overall exposure to various currencies into a more desirable balance. This is called "cross hedging". (v) Other: To otherwise adjust the currency exposure of their portfolios, the Funds may also enter into contracts that, in effect, simultaneously establish for the Fund (1) a "short" position in an amount of U.S. dollars, or other appropriate currency, and (2) a corresponding "long" position in an amount of foreign currency corresponding to the value of some of the Fund's securities. c. Instruments for managing currency exposure: In furtherance of the above-described techniques for managing currency exposure, the Funds may use one or more of the following instruments: (i) Forward exchange contracts (and related asset segregation requirements): In a forward exchange contract, a Fund purchases or sells a specific amount of foreign currency, at a price and time (which may be any fixed number of days in the future) set in the contract. A Fund's obligation to deliver an amount of a currency under a forward contract must at all times be "covered" by the Fund's (a) owning at least that amount of investments denominated or primarily traded in such currency that are not segregated to support any other Fund obligation or (b) having a contractual right to acquire that amount of such investments or such amount of currency at a price no greater than the amount the Fund will receive on settlement of the forward contract; or, alternatively, the relevant subadviser, subject to any oversight and any directions given by John Hancock, will (c) cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that, together with any margin the Fund has on deposit for that forward contract, at all times at least equals the amount of the Fund's obligation on that forward contract; provided that, as to any forward contract on any currency that settles on a "net" basis, a Fund may, for hedging purposes of clause (c), consider its "obligation" to be the net amount it owes under that contract that is not covered as provided in clauses (a) and (b) of this sentence. (ii) Options on currencies (and related asset segregation requirements): A Fund may purchase and write put and call options on foreign currencies. This could include options traded on U.S. and foreign exchanges, as well as those traded in "over-the-counter" markets. The characteristics and risks of these currency option transactions are similar to those discussed in Sections 11. and 12. below with respect to put and call options on securities. A Fund's obligation to deliver an amount of currency upon exercise of a call option written by the Fund must at all times be "covered" by the Fund's (a) owning at least that amount of investments denominated or primarily traded in such currency that are not segregated to support any other Fund obligation or (b) having a contractual right to acquire such investments or such amount of currency at a price no greater than the amount the Fund will receive upon exercise of the option; or the relevant subadviser, subject to any oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that, together with any margin the Fund has on deposit with respect to that option, at all times at least equals the value of the currency that the Fund is obligated to deliver under the option and that is not covered as provided in clause (a) or (b) of this sentence. In connection with any currency put option written by a Fund, the relevant subadviser, subject to any oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other obligation of the Fund and that, together with any margin the Fund has on deposit with respect to such option, at all times at least equals the amount the Fund is obligated to pay upon exercise of the option. 11 (iii) Currency futures contracts (and options thereon): A Fund may use currency futures contracts and options thereon to manage currency exposure. The characteristics and risks of such futures and options transactions are similar to those discussed in Sections 11, 12, and 13. below for other transactions in futures contracts and options thereon. All transactions in currency futures and options thereon also would be subject to the applicable limitations in Section 13.c.(ix) below. (iv) Other derivative instruments: A Fund may use certain "swaps," "caps," "floors," and "collars" to manage currency exposure. The characteristics and risks of such "derivative" transactions, as discussed in Section 14 below, are generally also applicable when such instruments are used for currency management purposes. 7. Reallocating a Fund's Assets Among Asset Classes The continual reallocation of assets among the major asset classes (e.g., stocks, bonds, and cash) involves the risk that the subadviser may reduce the Fund's holdings in an asset class whose value increases unexpectedly, or may increase the Fund's holdings in an asset class just prior to that asset class experiencing a loss of value. The Managed Fund tends to exercise broad discretion in reallocating assets across asset classes. The Global Bond Fund intends to exercise discretion to reallocate assets across domestic and international asset classes. All of the other Funds, with the exception of the Money Market Fund, generally allow the subadviser some latitude to allocate across asset classes. Nevertheless, this latitude is expected to be exercised to a lesser degree than in the Managed Fund. 8. Adopting a Temporary Defensive Strategy All of the Funds, except the Money Market Fund, may (but are not required to) adopt a defensive investment posture if the subadviser believes the investment environment for the Fund is negative. For example, the Earnings Growth Fund reserves the right to invest without limitation in preferred stock and investment-grade debt instruments for temporary, defensive purposes. Such a defensive posture would involve reallocating some or all of a Fund's assets in a manner different from that contemplated by its primary investment objective and strategies and normal level of assets, cash and cash equivalents. For most "actively managed" funds, (i.e., Funds that do not invest with an index-based objective), this level is 10% or less, except in abnormal market conditions, when the level can be higher. The Funds are limited only by their fundamental investment restrictions as to the types of investments they could use temporarily for defensive purposes. Thus, for example, a small cap equity Fund might temporarily invest in stocks of larger cap companies or in high quality, short term debt securities. A bond Fund might shorten maturities or tighten its investment quality parameters. An international Fund might, for example, limit the countries it would invest in or temporarily invest only in high quality, short-term debt securities in the United States. There can be no assurance that the transaction costs and lost investment opportunities will not outweigh any benefits to a Fund that attempts to adopt a defensive strategy. 9. Investing With an Index-Based Objective The Equity Index, International Equity Index, and Bond Index Funds expect to invest substantially all of their assets in equity or debt securities within their investment objectives and policies at all times. Accordingly, these Funds may carry more risk in times of declining markets than "actively managed" Funds that, during normal market conditions, maintain a higher level of cash or cash equivalents and, during periods of abnormal market conditions, are more likely to adopt a defensive investment posture by reallocating their assets in a manner different from that contemplated by their primary investment objective and strategies. Investments in the Equity Index, International Equity Index, and Bond Index Funds each involve the risk that the Fund will be unable to match the performance of its corresponding target index. Each Fund's ability to do so is affected by (a) the size and timing of cash flows into and out of that Fund, (b) the level of the Fund's expenses, including commissions and "spreads," on its portfolio transactions, other portfolio management expenses, and other operating expenses, and (c) the degree of success of the techniques employed by the Fund's subadviser. Further, if the size of a Fund limits the number of issues that the Fund can purchase, or that size is relatively small in relation to cash flows, there is a greater possibility that the Fund may be unable to match the performance of the corresponding target index. The S&P 500 Index: The S&P 500 is an index that is constructed by the Standard & Poor's Corporation ("Standard & Poor's" or "S&P"), which chooses stocks on the basis of market values and industry diversification. Most of the largest 500 companies listed on U.S. stock exchanges are included in the index. Additional stocks that are not among the 500 largest stocks, by market value, may be included in the S&P 500 for diversification purposes. The index is capitalization weighted -- that is, stocks with 12 a larger capitalization (shares outstanding times current price) have a greater weight in the index. Selection of a stock for inclusion in the S&P 500 Index in no way implies an opinion by S&P as to its attractiveness as an investment. The Trust and the insurance products supported by the Trust are not sponsored, endorsed, sold or promoted by Standard & Poor's. Standard & Poor's makes no representation or warranty, express or implied, to the owners of the insurance products supported by the Trust or to any member of the public regarding the advisability of investing in the Trust or such insurance products. Standard & Poor's only relationship to the Trust is the licensing of Standard & Poor's "marks" and the S&P 500 Index, which is determined, composed and calculated by Standard & Poor's without regard to the Fund or the Trust. "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and "500" are trademarks of McGraw-Hill, Inc. and have been licensed for use by the Trust. In determining, composing, or calculating the S&P 500 Index, S&P has no obligation to take into consideration the needs of the Trust or those of the owners of the insurance products supported by the Trust. S&P is not responsible for and has not participated in the determination of the prices and amount of the insurance products supported by the Trust or the timing of the issuance or sale of such products or in the determination or calculation of the equations by which such products are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing, or trading of such products. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE PRODUCTS SUPPORTED BY THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The Lehman Brothers Aggregate Bond Indexes: The Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index") is intended to measure the performance of the domestic, investment grade, fixed-rate investment grade debt market including government and corporate securities, agency mortgage pass-through securities, commercial mortgage-backed securities and asset-backed securities. The Aggregate Bond Index covers those securities in the Lehman Brothers Government/Credit Index (the "Government/Credit Index"), plus those covered by the Lehman Mortgage-Backed Securities Index ("MBS Index"), the Lehman Commercial Mortgage-Backed Securities (ERISA Eligible) Index ("CMBS (ERISA Eligible) Index"), and the Lehman Asset-Backed Securities Index ("ABS Index"). The Government/Credit Index is composed of (1) all public obligations of the U.S. Government, its agencies and instrumentalities (excluding "flower" bonds and pass-through issues, such as GNMA certificates) and (2) all publicly issued, fixed-rate, non-convertible, investment grade, U.S. dollar-denominated, SEC-registered obligations of domestic corporations, foreign governments and supranational organizations. The MBS Index covers fixed-rate securities backed by mortgage pools of the Government National Mortgage Association, the Federal Home Loan Mortgage Association, and the Federal National Mortgage Association. The CMBS (ERISA Eligible) Index covers ERISA-Eligible CMBS securities. The ABS Index covers several subsectors -- including credit and charge cards, auto, utilities and home equity loans -- and includes pass-through, "bullet," and controlled amortization structures. All securities in the index generally have at least $200 million par amount outstanding and at least 1 year remaining to maturity. All non-government issues in the Aggregate Bond Index are rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("Standard & Poor's") or, if unrated by Moody's or Stanard & Poor's, BBB by Fitch, Inc. ("Fitch") . All securities in the Aggregate Bond Index issued by non-U.S. entities are denominated in U.S. dollars. Lehman Brothers, Inc. is neither a sponsor of nor in any other way affiliated with the Trust or the insurance products supported by the Trust. Inclusion of a security in the Aggregate Bond Index in no way implies an opinion of Lehman Brothers, Inc. as to its attractiveness or appropriateness as an investment. The MSCI All Country World Excluding U.S. Index: The MSCI All Country World Excluding U.S. Index is a market capitalization weighted index composed of companies representative of the market structure of developed and emerging market 13 countries in the Americas (excluding the United States), Europe/Middle East, and Asia/Pacific Regions. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Trust and the insurance products supported by the Trust are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International ("MSCI"). MSCI makes no representation or warranty, express or implied, to the owners of the Trust, or any member of the public regarding the advisability of investing in funds generally or in the Trust or any Fund particularly, or the ability of the MSCI All Country World Excluding U.S. Index to track general stock market performance. MSCI is the licensor of certain trademarks, service marks and trade names of MSCI and of the MSCI All Country World Excluding U.S. Index, which is determined, composed and calculated by MSCI without regard to the Trust. "Morgan Stanley Capital International" is a service mark of Morgan Stanley & Co., Incorporated, that has been licensed for use by the Trust. MSCI has no obligation to take the needs of the Trust or the owners of insurance products supported by the Trust into consideration in determining, composing or calculating the MSCI All Country World Excluding U.S Index. MSCI is not responsible for and has not participated in the determination of the prices or amounts of insurance products supported by the Trust or the timing of the issuance and sale of such products, or in the determination or calculation of the equations by which such products are convertible into cash. MSCI has no obligation or liability to owners of the Trust or of the insurance products supported by the Trust in connection with the administration, marketing or trading of any Fund of the Trust. ALTHOUGH MSCI OBTAINS INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDEX FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY OWNERS OF THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 10. Investing on a Non-Diversified Basis TheReal Estate Equity, Health Sciences Financial Industries and Global Bond Funds are "non-diversified Funds." Non-diversified Funds are less restricted in the extent to which they may invest more than 5% of their assets in any issuer or purchase more than 10% of the voting securities of any issuer. Because a relatively high percentage of a non-diversified Fund's assets may be invested in the obligations of a single issuer or a limited number of issuers, the value of that Fund's shares may be more volatile and more susceptible to any single economic, political, or regulatory event, or to credit and market risks associated with a single issuer, than would the shares of a diversified Fund. 11. Using Options a. Overview: The Funds may, in varying degrees, use options on the following (which, for simplicity, may be referred to as the "subject" of an option): currencies, securities, equity indexes, interest rate indexes, financial futures contracts and rights under swap agreements ("swap options"). This Section 11. discusses certain characteristics and risks that are generally common to all of these types of options. The Funds' use of specific types is further discussed in Section 6. above and Sections 12 and 14. below, including characteristics and risks peculiar to those types of options. b. Purchasing "call" options: If a Fund (or anyone else) "purchases" a "call" option, it pays a purchase price (often called a "premium") plus, in most cases, a commission to the broker through whom the purchase was made. In return the Fund (or other purchaser) has the right (but not the obligation), at or before a specified future time (called the "expiration date"), to acquire a specified amount of the option's subject (or the economic equivalent thereof) at a specified price (called the "strike price" or "exercise price"). In a "call" swap option, the Fund (or other purchaser) has the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement at some designated future time on specified terms. If the purchaser of an option decides to exercise this right, we say the option has been "exercised." If an option is never exercised before its expiration date, it expires unexercised. A Fund (or other purchasers of a call option) may profit in one of two ways. First, the Fund may be able to exercise the call option at a date when the value of the option's subject exceeds the purchase price of the option (including any brokerage commission) 14 plus the exercise price. Whether the Fund will be able to do this depends on how favorable those prices were and how the value of the option's subject has changed since the option was purchased. Secondly, a Fund may profit from purchasing an option if the Fund is able to sell the option (unexercised) at a profit sometime before its expiration date. (As a practical matter, such a sale would generally be accomplished by having the Fund sell (i.e., "write") an option identical to the option it owns, thereby "netting out" the Fund's exposure to the position.) Whether such a profit will be possible, of course depends on whether the then market price for the option (less any commission payable on the sale) exceeds the option's purchase price (including any related commission). In this regard, one of the general risks of purchasing options is that, for a variety of reasons, the market price of an option usually does not vary in the same way or to the same extent as the value of the option's subject varies. Therefore, a Fund can lose money purchasing a call option, even if the value of the option's subject increases. The basic risk in purchasing an option is that, if the Fund never exercises or sells the option at a profit, the Fund will lose the entire purchase price of the option (plus any related commissions). That is the maximum amount the Fund could lose, however. c. Selling or "writing" call options: Selling an option is commonly referred to as "writing" an option. If the Fund (or anyone else) sells ("writes") a call option, it receives the premium (less any commission) paid by the option's purchaser and has the obligation to sell the option's subject to the purchaser at the exercise price, or change the terms of the underlying swap agreement under a swap option, if the purchaser exercises the option before it expires. The Fund can make a profit writing a call option if the purchaser fails to exercise the option (which usually would happen only if the value of the option's subject were below the exercise price or, under a swap option, if more favorable terms for swap agreements were available than those under the option). In this case, the option's purchase price (net of any commissions) would be a profit to the Fund. Alternatively, a Fund could profit from writing a call option if it is able to subsequently purchase an identical option that would close out the Fund's position at a profit. This could be done only if the market price of the option then exceeded the Fund's purchase price by an amount greater than any commissions payable by the Fund on the purchase and sale transactions. There is a risk, however, that a Fund may be unable to do this, even if the value of the call option's subject has declined. This is because, as noted above, the value of an option does not vary in identical fashion to the value of the option's subject and, with respect to swap options, because the swaps market is a relatively new market and identical options may not be available. The risk of writing a call option is that, if the value of the option's subject exceeds the option's exercise price, the option is almost sure to be exercised. In that case, the Fund will suffer a loss to the extent that the premium it received for writing the option (net of any commissions), plus the exercise price it receives are less than the value of the option's subject at the time of exercise. Therefore, the higher the value of the option's subject rises, the greater the Fund's potential loss on an option it has written. A Fund could cut off its further exposure in such a case by purchasing an identical call option that would close out its position. The Fund would, however, probably realize a loss on the transaction, because the purchase price it would have to pay for that call option would probably have increased to reflect the increasing value of the option's subject. Depending on the terms of the particular swap option, a Fund will generally incur a greater degree of risk when it sells ("writes") a swap option than it will incur when it purchases a swap option because the Fund will become obligated according to the terms of the underlying swap agreement upon exercise of the option by the purchaser. d. Writing call options on a "covered" basis. One way for a Fund to limit its risk exposure on call options it has written is to "cover." A call option may be considered "covered" if, as long as the option is outstanding, the writer (seller) of the option owns assets that are identical to, or have the same or similar investment characteristics to, the option's subject. In such a case, if the value of the option's subject increases, the losses that the Fund will incur on the call option it has written will tend to be offset by gains that Fund earns on the assets it is holding to "cover" the option. Call options written by Funds can also be considered to be "covered" to the extent that the Fund's liabilities under these options are fully offset by its rights under call options on the same subject owned by the Fund. Naturally, the more similar the assets held by the fund are to the option's subject, the more assurance the Fund will have that its losses on call options it has written will be "covered." To the extent that an option written by a Fund is not fully covered by assets that are very similar to the option's subject, the Fund's sub-adviser will segregate or "earmark" on the Fund's records cash or amounts it otherwise determines to be liquid in an amount equal to the Fund's exposure under the option. This procedure for each type of option written by the Fund is described more specifically in the portion of this Part C that describes the writing of that type of option. 15 Although a Fund may own an underlying swap agreement when it writes a swap option, its liabilities under the swap option would not be fully offset by the swap agreement. This is because the swap option will change the terms of the underlining swap agreement when the purchaser exercises the option. e. Purchasing and selling (writing) "put" options: A "put" option is the same as a call option, except that a Fund (or any other person) that purchases a put option, by paying the purchase price ("premium") has the right to sell (rather than buy) the option's subject for a stated exercise ("strike") price. Conversely, the seller (writer) of a put option receives the premium (net of any commissions) but has the obligation to purchase the option's subject at its exercise price if the option is exercised. These terms do not strictly apply to swap options because that type of option changes the terms of the underlying swap agreement, as discussed above in Section C.11.b. If a Fund purchases a put option, its maximum potential loss would equal the purchase price (plus any commissions thereon). If the Fund actually owns at least the amount of whatever assets are the subject of the option, the option is sometimes referred to as a "protective" put option. If the market value of such underlying securities remains above the option's exercise price, the Fund will, in effect, lose the premium it has paid for the option. The Fund, however, avoids the risk of loss on the underlying securities, to the extent that the market value of the underlying securities falls below the exercise price of the put option. On the other hand, if a Fund sells (writes) a put option, the Fund could experience continuing losses while the option is outstanding, to the extent that the value of the subject of the option continues to decline. If the subject lost its value entirely, the Fund's maximum loss would equal the exercise price less the premium (net of any commissions) that the Fund received initially for writing the option. Because of this risk exposure, a Fund that writes a put option may seek to "cover" that option with other assets that it owns f. Accounting for options: The value of any option that the Fund has purchased, and the amount of the Fund's obligation under any outstanding option it has written, will vary as market prices change. These variations are reflected daily in the Fund's calculation of its net asset value, so that such value always reflects the estimated impact of current market conditions on all of the Fund's option positions. g. Liquidity risk: The Funds intend to write and purchase options (other than swap options) only if the subadviser believes that adequate liquidity exists to close out open positions. If for any reason a Fund cannot, however, close out its open option position when deemed advisable, the Fund's investment performance could be adversely affected. h. Using options traded over-the-counter or on foreign exchanges: A Fund may use options on securities and options on indexes that are traded "over-the-counter" or on foreign exchanges. A Fund may use such options in any manner and to the same extent that it would be permitted to use such options that were traded on domestic exchanges. The Funds will treat over-the-counter options they have purchased and assets used to cover over-the-counter options they have written as illiquid securities. However, with respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the formula price. i. Asset segregation requirements for options written by a Fund: When a Fund writes an option, it is generally required that (a) that option be fully covered by the Fund's ownership of the same type of assets that are the subject - -to the option (or a right to acquire such assets) or (b) to the extent not so covered, that the Fund set aside cash or liquid securities to support the Fund's obligations under the option it has written. Except for swap options, the asset segregation requirements for each type of option that a Fund may write are described in the portion of this part C that more specifically describes that type of option. For swap options written by a Fund, the asset segregation requirements are described in Section 14.f. below. 12. Using Options on Securities (and related asset segregation requirements) a. Options on securities generally: A Fund may purchase or write (sell) put and call options on securities of a type that the Fund could invest in directly. If a Fund writes a call option, it will at all times, own (a) an amount of the securities subject to the option that are not segregated to support any other obligation of the Fund and/or a (b) a call option on the same securities at an exercise price that is not higher than that of the call option written by the Fund; or, alternatively, the relevant subadviser, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the subadviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that, together with any margin the Fund has on deposit with respect to the option it has written, at all times at least 16 equals the amount of the Fund's obligation under the option that is not "covered" as provided by clause (a) or (b) of this sentence. For this purpose, the amount of the obligation is deemed to be (i) the value of the securities that are the subject of the option or (ii) the amount by which the exercise price on any option the Fund has to acquire such securities exceeds the exercise price on the option the Fund has written on such securities. A Fund's obligation to make a payment upon the exercise of a put option on securities written by the Fund will at all times be fully covered by the Fund's owning a put option on the same securities at an exercise price that is no less than the amount the Fund must pay upon exercise of the put it has written; or, alternatively, the relevant subadviser, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the subadviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that, together with any margin the Fund has on deposit with respect to the put option it has written, at all times at least equals the amount of the Fund's obligation upon exercise of the put option that is not covered as provided in the first part of this sentence. b. Straddles: A straddle is a strategy that consists of a simultaneous call option and put option on the same underlying security with each such option having the same exercise price. The combination is usually sold (written) as a unit, but each "leg" (i.e., the put option or the call option) may be exercised separately by the purchaser of the straddle. A Fund may purchase or write straddles. When a Fund writes a straddle, the relevant sub-adviser will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) the same amount (if any) of cash or other assets it determines to be liquid as it would do if the Fund had written only the leg of the straddle that is "in the money." For example, if the value of the underlying security is higher than the exercise price of the straddle (i.e., the exercise price of the put and call option), a written straddle will be covered by the Fund in the same manner as it would for a written call option. Conversely, when the value of the underlying security is lower than the exercise price of the straddle, a written straddle will be covered by the Fund in the same manner as it would for a written put option. Similarly, if a Fund writes a put and call option on the same security, but each leg has a different exercise price, and if the exercise price of the put does not exceed that of the call, the segregation (or earmarking") requirement will be the same as it would be if the Fund had written only the leg of the strategy that is "in-the-money." If both options are "out-of-the-money," the segregation (or earmarking") requirement will be the same as it would be if the Fund had written only the leg of the transaction that represents the higher potential liability of the Fund. Because a straddle consists of two options, the commissions and other transaction costs of assuming and liquidating the position may be relatively high. 13. Using Financial Futures Contracts, Options on Such Contracts and Options on Stock Indexes a. Overview: The Funds may, in varying degrees, use financial futures contracts, options on such futures and options on stock indexes. This Section 13 discusses certain characteristics and risks that generally pertain to these instruments, as well as the Funds' specific uses of these instruments and specific risks related to those uses. b. General characteristics and risks: The general characteristics and risks of financial futures, options on such contracts and options on stock indexes are discussed in the following subsections. (i) Financial futures contracts: Financial futures contracts consist of interest rate futures contracts, stock index futures contracts, and currency futures contracts. An interest rate futures contract is a contract to buy or sell specified debt securities at a future time for a fixed price. A public market currently exists for interest rate futures contracts on United States Treasury Bills, United States Treasury Notes, bank certificates of deposit, and various other domestic or foreign instruments and indexes. Stock index futures contracts bind purchaser and seller to delivery at a future date specified in the contract of a cash amount equal to a multiple of the difference between the value of a specified stock index on that date and settlement price specified by the contract. That is, the seller of the futures contract must pay and the purchaser would receive a multiple of any excess of the value of the index over the settlement price, and the purchaser must pay and the seller would receive a multiple of any excess of the settlement price over the value of the index. A public market currently exists for stock index futures contracts based on the Standard & Poor's 500 Stock Index, the Standard & Poor's Midcap Index, the New York Stock Exchange Composite Index, the Value Line Stock Index, and various other domestic or foreign indexes. 17 A currency futures contract is a contract to buy or sell a specified amount of another currency at a future time for a fixed price. (ii) Options on financial futures contracts: The writer of an option on a financial futures contract agrees to assume a position in such financial futures contract having a specified price, if the purchaser exercises the option and thereby assumes the opposite position in the financial futures contract. If the option purchaser would assume the sale side of the futures contract upon exercise of the option, the option is commonly called a "put" option. If the option writer would assume the purchase side, it is commonly called a "call" option. As with other types of options, the party that writes the option receives a premium for doing so, and the party that purchases an option pays a premium therefor. However, there is no exercise (or strike) price, as such. Rather, if the value of the futures contract moves against the writer of the option, so that the option is (or is likely to be) exercised, the option writer, in effect, has the obligation to pay those losses. More specifically, an option written by a Fund on a financial futures contract requires the Fund to pay any amount by which the fluctuating price of the underlying debt instrument or index exceeds (in the case of a call option) or is less than (in the case of a put option) the price specified in the futures contract to which the option relates. Therefore, if the price of the debt instrument or stock index on which the futures contract is based increases (in the case of a call option written by a Fund) or decreases (in the case of a put option written by a Fund), the Fund may incur losses that exceed the amount of the premium received by the Fund for writing the option. (iii) Stock index options: After payment of a specified premium at the time a stock index option is entered into, the purchaser of a stock index call option obtains the right to receive a sum of money upon exercise of the option equal to a multiple of the excess of a specified stock index on the exercise date over the exercise or "strike" price specified by the option. The purchaser of a put option obtains the right to receive a sum of money upon exercise of the option equal to a multiple of any excess of the strike price over the stock index. The writer of a call or put stock index option receives a premium, but has the obligation, upon exercise of the option, to pay a multiple of the difference between the index and the strike price. Thus, if the price of the stock index on which an index option is based increases (in the case of a call option written by a Fund) or decreases (in the case of a put option written by a Fund), the Fund may incur losses that exceed the premium it received for writing the option. Stock indexes for which options are currently traded include the Standard & Poor's 100 and Standard & Poor's 500 Indexes. (iv) Margin requirements for futures and options: When futures contracts are traded, both buyer and seller are required to post an initial margin of cash or U.S. Treasury Bills equaling as much as 5 to 10 percent or more of the contract settlement price. The nature of the margin requirements in futures transactions differs from traditional margin payments made in securities transactions in that margins for futures contracts do not involve the borrowing of funds by the customer to finance the transaction. Instead, a customer's margin on a futures contract represents a good faith deposit securing the customer's contractual obligations under the futures contract. If the market moves against the Trust, so that a Fund has a net loss on its outstanding futures contracts for a given day, the Fund generally will be required to post additional margin to that extent. The margin deposit is returned, assuming the Trust's obligations have been met, when the futures contract is terminated. Similar margin requirements will apply in connection with any transactions in which a Fund writes any options. This includes options on indexes and futures contracts, as well as other types of options. (v) Certain risks: Financial futures, options thereon, and stock index options, if used by a Fund, will in most cases be based on securities or stock indexes the components of which are not identical to the portfolio securities owned or intended to be acquired by the Fund and in connection with which such instruments are used. Furthermore, due to supply and demand imbalances and other market factors, the price movements of financial futures, options thereon, and stock index options do not necessarily correspond exactly to the price movements of the securities, currencies, or stock index on which such instruments are based. These factors increase the difficulty of implementing a successful strategy using futures and options contracts. The Funds generally will not take delivery of debt instruments pursuant to purchasing an interest rate futures contract, nor make a delivery of debt instruments pursuant to selling an interest rate futures contract. Nor will the Funds necessarily take delivery of or deliver currencies in connection with currency futures contracts. Instead, a Fund will more typically close out such futures positions by entering into closing futures contract transactions. Similarly, a Fund may wish to close out an option on a futures contract or an option on an index by entering into an offsetting position in those instruments. 18 Generally speaking, entering into closing transactions such as described immediately above would not affect gains and losses of the Fund resulting from market action prior to such closing transactions. Moreover, there is a risk that, at the time a Fund wishes to enter into such a closing transaction, trading in futures or options could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers. The futures and options exchanges also may suspend trading after the price has risen or fallen more than the maximum amount specified by the exchange. Exercise of options could also be restricted or delayed because of regulatory restrictions or other factors. Although the subadvisers will seek to avoid situations where these factors would be likely to cause a problem for the Trust, in some cases they could adversely affect particular Fund transactions in these instruments. (vi) Asset segregation requirement for certain futures and options positions: The relevant subadviser, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the subadviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other obligations of the Fund and that at all times at least equals (a) the sum of the purchase prices of all of the Fund's open futures purchase positions, plus (b) the current value of the securities underlying all of the Fund's open futures sales positions that are maintained for purposes other than bona fide hedging, plus (c) the exercise price of all outstanding put options on futures contracts written by the Fund, plus (d) the current value of securities underlying any futures contracts with respect to which the Fund has outstanding call options that it has written, minus (e) the amount of margin deposits with respect to all of such contracts. (c) Specific uses of financial futures, options thereon, and stock index options: All Funds, except the Money Market Fund, may use exchange-traded financial futures contracts, options thereon, and exchange-traded put or call options on stock indexes, for the purposes discussed below. It should be emphasized that none of the Funds is required to use any of these strategies, and doing so is not a principal investment strategy of any of their investment portfolios. Therefore, it should not be assumed that any particular Fund will ever necessarily use any of these strategies to a significant extent. (i) Hedging with financial futures contracts against market changes, and risks thereon: A Fund may use financial futures contracts, and options thereon, as a hedge to protect against possible changes in interest rates and security prices. Thus, for example, to hedge against the possibility that interest rates or other factors may result in a general decline in prices of equity securities of a type it owns, a Fund may sell stock index futures contracts. Similarly, to hedge against the possibility that increases in interest rates may adversely affect the market values of debt securities it holds, a Fund may enter into interest rate futures sale contracts. (ii) Establishing market exposure and managing cash flow with financial futures contracts and options thereon: A Fund may purchase and sell stock index and interest rate futures, and options thereon, to maintain market exposure and manage cash flows. Purchasing futures contracts, and options thereon, could enable a Fund to take the approximate economic equivalent of a substantial position in bonds or equity securities, although there is no assurance that this goal can be achieved. (iii) Managing foreign currency exposure with foreign currency futures contracts: A Fund may use foreign currency futures contracts, and options thereon, to the same extent and in the same manner as it is authorized to use forward foreign exchange contracts in Section 6. above. (iv) Risks of hedging type strategies: If, after a Fund establishes a hedge position, the value of the securities or currency being hedged moves in the opposite direction from that anticipated, the Fund as a whole will perform less well than it would have had it not entered into the futures or option transaction. The success of the Funds in using hedging-type techniques depends, among other things, on the subadviser's ability to predict the direction and volatility of price movements in the futures or options markets, as well as the securities markets and, in some cases, currency markets, and on the subadviser's ability to select the proper type, time and duration of option or futures contracts. Certain of the subadvisers have limited experience in utilizing these hedging-type techniques, and there can be no assurance that these techniques will produce their intended result. The prices of the futures and options contracts used for hedging-type strategies may not vary as contemplated in relation to changes in the price of the securities or currencies being hedged. Accordingly, there is a risk that transactions in these instruments, if used by a Fund, may not in fact offset the impact of adverse market developments in the manner or to the extent contemplated or that such transactions may result in losses to the Fund which would not be offset by gains with 19 respect to corresponding portfolio securities owned or to be purchased by that Fund. Hedging-type transactions also may be more, rather than less, favorable to a Fund than originally anticipated. (v) Writing index options (and related asset segregation requirements): A Fund may write put and call options on indexes composed of securities in which the Fund may invest. A Fund's obligation to make a payment upon the exercise of a put or call option on an index written by the Fund will at all times be fully covered by (a) in the case of a put option, the Fund's owning a put option on the same index at an exercise price not lower than that of the option written by the Fund, or (b) in the case of a call option, the Fund's owning a call option on the same index at an exercise price not higher than that of the option written by the Fund; or, alternatively, the relevant subadviser, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that, together with any margin the Fund has on deposit with respect to the option it has written, at all times at least equals the amount of the Fund's obligation upon exercise of the option it has written that is not covered as provided in clause (a) or (b) of this sentence For this purpose, the amount of the obligation (i) with respect to a put option is the exercise price of the option or the amount by which that exercise price exceeds that of a put option that the Fund owns on the same index and (ii) with respect to a call option is the current value of the index underlying the option or the amount by which the exercise price of the option written by the Fund exceeds that of a call option that the Fund owns on the same index. (vi) Purchasing index options. A Fund may purchase put and call options on indexes composed of securities in which the Fund may invest, without specific restriction on the circumstances of such purchases. Option purchases of this type, however, would have to be consistent with the Fund's investment objective. Also, each Fund is subject to the limitation on certain futures and options transactions described in Section 13.c.(ix). (vii) Using futures contracts and options on futures contracts: A Fund may use futures contracts on securities or on market indexes, and options on such futures contracts, without specific restriction on the purposes of such transactions. Nevertheless, such transactions would have to be consistent with the Fund's investment objective. There is no specific overall limit on the amount of the assets a Fund may devote to financial futures contracts and options thereon, even if such contracts are not limited to hedging-type transactions. Nevertheless (except through the purchase of options, as discussed below) the Funds will not use these techniques for purpose of "leveraging" the Fund's exposure to the securities underlying any futures contract or option thereon or its exposure to foreign currencies. Although this limitation does not apply to options on futures contracts that are purchased by a Fund, the total amount of assets on deposit as margin to secure options on futures contracts that are not used for bona fide hedging purposes plus the amount of premiums paid by a Fund for such options is (pursuant to the limitations set forth below) limited to 5% of the Fund's net assets. (viii) Risks of potentially more aggressive options and futures strategies: To the extent that a Fund exercises its broad authority to enter into options and futures transactions for purposes that are not solely for hedging-type purposes or that otherwise may be for more speculative purposes, it may incur greater risks than another Fund that limits its strategy to hedging-type transactions. (ix) Limitations on the Funds' exposure to certain futures and option transactions: No Fund may purchase, sell or write futures contracts or options thereon other than for "bona fide" hedging purposes (as defined by the U.S. Commodity Futures Trading Commission) if immediately thereafter the Fund's initial margin deposits on such outstanding non-hedging futures and options positions, plus the amount of premiums paid by the Fund for such outstanding non-hedging options on futures contracts, exceeds 5% of the market value of the Fund's net assets. For the purpose of this calculation, any amount by which an option is "in the money" at the time of its purchase is excluded from the premium paid therefor. Nor will any Fund consider as "hedging" any transaction that is intended to leverage the Fund's investment exposure to the type of security being hedged or to leverage the Fund's currency exposure. 14. Using "Swaps," "Caps," "Floors," and "Collars" a. Overview: The nature and risks of these types of transactions are discussed in the paragraphs that follow. b. Interest rate swaps: In a typical interest rate swap agreement, one party agrees to make payments equal to a floating interest rate on a specified amount (the "notional amount") in return for payments equal to a fixed interest rate on the same amount for a specified period. If a swap agreement provides for payments in different currencies, the parties might agree to exchange the notional amount as well. 20 Provided the contract so permits, a Fund will usually enter into swaps on a "net" basis: that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. c. Interest rate caps, floors and collars: The purchaser of an interest rate cap or floor, upon payment of a fee, has the right to receive payments (and the seller of the cap is obligated to make payments) to the extent a specified interest rate exceeds (in the case of a cap) or is less than (in the case of a floor) a specified level over a specified period of time or at specified dates. The purchaser of an interest rate collar, upon payment of a fee, has the right to receive payments (and the seller of the collar is obligated to make payments) to the extent that a specified interest rate falls outside an agreed upon range over a specified period of time or at specified dates. d. Currency, credit default, index and equity swaps, caps, floors and collars: Currency, index, and equity swaps, caps, floors, and collars are similar to those for interest rates described in the two preceding paragraphs above, except that, rather than being determined by variations in specified interest rates, the obligations of the parties are determined by variations in a specified currency, interest rate index, or equity index, as the case may be. A Fund may sell or purchase credit default swap contracts for investment purposes when consistent with its investment goal and strategy. A Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio. In a credit default swap contract, the seller would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the purchaser in the event of a default by a third party, such as a U.S. or foreign corporate issuer, on the debt obligation, In return, the seller would receive a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the seller would keep the stream of payments and would have no payment obligations. e. Certain risks: The amount of a Fund's potential gain or loss on any swap transaction is not subject to any fixed limit. Nor is there any fixed limit on the Fund's potential loss if it sells a cap, floor or collar. If a Fund buys a cap, floor or collar, however, the Fund's potential loss is limited to the amount of the fee that it has paid. As a seller of a credit default swap contract, a Fund would be subject to investment exposure on the notional amount of the swap. As a purchaser of a credit default swap contract, a Fund would only receive income in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability), and the investment could expire without value. Swaps, caps, floors and collars tend to be more volatile than many other types of investments. Nevertheless, a Fund will use these techniques only as a risk management tool and not for purposes of leveraging the Fund's market exposure or its exposure to changing interest rates, security values or currency values. Typically, a Fund will use these transactions only to preserve a return or spread on a particular investment or portion of its investments, to protect against currency fluctuations, as a duration management technique, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, to protect against the risk of default on debt obligations, or to gain exposure to certain markets in the most economical way possible. Nor will a Fund sell interest rate caps, floors or collars if it does not own securities providing the interest that the Fund may be required to pay under such derivative instruments. Finally, of course, a Fund may use these derivative instruments only in ways that are consistent with its investment objective. The use of swaps, caps, floors and collars involves investment techniques and risks different from those associated with other portfolio security transactions. If the subadviser is incorrect in its forecasts of market values, interest rates, currency rates, credit risk and other applicable factors, the investment performance of a Fund might be less favorable than if these techniques had not been used. These instruments are typically not traded on exchanges. Accordingly, there is a heightened risk that the other party to certain of these instruments will not perform its obligations to the Fund. None of the Funds will enter into any swap, cap, floor, or collar, unless the other party to the transaction is deemed creditworthy by the subadviser. There also is a risk that a Fund may be unable to enter into offsetting positions to terminate its exposure or liquidate its investment under certain of these instruments when it wishes to do so. Such occurrences could result in losses to the Fund. In recent years, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, for that reason, they are less liquid than swaps. The liquidity of swaps, caps, floors and collars will be determined by the subadviser based on various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the nature of the instrument (including any demand or tender features) and (5) the nature of the marketplace for trades (including the ability to assign or offset a Fund's rights and obligations relating to the investment). Such 21 determinations will govern whether the instrument will be deemed within the Fund's 15% restriction on investments in securities that are not readily marketable. For purposes of applying the Funds' investment policies and restrictions (as stated in the prospectus and this Statement of Additional Information, swap agreements are generally valued by the Funds at market value. In the case of a credit default swap sold by a Fund (i.e., where the Fund is selling credit default protection), however, the Fund will generally value the swap at its notional amount. The manner in which certain securities or other instruments are valued by the Funds for purposes of applying investment policies and restrictions may differ from the manner in which those investments are valued by other types of investors. f. Segregation requirements for these derivatives: The relevant subadviser of each Fund, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the subadviser maintains) cash or other assets it determines to be liquid that are not then segregated to cover any other Fund obligation and that, together with any margin the Fund has deposited in connection with its outstanding swaps, caps, floors, and collars, at all times at least equals the amount of the Fund's obligations under these instruments. For a credit default swap sold by a Fund (i.e., where the Fund is "selling" credit default protection), the Fund's "obligation" will be considered to be the entire notional amount (i.e., the dollar amount of protection provided), for this purpose. For all swap agreements that are not credit default swaps written by the Fund, the Fund's obligation for this purpose will depend on the nature of the swap's settlement terms. If the swap settles on a "net" basis, the Fund's obligation will be accrued daily (and offset against any amounts owed to the Fund) on the transaction, and the Fund's "obligation" for asset segregation purposes will be deemed to be any accrued but unpaid net amounts owed to the other party to the swap transaction. If the swap does not provide for such "net" settlement procedures, the Fund's asset segregation requirement will be for the full accrued amount of the Fund's obligation. If a Fund writes a swap option, the asset segregation requirement will be substantially the same as for the swap rights that are the subject of the option. Thus, the Fund will generally segregate assets to the same extent and manner as it would do (as described in the immediately preceding paragraph), if it had already assumed the swap position it is required to assume upon exercise of the swap option the Fund has written. 15. Investing in Other Investment Companies a. Overview: Each Fund may invest up to 10% of its total assets in shares of other investment companies investing exclusively in securities in which that Fund may otherwise invest. Such investments may involve the payment of substantial premiums above the net asset value of those investment companies' portfolio securities and are subject to limitations under the Investment Company Act of 1940. As a shareholder in an investment company, a Fund would bear its ratable share of that investment company's expenses, including advisory and administration fees, except as specifically stated otherwise in the paragraphs that follow. b. Investing in passive foreign investment companies: Because of restrictions on direct investment by U.S. entities in certain countries, other investment companies may provide the most practical (or only) way for a Fund to invest in certain markets. A Fund may incur tax liability to the extent it invests in the stock of a foreign issuer that is a "passive foreign investment company," regardless of whether such "passive foreign investment company" makes distributions to the Fund. The International Equity Index Fund is more likely than other Funds to invest in closed-end investment companies known as "country funds" or passive foreign investment companies. (A "closed end" company is one whose shares can generally be disposed of only in market transactions, as opposed to redemptions. An "open end" company is one whose shares are freely redeemable.) c. Investing in exchange traded funds: All Funds (other than the Money Market Fund) may invest in certain forms of Exchange Traded Funds ("ETFs"), provided such investment is consistent with the Fund's investment objectives. ETFs are registered open-end investment companies (or investment companies that are exempt from registration) whose shares can be bought and sold on various exchanges in the same way as stocks. ETFs may be used for several reasons, including but not limited to: facilitating the handling of cash flows or trading, or reducing transaction costs. There are various forms of ETFs, but the ones that are most commonly used at the current time are iShares/sm/ (formerly called World Equity Benchmark Shares or "WEBS") and SPDRs (Standard and Poor's Depository Receipts). (i) Investing in iShares/sm/: iShares/sm/ are shares of an open-end investment company that invests substantially all of its assets in securities included in various indices. iShares/sm/ are listed on the AMEX and were initially offered to the public in 1996. The market prices of iShares/sm/ are expected to fluctuate in accordance with both changes in the NAVs of their underlying indices and supply and demand of iShares/sm/ on the AMEX. To date, iShares/sm/ have traded at relatively modest discounts and premiums to the NAVs. However, iShares/sm/ have a limited operating history and information is lacking regarding the actual performance and trading liquidity of iShares/sm/ for extended periods or over complete market cycles. In 22 addition, there is no assurance that the requirements of the AMEX necessary to maintain the listing of iShares/sm/ will continue to be met or will remain unchanged. In the event substantial market or other disruptions affecting iShares/sm/ should occur in the future, the liquidity and value of a Fund's shares could also be substantially and adversely affected. If such disruptions were to occur, a Fund could be required to reconsider the use of iShares/sm/ as part of its investment strategy. (ii) Investing in SPDRs: SPDRs are American Stock Exchange-traded securities that represent ownership in the SPDR Trust, a trust which has been established to accumulate and hold a portfolio of common stocks that is intended to track the price performance and dividend yield of the S&P 500. This trust is a regulated investment company that is sponsored by a subsidiary of the American Stock Exchange. d. Investing in money market fund shares: A Fund may also invest in money market funds managed by its subadviser in reliance upon an exemptive order received by its subadviser from the SEC. Such exemptive orders may permit funds managed by the subadviser to invest in money market funds managed by it, to an extent in excess of amounts otherwise permitted by the Investment Company Act. Nor are the Large Cap Value, Small Cap Value, and International Opportunities Funds charged any investment management fees for investments in money market funds managed by their subadvisers. 16. Purchasing "When Issued" Securities and Forward Commitments a. Overview: All Funds may purchase securities on a when issued or delayed delivery basis. When such transactions are negotiated, the price of such securities is fixed at the time of commitment, but delivery and payment for the securities may take place a month or more after the date of the commitment to purchase. The securities so purchased are subject to market fluctuations, and no interest accrues to the purchaser during this period. In addition, these Funds may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments"), because new issues of securities are typically offered to investors on that basis. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of the Fund's other assets. Although a Fund will enter into such contracts with the intention of acquiring the securities, the Fund may dispose of a commitment prior to settlement if its subadviser deems it appropriate to do so. b. Asset segregation requirement for these transactions. The relevant subadviser of each Fund, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not then segregated to cover any other obligation to the Fund and that, together with any margin the Fund has deposited in connection with when-issued securities and forward commitments, at least equals the purchase price under each of the Fund's then outstanding when issued and forward commitments. 17. Short-Term Trading All Funds can use short-term trading of securities as a means of managing their portfolios to achieve their investment objectives. As used herein, "short-term trading" means the purchase and subsequent sale of a security after it has been held for a relatively brief period of time. A Fund may engage in short-term trading to the extent that the subadviser believes the transactions, net of costs (including commissions, if any), will benefit the Fund. Generally speaking, short-term trading can be expected to generate expenses for a Fund that would not be incurred by a Fund that did not engage in that practice. 18. Entering Into Repurchase Agreements All of the Funds may enter into repurchase agreements. A repurchase agreement is a contract under which a Fund would acquire a security for a relatively short period (e.g., 7 days), subject to the seller's obligation to repurchase the security at a fixed time and price (representing the Fund's cost plus interest). Repurchase agreements will be entered into only with member banks of the Federal Reserve System, with "primary dealers" in U.S. Government securities or with other dealers and banks who meet a subadviser's credit standards. No Fund will invest in repurchase agreements maturing in more than 7 days if that investment, together with any other investments deemed "illiquid," would exceed 15% (10% in the case of the Money Market Fund) of the Fund's net assets. Each Fund has a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Fund's custodian, co-custodian, or sub-custodian, either physically or in book-entry form, and that the collateral must be marked-to-market daily to ensure that each repurchase agreement is fully "collateralized" at all times. In the event of a bankruptcy or 23 other default by a seller of a repurchase agreement, however, the Fund could experience delays in liquidating the underlying securities and could experience losses (including the possible decline in the value of the underlying securities during the period while the Fund seeks to enforce its rights thereto, possible subnormal levels of income and lack of access to income during this period, and expenses of enforcing its rights). 19. Participating in Joint Trading Accounts John Hancock has established a "joint trading account" that all Funds, in the discretion of their subadvisers, can use to invest relatively small amounts of cash on a more favorable basis than they could do individually. John Hancock is responsible for investing the aggregate cash balances in the joint trading account into one or more repurchase agreements, as described in Section 18. above, or in other money market instruments. The joint trading account was established pursuant to an order of the SEC and all of the Funds (except the Large Cap Growth, Large Cap Growth B, Fundamental Growth, Earnings Growth, Total Return Bond and Money Market Funds) regularly participate in it. Each Fund is also free to participate in any similar joint trading account that its subadviser operates for mutual fund assets managed by it. These other joint trading accounts would be operated pursuant to their own SEC exemptive orders The Total Return Bond Fund and the portion of the Active Bond Fund sub-managed by Pacific Investment Management Company LLC regularly participates in such other joint trading accounts. Whenever a subadviser operates a non-John Hancock joint trading account, the subadviser is responsible for ensuring that all repurchase agreements acquired through these accounts are at all times fully collateralized. 20. Lending of Fund Securities In order to generate additional income, all Funds may, and most do, lend securities from their portfolios to brokers, dealers and financial institutions such as banks and trust companies. Such loans will be secured by collateral consisting of cash or U.S. Government securities, which will be maintained in an amount equal to at least 100% of the current market value of the loaned securities. During the period of the loan, the Fund receives the income (if any) on the loaned securities, as well as additional compensation for making the loan. Cash collateral may be invested in short-term securities, which will increase the current income of the Fund. Such loans will be terminable by the Fund at any time. The Fund will have the right to regain record ownership of loaned securities in order to exercise rights of a holder thereof including receiving interest or other distributions or exercising voting rights. The Fund may pay reasonable fees to persons unaffiliated with the Fund for services in arranging such loans. Lending of portfolio securities involves a risk of failure by the borrower to return the loaned securities, in which event the Fund may incur a loss. However, most of the Funds' loans of securities are pursuant to an arrangement with State Street Bank & Trust Company, the Trust's primary custodian. Under these arrangements, State Street Bank & Trust Company guarantees the Trust against any loss or damages that any Fund incurs as a result of the borrower failing to return the Fund's securities in accordance with the terms of the loan. No Fund will lend portfolio securities having a total value in excess of 33 1/3% of its total assets. 21. Using Reverse Repurchase Agreements and Mortgage "Dollar Rolls" a. Overview: A Fund may enter into reverse repurchase agreements to facilitate portfolio liquidity, or in arbitrage transactions (discussed below). In a reverse repurchase agreement, the Fund sells a security and enters into an agreement to repurchase the security at a specified future date, but at a lower price. The Fund generally retains the right to interest and principal payments on the security, as well as use of the proceeds while the repurchase agreement is outstanding. A Fund may enter into mortgage dollar rolls, in which the Fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities at a specified future date and price. While the Fund foregoes principal and interest paid on the mortgage-backed securities during the "roll" period, the Fund is compensated by the difference between the current sale price and the lower price for the future purchase as well as by any return earned on the proceeds of the initial sale. The mortgage dollar rolls and reverse repurchase agreements entered into by a Fund may be used as arbitrage transactions in which the Fund will maintain an offsetting position in investment-grade debt obligations or repurchase agreements that mature on or before the settlement date of the related mortgage dollar roll or reverse repurchase agreement. Since the Fund will receive interest on the securities or repurchase agreements in which it invests the transaction proceeds, such transactions could be considered to involve financial leverage. However, since such securities or repurchase agreements will be high quality and will mature on or before the settlement date of the mortgage dollar roll or reverse repurchase agreement, the Trust does not believe that such arbitrage transactions present the risks to the Fund that are generally associated with financial leverage. 24 b. Asset segregation requirements for reverse repurchase agreements and mortgage dollar rolls: The relevant subadviser of each Fund, subject to oversight and any directions given by John Hancock, will cause the Fund's custodian to segregate (or will segregate by "earmarking" on Fund records that the sub-adviser maintains) cash or other assets it determines to be liquid that are not segregated to support any other Fund obligation and that at all times at least equals the amount of the Fund's obligations under outstanding mortgage dollar rolls and reverse repurchase agreements. 22. Investing in Rule 144A Securities, Section 4(2) Commercial Paper and Illiquid Securities A Fund may purchase unregistered securities that are eligible for resale to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act of 1933. A Fund may also purchase commercial paper that is offered in reliance on the exemption in Section 4(c) of that Act. Case-by-case determinations are made whether each issue of Rule 144A securities or Section 4(2) commercial paper owned by a Fund is an illiquid security. Each Fund may purchase illiquid Rule 144A securities, illiquid Section 4(2) commercial paper or other illiquid assets if, and only if, the total of all the Fund's illiquid assets would not thereby be made to exceed 15% (10% in the case of the Money Market Fund) of the Fund's net assets. 23. Investing in Preferred Stock, Convertible Securities and Warrants Investments may be made in debt or preferred equity securities and those convertible into, or exchangeable for, equity securities. Traditionally, convertible securities have paid dividends or interest at rates higher than common stocks but lower than nonconvertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree. In recent years, convertibles have been developed which combine higher or lower current income with options and other features. Warrants are options to buy a stated number of shares of common stock at a specified price anytime during the life of the warrants (generally, two or more years). 24. Investing in Initial Public Offerings ("IPOs") Almost all Funds of the Trust have the ability to invest in IPOs. IPO investments may be more volatile than other types of investments and a Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. The actual effect of IPOs on performance depends on a variety of factors, including the number of IPOs the Fund invests in, whether and to what extent a security purchased in an IPO appreciates in value, and the asset base of the Fund. There is no guarantee that a Fund's investments in IPOs, if any, will continue to have a similar impact on the Fund's performance in the future. D. THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS The Funds' investment objectives and strategies may, in general, be changed without the approval of shareholders. In a few cases, however, the Investment Company Act requires such approval. In addition, the Trust has adopted as "fundamental" the below-listed restrictions relating to the investment of each Fund's assets. That these restrictions are "fundamental" policies means that they may not be changed for any Fund without the approval of a majority of the outstanding voting shares of each affected Fund. (The term "majority of the outstanding voting shares" means the lesser of (1) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (2) more than 50% of the outstanding shares.) To the extent the Trust's prospectus or this Statement of Additional Information anywhere sets forth investment restrictions more restrictive than the fundamental restrictions described below, the more restrictive limitation controls; but any such more restrictive limitation may be changed without any shareholder approval, subject to the below fundamental restrictions. The Trust's current fundamental investment restrictions are as follows: 1. REAL ESTATE. No Fund will purchase or sell real estate. This restriction does not prevent (a) a Fund from acquiring real estate as a result of ownership of those securities or other instruments in which the Fund is permitted to invest; (b) a Fund from investing in securities that are secured by real estate or interests therein; (c) a Fund from investing in issuers that invest, deal, or otherwise engage in transactions in real estate or interests therein; or (d) the Real Estate Equity Fund from making any type of investment that it is otherwise permitted to make. 25 2. LOANS. No Fund will make loans, except that this restriction does not prevent a Fund from (a) making loans through the acquisition of obligations in which the Fund may invest consistent with its objective and investment policies; (b) lending portfolio securities; or (c) making loans to other Funds or investment companies managed or sponsored by an investment adviser to the Fund or by any company controlling, controlled by, or under common control with such investment adviser. 3. COMMODITIES. No Fund will purchase or sell physical commodities, except that a Fund may sell physical commodities acquired as a result of ownership of those securities or other instruments in which a Fund is permitted to invest. 4. UNDERWRITING. No Fund will engage in the underwriting of securities of other issuers. This restriction will not prevent a Fund from disposing of its portfolio securities regardless of its status as an underwriter under any federal or state securities laws. 5. BORROWING. No Fund will borrow money, except that this restriction will not prevent a Fund from borrowing (a) from banks for any purpose, provided that immediately after any such borrowing there is an asset coverage of at least 300% for all borrowings of the Fund as required under Section 18(f)(1) of the Investment Company Act (subject to any amendments to, regulations under, or exemptions from Section 18(f)(1) of the Investment Company Act); (b) for temporary purposes only, provided that loans for temporary purposes do not exceed 5% of the value of the total assets of the Fund as of the time when each such loan is made; or (c) from another fund, or from a related entity of another fund, pursuant to any amendments to, regulations under, exemptions from or interpretations of the Investment Company Act./1/ 6. SENIOR SECURITIES. No Fund will issue senior securities, except as permitted under Section 18(f) of the Investment Company Act, any amendments thereto, any regulations thereunder, or any applicable exceptions therefrom. 7. INDUSTRY CONCENTRATION. The Equity Index, Large Cap Value, Large Cap Growth, Large Cap Growth B, Earnings Growth, Fundamental Value, Fundamental Value B, Fundamental Growth, Mid Cap Value, Mid Cap Value B, Mid Cap Growth, Small Cap Value, Small Cap Growth, Small Cap Emerging Growth, International Equity Index, Overseas Equity, Overseas Equity B, Overseas Equity C, Short-Term Bond, Bond Index, Active Bond, Total Return Bond, High Yield Bond, and Global Bond Funds will not purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after such purchase, the value of the Fund's investments in such industry would exceed 25% of its total assets taken at market value. This restriction does not limit the Money Market Fund's investments in instruments issued by domestic banks (or by a foreign branch of a domestic bank, but only if the domestic bank is unconditionally liable in the event that the foreign branch fails to honor the instrument). For the purpose of determining industry concentration, telephone, water, gas and electric public utilities are each regarded as separate industries, and wholly-owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parent. In conformity with its understanding of current interpretations of the Investment Company Act by the staff of the SEC, the Trust, as a non-fundamental policy, interprets this limitation not to apply to securities issued by the Federal government, or state and local governments within the U.S., or political subdivisions thereof; but this exception does not apply to securities of foreign government entities. If these interpretations change, however, the Trust may modify its practices to conform to such changes - ---------- /1/ All of the Funds also operate under a non-fundamental policy that, if borrowings by a Fund ever exceed 5% of its total assets, that Fund will make no new investments until it has paid down its borrowings to below 5%. 26 E. BOARD OF TRUSTEES AND OFFICERS OF THE TRUST The Board of Trustees of the Trust is responsible for overall management of the Trust. The Board may exercise all powers of the Trust, except those powers which are conferred solely upon or reserved to the shareholders. The Board has three standing committees, which are discussed below. The Governance Committee of the Board consists of the Trust's four independent Trustees: Ms. Cook, Ms. Kessler, Mr. Verdonck and Mr. McClellan. The Governance Committee assists the Board of Trustees by considering and making recommendations on such matters as the Board's structure, composition, manner of operations, and effectiveness; and the compensation and continuing education of independent Trustees. This committee also gives particular consideration to certain matters that involve actual or potential conflicts of interest between the Trust and its service providers. The terms of the Trust's advisory agreements are one important example of this. This committee met four times in 2002. The Nominating Committee of the Board also consists of the Trust's four independent Trustees. This committee is responsible for the selection and nomination of candidates to be independent Trustees. Although the Nominating Committee may receive input from John Hancock in this regard, the committee controls the selection and nominating process. The extent of this committee's activities in a given year will vary somewhat, depending on how many vacancies for the office of independent trustee need to be filled. The Nominating Committee did not meet during 2002. The Audit Committee of the Board consists of the following independent Trustees: Ms. Cook, Mr. McClellan and Mr. Verdonck. The Audit Committee assists the Board in fulfilling its oversight responsibilities relating to the quality and objectivity of financial reporting, the effectiveness and efficiency of operations (including internal controls), and compliance with applicable laws and regulations. Among other things, the Audit Committee seeks to maintain good communication among the Trustees, the Trust's independent auditors and the Trust's management. Each year, the committee evaluates and makes a recommendation to the Board of Trustees as to the independent auditors to be retained by the Trust to audit the Trust's financial statements. The committee also reviews with such auditors the scope of the audit to be performed and the results of such audit. The Audit Committee met three times during 2002. Each of the above-described committees has authority to retain, at the Trust's expense, legal counsel and such other experts as the committee deems advisable to help discharge its functions. The following table provides information about the members of the Board of Trustees and the officers of the Trust:
Number of Other the Trust's Directorships Position Principal Occupation Funds Overseen Held by Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees - --------------------------- --------------- ---------------- --------------------------------- -------------- ------------- Interested Trustees/*/: Michele G. Van Leer Chairman and Indefinite Senior Vice President, Product 30 None (age 46) Trustee (Commenced Management, John Hancock Life John Hancock Place September, 1998) Insurance Company; President and Boston, Massachusetts 02117 Director John Hancock Variable Life Insurance Company Kathleen F. Driscoll Vice Chairman, Indefinite Senior Vice President, Signator 30 None (age 47) President and (Commenced Brokerage Development, John John Hancock Place Trustee June, 2001) Hancock Life Insurance Company, Boston, Massachusetts 02117 Vice President, Corporate Communications, John Hancock Life Insurance Company
- ---------- * Ms. Van Leer and Ms. Driscoll are the only Trustees who are "interested persons" as defined in the Investment Company Act. 27
Number of Other the Trust's Directorships Position Principal Occupation Funds Overseen Held by Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees - --------------------------- --------------- ---------------- --------------------------------- -------------- ------------- Independent Trustees: Elizabeth G. Cook Trustee Indefinite Expressive Arts Therapist, Dana 30 None (age 66) (Commenced Farber Cancer Institute; c/o John Hancock Variable April, 1993) President, The Advertising Club Series Trust I, of Greater Boston John Hancock Place, Boston, Massachusetts 02117 Diane C. Kessler Trustee Indefinite Executive Director, Massachusetts 30 None (age 57) (Commenced Council of Churches c/o John Hancock Variable April, 1999) Series Trust I, John Hancock Place, Boston, Massachusetts 02117 Robert F. Verdonck Trustee Indefinite President and Chief Executive 30 None (age 58) (Commenced Officer, East Boston Savings Bank c/o John Hancock Variable April, 1999) Series Trust I, John Hancock Place, Boston, Massachusetts 02117 Hassell H. McClellan Trustee Indefinite Associate Professor, The Graduate 30 None (age 58) (Commenced School of the Wallace E. Carroll c/o John Hancock Variable February, 2001) School of Management, Boston Series Trust I, College John Hancock Place, Boston, Massachusetts 02117
28
Number of Other the Trust's Directorships Position Principal Occupation Funds Overseen Held by Name, Address and Age with Trust Term of Office During Past 5 years by Trustees Trustees - --------------------------- --------------- ---------------- --------------------------------- -------------- ------------- Other Officers Chief Legal Ronald J. Bocage Officer Indefinite Vice President & Counsel, John N/A N/A (age 58) (Commenced Hancock Life Insurance Company John Hancock Place June, 2003) Boston, Massachusetts 02117 Jude A. Curtis Compliance Indefinite Second Vice President and Chief N/A N/A (age 45) Officer (Commenced Investment Compliance Officer, John Hancock Place June, 2000) John Hancock Life Insurance Boston, Company; formerly Second Vice Massachusetts 02117 President and Counsel, Office of Business Conduct; John Hancock Life Insurance Company; formerly a Partner at Hale and Dorr LLP (law firm) Raymond F. Skiba Treasurer Indefinite Director of Fund Operations, N/A N/A (age 58) (Commenced John Hancock Life Insurance John Hancock Place February, 1986) Company Boston, Massachusetts 02117 Gladys C. Millan Assistant Indefinite Manager of Fund Operations, N/A N/A (age 57) Treasurer (Commenced John Hancock Life Insurance John Hancock Place March, 2003) Company Boston, Massachusetts 02117 Karen Q. Visconti Secretary Indefinite Director, Product & Market N/A N/A (age 50) (Commenced Management, John Hancock Life John Hancock Place August, 1999) Insurance Company Boston, Massachusetts 02117 Arnold R. Bergman Assistant Indefinite Senior Counsel, Law Department, N/A N/A (age 53) Secretary (Commenced John Hancock Life Insurance John Hancock Place, December, 1999) company; formerly Vice President, Boston, Massachusetts 02117 General Counsel and Secretary, First Variable Life Insurance Company
Certain members of the Trust's Board of Trustees may own either variable annuity contracts or variable life insurance policies that are supported by one of the Separate Accounts and, in that sense, have an interest in shares of the Trust. 29 The names and range of each Trustee's interest in any Fund as of December 31, 2003 are set forth in the table below Dollar Range of Dollar Range of Interest Name of Trustee Interest in Any Fund in All Funds - --------------------- -------------------- ------------------------ Interested Trustees: Michele G. Van Leer 0 0 Kathleen F. Driscoll 0 0 Independent Trustees: Elizabeth G. Cook $50,000-$100,000 $50,000-$100,000 Diane C. Kessler $10,000-$50,000 $10,000-$50,000 Robert F. Verdonck $1,000-$10,000 $1,000-$10,000 Hassell H. McClellan 0 0 Compensation paid by the Trust to its current disinterested Trustees during 2003 was as follows: Ms. Cook $ 77,000 Ms. Kessler $ 69,000 Mr. Verdonck $ 77,000 Mr. McClellan $ 73,000 The Trust paid no compensation to any other officer or Trustee. The Trustees' fees are allocated among the Trust's Funds in proportion to their relative net assets. The average aggregate net assets for all of the Funds totaled approximately $10.3 billion for the year 2003. F. INVESTMENT ADVISORY ARRANGEMENTS 1. The Trust's Investment Advisory Arrangements With John Hancock John Hancock, the Trust's investment adviser, is a Massachusetts corporation. Until February 1, 2000, John Hancock was a mutual life insurance company. Now, it is a subsidiary of John Hancock Financial Services, Inc., a publicly-traded holding company. John Hancock provides advisory services to the Funds pursuant to several investment advisory agreements. The Trust is party to each of these investment advisory agreements with John Hancock. The Trust currently pays John Hancock investment advisory fees at the following rates: John Hancock's Investment Advisory Fee as an Annual Percentage of Each Portion Fund of the Fund's Average Daily Net Assets - -------------------------- --------------------------------------------------- Equity Index .15% on the first $75 million; .14% on the next $50 million; .13% above $125 million Large Cap Value .75% Large Cap Growth .80% on the first $500 million; .75% on the next $500 million; .70% above $1 billion Large Cap Growth B .80% on the first $500 million; .75% on the next $500 million; .70% above $1 billion Earnings Growth 1.00% on the first $100 million; .90% above $100 million Growth & Income .71% on the first $150 million; .69% on the next $150 million; .67% above $300 million Fundamental Value .95% on the first $25 million; .85% on the next $25 million; .75% on the next $50 million; 65% above $100 million Fundamental Value B .95% on the first $25 million; .85% on the next $25 million; .75% on the next $50 million; .65% above $100 million Fundamental Growth .80% on the first $500 million; .75% on the next $500 million; .70% above $1 billion Mid Cap Value 1.05% on the first $100 million; 1.00% above $100 million Mid Cap Value B 1.05% on the first $100 million; 1.00% above $100 million 30 John Hancock's Investment Advisory Fee as an Annual Percentage of Each Portion Fund of the Fund's Average Daily Net Assets - -------------------------- --------------------------------------------------- Mid Cap Growth 1.00% on the first $50 million; .95% on the next $150 million; .90% above $200 million Small Cap Value .95% Small Cap Emerging Growth 1.05% on the first $100 million; and 1.00% above $100 million Small Cap Growth 1.05% on the first $100 million; and 1.00% above $100 million International Equity Index .18% on the first $100 million; .15% on the next $100 million; .11% above $200 million Overseas Equity 1.30% on the first $20 million; 1.15% on the next $30 million; 1.05% above $50 million Overseas Equity B 1.30% on the first $20 million; 1.15% on the next $30 million; 1.05% above $50 million Overseas Equity C 1.30% on the first $20 million; 1.15% on the next $30 million; 1.05% above $50 million Real Estate Equity 1.10% on the first $50 million; 1.00% on the next $50 million; .90% on the next $100 million; .80% above $200 million Health Sciences 1.00% on the first $250 million; .95% above $250 million Financial Industries 0.80% Managed .74% on the first $500 million; .68% on the next $500 million; .65% above $1 billion Short-Term Bond .60% Bond Index .15% on the first $100 million; .13% on the next $150 million; .11% above $250 million Active Bond .70% on the first $100 million; .65% on the next $150 million; .61% on the next $250 million; .58% on the next $500 million; .55% above $1 billion Total Return Bond .70% on the first $250 million; .68% on the next $250 million; and .65% above $500 million High Yield Bond .80% on the first $100 million; .70% above $100 million Global Bond .85% on the first $150 million; .80% on the next $150 million; .75% on the next $200 million; .70% above $500 million Money Market .25% Under its investment advisory agreements with the Trust, John Hancock advises the Trust in connection with policy and strategy decisions; provides administration of much of the Trust's day-to-day operations; serves as the Trust's transfer agent and dividend disbursing agent; prepares the Trust's financial statements; maintains records required by the Investment Company Act of 1940; and supervises activities of the subadvisers (discussed below) and of other service providers to the Trust. John Hancock also provides the Trust with office space, supplies and other facilities required for the business of the Trust. John Hancock pays the compensation of Trust officers and employees and the expenses of clerical services relating to the administration of the Trust. To the extent that any administrative or legal services for the Trust are provided by John Hancock's Law Department, however, John Hancock charges the Trust separately, and the Trust pays such charges in accordance with the terms of the investment advisory agreements. All other expenses not expressly assumed by John Hancock under the investment advisory agreements are paid by the Trust. These include, but are not limited to, the Trust's taxes (if any); custodian fees; auditing fees; brokerage commissions; advisory fees; the compensation of Trustees who are not affiliated with John Hancock; the Trust's fidelity bond coverage; the costs of printing and distributing annual and semi-annual reports and voting materials to holders of variable annuity contracts and variable life insurance policies that participate in the Trust; tabulating votes; fees for certain accounting, valuation, and compliance services; legal fees; SEC registration costs; proxy costs; costs of organizing any new Funds; and other expenses related to the Trust's operations. 31 2. The Trust's Arrangements With Subadvisers Set forth below are the names of the Funds' subadvisers and certain persons who may control them.
Subadviser's Controlling General Nature of Control Subadviser and the Funds It Manages Person Basis of Control Person's Business -------------------------------------- ---------------- -------------------------------------- -------------------------- 1. Independence Investment LLC (Large Cap John Hancock Indirectly owns 100% of the Financial services holding Growth, Large Cap Growth B, Financial subadviser company Fundamental Growth, Managed, Growth & Services Income and Short-Term Bond Funds) Inc.("JHFS")* John Hancock Indirectly owns 100% of the subadviser Life insurance and other Life Insurance financial services Company provided directly or through subsidiaries 2. John Hancock Advisers, LLC (Financial Same as 1. Industries and Active Bond Funds) above.* 3. Declaration Research & Management LLC Same as 1. (Active Bond Fund) above.* 4. SSgA Funds Management, Inc. (Equity State Street Owns 100% of the subadviser Financial services holding Index and International Equity Index Corporation company Funds) 5. T. Rowe Price Associates, Inc. (Large T. Rowe Price Owns 100% of the subadviser Publicly traded financial Cap Value, Growth & Income, Mid Cap Group, Inc. services holding company Value, Mid Cap Value B and Small Cap Value Funds) 6. Morgan Stanley Investment Management Morgan Stanley Directly owns 100% of voting stock Publicly traded financial Inc.** (Real Estate Equity Fund) services company 7. Standish Mellon Asset Management Mellon Financial Indirectly owns 100% of the Bank holding company Company LLC (Bond Index Fund) Corporation subadviser through Standish Mellon Asset Management Holdings LLC (sole owner of subadviser) 8. Wellington Management Company, LLP Executive Executive Committee Investment management (Fundamental Value, Fundamental Value Committee B, Mid Cap Growth, Small Cap Value, consisting of Small Cap Emerging Growth, Small Cap nine of the Growth, Health Sciences, High Yield firm's partners Bond and Money Market Funds) 9. Capital Guardian Trust Company The Capital The subadviser is an indirect wholly Financial services holding (Managed, Overseas Equity, Overseas Group Companies owned subsidiary of CGCI company Equity B, Overseas Equity C and Global Inc. ("CGCI") Bond Funds) 10. Pacific Investment Management Company Allianz AG Subadviser is a majority-owned Allianz AG is a LLC(Active Bond and Total Return Bond subsidiary of Allianz Dresdner Asset European-based Funds) Pacific Life Management of America L.P., ("ADAM multinational insurance Insurance LP"). Allianz Aktiengesellschaft and financial services Company ("Allianz AG") is the indirect holding company. majority owner of ADAM
32
Subadviser's Controlling General Nature of Control Subadviser and the Funds It Manages Person Basis of Control Person's Business -------------------------------------- ---------------- -------------------------------------- -------------------------- LP. Pacific Life Insurance Company Pacific Life Insurance owns an indirect minority equity Company is a interest in ADAM LP. California-based insurance company. 11. RREEF America LLC(Real Estate Equity Deutsche Bank AG The subadviser is a wholly owned European-based, Fund) subsidiary multinational insurance and financial services holding company. 12. Fidelity Management & Research Company FMR Corp. FMR has entered into a sub-subadvisory ("FMR") (Earnings Growth Fund) agreement with FMR Co., Inc. (FMRC) pursuant to which FMRC has primary responsibility for choosing investments for the Earnings Growth Fund. FMR Corp., organized in 1972, is the ultimate parent company of FMR and FMRC. The voting common stock of FMR Corp. is divided into two classes. Class B is held predominantly by members of the Edward C. Johnson 3d family and is entitled to 49% of the vote on any matter acted upon by the voting common stock. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Under the Investment Company Act of 1940, control of a company is presumed where one individual or group of individuals owns more than 25% of the voting stock of that company. Therefore, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the 1940 Act, to form a controlling group with respect to FMR Corp.
- ---------- * In April, 2004, JHFS was merged with a subsidiary of Manulife Financial Corporation, a publicly-traded, multinational insurance and financial services holding corporation organized under the laws of Canada. As a consequence of this merger, the ultimate parent of John Hancock Life Insurance Company, Independence Investment LLC, John Hancock Advisers, LLC and Declaration Management & Research Company is now Manulife Financial Corporation. **Morgan Stanley Investment Management Inc. does business in certain instances (including in its role as Subadviser to the Real Estate Equity Fund) under the name "Van Kampen." 33 Set forth below are the sub-advisory fees that John Hancock pays the subadvisers for each Fund. The below fees are paid by John Hancock and not by the Funds. Subadvisory Fees Payable by John Hancock, as a Fund Percentage of Each Fund's Average Daily Net Assets - -------------------------- --------------------------------------------------- Equity Index .05% on the first $50 million; .04% on the next $50 million; .02% on the next $300 million; and .01% above $400 million Large Cap Value* .40% on the first $500 million; and .35% above $500 million Large Cap Growth .30% on the first $500 million; .2625% on the next $500 million; and .225% above $1 billion Large Cap Growth B .30% on the first $500 million; .2625% on the next $500 million; and .225% above $1 billion Earnings Growth .45% on the first $250 million; .42% on the next $500 million; and .38% above $750 million Growth & Income* Assets managed by T. Rowe Price Associates: .40% on the first $500 million and .35% above $500 million Assets managed by Independence Investment, LLC: .1875% Fundamental Value .40% on the first $100 million; and .30% above $100 million Fundamental Value B .40% on the first $100 million; and .30% above $100 million Fundamental Growth .30% on the first $500 million; .2625% on the next $500 million and .225% above $1 billion Mid Cap Value* .60% on the first $50 million and .50% on all assets once assets exceed $50 million Mid Cap Value B* .60% on the first $50 million and .50% on all assets once assets exceed $50 million Mid Cap Growth .50% on the first $50 million; .45% on the next $150 million and .40% above $200 million Small Cap Value* Assets managed by T. Rowe Price: .60% on the first $500 million and .55% above $500 million Assets managed by Wellington Management: .65% on the first $100 million and .60% above $100 million Small Cap Emerging Growth .65% on the first $100 million and .60% above $100 million Small Cap Growth .65% on the first $100 million and .60% above $100 million International Equity Index .10% on the first $100 million and .08% above $100 million Overseas Equity .60% on the first $300 million; .45% on the next $200 million and .40% above $500 million Overseas Equity B .60% on the first $300 million; .45% on the next $200 million and .40% above $500 million 34 Subadvisory Fees Payable by John Hancock, as a Fund Percentage of Each Fund's Average Daily Net Assets - -------------------------- --------------------------------------------------- Overseas Equity C .60% on the first $300 million; .45% on the next $200 million and .40% above $500 million Real Estate Equity Assets managed by RREEF America L.L.C.: .45% Assets managed by Van Kampen: .65% on the first $50 million; .55% on the next $50 million; .50% on the next $100 million and .40% above $200 million Health Sciences .65% on the first $50 million; .55% on the next $50 million and .45% above $100 million Financial Industries .70% on the first $50 million; .60% on the next $50 million; .50% on the next $100 million and .40% above $200 million Managed "Growth style" portion of assets managed by Independence Investment LLC: .30% on the first $500 million; .2625% on the next $500 million and .2250% above $1 billion "Fixed income" portion of assets managed by Independence Investment LLC: .15% of first $100 million; .125% on the next $150 million and .10% above $250 million Assets managed by Capital Guardian Trust Company: .475% on the first $150 million; .425% on the next $150 million; .325% on the next $200 million and .275% above $500 million Short-Term Bond .15% on the first $100 million; .125% on the next $150 million and .10% above $250 million Bond Index .07% on the first $100 million; .06% on the next $150 million; .03% on the next $250 million and .01% above $500 million Active Bond Assets managed by John Hancock Advisers, LLC: .25% on the first $100 million; .20% on the next $150 million; .16% on the next $250 million; .125% on the next $500 million and .10% above $1 billion Assets managed by Declaration Management & Research LLC: .15% on the first $100 million; .125% on the next $150 million and .10% above $250 million Assets managed by PIMCO: .25% Total Return Bond .25% High Yield Bond .40% Global Bond .375% on the first $300 million; .30% on the next $200 million and .275% above $500 million Money Market 0.075% on the first $500 million and .02% above $500 million *T. Rowe Price has voluntarily agreed to waive a portion of the sub-advisory fee it receives from John Hancock Life Insurance Company for services to the Fund shown. Effective December 15, 2003, the sub-investment advisory fee reduction is 5% based on the combined levels of Trust assets managed by T. Rowe Price. 35 3. Dollar Amounts of Advisory Fees, Subadvisory Fees, and Expense Reimbursements Set out below are the dollar amounts of advisory fees that the Trust paid to John Hancock and the sub-advisory fees that John Hancock paid to sub-advisers for the past three years:
Fund Investment Adviser Sub-advisers* - ------------------------------ ---------------------------------- ------------------------------- 2003 2002 2001 2003 2002 2001 ---------- ---------- ---------- --------- --------- --------- Equity Index.................. 733,990 670,965 638,853 119,929 115,079 184,656 Large Cap Value............... 2,241,923 1,958,804 1,654,981 1,195,700 1,044,702 892,337 Large Cap Growth.............. 4,348,351 2,906,241 3,319,872 1,620,859 1,810,686 2,489,889 Large Cap Growth B............ 235,226 278,349 272,132 149,444 198,066 193,921 Fundamental Growth............ 201,763 252,723 327,064 109,424 140,403 181,703 Earnings Growth............... 1,665,904 1,797,191 2,410,233 816,176 992,875 1,535,019 Growth & Income............... 12,774,424 14,166,639 18,378,237 4,392,251 4,940,873 6,378,814 Fundamental Value............. 965,198 1,098,084 342,746 489,507 588,303 208,657 Fundamental Value B........... 332,454 366,083 278,769 177,263 193,677 148,487 Mid Cap Value................. 86,810 -- -- 47,350 -- -- Mid Cap Value B............... 695,383 393,262 218,743 380,385 274,096 164,053 Mid Cap Growth................ 1,675,614 1,516,336 1,403,338 805,828 731,448 848,219 Small Cap Value............... 1,379,413 1,179,436 559,231 897,919 744,902 353,196 Small Cap Emerging Growth..... 658,792 539,384 619,083 422,462 389,543 459,131 Small Cap Growth.............. 1,380,249 1,548,512 1,533,746 657,282 737,409 937,017 International Equity Index.... 214,055 197,047 261,569 147,658 136,337 179,380 Overseas Equity............... 377,034 305,288 291,727 233,400 188,986 187,638 Overseas Equity B............. 1,136,004 988,252 844,115 582,864 512,504 547,558 Overseas Equity C............. 660,775 557,164 364,553 417,729 353,418 272,023 Real Estate Equity............ 1,929,064 1,796,693 1,556,143 880,122 758,395 Health Sciences............... 275,079 276,778 163,858 164,329 152,224 90,120 Financial Industries.......... 320,139 -- -- 273,662 -- -- Managed....................... 13,323,272 15,022,416 18,129,438 5,757,563 6,384,611 7,509,704 Short-Term Bond............... 1,533,284 1,151,717 468,356 411,536 364,685 225,303 Bond Index.................... 314,757 248,866 135,751 146,042 115,631 66,937 Active Bond................... 6,383,947 5,841,345 5,236,730 1,888,848 1,519,340 1,389,019 Total Return Bond............. 149,662 -- -- 53,448 -- -- High Yield Bond............... 633,292 463,989 260,006 334,340 260,997 175,704 Global Bond................... 817,465 492,904 518,629 378,269 231,954 239,893 Money Market.................. 2,065,570 1,966,939 1,319,703 440,297 454,983 650,891
- ---------- Paying these fees to the sub-advisers is solely the responsibility of John Hancock and not the Trust. Under the current investment advisory agreements for each Fund (other than the current investment advisory agreements for the International Equity Index, Overseas Equity, Overseas Equity B, Overseas Equity C, Health Sciences and Global Bond Funds), for any fiscal year in which the normal operating costs and expenses of any Fund, exclusive of the investment advisory fee, interest, brokerage commissions, taxes and extraordinary expenses outside the control of John Hancock exceed 0.10% of that Fund's average daily net assets, John Hancock will reimburse that Fund in an amount equal to such excess. Reimbursements for the past three years under the investment advisory agreements then in effect for each Fund have been as follows: Fund 2003 2002 2001 - ------------------------------ ---------- ---------- ---------- Large Cap Growth B............ 676 5,454 29,164 Fundamental Growth............ 0 45,456 67,599 Fundamental Value............. 7,589 -- 79,742 Fundamental Value B........... 42,131 63,635 10,830 Earning Growth 41,846 -- -- Mid Cap Value................. 21,663 -- -- Mid Cap Value B............... 27,357 70,763 68,521 Mid Cap Growth................ -- 13,182 -- 36 Fund 2003 2002 2001 - ------------------------------ ---------- ---------- ---------- Small Cap Value............... 11,621 1,730 16,492 Small Cap Emerging Growth..... 62,221 23,494 7,794 Small Cap Growth.............. 85,659 -- 50,542 International Equity Index.... 188,545 201,707 202,794 Overseas Equity............... 86,658 87,685 58,591 Overseas Equity B............. 207,499 468,798 165,435 Overseas Equity C............. 285,751 684,568 733,661 Health Sciences............... 41,196 76,501 13,968 Bond Index.................... 10,617 52,752 -- High Yield Bond............... 38,226 32,972 38,330 Global Bond................... 30,617 37,417 2,284 4. Basis of Trustee Approval of Advisory Arrangements The Trust's Board of Trustees ("Board"), at a meeting on February 11, 2004, approved the continuance of all of the Trust's investment management agreements ("advisory agreements") as in effect at that time with John Hancock and the continuance of all of the Trust's definitive sub-investment management agreements ("sub-advisory agreements") In the process, the Board evaluated, among other things, written and oral information provided by John Hancock in response to a request of the Trustees. In addition, the Board's Trust Governance Committee, composed exclusively of the Board's independent Trustees, met prior to the Board meeting on February 10, 2004 and evaluated written information provided in advance to the Board by John Hancock. During the year, the Board devotes a substantial portion of five of its six regularly scheduled meetings to an ongoing review and evaluation of John Hancock and the subadvisers. This ongoing process is based primarily on written and oral reports by John Hancock, in-person and written presentations by the Trust's subadvisers on a rotating basis, and answers to questions addressed by the Trustees to representatives of John Hancock and the subadvisers. In this connection, the Trustees receive information from John Hancock regarding John Hancock's performance of its functions, including monitoring and evaluation of each subadviser which includes, among other things, review of certain filings made with the SEC and written procedures and other materials submitted to John Hancock and the basis of compensation paid to portfolio managers. This information relates to such matters as the nature, scope and quality of the services provided by the subadvisers to the Trust, and includes, among other things, (i) the investment performance of each subadviser, (ii) any recommendation by John Hancock to terminate, replace or add a subadviser, and (iii) any recommendation by John Hancock to change any advisory or sub-advisory fee. The Trust Governance Committee schedules four meetings a year pursuant to a Charter that empowers the Committee to meet separately from management in connection with consideration of the advisory and sub-advisory agreements. The Charter also empowers the Committee, in any case it deems advisable, to retain special counsel or other experts or consultants, at the expense of the Trust or any Fund, to further the interests of the Trust. The Board generally schedules its meeting in February of each year to consider whether or not to approve generally continuing the advisory and sub-advisory agreements for another year. The Board considers, as applicable, factors bearing on the nature, scope, quality, cost and profitability of the services provided to the Trust under these agreements, with a view toward making a business judgment whether each agreement, including the fee, is, under all of the circumstances, in the best interest of the Trust. In approving the above-mentioned agreement continuances at their February 11, 2004 meeting, the Trustees considered various factors, and, in their business judgment, reached various conclusions, principally including the following: . The Trustees reviewed the nature and scope of the various management and administrative services that John Hancock provides to the Trust, including, among other things, John Hancock's functions in overseeing, monitoring and reporting on each of the Trust's subadvisers. The Trustees also reviewed the nature and scope of the portfolio management services that the subadvisers provide to the various Funds. . The Trustees assessed the quality of John Hancock's services and each subadviser's services, on such bases as investment performance and expense experience for each Fund, on both an absolute basis and a comparative basis (against benchmarks, Morningstar ratings, certain investment performance data of similar funds prepared at John Hancock's request by an unaffiliated company, and certain investment performance data of comparable John Hancock-sponsored publicly available Funds) over current and multi-year periods. Given that similar funds may allocate other operating expenses (non-advisory fees) differently between the fund and its adviser than does a Fund of the Trust, the Trustees concluded that a comparison of 37 aggregate fees and expenses can be more meaningful than comparison of advisory fees only and/or comparison of other operating expenses only. . The Trustees reviewed schedules of the advisory fee and sub-advisory fee(s) for each Fund and concluded that most of the Funds have breakpoints that can pass along a portion of any economies of scale to the contract owners. The Trustees will consider instituting or accentuating breakpoints for each Fund or seeking a fee reduction if the Fund's assets continue to increase and further economies of scale result. . The Trustees considered the above-mentioned analysis of similar fund advisory fee and expense data. Based on that analysis, the Trustees concluded that, while comparative data are not to be relied on exclusively, the aggregate advisory fees and other expenses of each Fund are within the range paid by similar funds. More specifically, the Trustees concluded that eight of the Funds (27%) had aggregate expenses more than ten basis points lower than, and 22 Funds (73%) had aggregate expenses within ten basis points (plus or minus) of, the average fund expense ratio in the appropriate Morningstar peer group. The Trustees also considered the fact that John Hancock has undertaken to reimburse the Funds for certain operating expenses in excess of a stated rate and that, for 2003, John Hancock reimbursed 18 of the Funds pursuant to this undertaking. . The Trustees also considered the fact that John Hancock has undertaken to bear certain expenses that the Trust otherwise would be required to absorb, including, for example, the cost of distributing annual Trust prospectuses to existing contract owners and providing Trust Statements of Additional Information upon request of contract owners. . The Trustees considered that, in addition to the advisory fees received by John Hancock from the Trust, the Insurers derive benefits by having the Trust serve as the underlying funding medium for variable insurance products offered by the Insurers, which are subject to fees and charges payable to the Insurers. In this regard, the Trustees considered representations from John Hancock that (i) those fees and charges, in the aggregate, are reasonable in relation to the services rendered, expenses expected to be incurred, and risks assumed by the Insurers, (ii) those fees and charges do not duplicate fees and expenses paid by the Trust, and (iii) the advisory fees make no specific allowance to provide monies to finance distribution of either Trust shares or variable insurance products (although John Hancock may use profits realized from the advisory fees for any lawful purpose). While the Trustees are not responsible for the fees and charges deducted by the Insurers under the variable insurance products funded through the Trust, the Trustees concluded that, under all the circumstances, any such benefits to John Hancock did not appear to be inconsistent with the best interest of each Fund. . The Trustees considered that, in addition to the sub-advisory fees received by subadvisers from John Hancock, subadvisers in some cases receive benefits through soft dollar arrangements by which brokers provide research and certain other services to subadvisers in return for being allocated Trust "brokerage" transactions. The Trustees considered: (i) information provided by John Hancock (both in connection with the February 11, 2004 meeting and on a periodic basis) about the extent and nature of such practice by each Fund as applicable; (ii) representations of subadvisers regarding the appropriateness of their practices and (iii) the ongoing assessment and reports by an unaffiliated company of the degree to which each Fund is receiving "best execution." Under all the circumstances, the Trustees concluded that each Fund's practices in this regard did not appear to be inconsistent with the best interest of the Fund. . The Trustees also reviewed any practices by a Fund of directing portfolio transactions to a broker-dealer affiliated with the Fund's sub-adviser, as well as data comparing each Fund's portfolio "turnover" rate to that of other comparable funds. . The Trustees considered John Hancock's representation that John Hancock had not entered into any material business arrangement with a sub-adviser, including the involvement of any sub-adviser in the distribution of the Trust's shares (or John Hancock's related variable insurance products); made "revenue sharing" payments to distributors; instructed sub-advisers to direct Trust brokerage transactions to broker-dealers to incentivize or reward sales; or received "soft dollar" benefits in the form of distribution services. . The Trustees considered certain information from John Hancock about the overall profitability to John Hancock and its affiliates of the variable insurance products funded through the Trust, including certain information about profits to John Hancock from serving as the Trust's primary investment adviser and data regarding John Hancock's profitability targets from particular variable insurance products. They also considered information they had received from John Hancock about the difficulties of quantifying the cost and profitability of the advisory function separately from the aggregate cost and profitability of all of the functions performed by John Hancock and its affiliates to develop, offer, and maintain the products, including the cost of processing orders for the purchase and redemption of Trust shares. The Trustees concluded that, particularly in view of the interdependence of the Fund and the variable insurance products that it supports, the aggregate profitability information the Trustees had received was appropriate for purposes of their deliberations. 38 . The Trustees considered the fact that: (i) John Hancock pays the sub-advisory fees to the subadvisers; (ii) John Hancock and a Fund generally have a common interest in negotiating the sub-advisory fees downward; (iii) in some cases, John Hancock has succeeded in negotiating a sub-advisory fee rate that is less than the average rate that a subadviser charges to similar funds; and (iv) the subadvisers have less influence over the management of their respective Funds than a primary adviser to a retail mutual fund normally would (including any influence with respect to the level of their sub-advisory fees). In light of, among other things, the particular characteristics of the adviser/subadviser relationship, the Trustees concluded that the profitability information mentioned above concerning the Insurers was appropriate for purposes of their deliberations over continuation of both the advisory and sub-advisory agreements. . The Trustees also considered the amount of "spread" between the investment advisory fee paid by each Fund to John Hancock and the amount of sub-advisory fees that John Hancock, in turn, pays with respect to that Fund. The Trustees considered how much spread for each Fund and sub-adviser compared to John Hancock's overall objectives for such spreads and the reasons for any discrepancies. . The Trustees considered introducing performance-based advisory and sub-advisory fees, particularly with regard to the Funds that had been underperforming their benchmarks (although not necessarily underperforming their peers). The Trustees, however, decided not to pursue performance-based fees at this time, based on John Hancock's concern that such fees could lead to management practices that would not be in the best interests of contract owners. In addition to approving the continuance of the advisory and sub-advisory agreements at their February 11, 2004 meeting, the Trustees have recently taken the additional actions described in numbered paragraphs 1.-13.,below that would affect the advisory and sub-advisory arrangements as in effect on or after the date of this Statement of Additional Information. In taking such additional actions,, the Trustees, as a fundamental matter, followed essentially the same process, and considered essentially the same various factors, as described above, regarding the Trustees' general continuation of the then current agreements. Moreover, the Trustees considered, for each applicable Fund, written recommendations and rationales of John Hancock, based on such factors as comparisons of recommended subadvisers with existing subadvisers and optional subadvisers and due diligence reviews. In addition, the Trustees considered various factors, and, in their business judgment, reached various conclusions related to the specific facts and circumstances of each agreement, principally including those explained below. 1. The Fundamental Growth Fund. At its December 10, 2003 meeting, the Board approved the removal of Putnam Investment Management, LLC ("Putnam") as the sub-adviser for this Fund and its replacement by Independence Investment LLC ("Independence"). John Hancock recommended that Putnam be terminated based on (i) concerns that Putnam's reputation and stability would be adversely impacted by recent allegations of improper trading practices by its personnel, loss of certain significant accounts and assets under management, and the turnover of key investment personnel; and (ii) a desire for improved investment performance for the Fund. The Trustees were influenced by the fact that Independence would manage the Fund substantially in the manner that it had already been managing the Trust's Large Cap Growth Fund, and they concluded that this was the best option available for the Fund at this time. At its meeting on March 24, 2004, the Board also approved a reduction in the investment advisory fee of the Fundamental Growth Fund to make it equivalent to that paid by the Large Cap Growth Fund. The Trustees were influenced by the fact that, because these two Funds are being managed in substantially the same manner, it is appropriate for the fee structure to be the same. 2. Large Cap Growth B Fund (formerly, the Large Cap Aggressive Growth Fund). At its December 10, 2003 meeting, the Board approved the removal of Janus Capital Management, LLC ("Janus") as the sub-adviser for this Fund and its replacement by Independence. John Hancock recommended that Janus be terminated based on concerns that Janus' reputation and stability would be adversely impacted by recent allegations of improper trading practices by its personnel and turnover of key investment personnel, including a chief investment officer. The Trustees were influenced by the fact that Independence would manage the Fund substantially in the manner that it had already been managing the Trust's Large Cap Growth Fund, and they concluded that this was the best option available for the Fund at this time. At its meeting on March 24, 2004, the Board also approved a reduction in the investment advisory fee for the Large Cap Growth B Fund to make it equivalent to that paid by the Large Cap Growth Fund. The Trustees were influenced by the fact that, because the two Funds are being managed in substantially the same manner, it is appropriate for the fee structures to be the same. 3. Overseas Equity B Fund (formerly, the International Opportunities Fund). At its December 10, 2003 meeting, the Board approved (a) the termination of this Fund's sub-adviser and its replacement by Capital Guardian Trust Company ("Capital Guardian") and (b) elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of ..10% per annum. In approving Capital Guardian as the Fund's new sub-adviser, the Trustees were influenced by the fact that Capital Guardian would manage the Fund in the manner that it already had been managing the Trust's Overseas Equity Fund, and they believed that retention of Capital Guardian would increase the potential for improved investment performance by the Fund. The Trustees approved elimination of the above-mentioned .10% cap partially in recognition that an international fund such as this 39 necessarily tends to have higher ordinary operating expenses than an otherwise similar purely domestic fund and partially in recognition that, because Capital Guardian's sub-advisory fee would be higher than that of the previous sub-adviser, John Hancock would be retaining a reduced "spread" from the advisory fees that it receives from the Fund. 4. Overseas Equity C Fund (formerly the Emerging Markets Equity Fund). At its December 10, 2003 meeting, the Board approved: (a) the termination of this Fund's sub-adviser and its replacement by Capital Guardian, (b) a reduction in the advisory fee paid by the Fund to John Hancock, and (c) elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of .10% per annum. In approving Capital Guardian, as the Fund's new sub-adviser, the Trustees were influenced by the fact that Capital Guardian would manage the Fund in the manner that it had already been managing the Trust's Overseas Equity Fund. The Trustees believed that this would increase the potential for improved investment performance by the Fund, as well as significantly reduce the high operating expenses that had resulted from the Fund's historic policy of investing primarily in emerging markets. In that connection, Capital Guardian's sub-advisory fee is substantially less than that of the prior sub-manager and the Trustees believed it was appropriate for John Hancock's advisory fee likewise to be substantially reduced. Furthermore, the Trustees approved elimination of the above-mentioned .10% cap partially in recognition of the reduction in the advisory fee and partially in recognition that an international fund such as this necessarily tends to have higher ordinary operating expenses than an otherwise similar purely domestic fund. 5. Overseas Equity Fund. At its December 10, 2003 meeting, the Board approved (a) an increase in the advisory fee paid by this Fund to John Hancock and (b) the elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of .10% per annum. The Trustees approved this partially in recognition that an international fund such as this necessarily tends to have higher ordinary operating expenses than an otherwise similar purely domestic fund. More broadly, however, these changes resulted from the Trustees' consideration of information presented by John Hancock to the effect that the fee structure of this Fund, coupled with the expense "cap," did not afford John Hancock a sufficient level of compensation to allow John Hancock to continue to support the fund on a long term basis as it had in the past. The Trustees' actions at the December 10, 2003 meeting were intended to address this problem. The same is true of subsequent action the Board took (at its February 11, 2004 meeting) approving a reduction in the fees paid to the sub-adviser of this Fund. In the case of such latter action, the Trustees also took into consideration a representation that the quality or quantity of sub-advisory services to the Fund would not be reduced as a consequence of the fee reduction. 6. International Equity Index Fund. At its December 10, 2003 meeting, the Board approved (a) the termination of this Fund's sub-adviser and its replacement by SSgA Funds Management, Inc. ("SSgA") and (b) the elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of .10% per annum. A change in sub-advisers was necessary, because the prior sub-adviser was terminating its business of managing international equity index funds. The board approved SSgA primarily based on its confidence in SSgA's capabilities, SSgA's willingness to accept a significantly lower sub-advisory fee than the prior sub-adviser, and the Board's belief that the "spread" retained by John Hancock would still not be unreasonably large. The Trustees approved elimination of the .10% expense cap partially in recognition that an international fund such as this necessarily tends to have higher ordinary operating expenses than an otherwise purely domestic fund and partially in recognition of the fact that this expense cap was preventing John Hancock from retaining a sufficient amount of compensation to make its relationship with this Fund economically viable. 7. Global Bond Fund. At its December 10, 2003 meeting, the Board approved the elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of .10% per annum. The Trustees approved this partially in recognition that an international fund such as this necessarily tends to have higher ordinary operating expenses than an otherwise similar purely domestic fund and partially in recognition of the fact that eliminating this expense "cap" would not currently have a substantial impact on the Fund's overall expense ratio. 8. Health Sciences Fund. As its December 10, 2003 meeting, the Board approved the elimination of John Hancock's contractual obligation to reimburse the Fund for certain operating expenses in excess of .10% per annum. The Trustees approved this partially in recognition that doing so would enable John Hancock to retain an amount of compensation from this Fund that would be more likely to result in continued strong support for the Fund by John Hancock, while still not being excessive. 9. Fundamental Value B Fund (formerly the Large Cap Value CORE Fund). At its December 10, 2003 meeting, the Board approved the termination of this Fund's sub-adviser and its replacement by Wellington Management Company, LLP ("Wellington Management"). The Trustees were influenced by the fact that Wellington Management would manage the Fund in the manner that it already had been managing the Trust's Fundamental Value Fund, and the Trustees believed that this strategy (implemented by Wellington Management) would be more attractive to prospective investors. At its February 11, 2004 meeting, however, the Board also approved an increase in the management fee paid to John Hancock by this Fund to make it equivalent to that paid by the Fundamental Value Fund. The Trustees were influenced by the fact that, because these two Funds are being managed in substantially the same manner, it is appropriate for their fee structure to be the same. 40 10. Growth & Income Fund. At its December 10, 2003 meeting, the Board approved the removal of Putnam as the sub-adviser for a portion of the Growth & Income Fund's assets, and its replacement by T. Rowe Price Associates, Inc. ("T. Rowe Price"). John Hancock recommended that Putnam be terminated based on (i) concerns that Putnam's reputation and stability would be adversely impacted by recent allegations of improper trading practices by its personnel, loss of certain significant accounts and assets under management, and turnover of key investment personnel. The Trustees had confidence in T. Rowe Price's ability to effectively manage a portion of this Fund and were also mindful of certain advantages of establishing a broader relationship with T. Rowe Price. Specifically, this change helped to make the Trust's relationship with T. Rowe Price sufficiently large that T. Rowe Price would voluntarily reduce all of its sub-advisory fees with the Trust by 5%. Although such a reduction will not directly benefit the affected Funds of the Trust, it should help to ease upward pressure on advisory fee rates. 11. Mid Cap Value B Fund (formerly the Small/Mid Cap CORE Fund). At its December 10, 2003 meeting, the Board approved the termination of this Fund's sub-adviser and its replacement by T. Rowe Price. The Trustees were influenced by the fact that T. Rowe Price would manage the fund in the same manner as it already had been managing the Trust's Mid Cap Value Fund, and the Trustees believed that this strategy (implemented by T. Rowe Price) would be more attractive to prospective investors. 12. Managed Fund. At its meeting on February 11, 2004, the Board approved a reduction in the sub-advisory fee for the fixed income portion of this Fund that is sub-advised by Independence. The Trustees were influenced by their understanding that the reduction in this fee would not result in any reduction in the quality or amount of services being furnished by Independence. 13. Small Cap Fund. At its February 11, 2004 meeting, the Board approved the removal of this Fund's sub-adviser and its replacement by Wellington Management. The Trustees were influenced by the fact that Wellington Management would manage the Fund substantially in the manner that it had already been managing the Trust's Small Cap Emerging Growth Fund, and the Trustees believed that this is the best option available to this Fund at this time. Although Wellington Management will receive a higher sub-advisory fee from John Hancock than did its predecessor, John Hancock has not increased its advisory fee for this Fund. In fact John Hancock has reduced its advisory fee somewhat (which was also approved by the Board at the February 11, 2004 meeting). The Board took all of these factors into account in approving the changes, as well as the fact that the new fee structure would be identical to that for the Trust's existing Small Cap Emerging Growth Fund. In connection with their deliberations, the Board and the Trust Governance Committee received legal advice from outside counsel to the Trust regarding the standards and methodology of evaluation articulated by the SEC, the courts and the industry for mutual funds selling shares to the public and the applicability of those standards and that methodology to mutual funds - like the Trust - selling shares to life insurance company separate accounts. Such legal counsel, through its representation of John Hancock on certain matters in which the Trust does not have a direct interest, is also familiar with the Insurers' variable insurance products and separate accounts funded through the Trust. The Trustees considered advice of such legal counsel that mutual funds selling shares to life insurance companies differed, in certain respects, from mutual funds selling shares to the public and that, consequently, the standards and methodology of evaluation developed for the latter did not necessarily apply to the former in all respects. The Trustees considered, for example, the fact that SEC rules would permit John Hancock to "veto" Trustee or contract owner proposals for an adviser other than John Hancock under specified circumstances and that the 1940 Act would permit John Hancock to seek SEC approval to substitute another mutual fund for the Trust if the Trustees were to select an adviser other than John Hancock. The Trustees also took into account the fact that John Hancock affords contract owners the privilege of instructing John Hancock how to vote the Trust shares held by John Hancock and that, pursuant to the process, the contract owners would have the opportunity to vote on, among other things, any increased advisory fees or elimination of expense caps The foregoing discussion of the material factors considered and conclusions reached by the Trustees is not intended to be all-inclusive. The Trustees reviewed a large variety of factors and considered a significant amount of information, including information received on an ongoing basis at meetings of the Board, the Trust Governance Committee, and the Audit Committee and otherwise. In view of the broad scope and variety of these factors and information, the Board did not find it practicable to, and did not, make specific assessments of, quantify, or otherwise assign relative weights to the specific factors considered in reaching the Board's conclusions and determinations to approve the continuance of the Trust's advisory agreement and each sub-advisory agreement. The approval determinations were made on the basis of each Trustee's business judgment after consideration of all of the factors taken as a whole, though individual Trustees may have given different weights to different factors and assigned various degrees of materiality to various conclusions. As a result of their consideration, the Trustees, in the exercise of their business judgment, gave the approvals discussed above as being in the best interest of each Fund to which it relates. 41 G. ARRANGEMENTS WITH OTHER SERVICE PROVIDERS TO THE TRUST 1. Underwriting and Indemnity Agreement Pursuant to an Underwriting and Indemnity Agreement, Signator Investors, Inc. ("Signator") serves as the Trust's principal underwriter for NAV shares, and John Hancock provides certain indemnities to the Trust and its Trustees. Neither Signator nor John Hancock receives any additional compensation from the Trust for the services and indemnities they provide pursuant to the Underwriting and Indemnity Agreement. The offering of the Trust's NAV shares through Signator is a continuous offering on a "best efforts" basis. Signator is a wholly-owned subsidiary of John Hancock and is located at 197 Clarendon Street, Boston, MA 02117. 2. Custody of the Trust's Assets State Street Bank and Trust Company ("State Street Bank") is the primary custodian of the assets of all Funds. State Street Bank's principal business address is 225 Franklin Street, Boston MA 02110. The primary custodian's duties include safeguarding and controlling the Trust's cash and investments, handling the receipt and delivery of securities, and collecting interest and dividends on the Trust's investments. Fund securities purchased in the United States are maintained in the custody of State Street Bank, although such securities may be deposited in the book-entry system of the Federal Reserve System, with Depository Trust Company, or with other qualified domestic book-entry systems or depositories. Also, pursuant to its agreement with the Trust, State Street Bank provides certain accounting and recordkeeping services to the Trust and generally values the Trust's assets by computing each Fund's net asset value each day. The Trust compensates State Street Bank for these functions through the payment of an annual custody asset fee of .01% of the total net assets of the Trust, allocated to each Fund based on the percentage of that Fund's total net assets to the total net assets of the Trust; miscellaneous transaction charges ranging from $7.00 to $25.00; global asset and transaction fees that vary by the country in which a Fund's assets are held or traded; a monthly accounting fee charge that is allocated to each Fund based on the percentage of that Fund's total net assets to the total net assets of the Trust; valuation and monthly quote charges; special service fees for activities of a non-recurring nature; and reimbursement of specified out-of-pocket expenses. Foreign securities are generally held through subcustodian banks and depositories around the world with whom State Street Bank has relationships. In some cases, Funds whose securities are held in this manner may be exposed to greater risks of loss. This is because the soundness of such foreign entities, as well as foreign regulatory practices and procedures, may provide less protection to security holders than is available in the U.S. In certain circumstances, brokers may have access to assets that a Fund posts as "margin" in connection with futures and options transactions. In the event of a broker's insolvency or bankruptcy, a Fund could experience a delay or incur costs in recovering such assets or might recover less than the full amount due. Also the value of such assets could decline by the time the Trust could effect such recovery. If on any day a Fund experiences net realized or unrealized gains with respect to financial futures contracts held through a given broker, it will be entitled immediately to receive from the broker the net amount of such gains. The Trust will request payment of such amounts promptly after notification by the broker that such amounts are due. Thereupon, these assets will be deposited in the Trust's general or segregated account with its primary custodian, as appropriate. 3. Subadministration Agreement With State Street Bank Pursuant to a Subadministration agreement, with the Trust, State Street Bank also provides assistance to John Hancock and the subadvisers in computing total return information for the Trust and in monitoring each Fund's compliance with the Fund's investment objectives and restrictions, as well as compliance with certain other applicable legal requirements. The Trust compensates State Street Bank for these services through payment of an annual fee that accrues daily and is billed monthly in arrears. The annual fee is based on the average net assets of the Trust and is 0.012% of the first $1 billion of average net assets, 0.0075% of the next $1 of average net assets, and 0.0025% of average net assets after that. Each Fund is allocated the greater of a minimum monthly Fund fee or the basis point annual fee, based on the pro-rata total net asset value of that Fund. The minimum monthly Fund fee is $1,333. 4. Independent Auditors Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts, are the independent auditors of the Trust. Ernst & Young audits the financial statements of the Trust, prepares the Trust's tax returns, and renders other advice to the Trust concerning accounting and tax matters. Ernst & Young also meets periodically with the Trust's Board and with the Audit Committee of the Board to discuss matters within the scope of Ernst & Young's activities with respect to the Trust. 42 5. Distribution of Series I and Series II Shares The Board of Trustees of the Trust have approved a plan (the "12b-1Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"). Under the 12b-1 Plan, Series I shares and Series II shares of the International Equity Index Fund are subject to Rule 12b-1fees as specified in a Distribution Agreement between the Trust and Manulife Financial Services LLC (the "Series Distributor"). Under that agreement, Series I shares are subject to a Rule 12b-1 fee up to an annual rate of .40% of Series I share average daily net assets and Series II shares are subject to a Rule 12b-1 fee up to an annual rate of .60% of Series II share average daily net assets. These Rule 12b-1 fees are paid to the Series Distributor. To the extent consistent with applicable laws, regulations and rules, the Series Distributor may use Rule 12b-1 fees: .. for any expenses relating to the distribution of the shares of the class, including, but not limited to, compensation to and expenses of employees of the Series Distributor or an affiliated insurer, including overhead and telephone expenses, who engage in the distribution of that class of that Fund's shares in connection with the distribution of variable annuity or variable life insurance contracts ("Contracts") under which that class of that Fund's shares is an investment option; printing and distributing Fund prospectuses, statements of additional information and reports to prospective investors (through Contracts) in that class of that Fund's shares; compensation to financial intermediaries and broker-dealers to pay or reimburse them for their services or expenses in connection with the distribution of Contracts under which that class of that Fund's shares is an investment option; expenses relating to the development, preparation, printing, mailing and publication of advertisements, sales literature and other promotional materials describing and/or relating to that class of that Fund's shares or Contracts under which that class of that Fund's shares is an investment option; expenses of holding seminars and sales meetings designed to promote the distribution (through Contracts) of that class of that Fund's shares; expenses of obtaining information from and providing explanations to owners (or potential owners) of Contracts under which that class of that Fund's shares is an investment option, regarding that Fund's investment objectives and policies and other information about the Fund, including the performance of the Fund; expenses of training sales personnel regarding that class of that Fund's shares; and expenses of compensating sales personnel in connection with the allocation of cash values and premiums under Contracts to that class of that Fund's shares, .. for any expenses relating to shareholder or administrative services for holders of the shares of the class (or owners of Contracts funded in insurance company separate accounts that invest in the shares of the class) and .. for the payment of "service fees" that come within Rule 2830(d)(5) of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. Currently, the "service fee" component of the Rule 12b-1 fees for both Series I and Series II shares is .25% of average daily net assets. Any such "service fee" is paid to the Series Distributor which then may reallocate all or a portion of the service fee to one or more affiliated or unaffiliated parties which have agreed to provide to beneficial owners of Series I and Series II shares those services encompassed by the term "personal service and/or the maintenance of shareholder accounts" as defined in Rule 2830(d)(5) of the Rules of Fair Practice of the NASD. Without limiting the foregoing, the Series Distributor may pay allor part of the Rule 12b-1 fees from the International Equity Index Fund to one or more affiliated and unaffiliated insurance companies that have issued variable insurance contracts for which the International Equity Index Fund serves as an investment vehicle as compensation for providing some or all of the types of services described in the preceding paragraph; this provision, however, does not obligate the Series Distributor to make any such payments of Rule 12b-1 fees and does not limit the use that the Series Distributor may make of the Rule 12b-1 fees it receives to such payments. Currently, all such payments are made to insurance companies affiliated with the Trust's Adviser and with the Series Distributor. However, payments may be made to nonaffiliated insurance companies in the future. The 12b-1 Plan provides that if only part of any of the above-listed activities or expenses (or of any other expenses or activities) is intended to result in sales of (or services to) a class of a Fund's shares, the Series Distributor may make a reasonable apportionment thereof, so as to apply Rule 12b-1 Fees borne by that class of that Fund's shares to the portion of such activities or expenses that pertains to the distribution of (or services to) that class of that Fund's shares. The 12b-1 Plan may not be amended to increase materially the amount to be spent by the International Equity Index Fund without such shareholder approval as is required by Rule12b-1 under the 1940 Act (the "Rule"). All material amendments of the 12b-1 Plan must be approved in the manner described in the Rule. The 12b-1Plan shall continue in effect (i) with respect to the International Equity Index Fund only so long as the 12b-1 Plan is specifically approved for that Fund at least annually as provided in the Rule and (ii) only while (a) a majority of the Trustees are not interested persons (as defined in the 1940 Act) of the Trust, (b) incumbent disinterested Trustees select and nominate any new disinterested Trustees of the Trust and (c) any person who acts as legal counsel for the disinterested Trustees is an independent legal counsel. The 12b-1Plan may be terminated with respect tothe International Equity Index Fund at any time as provided in the Rule. 43 During the fiscal year ended December 31, 2003, the 12b-1 Plan was not in effect and no amounts were paid thereunder. H. PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION The Funds pay brokers' commissions, transfer taxes, and other fees relating to their specific portfolio transactions. (Investments in debt securities are, however, generally traded on a "net" basis through issuers or dealers acting for their own account as principals and not as brokers. Therefore, no brokerage commissions are payable on most such transactions, although the price to the Trust usually reflects a dealer "spread" or "mark-up.") Amounts of Brokerage Paid Brokerage commissions paid by the Funds were as follows for the past three years: Fund 2003 2002 2001 - ----------------------------------- ------------ ------------ ------------ Equity Index....................... $ 74,513 $ 80,181 $ 96,080 Large Cap Value.................... 149,385 154,981 164,776 Large Cap Growth................... 1,188,313 1,554,313 1,042,938 Large Cap Growth B................. 49,709 68,300 64,914 Fundamental Growth................. 62,156 92,268 56,725 Earnings Growth.................... 681,069 769,172 483,126 Growth & Income.................... 3,919,445 4,372,752 4,394,341 Fundamental Value.................. 240,593 335,531 635,553 Fundamental Value B................ 2,212 16,030 40,010 Mid Cap Value...................... 38,191 -- -- Mid Cap Value B.................... 12,113 59,967 33,593 Mid Cap Growth..................... 749,750 735,675 362,533 Small Cap Value.................... 210,163 219,255 130,951 Small Cap Emerging Growth.......... 832,863 138,317 89,478 Small Cap Growth................... 859,559 562,914 268,016 International Equity Index......... 62,171 41,487 43,092 Overseas Equity.................... 94,860 40,104 21,248 Overseas Equity B.................. 180,968 217,451 128,826 Overseas Equity C.................. 155,441 166,769 158,236 Real Estate Equity................. 210,473 199,488 171,319 Health Sciences.................... 88,578 59,794 28,279 Financial Industries............... 39,219 -- -- Managed............................ 2,681,322 3,177,479 2,387,899 Bond Index......................... 1,141 836 3,312 Active Bond........................ 2,005 399 0 Total Return Bond.................. 0 -- -- High Yield Bond.................... 0 642 88 Global Bond........................ 43 0 0 How Brokers and Dealers are Selected Orders for the purchase and sale of Fund portfolio investments are placed by the respective subadvisers to the Funds. The subadvisers use their best efforts to obtain best available price (including brokerage commissions and other transaction costs) and most favorable execution for all transactions. The subadvisers select brokers and dealers to execute Fund portfolio transactions primarily on the basis of their execution capability and trading expertise. Consideration is also given to such factors as the price of the security, the rate of the commission, the size and difficulty of the order, the confidentiality of trades, the reliability, integrity, financial condition, and operational capabilities of competing brokers or dealers, and the brokerage and research services which they provide. Applicability of specific criteria will vary depending on the nature of the transaction, the market in which it is effected, and the extent to which it is possible to select from among multiple brokers or dealers capable of effecting the transaction. It is not the policy of the subadvisers to seek the lowest available commission if, in their reasonable judgment, there is a material risk that the total cost or proceeds from the transaction might be less favorable than may be obtainable elsewhere. 44 Research and Statistical Services Furnished by Brokers and Dealers Research and statistical assistance typically furnished by brokers or dealers includes analysts' reports on companies and industries, market forecasts, and economic analyses. Brokers or dealers may also provide reports on pertinent federal and state legislative developments and changes in accounting practices; direct access by telephone or meetings with leading research analysts throughout the financial community, corporate management personnel, industry experts, leading economists and government officials; comparative performance and evaluation and technical performance measurement services; portfolio optimization software; availability of economic advice; quotation services; and services from recognized experts on investment matters of particular interest to the subadviser. In addition, the foregoing services may comprise the use of or be delivered by computer systems whose software and hardware components may be provided to the subadviser as part of the services. In any case in which the foregoing systems can be used for both research and non-research purposes, the subadviser makes an appropriate allocation of those uses and will permit brokers and dealers to provide only the portion of the systems to be used for research services. Costs which are allocable to non-research purposes will be paid directly by the subadviser. Research and statistical services furnished by brokers and dealers handling the Funds' transactions may be used by the subadvisers for the benefit of all of the accounts managed by them and not all of such research and statistical services may be used by the subadvisers in connection with the Funds. Relationship Between Brokerage Commissions and Research and Statistical Services Furnished by Brokers and Dealers When the subadvisers reasonably determine that more than one broker or dealer can offer the brokerage and execution services needed to obtain best available price and most favorable execution, consideration may be given to selecting the brokers or dealers who supply research and statistical services to the subadvisers. In receiving these services, which are designed to augment the subadvisers' own internal research capabilities, the subadvisers comply with Section 28(e) of the Securities Exchange Act of 1934. This means that the subadvisers' traders for the Funds, on the basis of their experience and judgment, evaluate the overall reasonableness of any broker's commissions in light of all of the brokerage and research services the broker provides. If the trader for a Fund concludes that the commission rate is reasonable, and the other requirements of Section 28(e) are met, the law protects the subadviser from any legal liability that might otherwise result from causing the Fund to pay the broker a commission in excess of what another broker would have charged. The subadvisers of the Funds will not at any time make a commitment pursuant to an agreement with a broker because of research services provided. The subadvisers do, however, have internal procedures that seek to direct certain amounts to broker-dealers that provide research and statistical services of a type covered by Section 28(e). These internal procedures do not mandate that any amount of business be directed to any broker-dealer, and in no event will a broker-dealer be used unless the subadviser believes that the broker-dealer also will provide the best available price and most favorable execution, as discussed above. During 2003, the amount of transactions, of each Fund directed to brokers who are included in these internal arrangements, and the related amounts of commission were as follows: Dollar Amount Dollar Amount Fund of Transactions of Commissions - ---------------------------------------- --------------- -------------- Large Cap Value......................... $ 6,485,360 $ 11,141 Large Cap Growth........................ 179,232,159 262,988 Large Cap Growth B...................... 893,361 1,186 Fundamental Growth...................... 12,564,997 24,911 Earnings Growth......................... 252,228,282 66,116 Growth & Income......................... 499,297,059 969,234 Fundamental Value....................... 24,329,160 19,555 Mid Cap Value........................... 512,445 1,397 Small Cap Emerging Growth 13,344,345 8,449 Mid Cap Growth.......................... 45,929,832 54,016 Small Cap Value......................... 3,225,124 3,045 Small Cap Growth........................ 53,501,488 147,095 International Equity Index.............. 81,101,379 8,142 Overseas Equity B....................... 2,500,393 4,505 Overseas Equity C....................... $ 4,691,880 $ 5,808 Real Estate Equity...................... 95,858 11,843 Health Sciences......................... 532,893,201 7,300 45 Dollar Amount Dollar Amount Fund of Transactions of Commissions - ---------------------------------------- --------------- -------------- Financial Industries.................... 8,121,589 9,119 Managed................................. 338,422,269 548,196 Bond Index.............................. 5,843,847 1,141 Evaluations of the overall reasonableness of any broker's commissions are made by the subadvisers' traders for the Funds on the basis of their experience and judgment. To the extent permitted by Section 28(e) of the Securities Exchange Act of 1934, such traders are authorized to pay a brokerage commission on a particular transaction in excess of what another broker might have charged in recognition of the value of the broker's brokerage or research services. Brokerage Transactions in Foreign Markets Brokerage transactions in securities of companies domiciled in countries other than the United States are anticipated to be normally conducted on the stock exchanges or other markets of those countries in which the particular security is traded. Fixed commissions on foreign stock exchange transactions are generally higher than negotiated commissions available in the United States. Moreover, there is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the United States. Settlement periods in non-U.S. markets may differ from the normal settlement period in the United States. Simultaneous Transactions with Other Accounts The subadvisers also perform investment advisory services for a number of other accounts and clients, none of which is given preference over the Trust in allocating investment opportunities. When opportunities occur which are consistent with the investment objective of more than one account, it is the policy of each subadviser to avoid favoring any one account over another. Accordingly, investment opportunities in such cases are allocated in a manner deemed equitable by the subadvisers to the particular accounts involved. The allocation may be based, for example, on such factors as the accounts' respective investment objectives and then current investment and cash positions. Subject to these requirements, Trust orders may be combined with orders of other accounts or clients advised by any of the subadvisers at share prices which are approximately averaged. The subadvisers' allocation policies recognize that no rigid formula will always lead to a fair and reasonable result, and that a degree of flexibility to adjust to specific circumstances is necessary. Therefore, under certain circumstances, allocation on a basis other than strictly pro rata or based on order size is permitted if it is believed that such allocation is fair and reasonable. Use of Brokers Who are Affiliated With a Subadviser A Fund may place portfolio transactions through certain brokers who are affiliated with the Fund's subadviser. The Trust has implemented special procedures governing the circumstances of these transactions. In addition to complying with any applicable provisions of the Trust's procedures, these transactions must comply with all applicable legal requirements, including, where applicable, Rule 17e-1 under the Investment Company Act. Among other things, that rule requires the commissions or other compensation paid to the affiliated broker to be reasonable and fair compared to those in similar transactions between unrelated parties. 46 Set forth below is information about transactions by each Fund with affiliated brokers in reliance on Rule 17e-1 for each of the past three years:
Amount of Commissions Paid by Fund -------------------------------- Nature of Broker's Name of Affiliated Affiliation with Fund's Fund Broker Subadviser 2003 2002 2001 - ------------------- ---------------------- --------------------------- --------- --------- -------- Equity Index Lattice Wholly-owned subsidiary of $ 55,870 $ 0 $ 0 subadviser's parent Large Cap Growth B Sanford Bernstein & Wholly-owned subsidiary of 0 405 0 Co. former subadviser's parent Fundamental Value B Goldman, Sachs & Co. Dual operating division of 828 1,400 0 former subadviser's parent Fundamental Value B Spear, Leeds & Kellog. Dual operating division of 138 236 3,141 parent of former subadviser Mid Cap Value B Goldman, Sachs & Co. Dual operating division of 3,473 1,430 0 parent of former subadviser Mid Cap Value B Spear, Leeds & Kellog Dual operating division of 1,514 1,355 0 parent of former subadviser Overseas Equity C Morgan Stanley Asia Wholly-owned subsidiary of 0 254 163 Limited former subadviser's parent Overseas Equity C JM Morgan Stanley Wholly-owned subsidiary of 0 70 162 Securities Private former subadviser's parent Ltd. Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 746 429 2,120 Securities former subadviser's parent Overseas Equity C Morgan Stanley Wholly-owned subsidiary of 0 1,049 0 International Limited former subadviser's parent
For 2003, the total dollar amount of such transactions through affiliated brokers as a percentage of all brokerage-type transactions was 5.36% for the Equity Index Fund, 0.67% for the Fundamental Value B Fund, 1.19% for the Mid Cap Value B Fund, and 0.32% for the Overseas Equity C Fund. For 2002, the total dollar amount of such transactions through affiliated brokers as a percentage of all brokerage-type transactions was 2.91% for the Mid Cap Value B Fund, 1.09% for the Overseas Equity C Fund, 0.32% for the International Equity Fund, 0.09% for the Large Cap Growth B Fund, and 0.01% for the Fundamental Value B Fund. For 2001, the total dollar amount of such transactions through affiliated brokers as a percentage of all brokerage-type transactions was 3.92% for the International Equity Fund, and 1.54% for the Overseas Equity C Fund. Directed Brokerage From time to time the Trust may, on behalf of one or more Funds, request that John Hancock and the subadvisers also consider what are commonly referred to as "directed brokerage arrangements." Under such arrangements, a broker-dealer will rebate a portion of the brokerage commission it receives from (or on behalf of) a Fund and will apply that rebate to pay certain operating expenses that the Fund would otherwise pay directly. The Trust may condition its requests by requiring that subadvisers effect transactions with broker-dealers participating in such arrangements only if the subadviser believes that the broker-dealer will provide the best overall combination of price and execution (i.e., "best execution") for those transactions. While the Trust believes that overall this practice will benefit the Funds, in some cases the subadvisers may be unable to obtain volume discounts, and commissions charged under directed brokerage arrangements may be higher than those available from certain sources not involving such arrangements. In addition, directed brokerage arrangements may also result in a loss of the possible advantage from aggregation of orders for several clients of a subadviser as a single transaction for the purchase or sale of a particular security, and, in an effort to achieve orderly execution of transactions, directed brokerage transactions may be delayed until execution of other orders have been completed. John Hancock will monitor directed brokerage transactions to help ensure that they are in the best interest of the affected Funds and their shareholders. 47 The Trust has entered into a directed brokerage arrangement with State Street Global Markets, LLC ("SSGM"), an affiliate of the Custodian, under which a Fund will receive a credit on a trade-by-trade basis for part of the brokerage commission paid with respect to brokerage transactions directed by the Fund's subadviser(s) to a broker/dealer within SSGM's network of broker/dealers. SSGM will then apply the credit against other expenses of the Fund, including the Fund's share of the Custodian's fee. Under this arrangement, subadvisers will be instructed to use a broker-dealer participating in the arrangement only if the subadviser believes that the broker-dealer will provide the "best execution" for the transaction in question. Transition Services From time to time, John Hancock and the Trust may engage State Street Global Markets ("SSGM"), a division of State Street Bank, as a trading advisor in connection with the restructuring of the Fund's custody account maintained by the Custody Division of State Steet Bank. Such restructuring may be required, for example, when a Fund retains a new subadviser or when two Funds merge. As a trading advisor, SSGM provides consulting services concerning the most cost efficient and effective manner in which (1) Trust-identified securities in the custody account can be liquidated, and (2) Trust-identified securities can be acquired for the custody account. These services include, in part, reviewing the portfolio, analyzing transaction volumes and the number of securities positions in the restructuring, and examining potential trading costs including a review of using off-exchange trading networks, and effecting trades of the Trust-identified securities to be disposed or acquired. In the course of providing these services, SSGM may become aware that one or more of the collective funds or client accounts that State Street Bank manages (the "State Street Accounts") either have demand for certain of the securities contained in the Fund's custody account or have available for sale certain securities which are component securities of the investment portfolio that Trust (on behalf of the affected Fund) has directed SSGM to construct. In such event, SSGM may, in its capacity as manager of the State Street Accounts and consistent with its obligations to the State Street Accounts, extend to the affected Fund either an offer to purchase from the custody account a specific list of securities or to sell to the custody account a specific list of securities on behalf of the State Street Accounts. In such an event, the Trust (on behalf of the affected Fund), but not SSGM, has the authority and responsibility to determine whether to accept such an offer on behalf of the Fund's custody account. I. CODES OF ETHICS Employees of John Hancock Life Insurance Company, the Trust, and the subadvisers to the Trust and officers and Trustees of the Trust are subject to restrictions on engaging in personal securities transactions. These restrictions are set forth in the John Hancock Insider Information Policy and Procedures, the Variable Series Trust Code of Ethics, and the Codes of Ethics of the subadvisers to the various Funds of the Trust ("Subadvisers' Codes of Ethics"), (combined, "Codes"). The Codes, in accordance with rule 17j-1 of the Investment Company Act of 1940, as amended, contain provisions and requirements designed to identify and address certain conflicts of interest between personal investment activities of employees of the adviser and subadvisers to the Funds and the interests of the Funds. These Codes do not generally prohibit personnel from investing in securities that may be purchased or held by the Funds within the Trust. However, the Codes, consistent with standards recommended by the Investment Company Institute's Advisory Group on Personal Investing and requirements established by rule 17j-1, among other things, prohibit personal securities investments without pre-clearance for certain employees, impose time periods during which personal transactions may not be made in certain securities by employees with access to investment information, and require the timely submission to compliance personnel of broker confirmations and quarterly reporting of personal securities transactions. Additional restrictions may apply to portfolio managers, traders, research analysts and others involved in the investment advisory process. The Variable Series Trust Code of Ethics incorporates and applies its restrictions to officers and Trustees of the Trust who are affiliated with John Hancock Life Insurance Company. The Variable Series Trust Code of Ethics does not prohibit unaffiliated Trustees from investing in securities that may be held by the Trust; however, the Variable Series Trust Code of Ethics does regulate the personal securities transactions of unaffiliated Trustees of the Trust, including limiting the time periods during which they may personally buy and sell certain securities about which they may receive information. The Trust's Trustees, in compliance with rule 17j-1, have approved the Variable Series Trust Codes of Ethics and the Subadvisers' Codes of Ethics and are required to approve any material changes to the Variable Series Trust Code of Ethics as well as to the Subadvisers' Codes of Ethics. The Trustees also provide continuing oversight of personal investment policies and annually evaluate the implementation and effectiveness of the Codes. The Codes are on public file with, and are available from, the Securities and Exchange Commission. J. FEATURES OF THE TRUST'S SHARES The shares of beneficial interest of the Trust currently are divided into 30 series, each corresponding to one of the Trust's 30 Funds. The Trust has the right to establish additional series and issue additional shares without the consent of its shareholders. Each series may issue four classes of shares: NAV shares (this is the initial class of shares issued by each Fund), Series I shares, Series II shares and Series III shares. Currently, the International Equity Index Fund is the only series ("Fund") of the Trust that issues the Series II or Series III class of shares. (Each class of shares is the same except for differences in class expenses, including different Rule 12b-1 fees, and voting rights.) Series III shares are not currently offered. 48 If the holders of variable annuity contracts and variable life insurance policies show minimal interest in any Fund, the Trust's Board of Trustees, by majority vote, may eliminate the Fund or substitute shares of another investment company. Any such action by the Board would be subject to compliance with any requirements for governmental approvals or exemptions or for shareholder approval. The holders of variable annuity contracts and variable life insurance policies participating in any such Fund will be notified in writing of the Trust's intention to eliminate the Fund and given 30 days to transfer amounts from such Fund to other Funds without incurring any transaction fee. Amounts not transferred or withdrawn would automatically be transferred, at the discretion of the Fund's management. The assets received by the Trust for the issuance or sale of shares of each Fund and all income, earnings, profits, and proceeds thereof are specifically allocated to that Fund. They constitute the underlying assets of each Fund, are segregated on the books of the Trust, and are to be charged with the expenses of such Fund. Any assets which are not clearly allocable to a particular Fund or Funds are allocated in a manner determined by the Board of Trustees. Accrued liabilities which are not clearly allocable to one or more Funds would generally be allocated among the Funds in proportion to their relative net assets before adjustment for such unallocated liabilities. Each issued and outstanding share in a Fund is entitled to participate equally in dividends and distributions declared with respect to such Fund and in the net assets of such Fund upon liquidation or dissolution remaining after satisfaction of outstanding liabilities. A dividend from the net investment income of the Money Market Fund will be declared and distributed daily. Dividends from net investment income of the other Funds will be declared and distributed monthly. The Trust will distribute all of its net realized capital gains annually. Dividends and capital gains distributions will normally be reinvested in additional full or fractional shares of the Fund to which they relate and will be appropriately credited to investment performance under the variable life insurance policies and variable annuity contracts participating in that Fund. The shares of each Fund, when issued, will be fully paid and non-assessable, and will have no preference, preemptive, exchange or similar rights. Shares do not have cumulative voting rights. K. SHAREHOLDER MEETINGS AND VOTING RIGHTS Under the Trust's Declaration of Trust, the Trust is not required to hold an annual shareholders' meeting. Normally, for example, there will be no shareholders meetings for the purpose of electing Trustees. In addition, it is expected that the Trustees generally will elect their own successors and appoint Trustees to fill any vacancy, so long as, after filling the vacancy, at least two-thirds of the Trustees then in office have been elected by the shareholders. Notwithstanding the above, if at any time less than a majority of Trustees in office have been elected by the shareholders, the Trustees must call a special shareholders' meeting promptly. Also the Trustees will promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee or all of the Trustees, if requested in writing to do so by holders of 10% or more of the outstanding shares. In this regard, whenever ten or more shareholders who have been such for at least six months and who hold in the aggregate either shares having a net asset value of at least $25,000 or at least 1% of the outstanding shares, whichever is less, apply to the Trustees in writing stating that they wish to communicate with other shareholders with a view to obtaining signatures to a request for a shareholders' meeting, for consideration of the removal of any or all of the Trustees and accompanied by the material which they wish to transmit, the Trustees will within five business days after receipt either afford to such applicants access to the Trust's shareholder list or inform such applicants as to the approximate number of shareholders of record, and the approximate cost of mailing the material. If the Trustees elect the latter, the Trustees, upon written request of such applicants, accompanied by the material to be mailed and the reasonable expenses of mailing, shall promptly mail such material to all shareholders of record, unless within five business days the Trustees shall mail to such applicants and file with the SEC, together with a copy of the material to be mailed, a written statement signed by at least a majority of the Trustees to the effect that, in their opinion, either such material is misleading or in violation of applicable law and specifying the basis of such opinion. At any shareholders' meeting, all shares of the Trust of whatever class are entitled to one vote, and the votes of all classes are cast on an aggregate basis, except on matters where the interests of the Funds differ. Where the interests of the Funds differ, the voting is on a Fund-by-Fund basis. Approval or disapproval by the shareholders in one Fund on such a matter would not generally be a prerequisite of approval or disapproval by shareholders in another Fund; and shareholders in a Fund not affected by a matter generally would not be entitled to vote on that matter. Examples of matters which would require a Fund-by-Fund vote are changes in the fundamental investment policy of a particular Fund and approval of investment management or sub-investment management agreements. 49 Voting of Series I and Series II Shares. Manulife New York and Manufacturers USA have the right to vote Series I and Series II shares upon matters that may be voted upon at any Trust shareholders' meeting with respect to the International Equity Index Fund. These companies will vote all Series I and Series II shares of the International Equity Index Fund of the Trust issued to such companies in proportion to the timely voting instructions received from owners of the contracts participating in separate accounts of such insurance companies registered under the 1940 Act ("Contract Owner Instructions"). Each entity votes the shares it owns in proportion to Contract Owner Instructions. L. SALES AND REDEMPTIONS OF FUND SHARES "Seed Money" Shares Typically, when a new Fund is added to the Trust, John Hancock (or one of its affiliates) initially purchases a substantial amount of that Fund's shares to provide the new fund with a reasonable asset base with which to commence operations. For example, the most recent such contributions of "seed money" to currently available funds have been as follows: "Seed Money" NAV Shares Purchased Date of Fund by John Hancock Purchase - --------------------------------------------- ---------------- ---------- Large Cap Growth B 10,000,000 8/31/99 Fundamental Value............................ 5,000,000 8/31/99 Fundamental Value B.......................... 5,000,000 8/31/99 Fundamental Growth........................... 5,000,000 8/31/99 Mid Cap Value................................ 5,000,000 4/30/03 Mid Cap Value B.............................. 5,000,000 5/1/98 Small Cap Value.............................. 5,000,000 8/31/99 Health Sciences.............................. 20,000,000 5/1/01 Financial Industries......................... 200,000 4/29/03 International Opportunities.................. 15,000,000 5/1/96 Overseas Equity.............................. 20,000,000 5/1/96 Overseas Equity C............................ 10,000,000 5/1/98 Bond Index................................... 25,000,000 5/1/98 Total Return Bond............................ 25,000,000 4/30/03 High Yield Bond.............................. 10,000,000 5/1/98 John Hancock (or its affiliate) may redeem these NAV shares (and thus withdraw its seed money investment) at some time. However, before withdrawing any part of their interests in any Fund, John Hancock (or its affiliate) will consider any possible adverse impact the withdrawal might have on that Fund. Purchases and redemptions of seed money shares are made at the applicable Fund's net asset value per share (with no additions or deductions for charges) next computed after the purchase or redemption order is placed. As of December 31, 2003, only the following Funds still have seed money that has not been withdrawn: Mid Cap Value Fund, Overseas Equity Fund, Overseas Equity C Fund (then known as the "Emerging Markets Equity Fund"), Health Sciences Fund and Total Return Bond Fund. Shares Sold and Redeemed In Connection With Transactions Under Variable Annuity Contracts and Variable Life Insurance Policies Fund shares are sold at their net asset value as next determined after receipt of net premiums by the Separate Account, without the addition of any selling commission or sales load. Shares are redeemed at their net asset value as next determined after receipt of net surrender requests by the Separate Account. No fee is charged on redemption. Redemption payments will usually be paid within seven days after receipt of the redemption request, except that the right of redemption may be suspended or payments postponed whenever permitted by applicable law and regulations. Redemptions are normally made in cash, but the Trust reserves the right, at its discretion, to make full or partial payment by assignment to the appropriate Separate Account of portfolio securities at their value used in determining the redemption price. In such cases, the Separate Account would incur brokerage costs should it wish to liquidate these portfolio securities. 50 Trust shares are also sold and redeemed as a result of transfer requests, loans, loan repayments, and similar Separate Account transactions, in each case without any sales load or commission or at the net asset value per share computed for the day as of which such Separate Account transactions are effected. M. COMPUTING THE FUNDS' NET ASSET VALUE Each Fund determines its net asset value per share once daily as of the close of the customary trading session of the New York Stock Exchange ("Exchange") on each business day of the Fund. The Exchange generally closes at 4:00 p.m. Eastern Standard Time. However, ETFs and certain derivative instruments may be valued using prices as late as 4:15 p.m. Eastern Standard Time. In the event the Exchange closes at any time other than 4:00 p.m. Eastern Standard Time on a particular day, each Fund will determine its net asset value per share as of the close of the Exchange on that day. The net asset value per share of each Fund is determined by adding the value of all portfolio securities and other assets, deducting all portfolio liabilities, and dividing by the number of outstanding shares. All Trust expenses will be accrued daily for this purpose. Short-term investments with a remaining maturity of 60 days or less, and all investments of the Money Market Fund, are valued at "amortized cost," which approximates market value. This involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates. While this method provides certainty in valuation, it may result in periods during which the value of an instrument, as determined by amortized cost, is higher or lower than the price the Fund would receive upon the sale of the instrument. The Board of Trustees has established procedures designed to stabilize the Money Market Fund's price per share, as computed for the purpose of sales and redemptions, at $1. There can be no assurance, however, that the Fund will at all times be able to maintain a constant $1 net asset value per share. Such procedures include review of the Fund's holdings at such intervals as is deemed appropriate to determine whether the Fund's net asset value, calculated by using available market quotations, deviates from $1 per share and, if so, whether such deviation may result in material dilution, or is otherwise unfair to existing shareholders. In the event that it is determined that such a deviation exists, the Board of Trustees will take such corrective action as it regards as necessary and appropriate. Such action may cause losses or gains to be recorded for the Fund, including decreases or increases in the Fund's net asset value per share. Securities and call and put options that are listed on a stock exchange are normally valued at the closing sales price. If there were no sales during the day, they are normally valued at the last previous sale or bid price reported, as are equity securities that are traded in the over-the-counter market. Non-exchange traded debt securities (other than certain short-term investments) are valued on the basis of valuations furnished by a pricing service which uses electronic data processing techniques, without exclusive reliance upon quoted prices. Any other security for which market quotations are not readily available, and any other property for which valuation is not otherwise available, is valued at fair value as determined in good faith by, or under the direction of, the Board of Trustees. Financial futures contracts, options thereon and options on stock indexes are valued at the last trade price of the day. In the absence of a trade on a given day, the value generally is used which is established by the exchange on which the instrument is traded. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day on which the New York Stock Exchange is open. The values of such securities used in computing net asset value per share are normally determined as of such times. Trading of these securities may not take place on every New York Stock Exchange business day and may take place on days which are not business days in New York. The Trust calculates net asset value per share as of the close of regular trading on the New York Stock Exchange on each day on which that exchange is open. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the Funds' securities used in such calculation. If events affecting the value of such securities occur between the time when their price is determined and the time as of which the Fund's net asset value is calculated, such securities may be valued at fair value by or under the direction of the Board of Trustees. 51 N. TAXES The Trust intends that each Fund qualify as a regulated investment company under Subchapter M of the Internal Revenue Code ("Code"). This requires that each Fund comply with certain requirements as to the nature of its income and amounts of dividends and other distributions it pays. Also, in order to qualify under Subchapter M, at the end of each quarter of a Fund's taxable year, (i) at least 50% of the market value of the Fund's assets must be represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities, with such other securities limited, in respect of any one issuer, to an amount that does not exceed 10% of the voting securities of such issuer or 5% of the value of the Fund's total assets; and (ii) not more than 25% of the value of its assets may be invested in the securities (other than U.S. Government securities and securities of other RICs) of any one issuer or two or more issuers which the Fund controls and which are engaged in the same, similar or related trades or businesses. The Trust also intends that each Fund comply with certain other diversification requirements, promulgated under Section 817(h) of the Code. Under these requirements, no more than 55% of the total value of the assets of each Fund may be represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments and no more than 90% by any four investments. Generally, for these purposes, all securities of the same issuer are treated as one investment. In the context of U.S. Government securities (including any security that is issued, guaranteed or insured by the United States or an instrumentality of the United States), each U.S. Government agency or instrumentality is treated as a separate issuer. Assuming the Funds qualify as regulated investment companies under Subchapter M, and meet certain distribution requirements they will not owe any income taxes. On the other hand, if a Fund fails to qualify under Subchapter M, or fails to distribute a sufficient amount of income or gains it may incur income tax liabilities, which will negatively affect its investment performance. Also, qualification under Subchapter M, as well as compliance with the Section 817(h) diversification requirements, (among other things) are necessary to secure the tax treatment intended for most holders of variable annuity contracts and variable life insurance policies that are supported by the Trust. Therefore, any such failure to qualify under Subchapter M or to meet the diversification standards under Section 817(h) could have serious adverse consequences for such investors. For a discussion of these and other tax implications of owning a variable annuity contract or a variable life insurance policy for which the Fund serves as the investment medium, please refer to the Prospectus for such contract or policy attached at the front of this Prospectus. Those Funds that invest substantial amounts of their assets in foreign securities may be able to make an election to pass through to the insurance company issuing the variable annuity contract or a variable life insurance policy any taxes withheld by foreign taxing jurisdictions on foreign source income. Such an election will result in additional taxable income and income tax to the insurance company. The amount of additional income tax, however, may be more than offset by credits for the foreign taxes withheld, which are also passed through. O. INFORMATION ABOUT FUND PERFORMANCE How Money Market Fund Yields Are Calculated The Money Market Fund may advertise investment performance figures, including its current yield and its effective yield. The Money Market Fund's yield is its current investment income, expressed in annualized terms. The current yield is based on a specified seven-calendar-day period. It is computed by (1) determining the net change (exclusive of capital changes) in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, (2) dividing the net change in account value by the value of the account at the beginning of the base period to get the base period return, then (3) multiplying the base period return by 52.15 (365 divided by 7). The resulting yield figure is carried to the nearest hundredth of one percent. The calculations include the value of additional shares purchased with any dividends paid on the original share and the value of dividends declared on both the original share and any such additional shares. The capital changes excluded from the calculation are realized capital gains and losses from the sale of securities and unrealized appreciation and depreciation. Compound (effective) yield for the Fund will be computed by dividing the seven-day annualized yield (determined as above) by 365, adding 1 to the quotient, raising the sum to the 365th power, and subtracting 1 from the result. The Fund's yield will fluctuate depending upon market conditions, the type, quality, and maturity of the instruments in the Fund, and its expenses. 52 Charges Under Variable Life Insurance and Variable Annuity Policies Yield and total return quotations do not reflect any charges imposed on any Separate Account or otherwise imposed pursuant to the variable life insurance policies and variable annuity contracts that are supported by the Funds. (Those charges are discussed in the prospectus for such policies or contracts.) Therefore, the yield or total return of any Fund is not comparable to that of a publicly available fund. Nor should yield or total return quotations be considered representative of the Fund's yield or total return in any future period. P. LEGAL MATTERS The law firm of Foley & Lardner of Washington, D.C., advises the Trust on certain legal matters relating to the Federal securities laws. Q. REPORTS TO CONTRACTHOLDERS Annual and semi-annual reports containing financial statements of the Trust, as well as any materials soliciting voting instructions for Trust shares, will be sent to variable life insurance and annuity contractowners having an interest in the Trust. 53 APPENDIX A CORPORATE BOND RATINGS Moody's Investors Service, Inc. describes its ratings for corporate bonds as follows: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protection elements may be of greater amplitude, or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment some time in the future. Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Ba have speculative elements and their future cannot be considered as well assured. The protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Bonds in this class are characterized by uncertainty of position. Bonds which are rated B generally lack characteristics of a desirable investment; assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Bonds which are rated Caa are of poor standing. Issues may be in default or there may be present elements of danger with respect to principal or interest. Bonds which are rated Ca are speculative in a high degree. They are often in default or have other marked shortcomings. Bonds which are rated C are the lowest rated class of bonds. They can be regarded as having extremely poor prospects of ever attaining any real investment standing. Standard & Poor's Corporation describes its ratings for corporate bonds as follows: AAA -- This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA -- Bonds rated AA also qualify as high-quality obligations. Capacity to pay principal and interest is very strong, and in the majority of instances, they differ from AAA issues only in small degree. A -- Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC, C -- Bonds rated in these categories are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of 54 speculation and C the highest degree of speculation. While this debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C1 -- This rating is reserved for income bonds on which no interest is being paid. D -- Bonds rated D are in default and payment of interest and/or repayment of principal is in arrears. Fitch Inc. describes its ratings for corporate bonds as follows: AAA -- Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA -- Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A -- High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB -- Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category. BB -- Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B -- Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, C, C -- High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default. DDD, DD, D -- Default. Securities are not meeting current obligations and are extremely speculative. ~DDD' designates the highest potential for recovery of amounts outstanding on any securities involved. For U.S. corporates, for example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and 'D' the lowest recovery potential, i.e. below 50%. "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the 'AAA' long-term rating category or to categories below 'CCC'. 55 APPENDIX B PROXY VOTING POLICIES AND PROCEDURES The following pages of this appendix contain information on proxy voting polices, guidelines and procedures of the Trust and, with respect to its services to the Trust, John Hancock. After that, this appendix contains information on the proxy voting polices, guidelines and procedures of the following subadvisers: - -------------------------------------------------------------------------------- Subadviser Appendix Page - -------------------------------------------------------------------------------- Independence Investment LLC B - 5 - -------------------------------------------------------------------------------- John Hancock Advisers, LLC B - 7 - -------------------------------------------------------------------------------- Declaration Management & Research Company B - 11 - -------------------------------------------------------------------------------- SSgA Funds Management, Inc. B - 13 - -------------------------------------------------------------------------------- T. Rowe Price Associates, Inc. B - 18 - -------------------------------------------------------------------------------- Morgan Stanley Investment Management Inc. B - 20 - -------------------------------------------------------------------------------- Standish Mellon Asset Management Company LLC B - 25 - -------------------------------------------------------------------------------- Wellington Management Company, LLP B - 26 - -------------------------------------------------------------------------------- Capital Guardian Trust Company B - 27 - -------------------------------------------------------------------------------- Pacific Investment Management Company LLC B - 30 - -------------------------------------------------------------------------------- RREEF America L.L.C. B - 36 - -------------------------------------------------------------------------------- Fidelity Management & Research Company B - 42 - -------------------------------------------------------------------------------- B - 1 JOHN HANCOCK VARIABLE SERIES TRUST I PROXY VOTING POLICIES AND PROCEDURES I. BACKGROUND On January 23, 2003, the Securities and Exchange Commission ("SEC") adopted a final rule regarding the Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies (the "IC Proxy Voting Rule"). The IC Proxy Voting Rule requires that a registered management investment company (1) disclose the policies and procedures that it uses to determine how it votes proxies relating to portfolio securities, and (2) file its complete proxy voting record on an annual basis with the SEC on Form N-PX, and make this record available to shareholders. On January 23, 2003, the SEC also adopted a final rule regarding Proxy Voting by Investment Advisers (the "IA Proxy Voting Rule" or Rule 206(4)-6). The IA Proxy Voting Rule requires, among other things, that an investment adviser that exercises voting authority over client securities adopt policies and procedures reasonably designed to ensure the adviser votes proxies in the best interest of clients and that the adviser maintains certain records relating to proxy voting. These Policies and Procedures (the "JHVST Proxy Voting Procedures") govern the exercise of voting authority with respect to portfolio securities of the John Hancock Variable Series Trust I (the "Trust" or "JHVST"), disclosures required by the IC Proxy Voting Rules, and the related matters set forth below. II. DELEGATION OF VOTING AUTHORITY WITH RESPECT TO PORTFOLIO SECURITIES TO SUB-INVESTMENT MANAGERS The Trust has delegated voting authority with respect to portfolio securities to the sub-investment managers in the Sub-Investment Management Agreements among the Trust, John Hancock and the sub-investment managers. Consistent with this delegation, each sub-investment manager is responsible for the following: A. Adopting and implementing written policies and procedures in accordance with Rule 206(4)-6 reasonably designed to ensure that the sub-investment manager votes portfolio securities in the best interest of shareholders of the JHVST Fund (or a sleeve of the Fund) holding those portfolio securities. Those procedures should also address material conflicts that may arise between on one hand, the interest of the Fund (a sleeve of the Fund) shareholders, and on the other hand, the interest of the Fund's investment adviser, principal underwriter or any affiliated person of the fund, its investment adviser, or its principal underwriter; B. Exercising voting authority with respect to portfolio securities; C. Providing John Hancock Life Insurance Company ("John Hancock") with a copy and a description of the sub-investment manager's proxy voting procedures and any amendment or revisions to those procedures or the description; D. Providing John Hancock with a written record, in accordance with instructions provided by John Hancock, of how the sub-investment manager exercised votes with respect to portfolio securities; and E. Providing an annual report regarding proxy voting according to instructions provided by John Hancock. John Hancock, the JHVST's investment adviser, will not have voting authority with respect to portfolio securities, but will have the responsibilities set forth below. III. DISCLOSURES John Hancock will be responsible for making the following disclosures on behalf of the Trust: A. Description of Proxy Voting Policies and Procedures in Registration Statements: All registration statements and post-effective amendments that are annual updates to effective registrations statements, filed on or after July 1, 2003, will include a copy of, or a description of, the JHVST Proxy Voting Procedures and the proxy voting procedures of all sub-investment managers. B - 2 IV. DISCLOSURES - continued B. Availability of the Description of Policies and Procedures: All shareholder annual and semi-annual reports transmitted after the disclosure in Section III.A. is made, will disclose that shareholders may obtain a copy of a description of the Trust's proxy voting policies and procedures by the following methods: 1. Upon request and without charge, by calling a specified toll-free (or collect) telephone number, or 2. On the SEC's website at http://www.sec.gov. C. Availability of Fund's Proxy Voting Record: All initial registration statements and post-effective amendments that are annual updates to effective registration statements, filed on or after August 31, 2004, as well as all shareholder reports filed after August 31, 2004, will disclose that a shareholder may obtain a copy of the Trust's actual proxy voting record on Form N-PX by the following methods: 1. Upon request and without charge, by calling a specified toll-free (or collect) telephone number, or 2. On the SEC's website at http://www.sec.gov. D. Requests for Information: If John Hancock receives a request for information as provided in Section III.B. or III.C., John Hancock will respond to the request within three business days of receipt of the request, by first class mail or other means designed to ensure equally prompt delivery. V. PREPARATION AND FILING OF FORM N-PX John Hancock will be responsible for filing Form N-PX on behalf of the Trust, as required by Rule 30b1-4 under the Investment Company Act of 1940. The sub-investment mangers are responsible for providing to John Hancock the information required to be filed in the Form N-PX at a time designated by and in a format acceptable to John Hancock. VI. ANNUAL REPORT ON PROXY VOTING On an annual basis, John Hancock will prepare a summary report regarding the sub-investment managers' proxy voting policies and procedures and proxy voting activity with respect to portfolio securities for presentation to and consideration by the Trustees. The sub-investment managers will provide information reasonably requested by John Hancock for this annual report. VI. AMENDMENTS TO SUB-INVESTMENT MANAGER PROXY VOTING POLICIES AND PROCEDURES Each sub-investment manager will provide to John Hancock a copy of, and a description of, its proxy voting policies and procedures. If a sub-investment manager amends or otherwise revises its proxy voting policies and procedures, the sub-investment manager will provide a copy to John Hancock of its amended or revised proxy voting policies and procedures (and any revisions to its description of those policies and procedures) by no later than ten (10) business days after the effective date of the amendment or revision. VII. RECORDKEEPING A. Each sub-investment manager shall maintain the books and records relating to proxy voting required under Rule 204-2 that it has for a period of not less than five years from the end of the fiscal year during which the last entry was made on the record, the first two years in an appropriate office of the sub-investment manager. These records include: 1. The sub-investment manager's proxy voting policies and procedures (and any amendments or revisions); 2. Proxy statements that the sub-investment manager receives regarding portfolio securities; 3. Records of each vote cast by the sub-investment manager; and 4. Any document prepared by the sub-investment manager that was material to making a decision on how to vote with respect to portfolio securities, or that memorialized a decision to vote. B. John Hancock shall maintain the books and records relating to proxy voting required under Rule 204-2 that it has for a period of not less than five years from the end of the fiscal year during which the last entry was made on the record, the first two years in an appropriate office of John Hancock. These records include: 1. The JHVST Proxy Voting Procedures (and any amendments or revisions); and 2. A copy of each written request for information on proxy voting by a shareholder, and a copy of any written response. B - 3 VIII. MISCELLANEOUS A. Any sub-investment manager of a JHVST Fund that invests exclusively in non-voting securities is not required to comply with these JHVST Proxy Voting Procedures with respect to that Fund, except that the sub-investment manager will be required to provide a certification to John Hancock that the Fund invests exclusively in non-voting securities. B. The Trust participates in a securities lending program. Nothing in these Procedures should be interpreted as requiring that a sub-investment manager exercise voting authority with respect to a portfolio security that is out on loan at the time. C. Each sub-investment manager is obligated to provide to John Hancock promptly and without charge, any record or information regarding proxy voting reasonably requested by John Hancock. D. The fact that one JHVST fund or one sleeve of a JHVST fund votes a proxy one way and another JHVST fund or another sleeve of the JHVST fund votes the same proxy another way or does not vote the proxy will not, by itself, constitute a material conflict of interest. (Effective: July 1, 2003) B - 4 INDEPENDENCE INVESTMENT LLC ("Independence") PROXY VOTING POLICIES AND PROCEDURES At Independence, we recognize that many decisions regarding proxy voting may affect the value of a client's account, and, therefore, should be resolved based on in-depth analysis and careful consideration. The following proxy voting policy sets forth both our principles and our process for voting proxies on securities held in client accounts where Independence has discretion to vote the proxies. General Principles - ------------------ In order to set a framework within which proxy questions should be considered and voted, the following general principles should be applied: 1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies for a client's account should be exercised keeping in mind a fiduciary's duty to use its best efforts to preserve or enhance the value of the client's account. We should vote on proxy questions with the goal of fostering the interests of the client (or the participants and beneficiaries in the case of an ERISA account). 2) Proxy questions should be considered within the individual circumstances of the issuer. It is possible that individual circumstances might mean that a given proxy question could be voted differently than what is generally done in other cases. 3) If a proxy question clearly has the capability of affecting the economic value of the issuer's stock, the question should be voted in a way that attempts to preserve, or give the opportunity for enhancement of, the stock's economic value. 4) In certain circumstances, even though a proposal might appear to be beneficial or detrimental in the short term, our analysis will conclude that over the long term greater value may be realized by voting in a different manner. 5) It is our general policy that when we are given authority to vote proxies for a client's account, we must be authorized to vote all proxies for the account in our discretion. We do not generally accept partial voting authority nor do we generally accept instructions from clients on how to vote on specific issues, except in the case of registered investment companies and, in limited instances, certain clients such as labor unions may direct us to vote proxies in accordance with a specific set of guidelines or recommendations appropriate to their circumstances, in which case we will not have voting discretion but will vote in accordance with the client's direction. Other clients may wish to retain proxy voting authority and vote their own proxies if necessary in order to satisfy their individual social, environmental or other goals. We maintain a set of proxy voting guidelines that describe in greater detail how we generally vote specific issues for our clients. While it is not an exhaustive list, it is intended to serve as the foundation on which we make most of our proxy voting decisions. The guidelines are available to clients upon request. We will from time to time review this proxy voting policy and our guidelines and may adopt changes from time to time. Clients may contact the Compliance Office by calling 617-228-8603 or via e-mail at compliance@independence.com for a copy of our current guidelines or to obtain a record of how we voted the proxies for their account. Process - ------- At Independence, the fundamental analysts are responsible for performing research on the companies in which we invest. The same analysts are generally responsible for decisions regarding proxy voting, as they are the most familiar with company-specific issues. Portfolio managers also provide input when appropriate. We currently use Institutional Shareholders Services, Inc. ("ISS") to monitor and complete the proxy voting process for our equity portfolio holdings. ISS is responsible for ascertaining that proxies are received, voted and sent back on a timely basis, as well as maintaining all of the proxy voting records with respect to our clients' holdings. Each day our proxy administrator sends ISS our complete list of portfolio holdings. ISS notifies us of shareholder meetings and provides us with an electronic platform on which to vote the proxies. ISS also provides us with an analysis of proxy issues and recommendations for voting, based on criteria that we have approved. Our analysts will consider ISS's recommendations, but voting will be based upon our own analysis. Our analysts direct the manner in which proxies are to be voted, and ISS completes the voting process. We may abstain from voting a client proxy if we conclude that the effect on the client's economic interests or the value of the portfolio holding is indeterminable or insignificant. We may also abstain from voting a client proxy for cost reasons (e.g., costs associated with B - 5 voting proxies of non-U.S. securities). In accordance with our fiduciary duties, we weigh the costs and benefits of voting proxy proposals relating to foreign securities and make an informed decision with respect to whether voting a given proxy proposal is prudent. Our decision takes into account the effect that the vote of our client, either by itself or together with other votes, is expected to have on the value of our client's investment and whether this expected effect would outweigh the cost of voting. II. Conflicts of Interest --------------------- We manage the assets of various public and private company clients, and invest in the equity securities of certain public companies on behalf of our clients./2/ We recognize that the potential for conflicts of interest could arise in situations where we have discretion to vote client proxies and where we have material business relationships/3/ or material personal/family relationships/4/ with these issuers (or with a potential target or acquirer, in the case of proxy vote in connection with a takeover). To address these potential conflicts we have established a Proxy Voting Committee ("the Committee"). The Committee consists of the Head of US Equities, the Head of Fundamental Research and the members of the Compliance Office. The Committee will use reasonable efforts to determine whether a potential conflict may exist, including maintaining a list of clients with whom we have a material business relationship, and requiring analysts to screen the proxies identified by ISS against such list and to bring such conflicts, and any other conflicts of which they are aware, to the attention of the Committee. However, a potential conflict shall be deemed to exist only if one or more of the members of the Committee, or the analyst responsible for voting the proxy, actually knows of the potential conflict. The Committee will work with the analyst assigned to the specific security to oversee the proxy voting process for securities where we believe we may have potential conflicts. The Committee will meet to decide how to vote the proxy of any security with respect to which we have identified a potential conflict. The Committee will consider the analyst's recommendation, make a decision on how to vote the proxy and document the Committee's rationale for its decision. Independence is a wholly owned subsidiary of John Hancock Life Insurance Company, which is a wholly owned subsidiary of John Hancock Financial Services, Inc. ("JHFS"), a public company. It is our general policy not to acquire or hold JHFS stock on behalf of our clients. However, in the event that a client were to hold JHFS stock in a portfolio which we manage, and we were responsible for voting a JHFS proxy on behalf of the client, the Committee would decide on how to vote the JHFS proxy. The Committee would, in most cases, base its proxy voting decision according to the guidance provided by ISS. The Committee will document the rationale for its decision. It is Independence's policy not to accept any input from any other person or entity, including its affiliates when voting proxies for any security. In the event that an Independence employee was contacted by any affiliate, or any other person or entity, other than ISS or through standard materials available to all shareholders, with a recommendation on how to vote a specific proxy, the event would be reported to the Compliance Office and would be documented. The Committee would then decide how to vote the proxy in question and would document the rationale for its decision. If there is controversy or uncertainty about how any particular proxy question should be voted, or if an analyst or a Committee member believes that he or she has been pressured to vote in a certain way, he or she will consult with the Committee or with a member of the Compliance Office, and a decision will be made whether to refer the proxy to the Committee for voting. Final decisions on proxy voting will ultimately be made with the goal of enhancing the value of our clients' investments. Adopted 8/03 - ---------- /2/ It is Independence's general policy not to invest in private securities such as Rule 144A securities. If a portfolio were to hold a private security, however, and a proxy needed to be voted, we would vote in accordance with our established proxy voting policy including our process for voting securities where a conflict of interest was present. /3/ For purposes of this proxy voting policy, a "material business relationship" is considered to arise in the event a client has contributed more than 5% of Independence's annual revenues for the most recent fiscal year or is reasonably expected to contribute this amount for the current fiscal year. /4/ For purposes of this proxy voting policy, a "material personal/family relationship" is one that would be reasonably likely to influence how we vote proxies. To identify any such relationships, the Proxy Voting Committee will obtain information on a regular basis about (i) personal and/or family relationships between any Independence employee who is involved in the proxy voting process (e.g., analyst, portfolio manager, and/or members of the Proxy Voting Committee, as applicable) or senior executives, and directors or senior executives of issuers for which the adviser may vote proxies, and (ii) personal and/or immediate family investments of such employees in issuers which exceed 5% of the outstanding stock of the issuers. B - 6 JOHN HANCOCK ADVISERS, LLC SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES We believe in placing our clients' interests first. Before we invest in a particular stock or bond, our team of portfolio managers and research analysts look closely at the company by examining its earnings history, its management team and its place in the market. Once we invest, we monitor all our clients' holdings, to ensure that they maintain their potential to produce results for investors. As part of our active investment management strategy, we keep a close eye on each company we invest in. Routinely, companies issue proxies by which they ask investors like us to vote for or against a change, such as a new management team, a new business procedure or an acquisition. We base our decisions on how to vote these proxies with the goal of maximizing the value of our clients' investments. Currently, John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management Corporation ("Sovereign") manage open-end funds, closed-end funds and portfolios for institutions and high-net-worth investors. Occasionally, we utilize the expertise of an outside asset manager by means of a subadvisory agreement. In all cases, JHA or Sovereign makes the final decision as to how to vote our clients' proxies. There is one exception, however, and that pertains to our international accounts. The investment management team for international investments votes the proxies for the accounts they manage. Unless voting is specifically retained by the named fiduciary of the client, JHA and Sovereign will vote proxies for ERISA clients. In order to ensure a consistent, balanced approach across all our investment teams, we have established a proxy oversight group comprised of associates from our investment, operations and legal teams. The group has developed a set of policies and procedures that detail the standards for how JHA and Sovereign vote proxies. The guidelines of JHA have been approved and adopted by each fund client's board of trustees who have voted to delegate proxy voting authority to their investment adviser, JHA. JHA and Sovereign's other clients have granted us the authority to vote proxies in our advisory contracts or comparable documents. JHA and Sovereign have hired a third party proxy voting service which has been instructed to vote all proxies in accordance with our established guidelines except as otherwise instructed. In evaluating proxy issues, our proxy oversight group may consider information from many sources, including the portfolio manager, management of a company presenting a proposal, shareholder groups, and independent proxy research services. Proxies for securities on loan through securities lending programs will generally not be voted, however a decision may be made to recall a security for voting purposes if the issue is material. Below are the guidelines we adhere to when voting proxies. Please keep in mind that these are purely guidelines. Our actual votes will be driven by the particular circumstances of each proxy. From time to time votes may ultimately be cast on a case-by-case basis, taking into consideration relevant facts and circumstances at the time of the vote. Decisions on these matters (case-by-case, abstention, recall) will normally be made by a portfolio manager under the supervision of the chief investment officer and the proxy oversight group. We may abstain from voting a proxy if we conclude that the effect on our clients' economic interests or the value of the portfolio holding is indeterminable or insignificant. PROXY VOTING GUIDELINES Board of Directors ------------------ We believe good corporate governance evolves from an independent board. We support the election of uncontested director nominees, but will withhold our vote for any nominee attending less than 75% of the board and committee meetings during the previous fiscal year. Contested elections will be considered on a case by case basis by the proxy oversight group, taking into account the nominee's qualifications. We will support management's ability to set the size of the board of directors and to fill vacancies without shareholder approval but will not support a board that has fewer than 3 directors or allows for the removal of a director without cause. We will support declassification of a board and block efforts to adopt a classified board structure. This structure typically divides the board into classes with each class serving a staggered term. In addition, we support proposals for board indemnification and limitation of director liability, as long as they are consistent with corporate law and shareholders' interests. We believe that this is necessary to attract qualified board members. B - 7 Selection of Auditors --------------------- We believe an independent audit committee can best determine an auditor's qualifications. We will vote for management proposals to ratify the board's selection of auditors, and for proposals to increase the independence of audit committees. Capitalization -------------- We will vote for a proposal to increase or decrease authorized common or preferred stock and the issuance of common stock, but will vote against a proposal to issue or convert preferred or multiple classes of stock if the board has unlimited rights to set the terms and conditions of the shares, or if the shares have voting rights inferior or superior to those of other shareholders. In addition, we will support a management proposal to: create or restore preemptive rights; approve a stock repurchase program; approve a stock split or reverse stock split; and, approve the issuance or exercise of stock warrants Acquisitions, mergers and corporate restructuring ------------------------------------------------- Proposals to merge with or acquire another company will be voted on a case-by-case basis, as will proposals for recapitalization, restructuring, leveraged buyout, sale of assets, bankruptcy or liquidation. We will vote against a reincorporation proposal if it would reduce shareholder rights. We will vote against a management proposal to ratify or adopt a poison pill or to establish a supermajority voting provision to approve a merger or other business combination. We would however support a management proposal to opt out of a state takeover statutory provision, to spin-off certain operations or divisions and to establish a fair price provision. Corporate Structure and Shareholder Rights ------------------------------------------ In general, we support proposals that foster good corporate governance procedures and that provide shareholders with voting power equal to their equity interest in the company. To preserve shareholder rights, we will vote against a management proposal to restrict shareholders' right to: call a special meeting and to eliminate a shareholders' right to act by written consent. In addition, we will not support a management proposal to adopt a supermajority vote requirement to change certain by-law or charter provisions or a non-technical amendment to by-laws or a charter that reduces shareholder rights. Equity-based compensation ------------------------- Equity-based compensation is designed to attract, retain and motivate talented executives and independent directors, but should not be so significant as to materially dilute shareholders' interests. We will vote against the adoption or amendment of a stock option plan if the: . The compensation committee is not fully independent . plan dilution is more than 10% of outstanding common stock, . company allows or has allowed the re-pricing or replacement of underwater options in the past three fiscal years (or the exchange of underwater options) without shareholder approval. . if the option is not premium priced or indexed, or does not vest based on future performance With respect to the adoption or amendment of employee stock purchase plans or a stock award plan, we will vote against management if: . the plan allows stock to be purchased at less than 85% of fair market value; . this plan dilutes outstanding common equity greater than 10% . all stock purchase plans, including the proposed plan, exceed 15% of outstanding common equity . if the potential dilution from all company plans is more than 85% With respect to director stock incentive/option plans, we will vote against management if: . the minimum vesting period for options or time lapsing restricted stock is les than one year . if the potential dilution for all company plans is more than 85% B - 8 Other Business -------------- For routine business matters which are the subject of many proxy related questions, we will vote with management proposals to: . change the company name; . approve other business; . adjourn meetings; . make technical amendments to the by-laws or charters; . approve financial statements; . approve an employment agreement or contract. Shareholder Proposals --------------------- Shareholders are permitted per SEC regulations to submit proposals for inclusion in a company's proxy statement. We will generally vote against shareholder proposals and in accordance with the recommendation of management except as follows where we will vote for proposals: . calling for shareholder ratification of auditors; . calling for auditors to attend annual meetings; . seeking to increase board independence; . requiring minimum stock ownership by directors; . seeking to create a nominating committee or to increase the independence of the nominating committee; . seeking to increase the independence of the audit committee. Corporate and social policy issues ---------------------------------- We believe that "ordinary business matters" are primarily the responsibility of management and should be approved solely by the corporation's board of directors. Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. We generally vote against business practice proposals and abstain on social policy issues, though we may make exceptions in certain instances where we believe a proposal has substantial economic implications. PROXY VOTING PROCEDURES The role of the proxy voting service ------------------------------------ JHA and Sovereign Asset Management Corporation ("Sovereign") have hired a proxy voting service to assist with the voting of client proxies. The proxy service coordinates with client custodians to ensure that proxies are received for securities held in client accounts and acted on in a timely manner. The proxy service votes all proxies received in accordance with the proxy voting guidelines established and adopted by JHA and Sovereign. When it is unclear how to apply a particular proxy voting guideline or when a particular proposal is not covered by the guidelines, the proxy voting service will contact the proxy oversight group coordinator for a resolution. The role of the proxy oversight group and coordinator ----------------------------------------------------- The coordinator will interact directly with the proxy voting service to resolve any issues the proxy voting service brings to the attention of JHA or Sovereign. When a question arises regarding how a proxy should be voted the coordinator contacts the firm's investment professionals and the proxy oversight group for a resolution. In addition the coordinator ensures that the proxy voting service receives responses in a timely manner. Also, the coordinator is responsible for identifying whether, when a voting issue arises, there is a potential conflict of interest situation and then escalating the issue to the firm's Executive Committee. For securities out on loan as part of a securities lending program, if a decision is made to vote a proxy, the coordinator will manage the return/recall of the securities so the proxy can be voted. The role of mutual fund trustees -------------------------------- The boards of trustees of our mutual fund clients have reviewed and adopted the proxy voting guidelines of the funds' investment adviser, JHA. The trustees will periodically review the proxy voting guidelines and suggest changes they deem advisable. B - 9 Conflicts of interest --------------------- Conflicts of interest are resolved in the best interest of clients. With respect to potential conflicts of interest, proxies will be voted in accordance with JHA's or Sovereign's predetermined policies. If application of the predetermined policy is unclear or does not address a particular proposal, a special internal review by the JHA Executive Committee or Sovereign Executive Committee will determine the vote. After voting, a report will be made to the client (in the case of an investment company, to the fund's board of trustees), if requested. An example of a conflict of interest created with respect to a proxy solicitation is when JHA or Sovereign must vote the proxies of companies that they provide investment advice to or are currently seeking to provide investment advice to, such as to pension plans. B - 10 DECLARATION MANAGEMENT & RESEARCH LLC ("Declaration") PROXY VOTING POLICY AND PROCEDURES Declaration is a fixed income manager and the securities we purchase for client accounts are predominantly fixed income securities. Accordingly, we are seldom if ever called upon to vote equity securities on our clients' behalf. However, in the event we were granted the discretion to vote proxies for a client's account and an occasion arose where an equity security needed to be voted, we would follow the following proxy voting policy in carrying out our responsibilities to that client. I. GENERAL PRINCIPLES In order to set a framework within which proxy questions should be considered and voted, the following general principles should be applied: 1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies for a client's account should be exercised keeping in mind a fiduciary's duty to use its best efforts to preserve or enhance the value of the client's account. We should vote on proxy questions with the goal of fostering the interests of the client (or the participants and beneficiaries in the case of an ERISA account). 2) Proxy questions should be considered within the individual circumstances of the issuer. It is possible that individual circumstances might mean that a given proxy question could be voted differently than what is generally done in other cases. 3) If a proxy question clearly has the capability of affecting the economic value of the issuer's stock, the question should be voted in a way that attempts to preserve, or give the opportunity for enhancement of, the stock's economic value. 4) In certain circumstances, even though a proposal might appear to be beneficial or detrimental in the short term, our analysis will conclude that over the long term greater value may be realized by voting in a different manner. 5) It is our policy that when we are given authority to vote proxies for a client's account, we must be authorized to vote all proxies for the account in our discretion. We do not accept partial voting authority nor do we accept instructions from clients on how to vote on specific issues, except in the case of registered investment companies. Clients may wish to retain proxy voting authority and vote their own proxies if necessary in order to satisfy their individual social, environmental or other goals. Since we cannot currently anticipate circumstances in which Declaration would be called upon to vote an equity security for a client's account, it is difficult to specify in advance how we would vote on particular questions. For routine matters, we would expect to vote in accordance with the recommendation of the issuer's management. For all other matters, we would decide how to vote on a case-by-case basis considering the relevant circumstances of the issuer. We will from time to time review this proxy voting policy and procedures and may adopt changes from time to time. Clients may contact Carole Parker, our Compliance Officer, by calling 703-749-8240 or via e-mail at cparker@declaration.com to obtain a record of how we voted the proxies for their account. II. PROCESS At Declaration, the investment research analysts are responsible for performing research on the companies in which we invest. The same analysts would be responsible for decisions regarding proxy voting, as they would be the most familiar with company-specific issues. Portfolio managers may also provide input when appropriate. Proxy voting mechanics are the responsibility of the analyst. We may abstain from voting a client proxy if we conclude that the effect on the client's economic interests or the value of the portfolio holding is indeterminable or insignificant. We may also abstain from voting a client proxy for cost reasons (e.g., costs associated with voting proxies of non-U.S. securities). In accordance with our fiduciary duties, we would weigh the costs and benefits of voting proxy proposals relating to foreign securities and make an informed decision with respect to whether voting a given proxy proposal is prudent. Our decision would take into account the effect that the vote of our client, either by itself or together with other votes, was expected to have on the value of our client's investment and whether this expected effect would outweigh the cost of voting. B - 11 II. PROCESS - continued We will maintain the records required to be maintained by us with respect to proxies in accordance with the requirements of the Investment Advisers Act of 1940 and, with respect to our registered investment company clients, the Investment Company Act of 1940. We may, but need not, maintain proxy statements that we receive regarding client securities to the extent that such proxy statements are available on the SEC's Edgar system. We may also rely upon a third party to maintain certain records required to be maintained by the Advisors Act or the Investment Company Act. III. CONFLICTS OF INTEREST We manage the assets of various public and private company clients, and may invest in the securities of certain of these companies on behalf of our clients. As noted above, we invest principally in fixed income securities with respect to which proxies are not required to be voted. However, in the event we were to be granted the discretion to vote proxies by a client, and an equity security were to be held in that client's portfolio with respect to which a vote was required, we would be responsible for voting proxies for that security. We recognize that the potential for conflicts of interest could arise in situations where we have discretion to vote client proxies and where we have material business relationships or material personal/family relationships/5/ with an issuer (or with a potential target or acquirer, in the case of a proxy vote in connection with a takeover). To address these potential conflicts we have established a Proxy Voting Committee (the "Committee"). The Committee consists of the President, the Senior Vice President - Director of Portfolio Management, and the Compliance Officer. The Committee will use reasonable efforts to determine whether a potential conflict may exist, including screening proxies against a list of clients with whom we have a material business relationship. However, a potential conflict shall be deemed to exist only if one or more of the members of the Committee actually know of the potential conflict. The Committee will work with the analyst assigned to the specific security to oversee the proxy voting process for securities where we believe we may have potential conflicts. The Committee will meet to decide how to vote the proxy of any security with respect to which we have identified a potential conflict. The Committee will consider the analyst's recommendation, make a decision on how to vote the proxy and document the Committee's rationale for its decision. Declaration is a wholly owned subsidiary of John Hancock Life Insurance Company, which is a wholly owned subsidiary of John Hancock Financial Services, Inc. ("JHFS"), a public company. It is our general policy not to acquire or hold JHFS stock on behalf of our clients. However, in the event that a client were to hold JHFS stock in a portfolio which we managed, and we were responsible for voting a JHFS proxy on behalf of the client, the Committee would decide how to vote the JHFS proxy in a manner that it believes will maximize shareholder value. The Committee will document the rationale for its decision. It is Declaration's policy not to accept any input from any other person or entity, including its affiliates, when voting proxies for any security. In the event that a Declaration employee was contacted by any affiliate or any other person or entity, other than by means of standard materials available to all shareholders, with a recommendation on how to vote a specific proxy, the event would be reported to the Compliance Officer and would be documented. The Committee would then decide how to vote the proxy in question and would document the rationale for its decision. If there is controversy or uncertainty about how any particular proxy question should be voted, or if an analyst or a Committee member believes that he or she has been pressured to vote in a certain way, he or she will consult with the Committee or with the Compliance Officer, and a decision will be made whether to refer the proxy to the Committee for voting. Final decisions on proxy voting will ultimately be made with the goal of enhancing the value of our clients' investments. Adopted 07/03 - ---------- /5/For purposes of this proxy voting policy, a "material personal/family relationship" is one that would be reasonably likely to influence how we vote proxies. To identify any such relationships, the Proxy Voting Committee will in connection with each proxy vote obtain information about (1) personal and/or family relationships between any Declaration employee involved in the proxy vote (e.g., analyst, portfolio manager and/or members of the Proxy Voting Committee, as applicable), and directors or senior executives of the issuer, and (ii) personal and/or immediate family investments of such employees in issuers which exceed 5% of the outstanding stock of the issuer. B - 12 SSgA FUNDS MANAGEMENT, INC. PROXY VOTING POLICIES AND PROCEDURES INTRODUCTION SSgA Funds Management, Inc. ("FM") seeks to vote proxies in the best interests of its clients. In the ordinary course, this entails voting proxies in a way which FM believes will maximize the monetary value of each portfolio's holdings. FM takes the view that this will benefit our direct clients (e.g. investment funds) and, indirectly, the ultimate owners and beneficiaries of those clients (e.g. fund shareholders). Oversight of the proxy voting process is the responsibility of the State Street Global Advisors (SSgA) Investment Committee. The SSgA Investment Committee reviews and approves amendments to the FM Proxy Voting Policy and delegates authority to vote in accordance with this policy to Proxy Voting Services. FM retains the final authority and responsibility for voting. In addition to voting proxies, FM: 1) describes its proxy voting procedures to its clients in Part II of its Form ADV; 2) provides the client with this written proxy policy, upon request; 3) discloses to its clients how they may obtain information on how FM voted the client's proxies; 4) matches proxies received with holdings as of record date; 5) reconciles holdings as of record date and rectifies any discrepancies; 6) generally applies its proxy voting policy consistently and keeps records of votes for each client; 7) documents the reason(s) for voting for all non-routine items; and 8) keeps records of such proxy voting available for inspection by the client or governmental agencies. PROCESS The SSgA FM Principal -- Manager of Corporate Actions is responsible for monitoring corporate actions. As stated above, oversight of the proxy voting process is the responsibility of the SSgA Investment Committee, which retains oversight responsibility for all investment activities of all State Street Corporation investment firms. In order to facilitate our proxy voting process, FM retains a firm with expertise in the proxy voting and corporate governance fields to assist in the due diligence process. The Manager of Corporate Actions is responsible, working with this firm, for ensuring that proxies are submitted in a timely manner. All proxies received on behalf of FM clients are forwarded to our proxy voting firm. If (i) the request falls within one of the guidelines listed below, and (ii) there are no special circumstances relating to that company or proxy which come to our attention (as discussed below), the proxy is voted according to our guidelines. However, from time to time, proxy votes will be solicited which (i) involve special circumstances and require additional research and discussion or (ii) are not directly addressed by our policies. These proxies are identified through a number of methods, including but not limited to notification from our third party proxy voting specialist, concerns of clients, review by internal proxy specialists, and questions from consultants. In instances of special circumstances or issues not directly addressed by our policies, the Chairman of the Investment Committee is consulted for a determination of the proxy vote. The first determination is whether there is a material conflict of interest between the interests of our client and those of FM. If the Manager of Corporate Actions and the Chairman of the Investment Committee determine that there is a material conflict, the process detailed below under "Potential Conflicts" is followed. If there is no material conflict, we examine each of the issuer's proposals in detail in seeking to determine what vote would be in the best interests of our clients. At this point, the Chairman of the Investment Committee makes a voting decision based on maximizing the monetary value of each portfolios' holdings. However, the Chairman of the Investment Committee may determine that a proxy involves the consideration of particularly significant issues and present the proxy to the entire Investment Committee for a decision on voting the proxy. FM also endeavors to show sensitivity to local market practices when voting proxies of non-U.S. issuers. B - 13 VOTING For most issues and in most circumstances, we abide by the following general guidelines. However, as discussed above, in certain circumstances, we may determine that it would be in the best interests of our clients to deviate from these guidelines. MANAGEMENT PROPOSALS I. FM votes in support of management on the following ballot items, which are fairly common management sponsored initiatives. . Elections of directors who do not appear to have been remiss in the performance of their oversight responsibilities . Approval of auditors . Directors' and auditors' compensation . Directors' liability and indemnification . Discharge of board members and auditors . Financial statements and allocation of income . Dividend payouts that are greater than or equal to country and industry standards . Authorization of share repurchase programs . General updating of or corrective amendments to charter . Change in Corporation Name . Elimination of cumulative voting II. FM votes in support of management on the following items, which have potentially substantial financial or best-interest impact: . Capitalization changes which eliminate other classes of stock and voting rights . Changes in capitalization authorization for stock splits, stock dividends, and other specified needs which are no more than 50% of the existing authorization for U.S. companies and no more than 100% of existing authorization for non-U.S. companies . Elimination of pre-emptive rights for share issuance of less than a given percentage (country specific - ranging from 5% to 20%) of the outstanding shares . Elimination of "poison pill" rights . Stock purchase plans with an exercise price of not less that 85% of fair market value . Stock option plans which are incentive based and not excessive . Other stock-based plans which are appropriately structured . Reductions in super-majority vote requirements . Adoption of anti-"greenmail" provisions III. FM votes against management on the following items, which have potentially substantial financial or best interest impact: . Capitalization changes that add "blank check" classes of stock or classes that dilute the voting interests of existing shareholders . Changes in capitalization authorization where management does not offer an appropriate rationale or which are contrary to the best interest of existing shareholders . Anti-takeover and related provisions that serve to prevent the majority of shareholders from exercising their rights or effectively deter appropriate tender offers and other offers . Amendments to bylaws which would require super-majority shareholder votes to pass or repeal certain provisions . Elimination of Shareholders' Right to Call Special Meetings . Establishment of classified boards of directors . Reincorporation in a state which has more stringent anti-takeover and related provisions . Shareholder rights plans that allow the board of directors to block appropriate offers to shareholders or which trigger provisions preventing legitimate offers from proceeding . Excessive compensation . Change-in-control provisions in non-salary compensation plans, employment contracts, and severance agreements which benefit management and would be costly to shareholders if triggered . Adjournment of Meeting to Solicit Additional Votes B - 14 . "Other business as properly comes before the meeting" proposals which extend "blank check" powers to those acting as proxy . Proposals requesting re-election of insiders or affiliated directors who serve on audit, compensation, and nominating committees. IV. FM evaluates Mergers and Acquisitions on a case-by-case basis. Consistent with our proxy policy, we support management in seeking to achieve their objectives for shareholders. However, in all cases, FM uses its discretion in order to maximize shareholder value. FM, generally votes, as follows: . Against offers with potentially damaging consequences for minority shareholders because of illiquid stock, especially in some non-US markets . For offers that concur with index calculators treatment and our ability to meet our clients return objectives for passive funds . Against offers when there are prospects for an enhanced bid or other bidders . For proposals to restructure or liquidate closed end investment funds in which the secondary market price is substantially lower than the net asset value SHAREHOLDER PROPOSALS Traditionally, shareholder proposals have been used to encourage management and other shareholders to address socio-political issues. FM believes that it is inappropriate to use client assets to attempt to affect such issues. Thus, we examine shareholder proposals primarily to determine their economic impact on shareholders. I. FM votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives: . Requirements that auditors attend the annual meeting of shareholders . Establishment of an annual election of the board of directors . Mandates requiring a majority of independent directors on the Board of Directors and the audit, nominating, and compensation committees . Mandates that amendments to bylaws or charters have shareholder approval . Mandates that shareholder-rights plans be put to a vote or repealed . Establishment of confidential voting . Expansions to reporting of financial or compensation-related information, within reason . Repeals of various anti-takeover related provisions . Reduction or elimination of super-majority vote requirements . Repeals or prohibitions of "greenmail" provisions . "Opting-out" of business combination provisions . Proposals requiring the disclosure of executive retirement benefits if the issuer does not have an independent compensation committee II. In light of recent events surrounding corporate auditors and taking into account corporate governance provisions released by the SEC, NYSE, and NASDAQ, FM votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives: . Disclosure of Auditor and Consulting relationships when the same or related entities are conducting both activities . Establishment of selection committee responsible for the final approval of significant management consultant contract awards where existing firms are already acting in an auditing function . Mandates that Audit, Compensation and Nominating Committee members should all be independent directors . Mandates giving the Audit Committee the sole responsibility for the selection and dismissal of the auditing firm and any subsequent result of audits are reported to the audit committee B - 15 III. FM votes against shareholders on the following initiatives, which are fairly common shareholder-sponsored initiatives: . Limits to tenure of directors . Requirements that candidates for directorships own large amounts of stock before being eligible to be elected . Restoration of cumulative voting in the election of directors . Requirements that the company provide costly, duplicative, or redundant reports; or reports of a non-business nature . Restrictions related to social, political, or special interest issues which affect the ability of the company to do business or be competitive and which have significant financial or best-interest impact . Proposals which require inappropriate endorsements or corporate actions . Requiring the company to expense stock options unless already mandated by FASB (or similar body) under regulations that supply a common valuation model. . Proposal asking companies to adopt full tenure holding periods for their executives. . Proposals requiring the disclosure of executive retirement benefits if the issuer has an independent compensation committee SHAREHOLDER ACTIVISM We at FM agree entirely with the United States Department of Labor's position that "where proxy voting decisions may have an effect on the economic value of the plan's underlying investment, plan fiduciaries should make proxy voting decisions with a view to enhancing the value of the shares of stock" (IB 94-2). Our proxy voting policy and procedures are designed to ensure that our clients receive the best possible returns on their investments. We meet directly with corporation representatives and participate in conference calls and third-party inquiries in order to ensure our processes are as fully informed as possible. Through our membership in the Council of Institutional Investors as well as our contact with corporate pension plans, public funds, and unions, we are also able to communicate extensively with other shareholders regarding events and issues relevant to individual corporations, general industry, and current shareholder concerns. In addition, FM monitors "target" lists of underperforming companies prepared by various shareholder groups, including: California Public Employee Retirement System, The City of New York - Office of the Comptroller, International Brotherhood of Teamsters, and Council of Institutional Investors. Companies, so identified, receive an individual, systematic review by the Corporate Governance Subcommittee of SSgA's Investment Committee. As an active shareholder, FM's role is to ensure that corporate policies serve the best interests of the corporation's investor-owners. Though we do not seek involvement in the day-to-day operations of an organization, we recognize the need for conscientious oversight of and input into management decisions that may affect a company's value. To that end, our monitoring of corporate management and industry events is substantially more detailed than that of the typical voter. We have demonstrated our willingness to vote against management-sponsored initiatives and to support shareholder proposals when appropriate. To date we have not filed proposals or initiated letter-writing or other campaigns, but have used our active participation in the corporate governance process--especially the proxy voting process--as the most effective means by which to communicate our and our clients' legitimate shareholder concerns. Should an issue arise in conjunction with a specific corporation that cannot be satisfactorily resolved through these means, we shall consider other approaches. Through the consistent, conscientious execution of our responsibilities as both fiduciary and shareholder, FM is able to promote the best interests of its fellow shareholders and its clients. The SSgA Funds Management, Inc. Proxy Voting Policy provides for this active, informed participation in the management of those corporations in which we hold shares. POTENTIAL CONFLICTS As discussed above under Process, from time to time, FM will review a proxy which presents a potential material conflict. For example, FM or its affiliates may provide services to a company whose management is soliciting proxies, or to another entity which is a proponent of a particular proxy proposal. Another example could arise when FM has business or other relationships with participants involved in proxy contests, such as a candidate for a corporate directorship. As a fiduciary to its clients, FM takes these potential conflicts very seriously. While FM's only goal in addressing any such potential conflict is to ensure that proxy votes are cast in the clients' best interests and are not affected by FM's potential conflict, there are a number of courses FM may take. The final decision as to which course to follow shall be made by the Investment Committee. When the matter falls clearly within one of the proposals enumerated above, casting a vote which simply follows FM's pre-determined policy would eliminate FM's discretion on the particular issue and hence avoid the conflict. B - 16 In other cases, where the matter presents a potential material conflict and is not clearly within one of the enumerated proposals, or is of such a nature that FM believes more active involvement is necessary, the Chairman of the Investment Committee shall present the proxy to the Investment Committee, who will follow one of two courses of action. First, FM may employ the services of a third party, wholly independent of FM, its affiliates and those parties involved in the proxy issue, to determine the appropriate vote. Second, in certain situations the Investment Committee may determine that the employment of a third party is unfeasible, impractical or unnecessary. In such situations, the Investment Committee shall make a decision as to the voting of the proxy. The basis for the voting decision, including the basis for the determination that the decision is in the best interests of FM's clients, shall be formalized in writing as a part of the minutes to the Investment Committee. As stated above, which action is appropriate in any given scenario would be the decision of the Investment Committee in carrying out its duty to ensure that the proxies are voted in the clients', and not FM's, best interests. RECORDKEEPING In accordance with applicable law, FM shall retain the following documents for not less than five years from the end of the year in which the proxies were voted, the first two years in FM's office: 1) FM's Proxy Voting Policy and any additional procedures created pursuant to such Policy; 2) a copy of each proxy statement FM receives regarding securities held by its clients (note: this requirement may be satisfied by a third party who has agreed in writing to do so or by obtaining a copy of the proxy statement from the EDGAR database); 3) a record of each vote cast by FM (note: this requirement may be satisfied by a third party who has agreed in writing to do so); 4) a copy of any document created by FM that was material in making its voting decision or that memorializes the basis for such decision; and 5) a copy of each written request from a client, and response to the client, for information on how FM voted the client's proxies. DISCLOSURE OF CLIENT VOTING INFORMATION Any client who wishes to receive information on how its proxies were voted should contact its FM client service officer. B - 17 T. ROWE PRICE ASSOCIATES, INC. ("T. Rowe Price") PROXY VOTING PROCESS AND POLICIES T. Rowe Price Associates, Inc. (and T. Rowe Price International, Inc.) recognize and adhere to the principle that one of the privileges of owning stock in a company is the right to vote on issues submitted to shareholder vote--such as election of directors and important matters affecting a company's structure and operations. As an investment adviser with a fiduciary responsibility to its clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is owned by the investment companies that it sponsors and serves as investment adviser. T. Rowe Price also is involved in the proxy process on behalf of its institutional and private counsel clients who have requested such service. For those private counsel clients who have not delegated their voting responsibility but who request advice, T. Rowe Price makes recommendations regarding proxy voting. Proxy Administration - -------------------- The T. Rowe Price Proxy Committee develops our firm's positions on all major corporate issues, creates guidelines, and oversees the voting process. The Proxy Committee, composed of portfolio managers, investment operations managers, and internal legal counsel, analyzes proxy policies based on whether they would adversely affect shareholders' interests and make a company less attractive to own. In evaluating proxy policies each year, the Proxy Committee relies upon our own fundamental research, independent research provided by third parties, and information presented by company managements and shareholder groups. Once the Proxy Committee establishes its recommendations, they are distributed to the firm's portfolio managers as voting guidelines. Ultimately, the portfolio manager votes on the proxy proposals of companies in his or her portfolio. When portfolio managers cast votes that are counter to the Proxy Committee's guidelines, they are required to document their reasons in writing to the Proxy Committee. Annually, the Proxy Committee reviews T. Rowe Price's proxy voting process, policies, and voting records. T. Rowe Price has retained Institutional Shareholder Services, an expert in the proxy voting and corporate governance area, to provide proxy advisory and voting services. These services include in-depth research, analysis, and voting recommendations as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance-related efforts. While the Proxy Committee relies upon ISS research in establishing T. Rowe Price's voting guidelines--many of which are consistent with ISS positions--T. Rowe Price may deviate from ISS recommendations on general policy issues or specific proxy proposals. Fiduciary Considerations - ------------------------ T. Rowe Price's decisions with respect to proxy issues are made in light of the anticipated impact of the issue on the desirability of investing in the portfolio company. Proxies are voted solely in the interests of the client, Price Fund shareholders or, where employee benefit plan assets are involved, in the interests of plan participants and beneficiaries. Practicalities involved with international investing may make it impossible at times, and at other times disadvantageous, to vote proxies in every instance. Consideration Given Management Recommendations - ---------------------------------------------- When determining whether to invest in a particular company, one of the key factors T. Rowe Price considers is the quality and depth of its management. As a result, T. Rowe Price believes that recommendations of management on most issues should be given weight in determining how proxy issues should be voted. T. Rowe Price Voting Policies - ----------------------------- Specific voting guidelines have been established by the Proxy Committee for recurring issues that appear on proxies, which are available to clients upon request. The following is a summary of the more significant T. Rowe Price policies: Election of Directors T. Rowe Price generally supports slates with a majority of independent directors and nominating committees chaired by an independent board member. We withhold votes for inside directors serving on compensation and audit committees and for directors who miss more than one-fourth of the scheduled board meetings. Executive Compensation Our goal is to assure that a company's equity-based compensation plan is aligned with shareholders' long-term interests. While we evaluate most plans on a case-by-case basis, T. Rowe Price generally opposes compensation packages that provide what we view as excessive awards to a few senior executives or that contain excessively dilutive stock option plans. We base our review on criteria such as the costs associated with the plan, plan features, dilution to shareholders and comparability to plans in the company's peer group. We generally oppose plans that give a company the ability to reprice options. B - 18 Anti-takeover and Corporate Governance Issues T. Rowe Price generally opposes anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions. When voting on corporate governance proposals, we will consider the dilutive impact to shareholders and the effect on shareholder rights. Social and Corporate Responsibility Issues T. Rowe Price generally votes with a company's management on social issues unless they have substantial economic implications for the company's business and operations that have not been adequately addressed by management. Monitoring and Resolving Conflicts of Interest - ---------------------------------------------- The Proxy Committee is also responsible for monitoring and resolving possible material conflicts between the interests of T. Rowe Price and those of its clients with respect to proxy voting. Since our voting guidelines are pre-determined by the Proxy Committee using recommendations from ISS, an independent third party, application of the T. Rowe Price guidelines to vote clients' proxies should in most instances adequately address any possible conflicts of interest. However, for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy Committee reviews all such proxy votes in order to determine whether the portfolio manager's voting rationale appears reasonable. The Proxy Committee also assesses whether any business or other relationships between T. Rowe Price and a portfolio company could have influenced an inconsistent vote on that company's proxy. Issues raising possible conflicts of interest are referred to designated members of the Proxy Committee for immediate resolution. B - 19 MORGAN STANLEY INVESTMENT MANAGEMENT INC. ("MSIM") PROXY VOTING POLICY AND PROCEDURES I. POLICY STATEMENT Introduction - MSIM's policies and procedures for voting proxies with respect to securities held in the accounts of clients applies to those MSIM entities that provide discretionary Investment Management services and for which a MSIM entity has the authority to vote their proxies. The policies and procedures and general guidelines in this section will be reviewed and, as necessary, updated periodically to address new or revised proxy voting issues. The MSIM entities covered by these policies and procedures currently include the following: Morgan Stanley Investment Advisors Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Investment Management Company, Morgan Stanley Asset & Investment Trust Management Co., Limited, Morgan Stanley Investment Management Private Limited, Morgan Stanley Investments LP, Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and collectively referred to as the "MSIM Affiliates"). Each MSIM Affiliate will vote proxies as part of its authority to manage, acquire and dispose of account assets. With respect to the MSIM registered management investment companies (Van Kampen, Institutional and Advisor Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote proxies pursuant to authority granted under its applicable investment advisory agreement or, in the absence of such authority, as authorized by its Board of Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named fiduciary" for an ERISA account has reserved the authority for itself, or in the case of an account not governed by ERISA, the Investment Management Agreement does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in a prudent and diligent manner, vote proxies in the best interests of clients, including beneficiaries of and participants in a client's benefit plan(s) for which we manage assets, consistent with the objective of maximizing long-term investment returns ("Client Proxy Standard"). In certain situations, a client or its fiduciary may provide a MSIM Affiliate with a statement of proxy voting policy. In these situations, the MSIM Affiliate will comply with the client's policy unless to do so it would be inconsistent with applicable laws or regulations or the MSIM Affiliate's fiduciary responsibility. Proxy Research Services - To assist the MSIM Affiliates in their responsibility for voting proxies and the overall global proxy voting process, Institutional Shareholder Services ("ISS") and the Investor Responsibility Research Center ("IRRC") have been retained as experts in the proxy voting and corporate governance area. ISS and IRRC are independent advisers that specialize in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided to MSIM Affiliates include in-depth research, global issuer analysis, and voting recommendations. In addition to research, ISS provides vote execution, reporting, and recordkeeping. MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor and supervise the services provided by the proxy research services. Voting Proxies for certain Non-US Companies - While the proxy voting process is well established in the United States and other developed markets with a number of tools and services available to assist an investment manager, voting proxies of non-US companies located in certain jurisdictions, particularly emerging markets, may involve a number of problems that may restrict or prevent a MSIM Affiliate's ability to vote such proxies. These problems include, but are not limited to: (i) proxy statements and ballots being written in a language other than English; (ii) untimely and/or inadequate notice of shareholder meetings; (iii) restrictions on the ability of holders outside the issuer's jurisdiction of organization to exercise votes; (iv) requirements to vote proxies in person, (v) the imposition of restrictions on the sale of the securities for a period of time in proximity to the shareholder meeting; and (vi) requirements to provide local agents with power of attorney to facilitate the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies will be voted on a best efforts basis only, consistent with the Client Proxy Standard. ISS has been retained to provide assistance to the MSIM Affiliates in connection with voting their clients' non-US proxies. II. GENERAL PROXY VOTING GUIDELINES To ensure consistency in voting proxies on behalf of its clients, MSIM Affiliates will follow (subject to any exception set forth herein) these Proxy Voting Policies and Procedures, including the guidelines set forth below. These guidelines address a broad range of issues, including board size and composition, executive compensation, anti-takeover proposals, capital structure proposals and social responsibility issues and are meant to be general voting parameters on issues that arise most frequently. The MSIM Affiliates, however, may vote in a manner that is contrary to the following general guidelines, pursuant to the procedures set forth in Section IV. below, provided the vote is consistent with the Client Proxy Standard. B - 20 III. GUIDELINES A. Management Proposals 1. When voting on routine ballot items the following proposals are generally voted in support of management, subject to the review and approval of the Proxy Review Committee, as appropriate. . Selection or ratification of auditors. . Approval of financial statements, director and auditor reports. . Election of Directors. . Limiting Directors' liability and broadening indemnification of Directors. . Requirement that a certain percentage (up to 66 2/3%) of its Board's members be comprised of independent and unaffiliated Directors. . Requirement that members of the company's compensation, nominating and audit committees be comprised of independent or unaffiliated Directors. . Recommendations to set retirement ages or require specific levels of stock ownership by Directors. . General updating/corrective amendments to the charter. . Elimination of cumulative voting. . Elimination of preemptive rights. . Provisions for confidential voting and independent tabulation of voting results. . Proposals related to the conduct of the annual meeting except those proposals that relate to the "transaction of such other business which may come before the meeting." 2. The following non-routine proposals, which potentially may have a substantive financial or best interest impact on a shareholder, are generally voted in support of management, subject to the review and approval of the Proxy Review Committee, as appropriate. Capitalization changes ---------------------- . Capitalization changes that eliminate other classes of stock and voting rights. . Proposals to increase the authorization of existing classes of common stock (or securities convertible into common stock) if: (i) a clear and legitimate business purpose is stated; (ii) the number of shares requested is reasonable in relation to the purpose for which authorization is requested; and (iii) the authorization does not exceed 100% of shares currently authorized and at least 30% of the new authorization will be outstanding. . Proposals to create a new class of preferred stock or for issuances of preferred stock up to 50% of issued capital. . Proposals for share repurchase plans. . Proposals to reduce the number of authorized shares of common or preferred stock, or to eliminate classes of preferred stock. . Proposals to effect stock splits. . Proposals to effect reverse stock splits if management proportionately reduces the authorized share amount set forth in the corporate charter. Reverse stock splits that do not adjust proportionately to the authorized share amount will generally be approved if the resulting increase in authorized shares coincides with the proxy guidelines set forth above for common stock increases. Compensation ------------ . Director fees, provided the amounts are not excessive relative to other companies in the country or industry. . Employee stock purchase plans that permit discounts up to 15%, but only for grants that are part of a broad based employee plan, including all non-executive employees. . Establishment of Employee Stock Option Plans and other employee ownership plans. Anti-Takeover Matters --------------------- . Modify or rescind existing supermajority vote requirements to amend the charters or bylaws. . Adoption of anti-greenmail provisions provided that the proposal: (i) defines greenmail; (ii) prohibits buyback offers to large block holders not made to all shareholders or not approved by disinterested shareholders; and (iii) contains no anti-takeover measures or other provisions restricting the rights of shareholders. B - 21 3. The following non-routine proposals, which potentially may have a substantive financial or best interest impact on the shareholder, are generally voted against (notwithstanding management support), subject to the review and approval of the Proxy Review Committee, as appropriate. . Capitalization changes that add classes of stock that which substantially dilute the voting interests of existing shareholders. . Proposals to increase the authorized number of shares of existing classes of stock that carry preemptive rights or supervoting rights. . Creation of "blank check" preferred stock. . Changes in capitalization by 100% or more. . Compensation proposals that allow for discounted stock options that have not been offered to employees in general. . Amendments to bylaws that would require a supermajority shareholder vote to pass or repeal certain provisions. . Proposals to indemnify auditors. 4. The following types of non-routine proposals, which potentially may have a potential financial or best interest impact on an issuer, are voted as determined by the Proxy Review Committee: Corporate Transactions ---------------------- . Mergers, acquisitions and other special corporate transactions (i.e., takeovers, spin-offs, sales of assets, reorganizations, restructurings and recapitalizations) will be examined on a case-by-case basis. In all cases, ISS and IRRC research and analysis will be used along with MSIM Affiliates' research and analysis, based on, among other things, MSIM internal company-specific knowledge. . Change-in-control provisions in non-salary compensation plans, employment contracts, and severance agreements that benefit management and would be costly to shareholders if triggered. . Shareholders rights plans that allow appropriate offers to shareholders to be blocked by the board or trigger provisions that prevent legitimate offers from proceeding. . Executive/Director stock option plans. Generally, stock option plans should meet the following criteria: (i) Whether the stock option plan is incentive based; (ii) For mature companies, should be no more than 5% of the issued capital at the time of approval; (iii) For growth companies, should be no more than 10% of the issued capital at the time of approval. Anti-Takeover Provisions ------------------------ . Proposals requiring shareholder ratification of poison pills. . Anti-takeover and related provisions that serve to prevent the majority of shareholders from exercising their rights or effectively deter the appropriate tender offers and other offers. B. Shareholder Proposals 1. The following shareholder proposals are generally supported, subject to the review and approval of the Proxy Review Committee, as appropriate: . Requiring auditors to attend the annual meeting of shareholders. . Requirement that members of the company's compensation, nominating and audit committees be comprised of independent or unaffiliated Directors. . Requirement that a certain percentage of its Board's members be comprised of independent and unaffiliated Directors. . Confidential voting. . Reduction or elimination of supermajority vote requirements. B - 22 B. Shareholder Proposals - continued 2. The following shareholder proposals will be voted as determined by the Proxy Review Committee. . Proposals that limit tenure of directors. . Proposals to limit golden parachutes. . Proposals requiring directors to own large amounts of stock to be eligible for election. . Restoring cumulative voting in the election of directors. . Proposals that request or require disclosure of executive compensation in addition to the disclosure required by the Securities and Exchange Commission ("SEC") regulations. . Proposals that limit retirement benefits or executive compensation. . Requiring shareholder approval for bylaw or charter amendments. . Requiring shareholder approval for shareholder rights plan or poison pill. . Requiring shareholder approval of golden parachutes. . Elimination of certain anti-takeover related provisions. . Prohibit payment of greenmail. 3. The following shareholder proposals are generally not supported, subject to the review and approval of the Committee, as appropriate. . Requirements that the issuer prepare reports that are costly to provide or that would require duplicative efforts or expenditures that are of a non-business nature or would provide no pertinent information from the perspective of institutional shareholders. . Restrictions related to social, political or special interest issues that impact the ability of the company to do business or be competitive and that have a significant financial or best interest impact to the shareholders. . Proposals that require inappropriate endorsements or corporate actions. IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES A. Proxy Review Committee 1. The MSIM Proxy Review Committee ("Committee") is responsible for creating and implementing MSIM's Proxy Voting Policy and Procedures and, in this regard, has expressly adopted them. Following are some of the functions and responsibilities of the Committee. (a) The Committee, which will consist of members designated by MSIM's Chief Investment Officer, is responsible for establishing MSIM's proxy voting policies and guidelines and determining how MSIM will vote proxies on an ongoing basis. (b) The Committee will periodically review and have the authority to amend as necessary MSIM's proxy voting policies and guidelines (as expressed in these Proxy Voting Policy and Procedures) and establish and direct voting positions consistent with the Client Proxy Standard. (c) The Committee will meet at least monthly to (among other matters): (1) address any outstanding issues relating to MSIM's Proxy Voting Policy and Procedures; and (2) generally review proposals at upcoming shareholder meetings of MSIM portfolio companies in accordance with this Policy and Procedures including, as appropriate, the voting results of prior shareholder meetings of the same issuer where a similar proposal was presented to shareholders. The Committee, or its designee, will timely communicate to ISS MSIM's Proxy Voting Policy and Procedures (and any amendments to them and/or any additional guidelines or procedures it may adopt). (d) The Committee will meet on an ad hoc basis to (among other matters): (1) authorize "split voting" (i.e., allowing certain shares of the same issuer that are the subject of the same proxy solicitation and held by one or more MSIM portfolios to be voted differently than other shares) and/or "override voting" (i.e., voting all MSIM portfolio shares in a manner contrary to the Procedures); (2) review and approve upcoming votes, as appropriate, for matters for which specific direction has been provided in Sections I, II, and III above; and (3) determine how to vote matters for which specific direction has not been provided in Sections I, II and III above. Split votes will generally not be approved within a single Global Investor Group team. The B - 23 Committee may take into account ISS recommendations and the research provided by IRRC as well as any other relevant information they may request or receive. (e) In addition to the procedures discussed above, if the Committee determines that an issue raises a potential material conflict of interest, or gives rise to the appearance of a potential material conflict of interest, the Committee will designate a special committee to review, and recommend a course of action with respect to, the conflict(s) in question ("Special Committee"). The Special Committee may request the assistance of the Law and Compliance Departments and will have sole discretion to cast a vote. In addition to the research provided by ISS and IRRC, the Special Committee may request analysis from MSIM Affiliate investment professionals and outside sources to the extent it deems appropriate. (f) The Committee and the Special Committee, or their designee(s), will document in writing all of their decisions and actions, which documentation will be maintained by the Committee and the Special Committee, or their designee(s) for a period of at least 6 years. To the extent these decisions relate to a security held by a MSIM U.S. registered investment company, the Committee and Special Committee, or their designee(s), will report their decisions to each applicable Board of Trustees/Directors of those investment companies at each Board's next regularly Scheduled Board meeting. The report will contain information concerning decisions made by the Committee and Special Committee during the most recently ended calendar quarter immediately preceding the Board meeting. (g) The Committee and Special Committee, or their designee(s), will timely communicate to applicable PMs, the Compliance Departments and, as necessary to ISS, decisions of the Committee and Special Committee so that, among other things, ISS will vote proxies consistent with their decisions. B - 24 STANDISH MELLON ASSET MANAGEMENT COMPANY LLC ("SMAC") SUMMARY OF PROXY VOTING POLICY AND PROCEDURES SMAC, through its participation on Mellon's Proxy Policy Committee, has adopted a Proxy Voting Policy, related procedures, and voting guidelines which are applied to those client accounts over which it has been delegated the authority to vote proxies. In voting proxies, SMAC seeks to act solely in the best financial and economic interest of the applicable client. SMAC will carefully review proposals that would limit shareholder control or could affect the value of a client's investment. SMAC generally will oppose proposals designed to insulate an issuer's management unnecessarily from the wishes of a majority of shareholders. SMAC will generally support proposals designed to provide management with short-term insulation from outside influences so as to enable them to bargain effectively with potential suitors and otherwise achieve long-term goals. On questions of social responsibility where economic performance does not appear to be an issue, SMAC will attempt to ensure that management reasonably responds to the social issues. All proxy voting proposals are reviewed, categorized, analyzed and voted in accordance with written guidelines in effect from time to time. These proxy voting guidelines are based on research and recommendations provided by internal resources and third party vendors. The guidelines are reviewed periodically and updated as necessary to reflect new issues and any changes in our policies on specific issues. Items that can be categorized will be voted in accordance with any applicable guidelines or referred to the Proxy Policy Committee, if the applicable guidelines so require. Proposals that cannot be categorized under the guidelines will be referred to the Proxy Policy Committee for discussion and vote. Additionally, the Proxy Policy Committee may review any proposal where it has identified a particular company, industry or issue for special scrutiny. With regard to voting proxies of foreign companies, SMAC weighs the cost of voting and potential inability to sell the shares, against the benefit of voting the shares, to determine whether or not to vote. SMAC recognizes its duty to vote proxies in the best interests of its clients. SMAC seeks to avoid material conflicts of interest through the establishment of the Proxy Policy Committee, which applies detailed, pre-determined proxy voting guidelines in an objective and consistent manner across client accounts, based on internal and external research and recommendations provided by a third party vendor, and without consideration of any client relationship factors. Further, SMAC and its affiliates engage a third party as an independent fiduciary to vote all proxies for Mellon Financial Corporation securities and affiliated mutual fund securities SMAC will furnish a copy of its Proxy Voting Policy, any related procedures, and its voting guidelines to each advisory client upon request. Upon request, SMAC will also disclose to an advisory client the proxy voting history for its account after the votes have been recorded. Approved 6/6/2003 B - 25 WELLINGTON MANAGEMENT COMPANY LLP ("Wellington Management") SUMMBARY OF PROXY VOTING POLICIES AND PROCEDURES The Funds have granted to Wellington Management the authority to vote proxies on their behalf with respect to the assets managed by Wellington Management. Wellington Management votes proxies in what it believes are the best economic interests of its clients and in accordance with its Proxy Policies and Procedures. Wellington Management's Proxy Committee is responsible for the review and oversight of the firm's Proxy Policies and Procedures. The Proxy Group within Wellington Management's Corporate Operations Department is responsible for the day-to-day administration of the proxy voting process. Although Wellington Management may utilize the services of various external resources in analyzing proxy issues and has established its own Proxy Guidelines setting forth general guidelines for voting proxies, Wellington Management personnel analyze all proxies and vote proxies based on our assessment of the merits of each proposal. The identified portfolio managers have the authority to determine the final vote for securities held in Funds for which they serve as the designated manager, unless such party is determined to have a material conflict of interest related to that proxy vote. Wellington Management maintains procedures designed to identify and address material conflicts of interest in voting proxies. The Proxy Committee sets standards for identifying material conflicts based on client, vendor and lender relationships. Proxy votes for which Wellington Management identifies a material conflict are reviewed by designated members of the Proxy Committee or by the entire Committee in some cases to resolve the conflict and direct the vote. Wellington Management may be unable to vote or may determine not to vote a proxy on behalf of the Funds due to securities lending, share blocking and re-registration requirements, lack of adequate information, untimely receipt of proxy materials, immaterial impact of the vote, and/or excessive costs. B - 26 CAPITAL GUARDIAN TRUST COMPANY ("CGTC") PROXY VOTING POLICY AND PROCEDURES POLICY CGTC provides investment management services to clients that include, among others, corporate and public pension plans, foundations and endowments and unaffiliated registered investment companies. CGTC's Personal Investment Management Division ("PIM") provides investment management and fiduciary services, including trust and estate administration, primarily to high net-worth individuals and families. CGTC considers proxy voting an important part of those management services, and as such, CGTC seeks to vote the proxies of securities held by clients in accounts for which it has proxy voting authority in the best interest of those clients. The procedures that govern this activity are reasonably designed to ensure that proxies are voted in the best interest of CGTC's clients. Fiduciary Responsibility and Long-term Shareholder Value -------------------------------------------------------- CGTC's fiduciary obligation to manage its accounts in the best interest of its clients extends to proxy voting. When voting proxies, CGTC considers those factors which would affect the value of its clients' investment and acts solely in the interest of, and for the exclusive purpose of providing benefits to, its clients. As required by ERISA, CGTC votes proxies solely in the interest of the participants and beneficiaries of retirement plans and does not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. CGTC believes the best interests of clients are served by voting proxies in a way that maximizes long-term shareholder value. Therefore, the investment professionals responsible for voting proxies have the discretion to make the best decision given the individual facts and circumstances of each issue. Proxy issues are evaluated on their merits and considered in the context of the analyst's knowledge of a company, its current management, management's past record, and CGTC's general position on the issue. In addition, many proxy issues are reviewed and voted on by a proxy voting committee comprised primarily of investment professionals, bringing a wide range of experience and views to bear on each decision. As the management of a portfolio company is responsible for its day to day operations, CGTC believes that management, subject to the oversight of its board of directors, is often in the best position to make decisions that serve the interests of shareholders. However, CGTC votes against management on proposals where it perceives a conflict may exist between management and client interests, such as those that may insulate management or diminish shareholder rights. CGTC also votes against management in other cases where the facts and circumstances indicate that the proposal is not in its clients' best interests. Special Review -------------- From time to time CGTC may vote a) on proxies of portfolio companies that are also clients of CGTC or its affiliates, b) on shareholder proposals submitted by clients, or c) on proxies for which clients have publicly supported or actively solicited CGTC or its affiliates to support a particular position. When voting these proxies, CGTC analyzes the issues on their merits and does not consider any client relationship in a way that interferes with its responsibility to vote proxies in the best interest of its clients. The CGTC Special Review Committee reviews certain of these proxy decisions for improper influences on the decision-making process and takes appropriate action, if necessary. PROCEDURES Proxy Review Process -------------------- Associates in CGTC's proxy voting department, along with compliance associates from the legal department, are responsible for coordinating the voting of proxies. These associates work with outside proxy voting service providers and custodian banks and are responsible for coordinating and documenting the internal review of proxies. The proxy voting department reviews each proxy ballot for standard and non-standard items. Standard proxy items are typically voted with management unless the research analyst who follows the company or a member of an investment or proxy voting committee requests additional review. Standard items currently include the uncontested election of directors, ratifying auditors, adopting reports and accounts, setting dividends and allocating profits for the prior year and certain other administrative items. All other items are sent by the proxy voting department to the research analyst who follows the company. The analyst reviews the proxy statement and makes a recommendation about how to vote on the issues based on his or her in-depth knowledge of the B - 27 company. Recommendations to vote with management on certain limited issues are voted accordingly. All other non-standard issues receive further consideration by a proxy voting committee, which reviews the issue and the analyst's recommendation, and decides how to vote. A proxy voting committee may escalate to the full investment committee(s) those issues for which it believes a broader review is warranted. Four proxy voting committees specialize in regional mandates and review the proxies of portfolio companies within their mandates. The proxy voting committees are comprised primarily of members of CGTC's and its affiliates' investment committees and their activity is subject to oversight by those committees. For securities held only in PIM accounts, non-standard items are sent to those associates to whom the CGTC Investment Committee has delegated the review and voting of proxies. These associates may forward certain proposals to the appropriate investment committee for discussion and a formal vote if they believe a broader review is warranted. CGTC seeks to vote all of its clients' proxies. In certain circumstances, CGTC may decide not to vote a proxy because the costs of voting outweigh the benefits to its clients (e.g., when voting could lead to share blocking where CGTC wishes to retain flexibility to trade shares). In addition, proxies with respect to securities on loan through client directed lending programs are not available to CGTC to vote and therefore are not voted. Proxy Voting Guidelines ----------------------- CGTC has developed proxy voting guidelines that reflect its general position and practice on various issues. To preserve the ability of decision makers to make the best decision in each case, these guidelines are intended only to provide context and are not intended to dictate how the issue must be voted. The guidelines are reviewed and updated as necessary, but at least annually, by the appropriate proxy voting and investment committees. CGTC's general positions related to corporate governance, capital structure, stock option and compensation plans and social and corporate responsibility issues are reflected below. . Corporate governance. CGTC supports strong corporate governance practices. It generally votes against proposals that serve as anti-takeover devices or diminish shareholder rights, such as poison pill plans and supermajority vote requirements, and generally supports proposals that encourage responsiveness to shareholders, such as initiatives to declassify the board. Mergers and acquisitions, reincorporations and other corporate restructurings are considered on a case-by-case basis, based on the investment merits of the proposal. . Capital structure. CGTC generally supports increases to capital stock for legitimate financing needs. It generally does not support changes in capital stock that can be used as anti-takeover devices, such as the creation of or increase in blank-check preferred stock or of a dual class capital structure with different voting rights. . Stock option compensation plans. CGTC supports the concept of stock-related compensation plans as a way to align employee and shareholder interests. However, plans that include features which undermine the connection between employee and shareholder interests generally are not supported. CGTC considers the following factors when voting on proposals related to new plans or changes to existing plans: the exercise price of the options, the size of the overall plan and/or the size of the increase, the historical dilution rate, whether the plan permits option repricing, the duration of the plan, and the needs of the company. Additionally, CGTC supports option expensing in theory and will generally support shareholder proposals on option expensing if such proposal language is non-binding and does not require the company to adopt a specific expensing methodology. . Social and corporate responsibility. CGTC votes on these issues based on the potential impact to the value of its clients' investment in the portfolio company. Special Review Procedures ------------------------- If a research analyst has a personal conflict in making a voting recommendation on a proxy issue, he or she must disclose such conflict, along with his or her recommendation. If a member of the proxy voting committee has a personal conflict in voting the proxy, he or she must disclose such conflict to the appropriate proxy voting committee and must not vote on the issue. Clients representing 0.0025 or more of assets under investment management across all affiliates owned by The Capital Group Companies, Inc. (CGTC's parent company), are deemed to be "Interested Clients". Each proxy is reviewed to determine whether the portfolio company, a proponent of a shareholder proposal, or a known supporter of a particular proposal is an Interested Client. If the voting decision for a proxy involving an Interested Client is against such client, then it is presumed that there was no undue influence in favor of the Interested Client. If the decision is in favor of the Interested Client, then the decision, the rationale for such decision, information about the client relationship and all other relevant information is reviewed by the Special Review Committee ("SRC"). The SRC determines whether the decision was in the best interest of CGTC's clients and may B - 28 accept or override the decision, or determine another course of action. The SRC is comprised of senior representatives from CGTC's and its affiliates' investment and legal groups and does not include representatives from the marketing department. Any other proxy will be referred to the SRC if facts or circumstances warrant further review. CGTC's Proxy Voting Record -------------------------- Upon client request, CGTC will provide reports of its proxy voting record as it relates to the securities held in the client's account(s) for which CGTC has proxy voting authority. Annual Assessment ----------------- CGTC will conduct an annual assessment of this proxy voting policy and related procedures. Effective Date -------------- This policy is effective as of August 1, 2003. B - 29 PACIFIC INVESTMENT MANAGEMENT COMPANY LLC ("PIMCO") PROXY VOTING POLICIES AND PROCEDURES The following are general proxy voting policies and procedures ("Policies and Procedures") adopted by Pacific Investment Management Company LLC ("PIMCO"), an investment adviser registered under the Investment Advisers Act of 1940, as amended ("Advisers Act")./6/ PIMCO serves as the investment adviser to a wide range of domestic and international clients, including investment companies registered under the Investment Company Act of 1940, as amended ("1940 Act") and separate investment accounts for other clients./7/ These Policies and Procedures are adopted to ensure compliance with Rule 206(4)-6 under the Advisers Act, other applicable fiduciary obligations of PIMCO and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") and interpretations of its staff. In addition to SEC requirements governing advisers, PIMCO's Policies and Procedures reflect the long-standing fiduciary standards and responsibilities applicable to investment advisers with respect to accounts subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), as set forth in the Department of Labor's rules and regulations./8/ PIMCO will implement these Policies and Procedures for each of its respective clients as required under applicable law, unless expressly directed by a client in writing to refrain from voting that client's proxies. PIMCO's authority to vote proxies on behalf of its clients is established by its advisory contracts, comparable documents or by an overall delegation of discretionary authority over its client's assets. Recognizing that proxy voting is a rare event in the realm of fixed income investing and is typically limited to solicitation of consent to changes in features of debt securities, these Policies and Procedures also apply to any voting rights and/or consent rights of PIMCO, on behalf of its clients, with respect to debt securities, including but not limited to, plans of reorganization, and waivers and consents under applicable indentures./9/ Set forth below are PIMCO's Policies and Procedures with respect to any voting or consent rights of advisory clients over which PIMCO has discretionary voting authority. These Policies and Procedures may be revised from time to time. General Statements of Policy - ---------------------------- These Policies and Procedures are designed and implemented in a manner reasonably expected to ensure that voting and consent rights are exercised in the best interests of PIMCO's clients. Each proxy is voted on a case-by-case basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances. PIMCO may abstain from voting a client proxy under the following circumstances: (1) when the economic effect on shareholders' interests or the value of the portfolio holding is indeterminable or insignificant; or (2) when the cost of voting the proxies outweighs the benefits. Conflicts of Interest - --------------------- PIMCO seeks to resolve any material conflicts of interest by voting in good faith in the best interest of its clients. If a material conflict of interest should arise, PIMCO will seek to resolve such conflict in the client's best interest by pursuing any one of the following courses of action: 1. convening an ad-hoc committee to assess and resolve the conflict;/10/ 2. voting in accordance with the instructions/consent of a client after providing notice of and disclosing the conflict to that client; 3. voting the proxy in accordance with the recommendation of an independent third-party service provider; 4. suggesting that the client engage another party to determine how the proxies should be voted; 5. delegating the vote to an independent third-party service provider; or 6. voting in accordance with the factors discussed in these Policies and Procedures. PIMCO will document the process of resolving any identified material conflict of interest. - ---------- /6/ These Policies and Procedures are adopted by PIMCO pursuant to Rule 206(4)-6 under the Advisers Act, effective August 6, 2003. See Proxy Voting by Investment Advisers, IA Release No. 2106 (January 31, 2003). /7/ These Policies and Procedures address proxy voting considerations under U.S. law and regulations and do not address the laws or requirements of other jurisdictions. /8/ Department of Labor Bulletin 94-2, 29 C.F.R. 2509.94-2 (July 29, 1994). If a client is subject to ERISA, PIMCO will be responsible for voting proxies with respect to the client's account, unless the client has expressly retained the right and obligation to vote the proxies, and provided prior written notice to PIMCO of this retention. /9/ For purposes of these Policies and Procedures, proxy voting includes any voting rights, consent rights or other voting authority of PIMCO on behalf of its clients. /10/ Any committee must be comprised of personnel who have no direct interest in the outcome of the potential conflict. B - 30 Reporting Requirements and the Availability of Proxy Voting Records - ------------------------------------------------------------------- Except to the extent required by applicable law or otherwise approved by PIMCO, PIMCO will not disclose to third parties how it voted a proxy on behalf of a client. However, upon request from an appropriately authorized individual, PIMCO will disclose to its clients or the entity delegating the voting authority to PIMCO for such clients (e.g., trustees or consultants retained by the client), how PIMCO voted such client's proxy. In addition, PIMCO provides its clients with a copy of these Policies and Procedures or a concise summary of these Policies and Procedures: (i) in Part II of Form ADV; (ii) together with a periodic account statement in a separate mailing; or (iii) any other means as determined by PIMCO. The summary will state that these Policies and Procedures are available upon request and will inform clients that information about how PIMCO voted that client's proxies is available upon request. PIMCO Record Keeping - -------------------- PIMCO or its agent maintains proxy voting records as required by Rule 204-2(c) of the Advisers Act. These records include: (1) a copy of all proxy voting policies and procedures; (2) proxy statements (or other disclosures accompanying requests for client consent) received regarding client securities (which may be satisfied by relying on obtaining a copy of a proxy statement from the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system or a third party provided that the third party undertakes to provide a copy promptly upon request); (3) a record of each vote cast by PIMCO on behalf of a client; (4) a copy of any document created by PIMCO that was material to making a decision on how to vote proxies on behalf of a client or that memorializes the basis for that decision; and (5) a copy of each written client request for proxy voting records and any written response from PIMCO to any (written or oral) client request for such records. Additionally, PIMCO or its agent maintains any documentation related to an identified material conflict of interest. Proxy voting books and records are maintained by PIMCO or its agent in an easily accessible place for a period of five years from the end of the fiscal year during which the last entry was made on such record, the first two years in the offices of PIMCO or its agent. Review and Oversight - -------------------- PIMCO's proxy voting procedures are described below. PIMCO's Compliance Group will provide for the supervision and periodic review, no less than on a quarterly basis, of its proxy voting activities and the implementation of these Policies and Procedures. Because PIMCO has contracted with State Street Investment Manager Solutions, LLC ("IMS West") to perform portfolio accounting, securities processing and settlement processing on behalf of PIMCO, certain of the following procedures involve IMS West in administering and implementing the proxy voting process. IMS West will review and monitor the proxy voting process to ensure that proxies are voted on a timely basis. 1. Transmit Proxy to PIMCO. IMS West will forward to PIMCO's Middle Office Group each proxy received from registered owners of record (e.g., custodian bank or other third party service providers). 2. Conflicts of Interest. PIMCO's Middle Office Group will review each proxy to determine whether there may be a material conflict between PIMCO and its client. As part of this review, the group will determine whether the issuer of the security or proponent of the proposal is a client of PIMCO, or if a client has actively solicited PIMCO to support a particular position. If no conflict exists, this group will forward each proxy to the appropriate portfolio manager for consideration. However, if a conflict does exist, PIMCO's Middle Office Group will seek to resolve any such conflict in accordance with these Policies and Procedures. 3. Vote. The portfolio manager will review the information, will vote the proxy in accordance with these Policies and Procedures and will return the voted proxy to PIMCO's Middle Office Group. 4. Review. PIMCO's Middle Office Group will review each proxy that was submitted to and completed by the appropriate portfolio manager. PIMCO's Middle Office Group will forward the voted proxy back to IMS West with the portfolio manager's decision as to how it should be voted. 5. Transmittal to Third Parties. IMS West will document the portfolio manager's decision for each proxy received from PIMCO's Middle Office Group in a format designated by the custodian bank or other third party service provider. IMS West will maintain a log of all corporate actions, including proxy voting, which indicates, among other things, the date the notice was received and verified, PIMCO's response, the date and time the custodian bank or other third party service provider was notified, the expiration date and any action taken. 6. Information Barriers. Certain entities controlling, controlled by, or under common control with PIMCO ("Affiliates") may be engaged in banking, investment advisory, broker-dealer and investment banking activities. PIMCO personnel and PIMCO's agents are prohibited from disclosing information regarding PIMCO's voting intentions to any Affiliate. Any PIMCO personnel involved in the proxy voting process who are contacted by an Affiliate regarding the manner in which PIMCO or its delegate intend to vote on a specific issue must terminate the contact and notify the Compliance Group immediately. Categories of Proxy Voting Issues - --------------------------------- In general, PIMCO reviews and considers corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices. PIMCO considers each proposal on a case-by-case basis, taking into consideration various factors and all relevant facts and circumstances at the time of the vote. PIMCO may vote proxies as recommended by management on routine matters related to the operation of the issuer and on matters not expected to have a significant economic impact on the issuer and/or shareholders, because PIMCO believes the recommendations by the issuer generally are in shareholders' B - 31 best interests, and therefore in the best economic interest of PIMCO's clients. The following is a non-exhaustive list of issues that may be included in proxy materials submitted to clients of PIMCO, and a non-exhaustive list of factors that PIMCO may consider in determining how to vote the client's proxies. Board of Directors 1. Independence. PIMCO may consider the following factors when voting on director independence issues: (i) majority requirements for the board and the audit, nominating, compensation and/or other board committees; and (ii) whether the issuer adheres to and/or is subject to legal and regulatory requirements. 2. Director Tenure and Retirement. PIMCO may consider the following factors when voting on limiting the term of outside directors: (i) the introduction of new viewpoints on the board; (ii) a reasonable retirement age for the outside directors; and (iii) the impact on the board's stability and continuity. 3. Nominations in Elections. PIMCO may consider the following factors when voting on uncontested elections: (i) composition of the board; (ii) nominee availability and attendance at meetings; (iii) any investment made by the nominee in the issuer; and (iv) long-term corporate performance and the price of the issuer's securities. 4. Separation of Chairman and CEO Positions. PIMCO may consider the following factors when voting on proposals requiring that the positions of chairman of the board and the chief executive officer not be filled by the same person: (i) any potential conflict of interest with respect to the board's ability to review and oversee management's actions; and (ii) any potential effect on the issuer's productivity and efficiency. 5. D&O Indemnification and Liability Protection. PIMCO may consider the following factors when voting on proposals that include director and officer indemnification and liability protection: (i) indemnifying directors for conduct in the normal course of business; (ii) limiting liability for monetary damages for violating the duty of care; (iii) expanding coverage beyond legal expenses to acts that represent more serious violations of fiduciary obligation than carelessness (e.g. negligence); and (iv) providing expanded coverage in cases where a director's legal defense was unsuccessful if the director was found to have acted in good faith and in a manner that he or she reasonably believed was in the best interests of the company. 6. Stock Ownership. PIMCO may consider the following factors when voting on proposals on mandatory share ownership requirements for directors: (i) the benefits of additional vested interest in the issuer's stock; (ii) the ability of a director to fulfill his duties to the issuer regardless of the extent of his stock ownership; and (iii) the impact of limiting the number of persons qualified to be directors. Proxy Contests and Proxy Contest Defenses 1. Contested Director Nominations. PIMCO may consider the following factors when voting on proposals for director nominees in a contested election: (i) background and reason for the proxy contest; (ii) qualifications of the director nominees; (iii) management's track record; (iv) the issuer's long-term financial performance within its industry; (v) assessment of what each side is offering shareholders; (vi) the likelihood that the proposed objectives and goals can be met; and (vii) stock ownership positions of the director nominees. 2. Reimbursement for Proxy Solicitation Expenses. PIMCO may consider the following factors when voting on reimbursement for proxy solicitation expenses: (i) identity of the persons who will pay the expenses; (ii) estimated total cost of solicitation; (iii) total expenditures to date; (iv) fees to be paid to proxy solicitation firms; and (v) when applicable, terms of a proxy contest settlement. 3. Ability to Alter the Size of the Board by Shareholders. PIMCO may consider whether the proposal seeks to fix the size of the board and/or require shareholder approval to alter the size of the board. 4. Ability to Remove Directors by Shareholders. PIMCO may consider whether the proposal allows shareholders to remove directors with or without cause and/or allow shareholders to elect directors and fill board vacancies. 5. Cumulative Voting. PIMCO may consider the following factors when voting on cumulative voting proposals: (i) the ability of significant stockholders to elect a director of their choosing; (ii) the ability of minority shareholders to concentrate their support in favor of a director(s) of their choosing; and (iii) any potential limitation placed on the director's ability to work for all shareholders. 6. Supermajority Shareholder Requirements. PIMCO may consider all relevant factors, including but not limited to limiting the ability of shareholders to effect change when voting on supermajority requirements to approve an issuer's charter or bylaws, or to approve a merger or other significant business combination that would require a level of voting approval in excess of a simple majority. B - 32 Tender Offer Defenses 1. Classified Boards. PIMCO may consider the following factors when voting on classified boards: (i) providing continuity to the issuer; (ii) promoting long-term planning for the issuer; and (iii) guarding against unsolicited takeovers. 2. Poison Pills. PIMCO may consider the following factors when voting on poison pills: (i) supporting proposals to require a shareholder vote on other shareholder rights plans; (ii) ratifying or redeeming a poison pill in the interest of protecting the value of the issuer; and (iii) other alternatives to prevent a takeover at a price clearly below the true value of the issuer. 3. Fair Price Provisions. PIMCO may consider the following factors when voting on proposals with respect to fair price provisions: (i) the vote required to approve the proposed acquisition; (ii) the vote required to repeal the fair price provision; (iii) the mechanism for determining fair price; and (iv) whether these provisions are bundled with other anti-takeover measures (e.g., supermajority voting requirements) that may entrench management and discourage attractive tender offers. Capital Structure 1. Stock Authorizations. PIMCO may consider the following factors to help distinguish between legitimate proposals to authorize increases in common stock for expansion and other corporate purchases and those proposals designed primarily as an anti-takeover device: (i) the purpose and need for the stock increase; (ii) the percentage increase with respect to the authorization currently in place; (iii) voting rights of the stock; and (iv) overall capitalization structure of the issuer. 2. Issuance of Preferred Stock. PIMCO may consider the following factors when voting on the issuance of preferred stock: (i) whether the new class of preferred stock has unspecified voting, conversion, dividend distribution, and other rights; (ii) whether the issuer expressly states that the stock will not be used as a takeover defense or carry superior voting rights; (iii) whether the issuer specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable; and (iv) whether the stated purpose is to raise capital or make acquisitions in the normal course of business. 3. Stock Splits. PIMCO may consider the following factors when voting on stock splits: (i) the percentage increase in the number of shares with respect to the issuer's existing authorized shares; and (ii) the industry that the issuer is in and the issuer's performance in that industry. 4. Reversed Stock Splits. PIMCO may consider the following factors when voting on reverse stock splits: (i) the percentage increase in the shares with respect to the issuer's existing authorized stock; and (ii) issues related to delisting the issuer's stock. Executive and Director Compensation 1. Stock Option Plans. PIMCO may consider the following factors when voting on stock option plans: (i) whether the stock option plan expressly permits the repricing of options; (ii) whether the plan could result in earnings dilution of greater than a specified percentage of shares outstanding; (iii) whether the plan has an option exercise price below the market price on the day of the grant; (iv) whether the proposal relates to an amendment to extend the term of options for persons leaving the firm voluntarily or for cause; and (v) whether the stock option plan has certain other embedded features. 2. Director Compensation. PIMCO may consider the following factors when voting on director compensation: (i) whether director shares are at the same market risk as those of the issuer's shareholders; and (ii) how stock option programs for outside directors compare with the standards of internal stock option programs. 3. Golden and Tin Parachutes. PIMCO may consider the following factors when voting on golden and/or tin parachutes: (i) whether they will be submitted for shareholder approval; and (ii) the employees covered by the plan and the quality of management. State of Incorporation State Takeover Statutes. PIMCO may consider the following factors when voting on proposals to opt out of a state takeover statute: (i) the power the statute vests with the issuer's board; (ii) the potential of the statute to stifle bids; and (iii) the potential for the statute to empower the board to negotiate a better deal for shareholders. Mergers and Restructurings 1. Mergers and Acquisitions. PIMCO may consider the following factors when voting on a merger and/or acquisition: (i) anticipated financial and operating benefits as a result of the merger or acquisition; (ii) offer price; (iii) prospects of the combined companies; (iv) how the deal was negotiated; and (v) changes in corporate governance and the potential impact on shareholder rights. PIMCO may also consider what impact the merger or acquisition may have on groups/organizations other than the issuer's shareholders. 2. Corporate Restructurings. With respect to a proxy proposal that includes a spin-off, PIMCO may consider the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial incentives. With respect to a proxy proposal that includes an asset sale, PIMCO may consider the impact on the balance sheet or working capital and the value received for the asset. With respect to a proxy proposal that includes a liquidation, PIMCO may consider management's efforts to pursue alternatives, the appraisal value of assets, and the compensation plan for executives managing the liquidation. B - 33 Investment Company Proxies For a client that is invested in an investment company, PIMCO votes each proxy of the investment company on a case-by-case basis and takes all reasonable steps to ensure that proxies are voted consistent with all applicable investment policies of the client and in accordance with any resolutions or other instructions approved by authorized persons of the client. For a client that is invested in an investment company that is advised by PIMCO or its affiliates, if there is a conflict of interest which may be presented when voting for the client (e.g., a proposal to approve a contract between PIMCO and the investment company), PIMCO will resolve the conflict by doing any one of the following: (i) voting in accordance with the instructions/consent of the client after providing notice of and disclosing the conflict to that client; (ii) voting the proxy in accordance with the recommendation of an independent third-party service provider; or (iii) delegating the vote to an independent third-party service provider. 1. Election of Directors or Trustees. PIMCO may consider the following factors when voting on the director or trustee nominees of a mutual fund: (i) board structure, director independence and qualifications, and compensation paid by the fund and the family of funds; (ii) availability and attendance at board and committee meetings; (iii) investments made by the nominees in the fund; and (iv) the fund's performance. 2. Converting Closed-end Fund to Open-end Fund. PIMCO may consider the following factors when voting on converting a closed-end fund to an open-end fund: (i) past performance as a closed-end fund; (ii) the market in which the fund invests; (iii) measures taken by the board to address any discount of the fund's shares; (iv) past shareholder activism; (v) board activity; and (vi) votes on related proposals. 3. Proxy Contests. PIMCO may consider the following factors related to a proxy contest: (i) past performance of the fund; (ii) the market in which the fund invests; (iii) measures taken by the board to address past shareholder activism; (iv) board activity; and (v) votes on related proposals. 4. Investment Advisory Agreements. PIMCO may consider the following factors related to approval of an investment advisory agreement: (i) proposed and current fee arrangements/schedules; (ii) fund category/investment objective; (iii) performance benchmarks; (iv) share price performance as compared with peers; and (v) the magnitude of any fee increase and the reasons for such fee increase. 5. Policies Established in Accordance with the 1940 Act. PIMCO may consider the following factors: (i) the extent to which the proposed changes fundamentally alter the investment focus of the fund and comply with SEC interpretation; (ii) potential competitiveness; (iii) regulatory developments; and (iv) current and potential returns and risks. 6. Changing a Fundamental Restriction to a Non-fundamental Restriction. PIMCO may consider the following when voting on a proposal to change a fundamental restriction to a non-fundamental restriction: (i) reasons given by the board and management for the change; and (ii) the projected impact of the change on the fund's portfolio. 7. Distribution Agreements. PIMCO may consider the following when voting on a proposal to approve a distribution agreement: (i) fees charged to comparably sized funds with similar investment objectives; (ii) the distributor's reputation and past performance; and (iii) competitiveness of the fund among other similar funds in the industry. 8. Names Rule Proposals. PIMCO may consider the following factors when voting on a proposal to change a fund name, consistent with Rule 35d-1 of the 1940 Act: (i) whether the fund invests a minimum of 80% of its assets in the type of investments suggested by the proposed name; (ii) the political and economic changes in the target market; and (iii) current asset composition. 9. Disposition of Assets/Termination/Liquidation. PIMCO may consider the following when voting on a proposal to dispose of fund assets, terminate, or liquidate the fund: (i) strategies employed to salvage the fund; (ii) the fund's past performance; and (iii) the terms of the liquidation. 10. Changes to Charter Documents. PIMCO may consider the following when voting on a proposal to change a fund's charter documents: (i) degree of change implied by the proposal; (ii) efficiencies that could result; (iii) state of incorporation; and (iv) regulatory standards and implications. 11. Changing the Domicile of a Fund. PIMCO may consider the following when voting on a proposal to change the domicile of a fund: (i) regulations of both states; (ii) required fundamental policies of both states; and (iii) the increased flexibility available. 12. Change in Fund's Subclassification. PIMCO may consider the following when voting on a change in a fund's subclassification from diversified to non-diversified or to permit concentration in an industry: (i) potential competitiveness; (ii) current and potential returns; (iii) risk of concentration; and (iv) consolidation in the target industry. B - 34 Distressed and Defaulted Securities 1. Waivers and Consents. PIMCO may consider the following when determining whether to support a waiver or consent to changes in provisions of indentures governing debt securities which are held on behalf of clients: (i) likelihood that the granting of such waiver or consent will potentially increase recovery to clients; (ii) potential for avoiding cross-defaults under other agreements; and (iii) likelihood that deferral of default will give the obligor an opportunity to improve its business operations. 2. Voting on Chapter 11 Plans of Liquidation or Reorganization. PIMCO may consider the following when determining whether to vote for or against a Chapter 11 plan in a case pending with respect to an obligor under debt securities which are held on behalf of clients: (i) other alternatives to the proposed plan; (ii) whether clients are treated appropriately and in accordance with applicable law with respect to their distributions; (iii) whether the vote is likely to increase or decrease recoveries to clients. Miscellaneous Provisions 1. Such Other Business. Proxy ballots sometimes contain a proposal granting the board authority to "transact such other business as may properly come before the meeting." PIMCO may consider the following factors when developing a position on proxy ballots that contain a proposal granting the board authority to "transact such other business as may properly come before the meeting": (i) whether the board is limited in what actions it may legally take within such authority; and (ii) PIMCO's responsibility to consider actions before supporting them. 2. Equal Access. PIMCO may consider the following factors when voting on equal access: (i) the opportunity for significant company shareholders to evaluate and propose voting recommendations on proxy proposals and director nominees, and to nominate candidates to the board; and (ii) the added complexity and burden of providing shareholders with access to proxy materials. 3. Charitable Contributions. PIMCO may consider the following factors when voting on charitable contributions: (i) the potential benefits to shareholders; and (ii) the potential impact on the issuer's resources that could have been used to increase shareholder value. 4. Special Interest Issues. PIMCO may consider the following factors when voting on special interest issues: (i) the long-term benefit to shareholders of promoting corporate accountability and responsibility on social issues; (ii) management's responsibility with respect to special interest issues; (iii) any economic costs and restrictions on management; (iv) a client's instruction to vote proxies in a specific manner and/or in a manner different from these Policies and Procedures; and (v) the responsibility to vote proxies for the greatest long-term shareholder value. B - 35 RREEF AMERICA L.L.C. ("RREEF") PROXY VOTING POLICY AND GUIDELINES PROXY VOTING POLICY RREEF, as a federally registered investment adviser, often has voting power with respect to securities in client accounts. When RREEF has proxy voting power with respect to securities in a client's account, it owes certain fiduciary duties with respect to the voting of proxies. These fiduciary duties include (a) the duty of care which requires RREEF to monitor corporate events and to vote the proxies and (b) the duty of loyalty which requires RREEF to vote proxies in a manner consistent with the best interests of the client and to put the client's interests before RREEF's own interests. In keeping with its fiduciary duties, RREEF has adopted and implemented this Proxy Voting Policy which sets forth RREEF's policies and procedures designed to ensure that RREEF votes each client's securities in the best interest of the client. Notwithstanding anything in this Proxy Voting Policy, RREEF places priority on investment returns over corporate governance correctness. Accordingly, when economic considerations or extraordinary circumstances warrant, RREEF may make exceptions to this Proxy Voting Policy. I. PROXY VOTING DECISIONS RREEF portfolio management teams will monitor corporate actions, make proxy voting decisions, describe the basis on which a proxy voting decision is made if the decision is inconsistent with the Proxy Voting Guidelines (see Section V below), and be responsible for ensuring that proxies are submitted in a timely manner. Specifically, each analyst is responsible for making a voting recommendation on each proposal in such analyst's sector. Each analyst will communicate his or her voting recommendations in hardcopy or via e-mail to the portfolio manager. The portfolio manager will review the recommendations and inform the analyst, the sector portfolio manager and the group's executive assistant whether the recommendation has been approved. The executive assistant will then coordinate the vote for each proxy. As a general rule, RREEF will vote all proxies relating to a particular proposal the same way for all client accounts holding the security in accordance with RREEF's Proxy Proposal Guidelines (see Section V below), unless a client specifically instructs RREEF in writing to vote such client's securities otherwise. When making proxy voting decisions, RREEF may seek advice or assistance from third party consultants, such as proxy voting services (e.g., Institutional Shareholder Services) or legal counsel. II. CONFLICTS OF INTEREST RREEF has adopted a Code of Ethics, Insider Trading Policy, and other compliance policies and procedures to preserve the independence of its investment advice to its clients. In addition, RREEF's affiliates, including Deutsche Bank AG, Deutsche Bank Americas and Deutsche Asset Management ("DeAM"), have adopted certain policies and procedures (including, among others, Deutsche Bank Americas/DeAM Confidential, Material, Non-Public Information, Chinese Walls, Insider Trading Policy) to preserve the independence of investment managers and to address various conflicts of interest. Nonetheless, from time to time, a proxy proposal may still involve a conflict between the interests of RREEF's client and the interests of RREEF or an affiliated person of RREEF. For example, a conflict may arise if RREEF client accounts held securities issued by a company when that company (or its affiliate or pension plan) was also RREEF's client. As another example, a conflict may arise if RREEF client accounts held securities issued by a company with which a RREEF affiliate has significant investment banking business. RREEF securities personnel who are aware of any actual or apparent conflict of interest relevant to, or any attempt to improperly influence, how RREEF votes client proxies has a duty to inform the Compliance Officer, or a designee, of such situation, including any relevant details. In the case of a person participating in the deliberation on a specific vote, such information should be conveyed before engaging in any activities or participating in any discussion relating to such vote. No retaliatory action will be taken against any person for reporting, in good faith, an actual or apparent conflict. RREEF personnel responsible for voting client proxies should consult with the Compliance Officer, who may consult with legal counsel if necessary, to determine whether a material conflict appears to exist with respect to a given proxy proposal. The Compliance Officer may also consult the Proxy Voting Working Group of Deutsche Asset Management when a material conflict situation arises. When a material conflict appears to exist and cannot be adequately addressed or resolved by RREEF's other policies and procedures (including RREEF's Proxy Voting Guidelines attached as an Appendix to this Proxy Voting Policy), or its structural B - 36 independence from its affiliates, the following procedures will be followed: . Before voting proxies for clients affected by the conflict, RREEF will (a) disclose the nature of the conflict to such clients; (b) inform such clients how RREEF plans to vote the proxies; and (c) give each such client the opportunity, by a certain date, to waive the conflict or to instruct RREEF how to vote the proxies affected by the conflict. . If a client instructs RREEF how to vote proxies affected by the conflict, RREEF will vote such proxies in accordance with such client's instructions. If a client waives the conflict or does not respond in a timely manner, RREEF will vote such proxies as previously disclosed to the client in accordance with this Proxy Voting Policy. . RREEF will take such other action as may be deemed necessary or appropriate, including, without limitation, recusing certain persons from the proxy vote at issue. Nothing in these procedures is intended to revoke RREEF's voting power with respect to proxies relating to proposals that do not pose a material conflict. III. DISCLOSURES TO CLIENTS Upon a client's request, RREEF will furnish, without charge, to the requesting client (a) a copy of this Proxy Voting Policy or (b) information about how RREEF voted with respect to such client's securities. Except as otherwise directed by a client or required by law, RREEF will maintain the confidentiality of how it plans to vote or has voted proxies relating to such client's securities. RREEF will disclose to its clients, in its written disclosure statement on Part II of Form ADV or elsewhere (as deemed necessary or appropriate): . How clients may obtain information from RREEF about how RREEF voted with respect to their securities; and . A descriptive summary of RREEF's proxy voting policies and procedures as well as how a client may request a copy of this Proxy Voting Policy. IV. BOOKS AND RECORDS RELATING TO PROXIES In connection with voting proxies and this Proxy Voting Policy, RREEF shall maintain (in hardcopy or electronic form) such books and records as may be required by applicable law, rules or regulations, including: . RREEF's policies and procedures relating to voting proxies; . A copy of each proxy statement that RREEF receives regarding clients' securities, provided that RREEF may rely on (a) a third party to make and retain, on RREEF's behalf, pursuant to a written undertaking, a copy of proxy statements or (b) obtaining a copy of proxy statements from the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system; . A record of each vote cast by RREEF on behalf of clients, provided that RREEF may rely on a third party to make and retain, on RREEF's behalf, pursuant to a written undertaking, records of votes cast; . Copies of any documents created by RREEF that were material to making a decision on how to vote proxies on behalf of a client or that memorialize the basis for that decision; and . A record of each written client request for proxy voting information and a copy of any written response by RREEF to any written or oral client request for information on how RREEF voted proxies on behalf of the requesting client. Such books and records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate RREEF office. V. PROXY VOTING GUIDELINES The Proxy Voting Guidelines beginning on the next page sets forth how RREEF generally votes proxies with respect to certain proxy proposals that arise frequently. The Proxy Voting Guidelines are not intended to address every proxy proposal that may arise, and RREEF will evaluate on a case-by-case basis any proxy proposals not addressed in the Proxy Voting Guidelines. RREEF reserves the right to depart from the Proxy Voting Guidelines when RREEF believes that it is in the client's best interest to do so. Furthermore, instead of voting a proxy, RREEF may, as it deems in the client's interest, (a) intentionally refrain from voting a proxy or (b) sell the security. In addition, RREEF's proxy voting guidelines may be superceded by proxy voting policies or guidelines submitted by the client. B - 37 PROXY VOTING GUIDELINES A. Board of Directors 1. Voting on Director Nominees in Uncontested Elections. RREEF America L.L.C. ("RREEF") votes on a case-by-case basis ballots for director nominees, considering such factors as RREEF may deem relevant, including, among others: . nominee's background qualifications, such as education and experience; . nominee's independence; . nominee's financial expertise; . composition of board and committees; . nominee's attendance at board and committee meetings during the past two years; . nominee's investment in the company; . whether a retired CEO sits on the board; . whether the chairman is also serving as CEO; and . long-term corporate performance record relative to a market index. In cases of significant votes and when information is readily available, RREEF may also consider additional factors, such as: . corporate governance provisions and takeover activity; . whether the board is staggered; . board decisions regarding executive pay; . director compensation; . number of other board seats held by nominee; and . interlocking directorships. 2. Chairman and CEO as Different Persons. Generally, RREEF votes for proposals that would require the positions of chairman and CEO to be held by different persons. 3. Majority or Supermajority of Independent Directors. RREEF votes for proposals to require that the board be comprised of a majority or supermajority of independent directors. 4. Stock Ownership Requirements. RREEF evaluates on a case-by-case basis shareholder proposals to require directors to own a minimum amount of company stock in order to qualify as a director or to remain on the board. 5. Term of Office. RREEF evaluates on a case-by-case basis shareholder proposals to limit the tenure of outside directors. 6. Director and Officer Indemnification and Liability Protection. RREEF evaluates on a case-by-case basis proposals concerning director and officer indemnification and liability protection. 7. Charitable Contributions. RREEF votes on a case-by-case basis shareholder proposals to eliminate, direct or otherwise restrict charitable contributions. B. Proxy Contests 1. Voting for Director Nominees in Contested Elections. RREEF evaluates on a case-by-case basis votes in a contested election of directors, considering such factors as RREEF may deem relevant, including, among others: . long-term financial performance of the target company relative to its industry; . management's track record; . background to the proxy contest; . qualifications of director nominees (both slates); . evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and . stock ownership positions. 2. Reimburse Proxy Solicitation Expenses. RREEF evaluates on a case-by-case basis decisions to provide full reimbursement for dissidents waging a proxy contest. In cases where RREEF recommends voting in favor of dissidents, RREEF generally votes for reimbursing proxy solicitation expenses. B - 38 C. Outside Auditors When considering proposals involving outside auditors, RREEF considers such factors as RREEF may deem relevant, including, among other, (a) whether an auditor lacks independence due to a financial interest in or association with the company or otherwise, including the amount and type of non-audit fees received by the auditor; (b) whether the outside auditor has ever rendered an opinion that does not fairly present the company's financial position; and (c) whether the company's internal controls appear to be ineffective due to guidance provided by the outside auditor. 1. Ratifying Auditors. RREEF evaluates on a case-by-case basis proposals to ratify outside auditors. 2. Changing Auditors. RREEF evaluates on a case-by-case basis proposals to change outside auditors. D. Proxy Contest Defenses 1. Board Structure: Staggered vs. Annual Elections. . RREEF votes against proposals to classify the board. . RREEF votes for proposals to repeal classified boards and to elect all directors annually. 2. Shareholder Ability to Remove Directors. . RREEF votes against proposals that provide that directors may be removed only for cause. . RREEF votes for proposals to restore shareholder ability to remove directors with or without cause. . RREEF votes against proposals that provide that only continuing directors may elect replacements to fill board vacancies. . RREEF votes for proposals that permit shareholders to elect directors to fill board vacancies. 3. Shareholder Ability to Call Special Meetings. . RREEF votes against proposals to restrict or prohibit shareholder ability to call special meetings. . RREEF votes for proposals that remove restrictions on the right of shareholders to act independently of management. 4. Shareholder Ability to Act by Written Consent. . RREEF votes against proposals to restrict or prohibit shareholder ability to take action by written consent. . RREEF votes for proposals to allow or make easier shareholder action by written consent. 5. Shareholder Ability to Alter the Size of the Board. . RREEF votes for proposals that seek to fix the size of the board. . RREEF votes against proposals that give management the ability to alter the size of the board without shareholder approval. E. Tender Offer Defenses 1. Poison Pills. . RREEF votes for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. . RREEF reviews on a case-by-case basis shareholder proposals to redeem a company's poison pill. . RREEF reviews on a case-by-case basis management proposals to ratify a poison pill. 2. Supermajority Shareholder Vote Requirement to Amend the Charter or Bylaws. . RREEF votes against management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments. . RREEF votes for shareholder proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments. 3. Supermajority Shareholder Vote Requirement to Approve Mergers. . RREEF votes against management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations. . RREEF votes for shareholder proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations. B - 39 F. Capital Structure 1. Common Stock Authorization. . RREEF reviews on a case-by-case basis proposals to increase the number of shares of common stock authorized for issue. 2. Multiple Class Structures. . RREEF reviews on a case-by-case basis proposals to create multiple class capital structures to increase the number of shares issued, taking into account, among other things, whether the total number of shares is proportionately reduced. 3. Reverse Stock Splits. . RREEF reviews on a case-by-case basis proposals to implement a reverse stock split. 4. Blank Check Preferred Authorization. . RREEF votes on a case-by-case basis proposals to create blank check preferred stock in cases when the company expressly states that the stock will not be used as a takeover defense or carry superior voting rights. . RREEF reviews on a case-by-case basis proposals that would authorize the creation of new classes of preferred stock with unspecified voting, conversion, dividend and distribution, and other rights. . RREEF reviews on a case-by-case basis proposals to increase the number of authorized blank check preferred shares. 5. Shareholder Proposals Regarding Blank Check Preferred Stock. . RREEF votes for shareholder proposals to have blank check preferred stock placements, other than those shares issued for the purpose of raising capital or making acquisitions in the normal course of business, submitted for shareholder ratification. 6. Adjust Par Value of Common Stock. . RREEF votes for management proposals to reduce the par value of common stock. 7. Preemptive Rights. . RREEF reviews on a case-by-case basis proposals to create or abolish preemptive rights. In evaluating proposals on preemptive rights, RREEF looks at the size of a company and the characteristics of its shareholder base. 8. Debt Restructurings. . RREEF reviews on a case-by-case basis proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan. 9. Share Repurchase Programs. . RREEF votes on a case-by-case basis proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, taking into account, among other things, whether the share repurchase program appears to be for anti-takeover purposes. H. Equity Compensation In general, RREEF votes on a case-by-case basis on equity compensation plans (e.g., stock option plans, golden parachutes and employee stock ownership plans, 401(k) employee benefit plans, etc.) with the view that viable compensation programs reward the creation of stockholder wealth by having a high payout sensitivity to increases in shareholder value. Notwithstanding the preceding sentence, as a general rule, RREEF believes that all outstanding options plus new options issued cannot be greater than 10% of the fully diluted number of shares, and RREEF will generally vote against proposals to establish equity compensation plans that exceed such 10% threshold. In addition, as a general policy, RREEF will vote against option plans that contain so-called "evergreen" formulae. In general, RREEF considers on a case-by-case basis proposals to make material amendments (e.g., increase in the number of options, repricing, expansion of plan participants, etc.) to equity compensation plans. B - 40 I. State of Incorporation 1. Voting on State Takeover Statutes. . RREEF reviews on a case-by-case basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freezeout provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions, and disgorgement provisions). 2. Voting on Reincorporation Proposals. . RREEF reviews proposals to change a company's state or country of incorporation on a case-by-case basis. J. Mergers and Corporate Restructurings 1. Mergers and Acquisitions. RREEF votes on mergers and acquisitions on a case-by-case basis, considering such factors as RREEF may deem relevant. 2. Corporate Restructuring. . RREEF votes on corporate restructuring proposals (including minority squeeze-outs, leveraged buyouts, spin-offs, liquidations, and asset sales) on a case-by-case basis. 3. Spin-offs. . RREEF votes on spin-offs on a case-by-case basis depending on the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial incentives. 4. Asset Sales. . RREEF votes on asset sales on a case-by-case basis after considering the impact on the balance sheet/working capital, value received for the asset, and potential elimination of diseconomies. 5. Liquidations. . RREEF votes on liquidations on a case-by-case basis after reviewing management's efforts to pursue other alternatives, appraisal value of assets, and the compensation plan for executives managing the liquidation. 6. Appraisal Rights. . RREEF votes for proposals to restore, or provide shareholders with, rights of appraisal. 7. Changing Corporate Name. . RREEF votes for changing the corporate name. K. Social And Environmental Issues In general, RREEF abstains from voting on shareholder social and environmental proposals, on the basis that their impact on share value can rarely be anticipated with any high degree of confidence. Effective Date for Proxy Voting Policy and Guidelines: As of August 6, 2003 B - 41 FIDELITY MANAGEMENT& RESEARCH COMPANY ("FMR") PROXY VOTING GUIDELINES FOR FUNDS SUB-ADVISED BY FMR CO. The following Proxy Voting Guidelines were established in consultation with Fidelity Management & Research Company, the subadviser to the Earnings Growth Fund. These guidelines are reviewed periodically by FMR and by non-interested trustees of Fidelity's Boards of Trustees and, accordingly, are subject to change. The guidelines are current as of March, 2004. I. General Principles A. Except as set forth herein, portfolio securities should generally be voted in favor of incumbent directors and in favor of routine management proposals. In general, FMR will oppose shareholder proposals that do not appear reasonably likely to enhance the economic returns or profitability of the portfolio company or to maximize shareholder value. B. Non-routine proposals covered by the following guidelines should generally be voted in accordance with the guidelines. C. Non-routine proposals not covered by the following guidelines or other special circumstances should be evaluated by the appropriate FMR analyst or portfolio manager, subject to review by the President or General Counsel of FMR or the General Counsel of FMR Corp. A significant pattern of such non-routine proposals or other special circumstances should be referred to the Operations Committee or its designee. II. Portfolio shares should generally be voted against anti-takeover proposals, including: A. Fair Price Amendments, except those that consider only a two year price history and are not accompanied by other anti-takeover measures. B. Classified Boards. FMR will generally vote in favor of proposals to declassify a board of directors. FMR will consider voting against such a proposal if the issuer's Articles of Incorporation or applicable statute includes a provision whereby a majority of directors may be removed at any time, with or without cause, by written consent, or other reasonable procedures, by a majority of shareholders entitled to vote for the election of directors. C. Authorization of "Blank Check" Preferred Stock. D. Golden Parachutes: 1. Accelerated options and/or employment contracts that will result in a lump sum payment of more than three times annual compensation (salary and bonus) in the event of termination. 2. Compensation contracts for outside directors. 3. Tin Parachutes that cover a group beyond officers and directors and permit employees to voluntarily terminate employment and receive payment. 4. Adoption of a Golden or Tin Parachute will result in our withholding authority in the concurrent or next following vote on the election of directors. E. Supermajority Provisions. F. Poison Pills: 1. Introduction of a Poison Pill without shareholder approval will result in FMR withholding authority in the concurrent or next following vote on the election of directors. In addition, extension of an existing Poison Pill or the adoption of a new Poison Pill without shareholder approval upon the expiration of an existing Pill will result in FMR withholding authority in the concurrent or next following vote on the election of directors. 2. FMR will consider not withholding its authority on the election of directors if (a) the board has adopted a Poison Pill with a sunset provision; (b) the Pill is linked to a business strategy that will result in greater value for the shareholders; (c) the term is less than 5 years; and (d) shareholder approval is required to reinstate the expired Pill. In addition, the Funds will consider not withholding authority on the election of directors if company management indicates that the B - 42 board is willing to strongly consider seeking shareholder ratification of, or adding a sunset provision meeting the above conditions to, an existing Pill. In such a case, if the company does not take appropriate action prior to the next annual shareholder meeting, the Funds would withhold their vote from the election of directors at that next meeting. 3. FMR will generally withhold authority on the election of directors if a company refuses, upon request by FMR, to amend a Poison Pill Plan to allow the Fidelity funds to hold an aggregate position of up to 20% of a company's total voting securities and of any class of voting securities. On a case-by-case basis, FMR may determine not to withhold authority on the election of directors if a company's Poison Pill Plan, although imposing an aggregate ownership position limit of less than 20%, in the judgment of FMR provides the funds with sufficient investment flexibility. 4. Portfolio shares will be voted for shareholder proposals requiring or recommending that shareholders be given an opportunity to vote on the adoption of poison pills. 5. If shareholders are requested to approve adoption of a Poison Pill plan, the Funds will, in general, consider voting in favor of the Poison Pill plan if: (a) the board has adopted a Poison Pill with a sunset provision; (b) the Pill is determined to be linked to a business strategy that will result in greater value for the shareholders; (c) the term is generally not longer than 5 years; (d) shareholder approval is required to reinstate an expired Pill; (e) the Pill contains a provision suspending its application, by shareholder referendum, in the event a potential acquirer announces a bona fide offer, made for all outstanding shares; and (f) the Pill allows the Fidelity funds to hold an aggregate position of up to 20% of a company's total voting securities and of any class of voting securities. On a case-by-case basis, FMR may determine to vote in favor of a company's Poison Pill Plan if the Plan, although imposing an aggregate ownership position limit of less than 20%, in the judgment of FMR provides the funds with sufficient investment flexibility. G. Elimination of, or limitation on, shareholder rights (e.g., action by written consent, ability to call meetings, or remove directors). H. Transfer of authority from shareholders to directors. I. Reincorporation in another state (when accompanied by anti-takeover provisions). III. Stock Option Plans A. Stock Option plans should be evaluated on a case-by-case basis. Portfolio shares should generally be voted against Stock Option Plan adoptions or amendments to authorize additional shares if: 1. The dilution effect of the shares authorized under the plan, plus the shares reserved for issuance pursuant to all other stock plans, is greater than 10%. However, for companies with a smaller market capitalization, the dilution effect may not be greater than 15%. If the plan fails this test, the dilution effect may be evaluated relative to any unusual factor involving the company. 2. The offering price of options is less than 100% of fair market value on the date of grant, except that the offering price may be as low as 85% of fair market value if the discount is expressly granted in lieu of salary or cash bonus. 3. The Board may, without shareholder approval, (i) materially increase the benefits accruing to participants under the plan, (ii) materially increase the number of securities which may be issued under the plan, or (iii) materially modify the requirements for participation in the plan. 4. The granting of options to non-employee directors is subject to management discretion, the plan is administered by a compensation committee not comprised entirely of non-employee directors or the plan is administered by a board of directors not comprised of a majority of non-employee directors, versus non-discretionary grants specified by the plan's terms. 5. However, a modest number of shares may be available for grant to employees and non-employee directors without complying with Guidelines 2, 3 and 4 immediately above if such shares meet both of two conditions: a. They are granted by a compensation committee composed entirely of independent directors. b. They are limited to 5% (large capitalization company) and 10% (small capitalization company) of the shares authorized for grant under the plan. B - 43 6. The plan's terms allow repricing of underwater options, or the Board/Committee has repriced options outstanding under the plan in the past 2 years. However, option repricing may be acceptable if all of the following conditions, as specified by the plan's express terms, or board resolution, are met: a. The repricing is authorized by a compensation committee composed entirely of independent directors to fulfill a legitimate corporate purpose such as retention of a key employee; b. The repricing is rarely used and then only to maintain option value due to extreme circumstances beyond management's control; and c. The repricing is limited to no more than 5% (large capitalization company) or 10% (small capitalization company) of the shares currently authorized for grant under the plan. 7. Furthermore, if a compensation committee composed entirely of independent directors determines that options need to be granted to employees other than the company's executive officers, that no shares are currently available for such options under the company's existing plans, and that such options need to be granted before the company's next shareholder meeting, then the company may reprice options in an amount not to exceed an additional 5% or 10%, as applicable, if such company seeks authorization of at least that amount at the very next shareholders' meeting. 8. For purposes of this Guideline III, a large capitalization company generally means a company in the Russell 1000; the small capitalization company category generally includes all companies outside the Russell 1000. B. FMR will generally withhold its authority on the election of directors if, within the last year and without shareholder approval, the company's board of directors or compensation committee has repriced outstanding options held by officers or directors which, together with all other options repriced under the same stock option plan (whether held by officers, directors or other employees) exceed 5% (for a large capitalization company) or 10% (for a small capitalization company) of the shares authorized for grant under the plan. C. Proposals to reprice outstanding stock options should be evaluated on a case-by-case basis. FMR will consider supporting a management proposal to reprice outstanding options based upon whether the proposed repricing is consistent with the interests of shareholders, taking into account such factors as: 1. Whether the repricing proposal excludes senior management and directors; 2. Whether the options proposed to be repriced exceeded FMR's dilution thresholds when initially granted; 3. Whether the repricing proposal is value neutral to shareholders based upon an acceptable options pricing model; 4. The company's relative performance compared to other companies within the relevant industry or industries; 5. Economic and other conditions affecting the relevant industry or industries in which the company competes; and 6. Any other facts or circumstances relevant to determining whether a repricing proposal is consistent with the interests of shareholders. IV. Restricted Stock Awards ("RSA") should be evaluated on a case-by-case basis. Portfolio shares should generally be voted against RSA adoptions or amendments to authorize additional shares if: A. The dilution effect of the shares authorized under the plan, plus the shares reserved for issuance pursuant to all other stock plans, is greater than 10%. However, for companies with a smaller market capitalization, the dilution effect may not be greater than 15%. If the plan fails this test, the dilution effect may be evaluated relative to any unusual factor involving the company. B. The Board may materially alter the RSA without shareholder approval, including a provision that allows the Board to lapse or waive restrictions at its discretion. C. The granting of RSAs to non-employee directors is subject to management discretion, versus non-discretionary grants specified by the plan's terms. B - 44 D. The restriction period is less than 3 years. RSAs with a restriction period of less than 3 years but at least 1 year are acceptable if the RSA is performance based. E. However, a modest number of shares may be available for grant to employees and non-employee directors without complying with Guidelines B, C and D immediately above if such shares meet both of two conditions: 1. They are granted by a compensation committee composed entirely of independent directors. 2. They are limited to 5% (large capitalization company) and 10% (small capitalization company) of the shares authorized for grant under the plan. F. For purposes of this Guideline IV, a large capitalization company generally means a company in the Russell 1000; the small capitalization company category generally includes all companies outside the Russell 1000. G. Proposals to grant restricted stock in exchange for options should be evaluated on a case-by-case basis. FMR will consider supporting a management proposal to grant restricted stock awards in exchange for options based upon whether the proposed exchange is consistent with the interests of shareholders, taking into account such factors as: 1. Whether the restricted stock award exchange proposal excludes senior management and directors; 2. Whether the options proposed to be exchanged exceeded FMR's dilution thresholds when initially granted; 3. Whether the restricted stock award exchange proposal is value neutral to shareholders based upon an acceptable stock award pricing model; 4. The company's relative performance compared to other companies within the relevant industry or industries; 5. Economic and other conditions affecting the relevant industry or industries in which the company competes; and 6. Any other facts or circumstances relevant to determining whether a restricted stock award exchange proposal is consistent with the interests of shareholders. V. Other Stock-Related Plans should be evaluated on a case-by-case basis: A. Omnibus Stock Plans - vote against entire plan if one or more component violates any of the criteria in parts III or IV above, except if the component is de minimus. In the case of an omnibus stock plan, the 5% and 10% limits in Guidelines III and IV will be measured against the total number of shares under all components of such plan. B. Employee Stock Purchase Plans - vote against if the plan violates any of the criteria in parts III and IV above, except that the minimum stock purchase price may be equal to or greater than 85% of the stock's fair market value if the plan constitutes a reasonable effort to encourage broad based participation in the company's equity. In the case of non-U.S. company stock purchase plans, the minimum stock purchase price may be equal to the prevailing "best practices," as articulated by the research or recommendations of the relevant proxy research or corporate governance services, provided that the minimum stock purchase price must be at least 75% of the stock's fair market value. C. Stock Awards (other than stock options and RSAs) - generally vote against unless they are identified as being granted to officers/directors in lieu of salary or cash bonus, subject to number of shares being reasonable. VI. Unusual Increases in Common Stock: A. An increase of up to 3 times outstanding and scheduled to be issued, including stock options, is acceptable; any increase in excess of 3 times would be voted against except in the case of real estate investment trusts, where an increase of 5 times is, in general, acceptable. B. Measured as follows: requested increased authorization plus stock authorized to be issued under Poison Pill divided by current stock outstanding plus any stock scheduled to be issued (not including Poison Pill authority). (If the result is greater than 3, Portfolio shares should be voted against.) B - 45 VII. Portfolio shares should, in general, be voted against the introduction of new classes of Stock with Differential Voting Rights. VIII. With regard to Cumulative Voting Rights, Portfolio shares should be voted in favor of introduction or against elimination on a case-by-case basis where this is determined to enhance Portfolio interests as minority shareholders. IX. Greenmail - Portfolio shares should be voted for anti-greenmail proposals so long as they are not part of anti-takeover provisions. X. Portfolio shares should be voted in favor of charter by-law amendments expanding the Indemnification of Directors and/or limiting their liability for Breaches of Care. A. Portfolio shares should be voted against such proposals if FMR is otherwise dissatisfied with the performance of management or the proposal is accompanied by anti-takeover measures. XI. Portfolio shares should be voted in favor of proposals to adopt Confidential Voting and Independent Vote Tabulation practices. XII. Portfolio shares should be voted in favor of proposed amendments to a company's certificate of incorporation or by-laws that enable the company to Opt Out of the Control Shares Acquisition Statutes. XIII. Employee Stock Ownership Plans ("ESOPs") should be evaluated on a case-by-case basis. Portfolio shares should usually be voted for non-leveraged ESOPs. For leveraged ESOPs, FMR may examine the company's state of incorporation, existence of supermajority vote rules in the charter, number of shares authorized for the ESOP, and number of shares held by insiders. FMR may also examine where the ESOP shares are purchased and the dilution effect of the purchase. Portfolio shares should be voted against leveraged ESOPs if all outstanding loans are due immediately upon change in control. XIV. Voting of shares in securities of any U.S. banking organization shall be conducted in a manner consistent with conditions that may be specified by the Federal Reserve Board for a determination under federal banking law that no Fund or group of Funds has acquired control of such banking organization. XV. Avoidance of Potential Conflicts of Interest Voting of shares shall be conducted in a manner consistent with the best interests of mutual fund shareholders as follows: (i) securities of a portfolio company shall be voted solely in a manner consistent with the Proxy Voting Guidelines; and (ii) voting shall be done without regard to any other Fidelity Companies' relationship, business or otherwise, with that portfolio company. FMR applies the following policies and follows the procedures set forth below: A. FMR has placed responsibility for the Funds' proxy voting in the FMR Legal Department. B. The FMR Legal Department votes proxies according to the Proxy Voting Guidelines that are approved by the Funds' Board of Trustees. C. The FMR Legal Department consults with the appropriate analysts or portfolio managers regarding the voting decisions of non-routine proposals that are not addressed by the Proxy Voting Guidelines. Each of the President or General Counsel of FMR or the General Counsel of FMR Corp is authorized to take a final decision. D. When a Fidelity Fund invests in an underlying fund in reliance on any one of Sections 12(d)(1)(E), (F) or (G) of the Investment Company Act of 1940, as amended, or to the extent disclosed in the Fund's registration statement, FMR will use pass through voting or echo voting procedures. XVI. Executive Compensation FMR will consider withholding authority for the election of directors and voting against management proposals on stock-based compensation plans or other compensation plans based on whether the proposals are consistent with the interests of shareholders, taking into account such factors as: (i) whether the company has an independent compensation committee; and (ii) whether the compensation committee has authority to engage independent compensation consultants. XVII. Portfolio shares should generally be voted against shareholder proposals calling for or recommending the appointment of a non-executive or independent chairperson. However, FMR will consider supporting such proposals in limited cases if, based B - 46 upon particular facts and circumstances, appointment of a non-executive or independent chairperson appears likely to further the interests of shareholders and to promote effective oversight of management by the board of directors. XVIII. Auditors A. Portfolio shares should generally be voted against shareholder proposals calling for or recommending periodic rotation of a portfolio company's auditor. FMR will consider voting for such proposals in limited cases if, based upon particular facts and circumstances, a company's board of directors and audit committee appear to have clearly failed to exercise reasonable business judgment in the selection of the company's auditor. B. Portfolio shares should generally be voted against shareholder proposals calling for or recommending the prohibition or limitation of the performance of non-audit services by a portfolio company's auditor. Portfolio shares should also generally be voted against shareholder proposals calling for or recommending removal of a company's auditor due to, among other reasons, the performance of non-audit work by the auditor. FMR will consider voting for such proposals in limited cases if, based upon particular facts and circumstances, a company's board of directors and audit committee appear to have clearly failed to exercise reasonable business judgment in the oversight of the performance of the auditor of audit or non-audit services for the company. XIX. Incorporation or Reincorporation in Another State or Country Portfolio shares should generally be voted against shareholder proposals calling for or recommending that a portfolio company reincorporate in the United States and voted in favor of management proposals to reincorporate in a jurisdiction outside the United States if (i) it is lawful under United States, state and other applicable law for the company to be incorporated under the laws of the relevant foreign jurisdiction and to conduct its business and (ii) reincorporating or maintaining a domicile in the United States would likely give rise to adverse tax or other economic consequences detrimental to the interests of the company and its shareholders. However, FMR will consider supporting such shareholder proposals and opposing such management proposals in limited cases if, based upon particular facts and circumstances, reincorporating in or maintaining a domicile in the relevant foreign jurisdiction gives rise to significant risks or other potential adverse consequences that appear reasonably likely to be detrimental to the interests of the company or its shareholders. B - 47 MIT International Index Trust and JHVST International Equity Index Fund Pro Forma Financial Statements The Pro Forma Combining Statement of Operations set out below provides information about the impact of the proposed Reorganization by indicating how the Reorganization might have affected the Funds' results of operations if the Reorganization had been consummated as of December 31, 2002. The Pro Forma Combining Statement of Assets and Liabilities and Pro Forma Combining Schedule of Portfolio Investments show how the Reorganization might have affected the Funds' assets and liabilities if it had been consummated as of December 31, 2003. In each case the combined results give effect to the pro-forma adjustments described in the related footnotes. PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES December 31, 2003 (Unaudited)
(000's Omitted) VST MIT International International Pro forma Equity Index Index Trust Adjustment Combined --------------------------------------------------------- Assets: Investments in securities, at value $ 167,180 $ 108,882 $ 276,062 (Cost: Acquired Fund - $110,150 Acquiring Fund - $142,128) Foreign currency at value 47 17 64 (Cost: Acquired Fund - $17 Acquiring Fund - $47) Receivable for: Investments sold 1 4 5 Fund shares sold 80 94 174 Income receivable 242 88 330 (Net of withholding taxes or: Acquired Fund - $8 Acquiring Fund - $ -) Futures contracts variation margin 9 5 14 Forward foreign currency exchange contracts sold 74 74 Foreign tax withholding reclaims 22 22 Other assets 6 1 7 --------------------------------------------------------- Total assets 167,639 109,113 276,752 --------------------------------------------------------- LIABILITIES Payables for: Collateral for securities on loan 8,571 9,718 18,289 Due to adviser 1 1 Forward foreign currency exchange contracts purchased 12 12 Other liabilities 20 18 38 ----------- ----------- ----------- Total liabilities 8,603 9,737 18,340 Net assets $ 159,036 $ 99,376 $ 258,412 =========== =========== =========== Composition of net assets: Capital paid-in $ 169,313 $ 105,444 $ 274,757 Accumulated net realized loss on investments, futures and foreign currency transactions (22,996) (4,586) (27,582) Undistributed net investment loss (421) (415) (836) Net unrealized appreciation (depreciation) of: Investments 13,002 (1,268) 11,734 Futures 79 195 274 Translation of assets and liabilities in foreign currencies 59 6 65 ----------- ----------- ----------- Net assets $ 159,036 $ 99,376 $ 258,412D =========== =========== =========== Outstanding Shares: NAV Shares 11,508,157 11,508,157 Series I Shares - A 5,947,684 5,947,684 Series II Shares - B 1,242,867 1,242,867 Series I Shares - MIT International Index Trust - A 9,056,146 Series II Shares - MIT International Index Trust - B 1,891,609 Series III Shares - MIT International Index Trust - C 374 (374) - Net asset value per share: NAV Shares $ 13.82 $ 13.82 Series I Shares - A - 13.82 Series II Shares - B - 13.82 Series I Shares - MIT International Index Trust - A,D $ 9.08 Series II Shares - MIT International Index Trust - B,D 9.08
A - Series I of the Acquired Fund are exchanged for Series I of the Acquiring Fund upon consummation of the reorganization. Initial per share values of Series I shares are presumed to equal that of NAV Shares. B - Series II of the Acquired Fund are exchanged for Series II of the Acquiring Fund upon consummation of the reorganization. Initial per share values of Series II shares are presumed to equal that of NAV Shares. C - The Series III shares were all redeemed prior to the record date for The Special Meeting of Shareholders to vote on the reorganization. D - The pro forma figures for net assets and net asset values per share do not reflect Manulife U.S.A.'s withdrawal, in February and April 2004, of seed capital in the amount of $34,477,450 at December 31, 2003 from the Acquired Fund. The accompanying notes are an integral part of the financial statements. PRO FORMA COMBINING STATEMENT OF OPERATIONS December 31, 2003 (Unaudited)
(000's Omitted) VST International MIT International Pro forma Equity Index Index Trust Adjustments Combined --------------------------------------------------------------- Investment Income: Interest $ 57 $ 100 $ $ 157 Dividends 2,738 1,739 4,477 Securities lending 146 41 187 Less Foreign taxes withheld (182) (182) ------------ ----------- -------- Total investment income 2,941 1,698 4,639 Expenses: Investment advisory fee 214 288 (231) A 271 Custodian fees 253 18 (244) B 27 Fund administration fees 8 (8) B - Audit & Legal fees 25 15 (10) B 30 Printing & mailing fees 10 6 (3) B 13 Registration and filing fees 1 (1) B - Trustees' fees 4 1 5 Other fees 10 2 (1) B 11 Distribution fee for Series I 91 152 C 243 Distribution fee for Series II 40 29 C 69 ------------ ----------- --------- -------- Total expenses 516 470 669 D Less expenses reimbursed (189) (15) -- ------------ ----------- --------- -------- Net expenses 327 455 (317) 669 ------------ ----------- -------- Net investment income 2,614 1,243 3,972 ------------ ----------- -------- Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments (7,135) (133) (7,268) Financial futures contracts 282 1,406 1,688 Foreign currency transactions 516 (277) 239 Change in unrealized appreciation (depreciation) on: Investments 50,873 21,167 72,040 Futures 171 193 364 Translation of assets and liabilities in foreign currencies (4) (9) (13) ------------ ----------- -------- Net realized and unrealized gain 44,703 22,347 67,050 ------------ ----------- -------- Net increase in net assets resulting from operations $ 47,317 $ 23,590 $ 71,201 ============ =========== ========
Pro Forma Adjustments: (A) Adjustment to reflect the change in advisory fees upon reorganization. (B) Adjustment to reflect the reduction in the custodian agreement fees and elimination of duplicate expenses upon reorganization. (C) Adjustment to reflect the increase in 12b-1 fees associated with the proposed merger. (D) Adjustment has not been made to reflect estimated one-time proxy, legal and other expenses of the reorganization in the pro-forma Statement of Operations. These estimated expenses are $75,000 for each Fund. The accompanying notes are an integral part of the financial statements. PRO FORMA COMBINING SCHEDULE OF PORTFOLIO INVESTMENTS December 31, 2003 (Unaudited) The Schedule of Investments is a complete list of all the securities owned by the V.S.T. International Equity Index and the MIT International Index Trust, combined on December 31, 2003.
------------------------------------------------------------------------------------- VST INTERNATIONAL EQUITY INDEX MIT INTERNATIONAL INDEX TRUST PRO FORMA COMBINED ------------------------------------------------------------------------------------- MARKET VALUE NUMBER OF MARKET VALUE NUMBER OF MARKET VALUE Name of Issuer SHARES (000'S SHARES OR (000'S SHARES OR (000'S OMITTED) PAR VALUE OMITTED) PAR VALUE OMITTED) ------------------------------------------------------------------------------------- COMMON STOCK Australia - 3.9% # Alumina, Ltd. * 19,300 95 13,123 65 32,423 160 Amcor, Ltd. * 10,060 63 10,060 63 AMP, Ltd. 50,472 190 17,632 66 68,104 256 Ansell, Ltd. * 11,800 57 2,243 11 14,043 68 Aristocrat Leisure, Ltd. * 2,388 3 2,388 3 Austrailia Gas Light Company, Ltd. * 5,101 43 5,101 43 Australia and New Zealand Bank Group Ltd. * 20,981 279 20,981 279 Australian Stock Exchange, Ltd. * 1,311 17 1,311 17 BHP Steel * 33,357 141 9,229 39 42,586 180 Boral, Ltd. * 6,916 26 6,916 26 Brambles Industries, Ltd. * (a) 11,480 46 11,480 46 Broken Hill Proprietary Co., Ltd. * 78,691 722 43,744 401 122,435 1,123 Centro Props Group * 6,710 20 6,710 20 CFS Gandel Retail Trust * 13,880 14 13,880 14 Coca-Cola Amatil, Ltd. * 5,717 27 5,717 27 Cochlear, Ltd. * 563 9 563 9 Coles Myer, Ltd. * 23,600 134 12,639 72 36,239 206 Commonwealth Bank of Australia 27,670 614 14,641 325 42,311 939 Commonwealth Property Office Fund * 16,430 14 16,430 14 Computershare, Ltd. * 4,926 12 4,926 12 CSL, Ltd. * 2,600 35 1,843 25 4,443 60 CSR, Ltd. 65,000 91 9,889 14 74,889 105 David Jones, Ltd. * 2,251 2 2,251 2 Deutsche Office Trust * 14,906 12 14,906 12 Foster's Brewing Group, Ltd. * 39,000 132 25,387 86 64,387 218
The accompanying notes are an integral part of the financial statements. Futuris Corp., Ltd. * 6,834 8 6,834 8 General Property Trust 168,892 380 22,880 51 191,772 431 Harvey Norman Holding, Ltd. * 5,707 13 5,707 13 HHG plc * 50,472 36 50,472 36 Iluka Resources, Ltd. * 2,500 8 2,500 8 Investa Property Group * 15,352 23 15,352 23 James Hardie Industries NV * 5,490 28 5,490 28 John Fairfax Holdings, Ltd. * 10,236 27 10,236 27 Leighton Holdings * 1,493 13 1,493 13 Lend Lease Corp. 10,600 80 4,246 32 14,846 112 Lion Nathan, Ltd. * 3,000 14 3,000 14 Macquarie Bank, Ltd. * 2,499 67 2,499 67 Macquarie Goodman * 15,874 20 15,874 20 Macquarie Infrastructure Group * 21,866 56 21,866 56 Mayne Nickless, Ltd. * 8,985 22 8,985 22 Mirvac Group * 7,935 26 7,935 26 National Australia Bank, Ltd. 31,556 712 17,545 396 49,101 1,108 Newcrest Mining, Ltd. * 3,890 38 3,890 38 News Corp., Ltd. 31,113 281 17,031 154 48,144 435 NRMA Insurance Group, Ltd. * 20,058 64 20,058 64 OneSteel, Ltd. 37,275 57 5,172 8 42,447 65 Orica, Ltd. 8,400 88 3,066 32 11,466 120 Origin Energy, Ltd. * 8,130 29 8,130 29 PaperlinkX, Ltd. * 4,733 18 4,733 18 Patrick Corp., Ltd. * 1,769 19 1,769 19 Publishing & Broadcasting, Ltd. * 1,585 15 1,585 15 QBE Insurance Group, Ltd. * 30,618 244 7,711 62 38,329 306 Rinker Group Ltd. 18,000 89 10,937 54 28,937 143 Rio Tinto, Ltd. 5,600 157 3,619 101 9,219 258 Santos, Ltd. * 39,200 203 6,535 34 45,735 237 Sonic Healthcare, Ltd. * 2,854 15 2,854 15 Sons Of Gwalia, Ltd. * 670 2 670 2 Southcorp, Ltd. * 6,901 14 6,901 14 Stockland 56,157 221 13,903 55 70,060 276 Suncorp-Metway, Ltd. * 6,181 58 6,181 58 Tab, Ltd. * 5,702 20 5,702 20 Tabcorp Holdings, Ltd. 16,400 139 4,739 40 21,139 179 Telstra Corp. * 43,000 156 25,507 93 68,507 249 Toll Holdings, Ltd. * 2,546 16 2,546 16 Transurban Group * 5,224 18 5,224 18
The accompanying notes are an integral part of the financial statements. Wesfarmers, Ltd. * 4,374 87 4,374 87 Westfield Holdings, Ltd. * 5,050 53 5,050 53 Westfield Trust 142,560 382 25,433 68 167,993 450 Westpac Banking Corp., Ltd. * 31,200 376 20,984 253 52,184 629 WMC Resorces, Ltd. * 19,300 82 13,039 55 32,339 137 Woodside Petroleum, Ltd. * 5,389 60 5,389 60 Woolworths, Ltd. * 16,300 145 11,903 106 28,203 251 ------- -------- -------- 6,039 4,136 10,175 Austria - 0.2% # Bank Austria Creditanstalt * 2,049 105 469 24 2,518 129 Bohler Uddeholm AG 1,600 108 43 3 1,643 111 BWT AG 2,000 37 2,000 37 Erste Bank AG * 658 81 359 44 1,017 125 Flughafen Wien AG 2,178 102 119 5 2,297 107 Immofinanz Immobiien Anlage AG * 3,481 28 3,481 28 Mayr-Melnhof Karton AG * 68 8 68 8 Oesterreichische Elektrizitaets AG, Class A * 70 8 70 8 OMV AG * 154 23 154 23 RHI AG * (a) 94 2 94 2 Telekom Austria AG * 2,323 29 2,323 29 VA Technologie AG * 71 2 71 2 Voestalpine AG * 284 12 284 12 Wienerberger Baustoffindustrie AG * 300 8 300 8 ------- -------- -------- 433 196 629 Belgium - 1.0% # Agfa Gevaert NV * 1,360 39 1,360 39 Barco NV * 120 11 120 11 Bekaert NV 890 57 198 13 1,088 70 Cofinimmo SA * 40 5 40 5 Colruyt NV 970 93 190 18 1,160 111 Compagnie Maritime Belge SA 521 42 42 3 563 45 D' Ieteren SA 390 80 31 6 421 86 Delhaize SA 2,855 147 828 43 3,683 190 DEXIA * 7,205 124 7,439 128 14,644 252 Electrabel SA 254 80 348 109 602 189 Exmar SA * 521 22 521 22 Fortis * 13,470 271 11,983 241 25,453 512 GPE Bruxelles LAM 2,388 134 795 45 3,183 179
The accompanying notes are an integral part of the financial statements. Interbew 5,301 141 1,734 46 7,035 187 KBC Bancassurance Holding NV 2,540 119 1,091 51 3,631 170 Mobistar SA * 249 14 249 14 NV Union Miniere SA 1,461 102 204 14 1,665 116 Omega Pharma SA * 277 9 277 9 Solvay SA 1,215 105 744 64 1,959 169 UCB SA * 3,900 147 1,078 41 4,978 188 -------- -------- -------- 1,664 900 2,564 Brazil - 0.0% # Aracruz Celulose SA - ADR * 1,500 55 1,500 55 Canada - 3.0% # Abitibi Consolidated, Inc. * 9,699 78 9,699 78 Alcan Aluminum, Ltd. 5,575 261 5,575 261 ATI Technologies, Inc. 5,104 77 5,104 77 Bank of Montreal 8,151 337 8,151 337 Bank Nova Scotia Halifax * 8,445 430 8,445 430 Barrick Gold Corp. 9,441 214 9,441 214 BCE, Inc. 5,282 118 5,282 118 Biovail Corp. * 2,999 65 2,999 65 Bombardier, Inc. - Cl.B * 27,549 117 27,549 117 Brascan Corp. - Cl. A 3,244 100 3,244 100 Brookfield Properties Corp. * 3,034 88 3,034 88 Canadian National Railway Co. 3,587 228 3,587 228 Canadian Natural Resources, Ltd. 2,759 139 2,759 139 Canadian Pacific Railway 4,175 118 4,175 118 Canadian Tire, Ltd. - Cl.A * 2,230 68 2,230 68 Canadian Imperial Bank of Commerce 6,082 301 6,082 301 Celestica, Inc. * 4,634 70 4,634 70 Cognos, Inc. * 1,996 61 1,996 61 CP Ships, Ltd. Common 3,706 77 3,706 77 Dofasco, Inc. 2,944 82 2,944 82 Enbridge, Inc. 2,600 108 2,600 108 Encana Corp. 8,422 332 8,422 332 Fairmont Hotels Resorts, Inc. 2,964 81 2,964 81 Goldcorp, Inc. 4,202 67 4,202 67 Great West Lifeco, Inc. 2,299 81 2,299 81 Husky Energy, Inc. 4,971 90 4,971 90 Imperial Oil, Ltd. 2,992 133 2,992 133
The accompanying notes are an integral part of the financial statements. Inco, Ltd. * 3,788 151 3,788 151 Investors Group, Inc. * 3,075 74 3,075 74 Loblaw Co., Ltd. 2,200 114 2,200 114 Magna International, Inc. 1,687 136 1,687 136 MDS, Inc. * 4,378 68 4,378 68 Molson Cos., Ltd. 2,729 76 2,729 76 National Bank of Canada 3,571 119 3,571 119 Nexen, Inc. 3,127 114 3,127 114 Noranda, Inc. 6,028 96 6,028 96 Nortel Networks Corp. 70,287 299 70,287 299 Petro Canada 4,246 210 4,246 210 Placer Dome, Inc. 7,841 141 7,841 141 Potash Corp. of Saskatchewan, Inc. * 1,128 98 1,128 98 Power Corp. Canada 3,014 113 3,014 113 Power Financial Corp. 2,532 97 2,532 97 Royal Bank of Canada 10,639 509 10,639 509 Shaw Communications, Inc. 5,140 80 5,140 80 Shell Canada, Ltd. 2,271 108 2,271 108 Sun Life Financial, Inc. * 10,490 262 10,490 262 Suncor Energy , Inc. 8,607 216 8,607 216 Talisman Energy, Inc. 2,702 154 2,702 154 Teck Cominco, Ltd. 5,191 88 5,191 88 Thomson Corp. 4,493 164 4,493 164 Transalta Corp. 4,891 70 4,891 70 TransCanada Corp. 8,180 176 8,180 176 Weston George, Ltd. 1,156 93 1,156 93 -------- -------- 7,747 7,747 Czech Republic - 0.1% # Ceske Energeticke Zavody AS 21,600 123 21,600 123 Komercni Banka AS * 900 85 900 85 -------- -------- 208 208 Denmark - 0.6% # A P Moller- Maersk A/S * 16 115 13 94 29 209 AS Det Ostasiatiske Kompagni * - 213 9 213 9 Bang & Olufsen AS - B Series * - 100 4 100 4 Carlsberg AS, B Shares * - 300 14 300 14 Coloplast AS, Class B * - 125 11 125 11 Danisco AS 3,050 136 550 25 3,600 161
The accompanying notes are an integral part of the financial statements. Danske Bank 8,587 201 5,900 138 14,487 339 DSV * - 200 9 200 9 FLS Industries AS, B Shares * - 200 2 200 2 GN Store Nord AS * - 2,323 15 2,323 15 Group 4 Falck * - 800 16 800 16 H. Lundbeck AS * - 938 16 938 16 ISS AS 1,650 81 500 25 2,150 106 Kobenhavn Lufthavne * - 70 8 70 8 NEG Micon AS * - 200 3 200 3 NKT Holding * - 100 2 100 2 Novo Nordisk AS 3,148 128 2,977 121 6,125 249 Novozymes AS 4,450 162 626 23 5,076 185 Tele Danmark AS 4,150 150 1,650 59 5,800 209 Topdanmark AS * - 300 16 300 16 Vestas Wind Systems AS 2,500 41 1,268 21 3,768 62 William Demant Holdings * - 300 10 300 10 -------- ------ -------- 1,014 641 1,655 Finland -1.3% # Amer Group, Ltd. * 300 13 300 13 Asko Oyj * 300 9 300 9 Elisa Corporation * 1,650 22 1,650 22 Fortum Corp. * 4,000 41 4,000 41 KCI Konecranes Oyj * 200 7 200 7 Kesko Oyj * 700 12 700 12 Kone Corp. * 420 24 420 24 Metra Oyj, B Shares * 400 8 400 8 Metso Oyj * 1,300 16 1,300 16 Nokia Oyj * 91,721 1,584 55,955 967 147,676 2,551 Nokian Renkaat Oyj * - 100 7 100 7 Orion, Series B * - 500 11 500 11 Outokumpu Oyj * - 1,100 15 1,100 15 Pohjola Group PLC * - 200 5 200 5 Rautaruukki Oyj * - 800 6 800 6 Sampo Insurance Co. plc 4,700 49 3,200 33 7,900 82 Stora Enso Oyj * 7,903 106 7,259 98 15,162 204 Tietoenator Oyj 1,338 37 901 25 2,239 62 UPM-Kymmene Corp. 7,900 150 6,100 116 14,000 266 -------- ------ -------- 1,926 1,435 3,361
The accompanying notes are an integral part of the financial statements. France - 8.3% # Accor SA 4,483 203 2,180 99 6,663 302 Air France * - 917 14 917 14 Air Liquide 1,412 249 1,168 206 2,580 455 Air Liquide SA * - 580 102 580 102 Alcatel 23,577 303 14,207 183 37,784 486 Alstom * 3,692 6 3,692 6 Alstom * 2,424 - 2,424 - Alstom Subscription * 122 - 122 - Altran Technologies SA * 6,277 81 6,277 81 Areclor 7,731 135 7,731 135 Atos Origin SA * - 273 17 273 17 Autoroutes du Sud de la France * - 841 28 841 28 Aventis SA * 12,657 836 7,916 523 20,573 1,359 AXA * 27,474 587 16,448 352 43,922 939 BNP Paribas * 13,566 853 9,484 597 23,050 1,450 Bouygues SA * 3,607 126 2,331 81 5,938 207 Business Objects 1,259 44 803 28 2,062 72 Caisse Nationale du Credit Agricole * - 4,214 101 4,214 101 Cap Gemini SA * 1,627 72 1,247 55 2,874 127 Carrefour SA * 11,330 621 6,676 366 18,006 987 Casino Guichard-Perrachon SA 1,045 102 432 42 1,477 144 CIE De St. Gobain * 6,517 319 3,652 179 10,169 498 Club Mediterranee SA 838 31 101 4 939 35 Cnp Assurances * (a) - 400 21 400 21 Dassault Systemes SA * 1,995 91 649 30 2,644 121 EADS, Inc. 5,569 132 3,288 78 8,857 210 Essilor International 2,365 122 1,106 57 3,471 179 France Telecom 20,955 598 12,603 360 33,558 958 Gecina * - 179 26 179 26 Groupe Danone * 1,748 285 1,435 234 3,183 519 Hermes International * - 100 19 100 19 Imerys SA * - 94 20 94 20 Klepierre * - 250 15 250 15 Lafarge * - 494 44 494 44 Lafarge SA * 2,579 229 1,944 173 4,523 402 Lagardere SCA 3,125 180 1,433 83 4,558 263 L'Oreal SA 6,925 567 3,948 323 10,873 890 LVMH * (Louis Vuitton Moet Hennessy) 4,273 311 2,853 207 7,126 518 Michelin 3,462 159 1,624 74 5,086 233
The accompanying notes are an integral part of the financial statements. Pechiney SA, Class A * - 729 45 729 45 Pernod Ricard 1,045 116 611 68 1,656 184 Peugoet SA 1,567 80 2,099 107 3,666 187 Pinault-Printemps-Redoute SA * 1,465 142 794 77 2,259 219 Publicis Groupe SA * 2,645 86 1,161 37 3,806 123 Renault 3,207 221 1,992 137 5,199 358 Sagem SA 731 78 239 26 970 104 Sanofi-Synthelabo SA * 7,657 576 4,269 321 11,926 897 Schneider SA * 4,580 299 2,406 157 6,986 456 Societe BIC SA 1,234 57 357 16 1,591 73 Societe Generale * 5,636 497 3,829 338 9,465 835 Societe Television Francaise 4,028 140 1,417 49 5,445 189 Sodexho Alliance * - 1,097 33 1,097 33 STMicroelectronics * 10,712 290 6,821 185 17,533 475 SUEZ 15,282 307 9,349 188 24,631 495 Technip SA * - 207 22 207 22 Thomson CFS 1,747 59 839 28 2,586 87 Thomson Multimedia * 2,834 60 2,761 59 5,595 119 Total Fina SA - Cl.B * 12,377 2,299 7,509 1,394 19,886 3,693 Unibail SA 1,797 168 458 43 2,255 211 Valeo SA 1,489 60 867 35 2,356 95 Veolia Environnement * - 2,814 76 2,814 76 Vinci SA * - 803 66 803 66 Vivendi Universal SA * - 10,617 258 10,617 258 Wanadoo * - 4,344 35 4,344 35 Zodiac SA * - 463 13 463 13 ------- ------- ------- 12,771 8,560 21,331 Germany - 5.8% # Adidas-Salomon AG 1,005 114 539 61 1,544 175 Aixtron AG * 607 4 607 4 Allianz AG * 4,706 593 3,353 423 8,059 1,016 Altana AG 1,460 88 842 51 2,302 139 BASF AG 12,086 679 6,322 355 18,408 1,034 Bayer AG * 11,401 333 7,649 224 19,050 557 Bayerische Vereinsbank AG * 6,678 154 4,240 98 10,918 252 Beiersdorf AG * 302 37 302 37 Celesio AG * 374 18 374 18 Commerzbank AG 8,364 164 5,044 99 13,408 263 Continental AG 2,656 101 1,361 52 4,017 153
The accompanying notes are an integral part of the financial statements. DaimlerChrysler AG * 15,055 702 10,026 467 25,081 1,169 Deutsche Bank AG * 9,067 750 6,108 506 15,175 1,256 Deutsche Boerse AG 2,010 110 1,233 67 3,243 177 Deutsche Post AG 7,129 147 4,561 94 11,690 241 Deutsche Telekom AG * 37,337 683 29,354 537 66,691 1,220 Douglas Holding AG * 330 9 330 9 E.ON AG 9,846 642 7,257 473 17,103 1,115 Epcos AG * 574 13 574 13 Fresenius Medical Care AG 1,209 86 396 28 1,605 114 Heidelbergcement AG * 499 21 499 21 Henkel Kgaa-Vorzug * 685 54 685 54 Hypo Real Estate 3,568 89 1,492 37 5,060 126 Infineon Technologies AG * 8,538 118 5,447 76 13,985 194 Karstadt Quelle AG * 510 13 510 13 Linde AG 1,694 91 981 53 2,675 144 Lufthansa AG 4,687 78 2,285 38 6,972 116 MAN AG 2,695 82 1,194 36 3,889 118 Merck & Company, Inc. * 544 23 544 23 Metro AG 2,786 123 1,690 74 4,476 197 MLP AG * 659 13 659 13 Muenchener Rueckversicherungs-Gesellschaft AG * 2,643 320 1,737 210 4,380 530 ProSieben Sat.1 Media AG * 832 14 832 14 Puma AG 463 82 184 32 647 114 RWE AG 6,823 270 4,879 193 11,702 463 SAP AG * 3,683 618 2,387 400 6,070 1,018 Schering AG * 3,162 160 1,929 98 5,091 258 Siemens AG * 16,196 1,296 9,338 747 25,534 2,043 Suedzucker AG * 550 10 550 10 Thyssen Krupp AG * 6,252 123 3,702 73 9,954 196 Tui AG 3,781 79 1,512 31 5,293 110 Volkswagen AG 3,711 206 2,610 145 6,321 351 WCM Beteilgungs & Grundbesitz AG * 1,700 2 1,700 2 Wella AG * 163 14 163 14 ------- ------- -------- 9,081 6,023 15,104 Greece - 0.4% # Alpha Bank * 1,900 57 1,900 57 Attica Enterprises Holding SA * 700 4 700 4 Bank of Piraeus 8,434 101 1,600 19 10,034 120 Commercial Bank of Greece 3,706 93 700 18 4,406 111
The accompanying notes are an integral part of the financial statements. Duty Free Shops * 270 5 270 5 EFG Eurobank 8,088 156 2,210 43 10,298 199 Folli-Follie SA * 100 3 100 3 Greek Organization of Football Prognostics * 1,790 26 1,790 26 Hellenic Bottling Co. SA 5,160 108 810 17 5,970 125 Hellenic Petroleum SA * 1,200 11 1,200 11 Hellenic Technodomiki Tev SA * 500 3 500 3 Hellenic Telecommunications Organization SA * 3,040 40 3,040 40 Intracom SA 5,252 36 1,100 7 6,352 43 National Bank Of Greece * 2,162 56 2,162 56 Public Power Corp. * 1,180 29 1,180 29 Techniki Olympiaki SA * 600 3 600 3 Titan Cement Co. SA 2,217 91 340 14 2,557 105 Viohalco * 1,130 7 1,130 7 Vodafone Panafon SA * 15,869 123 2,000 16 17,869 139 ------ ----- ------ 708 378 1,086 Hong Kong - 1.5% # 0 - ASM Pacific Technology, Ltd. * 0 2,000 9 2,000 9 Bank of East Asia * 0 16,000 49 16,000 49 Beijing Datang Power Generation Co., Ltd. 263,000 188 - 263,000 188 BOC Hong Kong Holdings, Ltd. * 0 30,000 57 30,000 57 Cathay Pacific Airways 20,000 38 12,000 23 32,000 61 Cheung Kong Holdings, Ltd. * 0 18,000 143 18,000 143 Cheung Kong Infrastructure Holdings, Ltd. * 0 6,000 13 6,000 13 China Southern Airlines Co. Ltd * 207,000 89 - 207,000 89 China Telecom, Ltd. * 16,199 50 - 16,199 50 CLP Holdings, Ltd. 42,100 200 20,900 99 63,000 299 Esprit Holdings, Ltd. * 0 7,500 25 7,500 25 Giordano International, Ltd. * 0 20,000 9 20,000 9 Guangshen Railway Co., Ltd. * 499,000 141 - 499,000 141 Hang Lung Properties, Ltd. * 0 13,000 17 13,000 17 Hang Seng Bank, Ltd. * 25,000 328 9,000 118 34,000 446 Henderson Land Development Co., Ltd. * 22,000 97 8,000 35 30,000 132 Hong Kong & China Gas Company, Ltd. * 0 42,490 65 42,490 65 Hong Kong Electric Holdings, Ltd. * 0 16,500 65 16,500 65 Hong Kong Exchange & Clearing, Ltd. * 0 12,000 26 12,000 26 Hopewell Highway * 0 700 - 700 - Hopewell Holdings, Ltd. * 0 7,000 11 7,000 11 HSBC Holdings plc 4,900 77 - 4,900 77
The accompanying notes are an integral part of the financial statements. Hutchison Whampoa, Ltd. * 41,500 305 24,800 182 66,300 487 Hysan Development Company, Ltd. * 0 6,000 9 6,000 9 Island Cable Communications * 6,200 1 1,200 - 7,400 1 Johnson Electric Holdings, Ltd. * 33,000 42 18,000 23 51,000 65 Legend Holdings * 122,000 52 - 122,000 52 Li & Fung, Ltd. * 36,000 62 18,000 31 54,000 93 MTR Corp. * 0 15,500 21 15,500 21 New World Development Co., Ltd. 48,000 39 19,000 15 67,000 54 PCCW, Ltd. 31,876 21 36,984 24 68,860 45 Shangri-La Asia, Ltd. * 0 12,000 11 12,000 11 Sino Land Company, Ltd. * 0 16,000 9 16,000 9 Smartone Telecommunications Holdings, Ltd. * 0 5,000 5 5,000 5 South China Morning Post, Ltd. * 0 10,000 4 10,000 4 Sun Hung Kai Properties, Ltd. * 46,000 379 15,000 124 61,000 503 Swire Pacific, Ltd. - Cl. A * 23,500 145 11,000 68 34,500 213 Techtronic Industries Company, Ltd. * 0 5,500 15 5,500 15 Television Broadcast, Ltd. * 0 3,000 15 3,000 15 Texwinca Holdings, Ltd. * 0 8,000 6 8,000 6 Wharf Holdings, Ltd. 62,000 172 14,000 39 76,000 211 ----------- ----------- ---------- 2,426 1,365 3,791 Hungary - 0.1% # Gedeon Richter * 900 106 900 106 Mol Magyar Olaj-es Gazipari 3,600 109 3,600 109 OTP Bank 10,900 140 10,900 140 ----------- ---------- 355 355 Ireland - 0.6% # 0 - Allied Irish Banks PLC - London * - 6,345 101 6,345 101 Allied Irish Banks plc * 8,467 135 3,649 58 12,116 193 Bank of Ireland 17,060 233 10,930 149 27,990 382 Bank of Ireland - London * - 405 6 405 6 CRH PLC - London * - 4,171 85 4,171 85 CRH plc * 9,000 185 1,944 40 10,944 225 DCC PLC * - 400 5 400 5 DCC PLC-GBP * - 627 9 627 9 Elan Corp. 5,813 40 4,143 29 9,956 69 Fyffes * - 4,000 8 4,000 8 Grafton Group * - 2,000 14 2,000 14
The accompanying notes are an integral part of the financial statements. Greencore Group * - 1,069 5 1,069 5 Greencore Group PLC * - 1,300 6 1,300 6 Independent News & Media * - 6,463 15 6,463 15 Independent News & Media PLC * - 520 1 520 1 Irish Life & Permanent plc 4,553 73 3,142 51 7,695 124 Kerry Group * - 800 15 800 15 Kerry Group plc 5,800 109 815 15 6,615 124 Ryanair Holdings 4,845 40 - 4,845 40 Ryanair Holdings PLC * - 1,939 16 1,939 16 Waterford Wedgewood * - 700 - 700 - Waterford Wedgewood PLC * - 8,769 2 8,769 2 ----------- ---------- ---------- 815 630 1,445 Israel - 0.2% # Bank Hapoalim 43,700 108 43,700 108 Bezeq Israeli Telecommunication Corp., Ltd. 23,600 27 23,600 27 IDB Holding Corp., Ltd. 5,100 100 5,100 100 Koor Industries, Ltd. * 83 3 83 3 Makteshim-Agan Industries, Ltd. 26,900 101 26,900 101 Teva pharmaceutical Industries, Ltd. * 5,200 296 5,200 296 ----------- ---------- 635 635 Italy - 3.2% # Alleanza Assicurazioni * 9,339 102 5,390 59 14,729 161 Assicurazioni Generali * 15,818 418 11,175 296 26,993 714 Autogrill SpA 5,723 82 1,307 19 7,030 101 Banca Fideuram 15,000 89 3,445 20 18,445 109 Banca Intesa SpA 76,966 301 41,262 161 118,228 462 Banca Intesa SPA - Non convertible * - 11,151 32 11,151 32 Banca Nazionale del Lavoro 41,580 99 17,775 42 59,355 141 Banca Popolare di Milano 18,100 118 4,533 30 22,633 148 BCA Di Roma * 31,073 91 14,103 41 45,176 132 BCE Pop Unite 7,459 135 - 7,459 135 BCP Pop Veron 8,371 142 4,267 72 12,638 214 Benetton Group SPA * - 631 7 631 7 Bulgari SPA * - 1,750 16 1,750 16 Enel SpA * 30,057 204 28,367 193 58,424 397 ENI * 52,773 995 30,411 573 83,184 1,568 Fiat SPA - DI RISP (Non Convertible) * - 680 3 680 3 Fiat SpA * 13,040 100 4,217 32 17,257 132
The accompanying notes are an integral part of the financial statements. Finecogroup SPA * - 17,785 12 17,785 12 Finmeccanica SA 145,025 113 68,235 53 213,260 166 Gruppo Editoriale L'Espresso SPA * - 1,900 12 1,900 12 Italcementi SPA * - 854 11 854 11 Luxottica Group 4,176 72 1,621 28 5,797 100 Mediaset SpA * 13,210 157 6,979 83 20,189 240 Mediobanca SpA 11,141 121 5,396 58 16,537 179 Mediolanum SPA * - 2,775 22 2,775 22 Mondadori (Arnoldo) Editore SPA * - 1,400 13 1,400 13 Monte Paschi Siena 29,322 93 12,639 40 41,961 133 Parmalat Finanziaria SPA * - 4,047 1 4,047 1 Pirelli & Co SPA * - 20,319 21 20,319 21 Riunione Adriatica di Sicorta SpA 5,255 89 3,513 60 8,768 149 San Paolo-IMI SpA 7,083 92 11,816 154 18,899 246 Seat Pagine Gialle * 80,911 77 38,084 36 118,995 113 Snam Rete Gas SPA * - 10,081 43 10,081 43 Snia SPA * - 3,000 7 3,000 7 Telecom Italia 168,243 498 84,977 252 253,220 750 Telecom Italia 98,642 201 74,975 153 173,617 354 Telecom Italia Media * - 14,446 7 14,446 7 Telecom Italia Mobile SpA 69,129 375 44,093 239 113,222 614 Tiscali SPA * - 2,417 17 2,417 17 UniCredito Italiano SpA * 64,732 349 44,136 238 108,868 587 ---------- ---------- ---------- 5,113 3,156 8,269 Japan - 18.2% # 0 - Acom Co., Ltd. * 2,300 104 840 38 3,140 142 Aderans Company, Ltd. * - 400 6 400 6 Advantest 2,000 159 800 63 2,800 222 Aeon Credit Service Company, Ltd. * - 300 13 300 13 Aiful Corp. * 1,000 73 500 37 1,500 110 Ajinomoto Co., Inc. 12,000 138 6,000 69 18,000 207 All Nippon Airways Company, Ltd. * - 5,000 12 5,000 12 Alps Electric Co. 6,000 88 2,000 29 8,000 117 Amada Company, Ltd. * - 3,000 16 3,000 16 Anritsu Corp. * - 1,000 7 1,000 7 Aoyama Trading Company * - 600 12 600 12 Ariake Japan Company, Ltd. * - 200 6 200 6 Asahi Breweries, Ltd. 13,000 119 4,500 41 17,500 160 Asahi Chemical Industry Co., Ltd. 26,000 141 14,000 76 40,000 217
The accompanying notes are an integral part of the financial statements. Asahi Glass Co., Ltd. 18,000 148 9,000 74 27,000 222 ASATSU-DK, Inc. * - 300 8 300 8 Ashikaga Financial Group, Inc. * - 9,000 - 9,000 - Autobacs Seven Company * - 400 9 400 9 Bandai Company * - 800 20 800 20 Bank of Yokohama, Ltd. * 23,000 107 11,000 51 34,000 158 Bellsystem24, Inc. * - 30 6 30 6 Benesse Corp. * - 800 20 800 20 Bridgestone Corp. 13,000 175 8,000 108 21,000 283 Canon, Inc. * 13,000 606 10,000 466 23,000 1,072 Capcom Company, Ltd. * - 300 4 300 4 Casio Computer Co. 9,000 95 2,000 21 11,000 116 Central Glass Company * - 2,000 13 2,000 13 Central Japan Railway Co. 13 112 11 95 24 207 Chiba Bank, Ltd. 16,000 66 7,000 29 23,000 95 Chichibu Onoda Cement * - 10,000 28 10,000 28 Chubu Electric Power 10,100 211 7,300 152 17,400 363 Chugai Pharmaceutical Co., Ltd. 7,600 109 3,200 46 10,800 155 Citizen Watch Co., Ltd. 10,000 92 3,000 28 13,000 120 Coca-Cola West Japan Company, Ltd. * - 400 8 400 8 Comsys Holdings * 5,000 32 1,000 6 6,000 38 Credit Saison Co., Ltd. 3,600 81 1,600 36 5,200 117 CSK Corp. * 2,100 76 700 25 2,800 101 Daicel Chemical Industries, Ltd. * - 3,000 12 3,000 12 Daido Life Insurance 25 74 14 42 39 116 Daiei, Inc. * - 2,000 4 2,000 4 Dai-Ichi Pharmaceutical Co., Ltd. 7,000 126 2,800 50 9,800 176 Daikin Industries, Ltd. 5,000 116 2,000 46 7,000 162 Daimaru, Inc. * - 3,000 17 3,000 17 Dainippon Ink & Chemicals, Inc. * - 8,000 15 8,000 15 Dai-Nippon Printng Co., Ltd. 13,000 183 7,000 98 20,000 281 Dainippon Screen Manufacturing Company, Ltd. * - 2,000 14 2,000 14 Daito Trust Construction Co., Ltd. 2,300 68 1,100 33 3,400 101 Daiwa Bank Holdings 92,000 116 53,000 67 145,000 183 Daiwa House Industry Co., Ltd. 10,000 106 5,000 53 15,000 159 Daiwa Securities Group, Inc. 2,900 20 14,000 95 16,900 115 Denki Kagaku Kogyo Kabushiki Kaisha * - 5,000 16 5,000 16 Denso Corp. 8,400 165 5,700 112 14,100 277 Dentsu, Inc. * - 3 15 3 15 Dowa Mining Company, Ltd. * - 3,000 16 3,000 16
The accompanying notes are an integral part of the financial statements. East Japan Railway Co. 60 283 40 189 100 472 Ebara Corp. * - 3,000 13 3,000 13 Eisai Company * 4,900 132 2,600 70 7,500 202 Familymart Company, Ltd. * - 800 18 800 18 Fanuc, Ltd. * 2,400 144 1,400 84 3,800 228 Fast Retailing Co. 1,100 67 600 36 1,700 103 Fuji Electric Holdings * - 7,000 15 7,000 15 Fuji Photo Film Company, Ltd. * 9,000 291 5,000 162 14,000 453 Fuji Television Network, Inc. * - 3 16 3 16 Fujikura, Ltd. * - 4,000 24 4,000 24 Fujisawa Pharmeceutical Co., Ltd. * 7,000 149 3,000 64 10,000 213 Fujitsu, Ltd. * 33,000 195 19,000 112 52,000 307 Furukawa Electric Company, Ltd. * - 7,000 23 7,000 23 Gunma Bank * - 4,000 18 4,000 18 Gunze, Ltd. 14,000 63 2,000 9 16,000 72 Hankyu Department Stores * - 2,000 13 2,000 13 Hino Motors, Ltd. * - 3,000 21 3,000 21 Hirose Electric Co., Ltd. * 1,100 126 300 34 1,400 160 Hitachi Cable, Ltd. * - 2,000 8 2,000 8 Hitachi Chemical * - 1,300 22 1,300 22 Hitachi Software Engineering Company, Ltd. * - 300 8 300 8 Hitachi, Ltd. 54,000 326 33,000 199 87,000 525 Hokugin Financial * - 10,000 14 10,000 14 Honda Motor Co. 14,300 635 9,100 404 23,400 1,039 House Food Corp. * - 800 9 800 9 Hoya Corp. * 200 18 1,300 119 1,500 137 Isetan Company, Ltd. * - 1,800 20 1,800 20 Ishihara Sangyo * (a) - 4,000 8 4,000 8 Ishikawajima Harima Heavy Industries Company, Ltd. * - 12,000 17 12,000 17 Itochu Corp. 34,000 112 16,000 53 50,000 165 Itochu Techno-Science Corp. * - 300 9 300 9 ITOEN, Ltd. * - 300 13 300 13 Ito-Yokado Co., Ltd. * 7,000 220 4,000 126 11,000 346 Jafco Company, Ltd. * - 300 24 300 24 Japan Airlines System Corp. * - 8,000 21 8,000 21 Japan Real Estate Investment * - 3 19 3 19 Japan Tobacco, Inc. 21 154 8 59 29 213 JFE Holdings, Inc. * 8,800 240 5,400 147 14,200 387 JGC Corp. * - 2,000 21 2,000 21 Joyo Bank, Ltd. 29,000 95 8,000 26 37,000 121
The accompanying notes are an integral part of the financial statements. JSR Corp. 4,000 89 2,000 45 6,000 134 Jusco Co., Ltd. 4,800 161 2,700 90 7,500 251 Kajima Corp. 25,000 81 10,000 32 35,000 113 Kaken Pharmaceutical Company, Ltd. * - 1,000 5 1,000 5 Kamigumi Company * - 3,000 21 3,000 21 Kanebo * - 3,000 3 3,000 3 Kaneka Corp. * - 3,000 22 3,000 22 Kansai Electric Power Co., Inc. 800 14 7,900 138 8,700 152 KAO Corp. 10,000 203 6,000 122 16,000 325 Katokichi Company * - 500 8 500 8 Kawasaki Heavy Industries, Ltd. * - 13,000 16 13,000 16 Kawasaki Kisen 23,000 114 5,000 25 28,000 139 Keihin Electric Express Railway Co., Ltd. 17,000 100 5,000 29 22,000 129 Keio Teito Electric Railway 14,000 73 6,000 31 20,000 104 Keyence Corp. 700 148 400 84 1,100 232 Kikkoman Corp. * - 1,000 7 1,000 7 Kinden Corp. * - 2,000 9 2,000 9 Kinki Nippon Railway 33,000 99 17,000 51 50,000 150 Kirin Brewery Co. * 14,000 119 8,000 68 22,000 187 Kokuyo Company, Ltd. * - 600 7 600 7 Komatsu 28,000 178 11,000 70 39,000 248 Komori Corp. * - 1,000 15 1,000 15 Konami Co., Ltd. 3,000 87 1,000 29 4,000 116 Konica Corp. 11,000 148 4,500 61 15,500 209 Koyo Seiko Company * - 1,000 10 1,000 10 Kubota Corp. * 25,000 103 11,000 45 36,000 148 Kuraray Co., Ltd. 10,000 84 4,000 34 14,000 118 Kurita Water Industries, Ltd. * - 1,000 12 1,000 12 Kyocera Corp. * 3,300 220 1,900 127 5,200 347 Kyowa Hakko Kogyo * - 4,000 25 4,000 25 Kyushu Electric Power 6,300 108 4,700 81 11,000 189 Lawson 1,600 55 700 24 2,300 79 Mabuchi Motor Co. * 900 69 300 23 1,200 92 Makita Corp. * - 1,000 10 1,000 10 Marubeni Corp. 38,000 73 15,000 29 53,000 102 Marui Co., Ltd. * 10,000 126 4,000 50 14,000 176 Matsumotokiyoshi Co * - 200 4 200 4 Matsumotokiyoshi Company, Ltd. * - 200 4 200 4 Matsushita Electric Industrial Co. * 27,000 374 24,000 332 51,000 706 Matsushita Electric Works 10,000 90 5,000 45 15,000 135
The accompanying notes are an integral part of the financial statements. Meiji Milk Product * - 2,000 9 2,000 9 Meiji Seika Kaisha, Ltd. * - 3,000 12 3,000 12 Meitec Corp. * - 400 15 400 15 Millea Holdings, Inc. * 23 301 17 222 40 523 Minebea Co., Ltd. 12,000 61 4,000 20 16,000 81 Mitsubishi Chemical Corp. 43,000 112 19,000 49 62,000 161 Mitsubishi Corp. 3,000 32 12,000 127 15,000 159 Mitsubishi Electric Corp. 43,000 179 20,000 83 63,000 262 Mitsubishi Estate Co., Ltd. * 19,000 180 11,000 104 30,000 284 Mitsubishi Gas Chemical Company, Inc. * - 4,000 14 4,000 14 Mitsubishi Heavy Industries, Ltd. * 58,000 161 33,000 92 91,000 253 Mitsubishi Logistc Corp. * - 1,000 8 1,000 8 Mitsubishi Materials Corp. * - 11,000 17 11,000 17 Mitsubishi Paper Company * - 2,000 3 2,000 3 Mitsubishi Rayon Company, Ltd. * - 6,000 23 6,000 23 Mitsubishi Tokyo Finance 73 570 47 367 120 937 Mitsui & Co., Ltd. 1,000 8 14,000 113 15,000 121 Mitsui Engineering & Shipbuilding Company, Ltd. * - 8,000 13 8,000 13 Mitsui Fudosan Co., Ltd. * 15,000 136 8,000 72 23,000 208 Mitsui Marine & Fire Insurance Co., Ltd. 23,000 189 15,000 123 38,000 312 Mitsui Mining & Smelting Co., Ltd. * 17,000 71 6,000 25 23,000 96 Mitsui OSK Lines, Ltd. 24,000 117 9,000 44 33,000 161 Mitsui Petrochemical Co. 18,000 105 6,000 35 24,000 140 Mitsui Trust Holdings 17,000 95 6,000 34 23,000 129 Mitsukoshi, Ltd. * - 3,000 12 3,000 12 Mitsumi Electric Company, Ltd. * - 900 10 900 10 Mizuho Financial GB * 110 334 56 170 166 504 Murata Manufacturing Co., Ltd. * 4,600 249 2,600 141 7,200 390 Namco, Ltd. * - 400 11 400 11 NEC Corp. * 29,000 214 17,000 125 46,000 339 Net One Systems Company, Ltd. * - 2 15 2 15 NGK Insulators, Ltd. * - 3,000 22 3,000 22 NGK Spark Plug Company * - 2,000 16 2,000 16 Nichii Gakkan Company * - 200 11 200 11 Nichirei Corp. * - 3,000 10 3,000 10 Nidec Corp. * 900 86 400 38 1,300 124 Nikko Securities Co., Ltd. * 28,000 156 15,000 84 43,000 240 Nikon Corp. 8,000 121 3,000 45 11,000 166 Nintendo Corp., Ltd. 2,100 196 1,200 112 3,300 308 Nippon Building Fund 11 71 2 13 13 84
The accompanying notes are an integral part of the financial statements. Nippon Express Co., Ltd. 22,000 104 9,000 43 31,000 147 Nippon Kayaku Company, Ltd. * - 2,000 10 2,000 10 Nippon Meat Packer * - 2,000 20 2,000 20 Nippon Mining Holdings, Inc. * - 6,000 21 6,000 21 Nippon Oil Corp. 36,000 183 15,000 76 51,000 259 Nippon Sanso Corp. * - 2,000 8 2,000 8 Nippon Sheet Glass * - 5,000 15 5,000 15 Nippon Shokubai Company, Ltd. * - 2,000 15 2,000 15 Nippon Steel Co. 19,000 41 63,000 135 82,000 176 Nippon Telegraph & Telephone Corp. * 95 458 61 294 156 752 Nippon Unipac Holding, Co. 27 139 10 52 37 191 Nippon Yusen Kabushiki Kaisha 27,000 122 11,000 50 38,000 172 Nishimatsu Construction Company, Ltd. * - 3,000 10 3,000 10 Nissan Chemical Industries, Ltd. * - 2,000 18 2,000 18 Nissan Motor Acceptance Corp. 45,700 522 29,000 331 74,700 853 Nisshin Flour Mill * - 2,000 18 2,000 18 Nisshinbo Industries, Inc. * - 2,000 11 2,000 11 Nissin Food Products * - 1,000 25 1,000 25 Nitto Denko Corp. * 3,200 170 1,800 96 5,000 266 Nomura Research Institute, Ltd. * - 300 29 300 29 Nomura Securities Co., Ltd. * 33,000 562 21,000 358 54,000 920 Noritake Company * - 1,000 4 1,000 4 NSK, Ltd. * - 5,000 18 5,000 18 NTN Corp. 13,000 62 5,000 24 18,000 86 NTT Data Corp. 33 125 15 57 48 182 NTT Mobile Communications Network, Inc. * 317 719 205 465 522 1,184 Obayashi Corp. 16,000 72 7,000 31 23,000 103 OBIC Co., Ltd. * - 100 20 100 20 Oji Paper Co. 17,000 110 9,000 58 26,000 168 Oki Electric Industry Co. * 16,000 63 6,000 23 22,000 86 Okumura Corp. * - 2,000 9 2,000 9 Olympus Optical Co. * 6,000 130 2,000 43 8,000 173 Omron Corp. 5,000 102 2,400 49 7,400 151 Onward Kashiyama Company, Ltd. * - 1,000 12 1,000 12 Oracle Corp. * - 400 21 400 21 Oriental Land Co., Ltd. 2,000 123 600 37 2,600 160 Orix Corp. * 2,100 174 1,000 83 3,100 257 Osaka Gas Co. 42,000 114 24,000 65 66,000 179 Pioneer Corp. * 5,000 138 1,800 50 6,800 188 Promise Co., Ltd. * 2,600 113 1,050 46 3,650 159
The accompanying notes are an integral part of the financial statements. Q.P. Corp. * - 1,500 12 1,500 12 Ricoh Co., Ltd. 13,000 257 7,000 138 20,000 395 Rohm Co., Ltd. * 2,100 246 1,200 141 3,300 387 Saizeriya Company, Ltd. * - 200 2 200 2 Sanden Corp. * - 1,000 6 1,000 6 Sankyo Co., Ltd. * 7,700 145 4,200 79 11,900 224 Sankyo Company * - 500 16 500 16 Sanyo Electric Co. * 32,000 167 18,000 94 50,000 261 Sapporo Holdings * - 4,000 11 4,000 11 Secom Company, Ltd. * 4,500 168 2,500 93 7,000 261 SEGA Enterprises * - 1,300 12 1,300 12 Seiko Epson Corp. * - 700 33 700 33 Seino Transportation * - 2,000 17 2,000 17 Sekisui Chemical Company, Ltd. * - 5,000 25 5,000 25 Sekisui House, Ltd. * 13,000 134 6,000 62 19,000 196 Seven-Eleven Japan * 8,000 243 5,000 152 13,000 395 Sharp Corp. 18,000 284 10,000 158 28,000 442 Shimachu Company, Ltd. * - 600 12 600 12 Shimamura Company * - 300 20 300 20 Shimano, Inc. * - 800 17 800 17 Shimizu Corp. * - 6,000 23 6,000 23 Shin-Etsu Chemical Co. * 6,600 270 4,200 172 10,800 442 Shionogi & Co., Ltd. * 8,000 149 3,000 56 11,000 205 Shiseido Co., Ltd. * 8,000 97 4,000 49 12,000 146 Shizuoka Bank, Ltd. 13,000 96 7,000 52 20,000 148 Showa Denko KK * - 11,000 25 11,000 25 Showa Shell Sekiyu * - 1,400 11 1,400 11 Skylark Company * - 1,000 17 1,000 17 SMC Corp. * 1,400 174 600 75 2,000 249 Snow Brand Milk * - 1,000 3 1,000 3 Softbank Corp. 3,900 119 2,400 73 6,300 192 Sony Corp. * 16,400 568 10,200 353 26,600 921 Stanley Electric 3,800 74 1,700 33 5,500 107 Sumitomo Bakelite Company, Ltd. * - 2,000 13 2,000 13 Sumitomo Chemical Co. 26,000 107 13,000 54 39,000 161 Sumitomo Corp. * 20,000 149 8,000 60 28,000 209 Sumitomo Electric Industries 15,000 134 7,000 63 22,000 197 Sumitomo Heavy Industries, Ltd. * - 6,000 14 6,000 14 Sumitomo Metal Industries 102,000 101 39,000 39 141,000 140 Sumitomo Metal Mining Co. 17,000 126 6,000 45 23,000 171
The accompanying notes are an integral part of the financial statements. Sumitomo Mitsui GR 71 378 44 235 115 613 Sumitomo Osaka Cement Company, Ltd. * - 4,000 8 4,000 8 Sumitomo Realty & Development 8,000 70 4,000 35 12,000 105 Sumitomo Trust & Banking 23,000 135 11,000 65 34,000 200 Suruga Bank * - 2,000 13 2,000 13 Suzuken Company, Ltd. * - 500 16 500 16 Taisei Corp. 20,000 73 9,000 33 29,000 106 Taisho Pharmaceutical Co., Ltd. * 5,000 89 2,000 36 7,000 125 Taiyo Yuden Company * - 1,000 13 1,000 13 Takara Holdings * - 2,000 19 2,000 19 Takashimaya Co. * 9,000 64 3,000 21 12,000 85 Takeda Chemical Industries * 15,100 599 9,800 389 24,900 988 Takefuji Corp. * 2,020 94 740 35 2,760 129 Takuma Company * - 1,000 5 1,000 5 TDK Corp. * 2,400 173 1,300 94 3,700 267 Teijin, Ltd. 25,000 74 9,000 26 34,000 100 Teikoku Oil Company * - 2,000 10 2,000 10 Terumo Corp. * 5,200 99 1,900 36 7,100 135 The 77th Bank, Ltd. * - 4,000 23 4,000 23 The Bank of Fukuoka, Ltd. 20,000 84 6,000 25 26,000 109 THK Company, Ltd. * - 1,100 22 1,100 22 TIS, Inc. * - 400 14 400 14 Tobu Railway Co., Ltd. 22,000 79 9,000 32 31,000 111 Toda Corp. * - 2,000 6 2,000 6 Toho Company * - 1,500 19 1,500 19 Tohoku Electric Power 6,700 111 5,000 83 11,700 194 Tokyo Broadcasting Company * - 400 6 400 6 Tokyo Electric Power 19,700 432 13,400 294 33,100 726 Tokyo Electron, Ltd. * 3,100 236 1,700 129 4,800 365 Tokyo Gas Co. 47,000 168 29,000 103 76,000 271 Tokyo Style Co. 6,000 65 1,000 11 7,000 76 Tokyu Corp. * 26,000 133 11,000 56 37,000 189 Tonengeneral Sekiyu 8,000 66 3,000 25 11,000 91 Toppan Printing Co. * 16,000 167 6,000 62 22,000 229 Toray Industries, Inc. * 33,000 138 14,000 59 47,000 197 Toshiba Corp. * 54,000 205 32,000 121 86,000 326 Toshiba Corp. * - 5,000 17 5,000 17 Tostem Corp. 6,000 116 3,000 58 9,000 174 Toto, Ltd. 8,000 68 4,000 34 12,000 102 Toyo Seikan Kaisha * - 2,000 28 2,000 28
The accompanying notes are an integral part of the financial statements. Toyo Suisan Kaisha * - 1,000 11 1,000 11 Toyobo Co. 32,000 70 7,000 15 39,000 85 Toyoda Gosei * - 600 17 600 17 Toyota Industries Corp. * - 1,900 40 1,900 40 Toyota Motor Corp. * 48,300 1,632 31,600 1,068 79,900 2,700 Trend Micro, Inc. * - 1,000 27 1,000 27 UBE Industries * - 9,000 18 9,000 18 UFJ Holdings, Inc. * 67 322 41 197 108 519 UNI Charm Corp. * - 500 25 500 25 UNY Company, Ltd. * - 2,000 21 2,000 21 Ushio, Inc. 3,000 50 1,000 17 4,000 67 Uss Co., Ltd. * - 220 16 220 16 Wacoal Corp. * 8,000 66 1,000 8 9,000 74 West Japan Railway 25 98 13 51 38 149 World Company * - 400 13 400 13 Yakult Honsha Company * - 1,000 16 1,000 16 Yamada Denki Co. 2,300 77 900 30 3,200 107 Yamaha Corp. 3,800 75 1,800 35 5,600 110 Yamaha Motor Company, Ltd. * - 1,000 11 1,000 11 Yamanouchi Pharmaceutical Co., Ltd. * 6,200 193 3,600 112 9,800 305 Yamato Transport Co., Ltd. 12,000 141 5,000 59 17,000 200 Yamazaki Baking Company * - 2,000 17 2,000 17 Yasuda F & M Insurance 15,000 123 9,000 74 24,000 197 Yokogawa Electric 8,000 116 2,000 29 10,000 145 ----------- ----------- ----------- 28,649 18,275 46,924 Luxembourg - 0.0% # Areclor * 3,986 69 3,986 69 Malaysia - 0.3% # 0 - Berjaya Sports Toto Berhad 39,000 42 39,000 42 Commerce Asset Holdings * 44,000 48 44,000 48 Gamuda Berhad 22,000 37 22,000 37 IJM Corporation Berhad 19,000 23 19,000 23 IJM Plantations 7,600 2 7,600 2 Malayan Banking Berhad * 66,000 168 66,000 168 Malaysia International Shipping Berhad 27,000 82 27,000 82 Public Bank Berhad 91,250 74 91,250 74 Resorts World Berhad * 21,000 56 21,000 56 Sime Darby Berhad * 68,000 93 68,000 93
The accompanying notes are an integral part of the financial statements. Telekom Malaysia Berhad 40,000 88 40,000 88 Tenaga Nasional Berhad 28,000 70 28,000 70 YTL Corp., Berhad 76,460 87 76,460 87 ----------- ----------- 870 870 Mexico - 0.4% # America Movil SA de CV -Ser. L * 162,000 223 162,000 223 Cemex SA de CV * 24,000 125 24,000 125 Cifra SA de CV - Ser. V * 30,000 86 30,000 86 Fomento Economico Mexicano SA de CV * 20,000 74 20,000 74 GF BBVA Bancomer - Ser. B 70,000 60 70,000 60 Grupo Carso SA de CV - Ser. A1 * 16,000 56 16,000 56 Grupo Modelo SA de CV - Ser. C * 34,000 81 34,000 81 Grupo Televisa SA 54,000 108 54,000 108 Kimberly-Clark de Mexico SA de CV * 22,000 56 22,000 56 Nuevo Grupo Mexico 18,000 46 18,000 46 Telephonos de Mexico SA - Ser. L 63,031 104 63,031 104 U.S. Commercial Corp. - Ser. B1 16,000 7 16,000 7 ----------- ----------- 1,026 1,026 Netherlands - 4.2% # ABN Amro Holding NV * 27,165 635 17,885 418 45,050 1,053 Aegon NV * 27,787 411 15,715 232 43,502 643 Akzo Nobel NV * 5,304 205 3,156 122 8,460 327 ASM Lithography Holding NV 5,100 101 5,335 106 10,435 207 Corio NV * - 500 19 500 19 Dsm NV * - 900 44 900 44 Elsevier NV * 22,877 284 7,276 90 30,153 374 Euronext * - 1,117 28 1,117 28 Getronics NV * - 1,907 4 1,907 4 Hagemeyer NV * - 849 2 849 2 Heineken NV * 2,968 113 2,273 87 5,241 200 IHC Caland NV * - 371 20 371 20 ING Groep NV 31,865 742 20,437 476 52,302 1,218 Koninklijke (Royal) KPN NV * - 933 13 933 13 Koninklijke (Royal) Philips Electronics NV * 22,807 665 15,348 448 38,155 1,113 Koninklijke Ahold NV * - 7,596 58 7,596 58 Koninklijke KPN NV * 36,643 283 24,664 190 61,307 473 Numico Kon NV * - 1,731 48 1,731 48 Oce-Van Der Grinten * - 972 15 972 15
The accompanying notes are an integral part of the financial statements. Qiagen NV * - 1,475 18 1,475 18 Rodamco Europe NV * - 500 29 500 29 Royal Dutch Petroleum Co. * 40,573 2,137 24,306 1,280 64,879 3,417 TNT Post Group NV 5,610 131 3,914 92 9,524 223 Unilever NV * 10,965 716 6,663 435 17,628 1,151 Vedior NV * - 992 16 992 16 VNU NV * - 2,606 82 2,606 82 Wereldhave NV * - 257 19 257 19 Wolters Kluwer NV * 4,000 62 3,127 49 7,127 111 ----------- ----------- ----------- 6,485 4,440 10,925 New Zealand - 0.3% # Auckland International Airport, Ltd. * - 2,732 12 2,732 12 Carter Holt Harvey, Ltd. 37,800 47 9,831 12 47,631 59 Contact Energy Limited 40,900 144 3,264 11 44,164 155 Fisher & Paykel AP 28,996 73 3,080 8 32,076 81 Fisher & Paykel Industries, Inc. 8,443 70 863 7 9,306 77 Fletcher Building 31,200 87 5,215 14 36,415 101 Fletcher Challenge Forests * - 967 1 967 1 Independent Newspapers, Ltd. * - 2,005 7 2,005 7 NGC Holdings Ltd. * - 1,971 3 1,971 3 Sky City Entertainment Group, Ltd. * - 4,544 14 4,544 14 Sky Network Television, Ltd. * - 1,125 4 1,125 4 Telecom Corp. of New Zealand, Ltd. * - 22,717 80 22,717 80 The Warehouse Group, Ltd. 29,000 97 1,694 6 30,694 103 Tower Ltd. * - 4,813 4 4,813 4 ----------- ----------- ----------- 518 183 701 Norway - 0.5% # Aker Kvaerner 380 7 230 4 610 11 Den Norske Bank 18,760 125 8,929 60 27,689 185 Elkem ASA 700 21 - 700 21 Frontline, Ltd. * - 400 10 400 10 Merkantildata ASA 9,800 8 - 9,800 8 Nera ASA * - 700 2 700 2 Norsk Hydro ASA 84 5 1,700 105 1,784 110 Norske Skogindustrier ASA * 5,100 97 1,350 26 6,450 123 Opticom AS 160 2 - 160 2 Orkla SA * - 2,300 51 2,300 51 Schibsted ASA * - 600 10 600 10
The accompanying notes are an integral part of the financial statements. Smedvig * 3,600 27 100 1 3,700 28 Smedvig ASA * 4,600 29 200 1 4,800 30 Statoil ASA * 8,908 100 5,000 56 13,908 156 Storebrand ASA 16,140 105 2,200 14 18,340 119 Tandberg ASA 3,920 29 1,400 10 5,320 39 Telenor AS * 22,160 145 8,300 54 30,460 199 Tomra Systems ASA 10,000 60 2,300 14 12,300 74 ----------- ----------- ----------- 760 418 1,178 Philippines - 0.1% # Ayala Land, Inc. * 410,460 45 410,460 45 Metro Bank & Trust 65,450 32 65,450 32 Philippine Long Distance Telephone Co. * 3,200 56 3,200 56 SM Prime Holdings, Inc. 48,000 6 48,000 6 ----------- ----------- 139 139 Portugal - 0.3% # Banco Comercial Portgues SA 62,300 139 22,491 50 84,791 189 Banco Espirito Santo SA * - 1,272 21 1,272 21 BPI-SGPS SA 33,590 123 4,613 17 38,203 140 Brisa Auto Estrada * - 3,395 23 3,395 23 Cimpor-Cimentos De Portugal, SA * - 2,540 13 2,540 13 Electricidade De Portugal * - 20,775 55 20,775 55 Jeronimo Martins, SGPS * - 185 2 185 2 Part Multimedia SGPS 4,439 86 522 10 4,961 96 Portugal Telecom * - 10,896 110 10,896 110 Sonae SGPS SA 87,600 73 13,165 11 100,765 84 ----------- ----------- ----------- 421 312 733 Singapore - 0.7% # Allgreen Properties, Ltd. * - 7,000 5 7,000 5 CapitaLand, Ltd. * - 12,000 11 12,000 11 Chartered Semiconductor Manufacturing 12,000 12 12,000 12 24,000 24 City Developments, Ltd. 15,000 53 5,000 18 20,000 71 Comfortdelgro Corp * - 16,000 8 16,000 8 Creative Technology, Ltd. * - 450 5 450 5 Cycle & Carriage, Ltd. 8,766 30 1,000 3 9,766 33 Datacraft Asia, Ltd. * - 4,000 5 4,000 5 DBS Group Holdings, Ltd. * 17,000 147 13,000 113 30,000 260 Fraser & Neave, Ltd. * - 1,620 12 1,620 12
The accompanying notes are an integral part of the financial statements. Guocoland, Ltd. * - 2,000 1 2,000 1 Haw Par Value Corp. , Ltd. 26,876 71 1,490 4 28,366 75 Hotel Properties, Ltd. * - 3,000 2 3,000 2 Keppel Corp., Ltd. * - 6,000 22 6,000 22 Keppel Land, Ltd. * - 3,000 3 3,000 3 NatSteel, Ltd. * - 1,000 1 1,000 1 Neptune Orient Lines, Ltd. 14,000 18 12,000 15 26,000 33 Oversea-Chinese Banking Corp., Ltd. 39,000 278 12,000 85 51,000 363 OverSeas Union Enterprises, Ltd. * - 1,000 4 1,000 4 Parkway Holdings, Ltd. * - 6,000 3 6,000 3 SembCorp Industries, Ltd. * - 9,000 7 9,000 7 SembCorp Logistics, Ltd. * - 5,000 6 5,000 6 SembCorp Marine, Ltd. * - 2,000 1 2,000 1 Singapore Airlines, Ltd. * - 7,000 46 7,000 46 Singapore Exchange, Ltd. * - 8,000 8 8,000 8 Singapore Land, Ltd. * - 1,000 2 1,000 2 Singapore Post Ltd. * - 14,000 6 14,000 6 Singapore Press Holdings, Ltd. * - 4,000 45 4,000 45 Singapore Technologies Engineering, Ltd. * - 15,000 18 15,000 18 Singapore Telecommunications, Ltd. * 101,000 116 73,000 84 174,000 200 SMRT Corporation Ltd. * - 12,000 4 12,000 4 ST Assembly Test Services, Ltd. * - 4,000 5 4,000 5 United Overseas Bank * 42,448 330 14,000 109 56,448 439 United Overseas Land, Ltd. * - 3,000 3 3,000 3 Venture Corp., Ltd. * - 3,000 35 3,000 35 Wing Tai Holdings * - 4,000 2 4,000 2 ----------- ----------- ----------- 1,055 713 1,768 South Africa - 0.9% # Anglo American Platinum Corp., Ltd. * 1,200 52 1,200 52 Anglo American plc * 30,000 641 30,000 641 Anglogold * 3,100 145 3,100 145 Barlow, Ltd. * 7,400 78 7,400 78 Dimension Data Holdings plc 79,483 53 79,483 53 FirstRand, Ltd. 94,300 126 94,300 126 Foschini, Ltd. 37,100 109 37,100 109 Gold Fields Mining * 9,600 137 9,600 137 Impala Platinum Holdings, Ltd. 1,000 87 1,000 87 Imperial Holdings, Ltd. 10,091 101 10,091 101 Investec Ltd. 3,051 58 3,051 58
The accompanying notes are an integral part of the financial statements. Liberty Life Association of Africa, Ltd. 10,300 83 10,300 83 M-Cell, Ltd. 8,400 36 8,400 36 Nampak, Ltd. 25,500 50 25,500 50 Nedcor, Ltd. * 4,300 40 4,300 40 Sappi, Ltd. * 5,700 78 5,700 78 Sasol, Ltd. * 11,800 168 11,800 168 South African Breweries plc 6,000 61 6,000 61 Standard Bank Investment Corp., Ltd. 18,000 105 18,000 105 ------- ------- 2,208 2,208 South Korea - 0.9% # Hyundai Motor Co., Ltd. 3,560 151 3,560 151 KIA Motors Corp. 3,310 30 3,310 30 Kookmin Bank * 6,399 240 6,399 240 Korea Electric Power Corp. * 7,430 133 7,430 133 Korea Telecom Corp. 1,040 39 1,040 39 Korea Telecom Freetel 2,980 48 2,980 48 LG Chemical 2,035 94 2,035 94 LG Electronics, Inc. 1,931 95 1,931 95 LG Investment & Securities Co., Ltd. * 2,460 17 2,460 17 Pohang Iron & Steel Co., Ltd. 1,323 181 1,323 181 Samsung Corp. 6,120 51 6,120 51 Samsung Display Devices Co. 1,000 118 1,000 118 Samsung Electro-Mechanics Co. 1,460 48 1,460 48 Samsung Electronics * 2,159 817 2,159 817 Samsung Fire & Marine Insurance 942 54 942 54 Samsung Securities Co., Ltd. 2,470 53 2,470 53 Shinhan Financial 6,930 111 6,930 111 SK Telecom Co., Ltd. * 820 137 820 137 ------- ------- 2,417 2,417 Spain - 3.2% # Abertis Infrastructuras SA * 6,287 95 2,536 38 8,823 133 Acciona SA * - 363 22 363 22 Acerinox SA 1,752 82 559 26 2,311 108 ACS, Actividades de Construccion y Servicios, SA 4,229 206 1,127 55 5,356 261 Aguas De Barcelona * - 695 10 695 10 Altadis SA, Series A * 6,360 180 3,147 89 9,507 269 Amadeus Global Travel 5,240 34 3,055 20 8,295 54 Antena 3 Television SA * - 177 8 177 8
The accompanying notes are an integral part of the financial statements. Banco Bilbao Vizcaya SA * 49,959 689 35,328 487 85,287 1,176 Banco Popular Espanol SA 3,070 183 1,846 110 4,916 293 Banco Santander Central Hispano SA * 71,715 848 50,119 593 121,834 1,441 Corporacion Mapfre SA * - 1,026 15 1,026 15 Endesa SA * 15,465 297 10,443 201 25,908 498 Fomento de Construcciones y Contratas SA 1,400 52 578 21 1,978 73 Gas Natural SDG SA * 6,400 150 2,413 56 8,813 206 Grupo Ferrovial SA * 2,312 81 752 26 3,064 107 Iberdrola SA 13,874 274 8,906 176 22,780 450 Iberia Lineas Aereas de Espana SA * - 5,566 16 5,566 16 Inditex 6,292 128 2,499 51 8,791 179 Indra Sistemas SA 6,236 80 1,300 17 7,536 97 NH Hoteles SA * 7,422 85 768 9 8,190 94 Promotora de Informaciones SA * - 897 13 897 13 Repsol SA * 17,332 338 10,683 208 28,015 546 Telefonica Publicidad e Informacion SA * - 1,733 9 1,733 9 Telefonica SA * 82,822 1,215 54,865 805 137,687 2,020 TelePizza SA * - 1,211 2 1,211 2 Union Electrica Fenosa SA 4,900 92 2,249 42 7,149 134 Vallehermoso SA 4,915 74 1,116 17 6,031 91 Zeltia SA * - 1,784 13 1,784 13 ------- ------- ------- 5,183 3,155 8,338 Sweden - 1.8% # Alfa Laval AB * - 900 14 900 14 Assa Abloy AB * - 3,400 40 3,400 40 Atlas Copco AB-A Shares * - 1,300 47 1,300 47 Atlas Copco AB-B Shares * - 800 26 800 26 Axfood AB * - 300 7 300 7 Billerud Aktibolag * - 600 9 600 9 Castellum AB * - 400 9 400 9 Drott AB 5,400 103 900 17 6,300 120 Electrolux AB * 4,900 108 3,500 77 8,400 185 Eniro AB * - 2,200 21 2,200 21 Gambro AB, B Shares * - 1,100 9 1,100 9 Getinge Ab * - 1,600 15 1,600 15 Hennes & Mauritz AB * 14,223 338 5,525 131 19,748 469 Hoganas AB, B Shares * - 300 6 300 6 Holmen AB * - 600 21 600 21 Incentive AB, Series A * - 1,900 16 1,900 16
The accompanying notes are an integral part of the financial statements. Modern Time Group AB, B Shares * - 550 12 550 12 NetCom Systems, Inc. 1,732 92 1,150 61 2,882 153 Nobel Biocare Holding AG * - 100 10 100 10 Nordic Baltic Holding AB 59,137 444 27,500 206 86,637 650 OM Hex AB - 750 9 750 9 Sandvik AB * 4,350 150 2,600 90 6,950 240 SAS AB * - 1,200 11 1,200 11 Securitas AB * 11,000 148 3,400 46 14,400 194 Skand Enskilda Banken 10,200 150 5,600 83 15,800 233 Skandia Forsakrings AB 13,900 51 10,100 37 24,000 88 Skanska AB 11,000 97 4,300 38 15,300 135 SKF AB-A Shares * - 200 8 200 8 SKF AB-B Shares * - 1,000 39 1,000 39 SSAB Svenskt Stal AB, Series A * - 600 11 600 11 SSAB Svenskt Stal AB, Series B * - 200 3 200 3 Svenska Cellulosa AB 3,100 127 2,300 94 5,400 221 Svenska Handelsbanken AB, B Shares * - 600 12 600 12 Svenska Handelsbanken, Inc. 9,300 190 6,400 131 15,700 321 Swedish Match AB * - 4,000 41 4,000 41 Telefonaktiebolaget LM Ericsson AB 246,500 442 172,700 310 419,200 752 Telia AB 30,044 157 18,900 99 48,944 256 Trelleborg AB * - 800 13 800 13 Volvo AB, A Shares * - 1,100 32 1,100 32 Volvo AB, B Shares * 5,750 176 2,700 83 8,450 259 WM Data AB, B shares * - 2,000 4 2,000 4 ------- ------- ------- 2,773 1,948 4,721 Switzerland - 6.2% # ABB, Ltd. 21,138 107 20,155 102 41,293 209 Adecco SA * 2,733 176 1,537 99 4,270 275 Ciba Specialty Chemicals AG * 1,667 129 805 62 2,472 191 Clariant AG * - 1,531 23 1,531 23 Credit Suisse Group * 21,266 778 13,867 507 35,133 1,285 Geberit AG * - 40 20 40 20 Givaudan 224 116 88 46 312 162 Holcim * 3,096 144 1,590 74 4,686 218 Kudelski SA * - 405 13 405 13 Kuoni Reisen Holding AG * - 34 11 34 11 Logitech International SA * - 513 22 513 22 Lonza Group AG 1,604 92 520 30 2,124 122
The accompanying notes are an integral part of the financial statements. Nestle SA * 6,988 1,745 4,709 1,176 11,697 2,921 Novartis AG 41,256 1,872 27,769 1,260 69,025 3,132 Richemont 10,552 253 6,071 146 16,623 399 Roche Holdings AG 746 103 367 51 1,113 154 Roche Holdings AG * 11,960 1,206 8,195 826 20,155 2,032 Schindler Holding AG * - 63 15 63 15 Serono SA 156 111 81 58 237 169 SGS Holdings 119 75 50 31 169 106 Sulzer AG * - 38 10 38 10 Swatch Group 1,021 123 394 47 1,415 170 Swatch Group AG * - 573 14 573 14 Swiss Reinsurance Co. * 5,579 377 3,738 252 9,317 629 Swisscom AG * 541 178 306 101 847 279 Syngenta AG 2,037 137 1,226 83 3,263 220 Synthes-Stratec, Inc. 109 108 50 50 159 158 Tecan Group AG * - 79 4 79 4 UBS AG * 20,534 1,406 13,770 943 34,304 2,349 Unaxis Holding AG * - 130 18 130 18 Valora Holding AG 321 80 46 12 367 92 Zurich Finance 2,571 370 1,671 240 4,242 610 ------ -------- ------- 9,686 6,346 16,032 Taiwan - 0.6% # Acer Communicaton 22,800 28 22,800 28 Acer, Inc. 44,963 67 44,963 67 Advanced Semiconductor Engineering, Inc. 64,900 67 64,900 67 Arima Computer 49,500 18 49,500 18 Asustek Computer 20,250 45 20,250 45 AU Optronics Corp. 55,650 65 55,650 65 China Dev Fin Holding 144,203 71 144,203 71 China Trust Finance 79,920 80 79,920 80 CMC Magnetics Corp. 51,600 40 51,600 40 Compal Electronics, Inc. 44,160 60 44,160 60 Formosa Chemical & Fibre 32,054 54 32,054 54 Formosa Plastic 52,956 87 52,956 87 Hon Hai Precision Insustry Co., Ltd. 20,700 81 20,700 81 Kinpo Electronics 69,608 40 69,608 40 Lite on Technology 48,056 51 48,056 51 Macronix International Co., Ltd. 59,400 13 59,400 13 Micro Star International 9,176 14 9,176 14
The accompanying notes are an integral part of the financial statements. Nan Ya Plastic Corp. 83,824 121 83,824 121 Quanta Computer, Inc. 16,445 40 16,445 40 Realtek Semiconductor Corp. 10,920 19 10,920 19 Ritek Corp. 45,000 28 45,000 28 Siliconware Precision 44,000 45 44,000 45 Taiwan Semiconductor 173,880 325 173,880 325 Tatung 100,000 25 100,000 25 United Microelectronics Corp. 83,525 72 83,525 72 Via Technologies Inc. 14,090 18 14,090 18 Winbond Electronic 69,000 33 69,000 33 --------- ----- 1,607 1,607 Thailand - 0.2% # Advanced Information Services 65,700 140 65,700 140 PTT Exploration & Production Public Co., Ltd. 22,200 150 22,200 150 Siam Cement Co. 31,600 220 31,600 220 --------- ----- 510 510 Turkey - 0.1% # Arcelik AS 6,490,550 36 6,490,550 36 Turkiye Is Bankasi ######### 285 70,216,241 285 --------- ----- 321 321 United Kingdom - 21.9% # 3i Group PLC * 11,775 130 7,072 78 18,847 208 Aegis Group PLC * - 13,367 23 13,367 23 Aggreko PLC * - 3,035 8 3,035 8 Alliance Unichem 7,717 71 2,952 27 10,669 98 AMEC PLC * - 3,798 18 3,798 18 Amvescap plc * 13,224 96 7,939 58 21,163 154 ARM Holdings PLC * - 11,849 27 11,849 27 Association British Ports 11,901 95 3,613 29 15,514 124 AstraZeneca Group PLC * 30,224 1,446 19,917 953 50,141 2,399 Barclays 110,773 985 76,452 680 187,225 1,665 Barratt Developments * - 3,002 29 3,002 29 BBA Group PLC * - 5,542 25 5,542 25 BG Group plc 64,498 330 41,085 210 105,583 540 BICC PLC * - 5,099 20 5,099 20 Billiton plc 44,847 391 28,788 251 73,635 642 BOC Group plc * 17,596 268 5,760 88 23,356 356
The accompanying notes are an integral part of the financial statements. Boots Group 15,100 186 9,129 113 24,229 299 BP Amoco plc 410,567 3,320 257,874 2,085 668,441 5,405 BPB 12,089 75 6,111 38 18,200 113 Brambles Industries 22,730 83 8,380 30 31,110 113 British Aerospace plc 57,462 173 35,757 107 93,219 280 British Airport Authority plc 21,926 194 12,429 110 34,355 304 British Airways * - 6,466 27 6,466 27 British American Tobacco plc * 29,280 402 18,433 253 47,713 655 British Land Co. plc 9,000 94 5,721 60 14,721 154 British Sky Broadcast plc 23,449 294 14,667 184 38,116 478 BT Group 153,664 516 100,873 339 254,537 855 Bunzl 12,430 95 5,477 42 17,907 137 Cable & Wireless plc * 48,728 116 27,996 67 76,724 183 Cadbury Schweppes plc * 37,586 275 23,980 176 61,566 451 Canary Wharf Group PLC * - 5,703 27 5,703 27 Capita Group plc 17,669 77 8,112 35 25,781 112 Carlton Communications PLC * 13,900 57 7,353 30 21,253 87 Carnival plc 3,303 133 1,813 73 5,116 206 Cattles PLC * - 3,600 21 3,600 21 Celltech Group PLC * - 3,348 23 3,348 23 Centrica plc 76,232 287 49,380 186 125,612 473 CGU plc 37,687 330 26,273 230 63,960 560 Close Brothers Group PLC * - 1,520 20 1,520 20 Cobham PLC * - 1,279 27 1,279 27 Compass Group plc * 39,189 266 25,420 172 64,609 438 Daily Mail & General Trust 7,508 88 3,372 40 10,880 128 Davis Service 11,677 78 2,454 16 14,131 94 De Lousiana Rue PLC * - 1,732 9 1,732 9 Diageo plc * 53,890 707 36,167 474 90,057 1,181 Dixons Group plc 42,741 106 22,056 55 64,797 161 Electrocomponents plc * 12,098 70 5,197 30 17,295 100 EMAP plc * 6,164 94 3,071 47 9,235 141 EMI Group plc 9,000 26 8,998 25 17,998 51 Enterprise Inns PLC * 5,116 93 2,048 37 7,164 130 Exel * 7,462 98 3,413 45 10,875 143 Firstgroup 12,870 63 5,028 25 17,898 88 FKI PLC * - 7,192 14 7,192 14 Friends Provident Ethical Investment Trust * - 19,556 46 19,556 46 George Wimpey PLC * - 4,233 28 4,233 28 GKN * 17,633 84 8,575 41 26,208 125
The accompanying notes are an integral part of the financial statements. GlaxoSmithKline plc * 104,018 2,377 69,551 1,589 173,569 3,966 Granada Compass PLC * 57,831 126 32,121 70 89,952 196 Great Portland Estates PLC * - 2,022 8 2,022 8 Hammerson plc 8,028 93 3,372 39 11,400 132 Hanson Building Materials * 8,990 66 7,856 58 16,846 124 Hanson PLC * - 387 3 387 3 Hays plc * 41,349 89 19,215 41 60,564 130 HBOS * 65,987 852 44,752 578 110,739 1,430 HHG Plc * 17,632 13 17,632 13 Hilton Group plc * 27,700 111 18,792 75 46,492 186 HSBC Holdings plc 182,550 2,861 126,924 1,989 309,474 4,850 IMI 11,248 68 3,852 23 15,100 91 Imperial Chemical Industries plc * 26,199 93 13,726 49 39,925 142 Imperial Tobacco Group plc 13,917 273 8,486 167 22,403 440 Intercontinental Hampshire 15,693 148 7,279 69 22,972 217 Invensys PLC * - 37,344 12 37,344 12 J Sainsbury plc 28,966 162 16,844 94 45,810 256 Johnson Matthey 5,434 95 2,543 45 7,977 140 Kelda Group plc 10,845 91 4,576 38 15,421 129 Kesa Electricals PLC * - 6,582 30 6,582 30 Kidde PLC * - 10,723 20 10,723 20 Kingfisher * 42,693 212 24,891 124 67,584 336 Land Securities SGP 7,350 130 5,449 96 12,799 226 Legal & General Group plc 105,588 189 75,519 135 181,107 324 Liberty National 6,968 85 2,800 34 9,768 119 Lloyds TSB Group PLC 118,179 945 65,085 520 183,264 1,465 Logica plc * 16,105 74 8,713 40 24,818 114 Manitoba Group 5,609 146 3,213 84 8,822 230 Marks & Spencer * 42,777 221 26,272 136 69,049 357 MFI Furniture Group * - 6,400 17 6,400 17 Misys plc 13,522 51 6,675 25 20,197 76 Mitchells & Butler 5,981 24 5,962 24 11,943 48 National Grid Group * 53,002 379 35,753 255 88,755 634 National Power PLC 14,200 31 13,485 30 27,685 61 Next Group 6,142 123 3,228 65 9,370 188 Novar PLC * - 4,484 11 4,484 11 Nycomed Amersham plc 14,138 193 8,148 111 22,286 304 Pearson PLC 15,605 173 9,283 103 24,888 276 Peninsular & Oriental Steam Navigation Co. 18,718 77 8,260 34 26,978 111 Persimmon PLC * - 3,308 32 3,308 32
The accompanying notes are an integral part of the financial statements. Pilkington PLC * - 11,203 19 11,203 19 Provident Financial 6,656 77 2,957 34 9,613 111 Prudential Corp. 34,647 292 23,352 197 57,999 489 Rank Group PLC 25,300 126 6,786 34 32,086 160 Reckitt Benckiser 11,385 257 7,008 158 18,393 415 Reed International plc 44,446 371 14,719 123 59,165 494 Rentokil Initial plc 39,081 133 21,573 73 60,654 206 Reuters Group plc 29,157 122 16,417 69 45,574 191 Rexam 11,775 90 6,280 48 18,055 138 Rio Tinto plc 18,738 516 12,426 342 31,164 858 RMC Group plc 6,457 80 2,981 37 9,438 117 Rolls Royce Group 30,599 97 15,792 50 46,391 147 Royal & Sun Alliance Insurance Group 60,060 95 33,221 52 93,281 147 Royal Bank of Scotland Group 48,532 1,426 32,593 958 81,125 2,384 Safeway plc 23,118 117 12,614 64 35,732 181 Schroders PLC * - 1,626 18 1,626 18 Scottish & Newcastle 18,779 127 9,340 63 28,119 190 Scottish and Southern Energy 16,614 200 9,965 120 26,579 320 Scottish Power plc 34,695 231 21,568 143 56,263 374 Securicor * - 5,150 9 5,150 9 Serco Group PLC * - 4,450 14 4,450 14 Severn Trent 8,253 110 4,138 55 12,391 165 Shell Transport & Trading Co. plc 189,806 1,408 112,828 837 302,634 2,245 Signet Group 42,561 78 19,627 36 62,188 114 Slough Estates Finance plc 8,000 63 4,788 38 12,788 101 Smith & Nephew 19,151 160 10,791 90 29,942 250 Smiths Group 11,076 131 6,513 77 17,589 208 South African Breweries plc 15,790 163 9,259 96 25,049 259 SSL International PLC * - 2,478 15 2,478 15 Stagecoach Holdings PLC * - 11,469 16 11,469 16 Tate & Lyle 12,545 70 4,898 27 17,443 97 Taylor Woodrow 17,488 83 6,527 31 24,015 114 Tesco plc 127,371 586 85,336 393 212,707 979 The Berkeley Group PLC * - 1,243 19 1,243 19 The Great Universal Stores plc 19,002 262 11,775 163 30,777 425 The Sage Group plc 15,700 49 14,258 45 29,958 94 Tomkins plc 18,702 89 9,260 44 27,962 133 Unilever plc 49,648 462 32,221 300 81,869 762 United Business Media 8,630 75 3,864 34 12,494 109 United Utilities plc 10,400 92 6,616 59 17,016 151
The accompanying notes are an integral part of the financial statements. United Utilities PLC, Class A * - 3,432 19 3,432 19 Vodafone AirTouch plc 1,203,067 2,974 795,070 1,966 1,998,137 4,940 Whitbread 7,465 96 3,452 44 10,917 140 William Hill PLC * - 4,885 37 4,885 37 Wolseley 11,481 162 6,819 96 18,300 258 WPP Group plc 22,552 221 13,730 134 36,282 355 Yell Group PLC * - 5,218 28 5,218 28 -------- -------- -------- 34,541 22,141 56,682 United States - 1.6% # Bajaj Auto, Ltd. - GDR 5,900 143 - 5,900 143 Banco Bradesco - ADR 2,918 77 - 2,918 77 Banco Itau SA - ADR 3,960 197 - 3,960 197 Banco Santander Chile - ADR 2,900 69 - 2,900 69 Brasil Telecom Participacoes S.A. 2,426 91 - 2,426 91 Carnival Corp. 180 7 - 180 7 Centrais Electricas Brasileirias SA - ADR Cl.B * 12,874 101 - 12,874 101 Check Point Software Technologies, Ltd. * 4,200 71 - 4,200 71 Companhia De Bebidas ADR 6,850 175 - 6,850 175 Companhia Energetica de Minas Gerias - ADR 7,701 141 - 7,701 141 Companhia Vale do Rio Doce 3,700 189 - 3,700 189 Compania Cervecerias Unidas SA - ADR * 900 19 - 900 19 Compania de Telecomunicaciones de Chile SA * 2,500 37 - 2,500 37 EIH, Ltd. - GDR 6,700 44 - 6,700 44 Embotelladora Andina SA - ADR * 6,100 64 - 6,100 64 Empresa Nacional de Electricidad SA - ADR * 10,100 118 - 10,100 118 Enersis SA - ADR * 28,447 209 - 28,447 209 Gen-Probe, Inc. * - 344 13 344 13 Grasim Industries, Ltd. - GDR 7,100 156 - 7,100 156 Great Eastern Shipping Co. - GDR 9,020 152 - 9,020 152 Hindalco Industries, Ltd. - GDR 4,900 151 - 4,900 151 Huaneng Power International, Inc. - ADR * 400 28 - 400 28 ITC, Ltd. - GDR 5,900 130 - 5,900 130 Lukoil Holding - ADR* 2,700 251 - 2,700 251 Mahindra & Mahindra, Ltd. * 16,500 141 - 16,500 141 Petroleo Brasileiro SA * 5,500 160 - 5,500 160 Petroleo Brasileiro SA - ADR* 6,800 180 - 6,800 180 Ranbaxy Laboratories, Ltd. - GDR 6,560 167 - 6,560 167 Reliance Industries, Ltd. - GDR 11,000 276 - 11,000 276 Surgutneftegaz - ADR 11,581 337 - 11,581 337
The accompanying notes are an integral part of the financial statements. Tatneft - ADR 2,400 55 - 2,400 55 Unified Energy Systems Russia - ADR 6,700 187 - 6,700 187 --------- ---------- --------- 4,123 13 4,136 --------- ---------- --------- TOTAL COMMON STOCK # 154,282 85,433 239,715 PREFERRED STOCK Australia - 0.2% # News Corp., Ltd. 53,728 404 23,372 176 77,100 580 Germany - 0.2% # Fresenius Medical Care AG * - 325 16 325 16 Henkel KGAA 1,112 87 1,112 87 Porsche AG 195 116 90 53 285 169 RWE AG * - 408 14 408 14 Volkswagen AG 2,462 89 1,226 45 3,688 134 --------- ---------- --------- 292 128 420 Italy - 0.0% # Fiat SPA - PRIV EUR * 849 4 849 4 New Zealand - 0.0% # Fletcher Challenge * 1,940 2 1,940 2 South Korea - 0.0% # Samsung Electronics 550 113 550 113 --------- ---------- --------- TOTAL PREFERRED STOCK # 809 310 1,119 WARRANTS Mexico - 0.0% # Cemex SA expire 12/21/04 (Cost $1) 2,000 1 2,000 1 --------- --------- TOTAL WARRANTS # 1 1 RIGHTS Germany - 0.0% # Muenchener Ruckversage expires 11/10/03 (Cost $0) 4,360 38 4,360 38
The accompanying notes are an integral part of the financial statements. Thailand - 0.0% # TelecomAsia expires 04/30/08 (Cost $0) 35,747 - 35,747 - --------- ---------- --------- TOTAL RIGHTS # 38 38 PAR VALUE PAR VALUE PAR VALUE (000'S (000'S (000'S OMITTED) OMITTED) OMITTED) COLLATERAL ON LOANED SECURITIES - 7.1% State Street Navigator Securities Lending Portfolio $ 8,571 8,571 9,718 9,718 18,289 18,289 SHORT TERM INVESTMENTS Investment in joint trading account 1.061% due 01/02/04 2,955 2,955 2,955 2,955 Federal National Mortgage Association Discount Notes, 1.05% due 01/07/2004 2,300 2,300 2,300 2,300 1.06% due 02/18/2004 6,700 6,690 6,700 6,690 U.S Treasury Bills 0.00% due 01/22/2004 500 500 500 500 0.99% due 03/11/2004 524 524 524 524 --------- ---------- --------- TOTAL SHORT TERM INVESTMENTS # 3,479 9,490 12,969 REPURCHASE AGREEMENTS # Repurchase Agreement with State Street Corp. dated 12/31/2003 at 0.70%, to be repurchased at $3,931,153 on 01/02/2004, col1ateralized by $281,000 U.S. Treasury Bonds, 8.50% due 02/15/2020 (valued at $4,013,031, including interest) TOTAL REPURCHASE AGREEMENTS # 3,931 3,931 3,931 3,931 ---------- --------- 3,931 3,931 TOTAL INVESTMENTS AT MARKET # 167,180 108,882 276,062 TOTAL INVESTMENTS AT COST 142,128 110,150 252,278
The accompanying notes are an integral part of the financial statements. Payables, less cash and receivables # (8,144) (9,506) (17,650) --- --------- ---------- --------- NET ASSETS # 159,036 99,376 258,412 === ========= ========== =========
* Non-income producing security. ADR-American Depository Receipt. GDR-Global Depository Receipt. The accompanying notes are an integral part of the financial statements. MIT INTERNATIONAL INDEX TRUST AND JHVST INTERNATIONAL EQUITY INDEX FUND NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF COMBINATION. The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets and Liabilities and Statement of Operations reflect the accounts of the John Hancock Variable Series Trust I International Equity Index Fund ("JHVST International Equity Index Fund") one of thirty investment funds offered by the John Hancock Variable Series Trust I ("JHVST") and the International Index Trust ("MIT International Index Trust"), one of seventy-six investment Portfolios offered by the Manufacturers Investment Trust ("MIT") at and for the year ended December 31, 2003. These statements have been derived from the books and records of each Portfolio utilized in calculating daily net asset value at December 31, 2003. The pro forma statements reflect the proposed transfer of the assets and liabilities of the MIT International Index Trust in exchange for Series I and Series II shares of the JHVST International Equity Index Fund. Under generally accepted accounting principles in the United States of America ("GAAP"), JHVST International Equity Index Fund will be the surviving entity for accounting purposes. The pro forma financial statements have been adjusted to reflect the anticipated fee arrangements for the surviving entity. The Pro Forma Combining Schedule of Portfolio Investments, Statement of Assets and Liabilities and Statement of Operations should be read in conjunction with the historical financial statements of MIT and JHVST International Equity Index Fund incorporated by reference in the Statement of Additional Information. Series I and II Class shares of the MIT International Index Trust and Series I and Series II Class shares of the JHVST International Equity Index Fund are presently offered only to: Separate Accounts A, H,I, L, M, N and to certain unregistered separate accounts of The Manufacturers Life Insurance Company (U.S.A.) ("Manulife USA") and to Separate Accounts A and B and to certain unregistered separate accounts of The Manufacturers Life Insurance Company of New York ("Manulife New York"). Manulife USA and Manulife New York are indirect wholly owned subsidiaries of The Manufacturers Life Insurance Company ("Manulife"), which in turn is a wholly owned subsidiary of Manulife Financial Corporation, a publicly traded company. Manulife Financial Corporation and its subsidiaries are known collectively as "Manulife Financial". Manulife New York is a wholly owned subsidiary of Manulife USA. NAV Class shares of the JHVST International Equity Index Fund are presently offered only to John Hancock Variable Life Accounts U, V, and S to support variable life insurance policies issued by John Hancock Variable Life Insurance Company ("JHVLICO)"); John Hancock Variable Annuity Accounts I and JF to support variable annuity contracts issued by JHVLICO; John Hancock Variable Annuity Accounts H, U, and V to support variable annuity contracts issued by John Hancock Life Insurance Company ("John Hancock") and John Hancock Life Account UV to support variable life insurance policies issued by John Hancock and certain unregistered separate accounts of JHVLICO and John Hancock. John Hancock and JHVLICO are indirect wholly owned subsidiaries of Manulife Financial Corporation. The JHVST International Equity Index Fund currently offers three classes of shares: NAV, Series I and Series II. Series I and Series II shares are the same, except for differences in class expenses with respect to the Portfolio's distribution plan. NAV shares, which will not be issued as part of the Agreement and Plan of Reorganization, do not assess 12b-1 expense fees. The MIT International Index Trust currently offers two classes of shares. Series I, and Series II shares are the same, except for differences in class expenses with respect to the Portfolio's distribution plan. Pro Forma Adjustments: (A) Adjustment to reflect the change in advisory fees upon reorganization. (B) Adjustment to reflect the reduction in the custodian agreement fees and elimination of duplicate expenses upon reorganization. (C) Adjustment to reflect the increase in 12b-1 fees associated with the proposed merger. (D) Adjustment has not been made to reflect estimated one-time proxy, legal and other expenses of the reorganization in the pro-forma Statement of Operations. These estimated expenses are $75,000 for each Fund. 2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed in the preparation of the financial statements. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates. SECURITY VALUATION. Each Portfolio determines its net asset value per share once daily as of the close of the customary trading session of the New York Stock Exchange ("Exchange") on each business day of the Portfolio. The Exchange generally closes at 4:00 p.m. Eastern Standard Time. However, exchange-traded funds and certain derivative instruments may be valued using prices as late as 4:15 p.m. Eastern Standard Time. In the event the Exchange closes at any time other than 4:00 p.m. Eastern Standard Time on a particular day, each Fund will determine its net asset value per share as of the close of the Exchange on that day. Short-term investments with a remaining maturity of 60 days or less are valued at "amortized cost," which approximates market value. This involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates. While this method provides certainty in valuation, it may result in periods during which the value of an instrument, as determined by amortized cost, is higher or lower than the price the Fund would receive upon the sale of the instrument. Securities and call and put options that are listed on a stock exchange are normally valued at the closing sales price. If there were no sales during the day, they are normally valued at the last previous sale or bid price reported, as are equity securities that are traded in the over-the counter market. Non-exchange traded debt securities (other than certain short-term investments) are valued on the basis of valuations furnished by a pricing service which uses electronic data processing techniques, without exclusive reliance upon quoted prices. Any other security for which market quotations are not readily available or any other property for which valuation is not otherwise available, is valued at fair value as determined in good faith by, or under the direction of, the Board of Trustees for the applicable Portfolio. Financial futures contracts, options thereon and options on stock indexes are valued at the last trade price of the day. In the absence of a trade on a given day, the value generally is used which is established by the exchange on which the instrument is traded. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day on which the New York Stock Exchange is open. The values of such securities used in computing net asset value per share are normally determined as of such times. Trading of these securities may not take place on every New York Stock Exchange business day and may take place on days which are not business days in New York. The Portfolios calculate net asset value per share as of the close of regular trading on the New York Stock Exchange on each day on which that exchange is open. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the Funds' securities used in such calculation. If events affecting the value of such securities occur between the time when their price is determined and the time as of which the Fund's net asset value is calculated, such securities may be valued at fair value by or under the direction of the Board of Trustees for the applicable Portfolio. Occasionally, events that affect the values of such securities may occur between the times at which they are generally determined and the close of the New York Stock Exchange. In such event, these securities will then be valued at their fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Board of Trustees for the applicable Portfolio. FEDERAL INCOME TAXES. Each Portfolio intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income to shareholders. Therefore no federal income tax provision is required. Each Portfolio is treated as a separate taxpayer for federal income tax purposes. PART C OTHER INFORMATION Item 15. Indemnification In response to this item and the requirements of Rule 484 under the Securities Act of 1933, Registrant incorporates by reference herein its response to item 25 in Post-Effective Amendment No. 37 to Form N-1A (File No. 33-2081) filed on May 1, 2003. Item 16. Exhibits (1)(a) Declaration of Trust of John Hancock Variable Series Trust I, dated February 21, 1988, incorporated by reference herein to Pre-Effective Amendment No. 2 to Form N-14 (File No. 333-47686) filed on December 6, 2000. (1)(b) Amendment dated May 2, 2003 to the Declaration of Trust, incorporated by reference herein to Post-Effective Amendment No. 38 to Form N-1A (File No. 33-2081), filed on June 3, 2003. (1)(c) Amendments dated September 24 and March 24, 2004 to the Declaration of Trust, included in the initial filing of this registration statement on April 1, 2004. (2) By-Laws of John Hancock Variable Series Trust I, adopted April 12, 1988, and amended and restated as of September 18, 2002, incorporated by reference herein to Post-Effective Amendment No. 37 to Form N-1A (File No. 33-2081) filed on May 1, 2003. (3) Not Applicable. (4) Agreement and Plan of Reorganization (included as exhibit A to the proxy statement/prospectus filed as part of this Registration Statement). (5) Not Applicable. (6)(a) Investment Management Agreement by and between John Hancock Variable Series Trust I and John Hancock Life Insurance Company dated April 12, 1988 relating to the Real Estate Equity Fund and the International Equity Index (formerly "International Equities," formerly "International," originally "Special Opportunities") Fund, incorporated by reference herein to Post-Effective Amendment No. 3 to Form N-1A (File No. 33-2081) filed on April, 12 1988. (6)(b) Amendment No. 1 dated May 1, 1997 to Investment Management Agreement by and between John Hancock Variable Series Trust I and John Hancock Life Insurance Company dated April 12, 1988, incorporated by reference herein, to Post-Effective Amendment No. 16 to Form N-1A (File No. 33-2081) filed on May 1, 1997. (6)(c) Amendment No. 2 dated May 1, 1998 to Investment Management Agreement by and between John Hancock Variable Series Trust I and John Hancock Life Insurance Company dated April 12, 1988 relating to the International Equity Index Fund, incorporated by reference herein to Post-Effective Amendment No. 19 to Form N-1A (File No. 33-2081) filed on May 1, 1998. (6)(d) Amendment No. 3 dated April 23, 1999 to Investment Management Agreement by and between John Hancock Variable Series Trust I and John Hancock Life Insurance Company dated April 12, 1988, incorporated by reference herein to Post-Effective Amendment No. 33 to Form N-1A (File No. 33-2081 ) filed on April 12, 2002. (6)(e) Supplement dated June 1, 2004 to Investment Management Agreement by and between John Hancock Variable Series Trust and John Hancock Life Insurance Company dated April 12, 1988, included in the initial filing of this registration statement on April 1, 2004. (6)(f) Amendment No. 5 dated May 1, 2004 to Investment Management Agreement by and between John Hancock Variable Series Trust and John Hancock Life Insurance Company dated April 12, 1988 (filed herewith). (6)(g) Sub-Investment Management Agreement, dated as of March 29, 2004, among John Hancock Variable Series Trust I, SSgA Funds Management, Inc., and John Hancock Life Insurance Company relating to the International Equity Index Fund, included in the initial filing of this registration statement on April 1, 2004. (7)(a) Amended and Restated Underwriting and Indemnity Agreement among John Hancock Variable Series Trust I, Signator Investors, Inc., and John Hancock Life Insurance Company, dated March 24, 2004, included in the initial filing of this registration statement on April 1, 2004. (7)(b) Distribution Agreement dated May 1, 2004, between John Hancock Variable Series Trust and Manufacturers Financial Securities, LLC (filed herewith). (8) Not Applicable. (9)(a) Custodian Agreement between John Hancock Variable Series Trust I and State Street Bank and Trust Company, dated January 30, 1995, incorporated by reference herein to Post-Effective Amendment No. 10 to Form N-1A (File No. 33-2081) filed on March 2, 1995. (9)(b) Form of Amendment, dated as of April 10, 2003, to Custodian Agreement dated January 30, 1995, as amended, between John Hancock Variable Series Trust I and State Street Bank and Trust Company, incorporated by reference herein to Post-Effective Amendment No. 38 to Form N-1A (File No. 33-2081) filed on June 3, 2003. (9)(c) Form of Amendment, dated as of April 30, 2004, to Custodian Agreement dated January 30, 1995, as amended, between John Hancock Variable Series Trust I and State Street Bank and Trust Company (filed herewith). (10)(a) Rule 12b-1 Plan dated March 24, 2004 for Series I and II shares, included in the initial filing of this registration statement on April 1, 2004. (10)(b) Rule 18f-3 Plan dated February 11, 2004, included in the initial filing of this registration statement on April 1, 2004. (10)(c) Amendment dated March 24, 2004 to Rule 18f-3 Plan dated February 11, 2004, included in the initial filing of this registration statement on April 1, 2004. (11) Opinion and consent of Ronald J. Bocage, Esq. as to legality of securities for International Equity Index Fund (filed herewith). (12) Form of Opinion of Dykema Gossett PLLC on tax matters (filed herewith). (13) Not Applicable. (14)(a) Consent of Dykema Gossett PLLC (filed herewith). (14)(b) Consent of Ernst & Young LLP (filed herewith). (14)(c) Consent of PricewaterhouseCoopers, LLP (filed herewith). (15) Not Applicable. (16) Powers of Attorney for Elizabeth G. Cook, Kathleen F. Driscoll, Diane C. Kessler, Michele G. Van Leer, Hassell H. McClellan, and Robert F. Verdonck, included in the initial filing of this registration statement on April 1, 2004. (17)(a) Prospectus of the International Equity Index Fund of the John Hancock Variable Series Trust I dated May 1, 2004 (filed herewith). (17)(b) Prospectus of Manufacturers Investment Trust dated May 1, 2004 (filed herewith). (17)(c) Annual Report of the International Equity Index Fund of John Hancock Variable Series Trust I for the year ended December 31, 2003, included in the initial filing of this registration statement on April 1, 2004. (17)(d) Annual Report of Manufacturers Investment Trust for the year ended December 31, 2003, included in the initial filing of this registration statement on April 1, 2004. (17)(e) Form of Participation Agreement between John Hancock Variable Series Trust I, John Hancock Life Insurance Company, and John Hancock Variable Life Insurance company, included in the initial filing of this registration statement on April 1, 2004. (17)(f) Participation Agreement between John Hancock Variable Series Trust I, The Manufacturers Life Insurance Company (U.S.A.), and The Manufacturers Life Insurance Company of New York, Incorporated by reference herein to Post-Effective Amendment No. 42 to Form N-1A (File No 33-2081) filed on April 29, 2004. Item 17. Undertakings (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of the Registrant, in the City of Boston and the Commonwealth of Massachusetts, on the 12th day of May, 2004. JOHN HANCOCK VARIABLE SERIES TRUST I By: /s/ Michele Van Leer --------------------------------- Name: Michele G. Van Leer Title: Chairman of the Board of Trustees As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the date indicated. SIGNATURE DATE By: /s/ Raymond F. Skiba --------------------------------- May 12, 2004 Raymond F. Skiba Treasurer (Principal Financial and Accounting Officer) By: /s/ Michele Van Leer --------------------------------- May 12, 2004 Michele G. Van Leer Chairman of the Board of Trustees (Principal Executive Officer) For herself and as attorney-in-fact for: Elizabeth G. Cook, Trustee Diane C. Kessler, Trustee Robert F. Verdonck, Trustee Hassell H. McClellan, Trustee Kathleen F. Driscoll, Trustee
EX-99.(6)(F) 2 dex996f.txt AMEN. NO. 5 TO THE INVESTMENT MANAGEMENT AGREEMENT BETWEEN VST I AND JHLICO Exhibit (6)(f) Amendment No. 5 to the Investment Management Agreement Between John Hancock Variable Series Trust I and John Hancock Life Insurance Company Reference is made to that certain Investment Management Agreement dated as of April 12, 1988 and, as amended, by and between John Hancock Variable Series Trust I and John Hancock Life Insurance Company, as amended (the "Agreement"). The parties agree to amend and restate Section 5 of the Agreement to read as follows: 5. INVESTMENT ADVISORY FEE AND EXPENSE LIMITATION. For all of the services rendered, facilities furnished and expenses paid or assumed as herein provided, the Series shall pay to JHLICO a fee, which fee shall, with respect to each Portfolio ("Fund"), be at the effective rate of: (a) For the Real Estate Equity Fund (formerly "Real Estate Portfolio"): (i) 1.10% on an annual basis on the first $50,000,000 of the Current Net Assets of such Fund; (ii) 1.00% on an annual basis on the next $50,000,000 of the Current Net Assets of such Fund; (iii) 0.90% on an annual basis on the next $100,000,000 of the Current Net Assets of such Fund; and (iv) 0.80% on an annual basis of that portion of the Current Net Assets of such Fund in excess of $200,000,000. (b) For the International Equity Index Fund (formerly "International Equities Portfolio," "International Portfolio" and "Global Portfolio"): (i) 1.30% on an annual basis on the first $20,000,000 of the Current Net Assets of such Fund; (ii) 1.15% on an annual basis on the next $30,000,000 of the Current Net Assets of such Fund; and (iii) 1.05% on an annual basis of that portion of the Current Net Assets of such Fund in excess of $50,000,000. The fee shall be accrued daily and payable monthly as soon as possible after the last day of each calendar month. In the case of termination of this Agreement with respect to any Fund during any calendar month, the amount of the fee accrued to the date of termination shall be paid. "Current Net Assets" of any Fund for purposes of computing the amount of advisory fee accrued for any day shall mean that Fund's net assets for the most recent preceding day for which that Fund's net assets were computed. For any fiscal year in which the normal operating costs and expenses of any Fund of the Series, exclusive of the investment advisory fee, interest, brokerage commissions, taxes and extraordinary expenses outside the control of JHLICO exceed 0.10% of that Fund's average daily net assets, JHLICO will reimburse that Fund promptly after the end of the fiscal year in an amount equal to such excess. In the event of termination of this 5. INVESTMENT ADVISORY FEE AND EXPENSE LIMITATION - continued. Agreement as of a date other than the last day of Series' fiscal year, JHLICO shall pay any Fund of Series the amount by which such expenses incurred by that Fund prior to the date of termination exceeds a pro rata portion of the expense limitation. Effective June 1, 2003, any fees pursuant to a plan adopted by the Trust under Rule 12b-1 ("Rule 12b-1 fees") under the 1940 Act that are chargeable to any class of a Fund's (Portfolio's) shares shall be excluded from the expenses that are reimbursable pursuant to this paragraph. Notwithstanding anything stated above to the contrary, JHLICO shall have no obligation hereunder to reimburse the International Equity Index Fund on and after May 1, 2004 for any normal operating costs and expenses directly incurred by, or allocated to, that Fund. 2. All other terms and provisions of the Agreement, as previously amended, shall remain unchanged and in full force and effect, including but not limited to, replacement of the phrase "John Hancock Mutual Life Insurance Company" with the phrase "John Hancock Life Insurance Company" and replacement of the phrase "JHMLICO" with the phrase "JHLICO" wherever shown in the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and to take effect as of May 1, 2004. ATTEST: JOHN HANCOCK VARIABLE SERIES TRUST I /s/ Arnold R. Bergman By: /s/ Michele G. Van Leer Michele G. Van Leer Title: Chairman and CEO ATTEST: JOHN HANCOCK LIFE INSURANCE COMPANY /s/ Arnold R. Bergman By: /s/ Michele G. Van Leer Michele G. Van Leer Title: Senior Vice President EX-99.(7)(B) 3 dex997b.txt DISTRIBUTION AGREEMENT DISTRIBUTION AGREEMENT AGREEMENT, dated as of May 1, 2004, by and between John Hancock Variable Series Trust I (the "Trust"), on behalf of each of the one or more portfolios of the Trust listed in Appendix A (each such portfolio a "Participating Fund"), and Manulife Financial Securities LLC (the "Series Distributor"). WHEREAS, the Trust is a Massachusetts business trust which is registered as an open-end investment company under the Investment Company Act of 1940 (the "1940 Act") and sells its shares to insurance company separate accounts to which net premiums, contributions and considerations under variable insurance and annuity products ("Variable Products") are allocated for investment in the Trust ("Eligible Separate Accounts"); WHEREAS, the Trust has divided its shares into series, each representing a different Fund, has further divided the shares of each Fund into three classes of shares (NAV Class, Series I and Series II), and has adopted a plan with respect to the Series I and shares (collectively, the "Rule 12b-1 Classes") of each Participating Fund pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan"); WHEREAS, The Trust also has adopted a related plan under Rule 18f-3 (the "Rule 18f-3 Plan") under the 1940 Act; WHEREAS, the Rule 12b-1 Plan and the Rule 18f-3 Plan (together, the "Plans") provide that the Rule 12b-1 Classes of a Participating Fund of the Trust may be assessed with fees at rates specified in the Rule 12b-1 Plan; WHEREAS, the Trust desires the Series Distributor to act as a principal underwriter with respect to Series I and Series II shares of the Participating Fund; and WHEREAS, the Series Distributor is registered as a broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. ("NASD"); NOW, THEREFORE, the Trust and the Series Distributor agree as follows: 1. Appointment and Acceptance The Trust hereby appoints the Series Distributor as principal underwriter and distributor of the shares of the Funds, and the Series Distributor hereby accepts that appointment; provided, however, that this appointment shall extend only to sales to Eligible Separate Accounts of Manufacturers Life Insurance Company (U.S.A.) (hereinafter, "Manufacturers USA") and Manufacturers Life Insurance Company of New York (hereinafter "Manufacturers New York") and Eligible Separate Accounts of such other insurance companies as the Trust shall have authorized in writing. 2. Rule 12b-1 Compensation to the Series Distributor 2.1 Each Participating Fund will pay Rule 12b-1 compensation to the Series Distributor up to the net effective annual rate indicated below for each Rule 12b-1 Class of the Fund's shares: Series I .40% Series II .60% These fees shall be accrued daily and payable monthly based on the current net assets of the applicable Rule 12b-1 Class of a Participating Fund's shares as to which the Series Distributor has served as principal underwriter (or that are exchanged or converted in any reorganization for other shares of any fund as to which the Series Distributor served as a principal underwriter). "Current net assets" for purposes of computing the amount of Rule 12b-1 Fee accrued with respect to any class of a Participating Fund's shares shall mean the net assets for that class of that Fund's shares for the most recent preceding day for which the net assets for that Fund were computed. The fee shall be payable as soon as possible after the last day of each calendar month. In the case of termination of this Agreement as to any class of a Participating Fund, the fees accrued for such shares through the date of termination will be paid. The Series Distributor waives any claim for Rule 12b-1 Fees in excess of the rates specified above. 2.2. The Series Distributor shall be entitled to no compensation for services rendered and expenses borne as principal underwriter and distributor other then as specified in this Section 2. 3. Authority of Series Distributor Without limiting the foregoing, in its capacity as principal underwriter and distributor, and acting as principal and not as agent for the Trust, the Series Distributor is authorized, from time to time, to enter into separate agreements with Manufacturers USA, with Manufacturers New York and with other insurance companies authorized pursuant to Section 1 hereof, and with any broker or other intermediary through whom a transaction is effected as to which the Series Distributor is acting as principal underwriter hereunder, which agreements may provide how much compensation out of any related Rule 12b-1 payments the Series Distributor will pay to any such company or person and how much of such payments, if any, will be retained by the Series Distributor, in each case, however, on terms and conditions not inconsistent with this Agreement or the Rule 12b-1 Plan. 4. Compliance with Plans Each party hereto agrees to comply with each provision of the Rule 12b-1 Plan or the Rule 18f-3 Plan (as they may be amended from time to time) that is applicable to that party. The Trust agrees to advise the Series Distributor of any change in either Plan. 2 5. Furnishing Certain Information Without limitation of any other provision of this Agreement, the parties hereto agree, upon request, to furnish to the Trustees of the Trust such information available to them that may be reasonably necessary (a) to evaluate the Rule 18f-3 Plan (or any successor or proposed successor to that Plan) in connection with any vote referred to in Rule 18f-3(d) or (b) to an informed determination of whether the Rule 12b-1 Plan (or any successor or proposed successor to such Plan), or any agreement related to such Plan, or any revisions thereto, should be approved or continued. Also, the Series Distributor shall furnish to the Trust, at least quarterly, reports as to the sales of Trust shares made pursuant to this Agreement. Such reports shall be in writing and include information on the amounts of Rule 12b-1 Fees expended for each Rule 12b-1 Class of each Participating Fund, the recipients of the Rule 12b-1 Fees expended by the Series Distributor or by affiliated and unaffiliated insurance companies, and the purposes for which such amounts were expended. Series Distributor hereby authorizes John Hancock Life Insurance Company to deliver these reports on the Series Distributor's behalf, if the Trustees of the Trust so request. These reports shall also include such information about expense apportionments or allocations, fee or expense waivers for any classes, and differences in shareholder voting patterns as among different classes of the same Participating Fund, and other pertinent matters as the Trustees may reasonably request. 6. Purchases and Redemptions of Shares 6.1. Purchases and redemptions of Series I and Series II shares of a Participating Fund shall be at the net asset value therefore as described in the Trust's prospectus and statement of additional information. 6.2. Sales, redemptions and repurchases shall be effected directly by the transfer agent of the Trust, as such, according to the terms of the Trust's transfer agency agreement, and payment for shares shall be transmitted by the transfer agent directly to the Trust's custodian. 6.3. The Trust shall have the right to suspend the redemption of shares of any of its Participating Funds pursuant to the conditions set forth in its Prospectus and Statement of Additional Information. The Trust shall also have the right to suspend the sale of shares of any or all of its Funds at any time when it is authorized to suspend redemption of such shares. The Trustees of the Trust also may refuse to sell shares of any Fund to any person, or suspend or terminate the offering of shares of any Fund, if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Trustees acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, in the best interests of such Fund and its shareholders (including Variable Product owners). 6.4. The Trust will give the Series Distributor prompt notice of any such suspension and shall promptly furnish such other information in connection with the sale and redemption of Participating Fund shares as the Series Distributor reasonably requests. 3 6.5. Issuance and transfer of the Trust's shares will be by book entry only. Share certificates will not be issued. Shares ordered from the Trust will be recorded on the transfer records of the Trust in an appropriate title for each shareholder. 7. Certain Documents and Expenses 7.1. The Trust will prepare and be responsible for filing with the SEC and any state regulatory authorities requiring such filing all shareholder reports, proxy materials and prospectuses and statements of additional information of the Trust. The Trust will bear the costs of registration and qualification of the shares of the Funds, preparation and filing of the documents listed in this paragraph and all taxes to which an issuer is subject on the issuance and transfer of its shares. 7.2. At the option of the Series Distributor, the Trust will either (a) provide the Series Distributor with as many copies of the Trust's current prospectus, statement of additional information, annual report, semi-annual report, proxy materials and other shareholder communications, including any amendments or supplements to any of the foregoing, as the Series Distributor may reasonably request with respect to the Participating Funds; or (b) provide the Series Distributor with camera ready copies of such documents in a form suitable for printing. To the extent that the Series Distributor requests multiple copies of documents pursuant to clause (a) above for marketing or other purposes, the Series Distributor shall bear the cost of such multiple copies. 8. Sales Material and Information 8.1. The Series Distributor will use its best efforts to ensure that any sales literature and other promotional material prepared by it or on its behalf in which the Trust, a Fund, any investment adviser of subadviser to any Fund is named, conforms to all requirements of all applicable federal and state laws and rules and regulations, including all applicable rules and regulations of the NASD. 8.2. The Series Distributor will not give any information or make any representations or statements on behalf of the Trust or concerning the Trust in connection with the sale of Fund shares, other than the information or representations contained in the registration statement, prospectus or statement of additional information for the Fund's shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Trust, or in sales literature or other promotional material approved in writing by the Trust or its designee, except with the written approval of the Trust or its designee. 8.3. The Trust will use its best efforts to ensure that sales literature and other promotional material prepared by it or on its behalf in which the Series Distributor is named, conform to all requirements of all applicable federal rules and regulations of the NASD. 8.4. The Trust will not give any information or make any representations or statements on behalf of or concerning the Series Distributor except with the written permission of the Series Distributor or its designee. 4 8.5. Each party hereto will provide to each other party, to the extent it is relevant to the Contracts or the Trust, a copy of any comment letter received from the staff of the United States Securities and Exchange Commission ("SEC") or the NASD, and such party's response thereto, following any examination or inspection by the staff of the SEC or the NASD. 8.6. As used herein, the phrase "sales literature and other promotional material" includes, but is not limited to, advertisements (such as material published or designed for use in a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, sign or billboard, motion picture or other public medium), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees. 9. Representations and Warranties 9.1 Representations and Warranties of the Series Distributor (a) The Series Distributor represents and warrants that it is limited liability company duly organized or existing and in good standing under applicable law, and that, in discharging its functions hereunder, it will comply in all material respects with all applicable federal and state laws. (b) The Series Distributor represents and warrants that it will use all reasonable efforts to avoid offering or selling shares of a Participating Fund to any person or entity that is not (a) an insurance company that will hold such shares in a "segregated asset account" within the meaning of Treas. Reg. Section 1.817-5(e) through which public access to the Fund is available only pursuant "variable contracts," within the meaning of Section 817(d) of the Code or (b) other purchasers of the kind specified in Treas. Reg. Section 1.817-5(f)(3) as from time to time in effect; and the Series Distributor agrees to promptly notify the Trust if it has reason to believe that Fund shares are being held by or are being offered or sold to any person or entity not referred to in clause (a) or (b) above. 9.2 Representations and Warranties of the Trust (a) The Trust represents and warrants that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will at all times during the term of this Agreement comply in all material respects with the 1940 Act. (b) The Trust represents and warrants that shares of the Participating Fund offered and sold pursuant to this Agreement will be registered under the Securities Act of 1933 (the "1933 Act"), duly authorized for issuance and sold in compliance with the laws of the Commonwealth of Massachusetts and all applicable federal and state securities laws and that the Trust is and will remain during the term of this Agreement registered as an open-end management investment company under the 1940 Act. The Trust agrees that it will amend the registration statement for a Participating Fund's shares under the 1933 Act and the 1940 Act from time to time as required in order to permit the continuous offering of its shares in 5 accordance with the 1933 Act. The Trust will register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Trust or the Series Distributor. (c) The Trust represents and warrants that the registration statement for shares of a Participating Fund and any amendments or supplement thereto will, when they become effective, conform in all material respects to the requirements of the 1933 Act and the 1940 Act and the rules and regulations of the SEC thereunder and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, provided, however, that this representation and warranty will not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Trust by or on behalf of the Series Distributor or any holder of the Trust's shares expressly for use therein. 10. Notices Any notice required under this Agreement shall be sufficiently given when sent by registered or certified mail, by facsimile transmission (provided that a copy is also sent by registered or certified mail) or by a nationally recognized overnight delivery service, to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust: John Hancock Variable Series Trust I John Hancock Place P.O. Box 111 Boston, MA 021117 Attention: Raymond F. Skiba Fax No.: (617) 886-3746 If to Series Distributor: Manulife Financial Services, LLC P.O. Box 4700 Buffalo, NY 14240 - 4700 Attention: President 11. Continuation and Termination of this Agreement 11.1 This Agreement shall continue as to Series I and Series II classes of a Participating Fund's shares for a period of more than one year after it takes effect as to that class of that Fund only so long as such continuance is specifically approved as to that class of that Fund at least annually by votes of the majority of (a) the Trustees and (b) the Independent Trustees of the Trust cast in person at a meeting called for the purpose of voting on such continuance. 6 11.2. This Agreement shall terminate automatically in the event of its assignment. 11.3. This Agreement may be terminated at any time with respect to any class of a Participating Fund's shares, without payment of any penalty, by vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities representing that class of that Fund's shares, or by the Series Distributor, on 60 days' written notice to any other parties hereto. 11.4. Termination of this Agreement as to any Participating Fund or class of shares thereof shall not be deemed to extinguish any claim arising prior to such termination for breach of this Agreement or breach of any representation or warrantee herein. 12. Definitions As used in this agreement, (a) the term "Independent Trustees" shall mean those Trustees of the Trust who are not interested persons of the Trust, and have no direct or indirect financial interest in the operation of the Rule 12b-1 Plan or any agreements related to it, and (b) the terms "assignment" and "interested person" shall have the respective meanings specified in the 1940 Act and the rules and regulations thereunder, subject to such exemptions or interpretations as may be granted or issued by the SEC. 13. Miscellaneous 13.1. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, to which the parties hereto are entitled or subject under state and federal laws. 13.2. This Agreement is executed on behalf of the Trustees of the Trust as Trustees and not individually, and the obligations of or arising out of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the respective class of each Participating Fund. 13.3. This Agreement may be executed in two or more counterparts which together will constitute one and the same instrument. 13.4. If any provision of this Agreement is held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. JOHN HANCOCK VARIABLE SERIES TRUST I By: /s/ Michele G. Van Leer -------------------------- Name Michele G. Van Leer Title: Chairman and CEO MANULIFE FINANCIAL SECURITIES LLC By: The Manufacturers Life Insurance Company (U.S.A.) Its Managing Member By: /s/ James D. Gallagher -------------------------- Name: James D. Gallagher Title: Executive Vice President, Secretary and General Counsel 8 APPENDIX A to Distribution Agreement Dated as of May 1, 2004 Between John Hancock Variable Series Trust I (the "Trust") and Manulife Financial Services LLC The portfolios of the Trust that are deemed to be "Participating Funds," and to which the above-captioned Agreement therefore pertains, are as follows: International Equity Index Fund 9 EX-99.(9)(C) 4 dex999c.txt VST I SUB-ADMINISTRATION AGREEMENT John Hancock Variable Series Trust I Michele G. Van Leer Chairman and Chief Executive Officer [LOGO] April 30, 2004 State Street Bank and Trust Company Lafayette Corporate Center Legal Division LCC/2S 2 Avenue de Lafayette Boston, MA 02111 Attention: Jean Carr Re: Amended and Restated Custodian Agreement ("Agreement") dated as of January 30, 1995, as amended Gentlemen: This letter will memorialize our mutual agreement to amend the Agreement, effective May 1, May 1, 2004, to reflect name changes for the following six funds: .. Mid Cap Growth Fund (formerly Small/Mid Cap Growth Fund); .. Overseas Equity B Fund (formerly International Opportunities Fund); .. Mid Cap Value B Fund (formerly Small/Mid Cap CORE Fund): .. Overseas Equity C Fund (formerly Emerging Markets Equity Fund); .. Large Cap Growth B Fund (formerly Large Cap Aggressive Growth Fund); and .. Fundamental Value B Fund (formerly Large Cap Value CORE Fund). We have also updated the list of current sub-advisers to all Funds. Please substitute copies of the attached Appendix A for the old copies of Appendix A in your files. Kindly acknowledge receipt of this letter and the attachment, and your agreement with the terms hereof, by signing and returning the duplicate of this letter. Thank you. Sincerely, JOHN HANCOCK VARIABLE SERIES TRUST I -------------------------- Michele G. Van Leer Chairman and CEO Received and agreed to: STATE STREET BANK AND TRUST COMPANY By:______________________________ Name:____________________________ Title:___________________________ APPENDIX A CUSTODIAL AGREEMENT (As of May 1, 2004)
Name of Fund Fund Sub-Manager(s) ------------ ------------------- 1. International Equity Index SSgA Funds Management, Inc. 2. Mid Cap Growth (formerly Wellington Management Company, LLP "Small/Mid Cap Growth") 3. Small Cap Growth Wellington Management Company, LLP 4. Small Cap Emerging Growth Wellington Management Company, LLP 5. Earnings Growth Fidelity Management & Research Company 6. Overseas Equity Capital Guardian Trust Company 7. Overseas Equity B (formerly Capital Guardian Trust Company "International Opportunities") 8. Large Cap Value T. Rowe Price Associates, Inc. 9. Global Bond Capital Guardian Trust Company 10. Equity Index SSgA Funds Management, Inc. 11. Managed Independence Investment LLC and Capital Guardian Trust Company 12. Money Market Wellington Management Company, LLP 13. Large Cap Growth Independence Investment LLC 14. Growth & Income Independence Investment LLC and T. Rowe Price Associates, Inc. 15. Real Estate Equity RREEF American L.L.C. and Van Kampen 16. Short-Term Bond Independence Investment LLC 17. Active Bond John Hancock Advisers, LLC., Pacific Investment Management Company LLC and Declaration Management & Research Company 18. Mid Cap Value B (formerly T. Rowe Price Associates, Inc. "Small/Mid Cap CORE") 19. High Yield Bond Wellington Management Company, LLP 20. Bond Index Standish Mellon Asset Management Company LLC 21. Overseas Equity C (formerly Capital Guardian Trust Company "Emerging Markets Equity" 22. Large Cap Growth B (formerly "Large Independence Investment LLC Cap Aggressive Growth") 23. Small Cap Value T. Rowe Price Associates, Inc. and Wellington Management Company, LLP 24. Fundamental Value B (formerly Wellington Management Company, LLP "Large Cap Value CORE") 25. Fundamental Growth Independence Investment LLC 26. Fundamental Value Wellington Management Company, LLP 27. Health Sciences Wellington Management Company, LLP 28. Mid Cap Value T. Rowe Price Associates, Inc. 29. Financial Industries John Hancock Advisors, LLC 30. Total Return Bond Pacific Investment Management Company LLC
EX-99.(11) 5 dex9911.txt OPINION OF COUNSEL EXHIBIT (11) [JOHN HANCOCK FINANCIAL SERVICES LOGO] May 11, 2004 John Hancock Variable Series Trust I John Hancock Place P.O. Box 111 Boston, MA 02117 Trustees: This opinion is given in connection with the filing by John Hancock Variable Series Trust I, a Massachusetts business trust, (the "Trust") of its Pre-Effective Amendment Number 1 to its Registration Statement on Form N-14 (SEC File Number 333-114139; the "Registration Statement") under the Securities Act of 1933. The Registration Statement relates to an indefinite amount of Class I and Class II shares of beneficial interest in the Trust's International Equity Index Fund (the "shares"). I have examined the Trust's Declaration of Trust, its By-Laws, the Registration Statement, and such other records, certificates, documents and statutes that I have deemed relevant in order to render the opinion expressed herein. Based on such examination, I am of the opinion that: 1) The Trust is a business trust duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. 2) The shares offered for sale by the Trust, when issued in the manner contemplated by the Registration Statement, will be legally issued, fully-paid and non-assessable. I consent to the use of this opinion as an exhibit to the Registration Statement and to the use of my name in the Prospectus comprising a part of the Registration Statement. Very truly yours, /s/ RONALD J. BOCAGE -------------------- Ronald J. Bocage EX-99.(12) 6 dex9912.txt FORM OF OPINION OF DYKEMA GOSSETT PLLC ON TAX MATTERS [DYKEMA GOSSETT PLLC LETTERHEAD] FORM OF OPINION LETTER ____, 2004 Manufacturers Investment Trust 73 Tremont Street Boston, Massachusetts 02108 John Hancock Variable Series Trust I John Hancock Place P.O. Box 111 Boston, Massachusetts 02117 RE: FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSFER OF ASSETS OF THE INTERNATIONAL INDEX TRUST TO THE INTERNATIONAL EQUITY INDEX FUND Ladies and Gentlemen: You have requested our opinion that the proposed acquisition of the assets and liabilities of the International Index Trust by the International Equity Index Fund will qualify as a "reorganization" under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). Hereinafter the International Index Trust is referred to as the "Acquired Fund" and the International Equity Index Fund is referred to as the "Acquiring Fund". BACKGROUND The transaction will take place pursuant to an Agreement and Plan of Reorganization (the "Reorganization Agreement") adopted on behalf of the Acquired Fund by Manufacturers Investment Trust ("MIT") and on behalf of the Acquiring Fund by John Hancock Variable Series Trust I ("JHVST"). Each of MIT and JHVST is a Massachusetts business trust organized as a series company and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end investment company of the management type. The Acquired Fund and the Acquiring Fund are each treated as a separate corporation for Federal income tax purposes. Manufacturers Investment Trust John Hancock Variable Series Trust I ______, 2004 Page 2 Where relevant, capitalized terms not otherwise defined herein have the meanings they have for the purposes of the Reorganization Agreement. For purposes of this opinion, all statutory references are to the Code unless otherwise specified. In connection with the preparation of this opinion, we have, among other things, reviewed, and relied upon the accuracy of, the following documents: 1. The Reorganization Agreement; 2. The Registration Statement on Form N-14 under the Securities Act of 1933, as filed with the Securities and Exchange Commission (the "Registration Statement"); and 3. Officer's Certificates provided to us separately by each of MIT and JHVST (the "Certificates"). In rendering this opinion, we have assumed that the Reorganization will be carried out pursuant to the terms of the Reorganization Agreement and in accordance with the Certificates. In addition, we have further assumed that factual statements and information contained in the Registration Statement, the Certificates, and other documents, records and instruments supplied to us are correct and that there has been no material change with respect to such facts or information prior to the time of the Reorganization. If the Reorganization is effected on a factual basis different from that contemplated above, any or all of the opinions expressed herein may be inapplicable. Further, our opinion expressed herein is based upon existing law, regulations, administrative pronouncements, and judicial authority, all as in effect as of today's date. This opinion represents our best legal judgment as to the matters addressed herein, but is not binding on the Internal Revenue Service ("IRS") or the courts. Accordingly, no assurance can be given that the opinion expressed herein, if contested, would be sustained by a court. Furthermore, the authorities upon which we rely may be changed at any time, potentially with retroactive effect. No assurances can be given as to the effect of any such changes on the conclusions expressed in this opinion. ASSUMPTIONS 1. Each of MIT and JHVST is a business trust under Massachusetts law and an open-end management investment company operating as a series fund under the 1940 Act. 2. The Acquired Fund has been a regulated investment company ("RIC") under Section 851 of the Code since the date of its organization through the end of its last complete Manufacturers Investment Trust John Hancock Variable Series Trust I ______, 2004 Page 3 taxable year and will qualify as a RIC for the taxable year ending on the date of the Reorganization. 3. The Acquiring Fund has been a RIC within the meaning of Section 851 of the Code since the date of its organization through the end of its last complete taxable year and will qualify as a RIC for the taxable year ending on the date of the Reorganization. 4. The Board of Trustees of each of MIT and JHVST has determined, for valid business reasons, that it is advisable to combine the assets and liabilities, if any, of the Acquired Fund into the Acquiring Fund and has adopted the Reorganization Agreement, subject to, among other things, approval by the shareholders of the Acquired Fund. 5. For the taxable year ending on the Exchange Date (as defined in Section 1(b)(i) of the Reorganization Agreement), the Acquired Fund shall calculate, declare and pay ordinary and capital gains dividends on its shares in amounts sufficient to distribute all of its investment company taxable income and all of its capital gains immediately prior to the close of business on the Exchange Date. Such dividends shall be automatically reinvested in additional shares of the Acquired Fund. 6. On the Exchange Date, the Acquired Fund will convey, transfer and deliver to the Acquiring Fund all of the then existing assets of the Acquired Fund (consisting, without limitation, of portfolio securities and instruments, dividend and interest receivables, cash and other assets). In consideration thereof, the Acquiring Fund will (A) assume and pay, to the extent that they exist on or after the Exchange Date, all of the obligations and liabilities of the Acquired Fund and (B) issue and deliver to the Acquired Fund full and fractional Series I and Series II shares of the Acquiring Fund, equal to that number of full and fractional Series I and Series II shares of the Acquired Fund as determined in Section 1(c) of the Reorganization Agreement. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. Any Series I and Series II shares of capital stock (if any) of the Acquired Fund held in the Treasury of MIT on the Exchange Date shall thereupon be retired. Such transactions shall take place on the Exchange Date. All computations relating to the shares of the Acquired Fund and of the Acquiring Fund shall be performed by the Custodian under the Reorganization Agreement. The determination of said Custodian shall be conclusive and binding on all parties in interest. 7. As of the Exchange Date, the Acquired Fund will liquidate and distribute pro rata to its shareholders, the shares of the Acquiring Fund received pursuant to Section 1(a)(i) of the Reorganization Agreement in actual or constructive exchange for the shares of the Acquired Manufacturers Investment Trust John Hancock Variable Series Trust I ______, 2004 Page 4 Fund held by its shareholders. The holders of Series I and Series II shares of the Acquired Fund will receive, respectively, Series I and Series II shares of the Acquiring Fund. 8. The liquidation and distribution will be accomplished by the transfer of the shares of the Acquiring Fund then credited to the account of the Acquired Fund on the books of the Acquiring Fund to accounts opened on the share records of the Acquiring Fund in the names of the Acquired Fund shareholders and representing the respective pro rata number of shares of the Acquiring Fund due such shareholders. The Acquiring Fund will not issue certificates representing shares of the Acquiring Fund in connection with such exchange. 9. Notwithstanding Sections 6, 7 and 8, a pro rata portion of the assets of the Acquired Fund has been transferred to the Acquiring Fund solely for shares of the Acquiring Fund in advance of the Exchange Date. Such transfers occurred solely for reasons of administrative convenience, and the assets so transferred shall be treated by the parties as assets acquired from the Acquired Fund pursuant to the Reorganization. 10. As soon as practicable after the Exchange Date, MIT shall take all the necessary steps under Massachusetts law, MIT's Declaration of Trust and any other applicable law to effect a complete dissolution of the Acquired Fund. Based on the Code, Treasury Regulations issued thereunder, IRS rulings and relevant case law, as of the date hereof, and on the facts, representations and assumptions set forth above, and the documents records and other instruments we have reviewed, it is our opinion that, under current Federal income tax law in effect as of this date: (i) The acquisition by the Acquiring Fund of all the assets of the Acquired Fund solely in exchange for shares of the Acquiring Fund and the assumption by the Acquiring Fund of all the liabilities of the Acquired Fund, followed by the distribution of the shares of the Acquiring Fund by the Acquired Fund, as described above, qualifies as a reorganization within the meaning of Section 368(a)(1). Each of the Acquiring Fund and the Acquired Fund is "a party to a reorganization" within the meaning of Section 368(b) of the Code. (ii) No gain or loss will be recognized by the Acquired Fund upon the transfer of all its assets to the Acquiring Fund solely in exchange for shares of the Acquiring Fund and the assumption by the Acquiring Fund of the liabilities of the Acquired Fund, if any, and the subsequent distribution of those shares of the Acquiring Fund to the shareholders of the Acquired Fund in liquidation thereof (Sections 361(a), 357(b), 361(c)). Manufacturers Investment Trust John Hancock Variable Series Trust I ______, 2004 Page 5 (iii) The Acquiring Fund will not recognize any gain or loss on the receipt of the assets of the Acquired Fund solely in exchange for the Acquiring Fund's shares and the Acquiring Fund's assumption of the Acquired Fund's liabilities, if any (Section 1032(a)). (iv) The basis of the assets of the Acquired Fund in the hands of the Acquiring Fund will be the same as the basis of those assets in the hands of the Acquired Fund immediately prior to the Reorganization (Section 362(b)). (v) The Acquiring Fund's holding period for the Acquired Fund's assets acquired in the Reorganization will include the period during which the Acquired Fund held such assets (Section 1223(2)). (vi) No gain or loss will be recognized by the shareholders of the Acquired Fund upon the liquidation of the Acquired Fund and upon the receipt of shares of the Acquiring Fund solely in exchange for their shares in the Acquired Fund (Section 354(a)). (vii) The basis of the shares of the Acquiring Fund received by the shareholders of the Acquired Fund will be the same as the basis of the shares of the Acquired Fund constructively surrendered in exchange therefor (Section 358(a)(1)). (viii) The holding period of shares of the Acquiring Fund received by the shareholders of the Acquired Fund will include the period during which such shareholders held the shares of the Acquired Fund constructively surrendered in exchange therefor, provided that the Acquired Fund's shareholders held the shares of the Acquired Fund as a capital asset on the Exchange Date (Section 1223(1)). (ix) Pursuant to Section 381(a), the Acquiring Fund will succeed to and take into account the items of the Acquired Fund described in Section 381(c), subject to the provisions and limitations specified in Sections 381, 382, 383, and 384, and the Treasury Regulations thereunder. Pursuant to Section 1.381(b)-1 of the Treasury Regulations, the taxable year of the Acquired Fund will end on the Exchange Date. The opinion expressed herein is rendered only with respect to the specific matters discussed herein. We express no opinion with respect to any other federal, state, local, or foreign Manufacturers Investment Trust John Hancock Variable Series Trust I ______, 2004 Page 6 income tax or legal aspect of the Reorganization, and no inference should be drawn with respect to any matter not expressly opined upon. We express our opinion herein only for the exclusive purpose of ascertaining the Federal income tax consequences of the Reorganization contemplated in the Reorganization Agreement to the Acquired Fund, the Acquiring Fund and the shareholders of the Acquired Fund on their receipt of the shares of the Acquiring Fund in exchange for their shares of the Acquired Fund pursuant to the Reorganization Agreement. This opinion letter may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation, other than those specifically listed above, without our prior written consent. Very truly yours, DYKEMA GOSSETT, PLLC EX-99.(14)(A) 7 dex9914a.txt CONSENT OF DYKEMA GOSSETT PLLC CONSENT OF DYKEMA GOSSETT PLLC We consent to the filing of our tax opinion as an exhibit to the Registration Statement on Form N-14 of the John Hancock Variable Series Trust I (File No. 333-114139) and to the references made to our firm therein and in any amendments thereto. /s/ DYKEMA GOSSETT PLLC Bloomfield Hills, Michigan May 11, 2004 EX-99.(14)(B) 8 dex9914b.txt CONSENT OF ERNST & YOUNG LLP CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Financial Highlights" in the John Hancock Variable Series Trust I (the "Trust") Prospectus dated May 1, 2004 and "The Trust's Financial Statements and Investment Performance Information" and "Independent Auditors" in the Statement of Additional Information, dated May 1, 2004, included in Post-Effective Amendment Number 42 to the Registration Statement (Form N-1A, No. 33-2081) of the Trust, and to the incorporation by reference in the Statement of Additional Information our reports dated February 6, 2004 on the thirty portfolios comprising the Trust included in the 2003 Annual Reports to Shareholders, which Prospectus and Statement of Additional Information are incorporated by reference in the Proxy Statement/Prospectus and the Statement of Additional Information included in this Registration Statement (Form N-14, No. 333-114139) of the Trust. We also consent to the reference to our firm under the captions "Financial Statements" and "Financial Highlights" in the Prospectus/Proxy Statement and "Independent Auditors" in the Statement of Additional Information included in this Registration Statement on Form N-14 of John Hancock Variable Series Trust I. /s/ ERNST & YOUNG LLP Boston, Massachusetts May 10, 2004 EX-99.(14)(C) 9 dex9914c.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Proxy Statement/Prospectus and the Statement of Additional Information constituting parts of this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-14 (the "Registration Statement") of our report dated February 23, 2004 relating to the financial statements and financial highlights of International Index Trust appearing in the December 31, 2003 Annual Report to Shareholders of Manufacturers Investment Trust, which have also been incorporated by reference into this Registration Statement. We also consent to the references to us under the headings "Financial Statements", "Agreement and Plan of Reorganization", and on the front cover page of the Statement of Additional Information in this Registration Statement. In addition, we consent to the reference to us under the heading "Financial Highlights" in the Prospectus of Manufacturers Investment Trust dated May 1, 2004, which has also been incorporated by reference into this Registration Statement. /s/ PricewaterhouseCoopers, LLP Boston, Massachusetts May 10, 2004 EX-99.(17)(A) 10 dex9917a.txt VST I PROSPECTUS DATED 5/1/2004 As with all mutual funds, the Securities and Exchange Commission has not judged whether the funds of the John Hancock Variable Series Trust I are good investments or whether the information in this prospectus is adequate and accurate. Anyone who tells you otherwise is committing a federal crime. This prospectus contains important information about the Series I and Series II shares of the International Equity Index Fund. JOHN HANCOCK VARIABLE SERIES TRUST I May 1, 2004 PROSPECTUS Series I and Series II shares International Equity Index Fund Managed by John Hancock Life Insurance Company John Hancock Place Boston, MA 02117 Contents - -------------------------------------------------------------------------------- John Hancock Variable Series Overview 1 Trust I ("Trust") A summary of the Fund's goals, International Equity Index Fund 5 strategies and risks. Policies and instructions for opening, Your Account 7 maintaining and closing an account in Investments in shares of the fund 7 the Fund Share price 7 Valuation 7 Conflicts 7 Further information on the funds Fund's Expenses 8 Dividends and Taxes 8 Dividends 8 Taxes 8 Share Classes 8 Financial Highlights 10 Further information on the Trust Trust Business Structure 12 For more information back cover
Overview - -------------------------------------------------------------------------------- FUND INFORMATION KEY A concise description of the International Equity Index Fund begins on page . The description provides the following information: Goal and Strategy The Fund's particular investment goals and the principal strategies it intends to use in pursuing those goals. Subadviser/Manager The firm and individual(s) providing investment management services to the Fund. Past Performance The Fund's total return, measured year-by-year and over time. Main Risks The significant risk factors associated with the Fund. The risks are categorized as "Primary" or "Secondary". The Primary Risks are considered major factors in the Fund's performance and are described first. The Secondary Risks are not considered major factors in the Fund's performance because the Fund would not normally commit a large portion of its assets to the investments involved. However, the Secondary Risks are of such a nature that they could significantly affect the Fund's performance, even if the investments are held in relatively small amounts. Fees and Expenses A table describes the Fund's fees and expenses and examples show the costs over time. THE FUND The Trust offers Series I and Series II shares of the International Equity Index Fund, for the variable contracts ("variable contracts") of: .. The Manufacturers Life Insurance Company of New York .. The Manufacturers Life Insurance Company (U.S.A.), and In some variable contract forms, the Trust may be referred to by some other term (such as the "Fund" or "Series Fund") and the International Equity Index Fund may also be referred to by some other term (such as "Portfolio" or "Series"). RISKS OF FUND This Fund, like all mutual funds, is not a bank account. The Fund's value is not insured or guaranteed by the FDIC or any other government agency. You could lose money by investing in this Fund. So, be sure to read all risk disclosure carefully before investing. MANAGEMENT John Hancock Life Insurance Company ("John Hancock") is the investment adviser for the International Equity Index Fund and for other funds of the Trust. John Hancock is a Massachusetts stock life insurance company. On February 1, 2000, John Hancock changed its form of organization by "demutualizing" and becoming a subsidiary of John Hancock Financial Services, Inc. ("JHFS"). Prior to that date, John Hancock was "John Hancock Mutual Life Insurance Company," a mutual life insurance company that was chartered in 1862. At the end of 2003, JHFS and its subsidiaries (including John Hancock) managed approximately $142.5 billion in assets, of which it owned approximately $100.1 billion. In April 2004, JHFS was merged with a subsidiary of Manulife Financial Corporation, a publicly-traded corporation organized under the laws of Canada. As a consequence of the merger, John Hancock's ultimate parent is now Manulife Financial Corporation. The International Equity Index Fund may have one or more subadvisers. John Hancock recommends subadvisers for all of the funds to the Trust, and oversees and evaluates the subadvisers' performance. To do this, John Hancock uses both quantitative and qualitative tools to evaluate investment expertise, performance, diversification, style consistency and risk. This evaluation typically includes on-site due diligence meetings with subadvisers, periodic face-to-face meetings and other communication. While short-term investment performance is monitored, it is not the primary factor in the selection or termination of a subadviser. John Hancock also oversees the allocation of a fund's assets between and among subadvisers for those funds of the Trust that are "multi-managed," and manages the Trust's joint trading account for various funds' liquidity reserves. Each subadviser has discretion to purchase and sell securities for the fund, or the portion of the fund, that it manages. While employing their own investment approach in managing a Fund, each subadviser must also adhere to that fund's investment goals, strategies and restrictions. 1 This page intentionally left blank 2 Your Investment Choices - -------------------------------------------------------------------------------- The Trust offers a number of investment choices, or funds, to suit a variety of objectives under variable contracts. This prospectus describes a Fund that is available under your variable contract. The Fund can be broadly categorized as an international/global fund. Within this broad category, the Fund can be further categorized as follows: INTERNATIONAL EQUITY FUNDS International funds invest primarily in securities markets outside the United States. These funds can be categorized by the types of markets theyinvest in. Developed Markets: ..International Equity Index Fund These funds invest primarily in the larger, well-established developed or industrialized markets around the world. These funds have a lower level of foreign securities risk than emerging market funds. (Emerging market funds invest primarily in developing or emerging markets.)
ADDITIONAL INFORMATION Manager of Managers Arrangement A "manager of managers" arrangement is now quite common among mutual funds that employ subadvisers to manage investment portfolios. This type of arrangement allows a fund, its overall investment manager and the fund's subadviser to enter into various new or amended sub-investment management agreements without the need to obtain additional shareholder and contract owner approval. This arrangement permits John Hancock and the Trust, under certain circumstances, to select or change subadvisers, enter into new agreements with subadvisers or amend existing agreements with subadvisers, without first obtaining shareholder approval. (The Fund must still obtain shareholder approval of any agreement with a subadviser that is an affiliate of John Hancock.) John Hancock believes that the arrangement permits changes in subadvisory arrangements faster and at lower cost, since the need for the Fund to seek additional shareholder approval for such changes will be reduced. Shareholders for the Fund previously approved the arrangement. Shareholders of the Fund will be notified of any changes in the subadviser to the Fund. General Information In the following pages, any strategy that is stated as a percentage of a fund's assets applies at all times, not just at the time the fund buys or sells an investment security. However, the Fund may be allowed to temporarily deviate from its normal strategy (1) to avoid unnecessary transaction costs when markets are are unusually volatile, or (2) when the Fund experiences unusually large cash flows. In addition, investments in a company whose market capitalization was within the range of market capitalizations under a fund's 80% investment policy at the time of purchase may continue to be considered within that range even after the publisher of an index changes the constituents used by the fund to measure market capitalization. The fund may not achieve its investment objectives when taking any of these measures. The trustees of the Trust can change the investment goals and strategy of the Fund without shareholder (i.e., contractowner) approval. If the total investment return for the Fund for any given year appears unusually high, the return may be attributable to unusually favorable market conditions which will probably not be sustainable. For instance, a high total investment return may reflect participation in IPOs, "hot" industries (e.g., internet-related companies), private placements and/or leveraging investment techniques during the period indicated. There is no assurance that any of those methods, or any other investment technique, will continue to have the same impact on the Fund's total investment returns. In this prospectus, the term "stock" is used as a shorthand reference for equity investments generally and the term "bond" is used as a shorthand reference for debt obligations generally. 3 International Equity Index Fund GOAL AND STRATEGY This is an international stock fund that seeks to track the performance of a broad-based equity index of foreign companies primarily in developed countries and, to a lesser extent, in emerging market countries. The Fund seeks to invest more than 80% of its assets in securities included in the Morgan Stanley Capital International All Country World Excluding U.S. ("MSCI ACW ex-US") Index. The MSCI ACW ex-US Index is a well known international stock market index that, as of December 31, 2003, included approximately 1,700 securities listed on the stock exchanges of 48 developed and emerging market countries (but not the United States). The manager employs a passive management strategy by normally investing in all stocks included in the MSCI ACW ex-US Index. The manager normally invests in each stock in roughly the same proportion as represented in the Index. The manager seeks to replicate as closely as possible the aggregate risk characteristics and country diversification of the Index. The Index composition changes from time to time. The manager will reflect those changes as soon as practical. The Fund is normally fully invested. The manager may invest in stock index futures to maintain market exposure and manage cash flow. Although the Fund may employ foreign currency hedging techniques, the Fund normally maintains the currency exposure of the underlying equity investments. The Fund may purchase other types of securities that are not primary investment vehicles, for example: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), certain Exchange Traded Funds (ETFs), cash equivalents, and certain derivatives (investments whose value is based on indices or other securities). As an example of how derivatives may be used, the Fund may invest in stock index futures to manage cash flow. 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 SSgA Funds Management, Inc. One Lincoln Street Boston, Massachusetts 02110-2900 Managing, with predecessor, since 1978 Managing Fund since March, 2004 Managed approximately $92 billion in assets at year-end 2003 Past Performance information set forth herein does not reflect SSgA Funds Management, Inc. services to the Fund. FUND MANAGERS Managed by investment team overseen by: James Francis, CFA - --------------------- Principal of subadviser Joined subadviser in 1987 Jeffrey Beach - --------------------- Principal of subadviser Joined subadviser in 1986 Note: "MSCI" and "MSCI All Country World ex-US Index" are the exclusive property of Morgan Stanley & Co., Incorporated and are registered service marks of Morgan Stanley Capital International. PAST PERFORMANCE The following bar chart and table of average annual total returns reflects the performance of the Fund's NAV shares during the period shown (along with a broad-based market index for reference). Series I and Series II shares were not offered during this period. The performance of Series I shares will be lower than NAV performance due to its 12b-1 Fee. The performance of Series II shares will be lower than NAV performance or Series I performance due to its higher 12b-1 Fee. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. If such fees and charges had been reflected, performance would be lower. Past performance does not indicate future results. Year-by year total returns for NAV shares -- calendar years LOGO Best quarter: up 20.91% fourth quarter 1998 Worst quarter: down 20.18% third quarter 2002
Average annual total returns for NAV Shares -- for periods ending 12/31/03 Fund Index 1 Index 2 Index 3* 1 year 41.99% 41.41% 43.61% 44.58% 5 years 0.74% 1.55% 1.04% 1.43% 10 years 2.80% 4.66% 6.37% 5.65%
Index 1: MSCI ex US Index Index 2: MSCI EAFE GDP Index Index 3: A composite index combining the performance of the following indices over the periods indicated: MSCI EAFE Index (from January, 1994 through April, 1998); MSCI EAFE GDP Index (from May, 1998 through June, 1999); 90% MSCI EAFE GDP Index/10% MSCI Emerging Markets Free Index (from July, 1999 through October, 2003); MSCI ACW ex US (after November, 2003) * 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 changes in investment strategy during that period. 4 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. Index Management Risk: Certain factors such as the following may cause the Fund to track the Indexes less closely: .. The securities selected by the manager may not be fully representative of the Indexes. .. Transaction expenses of the Fund may result in the Fund's performance being different than that of the Indexes. .. The size and timing of the Fund's cash flows may result in the Fund's performance being different than that of the Indexes. Also, index funds like this one will have more difficulty in taking defensive positions in abnormal market conditions. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally considered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FEES AND EXPENSES OF THE FUND The following table describes the fees and expenses you may pay if you buy and hold Series I shares or Series II shares of the Fund and do not reflect the expenses and charges of any variable insurance contract which may use the Fund as an underlying investment medium. Those expenses and charges may vary considerably from contract to contract, and are listed in the prospectus for the variable contract. The Fund does not charge a sales load or a surrender fee. Annual Fund Operating Expenses/1/ (expenses that are deducted from Fund assets, as a percentage of average net assets for the fiscal year ended December 31, 2003)
Distribution Total Annual Investment and Fund Management Service Other Operating Fee (12b-1) Fee Expenses/2/ Expenses --- ----------- ----------- -------- Series I. 0.17% 0.40% 0.05% 0.62% Series II 0.17% 0.60% 0.05% 0.82%
/1/ Amounts shown are estimates, based on the average net assets of the Fund's NAV shares, because the International Equity Index Fund has not yet issued Series I and Series II shares. /2/ Amounts shown (a) reflect discontinuance of John Hancock's agreement to reimburse the Fund for "other fund expenses" in 2003 that exceeded 0.10% per annum of the Fund's average daily net assets and (b) the custodian's agreement, effective April 1, 2004, to reduce its fees for this Fund. Examples. The Examples are intended to help you compare the cost of investing in Series I or Series II shares of the Fund with the costs of investing in other mutual funds. The Examples assume that you invest $10,000 directly in the shares for the time periods indicated, and then redeem all your shares at the end of those periods. The Examples also assume that your investment has a 5% return each year, the reinvestment of all dividends and distributions, and that the Fund's operating expenses remain the same. Although actual Fund costs may be higher or lower, the Examples show what the Fund costs would be based on these assumptions.
Year 1 Year 3 Year 5 Year 10 Series I. $ 63 $199 $346 $ 455 Series II $84 $262 $774 $1,014
5 Your Account Investments in shares of the funds The Fund sells its Series I and Series II shares directly to separate accounts of insurance companies to fund variable contracts. Each fund also buys back its Series I and Series II shares on redemption by the separate accounts. Under the variable contracts, a separate account buys or redeems a fund's shares based on: .. instructions by you and other contractowners to invest or receive back monies under a contract (such as making a premium payment or surrendering a contract), and .. the operation of a contract (such as deduction of fees and charges). The Trust, as law permits, may: .. refuse a buy order if the adviser believes it would disrupt management .. suspend a fund's offer of shares, or .. suspend a fund's redemption obligation or postpone a fund's payment of redemption proceeds for more than seven days. Share price The Fund sells and buys back its Series I and Series II shares at the net asset value per share next computed after receipt by a separate account of a contractowner's instructions. The Fund calculates its net asset value per share: .. by dividing net assets of the Series by the number of its outstanding shares, .. once daily as of the close of regular trading on the New York Stock Exchange (generally at 4 p.m. New York time) on each day the Exchange is open. Valuation The Fund values its 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. The 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. The Fund may hold securities primarily listed on foreign exchanges that trade on weekends or other days when the Trust does not calculate share price. Consequently, share price may change on days when contractowners will not be able to instruct a separate account to buy or redeem fund shares. Conflicts The Trust's trustees monitor for possible material irreconcilable conflicts among separate accounts buying shares of the Fund. The Trust's net asset value could decrease if the Trust had to sell investment securities to pay redemption proceeds to a separate account withdrawing because of a conflict. 6 Funds' Expenses The advisory fee paid by the International Equity Index Fund to the adviser in 2003 was 0.17% of net assets The adviser, not the Fund, pays subadvisory fees out of its own assets. Dividends and Taxes Dividends The Fund automatically reinvests its dividends and distributions in additional shares of the fund at net asset value per share. The Fund declares and pays dividends monthly. The Fund generally declares capital gains distributions annually. Taxes The Fund must meet investment diversification and other requirements under the Internal Revenue Code, in order to: .. avoid federal income tax and excise tax, and .. assure the tax-deferred treatment of variable contracts under the Code. You should read the prospectus for your variable contract for the federal income tax consequences for contractowners, including the consequences of a fund's failure to meet Code requirements. Share Classes Multiple Classes of Shares The Trust has four classes of shares: NAV shares, Series I shares, Series II shares and Series III shares. Each class is identical except for differences in class expenses, including different Rule 12b-1 fees, and voting rights. (NAV shares of the International Equity Index Fund, which are described in the prospectus relating to that class' shares, are not subject to a Rule 12b-1 fee, and Series III shares are not currently available for sale. The offering of Series III shares and the amount of class expenses of Series III shares are subject to the approval of the Trustees of the Trust.) Series I shares of the International Equity Index Fund are subject to a Rule 12b-1 fee of .40% of Series I share average daily net assets. Series II shares of the International Equity Index Fund are subject to a Rule 12b-1 fee of .60% of Series II share average daily net assets. Rule 12b-1 fees for Series I shares and Series II shares will be paid to the Trust's Distributor for those shares, Manulife Financial Securities LLC, or any successor thereto. To the extent consistent with applicable laws, regulations and rules, the Distributor may use Rule 12b-1 fees: (i)for any expenses relating to the distribution of the shares of the respective class, (ii)for any expenses relating to shareholder or administrative services for holders of the shares of the class (or owners of contracts funded in insurance company separate accounts that invest in the shares of the class) and (iii)for the payment of "service fees" that come within Rule 2830(d)(5) of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. Without limiting the foregoing, the Distributor may pay all or 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 Fund serves as an investment vehicle as compensation for providing some or all of the types of services describe in the preceding sentence; this provision, however, does not obligate the Distributor to make any payments of Rule 12b-1 fees and does not limit the use that the Distributor may make of the Rule 12b-1 fees it receives. Currently, all such payments are made to insurance companies affiliated with the Trust's investment adviser and Distributor. However, payments may be made to nonaffiliated insurance companies in the future. Rule 12b-1 fees are paid out of a portfolio's assets on an ongoing basis. Therefore, these fees will increase the cost of an investment in the Fund and may, over time, be greater than other types of sales charges. 7 FINANCIAL HIGHLIGHTS The financial highlights detail the historical performance of the Fund's NAV shares, including total return information for the past 5 years. The total return information does not reflect: .. 12b-1 expenses of Series I shares, .. 12b-1 expenses of Series II shares, and .. expenses and charges of the applicable separate accounts and variable contracts. 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, whose report (along with the Trust's financial statements) are included in the Trust'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 --------- ----------- ----------------- ---------- International Equity Index Fund -- NAV shares ------ Year Ended December 31, 2003...... $10.05 $0.24 $ 3.91 $ 4.15 2002...... 12.07 0.21 (2.02) (1.81) 2001...... 15.39 0.22 (3.32) (3.10) 2000...... 19.64 0.23 (3.64) (3.41) 1999...... 15.56 0.21 4.51 4.72 -----------------------------------------------------------------
(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. 8 - --------------------------------------------------------------------------------
Less Distributions - ---------------------------------------------------------------------------------- Distribution Distribution From Net Distribution in Distribution Net Assets From Net Realized Excess of From Value at Total Investment Gains on Net Investment Capital Total Capital End Investment Income Investments Income/Gains Paid-in Distributions Contributions of Period Return(b) - ------------ ------------ --------------- ------------ ------------- ------------- ---------- ---------- $(0.29) $(0.09) $ -- $ -- $(0.38) $-- $13.82 41.99% (0.21) -- -- -- (0.21) -- 10.05 (15.18)% (0.17) -- -- (0.05) (0.22) -- 12.07 (20.30)% (0.18) (0.59) -- (0.07) (0.84) -- 15.39 (17.42)% (0.21) (0.38) (0.05) -- (0.64) -- 19.64 30.87% - ---------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data - ------------------------------------------------- Net Operating Investment Net Assets Expenses to Income (Loss) Portfolio End of Period Average to Average Turnover (000s Omitted) Net Assets Net Assets Rate - -------------- ----------- ------------- --------- $159,036 0.27%(b) 2.13% 37.90% 98,917 0.28%(b) 1.85% 17.55% 122,020 0.27%(b) 1.66% 8.31% 195,012 0.28%(b) 1.40% 14.86% 244,017 0.31%(b) 1.26% 19.01% - --------------------------------------------------
(b) Expense ratio is net of expense reimbursements. Had such reimbursements not been made, the annual expense ratio would have been .42%, .46%, .40%, .37% and .38% for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively. 9 Trust Business Structure The diagram below shows the basic business structure of the Trust. The Trust's trustees oversee the Trust's investment and business activities and hire various service providers to carry out the Trust's operations. VARIABLE CONTRACTOWNERS THE MANUFACTURERS LIFE INSURANCE COMPANY OF NEW YORK, THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A) OR OTHER INSURANCE COMPANY THE TRUST Trustee oversee the Trust's investment and business activities INVESTMENT ADVISER CUSTODIAN John Hancock Life State Street Bank and Trust Insurance Company Company Manages the Trust's investment and business Holds the Trust's assets, settles all Trust business activities trades and collects most of the valuation data required for calculating the Trust's net asset value per share. SUBADVISER TO THE INTERNATIONAL EQUITY INDEX FUND SSgA Funds Management, Inc. Provides management to the Fund. 10 For more information This prospectus should be used only with a variable contract prospectus. John Hancock Variable Series Trust I John Hancock Place Boston, Massachusetts 02117 Two documents are available that offer further information on John Hancock Variable Series Trust I: Annual/Semiannual Report to shareholders Includes financial statements, a discussion of the market conditions and investment strategies that significantly affected performance, and the auditors' report (in the annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information on all aspects of the funds. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into (i.e., is legally a part of) this prospectus. To request a free copy of the current annual/semiannual report or the SAI, or to make shareholder inquiries, please contact: By mail: John Hancock Variable Series Trust I John Hancock Place Boston, MA 02117 By phone: 1-800-732-5543 Or you may view or obtain these documents from the SEC: In person: at the SEC's Public Reference Room in Washington, DC By phone: 1-202-942-8090 By mail: Office of Public Reference Securities and Exchange Commission 450 5th Street, N.W., Room 1300 Washington, DC 20549-0102 (duplicating fee required) By e-mail: publicinfo@SEC.gov On the Internet: www.sec.gov SEC File Number: 811-4490 VSTPRO-SERIES I II
EX-99.(17)(B) 11 dex9917b.txt MANUFACTURERS INVESTMENT TRUST PROSPECTUS DATED 5/1/2004 MANUFACTURERS INVESTMENT TRUST 73 Tremont Street, Boston, Massachusetts 02108 Manufacturers Investment Trust (the "Trust") is an open-end management investment company, commonly known as a mutual fund, which is sold without a sales charge. Shares of the Trust are not offered directly to the public but are sold only to insurance companies and their separate accounts as the underlying investment medium for variable contracts and, in the case of Series III shares, to certain qualified plans and other permitted entities. The Trust provides a range of investment objectives through 80 separate investment portfolios, 73 of which are described in this prospectus. The names of those portfolios are as follows: SCIENCE & TECHNOLOGY TRUST PACIFIC RIM TRUST (formerly, Pacific Rim Emerging Markets Trust) HEALTH SCIENCES TRUST EMERGING GROWTH TRUST AGGRESSIVE GROWTH TRUST EMERGING SMALL COMPANY TRUST SMALL COMPANY BLEND TRUST SMALL COMPANY TRUST DYNAMIC GROWTH TRUST MID CAP STOCK TRUST NATURAL RESOURCES TRUST ALL CAP GROWTH TRUST STRATEGIC OPPORTUNITIES TRUST FINANCIAL SERVICES TRUST INTERNATIONAL STOCK TRUST OVERSEAS TRUST INTERNATIONAL SMALL CAP TRUST INTERNATIONAL VALUE TRUST QUANTITATIVE MID CAP TRUST MID CAP CORE TRUST GLOBAL TRUST (formerly Global Equity Trust) STRATEGIC GROWTH TRUST CAPITAL APPRECIATION TRUST U.S. GLOBAL LEADERS GROWTH TRUST QUANTITATIVE ALL CAP TRUST ALL CAP CORE TRUST LARGE CAP GROWTH TRUST BLUE CHIP GROWTH TRUST U.S. LARGE CAP TRUST CORE EQUITY TRUST STRATEGIC VALUE TRUST LARGE CAP VALUE TRUST CLASSIC VALUE TRUST UTILITIES TRUST REAL ESTATE SECURITIES TRUST SMALL CAP OPPORTUNITIES TRUST SMALL COMPANY VALUE TRUST SPECIAL VALUE TRUST MID CAP VALUE TRUST VALUE TRUST ALL CAP VALUE TRUST EQUITY INDEX TRUST FUNDAMENTAL VALUE TRUST GROWTH & INCOME TRUST GREAT COMPANIES -- AMERICA TRUST* QUANTITATIVE VALUE TRUST EQUITY-INCOME TRUST INCOME & VALUE TRUST GLOBAL ALLOCATION TRUST HIGH YIELD TRUST STRATEGIC BOND TRUST STRATEGIC INCOME TRUST GLOBAL BOND TRUST DIVERSIFIED BOND TRUST INVESTMENT QUALITY BOND TRUST TOTAL RETURN TRUST REAL RETURN BOND TRUST U.S. GOVERNMENT SECURITIES TRUST MONEY MARKET TRUST SMALL CAP INDEX TRUST INTERNATIONAL INDEX TRUST MID CAP INDEX TRUST TOTAL STOCK MARKET INDEX TRUST 500 INDEX TRUST LIFESTYLE AGGRESSIVE 1000 TRUST LIFESTYLE GROWTH 820 TRUST LIFESTYLE BALANCED 640 TRUST LIFESTYLE MODERATE 460 TRUST LIFESTYLE CONSERVATIVE 280 TRUST AMERICAN GROWTH TRUST AMERICAN INTERNATIONAL TRUST AMERICAN BLUE CHIP INCOME AND GROWTH TRUST AMERICAN GROWTH-INCOME TRUST *Not Currently Available for Sale NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO PERSON, INCLUDING ANY DEALER OR SALESPERSON, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, UNLESS THE INFORMATION OR REPRESENTATION IS SET FORTH IN THIS PROSPECTUS. IF ANY SUCH INFORMATION OR REPRESENTATION IS GIVEN, IT SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST, THE ADVISER OR ANY SUBADVISERS TO THE TRUST OR THE PRINCIPAL UNDERWRITER OF THE CONTRACTS. THIS PROSPECTUS IS NOT AN OFFER TO SELL SHARES OF THE TRUST IN ANY STATE WHERE SUCH OFFER OR SALE WOULD BE PROHIBITED. The date of this Prospectus is May 1, 2004 MANUFACTURERS INVESTMENT TRUST TABLE OF CONTENTS PORTFOLIO DESCRIPTIONS: INVESTMENT OBJECTIVES AND STRATEGIES, RISKS, PERFORMANCE, EXPENSES AND FINANCIAL HIGHLIGHTS.............. 1 Science & Technology Trust........................... 13 Pacific Rim Trust (formerly, Pacific Rim Emerging Markets Trust)...................................... 14 Health Sciences Trust................................ 16 Emerging Growth Trust................................ 18 Aggressive Growth Trust.............................. 19 Emerging Small Company Trust......................... 21 Small Company Blend Trust............................ 22 Small Company Trust.................................. 24 Dynamic Growth Trust................................. 25 Mid Cap Stock Trust.................................. 26 Natural Resources Trust.............................. 28 All Cap Growth Trust................................. 29 Strategic Opportunities Trust........................ 31 Financial Services Trust............................. 32 International Stock Trust............................ 33 Overseas Trust....................................... 36 International Small Cap Trust........................ 37 International Value Trust............................ 39 Quantitative Mid Cap Trust........................... 40 Mid Cap Core Trust................................... 41 Global Trust (formerly, Global Equity Trust)......... 42 Strategic Growth Trust............................... 44 Capital Appreciation Trust........................... 45 U.S. Global Leaders Growth Trust..................... 47 Quantitative All Cap Trust........................... 48 All Cap Core Trust................................... 49 Large Cap Growth Trust............................... 51 Blue Chip Growth Trust............................... 52 U.S. Large Cap Trust................................. 54 Core Equity Trust.................................... 56 Strategic Value Trust................................ 57 Large Cap Value Trust................................ 58 Classic Value Trust.................................. 60 Utilities Trust...................................... 61 Real Estate Securities Trust......................... 63 Small Cap Opportunities Trust........................ 66 Small Company Value Trust............................ 67 Special Value Trust.................................. 68 Mid Cap Value Trust.................................. 69 Value Trust.......................................... 71 All Cap Value Trust.................................. 72 Equity Index Trust................................... 73 Fundamental Value Trust.............................. 75 Growth & Income Trust................................ 77 Great Companies -- America Trust..................... 78 Quantitative Value Trust............................. 80 Equity-Income Trust.................................. 81 Income & Value Trust................................. 83 Global Allocation Trust.............................. 85 High Yield Trust..................................... 87 Strategic Bond Trust................................. 88 Strategic Income Trust............................... 91 Global Bond Trust.................................... 92 Diversified Bond Trust............................... 94
Investment Quality Bond Trust........................ 95 Total Return Trust................................... 97 Real Return Bond Trust............................... 99 U.S. Government Securities Trust..................... 101 Money Market Trust................................... 103 The Index Trusts..................................... 104 The Lifestyle Trusts................................. 109 American Growth Trust................................ 114 American International Trust......................... 115 American Blue Chip Income and Growth Trust........... 115 American Growth-Income Trust......................... 116 ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS' INVESTMENTS.... 120 Risks of Investing in Certain Types of Securities...... 120 Additional Investment Policies......................... 125 Hedging and Other Strategic Transactions............... 127 MANAGEMENT OF THE TRUST..................................... 128 Advisory Arrangements.................................. 128 Subadvisory Arrangements............................... 134 MULTIPLE CLASS PRICING; RULE 12B-1 PLANS.................... 134 GENERAL INFORMATION......................................... 135 Taxes.................................................. 135 Dividends.............................................. 136 Purchase and Redemption of Shares...................... 136 Disruptive Short Term Trading.......................... 137 Purchasers of Shares of the Trust...................... 137 FINANCIAL HIGHLIGHTS........................................ 138 Additional Information................................. 173
PORTFOLIO DESCRIPTIONS: INVESTMENT OBJECTIVES AND STRATEGIES, RISKS, PERFORMANCE AND FINANCIAL HIGHLIGHTS The Trust is a series trust which currently has 80 separate investment portfolios, 73 of which are described in this prospectus. The investment objectives, principal investment strategies and principal risks of the portfolios are set forth in the portfolio descriptions below, together with performance information and financial highlights for each portfolio. Manufacturers Securities Services, LLC is the investment adviser to the Trust, and each portfolio has its own subadviser. INVESTMENT OBJECTIVES AND STRATEGIES Each portfolio has a stated investment objective which it pursues through separate investment strategies or policies and which may only be changed with the approval of the shareholders of the portfolio. There can be no assurance that the portfolio will achieve its investment objective. The differences in objectives and policies among the portfolios can be expected to affect the return of each portfolio and the degree of market and financial risk to which each portfolio is subject. Additional information about the portfolios' investment policies is set forth under "Additional Investment Policies." Temporary Defensive Investing. Except as otherwise stated below in the description of a particular portfolio, during unusual or unsettled market conditions, for purposes of meeting redemption requests, or pending investment of its assets, each portfolio may invest all or a portion of its assets in cash and securities that are highly liquid, including (a) high quality money market instruments such as short-term U.S. government obligations, commercial paper, repurchase agreements or other cash equivalents and (b) securities of other investment companies that are money market funds. In the case of portfolios investing extensively in foreign securities, these investments may be denominated in either U.S. or non-U.S. dollars and may include debt of foreign corporations and governments and debt of supranational organizations. To the extent a portfolio is in a defensive position, its ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions. Except as otherwise stated below in the description of a particular portfolio, each portfolio is authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." More complete descriptions of the money market instruments and certain other instruments in which certain portfolios of the Trust may invest and of the options, futures, currency and other derivative transactions that certain portfolios may engage in are set forth in the Statement of Additional Information. A more complete description of the debt security ratings used by the Trust assigned by Moody's or Standard & Poor's is included in Appendix I in the Statement of Additional Information. RISKS OF INVESTING IN EACH PORTFOLIO Certain risks of investing in each portfolio are set forth in the portfolio descriptions. If these risks materialize, an investor could lose money in the portfolio. The risks of investing in the following types of securities, as well as the definition of a non-diversified portfolio and the risks associated with such a portfolio, are more fully described below under "Risks of Investing in Certain Types of Securities." -- Non-Diversified Portfolios -- Investment Company Securities -- Equity Securities -- Exchange Traded Funds (ETFs) -- Fixed Income Securities -- Stripped Securities -- Investment Grade Fixed Income Securities -- Mortgage-Backed and Asset-Backed Securities in the Lowest Rating Category -- Securities Linked to the Real Estate Market -- Lower Rated Fixed Income Securities -- Industry or Sector Investing -- Small and Medium Size Companies -- IPOs ("Initial Public Offerings") -- Foreign Securities
An investment in any of the portfolios is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Portfolio Turnover. Unless otherwise noted in the description a portfolio, each portfolio anticipates that its annual portfolio turnover rate will exceed 100%. A high portfolio turnover rate generally involves correspondingly greater brokerage commission expenses, which must be borne directly by the portfolio. The portfolio turnover rate of each of the Trust's portfolios may vary from year to year, as well as within a year. Portfolio turnover rates are set forth in the Financial Highlights included in each portfolio description. See also "Portfolio Turnover" in the Statement of Additional Information. 1 PERFORMANCE INFORMATION FOR EACH PORTFOLIO Each portfolio description contains a bar chart and a performance table which provide some indication of the risks of investing in each portfolio of the Trust. Bar Chart. The bar chart shows changes in the performance of Series I shares (formerly referred to as Class A shares) of each portfolio from year to year over a ten-year period. The performance of Series II shares (formerly referred to as Class B shares) and Series III shares (also referred to as "Class R shares") of each portfolio would be lower due to the higher Rule 12b-1 fees. Portfolios with less than ten years of performance history show performance from the inception date of the portfolio. Performance Table. The table compares each portfolio's one, five and ten year average annual returns as of December 31, 2003 for each series of shares to those of a broad measure, and in some cases to an index, of market performance. If the period since inception of the portfolio is less than one year, the performance shown will be the actual total return rather than an annualized total return. Performance information in the Bar Chart and the Performance Table reflects all fees charged to each portfolio such as advisory fees and all portfolio expenses. None of the portfolios charges a sales load or a surrender fee. The performance information does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. FEES AND EXPENSES FOR EACH PORTFOLIO The table below describes the fees and expenses for each class of shares of each portfolio of the Trust offered through this Prospectus. None of the portfolios charge a sales load or surrender fee. The fees and expenses do not reflect the fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. In the case of variable insurance contracts, such fees and expenses are listed in the prospectus for the variable insurance contract. TRUST ANNUAL EXPENSES (as a percentage of a portfolio's average net assets for the fiscal year ended December 31, 2003)
- --------------------------------------------------------------------------------------------------------------------------------- MANAGEMENT TRUST PORTFOLIO FEES 12B-1 FEES OTHER EXPENSES TOTAL TRUST ANNUAL EXPENSES - --------------------------------------------------------------------------------------------------------------------------------- SERIES SERIES SERIES SERIES I & SERIES SERIES SERIES SERIES I II III SERIES II III(G+) I II III(+) - --------------------------------------------------------------------------------------------------------------------------------- Science & Technology 0.95%(C) 0.15% 0.35% 0.50% 0.09% 0.09% 1.19% 1.39% 1.54% - --------------------------------------------------------------------------------------------------------------------------------- Pacific Rim 0.70% 0.15% 0.35% 0.50% 0.43% 0.43% 1.28% 1.48% 1.63% - --------------------------------------------------------------------------------------------------------------------------------- Health Sciences 0.95%(C) 0.15% 0.35% 0.50% 0.13% 0.14% 1.23% 1.43% 1.59% - --------------------------------------------------------------------------------------------------------------------------------- Emerging Growth 0.70% 0.15% 0.35% 0.50% 1.69% 1.69% 2.54%(E) 2.74%(E) 2.89% - --------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 0.85% 0.15% 0.35% 0.50% 0.09% 0.09% 1.09% 1.29% 1.44% - --------------------------------------------------------------------------------------------------------------------------------- Emerging Small Company 0.90% 0.15% 0.35% 0.50% 0.06% 0.06% 1.11% 1.31% 1.46% - --------------------------------------------------------------------------------------------------------------------------------- Small Company Blend 0.90% 0.15% 0.35% N/A 0.10% N/A 1.15% 1.35% N/A - --------------------------------------------------------------------------------------------------------------------------------- Small Company 0.95% 0.15% 0.35% N/A 0.12%(A) N/A 1.22% 1.42% N/A - --------------------------------------------------------------------------------------------------------------------------------- Dynamic Growth 0.85% 0.15% 0.35% N/A 0.09% N/A 1.09% 1.29% N/A - --------------------------------------------------------------------------------------------------------------------------------- Mid Cap Stock 0.77% 0.15% 0.35% 0.50% 0.07% 0.07% 0.99% 1.19% 1.34% - --------------------------------------------------------------------------------------------------------------------------------- Natural Resources 0.92% 0.15% 0.35% 0.50% 0.14% 0.14% 1.21% 1.41% 1.56% - --------------------------------------------------------------------------------------------------------------------------------- All Cap Growth 0.80% 0.15% 0.35% 0.50% 0.06% 0.06% 1.01% 1.21% 1.36% - --------------------------------------------------------------------------------------------------------------------------------- Strategic Opportunities 0.70% 0.15% 0.35% N/A 0.08% N/A 0.93% 1.13% N/A - --------------------------------------------------------------------------------------------------------------------------------- Financial Services 0.79% 0.15% 0.35% 0.50% 0.11% 0.11% 1.05% 1.25% 1.40% - --------------------------------------------------------------------------------------------------------------------------------- International Stock 0.85% 0.15% 0.35% 0.50% 0.17% 0.17% 1.17% 1.37% 1.52% - --------------------------------------------------------------------------------------------------------------------------------- Overseas 0.80% 0.15% 0.35% 0.50% 0.18% 0.18% 1.13% 1.33% 1.48% - --------------------------------------------------------------------------------------------------------------------------------- International Small Cap 0.93% 0.15% 0.35% 0.50% 0.24% 0.24% 1.32% 1.52% 1.67% - --------------------------------------------------------------------------------------------------------------------------------- International Value 0.81%(F) 0.15% 0.35% 0.50% 0.17% 0.17% 1.13% 1.33% 1.48% - --------------------------------------------------------------------------------------------------------------------------------- Quantitative Mid Cap 0.65% 0.15% 0.35% N/A 0.10% N/A 0.90% 1.10% N/A - --------------------------------------------------------------------------------------------------------------------------------- Mid Cap Core 0.82% 0.15% 0.35% 0.50% 0.24% 0.24% 1.21% 1.41% 1.56% - --------------------------------------------------------------------------------------------------------------------------------- Global 0.75%(F) 0.15% 0.35% 0.50% 0.15% 0.15% 1.05% 1.25% 1.40% - ---------------------------------------------------------------------------------------------------------------------------------
2
- -------------------------------------------------------------------------------------------------------------------------------- MANAGEMENT TRUST PORTFOLIO FEES 12B-1 FEES OTHER EXPENSES TOTAL TRUST ANNUAL EXPENSES - -------------------------------------------------------------------------------------------------------------------------------- SERIES SERIES SERIES SERIES I & SERIES SERIES SERIES SERIES I II III SERIES II III(G) I II III+ - -------------------------------------------------------------------------------------------------------------------------------- Strategic Growth 0.75% 0.15% 0.35% 0.50% 0.09% 0.09% 0.99% 1.19% 1.34% - -------------------------------------------------------------------------------------------------------------------------------- Capital Appreciation 0.75% 0.15% 0.35% 0.50% 0.09% 0.09% 0.99% 1.19% 1.34% - -------------------------------------------------------------------------------------------------------------------------------- U.S. Global Leaders Growth 0.61% 0.15% 0.35% N/A 0.14%(A) N/A 0.90% 1.10% N/A - -------------------------------------------------------------------------------------------------------------------------------- Quantitative All Cap 0.65% 0.15% 0.35% 0.50% 1.79% 1.79% 2.59%(E) 2.79%(E) 2.94% - -------------------------------------------------------------------------------------------------------------------------------- All Cap Core 0.70% 0.15% 0.35% N/A 0.08% N/A 0.93% 1.13% N/A - -------------------------------------------------------------------------------------------------------------------------------- Large Cap Growth 0.75% 0.15% 0.35% N/A 0.07% N/A 0.97% 1.17% N/A - -------------------------------------------------------------------------------------------------------------------------------- Blue Chip Growth 0.72%(C) 0.15% 0.35% 0.50% 0.05% 0.05% 0.92% 1.12% 1.27% - -------------------------------------------------------------------------------------------------------------------------------- U.S. Large Cap 0.73% 0.15% 0.35% 0.50% 0.05% 0.05% 0.93% 1.13% 1.28% - -------------------------------------------------------------------------------------------------------------------------------- Core Equity 0.75% 0.15% 0.35% N/A 0.12%(A) N/A 1.02% 1.22% N/A - -------------------------------------------------------------------------------------------------------------------------------- Strategic Value 0.75% 0.15% 0.35% 0.50% 0.14% 0.14% 1.04% 1.24% 1.39% - -------------------------------------------------------------------------------------------------------------------------------- Classic Value 0.78% 0.15% 0.35% N/A 0.10%(A) N/A 1.03% 1.23% N/A - -------------------------------------------------------------------------------------------------------------------------------- Large Cap Value 0.75% 0.15% 0.35% N/A 1.96% N/A 2.86%(E) 3.06%(E) N/A - -------------------------------------------------------------------------------------------------------------------------------- Utilities 0.75% 0.15% 0.35% 0.50% 0.41% 0.41% 1.31% 1.51% 1.66% - -------------------------------------------------------------------------------------------------------------------------------- Real Estate Securities 0.60% 0.15% 0.35% 0.50% 0.05% 0.06% 0.80% 1.00% 1.16% - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Opportunities 0.90% 0.15% 0.35% 0.50% 0.18% 0.18% 1.23% 1.43% 1.58% - -------------------------------------------------------------------------------------------------------------------------------- Small Company Value 0.90%(C) 0.15% 0.35% 0.50% 0.06% 0.06% 1.11% 1.31% 1.46% - -------------------------------------------------------------------------------------------------------------------------------- Special Value 0.90% 0.15% 0.35% 0.50% 0.59% 0.59% 1.64%(E) 1.84%(E) 1.99% - -------------------------------------------------------------------------------------------------------------------------------- Mid Cap Value 0.78% 0.15% 0.35% 0.50% 0.06% 0.06% 0.99% 1.19% 1.34% - -------------------------------------------------------------------------------------------------------------------------------- Value 0.65% 0.15% 0.35% N/A 0.07% N/A 0.87% 1.07% N/A - -------------------------------------------------------------------------------------------------------------------------------- All Cap Value 0.75% 0.15% 0.35% 0.50% 0.08% 0.08% 0.98% 1.18% 1.33% - -------------------------------------------------------------------------------------------------------------------------------- Equity Index 0.25% N/A N/A N/A 0.25% N/A 0.50%(E) N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Fundamental Value 0.76% 0.15% 0.35% 0.50% 0.06% 0.06% 0.97% 1.17% 1.32% - -------------------------------------------------------------------------------------------------------------------------------- Growth & Income 0.55% 0.15% 0.35% 0.50% 0.05% 0.05% 0.75% 0.95% 1.10% - -------------------------------------------------------------------------------------------------------------------------------- Great Companies -- America 0.75% N/A 0.35% N/A 2.04% N/A N/A 3.14%(E) N/A - -------------------------------------------------------------------------------------------------------------------------------- Quantitative Value 0.60% 0.15% 0.35% N/A 0.11%(A) N/A 0.86% 1.06% N/A - -------------------------------------------------------------------------------------------------------------------------------- Equity-Income 0.72%(C) 0.15% 0.35% 0.50% 0.05% 0.05% 0.92% 1.12% 1.27% - -------------------------------------------------------------------------------------------------------------------------------- Income & Value 0.65% 0.15% 0.35% N/A 0.07% N/A 0.87% 1.07% N/A - -------------------------------------------------------------------------------------------------------------------------------- Global Allocation 0.75% 0.15% 0.35% N/A 0.32% N/A 1.22% 1.42% N/A - -------------------------------------------------------------------------------------------------------------------------------- High Yield 0.61% 0.15% 0.35% 0.50% 0.06% 0.06% 0.82% 1.02% 1.17% - -------------------------------------------------------------------------------------------------------------------------------- Strategic Bond 0.62% 0.15% 0.35% 0.50% 0.09% 0.09% 0.86% 1.06% 1.21% - -------------------------------------------------------------------------------------------------------------------------------- Strategic Income 0.63% 0.15% 0.35% N/A 0.18%(A) N/A 0.96% 1.16% N/A - -------------------------------------------------------------------------------------------------------------------------------- Global Bond 0.60% 0.15% 0.35% 0.50% 0.16% 0.16% 0.91% 1.11% 1.26% - -------------------------------------------------------------------------------------------------------------------------------- Diversified Bond 0.60% 0.15% 0.35% 0.50% 0.08% 0.08% 0.83% 1.03% 1.18% - -------------------------------------------------------------------------------------------------------------------------------- Investment Quality Bond 0.50% 0.15% 0.35% 0.50% 0.10% 0.11% 0.75% 0.95% 1.11% - -------------------------------------------------------------------------------------------------------------------------------- Total Return 0.60% 0.15% 0.35% 0.50% 0.07% 0.13% 0.82% 1.02% 1.23% - -------------------------------------------------------------------------------------------------------------------------------- Real Return Bond 0.60% 0.15% 0.35% 0.50% 0.08% 0.08% 0.83% 1.03% 1.18% - -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Securities 0.51% 0.15% 0.35% 0.50% 0.07% 0.09% 0.73% 0.93% 1.10% - -------------------------------------------------------------------------------------------------------------------------------- Money Market 0.35% 0.15% 0.35% 0.50% 0.05% 0.50% 0.55% 0.75% 1.35% - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93% - -------------------------------------------------------------------------------------------------------------------------------- International Index 0.40% 0.15% 0.35% 0.50% 0.07% 0.07% 0.62%(D) 0.82%(D) 0.97% - -------------------------------------------------------------------------------------------------------------------------------- Mid Cap Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93% - -------------------------------------------------------------------------------------------------------------------------------- Total Stock Market Index 0.38% 0.15% 0.35% 0.50% 0.05% 0.05% 0.58% 0.78% 0.93% - -------------------------------------------------------------------------------------------------------------------------------- 500 Index 0.38% 0.15% 0.35% 0.50% 0.04% 0.04% 0.57% 0.77% 0.92% - --------------------------------------------------------------------------------------------------------------------------------
3
- ------------------------------------------------------------------------------------------------------- TOTAL TRUST MANAGEMENT OTHER ANNUAL TRUST PORTFOLIO FEES 12B-1 FEES EXPENSES(B) EXPENSES(B) - ------------------------------------------------------------------------------------------------------- Lifestyle Aggressive 1000 Trust -- Series I 0.06% N/A 1.07% 1.13% Lifestyle Aggressive 1000 Trust -- Series II - ------------------------------------------------------------------------------------------------------- Lifestyle Growth 820 Trust -- Series I 0.05% N/A 1.00% 1.05% Lifestyle Growth 820 Trust -- Series II - ------------------------------------------------------------------------------------------------------- Lifestyle Balanced 640 Trust -- Series I 0.05% N/A 0.94% 0.99% Lifestyle Balanced 640 Trust -- Series II - ------------------------------------------------------------------------------------------------------- Lifestyle Moderate 460 Trust -- Series I 0.05% N/A 0.91% 0.96% Lifestyle Moderate 460 Trust -- Series II - ------------------------------------------------------------------------------------------------------- Lifestyle Conservative 280 Trust -- Series I 0.06% N/A 0.85% 0.91% Lifestyle Conservative 280 Trust -- Series II - ------------------------------------------------------------------------------------------------------- Lifestyle Aggressive 1000 Trust -- Series III 0.06% 0.15% 1.07%+ 1.28%+ - ------------------------------------------------------------------------------------------------------- Lifestyle Growth 820 Trust -- Series III 0.05% 0.15% 1.00%+ 1.20%+ - ------------------------------------------------------------------------------------------------------- Lifestyle Balanced 640 Trust -- Series III 0.05% 0.15% 0.95%+ 1.15%+ - ------------------------------------------------------------------------------------------------------- Lifestyle Moderate 460 Trust -- Series III 0.05% 0.15% 0.91%+ 1.11%+ - ------------------------------------------------------------------------------------------------------- Lifestyle Conservative 280 Trust -- Series III 0.06% 0.15% 0.89% 1.10%+ - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------ MANAGEMENT OTHER TOTAL TRUST TRUST PORTFOLIO FEES 12B-1 FEES EXPENSES ANNUAL EXPENSES - ------------------------------------------------------------------------------------------------------ SERIES SERIES SERIES I & SERIES SERIES I II SERIES II I II - ------------------------------------------------------------------------------------------------------ American Growth Trust(H) 0.37% 0.60% 0.75% 0.05% 1.02% 1.17% - ------------------------------------------------------------------------------------------------------ American International Trust(H) 0.57% 0.60% 0.75% 0.10% 1.27% 1.42% - ------------------------------------------------------------------------------------------------------ American Blue Chip Income and Growth 0.50% 0.60% 0.75% 0.05% 1.15% 1.30% Trust(H) - ------------------------------------------------------------------------------------------------------ American Growth-Income Trust(H) 0.33% 0.60% 0.75% 0.04% 0.97% 1.12% - ------------------------------------------------------------------------------------------------------
+Commencement of operations -- September 5, 2003. Based on estimates for the current fiscal year as operating results are for a period of less than 6 months. (A)Based on estimates for the current fiscal year. (B)"Other Expenses" reflects the expenses of the Underlying Portfolios as well as the expenses of the Lifestyle Trust. The Adviser is currently paying a portion of the expenses of each Lifestyle Trust. This voluntary expense reimbursement may be terminated at any time. The expenses above do not reflect this expense reimbursement. (C)The Adviser has voluntarily agreed to waive a portion of its advisory fee for the Science & Technology Trust, Health Sciences Trust, Small Company Value Trust, the Blue Chip Growth Trust and the Equity-Income Trust. The waiver is based on the combined assets of these portfolios once they exceed specified amounts, the fee reduction is increased. The fee reductions are applied to the advisory fees of each of the five portfolios. This voluntary fee waiver may be terminated at any time by the Adviser. If such advisory fee waiver were reflected, it is estimated that the advisory fees for these portfolios would have been as follows: Science & Technology Trust.................................. 0.92% Health Sciences Trust....................................... 0.93% Small Company Value Trust................................... 0.59% Blue Chip Growth Trust...................................... 0.70% Equity-Income Trust......................................... 0.69%
(D)MSS has voluntarily agreed to pay expenses of each Index Trust (excluding the advisory fee) that exceed the following amounts: 0.050% in the case of the International Index Trust and 500 Index Trust and 0.075% in the case of the Small Cap 4 Index Trust, the Mid Cap Index Trust and Total Stock Market Index Trust. If such expense reimbursement were reflected, it is estimated that "Other Expenses" and "Total Trust Annual Expenses would be as follows: SERIES I
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- International Index Trust........................... 0.05% 0.60%
SERIES II
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- International Index Trust........................... 0.05% 0.80%
SERIES III
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- International Index Trust........................... 0.05% 0.95%
It is estimated that the expense reimbursement will not be effective during the year end December 31, 2004 for the Small Cap Index Trust, the Mid Cap Index Trust, the Total Stock Market Index Trust and the 500 Index Trust. The expense reimbursement may be terminated at any time by MSS. (E)For all portfolios except the Lifestyle Trusts, the Adviser reduces its advisory fee or reimburses the portfolio if the total of all expenses (excluding advisory fees, Rule 12b-1 fees, taxes, portfolio brokerage commissions, interest, litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the portfolio's business) exceed certain annual rates. In the case of the Emerging Growth Trust, Quantitative All Cap Trust, Large Cap Value Trust, Special Value Trust, Equity Index Trust, and Great Companies -- America Trust, the Adviser reimbursed the portfolio for certain expenses for the year ended December 31, 2003. If such expense reimbursement were reflected, it is estimated that "Other Expenses" and "Total Trust Annual Expenses" would be: SERIES I
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- Emerging Growth Trust............................... 0.50% 1.35% Quantitative All Cap Trust.......................... 0.50% 1.30% Large Cap Value Trust............................... 0.50% 1.40% Special Value Trust................................. 0.50% 1.55% Equity Index Trust.................................. 0.15% 0.40%
SERIES II
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- Emerging Growth Trust............................... 0.50% 1.55% Quantitative All Cap Trust.......................... 0.50% 1.50% Large Cap Value Trust............................... 0.50% 1.60% Special Value Trust................................. 0.50% 1.75% Great Companies -- America Trust.................... 0.50% 1.60%
These voluntary expense reimbursements may be terminated at any time. (F)Effective December 9, 2003, due to a decrease in the subadvisory fees for the Global Trust and the International Value Trust, the Adviser voluntarily agreed to waive its advisory fees so that the amount retained by the Adviser after payment of the subadvisory fees for each such portfolio does not exceed 0.35% of the portfolio's average net assets. For the year ended December 31, 2003, the effective annual advisory fee for the Global Trust and the International Value Trust was 0.75% and 0.81%, respectively. Had the lower subadvisory fees and this fee waiver been in effect for the year ended December 31, 2003, the effective annual advisory fee would have been 0.70% for the Global Trust and 0.70% for the International Value Trust. These advisory fee waivers may be rescinded at any time. 5 (G)The Adviser has voluntarily agreed to reimburse certain "Other Expenses" of Series III shares. This voluntary expense reimbursement may be terminated at any time. The expenses reflected in the table above are absent reimbursement. If such expense reimbursement were reflected, it is estimated that "Other Expenses" and "Total Trust Annual Expenses" would be: SERIES III
TOTAL TRUST OTHER EXPENSES ANNUAL EXPENSES -------------- --------------- Science & Technology................................ 0.06% 1.51% Pacific Rim......................................... 0.43% 1.63% Health Sciences..................................... 0.11% 1.56% Emerging Growth..................................... 0.50% 1.70% Emerging Small Company.............................. 0.06% 1.46% Mid Cap Stock....................................... 0.07% 1.34% Natural Resources................................... 0.14% 1.56% Financial Services.................................. 0.11% 1.40% International Small Cap............................. 0.16% 1.59% Global.............................................. 0.15% 1.40% Strategic Growth.................................... 0.09% 1.34% Quantitative All Cap................................ 0.50% 1.65% Blue Chip Growth.................................... 0.03% 1.25% Utilities........................................... 0.41% 1.66% Real Estate Securities.............................. 0.05% 1.15% Special Value....................................... 0.50% 1.90% Mid Cap Value....................................... 0.06% 1.34% All Cap Value....................................... 0.08% 1.33% Fundamental Value................................... 0.06% 1.32% Growth & Income..................................... 0.05% 1.10% Equity-Income....................................... 0.02% 1.24% High Yield.......................................... 0.06% 1.17% Strategic Bond...................................... 0.09% 1.21% Global Bond......................................... 0.16% 1.26% Investment Quality Bond............................. 0.10% 1.10% Total Return........................................ 0.07% 1.17% Real Return Bond.................................... 0.08% 1.18% U.S. Government Securities.......................... 0.07% 1.08% Money Market........................................ 0.05% 0.90% Small Cap Index..................................... 0.05% 0.93% International Index................................. 0.05% 0.95% Mid Cap Index....................................... 0.05% 0.93% Total Stock Market Index............................ 0.05% 0.93% 500 Index........................................... 0.04% 0.92% Lifestyle Aggressive 1000 Trust III................. 1.07% 1.27% Lifestyle Growth 820 Trust III...................... 1.00% 1.20% Lifestyle Balanced 640 Trust III.................... 0.94% 1.14% Lifestyle Moderate 460 Trust III.................... 0.91% 1.11% Lifestyle Conservative 280 Trust III................ 0.85% 1.06%
(H)Reflects the aggregate annual operating expenses of each portfolio and its corresponding master fund. In the case of the American Blue Chip Income and Growth Trust, during the year ended December 31, 2003, Capital Research and 6 Management Company (the adviser to the American Blue Chip Income and Growth Trust) voluntarily reduced investment advisory fees to rates provided by the amended agreement effective January 1, 2004. If such fee waiver had been reflected, the advisory fee would be 0.48% and Total Trust Annual Expenses would be 1.13% for Series I and 1.28% for Series II. EXAMPLE OF EXPENSES FOR EACH PORTFOLIO The Example is intended to help an investor compare the cost of investing in each Portfolio with the cost of investing in other mutual funds. The Example assumes that $10,000 is invested in the Portfolio for the times periods indicated and then all the shares are redeemed at the end of those periods. The Example also assumes that the investment has a 5% return each year, that the Portfolio's operating expenses remain the same and that no voluntary expense reimbursements are reflected. The Example does not reflect the expenses of any variable insurance contract or qualified plan that may use the Trust as its underlying investment medium. If such expenses were reflected, the expense amounts indicated would be higher. Although a particular investor's actual expenses may be higher or lower, based on these assumptions the expenses would be: SERIES I SHARES
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Science & Technology $121 $378 $654 $1,443 - ----------------------------------------------------------------------------------------------------------------------- Pacific Rim 130 406 702 1,545 - ----------------------------------------------------------------------------------------------------------------------- Health Sciences 125 390 676 1,489 - ----------------------------------------------------------------------------------------------------------------------- Emerging Growth 257 791 1,350 2,875 - ----------------------------------------------------------------------------------------------------------------------- Aggressive Growth 111 347 601 1,329 - ----------------------------------------------------------------------------------------------------------------------- Emerging Small Company 113 353 612 1,352 - ----------------------------------------------------------------------------------------------------------------------- Small Company Blend 117 365 633 1,398 - ----------------------------------------------------------------------------------------------------------------------- Small Company 124 387 670 1,477 - ----------------------------------------------------------------------------------------------------------------------- Dynamic Growth 111 347 601 1,329 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Stock 101 315 547 1,213 - ----------------------------------------------------------------------------------------------------------------------- Natural Resources 123 384 665 1,466 - ----------------------------------------------------------------------------------------------------------------------- All Cap Growth 103 322 558 1,236 - ----------------------------------------------------------------------------------------------------------------------- Strategic Opportunities 95 296 515 1,143 - ----------------------------------------------------------------------------------------------------------------------- Financial Services 107 334 579 1,283 - ----------------------------------------------------------------------------------------------------------------------- International Stock 119 372 644 1,420 - ----------------------------------------------------------------------------------------------------------------------- Overseas 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- International Small Cap 134 418 723 1,590 - ----------------------------------------------------------------------------------------------------------------------- International Value 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- Quantitative Mid Cap 92 287 498 1,108 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Core 123 384 665 1,466 - ----------------------------------------------------------------------------------------------------------------------- Global 107 334 579 1,283 - ----------------------------------------------------------------------------------------------------------------------- Strategic Growth 101 315 547 1,213 - ----------------------------------------------------------------------------------------------------------------------- Capital Appreciation 101 315 547 1,213 - ----------------------------------------------------------------------------------------------------------------------- U.S. Global Leaders Growth 92 287 498 1,108 - ----------------------------------------------------------------------------------------------------------------------- Quantitative All Cap 262 805 1,375 2,925 - ----------------------------------------------------------------------------------------------------------------------- All Cap Core 95 296 515 1,143 - ----------------------------------------------------------------------------------------------------------------------- Large Cap Growth 99 309 536 1,190 - -----------------------------------------------------------------------------------------------------------------------
7
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Blue Chip Growth $94 $293 $509 $1,131 - ----------------------------------------------------------------------------------------------------------------------- U.S. Large Cap 95 296 515 1,143 - ----------------------------------------------------------------------------------------------------------------------- Core Equity 104 325 563 1,248 - ----------------------------------------------------------------------------------------------------------------------- Strategic Value 106 331 574 1,271 - ----------------------------------------------------------------------------------------------------------------------- Classic Value 105 328 569 1,259 - ----------------------------------------------------------------------------------------------------------------------- Large Cap Value 289 886 1,508 3,185 - ----------------------------------------------------------------------------------------------------------------------- Utilities 133 415 718 1,579 - ----------------------------------------------------------------------------------------------------------------------- Real Estate Securities 82 255 444 990 - ----------------------------------------------------------------------------------------------------------------------- Small Cap Opportunities 125 390 676 1,489 - ----------------------------------------------------------------------------------------------------------------------- Small Company Value 113 353 612 1,352 - ----------------------------------------------------------------------------------------------------------------------- Special Value 167 517 892 1,944 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Value 101 315 547 1,213 - ----------------------------------------------------------------------------------------------------------------------- Value 89 278 482 1,073 - ----------------------------------------------------------------------------------------------------------------------- All Cap Value 100 312 542 1,201 - ----------------------------------------------------------------------------------------------------------------------- Equity Index 51 160 280 628 - ----------------------------------------------------------------------------------------------------------------------- Fundamental Value 99 309 536 1,190 - ----------------------------------------------------------------------------------------------------------------------- Growth & Income 77 240 417 930 - ----------------------------------------------------------------------------------------------------------------------- Quantitative Value 88 274 477 1,061 - ----------------------------------------------------------------------------------------------------------------------- Equity-Income 94 293 509 1,131 - ----------------------------------------------------------------------------------------------------------------------- Income & Value 89 278 482 1,073 - ----------------------------------------------------------------------------------------------------------------------- Global Allocation 124 387 670 1,477 - ----------------------------------------------------------------------------------------------------------------------- High Yield 84 262 455 1,014 - ----------------------------------------------------------------------------------------------------------------------- Strategic Bond 88 274 477 1,061 - ----------------------------------------------------------------------------------------------------------------------- Strategic Income 98 306 531 1,178 - ----------------------------------------------------------------------------------------------------------------------- Global Bond 93 290 504 1,120 - ----------------------------------------------------------------------------------------------------------------------- Diversified Bond 85 265 460 1,025 - ----------------------------------------------------------------------------------------------------------------------- Investment Quality Bond 77 240 417 930 - ----------------------------------------------------------------------------------------------------------------------- Total Return 84 262 455 1,014 - ----------------------------------------------------------------------------------------------------------------------- Real Return Bond 85 265 460 1,025 - ----------------------------------------------------------------------------------------------------------------------- U.S. Government Securities 75 233 406 906 - ----------------------------------------------------------------------------------------------------------------------- Money Market 56 176 307 689 - ----------------------------------------------------------------------------------------------------------------------- Small Cap Index 59 186 324 726 - ----------------------------------------------------------------------------------------------------------------------- International Index 63 199 346 774 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Index 59 186 324 726 - ----------------------------------------------------------------------------------------------------------------------- Total Stock Market Index 59 186 324 726 - ----------------------------------------------------------------------------------------------------------------------- 500 Index 58 183 318 714 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Aggressive 1000 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Growth 820 107 334 579 1,283 - -----------------------------------------------------------------------------------------------------------------------
8
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Balanced 640 $101 $315 $547 $1,213 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Moderate 460 98 306 531 1,178 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Conservative 280 93 290 504 1,120 - ----------------------------------------------------------------------------------------------------------------------- American Growth 104 325 564 1,249 - ----------------------------------------------------------------------------------------------------------------------- American International 129 403 698 1,535 - ----------------------------------------------------------------------------------------------------------------------- American Blue Chip Income and Growth 117 366 634 1,399 - ----------------------------------------------------------------------------------------------------------------------- American Growth-Income 99 309 537 1,191 - -----------------------------------------------------------------------------------------------------------------------
SERIES II SHARES
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Science & Technology $142 $440 $761 $1,669 - ----------------------------------------------------------------------------------------------------------------------- Pacific Rim 151 468 808 1,768 - ----------------------------------------------------------------------------------------------------------------------- Health Sciences 146 452 782 1,713 - ----------------------------------------------------------------------------------------------------------------------- Emerging Growth 277 850 1,450 3,070 - ----------------------------------------------------------------------------------------------------------------------- Aggressive Growth 131 409 708 1,556 - ----------------------------------------------------------------------------------------------------------------------- Emerging Small Company 133 415 718 1,579 - ----------------------------------------------------------------------------------------------------------------------- Small Company Blend 137 428 739 1,624 - ----------------------------------------------------------------------------------------------------------------------- Small Company 145 449 776 1,702 - ----------------------------------------------------------------------------------------------------------------------- Dynamic Growth 131 409 708 1,556 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Stock 121 378 654 1,443 - ----------------------------------------------------------------------------------------------------------------------- Natural Resources 144 446 771 1,691 - ----------------------------------------------------------------------------------------------------------------------- All Cap Growth 123 384 665 1,466 - ----------------------------------------------------------------------------------------------------------------------- Strategic Opportunities 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- Financial Services 127 397 686 1,511 - ----------------------------------------------------------------------------------------------------------------------- International Stock 139 434 750 1,646 - ----------------------------------------------------------------------------------------------------------------------- Overseas 135 421 729 1,601 - ----------------------------------------------------------------------------------------------------------------------- International Small Cap 155 480 829 1,813 - ----------------------------------------------------------------------------------------------------------------------- International Value 135 421 729 1,601 - ----------------------------------------------------------------------------------------------------------------------- Quantitative Mid Cap 112 350 606 1,340 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Core 144 446 771 1,691 - ----------------------------------------------------------------------------------------------------------------------- Global 127 397 686 1,511 - ----------------------------------------------------------------------------------------------------------------------- Strategic Growth 121 378 654 1,443 - ----------------------------------------------------------------------------------------------------------------------- Capital Appreciation 121 378 654 1,443 - ----------------------------------------------------------------------------------------------------------------------- U.S. Global Leaders Growth 112 350 606 1,340 - ----------------------------------------------------------------------------------------------------------------------- Quantitative All Cap 282 865 1,474 3,119 - ----------------------------------------------------------------------------------------------------------------------- All Cap Core 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- Large Cap Growth 119 372 644 1,420 - ----------------------------------------------------------------------------------------------------------------------- Blue Chip Growth 114 356 617 1,363 - -----------------------------------------------------------------------------------------------------------------------
9
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- U.S. Large Cap $115 $359 $622 $1,375 - ----------------------------------------------------------------------------------------------------------------------- Core Equity 124 387 670 1,477 - ----------------------------------------------------------------------------------------------------------------------- Strategic Value 126 393 681 1,500 - ----------------------------------------------------------------------------------------------------------------------- Classic Value 125 390 676 1,489 - ----------------------------------------------------------------------------------------------------------------------- Large Cap Value 309 945 1,606 3,374 - ----------------------------------------------------------------------------------------------------------------------- Utilities 154 477 824 1,802 - ----------------------------------------------------------------------------------------------------------------------- Real Estate Securities 102 318 552 1,225 - ----------------------------------------------------------------------------------------------------------------------- Small Cap Opportunities 146 452 782 1,713 - ----------------------------------------------------------------------------------------------------------------------- Small Company Value 133 415 718 1,579 - ----------------------------------------------------------------------------------------------------------------------- Special Value 187 579 995 2,159 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Value 121 378 654 1,443 - ----------------------------------------------------------------------------------------------------------------------- Value 109 340 590 1,306 - ----------------------------------------------------------------------------------------------------------------------- All Cap Value 120 375 649 1,432 - ----------------------------------------------------------------------------------------------------------------------- Fundamental Value 119 372 644 1,420 - ----------------------------------------------------------------------------------------------------------------------- Growth & Income 97 303 525 1,166 - ----------------------------------------------------------------------------------------------------------------------- Great Companies -- America 317 969 1,645 3,448 - ----------------------------------------------------------------------------------------------------------------------- Quantitative Value 108 337 585 1,294 - ----------------------------------------------------------------------------------------------------------------------- Equity-Income 114 356 617 1,363 - ----------------------------------------------------------------------------------------------------------------------- Income & Value 109 340 590 1,306 - ----------------------------------------------------------------------------------------------------------------------- Global Allocation 145 449 776 1,702 - ----------------------------------------------------------------------------------------------------------------------- High Yield 104 325 563 1,248 - ----------------------------------------------------------------------------------------------------------------------- Strategic Bond 108 337 585 1,294 - ----------------------------------------------------------------------------------------------------------------------- Strategic Income 118 368 638 1,409 - ----------------------------------------------------------------------------------------------------------------------- Global Bond 113 353 612 1,352 - ----------------------------------------------------------------------------------------------------------------------- Diversified Bond 105 328 569 1,259 - ----------------------------------------------------------------------------------------------------------------------- Investment Quality Bond 97 303 525 1,166 - ----------------------------------------------------------------------------------------------------------------------- Total Return 104 325 563 1,248 - ----------------------------------------------------------------------------------------------------------------------- Real Return Bond 105 328 569 1,259 - ----------------------------------------------------------------------------------------------------------------------- U.S. Government Securities 95 296 515 1,143 - ----------------------------------------------------------------------------------------------------------------------- Money Market 77 240 417 930 - ----------------------------------------------------------------------------------------------------------------------- Small Cap Index 80 249 433 966 - ----------------------------------------------------------------------------------------------------------------------- International Index 84 262 455 1,014 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Index 80 249 433 966 - ----------------------------------------------------------------------------------------------------------------------- Total Stock Market Index 80 249 433 966 - ----------------------------------------------------------------------------------------------------------------------- 500 Index 79 246 428 954 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Aggressive 1000 115 359 622 1,375 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Growth 820 107 334 579 1,283 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Balanced 640 101 315 547 1,213 - -----------------------------------------------------------------------------------------------------------------------
10
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Moderate 460 $98 $306 $531 $1,178 - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Conservative 280 93 290 504 1,120 - ----------------------------------------------------------------------------------------------------------------------- American Growth 119 372 644 1,422 - ----------------------------------------------------------------------------------------------------------------------- American International 145 450 777 1,703 - ----------------------------------------------------------------------------------------------------------------------- American Blue Chip Income and Growth 133 413 714 1,569 - ----------------------------------------------------------------------------------------------------------------------- American Growth-Income 114 356 618 1,365 - -----------------------------------------------------------------------------------------------------------------------
SERIES III SHARES
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Science & Technology $157 $486 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Pacific Rim 166 514 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Health Sciences 162 502 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Emerging Growth 292 895 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Aggressive Growth 147 456 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Emerging Small Company 149 462 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Stock 136 425 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Natural Resources 159 493 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- All Cap Growth 138 431 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Financial Services 143 443 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- International Stock 155 480 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Overseas 151 468 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- International Small Cap 170 526 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- International Value 151 468 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Core 159 493 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Global 143 443 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Strategic Growth 136 425 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Capital Appreciation 136 425 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Quantitative All Cap 297 910 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Blue Chip Growth 129 403 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- U.S. Large Cap 130 406 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Strategic Value 142 440 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Utilities 169 523 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Real Estate Securities 118 368 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Small Cap Opportunities 161 499 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Small Company Value 149 462 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Special Value 202 624 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Value 136 425 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- All Cap Value 135 421 N/A N/A - -----------------------------------------------------------------------------------------------------------------------
11
- ----------------------------------------------------------------------------------------------------------------------- TRUST PORTFOLIO 1 YEAR 3 YEAR 5 YEAR 10 YEAR - ----------------------------------------------------------------------------------------------------------------------- Fundamental Value $134 $418 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Growth & Income 112 350 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Equity-Income 129 403 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- High Yield 119 372 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Strategic Bond 123 384 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Global Bond 128 400 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Diversified Bond 120 375 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Investment Quality Bond 113 353 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Total Return 125 390 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Real Return Bond 120 375 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- U.S. Government Securities 112 350 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Money Market 137 428 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Small Cap Index 95 296 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- International Index 99 309 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Index 95 296 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Total Stock Market Index 95 296 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- 500 Index 94 293 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Aggressive 1000 130 406 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Growth 820 122 381 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Balanced 640 117 365 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Moderate 460 113 353 N/A N/A - ----------------------------------------------------------------------------------------------------------------------- Lifestyle Conservative 260 112 350 N/A N/A - -----------------------------------------------------------------------------------------------------------------------
12 SCIENCE & TECHNOLOGY TRUST SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price") INVESTMENT OBJECTIVE: To seek long-term growth of capital. Current income is incidental to the portfolio's objective. INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks of science and technology companies. The Science & Technology Trust invests, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in the common stocks of companies expected to benefit from the development, advancement, and/or use of science and technology. Some industries likely to be represented in the portfolio include: -- Computers including hardware, software -- life sciences and health care, including and electronic components pharmaceuticals, medical devices, and -- telecommunications biotechnology -- media and information services -- chemicals and synthetic materials -- environmental services -- defense and aerospace -- e-commerce
While most of the portfolio's assets are invested in U.S. common stocks, the Science & Technology Trust may also purchase other types of securities, including U.S. and non U.S. dollar denominated foreign securities, convertible stocks and bonds, and warrants in keeping with its objectives. Stock selection for the portfolio generally reflects a growth approach based on an assessment of a company's fundamental prospects for above-average earnings, rather than on a company's size. As a result, portfolio holdings can range from securities of small companies developing new technologies to securities of blue chip firms with established track records of developing and marketing technological advances. The portfolio may also invest in companies that are expected to benefit from technological advances even if they are not directly involved in research and development. The portfolio may invest in suitable technology companies through initial public offerings. The portfolio holds a certain portion of its assets in money market reserves which can consist of shares of the T. Rowe Price Reserve Investment Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. The portfolio may sell securities for a variety of reasons such as to secure gains, limit losses or redeploy assets into more promising opportunities. Use of Hedging and Other Strategic Transactions The Science & Technology Trust may also engage in a variety of investment practices, such as buying and selling futures and options. The portfolio may invest up to 10% of its total assets in hybrid instruments. Hybrid instruments are a type of high-risk derivative which can combine the characteristics of securities, futures and options. In pursuing its investment objective, the portfolio's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the portfolio's management believes a security could increase in value for a variety of reasons including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Science & Technology Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions" below. Principal Risks of Investing in this Portfolio -- The portfolio is subject to the risks of industry or sector investing since it invests primarily in science and technology sectors, including Internet-related investments. The products and services of companies in the science and technology sectors may not prove commercially successful or may become obsolete quickly, and a portfolio of these securities may be riskier or more volatile in price than one that invests in more market sectors. The risks of industry or sector investing, and the specific risks of investing in Internet-related, telecommunications, and health sciences companies, are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests extensively in equity securities, including securities of small or unseasoned companies (less than 3 years operating experience) and newly public companies. The portfolio may also invest up to 30% of its assets in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." 13 -- Due to the portfolio's emphasis on science and technology sectors, including Internet-related investments, an investment in the portfolio should be considered extremely risky even as compared to other portfolios that invest primarily in the securities of small companies. Investing in the portfolio alone cannot provide a balanced investment program. Performance(A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 47.1% (for the quarter ended 12/1998) and the lowest return was -40.30% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- 10.7% 43.3% 95.5% -34.1% -41.3% -40.8% 50.4% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Science & Technology Trust Series I 50.39% -7.19% 1.27% 01/01/1997 Series II 50.46% N/A -5.00% 01/28/2002 Series III N/A N/A 7.73% 09/05/2003 Lipper Science and Technology Avg. Funds Classification(A) 51.98% -2.73% 5.97%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Since June 1, 2000, a portion of the Science & Technology Trust expenses was reimbursed. If such expenses had not been reimbursed, returns would be lower. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (D)As of January 16, 2002, Michael Sola took over management responsibilities of the Science & Technology Trust. SUBADVISER AND PORTFOLIO MANAGERS T. Rowe Price manages the Science & Technology Trust. T. Rowe Price, whose address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded financial services holding company, owns 100% of the stock of T. Rowe Price. As of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion for over eight million individual and institutional investor accounts. The portfolio is managed by an investment advisory committee chaired by: -- Michael F. Sola (since January 2002). Mr. Sola, who joined T. Rowe Price in 1995 as a technology analyst, is a Vice President of T. Rowe Price and has been managing investments since 1997. He is a Chartered Financial Analyst. The committee chairman has day-to-day responsibility for managing the portfolio and works with the committee in developing and executing the portfolio's investment program. PACIFIC RIM TRUST (Formerly, Pacific Rim Emerging Markets Trust) SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.)") INVESTMENT OBJECTIVE: To achieve long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks and equity-related securities of companies in countries located in the Pacific Rim region. Current income from dividends and interest will not be an important consideration in the selection of portfolio securities. The countries of the Pacific Rim region are: -- Australia -- China -- India -- Indonesia -- Hong Kong -- Japan -- Malaysia -- New Zealand -- Pakistan -- Philippines -- Singapore -- South Korea -- Taiwan -- Thailand 14 The Pacific Rim Trust, under normal conditions, invests at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks and equity-related securities of established, larger-capitalization non-U.S. companies located in the Pacific Rim region that have attractive long-term prospects for growth of capital. Equity-related securities in which the portfolio may invest include: (i) preferred stocks, (ii) warrants and (iii) securities convertible into or exchangeable for common stocks. The Portfolio may also invest up to 20% of its assets in countries outside the Pacific Rim region. MFC Global (U.S.A.)'s decision to invest in a particular country or particular region will be based upon its evaluation of political, economic and market trends in the country or region and throughout the world. MFC Global (U.S.A.) will shift investments among countries and the world's capital markets in accordance with its ongoing analyses of trends and developments affecting such markets and securities. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Pacific Rim Trust may invest all or a portion of its assets in non-convertible, fixed income securities and cash and cash equivalents. These investments may be denominated in either U.S. or non-U.S. dollars. These securities may include debt of corporations, foreign governments and supranational organizations. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The Pacific Rim Trust may also purchase and sell the following equity-related financial instruments: -- exchange-listed call and put options on equity indices, -- over-the-counter ("OTC") and exchange-listed equity index futures, -- OTC and exchange-listed call and put options on currencies in the portfolio, and -- OTC foreign currency futures contracts on currencies in the portfolio. A call option gives the holder the right to buy shares of the underlying security at a fixed price before a specified date in the future. A put option gives the holder the right to sell a specified number of shares of the underlying security at a particular price within a specified time period. See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities and may invest up to 100% of its assets in foreign securities, including securities of companies in emerging market countries. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- Since the portfolio concentrates its investments in the Pacific Rim region, the portfolio will be affected by economic and political events in this area. Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 24.41% (for the quarter ended 12/1998) and the lowest return was -26.12% (for the quarter ended 12/1997). - -------------------------------------------------------------------------------- 11.3% 9.8% -34.1% -4.6% 62.9% -24.4% -18.6% -12.5% 40.4% 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Pacific Rim Trust Series I 40.37% 4.30% -1.15% 10/04/1994 Series II 40.17% N/A 11.44% 01/28/2002 Series III N/A N/A 10.75% 09/05/2003 MSCI Pacific Index(B) 38.98% 2.12% -2.60% MSCI AC Pacific Free Index(B, C) 36.51% 2.18% -2.88%
15 (A)On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust. Performance presented for this portfolio is based upon the performance of the respective predecessor Manulife Series Fund, Inc. portfolio for periods prior to December 31, 1996. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)The MSCI AC Pacific Free Index was added in 2003 to move accurately reflect the investment objective of the portfolio. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) manages the Pacific Rim Trust. MFC is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios of the Trust for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Fund Direct (Hong Kong) Limited, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The portfolio managers are: -- Samantha Ho (since June, 2000). Ms. Ho joined MFC Global in 2000. Prior to joining MFC Global, she was a senior portfolio manager at SEB Investment Management where she served from 1994 to 2000. Prior to that, she was an investment analyst at Jardine Fleming. She is a Chartered Financial Analyst. -- Seton Lor (since June, 2000). Mr. Lor joined MFC Global in 2000. Prior to joining MFC Global , he was Director of Balanced Investments at AXA Investment Managers in Hong Kong where he served from 1996 to 2000. HEALTH SCIENCES TRUST SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences (collectively termed "health sciences"). While the portfolio may invest in companies of any size, the majority of its assets are expected to be invested in large-and mid-capitalization companies. T. Rowe Price's portfolio managers divide the health sciences sector into four main areas: pharmaceuticals, health care services companies, products and devices providers, and biotechnology firms. Their allocation among these four areas will vary depending on the relative potential within each area and the outlook for the overall health sciences sector. While most assets will be invested in U.S. common stocks, the portfolio may purchase other securities, including foreign securities, futures, and options in keeping with its objective. In managing the Health Sciences Trust, T. Rowe Price uses a fundamental, bottom-up analysis that seeks to identify high quality companies and the most compelling investment opportunities. In general, the portfolio will follow a growth investment strategy, seeking companies whose earnings are expected to grow faster than inflation and the economy in general. When stock valuations seem unusually high, however, a "value" approach, which gives preference to seemingly undervalued companies, may be emphasized. The Health Sciences Trust may invest in futures and options, which could subject the portfolio to additional volatility and losses. The Health Sciences Trust may invest up to 35% of its total assets in foreign securities (including emerging market securities) and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. In pursuing its investment objective, the portfolio's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the portfolio's management believes a security could increase in value for a variety of reasons 16 including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Health Sciences Trust holds a certain portion of its assets in money market reserves which can consist of shares of the T. Rowe Price Reserve Investment Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. The portfolio may sell securities for a variety of reasons such as to secure gains, limit losses or redeploy assets into more promising opportunities. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio concentrates its investments (invests more than 25% of its total assets) in securities of companies in the health sciences sector, a comparatively narrow segment of the economy, and therefore may experience greater volatility than funds investing in a broader range of industries. The portfolio may invest a considerable portion of assets in the same business, such as pharmaceuticals, or in related businesses such as hospital management and managed care. Moreover, companies in this segment are subject to the additional risks of increased competition within the health care industry, changes in legislation or government regulations, reductions in government funding, product liability or other litigation and the obsolescence of popular products. The risks of investing in the health sciences sector are set forth below under "Risks of Investing in Certain Types of Securities". Investing in the portfolio alone cannot provide a balanced investment program. -- The portfolio may invest a significant portion of its assets in derivatives, such as futures and options. The risks of investing in these instruments are set forth under "Hedging and Other Strategic Transactions." -- The portfolio may invest in foreign securities (including emerging market securities). The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risk of Investing in Certain Types of Securities." Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 18.13% (for the quarter ended 6/2003) and the lowest return was -15.78% (for the quarter ended 6/2002). - -------------------------------------------------------------------------------- -27.2% 36.2% 2002 2003
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One Life of Date First Year Portfolio Available Health Sciences Trust Series I 36.22% 2.69% 04/30/2001 Series II 35.91% 1.95% 01/28/2002 Series III N/A 5.93% 09/05/2003 Lipper Health/Biotechnology Avg. Funds Classification(A) 28.99% -2.79%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS T. Rowe Price manages the Health Sciences Trust. T. Rowe Price, whose address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded 17 financial services holding company, owns 100% of the stock of T. Rowe Price. As of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion for over eight million individual and institutional investor accounts. The portfolio is managed by an investment advisory committee chaired by: -- Kris H. Jenner, M.D., D. Phil (since May, 2001). Dr. Jenner, who joined T. Rowe Price in 1997, is a Vice-President of T. Rowe Price and has been managing investments since 1998. From 1995 -- 1997 he was a post-doctoral fellow at the Brigham and Women's Hospital, Harvard Medical School. -- The committee chairman has day-to-day responsibility for managing the portfolio and works with the committee in developing and executing the portfolio's investment program. EMERGING GROWTH TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited. ("MFC GLOBAL (U.S.A.)") INVESTMENT OBJECTIVE: To seek superior long-term rates of return through capital appreciation. INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by investing, under normal circumstances, primarily in high quality securities (those with a proven track record of performance and/or growth) and convertible instruments of small-cap U.S. companies. Stocks of publicly traded companies -- and mutual funds that hold these stocks -- can be classified by the companies' market value, or capitalization. Market capitalization is defined according to Morningstar U.S. as follows: Based on a universe of the 5000 largest stocks in the U.S., the top 5% of the universe are large cap, the next 15% mid cap, and the bottom 80% are classified as small cap. The portfolio will focus on purchasing high quality securities of small-cap U.S. companies whose growth prospects are better than average because they have a unique product or a technology/service edge or an expanding market share. MFC Global (U.S.A.) focuses on a universe of approximately 1000 leading emerging growth stocks (those with growth prospects that are expected to be better than average) derived through a host of considerations including: size, fundamental analysis, balance sheet and market share analysis, company and industry growth prospectus and management interviews. The management team then uses a proprietary, quantitative system to rank stocks based on a variety of financial measures. Top-ranked stocks meeting both fundamental and quantitative criteria will be considered for the portfolio. The Emerging Growth Trust may invest to a limited extent in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. Investments in foreign securities may include depositary receipts. The Emerging Growth Trust may also invest to a limited extent in fixed income securities including money market instruments. The Trust may invest in or use the following derivatives for hedging purposes in a manner consistent with the investment objectives of the Trust and as permitted by applicable securities legislation: S&P Depository Receipts and Russell 2000 Growth i shares (or similar types of exchange traded funds). Such use would include the hedging of significant cash flows into or out of the Trust. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities, especially small and mid-cap securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest to a limited extent in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest to a limited extent in fixed income securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios listed above. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Asset 18 Management (Hong Kong) Limited (formerly Manulife Funds Direct (Hong Kong) Limited), collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Portfolio Managers are: -- Robert Lutzko (since May, 2003). Mr. Lutzko joined MFC Global in September of 1995. He is Vice President and Senior Portfolio Manager of U.S. Equities at MFC Global. Prior to joining MFC Global in 1995, Mr. Lutzko was Portfolio Manager U.S. Equities, managing both U.S. Large-Cap and Small-Cap investments at the Workers Compensation Board's Investment Management division. Mr. Lutzko holds the Chartered Financial Analyst designation and is a graduate of Sheridan College (Computer Science). -- Luciano Orengo (since May, 2003). Mr. Orengo joined MFC Global in June of 2001. He is a Senior Research Analyst of U.S. Equities at MFC Global. Prior to joining MFC Global in 2001, Mr. Orengo was a Research Analyst at the Canadian Shareowner Association. Luciano holds the Chartered Financial Analyst designation and has his Masters in Economics from McGill University. -- Niall Brown (since May, 2003). Mr. Brown joined MFC Global Investment Management Limited in January of 2003. He is a Portfolio Manager of Small Cap and Global Equities at MFC Global. Prior to joining MFC Global in 2003, Mr. Brown was Vice President of U.S. Equities at TD Asset Management. Niall holds the Chartered Financial Analyst designation and has his Honours BA in Political Science (International Relations) from the University of Toronto. AGGRESSIVE GROWTH TRUST SUBADVISER: A I M Capital Management, Inc. ("AIM") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The portfolio invests principally in common stocks, of companies which in the opinion of AIM are expected to achieve earnings growth over time at a rate in excess of 15% per year. The portfolio's assets are principally invested in common stocks of companies which in the opinion of AIM are expected to achieve earnings growth over time at a rate in excess of 15% per year. Many of these companies are in the small and medium-sized growth categories. AIM's portfolio managers focus on companies that are likely to benefit from new or innovative products, services or processes that should enhance such companies' prospects for future growth in earnings. As a result of this policy, the market prices of many of the securities purchased and held by the portfolio may fluctuate widely. Any income received from securities held by the portfolio will be incidental. Aggressive Growth Trust's portfolio is primarily comprised of securities of two basic categories of companies: -- "core" companies, which AIM considers to have experienced above-average and consistent long-term growth in earnings and to have excellent prospects for outstanding future growth, and -- "earnings acceleration" companies which AIM believes are currently enjoying a dramatic increase in profits. The Aggressive Growth Trust's strategy does not preclude investment in large, seasoned companies which in the judgment of AIM possess superior potential returns similar to companies with formative growth profiles. The portfolio may also invest in established smaller companies (under $500 million in market capitalization) which offer exceptional value based upon substantially above average earnings growth potential relative to market value. The Aggressive Growth Trust may invest in non-equity securities, such as corporate bonds or U.S. Government obligations during periods when, in the opinion of AIM, prevailing market, financial, or economic conditions warrant, as well as when such holdings are advisable in light of a change in circumstances of a particular company or within a particular industry. The portfolio may invest up to 25% of its total assets in foreign securities. American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs") and other securities representing underlying securities of foreign issuers are treated as foreign securities and included in this 25% limitation. Use of Hedging and Other Strategic Transactions Aggressive Growth Trust may: -- purchase and sell stock index futures contracts, -- purchase options on stock index futures as a hedge against changes in market conditions, -- purchase and sell futures contracts and purchase related options in order to hedge the value of its portfolio against changes in market conditions, -- write (sell) covered call options (up to 25% of the value of the portfolio's net assets), -- enter into foreign exchange transactions to hedge against possible variations in foreign exchange rates between currencies of countries in which the portfolio is invested including: the direct purchase or sale of foreign currency, the purchase or sale of options on futures contracts with respect to foreign currency, the purchase or sale of forward contracts, exchange traded futures contracts and options of futures contracts. 19 See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities with emphasis on medium and small sized growth companies. The risks of investing in equity securities and small and medium sized companies are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 25% of its assets in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest at most 25% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. -- The portfolio may invest in internet related companies. The risks of investing in these companies is set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 32.25% (for the quarter ended 12/1998) and the lowest return was -24.73% (for the quarter ended 9/1998). - -------------------------------------------------------------------------------- 0% 4.3% 33% 3% -26% -25% 33.9% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Aggressive Growth Trust Series I 33.87% 0.37% 0.87% 01/01/1997 Series II 33.57% N/A 1.40% 01/28/2002 Series III N/A N/A 6.58% 09/05/2003 Russell 2000 Growth Index(B) 48.54% 0.86% 2.56%
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISERS AND PORTFOLIO MANAGERS AIM Capital Management, Inc. ("AIM") manages the Aggressive Growth Trust. AIM is an indirect wholly owned subsidiary of A I M Management Group Inc., whose principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. A I M Management Group, Inc. founded in 1976, is a holding company engaged in the financial services business and is a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are an independent investment management group engaged in institutional investment management and retail mutual fund businesses in the United States, Europe and the Pacific Region. AIM, and/or its affiliates is the investment adviser for mutual funds, separately managed accounts, such as corporate and municipal pension plans, charitable institutions and private individuals. The portfolio is managed by the following two portfolios managers: -- Karl Farmer (since May, 2003). Mr. Farmer has been associated with AIM and/or its affiliates since 1998. Prior to 1998, Mr. Farmer was a pension actuary with William M. Merer, Inc., focusing on retirement plans and other benefit programs. -- Jay K. Rushkin (lead manager) (since December, 2000). Mr. Rushin is portfolio manager for several of the AIM funds including the AIM Aggressive Growth Fund. He has been associated with AIM and/or its affiliates since 1998. From 1996 to 1998, he was an associate equity analyst for Prudential Securities. 20 EMERGING SMALL COMPANY TRUST SUBADVISER: Franklin Advisers, Inc. ("Franklin") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of the portfolio's total assets in common stock equity securities of companies with market capitalizations that approximately match the range of capitalizations of the Russell 2000 Growth Index. The Emerging Small Company Trust invests, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stock equity securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Growth Index ("small cap stocks") at the time of purchase. The securities of small cap companies are traded on the New York Stock Exchange, the American Stock Exchange and in the over-the-counter market. Equity securities also include preferred stocks, securities convertible into common stocks, and warrants for the purchase of common stocks. The portfolio may also invest up to 20% (measured at the time of purchase) of its total assets in any combination of the following if the investment presents a favorable investment opportunity consistent with the portfolio's investment goal: -- equity securities of larger capitalization companies which Franklin believes have the potential for strong growth potential, and -- relatively well-known, larger companies in mature industries which Franklin believes have the potential for capital appreciation. Franklin will choose small cap companies that it believes are positioned for above average growth in revenues, earnings or assets. Franklin looks for companies it believes have distinct and sustainable competitive advantages, such as a particular marketing or product niche, proven technology and industry leadership. Franklin uses a disciplined "bottom-up" approach to stock selection, blending fundamental and quantitative analysis. Franklin diversifies the portfolio's assets across many industries, and from time to time may invest substantially in certain sectors, including electronic technology and technology services. Small companies often pay no dividends, and current income is not a factor in the selection of stocks. The portfolio may invest up to 5% of its total assets in corporate debt securities that Franklin believes have the potential for capital appreciation as a result of improvements in the creditworthiness of the issuer. Debt securities may include bonds, notes and debentures. The portfolio may invest in both rated and unrated debt securities. The portfolio will only purchase securities rated "B" or above by Moody's or Standard & Poor's (or comparable unrated securities). The portfolio will not invest more than 5% of its total assets in non-investment grade securities (rated lower than "BBB" by Standard & Poor's or "Baa" by Moody's or comparable unrated securities). The receipt of income from debt securities is incidental to the portfolio's investment goal of capital growth. The portfolio may invest up to 25% of its total assets in foreign securities, including those of developing or undeveloped markets, and sponsored or unsponsored American, European and Global Depositary Receipts. The portfolio currently intends to limit its investments in foreign securities to 10% of its total assets. The portfolio may also invest up to 10% of its total assets in real estate investment trusts ("REITS"). See "Real Estate Securities Trust" below for a discussion of REITS and the risks of investing in these trusts. Use of Hedging and Other Strategic Transactions The Emerging Small Company Trust may: -- write (sell) covered put and call options and may buy put and call options on securities and securities indices, and -- buy and sell futures and options on futures with respect to securities, indices and currencies. See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in small cap equity securities. The risks of investing in equity securities and the risks of investing in small cap (small and medium size companies) securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in internet related companies. The risks of investing in these companies is set forth below under "Risks of Investing in Certain Types of Securities." 21 Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 59.08% (for the quarter ended 12/1999) and the lowest return was -26.19% (for the quarter ended 3/2001). - -------------------------------------------------------------------------------- 17.1% 0.1% 73.5% -4.3% -22.2% -29.2% 39.7% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Emerging Small Company Trust Series I 39.73% 5.02% 5.94% 01/01/1997 Series II 39.48% N/A 1.21% 01/28/2002 Series III N/A N/A 7.60% 09/05/2003 Russell 2000 Growth Index(B) 48.54% 0.86% 2.56%
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISERS AND PORTFOLIO MANAGERS Franklin Advisers, Inc. manages the Emerging Small Company Trust. Franklin Advisers is a wholly-owned subsidiary of Franklin Resources, Inc., referred to as Franklin(R) Templeton(R) Investments, -- located at One Franklin Parkway, San Mateo, California, 94403. Through its subsidiaries, Franklin(R) Templeton(R) provides global and domestic investment management, shareholder, custody and distribution services to the Franklin, Templeton, Mutual Series and Fiduciary products, high net-worth and institutional accounts, as well as separate account management services. Today, Franklin Templeton is a major force in the mutual fund industry. The portfolio is managed by the following portfolio management team: -- Michael McCarthy (since May, 1999). Mr. McCarthy joined Franklin Templeton Investments in 1992 and is currently a Senior Vice President and Director of Equity Research. He is a Chartered Financial Analyst (CFA). -- Edward Jamieson (since May, 1999). Mr. Jamieson joined Franklin Templeton Investments in 1987 and is currently an Executive Vice President and Chief Investment Officer of the Franklin Equity Group. -- Aidan O'Connell (since May, 1999). Mr. O'Connell joined Franklin Templeton Investments in 1998 and is currently a Vice President. Before joining Franklin Templeton, Mr. O'Connell was a research associate and a corporate finance associate at Hambrecht & Quist. He is a Chartered Financial Analysist (CFA). SMALL COMPANY BLEND TRUST SUBADVISER: Capital Guardian Trust Company ("CGTC") INVESTMENT OBJECTIVE: To seek long-term growth of capital and income. Generation of current dividends will be a secondary consideration. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in equity and equity-related securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Index at the time of purchase. The Small Company Blend Trust invests at least 80% its net assets (plus any borrowings for investment purposes), under normal market conditions, in equity and equity-related securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Index ("small cap stocks") at the time of purchase. The market capitalizations within the Russell 2000 Index will vary but as of June 30, 2002, were $1.3 billion and below. In 22 determining market capitalization, CGTC may consider the value of shares which are publicly traded. The portfolio may hold ADRs and other U.S. registered securities of foreign issuers which are denominated in U.S. dollars. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Small Company Blend Trust may invest all or a portion of its assets in bonds, cash and cash equivalents. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The Small Company Blend Trust is currently authorized to use all of the investment strategies referred to under "Hedging and Other Strategic Transactions." However, it is not presently contemplated that any of these strategies will be used to a significant degree by the portfolio. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities, especially securities of small or unseasoned companies (less than 3 years operating experience). The risks of investing in equity securities and small or unseasoned companies are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 26.94% (for the quarter ended 12/2001) and the lowest return was -25.88% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -19.7% -2.3% -25.6% 39.7% 2000 2001 2002 2003
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One Life of Date First Year Portfolio Available Small Company Blend Trust Series I 39.71% 1.02% 05/01/1999 Series II 39.63% 3.38% 01/28/2002 Russell 2000 Index(A) 47.25% 6.97%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. SUBADVISERS AND PORTFOLIO MANAGERS CGTC manages the Small Company Blend Trust. CGTC is located at 333 South Hope Street, Los Angeles, California 90071. CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC has been providing investment management services since 1968 and manages approximately $146 billion of assets as of December 31, 2003. The portfolio is managed by the following portfolio managers. In addition, a portion of the portfolio is managed by individual members of the research team. -- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice President and portfolio manager for CGTC. He joined the Capital Group organization in 1987. -- James S. Kang (since May, 1999). Mr. Kang is Senior Vice President for Capital International Research Inc. He joined the Capital Group organization in 1988. -- Robert G. Kirby (since May, 1999). Mr. Kirby is a Senior Partner of The Capital Group Partners L.P. and Chairman Emeritus and a portfolio manager of CGTC. He joined the Capital Group organization in 1965. -- Karen A. Miller (since May, 2000). Ms. Miller is a Senior Vice President of Capital International Research, Inc. She joined the Capital Group organization in 1990. 23 -- Lawrence R. Solomon (since May, 2000). Mr. Solomon is a Senior Vice President of Capital International Research, Inc. He also serves as a Director of Capital Management Services, Inc. Mr. Solomon joined the Capital Group organization in 1985. -- Kathryn M. Peters (since September, 2002). Ms. Peters is a Vice President and U.S. small-capitalization Portfolio Manager for Capital International Research, Inc. She also serves as a Director of Capital Management Services, Inc. Ms. Peters joined the Capital Group organization in 2001. Prior to joining Capital Guardian, Ms. Peters was employed as a portfolio manager at Montgomery Asset Management, LLC. SMALL COMPANY TRUST SUBADVISER: American Century Investment Management, Inc. ("American Century") INVESTMENT OBJECTIVE: To seek long-term capital growth. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in equity securities of smaller-capitalization U.S. companies. The subadviser uses quantitative, computer-driven models to construct the portfolio of stocks for the Small Company Trust. Under normal market conditions, at least 80% of the portfolio will consist of stocks of companies that, at the time of investment, have market capitalization not greater than that of the largest company in the S&P Small Cap 600 Index. (The market cap range of this index as of December 31, 2003 was $60 million to $4.87 billion.) If the companies in which the portfolio invests are successful, these companies may grow into medium- and larger-sized companies. In addition, if the portfolio managers determine that the availability of small-sized companies in which to invest is not adequate to meet the portfolio's investment needs, the subadviser may invest up to 20% of the portfolio's assets in medium- and larger-sized companies. The portfolio's investment strategy utilizes quantitative management techniques in a two-step process that draws heavily on computer technology. In the first step, the subadviser ranks stocks, primarily smaller companies, from most attractive to least attractive. This is determined by using a computer model that combines measures of a stock's value, as well as measure of its growth potential. To measure value, the subadviser uses ratios of stock price-to-book value and stock price-to-cash flow, among others. To measure growth, the subadviser uses the rate of growth of a company's earnings and changes in its earnings estimates, as well as other factors. In the second step, the subadviser uses a technique called portfolio optimization. In portfolio optimization, the subadviser uses a computer to build a portfolio of stocks from the ranking described above that the subadviser believes will provide the optimal balance between risk and expected return. The goal is to create a portfolio that provides better returns than its benchmark without taking on significant additional risk. The subadviser does not attempt to time the market. Instead, under normal market conditions, the subadviser intends to keep the portfolio fully invested in stocks regardless of the movement of the stock prices generally. When the subadvisers believes it is prudent, the portfolio may invest a portion of its assets in convertible debt securities, equity-equivalent securities, foreign securities, short-term securities, nonleverage futures contracts and other similar securities. Futures contracts, a type of derivative security, can help the portfolio's cash assets remain liquid while performing more like stocks. The portfolio may invest in IPOs (initial public offerings). For the risks associated with IPOs, see "Additional Information about the Portfolios' Investments -- Risks of Investing in Certain Types of Securities -- IPOs." The portfolio is authorized to use each of the investment strategies listed under "Additional Investment Policies" including, without limitation, investing in U.S. government securities and entering into short sales. The portfolio may also purchase securities of other investment companies, including exchange traded funds, and cash and cash equivalents. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities, especially securities of small or unseasoned companies (less than 3 years operating experience). The risks of investing in equity securities and small or unseasoned companies are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2004. The portfolio's performance may be affected by investments in initial public offerings (IPOs). The impact of IPOs on a portfolio's performance depends on the strength of the IPO market and the size of the portfolio. IPOs may have less impact on a fund's performance as its assets grow. 24 SUBADVISERS AND PORTFOLIO MANAGERS American Century manages the Small Company Trust. American Century is located at 4500 Main Street, Kansas City, Missouri 64111. American Century is controlled by James E. Stowers Jr., the Chairman of American Century Companies, Inc. American Century has been providing investment management services since 1958. The portfolio is managed by the following portfolio managers. -- John Schniedwind (since May, 2004). Mr. Schniedwind is the Chief Investment Officer -- Quantitative Equity for American Century. He joined American Century in 1982. He has degrees from Purdue University and an MBA in finance from the University of California -- Berkeley. He is a CFA charterholder. -- William Martin (since May, 2004). Mr. Martin is a Senior Vice President and Senior Portfolio Manager for American Century. He joined American Century in 1989. He has a degree from the University of Illinois. He is a CFA charterholder. -- Wilhelmine von Turk (since May, 2004). Ms. von Turk is a Portfolio Manager for American Century. She joined American Century in 2000. She has a bachelor of arts from Wellesley College and a Ph.D in statistics from the University of California -- Berkeley. She is a CFA charterholder. -- Thomas P. Vaiana (since May, 2004). Mr. Vaiana is a Portfolio Manager for American Century. He joined American Century in 1997. He has a bachelor's degree in business finance from California State University. -- Zili Zhang (since May, 2004). Mr. Zhang is a Vice President and Portfolio Manager/Director of Quantitative Research for American Century. He joined American Century in 1997. He has a bachelor's degree in physics from University of Science and Technology of China and a Ph.D in theoretical physics from the University of Texas at Austin. DYNAMIC GROWTH TRUST SUBADVISER: Deutsche Asset Management, Inc. ("DeAM") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests primarily in stocks and other equity securities of medium-sized U.S. companies with strong growth potential. Under normal circumstances, the portfolio invests the majority of its assets in the stock and other securities with equity characteristics of U.S. companies with market capitalizations, at the time of purchase, within the market capitalization range of the S&P Mid-Cap 400 Index. DeAM believes these companies contain the greatest concentration of businesses with significant growth prospects. DeAM focuses on individual security selection rather than industry selection. DeAM uses an active process which combines financial analysis with company visits to evaluate management and strategies. The portfolio may invest in convertible securities when it is more advantageous than investing in a company's common stock. The portfolio may also invest up to 20% of its assets in stocks and other securities of companies based outside the U.S. Under normal conditions this tactic will not comprise a major element of its strategy. Investment Process. Company research lies at the heart of DeAM's investment process. DeAM uses a "bottom-up" approach to picking securities. This approach focuses on individual stock selection rather than industry selection. -- DeAM focuses on undervalued stocks with fast-growing earnings and superior near-to-intermediate term performance potential. -- DeAM emphasizes individual selection of medium-sized stocks across all economic sectors, early in their growth cycles and with the potential to be the blue chips of the future. -- DeAM generally seeks companies with leading or dominant position in their niche markets, a high rate of return on invested capital and the ability to finance a major part of future growth from internal sources. -- DeAM screens within the market capitalization range of the S&P Mid-Cap 400 Index for medium-sized companies with growth and profitability. Temporary Defensive Position. The portfolio may from time to time adopt a temporary defensive position in response to extraordinary adverse political, economic or stock market events. DeAM may invest up to 100% of the portfolio's assets in the common stock of larger companies, in fixed-income securities, or short-term money market securities. To the extent DeAM adopts such a position and over the course of its duration, the portfolio may not meet its goal of long-term capital growth. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities including those of small companies. The risks of investing in equity securities and small companies are set forth below under "Risks of Investing in Certain Types of Securities." 25 -- The portfolio may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risk of Investing in Certain Types of Securities." -- The portfolio may invest in internet related companies. The risks of investing in these companies is set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 16.05% (for the quarter ended 6/2003) and the lowest return was -32.20% (for the quarter ended 12/2000). - -------------------------------------------------------------------------------- -40.2% -28.4% 29.0% 2001 2002 2003
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One Life of Date First Year Portfolio Available Dynamic Growth Trust Series I 29.03% -24.73% 05/01/2000 Series II 29.12% -0.12% 01/28/2002 Russell Midcap Growth Index(A) 42.71% -10.44%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. (C)As of November 25, 2002, DeAM took over management responsibilities of the Dynamic Growth Trust. SUBADVISER AND PORTFOLIO MANAGERS DeAM located at 280 Park Avenue, New York, New York 10017, is an indirect wholly-owned subsidiary of Deutsche Bank AG, an international commercial and investment banking group. Deutsche Bank AG is a major banking institution that is engaged in a wide range of financial services, including investment management, mutual fund, retail, private and commercial banking, investment banking and insurance. DeAM provides a full range of investment advisory services to retail and institutional clients. The Portfolio Manager is: -- Audrey M. T. Jones, CFA. Managing Director, Deutsche Asset Management, and Lead Manager of the portfolio. - Joined the investment advisor in 1986. - Portfolio manager with a primary focus on the credit sensitive, communication services, energy, process industries and transportation sectors. - 30 years of investment industry experience. - BBA from Pace University Lubin School of Business. MID CAP STOCK TRUST SUBADVISER: Wellington Management Company, LLP ("Wellington Management") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities of mid-sized companies with significant capital appreciation potential. Wellington Management seeks to achieve the Trust's objective by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in equity securities of medium-sized companies with significant capital appreciation potential. The Trust tends to invest in companies whose capitalization is similar to the market capitalization of companies in the Russell Mid Cap Index. 26 Wellington Management's investment approach while based primarily on proprietary fundamental analysis, may also be shaped by secular and industry themes. Fundamental analysis involves the assessment of a company through such factors as its business environment, management, balance sheet, income statement, anticipated earnings, revenues and other related measures of value. In analyzing companies for investment, Wellington Management looks for, among other things, a strong balance sheet, strong earnings growth, attractive industry dynamics, strong competitive advantages (e.g., great management teams), and attractive relative value within the context of a security's primary trading market. Securities are sold when the investment has achieved its intended purpose, or because it is no longer considered attractive. The Mid Cap Stock Trust may invest up to 10% of its assets in foreign securities. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- To the extent that the portfolio emphasizes a mid-capitalization growth style, the portfolio may underperform in markets that favor other styles. Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 20.74% (for the quarter ended 12/2001) and the lowest return was -23.64% (for the quarter ended 3/2001). - -------------------------------------------------------------------------------- -4.0% -11.0% -22.6% 42.3% 2000 2001 2002 2003
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One Life of Date First Year Portfolio Available Mid Cap Stock Trust Series I 42.33% -1.10% 05/01/1999 Series II 41.97% 5.69% 01/28/2002 Series III N/A 10.42% 09/05/2003 Russell Midcap Growth Index(A) 42.71% 0.46%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Wellington Management Company, LLP, a Massachusetts limited liability partnership, is a professional investment counseling firm with its principal business offices located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided investment services to investment companies, employee benefit plans, endowments, foundations and other institutions since 1928. The managing partners of Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R. Ryan. The Portfolio Manager is: -- Michael Carmen (since April, 2000). Mr. Carmen, Senior Vice President of Wellington Management, joined Wellington Management in 1999 as an equity portfolio manager. Prior to joining Wellington Management, Mr. Carmen was an equity portfolio manager at Kobrick Funds (1997-1999), State Street Research and Management (1992-1996, 1997) and Montgomery Asset Management (1996). He is a Chartered Financial Analyst. 27 NATURAL RESOURCES TRUST SUBADVISER: Wellington Management Company, LLP ("Wellington Management") INVESTMENT OBJECTIVE: To seek long-term total return. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in equity and equity-related securities of natural resource-related companies worldwide. Under normal market conditions, the portfolio will invest at least 80% of its net assets (plus any borrowings for investment purposes) in equity and equity-related securities of natural resource-related companies worldwide. Natural resource-related companies include companies that own or develop energy, metals, forest products and other natural resources, or supply goods and services to such companies. The portfolio seeks to invest in companies that are expected to benefit from rising demand for natural resources and natural resource-based products and services. The portfolio invests in four major areas: 1) energy, 2) metals and mining, 3) forest products and 4) other natural resource-based companies which are described below. Energy. The energy sector includes companies engaged in exploration, extraction, servicing, processing, distribution and transportation of oil, natural gas and other energy sources. Metals and Mining. The metals and mining sector includes companies engaged in exploration, mining, processing, fabrication, marketing or distribution of precious and non-precious metals and minerals. Forest Products. The forest products sector includes timber, pulp and paper product companies. Other Natural Resources-Based Companies. The other natural resources area consists of companies engaged in producing, processing and distributing agricultural products, fertilizer, and miscellaneous raw materials. The portfolio's "normal" allocation across the natural resources sub-sectors is approximately: -- 60% -- Energy and energy related -- 30% -- Metals and mining -- 10% -- Forest products, miscellaneous commodities companies, and non-ferrous metals. The "normal" sub-sector allocation reflects Wellington Management's view on availability and relative attractiveness of investment opportunities within the natural resources sector. The portfolio's sector allocation might differ significantly from this "normal" allocation at any specific point in time. Wellington Management uses a value-based approach to invest in a broad range of natural resources sectors. Wellington Management utilizes a moderate rotation among sectors in conjunction with bottom-up stock selection. Under normal market conditions, the portfolio is fully invested. Natural resources companies often operate in countries that are different from the country in which their securities trade. Country allocation is primarily a result of the sector and security selection; however, a key element of Wellington Management's analysis is understanding the economic and political dynamics of each of these countries. The portfolio may invest without limitation in foreign securities. The portfolio utilizes currency hedging to protect the value of the portfolio's assets when Wellington Management deems it advisable to do so. Wellington Management utilizes fundamental research to identify companies with the best growth prospects and relative values. A large number of companies worldwide in the relevant sub-sectors are monitored and stocks are added or deleted from the portfolio on the basis of relative attractiveness. Wellington Management uses a variety of tools such as income statement and balance sheet analysis, cash flow projections and asset value calculations to analyze companies. Particularly in the oil and gas industry, specific accounting issues play an important role. Benchmark. The custom natural resources benchmark will consist of: 60% MSCI World Energy Sources and Equipment & Services, 30% MSCI World Metals and Mining and 10% MSCI World Forest Products & Paper. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity and equity-related securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests in natural resource related companies which involves special risks. For example, these companies may be affected by international political and economic developments, energy conservation, success of exploration projects, tax and other government regulations. -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is nondiversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." 28 Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS Wellington Management Company, LLP, a Massachusetts limited liability partnership, is a professional investment counseling firm with its principal business offices located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided investment services to investment companies, employee benefit plans, endowments, foundations and other institutions since 1928. The managing partners of Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R. Ryan. The Portfolio Manager is: -- James A. Bevilacqua (since May, 2003). Mr. Bevilacqua, Senior Vice President and Equity Portfolio Manager of Wellington Management, joined the firm in 1994. Mr. Bevilacqua is responsible for managing energy and natural resource portfolios for institutional investors worldwide. Jim received both a BS (1988) and an MS (1989) in Aeronautics and Astronautics from the Massachusetts Institute of Technology, and an MBA from Stanford Graduate School of Business (1994). ALL CAP GROWTH TRUST SUBADVISER: A I M Capital Management, Inc. ("AIM") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The portfolio seeks to achieve this investment objective by investing its assets, under normal market conditions, principally in common stocks of companies that the portfolio managers believe likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth. Any income received from securities held by the portfolio will be incidental. The All Cap Growth Trust's portfolio is primarily comprised of securities of two basic categories of companies: -- "core" companies, which AIM considers to have experienced above-average and consistent long-term growth in earnings and to have excellent prospects for outstanding future growth, and -- "earnings acceleration" companies which AIM believes are currently enjoying a dramatic increase in profits. The All Cap Growth Trust may also purchase the common stocks of foreign companies. It is not anticipated, however, that foreign securities will constitute more than 20% of the value of the portfolio. American Depository Receipts ("ADRs") and European Depositary Receipts ("EDRs") and other securities representing underlying securities of foreign issuers are treated as foreign securities and included in this 20% limitation. Use of Hedging and Other Strategic Transactions The All Cap Growth Trust may: -- purchase and sell stock index futures contracts, -- purchase options on stock index futures as a hedge against changes in market conditions, -- purchase and sell futures contracts and purchase related options in order to hedge the value of its portfolio against changes in market conditions, -- write (sell) covered call options (up to 25% of the value of the portfolio's net assets), -- foreign exchange transactions to hedge against possible variations in foreign exchange rates between currencies of countries in which the portfolio is invested including: the direct purchase of sale of foreign currency, the purchase or sale of options on futures contract with respect to foreign currency, the purchase or sale of forward contracts, exchange traded futures contracts and options of futures contracts. See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 20% of its assets in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest at most 20% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. 29 The portfolio may invest in internet related companies. The risks of investing in these companies is set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 36.09% (for the quarter ended 12/1999) and the lowest return was -23.20% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- 15.3% 28.3% 44.7% -10.8% -23.8% -24.4% 29.2% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available All Cap Growth Trust Series I 29.24% -0.79% 5.50% 03/04/1996 Series II 28.99% N/A -0.43% 01/28/2002 Series III N/A N/A 6.90% 09/05/2003 Russell 3000 Growth Index(B) 30.97% -4.69% 6.06% Combined Index(B, C) 30.97% -3.41% 3.91%
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)The Combined Index is a blend of the Russell Mid Cap Growth Index since inception until November 30, 1999, and the performance of the Russell 3000 Growth Index from December 1, 1999 and thereafter. The Combined Index was prepared by the adviser using Ibbotson Associates Software and Data. The Russell 3000 Growth Index was added to reflect a change in investment policy effective December 1, 1999. The Combined Index was added to provide a more accurate comparison of performance. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS A I M Capital Management, Inc., ("AIM"). AIM manages the All Cap Growth Trust. AIM is an indirect wholly owned subsidiary of AIM Management Group Inc., whose principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. AIM Management Group, Inc. founded in 1976, is a holding company engaged in the financial services business and is a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are an independent investment management group engaged in institutional investment management and retail mutual fund businesses in the United States, Europe and the Pacific Region. AIM, and/or its affiliates is the investment adviser for mutual funds, separately managed accounts, such as corporate and municipal pension plans, charitable institutions and private individuals. The Portfolio Managers are: -- Christian A. Costanzo (since May, 2003). Ms. Costanzo has been associated with AIM/and or its affiliates since 1995. -- Robert J. Lloyd (since May, 2003). Mr. Lloyd has been associated with AIM/and or its affiliates since 2000. From 1997 to 2000, he was a trader for American Electric Power. -- Bryan A. Unterhalter (since August, 2003). Mr. Unterhalter has been associated with AIM/and or its affiliates since 1997. Mr. Unerhlater began his investment career in 1995 as an equity trader with First Interstate Bank. -- Kenneth A. Zschappel (since May, 1999). Mr. Zschappel is assistant vice president and senior portfolio manager of AIM. He is involved in managing several of the AIM funds, including the AIM Aggressive Growth Fund and the AIM Constellation Fund. Mr. Zschappel has been associated with AIM and/or its affiliates since 1990. 30 STRATEGIC OPPORTUNITIES TRUST SUBADVISER: Fidelity Management & Research Company ("FMR") INVESTMENT OBJECTIVE: To seek growth of capital. Although current income is a secondary objective, growth of income may accompany growth of capital. INVESTMENT STRATEGIES: The portfolio normally invests primarily in common stocks. Investments may include securities of domestic and foreign issuers, and growth or value stocks or a combination of both. FMR normally invests the portfolio's assets primarily in common stocks. FMR may invest the portfolio's assets in securities of foreign issuers in addition to securities of domestic issuers. FMR is not constrained by any particular investment style. At any given time, FMR may tend to buy "growth" stocks or "value" stocks, or a combination of both types. In buying and selling securities for the portfolio, FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. Factors considered include growth potential, earnings estimates, and management. FMR may use various techniques, such as buying and selling futures contracts and exchange traded funds, to increase or decrease the portfolio's exposure to changing security prices or other factors that affect security values. If FMR's strategies do not work as intended, the portfolio may not achieve its objective. Temporary Defensive Investing The portfolio reserves the right to invest without limitation in preferred stocks and investment-grade debt instruments for temporary, defensive purposes. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may also invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 27.76% (for the quarter ended 3/1987) and the lowest return was -27.33% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -0.5% 42.8% 20.1% 19.3% 9.4% 27.8% -6.4% -15.3% -38.8% 25.8% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Strategic Opportunities Trust Series I 25.84% -4.82% 5.69% N/A 06/18/1985 Series II 25.61% N/A N/A -10.34% 01/28/2002 S&P 500(A) 28.70% -0.57% 11.06% N/A Combined Index(B) 28.70% 3.14% 10.01% N/A
(A)Effective November 1, 2002, the portfolio's performance is compared against the Standard & Poor's 500 (S&P 500) Index, rather than the Russell 3000 Index, due to changes in the portfolio's investment policies which resulted in a change to the portfolio's benchmark. (B)The Combined Index represents the performance of the Russell Midcap Index from inception to April 30, 2001 and the Russell 3000 Index from May 1, 2001 through October 2002, and the performance of the S&P 500 Index thereafter. The Combined Index was prepared by the Advisor using Ibbotson Associates Software and Data. (C)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. (D)Current subadviser assignment became effective December 13, 1991. 31 SUBADVISER AND PORTFOLIO MANAGERS Fidelity Management & Research Company ("FMR") has served as the portfolio's subadviser since May 1, 2001 when it assumed responsibility from Fidelity Management Trust Company as subadviser to the portfolio listed above. FMR Corp., organized in 1972, is the ultimate parent company of FMR. As of December 31, 2003, FMR and its affiliate, FMR Co., Inc, had approximately $799 billion in discretionary assets under management. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for the portfolio. FMRC will be primarily responsible for choosing investments for the portfolio. FMRC is a wholly-owned subsidiary of FMR. The Portfolio Manager is: -- Jason Weiner (since April, 2003). Mr. Weiner is vice president and portfolio manager for FMRC. Since joining FMR in 1991 and FMRC in 2001, Mr. Weiner has worked as a research analyst and manager. FINANCIAL SERVICES TRUST SUBADVISER: Davis Advisors ("Davis") INVESTMENT OBJECTIVE: To seek growth of capital. INVESTMENT STRATEGIES: The portfolio invests primarily in common stocks of financial services companies. During normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) are invested in companies that are principally engaged in financial services. A company is "principally engaged" in financial services if it owns financial services-related assets constituting at least 50% of the value of its total assets, or if at least 50% of its revenues are derived from its provision of financial services. Companies in the financial services industry include commercial banks, industrial banks, savings institutions, finance companies, diversified financial services companies, investment banking firms, securities brokerage houses, investment advisory companies, leasing companies, insurance companies and companies providing similar services. The portfolio may also invest in other equity securities and in foreign and fixed income securities. Davis uses the Davis investment philosophy in managing the Financial Services Trust's portfolio. The Davis investment philosophy stresses a back-to-basics approach, using extensive research to select common stocks of quality overlooked growth companies at value prices and holding such securities for the long-term. Davis looks for banking and financial services companies with sustainable growth rates selling at modest price-earnings multiples that it believes will expand as other investors recognize the company's true worth. Davis believes that if a sustainable growth rate is combined with a gradually expanding multiple, these rates compound and can generate above-average returns. Davis searches for companies possessing several of the following characteristics that it believes foster sustainable long-term growth, minimize risk and enhance the potential for superior long-term returns: -- First-class management -- Proven record as an acquirer -- Management ownership -- Strong balance sheet -- Strong returns on capital -- Competitive products or services -- Lean expense structure -- Successful international operations -- Dominant or growing market share in a -- Innovation growing market
The portfolio may engage in active and frequent trading to achieve its principal investment strategies which will increase transaction costs. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Financial Services Trust may place any portion of its assets in: -- money market instruments (which include commercial paper, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks, repurchase agreements, nonconvertible debt securities and short term obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities); -- securities of other investment companies (or companies exempted under Section 3(c)(7) of the 1940 Act) that primarily invest in temporary defensive investments, subject to limitations under the 1940 Act.; and -- cash. When the portfolio is in a defensive position or awaiting investment of its assets, the ability to achieve its investment objective will be limited. 32 Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio concentrates its investments in securities of companies engaged in the financial services industries, a comparatively narrow segment of the economy, and may therefore experience greater volatility than funds investing in a broader range of industries. Moreover, a portfolio which concentrates its investments in a particular sector is particularly susceptible to the impact of market, economic, regulatory and other factors affecting that sector. The risks of investing in the banking and financial services industries are set forth below under "Risks of Investing in Certain Types of Securities." Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 20.96% (for the quarter ended 06/2003) and the lowest return was -15.36% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -17.9% 33.6% 2002 2003
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One Life of Date First Year Portfolio Available Financial Services Trust Series I 33.58% 0.78% 04/30/2001 Series II 33.40% 5.48% 01/28/2002 Series III N/A 12.85% 09/05/2003 Lipper Financial Services Avg. Funds Classification(A) 32.35% 5.62%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Davis Advisors ("Davis") was organized in 1969 and serves as the investment adviser for all of the Davis Funds, other mutual funds and other institutional clients. The sole general partner of Davis is Davis Investments, LLC, which is controlled by Christopher C. Davis. Davis is located at 2949 East Elvira Road, Suite 101, Tucson, Arizona 85706. The Portfolio Managers are: -- Christopher C. Davis (since May, 2001). Mr. Davis, Chairman and Chief Executive Officer of Davis and a director and Chief Executive Officer, president or vice president of each of the Davis Funds, is co-portfolio manager of the Fundamental Value Trust and the Financial Services Trust. He has served as a portfolio manager with Davis since 1995. -- Kenneth Charles Feinberg (since May, 2001). Mr. Feinberg is co-portfolio manager of the Fundamental Value Trust and the Financial Services Trust. Since joining Davis in 1992, he has co-managed other equity funds advised by Davis and has also served as a research analyst. INTERNATIONAL STOCK TRUST SUBADVISER: Deutsche Asset Management Investment Services Ltd ("DeAMIS") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: Under normal market conditions, the portfolio invests at least 80% of its net assets (plus any borrowing for investment purposes) in common stocks. The portfolio primarily invests in the countries that make up the MSCI EAFE Index. Under normal market conditions, the International Stock Trust invests at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks. The portfolio primarily invests in the countries that make up the 33 MSCI EAFE Index. The MSCI EAFE Index tracks stocks in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. At least 50% of the portfolio's assets will be invested in securities that are represented in the MSCI EAFE Index. However, the portfolio may invest up to 50% of its total assets in non-Index securities of companies located in the countries that make up the Index. The MSCI EAFE Index has a median market capitalization of over $2.8 billion. Under normal market conditions, the portfolio invests in securities of issuers with a minimum market capitalization of $500 million. Strategy. DeAMIS seeks to identify a focused list of approximately 30 to 40 companies that offer, in DeAMIS's opinion, the greatest upside potential on a rolling 12 month view. DeAMIS uses an entirely bottom-up approach, with no active allocation between countries, regions or industries. Investment Process. DeAMIS begins with a broad universe of equity securities of issuers located in the countries that make up the MSCI EAFE Index. The universe includes all securities in the Index and a large number of securities not included in the Index but whose issuers are located in the countries that make up the Index. Research is conducted by 15 global sector research teams in addition to 5 local research teams. These analysts are based in DeAMIS's worldwide offices but are connected by a systematic valuation approach, encapsulated in CFROI (cashflow return on investment). Focusing on CFROI enables DeAMIS to attempt to remove the distortions found in traditional accounting methods and enables the analyst to focus on the true worth of the company. Teams of analysts identify those companies with high and sustainable return on capital and long-term prospects for growth. The most important part of our investment process is the company meeting schedule. Each global sector analyst ranks their stocks relative to their own sector. Stocks are ranked on a relative expected return and the level of conviction. Based on fundamental research, DeAMIS sets a target price objective (DeAMIS's opinion of the intrinsic value of the security) for each security and rank the securities based on these target price objectives. DeAMIS applies a strict buy and sell strategy. The top 30 to 40 stocks in the ranking are purchased for the portfolio. Stocks are sold when they meet their target price objectives or when DeAMIS revised price objectives downward. In implementing this strategy, the portfolio may experience a high portfolio turnover rate. Other Investments. The portfolio may also invest up to 20% of its assets in cash equivalents, U.S. investments grade fixed income securities and U.S. stocks and other equity securities. HEDGING AND OTHER STRATEGIC TRANSACTIONS The portfolio is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." TEMPORARY DEFENSIVE INVESTING DeAMIS may from time to time adopt a temporary defensive position in response to extraordinary adverse political, economic or stock market events. DeAMIS could place up to 100% of the portfolio's asset in U.S. or foreign-government money market investments, or other short-term bonds that offer comparable safety, if the situation warranted. To the extent DeAMIS might adopt such a position and over the course of its duration, the portfolio may not meet its goal of capital appreciation. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in foreign equity securities including securities of companies in emerging markets. This and other risks of investing in foreign securities and equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Because the portfolio may invest in foreign securities in emerging markets, an investment in the portfolio will be riskier than a portfolio that only invests in developed foreign countries. To the extent the portfolio uses futures and options, it is exposed to additional volatility and potential losses. Performance (A,B,C,D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 34 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 23.58% (for the quarter ended 12/1999) and the lowest return was -22.22% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 1.4% 14.9% 29.7% -16.6% -21.5% -21.7% 30.3% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available International Stock Trust Series I 30.27% -2.83% 0.13% 01/01/1997 Series II 30.26% N/A -0.72% 01/28/2002 Series III N/A N/A 15.08% 09/05/2003 MSCI EAFE Index(B) 39.17% 0.26% 3.17%
(A)From June 1, 2000 until November 25, 2002, a portion of the International Stock Trust expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (D)Effective November 25, 2002, DeAMIS became the subadviser to the International Stock Trust. Performance reflects results prior to this change. SUBADVISER AND PORTFOLIO MANAGERS DeAMIS located at One Appold Street, London, England, is an indirect wholly-owned subsidiary of Deutsche Bank AG which is described above. DeAMIS provides a full range of investment advisory services to retail and institutional clients and as of September 30, 2002 had total assets under management of approximately $6 billion. The portfolio managers are: -- Alexander Tedder. Managing Director, Deutsche Asset Management, and Lead Manager of the portfolio. - Joined the investment advisor in 1994. Prior to that, was a European analyst and representative for Schroders. - 13 years of investment industry experience. - Fluent in German, French, Italian and Spanish. - Masters in Economics and Business Administration from Freiburg University. -- Marc Slenderbroek, Director, Deutsche Asset Management, and Co-Manager of the portfolio. - Portfolio manager for EAFE Equities; London. - Joined Deutsche Investment Management Americas Inc. (formerly Zurich Scudder Investments, Inc.) in 1994 after five years of experience as equity analyst at Kleinwort Benson Securities and at Enskilda Securities. - Fluent in English, Dutch, German, Swedish and Norwegian. - MA from University of Leiden, Netherlands. -- Clare Gray, Director, Deutsche Asset Management and Co-Manager of the portfolio. - Joined the investment advisor in 1993. - Ten years of investment industry experience. - Chartered Financial Analyst. - BS, Cornell University. -- Stuart Kirk, Associate Director, Deutsche Asset Management, and Co-Manager of the portfolio. - Joined the investment advisor in 1995. - Seven years of investment industry experience. - Asia-Pacific analyst. - MA from Cambridge University. 35 OVERSEAS TRUST SUBADVISER: Fidelity Management & Research Company ("FMR") INVESTMENT OBJECTIVE: To seek growth of capital. INVESTMENT STRATEGIES: The portfolio normally invests at least 80% of its net assets in non-U.S. securities (primarily common stocks). FMR relies on fundamental analysis of each issuer and may also invest across different countries and regions. FMR normally invests at least 80% of the portfolio's assets in non-U.S. securities. FMR normally invests the portfolio's assets primarily in common stocks. The portfolio normally diversifies its investments across different countries and regions. In allocating the portfolio's investments across countries and regions, FMR will consider the size of the market in each country and region relative to the size of the international market as a whole. In buying and selling securities for the portfolio, FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. Factors include growth potential, earnings estimates, and management. FMR may use various techniques, such as buying and selling futures contracts and exchange traded funds, to increase or decrease the portfolio's exposure to changing security prices or other factors that affect security values. If FMR's strategies do not work as intended, the portfolio may not achieve its objective. Temporary Defensive Investing The portfolio reserves the right to invest without limitation in preferred stocks and investment-grade debt instruments for temporary, defensive purposes. Country or Geographic Region FMR considers non-U.S. securities to include investments that are tied to a particular country or region outside the U.S. FMR considers a number of factors to determine whether an investment is tied to a particular country or region including: the source of government guarantees (if any); the primary trading market; the issuer's domicile, sources of revenue, and location of assets; whether the investment is included in an index representative of a particular country or region; and whether the investment is exposed to the economic fortunes and risks of a particular country or region. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in foreign equity securities. The risks of investing in equity securities and in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance(A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 25.75% (for the quarter ended 12/1999) and the lowest return was -21.38% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 7% 12.6% -0.1% 8% 40.5% -18.7% -21.1% -21.4% 43.8% 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Overseas Trust Series I 43.83% 0.36% 3.18% 01/09/1995 Series II 43.71% N/A 8.54% 01/28/2002 Series III N/A N/A 16.14% 09/05/2003 MSCI EAFE Index(B) 39.17% 0.26% 4.42%
36 (A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS FMR has served as the portfolio's subadviser since May 1, 2001 when it assumed responsibility from Fidelity Management Trust Company as subadviser to the portfolio listed above. FMR Corp., organized in 1972, is the ultimate parent company of FMR. As of December 31, 2003, FMR and its affiliate, FMR Co., Inc, had approximately $799 billion in discretionary assets under management. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for the portfolio listed above. FMRC will be primarily responsible for choosing investments for the portfolio. FMRC is a wholly-owned subsidiary of FMR. The Portfolio Manager is: -- Richard R. Mace, Jr. (since May, 1999). Mr. Mace joined FMR in 1987, FMRC in 2001 and has worked as an analyst and manager. Mr. Mace also manages Fidelity Overseas and Advisor Overseas Fund. INTERNATIONAL SMALL CAP TRUST SUBADVISER: Templeton Investment Counsel, LLC ("Templeton") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The Portfolio invests primarily in the common stock of smaller companies outside the U.S. Under normal market conditions, the portfolio will invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities issued by foreign companies which have total stock market capitalizations or annual revenues of $2 billion or less ("small company securities"). The portfolio may invest in small company securities in emerging markets. In some emerging markets, the Portfolio may invest in companies that qualify as smaller companies but that still are among the largest in the market. The Portfolio may also invest a portion of its assets in the equity securities of larger foreign companies. An equity security, or stock, represents a proportionate share of the ownership of a company; its value is based on the success of the company's business, any income paid to stockholders, the value of its assets, and general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities have characteristics of both debt securities (which is generally the form in which they are first issued) and equity securities (which are what they can be converted into). The Portfolio may invest more than 25% of its assets in the securities of issuers located in any one country. At least 65% of the portfolio's total assets are normally invested in foreign securities representing a minimum of three countries (other than the United States). When choosing equity investments for this Portfolio, the manager applies a "bottom up", value-oriented, long-term approach, focusing on the market price of a company's securities relative to the manager's evaluation of the company's long-term earnings, asset value and cash flow potential. The manager also considers a company's price/earnings ratio, profit margins and liquidation value. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in foreign securities, especially securities of small companies. The risks of investing in foreign securities, equity securities and small companies are set forth below under "Risks of Investing in Certain Types of Securities." -- Because the portfolio invests primarily in foreign securities, which are generally riskier investments than U.S. securities investing in this portfolio is riskier than investing in a portfolio that invests primarily in U.S. small companies. -- The portfolio invest in value stocks. A value stock may not increase in price, as anticipated by the subadviser, if other investors fail to recognize the company's value and bid up the price or invest in markets favoring faster-growing companies. 37 Performance(A, B, C, D, E) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 58.65% (for the quarter ended 12/1999) and the lowest return was -22.36% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- 0.8% 11.9% 84.9% -29.2% -31.1% -16.7% 54.7% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available International Small Cap Trust Series I 54.73% 3.10% 4.71% 03/04/1996 Series II 54.52% N/A 13.76% 01/28/2002 Series III N/A N/A 14.74% 09/05/2003 MSCI World ex-US Index(A) 40.01% 0.77% 3.89% Combined Index(A, C) 54.10% 2.72% 5.17% Citigroup Global ex-US <$2 billion Index(A, D) 59.20% 8.71% 4.07%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)The Combined Index was added to more accurately reflect the investment objective of the International Small Cap Trust. The Combined Index is a blend of the MSCI World ex US Index from inception through May 31, 2003 and the Citigroup Global ex US <$2 billion Index from June 1, 2003 and thereafter. (D)The Citigroup Global ex US <$2 billion Index was added to more accurately reflect the investment objective of the International Small Cap Trust. (E)Current subadviser assignment became effective May 5, 2003. SUBADVISER AND PORTFOLIO MANAGERS Templeton, located at 500 East Broward Blvd., Suite 2100, Ft. Lauderdale, FL 33394, has been in the business of providing investment advisory services since 1954. As of December 31, 2003, Templeton and its affiliates manage over $301 billion in assets. Templeton Investment Counsel, LLC is an indirect wholly owned subsidiary of Franklin Resources, Inc. The portfolio is managed by the following two portfolio managers: -- Tucker Scott (since May, 2003). Mr. Scott joined Templeton in 1996 and is currently a Senior Vice President. He is a Chartered Financial Analyst (CFA). -- Cindy Sweeting (since May, 2003). Ms. Sweeting joined the Templeton in 1997 and is currently an Executive Vice President and Director of Research. She is a Chartered Financial Analyst (CFA). -- Simon Rudolph (since May 2004). Mr. Rudolph joined Templeton in 1997 and is currently an Executive Vice President. He is a Chartered Accountant (ACA) and a member of the Institute of Chartered Accountants of England and Wales. 38 INTERNATIONAL VALUE TRUST SUBADVISER: Templeton Investment Counsel, LLC ("Templeton") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in equity securities of companies located outside the U.S., including in emerging markets. Equity securities generally entitle the holder to participate in a company's general operating results. These include common stocks and preferred stocks. The portfolio also invests in American, European and Global Depositary Receipts, which are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. Depending upon current market conditions, the portfolio generally invests up to 25% of its total assets in debt securities of companies and governments located anywhere in the world. Debt securities represent an obligation of the issuer to repay a loan of money to it, and generally provide for the payment of interest. Debt securities include bonds, notes and debentures. Templeton's investment philosophy is "bottom-up," value-oriented, and long-term. In choosing equity investments, Templeton will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measure, including price/earnings ratio, profit margins and liquidation value, will also be considered. Use of Hedging and Other Strategic Transactions The International Value Trust does not currently intend to use any of the investment strategies referred to under "Hedging and Other Strategic Transactions." Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities of companies located outside the United States. The risks of investing in equity securities and in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 25% of its assets in debt (fixed income) securities including foreign debt securities. The risks of investing in fixed income securities and in foreign securities is set forth below under "Risks of Investing in Certain Types of Securities." Because the portfolio has a 25% limit on debt securities, these risks will not affect the portfolio to the same degree as the risks of foreign equity securities. Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 24.18% (for the quarter ended 6/2003) and the lowest return was -23.56% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -6.5% -10.0% -17.8% 44.9% 2000 2001 2002 2003
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One Life of Date First Year Portfolio Available International Value Trust Series I 44.86% 0.86% 05/01/1999 Series II 44.52% 10.56% 01/28/2002 Series III N/A 14.27% 09/05/2003 MSCI EAFE Index(A) 39.17% -0.89%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. 39 SUBADVISER AND PORTFOLIO MANAGERS Templeton, located at 500 East Broward Blvd., Suite 2100, Ft. Lauderdale, FL 33394, has been in the business of providing investment advisory services since 1954. As of December 31, 2003, Templeton and its affiliates manage over $336 billion in assets. Templeton Investment Counsel, LLC is an indirect wholly owned subsidiary of Franklin Resources, Inc. The Portfolio Managers are: Lead Portfolio Manager -- Tucker Scott (since May, 1999). Mr. Scott joined Templeton in 1996 and is currently Senior Vice President. Prior to joining Franklin Templeton, Mr. Scott worked at Aeltus Investment Management. He is a Chartered Financial Analyst (CFA) Charter holder. The following individual has secondary portfolio management responsibilities: -- Cindy L. Sweeting (since 2003). Ms. Sweeting joined Templeton in 1997 and is currently an Executive Vice President and Director of Research. She is a Chartered Financial Analyst (CFA) Charter holder. -- Antonio T. Docal (since 2003). Mr. Docal joined Templeton in 2001 and is currently a Senior Vice President. He is a Chartered Financial Analyst (CFA) Charter holder. QUANTITATIVE MID CAP TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.") INVESTMENT OBJECTIVE: To seek long-term capital growth. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in U.S. mid-cap stocks, convertible preferred stocks, convertible bonds and warrants. The portfolio may also invest up to 20% of its assets in large-cap stocks, convertible preferred stocks, convertible bonds and warrants in an effort to reduce overall portfolio volatility and increase performance. Stocks of publicly traded companies -- and mutual funds that hold these stocks -- can be classified by the companies' market value, or capitalization. Market capitalization is defined according to Morningstar U.S. as follows: Based on a universe of the 5000 largest stocks in the U.S., the top 5% of the universe are large cap, the next 15% mid cap, and the bottom 80% are classified as small cap. Using this definition, as of 3/31/02, the largest company in the mid-cap universe was about $10 billion and the smallest about $1 billion. MFC Global ("U.S.A.") uses a bottom-up, as opposed to a top-down, investment style in managing the portfolio. This means that securities are selected based upon fundamental analysis performed by the portfolio manager and MFC Global ("U.S.A.")'s equity research analysts. The equity research analysts use fundamental analysis to identify mid-cap and large-cap securities with strong industry position, leading market share, proven management and a strong balance sheet. The analysts then rank all such securities based on financial attributes (including earnings, growth and momentum) using quantitative analysis. Securities at the top of this ranking may be purchased by the portfolio. The Quantitative Mid Cap Trust may invest in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contract for the purchase or sale of a fixed quantity of a foreign currency at a future date. Investments in foreign securities may include depositary receipts. The Quantitative Mid Cap Trust may also invest to a limited extent in fixed income securities including money market instruments. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities, especially mid-cap equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities -- Equity Securities" and "Risks of Investing in Certain Types of Securities -- Small and Medium Size Companies." -- The portfolio may invest in foreign securities (including emerging market securities). The risks of investing in these securities are set forth under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 40 The bar chart reflect the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 14.96% (for the quarter ended 6/2003) and the lowest return was -23.63% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -22.7% 38.5% 2002 2003
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One Life of Date First Year Portfolio Available Quantitative Mid Cap Trust Series I 38.53% -4.90% 04/30/2001 Series II 38.32% 4.40% 01/28/2002 S&P Mid Cap 400 Index(B) 35.61% 5.83%
(A)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. (B)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since the information for this index is only provided as of a month end. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios listed above. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Funds Direct (Hong Kong) Limited, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Portfolio Managers are: -- Mark Schmeer (since May, 2001). Mr. Schmeer joined MFC Global in 1996. He is Vice President and Managing Director of North American Equities at Manulife Financial. Prior to 1996, Mr. Schmeer was Vice President of Sun Life Investment Management, where he served from 1993 to 1996. He is a Chartered Financial Analyst, and graduated from Boston College with an MA in Economics. -- Rhonda Chang (since May, 2001). Ms. Chang joined MFC Global in 1996. She is Assistant Vice President and Portfolio Manager of U.S. Equities at Manulife Financial. Prior to joining Manulife Financial in 1994, Ms. Chang was an investment analyst with AIG Global Investors. She is a Chartered Financial Analyst and graduated from York University with an MBA. MID CAP CORE TRUST SUBADVISER: A I M Capital Management, Inc. ("AIM") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by investing, normally, at least 80% of its assets in equity securities, including convertible securities, of mid-capitalization companies. The portfolio considers a company to be a mid-capitalization company if it has a market capitalization, at the time of purchase, within the range of the largest and smallest capitalized companies included in the Russell Midcap Index during the most recent 11-month period (based on month-end data) plus the most recent data during the current month. The Russell Midcap Index measure the performance of the 800 companies with the lowest market capitalization in the Russell 1000 Index. The Russell 1000 Index is a widely recognized, unmanaged index of common stocks of the 1000 largest companies in the Russell 3000 Index, which measure the performance of the 3000 largest U.S. companies based on total market capitalization. The companies in the Russell Midcap Index are considered representative of medium-sized companies. As of March 26, 2003, the market cap range of the Russell Midcap Index was $650 million to $11 billion. In complying with the 80% investment requirement, the portfolio's investments may include synthetic instruments. Synthetic instruments are investment that have economic characteristics similar to the portfolio's direct investments. The portfolio may invest up to 20% of it assets in equity securities of companies in other market capitalization ranges. The portfolio may also invest up to 20% of its assets in investment-grade debt securities. The portfolio may invest up to 25% of its total assets in foreign securities. For risk management or cash management purposes, the portfolio may hold a portion of its assets in cash or cash equivalents, including shares of money market funds*. Any percentage limitations with respect to assets of the portfolio are applied at the time of purchase. 41 In selecting investments, the portfolio managers seek to identify those companies that are, in their view, undervalued relative to current or projected earnings, or the current market value of assets owned by the company. The primary emphasis of the portfolio managers' search for undervalued equity securities is in four categories: (1) out-of-favor cyclical growth; (2) established growth companies that are undervalued compared to historical relative valuation parameters; (3) companies where there is early but tangible evidence of improving prospects which are not yet reflected in the value of the companies' equity securities; and (4) companies whose equity securities are selling at prices that do not yet reflect the current market value of their assets. The portfolio managers consider whether to sell a particular security when any of these factors materially change. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests in mid-cap companies. The risks of investing in mid-cap companies are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 25% of its assets in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 20% of its assets in investment-grade debt securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS A I M Capital Management, Inc., ("AIM"). AIM manages the Aggressive Growth Trust and the All Cap Growth Trust. AIM is an indirect wholly owned subsidiary of A I M Management Group Inc., whose principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas 77046. A I M Management Group, Inc. founded in 1976, is a holding company engaged in the financial services business and is a wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are an independent investment management group engaged in institutional investment management and retail mutual fund businesses in the United States, Europe and the Pacific Region. AIM, and/or its affiliates is the investment adviser for mutual funds, separately managed accounts, such as corporate and municipal pension plans, charitable institutions and private individuals. The Portfolio Managers are: -- Ronald S. Sloan (Lead Manager) (since May, 2003). Mr. Sloan is a Senior Portfolio Manager at AIM. Mr. Sloan joined AIM in 1998. From 1993 to 1998, he was President of Verissimo Research & Management, Inc. GLOBAL TRUST (FORMERLY, GLOBAL EQUITY TRUST) SUBADVISER: Templeton Global Advisors Limited ("Templeton Global"). INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: Under normal market conditions, the portfolio invests at least 80% of its net assets (plus any borrowings for investment purposes) in the equity securities of companies located anywhere in the world, including emerging markets. At least 65% of its total assets will be invested in issuers located in at least three different countries (including the U.S.). Equity securities include common stocks and preferred stocks. The portfolio also invests in American, European and Global Depositary Receipts. These are certificates issued typically by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. The portfolio, from time to time, may have significant investments in one or more countries or in particular sectors such as technology (including computer hardware and software, electronics, and telecommunications) and financial institutions. Depending upon current market conditions, the portfolio generally invests a portion of its total assets in debt securities of companies and governments located anywhere in the world. Debt securities represent the obligation of the issuer to repay a loan of money to it, and generally pay interest to the holder. Bonds, notes and debentures are examples of debt securities. The portfolio may use swap agreements as a derivative strategy to protect its assets, implement a cash or tax management strategy or enhance its returns. The portfolio may invest up to 5% of its total assets in swap agreements. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest 42 factor. Please see "Hedging and Other Strategic Transactions -- Swaps, Caps, Floors and Collars in the Statement of Additional Information for further information. When choosing equity investments for the portfolio, the subadviser applies a "bottom-up," value-oriented, long-term approach, focusing on the market price of a company's securities relative to the subadviser's evaluation of the company's long-term earnings, asset value and cash flow potential. The subadviser also considers and analyzes various measure related to stock valuation, such as a company's price/cash flow ratio, price/earnings ratio, profit margins and liquidation value. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Global Trust may invest primarily in cash, cash equivalents, money market securities or other short-term debt securities. When the portfolio is in a defensive position or awaiting investment of its assets, the ability to achieve its investment objective will be limited. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio will invest in foreign securities (including emerging market securities). The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 17.83% (for the quarter ended 6/2003) and the lowest return was -16.96% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- 1.7% 7.7% 12.6% 20.8% 12.2% 3.7% 12.2% -16.1% -19.1% 27.5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Global Trust Series I 27.46% 0.12% 5.34% N/A 03/18/1988 Series II 27.23% N/A N/A 5.18% 01/28/2002 Series III N/A N/A N/A 9.07% 09/05/2003 MSCI World Index 33.76% -0.39% 7.58% N/A
(A)Effective October 1, 1996, April 30, 2001 and December 9, 2003, the portfolio changed its subadviser. Performance reflects results prior to this change. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Templeton Global, located at Box N-7759, Nassau, Bahamas has been in the business of providing investment advisory services since 1954. As of December 31, 2003, Templeton and its affiliates manage over $301 billion in assets. Templeton Global is an indirect wholly owned subsidiary of Franklin Resources, Inc. The portfolio's lead portfolio manager is: -- Jeffrey A. Everett (since December, 2003). Mr. Everett joined the Templeton in 1989 and is currently President of Templeton Global Advisors Limited and a Chief Investment Officer -- Retail for the Templeton Global Equity Group. He is a Chartered Financial Analyst (CFA). The following individuals have secondary portfolio management responsibilities: -- Murdo Murchison (since December, 2003). Mr. Murchinson joined the Templeton in 1993 and is currently Executive Vice President of Templeton Global Advisors Limited. He is a Chartered Financial Analyst (CFA). 43 -- Lisa Myers (since December, 2003). Ms. Myers joined Templeton in 1996 and is currently Vice President of Templeton Global Advisors Limited. She is a Chartered Financial Analyst (CFA). STRATEGIC GROWTH TRUST SUBADVISER: Massachusetts Financial Services Company ("MFS") INVESTMENT OBJECTIVE: To seek capital appreciation. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 65% of its total assets in common stocks and related securities (such as preferred stocks, bonds, warrants or rights convertible into stock and depositary receipts for these securities) of companies which MFS believes offer superior prospects for growth. Equity securities may be listed on a securities exchange or traded in the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the equity-oriented portfolios (such as the Strategic Growth Trust) that it advises. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and managements' abilities) performed by the portfolio manager of the portfolio and MFS' large group of equity research analysts. In managing the portfolio, MFS seeks to purchase securities of companies which MFS considers well-run and poised for growth. MFS look particularly for companies which demonstrate: -- a strong franchise, strong cash flows and a recurring revenue stream -- a solid industry position, where there is potential for high profit margins -- substantial barriers to new entry in the industry -- a strong management team with a clearly defined strategy -- a catalyst which may accelerate growth The portfolio may invest in foreign securities, including depositary receipts, dollar denominated foreign debt securities and emerging market securities, through which it may have exposure to foreign currencies. The Strategic Growth may also invest to a limited extent in: (a) fixed income securities, (c) U.S. Government Securities, (d) variable and floating rate obligations, (e) zero coupon bonds, deferred interest bonds and PIK bonds, (f) investment companies, (g) restricted securities, (h) short sales and short sales against the box, (i) indexed securities. These investment techniques and practices are described further in the prospectus under "Additional Investment Policies and Transactions" and in the Statement of Additional Information. The portfolio may engage in active and frequent trading to achieve its principal investment strategies which will increase transaction costs. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests extensively in the securities of companies which the subadviser believes are poised for growth. The price of such securities in certain economic, political or market conditions may fall to a greater extent than a decline in the overall equity markets (e.g., as represented by the Standard and Poor's Composite 500 Index). -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in securities traded in the over-the-counter markets which involves risks in addition to those associated with transaction in securities traded on exchanges. OTC listed companies may have limited product lines, markets or financial resources. Many OTC stocks trade less frequently and in smaller volume than exchange-listed stocks. The value of these stocks may be more volatile than exchange-listed stocks, and the portfolio may experience difficulty in establishing or closing out positions in these stocks at prevailing market prices. Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 44 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 19.39% (for the quarter ended 12/2001) and the lowest return was -23.91% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -28.0% 26.9% 2002 2003
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One Life of Date First Year Portfolio Available Strategic Growth Trust Series I 26.86% -7.81% 04/30/2001 Series II 26.61% -2.68% 01/28/2002 Series III N/A 4.36% 09/05/2003 Russell 1000 Growth Index(B) 29.75% -6.51%
(A)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (B)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since the information for this index is only provided as of a month end. SUBADVISER AND PORTFOLIO MANAGERS Massachusetts Financial Services Company ("MFS") is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. MFS is an indirect subsidiary of Sun Life Assurance Company of Canada (an insurance company). MFS is located at 500 Boylston Street, Boston, Massachusetts 02116. The Portfolio Manager is: -- S. Irfan Ali (since May, 2001). Mr. Ali is a Senior Vice President of MFS and has been employed by MFS since 1993. Mr. Ali has managed the MFS Strategic Growth Fund since 1999. CAPITAL APPRECIATION TRUST SUBADVISER: Jennison Associates LLC ("Jennison") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests at least 65% of the portfolio's total assets in equity-related securities of companies that exceed $1 billion in market capitalization and that Jennison believes have above-average growth prospects. These companies are generally medium- to large-capitalization companies. Jennison follows a highly disciplined investment selection and management process that seeks to identify companies that show superior absolute and relative earnings growth and also are attractively valued. Jennison looks for companies that experience some or all of the following: (i) above average revenue and earnings per share growth, (ii) strong market position, (iii) improving profitability and distinctive attributes such as unique marketing ability, (iv) strong research and development and productive new product flow and (v) financial strength. Such companies generally trade at high prices relative to their current earnings. Earnings predictability and confidence in earnings forecasts are important parts of the selection process. Securities in which the Capital Appreciation Trust invests have historically been more volatile than the S&P 500 Index. Also, companies that have an earnings growth rate higher than that of the average S&P 500 company tend to reinvest their earnings rather than distribute them. Therefore, the portfolio is not likely to receive significant dividend income on its portfolio securities. In addition to common stocks, nonconvertible preferred stock and convertible securities, equity-related securities in which the Capital Appreciation Trust invests include: (i) American Depository Receipts (ADRs); (ii) warrants and rights that can be exercised to obtain stock; (iii) investments in various types of business ventures, including partnerships and joint ventures; (iv) real estate investment trusts (REITS) and similar securities. (Convertible securities are securities -- like bonds, corporate notes and preferred stocks -- that the portfolio can convert into the company's common stock or some other equity security.) The Capital Appreciation Trust may invest up to 35% of its total assets in equity-related securities of companies that are undergoing changes in management or product or changes in marketing dynamics that have not yet been reflected in 45 reported earnings (but are expected to affect earnings in the intermediate term.) These securities often are not widely known and favorably valued. In addition to the principal strategies discussed above, the Capital Appreciation Trust may also use the following investment strategies to attempt to increase the portfolio's return or protect its assets if market conditions warrant: 1. The portfolio may invest up to 35% of its total assets in equity-related securities of companies that are undergoing changes in management or product or changes in marketing dynamics that have not yet been reflected in reported earnings (but are expected to affect earnings in the intermediate term.) These securities often are not widely known and favorably valued. 2. The portfolio may make short sales of a security including short sales "against the box." 3. The portfolio may invest up to 20% of the portfolio's total asset in foreign equity securities. (For purposes of this 20% limit, ADRs and other similar receipts or shares are not considered to be foreign securities.) 4. The portfolio may invest in U.S. government securities issued or guaranteed by the U.S. government or by an agency or instrumentality of the U.S. government. 5. The portfolio may invest in mortgage-related securities issued or guaranteed by U.S. governmental entities, including collateralized mortgage obligations, multi-class pass through securities and stripped mortgage backed securities. 6. The portfolio may invest in fixed-income securities rated investment-grade (Baa or higher by Moody's Investor Service, Inc. or BBB or higher by Standard & Poor's Ratings Group or the equivalent rating by another rating service.) These include corporate debt and other debt obligations of U.S. and foreign issuers. The portfolio may invest in obligations that are not rated, but that the Jennison believes are of comparable quality to these obligations. 7. The portfolio may invest in repurchase agreements. Jennison considers selling or reducing a stock position when, in the opinion of the investment adviser, the stock has experienced a fundamental disappointment in earnings, it has reached an intermediate price objective and its outlook no longer seems sufficiently promising, a relatively more attractive stock emerges or the stock has experienced adverse price movement. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 16.38% (for the quarter ended 12/2001) and the lowest return was -19.64% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -18.4% -30.6% 29.5% 2001 2002 2003
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One Life of Date First Year Portfolio Available Capital Appreciation Trust Series I 29.47% -13.02% 11/01/2000 Series II 29.35% -4.30% 01/28/2002 Series III N/A 5.51% 09/05/2003 Russell 1000 Growth Index(A) 29.75% -14.24%
(A)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. 46 (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)Since November, 2000 a portion of the Capital Appreciation Trust expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. SUBADVISER AND PORTFOLIO MANAGERS Jennison, 466 Lexington Avenue, New York, New York 10017, is a Delaware limited liability company and has been in the investment advisory business since 1969 (includes its predecessor, Jennison Associates Capital Corp.). Jennison is a direct, wholly-owned subsidiary of Prudential Investment Management, Inc., which is a direct, wholly-owned subsidiary of Prudential Asset Management Holding Company, which is a direct, wholly-owned subsidiary of Prudential Financial, Inc. As of December 31, 2003, Jennison had approximately $59 billion in assets under management. The Portfolio Managers are: -- Kathleen A. McCarragher (since November, 2000). Ms. McCarragher joined Jennison in 1998 and is a Director and Executive Vice President at Jennison. She is also Jennison's Head of Growth Equity. Prior to joining Jennison, she was employed at Weiss, Peck & Greer L.L.C. as a managing director and director of large cap growth equities for six years. Ms McCarragher received her B.B.A. degree from the University of Wisconsin and her M.B.A. from Harvard University. -- Michael A. Del Balso (since November, 2000). Mr. Del Balso joined Jennison in 1972 and is currently a Director and Executive Vice President at Jennison. He is also Jennison's Director of Research for Growth Equity. Mr. Del Baslo is a graduate of Yale University and received his M.B.A. from Columbia University. He is a member of The New York Society of Security Analysts, Inc. -- Spiros Segalas (since November, 2000). Mr. Segalas was a founding member of Jennison in 1969 and is currently a Director, President and Chief Investment Officer at Jennison. He received his B.A. from Princeton University and is a member of The New York Society of Security Analysts, Inc. U.S. GLOBAL LEADERS GROWTH TRUST SUBADVISER: Sustainable Growth Advisers, L.P. ("SGA") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in common stocks of "U.S. Global Leaders." Under normal market conditions, at least 80% of the portfolio's assets will be invested in stocks of companies the subadviser regards as U.S. Global Leaders. The subadviser consider U.S. Global Leaders to be U.S. companies with multi-national operations that typically exhibit the following sustainable growth characteristics: -- Hold leading market share of their relevant industries that result in high profit margins and high investment returns. -- Supply consumable products or services so that their revenue streams are recurring. The subadvisers seek to indentify companies with superior long-term earnings prospects and to continue to own them as long as the subadvisers believe they will continue to enjoy favorable prospectus for capital growth and are not overvalued in the marketplace. As a result of its investment strategy, the portfolio typically invests in large capitalization companies (companies in the capitalization range of the Standard & Poor's 500 Index). The portfolio may invest in other types of equities and foreign stocks. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio's management strategy has a significant influence on portfolio performance. Large capitalization stocks as a group could fall out of favor with the market, causing the portfolio to underperform investments that focus on small- or medium capitalization stocks. -- The portfolio focuses on growth stocks, which could underperform value stocks. -- The portfolio may invest in multinational companies which may have substantial international operations. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." 47 Performance Performance is not provided since the portfolio commenced operations in May, 2004. SUBADVISERS AND PORTFOLIO MANAGERS SGA manages the U.S. Global Leader Growth Trust. SGA is located at 1285 Avenue of the Americas, 35th Floor, New York, NY 10019. SGA was founded in July, 2003 and is controlled by its founders, George P. Fraise, Gordon M. Marchand and Robert L. Rohn, who are also the portfolio managers of the portfolio. The portfolio is managed by the following portfolio managers. -- George P. Fraise (since May, 2004). Mr. Fraise is a principal of SGA. From 2000-2003, Mr. Fraise was executive vice president of Yeager, Wood & Marshall, Inc. From 1997 to 2000, Mr. Fraise was a portfolio manager at Scudder Kemper Investments. -- Gordon M. Marchand (since May, 2004). Mr. Marchand is a principal of SGA. From 1984-2003, Mr. Marchand was chief financial and operating officer of Yeager, Wood & Marshall, Inc. -- Robert L. Rohn (since May, 2004). Mr. Rohn is a principal of SGA. From 1992 to 2003, Mr. Rohn was an Analyst and Portfolio Manager at W.P. Stewart & Co. ("W.P. Stewart") and held positions of Chairman of the Board and Chief Executive Officer of W.P. Stewart Inc., W.P. Stewart's core U.S. investment business, and served as Chairman of the W.P. Stewart Inc.'s Management Committee. QUANTITATIVE ALL CAP TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited. ("MFC GLOBAL (U.S.A.)") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by investing, under normal circumstances, primarily in equity securities of U.S. companies. The portfolio will generally focus on equity securities of U.S. companies across the three market capitalization ranges of large, mid and small. MFC Global ("U.S.A.") ranks stocks based on financial attributes, including earnings, valuation, growth and momentum using quantitative analysis. (Quantitative Analysis is the process of determining the value of a security by examining its numerical, measurable characteristics such as revenues, price, earnings, valuation and growth and by performing statistical and numerical analysis on this characteristic data.) The management team will then use fundamental analysis to identify large, mid and small cap companies with strong industry position, leading market share, proven management and strong financials. Stocks meeting both fundamental and quantitative analysis will be considered for the portfolio. The Quantitative All Cap Trust may invest to a limited extent in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. Investments in foreign securities may include depositary receipts. The Quantitative All Cap Trust may also invest to a limited extent in fixed income securities including money market instruments. The portfolio may invest in or use the following derivatives for hedging purposes in a manner consistent with the investment objectives of the Fund and as permitted by applicable securities legislation: buying futures and S&P Depository Receipts. Such use would include the hedging of significant cash flows into or out of the portfolio. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest to a limited extent in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest to a limited extent in fixed income securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. 48 SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios listed above. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Asset Management (Hong Kong) Limited (formerly known as Manulife Funds Direct (Hong Kong) Limited, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Portfolio Managers are: -- Mark Schmeer (since May, 2003). Mr. Schmeer joined MFC Global in August of 1995. He is Vice President and Managing Director of North American Equities at MFC Global. Prior to August of 1995, Mr. Schmeer was Vice President of Sun Life Investment Management, where he served from 1993 to August 1995. He holds the Chartered Financial Analyst designation, and graduated from Boston College with an MA in Economics. -- Harpreet Singh (since May, 2003). Mr. Singh joined MFC Global in August of 2000. He is Assistant Vice President and Portfolio Manager of U.S. Equities at MFC Global. Prior to joining MFC Global in 2000, Mr. Singh was Quantitative Analyst at Standish, Ayer & Wood Inc. Mr. Singh graduated with an MBA from Bentley College and a B. Tech (Chemical Engineering) from Indian Institute of Technology. -- Chris Hensen (since May, 2003). Mr. Hensen joined MFC Global in July of 1995. He is Assistant Vice President and Portfolio Manager of U.S. Equities at MFC Global. Mr. Hensen holds the Chartered Financial Analyst designation and is a graduate of York University with a BBA and an MBA. -- Rhonda Chang (since May, 2003). Ms. Chang joined MFC Global in 1994 as research analyst with the U.S. equity team and was promoted to portfolio manager in 1996. She is now Assistant Vice President and Senior Portfolio Manager of U.S. Equities at MFC Global. Prior to joining MFC Global in 1994, Ms. Chang was an investment analyst with AIG Global Investors. She holds the Chartered Financial Analyst designation and graduated from York University with an MBA. -- Robert Lutzko (since May, 2003). Mr. Lutzko joined MFC Global in September of 1995. He is Vice President and Senior Portfolio Manager of U.S. Equities at MFC Global. Prior to joining MFC Global in 1995, Mr. Lutzko was Portfolio Manager U.S. Equities, managing both U.S. Large-Cap and Small-Cap investments at the Workers Compensation Board's Investment Management division. Mr. Lutzko holds the Chartered Financial Analyst designation and is a graduate of Sheridan College (Computer Science). -- Brett Hryb (since May, 2003). Mr. Hryb joined MFC Global in March of 1993. He is a Portfolio Manager of U.S. Equities at MFC Global. Mr. Hyrb holds the Chartered Financial Analyst designation and is a graduate of McMaster University (B.Comm). ALL CAP CORE TRUST (FORMERLY, GROWTH TRUST) SUBADVISER: Deutsche Asset Management, Inc. ("DeAM") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests in common stocks and other equity securities within all asset classes (small, mid and large cap) primarily those within the Russell 3000 Index. The portfolio may invest in all types of equity securities including common stocks, preferred stocks and preferred and preference stocks, convertible securities and depositary receipts for such securities. These securities may be listed on securities exchanges, traded in various over-the-counter markets or have no organized markets. The portfolio may also invest in U.S. Government securities and up to 5% of its assets in foreign securities. Investment Philosophy. DeAM pursues an actively managed, quantitative investment process. DeAM's investment philosophy is based on three central tenets: -- Securities have an intrinsic value from which they deviate over time. DeAM believes that the best way to measure a security's fair vale is relative to its peers within its own industry. -- Finding attractive companies with long-term potential requires a consideration of both growth and value attributes. Technical analysis further enhances the stock selection process, helping to identify timely market opportunities. -- Quantitative investment models provide an improved framework for selecting mispriced stocks in an unbiased, consistent and repeatable manner. Quantitative Investment Approach. DeAM blends fundamental equity analysis and quantitative investment theory into a disciplined and systematic process. This technique minimizes subjectivity and allows the team to analyze the broadest possible universe of stocks. DeAM's proprietary U.S. stock evaluation model, the Quantitative Investment Model (the "Model"), incorporates valuation and growth investment parameters and is used to select securities. DeAM believes that combining techniques used by fundamental value investors with extensive growth and earnings analysis minimizes investment style bias and ultimately produces a "pure" stock selection process that seeks to add value in any market 49 environment. DeAM also incorporates technical analysis to capture short-term price changes and market responsiveness to new information. By applying a rigorous portfolio construction process, the team targets excess return levels similar to traditional managers, while holding a significantly more diversified basket of stocks. Non-linear market impact assumptions are also incorporated into the process to maximize the trade-off between the anticipated pickup from trading and the costs associated with making these trades. Portfolio Construction and Quantitative Risk Management. DeAM extensively screens the Russell 3000 universe using multiple investment parameters to identify what DeAM believes are the most and least attractive securities. Expected returns are generated for each stock relative to its own industry. Securities are then selected based on expected returns, risk control constraints and anticipated transaction costs. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 23.59% (for the quarter ended 12/1999) and the lowest return was -24.41% (for the quarter ended 3/2001). - -------------------------------------------------------------------------------- 25.4% 24.0% 37.2% -27.3% -21.4% -25.2% 31.5% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available All Cap Core Trust Series I 31.54% -5.05% 3.84% 07/15/1996 Series II 31.26% N/A 0.19% 01/28/2002 Russell 3000 Index(B) 31.06% 0.37% 9.42% Combined Index(B, C) 31.06% -4.67% 7.10%
(A)Effective November 25, 2002, the portfolio changed its subadviser. Performance reflects results prior to these changes. (B)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (C)The Combined Index was added to more accurately reflect the investment objective of the All Cap Core Trust. The Combined Index is a blend of the Russell 1000 Growth Index from inception through December 31, 2002 and the Russell 3000 Index from January 1, 2003 and thereafter. (D)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS DeAM, located at 280 Park Avenue, New York, New York 10017, is an indirect wholly-owned subsidiary of Deutsche Bank AG, an international commercial and investment banking group. Deutsche Bank AG is a major banking institution that is engaged in a wide range of financial services, including investment management, mutual fund, retail, private and commercial banking, investment banking and insurance. DeAM provides a full range of investment advisory services to retail and institutional clients. 50 The portfolio managers are as follows: -- Janet Campagna. Managing Director, DeAM and portfolio manager - Joined the investment advisor in 1999. - Head of DeAM's Advance Research and Quantitative Strategies Group - Overseas $250 billion in global asset allocation assets -- Robert Wang. Managing Director, DeAM and portfolio manager - Joined the investment advisor in 1995. - Senior Portfolio Manager for the Multi-Asset Class Quantitative Strategies Group - Overseas $2.4 billion in global quantitative equity assets LARGE CAP GROWTH TRUST SUBADVISER: Fidelity Management & Research Company ("FMR") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: FMR normally invests at least 80% the portfolio's assets in securities (primarily common stocks) of companies with large market capitalizations. Portfolio securities are selected based on the fundamental analysis of each issuer. Investments may include domestic and foreign issuers, and growth or value stocks or a combination of both. FMR normally invests at least 80% of the portfolio's assets in securities of companies with large market capitalizations. FMR normally invests the portfolio's assets primarily in common stock. Although a universal definition of large market capitalization companies does not exist, for purposes of this portfolio, FMR generally defines large market capitalization companies as those whose market capitalization is similar to the market capitalization of companies in the S&P 500(R) Index or the Russell 1000(R) Index. A company's market capitalization is based on its current market capitalization or its market capitalization at the time of the portfolio's investment. Companies whose capitalization is below this level after purchase continue to be considered to have a large market capitalization for purposes of the 80% policy. The size of the companies in each index changes with market conditions and the composition of each index. FMR may invest the portfolio's assets in securities of foreign issuers in addition to securities of domestic issuers. FMR is not constrained by any particular investment style. At any given time, FMR may tend to buy "growth" stocks or "value" stocks, or a combination of both types. In buying and selling securities for the portfolio, FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. Factors considered include growth potential, earnings estimates and management. FMR may use various techniques, such as buying and selling futures contracts and exchange traded funds, to increase or decrease the portfolio's exposure to changing security prices or other factors that affect security values. If FMR's strategies do not work as intended, the portfolio may not achieve its objective. Temporary Defensive Investing The portfolio reserves the right to invest without limitation in preferred stocks and investment-grade debt instruments for temporary, defensive purposes. Use of Hedging and Other Strategic Transactions The Large Cap Growth Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." The portfolio may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 51 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 20.83% (for the quarter ended 12/1999) and the lowest return was -18.72% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -0.7% 22.8% 13.0% 19.1% 19.1% 25.3% -14.2% -17.8% -22.8% 25.3% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Large Cap Growth Trust Series I 25.33% -3.11% 5.26% N/A 08/03/1989 Series II 25.24% N/A N/A -2.50% 01/28/2002 Russell 1000 Growth Index 29.75% -5.11% 9.21% N/A Combined Index(B) 29.75% -5.26% 4.21% N/A
(A)Effective May 1, 1999, the portfolio changed its investment objective. Performance includes results prior to these changes. (B)The Combined Index is comprised of 47.5% of the return of the Wilshire 5000 Index, 20% of the MSCI EAFE Index, 15% of the Lehman Brothers Aggregate Bond Index, 10% of the 90 Day T-Bill, and 7.5% of the Merrill Lynch High Yield Index since inception and 100% return of the Russell 1000 Growth Index thereafter. The Combined Index was prepared by the adviser using Ibbotson Associates Software and Data. (C)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS FMR has served as the portfolio's subadviser since May 1, 2001 when it assumed responsibility from Fidelity Management Trust Company as subadviser to the portfolio listed above. FMR Corp., organized in 1972, is the ultimate parent company of FMR. As of December 31, 2003, FMR and its affiliate, FMR Co., Inc, had approximately $799 billion in discretionary assets under management. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109. Beginning May 1, 2001, FMR Co., Inc. (FMRC) serves as sub-subadviser for the portfolio listed above. FMRC will be primarily responsible for choosing investments for the portfolio. FMRC is a wholly owned subsidiary of FMR. The Portfolio Manager is: -- Karen Firestone (since May, 1999). Ms. Firestone joined FMR 1983, FMRC in 2001 and has worked as an analyst and manager. Ms. Firestone also manages Fidelity Advisor Large Cap Fund. BLUE CHIP GROWTH TRUST SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price") INVESTMENT OBJECTIVE: To provide long-term growth of capital. Current income is a secondary objective. INVESTMENT STRATEGIES: The portfolio invests at least 80% of its net assets in the common stocks of large and medium-sized blue chip growth companies. These are firms that in T. Rowe Price's view, are well established in their industries and have the potential for above-average earnings growth. In identifying blue chip companies, T. Rowe Price generally considers the following characteristics: Leading market positions. Blue chip companies often have leading market positions that are expected to be maintained or enhanced over time. Strong positions, particularly in growing industries, can give a company pricing flexibility as well as the potential for good unit sales. These factors, in turn, can lead to higher earnings growth and greater share price appreciation. Seasoned management teams. Seasoned management teams with a track record of providing superior financial results are important for a company's long-term growth prospects. T. Rowe Price analysts will evaluate the depth and breadth of a company's management experience. Strong financial fundamentals. Companies should demonstrate faster earnings growth than their competitors and the market in general; high profit margins relative to competitors; strong cash flow; a healthy balance sheet with relatively low debt; and a high return on equity with a comparatively low dividend payout ratio. T. Rowe Price evaluates the growth prospects of companies and the industries in which they operate. T. Rowe Price seeks to identify companies with strong market franchises in industries that appear to be strategically poised for long-term growth. This investment approach reflects T. Rowe Price's belief that the combination of solid company fundamentals (with 52 emphasis on the potential for above-average growth in earnings or operating cash flow) along with a positive industry outlook will ultimately reward investors with strong investment performance. Some of the companies T. Rowe Price targets will have good prospects for dividend growth. While most of the assets of the portfolio are invested in U.S. common stocks. However, the portfolio may also purchase other types of securities, including, (i) U.S. and non-U.S. dollar denominated foreign securities (up to 20% of its total assets) including ADRs, (ii) convertible stocks, warrants and bonds, and (iii) futures and options. Investments in convertible securities, preferred stocks and debt securities are limited to 25% of total assets. The Blue Chip Growth Trust may invest in debt securities of any type without regard to quality or rating. Such securities would be issued by companies which meet the investment criteria for the portfolio but may include non-investment grade debt securities (junk bonds). The portfolio will not purchase a non-investment-grade debt security if, immediately after such purchase, the portfolio would have more than 5% of its total assets invested in such securities. The portfolio holds a certain portion of its assets in money market reserves which can consist of shares of the T. Rowe Price Reserve Investment Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. The portfolio may sell securities for a variety of reasons such as to secure gains, limit losses or redeploy assets into more promising opportunities. Use of Hedging and Other Strategic Transactions The Blue Chip Growth Trust may also engage in a variety of investment management practices, such as buying and selling futures and options and is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." The portfolio may invest up to 10% of its total assets in hybrid instruments, which are a type of high-risk derivative which can combine the characteristics of securities, futures and options. The Statement of Additional Information contains a description of these strategies and of certain risks associated therewith. In pursuing its investment objective, the portfolio's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the portfolio's management believes a security could increase in value for a variety of reasons including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities and to a limited extent in fixed income securities. The risks of investing in equity securities and fixed income securities are set forth below under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest to a limited extent in fixed income securities, the risks associated with fixed income securities will not affect the portfolio as much as a portfolio that invests more of its assets in fixed income securities. -- During periods when growth stocks are not in favor with other investors, the portfolio may not perform as well as a portfolio that invests in value stocks that can cushion share prices in a down market. -- The portfolio may invest up to 20% of its assets in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest up to 20% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 53 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 24.8% (for the quarter ended 12/1998) and the lowest return was -17.09% (for the quarter ended 3/2001). - -------------------------------------------------------------------------------- -4.8% 26.5% 25.9% 26.9% 28.5% 19.4% -2.8% -14.6% -24.3% 29.2% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Blue Chip Growth Trust Series I 29.17% -0.60% 9.15% N/A 12/11/1992 Series II 29.02% N/A N/A -0.48% 01/28/2002 Series III N/A N/A N/A 7.80% 09/05/2003 S&P 500 Index(C) 28.70% -0.57% 11.06% N/A Russell 1000 Growth 29.75% -5.11% 9.21% N/A
(A)Effective October 1, 1996, the portfolio changed its subadviser. Performance reflects results prior to this change. (B)Since June 1, 2000, a portion of the Blue Chip Growth Trust expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. (C)This index was added to more accurately reflect the investment objective of the Trust. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS T. Rowe Price manages the Blue Chip Growth Trust. T. Rowe Price, whose address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded financial services holding company, owns 100% of the stock of T. Rowe Price. As of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion for over eight million individual and institutional investor accounts. The portfolio is managed by an investment advisory committee chaired by: -- Larry J. Puglia (since October, 1996). Mr. Puglia, who joined T. Rowe Price in 1990, is a Vice President of T. Rowe Price and has been managing investments since 1993. He is a Chartered Financial Analyst and a Certified Public Accountant. The committee chairman has day-to-day responsibility for managing the portfolio and works with the committee in developing and executing the portfolio's investment program. U.S. LARGE CAP TRUST (FORMERLY, U.S. LARGE CAP VALUE TRUST) SUBADVISER: Capital Guardian Trust Company ("CGTC") INVESTMENT OBJECTIVE: To seek long-term growth of capital and income. INVESTMENT STRATEGIES: The portfolio invests at least 80% of its net assets (plus any borrowings for investment purposes), under normal market conditions, in equity and equity-related securities of companies with market capitalization greater than $500 million at the time of purchase. In selecting investments, greater consideration is given to potential appreciation and future dividends than to current income. The portfolio may hold ADRs and other U.S. registered securities of foreign issuers which are denominated in U.S. dollars. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the U.S. Large Cap Value Trust may invest all or a portion of its assets in preferred stocks, bonds, cash and cash equivalents. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The U.S. Large Cap Trust is currently authorized to use all of the investment strategies referred to under "Hedging and Other Strategic Transactions." However, it is not presently contemplated that any of these strategies will be used to a significant degree by the portfolio. 54 Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities, including securities of medium sized companies. The risks of investing in equity securities and medium sized companies are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 18.70% (for the quarter ended 12/2003) and the lowest return was -20.15% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 2.8% -2.5% -25.2% 37.1% 2000 2001 2002 2003
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One Life of Date First Year Portfolio Available U.S. Large Cap Trust Series I 37.06% 1.16% 05/01/1999 Series II 36.68% 2.26% 01/28/2002 Series III N/A 9.56% 09/05/2003 S&P 500 Index(A) 28.70% -2.44%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS CGTC is located at 333 South Hope Street, Los Angeles, California 90071. CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC has been providing investment management services since 1968 and manages approximately $146 billion of assets as of December 31, 2003. The Portfolio Managers are: -- Terry Berkemeier (since May, 1999). Mr. Berkemeier is a Vice President and portfolio manager for CGTC. He joined the Capital Group organization in 1992. -- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice President and portfolio manager for CGTC. He joined the Capital Group organization in 1987. -- David I. Fisher (since May, 1999). Mr. Fisher is Chairman of the Board of Capital Guardian Trust Company. He joined the Capital Group organization in 1969. -- Theodore R. Samuels (since May, 1999). Mr. Samuels is a Senior Vice President and a Director for CGTC. He joined the Capital Group organization in 1981. -- Eugene P. Stein (since May, 1999). Mr. Stein is Executive Vice President and a Director. He joined the Capital Group organization in 1972. -- Karen A. Miller (since May, 2000). Ms. Miller is a Senior Vice President of Capital International Research, Inc. She joined the Capital Group organization in 1990. -- Alan J. Wilson (since May, 2000). Mr. Wilson is Vice President of Capital International Research, Inc. Mr. Wilson joined the Capital Group organization in 1991. A portion of the portfolio is managed by individual members of the research team. 55 CORE EQUITY TRUST SUBADVISER: Legg Mason Funds Management, Inc. ("Legg Mason") INVESTMENT OBJECTIVE: To seek long-term capital growth. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in equity securities that, in the subadviser's opinion, offer the potential for capital growth. The subadviser seeks to purchase securities at large discounts to the subadviser's assessment of their intrinsic value. The portfolio invests, under normal market conditions, primarily in equity securities that, in the subadviser's opinion, offer the potential for capital growth. The subadviser seeks to purchase securities at large discounts to the subadviser's assessment of their intrinsic value. Intrinsic value, according to the subadviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies and the costs to replicate the business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, may also be considered. Securities may be undervalued due to, among other things, uncertainty arising from the limited availability of accurate information, economic growth and change, changes in competitive conditions, technological change, investor overreaction to negative news or events, and changes in government policy or geopolitical dynamics. The subadviser takes a long-term approach to investing, generally characterized by long holding periods and annual portfolio turnover of less than 50%. The portfolio generally invests in companies with market capitalizations greater than $5 billion, but may invest in companies of any size. The subadviser may decide to sell securities given a variety of circumstances, such as when a security no longer appears to the subadviser to offer the potential for long-term growth of capital, when an investment opportunity arises that the subadviser believes is more compelling, or to realize gains or limit potential losses. The portfolio may also invest in debt securities of companies having one or more of the above characteristics. The portfolio may invest up to 25% of its total assets in long-term debt securities. Up to 10% of its total assets may be invested in debt securities rated below investment grade, commonly known as "junk bonds." Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in fixed income securities, including non-investment grade fixed income securities. The risks of investing in fixed income securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The subadviser's approach to investing involves the risk that stocks purchased by the subadviser, which the subadviser believes to be undervalued at the time of purchase, may remain undervalued for a significant time period. The subadviser may concentrate much of the portfolio's investments in certain industries, and will, therefore, be more susceptible to factors adversely affecting issuers within that industry than would a more diversified portfolio of securities. -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2004. SUBADVISERS AND PORTFOLIO MANAGERS Legg Mason manages the Core Equity Trust. Legg Mason traces its history to 1982, is a subsidiary of Legg Mason, Inc., a financial services holding company, and is located at 100 Light Street, Baltimore, Maryland 21202. Legg Mason serves as the investment manager or adviser for several domestic and offshore equity mutual funds. Legg Mason's investment team is led by Bill Miller, its Chief Investment Officer. Mr. Miller is the creator of LMFM's investment process and has served as a portfolio manager with LMFM since 1982. Mary Chris Gay serves as the portfolio manager of the Core Equity Trust. She has managed or co-managed other equity funds advised by LMFM since 1998 and has also served as a research analyst. 56 STRATEGIC VALUE TRUST (FORMERLY, CAPITAL OPPORTUNITIES TRUST) SUBADVISER: Massachusetts Financial Services Company ("MFS") INVESTMENT OBJECTIVE: To seek capital appreciation. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts, of companies which MFS believes are undervalued in the market relative to their long term potential. The equity securities of the companies invested in by the portfolio may be undervalued because: -- They are temporarily out of favor in the market due to: -- a decline in the market -- Poor economic conditions -- Developments that have affected or may affect the issuer of the securities or the issuer's industry; or -- The market has overlooked them. Undervalued equity securities generally have low price-to-book, price-to-sales and/or price-to-earnings ratios. The fund's investments may include securities listed on a securities exchange or traded in the over-the-counter markets. The fund also invests in other types of securities, such as fixed income securities, including lower rated securities commonly referred to as junk bonds, and warrants, when relative value make such purchases attractive. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the equity-oriented portfolios (such as the Strategic Value Trust) that it advises. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management abilities) performed by the portfolio manager of the portfolio and MFS' large group of equity research analysts. The Strategic Value Trust may invest in foreign securities (including emerging market securities) and may have exposure to foreign currencies. The Strategic Value Trust may engage in short sales as described under "Additional Investment Policies -- Short Sales." The Strategic Value Trust may engage in active and frequent trading to achieve its principal investment strategies which will increase transaction costs. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Strategic Value Trust may place any portion of its assets in: -- money market instruments (which include commercial paper, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks, nonconvertible debt securities and short term obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities), and -- cash. When the portfolio is in a defensive position or awaiting investment of its assets, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The Strategic Value Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions". Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests in value stocks. A value stock may not increase in price, as anticipated by the subadviser, if other investors fail to recognize the company's value and bid up the price or invest in markets favoring faster-growing companies. -- The portfolio may invest in foreign securities (including emerging market securities). The risks of investing in these securities are set forth under "Risks of Investing in Certain Types of Securities." Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, 57 performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 19.83% (for the quarter ended 6/2003) and the lowest return was -23.66% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -27.2% 28.8% 2002 2003
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One Life of Date First Year Portfolio Available Strategic Value Trust Series I 28.78% -7.90% 04/30/2001 Series II 28.68% -1.31% 01/28/2002 Series III N/A 6.48% 09/05/2003 Russell 1000 Value Index(B, C) 30.03% 1.85% S&P 500 Index(B) 28.70% -2.69%
(A)Effective May 1, 2003, the portfolio changed its investment policies. (B)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since the information for this index is only provided as of a month end. (C)The index was added to more accurately reflect the current strategy of the manager. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun Life Financial Services of Canada, Inc. (a diversified financial services organization). MFS is located at 500 Boylston Street, Boston, Massachusetts 02116. The Portfolio Manager is: -- Kenneth Enright (since November, 2002; in May, 2003, Mr. Enright became the sole portfolio manager of the fund). Mr. Enright is the current portfolio manager of the MFS Strategic Value retail mutual fund. He is a Senior Vice President at MFS and has been employed by MFS since 1986. LARGE CAP VALUE TRUST SUBADVISER: FUND ASSET MANAGEMENT, L.P. (doing business as "Mercury Advisors") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio will seek to achieve this objective by investing in a diversified portfolio of equity securities of large cap companies located in the U.S. The portfolio will seek to outperform the Russell 1000 Value Index by investing in equity securities that the subadviser believes are selling at below normal valuations. The Russell 1000 Value Index, a subset of the Russell 1000 Index, consists of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The portfolio seeks to achieve its investment objective by investing at least 80% of its net assets in common stocks of large cap companies the subadviser selects from among those that are, at the time of purchase, included in the Russell 1000 Index. As of March 27, 2003, the capitalization range of the Russell 1000 Index as $650 million to $240 billion. In selecting securities for the portfolio, the subadviser uses a proprietary model that employs three filters in its initial screens: (1) earnings momentum (which is an evaluation of what it believes to be the issuer's prospects for future earnings per share based on the growth and sustainability of earnings over previous periods); (2) earnings surprise (which analyzes an issuer's reported earnings as opposed to those that were anticipated); and (3) valuations based on price-to-earnings and a dividend discount model. The subadviser looks for strong relative earnings growth, preferring growth based on increased productivity and sales to growth resulting from the company's simply revising its pricing structure. A company's stock price 58 relative to its earnings and book value is also examined. If the subadviser believes that a company is overvalued, the company will not be considered as an investment for the portfolio. After the initial screening is done, the subadviser relies on fundamental analysis, using both internal and external research, to optimize its quantitative model to choose companies the subadviser believes have strong, sustainable earnings growth with current momentum at attractive price valuations. Because the portfolio will not hold all the stocks in the Russell 1000 Value Index and because a portfolio's investments may be allocated in amounts that vary from the proportional weightings of the various stocks in that index, the portfolio is not an "index" fund. In seeking to outperform the relevant benchmark, however, the subadviser reviews potential investments using certain criteria that are based on the securities in the relevant index. These criteria currently include the following: -- Relative price to earnings and price to book ratios -- Weighted median market capitalization of the portfolio -- Allocation among the economic sectors of the portfolio as compared to the applicable index -- Weighted individual stocks within the applicable index. The portfolio may invest up to 10% of its assets in securities of companies organized under the laws of countries other than the United States that are traded on foreign securities exchanges or in the foreign over-the-counter markets, including securities of foreign issuers that are represented by American Depositary Receipts ("ADRs"). Securities of foreign issuers that are represented by ADRs or that are listed on a U.S. securities exchange or traded in the U.S. over-the-counter markets are considered "foreign securities" for the purpose of the portfolio's investment allocations. The portfolio anticipates that it would generally limit its foreign securities investment to ADRs of issuers in developed countries. The portfolio may invest in investment grade convertible securities, preferred stocks, illiquid securities, and U.S. Government debt securities (i.e., securities that are direct obligations of the U.S. Government). There are no restrictions on the maturity of the debt securities in which a portfolio may invest. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invest in value stocks. A value stock may not increase in price, as anticipated by the subadviser, if other investors fail to recognize the company's value and bid up the price or invest in markets favoring faster-growing companies. -- The portfolio may invest in debt securities. The risks of investing in debt securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS Mercury Advisors, a wholly owned subsidiary of Merrill Lynch & Co., Inc., and its advisory affiliates constitute one of the world's largest asset management firms overseeing client assets in over 70 countries around the globe. The Portfolio Managers for the Large Cap Value strategy are: -- Senior Portfolio Manager Bob Doll Senior Portfolio Manager Bob Doll, President and Chief Investment Officer of Merrill Lynch Investment Managers, joined Merrill Lynch Investment Managers in 1999 and heads the Merrill Lynch Large Cap Value Fund team. Mr. Doll received bachelor's degrees in accounting and economics from Lehigh University and an MBA from The Wharton School of the University of Pennsylvania. He is a CFA(R) charterholder and a Certified Public Accountant. -- Milind Sharma In addition to Mr. Doll, the investment team includes Quantitative Analyst Milind Sharma, who received a bachelor's degree from Vassar College and completed the Honors Moderations Program at Oxford University. He holds master's degrees in computational finance and applied mathematics from Carnegie Mellon University. The team has a combined 28 years of investment experience. 59 CLASSIC VALUE TRUST SUBADVISER: Pzena Investment Management, LLC. ("Pzena") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of its net assets in domestic equity securities. The portfolio may invest in securities of foreign issuers, but will generally limit such investments to American Depositary Receipts (ADRs) and foreign securities listed and traded on a U.S. Exchange or the NASDAQ market. In managing the portfolio, Pzena seeks to identify companies that it believes are currently undervalued relative to the market, based on estimated future earnings and cash flow. These companies generally have market values at valuation ratios, such as price-to-book, below market average, as defined by the S&P 500 Index. In choosing individual securities, Pzena screens a universe of the 500 largest U.S. listed companies to construct a portfolio of approximately 30 to 40 stocks that Pzena believes generally have the following characteristics: -- cheap on the basis of current price to estimated normal level of earnings -- current earnings below normal levels -- a sound plan to restore earnings to normal -- a sustainable business advantage. Using fundamental research and a proprietary computer model, Pzena ranks these companies from the cheapest to the most expensive on the basis of current share price to Pzena's estimate of normal long-term earnings power. Pzena's management team then focuses its research efforts on companies in the most undervalued 20% of the universe. After performing rigorous in-depth analysis that typically culminates in discussions with senior company management, Pzena refines its earnings model and makes its final investment decision. Before investing, Pzena considers the value of an entire business relative to its price. Pzena views itself as a long-term business investor, rather than a stock buyer. This systematic process is intended to ensure that the portfolio's investments avoids the emotional inputs that can lead to overvalued securities. Pzena approaches sell decisions from the same disciplined framework. The subadviser automatically sells a security when it reaches fair value (i.e., the price fairly reflects the normal earnings power and the stock falls to the mid point in Pzena's ranking system. Pzena also will generally sells a security when there are more attractive opportunities or there is a change in company fundamentals. Pzena seeks to maintain a fully invested portfolio (generally at least 90% invested), but does not try to make investment decisions based on short-term trends in the stock market. Therefore, if attractively priced stocks cannot be found, the portfolio's cash levels will increase. To the extent the portfolio's cash levels increase, its ability to achieve its investment objective will be limited. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio's management strategy has a significant influence on portfolio performance. Large capitalization stocks as a group could fall out of favor with the market, causing the portfolio to underperform investments that focus on small- or medium capitalization stocks. -- The portfolio focuses on value stocks, which could underperform growth stocks. -- The portfolio may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2004. SUBADVISERS AND PORTFOLIO MANAGERS Pzena is located at 120 West 45th Street, 34th Floor, New York, New York 10036. Established in 1995, Pzena is an investment advisor to high net worth individuals, pension plans, foundations, endowments, mutual funds and other institutional accounts. As of December 31, 2003, the majority of Pzena was owned by the firm's five managing principals: Richard S. Pzena (President and Chief Executive Officer), John P. Goetz (Managing Principal, Research), Bill Lipsey (Managing Principal, Marketing and Client Services), Amy Jones (Managing Principal, Operations and Administration) and Rama Krishna (Managing Principal, Large Cap Value). In addition, nine additional employees owned interests in the 60 firm as of January 1, 2004. Mr. Pzena has ownership interests in excess of 25% and is therefore deemed a control person of Pzena. As of January 31, 2004, Pzena had approximately $6.03 billion in assets under management. The investment team primarily responsible for overseeing the portfolio's investments are: Richard S. Pzena (since May, 2004). Managing Principal, Chief Executive Officer and Founder of Pzena. Rich has worked in investment management since 1986; has been with Pzena since 1995, and has managed assets in the Fund since inception. Education: B.S. and M.B.A., The Wharton School of the University of Pennsylvania. John P. Goetz (since May, 2004). Managing Principal, Research. John has worked in investment management since 1996; has been with Pzena since 1996, and has managed assets in the Fund since inception. Education: B.A. Wheaton College; M.B.A., Kellogg School, Northwestern University. A. Rama Krishna (since May, 2004). Managing Principal, Large Cap Portfolio Manager. Rama has worked in the investment business since 1987 and investment management since 1993; has been with Pzena since 2003 and has managed assets in the Fund since inception. Education: B.A. St. Stephen's College, The University of Delhi; MBA and M.A. University of Michigan, Ann Arbor. UTILITIES TRUST SUBADVISER: Massachusetts Financial Services Company ("MFS") INVESTMENT OBJECTIVE: To seek capital growth and current income (income above that available from a portfolio invested entirely in equity securities). INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of its net assets in securities of companies in the utilities industry. Securities in the utilities industry may include equity and debt securities of domestic and foreign companies. MFS considers a company to be in the utilities industry if, at the time of investment, MFS determines that a substantial portion (i.e., at least 50%) of the company's assets or revenues are derived from one or more utilities. Securities in which the portfolio invests are not selected based upon what sector of the utilities industry a company is in (i.e., electric, gas telecommunications) or upon a company's geographic region. Equity Investments. The portfolio may invest in equity securities, including common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the equity-oriented funds (including the equity portion of the fund) it advises. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management's abilities) performed by the portfolio manager of the portfolio and MFS' large group of equity research analysts. In performing this analysis and selecting securities for the portfolio, MFS places particular emphasis on each of the following factors: -- the current regulatory environment; -- the strength of the company's management team; and -- the company's growth prospects and valuation relative to its long-term potential. Equity securities may be listed on a securities exchange or traded in the over-the-counter markets. As noted above, the portfolio's investments in equity securities include convertible securities. A convertible security is a security that may be converted within a specified period of time into a certain amount of common stock of the same or a different issuer. A convertible security generally provides: -- a fixed income stream, and -- the opportunity, through its conversion feature, to participate in an increase in the market price of the underlying common stock. Fixed Income Investments. The portfolio invests in the following fixed income securities: -- corporate bonds, which are bonds or other debt obligations issued by corporations or similar entities, including up to 20% of its total assets lower rated bonds, commonly known as junk bonds (see "Other Risks of Investing -- Lower Rated Fixed Income Securities" for further information on these securities.) -- mortgage-back securities and asset-back securities, (see "Other Risks of Investing -- Asset Back Securities/ Mortgage Backed Securities" for further information on these securities.) -- U.S. government securities, which are bonds or other debt obligations issued by, or whose principal and interest payments are guaranteed by, the U.S. government or one of its agencies or instrumentalities. In selecting fixed income investments for the portfolio, MFS considers the views of its large group of fixed income portfolio managers and research analysts. This group periodically assesses the three-month total return outlook for various segments of the fixed income markets. This three-month "horizon" outlook is used by the portfolio manager(s) of MFS' 61 fixed income oriented funds (including the fixed income portion of the fund) as a tool in making or adjusting the fund's asset allocations to these various segments of the fixed income markets. In assessing the credit quality of fixed income securities, MFS does not rely solely on the credit ratings assigned by credit rating agencies, but rather performs its own independent credit analysis. Foreign Securities. The portfolio may invest up to 35% of its total assets in foreign securities (including emerging markets securities, Brady bonds and depositary receipts) such as: -- Equity securities of foreign companies in the utilities industry, -- Fixed income securities of foreign companies in the utilities industry, -- Fixed income securities issued by foreign governments. The portfolio may have exposure to foreign currencies through its investments in foreign securities, its direct holdings of foreign currencies, or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. General. The Utilities Trust may also invest to a limited extent in: (a) municipal bonds, (b) variable and floating rate obligations, (c) zero coupon bonds, deferred interest bonds and PIK bonds, (d) investment companies, (e) restricted securities and (f) indexed/structured securities. These investment techniques and practices are described further in the prospectus under "Additional Investment Policies and Transactions" and in the Statement of Additional Information. The Utilities Trust may engage in active and frequent trading to achieve its principal investment strategies which will increase transaction costs. Use of Hedging and Other Strategic Transactions The Utilities Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions" (except swaps and related derivative instruments). Principal Risks of Investing in this Portfolio -- The portfolio's investment performance will be closely tied to the performance of utility companies. Many utility companies, especially electric and gas and other energy related utility companies, are subject to various uncertainties, including: -- risks of increases in fuel and other operating costs; -- restrictions on operations and increased costs and delays as a result of environmental and nuclear safety regulations; -- coping with the general effects of energy conservation; -- technological innovations which may render existing plans, equipment or products obsolete; -- the potential impact of natural or man-made disasters; -- difficulty obtaining adequate returns on invested capital, even if frequent rate increases are approved by public service commissions; -- the high cost of obtaining financing during periods of inflation; -- difficulties of the capital markets in absorbing utility debt and equity securities; and -- increased competition. Furthermore, there are uncertainties resulting from certain telecommunications companies' diversification into new domestic and international businesses as well as agreements by many such companies linking future rate increases to inflation or other factors not directly related to the active operating profits of the enterprise. Because utility companies are faced with the same obstacles, issues and regulatory burdens, their securities may react similarly and more in unison to these or other market conditions. These price movements may have a larger impact on the portfolio than on a portfolio with a more broadly diversified portfolio. -- The value of utility company securities may decline because governmental regulation controlling the utilities industry can change. This regulation may prevent or delay the utility company from passing along cost increases to its customers. Furthermore, regulatory authorities may not grant future rate increases. Any increases granted may not be adequate to permit the payment of dividends on common stocks. -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risk of Investing in Certain Types of Securities." -- The portfolio invests in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." 62 -- The portfolio may invest in fixed income securities include, including non-investment grade fixed income securities, mortgage-backed and asset-backed securities and collateralized mortgage obligations. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Securities." -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 19.87% (for the quarter ended 6/2003) and the lowest return was -17.95% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -23.5% 34.5% 2002 2003
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One Life of Date First Year Portfolio Available Utilities Trust Series I 34.53% -9.36% 04/30/2001 Series II 34.25% 4.41% 01/28/2002 Series III N/A 11.20% 09/05/2003 S&P Utilities Index(A) 26.26% -16.15%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since the information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund, Massachusetts Investors Trust. MFS is an indirect subsidiary of Sun Life Assurance Company of Canada (an insurance company). MFS is located at 500 Boylston Street, Boston, Massachusetts 02116. The Portfolio Manager is: -- Maura A. Shaughnessy (since May, 2001). Ms. Shaughnessy is a Senior Vice President of MFS and has been employed by MFS since 1991. Ms. Shaughnessy has managed the MFS Capital Opportunities Fund since 1999 and the MFS Utilities Fund since 1992. REAL ESTATE SECURITIES TRUST SUBADVISER: Deutsche Asset Management, Inc ("DeAM") INVESTMENT OBJECTIVE: To seek to achieve a combination of long-term capital appreciation and current income. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of net assets (plus any borrowings for investment purposes) in equity securities of real estate investment trusts ("REITS") and real estate companies. Equity securities include common stock preferred stock and securities convertible into common stock. A company is considered to be a real estate company if, in the opinion of DeAM, at least 50% of its revenues or 50% of the market value of its assets at the time its securities are purchased by the portfolio are attributed to the ownership, construction, management or sale of real estate. DeAM looks for real estate securities it believes will provide superior returns to the portfolio, and attempts to focus on companies with the potential for stock price appreciation and a record of paying dividends. 63 To find these issuers, DeAM tracks economic conditions and real estate market performance in major metropolitan areas and analyzes performance of various property types within those regions. To perform this analysis, it uses information from a nationwide network of real estate professionals to evaluate the holdings of real estate companies and REITs in which the portfolio may invest. Its analysis also includes the companies' management structure, financial structure and business strategy. The goal of these analyses is to determine which of the issuers DeAM believes will be the most profitable to the portfolio. DeAM also considers the effect of the real estate securities markets in general when making investment decisions. DeAM does not attempt to time the market. Description of REITs. A REIT invest primarily in income-producing real estate or makes loans to persons involved in the real estate industry. Some REITs, called equity REITs, buy real estate and pay investors income from the rents received from the real estate owned by the REIT and from any profits on the sale of its properties. Other REITs, called mortgage REITs, lend money to building developers and other real estate companies and pay investors income from the interest paid on those loans. There are also hybrid REITs which engage in both owning real estate and making loans. If a REIT meets certain requirements, it is not taxed on the income it distributes to its investors. The portfolio may realize some short-term gains or losses if DeAM chooses to sell a security because it believes that one or more of the following is true: -- A security is not fulfilling its investment purpose; -- A security has reached its optimum valuation; or -- A particular company or general economic conditions have changed. Based on its recent practices, DeAM expects that the portfolio's assets will be invested primarily in equity REITs. In changing market conditions, the portfolio may invest in other types of REITs. Other Investments. When DeAM believes that it is prudent, the portfolio may invest a portion of its assets in other types of securities. These securities may include convertible securities, short-term securities, bonds, notes, securities of companies not principally engaged in the real estate industry, non-leveraged stock index futures contracts and other similar securities. (Stock index futures contracts, can help the portfolio's cash assets remain liquid while performing more like stocks.) Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Real Estate Securities Trust may place all or a portion of its assets in liquid, high grade fixed income securities such as money market instruments, certificates of deposit, commercial paper, short-term corporate debt securities, variable rate demand notes, governments securities and repurchase agreements. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Principal Risks of Investing in this Portfolio -- Investing in REITs and real estate related securities involves the risks associated with real estate investing, such as declines in real estate values, deterioration in general and local economic conditions and increases in interest rates. Any such developments could negatively affect the securities held by the portfolio and the value of the portfolio may decline. Additional risks associated with investing in securities linked to the real estate market is set forth under "Risks of Investing in Certain Types of Securities." -- REITs and real estate related securities are also subject to the risks associated with financial building projects such as failure of borrowers to repay loans, management skills, heavy cash flow dependency and increases in operating and building expenses. Problems which affect the building projects could negatively affect the securities held by the portfolio and the value of the portfolio may decline. -- Shares of REITs may trade less frequently and, therefore, are subject to more erratic price movements than securities of larger issuers. -- The portfolio may invest in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 10% of its total assets in securities of foreign real estate companies. The risks associated with investing in foreign securities are set forth under "Risk of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risk of Investing in Certain Types of Securities." 64 Performance (A,B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 21.09% (for the quarter ended 3/1991) and the lowest return was -11.18% (for the quarter ended 9/1990). - -------------------------------------------------------------------------------- -2.8% 15.1% 34.7% 18.4% -16.4% -8% 25.7% 3.2% 2.6% 39.2% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Real Estate Securities Trust Series I 39.15% 11.23% 9.77% N/A 04/30/1987 Series II 38.93% N/A N/A 43.17% 01/28/2002 Series III N/A N/A N/A 10.49% 09/05/2003 Wilshire Real Estate Securities Index 37.06% 14.50% 11.90% N/A
(A)On November 25, 2002, the portfolio changed its subadviser. Performance reflects results prior to this change. On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust. Performance presented for this portfolio is based upon the performance of the respective predecessor Manulife Series Fund, Inc. portfolio for periods prior to December 31, 1996. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Deutsche Asset Management, Inc. ("DeAM") , located at 280 Park Avenue, New York, New York 10017, is an indirect wholly-owned subsidiary of Deutsche Bank AG, an international commercial and investment banking group. Deutsche Bank AG is a major banking institution that is engaged in a wide range of financial services, including investment management, mutual fund, retail, private and commercial banking, investment banking and insurance. DeAM provides a full range of investment advisory services to retail and institutional clients. The portfolio managers are: -- Karen J. Knudson. Principal, Deutsche Asset Management -- Joined the investment advisor in 1995. -- More than 20 years of investment industry experience. -- MBA, University of California at Berkeley -- John F. Robertson. Vice President, Deutsche Asset Management -- Joined the investment advisor in 1996. -- Prior to 1996, Assistant Vice President for Lincoln Investment Management responsible for REIT research -- Charter Financial Analyst -- Jerry W. Ehlinger. Managing Director, Deutsche Asset Management -- Joined the Deutsche Asset Management in 2004. Previously, a senior vice president with Heitman Real Estate Management. -- Over six years of investment experience -- Mark D. Zeisloft. Vice President, Deutsche Asset Management -- Joined the investment advisor in 1996. -- Over twelve years of investment experience -- MBA, University of Chicago 65 SMALL CAP OPPORTUNITIES TRUST SUBADVISER: Munder Capital Management ("Munder") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The portfolio seeks this objective by investing, under normal circumstances, at least 80% of its assets (plus any borrowings for investment purposes) in equity securities of small-capitalization companies. Small-capitalization companies are those companies with market capitalizations within the range of the companies in the Russell 2000 Index. The portfolio attempts to provide potentially higher returns than a portfolio that invests primarily in larger, more established companies. Since small companies are generally not as well known to investors or have less of an investor following than larger companies, they may provide higher returns due to inefficiencies in the marketplace. The portfolio will usually invest in equity securities of companies that the subadviser believes can be purchased at a price significantly below its inherent value. A company's equity securities may be undervalued because the company is temporarily overlooked or out of favor due to general economic conditions, a market decline, industry conditions or developments affecting the particular company. In addition to valuation, the subadviser considers these factors, among others in choosing companies: -- A stable or improving earnings records; -- Sound finances; -- Above-average growth prospectus; -- Participation in a fast growing industry; -- Strategic niche position in a specialized market; and -- Adequate capitalization. The portfolio may write covered call options during especially volatile markets and also invest in equity securities of larger capitalization companies. Even though a portfolio will receive the option premium to help protect it against loss, a call option sold by the portfolio will expose the portfolio during the term of the option to possible loss of the opportunity to sell the underlying security or instrument with a gain. The portfolio may engage in short-term trading of portfolio securities. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities especially of small cap companies . The risks of investing in equity securities, including those of small companies are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invest in value stocks. A value stock may not increase in price, as anticipated by the subadviser, if other investors fail to recognize the company's value and bid up the price or invest in markets favoring faster-growing companies. -- The portfolio may engage in short-term trading. A high portfolio turnover rate (100% or more) could produce trading costs and taxable distributions, which would detract from the portfolio's performance. Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS Munder manages the Small Cap Opportunities Trust. Munder, with offices at 480 Pierce Street, Birmingham, Michigan 48009, currently serves as investment adviser to the Munder Funds, acts as sub-adviser for a number of private-label mutual funds and provides separate account advisory services for institutional accounts and high net worth individuals. A committee of Munder investment personnel manages the portfolio. 66 SMALL COMPANY VALUE TRUST SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price") INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The portfolio invests primarily in small companies whose common stocks are believed to be undervalued. Under normal market conditions, the portfolio will invest at least 80% of its net assets (plus any borrowings for investment purposes) in companies with market capitalizations that do not exceed the maximum market capitalization of any security in the Russell 2000 Index at the time of purchase. Market capitalizations of companies in the Russell Index change over time, however, the portfolio will not sell a stock just because a company has grown to a market capitalization outside the range of the Russell 20000. The portfolio may occasionally purchase companies with a market cap above the range. Reflecting a value approach to investing, the Small Company Value Trust will seek the stocks of companies whose current stock prices do not appear to adequately reflect their underlying value as measured by assets, earnings, cash flow, or business franchises. T. Rowe Price's in-house research team seeks to identify companies that appear to be undervalued by various measures, and may be temporarily out of favor, but have good prospects for capital appreciation. In selecting investments, they generally look for some of the following factors: -- Low price/earnings, price/book value or price/cash flow ratios relative to the S&P 500, the company's peers or its own historic norm; -- Low stock price relative to a company's underlying asset values; -- Above-average dividend yield relative to a company's peers or its own historic norm; -- A plan to improve the business through restructuring; or -- A sound balance sheet and other positive financial characteristics. While most assets will be invested in U.S. common stocks, the portfolio may purchase other securities, including foreign securities (up to 20% of it's total assets), futures, and options. The portfolio holds a certain portion of its assets in money market reserves which can consist of shares of the T. Rowe Price Reserve Investment Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. The portfolio may sell securities for a variety of reasons, such as to secure gains, limit losses or redeploy assets into more promising opportunities. Use of Hedging and Other Strategic Transactions The Small Company Value Trust may also engage in a variety of investment practices, such as buying and selling futures and options. The portfolio may invest up to 10% of its total assets in hybrid instruments. Hybrid instruments are a type of high-risk derivative which can combine the characteristics of securities, futures and options. In pursuing its investment objective, the portfolio's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the portfolio's management believes a security could increase in value for a variety of reasons including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Small Company Value Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions" below. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests primarily in securities of small companies. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio employs a value approach. This approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. -- The portfolio may invest in foreign securities (including emerging market securities). The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." 67 Performance(A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 16.97% (for the quarter ended 6/2003) and the lowest return was -18.31% (for the quarter ended 9/1998). - -------------------------------------------------------------------------------- -4.7% 8% 5.9% 6.5% -5.9% 33.7% 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Small Company Value Trust Series I 33.66% 8.91% 5.47% 10/01/1997 Series II 33.56% N/A 12.37% 01/28/2002 Series III N/A N/A 7.33% 09/05/2003 Russell 2000 Value Index(B) 46.03% 12.28% 8.83%
(A)Effective April 30, 2001, the portfolio changed its subadviser. Performance reflects results prior to this change. (B)The return of the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of month end. (C)Since January 1, 2001, a portion of the Small Company Value Trust's expenses were reimburse. If such expenses had not been reimbursed returns would be lower. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS T. Rowe Price manages the Small Company Value Trust. T. Rowe Price, whose address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded financial services holding company, owns 100% of the stock of T. Rowe Price. As of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion for over eight million individual and institutional investor accounts. The portfolio is managed by an investment advisory committee chaired by: -- Preston G. Athey (since May, 2001). Mr. Athey, who joined T. Rowe Price in 1978, is a Vice President of T. Rowe Price and has been managing investments since 1982. He is a Chartered Financial Analyst. The committee chairman has day-to-day responsibility for managing the portfolio and works with the committee in developing and executing the portfolio's investment program. SPECIAL VALUE TRUST SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM") INVESTMENT OBJECTIVE: To seek long-term capital growth. INVESTMENT STRATEGIES: Under normal circumstances, the portfolio invests at least 80% of the value of its net assets (plus any borrowings for investment purposes) in common stocks and other equity securities of smaller capitalized U.S. companies. Smaller capitalized companies are those whose market capitalization at the time of investment is no greater than the market capitalization of companies in the Russell 2000 Value Index. The size of companies in the index changes with market conditions and the composition of the index. Equity securities include exchange traded and over-the-counter common stocks and preferred shares, debt securities convertible into equity securities and warrants and rights relating to equity securities. SaBAM emphasizes individual security selection while spreading the portfolio's investments among industries and sectors. SaBAM uses both quantitative and fundamental methods to identify stocks of smaller capitalization companies it believes have the best prospects for outperforming its competition. (Quantitative methods are screening mechanisms to identify potential investments and include review of: (a) stock yields, (b) stock prices, (c) cash flow and (d) rankings.) 68 SaBAM uses quantitative parameters to select a universe of smaller capitalized companies that fit the portfolio's general investment criteria. (Quantitative parameter are the values used to evaluate investments.) In selecting individual securities from within this range, SaBAM looks for "value" attributes, such as: -- Low stock price relative to earnings, book value and cash flow -- High return on invested capital The subadviser also uses quantitative methods to identify catalysts and trends that might influence the portfolio's industry or sector focus, or the subadviser's individual security selection. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests primarily in stocks of smaller capitalized companies. The risks of investing in small cap companies are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invest in value stocks. A value stock may not increase in price, as anticipated by SaBAM, if other investors fail to recognize the company's value and bid up the price or invest in markets favoring faster-growing companies. Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS SaBAM was established in 1987 and, together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and equity investment services to individuals and institutional clients throughout the world. SaBAM's principal address is 399 Park Avenue, New York, New York 10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses provide abroad range of financial services, asset management, banking and consumer finance, credit and charge cards, insurance investments, investment banking and trading -- and use diverse channels to make them available to consumer and corporate customers around the world. The Portfolio Managers are: -- Peter J. Hable -- Managing Director 21 years of securities business experience Employed by Citigroup or its predecessor firms since 1983 BS in Economics from Southern Methodist University MBA from Wharton School of Finance -- Thomas B. Driscoll -- Director Employed by Citigroup or its predecessor firms since 1996 8 years investment experience Member of the Security Analysts of San Francisco BA from Drew University MBA from the University of California, Davis MID CAP VALUE TRUST SUBADVISER: Lord, Abbett & Co. LLC ("Lord Abbett") INVESTMENT OBJECTIVE: To seek capital appreciation. INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities which it believes to be undervalued in the marketplace. Under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) will consist of investments in mid-sized companies, with market capitalizations of approximately $500 million to $10 billion. Lord Abbett uses a value approach in managing the Mid Cap Value Trust. It generally tries to identify stocks of companies that have the potential for significant market appreciation due to growing recognition of improvement in their financial results or increasing anticipation of such improvement. In trying to identify these companies, Lord Abbett looks for such factors as: -- Changes in economic and financial -- Price increases for the company's products environment or services -- New or improved products or services -- Changes in management or company structure -- Improved efficiencies resulting from new -- Changes in government regulations, technologies or changes in distribution political climate or competitive conditions -- New or rapidly expanding markets
69 The Mid Cap Value Trust may invest up to 10% of its assets in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contract for the purchase or sale of a fixed quantity of a foreign currency at a future date. Lord Abbett does not consider ADRs and securities of companies domiciled outside the U.S. but that are traded in the United States to be "foreign Securities". Accordingly, such investments are not subject to the 10% limitation on foreign securities. Temporary Defensive Investments At times the Mid Cap Value Trust may take a temporary defensive position by investing some or all of its assets in short-term fixed income securities. Such securities may be used to attempt to avoid losses in response to adverse market, economic, political or other conditions, to invest uncommitted cash balances, or to maintain liquidity to meet shareholder redemptions. These securities include: obligations of the U.S. Government and its agencies and instrumentalities, commercial paper, bank certificates of deposit, bankers' acceptances, and repurchase agreements collateralized by cash and obligations of the U.S. Government and its agencies and instrumentalities. These investments could reduce the benefit from any upswing in the market and prevent the Mid Cap Value Trust from achieving its investment objective. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio employs a value approach. This approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 15.35% (for the quarter ended 12/2003) and the lowest return was -14.75% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -10.1% 25.4% 2002 2003
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One Life of Date First Year Portfolio Available Mid Cap Value Series I 25.36% 6.39% 04/30/2001 Series II 25.14% 8.14% 01/28/2002 Series III N/A 9.49% 09/05/2003 Russell Midcap Value Index(A) 38.07% 8.87%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since the information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Lord Abbett was founded in 1929 and manages one of America's oldest mutual fund complexes. Lord Abbett is located at 90 Hudson Street, Jersey City, New Jersey 07302-3973. The Portfolio Managers are: -- Lord Abbett uses a team of investment managers and analysts acting together to manage the portfolio's investments. Edward K. von der Linde heads the team and the other senior members are Eileen Banko, Howard Hansen and David Builder. Mr. Von der Linde, Partner and Investment Manager, joined Lord Abbett in 1988. Mr. Von der Linde has been in the investment business since 1985. Ms. Banko, Equity analyst joined Lord Abbett in 1990. Mr. Hansen, Investment Manager, joined Lord Abbett in 1994. Mr. Builder, Equity Analyst, joined Lord Abbett in 1998 from Bear Stearns where he served as equity analyst. 70 VALUE TRUST SUBADVISER: Van Kampen Investments INVESTMENT OBJECTIVE: To realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk. INVESTMENT STRATEGIES: The portfolio seeks to attain this objective by investing primarily in equity securities of companies with capitalizations similar to the market capitalization of companies in the Russell Midcap Value Index. Under normal circumstances, the Value Trust invests at least 65% of its total assets in equity securities. These primarily include common stocks, but may also include preferred stocks, convertible securities, rights, warrants, and ADR's. The Value Trust may invest without limit in ADRs and may invest up to 5% of its total assets in foreign equities excluding ADRs. Van Kampen's approach is to select equity securities which are believed to be undervalued relative to the stock market in general as measured by the Russell Midcap Value Index. Generally, medium market capitalization companies will consist primarily of those that Van Kampen believes are selling below their intrinsic value and offer the opportunity for growth of capital. The portfolio emphasizes a "value" style of investing focusing on those companies with strong fundamentals, consistent track records, growth prospectus, and attractive valuations. Van Kampen may favor securities of companies that are undervalued industries. Van Kampen may purchase stocks that do not pay dividends. Van Kampen may also invest the portfolio's assets in companies with smaller or larger market capitalizations. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Value Trust may place all or a portion of its assets in fixed income securities, and cash and cash equivalents. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Principal Risks of Investing in this Portfolio -- The price of the securities purchased by the portfolio will increase if other investors in the stock market subsequently believe that the securities are undervalued and are willing to pay a higher price for them. If other investors in the stock market continue indefinitely to undervalue these securities, or if in fact these securities are not undervalued, the value of the portfolio may decline. -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The Value Trust invests primarily in securities of small or medium sized value companies. This market sector may underperform relative to other sectors. During an overall stock market decline, stock prices of small or mid-sized companies often fluctuate more than the stock prices of larger companies. The risks of investing in small or medium sized companies are set forth under "Risks of Investing in Certain Types of Securities" above. Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 20.39% (for the quarter ended 6/2003) and the lowest return was -23.40% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 22.1% -1.7% -2.8% 24.6% 3.4% -22.8% 38.8% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Value Trust Series I 38.76% 6.05% 7.05% 01/01/1997 Series II 38.60% N/A 4.21% 01/28/2002 Russell Mid Cap Value Index(A) 38.07% 8.73% 11.52%
71 (A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. (C)Current Subadvisor assignment became effective May 1, 2003. SUBADVISER AND PORTFOLIO MANAGERS Morgan Stanley Investment Management Inc. ("MSIM"), which does business in certain instances using the name "Van Kampen", has its principal offices at 1221 Avenue of the Americas, New York, New York. MSIM conducts a worldwide portfolio management business and provides a broad range of portfolio management services to customers in the United States and abroad. Morgan Stanley is the direct parent of MSIM. MSIM also does business in certain instances using the name "Miller Anderson." Prior to May 1, 2003, Miller Anderson was listed as the subadviser to the Value Trust. The portfolio is managed by Van Kampen's Equity Income team. Current members of the Equity Income team are: James Gilligan, a Managing Director of Van Kampen, James O. Roeder, an Executive Director of Van Kampen, Thomas Bastian, a Vice President of Van Kampen, Sergio Marcheli, a Vice President of Van Kampen, and Vincent Vizachero, an Associate of Van Kampen. The composition of the team may change without notice from time to time. ALL CAP VALUE TRUST SUBADVISER: Lord, Abbett & Co. LLC ("Lord Abbett") INVESTMENT OBJECTIVE: To seek capital appreciation. INVESTMENT STRATEGIES: The portfolio invests primarily in equity securities of U.S. and multinational companies that Lord Abbett believes are undervalued in all capitalization ranges. Under normal circumstances, the portfolio will invest at least 50% of its net assets in equity securities of large, seasoned companies with market capitalizations of at least $5 billion at the time of purchase. Equity securities may include common stocks, preferred stock, convertible securities, warrants, and similar instruments. These are companies that appear underpriced according to certain financial measurements of their intrinsic worth or business prospects (such as price-to-earnings or price to-book ratios). In selecting investments, Lord Abbett attempts to invest in securities selling at reasonable prices in relation to its assessment of their potential value. While there is the risk that an investment may never reach what Lord Abbett thinks is its full value, or may go down in value, Lord Abbett's emphasis on large, seasoned company value stocks may limit the portfolio's downside risk. This is because value stocks are believed to be underpriced, and large, seasoned company stocks tend to be issued by more established companies and less volatile than mid-sized or small company stock. Although small companies may present greater risks than larger companies, they also may present higher potential for attractive long-term returns. Lord Abbett generally sells a stock when it thinks it seems less likely to benefit from the current market and economic environment, shows deteriorating fundamentals, or has reached Lord Abbett's valuation target. The All Cap Value Trust may investment up to 10% of its net assets in foreign equity securities. Lord Abbett does not consider ADRs and securities of companies domiciled outside the U.S. but that are traded in the United States to be "foreign securities." Accordingly, such investments are not subject to the 10% limitation on foreign securities. Temporary Defensive Investments At times the All Cap Value Trust may take a temporary defensive position by investing some or all of its assets in short-term fixed income securities. Such securities may be used to attempt to avoid losses in response to adverse market, economic, political or other conditions, to invest uncommitted cash balances, or to maintain liquidity to meet shareholder redemptions. These securities include: obligations of the U.S. Government and its agencies and instrumentalities, commercial paper, bank certificates of deposit, bankers' acceptances, and repurchase agreements collateralized by cash and obligations of the U.S. Government and its agencies and instrumentalities. These investments could reduce the benefit from any upswing in the market and prevent the All Cap Value Trust from achieving its investment objective. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio employs a value approach. This approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. 72 -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in the securities of small and medium sized companies. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 18.09% (for the quarter ended 12/2001) and the lowest return was -23.92% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -27.8% 38.4% 2002 2003
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One Life of Date First Year Portfolio Available All Cap Value Trust Series I 38.36% 0.28% 04/30/2001 Series II 38.16% 0.00% 01/28/2002 Series III N/A 11.03% 09/05/2003 Russell 3000 Value Index(A) 31.14% 2.66%
(A)The Return under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)Current subadvisor assignment became effective May 1, 2003. SUBADVISER AND PORTFOLIO MANAGERS Lord Abbett was founded in 1929 and manages one of America's oldest mutual fund complexes. Lord Abbett is located at 90 Hudson Street, Jersey City, New Jersey 07302-3973. The Portfolio Managers are: -- Lord Abbett uses a team of investment managers and analysts acting together to manager the portfolio's investments. Robert G. Morris heads the team and the other senior members are Robert P. Fetch, David G. Builder, Daniel H. Frascarelli, Howard Hansen, and Gerard S. E. Heffernan. Mr. Morris, Partner and Director of Equity Investments, joined Lord Abbett in 1991. Mr. Fetch, Partner and Small-Cap Value Senior Investment Manager, joined Lord Abbett in l995. Mr. Builder, Equity Analyst on the Mid-Cap Value Team, joined Lord Abbett in 1998 from Bear Stearns where he served as an Equity Analyst. Mr. Frascarelli, Partner and Investment Manager, joined Lord Abbett in 1990. Mr. Hansen, Partner and Investment Manager, joined Lord Abbett in 1995. Mr. Heffernan, Research Analyst on the Small-Cap Value team, joined Lord Abbett in 1998 from CL Capital Management where he served as Portfolio Manager and Equity Research Analyst. EQUITY INDEX TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.)") INVESTMENT OBJECTIVE: To approximate the aggregate total return of publicly traded common stocks which are included in the S&P Composite Stock Price Index (the "S&P 500 Index"). INVESTMENT STRATEGIES: The portfolio invests in the equity securities of a diversified group of U.S. companies. The portfolio is not actively managed; rather MFC Global (U.S.A.) tries to duplicate the performance of the S&P 500 Index by investing the portfolio's assets in the common stocks that are included in the S&P 500 Index in approximately the proportion of their respective market value weightings in the S&P 500 Index. The portfolio uses the S&P 500 Index as its standard performance comparison because the S&P 500 Index (i) represents more than 70% of the total market value of all publicly traded common stocks in the U.S. and (ii) is widely viewed among investors as representative of the performance of publicly traded common stocks in the U.S. 73 The S&P 500 Index is an unmanaged index composed of 500 selected common stocks, over 95% of which are listed on the New York Stock Exchange. The performance of the S&P 500 Index is based on changes in the prices of stocks comprising the S&P 500 Index and assumes the reinvestment of all dividends paid on such stocks. Taxes, brokerage commissions and other fees are disregarded in computing the level of the S&P 500 Index. Standard & Poor's(1) selects the stocks to be included in the S&P 500 Index on a proprietary basis but does incorporate such factors as the market capitalization and trading activity of each stock and its adequacy as representative of stocks in a particular industry group. Stocks in the S&P 500 Index are weighted according to their market capitalization (i.e., the number of shares outstanding multiplied by the stock's current price). Since MFC Global (U.S.A.) attempts to match the performance of the S&P 500 Index, the adverse financial situation of a company will not result in its elimination from the portfolio unless, of course, the company in question is removed from the S&P 500 Index. Conversely, the projected superior financial performance of a company would not normally lead to an increase in the portfolio's holdings of the company. Under normal circumstances, the net assets of the Equity Index Trust will be invested in any combination of the following investments: -- representative common stocks -- Standard & Poor's Stock Index Futures Contracts ("S&P 500 Futures Contracts"), and -- Standard & Poor's Depository Receipts(R). (1)"Standard & Poor's(R)," "S&P 500(R)," "S&P(R)," "Standard & Poor's 500(R)" and "500" are trademarks of McGraw-Hill, Inc. With regard to the portion of the Equity Index Trust invested in common stocks, the method used to select investments for the portfolio involves investing in common stocks in approximately the order of their respective market value weightings in the S&P 500 Index, beginning with those having the highest weightings. For diversification purposes, the portfolio can purchase stocks with smaller weightings in order to represent other sectors of the S&P 500 Index. There is no minimum or maximum number of stocks included in the S&P 500 Index which the Equity Index Trust must hold. Under normal circumstances, it is expected that the portion of the portfolio invested in stocks would be between 300 and 500 different stocks included in the S&P 500 Index. The portfolio may compensate for the omission of a stock that is included in the S&P 500 Index, or for purchasing stocks in other than the same proportion that they are represented in the S&P 500 Index, by purchasing stocks that are believed by MFC Global (U.S.A.) to have characteristics that correspond to those of the omitted stocks. Tracking error is measured by the difference between the total return for the S&P 500 Index and the total return for the portfolio after deductions of fees and expenses. All tracking error deviations are reviewed to determine the effectiveness of investment policies and techniques. Tracking error is reviewed at least weekly and more frequently if such a review is indicated by significant cash balance changes, market conditions or changes in the composition of the S&P 500 Index. If deviation accuracy is not maintained, the Equity Index Trust will rebalance its composition by selecting securities which, in the opinion of MFC Global (U.S.A.), will provide a more representative sampling of the capitalization of the securities in the S&P 500 Index as a whole or a more representative sampling of the sector diversification in the S&P 500 Index. The portfolio may also invest in short-term debt securities to maintain liquidity or pending investment in stocks or S&P 500 Futures Contracts. Standard & Poor's licenses certain trademarks and trade names to the Trust but disclaims any responsibility or liability to the Trust and its shareholders. See Appendix II in the Statement of Additional Information for such disclaimer. Use of Hedging and Other Strategic Transactions The Equity Index Trust may invest in S&P 500 Futures Contracts. A more complete description of this investment strategy appears under "Hedging and Other Strategic Transactions" below in this Prospectus and in the Statement of Additional Information. Principal Risks of Investing in this Portfolio -- An investment in the Equity Index Trust involves risks similar to the risks of investing directly in the equity securities included in the S&P 500 Index. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- Since the portfolio is not actively managed, if the S&P 500 Index does not perform well, MFC Global (U.S.A.) will not have the ability to transfer portfolio assets into other investments. 74 Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 21.22% (for the quarter ended 12/1998) and the lowest return was -17.39% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 33.5% 28.6% 20.6% -9.3% -12.3% -22.3% 28.3% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Equity Index Trust Series I 28.29% -0.88% 8.39% 02/14/1996 S&P 500 Index(B) 28.70% -0.57% 9.03%
(A)On December 31, 1996, Manulife Series Fund, Inc. merged with the Trust. Performance presented for this portfolio is based upon the performance of the respective predecessor Manulife Series Fund, Inc. portfolio for periods prior to December 31, 1996. (B)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (C)During the periods shown in the chart, a portion of the Equity Index Trust's expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. (D)The Equity Index Trust does not offer Series II shares or Series III shares. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios listed above. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Funds Direct (Hong Kong) Limited, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Portfolio Managers are: -- Martin Ayow (since May, 2000). Mr. Ayow joined MFC Global in 2000 and is Assistant Vice President and Senior Portfolio Manager for Manulife Financial. He has been managing and hedging fixed income and equity exposures for Manulife Financial using financial derivatives since 1994. Prior to joining Manulife Financial, Mr. Ayow was Senior Treasury Officer at the Ontario Hydro Treasury Division. He is a Chartered Financial Analyst and graduated from the University of Toronto with an MBA. -- Ram Brahmachari (since December, 2000). Mr. Brahmachari joined MFC Global in 2000. He is a Senior Analyst on the team responsible for the management of the equity index portfolios at Manulife Financial. Prior to joining Manulife, Financial, Mr. Brahmachari was employed as an analyst at Nortel. He is a Chartered Financial Analyst and graduated from the University of Victoria with an MBA. FUNDAMENTAL VALUE TRUST SUBADVISER: Davis Advisors ("Davis") INVESTMENT OBJECTIVE: To seek growth of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in common stocks of U.S. companies with market capitalizations of at least $10 billion. The portfolio may also invest in companies with smaller capitalizations. Davis uses the Davis investment philosophy in managing the Fundamental Value Trust's portfolio. The Davis investment philosophy stresses a back-to-basics approach, using extensive research to select common stocks of quality overlooked growth companies at value prices and holding such securities for the long-term. Davis looks for companies with 75 sustainable growth rates selling at modest price-earnings multiples that it believes will expand as other investors recognize the company's true worth. Davis believes that if a sustainable growth rate is combined with a gradually expanding multiple, these rates compound and can generate above-average returns. Davis searches for companies possessing several of the following characteristics that it believes foster sustainable long-term growth, minimize risk and enhance the potential for superior long-term returns: -- First-class management -- Proven record as an acquirer -- Management ownership -- Strong balance sheet -- Strong returns on capital -- Competitive products or services -- Lean expense structure -- Successful international operations -- Dominant or growing market share in a -- Innovation growing market
The Fundamental Value Trust may also invest to a limited extent in foreign securities and fixed income securities. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Fundamental Value Trust may place any portion of its assets in: -- money market instruments (which include commercial paper, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks, repurchase agreements, nonconvertible debt securities and short term obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities); -- securities of other investment companies (or companies exempted under Section 3(c)(7) of the 1940 Act) that primarily invest in temporary defensive investments, subject to limitations under the 1940 Act; and -- cash. When the portfolio is in a defensive position or awaiting investment of its assets, the ability to achieve its investment objective will be limited. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 17.39% (for the quarter ended 6/2003) and the lowest return was -13.77% (for the quarter ended 9/2001). - -------------------------------------------------------------------------------- -16.2% 29.8% 2002 2003
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One Life of Date First Year Portfolio Available Fundamental Value Trust Series I 29.83% 0.78% 04/30/2001 Series II 29.57% 5.47% 01/28/2002 Series III N/A 12.68% 09/05/2003 S&P 500 Index(A) 28.70% -2.69% Russell 1000 Value Index(A) 30.03% 1.85%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. 76 SUBADVISER AND PORTFOLIO MANAGERS Davis was organized in 1969 and serves as the investment adviser for all of the Davis Funds, other mutual funds and other institutional clients. The sole general partner of Davis is Davis Investments, LLC, which is controlled by Christopher C. Davis. Davis is located at 2949 East Elvira Road, Suite 101, Tucson, Arizona 85706. The Portfolio Managers are: -- Christopher C. Davis (since May, 2001). Mr. Davis, Chairman and Chief Executive Officer of Davis and a director and Chief Executive Officer, president or vice president of each of the Davis Funds, is co-portfolio manager of the Fundamental Value Trust and the Financial Services Trust. He has served as a portfolio manager with Davis since 1995. -- Kenneth Charles Feinberg (since May, 2001). Mr. Feinberg is co-portfolio manager of the Fundamental Value Trust and the Financial Services Trust. Since joining Davis in 1992, he has co-managed other equity funds advised by Davis and has also served as a research analyst. GROWTH & INCOME TRUST SUBADVISER: Wellington Management Company, LLP ("Wellington Management") INVESTMENT OBJECTIVE: To seek long-term growth of capital and income consistent with prudent investment risk. INVESTMENT STRATEGIES: The portfolio invests primarily in a diversified portfolio of common stocks of U.S. issuers which Wellington Management believes are of high quality. Wellington Management believes that high quality is evidenced by: -- a leadership position within an industry, -- a strong or improving balance sheet, -- relatively high return on equity, -- steady or increasing dividend payout, and -- strong management skills. The Growth & Income Trust's investments primarily emphasize dividend-paying stocks of larger companies. The portfolio may also invest in securities convertible into or which carry the right to buy common stocks. These securities include those convertible securities issued in the Euromarket, preferred stocks and debt securities. Wellington Management selects portfolio investments on the basis of fundamental analysis, which it utilizes to identify those securities that provide the potential for long-term growth of capital and income. Fundamental analysis involves assessing a company and its business environment, management, balance sheet, income statement, anticipated earnings and revenues, and other related measures of value. When selecting securities of issuers domiciled outside of the United States, Wellington Management also monitors and evaluates the economic and political climate and the principal securities markets of the country in which each company is located. Securities are sold when the investment has achieved its intended purpose, or because it is no longer considered attractive. The Growth & Income Trust invests primarily in securities listed on national securities exchanges, but from time to time it may also purchase securities traded in the over-the-counter market. The Growth & Income Trust may also invest up to 20% of its assets in foreign securities. The risks of investing in foreign securities are set forth above under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest at most 20% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Growth & Income Trust may invest up to 100% of its assets in securities which are authorized for purchase by the Investment Quality Bond Trust (excluding non-investment grade securities) or the Money Market Trust. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The Growth & Income Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." However, it is not presently anticipated that any of these strategies will be used to a significant degree by the portfolio. 77 Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- Because the portfolio invests primarily in high quality equity securities, it may underperform portfolios invested in more speculative growth securities when these securities are in favor in the market. Performance (A) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 20.16% (for the quarter ended 12/1998) and the lowest return was -17.43% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 2.9% 29.2% 22.8% 32.8% 26.5% 18.9% -7.1% -11.3% -24.3% 26.5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Growth & Income Trust Series I 26.45% -1.27% 9.91% N/A 04/23/1991 Series II 26.41% N/A N/A -2.44% 01/28/2002 Series III N/A N/A N/A 7.82% 09/05/2003 S&P 500 Index 28.70% -0.57% 11.06% N/A
(A)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Wellington Management Company, LLP, a Massachusetts limited liability partnership, is a professional investment counseling firm with its principal business offices located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided investment services to investment companies, employee benefit plans, endowments, foundations and other institutions since 1928. The managing partners of Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R. Ryan. The Portfolio Manager is: -- Matthew E. Megargel (since February, 1992). Mr. Megargel, Senior Vice President of Wellington Management, joined Wellington Management in 1983 as a research analyst and took on additional responsibilities as a portfolio manager in 1988. In 1991, he became solely a portfolio manager with Wellington Management. He is a Chartered Financial Analyst. GREAT COMPANIES -- AMERICA(SM) TRUST (Not Available for Sale) SUBADVISER: Great Companies, L.L.C. INVESTMENT OBJECTIVE: To seek long-term growth of capital. INVESTMENT STRATEGIES: The subadviser seeks to achieve this objective by investing principally in large-cap stocks. The Portfolio's subadviser, Great Companies, L.L.C. ("Great Companies") seeks to invest in common stocks of large, established, U.S.-based companies. Stocks for this portfolio are selected by Great Companies from a group of companies that it has identified, in its opinion, as being "great companies." To be considered a "great company" by the subadviser, the subadviser will initially determine if a company meets the following criteria: -- have a market cap in excess of $15 billion; -- be highly regard by management experts; -- be incorporated in the U.S.; 78 -- be publicly traded; -- be engaged in what the subadviser considers to be "terrific businesses" (i.e., businesses which, in the opinion of the subadviser, have low labor costs, high return on invested capital and are not subject to commoditization); -- have a "protective barrier" such as superior business franchises; have been in business for at least 50 years and survived the founder; -- consider employees to be the company's most valuable asset; -- have, in the subadviser's opinion, "world class management" (i.e., management which, in the opinion of the subadviser, have the confidences of their boards, have the long term interest of shareholders as a priority, provide a clear strategic vision for their company and seek to manage under high ethical standards); -- deliver outstanding return to shareholders; -- be a global company (as defined by the subadviser); and, -- be in an innovation-driven company that, in the subadviser's opinion, can convert changes into opportunities. The subadviser seeks common stocks that have outstanding shareholder returns (defined as having outperformed the portfolio's benchmark over a set period of time). The subadviser will use the S&P 500 as the performance benchmark for the portfolio. Companies identified by the subadviser for inclusion in the portfolio may fall outside of the initial screening process. The final selection of companies identified by the stock selection process and the addition of such companies to the portfolio, is at the sole discretion of the subadviser, irrespective of the stock screening process or methods used. To determine how to allocate fund assets among the "great companies" the subadviser has identified, the subadviser uses Intrinsic Value. Intrinsic Value is the discounted value of the cash that can be take out of a business during its remaining life. It is an estimate rather than a precise figure, and changes when interest rates move or when forecasts of future cash flows are revised. Principal Risks of Investing in this Portfolio -- Equity Securities. The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- Nondiversified. The portfolio is nondiversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." -- Intrinsic Value Strategy. The subadviser uses Intrinsic Value to allocate the portfolio's assets. If the subadviser's determination of a company's intrinsic value is not correct (or is subsequently revised) performance may be lower. Intrinsic Value is an estimate rather than a precise figure and changes when interest rates move or forecasts of future cash flows are revised. -- Proprietary forms of research may not be effective and may cause overall returns to be lower than if other forms of research are used. Performance Performance is not provided since the portfolio commenced operations in July, 2003. SUBADVISER AND PORTFOLIO MANAGERS Great Companies, located at 635 Court Street, Suite 100, Clearwater, Florida 33756, is a 30% owned indirect subsidiary of AUSA Holding Company. AUSA is wholly-owned by Transamerica Holding Company, which is wholly-owned by AEGON USA, Inc. (AEGON USA), a financial services holding company whose primary emphasis is on life and health insurance, and annuity and investment products. AEGON USA is a wholly-owned indirect subsidiary of AEGON N.V., a Netherlands corporation and publicly traded international insurance group. The Portfolio Managers are: -- Jim Huguet (since July, 2003). Mr. Huguet has served as Co-CEO, Manager, and Chief Investment Officer of Great Companies since May 2000. Mr. Huguet was born in 1944 and received both a bachelor's and a master's degree from Louisiana State University. He founded and operated a sales and business consulting firm, NEO, Inc., from 1982 until 1994. From 1994 until 1998, Mr. Huguet served as Executive Vice President of Information Resources Inc. From 1998 to May 2000, Mr. Huguet served as Director and President of Great Companies, Inc., an investment advisory firm registered with the State of Connecticut. In May 2000, Mr. Huguet, together with Mr. Kenney and Money Services, Inc., formed Great Companies, LLC. -- Gerry Bollman, CFA (since July, 2003). Mr. Bollman has served as Executive Vice President and Portfolio Manager since May 2000. Mr. Bollman was born in 1942 and received a bachelor's degree in business administration from the University of Oregon. He also completed the Program for Management Development at Harvard University. From 1983 until 1995, Mr. Bollman was Executive Vice President and portfolio manager for Continental Asset Management Corporation in New York City, and was responsible for all equity and venture capital portfolios 79 for that firm. From 1995 to May 2001, Mr. Bollman founded and served as Chairman and Managing Member of Intrinsic Value Associates, LLC, a Chatham, New Jersey based consulting firm that provided portfolio management services and Intrinsic Value advice to Great Companies, Inc and then to Great Companies, LLC. Mr. Bollman also served as executive vice president of Great Companies, Inc., an investment advisory firm registered with the State of Connecticut, from 1999 until May 2000. -- Matt Stephani, CFA, CPA (since July, 2003). Senior Vice President has served as Co-Portfolio Manager since May 2001. He is responsible for analysis of both domestic and foreign securities for Great Companies. Mr. Stephani was born in 1970 and received a B.S. and Masters in Accounting concurrently from Brigham Young University. From 1995 to May 2001, Mr. Stephani served as Accounting Manager for Deloitte & Touche in Wilton Connecticut. Mr. Stephani currently holds a CPA and CFA License. QUANTITATIVE VALUE TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.)") INVESTMENT OBJECTIVE: To seek long-term capital appreciation. INVESTMENT STRATEGIES: The subadviser seeks to obtain this objective by investing primarily in large-cap U.S. securities with the potential for long-term growth of capital. The portfolio invests primarily in large-cap U.S. securities with the potential for long-term growth of capital. The subadviser uses both qualitative and quantitative analysis to determine the best investment values, emphasizing securities that may have been undervalued by the market. Qualitative analysis may include company visits and management interviews while quantitative analysis may include evaluations of financial data, assessment of market share and industry position, and factors such as price-to-earnings ratios, dividend yield, and earnings growth. The portfolio may also hold fixed income securities (including cash and cash equivalents) and foreign securities from time to time. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in securities that the subadviser believes have been undervalued by the market. The price of these securities will increase if other investors in the stock market subsequently believe that the securities are undervalued and are willing to pay a higher price for them. If other investors in the stock market continue indefinitely to undervalue these securities, or if in fact these securities are not undervalued, the value of the portfolio may decline. Performance Performance is not provided since the portfolio commenced operations in May, 2004. SUBADVISERS AND PORTFOLIO MANAGERS MFC Global (U.S.A.) manages the Quantitative Value Trust. MFC is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios of the Trust for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, including Elliott & Page Limited and Manulife Fund Direct (Hong Kong) Limited, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The portfolio is managed by the following portfolio managers: -- Mark Schmeer (since May, 2004). Mr. Schmeer joined MFC Global in 1996. He is Vice President and Managing Director of North American Equities at Manulife Financial. Prior to 1996, Mr. Schmeer was Vice President of Sun Life Investment Management, where he served from 1993 to 1996. He is a Chartered Financial Analyst, and graduated from Boston College with an MA in Economics. -- Harpreet Singh (since May, 2004). Mr. Singh joined MFC Global in August of 2000. He is Assistant Vice President and Portfolio Manager of U.S. Equities at MFC Global. Prior to joining MFC Global in 2000, Mr. Singh was Quantitative Analyst at Standish, Ayer & Wood Inc. Mr. Singh graduated with an MBA from Bentley College and a B. Tech (Chemical Engineering) from Indian Institute of Technology. -- Chris Hensen (since May, 2004). Mr. Hensen joined MFC Global in July of 1995. He is Assistant Vice President and Portfolio Manager of U.S. Equities at MFC Global. Mr. Hensen holds the Chartered Financial Analyst designation and is a graduate of York University with a BBA and an MBA. 80 -- Brett Hryb (since May, 2004). Mr. Hryb joined MFC Global in March of 1993. He is a Portfolio Manager of U.S. Equities at MFC Global. Mr. Hyrb holds the Chartered Financial Analyst designation and is a graduate of McMaster University (B.Comm). EQUITY-INCOME TRUST SUBADVISER: T. Rowe Price Associates, Inc. ("T. Rowe Price") INVESTMENT OBJECTIVE: To provide substantial dividend income and also long-term capital appreciation. INVESTMENT STRATEGIES: The portfolio invests, under normal circumstances, at least 80% of the portfolio's total assets in equity securities, with 65% in common stocks of well-established companies paying above-average dividends. T. Rowe Price believes that income can contribute significantly to total return over time and expects the portfolio's yield to exceed that of the S&P 500 Index. Dividends can also help reduce the portfolio's volatility during periods of market turbulence and help offset losses when stock prices are falling. The Equity-Income Trust employs a "value" approach and invests in stocks and other securities that appear to be temporarily undervalued by various measures and may be temporarily out of favor, but have good prospects for capital appreciation and dividend growth. Value investors seek to buy a stock (or other security) when its price is low in relation to what they believe to be its real worth or future prospects. By identifying companies whose stocks are currently out of favor, value investors hope to realize significant appreciation as other investors recognize a stock's intrinsic value. Finding undervalued stocks requires considerable research to identify the particular stocks, to analyze each company's underlying financial condition and prospects, and to assess the likelihood that a stock's underlying value will be recognized by the market and reflected in its price. The Equity-Income Trust will generally consider companies with the following characteristics: -- established operating histories; -- above-average dividend yield relative to the S&P 500 Index; -- low price/earnings ratios relative to the S&P 500 Index; -- sound balance sheets and other financial characteristics; and -- low stock price relative to a company's underlying value, as measured by assets, cash flow or business franchises. The Equity-Income Trust may also purchase other types of securities in keeping with its objective, including: -- U.S. and non-U.S. dollar denominated foreign securities including ADRs (up to 25% of total assets); -- preferred stocks; -- convertible stocks, bonds, and warrants; and -- futures and options. The portfolio may invest in fixed income securities without regard to quality or rating, including up to 10% in non-investment grade ("junk bonds") fixed income securities. The risks of investing in fixed income securities are set forth above under "Risks of Investing in Certain Types of Securities." Since the portfolio invests primarily in equity securities, the risks associated with fixed income securities will not affect the portfolio as much as a portfolio that invests more of its assets in fixed income securities. The portfolio holds a certain portion of its assets in money market reserves which can consist of shares of the T. Rowe Price Reserve Investment Fund (or any other internal T. Rowe Price money market fund) as well as U.S. and foreign dollar-denominated money market securities, including repurchase agreements, in the two highest rating categories, maturing in one year or less. The portfolio may sell securities for a variety of reasons such as to secure gains, limit losses or redeploy assets into more promising opportunities. Use of Hedging and Other Strategic Transactions The Equity-Income Trust may also engage in a variety of investment management practices, such as buying and selling futures and options. The portfolio may invest up to 10% of its total assets in hybrid instruments. Hybrid instruments are a type of high-risk derivative which can combine the characteristics of securities, futures and options. Such securities may bear interest or pay dividends at below market (or even relatively nominal) rates. The Statement of Additional Information contains more complete description of such instruments and the risks associated therewith. In pursuing its investment objective, the portfolio's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the portfolio's management believes a security could increase in value for a variety of reasons 81 including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Equity-Income Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." Principal Risks of Investing in this Portfolio -- The portfolio's emphasis on stocks of established companies paying high dividends, and its potential investments in fixed income securities, may limit its potential appreciation in a broad market advance. The portfolio's value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. -- The portfolio invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 25% of its assets in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Since the portfolio will only invest up to 25% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. Performance (A, B, C, D) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 16.68% (for the quarter ended 6/2003) and the lowest return was -17.40% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- 0.8% 23.7% 19.9% 29.7% 9.2% 3.4% 13% 1.3% -13.3% 25.6% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Equity-Income Trust Series I 25.57% 5.20% 10.56% 02/19/1993 Series II 25.40% N/A 4.68% 01/28/2002 Series III N/A N/A 9.81% 09/05/2003 Russell 1000 Value Index(C) 30.03% 3.56% 11.88%
(A)Effective October 1, 1996, the portfolio changed its subadviser. Performance reflects results prior to this change. (B)Since June 1, 2000, a portion of the Equity-Income Trust expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. (C)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of a month end. (D)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS T. Rowe Price manages the Equity Income Trust. T. Rowe Price, whose address is 100 East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price Group, Inc., a publicly traded financial services holding company, owns 100% of the stock of T. Rowe Price. As of December 31, 2003, T. Rowe Price and its affiliates managed over $190 billion for over eight million individual and institutional investor accounts. The portfolio is managed by an investment advisory committee chaired by: -- Brian C. Rogers (since October, 1996). Mr. Rogers, who joined T. Rowe Price in 1982, is a Vice President of T. Rowe Price and has been managing investments since 1983. He is a Chartered Financial Analyst. The committee chairman has day-to-day responsibility for managing the portfolio and works with the committee in developing and executing the portfolio's investment program. 82 INCOME & VALUE TRUST SUBADVISER: Capital Guardian Trust Company ("CGTC") INVESTMENT OBJECTIVE: To seek the balanced accomplishment of (a) conservation of principal and (b) long-term growth of capital and income. INVESTMENT STRATEGIES: The portfolio invests its assets in both equity and fixed income securities. CGTC has full discretion to determine the allocation of assets between equity and fixed income securities. Generally, between 25% and 75% of the portfolio's assets will be invested in fixed income securities unless CGTC determines that some other proportion would better serve the portfolio's investment objective. Fixed Income Securities. At least 80% of the fixed income portion of the portfolio will consist of the following: -- securities rated "Baa" or better at the time of purchase by Moody's or "BBB" by Standard & Poor's or deemed by CGTC to be of equivalent investment quality including mortgage-related and asset-backed securities (see "Other Risks of Investing" below for a description of these securities); -- non-U.S. dollar fixed income securities (up to 15% of the portfolio's assets including up to 5% in emerging market fixed income securities); -- securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities; -- cash or cash equivalents including commercial bank obligations and commercial paper. Fixed-income securities may include ADRs, Yankee Bonds and Eurodollar instruments which are U.S. dollar denominated and non-U.S. dollar fixed income securities subject to the limits set forth above. Equity Securities. Equity securities shall be traded on national securities exchanges, NASDAQ or in other national OTC markets and may include ADRs and other U.S. registered securities of foreign issuers which are denominated in U.S. dollars. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Income & Value Trust may invest all or a portion of its assets in fixed income securities, cash and cash equivalents. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions The Income & Value Trust is currently authorized to use all of the investment strategies referred to under "Hedging and Other Strategic Transactions." However, it is not presently contemplated that any of these strategies will be used to a significant degree by the portfolio. Principal Risks of Investing in this Portfolio -- The portfolio invests in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests in fixed income securities, including those rated below investment grade. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio invests in fixed income securities from foreign and emerging markets. The risks of investing in foreign securities and emerging market securities are set forth below under "Risk of Investing in Certain Types of Securities." -- The portfolio may invest in mortgage-backed and other asset-backed securities. Investing in these securities subjects the portfolio to prepayment risk. Prepayments of underlying mortgages or pools of assets result in a loss of anticipated interest payments and all or part of any premium paid for the security. Therefore, the portfolio could make less money than expected or could lose money. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 83 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 13.68% (for the quarter ended 6/2003) and the lowest return was -13.70% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -1.6% 20.7% 10% 15.3% 15.1% 8.5% 4.9% 1% -15.9% 26.5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Income & Value Trust Series I 26.48% 4.11% 7.87% N/A 08/03/1989 Series II 26.29% N/A N/A 3.87% 01/28/2002 S&P 500 Index 28.70% -0.57% 11.06% N/A Citigroup Broad Investment Grade Bond Index 4.20% 6.62% 6.96% N/A 60% S&P 500/40% Citigroup Broad Investment Grade Bond Index 18.53% 2.67% 9.75% N/A Combined Index(B) 18.53% 2.35% 7.81% N/A
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)The Combined Index represents 32.5% of the return of the Wilshire 5000 Index, 10% of the MSCI EAFE Index, 40% of the Lehman Brothers Aggregate Bond Index, 10% of the 90 Day T-Bill, and 7.5% of the Merrill Lynch High Yield Index through April 30, 1999, and 60% of the return of the S&P 500 Index and 40% of the return of the Citigroup Broad Investment Grade Bond Index from May 1, 1999 and thereafter. The Combined Index was prepared by the adviser using Ibbotson Associates Software and Data. The Combined Index was added to provide a more accurate comparison of performance. (C)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS CGTC is located at 333 South Hope Street, Los Angeles, California 90071. CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC has been providing investment management services since 1968 and manages approximately $146 billion of assets as of December 31, 2003. The Portfolio Managers are: -- Alan J. Wilson (since January, 1999). Mr. Wilson is Vice President of Capital International Research, Inc. Mr. Wilson joined the Capital Group organization in 1991. -- Michael D. Locke (since December 2001). Mr. Locke is Vice President of Capital Research Company with portfolio specialist and research responsibilities for mortgage- and asset-backed securities and derivatives. He joined the Capital Group organization in 1996. -- Christine C. Cronin (since December 2001). Ms. Cronin is a Vice President of Capital Research Company with portfolio specialist responsibility for investment grade corporate bonds, and research responsibility for the airline, cruise, food, and financial services industries. She joined the Capital Group organization in 1997. -- Michael R. Ericksen (since May, 1999). Mr. Ericksen is a Senior Vice President and portfolio manager for CGTC. He joined the Capital Group organization in 1987. -- David I. Fisher (since May, 1999). Mr. Fisher is Chairman of the Board of Capital Guardian Trust Company. He joined the Capital Group organization in 1969. -- James R. Mulally (since May, 1999). Mr. Mulally is Senior Vice President, a Director, and Chairman of the Fixed Income Investment Sub-Committee for CGTC. He joined the Capital Group organization in 1980. -- Theodore R. Samuels (since May, 1999). Mr. Samuels is a Senior Vice President and a Director for CGTC. He joined the Capital Group organization in 1981. -- Eugene P. Stein (since May, 1999). Mr. Stein is Executive Vice President and a Director. He joined the Capital Group organization in 1972. -- Terry Berkemeier (since July, 1999). Mr. Berkemeier is a Vice President and portfolio manager for CGTC. He joined the Capital Group organization in 1992. -- Karen A. Miller (since December, 2000). Ms. Miller is a Senior Vice President of Capital International Research, Inc. She joined the Capital Group organization in 1990. A portion of the portfolio is managed by individual members of the research team. 84 GLOBAL ALLOCATION TRUST (FORMERLY, TACTICAL ALLOCATION TRUST) SUBADVISER: UBS Global Asset Management INVESTMENT OBJECTIVE: To seek total return, consisting of long-term capital appreciation and current income. INVESTMENT STRATEGIES: The portfolio invests in equity and fixed income securities of issuers located within and outside the U.S. Under normal circumstances, the portfolio will allocate its assets between fixed income securities and equity securities. Investments in fixed income securities may include debt securities of governments throughout the world (including the U.S.), their agencies and instrumentalities, debt securities of corporations, mortgage-backed securities and asset-backed securities. Investment in equity securities may include common stock and preferred stock. The portfolio may invest in certain issuers by investing in other open-end investment companies, including investment companies advised by the subadviser, to the extent permitted by applicable law. In addition, the portfolio attempts to generate positive returns through sophisticated currency management techniques. These decisions are integrated with analysis of global market and economic conditions. The portfolio may (but is not required to) use forward currency contracts, options, futures and other derivatives as part of its investment strategy or to help manage portfolio risks. The portfolio is a multi-asset portfolio and invests in each of the major asset classes: U.S. fixed income, U.S. equities, international fixed income and international equities, based upon the subadviser's assessment of prevailing market conditions in the U.S. and abroad. Within the equity portion of the portfolio, the subadviser selects securities whose fundamental values it believes are greater than their market prices. In this context, the fundamental value of a given security is the subadviser's assessment of what a security is worth. The subadviser bases its estimates of value upon economic, industry and company analysis, as well as upon a company's management team, competitive advantage and core competencies. The subadviser then compares its assessment of a security's value against the prevailing market prices, with the aim of constructing a portfolio of stocks with attractive relative price/value characteristics. For each security under analysis, the fundamental value estimate is compared to the company's current market price to ascertain whether a valuation anomaly exists. A stock with a market price below the estimated intrinsic or fundamental value would be considered a candidate for inclusion in the portfolio. The comparison between price and intrinsic or fundamental value allows comparisons across industries and countries. In selecting fixed income securities, the subadviser uses an internally developed valuation model that quantifies return expectations for all major bond markets, domestic and foreign. The model employs a qualitative credit review process that assesses the ways in which macroeconomic forces (such as inflation, risk premiums and interest rates) may affect industry trends. Against the output of this model, the subadviser considers the viability of specific debt securities compared to certain qualitative factors, such as management strength, market position, competitive environment and financial flexibility, as well as certain quantitative factors, such as historical operating results, calculation of credit ratios, and expected future outlook. These securities will have an initial maturity of more than one year and will generally be of investment-grade quality and possess a minimum rating of BBB by S&P or Baa by Moody's, or, if unrated, determined to be of comparable quality by the subadviser. The subadviser's fixed income strategy combines judgments about the absolute value of the fixed income universe and the relative value of issuer sectors, maturity intervals, duration of securities, quality and coupon segments and specific circumstances facing the issuers of fixed income securities. Duration management involves adjusting the sensitivity to interest rates of the holdings within a country. The subadviser manages duration by choosing a maturity mix that provides opportunity for appreciation while also limiting interest rate risks. The portfolio's risk is carefully monitored with consideration given to the risk generated by individual positions, sector, country and currency views. The portfolio may invest in cash or cash equivalent instruments, including shares of an affiliated investment company. When market conditions warrant, the portfolio may make substantial temporary defensive investments in cash equivalents, which may affect the portfolio's ability to pursue its investment objective. The subadviser actively manages the portfolio. As such, increased portfolio turnover may result in higher costs for brokerage commissions, transaction costs and taxable gains. Principal Risks of Investing in this Portfolio -- The portfolio may invest in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in fixed income securities. The risks of investing in fixed income securities are set forth below under "Risk of Investing in Certain Types of Securities." 85 -- The portfolio may invest in foreign securities, including emerging market securities. The risks of investing in foreign securities and emerging market securities are set forth below under "Risk of Investing in Certain Types of Securities." -- The subadviser allocates the portfolio's assets among several asset categories. The risks associated with asset allocation include the risk that the portfolio may allocate assets to an asset category that underperforms other asset categories. For example, the portfolio may be overweighted in equity securities when the stock market is falling and the fixed income market is rising. Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 14.38% (for the quarter ended 6/2003) and the lowest return was -17.65% (for the quarter ended 9/2002). - -------------------------------------------------------------------------------- -13.4% -23.2% 26.4% 2001 2002 2003
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One Life of Date First Year Portfolio Available Global Allocation Trust Series I 26.43% -5.45% 05/01/2000 Series II 26.47% -0.90% 01/28/2002 S&P 500 Index(A) 28.70% -5.61% Global Securities Market Index(A, B) 26.48% 0.73%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)The Global Securities Markets Index was added to more accurately reflect the investment objective of the Global Allocation Trust, and is an unmanaged index compiled by UBS Global Asset Management. It is currently constructed as follows: 40% Russell 3000 Index, 22% MSCI World ex-USA (free) Index, 21% Citigroup Broad Investment Grade (BIG) Bond Index, 9% Citigroup World Government Bond non-US Index, 3% Merrill Lynch High Yield Cash Pay Index, 3% MSCI Emerging Free Markets Index and 2% J.P. Morgan EMBI Global Index. (C)Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS UBS Global Asset Management (Americas) Inc., One North Wacker Drive, Chicago, Illinois, 60606, is an indirect wholly owned asset management subsidiary of UBS AG and a member of the UBS Global Asset Management Division. UBS AG, with headquarters in Zurich, Switzerland, is an internationally diversified organization with operations in many areas of the financial services industry. Investment decisions for the portfolio are made by an investment management team at the subadviser. No member of the investment management team is primarily responsible for making recommendations for portfolio purchases. 86 HIGH YIELD TRUST SUBADVISER: Salomon Brothers Asset Management Inc. ("SaBAM") INVESTMENT OBJECTIVE: To realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of it's net assets (plus any borrowings for investment purposes) in high yield securities, including corporate bonds, preferred stocks, U.S. Government securities, mortgage-backed securities, loan assignments or participations and convertible securities which have the following ratings (or, if unrated, are considered by SaBAM to be of equivalent quality):
CORPORATE BONDS, PREFERRED STOCKS AND CONVERTIBLE SECURITIES RATING AGENCY ---------------------------------------------------------------------------- Moody's Ba through C Standard & Poor's BB through D
Securities rated less than "Baa" by Moody's or "BBB" by Standard & Poor's are classified as non-investment grade securities and are commonly referred to as "junk bonds." The Portfolio may also invest in investment grade securities. The High Yield Trust may invest in foreign bonds and other fixed income securities denominated in foreign currencies, where, in the opinion of SaBAM, the combination of current yield and currency value offer attractive expected returns. Foreign securities in which the portfolio may invest include emerging market securities. SaBAM may utilize futures, swaps and other derivatives in managing the portfolio. The High Yield Trust may invest in fixed-and floating-rate loans, which investments generally will be in the form of loan participations and assignments of such loans. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in non-investment grade fixed income securities. The risks of investing in these types of securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest its assets in foreign securities including securities of companies in emerging markets. The risks of investing in foreign securities are set forth below under "Risks of Investing in Foreign Securities." Because the portfolio may invest up to 100% of its assets in foreign securities, which are generally riskier investments in U.S. securities, investing in this portfolio is riskier than investing in a portfolio that invests primarily in U.S. high yield fixed income securities. -- The portfolio may invest in mortgage-backed securities. Investing in mortgage-backed securities subjects the portfolio to prepayment risk. Prepayments of underlying mortgages result in a loss of anticipated interest payments and all or part of any premium paid for the security. Therefore, the portfolio could make less money than expected or could lose money. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. 87 Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 7.94% (for the quarter ended 6/2003) and the lowest return was -6.52% (for the quarter ended 9/1998). - -------------------------------------------------------------------------------- 12.7% 2.8% 8% -9% -5.5% -6.7% 24.2% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available High Yield Trust Series I 24.15% 1.49% 3.21% 01/01/1997 Series II 23.91% N/A 7.36% 01/28/2002 Series III N/A N/A 8.03% 09/05/2003 Citigroup High Yield Index(A) 30.62% 5.41% 6.23%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)Current subadvisor assignment became effective May 1, 2003. SUBADVISER AND PORTFOLIO MANAGERS SaBAM was established in 1987 and, together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and equity investment services to individuals and institutional clients throughout the world. SaBAM's principal address is 399 Park Avenue, New York, New York 10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses provide a broad range of financial services -- asset management, banking and consumer finance, credit and charge cards, insurance investments, investment banking and trading -- and use diverse channels to make them available to consumer and corporate customers around the world. The Portfolio is managed by the Salomon Brothers Asset Management Fixed Income Team. Current members of the team include Peter Wilby, CFA, Managing Director, Beth Semmel, CFA, Managing Director, Thomas Flanagan, CFA, Managing Director and James Craige, CFA, Managing Director. John Madden, Vice President serves as the portfolio specialist for the global high yield team. STRATEGIC BOND TRUST SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM") INVESTMENT OBJECTIVE: To seek a high level of total return consistent with preservation of capital. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 80% of it's net assets (plus any borrowings for investment purposes) in fixed income securities. The portfolio's assets may be allocated among the following five sectors of the fixed income market listed below: (a) U.S. government obligations, (b) investment grade domestic corporate fixed income securities, (c) below investment grade or non-investment grade high yield corporate fixed income securities, (d) mortgage-backed and asset-backed securities and (e) investment grade and below investment grade or non-investment grade high yield international fixed income securities. 88 The portfolio invests in fixed income securities across a range of credit qualities and may invest a substantial portion of its assets in obligations rated below investment grade by a recognized rating agency, or, if unrated, of equivalent quality as determined by SaBAM. Below investment grade securities are commonly referred to as "junk bonds". SaBAM will determine the amount of assets to be allocated to each type of security based on its assessment of the maximum level of total return that can be achieved from a portfolio which is invested in these securities without incurring undue risks to principal value. The allocation decisions are based on SaBAM's analysis of current economic and market conditions and the relative risks and opportunities presented in these markets. In making this determination, SaBAM relies in part on quantitative analytical techniques that measure relative risks and opportunities of each type of security. SaBAM also relies on its own assessment of economic and market conditions both on a global and local (country) basis. SaBAM considers economic factors including current and projected levels of growth and inflation, balance of payment status and monetary policy. The allocation of assets to international debt securities is further influenced by current and expected currency relationships and political and sovereign factors. The portfolio's assets may not always be allocated to the highest yielding securities if SaBAM believes that such investments would impair the portfolio's ability to preserve shareholder capital. SaBAM will continuously review this allocation of assets and make such adjustments as it deems appropriate. The portfolio does not plan to establish a minimum or a maximum percentage of the assets which it will invest in any particular type of fixed income security. The types and characteristics of the U.S. government obligations, mortgage-backed and asset-backed securities, investment grade corporate fixed income securities and investment grade international fixed income securities purchased by the Strategic Bond Trust are set forth in the discussion of investment objectives and policies for the Investment Quality Bond, U.S. Government Securities and Global Bond Trusts, and in the section entitled "Other Instruments" in the Statement of Additional Information. The types and characteristics of the money market securities purchased by the portfolio are set forth in the discussion of investment objectives of the Money Market Trust. Potential investors should review these other discussions in considering an investment in shares of the Strategic Bond Trust. The Strategic Bond Trust may invest without limitation in high yield domestic and foreign fixed income securities and up to 100% of the Strategic Bond Trust's assets may be invested in foreign securities. SaBAM has discretion to select the range of maturities of the various fixed income securities in which the portfolio invests. Such maturities may vary substantially from time to time depending on economic and market conditions. The high yield sovereign fixed income securities in which the Strategic Bond Trust may invest are U.S. dollar-denominated and non-dollar-denominated fixed income securities issued or guaranteed by governments or governmental entities of developing and emerging countries. SaBAM expects that these countries will consist primarily of those which have issued or have announced plans to issue Brady Bonds, but the portfolio is not limited to investing in the debt of such countries. Brady Bonds are debt securities issued under the framework of the Brady Plan. Although SaBAM does not anticipate investing in excess of 75% of the portfolio's assets in domestic and developing country fixed income securities that are rated below investment grade, the portfolio may invest a greater percentage in such securities when, in the opinion of the SaBAM, the yield available from such securities outweighs their additional risks. By investing a portion of the portfolio's assets in securities rated below investment grade, as well as through investments in mortgage-backed securities and international debt securities, as described below, SaBAM seeks to provide investors with a higher yield than a high-quality domestic corporate bond fund with less risk than a fund that invests principally in securities rated below investment grade. Certain of the debt securities in which the portfolio may invest may have, or be considered comparable to securities having, the lowest ratings for non-subordinated debt instruments assigned by Moody's or Standard & Poor's (i.e., rated "C" by Moody's or "CCC" or lower by Standard & Poor's). In light of the risks associated with investing in high yield corporate and sovereign debt securities, SaBAM considers various factors in evaluating the credit worthiness of an issue. These factors will typically include:
CORPORATE DEBT SECURITIES SOVEREIGN DEBT INSTRUMENTS - ------------------------------------------------------------------------------------------------ -- issuer's financial condition -- economic and political conditions within -- issuer's sensitivity to economic the issuer's country conditions and trends -- issuer's external and overall Debt levels, -- issuer's operating history and its ability to pay principal and interest -- experience and track record of the when due issuer's management -- issuer's access to capital markets and other sources of funding -- issuer's debt service payment history
SaBAM also reviews the ratings, if any, assigned to a security by any recognized rating agencies, although its judgment as to the quality of a debt security may differ from that suggested by the rating published by a rating service. The portfolio's ability to achieve its investment objective may be more dependent on SaBAM's credit analysis than would be the case if it invested in higher quality debt securities. 89 The portfolio may invest in fixed-and floating-rate loans, which investments generally will be in the form of loan participations and assignments of such loans. Use of Hedging and Other Strategic Transactions The Strategic Bond Trust is currently authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." With the exception of currency transactions, however, it is not presently anticipated that any of these strategies will be used to a significant degree by the portfolio. Principal Risks of Investing in this Portfolio -- Whether the portfolio achieves its investment objective is significantly dependent on the ability of SaBAM to allocate the portfolio effectively among the different investment categories. If SaBAM does not correctly assess the returns that can be achieved from a particular category of assets, the returns for the portfolio could be volatile and the value of the portfolio may decline. -- The portfolio invests substantially all of its assets in fixed income securities, including a significant amount in non-investment grade fixed income securities. The risks of investing in fixed income securities is set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest up to 100% of its assets in foreign securities including securities of companies in emerging markets. Investing in foreign securities increases the risk of investing in the portfolio. However, the ability of the portfolio to spread its investments among the fixed income markets in a number of different countries may reduce the overall level of market risk of the portfolio to the extent it may reduce the portfolio's exposure to a single market. The risks of investing in foreign securities are set forth below under "Risks of Investing in Foreign Securities." -- The portfolio may invest in mortgage-backed securities. Investing in mortgage-backed securities subjects the portfolio to prepayment risk. Prepayments of underlying mortgages result in a loss of anticipated interest payments and all or part of any premium paid for the security. Therefore, the value of the portfolio may decline. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 9.55% (for the quarter ended 6/1995) and the lowest return was -4.04% (for the quarter ended 3/1994). - -------------------------------------------------------------------------------- -6% 19.2% 14.7% 11% 1.3% 2% 7.3% 6.2% 9% 13.1% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Strategic Bond Trust Series I 13.11% 7.53% 7.58% 02/19/1993 Series II 12.93% N/A 10.54% 01/28/2002 Series III N/A N/A 5.01% 09/05/2003 Lehman Brothers Aggregate Bond Index(A) 4.11% 6.62% 6.95%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS SaBAM was established in 1987 and, together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and equity investment services to individuals and institutional clients throughout the world. SaBAM's principal address is 399 Park Avenue, New York, New York 10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses provide a broad range of financial services -- asset management, banking and consumer finance, 90 credit and charge cards, insurance investments, investment banking and trading -- and use diverse channels to make them available to consumer and corporate customers around the world. In connection with SaBAM's service as subadviser to the Strategic Bond Trust, SaBAM's affiliate, Citigroup Asset Management Limited ("CAM Limited"), whose principal address is Citigroup Centre, Canada Square, London, E14 5LB, England, provides certain advisory services to SaBAM with regard to currency transactions and investments in non-dollar denominated debt securities for the benefit of the portfolio. CAM Limited is compensated by SaBAM at no additional expense to the portfolio. The Portfolio Manager is: -- Roger Lavan (since February, 1993). Mr. Lavan joined SaBAM in 1990 and is a Managing Director in the fixed income department. He is a Portfolio Manager responsible for SaBAM's investment company and institutional portfolios which invest primarily in mortgage-backed and U.S. government debt securities. He is a Chartered Financial Analyst. Assisted by: -- David Scott (since January, 1995). Mr. Scott is Managing Director and a Senior Portfolio Manager with Citigroup Limited in London with primary responsibility for managing long-term global bond portfolios. He also plays an integral role in developing strategy. Mr. Scott manages currency transactions and investments in non-dollar denominated securities for the Strategic Bond Trust. -- Peter Wilby (since February, 1993). Mr. Wilby, who joined SaBAM in 1989, is a Managing Director and Senior Portfolio Manager responsible for investment company and institutional portfolio investments in high yield U.S. corporate debt securities and high yield foreign sovereign debt securities. He is a Chartered Financial Analyst and a Certified Public Accountant. STRATEGIC INCOME TRUST SUBADVISER: John Hancock Advisers ("John Hancock") INVESTMENT OBJECTIVE: To seek a high level of current income. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, primarily in foreign government and corporate debt securities from developed and emerging markets; U.S. Government and agency securities; and U.S. high yield bonds. The portfolio invests, under normal market conditions, primarily in the following types of securities: -- foreign government and corporate debt securities from developed and emerging markets; -- U.S. Government and agency securities; and -- U.S. high yield bonds. The portfolios may also invest in preferred stock and other types of debt securities, including domestic corporate debt securities and mortgage-backed securities. Although the portfolio invests in securities rates as low as CC/Ca and their unrated equivalents, it generally intends to keep its average credit quality in the investment-grade (AAA to BBB). There is no limit on the portfolio's average maturity. In managing the portfolio, the subadviser allocates assets among the three major sectors based on analysis of economic factors such as projected international interest rate movements, industry cycles and political trends. However, the subadviser may invest up to 100% of the portfolio's assets in any one sector. Within each sector, the subadviser looks for securities that are appropriate for the overall portfolio in terms of yield, credit quality, structure and industry distribution. In selecting securities, relative yields and risk/reward ratios are the primary considerations. The portfolio may use certain higher-risk investments, including derivatives (investments whose value is based on indexes, securities or currencies) and restricted or illiquid securities. In addition, the portfolio may invest up to 10% of net assets in U.S. or foreign stocks. The portfolio may trade securities actively, which could increase its transaction costs (thus lowering performance). Principal Risks of Investing in this Portfolio -- The portfolio invests in fixed income securities, including non-investment grade fixed income securities. The risks of investing in these types of securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." 91 -- The portfolio may invest up to 10% of its assets in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in derivatives. The risks of investing in derivatives is set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2004. SUBADVISERS AND PORTFOLIO MANAGERS John Hancock manages the Strategic Income Trust. John Hancock is located 101 Huntington Avenue, Boston, MA 02199-7603. John Hancock was founded in 1968 and is a wholly owned subsidiary of John Hancock Financial Services, Inc. The portfolio is managed by the following portfolio managers. Frederick L. Cavanaugh, Jr. (since May, 2004). Mr. Cavanaugh joined John Hancock in 1986 and is a Senior Vice President. Daniel S. Janis, III (since May, 2004). Mr. Janis joined John Hancock in 1999 and is a Vice President. From 1997 to 1999, Mr. Janis was a senior risk manager at BankBoston. GLOBAL BOND TRUST SUBADVISER: Pacific Investment Management Company LLC ("PIMCO") INVESTMENT OBJECTIVE: To seek to realize maximum total return, consistent with preservation of capital and prudent investment management. INVESTMENT STRATEGIES: PIMCO seeks to achieve this investment objective by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in fixed income securities. These fixed income securities include fixed income securities denominated in major foreign currencies and in U.S. dollars. The portfolio may also invest in baskets of foreign currencies (such as the euro), and the U.S. dollar. These securities may be represented by futures contracts (including related options) with respect to such securities, and options on such securities, when PIMCO deems it appropriate to do so. Depending on PIMCO's current opinion as to the proper allocation of assets among domestic and foreign issuers, investments in the securities of issuers located outside the United States will normally vary between 25% and 75% of the portfolio's assets. The portfolio may invest up to 10% of its assets in fixed income securities that are rated below investment grade but rated "B" or higher by Moody's or Standard & Poor's (or, if unrated, determined by PIMCO to be of comparable quality). The average portfolio duration of the Global Bond Trust will normally vary within a three to seven year time frame. (Duration is a measure of the expected life of a fixed income security on a present value basis.) In selecting securities for the portfolio, PIMCO utilizes economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting, and other security selection techniques. The proportion of the Global Bond Trust's assets committed to investment in securities with particular characteristics (such as maturity, type and coupon rate) will vary based on PIMCO's outlook for the U.S. and foreign economies, the financial markets, and other factors. The types of fixed income securities in which the Global Bond Trust may invest include the following securities which unless otherwise noted may be issued by domestic or foreign issuers and may be denominated in U.S. dollars or foreign currencies: -- securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities; -- corporate debt securities, including convertible securities and corporate commercial paper; -- mortgage-backed and other asset-backed securities; -- inflation-indexed bonds issued by both governments and corporations; -- structured notes, including hybrid or "indexed" securities, -- event-linked bonds; -- loan participations; -- delayed funding loan and revolving credit facilities; -- bank certificates of deposit, fixed time deposits and bankers' acceptances; -- debt securities issued by states or local governments and their agencies, authorities and other instrumentalities; -- repurchase agreements and reverse repurchase agreements; -- obligations of foreign governments or their subdivisions, agencies and instrumentalities; and -- obligations of international agencies or supranational entities. 92 Fixed-income securities may have fixed, variable, or floating rates of interest, including rates of interest that vary inversely at a multiple of a designated or floating rate, or that vary according to change in relative values of currencies. Use of Hedging and Other Strategic Transactions Global Bond Trust may: -- purchase and sell options on domestic and foreign securities, securities indexes and currencies, -- purchase and sell futures and options on futures, -- purchase and sell currency or securities on a forward basis, -- enter into interest rate, index, equity, credit default swaps and currency rate swap agreements. The Global Bond Trust may use the above-mentioned strategies to obtain market exposure to the securities in which the portfolio primarily invests and to hedge currency risk. See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests in foreign fixed income securities. The risks of investing in fixed income securities and in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risk of Investing in Certain Types of Securities." Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 10.64% (for the quarter ended 6/2002) and the lowest return was -4.81% (for the quarter ended 3/1999). - -------------------------------------------------------------------------------- -5.8% 23.2% 13% 3% 7.6% -6.7% 1.7% 0.5% 20.1% 15.4% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Global Bond Trust Series I 15.40% 5.75% 6.75% N/A 03/18/1988 Series II 15.25% N/A N/A 18.90% 01/28/2002 Series III N/A N/A N/A 11.81% 09/05/2003 JP Morgan Global Unhedged Bond Index 14.53% 5.67% 6.87% N/A
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660 serves as sub-advisor to the Trust portfolios listed above. PIMCO is an investment counseling firm founded in 1971. PIMCO is a Delaware limited liability company and is a majority-owned subsidiary of Allianz Dresdner Asset Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors and executive management of PIMCO. ADAM LP was organized as a limited partnership under Delaware law in 1987. ADAM LP's sole general partner is Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited company with three members, ADAM U.S. Holding LLC, the managing member, which is a Delaware limited liability company, Pacific Life Insurance Company and Pacific Asset Management LLC, a Delaware limited liability company. The sole member of ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC. Allianz Dresdner Asset Management of America LLC has two members, Allianz of America, Inc., a Delaware corporation which owns a 99.9% non-managing interest and Allianz Dresdner Asset Management of America Holding Inc., a Delaware corporation which owns a 0.01% managing interest. Allianz Dresdner Asset Management of America Holding Inc. is a wholly-owned subsidiary of 93 Allianz Dresdner Asset Management Aktiengesellschaft, which is wholly owned by Allianz Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is wholly-owned by Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific Life Insurance Company, a wholly-owned subsidiary of Pacific Mutual Holding Company. Allianz AG indirectly holds a controlling interest in Allianz Dresdner Asset Management of America L.P. Allianz AG is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company owns an indirect minority equity interest in Allianz Dresdner Asset Management of America L.P. and is a California-based insurance company. PIMCO had approximately $373.8 billion of assets under management as of December 31, 2003. The Portfolio Manager is: -- Sudi Mariappa (since May, 2003). Mr. Mariappa is a Managing Director and head of global portfolio management with responsibility for overseeing PIMCO's global portfolio management efforts. Prior to joining PIMCO, he served as Managing director for Merrill Lynch in Tokyo as manager of JGB and Swap Derivative Trading. Mr. Mariappa holds both a bachelor's degree in chemical engineering and a MBA from Cornell University. DIVERSIFIED BOND TRUST SUBADVISER: Capital Guardian Trust Company ("CGTC") INVESTMENT OBJECTIVE: To seek high total return as is consistent with the conservation of capital. INVESTMENT STRATEGIES: The portfolio invests its assets in fixed income securities. CGTC seeks to achieve this investment objective by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in fixed income securities. Securities that the portfolio may invest in include one or a combination of the following categories: -- fixed income securities rated at the time of purchase "Baa" or better by Moody's or "BBB" or better by Standard & Poor's or fixed income securities not rated by Moody's or Standard & Poor's deemed by CGTC to be of equivalent investment quality; -- up to 20% of the portfolio's assets in non-U.S. dollar fixed income securities including up to 5% in emerging market fixed income securities*; -- securities issued or guaranteed by the U.S. Government, the Canadian Government or its Provinces, or their respective agencies and instrumentalities; -- interest bearing short-term investments, such as commercial paper, bankers' acceptances, bank certificates of deposit and other cash equivalents, and cash. The remaining 20% of the portfolio's assets may be invested in other fixed income securities, including securities rated below investment grade ratings described above. Fixed-income securities may include ADRs, Yankee Bonds, Eurodollar instruments which are U.S. dollar denominated and non-U.S. dollar fixed income securities subject to the limits set forth above. All portfolio investment percentages described above are measured at the time of purchase of a security for the portfolio. Use of Hedging and Other Strategic Transactions The Diversified Bond Trust is currently authorized to use all of the investment strategies referred to under "Hedging and Other Strategic Transactions." However, it is not presently contemplated that any of these strategies will be used to a significant degree by the portfolio. Principal Risks of Investing in this Portfolio -- The portfolio invests in fixed income securities, including those rated below investment grade. The risks of investing in these types of securities are set forth below under "Risks of Investing in Certain Types of Securities. -- The portfolio invests in fixed income securities from foreign and emerging markets. The risks of investing in foreign securities and emerging market securities are set forth below under "Risk of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 94 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 6.17% (for the quarter ended 3/1991) and the lowest return was -6.26% (for the quarter ended 9/1990). - -------------------------------------------------------------------------------- -1.8% 18.1% 7% 11.4% 10.7% 0.7% 10.3% 7.1% 7.6% 4.6% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Diversified Bond Trust Series I 4.60% 6.02% 7.44% N/A 08/03/1989 Series II 4.59% N/A N/A 6.11% 01/28/2002 Series III N/A N/A N/A 3.04% 09/05/2003 Citigroup Broad Investment Grade Bond Index 4.20% 6.62% 6.96% N/A Combined Index(C) 4.20% 7.13% 8.46% N/A
(A)Effective May 1, 1999, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)The Combined Index represents 20% of the return of the Wilshire 5000 Index, 5% of the MSCI EAFE Index, 50% of the Lehman Brothers Aggregate Bond Index, 25% of the 90 Day T-Bill through April 30, 1999, and 100% of the return of the Citigroup Broad Investment Grade Bond Index from May 1, 1999 and thereafter. The Combined Index was prepared by the advisor using Ibbotson Associates Software & Data. SUBADVISER AND PORTFOLIO MANAGERS CGTC is located at 333 South Hope Street, Los Angeles, California 90071. CGTC is a wholly-owned subsidiary of Capital Group International, Inc. which itself is a wholly-owned subsidiary of The Capital Group Companies, Inc. CGTC has been providing investment management services since 1968 and manages approximately $146 billion of assets as of December 31, 2003. The Portfolio Managers are: -- James R. Mulally (since May, 1999). Mr. Mulally is Senior Vice President, a Director, and Chairman of the Fixed Income Investment Sub-Committee for CGTC. He joined the Capital Group organization in 1980. -- Michael D. Locke (since December 2001). Mr. Locke is Vice President of Capital Research Company with portfolio specialist and research responsibilities for mortgage- and asset-backed securities and derivatives. He joined the Capital Group organization in 1996. -- Christine C. Cronin (since December 2001). Ms. Cronin is a Vice President of Capital Research Company with portfolio specialist responsibility for investment grade corporate bonds, and research responsibility for the airline, cruise, food, and financial services industries. She joined the Capital Group organization in 1997. A portion of the portfolio is managed by individual members of the research team. INVESTMENT QUALITY BOND TRUST SUBADVISER: Wellington Management Company, LLP ("Wellington Management") INVESTMENT OBJECTIVE: To provide a high level of current income consistent with the maintenance of principal and liquidity. INVESTMENT STRATEGIES: Wellington Management seeks to achieve the portfolio's objective by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in investment grade bonds. The portfolio will tend to focus on corporate bonds and U.S. government bonds with intermediate to longer term maturities. Wellington Management's investment decisions derive from a three-pronged analysis, including: -- sector analysis, -- credit research, and -- call protection. Sector analysis focuses on the differences in yields among security types, issuers, and industry sectors. Credit research focuses on both quantitative and qualitative criteria established by Wellington Management, such as call protec- 95 tion (payment guarantees), an issuer's industry, operating and financial profiles, business strategy, management quality, and projected financial and business conditions. Individual purchase and sale decisions are made on the basis of relative value and the contribution of a security to the desired characteristics of the overall portfolio. Factors considered include: -- relative valuation of available alternatives, -- impact on portfolio yield, quality and liquidity, and -- impact on portfolio maturity and sector weights. Wellington Management attempts to maintain a high, steady and possibly growing income stream. At least 80% of the Investment Quality Bond Trust's assets are invested in bonds and debentures, including: -- marketable investment grade debt securities of U.S. and foreign issuers (payable in U.S. dollars) rated at the time of purchase "Baa" or higher by Moody's or "BBB" or higher by Standard & Poor's (or, if unrated, of comparable quality as determined by Wellington Management), including privately placed debt securities, asset-backed securities and commercial mortgage-backed securities; -- securities issued or guaranteed as to principal or interest by the U.S. Government or its agencies or instrumentalities, including mortgage-backed securities (described below under "Other Risks of Investing"); and -- cash and cash equivalent securities which are authorized for purchase by the Money Market Trust. -- up to 20% of the portfolio's assets in non-U.S. dollar fixed income securities including up to 5% emerging market fixed income securities. The balance (no more than 20%) of the Investment Quality Bond Trust's assets may be invested in below investment grade bonds and other securities including privately placed debt securities and commercial mortgage-backed securities: -- U.S. and foreign debt securities rated "Ba" or lower by Moody's or "BB" or lower by Standard & Poor's (and unrated securities of comparable quality as determined by Wellington Management), -- preferred stocks, -- convertible securities (including those issued in the Euromarket), -- securities carrying warrants to purchase equity securities, and -- non-U.S. dollar fixed income securities subject to the 20% limit set forth above. In pursuing its investment objective, the Investment Quality Bond Trust may invest up to 20% of its assets in U.S. and foreign high yield (high risk) corporate and government debt securities (commonly known as "junk bonds"). These instruments are rated "Ba" or below by Moody's or "BB" or below by Standard & Poor's (or, if unrated, are deemed of comparable quality as determined by Wellington Management). The high yield sovereign debt securities in which the portfolio will invest are described above under "Strategic Bond Trust." No minimum rating standard is required for a purchase of high yield securities by the portfolio. While the Investment Quality Bond Trust may only invest up to 20% of its assets in securities rated in these rating categories at the time of investment, it is not required to dispose of bonds that may be downgraded after purchase, even though such downgrade may cause the portfolio to exceed this 20% maximum. The risks of investing in foreign securities are set forth above under "Risks of Investing in Certain Types of Securities." Since the portfolio will, at most, invest 20% of its assets in foreign securities, the risks associated with foreign securities will not affect the portfolio as much as a portfolio that invests more of its assets in foreign securities. Special Risks The Investment Quality Bond Trust will be subject to certain risks as a result of its ability to invest up to 20% in foreign securities. The principal risks of investing in the Investment Quality Bond Trust are described in the "Risk/Return Summary" in the beginning of this Prospectus. Principal Risks of Investing in this Portfolio -- The portfolio invests substantially all of its assets in fixed income securities, including non-investment grade fixed income securities. Because the portfolio invests in fixed income securities with intermediate to longer-term maturities, the portfolio will be more sensitive to interest rate changes than a portfolio that invests in fixed income securities with shorter maturities. The risks of investing in these types of securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in fixed income securities in foreign and emerging markets. The risks of investing in foreign and emerging market securities are set forth under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 96 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 6.57% (for the quarter ended 9/1991) and the lowest return was -6.06% (for the quarter ended 3/1990). - -------------------------------------------------------------------------------- -4.6% 19.5% 2.6% 9.8% 8.7% -1.8% 9.4% 7.3% 9.9% 7.3% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Investment Quality Bond Trust Series I 7.32% 6.35% 6.62% N/A 06/18/1985 Series II 7.24% N/A N/A 16.91% 01/28/2002 Series III N/A N/A N/A 4.14% 09/05/2003 Lehman Brothers Aggregate Bond Index 4.11% 6.62% 6.95% N/A Combined Index(B) 5.00% 6.69% 7.08% N/A
(A)Effective April 23, 1991, the portfolio changed its subadviser and investment objective. Performance reflects results prior to these changes. (B)The Combined Benchmark is comprised of 50% of the return of the Lehman Brothers Government Bond Index and 50% of the return of the Lehman Brothers Credit Bond Index. The Combined Benchmark was prepared by the Adviser using Ibbotson Associates Software and Data. (C)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS Wellington Management Company, LLP, a Massachusetts limited liability partnership, is a professional investment counseling firm with its principal business offices located at 75 State Street, Boston, Massachusetts 02109. Wellington Management and its predecessor organizations have provided investment services to investment companies, employee benefit plans, endowments, foundations and other institutions since 1928. The managing partners of Wellington Management are Laurie A. Gabriel, Duncan M. McFarland and John R. Ryan. The Portfolio Manager is: -- Thomas L. Pappas (since March, 1994). Mr. Pappas, Senior Vice President of Wellington Management, has been a portfolio manager with Wellington Management since 1987. He is a Chartered Financial Analyst. TOTAL RETURN TRUST SUBADVISER: Pacific Investment Management Company LLC ("PIMCO") INVESTMENT OBJECTIVE: To seek to realize maximum total return, consistent with preservation of capital and prudent investment management. INVESTMENT STRATEGIES: The portfolio invests, under normal market conditions, at least 65% of the portfolio's assets in a diversified portfolio of fixed income securities of varying maturities. The average portfolio duration of the Total Return Trust will normally vary within a three to six year time frame based on PIMCO's forecast for interest rates. (Duration is a measure of the expected life of a fixed income security on a present value basis.) The portfolio may invest up to 10% of its assets in fixed income securities that are rated below investment grade but rated "B" or higher by Moody's or Standard & Poor's (or if unrated, determined by PIMCO to be of comparable quality). The portfolio may also invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. Portfolio holdings will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) which PIMCO believes to be relatively undervalued. In selecting securities for the portfolio, PIMCO utilizes economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting, and other security selection techniques. The proportion of the Total Return Trust's assets committed to investment in securities with particular characteristics (such as maturity, type and coupon rate) will vary based on PIMCO's outlook for the U.S. and foreign economies, the financial markets, and other factors. 97 The types of fixed income securities in which the Total Return Trust may invest include the following securities which unless otherwise noted may be issued by domestic or foreign issuers and may be denominated in U.S. dollars or foreign currencies: -- securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities; -- corporate debt securities, including convertible securities and corporate commercial paper; -- mortgage-backed and other asset-backed securities; -- inflation-indexed bonds issued by both governments and corporations; -- structured notes, including hybrid or "indexed" securities, -- event-linked bonds; -- loan participations; -- delayed funding loan and revolving credit facilities; -- bank certificates of deposit, fixed time deposits and bankers' acceptances; -- debt securities issued by states or local governments and their agencies, authorities and other instrumentalities; -- repurchase agreements and reverse repurchase agreements; -- obligations of foreign governments or their subdivisions, agencies and instrumentalities; and -- obligations of international agencies or supranational entities. Fixed-income securities may have fixed, variable, or floating rates of interest, including rates of interest that vary inversely at a multiple of a designated or floating rate, or that vary according to change in relative values of currencies. Temporary Defensive Investing To meet redemption requests or pending investment of its assets or during unusual market conditions, the Total Return Trust may invest all or a portion of its assets in repurchase agreements, cash and cash equivalents. To the extent the portfolio is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions Total Return Trust may: -- purchase and sell options on domestic and foreign securities, securities indexes and currencies, -- purchase and sell futures and options on futures, -- purchase and sell currency or securities on a forward basis, -- enter into interest rate, index, equity, credit default swaps and currency rate swap agreements. The Total Return Trust may use the above-mentioned strategies to obtain market exposure to the securities in which the portfolio primarily invests and to hedge currency risk. As a non-fundamental operating policy, PIMCO normally intends to use foreign currency-related strategic transactions in an effort to hedge foreign currency risk with respect to at least 75% of the assets of the portfolio denominated in currencies other than the U.S. dollar. See "Hedging and Other Strategic Transactions" for further information on these investment strategies. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in fixed income securities. The risks of investing in fixed income securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may also invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance(A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. 98 The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 6.43% (for the quarter ended 09/2001) and the lowest return was -0.50% (for the quarter ended 6/2001). - -------------------------------------------------------------------------------- 10.5% 8.3% 9.5% 5.0% 2000 2001 2002 2003
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One Life of Date First Year Portfolio Available Total Return Trust Series I 5.02% 6.92% 05/01/1999 Series II 4.87% 6.92% 01/28/2002 Series III N/A 3.35% 09/05/2003 Lehman Brothers Aggregate Bond Index(A) 4.11% 7.15%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for the index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660 serves as sub-advisor to the Trust portfolios listed above. PIMCO is an investment counseling firm founded in 1971. PIMCO is a Delaware limited liability company and is a majority-owned subsidiary of Allianz Dresdner Asset Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors and executive management of PIMCO. ADAM LP was organized as a limited partnership under Delaware law in 1987. ADAM LP's sole general partner is Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited company with three members, ADAM U.S. Holding LLC, the managing member, which is a Delaware limited liability company, Pacific Life Insurance Company and Pacific Asset Management LLC, a Delaware limited liability company. The sole member of ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC. Allianz Dresdner Asset Management of America LLC has two members, Allianz of America, Inc., a Delaware corporation which owns a 99.9% non-managing interest and Allianz Dresdner Asset Management of America Holding Inc., a Delaware corporation which owns a 0.01% managing interest. Allianz Dresdner Asset Management of America Holding Inc. is a wholly-owned subsidiary of Allianz Dresdner Asset Management Aktiengesellschaft, which is wholly owned by Allianz Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is wholly-owned by Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific Life Insurance Company, a wholly-owned subsidiary of Pacific Mutual Holding Company. Allianz AG indirectly holds a controlling interest in Allianz Dresdner Asset Management of America L.P. Allianz AG is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company owns an indirect minority equity interest in Allianz Dresdner Asset Management of America L.P. and is a California-based insurance company. PIMCO had approximately $373.8 billion of assets under management as of December 31, 2003. The Portfolio Manager is: -- William H. Gross (since May, 1999). Mr. Gross is a Managing Director, Chief Investment Officer and founding partner of PIMCO. He is also a Chartered Financial Analyst. Mr. Gross has been with PIMCO for more than 32 years. REAL RETURN BOND TRUST SUBADVISER: Pacific Investment Management Company LLC ("PIMCO") INVESTMENT OBJECTIVE: To seek maximum real return, consistent with preservation of real capital and prudent investment management INVESTMENT STRATEGIES: The portfolio seeks to achieve its objective by investing under normal circumstances at least 80% of its net assets (plus borrowings for investment purposes) in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and corporations. Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income securities that are structured to provide protection against inflation. The value of the bond's principal or the interest income paid on the bond is adjusted to track changes in an official inflation measure. The U.S. Treasury uses the Consumer Price Index for Urban Consumers as the inflation measure. 99 Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. "Real return" equal total return less the estimated cost of inflation, which is typically measured by the change in an official inflation measure. Portfolio Duration of Fund. The average portfolio duration of this fund normally varies within two year (plus or minus) of the duration of the Lehman Global Real: U.S. TIPS Index. Credit Quality. The portfolio invests primarily in investment grade securities, but may invest up to 10% of its total assets in high yield securities ("junk bonds") rate B or higher by Moody's or S&P, or, if unrated, determined by PIMCO to be of comparable quality. Foreign Securities. The portfolio may also invest up to 20% of its total assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar denominated securities of foreign issuers. The portfolio will normally hedge at least 75% of its exposure to foreign currency to reduce the risk of loss due to fluctuations in currency exchange rates. Use of Hedging and Other Strategic Transactions. The portfolio is authorized to use all of the various investment strategies referred to under "Hedging and Other Strategic Transactions." The portfolio may invest all of its assets in derivative instruments, such as option, futures contracts or swap agreement, or in mortgage or asset backed securities. The portfolio may also lend its portfolio securities to brokers, dealers and other financial institutions to earn income. The portfolio may, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contract or by using other investment techniques (such as buy backs or dollar rolls). Nondiversified Status. The portfolio is non-diversified, which means that it may concentrate its assets in a smaller number of issuers than a diversified portfolio. Principal Risks of Investing in this Portfolio -- The portfolio invests primarily in fixed income securities. The risks of investing in fixed income securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in foreign securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio is non-diversified. The definition of a non-diversified portfolio and the risks associated with such a portfolio are set forth below under "Risks of Investing in Certain Types of Securities." -- The portfolio may invest in derivatives. The risks of investing in derivatives is set forth below under "Hedging and Other Strategic Transactions." -- The portfolio may invest up to 10% of its total assets in high yield securities ("junk bonds"). The risks of investing in these securities is set forth below under "Hedging and Other Strategic Transactions." Performance Performance is not provided since the portfolio commenced operations in May, 2003. SUBADVISER AND PORTFOLIO MANAGERS PIMCO, located at 840 Newport Center Drive, Newport Beach, California 92660 serves as sub-advisor to the Trust portfolios listed above. PIMCO is an investment counseling firm founded in 1971. PIMCO is a Delaware limited liability company and is a majority-owned subsidiary of Allianz Dresdner Asset Management of America L.P., ("ADAM LP") with a minority interest held by PIMCO Partners, LLC. PIMCO Partners, LLC is owned by the current managing directors and executive management of PIMCO. ADAM LP was organized as a limited partnership under Delaware law in 1987. ADAM LP's sole general partner is Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited company with three members, ADAM U.S. Holding LLC, the managing member, which is a Delaware limited liability company, Pacific Life Insurance Company and Pacific Asset Management LLC, a Delaware limited liability company. The sole member of ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC. Allianz Dresdner Asset Management of America LLC has two members, Allianz of America, Inc., a Delaware corporation which owns a 99.9% non-managing interest and Allianz Dresdner Asset Management of America Holding Inc., a Delaware corporation which owns a 0.01% managing interest. Allianz Dresdner Asset Management of America Holding Inc. is a wholly-owned subsidiary of Allianz Dresdner Asset Management Aktiengesellschaft, which is wholly owned by Allianz Aktiengesellschaft ("Allianz AG"). Allianz of America, Inc. is wholly-owned by Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific Life Insurance Company, a wholly-owned subsidiary of Pacific Mutual Holding Company. Allianz AG indirectly holds a controlling interest in Allianz Dresdner Asset Management of America L.P. Allianz AG is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company owns an indirect minority equity interest in Allianz Dresdner Asset Management of America L.P. and is a California-based insurance company. PIMCO had approximately $373.8 billion of assets under management as of December 31, 2003. 100 The Portfolio Manager is: -- John B. Brynjolfsson (since May, 2003). Mr. Brynjolfsson is a Managing Director of PIMCO, portfolio manager and head of the PIMCO Real Return Bond Fund. He is co-author of Inflation-Protection Bonds and co-editor of The Handbook of Inflation-Indexed Bonds. He joined the firm in 1989, having been previously associated with Charles River Associates and JP Morgan Securities. Mr. Brynjolfsson has 15 years of investment experience and holds a bachelor's degree in Physics and Mathematics from Columbia College and an MBA in Finance and Economics from the MIT Sloan School of Management. U.S. GOVERNMENT SECURITIES TRUST SUBADVISER: Salomon Brothers Asset Management Inc ("SaBAM") INVESTMENT OBJECTIVE: To obtain a high level of current income consistent with preservation of capital and maintenance of liquidity. INVESTMENT STRATEGIES: The portfolio invests a substantial portion of its assets in debt obligations and mortgage-backed securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and derivative securities such as collateralized mortgage obligations backed by such securities and futures contracts. The portfolio may also invest a portion of its assets in the types of securities in which the Investment Quality Bond Trust may invest. SaBAM seeks to attain this objective by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in debt obligations and mortgage-backed securities issued or guaranteed by the U.S. government, its agencies or instrumentalities and derivative securities including: -- mortgage-backed securities guaranteed by the Government National Mortgage Association that are supported by the full faith and credit of the U.S. government and which are the "modified pass-through" type of mortgage-backed security ("GNMA Certificates"). Such securities entitle the holder to receive all interest and principal payments due whether or not payments are actually made on the underlying mortgages; -- U.S. Treasury obligations (including repurchase agreements collateralized by U.S. Treasury obligations) (U.S. Treasury obligations are supported by the full faith and credit of the U.S. government); -- obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government which are backed by their own credit and may not be backed by the full faith and credit of the U.S. Government (including repurchase agreements collateralized by these obligations); -- mortgage-backed securities guaranteed by agencies or instrumentalities of the U.S. Government which are supported by their own credit but not the full faith and credit of the U.S. Government, such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association; and -- futures contracts or financial instruments and indices. -- collateralized mortgage obligations issued by private issuers for which the underlying mortgage-backed securities serving as collateral are backed (i) by the credit alone of the U.S. Government agency or instrumentality which issues or guarantees the mortgage-backed securities, or (ii) by the full faith and credit of the U.S. Government. As noted above, the portfolio may invest not only in U.S. government securities that are backed by the full faith and credit of the U.S. government, such as GNMA Certificates and U.S. Treasury obligations, but also in U.S. Government securities that are backed only by their own credit and not the full faith and credit of the U.S. government (such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). The U.S. Government Securities Trust must comply with diversification requirements established pursuant to the Code for investments of separate accounts funding contracts. Under these requirements, the value of the assets of the portfolio are subject to the following restrictions: -- no more than 55% of the value of the portfolio's assets may be represented by any one investment; -- no more than 70% of the value of the portfolio's assets may be represented by any two investments; -- no more than 80% of the value of the portfolio's assets may be represented by any three investments; and -- no more than 90% of the value of the portfolio's assets may be represented by any four investments. To determine the portfolio's compliance with the requirements above, all securities of the same issuer are treated as a single investment and each U.S. Government agency or instrumentality is treated as a separate issuer. As a result of these requirements, the U.S. Government Securities Trust may not invest more than 55% of the value of its assets in GNMA Certificates or in securities issued or guaranteed by any other single U.S. Government agency or instrumentality. Mortgage-Backed Securities See "Other Risks of Investing" for a description of mortgage-backed securities and the risks associated with investing in them. 101 Use of Hedging and Other Strategic Transactions The U.S. Government Securities Trust is currently authorized to use only certain of the various investment strategies referred to under "Hedging and Other Strategic Transactions." Specifically, the U.S. Government Securities Trust may: -- write covered call options and put options on securities and purchase call and put options on securities, -- write covered call and put options on securities indices and purchase call and put options on securities indices, -- enter into futures contracts on financial instruments and indices, and -- write and purchase put and call options on such futures contracts. Principal Risks of Investing in this Portfolio -- While the portfolio invests a substantial portion of its assets in securities which are guaranteed as to principal and interest by the U.S. Government or one of its agencies or instrumentalities, the market value of the portfolio could still decline due to interest rate changes. When interest rates decline, the market value of the portion of the portfolio invested at higher yields can be expected to rise. Conversely, when interest rates rise, the market value of a portfolio invested at lower yields can be expected to decline. Fixed-income securities with longer maturities are generally more sensitive to interest rate changes than those with shorter maturities. -- Investing in mortgage backed securities subjects the portfolio to prepayment risk. Prepayment of underlying mortgages result in a loss of anticipated interest payments and all or part of any premium paid for the security. Therefore, the portfolio could make less money than expected or could lose money. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Performance (A, B) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 5.4% (for the quarter ended 6/1995) and the lowest return was - 2.02% (for the quarter ended 3/1992). - -------------------------------------------------------------------------------- -1.2% 15.6% 3.4% 8.5% 7.5% -0.2% 10.9% 7% 8% 1.7% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available U.S. Government Securities Trust Series I 1.73% 5.40% 5.99% N/A 03/18/1988 Series II 1.59% N/A N/A 4.68% 01/28/2002 Series III N/A N/A N/A 2.26% 09/05/2003 Citigroup 1-10 Year Treasury Index 2.12% 5.95% 6.20% N/A
(A)Effective December 13, 1991, the portfolio changed its subadviser and its investment objective. Performance reflects results prior to these changes. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS SaBAM was established in 1987 and, together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of fixed income and equity investment services to individuals and institutional clients throughout the world. SaBAM's principal address is 399 Park Avenue, New York, New York 10022. It is a wholly owned subsidiary of Citigroup Inc. Citigroup businesses provide a broad range of financial services -- asset management, banking and consumer finance, credit and charge cards, insurance investments, investment banking and trading -- and use diverse channels to make them available to consumer and corporate customers around the world. The Portfolio Manager is: -- Roger Lavan (since February, 1993). Mr. Lavan joined SaBAM in 1990 and is a Managing Director in the fixed income department. He is a Portfolio Manager responsible for SaBAM's investment company and institutional portfolios, which invest primarily in mortgage-backed and U.S. government debt securities. He is a Chartered Financial Analyst. 102 MONEY MARKET TRUST SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.)") INVESTMENT OBJECTIVE: To obtain maximum current income consistent with preservation of principal and liquidity. INVESTMENT STRATEGIES: The portfolio invests in high quality, U.S. dollar denominated money market instruments. MFC Global (U.S.A.) may invest the portfolio's assets in high quality, U.S. dollar denominated money market instruments of the following types: -- obligations issued or guaranteed as to principal and interest by the U.S. Government, or any agency or authority controlled or supervised by and acting as an instrumentality of the U.S. Government pursuant to authority granted by Congress ("U.S. Government Securities"), or obligations of foreign governments including those issued or guaranteed as to principal or interest by the Government of Canada, the government of any province of Canada, or any Canadian or provincial Crown agency (any foreign obligation acquired by the portfolio must be payable in U.S. dollars); -- certificates of deposit, bank notes, time deposits, Eurodollars, Yankee obligations and bankers' acceptances of U.S. banks, foreign branches of U.S. banks, foreign banks and U.S. savings and loan associations which at the date of investment have capital, surplus and undivided profits as of the date of their most recent published financial statements in excess of $100,000,000 (or less than $100,000,000 if the principal amount of such bank obligations is insured by the Federal Deposit Insurance Corporation or the Saving Association Insurance Fund); -- commercial paper which at the date of investment is rated (or guaranteed by a company whose commercial paper is rated) within the two highest rating categories by any NRSRO (such as "P-1" or "P-2" by Moody's or "A-1" or "A-2" by Standard & Poor's) or, if not rated, is issued by a company which MFC acting pursuant to guidelines established by the Trust's Board of Trustees, has determined to be of minimal credit risk and comparable quality; -- corporate obligations maturing in 397 days or less which at the date of investment are rated within the two highest rating categories by any NRSRO (such as "Aa" or higher by Moody's or "AA" or higher by Standard & Poor's); -- short-term obligations issued by state and local governmental issuers; -- securities that have been structured to be eligible money market instruments such as participation interests in special purpose trusts that meet the quality and maturity requirements in whole or in part due to features for credit enhancement or for shortening effective maturity; and -- repurchase agreements with respect to any of the foregoing obligations. Commercial paper may include variable amount master demand notes, which are obligations that permit investment of fluctuating amounts at varying rates of interest. Such notes are direct lending arrangements between the Money Market Trust and the note issuer. MFC Global (U.S.A.) monitors the creditworthiness of the note issuer and its earning power and cash flow. MFC Global (U.S.A.) will also consider situations in which all holders of such notes would redeem at the same time. Variable amount master demand notes are redeemable on demand. All of the Money Market Trust's investments will mature in 397 days or less and the portfolio maintains a dollar-weighted average portfolio maturity of 90 days or less. By limiting the maturity of its investments, the Money Market Trust seeks to lessen the changes in the value of its assets caused by fluctuations in short-term interest rates. In addition, the Money Market Trust invests only in securities which the Trust's Board of Trustees determine to present minimal credit risks and which at the time of purchase are "eligible securities" as defined by Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). The Money Market Trust also intends to maintain, to the extent practicable, a constant per share net asset value of $10.00. There is no assurance that the portfolio will be able to do so. The Money Market Trust may invest up to 20% of its assets in any of the U.S. dollar denominated foreign securities described above. The Money Market Trust is not authorized to enter into mortgage dollar rolls or warrants. Use of Hedging and Other Strategic Transactions The Money Market Trust is not authorized to use any of the various investment strategies referred to under "Hedging and Other Strategic Transactions." Principal Risks of Investing in this Portfolio -- An investment in the Money Market Trust is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Money Market Trust seeks to preserve the value of a shareholder's investment at $10.00 per share, it is possible to lose money by investing in this portfolio. For example, the portfolio could lose money if a security purchased by the portfolio is downgraded and the portfolio must sell the security at less than the cost of the security. -- The portfolio may invest up to 20% of its assets in U.S. dollar denominated foreign securities which increases the risk of investing in the portfolio as described below under "Risks of Investing in Certain Types of Securities." Since the portfolio only invests in U.S. dollar denominated securities, it will not be subject to the exchange rate risks described in this section. 103 Performance (A) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return was 2.19% (for the quarter ended 6/1989) and the lowest return was 0.12% (for the quarter ended 12/2003). - -------------------------------------------------------------------------------- 3.8% 5.6% 5.1% 5.2% 5.0% 4.6% 5.9% 3.6% 1.2% 0.6% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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One Five Ten Life of Date First Year Years Years Portfolio Available Money Market Trust Series I 0.58% 3.14% 4.04% N/A 06/18/1985 Series II 0.38% N/A N/A 0.66% 01/28/2002 Series III N/A N/A N/A 0.04% 09/05/2003 Citigroup U.S. 90 Day T-Bill 1.07% 3.50% 4.30% N/A
(A)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. The 7-day yield of the Money Market Trust as of December 31, 2003 was 0.45%, 0.25% and 0.10% for Series I, Series II and Series III, respectively. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios listed above. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. THE INDEX TRUSTS There are five Index Trusts -- International Index, Small Cap Index, Mid Cap Index, Total Stock Market Index, and 500 Index (the "Index Trusts") -- each with its own investment objective and policy. The Index Trusts differ from the actively managed portfolios described in this prospectus. Actively managed portfolios seek to outperform their respective indices through research and analysis. Over time, their performance may differ significantly from their respective indices. Index portfolios, however, seek to mirror the performance of their target indices, minimizing performance differences over time. An index is an unmanaged group of securities whose overall performance is used as an investment benchmark. Indices may track broad investment markets, such as the global equity market, or more narrow investment markets, such as the U.S. small cap equity market. Each Index Trust attempts to match the performance of a particular index by: (a) holding all, or a representative sample, of the securities that comprise the index and/or (b) by holding securities (which may or may not be included in the index) that MFC believes as a group will behave in a manner similar to the index. However, an index portfolio has operating expenses and transaction costs, while a market index does not. Therefore, an Index Trust, while it attempts to track its target index closely, typically will be unable to match the performance of the index exactly. 104
- ---------------------------------------------------------------------------------------------------------- MARKET CAP OF INDEX AS OF PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGY* FEBRUARY 27, 2004 - ---------------------------------------------------------------------------------------------------------- Small Cap Index To seek to approximate the Invests, under normal $20 million to $2.7 billion aggregate total return of a market conditions, at least small cap U.S. domestic 80% of its net assets (plus equity market index any borrowings for investment purposes) in (a) the common stocks that are included in the Russell 2000 Index and (b) securities (which may or may not be included in the Russell 2000 Index) that MFC believes as a group will behave in a manner similar to the index. International* To seek to approximate the Invests, under normal $16 million to $178.7 Index aggregate total return of a market conditions, at least billion foreign equity market index 80% of its net assets (plus any borrowings for investment purposes) in (a) the common stocks that are included in the MSCI EAFE Index and (b) securities (which may or may not be included in the MSCI EAFE Index) that MFC believes as a group will behave in a manner similar to the index. Mid Cap Index To seek to approximate the Invests, under normal $456 million to $11 billion aggregate total return of a market conditions, at least mid cap U.S. domestic 80% of its net assets (plus equity market index any borrowings for investment purposes) in (a) the common stocks that are included in the S&P 400 Index and (b) securities (which may or may not be included in the S&P 400 Index) that MFC believes as a group will behave in a manner similar to the index. Total Stock Market To seek to approximate the Invests, under normal Less than $1 million to Index aggregate total return of a market conditions, at least $326.5 billion broad U.S. domestic equity 80% of its net assets (plus market index any borrowings for investment purposes) in (a) the common stocks that are included in the Wilshire 5000 Index and (b) securities (which may or may not be included in the Wilshire 5000 Index) that MFC believes as a group will behave in a manner similar to the index.
105
- ---------------------------------------------------------------------------------------------------------- MARKET CAP OF INDEX AS OF PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGY* FEBRUARY 27, 2004 - ---------------------------------------------------------------------------------------------------------- 500 Index To seek to approximate the Invests, under normal $867 million to $326.5 aggregate total return of a market conditions, at least billion broad U.S. domestic equity 80% of its net assets (plus market index any borrowings for investment purposes) in (a) the common stocks that are included in the S&P 500 Index and (b) securities (which may or may not be included in the S&P 500 Index) that MFC believes as a group will behave in a manner similar to the index.
*Subject to shareholder approval, the International Index Trust will merge with the International Equity Index Trust, a series of John Hancock Variable Series Trust I, immediately after the close of business on June 18, 2004. *"Standard & Poor's(R)," "S&P 500(R)," "Standard & Poor's 500(R)," and "Standard & Poor's 400(R)" are trademarks of The McGraw-Hill Companies, Inc. "Russell 1000(R)," "Russell 2000(R)," "Russell 2000(R) Growth," "Russell 3000(R)" and "Russell Midcap(R)" are trademarks of Frank Russell Company. "Wilshire 5000(R)" is a trademark of Wilshire Associates. "Morgan Stanley European Australian Far East Free(R)," "EAFE(R)" and "MSCI(R)" are trademarks of Morgan Stanley & Co. Incorporated. None of the Index Trusts are sponsored, endorsed, managed, advised, sold or promoted by any of these companies, and none of these companies make any representation regarding the advisability of investing in the Trust. Use of Hedging and Other Strategic Transactions The Small Cap Index Trust, International Index Trust, and Total Stock Market may invest in Futures Contacts. A more complete description of this investment strategy appears under "Hedging and Other Strategic Transactions" below in this Prospectus and in the Statement of Additional Information. The Mid Cap Index Trust and 500 Index Trust may invest in Futures Contracts and Depository Receipts. A more complete description of this investment strategy appears under "Hedging and Other Strategic Transactions" below in this Prospectus and in the Statement of Additional Information. Principal Risks of Investing in the Index Trusts Risks Applicable to All of the Index Trusts -- Since each of the Index Trusts are not actively managed, each Index Trust will generally reflect the performance of the index its attempts to track even in markets when this index does not perform well. Risks Applicable to the International Index Trust -- An investment in the International Index Trust involves risks similar to the risks of investing directly in the foreign securities in the MSCI EAFE Index. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Risks Applicable to the Small Cap Index Trust -- An investment in the Small Cap Index Trust involves risks similar to the risks of investing directly in the equity securities included in the Russell 2000 Index which are primarily small and mid cap securities. The risks of investing in equity securities and the risks of investing in small and mid cap securities (small and medium companies) are set forth below under "Risks of Investing in Certain Types of Securities." Risks Applicable to the Mid Cap Index Trust -- An investment in the Mid Cap Index Trust involves risks similar to the risks of investing directly in the equity securities included in the Mid Cap Index. The risks of investing in equity securities and Mid Cap securities (medium size companies) are set forth below under "Risks of Investing in Certain Types of Securities." 106 Risks Applicable to the Total Stock Market Index Trust -- An investment in the Total Stock Market Index Trust involves risks similar to the risks of investing directly in the equity securities included in the Wilshire 5000 Index. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Risks Applicable to the 500 Index Trust -- An investment in the 500 Index Trust involves risks similar to the risks of investing directly in the equity securities included in the S&P 500 Index. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance (A, B, C) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return and the lowest quarterly return for each Index Trust was as follows:
HIGHEST QUARTERLY RETURN QUARTER LOWEST QUARTERLY RETURN QUARTER Small Cap Index 22.77% 6/2003 -21.83% 9/2002 International Index 18.15% 6/2003 -20.02% 9/2002 Mid Cap Index 17.71% 12/2001 -16.75% 9/2002 Total Stock Market Index 16.26% 6/2003 -16.74% 9/2002 500 Index 15.32% 6/2003 -17.43% 9/2002
SMALL CAP INDEX TRUST - -------------------------------------------------------------------------------- 1.5% -21.5% 45.8% 2001 2002 2003
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One Life of Date First Year Portfolio Available Small Cap Index Trust Series I 45.79% 2.32% 05/01/2000 Series II 45.33% 8.15% 01/28/2002 Series III N/A 8.75% 09/05/2003 Russell 2000 Index(A) 47.25% 4.04%
INTERNATIONAL INDEX TRUST - -------------------------------------------------------------------------------- -22.4% -17.2% 32.2% 2001 2002 2003
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One Life of Date First Year Portfolio Available International Index Trust Series I 32.18% -7.00% 05/01/2000 Series II 32.12% 7.25% 01/28/2002 Series III N/A 15.57% 09/05/2003 MSCI EAFE Index(A) 39.17% -4.64%
107 MID CAP INDEX TRUST - -------------------------------------------------------------------------------- -1.7% -15.2% 34.6% 2001 2002 2003
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One Life of Date First Year Portfolio Available Mid Cap Index Trust Series I 34.57% 5.14% 05/01/2000 Series II 34.32% 7.05% 01/28/2002 Series III N/A 9.39% 09/05/2003 S&P MidCap 400 Index(A) 35.61% 6.16%
TOTAL STOCK MARKET INDEX TRUST - -------------------------------------------------------------------------------- -11.4% -21.3% 30.5% 2001 2002 2003
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One Life of Date First Year Portfolio Available Total Stock Market Index Trust Series I 30.54% -5.30% 05/01/2000 Series II 30.31% 1.94% 01/28/2002 Series III N/A 8.62% 09/05/2003 Wilshire 5000 Index(A) 31.64% -4.65%
500 INDEX TRUST - -------------------------------------------------------------------------------- -12.4% -22.5% 28.0% 2001 2002 2003
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One Life of Date First Year Portfolio Available 500 Index Trust Series I 28.01% -6.36% 05/01/2000 Series II 27.76% 0.09% 01/28/2002 Series III N/A 8.57% 09/05/2003 S&P 500 Index(A) 28.70% -5.61%
(A)The return for the index under "Life of Portfolio" is calculated from the month end closest to the inception date of the portfolio since information for this index is only provided as of a month end. (B)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series II performance will be lower than Series I performance due to the higher Rule 12b-1 fee. Series III performance will be lower than Series I and Series II performance due to the higher Rule 12b-1 fee. (C)Since III May 2000, certain expenses of each of the Index Trusts (except the 500 Index Trust) were reimbursed. If such expenses had not been reimbursed, returns would be lower. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) manages each Index Trust. MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios of the Trust for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Portfolio Managers are: -- Narayan Ramani (since 2003). Mr. Ramani joined MFC Global in 1998, has a MBA from York University, a PH.D from the University of Brunswick, and is a Chartered Financial Analyst. 108 -- Carson Jen (since 2003). Mr. Brahmachari joined MFC Global in 1997, has a MBA from the University of Western Ontario, a BA Science (engineering) from the University of Toronto, and has a Certified Management Accounting designation. THE LIFESTYLE TRUSTS SUBADVISER: MFC Global Investment Management (U.S.A.) Limited ("MFC Global (U.S.A.)") There are five Lifestyle Trusts (each of which is a fund of funds) -- Aggressive 1000, Growth 820, Balanced 640, Moderate 460 and Conservative 280. The Lifestyle Trusts differ from the portfolios previously described in that each Lifestyle Trust invests in a number of the other portfolios of the Trust which invest primarily in either equity securities or fixed income securities, as applicable ("Underlying Portfolios"). Each Lifestyle Trust has a target percentage allocation between the two types of Underlying Portfolios (fixed income and equity).
- ------------------------------------------------------------------------------------------------------------ PORTFOLIO INVESTMENT OBJECTIVE INVESTMENT STRATEGIES - ------------------------------------------------------------------------------------------------------------ Lifestyle Aggressive 1000 Long-term growth of capital. Current The portfolio invests 100% of its income is not a consideration. assets in Underlying Portfolios which invest primarily in equity securities. Lifestyle Growth 820 Long-term growth of capital. Current The portfolio invests approximately 20% income is also a consideration. of its assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 80% in Underlying Portfolios which invest primarily in equity securities. Lifestyle Balanced 640 A balance between a high level of The portfolio invests approximately 40% current income and growth of capital, of its assets in Underlying Portfolio with a greater emphasis on growth of which invest primarily in fixed income capital. securities and approximately 60% in Underlying Portfolios which invest primarily in equity securities. Lifestyle Moderate 460 A balance between a high level of The portfolio invests approximately 60% current income and growth of capital, of its assets in Underlying Portfolios with a greater emphasis on income. which invest primarily in fixed income securities and approximately 40% in Underlying Portfolios which invest primarily in equity securities. Lifestyle Conservative 280 A high level of current income with The portfolio invests approximately 80% some consideration given to growth of of its assets in Underlying Portfolios capital. which invest primarily in fixed income securities and approximately 20% in Underlying Portfolio which invest primarily in equity securities. - ------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON INVESTMENT STRATEGIES The Lifestyle Trusts seek to provide a variety of comprehensive investment programs designed for differing investment orientations. Each program is implemented by means of selected long-term investment allocations among the Underlying Portfolios. The portfolios eligible for purchase by the Lifestyle Trusts consist of all of the non-Lifestyle Trusts except the American Growth Trust, American International Trust, American Blue Chip Income and Growth Trust and American Growth- 109 Income Trust. The Underlying Portfolios are grouped according to whether they invest primarily in fixed income securities or equity securities. The Underlying Portfolios investing primarily in fixed income securities are the: -- High Yield Trust -- Investment Quality Bond Trust -- Strategic Bond Trust -- Diversified Bond Trust -- Global Bond Trust -- U.S. Government Securities Trust -- Total Return Trust -- Strategic Income Trust -- Real Return Bond Trust -- Money Market Trust
The other Underlying Portfolios invest primarily in equity securities. Because substantially all of the securities in which the Lifestyle Trusts may invest are Underlying Portfolios, each of the Lifestyle Trusts is non-diversified for purposes of the 1940 Act. Variations in the target percentage allocations between the two types of Underlying Portfolios (fixed income and equity) are permitted up to 10% in either direction. For example, based on its investment allocation of approximately 80% of assets in fixed income securities and 20% of assets in equity securities, the Lifestyle Conservative 280 Trust may have a fixed income/ equity allocation of 10%/90% or 30%/70%. Variations beyond the permissible deviation range of 10% are not permitted. However, in light of market or economic conditions, MFC Global (U.S.A.) may determine that the normal percentage limitations should be exceeded to protect the portfolio or to achieve the portfolio's objective. Within the prescribed percentage allocations, MFC Global (U.S.A.) selects the percentage levels to be maintained in specific portfolios. On each valuation day, the assets of each Lifestyle Trust are rebalanced to maintain the selected percentage level. MFC Global (U.S.A.) may from time to time adjust the percent of assets invested in any specific portfolios held by a Lifestyle Trust. Such adjustments may be made to increase or decrease the Lifestyle Trust's holdings of particular assets classes, such as common stocks of foreign issuers, or to adjust portfolio quality or the duration of fixed income securities. Adjustments may also be made to increase or reduce the percent of the Lifestyle Trust's assets subject to the management of a particular subadviser. In addition, changes may be made to reflect fundamental changes in the investment environment. The proceeds from the sale of each class of shares of a Lifestyle Trust are invested in shares of the same class of shares of the Underlying Portfolios. All of the outstanding shares of all the classes of shares of a Lifestyle Trust, however, have the same proportional interest in all the classes of shares of the Underlying Portfolios held by the Lifestyle Trust (which means, for example, investors in Series I shares of a Lifestyle Trust have an interest not only in the Series I shares but also in the Series II and Series III shares of the Underlying Portfolios held by that Lifestyle Trust). Therefore, Series I shareholders may be able to realize lower aggregate expenses by investing directly in Series I shares of the Underlying Portfolios of a Lifestyle Trust instead of in the Lifestyle Trust itself. However, a shareholder who chooses to invest directly in the Underlying Portfolios would not receive the asset allocation services provided by MFC Global (U.S.A.). Temporary Defensive Investing Although substantially all of the assets of the Lifestyle Trusts will be invested in shares of the Underlying Portfolios, the Lifestyle Trusts may invest up to 100% of their assets in cash or money market instruments of the type in which the Money Market Trust is authorized to invest for the purpose of: -- meeting redemption requests, -- making other anticipated cash payments, or -- protecting the portfolio in the event MFC Global (U.S.A.) determines that market or economic conditions warrant a defensive posture. To the extent a Lifestyle Trust is in a defensive position, the ability to achieve its investment objective will be limited. Use of Hedging and Other Strategic Transactions. The Lifestyle Trusts are not authorized to use any of the various investment strategies referred to under "Hedging and Other Strategic Transactions." The Lifestyle Trusts are not authorized to purchase warrants or indexed/structured securities or enter into mortgage dollar rolls. Principal Risks of Investing in the Lifestyle Trusts The Lifestyle Trusts are ranked in order of risk. The Lifestyle Aggressive 1000 portfolio is the riskiest of the Lifestyle portfolios since it invests 100% of its assets in Underlying Portfolios which invest primarily in equity securities. The Lifestyle Conservative 280 portfolio is the least risky of the Lifestyle Trusts since it invests approximately 80% of its assets in 110 Underlying Portfolios which invest primarily in fixed income securities. Each Lifestyle Trust is subject to the same risks as the Underlying Portfolios in which it invests. The principal risks of investing in each of the Lifestyle Trusts are: -- To the extent a Lifestyle Trust invests in Underlying Portfolios that invest primarily in equity securities, the portfolio will be subject to the risks of investing in equity securities. The risks of investing in these securities are set forth below under "Risks of Investing in Certain Types of Securities." -- To the extent a Lifestyle Trust invests in Underlying Portfolios that invest primarily in fixed income securities, the portfolio will be subject to the risks of investing in fixed income securities. Some of the fixed income portfolios may invest in non-investment grade securities. The risks of investing in fixed income securities, including non-investment grade securities, are set forth below under "Risks of Investing in Certain Types of Securities." -- To the extent a Lifestyle Trust invests in Underlying Portfolios that invest in foreign securities, the portfolio will be subject to the risks of investing in foreign securities. These risks are set forth below under "Risks of Investing in Certain Types of Securities." -- Each of the Lifestyle Trust is a non-diversified portfolio so that it may invest substantially all of its assets in other portfolios of the Trust. Since a non-diversified portfolio may invest a high percentage of its assets in the securities of a small number of companies, a non-diversified portfolio may be affected more than a diversified portfolio by a change in the financial condition of any of these companies or by the financial markets' assessment of any of these companies. In the case of the Lifestyle Trusts, this risk is greatly reduced since each Lifestyle Trust invests its assets in other portfolios of the Trust which have diverse holdings. See "Risks of Investing in Certain Types of Securities" for a complete definition of a non-diversified portfolio. Performance(A, B, C, D, E, F, G, H, I) The performance information below does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. The past performance of any portfolio is not necessarily an indication of how a portfolio will perform in the future. The bar chart reflects the performance of Series I shares. During the time period shown in the bar chart, the highest quarterly return and the lowest quarterly return for each Lifestyle Trust was as follows:
HIGHEST QUARTERLY RETURN QUARTER LOWEST QUARTERLY RETURN QUARTER Lifestyle Aggressive 18.07% 06/2003 -18.84% 9/2002 Lifestyle Growth 14.90% 06/2003 -14.50% 9/2002 Lifestyle Balanced 11.64% 06/2003 -10.36% 9/1998 Lifestyle Moderate 8.71% 06/2003 -5.57% 9/2002 Lifestyle Conservative 6.12% 12/2002 -1.61% 9/2002
LIFESTYLE AGGRESSIVE 1000 TRUST - -------------------------------------------------------------------------------- 10.9% 4.9% 14.6% -5.1% -13.7% -20.7% 34.9% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Lifestyle Aggressive 1000 Series I 34.91% 0.04% 2.20% 01/07/1997 Series II 34.91% N/A 4.87% 01/28/2002 Series III N/A N/A 11.53% 09/05/2003 Russell 2000 Index(A) 47.25% 7.13% 7.72% Russell 3000 Index(A, H) 31.06% 0.37% 7.57% Lifestyle Aggressive Policy(A, B) 38.89% 2.40% 6.69%
111 LIFESTYLE GROWTH 820 TRUST - -------------------------------------------------------------------------------- 13.8% 6.2% 16.6% -3.1% -9.0% -15.8% 29.6% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Lifestyle Growth 820 Series I 29.55% 2.24% 4.39% 01/07/1997 Series II 29.44% N/A 5.45% 01/28/2002 Series III N/A N/A 10.12% 09/05/2003 S&P 500 Index(A) 28.70% -0.57% 7.57% Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49% Lifestyle Growth Policy(A, C) 33.38% 2.86% 7.02%
LIFESTYLE BALANCED 640 TRUST - -------------------------------------------------------------------------------- 14.1% 5.7% 12.4% 2.5% -4.7% -10.0% 24.0% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Lifestyle Balanced 640 Series I 23.97% 4.15% 5.75% 01/07/1997 Series II 23.97% N/A 6.33% 01/28/2002 Series III N/A N/A 8.56% 09/05/2003 S&P 500 Index(A) 28.70% -0.57% 7.57% Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49% Lifestyle Balanced Policy(A,D) 26.09% 3.98% 7.18%
LIFESTYLE MODERATE 460 TRUST - -------------------------------------------------------------------------------- 13.7% 9.8% 7.9% 4.3% -1.1% -4.1% 17.8% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Lifestyle Moderate 460 Series I 17.83% 4.69% 6.67% 01/07/1997 Series II 17.83% N/A 6.72% 01/28/2002 Series III N/A N/A 6.76% 09/05/2003 S&P 500 Index(A) 28.70% -0.57% 7.57% Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49% Lifestyle Moderate Policy(A, E) 18.75% 4.81% 6.97%
LIFESTYLE CONSERVATIVE 280 TRUST - -------------------------------------------------------------------------------- 12.2% 10.2% 4.2% 7.6% 3.3% 1.8% 11.5% 1997 1998 1999 2000 2001 2002 2003
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One Five Life of Date First Year Years Portfolio Available Lifestyle Conservative 280 Series I 11.47% 5.62% 7.20% 01/07/1997 Series II 11.46% N/A 6.78% 01/28/2002 Series III N/A N/A 5.33% 09/05/2003 Lehman Brothers Government/Credit Bond Index(A) 4.68% 6.65% 7.49% Lifestyle Conservative Policy(A, F) 10.75% 5.39% 6.51%
112 (A)All since inception returns for the indices begin on the month-end closest to the actual inception date of the trust. (B)The Lifestyle Aggressive Policy is a blend of returns (41% Russell 1000 Index, 27% Russell 2000 Index, and 32% MSCI EAFE Index). The Lifestyle Aggressive Policy was prepared by the advisor using Ibbotson Associates Software and Data. (C)The Lifestyle Growth Policy is a blend of returns (42% Russell 1000 Index, 17% Russell 2000 Index, 21% MSCI EAFE Index, 3% Lehman Brothers IT Government/Credit Bond Index, 3% Lehman Brothers 1-3 Year Government Index, 2% Lehman Brothers LT Government/Credit Bond Index, 12% Salomon Brothers High Yield Bond Index). The Lifestyle Growth Policy was prepared by the adviser using Ibbotson Associates Software and Data. (D)The Lifestyle Balanced Policy is a blend of returns (35% Russell 1000 Index, 4% Russell 2000 Index, 14% MSCI EAFE, 6% Lehman Brothers IT Government/Credit Bond Index, 4% Lehman Brothers LT Government/Credit Bond Index, 9% Lehman Brothers 1-3 Year Government Index, 16% Salomon Brothers High Yield Index, 7% NAREIT Index, and 5% of the 3-month T-Bill). The Lifestyle Balanced Policy was prepared by the adviser using Ibbotson Associates Software and Data. (E)The Lifestyle Moderate Policy is a blend of returns (22% Russell 1000 Index, 1% Russell 2000 Index, 10% MSCI EAFE Index, 14% Lehman Brothers IT Government/Credit Bond Index, 6% Lehman Brothers LT Government/Credit Bond Index, 17% Lehman Brothers 1-3 Year Government Index, 8% Salomon Brothers 3-month T-Bill, 15% Salomon Brothers High Yield Index, and 7% NAREIT Index). The Lifestyle Moderate Policy was prepared by the adviser using Ibbotson Associates Software and Data. (F)The Lifestyle Conservative Policy is a blend of returns (10% Russell 1000 Index, 5% MSCI EAFE Index, 2% Lehman Brothers LT Government/Credit Bond Index, 30% Lehman Brothers 1-3 Year Government Index, 15% of the 3-month T-Bill, 8% Salomon Brothers High Yield Index and 5% NAREIT Index). The Lifestyle Conservative Policy was prepared by the adviser using Ibbotson Associates Software and Data. (G)During the time periods shown below, a portion of the Lifestyle Trust's expenses were reimbursed. If such expenses had not been reimbursed, returns would be lower. This voluntary expense reimbursement may be terminated at any time. (H)The Russell 3000 Index was added to more accurately reflect the investment objective of the Trust. (I)Series III shares were first offered September 5, 2003. The performance for Series III is aggregate total return. Series III performance will be lower than Series I and Series II performance due to the 0.15% Rule 12b-1 fee. SUBADVISER AND PORTFOLIO MANAGERS MFC Global (U.S.A.) manages each Lifestyle Trust. MFC Global (U.S.A.) is a corporation subject to the laws of Canada. Its principal business at the present time is to provide investment management services to the portfolios of the Trust for which it is the subadviser. MFC Global (U.S.A.) is an indirect wholly-owned subsidiary of Manulife Financial Corporation ("MFC") based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, collectively known as Manulife Financial. The address of MFC Global (U.S.A.) is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. A committee of MFC Global (U.S.A.) investment personnel manages each Lifestyle Trust. Deutsche Asset Management, Inc. provides subadvisory consulting services to MFC Global (U.S.A.) in its management of the Lifestyle Trusts. 113 AMERICAN GROWTH TRUST AMERICAN INTERNATIONAL TRUST AMERICAN GROWTH-INCOME TRUST AMERICAN BLUE CHIP INCOME AND GROWTH TRUST MASTER-FEEDER STRUCTURE The American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust each operate as a "feeder fund" which means that the portfolio does not buy investment securities directly. Instead, it invests in a "master fund" which in turn purchases investment securities. Each portfolio has the same investment objective and limitations as its master fund. Each master fund is a series of American Funds Insurance Series ("American Funds"). Each portfolio's master fund is listed below:
TRUST FEEDER FUND AMERICAN FUND MASTER FUND American Growth Trust Growth Fund (Class 2 shares) American International Trust International Fund (Class 2 shares) American Growth-Income Trust Growth-Income Fund (Class 2 shares) American Blue Chip Income and Growth Trust Blue Chip Income and Growth Fund (Class 2 shares)
THE PROSPECTUS FOR THE AMERICAN FUND MASTER FUND IS DELIVERED TOGETHER WITH THIS PROSPECTUS. Series I shares of these portfolios are only available for sale to separate accounts that are used to support variable life insurance policies issued by The Manufacturers Life Insurance Company (U.S.A.) or The Manufacturers Life Insurance Company of New York. INVESTMENT OBJECTIVES AND STRATEGIES Each portfolio has a stated investment objective which is the same as the objective of the master fund in which it invests. Each master fund pursues this objective through separate investment strategies or policies. There can be no assurance that the portfolio or the master fund will achieve its investment objective. The differences in objectives and policies among the master funds can be expected to affect the return of each portfolio and the degree of market and financial risk to which each portfolio is subject. Additional information about the portfolios' and master funds' investment policies is set forth below under "Additional Information about the Portfolios' Investments -- Additional Investment Policies." The investment objective of each portfolio is nonfundamental (i.e., the objective may be changed without the approval of shareholders). More complete descriptions of certain other instruments in which the portfolios may invest are set forth in the Statement of Additional Information. AMERICAN GROWTH TRUST ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC") INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow INVESTMENT STRATEGIES: The American Growth Trust invests all of its assets in the master fund, Class 2 shares of the Growth Fund, a series of American Funds Insurance Series. The Growth Fund invests primarily in common stocks of companies that appear to offer superior opportunities for growth of capital. The Growth Fund may also invest up to 15% of its assets in equity securities of issuers domiciled outside the U.S. and Canada and not included in the S&P 500 Composite Index. TEMPORARY DEFENSIVE INVESTING The Growth Fund may also hold cash or money market instruments. The size of the funds' cash position will vary and will depend on various factors, including market conditions and purchases and redemptions of fund shares. A larger cash position could detract from the achievement of a fund's objective in a period of rising market prices; conversely, it would reduce a fund's magnitude of loss in the event of a general downturn and provide liquidity to make additional investments or to meet redemptions. PRINCIPAL RISKS OF INVESTING IN THIS PORTFOLIO -- The Growth Fund invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The Growth Fund may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." 114 Performance Performance is not provided since the portfolio commenced operations in May, 2003. AMERICAN INTERNATIONAL TRUST ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC") INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow INVESTMENT STRATEGIES: The American International Trust invests all of its assets in the master fund, Class 2 shares of the International Fund, a series of American Funds Insurance Series. The International Fund invests primarily in common stocks of companies located outside the United States. TEMPORARY DEFENSIVE INVESTING The International Fund may also hold cash or money market instruments. The size of the funds' cash position will vary and will depend on various factors, including market conditions and purchases and redemptions of fund shares. A larger cash position could detract from the achievement of a fund's objective in a period of rising market prices; conversely, it would reduce a fund's magnitude of loss in the event of a general downturn and provide liquidity to make additional investments or to meet redemptions. Principal Risks of Investing in this Portfolio -- The International Fund invests primarily in foreign equity securities. The risks of investing in equity securities and foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. AMERICAN BLUE CHIP INCOME AND GROWTH TRUST ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC") INVESTMENT OBJECTIVE: To seek to produce income exceeding the average yield on U.S. stock generally (as represented by the average yield on the Standard & Poor's 500 Composite Index) and to provide an opportunity for growth of principal consistent with sound common stock investing. INVESTMENT STRATEGIES: The American Blue Chip Income and Growth Trust invests all of its assets in the master fund, Class 2 shares of the Blue Chip Income and Growth Fund, a series of American Funds Insurance Series. The Blue Chip Income and Growth Fund invests primarily in common stocks of larger, more established companies based in the U.S. with market capitalizations of $4 billion and above. The fund may also invest up to 10% of its assets in common stocks of larger, non-U.S. companies, so long as they are listed or traded in the U.S. The fund will invest, under normal market conditions, at least 90% of its assets in equity securities. Temporary Defensive Investing The Blue Chip Income and Growth Fund may also hold cash or money market instruments. The size of the funds' cash position will vary and will depend on various factors, including market conditions and purchases and redemptions of fund shares. A larger cash position could detract from the achievement of a fund's objective in a period of rising market prices; conversely, it would reduce a fund's magnitude of loss in the event of a general downturn and provide liquidity to make additional investments or to meet redemptions. Principal Risks of Investing in this Portfolio -- The Blue Chip Income and Growth Fund invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The Blue Chip Income and Growth Fund may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." 115 Performance Performance is not provided since the portfolio commenced operations in May, 2003. AMERICAN GROWTH-INCOME TRUST ADVISER TO MASTER FUND: Capital Research and Management Company ("CRMC") INVESTMENT OBJECTIVE: To seek to make the shareholders investment grow and to provide the shareholder with income over time INVESTMENT STRATEGIES: The American Growth-Income Trust invests all of its assets in the master fund, Class 2 shares of the Growth -- Income Fund, a series of American Funds Insurance Series. The Growth -- Income Fund invests primarily in common stocks or other securities which demonstrate the potential for appreciation and/or dividends. The fund may invest a portion of its assets in securities of issuers domiciled outside the U.S. and not included in the Standard & Poor's 500 composite Index. Temporary Defensive Investing The Growth -- Income Fund may also hold cash or money market instruments. The size of the funds' cash position will vary and will depend on various factors, including market conditions and purchases and redemptions of fund shares. A larger cash position could detract from the achievement of a fund's objective in a period of rising market prices; conversely, it would reduce a fund's magnitude of loss in the event of a general downturn and provide liquidity to make additional investments or to meet redemptions. Principal Risks of Investing in this Portfolio -- The Growth -- Income Fund invests primarily in equity securities. The risks of investing in equity securities are set forth below under "Risks of Investing in Certain Types of Securities." -- The Growth -- Income Fund may invest in foreign securities. The risks of investing in foreign securities are set forth below under "Risks of Investing in Certain Types of Securities." Performance Performance is not provided since the portfolio commenced operations in May, 2003. ADDITIONAL INFORMATION ABOUT AMERICAN GROWTH TRUST, AMERICAN INTERNATIONAL TRUST, AMERICAN GROWTH-INCOME TRUST, AMERICAN BLUE CHIP INCOME AND GROWTH TRUST AND EACH MASTER FUNDS' INVESTMENT REPURCHASE AGREEMENTS Each of the portfolios may enter into repurchase agreements. Information regarding repurchase agreements is set forth under "Additional Information about the Portfolios' Investments -- Repurchase Agreements." ADDITIONAL INVESTMENT POLICIES Additional investment policies of the master funds are set forth in the statement of additional information of the master fund which is available upon request. ADVISORY ARRANGEMENTS The portfolios do not have an investment adviser. Capital Research and Management Company ("CRMC"), an experienced investment management organization founded in 1931, serves as investment adviser to each American Fund master fund and to other mutual funds, including those in The American Funds Group. Capital Research Management Company, a wholly owned subsidiary of The Capital Group Companies, Inc., is headquartered at 333 South Hope Street, Los Angeles, CA 90071. Capital Research Management Company manages the investment portfolio and business affairs of each American Fund master fund. 116 The total management fee paid by each master fund, as a percentage of average net assets, for the fiscal year ended December 31, 2003 is as follows: Growth Fund........................................ 0.370% International Fund................................. 0.570% Blue Chip Income and Growth Fund................... 0.480% Growth-Income Fund................................. 0.330%
Capital Research and Management Company uses a system of multiple portfolio counselors in managing mutual fund assets. Under this system, the portfolio of a fund is divided into segments which are managed by individual counselors. Counselors decide how their respective segments will be invested, within the limits provided by a fund's objective(s) and policies and by Capital Research and Management Company's investment committee. In addition, Capital Research and Management Company's research professionals may make investment decisions with respect to a portion of a fund's portfolio. The primary portfolio counselors for the Growth Fund are listed below.
- ------------------------------------------------------------------------------------------------------------------- APPROXIMATE YEARS OF EXPERIENCE AS AN INVESTMENT PROFESSIONAL ------------------------------------ YEARS OF EXPERIENCE AS ------------------------------------ PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT (FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS - ------------------------------------------------------------------------------------------------------------------- Donald D. O'Neal (President Senior Vice 13 Years (plus 4 years 19 19 and Trustee) President, Capital prior experience as a Research and research professional for Management Company the fund) - ------------------------------------------------------------------------------------------------------------------- Gordon Crawford Senior Vice 10 Years (plus 5 years 33 33 President and prior experience as a Director, Capital research professional for Research and the fund) Management Company - ------------------------------------------------------------------------------------------------------------------- J. Blair Frank Vice President, 4 Years (plus 3 years 9 10 Capital Research prior experience as a Company research professional for the fund) - ------------------------------------------------------------------------------------------------------------------- Donnalisa Barnum Senior Vice Growth Fund -- 1 year 17 23 President, Capital Research Company - ------------------------------------------------------------------------------------------------------------------- Ronald B. Morrow Senior Vice Growth Fund -- 1 year 7 36 President, Capital (plus 5 years prior Research Company experience as a research professional for the fund) - -------------------------------------------------------------------------------------------------------------------
117 The primary portfolio counselors for the International Fund are listed below.
- ------------------------------------------------------------------------------------------------------------------- APPROXIMATE YEARS OF EXPERIENCE AS AN INVESTMENT PROFESSIONAL ------------------------------------ YEARS OF EXPERIENCE AS ------------------------------------ PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT (FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS - ------------------------------------------------------------------------------------------------------------------- Robert W. Lovelace (Vice President and 10 Years 19 19 President) Director, Capital Research Company - ------------------------------------------------------------------------------------------------------------------- Alwyn Heong Senior Vice 8 Years 12 16 President, Capital Research Company - ------------------------------------------------------------------------------------------------------------------- Nick J. Grace Senior Vice Global Growth Fund -- 2 10 14 President and years (plus 4 years prior Director, Capital experience as a research Research Company professional for the fund) International Fund -- less than one year (plus 7 years prior experience as a research professional for the fund) - -------------------------------------------------------------------------------------------------------------------
The primary portfolio counselors for the Blue Chip Income and Growth Fund are listed below.
- ------------------------------------------------------------------------------------------------------------------- APPROXIMATE YEARS OF EXPERIENCE AS AN INVESTMENT PROFESSIONAL ------------------------------------ YEARS OF EXPERIENCE AS ------------------------------------ PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT (FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS - ------------------------------------------------------------------------------------------------------------------- James K. Dunton, Chairman Senior Vice 3 Years (since the fund 42 42 of the Board and Principal President and began operations) Executive Officer Director, Capital Research and Management Company - ------------------------------------------------------------------------------------------------------------------- Alan N Berro, Vice Senior Vice 3 Years (since the fund 13 18 President President, Capital began operations) Research Company - ------------------------------------------------------------------------------------------------------------------- C. Ross Sappenfield Vice President and 3 Years (since the fund 12 12 Director, Capital began operations) Research Company - -------------------------------------------------------------------------------------------------------------------
118 The primary portfolio counselors for the Growth -- Income Fund are listed below.
- ------------------------------------------------------------------------------------------------------------------- APPROXIMATE YEARS OF EXPERIENCE AS AN INVESTMENT PROFESSIONAL ------------------------------------ YEARS OF EXPERIENCE AS ------------------------------------ PORTFOLIO COUNSELOR (AND WITH CAPITAL RESEARCH PORTFOLIO COUNSELOR PRIMARY TITLE WITH RESEARCH PROFESSIONAL, IF AND MANAGEMENT (FUND TITLE, IF APPLICABLE) INVESTMENT ADVISER APPLICABLE (APPROXIMATE)) COMPANY OR AFFILIATES TOTAL YEARS - ------------------------------------------------------------------------------------------------------------------- James K. Dunton, Chairman Senior Vice 20 Years (since the fund 42 42 of the Board and Principal President and began operations Executive Officer Director, Capital Research and Management Company - ------------------------------------------------------------------------------------------------------------------- Alan N. Berro, Vice Senior Vice 8 Years (plus 4 years 13 18 President President, Capital prior experience as a Research Company research professional for the fund) - ------------------------------------------------------------------------------------------------------------------- Claudia P. Huntington, Vice Senior Vice 10 Years (plus 5 years 29 31 President President, Capital prior experience as a Research and research professional for Management Company the fund) - ------------------------------------------------------------------------------------------------------------------- Robert G. O'Donnell Senior Vice 14 Years (plus 1 year 29 32 President and prior experience as a Director, Capital research professional for Research and the fund) Management Company - ------------------------------------------------------------------------------------------------------------------- C. Ross Sappenfield Vice President and 5 Years 12 12 Director, Capital Research Company - -------------------------------------------------------------------------------------------------------------------
GENERAL INFORMATION MASTER-FEEDER STRUCTURE Each master fund may have other shareholders, each of whom will pay their proportionate share of the master fund's expenses. Each of the American Growth Trust, American International Trust, American Blue Chip Income and Growth Trust and American Growth-Income Trust each has the right to switch master funds or decide to manage its assets directly at any time the Trust Board of Trustees decides it is in the best interest of a portfolio to do so. 119 ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS' INVESTMENTS RISKS OF INVESTING IN CERTAIN TYPES OF SECURITIES The risks of investing in certain types of securities are described below. The value of an individual security or a particular type of security can be more volatile than the market as a whole and can perform differently than the value of the market as a whole. NON-DIVERSIFIED PORTFOLIOS Definition of Non-Diversified. Any portfolio that is non-diversified is limited as to the percentage of its assets that may be invested in any one issuer, and as to the percentage of the outstanding voting securities of such issuer that may be owned, only by the portfolio's own investment restrictions and the diversification requirements of the Internal Revenue Code (the "Code"). In contrast, a diversified portfolio may not invest more than five percent of its total assets in the securities, or own more than ten percent of the outstanding voting securities, of any one issuer. Risks. Since a non-diversified portfolio may invest a high percentage of its assets in the securities of a small number of companies, a non-diversified portfolio may be affected more than a diversified portfolio by a change in the financial condition of any of these companies or by the financial markets' assessment of any of these companies. EQUITY SECURITIES Equity securities include common, preferred and convertible preferred stocks and securities the values of which are tied to the price of stocks, such as rights, warrants and convertible debt securities. Common and preferred stocks represent equity ownership in a company. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce the value of a portfolio investing in equities. The price of equity securities fluctuates based on changes in a company's financial condition and overall market and economic conditions. The value of equity securities purchased by a portfolio could decline if the financial condition of the companies the portfolio is invested in decline or if overall market and economic conditions deteriorate. Even portfolios that invest in high quality or "blue chip" equity securities or securities of established companies with large market capitalizations (which generally have strong financial characteristics) can be negatively impacted by poor overall market and economic conditions. Companies with large market capitalizations may also have less growth potential than smaller companies and may be able to react less quickly to change in the marketplace. FIXED INCOME SECURITIES Fixed income securities are generally subject to two principal types of risks: (a) interest rate risk and (b) credit quality risk. Interest Rate Risk. Fixed income securities are affected by changes in interest rates. When interest rates decline, the market value of the fixed income securities generally can be expected to rise. Conversely, when interest rates rise, the market value of fixed income securities generally can be expected to decline. Credit Quality Risk. Fixed income securities are subject to the risk that the issuer of the security will not repay all or a portion of the principal borrowed and will not make all interest payments. If the credit quality of a fixed income security deteriorates after a portfolio has purchased the security, the market value of the security may decrease and lead to a decrease in the value of the portfolio's investments. Portfolios that may invest in lower rated fixed income securities are riskier than portfolios that may invest in higher rated fixed income securities. Additional information on the risks of investing in investment grade fixed income securities in the lowest rating category and lower rated fixed income securities is set forth below. INVESTMENT GRADE FIXED INCOME SECURITIES IN THE LOWEST RATING CATEGORY Investment grade fixed income securities in the lowest rating category (rated "Baa" by Moody's or "BBB" by Standard & Poor's and comparable unrated securities) involve a higher degree of risk than fixed income securities in the higher rating categories. While such securities are considered investment grade quality and are deemed to have adequate capacity for payment of principal and interest, such securities lack outstanding investment characteristics and have speculative characteristics as well. For example, changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade securities. 120 LOWER RATED FIXED INCOME SECURITIES Lower rated fixed income securities are defined as securities rated below investment grade (rated "Ba" and below by Moody's and "BB" and below by Standard & Poor's). The principal risks of investing in these securities are as follows: General Risks -- Risk to Principal and Income. Investing in lower rated fixed income securities is considered speculative. While these securities generally provide greater income potential than investments in higher rated securities, there is a greater risk that principal and interest payments will not be made. Issuers of these securities may even go into default or become bankrupt. -- Price Volatility. The price of lower rated fixed income securities may be more volatile than securities in the higher rating categories. This volatility may increase during periods of economic uncertainty or change. The price of these securities is affected more than higher rated fixed income securities by the market's perception of their credit quality especially during times of adverse publicity. In the past, economic downturns or an increase in interest rates have, at times, caused more defaults by issuers of these securities and may do so in the future. Economic downturns and increases in interest rates have an even greater affect on highly leveraged issuers of these securities. -- Liquidity. The market for lower rated fixed income securities may have more limited trading than the market for investment grade fixed income securities. Therefore, it may be more difficult to sell these securities and these securities may have to be sold at prices below their market value in order to meet redemption requests or to respond to changes in market conditions. -- Dependence on Subadviser's Own Credit Analysis. While a subadviser to a portfolio may rely on ratings by established credit rating agencies, it will also supplement such ratings with its own independent review of the credit quality of the issuer. Therefore, the assessment of the credit risk of lower rated fixed income securities is more dependent on the subadviser's evaluation than the assessment of the credit risk of higher rated securities. Additional Risks Regarding Lower Rated Corporate Fixed Income Securities Lower rated corporate debt securities (and comparable unrated securities) tend to be more sensitive to individual corporate developments and changes in economics conditions than higher-rated corporate fixed income securities. Issuers of lower rated corporate debt securities may also be highly leveraged, increasing the risk that principal and income will not be repaid. Additional Risks Regarding Lower Rated Foreign Government Fixed Income Securities Lower rated foreign government fixed income securities are subject to the risks of investing in emerging market countries described below under "Foreign Securities." In addition, the ability and willingness of a foreign government to make payments on debt when due may be affected by the prevailing economic and political conditions within the country. Emerging market countries may experience high inflation, interest rates and unemployment as well as exchange rate trade difficulties and political uncertainty or instability. These factors increase the risk that a foreign government will not make payments when due. SMALL AND MEDIUM SIZE COMPANIES Small or Unseasoned Companies -- Survival of Small or Unseasoned Companies. Companies that are small or unseasoned (less than 3 years of operating history) are more likely than larger or established companies to fail or not to accomplish their goals. As a result, the value of their securities could decline significantly. These companies are less likely to survive since they are often dependent upon a small number of products, may have limited financial resources and a small management group. -- Changes in Earnings and Business Prospects. Small or unseasoned companies often have a greater degree of change in earnings and business prospects than larger or established companies, resulting in more volatility in the price of their securities. -- Liquidity. The securities of small or unseasoned companies may have limited marketability. This factor could cause the value of a portfolio's investments to decrease if it needs to sell such securities when there are few interested buyers. -- Impact of Buying or Selling Shares. Small or unseasoned companies usually have fewer outstanding shares than larger or established companies. Therefore, it may be more difficult to buy or sell large amounts of these shares without unfavorably impacting the price of the security. -- Publicly Available Information. There may be less publicly available information about small or unseasoned companies. Therefore, when making a decision to purchase a security for a portfolio, a subadviser may not be aware of problems associated with the company issuing the security. 121 Medium Size Companies -- Investments in the securities of medium sized companies present risks similar to those associated with small or unseasoned companies although to a lesser degree due to the larger size of the companies. FOREIGN SECURITIES The principal risks of investing in foreign securities are set forth below. As noted below, many of these risks are greater in the case of investments in emerging market countries. -- Currency Fluctuations. Investments in foreign securities may cause a portfolio to lose money when converting investments from foreign currencies into U.S. dollars. A portfolio may attempt to lock in an exchange rate by purchasing a foreign currency exchange contract prior to the settlement of an investment in a foreign security. However, it may not always be successful in doing so and the portfolio could still lose money. -- Political and Economic Conditions. Investments in foreign securities subject a portfolio to the political or economic conditions of the foreign country. These conditions could cause portfolio investments to lose value if these conditions deteriorate for any reason. This risk increases in the case of emerging market countries which are more likely to be politically unstable. Political instability could cause the value of any investment in the securities of an issuer based in a foreign country to decrease or could prevent or delay the portfolio from selling its investment and taking the money out of the country. -- Removal of Proceeds of Investments from a Foreign Country. Foreign countries, especially emerging market countries, often have currency controls or restrictions which may prevent or delay a portfolio from taking money out of the country or may impose additional taxes on money removed from the country. Therefore, a portfolio could lose money if it is not permitted to remove capital from the country or if there is a delay in taking the assets out of the country, since the value of the assets could decline during this period or the exchange rate to convert the assets into U.S. dollars could worsen. -- Nationalization of Assets. Investments in foreign securities subject a portfolio to the risk that the company issuing the security may be nationalized. If the company is nationalized, the value of the company's securities could decrease in value or even become worthless. -- Settlement of Sales. Foreign countries, especially emerging market countries, may also have problems associated with settlement of sales. Such problems could cause the portfolio to suffer a loss if a security to be sold declines in value while settlement of the sale is delayed. -- Investor Protection Standards. Foreign countries, especially emerging market countries, may have less stringent investor protection and disclosure standards than the U.S. Therefore, when making a decision to purchase a security for a portfolio, a subadviser may not be aware of problems associated with the company issuing the security and may not enjoy the same legal rights as those provided in the U.S. INVESTMENT COMPANY SECURITIES Certain of the portfolios may invest in securities of other investment companies. The total return on such investments will be reduced by the operating expenses and fees of such other investment companies, including advisory fees. Investments in closed end funds may involve the payment of substantial premiums above the value of such investment companies' portfolio securities. EXCHANGE TRADED FUNDS (ETFS) These are a type of investment company bought and sold on a securities exchange. An ETF represents a fixed portfolio of securities designed to track a particular market index. A portfolio could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees which increase their costs. STRIPPED SECURITIES Stripped securities are the separate income or principal components of a debt security. The risks associated with stripped securities are similar to those of other debt securities, although stripped securities may be more volatile, and the value of certain types of stripped securities may move in the same direction as interest rates. U.S. Treasury securities that have been stripped by a Federal Reserve Bank are obligations issued by the U.S. Treasury. MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Mortgage-Backed Securities. Mortgage-backed securities represent participating interests in pools of residential mortgage loans which are guaranteed by the U.S. Government, its agencies or instrumentalities. However, the guarantee of these types of securities relates to the principal and interest payments and not the market value of such securities. In 122 addition, the guarantee only relates to the mortgage-backed securities held by the portfolio and not the purchase of shares of the portfolio. Mortgage-backed securities are issued by lenders such as mortgage bankers, commercial banks, and savings and loan associations. Such securities differ from conventional debt securities which provide for the periodic payment of interest in fixed amounts (usually semiannually) with principal payments at maturity or on specified dates. Mortgage-backed securities provide periodic payments which are, in effect, a "pass-through" of the interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans. A mortgage-backed security will mature when all the mortgages in the pool mature or are prepaid. Therefore, mortgage-backed securities do not have a fixed maturity, and their expected maturities may vary when interest rates raise or fall. When interest rates fall, homeowners are more likely to prepay their mortgage loans. An increased rate of prepayments on the portfolio's mortgage-backed securities will result in an unforeseen loss of interest income to the portfolio as the portfolio may be required to reinvest assets at a lower interest rate. Because prepayments increase when interest rates fall, the prices of mortgaged-backed securities do not increase as much as other fixed income securities when interest rates fall. When interest rates rise, homeowners are less likely to prepay their mortgages loans. A decreased rate of prepayments lengthen the expected maturity of a mortgage-backed security. Therefore, the prices of mortgage-backed securities may decrease more than prices of other fixed income securities when interest rates rise. The yield of mortgage-backed securities is based on the average life of the underlying pool of mortgage loans. The actual life of any particular pool may be shortened by unscheduled or early payments of principal and interest. Principal prepayments may result from the sale of the underlying property or the refinancing or foreclosure of underlying mortgages. The occurrence of prepayments is affected by a wide range of economic, demographic and social factors and, accordingly, it is not possible to accurately predict the average life of a particular pool. The actual prepayment experience of a pool of mortgage loans may cause the yield realized by the portfolio to differ from the yield calculated on the basis of the average life of the pool. In addition, if the portfolio purchases mortgage-backed securities at a premium, the premium may be lost in the event of early prepayment which may result in a loss to the portfolio. Prepayments tend to increase during periods of falling interest rates, while during periods of rising interest rates prepayments are likely to decline. Monthly interest payments received by the portfolio have a compounding effect which will increase the yield to shareholders as compared to debt obligations that pay interest semiannually. Because of the reinvestment of prepayments of principal at current rates, mortgage-backed securities may be less effective than Treasury bonds of similar maturity at maintaining yields during periods of declining interest rates. Also, although the value of debt securities may increase as interest rates decline, the value of these pass-through type of securities may not increase as much due to their prepayment feature. Collateralized Mortgage Obligations. The portfolio may invest in mortgage-backed securities called collateralized mortgage obligations (CMOs). CMOs are issued in separate classes with different stated maturities. As the mortgage pool experiences prepayments, the pool pays off investors in classes with shorter maturities first. By investing in CMOs, the portfolio may manage the prepayment risk of mortgage-backed securities. However, prepayments may cause the actual maturity of a CMO to be substantially shorter than its stated maturity. Asset-Backed Securities. Asset-backed securities include interests in pools of debt securities, commercial or consumer loans, or other receivables. The value of these securities depends on many factors, including changes in interest rates, the availability of information concerning the pool and its structure, the credit quality of the underlying assets, the market's perception of the servicer of the pool, and any credit enhancement provided. In addition, asset-backed securities have prepayment risks similar to mortgage-backed securities. SECURITIES LINKED TO THE REAL ESTATE MARKET Investing in securities of companies in the real estate industry subjects a portfolio to the risks associated with the direct ownership of real estate. These risks include: -- Declines in the value of real estate; -- Change in zoning laws; -- Risks related to general and local -- Losses due to costs resulting from the economic conditions; clean-up of environmental problems; -- Possible lack of availability of mortgage -- Liability to third parties for damages funds; resulting from environmental problems; -- Overbuilding; -- Casualty or condemnation losses; -- Extended vacancies of properties; -- Limitations on rents; -- Increased competition; -- Changes in neighborhood values and the -- Increases in property taxes and operating appeal of properties to tenants; and expenses; -- Changes in interest rates.
123 Therefore, for a portfolio investing a substantial amount of its assets in securities of companies in the real estate industry, the value of the portfolio's shares may change at different rates compared to the value of shares of a portfolio with investments in a mix of different industries. Securities of companies in the real estate industry include REITs including Equity REITs and Mortgage REITs. Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidations. In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue Code of 1986, as amended, or to maintain their exemptions form registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. In addition, even the larger REITs in the industry tend to be small to medium-sized companies in relation to the equity markets as a whole. See "Small and Medium Size Companies" above for a discussion of the risks associated with invests in these companies. INDUSTRY OR SECTOR INVESTING When a portfolio's investments are concentrated in a particular industry or sector of the economy, they are not as diversified as the investments of most mutual funds and are far less diversified than the broad securities markets. This means that concentrated portfolios tend to be more volatile than other mutual funds, and the values of their investments tend to go up and down more rapidly. In addition, a portfolio which invests in a particular industry or sector is particularly susceptible to the impact of market, economic, regulatory and others factors affecting that industry or sector. Internet-Related Investments. The value of companies engaged in Internet-related activities, which is a developing industry, is particularly vulnerable to (a) rapidly changing technology, (b) extensive government regulation and (c) relatively high risk of obsolescence caused by scientific and technological advances. In addition, companies engaged in Internet-related activities are difficult to value and many have high share prices relative to their earnings which they may not be able to maintain over the long-term. Moreover, many Internet companies are not yet profitable and will need additional financing to continue their operations. There is no guarantee that such financing will be available when needed. Since many internet companies are start-up companies, the risks associated with investing in small companies are heightened for these companies. Any portfolio that invests a significant portion of its assets in Internet-related companies should be considered extremely risky even as compared to other portfolios that invest primarily in small company securities. Financial Services Industry. A portfolio investing principally in securities of companies in the financial services industry is particularly vulnerable to events affecting that industry. Companies in the financial services industry include commercial and industrial banks, savings and loan associations and their holding companies, consumer and industrial finance companies, diversified financial services companies, investment banking, securities brokerage and investment advisory companies, leasing companies and insurance companies. Banking. Commercial banks (including "money center" regional and community banks), savings and loan associations and holding companies of the foregoing are especially subject to adverse effects of volatile interest rates, concentrations of loans in particular industries (such as real estate or energy) and significant competition. The profitability of these businesses is to a significant degree dependent upon the availability and cost of capital funds. Economic conditions in the real estate market may have a particularly strong effect on certain banks and savings associations. Commercial banks and savings associations are subject to extensive federal and, in many instances, state regulation. Neither such extensive regulation nor the federal insurance of deposits ensures the solvency or profitability of companies in this industry, and there is no assurance against losses in securities issued by such companies. Insurance. Insurance companies are particularly subject to government regulation and rate setting, potential anti-trust and tax law changes, and industry-wide pricing and competition cycles. Property and casualty insurance companies may also be affected by weather and other catastrophes. Life and health insurance companies may be affected by mortality and morbidity rates, including the effects of epidemics. Individual insurance companies may be exposed to reserve inadequacies, problems in investment portfolios (for example, due to real estate or "junk" bond holdings) and failures of reinsurance carriers. Other Financial Services Companies. Many of the investment considerations discussed in connection with banks and insurance also apply to financial services companies. These companies are all subject to extensive regulation, rapid business changes, volatile performance dependent upon the availability and cost of capital and prevailing interest rates and significant competition. General economic conditions significantly affect these companies. Credit and other losses resulting from the financial difficulty of borrowers or other third parties have a potentially adverse effect on companies in this industry. 124 Investment banking, securities brokerage and investment advisory companies are particularly subject to government regulation and the risks inherent in securities trading and underwriting activities. Telecommunications. Companies in the telecommunications sector are subject to the additional risks of rapid obsolescence, lack of standardization or compatibility with existing technologies, an unfavorable regulatory environment, and a dependency on patent and copyright protection. The prices of the securities of companies in the telecommunications sector may fluctuate widely due to both federal and state regulations governing rates of return and services that may be offered, fierce competition for market share, and competitive challenges in the U.S. from foreign competitors engaged in strategic joint ventures with U.S. companies, and in foreign markets from both U.S. and foreign competitors. In addition, recent industry consolidation trends may lead to increased regulation of telecommunications companies in their primary markets. Health Sciences. Companies in this sector are subject to the additional risks of increased competition within the health care industry, changes in legislation or government regulations, reductions in government funding, product liability or other litigation and the obsolescence of popular products. The prices of the securities of heath sciences companies may fluctuate widely due to government regulation and approval of their products and services, which may have a significant effect on their price and availability. In addition, the types of products or services produced or provided by these companies may quickly become obsolete. Moreover, liability for products that are later alleged to be harmful or unsafe may be substantial and may have a significant impact on a company's market value or share price. IPOS ("INITIAL PUBLIC OFFERINGS") Certain portfolios may invest a portion of their assets in shares of initial public offerings ("IPOs"). IPOs may have a magnified impact on the performance of a portfolio with a small asset base. The impact of IPOs on a portfolio's performance likely will decrease as the portfolio's asset size increases, which could reduce the portfolio's returns. IPOs may not be consistently available to a portfolio for investing, particularly as the portfolio's asset base grows. IPO shares frequently are volatile in price due to the absence of a prior public market, the small number of shares available for trading and limited information about the issuer. Therefore, a portfolio may hold IPO shares for a very short period of time. This may increase the turnover of a portfolio and may lead to increased expenses for a portfolio, such as commissions and transaction costs. In addition, IPO shares can experience an immediate drop in value if the demand for the securities does not continue to support the offering price. ------------------ Additional risks of investing in the types of securities mentioned above are contained in the Statement of Additional Information. ADDITIONAL INVESTMENT POLICIES Subject to certain restrictions and except as noted below, each of the portfolios of the Trust may use the following investment strategies and purchase the following types of securities. Except in the case of repurchase agreements, the disclosure below does not apply to the American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust. The investment strategies of the underlying master funds for each of these portfolios are set for in the master fund prospectus (the "American Funds Insurance Series" prospectus) which accompanies this prospectus. LENDING OF PORTFOLIO SECURITIES Each portfolio may lend its securities so long as such loans do not represent more than 33 1/3% of a portfolio's total assets. As collateral for the lent securities, the borrower gives the lending portfolio collateral equal to at least 100% of the value of the lent securities. The collateral may consist of cash, cash equivalents or securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. The borrower must also agree to increase the collateral if the value of the lent securities increases. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. WHEN-ISSUED SECURITIES ("FORWARD COMMITMENTS") In order to help ensure the availability of suitable securities, each of the portfolios may purchase debt or equity securities on a "when-issued" or on a "forward delivery" basis. These terms mean that the obligations will be delivered to the portfolio at a future date, which may be a month or more after the date of commitment. While awaiting delivery of the obligations purchased on such bases, a portfolio will maintain on its record liquid assets consisting of cash or high quality debt securities equal to the amount of the commitments to purchase when-issued or forward delivery securities. At the time delivery is made, the value of when-issued or forward delivery securities may be more or less than the transaction price, and the yields then available in the market may be higher than those obtained in the transaction. 125 U.S. GOVERNMENT SECURITIES Certain of the portfolios may invest in U.S. government securities issued or guaranteed by the U.S. government or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the full faith and credit of the United States. Some are supported only by the credit of the issuing agency or instrumentality which depends entirely on its own resources to repay the debt. U.S. government securities that are backed by the full faith and credit of the United States include U.S. Treasuries and mortgage-backed securities guaranteed by the Government National Mortgage Association. Securities that are only supported by the credit of the issuing agency or instrumentality include the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Banks ("FHLBs") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). REPURCHASE AGREEMENTS Each of the portfolios may enter into repurchase agreements. Repurchase agreements involve the acquisition by a portfolio of debt securities subject to an agreement to resell them at an agreed-upon price. The arrangement is in economic effect a loan collateralized by securities. The portfolio's risk in a repurchase transaction is limited to the ability of the seller to pay the agreed-upon sum on the delivery date. In the event of bankruptcy or other default by the seller, the instrument purchased may decline in value, interest payable on the instrument may be lost and there may be possible delays and expense in liquidating the instrument. Securities subject to repurchase agreements will be valued every business day and additional collateral will be requested if necessary so that the value of the collateral is at least equal to the value of the repurchased obligation, including the interest accrued thereon. REVERSE REPURCHASE AGREEMENTS Each portfolio of the Trust may enter into "reverse" repurchase agreements. Under a reverse repurchase agreement, a portfolio may sell a debt security and agree to repurchase it at an agreed upon time and at an agreed upon price. The portfolio will maintain on its records liquid assets such as cash, Treasury bills or other U.S. Government Securities having an aggregate value equal to the amount of such commitment to repurchase including accrued interest, until payment is made. While a reverse repurchase agreement may be considered a form of leveraging and may, therefore, increase fluctuations in a portfolio's net asset value per share, each portfolio will cover the transaction as described above. FOREIGN REPURCHASE AGREEMENTS Certain Trust portfolios may enter into foreign repurchase agreements. Foreign repurchase agreements may be less well secured than U.S. repurchase agreements, and may be denominated in foreign currencies. They also may involve greater risk of loss if the counterparty defaults. Some counterparties in these transactions may be less creditworthy than those in U.S. markets. MORTGAGE DOLLAR ROLLS Unless otherwise explicitly prohibited in the description of a portfolio, each portfolio of the Trust may enter into mortgage dollar rolls. Under a mortgage dollar roll, a portfolio sells mortgage-backed securities for delivery in the future (generally within 30 days) and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. At the time a portfolio enters into a mortgage dollar roll, it will maintain on its records liquid assets such as cash, U.S. Government Securities equal in value to its obligations in respect of dollar rolls, and accordingly, such dollar rolls will not be considered borrowings. A portfolio may only enter into covered rolls. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash or cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction. Dollar roll transactions involve the risk that the market value of the securities sold by the portfolio may decline below the repurchase price of those securities. While a mortgage dollar roll may be considered a form of leveraging, and may, therefore, increase fluctuations in a portfolio's net asset value per share, each portfolio will cover the transaction as described above. WARRANTS Unless otherwise explicitly prohibited in the description of a portfolio, each portfolio of the Trust may, subject to certain restrictions, purchase warrants, including warrants traded independently of the underlying securities. Warrants are rights to purchase securities at specific prices valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities, and warrant holders receive no dividends and have no voting rights or rights with respect to the assets of an issuer. Warrants cease to have value if not exercised prior to the expiration date. 126 ILLIQUID SECURITIES Each portfolio of the Trust is precluded from investing in excess of 15% of its net assets in securities that are not readily marketable, except that the Money Market Trust may not invest in excess of 10% of its net assets in such securities. Investment in illiquid securities involves the risk that, because of the lack of consistent market demand for such securities, the Trust may be forced to sell them at a discount from the last offer price. INDEXED/STRUCTURED SECURITIES Unless otherwise explicitly prohibited in the description of a portfolio, each of the portfolios may invest in indexed/structured securities. These securities are typically short- to intermediate-term debt securities whose value at maturity or interest rate is linked to currencies, interest rates, equity securities, indices, commodity prices or other financial indicators. Such securities may be positively or negatively indexed (i.e., their value may increase or decrease if the reference index or instrument appreciates). Index/structured securities may have return characteristics similar to direct investments in the underlying instruments. A portfolio bears the market risk of an investment in the underlying instruments, as well as the credit risk of the issuer. SHORT SALES Certain of the portfolios may make short sales of securities. This means a portfolio may sell a security that it does not own in anticipation of a decline in the market value of the security. The portfolio generally borrows the security to deliver to the buyer in a short sale. The portfolio must then buy the security at its market price when the borrowed security must be returned to the lender. Short sales involve costs and risk. The portfolio must pay the lender interest on the security it borrows, and the portfolio will lose money if the price of the security increases between the time of the short sale and the date when the portfolio replaces the borrowed security. Certain of the portfolios may also make short sales "against the box." In a short sale against the box, at the time of sale, the portfolio owns or has the right to acquire the identical security, or one equivalent in kind or amount, at no additional cost. Until a portfolio closes its short position or replaces a borrowed security, the portfolio will (i) segregate with its custodian cash or other liquid assets at such a level that the amount segregated plus the amount deposited with the lender as collateral will equal the current market value of the security sold short or (ii) otherwise cover its short position. LOAN PARTICIPATIONS Certain of the portfolios may invest in fixed-and floating-rate loans, which investments generally will be in the form of loan participations and assignments of such loans. Participations and assignments involve special types of risks, including credit risk, interest rate risk, liquidity risk, and the risks of being a lender. If a portfolio purchases a participation, it may only be able to enforce its rights through the lender and may assume the credit risk of the lender in addition to the borrower. ------------------ These investment strategies and securities are described further in the Statement of Additional Information. HEDGING AND OTHER STRATEGIC TRANSACTIONS Individual portfolios may be authorized to use a variety of investment strategies. These strategies will be used primarily for hedging purposes, including hedging various market risks (such as interest rates, currency exchange rates and broad or specific market movements) and managing the effective maturity or duration of debt instruments held by the portfolio. Hedging refers to protecting against possible changes in the market value of securities a portfolio already owns or plans to buy or protecting unrealized gains in the portfolio. These strategies may also be used to gain exposure to a particular securities market. The hedging and other strategic transactions which may be used are described below: -- exchange-listed and over-the-counter put and call options on securities, financial futures contracts and fixed income indices and other financial instruments, -- financial futures contracts (including stock index futures), -- interest rate transactions*, and -- currency transactions** 127 Collectively, these transactions are referred to in this Prospectus as "Hedging and Other Strategic Transactions." The description in this Prospectus of each portfolio (including the introductory description under "Investment Objectives and Strategies") indicates which, if any, of these types of transactions may be used by the portfolio. * A portfolio's interest rate transactions may take the form of swaps, caps, floors and collars. **A portfolio's currency transactions may take the form of currency forward contracts, currency futures contracts, currency swaps and options on currencies or currency futures contracts. Hedging and Other Strategic Transactions may be used for the following purposes: -- to attempt to protect against possible changes in the market value of securities held or to be purchased by a portfolio resulting from securities markets or currency exchange rate fluctuations, -- to protect a portfolio's unrealized gains in the value of its securities, -- to facilitate the sale of a portfolio's securities for investment purposes, -- to manage the effective maturity or duration of a portfolio's securities or -- to establish a position in the derivatives markets as a substitute for purchasing or selling securities in a particular market. -- to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. The ability of a portfolio to utilize Hedging and Other Strategic Transactions successfully will depend in part on its Subadviser's ability to predict pertinent market movements, which cannot be assured. The skills required to successfully utilize Hedging and Other Strategic Transactions are different from those needed to select a portfolio's securities. While a Subadviser will only use Hedging and Other Strategic Transactions in a portfolio primarily for hedging purposes or to gain exposure to a particular securities market., if the transaction is not successful it could result in a loss to the portfolio. These transactions may also increase the volatility of a portfolio and may involve a small investment of cash relative to the magnitude of the risks assumed. The potential loss from the use of futures can exceed a fund's initial investment in such contracts. In addition, these transactions could result in a loss to the portfolio if the counterparty to the transaction does not perform as promised. A detailed discussion of various Hedging and Other Strategic Transactions, including applicable regulations of the CFTC and the requirement to segregate assets with respect to these transactions, appears in the Statement of Additional Information. MANAGEMENT OF THE TRUST ADVISORY ARRANGEMENTS Manufacturers Securities Services, LLC (the "Adviser") is the adviser to the Trust. The Adviser is a Delaware limited liability company whose principal offices are located at 73 Tremont Street, Boston, Massachusetts 02108. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Adviser administers the business and affairs of the Trust. The Adviser also selects, contracts with and compensates Subadvisers to manage the investment and reinvestment of the assets of all portfolios of the Trust. The Adviser does not itself manage any of the Trust portfolio assets but has ultimate responsibility to oversee the Subadvisers. In this connection, the Adviser (i) monitors the compliance of the Subadvisers with the investment objectives and related policies of each portfolio, (ii) reviews the performance of the Subadvisers and (iii) reports periodically on such performance to the Trustees of the Trust. The Trust has received an order from the SEC permitting the Adviser to appoint a Subadviser or change the terms of a subadvisory agreement pursuant to an agreement that is not approved by shareholders. The Trust, therefore, is able to change Subadvisers or the fees paid to Subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. This order does not, however, permit the Adviser to appoint a Subadviser that is an affiliate of the Adviser or the Trust (other than by reason of serving as Subadviser to a portfolio) (an "Affiliated Subadviser") or to change a subadvisory fee of an Affiliated Subadviser without the approval of shareholders. Currently, MFC Global Investment Management (U.S.A.) Limited is an Affiliated Subadviser. As compensation for its services, the Adviser receives a fee from the Trust computed separately for each portfolio. The fee for each portfolio is stated as an annual percentage of the current value of the net assets of the portfolio. The fee, which is accrued daily and payable daily, is calculated for each day by multiplying the daily equivalent of the annual percentage 128 prescribed for a portfolio by the value of the net assets of the portfolio at the close of business on the previous business day of the Trust. The following table presents a schedule of the management fees each portfolio currently is obligated to pay the Adviser as a percentage of average annual net assets. For information on the advisory fee for the underlying master fund for each of the American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust please refer to the master fund prospectus (the American Funds Insurance Series prospectus) which accompanies this prospectus as well as the disclosure regarding these four portfolios set forth above under "Fees and Expenses for Each Portfolio."
BETWEEN BETWEEN BETWEEN FIRST $50 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER PORTFOLIO $50 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION - --------- ----------- --------------- ---------------- ---------------- ----------- Science & Technology................ 0.950% 0.950% 0.950% 0.900% 0.900% Pacific Rim (formerly, Pacific Rim Emerging Markets)................. 0.700% 0.700% 0.700% 0.600% 0.600% Health Sciences..................... 0.950% 0.950% 0.950% 0.900% 0.900% Emerging Growth..................... 0.700% 0.700% 0.700% 0.700% 0.700% Aggressive Growth................... 0.850% 0.850% 0.850% 0.800% 0.800% Emerging Small Company.............. 0.900% 0.900% 0.900% 0.870% 0.850% Small Company Blend................. 0.900% 0.900% 0.900% 0.900% 0.900% Dynamic Growth...................... 0.850% 0.850% 0.850% 0.800% 0.800% Mid Cap Stock....................... 0.775% 0.775% 0.750% 0.725% 0.725% Natural Resources................... 0.950% 0.900% 0.900% 0.900% 0.900% All Cap Growth...................... 0.800% 0.800% 0.800% 0.750% 0.750% Strategic Opportunities............. 0.700% 0.700% 0.700% 0.700% 0.700% International Stock................. 0.850% 0.850% 0.850% 0.800% 0.800% Overseas............................ 0.800% 0.800% 0.800% 0.800% 0.800% International Small Cap............. 0.950% 0.950% 0.850% 0.750% 0.750% International Value................. 0.850% 0.850% 0.750% 0.700% 0.700% Quantitative Mid Cap................ 0.650% 0.650% 0.550% 0.550% 0.550% Quantitative All Cap................ 0.650% 0.600% 0.600% 0.600% 0.600% All Cap Core (formerly, Growth)..... 0.700% 0.700% 0.700% 0.650% 0.650% Quantitative Equity................. 0.600% 0.600% 0.600% 0.550% 0.500% Blue Chip Growth.................... 0.725% 0.725% 0.725% 0.725% 0.700% U.S. Large Cap (formerly, U.S. Large Cap Value)............. 0.725% 0.725% 0.725% 0.725% 0.700% Real Estate Securities.............. 0.600% 0.600% 0.600% 0.600% 0.600% Small Cap Opportunities............. 0.900% 0.900% 0.900% 0.850% 0.850% Small Company Value................. 0.900% 0.900% 0.900% 0.900% 0.900% Special Value....................... 0.900% 0.900% 0.900% 0.850% 0.850% Mid Cap Value....................... 0.800% 0.800% 0.750% 0.725% 0.725% Value............................... 0.650% 0.650% 0.625% 0.550% 0.550% Equity Index........................ 0.250% 0.250% 0.250% 0.250% 0.250% Growth & Income..................... 0.600% 0.600% 0.600% 0.550% 0.500% Great Companies -- America.......... 0.750% 0.750% 0.750% 0.700% 0.700% Equity-Income....................... 0.725% 0.725% 0.725% 0.725% 0.700% Income & Value...................... 0.650% 0.650% 0.650% 0.650% 0.650% Balanced............................ 0.600% 0.550% 0.500% 0.500% 0.500% Global Allocation (formerly, Tactical Allocation).............. 0.750% 0.750% 0.750% 0.700% 0.700%
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BETWEEN BETWEEN BETWEEN FIRST $50 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER PORTFOLIO $50 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION - --------- ----------- --------------- ---------------- ---------------- ----------- High Yield.......................... 0.625% 0.625% 0.625% 0.550% 0.550% Strategic Bond...................... 0.625% 0.625% 0.625% 0.550% 0.550% Global Bond......................... 0.600% 0.600% 0.600% 0.600% 0.600% Diversified Bond.................... 0.600% 0.600% 0.600% 0.600% 0.600% Investment Quality Bond............. 0.500% 0.500% 0.500% 0.450% 0.450% Total Return........................ 0.600% 0.600% 0.600% 0.600% 0.600% Real Return Bond.................... 0.600% 0.600% 0.600% 0.600% 0.600% U.S. Government Securities.......... 0.550% 0.550% 0.550% 0.450% 0.450% Money Market........................ 0.350% 0.350% 0.350% 0.350% 0.350% Small Cap Index..................... 0.375% 0.375% 0.375% 0.375% 0.375% International Index................. 0.400% 0.400% 0.400% 0.400% 0.400% Mid Cap Index....................... 0.375% 0.375% 0.375% 0.375% 0.375% Total Stock Market.................. 0.375% 0.375% 0.375% 0.375% 0.375% 500 Index........................... 0.375% 0.375% 0.375% 0.375% 0.375% Small-Mid Cap....................... 0.950% 0.950% 0.950% 0.950% 0.950%
BETWEEN BETWEEN BETWEEN FIRST $50 MILLION AND $250 MILLION AND $500 MILLION AND EXCESS OVER PORTFOLIO $50 MILLION $250 MILLION $500 MILLION $1 BILLION $1 BILLION - --------- ----------- --------------- ---------------- ---------------- ----------- International Equity Select......... 0.900% 0.900% 0.850% 0.800% 0.800% Global Equity Select................ 0.900% 0.900% 0.850% 0.800% 0.800% Financial Services.................. 0.800% 0.750% 0.750% 0.700% 0.700% Fundamental Value................... 0.800% 0.750% 0.750% 0.700% 0.700% All Cap Value....................... 0.750% 0.750% 0.700% 0.650% 0.650%
BETWEEN BETWEEN BETWEEN FIRST $100 MILLION AND $200 MILLION AND $500 MILLION AND EXCESS OVER PORTFOLIO $100 MILLION $200 MILLION $500 MILLION $1 BILLION $1 BILLION - --------- ------------ ---------------- ---------------- ---------------- ----------- Small-Mid Cap Growth............... 0.800% 0.750% 0.750% 0.750% 0.750% Select Growth...................... 0.800% 0.750% 0.750% 0.750% 0.750% Core Value......................... 0.800% 0.750% 0.750% 0.750% 0.750% Lifestyle Aggressive 1000.......... 0.075% 0.050% 0.050% 0.050% 0.050% Lifestyle Growth 820............... 0.075% 0.050% 0.050% 0.050% 0.050% Lifestyle Balanced 640............. 0.075% 0.050% 0.050% 0.050% 0.050% Lifestyle Moderate 460............. 0.075% 0.050% 0.050% 0.050% 0.050% Lifestyle Conservative 280......... 0.075% 0.050% 0.050% 0.050% 0.050%
BETWEEN BETWEEN FIRST $50 MILLION AND $100 MILLION AND EXCESS OVER PORTFOLIO $50 MILLION $100 MILLION $250 MILLION $250 MILLION - --------- ----------- --------------- ---------------- ------------ High Grade Bond................... 0.600% 0.550% 0.500% 0.450%
FIRST EXCESS OVER PORTFOLIO $300 MILLION $300 MILLION - --------- ------------ ------------ Capital Appreciation............. 0.750% 0.700%
FIRST EXCESS OVER PORTFOLIO $1 BILLION $1 BILLION - --------- ---------- ----------- Global (formerly, Global Equity)........................ 0.750% 0.700%
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FIRST EXCESS OVER PORTFOLIO $750 MILLION $750 MILLION - --------- ------------ ------------ Large Cap Growth................. 0.750% 0.700%
BETWEEN BETWEEN BETWEEN FIRST $300 MILLION AND $600 MILLION AND $900 MILLION AND EXCESS OVER PORTFOLIO $300 MILLION $600 MILLION $900 MILLION $1.5 BILLION $1.5 BILLION - --------- ------------ ---------------- ---------------- ---------------- ------------ Strategic Growth................. 0.750% 0.725% 0.700% 0.675% 0.600% Strategic Value (formerly, Capital Opportunities)......... 0.750% 0.725% 0.700% 0.675% 0.600% Utilities........................ 0.750% 0.725% 0.700% 0.675% 0.600%
BETWEEN BETWEEN BETWEEN FIRST $10 MILLION AND $50 MILLION AND $200 MILLION AND EXCESS OVER PORTFOLIO $10 MILLION $50 MILLION $200 MILLION $500 MILLION $500 MILLION - --------- ----------- --------------- --------------- ---------------- ------------ Mid Cap Core..................... 0.850% 0.800% 0.775% 0.750% 0.725%
BETWEEN BETWEEN FIRST $100 MILLION AND $300 MILLION AND EXCESS OVER PORTFOLIO $100 MILLION $300 MILLION $500 MILLION $500 MILLION - --------- ------------ ---------------- ---------------- ------------ Large Cap Value.................. 0.750% 0.750% 0.725% 0.700%
BETWEEN FIRST $500 MILLION EXCESS OVER PORTFOLIO $500 MILLION AND $1 BILLION $1 BILLION - --------- ------------ -------------- ----------- U.S. Global Leaders Growth....... 0.6125% 0.575% 0.575% Classic Value.................... 0.775% 0.7325% 0.700% Quantitative Value............... 0.600% 0.550% 0.500% Strategic Income................. 0.625% 0.550% 0.550%
FIRST EXCESS OVER PORTFOLIO $125 MILLION $125 MILLION - --------- ------------ ------------ Small Company.................... 0.950% 0.900%
FIRST EXCESS OVER PORTFOLIO $350 MILLION $350 MILLION - --------- ------------ ------------ Core Equity...................... 0.750% 0.650%
The following table presents the investment advisory fee paid by each portfolio of the Trust for the year ended December 31, 2003.
ADVISORY FEE AS A PORTFOLIO DOLLAR AMOUNT - --------- ----------------- Science & Technology Trust.................................. $ 4,681,446 Pacific Rim Trust (formerly Pacific Rim Emerging Markets Trust).................................................... 429,130 Health Sciences Trust....................................... 1,092,397 Emerging Growth Trust....................................... 25,370 Aggressive Growth Trust..................................... 2,206,081 Emerging Small Company Trust................................ 3,373,559 Small Company Blend Trust................................... 1,426,321 Dynamic Growth Trust........................................ 1,127,166 Mid Cap Stock Trust......................................... 2,065,374 Natural Resources Trust..................................... 689,622 All Cap Growth Trust........................................ 4,162,214 Strategic Opportunities Trust............................... 3,670,593 Financial Services Trust.................................... 515,197 International Stock Trust................................... 2,614,274 Overseas Trust.............................................. 2,941,631 International Small Cap Trust............................... 1,862,419
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ADVISORY FEE AS A PORTFOLIO DOLLAR AMOUNT - --------- ----------------- International Value Trust................................... 2,527,140 Quantitative Mid Cap Trust.................................. 614,214 Mid Cap Core Trust.......................................... 180,602 Global Trust (formerly, Global Equity Trust)................ 2,708,494 Strategic Growth Trust...................................... 1,488,580 Capital Appreciation Trust.................................. 1,114,821 Quantitative All Cap Trust.................................. 15,620 All Cap Core Trust.......................................... 1,746,290 Large Cap Growth Trust...................................... 3,321,396 Quantitative Equity Trust................................... 1,507,407 Blue Chip Growth Trust...................................... 9,155,555 U.S. Large Cap Trust........................................ 3,463,143 Strategic Value Trust....................................... 666,775 Large Cap Value Trust....................................... 35,746 Utilities Trust............................................. 298,813 Real Estate Securities Trust................................ 2,765,858 Small Cap Opportunities Trust............................... 258,418 Small Company Value Trust................................... 3,737,802 Special Value Trust......................................... 71,496 Mid Cap Value Trust......................................... 2,831,730 Value Trust................................................. 1,628,789 All Cap Value Trust......................................... 1,175,734 Equity Index Trust.......................................... 185,625 Fundamental Value Trust..................................... 3,165,632 Growth & Income Trust....................................... 8,314,092 Great Companies -- America.................................. 7,159 Equity-Income Trust......................................... 9,193,136 Income & Value Trust........................................ 3,432,039 Balanced Trust.............................................. 826,923 Global Allocation Trust..................................... 498,796 High Yield Trust............................................ 3,904,182 Strategic Bond Trust........................................ 3,254,319 Global Bond Trust........................................... 1,481,608 Diversified Bond Trust...................................... 2,209,424 Investment Quality Bond Trust............................... 2,581,493 Total Return Trust.......................................... 8,627,857 Real Return Bond Trust...................................... 801,605 U.S. Government Securities Trust............................ 4,213,924 Money Market Trust.......................................... 5,235,724 Small Cap Index Trust....................................... 402,004 International Index Trust................................... 288,461 Mid Cap Index Trust......................................... 489,790 Total Stock Market Index Trust.............................. 405,708 500 Index Trust............................................. 3,290,414 Lifestyle Aggressive 1000 Trust............................. 180,863 Lifestyle Growth 820 Trust.................................. 650,210 Lifestyle Balanced 640 Trust................................ 747,831 Lifestyle Moderate 460 Trust................................ 302,152 Lifestyle Conservative 260 Trust............................ 220,906
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ADVISORY FEE AS A PORTFOLIO DOLLAR AMOUNT - --------- ----------------- Small-Mid Cap Growth Trust.................................. 17,676 Small-Mid Cap Trust......................................... 1,019,650 International Equity Select Trust........................... 719,514 Select Growth Trust......................................... 20,260 Global Equity Select Trust.................................. 24,336 Core Value Trust............................................ 22,738 High Grade Bond Trust....................................... 716,128 Total for all Portfolios.................................... $141,649,396
Advisory Fee Waivers Science & Technology, Health Sciences, Small Company Value, Blue Chip Growth and Equity-Income Trusts. The Adviser has voluntarily agreed to waive a portion of its advisory fee for the Science & Technology Trust, Health Sciences Trust, Small Company Value Trust, Blue Chip Growth Trust and Equity-Income Trust. Once the combined assets exceed specified amounts, the fee reduction is increased. The percentage fee reduction for each asset level is as follows:
COMBINED ASSET LEVELS FEE REDUCTION - --------------------- ------------------- (AS A PERCENTAGE OF THE ADVISORY FEE) First $750 million.......................................... 0.00% Between $750 million and $1.5 billion....................... 5.0% Between $1.5 billion and $3.0 billion....................... 7.5% Over $3.0 billion........................................... 10%
The fee reductions are applied to the advisory fees of each of the five portfolios. This voluntary fee waiver may be terminated at any time by the Adviser. Global and International Value Trusts. Effective December 9, 2003, due to a decrease in the subadvisory fees for the Global Trust and the International Value Trust, the Adviser voluntarily agreed to waive its advisory fees so that the amount retained by the Adviser after payment of the subadvisory fees for each such portfolio does not exceed 0.35% of the portfolio's average net assets. These advisory fee waivers may be terminated at any time. Expense Reimbursement. All Portfolios Except the Lifestyle Trusts. Advisory fees are reduced or the Adviser reimburses the Trust if the total of all expenses (excluding advisory fees, Rule 12b-1 fees, taxes, portfolio brokerage commissions, interest, litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Trust's business) applicable to a portfolio exceeds the annual rate specified below of the average annual net assets of the portfolio: - 0.10% in the case of the Small-Mid Cap Growth Trust, Small-Mid Cap Trust, Select Growth Trust, Core Value Trust - 0.15% in the case of the Equity Index Trust, International Equity Select Trust, Global Equity Select Trust - 0.050% in the case of the International Index Trust and the 500 Index Trust, - 0.075% in the case of the Small Cap Index Trust, the Mid Cap Index Trust and the Total Stock Market Index Trust, - 0.75% in the case of the International Small Cap, Global, Global Bond, International Value, Overseas, International Stock and Pacific Rim Trusts, - 0.50% in the case of all other portfolios except the Lifestyle Trusts. Lifestyle Trusts. If total expenses of a Lifestyle Trust (absent reimbursement) exceed 0.075%, the Adviser will reduce the advisory fee or reimburse expenses of that Lifestyle Trust by an amount such that total expenses of the Lifestyle Trust equal 0.075%. If the total expenses of a Lifestyle Trust (absent reimbursement) are equal to or less than 0.075%, then no expenses will be reimbursed by the Adviser. (For purposes of the expense reimbursement total expenses of a Lifestyle Trust includes the advisory fee but excludes (a) the expenses of the Underlying Portfolios, (b) taxes, (c) portfolio brokerage, (d) interest, (e) litigation, (f) Rule 12b-1 fees, (g) transfer agency fees, blue sky fees and (f) indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Trust's business.) These expense limitations will continue in effect unless otherwise terminated by the Adviser upon notice to the Trust. These voluntary expense reimbursements may be terminated at any time. 133 SUBADVISORY ARRANGEMENTS Under the terms of each of the Subadvisory Agreements, the Subadviser manages the assets of the assigned portfolios, subject to the supervision of the Adviser and the Trustees of the Trust. The Subadviser formulates a continuous investment program for each such portfolio consistent with its investment objectives and policies outlined in this Prospectus. Each Subadviser regularly reports to the Adviser and the Trustees of the Trust with respect to the implementation of such programs. MULTICLASS PRICING; RULE 12B-1 PLANS MULTIPLE CLASSES OF SHARES The Trust may issue three classes of shares, Series I shares (formerly referred to as Class A shares), Series II shares (formerly referred to as Class B shares) and Series III (also referred to as "Class R shares"). Each class of shares is the same except for differences in class expenses, including different Rule 12b-1 fees, and voting rights. Series III Shares. Only certain "Qualified Plans" and certain permitted entities may invest in Series III shares. For this purpose, a "Qualified Plan" includes: (i) a plan described in Section 401(a) of the Code; (ii) an annuity plan described in 403(a) of the Code; (iii) an annuity contract described in Section 403(b) of the Code, including a custodial account described in Section 403(b)(7) of the Code; (iv) an individual retirement account described in Section 408(a) of the Code; (v) an individual retirement annuity described in Section 408(b) of the Code; (vi) a governmental plan within the meaning of Section 414(d) of the Code; (vii) an eligible deferred compensation plan described in Section 457(b) of the Code; (viii) a simplified employee pension described in Section 408(k) of the Code; (ix) a plan described in Section 501(c)(18) of the Code; and (x) any other trust, plan, account, contract, or annuity that the Internal Revenue Service has determined to be within the scope of Section 1.817-5(f)(3)(iii) of the Income Tax Regulations. RULE 12B-1 PLANS OF EACH CLASS Series I shares of each portfolio are subject to a Rule 12b-1 fee of .15% of Series I share average daily net assets except as follows: -- Equity Index Trust and the Lifestyle Trusts are not subject to a Rule 12b-1 fee. -- American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust are subject to a Rule 12b-1 fee of .35%. In addition, each master fund pays a Rule 12b-1 fee of .25% of average annual net assets of the master fund. Series II shares of each portfolio are subject to a Rule 12b-1 fee of up to ..35% of Series II share average daily net assets except as follows: -- Equity Index Trust and the Lifestyle Trusts are not subject to a Rule 12b-1 fee. -- American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust are subject to a Rule 12b-1 fee of .50%. In addition, each master fund pays a Rule 12b-1 fee of .25% of average annual net assets of the master fund. Series III shares of each portfolio are subject to a Rule 12b-1 fee of up to .50% of Series III share average daily net assets (.15% in the case of the Lifestyle Trusts) except as follows: -- Equity Index Trust, American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust do not offer Series III shares. -- The Lifestyle Trusts are subject to a Rule 12b-1 fee of .15%. Rule 12b-1 fees will be paid to the Trust's Distributor, Manufacturers Financial Securities LLC, or any successor thereto. To the extent consistent with applicable laws, regulations and rules, the Distributor may use Rule 12b-1 fees: (i) for any expenses relating to the distribution of the shares of the class, (ii) for any expenses relating to shareholder or administrative services for holders of the shares of the class (or owners of contracts funded in insurance company separate accounts that invest in the shares of the class) and (iii) for the payment of "service fees" that come within Rule 2830(d)(5) of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. 134 Without limiting the foregoing, the Distributor may pay all or part of the Rule 12b-1 fees from a portfolio to one or more affiliated and unaffiliated insurance companies that have issued variable insurance contracts for which the portfolio serves as an investment vehicle as compensation for providing some or all of the types of services described in the preceding sentence; this provision, however, does not obligate the Distributor to make any payments of Rule 12b-1 fees and does not limit the use that the Distributor may make of the Rule 12b-1 fees it receives. Currently, all such payments are made to insurance companies affiliated with the Trust's investment adviser and Distributor. However, payments may be made to nonaffiliated insurance companies in the future. Rule 12b-1 fees are paid out of a portfolio's assets on an ongoing basis. Therefore, these fees will increase the cost of an investment in a portfolio and may, over time, be greater than other types of sales charges. GENERAL INFORMATION TAXES QUALIFICATION AS A REGULATED INVESTMENT COMPANY DIVERSIFICATION REQUIREMENTS APPLICABLE TO INSURANCE COMPANY SEPARATE ACCOUNTS The Trust intends to take the steps necessary to qualify each portfolio as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code") and believes that each portfolio will so qualify. As a result of qualifying as a regulated investment company, each portfolio will not be subject to U.S. Federal income tax on its net investment income and net capital gain that it distributes to its shareholders in each taxable year provided that it distributes to its shareholders at least 90% of its net investment income for such taxable year. Net investment income is defined as investment company taxable income, as that term is defined in the Code, determined without regard to the deduction for dividends paid and excluding net capital gains. Net capital gain is defined as the excess of its net realized long-term capital gain over its net realized short-term capital loss. Each portfolio is subject to a nondeductible 4% excise tax calculated as a percentage of certain undistributed amounts of ordinary income and capital gain net income. To the extent possible, each portfolio intends to make sufficient distributions to avoid the application of both corporate income and excise taxes. Because the Trust complies with the ownership restrictions of Treas. Reg. Section 1.817-5(f) and Rev. Rule 81-225 (no direct ownership by the public), each insurance company separate account will be treated as owning its proportionate share of the assets of any portfolio in which it invests, provided that the portfolio qualifies as a regulated investment company. Therefore, each portfolio intends to meet the additional diversification requirements that are applicable to insurance company separate accounts under Subchapter L of the Code. These requirements generally provide that no more than 55% of the value of the assets of a portfolio may be represented by any one investment; no more than 70% by any two investments; no more than 80% by any three investments; and no more than 90% by any four investments. For these purposes, all securities of the same issuer are treated as a single investment and each United States government agency or instrumentality is treated as a separate issuer. If a portfolio failed to qualify as a regulated investment company, owners of contracts based on the portfolio: -- would be treated as owning shares of the portfolio (rather than their proportionate share of the assets of such portfolio) for purposes of the diversification requirements under Subchapter L of the Code, and as a result might be taxed currently on the investment earnings under their contracts and thereby lose the benefit of tax deferral, and -- the portfolio would incur regular corporate federal income tax on its taxable income for that year and be subject to certain distribution requirements upon requalification. In addition, if a portfolio failed to comply with the diversification requirements of the regulations under Subchapter L of the Code, owners of contracts based on the portfolio might be taxed on the investment earnings under their contracts and thereby lose the benefit of tax deferral. Accordingly, compliance with the above rules is carefully monitored by the Adviser and the Subadvisers and it is intended that the portfolios will comply with these rules as they exist or as they may be modified from time to time. Compliance with the tax requirements described above may result in a reduction in the return under a portfolio, since, to comply with the above rules, the investments utilized (and the time at which such investments are entered into and closed out) may be different from what the Subadvisers might otherwise believe to be desirable. FOREIGN INVESTMENTS Portfolios investing in foreign securities or currencies may be required to pay withholding or other taxes to foreign governments. Foreign tax withholding from dividends and interest, if any, is generally imposed at a rate between 10% and 35%. The investment yield of any portfolio that invests in foreign securities or currencies will be reduced by these foreign taxes. The foreign tax credit, if any, allowable with respect to such foreign taxes will not benefit owners of variable annuity or variable life insurance contracts who allocate investments to a portfolio of the Trust. 135 TAX IMPLICATIONS FOR INSURANCE CONTRACTS WITH INVESTMENTS ALLOCATED TO THE TRUST For information regarding the tax implications for the purchaser of a variable annuity or life insurance contract who allocates investments to a portfolio of the Trust, please refer to the prospectus for the contract. ------------------ The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations currently in effect. It is not intended to be a complete explanation or a substitute for consultation with individual tax advisors. The Code and Regulations are subject to change, possibly with retroactive effect. See "Additional Information Concerning Taxes" in the Statement of Additional Information for additional information on taxes. DIVIDENDS The Trust intends to declare as dividends substantially all of the net investment income, if any, of each portfolio. Dividends from the net investment income and the net capital gain, if any, for each portfolio except the Money Market Trust will be declared not less frequently than annually and reinvested in additional full and fractional shares of that portfolio or paid in cash. Dividends from net investment income and net capital gain, if any, for the Money Market Trust will be declared and reinvested, or paid in cash, daily. PURCHASE AND REDEMPTION OF SHARES Shares of each portfolio of the Trust are offered continuously, without sales charge, at a price equal to their net asset value. The Trust sells its shares directly without the use of any underwriter. Shares of each portfolio of the Trust are sold and redeemed at their net asset value next computed after a purchase payment or redemption request is received by the shareholder from the contract owner or after any other purchase or redemption order is received by the Trust. Depending upon the net asset value at that time, the amount paid upon redemption may be more or less than the cost of the shares redeemed. Payment for shares redeemed will generally be made within seven days after receipt of a proper notice of redemption. However, the Trust may suspend the right of redemption or postpone the date of payment beyond seven days during any period when: -- trading on the New York Stock Exchange is restricted, as determined by the SEC, or such Exchange is closed for other than weekends and holidays; -- an emergency exists, as determined by the SEC, as a result of which disposal by the Trust of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Trust fairly to determine the value of its net assets; or -- the SEC by order so permits for the protection of security holders of the Trust. Calculation of Net Asset Value The net asset value of the shares of each portfolio is determined once daily as of the close of day-time trading of the New York Stock Exchange, Monday through Friday, except that no determination is required on: (i) days on which changes in the value of such portfolio's portfolio securities will not materially affect the current net asset value of the shares of the portfolio, (ii) days during which no shares of such portfolio are tendered for redemption and no order to purchase or sell such shares is received by the Trust, or (iii) the following business holidays or the days on which such holidays are observed by the New York Stock Exchange: New Year's Day, Martin Luther King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset values per share of all portfolios, except the Money Market Trust, are computed by: (i) adding the sum of the value of the securities held by each portfolio plus any cash or other assets it holds, (ii) subtracting all its liabilities, and (iii) dividing the result by the total number of shares outstanding of that portfolio at such time. Securities held by each of the portfolios, except securities held by the Money Market and Lifestyle Trusts and money market instruments with remaining maturities of 60 days or less, are valued at their market value if market quotations are readily available. Otherwise, such securities are valued at fair value as determined in good faith by the Trustees or their designee although the actual calculations may be made by persons acting pursuant to the direction of the Trustees. All instruments held by the Money Market Trust and money market instruments with a remaining maturity of 60 days or less held by the other portfolios are valued on an amortized cost basis. Underlying Portfolio shares held by the Lifestyle Trust are valued at their net asset value. Generally, trading (i) in non-U.S. securities, (ii) U.S. Government Securities and (iii) money market instruments is substantially completed each day at various times prior to the close of trading of the New York Stock Exchange. The values 136 of such securities used in computing the net asset value of a portfolio's shares are generally determined as of such times. Occasionally, events which affect the values of such securities may occur between the times at which they are generally determined and the close of the New York Stock Exchange and would therefore not be reflected in the computation of a portfolio's net asset value. In such event, these securities will then be valued at their fair value as determined in good faith by the Trustees or their designee. Fair value pricing in these circumstances will help ensure that shareholders buying and selling shares on this date receive a price that accurately reflects the value of the securities as of the close of the New York Stock Exchange as opposed to a price that reflects values of securities which are no longer accurate. Fair value pricing in these circumstances will also help ensure that aggressive traders are not able to purchase shares of a portfolio at a deflated price that reflects stale security valuations and then immediately sell these shares at a gain. DISRUPTIVE SHORT TERM TRADING None of the Trust portfolios are designed for short-term investing since such activity may increase portfolio transaction costs and be disruptive to management of a portfolio (affecting a subadviser's ability to effectively manage a portfolio in accordance with its investment objective and policies). The Board of Trustees of the Trust as adopted the following policy regarding short-term investing in the Trust: Management of the Trust will monitor purchases and redemptions of Trust shares. If management of the Trust becomes aware of short-term trading that it believes, in its sole discretion, is significantly disrupting (or may potentially significantly disrupt) management of a portfolio or materially increasing portfolio transaction costs ("Disruptive Short-Term Trading"), the Trust may impose restrictions on such trading. Since shares of the Trust are sold primarily to separate accounts of affiliated insurance companies, the Trust's participation agreement with such insurance companies requires the insurance companies to impose trading restrictions on its contract owners if requested by the Trust. In addition, since trading in shares of Series I and Series II of the Trust is effected through the insurance company separate accounts and not directly through the Trust, the Trust's participation agreement also provides that each insurance company may impose restrictions on transfers in addition to those requested by the Trust. Currently, Series III shares of the Trust are sold directly to qualified retirement plans. In the case of Series III shares, the Trust restricts transfers to two per month per account. (For purposes of this restriction, all transfers made during the period from the opening of trading each day the net asset value of the shares are determined (usually 9 a.m.) to the close of trading that day (the close of day-time trading of the New York Stock Exchange (usually 4 p.m.)) are considered one transfer.) Shareholders may, however, transfer to the Money Market Trust even if the two transfer per month limit has been reached if 100% of the assets in an account are transferred to the Money Market Trust. If such a transfer to the Money Market Trust is made, for a 30 day period after such transfer, no subsequent transfers from the Money Market Trust to another portfolio of the Trust may be made. This restriction is applied uniformly to all participants in qualified retirement plans. The Trust also reserves the right to take other actions to restrict trading as noted below. Actions that the Trust or the insurance companies may take to restrict Disruptive Short-Term Trading include, but are not limited to: -- restricting the number of transfers made during a defined period, -- restricting the dollar amount of transfers, -- restricting the method used to submit transfers (e.g., requiring transfer requests to be submitted in writing via U.S. mail), and -- restricting transfers into and out of certain Trust portfolios. Investors in the Trust should note that while the Trust seeks to identify and prevent Disruptive Short-Term Trading, it is not always possible to do so. Therefore, no assurance can be given that the Trust will successfully impose restrictions on all Disruptive Short-Term Trading. If the Trust is unsuccessful in restricting Disruptive Short-Term Trading, the portfolios may incur higher brokerage costs, may maintain higher cash levels (limiting their ability to achieve their investment objective) and may be exposed to dilution with respect to interests held for long-term investment. PURCHASERS OF SHARES OF THE TRUST Shares of the Trust may be sold to insurance company separate accounts for both variable annuity and variable life insurance contracts and to certain qualified pension and retirement plans ("Qualified Plans"). Due to differences in tax treatments and other considerations, the interests of various contract owners participating in the Trust and the interests of Qualified Plans investing the Trust may conflict. The Board of Trustees of the Trust will monitor events in order to identify the existence of any material irreconcilable conflicts and determine what action, if any, should be taken in response to any such conflict. 137 FINANCIAL HIGHLIGHTS The financial highlights table included with each portfolio description is intended to help investors understand the financial performance of the portfolio for the past five years (or since inception in the case of a portfolio in operation for less than five years. Certain information reflects financial results for a single share of a Trust portfolio. The total returns presented in the table represent the rate that an investor would have earned (or lost) on an investment in a particular Trust portfolio (assuming reinvestment of all dividends and distributions). The financial statements of the Trust as of December 31, 2003, have been audited by PricewaterhouseCoopers LLP, independent accountants. The report of PricewaterhouseCoopers LLP is included, along with the Trust's financial statements, in the Trust's annual report which has been incorporated by reference into the Statement of Additional Information and is available upon request. The performance information included in the "Financial Highlights" does not reflect fees and expenses of any variable insurance contract or qualified plan which may use the Trust as its underlying investment medium. If such fees and expenses had been reflected, performance would be lower. 138 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
SCIENCE & TECHNOLOGY TRUST --------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III -------------------------------------------------------- -------------------------- ----------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003* -------------------------------------------------------- DECEMBER 31, TO TO 2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- ---------- ---------- -------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.60 $ 12.83 $ 23.24 $ 36.17 $ 19.52 $ 7.59 $ 12.61 $ 10.61 Income from investment operations: - ---------------------- Net investment income (loss) (0.07) (0.08) (0.13) (0.24) (0.06) (0.10) (0.08) (0.03) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.90 (5.15) (9.36) (11.77) 19.43 3.93 (4.94) 0.85 -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Total from investment operations 3.83 (5.23) (9.49) (12.01) 19.37 3.83 (5.02) 0.82 -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Less distributions: - ---------------------------------- Distributions from capital gains - - (0.92) (0.92) (2.72) - - - -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Total distributions - - (0.92) (0.92) (2.72) - - - -------- -------- ---------- ---------- -------- ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 11.43 $ 7.60 $ 12.83 $ 23.24 $ 36.17 $ 11.42 $ 7.59 $ 11.43 ======== ======== ========== ========== ======== ============ =========== =========== TOTAL RETURN(B) 50.39% (40.76%) (41.25%) (34.06%) 99.49% 50.46% (39.81%)+ 7.73%+ Net assets, end of period (000's) $557,623 $358,553 $729,587 $1,262,181 $1,144,454 $65,613 $11,064 $6 Ratio of expenses to average net assets 1.19%& 1.17% 1.16% 1.15% 1.16% 1.39%& 1.37%(A) 15.13%(A) Ratio of expenses to average net assets after expense reductions 1.16%& 1.15% 1.15% 1.14% 1.16% 1.36%& 1.35%(A) 1.51%(A) Ratio of net investment income (loss) to average net assets (0.79%) (0.87%) (0.80%) (0.73%) (0.40%) (0.99%) (1.07%)(A) (1.00%)(A) Portfolio turnover rate 56%++ 59% 144% 133% 113% 56%++ 59% 56%
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PACIFIC RIM EMERGING MARKETS TRUST --------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III -------------------------------------------------------- -------------------------- ----------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003* -------------------------------------------------------- DECEMBER 31, TO TO 2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- ---------- ---------- -------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.81 $ 6.65 $ 8.20 $ 10.88 $ 6.83 $ 5.81 $ 6.63 $ 7.35 Income from investment operations: - ---------------------- Net investment income (loss) 0.05 0.02 0.02 0.06 0.09 0.03 (0.02) (0.02) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.29 (0.85) (1.54) (2.70) 4.17 2.30 (0.79) 0.81 -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Total from investment operations 2.34 (0.83) (1.52) (2.64) 4.26 2.33 (0.81) 0.79 -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Less distributions: - ------------------- Dividends from net investment income (0.01) (0.01) (0.03) (0.04) (0.21) (0.02) (0.01) - -------- -------- ---------- ---------- -------- ------------ ----------- ----------- Total distributions (0.01) (0.01) (0.03) (0.04) (0.21) (0.02) (0.01) - -------- -------- ---------- ---------- -------- ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 8.14 $ 5.81 $ 6.65 $ 8.20 $ 10.88 $ 8.12 $ 5.81 $ 8.14 ======== ======== ========== ========== ======== ============ =========== =========== TOTAL RETURN(C) 40.37% (12.53%) (18.57%) (24.37%) 62.87% 40.17% (12.27%)+ 10.75%+ Net assets, end of period (000's) $66,612 $45,937 $55,981 $83,370 $94,753 $19,594 $4,287 $3 Ratio of expenses to average net assets 1.28% 1.23% 1.23% 1.03% 1.11% 1.48% 1.43%(A) 22.22%(A) Ratio of expenses to average net assets after expense reductions 1.28% 1.23% 1.23% 1.03% 1.11% 1.48% 1.43%(A) 1.63%(A) Ratio of net investment income (loss) to average net assets 0.80% 0.24% 0.32% 0.61% 0.90% 0.38% (0.28%)(A) (0.74%)(A) Portfolio turnover rate 57% 28% 76% 55% 42% 57% 28% 57%
@ Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized & The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were 1.18% and 1.15% for Series I and 1.38% and 1.35% for Series II, respectively. ++ The portfolio turnover rate does not include the assets acquired in the merger. (A) Annualized (B) The total return for the years ended 2003, 2002, 2001 and 2000 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 139 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
HEALTH SCIENCES TRUST ------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 4/30/2001* YEAR END 1/28/2002* 9/05/2003* ------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.83 $ 13.54 $ 12.50 $ 9.83 $ 12.90 $ 12.64 Income from investment operations: - ---------------------- Net investment income (loss) (0.10) (0.08) (0.07) (0.12) (0.09) (0.05) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.66 (3.60) 1.11 3.65 (2.95) 0.80 -------- -------- -------- -------- -------- -------- Total from investment operations 3.56 (3.68) 1.04 3.53 (3.04) 0.75 -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Distributions from capital gains - (0.03) - - (0.03) - -------- -------- -------- -------- -------- -------- Total distributions - (0.03) - - (0.03) - -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.39 $ 9.83 $ 13.54 $ 13.36 $ 9.83 $ 13.39 ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 36.22% (27.24%) 8.32%+ 35.91% (23.63%)+ 5.93%+ Net assets, end of period (000's) $100,829 $62,075 $51,568 $53,916 $15,924 $37 Ratio of expenses to average net assets 1.23% 1.25% 1.45%(A) 1.43% 1.45%(A) 10.76%(A) Ratio of expenses to average net assets after expense reductions 1.21% 1.23% 1.44%(A) 1.41% 1.43%(A) 1.56%(A) Ratio of net investment income (loss) to average net assets (0.82%) (0.74%) (0.76%)(A) (1.04%) (1.02%)(A) (1.31%)(A) Portfolio turnover rate 44% 55% 81% 44% 55% 44%
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EMERGING GROWTH TRUST ------------------------------------------ SERIES I SERIES II SERIES III ------------ ------------ ------------ 5/5/2003* 5/5/2003* 9/5/2003* TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 15.61 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.09) (0.11) 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.95 3.95 0.74 -------- -------- ------- Total from investment operations 3.86 3.84 0.75 -------- -------- ------- Less distributions: - ------------------- Dividends from net investment income (0.61) (0.61) (0.61) -------- -------- ------- Total distributions (0.61) (0.61) (0.61) -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 15.75 $ 15.73 $ 15.75 ======== ======== ======= TOTAL RETURN(C) 30.84%+ 30.68%+ 4.77%+ Net assets, end of period (000's) $3,178 $6,080 - ## Ratio of expenses to average net assets 2.54%(A) 2.74%(A) 354.65%(A) Ratio of expenses to average net assets after expense reductions 1.35%(A) 1.55%(A) 1.70%(A) Ratio of net investment income (loss) to average net assets (0.89%)(A) (1.08%)(A) 0.19%(A) Portfolio turnover rate 183% 183% 183%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002 and the period ended December 31, 2001 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series I, Series II and Series III would have been lower, had operating expenses not been reduced. 140 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
AGGRESSIVE GROWTH TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $ 13.22 $ 17.86 $ 17.34 $ 13.04 $ 9.92 $ 12.90 $ 12.46 Income from investment operations: - ---------------------- Net investment income (loss) (0.09) (0.09) (0.11) (0.12) (0.06) (0.12) (0.12) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.45 (3.21) (4.53) 0.64 4.36 3.45 (2.86) 0.83 -------- -------- -------- -------- -------- -------- ------- ------- Total from investment operations 3.36 (3.30) (4.64) 0.52 4.30 3.33 (2.98) 0.82 -------- -------- -------- -------- -------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 13.28 $ 9.92 $ 13.22 $ 17.86 $ 17.34 $ 13.25 $ 9.92 $ 13.28 ======== ======== ======== ======== ======== ======== ======= ======= TOTAL RETURN 33.87% (24.96%) (25.98%) 3.00% 32.98% 33.57% (23.1%)+ 6.58%+ Net assets, end of period (000's) $261,138 $225,798 $309,746 $416,643 $135,503 $40,267 $17,322 -## Ratio of expenses to average net assets 1.09% 1.09% 1.07% 1.07% 1.15% 1.29% 1.29%(A) 1.44%(A) Ratio of net investment income (loss) to average net assets (0.81%) (0.80%) (0.73%) (0.61%) (0.59%) (1.03%) (1.27%)(A) (0.25%)(A) Portfolio turnover rate 71% 104% 96% 70% 161% 71% 104% 71%
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EMERGING SMALL COMPANY TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 18.45 $ 26.06 $ 35.02 $ 40.74 $ 23.82 $ 18.44 $ 25.13 $ 23.96 Income from investment operations: - ---------------------- Net investment income (loss) (0.12) (0.12) (0.08) (0.02) (0.09) (0.18) (0.11) (0.08) Net realized and unrealized gain (loss) on investments and foreign currency transactions 7.45 (7.49) (7.75) (1.33) 17.35 7.46 (6.58) 1.90 -------- -------- -------- -------- -------- -------- ------- ------- Total from investment operations 7.33 (7.61) (7.83) (1.35) 17.26 7.28 (6.69) 1.82 -------- -------- -------- -------- -------- -------- ------- ------- Less distributions: - ------------------- Distributions from capital gains - - (1.13) (4.37) (0.34) - - - -------- -------- -------- -------- -------- -------- ------- ------- Total distributions - - (1.13) (4.37) (0.34) - - - -------- -------- -------- -------- -------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $25.78 $18.45 $26.06 $35.02 $40.74 $25.72 $18.44 $25.78 ======== ======== ======== ======== ======== ======== ======= ======= TOTAL RETURN(B) 39.73% (29.20%) (22.24%) (4.30%) 73.53% 39.48% (26.62%)+ 7.60%+ Net assets, end of period (000's) $401,433 $293,594 $447,673 $573,471 $453,152 $82,836 $17,791 $1 Ratio of expenses to average net assets 1.11% 1.12% 1.12% 1.10% 1.12% 1.31% 1.32%(A) 20.19%(A) Ratio of expenses to average net assets after expense reductions 1.11% 1.12% 1.12% 1.10% 1.12% 1.31% 1.32%(A) 1.46%(A) Ratio of net investment income (loss) to average net assets (0.58%) (0.57%) (0.30%) (0.04%) (0.35%) (0.82%) (0.63%)(A) (0.98%)(A) Portfolio turnover rate 51% 35% 48% 23% 136% 51% 35% 51%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized ## Amount is less than $1,000 (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 141 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
SMALL COMPANY BLEND TRUST ---------------------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------------------- --------------------------- YEAR YEARS ENDED DECEMBER 31, 05/01/1999* ENDED 1/28/2002* -------------------------------------------------- TO DECEMBER 31, TO 2003-- 2002-- 2001-- 2000-- 12/31/1999 2003-- 12/31/2002-- ------------------ -------- -------- ------- ----------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.16 $ 10.98 $ 11.31 $ 15.76 $ 12.50 $ 8.15 $ 10.69 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.01) - # 0.03 - # (0.01) (0.03) 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.25 (2.80) (0.30) (3.11) 3.58 3.26 (2.53) -------- -------- -------- ------- ------- ------- ------- Total from investment operations 3.24 (2.80) (0.27) (3.11) 3.57 3.23 (2.52) -------- -------- -------- ------- ------- ------- ------- Less distributions: - ------------------- Dividends from net investment income - (0.02) - - - - (0.02) Distributions from capital gains - - (0.06) (1.34) (0.31) - - -------- -------- -------- ------- ------- ------- ------- Total distributions - (0.02) (0.06) (1.34) (0.31) - (0.02) -------- -------- -------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 11.40 $ 8.16 $ 10.98 $ 11.31 $ 15.76 $ 11.38 $ 8.15 ======== ======== ======== ======= ======= ======= ======= TOTAL RETURN 39.71% (25.55%) (2.31%) (19.74%) 28.56%+ 39.63% (23.63%)+ Net assets, end of period (000's) $150,801 $106,357 $161,250 $95,123 $53,514 $59,724 $16,014 Ratio of expenses to average net assets 1.15% 1.15% 1.17% 1.19% 1.30%(A) 1.35% 1.35%(A) Ratio of net investment income (loss) to average net assets (0.08%) (0.04%) 0.29% (0.01%) (0.12%)(A) (0.29%) 0.12%(A) Portfolio turnover rate 37% 48% 39% 49% 28% 37% 48%
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DYNAMIC GROWTH TRUST ------------------------------------------------------------------------------------ SERIES I SERIES II ------------------------------------------------------ --------------------------- YEAR YEARS ENDED DECEMBER 31, 5/1/2000* ENDED 1/28/2002* --------------------------------------- TO DECEMBER 31, TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- ------------------ ------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 3.41 $ 4.76 $ 7.98 $ 12.50 $ 3.40 $ 4.40 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.03) (0.02) (0.02) 0.02 (0.03) (0.03) Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.02 (1.33) (3.19) (4.54) 1.02 (0.97) -------- ------- -------- -------- ------- ------ Total from investment operations 0.99 (1.35) (3.21) (4.52) 0.99 (1.00) -------- ------- -------- -------- ------- ------ Less distributions: - ------------------- Dividends from net investment income - - (0.01) - - - -------- ------- -------- -------- ------- ------ Total distributions - - (0.01) - - - -------- ------- -------- -------- ------- ------ NET ASSET VALUE, END OF PERIOD $ 4.40 $ 3.41 $ 4.76 $ 7.98 $ 4.39 $ 3.40 ======== ======= ======== ======== ======= ====== TOTAL RETURN 29.03% (28.36%) (40.24%) (36.16%)+ 29.12% (22.73%)+ Net assets, end of period (000's) $140,190 $63,745 $132,709 $135,758 $41,792 $4,242 Ratio of expenses to average net assets 1.09%@ 1.10% 1.08% 1.07%(A) 1.29%@ 1.30%(A) Ratio of net investment income (loss) to average net assets (0.68%) (0.55%) (0.43%) 0.35%(A) (0.88%) (0.81%)(A) Portfolio turnover rate 133%++ 165% 180% 80% 133%++ 165%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized @ The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were 1.08% for Series I and 1.28% for Series II. ++ The portfolio turnover rate does not include the assets acquired in the merger. 142 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
MID CAP STOCK TRUST -------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ------------------------------------------------------- -------------------------- ----------- YEAR ENDED YEARS ENDED DECEMBER 31, 05/01/1999* DECEMBER 31, 1/28/2002* 9/05/2003* ----------------------------------------- TO ------------ TO TO 2003@ 2002@ 2001@ 2000@ 12/31/1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- -------- -------- ----------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.34 $ 10.77 $ 12.10 $ 12.60 $ 12.50 $ 8.34 $ 10.64 $ 10.75 Income from investment operations: - ---------------------- Net investment income (loss) (0.05) (0.05) (0.04) (0.01) (0.01) (0.08) (0.05) (0.04) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.58 (2.38) (1.29) (0.49) 0.11 3.58 (2.25) 1.16 -------- -------- -------- -------- -------- ------------ ----------- ----------- Total from investment operations 3.53 (2.43) (1.33) (0.50) 0.10 3.50 (2.30) 1.12 -------- -------- -------- -------- -------- ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 11.87 $ 8.34 $ 10.77 $ 12.10 $ 12.60 $ 11.84 $ 8.34 $ 11.87 ======== ======== ======== ======== ======== ============ =========== =========== TOTAL RETURN(B) 42.33% (22.56%) (10.99%) (3.97%) 0.80%+ 41.97% (21.62%)+ 10.42%+ Net assets, end of period (000's) $260,191 $186,950 $153,732 $122,350 $99,504 $116,299 $31,611 $6 Ratio of expenses to average net assets 0.99% 1.00% 1.00% 1.00% 1.03%(A) 1.19% 1.20%(A) 39.49%(A) Ratio of expenses to average net assets after expense reductions 0.99% 1.00% 1.00% 1.00% 1.03%(A) 1.19% 1.20%(A) 1.34%(A) Ratio of net investment income (loss) to average net assets (0.55%) (0.53%) (0.36%) (0.11%) (0.15%)(A) (0.75%) (0.70%)(A) (1.05%)(A) Portfolio turnover rate 132% 128% 170% 300% 36% 132% 128% 132%
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NATURAL RESOURCES TRUST --------------------------------------- SERIES I SERIES II SERIES III ----------- ----------- ----------- 05/05/2003* 05/05/2003* 09/05/2003* TO TO TO 12/31/2003@ 12/31/2003@ 12/31/2003@ ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.72 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.05 0.02 (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.45 5.46 3.29 -------- -------- -------- Total from investment operations 5.50 5.48 3.28 -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 18.00 $ 17.98 $ 18.00 ======== ======== ======== TOTAL RETURN(B) 44.00%+ 43.84%+ 22.28%+ Net assets, end of period (000's) $90,099 $74,882 $2 Ratio of expenses to average net assets 1.21%(A) 1.41%(A) 45.65%(A) Ratio of expenses to average net assets after expense reductions 1.21%(A) 1.41%(A) 1.56%(A) Ratio of net investment income (loss) to average net assets 0.54%(A) 0.23%(A) (0.20%)(A) Portfolio turnover rate 23% 23% 23%
@ Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 143 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
ALL CAP GROWTH TRUST ----------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- -------------------------- ----------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 09/05/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- -------- -------- -------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.15 $ 14.75 $ 20.65 $ 24.89 $ 19.77 $ 11.14 $ 14.49 $ 13.48 Income from investment operations: - ---------------------- Net investment income (loss) (0.05) (0.06) (0.06) (0.09) (0.08) (0.07) (0.06) (0.03) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.31 (3.54) (4.81) (2.32) 7.87 3.30 (3.29) 0.96 -------- -------- -------- -------- -------- ------------ ----------- ----------- Total from investment operations 3.26 (3.60) (4.87) (2.41) 7.79 3.23 (3.35) 0.93 -------- -------- -------- -------- -------- ------------ ----------- ----------- Less distributions: - ------------------- Distributions from capital gains - - (1.03) (1.83) (2.67) - - - -------- -------- -------- -------- -------- ------------ ----------- ----------- Total distributions - - (1.03) (1.83) (2.67) - - - -------- -------- -------- -------- -------- ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 14.41 $ 11.15 $ 14.75 $ 20.65 $ 24.89 $ 14.37 $ 11.14 $ 14.41 ======== ======== ======== ======== ======== ============ =========== =========== TOTAL RETURN 29.24% (24.41%) (23.77%) (10.79%) 44.69% 28.99% (23.12%)+ 6.90%+ Net assets, end of period (000's) $520,181 $456,752 $637,879 $873,214 $662,674 $87,300 $24,896 $2 Ratio of expenses to average net assets 1.01% 1.02% 1.01% 1.00% 1.03% 1.21% 1.22%(A) 1.36%(A) Ratio of net investment income (loss) to average net assets (0.38%) (0.43%) (0.39%) (0.37%) (0.46%) (0.58%) (0.54%)(A) (0.61%)(A) Portfolio turnover rate 58% 80% 69% 103% 193% 58% 80% 58%
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STRATEGIC OPPORTUNITIES TRUST --------------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------------- -------------------------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* ---------------------------------------------------------- DECEMBER 31, TO 2003@ 2002@ 2001@ 2000@ 1999@ 2003@ 12/31/2002@ -------- -------- ---------- ---------- ---------- ------------ ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.74 $ 12.64 $ 17.52 $ 21.90 $ 19.48 $ 7.73 $ 11.99 Income from investment operations: - ---------------------- Net investment income (loss) 0.01 (0.03) (0.02) 0.08 0.07 (0.01) -# Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.99 (4.87) (2.47) (1.20) 4.75 1.99 (4.26) -------- -------- ---------- ---------- ---------- ------------ ----------- Total from investment operations 2.00 (4.90) (2.49) (1.12) 4.82 1.98 (4.26) -------- -------- ---------- ---------- ---------- ------------ ----------- Less distributions: - ------------------- Dividends from net investment income - - (0.08) (0.07) (0.09) - - Distributions from capital gains - - (2.31) (3.19) (2.31) - - -------- -------- ---------- ---------- ---------- ------------ ----------- Total distributions - - (2.39) (3.26) (2.40) - - -------- -------- ---------- ---------- ---------- ------------ ----------- NET ASSET VALUE, END OF PERIOD $ 9.74 $ 7.74 $ 12.64 $ 17.52 $ 21.90 $ 9.71 $ 7.73 ======== ======== ========== ========== ========== ============ =========== TOTAL RETURN 25.84% (38.77%) (15.25%) (6.37%) 27.75% 25.61% (35.53%)+ Net assets, end of period (000's) $533,891 $513,567 $1,057,285 $1,425,677 $1,673,228 $22,968 $9,181 Ratio of expenses to average net assets 0.93% 0.92% 0.91% 0.90% 0.88% 1.13% 1.12%(A) Ratio of net investment income (loss) to average net assets 0.10% (0.28%) (0.12%) 0.41% 0.34% (0.13%) 0.02%(A) Portfolio turnover rate 185% 229% 260% 165% 129% 185% 229%
@ Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized 144 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
Financial Services Trust --------------------------------------------------------------------------------------------------- Series I Series II Series III ------------------------------------------------------ --------------------------- ------------ Years Ended December 31, 4/30/2001* YEAR ENDED 1/28/2002* 9/05/2003* --------------------------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- ------------------ ------------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.55 $ 11.63 $ 12.50 $ 9.54 $ 11.48 $ 11.28 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 0.03 0.01 0.04 0.03 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.14 (2.11) (0.88) 3.14 (1.97) 1.41 ------------------ ------------------ -------- -------- -------- -------- Total from investment operations 3.20 (2.08) (0.87) 3.18 (1.94) 1.45 ------------------ ------------------ -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.02) -# -# (0.03) -# - ------------------ ------------------ -------- -------- -------- -------- Total distributions (0.02) -# -# (0.03) -# - ------------------ ------------------ -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.73 $ 9.55 $ 11.63 $ 12.69 $ 9.54 $ 12.73 ================== ================== ======== ======== ======== ======== TOTAL RETURN(B) 33.58% (17.88%) (6.93%)+ 33.40% (16.90%)+ 12.85%+ Net assets, end of period (000's) $52,467 $37,132 $24,840 $36,337 $12,138 -## Ratio of expenses to average net assets 1.05% 1.07% 1.21%(A) 1.25% 1.27%(A) 186.33%(A) Ratio of expenses to average net assets after expense reductions 1.05% 1.07% 1.21%(A) 1.25% 1.27%(A) 1.40%(A) Ratio of net investment income (loss) to average net assets 0.58% 0.31% 0.08%(A) 0.37% 0.37%(A) 0.97%(A) Portfolio turnover rate 25% 34% 53% 25% 34% 25%
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INTERNATIONAL STOCK TRUST ----------------------------------------------------------------------------- SERIES I SERIES II -------------------------------------------------------------- ------------ YEAR YEARS ENDED DECEMBER 31, ENDED -------------------------------------------------------------- DECEMBER 31, 2003-- 2002-- 2001-- 2000-- 1999 2003-- ---------- ---------- ---------- ---------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.48 $ 9.59 $ 12.81 $ 15.43 $ 12.98 $ 7.48 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.08 0.07 0.04 0.01 0.08 0.05 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.17 (2.14) (2.75) (2.56) 3.76 2.20 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 2.25 (2.07) (2.71) (2.55) 3.84 2.25 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions: - ------------------- Dividends from net investment income (0.04) (0.04) (0.02) - (0.07) (0.05) Distributions from capital gains - - (0.49) (0.07) (1.32) - ---------- ---------- ---------- ---------- ---------- ---------- Total Distributions (0.04) (0.04) (0.51) (0.07) (1.39) (0.05) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 9.69 $ 7.48 $ 9.59 $ 12.81 $ 15.43 $ 9.68 ========== ========== ========== ========== ========== ========== TOTAL RETURN(C) 30.27% (21.69%) (21.54%) (16.57%) 29.71% 30.26% Net assets, end of period (000's) $289,227 $246,794 $265,353 $298,054 $231,729 $99,529 Ratio of expenses to average net assets 1.17% 1.18% 1.22% 1.24% 1.25% 1.37% Ratio of expenses to average net assets after expense reductions 1.17% 1.17% 1.21% 1.23% 1.25% 1.37% Ratio of net investment income (loss) to average net assets 1.07% 0.77% 0.42% 0.10% 0.58% 0.65% Portfolio turnover rate 159% 78% 31% 39% 39% 159% INTERNATIONAL STOCK TRUST --------------------------- SERIES II SERIES III ------------ ------------ 1/28/2002* 9/05/2003* TO TO 12/31/2002-- 12/31/2003-- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $ 8.42 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.01) (0.02) Net realized and unrealized gain (loss) on investments and foreign currency transactions (2.39) 1.29 ---------- -------- Total from investment operations (2.40) 1.27 ---------- -------- Less distributions: - ------------------- Dividends from net investment income (0.04) - Distributions from capital gains - - ---------- -------- Total Distributions (0.04) - ---------- -------- NET ASSET VALUE, END OF PERIOD $ 7.48 $ 9.69 ========== ======== TOTAL RETURN(C) (24.29%)+ 15.08%+ Net assets, end of period (000's) $32,674 $2 Ratio of expenses to average net assets 1.38%(A) 1.52%(A) Ratio of expenses to average net assets after expense reductions 1.37%(A) 1.52%(A) Ratio of net investment income (loss) to average net assets (0.20%)(A) (0.58%)(A) Portfolio turnover rate 78% 159%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the years ended 2002, 2001 and 2000 for Series I and for the period ended December 31, 2002 for Series II would have been lower, had operating expenses not been reduced. 145 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
OVERSEAS TRUST -------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ------------------------------------------------------- --------------------------- ------------ YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003* ------------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- --------- --------- --------- --------- --------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 6.69 $ 8.56 $ 11.91 $ 15.92 $ 11.33 $ 6.69 $ 8.25 $ 8.24 Income from investment operations: - ---------------------- Net investment income (loss) 0.04 0.03 0.07 0.05 0.08 0.01 (0.02) (0.02) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.87 (1.86) (2.47) (2.84) 4.51 2.89 (1.50) 1.35 -------- --------- --------- --------- --------- ----------- -------- -------- Total from investment operations 2.91 (1.83) (2.40) (2.79) 4.59 2.90 (1.52) 1.33 -------- --------- --------- --------- --------- ----------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.03) (0.04) (0.03) (0.13) - (0.04) (0.04) - Distributions from capital gains - - (0.92) (1.09) - - - - -------- --------- --------- --------- --------- ----------- -------- -------- Total distributions (0.03) (0.04) (0.95) (1.22) - (0.04) (0.04) - -------- --------- --------- --------- --------- ----------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.57 $ 6.69 $ 8.56 $ 11.91 $ 15.92 $ 9.55 $ 6.69 $ 9.57 ======== ========= ========= ========= ========= =========== ======== ======== TOTAL RETURN 43.83% (21.44%) (21.10%) (18.72%) 40.51% 43.71% (18.49%)+ 16.14%+ Net assets, end of period (000's) $364,179 $298,843 $428,911 $488,582 $404,223 $96,010 $27,680 $5 Ratio of expenses to average net assets 1.13% 1.10% 1.10% 1.15% 1.21% 1.33% 1.30%(A) 1.48%(A) Ratio of net investment income (loss) to average net assets 0.51% 0.37% 0.76% 0.40% 0.73% 0.19% (0.24%)(A) (0.67%)(A) Portfolio turnover rate 103% 81% 100% 142% 147% 103% 81% 103%
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INTERNATIONAL SMALL CAP TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.41 $ 11.30 $ 16.40 $ 28.16 $ 15.28 $ 9.41 $ 11.35 $ 12.69 Income from investment operations: - ---------------------- Net investment income (loss) 0.08 (0.04) -# (0.15) (0.07) 0.05 (0.07) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.07 (1.85) (5.10) (6.33) 13.00 5.08 (1.87) 1.88 -------- -------- -------- -------- -------- ------- -------- -------- Total from investment operations 5.15 (1.89) (5.10) (6.48) 12.93 5.13 (1.94) 1.87 -------- -------- -------- -------- -------- ------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - - - - (0.05) - - - Distributions from capital gains - - - (5.28) - - - - -------- -------- -------- -------- -------- ------- -------- -------- Total distributions - - - (5.28) (0.05) - - - -------- -------- -------- -------- -------- ------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.56 $ 9.41 $ 11.30 $ 16.40 $ 28.16 $ 14.54 $ 9.41 $ 14.56 ======== ======== ======== ======== ======== ======= ======== ======== TOTAL RETURN(B) 54.73% (16.73%) (31.10%) (29.16%) 84.92% 54.52% (17.09%)+ 14.74%+ Net assets, end of period (000's) $245,603 $100,006 $146,451 $257,406 $239,961 $73,655 $4,848 $9 Ratio of expenses to average net assets 1.32% 1.57% 1.60% 1.54% 1.37% 1.52% 1.77%(A) 15.64%(A) Ratio of expenses to average net assets after expense reductions 1.32% 1.57% 1.60% 1.54% 1.37% 1.52% 1.77%(A) 1.59%(A) Ratio of net investment income (loss) to average net assets 0.66% (0.40)% (0.01)% (0.67)% (0.41)% 0.41% (0.73%)(A) (0.19%)(A) Portfolio turnover rate 140% 501% 721% 529% 309% 140% 501% 140%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 146 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
INTERNATIONAL VALUE TRUST -------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ------------------------------------------------------- -------------------------- ----------- YEAR YEARS ENDED DECEMBER 31, 05/01/1999* ENDED 1/28/2002* 9/05/2003* ----------------------------------------- TO DECEMBER 31, TO TO 2003@ 2002@ 2001@ 2000@ 12/31/1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- -------- -------- ----------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.60 $ 10.54 $ 12.06 $ 12.98 $ 12.50 $ 8.60 $ 10.31 $ 10.79 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.21 0.14 0.14 0.20 0.08 0.18 0.01 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.60 (2.01) (1.34) (1.04) 0.40 3.60 (1.65) 1.53 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 3.81 (1.87) (1.20) (0.84) 0.48 3.78 (1.64) 1.54 -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions - ------------------- Dividends from net investment income (0.08) (0.07) (0.12) (0.05) - (0.09) (0.07) - Distributions from capital gains - - (0.20) (0.03) - - - - -------- -------- -------- -------- -------- -------- -------- -------- Total Distributions (0.08) (0.07) (0.32) (0.08) - (0.09) (0.07) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.33 $ 8.60 $ 10.54 $ 12.06 $ 12.98 $ 12.29 $ 8.60 $ 12.33 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 44.86% (17.84%) (9.97%) (6.46%) 3.84%+ 44.52% (16.00%)+ 14.27%+ Net assets, end of period (000's) $267,454 $228,882 $208,230 $158,511 $100,970 $138,365 $50,353 $1 Ratio of expenses to average net assets 1.13% 1.12% 1.15% 1.18% 1.23%(A) 1.33% 1.32%(A) 1.48%(A) Ratio of expenses to average net assets after expense reductions 1.12% 1.12% 1.15% 1.18% 1.23%(A) 1.32% 1.32%(A) 1.47%(A) Ratio of net investment income (loss) to average net assets 2.18% 1.45% 1.32% 1.63% 1.27%(A) 1.78% 0.09%(A) 0.28%(A) Portfolio turnover rate 51% 26% 33% 41% 4% 51% 26% 51%
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QUANTITATIVE MID CAP TRUST ------------------------------------------------------------------------ SERIES I SERIES II ------------------------------------------ --------------------------- YEARS ENDED DECEMBER 31, 4/30/2001* YEAR ENDED 1/28/2002* --------------------------- TO DECEMBER 31, TO 2003@ 2002@ 12/31/2001@ 2003@ 12/31/2002@ ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.89 $ 10.20 $ 12.50 $ 7.88 $ 10.03 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.01) (0.01) - # (0.03) (0.02) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.05 (2.30) (2.30) 3.05 (2.13) -------- -------- -------- -------- -------- Total from investment operations 3.04 (2.31) (2.30) 3.02 (2.15) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.93 $ 7.89 $ 10.20 $ 10.90 $ 7.88 ======== ======== ======== ======== ======== TOTAL RETURN 38.53% (22.65%) (18.40)%+ 38.32% (21.44%)+ Net assets, end of period (000's) $110,382 $78,053 $99,546 $7,286 $2,208 Ratio of expenses to average net assets 0.90% 0.90% 0.90%(A) 1.10% 1.10%(A) Ratio of net investment Income (loss) to average net assets (0.10%) (0.07%) (0.07%)(A) (0.30%) (0.31%)(A) Portfolio turnover rate 107% 273% 320% 107% 273%
@ Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the year ended 2003 for Series I and Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 147 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
MID CAP CORE TRUST --------------------------------------- SERIES I SERIES II SERIES III ----------- ----------- ----------- 5/05/2003* 5/05/2003* 9/05/2003* TO TO TO 12/31/2003@ 12/31/2003@ 12/31/2003@ ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.47 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.01) (0.03) 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.83 2.83 0.81 -------- -------- -------- Total from investment operations 2.82 2.80 0.85 -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.32 $ 15.30 $ 15.32 ======== ======== ======== TOTAL RETURN 22.56%+ 22.40%+ 5.87%+ Net assets, end of period (000's) $19,539 $29,798 - ## Ratio of expenses to average net assets 1.21%(A) 1.41%(A) 1.56%(A) Ratio of net investment income (loss) to average net assets (0.08%)(A) (0.27%)(A) 0.76%(A) Portfolio turnover rate 22% 22% 22%
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GLOBAL EQUITY TRUST ---------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III --------------------------------------------------- -------------------------- ----------- 1/28/2002* 9/05/2003* YEAR ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, --------------------------------------------------- ------------ TO TO 2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ 12/31/2003@ -------- -------- -------- -------- ------- ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 13.00 $ 18.48 $ 18.79 $ 20.38 $ 10.39 $ 12.72 $ 12.02 Income from investment operations: - ---------------------- Net investment income (loss) 0.10 0.08 0.12 0.25 0.23 0.08 0.05 0.06 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.72 (2.54) (2.78) 1.78 0.38 2.71 (2.23) 1.03 -------- -------- -------- -------- ------- ------------ ----------- ----------- Total from investment operations 2.82 (2.46) (2.66) 2.03 0.61 2.79 (2.18) 1.09 -------- -------- -------- -------- ------- ------------ ----------- ----------- Less distributions: - ------------------- Dividends from net investment income (0.10) (0.15) (0.40) (0.35) (0.13) (0.11) (0.15) - Distributions from capital gains - - (2.42) (1.99) (2.07) - - - -------- -------- -------- -------- ------- ------------ ----------- ----------- Total distributions (0.10) (0.15) (2.82) (2.34) (2.20) (0.11) (0.15) - -------- -------- -------- -------- ------- ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 13.11 $ 10.39 $ 13.00 $ 18.48 $ 18.79 $ 13.07 $ 10.39 $ 13.11 ======== ======== ======== ======== ======= ============ =========== =========== TOTAL RETURN(B) 27.46% (19.11%) (16.09%) 12.19% 3.66% 27.23% (17.33%)+ 9.07%+ Net assets, end of period (000's) $363,134 $347,619 $528,027 $725,419 $837,728 $19,672 $8,503 - ## Ratio of expenses to average net assets 1.05% 1.04% 1.01% 1.02% 1.06% 1.25% 1.24%(A) 345.59%(A) Ratio of expenses to average net assets after expense reductions 1.05% 1.04% 1.01% 1.02% 1.06% 1.25% 1.24%(A) 1.40%(A) Ratio of net investment income (loss) to average net assets 0.93% 0.72% 0.81% 1.44% 1.14% 0.68% 0.55%(A) 1.38%(A) Portfolio turnover rate 149% 92% 156% 43% 43% 149% 92% 149%
@ Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 148 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
STRATEGIC GROWTH TRUST ----------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III -------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ----------------------------- 4/30/2001* ENDED 1/28/2002* 9/05/2003* TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- ------------------ -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.93 $ 11.02 $ 12.50 $ 7.93 $ 10.58 $ 9.64 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.01) (0.02) (0.01) (0.03) (0.02) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.14 (3.07) (1.47) 2.14 (2.63) 0.43 -------- -------- -------- -------- -------- -------- Total from investment operations 2.13 (3.09) (1.48) 2.11 (2.65) 0.42 -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.06 $ 7.93 $ 11.02 $ 10.04 $ 7.93 $ 10.06 ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 26.86% (28.04%) (11.84%)+ 26.61% (25.05%)+ 4.36%+ Net assets, end of period (000's) $175,020 $132,098 $91,393 $86,609 $25,425 $2 Ratio of expenses to average net assets 0.99% 1.01% 1.10%(A) 1.19% 1.21%(A) 52.48%(A) Ratio of expenses to average net assets after expense reductions 0.99% 1.01% 1.10%(A) 1.19% 1.21%(A) 1.34%(A) Ratio of net investment income (loss) to average net assets (0.09%) (0.22%) (0.19%)(A) (0.29%) (0.23%)(A) (0.18%)(A) Portfolio turnover rate 77% 91% 107% 77% 91% 77%
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CAPITAL APPRECIATION TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 11/1/2000* YEAR ENDED 1/28/2002* 9/05/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 6.21 $ 8.95 $ 10.97 $ 12.50 $ 6.20 $ 8.73 $ 7.62 Income from investment operations: - ---------------------- Net investment income (loss) (0.01) (0.01) (0.02) - # (0.03) (0.02) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.84 (2.73) (2.00) (1.53) 1.85 (2.51) 0.43 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 1.83 (2.74) (2.02) (1.53) 1.82 (2.53) 0.42 -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.04 $ 6.21 $ 8.95 $ 10.97 $ 8.02 $ 6.20 $ 8.04 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 29.47% (30.61%) (18.41%) (12.24%)+ 29.35% (28.98%)+ 5.51%+ Net assets, end of period (000's) $120,859 $100,415 $40,202 $5,280 $72,208 $22,698 $2 Ratio of expenses to average net assets 0.99% 1.05% 1.20% 1.60%(A) 1.19% 1.25%(A) 1.34%(A) Ratio of expenses to average net assets after expense reductions 0.99% 1.05% 1.20% 1.40%(A) 1.19% 1.25%(A) 1.34%(A) Ratio of net investment income (loss) to average net assets (0.13%) (0.14%) (0.22%) (0.21%)(A) (0.35%) (0.27%)(A) (0.38%)(A) Portfolio turnover rate 71% 67% 102% 143% 71% 67% 71%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2000 for Series I would have been lower, had operating expenses not been reduced. 149 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
QUANTITATIVE ALL CAP TRUST --------------------------------------------------- SERIES I SERIES II SERIES III --------------- --------------- --------------- 5/05/2003* 5/05/2003* 9/05/2003* TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- --------------- --------------- --------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.08 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.02 - # 0.06 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.04 3.05 1.41 -------- -------- ------- Total from investment operations 3.06 3.05 1.47 -------- -------- ------- Less distributions: - -------------------- Dividends from net investment income (0.51) (0.50) (0.50) -------- -------- ------- Total distributions (0.51) (0.50) (0.50) -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 15.05 $ 15.05 $ 15.05 ======== ======== ======= TOTAL RETURN(B) 24.49%+ 24.38%+ 10.42%+ Net assets, end of period (000's) $2,141 $2,542 - ## Ratio of expenses to average net assets 2.59%(A) 2.81%(A) 347.32%(A) Ratio of expenses to average net assets after expense reductions 1.30%(A) 1.50%(A) 1.65%(A) Ratio of net investment income (loss) to average net assets 0.18%(A) (0.02%)(A) 1.30%(A) Portfolio turnover rate 96% 96% 96%
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ALL CAP CORE TRUST (FORMERLY, GROWTH TRUST) ---------------------------------------------------------------------------------- SERIES II SERIES I --------------------------- ---------------------------------------------------- YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* ---------------------------------------------------- DECEMBER 31, TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- -------- -------- -------- -------- -------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.43 $ 13.95 $ 17.74 $ 26.88 $ 20.50 $ 10.43 $ 13.64 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 (0.02) (0.06) (0.06) (0.04) 0.03 (0.02) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.23 (3.50) (3.73) (6.47) 7.46 3.23 (3.19) -------- -------- -------- -------- -------- -------- -------- Total from investment operations 3.29 (3.52) (3.79) (6.53) 7.42 3.26 (3.21) -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - - - - (0.05) - - Distribution from capital gains - - - (2.61) (0.99) - - -------- -------- -------- -------- -------- -------- -------- Total distributions - - - (2.61) (1.04) - - -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.72 $ 10.43 $ 13.95 $ 17.74 $ 26.88 $ 13.69 $ 10.43 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN 31.54% (25.23%) (21.36%) (27.29%) 37.20% 31.26% (23.53%)+ Net assets, end of period (000's) $264,170 $243,484 $494,523 $637,194 $642,948 $10,246 $4,296 Ratio of expenses to average net assets 0.93% 0.91% 0.91% 0.90% 0.90% 1.13% 1.11%(A) Ratio of net investment income (loss) to average net assets 0.49% (0.20%) (0.41%) (0.26%) (0.18%) 0.29% (0.19%)(A) Portfolio turnover rate 183% 153% 121% 147% 156% 183% 153%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series I, Series II and Series III would have been lower, had operating expenses not been reduced. 150 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
LARGE CAP GROWTH TRUST --------------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------------- -------------------------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* ---------------------------------------------------------- DECEMBER 31, TO 2003@ 2002@ 2001@ 2000@ 1999 2003@ 12/31/2002@ -------- -------- ---------- ---------- ---------- ------------ ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.61 $ 9.89 $ 12.58 $ 17.23 $ 15.26 $ 7.60 $ 9.79 Income from investment operations: - ---------------------- Net investment income (loss) 0.03 0.02 0.03 (0.01) 0.06 0.01 0.02 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.89 (2.27) (2.25) (2.03) 3.52 1.90 (2.18) -------- -------- ---------- ---------- ---------- ------------ ----------- Total from investment operations 1.92 (2.25) (2.22) (2.04) 3.58 1.91 (2.16) -------- -------- ---------- ---------- ---------- ------------ ----------- Less distributions: - ------------------- Dividends from net investment income (0.02) (0.03) - (0.04) (0.23) (0.03) (0.03) Distributions from capital gains - - (0.47) (2.57) (1.38) - - -------- -------- ---------- ---------- ---------- ------------ ----------- Total distributions (0.02) (0.03) (0.47) (2.61) (1.61) (0.03) (0.03) -------- -------- ---------- ---------- ---------- ------------ ----------- NET ASSET VALUE, END OF PERIOD $ 9.51 $ 7.61 $ 9.89 $ 12.58 $ 17.23 $ 9.48 $ 7.60 ======== ======== ========== ========== ========== ============ =========== TOTAL RETURN 25.33% (22.83%) (17.81%) (14.24%) 25.28% 25.24% (22.15%)+ Net assets, end of period (000's) $414,672 $370,765 $496,049 $541,693 $402,585 $85,866 $31,496 Ratio of expenses to average net assets 0.97% 0.98% 0.95% 0.94% 0.94% 1.17% 1.18%(A) Ratio of net investment income (loss) to average net assets 0.31% 0.26% 0.30% (0.01%) 0.45% 0.12% 0.27%(A) Portfolio turnover rate 62% 92% 123% 92% 164% 62% 92%
@ Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized 151 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
BLUE CHIP GROWTH TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.99 $ 15.83 $ 20.13 $ 21.64 $ 18.92 $ 11.98 $ 15.53 $ 14.36 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.02 0.01 - # (0.02) 0.01 - # - # 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.48 (3.85) (2.97) (0.50) 3.58 3.47 (3.55) 1.11 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 3.50 (3.84) (2.97) (0.52) 3.59 3.47 (3.55) 1.12 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.01) - - (0.01) (0.05) (0.02) - - Distributions from capital gains - - (1.33) (0.98) (0.82) - - - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.01) - (1.33) (0.99) (0.87) (0.02) - - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.48 $ 11.99 $ 15.83 $ 20.13 $ 21.64 $ 15.43 $ 11.98 $ 15.48 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN (B) 29.17% (24.26%) (14.61%) (2.76%) 19.43% 29.02% (22.86%)+ 7.80%+ Net assets, end of period (000's) $1,290,525 $1,092,775 $1,633,194 $1,999,039 $1,734,233 $204,653 $61,375 $6 Ratio of expenses to average net assets 0.92% 0.93% 0.93% 0.92% 0.94% 1.12% 1.13%(A) 19.68%(A) Ratio of expenses to average net assets after expense reductions 0.90% 0.91% 0.92% 0.91% 0.94% 1.10% 1.11%(A) 1.25%(A) Ratio of net investment income (loss) to average net assets 0.15% 0.05% 0.00% (0.07%) 0.06% (0.03%) (0.01%)(A) 0.12%(A) Portfolio turnover rate 35% 39% 48% 48% 42% 35% 39% 35%
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U.S. LARGE CAP TRUST (FORMERLY, U.S. LARGE CAP VALUE TRUST) ------------------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III ------------------------------------------------------- ---------------------------- ------------- YEARS ENDED DECEMBER 31, 05/01/1999* YEAR ENDED 1/28/2002* 9/05/2003* ----------------------------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 12/31/1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- ----------- ------------ ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.41 $ 12.61 $ 13.09 $ 12.84 $ 12.50 $ 9.41 $ 12.35 $11.72 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.05 0.05 0.04 0.07 0.04 0.02 0.03 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.42 (3.22) (0.38) 0.29 0.30 3.41 (2.94) 1.11 -------- -------- -------- -------- -------- -------- ------- ------ Total from investment operations 3.47 (3.17) (0.34) 0.36 0.34 3.43 (2.91) 1.12 -------- -------- -------- -------- -------- -------- ------- ------ Less distributions: - ------------------- Dividends from net investment income (0.04) (0.03) (0.05) (0.03) - (0.05) (0.03) - Distributions from capital gains - - (0.09) (0.08) - - - - -------- -------- -------- -------- -------- -------- ------- ------ Total distributions (0.04) (0.03) (0.14) (0.11) - (0.05) (0.03) - -------- -------- -------- -------- -------- -------- ------- ------ NET ASSET VALUE, END OF PERIOD $ 12.84 $ 9.41 $ 12.61 $ 13.09 $ 12.84 $ 12.79 $ 9.41 $12.84 ======== ======== ======== ======== ======== ======== ======= ====== TOTAL RETURN 37.06% (25.18%) (2.54%) 2.78% 2.72%+ 36.68% (23.61%)+ 9.56%+ Net assets, end of period (000's) $413,803 $382,248 $518,621 $435,395 $210,725 $143,409 $59,287 $1 Ratio of expenses to average net assets 0.93% 0.94% 0.93% 0.93% 0.94%(A) 1.13% 1.14%(A) 1.28%(A) Ratio of net investment income (loss) to average net assets 0.43% 0.43% 0.32% 0.53% 0.64%(A) 0.21% 0.35%(A) 0.34%(A) Portfolio turnover rate 34% 42% 38% 31% 30% 34% 42% 34%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 152 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
STRATEGIC VALUE TRUST (FORMERLY, CAPITAL OPPORTUNITIES TRUST) --------------------------------------------------------------------------------- SERIES I SERIES II ----------------------------------- ---------------------------- SERIES III YEARS ENDED YEAR ------------ DECEMBER 31, 4/31/2001* ENDED 1/28/2002* 9/05/2003* ------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- ------------- ------------ ------------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.79 $ 10.70 $ 12.50 $ 7.78 $ 10.27 $ 9.42 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 - # (0.02) 0.05 - # 0.03 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.18 (2.91) (1.78) 2.18 (2.49) 0.58 -------- -------- -------- -------- -------- -------- Total from investment operations 2.24 (2.91) (1.80) 2.23 (2.49) 0.61 -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - # - - (0.01) - - Total distributions - # - - (0.01) - - -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.03 $ 7.79 $ 10.70 $ 10.00 $ 7.78 $ 10.03 ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 28.78% (27.20%) (14.4%)+ 28.68% (24.25%)+ 6.48%+ Net assets, end of period (000's) $95,602 $34,153 $33,428 $47,466 $5,904 $1 Ratio of expenses to average net assets 1.04% 1.14% 1.46%(A) 1.24% 1.34%(A) 1.39%(A) Ratio of expenses to average net assets after expense reductions 1.04% 1.14% 1.40%(A) 1.24% 1.34%(A) 1.39%(A) Ratio of net investment income (loss) to average net assets 0.69% 0.04% (0.27%)(A) 0.55% 0.04%(A) 0.93%(A) Portfolio turnover rate 62% 109% 86% 62% 109% 62%
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LARGE CAP VALUE TRUST ---------------------------- SERIES I SERIES II ------------- ------------ 5/05/2003* 5/05/2003* TO TO 12/31/2003-- 12/31/2003-- ------------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 Income from investment operations: - ---------------------------------- Net investment income (loss) -# (0.03) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.46 3.47 -------- -------- Total from investment operations 3.46 3.44 -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.30) (0.30) -------- -------- Total distributions (0.30) (0.30) -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.66 $ 15.64 ======== ======== TOTAL RETURN(C) 27.65%+ 27.49%+ Net assets, end of period (000's) $6,203 $7,977 Ratio of expenses to average net assets 2.86%(A) 3.06%(A) Ratio of expenses to average net assets after expense reductions 1.40%(A) 1.60%(A) Ratio of net investment income (loss) to average net assets (0.02%)(A) (0.27%)(A) Portfolio turnover rate 105% 105%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2001 for Series I would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series I and Series II would have been lower, had operating expenses not been reduced. 153 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
UTILITIES TRUST ------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 4/30/2001* YEAR ENDED 1/28/2002* 9/05/2003* ------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.11 $ 9.29 $ 12.50 $ 7.10 $ 8.77 $ 8.48 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.13 0.15 0.07 0.11 0.12 0.07 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.29 (2.33) (3.23) 2.29 (1.79) 0.88 -------- -------- -------- -------- -------- -------- Total from investment operations 2.42 (2.18) (3.16) 2.40 (1.67) 0.95 ======== ======== ======== ======== ======== ======== Less distributions: - ------------------- Dividends from net investment income (0.10) -# (0.05) (0.11) -# - -------- -------- -------- -------- -------- -------- Total distributions (0.10) -# (0.05) (0.11) -# - -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.43 $ 7.11 $ 9.29 $ 9.39 $ 7.10 $ 9.43 ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 34.53% (23.46%) (25.3%)+ 34.25% (19.04%)+ 11.20%+ Net assets, end of period (000's) $34,440 $20,607 $18,260 $20,494 $6,540 -## Ratio of expenses to average net assets 1.31% 1.28% 1.51%(A) 1.51% 1.48%(A) 347.24%(A) Ratio of expenses to average net assets after expense reductions 1.31% 1.28% 1.40%(A) 1.51% 1.48%(A) 1.66%(A) Ratio of net investment income (loss) to average net assets 1.64% 1.99% 1.07%(A) 1.36% 1.83%(A) 2.39%(A) Portfolio turnover rate 131% 89% 81% 131% 89% 131%
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REAL ESTATE SECURITIES TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 15.44 $ 15.52 $ 15.57 $ 12.89 $ 14.76 $ 15.43 $ 15.44 $ 18.87 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.69 0.83 0.75 0.67 0.78 0.60 0.85 0.12 Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.20 (0.38) (0.30) 2.53 (1.94) 5.25 (0.33) 1.86 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 5.89 0.45 0.45 3.20 (1.16) 5.85 0.52 1.98 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.48) (0.53) (0.50) (0.52) (0.71) (0.49) (0.53) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.48) (0.53) (0.50) (0.52) (0.71) (0.49) (0.53) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 20.85 $ 15.44 $ 15.52 $ 15.57 $ 12.89 $ 20.79 $ 15.43 $ 20.85 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 39.15% 2.58% 3.15% 25.71% (8.00%) 38.93% 3.05%+ 10.49%+ Net assets, end of period (000's) $447,860 $303,070 $220,919 $257,641 $196,756 $168,405 $48,749 $21 Ratio of expenses to average net assets 0.80% 0.84% 0.83% 0.76% 0.77% 1.00% 1.04%(A) 11.07%(A) Ratio of expenses to average net assets after expense reductions 0.80% 0.84% 0.83% 0.76% 0.77% 1.00% 1.04%(A) 1.15%(A) Ratio of net investment income (loss) to average net assets 3.93% 5.28% 4.96% 4.89% 5.88% 3.33% 6.03%(A) 1.94%(A) Portfolio turnover rate 30% 74% 116% 147% 201% 30% 74% 30%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. ## Amount is less than $1,000. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2001 for Series I and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 154 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
SMALL CAP OPPORTUNITIES TRUST ------------------------------------------ SERIES I SERIES II SERIES III ------------ ------------ ------------ 5/05/2003* 5/05/2003* 9/5/2003* TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.85 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.10 0.02 0.08 Net realized and unrealized gain (loss) on investments and foreign currency transactions 4.90 4.96 2.57 -------- -------- -------- Total from investment operations 5.00 4.98 2.65 -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 17.50 $ 17.48 $ 17.50 ======== ======== ======== TOTAL RETURN 40.00%+ 39.84%+ 17.85%+ Net assets, end of period (000's) $35,587 $33,352 $1 Ratio of expenses to average net assets 1.23%(A) 1.43%(A) 1.58%(A) Ratio of net investment income (loss) to average net assets 0.33%(A) 0.23%(A) 1.49%(A) Portfolio turnover rate 17% 17% 17%
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SMALL COMPANY VALUE TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003 ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.90 $ 13.80 $ 12.98 $ 12.27 $ 11.37 $ 12.89 $ 13.83 $ 15.97 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.04 0.08 0.09 0.04 0.02 0.01 0.13 0.02 Net realized and unrealized gain (loss) on investments and foreign currency transactions 4.28 (0.88) 0.76 0.69 0.89 4.29 (0.97) 1.15 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 4.32 (0.80) 0.85 0.73 0.91 4.30 (0.84) 1.17 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.06) (0.04) (0.03) (0.02) (0.01) (0.07) (0.04) - Distributions from capital gains (0.02) (0.06) - - - (0.02) (0.06) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.08) (0.10) (0.03) (0.02) (0.01) (0.09) (0.10) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 17.14 $ 12.90 $ 13.80 $ 12.98 $ 12.27 $ 17.10 $ 12.89 $ 17.14 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN (B) 33.66% (5.93)% 6.54% 5.93% 8.00% 33.56% (6.20%)+ 7.33%+ Net assets, end of period (000's) $385,926 $305,338 $213,046 $115,982 $89,167 $147,770 $50,843 -## Ratio of expenses to average net assets 1.11% 1.12% 1.16% 1.24% 1.22% 1.31% 1.32%(A) 1.46%(A) Ratio of expenses to average net assets after expense reductions 1.11% 1.11% 1.15% 1.24% 1.22% 1.31% 1.31%(A) 1.46%(A) Ratio of net investment income (loss) to average net assets 0.26% 0.61% 0.72% 0.35% 0.15% 0.06% 1.12%(A) 0.39%(A) Portfolio turnover rate 14% 19% 119% 178% 142% 14% 19% 14%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized ## Amount is less than $1,000 (A) Annualized (B) The total return for the years ended 2002 and 2001 for Series I and for the period ended December 31, 2002 for Series II would have been lower, had operating expenses not been reduced. 155 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
SPECIAL VALUE TRUST ------------------------------------------ SERIES I SERIES II SERIES III ------------ ------------ ------------ 5/05/2003* 5/05/2003* 9/05/2003* TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 14.65 Income from investment operations: - ---------------------------------- Net investment income (loss) (0.04) (0.06) 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.36 3.36 1.16 -------- -------- -------- Total from investment operations 3.32 3.30 1.17 -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.82 $ 15.80 $ 15.82 ======== ======== ======== TOTAL RETURN(B) 26.56%+ 26.40%+ 7.99%+ Net assets, end of period (000's) $10,896 $6,749 -## Ratio of expenses to average net assets 1.64%(A) 1.84%(A) 208.58%(A) Ratio of expenses to average net assets after expense reductions 1.55%(A) 1.75%(A) 1.90%(A) Ratio of net investment income (loss) to average net assets (0.44%)(A) (0.68%)(A) 0.27%(A) Portfolio turnover rate 26% 26% 26%
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MID CAP VALUE TRUST ------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------- --------------------------- ------------ YEARS ENDED YEAR DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003* ------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.74 $ 13.06 $ 12.50 $ 11.74 $ 12.63 $ 13.38 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.09 0.11 0.06 0.07 0.09 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.87 (1.43) 0.53 2.86 (0.98) 1.26 -------- -------- ------- -------- -------- -------- Total from investment operations 2.96 (1.32) 0.59 2.93 (0.89) 1.27 -------- -------- ------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.05) - (0.03) (0.05) - - Total distributions (0.05) - (0.03) (0.05) - - -------- -------- ------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.65 $ 11.74 $ 13.06 $ 14.62 $ 11.74 $ 14.65 ======== ======== ======= ======== ======== ======== TOTAL RETURN(C) 25.36% (10.11%) 4.72%+ 25.14% (7.05%)+ 9.49%+ Net assets, end of period (000's) $283,432 $269,345 $80,737 $171,216 $71,096 $2 Ratio of expenses to average net assets 0.99% 1.02% 1.15%(A) 1.19% 1.22%(A) 42.62%(A) Ratio of expenses to average net assets after expense reductions 0.99% 1.02% 1.15%(A) 1.19% 1.22%(A) 1.34%(A) Ratio of net investment income (loss) to average net assets 0.76% 0.92% 0.75%(A) 0.54% 0.83%(A) 0.14%(A) Portfolio turnover rate 34% 24% 23% 34% 24% 34%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series I, Series II and Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 156 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
VALUE TRUST ---------------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------------- --------------------------- YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* ---------------------------------------------------------- DECEMBER 31, TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- -------- ----------- ----------- -------- -------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.49 $ 16.47 $ 16.48 $ 13.23 $ 14.06 $ 12.48 $ 16.26 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.10 0.14 0.15 0.14 0.20 0.06 0.12 Net realized and unrealized gain (loss) on investments and foreign currency transactions 4.67 (3.82) 0.40 3.11 (0.59) 4.68 (3.60) -------- -------- ------- -------- -------- -------- -------- Total from investment operations 4.77 (3.68) 0.55 3.25 (0.39) 4.74 (3.48) -------- -------- ------- -------- -------- -------- -------- Less distributions: - ---------------------------------- Dividends from net investment income (0.17) (0.12) (0.11) - (0.20) (0.18) (0.12) Distributions from capital gains - (0.18) (0.45) - (0.24) - (0.18) -------- -------- ------- -------- -------- -------- -------- Total distributions (0.17) (0.30) (0.56) - (0.44) (0.18) (0.30) -------- -------- ------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 17.09 $ 12.49 $ 16.47 $ 16.48 $ 13.23 $ 17.04 $ 12.48 ======== ======== ======= ======== ======== ======== ======== TOTAL RETURN 38.76% (22.80%) 3.42% 24.57% (2.79%) 38.60% (21.87%)+ Net assets, end of period (000's) $272,292 $238,370 $360,027 $189,245 $146,279 $ 28,744 $ 11,473 Ratio of expenses to average net assets 0.87% 0.86% 0.86% 0.86% 0.87% 1.07% 1.06%(A) Ratio of net investment income (loss) to average net assets 0.71% 0.94% 0.92% 1.05% 1.12% 0.44% 1.02%(A) Portfolio turnover rate 186% 52% 27% 65% 54% 186% 52%
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ALL CAP VALUE TRUST ---------------------------------------------------------------------------------- SERIES I SERIES II ------------------------------------- --------------------------- SERIES III YEARS ENDED YEAR ------------ DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003* ---------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- ----------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.10 $ 12.61 $ 12.50 $ 9.09 $ 12.56 $ 11.33 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.07 0.02 - # 0.05 - # 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.42 (3.53) 0.11 3.41 (3.47) 1.24 -------- -------- ------- -------- -------- -------- Total from investment operations 3.49 (3.51) 0.11 3.46 (3.47) 1.25 -------- -------- ------- -------- -------- -------- Less distributions: - ---------------------------------- Dividends from net investment income (0.01) - # - # (0.01) - # - -------- -------- ------- -------- -------- -------- Total distributions (0.01) - # - # (0.01) - # - -------- -------- ------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.58 $ 9.10 $ 12.61 $ 12.54 $ 9.09 $ 12.58 ======== ======== ======= ======== ======== ======== TOTAL RETURN(B) 38.36% (27.83%) 0.90%+ 38.16% (27.63%)+ 11.03%+ Net assets, end of period (000's) $183,743 $ 32,237 $20,877 $101,429 $ 7,204 $ 4 Ratio of expenses to average net assets 0.98% 1.15% 1.42%(A) 1.18% 1.35%(A) 20.92%(A) Ratio of expenses to average net assets after expense reductions 0.98% 1.15% 1.42%(A) 1.18% 1.34%(A) 1.33%(A) Ratio of net investment income (loss) to average net assets 0.64% 0.15% 0.05%(A) 0.44% 0.04%(A) 0.32%(A) Portfolio turnover rate 52% 31% 194% 52% 31% 52%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 157 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
EQUITY INDEX TRUST ---------------------------------------------------- SERIES I ---------------------------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2003-- 2002-- 2001-- 2000-- 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.77 $ 14.00 $ 16.40 $ 18.13 $ 15.43 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.16 0.15 0.14 0.16 0.17 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.84 (3.24) (2.14) (1.84) 3.00 -------- -------- -------- -------- -------- Total from investment operations 3.00 (3.09) (2.00) (1.68) 3.17 -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.17) (0.14) (0.16) - (0.17) Distributions from capital gains - - (0.24) (0.05) (0.30) -------- -------- -------- -------- -------- Total distributions (0.17) (0.14) (0.40) (0.05) (0.47) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.60 $ 10.77 $ 14.00 $ 16.40 $ 18.13 ======== ======== ======== ======== ======== TOTAL RETURN(B) 28.29% (22.30%) (12.26%) (9.29%) 20.58% Net assets, end of period (000's) $81,536 $73,082 $103,007 $114,154 $114,775 Ratio of expenses to average net assets 0.50% 0.41% 0.41% 0.40% 0.41% Ratio of expenses to average net assets after expense reductions 0.40% 0.40% 0.40% 0.40% 0.40% Ratio of net investment income (loss) to average net assets 1.38% 1.21% 0.97% 0.91% 1.17% Portfolio turnover rate 2% 4% 4% 8% 10%
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FUNDAMENTAL VALUE TRUST ------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------- --------------------------- ------------ YEARS ENDED YEAR DECEMBER 31, 4/30/2001* ENDED 1/28/2002* 9/05/2003* ------------------- TO DECEMBER 31, TO TO 2003-- 2002-- 12/31/2001-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.82 $ 11.73 $ 12.50 $ 9.82 $ 11.48 $ 11.28 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.08 0.07 0.03 0.06 0.07 0.02 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.84 (1.97) (0.80) 2.83 (1.72) 1.41 -------- -------- -------- -------- -------- -------- Total from investment operations 2.92 (1.90) (0.77) 2.89 (1.65) 1.43 -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.03) (0.01) - (0.03) (0.01) - -------- -------- -------- -------- -------- -------- Total distributions (0.03) (0.01) - (0.03) (0.01) - -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.71 $ 9.82 $ 11.73 $ 12.68 $ 9.82 $ 12.71 ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 29.83% (16.20%) (6.16%)+ 29.57% (14.46%)+ 12.68%+ Net assets, end of period (000's) $355,263 $269,250 $111,590 $203,168 $65,174 $9 Ratio of expenses to average net assets 0.97% 0.98% 1.07%(A) 1.17% 1.18%(A) 15.43%(A) Ratio of expenses to average net assets after expense reductions 0.97% 0.98% 1.07%(A) 1.17% 1.18%(A) 1.32%(A) Ratio of net investment income (loss) to average net assets 0.78% 0.71% 0.45%(A) 0.59% 0.75%(A) 0.55%(A) Portfolio turnover rate 12% 19% 16% 12% 19% 12%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for Series I would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 158 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
GROWTH & INCOME TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------- --------------------------- SERIES III YEAR ------------ YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/05/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 17.40 $ 23.91 $ 28.54 $ 32.67 $ 28.43 $ 17.39 $ 23.43 $ 20.21 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.17 0.16 0.12 0.10 0.17 0.13 0.12 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 4.41 (5.80) (3.32) (2.21) 5.12 4.41 (5.29) 1.54 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 4.58 (5.64) (3.20) (2.11) 5.29 4.54 (5.17) 1.58 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.19) (0.12) (0.11) (0.18) (0.19) (0.21) (0.12) - Distributions from capital gains - (0.75) (1.32) (1.84) (0.86) - (0.75) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.19) (0.87) (1.43) (2.02) (1.05) (0.21) (0.87) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 21.79 $ 17.40 $ 23.91 $ 28.54 $ 32.67 $ 21.72 $ 17.39 $ 21.79 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 26.45% (24.33%) (11.28%) (7.12%) 18.87% 26.41% (22.83%)+ 7.82%+ Net assets, end of period (000's) $1,553,119 $1,436,309 $2,387,718 $2,914,338 $3,187,220 $114,785 $39,491 $1 Ratio of expenses to average net assets 0.75% 0.75% 0.80% 0.79% 0.80% 0.95% 0.95%(A) 57.22%(A) Ratio of expenses to average net assets after expense reductions 0.75% 0.75% 0.80% 0.79% 0.80% 0.95% 0.95%(A) 1.10%(A) Ratio of net investment income (loss) to average net assets 0.92% 0.79% 0.48% 0.33% 0.63% 0.69% 0.77%(A) 0.67%(A) Portfolio turnover rate 39% 40% 24% 32% 19% 39% 40% 39%
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GREAT COMPANIES AMERICA ------------ SERIES II ------------ 08/04/2003* TO 12/31/2003-- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 Income from investment operations: - ---------------------------------- Net investment income (loss) -# Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.51 -------- Total from investment operations 1.51 -------- Less distributions: - ------------------- Dividends from net investment income (0.01) -------- Total distributions (0.01) -------- NET ASSET VALUE, END OF PERIOD $ 14.00 ======== TOTAL RETURN(C) 12.07%+ Net assets, end of period (000's) $2,796 Ratio of expenses to average net assets 3.14%(A) Ratio of expenses to average net assets after expense reductions 1.60%(A) Ratio of net investment income (loss) to average net assets (0.02%)(A) Portfolio turnover rate 5%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series II would have been lower, had operating expenses not been reduced. 159 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
EQUITY-INCOME TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/05/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.62 $ 15.13 $ 16.83 $ 17.05 $ 17.78 $ 12.61 $ 15.05 $ 13.86 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.23 0.22 0.22 0.30 0.35 0.21 0.21 0.07 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.85 (2.13) (0.06) 1.63 0.25 2.84 (2.05) 1.29 -------- -------- -------- -------- -------- ------------ -------- -------- Total from investment operations 3.08 (1.91) 0.16 1.93 0.60 3.05 (1.84) 1.36 -------- -------- -------- -------- -------- ------------ -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.22) (0.19) (0.29) (0.34) (0.37) (0.23) (0.19) - Distributions from capital gains (0.26) (0.41) (1.57) (1.81) (0.96) (0.26) (0.41) - -------- -------- -------- -------- -------- ------------ -------- -------- Total distributions (0.48) (0.60) (1.86) (2.15) (1.33) (0.49) (0.60) - -------- -------- -------- -------- -------- ------------ -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.22 $ 12.62 $ 15.13 $ 16.83 $ 17.05 $ 15.17 $ 12.61 $ 15.22 ======== ======== ======== ======== ======== ============ ======== ======== TOTAL RETURN(B) 25.57% (13.28%) 1.29% 12.99% 3.40% 25.40% (12.89%)+ 9.81%+ Net assets, end of period (000's) $1,277,187 $1,015,246 $1,147,075 $965,675 $1,011,260 $314,184 $87,245 $8 Ratio of expenses to average net assets 0.92% 0.93% 0.93% 0.92% 0.91% 1.12% 1.13%(A) 14.85%(A) Ratio of expenses to average net assets after expense reductions 0.89% 0.91% 0.91% 0.91% 0.91% 1.09% 1.11%(A) 1.24%(A) Ratio of net investment income (loss) to average net assets 1.73% 1.58% 1.45% 1.94% 1.83% 1.55% 1.83%(A) 1.57%(A) Portfolio turnover rate 15% 18% 19% 34% 30% 15% 18% 15%
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INCOME & VALUE TRUST ---------------------------------------------------------------------------------- SERIES I SERIES II ---------------------------------------------------- --------------------------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* ---------------------------------------------------- DECEMBER 31, TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- -------- -------- -------- -------- -------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.36 $ 10.13 $ 10.56 $ 12.91 $ 13.36 $ 8.35 $ 10.01 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.13 0.17 0.19 0.27 0.32 0.11 0.12 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.04 (1.76) (0.11) 0.33 0.77 2.04 (1.60) -------- -------- -------- -------- -------- ------------ -------- Total from investment operations 2.17 (1.59) 0.08 0.60 1.09 2.15 (1.48) -------- -------- -------- -------- -------- ------------ -------- Less distributions: - ------------------- Dividends from net investment income (0.18) (0.18) (0.28) (0.33) (0.40) (0.19) (0.18) Distributions from capital gains - - (0.23) (2.62) (1.14) - - -------- -------- -------- -------- -------- ------------ -------- Total distributions (0.18) (0.18) (0.51) (2.95) (1.54) (0.19) (0.18) -------- -------- -------- -------- -------- ------------ -------- NET ASSET VALUE, END OF PERIOD $ 10.35 $ 8.36 $ 10.13 $ 10.56 $ 12.91 $ 10.31 $ 8.35 ======== ======== ======== ======== ======== ============ ======== TOTAL RETURN 26.48% (15.93%) 0.98% 4.94% 8.52% 26.29% (15.02%)+ Net assets, end of period (000's) $521,949 $448,524 $561,623 $546,311 $639,824 $80,776 $22,839 Ratio of expenses to average net assets 0.87% 0.88% 0.87% 0.86% 0.86% 1.07% 1.08%(A) Ratio of net investment income (loss) to average net assets 1.45% 1.90% 1.90% 2.46% 2.39% 1.19% 1.55%(A) Portfolio turnover rate 91% 61% 70% 51% 165% 91% 61%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001 and 2000 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended for December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 160 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
GLOBAL ALLOCATION TRUST (FORMERLY, TACTICAL ALLOCATION TRUST) --------------------------------------------------------------------------------- SERIES I SERIES II --------------------------------------------------- --------------------------- YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* ------------------------------------ TO DECEMBER 31, TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- ---------- ---------- ---------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.71 $ 10.04 $ 11.67 $ 12.50 $ 7.70 $ 9.91 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 0.04 0.01 0.15 0.04 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.97 (2.37) (1.57) (0.55) 1.99 (2.25) ---------- ---------- ---------- -------- -------- -------- Total from investment operations 2.03 (2.33) (1.56) (0.40) 2.03 (2.21) ---------- ---------- ---------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.04) - # (0.01) (0.15) (0.05) - # Distributions from capital gains - - (0.06) (0.28) - - ---------- ---------- ---------- -------- -------- -------- Total distributions (0.04) - # (0.07) (0.43) (0.05) - # ---------- ---------- ---------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.70 $ 7.71 $ 10.04 $ 11.67 $ 9.68 $ 7.70 ========== ========== ========== ======== ======== ======== TOTAL RETURN 26.43% (23.21%) (13.38%) (3.20%)+ 26.47% (22.30%)+ Net assets, end of period (000's) $64,143 $57,408 $73,714 $43,263 $18,820 $5,364 Ratio of expenses to average net assets 1.22% 1.18% 1.30% 1.33%(A) 1.42% 1.38%(A) Ratio of net investment income (loss) to average net assets 0.74% 0.44% 0.11% 1.74%(A) 0.49% 0.51%(A) Portfolio turnover rate 147% 18% 25% 133% 147% 18%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized # Amount is less than $.01 per share. (A) Annualized 161 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
HIGH YIELD TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.50 $ 9.88 $ 11.65 $ 12.83 $ 12.92 $ 8.49 $ 9.95 $ 9.21 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.69 0.75 1.06 1.26 1.14 0.68 0.47 0.22 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.28 (1.37) (1.64) (2.40) (0.12) 1.27 (1.17) 0.52 -------- -------- -------- -------- -------- ------------ -------- -------- Total from investment operations 1.97 (0.62) (0.58) (1.14) 1.02 1.95 (0.70) 0.74 -------- -------- -------- -------- -------- ------------ -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.52) (0.76) (1.19) (0.04) (1.11) (0.53) (0.76) - -------- -------- -------- -------- -------- ------------ -------- -------- Total distributions (0.52) (0.76) (1.19) (0.04) (1.11) (0.53) (0.76) - -------- -------- -------- -------- -------- ------------ -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.95 $ 8.50 $ 9.88 $ 11.65 $ 12.83 $ 9.91 $ 8.49 $ 9.95 ======== ======== ======== ======== ======== ============ ======== ======== TOTAL RETURN(B) 24.15% (6.65%) (5.48%) (8.97%) 8.00% 23.91% (7.42%)+ 8.03%+ Net assets, end of period (000's) $621,277 $336,640 $323,309 $238,207 $241,054 $295,865 $50,127 $16 Ratio of expenses to average net assets 0.82% 0.84% 0.84% 0.84% 0.84% 1.02% 1.04%(A) 11.65%(A) Ratio of expenses to average net assets after expense reductions 0.82% 0.84% 0.84% 0.84% 0.84% 1.02% 1.04%(A) 1.17%(A) Ratio of net investment income (loss) to average net assets 7.56% 8.55% 10.10% 10.15% 8.59% 7.38% 6.18%(A) 7.15%(A) Portfolio turnover rate 75% 53% 64% 57% 62% 75% 53% 75%
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STRATEGIC BOND TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.89 $ 10.74 $ 10.92 $ 11.14 $ 11.72 $ 10.88 $ 10.88 $ 11.17 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.56 0.71 0.73 0.87 1.00 0.51 0.60 0.15 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.82 0.21 (0.07) (0.11) (0.75) 0.85 0.17 0.41 -------- -------- -------- -------- -------- ------------ -------- -------- Total from investment operations 1.38 0.92 0.66 0.76 0.25 1.36 0.77 0.56 -------- -------- -------- -------- -------- ------------ -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.54) (0.77) (0.84) (0.98) (0.83) (0.55) (0.77) - -------- -------- -------- -------- -------- ------------ -------- -------- Total distributions (0.54) (0.77) (0.84) (0.98) (0.83) (0.55) (0.77) - -------- -------- -------- -------- -------- ------------ -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.73 $ 10.89 $ 10.74 $ 10.92 $ 11.14 $ 11.69 $ 10.88 $ 11.73 ======== ======== ======== ======== ======== ============ ======== ======== TOTAL RETURN(B) 13.11% 8.96% 6.24% 7.28% 2.22% 12.93% 7.46%+ 5.01%+ Net assets, end of period (000's) $456,192 $406,972 $302,499 $333,293 $368,380 $151,218 $42,538 $13 Ratio of expenses to average net assets 0.86% 0.86% 0.86% 0.87% 0.87% 1.06% 1.06%(A) 12.56%(A) Ratio of expenses to average net assets after expense reductions 0.86% 0.86% 0.86% 0.87% 0.87% 1.06% 1.06%(A) 1.21%(A) Ratio of net investment income (loss) to average net assets 4.96% 6.78% 6.85% 8.15% 8.15% 4.56% 6.18%(A) 4.11%(A) Portfolio turnover rate 80% 86% 85% 175% 107% 80% 86% 80%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 162 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
GLOBAL BOND TRUST ----------------------------------------------------------------------------- SERIES I SERIES II -------------------------------------------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED -------------------------------------------------------------- DECEMBER 31, 2003-- 2002-- 2001-- 2000-- 1999 2003-- ---------- ---------- ---------- ---------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 13.79 $ 11.48 $ 11.42 $ 11.60 $ 13.73 $ 13.77 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.39 0.40 0.38 0.51 0.67 0.33 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.67 1.91 (0.32) (0.33) (1.55) 1.70 ---------- ---------- ---------- ---------- ---------- -------- Total from investment operations 2.06 2.31 0.06 0.18 (0.88) 2.03 ---------- ---------- ---------- ---------- ---------- -------- Less distributions: - ------------------- Dividends from net investment income (0.51) - - (0.36) (1.25) (0.51) ---------- ---------- ---------- ---------- ---------- -------- Total distributions (0.51) - - (0.36) (1.25) (0.51) ---------- ---------- ---------- ---------- ---------- -------- NET ASSET VALUE, END OF PERIOD $ 15.34 $ 13.79 $ 11.48 $ 11.42 $ 11.60 $ 15.29 ========== ========== ========== ========== ========== ======== TOTAL RETURN(B) 15.40% 20.12% 0.53% 1.68% (6.67%) 15.25% Net assets, end of period (000's) $195,165 $181,728 $96,534 $116,370 $145,992 $64,400 Ratio of expenses to average net assets 0.91% 0.92% 1.02% 1.00% 0.98% 1.11% Ratio of expenses to average net assets after expense reductions 0.91% 0.92% 1.02% 1.00% 0.98% 1.11% Ratio of net investment income (loss) to average net assets 2.75% 3.20% 3.29% 4.61% 4.38% 2.33% Portfolio turnover rate 338% 439% 527% 644% 471% 338% GLOBAL BOND TRUST --------------------------- SERIES II SERIES III ------------ ------------ 1/28/2002* 9/5/2003* TO TO 12/31/2002-- 12/31/2003-- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.36 $ 13.72 Income from investment operations: - -------------------------------- Net investment income (loss) 0.37 0.02 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.04 1.60 -------- -------- Total from investment operations 2.41 1.62 -------- -------- Less distributions: - ------------------- Dividends from net investment income - - -------- -------- Total distributions - - -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.77 $ 15.34 ======== ======== TOTAL RETURN(B) 21.21%+ 11.81%+ Net assets, end of period (000's) $21,820 $5 Ratio of expenses to average net assets 1.12%(A) 18.10%(A) Ratio of expenses to average net assets after expense reductions 1.12%(A) 1.26%(A) Ratio of net investment income (loss) to average net assets 3.07%(A) 0.53%(A) Portfolio turnover rate 439% 338%
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DIVERSIFIED BOND TRUST ----------------------------------------------------------------------------- SERIES I SERIES II -------------------------------------------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED -------------------------------------------------------------- DECEMBER 31, 2003-- 2002-- 2001-- 2000-- 1999 2003-- ---------- ---------- ---------- ---------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.89 $ 10.59 $ 10.47 $ 10.82 $ 11.83 $ 10.88 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.40 0.53 0.57 0.66 0.56 0.35 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.09 0.24 0.14 0.34 (0.46) 0.13 ---------- ---------- ---------- ---------- ---------- ------- Total from investment operations 0.49 0.77 0.71 1.00 0.10 0.48 ---------- ---------- ---------- ---------- ---------- ------- Less distributions: - ------------------- Dividends from net investment income (0.52) (0.47) (0.59) (0.58) (0.49) (0.52) Distributions from capital gains - - - (0.77) (0.62) - ---------- ---------- ---------- ---------- ---------- ------- Total distributions (0.52) (0.47) (0.59) (1.35) (1.11) (0.52) ---------- ---------- ---------- ---------- ---------- ------- NET ASSET VALUE, END OF PERIOD $ 10.86 $ 10.89 $ 10.59 $ 10.47 $ 10.82 $ 10.84 ========== ========== ========== ========== ========== ======= TOTAL RETURN 4.60% 7.61% 7.09% 10.32% 0.72% 4.59% Net assets, end of period (000's) $296,041 $329,804 $286,742 $212,462 $218,868 $57,909 Ratio of expenses to average net assets 0.83% 0.82% 0.82% 0.81% 0.84% 1.03% Ratio of net investment income (loss) to average net assets 3.69% 5.03% 5.40% 6.50% 5.18% 3.31% Portfolio turnover rate 193% 83% 140% 76% 173% 193% DIVERSIFIED BOND TRUST --------------------------- SERIES II SERIES III ------------ ------------ 1/28/2002* 9/5/2003* TO TO 12/31/2002-- 12/31/2003-- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $10.62 $10.54 Income from investment operations: - -------------------------------- Net investment income (loss) 0.44 0.08 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.29 0.24 ------ ------ Total from investment operations 0.73 0.32 ------ ------ Less distributions: - ------------------- Dividends from net investment income (0.47) - Distributions from capital gains - - ------ ------ Total distributions (0.47) - ------ ------ NET ASSET VALUE, END OF PERIOD $10.88 $10.86 ====== ====== TOTAL RETURN 7.21%+ 3.04%+ Net assets, end of period (000's) $25,249 $5 Ratio of expenses to average net assets 1.02%(A) 1.18%(A) Ratio of net investment income (loss) to average net assets 4.52%(A) 2.30%(A) Portfolio turnover rate 83% 193%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 163 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
INVESTMENT QUALITY BOND TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.33 $ 11.85 $ 11.74 $ 11.60 $ 12.46 $ 12.32 $ 11.94 $12.08 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.61 0.67 0.74 0.79 0.81 0.57 0.56 0.17 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.26 0.45 0.09 0.24 (1.02) 0.29 0.46 0.33 -------- -------- -------- -------- -------- ------- ------- ------ Total from investment operations 0.87 1.12 0.83 1.03 (0.21) 0.86 1.02 0.50 -------- -------- -------- -------- -------- ------- ------- ------ Less distributions: - ---------------------------------- Dividends from net investment income (0.62) (0.64) (0.72) (0.89) (0.65) (0.63) (0.64) - -------- -------- -------- -------- -------- ------- ------- ------ Total distributions (0.62) (0.64) (0.72) (0.89) (0.65) (0.63) (0.64) - -------- -------- -------- -------- -------- ------- ------- ------ NET ASSET VALUE, END OF PERIOD $ 12.58 $ 12.33 $ 11.85 $ 11.74 $ 11.60 $ 12.55 $ 12.32 $12.58 ======== ======== ======== ======== ======== ======= ======= ====== TOTAL RETURN(B) 7.32% 9.94% 7.33% 9.40% (1.79)% 7.24% 9.02%+ 4.14%+ Net assets, end of period (000's) $399,189 $469,334 $407,652 $282,725 $288,594 $84,928 $38,021 $22 Ratio of expenses to average net assets 0.75% 0.74% 0.74% 0.73% 0.77% 0.95% 0.94%(A) 11.06%(A) Ratio of expenses to average net assets after expense reductions 0.75% 0.74% 0.74% 0.73% 0.77% 0.95% 0.94%(A) 1.10%(A) Ratio of net investment income (loss) to average net assets 4.93% 5.71% 6.28% 6.95% 6.79% 4.64% 5.07%(A) 4.31%(A) Portfolio turnover rate 59% 46% 50% 35% 36% 59% 46% 59%
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TOTAL RETURN TRUST -------------------------------------------------------------------------- SERIES I SERIES II --------------------------------------------- ------------ YEARS ENDED DECEMBER 31, 05/01/1999* YEAR ENDED --------------------------------------------- TO DECEMBER 31, 2003-- 2002-- 2001-- 2000-- 12/31/1999 2003-- ---------- ---------- -------- -------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 14.43 $ 13.88 $ 13.33 $ 12.37 $ 12.50 $ 14.42 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.35 0.49 0.61 0.79 0.35 0.31 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.35 0.78 0.51 0.48 (0.48) 0.37 ---------- ---------- -------- -------- -------- -------- Total from investment operations 0.70 1.27 1.12 1.27 (0.13) 0.68 ---------- ---------- -------- -------- -------- -------- Less distributions: - ---------------------------------- Dividends from net investment income (0.77) (0.42) (0.57) (0.31) - (0.78) Distributions from capital gains (0.15) (0.30) - - - (0.15) ---------- ---------- -------- -------- -------- -------- Total distributions (0.92) (0.72) (0.57) (0.31) - (0.93) ---------- ---------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.21 $ 14.43 $ 13.88 $ 13.33 $ 12.37 $ 14.17 ========== ========== ======== ======== ======== ======== TOTAL RETURN(B) 5.02% 9.52% 8.28% 10.49% (1.04%)+ 4.87% Net assets, end of period (000's) $1,036,128 $1,072,629 $736,472 $387,647 $240,016 $491,176 Ratio of expenses to average net assets 0.82% 0.81% 0.83% 0.84% 0.84%(A) 1.02% Ratio of expenses to average net assets after expense reductions 0.82% 0.81% 0.83% 0.84% 0.84%(A) 1.02% Ratio of net investment income (loss) to average net assets 2.48% 3.53% 4.52% 6.23% 5.72%(A) 2.15% Portfolio turnover rate 285% 381% 439% 551% 95% 285% TOTAL RETURN TRUST --------------------------- SERIES II SERIES III ------------ ------------ 1/28/2002* 9/5/2003* TO TO 12/31/2002-- 12/31/2003-- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 14.00 $13.75 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.36 0.08 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.78 0.38 -------- ------ Total from investment operations 1.14 0.46 -------- ------ Less distributions: - ---------------------------------- Dividends from net investment income (0.42) - Distributions from capital gains (0.30) - -------- ------ Total distributions (0.72) - -------- ------ NET ASSET VALUE, END OF PERIOD $ 14.42 $14.21 ======== ====== TOTAL RETURN(B) 8.51%+ 3.35%+ Net assets, end of period (000's) $218,354 $337 Ratio of expenses to average net assets 1.01%(A) 7.92%(A) Ratio of expenses to average net assets after expense reductions 1.01%(A) 1.17%(A) Ratio of net investment income (loss) to average net assets 2.78%(A) 1.74%(A) Portfolio turnover rate 381% 285%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 164 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
REAL RETURN BOND TRUST ------------------------------------------ SERIES I SERIES II SERIES III ------------ ------------ ------------ 5/05/2003* 5/05/2003* 9/5/2003* TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 12.50 $ 12.50 $ 12.41 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.08 0.06 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.53 0.54 0.69 ------- ------- ------- Total from investment operations 0.61 0.60 0.70 ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 13.11 $ 13.10 $ 13.11 ======= ======= ======= TOTAL RETURN(B) 4.88%+ 4.80%+ 5.64%+ Net assets, end of period (000's) $137,432 $142,254 $8 Ratio of expenses to average net assets 0.83%(A) 1.03%(A) 14.88%(A) Ratio of expenses to average net assets after expense reductions 0.83%(A) 1.03%(A) 1.18%(A) Ratio of net investment income (loss) to average net assets 1.00%(A) 0.67%(A) 0.20%(A) Portfolio turnover rate 574% 574% 574%
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U.S. GOVERNMENT SECURITIES TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 14.22 $ 13.72 $ 13.57 $ 13.24 $ 13.82 $ 14.21 $ 13.77 $ 13.70 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.21 0.54 0.69 0.85 0.74 0.18 0.39 0.03 Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.03 0.52 0.23 0.50 (0.77) 0.04 0.61 0.28 -------- -------- -------- -------- -------- ------------ ------- ------- Total from investment operations 0.24 1.06 0.92 1.35 (0.03) 0.22 1.00 0.31 -------- -------- -------- -------- -------- ------------ ------- ------- Less distributions: - ------------------- Dividends from net investment income (0.45) (0.56) (0.77) (1.02) (0.55) (0.46) (0.56) - -------- -------- -------- -------- -------- ------------ ------- ------- Total distributions (0.45) (0.56) (0.77) (1.02) (0.55) (0.46) (0.56) - -------- -------- -------- -------- -------- ------------ ------- ------- NET ASSET VALUE, END OF PERIOD $ 14.01 $ 14.22 $ 13.72 $ 13.57 $ 13.24 $ 13.97 $ 14.21 $ 14.01 ======== ======== ======== ======== ======== ============ ======= ======= TOTAL RETURN(B) 1.73% 7.99% 7.03% 10.87% (0.23%) 1.59% 7.53%+ 2.26%+ Net assets, end of period (000's) $524,845 $707,709 $558,392 $333,163 $363,269 $207,778 $128,200 $106 Ratio of expenses to average net assets 0.73% 0.74% 0.71% 0.72% 0.72% 0.93% 0.94%(A) 8.13%(A) Ratio of expenses to average net assets after expense reductions 0.73% 0.74% 0.71% 0.72% 0.72% 0.93% 0.94%(A) 1.08%(A) Ratio of net investment income (loss) to average net assets 1.52% 3.88% 5.10% 6.56% 6.03% 1.28% 3.04%(A) 0.82%(A) Portfolio turnover rate 97% 19% 41% 58% 40% 97% 19% 97%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 165 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
MONEY MARKET TRUST ------------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, ---------------------------------------------------- YEAR ENDED 1/28/2002* 9/5/2003* DECEMBER 31, TO TO 2003-- 2002-- 2001-- 2000-- 1999 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- -------- -------- ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 0.12 0.34 0.57 0.45 0.04 0.08 -# -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 0.06 0.12 0.34 0.57 0.45 0.04 0.08 -# -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.06) (0.12) (0.34) (0.57) (0.45) (0.04) (0.08) -# -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.06) (0.12) (0.34) (0.57) (0.45) (0.04) (0.08) -# -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 0.58% 1.18% 3.59% 5.88% 4.60% 0.38% 0.89%+ 0.04%+ Net assets, end of period (000's) $1,037,112 $1,415,874 $1,484,694 $950,155 $1,084,859 $183,428 $201,613 $2,152 Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.54% 0.55% 0.75% 0.75%(A) 8.15%(A) Ratio of expenses to average net assets after expense reductions 0.55% 0.55% 0.55% 0.54% 0.55% 0.75% 0.75%(A) 0.90%(A) Ratio of net investment income (loss) to average net assets 0.59% 1.17% 3.38% 5.71% 4.54% 0.38% 0.91%(A) 0.14%(A)
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SMALL CAP INDEX TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.78 $ 11.28 $ 11.29 $ 12.50 $ 8.78 $ 11.07 $ 11.77 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.06 0.10 0.20 0.46 0.04 0.07 0.01 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.96 (2.52) (0.03) (1.26) 3.94 (2.28) 1.02 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 4.02 (2.42) 0.17 (0.80) 3.98 (2.21) 1.03 -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - (0.08) (0.18) (0.41) - (0.08) - -------- -------- -------- -------- -------- -------- -------- Total distributions - (0.08) (0.18) (0.41) - (0.08) - -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 12.80 $ 8.78 $ 11.28 $ 11.29 $ 12.76 $ 8.78 $ 12.80 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 45.79% (21.47%) 1.50% (6.38%)+ 45.33% (19.95%)+ 8.75%+ Net assets, end of period (000's) $136,719 $59,161 $50,280 $34,825 $38,350 $9,714 $6 Ratio of expenses to average net assets 0.58% 0.59% 0.60% 0.65%(A) 0.78% 0.79%(A) 16.49%(A) Ratio of expenses to average net assets after expense reductions 0.58% 0.59% 0.60% 0.60%(A) 0.78% 0.79%(A) 0.93%(A) Ratio of net investment income (loss) to average net assets 0.61% 1.05% 1.87% 5.63%(A) 0.39% 0.87%(A) 0.18%(A) Portfolio turnover rate 36% 57% 32% 1% 36% 57% 36%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 166 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
INTERNATIONAL INDEX TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 6.96 $ 8.52 $ 11.11 $ 12.50 $ 6.96 $ 8.15 $ 7.96 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.13 0.12 0.12 0.09 0.12 0.05 -# Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.11 (1.58) (2.61) (1.32) 2.11 (1.14) 1.24 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.24 (1.46) (2.49) (1.23) 2.23 (1.09) 1.24 -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.12) (0.10) (0.10) (0.16) (0.11) (0.10) (0.13) -------- -------- -------- -------- -------- -------- -------- Total distributions (0.12) (0.10) (0.10) (0.16) (0.11) (0.10) (0.13) -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.08 $ 6.96 $ 8.52 $ 11.11 $ 9.08 $ 6.96 $ 9.07 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 32.18% (17.15%) (22.41%) (9.84%)+ 32.12% (13.35%)+ 15.57%+ Net assets, end of period (000's) $82,197 $50,675 $49,673 $49,180 $17,176 $5,338 $3 Ratio of expenses to average net assets 0.62% 0.62% 0.62% 0.65%(A) 0.82% 0.82%(A) 78.84%(A) Ratio of expenses to average net assets after expense reductions 0.60% 0.60% 0.60% 0.60%(A) 0.80% 0.80%(A) 0.95%(A) Ratio of net investment income (loss) to average net assets 1.75% 1.57% 1.25% 1.17%(A) 1.57% 0.81%(A) 0.17%(A) Portfolio turnover rate 13% 7% 12% 8% 13% 7% 13%
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MID CAP INDEX TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.82 $ 12.82 $ 13.11 $ 12.50 $ 10.81 $ 12.80 $ 13.31 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.08 0.07 0.11 0.10 0.05 0.05 0.04 Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.66 (2.01) (0.32) 0.77 3.66 (1.98) 1.21 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 3.74 (1.94) (0.21) 0.87 3.71 (1.93) 1.25 -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - (0.06) (0.08) (0.08) - (0.06) - Distributions from capital gains - - - (0.18) - - - -------- -------- -------- -------- -------- -------- -------- Total distributions - (0.06) (0.08) (0.26) - (0.06) - -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.56 $ 10.82 $ 12.82 $ 13.11 $ 14.52 $ 10.81 $ 14.56 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 34.57% (15.16%) (1.73%) 7.15%+ 34.32% (15.07%)+ 9.39%+ Net assets, end of period (000's) $145,255 $87,282 $58,197 $32,007 $42,657 $12,810 -## Ratio of expenses to average net assets 0.58% 0.58% 0.60% 0.69%(A) 0.78% 0.78%(A) 128.76%(A) Ratio of expenses to average net assets after expense reductions 0.58% 0.58% 0.60% 0.60%(A) 0.78% 0.78%(A) 0.93%(A) Ratio of net investment income (loss) to average net assets 0.62% 0.58% 0.85% 1.17%(A) 0.42% 0.42%(A) 0.88%(A) Portfolio turnover rate 8% 20% 19% 49% 8% 20% 8%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. ## Amount is less than $1,000 + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001 and the period ended December 31, 2000 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2000 for Series I and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 167 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
TOTAL STOCK MARKET INDEX TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.63 $ 9.79 $ 11.14 $ 12.50 $ 7.62 $ 9.67 $ 9.17 Income from investment operations: - ---------------------------------- Net investment income (loss) 0.09 0.08 0.09 0.08 0.07 0.07 0.03 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.24 (2.16) (1.36) (1.33) 2.24 (2.04) 0.76 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.33 (2.08) (1.27) (1.25) 2.31 (1.97) 0.79 -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income - (0.08) (0.08) (0.06) - (0.08) - Distributions from capital gains - - - (0.05) - - - -------- -------- -------- -------- -------- -------- -------- Total distributions - (0.08) (0.08) (0.11) - (0.08) - -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.96 $ 7.63 $ 9.79 $ 11.14 $ 9.93 $ 7.62 $ 9.96 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 30.54% (21.29%) (11.41%) (10.04%)+ 30.31% (20.36%)+ 8.62%+ Net assets, end of period (000's) $133,964 $59,970 $73,657 $56,390 $29,972 $6,163 $1 Ratio of expenses to average net assets 0.58% 0.59% 0.59% 0.62%(A) 0.78% 0.79%(A) 122.81%(A) Ratio of expenses to average net assets after expense reductions 0.58% 0.59% 0.59% 0.60%(A) 0.78% 0.79%(A) 0.93%(A) Ratio of net investment income (loss) to average net assets 1.05% 0.96% 0.93% 0.93%(A) 0.86% 0.98%(A) 0.96%(A) Portfolio turnover rate 6% 4% 5% 16% 6% 4% 6%
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500 INDEX TRUST ------------------------------------------------------------------------------------------ SERIES I SERIES II SERIES III --------------------------------------------- --------------------------- ------------ YEARS ENDED DECEMBER 31, 5/1/2000* YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------ TO DECEMBER 31, TO TO 2003-- 2002-- 2001-- 12/31/2000-- 2003-- 12/31/2002-- 12/31/2003-- -------- -------- -------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 7.60 $ 9.81 $ 11.28 $ 12.50 $ 7.59 $ 9.68 $ 8.87 Income from investment operations: - ------------------- Net investment income (loss) 0.10 0.09 0.09 0.09 0.09 0.08 0.03 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.01 (2.30) (1.48) (1.29) 1.99 (2.17) 0.73 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.11 (2.21) (1.39) (1.20) 2.08 (2.09) 0.76 -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.08) -# (0.08) (0.02) (0.08) -# - -------- -------- -------- -------- -------- -------- -------- Total distributions (0.08) -# (0.08) (0.02) (0.08) -# - -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.63 $ 7.60 $ 9.81 $ 11.28 $ 9.59 $ 7.59 $ 9.63 ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 28.01% (22.53%) (12.37%) (9.57%)+ 27.76% (21.59%)+ 8.57%+ Net assets, end of period (000's) $980,366 $678,414 $772,559 $680,264 $115,826 $38,267 $16 Ratio of expenses to average net assets 0.57% 0.57% 0.57% 0.55%(A) 0.77% 0.77%(A) 11.12%(A) Ratio of expenses to average net assets after expense reductions 0.57% 0.57% 0.57% 0.55%(A) 0.77% 0.77%(A) 0.92%(A) Ratio of net investment income (loss) to average net assets 1.22% 1.05% 0.84% 1.08%(A) 1.02% 1.12%(A) 1.09%(A) Portfolio turnover rate 1% 6% 1% 6% 1% 6% 1%
- -- Net investment income has been calculated using the average shares method. * Commencement of operations # Amount is less than $.01 per share. + Not Annualized (A) Annualized (B) The total return for the period ended December 31, 2000 for Series I and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 168 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
LIFESTYLE AGGRESSIVE 1000 TRUST --------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- ------------------------- ---------- YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003 -------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.14 $ 10.34 $ 13.09 $ 14.54 $ 13.39 $ 8.14 $ 10.09 $ 9.80 Income from investment operations: - ---------------------------- Net investment income (loss)** 0.02 0.04 0.04 0.05 0.08 0.02 0.04 0.00 Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.81 (2.16) (1.84) (0.78) 1.77 2.81 (1.91) 1.13 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.83 (2.12) (1.80) (0.73) 1.85 2.83 (1.87) 1.13 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.02) (0.04) (0.04) (0.05) (0.08) (0.02) (0.04) - Distributions from capital gains - - (0.53) (0.67) (0.62) - - - Return of capital (0.02) (0.04) (0.38) - - (0.02) (0.04) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.04) (0.08) (0.95) (0.72) (0.70) (0.04) (0.08) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.93 $ 8.14 $ 10.34 $ 13.09 $ 14.54 $ 10.93 $ 8.14 $ 10.93 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 34.91% (20.71%) (13.67%) (5.11%) 14.61% 34.91% (18.74%)+ 11.53%+ Net assets, end of period (000's) $327,927 $185,893 $187,473 $148,693 $93,073 $157,764 $27,099 $7 Ratio of expenses to average net assets*** 0.079% 0.10% 0.10% 0.075% 0.03% 0.079% 0.10%(A) 21.50%(A) Ratio of expenses to average net assets after expense reductions*** 0.075% 0.075% 0.075% 0.05% 0.03% 0.075% 0.075%(A) 0.225%(A) Ratio of net investment income (loss) to average net assets** 0.23% 0.33% 0.29% 0.33% 0.64% 0.11% (0.05%)(A) (0.13%)(A) Portfolio turnover rate 53% 90% 82% 104% 136% 53% 90% 53%
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LIFESTYLE GROWTH 820 TRUST --------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- ------------------------- ---------- YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003 -------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.28 $ 11.25 $ 13.59 $ 15.18 $ 13.78 $ 9.28 $ 11.06 $ 10.77 Income from investment operations: - ---------------------------- Net investment income (loss)** 0.09 0.14 0.18 0.13 0.23 0.09 0.14 - Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.61 (1.89) (1.43) (0.57) 1.94 2.60 (1.70) 1.09 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.70 (1.75) (1.25) (0.44) 2.17 2.69 (1.56) 1.09 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.09) (0.14) (0.18) (0.13) (0.23) (0.09) (0.14) - Distributions from capital gains (0.01) (0.02) (0.59) (1.02) (0.54) (0.01) (0.02) - Return of capital (0.02) (0.06) (0.32) - - (0.02) (0.06) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.12) (0.22) (1.09) (1.15) (0.77) (0.12) (0.22) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.86 $ 9.28 $ 11.25 $ 13.59 $ 15.18 $ 11.85 $ 9.28 $ 11.86 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(C) 29.55% (15.84%) (8.97%) (3.05%) 16.56% 29.44% (14.4%)+ 10.12%+ Net assets, end of period (000's) $1,223,950 $765,561 $726,548 $545,106 $414,257 $651,730 $120,949 $15 Ratio of expenses to average net assets*** 0.071% 0.09% 0.09% 0.06% 0.04% 0.071% 0.09%(A) 19.95%(A) Ratio of expenses to average net assets after expense reductions*** 0.071% 0.075% 0.075% 0.05% 0.04% 0.071% 0.075%(A) 0.221%(A) Ratio of net investment income (loss) to average net assets** 0.84% 1.24% 1.33% 0.94% 1.73% 0.53% (0.01%)(A) (0.14%)(A) Portfolio turnover rate 55% 117% 84% 102% 127% 55% 117% 55%
* Commencement of operations ** Recognition of net investment income by the Portfolio is affected by the timing of the declaration of dividends by the underlying investment companies in which the Portfolio invests. *** Does not include expenses of the investment companies in which the Portfolio invests. + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 169 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
LIFESTYLE BALANCED 640 TRUST ----------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ------------------------------------------------------ ------------------------- ---------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------------------------------ DECEMBER 31, TO TO 2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003 ---------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.30 $ 11.82 $ 13.53 $ 14.24 $ 13.49 $ 10.30 $ 11.72 $ 11.45 Income from investment operations: - ---------------------- Net investment income (loss)** 0.19 0.29 0.35 0.26 0.39 0.19 0.29 - Net realized and unrealized gain (loss) on investments and foreign currency transactions 2.22 (1.43) (1.02) 0.06 1.20 2.22 (1.33) 0.98 ---------- -------- -------- -------- -------- ------------ ---------- ---------- Total from investment operations 2.41 (1.14) (0.67) 0.32 1.59 2.41 (1.04) 0.98 ---------- -------- -------- -------- -------- ------------ ---------- ---------- Less distributions: - ------------------- Dividends from net investment income (0.19) (0.29) (0.35) (0.26) (0.39) (0.19) (0.29) - Distributions from capital gains (0.05) (0.04) (0.69) (0.77) (0.45) (0.05) (0.04) - Return of capital (0.04) (0.05) - - - (0.04) (0.05) - ---------- -------- -------- -------- -------- ------------ ---------- ---------- Total distributions (0.28) (0.38) (1.04) (1.03) (0.84) (0.28) (0.38) - ---------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, END OF PERIOD $12.43 $10.30 $11.82 $13.53 $14.24 $12.43 $10.30 $12.43 ========== ======== ======== ======== ======== ============ ========== ========== TOTAL RETURN(B) 23.97% (9.95%) (4.71%) 2.45% 12.42% 23.97% (9.18%)+ 8.56%+ Net assets, end of period (000's) $1,330,925 $859,857 $745,215 $545,718 $416,706 $740,011 $164,273 $46 Ratio of expenses to average net assets*** 0.070% 0.09% 0.09% 0.06% 0.03% 0.070% 0.09%(A) 8.35%(A) Ratio of expenses to average net assets after expense reductions*** 0.070% 0.075% 0.075% 0.05% 0.03% 0.070% 0.075%(A) 0.220%(A) Ratio of net investment income (loss) to average net assets** 1.59% 2.48% 2.47% 1.87% 2.93% 1.11% 0.07%(A) (0.22%)(A) Portfolio turnover rate 55% 114% 71% 85% 126% 55% 114% 55%
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LIFESTYLE MODERATE 460 TRUST ----------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ------------------------------------------------------ ------------------------- ---------- YEARS ENDED DECEMBER 31, YEAR ENDED 1/28/2002* 9/5/2003* ------------------------------------------------------ DECEMBER 31, TO TO 2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003 ---------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.22 $ 12.11 $ 13.01 $ 14.13 $ 13.91 $ 11.22 $ 12.07 $ 11.98 Income from investment operations: - ---------------------- Net investment income (loss) ** 0.27 0.40 0.45 0.58 0.41 0.27 0.40 - Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.67 (0.88) (0.61) (0.07) 0.65 1.67 (0.84) 0.81 ---------- -------- -------- -------- -------- ------------ ---------- ---------- Total from investment operations 1.94 (0.48) (0.16) 0.51 1.06 1.94 (0.44) 0.81 ---------- -------- -------- -------- -------- ------------ ---------- ---------- Less distributions: - ------------------- Dividends from net investment income (0.27) (0.40) (0.45) (0.58) (0.41) (0.27) (0.40) - Distributions from capital gains (0.06) - (0.10) (1.05) (0.43) (0.06) - - Return of capital (0.04) (0.01) (0.19) - - (0.04) (0.01) - ---------- -------- -------- -------- -------- ------------ ---------- ---------- Total distributions (0.37) (0.41) (0.74) (1.63) (0.84) (0.37) (0.41) - ---------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 12.79 $ 11.22 $ 12.11 $ 13.01 $ 14.13 $ 12.79 $ 11.22 $ 12.79 ========== ======== ======== ======== ======== ============ ========== ========== TOTAL RETURN(C) 17.83% (4.07%) (1.09%) 4.26% 7.89% 17.83% (3.77%)+ 6.76%+ Net assets, end of period (000's) $461,743 $325,608 $245,499 $182,038 $167,500 $285,665 $74,241 $3 Ratio of expenses to average net assets*** 0.075% 0.09% 0.10% 0.075% 0.04% 0.075% 0.09%(A) 44.71%(A) Ratio of expenses to average net assets after expense reductions*** 0.075% 0.075% 0.075% 0.05% 0.04% 0.075% 0.075%(A) 0.225%(A) Ratio of net investment income (loss) to average net assets** 2.15% 3.17% 3.23% 4.37% 2.92% 1.58% 0.19%(A) (0.14%)(A) Portfolio turnover rate 46% 113% 84% 86% 109% 46% 113% 46%
* Commencement of operations ** Recognition of net investment income by the Portfolio is affected by the timing of the declaration of dividends by the underlying investment companies in which the Portfolio invests. *** Does not include expenses of the investment companies in which the Portfolio invests. + Not Annualized (A) Annualized (B) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. (C) The total return for the years ended 2002, 2001, 2000 and 1999 for Series I, for the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 170 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
LIFESTYLE CONSERVATIVE 280 TRUST --------------------------------------------------------------------------------------------- SERIES I SERIES II SERIES III ---------------------------------------------------- ------------------------- ---------- YEAR YEARS ENDED DECEMBER 31, ENDED 1/28/2002* 9/5/2003* ---------------------------------------------------- DECEMBER 31, TO TO 2003 2002 2001 2000 1999 2003 12/31/2002 12/31/2003 -------- -------- -------- -------- -------- ------------ ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.72 $ 12.94 $ 13.17 $ 13.15 $ 13.53 $ 12.72 $ 12.93 $ 12.95 Income from investment operations: - ---------------------- Net investment income (loss)** 0.38 0.39 0.55 0.51 0.60 0.38 0.39 - Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.03 (0.16) (0.14) 0.41 (0.05) 1.03 (0.15) 0.69 -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 1.41 0.23 0.41 0.92 0.55 1.41 0.24 0.69 -------- -------- -------- -------- -------- -------- -------- -------- Less distributions: - ------------------- Dividends from net investment income (0.39) (0.39) (0.55) (0.51) (0.60) (0.39) (0.39) - Distributions from capital gains (0.10) (0.04) (0.09) (0.39) (0.33) (0.10) (0.04) - Return of capital - (0.02) - - - - (0.02) - -------- -------- -------- -------- -------- -------- -------- -------- Total distributions (0.49) (0.45) (0.64) (0.90) (0.93) (0.49) (0.45) - -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.64 $ 12.72 $ 12.94 $ 13.17 $ 13.15 $ 13.64 $ 12.72 $ 13.64 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN(B) 11.47% 1.80% 3.30% 7.62% 4.21% 11.46% 1.83%+ 5.33%+ Net assets, end of period (000's) $299,278 $250,656 $174,041 $105,627 $106,435 $153,654 $47,697 $101 Ratio of expenses to average net assets*** 0.079% 0.09% 0.10% 0.08% 0.03% 0.079% 0.09%(A) 8.73%(A) Ratio of expenses to average net assets after expense reductions*** 0.075% 0.075% 0.075% 0.05% 0.03% 0.075% 0.075%(A) 0.225%(A) Ratio of net investment income (loss) to average net assets** 2.89% 2.62% 3.82% 4.00% 4.40% 2.21% 0.25%(A) (0.22%)(A) Portfolio turnover rate 40% 69% 38% 53% 93% 40% 69% 40%
- -------------------------------------------------------------------------------- * Commencement of operations ** Recognition of net investment income by the Portfolio is affected by the timing of the declaration of dividends by the underlying investment companies in which the Portfolio invests. *** Does not include expenses of the investment companies in which the Portfolio invests. + Not Annualized (A) Annualized (B) The total return for the years ended 2003, 2002, 2001, 2000 and 1999 for Series I, for the year ended 2003 and the period ended December 31, 2002 for Series II and for the period ended December 31, 2003 for Series III would have been lower, had operating expenses not been reduced. 171 MANUFACTURERS INVESTMENT TRUST FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
AMERICAN INTERNATIONAL AMERICAN GROWTH TRUST TRUST --------------------------- --------------------------- SERIES I SERIES II SERIES I SERIES II ------------ ------------ ------------ ------------ 07/09/2003* 05/05/2003* 07/09/2003* 05/05/2003* TO TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $13.94 $ 12.50 $13.78 $ 12.50 Income from investment operations: - ---------------------------------- Net investment Income (loss)** - # - # 0.16 0.14 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.48 2.91 2.74 4.02 ------ -------- ------ -------- Total from investment operations 1.48 2.91 2.90 4.16 ------ -------- ------ -------- NET ASSET VALUE, END OF PERIOD $15.42 $ 15.41 $16.68 $ 16.66 ====== ======== ====== ======== TOTAL RETURN 10.62%+ 23.28%+ 21.04%+ 33.28%+ Net assets, end of period (000's) $3,389 $269,774 $2,590 $178,069 Ratio of expenses to average net assets*** 0.38%(A) 0.53%(A) 0.39%(A) 0.54%(A) Ratio of net investment income (loss) to average net assets** 0.04%(A) (0.23%)(A) 3.34%(A) 2.01%(A) Portfolio turnover rate 1% 1% 22% 22%
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AMERICAN BLUE CHIP AMERICAN GROWTH-INCOME INCOME AND GROWTH TRUST TRUST --------------------------- --------------------------- SERIES I SERIES II SERIES I SERIES II ------------ ------------ ------------ ------------ 07/09/2003* 05/05/2003* 07/09/2003* 05/05/2003* TO TO TO TO 12/31/2003-- 12/31/2003-- 12/31/2003-- 12/31/2003-- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 13.66 $ 12.50 $ 13.78 $ 12.50 Income from investment operations: - ---------------------------------- Net investment income (loss)** - # - # 0.10 0.09 Net realized and unrealized gain (loss) on investments and foreign currency transactions 1.80 2.94 1.67 2.94 -------- -------- -------- -------- Total from investment operations 1.80 2.94 1.77 3.03 -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 15.46 $ 15.44 $ 15.55 $ 15.53 ======== ======== ======== ======== TOTAL RETURN 13.18%+ 23.52%+ 12.84%+ 24.24%+ Net assets, end of period (000's) $1,282 $180,792 $1,223 $182,259 Ratio of expenses to average net assets*** 0.39%(A) 0.54%(A) 0.38%(A) 0.53%(A) Ratio of net investment income (loss) to average net assets** (0.39%)(A) (0.54%)(A) 3.66%(A) 2.08%(A) Portfolio turnover rate - ## - ## 2% 2%
- -- Net investment income has been calculated using the SEC method. * Commencement of operations ** Recognition of net investment income by the Portfolio is affected by the timing of the declaration of dividends by the underlying investment companies in which the Portfolio invests. *** Does not include expenses of the investment companies in which the Portfolio invests. # Amount is less than $.01 per share. ## Amount is less than 1%. + Not Annualized (A) Annualized 172 ADDITIONAL INFORMATION Additional information about the Trust's investments is available in the Trust's annual and semi-annual reports to shareholders. The Trust's annual report contains a discussion of the market conditions and investment strategies that significantly affected the Trust's performance during its last fiscal year. Additional information about the Trust is also contained in the Statement of Additional Information dated the same date as this Prospectus. The Statement of Additional Information is incorporated by reference into this Prospectus. The annual and semi-annual reports, the Statement of Additional Information and other information about the Trust are available upon request and without charge by writing the Trust at 73 Tremont Street, Boston, MA 02108 or calling the Trust at (800) 344-1029. Shareholder inquiries should also be directed to this address and phone number. Information about the Trust (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission ("SEC") at 1-202-942-8090. Reports and other information about the Trust are available on the SEC's Internet site at http://www.sec.gov and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section in Washington D.C. 20549-0102. The Trust's Investment Company and 1933 Act File Numbers are 811-4146 and 2-94157 MIT.PRO5/2004 173
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