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Filed Pusuant to Rule 424(b)(3)
Registration No. 333-6011
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Annuity Service Office Mailing Address
116 Huntington Avenue Post Office Box 9230
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6004 02205-9230
(800) 344-1029
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THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
DEFERRED FIXED ANNUITY
CONTRACT
NON-PARTICIPATING
This Prospectus describes Venture Market Value Adjusted Annuity ("Venture
MVA"), a single payment deferred fixed annuity contract, offered by The
Manufacturers Life Insurance Company of North America, formerly, North American
Security Life Insurance Company, (the "Company"), a stock life insurance company
the ultimate parent of which is The Manufacturers Life Insurance Company
("Manulife").
The Prospectus describes both an individual deferred annuity contract and a
participating interest in a group deferred annuity contract. Both are designed
and offered to provide retirement income pursuant to either non-qualified
retirement plans or plans qualifying for special income tax treatment under the
Internal Revenue Code.
Participation in a group contract will be separately accounted for by the
issuance of a certificate evidencing the owner's interest under the contract.
Ownership of an individual contract is evidenced by the issuance of an
individual annuity contract. The certificate and individual annuity contract are
hereafter referred to as the "contract."
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The purchase payment is paid to the Company at its Annuity Service Office.
The minimum purchase payment for a contract is $5,000. The maximum purchase
payment accepted without prior approval of the Company is $500,000. The purchase
payment is allocated to the guarantee period designated by the contract owner.
Additional purchase payments for a contract will not be accepted. Additional
contracts may, however, be purchased at the then prevailing rates and terms.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE FIXED ACCOUNT AND THE CONTRACT THAT A PROSPECTIVE
PURCHASER SHOULD KNOW BEFORE INVESTING.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE CONTRACT
OWNER BEARS THE INVESTMENT RISK THAT THE GUARANTEED INTEREST RATES OFFERED BY
THE COMPANY AT THE TIME OF WITHDRAWAL, TRANSFER OR THE START OF ANNUITY PAYMENTS
MAY BE HIGHER THAN THE GUARANTEED INTEREST RATE APPLIED TO THE CONTRACT WITH THE
RESULT THAT THE AMOUNT RECEIVED UPON WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY
BE REDUCED BY THE MARKET VALUE ADJUSTMENT AND MAY BE LESS THAT THE ORIGINAL
INVESTMENT IN THE CONTRACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), NOR HAS THE SEC PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY.
The date of the Prospectus is May 1, 1998
MVA.PRO598
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AVAILABLE INFORMATION
Commencing with the offering of the securities described in this
Prospectus, The Manufacturers Life Insurance Company of North America became
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, (the "1934 Act") and in accordance therewith files reports and
other information with the SEC. Such reports and other information can be
inspected and copied at the public reference facilities of the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Offices
located at 75 Park Place, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials also can be obtained from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC which is located at http://www.sec.gov.
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, (the "1933 Act") with respect to the contracts
discussed in the Prospectus. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Prospectus. Statements contained in this Prospectus concerning the content
of the contracts and other legal instruments are only summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the SEC. The Registration Statements and the exhibits
thereto may be inspected and copied, and copies can be obtained at the
prescribed rates, in the manner set forth in the preceding paragraph.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SPECIAL TERMS ................................................................................ 4
SUMMARY ...................................................................................... 6
DESCRIPTION OF THE CONTRACT .................................................................. 8
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT ............................................. 8
ACCUMULATION PROVISIONS ................................................................ 8
Purchase Payments ...................................................................... 8
Guarantee Periods ...................................................................... 9
Transfers Among Guarantee Periods ...................................................... 9
Telephone Transactions ................................................................. 9
Renewals ............................................................................... 9
Withdrawals ............................................................................ 9
Death Benefit Before Maturity Date ..................................................... 10
ANNUITY PROVISIONS ..................................................................... 11
General ................................................................................ 11
Annuity Options ........................................................................ 11
Death Benefit on or After Maturity Date ................................................ 12
OTHER CONTRACT PROVISIONS .............................................................. 12
Ten Day Right to Review ................................................................ 12
Ownership .............................................................................. 13
Beneficiary ............................................................................ 13
Annuitant .............................................................................. 13
Modification ........................................................................... 13
Company Approval ....................................................................... 14
Discontinuance of New Owners ........................................................... 14
MARKET VALUE ADJUSTMENT ................................................................ 14
CHARGES AND DEDUCTIONS ................................................................. 15
Withdrawal Charge ...................................................................... 15
Reduction or Elimination of Withdrawal Charge .......................................... 15
Taxes .................................................................................. 16
Administration Fee ..................................................................... 16
REINSURANCE .................................................................................. 16
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA .................................... 17
Description of Business ................................................................ 17
Management Discussion & Analysis ....................................................... 18
Selected Financial Data ................................................................ 23
Officers and Directors of the Company .................................................. 24
Executive Compensation ................................................................. 25
The Manufacturers Life Insurance Company of North America Separate Account D ........... 29
Distribution of the Contract ........................................................... 30
Confirmation Statements ................................................................ 30
Legal Proceedings ...................................................................... 30
Legal Matters .......................................................................... 30
Independent Auditors ................................................................... 30
Notices and Reports to Contract Owners ................................................. 30
Contract Owner Inquiries ............................................................... 31
FEDERAL TAX MATTERS .......................................................................... 31
Introduction ........................................................................... 31
The Company's Tax Status ............................................................... 31
Taxation of Annuities in General ....................................................... 31
Qualified Retirement Plans ............................................................. 34
Federal Income Tax Withholding ......................................................... 36
GENERAL MATTERS .............................................................................. 37
Restrictions Under the Texas Optional Retirement Program ............................... 37
APPENDIX A - Examples of Calculation of Withdrawal Charge .................................... 38
APPENDIX B - Market Value Adjustment Examples ................................................ 39
APPENDIX C - State Premium Taxes ............................................................. 41
FINANCIAL STATEMENTS OF THE COMPANY .......................................................... 42
</TABLE>
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SPECIAL TERMS
Annuitant Any individual person or persons whose life is
used to determine the duration of annuity payments
involving life contingencies. The Annuitant is as
designated on the contract or certificate
specifications page or in the application, unless
changed.
Annuity Option One of several alternative methods by which
payment of the proceeds may be made.
Annuity Service Office The annuity service office of the company is P.O.
Box 9230, Boston Massachusetts 02205-9230.
Beneficiary The person, persons, or entity to whom the death
benefit proceeds are payable following the death
of the owner, or in certain circumstances, an
annuitant.
Certificate For a group contract, the documents issued to each
owner which summarizes the rights and benefits of
the owner under the contract.
Company The Manufacturers Life Insurance Company of North
America.
Contingent Beneficiary The person, persons or entity who becomes the
beneficiary if the beneficiary is not alive.
Contract For an individual contract, the individual annuity
contract. For a group contract, the certificate
evidencing a participating interest in the group
annuity contract. Any reference in this prospectus
to "contract" includes the underlying group
annuity contract.
Contract Anniversary For an individual contract, the anniversary of the
contract date. For a group contract, the
anniversary of the date of issue of a certificate
under the contract.
Contract Date In the case of an individual annuity contract, the
date of issue of the contract as designated on the
contract specifications page. In the case of a
group annuity contract, the effective date of
participation under the group annuity contract as
designated in the certificate specifications page.
Contract Value The contract value is the sum of the net purchase
payment and accrued interest, less the sum of any
withdrawals and any administration fee, adjusted
for any transfer market value adjustment.
Contract Year The period of twelve consecutive months beginning
on the contract date, certificate date in the case
of a group contract, or any anniversary
thereafter.
Code The Internal Revenue Code of 1986, as amended.
Due Proof of Death Due Proof of Death is required upon the death of
the owner or annuitant, as applicable. One of the
following must be received at the Annuity Service
Office:
(a) A certified copy of a death certificate;
(b) A certified copy of a decree of a court
of competent jurisdiction as to the
finding of death; or
(c) Any other proof satisfactory to the
Company.
Death benefits will be paid within 7 days of
receipt of due proof of death and all required
claim forms by the Company's Annuity Service
Office.
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Fixed Account The Manufacturers Life Insurance Company of North
America Separate Account D, formerly, NASL Fixed
Account, which is a separate account of the
Company.
Fixed Annuity An annuity option with payments which are
predetermined and guaranteed as to dollar amount.
General Account All of the assets of the Company other than assets
in separate accounts.
Group Holder In the case of a group annuity contract, the
person, persons or entity to whom the contract is
issued.
Gross Withdrawal Value The portion of the contract value specified by the
owner for a full or partial withdrawal. Such
amount is determined prior to the application of
any withdrawal charge, annual administration fee
and market value adjustment.
Initial Guarantee Period The period of time during which the initial
guaranteed interest rate is in effect.
Initial Guaranteed The compound annual rate used to determine the
Interest Rate interest earned on the net purchase payment during
the initial guarantee period.
Market Value Adjustment An adjustment to amounts that are withdrawn,
transferred or annuitized prior to the end of the
guarantee period. It may increase or decrease the
amount available for transfer, withdrawal or
annuitized.
Maturity Date The date on which annuity benefits commence. It is
the date specified on the contract specifications
page, unless changed.
Net Purchase Payment The purchase payment less the amount of premium
tax, if any, deducted from the payment.
Non-Qualified Certificates Certificates issued under Non-Qualified Contracts.
Non-Qualified Contracts Contracts which are not issued under Qualified
Plans.
Owner or Contract Owner In the case of an individual contract, the person,
persons or entity entitled to the ownership rights
under the contract. In the case of a group annuity
contract, the person, persons or entity named in a
certificate and entitled to all of the ownership
rights under the contract not expressly reserved
to the group holder. The owner is as designated on
the contract or certificate specifications page or
in the application, unless changed.
Payment or Purchase Payment An amount paid by a contract owner to the Company
as consideration for the benefits provided by the
contract.
Qualified Certificates Certificates issued under Qualified Contracts.
Qualified Contracts Contracts issued under Qualified Plans
Qualified Plans Retirement plans which receive favorable tax
treatment under section 401, 403, 408, 408A or 457
of the Code.
Renewal Amount The contract value at the end of the initial
guarantee period or at the end of a renewal
guarantee period.
Renewal Guarantee Period The period of time during which a renewal
guaranteed interest rate is in effect.
Renewal Guaranteed The compound annual rate used to determine the
Interest Rate interest earned on a renewal amount during a
renewal guarantee period. In no event shall this
rate be less than 3%.
Separate Account A segregated account of the Company that is not
commingled with the Company's general assets and
obligations.
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SUMMARY
DESCRIPTION OF THE CONTRACT
The Contract. The contract offered by this Prospectus is a single purchase
payment deferred fixed annuity contract. The contract provides for the
accumulation of the contract value and the payment of annuity benefits on a
fixed basis. The Prospectus describes participating interests in both group
deferred annuity contracts and individual deferred annuity contracts. For
information on eligible groups for the group deferred annuity contracts (see
"ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT").
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code of 1986, as amended (the "Code"), such
as individual retirement accounts and annuities (including Roth IRAs), pension
and profit-sharing plans for corporations and sole proprietorships/partnerships
("H.R. 10" and "Keogh" plans), tax-sheltered annuities, and state and local
government deferred compensation plans (see "QUALIFIED RETIREMENT PLANS"). Those
who are considering purchase of a contract for use in connection with a
qualified retirement plan should consider, in evaluating the suitability of the
contract, that the contract allows only a single premium purchase payment in an
amount of at least $5,000.
Purchase Payments. Purchase payments are paid to the Company at its Annuity
Service Office. The minimum purchase payment for a contract is $5,000. The
maximum purchase payment accepted without prior approval of the Company is
$500,000. The purchase payment is allocated to the guarantee period designated
by the contract owner. Additional purchase payments for a contract will not be
accepted. Additional contracts may, however, be purchased at the then prevailing
rates and terms.
Prior to the maturity date, the Company may, at its option, cancel a
contract following the second contract anniversary if both (i) the total
purchase payment made, less any withdrawals, is less than $2,000; and (ii) the
higher of the contract value or the amount available upon total withdrawal is
less than $2,000. The cancellation of contract privileges may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states (see "PURCHASE PAYMENTS").
Guarantee Periods. Currently, there are ten guarantee periods under the
contract: one year through ten years. The Company may offer additional guarantee
periods for any yearly period from one to twenty years (see "INVESTMENT
OPTIONS").
Transfers Among Guarantee Periods. Before the maturity date, the contract
owner may transfer the entire contract value to a different guarantee period at
any time upon written notice to the Company or by telephone if the contract
owner authorizes the Company in writing to accept telephone transfer requests.
Amounts may only be transferred, however, once per contract year and the entire
amount of the account must be transferred. Amounts transferred will be subject
to a market value adjustment (see "TRANSFERS AMONG INVESTMENT OPTIONS").
Telephone Transactions. Contract owners are permitted to request transfers
or withdrawals by telephone (see "TELEPHONE TRANSACTIONS").
Renewals. At the end of a guarantee period, the contract owner may choose a
renewal guarantee period from any of the then existing guarantee period options,
at the then current interest rates (see "RENEWALS").
Withdrawals. Prior to the earlier of the maturity date or the death of the
contract owner, the owner may withdraw all or a portion of the contract value.
The amount withdrawn must be at least $300 or, if less, the entire contract
value. If a partial withdrawal plus any applicable withdrawal charge, after
giving effect to any market value adjustment would reduce the contract value to
less than $300, the Company will treat the partial withdrawal as a total
withdrawal of the contract value. A withdrawal charge and market value
adjustment may be imposed (see "WITHDRAWALS"). A withdrawal may be subject to
income tax and a 10% penalty tax (see "FEDERAL TAX MATTERS").
Confirmation Statements. Owners will be sent confirmation statements for
certain transactions in their account. Owners should carefully review these
statements to verify their accuracy. Any mistakes should immediately be reported
to the Company's Annuity Service Office. If the owner fails to notify the
Company's
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Annuity Service Office of any mistake within 60 days of the mailing of the
confirmation statement, the owner will be deemed to have ratified the
transaction.
Death Benefits. The Company will pay the death benefit to the beneficiary
if any contract owner dies before the maturity date. The death benefit is equal
to the contract value. If there is a surviving contract owner, that contract
owner will be deemed to be the beneficiary. No death benefit is payable on the
death of any annuitant, except that if any contract owner is not a natural
person, the death of any annuitant will be treated as the death of an owner. The
death benefit will be determined as of the date on which written notice and
proof of death and all required claim forms are received at the Company's
Annuity Service Office.
Annuity Payments. The Company offers a variety of fixed annuity options.
Periodic annuity payments will begin on the maturity date. The contract owner
may select the maturity date, frequency of payment and annuity option (see
"ANNUITY PROVISIONS").
Ten Day Review. Within 10 days of receipt of a contract, the contract owner
may cancel the contract by returning it to the Company or its agent (see "TEN
DAY RIGHT TO REVIEW").
Market Value Adjustment. Any amount withdrawn, transferred or annuitized
prior to the end of either the initial guarantee period or a renewal guarantee
period will be adjusted by the market value adjustment factor described under
"MARKET VALUE ADJUSTMENT."
Withdrawal Charge. If a withdrawal is made from the contract before the
maturity date, a withdrawal charge (contingent deferred sales charge) may be
assessed against amounts withdrawn during the first seven contract years. There
is never a withdrawal charge with respect to certain free withdrawal amounts
described below or after seven complete contract years. The amount of the
withdrawal charge and when it is assessed is discussed under "CHARGES AND
DEDUCTIONS - WITHDRAWAL CHARGE."
Tax Deferral. The status of the contract as an annuity generally allows all
earnings on the underlying investments to be tax-deferred until withdrawn or
until annuity payments begin (see "FEDERAL TAX MATTERS"). This tax deferred
treatment may be beneficial to contract owners in building assets in a long-term
investment program.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
The Manufacturers Life Insurance Company of North America (the "Company")
is a stock life insurance company organized under the laws of Delaware in 1979.
The Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The ultimate parent of the Company is The Manufacturers
Life Insurance Company ("Manulife"), a Canadian mutual life insurance company
based in Toronto, Canada. Prior to January 1, 1996, the Company was a wholly
owned subsidiary of North American Life Assurance Company ("NAL"), a Canadian
mutual life insurance company. On January 1, 1996 NAL and Manulife merged with
the combined company retaining the Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and
Manulife, the Company experienced a corporate restructuring which resulted in
the formation of a newly organized holding corporation, Manulife-Wood Logan
Holding Co., Inc., formerly, NAWL Holding Co., Inc. ("MWL"). MWL holds all of
the outstanding shares of the Company and Wood Logan Associates, Inc. ("WLA").
MWL is 62.5% owned by The Manufacturers Life Insurance Company (U.S.A.), 22.5%
owned by MRL Holding, LLC and approximately 15% owned by the principals of WLA.
The Company issues fixed and variable annuity and variable life contracts.
Amounts invested in the fixed portion of the contracts are allocated either to
the general account of the Company or in the case of the contract described in
this Prospectus, to a separate account of the Company. Amounts invested in the
variable portion of the contracts are allocated to the separate accounts of the
Company (excluding the Fixed Account). These separate account assets are
invested in shares of Manufacturers Investment Trust, formerly NASL Series
Trust, ("MIT")a no-load, open end management investment company organized as a
Massachusetts business trust.
An indemnity coinsurance agreement was entered into between the Company and
Peoples Security Life Insurance Company ("Peoples"), to reinsure fixed annuity
business written by the Company including the
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product described in this prospectus. The indemnity aspects of the agreement
provide that the Company remains liable for the contractual obligations whereas
Peoples agrees to indemnify the Company for any contractual claims incurred. The
coinsurance aspects of the agreement require the Company to transfer to Peoples
an agreed upon percentage (currently, 100%) of all fixed premiums received by
the Company for fixed annuity contracts written for the product described in
this prospectus. Peoples reimburses the Company for the same agreed upon
percentage of claims and provides expense allowances to cover commission and
other costs associated with this fixed annuity business. Peoples contractual
liability runs solely to the Company, and no contract owner shall have any right
of action against Peoples. Peoples is responsible for investing the assets and
is at risk for any potential investment gains and losses. There is no recourse
back to the Company if investment losses are incurred. The above summary is
qualified in its entirety by the detailed information appearing elsewhere in
this Prospectus.
DESCRIPTION OF CONTRACT
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT
The group deferred annuity contract may be issued to fund plans qualifying
for special income tax treatment under the Internal Revenue Code, such as
individual retirement accounts and annuities, pension and profit-sharing plans
for corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh"
plans), tax-sheltered annuities, and state and local government deferred
compensation plans. Those who are considering purchase of a contract for use in
connection with a qualified retirement plan should consider, in evaluating the
suitability of the contract, that the contract allows only a single premium
purchase payment in an amount of at least $5,000 (see "QUALIFIED RETIREMENT
PLANS"). The group deferred annuity contract is also designed so that it may be
used with non-qualified retirement plans, such as deferred compensation and
payroll savings plans and such other groups (trusteed or non-trusteed) as may be
eligible under applicable law. Group deferred annuity contracts have been issued
to the Security Life Trust, a trust established with United Missouri Bank, N.A.,
Kansas City, Missouri, as group holder for groups comprised of persons who have
brokerage accounts with brokers having selling agreements with Manufacturers
Securities Services, LLC, the successor to NASL Financial Services, Inc.
("MSS"), the principal underwriter of the contracts.
An eligible member of a group to which a contract has been issued may
become an owner under the contract by submitting a completed application, if
required by the Company, and a minimum purchase payment. A certificate
summarizing the rights and benefits of the owner under the contract will be
issued to an applicant acceptable to the Company. The Company reserves the right
to decline to issue a certificate to any person in its sole discretion. All
rights and privileges under the contract may be exercised by each owner as to
his or her interest unless expressly reserved to the group holder. However,
provisions of any plan in connection with which the contract was issued may
restrict an owner's ability to exercise such rights and privileges.
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service Office.
The minimum purchase payment for a contract is $5,000. The maximum purchase
payment accepted without prior approval of the Company is $500,000. The purchase
payment is allocated to the guarantee period selected by the contract owner.
Additional purchase payments for a contract will not be accepted. Additional
contracts may, however, be purchased at the then prevailing rates and terms.
Prior to the maturity date, the Company may, at its option, cancel a
contract following the second contract anniversary, if both (i) the total
purchase payment made, less any withdrawals, is less than $2,000; and (ii) the
higher of the contract value or the amount available upon total withdrawal is
less than $2,000. The cancellation of contract privileges may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such state. Upon cancellation the Company will pay the contract
owner the higher of the contract value and any annual administration fee or the
amount available upon total withdrawal. The amount paid will be treated as a
withdrawal for Federal tax purposes and thus may be subject to income tax and to
a 10% penalty tax (see "FEDERAL TAX MATTERS").
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GUARANTEE PERIODS
Currently, there are ten guarantee periods: one year through ten years. The
Company may offer additional guarantee periods for any yearly period from one to
twenty years. The contract provides for the accumulation of interest on the
purchase payment at guaranteed rates for the duration of the guarantee period.
From time to time, customers of certain broker-dealers may be offered special
initial guaranteed interest rates which are higher than the initial guaranteed
interest rate offered to the general public. In consideration of these higher
interest rates, commissions to these broker-dealers may be reduced. The
guaranteed interest rate on a renewal amount allocated or transferred to a
renewal guarantee period is determined from time-to-time by the Company in
accordance with market conditions. Under certain circumstances, the Company may
offer a rate in excess of the renewal guaranteed rate for the first year only of
a renewal guarantee period. In no event will the renewal guaranteed interest
rate be less than 3%. The interest rate is guaranteed for the duration of the
guarantee period and may not be changed by the Company.
For information on the reinsurance for the product described in this
prospectus (see "REINSURANCE").
TRANSFERS AMONG GUARANTEE PERIODS
Before the maturity date the contract owner may transfer the entire
contract value to a different guarantee period at any time upon written notice
to the Company or by telephone if the contract owner authorizes the Company in
writing to accept telephone transfer requests. Amounts may only be transferred,
however, once per contract year and the entire contract value must be
transferred. Amounts transferred will be subject to a transfer market value
adjustment. The amount requested to be transferred will be multiplied by the
market value adjustment factor to determine the transferred amount (see "MARKET
VALUE ADJUSTMENT"). The Company also reserves the right to modify or terminate
the transfer privilege at any time in accordance with applicable law.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers or withdrawals by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request transfers or withdrawals by telephone, a contract owner
must elect the option on an appropriate authorization form provided by the
Company. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following: Upon
telephoning a request, contract owners will be asked to provide certain
identifying information. For the contract owner's and Company's protection, all
conversations with contract owners will be tape recorded. All telephone
transactions will be followed by a confirmation statement of the transaction.
RENEWALS
At the end of a guarantee period, the contract owner may choose a renewal
guarantee period from any of the then existing guarantee periods at the then
current interest rate, all without the imposition of any charge. The contract
owner may not select a guarantee period that would extend beyond the maturity
date. In the case of renewals within one year of the maturity date, the only
option available is to have interest accrued up to the maturity date at the then
current interest rate for one year guarantee periods.
If the contract owner does not specify the renewal guarantee period
desired, the Company will select the same guarantee period as has just expired,
so long as such period does not extend beyond the maturity date. In the event a
renewal would extend beyond the maturity date, the Company will select the
longest period that will not extend beyond such date, except in the case of a
renewal within one year of the maturity date in which case the Company will
credit interest up to the maturity date at the then current interest rate for
one year guarantee periods.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the contract
owner, the owner may withdraw all or a portion of the contract value upon
written request, complete with all necessary information, to the Company's
Annuity Service Office. For certain qualified contracts, exercise of the
withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department.
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In the case of a total withdrawal, as of the date of receipt of the request
at its Annuity Service Office, the Company will cancel the contract and pay the
following amount:
C + [ (A - B - C) x D], where:
A=the gross withdrawal value reduced by an applicable annual administration fee;
B=the withdrawal charge;
C=the free withdrawal amount;
D=the market value adjustment factor.
(See "CHARGES AND DEDUCTIONS" and "MARKET VALUE ADJUSTMENT".)
Partial withdrawals will use the formula specified above and the gross
withdrawal value to determine the amount payable. Partial withdrawals will be
subject to market value adjustments and possible withdrawal charges. The Company
will deduct the gross withdrawal value from the contract value. The gross
withdrawal value may not exceed the contract value.
The Company may defer the payment of a full or partial withdrawal for not
more than six months (or the period permitted by applicable state law if
shorter) from the date the Company receives the withdrawal request and the
contract. If payments are deferred thirty days or more, the amount deferred will
earn interest at a rate not less than 3% per year or at a rate determined by
applicable state law. The Company will not, however, defer payment for more than
thirty days for any withdrawal effective at the end of any guarantee period.
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire contract value.
If a partial withdrawal plus any applicable withdrawal charge, after giving
effect to any market value adjustment would reduce the contract value to less
than $300, the Company will treat the partial withdrawal as a total withdrawal
of the contract value.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances (see "FEDERAL
TAX MATTERS").
Telephone Redemptions. The contract owner may request the option to
withdraw a portion of the contract value by telephone by completing the
application described under "Telephone Transactions" above. The Company reserves
the right to impose maximum withdrawal amounts and procedural requirements
regarding this privilege. For additional information on Telephone Redemptions
see "Telephone Transactions" above.
DEATH BENEFIT BEFORE MATURITY DATE
In General. The following discussion applies principally to contracts that
are not issued in connection with qualified plans, i.e., a "non-qualified
contract." The requirements of the tax law applicable to qualified plans, and
the tax treatment of amounts held and distributed under such plans, are quite
complex. Accordingly, a prospective purchaser of the contract to be used in
connection with a qualified plan should seek competent legal and tax advice
regarding the suitability of the contract for the situation involved and the
requirements governing the distribution of benefits, including death benefits,
from a contract used in the plan.
Determination of Death Benefit. The determination of the death benefit will
be made on the date written notice and proof of death, as well as all required
claims forms, are received at the Company's Annuity Service Office. No person is
entitled to the death benefit until this time.
Amount and Payment of Death Benefit. The Company will pay a death benefit
equal to the contract value to the beneficiary if any contract owner dies before
the maturity date. If there is a surviving contract owner, that contract owner
will be deemed to be the beneficiary. No death benefit is payable on the death
of any annuitant, except that if any contract owner is not a natural person, the
death of any annuitant will be treated as the death of an owner. On the death of
the last surviving annuitant, the contract owner, if a natural person, will
become the annuitant unless the contract owner designates another person as the
annuitant.
11
<PAGE> 12
The death benefit may be taken in the form of a lump sum immediately. If
not taken immediately, the contract will continue subject to the following: (1)
The beneficiary will become the contract owner. (2) No additional purchase
payments may be made. (3) If the beneficiary is not the deceased owner's spouse,
distribution of the contract owner's entire interest in the contract must be
made within five years of the owner's death, or alternatively, distribution may
be made as an annuity, under one of the annuity options described below, which
begins within one year of the owner's death and is payable over the life of the
beneficiary or over a period not extending beyond the life expectancy of the
beneficiary. If the beneficiary dies before distributions described in "(3)"
above are completed, the entire remaining contract value must be distributed in
a lump sum immediately. (4) If the owner's spouse is the beneficiary, the spouse
continues the contract as the new owner. In such a case, the distribution rules
described in "(3)" applicable when a contract owner dies will apply when the
spouse, as the owner, dies.
If any annuitant is changed and any contract owner is not a natural person,
the entire interest in the contract must be distributed to the contract owner
within five years.
Death benefits will be paid within seven days of the date the amount of the
death benefit is determined, as described above, subject to postponement under
the same circumstances that payment of withdrawals may be postponed (see
"WITHDRAWALS").
ANNUITY PROVISIONS
GENERAL
The proceeds of the contract payable on death, withdrawal or on the
contract maturity date may be applied to the annuity options described below,
subject to the distribution of death benefit provisions (see "DEATH BENEFIT
BEFORE MATURITY DATE").
Generally, annuity benefits under the contract will begin on the maturity
date. The maturity date is the date specified on the contract specifications
page, unless changed. If no date is specified, the maturity date is the maximum
maturity date described below. The maximum maturity date is the first day of the
month following the later of the 85th birthday of the annuitant or the tenth
contract anniversary. The contract owner may specify a different maturity date
at any time by written request at least one month before both the previously
specified and the new maturity date. The new maturity date may not be later than
the maximum maturity date unless the Company consents. Maturity dates which
occur, or are scheduled to occur, at advanced ages, e.g., past age 85, may in
some circumstances have adverse income tax consequences (see "FEDERAL TAX
MATTERS"). Distributions from qualified contracts may be required before the
maturity date.
The contract owner may select the frequency of annuity payments. However,
if the contract value at the maturity date is such that a monthly payment would
be less than $20, the Company may pay the higher of contract value and any
annual administration fee or the amount available upon total withdrawal in one
lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed basis. Upon
purchase of the contract, and on or before the maturity date, the contract owner
may select one or more of the annuity options described below or choose an
alternate form of settlement acceptable to the Company. If an annuity option is
not selected, the Company will provide as a default option annuity payments to
be made for a period certain of 10 years and continuing thereafter during the
lifetime of the annuitant. Treasury Department regulations may preclude the
availability of certain annuity options in connection with certain qualified
contracts.
The following annuity options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments during the
lifetime of the annuitant. No payments are due after the death of the
annuitant. Since there is no guarantee that any minimum number of payments
will be made, an annuitant may receive only one payment if the annuitant
dies prior to the date the second payment is due.
12
<PAGE> 13
Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An
annuity with payments guaranteed for 10 years and continuing thereafter
during the lifetime of the annuitant. Since payments are guaranteed for 10
years, annuity payments will be made to the end of such period if the
annuitant dies prior to the end of the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with
payments during the lifetimes of the annuitant and a designated
co-annuitant. No payments are due after the death of the last survivor of
the annuitant and co-annuitant. Since there is no guarantee that any
minimum number of payments will be made, an annuitant or co-annuitant may
receive only one payment if the annuitant and co-annuitant die prior to the
date the second payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for 10
Years - An annuity with payments guaranteed for 10 years and continuing
thereafter during the lifetimes of the annuitant and a designated
co-annuitant. Since payments are guaranteed for 10 years, annuity payments
will be made to the end of such period if both the annuitant and the
co-annuitant die prior to the end of the tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following annuity
options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years - An
Annuity with payments guaranteed for 5, 15 or 20 years and continuing
thereafter during the lifetime of the annuitant. Since payments are
guaranteed for the specific number of years, annuity payments will be made
to the end of the last year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An annuity
with full payments during the joint lifetime of the annuitant and a
designated co-annuitant and two-thirds payments during the lifetime of the
survivor. Since there is no guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only one payment if
the annuitant and co-annuitant die prior to the date the second payment is
due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An
annuity with payments for a 5, 10, 15 or 20 year period and no payments
thereafter.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an annuity option providing
for payments for a guaranteed period, and the annuitant dies on or after the
maturity date, the Company will make the remaining guaranteed payments to the
beneficiary. Any remaining payments will be made as rapidly as under the method
of distribution being used as of the date of the annuitant's death. If no
beneficiary is living, the Company will commute any unpaid guaranteed payments
to a single sum (on the basis of the interest rate used in determining the
payments) and pay that single sum to the estate of the last to die of the
annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the Service
Office or agent at any time within 10 days after receipt of the contract. Within
7 days of receipt of the contract by the Company, the Company will refund the
payment made for the contract.
No withdrawal charge is imposed upon return of the contract within the ten
day right to review period. The ten day right to review may vary in certain
states in order to comply with the requirements of insurance laws and
regulations in such states. When the certificate is issued as an individual
retirement annuity under the Code sections 408 or 408A, during the first 7 days
of the 10 day period, the Company will return the contract value if this is
greater than the amount otherwise payable.
13
<PAGE> 14
OWNERSHIP
In the case of an individual annuity contract, the contract owner is the
person entitled to exercise all rights under the contract. In the case of a
group annuity contract, the contract is owned by the group holder; however, all
contract rights and privileges not expressly reserved to the group holder may be
exercised by each owner as to his or her interest as specified in his or her
certificate. Prior to the maturity date, the contract owner is the person
designated in the contract specifications page or as subsequently named. On and
after the maturity date, the annuitant is the contract owner. If amounts become
payable to any beneficiary under the contract, the beneficiary is the contract
owner.
In the case of non-qualified contracts, ownership of the contract may be
changed or the contract may be collaterally assigned at any time prior to the
maturity date, subject to the rights of any irrevocable beneficiary. Assigning a
contract, or changing the ownership of a contract, may be treated as a
distribution of the contract value for Federal tax purposes (see "FEDERAL TAX
MATTERS").
Any change of ownership or assignment must be made in writing. Any change
must be approved by the Company. Any assignment and any change, if approved,
will be effective as of the date the Company receives the request at its Annuity
Service Office. The Company assumes no liability for any payments made or
actions taken before a change is approved or an assignment is accepted or
responsibility for the validity or sufficiency of any assignment. An absolute
assignment will revoke the interest of any revocable beneficiary.
In the case of qualified contracts, ownership of the contract generally may
not be transferred except by the trustee of an exempt employees' trust which is
part of a retirement plan qualified under Section 401 of the Code or as
otherwise permitted by applicable Internal Revenue Service ("IRS") regulations.
Subject to the foregoing, a qualified contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than the Company.
BENEFICIARY
The beneficiary is the person, persons or entity designated on the contract
specifications page or as subsequently named. However, if there is a surviving
contract owner, that person will be treated as the beneficiary. The beneficiary
may be changed subject to the rights of any irrevocable beneficiary. Any change
must be made in writing, approved by the Company and if approved, will be
effective as of the date on which written. The Company assumes no liability for
any payments made or actions taken before the change is approved. If no
beneficiary is living, the contingent beneficiary will be the beneficiary. The
interest of any beneficiary is subject to that of any assignee. If no
beneficiary or contingent beneficiary is living, the beneficiary is the estate
of the deceased contract owner. In the case of certain qualified contracts,
regulations promulgated by the Treasury Department prescribe certain limitations
on the designation of a beneficiary.
ANNUITANT
The annuitant is any natural person or persons whose life is used to
determine the duration of annuity payments involving life contingencies. If the
contract owner names more than one person as an "annuitant," the second person
named shall be referred to as "co-annuitant." The annuitant is as designated on
the contract specifications page or in the application, unless changed.
On the death of the annuitant, the co-annuitant, if living, becomes the
annuitant. If there is no living co-annuitant, the owner becomes the annuitant.
In the case of certain qualified contracts, there are limitations on the ability
to designate and change the annuitant and the co-annuitant.
MODIFICATION
The Company will not change or modify the contract without the owner's or
group holder's consent, as applicable, except to the extent necessary to conform
to any applicable law or regulation or any ruling issued by a government agency.
However, on 60 days notice to the group holder, the Company may change the
withdrawal charges, administration fees, free withdrawal percentage, annuity
purchase rate and the market value adjustment as to any certificates issued
after the effective date of the modification. The provisions of the contract
shall be interpreted so as to comply with the requirements of Section 72(s) of
the Code.
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<PAGE> 15
COMPANY APPROVAL
The Company reserves the right to accept or reject a contract application
at its sole discretion.
DISCONTINUANCE OF NEW OWNERS
In the case of a group annuity contract, on thirty days notice to the group
holder, the company may limit or discontinue acceptance of new applications and
the issuance of new certificates under a contract.
MARKET VALUE ADJUSTMENT
Any amount withdrawn, transferred or annuitized prior to the end of either
the initial guarantee period or a renewal guarantee period will be adjusted by
the market value adjustment factor described below.
The market value adjustment factor is determined by the following formula:
((1+i)/(1+j))n/12 where:
i - The initial guaranteed interest rate or renewal guaranteed interest
rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the request is
processed by the Company, for a guarantee period with the same length as
the period remaining in the initial guarantee period or renewal guarantee
period. If the guarantee period of this length is not available, the
guarantee period with the next highest duration which is maintained by the
Company will be chosen.
n - The number of complete months remaining to the end of the initial
guarantee period or renewal guarantee period.
There will be no market value adjustment in the following situations: (a)
death of the contract owner; (b) amounts withdrawn within one month prior to the
end of the guarantee period; and (c) amounts withdrawn in any contract year that
do not exceed (i) 10% of total purchase payments less (ii) any prior partial
withdrawals in that year.
The market value adjustment reflects the relationship between the initial
guaranteed interest rate or the renewal guaranteed interest rate applicable to
the contract and the then current available guaranteed interest rate. Generally,
if the initial guaranteed interest rate or the renewal guaranteed interest rate
is lower than the then current available guaranteed interest rate, then the
effect of the market value adjustment will be to reduce the amount withdrawn,
transferred or annuitized. Similarly, if the initial guaranteed interest rate or
the renewal guaranteed interest rate is higher than the then current available
guaranteed interest rate, then the effect of the market value adjustment will be
to increase the amount withdrawn, transferred or annuitized. The greater the
difference in these interest rates the greater the effect of the market value
adjustment.
The market value adjustment is also affected by the amount of time
remaining in the guarantee period. Generally, the longer the time remaining in
the guarantee period, the greater the effect of the market value adjustment on
the amount withdrawn, transferred or annuitized. This is because the longer the
time remaining in the guarantee period, the higher the compounding factor `n' in
the market value adjustment factor.
The cumulative effect of the market value adjustment and withdrawal charges
could result in a contract owner receiving total withdrawal proceeds of less
than the contract owner's investment in the contract.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE
CONTRACT OWNER BEARS THE INVESTMENT RISK THAT THE CURRENT AVAILABLE GUARANTEED
INTEREST RATE OFFERED BY THE COMPANY AT THE TIME OF WITHDRAWAL, TRANSFER OR
ANNUITIZATION MAY BE HIGHER THAN THE INITIAL OR RENEWAL GUARANTEE INTEREST RATE
APPLICABLE TO THE CONTRACT WITH THE RESULT THAT THE AMOUNT THE CONTRACT OWNER
RECEIVES UPON A WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY BE SUBSTANTIALLY
REDUCED.
For more information on the market value adjustment, including examples of
its calculation, see Appendix B.
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<PAGE> 16
CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn during the first seven contract years. There is never a
withdrawal charge with respect to certain free withdrawal amounts described
below or after seven complete contract years. The amount of the withdrawal
charge and when it is assessed is discussed below:
1. In any contract year, the free withdrawal amount for that year is the
excess of (i) over (ii), where (i) is 10% of the purchase payment and (ii) is
all prior partial withdrawals in that contract year. Withdrawals allocated to
the free withdrawal amount may be withdrawn without the imposition of a
withdrawal charge.
2. If a withdrawal is made at the end of the initial guarantee period, no
withdrawal charge will be applied provided such withdrawal occurs on or after
the end of the third contract year. If a withdrawal is made at the end of any
other guarantee period, no withdrawal charge will be applied provided such
withdrawal occurs on or after the end of the fifth contract year. A request for
withdrawal at the end of a guarantee period must be received in writing during
the 30 days period preceding the end of that guarantee period.
3. The amount of the withdrawal charge is calculated by multiplying the
gross withdrawal value, less any administration fee and free withdrawal amount
by the applicable withdrawal charge percentage obtained from the table below.
<TABLE>
<CAPTION>
NUMBER OF COMPLETED WITHDRAWAL CHARGE
CONTRACT YEARS PERCENTAGE
-------------- ----------
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
</TABLE>
4. There is generally no withdrawal charge on distributions made as a
result of the death of the contract owner or, if applicable, the annuitant (see
"Death Benefit Before Maturity Date - Amount and Payment of Death Benefit").
The amount collected from the withdrawal charge will be used to reimburse
the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
Withdrawals may be subject to a market value adjustment in addition to the
withdrawal charge described above (see "MARKET VALUE ADJUSTMENT").
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract or the period to which it
applies may from time to time be reduced or eliminated for sales of the
contracts to certain individuals or groups of individuals in such a manner that
results in savings of sales expenses. The Company will consider such factors as
(i) the size and type of group, (ii) the amount of the single premium and/or
(iii) other transactions where sales expenses are reduced, when considering
whether to reduce or eliminate the sales charge or the period to which it
applies.
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<PAGE> 17
Withdrawal Charge Waiver in Connection with Clinton's Administration's
Fiscal Year 1999 Budget Proposal. The Clinton administration's Fiscal Year 1999
Budget proposal dated February 2, 1998 (the "1999 Budget Proposal") contains
proposals to change the 1999 Budget Proposal will become law, if the 1999 Budget
Proposal is enacted substantially as proposed, withdrawal charges will be waived
on purchase payments made on or after February 2, 1998, provided such amounts
are withdrawn within 60 days of the date that the 1999 Budget Proposal becomes
law. The Company reserves the right to terminate this withdrawal charge waiver
at any time. If the waiver is terminated, purchase payments made from February
2, 1998 to the termination date of the waiver will not be subject to withdrawal
charge as provided above. This waiver does not affect a contract owner's right
to cancel a contract within the ten day right to review period (see "OTHER
CONTRACT PROVISIONS - Ten Day Right to Review"). Withdrawals may be subject to
income tax to the extent of earnings under the contract and, if made prior to
age 59 1/2, generally will be subject to a 10% IRS penalty tax (see "FEDERAL TAX
MATTERS - Taxation of Partial and Full Withdrawals").
TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values, death benefits or annuity payments.
Such taxes may include premium taxes or other taxes levied by any government
entity which the Company determines to have resulted from the (i) establishment
or maintenance of the Fixed Account, (ii) receipt by the Company of purchase
payments, (iii) issuance of the contracts, (iv) commencement or continuance of
annuity payments under the contracts or (v) death of the owner or annuitant. In
addition, the Company will withhold taxes to the extent required by applicable
law.
Except for residents of those states which apply premium taxes upon receipt
of purchase payments, premium taxes will be deducted from the contract value
used to provide for annuity payments. For residents of those states which apply
premium taxes upon receipt of purchase payments, premium taxes will be deducted
upon payment of any withdrawal benefits, upon any annuitization, or payment of
death benefits. The amount deducted will depend on the premium tax assessed in
the applicable state. State premium taxes currently range from 0% to 3.5%
depending on the jurisdiction and the tax status of the contract and are subject
to change by the legislature or other authority (see "APPENDIX C: STATE PREMIUM
TAXES").
ADMINISTRATION FEE
To compensate the Company for assuming certain administrative expenses, the
Company reserves the right to charge an annual administration fee. Prior to the
maturity date, the administration fee is deducted on the last day of each
contract year. If the contract is surrendered for its contract value on any date
other than the last day of any contract year, the Company will deduct the full
amount of the administration fee from the amount paid. Currently, no fee is
being assessed.
REINSURANCE
An indemnity coinsurance agreement was entered into between the Company and
Peoples Security Life Insurance Company ("Peoples"), to reinsure fixed annuity
business written by the Company for the product described in this prospectus.
The indemnity aspects of the agreement provide that the Company remains
liable for the contractual obligations whereas Peoples agrees to indemnify the
Company for any contractual claims incurred. The coinsurance aspects of the
agreement require the Company to transfer to Peoples an agreed upon percentage
(currently, 100%) of assets backing the fixed annuity premiums received by the
Company for fixed annuity contracts. Peoples reimburses the Company for a
percentage of claims and provides expense allowances to cover commission and
other costs associated with this fixed annuity business. Peoples contractual
liability runs solely to the Company, and no contract owner shall have any right
of action against Peoples.
Peoples is responsible for investing the fixed annuity premiums received
and is at risk for any potential investment gains and losses. Under this
agreement, the Company will continue to administer the fixed annuity business
for which it will earn an expense allowance. The Company has set up a reserve to
recognize that expense
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<PAGE> 18
allowances received from Peoples under this indemnity coinsurance agreement do
not fully reimburse the Company for overhead expenses allocated to this fixed
annuity line of business (See Note F to the Company's financial statements).
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
DESCRIPTION OF BUSINESS
ORGANIZATION AND HISTORY
The Company is a stock life insurance company organized under the laws of
Delaware in 1979. The Company's principal office is located at 116 Huntington
Avenue, Boston, Massachusetts 02116. The ultimate parent of the Company is The
Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life
insurance company based in Toronto, Canada. Prior to January 1, 1996, the
Company was a wholly owned subsidiary of North American Life Assurance Company
("NAL"), a Canadian mutual life insurance company. On January 1, 1996 NAL and
Manulife merged with the combined company retaining the Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and
Manulife, the Company experienced a corporate restructuring which resulted in
the formation of a newly organized holding corporation, Manulife-Wood Logan
Holding Co., Inc., formerly, NAWL Holding Co., Inc. ("MWL"). MWL holds all of
the outstanding shares of the Company and Wood Logan Associates, Inc. ("WLA").
MWL is 62.5% owned by The Manufacturers Life Insurance Company (U.S.A.), 22.5%
owned by MRL Holding, LLC and approximately 15% owned by the principals of Wood
Logan.
On June 19, 1992, the Company formed The Manufacturers Life Insurance
Company of New York, formerly, First North American Life Assurance Company
("Manulife New York"). Subsequently, on July 22, 1992, Manulife New York was
granted a license by the New York State Insurance Department. Manulife New York
issues fixed and variable annuity contracts in the State of New York.
MSS, a wholly-owned subsidiary of the Company, acts as principal
underwriter to the contracts issued by the Company and Manulife New York. MSS
has entered into a promotional agent agreement with WLA to act as the
non-exclusive agent for the promotion of the Company's insurance contract sales
(see "Distributor" below).
On January 20, 1998, the Board of Directors of Manulife asked the
management of Manulife to prepare a plan for conversion of Manulife from a
mutual life insurance company to an investor-owned, publicly-traded stock
company. Any demutualization plan for Manulife is subject to the approval of the
Manulife Board of Directors and policyholders as well as regulatory approval.
PRODUCT LINES
The Company issues fixed and variable annuities and variable life
contracts. Annuity and Life deposits received during 1997 totaled $2,126.6
million, gross of reinsurance of $213.5 million, and included $5.7 million from
variable annuity contracts, $1,885.5 million from combination fixed and variable
annuity contracts and $21.9 million from variable life contracts. Amounts
invested in the fixed portion of the Company's insurance contracts are allocated
to the general account of the Company or in the case of the contract described
in this prospectus, to a non-unitized separate account of the Company. Amounts
invested in the variable portion of the contracts are allocated to separate
accounts of the Company. The separate account assets (other than the separate
account described in this prospectus) are invested in shares of Manufacturers
Investment Trust, a no-load, open end management investment company organized as
a Massachusetts business trust.
As of December 31, 1997, the Company was licensed to sell fixed and
variable and variable life insurance in all states except New Hampshire and New
York.
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<PAGE> 19
PROPERTY AND OFFICE LOCATION
The Company's offices are located at 116 Huntington Avenue, Boston,
Massachusetts where the Company leases office space. The Company owns no real
property which is used for business purposes.
MANAGEMENT DISCUSSION & ANALYSIS
OVERVIEW
Prior to 1997 the Company was comprised of two different segments, annuity
and life insurance products and retail mutual funds. The Company discontinued
its retail mutual fund operations, North American Funds, on October 1, 1997
through a sale to an unrelated third party. This sale has been treated as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions.
Within the annuity and life insurance segment, the Company issues fixed and
variable annuity contracts and variable life insurance through major wirehouses,
regional broker dealers, financial planners and banks. Amounts invested in
variable contracts are allocated to Separate Accounts of the Company. The assets
of the Separate Accounts are invested in shares of Manufactures Investors Trust
("MIT") or other underlying mutual funds sponsored by Merrill Lynch Asset
Management ("Merrill Lynch"). Amounts invested in the fixed portion of the
contracts, excluding the Company's wholly owned subsidiary Manulife New York,
are subject to an indemnity coinsurance agreement entered into between the
Company and Peoples Security Life Insurance Company ("Peoples") effective
June 30, 1995. Manulife New York's fixed portion of the contracts are invested
in Manulife New York's general account and are backed by investment grade fixed
income maturities.
The Company's primary source of earnings from the annuity and life
insurance product segment is generated from Separate Account fees assessed
against policyholder account balances: mortality and expense risk charges,
surrender charges and an annual administrative charge. In addition, the segment
earns advisory fees from the Separate Account assets invested in MIT. A key
factor in the Company's profitability is sustained growth in the underlying
assets through market performance coupled with the ability to acquire and retain
annuity and variable life deposits.
The Company's primary source of earnings from the retail mutual fund
segment was from the advisory fees earned on the North American Funds assets
maintained in the underlying portfolios and distribution and servicing fees and
sales loads associated with the sales of the Class A, Class B and Class C
shares.
BASIS OF PRESENTATION
During 1996, the Company adopted generally accepted accounting principles
("GAAP") in conformity with the requirements of the Financial Accounting
Standards Board. Prior to 1996, the Company prepared its financial statements in
conformity with statutory accounting practices prescribed or permitted by the
Insurance Department of the State of Delaware which practices were considered
GAAP for mutual life insurance companies and their direct and indirect
subsidiaries. As discussed in Note 2 to the consolidated financial statements,
the effect of the adoption of GAAP has been reflected retroactively and the
previously issued 1995 consolidated financial statements have been restated for
the change. A description of accounting policies under GAAP can be found in Note
2 to the consolidated financial statements.
Review of consolidated operating results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Financial Summary (In `000's) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees from separate accounts and policyholder funds $ 126,637 $ 95,323 $77,572
Advisory fees and other distribution revenues 67,678 46,233 27,912
Net investment income 7,905 5,452 28,701
Net realized investment gains 531 764 9,711
</TABLE>
19
<PAGE> 20
Review of consolidated operating results (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Financial Summary (In `000's) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES 202,751 147,772 143,896
- -------------------------------------------------------------------------------------------------------------------
Benefits to policyholders 4,986 4,242 27,129
Amortization of deferred policy acquisition costs 40,649 30,830 43,287
Other insurance expenses 100,385 71,255 58,745
Financing costs 14,268 15,821 9,282
- -------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 160,288 122,148 138,443
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for income tax (benefit) 42,463 25,624 5,453
Provision for income tax (benefit) 15,043 9,079 (7,041)
Income from continuing operations 27,420 16,545 12,494
Discontinued operations - (loss) from operations, net (141) (810) (1,462)
of tax
Discontinued operations - gain on disposal, net of tax 5,954
Net income $ 33,233 $ 15,735 $ 11,032
- -------------------------------------------------------------------------------------------------------------------
General Account Assets 1,104,603 990,771 1,112,816
Separate Account Assets 9,529,160 6,820,599 5,131,536
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,633,763 $7,811,370 $6,244,352
- -------------------------------------------------------------------------------------------------------------------
General Account Liabilities $ 895,877 $ 863,700 $1,017,560
Separate Account Liabilities 9,529,160 6,820,599 5,131,536
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY $ 208,726 $ 127,071 $ 95,256
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 COMPARED TO 1996
The Company recorded net income of $33.2 million in 1997 versus net income of
$15.7 million in 1996, an increase of $17.5 million or 112%. A portion of the
increase, $6.6 million, is attributable to the gain on the disposal of the
Company's mutual fund segment and the decreased loss from its operations in
1997. The increase in net income from continuing operations was primarily a
result of fee income earned on additional Separate Account assets. Separate
Account assets grew by 40% while total assets increased by 36% during 1997. This
growth is attributable to deposits of $2.1 billion for 1997 compared to 1996
deposits of $1.4 billion, strong equity market performance during 1997 and
favorable contract persistency. The increase in deposits for 1997 was
attributable to the Company's implementation of the Efficient Frontier
Investment model in early 1997 and the addition of competitively performing
funds, including additional investment options. The latter includes five
Lifestyle funds which offer the buyer the opportunity to invest in a
pre-determined "fund of funds." In addition the Company also modified its
product features and pricing to directly compete in a profitable manner with its
key competitors. Total fees, including advisory fees, generated by Separate
Accounts and policyholder funds increased by $52.7 million or 37% in 1997. Net
investment income grew by $2.5 million or 45% due to higher fixed account sales
and a $47.7 million capital infusion received in the fourth quarter of 1997 to
support expanded operations in Manulife New York.
The Company incurred total benefits and expenses in 1997 of $160.3 million,
an increase of $38.1 million, or 31% compared to 1996. The additional expenses
are associated with higher subadvisory fees generated from higher asset levels
in MIT and Merrill Lynch, an increase in non-capitalized acquisition expenses
and other costs associated with growth in the Company's business, and additional
operating expenses associated with expanding the Company's operations in New
York.
The mutual fund segment net loss from operations improved by $0.7 million
between 1997 and 1996. The decrease in the loss is primarily attributable to
higher advisory fees and other revenues through the nine month
20
<PAGE> 21
period ended September 30, 1997 (date of disposal). Total revenues for this
segment were $10.5 million (nine month period) in 1997 compared to $12.4 million
(twelve month period) for 1996.
1996 COMPARED TO 1995
The Company recorded net income of $15.7 million in 1996 versus net income
of $11.0 million in 1995, an increase of $4.7 million or 43%. The increase was
primarily a result of fee income earned on additional Separate Account assets.
Separate Account assets grew by 33% during 1996, while total assets grew by 25%.
This growth was due to strong equity market performance and favorable contract
persistency. Transfers of approximately $200 million from the fixed account also
contributed to the increased asset levels. Deposits for 1996 were $1.4 billion
compared to $1.2 billion for 1995. The Company's relatively flat deposits and
reduced market share during 1996 were primarily a result of relatively poor
investment performance in the underlying funds within MIT along with more
competitive product features and pricing offered by the competition. Total fees,
including advisory fees, generated by Separate Accounts and policyholder funds
increased by $36.1 million or 34% in 1996. As a result of the transfer of
general account assets to Peoples in accordance with the coinsurance agreement
established in 1995, net investment income and net realized investment gains
decreased between 1996 and 1995 by $23.2 million and $8.9 million, respectively.
Benefits and expenses were $122.1 million in 1996 and $138.4 million in
1995. The decrease is primarily attributed to the transfer of the general
account liabilities to Peoples in accordance with the coinsurance agreement
established in 1995. The decrease in overall expenses was partially offset by
higher subadvisory fees generated from higher asset levels in MIT, an increase
in non-capitalizable acquisition expenses and other operating expenses. Higher
financing costs, associated with the People's coinsurance agreement, were
incurred during 1996 as the Company experience increased transfers from the
fixed account to the Separate Account.
Net income for 1995 included the reversal of a $12.0 million deferred tax
allowance established at December 31, 1994.
The mutual fund segment net loss from operations improved by $0.7 million
between 1996 and 1995. The decrease in the loss is attributed to higher advisory
fees, and other revenues. During 1996 and 1995 the Company recorded total
revenues of $12.4 million and $10.3 million, respectively, for its mutual fund
segment.
Financial Position
<TABLE>
<CAPTION>
Assets
- ------------------------------------------------------------------------------------------------
(In `000's) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Invested assets $ 161,575 $ 104,632
Deferred policy acquisition costs 364,984 290,610
Due from reinsurers 553,834 573,419
Separate account assets 9,529,160 6,820,599
Other assets 24,210 22,110
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,633,763 $7,811,370
- ------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
Fixed maturities by Investment Grade
(In `000's) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA $ 30,145 21.0% $17,589 18.1%
AA 12,545 8.8% 7,099 7.3%
A 85,130 59.4% 63,899 65.5%
BBB 15,487 10.8% 8,844 9.1%
- ------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $143,307 $97,431
- ------------------------------------------------------------------------------------------------
</TABLE>
Total assets increased from $7.8 billion at December 31, 1996 to $10.6
billion at December 31, 1997, an increase of $2.8 billion or 56%. Separate
Account assets increased by 40% in 1997 compared to 1996 and represent 90% of
total assets as the Company continues to focus on its variable option insurance
products. Fixed
21
<PAGE> 22
maturity and short-term investments, included in invested assets, increased by
56% during 1997. This increase is a result of a $47.7 million capital infusion
in the fourth quarter of 1997 to support expansion of Manulife New York's
operations to include individual life insurance and pension products in the
state of New York. The Company continues to own high quality investment grade
fixed maturity investments, with an average rating of A, to support its general
account. The Company's deferred policy acquisition costs (DPAC) asset grew by
26% as the Company experienced strong sales volumes during 1997 and deferred the
related costs, net of current amortization, associated with the sales. Due from
reinsurers decreased $19.6 million as a result of lower fixed deferred account
values associated with the policies reinsured under the Peoples coinsurance
agreement.
<TABLE>
<CAPTION>
Liabilities
- --------------------------------------------------------------------------------------------
(In `000's) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Amount payable to reinsurers $ 571,882 $ 593,910
Notes payable to affiliates 183,955 158,201
Separate account liabilities 9,529,160 6,820,599
Other liabilities 140,040 111,589
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES $10,425,037 $7,684,299
- --------------------------------------------------------------------------------------------
</TABLE>
Total liabilities have increased proportionately with the growth in the
related assets during 1997, primarily in the Company's Separate Accounts. During
1997, the Company borrowed an additional $25.0 million from Manulife to support
the record sales volumes and related acquisition expenses. Amount payable to
reinsurers decreased $22.0 million primarily as a result of lower fixed deferred
account values associated with the policies reinsured under the Peoples
coinsurance agreement.
<TABLE>
<CAPTION>
Shareholder's Equity
- -------------------------------------------------------------------------------------------
(In `000's) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock $ 2,600 $ 2,600
Additional paid-in capital 179,053 131,322
Unrealized appreciation on securities
available-for sale 1,200 509
Retained earnings (deficit) 25,873 (7,360)
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY $208,726 $127,071
- -------------------------------------------------------------------------------------------
</TABLE>
The Company received $47.7 million of additional capital to support
expansion of its New York operations. The growth in retained earnings is due to
net income from continuing operations and discontinued operations of $27.4
million and $5.8 million, respectively, during 1997.
ASSET/LIABILITY MANAGEMENT
The Company has established a target portfolio mix which takes into account
the risk attributes of the liabilities supported by the assets, expectations of
market performance, and a generally conservative investment philosophy.
Preservation of capital and maintenance of income flows are key objectives.
LIQUIDITY AND CAPITAL RESOURCES
The substantial increase in the Company's sales since 1993 has resulted in
the Company requiring cash financing to support this growth. The Company must
invest all of its variable option deposits in the Separate Accounts while paying
commissions and acquisition expenses related to these deposits and other sales
from its general account. Prior to 1995, the Company used capital and general
account assets to fund these costs. Since 1995, The Company's fixed account
acquisition expenses are largely funded by the Peoples fixed account reinsurance
agreement. Substantially all variable account acquisition costs are financed
through borrowings from Manulife and internally generated cashflows.
22
<PAGE> 23
The Company obtained external financing in 1994 by entering into a $150
million revolving credit and term loan agreement (the "Loan") with the Canadian
Imperial Bank of Commerce and Deutsche Bank AG ("CIBC"). The Loan was
collateralized by the mortality and expense risk charges and surrender charges
related to the Company's business. As a result of the merger with Manulife, the
Company became party to a restructured lending facility that provides sufficient
cash flow needs at more favorable interest rate margins. Consequently, in April
1996, the Company extinguished its debt with CIBC through a restructured
financing arrangement directly with Manulife.
Aside from the financing required to partially fund acquisition costs, the
Company's cash flows are adequate to meet the general obligations on all annuity
contracts.
INVESTMENTS
All assets backing the fixed annuity obligations of the Company were transferred
to Peoples. The Company's assets must be invested in accordance with
requirements of applicable state laws and regulations regarding the nature and
quality of investments that may be made by insurance companies and the
percentage of its assets that may be held in certain types of investments. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing annuity products. There are over 2,100 stock, mutual and other types
of insurers in the life insurance business in the United States, a significant
number of which are substantially larger than the Company. As of December 31,
1997, the Company had 233 employees.
REGULATION
The Company is subject to the laws of the state of Delaware governing insurance
companies and to the regulation of the Delaware Insurance Department (Manulife
New York is subject to the laws and regulation of the State of New York). In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which the Company operates. Regulation by each insurance
department includes periodic examination to determine the Company's contract
liabilities and reserves so that each insurance department may verify that these
items are correct. Regulation by supervisory agencies includes licensing to
transact business, overseeing trade practices, licensing agents, approving
policy forms, establishing reserve requirements, fixing maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values, prescribing the form and content of required financial statements and
regulation of the type and amounts of investments permitted. The Company's books
and accounts are subject to review by each insurance department and other
supervisory agencies at all times, and the Company files annual statements with
these agencies. A full examination of the Company's operations is conducted
periodically by the Delaware insurance department.
In addition, several states, including Delaware and Michigan, regulate
affiliated groups of insurers, such as the Company, under insurance holding
company legislation. Manulife's state of entry for insurance regulatory purposes
is Michigan. In addition, several of its insurance subsidiaries are domiciled
there. Consequently, Michigan's Insurance Bureau has jurisdiction in applying
such legislation to transactions between Manulife and its U.S. insurance company
affiliates. Under such laws, intercompany transactions, transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies. Transactions between the Company and
WLA are primarily regulated by Delaware, but may also be regulated by Michigan
if the transaction involves Manulife or any of its insurance subsidiaries
domiciled in Michigan.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments on the
Company under these laws cannot be reasonably estimated. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
23
<PAGE> 24
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal legislation that removed barriers preventing banks
from engaging in the insurance business or that changed the Federal income tax
treatment of insurance companies, insurance company products, or employee
benefit plans could significantly affect the insurance business.
CAPITAL REQUIREMENTS AND SOLVENCY PROTECTION
In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners enforces minimum Risk Based Capital (RBC)
requirements. The requirements are designed to monitor capital adequacy and to
raise the level of protection that statutory surplus provides for policyholders.
The RBC model law requires that life insurance companies report on a
formula-based RBC standard which is calculated by applying factors to various
asset, premium and reserve items. The formula takes into account risk
characteristics of the life insurer, including asset risk, insurance risk,
interest risk and business risk. If an insurer's ratio falls below certain
thresholds, regulators will be authorized, and in some circumstance required, to
take regulatory action.
The Company's policy is to maintain capital and surplus balances well in
excess of the minimums required under government regulations in all
jurisdictions in which the Company does business. This was the case for each of
the years ended December 31, 1997, 1996 and 1995.
IMPACT OF YEAR 2000
Like other business organizations and individuals, the Company would be
adversely affected if its computer systems and those of its service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. The Company is completing an assessment of the Year 2000
impact on its systems and business processes. Management believes that the
Company will complete its Year 2000 project for all critical systems and
processes by September 30, 1998, prior to any anticipated impact on the critical
systems and processes.
The date on which the Company believes it will complete the Year 2000
project is based on management's best estimates, which were derived utilizing
numerous assumptions of future events. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer code, and
other similar uncertainties.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994* 1993*
---- ---- ---- ----- -----
(in thousands)
Under Generally Accepted Accounting Principles:
<S> <C> <C> <C>
Total Revenues $ 202,751 $ 147,772 $ 143,896
Income from Continuing Operations 27,420 16,545 12,494
Net Income 33,233 15,735 11,032
Total Separate Account Assets 9,529,160 6,820,599 5,131,536
Total Assets 10,633,763 7,811,370 6,244,352
Separate Account Liabilities 9,529,160 6,820,599 5,131,536
Payable to Affiliates 183,955 158,201 129,867
Total Liabilities 10,425,037 7,684,299 6,149,096
Shareholder's Equity 208,726 127,071 95,256
</TABLE>
* Selected financial data under generally accepted accounting principles is not
available for the 1994 and 1993 fiscal year. See Management's Discussion and
Analysis and Notes to the Consolidated Financial Statements for additional
information.
24
<PAGE> 25
<TABLE>
<CAPTION>
For the Years Ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
On Statutory Basis **:
Total Revenues $1,733,920 $1,045,188 $ 997,817 $1,176,476 $1,259,976
Net Income (Loss) 22,259 3,067 (7,288) (30,454) (10,678)
Total Separate Account Assets 8,931,967 6,459,290 4,914,728 3,661,278 2,937,436
Total Assets 9,055,820 6,517,773 4,962,504 4,240,250 3,415,584
Capital and Surplus 139,171 69,554 50,158 59,408 51,723
</TABLE>
** Statutory accounting practices differ in certain respects from generally
accepted accounting principles. The significant differences relate to
consolidation accounting, investments, deferred acquisition costs, deferred
income taxes, non-admitted asset balances and reserve calculation assumptions.
All information presented elsewhere in this document is presented under
generally accepted accounting principles.
OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company, together with their
principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY PRINCIPAL OCCUPATION
---- ------------------------- --------------------
<S> <C> <C>
John D. DesPrez III Director* and President Senior Vice President, U.S. Annuities, Manulife, September
1996 Age: 41 to present; Director and President of the
Company, September 1996 to present; Vice President, Mutual
Funds, Manulife, January, 1995 to September 1996, President
and Chief Executive Officer, North American Funds, March
1993 to September 1996; Vice President and General Counsel
of the Company, January 1991 to June 1994.
Peter S. Hutchison Director* Senior Vice President, Corporate Taxation, Manulife, January
Age: 48 1996 to present; Director of the Company January 1991 to
present; Executive Vice President and Chief Financial
Officer, North American Life, September 1994 to December 31,
1995; Senior Vice President and Chief Actuary, North
American Life, April 1992 to August 1994.
John D. Richardson Director* and Chairman of Senior Vice President and General Manager, U.S. Operations,
Age: 60 the Board Manulife, January 1995 to present; Director and Chairman of
the Board of the Company, March 1997 to present; Senior Vice
President and General Manager, Canadian Operations,
Manulife, June 1992 to January 1995.
Robert Boyda Vice President, Investment Vice President, Investment Management Services of the
Age: 41 Management Services Company, January 1997 to present; Assistant Vice President,
Management Service, Manulife, August 1994 to January 1997;
General Manager, Retail Banking, CIBC, January 1987 to April
1994.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY PRINCIPAL OCCUPATION
---- ------------------------- --------------------
<S> <C> <C>
James R. Boyle Vice President, Vice President, Administration Accumulation Products,
Age: 38 Administration Manulife September 1996 to present; Vice President,
Administration of the Company, September 1996 to present;
Vice President, Treasurer and Chief Administrative Officer,
North American Funds, June 1994 to September 1996; Corporate
Controller of the Company, July 1993 to June 1994; Mutual
Fund Accounting Executive of the Company, June 1992 to July
1993.
James D. Gallagher Vice President, Secretary Vice President, Legal Services U.S. Operations, Manulife,
Age: 43 and General Counsel January 1996 to present; Vice President, Secretary and
General Counsel of the Company, June 1994 to present; Vice
President and Associate General Counsel, The Prudential
Insurance Company of America, 1990-1994.
Richard C. Hirtle Vice President, Strategic Vice President, Strategic Development, Annuities, Manulife,
Age: 42 Development & Accumulation December 1997 to present; Vice President, Strategic
Life Development Products & Accumulation Life Products of the
Company December 1997 to present; Vice President, Treasurer,
Chief Financial Officer of the Company November 1988 to
December 1997.
Hugh C. McHaffie Vice President, U.S. Vice President, Product Development, Annuities, Manulife,
Age: 39 Annuities and Product January 1996 to present; Vice President U.S. Annuities and
Development Product Development of the Company August 1994 to present;
Product Development Executive of the Company, August 1990 to
August 1994.
David W. Libbey Vice President, Treasurer, Vice President and Chief Financial Officer, Annuities,
Age: 50 and Chief Financial Officer Manulife, December 1997 to present; Vice President,
Treasurer and Chief Financial Officer of the Company
December 1997 to present; Vice President, Finance of the
Company June 1997 to December 1997; Vice President &
Actuary, Paul Revere Insurance Group June 1970 to March
1997.
Janet Sweeney Vice President, Corporate Vice President, Human Resources, U.S. Operations, Manulife,
Age: 47 Services January 1996 to present; Vice President, Corporate Services
of the Company, January 1995 to present; Executive,
Corporate Services of the Company, July 1989 to December
1994.
John G. Vrysen Vice President and Chief Vice President and Chief Financial Officer, U.S. Operations,
Age: 42 Actuary Manulife, January 1996 to present; Vice President and Chief
Actuary of the Company, January 1986 to present.
</TABLE>
*Each Director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and qualified.
EXECUTIVE COMPENSATION
The Company's executive officers may also serve as officers of one or more
of Manulife's affiliates. Allocations have been made as to such officers' time
devoted to duties as executive officers of the Company. The following table
shows the allocated compensation paid or awarded to or earned by the Company's
Chief Executive Officer for services provided to the Company. No other executive
officer had allocated cash compensation in excess of $100,000.
26
<PAGE> 27
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus(1) Other Restricted Securities LTIP All Other
Principal Annual Stock Under-lying Payout Compensation(3)
Position Compensation(2) Award(s) Options/SARs
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John D. DesPrez, 1997 $99,959 $39,292 N/A N/A N/A N/A $3,612
President
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Bonus for 1996 performance paid in 1997.
(2) Does not include group health insurance since the plans are the same for all
salaried employees. Other Annual Compensation disclosed only if the aggregate
value of the perquisite exceeded the lesser of $50,000 or 10% of salary and
bonus.
(3) Other Compensation includes the value of term life insurance premiums paid
by Manulife for the benefit of the executive officer and Company paid 401(k)
plan contributions. In prior years, this column included company paid pension
plan contributions but this year there were no company paid contributions since
the plan is overfunded.
The Management Resources and Compensation Committee (the "Committee") of
the Board of Directors for Manulife approves the compensation programs for all
officers as well as the annual review of Manulife's Annual Incentive Plan awards
and Long-Term Incentive Plan grants. Executive officers participate in certain
plans sponsored by Manulife.
Manulife's executive compensation policies are designed to recognize and
reward individual performance as well as provide a total compensation package
which is competitive with the median of Manulife's comparator group.
Manulife's officer compensation program is comprised of three key
components; base salary, annual incentive and long-term incentive.
SALARY
The Committee approves the salary ranges and salary increase levels for all
Vice Presidents and above based on competitive industry data for all markets in
which Manulife operates. Salary increases to Manulife's officers and executive
officers have been consistent with the salary increase programs approved for all
employees.
In establishing Manulife's competitive position and developing annual
salary increase programs, Manulife uses several annual surveys as prepared by
independent compensation consulting firms with reference to publicly disclosed
information.
The compensation of executive officers is determined by the individual to
whom the officer reports and is approved by Manulife.
ANNUAL INCENTIVE PLAN
Manulife's Annual Incentive Plan ("AIP") provides the opportunity to earn
incentive bonuses based on the achievement of pre-established corporate and
divisional earnings objectives and divisional and individual performance
objectives. The AIP uses earnings and performance measures to determine awards
with predetermined thresholds for each component as approved by the Committee
annually. Incentive award levels are established for each participant based on
organizational level. When corporate and divisional performance objectives are
significantly exceeded, a participant can receive up to a maximum of 150% to
200% of the established incentive award which would result in incentive award
levels ranging from 22.5% to 100% of base salary. For named executive officers,
incentive award levels range from 20-35% of base salary assuming
27
<PAGE> 28
achievement of targeted performance objectives. If corporate and divisional
performance objectives are above or below targeted pay the incentive award is
adjusted according to plan guidelines.
LONG TERM INCENTIVE PLAN
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name Securities Units Performance or Estimated Future Payouts Under
of Other Rights Other Period Until Non-Securities-Price-Based Plans (US$)(3)
(#)(1) Maturation or ---------------------------------------------
Payout(2) Threshold Target(4) Maximum
($ or #) ($ or #) ($ or #)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John D. DesPrez, 2,942 Jan. 1, 2001 0 $16,940 N/A
President
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Each grant has two components: Cash Appreciation Rights and Retirement
Appreciation Rights.
(2) The appreciation in the value of Cash Appreciation Rights are redeemed four
years following the grant date. Retirement Appreciation Rights are only redeemed
upon retirement or cessation of employment with the Company.
(3) Canadian Dollars converted to US dollars using a book rate of 1.36.
(4) The target is calculated assuming Cash Appreciation Rights are exercised in
the fourth year. At that time 50% of the target is redeemed in cash and the
balance continues to appreciate until redeemed upon retirement or cessation of
employment.
All employees at the Vice President level and above are eligible to
participate in the Manulife Long-Term Incentive Plan.
The purpose of the Long Term Incentive Plan is to encourage senior officers
to act in the long term interests of Manulife and to provide an opportunity to
share in value creation as measured by the changes in Manulife's statutory
surplus. The Plan is an appreciation rights plan which requires that substantial
portion of any accumulated gain remain invested with Manulife during the
participant's career with Manulife.
The Committee reviews the Plan on an annual basis with respect to
Manulife's performance, targeted growth and competitive position. Based on
management's recommendations, the Committee approves certain officers for
participation in Plan, when grants will be awarded, and the size and terms of
grant.
Grants are determined as a percentage of the participant's base salary or
Canadian job grade midpoint depending on organization level of the participant.
Each grant has two components: cash appreciation rights and retirement
appreciation rights which are granted in tandem on a one-for-one basis. Grants
appreciate proportionally to the statutory surplus of Manulife. Cash
appreciation rights are exercised on the fourth anniversary of the grant whereas
retirement appreciation rights may only be exercised upon retirement. The net
present value of the payout opportunity after four years varies between 20% to
100% of base salary depending on the organization level of the participant.
PERQUISITES
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, dental, pension, basic and dependent life
insurance, defined contribution plan and long and short-term disability
coverage.
US domiciled officers at the Vice President levels and above are provided
with an automobile and parking benefit, cellular telephone and computer. The
automobile benefit covers insurance and maintenance. There are no other benefit
packages which currently enhance overall compensation by more than 10%.
28
<PAGE> 29
US RETIREMENT PLANS
The United States domiciled executive officers of The Manufacturers Life
Insurance Company (U.S.A.) ("ManUSA") and the Company continue to earn Pension
Benefits pursuant to their plan membership prior to the merger of Manulife and
NAL. In addition they are also eligible for benefits under the Supplemental
Pension Plan for United States Salaried Employees of Manulife. Their
participation also continues in their respective 401(k) Savings Plans (Manulife
Financial 401(k) Savings Plan and North American Security Life 401(k) Savings
Plan).
NORTH AMERICAN LIFE STAFF PENSION FUND 1948 FOR UNITED STATES MEMBERS
Under the North American Life Staff Pension Fund 1948 For United States Members,
income is payable for the life of the executive officer, with a guarantee of a
minimum of 120 monthly payments. The defined benefit pension plan vests with
five years of service. The normal retirement benefit is a monthly pension
benefit in an amount equal to the Employer Pension Credit. Employer Pension
units are equal to the average of 1.1% of compensation plus 0.4% of compensation
in excess of the Social Security Taxable Wage Base during the employee's last
five years of employment, multiplied by the years of benefit service earned
after December 31, 1966 (Maximum 35 years). Normal retirement age is 65. Early
retirement is age 55 with 5 years of service.
Combined pension benefits at age 65 under this arrangement are as follows:
<TABLE>
<CAPTION>
============================================================================================================
Years of Service
---------------------------------------------------------------------------------
Remuneration ($) 15 20 25 30 35
============================================================================================================
$ $ $ $ $
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 21,881 29,175 36,468 43,762 51,056
- ------------------------------------------------------------------------------------------------------------
150,000 26,995 35,994 44,992 53,990 62,989
- ------------------------------------------------------------------------------------------------------------
175,000 30,239 40,318 50,398 60,478 70,557
- ------------------------------------------------------------------------------------------------------------
200,000 30,510 40,680 50,850 61,020 71,190
- ------------------------------------------------------------------------------------------------------------
225,000 30,510 40,680 50,850 61,020 71,190
- ------------------------------------------------------------------------------------------------------------
250,000 30,510 40,680 50,850 61,020 71,190
- ------------------------------------------------------------------------------------------------------------
300,000 30,510 40,680 50,850 61,020 71,190
- ------------------------------------------------------------------------------------------------------------
400,000 30,510 40,680 50,850 61,020 71,190
============================================================================================================
</TABLE>
Mr. DesPrez has 6.9 years of credited service.
SUPPLEMENTAL PENSION PLAN FOR UNITED STATES SALARIED EMPLOYEES OF MANULIFE
FINANCIAL
In addition to their respective pension plans, executives officers are
eligible for benefits under the Supplemental Pension Plan for United States
Salaried Employees of Manulife Financial. This is a non-contributory,
non-qualified plan intended to provide additional pension income. The pension
earned under the Supplemental Pension Plan for United States Salaried Employees
of Manulife is 60% of the first $200,000 of Final Average Earnings, plus 30% of
the next $300,000, plus 10% of amount over $500,000, less 15.75% of their Social
Security Offset Base, multiplied by the number of years of service (maximum 35).
This benefit is offset by pension benefit payable from the executive officer's
respective Qualified Plan.
Combined pension benefits at age 65 under this arrangement were as follows:
<TABLE>
<CAPTION>
============================================================================================================
Years of Service
---------------------------------------------------------------------------------
Remuneration ($) 15 20 25 30 35
============================================================================================================
$ $ $ $ $
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$150,000 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------
175,000 2,138 2,850 3,563 4,275 4,988
- ------------------------------------------------------------------------------------------------------------
200,000 7,673 10,230 12,788 15,345 17,903
- ------------------------------------------------------------------------------------------------------------
225,000 12,930 17,240 21,550 25,860 30,170
- ------------------------------------------------------------------------------------------------------------
250,000 15,853 21,137 26,421 31,705 36,989
- ------------------------------------------------------------------------------------------------------------
300,000 21,697 28,930 36,162 43,395 50,627
- ------------------------------------------------------------------------------------------------------------
400,000 33,387 44,516 55,645 66,774 77,903
- ------------------------------------------------------------------------------------------------------------
500,000 45,077 60,102 75,128 90,153 105,179
============================================================================================================
</TABLE>
29
<PAGE> 30
NORTH AMERICAN SECURITY LIFE 401(k) SAVINGS PLAN
The Company offers a 401(k) savings plan. This plan allows employees of the
Company to contribute 6% of their annual earnings up to the yearly compensation
limits of $160,000 for 1997. The yearly maximum an employee can contribute is
$9,500 for 1997. The Company matches 50% of employees contributions as well as
contributes a floor amount of 2% of base pay. Employees become 100% vested in
the employer matching contributions if he or she retires on or after age 65,
becomes disabled or dies. Otherwise employees become vested in the employer
contribution through the following vesting schedule:
<TABLE>
<CAPTION>
Years of Service Vested Percentage
<S> <C>
less than 3 0%
at least 3 33 1/3%
at least 4 66 2/3%
5 or more 100%
</TABLE>
EMPLOYMENT CONTRACT
Mr. DesPrez's previous compensation package with the Company (the "Previous
Agreement") included a termination provision which was subsequently incorporated
into his employment agreement with ManUSA. The Previous Agreement was due to
expire 3 years from the date (January 1, 1996) NAL merges with Manulife. The
provision provides that if a termination occurs without just and proper cause
prior to January 1, 1999, the Mr. DesPrez shall be entitled to receive the
following severance allowances and benefits in equal semi-monthly installments
on the date of termination for a period of 18 months: one twelfth the sum of his
annual base salary and the average of his last two years bonus payments
multiplied by the number of months in the severance period. He would also
receive a lump sum payment equal to the monthly average of his annual bonus
payments for the last two years multiplied by the number of full months in which
he provided employment services to the Company during the calendar year in which
he is terminated. The Employer will continue to pay for premiums for the benefit
of Mr. DesPrez under the Employer's group life, medical, dental and vision
insurance plans. Any unvested pension benefits shall vest at date of
termination. The employer will pay for outplacement counseling services up to a
maximum of $25,000.
Directors of the Company, all of whom are also officers or employees of the
Company or its affiliates, receive no compensation in addition to their
compensation as officers or employees of the Company or its affiliates. No
shares of the Company or any of its affiliates are owned by any executive
officer or Director of the Company.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA SEPARATE ACCOUNT D,
FORMERLY, NASL FIXED ACCOUNT (THE "FIXED ACCOUNT")
The Company established the Fixed Account in 1996 as a separate account
under Delaware law. It is not a registered investment company. The Fixed Account
holds assets that are segregated from all of the Company's other assets. The
Fixed Account is currently used only to support the obligations under the
contracts offered by this prospectus. These obligations are based on interest
rates credited to the contracts and do not depend on the investment performance
of the Fixed Account. Any gain or loss in the Fixed Account accrues solely to
the Company and the Company assumes any risk associated with the possibility
that the value of the assets in the Fixed Account might fall below the reserves
and other liabilities that must be maintained. Should the value of the assets in
the Fixed Account fall below reserve and other liabilities, the Company will
transfer assets from its General Account to the Fixed Account to make up the
shortfall. The Company reserves the right to transfer to its General Account any
assets of the Fixed Account in excess of such reserves and other liabilities and
to maintain assets in the Fixed Account which support any number of annuities
which the Company offers or may offer. The assets of the Fixed Account are not
insulated from the claims of the Company's creditors and may be charged with
liabilities which arise from other business conducted by the Company. Thus the
Company may, at its discretion if permitted by applicable state law, transfer
existing Fixed Account assets to, or place future Fixed Account allocations in,
it General Account for purposes of administration.
The assets of the Fixed Account will be invested in those assets chosen by
the Company and permitted by applicable state laws for separate account
investment. As noted above under "REINSURANCE," Peoples is responsible for
investing an agreed upon percentage (currently, 100%) of the assets in the Fixed
Account.
30
<PAGE> 31
DISTRIBUTION OF THE CONTRACT
MSS, located at 73 Tremont Street, Boston, Massachusetts 02108, a Delaware
limited liability company controlled by the Company, is the principal
underwriter of the contracts in addition to providing advisory services to the
Trust. MSS is a broker-dealer registered under the 1934 Act and a member of the
National Association of Securities Dealers, Inc. ("NASD"). MSS has entered into
a non-exclusive promotional agent agreement with WLA. WLA is a broker-dealer
registered under the 1934 Act and a member of the NASD. WLA is a wholly owned
subsidiary of a holding company that is 62.5% owned by The Manufacturers Life
Insurance Company (U.S.A.), 22.5% owned by MRL Holding, LLC and approximately
15% owned by the principals of WLA. Sales of the contracts will be made by
registered representatives of broker-dealers authorized by MSS to sell them.
Such registered representatives will also be licensed insurance agents of the
Company. Under the promotional agent agreement, WLA will recruit and provide
sales training and licensing assistance to such registered representatives. In
addition, Wood Logan will prepare sales and promotional materials for the
Company's approval. MSS will pay distribution compensation to selling brokers in
varying amounts which under normal circumstances are not expected to exceed 5%
of purchase payments. MSS may from time to time pay additional compensation
pursuant to promotional contests. Additionally, in some circumstances, MSS will
provide reimbursement of certain sales and marketing expenses. MSS will pay the
promotional agent for providing marketing support for the distribution of the
contracts.
CONFIRMATION STATEMENTS
Owners will be sent confirmation statements for certain transactions in
their account. Owners should carefully review these statements to verify their
accuracy. Any mistakes should immediately be reported to the Company's Annuity
Service Office. If the owner fails to notify the Company's Annuity Service
Office of any mistake within 60 days of the mailing of the confirmation
statement, the owner will be deemed to have ratified the transaction.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation, to which either the Company or any of its subsidiaries is a
party or to which any of their property is subject and, to the best knowledge of
the Company, no such proceedings are contemplated by any governmental authority.
LEGAL MATTERS
All matters of applicable state law pertaining to the contract, including
the Company's right to issue the contract thereunder, have been passed upon by
James D. Gallagher, Esq., Vice President, Secretary and General Counsel of the
Company.
INDEPENDENT AUDITORS
The financial statements of the Company at December 31, 1997 and 1996 and
for the years then ended appearing in this Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated statements of income, changes in shareholder's equity and
cash flows for the year ended December 31, 1995, appearing this Registration
Statement have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
NOTICES AND REPORTS TO CONTRACT OWNERS
At least once each contract year, the Company will send to contract owners
a statement showing the contract value of the contract as of the date of the
statement. The statement will also show premium payments and any other
information required by any applicable law or regulation.
31
<PAGE> 32
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's Annuity
Service Office at P.O. Box 9230, Boston, Massachusetts 02205-9230.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the Federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The Federal income tax treatment of the Contracts is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this Prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
The 1999 Budget Proposal dated February 2, 1998 contains proposals to
change the taxation of non-qualified annuity contracts. The 1999 Budget Proposal
proposes to tax exchanges of variable contracts for fixed contracts, exchanges
of fixed contracts for variable contracts, exchanges of variable contracts for
variable contracts and reallocation within variable contracts. Currently, owners
of annuity contracts may exchange their contracts for another annuity without
currently incurring tax, and reallocations among investment options are not
treated as a taxable exchange. In addition, the 1999 Budget Proposal proposes
that the contract owner's basis in annuity contracts be reduced annually by
1.25% of the cash value for purposes of determining the taxable gain on
surrenders, withdrawals, and all annuity payments except those made for life at
the rates guaranteed in the contract. Currently, basis in annuity contracts is
not reduced by this amount. The 1999 Budget Proposal states that it generally
would apply only to contracts issued after the date of first congressional
committee action, but that the new exchange and reallocation rules would also
apply to any existing contract that was materially changed. While it is
uncertain whether the Budget Proposal will become law, if the 1999 Budget
Proposal is enacted substantially as proposed, withdrawal charges will be waived
(see "CHARGES AND DEDUCTIONS - Reduction or Elimination of Withdrawal Charge").
This discussion does not address state or local tax consequences associated
with the purchase of the Contracts. In addition, THE COMPANY MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY CONTRACT OR OF
ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under the Code. The assets
in the separate account will be owned by the Company, and the income derived
from such assets will be includible in the Company's income for Federal income
tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in an owner's contract value is generally not taxable to the owner or
annuitant until received, either in the form of annuity payments as contemplated
by the Contracts, or in some other form of distribution. However, this rule
applies only if the owner is an individual.
As a general rule, deferred annuity contracts held by "non-natural
persons," such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for Federal income tax
purposes. The income on such contracts (as defined in the tax law) is taxed as
ordinary income that is received or accrued by the owner during the taxable
year. There are several exceptions to this general rule for non-natural contract
owners. First, annuity contracts will generally be treated as held by a natural
person if the nominal owner is a trust or other entity which holds the contract
as an agent for a natural person. Thus, if a group annuity contract
32
<PAGE> 33
is held by a trust or other entity as an agent for contract owners who are
individuals, those individuals should be treated as owning an annuity contract
for Federal income tax purposes. However, this exception will not apply in the
case of any employer which is the nominal owner of an annuity contract under a
non-qualified deferred compensation arrangement for its employees.
Other exceptions to the general rule for non-natural contract owners will
apply with respect to (1) annuity contracts acquired by an estate of a decedent
by reason of the death of the decedent, (2) certain annuity contracts issued in
connection with various qualified retirement plans, (3) annuity contracts
purchased by employers upon the termination of certain qualified retirement
plans, (4) certain annuity contracts used in connection with structured
settlement agreements, and (5) annuity contracts purchased with a single premium
when the annuity starting date is no later than a year from purchase of the
annuity and substantially equal periodic payments are made, not less frequently
than annually, during the annuity period.
In addition to the foregoing, if the Contract's maturity date occurs, or is
scheduled to occur, at a time when the annuitant is at an advanced age, such as
over age 85, it is possible that the owner will be taxable currently on the
annual increase in the contract value.
The remainder of this discussion assumes that the contract will constitute
an annuity for Federal tax purposes.
TAXATION OF PARTIAL AND TOTAL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the owner's contract value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
total withdrawal, amounts received are includible in income to the extent they
exceed the "investment in the contract." For these purposes the investment in
the contract at any time equals the total of the purchase payments made under
the Contract to that time (to the extent such payments were neither deductible
when made nor excludable from income as, for example, in the case of certain
employer contributions to Qualified Plans) less any amounts previously received
from the Contract which were not included in income.
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the contract value
is treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount includible in income with respect to such
assignment or pledge, though it is not affected by any other aspect of the
assignment or pledge (including its release). If an owner transfers his or her
interest in a Contract without adequate consideration to a person other than the
owner's spouse (or to a former spouse incident to divorce), the owner will be
taxed on the difference between his or her contract value and the investment in
the contract at the time of transfer. In such case, the transferee's investment
in the contract will be increased to reflect the increase in the transferor's
income.
There is some uncertainty regarding the treatment of the market value
adjustment for purposes of determining the amount includible in income as a
result of any partial withdrawal or transfer without adequate consideration.
Congress has given the IRS regulatory authority to address this uncertainty.
However, as of the date of this Prospectus, the IRS has not issued any
regulations addressing these determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of annuity payments for the term of the
Contract (determined under Treasury Department regulations). A simplified method
of determining the taxable portion of annuity payments applies to Contracts
issued in connection with certain Qualified Plans other than IRAs.
Once the total amount of the investment in the contract is excluded using
this ratio, annuity payments will be fully taxable. If annuity payments cease
because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his last taxable year.
33
<PAGE> 34
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person or are not married. A tax
advisor should be consulted in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of the death of an owner
or the annuitant. Prior to the maturity date, such death benefit proceeds are
includible in income as follows: (1) if distributed in a lump sum, they are
taxed in the same manner as a full withdrawal, as described above, or (2) if
distributed under an annuity option, they are taxed in the same manner as
annuity payments, as described above. After the maturity date, where a
guaranteed period exists under an annuity option and the annuitant dies before
the end of that period, payments made to the beneficiary for the remainder of
that period are includible in income as follows: (1) if received in a lump sum,
they are includible in income to the extent that they exceed the unrecovered
investment in the Contract at that time, or (2) if distributed in accordance
with the existing annuity option selected, they are fully excludable from income
until the remaining investment in the Contract is deemed to be recovered, and
all annuity payments thereafter are fully includible in income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the owner reaches
age 59 1/2; (b) attributable to the owner's becoming disabled (as defined in the
tax law); (c) made on or after the death of the owner or, if the owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or the joint lives (or joint life expectancies) of the annuitant and a
"designated beneficiary" (as defined in the tax law); or (e) made under a
Contract purchased with a single premium when the maturity date is no later than
a year from purchase of the Contract and substantially equal periodic payments
are made, not less frequently than annually, during the annuity period.
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an annuity
payment or a withdrawal from a Contract that is includible in income by
combining some or all of the annuity contracts owned by an individual which are
not issued in connection with a Qualified Plan. For example, if a person
purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract.
In addition, if a person purchases two or more deferred annuity contracts
from the same insurance company (or its affiliates) during any calendar year,
all such contracts will be treated as one contract for purposes of determining
whether any payment not received as an annuity (including withdrawals prior to
the maturity date) is includible in income. Thus, if during a calendar year a
person buys two or more of the Contracts offered by this Prospectus (which might
be done, for example, in order to invest amounts in different guarantee
periods), all of such Contracts would be treated as one Contract in determining
whether withdrawals from any of such Contracts are includible in income.
The effects of such aggregation are not clear and depend on the
circumstances. However, aggregation could affect the amount of a withdrawal that
is taxable and the amount that might be subject to the 10% penalty tax described
above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT
OF CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural
taxpayer (such as a corporation or a trust), or held for the benefit of such an
entity, recent changes in the tax law may result in otherwise deductible
interest no longer being deductible by the entity, regardless of whether the
interest relates to debt used to purchase or carry the Contract. However, this
interest deduction disallowance does not affect Contracts where the income on
such Contracts is treated as ordinary income that is received or accrued by the
owner during the taxable year. Entities that are considering purchasing the
Contract, or entities that will be beneficiaries under a Contract, should
consult a tax advisor.
34
<PAGE> 35
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
qualified retirement plans which receive favorable treatment under the Code.
Numerous special tax rules apply to participants in such Qualified Plans and to
Contracts used in connection with such Qualified Plans. Therefore, no attempt is
made in this Prospectus to provide more than general information about use of
the Contract with the various types of Qualified Plans.
The tax rules applicable to qualified plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain qualified Contracts, there may be
no "investment in the Contract" and the total amount received may be taxable.
Also, loans from Qualified Contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loan must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries prior
to exercising their loan privileges.) Both the amount of the contribution that
may be made, and the tax deduction or exclusion that the owner may claim for
such contribution, are limited under Qualified Plans. Those who are considering
purchase of a contract for use in connection with a qualified retirement plan
should consider, in evaluating the suitability of the contract, that the
contract allows only a single premium purchase payment in an amount of at least
$5,000. If this Contract is used in connection with a Qualified Plan, the owner
and annuitant must be the same individual. If a co-annuitant is named, all
distributions made while the annuitant is alive must be made to the annuitant.
Also, if a co-annuitant is named who is not the annuitant's spouse, the annuity
options which are available may be limited, depending on the difference in ages
between the annuitant and co-annuitant. Furthermore, the length of any guarantee
period may be limited in some circumstances to satisfy certain minimum
distribution requirements under the Code.
In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example,
failure to comply with minimum distribution requirements applicable to Qualified
Plans will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the Qualified Plan. In the case of Individual
Retirement Annuities ("IRA"), distributions of minimum amounts (as specified in
the tax law) must generally commence by April 1 of the calendar year following
the calendar year in which the owner attains age 70 1/2. In the case of certain
other Qualified Plans, distributions of such minimum amounts generally must
commence by the later of this date or April 1 of the calendar year following the
calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain qualified Contracts (but not section 457 plans). (The amount of the
penalty tax is 25% of the taxable amount of any payment received from a "SIMPLE
retirement account" during the 2-year period beginning on the date the
individual first participated in any qualified salary reduction agreement (as
defined in the tax law) maintained by the individual's employer.) There are
exceptions to this penalty tax which vary depending on the type of Qualified
Plan. In the case of an IRA, including a "SIMPLE IRA," exceptions provide that
the penalty tax does not apply to a payment (a) received on or after the owner
reaches age 59 1/2, (b) received on or after the owner's death or because of the
owner's disability (as defined in the tax law), or (c) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the owner or for the joint lives (or joint life
expectancies) of the owner and designated beneficiary (as defined in the tax
law). These exceptions, as well as certain others not described herein,
generally apply to taxable distributions from other Qualified Plans (although,
in the case of plans qualified under sections 401 and 403, exception "c" above
for substantially equal periodic payments applies only if the owner has
separated from service). In addition, the penalty tax does not apply to certain
distributions from IRAs taken after December 31, 1997 which are used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met to qualify for these two exceptions to the penalty tax.
Those wishing to take a distribution from an IRA for these purposes should
consult their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
owners, annuitants, and beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by
35
<PAGE> 36
terms and conditions of Qualified Plans to the extent such terms and conditions
contradict the Contract, unless the Company consents.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of Qualified Plans in
connection with which the Company may issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 and 408A of the Code permits
eligible individuals to contribute to an individual retirement program known as
an "IRA." IRAs are subject to limits on the amounts that may be contributed, the
persons who may be eligible and on the time when distributions may commence.
Also, distributions from certain Qualified Plans may be "rolled over" on a
tax-deferred basis into an IRA. The Contract may not, however, be issued in
connection with an "Education IRA" under Section 530 of the Code.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. Employers intending to use the
Contract in connection with such plans should seek competent advice.
SIMPLE IRAS. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. Employers intending to
use the Contract in connection with such plans should seek competent advise.
ROTH IRAS. Recently enacted Section 408A of the Code permits eligible
individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs
differ from other IRAs in several respects. Among the differences is that,
although contributions to a Roth IRA are not deductible, "qualified
distributions" from a Roth IRA will be excludable from income. The eligibility
and mandatory distribution requirements for Roth IRAs also differ from non-Roth
IRAs. Furthermore, a rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover contribution to a Roth IRA from another Roth IRA or from a non-Roth
IRA, but only if such rollover contribution meets the rollover requirements for
IRAs under section 408(d)(3) of the Code. In the case of a qualified rollover
contribution or a transfer from a non-Roth IRA to a Roth IRA, any portion of the
amount rolled over which would be includible in gross income were it not part of
a qualified rollover contribution or a nontaxable transfer will be includible in
gross income. However, the 10 percent penalty tax on premature distributions
generally will not apply to such amounts.
All or part of amounts in a non-Roth IRA may be converted into a Roth IRA.
Such a conversion can be made without taking an actual distribution from the
IRA. For example, an individual may make a conversion by notifying the IRA
issuer or trustee, whichever is applicable. The conversion of an IRA to a Roth
IRA is a special type of qualified rollover distribution. Hence, the IRA
participant must be eligible to make a qualified rollover distribution in order
to convert an IRA to a Roth IRA. A conversion typically will result in the
inclusion of some or all of the IRA value in gross income, as described above.
Persons with adjusted gross incomes in excess of $100,000 or who are married and
file a separate return are not eligible to make a qualified rollover
contribution or a transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross
income. A "qualified distribution" is a payment or distribution which satisfies
two requirements. First, the payment or distribution must be (a) made after the
Owner attains age 59 1/2, (b) made after the Owner's death, (c) attributable to
the Owner being disabled, or (d) a qualified first-time homebuyer distribution
within the meaning of section 72(t)(2)(F) of the Code. Second, the payment or
distribution must be made in a taxable year that is at least five years after
(a) the first taxable year for which a contribution was made to any Roth IRA
established for the Owner, or (b) in the case of a payment or distribution
properly allocable to a qualified rollover contribution from a non-Roth IRA (or
income allocable thereto), the taxable year in which the rollover contribution
was made. A distribution from a Roth IRA which is not a qualified distribution
is generally taxed in the same manner as a distribution from non-Roth IRAs.
Distributions from a Roth IRA need not commence at age 70 1/2.
36
<PAGE> 37
The state income tax treatment of a Roth IRA may differ from he federal
income tax treatment of a Roth IRA. A tax advisor should be consulted regarding
state law treatment of a Roth IRA.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities. " Purchasers of the Contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the Contracts.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings in such years on amounts held as of the last year beginning before
January 1, 1989. These amounts can be paid only if the employee has reached age
59 1/2, separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship are
limited to actual contributions; earnings thereon cannot be distributed on
account of hardship. (These limitations on withdrawals do not apply to the
extent the Company is directed to transfer some or all of the contract value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. Generally, a Contract purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for Federal income tax purposes. Those who intend to use the
Contract in connection with such plans should seek competent advice.
DIRECT ROLLOVER RULES
In the case of Contracts used in connection with a pension, profit-sharing,
or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the
case of a Section 403(b) tax sheltered annuity, any "eligible rollover
distribution" from the Contract will be subject to direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under Section 401(a) of the
Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b)
tax sheltered annuity or custodial account, excluding certain amounts (such as
minimum distributions required under Section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, withholding at a rate of 20% will be imposed on
any eligible rollover distribution. In addition, the participant in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the participant elects
to have amounts directly transferred to certain qualified retirement plans (such
as to an Individual Retirement Annuity). Prior to receiving an eligible rollover
distribution, a notice will be provided explaining generally the direct rollover
and mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct rollover.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the
37
<PAGE> 38
distribution that he or she elects not to have any amounts withheld. In certain
circumstances, the Company may be required to withhold tax. The withholding
rates applicable to the taxable portion of periodic annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the maturity
date and conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%.
As described above, the withholding rate applicable to eligible rollover
distributions is 20%.
GENERAL MATTERS
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in the
Texas Optional Retirement Program ("ORP") to withdraw their interest in a
deferred annuity contract issued under the ORP only upon (1) termination of
employment in the Texas public institutions of higher education, (2) retirement,
(3) death, or (4) the participant's attainment of age 70 1/2. Accordingly,
before any amounts may be distributed from the contract, proof must be furnished
to the Company that one of the four events has occurred. The foregoing
restrictions on withdrawal do not apply in the event a participant in the ORP
transfers his or her contract value to another contract or another qualified
custodian during the period of participation in the ORP.
38
<PAGE> 39
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, there
are no transfers or partial withdrawals and the withdrawal is not made at the
end of a guarantee period. The table below illustrates three examples of the
withdrawal charges that would be imposed if the contract is completely withdrawn
during the contract year shown, based on hypothetical contract values and
assuming no market value adjustment.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE AMOUNT SUBJECT TO
CONTRACT CONTRACT WITHDRAWAL WITHDRAWAL CHARGE WITHDRAWAL
YEAR VALUE AMOUNT CHARGE
--------------------------
PERCENT AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 55,000 5,000(a) 50,000 6% 3,000
6 60,000 5,000(b) 55,000 2% 1,100
8 70,000 5,000 0(c) 0% 0
</TABLE>
(a) During any contract year the free withdrawal amount is 10% of the single
payment made under the contract less any prior partial withdrawals in that
contract year. Ten percent of payments less prior withdrawals equals $5,000
($5,000-0). Consequently, on total withdrawal $5,000 is withdrawn free of
the withdrawal charge and the withdrawal charge is assessed against the
remaining balance of $50,000 (contract value less free withdrawal amount).
(b) The free withdrawal amount is again equal to $5,000 and the withdrawal
charge is applied to the remaining balance of $55,000 (contract value less
free withdrawal amount).
(c) There is no withdrawal charge after 7 contract years.
EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract and
that no transfers are made. The table below illustrates two partial withdrawals
made during the third contract year of $2,000 and $7,000 and assumes no market
value adjustment applies.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL PARTIAL FREE AMOUNT SUBJECT CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL TO WITHDRAWAL ---------------------------
VALUE REQUESTED AMOUNT CHARGE PERCENTAGE AMOUNT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
65,000 2,000 2,000(a) 0 5% 0
63,000 7,000 3,000(b) 4,000 5% 200
</TABLE>
(a) The free withdrawal amount during any contract year is 10% of the single
payment made under the contract less any prior withdrawals in that contract
year. Ten percent of the payment less prior withdrawals equals $5,000
($5,000-0). The amount requested ($2,000) is less than the free withdrawal
amount; therefore, no withdrawal charge applies.
(b) Since $2,000 has already been withdrawn in the current contract year, the
remaining free withdrawal amount during the third contract year is $3,000.
The $7,000 partial withdrawal will consist of $3,000 free of withdrawal
charge, and the remaining $4,000 will be subject to a withdrawal charge.
Withdrawals may be subject to a market value adjustment in addition to the
withdrawal charge described above (see "MARKET VALUE ADJUSTMENT."
39
<PAGE> 40
APPENDIX B
MARKET VALUE ADJUSTMENT EXAMPLES
The market value adjustment factor is determined by the following formula:
((1+i)/(1+j))n/12 where:
i - The initial guaranteed interest rate or renewal guaranteed interest
rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the request is
processed by the Company, for a guarantee period with the same length as
the period remaining in the initial renewal guarantee period or RENEWAL
guarantee period. If the guarantee period of this length is not available,
the guarantee period with the next highest duration which is maintained by
the Company will be chosen.
n - The number of complete months remaining to the end of the initial
guarantee period or renewal guarantee period.
EXAMPLE 1
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest
rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 6.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of
contract year 3 =$100,000 x 1.052.5=$112,972.63
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment =((1+i)/(1+j))n/12
factor i = .05
j = .06
n = 30
=(1.05/1.06)30/12
=0.9765817
Amount transferred to a
different guarantee period =$112,972.63 x 0.9765817
=$110,327.00
40
<PAGE> 41
EXAMPLE 2
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 4.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of =$100,000 x 1.05(2.5)=$112,972.63
contract year 3
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment
factor =((1+i)/(1+j))n/12
i = .05
j = .04
n = 30
=(1.05/1.04)30/12
=1.0242121
Amount transferred to a
different guarantee period =$112,972.63 x 1.0242121
=$115,707.93
41
<PAGE> 42
APPENDIX C
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In many
jurisdictions there is no tax at all. For current information, a tax adviser
should be consulted.
<TABLE>
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CALIFORNIA......................................................... .50% 2.35%
DISTRICT OF COLUMBIA............................................... 2.25% 2.25%
KENTUCKY .......................................................... 2.00% 2.00%
MAINE .......................................................... 00% 2.00%
NEVADA .......................................................... 00% 3.50%
PUERTO RICO........................................................ 1.00% 1.00%
SOUTH DAKOTA*...................................................... .00% 1.25%
WEST VIRGINIA...................................................... 1.00% 1.00%
WYOMING .......................................................... 00% 1.00%
</TABLE>
* Premium tax paid upon receipt of premium (no tax at annuitization if tax paid
on premium at issue).
42
<PAGE> 43
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE
INSURANCE COMPANY OF NORTH
AMERICA (FORMERLY NORTH
AMERICAN SECURITY LIFE
INSURANCE COMPANY)
Years ended December 31, 1997, 1996
and 1995
<PAGE> 44
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Audited Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors............................................... 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................. 3
Consolidated Statements of Income............................................ 4
Consolidated Statements of Changes in Shareholder's Equity................... 5
Consolidated Statements of Cash Flows........................................ 6
Notes to Consolidated Financial Statements................................... 7
<PAGE> 45
Report of Independent Auditors
The Board of Directors and Shareholder
The Manufacturers Life Insurance Company of North America
We have audited the accompanying consolidated balance sheets of The
Manufacturers Life Insurance Company of North America (formerly North American
Security Life Insurance Company and hereinafter referred to as the Company) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Manufacturers Life Insurance Company of North America at December 31, 1997 and
1996, and the consolidated results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
- ---------------------
Boston, Massachusetts
February 26, 1998
1
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Shareholder of The Manufacturers Life Insurance
Company of North America:
We have audited the accompanying statements of income, changes in stockholder's
equity and cash flows of The Manufacturers Life Insurance Company of North
America (formerly North American Security Life Insurance Company) for the year
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of The
Manufacturers Life Insurance Company of North America for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 40 (FIN 40) and
Statement of Financial Accounting Standards No. 120 (SFAS 120), which required
implementation of several accounting pronouncements not previously adopted.
The effects of adopting FIN 40 and SFAS 120 were retroactively applied to the
Company's previously issued financial statements, consistent with the
implementation guidance of those standards.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Boston, Massachusetts
May 29, 1997, except for Note 14,
as to which the date is February 26, 1998
2
<PAGE> 47
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 143,307,365 $ 97,431,343
Marketable equity securities available-for-sale,
at fair value 1,177
Short-term investments 14,991,793 4,294,370
Foreclosed real estate -- 2,268,120
Policy loans 3,275,654 637,096
--------------------------------------
161,574,812 104,632,106
Cash and cash equivalents 7,338,690 12,073,302
Accrued investment income 2,640,707 1,806,106
Deferred policy acquisition costs 364,983,732 290,610,274
Receivable from affiliates 4,605,036
Other assets 9,625,844 8,229,825
Due from reinsurers 553,833,869 573,418,610
Separate account assets 9,529,160,219 6,820,599,385
--------------------------------------
Total assets $10,633,762,909 $7,811,369,608
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policyholder funds $ 92,750,188 $ 82,619,372
Payable to affiliates 1,462,021
Amounts on deposit from reinsurer 3,000,000 6,000,000
Amount payable to reinsurers 571,881,943 593,909,628
Notes payable to affiliates 183,955,075 158,200,680
Deferred tax liability 16,428,278 288,800
Other liabilities 27,861,648 21,219,254
Separate account liabilities 9,529,160,219 6,820,599,385
--------------------------------------
Total liabilities 10,425,037,351 7,684,299,140
Shareholder's equity:
Common stock (par value $1,000 per share--authorized, 3,000
shares; issued and outstanding, 2,600 shares) 2,600,000 2,600,000
Additional paid-in capital 179,052,696 131,322,072
Unrealized appreciation on securities available-for-sale 1,199,890 508,601
Retained earnings (deficit) 25,872,972 (7,360,205)
--------------------------------------
Total shareholder's equity 208,725,558 127,070,468
--------------------------------------
Total liabilities and shareholder's equity $10,633,762,909 $7,811,369,608
======================================
</TABLE>
See accompanying notes.
3
<PAGE> 48
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Revenues:
Fees from separate accounts and policyholder funds $126,636,872 $ 95,323,185 $ 77,572,040
Advisory fees and other distribution revenues 67,677,977 46,232,682 27,911,710
Net investment income 7,905,545 5,452,083 28,701,102
Net realized investment gains 530,886 764,139 9,711,168
-------------------------------------------------
202,751,280 147,772,089 143,896,020
Benefits and expenses:
Benefits to policyholders 4,986,244 4,241,628 27,128,685
Amortization of deferred policy acquisition costs 40,648,703 30,830,214 43,287,070
Other insurance expenses 100,385,240 71,255,354 58,745,087
Financing costs 14,267,785 15,820,730 9,282,164
-------------------------------------------------
160,287,972 122,147,926 138,443,006
-------------------------------------------------
Income from continuing operations before provision
for income tax (benefit) 42,463,308 25,624,163 5,453,014
Provision for income tax (benefit):
Current (723,741) 1,464,291 2,022,624
Deferred 15,767,246 7,614,476 (9,063,710)
-------------------------------------------------
15,043,505 9,078,767 (7,041,086)
-------------------------------------------------
Income from continuing operations 27,419,803 16,545,396 12,494,100
Discontinued operations
Loss from operations, net of tax (141,134) (809,948) (1,461,888)
Gain on disposal, net of tax 5,954,508
-------------------------------------------------
Net income $ 33,233,177 $ 15,735,448 $ 11,032,212
=================================================
</TABLE>
See accompanying notes.
4
<PAGE> 49
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Changes in Shareholder's Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION ON RETAINED TOTAL
ADDITIONAL SECURITIES EARNINGS SHAREHOLDER'S
COMMON STOCK PAID-IN CAPITAL AVAILABLE-FOR-SALE (DEFICIT) EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 as
previously reported $2,600,000 $110,633,000 $(53,824,868) $ 59,408,132
Cumulative effect on prior years
of applying the new basis of
accounting 1,830,140 $ (8,664,619) 19,697,003 12,862,524
------------------------------------------------------------------------------------
Balance at January 1, 1995 2,600,000 112,463,140 (8,664,619) (34,127,865) 72,270,656
Net income 11,032,212 11,032,212
Reversal of deferred tax
valuation allowance 858,932 858,932
Change in unrealized
appreciation on securities
available-for-sale, net of tax 11,094,515 11,094,515
------------------------------------------------------------------------------------
Balance at December 31, 1995 2,600,000 113,322,072 2,429,896 (23,095,653) 95,256,315
Capital contribution 18,000,000 18,000,000
Net income 15,735,448 15,735,448
Change in unrealized
appreciation on securities
available-for-sale, net of
tax and DPAC adjustments (1,921,295) (1,921,295)
------------------------------------------------------------------------------------
Balance at December 31, 1996 2,600,000 131,322,072 508,601 (7,360,205) 127,070,468
Capital contribution 47,730,624 47,730,624
Net income 33,233,177 33,233,177
Change in unrealized
appreciation on securities
available-for-sale, net of
tax and DPAC adjustments 691,289 691,289
------------------------------------------------------------------------------------
Balance at December 31, 1997 $2,600,000 $179,052,696 $ 1,199,890 $ 25,872,972 $208,725,558
====================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 50
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,233,177 $ 15,735,448 $ 11,032,212
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Write-down of foreclosed real estate 342,025 1,235,620
Amortization of bond discount and premium 400,488 196,315 56,458
Benefits to policyholders 4,986,244 4,241,628 27,128,685
Gain on interest rate swap (1,632,000) (475,407)
Provision for deferred income tax (benefit) 15,767,246 7,944,703 (7,929,766)
Net realized investment gains (530,886) (764,139) (9,711,168)
Amortization of deferred policy acquisition costs 40,648,703 30,830,214 43,287,070
Amortization of deferred policy acquisition costs
included in discontinued operations 1,706,547 2,213,505 1,035,069
Policy acquisition costs deferred (123,964,814) (89,535,239) (61,103,093)
Gain on disposal of discontinued operations (9,393,984)
Changes in assets and liabilities:
Accrued investment income (834,601) 146,322 5,575,157
Other assets (1,396,019) 2,061,204 (2,456,292)
Receivable from affiliates (4,605,036)
Payable to affiliates (1,462,021) (4,203,687) (4,233,252)
Other liabilities 6,642,395 (1,788,725) 12,081,461
------------------------------------------------------
Net cash (used in) provided by operating activities (38,802,561) (34,212,426) 15,522,754
INVESTING ACTIVITIES
Purchase of fixed maturities (118,765,270) (48,300,025) (506,524,031)
Purchase of marketable equity securities (250,000) (6,033,533) (10,137,860)
Mortgage loans issued (136,101)
Proceeds from fixed maturities sold, matured or repaid 74,625,632 41,269,218 781,840,143
Proceeds from marketable equity securities sold 1,239 12,737,787 5,080,010
Proceeds from sales of foreclosed real estate 2,268,120 1,602,064 860,375
Proceeds from disposal of discontinued operations 16,337,562
Proceeds from sales of mortgage loans 110,791,046
Net change in short-term investments (10,697,423) (3,984,370)
Net change in policy loans (2,638,558) (569,773) 2,511,985
------------------------------------------------------
Net cash (used in) provided by investing activities (39,118,698) (3,278,632) 384,285,567
FINANCING ACTIVITIES
Net reinsurance (consideration) proceeds (2,442,944) (1,116,114) 4,785,845
Repayment of amounts on deposit from reinsurers (3,000,000) (3,000,000) (3,000,000)
Receipts credited to policyholder funds 20,606,428 20,923,239 302,496,632
Return of policyholder funds (15,461,856) (24,657,906) (69,404,163)
Transfer of policyholder funds to reinsurer (745,950,764)
Increase in notes payable to affiliates 25,754,395 138,200,680
Increase in notes payable 29,843,003
Notes payable repaid (109,866,565) (20,000,000)
Capital contribution 47,730,624 18,000,000
------------------------------------------------------
Net cash provided by (used in) financing activities 73,186,647 38,483,334 (501,229,447)
------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,734,612) 992,276 (101,421,126)
Cash and cash equivalents at beginning of year 12,073,302 11,081,026 112,502,152
------------------------------------------------------
Cash and cash equivalents at end of year $ 7,338,690 $ 12,073,302 $ 11,081,026
======================================================
Non-cash transactions:
Mortgage loans transferred to foreclosed real estate $2,405,052
======================================================
</TABLE>
See accompanying notes.
6
<PAGE> 51
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION
The Manufacturers Life Insurance Company of North America (formerly North
American Security Life Insurance Company and hereinafter referred to as MNA or
the Company) is a stock life insurance company domiciled in the State of
Delaware. The Company is a wholly-owned subsidiary of Manulife Wood Logan
Holding Company, Inc. (formerly NAWL Holding Company, Inc. and hereinafter
referred to as MWL or the Parent). On January 1, 1996, North American Life
Assurance Company of North York, Canada (NAL), the former parent of the Company,
merged with The Manufacturers Life Insurance Company. The surviving company
conducts business under the name The Manufacturers Life Insurance Company (MLI).
Concurrent with the merger, the Company's Parent went through a corporate
restructuring which resulted in the formation of a newly organized holding
corporation, MWL. At that time, all of the assets and liabilities of MNA and its
subsidiaries, The Manufacturers Life Insurance Company of New York (formerly
First North American Life Assurance Company and hereinafter referred to as MNY)
and NASL Financial Services, Inc. (NASL Financial), were transferred from MLI to
MWL. In addition, MLI's 20.2% ownership interest in Wood Logan Associates, Inc.
and its majority-owned subsidiary, Wood Logan Distributors, Inc., (collectively
Wood Logan) was transferred to MWL. In exchange, MLI received all Class A shares
of MWL common stock representing an 85% ownership interest. On January 1, 1997,
MLI contributed 62.5% of its 85% ownership interest to its indirect wholly-owned
subsidiary, The Manufacturers Life Insurance Company (U.S.A.) (MANUSA).
Effective December 18, 1997, MLI transferred its remaining 22.5% interest in MWL
to MRL Holding, LLC, (MRL) a newly formed Delaware limited liability company.
Also effective January 1, 1996, as part of the restructuring, the remaining
79.8% of Wood Logan was purchased by MWL. In exchange for the remaining shares
of Wood Logan, certain employees and former owners of Wood Logan received the
Class B voting shares of MWL representing a 15% ownership interest. Wood Logan
provides marketing services for the sale of the annuity products of MNA and MNY.
7
<PAGE> 52
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION (CONTINUED)
The Company issues individual life, variable life and annuity insurance
contracts (the contracts) in forty-eight states, including New York. Amounts
invested in the fixed portion of the contracts are allocated to the general
account of the Company. Amounts invested in the variable portion of the
contracts are allocated to the separate accounts of the Company. The separate
account assets are invested in shares of the Manufacturers Investment Trust
(formerly NASL Series Trust and hereinafter referred to as MIT), a no-load,
open-end management investment company organized as a Massachusetts business
trust.
NASL Financial acted as investment adviser to MIT and the North American Funds
(NAF), a no-load, open-end management investment company organized as a
Massachusetts business trust. NASL Financial also acted as principal underwriter
of the annuity and life insurance contracts issued by the Company. NASL
Financial had an agreement with Wood Logan to act as the promotional agent for
the sale of the variable annuity and variable life insurance products issued by
MNA and MNY.
Effective October 1, 1997, Manufacturers Securities Services, LLC (MSS),
replaced NASL Financial as the investment advisor to MIT and as the principal
underwriter of the annuity contracts. Wood Logan provides marketing services for
the sale of annuity contracts under an Administrative Services Agreement dated
October 7, 1997, between the Company and MLI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
majority and wholly-owned subsidiaries have been prepared in conformity with
generally accepted accounting principles (GAAP).
8
<PAGE> 53
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Prior to 1996, the Company prepared its financial statements in conformity with
accounting practices prescribed or permitted by the Delaware Insurance
Department which practices were considered GAAP for mutual life insurance
companies. FASB Interpretation 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and other Enterprises (FIN 40),
as amended, which is effective for 1996 annual financial statements, no longer
permits statutory-basis financial statements to be described as being prepared
in conformity with GAAP. Accordingly, the Company has adopted various accounting
pronouncements, principally Statement of Financial Accounting Standards No. 120,
Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts (SFAS No. 120),
which addresses the accounting for long-duration insurance contracts.
Pursuant to the requirements of the above pronouncements, the effect of the
changes in accounting have been applied retroactively and the previously issued
1995 financial statements have been restated for the change. The effect of the
change applicable to years prior to January 1, 1995 has been presented as a
restatement of shareholder's equity as of this date.
The adoption had the effect of increasing net income for 1995 by approximately
$18,320,197.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and the
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
operations, after intercompany eliminations, of the Company and its majority and
wholly-owned subsidiaries, MNY and MSS (NASL Financial through October 1, 1997).
9
<PAGE> 54
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS AND INVESTMENT INCOME
The Company accounts for its fixed maturities and marketable equity securities
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that fixed maturities and marketable equity securities be
designated as either held-to-maturity, available-for-sale or trading at the time
of purchase. Held-to-maturity fixed maturities are reported at amortized cost
and the remainder of fixed maturities and marketable equity securities are
reported at fair value with unrealized holding gains and losses reported in
income for those designated as trading and as a separate component of
shareholder's equity for those designated as available-for-sale.
The Company has classified all of its fixed maturities and marketable equity
securities as available-for-sale. As a result, these securities are reported in
the accompanying financial statements at fair value. Changes in fair values,
after adjustment for deferred policy acquisition costs (DPAC) and deferred
income taxes, are reported as unrealized appreciation or depreciation directly
in shareholder's equity, and accordingly, have no effect on net income. The DPAC
offset to the unrealized appreciation or depreciation represents valuation
adjustments or reinstatements of DPAC that would have been required as a charge
or credit to operations had such unrealized amounts been realized.
The amortized cost of fixed maturities is adjusted for the amortization of
premiums and accretion of discounts using the interest method. This amortization
or accretion is included in net investment income.
For the mortgage-backed bond portion of the fixed maturities portfolio, the
Company recognizes amortization using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the security is adjusted to
the amount that would have existed had the new effective yield been applied
since the acquisition of the security. That adjustment is included in net
investment income.
Short-term investments generally consist of instruments which have a maturity of
less than one year at the time of acquisition. Short-term investments are
reported at cost, which approximates fair value.
10
<PAGE> 55
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
Real estate acquired in satisfaction of debt is stated at the lower of the
appraised fair value or the outstanding principal loan balance plus accrued
interest and foreclosure costs.
Policy loans are reported at unpaid balances, not in excess of the underlying
cash value of the policies.
Realized gains or losses on investments sold and declines in value judged to be
other-than-temporary are determined on the specific identification basis.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest, which approximates fair
value.
DEFERRED POLICY ACQUISITION COSTS
Commissions, net of commission allowances for reinsurance ceded, and other costs
of acquiring new business that vary with and are primarily related to the
production of new business have been deferred. These acquisition costs are being
amortized generally in proportion to the present value of expected gross profits
from surrender charges and investment, mortality and expense margins. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of products are revised.
The Company, through the date of the NAF sale, deferred NAF commissions and
promotional agent fees (NAF commission) up to the amount recoverable from
contingent deferred sales charges (CDSC). Deferred NAF commissions were
recognized on a straight-line basis over the period in which the CDSC's were in
effect.
11
<PAGE> 56
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities that are reported in the accompanying
consolidated balance sheet represent investments in MIT, which are mutual funds
that are separately administered for the exclusive benefit of the variable life
and annuity policyholders and are reported at fair value. Such policyholders,
rather than the Company, bear the investment risk. The operations of the
separate accounts are not included in the accompanying consolidated financial
statements. Fees charged on separate account policyholder funds are included in
revenues.
POLICYHOLDER FUNDS AND BENEFITS TO POLICYHOLDERS
Policyholder funds for the fixed portion of variable life and annuity contracts
are computed under a retrospective deposit method and represent account balances
before applicable surrender charges. Benefits to policyholders include interest
credited to policyholders and other benefits that are charged to expense
including benefit claims incurred in the period in excess of the related
policyholder account balances. Interest crediting rates for the fixed portion of
variable life and annuity contracts ranged from 4.10% to 6.15% in 1997; 4.00% to
6.15% in 1996 and 4.20% to 7.15% in 1995.
RECOGNITION OF REVENUES
Fees from separate accounts and policyholder funds represent fees assessed
against policyholder account balances, and include mortality and expense risk
charges, surrender charges and an annual administrative charge.
MSS, and formerly NASL Financial (collectively the Advisor), are responsible for
managing the corporate and business affairs of MIT and act as investment advisor
to MIT. As compensation for its investment advisory services, the Advisor
receives advisory fees based on the daily average net assets of the portfolios.
The Advisor, as part of its advisory services, is responsible for selecting and
compensating subadvisors to manage the investment and reinvestment of the assets
of each portfolio, subject to the supervision of the Board of Trustees of MIT.
The Company's discontinued operations include the compensation of NASL Financial
for investment advisory fees and subadvisor compensation from NAF through
October 1, 1997 the date the Company sold NAF. Subadvisor compensation, for MIT,
is included in other insurance expenses.
12
<PAGE> 57
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCING AGREEMENTS
The Company has entered into various financing agreements with reinsurers. All
assets and liabilities related to these contracts are reported on a gross basis.
Due to the nature of the Company's products, these agreements are accounted for
under the deposit method whereby the net premiums paid to the reinsurer are
recorded as deposits.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that likely will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced by a valuation allowance if, based
upon the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
RECLASSIFICATIONS
Certain 1995 balances have been reclassified to permit comparison with the 1997
and 1996 presentations.
13
<PAGE> 58
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Fixed maturities $7,250,366 $ 5,197,363 $21,980,896
Marketable equity securities 34,993 137,862
Mortgage loans 5,620,613
Short-term investments 1,126,181 1,187,368 3,133,008
Foreclosed real estate 432,648 (164,540)
----------------------------------------------
8,376,547 6,852,372 30,707,839
Less: investment expenses (471,002) (1,400,289) (2,006,737)
----------------------------------------------
Net investment income $7,905,545 $ 5,452,083 $28,701,102
==============================================
</TABLE>
The proceeds from sales of available-for-sale fixed maturities for the year
ended December 31, 1997, 1996 and 1995 were $53,325,435, $15,151,764 and
$755,538,955, respectively.
The gross realized gains and losses on the sales of investments for the year
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEAR DECEMBER 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Gross realized gains $ 787,645 $ 429,786 $10,913,975
Gross realized losses (6,759) (3,814) (2,042,666)
Marketable equity securities:
Gross realized gains 988,022 80,010
Gross realized losses (250,000) (15,308)
Mortgage loans:
Gross realized gains 967,301
Foreclosed real estate:
Gross realized gains 12,063
Gross realized losses (634,547) (219,515)
--------------------------------------------
Net realized gain $ 530,886 $ 764,139 $ 9,711,168
============================================
</TABLE>
14
<PAGE> 59
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The gross unrealized gains and losses for fixed maturities available-for-sale
and marketable equity securities held at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 14,333 $ 566 $ 13 $ 14,886
Corporate securities 110,191 1,905 23 112,073
Mortgage-backed securities 10,455 74 3 10,526
States, territories and possessions 5,594 228 5,822
---------------------------------------------------
Total $140,573 $2,773 $ 39 $143,307
===================================================
DECEMBER 31, 1996
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 10,160 $ 337 $ 27 $ 10,470
Corporate securities 79,375 1,084 208 80,251
Mortgage-backed securities 1,940 19 9 1,950
States, territories and possessions 4,578 182 4,760
---------------------------------------------------
Total fixed-maturity securities 96,053 1,622 244 97,431
Marketable equity securities 1 1
---------------------------------------------------
Total $ 96,054 $1,622 $244 $ 97,432
===================================================
</TABLE>
15
<PAGE> 60
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities available-for-sale at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers or lenders may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------------------------
(In Thousands)
<S> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE
Due in one year or less $ 13,870 $ 13,870
Due after one year through five years 61,741 63,235
Due after five years through ten years 32,936 33,350
Due after ten years through twenty years 2,050 2,127
Due after twenty years 19,521 20,199
Mortgage-backed securities 10,455 10,526
----------------------------
Total fixed maturities available-for-sale $140,573 $143,307
============================
</TABLE>
Investments with a fair value of $6,283,750 and $5,820,150 at December 31, 1997
and 1996 respectively were on deposit with, or in custody accounts on behalf of,
state insurance departments to satisfy regulatory requirements.
4. FEDERAL INCOME TAXES
Beginning in 1996, the Company participated as a member of the MWL affiliated
group consolidated federal income tax return. In 1995, the Company filed a group
consolidated federal income tax return with MNY and NASL Financial. The Company
files separate state income tax returns. The method of allocation between
companies is subject to a written tax sharing agreement. The tax liability is
allocated to each member on a pro rata basis based on the relationship that the
member's tax liability computed on a separate return basis bears to the tax
liability of the consolidated group. The tax charge to the Company shall not be
more than the Company would have paid on a separate return basis.
16
<PAGE> 61
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (continued)
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Statutory federal income rate applied to income
before federal income taxes 35% 35% 35%
Add (deduct):
Non-deductible meals and entertainment 1 1 2
Nondeductible consulting fees 4
Change in prior year income taxes (1) (1)
Reversal of deferred asset valuation allowance (285)
---------------------------------
Effective income tax rate 35% 35% (244)%
=================================
</TABLE>
The Company maintained a valuation allowance of approximately $11,982,000 at
December 31, 1994 as the Company had current and cumulative net losses. During
1997, 1996 and 1995, no valuation allowance has been established as the Company
believes that it is more likely than not that its deferred tax assets will be
realized from the generation of future taxable income.
17
<PAGE> 62
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,313,135
Financing arrangements $ 2,699,371 4,222,611
Interest on notes payable 1,282,776 677,823
Guaranty fund assessment liabilities 315,000 490,000
Alternative minimum tax credit 313,839
Real estate 607,920 241,266
Other 116,862 500,524
--------------------------------
Total deferred tax assets 5,021,929 16,759,198
--------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs (18,429,529) (15,336,265)
Unrealized appreciation on securities
available-for-sale (646,094) (273,863)
Other (2,374,584) (1,437,870)
--------------------------------
Total deferred tax liabilities (21,450,207) (17,047,998)
--------------------------------
Net deferred tax liability $(16,428,278) $ (288,800)
================================
</TABLE>
The Company made estimated tax payments of $530,666, $0 and $164,260 in 1997,
1996 and 1995, respectively.
18
<PAGE> 63
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS
All financing agreements entered into with reinsurance companies relate solely
to the products sold by the Company and not its subsidiaries. The Company's
reinsured products are considered investment products under generally accepted
accounting principles and, as such, the reinsurance agreements are considered
financing arrangements and are accounted for under the deposit method. Under
this method, net premiums received by the reinsurer are recorded as deposits.
Financing transactions have been entered into primarily to improve cash flow and
statutory capital. All financing agreements discussed below were in effect for
the full year in 1997, 1996 and 1995 unless otherwise indicated.
On June 30, 1995, the Company entered into an indemnity coinsurance agreement
with Peoples Security Life Insurance Company (Peoples), a AA+ rated subsidiary
of the Aegon Corporation, to reinsure 100% of the fixed portion of the variable
annuity business written by the Company. In 1997, the treaty was amended to
cover the Company's Market Value Adjusted fixed annuity product.
The indemnity aspects of the agreement provide that the Company remains liable
for the contractual obligations whereas Peoples agrees to indemnify the Company
for any contractual claims incurred. The coinsurance aspects of the agreement
require the Company to transfer to Peoples all receipts of the fixed portion of
premiums and transfers from variable to the fixed portion of the variable
annuity contracts. Once transferred, the assets belong to Peoples. In exchange,
Peoples reimburses the Company for all claims and provides expense allowances to
cover commissions and other costs associated with the acquisition of the fixed
portion of the variable annuity business. Under this agreement, the Company will
continue to administer the fixed portion of the annuity business for which it
will earn an expense allowance.
Peoples is responsible for investing the premiums received for the fixed portion
of the contracts and is at risk for any potential investment gains and losses.
There is no recourse to the Company if investment losses are incurred. As of
October, 1997, the assets are maintained at Bankers Trust under a trust
agreement owned by Peoples. The Company is the beneficiary of the trust.
19
<PAGE> 64
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS (CONTINUED)
Effective July 1, 1995 and August 1, 1995, the Company entered into treaties
with the Connecticut General Life Insurance Company (CIGNA) and Swiss Re Life
Insurance Company, respectively, to reinsure the minimum death benefit guarantee
risks of the Company. Each company has assumed 50% of the risk. In addition, the
Company reinsured 50% of its risk related to the waiving of surrender charges at
death with CIGNA. The Company is paying the reinsurers an asset-based premium,
the level of which varies with both the amount of exposure to this risk and the
realized experience.
Effective November 1, 1995, the Company entered into a modified coinsurance
treaty with Transamerica Occidental Life Insurance Company (Transamerica).
Transamerica reinsures a 50% quota share of the variable portion of the
Company's variable life insurance contracts. At inception, Transamerica
reinsured 80% of this product's net amount at risk in excess of the Company's
retention limit on a yearly renewable term basis. At December 31, 1997, this
contract was amended to increase this percentage to 100%.
The Company entered into a modified coinsurance agreement with RGA/Swiss,
formerly ITT Lyndon Life, to cede 64% of certain variable annuity contracts
(policy form 203-VA) and 95% of certain other variable annuity contracts
(VISION.001). At the time of the transaction, the Company received $25 million
in cash representing withheld premiums of $15 million and $10 million of ceding
commissions. The withheld premiums are being repaid with interest over five
years. The ceding commission is payable out of future profits generated by the
business reinsured. Effective December 31, 1994, the agreement was amended to
increase the percentage of ceded business on policy form 203-VA to 95%. In
return, the Company received additional ceding commissions of $5,200,000 which
is reflected as a due to reinsurers and is expected to be paid back over a five
year period. Policies issued under the applicable policy forms after December
31, 1996, in accordance with a 1997 amendment, are not reinsured under this
agreement.
20
<PAGE> 65
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS (CONTINUED)
The Company entered into an indemnity quota share reinsurance agreement with
PaineWebber Life to reinsure a portion of its policy forms 207-VA, VFA,
VENTURE.001, and VENTURE.003. The quota share percentage for business written
prior to January 1, 1997 varies between 15% and 35% depending on the policy
form. Effective January 1, 1997, the agreement was amended to change the quota
share to 20% for policies written thereafter. The form of reinsurance is
modified coinsurance and only covers the variable portion of contracts written
by PaineWebber brokers. All elements of risk (including persistency, investment
performance, and mortality) have been transferred.
During 1997, the Company entered into a modified coinsurance agreement with
Merrill Lynch Life to cede 50% of the variable portion of its Merrill Lynch
policies. The agreement only covers the variable portion of contracts sold by
Merrill Lynch brokers. All elements of risk (including persistency, investment
performance, and mortality) have been transferred.
In the event of insolvency of a reinsurer, the Company remains primarily liable
to its policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company and accordingly, the Company periodically
monitors the financial condition of its reinsurers.
6. SHAREHOLDER'S EQUITY
Generally, the net assets of the Company and its insurance subsidiary available
for the Parent as dividends are limited to and cannot be made except from earned
statutory basis profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Insurance Commissioners
of the States of Delaware and New York is subject to restrictions relating to
statutory surplus and net gain from operations on a statutory basis.
21
<PAGE> 66
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
6. SHAREHOLDER'S EQUITY (CONTINUED)
Net income (loss) and capital and surplus, as determined in accordance with
statutory accounting principles, for the Company and its insurance subsidiary,
MNY, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
MNA:
Net income (loss) $ 22,259,385 $ 3,066,908 $(7,287,985)
Net capital and surplus 139,170,756 69,553,706 50,157,994
MNY:
Net (loss) income (1,562,544) 231,315 (578,899)
Net capital and surplus 68,336,238 22,265,070 8,821,782
</TABLE>
The Company's broker dealer subsidiaries, MSS and formerly NASL Financial
(through October 1, 1997), are subject to the Securities and Exchange
Commission's (SEC) "Net Capital Rule" as defined under rule 15c3-1. At December
31, 1997 and 1996, the net capital of each of the broker dealers exceeded the
SEC's minimum capital requirements.
The components of the balance sheet caption "Unrealized appreciation on
securities available-for-sale" in shareholder's equity are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------
(In Thousands)
<S> <C> <C>
Fair value of securities $143,307 $97,432
Amortized cost of securities 140,573 96,054
------------------------
Unrealized appreciation 2,734 1,378
Adjustment to deferred policy
acquisition costs (888) (595)
Deferred income taxes (646) (274)
------------------------
Unrealized appreciation on securities
available-for-sale $ 1,200 $ 509
========================
</TABLE>
22
<PAGE> 67
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
7. RELATED-PARTY TRANSACTIONS
In connection with the indemnity coinsurance agreement (see Note 5) of the fixed
portion of annuities, the Company pooled its mortgage portfolio (book value of
approximately $106 million) and transferred a senior participation interest to
an affiliate of Peoples. The senior interest was transferred for a purchase
price of approximately $72 million and entitles an affiliate of Peoples to 100%
of the cash flows produced by the portfolio until it recovers in full the
purchase price with interest at a rate of 7.52%. The remaining residual interest
was transferred to First North American Realty, Inc., which at the time of the
transaction was a wholly-owned subsidiary of NAL, the former Parent, for a
purchase price of $33 million. As a result of the sale of the senior and
residual interests in the Company's mortgages, the Company has no further
economic interest in any mortgages.
The Company utilizes various services administered by MLI in 1997 and 1996 and
NAL in 1995, such as legal, personnel, investment accounting and other corporate
services. The charges for these services were approximately $8,229,000,
$6,053,000 and $295,000 in 1997, 1996 and 1995, respectively. During 1996, MLI
changed the allocation method of expenses subsequent to the merger with NAL. At
December 31, 1997 and 1996, the Company had a net liability to MLI for these
services and interest accrued on notes payable of $3,646,308 and $3,172,259,
respectively. At December 31, 1997, the payable is offset by a receivable from
MIT and MLI for expenses paid on their behalf of $8,251,344. At December 31,
1996, payable to affiliates was offset by a receivable from MIT and NAF of
$1,710,238 for expenses paid on behalf of those entities.
The financial statements have been prepared from the records maintained by the
Company and may not necessarily be indicative of the financial conditions or
results of operations that would have occurred if the Company had been operated
as an unaffiliated corporation (see also Notes 1, 4, 6, 8, 10, 11 and 13 for
additional related-party transactions).
23
<PAGE> 68
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT
The Company has a promissory note dated March 27, 1997, from MANUSA for
$138,500,000. Interest on the loan is calculated at a fluctuating rate equal to
LIBOR plus 32.5 basis points and is payable in quarterly installments starting
June 15, 1997. Principal and accrued interest are payable within 45 days of
demand. On June 15, 1997, the Company borrowed an additional $25,000,000
increasing the principal outstanding to $163,500,000.
During 1996 and through March 26, 1997 the Company had a revolving credit line
with Manufacturers Investment Corporation (MIC), an affiliated company. The
original term of the agreement was seven years. Each additional borrowing under
the agreement had a seven year term from the date of that additional borrowing.
Principal and interest was payable in quarterly installments. The interest rate
was LIBOR plus 32.5 basis points. This revolving credit line was replaced by the
demand promissory note. The balance outstanding for the borrowings at December
31, 1997 and 1996 is $163,500,000 and $137,864,052, respectively. Accrued
interest payable at December 31, 1997 and 1996 is $455,075 and $336,628,
respectively.
During 1995, the Company had a $150 million revolving credit and term loan
agreement with the Canadian Imperial Bank of Commerce and Deutsche Bank AG. The
amount outstanding at December 31, 1995 was in the form of a term loan of $107
million. In April of 1996, this loan was paid in full and the credit line with
MIC described above was established.
The Company received $20,000,000 from its former Parent, NAL, in the form of a
surplus note agreement with interest at 8%. This note agreement was assumed by
MLI upon the merger described in Note 1. The note and accrued interest are
subordinated to payments due to policyholders and other claimants. Principal and
interest payments can be made only upon prior approval of the Insurance
Department of the State of Delaware. Interest accrued at December 31, 1997 and
1996 was $3,191,231 and $1,591,232, respectively.
The Company and its insurance subsidiaries have unsecured lines of credit with
State Street Bank and Trust totaling $15,000,000, bearing interest at the bank's
money market rate plus 50 basis points. There were no outstanding advancements
under the line of credit at December 31, 1997 and 1996.
24
<PAGE> 69
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT (CONTINUED)
Interest expense and interest paid in 1997 were $11,072,791 and $9,354,343,
respectively. Interest expense and interest paid in 1996 were $8,774,643 and
$11,727,002, respectively. Interest expense and interest paid in 1995 were
$8,981,532 and $8,980,132.
9. OTHER INSURANCE EXPENSES
Other insurance expenses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Selling and administrative expenses $ 42,580,888 $29,207,640 $28,058,234
Subadvisory fees 26,364,212 15,882,860 12,007,940
General operating expenses 31,440,140 26,164,854 18,678,913
-------------------------------------------------
$100,385,240 $71,255,354 $58,745,087
=================================================
</TABLE>
10. RETIREMENT PLANS
MLI, and formerly NAL prior to the merger, sponsors a defined benefit pension
plan (the Plan) covering substantially all of the Company's employees. The
benefits are based on years of service and the employee's compensation during
the last five years of employment. MLI's funding policy is to contribute
annually the normal cost up to the maximum amount that can be deducted for
federal income tax purposes and to charge each subsidiary for its allocable
share of such contributions based on a percentage of payroll. No pension costs
were allocated to the Company in 1997, 1996 or 1995, as the Plan was subject to
the full funding limitation under the Internal Revenue Code.
The Company sponsors a defined contribution retirement plan pursuant to
regulation 401(k) of the Internal Revenue Code. All employees who are 21 years
old are eligible after one year of service. The Company contributes two percent
of base pay plus fifty percent of the employee savings contribution. The
employee savings contribution is limited to six percent of base pay. The Company
contributed $352,867, $306,989 and $209,423 in 1997, 1996 and 1995,
respectively.
25
<PAGE> 70
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
11. LEASES
The Company leases its office space and various office equipment under operating
lease agreements. For the years ended December 31, 1997, 1996 and 1995, the
Company incurred rent expense of $1,315,567, $1,224,352 and $1,461,475,
respectively. The Company negotiated a ten-year lease for new office space which
commenced in March 1992. In connection with the lease, the Company was required
to deposit $1,500,000 in an escrow account as security toward fulfilling the
future lease commitment. The balance of the escrow at December 31, 1997 and 1996
is $750,000 and $900,000, respectively. The lease for the offices of MNY expires
in 1999 and is subject to a renewal option at market rates prevailing at the
time of renewal.
The minimum lease payments associated with the office space and various office
equipment under operating lease agreements are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYMENTS
-------------
<S> <C>
Year ended:
1998 $1,285,808
1999 1,261,159
2000 1,197,368
2001 1,197,368
2002 197,651
----------
Total $5,139,354
==========
</TABLE>
12. INTEREST RATE SWAP
The Company entered into a variable-for-fixed interest rate swap in 1995 with
Canadian Imperial Bank of Commerce and Deutsche AG for the purpose of minimizing
exposure to fluctuations in interest rates on a portion of the variable-rate
outstanding debt held by the Company. This interest rate swap was prematurely
terminated in 1996 concurrent with the restructuring of the Company's revolving
line of credit resulting in a gain of $1,632,000 recorded as an offset to
interest expense.
26
<PAGE> 71
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
13. GUARANTEE AGREEMENT
Pursuant to a guarantee agreement, MLI unconditionally guarantees that it will,
on demand, make funds available to the Company for the timely payment of
contractual claims made under the fixed portion of the variable annuity
contracts issued by its subsidiaries. The guarantee covers the outstanding fixed
portion of variable annuity contracts, including those issued prior to the date
of the guarantee agreement.
14. DISCONTINUED OPERATIONS
On May 6, 1997, the Company signed a letter of intent to sell their mutual fund
operations. This disposal has been accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which among other
provisions, requires the plan of disposal to be carried out within one year. On
October 1, 1997, the Company sold its advisory operations for NAF and the
pre-existing deferred commission assets related to the mutual fund operations.
The Company realized a gain of $9,160,782, before applicable taxes of
$3,206,274. Included in the gain is a provision of $9,758, before applicable
taxes of $3,415, for the loss from continuing operations during the phase-out
period. Expenses of $223,444 were incurred on the sale and netted against the
realized gain.
The operating results related to discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Advisory fees, commissions
and distribution revenues $4,605,110 $12,444,560 $10,336,334
==============================================
Loss from operations before provision for
income (tax) benefit $ (217,129) $(1,246,074) $(2,249,058)
Provision for income (tax) benefit:
Current 75,995 766,353 1,921,114
Deferred (330,227) (1,133,944)
----------------------------------------------
75,995 436,126 787,170
Loss from operations, net of tax $ (141,134) $ (809,948) $(1,461,888)
==============================================
</TABLE>
27
<PAGE> 72
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
14. DISCONTINUED OPERATIONS (CONTINUED)
The sale agreement contains a contingent payment option where the Company could
earn an additional $1,000,000, before income taxes, if certain conditions are
met. This amount, if earned, would be reflected in discontinued operations
during 1998.
15. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements and allows companies to forego the
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by
each of these factors and do not purport to represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
Investments: Fair values for fixed maturities are obtained from an
independent pricing service. The fair value for marketable equity
securities are based on quoted market prices.
Short-term investment and cash and cash equivalents: The carrying amounts
reported in the consolidated balance sheets for short-term investments and
cash and cash equivalents approximate their fair values.
Policy loans: The carrying amount in the consolidated balance sheets for
policy loans approximates their fair value.
28
<PAGE> 73
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
15. FINANCIAL INSTRUMENTS (CONTINUED)
Due from reinsurers: The fair value of the amount due from reinsurers is
equal to deposits made under the contract and approximates the carrying
value.
Policyholder funds: Fair values of the Company's liabilities under
contracts not involving significant mortality risk (deferred annuities)
are estimated to be the cash surrender value, or the cost the Company
would incur to extinguish the liability.
Amounts on deposit from and payable to reinsurers: Amounts on deposit from
and payable to reinsurers reflects the net reinsured cash flow related to
financing agreements which is primarily a current liability. As such, fair
value approximates carrying value.
Notes payable to affiliates: Fair value is considered to approximate
carrying value as the majority of notes payable are at variable interest
rates that fluctuate with market interest rate levels.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $143,307,365 $143,307,365 $ 97,431,343 $ 97,431,343
Marketable equity securities 1,177 1,177
Short-term investments 14,991,793 14,991,793 4,294,370 4,294,370
Policy loans 3,275,654 3,275,654 637,096 637,096
Cash and cash equivalents 7,338,690 7,338,690 12,073,302 12,073,302
Due from reinsurers 553,833,869 553,833,869 573,418,610 573,418,610
Liabilities:
Policyholder funds 92,750,188 87,375,237 82,619,372 81,123,255
Amounts on deposit from and
payable to reinsurers 574,881,943 574,881,943 599,909,628 599,909,628
Notes payable to affiliates 183,955,075 183,955,075 158,200,680 158,200,680
</TABLE>
29
