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PROSPECTUS
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
SEPARATE ACCOUNT THREE
VENTURE SVUL
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
This prospectus describes the flexible premium survivorship variable life
insurance policy (the "Policy") issued by The Manufacturers Life Insurance
Company of America ("we" or "us"). The Policies provide lifetime insurance
protection together with flexibility as to the timing and amount of premium
payments, the investments underlying the Policy Value and the amount of
insurance coverage. This flexibility allows you, the policyowner or
policyowners, to pay premiums and adjust insurance coverage in light of your
current financial circumstances and insurance needs.
- Policy Value may be accumulated on a fixed basis or vary with the
investment performance of the sub-accounts of our Separate Account
Three (the "Separate Account").
- We invest the assets of each sub-account in shares of a
corresponding investment portfolio ("Portfolio") of a mutual fund,
Manufacturers Investment Trust (the "Trust"). The Trust Portfolios
available to you are set forth under the sub-heading "Eligible
Portfolios." We may add other sub-accounts and Portfolios in the
future. The accompanying Trust prospectus and the corresponding
statement of additional information more fully describe the Trust,
the Portfolios and their investment objectives.
You should ask one of our representatives if changing, or adding to, existing
insurance coverage would be advantageous. You should note that it may not be
advisable to purchase a Policy as a replacement for existing insurance.
Because of the substantial nature of the surrender charges in the early years,
the Policy is not suitable for short-term investment purposes. If you are
contemplating surrendering a Policy, you should pay special attention to the
sales charge limitation provisions described in this prospectus. These
limitations apply only during the first two years following the Policy date or
following an increase in face amount.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE SEPARATE ACCOUNT AND THE POLICY THAT YOU SHOULD
KNOW BEFORE INVESTING.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains material incorporated by reference and other information regarding
registrants that file electronically with the SEC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
Home Office: Service Office:
500 N. Woodward Avenue 200 Bloor Street east
Bloomfield Hills, Michigan 48304 Toronto, Ontario, Canada M4W 1E5
Telephone: 1-800-427-4546
(1-800-VARILIN[E])
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
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PROSPECTUS CONTENTS
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INTRODUCTION TO POLICIES................................................................1
GENERAL INFORMATION ABOUT US, THE SEPARATE ACCOUNT AND THE
TRUST...................................................................................7
Manufacturers Life of America And Manufacturers Life...............................7
Manufacturers Life of America's Separate Account
Three.............................................................................7
Manufacturers Investment Trust.....................................................7
DETAILED INFORMATION ABOUT THE POLICIES.................................................11
PREMIUM PROVISIONS....................................................................11
Policy Issue And Initial Premium...................................................11
Premium Allocation.................................................................12
Premium Limitations................................................................12
Short-Term Cancellation Right And
"Free Look" Provisions...........................................................12
PROVISIONS FOR AVOIDING LAPSE.........................................................13
No Lapse Guarantee.................................................................13
Death Benefit Guarantee............................................................14
INSURANCE BENEFIT.....................................................................15
The Insurance Benefit..............................................................15
Death Benefit Options..............................................................15
Death Benefit Option Changes.......................................................16
Face Amount Changes................................................................17
POLICY VALUES.........................................................................18
Policy Value.......................................................................18
Transfers Of Policy Value..........................................................19
Policy Loans.......................................................................20
Partial Withdrawals And Surrenders.................................................22
CHARGES AND DEDUCTIONS..................................................................22
Deductions From Premiums...........................................................23
Surrender Charges..................................................................23
Monthly Deductions.................................................................27
Administration Charge..............................................................27
Cost Of Insurance Charge...........................................................27
Mortality And Expense Risks Charge.................................................28
Other Charges......................................................................28
Special Provisions For Group Or Sponsored
Arrangements......................................................................30
Special Provisions For Exchanges...................................................31
The General Account................................................................31
OTHER GENERAL POLICY PROVISIONS.......................................................31
Policy Default.....................................................................31
Policy Reinstatement...............................................................32
Miscellaneous Policy Provisions....................................................32
OTHER PROVISIONS......................................................................33
Supplementary Benefits.............................................................33
Payment Of Proceeds................................................................33
Reports To Policyowners............................................................33
MISCELLANEOUS MATTERS.................................................................34
Portfolio Share Substitution.......................................................34
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Federal Income Tax Considerations..................................................34
Tax Status Of The Policy...........................................................35
Tax Treatment Of Policy Benefits...................................................36
The Company's Taxes................................................................38
Distribution Of The Policy..............................................................38
Responsibilities Assumed By Manufacturers Life.....................................39
Voting Rights......................................................................39
Directors And Officers Of Manufacturers Life of
America...........................................................................40
State Regulations..................................................................42
Pending Litigation.................................................................42
Additional Information.............................................................42
Independent Auditors...............................................................43
Impact of Year 2000................................................................43
Financial Statements....................................................................F-1
Appendices..............................................................................A-1
A. Sample Illustrations Of Policy Values, Cash Surrender
Values And Death Benefits..........................................................A-1
B. Definitions.........................................................................B-1
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION WHERE THE
OFFERING WOULD NOT BE LAWFUL. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED
IN THIS PROSPECTUS OR IN THE PROSPECTUS OR STATEMENT OF ADDITIONAL INFORMATION
OF THE TRUST. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT.
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INTRODUCTION TO POLICIES
The following summary describes the most important features of the Policy. It is
not a complete description. You should read all of this prospectus to fully
understand the provisions of the Policy.
GENERAL
The Policy provides a death benefit at the time of the death of the last
surviving life insured.
You may pay premiums at any time and in any amount, subject to certain
limitations.
You may instruct us how to allocate your premiums, net of certain deductions,
among one or more of our general account and the sub-accounts of the Separate
Account. We invest the premiums you allocate to the sub-accounts of the Separate
Account in shares of corresponding Portfolios of the Trust. You may change
allocation instructions at any time. You may also transfer amounts among the
sub-accounts subject to certain restrictions (see "Transfers of Policy Value").
If the Policy is owned by two or more persons, we require each policyowner to
authorize any action on the Policy.
The Portfolios currently available to you are set forth beginning on the inside
front cover of this prospectus. In the future, we may make available other
sub-accounts and Portfolios.
The Policy has a Policy Value reflecting premiums you have paid, the investment
performance of the accounts to which you have allocated premiums, and certain
charges for expenses and cost of insurance. You may obtain a portion of the
Policy Value by taking a policy loan, making a partial withdrawal, or fully
surrendering the Policy.
DEATH BENEFIT
DEATH BENEFIT OPTIONS. You choose one of two death benefit options:
- a death benefit equal to the face amount of the Policy, or
- a death benefit equal to the face amount of the Policy plus the
Policy Value.
Under either option, the death benefit may have to be increased to satisfy the
so-called "corridor percentage test" under the definition of life insurance in
the Internal Revenue Code of 1986, as amended (the "Code"). See DETAILED
INFORMATION ABOUT THE POLICIES: INSURANCE BENEFIT -- "The Insurance Benefit" and
"Death Benefit Options."
YOU MAY CHANGE THE DEATH BENEFIT OPTION. You may change the death benefit option
after the Policy has been in force for two years. See DETAILED INFORMATION ABOUT
THE POLICIES; INSURANCE BENEFIT -- "Death Benefit Option Changes."
YOU MAY INCREASE THE FACE AMOUNT. After the Policy has been in force for two
years, you may increase the face amount of the Policy once per policy year. You
may have to furnish satisfactory evidence of your insurability. Usually a Policy
will have new surrender charges after an increase. See DETAILED INFORMATION
ABOUT THE POLICIES; INSURANCE BENEFIT -- "Face Amount Changes."
YOU MAY DECREASE THE FACE AMOUNT. After the Policy has been in force for two
years, you may decrease the face amount once per policy year, except during the
two-year period following any increase in face amount. During the two-year
period following an increase, you may choose to decrease the increased face
amount. Such a decrease will result in the deduction of certain surrender
charges from Policy Value. Also during the two-year period following an
increase, the deferred sales charge for the increase is subject to the Policy's
sales charge limitation provisions. A decrease in face amount may result in
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the deduction of certain surrender charges from Policy Value. See DETAILED
INFORMATION ABOUT THE POLICIES; INSURANCE BENEFIT -- "Face Amount Changes."
DEATH BENEFIT GUARANTEE
A Death Benefit Guarantee is available under the Policies. As long as the Death
Benefit Guarantee Cumulative Premium Test or, where applicable, the Fund Value
Test is satisfied, and regardless of the investment performance of the
Portfolios underlying the Policy Value, we guarantee that the Policy will not go
into default:
- prior to the youngest life insured's attaining age 100 if Death
Benefit Option 1 is maintained throughout the life of the Policy
and
- prior to the youngest life insured's attaining age 85, or when he
or she would have attained age 85, if living, if Death Benefit
Option 2 is selected at any time.
NO LAPSE GUARANTEE
As long as the No Lapse Guarantee Cumulative Premium Test is satisfied, we
guarantee that the Policy will not go into default during the No Lapse Guarantee
Period. For lives insured with an average Issue Age of up to and including age
70, the No Lapse Guarantee Period is 10 years. For lives insured with an average
Issue Age of 71 and older, the No Lapse Guarantee Period decreases by one year
for each year the average age exceeds 70, until average age 77. From average age
77 to 85, the No Lapse Guarantee Period is fixed at three years. The No Lapse
Guarantee is not available to life insureds whose average Issue Age exceeds 85.
See DETAILED INFORMATION ABOUT THE POLICIES; INSURANCE BENEFIT - "No Lapse
Guarantee."
DOLLAR COST AVERAGING
Under our Dollar Cost Averaging ("DCA") program, you may designate an amount
which will be transferred at predetermined intervals from one Investment Account
into any other Investment Account(s) or the Fixed Account.
Each transfer under the DCA program must be of a minimum amount as set by us. We
may change this minimum at any time in our discretion. Currently, there is no
charge for this program if the Policy Value exceeds $15,000 on the date of
transfer. Otherwise, we will charge $5 for each transfer under this program. We
will deduct the charge from the value of the Investment Account out of which the
transfer occurs. If insufficient funds exist to effect a DCA transfer, including
the charge, if applicable, we will not effect the transfer and will so notify
you.
We may cease to offer this program as of 90 days after sending you written
notice of discontinuance.
ASSET ALLOCATION BALANCER TRANSFERS
Under our Asset Allocation Balancer program, you may designate an allocation of
Policy Value among Investment Accounts. At six-month intervals , we will move
amounts among the Investment Accounts as necessary to maintain your chosen
allocation.
Currently, there is no charge for this program. We may, however, institute a
charge on 90 days' notice to you. We may also cease to offer this program as of
90 days after sending you written notice of discontinuance.
PREMIUM PAYMENTS ARE FLEXIBLE
You may pay premiums at any time and in any amount, subject to certain
limitations. See DETAILED INFORMATION ABOUT THE POLICIES; PREMIUM PROVISIONS --
"Policy Issue" and "Premium Limitations."
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You must pay at least the Initial Premium to put the Policy in force. See
DETAILED INFORMATION ABOUT THE POLICIES; PREMIUM PROVISIONS -- "Policy
Limitations" and "Death Benefit Guarantee."
After the Initial Premium is paid there is no minimum premium required. However,
minimum premiums are required to maintain the Death Benefit Guarantee or the No
Lapse Guarantee. See DETAILED INFORMATION ABOUT THE POLICIES; INSURANCE BENEFIT
"Death Benefit Guarantee" and "No Lapse Guarantee." In addition, certain premium
payments may be required to keep the Policy from lapsing. See DETAILED
INFORMATION ABOUT THE POLICIES; OTHER GENERAL POLICY PROVISIONS -- "Policy
Default."
The Policy is subject to maximum premium limitations to ensure that it qualifies
as life insurance under the Code. See DETAILED INFORMATION ABOUT THE POLICIES;
PREMIUM PROVISIONS -- "Premium Limitations."
THE POLICY VALUE
The Policy has a Policy Value which reflects the following:
- the premium payments you have made, together with the investment
performance of the sub accounts to which you have allocated net
premiums; plus
- the interest we have credited to amounts allocated to our general
account; less
- any partial withdrawals you have made; and less
- any charges we have deducted under the Policy.
The Policy Value is the sum of the values in the Investment Accounts, the Fixed
Account and the Loan Account.
INVESTMENT ACCOUNT. We establish an Investment Account under the Policy for each
sub-account of the Separate Account to which you have allocated net premiums or
transferred amounts. An Investment Account measures the interest of the Policy
in the corresponding sub-account.
The value of each Investment Account varies each Business Day and reflects the
investment performance of the Portfolio shares held in the corresponding
sub-account. See DETAILED INFORMATION ABOUT THE POLICIES; POLICY VALUES --
"Policy Value."
FIXED ACCOUNT. The Fixed Account consists of that portion of the Policy Value
based on net premiums allocated to, and amounts transferred to, our general
account.
We credit interest on amounts in the Fixed Account at an effective annual rate
guaranteed to be at least 4%. See DETAILED INFORMATION ABOUT THE POLICIES;
POLICY VALUES - "The General Account."
LOAN ACCOUNT. When you take a policy loan, we will establish a Loan Account
under the Policy and transfer an amount from the Investment Accounts and the
Fixed Account to the Loan Account.
We will credit interest to amounts in the Loan Account at an effective annual
rate of at least 4%. The actual rate credited on loan amounts will be the rate
charged on loan amounts less an interest rate differential. See DETAILED
INFORMATION ABOUT THE POLICIES; POLICY VALUES -- "Policy Loans."
TRANSFERS ARE PERMITTED. You may transfer amounts among Investment Accounts and
the Fixed Account, subject to certain restrictions. See DETAILED INFORMATION
ABOUT THE POLICIES; POLICY VALUES -- "Policy Value."
We permit twelve transfers per policy year at no cost to you. Additional
transfers will cost $25 per transfer. We will treat requests for more than one
transfer at the same time as a single request.
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USING THE POLICY VALUE.
BORROWING AGAINST THE POLICY VALUE. You may borrow against the Policy Value. In
most states, the minimum loan amount is $500.
Loan interest will be charged on a fixed basis at an effective annual rate of
5.75%. See DETAILED INFORMATION ABOUT THE POLICIES; POLICY VALUES -- "Policy
Loans."
PARTIAL WITHDRAWAL OF THE POLICY VALUE. After a Policy has been in force for two
years, you may make a partial withdrawal of the Policy Value. In most states,
the minimum amount you may withdraw is $500. You may specify that the withdrawal
be made from a specific Investment Account or the Fixed Account.
A partial withdrawal may result in a reduction in the face amount of the Policy.
It may also result in the assessment of a portion of the surrender charges to
which the Policy is subject. See DETAILED INFORMATION ABOUT THE POLICIES; POLICY
VALUES -- "Partial Withdrawals and Surrenders" and CHARGES AND DEDUCTIONS --
"Surrender Charges."
SURRENDER OF THE POLICY FOR NET CASH SURRENDER VALUE. You may surrender the
Policy for its Net Cash Surrender Value. The Net Cash Surrender Value is equal
to the Policy Value less surrender charges, outstanding monthly deductions due
and the value of the Loan Account. Surrender of a Policy during the Surrender
Charge Period will usually result in our assessing surrender charges. See
DETAILED INFORMATION ABOUT THE POLICIES; POLICY VALUES -- "Partial Withdrawals
and Surrenders" and CHARGES AND DEDUCTIONS -- "Surrender Charges."
CHARGES AND DEDUCTIONS
1) DEDUCTIONS FROM PREMIUMS. We deduct:
- 2.35% of all premiums paid, for state and local taxes (except for
Oregon where no premium tax is deducted), and 1.25% of all premiums
paid for federal taxes, to the end of the tenth policy year. Currently
we expect this deduction to cease after the tenth policy year.
- a sales charge of 5.5% of the premiums paid, in the current policy
year, up to a maximum of the Target Premium for the current policy
year. This deduction is taken to the end of the tenth policy year. See
DETAILED INFORMATION ABOUT THE POLICIES; CHARGES AND DEDUCTIONS -
"Deductions from Premiums."
2) SURRENDER CHARGES. We deduct a deferred underwriting charge and a deferred
sales charge if:
- you surrender the Policy,
- you make a partial withdrawal in excess of the Withdrawal Tier Amount,
- you decrease the face amount of the Policy, or
- the Policy lapses.
The deferred underwriting charge is $4 for each $1,000 of face amount.
The maximum deferred sales charge is 100% of the lower of first-year premium or
the Target premium.
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3) MONTHLY DEDUCTIONS. We deduct monthly:
- an administration charge of $.04 per $1,000 of face amount , until the
later of the fifteenth policy year or the time the youngest life
insured reaches Attained Age 55, or when he or she would have attained
age 55, if living; thereafter the administration charge is 0. The
minimum monthly charge is $30; the maximum is $60;
- a charge for the cost of insurance;
- a charge for mortality and expense risks of 0.67% through the later of
the tenth policy year and the youngest life insured's reaching Attained
Age 55, or when he or she would have attained age 55, if living; we
currently expect the charge for mortality and expense risks thereafter
to be .0125%; and
- charge(s) for any supplementary benefit(s) added to the Policy.
If the Policy is still in force when the youngest life insured reaches or would
have reached age 100, we will not take any further monthly deductions from the
Policy Value.
4) OTHER CHARGES.
TRANSFER FEES. We impose charges on certain transfers of Policy Values,
including a $25 charge for each transfer in excess of twelve per policy year and
a $5 charge for each transfer under the DCA program if Policy Value does not
exceed $15,000. We treat multiple transfer requests received at the same time as
a single request. See DETAILED INFORMATION ABOUT THE POLICIES; POLICY VALUES --
"Transfers Of Policy Value."
INVESTMENT MANAGEMENT FEES AND EXPENSES
The Separate Account purchases shares of the Portfolios at net asset value. The
net asset value of those shares reflects investment management fees and certain
expenses. The Trust (excluding the Lifestyle Trusts) pays investment management
fees that range from 0.25% to 1.10% of the assets of the Portfolios. In
addition, the Portfolios' other expenses range from between 0.04% and 0.36% of
the assets of the Portfolios (excluding the Lifestyle Trusts). Because each
Lifestyle Trust invests in shares of other Portfolios, each bears its pro rata
share of the fees and expenses incurred by the other Portfolios.
The fees and expenses for each Portfolio for the Trust's last fiscal year are
shown in the Table of Investment Management Fees and Expenses. These fees and
expenses are described in detail in the accompanying Trust prospectus to which
reference should be made.
We reserve the right to charge or establish a provision for any federal, state
or local taxes that may be attributable to the Separate Account or our
operations with respect to the Policies. This charge or provision for taxes
would be in addition to the deductions for state, local and federal taxes
currently being made.
SUPPLEMENTARY BENEFITS
You may choose to add certain supplementary benefits to the Policy. These
supplementary benefits include an estate preservation rider and a policy split
option. We will deduct the cost of any supplementary benefits from the Policy
Value monthly. See DETAILED INFORMATION ABOUT THE POLICIES; OTHER PROVISIONS --
"Supplementary Benefits."
DEFAULT
Unless the Death Benefit Guarantee or No Lapse Guarantee is in effect, the
Policy will go into default if the Net Cash Surrender Value at the beginning of
any policy month would go below zero after deducting the monthly charges then
due. The Policy will not go into default if it qualifies for the Death Benefit
Guarantee or No Lapse Guarantee. We will send you a notice if the Policy goes
into default. You will have a grace period in which to make a premium payment
sufficient to bring
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the Policy out of default. If you do not pay the required premium during the
grace period, the Policy will terminate. See DETAILED INFORMATION ABOUT THE
POLICIES; PREMIUM PROVISIONS -- "Policy Default."
REINSTATEMENT
If your Policy is terminated, you may have it reinstated within either the
21-day or five-year period following the date of termination if certain
conditions are met. See DETAILED INFORMATION ABOUT THE POLICIES; PREMIUM
PROVISIONS -- "Policy Reinstatement."
FREE LOOK. You may return a Policy for a refund of premium within the latest of:
- 10 days after you receive the Policy,
- 45 days after you sign the application for the Policy, or
- 10 days after we mail or deliver a notice of this right of withdrawal.
If you request an increase in face amount which results in new surrender
charges, the "free look" provision will also apply to the increase. See DETAILED
INFORMATION ABOUT THE POLICIES; PREMIUM PROVISIONS -- "Short-Term Cancellation
Right and `Free Look' Provisions."
FEDERAL TAX MATTERS
We believe that a Policy issued on a standard risk class basis should meet the
definition of a life insurance contract as set forth in Section 7702 of the
Code. There is less guidance available to determine if a Policy issued on a
substandard basis would satisfy the Section 7702 definition, particularly if the
policyowner pays the full amount of premiums permitted under such a Policy. If
your Policy qualifies as a life insurance contract for federal income tax
purposes, you should not be deemed to be in constructive receipt of Policy Value
under the Policy until there is a distribution from the Policy. Moreover, death
benefits payable under a Policy should be completely excludable from the gross
income of the beneficiary. As a result, the beneficiary generally should not be
taxed on these proceeds. See DETAILED INFORMATION ABOUT THE POLICIES;
MISCELLANEOUS MATTERS - "Federal Income Tax Considerations (Tax Status of the
Policy)."
Under certain circumstances, a Policy may be treated as a "Modified Endowment
Contract" ("MEC"). If the Policy is a MEC, then all pre-death distributions,
including policy loans, will be treated first as a distribution of taxable
income and then as a return of investment in the Policy. In addition, prior to
age 59 1/2 any such distributions generally will be subject to a 10% penalty
tax. The Company has established appropriate procedures for monitoring the
compliance of policies with Section 7702A of the Code (the "MEC" Rules). See
DETAILED INFORMATION ABOUT THE POLICIES; MISCELLANEOUS MATTERS "Federal Income
Tax Considerations," "Tax Status of the Policy" and "Tax Treatment of Policy
Benefits."
If the Policy is not a MEC, distributions generally will be treated first as a
return of investment in the Policy and then a disbursement of taxable income.
Moreover, loans will not be treated as distributions. Select Loans may, however,
be treated as taxable distributions. If you are considering the use of
systematic Policy loans as one element of a comprehensive retirement income
plan, you should consult your personal tax adviser regarding the potential tax
consequences if such loans were to so reduce Policy Value such that the Policy
would lapse in the absence of additional payments. The premium payment necessary
to avert lapse would increase with the average age of the lives of the insured.
Finally, neither distributions nor loans under a Policy that is not a MEC are
subject to the 10% penalty tax. See DETAILED INFORMATION ABOUT THE POLICIES;
MISCELLANEOUS MATTERS - "Distributions from Policies Not Classified as Modified
Endowment Contracts."
The United States Congress has in the past considered, and in the future may
consider legislation that, if enacted, could change the tax treatment of life
insurance policies. In addition, the Treasury Department may amend existing
regulations or adopt new interpretations of existing laws; state tax laws or, if
the policyowner is not a United States resident, foreign tax laws may affect the
tax consequences to the policyowner, the lives insured or the beneficiary. These
laws may change from
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time to time without notice and, as a result, the tax consequences may be
altered. There is no way of predicting whether, when or in what form any such
change would be adopted. Any such change could have a retroactive effect
regardless of the date of enactment. We suggest that you consult a tax adviser.
ESTATE AND GENERATION-SKIPPING TAXES
The proceeds of the Policy may be taxable under Estate and Generation-Skipping
Tax provisions of the Code. You should consult your tax adviser regarding these
taxes.
GENERAL INFORMATION ABOUT US, THE SEPARATE ACCOUNT AND THE TRUST
MANUFACTURERS LIFE OF AMERICA AND MANUFACTURERS LIFE
We are a stock life insurance company governed by the laws of Michigan. We are
licensed to do business as a life insurance company in the District of Columbia
and all states of the United States except New York. We are an indirect
wholly-owned subsidiary of The Manufacturers Life Insurance Company
("Manufacturers Life"), a mutual life insurance company based in Toronto,
Canada. Manufacturers Life and its subsidiaries, together, constitute one of the
largest life insurance companies in North America and rank among the 60 largest
life insurers in the world as measured by assets.
We and Manufacturers Life have received the following ratings from independent
rating agencies: Standard and Poor's Insurance Rating Service -- AA+ (for
financial strength), A.M. Best Company -- A++ (for financial strength), Duff &
Phelps Credit Rating Co. -- AAA (for claims paying ability), and Moody's
Investors Service, Inc. - Aa2 (for financial strength). Neither we nor
Manufacturers Life guarantees the investment performance of the Separate
Account.
On January 20, 1998, the Board of Directors of Manufacturers Life announced that
it had asked the management of Manufacturers Life to prepare a plan for
conversion of Manufacturers Life from a mutual life insurance company to an
investor-owned, publicly traded stock company. Any demutualization plan for
Manufacturers Life is subject to the approval of its Board of Directors and
participating policy holders, as well as regulatory approval.
MANUFACTURERS LIFE OF AMERICA'S SEPARATE ACCOUNT THREE
We established the Separate Account on August 22, 1986. The Separate Account
holds assets that are segregated from all of our other assets. It is currently
used only to support variable life insurance policies.
We are the legal owner of the assets in the Separate Account. The income, gains
and losses of the Separate Account, whether or not realized, are, in accordance
with applicable contracts, credited to or charged against the Separate Account
without regard to our other income, gains or losses.
We will at all times maintain assets in the Separate Account with a total market
value at least equal to the reserves and other liabilities relating to variable
benefits under all policies participating in the Separate Account. These assets
may not be charged with liabilities which arise from any other business we
conduct. However, our obligations under the policies are part of our general
corporate obligations.
The Separate Account is registered with the SEC under the Investment Company Act
of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a
type of investment company which invests its assets in specified securities,
such as the shares of one or more investment companies, rather than in a
portfolio of unspecified securities. Registration under the 1940 Act does not
involve any supervision by the SEC of the management or investment policies or
practices of the Separate Account. For state law purposes the Separate Account
is treated as a part or division of us.
MANUFACTURERS INVESTMENT TRUST
We invest the assets of each sub-account of the Separate Account in shares of a
corresponding Portfolio of the Trust. The Trust, a mutual fund, is registered
under the 1940 Act as an open-end management investment company. It receives
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investment advisory services from Manufacturers Securities Services, LLC
("MSS"). MSS is a registered investment adviser under the Investment Advisers
Act of 1940. It too is an indirect wholly-owned subsidiary of Manufacturers
Life. The Trust also employs sub-advisers to perform the securities selection
process.
The Separate Account purchases and redeems shares of the Trust at net asset
value. Any dividend or capital gain distribution received from a Portfolio will
be reinvested immediately at net asset value in shares of that Portfolio and
retained as assets of the corresponding sub-account.
The list of the Trust's investment Portfolios available to you under the Policy,
brief summaries of their respective investment objectives are set forth below. A
full description of the Trust, its investment objectives, policies and
restrictions, the risks associated therewith, its expenses, and other aspects of
its operation is contained in the accompanying Trust prospectus. You should read
the Trust prospectus together with this prospectus.
We use shares of the Trust to support benefits under both variable annuity
contracts and variable life insurance policies that we or life insurance
companies affiliated with us issue. We also purchase shares through our general
account for certain limited purposes including providing initial portfolio seed
money. For a description of the procedures for handling potential conflicts of
interest arising from the funding of benefits under both types of policies, you
should review the accompanying Trust prospectus.
ELIGIBLE PORTFOLIOS
The Portfolios of the Trust in which you may invest net premiums under the
Policies are listed below, together with summary descriptions of their
respective investment objectives.
The PACIFIC RIM EMERGING MARKETS TRUST seeks long-term growth of capital by
investing in a diversified portfolio that is comprised primarily of common
stocks and equity-related securities of corporations domiciled in countries in
the Pacific Rim region.
The SCIENCE & TECHNOLOGY TRUST seeks long-term growth of capital. Current income
is incidental to the portfolio's objective.
The INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by investing
primarily in securities issued by foreign companies which have total market
capitalization or annual revenues of $1 billion or less. These securities may
represent companies in both established and emerging economies throughout the
world.
The AGGRESSIVE GROWTH TRUST (formerly, the Pilgrim Baxter Growth Trust) seeks
long-term capital appreciation by investing the portfolio's asset principally in
common stocks, convertible bonds, convertible preferred stocks and warrants of
companies which in the opinion of the subadviser are expected to achieve
earnings growth over time at a rate in excess of 15% per year. Many of these
companies are in the small and medium-sized category.
The EMERGING SMALL COMPANY TRUST (formerly, the Emerging Growth Trust) seeks
long-term growth of capital by investing, under normal market conditions, at
least 65% of the portfolio's total assets in common stock equity securities of
small capitalization ("small cap") growth companies. In general, companies in
which the portfolios invests will have market cap values of less than $1.5
billion at the time of purchase.
The SMALL COMPANY BLEND TRUST seeks long-term growth of capital and income by
investing the portfolio's assets, under normal market conditions, primarily in
equity and equity-related securities of companies with market capitalization
between $50 million and $1 billion.
The MID CAP GROWTH TRUST (formerly, the Small/Mid Cap Trust) seeks long-term
capital appreciation by investing the portfolio's assets principally in common
stocks, with emphasis on medium-sized and smaller emerging growth companies.
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<PAGE> 12
The MID CAP STOCK TRUST seeks long-term growth of capital by investing primarily
in equity securities of companies with market capitalizations that approximately
match the range of capitalization of the Wilshire Mid Cap 750 Index.
The OVERSEAS TRUST (formerly, the International Growth & Income Trust) seeks
growth of capital by investing, under normal market conditions, at least 65% of
the portfolios' assets in foreign securities (including American Depositary
Receipts (ADRs) and European Depositary Receipts (EDRs). The portfolios expects
to invest primarily in equity securities.
The INTERNATIONAL STOCK TRUST seeks long-term growth of capital by investing
primarily in common stocks of established, non-U.S. companies.
The INTERNATIONAL VALUE TRUST seeks long-term growth of capital by investing,
under normal market conditions, primarily in equity securities of companies
located outside the U.S., including in emerging markets.
The MID CAP BLEND TRUST (formerly, the Equity Trust) seeks growth of capital by
investing primarily in common stocks of United States issuers and securities
convertible into or carrying the right to buy common stocks.
The SMALL COMPANY VALUE TRUST seeks long term growth of capital by investing in
equity securities of smaller companies which are traded principally in the
markets of the United States.
The GLOBAL EQUITY TRUST seeks long-term capital appreciation by investing
primarily in equity securities throughout the world, including U.S. issuers and
emerging markets.
The GROWTH TRUST seeks long-term growth of capital by investing primarily in
large capitalization growth securities (market capitalizations of approximately
$1 billion or greater).
The LARGE CAP GROWTH TRUST (formerly, the Aggressive Asset Allocation Trust)
seeks long-term growth of capital by investing, under normal market conditions,
at least 65% of the portfolio's assets in equity securities of companies with
large market capitalizations.
The QUANTITATIVE EQUITY TRUST seeks to achieve intermediate and long-term growth
through capital appreciation and current income by investing in common stocks
and other equity securities of well established companies with promising
prospects for providing an above average rate of return.
The BLUE CHIP GROWTH TRUST seeks to achieve long-term growth of capital (current
income is a secondary objective) and many of the stocks in the portfolio are
expected to pay dividends.
The REAL ESTATE SECURITIES TRUST seeks to achieve a combination of long-term
capital appreciation and satisfactory current income by investing in real estate
related equity and debt securities.
The VALUE TRUST seeks to realize an above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in common and preferred stocks, convertible securities, rights and
warrants to purchase common stocks, ADRs and other equity securities of
companies with equity capitalizations usually greater than $300 million.
The EQUITY INDEX TRUST seeks to achieve investment results which approximate the
aggregate total return of publicly traded common stocks which are included in
the Standard & Poor's Composite Stock Price Index.
The GROWTH & INCOME TRUST seeks long-term growth of capital and income,
consistent with prudent investment risk, by investing primarily in a diversified
portfolio of common stocks of United States issuers which the subadviser
believes are of high quality.
The U.S. LARGE CAP TRUST seeks long-term growth of capital and income by
investing the portfolio's assets, under normal market conditions, primarily in
equity and equity-related securities of companies with market capitalization
greater than $500 million.
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<PAGE> 13
The EQUITY-INCOME TRUST seeks to provide substantial dividend income and also
long-term capital appreciation by investing primarily in dividend-paying common
stocks, particularly of established companies with favorable prospects for both
increasing dividends and capital appreciation.
The INCOME & VALUE TRUST (formerly, the Moderate Asset Allocation Trust) seeks
the balanced accomplishment of (a) conservation of principal and (b) long-tem
growth of capital and income by investing the portfolio's assets in both equity
and fixed-income securities. The subadviser has full discretion to determine the
allocation between equity and fixed-income securities.
The BALANCED TRUST seeks current income and capital appreciation by investing in
a balanced portfolio of common stocks, U.S. and foreign government obligations
and a variety of corporate fixed-income securities.
The HIGH YIELD TRUST seeks to realize an above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high yield debt securities, including corporate bonds and
other fixed-income securities.
The STRATEGIC BOND TRUST seeks a high level of total return consistent with
preservation of capital by giving its subadviser broad discretion to deploy the
portfolio's assets among certain segments of the fixed-income market as the
subadviser believes will best contribute to achievement of the portfolio's
investment objective.
The GLOBAL BOND TRUST (formerly, the Global Government Bond Trust) seeks to
realize maximum total return, consistent with preservation of capital and
prudent investment management by investing the portfolio's asset primarily in
fixed income securities denominated in major foreign currencies, baskets of
foreign currencies (such as the ECU),and the U.S. dollar.
The TOTAL RETURN TRUST seeks to realize maximum total return, consistent with
preservation of capital and prudent investment management by investing, under
normal market conditions, at least 65% of the portfolio's assets in a
diversified portfolio of fixed income securities of varying maturities. The
average portfolio duration will normally vary within a three- to six- year time
frame based on PIMCO's forecast for interest rates.
The INVESTMENT QUALITY BOND TRUST seeks a high level of current income
consistent with the maintenance of principal and liquidity, by investing
primarily in a diversified portfolio of investment grade corporate bonds and
U.S. Government bonds with intermediate to longer term maturities. The portfolio
may also invest up to 20% of its assets in non-investment grade fixed income
securities.
The DIVERSIFIED BOND TRUST (formerly, the Conservative Asset Allocation Trust)
seeks high total return as is consistent with the conservation of capital by
investing at least 75% of the portfolio's assets in fixed-income securities.
The U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current income
consistent with preservation of capital and maintenance of liquidity, by
investing in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
derivative securities such as collateralized mortgage obligations backed by such
securities.
The MONEY MARKET TRUST seeks maximum current income consistent with preservation
of principal and liquidity by investing in high quality money market instruments
with maturities of 397 days or less issued primarily by United States entities.
The LIFESTYLE AGGRESSIVE 1000 TRUST seeks to provide long-term growth of capital
(current income is not a consideration) by investing 100% of the Lifestyle
Trust's assets in other portfolios of the Trust ("Underlying Portfolios") which
invest primarily in equity securities.
The LIFESTYLE GROWTH 820 TRUST seeks to provide long-term growth of capital with
consideration also given to current income by investing approximately 20% of the
Lifestyle Trust's assets in Underlying Portfolios which invest
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<PAGE> 14
primarily in fixed income securities and approximately 80% of its assets in
Underlying Portfolios which invest primarily in equity securities.
The LIFESTYLE BALANCED 640 TRUST seeks to provide a balance between a high level
of current income and growth of capital with a greater emphasis given to capital
growth by investing approximately 40% of the Lifestyle Trust's assets in
Underlying Portfolios which invest primarily in fixed income securities and
approximately 60% of its assets in Underlying Portfolios which invest primarily
in equity securities.
The LIFESTYLE MODERATE 460 TRUST seeks to provide a balance between a high level
of current income and growth of capital with a greater emphasis given to high
income by investing approximately 60% of the Lifestyle Trust's assets in
Underlying Portfolios which invest primarily in fixed income securities and
approximately 40% of its assets in Underlying Portfolios which invest primarily
in equity securities.
The LIFESTYLE CONSERVATIVE 280 TRUST seeks to provide a high level of current
income with some consideration also given to growth of capital by investing
approximately 80% of the Lifestyle Trust's assets in Underlying Portfolios which
invest primarily in fixed income securities and approximately 20% of its assets
in Underlying Portfolios which invest primarily in equity securities.
DETAILED INFORMATION ABOUT THE POLICIES
Unless otherwise indicated or required by the context, the discussion throughout
this prospectus assumes that the Policy has not gone into default, there is no
outstanding Policy Debt, and the death benefit is not determined by the corridor
percentage test (see "Death Benefit Options").
PREMIUM PROVISIONS
POLICY ISSUE AND INITIAL PREMIUM
To purchase a Policy, you must submit a completed application. We will generally
issue a Policy only if it has a face amount of at least $250,000. Generally, we
issue a Policy only to persons between ages 0 and 90. In certain circumstances
we may in our sole discretion issue a Policy to persons above age 90. Before
issuing a Policy, we will require evidence of insurability satisfactory to us.
Each life insured will have a risk class of preferred/non-smoker,
preferred/smoker, standard/non-smoker or standard/smoker as determined by our
underwriting rules. We may issue Policies to persons who fail to meet standard
underwriting requirements by assigning an additional rating.
We will accept an application if it meets our insurance underwriting rules. Each
Policy has an effective date and a policy date. The effective date is the date
we become obligated under the Policy and take the first monthly deductions,
other than for backdated policies (which are described below). The policy date
is the date used to calculate the insurance age. It is also the date from which
policy years, policy months and policy anniversaries are all determined.
If an application is accompanied by a check for at least the Initial Premium and
we accept the application, the policy date will be the date we receive the
application and check at our Service Office. The effective date will be the date
our underwriters approve issuance of the Policy. If an application is
accompanied by a check for at least the Initial Premium, the life insured may be
covered under the terms of a conditional insurance agreement until the effective
date.
If an application that we accept is not accompanied by a check for at least the
Initial Premium, we will issue the Policy with a policy date which is seven days
after issuance of the Policy (the "issue date") and with an effective date which
is the date our Service Office receives at least the Initial Premium. In certain
situations a different policy date may be used. We must receive the Initial
Premium within 60 days after the policy date; however, we may require the
Initial Premium within 30 days on Policies issued with Additional Ratings. If
the Initial Premium is not paid or if the application is rejected, we will
cancel the Policy and return any premiums paid to the applicant.
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<PAGE> 15
Under certain circumstances we may issue a Policy with a backdated policy date.
A Policy will not be backdated more than six months (12 months where allowed by
state regulation) before the date of the application for the Policy. Monthly
deductions will be made for the period the policy date is backdated.
We will credit interest on all premiums received prior to the effective date of
a Policy from the date of receipt at the rate of return then being earned on
amounts allocated to the Money Market Trust. On the effective date, we will
allocate the premiums paid plus interest credited, net of deductions for
federal, state and local taxes and the premium charge, among the Investment
Accounts and/or the Fixed Account in accordance with your instructions.
We will allocate all premiums received on or after the effective date of the
Policy among the Investment Accounts or the Fixed Account as of the date the
premiums were received at our Service Office. Monthly deductions are made as of
the policy date and at the beginning of each policy month thereafter. However,
if due prior to the effective date on a backdated policy, they will be made as
of the effective date instead of the dates they were due.
PREMIUM ALLOCATION
You may allocate your premium payments, net of deductions, to either the Fixed
Account or to one or more of the Investment Accounts. Amounts allocated to the
Fixed Account will accumulate at an annual rate of interest equal to at least
4%. We will invest amounts allocated to the Investment Accounts in shares of the
Portfolios held by the corresponding sub-accounts of the Separate Account. Your
allocation must be made as a percentage of the Net Premium. The percentage may
be any whole number between zero and 100, provided the total percentage equals
100. You may change your allocation at any time without charge. The change will
take effect as of the date a written or telephone request for change, in a
format satisfactory to us, is received at our Service Office.
PREMIUM LIMITATIONS
After you pay the Initial Premium, you may pay additional premiums at any time
and in any amount during the lifetime of any of the lives insured subject to
certain limitations. After the Initial Premium, all premiums must be paid to our
Service Office. Unlike traditional insurance, premiums are not payable at
specified intervals or in specified amounts. Your Policy will be issued with a
Planned Premium which is based on the amount of premium you wish to pay. We
recommend as the Planned Premium a premium amount that will satisfy the
requirements of the No Lapse Guarantee Cumulative Premium Test or the Death
Benefit Guarantee.
We will send you notices setting forth the Planned Premium at the payment
interval you select, unless you are making payments pursuant to a pre-authorized
payment plan. However, you are under no obligation to make the indicated
payment.
We will not accept any premium payment which is less than $50, unless the
premium is payable pursuant to a pre-authorized payment plan. In that case we
will accept a payment of as little as $10. We may change these as of 90 days
after giving you written notice. The Policies also limit the sum of the premiums
that may be paid at any time in order to preserve the qualification of the
Policies as life insurance for federal tax purposes. These limitations are set
forth in each Policy. We reserve the right to refuse or refund any premium
payments that may cause a Policy to fail to qualify as life insurance under
applicable tax law.
SHORT-TERM CANCELLATION RIGHT AND "FREE LOOK" PROVISIONS
You may return a Policy for a refund of the premium within the latest of:
- 10 days after it is received,
- 45 days after the application for the Policy is signed, or
- 10 days after we mail or deliver a notice of right of withdrawal.
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<PAGE> 16
The Policy can be mailed or delivered to our agent who sold it or to our Service
Office. Immediately on such delivery or mailing, the Policy is deemed void from
the beginning. Within seven days after receipt of the returned Policy at our
Service Office, we will refund any premium paid. We reserve the right to delay
the refund of any premium paid by check until the check has cleared.
If you request an increase in face amount which results in new surrender
charges, you will have the same rights as described above to cancel the
increase. If you cancel the increase, the Policy Value and the surrender charges
will be recalculated to the amounts they would have been had the increase not
taken place. You may request a refund of all or any portion of premiums paid
during the free look period, and the Policy Value and the surrender charges will
be recalculated to the amounts they would have been had the premiums not been
paid.
PROVISIONS FOR AVOIDING LAPSE
NO LAPSE GUARANTEE
In those states where it is permitted, you may elect the No Lapse Guarantee. If
elected, as long as the No Lapse Guarantee Cumulative Premium Test (see below)
is satisfied during the No Lapse Guarantee Period, we guarantee that the Policy
will not go into default (see OTHER GENERAL PROVISIONS -- "Policy Default"). Our
guarantee applies even if a combination of Policy loans, adverse investment
experience and other factors causes the Policy's Net Cash Surrender Value to be
insufficient to meet the monthly deductions due at the beginning of a policy
month.
The No Lapse Guarantee Period terminates at the end of the tenth policy year for
lives insured with an average Issue Age up to and including 70. For lives
insured with an average Issue Age of 71 and older, the No Lapse Guarantee Period
decreases by one year for each year the average age exceeds 70, until the
average age reaches 77. For lives insured with an average Issue Age between 77
and 85, the No Lapse Guarantee Period is three years. The No Lapse Guarantee is
not offered to lives insured whose average Issue Age exceeds 85.
While the No Lapse Guarantee is in effect, we will determine at the beginning of
each policy month whether the No Lapse Guarantee Cumulative Premium Test,
described below, has been satisfied. If it has not been satisfied, we will
notify you and allow a 61-day grace period in which you may make a premium
payment sufficient to keep the No Lapse Guarantee in effect. This required
payment, as described in the notification to you, will be equal to the
outstanding premium required to meet the No Lapse Guarantee Cumulative Premium
Test as of the date the No Lapse Guarantee was not satisfied plus the Monthly No
Lapse Guarantee Premium due for the next two policy months.
If the required payment is not received by the end of the grace period, the No
Lapse Guarantee will terminate. Thereafter, the Policy may go into default. A
death benefit option change will also terminate the No Lapse Guarantee if it is
in effect at the time of the change. The No Lapse Guarantee cannot be reinstated
after it has been terminated. See OTHER GENERAL POLICY PROVISIONS -- "Policy
Default," and INSURANCE BENEFIT -- "Death Benefit Option Changes."
NO LAPSE GUARANTEE CUMULATIVE PREMIUM TEST. The No Lapse Guarantee Cumulative
Premium Test is satisfied if, as of the beginning of the policy month, the sum
of all premiums paid to date less any partial withdrawals and less any Policy
Debt is at least equal to the sum of the Monthly No Lapse Guarantee Premiums due
since the policy date.
The Monthly No Lapse Guarantee Premium is one-twelfth of the No Lapse Guarantee
Premium.
The No Lapse Guarantee Premium is equal to the Target Premium and any Additional
Rating, if applicable. The No Lapse Guarantee Premium is set forth in the
Policy. It is subject to change if you change the face amount of the Policy (see
INSURANCE BENEFIT -- "Face Amount Changes"), or if there is any change in the
supplementary benefits added to the Policy or in the risk class of any life
insured.
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<PAGE> 17
DEATH BENEFIT GUARANTEE
If permitted by state law and if you elect, we will guarantee that the Policy
will not go into default if the Death Benefit Guarantee Cumulative Premium Test
(see below) is satisfied. (See OTHER GENERAL POLICY PROVISIONS -- "Policy
Default".) Our guarantee applies even if a combination of policy loans, adverse
investment experience or other factors causes the Policy's Net Cash Surrender
Value to be insufficient to meet the monthly deductions due at the beginning of
a policy month.
If after the tenth policy year the Death Benefit Guarantee Cumulative Premium
Test is not satisfied but the Fund Value Test (see below) is satisfied, we will
keep the Death Benefit Guarantee in effect.
This Death Benefit Guarantee will expire at the end of a policy year specified
in the Policy. Currently, the specified policy year is
(i) the year in which the youngest life insured reaches or would have
reached Attained Age 100 if Death Benefit Option 1 is maintained
throughout the life of the Policy, and
(ii) the year in which the youngest life insured reaches or would have
reached Attained Age 85 if Death Benefit Option 2 is selected at any
time.
While the Death Benefit Guarantee is in effect, we will determine at the
beginning of each policy month whether the Death Benefit Guarantee Cumulative
Premium Test or the Fund Value Test has been satisfied. If neither has been
satisfied, we will notify you and allow a 61-day grace period in which you may
make a premium payment sufficient to keep the Death Benefit Guarantee in effect.
The required payment stated in the notification will be equal to the outstanding
premium required to meet the Death Benefit Guarantee Cumulative Premium Test or
the Fund Value Test at the date neither test was satisfied, plus the Monthly
Minimum Death Benefit Guarantee Premium due for the next two policy months. If
the required payment is not received by the end of the grace period, the Death
Benefit Guarantee will terminate, and the Policy may go into default.
Once the Death Benefit Guarantee is terminated, it cannot be reinstated.
POLICIES WITH FACE AMOUNTS UNDER $250,000. If permitted by state law and you
elect, we will guarantee that a Policy issued by us with a face amount less than
$250,000 at issue or after face amount decrease will not go into default during
the first three policy years if the Cumulative Premium Test is satisfied. Our
guarantee applies even if a combination of policy loans, adverse investment
experience or other factors should causes the Policy's Net Cash Surrender Value
to be insufficient to meet the monthly deductions due at the beginning of a
policy month. After the third policy anniversary, the Death Benefit Guarantee
terminates.
DEATH BENEFIT GUARANTEE CUMULATIVE PREMIUM TEST. The Death Benefit Guarantee
Cumulative Premium Test is satisfied if at the beginning of each policy month
the sum of all premiums paid to date less any partial withdrawals and any Policy
Debt is at least equal to the sum of the Monthly Death Benefit Guarantee
Premiums due since the policy date.
The Death Benefit Guarantee Premium is set forth in the Policy. It is subject to
change if you change the face amount of the Policy or the death benefit option
(see -- "Death Benefit Option Changes" and "Face Amount Changes") or if there is
any change in the supplementary benefits added to the Policy or in the risk
class of any life insured.
FUND VALUE TEST. The Fund Value Test is applicable after the end of the tenth
year of the Policy. The Fund Value Test is satisfied if at the beginning of each
policy month the Net Policy Value is greater than or equal to the Gross Single
Premium.
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<PAGE> 18
INSURANCE BENEFIT
THE INSURANCE BENEFIT
If the Policy is in force at the time of the last surviving life insured's
death, we will pay , upon receipt of due proof of death, an insurance benefit
based on the death benefit option that you select. The amount payable will be
the death benefit under the selected option, plus any amounts payable under any
supplementary benefits added to the Policy, less the value of the Loan Account
at the date of death. The insurance benefit will be paid in one sum unless we
and the beneficiary agree upon another form of settlement. If the insurance
benefit is paid in one sum, we will pay interest from the date of death to the
date of payment. If the last surviving life insured should die after our receipt
of a request for surrender, no insurance benefit will be payable, and we will
pay only the Net Cash Surrender Value.
DEATH BENEFIT OPTIONS
You may select one of two death benefit options -- Option 1 and Option 2.
Under Option 1 the death benefit is the greater of
- the face amount of the Policy, or
- the Policy Value multiplied by the applicable percentage in the table
set forth below.
Under Option 2 the death benefit is the greater of
- the face amount of the Policy plus the Policy Value, or
- the Policy Value multiplied by the applicable percentage in the
following table set forth below.
Age in the table refers to the age of the youngest life insured or the age such
person would have reached.
<TABLE>
<CAPTION>
- ----------------- ------------- ---------- ----------- -------------- ---------- -------------- -------------
AGE CORRIDOR AGE CORRIDOR AGE CORRIDOR
PERCENTAGE PERCENTAGE PERCENTAGE
- ----------------- ------------- ---------- ----------- -------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
40 & below 250% 53 164 67 118
41 243 54 157 68 117
42 236 55 150 69 116
43 229 56 146 70 115
44 222 57 142 71 113
45 215 58 138 72 111
58 138 59 134 73 109
46 209 60 130 74 107
47 203 61 128 75-90 105
48 197 62 126 91 104
49 191 63 124 92 103
50 185 64 122 93 102
51 178 65 120 94 101
52 171 66 119 95 & above 100
</TABLE>
Regardless of which death benefit option is in effect, the relationship of
Policy Value to death benefit will change whenever we use the "corridor
percentages" to determine the amount of the death benefit. This will occur
whenever multiplying the Policy Value by the applicable percentage set forth in
the above table results in a greater death benefit than would otherwise apply
under the selected option.
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<PAGE> 19
For example, assume the youngest life insured under a Policy with a face amount
of $400,000 has an Attained Age of 40. If Option 1 is in effect, the corridor
percentage will produce a greater death benefit whenever the Policy Value
exceeds $160,000 (250% x $160,000 = $400,000). If the Policy Value is less than
$160,000, an incremental change in Policy Value will have no effect on the death
benefit. If the Policy Value is greater than $160,000, an incremental change in
Policy Value will result in a change in the death benefit by a factor of 2.5.
Thus, if the Policy Value were to increase to $160,010, the death benefit would
be increased to $400,025 (250% x $160,010 = $400,025).
If Option 2 were in effect in the above example, the corridor percentage would
produce a greater death benefit whenever the Policy Value exceeded $266,667
(250% x $266,667 = $666,667). At that point the death benefit produced by
multiplying the Policy Value by 250% would result in a greater amount than
adding the Policy Value to the face amount of the Policy. If the Policy Value is
less than $266,667, an incremental change in Policy Value will have a
dollar-for-dollar effect on the death benefit. If the Policy Value is greater
than $266,667, an incremental change in Policy Value will result in a change in
the death benefit by a factor of 2.5 in the same manner as would be the case
under Option 1 when the corridor percentage determined the death benefit.
DEATH BENEFIT OPTION CHANGES
Your initial selection of the death benefit option is made in the application.
After the Policy has been in force for two years, you may change the death
benefit option. The change will be effective as of the next policy anniversary
following a request. Your written request for a change must be received by us at
least 30 days prior to a policy anniversary in order to become effective on that
date. We reserve the right to limit a request for change if the change would
cause the Policy to fail to qualify as life insurance for tax purposes.
A change in death benefit option will result in a change in the Policy's face
amount. The change in face amount is required to avoid any change in the amount
of the death benefit.
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------------------------------------------
<S> <C>
CHANGE TO OPTION 2 If the change in death benefit is from OPTION 1 TO OPTION 2, the new face
amount will be equal to the face amount prior to the change minus the
NEW FACE AMOUNT = Policy Value on the effective date of the change. Thereafter, the death
OLD FACE AMOUNT benefit will vary with changes in the policy Value. A change to Option 2
MINUS will not be allowed if it would cause the face amount of the Policy to go
POLICY VALUE below the minimum face amount of $250,000. A change to Option 2 will
shorten the Death Benefit Guarantee Period to the year in which the
younger Insured reaches average Attained Age 85.
- -------------------------------- ----------------------------------------------------------------------------
CHANGE TO OPTION 1 If the change in death benefit is from OPTION 2 TO OPTION 1, the new face
amount will be equal to the face amount prior to the change plus the
NEW FACE AMOUNT = Policy Value on the effective date of the change. The increase in face
OLD FACE AMOUNT amount resulting from a change to Option 1 will not affect the amount of
PLUS surrender charges to which a Policy may be subject. We have the right to
POLICY VALUE require satisfactory evidence of insurability before permitting a change
from Option 2 to Option 1. We do not currently require evidence of
insurability when making this change.
- -------------------------------- ----------------------------------------------------------------------------
</TABLE>
If you wish to have level insurance coverage, you should generally select Option
1. Under Option 1, increases in Policy Value usually will reduce the net amount
of risk under a Policy which will reduce cost of insurance charges. This means
that favorable investment performance should result in a faster increase in
Policy Value than would occur under an identical Policy with Option 2 in effect.
However, the larger Policy Value which may result under Option 1 will not affect
the amount of the death benefit unless the corridor percentages are used to
determine the death benefit.
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<PAGE> 20
If you want to have the Policy Value reflected in the death benefit so that any
increases in Policy Value will increase the death benefit, you should generally
select Option 2. Under Option 2, the net amount at risk will remain level unless
the corridor percentages are used to determine death benefit, in which case
increases in Policy Value will increase the net amount at risk.
FACE AMOUNT CHANGES
Subject to certain limitations, you may increase or decrease the face amount of
your Policy. A change in face amount may affect the Death Benefit Guarantee
Premium, the No Lapse Guarantee Premium, the Guideline Single Premium , the
Guideline Level Premium and the monthly deductions and surrender charges (see
CHARGES AND DEDUCTIONS).
MINIMUM CHANGES. Currently, each increase in face amount (other than an increase
for a corporate-owned policy) must be at least $100,000. Each decrease in face
amount (other than a decrease resulting from a partial withdrawal or a decrease
for a corporate-owned policy) currently must be at least $50,000. We reserve the
right to modify this minimum requirement as of 90 days after we give you written
notice of such modification. We also reserve the right to limit a change in face
amount to the extent necessary to prevent the Policy from failing to qualify as
life insurance for tax purposes.
INCREASES. After the Policy has been in force for two years, you may increase
the face amount of your Policy once per policy year, subject to satisfactory
evidence of insurability. Increases in corporate-owned Policies may be made in
any policy year and with no minimum amount requirement. An increase will become
effective at the beginning of the next policy month following the date we
approve the requested increase. We reserve the right to refuse your request for
an increase if the Attained Age of any of the lives insured still living at the
effective date of the increase would be greater than the maximum issue age for
new Policies at that time.
In addition, subject to certain conditions as set forth in the Policy, you may
be entitled to increase the face amount of he Policy by a certain amount without
further evidence of insurability if there is an increase in federal estate taxes
within three years of the policy date. You are entitled to this benefit if both
insureds are standard risks and under age 75 at the time of issue. The benefit
may not be available If you are considered a substandard risk in accordance with
our normal underwriting practices.
An increase in face amount will usually subject the Policy to new surrender
charges. The new surrender charges will be computed as if a new Policy were
being purchased for the increase in face amount. For purposes of determining the
new deferred sales charge, a portion of the Policy Value at the time of the
increase, and a portion of the premiums paid on or subsequent to the increase,
will be deemed to be premiums attributable to the increase. See CHARGES AND
DEDUCTIONS -- "Surrender Charges."
Any increase in face amount, following a prior decrease in face amount, to a
level less than the highest face amount previously in effect will have no effect
on the surrender charges to which the Policy is subject. This is because
surrender charges, if applicable, will have been assessed in connection with the
prior decrease in face amount. The insurance coverage eliminated by the decrease
of the oldest face amount will be deemed to be restored first. As with the
purchase of a Policy, you will have free look and sales charge limitation rights
with respect to any increase resulting in new surrender charges.
An additional premium may be required for a face amount increase, and new Death
Benefit Guarantee Premiums, No Lapse Guarantee Premiums, Guideline Annual
Premium and Target Premium will be determined.
DECREASES. After the Policy has been in force for two years, you may decrease
the face amount of your Policy once per policy year. For corporate-owned
Policies, decreases may be made in any policy year, with no minimum requirement.
However, during the two-year period following an increase in face amount, you
may choose to cancel the increase in face amount and have the deferred sales
charge for the increase reduced by applicable limitations on sales charges
attributable to the increase. A decrease in face amount will become effective at
the beginning of the next policy month following the receipt of a properly
executed request. A decrease will not be allowed if it would cause the face
amount to go below the minimum face amount of $250,000.
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<PAGE> 21
Usually, we will deduct surrender charges from the Policy Value whenever a
decrease in face amount is made during the Surrender Charge Period. See CHARGES
AND DEDUCTIONS -- "Surrender Charges." For purposes of determining surrender and
cost of insurance charges, a decrease will reduce face amount in the following
order: first (a) the face amount provided by the most recent increase, then (b)
the face amounts provided by the next most recent increases successively, and
finally (c) the initial face amount.
POLICY VALUES
POLICY VALUE
A Policy has a Policy Value. You may access a portion of the Policy Value by
making a policy loan or partial withdrawal or by surrendering the Policy. See
"Policy Loans" and "Partial Withdrawals And Surrenders" below. The Policy Value
may also affect the amount of the death benefit. See INSURANCE BENEFIT -- "Death
Benefit Options." The Policy Value at any time is equal to the sum of the values
in the Investment Accounts, the Fixed Account and the Loan Account. The
following discussion relates only to the Investment Accounts. Policy loans are
discussed under "Policy Loans" and the Fixed Account is discussed under "The
General Account." The portion of the Policy Value based on the Investment
Accounts is not guaranteed and will vary each Business Day with the investment
performance of the underlying Portfolio.
We establish an Investment Account under the Policy for each sub-account of the
Separate Account to which you allocate net premiums or transfer amounts. Each
Investment Account measures the interest of the Policy in the corresponding
sub-account. The value of the Investment Account for a particular sub-account is
equal to the number of units of that sub-account credited to the Policy times
the value of such units.
We credit sub-account units to a Policy whenever you allocate net premiums or
transfer amounts to that sub-account. Sub-account units are canceled whenever
amounts are deducted, transferred or withdrawn from the sub-account. The number
of units credited or canceled for a specific transaction is based on the dollar
amount of the transaction divided by the value of the unit at the end of the
Business Day on which the transaction occurs. The number of units credited with
respect to a premium payment is based on the applicable unit values at the end
of the Business Day on which the premium is received at our Service Office or
other office or entity so designated by us.
Units are valued at the end of each Business Day. A Business Day is deemed to
end at the time of the determination of the net asset value of the underlying
Portfolio shares. When an order involving the crediting or canceling of units is
received after the end of a Business Day or on a day which is not a Business
Day, the order will be processed on the basis of unit values determined at the
end of the next Business Day. Similarly, any determination of Policy Value,
Investment Account value or death benefit to be made on a day which is not a
Business Day will be made at the end of the next Business Day.
The value of a unit of each sub-account was initially fixed at $10. For each
subsequent Business Day the unit value is determined by multiplying the unit
value for the preceding Business Day by the "net investment factor" for the
particular sub-account for that subsequent Business Day. The net investment
factor for a sub-account for any Business Day is equal to (a) divided by (b),
where:
(a) is the net asset value of the underlying Portfolio shares held by that
sub-account as of the end of such Business Day before any policy
transactions are made for that day;
(b) is the net asset value of the underlying Portfolio shares held by that
sub-account as of the end of the immediately preceding Business Day
after all policy transactions have been made for that day.
We reserve the right to adjust the above formula for any taxes determined by us
to be attributable to the operations of the sub-account.
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<PAGE> 22
TRANSFERS OF POLICY VALUE
You may transfer amounts from one or more Investment Accounts or our general
account to other Investment Accounts and/or the general account. You are
permitted to make twelve transfers each policy year free of charge. If you make
additional transfers in a policy year, we will charge you $25 per transfer. We
will assess this charge against the Investment Account or Fixed Account from
which the amount is being transferred. For this purpose all transfer requests
which we receive from you on the same Business Day will be treated as a single
transfer request.
The most that you may transfer from the Fixed Account in any one policy year is
the greater of $500 or 15% of the Fixed Account value as of the previous policy
anniversary. Any transfer which involves a transfer out of the Fixed Account may
not involve a transfer to the Investment Account for the Money Market Trust.
Your transfer request must be in a format satisfactory to us. It must be in
writing unless you have a currently valid telephone transfer authorization form
on file with us. Generally, we will not be liable for following telephone
instructions that we reasonably believe to be genuine. We will employ reasonable
procedures to confirm that telephone instructions are genuine. Those procedures
will consist of confirming that a valid telephone authorization form is on file,
tape recording all telephone transactions and providing written confirmation of
the instructions. We may be liable for any losses resulting from unauthorized or
fraudulent telephone transfers if we fail to follow reasonable procedures.
You may effectively convert your Policy to a fixed benefit Policy by
transferring the Policy Value in all of the Investment Accounts to the Fixed
Account and by changing your allocation of net premiums entirely to the Fixed
Account. As long as the entire Policy Value is allocated to the Fixed Account,
the Policy Value, other values based thereon and the death benefit will be
determinable and guaranteed. This means that future values and minimum levels of
benefits can be computed using guaranteed charges, guaranteed interest rate and
the guaranteed Mortality Table for a given death benefit option, face amount of
insurance and premium payment. Actual values will never be less than the minimum
guaranteed values provided the entire Policy Value remains in the Fixed Account.
The Investment Account values to be transferred to the Fixed Account will be
determined as of the Business Day on which we receive the request for
conversion. No change in the issue age, risk classes of the lives insured or
face amount will result from a conversion. You may transfer any or all of the
Policy Value to the Fixed Account at any time, even if a prior transfer has been
made during the policy month. After the conversion has been effected, you may
again transfer all or part of the Policy Value back into the Investment Accounts
and/or allocate net premiums to the Investment Accounts. The Policy will then
cease to be considered a fixed-benefit Policy. Transfers from the Fixed Account
will be subject to the limitations stated above.
DOLLAR COST AVERAGING. Under our DCA program, you may designate an amount which
will be transferred at predetermined intervals from one Investment Account into
any other Investment Account(s) or the Fixed Account. Each transfer under the
DCA program must be of a minimum amount set by us. We may change this minimum at
any time in our discretion. Currently, no charge will be made for this program
if the Policy Value exceeds $15,000 on the date of transfer. Otherwise, there
will be a charge of $5 for each transfer. We will deduct the charge from the
value of the Investment Account out of which the transfer is made. If there are
insufficient funds to effect a DCA transfer, including the charge, if
applicable, we will not effect the transfer and will notify you of that fact. We
reserve the right to cease to offer this program on 90 days' written notice.
ASSET ALLOCATION BALANCER TRANSFERS. We offer policyowners the ability to have
amounts automatically transferred among stipulated Investment Accounts to
maintain an allocated percentage in each stipulated Investment Account.
Under the Asset Allocation Balancer program you designate an allocation of
Policy Value among Investment Accounts. At six month intervals, beginning six
months after the policy date, we will move amounts among the Investment Accounts
as necessary to maintain your chosen allocation. A change to your premium
allocation instructions will automatically result in a change in Asset
Allocation Balancer instructions so that the two are identical unless you
instruct us differently or a DCA request is in effect. Currently, we make no
charge for this program; however, we reserve the right to institute a charge on
90 days' written notice.
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<PAGE> 23
We may cease to offer this program on 90 days' written notice.
POLICY LOANS
While the Policy is in force and has a loan value, you may borrow against your
Policy Value. The Policy serves as the only security for the loan. In most
states the minimum loan amount is $500. The maximum loan amount is the amount
which would cause the Modified Policy Debt, as described below, to equal the
loan value of the Policy as of the date of the loan. The loan value is the
Policy's Cash Surrender Value less the monthly deductions due to the next policy
anniversary. The Modified Policy Debt as of any date is the Policy Debt (the
aggregate amount of policy loans, including borrowed interest, less any loan
repayments) plus the amount of interest to be charged to the next policy
anniversary, all discounted from the next policy anniversary to such date at an
annual rate of 4%. When a loan has been taken out, or when loan interest charges
are borrowed, we transfer an amount equal to the Modified Policy Debt to the
Loan Account to ensure that a sufficient amount will be available to pay
interest on the Policy Debt at the next policy anniversary.
For example, assume a Policy with a loan value of $5,000, no outstanding policy
loans and a loan interest rate of 5.75%. The maximum amount that can be borrowed
is an amount that will cause the Modified Policy Debt to equal $5,000. If the
loan is made on a policy anniversary, the maximum loan will be $4,917. This
amount at 5.75% interest will equal $5,200 one year later; $5,200 discounted to
the date of the loan at 4% (the Modified Policy Debt) equals $5,000. Because the
minimum rate of interest credited to the Loan Account is 4%, $5,000 must be
transferred to the Loan Account to ensure that $5,200 will be available as of
the next policy anniversary to cover the interest accrued on the Policy Debt.
The current credited interest rate to the loan account is 4.5%
When a loan is made, we will deduct from the Investment Accounts or the Fixed
Account, and transfer to the Loan Account, an amount which will result in the
Loan Account value being equal to the Modified Policy Debt. You may designate
how the amount to be transferred to the Loan Account is allocated among the
accounts from which the transfer is to be made. In the absence of instructions,
we will allocate the amount to be transferred to each account in the same
proportion as the value in each Investment Account and the Fixed Account bears
to the Net Policy Value.
A policy loan may result in a Policy's failing to satisfy the Death Benefit
Guarantee Cumulative Premium Test and/or the No Lapse Guarantee Cumulative
Premium Test, since the Policy Debt is subtracted from the sum of the premiums
paid in determining whether these tests are satisfied. As a result, the Death
Benefit Guarantee and/or No Lapse Guarantee may terminate. See INSURANCE BENEFIT
- -- "Death Benefit Guarantee" and OTHER GENERAL POLICY PROVISIONS -- "Policy
Default."
Moreover, if the Death Benefit Guarantee or No Lapse Guarantee is not in force,
a policy loan may cause a Policy to be more susceptible to going into default,
since a policy loan will be reflected in the Net Cash Surrender Value. See OTHER
GENERAL POLICY PROVISIONS -- "Policy Default."
A policy loan will also affect future Policy Values, since that portion of the
Policy Value in the Loan Account will increase in value at the crediting
interest rate rather than varying with the performance of the underlying
Portfolios selected by the policyowner or increasing in value at the rate of
interest credited for amounts allocated to the Fixed Account.
Policy loans may have tax consequences. If you are considering the use of
systematic policy loans as one element of a comprehensive retirement income
plan, you should consult your personal tax adviser regarding the potential tax
consequences if such loans were to so reduce Policy Value that the Policy would
lapse, absent additional payments. The premium payment necessary to avert lapse
would increase with the ages of the insureds. See MISCELLANEOUS MATTERS -
"Federal Income Tax Considerations (Tax Treatment of Policy Benefits)." In
addition, a Policy loan will affect the amount payable on the death of the last
surviving life insured, since the death benefit is reduced by the value of the
Loan Account at the date of death in arriving at the insurance benefit. Finally,
upon a complete surrender or lapse of a policy or when benefits are paid at a
policy's maturity date, if the amount received plus the amount of indebtedness
exceeds the total investment in the policy, the excess will generally be treated
as ordinary income subject to tax. See "Tax Treatment of Policy Benefits - In
General."
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<PAGE> 24
INTEREST CHARGED ON POLICY LOANS. Interest on the Policy Debt will accrue daily
and be payable annually on the policy anniversary. We will fix the rate of
interest charged at an effective annual rate of 5.75%. If the interest due on a
policy anniversary is not paid by the policyowners, the interest will be
borrowed against the Policy.
INTEREST CREDITED TO THE LOAN ACCOUNT. We will credit interest to any amount in
the Loan Account at an effective annual rate of at least 4%. The actual rate
credited is the rate of interest charged on the Policy loan less an interest
rate differential, currently 1.25%.
LOAN ACCOUNT ADJUSTMENT. Whenever a loan is first taken out, and at specified
events thereafter, we adjust the value of the Loan Account. We take the
difference between (i) the Loan Account before any adjustment and (ii) the
Modified Policy Debt at the time of adjustment and transfer that amount between
the Loan Account and the Investment Accounts or the Fixed Account. The amount
transferred to or from the Loan Account will be such that the value of the Loan
Account after the adjustment will be equal to the Modified Policy Debt.
The specified events which cause an adjustment to the Loan Account are:
- a policy anniversary,
- a partial or full loan repayment,
- a new loan, or
- an amount is needed to meet a monthly deduction.
A loan repayment may be implicit in that Policy Debt is effectively repaid upon
termination (i.e., upon death of the last surviving life insured, surrender or
lapse of the policy). In each of these instances, the Loan Account will be
adjusted so that any excess of the Loan Account over the Modified Policy Debt
after the repayment will be included in the termination proceeds.
Except as noted below under "Loan Repayments," we will allocate amounts
transferred from the Loan Account to the Investment Accounts and the Fixed
Account in the same proportion as the value in the corresponding "loan
sub-account" bears to the value of the Loan Account. A "loan sub-account" exists
for each Investment Account and for the Fixed Account. Amounts transferred to
the Loan Account are allocated to the appropriate loan sub-account to reflect
the account from which the transfer was made.
LOAN ACCOUNT ILLUSTRATION. (Dollar amounts in this illustration have been
rounded to the nearest dollar.) The operation of the Loan Account may be
illustrated as follows: assume a Policy with a loan value of $5,000, a loan
interest rate of 5.75%, and a maximum loan amount on a policy anniversary of
$4,917. If a loan in the maximum amount of $4,917 is made, an amount equal to
the Modified Policy Debt, $5,000, is transferred to the Loan Account. At the
next policy anniversary the value of the Loan Account will have increased to
$5,225 ($5,000 x 1.045) reflecting interest credited at an effective annual rate
of 4.5%. At that time the loan will have accrued interest charges of $283
($4,917 x .0575), bringing the Policy Debt to $5,200.
If the accrued interest charges are paid on the policy anniversary, the Policy
Debt will continue to be $4,917, and the Modified Policy Debt, reflecting
interest for the next policy year and discounting the Policy Debt and such
interest at 4%, will be $5,000. An amount will be transferred from the Loan
Account to the Fixed Account or the Investment Accounts so that the Loan Account
value will equal the Modified Policy Debt. Since the Loan Account value was
$5,225, a transfer of $225 will be required ($5,225 - $5,000).
If, however, the accrued interest charges of $283 are borrowed, an amount will
be transferred from the Investment Accounts and the Fixed Account so that the
Loan Account value will equal the Modified Policy Debt recomputed at the policy
anniversary. The new Modified Policy Debt is the Policy Debt, $5,200, plus loan
interest to be charged to the next policy anniversary, $299 ($5,200 x .0575),
discounted at 4%, which results in a figure of $5,288. Since the value of the
Loan Account was $5,225, a transfer of $63 will be required. This amount is
equivalent to the 1.25% interest rate differential on the $5,000 transferred to
the Loan Account on the previous policy anniversary.
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<PAGE> 25
LOAN REPAYMENTS. You may repay Policy Debt in whole or in part at any time prior
to the death of the last surviving life insured provided the Policy is in force.
When a repayment is made, we will credit the repayment amount to the Loan
Account and transfer an amount to the Fixed Account or the Investment Accounts
so that the Loan Account at that time will equal the Modified Policy Debt. We
will allocate loan repayments first to the Fixed Account until the associated
loan sub-account is reduced to zero. We will then allocate loan repayments to
each Investment Account in the same proportion as the value in the corresponding
loan sub-account bears to the value of the Loan Account. Amounts paid to us not
specifically designated in writing as loan repayments will be treated as
premiums.
PARTIAL WITHDRAWALS AND SURRENDERS
Partial Withdrawals. After a Policy has been in force for two policy years, you
may make a partial withdrawal of the Net Cash Surrender Value. In most states
the minimum amount that may be withdrawn is $500. You should specify the portion
of the withdrawal to be taken from each Investment Account and the Fixed
Account. In the absence of instructions we will allocate the withdrawal among
such accounts in the same proportion as the Policy Value in each account bears
to the Net Policy Value. No more than one partial withdrawal may be made in any
one policy month.
If you make a partial withdrawal during the Surrender Charge Period, we will
usually assess a portion of the surrender charges to which the Policy is subject
(see CHARGES AND DEDUCTIONS -- "Surrender Charges") if the amount withdrawn is
in excess of the Withdrawal Tier Amount. The Withdrawal Tier Amount is 10% of
the Net Cash Surrender Value determined as of the previous policy anniversary.
The portion of a partial withdrawal that is considered to be in excess of the
Withdrawal Tier Amount includes all previous partial withdrawals that have
occurred in the current policy year.
If the Option 1 death benefit is in effect under a Policy from which a partial
withdrawal is made, the face amount of the Policy will be reduced by the amount
of the partial withdrawal and any surrender charges. If the death benefit is
equal to the face amount at the time of withdrawal, the face amount will be
reduced by the amount of the withdrawal plus the portion of the surrender
charges assessed. If the death benefit is based upon the Policy Value times the
corridor percentage set forth under INSURANCE BENEFIT -- "Death Benefit Options"
above, the face amount will be reduced only to the extent that the amount of the
withdrawal plus the portion of the surrender charges assessed exceeds the
difference between the death benefit and the face amount.
Reductions in face amount resulting from partial withdrawals will not incur any
surrender charges above the surrender charges applicable to the withdrawal. When
the face amount of a Policy is based on one or more increases subsequent to
issuance of the Policy, a reduction resulting from a partial withdrawal will be
applied in the same manner as a requested decrease in face amount, i.e., first
against the face amount provided by the most recent increase, then against the
next most recent increases successively ,and finally against the initial face
amount. If there has been a prior increase in face amount, then the face amount
will be decreased in the same order as if the policyowner had requested the
decrease. See CHARGES AND DEDUCTIONS - "Surrender Charges (Charges on Partial
Withdrawals)."
Full Surrenders. You may surrender your Policy for its Net Cash Surrender Value
at any time while at least one of the lives insured is living. The Net Cash
Surrender Value is the Policy Value less any surrender charges and outstanding
monthly deductions due (the "Cash Surrender Value") minus the value of the Loan
Account. The Net Cash Surrender Value will be determined as of the end of the
Business Day on which we receive the Policy and a written request for surrender
at our Service Office. After a Policy is surrendered, the insurance coverage and
all other benefits under the Policy will terminate. Surrender of a Policy during
the Surrender Charge Period will usually result in our assessment of surrender
charges. See Charges And Deductions -- "Surrender Charges."
CHARGES AND DEDUCTIONS
The charges we make under the Policy are assessed as:
- deductions from premiums,
- surrender charges upon surrender, partial withdrawals, decreases in
face amount or lapse,
- monthly deductions, and
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<PAGE> 26
- other charges.
DEDUCTIONS FROM PREMIUMS
We deduct a charge of 2.35% from each premium payment for state and local taxes,
except for Policies issued in Oregon where no premium tax is deducted. State and
local taxes differ from state to state. We expect the 2.35% rate to be
sufficient, on average, to pay state and local taxes where required.
We also deduct a charge of 1.25% of each premium payment for federal taxes
related to premium payments, an amount which we also expect to be sufficient to
pay federal taxes.
Currently, we intend to cease these deductions at the end of the tenth policy
year. However, we may continue these deductions beyond the tenth policy year. In
addition, if any other taxes are incurred, we may make a charge for those taxes
in addition to the deductions for federal, state or local taxes currently being
made from premium payments. We also deduct a sales charge of 5.5% of the
premiums paid in each policy year, up to a maximum of the Target Premium in the
then current policy year. We guarantee that this deduction will cease at the end
of the tenth policy year, or 10 years after a face increase.
SURRENDER CHARGES
We will assess surrender charges upon surrender, a partial withdrawal of Policy
Value in excess of the Withdrawal Tier Amount, a requested decrease in face
amount, or lapse. We usually assess these charges if any of the above
transactions occurs within the Surrender Charge Period (see Table 1 below)
unless the charges have been previously deducted. There are two surrender
charges -- a deferred underwriting charge and a deferred sales charge.
In states where approved, we will reduce the surrender charge as described below
on Policies where the anticipated annual premium is $100,000 or greater and the
Policy is issued as part of an employer sponsored split dollar or keyman
arrangement. We will waive 80% of the Surrender Charge (deferred underwriting
charge and deferred sales charge) during the first year of the Policy, 60%
during the second year and 40% during the third year. The full Surrender Charge
will be imposed if the surrender takes place in a fourth or subsequent policy
year.
DEFERRED UNDERWRITING CHARGE. The deferred underwriting charge is $4 for each
$1,000 of face amount of life insurance coverage initially purchased or added by
increase, multiplied by the percentages shown in Table 1 below. The charge
applies only to the first $1,000,000 of face amount initially purchased or the
first $1,000,000 of each subsequent increase in face amount. Thus, the charge
made in connection with any one underwriting will not exceed $4,000.
We designed the deferred underwriting charge to cover the administrative
expenses associated with underwriting and policy issue, including the costs of
processing applications, conducting medical examinations, determining each life
insured's risk class and establishing policy records. We do not expect to
recover from the deferred underwriting charge any amount in excess of its
expenses associated with underwriting and Policy issue, including the costs of
processing applications, conducting medical examinations, determining the risk
classes of the lives insured and establishing Policy records.
DEFERRED SALES CHARGE. The maximum deferred sales charge is equal to the
premiums paid in the first policy year up to a maximum of the Target Premium,
multiplied by the percentages shown in Table 1 below. This charge compensates us
for some of the expenses of selling and distributing the Policies, including
agents' commissions, advertising, agent training and the printing of
prospectuses and sales literature.
The deferred sales charge deducted in any policy year is not specifically
related to sales expenses incurred in that year. Instead, we expect that the
major portion of the sales expenses attributable to a Policy will be incurred
during the first policy year, although the deferred sales charge might be
deducted up to fifteen years later. We anticipate that the aggregate amounts we
receive under the Policies for sales charges will be insufficient to cover our
aggregate sales expenses. To the extent that our sales expenses exceed our sales
charges, we will pay the excess from our other assets or surplus, including
amounts derived from the mortality and expense risks charge described below. If
you surrender the Policy for its Net Cash Surrender Value during the first two
policy years, or during the first two policy years following a face amount
increase, we may forego
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<PAGE> 27
deducting a portion of the deferred sales charge. Where such sales charge
limitation is applicable, the deferred sales charge assessable under the Policy
will increase at the beginning of the third policy year to the level that would
have applied absent the limitation. See "Surrender Charges (Sales Charge
Limitation)" below.
We specify the Target Premium for the initial face amount in the Policy. We will
compute a Target Premium for each increase in face amount above the highest face
amount of coverage previously in effect, except for an increase in face amount
which results from a change in the death benefit option, and we will advise you
of each new Target Premium. Target Premiums depend upon the face amount of
insurance provided at issue or by an increase and the issue age and sex (unless
unisex rates are required by law) of each life insured. Except for surrenders to
which the sales charge limitation provisions described below apply, the maximum
deferred sales charge will be in effect for at least the first six years of the
Surrender Charge Period for lives insured with either an Average Issue Age (or
an Average Attained Age at time of face increase) of 0-75. For average ages
higher than 75, the portion of the deferred sales charge that remains in effect
will grade down at a rate that also varies according to Table 1 as described
below.
To determine the deferred sales charge applicable to a face amount increase, we
will treat a portion of the Policy Value on the date of increase as a premium
attributable to the increase. In addition, we will treat a portion of each
premium paid on or subsequent to the increase as attributable to the increase.
In each case, the portion attributable to the increase will be the ratio of the
"Guideline Annual Premium" for the increase to the sum of the guideline annual
premiums for the initial face amount and all increases including the requested
increase.
A "Guideline Annual Premium" is a hypothetical amount that we use to measure the
maximum amount of the deferred sales charge that may be imposed upon surrender,
partial withdrawal, a decrease in face amount or lapse during the first two
years after issuance or after an increase in face amount.
TABLE 1: DEFERRED UNDERWRITING CHARGE AND DEFERRED SURRENDER CHARGE GRADING
PERCENTAGES DURING THE SURRENDER CHARGE PERIOD
(APPLICABLE TO THE INITIAL FACE AMOUNT AND SUBSEQUENT INCREASES)
<TABLE>
<CAPTION>
SURRENDER AVERAGE AGE AND PERCENTAGE OF CHARGES**
CHARGE PERIOD* AVERAGE AGE:
- ---------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
0-75 76 77 78 79 80+
12 100% 100% 100% 100% 100% 100%
24 100% 100% 100% 100% 100% 90%
36 100% 100% 100% 100% 90% 80%
48 100% 100% 100% 90% 80% 70%
60 100% 100% 90% 80% 70% 60%
72 100% 90% 80% 70% 60% 50%
84 90% 80% 70% 60% 50% 40%
96 80% 70% 60% 50% 40% 30%
108 70% 60% 50% 40% 30% 20%
120 60% 50% 40% 30% 20% 10%
132 50% 40% 30% 20% 10% 0%
144 40% 30% 20% 10% 0%
156 30% 20% 10% 0%
168 20% 10% 0%
180 0% 0%
</TABLE>
* Periods shown are after end of policy month. Policy months not shown may be
calculated by linear extrapolation.
** Average Age refers to the average rated Issue Age of the lives insured when
the Policy is first issued, or their average Attained Age at the time of a
subsequent face amount increase.
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<PAGE> 28
The following example illustrates how deferred underwriting and sales charges
are calculated using data from Table 1 above.
EXAMPLE:
Assume a 42-year-old male and a 42-year-old female (standard risks), whose
Policy was issued at an average Issue Age 35 and who have paid $9,000 in
premiums in equal installments under a Policy with a Target Premium of $505 and
a face amount of $250,000, surrender their Policy during the last month of the
seventh Policy Year.
We would assess a deferred underwriting charge of $900. The maximum deferred
underwriting charge of $1,000 ($4 per $1,000 of face amount x 250) would be
multiplied by the 90% listed in Table 1 as applicable to surrenders during the
last month of the seventh Policy Year (90% x ($4 x 250) = $900).
We would assess a deferred sales charge of $454.50. The deferred sales charge is
equal to the lower of premiums paid in the first Policy Year (or first year
after a face increase), in our example $9,000/7 = $1,285.71, or the Target
Premium ($505). Therefore the deferred sales charge is $505. Because the
surrender occurs during the last month of the seventh Policy Year, only 90%
(from Table 1) of the maximum sales charge remains applicable (.90 x $505 =
$454.50).
SALES CHARGE LIMITATION. The maximum sales charge that we may take under the
Policy is 9% of 20 guideline annual premiums ("GAPs"). If the insureds' joint
life expectancy is less than 20 years, then the number of years of life
expectancy would replace 20 GAPs in determining the maximum sales charge.
However, if you surrender a Policy or the Policy lapses, or you request a face
amount decrease at any time during the first two years after issuance or after
an increase in face amount, we will forego taking that part of the deferred
sales charge with respect to "premiums" paid for the initial face amount or such
increase (including the portion of Policy Value treated as premiums for the
increase, as described above), whichever is applicable, which exceeds the sum of
(i) 30% of the premiums paid up to the lesser of one guideline annual premium or
the cumulative premiums paid to the surrender date plus (ii) 10% of the premiums
paid in excess of one guideline annual premium, up to the lesser of two
guideline annual premiums or the cumulative premiums paid to the surrender date,
plus (iii) 9% of the premiums paid in excess of two guideline annual premiums.
The operation of the sales charge limitation that applies in the first two years
after issuance, or after an increase in face amount, is illustrated by the
following example.
EXAMPLE:
A 37-year-old male non-smoker and a 37-year-old female non-smoker purchased a
Policy with a face amount in excess of $250,000 when their average Issue Age was
35. They have paid $2,000 in premiums in equal installments under the Policy,
and the Policy has a guideline annual premium ("GAP") of $1,614 and a Target
Premium ("TP") of $505. They surrender the Policy during the second Policy Year.
In the absence of the sales charge limitation, the maximum deferred sales charge
would be $505 as described IN CHARGES AND DEDUCTIONS -- "Deferred Sales Charge."
However, under the formula described above, the maximum sales charge allowable
would be $523. This is calculated as the sum of:
(i) 30% of one GAP, or $484 (.30 x $1,614 = $484), because one GAP($1,614)
is less than premiums paid ($2,000);
plus
(ii) 10% of premiums paid in excess of one GAP, or $39 (.1 x $386 = $39)
because premiums paid in excess of one GAP ($2,000 - $1,614 = $386)
are less than the amount of a second GAP ($1,614);
plus
(iii) $0, because no premiums in excess of two GAPs were paid.
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<PAGE> 29
Thus, (i) $484 plus (ii) $39 plus (iii) $0 equals $523.
Thus after applying the sales charge limitation calculation, the maximum
allowable sales charge is $523. However, since we have already deducted from
premiums the sum of $27.78 (5.5% of $505), this amount is deducted from $523 to
arrive at a maximum deferred sales charge of $495.22. This maximum deferred
sales is equal to the smaller of the deferred sales charge ($505) and the
maximum sales charge limitation ($495.22).
Since a deferred sales charge is deducted when a Policy terminates for failure
to make the required payment following the Policy's going into default, the
sales charge limitation will apply if the termination occurs during the two-year
period following issuance or any increase in face amount. If the Policy
terminates during the two years after a face amount increase, the sales charge
limitation will relate only to the sales charges applicable to the increase.
CHARGES ON PARTIAL WITHDRAWALS. Whenever a portion of the surrender charges is
deducted as a result of a partial withdrawal of Policy Value in excess of the
Withdrawal Tier Amount, we will reduce the Policy's remaining surrender charges
by the amount of the charges taken. The surrender charges not assessed as a
result of the 10% free withdrawal provision remain in effect under the Policy
and may be assessed upon surrender or lapse, other partial withdrawals in excess
of the Withdrawal Tier Amount in each policy year, or a requested decrease in
face amount. The portion of the surrender charges assessed will be based on the
ratio of (i) to (ii), where
(i) is the amount of the withdrawal in excess of the Withdrawal Tier
Amount, and
(ii) is the Net Cash Surrender Value of the Policy less the Withdrawal Tier
Amount immediately prior to the withdrawal.
We will deduct the surrender charges from each Investment Account and the Fixed
Account in the same proportion as the amount of the withdrawal taken from such
account bears to the total amount of the withdrawal. If the amount in the
account is insufficient to pay the portion of the surrender charges allocated to
that account, then the portion of the withdrawal allocated to that account will
be reduced so that the withdrawal plus the portion of the surrender charges
allocated to that account equal the value of that account.
Units equal to the amount of the partial withdrawal taken, and surrender charges
deducted, from each Investment Account will be redeemed based on the value of
such units determined as of the end of the Business Day on which we receive a
written request for withdrawal at our Service Office.
CHARGES ON DECREASES IN FACE AMOUNT. As with partial withdrawals, we will deduct
a portion of a Policy's surrender charges upon a decrease, or a cancellation of
an increase (other than by means of a "Free Look") in face amount which you
request. Since surrender charges are determined separately for the initial face
amount and each face amount increase, and since a decrease in face amount will
have a different impact on each level of insurance coverage, we will determine
separately the portion of the surrender charges to be deducted with respect to
each level of insurance coverage. That portion will be the same as the ratio of
the amount of the reduction in such coverage to the amount of such coverage
prior to the reduction.
As noted under INSURANCE BENEFIT -- "Face Amount Changes," we apply decreases to
the most recent increase first and thereafter to the next most recent increases
successively. We will deduct the charges from the Policy Value, and we will
allocate the amount so deducted among the Investment Accounts and the Fixed
Account in the same proportion as the Policy Value in each bears to the Net
Policy Value. Whenever a portion of the surrender charges is deducted as a
result of a decrease in face amount, the Policy's remaining surrender charges
will be reduced by the amount of the charges taken.
CHARGES REMAINING AFTER FACE AMOUNT DECREASES OR PARTIAL WITHDRAWALS. Each time
we deduct a portion of the deferred underwriting charge or a portion of the
deferred sales charge for a face amount decrease or for a partial withdrawal, we
will reduce the remaining deferred underwriting charge and deferred sales charge
proportionately.
We will calculate the remaining deferred underwriting and sales charge using
Table 1 above. The actual remaining charges will be the result of (a) multiplied
by (b), where
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<PAGE> 30
(a) is the grading percentage applicable as per Table; and
(b) is the remaining deferred sales charge prior to the last face amount
decrease or partial withdrawal less the deferred sales charge deducted
for that face amount decrease or partial withdrawal.
MONTHLY DEDUCTIONS
Each month we make a deduction from Policy Value consisting of:
- - an administration charge,
- - a charge for the cost of insurance,
- - a charge for mortality and expense risks, and
- - charge(s) for any supplementary benefit(s) (see OTHER PROVISIONS --
"Supplementary Benefits").
We allocate the monthly deduction among the Investment Accounts and (other than
the mortality and expense risks charge) the Fixed Account in the same proportion
as the Policy Value in each bears to the Net Policy Value. Monthly deductions
due prior to the effective date will be taken as of the effective date instead
of the dates they were due. Monthly deductions are due until the youngest of the
lives insured attains or would have attained age 100.
ADMINISTRATION CHARGE
The monthly administration charge is $.04 per $1,000 of face amount until the
later of the youngest life insured's Attained Age 55, or when he or she would
have attained age 55, if living, or the end of the fifteenth Policy Year.
Thereafter, the charge is 0. This charge has a minimum of $30 per month and a
maximum of $60 per month. The charge covers certain administrative expenses
associated with the Policy, including maintaining policy records, collecting
premiums and processing death claims, surrender and withdrawal requests and
various charges permitted under a Policy.
COST OF INSURANCE CHARGE
The monthly charge for the cost of insurance is determined by multiplying the
applicable cost of insurance rate times the net amount at risk at the beginning
of each policy month. The cost of insurance rate is based on:
- each life insured's Issue Age,
- the duration of the coverage,
- sex (unless unisex rates are required by law or are requested),
- risk class, and,
- in the case of certain Policies issued in group or sponsored
arrangements providing for reduction in cost of insurance charges (see
"Special Provisions For Group Or Sponsored Arrangements"), the face
amount of the Policy.
We determine the rate separately for the initial face amount and for each
increase in face amount. Cost of insurance rates will generally increase with
the Attained Age of the lives insured. Any additional risk ratings as indicated
in the Policy will be added to the cost of insurance rate.
We use cost of insurance rates that reflect our expectations as to future
mortality experience as based on current experience. We may change the rates
from time to time on a basis which does not unfairly discriminate within the
class of life insureds. In no event will the cost of insurance rate exceed the
guaranteed rate set forth in the Policy except to the extent that an extra rate
is imposed because of an Additional Rating applicable any life insured or if
simplified underwriting is granted in a group or sponsored arrangement (see
"Special Provisions for Group or Sponsored Arrangements"). The guaranteed rates
are based
27
<PAGE> 31
on the 1980 Commissioners Standard Ordinary Smoker/Nonsmoker Mortality
Tables, except in the case of Group or Sponsored Arrangements, where the
guaranteed rates are based on the 1980 Commissioners Extended Term Mortality
Table.
If requested by the applicant, we may offer the Policy with provisions based on
actuarial tables that do not differentiate on the basis of sex to such
prospective purchasers in states where the unisex version of the Policy has been
approved.
The State of Montana currently prohibits the issuance of policies with
assumptions that distinguish between men and women in determining premiums and
policy benefits for policies issued on the life of any of its residents.
Consequently, Policies issued to Montana residents will have premiums and
benefits which do not differentiate on the basis of sex.
The net amount at risk to which the cost of insurance rate is applied is the
difference between the death benefit, divided by 1.0032737 (a factor which
reduces the net amount at risk for cost of insurance charge purposes by taking
into account assumed monthly earnings at an annual rate of 4%), and the Policy
Value. Because different cost of insurance rates may apply to different levels
of insurance coverage, we will calculate the net amount at risk separately for
each level of insurance coverage. When the Option 1 death benefit is in effect,
for purposes of determining the net amount at risk applicable to each level of
insurance coverage, the Policy Value is attributed first to the initial face
amount and then, if the Policy Value is greater than the initial face amount, to
each increase in face amount in the order made.
Because the calculation of the net amount at risk is different under the death
benefit options when more than one level of insurance coverage is in effect, a
change in the death benefit option may result in a different net amount at risk
for each level of insurance coverage than would have occurred had the death
benefit option not been changed. Since the cost of insurance is calculated
separately for each level of insurance coverage, any change in the net amount at
risk for a level of insurance coverage resulting from a change in the death
benefit option may affect the amount of the charge for the cost of insurance.
Partial withdrawals and decreases in face amount will also affect the manner in
which the net amount at risk for each level of insurance coverage is calculated.
MORTALITY AND EXPENSE RISKS CHARGE
We make a monthly charge against your Policy Value for the mortality and expense
risks we assume under the Policies. We make this charge at the beginning of each
policy month at an annual rate of:
- .067% through the later of the tenth policy year and the youngest life
insured's Attained Age 55, and
- (currently) .0125% monthly thereafter (this drop in the mortality and
expense risks charge is not guaranteed).
We assess the charge against the value of your Investment Accounts by canceling
units in the same proportion as the value of each Investment Account bears to
the total value of your Investment Accounts. The mortality risk assumed is that
the lives insured may live for a shorter period of time than we estimated when
setting the maximum mortality rates in the Policy. The expense risk assumed is
that expenses incurred in issuing and administering the Policies will be greater
than we estimated when setting the guaranteed administration charge in the
Policy. We will realize a gain from this charge to the extent it is not needed
to provide benefits and pay expenses under the Policies.
OTHER CHARGES
Currently, we make no charge against the Separate Account for federal, state or
local taxes that may be attributable to the Separate Account or to our
operations with respect to the Policies. However, if we incur any such taxes, we
may make a charge therefor in addition to the deductions from premium payments
currently made for federal, state or local taxes.
We impose charges on certain transfers of Policy Values, including a $25 charge
for each transfer in excess of twelve in a policy year and a $5 charge for each
DCA transfer when Policy Value does not exceed $15,000. See POLICY VALUES --
"Transfers of Policy Value."
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<PAGE> 32
The Separate Account purchases shares of the Portfolios at net asset value. The
net asset value of those shares reflects investment management fees and other
expenses of the Portfolios which are summarized below.
TRUST ANNUAL EXPENSES
(as a percentage of Trust average net assets)
<TABLE>
<CAPTION>
OTHER EXPENSES
MANAGEMENT (AFTER EXPENSE TOTAL TRUST
TRUST PORTFOLIO FEES REIMBURSEMENT)** ANNUAL EXPENSES
- -------------------------------- ---------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets........ 0.850% 0.360% 1.210%
Science & Technology................ 1.100% 0.110% 1.210%
International Small Cap............. 1.100% 0.150% 1.250%
Aggressive Growth................... 1.000%+ 0.090% 1.090%
Emerging Small Company.............. 1.050% 0.050% 1.100%
Small Company Blend................. 1.050% 0.150%* 1.200%
Mid Cap Growth...................... 0.950%+ 0.040% 0.990%
Mid Cap Stock....................... 0.925% 0.000%* 0.925%
Overseas............................ 0.950% 0.210% 1.160%
International Stock................. 1.050% 0.200% 1.250%
International Value................. 1.000% 0.300%* 1.300%
Mid Cap Blend....................... 0.850%+ 0.050% 0.900%
Small Company Value................. 1.050% 0.180% 1.230%
Global Equity....................... 0.900% 0.110% 1.010%
Growth.............................. 0.850% 0.050% 0.900%
Large Cap Growth.................... 0.875%+ 0.130% 1.005%
Quantitative Equity................. 0.700% 0.060% 0.760%
Blue Chip Growth.................... 0.875%+ 0.045% 0.920%
Real Estate Securities.............. 0.700% 0.060% 0.760%
Value............................... 0.800% 0.050% 0.850%
Equity Index........................ 0.250% 0.150%** 0.400%**
Growth & Income..................... 0.750% 0.040% 0.790%
U.S. Large Cap Value................ 0.875% 0.100%* 0.975%
Equity-Income....................... 0.875%+ 0.050% 0.925%
Income & Value...................... 0.800% 0.090% 0.890%
Balanced............................ 0.800% 0.070% 0.870%
High Yield.......................... 0.775% 0.065% 0.840%
Strategic Bond...................... 0.775% 0.075% 0.850%
Global Bond......................... 0.800% 0.110% 0.910%
Total Return........................ 0.775% 0.100%* 0.875%
Investment Quality Bond............. 0.650% 0.070% 0.720%
Diversified Bond.................... 0.750% 0.140% 0.890%
U.S. Government Securities.......... 0.650% 0.070% 0.720%
Money Market........................ 0.500% 0.120% 0.620%
Lifestyle Aggressive 1000#.......... 0% 1.110%*** 1.110%
Lifestyle Growth 820#............... 0% 1.000%*** 1.000%
Lifestyle Balanced 640#............. 0% 0.920%*** 0.920%
Lifestyle Moderate 460#............. 0% 0.830%*** 0.830%
Lifestyle Conservative 280#......... 0% 0.720%*** 0.720%
</TABLE>
+Management Fees for these portfolios changed effective May 1, 1999. Prior to
May 1, 1999, management fees were as follows:
<TABLE>
<S> <C>
Aggressive Growth Trust 1.050%
Mid Cap Growth Trust 1.000%
Mid Cap Blend Trust 0.750%
</TABLE>
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<PAGE> 33
<TABLE>
<S> <C>
Large Cap Growth Trust 0.750%
Blue Chip Growth Trust 0.925%
Equity Income Trust 0.800%
Income & Value Trust 0.750%
</TABLE>
*Based on estimates of payments to be made during the current fiscal year.
** Under the Advisory Agreement, MSS has agreed to reduce its advisory fee or
reimburse the Equity Index Trust if the total of all expenses (excluding
advisory fees, taxes, portfolio brokerage commissions, interest, litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business) exceed an annual rate of 0.15% of the
average annual net assets of the Equity Index Trust. The expense limitation will
continue in effect from year to year unless otherwise terminated at any year end
by MSS on 30 days' notice to the Trust. If this expense reimbursement had not
been in effect, Total Trust Annual Expenses would have been 0.55%, and Other
Expenses would have been 0.30%, of the average annual net assets of the Equity
Index Trust.
*** Reflects expenses of the Underlying Portfolios. Manufacturers Securities
Services, LLC ("MSS") has voluntarily agreed to pay the expenses of each
Lifestyle Trust (excluding the expenses of the Underlying Portfolios). This
voluntary expense reimbursement may be terminated at any time. If such expense
reimbursement was not in effect, Total Trust Annual Expenses would be 0.02%
higher, except for the Lifestyle Conservative 280 Trust, which would be 0.03%
higher (based on expenses of the Lifestyle Trusts for the fiscal year ended
December 31, 1998) as noted in the chart below:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lifestyle Aggressive 1000........... 0% 1.130% 1.130%
Lifestyle Growth 820................ 0% 1.020% 1.020%
Lifestyle Balanced 640.............. 0% 0.940% 0.940%
Lifestyle Moderate 460.............. 0% 0.850% 0.850%
Lifestyle Conservative 280.......... 0% 0.750% 0.750%
</TABLE>
# Each Lifestyle Trust will bear its own pro rata share of the fees and expenses
incurred by the Underlying Portfolios in which it invests, and the investment
return of each Lifestyle Trust will be net of the Underlying Portfolio expenses.
Each Lifestyle Portfolio must also bear its own expenses. However, MSS is
currently paying those expenses as described in footnote (***) above.
SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS
Where permitted by state insurance laws, Policies may be purchased under group
or sponsored arrangements, as well as on an individual basis. A "group
arrangement" includes a program under which a trustee, employer or similar
entity purchases Policies covering a group of individuals on a group basis. In
California all participants of group arrangements will be individually
underwritten. A "sponsored arrangement" includes a program under which an
employer permits group solicitation of its employees or an association permits
group solicitation of its members for the purchase of Policies on an individual
basis.
We may reduce the charges and deductions described above for Policies issued in
connection with group or sponsored arrangements. Such arrangements may include
reduction or elimination of withdrawal charges and deductions for our employees,
officers, directors, agents, immediate family members of the foregoing, and
employees of our agents and our subsidiaries. We will reduce or eliminate the
above charges and deductions in accordance with our rules in effect as of the
date an application for a Policy is approved. To qualify for such a reduction, a
group or sponsored arrangement must satisfy certain criteria as to, for example,
size of the group, expected number of participants and anticipated premium
payments from the group.
Generally, the sales contacts and effort, administrative costs and mortality
cost per Policy vary based on such factors as the size of the group or sponsored
arrangement, the purposes for which Policies are purchased and certain
characteristics of its
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<PAGE> 34
members. The amount of reduction and the criteria for qualification will reflect
the reduced sales effort and administrative costs resulting from, and the
different mortality experience expected as a result of, sales to qualifying
groups and sponsored arrangements.
We may modify from time to time, on a uniform basis, both the amounts of
reductions and the criteria for qualification. Reductions in these charges will
not be unfairly discriminatory against any person, including the affected
policyowners and all other policyowners funded by the Separate Account.
In addition, groups and persons purchasing under a sponsored arrangement may
request increases in face amount within the first policy year and decreases in
face amount within one year of an increase in face amount. Groups and persons
purchasing under a sponsored arrangement may apply for simplified underwriting.
If simplified underwriting is granted, the cost of insurance charge may increase
as a result of higher anticipated mortality experience.
SPECIAL PROVISIONS FOR EXCHANGES
We will permit owners of certain life insurance policies issued either by us or
Manufacturers Life to exchange their policies for the Policies described in this
prospectus. Owners of certain policies may be entitled to convert their policies
to the Policies described in this prospectus. If they elect to convert, they may
receive a credit upon conversion in an amount up to their first-year premium.
Charges under the policies being exchanged or the Policies issued upon an
exchange may be reduced or eliminated. Policy loans made under policies being
exchanged may, in some circumstances, be carried over to the new Policies
without repayment at the time of exchange. If you are considering an exchange,
you should consult your tax advisers as to its tax consequences.
THE GENERAL ACCOUNT
By virtue of exclusionary provisions, interests in our general account have not
been registered under the Securities Act of 1933 and our general account has not
been registered as an investment company under the 1940 Act. Accordingly,
neither our general account nor any interests therein are subject to the
provisions of these acts, and as a result the staff of the SEC has not reviewed
the disclosures in this prospectus relating to the general account. Disclosures
regarding the general account may, however, be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in a prospectus.
Our general account consists of all assets owned by us other than those in our
separate accounts. Subject to applicable law, we have sole discretion over the
investment of the assets of our general account.
You may elect to allocate net premiums to the Fixed Account or to transfer all
or a portion of your Policy Value to the Fixed Account from the Investment
Accounts. Transfers from the Fixed Account to the Investment Accounts are
subject to restrictions. See POLICY VALUES -- "Transfers Of Policy Value" and
"Policy Value." We will hold the reserves required for any portion of the Policy
Value allocated to the Fixed Account in our general account. However, your
allocation of Policy Value to the Fixed Account does not entitle you to share in
the investment experience of our general account. Instead, we guarantee that
your Policy Value in the Fixed Account will accrue interest daily at an
effective annual rate of at least 4%, without regard to the actual investment
experience of our general account. We may, at our sole discretion, credit a
higher rate of interest, although we are not obligated to do so. You assume the
risk that interest credited may not exceed the guaranteed minimum rate of 4% per
year.
OTHER GENERAL POLICY PROVISIONS
POLICY DEFAULT
Unless the Death Benefit Guarantee or the No Lapse Guarantee is in effect, your
Policy will go into default if the Policy's Net Cash Surrender Value at the
beginning of any policy month would go below zero after deducting the monthly
deductions then due. We will notify you of the default and will allow a 61-day
grace period in which you may make a premium payment sufficient to bring the
Policy out of default. The payment you must make will be equal to the amount
necessary to bring the
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<PAGE> 35
Net Cash Surrender Value to zero, if it was less than zero as of the date of
default, plus the monthly deductions due as of the date of default and as of the
beginning of each of the two policy months thereafter, based on the Policy Value
as of the date of default. If we do not receive the required payment by the end
of the grace period, we will terminate the Policy and pay to you the Net Cash
Surrender Value (subject to any applicable limitation on surrender charges; see
CHARGES AND DEDUCTIONS -- "Surrender Charges") as of the date of default less
the monthly deductions then due. If the last surviving life insured should die
during the grace period following a Policy's going into default, the Policy
Value used in the calculation of the death benefit will be the Policy Value as
of the date of default, and the insurance benefit payable will be reduced by any
outstanding monthly deductions due at the time of death.
POLICY REINSTATEMENT
You can reinstate a Policy which has terminated after going into default at any
time within 21 days following the date of termination without furnishing
evidence of insurability, subject to the following conditions:
- the risk class of all lives insured is standard or preferred; and
- the Attained Age of all lives insured is less than 46.
You can reinstate a Policy which has terminated after going into default at any
time within the five-year period following the date of termination, subject to
the following conditions:
- you must not have surrendered the Policy for its Net Cash Surrender
Value;
- you furnish to us satisfactory evidence of insurability with respect to
all lives insured;
- you pay us a premium equal to the payment required during the 61-day
grace period following default to keep the Policy in force; and
- you repay to us an amount equal to any amounts paid by us in connection
with the termination of the Policy.
If we approve the reinstatement, the date of reinstatement will be the later of
the date of your written request or the date we receive the required payment at
our Service Office.
MISCELLANEOUS POLICY PROVISIONS
BENEFICIARY. You may appoint one or more beneficiaries of the Policy by naming
them in the application. You may appoint beneficiaries in three classes --
primary, secondary and final. Thereafter you may change the beneficiary during
the last surviving life insured's lifetime by giving written notice to us in a
form satisfactory to us unless an irrevocable designation has been elected. If
the last surviving life insured dies and there is no surviving beneficiary, you,
or your estate if you are the last surviving life insured, will be the
beneficiary. If a beneficiary dies before the seventh day after the death of the
life insured, we will pay the insurance benefit as if the beneficiary had died
before the life insured.
INCONTESTABILITY. We will not contest the validity of a Policy after it has been
in force during the lifetime of the last surviving life insured for two years
from the issue date. We will not contest the validity of an increase in face
amount or the addition of a supplementary benefit after such increase or
addition has been in force during the lifetime of the last surviving life
insured for two years. If a Policy has been reinstated and has been in force for
less than two years from the reinstatement date, we can contest any
misrepresentation of a fact material to the reinstatement.
MISSTATEMENT OF AGE OR SEX. If any life insured's stated age or sex or both in
the Policy are incorrect, we will change the face amount of insurance so that
the death benefit will be that which the most recent monthly charge for the cost
of insurance would have bought for the correct age and sex (unless unisex rates
are required by law or are requested).
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<PAGE> 36
SUICIDE EXCLUSION. Except for the last to die, if any of the lives insured dies
by suicide within two years after the Issue Date, whether such life insured is
sane or insane, we will re-issue the Policy. The new policy(ies) on the
survivor(s) will be any single life permanent policy that is available at the
time of re-issue. The suicide provision for any new policy(ies) will be
effective as of the original Issue Date.
If the last surviving life insured, whether sane or insane, dies by suicide
within two years from the policy date, we will pay only the premiums paid less
any partial withdrawals of the Net Cash Surrender Value and any amount in the
Loan Account. If the last surviving life insured should die by suicide within
two years after a face amount increase, the death benefit for the increase will
be limited to the monthly deductions for the increase.
ASSIGNMENT. We will not be bound by an assignment until we receive a copy of it
at our Service Office. We assume no responsibility for the validity or effects
of any assignment.
OTHER PROVISIONS
SUPPLEMENTARY BENEFITS
Subject to certain requirements, you may add one or more supplementary benefits
to a Policy. These include the Estate Preservation Rider, which provides
additional term insurance at no extra charge during the first four policy years
to protect against application of the "three year contemplation of death rule,"
and an option to split the Policy into two individual life policies upon divorce
or certain federal tax law changes without evidence of insurability ("Policy
Split Option").
You may obtain more detailed information concerning supplementary benefits from
one of our authorized agents. The cost of any supplementary benefits will be
deducted as part of the monthly deduction. See CHARGES AND DEDUCTIONS --
"Monthly Deductions."
PAYMENT OF PROCEEDS
As long as the Policy is in force, we will ordinarily pay any policy loans,
partial withdrawals, Net Cash Surrender Value or any insurance benefit within
seven days after we receive at our Service Office all the documents required for
such a payment.
We may delay the payment of any policy loans, partial withdrawals, Net Cash
Surrender Value or the portion of any insurance benefit that depends on the
Fixed Account value for up to six months. Otherwise we may delay payment for any
period during which:
* the New York Stock Exchange is closed for trading (except for normal
holiday closings) or trading is otherwise restricted;
* an emergency exists as defined by the SEC or the SEC requires that
trading be restricted; or
* the SEC permits a delay for the protection of policyowners.
We may also deny transfers in the circumstances stated above and in the
circumstances previously set forth. See POLICY VALUES -- "Transfers of Policy
Value."
REPORTS TO POLICYOWNERS
Within 30 days after each Policy Anniversary, we will send you a statement
showing, among other things, the following:
- the amount of the death benefit,
- the Policy Value and its allocation among the Investment Accounts, the
Fixed Account and the Loan Account,
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<PAGE> 37
- the value of the units in each Investment Account to which the Policy
Value is allocated,
- any Loan Account balance and any interest charged since the last
statement,
- the premiums paid and policy transactions made during the period since
the last statement, and
- any other information required by law.
Within seven days after any transaction involving the purchase, sale, or
transfer of units of Investment Accounts, we will send a confirmation statement.
You will also be sent an annual and a semi-annual report for the Trust which
will include a list of the securities held in each Portfolio as required by the
1940 Act.
MISCELLANEOUS MATTERS
PORTFOLIO SHARE SUBSTITUTION
Although we believe it to be highly unlikely, it is possible that in the
judgment of our management, one or more of the Portfolios of the Trust may
become unsuitable for investment by the Separate Account because of a change in
investment policy or a change in applicable laws or regulations, because the
shares are no longer available for investment, or for some other reason. In that
event, we may seek to substitute the shares of another Portfolio or of an
entirely different mutual fund. Before this can be done, the approval of the SEC
and one or more state insurance departments may be required.
We also reserve the right to:
- create new separate accounts,
- combine other separate accounts with the Separate Account,
- establish additional sub-accounts within the Separate Account,
- operate the Separate Account as a management investment company or
other form permitted by law,
- transfer assets from the Separate Account to another separate account
and from another separate account to the Separate Account,
- de-register the Separate Account under the 1940 Act, and
- eliminate sub-accounts.
We would make any such changes only if permissible under applicable federal and
state laws.
We will not materially change the investment objectives of the Separate Account
without first filing the change with the Insurance Commissioner of the State of
Michigan. You will be advised of any change at the time it is made.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary generally describes the federal income tax considerations
associated with the Policy. The summary does not purport to be complete or to
cover all situations and is not intended as tax advice. You should consult
counsel or other competent tax advisers for more complete information. This
discussion is based upon our understanding of the present federal income tax
laws as they are currently interpreted by the Internal Revenue Service (the
"IRS"). We make no
34
<PAGE> 38
representation as to the likelihood of continuation of the present federal
income tax laws or of the current interpretations by the IRS. WE DO NOT MAKE ANY
GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY OR ANY TRANSACTION REGARDING
THE POLICIES.
The Policies may be used in various arrangements, including non-qualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans, charitable remainder
trusts and others. The tax consequences of all such plans may vary depending on
the particular facts and circumstances of each individual arrangement.
Therefore, if you contemplate the use of a Policy in any such arrangement and
the value of such use depends in part on its tax consequences, you should
consult a qualified tax adviser for advice on the tax attributes of the
particular arrangement.
TAX STATUS OF THE POLICY
Section 7702 of the "Code" sets forth a definition of a life insurance contract
for federal tax purposes. The Secretary of Treasury (the "Treasury") is
authorized to prescribe regulations implementing Section 7702. However, while
proposed regulations and other interim guidance have been issued, final
regulations have not been adopted and guidance as to how Section 7702 is to be
applied is limited. If a Policy were determined not to be a life insurance
contract for purposes of Section 7702, such Policy would not provide the tax
advantages normally provided by a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, we
believe (largely in reliance on IRS Notice 88-128 and the proposed mortality
charge regulations under Section 7702, issued on July 5, 1991) that such a
Policy should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (i.e., a premium
class involving higher-than-standard mortality risk), there is less guidance, in
particular as to how mortality and other expense requirements of Section 7702
are to be applied in determining whether such a Policy meets the Section 7702
definition of a life insurance contract. Thus, it is not clear whether or not
such a Policy would satisfy Section 7702, particularly if the policyowner pays
the full amount of premiums permitted under the Policy.
If it is subsequently determined that a Policy does not satisfy Section 7702, we
may take whatever steps are appropriate and reasonable to attempt to cause such
a Policy to comply with Section 7702. For these reasons, we reserve the right to
restrict Policy transactions as necessary to attempt to qualify a Policy as a
life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of the Separate Account
be "adequately diversified" in accordance with Treasury regulations in order for
the Policy to qualify as a life insurance contract under Section 7702. The
Separate Account, through the Trust, intends to comply with the diversification
requirements prescribed in Treas. Reg. Sec. 1.817-5, which affect how the
Trust's assets are to be invested. We believe that the Separate Account will
thus meet the diversification requirement, and we will monitor continued
compliance with the requirement.
In certain circumstances, owners of variable life insurance policies may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their policies. In those circumstances, income
and gains from the separate account assets would be includible in the variable
policyowner's gross income. The IRS has stated in published rulings that a
variable policyowner will be considered the owner of separate account assets if
the policyowner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. The Treasury Department
has also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the policyowner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyowners may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that policyowners were not owners of separate account assets.
35
<PAGE> 39
For example, the Policy has many more Portfolios to which policyowners may
allocate premium payments and Policy Values than were available in the policies
described in the rulings. These differences could result in a policyowner being
treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, we do not know what standards will be set forth, if any,
in the regulations or rulings which the Treasury Department has stated it
expects to issue. We therefore reserve the right to modify the Policy as
necessary to attempt to prevent an owner from being considered the owner of a
pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the proceeds and cash value increases of a Policy
should be treated in a manner consistent with a fixed-benefit life insurance
policy for federal income tax purposes. Thus, the death benefit under the Policy
should be excludable from the gross income of the beneficiary under Section
101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's death benefit option, a Policy loan, a partial withdrawal, a surrender,
a change in ownership, or an assignment of the Policy may have federal income
tax consequences. In addition, federal, state and local transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each policyowner or beneficiary. Generally, the policyowner
will not be deemed to be in constructive receipt of the Policy Value, including
increments thereof, until there is a distribution. The tax consequences of
distributions from, and loans taken from or secured by, a Policy depend on
whether the Policy is classified as a "Modified Endowment Contract" ("MEC").
Upon a complete surrender or lapse of a Policy or when benefits are paid at a
Policy's maturity date, if the amount received plus the amount of indebtedness
exceeds the total investment in the Policy, the excess will generally be treated
as ordinary income subject to tax, regardless of whether the Policy is or is not
a MEC.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Because of the Policy's flexibility, classification as a MEC will depend on the
individual circumstances of each Policy. In general, a Policy will be a MEC if
the accumulated premiums paid at any time during the first seven policy years
exceed the sum of the net level premiums which would have been paid on or before
such time if the Policy provided for paid-up future benefits after the payment
of seven level annual premiums (the "seven-pay test"). The determination of
whether a Policy will be a MEC after a material change generally depends upon
the relationship of the death benefit and Policy Value at the time of such
change and the additional premiums paid in the seven years following the
material change. If a premium is received which would cause the Policy to become
a MEC within 23 days of the next policy anniversary, we will not apply the
portion of the premium which would cause MEC status (excess premium) to the
Policy when received. The excess premium will be placed in a suspense account
until the next anniversary date, at which point the excess premium, along with
interest earned on the excess premium at a rate of 3.5% from the date the
premium was received, will be applied to the Policy. We will advise you of this
action, and you will be offered the opportunity to have the premium credited as
of the original date received or to have the premium returned. If you do not
respond, we will apply the premium and interest to the Policy as of the first
day of the next anniversary.
If a premium is received which would cause your Policy to become a MEC more than
23 days prior to the next policy anniversary, we will refund any excess premium
to you. The portion of the premium which is not excess will be applied as of the
date received. We will advise you of this action and will offer to return the
premium and have it credited to the account as of the original date received.
If, in connection with the application or issue of the Policy, you acknowledge
that your Policy is or will become a MEC, we will credit excess premiums that
would cause MEC status as of the date received.
Further, if a transaction occurs which reduces the face amount of your Policy,
we will retest the Policy, retroactive to the date of purchase, to determine
compliance with the seven-pay test based on the lower face amount. Failure to
comply would result
36
<PAGE> 40
in classification as a MEC regardless of any efforts by us to provide a payment
schedule that will not violate the seven-pay test.
The rules relating to whether a Policy will be treated as a MEC are extremely
complex and cannot be adequately described in the limited confines of this
summary. Therefore, you should consult with a competent adviser to determine
whether a transaction will cause the Policy to be treated as a MEC.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. Policies
classified as MECs will be subject to the following tax rules:
- - First, all partial withdrawals from such a Policy are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Policy Value immediately before the distribution over the investment in the
Policy (described below) at such time.
- - Second, loans taken from or secured by such a Policy are treated as partial
withdrawals from the Policy and taxed accordingly; past-due loan interest
that is added to the loan amount is treated as a loan.
- - Third, a 10% additional income tax is imposed on the portion of any
distribution (including distributions upon surrender) from, or loan taken
from or secured by, such a Policy that is included in income except where
the distribution or loan: (i) is made on or after the date the policyowner
attains age 59 1/2; (ii) is attributable to the policyowner's becoming
disabled; or (iii) is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the policyowner or the joint
lives (or joint life expectancies) of the policyowner and the policyowner's
beneficiary.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. A
distribution from a Policy that is not a MEC is generally treated as a tax-free
recovery by the policyowner of the investment in the Policy (described below) to
the extent of such investment in the Policy, and as a distribution of taxable
income only to the extent the distribution exceeds the investment in the Policy.
An exception to this general rule occurs in the case of a decrease in the
Policy's death benefit or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and that results in a
cash distribution to the policyowner in order for the Policy to continue
complying with the Section 7702 definitional limits. Such a cash distribution
will be taxed in whole or in part as ordinary income (to the extent of any gain
in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a MEC are not treated as
distributions. Instead, such loans are treated as indebtedness of the
policyowner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a MEC are subject to the 10%
additional tax.
POLICY LOAN INTEREST. Generally, personal interest paid on any loan under a
Policy which is owned by an individual is not deductible. In addition, except
for the transition rules described in the paragraph below, interest on any loan
under a Policy owned by a taxpayer and covering the life of any individual who
is an officer or employee of or is financially interested in the business
carried on by the taxpayer will not be tax deductible unless the employee is a
key person within the meaning of Section 264 of the Code. A deduction will not
be permitted for interest on a loan under a policy held on the life of a key
person to the extent the aggregate of such loans with respect to contracts
covering the key person exceeds $50,000. The number of employees who can qualify
as key persons depends in part on the size of the employer but cannot exceed 20
individuals.
For policies issued after June 20, 1986 and prior to January 1, 1994 a
transition rule permits all or a portion of the interest paid on policy debt
incurred before January 1, 1996 to be deducted. For policies issued in 1994 or
1995 the transition rule applies to indebtedness incurred before January 1,
1997. To be deducted the interest must be paid or accrued prior to January 1,
1999, and must meet other rules contained in Section 264 of the Code and section
501 of the Health Insurance Portability and Accountability Act of 1996.
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<PAGE> 41
Furthermore, if a non-natural person owns a policy, or is the direct or indirect
beneficiary under a policy, Section 264(f) of the Code disallows a pro-rata
portion of the taxpayer's interest expense allocable to unborrowed policy cash
values attributable to insurance held on the lives of individuals who are not
20% (or more) owners of the taxpayer-entity, officers, employees, or former
employees of the taxpayer.
The portion of the interest expense that is allocable to unborrowed policy cash
values is an amount that bears the same ratio to that interest expense as the
taxpayer's average unborrowed policy cash values under such life insurance
policies bears to the average adjusted bases for all assets of the taxpayer.
If the taxpayer is not the owner, but is the direct or indirect beneficiary
under the contract, then the amount of unborrowed cash value of the policy taken
into account in computing the portion of the taxpayer's interest expense
allocable to unborrowed policy cash values cannot exceed the benefit to which
the taxpayer is directly or indirectly entitled under the policy.
INVESTMENT IN THE POLICY. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which has been excluded from gross
income of the policyowner (except that the amount of any loan from, or secured
by, a Policy that is a MEC, to the extent such amount has been excluded from
gross income, will be disregarded), plus (iii) the amount of any loan from, or
secured by, a Policy that is a MEC to the extent that such amount has been
included in the gross income of the policyowner.
MULTIPLE POLICIES. All MECs that are issued by us (or our affiliates) to the
same policyowner during any calendar year are treated as one MEC for purposes of
determining the amount includible in the gross income under Section 72(e) of the
Code.
TAXATION OF POLICY SPLIT OPTION. This option permits a Policy to be split into
two other individual Policies upon the occurrence of a divorce of the lives
insured or certain changes in federal estate tax law. The purchase and exercise
of the policy split option could have adverse tax consequences. For example, it
is not clear whether a policy split will be treated as a nontaxable exchange
under Sections 1031 through 1043 of the Code. If a policy split is not treated
as a nontaxable exchange, a split could result in the recognition of taxable
income in an amount up to any gain in the Policy at the time of the split. It is
also not clear whether the cost of the policy split option, which is deducted
monthly from Policy Value, will be treated as a taxable distribution. Before
purchasing the policy split option or exercising rights provided by the policy
split option, you should consult with a competent tax adviser regarding the
possible consequences.
THE COMPANY'S TAXES
As a result of the Omnibus Budget Reconciliation Act of 1990, insurance
companies are generally required to capitalize and amortize certain policy
acquisition expenses over a 10-year period rather than currently deducting such
expenses. This treatment applies to the deferred acquisition expenses of a
Policy and results in a significantly higher corporate income tax liability for
us. We reserve the right to make a charge to premiums to compensate us for the
anticipated higher corporate income taxes.
At the present time, we make no charge to the Separate Account for any federal,
state or local taxes that we incur that may be attributable to the Separate
Account or to the Policies. We, however, reserve the right in the future to make
a charge for any such tax or other economic burden resulting from the
application of the tax laws that we determine to be properly attributable to the
Separate Account or to the Policies.
DISTRIBUTION OF THE POLICY
ManEquity, Inc., one of our indirect wholly-owned subsidiaries, acts as the
principal underwriter of, and continuously offers, the Policies pursuant to a
Distribution Agreement with us. ManEquity, Inc. is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The Policies will be sold by registered
representatives of either ManEquity, Inc. or other broker-dealers having
distribution agreements with ManEquity, Inc. who are also authorized by state
insurance departments to do so.
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<PAGE> 42
Compensation is comprised of:
- - first-year commissions and bonus not to exceed 136.5% of premiums paid up
to the Target Premium,
- - commissions not to exceed 2% of premiums in excess thereof ,and
- - beginning in the second policy year, 0.15% of the previous unloaned Policy
Value per annum.
If certain standards with regard to the sale of the Policies and certain other
policies issued by us or Manufacturers USA are met, additional compensation will
be available.
RESPONSIBILITIES ASSUMED BY MANUFACTURERS LIFE
Manufacturers Life and its wholly-owned subsidiary, The Manufacturers Life
Insurance Company (U.S.A.) ("Manufacturers USA"), have entered into an agreement
with ManEquity, Inc. pursuant to which Manufacturers Life or Manufacturers USA,
on behalf of ManEquity, Inc., will pay the sales commissions in respect of the
Policies and certain other policies issued by us, prepare and maintain all books
and records required to be prepared and maintained by ManEquity, Inc. with
respect to the Policies and such other policies, and send all confirmations
required to be sent by ManEquity, Inc. with respect to the Policies and such
other policies. ManEquity, Inc. will promptly reimburse Manufacturers Life and
Manufacturers USA for all sales commissions paid by them and will pay them for
their other services under the agreement in such amounts and at such times as
agreed to by the parties.
Manufacturers Life and Manufacturers USA have also entered into a Service
Agreement with us pursuant to which they will provide to us all issue,
administrative, general services and record-keeping functions on our behalf with
respect to all of our insurance policies including the Policies.
Finally, Manufacturers Life of America may, from time to time in its sole
discretion, enter into one or more reinsurance agreements with other life
insurance companies under which policies issued by it may be reinsured, such
that its total amount at risk under a policy would be limited for the life of an
insured.
VOTING RIGHTS
As stated above, we will invest all of the assets held in the sub-accounts of
the Separate Account in shares of corresponding Portfolios of the Trust. We are
the legal owner of those shares and as such have the right to vote upon certain
matters that are required by the 1940 Act to be approved or ratified by the
shareholders of a mutual fund and to vote upon any other matters that may be
voted upon at a shareholders' meeting. However, we will vote shares held in the
sub-accounts in accordance with instructions received from policyowners having
an interest in such sub-accounts.
We will vote shares held in each sub-account for which no timely instructions
from policyowners are received, including shares not attributable to Policies,
in the same proportion as those shares in that sub-account for which
instructions are received. Should the applicable federal securities laws or
regulations change so as to permit us to vote shares held in the Separate
Account in our own right, we may elect to do so.
The number of shares in each sub-account for which instructions may be given by
a policyowner is determined by dividing the portion of the Policy Value derived
from participation in that sub-account, if any, by the value of one share of the
corresponding Trust Portfolio. We will determine the number as of a date chosen
by us, but not more than 90 days before the shareholders' meeting. Fractional
votes are counted. We will solicit voting instructions in writing at least 14
days prior to the shareholders' meeting.
We may, if required by state insurance officials, disregard voting instructions
which would direct shares to be voted so as to cause a change in the
sub-classification or investment policies of one or more of the Portfolios, or
to approve or disapprove an investment management contract. In addition, we may
disregard voting instructions that would require changes in the investment
policies or investment adviser, provided that we reasonably disapprove such
changes in accordance with
39
<PAGE> 43
applicable federal regulations. If we disregard voting instructions, we will
advise you of that action and our reasons therefor in the next communication to
policyowners.
DIRECTORS AND OFFICERS OF MANUFACTURERS LIFE OF AMERICA
Our Directors and Officers, together with their principal occupations during the
past few years, are as follows:
<TABLE>
<CAPTION>
Position with
Manufacturers Life
Name of America Principal Occupation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sandra M. Cotter (35) Director Attorney 1989 - present,
(since December 1992) Dykema Gosset
James D. Gallagher (43) Director (since May 1996)
Secretary and General Counsel Vice President, Secretary and
General Counsel, The
Manufacturers Life Insurance
Company (USA), January 1997 to
present; Secretary and General
Counsel, Manufacturers Adviser
Corporation, January 1997 to
present; Vice President, Legal
Services - U.S. Operations,
The Manufacturers Life
Insurance Company, January
1996 to present; Vice
President, Secretary and
General Counsel, The
Manufacturers Life Insurance
Company of North America, 1994
to present; Vice President and
Associate General Counsel, The
Prudential Insurance Company
of America, 1991 to 1994.
Donald A. Guloien (41) Director (since August 1990) Executive Vice President,
and President Business Development, The
Manufacturers Life Insurance
Company, January 1999 to
present; Senior Vice
President, Business
Development, The Manufacturers
Life Insurance Company, 1994
to December 1998; Vice
President, U.S. Individual
Business, The Manufacturers
Life Insurance Company, 1990
to 1994.
Theodore Kilkuskie (43) Director (since May 1996) Senior Vice President, U.S.
Annuities, The Manufacturers
Life Insurance Company,
January 1999 to present;
President, The Manufacturers
Life Insurance Company of
North America, January 1999 To
present; Senior Vice
President, U.S. Individual
Insurance, The Manufacturers
Life Insurance Company, August
1998 to December 1998; Vice
President, U.S. Individual
Insurance, The Manufacturers
Life Insurance Company, June
1995 To February 1998;
Executive Vice President,
Mutual Fund Sales & Marketing,
State Street Research &
Management, March 1994 to June
1995.
James O'Malley (52) Director (since November 1998) Senior Vice President, U.S.
Pensions, The Manufacturers
Life Insurance Company,
January 1999 to present; Vice
President, Systems New
Business Pensions, The
Manufactures Life Insurance
</TABLE>
40
<PAGE> 44
<TABLE>
<S> <C> <C>
Company, 1984 to December
1998.
Joseph J. Pietroski (59) Director (since July 1992) Senior Vice President, General
Counsel and Corporate
Secretary, The Manufacturers
Life Insurance Company, 1988
to present.
John D. Richardson (60) Chairman and Director Senior Executive Vice
(Since January 1995) President, The Manufacturers
Life Insurance Company,
January 1999 to present;
Executive Vice President, U.S.
Operations, The Manufacturers
Life Insurance Company,
November 1997 to December
1998; Senior Vice President
and General Manager, U.S.
Operations, The Manufacturers
Life Insurance Company,
January 1995 to October 1997;
Senior Vice President and
General Manager, Canadian
Operations, The Manufacturers
Life Insurance Company, June
1992 To December 1994.
Victor Apps (51) Vice President, Asia Executive Vice President, Asia
Operations, The Manufacturers
Life Insurance Company,
November 1997 to present;
Senior Vice President and
General Manager, Greater China
Division, The Manufacturers
Life Insurance Company, 1993
to 1995; International Vice
President, Asia Pacific
Division, The Manufacturers
Life Insurance Company, 1988
to 1993.
Felix Chee (52) Vice President, Investments Executive Vice President, The
Manufacturers Life Insurance
Company, November 1997 to
present; Chief Investment
Officer, The Manufacturers
Life Insurance Company, June
1997 to present; Senior Vice
President and Treasurer, The
Manufacturers Life Insurance
Company, August 1994 to May
1997; Vice President and
Treasurer, The Manufacturers
Life Insurance Company,
October 1993 to July 1994.
Robert A. Cook (44) Vice President, Marketing Senior Vice President, U.S.
Individual Insurance, The
Manufacturers Life Insurance
Company, January 1999 to
present; Vice President,
Product Management, The
Manufacturers Life Insurance
Company, 1996 to December
1998; Sales and Marketing
Director, The Manufacturers
Life Insurance Company, 1994
to 1995.
Hugh McHaffie (40) Vice President Vice President, Product
Development, U.S. Annuities
The Manufacturers Life
Insurance Company, January
1996 to present; Vice
President, U.S. Annuities, The
Manufacturers Life Insurance
Company of North America,
September 1996 to present,
Vice President Product
Actuary, The Manufacturers
Life Insurance Company of
North America, August 1994 to
September 1996; Product
Development Executive, The
Manufacturers Life Insurance
Company of North America,
August 1990 to August 1994.
</TABLE>
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<PAGE> 45
<TABLE>
<S> <C> <C>
Douglas H. Myers (44) Vice President, Finance and President, ManEquity, Inc.,
Compliance, Controller April 1994 to present;
Assistant Vice President and
Controller, U.S. Operations,
The Manufacturers Life
Insurance Company, 1988 to
present.
John G. Vrysen (43) Vice President and Appointed Chief Financial Officer and
Actuary Treasurer, Manulife- Wood
Logan Holding Co., Inc.,
January 1996 to Present; Vice
President and Chief Financial
Officer U.S. Operations, The
Manufacturers Life Insurance
Company, January 1996 to
present; Vice President And
Chief Actuary, The
Manufacturers Life Insurance
Company of North America,
January 1986 to present.
Jean Wong (35) Vice President and Treasurer Vice President and Chief
Accountant, U.S. Division, The
Manufacturers Life Insurance
Company, May 1998 to present;
Chief Accountant, U.S.
Division, The Manufacturers
Life Insurance Company, July
1996 to May 1998; Director,
Finance and Administration,
Star Data Systems Inc.,
December 1995 to July 1996;
Vice President and Chief
Financial Services, June 1993
to December 1995.
</TABLE>
STATE REGULATIONS
We are subject to regulation and supervision by the Michigan Department of
Insurance, which periodically examines our financial condition and operations.
We are also subject to the insurance laws and regulations of all jurisdictions
in which we are authorized to do business. The Policies have been filed with
insurance officials, and meet all standards set by law, in each jurisdiction
where they are sold.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business for the purposes of determining solvency and compliance
with local insurance laws and regulations.
PENDING LITIGATION
No litigation is pending that would have a material effect upon the Separate
Account or the Trust.
ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act of 1933 with the
SEC relating to the offering described in this prospectus. This prospectus does
not include all the information set forth in the registration statement. You may
obtain the omitted information from the SEC's principal office in Washington,
D.C. upon payment of the prescribed fee.
For further information you may also contact our Service Office, the address and
telephone number of which are on the cover page of this prospectus.
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<PAGE> 46
INDEPENDENT AUDITORS
The consolidated financial statements of Manufacturers Life Insurance Company of
America and Separate Account Three of The Manufacturers Life Insurance Company
of America at December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given on the authority of such firm as experts in
accounting and auditing.
IMPACT OF YEAR 2000
The Company makes extensive use of information systems in the operations of its
various businesses, including for the exchange of financial data and other
information with customers, suppliers and other counterparties. The Company also
uses software and information systems provided by third parties in its
accounting, business and investment systems.
The Year 2000 risk, as it is commonly known, is the result of computer programs
being written using two digits, rather than four, to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in systems failures or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send premium billing notices, make claims payments or engage in
other normal business activities.
The systems used by the Company have been assessed as part of a comprehensive
written plan conducted by The Manufacturers Life Insurance Company (collectively
with its subsidiaries "Manufacturers Life "), to ensure that computer systems
and processes of Manufacturers Life and its subsidiaries and affiliates,
including the Company, will continue to perform through the end of this century
and in the next. In 1996, in order to make Manufacturers Life's systems Year
2000 compliant, a program was instituted to modify or replace both Manufacturers
Life's information technology systems ("IT systems") and embedded technology
systems ("Non-IT systems"). The phases of this program include (i) an inventory
and assessment of all systems to determine which are critical, (ii) planning and
designing the required modifications and replacements, (iii) making these
modifications and replacements, (iv) testing modified or replaced systems, (v)
redeploying modified or replaced systems and (vi) final management review and
certification. For most IT and non-IT systems identified as critical,
certification has been completed for the Company. Of those systems classified as
critical, management believes that over 99% were Year 2000 compliant at the end
of 1998. Management continues to focus attention on the remaining 1% of critical
systems. Those that affect the Company are expected to be compliant by the end
of the second quarter in 1999. Management believes that the Company's
non-critical systems will be Year 2000 compliant by the end of the first quarter
1999.
In addition to efforts directed at Manufacturers Life's own systems,
Manufacturers Life is presently consulting vendors, customers, and other third
parties with which it deals in an effort to ensure that no material aspect of
Manufacturers Life's operations will be hindered by Year 2000 problems of these
third parties. This process includes providing third parties with questionnaires
regarding the state of their Year 2000 readiness and, where possible or where
appropriate, conducting further due diligence activities. Manufacturers Life
recognizes the importance of preparing for the change to the Year 2000 and, in
January 1999, commenced preparation of contingency plans, in the event that
Manufacturers Life's Year 2000 program has not fully resolved its Year 2000
issues. The Year 2000 Project Management Office for Manufacturers Life's U.S.
Division is coordinating the preparation of the Year 2000 contingency plan on
behalf of U.S. Division affiliates and subsidiaries. Contingency planning is
targeted for completion by mid-1999.
Management currently believes that, with modifications to existing software and
conversions to new software, the Year 2000 risk will not pose significant
operational problems for Manufacturers Life's computer systems. As part of the
Year 2000 program, critical systems were "time-shift" tested in the Year 2000
and beyond to confirm that they will continue to function properly before,
during and after the change to the Year 2000. However, there can be no assurance
that Manufacturers Life's Year 2000 program, including consulting third parties
and its contingency planning, will avoid any material adverse effect on
Manufacturers Life operations, customer relations or financial condition.
Manufacturers Life estimates the total cost of its Year 2000 program will be
approximately $59 million, of which $49.5 million has been incurred through
December 31, 1998; however, there can be no assurance that the actual cost
incurred will not be materially higher than such estimate. Most
43
<PAGE> 47
costs will be expensed as incurred; however, those costs attributed to the
purchase of new software and hardware will generally be capitalized. The total
cost of the Year 2000 program is not expected to have a material effect on
Manufacturers Life's net operating income.
FINANCIAL STATEMENTS
Our financial statements included herein should be distinguished from the
financial statements of the Separate Account and should be considered only as
bearing upon our ability to meet our obligations under the Policies.
44
<PAGE> 48
Separate Account Three of
The Manufacturers Life Insurance Company of America
Financial Statements
Three years ended December 31, 1998
CONTENTS
Report of Independent Auditors..................................................
Audited Financial Statements
Statement of Assets and Liabilities.............................................
Statements of Operations........................................................
Statements of Changes in Net Assets.............................................
Notes to Financial Statements...................................................
F-1
<PAGE> 49
Report of Independent Auditors
To the Board of Directors
The Manufacturers Life Insurance
Company of America
We have audited the accompanying statement of assets and liabilities of Separate
Account Three of The Manufacturers Life Insurance Company of America as of
December 31, 1998 and the related statements of operations and changes in net
assets for each of the periods presented therein. These financial statements are
the responsibility of The Manufacturers Life Insurance Company of America'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. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Separate Account Three of The
Manufacturers Life Insurance Company of America at December 31, 1998, and the
results of its operations and the changes in its net assets for each of the
periods presented therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
February 4, 1999
F-2
<PAGE> 50
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNT NET ASSET
NET ASSET UNITS VALUE PER
VALUE OUTSTANDING UNIT
-----------------------------------------------
ASSETS
Investment in Manufacturers Investment Trust--at market value:
<S> <C> <C> <C>
Emerging Growth Trust, 2,802,542 shares (cost $62,104,620) $ 66,756,555 $ 1,547,427 $ 43.14
Quantitative Equity Trust, 2,069,537 shares (cost $38,807,860) 52,193,727 1,202,134 43.42
Real Estate Securities Trust, 1,536,662 shares (cost $24,594,352) 22,696,503 689,209 32.93
Balanced Trust, 2,589,172 shares (cost $43,897,491) 50,229,936 1,674,992 29.99
Capital Growth Bond Trust, 1,757,260 shares (cost $19,935,560) 21,245,278 929,261 22.86
Money Market Trust, 3,170,806 shares (cost $31,708,063) 31,708,063 1,731,857 18.31
International Stock Trust, 1,585,335 shares (cost $18,934,357) 20,577,642 1,473,246 13.97
Pacific Rim Emerging Markets Trust, 822,886 shares (cost $5,198,434) 5,620,314 772,206 7.28
Equity Index Trust, 2,839,061 shares (cost $37,536,543) 43,806,714 2,221,635 19.72
Equity Trust, 1,257,356 shares (cost $25,523,708) 24,493,286 1,651,448 14.83
Value Equity Trust, 1,044,760 shares (cost $16,442,598) 18,575,830 1,154,317 16.09
Growth and Income Trust, 1,165,238 shares (cost $26,765,264) 33,127,715 1,678,270 19.74
U.S. Government Securities Trust, 239,148 shares (cost $3,198,130) 3,305,023 276,793 11.94
Conservative Asset Allocation Trust, 80,313 shares (cost $925,126) 950,102 73,213 12.98
Moderate Asset Allocation Trust, 234,294 shares (cost $2,942,382) 3,125,486 218,986 14.27
Aggressive Asset Allocation Trust, 237,596 shares (cost $3,281,821) 3,625,719 233,924 15.50
International Small Cap Trust, 176,272 shares (cost $2,492,390) 2,693,435 190,424 14.14
Blue Chip Growth Trust, 566,488 shares (cost $8,957,998) 10,717,944 519,809 20.62
Science & Technology Trust, 252,885 shares (cost $3,476,302) 4,936,311 244,906 20.16
Pilgram Baxter Growth Trust, 122,992 shares (cost $1,528,419) 1,603,809 105,774 15.16
Small/Mid Cap Trust, 296,586 shares (cost $5,033,231) 5,863,507 299,424 19.58
Worldwide Growth Trust, 71,291 shares (cost $1,065,955) 1,080,064 72,735 14.85
Global Equity Trust, 208,185 shares (cost $3,996,239) 4,242,810 259,150 16.37
Growth Trust, 329,119 shares (cost $6,264,920) 6,746,944 363,585 18.56
Value Trust, 253,715 shares (cost $3,817,475) 3,567,228 251,058 14.21
International Growth and Income Trust, 124,135 shares (cost
$1,357,908) 1,405,214 104,239 13.48
High Yield Trust, 162,690 shares (cost $2,211,281) 2,101,957 147,641 14.24
Strategic Bond Trust, 247,629 shares (cost $2,962,146) 2,902,215 210,298 13.80
Global Government Bond Trust, 46,669 shares (cost $634,469) 640,768 45,061 14.22
Investment Quality Bond Trust, 114,782 shares (cost $1,396,240) 1,430,181 96,815 14.77
Lifestyle Aggressive 1000 Trust, 288,431 shares (cost $3,929,209) 3,862,092 257,160 15.02
Lifestyle Growth 820 Trust, 1,150,754 shares (cost $15,767,114) 15,857,396 1,049,185 15.11
Lifestyle Balanced 640 Trust, 422,244 shares (cost $5,614,581) 5,696,069 382,101 14.91
Lifestyle Moderate 460 Trust, 48,767 shares (cost $658,448) 678,344 44,619 15.20
Lifestyle Conservative 280 Trust, 7,984 shares (cost $102,293) 108,017 7,151 15.11
Small Company Value Trust, 32,243 shares (cost $355,941) 366,605 42,981 8.53
================
Net assets $ 478,538,803
================
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations
<TABLE>
<CAPTION>
EMERGING GROWTH QUANTITATIVE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
-------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
-------------------------------------------------------------------------------
Net investment income:
<S> <C> <C> <C> <C> <C> <C>
Dividend income $ 995,471 $ - $ 7,702,014 $ 5,169,494 $ - $ 4,240,752
-------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments:
Realized gain (loss) from security
transactions:
Proceeds from sales 6,100,016 7,107,331 4,088,127 4,267,545 3,096,117 1,222,403
Cost of securities sold 4,854,772 5,908,528 3,518,688 2,650,426 2,122,759 976,262
-------------------------------------------------------------------------------
Net realized gain (loss) 1,245,244 1,198,803 569,439 1,617,119 973,358 246,141
-------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of
investments:
Beginning of year 6,743,875 (1,640,500) 4,794,911 9,470,255 1,534,960 2,295,941
End of year 4,651,935 6,743,875 (1,640,500) 13,385,867 9,470,255 1,534,960
-------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
during
the year (2,091,940) 8,384,375 (6,435,411) 3,915,612 7,935,295 (760,981)
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (846,696) 9,583,178 (5,865,972) 5,532,731 8,908,653 (514,840)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from operations $ 148,775 $ 9,583,178 $ 1,836,042 $ 10,702,225 $ 8,908,653 $ 3,725,912
===============================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-4
<PAGE> 52
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES BALANCED CAPITAL GROWTH BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,092,425 $ - $ 2,776,056 $ 5,710,136 $ - $ 4,478,042 $ 1,051,960 $ - $ 864,430
- --------------------------------------------------------------------------------------------------------------------------
2,650,837 1,134,797 660,261 3,244,479 4,291,414 1,836,560 3,019,340 1,876,127 1,292,420
2,269,138 898,569 631,891 2,557,957 3,671,860 1,674,031 2,667,419 1,866,847 1,363,232
- --------------------------------------------------------------------------------------------------------------------------
381,699 236,228 28,370 686,522 619,554 162,529 351,921 9,280 (70,812)
- --------------------------------------------------------------------------------------------------------------------------
5,819,408 2,155,063 748,034 6,626,044 958,041 2,693,376 1,199,605 (223,171) 153,798
(1,897,849) 5,819,409 2,155,063 6,332,445 6,626,043 958,041 1,309,718 1,199,605 (223,171)
- --------------------------------------------------------------------------------------------------------------------------
(7,717,257) 3,664,346 1,407,029 (293,599) 5,668,002 (1,735,335) 110,113 1,422,776 (376,969)
- --------------------------------------------------------------------------------------------------------------------------
(7,335,558) 3,900,574 1,435,399 392,923 6,287,556 (1,572,806) 462,034 1,432,056 (447,781)
- --------------------------------------------------------------------------------------------------------------------------
$(4,243,133) $ 3,900,574 $ 4,211,455 $ 6,103,059 $ 6,287,556 $ 2,905,236 $ 1,513,994 $ 1,432,056 $ 416,649
==========================================================================================================================
</TABLE>
F-5
<PAGE> 53
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
MONEY MARKET INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
--------------------------------------------------------------------------------
Net investment income:
<S> <C> <C> <C> <C> <C> <C>
Dividend income $ 1,481,440 $ 1,159,280 $ 1,505,315 $ 313,529 $ 209,753 $ 248,736
--------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments:
Realized and unrealized gain (loss) from
security transactions:
Proceeds from sales 55,917,389 18,425,413 17,344,859 4,550,901 780,310 289,302
Cost of securities sold 55,917,389 19,340,111 16,936,049 3,876,157 656,813 250,445
--------------------------------------------------------------------------------
Net realized gain (loss) - (914,698) 408,810 674,744 123,497 38,857
--------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of
investments:
Beginning of year - (914,724) 233,720 131,809 450,565 99,777
End of year - 1 (914,724) 1,643,285 131,811 450,565
--------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
during the year - 914,725 (1,148,444) 1,511,476 (318,754) 350,788
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments - 27 (739,634) 2,186,220 (195,257) 389,645
--------------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from operations $ 1,481,440 $ 1,159,307 $ 765,681 $ 2,499,749 $ 14,496 $ 638,381
================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-6
<PAGE> 54
<TABLE>
<CAPTION>
PACIFIC RIM EMERGING MARKETS
SUB-ACCOUNT EQUITY INDEX SUB-ACCOUNT EQUITY SUB-ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ - $ 12,667 $ 239,201 $ 1,392,501 $ 2,468,634 $ 449,782 $ 3,871,537 $ 2,150,334 $ 26,181
- ----------------------------------------------------------------------------------------------------------------------------------
4,347,338 1,556,257 443,740 2,890,323 1,982,591 231,179 1,483,382 1,891,337 54,581
6,967,881 1,571,876 374,390 2,287,244 1,529,141 214,759 1,636,220 1,889,551 56,756
- ----------------------------------------------------------------------------------------------------------------------------------
(2,620,543) (15,619) 69,350 603,079 453,450 16,420 (152,838) 1,786 (2,175)
- ----------------------------------------------------------------------------------------------------------------------------------
(2,120,318) 67,813 88,856 488,049 (46,898) - 737,427 495,686 -
421,880 (2,120,317) 67,813 6,270,171 488,048 (46,898) (1,030,422) 737,427 495,686
- ----------------------------------------------------------------------------------------------------------------------------------
2,542,198 (2,188,130) (21,043) 5,782,122 534,946 (46,898) (1,767,849) 241,741 495,686
- ----------------------------------------------------------------------------------------------------------------------------------
(78,345) (2,203,749) 48,307 6,385,201 988,396 (30,478) (1,920,687) 243,527 493,511
- ----------------------------------------------------------------------------------------------------------------------------------
$ (78,345) $(2,191,082) $ 287,508 $ 7,777,702 $ 3,457,030 $ 419,304 $ 1,950,850 $ 2,393,861 $ 519,692
==================================================================================================================================
</TABLE>
F-7
<PAGE> 55
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
VALUE EQUITY SUB-ACCOUNT GROWTH AND INCOME SUB-ACCOUNT
----------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
----------------------------------------------------------------------------------
Net investment income:
<S> <C> <C> <C> <C> <C> <C>
Dividend income $ 976,745 $ 1,127,557 $ 8,790 $ 1,500,080 $ 556,761 $ 1,952
----------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments:
Realized and unrealized gain (loss) from
security transactions:
Proceeds from sales 1,391,651 1,288,325 438,548 2,830,806 3,054,342 82,474
Cost of securities sold 1,104,171 1,107,952 417,223 2,030,090 2,467,777 77,312
----------------------------------------------------------------------------------
Net realized gain (loss) 287,480 180,373 21,325 800,716 586,565 5,162
----------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of
investments:
Beginning of year 1,914,865 364,883 - 2,511,120 405,558 -
End of year 2,133,232 1,914,865 364,883 6,362,451 2,511,120 405,558
----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
during the year 218,367 1,549,982 364,883 3,851,331 2,105,562 405,558
----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 505,847 1,730,355 386,208 4,652,047 2,692,127 410,720
----------------------------------------------------------------------------------
Net increase (decrease) in net assets derived
from operations $ 1,482,592 $ 2,857,912 $ 394,998 $ 6,152,127 $ 3,248,888 $ 412,672
==================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-8
<PAGE> 56
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES CONSERVATIVE ASSET ALLOCATION MODERATE ASSET ALLOCATION
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 109,401 $ 123,037 $ 26,995 $ 72,830 $ 42,335 $ 8,660 $ 247,923 $ 83,798 $ 2,105
- -------------------------------------------------------------------------------------------------------------------------------
986,654 750,917 141,134 207,048 236,418 30,301 147,097 71,531 45,521
954,836 752,455 149,988 202,366 228,648 31,365 136,136 65,973 45,706
- -------------------------------------------------------------------------------------------------------------------------------
31,818 (1,538) (8,854) 4,682 7,770 (1,064) 10,961 5,558 (185)
- -------------------------------------------------------------------------------------------------------------------------------
67,077 38,928 - 17,540 6,566 - 101,169 23,967 -
106,893 67,077 38,928 24,976 17,540 6,566 183,104 101,169 23,967
- -------------------------------------------------------------------------------------------------------------------------------
39,816 28,149 38,928 7,436 10,974 6,566 81,935 77,202 23,967
- -------------------------------------------------------------------------------------------------------------------------------
71,634 26,611 30,074 12,118 18,744 5,502 92,896 82,760 23,782
- -------------------------------------------------------------------------------------------------------------------------------
$ 181,035 $ 149,648 $ 57,069 $ 84,948 $ 61,079 $ 14,162 $ 340,819 $ 166,558 $ 25,887
===============================================================================================================================
</TABLE>
F-9
<PAGE> 57
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
AGGRESSIVE ASSET ALLOCATION INTERNATIONAL SMALL CAP
SUB-ACCOUNT SUB-ACCOUNT
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97
----------------------------------------------------------------------
Net investment income:
<S> <C> <C> <C> <C> <C>
Dividend income $ 312,103 $ 140,784 $ 11,072 $ 5,687 $ 212
----------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments:
Realized and unrealized gain (loss) from
security transactions: 210,791 226,753 79,723 3,812,286 206,034
Proceeds from sales 181,226 204,492 82,946 3,842,577 203,025
----------------------------------------------------------------------
Cost of securities sold 29,565 22,261 (3,223) (30,291) 3,009
----------------------------------------------------------------------
Net realized gain (loss)
Unrealized appreciation (depreciation) of
investments:
Beginning of year 164,721 43,313 - (39,080) -
End of year 343,898 164,721 43,313 201,045 (39,080)
----------------------------------------------------------------------
Net unrealized appreciation (depreciation)
during
the year 179,177 121,408 43,313 240,125 (39,080)
----------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 208,742 143,669 40,090 209,834 (36,071)
----------------------------------------------------------------------
Net increase (decrease) in net assets derived
from operations $ 520,845 $ 284,453 $ 51,162 $ 215,521 $ (35,859)
======================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-10
<PAGE> 58
<TABLE>
<CAPTION>
BLUE CHIP GROWTH SCIENCE & TECHNOLOGY PILGRAM BAXTER GROWTH SMALL/MID WORLDWIDE GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT CAP SUB-ACCOUNT SUB-ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 98,459 $104,304 $ - $ 16,815 $ - $ - $ $ - $ 5,574 $ 2,704
- ------------------------------------------------------------------------------------------------------------------------------------
933,491 121,709 7,343,188 457,533 341,421 37,770 341,669 52,379 884,820 40,572
796,180 128,505 7,715,056 477,311 359,211 36,070 302,630 43,433 870,108 38,790
- ------------------------------------------------------------------------------------------------------------------------------------
137,311 (6,796) (371,868) (19,778) (17,790) 1,700 39,039 8,946 14,712 1,782
- ------------------------------------------------------------------------------------------------------------------------------------
239,380 - (62,464) - (18,510) - (4,182) - (4,391) -
1,759,946 239,382 1,460,009 (62,465) 75,390 (18,510) 830,276 (4,182) 14,109 (4,391)
- ------------------------------------------------------------------------------------------------------------------------------------
1,520,566 239,382 1,522,473 (62,465) 93,900 (18,510) 834,458 (4,182) 18,500 (4,391)
- ------------------------------------------------------------------------------------------------------------------------------------
1,657,877 232,586 1,150,605 (82,243) 76,110 (16,810) 873,497 4,764 33,212 (2,609)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,756,336 $336,890 $ 1,150,605 $ (65,428) $76,110 $ (16,810) $ 873,497 $ 4,764 $ 38,786 $ 95
====================================================================================================================================
</TABLE>
F-11
<PAGE> 59
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
GLOBAL VALUE
EQUITY SUB-ACCOUNT GROWTH SUB-ACCOUNT SUB-ACCOUNT
------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income:
Dividend income $ 167,578 $ - $ 95,683 $ - $ 117,791 $ 33,133
------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments:
Realized and unrealized gain (loss)
from security transactions:
Proceeds from sales 14,996,508 6,150 1,586,113 9,760 539,843 28,449
Cost of securities sold 15,031,676 5,777 1,462,588 8,653 517,327 25,668
------------------------------------------------------------------------------------------
Net realized gain (loss) (35,168) 373 123,525 1,107 22,516 2,781
------------------------------------------------------------------------------------------
Unrealized appreciation
(depreciation) of
investments:
Beginning of year 32,115 - 15,489 - (20,774) -
End of year 246,571 32,115 482,024 15,489 (250,247) (20,774)
------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) during the year 214,456 32,115 466,535 15,489 (229,473) (20,774)
------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on
investments 179,288 32,488 590,060 16,596 (206,957) (17,993)
------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
derived from operations $ 346,866 $ 32,488 $ 685,743 $ 16,596 $ (89,166) $ 15,140
==========================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-12
<PAGE> 60
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND GLOBAL INVESTMENT
INCOME HIGH YIELD STRATEGIC BOND GOVERNMENT BOND QUALITY BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 51,082 $ -- $ 151,912 $ 39,931 $ 86,088 $ -- $ 27,334 $ -- $ 20,278 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
7,091,488 18,809 2,330,540 347,712 556,779 18,384 370,605 3,662 134,493 4,700
7,095,830 18,622 2,338,454 339,830 574,721 17,681 378,835 3,587 127,939 4,564
- ------------------------------------------------------------------------------------------------------------------------------------
(4,342) 187 (7,914) 7,882 (17,942) 703 (8,230) 75 6,554 136
- ------------------------------------------------------------------------------------------------------------------------------------
(39,257) -- (13,453) -- 10,709 -- 3,801 -- 6,089 --
47,306 (39,257) (109,324) (13,453) (59,931) 10,709 6,299 3,801 33,941 6,089
- ------------------------------------------------------------------------------------------------------------------------------------
86,563 (39,257) (95,871) (13,453) (70,640) 10,709 2,498 3,801 27,852 6,089
- ------------------------------------------------------------------------------------------------------------------------------------
82,221 (39,070) (103,785) (5,571) (88,582) 11,412 (5,732) 3,876 34,406 6,225
- ------------------------------------------------------------------------------------------------------------------------------------
$ 133,303 $ (39,070) $ 48,127 $ 34,360 $ (2,494) $ 11,412 $ 21,602 $ 3,876 $ 54,684 $ 6,225
====================================================================================================================================
</TABLE>
F-13
<PAGE> 61
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
LIFESTYLE LIFESTYLE
AGGRESSIVE 1000 LIFESTYLE BALANCED 640
SUB-ACCOUNT GROWTH 820 SUB-ACCOUNT SUB-ACCOUNT
----------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income: $ 168,006 $ 4,916 $ 629,682 $ 36,584 $ 189,230 $ 16,038
-------------------------------------------------------------------------------------
Dividend income
Realized and unrealized gain (loss) on
investments:
Realized and unrealized gain (loss)
from security transactions: 787,348 18,722 634,837 53,801 896,183 152,797
Proceeds from sales 797,310 17,881 654,079 50,741 898,112 147,960
-------------------------------------------------------------------------------------
Cost of securities sold (9,962) 841 (19,242) 3,060 (1,929) 4,837
-------------------------------------------------------------------------------------
Net realized gain (loss)
Unrealized appreciation (depreciation)
of investments: (11,048) -- (24,738) -- 43,780 --
Beginning of year (67,117) (11,049) 90,282 (24,740) 81,488 43,781
-------------------------------------------------------------------------------------
End of year
Net unrealized appreciation (56,069) (11,049) 115,020 (24,740) 37,708 43,781
(depreciation)
-------------------------------------------------------------------------------------
during the year
Net realized and unrealized gain (loss) on (66,031) (10,208) 95,778 (21,680) 35,779 48,618
-------------------------------------------------------------------------------------
investments
Net increase (decrease) in net assets
derived from operations $ 101,975 $ (5,292) $ 725,460 $ 14,904 $ 225,009 $ 64,656
=====================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-14
<PAGE> 62
<TABLE>
<CAPTION>
LIFESTYLE LIFESTYLE SMALL COMPANY
MODERATE 460 CONSERVATIVE 280 VALUE TRUST
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** PERIOD ENDED*** YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/98 DEC. 31/97 DEC. 31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 20,025 $ 842 $ 552 $ 9 $ -- $ 28,132,536 $ 8,330,428 $ 22,590,083
- -----------------------------------------------------------------------------------------------------------------------------------
195,747 2,366 64,048 173 20,186 138,107,190 49,351,462 28,281,133
204,400 2,372 62,423 172 23,678 134,346,562 45,853,994 26,801,043
- -----------------------------------------------------------------------------------------------------------------------------------
(8,653) (6) 1,625 1 (3,492) 3,760,628 3,497,468 1,480,090
- -----------------------------------------------------------------------------------------------------------------------------------
4 -- 29 -- -- 33,986,145 3,720,050 11,108,413
19,896 3 5,724 29 10,664 45,119,935 33,986,146 3,720,050
- -----------------------------------------------------------------------------------------------------------------------------------
19,892 3 5,695 29 10,664 11,133,790 30,266,096 (7,388,363)
- -----------------------------------------------------------------------------------------------------------------------------------
11,239 (3) 7,320 30 7,172 14,894,418 33,763,564 (5,908,273)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 31,264 $ 839 $ 7,872 $ 39 $ 7,172 $ 43,026,954 $ 42,093,992 $ 16,681,810
===================================================================================================================================
</TABLE>
F-15
<PAGE> 63
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
EMERGING GROWTH QUANTITATIVE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
-----------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
-----------------------------------------------------------------------------------------------
FROM OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 995,471 $ -- $ 7,702,014 $ 5,169,494 $ -- $ 4,240,752
Net realized gain (loss) 1,245,244 1,198,803 569,439 1,617,119 973,358 246,141
Net unrealized appreciation
(depreciation) of investments
during the period (2,091,940) 8,384,375 (6,435,411) 3,915,612 7,935,295 (760,981)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets derived from operations 148,775 9,583,178 1,836,042 10,702,225 8,908,653 3,725,912
-----------------------------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 12,733,443 16,038,468 22,504,630 7,242,095 7,834,132 9,633,477
Transfer on death -- -- -- -- -- --
Transfer on terminations (6,445,689) (6,450,838) (4,593,540) (3,997,775) (4,132,053) (2,214,864)
Transfer on policy loans (218,046) (358,214) (610,713) (273,706) (432,977) (113,064)
Net interfund transfers (5,805,034) (6,440,946) (11,484) (1,628,360) (60,101) 1,337,385
-----------------------------------------------------------------------------------------------
264,674 2,788,470 17,288,893 1,342,254 3,209,001 8,642,934
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net 413,449 12,371,648 19,124,935 12,044,479 12,117,654 12,368,846
assets
NET ASSETS
Beginning of year 66,343,106 53,971,458 34,846,523 40,149,248 28,031,594 15,662,748
-----------------------------------------------------------------------------------------------
End of year $ 66,756,555 $ 66,343,106 $ 53,971,458 $52,193,727 $ 40,149,248 $28,031,594
===============================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-16
<PAGE> 64
<TABLE>
<CAPTION>
CAPITAL GROWTH
REAL ESTATE SECURITIES BALANCED BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,092,425 $ -- $ 2,776,056 $ 5,710,136 $ -- $ 4,478,042 $ 1,051,960 $ -- $ 864,430
381,699 236,228 28,370 686,522 619,554 162,529 351,921 9,280 (70,812)
(7,717,257) 3,664,346 1,407,029 (293,599) 5,668,002 (1,735,335) 110,113 1,422,776 (376,969)
- -----------------------------------------------------------------------------------------------------------------------------------
(4,243,133) 3,900,574 4,211,455 6,103,059 6,287,556 2,905,236 1,513,994 1,432,056 416,649
- -----------------------------------------------------------------------------------------------------------------------------------
5,859,264 5,723,061 4,465,307 7,177,808 8,963,510 10,619,657 3,364,775 4,146,312 4,480,626
-- -- -- -- (44,313) -- -- -- --
(2,117,340) (2,219,786) (1,347,117) (4,188,769) (3,729,355) (2,563,981) (1,655,470) (1,575,696) (1,205,581)
(77,402) (369,877) (65,858) (150,786) (417,435) (355,780) (32,638) (105,540) (27,779)
(2,327,888) 1,279,970 467,823 (534,390) (2,581,258) (394,561) (584,488) (81,587) 685,493
- -----------------------------------------------------------------------------------------------------------------------------------
1,336,634 4,413,368 3,520,155 2,303,863 2,191,149 7,305,335 1,092,179 2,383,489 3,932,759
- -----------------------------------------------------------------------------------------------------------------------------------
(2,906,499) 8,313,942 7,731,610 8,406,922 8,478,705 10,210,571 2,606,173 3,815,545 4,349,408
25,603,002 17,289,060 9,557,450 41,823,014 33,344,309 23,133,738 18,639,105 14,823,560 10,474,152
- -----------------------------------------------------------------------------------------------------------------------------------
$ 22,696,503 $ 25,603,002 $ 17,289,060 $ 50,229,936 $41,823,014 $ 33,344,309 $ 21,245,278 $ 18,639,105 $ 14,823,560
===================================================================================================================================
</TABLE>
F-17
<PAGE> 65
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
MONEY MARKET INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT
---------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
---------------------------------------------------------------------------------------
FROM OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 1,481,440 $ 1,159,280 $ 1,505,315 $ 313,529 $ 209,753 $ 248,736
Net realized gain (loss) -- (914,698) 408,810 674,744 123,497 38,857
Net unrealized appreciation
(depreciation) of investments
during the period -- 914,725 (1,148,444) 1,511,476 (318,754) 350,788
---------------------------------------------------------------------------------------
Net increase (decrease) in net
assets derived from operations 1,481,440 1,159,307 765,681 2,499,749 14,496 638,381
---------------------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 22,297,227 33,859,872 23,926,029 4,538,425 5,795,630 4,320,339
Transfer on death -- -- -- -- -- --
Transfer on terminations (3,358,411) (2,797,321) (2,399,186) (1,187,826) (1,224,478) (555,702)
Transfer on policy loans (384,658) (282,014) (34,484) (59,954) (106,208) (31,389)
Net interfund transfers (17,755,116) (20,937,650) (16,858,040) (574,437) 1,344,064 2,632,184
---------------------------------------------------------------------------------------
799,042 9,842,887 4,634,319 2,716,208 5,809,008 6,365,432
---------------------------------------------------------------------------------------
Net increase (decrease) in net 2,280,482 11,002,194 5,400,000 5,215,957 5,823,504 7,003,813
assets
NET ASSETS
Beginning of year 29,427,581 18,425,387 13,025,387 15,361,685 9,538,181 2,534,368
---------------------------------------------------------------------------------------
End of year $ 31,708,063 $ 29,427,581 $ 18,425,387 $ 20,577,642 $ 15,361,685 $ 9,538,181
=======================================================================================
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-18
<PAGE> 66
<TABLE>
<CAPTION>
PACIFIC RIM EMERGING MARKETS SUB-ACCOUNT EQUITY INDEX SUB-ACCOUNT EQUITY SUB-ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 12,667 $ 239,201 $ 1,392,501 $ 2,468,634 $ 449,782 $ 3,871,537 $ 2,150,334 $ 26,181
(2,620,543) (15,619) 69,350 603,079 453,450 16,420 (152,838) 1,786 (2,175)
2,542,198 (2,188,130) (21,043) 5,782,122 534,946 (46,898) (1,767,849) 241,741 495,686
- -----------------------------------------------------------------------------------------------------------------------------------
(78,345) (2,191,082) 287,508 7,777,702 3,457,030 419,304 1,950,850 2,393,861 519,692
- -----------------------------------------------------------------------------------------------------------------------------------
1,563,148 2,059,145 2,541,885 12,850,700 7,852,789 5,327,031 5,682,311 7,868,634 4,931,946
- -----------------------------------------------------------------------------------------------------------------------------------
(436,588) (620,211) (354,050) (2,024,088) (781,683) (136,828) (1,536,387) (1,054,893) (260,549)
(15,173) (58,638) (25,816) (475,140) (721,710) -- (34,034) (45,576) (65,890)
229,348 (630,778) 1,682,204 6,006,985 3,377,661 876,961 19,738 778,412 3,345,171
- -----------------------------------------------------------------------------------------------------------------------------------
1,340,735 749,518 3,844,223 16,358,457 9,727,057 6,067,164 4,131,628 7,546,577 7,950,678
- -----------------------------------------------------------------------------------------------------------------------------------
1,262,390 (1,441,564) 4,131,731 24,136,159 13,184,087 6,486,468 6,082,478 9,940,438 8,470,370
4,357,924 5,799,488 1,667,757 19,670,555 6,486,468 -- 18,410,808 8,470,370 --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 5,620,314 $ 4,357,924 $ 5,799,488 $ 43,806,714 $ 19,670,555 $ 6,486,468 $ 24,493,286 $ 18,410,808 $ 8,470,370
===================================================================================================================================
</TABLE>
F-19
<PAGE> 67
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
VALUE EQUITY GROWTH AND INCOME
SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 976,745 $ 1,127,557 $ 8,790 $ 1,500,080 $ 556,761 $ 1,952
Net realized gain (loss) 287,480 180,373 21,325 800,716 586,565 5,162
Net unrealized appreciation
(depreciation) of investments
during the period 218,367 1,549,982 364,883 3,851,331 2,105,562 405,558
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets derived from operations 1,482,592 2,857,912 394,998 6,152,127 3,248,888 412,672
------------ ------------ ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 3,243,426 4,090,507 3,266,118 6,862,398 7,079,242 2,527,210
Transfer on death -- -- -- -- -- --
Transfer on terminations (1,437,923) (793,110) (147,201) (1,576,405) (910,308) (98,012)
Transfer on policy loans (98,668) (69,774) (36,263) (46,701) (76,204) (13,676)
Net interfund transfers 563,898 3,108,426 2,150,892 2,330,998 4,479,340 2,756,146
------------ ------------ ------------ ------------ ------------ ------------
2,270,733 6,336,049 5,233,546 7,570,290 10,572,070 5,171,668
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net 3,753,325 9,193,961 5,628,544 13,722,417 13,820,958 5,584,340
assets
NET ASSETS
Beginning of year 14,822,505 5,628,544 -- 19,405,298 5,584,340 --
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 18,575,830 $ 14,822,505 $ 5,628,544 $ 33,127,715 $ 19,405,298 $ 5,584,340
============ ============ ============ ============ ============ ============
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-20
<PAGE> 68
<TABLE>
<CAPTION>
U.S. GOVERNMENT CONSERVATIVE ASSET MODERATE ASSET
SECURITIES ALLOCATION ALLOCATION
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED PERIOD ENDED*
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 109,401 $ 123,037 $ 26,995 $ 72,830 $ 42,335 $ 8,660 $ 247,923 $ 83,798 $ 2,105
31,818 (1,538) (8,854) 4,682 7,770 (1,064) 10,961 5,558 (185)
39,816 28,149 38,928 7,436 10,974 6,566 81,935 77,202 23,967
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
181,035 149,648 57,069 84,948 61,079 14,162 340,819 166,558 25,887
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
664,545 745,345 757,201 176,976 334,314 143,807 895,345 692,412 348,167
-- -- -- -- -- -- -- -- --
(154,411) (221,531) (35,748) (52,005) (34,376) (33,413) (208,435) (104,738) (25,611)
(32,573) (50,875) (30,576) -- -- -- (7,332) (346) --
423,298 (76,765) 929,361 46,253 (37,686) 246,043 230,395 588,790 183,575
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
900,859 396,174 1,620,238 171,224 262,252 356,437 909,973 1,176,118 506,131
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,081,894 545,822 1,677,307 256,172 323,331 370,599 1,250,792 1,342,676 532,018
2,223,129 1,677,307 -- 693,930 370,599 -- 1,874,694 532,018 --
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 3,305,023 $ 2,223,129 $ 1,677,307 $ 950,102 $ 693,930 $ 370,599 $ 3,125,486 $ 1,874,694 $ 532,018
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
F-21
<PAGE> 69
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
AGGRESSIVE ASSET ALLOCATION INTERNATIONAL SMALL CAP BLUE CHIP GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
-----------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED* YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 312,103 $ 140,784 $ 11,072 $ 5,687 $ 212 $ 98,459 $ 104,304
Net realized gain (loss) 29,565 22,261 (3,223) (30,291) 3,009 137,311 (6,796)
Net unrealized appreciation
(depreciation) of
investments during
the period 179,177 121,408 43,313 240,125 (39,080) 1,520,566 239,382
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in
net assets derived from
operations 520,845 284,453 51,162 215,521 (35,859) 1,756,336 336,890
------------ ------------ ------------ ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS
Additions (deductions)
from:
Transfer of net premiums 953,535 1,008,793 387,073 923,655 609,617 3,950,204 1,748,929
Transfer on death -- -- -- -- -- -- --
Transfer on terminations (257,332) (143,026) (58,999) (94,819) (48,039) (422,824) (152,046)
Transfer on policy loans (9,000) (2,986) -- (11,877) (2,873) (27,578) (5,593)
Net interfund transfers 193,464 263,513 434,224 258,711 879,398 1,683,424 1,850,202
------------ ------------ ------------ ------------ ------------ ------------ ------------
880,667 1,126,294 762,298 1,075,670 1,438,103 5,183,226 3,441,492
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in 1,401,512 1,410,747 813,460 1,291,191 1,402,244 6,939,562 3,778,382
net assets
NET ASSETS
Beginning of year 2,224,207 813,460 -- 1,402,244 -- 3,778,382 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
End of year $ 3,625,719 $ 2,224,207 $ 813,460 $ 2,693,435 $ 1,402,244 $ 10,717,944 $ 3,778,382
============ ============ ============ ============ ============ ============ ============
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-22
<PAGE> 70
<TABLE>
<CAPTION>
SCIENCE &TECHNOLOGY PILGRAM BAXTER GROWTH WORLDWIDE GROWTH
SUB-ACCOUNT SUB-ACCOUNT SMALL/MID CAP SUB-ACCOUNT SUB-ACCOUNT
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 16,815 $ -- $ -- $ -- $ -- $ 5,574 $ 2,704
(371,868) (19,778) (17,790) 1,700 39,039 8,946 14,712 1,782
1,522,473 (62,465) 93,900 (18,510) 834,458 (4,182) 18,500 (4,391)
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,150,605 (65,428) 76,110 (16,810) 873,497 4,764 38,786 95
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,150,664 361,963 515,555 141,492 1,769,196 757,544 396,653 143,932
-- -- -- -- -- -- -- --
(90,696) (21,603) (58,953) (7,886) (173,727) (32,683) (41,648) (4,603)
(13,553) (904) (11,158) -- (9,934) (269) (6,172) (1,290)
1,674,262 791,001 520,806 444,653 1,932,598 742,521 377,034 177,277
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
2,720,677 1,130,457 966,250 578,259 3,518,133 1,467,113 725,867 315,316
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
3,871,282 1,065,029 1,042,360 561,449 4,391,630 1,471,877 764,653 315,411
1,065,029 -- 561,449 -- 1,471,877 -- 315,411 --
- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$4,936,311 $ 1,065,029 $ 1,603,809 $ 561,449 $ 5,863,507 $ 1,471,877 $ 1,080,064 $ 315,411
========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
F-23
<PAGE> 71
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
GLOBAL EQUITY SUB-ACCOUNT GROWTH SUB-ACCOUNT VALUE SUB-ACCOUNT
-------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 167,578 $ -- $ 95,683 $ -- $ 117,791 $ 33,133
Net realized gain (loss) (35,168) 373 123,525 1,107 22,516 2,781
Net unrealized appreciation
(depreciation) of investments
during the period 214,456 32,115 466,535 15,489 (229,473) (20,774)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets derived from operations 346,866 32,488 685,743 16,596 (89,166) 15,140
----------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 1,830,508 697,468 3,294,658 470,000 1,600,753 346,369
Transfer on death -- -- -- -- -- --
Transfer on terminations (146,797) (22,616) (107,258) (29,691) (117,194) (21,998)
Transfer on policy loans (6,447) (283) (38,221) (2,329) (12,965) (1,030)
Net interfund transfers 750,096 761,527 1,662,737 794,709 1,104,824 742,495
----------- ----------- ----------- ----------- ----------- -----------
2,427,360 1,436,096 4,811,916 1,232,689 2,575,418 1,065,836
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in 2,774,226 1,468,584 5,497,659 1,249,285 2,486,252 1,080,976
net assets
NET ASSETS
Beginning of year 1,468,584 -- 1,249,285 -- 1,080,976 --
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 4,242,810 $ 1,468,584 $ 6,746,944 $ 1,249,285 $ 3,567,228 $ 1,089,976
=========== =========== =========== =========== =========== ===========
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes.
F-24
<PAGE> 72
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND GLOBAL GOVERNMENT BOND
INCOME SUB-ACCOUNT HIGH YIELD SUB-ACCOUNT STRATEGIC BOND SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
---------- --------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 51,082 $ - $ 151,912 $ 39,931 $ 86,088 $ - $ 27,334 $ -
(4,342) 187 (7,914) 7,882 (17,942) 703 (8,230) 75
86,563 (39,257) (95,871) (13,453) (70,640) 10,709 2,498 3,801
---------- --------- ---------- ---------- ---------- --------- --------- ---------
133,303 (39,070) 48,127 34,360 (2,494) 11,412 21,602 3,876
---------- --------- ---------- ---------- ---------- --------- --------- ---------
515,640 744,217 943,552 276,881 1,272,907 273,501 143,923 58,746
- - - - - - - -
(50,349) (9,912) (111,555) (31,310) (103,790) (11,295) (17,835) (2,335)
(2,253) - (7,304) (6,696) (10,279) (504) (6,107) -
23,545 90,093 158,145 797,757 1,091,881 380,876 277,425 161,473
---------- --------- ---------- ---------- ---------- --------- --------- ---------
486,583 824,398 982,838 1,036,632 2,250,719 642,578 397,406 217,884
---------- --------- ---------- ---------- ---------- --------- --------- ---------
619,886 785,328 1,030,965 1,070,992 2,248,225 653,990 419,008 221,760
785,328 - 1,070,992 - 653,990 - 221,760 -
---------- --------- ---------- ---------- ---------- --------- --------- ---------
$1,405,214 $ 785,328 $2,101,957 $1,070,992 $2,902,215 $ 653,990 $ 640,768 $ 221,760
========== ========= ========== ========== ========== ========= ========= =========
</TABLE>
F-25
<PAGE> 73
Separate Account Three of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
INVESTMENT QUALITY BOND LIFESTYLE AGGRESSIVE 1000 LIFESTYLE GROWTH 820
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED**
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 20,278 $ -- $ 168,006 $ 4,916 $ 629,682 $ 36,584
Net realized gain (loss) 6,554 136 (9,962) 841 (19,242) 3,060
Net unrealized appreciation
(depreciation) of investments
during the period 27,852 6,089 (56,069) (11,049) 115,020 (24,740)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets derived from operations 54,684 6,225 101,975 (5,292) 725,460 14,904
------------ ------------ ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 443,446 75,411 1,299,712 421,769 7,009,770 2,011,046
Transfer on death -- -- -- -- -- --
Transfer on terminations (45,715) (3,321) (258,375) (47,502) (827,050) (85,509)
Transfer on policy loans (46,096) -- (26,714) (3,766) (176,891) (826)
Net interfund transfers 762,855 182,692 316,522 2,063,763 3,867,109 3,319,383
------------ ------------ ------------ ------------ ------------ ------------
1,114,490 254,782 1,331,145 2,434,264 9,872,938 5,244,094
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net 1,169,174 261,007 1,433,120 2,428,972 10,598,398 5,258,998
assets
NET ASSETS
Beginning of year 261,007 -- 2,428,972 -- 5,258,998 --
------------ ------------ ------------ ------------ ------------ ------------
End of year $ 1,430,181 $ 261,007 $ 3,862,092 $ 2,428,972 $ 15,857,396 $ 5,258,998
============ ============ ============ ============ ============ ============
</TABLE>
* Reflects the period from commencement of operations February 14, 1996
through December 31, 1996
** Reflects the period from commencement of operations May 1, 1997 through
December 31, 1997
*** Reflects the period from commencement of operations May 1, 1998 through
December 31, 1998
See accompanying notes
F-26
<PAGE> 74
<TABLE>
<CAPTION>
SMALL COMPANY
LIFESTYLE BALANCED 640 LIFESTYLE MODERATE 460 LIFESTYLE CONSERVATIVE 280 VALUE TRUST
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** YEAR ENDED PERIOD ENDED** PERIOD ENDED***
DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98 DEC. 31/97 DEC. 31/98
- ----------- ---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 189,230 $ 16,038 $ 20,025 $ 842 $ 552 $ 9 $ -
(1,929) 4,837 (8,653) (6) 1,625 1 (3,492)
37,708 43,781 19,892 3 5,695 29 10,664
- ----------- ---------- --------- --------- --------- --------- ----------
225,009 64,656 31,264 839 7,872 39 7,172
- ----------- ---------- --------- --------- --------- --------- ----------
2,223,707 568,684 287,313 92,570 35,078 150 183,290
- - - - - - -
(520,437) (122,871) (25,583) (2,513) (3,934) (224) (6,126)
(28,495) - - - - - -
1,672,788 1,613,028 282,970 11,484 67,660 1,376 182,269
- ----------- ---------- --------- --------- --------- --------- ----------
3,347,563 2,058,841 544,700 101,541 98,804 1,302 359,433
- ----------- ---------- --------- --------- --------- --------- ----------
3,572,572 2,123,497 575,964 102,380 106,676 1,341 366,605
2,123,497 - 102,380 - 1,341 - -
- ----------- ---------- --------- --------- --------- --------- ----------
$ 5,696,069 $2,123,497 $ 678,344 $ 102,380 $ 108,017 $ 1,341 $ 366,605
=========== ========== ========= ========= ========= ========= ==========
</TABLE>
<TABLE>
TOTAL
- -----------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96
- ------------- ------------- -------------
<S> <C> <C>
$ 28,132,536 $ 8,330,428 $ 22,590,083
3,760,628 3,497,468 1,480,090
11,133,790 30,266,096 (7,388,363)
- ------------- ------------- -------------
43,026,954 42,093,992 16,681,810
- ------------- ------------- -------------
125,895,605 123,892,455 100,180,503
-- (44,313) --
(33,859,519) (27,451,360)
(2,357,855) (3,124,737) (1,411,288)
(497,675) 179,113 463,377
- ------------- ------------- -------------
89,180,556 93,451,158 83,202,210
- ------------- ------------- -------------
132,207,510 135,545,150 99,884,020
346,331,293 210,786,143 110,902,123
- ------------- ------------- -------------
$ 478,538,803 $ 346,331,293 $ 210,786,143
============= ============= =============
</TABLE>
F-27
<PAGE> 75
Separate Account Three of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION
Separate Account Three of The Manufacturers Life Insurance Company of America
(the "Separate Account") is a unit investment trust registered under the
Investment Company Act of 1940, as amended. The Separate Account is comprised of
investment sub-accounts available for allocation of net premiums under single
premium variable life and variable universal life insurance policies (the
"Policies") issued by The Manufacturers Life Insurance Company of America
("Manufacturers Life of America"). The Separate Account was established by
Manufacturers Life of America, a life insurance company organized in 1983 under
Michigan law. Manufacturers Life of America is an indirect, wholly-owned
subsidiary of The Manufacturers Life Insurance Company ("Manulife Financial"), a
Canadian mutual life insurance company. Each investment sub-account invests
solely in shares of a particular Manufacturers Investment Trust. Manufacturers
Investment Trust is registered under the Investment Company Act of 1940 as an
open-end management investment company.
The Equity Index Fund, Equity, Value Equity, Growth and Income, U.S. Government
Securities, Conservative Asset Allocation, Moderate Asset Allocation, and
Aggressive Asset Allocation Trusts were added to the Separate Account on
February 14, 1996 as investment options for variable universal life policy
holders of Manufacturers Life of America.
The International Small Cap and Blue Chip Growth Trusts was added to the
Separate Account on January 1, 1997 as investment options for variable universal
life policy holders of Manufacturers Life of America. The Science & Technology,
Pilgram Baxter Growth, Small/Mid Cap, Worldwide Growth, Global Equity, Growth,
Value, International Growth and Income, High Yield, Strategic Bond, Global
Government Bond, Investment Quality Bond, Lifestyle Aggressive 1000, Lifestyle
Growth 820, Lifestyle Balanced 640, Lifestyle Moderate 460, and Lifestyle
Conservative 280 Trusts were added to the Separate Account on May 1, 1997 as
investment options for variable universal life policy holders of Manufacturers
Life of America. The Small Company Value Trust was added to the Separate Account
on May 1, 1998.
F-28
<PAGE> 76
Separate Account Three of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
1. ORGANIZATION (CONTINUED)
Manufacturers Life of America is the legal owner of the Separate Account.
Manufacturers Life of America is required to maintain assets in the Separate
Account with a total market value at least equal to the reserves and other
liabilities relating to the variable benefits under all policies participating
in the Separate Account. These assets may not be charged with liabilities which
arise from any other business Manufacturers Life of America conducts. However,
all obligations under the variable policies are general corporate obligations of
Manufacturers Life of America.
Additional assets are held in Manufacturers Life of America's general account to
cover the contingency that the guaranteed minimum death benefit might exceed the
death benefit which would have been payable in the absence of such guarantee.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Separate Account in preparation of its financial statements:
a. Valuation of Investments - Investments are made among thirty-six Trusts of
Manufacturers Investment Trust and are valued at the reported net asset
values of these Trusts. Transactions are recorded on the trade date. Net
investment income and net realized gains on investments in Manufacturers
Investment Trust are reinvested.
b. Realized gains and losses on the sale of investments are computed on the
first-in, first-out basis.
c. Dividend income is recorded on the ex-dividend date.
d. Federal Income Taxes - Manufacturers Life of America, the Separate
Account's sponsor, is taxed as a "life insurance company" under the
Internal Revenue Code. Under these provisions of the Code, the operations
of the Separate Account form part of the sponsor's total operations and are
not taxed separately.
The current year's operations of the Separate Account are not expected to affect
the sponsor's tax liabilities and, accordingly, no charges were made against the
Separate Account for federal, state and local taxes. However, in the future,
should the sponsor incur significant tax liabilities related to the Separate
Account's operations, it intends to make a charge or establish a provision
within the Separate Account for such taxes.
F-29
<PAGE> 77
Separate Account Three of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PREMIUM DEDUCTIONS
Manufacturers Life of America deducts certain charges for state, local, and
federal taxes from the gross premium before placing the remaining net premiums
in the sub-accounts.
4. PURCHASES AND SALES OF MANUFACTURERS INVESTMENT TRUST SHARES
Purchases and sales of the shares of common stock of Manufacturers Investment
Trust for the year ended December 31, 1998 were $255,373,727 and $138,107,190,
respectively, and for the year ended December 31, 1997 were $152,223,137 and
$49,351,462, respectively.
5. RELATED PARTY TRANSACTIONS
ManEquity, Inc., a registered broker-dealer and indirect wholly-owned subsidiary
of Manulife Financial, acts as the principal underwriter of the Policies
pursuant to a Distribution Agreement with Manufacturers Life of America.
Registered representatives of either ManEquity, Inc. or other broker-dealers
having distribution agreements with ManEquity, Inc. who are also authorized as
variable life insurance agents under applicable state insurance laws, sell the
Policies. Registered representatives are compensated on a commission basis.
Manufacturers Life of America has a formal service agreement with its
affiliates, Manulife Financial and The Manufacturers Life Insurance Company
(U.S.A.), which can be terminated by either party upon two months notice. Under
this Agreement, Manufacturers Life of America pays for legal, actuarial,
investment and certain other administrative services.
F-30
<PAGE> 78
CONSOLIDATED FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
CONTENTS
Report of Independent Auditors..................................................
Audited Consolidated Financial Statements.......................................
Consolidated Balance Sheets................................................
Consolidated Statements of Income..........................................
Consolidated Statements of Changes in Capital And Surplus..................
Consolidated Statements of Cash Flows......................................
Notes to Consolidated Financial Statements......................................
F-31
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Manufacturers Life Insurance Company of America
We have audited the accompanying consolidated balance sheets of The
Manufacturers Life Insurance Company of America as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in capital and
surplus and cash flows for each of the three years in the period ended December
31, 1998. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Manufacturers
Life Insurance Company of America at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
March 15, 1999 Ernst & Young LLP
F-32
<PAGE> 80
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31 ($ thousands)
ASSETS 1998 1997
INVESTMENTS:
<S> <C> <C>
Securities available-for-sale, at fair value: (note 3)
Fixed maturity (amortized cost: 1998 $45,248; 1997 $66,565) $ 49,254 $ 67,893
Equity (cost: 1998 $ 19,219; 1997 $20,153) 20,524 19,460
Short-term investments 459 2,130
Policy loans 19,320 14,673
TOTAL INVESTMENTS $ 89,557 $ 104,156
Cash and cash equivalents $ 23,789 $ 19,882
Deferred acquisition costs (note 5) 163,506 130,355
Income taxes recoverable 2,665 5,679
Other assets 9,062 9,495
Separate account assets 1,075,231 897,044
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,363,810 $ 1,166,611
- --------------------------------------------------------------------------------------------------------------
LIABILITIES, CAPITAL AND SURPLUS 1998 1997
- --------------------------------------------------------------------------------------------------------------
LIABILITIES:
Policyholder liabilities and accruals $ 60,830 $ 94,477
Notes payable (note 7) -- 41,500
Due to affiliates 5,133 13,943
Deferred income taxes (note 6) 763 1,174
Other liabilities 18,656 11,704
Separate account liabilities 1,075,231 897,044
TOTAL LIABILITIES $ 1,160,613 $ 1,059,842
- --------------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common shares (note 8) $ 4,502 $ 4,502
Preferred shares (note 8) 10,500 10,500
Contributed surplus 193,096 98,569
Retained earnings (deficit) (2,664) (1,910)
Accumulated other comprehensive income (loss) (2,237) (4,892)
TOTAL CAPITAL AND SURPLUS $ 203,197 $ 106,769
TOTAL LIABILITIES, CAPITAL AND SURPLUS $ 1,363,810 $ 1,166,611
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 81
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Premiums $ 9,290 $ 8,607 $ 12,898
Consideration paid on reinsurance terminated (note 10) (40,975) -- --
Fee income 54,547 38,682 40,434
Net investment income (note 3) 6,128 8,275 19,651
Realized investment gains (losses) (206) 118 (119)
Other 1,082 544 668
- --------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 29,866 $ 56,226 $ 73,532
- --------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Policyholder benefits and claims $ 16,541 $ 6,733 $ 14,473
Reduction of reserves on reinsurance terminated (note 10) (40,975) -- --
Operating costs and expenses 41,676 41,742 34,581
Commissions 2,561 2,838 10,431
Amortization of deferred acquisition costs (note 5) 9,266 4,860 13,240
Interest expense 1,722 2,750 12,251
Policyholder dividends 221 1,416 872
- --------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 31,012 60,339 85,848
- --------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,146) (4,113) (12,316)
- --------------------------------------------------------------------------------------------------------------------------
INCOME TAX BENEFIT (NOTE 6) 392 477 3,909
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (754) $ (3,636) $ (8,407)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE> 82
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL
FOR THE YEARS ENDED DECEMBER 31 CAPITAL CONTRIBUTED EARNINGS COMPREHENSIVE CAPITAL AND
($ thousands) STOCK SURPLUS (DEFICIT) INCOME (LOSS) SURPLUS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $15,002 $ 83,569 $10,133 $ 1,816 $ 110,520
Issuance of shares - 15,000 - - 15,000
Comprehensive income (loss) (note 2) - - (8,407) (483) (8,890)
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $15,002 $ 98,569 $ 1,726 $ 1,333 $ 116,630
Comprehensive income (loss) (note 2) - - (3,636) (6,225) (9,861)
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $15,002 $ 98,569 $(1,910) $ (4,892) $ 106,769
Capital contribution (note 8) - 94,527 - - 94,527
Comprehensive income (loss) (note 2) - - (754) 2,655 1,901
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $15,002 $193,096 $(2,664) $ (2,237) $ 203,197
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE> 83
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Loss $ (754) $ (3,636) $ (8,407)
Adjustments to reconcile net loss to net cash used in operating activities:
Additions (deductions) to policy liabilities and accruals (36,217) (2,147) 3,287
Deferred acquisition costs (43,065) (33,544) (36,024)
Amortization of deferred acquisition costs 9,266 4,860 13,240
Realized (gains) losses on investments 206 (118) 119
Decreases (increases) to deferred income taxes (1,796) 2,730 777
Other 3,067 7,144 6,540
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (69,293) $ (24,711) $ (20,468)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Fixed maturity securities sold $ 27,852 $ 73,772 $ 120,234
Fixed maturity securities purchased (6,429) (89,763) (108,401)
Equity securities sold 8,555 10,586 25,505
Equity securities purchased (8,082) (11,289) (22,203)
Mortgage loans repaid -- 514 6,669
Net change in short-term investments 1,671 4,558 (2,992)
Net policy loans advanced (4,647) (4,851) (2,867)
Guaranteed annuity contracts -- 171,691 (16,356)
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by investing activities $ 18,920 $ 155,218 $ 2,581
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Receipts from variable life and annuity policies
credited to policyholder account balances $ 7,981 $ 7,582 $ 5,493
Withdrawals of policyholder account balances on
variable life and annuity policies (5,410) (3,252) (2,994)
Bonds payable repaid -- (158,760) --
Issuance of shares -- -- 15,000
Issuance of promissory note -- 33,000 --
Capital Contribution 51,709 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities $ 54,280 $(121,430) $ 17,499
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year 3,907 9,077 (3,380)
Balance, beginning of year 19,882 10,805 14,185
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 23,789 $ 19,882 $ 10,805
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE> 84
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION
The Manufacturers Life Insurance Company of America (the "Company") is
a wholly-owned subsidiary of The Manufacturers Life Insurance Company
(U.S.A.) ("ManUSA"), which is in turn an indirectly wholly-owned
subsidiary of The Manufacturers Life Insurance Company ("Manulife
Financial"), a Canadian-based mutual life insurance company. The
Company markets variable annuity and variable life products in the
United States and traditional insurance products in Taiwan.
On December 31, 1996, ManUSA transferred to the Company all of the
common and preferred shares of Manulife Holding Corporation ("Holdco"),
an investment holding company. The Company then transferred all the
common and preferred shares of Manufacturers Adviser Corporation
("MAC") to Holdco for two shares of $1 common stock of Holdco. Holdco
has primarily three wholly-owned subsidiaries, ManEquity Inc., a
registered broker/dealer, MAC, an investment fund management company,
and Manulife Capital Corporation ("MCC"), an investment holding
company.
In October 1997, the Manufacturers Life Mortgage Securities Corporation
("MLMSC"), a subsidiary of Holdco, was absorbed into Holdco subsequent
to the maturity and repayment of the mortgage-backed US dollar bonds.
All assets and liabilities of MLMSC were transferred to Holdco at their
respective book values.
These transfers have been accounted for using the pooling-of-interests
method of accounting. Under this method, the assets, liabilities,
capital and surplus, revenues and expenses of each separate entity are
combined retroactively at their historical carrying values to form the
financial statements of the Company for all periods presented to give
effect to the reorganization as if the structure in place at December
31, 1996 had been in place as of the earliest period presented in these
consolidated financial statements. The accounts of all subsidiary
companies are therefore combined and all significant intercompany
balances and transactions are eliminated on combination. In addition,
the capital and surplus of the Company has been restated retroactively
to reflect the capital structure in place at December 31, 1996.
F-37
<PAGE> 85
The revenues and net income reported by the separate entities and the combined
amounts presented in the accompanying consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
($ thousands) 1996
- -----------------------------------------------------------------------------------
Revenue:
<S> <C>
ManAmerica $54,404
Holdco 15,543
MAC 3,585
- -----------------------------------------------------------------------------------
TOTAL REVENUE $73,532
- -----------------------------------------------------------------------------------
Net Income (loss):
ManAmerica $(8,676)
Holdco (670)
MAC 939
- -----------------------------------------------------------------------------------
TOTAL NET LOSS $(8,407)
- -----------------------------------------------------------------------------------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting
principles ("GAAP").
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those
estimates.
Certain reclassifications have been made to 1997 and 1996 financial
information to conform to the 1998 presentation.
b) RECENT ACCOUNTING STANDARDS
i) During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose annual
financial statements. Comprehensive income includes all changes in
shareholder's equity during a period except those resulting from
investments by and distributions to shareholders. The adoption of SFAS
No. 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity
of the Company.
F-38
<PAGE> 86
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) $ (754) $ (3,636) $ (8,407)
----------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) arising during the period 2,435 (1,030) (560)
Foreign currency translation 86 (5,272) -
Reclassification adjustment for realized gains (losses)
included in net income (134) 77 (77)
----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 2,655 (6,225) (483)
----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 1,901 $ (9,861) $ (8,890)
----------------------------------------------------------------------------------------------------------
</TABLE>
Other comprehensive income (loss) is reported net of tax expense
(benefit) of $1,430, $(513), and $260 for 1998, 1997, and 1996,
respectively.
Accumulated other comprehensive income is comprised of the following:
<TABLE>
<CAPTION>
AS AT DECEMBER 31
($ thousands) 1998 1997
----------------------------------------------------------------------------------------------------------
UNREALIZED GAINS (LOSSES):
<S> <C> <C>
Beginning balance $ 380 $ 1,333
Current period change 2,569 (953)
----------------------------------------------------------------------------------------------------------
Ending balance $ 2,949 $ 380
----------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY:
Beginning balance $ (5,272) $ -
Current period change 86 (5,272)
----------------------------------------------------------------------------------------------------------
Ending balance $ (5,186) $ (5,272)
----------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) $ (2,237) $ (4,892)
----------------------------------------------------------------------------------------------------------
</TABLE>
ii) During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the disclosure of information about the
Company's operating segments, including disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS
No. 131 did not affect results of operations or financial position,
nor did it affect the manner in which the Company defines its
operating segments. The Company reports two business segments:
Traditional Life Insurance sold in Taiwan and Variable Life and
Annuities sold in the U.S. Refer to Note 12 for additional segment
information.
c) INVESTMENTS
The Company classifies all of its fixed maturity and equity securities
as available-for-sale and records these securities at fair value.
Realized gains and losses on sales of securities classified as
available-for-sale are recognized in net income using the specific
identification method. Changes in the fair value of securities
available-for-sale are reflected directly in accumulated other
comprehensive income after adjustments for deferred taxes and deferred
acquisition costs. Discounts and premiums on investments are amortized
using the effective interest method.
F-39
<PAGE> 87
Policy loans are reported at aggregate unpaid balances which
approximate fair value.
Short-term investments include investments with maturities of less than
one year at the date of acquisition.
d) 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.
e) DEFERRED ACQUISITION COSTS (DAC)
Commissions and other expenses which vary with and are primarily
related to the production of new business are deferred to the extent
recoverable and included as an asset. DAC associated with variable
annuity and variable life insurance contracts is charged to expense in
relation to the estimated gross profits of those contracts. The
amortization is adjusted retrospectively when estimates of current or
future gross profits are revised. DAC associated with traditional life
insurance policies is charged to expense over the premium paying period
of the related policies. DAC is adjusted for the impact on estimated
future gross profits assuming the unrealized gains or losses on
securities had been realized at year-end. The impact of any such
adjustments is included in net unrealized gains (losses) in accumulated
other comprehensive income. DAC is reviewed annually to determine
recoverability from future income and, if not recoverable, it is
immediately expensed.
f) POLICYHOLDER LIABILITIES
For variable annuity and variable life contracts, reserves equal the
policyholder account value. Account values are increased for deposits
received and interest credited and are reduced by withdrawals,
mortality charges and administrative expenses charged to the
policyholders. Policy charges which compensate the Company for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DAC.
Policyholder liabilities for traditional life insurance policies sold
in Taiwan are computed using the net level premium method and are based
upon estimates as to future mortality, persistency, maintenance expense
and interest rate yields that were established in the year of issue.
g) SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds that are
separately administered, principally for variable annuity and variable
life contracts, and for which the contract holder, rather than the
Company, bears the investment risk Separate account assets are recorded
at market value. Operations of the separate accounts are not included
in the accompanying financial statements.
F-40
<PAGE> 88
h) REVENUE RECOGNITION
Fee income from variable annuity and variable life insurance policies
consists of policy charges for the cost of insurance, expenses and
surrender charges that have been assessed against the policy account
balances. Policy charges that are designed to compensate the company
for future services are deferred and recognized in income over the
period benefited, using the same assumptions used to amortize DAC.
Premiums on long-duration life insurance contracts are recognized as
revenue when due. Investment income is recorded when due.
i) EXPENSES
Expenses for variable annuity and variable life insurance policies
include interest credited to policy account balances and benefit claims
incurred during the period in excess of policy account balances.
j) REINSURANCE
The Company is routinely involved in reinsurance transactions in order
to minimize exposure to large risks. Life reinsurance is accomplished
through various plans including yearly renewable term, co-insurance and
modified co-insurance. Reinsurance premiums, policy charges for cost of
insurance and claims are accounted for on a basis consistent with that
used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums, fees and claims are reported net
of reinsured amounts. Amounts paid with respect to ceded reinsurance
contracts are reported as reinsurance receivables in other assets.
k) FOREIGN EXCHANGE
The Company's Taiwanese branch balance sheet and statement of income
are translated at the current exchange and average exchange rates for
the year respectively. The resultant translation adjustments are
included in accumulated other comprehensive income.
l) INCOME TAX
Income taxes have been provided for in accordance with SFAS No. 109
"Accounting for Income Taxes." The Company joins ManUSA, Manulife
Reinsurance Corporation ("MRC") and Manulife Reinsurance Limited
("MRL") in filing a U.S. consolidated income tax return as a life
insurance group under provisions of the Internal Revenue Code. In
accordance with an income tax sharing agreement, the Company's income
tax provision (or benefit) is computed as if the Company filed a
separate income tax return. Tax benefits from operating losses are
provided at the U.S. statutory rate plus any tax credits attributable
to the Company, provided the consolidated group utilizes such benefits
currently. Deferred income taxes result from temporary differences
between the tax basis of assets and liabilities and their recorded
amounts for financial reporting purposes. Income taxes recoverable
represents amounts due from ManUSA in connection with the consolidated
return.
F-41
<PAGE> 89
3. INVESTMENTS AND INVESTMENT INCOME
a) FIXED MATURITY AND EQUITY SECURITIES
At December 31, 1998, all fixed maturity and equity securities have
been classified as available-for-sale and reported at fair value. The
amortized cost and fair value is summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSSES FAIR VALUE
AS AT DECEMBER 31, GAINS
($ thousands) 1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES:
U.S. government $27,349 $51,694 $2,578 $ 937 $ - $ (135) $29,927 $52,496
Foreign governments 9,353 6,922 709 203 - (14) 10,062 7,111
Corporate 8,546 7,949 719 415 - (78) 9,265 8,286
---------------------------------------------------------------------------------------------------------------
Total fixed maturity
securities $45,248 $66,565 $4,006 $1,555 $ - $ (227) $49,254 $67,893
Equity securities $19,219 $20,153 $3,217 $1,496 $(1,912) $(2,189) $20,524 $19,460
---------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturity securities during 1998 were
$27,852 (1997 $73,772; 1996 $120,234). Gross gains of $362 and gross
losses of $107 were realized on those sales (1997 $955 and $837; 1996
$1,858 and $1,837 respectively).
Proceeds from sale of equity securities during 1998 were $8,555 (1997
$10,586; 1996 $25,505). Gross gains of $16 and gross losses of $477
were realized on those sales (1997 $NIL and $NIL; 1996 $NIL and $140
respectively).
The contractual maturities of fixed maturity securities at December 31,
1998 are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
<TABLE>
<CAPTION>
($ thousands) AMORTIZED COST FAIR VALUE
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities
One year or less $ 1,174 $ 1,179
Greater than 1; up to 5 years 7,792 8,081
Greater than 5; up to 10 years 24,422 26,395
Due after 10 years 11,860 13,599
---------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITY SECURITIES $45,248 $49,254
---------------------------------------------------------------------------------------------------------
</TABLE>
F-42
<PAGE> 90
b) INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 4,675 $ 4,545 $ 4,447
Equity securities 227 331 671
Guaranteed annuity contracts - 2,796 13,196
Other investments 1,485 772 1,697
----------------------------------------------------------------------------------------------------------
Gross investment income 6,387 8,444 20,011
----------------------------------------------------------------------------------------------------------
Investment expenses 259 169 360
----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 6,128 $ 8,275 $ 19,651
----------------------------------------------------------------------------------------------------------
</TABLE>
4. GUARANTEED ANNUITY CONTRACTS AND BONDS PAYABLE
The Company's wholly-owned subsidiary, Manufacturers Life Mortgage
Securities Corporation, has historically invested amounts received as
repayments of mortgage loans in annuities issued by ManUSA. These
annuities were collateral for the 8 1/4 % mortgage-backed bonds
payable. On March 1, 1997 the annuities matured and the proceeds were
used to repay the bonds payable.
In October 1997, MLMSC was absorbed into Manulife Holding Corporation.
5. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, $130,355 $102,610 $ 78,829
Capitalization 43,065 33,544 36,024
Accretion of interest 11,417 9,357 6,344
Amortization (20,683) (14,217) (19,583)
Effect of net unrealized gains (losses)
on securities available for sale (784) 1,268 996
Currency 136 (2,207) -
---------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 $163,506 $130,355 $ 102,610
---------------------------------------------------------------------------------------------------------
</TABLE>
6. INCOME TAXES
Components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current expense (benefit) $ 1,404 $ (3,207) $(4,686)
Deferred expense (benefit) (1,796) 2,730 777
-------------------------------------------------------------------------------------------------------
TOTAL EXPENSE (BENEFIT) $ (392) $ (477) $(3,909)
-------------------------------------------------------------------------------------------------------
</TABLE>
F-43
<PAGE> 91
The Company's deferred income tax liability, which results from tax
effecting the differences between financial statement values and tax
values of assets and liabilities at each balance sheet date, relates to
the following:
<TABLE>
<CAPTION>
AS AT DECEMBER 31
($ thousands) 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences in computing policy reserves $38,888 $34,291
Policyholder dividends payable - 240
Investments 708 793
Other deferred tax assets 333 -
------------------------------------------------------------------------------------------------------
Deferred tax assets $39,929 $35,324
------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs $38,778 $30,682
Investments 1,859 166
Policyholder dividends payable 55 -
Other deferred tax liabilities - 5,650
------------------------------------------------------------------------------------------------------
Deferred tax liabilities $40,692 $36,498
------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $ (763) $(1,174)
------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the consolidated group has utilized all available
operating loss carryforwards and net capital loss carryforwards. The
losses of the Company, MRC and ManUSA may be used to offset the
ordinary and capital gain income of MRL. However, losses of MRL may not
be used to offset the income of the other members of the consolidated
group.
7. NOTES PAYABLE
a) On June 15, 1998, the outstanding promissory note in the
amount of $33,000 plus interest at 6.95% issued on December 5,
1997 payable to ManUSA was discharged and the amount due of
$34,318 ($33,000 plus interest of $1,318) was recorded as a
capital contribution.
b) On December 31, 1998, the surplus debenture in the amount of
$8,500 plus interest at 6.7% issued on December 31, 1995 to
ManUSA was discharged and the amount due of $8,500 was
recorded as a capital contribution.
8. CAPITAL AND SURPLUS
The Company has two classes of capital stock, as follows:
<TABLE>
<CAPTION>
AS AT DECEMBER 31:
($ thousands, except per share amounts) 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTHORIZED:
5,000,000 Common shares, Par value $1
5,000,000 Preferred shares, Par value $100
ISSUED AND OUTSTANDING:
4,501,861 Common shares $ 4,502 $4,502
</TABLE>
F-44
<PAGE> 92
<TABLE>
<CAPTION>
<S> <C> <C>
105,000 Preferred shares 10,500 10,500
------------------------------------------------------------------------------------------------------
TOTAL $15,002 $15,002
------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, the Company issued two common shares to its Parent Company
in return for a capital contribution of $15,000.
In 1998, the outstanding promissory note payable referred to in note
7(a) above, totaling $34,318, was discharged and recorded as a capital
contribution.
On December 31, 1998, the Company issued one common share to ManUSA in
exchange for a capital contribution of $60,209. Included in this
capital contribution was the discharge of the surplus debenture in the
amount of $8,500 referred to in note 7(b) above.
The Company is subject to statutory limitations on the payment of
dividends to its Parent. Under Michigan Insurance Law, the payment of
dividends to shareholders is restricted to the surplus earnings of the
Company, unless prior approval is obtained from the Michigan Insurance
Bureau.
The aggregate statutory capital and surplus of the Company at December
31, 1998 was $121,799 (1997 $56,598). The aggregate statutory net loss
of the Company for the year ended 1998 was $23,491 (1997 $2,550; 1996
$5,961). State regulatory authorities prescribe statutory accounting
practices that differ in certain respects from generally accepted
accounting principles followed by stock life insurance companies. The
significant differences relate to investments, deferred acquisition
costs, deferred income taxes, non-admitted asset balances and reserve
calculation assumptions.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and the estimated fair values of certain of the
Company's financial instruments at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
ESTIMATED
($ thousands) CARRYING VALUE FAIR VALUE
-----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Fixed maturity and equity securities $69,778 $69,778
Short-term investments 459 459
Policy loans 19,320 19,320
Cash and cash equivalents 23,789 23,789
-----------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
values of the above financial instruments:
FIXED MATURITY AND EQUITY SECURITIES: Fair values of fixed maturity and
equity securities were based on quoted market prices, where available.
Fair values were estimated using values obtained from independent
pricing services.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: Carrying values
approximate fair values.
F-45
<PAGE> 93
POLICY LOANS: Carrying values approximate fair values.
10. RELATED PARTY TRANSACTIONS
The Company has formal service agreements with Manulife Financial and
ManUSA which can be terminated by any party upon two months' notice.
Under the agreements, the Company will pay direct operating expenses
incurred each year by Manulife Financial and ManUSA on its behalf.
Services provided under the agreement include legal, actuarial,
investment, data processing and certain other administrative services.
Costs incurred under these agreements were $34,070, $32,733 and $29,384
in 1998, 1997 and 1996 respectively. In addition, there were $12,817,
$11,249 and $6,934 of agents bonuses allocated to the Company during
1998, 1997 and 1996, respectively, which are included in deferred
acquisition costs.
The Company has several reinsurance agreements with affiliated
companies which may be terminated upon the specified notice by either
party. These agreements are summarized as follows:
(a) On December 31, 1998, the coinsurance treaties under which the
Company had assumed two blocks of insurance from ManUSA were
terminated. The Company's risk under these treaties was limited to
$100,000 of initial face amount per claim plus a pro-rata share of
any increase in face amount. Upon the termination of the treaties,
the Company paid consideration in the amount of approximately
$41.0 million to ManUSA and policyholder reserves totaling $41.0
million were recaptured by ManUSA. No gain or loss resulted from
the termination of these treaties.
(b) The Company cedes the risk in excess of $25,000 per life to MRC
under the terms of an automatic reinsurance agreement
(c) The Company cedes a substantial portion of its risk on its
Flexible Premium Variable Life policies to MRC under the terms of
a stop loss reinsurance agreement.
Selected amounts relating to the above treaties reflected in the
financial statements are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life and annuity premiums assumed $ 48 $ 509 $ 724
Life and annuity premiums ceded 76 69 99
Policy reserves assumed - 40,975 44,497
Policy reserves ceded 145 130 304
-----------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts to affiliates
were $NIL, $3,972 and $NIL during 1998, 1997 and 1996 respectively.
F-46
<PAGE> 94
The Company and Manulife Financial have entered into an agreement
whereby Manulife Financial provides a claims paying guarantee to the
Company's U.S. policyholders. This claims paying guarantee does not
apply to the Company's separate account contract holders
11. REINSURANCE
In the normal course of business, the Company assumes and cedes
reinsurance as a party to several reinsurance treaties with major
unrelated insurance companies. The Company remains liable for amounts
ceded in the event that reinsurers do not meet their obligations.
The effects of reinsurance on premiums were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums $9,723 $8,607 $12,949
Reinsurance ceded 405 440 676
--------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS $9,318 $8,167 $12,273
========================================================================================================
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts with unrelated
insurance companies were $1,362, $909 and $357 during 1998, 1997 and
1996 respectively.
12. SEGMENT DISCLOSURES
The Company reports two business segments: Traditional Life Insurance
sold in Taiwan and Variable Life and Annuities sold in the U.S. The
Company's reportable segments have been determined based on geography,
differences in product features, and distribution; the segments are
also consistent with the Company's management structure. Segmented
information for the Company is as follows:
<TABLE>
<CAPTION>
AS AT DECEMBER 31,
($ thousands) TAIWAN U.S. TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Premiums and fee income $ 9,243 $ 54,594 $ 63,837
Interest expense -- 1,722 1,722
Income taxes (benefit) (1,219) 827 (392)
Net income (loss) (2,265) 1,511 (754)
Total assets excluding separate account assets $ 30,268 $ 258,311 $ 288,579
-----------------------------------------------------------------------------------------------
1997
Premiums and fee income $ 8,099 $ 39,190 $ 47,289
Interest expense -- 2,750 2,750
Income taxes (benefit) (1,526) 1,049 (477)
Net income (loss) (2,835) (801) (3,636)
Total assets excluding separate account assets $ 25,401 $ 244,166 $ 269,567
-----------------------------------------------------------------------------------------------
1996
Premiums and fee income $ 12,200 $ 41,132 $ 53,332
</TABLE>
F-47
<PAGE> 95
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest expense -- 12,251 12,251
Income taxes (benefit) (6,125) 2,216 (3,909)
Net income (loss) (17,500) 9,093 (8,407)
Total assets excluding separate account assets $ 15,268 $ 379,241 $ 394,509
-----------------------------------------------------------------------------------------------
</TABLE>
The accounting policies for each segment above are the same as those
described in the summary of significant accounting policies. The
Company has no intersegment revenues and no significant major
customers.
13. CONTINGENCIES
The Company is subject to various lawsuits that have arisen in the
course of its business. Contingent liabilities arising from litigation,
income taxes and other matters are not considered material in relation
to the financial position of the Company.
14. UNCERTAINTY DUE TO THE YEAR 2000 RISK (UNAUDITED)
The Year 2000 risk is the result of computer programs being written
using two digits, rather than four, to define the applicable year. Any
of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. The effects of the Year 2000 risk may be experienced before, on,
or after January 1, 2000 and, if not addressed, could result in systems
failures or miscalculations causing disruptions of normal business
operations. It is not possible to be certain that the Company's Year
2000 program will fully resolve all aspects of the Year 2000 risk,
including those related to third parties.
F-48
<PAGE> 96
APPENDIX A
SAMPLE ILLUSTRATIONS OF POLICY VALUES, CASH SURRENDER VALUES AND DEATH BENEFITS
The following tables have been prepared to help show how values under the Policy
change with investment performance. The tables include both Policy Values and
Cash Surrender Values as well as Death Benefits. The Policy Value is the sum of
the values in the Investment Accounts, as the tables assume no values in the
Fixed Account or Loan Account. The Cash Surrender Value is the Policy Value less
any applicable surrender charges. The tables illustrate how Policy Values and
Cash Surrender Values, which reflect all applicable charges and deductions, and
Death Benefits of the Policy on lives insured of given ages would vary over time
if the return on the assets of the Portfolios was a uniform, gross, after-tax,
annual rate of 0%, 6% or 12%. The Policy Values, Death Benefits and Cash
Surrender Values would be different from those shown if the returns averaged 0%,
6% or 12%, but fluctuated over and under those averages throughout the years.
The charges reflected in the tables include those for deductions from premiums,
surrender charges, and monthly deductions.
The amounts shown for the Policy Value, Death Benefit and Cash Surrender Value
as of each Policy Year reflect the fact that the net investment return on the
assets held in the sub-accounts is lower than the gross, after-tax return. This
is because the expenses and fees borne by Manufacturers Investment Trust are
deducted from the gross return. The illustrations reflect an average of those
Portfolios' current expenses, which is approximately 0.949% per annum. The gross
annual rates of return of 0%, 6% and 12% correspond to approximate net annual
rates of return of -0.944%, 4.999% and 10.942%. The illustrations reflect the
expense reimbursements in effect for the Lifestyle Trusts and the expense
limitation in effect for the Equity Index Trust. In the absence of such expense
reimbursements and expense limitation, the average of the Portfolios' current
expenses would have been 0.953% per annum and the gross annual rates of return
of 0%, 6% and 12% would have corresponded to approximate net annual rates of
return of -0.949%, 4.994% and 10.938%. The expense reimbursements for the
Lifestyle Trusts and the expense limitation for the Equity Index Trust remained
in effect during the fiscal year ended December 31, 1998 and are expected to
remain in effect during the fiscal year ended December 31, 1999. Were the
expense reimbursement and expense limitation to terminate, the average of the
Portfolios' current expenses would be higher and the approximate net annual
rates of return would be lower.
The tables assume that no premiums have been allocated to the Fixed Account,
that planned premiums are paid on the Policy Anniversary and that no transfers,
partial withdrawals, Policy loans, changes in death benefit options or changes
in face amount have been made. The tables reflect the fact that no charges for
federal, state or local taxes are currently made against the Separate Account.
If such a charge is made in the future, it would take a higher gross rate of
return to produce after-tax returns of 0%, 6% and 12% than it does now.
There are two tables shown for each combination of age and death benefit option
for a Policy issued to a male non-smoker and female non-smoker, one based on
current cost of insurance charges assessed by the Company and the other based on
the maximum cost of insurance charges based on the 1980 Commissioners Standard
Ordinary Smoker/Nonsmoker Mortality Tables. Current cost of insurance charges
are not guaranteed and may be changed. Upon request, Manufacturers Life of
America will furnish a comparable illustration based on the proposed lives
insured's issue ages, sex (unless unisex rates are required by law, or are
requested) and risk classes, any additional ratings and the death benefit
option, face amount and planned premium requested. Illustrations for smokers
would show less favorable results than the illustrations shown below.
From time to time, in advertisements or sales literature for the Policies that
quote performance data of one or more of the Portfolios, the Company may include
cash surrender values and death benefit figures computed using the same
methodology as that used in the following illustrations, but with the average
annual total return of the Fund for which performance data is shown in the
advertisement replacing the hypothetical rates of return shown in the following
tables. This information may be shown in the form of graphs, charts, tables and
examples.
The Policies have been offered to the public only since September 1, 1994.
However, total return data may be advertised for as long a period of time as the
underlying Portfolio has been in existence. The results for any period prior to
the Policies' being offered would be calculated as if the Policies had been
offered during that period of time, with all charges assumed to be those
applicable to the Policies.
A-1
<PAGE> 97
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER ISSUE AGE 55 (STANDARD) AND
FEMALE NON-SMOKER ISSUE AGE 50 (STANDARD)
$500,000 FACE AMOUNT DEATH BENEFIT OPTION 1
$7,500 ANNUAL PLANNED PREMIUM
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End Of Accumulated Policy Cash Death Policy Cash Death Policy Cash Death
Policy Premiums Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year (1) (2) Value Value Value
(3)(4) (3)(4) (3)(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,875 6,563 2,406 500,000 6,967 2,810 500,000 7,372 3,215 500,000
2 16,144 12,976 8,078 500,000 14,187 9,289 500,000 15,446 10,548 500,000
3 24,826 19,244 14,126 500,000 21,672 16,554 500,000 24,297 19,179 500,000
4 33,942 25,363 20,245 500,000 29,429 24,311 500,000 33,998 28,880 500,000
5 43,514 31,331 26,213 500,000 37,463 32,344 500,000 44,627 39,509 500,000
6 53,565 37,143 32,024 500,000 45,777 40,659 500,000 56,273 51,155 500,000
7 64,118 42,792 38,186 500,000 54,378 49,772 500,000 69,033 64,426 500,000
8 75,199 48,275 44,181 500,000 63,269 59,175 500,000 83,012 78,917 500,000
9 86,834 53,585 50,002 500,000 72,456 68,873 500,000 98,329 94,746 500,000
10 99,051 58,711 55,641 500,000 81,940 78,870 500,000 115,112 112,041 500,000
11 111,878 64,502 61,943 500,000 92,791 90,232 500,000 134,872 132,313 500,000
12 125,347 70,107 68,060 500,000 104,060 102,013 500,000 156,681 154,634 500,000
13 139,490 75,517 73,981 500,000 115,759 114,223 500,000 180,764 179,229 500,000
14 154,339 80,706 79,682 500,000 127,890 126,866 500,000 207,365 206,341 500,000
15 169,931 85,638 85,638 500,000 140,448 140,448 500,000 236,756 236,756 500,000
16 186,303 90,633 90,633 500,000 153,797 153,797 500,000 269,632 269,632 500,000
17 203,493 95,304 95,304 500,000 167,598 167,598 500,000 306,026 306,026 500,000
18 221,543 99,664 99,664 500,000 181,896 181,896 500,000 346,391 346,391 500,000
19 240,495 103,673 103,673 500,000 196,703 196,703 500,000 391,223 391,223 500,000
20 260,394 107,295 107,295 500,000 212,035 212,035 500,000 441,092 441,092 511,667
21 281,289 110,481 110,481 500,000 227,912 227,912 500,000 496,339 496,339 570,790
22 303,229 113,183 113,183 500,000 244,359 244,359 500,000 557,466 557,466 629,936
23 326,265 115,249 115,249 500,000 261,346 261,346 500,000 625,099 625,099 693,860
24 350,453 116,571 116,571 500,000 278,894 278,894 500,000 699,960 699,960 762,957
25 375,851 117,019 117,019 500,000 297,034 297,034 500,000 782,866 782,866 837,667
26 402,518 116,458 116,458 500,000 315,820 315,820 500,000 874,758 874,758 918,496
27 430,519 114,705 114,705 500,000 335,320 335,320 500,000 976,309 976,309 1,025,124
28 459,920 111,403 111,403 500,000 355,575 355,575 500,000 1,088,468 1,088,468 1,142,892
29 490,791 106,310 106,310 500,000 376,745 376,745 500,000 1,212,288 1,212,288 1,272,903
30 523,206 99,076 99,076 500,000 399,021 399,021 500,000 1,348,901 1,348,901 1,416,346
31 557,241 89,270 89,270 500,000 422,674 422,674 500,000 1,499,532 1,499,532 1,574,508
32 592,978 76,358 76,358 500,000 448,072 448,072 500,000 1,665,498 1,665,498 1,748,773
33 630,502 59,731 59,731 500,000 475,722 475,722 500,000 1,848,230 1,848,230 1,940,642
34 669,902 38,644 38,644 500,000 505,031 505,031 530,282 2,049,269 2,049,269 2,151,732
35 711,272 12,254 12,254 500,000 535,431 535,431 562,203 2,270,294 2,270,294 2,383,809
36 754,711 0 (5) 0 (5) 0 (5) 566,926 566,926 595,272 2,513,093 2,513,093 2,638,747
37 800,322 599,518 599,518 629,494 2,779,607 2,779,607 2,918,588
</TABLE>
A-2
<PAGE> 98
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
38 848,213 633,208 633,208 664,868 3,071,932 3,071,932 3,225,528
39 898,498 667,997 667,997 701,397 3,392,328 3,392,328 3,561,944
40 951,298 703,879 703,879 739,073 3,743,209 3,743,209 3,930,369
41 1,006,738 740,722 740,722 777,758 4,126,487 4,126,487 4,332,812
42 1,064,950 779,553 779,553 810,736 4,550,900 4,550,900 4,732,936
43 1,126,073 820,659 820,659 845,279 5,022,080 5,022,080 5,172,742
44 1,190,251 864,628 864,628 881,921 5,548,303 5,548,303 5,659,269
45 1,257,639 912,359 912,359 921,483 6,141,088 6,141,088 6,202,498
46 1,328,396 964,395 964,395 964,395 6,811,171 6,811,171 6,811,171
47 1,402,690 1,018,951 1,018,951 1,018,951 7,553,464 7,553,464 7,553,464
48 1,480,700 1,076,147 1,076,147 1,076,147 8,375,749 8,375,749 8,375,749
49 1,562,610 1,136,113 1,136,113 1,136,113 9,286,644 9,286,644 9,286,644
50 1,648,615 1,198,982 1,198,982 1,198,982 10,295,699 10,295,699 10,295,699
</TABLE>
(1) All values shown are as of the end of the policy year indicated, have been
rounded to the nearest dollar, and assume that (a) premiums paid after the
initial premium are received on the policy anniversary, (b) no policy loan
has been made, (c) no partial withdrawal of the Cash Surrender Value has
been made and (d) no premiums have been allocated to the Fixed Account.
(2) Assumes net interest of 5% compounded annually.
(3) Provided the No Lapse Guarantee Cumulative Premium Test has been and
continues to be met, the No Lapse Guarantee will keep the Policy in force
until the end of the first 10 Policy Years. Provided the Death Benefit
Guarantee Cumulative Premium Test or the Fund Value Test has been and
continues to be met, the Guaranteed Death Benefit will keep the Policy in
force until the Policy Anniversary on which the lives are average Attained
Age 100 years old.
(4) Cash Surrender Value for the first two years reflects sales charge
limitations imposed by the S.E.C.
(5) In the absence of additional premium payments, the Policy will lapse.
The policy value, cash surrender value and the death benefit will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment returns are illustrative only, and should not be deemed
a representation of past or future results. Actual investment returns may be
more or less than those shown and will depend on a number of factors, including
the investment allocation made by the policyowner, and the investment returns
for the funds of Manufacturers Investment Trust. The policy value, cash
surrender value and death benefit for a policy would be different from those
shown if actual rates of investment return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
policy years. No representations can be made that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
A-3
<PAGE> 99
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER ISSUE AGE 55 (STANDARD) AND
FEMALE NON-SMOKER ISSUE AGE 50 (STANDARD)
$500,000 FACE AMOUNT DEATH BENEFIT OPTION 1
$7,500 ANNUAL PLANNED PREMIUM
ASSUMING MAXIMUM CHARGES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
End Of Accumulated Policy Cash Death Policy Cash Death Policy Cash Death
Policy Premiums Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year (1) (2) Value Value Value
(3)(4) (3)(4) (3)(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,875 6,563 2,406 500,000 6,967 2,810 500,000 7,372 3,215 500,000
2 16,144 12,975 8,078 500,000 14,186 9,289 500,000 15,446 10,548 500,000
3 24,826 19,232 14,114 500,000 21,660 16,542 500,000 24,285 19,167 500,000
4 33,942 25,325 20,207 500,000 29,389 24,271 500,000 33,956 28,838 500,000
5 43,514 31,248 26,129 500,000 37,374 32,256 500,000 44,533 39,415 500,000
6 53,565 36,989 31,871 500,000 45,612 40,494 500,000 56,097 50,978 500,000
7 64,118 42,537 37,931 500,000 54,101 49,495 500,000 68,733 64,127 500,000
8 75,199 47,881 43,786 500,000 62,837 58,743 500,000 82,539 78,445 500,000
9 86,834 53,004 49,422 500,000 71,814 68,232 500,000 97,621 94,039 500,000
10 99,051 57,890 54,819 500,000 81,025 77,954 500,000 114,096 111,025 500,000
11 111,878 62,683 60,124 500,000 90,635 88,076 500,000 132,280 129,721 500,000
12 125,347 67,187 65,140 500,000 100,458 98,411 500,000 152,147 150,100 500,000
13 139,490 71,364 69,829 500,000 110,472 108,936 500,000 173,854 172,319 500,000
14 154,339 75,170 74,146 500,000 120,646 119,623 500,000 197,578 196,555 500,000
15 169,931 78,551 78,551 500,000 130,946 130,946 500,000 223,522 223,522 500,000
16 186,303 81,806 81,806 500,000 141,702 141,702 500,000 252,305 252,305 500,000
17 203,493 84,481 84,481 500,000 152,500 152,500 500,000 283,854 283,854 500,000
18 221,543 86,552 86,552 500,000 163,339 163,339 500,000 318,538 318,538 500,000
19 240,495 87,916 87,916 500,000 174,159 174,159 500,000 356,760 356,760 500,000
20 260,394 88,477 88,477 500,000 184,912 184,912 500,000 399,020 399,020 500,000
21 281,289 88,120 88,120 500,000 195,542 195,542 500,000 445,909 445,909 512,796
22 303,229 86,696 86,696 500,000 205,983 205,983 500,000 497,576 497,576 562,261
23 326,265 84,014 84,014 500,000 216,145 216,145 500,000 554,313 554,313 615,288
24 350,453 79,836 79,836 500,000 225,928 225,928 500,000 616,668 616,668 672,168
25 375,851 73,875 73,875 500,000 235,217 235,217 500,000 685,271 685,271 733,240
26 402,518 65,790 65,790 500,000 243,888 243,888 500,000 760,869 760,869 798,912
27 430,519 55,182 55,182 500,000 251,812 251,812 500,000 843,699 843,699 885,884
28 459,920 41,583 41,583 500,000 258,854 258,854 500,000 934,397 934,397 981,116
29 490,791 24,429 24,429 500,000 264,862 264,862 500,000 1,033,641 1,033,641 1,085,323
30 523,206 3,022 3,022 500,000 269,657 269,657 500,000 1,142,157 1,142,157 1,199,265
31 557,241 0 (5) 0 (5) 0 (5) 273,003 273,003 500,000 1,260,715 1,260,715 1,323,750
32 592,978 274,589 274,589 500,000 1,390,125 1,390,125 1,459,631
33 630,502 273,990 273,990 500,000 1,531,234 1,531,234 1,607,796
34 669,902 270,635 270,635 500,000 1,684,924 1,684,924 1,769,170
35 711,272 263,800 263,800 500,000 1,852,128 1,852,128 1,944,734
</TABLE>
A-4
<PAGE> 100
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
36 754,711 252,492 252,492 500,000 2,033,817 2,033,817 2,135,508
37 800,322 235,377 235,377 500,000 2,231,020 2,231,020 2,342,571
38 848,213 210,536 210,536 500,000 2,444,793 2,444,793 2,567,032
39 898,498 175,254 175,254 500,000 2,676,240 2,676,240 2,810,052
40 951,298 125,404 125,404 500,000 2,926,430 2,926,430 3,072,752
41 1,006,738 54,715 54,715 500,000 3,196,392 3,196,392 3,356,212
42 1,064,950 0 (5) 0 (5) 0 (5) 3,494,720 3,494,720 3,634,509
43 1,126,073 3,825,955 3,825,955 3,940,734
44 1,190,251 4,195,902 4,195,902 4,279,820
45 1,257,639 4,612,086 4,612,086 4,658,207
46 1,328,396 5,083,733 5,083,733 5,083,733
47 1,402,690 5,602,798 5,602,798 5,602,798
48 1,480,700 6,174,049 6,174,049 6,174,049
49 1,562,610 6,802,732 6,802,732 6,802,732
50 1,648,615 7,494,622 7,494,622 7,494,622
</TABLE>
(1) All values shown are as of the end of the policy year indicated, have been
rounded to the nearest dollar, and assume that (a) premiums paid after the
initial premium are received on the policy anniversary, (b) no policy loan
has been made, (c) no partial withdrawal of the Cash Surrender Value has
been made and (d) no premiums have been allocated to the Fixed Account.
(2) Assumes net interest of 5% compounded annually.
(3) Provided the No Lapse Guarantee Cumulative Premium Test has been and
continues to be met, the No Lapse Guarantee will keep the Policy in force
until the end of the first 10 Policy Years. Provided the Death Benefit
Guarantee Cumulative Premium Test or the Fund Value Test has been and
continues to be met, the Guaranteed Death Benefit will keep the Policy in
force until the Policy Anniversary on which the lives are average Attained
Age 100 years old.
(4) Cash Surrender Value for the first two years reflects sales charge
limitations imposed by the S.E.C.
(5) In the absence of additional premium payments, the Policy will lapse.
The policy value, cash surrender value and the death benefit will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment returns are illustrative only, and should not be deemed
a representation of past or future results. Actual investment returns may be
more or less than those shown and will depend on a number of factors, including
the investment allocation made by the policyowner, and the investment returns
for the funds of Manufacturers Investment Trust. The policy value, cash
surrender value and death benefit for a policy would be different from those
shown if actual rates of investment return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
policy years. No representations can be made that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
A-5
<PAGE> 101
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER ISSUE AGE 55 (STANDARD) AND
FEMALE NON-SMOKER ISSUE AGE 50 (STANDARD)
$500,000 FACE AMOUNT DEATH BENEFIT OPTION 2
$8,200 ANNUAL PLANNED PREMIUM
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ------------------------ -----------------------
End Of Accumulated Policy Cash Death Policy Cash Death Policy Cash Death
Policy Premiums Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year (1) (2) Value Value Value
(3)(4) (3)(4) (3)(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,610 7,226 2,766 507,226 7,670 3,210 507,670 8,114 3,654 508,114
2 17,651 14,289 9,171 514,289 15,620 10,502 515,620 17,004 11,886 517,004
3 27,143 21,193 16,075 521,193 23,864 18,746 523,864 26,750 21,632 526,750
4 37,110 27,936 22,817 527,936 32,407 27,289 532,407 37,431 32,313 537,431
5 47,576 34,510 29,392 534,510 41,253 36,135 541,253 49,131 44,013 549,131
6 58,564 40,911 35,793 540,911 50,406 45,288 550,406 61,945 56,827 561,945
7 70,103 47,131 42,525 547,131 59,867 55,261 559,867 75,974 71,368 575,974
8 82,218 53,163 49,069 553,163 69,640 65,545 569,640 91,328 87,233 591,328
9 94,939 58,998 55,415 558,998 79,723 76,140 579,723 108,127 104,544 608,127
10 108,296 64,623 61,552 564,623 90,114 87,043 590,114 126,499 123,429 626,499
11 122,320 70,946 68,387 570,946 101,958 99,399 601,958 148,065 145,506 648,065
12 137,046 77,049 75,002 577,049 114,220 112,173 614,220 171,794 169,747 671,794
13 152,509 82,915 81,379 582,915 126,899 125,364 626,899 197,898 196,363 697,898
14 168,744 88,510 87,486 588,510 139,979 138,955 639,979 226,596 225,572 726,596
15 185,791 93,787 93,787 593,787 153,427 153,427 653,427 258,113 258,113 758,113
16 203,691 99,048 99,048 599,048 167,570 167,570 667,570 293,071 293,071 793,071
17 222,486 103,897 103,897 603,897 182,031 182,031 682,031 331,419 331,419 831,419
18 242,220 108,341 108,341 608,341 196,830 196,830 696,830 373,525 373,525 873,525
19 262,941 112,326 112,326 612,326 211,921 211,921 711,921 419,732 419,732 919,732
20 284,698 115,799 115,799 615,799 227,258 227,258 727,258 470,419 470,419 970,419
21 307,543 118,693 118,693 618,693 242,780 242,780 742,780 525,993 525,993 1,025,993
22 331,530 120,939 120,939 620,939 258,418 258,418 758,418 586,901 586,901 1,086,901
23 356,716 122,339 122,339 622,339 273,964 273,964 773,964 653,498 653,498 1,153,498
24 383,162 122,750 122,750 622,750 289,260 289,260 789,260 726,236 726,236 1,226,236
25 410,930 122,010 122,010 622,010 304,111 304,111 804,111 805,593 805,593 1,305,593
26 440,087 119,956 119,956 619,956 318,317 318,317 818,317 892,095 892,095 1,392,095
27 470,701 116,378 116,378 616,378 331,615 331,615 831,615 986,273 986,273 1,486,273
28 502,846 110,864 110,864 610,864 343,517 343,517 843,517 1,088,499 1,088,499 1,588,499
29 536,599 103,189 103,189 603,189 353,704 353,704 853,704 1,199,379 1,199,379 1,699,379
30 572,038 93,040 93,040 593,040 361,743 361,743 861,743 1,319,486 1,319,486 1,819,486
31 609,250 80,077 80,077 580,077 367,153 367,153 867,153 1,449,424 1,449,424 1,949,424
32 648,323 63,931 63,931 563,931 369,394 369,394 869,394 1,589,829 1,589,829 2,089,829
33 689,349 44,281 44,281 544,281 367,944 367,944 867,944 1,741,449 1,741,449 2,241,449
34 732,427 20,819 20,819 520,819 362,266 362,266 862,266 1,905,123 1,905,123 2,405,123
35 777,658 0 (5) 0 (5) 0 (5) 351,897 351,897 851,897 2,081,882 2,081,882 2,581,882
</TABLE>
A-6
<PAGE> 102
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
36 825,151 336,252 336,252 836,252 2,272,771 2,272,771 2,772,771
37 875,018 314,827 314,827 814,827 2,479,052 2,479,052 2,979,052
38 927,379 287,113 287,113 787,113 2,702,151 2,702,151 3,202,151
39 982,358 252,623 252,623 752,623 2,943,690 2,943,690 3,443,690
40 1,040,086 210,805 210,805 710,805 3,205,427 3,205,427 3,705,427
41 1,100,700 159,422 159,422 659,422 3,487,598 3,487,598 3,987,598
42 1,164,345 95,693 95,693 595,693 3,790,016 3,790,016 4,290,016
43 1,231,173 15,668 15,668 515,668 4,111,407 4,111,407 4,611,407
44 1,301,341 0 (5) 0 (5) 0 (5) 4,453,210 4,453,210 4,953,210
45 1,375,018 4,827,118 4,827,118 5,327,118
46 1,452,379 5,243,977 5,243,977 5,743,977
47 1,533,608 5,673,066 5,673,066 6,173,066
48 1,618,899 6,083,752 6,083,752 6,583,752
49 1,708,454 6,420,953 6,420,953 6,920,953
50 1,802,486 6,594,901 6,594,901 7,094,901
</TABLE>
(1) All values shown are as of the end of the policy year indicated, have been
rounded to the nearest dollar, and assume that (a) premiums paid after the
initial premium are received on the policy anniversary, (b) no policy loan
has been made, (c) no partial withdrawal of the Cash Surrender Value has
been made and (d) no premiums have been allocated to the Fixed Account.
(2) Assumes net interest of 5% compounded annually.
(3) Provided the No Lapse Guarantee Cumulative Premium Test has been and
continues to be met, the No Lapse Guarantee will keep the Policy in force
until the end of the first 10 Policy Years. Provided the Death Benefit
Guarantee Cumulative Premium Test or the Fund Value Test has been and
continues to be met, the Guaranteed Death Benefit will keep the Policy in
force until the Policy Anniversary on which the lives are average Attained
Age 100 years old.
(4) Cash Surrender Value for the first two years reflects sales charge
limitations imposed by the S.E.C.
(5) In the absence of additional premium payments, the Policy will lapse.
The policy value, cash surrender value and the death benefit will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment returns are illustrative only, and should not be deemed
a representation of past or future results. Actual investment returns may be
more or less than those shown and will depend on a number of factors, including
the investment allocation made by the policyowner, and the investment returns
for the funds of Manufacturers Investment Trust. The policy value, cash
surrender value and death benefit for a policy would be different from those
shown if actual rates of investment return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
policy years. No representations can be made that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
A-7
<PAGE> 103
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER ISSUE AGE 55 (STANDARD) AND
FEMALE NON-SMOKER ISSUE AGE 50 (STANDARD)
$500,000 FACE AMOUNT DEATH BENEFIT OPTION 2
$8,200 ANNUAL PLANNED PREMIUM
ASSUMING MAXIMUM CHARGES
<TABLE>
<CAPTION>
0% Hypothetical 6% Hypothetical 12% Hypothetical
Gross Investment Return Gross Investment Return Gross Investment Return
----------------------- ----------------------- -----------------------
End Of Accumulated Policy Cash Death Policy Cash Death Policy Cash Death
Policy Premiums Value Surrender Benefit Value Surrender Benefit Value Surrender Benefit
Year(1) (2) Value Value Value
(3)(4) (3)(4) (3)(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,610 7,226 2,766 507,226 7,670 3,210 507,670 8,114 3,654 508,114
2 17,651 14,288 9,170 514,288 15,620 10,502 515,620 17,004 11,886 517,004
3 27,143 21,181 16,063 521,181 23,851 18,733 523,851 26,737 21,619 526,737
4 37,110 27,895 22,777 527,895 32,365 27,247 532,365 37,386 32,268 537,386
5 47,576 34,421 29,303 534,421 41,158 36,040 541,158 49,030 43,912 549,030
6 58,564 40,746 35,628 540,746 50,227 45,109 550,227 61,752 56,633 561,752
7 70,103 46,856 42,250 546,856 59,564 54,958 559,564 75,640 71,034 575,640
8 82,218 52,733 48,639 552,733 69,159 65,065 569,159 90,791 86,696 590,791
9 94,939 58,360 54,778 558,360 79,000 75,418 579,000 107,307 103,724 607,307
10 108,296 63,712 60,641 563,712 89,068 85,997 589,068 125,295 122,224 625,295
11 122,320 68,928 66,369 568,928 99,514 96,955 599,514 145,055 142,496 645,055
12 137,046 73,802 71,755 573,802 110,135 108,088 610,135 166,535 164,487 666,535
13 152,509 78,288 76,752 578,288 120,885 119,349 620,885 189,850 188,315 689,850
14 168,744 82,327 81,303 582,327 131,700 130,677 631,700 215,118 214,095 715,118
15 185,791 85,850 85,850 585,850 142,506 142,506 642,506 242,453 242,453 742,453
16 203,691 89,140 89,140 589,140 153,583 153,583 653,583 272,352 272,352 772,352
17 222,486 91,717 91,717 591,717 164,445 164,445 664,445 304,561 304,561 804,561
18 242,220 93,551 93,551 593,551 175,037 175,037 675,037 339,264 339,264 839,264
19 262,941 94,515 94,515 594,515 185,204 185,204 685,204 376,565 376,565 876,565
20 284,698 94,495 94,495 594,495 194,796 194,796 694,796 416,588 416,588 916,588
21 307,543 93,361 93,361 593,361 203,637 203,637 703,637 459,449 459,449 959,449
22 331,530 90,952 90,952 590,952 211,509 211,509 711,509 505,242 505,242 1,005,242
23 356,716 87,068 87,068 587,068 218,142 218,142 718,142 554,025 554,025 1,054,025
24 383,162 81,477 81,477 581,477 223,220 223,220 723,220 605,825 605,825 1,105,825
25 410,930 73,919 73,919 573,919 226,379 226,379 726,379 660,638 660,638 1,160,638
26 440,087 64,115 64,115 564,115 227,215 227,215 727,215 718,432 718,432 1,218,432
27 470,701 51,783 51,783 551,783 225,301 225,301 725,301 779,167 779,167 1,279,167
28 502,846 36,646 36,646 536,646 220,191 220,191 720,191 842,797 842,797 1,342,797
29 536,599 18,427 18,427 518,427 211,416 211,416 711,416 909,265 909,265 1,409,265
30 572,038 0 (5) 0 (5) 0 (5) 198,476 198,476 698,476 978,499 978,499 1,478,499
31 609,250 180,806 180,806 680,806 1,050,374 1,050,374 1,550,374
32 648,323 157,772 157,772 657,772 1,124,704 1,124,704 1,624,704
33 689,349 128,646 128,646 628,646 1,201,216 1,201,216 1,701,216
34 732,427 92,628 92,628 592,628 1,279,566 1,279,566 1,779,566
35 777,658 48,959 48,959 548,959 1,359,451 1,359,451 1,859,451
36 825,151 0 (5) 0 (5) 0 (5) 1,440,536 1,440,536 1,940,536
</TABLE>
A-8
<PAGE> 104
<TABLE>
<S> <C> <C> <C> <C> <C>
37 875,018 1,522,546 1,522,546 2,022,546
38 927,379 1,605,130 1,605,130 2,105,130
39 982,358 1,687,953 1,687,953 2,187,953
40 1,040,086 1,770,407 1,770,407 2,270,407
41 1,100,700 1,851,676 1,851,676 2,351,676
42 1,164,345 1,930,527 1,930,527 2,430,527
43 1,231,173 2,005,226 2,005,226 2,505,226
44 1,301,341 2,073,961 2,073,961 2,573,961
45 1,375,018 2,136,215 2,136,215 2,636,215
46 1,452,379 2,192,945 2,192,945 2,692,945
47 1,533,608 2,224,682 2,224,682 2,724,682
48 1,618,899 2,207,467 2,207,467 2,707,467
49 1,708,454 2,093,476 2,093,476 2,593,476
50 1,802,486 1,787,185 1,787,185 2,287,185
</TABLE>
(1) All values shown are as of the end of the policy year indicated, have been
rounded to the nearest dollar, and assume that (a) premiums paid after the
initial premium are received on the policy anniversary, (b) no policy loan
has been made, (c) no partial withdrawal of the Cash Surrender Value has
been made and (d) no premiums have been allocated to the Fixed Account.
(2) Assumes net interest of 5% compounded annually.
(3) Provided the No Lapse Guarantee Cumulative Premium Test has been and
continues to be met, the No Lapse Guarantee will keep the Policy in force
until the end of the first 10 Policy Years. Provided the Death Benefit
Guarantee Cumulative Premium Test or the Fund Value Test has been and
continues to be met, the Guaranteed Death Benefit will keep the Policy in
force until the Policy Anniversary on which the lives are average Attained
Age 100 years old.
(4) Cash Surrender Value for the first two years reflects sales charge
limitations imposed by the S.E.C.
(5) In the absence of additional premium payments, the Policy will lapse.
The policy value, cash surrender value and the death benefit will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment returns are illustrative only, and should not be deemed
a representation of past or future results. Actual investment returns may be
more or less than those shown and will depend on a number of factors, including
the investment allocation made by the policyowner, and the investment returns
for the funds of Manufacturers Investment Trust. The policy value, cash
surrender value and death benefit for a policy would be different from those
shown if actual rates of investment return averaged the rate shown above over a
period of years, but also fluctuated above or below that average for individual
policy years. No representations can be made that these hypothetical rates of
return can be achieved for any one year or sustained over any period of time.
A-9
<PAGE> 105
APPENDIX B
DEFINITIONS
The following terms have the following meanings when used in this Prospectus:
ADDITIONAL RATING -- an addition to the cost of insurance rate for lives insured
who do not meet at least the underwriting requirements of the standard risk
class.
AGE-- at a specific date means, for each of the lives insured, the age on the
nearest birthday. If no specific date is mentioned, age means the age on the
birthday nearest to the Policy Anniversary.
ATTAINED AGE -- Issue Age plus duration the policy has been in force since the
Policy Date.
BUSINESS DAY -- any day that the New York Stock Exchange is open for trading.
The net asset value of the underlying shares of a subaccount of the Separate
Account will be determined as of the end of each Business Day. A Business Day is
deemed to end at 4:00 p.m. Eastern Time.
CASH SURRENDER VALUE -- the Policy Value less the deferred sales charge, the
deferred underwriting charge and any outstanding monthly deductions due.
DEATH BENEFIT GUARANTEE -- Manufacturers Life of America guarantees that the
Policy will not go into default even if a combination of Policy loans, adverse
investment experience or other factors should cause the Policy's Net Cash
Surrender Value to be insufficient to meet the monthly deductions due at the
beginning of a Policy Month.
DEATH BENEFIT GUARANTEE CUMULATIVE PREMIUM TEST -- a test that, if satisfied to
youngest Attained Age 100 for death benefit Option 1 Policies, and youngest
Attained Age 85 for death benefit Option 2 Policies, will maintain the Death
Benefit Guarantee. To satisfy the Death Benefit Guarantee Cumulative Premium
Test, the sum of premiums paid, less withdrawals, and less Policy loans must
equal or exceed the sum of Death Benefit Guarantee Premiums since issue as at
the beginning of each Policy Month.
DEATH BENEFIT GUARANTEE PREMIUM -- a measure of premium used in determining
compliance with the Death Benefit Guarantee Cumulative Premium Test. The Death
Benefit Guarantee Premium as an annual amount is established by the Company
based on the individual life insured's Issue Age, sex (unless unisex rates are
required by law or are requested), risk class, death benefit option,
supplementary benefits and additional ratings.
EFFECTIVE DATE -- the date that Manufacturers Life of America becomes obligated
under the Policy and when the first monthly deductions are taken. It is the
later of the date the underwriters approve issuance of the Policy, or the date
at least the Initial Premium is received at the Service Office.
FIXED ACCOUNT -- that part of the Policy Value which reflects the value the
policyowner has in the general account of Manufacturers Life of America.
FUND VALUE TEST -- a test which, if satisfied in applicable Policy Years, will
maintain the Death Benefit Guarantee. To satisfy the Fund Value Test the Gross
Single Premium at the beginning of any applicable Policy Month must not be
greater than the Net Policy Value.
GROSS SINGLE PREMIUM -- the amount of premium, based on each life insured's
Attained Age, the duration of the coverage, sex (unless unisex rates are
required by law or are requested), and risk class, needed to endow the Policy at
the age the Death Benefit Guarantee terminates, assuming 4% interest and current
charges.
GUIDELINE ANNUAL PREMIUM (GAP) -- an amount defined by S.E.C. regulation. It is
used to determine maximum sales charges that may be deducted under the Policy.
B-1
<PAGE> 106
INITIAL PREMIUM -- at least 1/12 of the Target Premium.
ISSUE AGE-- the Age nearest birthday, at Policy Date, as shown in the Policy. If
there is an Additional Rate based on age, the Issue Age will be adjusted to
reflect the underwriting class.
LOAN ACCOUNT -- that part of the Policy Value which reflects the value the
policyowner has transferred from the Fixed Account or the Investment Accounts as
collateral for a Policy loan.
MODIFIED POLICY DEBT -- as of any date, the Policy Debt plus the amount of
interest to be charged to the next Policy Anniversary, all discounted from the
next Policy Anniversary to such date at an annual rate of 4%.
MONTHLY DEATH BENEFIT GUARANTEE PREMIUM -- 1/12 of the Death Benefit Guarantee
Premium.
MONTHLY NO LAPSE GUARANTEE PREMIUM -- 1/12 of the No Lapse Guarantee Premium.
NET CASH SURRENDER VALUE -- the Cash Surrender Value less the Policy Debt.
NET POLICY VALUE -- the Policy Value less the value in the Loan Account.
NET PREMIUM -- amount of premium allocated to the Investment Accounts and/or the
Fixed Account. It equals gross premiums less the deductions for premium charge
and state, local and federal taxes.
NO LAPSE GUARANTEE -- Manufacturers Life of America guarantees that the Policy
will not go into default even if a combination of Policy loans, adverse
investment experience or other factors should cause the Policy's Net Cash
Surrender Value to be insufficient to meet the monthly deductions due at the
beginning of a Policy Month.
The No Lapse Guarantee requires a lower cumulative premium than the Death
Benefit Guarantee, and in return guarantees a shorter number of years that the
Policy will stay in force if the No Lapse Guarantee Cumulative Premium Test is
met.
NO LAPSE GUARANTEE CUMULATIVE PREMIUM TEST -- a test that, if satisfied in the
No Lapse Guarantee Period, will maintain the No Lapse Guarantee. To satisfy the
No Lapse Guarantee Cumulative Premium Test, the sum of premiums paid, less
withdrawals, and less Policy loans must equal or exceed the sum of No Lapse
Guarantee Premiums since issue as at the beginning of each Policy Month.
NO LAPSE GUARANTEE PERIOD -- is the first 10 Policy Years for lives insured with
an average Issue Age up to and including age 70. For lives insured with an
average Issue Age of 71 and older, the No Lapse Guarantee Period decreases by
one year for each year the average Issue Age exceeds 70, until age 77. After age
77 the No Lapse Guarantee Period is fixed at three years.
The No Lapse Guarantee is available only to lives insured whose average Issue
Age is 85 or less.
NO LAPSE GUARANTEE PREMIUM -- is equal to Target Premium, and is a measure of
premium used in determining compliance with the No Lapse Guarantee Premium Test.
PLANNED PREMIUM -- the premium the policyowner plans to pay periodically.
Subject to certain requirements of law, the Planned Premium may be changed at
any time.
POLICY DATE -- the date from which Policy Years, Policy Months and Policy
Anniversaries are determined. Monthly deductions are due on the Policy Date.
POLICY DEBT -- as of any date, the aggregate amount of Policy loans, including
borrowed interest, less any loan repayments.
POLICY VALUE -- the sum of the values in the Loan Account, the Fixed Account and
the Investment Accounts.
B-2
<PAGE> 107
SERVICE OFFICE -- the office designated to service the Policies, which is shown
on the cover page of this prospectus.
SURRENDER CHARGE PERIOD -- the period (set forth in Table 1 in this prospectus
appearing under the heading "Charges and Deductions - Surrender Charges -
Deferred Sales Charge") following the Policy Date or any increase in face amount
during which surrender charges may be assessed if the Policy is surrendered or
lapsed, the face amount is decreased or a partial withdrawal takes place. There
are two surrender charges under the Policy: a Deferred Underwriting Charge and a
Deferred Sales Charge.
TARGET PREMIUM (TP) -- premium amount used to determine the maximum sales charge
and deferred sales charge under a Policy and to determine the level of
compensation the agent shall receive. The Target Premium for the initial face
amount is set forth in the Policy.
This premium is based on each individual life insured's Issue Age, sex (unless
unisex rates are required by law or are requested), risk class, death benefit
option, supplementary benefits and additional ratings. The policyowner will be
advised of the Target Premium for any increase in face amount.
WITHDRAWAL TIER AMOUNT-- of any date is the net Cash Surrender Value at the
previous anniversary, multiplied by 10%.
B-3
