-----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, Scm6MUJyrC8JVFRyF7F+AgYo/friN+nYY5wchbPSUUSxGNoDAJawkAlSiRV6MVm5 kKWSqcN/9xhYsz5Nq0LqoQ== 0001010521-01-500173.txt : 20010917 0001010521-01-500173.hdr.sgml : 20010917 ACCESSION NUMBER: 0001010521-01-500173 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20010914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN VARIABLE SERIES TRUST I CENTRAL INDEX KEY: 0000785303 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 042889957 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-69440 FILM NUMBER: 1737734 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 1 vst.txt JOHN HANCOCK VARIABLE SERIES TRUST Securities Act Registration No. 333-_______________ U.S. Securities and Exchange Commission Washington, D.C. 20549 Form N-14 Registration Statement Under the Securities Act of 1933 [ ] Pre-Effective Amendment No. __ [ ] 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 BERGMAN, ESQUIRE THOMAS C. LAUERMAN, ESQUIRE John Hancock Life Insurance Company Freedman, Levy, Kroll & Simonds 197 Clarendon Street 1050 Connecticut Avenue, N.W. Boston, MA 02117 Washington, D.C. 20036 Approximate Date of Proposed public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933. It is proposed that this filing will become effective on October 15, 2001 pursuant to Rule 488 under the Act. Pursuant to Rule 429 under the Act, the prospectus in this registration statement also relates to Registrant's currently effective registration statement on Form N-1A, File No. 33-2081. No filing fee is due in reliance on Section 24(f) of the Act JOHN HANCOCK VARIABLE SERIES TRUST I CROSS-REFERENCE SHEET Items Required by Form N-14
PART A - ------ Item No. Item Caption Prospectus Caption - -------- ------------ ------------------ 1. Beginning of Registration COVER PAGE OF REGISTRATION Statement and Outside Front STATEMENT; FRONT COVER PAGE OF Cover Page of Prospectus PROSPECTUS 2. Beginning and Outside Back TABLE OF CONTENTS Cover Page of Prospectus 3. Synopsis and Risk Factors SUMMARY; INVESTMENT RISKS 4. Information About the INTRODUCTION; SUMMARY; INVESTMENT Transaction RISKS; INFORMATION CONCERNING THE MEETING; PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION; FURTHER INFORMATION ON EACH REORGANIZATION; CAPITALIZATION 5. Information About the PROSPECTUS COVER PAGE; INTRODUCTION; Registrant SUMMARY; ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES 6. Information About the PROSPECTUS COVER PAGE; INTRODUCTION; Company Being Acquired SUMMARY; ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES 7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF SPECIAL MEETING OF SHAREHOLDERS; SUMMARY; INFORMATION CONCERNING THE MEETING; VOTING RIGHTS AND REQUIRED VOTE 8. Interest of Certain Persons EXPERTS and Experts 9. Additional Information NOT APPLICABLE Required for Reoffering by Persons Deemed to be Underwriters PART B - ------ Caption in Statement of Item No. Item Caption Additional Information - -------- ------------ ---------------------- 10. Cover Page COVER PAGE 11. Table of Contents TABLE OF CONTENTS 12. Additional Information A About the Registrant 13. Additional Information About B the Companies Being Acquired 14. Financial Statements C A ADDITIONAL INFORMATION ABOUT GROWTH & INCOME FUND, MONEY MARKET FUND, EQUITY INDEX FUND, INTERNATIONAL EQUITY FUND, FUNDAMENTAL GROWTH FUND, SMALL CAP GROWTH FUND AND ACTIVE BOND FUND. B ADDITIONAL INFORMATION ABOUT V.A. CORE EQUITY FUND, V.A. MONEY MARKET FUND, V.A. BOND FUND, V.A. 500 INDEX FUND, V.A. INTERNATIONAL FUND, V.A. LARGE CAP GROWTH FUND, V.A. MID CAP GROWTH FUND, V.A. SMALL CAP GROWTH FUND. C ADDITIONAL INFORMATION ABOUT GROWTH & INCOME FUND, MONEY MARKET FUND, EQUITY INDEX FUND, INTERNATIONAL EQUITY FUND, FUNDAMENTAL GROWTH FUND, SMALL CAP GROWTH FUND AND ACTIVE BOND FUND. PART C - ------ Item No. Item Caption - -------- ------------ 15. Indemnification INDEMNIFICATION 16. Exhibits EXHIBITS 17. Undertakings UNDERTAKINGS
November 1, 2001 Dear Contract or Certificate Owner: I am writing to ask for your vote on important matters concerning your investment in certain funds within your John Hancock Variable Annuity. Your fund's trustees are proposing the merger of certain funds in the John Hancock Declaration Trust (the "Acquired Funds") into certain similar funds in the John Hancock Variable Series Trust I (the "Acquiring Funds"), as described in the enclosed proxy materials and summarized in the questions and answers on the following pages. The Board of Trustees considered the following matters, among others, in approving the proposals: || In most cases, the Acquiring Funds' total expenses are lower. As a result, shareholders may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay. Consolidating your fund's assets with a similar fund to increase the overall asset base is a logical path for containing the fund's expense ratios going forward. || Combining the funds' assets into a single investment portfolio may broaden diversification, making investors less vulnerable to weakness in any single sector of the market. The fund merger proposals have been unanimously approved by each fund's board of trustees, who believe the mergers will benefit you. The enclosed proxy statement contains further explanation and important details of the reorganizations, which I strongly encourage you to read before voting. Your Vote Makes a Difference! No matter what size your investment may be, your vote is important. Please read the enclosed materials and to complete, sign and return the enclosed proxy ballot(s) to us immediately. Your prompt response will help avoid the need for additional mailings. For your convenience, we have provided a postage-paid envelope. If you have any questions or need additional information, please contact your Investment Professional or call a John Hancock Service Representative at 1-800-824-0335, Monday through Friday between 8:00 A.M. and 8:00 P.M. Eastern Time. I thank you for your prompt vote on this matter. Sincerely, /s/Maureen R. Ford - ------------------ Maureen R. Ford Chairman and Chief Executive Officer Declaration Variable Annuity, Patriot Variable Annuity and Revolution Variable Annuities are issued by John Hancock Life Insurance Company, or its subsidiary John Hancock Variable Life Insurance Company*, and are distributed by John Hancock Funds, Inc., 101 Huntington Avenue, Boston, MA 02199-7603, or Signator Investors Inc., 200 Clarendon Street, Boston, MA 02117. *Not licensed in New York. Q&A --- Q. What are the changes being proposed? A. Generally, these proposals focus on merging funds into similar funds, which have significantly larger assets and offer a greater opportunity for future growth. Specifically, the trustees of your fund(s) are proposing the following mergers: - -------------------------------------------------------------------------------- Acquired Fund Acquiring Fund - -------------------------------------------------------------------------------- Proposal 1 V.A. Core Equity Fund Growth & Income Fund - -------------------------------------------------------------------------------- Proposal 2 V.A. Large Cap Growth Fund Growth & Income Fund - -------------------------------------------------------------------------------- Proposal 3 V.A. 500 Index Fund Equity Index Fund - -------------------------------------------------------------------------------- Proposal 4 V.A. International Fund International Equity Fund - -------------------------------------------------------------------------------- Proposal 5 V.A. Mid Cap Growth Fund Fundamental Growth Fund - -------------------------------------------------------------------------------- Proposal 6 V.A. Small Cap Growth Fund Small Cap Growth Fund - -------------------------------------------------------------------------------- Proposal 7 V.A. Bond Fund Active Bond Fund - -------------------------------------------------------------------------------- Proposal 8 V.A. Money Market Fund Money Market Fund - -------------------------------------------------------------------------------- Q. Will this change affect the number of units I currently have? Will there be any tax implications? A. No. There will be no impact on the number of units you have invested in your variable annuity and there are no tax implications (no Form 1099R will be generated) Q. Will the transfer count towards the 12 free transfers allowed per contract year? A. No, the merger transfer will be free and it will not count toward your allowable 12 free transfers per year. Q. What if I do not want to have any units of the acquired fund transferred to the proposed acquiring fund? A. Prior to the merger, you may contact an Annuity Service Representative at 1-800-824-0335, Monday through Friday between 8:00 A.M. - 8:00 P.M. Eastern Time and request a transfer to another investment option or Fixed Account (if available in your state). Please consult your Investment Professional prior to reallocating your assets. Q. How do I vote? A. Follow two simple steps: STEP 1: First, read the sections of the proxy statement that apply to your fund(s). STEP 2: Finally, complete the enclosed voting card for each of your funds and return it in the enclosed postage-paid envelope. If you have more than one card, you need to complete, sign and mail each one. Q. Does my vote make a difference? A. Whether you are a large or small investor, your vote is important, and we urge you to participate in this process to ensure that John Hancock represents your wishes when it casts votes at the shareholder meeting. The Board voted unanimously to recommend these changes for your fund(s), and your approval is needed to implement the changes. JOHN HANCOCK V.A. CORE EQUITY FUND JOHN HANCOCK V.A. LARGE CAP GROWTH FUND JOHN HANCOCK V.A. 500 INDEX FUND JOHN HANCOCK V.A. INTERNATIONAL FUND JOHN HANCOCK V.A. MID CAP GROWTH FUND JOHN HANCOCK V.A. SMALL CAP GROWTH FUND JOHN HANCOCK V.A. BOND FUND JOHN HANCOCK V.A. MONEY MARKET FUND (each a "fund", and each a series of John Hancock Declaration Trust) 101 Huntington Avenue Boston, MA 02199 NOTICE OF MEETING OF SHAREHOLDERS SCHEDULED FOR DECEMBER 5, 2001 This is the formal agenda for each fund's shareholder meeting. It tells you, as contract owners, and the insurance companies that are the owners of each fund's shares, what matters will be voted on and the time and place of the meeting. The insurance companies will vote their fund shares as instructed by their contract or certificate owners, who are also referred to in the proxy materials as "shareholders" for this limited purpose. To the shareholders of each fund: A joint shareholder meeting for your fund(s) will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time, to consider the following: 1. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Core Equity Fund ("V.A. Core Equity Fund") and the Growth & Income Fund of the John Hancock Variable Series Trust I ("Growth & Income Fund"). Under this Agreement, V.A. Core Equity Fund would transfer all of its assets to Growth & Income Fund in exchange for shares of Growth & Income Fund. These shares would be distributed proportionately to the shareholders of V.A. Core Equity Fund. Growth & Income Fund would also assume V.A. Core Equity Fund's liabilities. V.A. Core Equity Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 2. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Large Cap Growth Fund ("V.A. Large Cap Growth Fund") and the Growth & Income Fund of the John Hancock Variable Series Trust I ("Growth & Income Fund"). Under this Agreement, V.A. Large Cap Growth Fund would transfer all of its assets to Growth & Income Fund in exchange for shares of Growth & Income Fund. These shares would be distributed proportionately to the shareholders of V.A. Large Cap Growth Fund. Growth & Income Fund would also assume V.A. Large Cap Growth Fund's liabilities. V.A. Large Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 3. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. 500 Index Fund ("V.A. 500 Index Fund") and the Equity Index Fund of the John Hancock Variable Series Trust I ("Equity Index Fund"). Under this Agreement, V.A. 500 Index Fund would transfer all of its assets to Equity Index Fund in exchange for shares of Equity Index Fund. These shares would be distributed proportionately to the shareholders of V.A. 500 Index Fund. Equity Index Fund would also assume V.A. 500 Index Fund's liabilities. V.A. 500 Index Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 4. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. International Fund ("V.A. International Fund") and the International Equity Fund of the John Hancock Variable Series Trust I ("International Equity Fund"). Under this Agreement, V.A. International Fund would transfer all of its assets to International Equity Fund in exchange for shares of International Equity Fund. These shares would be distributed proportionately to the shareholders of V.A. International Fund. International Equity Fund would also assume V.A. International Fund's liabilities. V.A. International Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 5. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Mid Cap Growth Fund ("V.A. Mid Cap Growth Fund") and the Fundamental Growth Fund of the John Hancock Variable Series Trust I ("Fundamental Growth Fund"). Under this Agreement, V.A. Mid Cap Growth Fund would transfer all of its assets to Fundamental Growth Fund in exchange for shares of Fundamental Growth Fund. These shares would be distributed proportionately to the shareholders of V.A. Mid Cap Growth Fund. Fundamental Growth Fund would also assume V.A. Mid Cap Growth Fund's liabilities. V.A. Mid Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 6. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Small Cap Growth Fund ("V.A. Small Cap Growth Fund") and the Small Cap Growth Fund of the John Hancock Variable Series Trust I ("VST Small Cap Growth Fund"). Under this Agreement, V.A. Small Cap Growth Fund would transfer all of its assets to VST Small Cap Growth Fund in exchange for shares of VST Small Cap Growth Fund. These shares would be distributed proportionately to the shareholders of V.A. Small Cap Growth Fund. VST Small Cap Growth Fund would also assume V.A. Small Cap Growth Fund's liabilities. V.A. Small Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 7. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Bond Fund ("V.A. Bond Fund") and the Active Bond Fund of the John Hancock Variable Series Trust I ("Active Bond Fund"). Under this Agreement, V.A. Bond Fund would transfer all of its assets to Active Bond Fund in exchange for shares of Active Bond Fund. These shares would be distributed proportionately to the shareholders of V.A. Bond Fund. Active Bond Fund would also assume V.A. Bond Fund's liabilities. V.A. Bond Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 8. A proposal to approve an Agreement and Plan of Reorganization between John Hancock V.A. Money Market Fund ("V.A. Money Market Fund") and the Money Market Fund of the John Hancock Variable Series Trust I ("VST Money Market Fund"). Under this Agreement, V.A. Money Market Fund would transfer all of its assets to VST Money Market Fund in exchange for shares of VST Money Market Fund. These shares would be distributed proportionately to the shareholders of V.A. Money Market Fund. VST Money Market Fund would also assume V.A. Money Market Fund's liabilities. V.A. Money Market Fund's Board of Trustees recommends that shareholders vote FOR this proposal. 9. Any other business that may properly come before the meeting. Shareholders of record as of the close of business on September 20, 2001 are entitled to vote at the meeting and any related follow-up meetings. Whether or not you expect to attend the meeting, please complete and return the enclosed proxy card (voting instruction card). If shareholders do not return their proxies in sufficient numbers, your fund will incur the cost of extra solicitations, which is indirectly borne by shareholders. By order of the Board of Trustees, Susan S. Newton Secretary November 1, 2001 2 PROXY STATEMENT OF V.A. CORE EQUITY FUND V.A. LARGE CAP GROWTH FUND V.A. 500 INDEX FUND V.A. INTERNATIONAL FUND V.A. MID CAP GROWTH FUND V.A. SMALL CAP GROWTH FUND V.A. BOND FUND V.A. MONEY MARKET FUND (each an "Acquired Fund" or "your fund", and each a series of John Hancock Declaration Trust) PROSPECTUS FOR GROWTH & INCOME FUND EQUITY INDEX FUND INTERNATIONAL EQUITY FUND FUNDAMENTAL GROWTH FUND SMALL CAP GROWTH FUND ACTIVE BOND FUND MONEY MARKET FUND (each an "Acquiring Fund", and each a series of John Hancock Variable Series Trust I) This proxy statement and prospectus contains the information shareholders should know before voting on the proposed reorganization of the Acquired Funds into the Acquiring Funds. Please read it carefully and retain it for future reference. How each Reorganization Will Work o Each Acquired Fund will transfer all of its assets to the respective Acquiring Fund. The Acquiring Fund will assume the Acquired Fund's liabilities. o Each Acquiring Fund will issue shares to the respective Acquired Fund in an amount equal to the value of the Acquired Fund's shares. These shares will be distributed to the Acquired Fund's shareholders in proportion to their holdings on the reorganization date. o The reorganization will be tax-free to shareholders. o Each Acquired Fund will be liquidated and fund shareholders will become shareholders of the corresponding Acquiring Fund. Shares of the Acquiring Funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other depository institution. These shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Shares of the Acquiring Funds have not been approved or disapproved by the Securities and Exchange Commission. The Securities and Exchange Commission has not passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 1 Why the Acquired Funds' Trustees are Recommending the Reorganizations The Acquired Funds' Trustees believe that reorganizing each fund into a larger fund with similar investment policies will enable the shareholders of the funds to benefit from increased diversification, the ability to achieve better net prices on securities trades and economies of scale that may contribute to a lower expense ratio. Therefore, the Trustees recommend that Acquired Fund shareholders vote FOR the reorganization.
- --------------------------------------------------------------------------------------------- Where to Get More Information - --------------------------------------------------------------------------------------------- Prospectuses of the Acquired Funds and the Incorporated by reference into this proxy Acquiring Funds dated May 1, 2001. statement and prospectus and summarized in Appendices A and B. - --------------------------------------------------------------------------------------------- The Acquiring Funds' annual and semiannual On file with the Securities and Exchange reports to shareholders. Commission ("SEC") and available at no - ------------------------------------------------ charge by calling 1-800-824-0335. The Acquired Funds' annual and semiannual Incorporated by reference into this proxy reports to shareholders. statement and prospectus. - ------------------------------------------------ A statement of additional information dated November 1, 2001. It contains additional information about the Acquired Funds and the Acquiring Funds. - --------------------------------------------------------------------------------------------- To ask questions about this proxy statement Call our toll-free telephone and prospectus. number: 1-800-824-0335. - ---------------------------------------------------------------------------------------------
The date of this proxy statement and prospectus is November 1, 2001. 2 TABLE OF CONTENTS Page INTRODUCTION............................................................. 4 PROPOSAL 1 - V.A. CORE EQUITY FUND....................................... 5 Summary................................................................. 5 Investment Risks........................................................ 11 Proposal to Approve the Agreement and Plan of Reorganization............ 12 PROPOSAL 2 - V.A. LARGE CAP GROWTH FUND.................................. 14 Summary................................................................. 14 Investment Risks........................................................ 20 Proposal to Approve the Agreement and Plan of Reorganization............ 21 PROPOSAL 3 - V.A. 500 INDEX FUND......................................... 23 Summary................................................................. 23 Investment Risks........................................................ 28 Proposal to Approve the Agreement and Plan of Reorganization............ 28 PROPOSAL 4 - V.A. INTERNATIONAL FUND..................................... 30 Summary................................................................. 30 Investment Risks........................................................ 35 Proposal to Approve the Agreement and Plan of Reorganization............ 36 PROPOSAL 5 - V.A. MID CAP GROWTH FUND.................................... 38 Summary................................................................. 38 Investment Risks........................................................ 43 Proposal to Approve the Agreement and Plan of Reorganization............ 43 PROPOSAL 6 - V.A. SMALL CAP GROWTH FUND.................................. 45 Summary................................................................. 45 Investment Risks........................................................ 50 Proposal to Approve the Agreement and Plan of Reorganization............ 50 PROPOSAL 7 - V.A. Bond Fund.............................................. 52 Summary................................................................. 52 Investment Risks........................................................ 57 Proposal to Approve the Agreement and Plan of Reorganization............ 57 PROPOSAL 8 - V.A. MONEY MARKET FUND...................................... 59 Summary................................................................. 59 Investment Risks........................................................ 64 Proposal to Approve the Agreement and Plan of Reorganization............ 65 FURTHER INFORMATION ON EACH REORGANIZATION............................... 66 CAPITALIZATION........................................................... 67 ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES................................................... 69 BOARDS' EVALUATION AND RECOMMENDATION ................................... 69 VOTING RIGHTS AND REQUIRED VOTE ......................................... 70 INFORMATION CONCERNING THE MEETING....................................... 70 OWNERSHIP OF SHARES OF THE FUNDS......................................... 72 EXPERTS.................................................................. 73 AVAILABLE INFORMATION.................................................... 74 EXHIBIT A - Form of Agreement and Plan of Reorganization................. 75 APPENDICES A. BASIC INFORMATION ABOUT THE FUNDS (attached to this document). B. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: DECEMBER 31, 2000 (attached to this document). 3 INTRODUCTION This proxy statement and prospectus is being used by the Acquired Funds' Board of Trustees to solicit proxies to be voted at a special meeting of each Acquired Fund's shareholders. This meeting will be held at 101 Huntington Avenue, Boston, Massachusetts on Wednesday, December 5, 2001 at 9:00 a.m., Eastern time. The purpose of the meeting is to consider proposals to approve Agreements and Plans of Reorganization providing for the reorganization of the Acquired Funds into the Acquiring Funds, as described in the table below:
----------------------------------------------------------------------------------- Acquired Fund Acquiring Fund ----------------------------------------------------------------------------------- Proposal 1 V.A. Core Equity Fund Growth & Income Fund ----------------------------------------------------------------------------------- Proposal 2 V.A. Large Cap Growth Fund Growth & Income Fund ----------------------------------------------------------------------------------- Proposal 3 V.A. 500 Index Fund Equity Index Fund ----------------------------------------------------------------------------------- Proposal 4 V.A. International Fund International Equity Fund ----------------------------------------------------------------------------------- Proposal 5 V.A. Mid Cap Growth Fund Fundamental Growth Fund ----------------------------------------------------------------------------------- Proposal 6 V.A. Small Cap Growth Fund VST Small Cap Growth Fund ----------------------------------------------------------------------------------- Proposal 7 V.A. Bond Fund Active Bond Fund ----------------------------------------------------------------------------------- Proposal 8 V.A. Money Market Fund VST Money Market Fund -----------------------------------------------------------------------------------
Who is Eligible to Vote? Shareholders of record on September 20, 2001 (record date) are entitled to attend and vote at the meeting or any adjourned meeting. Each share is entitled to one vote. As of the record date, the insurance companies, on behalf of the separate accounts, were shareholders of record of the Acquired Funds. The insurance companies will vote shares of the Acquired Funds held by them in accordance with voting instructions received from contract owners for whose accounts the shares are held. The enclosed voting instruction card will be used by the insurance companies to receive voting instructions from contract owners. The notice of meeting, the proxy card (voting instruction card), the proxy statement and prospectus are being mailed to the insurance companies and contract owners on or about November 1, 2001. Summary of each Proposal For each proposal, this proxy statement and prospectus includes a summary of more complete information appearing later in the proxy statement. You should read the entire proxy statement, Appendices A and B, and Exhibit A carefully, because they contain details that are not in the summary. You can obtain information about rights of a holder of a variable contract from your Annuity Prospectus. 4 PROPOSAL 1 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. CORE EQUITY FUND AND GROWTH & INCOME FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Core Equity Fund and Growth & Income Fund. Under this Agreement, V.A. Core Equity Fund would transfer all of its assets to Growth & Income Fund in exchange for shares of Growth & Income Fund. These shares would be distributed proportionately to the shareholders of V.A. Core Equity Fund. Growth & Income Fund would also assume V.A. Core Equity Fund's liabilities. V.A. Core Equity Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Core Equity Fund to Growth & Income Fund
- ---------------------------------------------------------------------------------------------------------------- V.A. Core Equity Growth & Income - ---------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A non-diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ---------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $41.1 million. $2,799.9 million. 2001: - ---------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Subadviser: Subadviser: Independence Investment LLC Independence Investment LLC -A subsidiary of John Hancock Portfolio Managers: Financial Services, Inc. Investment team overseen by: -Founded in 1982 -Supervised by the adviser Paul F. McManus -Senior Vice President of subadviser Portfolio Managers: -Joined team in 1996 -Joined subadviser in 1982 Team responsible for day-to-day investment management Subadviser: Putnam Investment Management LLC -Managing since 1937 -Managing fund since November, 2000 Portfolio Managers: Investment team overseen by: C. Beth Cotner, CFA -Managing Director and Chief Investment Officer of subadviser -Joined subadviser in 1995 -Began career in 1976 - ----------------------------------------------------------------------------------------------------------------
5
- ---------------------------------------------------------------------------------------------------------------- V.A. Core Equity Fund Growth & Income Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks above average total return The fund is a non-diversified large and (capital appreciation plus income). This mid cap stock fund that seeks income and objective can be changed without long-term capital appreciation. This shareholder approval. objective can be changed without shareholder approval. - ---------------------- ------------------------------------------- -------------------------------------------- Primary investments: The fund invests at least 65% of assets The fund invests primarily in a in a diversified portfolio of equities diversified mix of common stocks of large which are primarily large capitalization and mid-sized U.S. companies. The fund stocks. In normal market conditions, the employs two subadvisers, Independence and fund is almost entirely invested in Putnam, each of which employs its own stocks. The fund's risk profile is investment approach and independently similar to that of the Standard & Poor's manages its portion of the fund. 500 Index. Independence normally invests in 80 to 160 stocks, with at least 65% (usually higher) of its assets in large cap companies. Putnam normally invests in 65 to 110 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. - ---------------------- ---------------------------------------------------------------------------------------- Foreign securities: The Fund may invest in foreign securities which are U.S. dollar-denominated. - ---------------------- ------------------------------------------- -------------------------------------------- Diversification: The fund is diversified and, with respect The fund is non-diversified and can invest to 75% of total assets, cannot invest more than 5% of total assets in securities more than 5% of total assets in of a single issuer. securities of a single issuer. - ---------------------- ------------------------------------------- -------------------------------------------- Initial public Not applicable. The fund may invest in IPOs. offerings ("IPOs"): - ---------------------- ---------------------------------------------------------------------------------------- Derivatives: The fund may make limited use of certain derivatives (investments whose value is based on indices or other securities). - ---------------------- -------------------------------------------- ------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest more than 35% of may take temporary defensive measures - assets in investment-grade short-term such as holding unusually large amounts securities. In these and other cases, the of cash and cash equivalents - that are fund might not achieve its goal. inconsistent with the fund's primary investment strategy. In taking those measures, the fund may not achieve its investment goal. - ---------------------- -------------------------------------------- -------------------------------------------
6 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. V.A. Core Equity Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.70% Other expenses 0.17% Total fund operating expenses 0.87% Expense reimbursement (1) 0.00% Actual operating expenses 0.87% Example Year 1 Year 3 Year 5 Year 10 At end of period $89 $278 $483 $1075 (1) V.A. Core Equity Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. 7 Growth & Income Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (1) 0.02% Actual operating expenses 0.77% (1) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $428 $954 Pro Forma Expense Table The board of trustees of another John Hancock fund, V.A. Large Cap Growth Fund, has recommended that V.A. Large Cap Growth Fund also reorganize into Growth & Income Fund. The reorganization of V.A. Core Equity Fund with Growth & Income Fund, however, does not depend upon whether the reorganization involving V.A. Large Cap Growth Fund occurs. Your trustees do not expect the total expenses paid by Growth & Income Fund to increase if both reorganizations do occur. The next two expense tables show the hypothetical ("pro forma") expenses of Growth & Income Fund assuming (1) that a reorganization with V.A. Core Equity Fund, but not V.A. Large Cap Growth Fund, occurred on June 30, 2000 or (2) that a reorganization with both V.A. Core Equity Fund and V.A. Large Cap Growth Fund occurred on June 30, 2000. The expenses shown in the table for V.A. Core Equity Fund and Growth & Income Fund are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. Growth & Income Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The pro forma examples are for comparison purposes only and are not a representation of Growth & Income Fund's actual expenses or returns, either past or future. 8 Growth & Income Fund (PRO FORMA) (Assuming reorganization with V.A. Core Equity Fund only) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (1) 0.02% Actual operating expenses 0.77% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $427 $953 (1) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Growth & Income Fund (PRO FORMA) (Assuming reorganization with both V.A. Core Equity Fund and V.A. Large Cap Growth Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (2) 0.02% Actual operating expenses 0.77% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $427 $953 (2) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 9 The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Core Equity Fund will transfer all of its assets to Growth & Income Fund. Growth & Income Fund will assume V.A. Core Equity Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Growth & Income Fund will issue to V.A. Core Equity Fund shares in an amount equal to the aggregate net asset value of V.A. Core Equity Fund's shares. These shares will be distributed immediately to V.A. Core Equity Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Core Equity Fund will end up as shareholders of Growth & Income Fund. o After the reorganization is over, V.A. Core Equity Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Core Equity Fund. The following diagram shows how the reorganization would be carried out. V. A. Core Equity V. A. Core Equity Fund Growth & Income Fund transfers assets assets and liabilities Fund receives assets and liabilities to Growth ----------->---------- and assumes liabilities & Income Fund of V.A. Core Equity Fund Shareholders -----------<---------- Issues Shares V.A. Core Equity Fund receives Growth & Income Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Core Equity Fund--0.70% and Growth & Income Fund 0.67%. Growth & Income Fund's management fee rate of Fund 0.67% and its pro forma management fee rate of 0.67% are lower than V.A. Core Equity Fund's management fee rate of 0.70%. V.A. Core Equity Fund's gross total annual operating expenses of 0.87% are substantially higher than those of Growth & Income Fund which are 0.79%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Core Equity Fund's total annual operating expenses (0.87%) are higher than those of Growth & Income Fund (0.77%). After the reorganization, Growth & Income Fund's pro forma total annual operating expenses (0.77%) are less than those of V.A. Core Equity Fund's gross total annual operating expenses (0.87%) and net total annual operating expenses (0.87%). Investment management fees as a percentage of average daily net assets. V.A. Core Equity 0.70% Growth & Income 0.71% on first $150 million 0.69% on next $150 million 0.67% in excess of $300 million 10 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- --------------------------------------------------------------------------------------------------------------------------------- V.A. Core Equity Fund Growth & Income Fund - --------------------------------------------------------------------------------------------------------------------------------- - ------------------------------- -------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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 concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- ---------------------------------------------- --------------------------------------------- Investment category risk The large capitalization stocks in which the The large and medium capitalization stocks fund primarily invests could fall out of in which the fund primarily invests could favor with the market, causing the fund to fall out of favor with the market, causing underperform funds that focus on small or the fund to underperform funds that focus medium capitalization stocks. on small capitalization stocks. - ------------------------------- ---------------------------------------------- --------------------------------------------- Non-diversification risk Not applicable. The fund's larger positions in individual companies could lead to more volatile performance relative to more diversified funds. The less diversified the fund's holdings are, the more a specific stock's poor performance is likely to hurt the fund's performance. - ------------------------------- -------------------------------------------------------------------------------------------- Small and medium The fund's investments in small or medium companies may be subject to capitalization capitalization larger and more erratic price movements than investments in large capitalization companies. company risk - ------------------------------- ---------------------------------------------- --------------------------------------------- Initial public offering (IPO) Not applicable. A significant part of the fund's return may risk at times be attributable to investments in IPOs. Many IPO stocks are issued by, and involve the risks associated with, small and medium capitalization companies. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inadequate or inaccurate financial information and social or political instability. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- --------------------------------------------------------------------------------------------
11 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Core Equity Fund will transfer all of its assets to Growth & Income Fund and Growth & Income Fund will assume all of V.A. Core Equity Fund's liabilities. This will result in the addition of V.A. Core Equity Fund's assets to Growth & Income Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Growth & Income Fund will issue to V.A. Core Equity Fund shares in an amount equal to the aggregate net asset value of V.A. Core Equity Fund's shares. As part of the liquidation of V.A. Core Equity Fund, these shares will be distributed immediately to shareholders of record of V.A. Core Equity Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Core Equity Fund will end up as shareholders of Growth & Income Fund. o After the reorganization is over, the existence of V.A. Core Equity Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. Core Equity Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Core Equity Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Core Equity Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. Growth & Income Fund has a larger asset size than V.A. Core Equity Fund and may invest in a broader range of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, Growth & Income Fund shares have performed similarly to V.A. Core Equity Fund shares over the life of both funds. While past performance cannot predict future results, the Trustees believe that Growth & Income Fund is better positioned than V.A. Core Equity Fund to generate strong returns because of its ability to choose from a broader range of investment opportunities. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Core Equity Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. 12 Fifth, Growth & Income Fund's total expenses are lower than V.A. Core Equity Fund's total expenses. As a result of the reorganization, shareholders of V.A. Core Equity Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay each month. The Trustees believe that Growth & Income Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although Growth & Income Fund is a larger fund than V.A. Core Equity Fund, the Trustees believe that the addition of V.A. Core Equity Fund's assets may add to the diversification of Growth & Income Fund's overall portfolio and therefore provide an economic benefit to Growth & Income Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Core Equity Fund is higher than the rate paid by Growth & Income Fund. Growth & Income Fund's management fee rate of 0.67% and its pro forma management fee rate of 0.67% are lower than V.A. Core Equity Fund's management fee rate of 0.70%. V.A. Core Equity Fund's gross total annual operating expenses of 0.87% are substantially higher that those of Growth & Income Fund which are 0.79%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Core Equity Fund's total annual operating expenses (0.87%) are higher than those of Growth & Income Fund (0.77%). After the reorganization, Growth & Income Fund's pro forma total annual operating expenses (0.77%) are less than those of V.A. Core Equity Fund's gross total annual operating expenses (0.87%) and net total annual operating expenses (0.87%). The Trustees do not believe, given V.A. Core Equity Fund's current size and historical growth rate, that V.A. Core Equity Fund will grow to an asset size that would allow V.A. Core Equity Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Core Equity Fund will reach an asset size which will allow V.A. Core Equity Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Core Equity Fund and Growth & Income Fund. 13 PROPOSAL 2 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. LARGE CAP GROWTH FUND AND GROWTH & INCOME FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Large Cap Growth Fund and Growth & Income Fund. Under this Agreement, V.A. Large Cap Growth Fund would transfer all of its assets to Growth & Income Fund in exchange for shares of Growth & Income Fund. These shares would be distributed proportionately to the shareholders of V.A. Large Cap Growth Fund. Growth & Income Fund would also assume V.A. Large Cap Growth Fund's liabilities. V.A. Large Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Large Cap Growth Fund to Growth & Income Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth Growth & Income - ------------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A non-diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $6.3 million. $2,800.0 million. 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio Managers: Subadviser: Independence Investment LLC William L. Braman -Executive Vice President and Portfolio Managers: Chief Investment Officer of adviser Investment team overseen by: -Joined fund team in 2000 -Joined adviser in 2000 Paul F. McManus -Began business career in 1977 -Senior Vice President of subadviser -Joined team in 1996 Robert J. Uek, CFA -Joined subadviser in 1982 -Vice President of adviser -Joined fund team in 2000 Subadviser: -Joined adviser in 1997 Putnam Investment Management LLC -Began business career in 1990 -Managing since 1937 -Managing fund since November, 2000 Paul J. Berlinguet -Vice President of adviser Portfolio Managers: -Joined fund team in 2001 Investment team overseen by: -Joined adviser in 2001 -Began business career in 1986 C. Beth Cotner, CFA -Managing Director and Chief Investment Officer of subadviser -Joined subadviser in 1995 -Began career in 1976 - -------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth Fund Growth & Income Fund - ------------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks long-term capital The fund is a non-diversified large and mid appreciation. This objective can be cap stock fund that seeks income and changed without shareholder approval. long-term capital appreciation. This objective can be changed without shareholder approval. - -------------------------- ------------------------------------------- --------------------------------------------- Primary investments: The fund invests at least 65% of assets The fund invests primarily in a diversified in stocks of large capitalization mix of common stocks of large and mid-sized companies (companies in the U.S. companies. The fund employs two capitalization range of the Russell Top subadvisers, Independence and Putnam, each 200 Growth Index, which was $___ million of which employs its own investment to $___ billion as of September 30, approach and independently manages its 2001). The fund generally invests in a portion of the fund. Independence normally diversified portfolio of U.S. companies. invests in 80 to 160 stocks, with at least The managers favor companies for which 65% (usually higher) of its assets in large cap they project an above-average growth rate. companies. Putnam normally invests in 65 to 110 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. - -------------------------- ----------------------------------------------------------------------------------------- Preferred stocks: The fund may invest in preferred stocks and other types of equity securities. - -------------------------- ------------------------------------------- --------------------------------------------- Foreign securities: The Fund may invest up to 15% of assets The fund may invest in foreign securities in foreign securities. that are U.S. dollar-denominated. - -------------------------- ------------------------------------------- --------------------------------------------- Diversification: The fund is diversified and, with respect The fund is non-diversified and can invest to 75% of total assets, cannot invest more than 5% of assets in securities on a more than 5% of total assets in single issuer. securities of a single issuer. - -------------------------- ------------------------------------------- --------------------------------------------- Initial public offerings Not applicable. The fund may invest in IPOs. ("IPOs"): - -------------------------- ------------------------------------------ --------------------------------------------- Derivatives: The fund may make limited use of certain The fund may make limited use of certain derivatives (investments whose value is derivatives (investments whose value is based on indices, securities, or based on indices or other securities). currencies). - -------------------------- ------------------------------------------ --------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund may positions: may temporarily invest extensively in take temporary defensive measures - such as investment-grade short-term securities. holding unusually large amounts of cash and In these and other cases, the fund might cash equivalents - that are inconsistent not achieve its goal. with the fund's primary investment strategy. In taking those measures, the fund may not achieve its investment goal. - -------------------------- ------------------------------------------ ---------------------------------------------
15 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. 16 V.A. Large Cap Growth Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.75% Other expenses 0.31% Total fund operating expenses 1.06% Expense reimbursement (1) 0.06% Actual operating expenses 1.00% Example Year 1 Year 3 Year 5 Year 10 At end of period $102 $320 $555 $1,229 (1) V.A. Large Cap Growth Fund's adviser has agreed to limit expenses, excluding management fees, to 0.25% until 5/1/02. Growth & Income Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (1) 0.02% Actual operating expenses 0.77% Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $427 $953 (1) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 17 Pro Forma Expense Tables The board of trustees of another John Hancock fund, V.A. Core Equity Fund, has recommended that V.A. Core Equity Fund also reorganize into Growth & Income Fund. The reorganization of V.A. Large Cap Growth Fund with Growth & Income Fund, however, does not depend upon whether the reorganization involving V.A. Core Equity Fund occurs. Your trustees do not expect the total expenses paid by Growth & Income Fund to increase if both reorganizations do occur. The next two expense tables show the hypothetical ("pro forma") expenses of Growth & Income Fund assuming (1) that a reorganization with V.A. Large Cap Growth Fund, but not V.A. Core Equity Fund, occurred on June 30, 2000 or (2) that a reorganization with both V.A. Large Cap Growth Fund and V.A. Core Equity Fund occurred on June 30, 2000. The expenses shown in the table for V.A. Large Cap Growth Fund and Growth & Income Fund are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. Growth & Income Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The pro forma examples are for comparison purposes only and are not a representation of Growth & Income Fund's actual expenses or returns, either past or future. Growth & Income Fund (PRO FORMA) (Assuming reorganization with V.A. Large Cap Growth Fund only) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (1) 0.02% Actual operating expenses 0.77% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $427 $953 (1) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 18 Growth & Income Fund (PRO FORMA) (Assuming reorganization with both V.A. Large Cap Growth Fund and V.A. Core Equity Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.67% Other expenses 0.12% Total fund operating expenses 0.79% Expense reimbursement (1) 0.02% Actual operating expenses 0.77% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $79 $246 $427 $953 (1) Growth & Income Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Large Cap Growth Fund will transfer all of its assets to Growth & Income Fund. Growth & Income Fund will assume V.A. Large Cap Growth Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Growth & Income Fund will issue to V.A. Large Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Large Cap Growth Fund's shares. These shares will be distributed immediately to V.A. Large Cap Growth Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Large Cap Growth Fund will end up as shareholders of Growth & Income Fund. o After the reorganization is over, V.A. Large Cap Growth Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Large Cap Growth Fund. The following diagram shows how the reorganization would be carried out. 19 V.A. Large Cap Growth V.A. Large Cap Growth Fund Growth & Income Fund transfers assets assets and liabilities Fund receives assets and liabilities to Growth ------------->------------- and assumes liabilities & Income Fund of V.A. Large Cap Growth Fund Shareholders -------------<------------- Issues Shares V.A. Large Cap Growth Fund receives Growth & Income Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Large Cap Growth Fund--0.75% and Growth & Income Fund 0.67%. Growth & Income Fund's management fee rate of 0.67% and its pro forma management fee rate of 0.67% are lower than V.A. Large Cap Growth Fund's management fee rate of 0.75%. V.A. Large Cap Growth Fund's gross total annual operating expenses of 1.06% are substantially higher that those of Growth & Income Fund which are 0.79%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Large Cap Growth Fund's total annual operating expenses (1.00%) are higher than those of Growth & Income Fund (0.77%). After the reorganization, Growth & Income Fund's pro forma total annual operating expenses (0.77%) are less than those of V.A. Large Cap Growth Fund's gross total annual operating expenses (1.06%) and net total annual operating expenses (1.00%). Investment advisory fees as a percentage of average daily net assets. V.A. Large Cap Growth 0.75% Growth & Income 0.71% on first $150 million 0.69% on next $150 million 0.67% in excess of $300 million INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- --------------------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth Fund Growth & Income Fund - --------------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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 concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ------------------------------- ------------------------------------------------------------------------------------------ Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- --------------------------------------------- -------------------------------------------- Investment category risk The large capitalization stocks in which The large and medium capitalization stocks the fund primarily invests could fall out in which the fund primarily invests could of favor with the market, causing the fund fall out of favor with the market, causing to underperform funds that focus on small the fund to underperform funds that focus or medium capitalization stocks. on small capitalization stocks. - ------------------------------- --------------------------------------------- -------------------------------------------- Non-diversification risk Not applicable. The fund's larger positions in individual companies could lead to more volatile performance relative to more diversified funds. The less diversified the fund's holdings are, the more a specific stock's poor performance is likely to hurt the fund's performance. - ------------------------------- --------------------------------------------- -------------------------------------------- Small and medium The fund's investments in small or medium capitalization companies may be subject to capitalization company risk larger and more erratic price movements than investments in large capitalization companies. - ------------------------------- ------------------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth Fund Growth & Income Fund - --------------------------------------------------------------------------------------------------------------------------------- Initial public offering (IPO) Not applicable. A significant part of the fund's risk return may at times be attributable to investments in IPOs. Many IPO stocks are issued by, and involve the risks associated with, small and medium capitalization companies. - ------------------------------- --------------------------------------------- -------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inadequate or inaccurate financial information and social or political instability. - ------------------------------- ------------------------------------------------------------------------------------------ Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- ------------------------------------------------------------------------------------------ Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- ------------------------------------------------------------------------------------------
21 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Large Cap Growth Fund will transfer all of its assets to Growth & Income Fund and Growth & Income Fund will assume all of V.A. Large Cap Growth Fund's liabilities. This will result in the addition of V.A. Large Cap Growth Fund's assets to Growth & Income Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Growth & Income Fund will issue to V.A. Large Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Large Cap Growth Fund's shares. As part of the liquidation of V.A. Large Cap Growth Fund, these shares will be distributed immediately to shareholders of record of V.A. Large Cap Growth Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Large Cap Growth Fund will end up as shareholders of Growth & Income Fund. o After the reorganization is over, the existence of V.A. Large Cap Growth Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. Large Cap Growth Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Large Cap Growth Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Large Cap Growth Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. Growth & Income Fund has a larger asset size than V.A. Large Cap Growth Fund and may invest in a broader range of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, Growth & Income Fund shares have performed better than V.A. Large Cap Growth Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that Growth & Income Fund is better positioned than V.A. Large Cap Growth Fund to generate strong returns because of its ability to choose from a broader range of investment opportunities. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Large Cap Growth Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Fifth, Growth & Income Fund's total expenses are lower than V.A. Large Cap Growth Fund's total expenses. As a result of the reorganization, shareholders of V.A. Large Cap Growth Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay each month. The Trustees believe that Growth & Income Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although Growth & Income Fund is a larger fund than V.A. Large Cap Growth Fund, the Trustees believe that the addition of V.A. Large Cap Growth Fund's assets may add to the diversification of Growth & Income Fund's overall portfolio and therefore provide an economic benefit to Growth & Income Fund and 22 its shareholders without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Large Cap Growth Fund is higher than the rate paid by Growth & Income Fund. Growth & Income Fund's management fee rate of 0.67% and its pro forma management fee rate of 0.67% are lower than V.A. Large Cap Growth Fund's management fee rate of 0.75%. V.A. Large Cap Growth Fund's gross total annual operating expenses of 1.06% are substantially higher that those of Growth & Income Fund which are 0.79%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Large Cap Growth Fund's total annual operating expenses (1.00%) are higher than those of Growth & Income Fund (0.77%). After the reorganization, Growth & Income Fund's pro forma total annual operating expenses (0.77%) are less than those of V.A. Large Cap Growth Fund's gross total annual operating expenses (1.06%) and net total annual operating expenses (1.00%). V.A. Large Cap Growth Fund has not increased its asset size. The Trustees do not believe, given V.A. Large Cap Growth Fund's current size and historical growth rate, that V.A. Large Cap Growth Fund will grow to an asset size that would allow V.A. Large Cap Growth Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Large Cap Growth Fund will reach an asset size which will allow V.A. Large Cap Growth Fund to significantly broaden the diversification of its investment portfolio. 23 Comparative Performance. The trustees also took into consideration the relative performance of V.A. Large Cap Growth Fund and Growth & Income Fund. PROPOSAL 3 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. 500 INDEX FUND AND EQUITY INDEX FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. 500 Index Fund and Equity Index Fund . Under this Agreement, V.A. 500 Index Fund would transfer all of its assets to Equity Index Fund in exchange for shares of Equity Index Fund. These shares would be distributed proportionately to the shareholders of V.A. 500 Index Fund. Equity Index Fund would also assume V.A. 500 Index Fund's liabilities. V.A. 500 Index Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. 500 Index Fund to Equity Index Fund
- ------------------------------------------------------------------------------------------------------------------------ V.A. 500 Index Fund Equity Index Fund - ------------------------------------------------------------------------------------------------------------------------ Business: The fund is a diversified series of The fund is a diversified series of John Hancock John Hancock Declaration Trust. Variable Series Trust I. The trust is an open-end The trust is an open-end investment investment management company organized as a company organized as a Massachusetts Business Trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------------ Net assets as of June 30, $18.4 million. $539.1 million. 2001: - ------------------------------------------------------------------------------------------------------------------------ Investment adviser and Investment adviser: Investment adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio manager: Subadviser: SSgA Funds Management, Inc. James D. Schantz, CFA -Vice President of adviser Portfolio Managers: -Joined fund team in 2000 -Joined adviser in 1998 John A. Tucker -Began business career in 1970 -Principal of Subadviser -Joined subadviser in 1988 James B. May -Principal of Subadviser -Joined subadviser in 1989 - ------------------------------------------------------------------------------------------------------------------------ Investment objective: The fund seeks to provide investment The fund is a stock fund that seeks to results that correspond to the total track the performance of the S&P 500 return performance of the Standard & Index, which emphasizes the stocks of Poor's 500 Stock Price Index. This large U.S. companies. This objective can objective can be changed without be changed without shareholder approval. shareholder approval. - --------------------------- ----------------------------------------- ------------------------------------------- Primary investments: The fund normally invests at least 80% The fund normally invests in all stocks of assets in common stocks of S&P 500 included in the Index. The manager companies in approximately the same employs a passive management strategy by proportions as they are represented in normally investing in each stock in the index. The fund is passively roughly the same proportion as managed. Under normal circumstances, represented in the Index. The fund is the fund is fully invested - directly normally fully invested. or through futures and options contracts - in all 500 stocks represented in the index. The fund normally maintains less than 1% of assets in cash or cash equivalents. - --------------------------- ------------------------------------------------------------------------------------- Exchange traded funds: The fund may invest in Standard & Poor's Depositary Receipts ("SPDRs") and other exchange traded funds designed to track the S&P 500 Index. - --------------------------- ------------------------------------------------------------------------------------- Foreign securities: The fund may invest in U.S. dollar-denominated foreign securities. - --------------------------- ------------------------------------------------------------------------------------- Diversification: The fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. - --------------------------- ------------------------------------------------------------------------------------- Derivatives: The fund may invest in certain derivatives (investments whose value is based on indices or other securities) to maintain market exposure and manage cash flow. - --------------------------- -------------------------------------------------------------------------------------
24 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. 25 V.A. 500 Index Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee(1) 0.35% Other expenses 0.74% Total fund operating expenses 1.09% Expense reimbursement (2)(1) 0.74% Actual operating expenses 0.35% Example Year 1 Year 3 Year 5 Year 10 At end of period $36 $113 $197 $445 (1) The adviser has agreed to limit the management fee to 0.10% at least until 4/30/02. (2) V.A. 500 Index Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% at least until 4/30/02. Equity Index Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.13% Other expenses 0.04% Total fund operating expenses 0.17% Expense reimbursement (1) 0.00% Actual operating expenses 0.17% Example Year 1 Year 3 Year 5 Year 10 At end of period $17 $55 $96 $217 (1) Equity Index Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Pro Forma Expense Table 26 The following expense table shows the pro forma expenses of Equity Index Fund assuming that a reorganization with V.A. 500 Index Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. Equity Index Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of Equity Index Fund's actual expenses or returns, either past or future. Equity Index Fund (PRO FORMA) (Assuming reorganization with V.A. 500 Index Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.13% Other expenses 0.04% Total fund operating expenses 0.17% Expense reimbursement (1) 0.00% Actual operating expenses 0.17% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $17 $55 $96 $217 (1) Equity Index Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. 500 Index Fund will transfer all of its assets to Equity Index Fund. Equity Index Fund will assume V.A. 500 Index Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Equity Index Fund will issue to V.A. 500 Index Fund shares in an amount equal to the aggregate net asset value of V.A. 500 Index Fund's shares. These shares will be distributed immediately to V.A. 500 Index Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. 500 Index Fund will end up as shareholders of Equity Index Fund. o After the reorganization is over, V.A. 500 Index Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to the V.A. 500 Index Fund. 27 The following diagram shows how the reorganization would be carried out. V. A. 500 Index V. A. 500 Index Fund Equity Index Fund transfers assets assets and liabilities Fund receives assets and liabilities to Equity ----------->---------- and assumes liabilities Index Fund of V.A. 500 Index Fund Shareholders -----------<---------- Issues Shares V.A. 500 Index Fund receives Equity Index Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. 500 Index Fund--0.35% (before the Advisers agreement to limit the management fee to 0.10% at least until April 30, 2002) and Equity Index Fund 0.13%. Equity Index Fund's management fee rate of 0.13% and its pro forma management fee rate of 0.13% are less than V.A. 500 Index Fund's gross management fee rate of 0.35%. V.A. 500 Index Fund's gross total annual operating expenses of 1.09% are substantially higher than those of Equity Index Fund which are 0.17%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. 500 Index Fund's total annual operating expenses (0.35%) are higher than those of Equity Index Fund (0.17%). After the reorganization, Equity Index Fund's pro forma total annual operating expenses (0.17%) are less than those of V.A. 500 Index Fund's gross total annual operating expenses (1.09%) and net total annual operating expenses (0.35%). Investment advisory fees as a percentage of average daily net assets. V.A. 500 Index 0.35%* Equity Index 0.15% on first $75 million 0.14% on next $50 million 0.13% in excess of $125 million *Fee limited to 0.10% until 5/1/02. 28 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- ---------------------------------------------------------------------------------------------------------------------- V.A. 500 Index Fund Equity Index Fund - ---------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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. As an index fund, the fund will be less able than most funds to take defensive positions in abnormal market conditions. If the fund concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ------------------------------- ------------------------------------------------------------------------------------------ Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- ------------------------------------------------------------------------------------------ Investment category risk The large capitalization stocks that make up the Standard & Poor's 500 Stock Price Index and in which the fund primarily invests could fall out of favor with the market. This would cause the fund to underperform funds that focus on small or medium capitalization stocks. - ------------------------------- ------------------------------------------------------------------------------------------ Index replication risk Certain investment practices may cause the fund's composition and performance to deviate from those of the index. o The securities selected by the manager may not be fully representative of the index. o Transaction costs may reduce the fund's performance below that of the index. o The size and timing of the fund's cash flows may cause its performance to differ from that of the index. o The relative proportions of stocks in the fund's portfolio could drift overtime, which could increase tracking error. - ------------------------------- ------------------------------------------------------------------------------------------ Correlation risk The performance of S&P index-based futures, The performance of S&P index-based futures options and exchange traded funds may and options may correlate less closely correlate less closely than direct stock than direct stock investments with the investments with the performance of the performance of the index. index. - ------------------------------- --------------------------------------------- -------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- ------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a copy of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. 500 Index Fund will transfer all of its assets to Equity Index Fund and Equity Index Fund will assume all of V.A. 500 Index Fund's liabilities. This will result in the addition of V.A. 500 Index Fund's assets to Equity Index Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Equity Index Fund will issue to V.A. 500 Index Fund shares in an amount equal to the aggregate net asset value of V.A. 500 Index Fund's shares. As part of the liquidation of V.A. 500 Index Fund, these shares will be distributed immediately to shareholders of record of V.A. 500 Index 29 Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. 500 Index Fund will end up as shareholders of Equity Index Fund. o After the reorganization is over, the existence of V.A. 500 Index Fund will be terminated. Reasons for the Proposed Reorganization. The Board of Trustees of V.A. 500 Index Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. 500 Index Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. 500 Index Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. Equity Index Fund has a larger asset size than V.A. 500 Index Fund. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, Equity Index Fund shares have performed better than V.A. 500 Index Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that Equity Index Fund is better positioned than V.A. 500 Index Fund to continue to generate strong returns. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. 500 Index Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Fifth, Equity Index Fund's total expenses are lower than V.A. 500 Index Fund's total expenses. As a result of the reorganization, shareholders of V.A. 500 Index Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay each month. The Trustees believe that Equity Index Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although Equity Index Fund is a larger fund than V.A. 500 Index Fund, the Trustees believe that the addition of V.A. 500 Index Fund's assets may add to the diversification of Equity Index Fund's overall portfolio and therefore provide an economic benefit to Equity Index Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. 500 Index Fund is more than the rate paid by Equity Index Fund. Equity Index Fund's management fee rate of 0.13% and its pro forma management fee rate of 0.13% are less than V.A. 500 Index Fund's management fee rate of 0.35%. V.A. 500 Index Fund's gross total annual operating expenses of 1.09% are substantially higher that those of Equity Index Fund, which are 0.17%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. 500 Index Fund's total annual operating expenses (0.35%) are higher than those of Equity Index Fund (0.17%). After the reorganization, Equity Index Fund's pro forma total annual operating expenses (0.17%) are less than those of V.A. 500 Index Fund's gross total annual operating expenses (1.09%) and net total annual operating expenses (0.35%). V.A. 500 Index Fund has not increased its asset size. The Trustees do not believe, given V.A. 500 Index Fund's current size and historical growth rate, that V.A. 500 Index Fund will grow to an asset size that would allow V.A. 500 Index Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. 500 Index Fund will reach an asset size which will allow V.A. 500 Index Fund to significantly broaden the diversification of its investment portfolio. 30 Comparative Performance. The trustees also took into consideration the relative performance of V.A. 500 Index Fund and Equity Index Fund. PROPOSAL 4 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. INTERNATIONAL FUND AND INTERNATIONAL EQUITY FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. International Fund and International Equity Fund. Under this Agreement, V.A. International Fund would transfer all of its assets to International Equity Fund in exchange for shares of International Equity Fund. These shares would be distributed proportionately to the shareholders of V.A. International Fund. International Equity Fund would also assume V.A. International Fund's liabilities. V.A. International Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. International Fund to International Equity Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. International International Equity - ------------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of $5.0 million. $21.1 million. June 30, 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Subadviser: Subadviser: Nicholas-Applegate Capital Management Goldman Sachs Asset Management -U.S. based team responsible for day- -Managing since 1988 to-day investment management -Managed fund since August 1999 -Managed fund since December 2000 -Founded in 1984 Fund Managers: -Supervised by the adviser Management by investment team overseen by: Shogo Maeda -Managing director of subadviser -Joined subadviser in 1994 Susan Noble -Managing director of subadviser -Joined subadviser in 1997 Andrew Orchard -Executive director of subadviser -Joined subadviser in 1999 - -------------------------------------------------------------------------------------------------------------------
31
- -------------------------------------------------------------------------------------------------------------------- V.A. International Fund International Equity Fund - -------------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks long-term growth of The fund is an international stock fund that capital. This objective can be seeks long-term capital appreciation. This changed without shareholder approval. objective can be changed without shareholder approval. - --------------------------- --------------------------------------- ----------------------------------------------- Primary investments: The fund invests at least 80% of The fund primarily invests in a diversified assets in stocks of foreign mix of common stocks of large established and companies. The fund does not medium-sized foreign companies located maintain a fixed allocation of primarily in developed countries outside the assets, either with respect to U.S. The fund normally invests at least 65% securities type or geography. The of its assets in securities of non-U.S. managers allocate the fund's assets entities. The fund invests in at least 3 among securities of countries that different countries other than the U.S., but are expected to provide the best normally invests in 10 to 35 countries. The opportunities for meeting the fund's fund normally invests in 120 to 200 stocks investment objective. and normally has 10% or less (usually lower) of its assets in cash and cash equivalents. - --------------------------- --------------------------------------------------------------------------------------- Other Investments: The fund may invest in American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs"). - --------------------------- --------------------------------------- ----------------------------------------------- Emerging market The fund may invest up to 30% of The fund will invest no more than 10% of securities: assets in emerging markets. assets in emerging market stocks. - --------------------------- --------------------------------------- ----------------------------------------------- Diversification: The fund is diversified and cannot The fund is diversified and, with respect to invest more than 5% of total assets 75% of total assets, cannot invest more than in any one security. 5% of total assets in securities of a single issuer. - --------------------------- --------------------------------------- ----------------------------------------------- Initial public offerings Not applicable. The fund may invest in IPOs. ("IPOs"): - --------------------------- --------------------------------------------------------------------------------------- Derivatives: The fund may make limited use of certain derivatives (investments whose value is based on indices, securities, or currencies). - --------------------------- ------------------------------------------- ------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest more than 20% of may take temporary defensive measures - assets in investment-grade short-term such as holding unusually large amounts securities. In these and other cases, of cash and cash equivalents - that are the fund might not achieve its goal. inconsistent with the fund's primary investment strategy. In taking those measures, the fund may not achieve its investment goal. - --------------------------- ------------------------------------------- -------------------------------------------
32 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. 33 V.A. International Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.90% Other expenses 2.70% Total fund operating expenses 3.60% Expense reimbursement (1) 2.45% Actual operating expenses 1.15% Example Year 1 Year 3 Year 5 Year 10 At end of period $117 $366 $634 $1,399 (1) V.A. International Fund's adviser has agreed to limit expenses, excluding management fees, to 0.25% until 5/1/02. International Equity Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 1.20% Other expenses 0.80% Total fund operating expenses 2.00% Expense reimbursement (1) 0.70% Actual operating expenses 1.30% Example Year 1 Year 3 Year 5 Year 10 At end of period $133 $413 $714 $1,571 (1) International Equity Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 34 Pro Forma Expense Table The following expense table shows the pro forma expenses of International Equity Fund assuming that a reorganization with V.A. International Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. International Equity Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of International Equity Fund's actual expenses or returns, either past or future. International Equity Fund (PRO FORMA) (Assuming reorganization with V.A. International Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 1.20% Other expenses 0.80% Total fund operating expenses 2.00% Expense reimbursement (1) 0.70% Actual operating expenses 1.30% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $132 $413 $714 $1,571 (1) International Equity Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. International Fund will transfer all of its assets to International Equity Fund. International Equity Fund will assume V.A. International Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o International Equity Fund will issue to V.A. International Fund shares in an amount equal to the aggregate net asset value of V.A. International Fund's share. These shares will be distributed immediately to V.A. International Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. International Fund will end up as shareholders of International Equity Fund. o After the reorganization is over, V.A. International Fund will be terminated. 35 o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. International Fund. The following diagram shows how the reorganization would be carried out. V.A. International V.A. International Fund International Equity Fund transfers assets assets and liabilities Fund receives assets and liabilities to International ----------->------------ and assumes liabilities Equity Fund of V.A. International Fund Shareholders -----------<------------ Issues Shares V.A. International Fund receives International Equity Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. International Fund-- 0.90% and International Equity -1.20%. International Equity Fund's management fee rate of 1.20% and its pro forma management fee rate of 1.20% are higher than V.A. International Fund's management fee rate of 0.90%. V.A. International Fund's gross total annual operating expenses of 3.60% are substantially higher than those of International Equity Fund which are 2.00%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. International Fund's total annual operating expenses (1.15%) are lower than those of International Equity Fund (1.30%). After the reorganization, International Equity Fund's pro forma total annual operating expenses (2.00%) are less than those of V.A. International Fund's gross total annual operating expenses (3.60%) but not net total annual operating expenses (1.15%). Investment advisory fees as a percentage of average daily net assets. V.A. International 0.90% International Equity 1.20% on first $50 million 1.05% on next $150 million 1.00% in excess of $200 million
36 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- ----------------------------------------------------------------------------------------------------------------------------- V.A. International Fund International Equity Fund - ----------------------------------------------------------------------------------------------------------------------------- - ------------------------------- -------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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 concentrates in certain sectors or geographic regions, its performance could be worse than that of the overall stock market. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign investment risk Foreign investments are riskier than investments in U.S. companies. The special risks of foreign investments include: o Economic, political and social instability o Lack of reliable, publicly available information o Limited or excessive government regulation o Adverse governmental actions ranging from tax law changes to the collapse of governments o Lack of liquidity o Foreign currency exchange rate fluctuations o Restrictions on currency transfers o Foreign ownership limits These risks are more severe in emerging market countries. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- ---------------------------------------------- --------------------------------------------- Investment category risk Not applicable because the fund does not The large and medium capitalization stocks allocate a fixed amount of assets to any in which the fund primarily invests could particular region, country, industry, fall out of favor with the market, causing capitalization level or other investment the fund to underperform funds that focus category. on small capitalization stocks. - ------------------------------- ---------------------------------------------- --------------------------------------------- Initial public offering (IPO) Not applicable. A significant part of the fund's return may risk at times be attributable to investments in IPOs. Many IPO stocks are issued by small and medium capitalization companies. These stocks may be subject to larger and more erratic price movements than investments in large capitalization companies. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Liquidity and valuation risks In a down or unstable market, the fund's investments could become harder to value accurately or to sell at a fair price. - ------------------------------- ---------------------------------------------- --------------------------------------------- Turnover risk In general, the greater the volume of buying The fund's turnover rate generally does not and selling by a fund (and the higher its exceed 100%. "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- ---------------------------------------------- ---------------------------------------------
37 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. International Fund will transfer all of its assets to International Equity Fund and International Equity Fund will assume all of V.A. International Fund's liabilities. This will result in the addition of V.A. International Fund's assets to International Equity Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o International Equity Fund will issue to V.A. International Fund shares in an amount equal to the aggregate net asset value of V.A. International Fund's shares. As part of the liquidation of V.A. International Fund, these shares will be distributed immediately to shareholders of record of V.A. International Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. International Fund will end up as shareholders of International Equity Fund. o After the reorganization is over, the existence of V.A. International Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. International Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. International Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. International Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. International Equity Fund has a larger asset size than V.A. International Fund and may invest in a broader range of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, International Equity Fund shares have performed better than V.A. International Fund over the one year period ended June 30, 2001. While past performance cannot predict future results, the Trustees believe that International Equity Fund is better positioned than V.A. International Fund to generate strong returns because of its greater flexibility to choose from among a broader range of investment opportunities. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. International Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. The Trustees believe that International Equity Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although International Equity Fund is a larger fund than V.A. International Fund, the Trustees believe that the addition of V.A. International Fund's assets may add to the diversification of International Equity Fund's overall portfolio and therefore provide an economic benefit to International Equity Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. 38 Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. International Fund is lower than the rate paid by International Equity Fund. International Equity Fund's management fee rate of 1.20% and its pro forma management fee rate of 1.20% are higher than V.A. International Fund's management fee rate of 0.90%. V.A. International Fund's gross total annual operating expenses of 3.60% are substantially higher that those of International Equity Fund which are 2.00%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. International Fund's total annual operating expenses (1.15%) are lower than those of International Equity Fund (1.30%). After the reorganization, International Equity Fund's pro forma total annual operating expenses (2.00%) are less than those of V.A. International Fund's gross total annual operating expenses (3.60%) but not net total annual operating expenses (1.15%). V.A. International Fund has not increased its asset size. The Trustees do not believe, given V.A. International Fund's current size and historical growth rate, that V.A. International Fund will grow to an asset size that would allow V.A. International Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. International Fund will reach an asset size which will allow V.A. International Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. International Fund and International Equity Fund. 39 PROPOSAL 5 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. MID CAP GROWTH FUND AND FUNDAMENTAL GROWTH FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Mid Cap Growth Fund and Fundamental Growth Fund. Under this Agreement, V.A. Mid Cap Growth Fund would transfer all of its assets to Fundamental Growth Fund in exchange for shares of Fundamental Growth Fund. These shares would be distributed proportionately to the shareholders of V.A. Mid Cap Growth Fund. Fundamental Growth Fund would also assume V.A. Mid Cap Growth Fund's liabilities. V.A. Mid Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Mid Cap Growth Fund to Fundamental Growth Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. Mid Cap Growth Fundamental Growth Fund - ------------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $6.3 million. $40.3 million. 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment adviser: Investment adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio Managers: Subadviser: -Team responsible for day-to-day Putnam Investment Management, LLC investment management -Managing since 1937 -Managed fund since August 2000 Fund Managers: -Management by investment team overseen by: Eric M. Wetlaufer, CFA -Managing Director and Chief Investment Officer of subadviser -Joined subadviser in 1997 -Began business career in 1985 - -------------------------------------------------------------------------------------------------------------------
40
- ---------------------------------------------------------------------------------------------------------------- V.A. Mid Cap Growth Fund Fundamental Growth Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks long-term capital The fund is a stock fund with a growth appreciation. This objective can be emphasis that seeks long-term capital changed without shareholder approval. appreciation. This objective can be changed without shareholder approval. - ----------------------- -------------------------------------------- ------------------------------------------- Primary investments: The fund invests at least 80% of assets in The fund invests primarily in common stocks of medium-capitalization companies stocks of large-sized and mid-sized U.S. (companies in the capitalization range of companies that are believed to offer the Russell Midcap Growth Index, which was above-average potential for growth in $____ million to $___ billion on September revenues and earnings. The fund normally 30, 2001). In managing the portfolio, the invests in 90 to 150 stocks, with at mangers seek to identify companies with least 65% of its assets (usually higher) above-average earnings growth. in large and mid cap companies. - ----------------------- -------------------------------------------- ------------------------------------------- Foreign securities: The Fund may invest up to 10% of assets in The fund may invest in foreign securities foreign securities. that are U.S. dollar-denominated. - ----------------------- -------------------------------------------- ------------------------------------------- Diversification: The fund is diversified and cannot invest The fund is diversified and, with respect more than 5% of total assets in any one to 75% of total assets, cannot invest security. more than 5% of total assets in securities of a single issuer. - ----------------------- ---------------------------------------------------------------------------------------- Cash and cash The fund normally has less than 10% of assets in cash and cash equivalents. equivalents: - ----------------------- ---------------------------------------------------------------------------------------- Initial public The fund may invest in IPOs. offerings ("IPOs"): - ----------------------- ------------------------------------------- -------------------------------------------- Derivatives: The fund may make limited use of certain The fund may make limited use of certain derivatives (investments whose value is derivatives (investments whose value is based on indices or currencies). based on indices or other securities). - ----------------------- ------------------------------------------- -------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest in U.S. government may take temporary defensive measures - securities with maturities of up to three such as holding unusually large amounts of years, and may also invest more than 10% cash and cash equivalents - that are of assets in cash and/or cash inconsistent with the fund's primary equivalents. In these and other cases, investment strategy. In taking those the fund might not achieve its goal. measures, the fund may not achieve its investment goal. - ----------------------- ------------------------------------------- --------------------------------------------
41 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. V.A. Mid Cap Growth Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.75% Other expenses 0.35% Total fund operating expenses 1.10% Expense reimbursement (1) 0.10% Actual operating expenses 1.00% Example Year 1 Year 3 Year 5 Year 10 At end of period $102 $317 $550 $1,219 (1) V.A. Mid Cap Growth Fund's adviser has agreed to limit expenses, excluding management fees, to 0.25% at least until 4/30/02. 42 Fundamental Growth Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.90% Other expenses 0.24% Total fund operating expenses 1.14% Expense reimbursement (1) 0.14% Actual operating expenses 1.00% Example Year 1 Year 3 Year 5 Year 10 At end of period $102 $318 $551 $1,222 (1) Fundamental Growth Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Pro Forma Expense Table The following expense table shows the pro forma expenses of Fundamental Growth Fund assuming that a reorganization with V.A. Mid Cap Growth Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. Fundamental Growth Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of Fundamental Growth Fund's actual expenses or returns, either past or future. 43 Fundamental Growth Fund (PRO FORMA) (Assuming reorganization with V.A. Mid Cap Growth Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.90% Other expenses 0.23% Total fund operating expenses 1.13% Expense reimbursement (1) 0.13% Actual operating expenses 1.00% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $102 $318 $552 $1,225 (1) Fundamental Growth Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Mid Cap Growth Fund will transfer all of its assets to Fundamental Growth Fund. Fundamental Growth Fund will assume V.A. Mid Cap Growth Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Fundamental Growth Fund will issue to V.A. Mid Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Mid Cap Growth Fund's shares. These shares will be distributed immediately to V.A. Mid Cap Growth Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Mid Cap Growth Fund will end up as shareholders of Fundamental Growth Fund. o After the reorganization is over, V.A. Mid Cap Growth Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Mid Cap Growth Fund. 44 The following diagram shows how the reorganization would be carried out. V. A. Mid Cap Growth V. A. Mid Cap Growth Fund Fundamental Growth Fund transfers assets assets and liabilities Fund receives assets and liabilities to ------------>------------ and assumes liabilities Fundamental Growth of V.A. Mid Cap Growth Fund Fund Shareholders ------------<------------ Issues Shares V.A. Mid Cap Growth Fund receives Fundamental Growth Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Mid Cap Growth Fund--0.75% and Fundamental Growth Fund 0.90%. Fundamental Growth Fund's management fee rate of 0.90% and its pro forma management fee rate of 0.90% are higher than V.A. Mid Cap Growth Fund's management fee rate of 0.75%. V.A. Mid Cap Growth Fund's gross total annual operating expenses of 1.10% are lower than those of Fundamental Growth Fund which are 1.14%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Mid Cap Growth Fund's total annual operating expenses (1.00%) are the same as Fundamental Growth Fund (1.00%). After the reorganization, Fundamental Growth Fund's pro forma total annual operating expenses (1.13%) are higher than those of V.A. Mid Cap Growth Fund's gross total annual operating expenses (1.10%) and net total annual operating expenses (1.00%). Investment advisory fees as a percentage of average daily net assets. V.A. Mid Cap Growth 0.75% Fundamental Growth 0.90% on first $250 million 0.85% in excess of $250 million
45 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- -------------------------------------------------------------------------------------------------------------------------- V.A. Mid Cap Growth Fund Fundamental Growth Fund - -------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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 concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- ---------------------------------------------- --------------------------------------------- Investment category risk The medium capitalization growth stocks in The small and medium capitalization growth which the fund primarily invests could fall stocks in which the fund primarily invests out of favor with the market. This could could fall out of favor with the market. cause the fund to underperform funds that This could cause the fund to underperform focus on large or small capitalization funds that focus on large capitalization stocks or on value stocks. stocks or on value stocks. - ------------------------------- -------------------------------------------------------------------------------------------- Small and medium The fund's investments in small or medium capitalization companies may be subject to capitalization company risk larger and more erratic price movements than investments in large capitalization companies. - ------------------------------- -------------------------------------------------------------------------------------------- Initial public offering (IPO) A significant part of the fund's return may at times be attributable to investments in risk IPOs. Many IPO stocks are issued by, and involve the risks associated with, small and medium capitalization companies. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inadequate or inaccurate financial information and social or political instability. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Liquidity and valuation risks In a down or unstable market, the fund's investments could become harder to value accurately or to sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- --------------------------------------------------------------------------------------------
46 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Mid Cap Growth Fund will transfer all of its assets to Fundamental Growth Fund and Fundamental Growth Fund will assume all of V.A. Mid Cap Growth Fund's liabilities. This will result in the addition of V.A. Mid Cap Growth Fund's assets to Fundamental Growth Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Fundamental Growth Fund will issue to V.A. Mid Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Mid Cap Growth Fund's shares. As part of the liquidation of V.A. Mid Cap Growth Fund, these shares will be distributed immediately to shareholders of record of V.A. Mid Cap Growth Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Mid Cap Growth Fund will end up as shareholders of Fundamental Growth Fund. o After the reorganization is over, the existence of V.A. Mid Cap Growth Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. Mid Cap Growth Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Mid Cap Growth Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Mid Cap Growth Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. Fundamental Growth Fund has a larger asset size than V.A. Mid Cap Growth Fund and may invest in a broader range of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, Fundamental Growth Fund shares have performed better than V.A. Mid Cap Growth Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that Fundamental Growth Fund is better positioned than V.A. Mid Cap Growth Fund to generate strong returns because of its ability to choose from a broader range of investment opportunities. 47 Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Mid Cap Growth Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. The Trustees believe that Fundamental Growth Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although Fundamental Growth Fund is a larger fund than V.A. Mid Cap Growth Fund, the Trustees believe the addition of V.A. Mid Cap Growth Fund's assets may add to the diversification of Fundamental Growth Fund's overall portfolio and therefore provide an economic benefit to Fundamental Growth Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Mid Cap Growth Fund is lower than the rate paid by Fundamental Growth Fund. Fundamental Growth Fund's management fee rate of 0.90% and its pro forma management fee rate of 0.90% are higher than V.A. Mid Cap Growth Fund's management fee rate of 0.75%. V.A. Mid Cap Growth Fund's gross total annual operating expenses of 1.10% are lower than those of Fundamental Growth Fund which are 1.14%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Mid Cap Growth Fund's total annual operating expenses (1.00%) are equal to those of Fundamental Growth Fund (1.00%). After the reorganization, Fundamental Growth Fund's pro forma gross total annual operating expenses (1.13%) are higher than those of V.A. Mid Cap Growth Fund's gross total annual operating expenses (1.10%) and net total annual operating expenses (1.00%). V.A. Mid Cap Growth Fund has not increased its asset size. The Trustees do not believe, given V.A. Mid Cap Growth Fund's current size and historical growth rate, that V.A. Mid Cap Growth Fund will grow to an asset size that would allow V.A. Mid Cap Growth Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Mid Cap Growth Fund will reach an asset size which will allow V.A. Mid Cap Growth Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Mid Cap Growth Fund and Fundamental Growth Fund. 48 PROPOSAL 6 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. SMALL CAP GROWTH FUND AND VST SMALL CAP GROWTH FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Small Cap Growth Fund and VST Small Cap Growth Fund. Under this Agreement, V.A. Small Cap Growth Fund would transfer all of its assets to VST Small Cap Growth Fund in exchange for shares of VST Small Cap Growth Fund. These shares would be distributed proportionately to the shareholders of V.A. Small Cap Growth Fund. VST Small Cap Growth Fund would also assume V.A. Small Cap Growth Fund's liabilities. V.A. Small Cap Growth Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Small Cap Growth Fund to VST Small Cap Growth Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. Small Cap Growth VST Small Cap Growth - ------------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of $13.3 million. $202.1 million. June 30, 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio Managers: Subadviser: John Hancock Advisers, Inc. Bernice S. Behar, CFA -Senior Vice President of adviser -Owned by John Hancock -Joined fund team in 1996 -Managing since 1968 -Joined adviser in 1991 -Managing Fund since May 1996 -Began business career in 1986 Portfolio Manager: Anurag Pandit, CFA -Vice President of adviser Bernice S. Behar, CFA -Joined team in 1996 -Senior Vice President of subadviser -Joined adviser in 1996 -Joined fund team in 1996 -Began business career in 1984 -Joined subadviser in 1991 -Began business career in 1986 - -------------------------------------------------------------------------------------------------------------------
49
- ---------------------------------------------------------------------------------------------------------------- V.A. Small Cap Growth Fund VST Small Cap Growth Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks long-term capital The fund is a small cap stock fund with a appreciation. This objective can be growth emphasis that seeks long-term changed without shareholder approval. capital appreciation. This objective can be changed without shareholder approval. - ----------------------- -------------------------------------------- ------------------------------------------- Primary investments: The fund invests at least 80% of assets in The fund invests primarily in common stocks of small capitalization companies stocks of small U.S. companies that are (companies in the capitalization range of believed to offer above-average potential the Russell 2000 Growth Index, which was for growth in revenues and earnings. $___ million to $___ billion as of Stocks are purchased that are expected to September 30, 2001). The managers look have rapid earnings growth that is not for companies in the emerging growth phase yet widely recognized by the investment of development that are not yet widely community. The fund normally invests in recognized. The fund may also invest in 140 to 220 stocks, with at least established companies that offer the 65%(usually higher) of its assets in possibility of accelerating earnings. To small cap companies. manage risk, the fund typically invests in 150 to 220 companies across many industries. - ----------------------- -------------------------------------------- ------------------------------------------- Foreign securities: The fund may invest up to 10% of assets in The fund may invest in foreign securities foreign securities. that are U.S. dollar-denominated. - ----------------------- ---------------------------------------------------------------------------------------- Preferred stocks: The fund may invest in preferred stocks and other types of equity securities. - ----------------------- ---------------------------------------------------------------------------------------- Cash and cash The fund normally has less than 10% of assets in cash and cash equivalents. equivalents: - ----------------------- -------------------------------------------- ------------------------------------------- Diversification: The fund is diversified and cannot invest The fund is diversified and, with respect more than 5% of total assets in any one to 75% of total assets, cannot invest security. more than 5% of total assets in securities of a single issuer. - ----------------------- ---------------------------------------------------------------------------------------- Initial public The fund may invest in IPOs. offerings ("IPOs"): - ----------------------- -------------------------------------------- ------------------------------------------- Derivatives: The fund may make limited use of certain The fund may make limited use of certain derivatives (investments whose value is derivatives (investments whose value is based on indices or currencies). based on indices or other securities). - ----------------------- -------------------------------------------- ------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest in U.S. government may take temporary defensive measures - securities with maturities of up to three such as holding unusually large amounts years, and may also invest more than 10% of cash and cash equivalents - that are of assets in cash and/or cash inconsistent with the fund's primary equivalents. In these and other cases, investment strategy. In taking those the fund might not achieve its goal. measures, the fund may not achieve its investment goal. - ----------------------- -------------------------------------------- -------------------------------------------
50 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. V.A. Small Cap Growth Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.75% Other expenses 0.37% Total fund operating expenses 1.12% Expense reimbursement (1) 0.12% Actual operating expenses 1.00% Example Year 1 Year 3 Year 5 Year 10 At end of period $102 $317 $550 $1,220 (1) V.A. Small Cap Growth Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% at least until 4/30/02. 51 VST Small Cap Growth Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 1.05% Other expenses 0.09% Total fund operating expenses 1.14% Expense reimbursement (1) 0.00% Actual operating expenses 1.14% Example Year 1 Year 3 Year 5 Year 10 At end of period $116 $362 $627 $1,385 (1) VST Small Cap Growth Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Pro Forma Expense Table The following expense table shows the pro forma expenses of VST Small Cap Growth Fund assuming that a reorganization with V.A. Small Cap Growth Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. VST Small Cap Growth Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of VST Small Cap Growth Fund's actual expenses or returns, either past or future. 52 VST Small Cap Growth Fund (PRO FORMA) (Assuming reorganization with V.A. Small Cap Growth Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 1.05% Other expenses 0.09% Total fund operating expenses 1.14% Expense reimbursement (1) 0.00% Actual operating expenses 1.14% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $116 $362 $627 $1,385 (1) VST Small Cap Growth Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Small Cap Growth Fund will transfer all of its assets to VST Small Cap Growth Fund. VST Small Cap Growth Fund will assume V.A. Small Cap Growth Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o VST Small Cap Growth Fund will issue to V.A. Small Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Small Cap Growth Fund's shares. These shares will be distributed immediately to V.A. Small Cap Growth Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Small Cap Growth Fund will end up as shareholders of VST Small Cap Growth Fund. o After the reorganization is over, V.A. Small Cap Growth Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Small Cap Growth Fund. 53 The following diagram shows how the reorganization would be carried out. V. A. Small Cap Growth V. A. Small Cap Growth Fund VST Small Cap Growth Fund transfers assets assets and liabilities Fund receives assets and liabilities to VST ------------->------------- and assumes liabilities Small Cap Growth of V.A. Small Cap Growth Fund Fund Shareholders -------------<------------- Issues Shares V.A. Small Cap Growth Fund receives VST Small Cap Growth Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Small Cap Growth Fund--0.75% and VST Small Cap Growth Fund 1.05%. VST Small Cap Growth Fund's management fee rate of 1.05% and its pro forma management fee rate of 1.05% are higher than V.A. Small Cap Growth Fund's management fee rate of 0.75%. V.A. Small Cap Growth Fund's gross total annual operating expenses of 1.12% lower than those of VST Small Cap Growth Fund which are 1.14%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Small Cap Growth Fund's total annual operating expenses (1.00%) are lower than those of VST Small Cap Growth Fund (1.14%). After the reorganization, VST Small Cap Growth Fund's pro forma total annual operating expenses (1.14%) are higher than those of V.A. Small Cap Growth Fund's gross total annual operating expenses (1.12%) and net total annual operating expenses (1.00%). Investment advisory fees as a percentage of average daily net assets. V.A. Small Cap Growth 0.75% VST Small Cap Growth 1.05% 54 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- -------------------------------------------------------------------------------------------------------------------------- V.A. Small Cap Growth Fund VST Small Cap Growth Fund - -------------------------------------------------------------------------------------------------------------------------- Stock market risk The value of securities in the fund may go down in response to overall stock 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 concentrates in certain sectors, its performance could be worse than that of the overall stock market. - ------------------------------- -------------------------------------------------------------------------------------------- Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. - ------------------------------- -------------------------------------------------------------------------------------------- Investment category risk The small capitalization growth stocks in which the fund primarily invests could fall out of favor with the market. This could cause the fund to underperform funds that focus on large or medium capitalization stocks or on value stocks. - ------------------------------- -------------------------------------------------------------------------------------------- Small and medium The fund's investments in small or medium capitalization companies may be subject to capitalization company risk larger and more erratic price movements than investments in established large capitalization companies. Many smaller companies have short track records, narrow product lines or niche markets, making them highly vulnerable to isolated business setbacks. - ------------------------------- -------------------------------------------------------------------------------------------- Initial public offering (IPO) A significant part of the fund's return may at times be attributable to investments in risk IPOs. Many IPO stocks are issued by, and involve the risks associated with, small and medium capitalization companies. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inadequate or inaccurate financial information and social or political instability. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Liquidity and valuation risks In a down or unstable market, the fund's investments could become harder to value accurately or to sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- --------------------------------------------------------------------------------------------
55 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Small Cap Growth Fund will transfer all of its assets to VST Small Cap Growth Fund and VST Small Cap Growth Fund will assume all of V.A. Small Cap Growth Fund's liabilities. This will result in the addition of V.A. Small Cap Growth Fund's assets to VST Small Cap Growth Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o VST Small Cap Growth Fund will issue to V.A. Small Cap Growth Fund shares in an amount equal to the aggregate net asset value of V.A. Small Cap Growth Fund's shares. As part of the liquidation of V.A. Small Cap Growth Fund, these shares will be distributed immediately to shareholders of record of V.A. Small Cap Growth Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Small Cap Growth Fund will end up as shareholders of VST Small Cap Growth Fund. o After the reorganization is over, the existence of V.A. Small Cap Growth Fund will be terminated. Reasons for the Proposed Reorganization The Board of Trustees of V.A. Small Cap Growth Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Small Cap Growth Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Small Cap Growth Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. VST Small Cap Growth Fund has a larger asset size than V.A. Small Cap Growth Fund and invests in the same types of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, VST Small Cap Growth Fund shares have performed better than V.A. Small Cap Growth Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that VST Small Cap Growth Fund is better positioned than V.A. Small Cap Growth Fund to continue to generate strong return. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Small Cap Growth Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. The Trustees believe that VST Small Cap Growth Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although VST Small Cap Growth Fund is a larger fund than V.A. Small Cap Growth Fund, the Trustees believe that the addition of V.A. Small Cap Growth Fund's assets may add to the diversification of VST Small Cap Growth Fund's overall portfolio and therefore provide an economic benefit to VST Small Cap Growth Fund and its shareholders without the obligation to pay commissions or other transaction costs that a fund normally incurs when purchasing securities. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. 56 Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Small Cap Growth Fund is lower than the rate paid by VST Small Cap Growth Fund. VST Small Cap Growth Fund's management fee rate of 1.05% and its pro forma management fee rate of 1.05% are higher than V.A. Small Cap Growth Fund's management fee rate of 0.75%. V.A. Small Cap Growth Fund's gross total annual operating expenses of 1.12% are lower than those of VST Small Cap Growth Fund which are 1.14%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Small Cap Growth Fund's total annual operating expenses (1.00%) are lower than those of VST Small Cap Growth Fund (1.14%). After the reorganization, VST Small Cap Growth Fund's pro forma total annual operating expenses (1.14%) are more than those of V.A. Small Cap Growth Fund's gross total annual operating expenses (1.12%) and net total annual operating expenses (1.00%). V.A. Small Cap Growth Fund has not increased its asset size. The Trustees do not believe, given V.A. Small Cap Growth Fund's current size and historical growth rate, that V.A. Small Cap Growth Fund will grow to an asset size that would allow V.A. Small Cap Growth Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Small Cap Growth Fund will reach an asset size which will allow V.A. Small Cap Growth Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Small Cap Growth Fund and VST Small Cap Growth Fund. 57 PROPOSAL 7 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. BOND FUND AND ACTIVE BOND FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Bond Fund and Active Bond Fund. Under this Agreement, V.A. Bond Fund would transfer all of its assets to Active Bond Fund in exchange for shares of Active Bond Fund. These shares would be distributed proportionately to the shareholders of V.A. Bond Fund. Active Bond Fund would also assume V.A. Bond Fund's liabilities. V.A. Bond Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Bond Fund to Active Bond Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. Bond Fund Active Bond Fund - ------------------------------------------------------------------------------------------------------------------- Business: The fund is a diversified series of The fund is a diversified series of John John Hancock Declaration Trust. The Hancock Variable Series Trust I. The trust is trust is an open-end investment an open-end investment company organized as a company organized as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $67.7 million. $816.3 million. 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio managers: Subadviser: John Hancock Advisers, Inc. James K. Ho, CFA -Executive V.P. of adviser Portfolio manager: -Joined fund team in 1996 -Joined adviser in 1985 James K. Ho, CFA -Began business career in 1977 -Executive V.P. of subadviser -Joined fund team in 1995 Benjamin A. Matthews -Joined adviser in 1985 -Vice President of adviser -Began business career in 1977 -Joined fund team in 1998 -Joined adviser in 1995 -Began business career in 1970 - -------------------------------------------------------------------------------------------------------------------
58
- ---------------------------------------------------------------------------------------------------------------- V.A. Bond Fund Active Bond Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks to generate a high level of The fund is an intermediate term bond current income consistent with prudent fund of medium credit quality that seeks investment risk. This objective can be income and capital appreciation. changed without shareholder approval. This objective can be changed without shareholder approval. ---------------------- -------------------------------------------- ------------------------------------------- Primary investments: The fund normally invests at least 65% of The fund primarily invests in a assets in a diversified portfolio of debt diversified mix of debt securities securities. These include corporate bonds including: and debentures as well as U.S. government and agency securities. Most of these are o U.S. Treasury and agency investment grade. securities; o foreign government and agency securities (if dollar-denominated); o corporate bonds, both U.S. and foreign (if dollar-denominated); and o mortgage and asset-backed securities. The fund normally has an average credit rating of "A" or higher. ---------------------- -------------------------------------------- ------------------------------------------- Junk bonds: The fund may invest up to 25% of assets in The fund may invest up to 25% of assets junk bonds rated as low as CC/Ca and their in junk bonds. unrated equivalents. ---------------------- -------------------------------------------- ------------------------------------------- Foreign securities: The fund does not invest more than 25% of The fund may invest in foreign securities assets in foreign securities (excluding that are U.S. dollar-denominated. U.S. dollar-denominated Canadian securities). ---------------------- ---------------------------------------------------------------------------------------- Mortgage-backed and The fund invests in mortgage-backed and asset-backed securities. asset-backed securities: ---------------------- ---------------------------------------------------------------------------------------- Cash and cash Under normal conditions, the fund does not invest more than 10% of assets in cash or equivalents: cash equivalents. ---------------------- -------------------------------------------- ------------------------------------------- Average maturity: There is no limit on the fund's average The fund is an intermediate term bond maturity. fund with an average maturity that is typically between four and ten years. ---------------------- ---------------------------------------------------------------------------------------- Diversification: The fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. ---------------------- ------------------------------------------- -------------------------------------------- Derivatives: The fund may invest in certain The fund may invest in certain derivatives derivatives (investments whose value is (investments whose value is based on based on indices, securities or indices or other securities.) currencies). ---------------------- ------------------------------------------- -------------------------------------------- Temporary defensive In abnormal market conditions, the fund In abnormal market conditions, the fund positions: may temporarily invest more than 35% of may take temporary defensive measures - assets in investment-grade short-term such as holding unusually large amounts of securities. In these and other cases, cash and cash equivalents - that are the fund might not achieve its goal. inconsistent with the fund's primary investment strategy. In taking those measures, the fund may not achieve its investment goal. ---------------------- ------------------------------------------- --------------------------------------------
The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. 59 V.A. Bond Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.50% Other expenses 0.25% Total fund operating expenses 0.75% Expense reimbursement (1) 0.00% Actual operating expenses 0.75% Example Year 1 Year 3 Year 5 Year 10 At end of period $76 $238 $415 $925 (1) V.A. Bond Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.25% until 5/1/02. Active Bond Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.62% Other expenses 0.15% Total fund operating expenses 0.77% Expense reimbursement (1) 0.05% Actual operating expenses 0.72% Example Year 1 Year 3 Year 5 Year 10 At end of period $73 $229 $398 $889 (1) Active Bond Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 60 Pro Forma Expense Table The following expense table shows the pro forma expenses of Active Bond Fund assuming that a reorganization with V.A. Bond Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. Active Bond Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of Active Bond Fund's actual expenses or returns, either past or future. Active Bond Fund (PRO FORMA) (Assuming reorganization with V.A. Bond Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.61% Other expenses 0.12% Total fund operating expenses 0.73% Expense reimbursement (1) 0.02% Actual operating expenses 0.71% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $73 $228 $396 $884 (1) Active Bond Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. 61 The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Bond Fund will transfer all of its assets to Active Bond Fund. Active Bond Fund will assume V.A. Bond Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Active Bond Fund will issue to V.A. Bond Fund shares in an amount equal to the aggregate net asset value of V.A. Bond Fund's shares. These shares will be distributed immediately to V.A. Bond Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Bond Fund will end up as shareholders of Active Bond Fund. o After the reorganization is over, V.A. Bond Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Bond Fund. The following diagram shows how the reorganization would be carried out. V. A. Bond V. A. Bond Fund Active Bond Fund transfers assets assets and liabilities Fund receives assets and liabilities to Active --------------->--------------- and assumes liabilities Bond Fund of V.A. Bond Fund Shareholders ---------------<--------------- Issues Shares V.A. Bond Fund receives Active Bond Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Bond Fund--0.50% and Active Bond Fund 0.62%. Active Bond Fund's management fee rate of 0.62% and its pro forma management fee rate of 0.61% are higher than` V.A. Bond Fund's management fee rate of 0.50%. V.A. Bond Fund's gross total annual operating expenses of 0.75% are lower than those of Active Bond Fund which are 0.77%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Bond Fund's total annual operating expenses (0.75%) are higher than those of Active Bond Fund (0.72%). After the reorganization, Active Bond Fund's pro forma total annual operating expenses (0.73%) are less than those of V.A. Bond Fund's gross total annual operating expenses (0.75%) and net total annual operating expenses (0.75%). Investment advisory fees as a percentage of average daily net assets. V.A. Bond 0.50% Active Bond Fund 0.70% on first $100 million 0.65% on next $150 million 0.61% on next $250 million 0.575% on next $500 million 0.55% in excess of $1 billion 62 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- ------------------------------------------------------------------------------------------------------------------------- V.A. Bond Fund Active Bond Fund - ------------------------------------------------------------------------------------------------------------------------- Interest rate risk When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. - ------------------------------- -------------------------------------------------------------------------------------------- Prepayment (call) and If interest rate movements cause the fund's mortgage-related and callable securities to be extension risks paid off earlier or later than expected, the fund's share price or yield could be hurt. - ------------------------------- -------------------------------------------------------------------------------------------- Credit risk The fund could lose money if the credit rating of any bond in its portfolio is downgraded or if the issuer of the bond defaults on its obligations. In general, lower-rated bonds involve more credit risk. The prices of lower-rated bonds may also be more volatile and more sensitive to adverse economic developments. - ------------------------------- -------------------------------------------------------------------------------------------- Sector concentration risk If the fund concentrates in certain sectors of the bond market, its performance could be worse than that of the overall bond 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. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inaccurate financial information and social or political instability. The prices of foreign bonds may also be more volatile and more sensitive to adverse economic developments occuring outside the U.S. - ------------------------------- ---------------------------------------------- --------------------------------------------- Foreign currency risk Unfavorable foreign currency exchange rates Not applicable because the fund invests could reduce the value of bonds denominated only in U.S. dollar-denominated bonds. in foreign currencies. - ------------------------------- -------------------------------------------------------------------------------------------- Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct investments. Also, in a down market derivatives could become harder to value or sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Liquidity and valuation risks In a down or unstable market, the fund's investments could become harder to value accurately or to sell at a fair price. - ------------------------------- -------------------------------------------------------------------------------------------- Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's turnover rate may exceed 100%, which is considered relatively high. - ------------------------------- --------------------------------------------------------------------------------------------
63 PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a copy of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 7, 2001, but may occur on any later date before June 30, 2002. V.A. Bond Fund will transfer all of its assets to Active Bond Fund and Active Bond Fund will assume all of V.A. Bond Fund's liabilities. This will result in the addition of V.A. Bond Fund's assets to Active Bond Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o Active Bond Fund will issue to V.A. Bond Fund shares in an amount equal to the aggregate net asset value of V.A. Bond Fund's shares. As part of the liquidation of V.A. Bond Fund, these shares will be distributed immediately to shareholders of record of V.A. Bond Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Bond Fund will end up as shareholders of Active Bond Fund. o After the reorganization is over, the existence of V.A. Bond Fund will be terminated. Reasons for the Proposed Reorganization. The Board of Trustees of V.A. Bond Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Bond Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Bond Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. Active Bond Fund has a larger asset size than V.A. Bond Fund and invests in the same types of securities. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, Active Bond Fund shares have performed better than V.A. Bond Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that Active Bond Fund is better positioned than V.A. Bond Fund to generate strong returns. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Bond Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. The Trustees believe that Active Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although Active Bond Fund is a larger fund than V.A. Bond Fund, the Trustees believe that the addition of V.A. Bond Fund's assets may add to the diversification of Active Bond Fund's overall portfolio and therefore provide an economic benefit to Active Bond Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from a consolidated portfolio management effort and from the need to prepare fewer reports and regulatory filings as well as prospectus disclosure for one fund instead of two. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Bond Fund is lower than as the rate paid by Active Bond Fund. Active Bond Fund's management fee rate of 64 0.62% and its pro forma management fee rate of 0.61% are higher than those of V.A. Bond Fund's management fee rate of 0.50%. V.A. Bond Fund's gross total annual operating expenses of 0.75% are lower than those of Active Bond Fund, which are 0.77%. After the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Bond Fund's total annual operating expenses (0.75%) are higher than those of Active Bond Fund (0.72%). After the reorganization, Active Bond Fund's pro forma total annual operating expenses (0.73%) are less than those of V.A. Bond Fund's gross total annual operating expenses (0.75%) and net total annual operating expenses (0.75%). V.A. Bond Fund has not increased its asset size. The Trustees do not believe, given V.A. Bond Fund's current size and historical growth rate, that V.A. Bond Fund will grow to an asset size that would allow V.A. Bond Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Bond Fund will reach an asset size which will allow V.A. Bond Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Bond Fund and Active Bond Fund. 65 PROPOSAL 8 APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN V.A. MONEY MARKET FUND AND VST MONEY MARKET FUND A proposal to approve an Agreement and Plan of Reorganization between V.A. Money Market Fund and VST Money Market Fund. Under this Agreement, V.A. Money Market Fund would transfer all of its assets to VST Money Market Fund in exchange for shares of VST Money Market Fund. These shares would be distributed proportionately to the shareholders of V.A. Money Market Fund. VST Money Market Fund would also assume V.A. Money Market Fund's liabilities. V.A. Money Market Fund's Board of Trustees recommends that shareholders vote FOR this proposal. SUMMARY Comparison of V.A. Money Market Fund to VST Money Market Fund
- ------------------------------------------------------------------------------------------------------------------- V.A. Money Market VST Money Market - ------------------------------------------------------------------------------------------------------------------- Business: A diversified series of John Hancock A diversified series of John Hancock Declaration Trust. The trust is an Variable Series Trust I. The trust is an open-end investment company organized open-end investment company organized as a as a Massachusetts business trust. Massachusetts business trust. - ------------------------------------------------------------------------------------------------------------------- Net assets as of June 30, $143.5 million. $459.4 million. 2001: - ------------------------------------------------------------------------------------------------------------------- Investment adviser and Investment Adviser: Investment Adviser: portfolio managers: John Hancock Advisers, Inc. John Hancock Life Insurance Company Portfolio Managers: Subadviser: Team of Money Market research analysts Wellington Management Company, LLP and portfolio managers. -Managing, with predecessors, since 1928 -Managing fund since May 2001 Portfolio Managers: Management by investment team overseen by: John Keogh -Senior Vice President and Partner of subadviser -Joined subadviser in 1983 - -------------------------------------------------------------------------------------------------------------------
66
- ---------------------------------------------------------------------------------------------------------------- V.A. Money Market Fund VST Money Market Fund - ---------------------------------------------------------------------------------------------------------------- Investment objective: The fund seeks the maximum current income The fund is a money market fund that that is consistent with maintaing seeks to preserve capital and liquidity liquidity and preserving capital. The while also seeking to achieve a fund intends to maintain a stable $1 share competitive yield. The fund intends to price. This objective can be changed maintain a stable net asset value of without shareholder approval. $1.00 per share. This objective can be changed without shareholder approval. ---------------------- -------------------------------------------- ------------------------------------------- Primary investments: The fund invests only in The fund invests in U.S. dollar dollar-denominated securities rated within denominated money market instruments the two highest short-term credit rated in one of the two highest categories and their unrated equivalents. short-term credit rating categories, These securities may be issued by: primarily including: o U.S. and foreign companies o commercial paper and other o U.S. and foreign banks short-term obligations of U.S. and o U.S. and foreign governments foreign issuers (including asset-backed o U.S. agencies, states and securities); municipalities o certificates of deposit, bank o International organizations such notes and other obligations of U.S. and as the World Bank and the foreign banks and other lending International Monetary Fund. institutions; o debt securities issued by foreign governments and agencies; o U.S. Treasury, agency and state and local government obligations; and o repurchase agreements. ---------------------- ---------------------------------------------------------------------------------------- Average maturity: The fund maintains an average dollar-weighted maturity of 90 days or less, and does not invest in securities with maturities of more than 13 months. ---------------------- ---------------------------------------------------------------------------------------- Foreign securities: The fund may invest in foreign securities which are U.S. dollar-denominated. ---------------------- ---------------------------------------------------------------------------------------- Repurchase The fund may invest in repurchase agreements. agreements: ---------------------- ---------------------------------------------------------------------------------------- Diversification: The fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total assets in securities of a single issuer. ---------------------- ----------------------------------------------------------------------------------------
67 The Funds' Expenses Both funds pay various expenses. The first two expense tables appearing below show the expenses for the twelve-month period ended June 30, 2001, adjusted to reflect any changes. Future expenses may be greater or less. The examples contained in each expense table show what you would pay if you invested $10,000 over the various time periods indicated. Each example assumes that you reinvested all dividends and that the average annual return was 5%. (The examples do not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the funds serve as an investment vehicle.) The examples are for comparison purposes only and are not a representation of either fund's actual expenses or returns, either past or future. V.A. Money Market Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.50% Other expenses 0.07% Total fund operating expenses 0.57% Expense reimbursement (1) 0.00% Actual operating expenses 0.57% Example Year 1 Year 3 Year 5 Year 10 At end of period $58 $182 $317 $711 (1) V.A. Money Market fund's adviser has agreed to limit expenses, excluding management fees, to 0.25% until 5/1/02. 68 VST Money Market Fund Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.25% Other expenses 0.03% Total fund operating expenses 0.28% Expense reimbursement (1) 0.00% Actual operating expenses 0.28% Example Year 1 Year 3 Year 5 Year 10 At end of period $29 $90 $157 $356 (1) VST Money Market Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. Pro Forma Expense Table The following expense table shows the pro forma expenses of VST Money Market Fund assuming that a reorganization with V.A. Money Market Fund occurred on June 30, 2000. The expenses shown in the table are based on fees and expenses incurred during the twelve months ended June 30, 2001, adjusted to reflect any changes. VST Money Market Fund's actual expenses after the reorganization may be greater or less than those shown. The example contained in the pro forma expense table shows what you would pay on a $10,000 investment if the reorganization had occurred on June 30, 2000. The example assumes that you reinvested all dividends and that the average annual return was 5%. (The example does not reflect the fees or expenses associated with variable annuity and variable life insurance contracts for which the fund serves as an investment vehicle.) The pro forma example is for comparison purposes only and is not a representation of VST Money Market Fund's actual expenses or returns, either past or future. 69 VST Money Market Fund (PRO FORMA) (Assuming reorganization with V.A. Money Market Fund) Shareholder transaction expenses Maximum sales charge imposed on purchases (as a percentage of offering price) 0.00% Maximum sales charge imposed on Reinvested dividends none Maximum deferred sales charge none Redemption fee none Exchange fee none Annual fund operating expenses (as a % of average net assets) Management fee 0.25% Other expenses 0.03% Total fund operating expenses 0.28% Expense reimbursement (1) 0.00% Actual operating expenses 0.28% Pro Forma Example Year 1 Year 3 Year 5 Year 10 At end of period $29 $90 $157 $356 (1) VST Money Market Fund's adviser has agreed to limit the fund's expenses, excluding management fees, to 0.10%. The Reorganization o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. Money Market Fund will transfer all of its assets to VST Money Market Fund. VST Money Market Fund will assume V.A. Money Market Fund's liabilities. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o VST Money Market Fund will issue to V.A. Money Market Fund shares in an amount equal to the aggregate net asset value of V.A. Money Market Fund's shares. These shares will be distributed immediately to V.A. Money Market Fund's shareholders in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Money Market Fund will end up as shareholders of VST Money Market Fund. o After the reorganization is over, V.A. Money Market Fund will be terminated. o The reorganization will be tax-free and will not take place unless both funds receive a satisfactory opinion concerning the tax consequences of the reorganization from Hale and Dorr LLP, counsel to V.A. Money Market Fund. 70 The following diagram shows how the reorganization would be carried out. V. A. Money Market V. A. Money Market Fund VST Money Market Fund transfers assets assets and liabilities Fund receives assets and liabilities to VST --------------->--------------- and assumes liabilities Money Market of V.A. Money Market Fund Fund Shareholders ---------------<--------------- Issues Shares V.A. Money Market Fund receives VST Money Market Fund shares and and distributes them to its shareholders.
Other Consequences of the Reorganization. Each fund pays monthly advisory fees equal to the following annual percentage of its average daily net assets: V.A. Money Market Fund--0.50% and VST Money Market Fund 0.25%. VST Money Market Fund's management fee rate of 0.25% and its pro forma management fee rate of 0.25% are lower than V.A. Money Market Fund's management fee rate of 0.50%. V.A. Money Market Fund's gross total annual operating expenses of 0.57% are substantially higher that those of VST Money Market Fund which are 0.28%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Money Market Fund's total annual operating expenses (0.57%) are higher than those of VST Money Market Fund (0.28%). After the reorganization, VST Money Market Fund's pro forma total annual operating expenses (0.28%) are less than those of V.A. Money Market Fund's gross total annual operating expenses (0.57%) and net total annual operating expenses (0.57%). Investment advisory fees as a percentage of average daily net assets. V.A. Money Market 0.50% VST Money Market 0.25% 71 INVESTMENT RISKS The funds are exposed to various risks that could cause shareholders to lose money on their investments in the funds. The following table shows that the risks affecting each fund are similar and compares the risks affecting each fund.
- -------------------------------------------------------------------------------------------------------------------------- V.A. Money Market Fund VST Money Market Fund - -------------------------------------------------------------------------------------------------------------------------- Short term interest rate risk The value of fund shares will be most affected by short-term interest rates. If interest rates rise sharply, the fund could underperform its peers or lose money. - ------------------------------- -------------------------------------------------------------------------------------------- Credit risk The fund could lose money if the credit rating of any security in its portfolio is downgraded or if the issuer of the security defaults on its obligations. - ------------------------------- -------------------------------------------------------------------------------------------- Absence of government An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance guarantee Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. - ------------------------------- -------------------------------------------------------------------------------------------- Foreign securities risk Foreign investments involve additional risks, including potentially inaccurate financial information and social or political instability. - ------------------------------- --------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION Description of Reorganization Shareholders are being asked to approve an Agreement and Plan of Reorganization, a form of which is attached as Exhibit A. The Agreement provides for a reorganization on the following terms: o The reorganization is scheduled to occur at 5:00 p.m., Eastern time, on December 14, 2001, but may occur on any later date before June 30, 2002. V.A. Money Market Fund will transfer all of its assets to VST Money Market Fund and VST Money Market Fund will assume all of V.A. Money Market Fund's liabilities. This will result in the addition of V.A. Money Market Fund's assets to VST Money Market Fund's portfolio. The net asset value of both funds will be computed as of 5:00 p.m., Eastern time, on the reorganization date. o VST Money Market Fund will issue to V.A. Money Market Fund shares in an amount equal to the aggregate net asset value of V.A. Money Market Fund's shares. As part of the liquidation of V.A. Money Market Fund, these shares will be distributed immediately to shareholders of record of V.A. Money Market Fund in proportion to their holdings on the reorganization date. As a result, shareholders of V.A. Money Market Fund will end up as shareholders of VST Money Market Fund. o After the reorganization is over, the existence of V.A. Money Market Fund will be terminated. 72 Reasons for the Proposed Reorganization The Board of Trustees of V.A. Money Market Fund believes that the proposed reorganization will be advantageous to the shareholders of V.A. Money Market Fund for several reasons. The Board of Trustees considered the following matters, among others, in approving the proposal. First, V.A. Money Market Fund is no longer being offered to new variable insurance contract holders, making it increasingly difficult for the fund to attract assets. Second, shareholders may be better served by a fund offering more diversification. VST Money Market Fund has a larger asset size than V.A. Money Market Fund. Combining the funds' assets into a single investment portfolio may broaden diversification. Third, VST Money Market Fund shares have performed similarly to V.A. Money Market Fund over the life of both funds. While past performance cannot predict future results, the Trustees believe that VST Money Market Fund is better positioned than V.A. Money Market Fund to generate strong returns. Fourth, a combined fund may offer economies of scale that can lead to better control over expenses than is possible for V.A. Money Market Fund alone. Both funds incur substantial costs for accounting, legal, transfer agency services, insurance, and custodial and administrative services. Fifth, VST Money Market Fund Fund's total expenses are lower than V.A. Money Market Fund's total expenses. As a result of the reorganization, shareholders of V.A. Money Market Fund may experience a reduction in the total amount of fees, as a percentage of average net assets, that they indirectly pay each month. The Trustees believe that VST Money Market Fund shareholders will also benefit from improved diversification as a result of the reorganization. Although VST Money Market Fund is a larger fund than V.A. Money Market Fund, the Trustees believe the addition of V.A. Money Market Fund's assets may add to the diversification of VST Money Market Fund's overall portfolio and therefore provide an economic benefit to VST Money Market Fund and its shareholders. The Boards of Trustees of both funds also considered that the adviser will also benefit from the reorganization. For example, the adviser might realize time savings from the need to prepare fewer reports and regulatory filings. The Trustees believe, however, that these savings will not amount to a significant economic benefit to the adviser. Comparative Fees and Expense Ratios. As discussed above in the Summary, the advisory fee rate paid by V.A. Money Market Fund is higher than the rate paid by VST Money Market Fund. VST Money Market Fund's management fee rate of 0.25% and its pro forma management fee rate of 0.25% are lower than V.A. Money Market Fund's management fee rate of 0.50%. V.A. Money Market Fund's gross total annual operating expenses of 0.57% are substantially higher that those of VST Money Market Fund which are 0.28%. Even after the reduction of each fund's other expenses as a result of the adviser's voluntary agreement to limit the funds' other expenses, V.A. Money Market Fund's total annual operating expenses (0.57%) are higher than those of VST Money Market Fund (0.28%). After the reorganization, VST Money Market Fund's pro forma total annual operating expenses (0.28%) are less than those of V.A. Money Market Fund's gross total annual operating expenses (0.57%) and net total annual operating expenses (0.57%). V.A. Money Market Fund has not increased its asset size. The Trustees do not believe, given V.A. Money Market Fund's current size and historical growth rate, that V.A. Money Market Fund will grow to an asset size that would allow V.A. Money Market Fund to realize the benefits of economies of scale, including better control over expenses. The Trustees also do not believe that V.A. Money Market Fund will reach an asset size which will allow V.A. Money Market Fund to significantly broaden the diversification of its investment portfolio. Comparative Performance. The trustees also took into consideration the relative performance of V.A. Money Market Fund and VST Money Market Fund. 73 FURTHER INFORMATION ON EACH REORGANIZATION Tax Status of each Reorganization Each reorganization will be tax-free for federal income tax purposes and will not take place unless both funds in each respective reorganization receive a satisfactory opinion from Hale and Dorr LLP, counsel to the Acquired Funds, substantially to the effect that: o The reorganization described above will be a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (the "Code"), and each fund will be "a party to a reorganization" within the meaning of Section 368 of the Code; o No gain or loss will be recognized by each Acquired Fund upon (1) the transfer of all of its assets to the respective Acquiring Fund as described above or (2) the distribution by each Acquired Fund of Acquiring Fund shares to Acquired Fund shareholders; o No gain or loss will be recognized by each Acquiring Fund upon the receipt of each respective Acquired Fund's assets solely in exchange for the issuance of Acquiring Fund shares and the assumption of all of Acquired Fund liabilities by each respective Acquiring Fund; o The basis of the assets of each Acquired Fund acquired by each respective Acquiring Fund will be the same as the basis of those assets in the hands of each respective Acquired Fund immediately before the transfer; o The tax holding period of the assets of each Acquired Fund in the hands of each respective Acquiring Fund will include the Acquired Fund's tax holding period for those assets; o The shareholders of each Acquired Fund will not recognize gain or loss upon the exchange of all their shares of the Acquired Funds solely for Acquiring Fund shares as part of the reorganization; o The basis of Acquiring Fund shares received by Acquired Fund shareholders in the reorganization will be the same as the basis of the shares of each Acquired Fund surrendered in exchange; and o The tax holding period of the Acquiring Fund shares that Acquired Fund shareholders receive will include the tax holding period of the shares of the Acquired Fund surrendered in the exchange, provided that the shares of the Acquired Fund were held as capital assets on the reorganization date. Additional Terms of Each Agreement and Plan of Reorganization Conditions to Closing each Reorganization. The obligation of each Acquired Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including the performance by the respective Acquiring Fund of all its obligations under the Agreement and the receipt of all consents, orders and permits necessary to consummate the reorganization. Proposals 4 and 5 are conditioned on the receipt of an exemptive order from the Securities and Exchange Commission because the insurance companies own directly 5% or more of the Acquiring Funds (see Agreement, paragraph 6). 74 The obligation of each Acquiring Fund to consummate the reorganization is subject to the satisfaction of certain conditions, including each respective Acquired Fund's performance of all of its obligations under the Agreement, the receipt of certain documents and financial statements from each respective Acquired Fund and the receipt of all consents, orders and permits necessary to consummate the reorganization (see Agreement, paragraph 7). The obligations of each respective Acquired and Acquiring Funds are subject to approval of the Agreement by the necessary vote of the outstanding shares of the Acquired Fund, in accordance with the provisions of Acquired Funds' declaration of trust and by-laws. The funds' obligations are also subject to the receipt of a favorable opinion of Hale and Dorr LLP as to the federal income tax consequences of the reorganization. (see Agreement, paragraph 8). Termination of Agreement. The Board of Trustees of each respective Acquired Fund or Acquiring Fund may terminate the Agreement (even if the shareholders of an Acquired Fund have already approved it) at any time before the reorganization date, if that board believes that proceeding with the reorganization would no longer be advisable. Expenses of the Reorganization. John Hancock Advisers, Inc. will pay each Acquired Fund's merger costs, and each Acquiring Fund will pay its costs incurred in connection with entering into and carrying out the provisions of the Agreement, whether or not the reorganization occurs. With respect to each proposal, the expenses for each fund are estimated to be approximately $27,750 for V.A. Core Equity Fund and $17,250 for Growth & Income Fund; $18,750 for V.A. Large Cap Growth Fund and $14,250 for Growth & Income Fund; $21,000 for V.A. 500 Index Fund and $15,000 for Equity Index Fund; $16,500 for V.A. International Fund and $13,500 for International Equity Fund; $16,500 for V.A. Mid Cap Growth Fund and $13,500 for Fundamental Growth Fund; $19,500 for V.A. Small Cap Growth Fund and $14,500 for VST Small Cap Growth Fund; $33,750 for V.A. Bond Fund and $19,250 for Active Bond Fund; and $33,750 for V.A. Money Market Fund and $19,250 for VST Money Market Fund. CAPITALIZATION The following table sets forth the capitalization of each fund as of June 30, 2001, and the pro forma combined capitalization of both funds as if each reorganization had occurred on that date. If the reorganization is consummated, the actual exchange ratios on the reorganization date may vary from the exchange ratios indicated. This is due to changes in the market value of the portfolio securities of both funds between June 30, 2001 and the reorganization date, changes in the amount of undistributed net investment income and net realized capital gains of both funds during that period resulting from income and distributions, and changes in the accrued liabilities of both funds during the same period. It is impossible to predict how many shares of each Acquiring Fund will actually be received and distributed by each corresponding Acquired Fund on the reorganization date. The table should not be relied upon to determine the amount of Acquiring Fund shares that will actually be received and distributed. If the reorganization of your fund(s) had taken place on June 30, 2001:
- ------------------------------------------------------------------------------------------------------------------------------- V.A. Core Equity Growth & Income Pro Forma(1) Pro Forma(2) - ------------------------------------------------------------------------------------------------------------------------------- Net Assets $41.14M $2,799.99M $2,841.13M $2,847.41M - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $16.66 $12.87 $12.87 $12.87 - ------------------------------------------------------------------------------------------------------------------------------- Shares Outstanding 2.47M 217.63M 220.73M 221.24M - -------------------------------------------------------------------------------------------------------------------------------
(1) Assuming the reorganization of V.A. Large Cap Growth Fund into Growth & Income Fund does not occur. If the reorganization of your fund only had taken place on June 30, 2001, approximately 1.2945 Growth & Income Fund shares would have been issued for each share of V.A. Core Equity Fund. (2) Assuming the reorganization of V.A. Large Cap Growth Fund into Growth & Income Fund occurs. If both reorganizations had taken place on June 30, 2001, approximately 1.2945 Growth & Income Fund shares would have been issued for each share of V.A. Core Equity Fund. 75
- ------------------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth & Income Pro Forma (1) Pro Forma(2) Growth - ------------------------------------------------------------------------------------------------------------------------------- Net Assets $6.28M $2,799.99M $2,806.27M $2,847.41M - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $7.69 $12.87 $12.87 $12.87 - ------------------------------------------------------------------------------------------------------------------------------- Shares Outstanding .82M 217.63M 218.13M 221.24M - -------------------------------------------------------------------------------------------------------------------------------
(1) Assuming the reorganization of V.A. Core Equity Fund into Growth & Income Fund does not occur. If the reorganization of your fund only had taken place on June 30, 2001, approximately .5975 Growth & Income Fund shares would have been issued for each share of V.A. Large Cap Growth Fund. (2) Assuming the reorganization of V.A. Core Equity Fund into Growth & Income Fund occurs. If both reorganizations had taken place on June 30, 2001, approximately .5975 Growth & Income Fund shares would have been issued for each share of V.A. Large Cap Growth Fund.
- -------------------------------------------------------------------------------------------------------- V.A. 500 Index Equity Index Pro Forma - -------------------------------------------------------------------------------------------------------- Net Assets $18.42M $539.15M $557.57M - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $15.01 $16.36 $16.36 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 1.23M 32.95M 34.08M - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately .9175 Equity Index Fund shares being issued for each share of V.A. 500 Index Fund
- -------------------------------------------------------------------------------------------------------- V.A. International International Equity Pro Forma - -------------------------------------------------------------------------------------------------------- Net Assets $5.00M $21.09M $26.09M - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $8.89 $8.37 $8.37 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 0.56M 2.52M 3.12M - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately 1.0621 International Equity Fund shares being issued for each share of V.A. International Fund.
- -------------------------------------------------------------------------------------------------------- V.A. Mid Cap Fundamental Pro Forma Growth Growth - -------------------------------------------------------------------------------------------------------- Net Assets $6.32M $40.34M $46.66M - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $11.56 $9.86 $9.86 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 0.55M 4.1M 4.73M - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately 1.1724 Fundamental Growth Fund shares being issued for each share of V.A. Mid Cap Growth Fund.
- -------------------------------------------------------------------------------------------------------- V.A. Small Cap VST Small Cap Pro Forma Growth Growth - -------------------------------------------------------------------------------------------------------- Net Assets $13.31M $202.05M $215.37M - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $13.24 $12.40 $12.40 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 1.01M 16.29M 17.36M - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately 1.0677 VST Small Cap Growth Fund shares being issued for each share of V.A. Small Cap Growth Fund.
- -------------------------------------------------------------------------------------------------------- V.A. Bond Active Bond Pro Forma - -------------------------------------------------------------------------------------------------------- Net Assets $67.69M $816.30 $883.99 - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $10.28 $9.49 $9.49 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 6.58M 86.04 93.14 - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately 1.0832 Active Bond Fund shares being issued for each share of V.A. Bond Fund. 76
- -------------------------------------------------------------------------------------------------------- V.A. Money Market VST Money Market Pro Forma - -------------------------------------------------------------------------------------------------------- Net Assets $143.50M $459.40M $602.86M - -------------------------------------------------------------------------------------------------------- Net Asset Value Per Share $1.00 $1.00 $1.00 - -------------------------------------------------------------------------------------------------------- Shares Outstanding 143.50M 459.40M 602.86M - --------------------------------------------------------------------------------------------------------
The table reflects pro forma exchange ratios of approximately 1.0000 VST Money Market Fund shares being issued for each share of V.A. Money Market Fund. ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES The following table shows where in each fund's prospectus you can find additional information about the business of each fund.
- ------------------------------------------------------------------------------------------------------------------- Type of Information Headings in Prospectus for each Acquired Fund and each Acquiring Fund - ------------------------------------------------------------------------------------------------------------------- Investment objective and policies Goal and Strategy - ------------------------------------------------------------------------------------------------------------------- Portfolio Management Portfolio Management/Subadviser - ------------------------------------------------------------------------------------------------------------------- Expenses Financial Highlights - ------------------------------------------------------------------------------------------------------------------- Custodian Business Structure - ------------------------------------------------------------------------------------------------------------------- Dividends, distributions and taxes Dividends and Taxes - -------------------------------------------------------------------------------------------------------------------
BOARDS' EVALUATION AND RECOMMENDATION With respect to each reorganization, for the reasons described above, the Board of Trustees of each Acquired Fund, including the Trustees who are not "interested persons" of either fund or the adviser ("independent trustees"), approved the reorganization. In particular, the Trustees determined that the reorganization was in the best interests of each Acquired Fund and that the interests of each Acquired Fund's shareholders would not be diluted as a result of the reorganization. Similarly, the Board of Trustees of each Acquiring Fund, including the independent trustees, approved the reorganization. They also determined that the reorganization was in the best interests of the each Acquiring Fund and that the interests of the Acquiring Funds' shareholders would not be diluted as a result of the reorganization. - -------------------------------------------------------------------------------- The trustees of each Acquired Fund recommend that the shareholders vote for each proposal to approve the agreement and plan of reorganization. - -------------------------------------------------------------------------------- VOTING RIGHTS AND REQUIRED VOTE Each Acquired Fund share is entitled to one vote. Approval of the above proposal requires the affirmative vote of a majority of the shares of each Acquired Fund outstanding and entitled to vote. For this purpose, a majority of the outstanding shares of an Acquired Fund means the vote of the lesser of (1) 67% or more of the shares present at the meeting, if the holders of more than 50% of the shares of the fund are present or represented by proxy, or (2) more than 50% of the outstanding shares of the fund. 77 Shares of each Acquired Fund represented in person or by proxy, including shares that abstain or do not vote with respect to the proposal, will be counted for purposes of determining whether there is a quorum at the meeting. Accordingly, an abstention from voting has the same effect as a vote against the proposal. If the required approval of shareholders is not obtained, an Acquired Fund will continue to engage in business as a separate mutual fund and the Board of Trustees will consider what further action may be appropriate. This action could include, among other things, terminating a fund's expense limitation or closing the fund. INFORMATION CONCERNING THE MEETING Voting at the Meeting Contract owners use the voting instruction card as a ballot to give the insurance company voting instructions for those shares attributable to the variable contract as of the record date. When the contract owner completes the voting instruction card and sends it to the insurance company, the insurance company votes its proxy in accordance with the contract owner's instructions. If the contract owner completes and signs the voting instruction card, the shares attributable to the variable contract will be voted as instructed. If the contract owner merely signs and returns the card, the life insurance company will vote those shares in favor of the proposal. If the contract owner does not return the card, the life insurance company will vote those shares in the same proportion as shares for which instructions were received from other contract owners. Shares of each Acquired Fund which are not attributable to variable contracts will be represented and voted by one of the insurance companies in the same proportion as the voting instructions received from contract owners. These shares include shares purchased with contributions made as seed capital to the fund by the adviser. Solicitation of Proxies In addition to the mailing of these proxy materials, proxies may be solicited by telephone, by fax or in person by the trustees, officers and employees of the Acquired Funds and by personnel of the Acquired Funds' investment adviser, John Hancock Advisers, Inc. and its transfer agent, John Hancock Annuity Servicing Office. The Annuity Servicing Office, has agreed to provide proxy solicitation services to each Acquired Fund. Revoking Proxies Each Acquired Fund shareholder signing and returning a proxy has the power to revoke it at any time before it is exercised: o By filing a written notice of revocation with the Acquired Funds' transfer agent, John Hancock Annuity Servicing Office, 529 Main Street, Charlestown, Massachusetts 02129, or o By returning a duly executed proxy with a later date before the time of the meeting, or o If a shareholder has executed a proxy but is present at the meeting and wishes to vote in person, by notifying the secretary of the respective Acquired Fund (without complying with any formalities) at any time before it is voted. Being present at the meeting alone does not revoke a previously executed and returned proxy. Contract owners may revoke their voting instructions at any time before the proxy is voted by the life insurance company by following the procedure outlined above for revoking proxies. Outstanding Shares and Quorum As of September 20, 2001 (record date), the number of shares of beneficial interest of each Acquired Fund outstanding were as follows: 78 - -------------------------------------------------------------------------------- FUND SHARES OUTSTANDING - -------------------------------------------------------------------------------- V.A. Core Equity - -------------------------------------------------------------------------------- V.A. Large Cap Growth - -------------------------------------------------------------------------------- V.A. 500 Index - -------------------------------------------------------------------------------- V.A. International - -------------------------------------------------------------------------------- V.A. Mid Cap Growth - -------------------------------------------------------------------------------- V.A. Small Cap Growth - -------------------------------------------------------------------------------- V.A. Bond - -------------------------------------------------------------------------------- V.A. Money Market - -------------------------------------------------------------------------------- Only shareholders of record on September 20, 2001 (the "record date") are entitled to notice of and to vote at the meeting. A majority of the outstanding shares of each Acquired Fund that are entitled to vote will be considered a quorum for the transaction of business. Other Business The Acquired Funds' Board of Trustees knows of no business to be presented for consideration at the meeting other than the proposal. If other business is properly brought before the meeting, proxies will be voted according to the best judgment of the persons named as proxies. Adjournments If a quorum is not present in person or by proxy at the time any session of the meeting is called to order, the persons named as proxies may vote those proxies that have been received to adjourn the meeting to a later date. If a quorum is present but there are not sufficient votes in favor of the proposal, the persons named as proxies may propose one or more adjournments of the meeting to permit further solicitation of proxies concerning the proposal. Any adjournment will require the affirmative vote of a majority of an Acquired Fund's shares at the session of the meeting to be adjourned. If an adjournment of the meeting is proposed because there are not sufficient votes in favor of the proposal, the persons named as proxies will vote those proxies favoring the proposal in favor of adjournment, and will vote those proxies against the reorganization against adjournment. 79 OWNERSHIP OF SHARES OF THE FUNDS As of September 20, 2001, the following companies owned of record or on behalf of certain separate accounts, more than 5% of certain funds' outstanding shares, as noted on the table below: John Hancock Life Insurance Company ("JHLICO"), 200 Clarendon Street, Boston, Massachusetts 02117; and John Hancock Variable Life Insurance Company ("JHVLICO"), 197 Clarendon Street, Boston, Massachusetts, 02117.
- ---------------------------------------------------------------------------------------------------------------------- Name Number of Shares Percentage of Fund - ---------------------------------------------------------------------------------------------------------------------- V.A. Core Equity Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- Growth & Income Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. Large Cap Growth Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- Growth & Income Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. 500 Index Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- Equity Index Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. International Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- International Equity Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ----------------------------------------------------------------------------------------------------------------------
80
- ---------------------------------------------------------------------------------------------------------------------- Name Number of Shares Percentage of Fund - ---------------------------------------------------------------------------------------------------------------------- V.A. Mid Cap Growth Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- Fundamental Growth Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. Small Cap Growth Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLIO % - ---------------------------------------------------------------------------------------------------------------------- VST Small Cap Growth Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. Bond Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- Active Bond Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- V.A. Money Market Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ---------------------------------------------------------------------------------------------------------------------- VST Money Market Fund - ---------------------------------------------------------------------------------------------------------------------- JHLICO % - ---------------------------------------------------------------------------------------------------------------------- JHVLICO % - ----------------------------------------------------------------------------------------------------------------------
However, these companies will vote their Fund shares only in accordance with voting instructions received from the contract or certificate owners. For this reason, the companies do not exercise control over the funds by virtue of their record ownership of funds shares. EXPERTS The financial statements and the financial highlights of each fund as of December 31, 2000 and for the periods then ended and the unaudited financial statements and financial highlights of each fund as of June 30, 2001 are incorporated by reference into this proxy statement and prospectus. The financial statements and financial highlights as of December 31, 2000 have been independently audited by Ernst & Young LLP as stated in their report appearing in the statement of additional information. These financial statements and financial highlights have been included in reliance on their report given on their authority as experts in accounting and auditing. 81 AVAILABLE INFORMATION Each fund is subject to the informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and files reports, proxy statements and other information with the SEC. These reports, proxy statements and other information filed by the funds can be inspected and copied (at prescribed rates) at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C., and at the following regional offices: Chicago (500 West Madison Street, Suite 1400, Chicago, Illinois); and New York (7 World Trade Center, Suite 1300, New York, New York). For access to the Washington D.C. Reference Room, call (202) 942-8090. Copies of this material can also be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549-0102 (duplicating fee required). In addition, copies of these documents may be viewed on-screen or downloaded from the SEC's Internet site at (http://www.sec.gov), SEC file number 811-07437. 82 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this ___ day of September, 2001, by and between ____________________ (the "Acquiring Fund") of John Hancock Variable Series Trust I, a Massachusetts business trust (the "Trust II"), with its principal place of business at John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, and _________________________ (the "Acquired Fund"), a series of John Hancock Declaration Trust, a Massachusetts business trust (the "Trust") with its principal place of business at 101 Huntington Avenue, Boston, Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes referred to collectively herein as the "Funds" and individually as a "Fund." This Agreement is intended to be and is adopted as a plan of "reorganization," as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The reorganization will consist of the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the issuance of shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund Shares") to the Acquired Fund and the assumption by the Acquiring Fund of all of the liabilities of the Acquired Fund, followed by the distribution by the Acquired Fund, on or promptly after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation and termination of the Acquired Fund as provided herein, all upon the terms and conditions set forth in this Agreement. In consideration of the premises of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE ACQUIRED FUND 1.1 The Acquired Fund will transfer all of its assets (consisting, without limitation, of portfolio securities and instruments, dividends and interest receivables, cash and other assets), as set forth in the statement of assets and liabilities referred to in Paragraph 7.2 hereof (the "Statement of Assets and Liabilities"), to the Acquiring Fund free and clear of all liens and encumbrances, except as otherwise provided herein, in exchange for (i) the assumption by the Acquiring Fund of the known and unknown liabilities of the Acquired Fund, including the liabilities set forth in the Statement of Assets and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and transferred to the Acquiring Fund by the Acquired Fund and assumed by the Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund, for distribution pro rata by the Acquired Fund to its shareholders in proportion to their respective ownership of shares of beneficial interest of the Acquired Fund, as of the close of business on [either December 7, 2001 or December 14, 2001] (the "Closing Date"), of a number of the Acquiring Fund Shares having an aggregate net asset value equal to the value of the assets, less such liabilities (herein referred to as the "net value of the assets") assumed, assigned and delivered, all determined as provided in Paragraph 2.1 hereof and as of a date and time as specified therein. Such transactions shall take place at the closing provided for in Paragraph 3.1 hereof (the "Closing"). All computations with respect to the Acquiring Fund shall be provided by State Street Bank and Trust Company (the "Acquiring Fund's Custodian"), as custodian and pricing agent for the Acquiring Fund and, and with respect to the Acquired Fund by [either State Street Bank and Trust Company or Investors Bank & Trust Company] (the "Acquired Fund's Custodian). 1.2 The Acquired Fund has provided the Acquiring Fund with a list of the current securities holdings of the Acquired Fund as of the date of execution of this Agreement. The Acquired Fund reserves the right to sell any of these securities (except to the extent sales may be limited by representations made in connection with issuance of the tax opinion provided for in paragraph 8.6 hereof) but will not, without the prior approval of the Acquiring Fund, acquire any additional securities other than securities of the type in which the Acquiring Fund is permitted to invest. 1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses in connection with the transactions contemplated by this Agreement. 83 1.4 On or as soon after the Closing Date as is conveniently practicable (the "Liquidation Date"), the Acquired Fund will liquidate and distribute pro rata to shareholders of record (the "Acquired Fund shareholders"), determined as of the close of regular trading on the New York Stock Exchange on the Closing Date, the Acquiring Fund Shares received by the Acquired Fund pursuant to Paragraph 1.1 hereof. 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 Acquiring Fund Shares due such shareholders. The Acquiring Fund shall not issue certificates representing Acquiring Fund Shares in connection with such exchange. 1.5 The Acquired Fund shareholders holding certificates representing their ownership of shares of beneficial interest of the Acquired Fund shall surrender such certificates or deliver an affidavit with respect to lost certificates in such form and accompanied by such surety bonds as the Acquired Fund may require (collectively, an "Affidavit"), to John Hancock Signature Services, Inc. prior to the Closing Date. Any Acquired Fund share certificate which remains outstanding on the Closing Date shall be deemed to be canceled, shall no longer evidence ownership of shares of beneficial interest of the Acquired Fund and shall evidence ownership of Acquiring Fund Shares. Unless and until any such certificate shall be so surrendered or an Affidavit relating thereto shall be delivered, dividends and other distributions payable by the Acquiring Fund subsequent to the Liquidation Date with respect to Acquiring Fund Shares shall be paid to the holder of such certificate(s), but such shareholders may not redeem or transfer Acquiring Fund Shares received in the Reorganization. The Acquiring Fund will not issue share certificates in the Reorganization. 1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a name other than the registered holder of the Acquired Fund Shares on the books of the Acquired Fund as of that time shall, as a condition of such issuance and transfer, be paid by the person to whom such Acquiring Fund Shares are to be issued and transferred. 1.7 The existence of the Acquired Fund shall be terminated as promptly as practicable following the Liquidation Date. 1.8 Any reporting responsibility of the Trust, including, but not limited to, the responsibility for filing of regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (the "Commission"), any state securities commissions, and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Trust. 2. VALUATION 2.1 The net asset values of the Acquiring Fund Shares and the net values of the assets and liabilities of the Acquired Fund to be transferred shall, in each case, be determined as of the close of business (4:00 p.m. Boston time) on the Closing Date. The net asset values of the Acquiring Fund Shares shall be computed by the Acquiring Fund's Custodian in the manner set forth in the Acquiring Fund's Declaration of Trust as amended and restated (the "Declaration"), or By-Laws and the Acquiring Fund's then-current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. The net values of the assets of the Acquired Fund to be transferred shall be computed by the Acquired Fund's Custodian by calculating the value of the assets transferred by the Acquired Fund and by subtracting therefrom the amount of the liabilities assigned and transferred to and assumed by the Acquiring Fund on the Closing Date, said assets and liabilities to be valued in the manner set forth in the Acquired Fund's then current prospectus and statement of additional information and shall be computed in each case to not fewer than four decimal places. 2.2 The number of Acquiring Fund Shares to be issued (including fractional shares, if any) in exchange for the Acquired Fund's assets shall be determined by dividing the value of the Acquired Fund's assets less the liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net asset value per share, all as determined in accordance with Paragraph 2.1 hereof. 2.3 All computations of value shall be made by each Custodian in accordance with its regular practice as pricing agent for its respective Fund. 84 3. CLOSING AND CLOSING DATE 3.1 The Closing Date shall be [either December 7, 2001 or December 14, 2001] or such other date on or before June 30, 2002 as the parties may agree. The Closing shall be held as of 5:00 p.m. at the offices of the Trust, 101 Huntington Avenue, Boston, Massachusetts 02199, or at such other time and/or place as the parties may agree. 3.2 Portfolio securities that are not held in book-entry form in the name of the Acquired Fund's Custodian as record holder for the Acquired Fund shall be presented by the Acquired Fund to the Acquiring Fund's Custodian for examination no later than five business days preceding the Closing Date. Portfolio securities which are not held in book-entry form shall be delivered by the Acquired Fund to the Acquiring Fund's Custodian for the account of the Acquiring Fund on the Closing Date, 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 Acquired Fund's Custodian in book-entry form on behalf of the Acquired Fund shall be delivered to the Acquiring Fund by the Acquiring Fund's Custodian by recording the transfer of beneficial ownership thereof on its records. The cash delivered shall be in the form of currency or by the Acquiring Fund's Custodian crediting the Acquiring Fund's account maintained with the Acquiring Fund's Custodian with immediately available funds. 3.3 In the event that on the Closing 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 appraisal of the value of the net assets of the Acquiring Fund or the Acquired Fund is impracticable, the Closing 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; provided that if trading shall not be fully resumed and reporting restored on or before June 30, 2002, this Agreement may be terminated by the Acquiring Fund or by the Acquired Fund upon the giving of written notice to the other party. 3.4 The Acquired Fund shall deliver at the Closing a list of the names, addresses, federal taxpayer identification numbers and backup withholding and nonresident alien withholding status of the Acquired Fund shareholders and the number of outstanding shares of beneficial interest of the Acquired Fund owned by each such shareholder, all as of the close of business on the Closing Date, certified by its Treasurer, Secretary or other authorized officer (the "Shareholder List"). The Acquiring Fund shall issue and deliver to the Acquired Fund a confirmation evidencing the Acquiring Fund Shares to be credited on the Closing Date, or provide evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have been credited to the Acquired Fund's account on the books of the Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, stock certificates, receipts or other documents as such other party or its counsel may reasonably request. 4. REPRESENTATIONS AND WARRANTIES 4.1 The Trust on behalf of the Acquired Fund represents, warrants and covenants to the Acquiring Fund as follows: (a) The Trust is a business trust, duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts and has the power to own all of its properties and assets and, subject to approval by the shareholders of the Acquired Fund, to carry out the transactions contemplated by this Agreement. Neither the Trust nor the Acquired Fund is required to qualify to do business in any jurisdiction in which it is not so qualified or where failure to qualify would subject it to any material liability or disability. The Trust has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted; (b) The Trust is a registered investment company classified as a management company and its registration with the Commission as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), is in full force and effect. The Acquired Fund is a diversified series of the Trust; 85 (c) The Trust and the Acquired Fund are not, and the execution, delivery and performance of their obligations under this Agreement will not result, in violation of any provision of the Trust's Declaration of Trust, as amended and restated (the "Trust's Declaration") or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust or the Acquired Fund is a party or by which it is bound; (d) Except as otherwise disclosed in writing and accepted by the Acquiring Fund, no material litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending or threatened against the Trust or the Acquired Fund or any of the Acquired Fund's properties or assets. The Trust knows of no facts which might form the basis for the institution of such proceedings, and neither the Trust nor the Acquired Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects the Acquired Fund's business or its ability to consummate the transactions herein contemplated; (e) The Acquired Fund has no material contracts or other commitments (other than this Agreement or agreements for the purchase of securities entered into in the ordinary course of business and consistent with its obligations under this Agreement) which will not be terminated without liability to the Acquired Fund at or prior to the Closing Date; (f) The audited statement of assets and liabilities, including the schedule of investments, of the Acquired Fund as of December 31, 2000 and the related statement of operations (copies of which have been furnished to the Acquiring Fund) and the unaudited statements as of June 30, 2001, present fairly in all material respects the financial condition of the Acquired Fund as of December 31, 2000 and June 30, 2001 and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquired Fund as of the respective dates thereof not disclosed therein; (g) Since June 30, 2001, there has not been any material adverse change in the Acquired Fund's financial condition, assets, liabilities, or business other than changes occurring in the ordinary course of business, or any incurring by the Acquired Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Acquiring Fund; (h) At the date hereof and by the Closing Date, all federal, state and other tax returns and reports, including information returns and payee statements, of the Acquired Fund required by law to have been filed or furnished by such dates shall have been filed or furnished, and all federal, state and other taxes, interest and penalties shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of the Acquired Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns or reports; (i) Each of the Acquired Fund and its predecessors has qualified as a regulated investment company for each taxable year of its operation and the Acquired Fund will qualify as such as of the Closing Date with respect to its taxable year ending on the Closing Date; (j) The authorized capital of the Acquired Fund consists of an unlimited number of shares of beneficial interest, no par value. All issued and outstanding shares of beneficial interest of the Acquired Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable by the Trust. All of the issued and outstanding shares of beneficial interest of the Acquired Fund will, at the time of Closing, be held by the persons and in the amounts set forth in the Shareholder List submitted to the Acquiring Fund pursuant to Paragraph 3.4 hereof. The Acquired Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of beneficial interest, nor is there outstanding any security convertible into any of its shares of beneficial interest; (k) At the Closing Date, the Acquired Fund will have good and marketable title to the assets to be transferred to the Acquiring Fund pursuant to Paragraph 1.1 hereof, and full right, power and authority to sell, assign, transfer and deliver such assets hereunder, and upon delivery and payment for such assets, the Acquiring Fund will acquire good and marketable title thereto subject to no restrictions on the full transfer thereof, including such restrictions as might arise under the Securities Act of 1933, as amended (the "1933 Act"); 86 (l) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Trust on behalf of the Acquired Fund, and this Agreement constitutes a valid and binding obligation of the Trust and the Acquired Fund enforceable in accordance with its terms, subject to the approval of the Acquired Fund's shareholders; (m) The information to be furnished by the Acquired Fund to the Acquiring Fund for use in applications for orders, registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with federal securities and other laws and regulations thereunder applicable thereto; (n) The proxy statement of the Acquired Fund (the "Proxy Statement") to be included in the Registration Statement referred to in Paragraph 5.7 hereof (other than written information furnished by the Acquiring Fund for inclusion therein, as covered by the Acquiring Fund's warranty in Paragraph 4.2(m) hereof), on the effective date of the Registration Statement, on the date of the meeting of the Acquired Fund shareholders and on the Closing Date, shall 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, in light of the circumstances under which such statements were made, not misleading; (o) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquired Fund of the transactions contemplated by this Agreement; (p) All of the issued and outstanding shares of beneficial interest of the Acquired Fund have been offered for sale and sold in conformity with all applicable federal and state securities laws; (q) The prospectus of the Acquired Fund, dated May 1, 2001 (the "Acquired Fund Prospectus"), previously furnished to the Acquiring Fund, does 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, in light of the circumstances in which they were made, not misleading. 4.2 The Trust II on behalf of the Acquiring Fund represents, warrants and covenants to the Acquired Fund as follows: (a) The Trust II is a business trust duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts and has the power to own all of its properties and assets and to carry out the Agreement. Neither the Trust II nor the Acquiring Fund is required to qualify to do business in any jurisdiction in which it is not so qualified or where failure to qualify would subject it to any material liability or disability. The Trust II has all necessary federal, state and local authorizations to own all of its properties and assets and to carry on its business as now being conducted; (b) The Trust II is a registered investment company classified as a management company and its registration with the Commission as an investment company under the 1940 Act is in full force and effect. The Acquiring Fund is [either a diversified series or a non-diversified series] of the Trust II; (c) The prospectus (the "Acquiring Fund Prospectus") and statement of additional information of the Acquiring Fund, each dated May 1, 2001, and any amendments or supplements thereto on or prior to the Closing Date, and the Registration Statement on Form N-14 to be filed in connection with this Agreement (the "Registration Statement") (other than written information furnished by the Acquired Fund for inclusion therein, as covered by the Acquired Fund's warranty in Paragraph 4.1(m) hereof) will conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder, the Acquiring Fund Prospectus does not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and the Registration Statement will not include any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 87 (d) At the Closing Date, the Trust II on behalf of the Acquiring Fund will have good and marketable title to the assets of the Acquiring Fund; (e) The Trust II and the Acquiring Fund are not, and the execution, delivery and performance of their obligations under this Agreement will not result, in violation of any provisions of the Trust II's Declaration, or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Trust II or the Acquiring Fund is a party or by which the Trust II or the Acquiring Fund is bound; (f) Except as otherwise disclosed in writing and accepted by the Acquired Fund, no material litigation or administrative proceeding or investigation of or before any court or governmental body is currently pending or threatened against the Trust II or the Acquiring Fund or any of the Acquiring Fund's properties or assets. The Trust II knows of no facts which might form the basis for the institution of such proceedings, and neither the Trust II nor the Acquiring Fund is a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects the Acquiring Fund's business or its ability to consummate the transactions herein contemplated; (g) The audited statement of assets and liabilities, including the schedule of investments, of the Acquiring Fund as of December 31, 2000 and the related statement of operations and the unaudited statements as of June 30, 2001 (copies of which have been furnished to the Acquired Fund) present fairly in all material respects the financial condition of the Acquiring Fund as of December 31, 2000 and June 30, 2001 and the results of its operations for the period then ended in accordance with generally accepted accounting principles consistently applied, and there were no known actual or contingent liabilities of the Acquiring Fund as of the respective dates thereof not disclosed therein; (h) Since June 30, 2001, there has not been any material adverse change in the Acquiring Fund's financial condition, assets, liabilities or business other than changes occurring in the ordinary course of business, or any incurring by the Trust II on behalf of the Acquiring Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as disclosed to and accepted by the Acquired Fund; (i) Each of the Acquiring Fund and its predecessors has qualified as a regulated investment company for each taxable year of its operation and the Acquiring Fund will qualify as such as of the Closing Date; (j) The authorized capital of the Trust II consists of an unlimited number of shares of beneficial interest, no par value per share. All issued and outstanding shares of beneficial interest of the Acquiring Fund are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and nonassessable by the Trust II. The Acquiring Fund does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of beneficial interest, nor is there outstanding any security convertible into any of its shares of beneficial interest; (k) The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of the Trust II on behalf of the Acquiring Fund, and this Agreement constitutes a valid and binding obligation of the Acquiring Fund enforceable in accordance with its terms; (l) The Acquiring Fund Shares to be issued and delivered to the Acquired Fund pursuant to the terms of this Agreement, when so issued and delivered, will be duly and validly issued shares of beneficial interest of the Acquiring Fund and will be fully paid and nonassessable by the Trust II; (m) The information to be furnished by the Acquiring Fund for use in applications for orders, registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with federal securities and other laws and regulations applicable thereto; and (n) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Acquiring Fund of the transactions contemplated by the Agreement, except for the registration of the Acquiring Fund Shares under the 1933 Act and the 1940 Act. 88 5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND 5.1 Except as expressly contemplated herein to the contrary, the Trust on behalf of the Acquired Fund and the Trust II on behalf of Acquiring Fund, will operate their respective businesses in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and distributions and any other distributions necessary or desirable to avoid federal income or excise taxes. 5.2 The Trust will call a meeting of the Acquired Fund shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. 5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued hereunder are not being acquired by the Acquired Fund for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement. 5.4 The Trust on behalf of the Acquired Fund will provide such information within its possession or reasonably obtainable as the Trust II on behalf of the Acquiring Fund requests concerning the beneficial ownership of the Acquired Fund's shares of beneficial interest. 5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the Acquired Fund each shall take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate the transactions contemplated by this Agreement. 5.6 The Trust on behalf of the Acquired Fund shall furnish to the Trust II on behalf of the Acquiring Fund on the Closing Date the Statement of Assets and Liabilities of the Acquired Fund as of the Closing Date, which statement shall be prepared in accordance with generally accepted accounting principles consistently applied and shall be certified by the Acquired Fund's Treasurer or Assistant Treasurer. As promptly as practicable but in any case within 60 days after the Closing Date, the Acquired Fund shall furnish to the Acquiring Fund, in such form as is reasonably satisfactory to the Trust II, 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 will be carried over to the Acquiring Fund as a result of Section 381 of the Code, and which statement will be certified by the President of the Acquired Fund. 5.7 The Trust II on behalf of the Acquiring Fund will prepare and file with the Commission the Registration Statement in compliance with the 1933 Act and the 1940 Act in connection with the issuance of the Acquiring Fund Shares as contemplated herein. 5.8 The Trust on behalf of the Acquired Fund will prepare a Proxy Statement, to be included in the Registration Statement in compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the rules and regulations thereunder (collectively, the "Acts") in connection with the special meeting of shareholders of the Acquired Fund to consider approval of this Agreement. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE ACQUIRED FUND The obligations of the Trust on behalf of the Acquired Fund to complete the transactions provided for herein shall be, at its election, subject to the performance by the Trust II on behalf of the Acquiring Fund of all the obligations to be performed by it hereunder on or before the Closing Date, and, in addition thereto, the following further conditions: 6.1 All representations and warranties of the Trust II on behalf of the Acquiring Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date; and 6.2 The Trust II on behalf of the Acquiring Fund shall have delivered to the Acquired Fund a certificate executed in its name by the Trust II's President or Vice President and its Treasurer or Assistant Treasurer, in form and 89 substance satisfactory to the Acquired Fund and dated as of the Closing Date, to the effect that the representations and warranties of the Trust II on behalf of the Acquiring Fund made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Trust on behalf of the Acquired Fund shall reasonably request. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE ACQUIRING FUND The obligations of the Trust II on behalf of the Acquiring Fund to complete the transactions provided for herein shall be, at its election, subject to the performance by the Acquired Fund of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions: 7.1 All representations and warranties of the Acquired Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date; 7.2 The Trust on behalf of the Acquired Fund shall have delivered to the Trust II on behalf of the Acquiring Fund the Statement of Assets and Liabilities of the Acquired Fund, together with a list of its portfolio securities showing the federal income tax bases and holding periods of such securities, as of the Closing Date, certified by the Treasurer or Assistant Treasurer of the Trust; 7.3 The Trust on behalf of the Acquired Fund shall have delivered to the Trust II on behalf of the Acquiring Fund on the Closing Date a certificate executed in the name of the Acquired Fund by a President or Vice President and a Treasurer or Assistant Treasurer of the Trust, in form and substance satisfactory to the Trust II on behalf of the Acquiring Fund and dated as of the Closing Date, to the effect that the representations and warranties of the Acquired Fund in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as the Trust II on behalf of the Acquiring Fund shall reasonably request; and 7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser, or an affiliate thereof, shall have made all payments, or applied all credits, to the Acquired Fund required by any applicable contractual expense limitation. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND THE TRUST II The obligations hereunder of the Trust II on behalf of the Acquiring Fund and the Trust on behalf of the Acquired Fund are each subject to the further conditions that on or before the Closing Date: 8.1 The Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of beneficial interest of the Acquired Fund in accordance with the provisions of the Trust's Declaration and By-Laws, and certified copies of the resolutions evidencing such approval by the Acquired Fund's shareholders shall have been delivered by the Acquired Fund to the Trust II on behalf of the Acquiring Fund; 8.2 On the Closing Date no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain changes or other relief in connection with, this Agreement or the transactions contemplated herein; 8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Commission and their "no-action" positions) deemed necessary by the Trust or the Trust II to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Acquired Fund, provided that either party hereto may waive any such conditions for itself; 90 8.4 The Registration Statement shall have become effective under the 1933 Act and the 1940 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act or the 1940 Act; 8.5 The Acquired Fund shall have distributed to its shareholders, in a distribution or distributions qualifying for the deduction for dividends paid under Section 561 of the Code, all of its investment company taxable income (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 Closing 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 Closing Date, and all of its net capital gain (as such term is used in Sections 852(b)(3)(A) and (C) of the Code), after reduction by any available capital loss carry forward, for its taxable year ending on the Closing Date; and 8.6 The parties shall have received an opinion of Hale and Dorr LLP, satisfactory to the Trust on behalf of the Acquired Fund and the Trust II on behalf of the Acquiring Fund, substantially to the effect that for federal income tax purposes: (a) The acquisition by the Acquiring Fund of all of the assets of the Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund, followed by the distribution by the Acquired Fund, in liquidation of the Acquired Fund, of Acquiring Fund Shares to the shareholders of the Acquired Fund in exchange for their shares of beneficial interest of the Acquired Fund and the termination of the Acquired Fund, will constitute a "reorganization" within the meaning of Section 368(a) of the Code, and the Acquired Fund and the Acquiring Fund will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code; (b) No gain or loss will be recognized by the Acquired Fund upon (i) the transfer of all of its assets to the Acquiring Fund solely in exchange for the issuance of Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund; and (ii) the distribution by the Acquired Fund of such Acquiring Fund Shares to the shareholders of the Acquired Fund; (c) No gain or loss will be recognized by the Acquiring Fund upon the receipt of the assets of the Acquired Fund solely in exchange for the issuance of the Acquiring Fund Shares to the Acquired Fund and the assumption of all of the Acquired Fund Liabilities by the Acquiring Fund; (d) The basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be, in each instance, the same as the basis of those assets in the hands of the Acquired Fund immediately prior to the transfer; (e) The tax holding period of the assets of the Acquired Fund in the hands of the Acquiring Fund will, in each instance, include the Acquired Fund's tax holding period for those assets; (f) The shareholders of the Acquired Fund will not recognize gain or loss upon the exchange of all of their shares of beneficial interest of the Acquired Fund solely for Acquiring Fund Shares as part of the transaction; (g) The basis of the Acquiring Fund Shares received by the Acquired Fund shareholders in the transaction will be the same as the basis of the shares of beneficial interest of the Acquired Fund surrendered in exchange therefor; and (h) The tax holding period of the Acquiring Fund Shares received by the Acquired Fund shareholders will include, for each shareholder, the tax holding period for the shares of the Acquired Fund surrendered in exchange therefor, provided that the Acquired Fund shares were held as capital assets on the date of the exchange. The Trust II and the Trust agree to make and provide representations with respect to the Acquiring Fund and the Acquired Fund, respectively, which are reasonably necessary to enable Hale and Dorr LLP to deliver an opinion substantially as set forth in this Paragraph 8.6. Notwithstanding anything herein to the contrary, neither the Trust nor the Trust II may waive the conditions set forth in this Paragraph 8.6. 91 9. BROKERAGE FEES AND EXPENSES 9.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired Fund each represent and warrant to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for its own expenses incurred in connection with entering into and carrying out the provisions of this Agreement whether or not the transactions contemplated hereby are consummated. 10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES 10.1 The Trust II on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired Fund agree that neither party has made any representation, warranty or covenant not set forth herein or referred to in Paragraph 4 hereof and that this Agreement constitutes the entire agreement between the parties. 10.2 The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated hereunder. 11. TERMINATION 11.1 This Agreement may be terminated by the mutual agreement of the Trust II, on behalf of the Acquiring Fund, and the Trust on behalf of the Acquired Fund. In addition, either party may at its option terminate this Agreement at or prior to the Closing Date: (a) because of a material breach by the other of any representation, warranty, covenant or agreement contained herein to be performed at or prior to the Closing Date; (b) because of a condition herein expressed to be precedent to the obligations of the terminating party which has not been met and which reasonably appears will not or cannot be met; (c) by resolution of the Trust II's Board of Trustees if circumstances should develop that, in the good faith opinion of such Board, make proceeding with the Agreement not in the best interests of the Acquiring Fund's shareholders; or (d) by resolution of the Trust's Board of Trustees if circumstances should develop that, in the good faith opinion of such Board, make proceeding with the Agreement not in the best interests of the Acquired Fund's shareholders. 11.2 In the event of any such termination, there shall be no liability for damages on the part of the Trust II, the Acquiring Fund, the Trust, or the Acquired Fund, or the Trustees or officers of the Trust II or the Trust, but each party shall bear the expenses incurred by it incidental to the preparation and carrying out of this Agreement. 12. AMENDMENTS This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon by the authorized officers of the Trust and the Trust II. However, following the meeting of shareholders of the Acquired Fund held pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions regarding the method for determining the number of Acquiring Fund Shares to be received by the Acquired Fund shareholders under this Agreement to the detriment of such shareholders without their further approval; provided that nothing contained in this Article 12 shall be construed to prohibit the parties from amending this Agreement to change the Closing Date. 92 13. NOTICES Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy or certified mail addressed to the Acquiring Fund at John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117, Attention: Arnold Bergman, Esq. or to the Acquired Fund at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention: Avery P. Maher, Esq., and, in either case, with copies to Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq. 14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT 14.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 14.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 14.3 This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 14.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the prior 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 Agreement. 14.5 All persons dealing with the Trust or the Trust II must look solely to the property of the Trust or the Trust II, respectively, for the enforcement of any claims against the Trust or the Trust II as the Trustees, officers, agents and shareholders of the Trust or the Trust II assume no personal liability for obligations entered into on behalf of the Trust or the Trust II, respectively. None of the other series of the Trust or the Trust II shall be responsible for any obligations assumed by on or behalf of the Acquired Fund or the Acquiring Fund, respectively, under this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first set forth above by its President or Vice President and has caused its corporate seal to be affixed hereto. ----------------------------- OF JOHN HANCOCK VARIABLE SERIES TRUST I By: ----------------------------------------- JOHN HANCOCK DECLARATION TRUST on behalf of -------------------------------- By: ------------------------------------------ Maureen R. Ford President and Chief Executive Officer 93 Appendix A Basic information about the funds Proposal 1 V.A. Core Equity Fund GOAL AND STRATEGY [Clip Art] The fund seeks above-average total return (capital appreciation plus income). To pursue this goal, the fund normally invests at least 65% of assets in a diversified portfolio of equities which are primarily large-capitalization stocks. The portfolio's risk profile is similar to that of the Standard & Poor's 500 Index. The managers select from a menu of stocks of approximately 550 companies that evolves over time. Approximately 70% to 80% of these companies also are included in the Standard & Poor's 500 Index. The subadviser's investment research team is organized by industry and tracks these companies to develop earnings estimates and five-year projections for growth. A series of proprietary computer models use this in-house research to rank the stocks according to their combination of: o value, meaning they appear to be underpriced o improving fundamentals, meaning they show potential for strong growth This process, together with a risk/ return analysis against the Standard & Poor's 500 Index, results in a portfolio of approximately 100 to 130 of the stocks from the top 60% of the menu. The fund generally sells stocks that fall into the bottom 20% of the menu. In normal market conditions, the fund is almost entirely invested in stocks. The fund may invest in dollar-denominated foreign securities and make limited use of certain derivatives (investments whose value is based on indexes or securities). In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ SUBADVISER Independence Investment LLC - --------------------------- Team responsible for day-to-day investment management A subsidiary of John Hancock Financial Services, Inc. Founded in 1982 Supervised by the adviser PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 30.68% 28.42% 13.89% -7.11% 2001 total return as of June 30: 6.45% Best quarter: Q4 '98, 23.16% Worst quarter: Q3 '98, -13.01% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -7.11% -9.10% Life of fund - began 8/29/96 17.11% 19.18% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. A-2 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform funds that focus on smallor medium-capitalization stocks. The fund's management strategy has a significant influence on fund performance. If the investment research team's earnings estimates or projections turn out to be inaccurate, or if the proprietary computer models do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on August 29, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $11.11 $14.11 $17.74 $19.70 $17.52 Net investment income (2) 0.06 0.16 0.10 0.09 0.08 0.04 Net realized and unrealized gain (loss) on investments 1.12 3.23 3.90 2.36 (1.48) (0.86) Total from investment operations 1.18 3.39 4.00 2.45 (1.40) (0.82) Less distributions: From net investment income (0.06) (0.14) (0.10) (0.09) (0.09) (0.04) In excess of net investment income -- -- -- --(3) -- -- From net realized gain on investments sold (0.01) (0.25) (0.27) (0.40) (0.31) -- In excess of net realized gain on investments sold -- -- -- -- (0.38) -- Total distributions (0.07) (0.39) (0.37) (0.49) (0.78) (0.04) Net asset value, end of period $11.11 $14.11 $17.74 $19.70 $17.52 $16.66 Total investment return (4) (%) 11.78(5,6) 30.68(6) 28.42 13.89 (7.11) (4.68%)(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,149 8,719 26,691 44,991 40,673 41,136 Ratio of expenses to average net assets (%) 0.95(7) 0.95 0.95 0.83 0.85 0.87(7) Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 1.59 -- -- -- -- Ratio of net investment income to average net assets (%) 1.60(7) 1.24 0.65 0.47 0.45 0.49(7) Portfolio turnover rate (%) 24 53 55 77 97 43
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-3 Growth & Income Fund GOAL AND STRATEGY This is a non-diversified large and mid-cap stock fund that seeks income and long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large and mid-sized U.S. companies. The Fund employs two subadvisers, each of which employs its own investment approach and independently manages its portion of the Fund. On or about Novem- ber 1, 2000, the assets of the Fund were allocated between the two subadvisers with Putnam receiving $1 billion (approximately 26% of the Fund's assets as of October 31, 2000) and Independence the remainder. All subsequent investments in the Fund will be allocated equally between the two subadvisers, while redemp- tions will be allocated on an asset-weighted basis. These allocation methodolo- gies may change in the future. Independence Investment LLC ("Independence") selects stocks using a combination of proprietary equity research and quantitative tools. Stocks are purchased that are undervalued relative to the stock's history and have improving earn- ings growth prospects. Independence seeks to maintain risk and sector characteristics similar to the market benchmark for its portion of the Fund. Independence normally invests in 80 to 160 stocks, with at least 65% (usually higher) of its assets in large cap companies. Putnam Investment Management, LLC ("Putnam") selects stocks using a combination of: . a systematic screening approach to rank stocks based on: fundamental cata- lyst (such as earnings surprise and momentum); valuation (such as price-to- sales ratio); and financial strength (such as superior cash flow); and . proprietary fundamental equity research to identify companies with strong and innovative management teams, opportunities for above average growth within their industry and strong competitive positioning relative to peers and suppliers. Putnam seeks broad diversification by security and sector and uses risk manage- ment tools and qualitative judgement to determine sector and stock-specific weightings. Putnam normally invests in 65 to 110 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. The Fund is "non-diversified", which means that it can take larger positions in individual issuers. Each portion of the Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. Each portion of the Fund may invest in initial public offerings (IPOs). Each portion of the Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). As an example of how deriva- tives may be used, Putnam may invest in stock index futures to manage cash flow. In abnormal market conditions, each portion of the Fund may take temporary defensive measures--such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those measures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund and its predecessor since March, 1986 Managed approximately $25 billion in assets at end of 2000 FUND MANAGERS Management by investment team overseen by: Paul F. McManus - ----------------- Senior Vice President of subadviser Joined team in 1996 Joined subadviser in 1982 SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02109 Managing since 1937 Managing Fund since November, 2000 Managed approximately $370 Billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: C. Beth Cotner, CFA - ------------------- Managing Director and Chief Investment Officer of subadviser Joined subadviser in 1995 Began career in 1976 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1991 26.00% 1992 8.90% 1993 13.33% 1994 -0.56% 1995 34.21% 1996 20.10% 1997 29.79% 1998 30.25% 1999 16.23% 2000 -13.10% Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year -13.10% -9.11% 5 years 15.44% 18.35% 10 years 15.58% 17.46% Life of fund 14.17% 15.26%
Index:S & P 500 Index *Began operations on March 29, 1986. A-4 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance fo rthe time periods indicated. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96 12/97 12/98 12/99 12/00 6/01 (Unuadited) Net asset value, beginning of period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01 $ 14.18 Income from investment operations: Net investment income (loss) 0.34 0.27 0.23 0.20 0.17 0.02 Net realized and unrealized gain (loss) on investments* 2.43 4.07 4.75 2.88 (2.77) (1.31) Total from investment operations 2.77 4.34 4.98 3.08 (2.60) (1.29) Less distributions: Distributions from net investment income and capital paid in (0.34) (0.27) (0.23) (0.20) (0.40) (0.02) Distributions from net realized gain on investments sold (1.72) (2.11) (1.87) (2.36) (2.69) -- Distributions in excess of income/gain and from capital paid in -- -- -- -- (0.14) -- Total distributions (2.06) (2.38) (2.10) (2.56) (3.23) (0.02) Net asset value, end of period $ 14.65 $ 16.61 $ 19.49 $ 20.01 $ 14.18 12.87 Total investment return 20.10% 29.79% 30.25% 16.23% (13.10)% (9.13)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $2,047,927 $2,785,964 $3,670,785 $4,218,841 $3,324,988 $2,799,990 Ratio of expenses to average net assets (%) 0.27% 0.28% 0.27% 0.28% 0.40% 0.77% Ratio of net investment income (loss) to average net assets (%) 2.24% 1.61% 1.24% 0.98% 0.84% 0.35% Turnover rate (%) 81.02% 74.56% 48.45% 70.16% 112.94% 43.75%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** The performance of the portfolios shown on this page does not reflect and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. A-5 Proposal 2 V.A. Large Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 65% of assets in stocks of large-capitalization companies (companies in the capitalization range of the Russell Top 200 Growth Index, which was $0.88 billion to $415.8 billion as of March 31, 2001). In choosing individual stocks, the managers use fundamental financial analysis to identify companies with: o strong cash flows o secure market franchises o sales growth that outpaces their industries The fund generally invests in a diversified portfolio of U.S. companies. The fund has tended to emphasize, or overweight, certain sectors such as health care, technology or consumer goods. These weightings may change in the future. The management team uses various means to assess the depth and stability of companies' senior management, including interviews and company visits. The fund favors companies for which the managers project an above-average growth rate. The fund may invest in preferred stocks and other types of equities, and may invest up to 15% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal market conditions, the fund may temporarily invest extensively in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS William L. Braman - ----------------------------------- Executive vice president and chief investment officer of adviser Joined fund team in 2000 Joined adviser in 2000 Chief investment officer at Baring Asset Management (London 1998-2000) Head of U.S. equity team at Baring Asset Management (Boston 1989-1998) Began business career in 1977 Robert J. Uek, CFA - ----------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 1997 Corporate finance manager at Ernst & Young (1994-1997) Began business career in 1990 Paul J. Berlinguet - ----------------------------------- Vice president of adviser Joined fund team in 2001 Joined adviser in 2001 U.S. equity investment manager at Baring America Asset Management (1989-2001) Began business career in 1986 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 14.27% 24.60% 20.71% -31.30% 2001 total return as of June 30: 9.70% Best quarter: Q3 '97, 22.53% Worst quarter: Q1 '97, -15.55% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -31.30% -9.10% -24.53% Life of fund - began 8/29/96 2.41% 19.18% 19.57% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Russell Top 200 Growth Index, an unmanaged index containing growth-oriented stocks from the Russell Top 200 Index. In the future, the adviser will compare the fund's performance only to the Russell Top 200 Growth Index since it more closely represents the fund's investment strategy. A-6 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Large-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on smallor medium- capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on May 1, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $9.39 $10.73 $13.37 $15.77 $10.27 Net investment loss(2) (0.01) (0.04) --(3) (0.04) (0.08) (0.02) Net realized and unrealized gain (loss) on investments (0.60) 1.38 2.64 2.80 (4.85) (2.56) Total from investment operations (0.61) 1.34 2.64 2.76 (4.93) (2.58) Less distributions: Distributions from net realized gain on investments sold -- -- -- (0.36) (0.57) -- Net asset value, end of period $9.39 $10.73 $13.37 $15.77 $10.27 $7.69 Total investment return(4) (%) (6.10)(5,6) 14.27(6) 24.60(6) 20.71(6) (31.30) (25.12)(5,6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 994 3,733 10,372 21,872 12,304 6,280 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00 0.96 1.00(7) Ratio of adjusted expenses to average net assets(8) (%) 4.76(7) 2.37 1.33 1.02 -- 1.26(7) Ratio of net investment loss to average net assets (%) (0.23)(7) (0.39) (0.00) (0.25) (0.59) (0.53)(7) Portfolio turnover rate (%) 68 136 176 172 170 38
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) Not annualized. (6) The total returns would have been lower had certain expenses not been reduced during the periods shown. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-7 Growth & Income Fund GOAL AND STRATEGY This is a non-diversified large and mid-cap stock fund that seeks income and long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large and mid-sized U.S. companies. The Fund employs two subadvisers, each of which employs its own investment approach and independently manages its portion of the Fund. On or about Novem- ber 1, 2000, the assets of the Fund were allocated between the two subadvisers with Putnam receiving $1 billion (approximately 26% of the Fund's assets as of October 31, 2000) and Independence the remainder. All subsequent investments in the Fund will be allocated equally between the two subadvisers, while redemp- tions will be allocated on an asset-weighted basis. These allocation methodolo- gies may change in the future. Independence Investment LLC ("Independence") selects stocks using a combination of proprietary equity research and quantitative tools. Stocks are purchased that are undervalued relative to the stock's history and have improving earn- ings growth prospects. Independence seeks to maintain risk and sector characteristics similar to the market benchmark for its portion of the Fund. Independence normally invests in 80 to 160 stocks, with at least 65% (usually higher) of its assets in large cap companies. Putnam Investment Management, LLC ("Putnam") selects stocks using a combination of: . a systematic screening approach to rank stocks based on: fundamental cata- lyst (such as earnings surprise and momentum); valuation (such as price-to- sales ratio); and financial strength (such as superior cash flow); and . proprietary fundamental equity research to identify companies with strong and innovative management teams, opportunities for above average growth within their industry and strong competitive positioning relative to peers and suppliers. Putnam seeks broad diversification by security and sector and uses risk manage- ment tools and qualitative judgement to determine sector and stock-specific weightings. Putnam normally invests in 65 to 110 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. The Fund is "non-diversified", which means that it can take larger positions in individual issuers. Each portion of the Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. Each portion of the Fund may invest in initial public offerings (IPOs). Each portion of the Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). As an example of how deriva- tives may be used, Putnam may invest in stock index futures to manage cash flow. In abnormal market conditions, each portion of the Fund may take temporary defensive measures--such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those measures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund and its predecessor since March, 1986 Managed approximately $25 billion in assets at end of 2000 FUND MANAGERS Management by investment team overseen by: Paul F. McManus - ----------------- Senior Vice President of subadviser Joined team in 1996 Joined subadviser in 1982 SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02109 Managing since 1937 Managing Fund since November, 2000 Managed approximately $370 Billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: C. Beth Cotner, CFA - ------------------- Managing Director and Chief Investment Officer of subadviser Joined subadviser in 1995 Began career in 1976 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1991 26.00% 1992 8.90% 1993 13.33% 1994 -0.56% 1995 34.21% 1996 20.10% 1997 29.79% 1998 30.25% 1999 16.23% 2000 -13.10% Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year -13.10% -9.11% 5 years 15.44% 18.35% 10 years 15.58% 17.46% Life of fund 14.17% 15.26%
Index:S & P 500 Index *Began operations on March 29, 1986. A-8 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance fo rthe time periods indicated. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96 12/97 12/98 12/99 12/00 6/01 (Unuadited) Net asset value, beginning of period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01 $ 14.18 Income from investment operations: Net investment income (loss) 0.34 0.27 0.23 0.20 0.17 0.02 Net realized and unrealized gain (loss) on investments* 2.43 4.07 4.75 2.88 (2.77) (1.31) Total from investment operations 2.77 4.34 4.98 3.08 (2.60) (1.29) Less distributions: Distributions from net investment income and capital paid in (0.34) (0.27) (0.23) (0.20) (0.40) (0.02) Distributions from net realized gain on investments sold (1.72) (2.11) (1.87) (2.36) (2.69) -- Distributions in excess of income, capital paid in & gains -- -- -- -- (0.14) -- Total distributions (2.06) (2.38) (2.10) (2.56) (3.23) (0.02) Net asset value, end of period $ 14.65 $ 16.61 $ 19.49 $ 20.01 $ 14.18 12.87 Total investment return 20.10% 29.79% 30.25% 16.23% (13.10)% (9.13)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $2,047,927 $2,785,964 $3,670,785 $4,218,841 $3,324,988 $2,799,990 Ratio of expenses to average net assets (%) 0.27% 0.28% 0.27% 0.28% 0.40% 0.77% Ratio of net investment income (loss) to average net assets (%) 2.24% 1.61% 1.24% 0.98% 0.84% 0.35% Turnover rate (%) 81.02% 74.56% 48.45% 70.16% 112.94% 43.75%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** The performance of the portfolios shown on this page does not reflect and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. A-9 V.A. 500 Index Fund GOAL AND STRATEGY [Clip Art] The fund seeks to provide investment results that correspond to the total return performance of the Standard & Poor's 500 Stock Price Index. To pursue this goal, the fund normally invests at least 80% of assets in common stocks of S&P 500(R) companies, in approximately the same proportions as they are represented in the index. This fund is passively managed, meaning that the manager does not use any broad economic or fundamental financial analysis to select investments. The manager monitors the portfolio daily and rebalances periodically to maintain the proportions of the index. The fund also invests in futures contracts, exchange traded funds and options based on S&P 500 stocks. Under normal circumstances, the fund is fully invested -- directly or through futures and options contracts -- in all 500 stocks represented in the index. It may, however, invest in fewer stocks or in stocks of non-S&P 500 companies. The fund normally maintains less than 1% of assets in cash or cash equivalents. ================================================================================ PORTFOLIO MANAGER James D. Schantz, CFA - -------------------------------------- Vice president of adviser Joined fund team in 2000 Joined adviser in 1998 Executive vice president and director of quantitative research at Hagler, Mastrovita & Hewitt (1994-1998) Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 29.51% 28.44% 20.81% -9.28% 2001 total return as of June 30: 5.75% Best quarter: Q4 '98, 21.39% Worst quarter: Q3 '98, -10.01% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -9.28% -9.10% Life of fund - began 8/29/96 17.75% 19.18% Index: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. A-10 MAIN RISKS [Clip Art] The value of your investment will fluctuate with the index. The fund does not attempt to temper volatility or avoid losses associated with a decline in the index. The large-capitalization stocks that make up the index could fall out of favor with the market, causing the fund to underperform funds that focus on smallor medium-capitalization stocks. Certain investment practices may cause the fund to track the index less closely: o Transaction expenses can reduce fund performance. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o The performance of S&P futures, exchange traded funds or options could correlate less strongly with the index than investments in the underlying securities. o The relative proportions of stocks in the fund's portfolio could drift over time, which could increase tracking error. Other factors may affect performance, such as the liquidity of S&P 500 stocks and the timing of the fund's cash flows. You could lose money by investing in the fund. Note: "Standard & Poor's(R)" and "S&P 500(R)" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the adviser. Standard & Poor's does not sell or promote the fund or advise whether you should invest in the fund. A description of this license is provided in the statement of additional information. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on May 1, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(8) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $10.44 $12.62 $15.23 $18.09 $16.21 Net investment income (2) 0.17 0.30 0.20 0.17 0.14 0.07 Net realized and unrealized gain (loss) on investments 0.98 2.72 3.37 2.98 (1.81) (1.19) Total from investment operations 1.15 3.02 3.57 3.15 (1.67) (1.12) Less distributions: Dividends from net investment income (0.16) (0.30) (0.20) (0.17) (0.15) (0.08) Distributions from net realized gain on investments sold (0.55) (0.54) (0.76) (0.11) (0.06) -- Distributions in excess of net realized gain on investments sold -- -- -- (0.01) -- -- Total distributions (0.71) (0.84) (0.96) (0.29) (0.21) (0.08) Net asset value, end of period $10.44 $12.62 $15.23 $18.09 $16.21 $15.01 Total investment return(3,4) (%) 11.49(5) 29.51 28.44 20.81 (9.28) (6.88)(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 4,049 20,008 26,457 37,953 25,094 18,419 Ratio of expenses to average net assets (%) 0.60(6) 0.36 0.35 0.35 0.35 0.35(6) Ratio of adjusted expenses to average net assets(7) (%) 1.31(6) 0.83 0.92 0.75 0.93 1.22(6) Ratio of net investment income to average net assets (%) 4.57(6) 2.45 1.44 1.06 0.86 0.98(6) Portfolio turnover rate (%) 0 9 47 5 7 3
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-11 Equity Index Fund GOAL AND STRATEGY This is a stock fund that seeks to track the performance of the S&P 500 Index, which emphasizes the stocks of large U.S. companies. The manager employs a passive management strategy by normally investing in all stocks included in the 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 char- acteristics and sector diversification of the Index. The Fund normally invests in all 500 stocks in the Index, but has no predeter- mined number of stocks that it must hold. S&P may change the composition of the Index 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. The Fund may purchase other types of securities that are not primary investment vehicles, for example: Standard & Poor's Depositary Receipts (SPDRs), U.S. dol- lar denominated foreign securities, cash equivalents, and certain derivatives (investments whose value is based on indices or other securities). As an exam- ple of how derivatives may be used, the Fund may invest in stock index futures to manage cash flow. Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill, Inc. and have been licensed for use by the Trust. - -------------------------------------------------------------------------------- SUBADVISER SSgA Funds Management, Inc. (formerly State Street Global Advisors, a division of State Street Bank and Trust Company) Two International Place Boston, Massachusetts 02110 Managing, with predecessor, since 1978 Managing Fund since May, 1997 Predecessor managed approximately $725 billion in assets at the end of 2000 FUND MANAGERS John A. Tucker - ----------------- Principal of subadviser Joined subadviser in 1988 James B. May - ----------------- Principal of subadviser Joined subadviser in 1989 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1997 32.79% 1998 28.45% 1999 21.08% 2000 -9.15% Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year -9.15% -9.11% Life of fund 17.74% 18.06%
Index:S&P 500 Index *Began operations on May 1, 1996. A-12 MAIN RISKS Primary Index Management Risk: Certain factors such as the following may cause the Fund to track the Index less closely: . The securities selected by the manager may not be fully representative of the Index. . Transaction expenses of the Fund may result in the Fund's performance being different than that of the Index. . The size and timing of the Fund's cash flows may result in the Fund's per- formance being different than that of the Index. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform mid cap and small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance since its inception on May 1, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96** 12/97 12/98 12/99 12/00 6/01 (Unaudited) Net asset value, beginning of period $ 10.00 $ 11.10 $ 14.21 $ 17.70 $ 20.46 $ 17.64 Income from investment operations: Net investment income (loss) 0.15 0.24 0.25 0.27 0.22 0.09 Net realized and unrealized gain (loss) on investments* 1.26 3.41 3.76 3.41 (2.09) (1.27) Total from investment operations 1.41 3.65 4.01 3.68 (1.87) (1.18) Less distributions: Distributions from net investment income and capital paid in (0.21) (0.29) (0.24) (0.26) (0.23) (0.10) Distributions from net realized gain on investments sold (0.10) (0.25) (0.28) (0.66) (0.72) -- Distributions in excess of income/gain and from capital paid in -- -- -- -- -- -- Total distributions (0.31) (0.54) (0.52) (0.92) (0.95) (0.10) Net asset value, end of period $ 11.10 $ 14.21 $ 17.70 $ 20.46 $ 17.64 $ 16.36 Total investment return***+ 14.23%(a) 32.79% 28.45% 21.08% (9.15)% (6.74)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $14,650 $101,390 $232,578 $451,296 $525,659 $ 539,147 Ratio of expenses to average net assets (%)**** 0.00%(b) 0.00% 0.00% 0.00% 0.19% 0.19% Ratio of net investment income (loss) to average net assets (%) 2.47%(b) 1.97% 1.59% 1.42% 1.12% 1.15% Turnover rate (%) 15.72%(a) 64.56% 43.31% 55.24% 34.11% 11.28% * The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Includes the effect of a voluntary capital contribution from John Han- cock of $0.06 per share for the period ended 1996 and $0.04 per share for year ended 1997. The Total Investment Return without the capital contribution would have been 13.59% for the year ended 1996 and 32.47% for the year ended 1997. **** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and 0.22% for the years ended December 31, 1996, 1997, 1998 and 1999, respectively. + The performance of the portfolios shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. (a) Not annualized (b) Annualized
A-13 Proposal 4 V.A. International Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the fund normally invests at least 80% of assets in stocks of foreign companies. The fund may invest up to 30% of assets in emerging markets as classified by Morgan Stanley Capital International (MSCI). The fund does not maintain a fixed allocation of assets, either with respect to securities type or geography. In managing the portfolio, the managers focus on a "bottom-up" analysis on the financial conditions and competitiveness of individual foreign companies. In analyzing specific companies for possible investment, the managers ordinarily look for several of the following characteristics that will enable the companies to compete successfully in their respective markets: o above-average per share earnings growth o high return on invested capital o a healthy balance sheet o sound financial and accounting policies and overall financial strength o strong competitive advantages o effective research, product development and marketing. The managers consider whether to sell a particular security when any of those factors materially changes. The managers allocate the fund's assets among securities of countries that are expected to provide the best opportunities for meeting the fund's investment objective. To manage risk, the fund does not invest more than 5% of assets in any one security. The fund may use certain derivatives (investments whose value is based on indexes, securities or currencies). In abnormal conditions, the fund may temporarily invest more than 20% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ SUBADVISER Nicholas-Applegate Capital Management - ---------------------------------- U.S.-based team responsible for day-to-day investment manage- ment since December 2000 Founded in 1984 Supervised by the adviser PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 -0.54% 16.76% 31.55% -25.17% 2001 total return as of June 30: -0.22% Best quarter: Q4 `99, 25.38% Worst quarter: Q3 `98, -17.11% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year -25.17% -16.34% Life of fund - began 8/29/96 6.02% 5.25% Index: MSCI All Country World Ex-U.S. Free Index, an unmanaged index of freely traded stocks of foreign companies. A-14 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. Foreign investments are more risky than domestic investments. Investments in foreign securities may be affected by fluctuations in currency exchange rates, incomplete or inaccurate financial information on companies, social instability and political actions ranging from tax code changes to governmental collapse. These risks are more significant in emerging markets. The fund's management strategy has a significant influence on fund performance. If the fund invests in countries or regions that experience economic downturns, performance could suffer. In addition, if certain investments or industries do not perform as expected, or if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o In a down market, emerging market securities, other higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on May 1, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(8) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $11.23 $10.50 $12.18 $15.45 $11.01 Net investment income (2) 0.07 0.05 0.07 0.07 0.03 0.04 Net realized and unrealized gain (loss) on investments 1.20 (0.13) 1.69 3.75 (3.93) (2.16) Total from investment operations 1.27 (0.08) 1.76 3.82 (3.90) (2.12) Less distributions: Dividends from net investment income (0.04) (0.01) (0.07) (0.08) (0.17) -- Dividends in excess of net investment income -- -- (0.01) (0.02) -- -- Distributions from net realized gain on investments sold -- (0.64) -- (0.45) (0.37) -- Total distributions (0.04) (0.65) (0.08) (0.55) (0.54) -- Net asset value, end of period $11.23 $10.50 $12.18 $15.45 $11.01 $8.89 Total investment return(3,4) (%) 12.75(5) (0.54) 16.75 31.55 (25.17) (19.26)(5) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,267 3,792 7,201 9,375 7,330 4,999 Ratio of expenses to average net assets (%) 1.15(6) 1.15 1.15 1.15 1.15 1.15(6) Ratio of adjusted expenses to average net assets(7) (%) 3.13(6) 2.04 3.13 2.51 3.24 3.40(6) Ratio of net investment income to average net assets (%) 2.03(6) 0.43 0.59 0.52 0.19 0.84(6) Portfolio turnover rate (%) 14 273 89 116 177 176
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) The total returns would have been lower had certain expenses not been reduced during the periods shown. (5) Not annualized. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-15 International Equity Fund GOAL AND STRATEGY This is an international stock fund that seeks long-term capital appreciation. The Fund primarily invests in a diversified mix of common stocks of large established and medium-sized foreign companies located primarily in developed countries outside of the U.S. The manager selects stocks using proprietary equity research that identifies companies having: . strong market positions within their industry, . management with a history of excellence focusing on core businesses, . above average return on capital within their industry, and . demonstrated ability to create long-term shareholder value. The manager determines the allocation among regions and countries using a com- bination of qualitative and quantitative inputs, including: . quantitative models to rank the relative attractiveness of each country/region based on valuation, credit risk and momentum, and . qualitative assessment of regional portfolio managers to adjust model results. The Fund's sector exposures are largely the result of stock selection, although the Fund maintains broad sector representation. The Fund is managed using risk control techniques that maintain overall regional diversification. Although the Fund may employ foreign currency hedging techniques, the Fund normally main- tains the currency exposure of the underlying equity investments. The Fund invests in at least 3 different countries other than the U.S., but normally invests in 10 to 35 countries, with at least 65% of its assets in securities of non-U.S. entities. The Fund will invest no more than 10% of its assets in emerging market stocks. The Fund normally invests in 120 to 200 stocks and normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund also may purchase other types of securities that are not primary investment vehicles, for example: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), iShares SM and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other securities). As an example of how deriva- tives 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Goldman Sachs Asset Management, A unit of the Investment Management Division of Goldman, Sachs & Co. 32 Old Slip New York, New York 10005 Managing since 1988 Managing Fund since August, 1999 Managed approximately $282 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Shogo Maeda - ----------------- Managing Director of subadviser Joined subadviser in 1994 Senior Portfolio Manager at Nomura Investment Management, Inc. (1987-1994) Susan Noble - ----------------- Managing Director of subadviser Joined subadviser in 1997 Portfolio Management Director at Fleming Investment Management (1986-1997) Andrew Orchard - ----------------- Executive Director of subadviser Joined subadviser in 1999 Portfolio Manager at Morgan Grenfell Asset Management (1994-1999) PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year [GRAPH] 2000 -14.37% Best quarter: up 22.28%, fourth quarter 1999 Worst quarter: down 8.76%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -14.37% -13.96% Life of fund 3.01% 1.31%
Index:MSCI EAFE Index *Began operations on August 31, 1999. A-16 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, to the extent the Fund invests in emerging market coun- tries, it will have a significantly higher degree of foreign risk than if it invested exclusively in developed or newly-industrialized countries. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance since its inception on August 31, 1999. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
Period ended: 12/99** 12/00 6/01 (Unaudited) Net asset value, beginning of period $ 10.00 $ 11.95 $ 9.85 Income from investment operations Net investment income (loss) 0.01 0.06 0.05 Net realized and unrealized gain (loss) on investments* 2.12 (1.78) (1.48) Total from investment operations 2.13 (1.72) (1.43) Less distributions: Distributions from net investment income and capital paid in (0.01) (0.04) (0.05) Distributions from net realized gain on investment (0.17) (0.30) -- Distributions in excess of income/gains and from capital paid in -- (0.04) -- Total distributions (0.18) (0.38) (0.05) Net asset value, end of period $ 11.95 $ 9.85 $ 8.37 Total investment return**** 21.49%(a) (14.37)% (14.56)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $12,430 $15,716 $ 21,086 Ratio of expenses to average net assets (%)*** 1.10%(b) 1.10% 1.09% Ratio of net investment income (loss) to average net assets (%) 0.21%(b) 0.53% 1.15% Turnover rate (%) 26.76%(a) 75.41% 22.65% * The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.71% and 1.76% for the years ended December 31, 1999 and 2000, respectively. **** The performance of the portfolios shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. (a) Not annualized (b) Annualized
A-17 Proposal 5 V.A. Mid Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of medium- capitalization companies (companies in the capitalization range of the Russell Midcap Growth Index, which was $0.02 billion to $19.37 billion as of March 31, 2001). The manager conducts fundamental financial analysis to identify companies with above-average earnings growth. In choosing individual securities, the manager looks for companies with growth stemming from a combination of gains in market share and increasing operating efficiency. Before investing, the manager identifies a specific catalyst for growth, such as a new product, business reorganization or merger. The management team generally maintains personal contact with the senior management of the companies the fund invests in. The manager considers broad economic trends, demographic factors, technological changes, consolidation trends and legislative initiatives. The fund may not invest more than 5% of assets in any one security. The fund may invest up to 10% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes or currencies). In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash or cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Team responsible for day-to-day investment management. PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1998 1999 2000 10.35% 56.18% -11.73% 2001 total return as of June 30: 10.10% Best quarter: Q4 '99, 41.78% Worst quarter: Q3 '98, -19.74% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -11.73% -9.10% -11.75% Life of fund - began 1/7/98 15.12% 12.58% 17.28% Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks. Index 2: Russell Midcap Growth Index, an unmanaged index containing those stocks from the Russell Midcap Index with a greater-than-average growth orientation. A-18 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Medium-capitalization stocks tend to be more volatile than stocks of larger companies, and as a group could fall out of favor with the market, causing the fund to underperform investments that focus either on smallor large-capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on January 7, 1998. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------- Period ended: 12/98(1) 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------- Per share operating performance Net asset value, beginning of period $10.00 $11.03 $17.21 $15.09 Net investment income (loss)(2) 0.01 (0.03) (0.08) (0.05) Net realized and unrealized gain (loss) on investments 1.03 6.23 (1.94) (3.48) Total from investment operations 1.04 6.20 (2.02) (3.53) Less distributions: Dividends from net investment income (0.01) -- -- -- Distributions from net realized gain on investments sold -- (0.02) (0.10) -- Tax return of capital --(3) -- -- -- Total distributions (0.01) (0.02) (0.10) -- Net asset value, end of period $11.03 $17.21 $15.09 $11.56 Total investment return(4,5) (%) 10.35(6) 56.18 (11.73) (23.39)(6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,779 6,363 11,482 6,315 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00(7) Ratio of adjusted expenses to average net assets(8) (%) 4.23(7) 2.36 1.10 1.19(7) Ratio of net investment income (loss) to average net assets (%) 0.06(7) (0.23) (0.42) 0.74(7) Portfolio turnover rate (%) 103 136 155 71
(1) Began operations on January 7, 1998. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-19 Fundamental Growth Fund GOAL AND STRATEGY This is a stock fund with a growth emphasis that seeks long-term capital appre- ciation. The Fund invests primarily in the common stocks of large-sized and mid-sized U.S. companies that are believed to offer above-average potential for growth in revenues and earnings. The manager selects stocks using proprietary fundamental equity research and a systematic screening approach. The manager screens the universe for stocks that meet minimum size and earnings growth criteria. The manager employs a proprie- tary quantitative model to rank stocks based on: . fundamental catalyst (such as earnings surprise and momentum); . valuation (such as price-to sales ratio); and . financial strength (such as superior cash flow). The manager uses fundamental equity research with a global equity research team to identify companies with characteristics such as: . strong and innovative management teams; . opportunities for above average growth within its industry; . strong competitive positioning relative to peers and suppliers; . sufficient financial strength to grow the business; and . reasonable valuations relative to earnings expectations. The manager uses risk management tools and qualitative judgement to determine the Fund's sector and stock-specific weightings. The Fund is broadly diversi- fied by sector. The Fund normally invests in 90 to 150 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equiva- lents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02119 Managing since 1937 Managing Fund since August, 2000 Managed approximately $370 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Eric M. Wetlaufer, CFA - ----------------- Managing Director and Chief Investment Officer of subadviser Joined subadviser in 1997 Managing Director and Portfolio Manager at Cadence Capital Management (1991 -- 1997) Began career in 1985 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year [GRAPH] 2000 -3.03% Best quarter: up 54.57%, third quarter 1999 Worst quarter: down 20.91%, second quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -3.03% -11.75% Life of fund 35.44% 16.11%
Index:Russell Mid Cap(TM) Growth Index * Began operations on August 31, 1999. A-20 MAIN RISKS Primary Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized com- panies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "large/mid cap" approach carries the risk that large/mid cap stocks will underperform small cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance since its inception on August 31, 1999. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/99** 12/00 6/01 (Unaudited) Net asset value, beginning of period $10.00 $ 14.42 $ 12.52 Income from investment operations: Net investment income (loss) (0.02) (0.02) (0.02) Net realized and unrealized gain (loss) on investments* 5.34 (0.44) (2.64) Total from investment operations 5.32 (0.46) (2.66) Less distributions: Distributions from net investment income and capital paid in -- (0.03) -- Distributions from net realized gain on investments sold (0.90) (0.76) -- Distributions in excess of income/gains and from capital paid in -- (0.65) -- Total distributions (0.90) (1.44) -- Net asset value, end of period $14.42 $ 12.52 $ 9.86 Total investment return**** 54.57%(a) (3.03)% (21.20)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $9,175 $46,114 $40,342 Ratio of expenses to average net assets (%)*** 0.95%(b) 0.96% 0.99% Ratio of net investment income (loss) to average net assets (%) (0.55)%(b) (0.38)% (0.47)% Turnover rate (%) 61.66%(a) 250.46% 51.34% * The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.09% and 1.00% for the years ended December 31, 1999 and 2000, respectively. **** The performance of the portfolios shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. (a) Not annualized (b) Annualized
A-21 Proposal 6 V.A. Small Cap Growth Fund GOAL AND STRATEGY [Clip Art] The fund seeks long-term capital appreciation. To pursue this goal, the fund normally invests at least 80% of assets in stocks of small-capitalization companies (companies in the capitalization range of the Russell 2000 Growth Index, which was $10 million to $4.20 billion as of March 31, 2001). The managers look for companies in the emerging growth phase of development that are not yet widely recognized. The fund also may invest in established companies that, because of new management, products or opportunities, offer the possibility of accelerating earnings. To manage risk, the fund typically invests in 150 to 220 companies across many industries, and does not invest more than 5% of assets in any one security. In choosing individual securities, the managers use fundamental financial analysis to identify rapidly growing companies. The managers favor companies that dominate their market niches or are poised to become market leaders. They look for strong senior management teams and coherent business strategies. They generally maintain personal contact with the senior management of the companies the fund invests in. The fund may invest in preferred stocks and other types of equities, and may invest up to 10% of assets in foreign securities. The fund may also make limited use of certain derivatives (investments whose value is based on indexes or currencies). In abnormal conditions, the fund may temporarily invest in U.S. government securities with maturities of up to three years and more than 10% of assets in cash and cash equivalents. In these and other cases, the fund might not achieve its goal. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ PORTFOLIO MANAGERS Bernice S. Behar, CFA - --------------------------------- Senior vice president of adviser Joined fund team in 1996 Joined adviser in 1991 Began business career in 1986 Anurag Pandit, CFA - --------------------------------- Vice president of adviser Joined fund team in 1996 Joined adviser in 1996 Equity analyst at Loomis Sayles (1992-1996) Began business career in 1984 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with broad-based market indexes for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 11.06% 15.94% 68.52% -22.33% 2001 total return as of June 30: 17.58% Best quarter: Q4 `99, 44.55% Worst quarter: Q3 `98, -21.42% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 Index 2 1 year -22.33% -3.02% -22.43% Life of fund - began 8/29/96 11.02% 10.29% 6.88% Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S. small-capitalization stocks. Index 2: Russell 2000 Growth Index, an unmanaged index containing those stocks from the Russell 2000 Index with a greater-than-average growth orientation. A-22 MAIN RISKS [Clip Art] The value of your investment will fluctuate in response to stock market movements. The fund's management strategy has a significant influence on fund performance. Small-capitalization stocks as a group could fall out of favor with the market, causing the fund to underperform investments that focus on mediumor large-capitalization stocks. Similarly, growth stocks could underperform value stocks. To the extent the fund invests in a given industry, its performance will be hurt if that industry performs poorly. In addition, if the managers' security selection strategies do not perform as expected, the fund could underperform its peers or lose money. Stocks of smaller companies are more volatile than stocks of larger companies. Many smaller companies have short track records, narrow product lines or niche markets, making them highly vulnerable to isolated business setbacks. To the extent that the fund makes investments with additional risks, these risks could increase volatility or reduce performance: o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price; this risk could also affect small-capitalization stocks, especially those with low trading volumes. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on August 29, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $9.32 $10.35 $12.00 $19.76 $14.40 Net investment income (loss)(2) 0.02 (0.02) (0.06) (0.10) (0.13) (0.04) Net realized and unrealized gain (loss) on investments (0.68) 1.05 1.71 8.29 (4.33) (1.12) Total from investment operations (0.66) 1.03 1.65 8.19 (4.46) (1.16) Less distributions: Dividends from net investment income (0.02) --(3) -- -- -- -- Distributions from net realized gain on investments sold -- -- -- (0.43) (0.90) -- Total distributions (0.02) -- -- (0.43) (0.90) -- Net asset value, end of period $9.32 $10.35 $12.00 $19.76 $14.40 $13.24 Total investment return(4,5) (%) (6.62)(6) 11.06 15.94 68.52 (22.33) (8.06)(6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 975 3,841 8,232 20,867 19,772 13,313 Ratio of expenses to average net assets (%) 1.00(7) 1.00 1.00 1.00 1.00 1.00(7) Ratio of adjusted expenses to average net assets(8) (%) 5.19(7) 2.72 1.63 1.38 1.10 1.21(7) Ratio of net investment income (loss) to average net assets (%) 0.62(7) (0.16) (0.59) (0.76) (0.68) (0.67)(7) Portfolio turnover rate (%) 31 79 93 120 104 40
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Less than $0.01 per share. (4) Assumes dividend reinvestment. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Not annualized. (7) Annualized. (8) Does not take into consideration expense reductions during the periods shown. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-23 Small Cap Growth Fund GOAL AND STRATEGY This is a small cap stock fund with a growth emphasis that seeks long-term cap- ital appreciation. The Fund invests primarily in a diversified mix of the common stocks of small U.S. companies that are believed to offerabove-average potential for growth in revenues and earnings. The manager selects stocks using proprietary equity research. Stocks are pur- chased that are expected to have rapid earnings growth that is not yet widely recognized by the investment community. The manager looks for companies with: . demonstrated annual 20% earnings growth over 3 years and/or similar future growth expectations; . dominant market niche or poised to become market leaders; and . high quality senior management with coherent business strategies. The Fund is highly diversified by sector and number of individual stocks. The Fund's sector weightings are broadly diversified and managed relative to those of the Russell 2000(R) Growth Index. The Fund normally invests in 140 to 220 stocks, with at least 65% (usually higher) of its assets in small cap compa- nies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 Owned by John Hancock Managing since 1968 Managing Fund since May, 1996 Managed approximately $32 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Bernice S. Behar, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1991 Began career in 1986 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1997 14.26% 1998 14.49% 1999 70.38% 2000 -21.43% Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 22.48%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -21.43% -22.43% Life of fund 12.63% 4.72%
Index: Russell 2000(R) Growth Index *Began operations on May 1, 1996. A-24 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated 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 invest- ment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "small cap" approach carries the risk that in certain markets small cap stocks will underperform mid cap and large cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance since its inception on May 1, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96** 12/97 12/98 12/99 12/00 6/01 (Unaudited) Net asset value, beginning of period $ 10.00 $ 9.93 $ 11.34 $ 12.99 $ 19.12 $ 13.47 Income from investment operations: Net investment income (loss) 0.01 (0.02) (0.05) (0.21) (0.02) (0.04) Net realized and unrealized gain (loss) on investments* (0.06) 1.44 1.70 9.06 (4.16) (1.03) Total from investment operations (0.05) 1.42 1.65 8.85 (4.18) (1.07) Less distributions: Distributions from net investment income and (0.02) -- -- -- -- -- Distributions from net realized gain on investments sold -- -- -- (2.72) (0.12) -- Distributions in excess of income/gains and from capital paid in -- 0.01 -- -- (1.35) -- Total distributions (0.02) (0.01) -- (2.72) (1.47) -- Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $ 19.12 $ 13.47 $ 12.40 Total investment return**** (0.50)%(a)14.26% 14.49% 70.38% (21.43)% (7.94)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $20,633 $48,761 $74,849 $179,570 $234,542 $202,053 Ratio of expenses to average net assets (%)*** 1.00%(b) 1.00% 1.00% 0.89% 0.82% 0.84% Ratio of net investment income (loss) to average net assets (%) 0.12%(b) (0.28)% (0.65)% (0.70) (0.50)% (0.44)% Turnover rate (%) 50.93%(a) 86.23% 101.16% 113.11% 97.73% 45.16% * The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuations in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for the years ended December 31, 1996, 1997, and 1998, respectively. **** The performance of the portfolios shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. (a) Not annualized (b) Annualized
A-25 Proposal 7 V.A. Bond Fund GOAL AND STRATEGY [Clip Art] The fund seeks to generate a high level of current income consistent with prudent investment risk. In pursuing this goal, the fund normally invests at least 65% of assets in a diversified portfolio of debt securities. These include corporate bonds and debentures as well as U.S. government and agency securities. Most of these securities are investment grade, although the fund may invest up to 25% of assets in junk bonds rated as low as CC/Ca and their unrated equivalents. There is no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on sector allocation, industry allocation and securities selection: deciding which types of bonds and industries to emphasize at a given time, and then which individual bonds to buy. When making sector and industry allocations, the managers try to anticipate shifts in the business cycle, using top-down analysis to determine which sectors and industries may benefit over the next 12 months. In choosing individual securities, the managers use bottom-up research to find securities that appear comparatively undervalued. The managers look at bonds of all different quality levels and maturities from many different issuers, potentially including foreign governments and corporations. The fund intends to keep its exposure to interest rate movements generally in line with those of its peers. The fund may invest in mortgage-related securities and certain other derivatives (investments whose value is based on indexes, securities or currencies). Under normal conditions, the fund may not invest more than 10% of assets in cash or cash equivalents. In abnormal market conditions, the fund may temporarily invest more than 35% of assets in investment-grade short-term securities. In these and other cases, the fund might not achieve its goal. ================================================================================ PORTFOLIO MANAGERS James K. Ho, CFA - ------------------------------------ Executive vice president of adviser Joined fund team in 1996 Joined adviser in 1985 Began business career in 1977 Benjamin A. Matthews - ------------------------------------ Vice president of adviser Joined fund team in 1998 Joined adviser in 1995 Began business career in 1970 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 9.31% 9.41% -0.51% 11.89% 2001 total return as of June 30: -0.04% Best quarter: Q3 `98, 4.76% Worst quarter: Q1 `97, -0.96% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund Index 1 year 11.89% 9.39% Life of fund - began 8/29/96 7.88% 7.28% Index: Lehman Brothers Credit Bond Index, an unmanaged index of corporate bonds and Yankee bonds. A-26 MAIN RISKS [Clip Art] The major factors in this fund's performance are interest rates and credit risk. When interest rates rise, bond prices generally fall. Generally, an increase in the fund's average maturity will make it more sensitive to interest rate risk. The fund could lose money if any bonds it owns are downgraded in credit rating or go into default. In general, lower-rated bonds have higher credit risks. If certain sectors or investments do not perform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those risks could increase volatility or reduce performance: o Junk bonds and foreign securities may make the fund more sensitive to market or economic shifts in the U.S. and abroad. o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt. o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price. o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political instability. o Certain derivatives could produce disproportionate losses and are generally considered more risky than direct investments. Any U.S. government guarantees on portfolio securities do not apply to these securities' market value or current yield, or to fund shares. The fund may trade securities actively, which could increase its transaction costs, thus lowering performance. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on August 29, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(9) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $10.00 $10.19 $10.36 $10.51 $9.81 $10.29 Net investment income (2) 0.23 0.68 0.63 0.64 0.64 0.28 Net realized and unrealized gain (loss) on investments 0.21 0.24 0.32 (0.70) 0.50 0.01 Total from investment operations 0.44 0.92 0.95 (0.06) 1.12 0.29 Less distributions: Dividends from net investment income (0.23) (0.68) (0.63) (0.64) (0.64) 0.30 Distributions from net realized gain on investments sold (0.02) (0.07) (0.17) -- -- -- Total distributions (0.25) (0.75) (0.80) (0.64) (0.64) (0.30) Net asset value, end of period $10.19 $10.36 $10.51 $9.81 $10.29 $10.28 Total investment return(3) (%) 4.42(4,5) 9.30(5) 9.41(5) (0.51)(5) 11.89(5) 2.78(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,056 3,682 10,669 12,531 25,173 67,692 Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.75 0.75 0.75 0.68(6) Ratio of adjusted expenses to average net assets(7) (%) 4.15(6) 2.53 1.34 1.01 0.92 -- Ratio of net investment income to average net assets (%) 6.69(6) 6.57 5.93 6.39 6.47 5.50(6,8) Portfolio turnover rate (%) 45 193 367 307 298 195
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Had the Fund not amortized premiums on debt securities, the annualized ration of net investment income to average net assets would have been 5.77%. (9) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-27 Active Bond Fund GOAL AND STRATEGY This is an intermediate term bond fund of medium credit quality that seeks income and capital appreciation. The Fund primarily invests in a diversified mix of debt securities including: . U.S. Treasury and agency securities; . foreign government and agency securities (if dollar-denominated); . corporate bonds, both U.S. and foreign (if dollar-denominated); and . mortgage-backed and asset-backed securities. The manager normally invests: . mostly in investment grade debt securities; and . no more than 25% of the Fund's assets in high yield bonds. The manager seeks to identify specific bond sectors, industries and specific bonds that are attractively priced. The manager tries to anticipate shifts in the business cycle, using economic and industry analysis to determine which sectors and industries might benefit over the next 12 months. The manager uses proprietary research to identify securities that are undervalued. The manager evaluates bonds of all quality levels and maturities from many dif- ferent issuers. The Fund normally has an average credit rating of "A" or high- er. The Fund normally has 10% or less of its assets in cash and cash equivalents. The Fund may purchase other types of securities that are not primary investment vehicles, for example: emerging market debt securities, and certain derivatives (investments whose value is based on indices or other securities). The manager actively uses derivatives, such as futures, to adjust the Fund's average matu- rity and seeks to keep the Fund's interest rate sensitivity in line with the overall market. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 Owned by John Hancock Managing since 1968 Managing Fund since May, 1995 Managed approximately $32 billion in assets at the end of 2000 FUND MANAGER James K. Ho, CFA - ----------------- Executive Vice President of subadviser Managed fund since 1995 Associated with subadviser since 1985 Began career in 1977 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1991 16.70% 1992 7.70% 1993 10.80% 1994 -2.57% 1995 19.55% 1996 4.10% 1997 10.11% 1998 8.23% 1999 -0.94% 2000 10.45% Best quarter: up 7.14%, second quarter 1989 Worst quarter: down 2.51%, first quarter 1994 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 10.45% 11.63% 5 years 6.30% 6.46% 10 years 8.20% 7.96% Life of fund 8.04% 8.16%
Index: Lehman Brothers Aggregate Bond Index *Began operations on March 29, 1986. A-28 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Fund would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance for the time period indicated. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96 12/97 12/98 12/99 12/00 6/01 (Unaudited) Net asset value, beginning of period $ 10.13 $ 9.77 $ 9.95 $9.92 $ 9.12 $ 9.44 Income from investment operations: Net investment income (loss) 0.69 0.71 0.69 0.67 0.64 0.29 Net realized and unrealized gain (loss) on investments* (0.31) 0.24 0.11 (0.76) 0.28 0.06 Total from investment operations 0.38 0.95 0.80 (0.09) 0.92 0.35 Less distributions: Distributions from net investment income and capital paid in (0.69) (0.71) (0.69) (0.71) (0.60) (0.30) Distributions from net realized gain on investments sold (0.05) (0.06) (0.14) -- -- -- Total distributions (0.74) (0.77) (0.83) (0.71) (0.60) (0.30) Net asset value, end of period $ 9.77 $ 9.95 $ 9.92 $ 9.12 $ 9.44 $ 9.49 Total investment return** 4.10% 10.11% 8.23% (0.94)% 10.45% 3.63% Ratios and supplemental data Net assets, end of period (000s omitted)($) $726,111 $803,770 $907,121 $850,286 $842,299 $816,297 Ratio of expenses to average net assets (%) 0.29% 0.31% 0.29% 0.28% 0.41%*** 0.71% Ratio of net investment income (loss) to average net assets (%) 7.07% 7.18% 6.84% 6.97% 6.98% 6.13% Turnover rate (%) 119.12% 138.29% 228.74% 182.90% 164.34% 130.85% * The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** The performance of the portfolios shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 0.44% for year ended December 31, 2000.
A-29 Proposal 8 V.A. Money Market Fund GOAL AND STRATEGY [Clip Art] The fund seeks the maximum current income that is consistent with maintaining liquidity and preserving capital. The fund intends to maintain a stable $1 share price. The fund invests only in dollar-denominated securities rated within the two highest short-term credit categories and their unrated equivalents. These securities may be issued by: o U.S. and foreign companies o U.S. and foreign banks o U.S. and foreign governments o U.S. agencies, states and municipalities o International organizations such as the World Bank and the International Monetary Fund The fund may also invest in repurchase agreements based on these securities. The fund maintains an average dollar-weighted maturity of 90 days or less, and does not invest in securities with remaining maturities of more than 13 months. In managing the portfolio, the management team searches aggressively for the best values on securities that meet the fund's credit and maturity requirements. The team tends to favor corporate securities and looks for relative yield advantages between, for example, a company's secured and unsecured short-term debt obligations. ================================================================================ PORTFOLIO MANAGERS Team of money market research analysts and portfolio managers YIELD INFORMATION For the fund's 7-day effective yield, call 1-800-824-0335 PAST PERFORMANCE [Clip Art] The graph shows how the fund's total return has varied from year to year, while the table shows performance over time. This information may help provide an indication of the fund's risks. All figures assume dividend reinvestment but do not include variable contract charges (see attached variable product prospectus). Past performance does not indicate future results. - -------------------------------------------------------------------------------- Year-by-year total returns -- calendar years - -------------------------------------------------------------------------------- 1997 1998 1999 2000 4.90% 4.90% 4.60% 5.90% 2001 total return as of June 30: 1.02% Best quarter: Q1 `98, 1.25% Worst quarter: Q1 `99, 1.06% - -------------------------------------------------------------------------------- Average annual total returns-- for periods ending 12/31/00 - -------------------------------------------------------------------------------- Fund 1 year 5.90% Life of fund - began 8/29/96 5.00% A-30 MAIN RISKS [Clip Art] The value of your investment will be most affected by short-term interest rates. If interest rates rise sharply, the fund could underperform its peers or lose money. An issuer of securities held by the fund could default or have its credit rating downgraded. Foreign investments carry additional risks, including inadequate or inaccurate financial information and social or political instability. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. ================================================================================ FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquired Fund's financial performance since its inception on August 29, 1996. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus).
- ------------------------------------------------------------------------------------------------------------------------------------ Period ended: 12/96(1) 12/97 12/98 12/99 12/00 6/01(8) - ------------------------------------------------------------------------------------------------------------------------------------ Per share operating performance Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 Net investment income (2) 0.02 0.05 0.05 0.05 0.06 0.02 Less distributions: Dividends from net investment income (0.02) (0.05) (0.05) (0.05) (0.06) (0.02) Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 Total investment return(3) (%) 1.61(4,5) 4.88(5) 4.87 4.58 5.90 2.33(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 207 8,377 16,519 32,952 73,917 143,495 Ratio of expenses to average net assets (%) 0.75(6) 0.75 0.74 0.66 0.60 0.57 Ratio of adjusted expenses to average net assets(7) (%) 27.48(6) 1.27 -- -- -- -- Ratio of net investment income to average net assets (%) 4.68(6) 4.86 4.70 4.55 5.86 4.52(6)
(1) Began operations on August 29, 1996. (2) Based on the average of the shares outstanding at the end of each month. (3) Assumes dividend reinvestment. (4) Not annualized. (5) The total returns would have been lower had certain expenses not been reduced during the periods shown. (6) Annualized. (7) Does not take into consideration expense reductions during the periods shown. (8) Semiannual period from January 1, 2001 through June 30, 2001. Unaudited. A-31 Money Market Fund GOAL AND STRATEGY This is a money market fund that seeks to preserve capital and liquidity while also seeking to achieve a competitive yield. The Fund intends to maintain a stable net asset value of $1.00 per share. The Fund invests in U.S. dollar denominated money market instruments rated in one of the two highest short-term credit rating categories, primarily includ- ing: . commercial paper and other short-term obligations of U.S. and foreign issuers (including asset-backed securities); . certificates of deposit, bank notes and other obligations of U.S. and foreign banks and other lending institutions; . debt securities issued by foreign governments and agencies; . U.S. Treasury, agency and state and local government obligations; and, . repurchase agreements. The manager's investment approach combines top-down analysis with fundamental bottom-up security selection. The manager considers factors such as the antici- pated level of interest rates and the maturity of individual securities to determine the Fund's overall weighted average maturity. The manager seeks secu- rities; . with an acceptable maturity; . issued by issuers on a sound financial footing; . that are marketable and liquid; and . that offer competitive yields. The Fund only invests in individual securities with a maximum remaining matu- rity of 397 days (13 months). The overall weighted average maturity of the Fund's investments is 90 days or less. The Fund may invest: . up to 5% of assets in securities rated in the second-highest short-term cate- gory (or unrated equivalents); and . up to 1% of assets or $1 million (whichever is greater) in securities of a single issuer rated in the second-highest short-term category (or unrated equivalents). - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since May, 2001 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: John Keogh - ----------------- Senior Vice President and Partner of subadviser Joined subadviser in 1983 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time. This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years [GRAPH] 1991 6.00% 1992 3.60% 1993 3.41% 1994 4.03% 1995 5.78% 1996 5.32% 1997 5.38% 1998 5.40% 1999 5.05% 2000 6.29% Best quarter: up 2.38%, second quarter 1989 Worst quarter: up 0.74%, second quarter 1993 Average annual total return -- for periods ending 12/31/2000(/1/)
Fund 1 year 6.29% 5 years 5.50% 10 years 4.99% Life of fund 5.84%
(1)Began operations on March 29, 1986. A-32 MAIN RISKS Primary 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. Interest Rate Risk: When interest rates rise, yields on the Fund's investments will generally rise and prices on the Fund's investments will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining maturity of instruments held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has less interest rate risk than an intermediate-term or long-term bond fund. Credit Risk: An issuer of an instrument held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of an instrument held by the Fund may be downgraded. In either case, the value of the instrument held by the Fund would fall. All money market instruments have some credit risk, but in general lower-rated instruments have higher credit risk. Principal Risk: An investment in the Fund is not a bank deposit and is not guaranteed as to principal and interest. Although the Fund seeks to maintain a stable net asset value of $1.00 per share, investors may lose money by invest- ing in the Fund. Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Secondary None - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial highlights table below is intended to help you understand the Acquiring Fund's financial performance for the time periods indicated. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that a shareholder would have earned (lost) on an investment in the Fund (assuming reinvestment of all divid- ends and distributions). Except for the information as of June 30, 2001 (which is unaudited) the information in the below table has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, are in- cluded in the Trust's Annual Report to Shareholders for the year ended December 31, 2000 (which is available upon request via the phone number or address on the cover page of this Proxy Statement/Prospectus). Period ended: 12/96# 12/97# 12/98# 12/99# 12/00# 6/01## (Unaudited) Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from investment operations: Net investment income (loss) 0.05 0.05 0.05 0.04 0.06 0.02 Total from investment operations 0.05 0.05 0.05 0.04 0.06 0.02 Less distributions: Distributions from net investment income and capital paid in (0.05) (0.05) (0.05) (0.04) (0.06) (0.02) Total distributions $ (0.05) $ (0.05) $ (0.05) (0.04) (0.06) (0.02) Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Total investment return* 5.32% 5.38% 5.40% 5.05% 6.29%** 2.51% Ratios and supplemental data Net assets, end of period (000s omitted)($) $213,235 $229,443 $395,195 $451,235 $496,853 $459,369 Ratio of expenses to average net assets (%) 0.30% 0.33% 0.31% 0.31% 0.29% 0.29% Ratio of net investment income (loss) to average net assets (%) 5.20% 5.32% 5.29% 4.95% 6.05% 5.03% * The performance of the Funds shown on this page does not reflect expenses and charges of the applicable separate accounts and variable products, all of which vary to a considerable extent and are described in your product's prospectus. ** The Total Investment Return includes the effect of the capital contribution of $0.001 per share. The Total Investment Return without the capital contribution would have been 6.18% # Per share amounts have been restated to reflect a 10-for-1 stock split effective May 1, 2001. ## The Fund entered into a new sub-advisory agreement with Wellington Company, LLP during the period shown.
A-33 Appendix B Management's discussion of fund performance: December 31, 2001 B-1 PROPOSAL 1 John Hancock V.A. Core Equity Fund By Paul McManus for the Portfolio Management Team The year 2000 was marked by unprecedented volatility, as the markets fell sharply in the spring, rallied over the summer and plunged again during the final four months of the year. The Federal Reserve Board, which had already hiked interest rates three times in 1999, added three more increases in the first half of 2000, including a 0.50% increase in May. With share prices in technology, telecommunications and biotechnology stocks reflecting unrealistically optimistic expectations, the Fed's actions were enough to puncture the speculative bubble and bring the popular market averages lower. The tech-heavy NASDAQ Composite Index was particularly vulnerable, shedding a whopping 39.29% in 2000. At the time of the Fed's final increase on May 16, there was scant evidence of decelerating growth in corporate earnings or the overall economy. Accordingly, the markets rallied during the summer, buoyed by investors' belief that interest rates were stabilizing and their hope that higher rates would cool the economy without doing significant damage to earnings. That hope was shattered in the fall. Prominent companies in a broad variety of sectors issued warnings that fourth-quarter profits would be substantially lower than previously expected. At the same time, data on industrial production, retail sales, employment and consumer confidence all gave evidence of a slowing economy. As a result, sellers took control and the markets plummeted. Defensive sectors like health care, consumer nondurables and financial services managed to buck the trend, as did energy, but growth stocks in most sectors had an extremely difficult year in 2000. PERFORMANCE SUMMARY The Fund continued to implement its strategy of buying undervalued stocks of companies with improving fundamentals. In sectors such as technology, however, it was more a question of identifying the companies that appeared to suffer the least deterioration in fundamentals. The Fund had a losing year but finished ahead of the S&P 500 Index, primarily due to favorable stock selection. For the 12 months ended December 31, 2000, John Hancock V.A. Core Equity Fund had a return of - -7.11% at net asset value. In comparison, the S&P 500 returned -9.10%, including reinvested dividends. However, the Fund trailed the 1.15% return of the average variable annuity growth and income fund, according to Lipper, Inc. Many funds in the Lipper average have a heavier emphasis on value-oriented investments, which were the place to be, especially during the second half of the period. Longer-term performance information can be found on page six. HEALTH CARE, FINANCIALS HELP RETURNS On a relative basis, we were helped by our holdings in health care, a sector we steadily increased throughout the year. Compared with companies in other sectors, health-care firms, especially pharmaceutical companies, had generally superior earnings growth prospects. One of the best performers, Warner-Lambert, rose sharply as a result of being the target of a bidding war between Pfizer and American Home Products (Pfizer ultimately won). Merck, Pharmacia, Bristol-Myers Squibb and Schering-Plough were other drug stocks that made meaningful contributions to performance. Financial stocks were another area of strength, helped by the growing consensus that a weakening economy would bring lower interest rates. Both stock selection and a marginal overweighting aided performance relative to our benchmark. One of our top performers, Fannie Mae, also benefited when Congress lost interest in an initiative that would have removed the competitive advantages Fannie Mae enjoys because of its status as a quasi-government organization. Another holding in the sector meriting mention is Citigroup, which continued to post consistently good earnings growth through its favorable mix of banking, brokerage and insurance businesses. TECHNOLOGY AND TELECOMMUNICATIONS HIT THE SKIDS Leading the list of negative contributors were many names that made positive contributions a year ago. Microsoft was hurt earlier in the year by the Justice Department's antitrust lawsuit, then by slowing demand for personal computers. We reduced the position to below market weight in the first half of the period, but the stock still hurt performance substantially. Lucent Technologies was a different story. We liked the stock for the first half of the year, but it subsequently became apparent to us that the company was slipping behind competitors in some key technological areas. Consequently, we sold the entire position in the fourth quarter. Long-distance provider WorldCom reflected the intense competition for telephone services of all kinds, as did Sprint and AT&T, two other lackluster performers. Despite the carnage, we maintained roughly a market weighting in technology. The Fund stresses diversification and attempts to keep its risk profile similar to that of the S&P 500 Index. B-2 LOOKING AHEAD Amid considerable pessimism about stocks, the Fed surprised investors by cutting interest rates on January 3, just after the period ended. It appears that the primary challenge facing investors over the short term will be balancing the positive effects of lower rates with the negative ramifications of slower earnings growth. Through its actions, the Fed has served notice that it intends to be aggressive about addressing the current slowdown, so we would not be surprised to see a series of interest-rate reductions. Furthermore, history has shown that the stock market responds well to multiple rate cuts by the Fed. We will consider these and many other factors as we continue our search for undervalued stocks of companies with improving fundamentals. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (7.11%) 98.43% Average Annual Total Returns(1) (7.11%) 17.11% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 16.69%. The expense limitation did not impact the one-year performance. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.6%, the second is Citigroup 4.4%, the third Pfizer 3.6%, the fourth Merck 3.2% and the fifth ExxonMobil 3.0%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Core Equity Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Core Equity Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $22,043 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Core Equity Fund on August 29, 1996 and is equal to $19,844 as of December 31, 2000. B-3 Inception: March 29, 1986 GROWTH & INCOME FUND INDEPENDENCE INVESTMENT ASSOCIATES, INC. Paul F. McManus PUTNAM INVESTMENTS C. Beth Cotner Effective November 1, the Fund was modified to a multi-managed investment approach The Growth & Income Fund is a multi-manager fund with two sub-advisers each independently managing their own portion of the Fund. The two managers employ a distinct and complementary investment strategy. This unique multi-manager approach seeks to produce more consistent investment returns over market cycles and to reduce the risk of any one manager or strategy being out of favor in certain market environments. IIA selects stocks using a combination of fundamental equity research and quantitative tools and focuses on large cap stocks that are undervalued relative to the stock's history and have improving earnings growth prospects. Putnam selects stocks using a systematic screening approach and fundamental equity research and focuses on large and mid cap stocks with opportunities for above average growth. As of December 31, 2000, IIA managed approximately 77% and Putnam managed approximately 23% of the Fund's assets. For the year, the Fund performed - 13.10% below the benchmark's performance of -9.11%. Independence Investment Associates, Inc. The Fund outperformed the benchmark in the fourth quarter. Stock prices declined in the period as fears over an accelerating economic slowdown were discounted in the market. Increasing numbers of technology companies began to preannounce earnings shortfalls. The Fund was modestly underweight technology stocks, and this benefited portfolio performance, although specific stock selection skill was slightly negative. Health care was over weighted, particularly in large drug companies. Both stock selection and the active overweight benefited performance for the quarter. Holdings in Bristol Meyers, Merck and Pharmacia Upjohn helped the portfolio. Electric utilities were another positive are as investors were becoming even more defensive as the economy was slowing. Perceived as safer technology stocks, information services companies like First Data Corp and EDS did relatively well and helped portfolio performance. With the market being defensive, food and beverage stocks did well. We had an underweight there as valuations did not justify the purchases of some of the stocks. This relative underweight negatively impacted performance in the quarter. In the media area, fears of the slowing economy affected the broadcasters as advertising budgets became suspect. Also, the delay of Time Warner--AOL adversely affected performance of those stocks. Looking forward, we continue to maintain a broad sector neutral strategy while emphasizing individual stock selection. Based upon the relative valuation of stocks we will continue to select the best stocks within industries based upon their valuation and outlook for sustainable earnings growth. Putnam Investments The Fund benefited from overweighting the robust energy, conglomerate, utilities, and financial sectors, along with strong stock selection. In particular, exceptional stock performance by one of our holdings (Tyco) made conglomerates the greatest contributor to performance. The next-largest contribution came from energy, where oil services stocks boosted returns; in financial services, insurance (American International Group) and investment banking/brokerage (Goldman Sachs) aided performance. The single largest detractor from performance came from technology, where the benefit of being underweight in a very weak sector was more than offset by poor stock performance in software (Openwave Systems, Veritas Software), communications equipment (Redback Networks, Juniper Networks), and business applications software (Agile Software, I2 Technologies). Fund performance was also hindered by health care (underweighting pharmaceuticals and weak stock selection in biotechnology); overweighting communications services (the worst- performing sector), along with weak stock performance from that sector in the cellular industry (Sprint PCS, Nextel); underweighting consumer staples (along with not owning non-alcoholic beverage companies and owning weak TV broadcasting companies); and finally, underweighting consumer cyclicals. In the volatile environment of the new year, we anticipate additional earnings disappointments, especially in stocks leveraged to the consumer. We believe that the current environment will continue to place pressure on rapidly expanding, high-quality growth companies. We have concentrated the Fund on companies with a proven record of expanding profits even in unsettled economic times. Higher energy prices should benefit oil and gas producers and energy services companies. Going forward, we will be overweight energy (oil services) and financial services (banking/brokerage services and insurance) stocks while underweighting technology (communications equipment and software) and consumer staples (media and TV broadcasting.) B-4 Inception: March 29, 1986 GROWTH & INCOME FUND INDEPENDENCE INVESTMENT ASSOCIATES, INC. Paul F. McManus PUTNAM INVESTMENTS C. Beth Cotner [GRAPH] Growth & Income S&P 500. Growth & Income S&P 500. Fund Index Fund Index 12/31/90 $10,000 $10,000 01/31/96 $21,300 $22,266 01/31/91 10,449 10,442 02/29/96 21,576 22,479 02/28/91 11,145 11,190 03/31/96 21,852 22,695 03/31/91 11,406 11,456 04/30/96 22,098 23,029 04/30/91 11,401 11,488 05/31/96 22,609 23,623 05/31/91 11,844 11,980 06/30/96 22,733 23,720 06/31/91 11,266 11,432 07/31/96 21,659 22,664 07/31/91 11,655 11,967 08/31/96 22,175 23,145 08/31/91 11,905 12,249 09/30/96 23,205 24,445 09/30/91 11,760 12,048 10/31/96 23,772 25,115 10/31/91 11,933 12,209 11/30/96 25,354 27,021 11/30/91 11,518 11,716 12/31/96 24,918 26,492 12/31/91 12,596 13,055 01/31/97 26,201 28,137 01/31/92 12,375 12,812 02/28/97 26,344 28,365 02/29/92 12,522 12,976 03/31/97 25,318 27,185 03/31/92 12,311 12,722 04/30/97 26,545 28,808 04/30/92 12,702 13,092 05/31/97 27,985 30,577 05/31/92 12,827 13,163 06/30/97 29,088 31,940 06/30/92 12,732 12,972 07/31/97 31,688 34,476 07/31/92 12,734 13,495 08/31/97 30,083 32,559 08/31/92 12,911 13,222 09/30/97 31,832 34,344 09/30/92 13,056 13,374 10/31/97 30,635 33,197 10/31/92 13,033 13,422 11/30/97 31,787 34,734 11/30/92 13,541 13,875 12/31/97 32,341 35,331 12/31/92 13,717 14,056 01/31/98 32,690 35,723 01/31/93 13,858 14,159 02/28/98 35,358 38,299 02/28/93 14,052 14,350 03/31/98 37,336 40,260 03/31/93 14,487 14,659 04/30/98 37,439 40,666 04/30/93 14,101 14,299 05/31/98 37,030 39,967 05/31/93 14,467 14,686 06/30/98 38,602 41,590 06/30/93 14,609 14,734 07/31/98 38,151 41,149 07/31/93 14,530 14,665 08/31/98 32,294 35,199 08/31/93 15,115 15,223 09/30/98 33,951 37,455 09/30/93 15,142 15,111 10/31/98 36,978 40,500 10/31/93 15,400 15,418 11/30/98 39,191 42,954 11/30/93 15,263 15,273 12/31/98 42,123 45,428 12/31/93 15,545 15,460 01/31/99 43,536 47,327 01/31/94 16,007 15,978 02/28/99 42,184 45,855 02/28/94 15,541 15,547 03/31/99 43,433 47,690 03/31/94 14,939 14,871 04/30/99 45,263 49,535 04/30/94 15,199 15,064 05/31/99 43,943 48,366 05/31/94 15,257 15,310 06/30/99 46,973 51,051 06/30/94 14,980 14,931 07/31/99 45,365 49,458 07/31/94 15,385 15,426 08/31/99 44,829 49,210 08/31/94 15,957 16,053 09/30/99 43,592 47,862 09/30/94 15,486 15,667 10/31/99 46,142 50,892 10/31/94 15,733 16,025 11/30/99 46,676 51,925 11/30/94 15,211 15,437 12/31/99 47,579 54,983 12/31/94 15,459 15,663 01/31/00 47,808 52,223 01/31/95 15,777 16,070 02/29/00 48,957 51,236 02/28/95 16,400 16,693 03/31/00 45,974 56,247 03/31/95 16,763 17,187 04/30/00 44,819 54,554 04/30/95 17,252 17,688 05/31/00 49,836 53,436 05/31/95 17,826 18,386 06/30/00 48,617 54,750 06/30/95 18,232 18,818 07/31/00 47,976 53,896 07/31/95 18,814 19,445 08/31/00 48,744 57,243 08/31/95 18,936 19,498 09/30/00 48,151 54,221 09/30/95 19,757 20,314 10/31/00 51,130 53,993 10/31/95 19,628 20,243 11/30/00 48,040 49,738 11/30/95 20,456 21,134 12/31/00 34,913 49,982 12/31/95 20,748 21,525 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments General Electric Co. 3.3% 5.9% Pfizer, Inc. 3.0% 0.9% Cisco Systems, Inc. 2.4% 4.6% Citigroup, Inc. 2.3% 4.1% Merck & Co., Inc. 2.2% 1.6% Microsoft Corp. 2.1% 7.1% Exxon Mobil Corp. 2.1% 1.4% Wal-Mart Stores, Inc. 1.9% 1.5% Intel Corp. N/A 3.1% Tyco International, Ltd. 1.9% 1.5% Average Annual Total Returns* - --------------------------------------------------------------------------- Growth & Income S&P 500 MorningStar Fund Index Peer Group+ -------- ----------- ----------- 1 Year -13.10% -9.11% -7.52% 3 Years 9.57 12.26 11.71 5 Years 15.44 18.35 17.02 10 Years 15.58 16.56 16.58 Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Technology 28.1% Energy 5.6% Health Care 17.9% Consumer Cyclical 4.9% Financial 15.4% Utility 4.5% Capital Equipment 13.6% Consumer Staple 1.7% Retail 5.6% Basic Material 1.6% * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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. . "Standard & Poor's 500" is a trademark of the McGraw-Hill companies, Inc. and has been licensed for use by John Hancock Life Insurance Company. The product is not sponsored, endorsed, fold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the MorningStar variable universe having a Large Blend investment category. B-5 PROPOSAL 2 John Hancock V.A. Large Cap Growth Fund By William L. Braman and Robert Uek for the Portfolio Management Team The bears were out in full force during the past 12 months, particularly in the technology arena. Volatility began early on and continued in prolonged bouts as the period progressed. Speculation about the economy's direction and the sustainability of corporate profits dominated investors' concerns. By year's end, all the major stock indexes were down considerably, as was John Hancock V.A. Large Cap Growth Fund. FUND PERFORMANCE For the 12 months ended December 31, 2000, the Fund produced a total return of -31.30% at net asset value. By comparison, the Fund's benchmark index, the Russell Top 200 Growth Index, returned -24.53%, the tech-heavy NASDAQ Composite Index returned -39.29% and the broader market, as measured by the Standard & Poor's 500 Index, returned - -9.10%. In the same period, the average variable annuity growth fund returned -9.22%, according to Lipper, Inc. Historical performance information can be found on page 12. The Fund's performance lagged its peers primarily because of our heavy stake in technology, particularly the more aggressive companies, which we maintained throughout much of the year. As the earnings of many technology companies decelerated, their stock prices came back down to earth. TECHNOLOGY STRUGGLES For a long time, we have been espousing the dynamic long-term growth prospects of many technology stocks and, indeed, the sector itself. We firmly believe technology companies will continue to drive not only the United States' economy but the world's as well, thereby providing investors with considerable long-term growth potential. The strength of the technology stock sector in recent years is certainly a testament to this belief. However, with each interest rate increase by the Federal Reserve Board this past spring -- and then with each new economic report suggesting a slowdown -- investors began to question the ability of companies, particularly technology firms, to continue meeting the very high earnings expectations of the past few years. Consequently, it grew increasingly difficult for many investors to justify the high stock prices in exchange for the potential payback. When a company posted disappointing earnings -- as many did -- the stock price was pummeled. As the stock prices in the tech and biotech sec tors dropped, fears arose about the possible price declines of other richly valued stocks. Investors harvested whatever profits they could and ran for cover in the United States Treasury market. TECH HOLDINGS REDUCED Throughout the period, a large amount of the Fund's net assets remained in the technology sector, with the weighting peaking in September at around 60% of net assets. By period's end, however, the stake was reduced to 43%. While the sector's downturn had a hand in bringing that figure down, we also eliminated many holdings from the Fund. Our reasons had more to do with the possibility of further stock price volatility than with any concerns we had about the business fundamentals or long-term growth prospects of many of the companies we sold. In trimming the Fund's weighting, we targeted many names relating to personal computer hardware. Issues we sold included IBM, Microsoft, Gateway, Dell and Hewlett Packard. We also eliminated positions in commodity semiconductors and semiconductor equipment by selling Intel, Texas Instruments, Applied Materials and Micron. Other high-priced stocks that demonstrated an increased risk of price declines were sold as well. In the biotechnology sector, we moved out of Immunex and Amgen. We held on to, and even purchased, some stocks in the computer networking and communications sub sectors as stock prices became increasingly attractive. We bought such issues as Juniper Networks, CIENA, JDS Uniphase and Nortel Networks. HEALTH CARE, FINANCE INCREASED As the period progressed, we added to the Fund's weighting in health-care and financial stocks. In health care, it was the pharmaceuticals we sought. This past year, investors prized the earnings predictability of large drug companies. These steady growers are also defensive in nature, as they are relatively insulated from economic changes. We increased the size of our stakes in Pfizer, Pharmacia and Johnson & Johnson and initiated a new position in Merck. As technology stock prices dropped, drug stocks soared. B-6 Our financial focus has been fairly broad-based, though we emphasized insurance names slightly. In addition to the relatively attractive stock prices, the business cycle and pricing environment among property casualty and insurance companies has been improving. We also thought it prudent for the Fund to have exposure to the mortgage-lending and consumer-lending sub sectors. The stocks that caught our attention include AFLAC, American General, Wells Fargo, Fannie Mae, MBNA, Citigroup and State Street Corp. OUTLOOK Shortly after the close of the period, the Fed cut the fed funds rate by one-half a percent. As encouraged as we are by the Fed's recent actions, we are mindful that plenty of volatility may well lie ahead. In our opinion, investors will need quite a bit more convincing before returning to growth stocks. First-quarter earnings reports will be somewhat of a guidepost. The good news is that tech stock prices are now more attractive than they have been in years. While the stock prices of many companies have been taken down by 60% to 70%, many are still growing their earnings by anywhere from 30% to 50%. With that in mind, we are now inclined to selectively increase the Fund's technology exposure and position for what we believe will be an eventual rebound. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (31.30%) 10.87% Average Annual Total Returns(1) (31.30%) 2.41% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return since inception would have been 1.72%. The expense limitation did not impact the one-year performance. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Pfizer 5.3%, the second is General Electric 4.7%, the third Cisco Systems 4.1%, the fourth Oracle Systems 3.6% and the fifth Tyco International 3.6%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Large Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell Top 200 Growth Index -- an unmanaged index which measures the performance of the Russell Top 200 companies with higher price-to-book ratios and higher forecasted growth values. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Large Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Russell Top 200 Growth Index and is equal to $22,269 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Large Cap Growth Fund on August 29, 1996 and is equal to $11,087 as of December 31, 2000. B-7 Inception: March 29, 1986 GROWTH & INCOME FUND INDEPENDENCE INVESTMENT ASSOCIATES, INC. Paul F. McManus PUTNAM INVESTMENTS C. Beth Cotner Effective November 1, the Fund was modified to a multi-managed investment approach The Growth & Income Fund is a multi-manager fund with two sub-advisers each independently managing their own portion of the Fund. The two managers employ a distinct and complementary investment strategy. This unique multi-manager approach seeks to produce more consistent investment returns over market cycles and to reduce the risk of any one manager or strategy being out of favor in certain market environments. IIA selects stocks using a combination of fundamental equity research and quantitative tools and focuses on large cap stocks that are undervalued relative to the stock's history and have improving earnings growth prospects. Putnam selects stocks using a systematic screening approach and fundamental equity research and focuses on large and mid cap stocks with opportunities for above average growth. As of December 31, 2000, IIA managed approximately 77% and Putnam managed approximately 23% of the Fund's assets. For the year, the Fund performed - 13.10% below the benchmark's performance of -9.11%. Independence Investment Associates, Inc. The Fund outperformed the benchmark in the fourth quarter. Stock prices declined in the period as fears over an accelerating economic slowdown were discounted in the market. Increasing numbers of technology companies began to preannounce earnings shortfalls. The Fund was modestly underweight technology stocks, and this benefited portfolio performance, although specific stock selection skill was slightly negative. Health care was over weighted, particularly in large drug companies. Both stock selection and the active overweight benefited performance for the quarter. Holdings in Bristol Meyers, Merck and Pharmacia Upjohn helped the portfolio. Electric utilities were another positive are as investors were becoming even more defensive as the economy was slowing. Perceived as safer technology stocks, information services companies like First Data Corp and EDS did relatively well and helped portfolio performance. With the market being defensive, food and beverage stocks did well. We had an underweight there as valuations did not justify the purchases of some of the stocks. This relative underweight negatively impacted performance in the quarter. In the media area, fears of the slowing economy affected the broadcasters as advertising budgets became suspect. Also, the delay of Time Warner--AOL adversely affected performance of those stocks. Looking forward, we continue to maintain a broad sector neutral strategy while emphasizing individual stock selection. Based upon the relative valuation of stocks we will continue to select the best stocks within industries based upon their valuation and outlook for sustainable earnings growth. Putnam Investments The Fund benefited from overweighting the robust energy, conglomerate, utilities, and financial sectors, along with strong stock selection. In particular, exceptional stock performance by one of our holdings (Tyco) made conglomerates the greatest contributor to performance. The next-largest contribution came from energy, where oil services stocks boosted returns; in financial services, insurance (American International Group) and investment banking/brokerage (Goldman Sachs) aided performance. The single largest detractor from performance came from technology, where the benefit of being underweight in a very weak sector was more than offset by poor stock performance in software (Openwave Systems, Veritas Software), communications equipment (Redback Networks, Juniper Networks), and business applications software (Agile Software, I2 Technologies). Fund performance was also hindered by health care (underweighting pharmaceuticals and weak stock selection in biotechnology); overweighting communications services (the worst- performing sector), along with weak stock performance from that sector in the cellular industry (Sprint PCS, Nextel); underweighting consumer staples (along with not owning non-alcoholic beverage companies and owning weak TV broadcasting companies); and finally, underweighting consumer cyclicals. In the volatile environment of the new year, we anticipate additional earnings disappointments, especially in stocks leveraged to the consumer. We believe that the current environment will continue to place pressure on rapidly expanding, high-quality growth companies. We have concentrated the Fund on companies with a proven record of expanding profits even in unsettled economic times. Higher energy prices should benefit oil and gas producers and energy services companies. Going forward, we will be overweight energy (oil services) and financial services (banking/brokerage services and insurance) stocks while underweighting technology (communications equipment and software) and consumer staples (media and TV broadcasting.) B-8 Inception: March 29, 1986 GROWTH & INCOME FUND INDEPENDENCE INVESTMENT ASSOCIATES, INC. Paul F. McManus PUTNAM INVESTMENTS C. Beth Cotner [GRAPH] Growth & Income S&P 500. Growth & Income S&P 500. Fund Index Fund Index 12/31/90 $10,000 $10,000 01/31/96 $21,300 $22,266 01/31/91 10,449 10,442 02/29/96 21,576 22,479 02/28/91 11,145 11,190 03/31/96 21,852 22,695 03/31/91 11,406 11,456 04/30/96 22,098 23,029 04/30/91 11,401 11,488 05/31/96 22,609 23,623 05/31/91 11,844 11,980 06/30/96 22,733 23,720 06/31/91 11,266 11,432 07/31/96 21,659 22,664 07/31/91 11,655 11,967 08/31/96 22,175 23,145 08/31/91 11,905 12,249 09/30/96 23,205 24,445 09/30/91 11,760 12,048 10/31/96 23,772 25,115 10/31/91 11,933 12,209 11/30/96 25,354 27,021 11/30/91 11,518 11,716 12/31/96 24,918 26,492 12/31/91 12,596 13,055 01/31/97 26,201 28,137 01/31/92 12,375 12,812 02/28/97 26,344 28,365 02/29/92 12,522 12,976 03/31/97 25,318 27,185 03/31/92 12,311 12,722 04/30/97 26,545 28,808 04/30/92 12,702 13,092 05/31/97 27,985 30,577 05/31/92 12,827 13,163 06/30/97 29,088 31,940 06/30/92 12,732 12,972 07/31/97 31,688 34,476 07/31/92 12,734 13,495 08/31/97 30,083 32,559 08/31/92 12,911 13,222 09/30/97 31,832 34,344 09/30/92 13,056 13,374 10/31/97 30,635 33,197 10/31/92 13,033 13,422 11/30/97 31,787 34,734 11/30/92 13,541 13,875 12/31/97 32,341 35,331 12/31/92 13,717 14,056 01/31/98 32,690 35,723 01/31/93 13,858 14,159 02/28/98 35,358 38,299 02/28/93 14,052 14,350 03/31/98 37,336 40,260 03/31/93 14,487 14,659 04/30/98 37,439 40,666 04/30/93 14,101 14,299 05/31/98 37,030 39,967 05/31/93 14,467 14,686 06/30/98 38,602 41,590 06/30/93 14,609 14,734 07/31/98 38,151 41,149 07/31/93 14,530 14,665 08/31/98 32,294 35,199 08/31/93 15,115 15,223 09/30/98 33,951 37,455 09/30/93 15,142 15,111 10/31/98 36,978 40,500 10/31/93 15,400 15,418 11/30/98 39,191 42,954 11/30/93 15,263 15,273 12/31/98 42,123 45,428 12/31/93 15,545 15,460 01/31/99 43,536 47,327 01/31/94 16,007 15,978 02/28/99 42,184 45,855 02/28/94 15,541 15,547 03/31/99 43,433 47,690 03/31/94 14,939 14,871 04/30/99 45,263 49,535 04/30/94 15,199 15,064 05/31/99 43,943 48,366 05/31/94 15,257 15,310 06/30/99 46,973 51,051 06/30/94 14,980 14,931 07/31/99 45,365 49,458 07/31/94 15,385 15,426 08/31/99 44,829 49,210 08/31/94 15,957 16,053 09/30/99 43,592 47,862 09/30/94 15,486 15,667 10/31/99 46,142 50,892 10/31/94 15,733 16,025 11/30/99 46,676 51,925 11/30/94 15,211 15,437 12/31/99 47,579 54,983 12/31/94 15,459 15,663 01/31/00 47,808 52,223 01/31/95 15,777 16,070 02/29/00 48,957 51,236 02/28/95 16,400 16,693 03/31/00 45,974 56,247 03/31/95 16,763 17,187 04/30/00 44,819 54,554 04/30/95 17,252 17,688 05/31/00 49,836 53,436 05/31/95 17,826 18,386 06/30/00 48,617 54,750 06/30/95 18,232 18,818 07/31/00 47,976 53,896 07/31/95 18,814 19,445 08/31/00 48,744 57,243 08/31/95 18,936 19,498 09/30/00 48,151 54,221 09/30/95 19,757 20,314 10/31/00 51,130 53,993 10/31/95 19,628 20,243 11/30/00 48,040 49,738 11/30/95 20,456 21,134 12/31/00 34,913 49,982 12/31/95 20,748 21,525 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments General Electric Co. 3.3% 5.9% Pfizer, Inc. 3.0% 0.9% Cisco Systems, Inc. 2.4% 4.6% Citigroup, Inc. 2.3% 4.1% Merck & Co., Inc. 2.2% 1.6% Microsoft Corp. 2.1% 7.1% Exxon Mobil Corp. 2.1% 1.4% Wal-Mart Stores, Inc. 1.9% 1.5% Intel Corp. N/A 3.1% Tyco International, Ltd. 1.9% 1.5% Average Annual Total Returns* - --------------------------------------------------------------------------- Growth & Income S&P 500 MorningStar Fund Index Peer Group+ -------- ----------- ----------- 1 Year -13.10% -9.11% -7.52% 3 Years 9.57 12.26 11.71 5 Years 15.44 18.35 17.02 10 Years 15.58 16.56 16.58 Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Technology 28.1% Energy 5.6% Health Care 17.9% Consumer Cyclical 4.9% Financial 15.4% Utility 4.5% Capital Equipment 13.6% Consumer Staple 1.7% Retail 5.6% Basic Material 1.6% * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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. . "Standard & Poor's 500" is a trademark of the McGraw-Hill companies, Inc. and has been licensed for use by John Hancock Life Insurance Company. The product is not sponsored, endorsed, fold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the MorningStar variable universe having a Large Blend investment category. B-9 PROPOSAL 3 John Hancock V.A. 500 Index Fund By Roger Hamilton, CFA, Portfolio Manager During 2000, the Standard & Poor's 500 Index posted one of its largest losses in more than a decade, declining 9.10% for the year. But the Index's losses seem worse than they really were. While technology and telecommunications stocks -- two of the most influential groups within the Index -- suffered painful declines during the year, more than 249 out of 444 stocks that were in the Index at the start of 2000 actually posted gains for the year. Among the year's bright spots were groups like drugs, electric utilities, energy, insurance, food and thrifts. Possibly the most notable trend in 2000 was the shift away from high-growth tech and telecommunications companies into more defensive, value-oriented stocks. After bidding up their prices in 1998, 1999 and the first quarter of 2000, investors suddenly and dramatically soured on both tech and telecom as they became increasingly concerned that the business fundamentals of most of these companies didn't justify their sky-high valuations. That's not to say that tech and telecom stocks were the year's only disappointments. Retailers, automotive companies and basic-material producers also posted losses as concerns about a slowing economy weighed heavily on these groups. FUND PERFORMANCE John Hancock V.A. 500 Index Fund had a total return of -9.28% at net asset value. By comparison, the average variable annuity S&P 500 Index objective fund had a total return of -9.32%, according to Lipper, Inc. Historical performance information can be found on page nine. In managing the Fund, our goal is to have our holdings closely track those of the S&P 500 Index, while minimizing the costs associated with buying and selling shares of stocks. Although there are frequent changes in the composition of the Index, we re-balance the Fund's holdings less frequently to minimize transaction costs. When we get additional money into the Fund that cannot immediately be deployed into Index components, we buy S&P 500 Index futures, which allow us to participate in the Index's performance without incurring the higher transaction costs of buying stocks. Incidentally, 2000 was one of those years when there were many changes in the composition of the Index. As a result of a variety of factors, including mergers and acquisitions, financial failures or others, more than 56 new companies were added to the Index during the year. LEADERS AND LAGGARDS Undoubtedly, the biggest story of 2000 was the reversal of fortune of tech and telecommunications stocks. After posting eye-popping gains in 1999 and the first quarter of 2000, the tech stock mania stalled. From Internet-related companies to software makers to hardware manufacturers, investors increasingly sold tech stocks as evidence mounted that the slowing economy was eating away at profits. Losses suffered by Internet access providers Yahoo! and AOL took a big toll on the Index's performance on a capitalization weighted basis, losing more than 85% and 54%, respectively, for the year. Lucent Technologies posted a loss of nearly 81%. Shares of the beleaguered e-tailer Amazon.com slid almost 80% as investors worried that holiday sales would weaken. WorldCom and AT&T both suffered losses in excess of 65% in the wake of falling long-distance prices. Dell Computer and Intel lost 65% and 27%, respectively, due to slower-than-expected demand for personal computers. Microsoft tumbled more than 62% on worries about the antitrust suit against the company, coupled with weaker demand for its software. But outside the tech and telecommunications sectors, nowhere was the S&P 500 Index's health more evident than in the financial and drug sectors. Finance company Washington Mutual and insurance giant American International Group posted gains of 105% and 36% in response to expectations that falling interest rates in 2001 would boost their financial results. Likewise, Fannie Mae got a lift from the prospect of falling rates, and posted a gain of more than 38%. Citigroup, up 22%, was also boosted by the prospect of lower interest rates. Within the drug sector, Pfizer and Merck each rose about 40% on investors' growing desire for defensive stocks and on expectations that the demand for established drugs will remain steady. Higher oil prices lifted energy stocks, particularly Enron, which rose more than 87% during the year. Rounding out the Index's top 10 biggest contributors for 2000 were two consumer products companies nearly left for dead in 1999. Philip Morris surged more than 91% and PepsiCo gained roughly 40%. B-10 OUTLOOK The first half of 2001 could continue to be a difficult period for the stock market. Given the slowing economy, we could see more disappointing earnings results. But after the Fed's surprise move to cut rates just days after the year ended, and with the prospect of more rate cuts in the offing, we are hopeful that it could provide the impetus for better stock-market performance in the second half of the year. No matter what the direction of the market, our goal will be to closely track the performance of the S&P 500 Index, and our performance will be dictated by the Index. The past year has served as a useful reminder that S&P 500 Index funds are susceptible to market downturns, and, as a result, the Fund's share price will rise and fall in response to gains or losses posted by the underlying stocks in the Index. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (9.28%) 103.25% Average Annual Total Returns(1) (9.28%) 17.75% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) and the management fee to 0.l0% of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (9.86%) and 17.20%, respectively. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is General Electric 4.1%, the second is ExxonMobil 2.5%, the third Pfizer 2.4%, the fourth Cisco Systems 2.2% and the fifth Citigroup 2.1%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. 500 Index Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Standard & Poor's 500 Index -- an unmanaged index that includes 500 widely traded common stocks and is often used as a measure of stock market performance. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. 500 Index Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the Standard & Poor's 500 Index and is equal to $22,043 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. 500 Index Fund on August 29, 1996 and is equal to $20,326 as of December 31, 2000. B-11 Inception: May 1, 1996 EQUITY INDEX FUND STATE STREET GLOBAL ADVISORS Management Team The year 2000 provided the first negative return of the S&P 500 since 1990. This is only the second calendar year since 1980 to finish in the red. For the year, the S&P 500 was down 9.09%. Technology stocks grabbed most of the headlines during the year. The Nasdaq Composite Index fell more than 50% from its high on March 10, and finished the year down approximately 40%. The news was not all bad, as Financials, Health Care and Utilities all posted strong returns. In fact, the S&P 500 ex-Technology posted a gain for 2000. The smaller stocks in the Index performed much better than the giants in 2000. The top quartile of names lost about 15% in 2000, while the other 4 quartiles all posted gains ranging from 9.6% to 17.3%*. Value stocks outperformed their growth counterparts by over 28% during the year. The Equity Index Fund return was -9.15% for the year. The Index return was - 9.09% for the year. Fees cost the Fund -0.17% during the year. Removing these from the calculation shows the Fund slightly outperformed its goal for the year. The Equity Index Fund attempts to track the performance of The S&P 500 Index by fully replicating the index. The Fund attempts to match the index holdings and weights for each security in order to provide returns close to the index return. [GRAPH] Equity Index S&P 500. Fund Index 5/1/96 $10,000 $10,000 5/31/96 10,210 10,258 6/28/96 10,231 10,300 7/31/96 9,825 9,842 8/30/96 9,971 10,050 9/30/96 10,509 10,615 10/31/96 10,787 10,906 11/29/96 11,561 11,734 12/31/96 11,423 11,504 1/31/97 12,133 12,218 2/28/97 12,221 12,317 3/31/97 11,736 11,805 4/30/97 12,409 12,510 5/30/97 13,119 13,278 6/30/97 13,727 13,870 7/31/97 14,821 14,971 8/29/97 13,993 14,139 9/30/97 14,756 14,913 10/31/97 14,267 14,415 11/28/97 14,887 15,083 12/31/97 15,169 15,342 1/1/98 15,336 15,513 2/27/98 16,441 16,631 3/31/98 17,280 17,482 4/30/98 17,455 17,659 5/29/98 17,151 17,355 6/30/98 17,850 18,060 7/31/98 17,664 17,868 8/31/98 15,096 15,285 9/30/98 16,067 16,264 10/30/98 17,369 17,587 11/30/98 18,419 18,653 12/31/98 19,484 19,727 1/29/99 20,296 20,551 2/26/99 19,669 19,912 3/31/99 20,464 20,709 4/30/99 21,252 21,510 5/28/99 20,743 21,003 6/30/99 21,904 22,168 7/31/99 21,220 21,477 8/31/99 21,115 21,369 9/30/99 20,541 20,784 10/31/99 21,833 22,099 11/30/99 22,274 22,548 12/31/99 23,592 23,876 1/31/00 22,400 22,677 2/29/00 21,978 22,249 3/31/00 24,120 24,425 4/30/00 23,394 23,690 5/31/00 22,910 23,204 6/30/00 23,475 23,775 7/31/00 23,108 23,404 8/31/00 24,546 24,857 9/30/00 23,245 23,545 10/31/00 23,146 23,446 11/30/00 21,326 21,598 12/31/00 21,433 21,704 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments General Electric Co. 2.5% 3.6% Exxon Mobil Corp. 2.4% 2.0% Pfizer, Inc. 2.2% 0.9% Cisco Systems, Inc. 2.0% 2.5% Citigroup, Inc. 2.0% 1.3% Wal-Mart Stores, Inc. 2.0% 2.2% Microsoft Corp. 1.8% 4.3% American International Group, Inc. 1.7% 1.2% Merck & Co., Inc. N/A 1.1% Intel Corp. 1.4% 2.0% Average Annual Total Returns* - --------------------------------------------------------------------------- Equity Index S&P 500. MorningStar Fund(1) Index Peer Group+ ------------- ----------- ----------- 1 Year -9.15% -9.11% -7.52% 3 Years 12.21 12.26 11.71 Since Inception (5/1/96) 17.74 18.06 N/A Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Technology 23.7% Consumer Staple 6.5% Financial 16.9% Retail 6.3% Health Care 13.5% Utility 6.2% Capital Equipment 10.2% Consumer Cyclical 5.5% Energy 6.8% Basic Material 2.4% (1) Returns reflect waiver of advisory fee, reimbursement of all non-advisory fund expenses, and extra-ordinary capital contributions of $84,000 in 1996 and $250,000 in 1997. * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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 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. . "Standard & Poor's 500" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by John Hancock Life Insurance Company. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all the variable annuity and life sub-accounts within the Morningstar variable universe having a Large Blend investment category. * Source: Prudential Securities. B-12 PROPOSAL 4 John Hancock V.A. International Fund On December 14, 2000, Nicholas-Applegate Capital Management assumed management responsibility for the Fund under a new subadvisory agreement that shareholders will be asked to formally approve in an upcoming proxy solicitation. Founded in 1984, Nicholas-Applegate is a recognized leader in U.S. equity, global and international equity management and currently manages more that $35 billion for institutional and individual investors. The discussion below provides a summary of the Fund's performance for the year, followed by commentary from the new managers on their investment style and strategies going forward. The year 2000 was a difficult one for foreign stock markets as a group, led by a significant downturn in Japan, where economic problems prevailed, its currency fell and its main market index -- the Nikkei -- suffered from a reshuffling that upped the technology weighting. The year began on the same high that closed out 1999, as the "TMT" sectors - -- technology, media and telecommunications -- were soaring. But the tide turned in March, when TMT stocks worldwide began a dramatic plunge as fears grew that many of these stocks were far too expensive in the face of a potential slowdown in the global economy and earnings growth. In a major reversal of fortunes, the more cyclical, attractively valued old-economy stocks began to make a comeback. A number of factors continued to keep overseas markets volatile -- and their results contained -- through the year's end. These included rising oil prices, rising interest rates -- first in the United States and then in Europe and elsewhere -- a slowdown in the U.S. economy later in the year and the growing downturn in the U.S. stock market. What's more, declines in many of emerging Asia's currencies and the continuing drop in the value of the euro hurt U.S.-based investors. Overall, overseas markets, as measured by the Fund's benchmark, the MSCI All Country World Free Ex-U.S. Index, lost ground, returning -16.34% for the year ended December 31, 2000. FUND PERFORMANCE For the year ended December 31, 2000, John Hancock V.A. International Fund posted a total return of -25.17% at net asset value, compared with the -14.72% return of the average variable annuity international fund, according to Lipper, Inc. Historical performance information can be found on page 27. The Fund's relative underperformance came mainly from its timing in the volatile TMT sectors. Although overweight versus the MSCI index, the Fund had a lighter weighting than its peers when the tech group skyrocketed early in the year. After boosting the TMT stake, the Fund was hit by having an overweighted position -- particularly in Japan and Europe -- as the stocks came back down to earth in the tumultuous months of March and April. Some of the Fund's biggest detractors came from the tech and telecom sectors, including Japanese companies Sony, Hikari Tsushin and NTT DoCoMo Communications. The Fund was also hurt by its large stake in European telecom giant Vodafone, which was pounded after its announced plan to acquire Mannesman, although Mannesman's stock rose on the news and was one of the Fund's best performers. Nortel Networks and British Telecom were two telecom companies that plunged following profit warnings. NEW MANAGEMENT: STRATEGIES AND CHANGES By Randall Kahn, CFA, and Loretta Morris, for the Portfolio Management Team On December 14, 2000, Nicholas-Applegate Capital Management assumed management of the Fund. The cornerstone of our investment philosophy rests on identifying investment opportunities that have three core attributes. We look for companies that are poised to benefit from positive change -- such as innovation, new leadership or higher-than-expected earnings; that are in a position to sustain this positive change over time; and that are beginning to be recognized by the market through rising stock prices. When all three criteria are met, we seek to invest in a timely fashion to maximize gains. We are first and foremost bottom-up stock pickers, focusing on selecting individual stocks with superior earnings potential. But we also have a strict process in place to regularly assess political, economic, monetary and technology factors in each country. This active approach to country allocation guides our decisions on whether to overweight or underweight specific countries in the portfolio. B-13 Upon assuming management of the Fund on December 14, 2000, we began to gradually transition the portfolio to be consistent with our investment approach. We moved to pare the number of holdings in order to maintain larger positions in fewer names and to make the Fund less country and sector neutral. We also further reduced the Fund's exposure to the volatile technology sector. Our bottom-up process guided us to begin cutting the Fund's stake in Japan -- particularly in the construction and banking sectors -- as we foresee little growth in that country in the coming months. The shift out of Japan will continue in the new year. In its place, we have identified more attractive opportunities in the United Kingdom and have begun to shift some assets there. Due to year-end liquidity issues, these moves are being made with deliberate slowness. A LOOK AHEAD Many of the uncertainties haunting the world's markets in 2000 may linger in 2001. Technology stocks may remain under pressure in the coming quarters, as valuations for many technology leaders remain high. In addition, although global central banks seem to be done hiking interest rates, the lagged effects of their tightenings will continue to slow world activity well into 2001, according to International Strategy and Investment. Going forward, we are focusing on companies that are posting strong earnings, and we will take a more defensive stance by investing in the food, pharmaceutical, utilities, financials and energy/oil service sectors. International investing involves special risks such as political, economic and currency risks and differences in accounting standards and financial reporting. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (25.17%) 28.90% Average Annual Total Returns(1) (25.17%) 6.02% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (27.26%) and 4.40%, respectively. [Pie chart at bottom left-hand column with heading "Portfolio Diversification." The chart is divided into seven sections (from top to left): Pacific Rim ex-Japan 8%, Short-Term Investments & Other 28%, Latin America 1%, U.K. & Ireland 11%, Continental Europe 26%, Canada 5% and Japan 21%. A note below the chart reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. International Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Morgan Stanley Capital International (MSCI) All Country World Free Ex-U.S. Index, which measures the performance of a broad range of developed and emerging stock markets. The index represents securities that are freely traded on a variety of equity exchanges around the world. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. International Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the MSCI All Country World Free Ex-U.S. Index and is equal to $13,601 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. International Fund on August 29, 1996 and is equal to $12,889 as of December 31, 2000. B-14 Inception: August 31, 1999 INTERNATIONAL EQUITY FUND GOLDMAN SACHS ASSET MANAGEMENT Maeda/Noble/Orchard During the one-year reporting period the International Equity Fund generated a total cumulative return of -14.37% at net asset value versus the -13.96% total cumulative return of the Fund's benchmark, the MSCI EAFE Index. As these returns indicate, it has been an extremely challenging period in the financial markets. During the period we strategically moved to reduce the size of our sector positions (overweight or underweight) in response to high market volatility and intra-market rotation. We have focused instead on our key strength, bottom-up stock selection. Very few equity markets posted positive returns during the year. From a country standpoint the Fund's strongest absolute returns came from Sweden and Switzerland, while our stocks originating from Japan and The Netherlands generated weak performance. On a sector basis, our Consumer Staples and Utilities stocks enhanced returns, while our Telecom Services, Information Technology and Industrial stocks produced poor results. In terms of individual stocks, Epcos (0.0% of the total Fund at 12/31/00), Reuters Group (0.6%) and Unilever (1.6%) were examples of stocks that enhanced performance. Conversely, Advantest (0.2%), Rohm Co. (0.6%), TDK Corp. (0.0%) and United Pan-Europe Communications (0.3%) all produced disappointing results. [GRAPH] International MSCI EAFE Equity Fund Index 8/31/99 $10,000 $10,000 9/30/99 9,936 10,103 10/31/99 10,308 10,484 11/30/99 11,104 10,851 12/31/99 12,149 11,826 1/31/00 11,524 11,077 2/29/00 12,106 11,377 3/31/00 12,440 11,820 4/30/00 11,838 11,201 5/31/00 11,567 10,930 6/30/00 11,852 11,359 7/31/00 11,411 10,886 8/31/00 11,366 10,983 9/30/00 10,814 10,450 10/31/00 10,580 10,205 11/30/00 10,129 9,825 12/31/00 10,403 10,177 Top Ten Holdings (as of December 31, 2000) - -------------------------------------------------------------------------- % of six months ago investments % of investments Vodafone AirTouch plc 2.5% 1.4% GlaxoSmithKline plc 2.1% N/A Nokia Oyj 2.0% 2.5% Nestle SA 1.9% 0.6% Royal Dutch Petroleum Co. 1.7% N/A ING Groep NV 1.7% 0.8% BP Amoco plc 1.6% 1.1% Unilever plc 1.5% 0.4% Telefonaktiebolaget LM Ericsson AB N/A N/A Roche Holding AG 1.4% 0.9% Average Annual Total Returns* - --------------------------------------------------------------------------- International MSCI EAFE MorningStar Equity Fund Index Peer Group+ ------------- ------------ ----------- 1 Year -14.37% -13.95% -15.51% Since inception (8/31/99) 3.01 1.32 N/A Top Ten Countries (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments United Kingdom 20.0% Sweden 4.7% France 10.1% Italy 2.7% Netherlands 7.3% Finland 2.6% Switzerland 6.6% Australia 2.4% Germany 6.0% Spain 2.3% * Total returns are for the period ended December 31, 2000, returns represent past performance, assume reinvestment of all distributions, and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities, including investment in initial public offerings, that may not continue to occur in the future." 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the Morningstar variable universe having a Foreign Stock with Large Cap investment category. B-15 PROPOSAL 5 John Hancock V.A. Mid Cap Growth Fund By Barbara C. Friedman, CFA, Portfolio Management Team Leader Mid-cap growth stocks held up well in the volatile first half of 2000, but eventually faltered amid a sharp slowdown in economic growth. Early in the year, mid-cap stocks, with their strong earnings and more reasonable valuations, remained in favor. In March, however, investors abandoned technology stocks, concerned that they had reached unsustainably high prices in light of rising interest rates and a potential deceleration in the economy. Growth stocks of all sizes suffered, while safer haven sectors like finance, health care, energy and utilities took off. By the fourth quarter, there was evidence of much slower economic growth. Weaker consumer and corporate spending hurt sales in many sectors. Stock prices fell, with the Russell Midcap Growth Index returning -11.75% for 2000. STRATEGY AND PERFORMANCE REVIEW In this difficult environment, John Hancock V.A. Mid Cap Growth Fund maintained its long-term focus on mid-size companies with strong earnings growth prospects and market capitalizations in the range of the Russell Midcap Growth Index. The Fund's above-average stake in both technology and telecommunications stocks, along with weak performance among radio stocks, resulted in a -11.73% return at net asset value for the year ended December 31, 2000. By comparison, the average variable annuity mid-cap fund, which includes funds that invest in both mid-cap growth and value stocks, returned 5.21%, according to Lipper, Inc. Historical performance information appears on page 15. TELECOM AND RADIO DISAPPOINTMENTS The Fund maintained a high stake in competitive local exchange carriers (CLECs) such as Global Crossing, McLeodUSA, XO Communi cations (formerly NEXTLINK) and Allegiance Telecom. Concerns that some CLECs would be unable to obtain funding to build out their systems hurt the entire sector, sending stock prices down 50% or more for the year. We held on to CLECs that were fully funded through 2001 and, in many cases, beyond. In addition, most of our companies ended the year in better shape fundamentally than a year earlier, having added new customers and access lines faster than anticipated. Radio stocks also declined significantly last year, as investors anticipated a huge slowdown in advertising spending in 2001. We sold smaller, specialized names like Radio One last summer. But during the fall, we added shares of leading broadcasters like Clear Channel Com munications and His panic Broadcasting, believing that inves tors had overreacted to what should be a less precipitous drop in ad spending. TECHNOLOGY BRIGHT SPOTS We lightened up on technology over the summer, but kept a market weighting because we expect technology spending to continue to outpace the growth rate of the overall economy. We focused on stocks in the fast-growing areas of data storage and fiber optics. Companies like Brocade Communications Systems, which provides switches for storage systems, benefited as the Internet explosion increased data storage demands. Many top performers for the year were fiber-optics-related businesses, including Corning, a leading fiber supplier, which we sold mid-year; E-Tek Dynamics, an equipment manufacturer, which was bought out; and Applied Micro Circuits, which sells integrated circuits. Comverse Technology also did quite well as demand grew for the profitable, value-added services (like voice mail) that it provides to telephone companies. Unfortunately, we had our share of technology disappointments, including Lexmark International, which makes printers. As PC demand failed to pick up this fall, the stock got hammered, causing us to sell. STRENGTH IN FINANCE AND HEALTH CARE We used the proceeds from our technology sales to add to our finance and health-care investments. Finance stocks climbed largely in anticipation of declining interest rates. Concord EFS, a company that specializes in electronic transaction processing for credit cards, also soared as demand for its services increased. USA Education (formerly Sallie Mae), which makes student loans, benefited from a favorable competitive environment and a recent acquisition. Other strong performers included Ambac Financial Group, a municipal bond insurer that is expanding internationally, and Golden West Financial, a California savings and loan with a sizable mortgage business. In the health-care area, Waters Corp. and Applera Corp.--Applied Biosystems Group posted strong gains as demand increased for the analytical equipment they supply to biotech companies. We added health-care service names like Community Health Systems, a well-managed chain of rural hospitals that took off after going public this summer. Allergan, a drug company that specializes in eye diseases, also boosted performance as investors looked for safer-haven investments. B-16 OUTLOOK FOR 2001 As we start 2001, we believe the environment will be one of uncertainty, continued volatility and more modest gains. We expect more companies to announce earnings disappointments related to the rapid deceleration in economic growth. But economic growth, though low, should remain positive, as business in many sectors remains strong. Inflation should also remain under control. The fact that the Federal Reserve acted quickly after year end to cut interest rates bodes well for the economy - -- and for the market. Going forward, we expect a variety of sectors to participate in any market upturn, although there will also be more distinct winners and losers within each sector. For this reason, we have distributed the Fund's assets across a wider array of sectors with a focus on the strongest mid-cap stocks in each sector -- names that should be among the first to rebound in an economic recovery. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (1/7/98) ---------- ---------- Cumulative Total Returns (11.73%) 52.13% Average Annual Total Returns(1) (11.73%) 15.12% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (11.83%) and 13.55%, respectively. [Table at bottom left hand column entitled "Top Five Stock Holdings." The first listing is Waters Corp. 2.3%, the second is Millennium Pharmaceuticals 1.9%, the third Aeroflex 1.8%, the fourth AFLAC, Inc. 1.8% and the fifth McLeodUSA 1.8%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Mid Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in both the Standard & Poor's 500 Index and the Russell Midcap Growth Index. The Standard & Poor's 500 Index is an unmanaged index that includes 500 widely traded common stocks and is a commonly used measure of stock market performance. The Russell Midcap Growth Index is an unmanaged index that contains those securities from the Russell Midcap Index with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Mid Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell Midcap Growth Index and is equal to $15,737 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Mid Cap Growth Fund on January 7, 1998 and is equal to $15,213 as of December 31, 2000. The third line represents the Standard & Poor's 500 Index and is equal to $14,148 as of December 31, 2000. B-17 Inception: August 31, 1999 FUNDAMENTAL GROWTH FUND (FORMERLY FUNDAMENTAL MID CAP GROWTH FUND) PUTNAM INVESTMENTS Eric M. Wetlaufer Effective August 1, 2000 Putnam Investments assumed management of the Fund. The Fund returned -20.91% for the fourth quarter, outpacing the Russell Mid Cap Growth Index return of -23.25%. Outperformance in this hostile environment for growth investing was largely due to adept stock selection, particularly in the battered technology sector. Selection in health care contributed early in the period but detracted in the fourth quarter largely due to weakness in biotechnology. Energy, utilities, and financial holdings benefited performance throughout the period. Communications services holdings hurt results. The U.S. equity market remains extremely volatile as we begin the new year. We anticipate additional earnings disappointments, especially in stocks leveraged to the consumer. In the light of signs that the economy is slowing significantly, we expect several interest-rate cuts over the first half of 2001. High energy prices will continue to act as a tax on the economy, reducing consumers' disposable income and adding pressure to corporate profit margins. A forecasted colder-than-average winter will exacerbate the effect of higher oil and natural gas prices on local economies and on consumer spending. We expect growing unemployment and business failures--especially in the dot- com universe. As a result, consumer confidence will continue to erode, creating a difficult environment for retailers. We have concentrated the Fund on growth companies with a proven track record of expanding profits even in unsettled economic times. Higher energy prices should benefit oil and gas producers and energy services companies. Within the financial sector we will emphasize the regional banks and credit-cards issuers that should benefit from Fed rate cuts. While underweighting technology as a whole--particularly semiconductors and components--we will overweight software and communications and equipment. Within the underweight sector of consumer staples, we will emphasize broadcasting and restaurants, while underweighting foods. [GRAPH] Fundamental Russell Mid Cap Growth Fund Growth Index 8/31/99 $10,000 $10,000 9/30/99 10,000 9,915 10/31/99 10,836 10,681 11/30/99 12,529 11,788 12/31/99 15,457 13,829 1/31/00 15,972 13,826 2/29/00 22,030 16,732 3/31/00 18,801 16,749 4/30/00 16,532 15,122 5/31/00 14,461 14,020 6/30/00 18,224 15,507 7/31/00 17,402 14,526 8/31/00 18,979 16,716 9/30/00 18,950 15,899 10/31/00 17,465 14,811 11/30/00 13,822 11,593 12/31/00 14,989 12,204 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments Allergan, Inc. 2.6% N/A Brocade Communications Systems, Inc. 2.4% 0.2% Palm, Inc. 2.2% N/A Applera Corporation - 2.2% N/A Applied Biosystems Group Medimmune, Inc. 1.9% 0.4% Rational Software Corp. 1.9% 0.2% PerkinElmer, Inc. 1.8% N/A Immunex Corp. 1.8% N/A Transocean Sedco Forex, Inc. N/A N/A Symbol Technologies, Inc. 1.7% N/A Average Annual Total Returns* - --------------------------------------------------------------------------- Fundamental Russell Mid Cap MorningStar Growth Fund Growth Index Peer Group+ --------------- --------------- ----------- 1 Year -3.03% -11.75 -7.87 Since Inception (8/31/99) 35.44 16.11 N/A Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Technology 37.5% Retail 4.5% Health Care 25.3% Utility 3.3% Energy 9.9% Consumer Cyclical 2.8% Financial 7.5% Consumer Staple 1.9% Capital Equipment 6.0% Transportation 1.4% * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities, including investment in initial public offerings, that may not continue to occur in the future." 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. Small-company investing entails special risks as outlined in the prospectus. 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the MorningStar variable universe having a Mid Cap Growth investment category. B-18 PROPOSAL 6 John Hancock V.A. Small Cap Growth Fund By Bernice S. Behar, CFA, Portfolio Management Team Leader, and Anurag Pandit, CFA, Portfolio Manager After a very strong 1999, small-cap growth stocks sank under the weight of falling technology and telecommunications stocks in 2000. Rising interest rates and growing earnings concerns in the face of a slowing economy caused investors to flee these high-priced sectors that had held their undivided attention until mid March. This reversal sent the tech-heavy NASDAQ Composite Index down 39.29% for the year, as investors became more focused on less expensive and more defensive segments of the market like health care, financial and energy stocks. Value stocks replaced growth stocks as the place to be. The result was a huge gap in performance between two of the major indexes that track small-cap stocks, with the Russell 2000 Value Index gaining 22.83% and the Russell 2000 Growth Index losing 22.43% for the year ended December 31, 2000. FUND PERFORMANCE John Hancock V.A. Small Cap Growth Fund performed in line with its benchmark Russell 2000 Growth Index, posting a total return of -22.33% at net asset value for the year ended December 31, 2000. That compared with the 0.24% return of the average variable annuity small-cap fund, according to Lipper, Inc. Our relative underperformance stems from the fact that this Lipper group includes funds that were able to invest in more value-oriented stocks. Furthermore, while we were underweight in technology versus our benchmark index, we remained overweighted versus the peer group. We also suspect that some of our peers held on to more of the stocks that recently graduated from small-cap to mid-cap status on their strong performance, since mid-cap companies produced some of the best relative earnings growth. In contrast, we typically sell companies once they grow too big for our small-cap focus. INDIVIDUAL TECH STANDOUTS Despite the tech and telecom group's difficult run this year, good individual stock picking provided us with some standouts, including Internet software company Interwoven and telecommunications equipment companies Virata and Powerwave. While these helped us to outperform the index in the technology category, the group's results were still negative and held us back, especially in the Internet area. Some big detractors were Mediaplex and Broadbase Software, both of which help companies develop their Web sites and target their advertising; they were hurt as the Internet advertising model started to come into question. At appropriate times we sold some of these stocks. GOING DEFENSIVE: HEALTH CARE, FINANCIALS, ENERGY As questions arose over the year about the strength of user demand across all technology and telecom subsectors, we pared our stakes and put the proceeds into more defensive areas where we felt the relative earnings growth potential appeared more certain for the foreseeable future. These included health care, financials and energy. A large piece of our health-care stake was in biotechnology companies, where a string of good news -- from the completion of the Human Genome Project, to a flood of new products, increased spending and a favorable capital markets environment -- bodes well for the group. Although biotech stocks have a tendency to be volatile, many of our biotech companies served us well on balance for the year, including CV Therapeutics, COR Therapeutics, NPS Pharmaceuticals and Alkermes. In fact, by the end of the year, we took some profits in our biotech stake not only to lock in gains, but also to position the Fund more defensively and reduce our risk level. In addition to biotech, we built our weighting across a number of health-care industries, including medical device companies such as Wilson Greatbatch Technologies and distributors such as AmeriSource Health and Bindley Western Industries, which received a takeover proposal from one of the largest health-care distributors. We also upped our stake in rural hospital companies LifePoint Hospitals and Province Healthcare. Their results have improved, and their stock prices too, through a combination of aggressive management of the hospitals they run and positive pricing trends. We brought our weighting in financial stocks up to our benchmark's level by buying several regional banks with strong growth rates, such as Texas banks Southwest Bancorp and Sterling Bancshares. We also added several specialty property and casualty companies like HCC Insurance and title insurance company Fidelity National, all of which we believe will benefit from a lower interest-rate environment. B-19 With rising oil prices and a pickup in exploration, we added to energy companies like Lone Star Technologies, Pride International and Newfield Exploration. Companies serving the natural gas industry, like Universal Compression, did especially well. A LOOK AHEAD In the short term, we expect small-cap stocks to remain volatile while the economy continues to slow and companies adjust their earnings downward. We're more optimistic about later in the year, however, as small-cap growth stock valuation levels are more attractive now and companies will have a better chance of beating lowered expectations. This is especially true in the wake of the Fed's surprise cut in short-term interest rates just days after the year ended to prevent the economy from stalling. Even with a slowing economy, we remain confident in our ability to find good small companies with accelerating and sustainable earnings growth, dominant positions and strong management. We believe we will be rewarded for holding such companies over the long term. See the prospectus for a discussion of the risks of investing in small-cap stocks. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns (22.33%) 57.38% Average Annual Total Returns(1) (22.33%) 11.02% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been (22.43)% and 10.03%, respectively. [Table at bottom left-hand column entitled "Top Five Stock Holdings." The first listing is Newfield Exploration 1.5%, the second is Corporate Executive Board 1.5%, the third Bindley Western Industries 1.4%, the fourth AmeriSource Health Corp. 1.4% and the fifth LifePoint Hospitals 1.3%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Small Cap Growth Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Russell 2000 Index and the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged small-cap index that is comprised of 2,000 U.S. stocks. The Russell 2000 Growth Index is an unmanaged index that contains Russell 2000 Index stocks with a greater-than-average growth orientation. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Small Cap Growth Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are three lines. The first line represents the Russell 2000 Index and is equal to $16,219 as of December 31, 2000. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Small Cap Growth Fund on August 29, 1996 and is equal to $15,738 as of December 31, 2000. The third line represents the Russell 2000 Growth Index and is equal to $14,370 as of December 31, 2000. B-20 Inception: May 1, 1996 SMALL CAP GROWTH FUND JOHN HANCOCK ADVISERS, INC. Bernice Behar The fourth quarter brought yet another challenging environment for equity investors. A steady stream of pessimistic news fueled the volatility. Many companies, across a broad spectrum of industries, reported lower than expected earnings or reduced future growth rates. This led investors to more value- oriented sectors such as utilities, energy, financial services and certain health care groups. The trend caused a wide divergence between growth and value--a trend most pronounced in the small caps. The Fund was hurt by this market environment and underperformed the benchmark declining (21.43)% versus (20.2%) for the Russell 2000 Growth Index. Our healthcare holdings produced mixed results. After many months of impressive performance, biotechnology stocks stalled in October. Our sizeable allocation hurt performance as they underperformed through quarter end. Fortunately, we purchased many biotechnology names in early 2000 at prices well below current levels. Recently, their Fundamental outlook has weakened. As a result, we expect to lock-in current profits. We also owned several strong performing health care services companies. These stocks benefited from increased government reimbursement due to the Balanced Budget Refinement Act. The more reasonable reimbursement levels improved profit margins and revenue growth. In addition, patient volumes have increased as HMOs eased restrictions on admissions. We remain positive on the longer-term position for these stocks and expect maintain a focus to this group. Technology stocks were among the weakest performers in the benchmark declining over 36%. Lofty valuations coupled with a barrage of bad news caused the dramatic sell-off. We were underweight which helped relative performance versus our benchmark. Despite our reduced exposure, the sector's dismal results adversely impacted absolute performance. We expect negative news to continue through early 2001 extending the period of volatility. Accordingly, we will continue to underweight this sector. [GRAPH] Russell 2000 Small Cap Growth Index Growth Fund 5/1/96 $10,000 $10,000 5/31/96 10,513 10,599 6/28/96 9,830 10,294 7/31/96 8,629 9,480 8/30/96 9,268 10,298 9/30/96 9,745 11,151 10/31/96 9,325 10,170 11/29/96 9,585 9,976 12/31/96 9,771 9,950 1/31/97 10,016 10,302 2/28/97 9,411 9,638 3/31/97 8,746 8,962 4/30/97 8,645 8,763 5/30/97 9,944 9,781 6/30/97 10,281 10,514 7/31/97 10,808 11,205 8/29/97 11,132 11,571 9/30/97 12,020 12,817 10/31/97 11,298 11,834 11/28/97 11,029 11,387 12/31/97 11,036 11,370 1/1/98 10,889 11,170 2/27/98 11,850 12,062 3/31/98 12,348 12,788 4/30/98 12,423 12,730 5/29/98 11,521 11,856 6/30/98 11,639 12,366 7/31/98 10,667 11,537 8/31/98 8,205 8,966 9/30/98 9,037 9,701 10/30/98 9,509 10,230 11/30/98 10,247 11,424 12/31/98 11,174 13,017 1/29/99 11,677 13,456 2/26/99 10,609 12,384 3/31/99 10,986 13,341 4/30/99 11,956 13,873 5/28/99 11,975 13,626 6/30/99 12,606 14,903 7/31/99 12,217 15,022 8/31/99 11,760 14,920 9/30/99 11,987 15,236 10/31/99 12,294 16,337 11/30/99 13,593 18,479 12/31/99 15,988 22,179 1/31/00 15,840 21,633 2/29/00 19,526 27,928 3/31/00 17,474 25,551 4/30/00 15,709 21,939 5/31/00 14,333 19,338 6/30/00 16,184 23,398 7/31/00 14,797 21,153 8/31/00 16,354 23,673 9/30/00 15,541 22,478 10/31/00 14,279 20,010 11/30/00 11,686 16,004 12/31/00 12,401 17,425 Top Ten Holdings (as of December 31, 2000) - ----------------------------------------------------------------------------- % of six months ago investments % of investments Bindley Western Industries, Inc. 1.4% N/A Corporate Executive Board Co. 1.3% 0.6% LifePoint Hospitals, Inc. 1.3% N/A Province Healthcare Co. 1.3% N/A AmeriSource Health Corp. 1.3% N/A NewField Exploration Co. 1.2% 0.5% Fidelity National Financial, Inc. 1.2% N/A Universal Compression Holdings 1.2% N/A Affiliated Managers Group, Inc. N/A 0.4% NPS Pharmaceuticals, Inc. 1.2% N/A Average Annual Total Returns* - ----------------------------------------------------------------------------- Small Cap Russell 2000 MorningStar Growth Fund Growth Index Peer Group+ ----------- ------------ ----------- 1 Year -21.43% -22.43% -9.18% 3 Years 15.30 3.96 15.10 Since Inception (5/1/96) 12.63 4.72 N/A Top Ten Sectors (as of December 31, 2000) - ----------------------------------------------------------------------------- % of % of investments investments Technology 26.5% Energy 7.3% Health Care 23.0% Capital Equipment 5.2% Financial 11.7% Transportation 1.8% Retail 7.7% Utility 0.9% Consumer Cyclical 7.6% Basic Material 0.8% * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities, including investment in initial public offerings, that may not continue to occur in the future." 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. Small company investing entails special risks as outlined in the prospectus. 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for the sub-accounts of all variable annuity and life products within the Morningstar variable universe having a Small Growth investment category. B-21 PROPOSAL 7 John Hancock V.A. Bond Fund By James K. Ho, CFA, Portfolio Management Team Leader, and Benjamin A. Matthews, Portfolio Manager The broad fixed-income market had a better time of it this year than last, although corporate bonds experienced a fair amount of volatility and uncertainty. John Hancock V.A. Bond Fund's heavy weighting in U.S. government and agency issues was the primary driver of Fund performance, as this fixed-income segment produced the best results. Selectivity and in-depth research proved essential in the corporate area as well, particularly given the turbulence caused by the slowing economy. Overall, it was flexibility in asset allocation that enabled the Fund to post solid gains. FUND PERFORMANCE For the year ended December 31, 2000, John Hancock V.A. Bond Fund produced a total return of 11.89% at net asset value. This compares favorably with the 9.79% return of the average variable annuity corporate debt A-rated fund, according to Lipper, Inc. For historical performance information, please turn to page 39. DEFENSIVE APPROACH DEFINES PORTFOLIO COMPOSITION Early in the year, we began to build in some more defensive characteristics into the Fund's portfolio and further enhanced that approach as the period progressed. Calendar 2000 was the year in which the Treasury market was king. The run on Treasury securities, particularly longer-term issues, began in February and continued unabated through period's end. The U.S. government's budget surplus prompted the Treasury to propose a buyback of millions of dollars worth of bonds in coming years, jumpstarting a dramatic rally in its long-term bonds. The Federal Reserve Board continued to raise interest rates through mid-May, further strengthening the rally as investors looked past the rate hikes to their intended effect -- a slowdown in the economy. Stock market volatility simply stoked the fire as investors rushed to the relatively safe haven of U.S. government securities. Our strategy in the Treasury arena was at first to cluster assets at both the long-end and short-end of the Treasury yield curve, reflecting our belief that the yield curve would flatten. (The yield curve is a plotting of yields across the maturity spectrum.) By early summer, with the curve having flattened, we not only increased the Fund's exposure to Treasury securities but moved some assets into intermediate-term issues so that by period's end we had a laddered approach in place. We also bolstered the Fund's weighting in mortgage-backed and agency securities. All performed extremely well. UPGRADED CREDIT QUALITY Credit quality concerns played a big role in investor sentiment this past year. As the economy showed concrete signs of not only slowing, but perhaps slowing too much, investors became increasingly skittish about the creditworthiness of corporate issuers. This fear, combined with the strength of the Treasury market, caused credit yield spreads to widen dramatically. As you may know, credit spreads represent the difference in yield between bonds of different credit quality. The more credit sensitive an issue was, the greater the downward pressure. Over the period, we focused our attention on higher-quality issues within both the investment-grade and high-yield arenas. One such holding is General Electric Capital Corp. For the most part, we held smaller positions in the longer-maturity securities represented in the Fund, though at times we swapped into the shorter-term debt of corporate issuers that we already owned. DECREASED HIGH-YIELD EXPOSURE The high-yield sector suffered the most. Any corporate issuer that had even a hint of difficulty in meeting earnings projections witnessed the floor dropping out from under its bond prices. Defaults increased substantially. We trimmed the portfolio's exposure to high-yield debt by selling among other bonds those issued by telecommunication companies. These included Global Crossing, NEXTLINK Communications and Focal Communications. TROUBLED NAMES SOLD EARLY Thorough research and daily monitoring of securities proved vital to performance as the economy weakened. We were able to move out of several troubled names before the brunt of negative sentiment and price declines were realized. Holdings we sold included Dillard's Inc., Conseco, FINOVA Capital Group and two beaten down California utility companies -- Pacific Gas & Electric and Southern California Edison. B-22 UTILITIES, DEFENSE, HEALTHCARE, ENERGY EMPHASIZED We focused more on industries that tend to be relatively stable and insulated from an economic slowdown. These include utility, defense, healthcare, and energy-related issues, such as Verizon, Keyspan, CalEnergy, NRG, Lockheed Martin, Raytheon, Tenet Healthcare, Hospital Corporation of America, Amerada Hess and Apache. We also maintained sizable positions in high-demand media names such as Continental Cablevision. OUTLOOK Shortly after the close of 2000, the Fed cut short-term interest rates by one-half a percentage point. Bond prices rose and corporate spreads narrowed. While nothing is guaranteed, the outlook for corporate bonds appears much improved. Investors seem to be now anticipating the possibility of economic strengthening and greater corporate profitability down the road. Though we are encouraged, we will watch the economy closely to determine whether or not too much weakness has already set in. We shall move ahead with cautious optimism and consider opportunities to add selectively to high-yield and cyclical issues. Our duration, or interest rate sensitivity, remains relatively neutral, though we have begun to shorten it slightly, believing that yields in the government sector don't have much room to fall further. A LOOK AT PERFORMANCE For the period ended December 31, 2000 SINCE ONE INCEPTION YEAR (8/29/96) ---------- ---------- Cumulative Total Returns 11.89% 38.98% Average Annual Total Returns(1) 11.89% 7.88% YIELD For the period ended December 31, 2000 SEC 30-DAY YIELD ---------- John Hancock V.A. Bond Fund(1) 5.84% Total return measures the change in value of an investment from the beginning to the end of a period, assuming all distributions were reinvested. Performance figures reflect the effect of investment-related charges on the underlying funds, but do not include insurance and other charges levied at the separate account level. All figures represent past performance and are no guarantee of future results. Keep in mind that the total return and share price of the Fund's investments will fluctuate. As a result, your Fund's shares may be worth more or less than their original cost, depending on when you sell them. (1) The Adviser has agreed to limit the Fund's expenses to 0.25% (excluding management fee) of the Fund's daily average net assets. Without the limitation of expenses, the average annual total return for the one-year period and since inception would have been 11.72% and 6.95%, respectively, and the yield would have been 5.63%. [Table at bottom left-hand column entitled "Top Five Sectors." The first listing is U.S. Government 37%, the second is U.S. Agencies 24%, the third Mortgage Banking 6%, the fourth Utilities 6% and the fifth Finance 4%. A note below the table reads "As a percentage of net assets on December 31, 2000."] WHAT HAPPENED TO A $10,000 INVESTMENT . . . The chart below shows how much a $10,000 investment in the John Hancock V.A. Bond Fund would be worth, assuming all distributions were reinvested for the period indicated. For comparison, we've shown the same $10,000 investment in the Lehman Brothers Corporate Bond Index -- an unmanaged index that mirrors the investment objectives and characteristics of the Fund. It is not possible to invest in an index. Line chart with the heading John Hancock V.A. Bond Fund, representing the growth of a hypothetical $10,000 investment over the life of the fund. Within the chart are two lines. The first line represents the value of the hypothetical $10,000 investment made in the John Hancock V.A. Bond Fund on August 29, 1996 and is equal to $13,897 as of December 31, 2000. The second line represents the Lehman Brothers Corporate Bond Index and is equal to $13,466 as of December 31, 2000. B-23 Inception: March 29, 1986 ACTIVE BOND FUND (FORMERLY SOVEREIGN BOND FUND) JOHN HANCOCK ADVISERS, INC. James Ho During the quarter the Fund gained 3.84%, underperforming the Lehman Aggregate Index at 4.21%. YTD the Fund performed well on an absolute basis, returning 10.45%, though underperforming the index return of 11.63%. Underperformance can be attributed to the Fund's bias towards spread product, as most spread sectors underperformed Treasuries for both periods. Treasuries had their best year of performance since 1995. Our underweight position in this sector relative to the benchmark, for both the quarter and year, detracted from performance results. The Fund's overweight position in corporate bonds relative to the index detracted from performance results for both the quarter and 2000. With the unexpected and aggressive rate cut on January 3rd, the Fed effectively put a floor under the economy and the risk of recession is greatly reduced. Given an expected upturn in the economy later in 2001 in response to this stimulus action, we think interest rates may be close to bottom. We plan to use periods of market strength to reduce interest rate sensitivity by shortening duration. With a backdrop of a stronger economy expected, we plan to reduce our defensive stance. We'll likely reduce our Treasury holdings and asset backed securities and increase investments in the high-yield sector, which currently offers very attractive values and yields. We'll also look for attractive values among lower-rated investment grade issues. Additionally, we're likely to move away from defensive industry sectors-- such as energy, health care and utilities-in favor of more economically sensitive sectors such as autos, home building and financials. Our neutral weighting in mortgage securities is likely to remain constant, and we will emphasize prepayment- resistant securities with coupons of between 6% and 7%. Emerging markets may present opportunities, especially if the U.S. economy rebounds. [GRAPH] Active Bond Active Bond Active Bond Active Bond Fund Benchmark Fund Benchmark 12/31/90 $10,000 $10,000 01/31/96 $16,299 $16,061 01/31/91 10,081 10,112 02/29/96 15,986 15,721 02/28/91 10,204 10,199 03/31/96 15,888 15,589 03/31/91 10,298 10,269 04/30/96 15,808 15,481 04/30/91 10,448 10,387 05/31/96 15,804 15,455 05/31/91 10,526 10,436 06/30/96 15,964 15,662 06/30/91 10,534 10,425 07/31/96 16,015 15,698 07/31/91 10,648 10,556 08/31/96 16,027 15,660 08/31/91 10,889 10,799 09/30/96 16,317 15,939 09/30/91 11,110 11,025 10/31/96 16,664 16,311 10/31/91 11,219 11,123 11/30/96 16,925 16,611 11/30/91 11,313 11,234 12/31/96 16,868 16,426 12/31/91 11,666 11,613 01/31/97 16,931 16,446 01/31/92 11,553 11,441 02/28/97 17,011 16,481 02/29/92 11,583 11,501 03/31/97 16,831 16,284 03/31/92 11,554 11,438 04/30/97 17,061 16,522 04/30/92 11,628 11,507 05/31/97 17,253 16,676 05/31/92 11,822 11,730 06/30/97 17,479 16,876 06/30/92 11,976 11,902 07/31/97 18,003 17,392 07/31/92 12,265 12,207 08/31/97 17,826 17,198 08/31/92 12,398 12,316 09/30/97 18,115 17,468 09/30/92 12,565 12,483 10/31/97 18,271 17,747 10/31/92 12,412 12,292 11/30/97 18,372 17,841 11/30/92 12,374 12,281 12/31/97 18,573 18,028 12/31/92 12,559 12,492 01/31/98 18,828 18,283 01/31/93 12,783 12,765 02/28/98 18,812 18,246 02/28/93 13,049 13,030 03/31/98 18,919 18,303 03/31/93 13,121 13,075 04/30/98 19,011 18,394 04/30/93 13,203 13,175 05/31/98 19,180 18,591 05/31/93 13,196 13,169 06/30/98 19,364 18,781 06/30/93 13,467 13,468 07/31/98 19,400 18,796 07/31/93 13,581 13,554 08/31/98 19,591 19,162 08/31/93 13,868 13,865 09/30/98 20,040 19,710 09/30/93 13,936 13,914 10/31/98 19,852 19,570 10/31/93 13,951 13,971 11/30/98 20,043 19,688 11/30/93 13,846 13,813 12/31/98 20,102 19,735 12/31/93 13,911 13,874 01/31/99 20,287 19,875 01/31/94 14,114 14,082 02/28/99 19,871 19,402 02/28/94 13,855 13,775 03/31/99 20,013 19,499 03/31/94 13,561 13,438 04/30/99 20,076 19,548 04/30/94 13,440 13,326 05/31/99 19,859 19,346 05/31/94 13,417 13,302 06/30/99 19,809 19,286 06/30/94 13,404 13,271 07/31/99 19,769 19,232 07/31/94 13,621 13,537 08/31/99 19,730 19,217 08/31/94 13,654 13,542 09/30/99 19,906 19,390 09/30/94 13,495 13,338 10/31/99 19,946 19,462 10/31/94 13,473 13,323 11/30/99 20,016 19,460 11/30/94 13,448 13,299 12/31/99 19,913 19,366 12/31/94 13,554 13,387 01/31/00 19,830 19,302 01/31/95 13,812 13,644 02/29/00 20,053 19,536 02/28/95 14,143 13,960 03/31/00 20,256 19,794 03/31/95 14,253 14,054 04/30/00 20,178 19,736 04/30/95 14,459 14,249 05/31/00 20,160 19,727 05/31/95 15,081 14,846 06/30/00 20,583 20,137 06/30/95 15,211 14,965 07/31/00 20,748 20,320 07/31/95 15,145 14,907 08/31/00 21,062 20,615 08/31/95 15,320 15,098 09/30/00 21,181 20,745 09/30/95 15,474 15,252 10/31/00 21,293 20,882 10/31/95 15,726 15,476 11/30/00 21,576 21,224 11/30/95 15,960 15,731 12/31/00 21,994 21,619 12/31/95 16,203 15,962 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments Government National Mortgage Assoc. 25.9% 22.1% U.S. Treasury 11.4% 18.4% Federal National Mortgage Assoc. 8.8% 10.4% GMAC Commercial Mortgage Securities, Inc. 1.4% 1.4% Peco Energy Transition Trust 1.3% 0.3% Hydro-Quebec 1.1% 1.1% Amresco Residential Securities 1.0% 1.0% Morgan Stanley Capital 1.0% N/A UCFC Home Equity Loan 1.0% 1.5% Cleveland Electric Illuminating Co. 0.8% 0.8% Average Annual Total Returns* - --------------------------------------------------------------------------- Active Bond Active Bond MorningStar Fund Benchmark(1) Peer Group+ -------- --------------- ----------- 1 Year 10.45% 11.63% 8.21% 3 Years 5.80 6.24 4.86 5 Years 6.30 6.25 5.69 10 Years 8.20 7.62 7.80 Fund Composition (as of December 31, 2000) - --------------------------------------------------------------------------- Credit Quality Duration - -------------- -------- Short Term 5.30% less than 1 Year 5.30% AAA 44.80% 1-3 Years 0.30% AA 8.0% 3-5 Years 0.00% A 13.80% 5-10 Years 86.60% BBB 15.40% greater than 10 Years 7.80% BB 8.80% B 3.50% Below B 0.00% NR/NA 0.40% (1) The Active Bond Benchmark represents the Lehman Brothers Government/ Corporate Bond Index from April 1986 to September 1999 and Lehman Brothers Aggregate Bond Index from October 1999 to present. * Total returns are for the period ended December 31, 2000, returns represent past performance, assume reinvestment of all distributions, and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the MorningStar variable universe having an Intermediate Term Bond investment category. B-24 PROPOSAL 8 John Hancock V.A. Money Market Fund By Dawn Baillie for the Portfolio Management Team It was a good year for money-market fund investors, who saw their yields rise and their returns beat those of most stock-fund investors. In the first half of the year, money-market yields rose along with interest rates. This occurred after all signs pointed to a very robust U.S. economy in January, with soaring consumer confidence and a booming stock market sparking concerns of an uptick in inflation. As a result, the Federal Reserve switched to its inflation-fighting mode again, raising the federal funds rate that banks charge each other for overnight loans by one-quarter percentage point in February and again in March in an effort to cool the economy and block inflation. When that didn't deter the economy, or the stock market, the Fed took the unusual step of raising rates by one-half a percentage point in May. Shortly after, the economy began to show signs of slowing, while inflation remained relatively benign. This trend continued through the year's end, so the Fed stayed on the sidelines and the federal funds rate ended the year at 6.50%, up from 5.50% a year earlier. After rising in the first half of the year, money-market yields remained fairly level, since the federal funds rate is a key pricing benchmark for money-market securities. In the second half of the year, the effects of the slowing economy began to show up in earnest in the form of earnings disappointments -- which sent the stock market reeling -- and slowdowns in manufacturing, housing and consumer spending. So by the end of the year, the Fed actually returned to its neutral stance and investors even began to anticipate rate cuts in 2001. 7-day effective yield On December 31, 2000, John Hancock V.A. Money Market Fund had a 7-day effective yield of 6.17%. By comparison, the average taxable money-market fund had a 7-day effective yield of 5.91%, according to Lipper, Inc. STAYING SHORT For the first nine months of 2000, we kept the Fund's maturity slightly shorter than average, believing that rates were on the rise, as the Fed remained intent on slowing the economy and preventing inflation through a series of rate hikes. This conservative stance meant that our money was not tied up for as long, so we were able to move more quickly into higher-yielding securities as rates rose. Our thinking changed by the end of September, as we began to see a marked and consistent slowdown in housing, manufacturing and the consumer and producer price indexes. Believing that a slowing economy would keep the Fed on hold, or even cause it to reverse course and lower rates, we extended our maturity in October to be on the average. We stayed that way through year end, mostly to take advantage of the year-end bargains and higher yields that we can generally find as traders clear out their inventory of money-market securities. A LOOK AHEAD With the economy slowing down so rapidly, we had anticipated that the Fed would begin lowering rates at its next meeting in late January. In fact, just three days after the Fund's year ended, the Fed took the surprise step of lowering rates by one-half a percentage point in an aggressive effort to avoid a serious economic downturn. In doing so, the Fed cited weaker sales, production, consumer confidence and financial markets, while core inflation remained tame. Even before this move, we had confidence that the Fed would continue to nimbly manage the economy's growth and prevent a recession, and this recent action further bolsters that view. With the prospects for additional rate cuts real, we plan to extend our maturity to slightly longer than average in an effort to lock in higher rates. As always, we will continue to focus not only on providing the Fund with a competitive yield, but also on preserving stability of principal. The Fund is neither insured nor guaranteed by the U.S. government. Although the Fund seeks to maintain a net asset value of $1.00 per share, it is possible to lose money by investing in the Fund. B-25 Inception: March 29, 1986 MONEY MARKET FUND JOHN HANCOCK LIFE INSURANCE CO. Peter Mitsopoulos The Federal Reserve's monetary tightening actions starting in 1999 continued as we entered 2000, but by mid-year the Fed abandoned further rate increases as the economy showed signs of weakness. The Fed Funds target rate stood at 6.50% and the Fed remained on hold through December 31. Just a few days after the New Year, however, the Fed enacted a 50 basis point reduction in the rate to 6.0%. During the first half of the year we shortened the fund's weighted average maturity (WAM) in order to capture higher yields under the tightening policy. The WAM of the Fund was approximately 45 days at year-end 1999 and had reached a low of 21 days in late April. We made efforts to push the level into the 30 day to 40 day range for the later part of the year given growing expectations for an end to fed tightening and ended the year with a WAM of 31 days. The Fund performed generally in-line with expectations during the year. We had become more cautious in our acquisition of adjustable rate securities because of two factors: They were becoming more expensive and some of the more active issuers were developing credit concerns. The Fund ended with only a 16% position versus 22% at year-end 1999. The market continues to make it difficult to pick up any appreciable yield differential by going out beyond one or two months. However, when we see value out on the curve, we will acquire securities in an effort to lock in yield and increase the Fund's weighted average maturity. The Fund is invested primarily in commercial paper (78%), adjustable rate notes (16%) with other money market securities making up the balance. [GRAPH] Money Market Fund 12/31/90 $10,000 1/31/91 10,063 2/28/91 10,115 3/31/91 10,165 4/30/91 10,222 5/31/91 10,271 6/30/91 10,315 7/31/91 10,369 8/31/91 10,417 9/30/91 10,465 10/31/91 10,511 11/30/91 10,549 12/31/91 10,596 1/31/92 10,633 2/29/92 10,664 3/31/92 10,700 4/30/92 10,735 5/31/92 10,767 6/30/92 10,804 7/31/92 10,838 8/31/92 10,870 9/30/92 10,901 10/31/92 10,920 11/30/92 10,950 12/31/92 10,981 1/31/93 11,009 2/28/93 11,035 3/31/93 11,065 4/30/93 11,093 5/31/93 11,118 6/30/93 11,147 7/31/93 11,175 8/31/93 11,204 9/30/93 11,232 10/31/93 11,258 11/30/93 11,287 12/31/93 11,316 1/31/94 11,346 2/28/94 11,372 3/31/94 11,403 4/30/94 11,432 5/31/94 11,467 6/30/94 11,505 7/31/94 11,542 8/31/94 11,588 9/30/94 11,632 10/31/94 11,673 11/30/94 11,719 12/31/94 11,773 1/31/95 11,829 2/28/95 11,880 3/31/95 11,939 4/30/95 11,992 5/31/95 12,054 6/30/95 12,110 7/31/95 12,168 8/31/95 12,225 9/30/95 12,279 10/31/95 12,338 11/30/95 12,394 12/31/95 12,453 1/31/96 12,511 2/29/96 12,562 3/31/96 12,613 4/30/96 12,668 5/31/96 12,723 6/30/96 12,773 7/31/96 12,833 8/31/96 12,888 9/30/96 12,945 10/31/96 13,002 11/30/96 13,051 12/31/96 13,116 1/31/97 13,174 2/28/97 13,226 3/31/97 13,284 4/30/97 13,341 5/31/97 13,400 6/30/97 13,461 7/31/97 13,522 8/31/97 13,579 9/30/97 13,643 10/31/97 13,706 11/30/97 13,762 12/31/97 13,830 1/31/98 13,894 2/28/98 13,949 3/31/98 14,012 4/30/98 14,074 5/31/98 14,138 6/30/98 14,200 7/31/98 14,264 8/31/98 14,329 9/30/98 14,392 10/31/98 14,456 11/30/98 14,517 12/31/98 14,579 1/31/99 14,640 2/28/99 14,693 3/31/99 14,752 4/30/99 14,807 5/31/99 14,866 6/30/99 14,923 7/31/99 14,984 8/31/99 15,047 9/30/99 15,109 10/31/99 15,176 11/30/99 15,242 12/31/99 15,315 1/31/00 15,388 2/29/00 15,457 3/31/00 15,531 4/30/00 15,604 5/31/00 15,684 6/30/00 15,766 7/31/00 15,851 8/31/00 15,937 9/30/00 16,020 10/31/00 16,105 11/30/00 16,190 12/31/00 16,278 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments Monte Rosa Capital Corp. 4.2% 1.0% Falcon Asset Securitization Corp. 3.7% 2.1% Sigma Finance, Inc. 3.6% 4.2% Centric Capital Corp. 3.6% 3.2% Sheffield Receivables Corp. 3.3% 4.1% Merrill Lynch & Co., Inc. 3.3% 0.5% DOVER Corp. YRS 3+4 3.2% N/A Lehman Brothers Holdings 2.9% N/A Enterprise Funding Corp. 2.7% N/A K2 USA LLC 2.6% 2.9% Average Annual Total Returns* - --------------------------------------------------------------------------- Money Market Fund/1/ ------------ 1 Year 6.29% 3 Years 5.58% 5 Years 5.50% 10 Years 4.99% - --------------------------------------------------------------------------- Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Financial 83.9% Consumer Staple 2.3% Capital Equipment 5.7% Technologyyclical 1.3% Consumer Cyclical 3.5% Basic Material 0.4% Utility 2.9% - --------------------------------------------------------------------------- The Money Market Fund is neither insured nor guaranteed by the U.S. Government and there is no guarantee the fund will be able to maintain a stable net asset value of $10.00/share. * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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. /1/ Returns reflect extra-ordinary capital contribution of $284,471 in October 2000 B-26 SUPPLEMENT DATED MAY 7, 2001 TO PROSPECTUSES DATED MAY 1, 2001 This Supplement is intended to be distributed with prospectuses dated May 1, 2001 for certain variable life insurance policies issued by John Hancock Life Insurance Company or John Hancock Variable Life Insurance Company ("Product Prospectuses") and with the prospectus dated May 1, 2001 for the John Hancock Variable Series Trust I ("John Hancock Variable Series Trust Prospectus") that accompanies the Product Prospectuses. The variable life insurance policies involved bear the title "MAJESTIC VARIABLE ESTATE PROTECTION," "MAJESTIC VARIABLE ESTATE PROTECTION 98," "MAJESTIC VARIABLE UNIVERSAL LIFE," "MAJESTIC VARIABLE UNIVERSAL LIFE 98," "MEDALLION EXECUTIVE VARIABLE LIFE," "MEDALLION EXECUTIVE VARIABLE LIFE II," "MEDALLION EXECUTIVE VARIABLE LIFE III," "MEDALLION VARIABLE UNIVERSAL LIFE PLUS," "MEDALLION VARIABLE UNIVERSAL LIFE EDGE," "VARIABLE ESTATE PROTECTION," "VARIABLE ESTATE PROTECTION II," or "VARIABLE MASTER PLAN PLUS." . As stated in the John Hancock Variable Series Trust Prospectus, the sub- adviser of the Health Sciences fund is Putnam Investment Management, LLC. The reference on the first page of the Product Prospectuses to "John Hancock Advisers, Inc." as the manager for the Health Sciences variable investment option is a typographical error and the name "Putnam Investment Management, LLC" should be substituted in its place. You should read the John Hancock Variable Series Trust Prospectus for further information about the Health Sciences fund and Putnam Investment Management, LLC before selecting this variable investment option. . Morgan Stanley Dean Witter Investment Management Inc., the sub-adviser of the Emerging Markets Equity fund and one of the sub-advisers of the Real Estate Equity fund, has a new name. References in the Product Prospectuses and the John Hancock Variable Series Trust Prospectus to "Morgan Stanley Dean Witter Investment Management Inc." are therefor deleted and the new name, "Morgan Stanley Investment Management Inc.," is inserted in their place. 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. JOHN HANCOCK VARIABLE SERIES TRUST I PROSPECTUS May 1, 2001 Equity Index Fund Growth & Income Fund Large Cap Value Fund Large Cap Value CORE SM Fund Large Cap Value CORE SM II Fund Large Cap Growth Fund Large Cap Aggressive Growth Fund Large/Mid Cap Value Fund Large/Mid Cap Value II Fund Fundamental Growth Fund Mid Cap Blend Fund Mid Cap Growth Fund Small/Mid Cap CORE SM Fund Small/Mid Cap Growth Fund Small Cap Equity Fund Small Cap Value Fund Small Cap Growth Fund International Equity Index Fund International Opportunities Fund International Equity Fund Emerging Markets Equity Fund Real Estate Equity Fund Health Sciences Fund Managed Fund Aggressive Balanced Fund Global Balanced Fund Short-Term Bond Fund Bond Index Fund Active Bond Fund Active Bond II Fund High Yield Bond Fund Global Bond Fund Money Market Fund Managed by John Hancock Life Insurance Company John Hancock Place Boston, MA 02117 Contents - -------------------------------------------------------------------------------- John Hancock Variable Series Trust I ("Trust") A fund-by-fund summary of goals, strategies and risks. Policies and instructions for opening, maintaining and closing an account in any fund Further information on the funds Further information on the Trust Additional subadviser information Overview 1 Your Investment Choices 2 Equity Index Fund 6 Growth & Income Fund 8 Large Cap Value Fund 10 Large Cap Value CORE SM Fund 12 Large Cap Value CORE SM II Fund 14 Large Cap Growth Fund 16 Large Cap Aggressive Growth Fund 18 Large/Mid Cap Value Fund 20 Large/Mid Cap Value II Fund 22 Fundamental Growth Fund 24 Mid Cap Blend Fund 26 Mid Cap Growth Fund 28 Small/Mid Cap CORE SM Fund 30 Small/Mid Cap Growth Fund 32 Small Cap Equity Fund 34 Small Cap Value Fund 36 Small Cap Growth Fund 38 International Equity Index Fund 40 International Opportunities Fund 42 International Equity Fund 44 Emerging Markets Equity Fund 46 Real Estate Equity Fund 48 Health Sciences Fund 50 Managed Fund 52 Aggressive Balanced Fund 54 Global Balanced Fund 56 Short-Term Bond Fund 58 Bond Index Fund 60 Active Bond Fund 62 Active Bond II Fund 64 High Yield Bond Fund 66 Global Bond Fund 68 Money Market Fund 70 Your Account 72 Investments in shares of the funds 72 Share price 72 Valuation 72 Conflicts 72 Funds' Expenses 73 Dividends and Taxes 73 Dividends 73 Taxes 73 Trust Business Structure 74 Appendix A 75 For more information back cover
Overview - -------------------------------------------------------------------------------- FUND INFORMATION KEY Concise fund-by-fund descriptions begin on page 6. Each 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. Financial Highlights The fund's operating performance per share, measured year- by-year. THE FUNDS The Trust offers investment choices, or funds, for the variable annuity and variable life insurance contracts ("variable contracts") of: . John Hancock Life Insurance Company ("John Hancock"), . John Hancock Variable Life Insurance Company ("JHVLICO"), and . certain other insurance companies that may or may not be affiliated with John Hancock. In some variable contract forms, the Trust may be referred to by some other term (such as the "Fund" or "Series Fund") and the investment choices may also be referred to by some other term (such as "Portfolios" or "Series"). RISKS OF FUNDS These funds, like all mutual funds, are not bank deposits. They are not insured or guaranteed by the FDIC or any other government agency. You could lose money by investing in these funds. So, be sure to read all risk disclosure carefully before investing. MANAGEMENT John Hancock is the investment adviser of each fund of the Trust. John Hancock is a Massachusetts stock life insurance company. On February 1, 2000, John Han- cock changed its form of organization and its name. Prior to that date, it was John Hancock Mutual Life Insurance Company, a mutual life insurance company that was chartered in 1862. At the end of 2000, John Hancock and its affiliates managed approximately $125 billion in assets, of which it owned approximately $79 billion. All of the funds of the Trust have subadvisers. 1 Your Investment Choices - -------------------------------------------------------------------------------- The Trust offers a number of investment choices, or funds, to suit a variety of objectives under variable contracts. There are 33 funds available under your variable contract. Each fund has its own strategy and its own risk/reward profile.The funds can be broadly categorized as equity funds, sector funds, balanced funds, bond funds, and international/global funds. Within these broad categories, the funds can be further categorized as follows: EQUITY FUNDS Equity funds can be categorized in two ways--by capitalization and by invest- ment style. Capitalization Equity funds can be categorized by market capital- ization, which is defined as the market value of all shares of a company's stock. The following def- initions for large, mid and small cap are based upon statistics at year-end 2000, but are adjusted periodically with broad equity market movements as represented by the Russell 3000(R) Index/1/ or other widely- recognized source of market capital- ization data. Adjustments are typically made on a quarterly basis, but in extraordinary circumstances may be made as frequently as monthly. In volatile market environments, a fund's market cap exposure may be allowed to shift temporarily outside of the normal range in order to avoid unnecessary transac- tion costs. Large Cap Funds: . Equity Index Fund These funds invest primarily in large, well-estab- lished companies that typically are very actively . Growth & Income traded and provide more stable investment returns Fund over time. Large cap companies represent the 300 largest stocks in the Russell 3000(R) Index. Each . Large Cap Value of those companies has a market capitalization Fund greater than $7.8 billion as of the end of 2000. Large cap funds are appropriate for investors who . Large Cap Value want the least volatile investment returns within CORE SM Fund the overall equity markets. . Large Cap Value CORE SM II Fund . Large Cap Growth Fund . Large Cap Aggres- sive Growth Fund Large/Mid Cap Funds: . Large/Mid Cap These funds invest primarily in large cap and mid Value Fund cap companies. The capitalization of these funds can shift over time from primarily large cap to . Large/Mid Cap primarily mid cap or vice versa depending on where Value II Fund the manager identifies investment opportunities. These funds are generally more volatile than pure . Fundamental large cap funds, but generally less volatile than Growth Fund pure mid cap funds. Mid Cap Funds: . Mid Cap These funds invest primarily in medium-sized, less Blend Fund established companies that are less actively traded and provide more share price volatility over time . Mid Cap than large cap stocks. Mid cap companies represent Growth Fund the 250th to 1000th largest stocks in the Russell 3000(R) Index. Each of those companies has a market capitalization between $1.4 billion and $10 billion as of the end of 2000. Mid cap funds are appropri- ate for investors who are willing to accept more volatile investment returns within the overall equity markets with the potential reward of higher long-term returns. Small/Mid Cap Funds: These funds invest primarily in mid cap and small . Small/Mid Cap cap companies. The capitalization of these funds CORE SM Fund can shift over time from primarily mid cap to pri- marily small cap or vice versa depending on where . Small/Mid Cap the manager identifies investment opportunities. Growth Fund These funds are generally more volatile than pure mid cap funds, but generally less volatile than pure small cap funds. - ------- /1/The Russell 3000(R) Index is a broad market index and is representative of the U.S. stock markets with a total capitalization of $12.8 trillion at the end of 2000. The Russell 3000(R) Index is a service mark of Frank Russell Company, which does not sponsor and is not in any way affiliated with the Trust. Inclusion of a security in the index in no way implies an opinion on the part of Frank Russell Company as to its attractiveness or appropriateness as an investment. 2 Small Cap Funds: . Small Cap These funds invest primarily in small newly estab- Equity Fund lished companies that are less actively traded and have a high level of share price volatility over . Small Cap time. Small cap companies represent the 2000 small- Value Fund est stocks in the Russell 3000(R) Index. Each of these companies has a market capitalization of less . Small Cap than $1.4 billion as of the end of 2000. Small cap Growth Fund funds are appropriate for investors who are willing to accept the most volatile investment returns within the overall equity markets for the potential reward of higher long-term returns. Investment Style Value Funds: . Large Cap Value Value funds invest in companies that are attrac- Fund tively priced, considering their asset and earnings history. These stocks typically pay above average . Large Cap Value dividends and have low stock prices relative to mea- CORE SM Fund sures of earnings and book value. Value funds are appropriate for investors who want some dividend . Large Cap Value income and the potential for capital gains, but are CORE SM II Fund less tolerant of share-price fluctuations. . Large/Mid Cap Value Fund . Large/Mid Cap Value II Fund . Small Cap Value Fund Growth Funds: . Large Cap Growth Growth funds invest in companies believed to have Fund above-average prospects for capital growth due to their strong earnings and revenue potential. Growth . Large Cap Aggres- stocks typically have high stock prices relative to sive Growth Fund measures of earnings and book value. Growth funds are appropriate for investors who are willing to . Fundamental Growth accept more share-price volatility for the potential Fund reward of higher long-term returns. . Mid Cap Growth Fund . Small Mid/Cap Growth Fund . Small Cap Growth Fund Blend Funds: . Equity Index Fund Blend funds invest in both value and growth compa- nies. Blend funds are appropriate for investors who . Growth & Income seek both dividend and capital appreciation charac- Fund teristics. . Mid Cap Blend Fund . Small/Mid Cap CORE SM Fund . Small Cap Equity Fund SECTOR FUNDS Sector funds invest primarily in a single sector of the stock market and may be affected by economic factors and other factors specific to that sector. Sector funds are appropriate for investors who are willing to accept more volatile investment returns relative to the overall equity market. . Real Estate Equity Fund . Health Sciences Fund BALANCED FUNDS Balanced funds invest in a combination of stocks and bonds and actively manage the mix of stocks and bonds within a target range. Domestic balanced funds invest in U.S. stocks and bonds. Global balanced funds invest in foreign and U.S. stocks and bonds. . Managed Fund .Aggressive Balanced Fund . Global Balanced Fund BOND FUNDS Bond funds can be categorized in two ways--by average maturity and by credit quality: Average Maturity Bond maturity is a key measure of interest rate risk. A bond's maturity measures the time remaining until the bond matures, or until the repayment of the bond's principal comes due. The longer a bond's maturity, the more sensitive the bond's price is to changes in interest rates. 3 Short: . Money Market Fund These funds invest primarily in bonds with short . Short Term Bond maturities, typically less than four years. These Fund funds have less interest rate risk than intermedi- ate-term bond funds. Intermediate: . Bond Index Fund These funds invest in bonds of all maturities and . Active Bond Fund maintain an average maturity which is typically between four and ten years. These funds have more interest rate risk than short-term bond funds. . Active Bond II Fund . High Yield Bond Fund . Global Bond Fund Credit Quality Credit quality is a measure of the ability of a bond issuer to meet its financial obligations and repay principal and interest. High quality bonds have less credit risk than lower quality bonds. Investment grade bonds typically have "high" or "medium" credit quality ratings (as defined below), while high-yield bonds have "low" credit quality ratings. High: . Money Market Fund These funds focus on the highest-rated, most . Bond Index Fund creditworthy bonds or money market instruments and typically maintain an average credit quality rating of AAA/Aaa (A-1/P-1 for money market funds). Medium: . Short Term Bond These funds invest in bonds of all credit quality Fund levels with a focus on investment grade bonds. These funds typically maintain an average credit . Active Bond Fund quality rating of AA/Aa, A or BBB/Baa. . Active Bond II Fund . Global Bond Fund Low: . High Yield Bond These funds invest primarily in lower rated bonds-- Fund known as high yield or "junk" bonds. These funds typically maintain a below investment-grade average credit quality rating of BB/Ba or B. INTERNATIONAL/GLOBAL EQUITY FUNDS International funds invest primarily in securities markets outside the United States. Global funds invest both in the United States and abroad. These funds can be categorized by the types of markets they invest in. Developed Markets: . International These funds invest primarily in the larger, well- Equity Index Fund established developed or industralized markets around the world. These funds have a lower level of . International foreign securities risk than emerging market funds. Equity Fund . International Opportunities Fund Emerging Markets: . Emerging Markets These funds invest primarily in developing or Equity Fund emerging markets and have a higher level of foreign securities risk than funds that invest primarily in developed markets. These funds have more return volatility than the overall international/global equity markets. 4 -------------- In the following pages, any fund investment strategy that is stated as a per- centage of a fund's assets applies at all times, not just at the time the fund buys or sells an investment security. However, when markets are unusually vola- tile or when a fund experiences unusually large cash flows, a fund may be allowed to temporarily deviate from its normal strategy to avoid unnecessary transaction costs. The trustees of the Trust can change the investment goals and strategy of any fund without shareholder (i.e., contractowner) approval. The financial highlights tables on the following pages detail the historical performance of each fund, including total return information showing the increase or decrease of an investment in the fund each year (assuming reinvest- ment of all dividends and distributions). The "total investment return" shown for each fund does not reflect the expenses and charges of the applicable sepa- rate accounts and variable contracts. Those expenses and charges vary consider- ably from contract to contract and are described in the variable contract pro- spectus to which this prospectus is attached. If the earliest period shown in the financial highlights table is less than a full calendar year, the two "Ra- tios" shown for that period have been annualized (i.e., projected as if the fund had been in effect for a full year). However, the "total investment return" and "turnover rate" for that period have not been annualized. All of the funds (except bond funds and equity index funds) may participate in initial public offerings (IPOs). Under certain market conditions, such partici- pation could significantly improve a fund's total investment return. There is no assurance that such market conditions will continue and provide the same favorable impact on future investment returns. If the total investment return for any fund for any given year appears unusu- ally high, the return may be attributable to unusually favorable market condi- tions 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 refer- ence for debt obligations generally. 5 Equity Index Fund GOAL AND STRATEGY This is a stock fund that seeks to track the performance of the S&P 500 Index, which emphasizes the stocks of large U.S. companies. The manager employs a passive management strategy by normally investing in all stocks included in the 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 char- acteristics and sector diversification of the Index. The Fund normally invests in all 500 stocks in the Index, but has no predeter- mined number of stocks that it must hold. S&P may change the composition of the Index 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. The Fund may purchase other types of securities that are not primary investment vehicles, for example: Standard & Poor's Depositary Receipts (SPDRs), U.S. dol- lar denominated foreign securities, cash equivalents, and certain derivatives (investments whose value is based on indices or other securities). As an exam- ple of how derivatives may be used, the Fund may invest in stock index futures to manage cash flow. Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill, Inc. and have been licensed for use by the Trust. - -------------------------------------------------------------------------------- SUBADVISER SSgA Funds Management, Inc. (formerly State Street Global Advisors, a division of State Street Bank and Trust Company) Two International Place Boston, Massachusetts 02110 Managing, with predecessor, since 1978 Managing Fund since May, 1997 Predecessor managed approximately $725 billion in assets at the end of 2000 FUND MANAGERS John A. Tucker - ----------------- Principal of subadviser Joined subadviser in 1988 James B. May - ----------------- Principal of subadviser Joined subadviser in 1989 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 21.27%, fourth quarter 1998 Worst quarter: down 9.99%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year -9.15% -9.11% Life of fund 17.74% 18.06%
Index:S&P 500 Index *Began operations on May 1, 1996. 6 MAIN RISKS Primary Index Management Risk: Certain factors such as the following may cause the Fund to track the Index less closely: . The securities selected by the manager may not be fully representative of the Index. . Transaction expenses of the Fund may result in the Fund's performance being different than that of the Index. . The size and timing of the Fund's cash flows may result in the Fund's per- formance being different than that of the Index. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform mid cap and small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 11.10 $ 14.21 $ 17.70 $ 20.46 Income from investment operations: Net investment income (loss) 0.15 0.24 0.25 0.27 0.22 Net realized and unrealized gain (loss) on investments* 1.26 3.41 3.76 3.41 (2.09) Total from investment operations 1.41 3.65 4.01 3.68 (1.87) Less distributions: Distributions from net investment income and capital paid in (0.21) (0.29) (0.24) (0.26) (0.23) Distributions from net realized gain on investments sold (0.10) (0.25) (0.28) (0.66) (0.72) Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions (0.31) (0.54) (0.52) (0.92) (0.95) Net asset value, end of period $ 11.10 $ 14.21 $ 17.70 $ 20.46 $ 17.64 Total investment return*** 14.23% 32.79% 28.45% 21.08% (9.15)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $14,650 $101,390 $232,578 $451,296 $525,659 Ratio of expenses to average net assets (%)**** 0.00% 0.00% 0.00% 0.00% 0.19% Ratio of net investment income (loss) to average net assets (%) 2.74% 1.97% 1.59% 1.42% 1.12% Turnover rate (%) 15.72% 64.56% 43.31% 55.24% 34.11%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Includes the effect of a voluntary capital contribution from John Han- cock of $0.06 per share for the period ended 1996 and $0.04 per share for year ended 1997. The Total Investment Return without the capital contribution would have been 13.59% for the year ended 1996 and 32.47% for the year ended 1997. **** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.61%, 0.65%, 0.34% and 0.22% for the years ended December 31, 1996, 1997, 1998 and 1999, respectively. 7 Growth & Income Fund GOAL AND STRATEGY This is a non-diversified large and mid-cap stock fund that seeks income and long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large and mid-sized U.S. companies. The Fund employs two subadvisers, each of which employs its own investment approach and independently manages its portion of the Fund. On or about Novem- ber 1, 2000, the assets of the Fund were allocated between the two subadvisers with Putnam receiving $1 billion (approximately 26% of the Fund's assets as of October 31, 2000) and Independence the remainder. All subsequent investments in the Fund will be allocated equally between the two subadvisers, while redemp- tions will be allocated on an asset-weighted basis. These allocation methodolo- gies may change in the future. Independence Investment LLC ("Independence") selects stocks using a combination of proprietary equity research and quantitative tools. Stocks are purchased that are undervalued relative to the stock's history and have improving earn- ings growth prospects. Independence seeks to maintain risk and sector characteristics similar to the market benchmark for its portion of the Fund. Independence normally invests in 80 to 160 stocks, with at least 65% (usually higher) of its assets in large cap companies. Putnam Investment Management, LLC ("Putnam") selects stocks using a combination of: . a systematic screening approach to rank stocks based on: fundamental cata- lyst (such as earnings surprise and momentum); valuation (such as price-to- sales ratio); and financial strength (such as superior cash flow); and . proprietary fundamental equity research to identify companies with strong and innovative management teams, opportunities for above average growth within their industry and strong competitive positioning relative to peers and suppliers. Putnam seeks broad diversification by security and sector and uses risk manage- ment tools and qualitative judgement to determine sector and stock-specific weightings. Putnam normally invests in 65 to 110 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. The Fund is "non-diversified", which means that it can take larger positions in individual issuers. Each portion of the Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. Each portion of the Fund may invest in initial public offerings (IPOs). Each portion of the Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). As an example of how deriva- tives may be used, Putnam may invest in stock index futures to manage cash flow. In abnormal market conditions, each portion of the Fund may take temporary defensive measures--such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those measures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund and its predecessor since March, 1986 Managed approximately $25 billion in assets at end of 2000 FUND MANAGERS Management by investment team overseen by: Paul F. McManus - ----------------- Senior Vice President of subadviser Joined team in 1996 Joined subadviser in 1982 SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02109 Managing since 1937 Managing Fund since November, 2000 Managed approximately $370 Billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: C. Beth Cotner, CFA - ----------------- Managing Director and Chief Investment Officer of subadviser Joined subadviser in 1995 Began career in 1976 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 24.07%, fourth quarter 1998 Worst quarter: down 12.05%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year -13.10% -9.11% 5 years 15.44% 18.35% 10 years 15.58% 17.46% Life of fund 14.17% 15.26%
Index:S & P 500 Index *Began operations on March 29, 1986. 8 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 13.94 $ 14.65 $ 16.61 $ 19.49 $ 20.01 Income from investment operations: Net investment income (loss) 0.34 0.27 0.23 0.20 0.17 Net realized and unrealized gain (loss) on investments* 2.43 4.07 4.75 2.88 (2.77) Total from investment operations 2.77 4.34 4.98 3.08 (2.60) Less distributions: Distributions from net investment income and capital paid in (0.34) (0.27) (0.23) (0.20) (0.40) Distributions from net realized gain on investments sold (1.72) (2.11) (1.87) (2.36) (2.69) Distributions in excess of income, capital paid in & gains -- -- -- -- (0.14) Total distributions (2.06) (2.38) (2.10) (2.56) (3.23) Net asset value, end of period $ 14.65 $ 16.61 $ 19.49 $ 20.01 $ 14.18 Total investment return 20.10% 29.79% 30.25% 16.23% (13.10)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $2,047,927 $2,785,964 $3,670,785 $4,218,841 $3,324,988 Ratio of expenses to average net assets (%) 0.27% 0.28% 0.27% 0.28% 0.40% Ratio of net investment income (loss) to average net assets (%) 2.24% 1.61% 1.24% 0.98% 0.84% Turnover rate (%) 81.02% 74.56% 48.45% 70.16% 112.94%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 9 Large Cap Value Fund GOAL AND STRATEGY This is a large cap stock fund with a value emphasis that seeks long-term capi- tal appreciation and substantial dividend income. The Fund invests primarily in a diversified mix of common stocks of large established U.S. companies paying above-average dividends. The manager employs a value approach in selecting stocks using proprietary equity research. Stocks are purchased that are undervalued by various measures such as the stock's current price relative to its earnings potential. The manager looks for companies with: . established operating history; . above-average dividend yield relative to the S&P 500 Index; . low price/earnings ratio relative to the S&P 500 Index; . sound balance sheet and other positive financial characteristics; and . low stock price relative to the company's underlying value. The Fund's sector exposures are a result of stock selection as opposed to pre- determined allocations. The Fund normally invests in 100 to 175 stocks, with at least 65% (usually higher) of its assets in large cap companies. The Fund nor- mally has 10% or less (usually lower) of its assets in cash and cash equiva- lents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: foreign securities denominated in U.S. dollars or any other currency, high and medium quality debt securities, and certain deriva- tives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. Note: "S&P 500 Index" means the Standard & Poor's 500 Composite Stock Price Index. "Standard & Poor's", "S&P" and "S&P 500" are trademarks of McGraw Hill, Inc. and have been licensed for use by the Trust. - -------------------------------------------------------------------------------- SUBADVISER T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland 21202 Managing since 1937 Managing Fund since May, 1996 Managed approximately $167 billion in assets at the end of 2000 FUND MANAGERS Management by Investment Advisory Committee Brian C. Rogers, CFA, CIC - ----------------- Committee Chairman Director of subadviser Joined subadviser in 1982 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 12.86%, fourth quarter 1999 Worst quarter: down 8.58%, third quarter 1999 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 year 12.97% 7.01% Life of fund 14.30% 16.74%
Index:Russell 1000(R) Value Index *Began operations on May 1, 1996. 10 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform small cap and mid cap stocks. Secondary 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 cur- rency also pose special risks. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 11.09 $ 13.57 $ 14.02 $ 13.49 Income from investment operations: Net investment income (loss) 0.16 0.29 0.28 0.27 0.27 Net realized and unrealized gain (loss) on investments* 1.22 2.84 0.96 0.18 1.45 Total from investment operations 1.38 3.13 1.24 0.45 1.72 Less distributions: Distributions from net investment income and capital paid in (0.16) (0.29) (0.28) (0.27) (0.29) Distributions from net realized gain on investments sold (0.13) (0.36) (0.51) (0.71) (0.53) Distributions in excess of income, capital paid in & gains -- -- -- -- (0.01) Total distributions (0.29) (0.65) (0.79) (0.98) (0.83) Net asset value, end of period $ 11.09 $ 13.7 $ 14.02 $ 13.49 $ 14.38 Total investment return 13.90% 28.56% 9.26% 3.28% 12.97% Ratios and supplemental data Net assets, end of period (000s omitted)($) $19,781 $73,269 $123,365 $155,849 $204,535 Ratio of expenses to average net assets (%)*** 1.00% 1.0% 0.92% 0.85% 0.78% Ratio of net investment income (loss) to average net assets (%) 2.74% 2.4% 2.08% 1.88% 2.04% Turnover rate (%) 19.95% 19.2% 18.46% 32.62% 42.12%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.89% and 1.06% for the years ended December 31, 1996 and 1997, respectively. 11 Large Cap Value CORE SM Fund GOAL AND STRATEGY This is a large cap stock fund with a value emphasis that seeks long-term capi- tal appreciation and dividend income. The Fund invests primarily in a diversified mix of common stocks of large established U.S. companies that are believed to offer favorable prospects for increasing dividends and growth in capital. The manager selects stocks using a combination of quantitative techniques and fundamental equity research. The manager employs an investment process known as CORE, "Computer Optimized, Research-Enhanced," that employs a proprietary quan- titative model. "CORE SM" is a service mark of Goldman, Sachs & Co. The manager identifies stocks that have strong expected earnings growth and momentum and better valuation and risk characteristics than the Russell 1000(R) Value Index. Stocks are purchased that have: . Low to modest valuation characteristics relative to general market measures, such as price/earnings ratio, book value and other fundamental accounting measures, and . favorable prospects for capital appreciation and/or dividend paying ability. The Fund is managed using risk control techniques to maintain risk, style, cap- italization and sector characteristics similar to the Russell 1000(R) Value Index. The Fund is broadly diversified by sector. The Fund normally invests in 100 to 350 stocks, with at least 65% (usually higher) of the Fund's assets in large cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, Standard & Poor's Depositary Receipts (SPDRs) and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other secu- rities). 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Goldman Sachs Asset Management, A unit of the Investment Management Division of Goldman, Sachs & Co. 32 Old Slip New York, New York 10005 Managing since 1988 Managing Fund since August, 1999 Managed approximately $282 billion in assets at the end of 2000 FUND MANAGERS Robert C. Jones - ----------------- Managing Director of subadviser Joined subadviser in 1989 Melissa R. Brown - ----------------- Managing Director of subadviser Joined subadviser in 1998 Director of Quantitative Equity Research at Prudential Securities (1983-1998) Victor H. Pinter - ----------------- Vice President of subadviser Joined subadviser in 1989 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 8.62%, third quarter 2000 Worst quarter: down 4.14%, first quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 5.12% 7.01% Life of fund 6.58% 6.59%
Index:Russell 1000(R) Value Index * Began operations on August 31, 1999. 12 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform small and mid cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999** 2000 Net asset value, beginning of period $10.00 $ 10.16 Income from investment operations: Net investment income (loss) 0.04 0.15 Net realized and unrealized gain (loss) on investments* 0.31 0.36 Total from investment operations 0.35 0.51 Less distributions: Distributions from net investment income and capital paid in (0.04) (0.16) Distributions from net realized gain on investments sold (0.14) (0.06) Distributions in excess of income, capital paid in & gains (0.01) (0.03) Total distributions (0.19) (0.25) Net asset value, end of period $10.16 $ 10.42 Total investment return 3.58% 5.12% Ratios and supplemental data Net assets, end of period (000s omitted)($) $6,371 $18,164 Ratio of expenses to average net assets (%)*** 0.85% 0.85% Ratio of net investment income (loss) to average net assets (%) 1.13% 1.54% Turnover rate (%) 30.90% 59.15%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.17% and 1.09% for the years ended December 31, 1999 and 2000, respectively. 13 Large Cap Value CORE SM II Fund (Formerly American Leaders Large Cap Value Fund) GOAL AND STRATEGY This is a large cap stock fund with a value emphasis that seeks long-term capi- tal appreciation and dividend income. The Fund invests primarily in a diversified mix of common stocks of large established U.S. companies that are believed to offer favorable prospects for increasing dividends and growth in capital. The manager selects stocks using a combination of quantitative techniques and fundamental equity research. The manager employs an investment process known as CORE, "Computer Optimized, Research-Enhanced," that employs a proprietary quan- titative model. "CORE SM" is a service mark of Goldman, Sachs & Co. The manager identifies stocks that have strong expected earnings growth and momentum and better valuation and risk characteristics than the Russell 1000(R) Value Index. Stocks are purchased that have: . Low to modest valuation characteristics relative to general market measures, such as price/earnings ratio, book value and other fundamental accounting measures, and . favorable prospects for capital appreciation and/or dividend paying ability. The Fund is managed using risk control techniques to maintain risk, style, cap- italization and sector characteristics similar to the Russell 1000(R) Value Index. The Fund is broadly diversified by sector. The Fund normally invests in 100 to 350 stocks, with at least 65% (usually higher) of the Fund's assets in large cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, Standard & Poor's Depositary Receipts (SPDRs) and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other secu- rities). 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Goldman Sachs Asset Management, A unit of the Investment Management Division of Goldman, Sachs & Co. 32 Old Slip New York, New York 10005 Managing since 1988 Managing Fund since January, 2001 Managed approximately $282 billion in assets at the end of 2000 FUND MANAGERS Robert C. Jones - ----------------- Managing Director of subadviser Joined subadviser in 1989 Melissa R. Brown - ----------------- Managing Director of subadviser Joined subadviser in 1998 Director of Quantitative Equity Research at Prudential Securities (1983-1998) Victor H. Pinter - ----------------- Vice President of subadviser Joined subadviser in 1989 PAST PERFORMANCE Because this Fund did not have a full year of operations as of December 31, 2000, no year-by-year total returns or average annual total returns can be shown for this Fund. 14 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific investment cate- gory may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform small cap and mid cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Large Cap Value CORESM II Fund (formerly American Leaders Large Cap Value Fund) -- Period ended December 31: 2000** Net asset value, beginning of period $10.00 Income from investment operations: Net investment income (loss) 0.06 Net realized and unrealized gain (loss) on investments* 0.74 Total from investment operations 0.80 Less distributions: Distributions from net investment income and capital paid in (0.06) Distributions from net realized gain on investments sold (0.03) Distributions in excess of income, capital paid in & gains -- Total distributions (0.09) Net asset value, end of period $10.71 Total investment return 8.02% Ratios and supplemental data Net assets, end of period (000s omitted)($) $6,029 Ratio of expenses to average net assets (%) 0.85% Ratio of net investment income (loss) to average net assets (%) 1.22% Turnover rate (%) 17.16%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations June 30, 2000. 15 Large Cap Growth Fund GOAL AND STRATEGY This is a non-diversified large cap stock fund with a growth emphasis that seeks capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large established U.S. companies that are believed to offer above-average potential for growth in revenues and earnings. The manager selects stocks using a combination of proprietary equity research and quantitative tools. Stocks are purchased that are undervalued relative to the stock's history and have improving earnings growth prospects. The manager seeks to maintain risk and sector characteristics similar to the Russell 1000(R) Growth Index. The Fund is "non-diversified", which means it can take larger positions in individual issuers. However, the Fund normally invests in 80 to 160 stocks, with at least 65% (usually higher) of its assets in large cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund and its predecessor since March, 1986 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Mark C. Lapman - ----------------- Executive Vice President of subadviser Joined team in 1996 Joined subadviser in 1982 Began career in 1979 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 27.79%, fourth quarter 1998 Worst quarter: down 11.16%, third quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -17.89% -22.42% 5 years 17.08% 18.15% 10 years 16.24% 17.33% Life of fund 14.89% 14.98%
Index:Russell 1000(R) Growth Index * Began operations on March 29, 1986. 16 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform small cap and mid cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 17.37 $ 17.49 $ 20.82 $ 26.19 $ 27.33 Income from investment operations: Net investment income (loss) 0.25 0.17 0.14 0.09 0.03 Net realized and unrealized gain (loss) on investments* 2.89 5.21 8.05 6.03 (4.89) Total from investment operations 3.14 5.38 8.19 6.12 (4.86) Less distributions: Distributions from net investment income and capital paid in (0.25) (0.17) (0.14) (0.09) (0.11) Distributions from net realized gain on investments sold (2.77) (1.88) (2.68) (4.89) (2.69) Distributions in excess of income, capital paid in & gains -- -- -- -- (0.78) Total distributions (3.02) (2.05) (2.82) (4.98) (3.58) Net asset value, end of period $ 17.49 $ 20.82 $ 26.19 $ 27.33 $ 18.89 Total investment return 18.27% 30.89% 39.51% 24.07% (17.89)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $524,145 $754,398 $1,126,764 $1,382,473 $1,146,787 Ratio of expenses to average net assets (%) 0.44% 0.44% 0.41% 0.39% 0.46% Ratio of net investment income (loss) to average net assets (%) 1.35% 0.86% 0.59% 0.33% 0.10% Turnover rate (%) 135.98% 83.82% 56.41% 37.42% 89.30%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 17 Large Cap Aggressive Growth Fund GOAL AND STRATEGY This is a non-diversified large cap stock fund with a growth emphasis that seeks long-term capital appreciation. The Fund invests primarily in the common stocks of large established U.S. com- panies that are believed to offer above-average potential for long-term growth in revenues and earnings. The manager selects stocks using proprietary company-specific research that focuses on firms: . offering superior earnings growth that is not fully reflected in current mar- ket valuations, . having prospective earnings growth rates substantially above that of the S&P 500, and . exhibiting strong management, superior industry positions and excellent bal- ance sheets. The Fund employs aggressive investment strategies and invests most of its assets in a relatively small number of companies, with the 25 most highly regarded stocks representing a majority of the Fund's assets. The manager selects stocks without regard to any predefined sector selection criteria. The manager actively trades and adjusts the Fund's holdings to capitalize on market fluctuations. The manager typically: . increases investment in favored securities and reduces the number of holdings in declining markets, and . decreases investment in favored securities and increases the number of hold- ings in rising markets. The Fund is "non-diversified", which means it can take larger positions in individual issuers. The Fund normally invests in 35 to 75 stocks, with at least 65% (usually higher) of its assets in large cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Alliance Capital Management L.P. 1345 Avenue of the Americas New York, NY 10105 Managing, with predecessors, since 1971 Managing Fund since August, 1999 Managed approximately $454 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: John H. Fogarty - ----------------- Vice president of subadviser Joined subadviser in 1988 Began career in 1988 Alfred Harrison - ----------------- Vice chairman and Director of subadviser Joined subadviser in 1978 Began career in 1962 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the invesment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 20.81%, fourth quarter 1999 Worst quarter: down 15.21%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -18.77% -22.42% Life of fund -1.79% -3.74%
Index:Russell 1000(R) Growth Index * Began operations on August 31, 1999. 18 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "large cap" approach carries the risk that large cap stocks will underperform small cap and mid cap stocks. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999** 2000 Net asset value, beginning of period $ 10.00 $ 11.94 Income from investment operations: Net investment income (loss) (0.01) 0.03) Net realized and unrealized gain (loss) on investments* 2.03 (2.21) Total from investment operations 2.02 (2.24) Less distributions: Distributions from net investment income and capital paid in -- (0.11) Distributions from net realized gain on investments sold (0.08) (0.01) Distributions in excess of income, capital paid in & gains -- (0.06) Total distributions (0.08) (0.18) Net asset value, end of period $ 11.94 $ 9.52 Total investment return 20.18% (18.77)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $15,074 $26,244 Ratio of expenses to average net assets (%)*** 1.08% 1.00% Ratio of net investment income (loss) to average net assets (%) (0.39)% (0.37)% Turnover rate (%) 18.97% 75.97%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.17% and 1.05% for the years ended December 31, 1999 and 2000, respectively. 19 Large/Mid Cap Value Fund GOAL AND STRATEGY This is a large/mid cap stock fund with a value emphasis that seeks long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large- and mid-sized U.S. companies that are believed to offer favorable prospects for increasing dividends and growth in capital. The manager employs a value approach in selecting stocks, using proprietary equity research to identify stocks having distinct value characteristics based on industry- specific valuation criteria. The manager screens the investable universe for: . stocks in the Russell 1000(R) Value Index, or . stocks with dividend yields greater than the Russell 1000(R) Index, or . stocks with price/book ratios lower than the Russell 1000(R) Index. The Fund's assets are allocated to industry-specific sub-portfolios that are managed by each industry analyst. The manager oversees the Fund to maintain capitalization and sector weights similar to the Russell 1000(R) Value Index. The Fund normally invests in 90 to 130 stocks, with at least 65% (usually high- er) of its assets in large and mid cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since August, 1999 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGERS Management by Global Research Team overseen by: Doris Dwyer Chu - ----------------- Vice President of subadviser Joined subadviser in 1998 Partner and portfolio manager at Grantham, Mayo, Van Otterloo & Co. (1985-1998) Laurie A. Gabriel - ----------------- Managing Partner of subadviser Joined subadviser in 1976 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 11.62%, first quarter 2000 Worst quarter: down 5.65%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 13.41% 7.01% Life of fund 13.76% 6.59%
Index:Russell 1000(R) Value Index * Began operations on August 31, 1999. 20 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach carries the risk that large/mid cap stocks will underperform small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999** 2000 Net asset value, beginning of period $10.00 $ 10.42 Income from investment operations: Net investment income (loss) 0.03 0.09 Net realized and unrealized gain (loss) on investments* 0.45 1.30 Total from investment operations 0.48 1.39 Less distributions: Distributions from net investment income and capital paid in (0.03) (0.10) Distributions from net realized gain on investments sold (0.02) (0.08) Distributions in excess of income, capital paid in & gains (0.01) (0.06) Total distributions (0.06) (0.24) Net asset value, end of period $10.42 $ 11.57 Total investment return 4.72% 13.41% Ratios and supplemental data Net assets, end of period (000s omitted)($) $6,101 $15,728 Ratio of expenses to average net assets (%)*** 1.05% 1.05% Ratio of net investment income (loss) to average net assets (%) 0.94% 0.97% Turnover rate (%) 23.03% 86.97%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.42% and 1.36% for the years ended December 31, 1999 and 2000, respectively. 21 Large/Mid Cap Value II Fund (Formerly Mid Cap Value Fund) GOAL AND STRATEGY This is a large/mid cap stock fund with a value emphasis that seeks long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of large- and mid-sized U.S. companies that are believed to offer favorable prospects for increasing dividends and growth in capital. The manager employs a value approach in selecting stocks, using proprietary equity research to identify stocks having distinct value characteristics based on industry- specific valuation criteria. The manager screens the investable universe for: . stocks in the Russell 1000(R) Value Index, or . stocks with dividend yields greater than the Russell 1000(R) Index, or . stocks with price/book ratios lower than the Russell 1000(R) Index. The Fund's assets are allocated to industry-specific sub-portfolios that are managed by each industry analyst. The manager oversees the Fund to maintain capitalization and sector weights similar to the Russell 1000(R) Value Index. The Fund normally invests in 90 to 130 stocks, with at least 65% (usually high- er) of its assets in large and mid cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since January, 2001 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGERS Management by Global Research Team overseen by: Doris Dwyer Chu - ----------------- Vice President of subadviser Joined subadviser in 1998 Partner and portfolio manager at Grantham, Mayo, Van Otterloo & Co. (1985-1998) Laurie A. Gabriel - ----------------- Managing Partner of subadviser Joined subadviser in 1976 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 17.06%, third quarter 1997 Worst quarter: down 21.29%, third quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 28.38% 19.18% Life of fund 14.01% 14.72%
Index:Russell Mid Cap(TM) Value Index * Began operations on May 1, 1996. 22 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized com- panies may be subject to more erratic price movements than investment in large established companies. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "large/mid cap" approach carries the risk that in certain markets large cap and mid cap stocks will underperform small cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Although the Fund's turnover rate has been high in recent years, the current manager anticipates that the Fund's turnover rate will normally be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Large/Mid Cap Value II Fund (formerly Mid Cap Value Fund)--Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 11.35 $ 13.87 $ 12.19 $ 12.78 Income from investment operations: Net investment income (loss) 0.04 0.05 0.11 0.08 0.06 Net realized and unrealized gain (loss) on investments* 1.57 3.59 (1.68) 0.59 3.51 Total from investment operations 1.61 3.64 (1.57) 0.67 3.57 Less distributions: Distributions from net investment income and capital paid in (0.04) (0.05) (0.11) (0.08) (0.06) Distributions from net realized gain on investments sold (0.22) (1.07) -- -- (0.41) Distributions in excess of income, capital paid in & gains -- -- -- -- (1.23) Total distributions (0.26) (1.12) (0.11) (0.08) (1.70) Net asset value, end of period $ 11.35 $ 13.87 $ 12.19 $ 12.78 $ 14.65 Total investment return 16.18% 32.17% (11.33)% 5.52% 28.38% Ratios and supplemental data Net assets, end of period (000s omitted)($) $10,926 $64,973 $94,820 $92,150 $129,233 Ratio of expenses to average net assets (%)*** 1.05% 1.05% 0.96% 0.92% 0.87% Ratio of net investment income (loss) to average net assets (%) 0.69% 0.53% 0.93% 0.64% 0.42% Turnover rate (%) 62.99% 93.78% 173.33% 137.06% 235.80%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 2.15% and 1.14% for the years ended December 31, 1996, and 1997, respectively. 23 Fundamental Growth Fund GOAL AND STRATEGY This is a stock fund with a growth emphasis that seeks long-term capital appre- ciation. The Fund invests primarily in the common stocks of large-sized and mid-sized U.S. companies that are believed to offer above-average potential for growth in revenues and earnings. The manager selects stocks using proprietary fundamental equity research and a systematic screening approach. The manager screens the universe for stocks that meet minimum size and earnings growth criteria. The manager employs a proprie- tary quantitative model to rank stocks based on: . fundamental catalyst (such as earnings surprise and momentum); . valuation (such as price-to sales ratio); and . financial strength (such as superior cash flow). The manager uses fundamental equity research with a global equity research team to identify companies with characteristics such as: . strong and innovative management teams; . opportunities for above average growth within its industry; . strong competitive positioning relative to peers and suppliers; . sufficient financial strength to grow the business; and . reasonable valuations relative to earnings expectations. The manager uses risk management tools and qualitative judgement to determine the Fund's sector and stock-specific weightings. The Fund is broadly diversi- fied by sector. The Fund normally invests in 90 to 150 stocks, with at least 65% (usually higher) of its assets in large and mid cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equiva- lents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02119 Managing since 1937 Managing Fund since August, 2000 Managed approximately $370 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Eric M. Wetlaufer, CFA - ----------------- Managing Director and Chief Investment Officer of subadviser Joined subadviser in 1997 Managing Director and Portfolio Manager at Cadence Capital Management (1991 -- 1997) Began career in 1985 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 54.57%, third quarter 1999 Worst quarter: down 20.91%, second quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -3.03% -11.75% Life of fund 35.44% 16.11%
Index:Russell Mid Cap(TM) Growth Index * Began operations on August 31, 1999. 24 MAIN RISKS Primary Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized com- panies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "large/mid cap" approach carries the risk that large/mid cap stocks will underperform small cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999** 2000 Net asset value, beginning of period $10.00 $ 14.42 Income from investment operations: Net investment income (loss) (0.02) (0.02) Net realized and unrealized gain (loss) on investments* 5.34 (0.44) Total from investment operations 5.32 (0.46) Less distributions: Distributions from net investment income and capital paid in -- (0.03) Distributions from net realized gain on investments sold (0.90) (0.76) Distributions in excess of income, capital paid in & gains -- (0.65) Total distributions (0.90) (1.44) Net asset value, end of period $14.42 $ 12.52 Total investment return 54.57% (3.03)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $9,175 $46,114 Ratio of expenses to average net assets (%)*** 0.95% 0.96% Ratio of net investment income (loss) to average net assets (%) (0.55)% (0.38)% Turnover rate (%) 61.66% 250.46%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.09% and 1.00% for the years ended December 31, 1999 and 2000, respectively. 25 Mid Cap Blend Fund GOAL AND STRATEGY This is a mid cap stock fund that seeks long-term capital appreciation. The Fund invests primarily in a diversified mix of common stocks of mid-sized U.S. companies that are believed to offer: . favorable prospects for increasing dividends and capital appreciation (i.e., "value" companies), and . above-average potential for growth in revenues and earnings (i.e. "growth" companies). The manager selects stocks using a combination of proprietary equity research and quantitative tools. Stocks are purchased that are undervalued relative to the stock's history and have improving earnings growth prospects. The manager seeks to maintain risk and sector characteristics similar to the Russell Mid Cap(TM) Index. The Fund normally invests in 80 to 160 stocks, with at least 65% (usually high- er) of its assets in mid cap companies. The Fund normally has 10% or less (usu- ally lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund since August, 1999 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Coreen S. Kraysler, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1986 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 14.64%, second quarter 1999 Worst quarter: down 2.71%, third quarter 1999 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 18.58% 8.25% Life of fund 23.31% 16.40%
Index:Russell Mid Cap(TM) Index * Began operations on August 31, 1999. 26 MAIN RISKS Primary Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized com- panies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "mid cap" approach carries the risk that in certain markets "mid cap" stocks will underperform "large cap" and "small cap" stocks. Also, the Fund's "blend" style carries the risk that in certain markets, "blend" styles will underperform "growth" and "value" styles. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. The Fund had a high turnover rate in 2000 because of higher than expected market volatility. Normally, the Fund's turnover rate is expected to be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999 2000 Net asset value, beginning of period $10.00 $ 10.70 Income from investment operations: Net investment income (loss) 0.03 0.04 Net realized and unrealized gain (loss) on investments* 1.10 1.93 Total from investment operations 1.13 1.97 Less distributions: Distributions from net investment income and capital paid in (0.03) (0.04) Distributions from net realized gain on investments sold (0.40) (0.24) Distributions in excess of income, capital paid in & gains -- (0.27) Total distributions (0.43) (0.55) Net asset value, end of period $10.70 $ 12.12 Total investment return 11.53% 18.58% Ratios and supplemental data Net assets, end of period (000s omitted)($) $5,810 $21,259 Ratio of expenses to average net assets (%)*** 0.85% 0.85% Ratio of net investment income (loss) to average net assets (%) 0.82% 0.44% Turnover rate (%) 55.68% 138.64%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.20% and 1.04% for the years ended December 31, 1999 and 2000, respectively. 27 Mid Cap Growth Fund GOAL AND STRATEGY This is a non-diversified mid cap stock fund with a growth emphasis that seeks long-term capital appreciation. The Fund invests primarily in the common stocks of mid-sized U.S. companies that are believed to offer above-average potential for growth in revenues and earnings. The manager selects stocks using proprietary equity research. Stocks are pur- chased that are expected to have earnings growth potential that may not be rec- ognized by the investment community. The manager selects stocks without regard to any pre- defined sector selection criteria. The manager looks for companies experiencing: . above-average growth relative to their peers or the general economy; and . positive change due to new product developments, improved regulatory environ- ment or a new management team. The Fund is "non-diversified", which means it can take larger positions in individual issuers. The Fund normally invests in 35 to 85 stocks, with at least 65% of its assets in mid cap companies. The Fund normally has 15% or less of its assets in cash and cash equivalents. The Fund's sector exposures are a result of stock selection as opposed to predetermined allocations. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: foreign securities denominated in U.S. dollars or any other currency, and certain derivatives (investments whose value is based on indices or other securities). As an example of the use of derivatives, the Fund may use futures and forwards to implement currency management strategies and 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Janus Capital Corporation 100 Fillmore Street Denver, Colorado 80206 Managing since 1970 Managing Fund since May, 1996 Managed approximately $250 billion in assets at the end of 2000 FUND MANAGER James P. Goff - ----------------- Executive Vice President of subadviser Managed fund since 1996 (its inception) Joined subadviser in 1988 Began career in 1985 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 59.33%, fourth quarter 1999 Worst quarter: down 29.24%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -35.86% -11.75% Life of fund 19.90% 16.39%
Index:Russell Mid Cap(TM) Growth Index *Began operations on May 1, 1996. 28 MAIN RISKS Primary Small /Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized com- panies may be subject to more erratic price movements than investment in large established companies. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "mid cap" approach carries the risk that in certain markets mid cap stocks will underperform small cap and large cap stocks. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary 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 cur- rency also pose special risks. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could be- come harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share Interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.22 $ 11.93 $ 15.12 $ 29.22 Income from investment operations: Net investment income (loss) 0.05 (0.02) (0.09) (0.19) (0.05) Net realized and unrealized gain (loss) on investments* 0.22 1.73 4.75 17.70 (10.49) Total from investment operations 0.27 1.71 4.66 17.51 (10.54) Less distributions: Distributions from net investment income and capital paid in (0.05) -- (0.15) -- (1.06) Distributions from net realized gain on investments sold -- -- (1.32) (3.41) (0.41) Distributions in excess of income, capital paid in & gains -- -- -- -- (1.61) Total distributions (0.05) -- (1.47) (3.41) (3.08) Net asset value, end of period $ 10.22 $ 11.93 $ 15.12 $ 29.22 $ 15.60 Total investment return 2.69% 16.66% 39.07% 118.31% (35.86)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $16,492 $40,235 $94,085 $452,937 $393,988 Ratio of expenses to average net assets (%)*** 1.10% 1.10% 1.10% 0.93% 0.85% Ratio of net investment income (loss) to average net assets (%) 0.92% (0.26% (0.64)% (0.68)% (0.43)% Turnover rate (%) 71.25% 124.04% 137.01% 106.06% 140.94%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 2.34%, 1.42% and 1.13% for the years ended December 31, 1996, 1997, and 1998, respectively. 29 Small/Mid Cap CORE SM Fund GOAL AND STRATEGY This is a small/mid cap stock fund that seeks long-term capital appreciation. The Fund invests primarily in a diversified mix of the common stocks of small and mid-sized U.S. companies that are believed to offer: . favorable prospects for increasing dividends and capital appreciation (i.e., "value" companies); and . above-average potential for growth in revenues and earnings (i.e. "growth" companies). The manager selects stocks using a combination of quantitative techniques and equity research. The manager employs an investment process known as CORE, "Com- puter Optimized, Research-Enhanced," that employs a proprietary quantitative model. "CORE SM" is a service mark of Goldman, Sachs & Co. Stocks are purchased that have strong expected earnings growth and momentum and better valuation and risk characteristics than the Russell 2500(TM) Index. The Fund is managed using risk control techniques to maintain risk, style, cap- italization and sector characteristics similar to the Russell 2500(TM) Index. The Fund is broadly diversified by sector. The Fund normally invests in 400 to 700 stocks, with at least 65% (usually higher) of the Fund's assets in small cap and mid cap companies. The Fund nor- mally has 10% or less (usually lower) of its assets in cash and cash equiva- lents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, Standard & Poor's Depositary Receipts (SPDRs) and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other secu- rities). 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Goldman Sachs Asset Management, A unit of the Investment Management Division of Goldman Sachs and Co. 32 Old Slip New York, New York 10005 Managing since 1988 Managing Fund since May, 1998 Managed approximately $282 billion in assets at the end of 2000 FUND MANAGERS Robert C. Jones - ----------------- Managing Director of subadviser Joined subadviser in 1989 Melissa R. Brown - ----------------- Managing Director of subadviser Joined subadviser in 1998 Director of Quantitative Equity Research at Prudential Securities (1983-1998) Victor H. Pinter - ----------------- Vice President of subadviser Joined subadviser in 1990 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 17.85%, second quarter 1999 Worst quarter: down 20.01%, fourth quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 4.63% 4.27% Life of fund 4.94% 6.20%
Index: Russell 2500(TM) Index * Began operations on May 1, 1998. 30 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "small/mid cap" approach carries the risk that in certain markets small/mid cap stocks will underperform large cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. The Fund had unusually high turnover in 1999 and in 2000. This higher than expected turnover is due to (i) the relatively small size of the Fund, which magnifies the effect of contributions and redemptions, and (ii) the high vola- tility of the market, which in 1999 resulted in the subadviser implementing procedures to reduce the Fund's tracking risk. Normally, the Fund's turnover rate will be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1998** 1999 2000 Net asset value, beginning of period $10.00 $ 9.02 $ 9.82 Income from investment operations: Net investment income (loss) -- 0.02 0.05 Net realized and unrealized gain (loss) on investments* (0.98) 1.77 0.39 Total from investment operations (0.98) 1.79 0.44 Less distributions: Distributions from net investment income and capital paid in -- (0.03) (0.07) Distributions from net realized gain on investments sold -- (0.96) (0.32) Distributions in excess of income, capital paid in & gains -- -- (0.05) Total distributions -- (0.99) (0.44) Net asset value, end of period $ 9.02 $ 9.82 $ 9.82 Total investment return (9.81)% 20.54 % 4.63% Ratios and supplemental data Net assets, end of period (000s omitted)($) $5,015 $8,248 $21,636 Ratio of expenses to average net assets (%)*** 1.05% 0.94% 0.90% Ratio of net investment income (loss) to average net assets (%) (0.01)% 0.30% 0.56% Turnover rate (%) 60.51% 109.12% 94.78%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations May 1, 1998. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 4.55%, 2.24% and 1.23% for the years ended December 31, 1998, 1999 and 2000, respectively. 31 Small/Mid Cap Growth Fund GOAL AND STRATEGY This is a small/mid cap stock fund with a growth emphasis that seeks long-term capital appreciation. The Fund invests primarily in the common stocks of small and mid-sized U.S. companies that are believed to offer above-average potential for growth in rev- enues and earnings. The manager selects stocks using a combination of proprietary quantitative and qualitative equity research. Quantitative screening seeks to identify a group of high-quality companies with above-average growth characteristics relative to industry peers. Equity research seeks to identify indi vidual companies from that group with a higher potential for long term earnings growth and capital appreciation. The manager buys companies that seem attractive based on a combination of cri- teria, among others: . Superior historical earnings growth, . Prospects for above-average growth, . Attractive valuations, . Strong market positions, . Favorable new products, and . Superior management. The Fund is broadly diversified by sector. The Fund normally invests in 60 to 110 stocks, with at least 65% (usually higher) of its assets in small and mid cap companies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since May, 1999 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGERS Frank V. Wisneski - ----------------- Senior Vice President of subadviser Joined subadviser in 1968 (Retiring June, 2001) Frank J. Boggan, CFA - ----------------- Vice President of subadviser Joined subadviser in 2001 Managing Director of Palladian Capital Management (1998-2001) Portfolio Manager at The Pioneer Group (1991-1998) John J. Harrington, CFA - ----------------- Vice President of subadviser Joined subadviser in 1995 Portfolio Manager at Munder Capital Management (1991-1994) PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 21.59%, fourth quarter 1998 Worst quarter: down 21.48%, third quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2** 1 year 9.25% -16.10% -16.10% 5 Years 10.34% 12.17% 17.50% Life of fund 12.85% 14.14% 18.14%
Index 1: Russell 2500(TM) Growth Index Index 2: A composite index combining the performance of the following indices over the periods indicated: Russell Mid Cap(TM) Growth Index (from inception through April 30, 1999) and Russell 2500(TM) Growth Index (after April 30, 1999) *Began operations on May 1, 1994. ** John Hancock believes Index 2 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 32 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "small/mid cap" approach carries the risk that in certain markets small/mid cap stocks will underperform large cap stocks. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commis- sions and other transaction costs will have on the fund's performance. Any turnover rate in excess of 100% is considered relatively high. The Fund had a high turnover rate in 1999 and 2000 because of higher than expected market volatility and some restructuring of the Fund. In future years, the Fund's turnover rate will normally be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 13.18 $ 16.52 $ 15.39 $ 15.94 $ 14.03 Income from investment operations: Net investment income (loss) 0.02 0.01 (0.02) (0.07) (0.02) Net realized and unrealized gain (loss) on investments* 3.99 0.56 0.88 0.74 1.27 Total from investment operations 4.01 0.57 0.86 0.67 1.25 Less distributions: Distributions from net investment income and capital paid in (0.02) (0.01) -- (0.17) -- Distributions from net realized gain on investments sold (0.65) (1.69) (0.31) (2.41) (1.43) Distributions in excess of income, capital paid in & gains -- -- -- -- (0.15) Total distributions (0.67) (1.70) (0.31) (2.58) (1.58) Net asset value, end of period $ 16.52 $ 15.39 $ 15.94 $ 14.03 $ 13.70 Total investment return 30.33% 3.44% 5.61% 5.15% 9.25% Ratios and supplemental data Net assets, end of period (000s omitted)($) $194,108 $213,612 $193,332 $181,931 $190,010 Ratio of expenses to average net assets (%) 0.84% 0.85% 0.89% 0.85% 0.85% Ratio of net investment income (loss) to average net assets (%) 0.18% 0.09% (0.11)% (0.27)% (0.20)% Turnover rate (%) 217.84% 331.19% 162.21% 172.58% 103.19%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 33 Small Cap Equity Fund GOAL AND STRATEGY This is a small cap stock fund that seeks long-term capital appreciation. The Fund invests primarily in a diversified mix of the common stocks of small U.S. companies that are believed to be undervalued relative to long-term earn- ings growth potential. The manager selects stocks using proprietary fundamental equity research. Research focuses on identifying companies that are believed to be: . undervalued (i.e., with current stock price below long-term value); . asset rich with strong balance sheets and able to generate internal cash flows to meet capital needs; and . dynamic and growing with realistic payback periods for any price premium. The manager employs a research intensive approach using extensive field research and direct company contact to determine the fundamental value of a company. A company's future prospects are determined from analyzing a company's products, markets, management, suppliers, and competitors. The Fund is managed using a multiple portfolio manager system in which the Fund is managed by multiple portfolio managers and/or research analysts. The Fund is normally broadly diversified since its exposures reflect the aggregate deci- sions of the multiple portfolio managers and research analysts managing the Fund. The Fund's sector exposures are a result of stock selection as opposed to pre- determined allocations. The Fund normally invests in 150 to 300 stocks, with at least 65% (usually higher) of its assets in small cap companies. The Fund nor- mally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Capital Guardian Trust Company 333 South Hope Street Los Angeles, California 90071 Managing since 1968 Managing Fund since November, 2000 Managed approximately $122 billion in assets at the end of 2000 FUND MANAGERS Team managed by 5 Portfolio Managers Average 17 years with Capital Guardian Average 21 years industry experience See Appendix A for more details PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 18.11%, second quarter 1997 Worst quarter: down 21.06%, third quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2** 1 year -8.89% -3.02% 10.32% Life of fund 2.97% 8.69% 8.52%
Index 1: Russell 2000(R) Index Index 2: A composite index combining the performance of the following indices over the periods indicated: 50% Russell 2000(R) Index/50% Russell 2000(R) Value Index (from inception through August, 1999); Russell 2000(R) Value Index (from September, 1999 through October, 2000); and Russell 2000(R) Index (after Octo- ber, 2000) *Began operations on May 1, 1996. ** John Hancock believes Index 2 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 34 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "small cap" approach carries the risk that in certain markets small cap stocks will underperform mid cap and large cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Although the Fund's turnover rate has been high in recent years, the current manager anticipates that the Fund's turnover rate will normally be less than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.73 $ 12.40 $ 11.59 $ 10.92 Income from investment operations: Net investment income (loss) 0.07 0.08 0.07 0.09 0.14 Net realized and unrealized gain (loss) on investments* 0.96 2.66 (0.81) (0.50) (1.13) Total from investment operations 1.03 2.74 (0.74) (0.41) (0.99) Less distributions: Distributions from net investment income and capital paid in (0.07) (0.08) (0.07) (0.07) (0.45) Distributions from net realized gain on investments sold (0.23) (0.99) -- (0.01) (0.14) Distributions in excess of income, capital paid in & gains -- -- -- (0.18) (0.20) Total distributions (0.30) (1.07) (0.07) (0.26) (0.79) Net asset value, end of period $ 10.73 $ 12.40 $ 11.59 $ 10.92 $ 9.14 Total investment return 10.33% 25.57% (5.96)% (3.43)% (8.89)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $10,541 $43,261 $64,095 $68,900 $70,031 Ratio of expenses to average net assets (%)*** 1.05% 1.05% 1.05% 0.95% 0.92% Ratio of net investment income (loss) to average net assets (%) 1.15% 0.68% 0.63% 0.78% 1.25% Turnover rate (%) 66.31% 126.10% 100.83% 117.33% 189.57%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 2.06%, 1.30%, 1.08%, 0.96% and 0.95% for the years ended December 31, 1996, 1997, 1998, 1999 and 2000, respectively. 35 Small Cap Value Fund (Formerly Small/Mid Cap Value Fund) GOAL AND STRATEGY This is a small cap stock fund with a value emphasis that seeks long-term capi- tal appreciation. The Fund invests primarily in a diversified mix of common stocks of small U.S. companies that are believed to be undervalued by various measures and offer good prospects for capital appreciation. The manager employs a value approach in selecting stocks using proprietary fun- damental equity research. The manager generally looks for companies with: . Low price/earnings, price/book or price/cash flow ratios relative to small cap stocks, the company's peers, or its own historical norm. . Low stock price relative to a company's underlying asset values. . A sound balance sheet and other positive financial characteristics. . Catalysts with the potential for value realization such as beneficial manage- ment change, restructuring, or industry consolidation. The Fund's sector exposures are a result of stock selection as opposed to pre- determined allocations. The Fund normally invests in 75 to 135 stocks, with at least 65% (usually higher) of its assets in small cap compa- nies. The Fund normally has 10% or less of its assets in cash and cash equiva- lents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, Maryland 21202 Managing since 1937 Managing Fund since January, 2001 Managed approximately $167 billion in assets at the end of 2000 FUND MANAGERS Management by Investment Advisory Committee Preston G. Athey, CFA, CIC - ----------------- Managing Director of subadviser Joined subadviser in 1978 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 13.42%, third quarter 2000 Worst quarter: down 4.40%, third quarter 1999 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 34.19% 20.79% Life of fund 29.38% 15.91%
Index: Russell 2500(R) Value Index * Began operations on August 31, 1999. 36 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "value" approach carries the risk that in certain markets "value" stocks will underperform "growth" stocks. Also, the Fund's "small cap" approach carries the risk that in certain markets small cap stocks will underperform mid cap and large cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Although the Fund's turnover rate was high in 2000, the current manager antic- ipates that the Fund's turnover rate will normally be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Small Cap Value Fund (formerly Small/Mid Cap Value Fund) -- Period ended December 31: 1999** 2000 Net asset value, beginning of period $10.00 $ 10.13 Income from investment operations: Net investment income (loss) -- 0.01 Net realized and unrealized gain (loss) on investments* 0.49 3.37 Total from investment operations 0.49 3.38 Less distributions: Distributions from net investment income and capital paid in -- (0.01) Distributions from net realized gain on investments sold (0.36) (1.80) Distributions in excess of income, capital paid in & gains -- -- Total distributions (0.36) (1.81) Net asset value, end of period $10.13 $ 11.70 Total investment return 5.08% 34.19% Ratios and supplemental data Net assets, end of period (000s omitted)($) $5,570 $29,436 Ratio of expenses to average net assets (%)*** 1.05% 1.05% Ratio of net investment income (loss) to average net assets (%) (0.12)% 0.13% Turnover rate (%) 51.97% 220.80%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.61% and 1.29% for the years ended December 31, 1999 and 2000, respectively. 37 Small Cap Growth Fund GOAL AND STRATEGY This is a small cap stock fund with a growth emphasis that seeks long-term cap- ital appreciation. The Fund invests primarily in a diversified mix of the common stocks of small U.S. companies that are believed to offerabove-average potential for growth in revenues and earnings. The manager selects stocks using proprietary equity research. Stocks are pur- chased that are expected to have rapid earnings growth that is not yet widely recognized by the investment community. The manager looks for companies with: . demonstrated annual 20% earnings growth over 3 years and/or similar future growth expectations; . dominant market niche or poised to become market leaders; and . high quality senior management with coherent business strategies. The Fund is highly diversified by sector and number of individual stocks. The Fund's sector weightings are broadly diversified and managed relative to those of the Russell 2000(R) Growth Index. The Fund normally invests in 140 to 220 stocks, with at least 65% (usually higher) of its assets in small cap compa- nies. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 Owned by John Hancock Managing since 1968 Managing Fund since May, 1996 Managed approximately $32 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Bernice S. Behar, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1991 Began career in 1986 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 45.57%, fourth quarter 1999 Worst quarter: down 22.48%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -21.43% -22.43% Life of fund 12.63% 4.72%
Index: Russell 2000(R) Growth Index *Began operations on May 1, 1996. 38 MAIN RISKS Primary Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. 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 concen- trated 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 invest- ment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "small cap" approach carries the risk that in certain markets small cap stocks will underperform mid cap and large cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 9.93 $ 11.34 $ 12.99 $ 19.12 Income from investment operations: Net investment income (loss) 0.01 (0.02) (0.05) (0.21) (0.02) Net realized and unrealized gain (loss) on investments* (0.06) 1.44 1.70 9.06 (4.16) Total from investment operations (0.05) 1.42 1.65 8.85 (4.18) Less distributions: Distributions from net investment income and capital paid in (0.02) (0.01) -- -- (1.35) Distributions from net realized gain on investments sold -- -- -- (2.72) (0.12) Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions (0.02) (0.01) -- (2.72) (1.47) Net asset value, end of period $ 9.93 $ 11.34 $ 12.99 $ 19.12 $ 13.47 Total investment return (0.50)% 14.26% 14.49% 70.38% (21.43)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $20,633 $48,761 $74,849 $179,570 $234,542 Ratio of expenses to average net assets (%)*** 1.00% 1.00% 1.00% 0.89% 0.82% Ratio of net investment income (loss) to average net assets (%) 0.12% (0.28)% (0.65)% (0.70) (0.50)% Turnover rate (%) 50.93% 86.23% 101.16% 113.11% 97.73%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuations in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made, the expense ratio would have been 1.55%, 1.12% and 1.05% for the years ended December 31, 1996, 1997, and 1998, respectively. 39 International Equity Index Fund GOAL AND STRATEGY This is an international stock fund that seeks to track the performance of broad-based equity indices of foreign companies in developed and emerging mar- kets. The Fund is managed relative to a target mix of 90% in the MSCI EAFE GDP Index and 10% in the MSCI EMF Index. The EAFE GDP Index, known as the Europe Austral- asia and Far East Index, includes foreign companies in developed markets, with country index weights based upon a country's Gross Domestic Product (GDP). The EMF Index, known as the Emerging Markets Free Index, includes foreign companies in emerging markets, with country index weights based upon a country's market capitalization. The manager employs a passive management strategy using quantitative techniques to invest in a representative sample of stocks in the Index. The manager selects stocks in an attempt to track, as closely as possible, the characteris- tics of the Index, including country and sector weights. The Fund normally invests in 400 to 1,200 stocks. 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), iShares SM and other Exchange Traded Funds (ETFs), cash equivalents, and certain derivatives (in- vestments 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. Note: "MSCI EAFE GDP Index" and "MSCI EMF Index" are the exclusive property of Morgan Stanley & Co., Incorporated and are registered service marks of Morgan Stanley Capital International. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1986 Managing Fund since May, 1998 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGERS Bradford S. Greenleaf, CFA - ----------------- Senior Vice President of subadviser Joined team in 2000 Joined subadviser in 1994 Vice President, Franklin Portfolio Associates, Inc. (1986-1994) David P. Nolan, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1996 Portfolio manager Boston International Advisors, Inc. (1989-1996) PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 20.91%, fourth quarter 1998 Worst quarter: down 14.75%, third quarter 1998 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2** 1 year -17.42% -15.30% -16.93% 5 years 6.25% 10.16% 7.81% 10 years 8.21% 10.27% 8.75% Life of fund 7.29% 9.11% 6.29%
Index 1: MSCI EAFE GDP Index Index 2: A composite index combining the performance of the following indices over the periods indicated: MSCI EAFE Index (from inception through April 30, 1998); MSCI EAFE GDP Index (from May 1, 1998 through June 30, 1999); and 90% MSCI EAFE GDP Index/10% MSCI EMF Index (after June 30, 1999) * Began operations on May 2, 1988. ** John Hancock believes Index 2 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 40 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, to the extent the Fund invests in emerging market coun- tries, 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 Index less closely: . The securities selected by the manager may not be fully representative of the Index. . Transaction expenses of the Fund may result in the Fund's performance being different than that of the Index. . The size and timing of the Fund's cash flows may result in the Fund's per- formance being different than that of the Index. 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 invest- ments 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, deriva- tives could become harder to value or sell at a fair price. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 15.61 $ 16.83 $ 15.20 $ 15.56 $ 19.64 Income from investment operations: Net investment income (loss) 0.21 0.13 0.23 0.21 0.23 Net realized and unrealized gain (loss) on investments* 1.22 (0.97) 2.91 4.51 (3.64) Total from investment operations 1.43 (0.84) 3.14 4.72 (3.41) Less distributions: Distributions from net investment income and capital paid-in (0.21) (0.13) (0.23) (0.21) (0.25) Distributions from net realized gain on investments sold -- (0.66) (2.55) (0.38) (0.59) Distributions in excess of income, capital paid in & gains -- -- -- (0.05) -- Total distributions (0.21) (0.79) (2.78) (0.64) (0.84) Net asset value, end of period $ 16.83 $ 15.20 $ 15.56 $ 19.64 $ 15.39 Total investment return 9.19% (5.03)% 20.82% 30.87% (17.42)% Ratios and supplemental data Net assets, end of period (000s omitted) $155,753 $152,359 $173,137 $244,017 $195,012 Ratio of expenses to average net assets (%)** 0.76% 0.79% 0.56% 0.31% 0.28% Ratio of net investment income (loss) to average net assets (%) 1.30% 0.78% 1.45% 1.26% 1.40% Turnover rate (%) 92.03% 83.13% 158.63% 19.01% 14.86%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 0.63%, 0.38% and 0.37% for the years ended December 31, 1998, 1999 and 2000, respectively. 41 International Opportunities Fund GOAL AND STRATEGY This is an international stock fund that seeks long-term capital appreciation. The Fund primarily invests in a diversified mix of common stocks of large established and medium-sized foreign companies located outside the U.S., pri- marily in developed countries and in emerging markets to a lesser extent. The manager selects stocks using proprietary fundamental research that identi- fies companies that: . are capable of achieving sustainable above-average, long-term earnings growth; . are reasonably priced relative to present or anticipated earnings, cash flow, or book value; and . have attractive valuations relative to opportunities in large, mid or small cap companies. The Fund's country and regional exposures are primarily a result of stock selection, although the Fund maintains broad diversification across countries and regions. The manager selects stocks that have growth characteristics such as: . leading market position or technological leadership; . attractive business niche; . healthy balance sheets with relatively low debt; . strong competitive advantage; . strength of management; and . earnings growth and cash flow sufficient to support growing dividends. The Fund invests in at least 3 different countries other than the U.S., but normally invests in 15 to 45 countries, with at least 65% of its assets in securities of non-U.S. entities. The Fund will invest no more than 20% of its assets in emerging market stocks. The Fund normally invests in 150 to 250 stocks and normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). Although the Fund may employ foreign currency hedging techniques, the Fund nor- mally maintains the currency exposure of the underlying equity investments. The Fund also may purchase other types of securities that are not primary investment vehicles, for example: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), iSharesSM and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER T. Rowe Price International, Inc. 100 East Pratt Street Baltimore, Maryland 21202 Managing since 1979 Managing Fund since May, 1996 Managed approximately $33 billion in assets at the end of 2000 FUND MANAGERS Management by Investment Advisory Group overseen by: David J. L. Warren - ----------------- Portfolio Manager of subadviser Joined subadvisor in 1983 Began career in 1981 John R. Ford - ----------------- Portfolio Manager of subadviser Joined subadvisor in 1982 Began career in 1980 James B. M. Seddon - ----------------- Portfolio Manager of subadvisor Joined subadvisor in 1987 Began career in 1987 Mark Bickford-Smith - ----------------- Portfolio Manager of subadvisor Joined subadvisor in 1995 Began career in 1985 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 24.44%, fourth quarter 1999 Worst quarter: down 13.70%, third quarter 1998 Average annual total returns(/1/) -- for periods ending 12/31/2000*
Fund Index 1 year -16.36% -15.09% Life of fund 7.70% 5.81%
Index:MSCI All Country World Free Index, Excluding U.S. *Began operations on May 1, 1996. 42 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, to the extent the Fund invests in emerging market coun- tries, it will have a significantly higher degree of foreign risk than if it invested exclusively in developed or newly-industrialized countries. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.60 $ 10.63 $ 12.21 $ 15.17 Income from investment operations: Net investment income (loss) 0.07 0.10 0.11 0.10 0.07 Net realized and unrealized gain (loss) on investments* 0.60 0.11 1.57 3.95 (2.57) Total from investment operations 0.67 0.21 1.68 4.05 (2.50) Less distributions: Distributions from net investment income and capital paid in (0.07) (0.10) (0.10) (0.11) (0.15) Distributions from net realized gain on investments sold -- (0.08) -- (0.94) (0.62) Distributions in excess of income, capital paid in & gains -- -- -- (0.04) (0.05) Total distributions (0.07) (0.18) (0.10) (1.09) (0.82) Net asset value, end of period $ 10.60 $ 10.63 $ 12.21 $ 15.17 $ 11.85 Total investment return 6.72% 1.95% 15.92% 34.01% (16.36)% Ratios and supplemental data Net assets, end of period (000s omitted) $17,898 $30,631 $64,250 $79,794 $120,034 Ratio of expenses to average net assets (%)*** 1.25% 1.22% 1.16% 1.02% 0.93% Ratio of net investment income (loss) to average net assets (%) 0.87% 0.65% 0.89% 0.77% 0.47% Turnover rate (%) 5.46% 21.09% 18.67% 34.02% 37.92%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 2.76%, 1.57%, 1.46%, 1.15% and 1.09% for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 respectively. 43 International Equity Fund GOAL AND STRATEGY This is an international stock fund that seeks long-term capital appreciation. The Fund primarily invests in a diversified mix of common stocks of large established and medium-sized foreign companies located primarily in developed countries outside of the U.S. The manager selects stocks using proprietary equity research that identifies companies having: . strong market positions within their industry, . management with a history of excellence focusing on core businesses, . above average return on capital within their industry, and . demonstrated ability to create long-term shareholder value. The manager determines the allocation among regions and countries using a com- bination of qualitative and quantitative inputs, including: . quantitative models to rank the relative attractiveness of each country/region based on valuation, credit risk and momentum, and . qualitative assessment of regional portfolio managers to adjust model results. The Fund's sector exposures are largely the result of stock selection, although the Fund maintains broad sector representation. The Fund is managed using risk control techniques that maintain overall regional diversification. Although the Fund may employ foreign currency hedging techniques, the Fund normally main- tains the currency exposure of the underlying equity investments. The Fund invests in at least 3 different countries other than the U.S., but normally invests in 10 to 35 countries, with at least 65% of its assets in securities of non-U.S. entities. The Fund will invest no more than 10% of its assets in emerging market stocks. The Fund normally invests in 120 to 200 stocks and normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund also may purchase other types of securities that are not primary investment vehicles, for example: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), iShares SM and other Exchange Traded Funds (ETFs), and certain derivatives (investments whose value is based on indices or other securities). As an example of how deriva- tives 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Goldman Sachs Asset Management, A unit of the Investment Management Division of Goldman, Sachs & Co. 32 Old Slip New York, New York 10005 Managing since 1988 Managing Fund since August, 1999 Managed approximately $282 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Shogo Maeda - ----------------- Managing Director of subadviser Joined subadviser in 1994 Senior Portfolio Manager at Nomura Investment Management, Inc. (1987-1994) Susan Noble - ----------------- Managing Director of subadviser Joined subadviser in 1997 Portfolio Management Director at Fleming Investment Management (1986-1997) Andrew Orchard - ----------------- Executive Director of subadviser Joined subadviser in 1999 Portfolio Manager at Morgan Grenfell Asset Management (1994-1999) PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 22.28%, fourth quarter 1999 Worst quarter: down 8.76%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -14.37% -13.96% Life of fund 3.01% 1.31%
Index:MSCI EAFE Index *Began operations on August 31, 1999. 44 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, to the extent the Fund invests in emerging market coun- tries, it will have a significantly higher degree of foreign risk than if it invested exclusively in developed or newly-industrialized countries. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP.
Period ended December 31: 1999** 2000 Net asset value, beginning of period $ 10.00 $ 11.95 Income from investment operations Net investment income (loss) 0.01 0.06 Net realized and unrealized gain (loss) on investments* 2.12 (1.78) Total from investment operations 2.13 (1.72) Less distributions: Distributions from net investment income and capital paid in (0.01) (0.04) Distributions from net realized gain on investment (0.17) (0.30) Distributions in excess of income, capital paid in & gains -- (0.04) Total distributions (0.18) (0.38) Net asset value, end of period $ 11.95 $ 9.85 Total investment return 21.49% (14.37)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $12,430 $15,716 Ratio of expenses to average net assets (%)*** 1.10% 1.10% Ratio of net investment income (loss) to average net assets (%) 0.21% 0.53% Turnover rate (%) 26.76% 75.41%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of purchases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.71% and 1.76% for the years ended December 31, 1999 and 2000, respectively. 45 Emerging Markets Equity Fund GOAL AND STRATEGY This is an emerging markets stock fund that seeks long-term capital apprecia- tion. The Fund invests primarily in the stocks of companies in countries having econ- omies or markets generally considered by the World Bank or United Nations to be emerging or developing. The manager's investment approach combines top-down country allocation with bottom-up stock selection. In making country allocation decisions, the manager analyzes the global environment and selects countries with: . Improving macroeconomic, political and social trends, and . attractive valuation levels. The manager selects stocks using fundamental proprietary research to identify companies that have: . strong earnings growth potential, . reasonable valuations, and . shareholder-focused management, dominant products, and well established dis- tribution channels. The Fund normally invests in at least 15 emerging market countries. The Fund normally invests in 100 to 350 stocks in 15 to 30 countries. The Fund normally has 10% or less of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). 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), and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Morgan Stanley Dean Witter Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 Managing since 1975 Managing Fund since August, 1999 Managed approximately $170 billion in assets at the end of 2000 FUND MANAGERS Robert L. Meyer, CFA - ----------------- Managing Director of subadvisor Joined subadviser in 1989 Narayan Ramachandran, CFA - ----------------- Managing Director of subadviser Joined subadviser in 1996 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 50.45%, fourth quarter 1999 Worst quarter: down 20.41%, third quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -40.11% -30.61% Life of fund -9.21% -7.14%
Index:MSCI Emerging Markets Free Index *Began operations on May 1, 1998. 46 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, since the Fund invests primarily in emerging market coun- tries, it will have a significantly higher degree of foreign risk than funds that invest primarily in developed or newly- industrialized countries. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "growth" approach carries the risk that in certain markets "growth" stocks will underperform "value" stocks. Also, the Fund's "large/mid cap" approach carries the risk that large/mid cap stocks will underperform small cap stocks. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the funds perfor- mance. Any turnover rate in excess of 100% is considered relatively high. The Fund's turnover rate could be greater than 100% due to the relatively high vol- atility associated with investing in emerging markets. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1998** 1999 2000 Net asset value, beginning of period $10.00 $ 7.09 $ 12.26 Income from investment operations: Net investment income (loss) 0.03 0.03 (0.02) Net realized and unrealized gain (loss) on investments* (2.91) 5.67 (4.91) Total from investment operations (2.88) 5.70 (4.93) Less distributions: Distributions from net investment income and capital paid in (0.03) (0.01) (0.01) Distributions from net realized gain on investments sold -- (0.10) (0.62) Distributions in excess of income, capital paid in & gains -- (0.42) -- Total distributions (0.03) (0.53) (0.63) Net asset value, end of period $ 7.09 $ 12.26 $ 6.70 Total investment return*** (28.87)% 81.37% (40.11)% Ratios and supplemental data Net assets, end of period (000s omitted) $7,310 $32,596 $31,010 Ratio of expenses to average net assets (%)**** 1.55% 1.39% 1.32% Ratio of net investment income (loss) to average net assets (%) 0.51% 0.19% (0.28)% Turnover rate (%) 53.95% 196.32% 103.90%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1998. *** Includes the effect of a voluntary capital contribution from John Hancock of $32 per share for the year ended 1999. The Total Investment Return without the capital contribution would have been 79.02% for the year ended 1999. **** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 3.69%, 3.44% and 2.49% for the years ended December 31, 1998, 1999 and 2000, respectively. 47 Real Estate Equity Fund GOAL AND STRATEGY This is a non-diversified real estate stock fund that seeks above-average income and long-term capital appreciation. The Fund invests primarily in: . equity securities of real estate investment trusts (REITs) that own commer- cial and multi-family residential real estate; and . equity securities of real estate operating companies. The Fund invests mostly in stocks of U.S. companies but also invests to a lim- ited extent in foreign stocks. The Fund employs two subadvisers, each of which employs its own investment approach and independently manages its portion of the Fund. On or about June 30, 2000, the assets of the Fund were evenly divided between the subadvisers. All subsequent investments in and redemptions from the Fund will be evenly divided between the subadvisers. These allocation methodologies may change in the future. Independence Investment LLC ("Independence") selects real estate stocks using a combination of proprietary, equity research and quantitative tools. Real estate stocks are purchased that are undervalued relative to the stock's his- tory and the market and have improving earnings growth prospects. Independence seeks to maintain risk, style and sector characteristics similar to the public equity real estate market. Independence will normally invest in 30 to 60 stocks in its portion of the Fund. Morgan Stanley Dean Witter Investment Management Inc. ("MSDW") selects real estate stocks using a combination of: . top-down, market overview to identify undervalued property sectors and geo- graphic regions; and . proprietary, fundamental equity research to select companies that are attrac- tively priced relative to the value of their underlying real estate assets. MSDW seeks to maintain broad exposure to key property sectors (i.e., apart- ments, retail and office/industrial). MSDW will normally invest in 30 to 50 stocks in its portion of the Fund. The Fund is "non-diversified", which means that it can take larger positions in individual issuers. Each portion of the Fund normally has at least 65% (usually higher) of its assets invested in real estate equity securities and 10% or less (usually lower) of its assets in cash and cash equivalents. Each portion of the Fund may invest in initial public offerings (IPOs). Each portion of the Fund also may purchase other types of securities that are not primary investment vehicles, for example: foreign securities denominated in U.S. dollars or any other currency, equity securities of non-real estate busi- nesses whose real estate holdings are significant in relation to their market capitalization, and certain derivatives (investments whose value is based on indices and other securities). In abnormal market conditions, each portion of the Fund may take temporary defensive measures--such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those measures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund since May, 1988 Managed approximately $25 billion in assets at the end of 2000 Fund Managers John F. DeSantis - ----------------- Executive Vice President of subadviser Managed fund since 1999 Joined subadviser in 1982 Thomas D. Spicer - ----------------- Vice President of subadviser Managed fund since 1999 Joined team in 1996 Joined subadviser in 1991 SUBADVISER Morgan Stanley Dean Witter Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 Managing since 1975 Managing Fund since June, 2000 Managed approximately $170 billion in assets at the end of 2000 Fund Managers Theodore R. Bigman - ----------------- Managing Director, Global Real Estate, of subadviser Joined subadviser in 1995 Douglas A. Funke - ----------------- Principal of subadviser Joined subadviser in 1995 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 25.82%, first quarter 1991 Worst quarter: down 17.37%, third quarter 1990 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 31.29% 30.74% 5 years 10.89% 11.38% 10 years 13.41% 11.39% Life of fund 9.41% 6.39%
Index: Wilshire Real Estate Securities Index *Began operations on May 16, 1988. 48 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. Manager Risk: The managers and their respective strategies may fail to produce the intended results. The Fund could underperform its peers or lose money if the managers' investment strategies do not perform as expected. Sector Fund Risk: The Fund's investments are concentrated in a single sector of the stock market and the Fund's performance could be significantly affected by developments in that particular sector. Because of this concentration, the Fund's performance could be worse than the overall market by a wide margin or for extended periods. Also, the Fund's performance could be more volatile rela- tive to funds that invest broadly across different sectors of the stock market. Real Estate Securities Risk: Real estate investment trusts (REITs) or other real estate-related equity securities may be affected by changes in the value of the underlying property owned by the trust. Mortgage REITs may be affected by the quality of any credit extended. Other potential risks include the possi- bility of a REIT failing to qualify for tax-free pass-through of income under the Internal Revenue Code or failing to maintain exemption under the Investment Company Act of 1940. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a specific security's poor performance will hurt the fund significantly. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Interest Rate Risk: The Fund is subject to interest rate risk, which is the possibility that changes in interest rates could hurt REIT performance. In gen- eral, during periods of high interest rates, REITs may lose some of their appeal for investors who may be able to obtain higher yields from other income- producing investments, such as long-term bonds. Higher interest rates also mean that financing for property purchases and improvements is more costly and dif- ficult to obtain. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship limits and restrictions on removing currency also pose special risks. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated): The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 11.70 $ 14.64 $ 15.91 $ 12.46 $ 11.47 Income from investment operations: Net investment income (loss) 0.76 0.77 0.77 0.78 0.76 Net realized and unrealized gain (loss) on investments* 2.97 1.68 (3.38) (0.99) 2.73 Total from investment operations 3.73 2.45 (2.61) (0.21) 3.49 Less distributions: Distributions from net investment income and capital paid in (0.76) (0.77) (0.70) (0.78) (1.06) Distributions from net realized gain on investments sold (0.03) (0.41) (0.14) -- (0.06) Distributions in excess of income, capital paid in & gains -- -- -- -- (0.17) Total distributions (0.79) (1.18) (0.84) (0.78) (1.29) Net asset value, end of period $ 14.64 $ 15.91 $ 12.46 $ 11.47 $ 13.67 Total investment return 33.07% 17.22% (16.71)% (1.69)% 31.29% Ratios and supplemental data Net assets, end of period (000s omitted)($) $151,105 $204,131 $152,789 $126,214 $158,811 Ratio of expenses to average net assets (%) 0.69% 0.69% 0.69% 0.70% 0.76% Ratio of net investment income (loss) to average net assets (%) 6.14% 5.12% 5.48% 6.38% 5.99% Turnover rate (%) 18.37% 20.04% 22.69% 12.95% 58.81%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chase and withdrawals of shares in relation to the fluctuation in market val- ues of the fund. 49 Health Sciences Fund GOAL AND STRATEGY This is a non-diversified speciality health sciences stock fund with a growth emphasis that seeks long-term capital appreciation. The Fund invests primarily in the common stocks of companies in the health sci- ences industries, including pharmaceutical, health-care services, applied research and development, biotechnology, and medical technology, equipment and supplies industries. The Fund invests mostly in stocks of U.S. companies but also invests to a limited extent in foreign stocks. The manager selects health sciences and related stocks using proprietary funda- mental equity research and a systematic screening approach. The manager screens the universe for stocks that meet minimum size and earnings growth criteria. The manager employs a proprietary quantitative model to rank stocks based on: . fundamental catalyst (such as earnings surprise and momentum); . valuation (such as price-to-sales); and . financial strength (such as superior cash flow). The manager uses fundamental equity research with a health sciences team and global equity research team to identify companies with: . strong and innovative management teams; . opportunities for above-average growth within its industry; . strong competitive positioning relative to peers and suppliers; . sufficient financial strength to grow business; and . reasonable valuations relative to earnings expectations. The manager uses risk management tools and qualitative judgement to determine the Fund's industry and stock specific weightings. The Fund normally invests in 75 to 120 stocks. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: foreign securities denominated in U.S. dollars or any other currency, certain derivatives (investments whose value is based on indi- ces or other securities) and companies with the potential for growth as a result of their particular products, technology, patents or other market advan- tages in the health-sciences industries. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Putnam Investment Management, LLC One Post Office Square Boston, Massachusetts 02109 Managing since 1937 Managing Fund since May, 2001 Managed approximately $370 billion in assets at the end of 2000 Fund Managers Management by investment team overseen by: Richard England, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1992 PAST PERFORMANCE This is a new Fund. It was not in operation as of December 31, 2000. 50 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. Manager Risk: The managers and their respective strategies may fail to produce the intended results. The Fund could underperform its peers or lose money if the managers' investment strategies do not perform as expected. Sector Fund Risk: The Fund's investments are concentrated in a single sector of the stock market and the Fund's performance could be significantly affected by developments in that particular sector. Because of this concentration, the Fund's performance could be worse than the overall market by a wide margin or for extended periods. Also, the Fund's performance could be more volatile rel- ative to funds that invest broadly across different sectors of the stock mar- ket. Health Sciences and Related Securities Risk: Health sciences and related equity securities may be affected by changes in the regulatory and competitive environment for health sciences industries and in state and federal government policies relating to the funding of health care services. Other risks include (i) the possibility that regulatory approval may not be granted for new drugs or other products, (ii) lawsuits against health care companies related to product or service lia- bility issues, and (iii) technological advances that make existing health care products and services obsolete. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a spe- cific security's poor performance will hurt the fund significantly. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity markets. Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, political and social instability. Factors such as lack of liquidity, foreign ownership limits and restrictions on removing currency also pose special risks. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS--This is a new Fund. It was not in operation as of December 31, 2000. 51 Managed Fund GOAL AND STRATEGY This is a non-diversified balanced stock and bond fund that seeks income and long-term capital appreciation. The Fund invests primarily in a diversified mix of: . common stocks of large and mid sized U.S. companies, and . bonds with an overall intermediate term average maturity. The Fund employs two subadvisers, each of which employs its own investment approach and independently manages its portion of the Fund. On or about Novem- ber 1, 2000, the assets of the Fund were allocated between the two subadvisers with Capital Guardian receiving $500 million (approximately 16% of the Fund's assets as of October 31, 2000) and Independence the remainder. All subsequent investments in the Fund will be allocated equally between the two subadvisers, while redemptions will be allocated on an asset-weighted basis. These alloca- tion methodologies may change in the future. Independence Investment LLC ("Independence") selects stocks and bonds using a combination of proprietary research and quantitative tools. Stocks are pur- chased that are undervalued relative to the stock's history and have improving earnings growth prospects. Bonds are purchased that are attractively priced based upon market fundamentals and technical factors. Independence seeks to maintain risk and sector characteristics of the Fund similar to those of the overall equity market. Independence's portion of the Fund has a target mix of 60% equities and 40% bonds, but Independence actively manages the mix within +/- 10 percentage points of the target mix. Independence normally invests its equity portion in 80 to 160 stocks, with at least 65% (usually higher) in large cap companies. Independence may invest up to 30% of its bond assets in high yield and foreign bonds (denominated in foreign currencies). Capital Guardian Trust Company ("Capital Guardian") selects stocks and bonds using proprietary fundamental research that focuses on identifying securities that are believed to be undervalued (i.e., with current prices below long-term value). Capital Guardian's portion of the Fund has a target mix of 70% equities and 30% bonds, but Capital Guardian actively manages the mix within +/- 15 percentage points of the target mix. Capital Guardian uses a multiple portfolio manager system in which the stock and bond portions of the Fund are each managed by multiple portfolio managers and/or research analysts. Capital Guardian's strategy is normally broadly diversified since its exposures reflect the aggregate decisions of the multiple portfolio managers and research analysts. Capital Guardian's equity sector exposures are a result of stock selection as opposed to prede termined allocations. Capital Guardian normally invests its equity portion in 75 to 150 stocks, with at least 65% (usually higher) in large and mid cap companies. Capital Guardian may invest up to 30% of its bond assets in high yield and foreign bonds (denominated in foreign currencies). The Fund is "non-diversified," which means that it can take larger positions in individual issuers. Each portion of the Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. Each portion of the Fund may invest in initial public offerings (IPOs). Each portion of the Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). Each portion of the Fund may use derivatives, such as futures and forwards, to manage the Fund's average maturity and to implement foreign currency strategies. In abnormal market conditions, each portion of the Fund may take temporary defensive measures--such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those measures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund and its predecessor since March, 1986 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: John C. Forelli (equity) - ----------------- Senior Vice President of subadviser Joined team in 1996 Joined subadviser in 1990 Jay C. Leu, CFA (fixed income) - ----------------- Senior Vice President of subadviser Joined team in 1998 Joined subadvisor in 1997 Portfolio Manager, Pacific Capital Asset Management (1995-1997) SUBADVISER Capital Guardian Trust Company 333 South Hope Street Los Angeles, California 90071 Managing since 1968 Managing Fund since November, 2000 Managed approximately $122 billion in assets at the end of 2000 FUND MANAGERS Equity Managed by team of 23 research analysts Average of 10 years with Capital Guardian Average of 14 years industry experience Fixed Income Team managed by 3 portfolio managers Average of 15 years with Capital Guardian Average of 18 years industry experience See Appendix A for more details PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 14.77%, fourth quarter 1998 Worst quarter: down 7.22%, third quarter 1998 Average annual total return -- for periods ending 12/31/2000*
Fund Index 1 Index 2 Index 3** 1 year 0.03% -9.11% 11.63% -0.99% 5 years 11.55% 18.35% 6.46% 12.96% 10 years 12.15% 17.46% 7.96% 13.02% Life of fund 11.57% 15.26% 8.16% 12.09%
Index 1: S&P 500 Index Index 2:Lehman Brothers Aggregate Bond Index Index 3:A composite index combining the performance of the following indices over the periods indicated: 50% S&P 500 Index/50% Lehman Brothers Aggregate Bond Index (from inception through December, 1997) and 60% S&P 500 Index/40% Lehman Brothers Aggregate Bond Index (after December, 1997) * Began operations on March 29, 1986. **John Hancock believes Index 3 is a more suitable index against which to meas- ure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 52 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall market. Manager Risk: The manager and its strategy may fail to produce the intended results. The Fund could underperform its peers or lose money if the manager's investment strategy does not perform as expected. Market Allocation Risk: The allocation of the Fund's assets among major asset classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce the Fund's holdings in a class whose value then increases unexpectedly, or (2) increase the Fund's holdings in a class just prior to its experiencing a loss of value. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that in certain markets large/mid cap stocks will underperform small cap stocks. Non-Diversified Fund Risk: The Fund's larger position in individual issuers could produce more volatile performance relative to more diversified funds. The less diversified a fund's holdings are, the more likely it is that a specific security's poor performance will hurt the fund significantly. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the Fund may be downgraded. In either case, the value of the bond held by the Fund would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary 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. 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. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $13.73 $13.35 $14.35 $15.64 $ 15.45 Income from investment operations: Net investment income (loss) 0.61 0.59 0.46 0.44 0.44 Net realized and unrealized gain (loss) on investments* 0.81 1.86 2.43 0.94 (0.45) Total from investment operations 1.42 2.45 2.89 1.38 (0.01) Less distributions: Distributions from net investment income and capital paid in (0.61) (0.67) (0.51) (0.43) (0.44) Distributions from net realized gain on investments sold (1.19) (0.78) (1.09) (1.14) (1.18) Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions (1.80) (1.45) (1.60) (1.57) (1.62) Net asset value, end of period $13.35 $14.35 $15.64 $15.45 $ 13.82 Total investment return 10.72% 18.72% 20.42% 9.10% 0.03% Ratios and supplemental data Net assets, end of period (000s omitted)($) $2,386,660 $2,800,127 $3,301,910 $3,430,919 $2,995,794 Ratio of expenses to average net assets (%) 0.36% 0.37% 0.36% 0.36% 0.46% Ratio of net investment income (loss) to average net assets (%) 4.41% 4.18% 2.99% 2.75% 2.86% Turnover rate (%) 113.61% 200.41% 160.57% 203.86% 199.27%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 53 Aggressive Balanced Fund GOAL AND STRATEGY This is a balanced stock and bond fund that seeks income and long-term capital appreciation. The Fund invests primarily in a diversified mix of: . common stocks of large established U.S. companies, and . bonds with an overall intermediate term average maturity. The manager makes ongoing decisions about the mix among stocks and bonds. The manager has a target mix of 75% in equities and 25% in bonds, but actively man- ages the mix within +/-10 percentage points of the target mix. The manager selects stocks and bonds using a combination of proprietary research and quantitative tools. Stocks are purchased that are undervalued rel- ative to the stock's history and have improving earnings growth prospects. Bonds are purchased that are attractively priced based upon market fundamentals and technical factors. The manager seeks to maintain risk and sector character- istics similar to the overall equity market. The Fund normally invests its equity portion in 80 to 160 stocks, with at least 65% (usually higher) of its equity assets in large cap companies. The Fund may invest up to 30% of its bond assets in high yield and foreign bonds (denomi- nated in foreign currencies). The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial pub- lic offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: U.S. dollar denominated foreign securities, and certain derivatives (investments whose value is based on indices or other securities). The manager actively uses derivatives, such as futures and forwards, to adjust the Fund's average maturity and to implement currency strategies. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund since August, 1999 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: John C. Forelli (equity) - ----------------- Senior Vice President of subadviser Joined team in 1996 Joined subadviser in 1990 Jay C. Leu, CFA - ----------------- Senior Vice President of subadviser Joined team in 1998 Joined subadvisor in 1997 Portfolio Manager, Pacific Capital Asset Management (1995-1997) PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the vari- able contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 8.94%, fourth quarter 1999 Worst quarter: down 3.16%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2 Index 3** 1 year -1.53% -9.11% 11.63% -4.07% Life of fund 4.06% 1.17% 9.45% 3.44%
Index 1:S&P 500 Index Index 2:Lehman Brothers Aggregate Bond Index Index 3:75% S&P 500 Index/25% Lehman Brothers Aggregate Bond Index * Began operations on August 31, 1999. ** John Hancock believes Index 3 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's investment strategy. 54 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concen- trated 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. Market Allocation Risk: The allocation of the Fund's assets among major asset classes (i.e., stocks, bonds, and short-term debt securities) may (1) reduce the Fund's holdings in a class whose value then increases unexpectedly, or (2) increase the Fund's holdings in a class just prior to its experiencing a loss of value. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large cap" approach carries the risk that in certain markets large cap stocks will underperform mid cap and small cap stocks. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining maturity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obliga- tion to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general low- er-rated bonds have higher credit risk. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if inter- est rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally con- sidered more risky than direct investments. Also, in a down market, deriva- tives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1999** 2000 Net asset value, beginning of period $ 10.00 $ 10.62 Income from investment operations: Net investment income (loss) 0.06 0.19 Net realized and unrealized gain (loss) on investments* 0.64 (0.35) Total from investment operations 0.70 (0.16) Less distributions: Distributions from net investment income and capital paid in (0.05) (0.19) Distributions from net realized gain on investments sold (0.03) (0.02) Distributions in excess of income, capital paid in & gains -- (0.01) Total distributions (0.08) (0.22) Net asset value, end of period $ 10.62 $ 10.24 Total investment return 7.09% (1.53)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $11,883 $20,941 Ratio of expenses to average net assets (%)*** 0.78% 0.78% Ratio of net investment income (loss) to average net assets (%) 1.68% 1.87% Turnover rate (%) 70.28% 164.89%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on August 31, 1999. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 0.96% and 0.89% for the years ended December 31, 1999 and 2000, respectively. 55 Global Balanced Fund GOAL AND STRATEGY This is a non-diversified global balanced stock and bond fund that seeks income and long-term capital appreciation. The Fund invests primarily in a mix of: . U.S. and foreign common stocks of large and mid sized companies within devel- oped markets; and . U.S. and foreign bonds with an overall intermediate term average maturity. The Fund has a target mix of 60% stocks and 40% bonds, but the manager actively manages the mix within (+/-) 15 percentage points of the target mix. The Fund invests in at least 3 different countries, but normally in 15 to 45 countries. Capital Guardian uses a multiple portfolio manager system in which the stock and bond portions of the Fund are each managed by multiple portfolio managers and/or research analysts. Therefore, the Fund normally has broad country, cur- rency, sector and individual security exposures, reflecting the aggregate decisions of the multiple portfolio managers and research analysts managing the Fund. The managers make ongoing decisions regarding the Fund's country, currency, sector and individual security exposures. Each manager selects stocks and bonds using proprietary fundamental research that focuses on indentifying securities that are believed to be undervalued (i.e., with current prices below long-term value). The Fund is "non-diversified", which means that it can take larger positions in individual issuers. However, the Fund normally invests in 125 to 250 stocks within the equity portion. The Fund may invest: . no more than 10% of its equity assets in emerging market stocks; and . no more than 15% of its bond assets in high yield and emerging market bonds. The bond portion of the Fund normally has an average credit rating of "A" or higher. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may invest in initial public offerings (IPOs). The Fund may purchase other types of securities that are not primary investment vehicles, for example: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs), high yield debt securi- ties, and certain derivatives (investments whose value is based on indices or other securities). The Fund may use derivatives, such as futures and forwards, to manage the Fund's average maturity and to implement foreign currency strate- gies. Currency management strategies are primarily used for hedging purposes and to protect against anticipated changes in foreign currency exchange rates. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Capital Guardian Trust Company 333 South Hope Street Los Angeles, California 90071 Managing since 1968 Managing Fund since November, 2000 Managed approximately $122 billion in assets at the end of 2000 FUND MANAGERS Team managed by 14 Portfolio Managers Average 17 years with Capital Guardian Average 21 years industry experience See Appendix A for more details PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 13.06%, fourth quarter 1998 Worst quarter: down 4.49%, fourth quarter 1997 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2 Index 3** 1 year -9.08% -12.92% 1.59% -9.14% Life of fund 4.63% 11.93% 3.83% 5.69%
Index 1: MSCI World Index Index 2: Salomon Brothers World Government Bond Index, Unhedged Index 3: A composite index combining the performance of the following indices over the periods indicated: 65% MSCI World Index (Ex US)/35% Salomon Brothers Non-US Government Bond Index, Unhedged (from inception through April, 2000); 65% MSCI World Index/35% Salomon Brothers World Government Bond Index, Unhedged (from May, 2000 through October, 2000); and 60% MSCI World Index/40% Salomon Brothers World Government Bond Index, Unhedged (after October, 2000) * Began operations on May 1, 1996. ** John Hancock believes Index 3 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 56 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Market Allocation Risk: The allocation of the Fund's assets between the major asset classes (i.e., stocks and bonds) may (1) reduce the Fund's holdings in a class whose value then increases unexpectedly, or (2) increase the Fund's hold- ings in a class just prior to its experiencing a loss of value. 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, to the extent the Fund invests in emerging market coun- tries, it will have a significantly higher degree of foreign risk than if it invested exclusively in developed or newly-industrialized countries. Investment Category Risk: The returns of the Fund's specific equity investment category may lag the returns of the overall stock market. For example, the Fund's "large/mid cap" approach carries the risk that large/mid cap stocks will underperform small cap stocks. Non-Diversified Fund Risk: The Fund's larger position in foreign government securities could produce more volatile performance relative to funds with smaller positions. The less diversified a fund's holdings are, the more likely it is that a specific security's poor performance will hurt the fund signifi- cantly. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Small/Mid Cap Stock Risk: The Fund's investment in smaller or mid-sized compa- nies may be subject to more erratic price movements than investment in large established companies. High Yield Bond Risk. Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk. In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Although the Fund's turnover rate has been high in recent years, the current manager anticipates that the Fund's turnover rate will normally be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Initial Public Offering Risk: The Fund has the ability to invest in initial public offerings (IPOs) and a significant portion of the Fund's return may at times be attributable to its investment in IPOs. IPOs could have a substantial impact on performance, either positive or negative, particularly on a fund with a small asset base. Also, the Fund's investments in IPOs may be subject to more erratic price movements than the overall equity market. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.39 $ 10.11 $ 11.12 $ 10.71 Income from investment operations: Net investment income (loss) 0.24 0.33 0.34 0.29 0.23 Net realized and unrealized gain (loss) on investments* 0.41 (0.05) 1.44 0.25 (1.20) Total from investment operations 0.65 0.28 1.78 0.54 (0.97) Less distributions: Distributions from net investment income and capital paid in (0.24) (0.34) (0.35) (0.35) (0.36) Distributions from net realized gain on investments sold (0.02) (0.22) (0.42) (0.44) (0.01) Distributions in excess of income, capital paid in & gain -- -- -- (0.16) (0.10) Total distributions (0.26) (0.56) (0.77) (0.95) (0.47) Net asset value, end of period $ 10.39 $ 10.11 $ 11.12 $ 10.71 $ 9.27 Total investment return 6.73% 2.65% 17.99% 5.11% (9.08)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $24,098 $25,420 $30,416 $31,577 $28,527 Ratio of expenses to average net assets (%)*** 1.10% 1.10% 1.10% 1.00% 0.98% Ratio of net investment income (loss) to average net assets (%) 3.59% 3.18% 3.20% 2.73% 2.32% Turnover rate (%) 22.21% 81.04% 103.55% 131.21% 171.38%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.44%, 1.56%, 1.82%, 1.31% and 1.27% for the years ended December 31, 1996, 1997, 1998, 1999 and 2000, respectively. 57 Short-Term Bond Fund GOAL AND STRATEGY This is a short-term bond fund of medium credit quality that seeks high income. The Fund primarily invests in a diversified mix of short-term debt securities including: . U.S. Treasury and Agency securities; . U.S. corporate bonds; . foreign corporate bonds (if dollar-denominated); . foreign government and agency securities (if dollar denominated); and . mortgage-and asset-backed securities. The manager selects bonds using a combination of proprietary research and quan- titative tools. Bonds are purchased that are attractively priced based upon market fundamentals and technical factors. The Fund normally has: . an average maturity between one and three and a half years; . no more than 15% of its assets in high yield bonds; . an average credit quality rating of "A" or higher; and . 10% or less of its assets in cash and cash equivalents. The Fund may purchase other types of securities that are not primary investment vehicles, for example: certain derivatives (investments whose value is based on indexes or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Independence Investment LLC 53 State Street Boston, Massachusetts 02109 Owned by John Hancock Managing since 1982 Managing Fund since May, 1994 Managed approximately $25 billion in assets at the end of 2000 FUND MANAGER Jay C. Leu, CFA - ----------------- Senior Vice President of subadviser Joined team in 1998 Joined subadviser in 1997 Portfolio Manager, Pacific Capital Asset Management (1995-1997) PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 3.87%, second quarter 1995 Worst quarter: down 0.42%, first quarter 1999 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2** 1 year 7.98% 8.07% 7.93% 5 year 5.34% 5.99% 6.01% Life of fund 5.74% 6.33% 6.54%
Index 1: Lehman Brothers 1-3 Year Government/Credit Bond Index Index 2: A composite index combining the performance of the following indices over the periods indicated: Merrill Lynch 1-5 Year U.S. Government Bond Index (from inception through April, 1998) and 65% Lehman Brothers 1-3 Year Credit Bond Index/35% Lehman Brothers 1-3 Year Government Bond Index (after April, 1998) *Began operations on May 1, 1994. ** John Hancock believes Index 2 is a more suitable index against which to measure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 58 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has less interest rate risk than an intermediate-term or long- term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship limits and restrictions on removing currency also pose special risks. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 10.23 $ 10.05 $ 10.08 $ 10.05 $ 9.72 Income from investment operations: Net investment income (loss) 0.54 0.59 0.61 0.61 0.61 Net realized and unrealized gain (loss) on investments* (0.18) 0.03 (0.03) (0.33) 0.14 Total from investment operations 0.36 0.62 (0.58) 0.28 0.75 Less distributions: Distributions from net investment income and capital paid in (0.54) (0.59) (0.61) (0.61) (0.61) Distributions from net realized gain on investments sold -- -- -- -- -- Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions (0.54) (0.59) (0.61) (0.61) (0.61) Net asset value, end of period $ 10.05 $ 10.08 $ 10.05 $ 9.72 $ 9.86 Total investment return 3.61% 6.41% 5.82% 2.96% 7.98% Ratios and supplemental data Net assets, end of period (000s omitted) $58,676 $51,120 $77,194 $68,844 $80,109 Ratio of expenses to average net assets (%)** 0.75% 0.57% 0.53% 0.43% 0.36% Ratio of net investment income (loss) to average net assets (%) 5.66% 5.67% 6.17% 6.25% 6.27% Turnover rate (%) 20.68% 108.29% 184.50% 100.04% 45.27%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Expense ratio is net of expense reimbursement. Had such reimbursement not been made, the expense ratio would have been 0.79% for the year ended Decem- ber 31, 1996. 59 Bond Index Fund GOAL AND STRATEGY This is an intermediate term bond fund of high and medium credit quality that seeks to track the performance of the Lehman Brothers Aggregate Bond Index, which broadly represents the U.S. investment grade bond market. The manager employs a passive management strategy using quantitative techniques to select individual securities that provide a representative sample of the securities in the Index. The Index consists of dollar denominated, fixed rate, investment grade debt securities with maturities generally greater than one year and outstanding par values of at least $150 million including: . U.S. Treasury and agency securities; . mortgage-backed and asset-backed securities; . corporate bonds, issued by both U.S. and foreign companies; and . foreign government and agency securities. The manager selects securities to match, as closely as practicable, the Index's duration, cash flow, sector, credit quality, callability, and other key perfor- mance characteristics. The Index composition may change from time to time. The manager will reflect those changes as soon as practicable. The Fund may hold some cash and cash equivalents, but is normally fully invested. - -------------------------------------------------------------------------------- SUBADVISER Mellon Bond Associates, LLP One Mellon Center Pittsburgh, Pennsylvania 15258 Managing since 1986 Managing Fund since May, 1998 Managed approximately $58 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: Gregory D. Curran, CFA - ----------------- Senior Vice President of subadviser Joined subadviser in 1995 Began career in 1986 Vice President of Salomon Brothers (1986-1995) PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 5.35%, Fourth quarter 1998 Worst quarter: down 1.27%, first quarter 1999 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 11.81% 11.84% Life of fund 5.98% 6.20%
Index: Lehman Brothers Government/Credit Bond Index *Began operations on May 1, 1998. 60 MAIN RISKS Primary Index Management Risk: Certain factors such as the following may cause the Fund to track the Index less closely: . The securities selected by the manager may not be fully representative of the Index. . Transaction expenses of the Fund may result in the Fund's performance being different than that of the Index. . The size and timing of the Fund's cash flows may result in the Fund's perfor- mance being different than that of the Index. 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 mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1998** 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.19 $ 9.32 Income from investment operations: Net investment income (loss) 0.42 0.63 0.62 Net realized and unrealized gain (loss) on investments* 0.29 (0.89) 0.43 Total from investment operations 0.71 (0.26) 1.05 Less distributions: Distributions from net investment income and capital paid in (0.42) (0.61) (0.63) Distributions from net realized gain on investments sold (0.10) -- -- Distributions in excess of income, capital paid in & gains -- -- -- Total distributions (0.52) (0.61) (0.63) Net asset value, end of period $ 10.19 $ 9.32 $ 9.74 Total investment return 7.20% (2.57)% 11.81% Ratios and supplemental data Net assets, end of period (000s omitted)($) $28,001 $38,436 $64,768 Ratio of expenses to average net assets (%)*** 0.40% 0.29% 0.25% Ratio of net investment income (loss) to average net assets (%) 6.17% 6.56% 6.80% Turnover rate (%) 21.09% 17.06% 33.14%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1998. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 0.71%, 0.35% and 0.27% for the years ended December 31, 1998, 1999 and 2000, respectively. 61 Active Bond Fund GOAL AND STRATEGY This is an intermediate term bond fund of medium credit quality that seeks income and capital appreciation. The Fund primarily invests in a diversified mix of debt securities including: . U.S. Treasury and agency securities; . foreign government and agency securities (if dollar-denominated); . corporate bonds, both U.S. and foreign (if dollar-denominated); and . mortgage-backed and asset-backed securities. The manager normally invests: . mostly in investment grade debt securities; and . no more than 25% of the Fund's assets in high yield bonds. The manager seeks to identify specific bond sectors, industries and specific bonds that are attractively priced. The manager tries to anticipate shifts in the business cycle, using economic and industry analysis to determine which sectors and industries might benefit over the next 12 months. The manager uses proprietary research to identify securities that are undervalued. The manager evaluates bonds of all quality levels and maturities from many dif- ferent issuers. The Fund normally has an average credit rating of "A" or high- er. The Fund normally has 10% or less of its assets in cash and cash equivalents. The Fund may purchase other types of securities that are not primary investment vehicles, for example: emerging market debt securities, and certain derivatives (investments whose value is based on indices or other securities). The manager actively uses derivatives, such as futures, to adjust the Fund's average matu- rity and seeks to keep the Fund's interest rate sensitivity in line with the overall market. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 Owned by John Hancock Managing since 1968 Managing Fund since May, 1995 Managed approximately $32 billion in assets at the end of 2000 FUND MANAGER James K. Ho, CFA - ----------------- Executive Vice President of subadviser Managed fund since 1995 Associated with subadviser since 1985 Began career in 1977 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 7.14%, second quarter 1989 Worst quarter: down 2.51%, first quarter 1994 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year 10.45% 11.63% 5 years 6.30% 6.46% 10 years 8.20% 7.96% Life of fund 8.04% 8.16%
Index: Lehman Brothers Aggregate Bond Index *Began operations on March 29, 1986. 62 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Fund would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 10.13 $ 9.77 $ 9.95 $9.92 $ 9.12 Income from investment operations: Net investment income (loss) 0.69 0.71 0.69 0.67 0.64 Net realized and unrealized gain (loss) on investments* (0.31) 0.24 0.11 (0.76) 0.28 Total from investment operations 0.38 0.95 0.80 (0.09) 0.92 Less distributions: Distributions from net investment income and capital paid in (0.69) (0.71) (0.69) (0.71) (0.60) Distributions from net realized gain on investments sold (0.05) (0.06) (0.14) -- -- Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions (0.74) (0.77) (0.83) (0.71) (0.60) Net asset value, end of period $ 9.77 $ 9.95 $ 9.92 $ 9.12 $ 9.44 Total investment return 4.10% 10.11% 8.23% (0.94)% 10.45% Ratios and supplemental data Net assets, end of period (000s omitted)($) $726,111 $803,770 $907,121 $850,286 $842,299 Ratio of expenses to average net assets (%) 0.29% 0.31% 0.29% 0.28% 0.41% Ratio of net investment income (loss) to average net assets (%) 7.07% 7.18% 6.84% 6.97% 6.98% Turnover rate (%) 119.12% 138.29% 228.74% 182.90% 164.34%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 63 Active Bond II Fund (Formerly Core Bond Fund) GOAL AND STRATEGY This is an intermediate term bond fund of medium credit quality that seeks income and capital appreciation. The Fund primarily invests in a diversified mix of debt securities including: . U.S. Treasury and agency securities; . foreign government and agency securities (if dollar-denominated); . corporate bonds, both U.S. and foreign (if dollar-denominated); and . mortgage-backed and asset-backed securities. The manager normally invests: . mostly in investment grade debt securities; and . no more than 25% of the Fund's assets in high yield bonds. The manager seeks to identify specific bond sectors, industries and specific bonds that are attractively priced. The manager tries to anticipate shifts in the business cycle, using economic and industry analysis to determine which sectors and industries might benefit over the next 12 months. The manager uses proprietary research to identify securities that are undervalued. The manager evaluates bonds of all quality levels and maturities from many dif- ferent issuers. The Fund normally has an average credit rating of "A" or high- er. The Fund normally has 10% or less of its assets in cash and cash equivalents. The Fund may purchase other types of securities that are not primary investment vehicles, for example: emerging market debt securities, and certain derivatives (investments whose value is based on indices or other securities). The manager actively uses derivatives, such as futures, to adjust the Fund's average matu- rity and seeks to keep the Fund's interest rate sensitivity in line with the overall market. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER John Hancock Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 Owned by John Hancock Managing since 1968 Managing Fund since January, 2001 Managed approximately $32 billion in assets at the end of 2000 FUND MANAGER James K. Ho, CFA - ----------------- Executive Vice President of subadviser Associated with subadviser since 1985 Began career in 1977 PAST PERFORMANCE Because this Fund did not have a full year of operations as of December 31, 2000, no year-by-year total returns or average annual total returns can be shown for this Fund. 64 MAIN RISKS Primary Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Concentration Risk: The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. High Yield Bond Risk: Junk bonds, defined as bond securities rated below BBB- /Baa3, may be subject to more volatile or erratic price movements due to investor sentiment. In a down market, these high yield securities become harder to value or to sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Nor- mally, the Fund's turnover rate will be greater than 100%. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Active Bond II Fund (Formerly Core Bond Fund)--Period ended Decmeber 31: 2000** Net asset value, beginning of period $10.00 Income from investment operations: Net investment income (loss) 0.32 Net realized and unrealized gain (loss) on investments* 0.37 Total from investment operations 0.69 Less distributions: Distributions from net investment income and capital paid in (0.31) Distributions from net realized gain on investments sold (0.05) Distributions in excess of income, capital paid in & gains -- Total distributions (0.36) Net asset value, end of period $10.33 Total investment return 7.00% Ratios and supplemental data Net assets, end of period (000s omitted)($) $5,428 Ratio of expenses to average net assets (%) 0.75% Ratio of net investment income (loss) to average net assets (%) 16.09% Turnover rate (%) 131.71%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations June 30, 2000. 65 High Yield Bond Fund GOAL AND STRATEGY This is a high yield bond fund that seeks high income and capital appreciation. The Fund invests primarily in a diversified mix of high yield debt securities, commonly referred to as "junk bonds" (rated BB+/Ba1 or lower and their unrated equivalents), including: . corporate bonds, both U.S. and foreign (if dollar-denominated); . foreign government and agency securities (if dollar-denominated); . preferred stocks; and . convertible securities (convertible into common stocks or other equity inter- ests). The manager will invest no more than 15% of the Fund's assets in emerging mar- ket countries (with below investment-grade sovereign debt). The Fund normally has 10% or less of its assets in cash and cash equivalents. The manager seeks to purchase bonds with stable or improving credit quality before the market widely perceives the improvement. Purchase and sale decisions are primarily based upon the investment merits of the particular security. The manager selects bonds using proprietary research, including: . quantitative analysis of historical financial data; . qualitative analysis of a company's future prospects; and . economic and industry analysis. The Fund's average maturity depends on security selection decisions rather than interest rate decisions. The Fund may purchase other types of securities that are not primary investment vehicles, for example: equity securities, high quality debt securities (short- term and otherwise), foreign debt securities denominated in U.S. dollars or any other currency, and certain derivatives (investments whose value is based on indices or other securities). In abnormal market conditions, the Fund may take temporary defensive measures-- such as holding unusually large amounts of cash and cash equivalents--that are inconsistent with the Fund's primary investment strategy. In taking those mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since May, 1998 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGER Richard T. Crawford - ----------------- Vice President of subadviser Joined subadviser in 1994 Began career in 1991 Manager draws upon the other members of the High Yield team, including: Earl E. McEvoy - ----------------- Partner of subadviser Joined subadviser in 1978 Began career in 1972 Catherine A. Smith - ----------------- Partner of subadviser Joined subadviser in 1985 Began career in 1983 PAST PERFORMANCE The graph will show how the fund's total return varies from year to year, while the table will show performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar year Best quarter: up 4.55%, fourth quarter 1998 Worst quarter: down 8.80%, fourth quarter 2000 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 year -10.81% -5.86% Life of fund -3.48% -2.05%
Index:Lehman Brothers High-yield Bond Index *Began operations on May 1, 1998. 66 MAIN RISKS Primary High Yield Bond Risk: High yield or junk bonds, defined as bond securities rated below BBB-/Baa3, may be subject to more volatile or erratic price move- ments due to investor sentiment. In a down market, these high yield securities may become harder to value or to sell at a fair price. 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 mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Fund would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Secondary Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1998** 1999 2000 Net asset value, beginning of period $ 10.00 $ 9.23 $ 8.99 Income from investment operations: Net investment income (loss) 0.46 0.72 0.73 Net realized and unrealized gain (loss) on investments* (0.76) (0.26) (1.65) Total from investment operations (0.30) 0.46 (0.92) Less distributions: Distributions from net investment income and capital paid in (0.46) (0.70) (0.74) Distributions from net realized gain on investments sold (0.01) -- -- Distributions in excess of income, capital paid in & gains -- -- -- Total distributions (0.47) (0.70) (0.74) Net asset value, end of period $ 9.23 $ 8.99 $ 7.33 Total investment return (2.98)% 5.13% (10.81)% Ratios and supplemental data Net assets, end of period (000s omitted)($) $14,789 $19,921 $25,978 Ratio of expenses to average net assets (%)*** 0.90% 0.80% 0.75% Ratio of net investment income (loss) to average net assets (%) 7.43% 7.94% 8.88% Turnover rate (%) 17.67% 38.62% 21.94%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1998. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 2.03%, 1.04% and 0.87% for the years ended December 31, 1998, 1999 and 2000, respectively. 67 Global Bond Fund GOAL AND STRATEGY This is an intermediate term, non-diversified global bond fund of medium credit quality that seeks income and capital appreciation. The Fund primarily invests in a broad mix of debt securities throughout the world including: . U.S. Treasury and agency securities; . foreign government and agency securities; . supranational securities (such as the World Bank); . corporate bonds, both U.S. and foreign; and . mortgage-backed and asset-backed securities. The Fund has a target mix of 25% U.S. bonds and 75% non-U.S. bonds (denominated in foreign currencies), but the manager actively manages the mix within (+/-) 15 percentage points of the target mix. The Fund normally: . invests in at least 3 countries, but normally in 10 to 35 countries; . has an average credit quality rating of "A" or higher; and . invests up to 15% in emerging market and high yield debt securities. The Fund is managed using a multiple portfolio manager system in which the Fund is managed by multiple portfolio managers and/or research analysts. Therefore, the Fund normally has broad country, currency, sector and individual security exposures, reflecting the aggregate decisions of the multiple portfolio manag- ers and research analysts managing the Fund. The managers make ongoing decisions regarding the Fund's average maturity and the Fund's country, sector and foreign currency exposures. The manager uses proprietary research and economic analysis to identify attractive markets and currencies and undervalued sectors and securities. The Fund is "non-diversified", which means that it can take larger positions in individual issuers. The Fund normally has 10% or less (usually lower) of its assets in cash and cash equivalents. The Fund may purchase other types of securities that are not primary investment vehicles, for example: certain derivatives (investments whose value is based on indices or other securities). The Fund may use derivatives, such as futures and forwards, to manage the Fund's average maturity relative to the benchmark and to implement foreign currency strategies. Currency management strategies are primarily used for hedging purposes and to protect against anticipated changes in foreign currency exchange rates. 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 mea- sures, the Fund may not achieve its investment goal. - -------------------------------------------------------------------------------- SUBADVISER Capital Guardian Trust Company 333 South Hope Street Los Angeles, California 90071 Managing since 1968 Managing Fund since November, 2000 Managed approximately $122 billion in assets at the end of 2000 FUND MANAGERS Team managed by 4 Portfolio Managers Average 11 years with Capital Guardian Average 17 years industry experience See Appendix A for more details PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time (along with a broad-based market index for reference). This information may help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 7.04%, forth quarter 2000 Worst quarter: down 1.75%, second quarter 1999 Average annual total returns -- for periods ending 12/31/2000*
Fund Index 1 Index 2** 1 year 12.00% 1.59% 13.37% Life of fund 7.34% 3.83% 8.46%
Index 1:Salomon Brothers World Government Bond Index, Unhedged Index 2:A composite index combining the performance of the following indices over the periods indicated: 75% Lehman Brothers Aggregate Bond Index / 25% JP Morgan Non-US Government Bond Index, US Dollar Hedged (from inception through April, 1999); JP Morgan Global Government Bond Index, US Dollar Hedged (from May, 1999 through October, 2000); and Salomon Brothers World Government Bond Index, Unhedged (after October, 2000) * Began operations on May 1, 1996. **John Hancock believes Index 2 is a more suitable index against which to meas- ure the fund's performance because it more closely matches the fund's changes in investment strategy since inception. 68 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 cur- rency also pose special risks. All foreign securities have some degree of for- eign risk. However, the Fund's investments in emerging market countries have a significantly higher degree of foreign risk than investments in developed or newly-industrialized countries. Market Risk: The value of the securities in the Fund may go down in response to overall stock or bond market movements. Markets tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up and down in value more than bonds. If the Fund's investments are concentrated in certain sectors, the Fund's performance could be worse than the overall mar- ket. 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. Interest Rate Risk: When interest rates rise, the Fund's bond yields will gen- erally rise and the Fund's bond prices will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining matu- rity of bonds held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has more interest rate risk than a short-term bond fund, but less interest rate risk than a long-term bond fund. Credit Risk: An issuer of a bond held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of a bond held by the fund may be downgraded. In either case, the value of the bond held by the Trust would fall. All bonds have some credit risk, but in general lower-rated bonds have higher credit risk. Non-Diversified Fund Risk: The Fund's larger position in foreign government securities could produce more volatile performance relative to funds with smaller positions. The less diversified a fund's holdings are, the more likely it is that a specific security's poor performance will hurt the fund signifi- cantly. Concentration Risk. The Fund's investment in securities of a smaller number of issuers could produce more volatile performance relative to funds that invest in a larger number of issuers. The more concentrated a fund's holdings are, the more likely it is a specific security's poor performance will hurt the fund significantly. Turnover Risk: In general, the greater the volume of buying and selling by a fund (i.e., the higher its "turnover rate"), the greater the impact that bro- kerage commissions and other transaction costs will have on the fund's perfor- mance. Any turnover rate in excess of 100% is considered relatively high. Although the Fund's turnover rate has been high in recent years, the current manager anticipates that the Fund's turnover rate will normally be less than 100%. Secondary Derivatives Risk: Certain derivative instruments (such as options, futures and swaps) can produce disproportionate gains or losses. They are generally consid- ered more risky than direct investments. Also, in a down market, derivatives could become harder to value or sell at a fair price. Prepayment/Call Risk: The Fund's share price or yield could be hurt if interest rate movements cause the Fund's mortgage-related and callable securities to be paid off substantially earlier than expected. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996** 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.16 $ 10.24 $ 10.60 $ 9.82 Income from investment operations: Net investment income (loss) 0.38 0.59 0.54 0.48 0.48 Net realized and unrealized gain (loss) on investments* 0.28 0.30 0.38 (0.70) 0.67 Total from investment operations 0.66 0.89 0.92 (0.22) 1.15 Less distributions: Distributions from net investment income and capital paid in (0.38) (0.66) (0.47) (0.56) (0.63) Distributions from net realized gain on investments sold (0.12) (0.15) (0.09) -- -- Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions $ (0.50) $ (0.81) $ (0.56) (0.56) (0.63) Net asset value, end of period $ 10.16 $ 10.24 $ 10.60 $ 9.82 $ 10.34 Total investment return 6.71% 9.05% 9.15% (2.16)% 12.00% Ratios and supplemental data Net assets, end of period (000s omitted)($) $12,907 $28,647 $66,791 $70,991 $68,473 Ratio of expenses to average net assets (%)*** 1.00% 1.00% 0.95% 0.83% 0.81% Ratio of net investment income (loss) to average net assets (%) 6.05% 5.80% 5.27% 4.70% 4.71% Turnover rate (%) 171.39% 69.38% 186.70% 332.06% 209.39%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. ** Fund began operations on May 1, 1996. *** Expense ratio is net of expense reimbursement. Had such reimbursement not been made the expense ratio would have been 1.57%, 1.32%, 1.02%, 0.84% and 0.91% for the years ended December 31, 1996, 1997, 1998, 1999 and 2000, respectively. 69 Money Market Fund GOAL AND STRATEGY This is a money market fund that seeks to preserve capital and liquidity while also seeking to achieve a competitive yield. The Fund intends to maintain a stable net asset value of $1.00 per share. The Fund invests in U.S. dollar denominated money market instruments rated in one of the two highest short-term credit rating categories, primarily includ- ing: . commercial paper and other short-term obligations of U.S. and foreign issuers (including asset-backed securities); . certificates of deposit, bank notes and other obligations of U.S. and foreign banks and other lending institutions; . debt securities issued by foreign governments and agencies; . U.S. Treasury, agency and state and local government obligations; and, . repurchase agreements. The manager's investment approach combines top-down analysis with fundamental bottom-up security selection. The manager considers factors such as the antici- pated level of interest rates and the maturity of individual securities to determine the Fund's overall weighted average maturity. The manager seeks secu- rities; . with an acceptable maturity; . issued by issuers on a sound financial footing; . that are marketable and liquid; and . that offer competitive yields. The Fund only invests in individual securities with a maximum remaining matu- rity of 397 days (13 months). The overall weighted average maturity of the Fund's investments is 90 days or less. The Fund may invest: . up to 5% of assets in securities rated in the second-highest short-term cate- gory (or unrated equivalents); and . up to 1% of assets or $1 million (whichever is greater) in securities of a single issuer rated in the second-highest short-term category (or unrated equivalents). - -------------------------------------------------------------------------------- SUBADVISER Wellington Management Company, LLP 75 State Street Boston, Massachusetts 02109 Managing, with predecessors, since 1928 Managing Fund since May, 2001 Managed approximately $274 billion in assets at the end of 2000 FUND MANAGERS Management by investment team overseen by: John Keogh - ----------------- Senior Vice President and Partner of subadviser Joined subadviser in 1983 PAST PERFORMANCE The graph shows how the fund's total return has varied from year to year, while the table shows performance over time. This information may also help provide an indication of the fund's risks and potential rewards. All figures assume dividend reinvestment. Past performance does not indicate future results. The performance figures below do not reflect the deduction of fees and charges payable under the variable contracts. Such fees and charges would cause the investment returns under the contracts to be less than that shown below. Year-by-year total returns -- calendar years Best quarter: up 2.38%, second quarter 1989 Worst quarter: up 0.74%, second quarter 1993 Average annual total return -- for periods ending 12/31/2000(/1/)
Fund 1 year 6.29% 5 years 5.50% 10 years 4.99% Life of fund 5.84%
(1)Began operations on March 29, 1986. 70 MAIN RISKS Primary 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. Interest Rate Risk: When interest rates rise, yields on the Fund's investments will generally rise and prices on the Fund's investments will generally fall. When interest rates fall, the reverse will generally occur. The longer the average remaining maturity of instruments held by the Fund, the more sensitive the Fund is to interest rate risk. This Fund has less interest rate risk than an intermediate-term or long-term bond fund. Credit Risk: An issuer of an instrument held by the Fund may default on its obligation to pay interest and repay principal. Also, the credit rating of an instrument held by the Fund may be downgraded. In either case, the value of the instrument held by the Fund would fall. All money market instruments have some credit risk, but in general lower-rated instruments have higher credit risk. Principal Risk: An investment in the Fund is not a bank deposit and is not guaranteed as to principal and interest. Although the Fund seeks to maintain a stable net asset value of $1.00 per share, investors may lose money by invest- ing in the Fund. Foreign Risk: The Fund's foreign securities will pose special risks, due to limited government regulation, lack of public information, and economic, polit- ical and social instability. Factors such as lack of liquidity, foreign owner- ship 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. Secondary None - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Selected data for each share interest outstanding throughout the period indicated) The following financial highlights have been audited by Ernst & Young LLP. Period ended December 31: 1996 1997 1998 1999 2000 Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 Income from investment operations: Net investment income (loss) 0.52 0.53 0.53 0.45 0.60 Net realized and unrealized gain (loss) on investments* -- -- -- -- -- Total from investment operations 0.52 0.53 0.53 0.45 0.60 Less distributions: Distributions from net investment income and capital paid in (0.52) (0.53) (0.53) (0.45) (0.61) Distributions from net realized gain on investments sold -- -- -- -- -- Distributions in excess of income, capital paid in & gains -- -- -- -- -- Total distributions $ (0.52) $ (0.53) $ (0.53) (0.45) (0.61) Net asset value, end of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 Total investment return 5.32% 5.38% 5.40% 5.05% 6.29% Ratios and supplemental data Net assets, end of period (000s omitted)($) $213,235 $229,443 $395,195 $451,235 $496,853 Ratio of expenses to average net assets (%) 0.30% 0.33% 0.31% 0.31% 0.29% Ratio of net investment income (loss) to average net assets (%) 5.20% 5.32% 5.29% 4.95% 6.05%
* The amount shown may not accord with the change in the aggregate gains and losses in the fund securities for the period because of the timing of pur- chases and withdrawals of shares in relation to the fluctuation in market values of the fund. 71 Your Account Investments in shares of the funds Each fund sells its shares directly to separate accounts of John Hancock, JHVLICO and other insurance companies to fund variable contracts. Each fund also buys back its 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 con- tract), 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 Each fund sells and buys back its shares at the net asset value per share ("NAV") next computed after receipt by a separate account of a contractowner's instructions. Each fund calculates its NAV: . by dividing its net assets by the number of its outstanding shares, . once daily as of the close of regular trading on the New York Stock Exchange (generally at 4 p.m. New York time) on each day the Exchange is open. Certain funds may hold securities primarily listed on foreign exchanges that trade on weekends or other days when the Trust does not calculate NAV. Conse- quently, NAV may change on days when contractowners will not be able to instruct a separate account to buy or redeem fund shares. Valuation The Money Market Fund values its securities at amortized cost. Each of the other funds values securities based on: . market quotations, . amortized cost, . valuations of independent pricing services, or . fair value determined in accordance with procedures approved by the Trust's trustees. A fund may value securities at fair value where, for example: .market quotations are not readily available, or . the value of securities has been materially affected after the closing of a foreign market. Conflicts The Trust's trustees monitor for possible material irreconcilable conflicts among separate accounts buying shares of the funds. The Trust's net asset value could decrease, if the Trust had to sell investment securities to pay redemp- tion proceeds to a separate account withdrawing because of a conflict. 72 Funds' Expenses The advisory fee paid by each fund to the adviser in 2000 was:
Funds % of net assets Equity Index Fund 0.13% Growth & Income Fund 0.32% Large Cap Value Fund 0.73% Large Cap Value CORESM Fund 0.75% Large Cap Value CORESM II Fund* 0.80% Large Cap Growth Fund 0.36% Large Cap Aggressive Growth Fund 0.90% Large/Mid Cap Value Fund 0.95% Large/Mid Cap Value II Fund** 0.80% Fundamental Growth Fund 0.86% Mid Cap Blend Fund 0.75% Mid Cap Growth Fund 0.81% Small/Mid Cap CORESM Fund 0.80% Small/Mid Cap Growth Fund 0.75% Small Cap Equity Fund 0.82% Small Cap Value Fund*** 0.95% Small Cap Growth Fund 0.75% International Equity Index Fund 0.17% International Opportunities Fund 0.83% International Equity Fund 1.00% Emerging Markets Equity Fund 1.22% Real Estate Equity Fund 0.67% Managed Fund 0.38% Aggressive Balanced Fund 0.68% Global Balanced Fund 0.88% Short-term Bond Fund 0.30% Bond Index Fund 0.15% Active Bond Fund 0.31% Active Bond II Fund**** 0.70% High Yield Bond Fund 0.65% Global Bond Fund 0.71% Money Market Fund 0.25%
* Formerly American Leaders Large Cap Value ** Formerly Mid Cap Value *** Formerly Small/Mid Cap Value **** Formerly Core Bond The Health Sciences Fund was not in operation in 2000. That Fund pays fees to the adviser (as a percentage of net assets) equal to 0.55% of the first $250 million and 0.50% above $250 million. The adviser pays subadvisory fees out of its own assets. No fund pays a fee to its subadviser. The adviser has agreed to limit each fund's annual expenses (excluding advisory fees and certain other expenses such as brokerage and tax- es) to not more than 0.10 percent of the fund's average daily net assets. Dividends and Taxes Dividends Each fund automatically reinvests its dividends and distributions in additional shares of the fund at NAV. Each fund declares and pays dividends monthly, except that the Small/Mid Cap Growth Fund does so annually and the Money Market Fund does so daily. Funds generally declare capital gains distributions annually. Taxes Each 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. 73 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 vari- ous service providers to carry out the Trust's operations. Variable Contractowners John Hancock, JHVLICO and IPL Separate Accounts The Trust Trustees oversee the Trust's investment and business activities. Investment Adviser Custodian John Hancock Life State Street Bank and Insurance Company Trust Company Manages the Trust's investment and business Holds the Trust's assets, activities. settles all Trust trades and collects most of the valuation data required for calcu- lating the Trust's NAV. Subadvisers Alliance Capital Management Morgan Stanley Dean Witter In- L.P. vestment Management Inc. Capital Guardian Trust Company Putnam Investment Management, LLC Goldman Sachs Asset Manage- SSgA Funds Management, Inc. ment. T. Rowe Price Associates, Inc. Independence Investment LLC T. Rowe Price International, Inc. Janus Capital Corporation Wellington Management Company, John Hancock Advisers, Inc. LLP Mellon Bond Associates, LLP Provide management to various funds. 74 APPENDIX A Capital Guardian Trust Company uses a multiple portfolio manager system in which each Fund it subadvises is divided into segments that are managed by individual portfolio managers and/or research analysts. This multiple manager approach seeks to deliver the best ideas of individual portfolio managers and analysts within each Fund. Each portfolio manager and research analyst decides how their respective segment will be invested within the limits provided by the Fund's goal and strategy and investment policies. Capital Guardian's Investment Committee determines the specific allocation to individual portfolio managers and the research analyst team. Set forth below are details regarding the multi- ple portfolio managers of Capital Guardian who are involved in the management of the Funds indicated: MANAGED FUND U.S. Equity Investments: The Research Team, consisting of the following 23 research analysts, has an average of 10 years experience with Capital Guardian and 14 years of industry experience. Gene Barron Reed H. Lowenstein Andrew F. Barth, D. James Martin Research Portfolio Coordinator Karen A. Miller Terry Berkemeier Jason M. Pilalas Steven Connell Lars Reierson Caroline E. Ford Suzanne Rheault Zachary E. Guevara Carlos Schonfeld Todd S. James Lawrence R. Solomon Nancy Kamei Eric H. Stern James S. Kang Steven R. Wanek Karin L. Larson Alan J. Wilson Jin Lee John A. Longhurst U.S. Fixed Income Investments: James S. Baker John W. Ressner Vice President of subadviser Executive Vice President of subadviser Joined subadviser in 1987 Joined subadviser in 1988 Began career in 1981 Began career in 1988 James R. Mulally Senior Vice President of subadviser Joined subadviser in 1980 Began career in 1977 SMALL CAP EQUITY FUND Michael R. Ericksen Karen A. Miller Senior Vice President of Senior Vice President of subadviser subadviser Joined subadviser in 1990 Joined subadviser in 1987 Began career in 1989 Began career in 1981 Lawrence R. Solomon James S. Kang Senior Vice President of subadviser Senior Vice President of Joined subadviser in 1985 subadviser Began career in 1984 Joined subadviser in 1988 Began career in 1987 Robert G. Kirby Chairman Emeritus of subadviser Joined subadviser in 1966 Began career in 1953 75 GLOBAL BALANCED FUND Global Equity Investments: Michael R. Ericksen Robert Ronus Senior Vice President of President of subadviser subadviser Joined subadviser in 1972 Joined subadviser in 1987 Began career in 1969 Began career in 1981 Lionel M. Sauvage David I. Fisher Senior Vice President of Chairman of subadviser subadviser Joined subadviser in 1969 Joined subadviser in 1987 Began career in 1966 Began career in 1987 Richard N. Havas Nilly Sikorsky Senior Vice President of President of subadviser subadviser Joined subadviser in 1962 Joined subadviser in 1986 Began career in 1963 Began career in 1982 Rudolf M. Staehelin Nancy I. Kyle Senior Vice President of Senior Vice President of subadviser subadviser Joined subadviser in 1981 Joined subadviser in 1991 Began career in 1978 Began career in 1974 Eugene P. Stein Christopher A. Reed Executive Vice President of Vice President of subadviser subadviser Joined subadviser in 1994 Joined subadviser in 1973 Began career in 1994 Began career in 1972 Global Fixed Income Investments: Mark A. Brett James R. Mulally Senior Vice President of Senior Vice President of subadviser subadviser Joined subadviser in 1993 Joined subadviser in 1980 Began career in 1980 Began career in 1977 Laurentius Harrer John W. Ressner Vice President of subadviser Executive Vice President of subadviser Joined subadviser in 1993 Joined subadviser in 1988 Began career in 1988 Began career in 1988 GLOBAL BOND FUND Mark A. Brett James R. Mulally Senior Vice President of Senior Vice President of subadviser subadviser Joined subadviser in 1993 Joined subadviser in 1980 Began career in 1980 Began career in 1977 Laurentius Harrer John W. Ressner Vice President Executive Vice President of Joined subadviser in 1993 subadviser Began career in 1988 Joined subadviser in 1988 Began career in 1988 76 For more information This prospectus Two documents are To request a free should be used available that offer copy of the current only with a vari- further information annual/semiannual able contract on John Hancock report or the SAI, prospectus. Variable Series or to make share- Trust I: holder inquiries, please contact: Annual/Semiannual Report to shareholders By mail: Includes financial John Hancock Variable statements, a dis- Series Trust I cussion of the mar- John Hancock Place ket conditions and Boston, MA 02117 investment strate- gies that signifi- By phone: 1-800-732- cantly affected per- 5543 formance, and the auditors' report (in Or you may view or the annual report obtain these docu- only). ments from the SEC: Statement of In person: at the Additional SEC's Public Refer- Information (SAI) ence Room in Wash- ington, DC The SAI contains By phone: 1-202-942- more detailed infor- 8090 mation on all aspects of the By mail: Office of funds. Public Reference Secu- rities and Exchange Commission John Hancock A current SAI has 450 5th Street, Variable been filed with the N.W., Room 1300 Series Trust I Securities and Washington, DC John Hancock Exchange Commission 20549-0102 Place and is incorporated (duplicating fee Boston, Massachu- by reference into required) setts 02117 (i.e., is legally a part of) this pro- By e- spectus. mail: publicinfo@SEC.gov On the Internet: www.sec.gov SEC File Num- ber: 811-4490 [LOGO OF JOHN HANCOCK] Annual Report December 31, 2000 Investment Vision The Variable Series | Variable Series Trust - -------------------------------------------------------------------------------- Insurance Products: . Are NOT FDIC insured; NOT insured by the FDIC, NCUSIF, or any other federal entity; . Are NOT deposits or other obligations of any bank and are NOT guaranteed by any bank; and . Are subject to investment risk, including the possible loss of principal investment. - -------------------------------------------------------------------------------- [LOGO OF JOHN HANCOCK] [LOGO OF INDEPENDENCE INVESTMENT ASSOCIATES, INC.] [LOGO OF ALLIANCE CAPITAL] [LOGO OF THE BOSTON COMPANY] [LOGO OF CAPITAL GUARDIAN TRUST COMPANY] [LOGO OF FEDERATED] [LOGO OF GOLDMAN SACHS] [LOGO OF JANUS] [LOGO OF MELLON BOND] [LOGO OF MORGAN STANLEY DEAN WITTER] [LOGO OF NEUBERGER BERMAN] [LOGO OF PUNAM INVESTMENTS] [LOGO OF STATE STREET GLOBAL ADVISORS] [LOGO OF T. ROWE PRICE] [LOGO OF WELLINGTON MANAGEMENT] Dear Shareholder, The economic and financial landscape has shifted dramatically since our last report to you six months ago The Federal Reserve has finally achieved its goal of slowing economic growth, and market sentiment has moved abruptly toward fear of an impending recession. The Fed acknowledged in December that economic weakness is now a greater concern than inflation, but stopped short of lowering interest rates to stimulate the economy at that time. However, the rate was cut at a special meeting called on January 3, 2001. The overall macroeconomic picture right now is almost exactly what Alan Greenspan has been targeting; growth still positive but slightly below the economy's potential, minimal inflation, and a slight increase in the unemployment rate. There are two key reasons for the bleak mood in financial markets. First, the economic slowdown, even if it proceeds exactly according to the Fed's plan, implies a jarring halt to the recent pace of growth in corporate earnings. Stocks and bonds are both being hit by changed expectations of profits and defaults. Second, there is a legitimate fear that the Fed may have made a mistake, overdoing the monetary tightening earlier in 2000. It takes up to a year for the full impact of interest rate changes to work its way through the economy, so there could still be more tightening in the pipeline from last May's 50-basis-point increase. While the best guess is that the Fed is getting it right, and stands ready to ease rates again if the need is compelling, markets are still reflecting a valid concern that we might already be on a slippery slope. But while the market was turbulent this past year, not everyone faired poorly. Most financial pundits agree that those who had their assets well diversified in year 2000 were generally much better off than those who weren't diversified. John Hancock offers a unique and highly diversified group of funds for our shareholders to select from for their variable life and annuity products. Further, we monitor all of our funds regularly to ensure that each maintains its stated investment style. By offering you many choices across all investment styles, you can make sure that your variable life or variable annuity assets are properly diversified. It may be time for you to review the fund choices in your variable life and/or annuity policies to see if the asset allocation you selected is still appropriate for your current situation. If so, please contact the registered representative who assisted you with the purchase of your policy and he or she will assist you in that process. We want to help you get the most out of your John Hancock variable products. Diversification of investment choices, which meet your asset allocation preferences, is another way we may be able to achieve your objectives. Thank you for purchasing your variable life and/or annuity products from John Hancock. You can rest assured that we will continue to work on your behalf. Sincerely, /s/ Michele G. Van Leer /s/ Thomas J. Lee Michele G. Van Leer Thomas J. Lee Chairman President and Vice Chairman [PHOTO] [PHOTO] Michele G. Van Leer Thomas J. Lee Chairman President and Vice Chairman Economic Overview John Hancock Economic Research Economic conditions in the US shifted dramatically during 2000, slowing from over a 5% pace of growth in the first half to just over 2% in the second. The abrupt downshift cut sharply into corporate earnings, resulting in rising loan losses and bond defaults, and slumping equity prices for high-flying technology stocks. Changing conditions brought a chastened mood in financial markets and the media, with widespread fears of recession for the first time in several years. The Federal Reserve announced in December a reassessment of the relative risk of recession and inflation, followed in January by a surprise half-point cut in short-term interest rates. Investors seemed reassured by the Fed's action, seeing it as proof that Chairman Greenspan was on the job and ready to prevent a recession, despite some fear that his surprise rate cut showed that the economy must be even weaker than we had thought. Stock prices recovered some lost ground, and credit spreads narrowed as money started moving back into higher-risk corporate bonds. Overall, however, markets have remained volatile. A soft landing: soft for whom? We still appear to be headed for a soft landing rather than a recession. But "soft" means only that overall growth remains positive--it does not mean comfortable. A downshift from over 5% growth to under 2% may cause just as much pain to many sectors as past recessions. In financial markets, the impact of precipitous drops in corporate earnings can make a soft landing for the economy feel very bumpy. In addition, the risk of an actual recession has increased. Consumer confidence has fallen sharply, which may cut into spending (auto sales are already down), while lower stock prices and tighter credit cut into both the desire and the ability of businesses to finance new capital investment. We still believe that the Federal Reserve will successfully avert a recession, but the chance that a mistake or an external shock will put us over the edge are clearly much higher when growth is already sluggish. Inflation: dead but not buried With the economy slowing, the specter of inflation has almost evaporated as cost pressures which had been building in the services sectors start to abate. Wage growth will probably slow as jobs become less plentiful. Nonetheless, oil costs remain a constant worry, as OPEC tries to sustain high prices. In addition, falling interest rates normally weaken the dollar, boosting goods prices across the board. For the moment it seems that foreign interest rates will follow US rates down, so that there will not necessarily be any relative weakening of the dollar. But with slower US growth and a huge trade deficit, there is a real risk that imported inflation could at some point limit the Fed's freedom to stimulate the economy with more interest rate cuts. 1 Inception: March 29, 1986 Growth & Income Fund Independence Investment Associates, Inc. Paul F. McManus Putnam Investments C. Beth Cotner Effective November 1, the Fund was modified to a multi-managed investment approach The Growth & Income Fund is a multi-manager fund with two sub-advisers each independently managing their own portion of the Fund. The two managers employ a distinct and complementary investment strategy. This unique multi-manager approach seeks to produce more consistent investment returns over market cycles and to reduce the risk of any one manager or strategy being out of favor in certain market environments. IIA selects stocks using a combination of fundamental equity research and quantitative tools and focuses on large cap stocks that are undervalued relative to the stock's history and have improving earnings growth prospects. Putnam selects stocks using a systematic screening approach and fundamental equity research and focuses on large and mid cap stocks with opportunities for above average growth. As of December 31, 2000, IIA managed approximately 77% and Putnam managed approximately 23% of the Fund's assets. For the year, the Fund performed - 13.10% below the benchmark's performance of -9.11%. Independence Investment Associates, Inc. The Fund outperformed the benchmark in the fourth quarter. Stock prices declined in the period as fears over an accelerating economic slowdown were discounted in the market. Increasing numbers of technology companies began to preannounce earnings shortfalls. The Fund was modestly underweight technology stocks, and this benefited portfolio performance, although specific stock selection skill was slightly negative. Health care was over weighted, particularly in large drug companies. Both stock selection and the active overweight benefited performance for the quarter. Holdings in Bristol Meyers, Merck and Pharmacia Upjohn helped the portfolio. Electric utilities were another positive are as investors were becoming even more defensive as the economy was slowing. Perceived as safer technology stocks, information services companies like First Data Corp and EDS did relatively well and helped portfolio performance. With the market being defensive, food and beverage stocks did well. We had an underweight there as valuations did not justify the purchases of some of the stocks. This relative underweight negatively impacted performance in the quarter. In the media area, fears of the slowing economy affected the broadcasters as advertising budgets became suspect. Also, the delay of Time Warner--AOL adversely affected performance of those stocks. Looking forward, we continue to maintain a broad sector neutral strategy while emphasizing individual stock selection. Based upon the relative valuation of stocks we will continue to select the best stocks within industries based upon their valuation and outlook for sustainable earnings growth. Putnam Investments The Fund benefited from overweighting the robust energy, conglomerate, utilities, and financial sectors, along with strong stock selection. In particular, exceptional stock performance by one of our holdings (Tyco) made conglomerates the greatest contributor to performance. The next-largest contribution came from energy, where oil services stocks boosted returns; in financial services, insurance (American International Group) and investment banking/brokerage (Goldman Sachs) aided performance. The single largest detractor from performance came from technology, where the benefit of being underweight in a very weak sector was more than offset by poor stock performance in software (Openwave Systems, Veritas Software), communications equipment (Redback Networks, Juniper Networks), and business applications software (Agile Software, I2 Technologies). Fund performance was also hindered by health care (underweighting pharmaceuticals and weak stock selection in biotechnology); overweighting communications services (the worst- performing sector), along with weak stock performance from that sector in the cellular industry (Sprint PCS, Nextel); underweighting consumer staples (along with not owning non-alcoholic beverage companies and owning weak TV broadcasting companies); and finally, underweighting consumer cyclicals. In the volatile environment of the new year, we anticipate additional earnings disappointments, especially in stocks leveraged to the consumer. We believe that the current environment will continue to place pressure on rapidly expanding, high-quality growth companies. We have concentrated the Fund on companies with a proven record of expanding profits even in unsettled economic times. Higher energy prices should benefit oil and gas producers and energy services companies. Going forward, we will be overweight energy (oil services) and financial services (banking/brokerage services and insurance) stocks while underweighting technology (communications equipment and software) and consumer staples (media and TV broadcasting.) 2 Inception: March 29, 1986 Growth & Income Fund Independence Investment Associates, Inc. Paul F. McManus Putnam Investments C. Beth Cotner 3 Inception: May 1, 1996 Equity Index Fund State Street Global Advisors Management Team The year 2000 provided the first negative return of the S&P 500 since 1990. This is only the second calendar year since 1980 to finish in the red. For the year, the S&P 500 was down 9.09%. Technology stocks grabbed most of the headlines during the year. The Nasdaq Composite Index fell more than 50% from its high on March 10, and finished the year down approximately 40%. The news was not all bad, as Financials, Health Care and Utilities all posted strong returns. In fact, the S&P 500 ex-Technology posted a gain for 2000. The smaller stocks in the Index performed much better than the giants in 2000. The top quartile of names lost about 15% in 2000, while the other 4 quartiles all posted gains ranging from 9.6% to 17.3%*. Value stocks outperformed their growth counterparts by over 28% during the year. The Equity Index Fund return was -9.15% for the year. The Index return was - 9.09% for the year. Fees cost the Fund -0.17% during the year. Removing these from the calculation shows the Fund slightly outperformed its goal for the year. The Equity Index Fund attempts to track the performance of The S&P 500 Index by fully replicating the index. The Fund attempts to match the index holdings and weights for each security in order to provide returns close to the index return. * Source: Prudential Securities. 4 Inception: May 1, 1996 Large Cap Value Fund T. Rowe Price Associates, Inc. Brian C. Rogers In what will be remembered as one of the most tumultuous years in recent history, the stock market limped to the finish line with its first loss in several years and its worst overall showing in more than two decades. During the year, the Fed maintained a generally restrictive monetary policy, the economy showed signs of deceleration, and once high-flying sectors finally experienced the effects of gravity. In this challenging environment, the trust enjoyed an outstanding year as value stocks returned to favor. The Fund posted a strong gain for the 12-month period ended December 31, 2000, 13.83%, comfortably ahead of the Russell 1000 Value Index, 7.01%. Many of the beneficiaries of this difficult environment were companies with defensive characteristics and those that appeared, according to our assessment, to be undervalued. Companies with predictable revenue and earnings streams fared especially well in the turmoil of 2000. After all, at the beginning of the year, who would have guessed that the best performing S&P sector would be the electric and gas utility industry? Over the past 12 months, holdings in the utility, consumer products, financial, and energy sectors helped the Fund's performance. These sectors provided positive returns at a time when many stocks struggled. The trust also benefited from continued merger and acquisition activity, such as the acquisitions of Fort James, J.P. Morgan, and Honeywell International. Despite the trust's strong return, we also had some losers in the Fund, including Xerox and AT&T. Fortunately, some of the trust's better performing positions more than offset the drag of declining share prices. We made several transactions that are representative of how we manage the trust. Many of the positions we reduced or eliminated had generated good returns over the time we held the stocks. Our general strategy is to reduce position size when price appreciation results in less attractive valuations for the shares. For example, as Duke Energy's price rose last year, its relative valuation appeal (the relationship between upside potential and downside risk) became less attractive and we trimmed our stake. On the other hand, the stock of Sprint had declined fairly sharply, increasing the appeal of its relative valuation, which induced us to initiate a position in the shares. Honeywell International's price declined so sharply in the first half of the year that General Electric decided its relative valuation and strategic appeal was so compelling that it opted to buy Honeywell in its entirety. In making these Fund adjustments, we slightly increased the trust's volatility relative to the S&P 500. As the market's value structure has changed, it makes sense for us to take on slightly more risk. For example, at certain levels, some technology companies may offer better opportunities as value plays than utility stocks that have appreciated strongly. 5 Inception: August 31, 1999 Large Cap Value Core Fund Goldman Sachs Asset Management Brown/Jones/Pinter During the one-year reporting period the Large Cap Value CORE Fund generated a total cumulative return of 5.12%, versus the 7.01% total cumulative return of the Fund's benchmark, the Russell 1000 Value Index. The Fund's strategy is a well-defined investment process that has historically provided consistent, risk-managed performance. The diversification of our models typically adds value because, when one theme doesn't work, others usually do. For example, when momentum stocks underperform, value stocks typically advance more than average. Over the reporting period the returns of our various investment themes were extremely erratic. In fact, virtually every theme experienced one of its best months since inception, as well as at least one of its worst months ever. In addition, some months saw extremely positive returns for one variable and extremely negative for another--reflecting the high overall return dispersion nature of the market. The CORE themes struggled within the Index universe, especially the Value theme. In particular, Value had its two worst quarters (second and fourth quarters) since inception, and the fourth quarter of 2000 marked the worst quarter since inception of our Momentum and Stability themes. Though Research did not do as badly as the other three themes, it did have a slightly negative return for the year. Strong stock selection within the Financial and Consumer Non-Cyclical sectors helped returns, though we lagged the benchmark in the Consumer Services and Consumer Cyclical sectors. Looking ahead, we continue to believe that cheaper stocks should outpace more expensive ones, good momentum stocks should do better than poor momentum stocks, lower-risk stocks should perform better than higher risk stocks, as should those favored by research analysts. As such, we anticipate remaining fully invested and expect that the value we add over time will be due to stock selection, as opposed to sector or size allocations. 6 Inception: June 30, 2000 American Leaders Large Cap Value Fund Federated Investment Management Company M. Donnelly/K. McCloskey The fourth quarter marked a dramatic shift in market leadership and investor sentiment. Value strategies outperformed growth strategies during the quarter as investors continued to flee technology and telecommunications shares, as many of these companies lowered current and future earnings expectations. The American Leaders Large Cap Value Fund returned 2.89% during the fourth quarter, underperforming the benchmark Russell 1000 Value Index, which returned 3.6%. Relative to the Russell 1000 Value Index, positive influences on performance included an underweight position in Utilities and overweight positions in Healthcare and Other. Additional positive influences on performance included good security selection in Financial Services (Conseco up 73%, Cigna up 27%), Consumer Discretionary (Waste Management up 59%, Charter Communications up 39%), and Consumer Staples (Philip Morris up 51%, Sara Lee up 22%). Offsetting these positive influences on relative performance was an overweight position and unfavorable security selection in Technology (Sun Microsystems down 53%, Novell down 47%), as well as an underweight position in Consumer Staples. Unfavorable security selection in Utilities (Worldcom down 54%, AT&T down 41%), Producer Durables (Philips Electronics down 15%, Northrop Grumman down 8%) and an unassigned sector (News Corp. Ltd down 38%) also detracted from relative returns. For the six-month period, positive influences on relative performance were an underweight position in Utilities as well as an overweight position and favorable security selection in Healthcare (Healthsouth up 127%, Unitedhealth Group up 43%, Baxter Intl. up 27%). Favorable security selection in Financial Services (Washington Mutual up 87%, PNC Financial up 58%, Allstate up 97%) and Consumer Discretionary (Waste Management up 46%, Kimberly-Clark up 25%, Charter Communications up 38%) also aided relative returns. Offsetting these positive influences on performance were overweight positions in Technology and Unassigned names, as well as unfavorable security selection in Other Energy (Ensco Intl. down 5%) and Integrated Oils (Chevron up 1%, Royal Dutch Petroleum down 1%). 7 Inception: March 29, 1986 Large Cap Growth Fund Independence Investment Associates, Inc. Mark Lapman We are pleased to report that your Fund ended a difficult and volatile partial year well ahead of its benchmark. Your Fund returned -17.89% for the year, over 4.5% ahead of the -22.42% return of the Russell 1000 Growth Index. During 2000, there was an overall broadening of the US equity market, which we view as healthy despite the market's negative absolute return. While fourth quarter returns were negative, we were able to add value through solid stock selection. Your Fund returned -18.29% over 3% ahead of the -21.35% return of the Russell Growth Index. During the quarter, health care names such as Universal Health Services, Merck and St. Jude Medical were especially strong, due to their consistent and reliable earnings growth. Financial stocks also performed well, driven higher by the sentiment that the Fed will soon begin to cut interest rates. Holdings in Fannie Mae and Partnerre benefited from this trend. Resistant to an economic slowdown, consumer non-cyclicals such as Colgate Palmolive performed strongly, as investors focused on the fact that people buy toothpaste no matter what the economy is doing. After taking a beating earlier in the year, many retailers came back strong in the fourth quarter. Investors began to anticipate the positive impact of lower interest rates on consumer spending and snapped up shares of TJX and Kohls. It was a difficult, emotional year for the stock market, yet we were pleased to deliver a competitive return on your Fund, which exceeded your benchmark. These results were achieved by sticking to our philosophy that cheap stocks with improving fundamentals are attractive. We feel confident that with our unique blend of strong fundamental research, a disciplined investment philosophy and process, and strong risk control positions us well to have another. [GRAPH] Large Cap Large Cap Large Cap Large Cap Growth Growth Growth Growth Fund Benchmark(1) Fund Benchmark(1) 6/29/90 $10,000 $10,000 7/31/95 $18,981 $22,266 7/31/90 10,052 10,442 8/31/95 19,127 22,479 8/31/90 9,532 11,190 9/29/95 19,903 22,695 9/28/90 9,162 11,456 10/31/95 19,674 23,029 10/31/90 9,172 11,488 11/30/95 20,491 23,832 11/30/90 9,809 11,980 12/29/95 20,777 23,866 12/31/90 10,155 11,432 1/31/96 21,264 22,467 1/31/91 10,632 11,967 2/29/96 21,514 23,047 2/28/91 11,363 12,249 3/29/96 21,787 24,725 3/28/91 11,712 12,048 4/30/96 22,154 24,873 4/30/91 11,742 12,209 5/31/96 22,643 26,741 5/31/91 12,250 11,716 6/28/96 22,617 26,217 6/28/91 11,658 13,055 7/31/96 21,114 28,055 7/31/91 12,034 12,812 8/30/96 21,788 27,864 8/30/91 12,278 12,976 9/30/96 23,122 26,356 9/30/91 12,073 12,722 10/31/96 23,293 28,107 10/31/91 12,129 13,092 11/29/96 24,983 30,136 11/27/91 11,705 13,163 12/31/96 24,572 31,341 12/31/91 12,739 12,972 1/31/97 25,978 34,112 1/31/92 12,545 13,495 2/28/97 26,171 32,116 2/28/92 12,686 13,222 3/31/97 24,939 33,696 3/31/92 12,460 13,374 4/30/97 26,258 32,450 4/30/92 12,853 13,422 5/30/97 27,770 33,829 5/29/92 13,001 13,875 6/30/97 28,869 34,208 6/30/92 12,897 14,056 7/31/97 31,656 35,230 7/31/92 13,358 14,159 8/29/97 30,080 37,880 8/31/92 13,109 14,350 9/30/97 31,954 39,391 9/30/92 13,239 14,659 10/31/97 30,666 39,935 10/30/92 13,255 14,299 11/28/97 31,806 38,801 11/30/92 13,746 14,686 12/31/97 32,163 41,175 12/31/92 14,006 14,734 1/31/98 33,023 40,903 1/29/93 14,138 14,665 2/27/98 36,148 34,764 2/26/93 14,395 15,223 3/31/98 38,193 37,434 3/31/93 14,832 15,111 4/30/98 38,483 40,443 4/30/93 14,297 15,418 5/29/98 37,652 43,521 5/28/93 14,726 15,273 6/30/98 39,523 47,447 6/30/93 14,940 15,460 7/31/98 39,331 50,232 7/30/93 14,825 15,978 8/31/98 33,172 47,936 8/31/93 15,468 15,547 9/30/98 35,113 50,462 9/30/93 15,661 14,871 10/30/98 37,758 50,528 10/29/93 15,897 15,064 11/30/98 40,758 48,977 11/30/93 15,722 15,310 12/31/98 44,872 52,405 12/31/93 15,939 14,931 1/29/99 47,369 50,739 1/31/94 16,423 15,426 2/26/99 45,089 51,566 2/28/94 15,914 16,053 3/31/99 46,987 50,483 3/31/94 15,400 15,667 4/30/99 47,680 54,294 4/29/94 15,702 16,025 5/28/99 46,300 57,226 5/31/94 15,651 15,437 6/30/99 49,748 63,178 6/30/94 15,417 15,663 7/30/99 48,102 60,215 7/29/94 15,803 16,070 8/31/99 48,377 63,159 8/31/94 16,356 16,693 9/30/99 47,268 67,681 9/30/94 15,865 17,187 10/29/99 50,039 64,460 10/31/94 16,016 17,688 11/30/99 51,727 61,211 11/30/94 15,549 18,386 12/31/99 55,671 65,851 12/30/94 15,782 18,818 1/31/00 52,340 63,105 1/31/95 16,078 19,445 2/29/00 53,994 68,816 2/28/95 16,687 19,498 3/31/00 59,753 62,306 3/31/95 17,065 20,314 4/28/00 57,723 59,359 4/28/95 17,487 20,243 5/31/00 55,633 50,609 5/31/95 18,082 21,134 6/30/00 58,852 49,010 6/30/95 18,386 21,525 7/31/00 56,070 63,105 8/31/00 61,542 68,816 9/30/00 55,095 62,306 10/31/00 53,458 59,359 11/30/00 46,338 50,609 12/31/00 45,017 49,010 Top Ten Holdings (as of December 31, 2000) - --------------------------------------------------------------------------- % of six months ago investments % of investments General Electric Co. 5.7% 5.4% Pfizer, Inc. 3.7% 1.9% Cisco Systems, Inc. 3.3% 7.0% Intel Corp. 2.9% 4.9% EMC Corp. 2.6% 0.9% Microsoft Corp. 2.5% 7.5% Merck & Co., Inc. 2.1% 2.0% Oracle Corp. 2.1% 3.4% America Online, Inc. 2.0% 4.1% International Business Machines Corp. 1.8% 2.1% Average Annual Total Returns* - --------------------------------------------------------------------------- Large Cap Large Cap Growth MorningStar Growth Fund Benchmark(1) Peer Group+ --------------- ---------------- ----------- 1 Year -17.89% -22.42% -15.05% 3 Years 12.43 12.74 18.46 5 Years 17.08 17.89 18.78 10 Years 16.24 16.34 17.43 Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Technology 50.0% Consumer Cyclical 3.9% Health Care 21.6% Energy 1.0% Capital Equipment 13.1% Utility 0.7% Retail 6.9% Governmental 0.2% Financial 4.0% Consumer Staple N/A (1) The benchmark is represented by the S&P 500 for the period April 1986 to April 1996 and the Russell Large Cap Growth Index for the period May 1996 to present. * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities that may not continue to occur in the future." 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the MorningStar variable universe having a Large Cap Growth investment category. Prior to May 1996 (concurrent with the Fund's strategy change), the peer group represents the Large Blend investment category. 8 Inception: August 31, 1999 Large Cap Aggressive Growth Fund Alliance Capital Management L.P. J. Fogarty/A. Harrison The Fund returned -18.77% compared to the Russell 1000 Growth Index return of - -22.4% for the year ended December 31, 2000. The Fund outperformed due to an underweight in the poor-performing technology sector and an overweight and strong stock performance in financial services. Strong gains from capital goods stocks were also positive contributors to performance. Although the market is likely to remain volatile as sentiment vacillates with the economic data and corporate earnings reports, we believe the stage is set for a rebound during 2001. Looking out over the next six to twelve months, the most ideal, and we believe the most likely, economic scenario continues to be a "soft landing." In an economic environment of solid, albeit lower, growth and benign inflation, high quality, industry dominant growth companies traditionally outperform. We expect further interest rate cuts by the Federal Reserve to provide a positive tailwind for the market. While the next few months will likely bring more earnings disappointments and re-acceleration of earnings growth may not be visible until mid-year, the speculative excesses have been substantially reduced and many premier growth stocks, especially in technology, have been beaten down to valuation levels not seen in two years. We remain focussed on a relatively concentrated list of high quality growth stocks in technology, consumer services, financial services and healthcare that we believe will continue to generate superior investment returns. We will actively trade the core holdings in the Fund to take advantage of the natural volatility that is observed in the market and continue to strive to marry the Fundamentals with price considerations on each specific stock decision. 9 Inception: August 31, 1999 Large/Mid Cap Value Fund Wellington Management Company, LLP D. Chu/L. Gabriel During the fourth quarter, the Large/Mid Cap Value Fund gained 4.14%, outperforming the Fund's benchmark, the Russell 1000 Value Index, which increased 3.6% for the quarter ended December 31, 2000. For the one-year period ending December 31, 2000 the Fund returned 13.41% well ahead of its 2001 benchmark which only increased 7.0%. The US equity market lost ground during the fourth quarter due to fears over eroding corporate earnings, high energy prices, and uncertainty concerning the outcome of the US presidential election. Growth stocks lagged while value issues led the way as the Russell 1000 Value Index (3.6%) outperformed the Russell 1000 Growth Index (-21.4%) during the fourth quarter. During the quarter, the Fund's sector weights were kept closely in line with those of the Russell 1000 Value Index. The sectors in the Fund that added the most value were finance and energy. Conversely, the utilities and health care sectors detracted from returns. Some of the Fund's largest contributors through stock selection during the quarter include: Washington Mutual, which was the Fund's top performer, Ultramar Diamond Shamrock, which was a solid performer in the energy sector, and Fannie Mae, which was able to beat expectations, driven by strong loan growth and stable credit conditions. The year 2000 was the beginning of what we believe to be a longer-term rally in US larger capitalization value stocks. A Euro that has strengthened from the 2000 lows will boost larger-company profits, while continued consolidation in many economically sensitive sectors will drive the returns of many value stocks upward in the quarters to come. As we begin the New Year, we continue to believe that broad diversification across economic sectors is a central tenet of the investment strategy. We will continue to look for opportunities in large cap stocks that represent value through active Fund management. [GRAPH] Large/Mid Cap Russell 1000 Value Fund Value Index 8/31/99 $10,000 $10,000 9/30/99 9,787 9,650 10/31/99 10,352 10,206 11/30/99 10,295 10,126 12/31/99 10,472 10,175 1/31/00 10,031 9,843 2/29/00 9,614 9,112 3/31/00 10,829 10,223 4/30/00 10,445 10,105 5/31/00 10,607 10,211 6/30/00 10,218 9,744 7/31/00 10,452 9,866 8/31/00 11,179 10,415 9/30/00 11,405 10,510 10/31/00 11,710 10,769 11/30/00 11,229 10,370 12/31/00 11,877 10,889 Top Ten Holdings (as of December 31, 2000) - -------------------------------------------------------------------------- % of six months ago investments % of investments Citigroup, Inc. 3.3% 2.2% Verizon Communications 3.1% N/A Washington Mutual, Inc. 2.9% N/A Exxon Mobile Corp. 2.6% N/A Federal National Mortgage Assoc. 2.4% 1.0% American International Group, Inc. 2.4% 0.8% Cigna Corp. 2.2% 0.7% Wachovia Corp. 2.0% 0.7% KeyCorp N/A N/A Sara Lee Corp. 1.9% 0.3% Average Annual Total Returns* - --------------------------------------------------------------------------- Large/Mid Cap Russell 1000 MorningStar Value Fund Value Index Peer Group+ ------------- ------------ ----------- 1 Year 13.41% 7.01% 11.37% Since Inception (8/31/99) 13.76 6.60 N/A Top Ten Sectors (as of December 31, 2000) - --------------------------------------------------------------------------- % of % of investments investments Financial 8.6% Utility 5.1% Technology 8.5% Health Care 4.7% Capital Equiptment 7.9% Consumer Staple 4.1% Energy 7.6% Basic Material N/A Consumer Staple 7.5% Retail 2.9% * Total returns are for the period ended December 31, 2000. Returns represent past performance, assume reinvestment of all distributions and are not indicative of future performance. "Results may have been achieved during market conditions or pursuing performance opportunities, including investment in initial public offerings, that may not continue to occur in the future." 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. Small-company investing entails special risks outlined in the prospectus. 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. + Source: MorningStar, Inc. Data as of 12/31/00. Although gathered from reliable sources, data completeness and accuracy cannot be guaranteed. Represents an average annual total return for all variable annuity and life sub-accounts within the Morningstar variable universe having a 50% weighting of the Large Cap Value category and a 50% weighting of the Mid Cap Value category. 10 Inception: May 1, 1996 Mid Cap Value Fund Neuberger Berman, LLC R. Gendelman For the fourth quarter ended December 31, 2000, the Mid Cap Value Fund/1/ returned 6.20%. This gain fell short of the Russell Mid-Cap Value Index's/2/ return of 9.44%. However, the fund significantly outperformed the index for the one-year period: the Mid Cap Value rose an impressive 28.38% while the Russell Mid-Cap Value gained 19.18%. In the fourth quarter, we continued our commitment to invest in good businesses at attractive prices that possess positive risk-reward characteristics. Our holdings within Financial Services (33.04% of total market value as of 12-31-2000) had the most favorable impact on portfolio total return. We were overweight the Russell Mid-Cap Value and our stock selection led to better absolute returns. Dime Bancorp (1.75% of total net assets) and M&T Bank Corp. (1.64% of total net assets) were two of the top performers in the period. The Producer Durables sector (7.35% of total market value) also had a positive impact on total return. As with Financial Services, the fund was overweight the index and achieved superior absolute returns. Waste Management (1.32% of total net assets) and General Dynamics (1.56% of total net assets) both made solid contributions to portfolio return. Contrarily, many of our Technology holdings (6.20% of total market value) were not immune to the weakness in the sector and detracted from total return. 3Com and Comdisco, both of which were sold during the period, had negative impacts on return. Holdings within Materials & Processing (4.91% of total market value) and Utilities (11.01%) led to lost ground versus the index. The fund was underweight the M&P sector and had inferior returns. And while Utilities did have a small positive impact on total return, the fund was underweight the sector and had lower returns as compared to the index. (1) 28.32% and 14.01% were the average annual returns for the 1-year and since inception (5/01/96) periods through December 31, 2000. Results are shown on a total return basis and include reinvestment of all dividends and capital gains distributions. Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that the shares, when redeemed, may be worth more or less than their original cost. (2) The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represents approximately 26% of the total market capitalization of the Russell 1000 Index (which, in turn, consists of the 1,000 largest U.S. companies, based on market capitalization). The Russell Midcap Value Index measures the performance of those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. Please note that indices do not take into account any fees and expenses of investing in the individual securities that they track, and that individuals cannot invest directly in any index. Data about the performance of this index are prepared or obtained by Neuberger Berman Management Inc. and include reinvestment of all dividends and capital gain distributions. The Portfolio may invest in many securities not included in the above-described index. 11 Inception: August 31, 1999 Fundamental Growth Fund (formerly Fundamental Mid Cap Growth Fund) Putnam Investments Eric M. Wetlaufer Effective August 1, 2000 Putnam Investments assumed management of the Fund. The Fund returned -20.91% for the fourth quarter, outpacing the Russell Mid Cap Growth Index return of -23.25%. Outperformance in this hostile environment for growth investing was largely due to adept stock selection, particularly in the battered technology sector. Selection in health care contributed early in the period but detracted in the fourth quarter largely due to weakness in biotechnology. Energy, utilities, and financial holdings benefited performance throughout the period. Communications services holdings hurt results. The U.S. equity market remains extremely volatile as we begin the new year. We anticipate additional earnings disappointments, especially in stocks leveraged to the consumer. In the light of signs that the economy is slowing significantly, we expect several interest-rate cuts over the first half of 2001. High energy prices will continue to act as a tax on the economy, reducing consumers' disposable income and adding pressure to corporate profit margins. A forecasted colder-than-average winter will exacerbate the effect of higher oil and natural gas prices on local economies and on consumer spending. We expect growing unemployment and business failures--especially in the dot- com universe. As a result, consumer confidence will continue to erode, creating a difficult environment for retailers. We have concentrated the Fund on growth companies with a proven track record of expanding profits even in unsettled economic times. Higher energy prices should benefit oil and gas producers and energy services companies. Within the financial sector we will emphasize the regional banks and credit-cards issuers that should benefit from Fed rate cuts. While underweighting technology as a whole--particularly semiconductors and components--we will overweight software and communications and equipment. Within the underweight sector of consumer staples, we will emphasize broadcasting and restaurants, while underweighting foods. 12 Inception: August 31, 1999 Mid Cap Blend Fund Independence Investment Associates, Inc. Coreen Kraysler The Mid Cap Blend Fund posted another strong quarter, returning -1.5% vs. the Frank Russell Midcap Index return of -3.59%, while for the year the Fund returned 18.58%, far exceeding the benchmark return of 8.25%. Worried about an impending economic slowdown, investors took a defensive posture during the most recent quarter, and thus placed their bets on consumer noncyclical stocks such as the food and beverage names. As a result, holdings in Archer-Daniels-Midland and Conagra performed strongly. Unable to sustain high valuations after a string of earnings disappointments, technology and telecom names remained weak, hurting positions in Portal Software, Jabil Circuit and Vishay Intertechnology. Instead, investors preferred to seek out value in beaten down basic materials stocks. Consequently, paper & forest product holdings in Abitibi and Westvaco performed well. Similarly, chemical stocks such as Avery Dennison, Eastman Chemical and Air Products also outperformed. Industrial stocks such as Ingersoll Rand and Parker Hannifin also made a comeback. In anticipation of a decline in interest rates, financial stocks also outperformed. Holdings in Golden West and Torchmark benefited from this trend. In addition to the positive interest rate environment, property & casualty insurance stocks, such as St. Paul, XL Capital and Partner Re benefited from an upturn in insurance prices. During the quarter, we sold Stryker Corp., Capital One Financial and Hispanic Broadcasting after they met our price targets. We initiated positions in Lincare, Southern Energy and Southtrust. As always, we continue to look for inexpensive mid cap stocks with good growth potential. 13 Inception: May 1, 1996 Mid Cap Growth Fund Janus James Goff The Mid Cap Growth Fund lost 29.24% during the fourth quarter, a period that saw our benchmark, the Russell Mid Cap Growth Index, lose 23.25% of its value. For the year ended December 31, 2000, the Fund lost 35.86%, while the Index lost 11.75%. Both the Fund and its benchmark were pressured by evidence suggesting the U.S. economy was slowing faster than many analysts expected--a development that forced stocks lower nearly across the board. Fast-growing companies suffered the most, as illustrated by the Nasdaq Composite Index's more than 32% plunge as disappointing earnings news from a number of high-profile technology companies magnified the impacts of a slowing economy. Although small- and mid-sized stocks fared somewhat better than the market at large, many of the midcap market's most significant successes during the quarter fell toward the value side of the spectrum. Individual disappointments included biotechnology Millennium Pharmaceuticals and Human Genome Sciences, both of which fell sharply as investors shied away from the sector. While we were discouraged by the declines recorded by both companies, Millennium's performance was particularly difficult to understand given the progress of its anti-Leukemia drug Campath with FDA regulators. Other setbacks included Web hosting company Exodus Communications and Internet security and domain name registrar VeriSign. Meanwhile, notable successes included Hanover Compressor, a company that provides compression services critical to the production of natural gas from existing wells. The company reported a 48% increase in net income and a massive 60% increase in cash flow during the quarter, a strong performance that provided lift for the shares. Looking ahead, stocks could remain volatile as investors factor economic weakness and uncertainty surrounding the corporate earnings outlook into share prices. However, there is growing evidence that several key areas of the market may finally be oversold, and we have actively tried to position the Fund to benefit by using focused research to identify outstanding growth. 14 Inception: August 31, 1999 Small/Mid Cap Value Fund The Boston Company Asset Management, LLC Peter I. Higgins Value stocks have continued their dominance over growth stocks on a year-to- date basis. The Fund was up 4.67% for the quarter while the Russell 2500 Value Index was up 8.62%. For the year ended December 31, 2000 th