<PAGE> 1
LIFESTYLE FROM MANULIFE FINANCIAL
PROSPECTUS FOR
MULTI-ACCOUNT FLEXIBLE
PAYMENT VARIABLE ANNUITY
ISSUED BY
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
AND FOR
MANULIFE SERIES FUND, INC.
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(This Page Intentionally Left Blank)
<PAGE> 3
LIFESTYLE FROM MANULIFE FINANCIAL
MULTI-ACCOUNT FLEXIBLE PAYMENT
VARIABLE ANNUITY
This prospectus describes Multi-Account Flexible Payment Variable Annuity
Policies ("Policies" or "Policy") issued by The Manufacturers Life Insurance
Company of America ("Manufacturers Life of America"). The Policies are
designed for use in connection with retirement plans that may or may not be
entitled to special income tax treatment. The Policies will be offered on both
an individual basis and in connection with group or sponsored arrangements.
During the Accumulation Period, the Policies provide for the accumulation of
value on a fixed, variable, or fixed and variable basis. Annuity payments are
available on a fixed basis only.
Policy Value accumulated on a variable basis will be held in one or more of the
sub-accounts of Manufacturers Life of America's Separate Account Two. The
assets of each sub-account will be used to purchase shares of a particular
portfolio ("Fund") of Manulife Series Fund, Inc. (the "Series Fund"). The
accompanying prospectus for the Series Fund describes the investment objectives
of the Funds in which purchase payments may be invested: the Emerging Growth
Equity Fund, the Common Stock Fund, the Real Estate Securities Fund, the
Balanced Assets Fund, the Capital Growth Bond Fund, the Money-Market Fund, the
International Fund, and the Pacific Rim Emerging Markets Fund. Other
subaccounts and Funds may be added in the future.
In some jurisdictions the Policyowner may allocate Policy Value to various
Fixed Accounts during the Accumulation Period. Policy Value so allocated will
earn a fixed rate of interest for a specified period of time (the "Guarantee
Period"); however, the Policy Value so allocated and the interest earned
thereon is guaranteed only if the allocation is maintained to the Maturity
Date. If the allocation is not maintained to the Maturity Date, the value
thereof may be increased or decreased by the Market Value Adjustment. Fixed
Account Value may be held either in Manufacturers Life of America's Separate
Account A or, if applicable state law permits, in Manufacturers Life of
America's General Account.
The Policyowner may also allocate Policy Value to the Guaranteed Interest
Account during the Accumulation Period. Policy Value so allocated will earn a
rate of interest guaranteed not to be less than 3% per annum and may, at
Manufacturers Life of America's discretion, exceed that rate.
Prior to the Annuity Commencement Date, Manufacturers Life of America will
furnish to each Policyowner at least annually a report showing certain account
information including unit values, current rates, current purchase payment
allocations and cash surrender value. In addition, reports that include
financial statements of the Series Fund and information about the investment
holdings of the various Funds will be sent to the Policyowner semi-annually.
This prospectus contains a detailed discussion of the information a prospective
purchaser ought to know before making a purchase. Please read this prospectus
carefully and keep it for future reference. It is valid only when accompanied
by a current prospectus for Manulife Series Fund, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION 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
500 N. Woodward Avenue
Bloomfield Hills, Michigan 48304
Service Office:
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
Telephone: 1-800-827-4546 (1-800-VARILIN[E])
THE DATE OF THIS PROSPECTUS IS MAY 1, 1995.
1
<PAGE> 4
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
DEFINITIONS . . . . . . . . . . . . . . . . . . . 2 Annual Statements . . . . . . . . . . . . . . . 28
SUMMARY OF POLICIES . . . . . . . . . . . . . . . 5 Rights of Ownership . . . . . . . . . . . . . . 28
POLICYOWNER INQUIRIES . . . . . . . . . . . . . . 6 Beneficiary . . . . . . . . . . . . . . . . . . 29
EXPENSE TABLE . . . . . . . . . . . . . . . . . . 7 Modification . . . . . . . . . . . . . . . . . 30
CONDENSED FINANCIAL INFORMATION . . . . . . . . . 9 FEDERAL TAX MATTERS . . . . . . . . . . . . . . . . 30
GENERAL INFORMATION ABOUT MANUFACTURERS LIFE OF Taxation of Manufacturers Life of America . . . . 30
AMERICA . . . . . . . . . . . . . . . . . . . . 11 Tax Treatment Of The Policies . . . . . . . . . . 30
Manufacturers Life of America And Purchase of Policies by Qualified Plans . . . . . 31
Manufacturers Life . . . . . . . . . . . . . 11 ADDITIONAL INFORMATION ABOUT MANUFACTURERS
General Information about Manufacturers Life of LIFE OF AMERICA . . . . . . . . . . . . . . . . . 32
America's Separate Accounts . . . . . . . . . 11 Description of Business . . . . . . . . . . . . 32
Manufacturers Life of America's Separate Responsibilities Assumed By Manufacturers Life . 32
Account Two: The Variable Accounts . . . . . 11 Selected Financial Data . . . . . . . . . . . . 33
GENERAL INFORMATION ABOUT MANULIFE SERIES FUND, Management Discussion and Analysis of
INC. . . . . . . . . . . . . . . . . . . . . . . 11 Financial Condition and Results of
Investment Objectives And Risks Of The Funds . . 12 Operation . . . . . . . . . . . . . . . . . . . 34
Selection of Sub-account(s) . . . . . . . . . . 14 Executive Officers and Directors . . . . . . . . 39
DESCRIPTION OF THE POLICIES . . . . . . . . . . . 15 Executive Compensation . . . . . . . . . . . . . 40
Purchasing A Policy . . . . . . . . . . . . . . 15 Legal Proceedings . . . . . . . . . . . . . . . 41
"Free Look" Right . . . . . . . . . . . . . . . 16 State Regulations . . . . . . . . . . . . . . . 41
Restrictions Applicable To Purchase Payments . . 16 OTHER MATTERS . . . . . . . . . . . . . . . . . . . 42
Policy Value . . . . . . . . . . . . . . . . . . 16 Special Provisions For Group Or Sponsored
The Fixed Accounts . . . . . . . . . . . . . . 16 Arrangements . . . . . . . . . . . . . . . . . 42
The Guaranteed Interest Account . . . . . . . 17 Sale of the Policies . . . . . . . . . . . . . . 42
The Variable Accounts . . . . . . . . . . . . 17 Voting Rights . . . . . . . . . . . . . . . . . . 42
Annuity Value Guarantee . . . . . . . . . . . . 18 Further Information . . . . . . . . . . . . . . . 43
Transfers of Policy Value . . . . . . . . . . . 19 Legal Matters . . . . . . . . . . . . . . . . . . 43
Dollar Cost Averaging . . . . . . . . . . . . 19 Experts . . . . . . . . . . . . . . . . . . . . . 43
Asset Allocation Balancer . . . . . . . . . . 20 Performance and Other Comparative Information . . 43
Surrender Or Withdrawal Rights . . . . . . . . . 20 Advertising Performance of Variable Accounts . . 43
Special Policy Access . . . . . . . . . . . . . 20 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . 47
Provisions on Death . . . . . . . . . . . . . . 21 APPENDIX A . . . . . . . . . . . . . . . . . . . . 71
Survivor Benefit Amount . . . . . . . . . . . 22 Annuity Options . . . . . . . . . . . . . . . . . 71
Death of the Policyowner . . . . . . . . . . . 22 APPENDIX B . . . . . . . . . . . . . . . . . . . . 72
Death of the Annuitant . . . . . . . . . . . . 23 Sample Calculations Of Market Value
Commencement of Annuity Payments . . . . . . . . 24 Adjustments And Withdrawal Charges . . . . . . 72
Substitution of Fund Shares . . . . . . . . . . 24
Policy Charges . . . . . . . . . . . . . . . . . 24
Withdrawal Charge . . . . . . . . . . . . . . 24
Record-Keeping Charge . . . . . . . . . . . . 25
Transfer Charge . . . . . . . . . . . . . . . 26
Dollar Cost Averaging Charge . . . . . . . . . 26
Asset Allocation Balancer Charge . . . . . . . 26
Special Policy Access Charge . . . . . . . . . 26
Premium Tax Deduction . . . . . . . . . . . . 26 THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN
Mortality And Expense Risks Charges . . . . . 26 ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
Administration Charge . . . . . . . . . . . . 27 LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE
Market Value Adjustment . . . . . . . . . . . . 27 ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
Other General Policy Provisions . . . . . . . . 28 OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
Deferral of Payments . . . . . . . . . . . . . 28
</TABLE>
2
<PAGE> 5
DEFINITIONS
"ACCUMULATION PERIOD" is the period from the date Manufacturers Life of America
receives the first purchase payment to the Elected Annuity Date.
"ANNUITANT" means a person upon whose life annuity payments are based. An
Annuitant has no rights under the Policy.
"ANNUITY COMMENCEMENT DATE" means the date on which the first annuity payment
is made.
"BUSINESS DAY" is any day that the New York Stock Exchange is open for trading
and trading is not restricted. The net asset value of the underlying shares of
a Variable Account will be determined on each Business Day.
"CHARITABLE REMAINDER TRUST" means a trust established pursuant to Section 664
of the Internal Revenue Code of 1986, as amended.
"CUMULATIVE NET EARNINGS" means the greater of (i) zero and (ii) the Policy
Value less the sum of Net Premiums remaining after adjustments for any prior
withdrawals.
"ELECTED ANNUITY DATE" means the date selected by the Policyowner on which the
first annuity payment is due.
"FIXED ACCOUNT" or "FIXED ACCOUNTS" are the various accounts in which
allocations are credited with a Guaranteed Rate for a set period of time if the
allocations are maintained until the Maturity Date.
"FIXED ACCOUNT VALUE" is the sum of the values of a Policy's interest in the
Fixed Accounts prior to application of any Market Value Adjustment calculated
as set forth in Description of the Policies -- "Policy Value" (the Fixed
Accounts).
"GENERAL ACCOUNT" is all assets of Manufacturers Life of America except those
allocated to Separate Account Two, Separate Account A, or other separate
accounts of Manufacturers Life of America.
"GROSS WITHDRAWAL AMOUNT" is the amount of any full surrender or partial
withdrawal prior to (i) the deduction of any applicable charges or withholding
taxes and (ii) any adjustment for applicable Market Value Adjustments.
"GUARANTEE PERIOD" is a period during which a Guaranteed Rate will be paid on
an allocation to a Fixed Account.
"GUARANTEED INTEREST ACCOUNT" is the account in which allocations earn interest
at a rate guaranteed not to fall below 3% per annum and which can be reset
daily.
"GUARANTEED INTEREST ACCOUNT VALUE" is the value of a Policy's interest in the
Guaranteed Interest Account.
"GUARANTEED RATE" is the rate of interest credited by Manufacturers Life of
America on a Fixed Account for a given Guarantee Period.
"MARKET VALUE ADJUSTMENT" is an adjustment to any portion of the Fixed Account
Value which is surrendered, withdrawn, annuitized or transferred prior to the
Maturity Date.
"MATURITY DATE" is the last day of a Guarantee Period.
"NET PREMIUMS" are gross premiums less deductions for applicable premium taxes.
"PAYEE" is a person designated by the Policyowner to receive the annuity
payments due and payable on and after the Annuity Commencement Date.
"POLICY VALUE" means the value during the Accumulation Period of amounts
accumulated under the Policy. The Policy Value is the sum of the Variable
Policy Value, the Guaranteed Interest Account Value and the Fixed Account
Value.
3
<PAGE> 6
"POLICY YEARS", "POLICY ANNIVERSARIES" and "POLICY MONTHS" are determined from
the date the initial purchase payment is allocated. The first Policy
Anniversary will be the first day of the same month one year later.
"PURCHASE PAYMENT" is an amount paid under the Policy.
"QUALIFIED POLICY" means a Policy used in connection with a retirement plan
which receives favorable federal income tax treatment under sections 401 or 408
of the Internal Revenue Code of 1986, as amended ("Code").
"SERVICE OFFICE" is the office designated by Manufacturers Life of America to
service the Policy.
"SURVIVOR BENEFIT AMOUNT" is the amount to which the Policy Value may be set on
the death of the original Policyowner.
"UNIT" is an index used to measure the value of a Policy's interest in a
Variable Account.
"VARIABLE ACCOUNT" or "VARIABLE ACCOUNTS" are any one or more of the various
sub-accounts of Separate Account Two.
"VARIABLE POLICY VALUE" is the sum of the value of a Policy's interest in each
of the Variable Accounts calculated as set forth in Description of the Policies
-- "Policy Value" (The Variable Accounts).
4
<PAGE> 7
SUMMARY OF POLICIES
ELIGIBLE PURCHASERS. The Policies described in this prospectus are designed to
provide a flexible investment program for the accumulation of amounts for
retirement purposes under plans which receive favorable federal income tax
treatment pursuant to sections 401 or 408 of the Code ("Qualified Policies"),
or under plans and trusts not entitled to any special tax treatment
("Nonqualified Policies"). The Policies, which will generally be issued to
persons up to age 75, will be offered both on an individual basis and in
connection with group or sponsored arrangements. (See Description of the
Policies -- "Purchasing A Policy".)
FUNDING ARRANGEMENTS. The Policies are designed to provide flexibility as to
the timing and amount of purchase payments and the available funding media.
Purchase payments may be allocated among three types of accounts -- the
Variable Accounts, the Guaranteed Interest Account and, in some jurisdictions,
the Fixed Accounts. The Variable Accounts are sub-accounts of Separate Account
Two, each sub-account investing in a corresponding Fund of the Series Fund.
The Guaranteed Interest Account is an account in which allocated purchase
payments earn interest at a rate which can be reset daily but is guaranteed not
to be less than 3% per annum. The Fixed Accounts are accounts which earn a
fixed rate of interest only if held to maturity.
PURCHASE PAYMENTS. The minimum initial purchase payment is $5,000 ($2,000 for
Qualified Plans). Subsequent purchase payments must be at least $500.
Manufacturers Life of America reserves the right to alter these minimum payment
amounts on 90 days written notice to the Policyowner and it further reserves
the right to institute a pre-authorized payment plan which provides for
automatic monthly deductions and which may permit smaller payments. Purchase
payments may be allocated among the Variable Accounts, Fixed Accounts and
Guaranteed Interest Account in any manner the Policyowner wishes. A
Policyowner should specify how each purchase payment is to be allocated.
Allocations among the Variable Accounts, Fixed Accounts and Guaranteed Interest
Account are made as a percentage of Net Premiums. The percentage allocation to
any account may be any whole number between 0 and 100, provided the total
percentage allocations equal 100. A Policyowner may change the way in which
Net Premiums are allocated at any time without charge. If no allocation is
specified, a purchase payment will be allocated as set forth in the
Policyowner's previous allocation request. (See Description of the Policies --
"Restrictions Applicable To Purchase Payments".)
CHARGES AND DEDUCTIONS. There is no deduction from purchase payments for sales
expenses. However, full surrender of a Policy or a partial withdrawal
thereunder may be subject to a withdrawal charge (contingent deferred sales
charge), which is a percentage of the Gross Withdrawal Amount subject to the
withdrawal charge. The applicable percentage will depend upon when the
purchase payment to which such amount is deemed attributable was made. The
maximum withdrawal charge is 8% of the Gross Withdrawal Amount, decreasing over
time until, beginning in the seventh year after the purchase payment was made,
it is 0%. However, in no event may the charge exceed 8% of the total purchase
payments made. The Gross Withdrawal Amount will also be adjusted by any
applicable Market Value Adjustment and reduced by any applicable record-keeping
charges or withholding taxes.
When amounts allocated to a Fixed Account are not maintained until the
applicable Maturity Date, whether as a result of a surrender, partial
withdrawal, transfer or the Annuity Commencement Date, the Market Value
Adjustment may cause a deduction from, or an addition to, the amounts
surrendered, withdrawn, transferred or annuitized. In an investment
environment of rapidly increasing interest rates, the Market Value Adjustment
could cause the amount available from a Fixed Account prior to the Maturity
Date of that Fixed Account upon surrender, withdrawal, transfer or on the
Annuity Commencement Date to be substantially less than the amount allocated to
that Fixed Account.
A record-keeping charge equal to 2% of the Policy Value up to a maximum of $30
will be deducted on the last day of each Policy Year or on the date of a full
surrender made prior to the end of a Policy Year.
Deductions are made for (i) mortality and expense risks charges, and (ii) an
administration charge. Mortality and expense risks charges are deducted daily
at an annual rate of .80% of assets of Separate Account Two, and monthly, at
the beginning of each Policy Month, at an annual rate of .45% of the Variable
Policy Value and Fixed Account Value. The administration charge is deducted
daily at an annual rate of .20% of the assets of Separate Account Two.
A deduction may be made for any applicable premium taxes attributable to the
Policies (currently such taxes range from 0% to 3%).
5
<PAGE> 8
There is no charge for the first transfer between accounts in any Policy Month.
However, there is a charge of $35 for a second transfer in a Policy Month. For
this purpose, all transfer requests received by Manufacturers Life of America
on the same Business Day are treated as a single transfer and transfers
pursuant to the Dollar Cost Averaging and Asset Allocation Balancer provisions
are ignored. There is no charge for Dollar Cost Averaging transfers if Policy
Value exceeds $15,000; otherwise there is a charge of $5 per transfer. There
is a charge of $15 for each Asset Allocation Balancer transfer. (See
Description of the Policies -- "Policy Charges".)
ANNUITY PAYMENTS. Annuity payments will begin on the Elected Annuity Date and
will be on a fixed basis only. The Policyowner may change the Elected Annuity
Date to any date so long as payments will commence by the end of the year in
which the Annuitant reaches age 85. The date the first annuity payment is made
is the Annuity Commencement Date. Under some Qualified Policies, annuity
payments must commence no later than April 1 following the year the Annuitant
attains the age of 70. If application of the Policy Value would result in
annuity payments of less than $20 monthly, $60 quarterly, $100 semi-annually or
$200 annually, the Policy Value will be paid to the Policyowner in a single
sum. (See Description of the Policies -- "Commencement of Annuity Payments".)
SURRENDERS OR WITHDRAWALS. At any time prior to the Annuity Commencement Date,
a Policyowner may fully surrender the Policy for, or make a cash withdrawal in
an amount not exceeding, its Policy Value, reduced by any applicable withdrawal
charge and record-keeping charge, and adjusted for any Market Value Adjustment.
A full surrender or cash withdrawal may be subject to a tax penalty. (See "Tax
Treatment Of The Policies".) The minimum cash withdrawal that may be requested
at any one time is $500. Some Qualified Policies must contain restrictions on
withdrawal rights. (See Description of the Policies -- "Surrender Or
Withdrawal Rights".)
TRANSFERS. Subject to certain limitations, transfers may be made at any time
among the Guaranteed Interest Account, the Variable Accounts and the Fixed
Accounts (subject, in the case of transfers from Fixed Accounts, to any
applicable Market Value Adjustment). Transfers into the accounts may be made
in any amount. Transfers from any account of less than the entire account
value must be at least $500, including transfers under the Dollar Cost
Averaging program. Transfers from the Guaranteed Interest Account are limited
in any one Policy Year to the greater of $500 or 15% of the Guaranteed Interest
Account Value at the previous Policy Anniversary. (See Description of the
Policies -- "Transfers of Policy Value".)
FREE LOOK RIGHT. Within ten days after receiving a Policy, the Policyowner may
return it for cancellation by mailing it to the Service Office. Within seven
days after receipt, except where state insurance law requires return of any
purchase payments, Manufacturers Life of America will refund the Policy Value
plus or minus any applicable Market Value Adjustment.
* * *
The above summary is qualified in its entirety by the detailed information
appearing elsewhere in this prospectus and the accompanying prospectus of the
Series Fund to which reference should be made.
POLICYOWNER INQUIRIES
All communications or inquiries relating to a Policy should be addressed to the
Manufacturers Life of America Service Office at 200 Bloor Street East, Toronto,
Ontario, Canada, M4W 1E5. All notices and elections under a Policy must be
received at that Service Office to be effective.
6
<PAGE> 9
EXPENSE TABLE
<TABLE>
<CAPTION>
NUMBER OF
COMPLETE
POLICY YEARS
SINCE
PURCHASE PAYMENT WITHDRAWAL
WAS MADE CHARGE
-------- ------
<S> <C> <C> <C>
1. POLICY AND TRANSACTION CHARGES: 0-2.99 8.00%
(a) Withdrawal Charge (contingent deferred sales charge) 3 6.00%
(as a percentage of the lesser of amount surrendered 4 4.00%
or purchase payments)1: 5 2.00%
6 or more None
(b) Record-Keeping Charge $30
(c) Transfer Charge (if applicable)3 $35
(d) Dollar Cost Averaging Charge (if selected and applicable)4 $5
(e) Asset Allocation Balancer Charge (if selected)5 $15
ANNUAL RATE
-----------
2. MORTALITY AND EXPENSE RISKS CHARGE
(a) Variable (Separate) Accounts
# Charged daily as a percentage of average Variable
Account Values6 0.80%
# Charged monthly as a percentage of the policy
month-start Fixed Account Assets6 0.45%
--------
1.25%
(b) Fixed Accounts 0.45%
# Charged monthly as a percentage of the policy
month-start Fixed Account Assets 0.00%
(c) Guaranteed Interest Account
3. OTHER SEPARATE ACCOUNT EXPENSES
Charge for administration charged daily as a percentage of average 0.20%
Variable Account Values
------
TOTAL SEPARATE ACCOUNT AND OTHER ASSET BASED CHARGES 1.45%
</TABLE>
1 The withdrawal charge decreases over time depending on the number of
complete Policy Years elapsed since the purchase to which the
withdrawal is deemed attributable was made. A withdrawal other than
one made pursuant to the free withdrawal provision is deemed to be a
liquidation of a purchase payment. The free withdrawal provision
allows the Policyowner to withdraw in any Policy Year after the first
up to 10% of the Policy Value as of the most recent Policy Anniversary
free of the withdrawal charge. In addition, a Market Value Adjustment
may cause a deduction from or addition to amounts withdrawn from the
Fixed Accounts.[QL]
2 A record-keeping charge of 2% of the Policy Value up to a maximum of
$30 is deducted during the Accumulation Period on the last day of a
Policy Year. The charge is also deducted upon full surrender of a
Policy on a date other than the last day of a Policy Year.
3 There is no charge for the first transfer in any Policy Month. One
additional transfer is allowed each Policy Month subject to a charge
of $35. In addition, a Market Value Adjustment may cause a deduction
from or addition to amounts transferred from or among the Fixed
Accounts. Transfers made pursuant to the Dollar Cost Averaging or
Asset Allocation Balancer Programs do not count as transfers for
purposes of determining the availability of free transfers or of
transfers subject to the $35 charge.
4 Transfers pursuant to the optional Dollar Cost Averaging program are
free if Policy Value exceeds $15,000 at the time of the transfer, but
otherwise incur a $5 charge.
5 The Asset Allocation Balancer Program is optional. If elected, there
is a charge of $15 for transfers under the program.
6 A mortality and expense risks charge of .80% per annum is deducted
daily from Separate Account Two assets, and a mortality and expense
risks charge of .45% per annum is deducted monthly from Variable
Policy Values and Fixed Account Values.
7
<PAGE> 10
<TABLE>
<CAPTION>
ANNUAL RATE
-----------
<S> <C> <C> <C>
4. MANULIFE SERIES FUND, INC. EXPENSES:
Charged daily as a percentage of average values
International Fund
Management Fees .85%7
Other Expenses .50%
Pacific Rim Emerging Markets Fund
Management Fees .85%7
Other Expenses .65%
All Other Funds
Management Fees .50%
Total Manulife Series Fund Annual Expense
International Fund 1.35%
Pacific Rim Emerging Markets Fund 1.50%
All Other Funds .50%
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Example8
If you surrender your Policy at the end of the
applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual return
on assets:
INTERNATIONAL FUND $109 $147 $172 $320
PACIFIC RIM EMERGING MARKETS FUND $111 $151 $179 $334
ALL OTHER FUNDS $101 $123 $129 $235
If you do NOT surrender your Policy or if you
annuitize at the end of the applicable time
period:
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual
return on assets:
INTERNATIONAL FUND $ 29 $ 89 $152 $320
PACIFIC RIM EMERGING MARKETS FUND $ 31 $ 93 $159 $334
ALL OTHER FUNDS $ 64 $109 $235
</TABLE>
The purpose of the above table is to assist a Policyowner in understanding the
various costs and expenses that he or she will bear directly or indirectly.
The table reflects expenses of Separate Account Two, the Fixed Accounts and
Manulife Series Fund, Inc., but it does not reflect any deduction made to cover
any premium taxes attributable to a Policy. Such taxes may be as much as 3%
depending on the law of the applicable state or local jurisdiction. In
addition, although the table does not reflect any charge for the Special Policy
Access feature, Manufacturers Life of America reserves the right to charge an
administrative fee not to exceed $150 for withdrawal under this provision.
However, currently no charge is imposed. The example included in the above
table should not be considered a representation of past or future expenses, and
actual expenses may be greater or less than those shown.
Information concerning charges assessed under the Policies is set forth below.
See Description of the Policies -- "Policy Charges". Information concerning
the management fee paid by Manulife Series Fund, Inc. is provided under the
caption "Investment Management Arrangements" in the Fund prospectus attached
hereto.
7 The management fee will drop to .70% on assets over $100 million.
8 In the examples above, the $30 annual record-keeping charge has been
reflected in the calculation of annual expenses by converting it to a
percentage charge. In converting the charge to a percentage an
average account size of $40,000 was used. The 10% free withdrawal has
been incorporated where applicable.
8
<PAGE> 11
CONDENSED FINANCIAL INFORMATION
SCHEDULE OF ACCUMULATION UNIT VALUES AND
ACCUMULATION UNITS OUTSTANDING
The accumulation unit values set forth in the following table are accounting
data that do not reflect the impact of the following charges (which are not
deducted as part of the calculation of accumulation unit values): withdrawal
charges, record-keeping charges, the portion of the mortality and expense risk
charges deducted monthly, deductions for premium taxes (if any) or charges (if
any) for second transfers in a policy month, Dollar Cost Averaging and Asset
Allocation Balancer transfers or Special Policy Access transactions.
Accordingly, the change in accumulation unit values over time should not be
viewed as an accurate measure of the investment performance of Separate Account
Two.
FOR THE PERIOD NOVEMBER 3, 1987 THROUGH DECEMBER 31, 1994
SUB-ACCOUNTS
<TABLE>
<CAPTION>
EMERGING GROWTH EQUITY
----------------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (Commencement) $10.00
January 1 value $10.87 $12.58 $17.72 $14.93 $25.33 $30.55 $37.47
December 31 value $10.87 $12.58 $17.72 $14.93 $25.33 $30.55 $37.47 $35.58
December 31 units 329 11,285 22,539 41,687 76,705 288,277 874,970 1,454,901
BALANCED ASSETS
---------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
November 3 (Commencement) $10.00
January 1 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70
December 31 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70 $17.75
December 31 units 1,645 21,509 47,074 118,664 201,901 515,812 1,293,922 2,001,928
CAPITAL GROWTH BOND
-------------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
November 3 (Commencement) $10.00
January 1 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94
December 31 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94 $16.02
December 31 units 1,039 17,737 36,191 51,268 69,024 168,747 499,877 672,365
MONEY-MARKET
------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
November 3 (Commencement) $10.00
January 1 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37
December 31 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37 $13.75
December 31 units 7,161 23,091 32,907 160,484 122,681 176,160 328,922 918,869
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
COMMON STOCK
------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (Commencement) $10.00
January 1 value $10.43 $11.35 $14.68 $13.94 $17.97 $18.88 $21.19
December 31 value $10.43 $11.35 $14.68 $13.94 $17.97 $18.88 $21.19 $20.10
December 31 units 709 7,257 20,202 43,044 78,327 194,079 485,195 803,568
REAL ESTATE SECURITIES
----------------------
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
November 3 (Commencement) $10.00
January 1 value $ 9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01
December 31 value $ 9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01 $22.16
December 31 units 1,642 12,733 17,676 17,834 24,956 134,707 711,630 1,205,880
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
-------------
1994
----
<S> <C>
October 4 (Commencement) $10.00
December 31 value $ 9.72
December 31 units 89,180
</TABLE>
<TABLE>
<CAPTION>
PACIFIC RIM
EMERGING
MARKETS
-------
1994
----
<S> <C>
October 4 (Commencement) $10.00
December 31 value $ 9.41
December 31 units 67,272
</TABLE>
10
<PAGE> 13
GENERAL INFORMATION ABOUT MANUFACTURERS
LIFE OF AMERICA
MANUFACTURERS LIFE OF AMERICA AND
MANUFACTURERS LIFE
Manufacturers Life of America, a wholly-owned subsidiary of The Manufacturers
Life Insurance Company of Michigan, is a stock life insurance company organized
under the laws of Pennsylvania on April 11, 1977 and redomesticated under the
laws of Michigan on December 9, 1992. It is authorized to do business in the
District of Columbia and all states of the United States except New York. The
Manufacturers Life Insurance Company of Michigan is a life insurance company
organized in 1983 under the laws of Michigan and is a wholly-owned subsidiary
of The Manufacturers Life Insurance Company ("Manufacturers Life"), a mutual
life insurance company based in Toronto, Canada. Manufacturers Life of America
was acquired by Manufacturers Life in 1982. Manufacturers Life and its
subsidiaries, together, constitute one of the largest life insurance companies
in North America as measured by assets. (See Additional Information about
Manufacturers Life of America -- "Management Discussion and Analysis of
Financial Condition and Results of Operation".)
GENERAL INFORMATION ABOUT MANUFACTURERS LIFE
OF AMERICA'S SEPARATE ACCOUNTS
Manufacturers Life of America is the legal owner of the assets in its separate
accounts. The income, gains and losses of the separate accounts, whether or
not realized, are, in accordance with applicable contracts, credited to or
charged against the accounts without regard to the other income, gains or
losses of Manufacturers Life of America. Manufacturers Life of America will at
all times maintain assets in the accounts with a total market value at least
equal to the reserves and other liabilities relating to Variable Account or
Fixed Account benefits under all Policies participating in the accounts. While
the assets of Separate Account Two may not be charged with liabilities which
arise from any other business Manufacturers Life of America conducts, the
assets of Separate Account A may be so charged. However, all obligations under
the Policies are general corporate obligations of Manufacturers Life of
America.
The investments made by the separate accounts are subject to the requirements
of applicable state laws. These investment requirements may differ between
those for separate accounts supporting variable obligations and those for
separate accounts supporting fixed obligations.
MANUFACTURERS LIFE OF AMERICA'S
SEPARATE ACCOUNT TWO:
THE VARIABLE ACCOUNTS
Manufacturers Life of America established its Separate Account Two on May 25,
1983 as a separate account under Pennsylvania law. Since December 9, 1992 the
Separate Account has been operated under Michigan law. This account holds
assets that are segregated from all of Manufacturers Life of America's other
assets. Separate Account Two is currently used only to support the Variable
Account obligations under variable annuity contracts.
Separate Account Two is registered with the Securities and Exchange Commission
("S.E.C.") 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 S.E.C. of the management or investment policies or practices of
Separate Account Two. For state law purposes Separate Account Two is treated
as a part or division of Manufacturers Life of America.
GENERAL INFORMATION ABOUT
MANULIFE SERIES FUND, INC.
Each sub-account of Separate Account Two will purchase shares only of a
particular Fund of the Series Fund. The Series Fund is registered under the
1940 Act as an open-end diversified management investment company. Separate
Account Two will purchase and redeem shares of the Series Fund at net asset
value. Shares will be redeemed to the extent necessary for Manufacturers Life
of America to provide benefits under the Policies, to transfer assets from one
sub-account to another or to the General Account or Separate Account A as
requested by Policyowners, and for other purposes consistent with the Policies.
Any dividend or capital gain
11
<PAGE> 14
distribution received from a Fund will be reinvested immediately at net
asset value in shares of that Fund and retained as assets of the corresponding
sub-account. Series Fund shares are issued to fund benefits under both
variable annuity contracts and variable life insurance policies issued by
Manufacturers Life of America. For a description of the procedures for
handling potential conflicts of interest arising from the funding of such
benefits, see "Purchases and Redemptions of Shares" in the attached Series Fund
prospectus.
The Series Fund receives investment management services from Manufacturers
Adviser Corporation. Manufacturers Adviser Corporation is a registered
investment adviser under the Investment Advisers Act of 1940. Certain expenses
are assessed against the assets of the Series Fund. These are: (1)an
investment management fee of (a).50% of the average daily value of the
aggregate net assets of the Emerging Growth Equity Fund, Common Stock Fund,
Real Estate Securities Fund, Balanced Assets Fund, Capital Growth Bond Fund and
Money-Market Fund, and (b).85% of the average daily value of the first
$100million of net assets and .70% of the average daily value of the net assets
over $100million of each of the International Fund and the Pacific Rim Emerging
Markets Fund, and (2)expenses of up to .50% and .65% per annum assessed against
the assets of the International Fund and Pacific Rim Emerging Markets Fund,
respectively.
INVESTMENT OBJECTIVES AND RISKS OF THE FUNDS
The Funds are subject to varying degrees of financial and market risk.
Financial risk refers to the ability of an issuer of a debt security to pay
principal and interest on such security and to the earnings stability and
overall financial soundness of an issuer of an equity security; market risk
refers to the volatility of the reaction of the price of a security to changes
in conditions in the securities markets in general and, with particular
reference to debt securities, changes in the overall level of interest rates.
The investment objectives of the Funds currently available to Policyowners
through corresponding sub-accounts are set forth below. There is, of course,
no assurance that these objectives will be met.
EMERGING GROWTH EQUITY FUND
The investment objective of the Emerging Growth Equity Fund is to achieve
growth of capital by investing primarily in equity securities of companies
believed to offer growth potential over both the intermediate and the long
term. Current income is not a significant consideration. In selecting
investments, emphasis will be placed on securities of progressive companies
with aggressive and competent managements. A substantial portion of the Fund's
assets may be invested in emerging growth companies, which at the time of the
Fund's investment may be paying no dividends to their shareholders.
Emerging growth companies may have limited product lines, market or financial
resources, or they may be dependent upon a small management group. An
investment in the Emerging Growth Equity Fund may therefore involve greater
financial risk than is customarily associated with less aggressive companies.
In addition, the Fund may be subject to relatively high levels of market risk.
The securities of aggressive growth companies may be subject to more abrupt or
erratic market movements than other companies or the market averages in
general. Because shares of the Emerging Growth Equity Fund may experience
above average fluctuations in net asset value, they should be considered as
long-term investments.
COMMON STOCK FUND
The investment objective of the Common Stock Fund is 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. In selecting investments, emphasis will be placed on companies with
good financial resources, strong balance sheet, satisfactory rate of return on
capital, good industry position, superior management skills and earnings that
tend to grow consistently. The Fund's investments are not limited to any
particular type or size of company, but high quality growth stocks are
emphasized. Investment in shares of the Common Stock Fund should involve less
financial and market risk than the Emerging Growth Equity Fund, but the Fund
may occasionally experience above-average fluctuations in net asset value, and
therefore should be considered as a long-term investment.
REAL ESTATE SECURITIES FUND
The investment objective of the Real Estate Securities Fund is to achieve a
combination of long-term capital appreciation and satisfactory current income
by investing in real estate related equity and debt securities. In pursuit of
its objective, the Real Estate Securities Fund will invest principally in real
estate investment trust equity and debt securities and other securities issued
by companies which invest in real estate or interests therein. The Fund may
also purchase the common stocks, preferred stocks,
12
<PAGE> 15
convertible securities and bonds of companies operating in industry groups
relating to the real estate industry. This would include companies engaged
in the development of real estate, building and construction, and other
market segments related to real estate. The Fund will not invest directly in
real property nor will it purchase mortgage notes directly. Under normal
circumstances, at least 65% of the value of the Fund's total assets will be
invested in real estate related equity and debt securities. Because the Fund
considers current income in its investment objectives, an investment in the
Real Estate Securities Fund should involve less financial and market risk than
the Emerging Growth Equity Fund. However, the Fund's share value may experience
above-average fluctuation in periods of changing interest rates and therefore
the shares should be considered as long-term investments.
BALANCED ASSETS FUND
The investment objective of the Balanced Assets Fund is to achieve intermediate
and long-term growth through capital appreciation and income by investing in
both debt and equity securities. The Fund will maintain at all times a balance
between debt securities or preferred stocks, on the one hand, and common
stocks, on the other. At least 25% of the Fund's assets will be invested in
each of the two basic categories. Investment in shares of the Balanced Assets
Fund should involve less financial and market risk than an investment in the
Emerging Growth Equity Fund.
CAPITAL GROWTH BOND FUND
The investment objective of the Capital Growth Bond Fund is to achieve growth
of capital by investing in medium grade or better debt securities with income
as a secondary consideration. The Capital Growth Bond Fund differs from most
"bond" funds in that its primary objective is capital appreciation, not income.
The Fund will be carefully positioned in relation to the term of debt
obligations and the anticipated movement of interest rates. Because of the
Fund's emphasis on medium grade or better instruments, an investment in the
Capital Growth Bond Fund should result in less financial risk than an
investment in the Emerging Growth Equity Fund, Common Stock Fund, Real Estate
Securities Fund or Balanced Assets Fund. However, the Capital Growth Bond Fund
will be subject to substantial market risk arising from changes in the level of
prevailing interest rates and the Fund's active management in anticipation of
such changes.
MONEY-MARKET FUND
The investment objective of the Money-Market Fund is to provide maximum current
income consistent with capital preservation and liquidity by investing in a
portfolio of high quality money market instruments. Investment in shares of
the Money-Market Fund should involve less market or financial risk than an
investment in any other Fund. However, the Fund's performance will vary with
changes in short-term interest rates.
INTERNATIONAL FUND
The investment objective of the International Fund is to achieve long-term
growth of capital by investing in a diversified portfolio that is comprised
primarily of common stocks and equity related securities of companies domiciled
in countries other than the United States and Canada. It invests primarily in
the securities markets of Western European countries, Australia, the Far East,
Mexico and South America. The Fund will under normal conditions, invest at
least 65% of its net assets in common stocks and equity related securities of
established larger capitalization companies that have attractive long-term
prospects for growth of capital. Investments of this type involve risks of
political and economic instability in the country of the issuer, the
possibility of imposition of foreign exchange controls, confiscatory taxation,
and the restriction of capital repatriation. Such securities may be subject to
greater fluctuations in price than domestic securities and, under certain
market conditions, foreign securities may be less liquid than domestic
securities. The risk of currency fluctuations is present since it is
anticipated that, in general, the majority of securities in the Fund will not
be denominated in United States currency. Accordingly, investment in the
shares of the International Fund should involve more financial and market risk
than any of the domestic Funds. Because the shares of the International Fund
may experience above-average fluctuations in the net asset value, they should
be considered as long-term investments.
PACIFIC RIM EMERGING MARKETS FUND
The investment objective of the Pacific Rim Emerging Markets Fund is to
achieve long-term growth of capital by investing in a diversified portfolio
that is comprised primarily of common stocks and equity related securities of
companies domiciled in the countries of the Pacific Rim region. The Fund,
under normal conditions, invests at least 65% of its net assets in common
stocks and equity related securities of established larger capitalization
companies that have attractive long-term prospects for growth of capital.
Investments of this type involve risks of political and economic instability in
the country of the issuer, the possibility of imposition of foreign exchange
controls, confiscatory taxation, and the restriction of capital repatriation.
Such securities may be subject to
13
<PAGE> 16
greater fluctuations in price than domestic securities and, under certain
market conditions, foreign securities may be less liquid than domestic
securities. The risk of currency fluctuations is present since it is
anticipated that, in general, the majority of securities in the Fund will not
be denominated in United States currency. Accordingly, investment in the
shares of the Pacific Rim Emerging Markets Fund should involve more financial
and market risk than any of the domestic Funds. Because the shares of the
Pacific Rim Emerging Markets Fund may experience above-average fluctuations
in net asset value, they should be considered as long-term investments.
A full description of the Series Fund, its investment objectives, policies and
restrictions, its expenses, the risks associated therewith, and other aspects
of its operation is contained in the attached Series Fund prospectus, which
should be read together with this prospectus.
SELECTION OF SUB-ACCOUNT(S)
The basic purpose of the variable portion of the Policies is to accumulate
policy values through favorable investment results of the Funds selected by the
Policyowner. The final decision on Fund(s) selection must be made by the
Policyowner. Outlined below are a few points for consideration.
MARKET RISK
The previous section discussed the investment objective of each Fund and its
associated market risk. Before selecting a Fund or combination of Funds the
Policyowner should determine his or her comfort level with market volatility,
recognizing that the Policy is designed as a long-term contract.
FINANCIAL RISK
Each Fund differs with respect to financial risk of principal. This variation
also brings with it a divergent level of opportunity for investment gain or
loss. The Policyowner should determine the financial risk he or she is willing
to accept in relation to the potential for investment gain or loss.
HISTORICAL PERSPECTIVE OF FUND OBJECTIVES
The above risks should be considered in conjunction with past general trends.
Historically, if investments were held over relatively long periods, the
investment performance of equities has generally been superior to that of long
or short-term debt securities, even though equities have been subject to more
dramatic changes in value over periods of time. Emerging growth equities have
also tended to have better long-term investment performance when compared to
the larger, more mature equities, even though emerging growth equities, in
turn, have been subject to more dramatic fluctuations in value. Accordingly,
the Emerging Growth Equity Fund may be the more desirable option for
Policyowners who are focused on the longer term and are willing to accept such
short-term risks.
14
<PAGE> 17
Over the past few decades to the present, certain foreign economies have grown
faster than the United States economy, and the return on equity investments in
these markets has often been superior to similar investments in the United
States. The securities markets in different regions and countries have at
times in the past, moved relatively independently of one another due to
different economic, political and financial factors. To the extent the various
markets move independently, total portfolio volatility tends to be reduced when
securities from the various markets are combined into a single portfolio. A
low correlation between movement in one market and the Fund's total assets may,
however, reduce the gains the Fund might otherwise derive from movements in
that market. Currency exchange rates frequently move independently of
securities markets in a particular country. As a result, gains or losses in a
particular securities market may be affected by changes in currency exchange
rates.
Some Policyowners may prefer somewhat greater protection against financial and
market risk than an investment in the Emerging Growth Equity Fund,
International Fund or Pacific Rim Emerging Markets Fund provides. These
Policyowners may prefer the Common Stock Fund or, if more comfortable with the
long-term value of real estate, the Real Estate Securities Fund. Other
Policyowners, being even more risk averse, may prefer the Balanced Assets Fund,
which maintains at all times a balance between debt securities or preferred
stocks, on the one hand, and common stocks, on the other.
Other Policyowners may prefer less financial risk than that which comes with an
investment in either the Emerging Growth Equity Fund, the Common Stock Fund,
the Real Estate Securities Fund, the Balanced Assets Fund, International Fund
or Pacific Rim Emerging Markets Fund. This is made possible by the Capital
Growth Bond Fund's emphasis on investment in debt instruments. However, the
Capital Growth Bond Fund will be subject to substantial market risk arising
from changes in the level of prevailing interest rates and the Fund's active
management in anticipation of such changes.
Those who desire the least market or financial risk of all the Funds may prefer
the Money-Market Fund, recognizing that the performance of this Fund will vary
with changes in short-term interest rates.
Some Policyowners may wish to divide their Net Premiums among two or more of
the sub-accounts. Each Policyowner must make his or her own choice that takes
into account how willing he or she is to accept investment risks, the manner in
which his or her other assets are invested and his or her own predictions about
what investment results are likely to be in the future.
DESCRIPTION OF THE POLICIES
PURCHASING A POLICY
The Policies are designed for use in connection with retirement plans entitled
to special tax treatment under Sections 401 or 408 of the Code and retirement
plans and trusts not entitled to any special tax treatment. The Policies are
appropriate for group or sponsored plans with individual accounts or for
purchase directly by individuals. (See Other Matters -- "Special Provisions
for Group or Sponsored Arrangements".) A Policy will generally be issued to
persons up to age 75. In certain circumstances Manufacturers Life of America
may, in its sole discretion, issue a Policy to persons above age 75.
Except where application information and the initial purchase payment are
supplied by electronic transmission, persons seeking to purchase Policies must
submit an application and a check for the initial purchase payment. The
application, whether written, or via electronic transmission, is subject to
underwriting standards adopted by Manufacturers Life of America and
Manufacturers Life of America reserves the right to reject any application. A
properly completed application that is accompanied by the initial purchase
payment and all information necessary for the processing of the application
will normally be accepted within two business days. An incomplete application
which is subsequently made complete will normally be accepted within two
business days of completion; however, if an application is not completed
properly or necessary information is not obtained within 5 working days,
Manufacturers Life of America will offer to return the purchase payment.
Special provisions for electronic transmission of application information and
purchase payments. In jurisdictions where it is not prohibited, Manufacturers
Life of America will accept transmittal of initial and subsequent purchase
payments by electronic transfer to the Service Office provided the transmission
is (i) initiated by a broker-dealer from whom Manufacturers Life of America has
agreed to accept such transfers and (ii) accompanied by the information
necessary to issue a Policy and/or allocate the premium payments.
Initial purchase payments made via electronic transfer and accompanied by the
information necessary to issue a Policy will normally be accepted within two
business days. If the accompanying information is incomplete but is
subsequently made complete, it will normally be accepted within two business
days; however, if the requested information cannot be obtained within five
business days,
15
<PAGE> 18
Manufacturers Life of America will inform the broker-dealer, on the applicant's
behalf, of the reasons for the delay and offer to return the purchase payment.
Based on the information provided by the electronic transmission, Manufacturers
Life of America will generate an application and Policy to be forwarded to the
applicant for signature.
"FREE LOOK" RIGHT
Within ten days after receiving a Policy, the Policyowner may return it for
cancellation by mailing it to the Service Office. Within seven days after
receipt, except where state insurance law requires return of any purchase
payments made, Manufacturers Life of America will refund the Policy Value plus
or minus any applicable Market Value Adjustment.
RESTRICTIONS APPLICABLE TO PURCHASE PAYMENTS
Purchase payments are made directly by the Policyowner. They may be made at
any time until the Annuity Commencement Date or until the Policy is fully
surrendered. If the Policyowner is an individual, purchase payments will not
be permitted after the Policyowner's death unless the beneficiary is the
Policyowner's spouse. If the Policyowner is not an individual, purchase
payments will not be permitted after the Annuitant's death, unless the
Policyowner is the trustee of a trust which is part of a qualified retirement
plan described in section 401(a) of the Code. See Description of the Policies
-- "Provisions on Death" (Death of the Policyowner and Death of the Annuitant).
Purchase payments must be made to the Manufacturers Life of America Service
Office.
The minimum initial purchase payment is $5,000 ($2,000 for Qualified Plans).
This can be allocated to the Variable Accounts, the Guaranteed Interest Account
or the Fixed Accounts. Subsequent purchase payments must be at least $500. If
an additional purchase payment would cause the Policy Value to exceed
$1,000,000, or if the Policy Value should already exceed $1,000,000, the prior
approval of Manufacturers Life of America will be required for an additional
purchase payment. If, for any reason, the Policy Value should fall to zero,
the Policy and all rights of the Policyowner and any other person under the
Policy, will terminate and no further purchase payments may be made.
Manufacturers Life of America reserves the right to alter the minimum payment
amounts on 90 days written notice to the Policyowner and it further reserves
the right to institute a pre-authorized payment plan which will provide for
automatic monthly deductions and which may permit smaller payments.
A Policyowner should specify how each purchase payment is to be allocated. The
percentage allocation to any account may be any whole number between 0 and 100,
provided the total percentage allocations equal 100. A Policyowner may change
the way in which Net Premiums are allocated at any time without charge. The
change will take effect on the date a written or telephonic request for change
satisfactory to Manufacturers Life of America is received at its Service
Office. If no allocation is specified, a purchase payment will be allocated
using the same percentages as specified in the last allocation request received
from the Policyowner. Such allocation will be made at the end of the Business
Day in which the purchase payment is received at the Manufacturers Life of
America Service Office. Manufacturers Life of America will send a confirmation
of its receipt of each purchase payment.
POLICY VALUE
The Policy Value at any time is equal to the sum of the Variable Policy Value,
the Fixed Account Value and the Guaranteed Interest Account Value. The Policy
Value is available to the Policyowner through a partial withdrawal or a full
surrender. See "Surrender or Withdrawal Rights" below. The portion of the
Policy Value based on the Variable Policy Value is not guaranteed and will vary
each Business Day with the investment performance of the underlying Funds.
Reserves for Policy Values allocated to the Guaranteed Interest Account will be
held in the General Account of Manufacturers Life of America. Reserves for
Policy Values allocated to the Fixed Accounts will either be held in Separate
Account A or in the General Account of Manufacturers Life of America, depending
upon the requirements of the jurisdiction in which a Policy is purchased.
THE FIXED ACCOUNTS
Manufacturers Life of America established its Separate Account A on December 1,
1992 as a separate account under Michigan law. It is not a registered
investment company. This account holds assets that are segregated from all of
Manufacturers Life of America's other assets. Separate Account A is currently
used only to support the Fixed Account obligations under variable annuity
contracts. These Fixed Account obligations are based on interest rates
credited to Fixed Accounts and do not depend on the investment performance of
Separate Account A. Any gain or loss in Separate Account A accrues solely to
Manufacturers Life of America and
16
<PAGE> 19
Manufacturers Life of America assumes any risk associated with the possibility
that the value of the assets in Separate Account A might fall below the
reserves and other liabilities that must be maintained. Should the value of
the assets in Separate Account A fall below reserve and other liabilities,
Manufacturers Life of America will transfer assets from its General Account to
Separate Account A to make up the shortfall. Manufacturers Life of America
reserves the right to transfer to its General Account any assets of Separate
Account A in excess of such reserves and other liabilities and to maintain
assets in Separate Account A which support any number of annuities which
Manufacturers Life of America offers or may offer. The assets of Separate
Account A are not insulated from the claims of Manufacturers Life of America's
creditors and may be charged with liabilities which arise from other business
conducted by Manufacturers Life of America. Thus Manufacturers Life of America
may, at its discretion if permitted by applicable state law, transfer existing
Fixed Account assets to, or place future Fixed Account allocations in, its
General Account for purposes of administration.
The assets of Separate Account A will be invested in those assets chosen by
Manufacturers Life of America and permitted by applicable state laws for
separate account investments.
The Policyowner may allocate Net Premiums directly to the Fixed Accounts or
transfer Policy Values to the Fixed Accounts provided such allocations are
permitted by the Policyowner's jurisdiction. Each allocation to a Fixed
Account is accounted for separately and earns a fixed rate of interest for a
set period of time called a "Guarantee Period".
Currently, Guarantee Periods ranging from 1 to 10 years are offered under the
Policies.
To the extent permitted by law, Manufacturers Life of America reserves the
right at any time to offer Guarantee Periods with durations that differ from
those available at the date of this prospectus. Manufacturers Life of America
also reserves the right at any time to stop accepting new allocations,
transfers or renewals for a particular Guarantee Period. These actions may be
taken upon 60 days written notice to the Policyowner.
If the Policyowner surrenders, withdraws or transfers any Policy Value
attributable to the Fixed Accounts prior to the end of the applicable Guarantee
Period, a Market Value Adjustment will apply. (See Description of the Policies
-- "Policy Charges" -- Market Value Adjustment).
If Manufacturers Life of America does not receive written notice at least 7
days prior to the end of the Guarantee Period of a Fixed Account indicating
what action to take with respect to funds in the Fixed Account upon maturity
thereof, the funds will be allocated to a new Fixed Account for the same
Guarantee Period as the matured Fixed Account. If the same Guarantee Period is
no longer available, we will use the next shortest available Guarantee Period;
provided that Manufacturers Life of America will not allocate funds to a
Guarantee period that extends beyond the Elected Annuity Date. If the required
Guarantee Period is not available, funds will be transferred to the Guaranteed
Interest Account.
FIXED ACCOUNT VALUE. The value of a Policyowner's interest in a Fixed Account
reflects all interest credited to or accrued to date on the Fixed Account, all
purchase payments or transfers allocated to the Fixed Account, any withdrawals
or transfers from the Fixed Account, any applicable withdrawal or other charges
deducted from the account, and any applicable Market Value Adjustments
previously made.
THE GUARANTEED INTEREST ACCOUNT
As noted above, Policyowners may accumulate value on a variable basis,
by allocating purchase payments to one or more sub-accounts of Separate Account
Two, or on a fixed basis by allocating purchase payments either to one or more
of the Fixed Accounts, or, if permitted by the Policyowner's jurisdiction, to
the Guaranteed Interest Account. Amounts allocated to the Guaranteed Interest
Account will earn a minimum interest rate of 3% per annum. Manufacturers Life
of America may credit interest at a rate in excess of 3% per annum; however, it
is not obligated to do so. The rate of interest credited is subject to change
daily. No specific formula governs the determination of the rate to be
credited in excess of 3% per annum.
GUARANTEED INTEREST ACCOUNT VALUE. The value of a Policyowner's interest in
the Guaranteed Interest Account reflects all interest credited to or accrued to
date on the account, all purchase payments or transfers allocated to the
Guaranteed Interest Account, any withdrawals or transfers from the Guaranteed
Interest Account and any applicable withdrawal and other charges deducted from
the Guaranteed Interest Account.
17
<PAGE> 20
THE VARIABLE ACCOUNTS
VARIABLE POLICY VALUE. Upon receipt of a purchase payment at its Service
Office, Manufacturers Life of America credits the Policy with a number of units
for each Variable Account based upon the portion of the purchase payment
allocated to the Variable Account. Units are also credited to reflect any
transfers to a Variable Account. Units are cancelled whenever amounts are
deducted, transferred or withdrawn from a Variable Account, any charge or
deduction is assessed against a Variable Account, on the Annuity Commencement
Date, or on payment of proceeds payable on death.
The number of units credited or cancelled for a specific transaction is based
on the dollar amount of the transaction divided by the value of the unit on the
Business Day on which the transaction occurs. The number of units credited
with respect to an initial payment submitted with a completed purchase
application will be based on the applicable unit values for either the Business
Day on which the payment is received at the Manufacturers Life of America's
Service Office or the following Business Day, depending on when the application
is accepted. Units will be credited with respect to any subsequent purchase
payments allocated to, or transfers into, a Variable Account based on the
applicable unit values of the Business Day on which the payment or transfer
request is so received. The number of units cancelled in connection with
partial withdrawals, transfers out of a Variable Account or deduction of
charges from a Variable Account will also be based on the applicable unit
values of the Business Day on which the requests for a partial withdrawal or
transfer are so received, or on which deductions are made.
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 Fund shares.
When an order involving the crediting or cancelling of units is received at the
Manufacturers Life of America Service Office 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 on the next Business Day. Similarly, any
determination of Policy Value or Variable Account Value to be made on a day
which is not a Business Day will be made on the next Business Day.
The value of a unit of each Variable Account was initially fixed at $10.00.
For each subsequent Business Day the unit value of a particular Variable
Account is the value of the adjusted net assets of that account at the end of
the Business Day divided by the total number of units.
The value of a unit may increase, decrease or remain the same, depending on the
investment performance of a Variable Account from one Business Day to the next.
The unit value for any Variable Account for any Business Day is the result of
(a) minus (b) divided by (c), where:
(a) is the net assets of the Variable Account as of the end of such
Business Day;
(b) is a charge not exceeding .000027397 for each calendar day since the
preceding Business Day, multiplied by the net assets of the Variable
Account as of the end of such Business Day, corresponding to a charge
of 0.80% per annum for mortality and expense risks, and 0.20% per
annum for the administration charge; and
(c) is the total number of units of the Variable Account.
Manufacturers Life of America reserves the right to adjust the above formula to
provide for any taxes determined by it to be attributable to the operations of
Separate Account Two.
ANNUITY VALUE GUARANTEE
The Annuity Value Guarantee guarantees that, in those jurisdictions where
permitted, under certain conditions the Policy Value available at the Annuity
Commencement Date will be the greater of the Policy Value or an amount
reflecting the purchase payments and withdrawals made by the Policyowner.
Such amount is calculated as follows: (1) when the Policy is issued, the amount
is set equal to the initial purchase payment; (2) each time a purchase payment
is made the amount is increased by the amount of the purchase payment; and (3)
each time a withdrawal is made, the amount is reduced by the same percentage as
the Gross Withdrawal Amount bears to the Policy Value.
This Guarantee will be effective only for Policies owned individually or
jointly with another individual and only if the Annuity Commencement Date is a
date within 30 days of the later of the tenth Policy Anniversary or the first
Policy Anniversary after the original policyowner (or the older of two original
joint Policyowners) is age 65. If the Annuity Commencement Date does not fall
within this time frame, the Policy may still be eligible for this Guarantee.
Thereafter eligibility will re-occur every fifth anniversary, provided the
Annuity Commencement Date is within 30 days thereof.
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<PAGE> 21
The Policyowner will cease to be eligible for the Annuity Value Guarantee if,
at any time, (i) the Policyowner makes a withdrawal or transfers money out of a
Fixed Account prior to that account's Maturity Date or (ii) the Annuity
Commencement Date is prior to the Maturity Date of any Fixed Account to which
the Policyowner has allocated values.
TRANSFERS OF POLICY VALUE
Subject to the restrictions described below, transfers may be made among any of
the accounts at any time during the Policy Year. A Policyowner may direct one
transfer per Policy Month free of charge. One additional transfer in a Policy
Month will be permitted at a cost of $35.00. For this purpose all transfer
requests received by Manufacturers Life of America on the same Business Day are
treated as a single transfer and transfers pursuant to the Asset Allocation
Balancer and Dollar Cost Averaging provisions are ignored. Transfer requests
must be satisfactory to Manufacturers Life of America and in writing, or by
telephone if a currently valid telephone transfer authorization form is on
file.
The minimum amount that may be transferred from an account, except for Asset
Allocation Balancer transfers, is the lesser of $500 or the entire account
value. The maximum amount that may be transferred from the Guaranteed Interest
Account in any one Policy Year is the greater of $500 or 15% of the Guaranteed
Interest Account Value at the previous Policy anniversary. Any transfer which
involves a transfer out of the Guaranteed Interest Account may not involve a
transfer to the Variable Accounts' Money-Market Fund.
Transfer requests must be satisfactory to Manufacturers Life of America and in
writing, or by telephone if a currently valid telephone transfer authorization
form is on file. Although failure to follow reasonable procedures may result
in Manufacturers Life of America's liability for any losses due to unauthorized
or fraudulent telephone transfers, Manufacturers Life of America will not be
liable for following instructions communicated by telephone that it reasonably
believes to be genuine. Manufacturers Life of America will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Such procedures shall consist of confirming a valid telephone authorization
form is on file, tape recording all telephone transactions and providing
written confirmation thereof.
LIMITATIONS. To the extent that surrenders, partial withdrawals and transfers
out of a Variable Account exceed net premium allocations and transfers into
that Variable Account, portfolio securities of the underlying Fund may have to
be sold. Excessive sales of the Fund's portfolio securities in such a
situation could be detrimental to that Fund and to Policyowners with Policy
Values allocated to Variable Accounts investing in that Fund. To protect the
interests of all Policyowners, the Policy's transfer privilege is limited as
described below.
So long as effecting all requested transfers out of a Variable Account in a
particular Business Day would not reduce the number of shares of the underlying
Fund outstanding at the close of the prior Business Day by more than 5%, all
such requests will be effected. However, net transfers out of a Variable
Account greater than 5% would be permitted only if, and to the extent that, in
the judgment of Manufacturers Adviser Corporation, they would not result in
detriment to the underlying Fund or to the interests of Policyowners or others
with assets allocated to that Fund. If and when transfers must be limited to
avoid such detriment, some requests will not be effected. In determining which
requests will be effected, transfers pursuant to the Dollar Cost Averaging
program will be effected first, followed by Asset Allocation Balancer
transfers, written requests next and telephone requests last. Within each such
group, requests will be processed in the order received, to the extent
possible. Policyowners whose transfer requests are not effected will be so
notified. Current S.E.C. rules preclude Manufacturers Life of America from
processing at a later date those requests that were not effected. Accordingly,
a new transfer request would have to be submitted in order to effect a transfer
that was not effected because of the limitations described in this paragraph.
Manufacturers Life of America may be permitted to limit transfers in certain
other circumstances. (See Description of the Policies -- "Other General Policy
Provisions" -- Deferral of Payments).
DOLLAR COST AVERAGING
Manufacturers Life of America will offer Policyowners a Dollar Cost Averaging
program. Under this program amounts will be automatically transferred at
predetermined intervals from one Variable Account to any other Variable
Account(s), or a Fixed Account or the Guaranteed Interest Account.
Under the Dollar Cost Averaging program the Policyowner will designate a dollar
amount of available assets to be transferred at predetermined intervals from
one Variable Account into any other Variable Account(s) or a Fixed Account or
the Guaranteed Interest Account. Each transfer under the Dollar Cost Averaging
program must be at least $500 and Manufacturers Life of America reserves the
right to change this minimum at any time upon notice to the Policyowner.
Currently, there is no charge for this program if Policy Value exceeds $15,000;
otherwise a charge of $5 per transfer or series of transfers occurring on the
same transfer date will apply. If insufficient funds exist to effect a Dollar
Cost Averaging transfer, including the charge, if applicable, the transfer will
not be
19
<PAGE> 22
effected and the Policyowner will be so notified. Manufacturers Life of
America reserves the right to cease to offer the Dollar Cost Averaging program
on 90 days' written notice to the Policyowner.
ASSET ALLOCATION BALANCER
Manufacturers Life of America will also offer Policyowners the ability to have
amounts automatically transferred among stipulated accounts to maintain an
allocated percentage in each stipulated account.
Under the Asset Allocation Balancer program the Policyowner will designate an
allocation of Policy Value among the Variable Accounts. On the Policy
Anniversary, and at six month intervals thereafter, Manufacturers Life of
America will move amounts out of Variable Accounts and into other Variable
Accounts as necessary to maintain the Policyowner's chosen allocation.
Currently, the charge for this program is $15 per transfer or series of
transfers occurring on the same transfer date. Manufacturers Life of America
reserves the right to cease to offer the Asset Allocation Balancer Program on
90 days' written notice to the Policyowner.
SURRENDER OR WITHDRAWAL RIGHTS
At any time prior to the Elected Annuity Date, a Policyowner may fully
surrender the Policy for, or make a partial withdrawal in an amount not
exceeding, its Policy Value, reduced by any applicable withdrawal or
record-keeping charge and any applicable withholding taxes and reduced or
augmented by any applicable Market Value Adjustment. (See Description of the
Policies -- "Policy Charges".) For certain Qualified Policies, exercise of the
right to surrender may require the consent of the Policyowner's spouse under
regulations promulgated by the Treasury or Labor Department.
In any Policy Year after the first and before the Elected Annuity Date, up to
10% of the Policy Value as of the most recent Policy Anniversary may be
surrendered or withdrawn free of the withdrawal charge. In states where
permitted, if the Policyowner is a Charitable Remainder Trust, in any Policy
Year after the first and before the Elected Annuity Date, the Policyowner may
withdraw, free of the withdrawal charge, the greater of (i) 10% of the Policy
Value as of the most recent Policy Anniversary or (ii) Cumulative Net Earnings
under the Policy. During the first Policy Year, if the Policyowner is a
Charitable Remainder Trust, the Policyowner may withdraw, free of the
withdrawal charge, up to 10% of the cumulative Net Premiums as reduced by prior
withdrawals. The amount received on withdrawal will be adjusted for any
applicable Market Value Adjustment. Amounts surrendered or withdrawn during a
Policy Year which exceed the foregoing sums will be subject to a withdrawal
charge.
In the case of a full surrender of a Policy, Manufacturers Life of America will
pay the Policy Value reduced by any applicable withdrawal or record-keeping
charges and any applicable withholding taxes, and adjusted by any applicable
Market Value Adjustment as of the Business Day on which the request for
surrender is received at its Service Office, and the Policy will be cancelled.
In the case of a partial withdrawal from the Variable Accounts, Manufacturers
Life of America will pay the amount requested and cancel that number of units
credited to each Variable Account necessary to equal the amount of the partial
withdrawal plus any applicable withdrawal charges and withholding taxes. In
the case of a partial withdrawal from the Fixed Account or the Guaranteed
Interest Account, Manufacturers Life of America will pay the amount requested.
The Fixed Account Value and/or the Guaranteed Interest Account Value will be
reduced by the amount withdrawn and any applicable withdrawal charges and
withholding taxes, and adjusted by any applicable Market Value Adjustment. In
any event, should there not be sufficient funds available in the designated
account or accounts equal to the Gross Withdrawal Amount, Manufacturers Life of
America will notify the Policyowner and await further instruction before
effecting any withdrawal. (For a discussion of withholding taxes see Federal
Tax Matters -- "Tax Treatment of the Policies".)
For a partial withdrawal, the Policyowner should specify the account(s) from
which the withdrawal should be made. If no specification is indicated, the
withdrawal will not be made and the Policyowner will be so notified.
There is no limit on the frequency of partial withdrawals; however, the
requested withdrawal must be at least $500. Any request for a partial
withdrawal or a full surrender of a Policy must be in writing and delivered to
the Manufacturers Life of America Service Office. If the amount to be
withdrawn exceeds $10,000, it must be accompanied by a guarantee of the
Policyowner's signature by a commercial bank, trust company, member of the
National Association of Securities Dealers, Inc., a notary public, or any other
individual or association designated by Manufacturers Life of America.
SPECIAL POLICY ACCESS
In those states where permitted, if the Policyowner should become terminally
ill, he or she will be permitted to make one full surrender or partial
withdrawal without imposition of withdrawal charges. If partial withdrawal is
chosen, the Survivor Benefit
20
<PAGE> 23
Amount and Annuity Value Guarantee, if applicable, will be reduced accordingly.
To be eligible, Manufacturers Life of America must receive written evidence
acceptable to Manufacturers Life of America, including a written statement from
a licensed medical doctor, that the Policyowner is terminally ill and has a
life expectancy of one year or less and the consent of any irrevocable
beneficiary and any assignee.
There is currently no charge associated with this feature. However,
Manufacturers Life of America reserves the right to impose an administrative
charge not to exceed $150 for a partial withdrawal or full surrender pursuant
to this provision.
PROVISIONS ON DEATH
In the discussions that follow, references to the age, death, life expectancy,
or marital status of a Policy owner do not apply to a Policyowner who owns a
Policy other than individually or jointly with another person, except the
Survivor Benefit amount which will apply upon death of the annuitant if the
Policyowner is a charitable remainder trust. In addition, references to the
death of the original Policyowner include the first to die of two joint
Policyowners.
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<PAGE> 24
SURVIVOR BENEFIT AMOUNT
Upon occurrence of the death of the original Policyowner, Manufacturers Life of
America will compare the Policy Value to the Survivor Benefit Amount and, if
the Policy Value is lower, Manufacturers Life of America will deposit
sufficient funds into the Money-Market Variable Account to make the Policy
Value equal the Survivor Benefit Amount. Any funds which Manufacturers Life of
America deposits into the Money-Market Variable Account will not be deemed a
purchase payment for purposes of calculating withdrawal charges.
The Survivor Benefit Amount is calculated as follows: (1) when the Policy is
issued, the Survivor Benefit Amount is set equal to the initial purchase
payment; (2) each time a purchase payment is made, the Survivor Benefit Amount
is increased by the amount of the purchase payment; (3) each time a withdrawal
is made, the Survivor Benefit Amount is reduced by the same percentage as the
Gross Withdrawal Amount bears to the Policy Value; (4) in jurisdictions where
it is allowed, on every sixth Policy Anniversary Manufacturers Life of America
will set the Survivor Benefit Amount to the greater of its current value or the
Policy Value on that Policy Anniversary, provided the original Policyowner is
still alive and is not older than age 85.
Subsequent to the death of the original Policyowner, the Variable Policy Value
will continue to reflect the investment performance of the selected Variable
Accounts.
JOINT OWNERSHIP
If the Policy is owned jointly, the proceeds of the Survivor Benefit Amount
will be payable on the first death of a Policyowner. However, if the surviving
Policyowner is the spouse of the deceased and elects to continue the Policy,
payment of the Survivor Benefit Amount will be deferred. The Survivor Benefit
Amount will continue to be calculated as described above if payment is
deferred.
If the surviving Policyowner is not the spouse of the deceased Policyowner, the
proceeds of the Survivor Benefit Amount will be payable as set out in the
non-spousal ownership provisions of the section entitled Provisions on Death --
"Death of the Policyowner".
DEATH OF THE POLICYOWNER
DEATH PRIOR TO ANNUITY COMMENCEMENT DATE. If any Policyowner dies before the
Elected Annuity Date, all amounts will remain as allocated by that Policyowner
until Manufacturers Life of America receives further instructions from the new
Policyowner, or the surviving Policyowner if the Policy was owned jointly. The
new or surviving Policyowner can make withdrawals, transfer amounts, assign the
policy and name a payee, prior to payment of the Policy Value as described
below.
If the new or surviving Policyowner is the spouse, he or she can:
(a) continue the Policy and may make further purchase payments; or
(b) make a full surrender or partial withdrawal of the Policy Value within
60 days after the death without imposition of a Market Value
Adjustment or withdrawal charge except with respect to withdrawal of
purchase payments received after the death of the Policyowner; or
(c) elect to receive payment under a guaranteed annuity option. If the
payment is made as an annuity, the Policy Value used to provide the
annuity will be determined as of the date Manufacturers Life of
America receives written notification of the election at its Service
Office.
However, if a partial withdrawal or a full surrender of the Policy Value occurs
more than 60 days after the death of the Policyowner, the payment will be based
on the Policy Value determined as of the date of payment, adjusted for any
applicable Market Value Adjustment and withdrawal charge. (See Description of
the Policies -- "Market Value Adjustment" and "Policy Charges".)
The Policy will continue under option (a) in the absence of a written
notification from the surviving spouse to do otherwise.
If the new or surviving Policyowner is not the spouse, he or she can:
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<PAGE> 25
(a) continue the Policy. If this option is selected, no further purchase
payments can be made, and the Policy must be surrendered within 5
years of the death. Applicable Market Value Adjustments and
withdrawal charges will be imposed. (See Description of the Policies
-- "Market Value Adjustment" and "Policy Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within
60 days after the death without imposition of a Market Value
Adjustment or withdrawal charge; or
(c) elect to receive payment under a guaranteed annuity option. If the
payment is made as an annuity, (i) the Policy Value used to provide
the annuity will be determined as of the date Manufacturers Life of
America receives written notification of the election at its Service
Office, (ii) the only Annuity Options available are options 1, 2(b),
or 2(c) of the Annuity Options described in Appendix A, (iii) the
period selected for payment must not extend beyond the new or
surviving Policyowner's life expectancy, and (iv) payments under the
Annuity Option selected must begin no later than December 31 of the
year following death of the Policyowner.
The Policy will continue under option (a) in the absence of written
notification to do otherwise.
DEATH AFTER ANNUITY COMMENCEMENT DATE. If the Policyowner dies after the
Annuity Commencement Date, payments will continue under the annuity option
selected if the terms of the annuity so provide.
DEATH OF THE ANNUITANT
DEATH PRIOR TO ANNUITY COMMENCEMENT DATE. If the Policyowner is an individual
who is not the Annuitant, and the Annuitant dies before the Annuity
Commencement Date, the Policy will continue and the Policyowner may continue to
make purchase payments. If the Policyowner has appointed a contingent
Annuitant, he or she will become the new Annuitant. If no such appointment has
been made, the Policy owner must appoint a new Annuitant within 60 days of the
death of the original Annuitant; otherwise the Policyowner will be deemed to be
the new Annuitant.
If the Policyowner is not an individual, the Policy is not a Qualified Policy
owned by the trustee of a plan described in Section 401 of the Code, and the
Annuitant dies before the Annuity Commencement Date, the Policyowner can:
(a) continue the Policy. If this option is selected, no further purchase
payments can be made, and the Policy must be surrendered for a lump
sum within 5 years of the Annuitant's death. Market Value Adjustments
and all applicable charges will continue to be imposed. (See
Description of the Policies -- "Market Value Adjustment" and "Policy
Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within
60 days after the Annuitant's death without imposition of a Market
Value Adjustment or withdrawal charge.
The Policy will continue under option (a) in the absence of written
notification to do otherwise.
If the Policyowner is not an individual, the Policy is a Qualified Policy owned
by a trustee of a plan described in Section 401 of the Code, and the Annuitant
dies before the Annuity Commencement Date, the Policyowner can:
(a) continue the Policy. If this option is selected, a new Annuitant must
be appointed and no further purchase payments can be made. Market
Value Adjustments and all applicable charges will continue to be
imposed. (See Description of the Policies -- "Market Value
Adjustment" and "Policy Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within
60 days after the Annuitant's death without imposition of a Market
Value Adjustment or withdrawal charge.
The Policy will continue under option (a) in the absence of written
notification to do otherwise.
DEATH AFTER ANNUITY COMMENCEMENT DATE. If the Policyowner is an individual who
is not the Annuitant and the Annuitant dies after the Elected Annuity Date,
payments will continue under the annuity option selected if the terms of the
annuity so provide.
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<PAGE> 26
COMMENCEMENT OF ANNUITY PAYMENTS
The Policyowner elects an annuity date in the application (the "Elected Annuity
Date"). The Policyowner may change the Elected Annuity Date to any date prior
to the end of the Policy Year in which the Annuitant reaches age 85 except in
the case of Qualified Policies and Policies where the owner is a Charitable
Remainder Trust. If the Policyowner is a Charitable Remainder Trust there is
no required annuitization age. Written request for change of the Elected
Annuity Date must be received by the Manufacturers Life of America Service
Office at least thirty days prior to the new Elected Annuity Date.
Annuity payments will be made by application of the Policy Value to provide an
annuity. Annuity payments will be made on a fixed basis only; the Policy Value
will no longer reflect the investment performance of the Variable Accounts, the
Fixed Accounts or the Guaranteed Interest Account. The annuity options
available are described in Appendix A under "Annuity Options". The date on
which the first annuity payment is made is the Annuity Commencement Date.
There are legal restrictions on the Elected Annuity Date selected for Qualified
Policies. In general, the Annuity Commencement Date for Qualified Policies
owned by an individual cannot be later than April 1 following the calendar year
in which the Policyowner attains age 70 1/2. There are some exceptions to this
requirement. If the Policy is owned by the trustee of a trust established
pursuant to an employer retirement plan, the Elected Annuity Date is determined
by the terms of the trust and plan.
Annuity payments may be made monthly, quarterly, semi-annually or annually. If
application of the Policy Value would result in annuity payments of less than
$20 monthly, $60 quarterly, $100 semi-annually or $200 annually, Manufacturers
Life of America will pay the Policy Value to the Policyowner in a single sum in
lieu of annuity payments.
SUBSTITUTION OF FUND SHARES
Although Manufacturers Life of America believes it to be highly
unlikely, it is possible that in the judgment of its management, one or more of
the Funds may become unsuitable for investment by Separate Account Two because
of a change in investment policy or a change in the tax laws, because the
shares are no longer available for investment, or for some other reason. In
that event, Manufacturers Life of America may seek to substitute the shares of
another Fund or of an entirely different mutual fund. Before this can be done,
the approval of the S.E.C. and one or more state insurance departments may be
required.
Manufacturers Life of America also reserves the right to combine other
registered separate accounts with Separate Account Two investing in additional
Funds of the Series Fund or another investment company, to establish additional
sub-accounts within Separate Account Two, to operate Separate Account Two as a
management investment company or other form permitted by law, to transfer
assets from Separate Account Two to another registered separate account and
from another registered separate account to Separate Account Two, and to
deregister Separate Account Two under the 1940 Act. Any such change would be
made only if permissible under applicable federal and state law.
POLICY CHARGES
The various charges and deductions applicable to the Policy and the separate
accounts are set forth below.
WITHDRAWAL CHARGE
A withdrawal charge (contingent deferred sales charge) may be imposed
on partial withdrawals from, and the full surrender of, a Policy. In any
Policy Year after the first and before the Elected Annuity Date, up to 10% of
the Policy Value as of the most recent Policy Anniversary may be surrendered or
withdrawn free of the withdrawal charge. In states where permitted, if the
Policyowner is a Charitable Remainder Trust, in any Policy Year after the first
and before the Elected Annuity Date, the Policyowner may withdraw, free of the
withdrawal charge, the greater of (i) 10% of the Policy Value as of the most
recent Policy Anniversary, or (ii) the Cumulative Net Earnings under the
Policy. During the first Policy Year, if the Policyowner is a Charitable
Remainder Trust, the Policyowner may withdraw, free of the withdrawal charge,
up to 10% of the cumulative Net Premiums as reduced by prior withdrawals. The
amount received on withdrawal will be adjusted for any applicable Market Value
Adjustment. The withdrawal charge is deducted as a percentage of amounts
withdrawn in a Policy Year in excess of the foregoing sums minus any applicable
record-keeping charge (imposed on Policy Anniversaries and on full surrenders
made on other than a Policy Anniversary) and plus or minus any applicable
Market Value Adjustment.
The withdrawal charge is designed to partially compensate Manufacturers Life of
America for the cost of selling and distributing the Policies. The cost
includes agents' commissions, advertising, agent training and the printing of
prospectuses and sales literature.
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<PAGE> 27
The withdrawal charge is determined by applying a percentage to the Gross
Withdrawal Amount subject to the withdrawal charge. The applicable percentage
depends upon when the purchase payments to which the withdrawal or surrender is
deemed attributable were made, as indicated in the following schedule:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE POLICY YEARS ELAPSED THE WITHDRAWAL
SINCE PURCHASE PAYMENT WAS MADE: CHARGE IS
<S> <C>
0-2.99 8%
3 6%
4 4%
5 2%
6 or more None
</TABLE>
Where the Gross Withdrawal Amount is deemed attributable to purchase payments
made in different Policy Years, different percentages will be applied to the
portions of the Gross Withdrawal Amount attributable to such payments.
For purposes of determining the withdrawal charge applicable to a full
surrender or partial withdrawal, any Gross Withdrawal Amount, other than an
amount not subject to a withdrawal charge by reason of the free withdrawal
provisions described above, will be deemed to be a liquidation of a purchase
payment. The oldest previously unliquidated purchase payment will be deemed to
have been liquidated first, then the next oldest and so forth. In addition,
all purchase payments made during a Policy Year will be deemed to have been
made on the first day of that year. Once all purchase payments have been
liquidated, additional amounts surrendered or withdrawn will not be subject to
a withdrawal charge. Thus, in no event may aggregate withdrawal charges exceed
8% of the total purchase payments made.
No withdrawal charge will be applied: (1) if the Policy Value is applied to an
annuity, (2) when a full surrender or partial withdrawal is made within 60 days
of the death of the original Policyowner (except that a withdrawal charge will
be applied to a Gross Withdrawal Amount consisting of purchase payments made
after the date of death of the original Policyowner), (3) when the Policyowner
is not an individual and a full surrender or partial withdrawal is made within
60 days of the death of the Annuitant, or (4) upon a full surrender or the
first partial withdrawal made after the Policyowner becomes terminally ill.
(See Description of the Policies -- "Provisions on Death" and "Special Policy
Access".)
On a full surrender of the Policy, the Gross Withdrawal Amount is the Policy
Value. Upon full surrender, the Policyowner will receive the Gross Withdrawal
Amount adjusted by any applicable Market Value Adjustment, less applicable
withdrawal charges and withholding taxes, and less the record-keeping charge.
On a partial withdrawal, the Policyowner will receive the amount he or she
requests. Manufacturers Life of America will calculate the Gross Withdrawal
Amount such that after all applicable withdrawal charges, withholding taxes and
Market Value Adjustments have been applied, the Policyowner will receive the
amount requested. See Appendix B for examples of the application of withdrawal
charges.
Withdrawal charges on a partial withdrawal will be deducted from the accounts
proportionately to the Gross Withdrawal Amount, adjusted by any applicable
Market Value Adjustments attributable to the respective accounts. Should there
not be sufficient funds available in the designated account or accounts equal to
the Gross Withdrawal Amount, Manufacturers Life of America will notify the
Policyowner and await further instruction before effecting any withdrawal.
Manufacturers Life of America does not expect to recover its total sales
expenses through the withdrawal charge. To the extent that the withdrawal
charge is insufficient to recover sales expenses, Manufacturers Life of America
will pay sales expenses from its other assets or surplus. These assets may
include proceeds from the mortality and expense risks charges described below.
RECORD-KEEPING CHARGE
A record-keeping charge equal to 2% of the Policy Value up to a maximum of $30
will be deducted from Policy Value on the last day of each Policy Year during
the Accumulation Period. This charge will also be deducted upon full surrender
of a Policy on a date other than the last day of a Policy Year. The charge
will be taken before any withdrawal charge is applied and before any applicable
Market Value Adjustment. It will be deducted from the Variable Policy Value,
the Fixed Account Value and the Guaranteed Interest Account Value in the same
proportion that the value in each account bears to the Policy Value.
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<PAGE> 28
The record-keeping charge is paid to Manufacturers Life of America to
compensate it for certain costs associated with the Policies and the operations
of the separate accounts, including the establishing and maintaining of account
and tax records for each Policyowner; communicating with Policyowners by
mailing confirmations of transactions, Policy Anniversary statements, annual
reports of the Series Fund and annually updated prospectuses for the Series
Fund and the Policy and by responding to Policyowner requests to change
information contained in his or her records such as names, addresses,
allocation percentages, beneficiary or Annuitant designation, participation in
the Dollar Cost Averaging or Asset Allocation Balancer programs, certain Fixed
Account transactions such as calculations of Market Value Adjustments and
transfers solely between Fixed Accounts, and responding to written or oral
inquiries by Policyowners regarding the operations of the Policy, the separate
accounts or the Series Fund. Although these expenses may rise in the future,
Manufacturers Life of America guarantees that it will not increase the amount
of the record-keeping charge applicable to outstanding Policies. Moreover,
Manufacturers Life of America does not expect to recover from this charge any
amount in excess of its accumulated applicable expenses.
TRANSFER CHARGE
Each Policy Month a Policyowner is allowed to direct one transfer of Policy
Value among the accounts free of charge. One additional transfer per Policy
Month will be permitted at a cost of $35. For this purpose all transfer
requests received by Manufacturers Life of America on the same Business Day are
treated as a single transfer and transfers pursuant to the Dollar Cost
Averaging or Asset Allocation Balancer provisions are ignored. This charge
will be deducted from the first account from which funds are transferred. (See
Description of the Policies-- "Transfers of Policy Value".)
DOLLAR COST AVERAGING CHARGE
Currently, there is no charge for Dollar Cost Averaging transfers if Policy
Value exceeds $15,000, otherwise there is a charge of $5.00 per transfer or
series of transfers taking place on the same transfer date. This charge will
be deducted from the account from which funds are transferred. If insufficient
funds exist to effect a Dollar Cost Averaging transfer, including the charge,
if applicable, the transfer will not be effected.
ASSET ALLOCATION BALANCER CHARGE
The current charge for Asset Allocation Balancer transfers is $15 for each
transfer or series of transfers taking place on the same transfer date. This
charge will be deducted from all accounts affected by the Asset Allocation
Balancer transfer in the same proportion that the value in each account bears
to the Policy Value immediately after the transfer.
SPECIAL POLICY ACCESS CHARGE
There is currently no charge associated with this feature. However,
Manufacturers Life of America reserves the right to impose an administrative
charge not to exceed $150 for a partial withdrawal or full surrender pursuant
to the provision.
PREMIUM TAX DEDUCTION
Manufacturers Life of America will deduct any premium or similar state or local
tax attributable to a Policy. Currently, such taxes, if any, range up to 3%
depending on applicable law. Although the deduction can be made from purchase
payments or from Policy Value, it is anticipated that premium taxes will be
deducted from the Policy Value at the time it is applied to provide an annuity
unless required otherwise by applicable law. When deducted at the Annuity
Commencement Date, the premium tax deduction will be taken from the Variable
Policy Value, the Fixed Account Value and the Guaranteed Interest Account Value
in the same proportion that the value in each account bears to the Policy
Value.
Other than the premium taxes above, Manufacturers Life of America makes no
charge for federal, state or local taxes that may be attributable to the
separate accounts or to the operations of Manufacturers Life of America with
respect to the Policies. However, if Manufacturers Life of America incurs any
such such taxes, it may make a charge therefor, in addition to the foregoing.
MORTALITY AND EXPENSE RISKS CHARGES
A charge at an annual rate of .45% is made for mortality and expense risks that
Manufacturers Life of America assumes. This charge is deducted monthly at
.0375% of assets at the beginning of each Policy Month from the Variable
Account Value and the Fixed Account Value.
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<PAGE> 29
A charge at an annual rate of .80% is also made for mortality and expense risks
that Manufacturers Life of America assumes. This charge is deducted daily from
the assets of Separate Account Two.
The mortality risks assumed are (i) the risk that Annuitants may live for
longer periods of time than the periods indicated in the mortality tables on
which Manufacturers Life of America calculated the annuity tables in the
Policies, (ii) the risk that mortality will cause a Policy to terminate before
the assumed Annuity Commencement Date and (iii) the risk that mortality will
cause Manufacturers Life of America to incur higher costs than anticipated for
the Survivor Benefit Amount. The expense risks assumed are that the expenses
of administration of and recordkeeping for the Policies will be greater than
Manufacturers Life of America estimated. Manufacturers Life of America will
realize a gain from these charges to the extent they are not needed to pay
expenses under the Policies.
Although it is difficult to specify precisely the breakdown between expense and
mortality risk elements of the mortality and expense risks charge,
Manufacturers of America estimates that approximately .85% is for mortality
risks and .40% for expense risks. A little more than half of the mortality
risk element is estimated to be attributable to risks taken in connection with
the Survivor Benefit Amount (a death benefit guarantee). As both the daily and
monthly charges are imposed in connection with the same risks, each charge
could be estimated to be divided into mortality risk and expense risk
components at the same ratio as for the overall estimate.
ADMINISTRATION CHARGE
A charge at an annual rate of 0.20% of the Variable Account Value is made for
the administration of the Policy. This charge is deducted daily by assessing a
charge against the assets of Separate Account Two.
The administration charge is paid to Manufacturers Life of America to
compensate it for costs associated with administration of the Policies and the
separate accounts including those related to allocation of initial and
subsequent purchase payments, processing purchase applications, withdrawals,
surrenders, unit value calculations, transfers, calculation of proceeds payable
on death, payment of proceeds payable on death, cash management prior to Policy
issue, and establishing and maintaining computer system support for those or
other administrative functions. Manufacturers Life of America reserves the
right to increase the amount of the administration charge applicable to
outstanding Policies in the future if costs associated with the Policies and
the operations of the separate accounts should rise above current levels.
Manufacturers Life of America does not expect to recover from this charge any
amount in excess of its accumulated administrative expenses.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment ("MVA") will apply when money is removed from a Fixed
Account prior to the Maturity Date for any of the following reasons: full
surrender, partial withdrawal, transfer to another account (including another
Fixed Account), or to purchase an annuity. However, the MVA will be waived if
the amount is removed within the one month period prior to the Maturity Date.
The MVA will be applied after any transfer or contract charge is deducted, but
before the application of any withdrawal charges.
The MVA reflects the difference between the Guaranteed Rate for the applicable
Fixed Account, and the current Guaranteed Rate for the time period equal to the
remaining Guarantee Period ("Current Rate"). Generally, if the Guaranteed Rate
is higher than the Current Rate, the MVA will be positive. If the Guaranteed
Rate is lower than the Current Rate, the MVA will be negative.
On a full surrender, a positive MVA will increase the amount received by the
Policyowner, while a negative MVA will decrease the amount received by the
Policyowner.
On a transfer, the amount of the requested transfer from a Fixed Account will
not reflect any adjustment by the MVA. Any such adjustment will be reflected
in the amount transferred to the new account(s). A positive MVA will increase
the amount transferred into the new account(s), while a negative MVA will
decrease the amount so transferred.
On the Annuity Commencement Date, a positive MVA will increase the amount
applied to provide an annuity, while a negative MVA will decrease the amount
applied to provide an annuity.
27
<PAGE> 30
On a partial withdrawal, a positive MVA will decrease the Gross Withdrawal
Amount required to provide the requested amount. A negative MVA will increase
the Gross Withdrawal Amount so required.
The actual MVA is a proportion of the Gross Withdrawal Amount, determined by
the following formula:
(1+G) N
------- -1
(1+C)
where:
G is the Guaranteed Rate for the money being subjected to the MVA.
C is the Guaranteed Rate offered by Manufacturers Life of America for deposits
for a time period equal to the number of years remaining in the Guarantee
Period, rounded up to the next full year (the "Current Rate"). If at the time
of the MVA calculation, Manufacturers Life of America does not offer a
Guarantee Period with the required number of years, then the rate J will be
found by linear interpolation of the current rates for available Guarantee
Periods.
N is the number of full months remaining in the Guarantee Period divided by 12.
See Appendix B for examples of MVA calculations.
OTHER GENERAL POLICY PROVISIONS
DEFERRAL OF PAYMENTS
Manufacturers Life of America reserves the right to postpone the transfer or
payment of any value or benefit available under a Policy based upon the assets
allocated to Separate Account Two for any period during which:
(1) the New York Stock Exchange ("Exchange") is closed for trading (other
than customary weekend and holiday closings) or trading on the
Exchange is otherwise restricted; or
(2) an emergency exists as defined by the S.E.C. or the S.E.C. requires
that trading be restricted; or
(3) the S.E.C., by order, so permits a delay for the protection of
security holders.
Manufacturers Life of America also reserves the right to delay transfer or
payment of assets from the Fixed Accounts or the Guaranteed Interest Account
for up to six months and will pay interest at a rate determined by it if there
is a delay in payment for more than 30 days. In addition, transfers may be
denied under the circumstances previously set forth. (See Description of the
Policies -- "Provisions on Transfers".)
ANNUAL STATEMENTS
Within 30 days after each Policy Anniversary, Manufacturers Life of America
will send the Policyowner a statement showing:
(1) the summary of each active account up to the most recent Policy
Anniversary including the Policy Value up to the Policy Anniversary
date; and
(2) a description of the transactions affecting each active account during
the Policy Year including total units cancelled, amounts deducted from
each account for fees, and total units and amounts credited to each
account as allocations or interest.
RIGHTS OF OWNERSHIP
The Policyowner is the person entitled to exercise all rights under a Policy.
As such, any Policy rights or privileges may be exercised without the consent
of the Annuitant, beneficiary or any other individual, except as provided by
the Policyowner.
28
<PAGE> 31
Except as discussed below, ownership of the Policy may be changed or the Policy
collaterally assigned at any time prior to the Annuity Commencement Date,
subject to the rights of any irrevocable beneficiary or other person. Any
change of ownership or assignment must be made in writing and will not take
effect until received at the Manufacturers Life of America Service Office.
Manufacturers Life of America assumes no responsibility for the validity of any
assignment.
In the case of a Qualified Policy, there may be restrictions on the privileges
of ownership. Some plans do not permit the exercise of certain of the
Policyowner's rights without the written consent of the Policyowner's spouse.
Among the rights limited are the right to choose an optional form of payment;
to make withdrawals; or to surrender the Policy.
A Qualified Policy which is not owned by a trustee of a trust which qualifies
under section 401(a) of the Code, may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose to any person other than
to Manufacturers Life of America except as may be provided by applicable state
or federal law. Ownership of a Qualified Policy which is owned by a trustee of
a Qualified Plan may not be transferred to a participant prior to the Annuity
Commencement Date. The transfer of a Qualified Policy to a participant prior
to the Annuity Commencement Date would jeopardize the plan's qualified status
as the Policy does not contain the restrictions on a participant's rights on
withdrawal or on and after the Annuity Commencement Date required for plans
under the Employee Retirement Income Security Act.
CHANGE OF ANNUITANT. The Policyowner may change the Annuitant prior to the
Annuity Commencement Date. Eligible Annuitants are: (i) the Policyowner, (ii)
Policyowner's spouse, or (iii) the Policyowner's parent(s), brother(s),
sister(s), or child(ren).
If the Policyowner is not an individual, the Annuitant(s) may not be changed
except with respect to certain Qualified Plans. In any event, the Annuitant(s)
may not be changed after the Annuity Commencement Date.
CHANGE OF ELECTED ANNUITY DATE. The Elected Annuity Date may be changed
from that stated in the application to an earlier or later date. The new date
cannot be later than the end of the Policy Year in which the Annuitant reaches
age 85. A written request to change the Elected Annuity Date must be received
by the Manufacturers Life of America Service Office at least 30 days prior to
the new Elected Annuity Date. (See Description of the Policies -- "Annuity
Value Guarantee").
SELECTION OF PAYEE. The Policyowner must select a Payee to receive any
payments due under the Policy. If the Payee is the Policyowner, any payments
remaining on the Policyowner's death will be paid to the beneficiary. If a
Payee other than the Policyowner has been selected, any payments remaining on
the Policyowner's death will continue to be made to the Payee until
Manufacturers Life of America receives written notice from the beneficiary to
change the Payee.
The Payee for annuity payments should be chosen from the following:
(a) The Annuitant;
(b) The Annuitant's spouse, parent(s), brother(s), sister(s), child(ren);
or
(c) The Policyowner, if the Policyowner is an individual.
Any other choice of Payee will require the consent of Manufacturers Life of
America:
CHANGE OF PAYEE. The Policyowner may change the Payee at any time upon 30
days' written notice to Manufacturers Life of America. Such notice must
specify the date on which payments to the new Payee should begin. A change in
the Payee will not require the Payee's consent.
BENEFICIARY
Ownership of the Policy will pass to the designated beneficiary on the death of
the Policyowner. The beneficiary is the person designated in the application
or as subsequently designated. The beneficiary may be changed at any time by
written notice to Manufacturers Life of America. Any change will be effective
on the date written notice is received at the Manufacturers Life of America
Service Office. If no beneficiary survives the Policyowner, ownership will
pass to the Policyowner's estate. In the case of Qualified Policies,
regulations promulgated by the Departments of Labor and Treasury prescribe
certain limitations on the designation of a beneficiary.
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<PAGE> 32
MODIFICATION
A Policy may not be modified by Manufacturers Life of America without the
consent of the Policyowner, except where required to conform to any applicable
law or regulation or any ruling issued by a government agency.
FEDERAL TAX MATTERS
TAXATION OF MANUFACTURERS LIFE OF AMERICA
Manufacturers Life of America is taxed as a life insurance company under
Subchapter L of the Code. Since the operations of Separate Account Two are
part of, and are taxed with, the operations of Manufacturers Life of America,
Separate Account Two is not separately taxed as a "regulated investment
company" under Subchapter M of the Code. Under existing federal income tax
laws, investment income and capital gains of Separate Account Two are not taxed
to the extent they are applied to increase reserves under the Policies. Since,
under the Policies, investment income and realized capital gains of Separate
Account Two are automatically applied to increase reserves, Manufacturers Life
of America does not anticipate that it will incur any federal income tax
liability attributable to Separate Account Two, other than a federal income tax
based on premiums received which is currently absorbed by Manufacturers Life of
America, and therefore Manufacturers Life of America does not intend to make
provision for any such taxes. However, if changes in the federal tax laws or
interpretations thereof result in Manufacturers Life of America being taxed on
such income or gains, or taxes currently absorbed are increased, then
Manufacturers Life of America may impose a charge against Separate Account Two
in order to make provision for such taxes.
TAX TREATMENT OF THE POLICIES
The Policies are designed for use in connection with retirement savings plans
that may or may not qualify for special income tax treatment under the
provisions of the Code. The following discussion of federal income tax aspects
of amounts received under a variable annuity contract is not exhaustive, does
not purport to cover all situations, and is not intended as tax advice. A
qualified tax adviser should always be consulted with regard to the application
of law to individual circumstances.
Section 72 of the Code governs taxation of annuities in general. Under
existing provisions of the Code, except as described below, any increase in the
value of a Policy is not taxable to the Policyowner or Annuitant until
received, either in the form of annuity payments, as contemplated by the
Policy, or in some other form of distribution. However, as a general rule,
deferred Policies held by a corporation, trust or other similar entity, as
opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on such Policies is taxed as ordinary
income that is received or accrued by the Policyowner during the taxable year.
In certain circumstances policies will be treated as held by a natural person
if the nominal owner is a non-natural person and the beneficial owner is a
natural person, but this special exception will not apply in the case of any
employer who is the nominal owner of a Policy providing non-qualified deferred
compensation for its employees. Exceptions to the general rule (of immediate
taxation) for Policies held by a corporation, trust or similar entity may apply
with respect to (1) annuities held by an estate of a decedent, (2) Policies
issued in connection with qualified retirement plans, or IRAs, (3) certain
annuities purchased by employers upon the termination of a qualified retirement
plan, (4) certain annuities used in connection with structured settlement
agreements, and (5) annuities purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity.
When annuity payments commence, each payment is taxable under Section 72 of the
Code as ordinary income in the year of receipt if the Policyowner has not
previously been taxed on any portion of the purchase payments. If any portion
of the purchase payments has been included in the taxable income of the
Policyowner, this aggregate amount will be considered the "investment in the
contract." For fixed annuity payments, there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
annuity; the remainder of each payment is taxable. However, once the total
amount of the taxpayer's "investment in the contract" is excluded using this
ratio, annuity payments will be fully taxable. If annuity payments cease
before the total amount of the taxpayer's "investment in the contract" is
recovered, the unrecovered amount will be allowed as a deduction to the
Policyowner in his last taxable year.
In the case of a withdrawal, amounts received are taxable as ordinary income to
the extent that the Policy Value (determined without regard to any withdrawal
charges) before the withdrawal exceeds the "investment in the contract."
Amounts loaned under an annuity or amounts received pursuant to an assignment
or pledge of an annuity are treated as withdrawals. There are special rules
for loans to participants from annuities held in connection with qualified
retirement plans or IRA's. With respect to contracts issued after April 22,
1987, if an individual transfers an annuity without adequate consideration to a
person other than his or her spouse (or to
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<PAGE> 33
his former spouse incident to divorce), he will be taxed on the difference
between the value of the annuity minus any withdrawal charges and the
"investment in the contract" at the time of transfer. In such case, the
transferee's "investment in the contract" will be increased to reflect the
increase in the transferor's income.
In addition, there is a 10% penalty tax on the taxable amount of any payment
unless the payment is: (a) received on or after the date that the Policyowner
reaches age 59 1/2; (b) attributable to the Policyowner's becoming disabled as
defined in the Code; (c) made to a beneficiary on the death of the Policyowner;
(d) made to a beneficiary on the death of the taxpayer if the Policyowner is
not a natural person; (e) made as a series of substantially equal periodic
payments for the life of the taxpayer (or the joint lives of the taxpayer and
beneficiary), subject to certain recapture rules; (f) made under an annuity
that is purchased with a single premium whose annuity starting date is no later
than a year from purchase of the annuity; (g) attributable to "investment in
the contract" before August 14, 1982; or (h) made with respect to certain
annuities issued in connection with structured settlement agreements. Special
rules may apply to annuities issued in connection with qualified retirement
plans.
For both withdrawals and annuity payments under some types of plans qualifying
for special federal income tax treatment ("qualified plans"), there may be no
"investment in the contract" and the total amount received may be taxable.
Where the Policy is owned by an individual, Manufacturers Life of America will
withhold and remit to the U.S. Government a part of the taxable portion of each
distribution made under a Policy unless the distributee notifies Manufacturers
Life of America at or before the time of the distribution that he or she elects
not to have any amounts withheld. The withholding rates applicable to the
taxable portion of periodic annuity payments are the same as the withholding
rates generally applicable to payments of wages. The withholding rate
applicable to the taxable portion of nonperiodic payments (including
withdrawals prior to the annuity commencement date) is 10%. Where the Policy
is not owned by an individual as part of a qualified plan, or when the owner is
a non-resident alien, special withholding rules may apply.
In connection with the issuance of temporary regulations relating to
diversification requirements for separate accounts or funds underlying variable
life and annuity policies, the Treasury Department has announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular sub-accounts of the Account.
Regulations in this regard are expected in the future. It is not clear what
these regulations will provide or whether they will be prospective only. It is
possible that when regulations are issued, the Policy may need to be modified
to comply with such regulations.
For purposes of determining a Policyowner's gross income from distributions
which are not in the form of an annuity, the Code provides that all deferred
annuities issued by the same company to the same Policyowner during any
calendar year shall be treated as one annuity. Additional rules may be
promulgated under this provision to prevent avoidance of its effect. For
further information on current aggregation rules under this and other Code
provisions, the Policyowner should consult his or her tax adviser.
PURCHASE OF POLICIES BY QUALIFIED PLANS
The Policies are available for use with several types of qualified plans. The
tax rules applicable to participants in such qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made to provide more than general information about the use of
the Policies with the various types of qualified plans. Policyowners,
Annuitants and beneficiaries are cautioned that the rights of any person to any
benefits under such qualified plans may be subject to the terms and conditions
of the Policy. Following are brief descriptions of the various types of
qualified plans in connection with which Manufacturers Life of America will
issue a Policy.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible and on the
time when distributions may commence. Distributions from certain other types
of qualified plans may be "rolled over" on a tax-deferred basis into an IRA.
Sales of the Policies for use with IRAs may be subject to special requirements
of the Internal Revenue Service. Distributions from these qualified plans are
subject to special withholding rules. Consult your plan administrator before
taking a distribution which you wish to roll over. A direct rollover from a
qualified plan is permitted and is exempt from the special withholding rules.
When issued in connection with an IRA, a Policy will be amended as necessary to
conform to the requirements of federal laws governing such plans.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING
PLANS. Section 401(a) of the Code permits corporate employers to establish
various types of tax-favored retirement plans for employees. Self-employed
individuals may
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<PAGE> 34
establish plans for themselves and their employees. Such retirement plans may
permit the purchase of the Policies in order to provide benefits under the
plans. Employers intending to use Policies in connection with such plans
should seek competent advice.
PURCHASE OF POLICIES BY CHARITABLE REMAINDER TRUSTS
The Policies may be purchased by Charitable Remainder Trusts. If a Charitable
Remainder Trust is the Policyowner, the character of amounts received by the
income beneficiary of the Charitable Remainder Trust depends on the character
of the income in the trust. To the extent the trust has any undistributed
ordinary income, amounts received by the income beneficiary from the trust are
taxed as ordinary income. The Internal Revenue Service has held in at least
one private letter ruling that any increase in the value of a Policy will be
treated as income to the trust in the year it accrues regardless whether it is
actually received by the trust. However, a private letter ruling cannot be
relied on as precedent by anyone other than the taxpayer who requests it.
ADDITIONAL INFORMATION ABOUT
MANUFACTURERS LIFE OF AMERICA
DESCRIPTION OF BUSINESS
Manufacturers Life of America's primary purpose is to issue and sell variable
universal life and variable annuity products in the United States. In 1991
Manufacturers Life of America commenced establishment of branch operations in
Taiwan to develop and market traditional insurance for the Taiwanese market.
Of approximately 1800 life insurance companies in the United States, fewer than
100 offer variable life products. In an industry where financial strength
provides competitive advantage, Manufacturers Life of America is well
positioned competitively.
RESPONSIBILITIES ASSUMED BY MANUFACTURERS LIFE
Manufacturers Life has entered into an agreement with ManEquity, Inc. pursuant
to which Manufacturers Life, on behalf of ManEquity, Inc., will pay the sales
commissions in respect of the Policies and certain other policies issued by
Manufacturers Life of America, 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 for all sales
commissions paid by Manufacturers Life and will pay Manufacturers Life for its
other services under the agreement in such amounts and at such times as agreed
to by the parties.
Manufacturers Life has also entered into a Service Agreement with Manufacturers
Life of America pursuant to which Manufacturers Life will provide to
Manufacturers Life of America in Toronto, Ontario, Canada all issue,
administrative, general services and record-keeping functions on behalf of
Manufacturers Life of America with respect to all of its insurance policies
including the Policies. Under this agreement Manufacturers Life of America is
obligated to reimburse operating expenses and costs incurred by Manufacturers
Life on behalf of Manufacturers Life of America. For 1992, 1993 and 1994,
Manufacturers Life of America paid $4,919,667, $12,467,474 and $21,326,446,
respectively, to Manufacturers Life pursuant to the agreement.
Finally, Manufacturers Life has entered into an excess reinsurance arrangement
with Manufacturers Life of America for certain obligations arising under the
Survivor Benefit Amount. Except for its obligations to Manufacturers Life of
America under this reinsurance agreement, Manufacturers Life has no financial
obligation for any Policy benefits.
Manufacturers Life of America's ultimate parent company, Manufacturers Life, is
a Canadian-based mutual life insurance company with worldwide operations and
assets of $40.2 Billion (Canadian Dollars) and surplus of $3.1 Billion
(Canadian Dollars) as of December 31, 1994. As in the past, Manufacturers Life
of America may look to its ultimate parent company to provide the necessary
capital to finance its operations.
The vast majority of Manufacturers Life's business in the United States is sold
directly through the parent company; however, subsidiary companies are used for
certain special purposes. The primary purpose of this subsidiary,
Manufacturers Life of America, is to issue and sell variable universal life and
variable annuity products. Manufacturers Life of America has no direct
employees.
Manufacturers Life of America owns no property.
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<PAGE> 35
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums, Annuity Deposits and
Other Revenue $193,649 $125,948 $ 39,885 $14,410 $ 7,958
Investment Income, Net of
Investment Expenses 3,589 3,324 1,431 781 743
Commissions and Expense
Allowances on Reinsurance
Ceded 188 -- -- -- 3,016
-------- -------- -------- -------- -------
197,426 129,272 41,316 15,191 11,717
-------- -------- -------- ------- -------
BENEFITS AND EXPENSES
Policyholder Benefits 159,215 109,571 32,720 9,252 8,050
Other Expenses 52,899 32,229 12,799 4,363 3,988
Commissions and Expense
Allowances on Reinsurance
Assumed 810 330 269 81 3,042
212,924 142,130 45,788 13,696 15,080
-------- -------- -------- ------- -------
Gain (Loss) Before Policyholder
Dividends and Federal
Income Tax Provision (Benefit) (15,498) (12,858) (4,472) 1,495 (3,363)
Dividends to Policyholders 1,150 837 634 25 20
-------- -------- -------- ------- -------
Gain (Loss) Before Federal
Income Tax (Benefit) (16,648) (13,695) (5,106) 1,470 (3,383)
Federal Income Tax (Benefit) -- (325) 340 1,351 (23)
-------- -------- -------- ------- -------
Net Gain (Loss) from
Operations After
Policyholders Dividends and
Federal Income Tax (16,648) (13,370) (5,446) 119 (3,360)
Net Realized Capital Gains (3,012) 93 139 -- --
-------- -------- -------- ------- -------
Net Gain (Loss) from Operations $(19,660) $(13,277) $ (5,307) $ 119 $(3,360)
======== ======== ======== ======= =======
Total Assets $403,086 $253,392 $136,065 $92,501 $65,786
======== ======== ======== ======= =======
</TABLE>
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<PAGE> 36
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
Manufacturers Life of America is a wholly-owned subsidiary of The Manufacturers
Life Insurance Company of Michigan, (the Parent), which is in turn a
wholly-owned subsidiary of Manufacturers Life, a Canadian based mutual life
insurance company with world-wide operations and assets of $40.2 billion
(Canadian Dollars), and surplus of $3.1 billion (Canadian Dollars).
Manufacturers Life and its subsidiaries have consistently received excellent
ratings from Standard and Poor's Insurance Rating Service, A.M. Best Company,
Duff & Phelps Credit Rating Co., and Moody's Investors Service, Inc.
Manufacturers Life of America's rapid growth, which commenced in 1992 with the
emergence of the variable product line as a "core insurance product," continued
in 1994 despite general economic uncertainty, rising interest rates and
inflationary fears which produced poor equity and bond market performance.
This continuing growth reflects increasing market acceptance of variable
products and Manufacturers Life of America's commitment to develop these
products as core "estate planning tools" for its U.S. target market. In 1994
Manufacturers Life of America launched a survivorship variable universal life
product and a new variable annuity product. In addition, the Series Fund
launched the International and Pacific Rim Emerging Markets Funds in October,
increasing to eight the number of variable account investment options available
to policyholders.
Manufacturers Life remains committed to Manufacturers Life of America.
Reflecting this commitment, Manufacturers Life has provided a claims paying
guarantee to all U.S. policyholders and contributed an additional $20 million
of capital in 1994. New business growth and statutory earnings remain
consistent with internal projections. The significant growth in the variable
product lines has created negative earnings because of the new business strain
under statutory accounting principles. Long term profitability remains strong
once critical mass has been achieved. Manufacturers Life of America's capital
ratio remained strong with a surplus to liability ratio of 14%.
FINANCIAL POSITION
Financial results have been prepared on the basis of statutory accounting
practices which are currently considered by the insurance industry to be in
accordance with GAAP for all mutual life insurance companies and their
wholly-owned subsidiaries. A description of the accounting policies can be
found in Note 2 to the December 31, 1994 financial statements.
ASSETS
1994 COMPARED TO 1993
At December 31, 1994 the total assets of Manufacturers Life of America were
$403.1 million, an increase of $149.7 million or 59% from year-end 1993. The
main contributors to this growth were:
(1) General Account assets increased by $21.1 million.
Bonds and short-term investments increased by $28.8 million and $10
million respectively due to:
(a) A $20.0 million capital infusion in December, 1994.
(b) Receipt of $21.5 million related to a block of participating
whole life contracts assumed from Manufacturers Life.
Common Stocks decreased by $14.9 million. The investment in common
stocks represents Manufacturers Life of America's seed money
investment in the Series Fund. This investment decreased because:
(a) Manufacturers Life of America withdrew $13.0 million of seed
money to pay operating expenses.
(b) The values of the common stock decreased by $1.9 million due
to underlying investment performance of the Series Fund.
34
<PAGE> 37
Manufacturers Life of America's debt securities consist mainly of U.S.
Treasury notes and bonds, mortgage backed securities, investment grade
corporate bonds and money market securities.
(2) Separate Account assets increased by $128.6 million.
Consistent with Manufacturers Life of America's primary business
operations of marketing variable products, the majority of "policy
premium" is transferred immediately into the Separate Accounts.
1993 COMPARED TO 1992
At December 31, 1993, the total assets of Manufacturers Life of America were
$253.4 million, an increase of $117.3 million or 86% over year-end 1992. The
major changes in the various asset categories are due to the following:
(1) The common stock of Manufacturers Life of America increased by $40.5
million. This increase reflects a change in basis of presentation of
Manufacturers Life of America's seed money invested in the Series
fund. During 1993, Manufacturers Life of America transferred
ownership of its seed money from the Separate Account to the General
Account. This transfer resulted in an increase in common stocks of
$40.5 million. In prior years this investment was reported as a
Separate Account asset.
(2) Cash on hand increased by $4.5 million. This reflects, in part, the
additional capital contribution used to fund Taiwan operations. At
year-end 1993, the total capital and surplus invested in Taiwan
totaled $7.7 million.
(3) Consistent with Manufacturers Life of America's primary business
operations of marketing variable products, the majority of "policy
premium" is transferred immediately into the Separate Account.
Accordingly, in 1993, Separate Account assets exclusive of
Manufacturers Life of America's seed money increased by $114 million
over 1992.
LIABILITIES
1994 COMPARED TO 1993
At December 31, 1994, Manufacturers Life of America's total liabilities were
$353.7 million, reflecting an increase of $151.0 million over year-end 1993.
This increase is comprised of:
(1) General Account liabilities increased by $22.4 million. This increase
was primarily the result of Manufacturers Life of America's increasing
the face amount it assumes from Manufacturers Life on a participating
whole life block of business. Manufacturers Life of America increased
the amount it assumes from the first $50,000 to the first $100,000 of
initial face amount per policy. This transaction resulted in an
initial premium transfer and the establishment of reserves totaling
$21.5 million.
(2) Separate Account liabilities increased by $128 million. Separate
Account liabilities increase in tandem with, and are fully secured by,
Separate Account assets.
1993 COMPARED TO 1992
Manufacturers Life of America's liabilities have increased by $122.2 million
over year-end 1993, reflecting:
(1) Increases in Separate Account liabilities totaling $114 million, due
to increases in Separate Account deposits and investment results of
the Separate Account assets. With the exception of activities related
to the seed money, liabilities move in tandem with changes in
Segregated Assets;
35
<PAGE> 38
(2) Aggregate policy reserves increased by $8 million. This increase was
primarily the result of Manufacturers Life of America's assuming an
additional block of business from Manufacturers Life. Under this
agreement, Manufacturers Life of America has assumed the first $50,000
of initial face amount per policy on a traditional block of insurance.
This transaction resulted in an initial premium transfer and the
establishment of reserves totaling $10.2 million.
CAPITAL AND SURPLUS
1994 COMPARED TO 1993
At the end of 1994, Manufacturers Life of America's capital and surplus
totalled $49.4 million, a decrease of $1.3 million over year-end 1993. The
following details the changes made to capital and surplus during 1994:
<TABLE>
<CAPTION>
(MILLIONS)
----------
<S> <C>
Loss from Operations $(19.7)
Issue of Common Stock/Contributed Surplus 20.0
Miscellaneous Changes (1.6)
------
Net Decrease in Capital and Surplus $ (1.3)
======
</TABLE>
The loss from operations increased from a loss of $13.3 million in 1993 to a
loss of $19.7 million primarily as a result of new business strain on increased
sales. This reflects significant growth in the sale of both variable annuities
and variable universal life products.
The $20 million in proceeds from the sale of common stock is a result of
Manufacturers Life of America issuing one common share with a par value $1 with
the balance being treated as contributed surplus.
During 1994, Manufacturers Life of America restructured its capital and surplus
by exchanging 230,000 preferred shares, (par value $100), for 3,000,000 common
shares, (par value $1) and contributed surplus of $20 million. This
restructuring was done to ensure Manufacturers Life of America satisfied
continued compliance with all state regulations regarding surplus. Total
capital and surplus was unchanged by this restructuring.
1993 COMPARED TO 1992
At the end of 1993, Manufacturers Life of America's capital and surplus
totalled $50.7 million, a decrease of $4.9 million over 1992. The following
details the contributions made to capital and surplus during 1992:
<TABLE>
<CAPTION>
(MILLIONS)
----------
<S> <C>
Loss from Operations $(13.3)
Unrealized Capital Losses (1.6)
Gain on Surplus in the Separate Account 4.3
Sale of Common Stock/Contributed Surplus 5.9
Miscellaneous Changes in Capital (0.2)
------
Net decrease in Capital and Surplus $ (4.9)
======
</TABLE>
Earnings declined from a loss of $5.3 million in 1992 to a loss of $13.3
million in 1993, primarily as a result of new business strain on dramatically
increased sales. Premiums for 1993 represented an increase of 216% over 1992.
This reflects significant growth in the sale of both variable annuities and
variable universal life products.
The Unrealized Capital Loss of $1.6 million represents the difference between
the December 31, 1993 market value of the seed money shares and the actual cost
of these shares. The unrealized loss occurred because the Series Fund paid a
dividend shortly after the shares were transferred to the General Account. The
impact of the dividend, while increasing investment income, simultaneously
reduced the market value of the shares, giving rise to an unrealized loss.
The gain on surplus in the Separate Account represents the investment income
earned on Manufacturers Life of America's seed money in the Series Fund, while
it was still in the Separate Account.
36
<PAGE> 39
The $5.9 million in proceeds from the sale of common stock is a result of
Manufacturers Life of America's issuing one common share (par value $1) with
the balance being treated as contributed surplus. These funds were
subsequently transferred to fund start-up operations in Taiwan.
1992 COMPARED TO 1991
At year end 1992, Manufacturers Life of America's capital and surplus totalled
$55.5 million, an increase of $2.9 million over 1991.
During the year, Manufacturers Life of America issued 60,000 preferred shares
to its Parent resulting in a net increase of $6 million in capital. These
funds were used to fund start-up operations in Taiwan. The remaining increase
in surplus reflects investment income on Manufacturers Life of America's
Separate Account investment, offset by operating losses.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
The loss from operations increased from $13.3 million in 1993 to $19.7 million
in 1994, principally as a result of higher new business strain from increased
sales. The loss of $19.7 million in 1994 was derived as follows:
(1) Under statutory accounting practices, all growing life insurance
companies will experience operating losses in direct proportion to
increased sales. During 1994, Manufacturers Life of America lost
$15.9 million primarily due to the increased new business strain. In
accordance with statutory life insurance accounting, high first-year
business costs fall primarily to operations as higher expenses. These
expenses are recovered over the life of the policy through
policy/expense loads and will enhance future profit;
(2) $3.8 million due to start-up operations in Taiwan.
Manufacturers Life of America continues to expect significant growth
in the sale of variable products. Given this, Manufacturers Life of
America expects to experience statutory losses until the late 1990's
at which time economies of scale should be achieved and profits should
begin to emerge on business sold previously.
1993 COMPARED TO 1992
The loss from operations increased from $5.3 million in 1992 to $13.3 million
mainly as a result of higher new business strain from increased sales. The
1993 loss of $13.3 million was derived as follows:
(1) $10.2 million primarily due to the increased new business strain from
dramatically higher variable sales;
(2) $3.1 million due to start-up operations in Taiwan.
1992 COMPARED TO 1991
The Net Loss for 1992 was $5.3 million versus a profit of $.1 million in 1991.
Premiums for 1992 were $39.8 million versus $14.3 and $8.0 for 1991 and 1990,
respectively. This significant growth reflects positively on an internal
reorganization that took place in late 1991 to refocus Manufacturers Life of
America's activities on the marketing and sales activities for this emerging
product line after several disappointing years. The success of these
activities was directly reflected in the significant sales growth.
The loss in 1992 was entirely attributable to higher new business strain on
dramatically higher sales as required under current statutory accounting.
CASH FLOW
The majority of Manufacturers Life of America's cash flows arise from
policyowner transactions related to the Separate Accounts and, as such, the
assets and liabilities of these products are exactly matched. In the case of
death benefits, Manufacturers Life of
37
<PAGE> 40
America cedes a substantial portion of the risks to Manufacturers Life.
Manufacturers Life of America's cash flows are adequate to meet the obligations
retained on these contracts.
Because of the excess of expense over income, which arises from first policy
year issue, the continued success in generating substantial growth in sales
will not only result in losses in its Results of Operations, but will create a
cash flow strain as well. As a result, Manufacturers Life of America may look
to its ultimate parent to provide the necessary capital to support its
operations.
Manufacturers Life of America has no material commitments for capital
expenditures and, other than the claims paying guarantee discussed in the
"Overview", does not have any financing arrangements not reflected on its
balance sheet.
38
<PAGE> 41
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of Manufacturers Life of America, together
with their principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
POSITION WITH
MANUFACTURERS LIFE
NAME (AGE) OF AMERICA PRINCIPAL OCCUPATION
---------- ---------- --------------------
<S> <C> <C>
Sandra M. Cotter (32) Director (since
December 1992) Attorney -- 1989-present, Dykema, Gossett
Leonard V. Day, Jr. (53) Director (since
May 1987) General Manager, Philadelphia Branch -- 1970-present, The
Manufacturers Life Insurance Company
Donald A. Guloien (38) President and
Director (since
September 1990) Senior Vice President, Business Development -- 1994-present, The
Manufacturers Life Insurance Company; Vice President, U.S. Individual
Business -- 1990-1994, The Manufacturers Life Insurance Company;
Mr. Guloien is also a director of Manulife Series Fund, Inc.
Stephen C. Nesbitt (46) Secretary, General
Counsel, and
Director (since
May 1985) Legal Vice President -- 1990-present, The Manufacturers Life
Insurance Company
Joseph J. Pietroski (56) Director (since
July 1982) Senior Vice President, General Counsel and Corporate Secretary -- 1988-
present, The Manufacturers Life Insurance Company
John D. Richardson (57) Chairman and
Director (since
January 1995) Senior Vice President and General Manager, U.S. Operations -- 1995-
present, The Manufacturers Life Insurance Company; Senior Vice
President and General Manager, Canadian Operations -- 1992-1994, The
Manufacturers Life Insurance Company; Senior Vice President, Financial
Services -- 1992, The Manufacturers Life Insurance Company; Executive
Vice Chairman & CFO -- 1989-1991, Canada Trust
Diane M. Schwartz (48) Director (since
May 1987) Senior Vice President and International Operations -- 1992-present, The
Manufacturers Life Insurance Company; Senior Vice President and General
Manager, U.S. Operations -- 1988-1992, The Manufacturers Life Insurance
Company
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
POSITION WITH
MANUFACTURERS LIFE
NAME (AGE) OF AMERICA PRINCIPAL OCCUPATION
---------- ---------- --------------------
<S> <C> <C>
Robin Bolton (49) Vice President,
Marketing Assistant Vice President, Variable and Annuity Products -- 1992-
present, The Manufacturers Life Insurance Company; Assistant Vice
President, Variable Universal Life Products -- 1991-1992, The
Manufacturers Life Insurance Company; Director, Agencies -- 1990-1991,
The Manufacturers Life Insurance Company; Assistant Vice President,
Finance and Planning -- 1987-1991, The Manufacturers Life Insurance
Company
John R. Ostler (42) Vice President,
Chief Actuary and
Treasurer Financial Vice President -- 1992-present, The Manufacturers Life
Insurance Company; Vice President, Insurance Products -- 1990-1992,
The Manufacturers Life Insurance Company
Douglas H. Myers (40) Vice President,
Finance and Com-
pliance, Controller Assistant Vice President and Controller, U.S. Operations -- 1988-
present, The Manufacturers Life Insurance Company
</TABLE>
Legal fees were paid to the firm of Dykema Gossett during Manufacturers Life of
America's last fiscal year. A director of Manufacturers Life of America is
associated with that firm; however, legal fees so paid did not exceed 5% of
Dykema Gossett's consolidated gross revenues during its last full fiscal year.
EXECUTIVE COMPENSATION
All of the executive officers of Manufacturers Life of America also serve as
officers of Manufacturers Life and receive no compensation directly from
Manufacturers Life of America. Allocations have been made as to such officers'
time devoted to duties as executive officers of Manufacturers Life of America
and its subsidiaries. The aggregate allocated cash compensation of the
president of Manufacturers Life of America for services rendered in all
capacities to Manufacturers Life of America and its subsidiaries during 1994
was $23,049. This consisted of salary ($16,488), profit-sharing ($4,690),
flexible spending benefits ($1,871) and incentive plans (not eligible). No
executive officer had allocated cash compensation in excess of $100,000. These
figures include salary, applicable profit-sharing and incentive plans and
flexible spending benefits.
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, health and pension. There are no other
benefit packages which currently enhance overall compensation by more than 10%.
Directors of Manufacturers Life of America who are also officers or employees
of Manufacturers Life or its affiliates receive no compensation in addition to
their compensation as officers or employees of Manufacturers Life or its
affiliates. Directors who are not also officers or employees will receive
compensation as set by the Board. No shares of Manufacturers Life of America
are owned by any executive officer or director.
Executive officers participate in certain plans sponsored by Manufacturers
Life. A short-term profit sharing plan is in place for all employees of
Manufacturers Life and its subsidiaries at "director" level and above.
Pay-outs under the short-term profit sharing plan are based on a percentage of
salary and the employee's level in the organization. Manufacturers Life also
maintains a Long Term Incentive Plan for officers of Manufacturers Life who
have attained the title of Vice President. Benefits are directly linked to
long-term growth as measured by changes in Manufacturers Life's surplus.
40
<PAGE> 43
Manufacturers' Life Insurance Company maintains a defined benefit pension plan
for the benefit of all Canadian Staff which vests at two years of service.
Benefit pay-out is a function of years of service and salary including all
contractual incentive compensation.
Pay-outs under this program are regulated by the various provincial benefit
acts and Section 248 of the Income Tax Act (Canada).
The maximum yearly pension benefit as permitted by Section 248 of the Income
Tax Act (Canada) is $1,355 per year of service. There are no years of service
restrictions limiting overall pay-outs under this section. The maximum yearly
benefit is currently earned at a salary of $76,990. The yearly allowable
benefit will be indexed commencing 1999 based on increases in average
industrial wages.
All executive officers of Manufacturers Life of America currently accrue
maximum yearly benefits under this plan.
In addition there is a supplemental pension arrangement available to officers
of Manufacturers Life who have attained the title of Vice President.
This is an unfunded, non-qualified arrangement intended to provide additional
pension income consistent with the executive's pre-retirement income.
Combined pension benefits at age 65 under these arrangements is as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
REMUNERATION* 15 20 25 30 35
------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 26,772 35,695 44,620 53,543 62,467
150,000 32,677 43,570 54,462 65,354 76,246
200,000 44,488 59,317 74,147 88,976 103,805
250,000 56,299 75,065 93,832 112,598 131,364
300,000 68,110 90,813 113,517 136,220 158,924
400,000 91,732 22,309 152,887 183,465 214,041
500,000 115,354 53,805 192,257 230,709 269,160
<FN>
* Remuneration table is based on a 100% time allocation to Manufacturers Life
of America.
</TABLE>
Normal retirement age is 65. Pay-out is annuity based with either single life
with a ten year guarantee or joint life with a five year guarantee.
Donald Guloien, President and Chief Operating Officer, has 13 years and 9
months of vested service.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting Separate Account Two or
Manufacturers Life of America.
STATE REGULATIONS
Manufacturers Life of America is subject to regulation and supervision by the
Michigan Department of Insurance, which periodically examines its financial
condition and operations. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business. The
Policy has been filed with insurance officials and meets all standards set by
law in each jurisdiction where it is sold.
Manufacturers Life of America is required to submit annual statements of its
operations, including financial statements, to the insurance departments of the
various jurisdictions in which it does business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
41
<PAGE> 44
OTHER MATTERS
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. 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.
Charges and deductions described above (see Description of the
Policies--"Policy Charges") may be reduced for Policies issued in connection
with group or sponsored arrangements. Such arrangements may also include sales
without withdrawal charges and certain other charges to employees, officers,
directors, agents, immediate family members of the foregoing and employees of
agents of Manufacturers Life and its subsidiaries. Manufacturers Life of
America will reduce the charges and deductions in accordance with its 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 risks and expense risks costs
per Policy vary based on such factors as the size of the group or sponsored
arrangements, the purposes for which Policies are purchased and certain
characteristics of its members.
The amount of reduction and the criteria for qualification will reflect the
reduced sales effort and administrative, mortality and expense risks costs
resulting from sales to qualifying groups and sponsored arrangements.
Manufacturers Life of America 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 owners of the Policies.
SALE OF THE POLICIES
ManEquity, Inc., an indirect wholly-owned subsidiary of Manufacturers Life,
will act as the principal underwriter of, and continuously offer, the Policies
pursuant to a Distribution Agreement with Manufacturers Life of America.
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.
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.
For the years ended December 31, 1992, December 31, 1993 and December 31, 1994,
ManEquity, Inc. received $572,654, $2,053,988, and $2,389,494, respectively, as
compensation for sales of other variable annuity policies issued by Separate
Account Two by its registered representatives. Of these amounts $512,243,
$1,898,178, and $2,283,353, respectively, were remitted to Manufacturers Life
to reimburse it for commissions paid to such registered representatives.
Agents will receive commissions on purchase payments not to exceed 4% thereof
and, each year beginning with the seventh Policy Anniversary, 0.50% of the
Policy Value at the respective Policy Anniversary. Under certain circumstances
agents may be eligible for a bonus payment of not exceeding 1% of purchase
payments. In addition, agents who meet certain productivity and persistency
standards will be eligible for additional compensation.
VOTING RIGHTS
As stated above, all of the assets held in the Variable Accounts will
be invested in shares of a particular Fund of the Series Fund. Manufacturers
Life of America is the legal owner of those shares and as such has the right to
vote to elect the Board of Directors of the Series Fund, 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, Manufacturers Life of America
will vote shares of the Series Fund held in the Variable Accounts in accordance
with instructions received from Policyowners having an interest in such
Accounts. Fund shares held in each Variable Account for which no timely
instructions from Policyowners are received, including shares not attributable
to Policies, will be voted by Manufacturers Life of America in the same
proportion as those shares in that Variable Account for which instructions are
received. Should the applicable federal securities laws
42
<PAGE> 45
or regulations change so as to permit Manufacturers Life of America to vote
shares of the Series Fund held in the Variable Accounts in its own right, it
may elect to do so.
The number of Fund shares in each Variable Account for which instructions may
be given by a Policyowner is determined by dividing the portion of that
Policy's Variable Policy Value derived from participation in that Variable
Account, if any, by the value of one share of the corresponding Fund. The
number will be determined as of a date chosen by Manufacturers Life of America,
but not more than 90 days before the meeting of the Series Fund. Fractional
votes are counted. Voting instructions will be solicited in writing at least
14 days prior to the meeting of the Series Fund.
FURTHER INFORMATION
A registration statement under the Securities Act of 1933 has been filed with
the S.E.C. relating to the offering described in the prospectus. The
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the S.E.C.'s principal
office in Washington, D.C. upon payment of the prescribed fee.
For further information you may also contact Manufacturers Life of America's
Service Office, the address and telephone number of which are on the first page
of this prospectus.
LEGAL MATTERS
The legal validity of the Policies has been passed on by Stephen C. Nesbitt,
Esq., Secretary and General Counsel of Manufacturers Life of America. Jones &
Blouch, Washington, D.C. has passed on certain matters relating to the federal
securities laws.
EXPERTS
The financial statements of The Manufacturers Life Insurance Company of America
and of The Manufacturers Life Insurance Company of America Separate Account Two
appearing in this prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports appearing elsewhere herein
and are included herein in reliance upon such reports given upon the authority
of such firm as experts in auditing and accounting.
PERFORMANCE AND OTHER COMPARATIVE INFORMATION
From time to time, in advertisements or in reports to Policyowners,
Manufacturers Life of America may quote various independent quotation services
for the purpose of comparing Manufacturers Life of America's Policies'
performance and other rankings with other companies' variable annuity policies
and for the purpose of comparing any of the Funds of the Series Fund with other
mutual funds with similar investment objectives. Performance rankings are not
to be considered indicative of the future performance of the Funds. The
quotation services which are currently followed by Manufacturers Life of
America include Lipper Analytical Services, Inc., Morningstar, Inc., Variable
Annuity Research and Data Service, and Money Magazine; however, other
nationally recognized rating services may be quoted in the future. The
performance of certain indices may also be quoted in advertisements or in
reports to Policyowners. These indices include Standard & Poor's 500 Index,
National Association of Real Estate A11 REIT's Index, Salomon Brothers (broad
corporate index), Dow Jones Industrial Average, Donoghue Prime Money Fund
Index, 3 month Treasury Bills, the National Association of Securities Dealers
Automated Quotation System and the Financial Times Actuaries World Index.
These comparisons may include graphs, charts, tables or examples.
ADVERTISING PERFORMANCE OF VARIABLE ACCOUNTS
Manufacturers Life of America may publish advertisements or distribute sales
literature that contain performance data relating to the sub-accounts of
Separate Account Two. Performance data will include average annual return
quotations for one year, five year (when applicable) and ten year (when
applicable) periods ending the last day of the month. Quotations for the
period since inception of the Fund underlying a sub-account will replace such
periods for a Fund that has not been in existence for a full five year or ten
year period. In the case of a new Fund that is less than one year old, the one
year figure would be replaced by an aggregate for the period since inception.
Average annual total returns may also be advertised for three year periods and
one year periods as of the last day of any month.
Average annual total return is the average annual compounded rate of return
that equates a purchase payment to the market value of that purchase payment on
the last day of the period for which the return is calculated. Aggregate total
return, which will also be advertised from time to time, is the percentage
change that equates a purchase payment to the market value of that purchase
payment
43
<PAGE> 46
on the last day of the period. For the purpose of the calculations it
is assumed that an initial payment of $1000.00 is made on the first day of the
period for which the total return is calculated. All recurring charges are
reflected in the calculations. Asset charges are reflected in changes in unit
values. For purposes of the calculations, the annual administration charge is
estimated by dividing the total administration charges collected during a given
year by the average total assets attributable to the Policies during that year
(including amounts allocated to both Separate Account Two and the Guaranteed
Interest Account), multiplying that percentage by the average of the beginning
and ending values of the hypothetical investment and subtracting the result
from the year end account value. The contingent deferred sales charge that
would be applicable to withdrawals at the end of periods for which the total
return is measured are assumed to be deducted at the end of the period.
The Policies have been offered to the public only since May 4, 1994. However,
total return data may be advertised for as long a period of time as the
underlying separate account has been active. The results for any period prior
to the policies being offered would be calculated as if the policies had been
offered during that period, deducting all recurring charges, including the
annual record-keeping charge of $30.00 per policy, the daily mortality and
expense and administration charges and the additional mortality and expense
charge of .449928% annually (deducted monthly at a rate of .037494%). The
average Policy Value for any period prior to the first full year in which the
Policies are offered is determined assuming an initial deposit of $40,000 per
Policy.
44
<PAGE> 47
Total returns if surrendered for the period ending December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
AVG. AVG. AVG. AVG. AVG. ANNUAL AGGREGATE
ANNUAL ANNUAL ANNUAL ANNUAL TOTAL TOTAL
TOTAL TOTAL TOTAL TOTAL RETURN RETURN
RETURN RETURN RETURN RETURN SINCE SINCE
ONE YEAR THREE YEARS FIVE YEARS** TEN YEARS** INCEPTION* INCEPTION*
-------- ----------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity -13.11% 9.77% 14.12% 12.69% 12.51% 245.43%
Balanced Assets -13.16% 1.01% 5.46% 8.92% 9.73% 165.35%
Capital Growth Bond -13.46% 0.36% 4.82% 8.23% 9.06% 148.78%
Common Stock -13.19% 1.37% 5.60% N/A 5.99% 56.23%
Real Estate Securities -11.90% 9.74% 12.29% N/A 9.00% 93.68%
Money-Market -5.69% -0.10% 2.73% 4.21% 4.38% 56.96%
International N/A N/A N/A N/A N/A -9.75%
Pacific Rim Emerging Markets N/A N/A N/A N/A N/A -13.50%
<FN>
* June 26, 1984 for the Emerging Growth Equity, Balanced Assets, Capital
Growth Bond and Money-Market Funds; May 1, 1987 for the Common Stock
and Real Estate Securities Funds; October 4, 1994 for the
International and Pacific Rim Emerging Markets Funds.
** Policies have only been offered since May 4, 1994. Performance data
for earlier periods are hypothetical figures based on the performance
of the Fund in which policy assets may be invested.
</TABLE>
Total returns if not surrendered are as follows:
<TABLE>
<CAPTION>
AVG. AVG. AVG. AVG. AVG. ANNUAL AGGREGATE
ANNUAL ANNUAL ANNUAL ANNUAL TOTAL TOTAL
TOTAL TOTAL TOTAL TOTAL RETURN RETURN
RETURN RETURN RETURN RETURN SINCE SINCE
ONE YEAR THREE YEARS FIVE YEARS** TEN YEARS** INCEPTION* INCEPTION*
-------- ----------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity -5.55% 11.40% 14.35% 12.69% 12.51% 245.43%
Balanced Assets -5.60% 2.89% 5.78% 8.92% 9.73% 165.35%
Capital Growth Bond -5.93% 2.22% 5.15% 8.23% 9.06% 148.78%
Common Stock -5.64% 3.25% 5.92% N/A 5.99% 56.23%
Real Estate Securities -4.24% 11.37% 12.54% N/A 9.00% 93.68%
Money-Market 2.31% 1.77% 3.09% 4.21% 4.38% 56.96%
International N/A N/A N/A N/A N/A -1.90%
Pacific Rim Emerging Markets N/A N/A N/A N/A N/A -5.87%
<FN>
* June 26, 1984 for the Emerging Growth Equity, Balanced Assets, Capital
Growth Bond and Money-Market Funds; May 1, 1987 for the Common Stock
and Real Estate Securities Funds; October 4, 1994 for the
International and Pacific Rim Emerging Markets Funds.
** Policies have only been offered since May 4, 1994. Performance data
for earlier periods are hypothetical figures based on the performance
of the Fund in which policy assets may be invested.
</TABLE>
45
<PAGE> 48
Aggregate total returns if surrendered as of the end of each year since
inception are as follows:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity -13.11% 14.01 11.96% 60.76% -22.90% 32.05% 7.15% -13.80%
Balanced Assets -13.16% 2.30 -3.40% 13.51% -7.92% 11.50% -2.03% -10.98%
Capital Growth Bond -13.46% 0.89 -3.72% 6.62% -3.04% 4.16% -2.49% -10.92%
Common Stock -13.19% 3.67 -3.53% 20.20% -13.08% 20.68% 0.20% -22.58%
Real Estate Securities -11.90% 12.75 11.46% 30.95% -13.50% -0.42% 2.03% -16.61%
Money-Market -5.69% -6.82 -6.17% -4.00% -1.82% -0.76% -2.57% -3.92%
International -9.75% N/A N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets -13.50% N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
1986 1985 1984
---- ---- ----
<S> <C> <C> <C>
Emerging Growth Equity 15.37% 13.52% -3.40%
Balanced Assets 7.56% 17.37% 4.88%
Capital Growth Bond 12.51% 16.22% 4.86%
Common Stock N/A N/A N/A
Real Estate Securities N/A N/A N/A
Money-Market -3.54% -2.49% -4.02%
International N/A N/A N/A
Pacific Rim Emerging Markets N/A N/A N/A
</TABLE>
Aggregate total returns as of the end of each year since inception, if not
surrendered are as follows:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity -5.55% 22.01% 19.96% 68.76% -16.19% 40.05% 15.16% -6.31%
Balanced Assets -5.60% 10.30% 4.60% 21.51% 0.08% 19.50% 5.97% -3.24%
Capital Growth Bond -5.93% 8.89% 4.28% 14.62% 4.96% 12.16% 5.51% -3.17%
Common Stock -5.64% 11.67% 4.47% 28.20% -5.52% 28.68% 8.20% -15.85%
Real Estate Securities -4.24% 20.75% 19.46% 38.95% -5.98% 7.58% 10.03% -9.35%
Money-Market 2.31% 1.18% 1.83% 4.00% 6.18% 7.24% 5.43% 4.08%
International -1.90% N/A N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets -5.97% N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
1986 1985 1984
---- ---- ----
<S> <C> <C> <C>
Emerging Growth Equity -8.01% 21.52% 4.60%
Balanced Assets 5.56% 25.37% 12.88%
Capital Growth Bond 20.51% 24.22% 12.86%
Common Stock N/A N/A N/A
Real Estate Securities N/A N/A N/A
Money-Market 4.46% 5.51% 3.98%
International N/A N/A N/A
Pacific Rim Emerging Markets N/A N/A N/A
</TABLE>
All of the above performance data are based on the actual historical
performance of the Funds for specified periods, and the figures are not
intended to indicate future performance.
46
<PAGE> 49
FINANCIAL STATEMENTS
The financial statements of Manufacturers Life of America included herein
should be distinguished from the financial statements of the Account and should
be considered only as bearing upon the ability of Manufacturers Life of America
to meet its obligations under the Policies.
47
<PAGE> 50
Report of Independent Auditors
To the Board of Directors
The Manufacturers Life Insurance
Company of America
We have audited the statement of assets and liabilities as of December 31, 1994
and the statement of operations and the statements of changes in net assets for
each of the periods presented herein of Separate Account Two of The
Manufacturers Life Insurance Company of America (comprising, respectively,
Emerging Growth Equity Sub-Account, Common Stock Sub-Account, Real Estate
Securities Sub-Account, Balanced Assets Sub-Account, Capital Growth Bond
Sub-Account, Money Market Sub-Account, International Sub-Account and Pacific
Rim Emerging Markets Sub-Account). These financial statements are the
responsibility of the management of The Manufacturers Life Insurance Company of
America. 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 financial position of each of the respective
sub-accounts constituting Separate Account Two of The Manufacturers Life
Insurance Company of America at December 31, 1994, and the results of their
operations and changes in their net assets for each of the periods presented
herein, in conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
February 6, 1995
48
<PAGE> 51
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statement of Assets and Liabilities
December 31, 1994
<TABLE>
<CAPTION>
EMERGING COMMON REAL ESTATE
GROWTH EQUITY STOCK SECURITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment in Manulife Series
Fund, Inc.--at market value:
Emerging Growth Equity Fund,
2,788,822 shares (cost $52,281,085) $ 51,734,732
Common Stock Fund,
1,208,447 shares (cost $17,275,512) $ 16,148,694
Real Estate Securities Fund,
2,002,653 shares (cost $28,461,405) $ 26,724,581
Balanced Assets Fund,
2,577,528 shares (cost $38,572,524)
Capital Growth Bond Fund,
1,066,365 shares (cost $11,999,272)
Money Market Fund,
1,236,781 shares (cost $12,788,176)
International Fund,
86,308 shares (cost $853,025)
Pacific Rim Emerging Markets Fund,
66,905 shares (cost $643,471)
----------------------------------------------------------
$ 51,734,732 $ 16,148,694 $ 26,724,581
Receivable (payable) for policy-related
transactions $ 30,649 $ 3,027 $ (2,279)
----------------------------------------------------------
Net assets $ 51,765,381 $ 16,151,721 $ 26,722,302
==========================================================
Units outstanding $ 1,454,901 $ 803,568 $ 1,205,880
==========================================================
Net asset value per unit $ 36.58 $ 20.10 $ 22.16
==========================================================
</TABLE>
See accompanying notes.
49
<PAGE> 52
<TABLE>
<CAPTION>
PACIFIC RIM
BALANCED CAPITAL EMERGING
ASSETS GROWTH BOND MONEY MARKET INTERNATIONAL MARKETS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
51,734,732
16,148,694
26,724,581
$35,504,879 35,504,879
$10,769,201 10,769,201
$12,692,039 12,692,039
$847,379 847,379
$629,371 629,371
--------------------------------------------------------------------------------------------------------
35,504,879 10,769,201 12,692,039 847,379 629,371 155,050,876
29,336 2,089 (57,588) 19,446 3,660 28,340
--------------------------------------------------------------------------------------------------------
$35,534,215 $10,771,290 $12,634,451 $866,825 $633,031 $155,079,216
========================================================================================================
2,001,928 672,365 918,869 89,180 67,272
========================================================================================================
$ 17.75 $ 16.02 $ 13.75 $ 9.72 $ 9.41
========================================================================================================
</TABLE>
50
<PAGE> 53
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statement of Operations
Year ended December 31, 1994
<TABLE>
<CAPTION>
EMERGING COMMON REAL ESTATE
GROWTH EQUITY STOCK SECURITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividend income $ 196,396 $ 800,888 $ 615,224
Expenses:
Mortality and expense risks charge 431,634 139,014 231,870
--------------------------------------------------------------
Net investment (loss) income 235,238 661,874 383,354
--------------------------------------------------------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) from security transactions:
Proceeds from sales 3,338,038 608,055 1,091,602
Cost of securities sold 3,056,187 493,059 924,949
--------------------------------------------------------------
Net realized gain (loss) 281,851 114,996 166,653
--------------------------------------------------------------
Unrealized appreciation (depreciation)
of investments:
Beginning of year 1,464,566 395,888 127,600
End of year (546,353) (1,126,818) (1,736,824)
--------------------------------------------------------------
Net unrealized appreciation (depreciation)
during the year (2,010,919) (1,522,706) (1,864,424)
--------------------------------------------------------------
Net realized and unrealized loss on
investments (1,729,068) (1,407,710) (1,697,771)
--------------------------------------------------------------
Net (decrease) increase in net assets derived
from operations $ (1,964,306) $ (745,836) $ (1,314,417)
==============================================================
<FN>
*Reflects the period from commencement of operations October 4, 1994 through
December 31, 1994.
</TABLE>
See accompanying notes.
51
<PAGE> 54
<TABLE>
<CAPTION>
*PACIFIC RIM
BALANCED CAPITAL EMERGING
ASSETS GROWTH BOND MONEY MARKET *INTERNATIONAL MARKETS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,876,137 $ 709,840 $ 371,695 $ 2,198 $ 2,242 $ 4,574,620
318,087 98,973 81,503 872 689 1,302,642
-----------------------------------------------------------------------------------------------------------------
1,558,050 610,867 290,192 1,326 1,553 3,271,978
-----------------------------------------------------------------------------------------------------------------
2,049,830 2,204,010 5,915,298 4,898 31,794 15,243,525
1,923,618 2,330,475 5,881,619 4,987 32,667 14,647,561
-----------------------------------------------------------------------------------------------------------------
126,212 (126,465) 33,679 (89) (873) 595,964
-----------------------------------------------------------------------------------------------------------------
276,074 (226,829) (19,735) - - 2,017,564
(3,067,645) (1,230,071) (96,137) (5,646) (14,100) (7,823,594)
-----------------------------------------------------------------------------------------------------------------
(3,343,719) (1,003,242) (76,402) (5,646) (14,100) (9,841,158)
-----------------------------------------------------------------------------------------------------------------
(3,217,507) (1,129,707) (42,723) (5,735) (14,973) (9,245,194)
-----------------------------------------------------------------------------------------------------------------
$ (1,659,457) $ (518,840) $ 247,469 $ (4,409) $ (13,420) $ (5,973,216)
=================================================================================================================
</TABLE>
52
<PAGE> 55
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
EMERGING GROWTH COMMON STOCK REAL ESTATE SECURITIES
EQUITY SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
-----------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/94 DEC. 31/93 DEC. 31/94 DEC. 31/93 DEC. 31/94 DEC. 31/93
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment (loss) income $ (235,238) $ 3,200,433 $ 661,874 $ 479,778 $ 383,354 $ 1,293,019
Net realized gain (loss) 281,851 177,287 114,996 81,896 166,653 32,526
Unrealized (depreciation)
appreciation of investments
during the year (2,010,919) 957,940 (1,522,706) 106,332 (1,864,424) (101,193)
-----------------------------------------------------------------------------------------------
(Decrease) increase in net
assets derived from operations (1,964,306) 4,335,660 (745,836) 668,006 (1,314,417) 1,224,352
-----------------------------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 20,192,208 18,977,034 6,307,192 5,646,020 11,495,742 11,475,542
Transfer on death
Transfer on terminations (1,175,021) (316,957) (211,937) (103,519) (365,263) (72,275)
Transfer on maturity
Net interfund transfer 2,047,524 982,678 619,575 407,492 616,085 1,193,272
-----------------------------------------------------------------------------------------------
20,944,544 19,642,755 6,616,284 5,949,993 11,662,109 12,596,539
-----------------------------------------------------------------------------------------------
Net increase in net
assets 18,980,238 23,978,415 5,870,448 6,617,999 10,347,692 13,820,891
NET ASSETS
Beginning of year 32,785,143 8,806,728 10,281,273 3,663,274 16,374,610 2,553,719
-----------------------------------------------------------------------------------------------
End of year $51,765,381 $32,785,143 $16,151,721 $10,281,273 $26,722,302 $16,374,610
===============================================================================================
</TABLE>
See accompanying notes.
53
<PAGE> 56
<TABLE>
<CAPTION>
BALANCED ASSETS CAPITAL GROWTH MONEY MARKET
SUB-ACCOUNT BOND SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/94 DEC. 31/93 DEC. 31/94 DEC. 31/93 DEC. 31/94 DEC. 31/93
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1,558,050 $ 1,281,368 $ 610,867 $ 492,684 $ 290,192 $ 60,671
126,212 93,851 (126,465) 34,959 33,679 (500)
(3,343,719) 10,732 (1,003,242) (184,106) (76,402) (5,837)
--------------------------------------------------------------------------------------------------------------------------------
(1,659,457) 1,385,951 (518,840) 343,537 247,469 54,334
--------------------------------------------------------------------------------------------------------------------------------
14,684,868 13,478,551 4,091,955 5,672,487 9,297,572 4,906,844
(51,630) - (2,484) - - -
(715,314) (187,823) (530,903) (131,876) (504,302) (342,175)
(59,741) (27,287) (49,450) - (2,334) (51,966)
(860,845) 846,067 (686,906) (27,415) (801,647) (2,485,536)
--------------------------------------------------------------------------------------------------------------------------------
12,997,338 14,109,508 2,822,212 5,513,196 7,989,289 2,027,167
--------------------------------------------------------------------------------------------------------------------------------
11,337,881 15,495,459 2,303,372 5,856,733 8,236,758 2,081,501
24,196,334 8,700,875 8,467,918 2,611,185 4,397,693 2,316,192
--------------------------------------------------------------------------------------------------------------------------------
$ 35,534,215 $ 24,196,334 $ 10,771,290 $8,467,918 $ 12,634,451 $4,397,693
================================================================================================================================
</TABLE>
54
<PAGE> 57
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
PACIFIC RIM
INTERNATIONAL EMERGING MARKETS
SUB-ACCOUNT SUB-ACCOUNT TOTAL
--------------------------------------------------------------------------
*PERIOD ENDED *PERIOD ENDED YEAR ENDED YEAR ENDED
DEC. 31/94 DEC. 31/94 DEC. 31/94 DEC. 31/93
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 1,326 $ 1,553 $ 3,271,978 $ 6,807,953
Net realized (loss) gain (89) (873) 595,964 420,019
Unrealized (depreciation)
appreciation of investments
during the year (5,646) (14,100) (9,841,158) 783,868
--------------------------------------------------------------------------
(Decrease) increase in net
assets derived from operations (4,409) (13,420) (5,973,216) 8,011,840
--------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 266,607 162,380 66,498,524 60,156,478
Transfer on death - - (131,091) -
Transfer on terminations (69) (40) (3,502,849) (1,154,625)
Transfer of maturity - - (337,716) (79,253)
Net interfund transfers 604,696 484,111 2,022,593 916,558
--------------------------------------------------------------------------
871,234 646,451 64,549,461 59,839,158
--------------------------------------------------------------------------
Net increase in net
assets 866,825 633,031 58,576,245 67,850,998
NET ASSETS
Beginning of year - - 96,502,971 28,651,973
--------------------------------------------------------------------------
End of year $866,825 $633,031 $155,079,216 $96,502,971
--------------------------------------------------------------------------
<FN>
*Reflects the period from commencement of operations October 4, 1994 through
December 31, 1994.
</TABLE>
55
<PAGE> 58
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1994
1. ORGANIZATION
Separate Account Two 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 currently
comprised of eight investment sub-accounts, one for each series of shares of
Manulife Series Fund, Inc., available for allocation of net premiums under
variable annuity 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
wholly-owned subsidiary of The Manufacturers Life Insurance Company of Michigan
("MLIM"), as a separate investment account on November 3, 1987. MLIM is a life
insurance holding company organized in 1983 under Michigan law and a
wholly-owned subsidiary of The Manufacturers Life Insurance Company ("Manulife
Financial"), a mutual life insurance company based in Toronto, Canada.
The assets of the Separate Account are the property of Manufacturers Life of
America. The portion of the Separate Account's assets applicable to the
Policies will not be chargeable with liabilities arising out of any other
business Manufacturers Life of America may conduct.
In May 1994, Manufacturers Life of America began to market a new variable
annuity, Lifestyle, through Separate Account Two.
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 the eight Funds
of Manulife Series Fund, Inc. and are valued at the reported net asset
values of these Funds. Transactions are recorded on the trade date.
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.
56
<PAGE> 59
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Separate Account operations, it intends to make a charge or establish a
provision within the Separate Account for such taxes.
3. MORTALITY AND EXPENSE RISKS CHARGE
Manufacturers Life of America deducts from the assets of the Separate Account a
daily charge equivalent to an annual rate of 1.0% of the average net value of
the Separate Account's assets for mortality and expense risks.
4. PURCHASES AND SALES OF MANULIFE SERIES FUND, INC. SHARES
Purchases and sales of the shares of common stock of Manulife Series Fund, Inc.
for the year ended December 31, 1994 were $83,423,197 and $15,243,525,
respectively and for the year ended December 31, 1993 were $72,116,950 and
$5,871,626, 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
affiliate, Manulife Financial, 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.
57
<PAGE> 60
Report of Independent Auditors
The Board of Directors
The Manufacturers Life Insurance
Company of America
We have audited the accompanying balance sheets of The Manufacturers Life
Insurance Company of America as of December 31, 1994 and 1993, and the related
statements of operations, changes in capital and surplus, and cash flows for
each of the three years in the period ended December 31, 1994. 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 financial position of The Manufacturers Life
Insurance Company of America at December 31, 1994 and 1993, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles and with reporting practices prescribed or permitted by the
Insurance Department of the State of Michigan.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
February 20, 1995
58
<PAGE> 61
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
---------------------------------------
<S> <C> <C>
ASSETS
Bonds, at amortized cost (market $51,082,395--1994
and $24,120,198--1993) $ 52,149,080 $ 23,375,773
Stocks (note 9) 25,629,580 40,549,278
Short-term investments 10,914,561 797,875
Policy loans 4,494,390 3,023,275
---------------------------------------
Total investments 93,187,611 67,746,201
Cash 5,069,197 8,260,261
Life insurance premiums deferred and uncollected 13,646 31,574
Accrued investment income 796,333 468,968
Separate account assets 302,736,198 174,182,746
Funds receivable on reinsurance assumed 880,284 2,240,200
Receivable for undelivered securities 69,003 353,576
Other assets 333,651 108,260
---------------------------------------
Total assets $403,085,923 $253,391,786
=======================================
LIABILITIES, CAPITAL AND SURPLUS
Aggregate policy reserves $ 29,761,174 $ 13,019,605
Other contract deposits 3,938,425 3,284,211
Interest maintenance and asset valuation reserves 111,566 431,400
Policy and contract claims 94,346 153,709
Provision for policyholder dividends payable 1,385,409 1,016,502
Amounts due to affiliates 7,377,108 7,953,242
Payable for undelivered securities 3,512,459 -
Accrued liabilities 4,773,565 2,694,433
Separate account liabilities 302,736,198 174,182,746
---------------------------------------
Total liabilities 353,690,250 202,735,848
Capital and surplus:
Common shares, par value $1.00; authorized,
5,000,000 shares; issued and outstanding
4,501,855 shares (1,501,854 shares in 1993) 4,501,855 1,501,854
Preferred shares, par value $100; authorized
5,000,000 shares; issued and outstanding
105,000 shares (335,000 shares in 1993) 10,500,000 33,500,000
Surplus (deficit) (15,456,180) 5,804,085
---------------------------------------
Capital paid in excess of par value 49,849,998 9,849,999
Total capital and surplus 49,395,673 50,655,938
---------------------------------------
Total liabilities, capital and surplus $403,085,923 $253,391,786
=======================================
</TABLE>
See accompanying notes.
59
<PAGE> 62
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Life and annuity premiums, principally
reinsurance assumed $ 25,385,628 $ 12,745,981 $ 6,579,233
Other life and annuity considerations 168,075,003 113,332,974 33,268,869
Investment income, net of investment
expenses ($106,908 in 1994,
$89,186 in 1993, $58,423 in 1992) 3,588,629 3,323,962 1,430,454
Amortization of interest maintenance reserve 19,527 32,866 7,707
Commission and expense allowance
on reinsurance ceded 187,694 - -
Foreign exchange gain (loss) 114,728 (197,971) 24,657
Other revenue 54,763 33,935 4,903
-------------------------------------------------------
Total revenues 197,425,972 129,271,747 41,315,823
Benefits paid or provided:
Increase in aggregate policy reserves 16,741,569 5,168,484 3,625,964
Increase in liability for deposit funds 654,214 2,820,520 422,369
Transfers to separate accounts, net 136,896,150 98,601,141 26,789,260
Death benefits 640,875 582,534 286,278
Maturity benefits 580,615 79,253 -
Surrender benefits 3,701,591 2,319,926 1,596,434
-------------------------------------------------------
159,215,014 109,571,858 32,720,305
Insurance expenses:
Management fee 21,222,310 12,378,288 4,861,244
Commissions 23,416,110 14,742,130 5,192,462
General expenses 8,260,467 5,108,104 2,744,475
Commissions and expense allowances
on reinsurance assumed 810,252 329,634 269,141
-------------------------------------------------------
53,709,139 32,558,156 13,067,322
-------------------------------------------------------
Loss before policyholders' dividends
and federal income tax (15,498,181) (12,858,267) (4,471,804)
Dividends to policyholders 1,149,719 837,454 634,652
-------------------------------------------------------
Loss before federal income tax (16,647,900) (13,695,721) (5,106,456)
Federal income tax provision (benefit) - (324,643) 339,539
-------------------------------------------------------
Net loss from operations after policyholders'
dividends and federal income tax (16,647,900) (13,371,078) (5,445,995)
Net realized capital gains (net of capital
gains tax of $0 in 1994, $236,415 in 1993,
and $0 in 1992 and $(554,000) in 1994,
$347,292 in 1993, and $68,401 in 1992
transferred to (from) the interest
maintenance reserve) (3,012,485) 93,618 139,261
-------------------------------------------------------
Net loss from operations $ (19,660,385) $ (13,277,460) $ (5,306,734)
=======================================================
</TABLE>
See accompanying notes.
60
<PAGE> 63
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF SURPLUS
CAPITAL PAR VALUE (DEFICIT) TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 $ 29,001,853 $ 4,000,000 $ 19,650,265 $ 52,652,118
Net loss from operations (5,306,734) (5,306,734)
Issuance of preferred shares 6,000,000 6,000,000
Increase in asset valuation reserve (8,813) (8,813)
Increase in nonadmitted assets (1,025,556) (1,025,556)
Change in liability for reinsurance
in unauthorized companies (7,166) (7,166)
Company's share of increase
in separate account assets 3,240,199 3,240,199
---------------------------------------------------------------------------
Balance, December 31, 1992 35,001,853 4,000,000 16,542,195 55,544,048
Net loss from operations (13,277,460) (13,277,460)
Issuance of common stocks 1 5,849,999 5,850,000
Increase in asset valuation reserve (13,076) (13,076)
Increase in nonadmitted assets (133,575) (133,575)
Change in net unrealized capital
losses (1,592,242) (1,592,242)
Change in liability for reinsurance
in unauthorized companies (29,905) (29,905)
Company's share of increase in
separate account assets 4,308,148 4,308,148
---------------------------------------------------------------------------
Balance, December 31, 1993 35,001,854 9,849,999 5,804,085 50,655,938
Net loss from operations (19,660,385) (19,660,385)
Issuance of common shares 1 19,999,999 20,000,000
Capital restructuring of preference
shares (20,000,000) 20,000,000 -
Increase in asset valuation reserve (55,286) (55,286)
Increase in nonadmitted assets (1,021,357) (1,021,357)
Change in net unrealized capital
losses (425,082) (425,082)
Change in liability for reinsurance
in unauthorized companies (98,155) (98,155)
---------------------------------------------------------------------------
Balance, December 31, 1994 $ 15,001,855 $49,849,998 $(15,456,180) $ 49,395,673
===========================================================================
</TABLE>
See accompanying notes.
61
<PAGE> 64
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums collected, net $ 193,478,637 $ 126,075,035 $ 39,842,600
Policy benefits paid, net (4,982,444) (2,829,812) (1,932,712)
Commissions and other expenses paid (48,141,400) (35,203,997) (9,431,344)
Net investment income 3,343,515 3,197,892 1,356,553
Other income and expenses (1,946,063) (1,592,957) (1,849,180)
Transfers to separate accounts, net (136,950,482) (98,220,292) (26,266,436)
----------------------------------------------------------
Net cash provided by (used in)
operating activities 4,801,763 (8,574,131) 1,719,481
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments 73,187,733 28,248,633 11,975,475
Purchase of investments (91,063,874) (73,688,735) (24,400,135)
----------------------------------------------------------
Net cash used in investing activities (17,876,141) (45,440,102) (12,424,660)
FINANCING ACTIVITIES
Issuance of shares 20,000,000 5,850,000 6,000,000
Surplus withdrawn from separate account - 48,701,076 6,000,000
----------------------------------------------------------
Net cash provided by financing activities 20,000,000 54,551,076 12,000,000
----------------------------------------------------------
Net increase in cash and short-term
investments 6,925,622 536,843 1,294,821
Cash and short-term investments
at beginning of year 9,058,136 8,521,293 7,226,472
----------------------------------------------------------
Cash and short-term investments
at end of year $ 15,983,758 $ 9,058,136 $ 8,521,293
==========================================================
</TABLE>
See accompanying notes.
62
<PAGE> 65
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1994
1. ORGANIZATION
The Manufacturers Life Insurance Company of America (Manufacturers Life of
America or the Company) is a wholly-owned subsidiary of The Manufacturers Life
Insurance Company of Michigan (the Parent), which is in turn a wholly-owned
subsidiary of The Manufacturers Life Insurance Company (Manulife Financial), a
Canadian-based mutual life insurance company.
During 1994, the Company's parent contributed $20,000,000 capital in return for
1 share of the Company's common stock par value $1 with the remaining
$19,999,999 being recorded as contributed surplus. During 1994 the Company
restructured its capital by exchanging 230,000 shares of preferred stock with a
par value of $23,000,000 for 3,000,000 shares of common stock par value
$3,000,000 with the remaining $20,000,000 being recorded as contributed
surplus.
The Parent contributed $5,850,000 in capital in return for 1 share of common
stock during 1993, $6,000,000 in capital in return for 60,000 shares of
preferred stock during 1992.
During 1991, the Company invested $1,800,000 to fund initial branch operations
in Taiwan. This investment in Taiwan was increased by $6,000,000 in 1992 and a
further investment of $5,200,000 in 1993. There was no new funding in 1994 for
the Taiwan branch.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of Manufacturers Life of America have
been prepared in accordance with accounting practices prescribed or permitted
by the Insurance Department of Michigan, which are considered generally
accepted accounting principles for mutual life insurance companies and their
wholly-owned direct and indirect subsidiaries. Such practices differ in
certain respects from generally accepted accounting principles followed by
stock life insurance companies in determining financial position and results of
operations. In general, the differences are: (1) commissions and other costs
of acquiring and writing policies are charged to expense in the year incurred
rather than being amortized over the related policy term; (2) certain
non-admitted assets are excluded from the balance sheet; (3) deferred income
taxes are not provided for timing differences in recording certain items for
financial statement and tax purposes; (4) certain transactions are reflected
directly to surplus rather than reflected in net income from operations (for
example, certain transactions related to the separate accounts); and (5) debt
securities are carried at amortized cost.
63
<PAGE> 66
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
In April 1993, the Financial Accounting Standards Board issued Interpretation
40, Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises The interpretation, which has been amended to
be effective for 1996 annual financial statements and thereafter, will no
longer allow statutory financial statements to be described as being prepared
in conformity with generally accepted accounting principles (GAAP). This will
require life insurance companies to adopt all applicable standards promulgated
by the FASB in any general purpose financial statements such companies may
issue. While GAAP standards have recently been developed for mutual life
insurance companies, the Company has not yet completed the complex and
extensive historical calculations and thus is unable to quantify the effects of
the Interpretation on its financial statements.
All amounts presented are expressed in U.S. Dollars. Certain amounts from
prior periods have been reclassified to conform with current period
presentation.
STOCKS
Stocks are carried at market value.
BONDS
Bonds are carried at amortized cost. Discounts and premiums on investments are
amortized using the effective interest method. Gains and losses on sales of
bonds are calculated on the specific identification method and recognized into
income based on NAIC prescribed formulas. Short-term investments include
investments with maturities of less than one year at the date of acquisition.
Market values disclosed are based on NAIC quoted values.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve and Interest Maintenance Reserve were determined by
NAIC prescribed formulas and are reported as liabilities rather than as
valuation allowances or appropriations of surplus.
POLICY AND CONTRACT CLAIMS
Policy and contract claims are determined on an individual case basis for
reported losses. Estimates of incurred but not reported losses are developed
on the basis of past experience.
64
<PAGE> 67
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Separate Accounts
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity and variable life contracts. For the majority of these
contracts the contractholder, 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.
REVENUE RECOGNITION
Both premium and investment income are recorded when due.
REINSURANCE
Reinsurance premiums 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 and claims are reported net of reinsured
amounts.
POLICY RESERVES
Certain policy reserves are calculated based on statutorily required interest
and mortality assumptions.
3. INVESTMENTS AND INVESTMENT INCOME
The amortized cost and market value of investments in fixed maturities (bonds)
as of December 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
QUOTED OR
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 34,265,152 $ 243,971 $ (441,592) $ 34,067,531
Foreign government securities 7,388,458 - (294,385) 7,094,073
Corporate securities 10,495,470 2,457 (577,136) 9,920,791
---------------------------------------------------------------------
$ 52,149,080 $ 246,428 $(1,313,113) $ 51,082,395
=====================================================================
</TABLE>
Proceeds from sales of investments in debt securities during 1994 were
$43,175,845. Gross gains of $167,738 and gross losses of $1,006,702 were
realized on those sales.
65
<PAGE> 68
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
The amortized cost and market value of investments in fixed maturities (bonds)
as of December 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
QUOTED OR
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities $ 15,473,821 $ 725,851 $ (19,830) $ 16,179,842
Foreign government securities 3,277,886 39,710 (5,316) 3,312,280
Corporate securities 4,624,066 47,402 (43,392) 4,628,076
-------------------------------------------------------------------
$ 23,375,773 $ 812,963 $ (68,538) $ 24,120,198
===================================================================
</TABLE>
Proceeds from sales of investments in debt securities during 1993 were
$28,248,633. Gross gains of $694,800 and gross losses of $17,715 were realized
on those sales.
The amortized cost and market value of fixed maturities at December 31, 1994 by
contractual maturities, 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.
<TABLE>
<CAPTION>
YEARS TO MATURITY AMORTIZED COST MARKET VALUE
----------------- ------------------------------------
<S> <C> <C>
One year or less $ 107,413 $ 108,160
Greater than 1; up to 5 years 5,213,296 5,217,002
Greater than 5; up to 10 years 24,217,449 23,599,525
Due after 10 years 22,610,922 22,157,708
------------------------------------
$ 52,149,080 $ 51,082,395
====================================
</TABLE>
At December 31, 1994, $4,447,934 of bonds at amortized cost were on deposit
with government insurance departments to satisfy regulatory regulations.
66
<PAGE> 69
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
Major categories of net investment income for each year were as follows:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
1994 1993 1992
---------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Dividends; Manulife Series Fund, Inc. $ 1,244,794 $ 1,440,392 $ -
Bond income 1,712,294 1,422,064 1,043,273
Policy loans 236,972 166,514 131,606
Short-term investments 501,477 384,178 313,998
--------------------------------------------------
3,695,537 3,413,148 1,488,877
Investment expenses (106,908) (89,786) (58,423)
--------------------------------------------------
Net investment income $ 3,588,629 $ 3,323,962 $ 1,430,454
==================================================
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company has a formal service agreement with Manulife Financial which can be
terminated by either party upon two months' notice. Under the Agreement, the
Company will pay direct operating expenses incurred each year by Manulife
Financial on behalf of the Company. Services provided under the Agreement
include legal, actuarial, investment, data processing and certain other
administrative services. Costs incurred under this Agreement were $21,326,446
in 1994, $12,467,474 in 1993, and $4,919,667 in 1992. In addition, there were
$7,795,184 agents' bonuses in 1994, $5,363,558 in 1993, and $1,871,799 in 1992
which were allocated to the Company and are included in commissions.
The Company has reinsurance agreements with Manulife Financial which may be
terminated upon the specified notice by either party. These agreements are
summarized as follows:
(a) The Company assumes two blocks of insurance from Manulife Financial under
coinsurance treaties. The Company's risk is limited to $100,000 of
initial face amount per claim plus a pro-rata share of any increase in
face amount.
(b) The Company cedes the risk in excess of $25,000 per life to Manulife
Financial 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 Manulife Financial under the terms of a
stop loss reinsurance agreement.
d) Under the terms of an automatic coinsurance agreement, the Company cedes
its risk on structured settlements to Manulife Financial.
67
<PAGE> 70
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Selected amounts relating to the above treaties reflected in the financial
statements are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------
<S> <C> <C> <C>
Life and annuity premiums assumed $ 25,385,628 $ 12,745,981 $ 6,579,233
Other life and annuity
considerations ceded (437,650) (201,685) (114,505)
Commissions and expense allowances
on reinsurance assumed (810,252) (329,634) (269,141)
Policy reserves assumed 47,672,591 23,070,952 10,799,350
Policy reserves ceded 3,786,647 3,782,156 3,662,930
</TABLE>
During 1992 and 1993 the Company assumed the first $50,000 of initial face
amount on two blocks of business. This resulted in transfers of $5,031,000 and
$10,837,000, respectively, to establish the initial reserves. In 1994 the
treaties were amended to assume the first $100,000 of initial face amount for
the same blocks of business. This resulted in a transfer of $21,477,000 to
establish the additional reserve. Commissions equal to 17% are charged for all
renewed premiums related to these contracts.
During 1994, the Company terminated another treaty resulting in a premium to
Manulife Financial to transfer the reserve of $799,874.
5. FEDERAL INCOME TAX
The Company joins the Parent, The Manufacturers Life Insurance Co. (U.S.A.) and
Manufacturers Reinsurance Limited 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 dated December 29, 1983, the
Company's income tax provision (or benefit) is computed as if the Company filed
a separate income tax return. The Company receives no surtax exemption. 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.
The Company, Parent and The Manufacturers Life Insurance Co. (U.S.A.) have
available consolidated net operating losses of approximately $92,600,000 which
will expire in the years 2007 to 2009, and capital loss carryforwards of
$129,600,000 which will expire in 1999. The losses of the Company, Parent and
The Manufacturers Life Insurance Co. (U.S.A.) may be used to offset the
ordinary and capital gain income of Manufacturers Reinsurance Limited.
However, losses of Manufacturers Reinsurance Limited may not be used to offset
the income of the other members of the consolidated group.
68
<PAGE> 71
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
6. STATUTORY RESTRICTIONS ON DIVIDENDS
The Company is subject to statutory limitations on the payment of dividends to
its Parent. The Company cannot pay dividends during 1995 without the prior
approval of insurance regulatory authorities.
7. REINSURANCE
The Company cedes reinsurance as a party to several reinsurance treaties with
major unrelated insurance companies.
Summary financial information related to these reinsurance activities is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------------------
<S> <C> <C> <C>
Life insurance premiums assumed $ - $ - $28,887,669
Life insurance premiums ceded (218,767) (130,913) (28,809,307)
</TABLE>
During 1992, the Company assumed and ceded a significant block of business on a
yearly renewable term basis. This contract was not renewed in 1993.
8. AGGREGATE POLICY RESERVES
Aggregate policy reserves for life policies including variable life are based
on statutory mortality tables and interest assumptions using either the net
level or commissioners' reserve valuation method. The composition of the
aggregate policy reserves at December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
MORTALITY INTEREST
AGGREGATE RESERVES TABLE RATES
--------------------------------------- --------- --------
1994 1993
---------------------------------------
<S> <C> <C> <C>
$ - $ 758,158 1958 CSO 4%
28,553,885 11,792,874 1980 CSO 4%
(189,080) (62,228) Reinsurance ceded
1,396,369 530,801 Miscellaneous
---------------------------------------
$ 29,761,174 $ 13,019,605
=======================================
</TABLE>
69
<PAGE> 72
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
9. INVESTMENT IN SEPARATE ACCOUNTS
During 1984, the Company initiated plans to market variable life insurance
products through Separate Account One of The Manufacturers Life Insurance
Company of America ("Separate Account One") using Manulife Series Fund, Inc. as
its investment vehicle. Initial capitalization was $15,000,000. Through 1988,
the Company provided an additional capitalization of $6,000,000.
In December 1993, the Company transferred all of its shares, related to seed
money, in Manulife Series Fund, Inc. out of Separate Account One to the General
Account. At December 31, 1994, the $25,629,580 common stock represents the
Company's seed money investment in Manulife Series Fund, Inc.
During 1994, 1993, and 1992, the following dividends were received from
Manulife Series Fund, Inc.:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C>
Separate Account One $ 38,732 $ 1,610,693 $ 3,166,712
Separate Account Two 4,574,620 7,377,861 1,706,218
Separate Account Three 1,490,374 666,141 277,830
Separate Account Four 3,072,376 4,966,559 1,578,932
General Account 1,244,794 1,440,392 -
</TABLE>
Dividends have been reinvested by the Company in Manulife Series Fund, Inc.
During 1993, the Company withdrew $8,000,000 of its seed money and accumulated
earnings from Separate Account One and the Manulife Series Fund, Inc. and
utilized these funds to pay down its intercompany debt.
During 1994, the Company withdrew $13,011,137 of its seed money and accumulated
earnings from the Manulife Series Fund, Inc. and utilized these funds to pay
down its intercompany debt.
70
<PAGE> 73
APPENDIX A
ANNUITY OPTIONS
The Policyowner may elect one of the following annuity options
described below. If no option is specified, annuity payments will be made as a
life annuity with a ten year certain period. Treasury or Labor Department
regulations may require a different annuity option if no option is specified
and may preclude the availability of certain options in connection with
Qualified Policies. There may also be state insurance law requirements that
limit the availability of certain options. The amounts payable under each
option will be no less than amounts determined on the basis of tables contained
in each Policy. Such tables are based on the 1983 Individual Annuity Mortality
Tables and an assumed interest rate of 3% per year.
OPTION 1: ANNUITY CERTAIN -- payments in equal
installments for a period of not less than
five years and not more than twenty years.
OPTION 2(A): LIFE ANNUITY WITHOUT REFUND -- payments in
equal installments during the lifetime of an
Annuitant. Upon the death of the Annuitant,
payments will cease. Since there is no
guarantee that any minimum number of payments
will be made, the payee may receive only one
payment if he or she dies before the date the
second payment is due.
OPTION 2(B): LIFE ANNUITY WITH CERTAIN PERIOD -- payments
in equal installments during the lifetime of
an Annuitant and if the Annuitant dies before
installments have been paid for a designated
period, either five, ten or twenty years,
payments will continue for the remainder of
the period selected.
OPTION 2(C): LIFE ANNUITY WITH INSTALLMENT REFUND --
payments in equal installments during the
lifetime of an Annuitant and if the Annuitant
dies before the total installments paid equal
the Policy Value applied to provide the
annuity, payments will continue until the
Policy Value has been paid.
OPTION 3(A): JOINT AND SURVIVOR ANNUITY WITHOUT REFUND --
payments in equal installments during the
lifetime of two Annuitants with payments
continuing in full amount to the survivor
upon death of either. Since there is no
guarantee that any minimum number of payments
will be made, the payees may receive only one
payment if they both die before the date the
second payment is due.
OPTION 3(B): JOINT AND SURVIVOR ANNUITY WITH CERTAIN
PERIOD -- payments in equal installments
during the lifetime of two Annuitants and if
both die before installments have been paid
for a ten year period, payments will continue
for the remainder of the period.
Under Options 2(b), 2(c) and 3(b), upon the death of the Annuitant or second to
die of joint Annuitants, the beneficiary may elect to receive the commuted
value of any remaining payments. Any such commutation will be at the interest
rate used to determine the amount of the annuity payments plus 1/2%.
71
<PAGE> 74
APPENDIX B
SAMPLE CALCULATIONS OF MARKET VALUE ADJUSTMENTS
AND WITHDRAWAL CHARGES(1)
MVA FORMULA
The MVA factor is equal to:
(1+G) N
------- -1
(1+C)
EXAMPLE ONE: NEGATIVE MVA AND NO WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Transfer
Time remaining in the Guarantee Period: 30 months, 5 days
Guaranteed Rate: 6%
Current Rate for new 3-year deposits: 8%
Transfer Requested: $10,000
Withdrawal Charge: 0%
Other Charges: $35 transfer charge
In this example,
N = 30/12 = 2.5
G = .06
C = .08
The MVA factor equals:
1.06 (2.5) - 1 = -0.0457
1.08
Manufacturers Life of America will deduct a Gross Withdrawal Amount of
$10,000.00.
From this, Manufacturers Life of America will deduct the transfer charge of
$35. This will leave $9,965.00.
The amount of the MVA adjustment would be $9,965.00 x -0.0457, or -$455.40.
The cash transferred to another account(s) would be $9,965.00 -$455.40, or
$9,509.60.
(1) The assumed fixed interest rates used in the examples in this Appendix
illustrate the operation of the Market Value Adjustment and are not
intended to reflect the levels of interest rates currently offered on
the Fixed Accounts.
72
<PAGE> 75
EXAMPLE TWO: POSITIVE MVA AND NO WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Partial Withdrawal
Time remaining in the Guarantee Period: 47 months
Guaranteed Rate: 6%
Current Rate for new 3-year deposits: 4%
Current Rate for new 4-year deposits: Not Offered
Current Rate for new 5-year deposits: 6%
Cash Withdrawal Requested: $10,000
Withdrawal Charge: 0%
Other Charges: None
In this example,
N = 47/12 = 3.91677
G = .06
C = .05
The time remaining in the Guarantee Period, rounded to the next full year, is 4
years. Since the 4-year deposit is not available, interpolate between the
3-year rate and the 5-year rate, to get a rate of 5%.
The MVA factor equals:
1.06 (3.91677) - 1
1.05
= 0.0378
We will take out a Gross Withdrawal Amount of $9,635.77
The amount of the MVA adjustment would be $9,635.77 x 0.0378, or $364.23.
The cash received by the Policyowner would be $9,635.77 + $364.23, or $10,000.
EXAMPLE THREE: WITHDRAWAL CHARGE AND NO MVA
Assume the following:
Type of Account: Variable
Type of Transaction: Partial Withdrawal
Cash Withdrawal Requested: $10,000
Withdrawal Charge: 6%*
Other Charges: None
The Gross Withdrawal Amount will be $10,638.30.
The withdrawal charge will be $10,638.30 x 6%, or $638.30.
The cash received by the Policyowner would be $10,638.30 -- $638.30, or
$10,000.
* In this example, Manufacturers Life of America assumes that a 10% free
withdrawal has already been taken earlier in the year, and that the
withdrawal charge percentage applies to the total Policy Value. In
other situations the withdrawal charge may not apply to the total
Policy Value.
73
<PAGE> 76
EXAMPLE FOUR: NEGATIVE MVA AND WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Surrender
Time remaining in the Guarantee Period: 30 months, 5 days
Guaranteed Rate: 6%
Current Rate for new
3-year deposits: 8%
Policy Value: $10,000
Withdrawal Charge: 6%*
Other Charges: $30 record-keeping charge
In this example,
N = 30/12 = 2.5
G = .06
C = .08
The MVA factor equals:
1.06 (2.5) - 1
1.08
= - 0.0457
On a surrender, the Gross Withdrawal Amount is the Policy Value, or $10,000 in
this example.
Manufacturers Life of America will deduct the record-keeping charge of $30,
leaving $9,970.
The amount of the MVA adjustment would be $9,970 x - 0.0457, or $455.63.
This leaves an amount of $9,970.00 - $455.63, or $9,514.37.
The withdrawal charge will be $9,514.37 x 6%, or $570.86.
The cash received by the Policyowner would be $9,514.37 - $570.86, or
$8,943.51.
* In this example, Manufacturers Life of America assumes that a 10% free
withdrawal has already been taken earlier in the year, and that the
withdrawal charge percentage applies to the total Policy Value. In
other situations the withdrawal charge may not apply to the total
Policy Value.
74
<PAGE> 77
PROSPECTUS
MANULIFE SERIES FUND, INC.
with Executive Offices at
200 Bloor Street East
Toronto, Ontario, Canada M4W 1E5
(416) 926-6100
Manulife Series Fund, Inc. (the "Company"), a Maryland corporation, is a
diversified open-end management investment company, commonly known as a mutual
fund. Shares of the Company are not offered directly to the public but are
sold only to The Manufacturers Life Insurance Company of America
("Manufacturers Life of America") in connection with variable contracts issued
by Manufacturers Life of America. Such variable contracts are described in
their respective prospectuses. The Company offers the following separate
investment portfolios, referred to herein as "Funds," which have the following
investment objectives:
EMERGING GROWTH EQUITY FUND -- To achieve growth of capital by investing
primarily in equity securities of companies believed to offer growth potential
over both the intermediate and the long term.
BALANCED ASSETS FUND -- To achieve intermediate and long-term growth through
capital appreciation and income by investing in both debt and equity
securities.
CAPITAL GROWTH BOND FUND -- To achieve growth of capital by investing in
medium-grade or better debt securities, with income as a secondary
consideration.
MONEY-MARKET FUND -- To provide maximum current income consistent with capital
preservation and liquidity by investing in high-quality money-market
instruments.
COMMON STOCK FUND -- 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.
REAL ESTATE SECURITIES FUND -- To achieve a combination of long-term capital
appreciation and satisfactory current income by investing in real estate
related equity and debt securities.
INTERNATIONAL FUND -- To achieve long-term growth of capital by investing in a
diversified portfolio comprised primarily of common stocks and equity-related
securities of corporations domiciled in countries other than the U.S. and
Canada.
PACIFIC RIM EMERGING MARKETS FUND -- To achieve long-term growth of capital by
investing in a diversified portfolio comprised primarily of common stocks and
equity-related securities of the countries of the Pacific Rim region.
This Prospectus sets forth concisely the information about the Company that a
prospective purchaser of a variable contract from The Manufacturers Life
Insurance Company of America should know before purchasing such a contract.
Please read this Prospectus and retain it for future reference. Additional
information about the Company has been filed with the Securities and Exchange
Commission and is available upon request and without charge by writing to the
address or calling the number listed above and requesting the "Statement of
Additional Information for Manulife Series Fund, Inc." (hereinafter "Statement
of Additional Information"). The Statement of Additional Information is
incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE MONEY-MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT.
MANUFACTURERS ADVISER CORPORATION
INVESTMENT MANAGER
The date of this Prospectus and Statement of Additional Information is May 1,
1995.
<PAGE> 78
MANULIFE SERIES FUND, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company 2
Shareholder Transaction Expenses 2
Condensed Financial Information 4
Investment Objectives, Policies And Risks 11
Emerging Growth Equity Fund 11
Balanced Assets Fund 11
Capital Growth Bond Fund 12
Money-Market Fund 12
Common Stock Fund 13
Real Estate Securities Fund 13
International Fund And Pacific Rim Emerging Markets Fund 14
Investment Techniques Of The International Fund And Pacific Rim
Emerging Markets Fund 16
Investment Restrictions 17
Foreign Securities 18
Lending Securities 18
Management Of The Funds 19
Investment Management Arrangements 19
Expenses 22
Fees 22
Capital Stock 22
Taxes, Dividends And Distributions 22
Purchases And Redemptions Of Shares 22
Determination Of Net Asset Value 23
Custodian 23
Performance Data 24
</TABLE>
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INVESTMENT MANAGER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
1
<PAGE> 79
THE COMPANY
Manulife Series Fund, Inc. (the "Company") is a diversified, open-end
management investment company incorporated under Maryland law on July 22, 1983.
The Company was established to serve as the underlying investment medium for
variable life insurance and variable annuity products issued by The
Manufacturers Life Insurance Company of America ("Manufacturers Life of
America"). Both the Company and Manufacturers Life of America are indirect
wholly-owned subsidiaries of The Manufacturers Life Insurance Company
("Manufacturers Life"). Manufacturers Life is a mutual life insurance company
based in Toronto, Canada which, together with its subsidiaries, ranks among the
largest such companies in North America as measured by assets.
As the underlying investment medium for Manufacturers Life of America variable
products, the Company provides a range of investment alternatives. Currently,
the Company offers the following investment portfolios, referred to herein as
"Funds" -- the Emerging Growth Equity Fund, the Balanced Assets Fund, the
Capital Growth Bond Fund, the Money-Market Fund, the Common Stock Fund, the
Real Estate Securities Fund, the International Fund, and the Pacific Rim
Emerging Markets Fund. As described in the attached Prospectus for such
variable product, policyowners may allocate their net premiums among the Funds.
Because the value of certain benefits under the Policies will vary with the
investment performance of the Funds and because the type of investment and the
level of risk preferred by policyowners will vary, policyowners should
carefully review the investment objective, policies and risks of each Fund as
described in this Prospectus.
While policyowners will direct the investment of their net premiums, shares of
the Company are sold only to Manufacturers Life of America. Consequently, the
terms "shareholder" and "shareholders" in this Prospectus refer only to
Manufacturers Life of America. However, Manufacturers Life of America will
vote shares of the Company in accordance with instructions received from
policyowners. Shares for which no timely instructions from policyowners are
received, including shares not attributable to variable products, will be voted
by Manufacturers Life of America in the same proportion within those class of
shares for which instructions are received.
Subject to the supervision of the Company's Board of Directors, Manufacturers
Adviser Corporation (the "Manager") will serve as the Company's investment
manager. As such, the Manager will administer the Funds and direct the
investment and reinvestment of Fund assets.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
MANAGEMENT FEES
International Fund 0.85%*
Pacific Rim Emerging Markets Fund 0.85%*
All Other Funds 0.50%
OTHER EXPENSES
International Fund 0.50%
Pacific Rim Emerging Markets Fund 0.65%
TOTAL FUND OPERATING EXPENSES
International Fund 1.35%
Pacific Rim Emerging Markets Fund 1.50%
All Other Funds 0.50%
<FN>
* Management fee would drop to 0.70% on assets over $100 million.
</TABLE>
2
<PAGE> 80
EXAMPLE
-------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Fund $14 $43 $74 $162
Pacific Rim Emerging Markets Fund $15 $47 $82 $179
All Other Funds $5 $16 $28 $63
</TABLE>
The purpose of this table is to assist investors in understanding the
expenses an investor in the Company will bear. The management fee and total
fund operating expenses are the same for each Fund. Variable contracts issued
by Manufacturers Life of America provide for charges not reflected in the above
table.
3
<PAGE> 81
CONDENSED FINANCIAL INFORMATION
The following condensed financial information for the years and periods
mentioned below has been derived from financial statements audited by Ernst &
Young LLP, independent auditors, whose report with respect thereto appears in
the Statement of Additional Information. Further information about the
performance of the Company is contained in the Company's annual report, which
may be obtained without charge by calling or writing to the Company.
Performance information shown in this section does not reflect expenses that
apply to the separate account or the related insurance policies. Inclusion of
these charges would reduce the performance figures for all periods shown.
Selected data for a share of capital stock outstanding for the periods
indicated.
<TABLE>
<CAPTION>
EMERGING GROWTH EQUITY FUND
---------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 19.42 $ 17.76 $ 16.18 $ 9.95 $12.20
------- ------- ------- ------ ------
Income From Investment Operations:
Net investment income (loss) 0.01 (0.01) (0.02) -- 0.17
Net realized and unrealized gain (loss)
on investments (0.81) 4.16 3.51 7.08 (1.98)
------- ------- ------- ------ ------
Total from investment operations (0.80) 4.15 3.49 7.08 (1.81)
------- ------- ------- ------ ------
Dividends:
Net investment income -- -- -- -- (0.17)
Net realized gain (0.07) (2.49) (1.91) (0.85) (0.27)
(0.07) (2.49) (1.91) (0.85) (0.44)
------- ------- ------- ------ ------
Net asset value end of period $ 18.55 $ 19.42 $ 17.76 $16.18 $ 9.95
======= ======= ======= ====== ======
Net assets end of period ('000s) $97,379 $55,767 $18,504 $9,822 $4,137
Aggregate return on share outstanding
during entire period (4.10)% 23.89% 21.82% 71.34% (14.90)%
Significant Ratios:
Portfolio turnover 69.40% 92.95% 126.62% 87.63% 100.86%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income to
average net assets 0.07% (0.04)% (0.14)% 0.02% 1.55%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets (3.02) 23.61% 23.82% 50.44% (16.10)%
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 8.75 $ 7.61 $10.45 $12.58 $10.67
------- ------- ------- ------ ------
Income From Investment Operations:
Net investment income (loss) 0.20 0.14 0.01 0.03 0.10
Net realized and unrealized gain (loss)
on investments 3.46 1.16 0.18 (0.78) 2.32
------- ------- ------- ------ ------
Total from investment operations 3.66 1.30 0.19 (0.75) 2.42
------- ------- ------ ------ ------
Dividends:
Net investment income (0.21) (0.12) (0.01) (0.03) (0.40)
Net realized gain -- (0.04) (3.02) (1.35) (0.11)
(0.21) (0.16) (3.03) (1.38) (0.51)
------- ------- ------- ------ ------
Net asset value end of period $12.20 $ 8.75 $ 7.61 $10.45 $12.58
====== ====== ====== ====== ======
Net assets end of period ('000s) $3,859 $2,682 $2,012 $1,377 $1,403
Aggregate return on share outstanding
during entire period 42.19% 16.94% (4.88)% (6.59)% 23.38%
Significant Ratios:
Portfolio turnover 116.14% 190.06% 196.48% 247.88% 64.52%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20%
Ratio of net investment income to
average net assets 1.95% 1.54% 0.06% 0.26% 0.81%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets 34.63% 14.77% (16.68)% (6.68)% 20.63%
</TABLE>
4
<PAGE> 82
<TABLE>
<CAPTION>
COMMON STOCK FUND
-----------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value
beginning of period $ 14.68 $ 13.73 $13.33 $10.48
------- ------- ------ ------
Income From Investment Operations:
Net investment income (loss) 0.20 0.19 0.18 0.21
------- ------- ------ ------
Net realized and unrealized gain
(loss) on investments (0.81) 1.64 0.61 2.94
------- ------- ------ ------
Total from investment operations (0.61) 1.83 0.79 3.15
Dividends:
Net investment income (0.20) (0.19) (0.18) (0.21)
Net realized gain (0.51) (0.69) (0.21) (0.09)
------- ------- ------ ------
(0.71) (0.88) (0.39) (0.30)
------- ------- ------ ------
Net asset value:
end of period $ 13.36 $ 14.68 $13.73 $13.33
======= ======= ====== ======
Net assets
end of period ('000s) $34,829 $21,651 $9,708 $5,480
Aggregate return on share
outstanding during entire period (4.19)% 13.39% 6.07% 30.18%
Significant Ratios:
Portfolio turnover 84.78% 88.23% 47.60% 53.01%
Ratio of expenses to average
net assets 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income
to average net assets 1.53% 1.39% 1.51% 1.78%
Ratio of net investment income
and realized and unrealized
gain (loss) to average net assets (4.49)% 11.50% 7.94% 25.41%
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED 04/30/87-
12/31/90 12/31/89 12/31/88 12/31/87+
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value
beginning of period $ 11.25 $ 8.91 $ 8.36 $ 9.97
------- ------- ------- -------
Income From Investment Operations:
Net investment income (loss) 0.32 0.36 0.28 0.15
------- ------- ------- -------
Net realized and unrealized gain
(loss) on investments (0.77) 2.34 0.56 (1.63)
------- ------- ------- -------
Total from investment operations (0.45) 2.70 0.84 (1.48)
Dividends:
Net investment income (0.32) (0.36) (0.29) (0.13)
Net realized gain -- -- -- --
------- ------- ------- -------
(0.32) (0.36) (0.29) (0.13)
------- ------- ------- -------
Net asset value:
end of period $ 10.48 $ 11.25 $ 8.91 $ 8.36
======= ======= ======= =======
Net assets
end of period ('000s) $ 2,873 $ 2,140 $ 1,173 $ 942
Aggregate return on share
outstanding during entire period (4.06)% 30.66% 9.86% (14.98)%
Significant Ratios:
Portfolio turnover 120.84% 120.92% 172.13% 54.87%
Ratio of expenses to average
net assets 0.50% 0.50% 0.50% 0.50%**
Ratio of net investment income
to average net assets 3.06% 3.48% 3.16% 2.28%**
Ratio of net investment income
and realized and unrealized
gain (loss) to average net assets (3.40)% 23.77% 9.13% (24.73)%
</TABLE>
5
<PAGE> 83
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND
---------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $14.07 $12.75 $10.92 $ 8.16 $ 9.24 $ 9.12
------ ------ ------ ------ ------ ------
Income From Investment Operations:
Net investment income (loss) 0.55 0.47 0.45 0.53 0.67 0.68
Net realized and unrealized gain
(loss) on investments (0.93) 2.38 1.83 2.76 (1.09) 0.15
------- ------- ------ ------ ------ ------
Total from investment operations (0.38) 2.85 2.28 3.29 (0.42) 0.83
------- ------- ------ ------ ------ ------
Dividends:
Net investment income (0.27) (0.47) (0.45) (0.53) (0.66) (0.71)
Net realized gain (0.08) (1.06) -- -- -- --
------- ------- ------ ------ ------ ------
(0.35) (1.53) (0.45) (0.53) (0.66) (0.71)
------- ------- ------ ------ ------ ------
Net asset value end of period $ 13.34 $ 14.07 $12.75 $10.92 $ 8.16 $ 9.24
======= ======= ====== ====== ====== ======
Net assets end of period ('000s) $42,571 $24,106 $7,273 $4,120 $2,771 $2,875
Aggregate return on share
outstanding during entire period (2.76)% 22.61% 21.29% 41.10% (4.53)% 9.23%
Significant Ratios:
Portfolio turnover 35.60% 143.00% 70.71% 40.29% 24.37% 15.09%
Ratio of expenses to average
net assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income
to average net assets 4.26% 3.93% 4.13% 5.40% 7.74% 7.29%
Ratio of net investment income
and realized and unrealized
gain (loss) to average net assets (4.48)% 15.23% 20.29% 33.48% (4.73)% 8.53%
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND
---------------------------
YEAR PERIOD
ENDED 04/30/87-
12/31/88 12/31/87+
-------- --------
<S> <C> <C>
Net asset value
beginning of period $ 8.76 $10.02
------ ------
Income From Investment Operations:
Net investment income (loss) 0.70 0.48
Net realized and unrealized gain
(loss) on investments 0.37 (1.30)
------- -------
Total from investment operations 1.07 (0.82)
------- -------
Dividends:
Net investment income (0.71) (0.44)
Net realized gain -- --
------- -------
(0.71) (0.44)
------- -------
Net asset value end of period $ 9.12 $ 8.76
======= =======
Net assets end of period ('000s) $2,488 $2,007
Aggregate return on share
outstanding during entire period 11.72% (8.42)%
Significant Ratios:
Portfolio turnover 23.15% 10.27%
Ratio of expenses to average
net assets 0.50% 0.50%**
Ratio of net investment income
to average net assets 7.18% 7.34%**
Ratio of net investment income
and realized and unrealized
gain (loss) to average net assets 10.52% (13.19)%
<FN>
+ Effective Date of Registration under the Securities Act of 1933.
** Annualized.
</TABLE>
6
<PAGE> 84
<TABLE>
<CAPTION>
BALANCED ASSETS FUND
--------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 15.18 $ 14.52 $ 14.51 $ 12.35 $ 12.87
------- ------- ------- ------ -------
Income From Investment Operations:
Net investment income (loss) 0.48 0.44 0.51 0.60 0.69
Net realized and unrealized gain (loss)
on investments (1.11) 1.29 0.37 2.22 (0.50)
------- ------- ------- ------- -------
Total from investment operations (0.63) 1.73 0.88 2.82 0.19
------- ------- ------- ------- -------
Dividends:
Net investment income (0.48) (0.44) (0.51) (0.60) (0.71)
Net realized gain (0.30) (0.63) (0.36) (0.06) --
------- ------- ------- ------- -------
Total dividends (0.78) (1.07) (0.87) (0.66) (0.71)
------- ------- ------- ------- -------
Net asset value end of period $ 13.77 $ 15.18 $ 14.52 $ 14.51 $ 12.35
======= ======= ======= ======= =======
Net assets end of period ('000s) $74,737 $58,156 $27,733 $18,515 $12,733
Aggregate return on share outstanding
during entire period (4.15)% 11.99% 6.21% 23.36% 1.62%
Significant Ratios:
Portfolio turnover 86.42% 96.62% 75.83% 41.95% 116.03%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income to
average net assets 3.37% 3.08% 3.75% 4.52% 5.71%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets (4.11)% 10.09% 6.99% 20.84% 2.04%
</TABLE>
<TABLE>
<CAPTION>
BALANCED ASSETS FUND
--------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 11.22 $11.09 $14.11 $12.85 $11.57
------- ------ ------ ------ ------
Income From Investment Operations:
Net investment income (loss) 0.75 0.61 0.56 0.68 0.79
Net realized and unrealized gain (loss)
on investments 1.61 0.22 (0.28) 1.49 1.95
------- ------ ------ ---- ----
Total from investment operations 2.36 0.83 0.28 2.17 2.74
------- ------ ------ ---- ----
Dividends:
Net investment income (0.71) (0.67) (0.67) (0.66) (1.13)
Net realized gain -- (0.03) (2.63) (0.25) (0.33)
------- ------ ------ ------ -----
Total dividends (0.71) (0.70) (3.30) (0.91) (1.46)
------- ------ ------ ------ -----
Net asset value end of period $ 12.87 $11.22 $11.09 $14.11 $12.85
======= ====== ====== ====== ======
Net assets end of period ('000s) $10,412 $8,004 $7,872 $5,285 $4,435
Aggregate return on share outstanding
during entire period 21.33% 7.61% (1.77)% 17.35% 27.30%
Significant Ratios:
Portfolio turnover 131.31% 132.32% 127.46% 81.42% 36.46%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20%
Ratio of net investment income to
average net assets 6.06% 5.42% 3.60% 4.83% 6.73%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets 18.69% 7.40% (5.59)% 15.18% 24.70%
</TABLE>
7
<PAGE> 85
<TABLE>
<CAPTION>
CAPITAL GROWTH BOND FUND
------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 11.33 $ 11.12 $ 11.47 $ 10.62 $ 10.82
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income (loss) 0.72 0.65 0.77 0.83 0.88
Net realized and unrealized gain
(loss) on investments (1.22) 0.51 (0.11) 0.85 (0.21)
------- ------- ------- ------- -------
Total from investment operations (0.50) 1.16 0.66 1.68 0.67
------- ------- ------- ------- -------
Dividends:
Net investment income (0.72) (0.65) (0.78) (0.83) (0.87)
Net realized gain (0.01) (0.30) (0.23) -- --
------- ------- ------- ------- -------
Total dividends (0.73) (0.95) (1.01) (0.83) (0.87)
------- ------- ------- ------- -------
Net asset value end of period $ 10.10 $ 11.33 $ 11.12 $ 11.47 $ 10.62
======= ======= ======= ======= =======
Net assets end of period ('000s) $33,618 $41,183 $30,695 $29,326 $24,818
Aggregate return on share outstanding
during entire period (4.49)% 10.56% 5.89% 16.38% 6.58%
Significant Ratios:
Portfolio turnover 79.04% 94.75% 153.05% 19.60% 40.73%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income to
average net assets 6.29% 5.69% 6.76% 7.54% 8.25%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets (5.23)% 9.28% 5.78% 15.35% 6.51%
</TABLE>
<TABLE>
<CAPTION>
CAPITAL GROWTH BOND FUND
------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 10.32 $ 10.53 $ 13.09 $ 12.62 $ 11.53
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income (loss) 0.90 0.92 0.99 1.04 1.15
Net realized and unrealized gain
(loss) on investments 0.50 (0.17) (1.12) 1.46 1.48
------- ------- ------- ------- -------
Total from investment operations 1.40 0.75 (0.13) 2.50 2.63
------- ------- ------- ------- -------
Dividends:
Net investment income (0.90) (0.93) (1.20) (1.03) (1.53)
Net realized gain -- (0.03) (1.23) (1.00) (0.01)
------- ------- ------- ------- -------
Total dividends (0.90) (0.96) (2.43) (2.03) (1.54)
------- ------- ------- ------- -------
Net asset value end of period $ 10.82 $ 10.32 $ 10.53 $ 13.09 $ 12.62
======= ======= ======= ======= =======
Net assets end of period ('000s) $22,768 $19,722 $18,095 $17,674 $14,481
Aggregate return on share outstanding
during entire period 13.88% 7.14% (1.69)% 22.37% 26.13%
Significant Ratios:
Portfolio turnover 68.61% 29.36% 55.80% 42.57% 286.36%
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20%
Ratio of net investment income to
average net assets 8.34% 8.48% 8.13% 8.10% 9.96%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets 12.83% 6.88% (1.68)% 19.72% 23.91%
</TABLE>
8
<PAGE> 86
<TABLE>
<CAPTION>
MONEY-MARKET FUND
-----------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $ 10.23 $ 10.22 $ 10.21 $10.21 $10.16
------- ------- ------- ------ ------
Income From Investment Operations:
Net investment income (loss) 0.39 0.27 0.34 0.57 0.78
Net realized and unrealized gain
(loss) on investments -- -- -- -- --
------- ------- ------- ------ ------
Total from investment operations 0.39 0.27 0.34 0.57 0.78
Dividends:
Net investment income (0.36) (0.26) (0.33) (0.57) (0.73)
Net realized gain -- -- -- -- --
------- ------- ------- ------ ------
Total dividends (0.36) (0.26) (0.33) (0.57) (0.73)
------- ------- ------- ------ ------
Net asset value end of period $ 10.26 $ 10.23 $ 10.22 $10.21 $10.21
======= ======= ======= ====== ======
Net assets end of period ('000s) $24,384 $13,860 $10,825 $8,615 $8,606
Aggregate return on share outstanding
during entire period 3.89% 2.73% 3.40% 5.60% 7.82%
Significant Ratios:
Portfolio turnover None None None None None
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50%
Ratio of net investment income to
average net assets 3.84% 2.67% 3.25% 5.45% 7.41%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets 3.84% 2.67% 3.25% 5.45% 7.41%
</TABLE>
<TABLE>
<CAPTION>
MONEY-MARKET FUND
-----------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period $10.15 $10.02 $10.14 $10.19 $10.62
------ ------ ------ ------ ------
Income From Investment Operations:
Net investment income (loss) 0.88 0.89 0.58 0.60 0.71
Net realized and unrealized gain
(loss) on investments -- -- -- -- --
------ ------ ------ ------ ------
Total from investment operations 0.88 0.89 0.58 0.60 0.71
Dividends:
Net investment income (0.87) (0.76) (0.70) (0.65) (1.14)
Net realized gain -- -- -- -- --
------ ------ ------ ------ ------
Total dividends (0.87) (0.76) (0.70) (0.65) (1.14)
------ ------ ------ ------ ------
Net asset value end of period $10.16 $10.15 $10.02 $10.14 $10.19
====== ====== ====== ====== ======
Net assets end of period ('000s) $6,037 $5,259 $1,545 $1,198 $1,134
Aggregate return on share outstanding
during entire period 8.88% 7.06% 5.67% 6.07% 7.13%
Significant Ratios:
Portfolio turnover None None None None None
Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20%
Ratio of net investment income to
average net assets 8.43% 6.94% 5.50% 5.89% 6.89%
Ratio of net investment income and
realized and unrealized gain (loss)
to average net assets 8.43% 6.94% 5.50% 5.89% 6.89%
</TABLE>
9
<PAGE> 87
<TABLE>
<CAPTION>
INTERNATIONAL FUND
------------------
PERIOD 10/04/94-12/31/94+
-------------------------
<S> <C>
Net asset value beginning of period $ 10.00
-------
Income From Investment Operations:
Net investment income (loss) 0.02
Net realized and unrealized gain (loss) on investments (0.18)
-------
Total from investment operations (0.16)
Dividends:
Net investment income (0.02)
Net realized gain 0.00
-------
(0.02)
-------
Net asset value end of period $ 9.82
Net assets end of period ('000s) $11,290
Aggregate return on share outstanding during entire period (1.54)%**
Significant Ratios:
Portfolio turnover 0.00%
Ratio of expenses to average net assets 1.35%**
Ratio of net investment income to average net assets 1.31%**
Ratio of net investment income and realized and unrealized
gain (loss) to average net assets (6.28)%**
</TABLE>
<TABLE>
<CAPTION>
PACIFIC RIM
EMERGING MARKETS FUND
---------------------
PERIOD 10/04/94-12/31/94+
-------------------------
<S> <C>
Net asset value beginning of period $10.00
------
Income From Investment Operations:
Net investment income (loss) 0.04
Net realized and unrealized gain (loss) on investments (0.59)
------
Total from investment operations (0.55)
------
Dividends:
Net investment income (0.04)
Net realized gain 0.00
------
(0.04)
------
Net asset value end of period $ 9.41
Net assets end of period ('000s) $7,657
Aggregate return on share outstanding during entire period (5.63)%**
Significant Ratios:
Portfolio turnover 0.00%
Ratio of expenses to average net assets 1.65%**
Ratio of net investment income to average net assets 1.84%**
Ratio of net investment income and realized and unrealized
gain (loss) to average net assets (23.41)%**
<FN>
+ Inception date October 4, 1994.
** Annualized.
</TABLE>
10
<PAGE> 88
INVESTMENT OBJECTIVES, POLICIES AND RISKS
Each Fund has a different investment objective which it pursues through
separate investment policies as described below. The differences in objectives
and policies among the Funds can be expected to affect the return of each Fund
and the degree of market and financial risk to which each Fund is subject.
The investment objective of each Fund discussed below is a fundamental policy
of that Fund and may not be changed without the approval of the holders of a
majority of the outstanding shares of such Fund. The policies by which a Fund
seeks to achieve its investment objective, however, are not fundamental and may
be changed by the Board of Directors of the Company without the approval of the
shareholders. There can be no assurance that the investment objective of any
Fund will be achieved. The Funds are subject to varying degrees of financial
and market risk. Financial risk refers to the ability of an issuer of a debt
security to pay principal and interest on such security and to the earnings
stability and overall financial soundness of an issuer of an equity security;
market risk refers to the volatility of the reaction of the price of a security
to changes in conditions in the securities markets in general and, with
particular reference to debt securities, changes in the overall level of
interest rates.
EMERGING GROWTH EQUITY FUND
The investment objective of the Emerging Growth Equity Fund is to achieve
growth of capital by investing primarily in equity securities of companies
believed to offer growth potential over both the intermediate and the long
term. Current income is not a significant consideration.
In pursuit of its objective, the Emerging Growth Equity Fund will invest
primarily in common stocks or in securities convertible into or carrying rights
or warrants to purchase common stock or to participate in earnings. The Fund
will not purchase independent warrants if they are not publicly traded and if
any such purchase would cause more than 2% of the value of its total assets to
be invested in such warrants. In selecting investments, emphasis will be
placed on securities of progressive companies with aggressive and competent
managements. A substantial portion of the Fund's assets may be invested in
emerging growth companies, which at the time of the Fund's investment may be
paying no dividends to their shareholders. Emerging growth companies are
companies believed by management to have above-average prospects for growth as
a result of their providing products or services in emerging industries or
sub-industries.
Investments will be made primarily in securities listed on national securities
exchanges, but the Fund may purchase securities traded in the U.S.
over-the-counter market. When, in the opinion of management, market or
economic conditions warrant a defensive posture, the Fund may place all or a
portion of its assets in fixed-income securities. The Fund may also maintain a
portion of its assets in cash or short-term debt securities pending selection
of particular long-term investments. The Fund may purchase securities on a
forward-commitment, when-issued or delayed-delivery basis. For a discussion of
these securities, please see the Statement of Additional Information.
Emerging growth companies may have limited product lines, market or financial
resources, or they may be dependent upon a small management group. An
investment in the Emerging Growth Equity Fund may therefore involve greater
financial risk than is customarily associated with less aggressive companies.
In addition, the Fund may be subject to relatively high levels of market risk.
The securities of aggressive growth companies may be subject to more abrupt or
erratic market movements than other companies or the market averages in
general. Because shares of the Emerging Growth Equity Fund may experience
above-average fluctuations in net asset value, they should be considered as
long-term investments.
BALANCED ASSETS FUND
The investment objective of the Balanced Assets Fund is to achieve intermediate
and long-term growth through capital appreciation and income by investing in
both debt and equity securities.
In pursuit of its objective, the Balanced Assets Fund will invest in common
stocks, preferred stocks or bonds (which may or may not be convertible into or
carry rights to purchase common stock or to participate in earnings) and other
long-term and short-term debt securities. Common stocks will be held for
possible growth of capital as well as for income, while preferred stocks and
debt securities will be held for income and possible capital appreciation as a
result of a decline in the level of prevailing interest rates. The Fund will
maintain at all times a balance between debt securities or preferred stocks, on
the one hand, and common stocks, on the other. At least 25% of the Fund's
assets will be invested in each of the two basic categories. Investments will
be made primarily in securities listed on national securities exchanges, but
the Fund may purchase securities traded in the U.S. over-the-counter market.
The Fund may also maintain a portion of its assets in cash or short-term
debt securities pending selection of particular long-term investments.
The Fund may purchase securities on a forward-commitment, when-issued or
delayed-delivery basis. For a discussion of these securities, please see
the Statement of
11
<PAGE> 89
Additional Information. See the Capital Growth Bond Fund, below, for a
description of the type of debt securities in which the Fund may invest.
Investment in shares of the Balanced Assets Fund should involve less financial
and market risk than an investment in the Emerging Growth Equity Fund.
CAPITAL GROWTH BOND FUND
The investment objective of the Capital Growth Bond Fund is to achieve growth
of capital by investing in medium-grade or better debt securities, with income
as a secondary consideration.
The Capital Growth Bond Fund differs from most "bond" funds in that its primary
objective is capital appreciation, not income. Opportunities for capital
appreciation will usually exist only when the levels of prevailing interest
rates are falling. During periods when the Manager expects interest rates to
decline, the Fund will invest primarily in intermediate-term and long-term
corporate and government debt securities. However, during periods when the
Manager expects interest rates to rise or believes that market or economic
conditions otherwise warrant such action, the Fund may invest substantially all
of its assets in short-term debt securities to preserve capital and maintain
income. The Fund may also maintain a portion of its assets temporarily in cash
or short-term debt securities pending selection of particular long-term
investments.
The Capital Growth Bond Fund will be carefully positioned in relation to the
term of debt obligations and the anticipated movement of interest rates. It is
contemplated that at least 75% of the value of the Fund's total investment in
corporate debt securities, excluding commercial paper, will be represented by
debt securities which have, at the time of purchase, a rating within the four
highest grades as determined by Moody's Investors Service, Inc. (Aaa, Aa, A or
Baa), Standard & Poor's Corporation (AAA, AA, A or BBB), or Fitch's Investors
Service (AAA, AA, A or BBB) and debt securities of banks and other issuers
which, although not rated as a matter of policy by either Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"),
or Fitch's Investors Service ("Fitch's"), are considered by the Manager to have
investment quality comparable to securities receiving ratings within such four
highest grades. Although the Fund does not intend to acquire or hold debt
securities of below investment-grade quality, policyowners should note that
even bonds of the lowest categories of investment-grade quality may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher-grade bonds. It should be
further noted that should an obligation in the Fund's portfolio drop below
investment grade, the Fund will make every effort to dispose of it promptly so
long as to do so would not be detrimental to the Fund. Government obligations
in which the Capital Growth Bond Fund may invest will be limited to those
issued or guaranteed as to principal or interest by the United States
Government or its agencies or instrumentalities or by the Government of Canada
or any Canadian Crown agency. Any Canadian obligation acquired by the Fund
will be payable in U.S. dollars. The Fund may purchase securities on a
forward-commitment, when-issued or delayed-delivery basis. For a discussion of
these securities, please see the Statement of Additional Information.
The Capital Growth Bond Fund may purchase corporate debt securities which carry
certain equity features, such as conversion or exchange rights or warrants for
the acquisition of stock of the same or a different issuer or participations
based on revenues, sales, or profits. The Fund will not exercise any such
conversion, exchange or purchase rights if, at the time, the value of all
equity interests so owned would exceed 10% of the value of the Fund's total
assets.
Because of the Fund's emphasis on medium-grade or better instruments, an
investment in the Capital Growth Bond Fund should result in less financial risk
than an investment in the Emerging Growth Equity Fund or Balanced Assets Fund.
However, the Capital Growth Bond Fund will be subject to substantial market
risk arising from changes in the level of prevailing interest rates and the
Fund's active management in anticipation of such changes.
MONEY-MARKET FUND
The investment objective of the Money-Market Fund is to provide maximum current
income consistent with capital preservation and liquidity by investing in a
portfolio of high-quality money market instruments.
In pursuit of its objective, the Money-Market Fund may invest in:
(1) obligations issued or guaranteed as to principal or interest by the United
States Government, or any agency or authority controlled or supervised by and
acting as an instrumentality of the U.S. Government pursuant to authority
granted by Congress, or issued or guaranteed as to principal or interest by the
Government of Canada or any Canadian Crown agency (any Canadian obligation
acquired by the Fund will be payable in U.S. dollars);
12
<PAGE> 90
(2) obligations (including negotiable certificates of deposit) of U.S. banks
and savings and loan associations which at the date of the investment have
capital, surplus and undivided profits (as of the date of their most recently
published financial statements) in excess of $100,000,000 and foreign branches
of U.S. banks if such banks meet the stated qualifications;
(3) commercial paper which at the date of the investment is rated (or
guaranteed by a company whose commercial paper is rated) A-1 by Standard &
Poor's, P-1 by Moody's, or F-1 by Fitch's, or, if not rated, is issued by a
company which at the date of the investment has an outstanding short-term debt
issue that is so rated or which is determined by management, pursuant to
guidelines adopted and reviewed by the Fund's Board of Directors, to be of
comparable quality to securities that are so rated;
(4) corporate obligations maturing in one year or less which at the date of
investment are rated AA or higher by Standard & Poor's, Fitch's or Moody's or
either (a) are issued by a company with outstanding short-term debt securities
rated A-1 by Standard & Poor's, P-1 by Moody's, or F-1 by Fitch's or (b) are
determined by management, pursuant to guidelines established and reviewed by
the Fund's Board of Directors, to be of comparable quality to securities that
are so rated; and
(5) repurchase agreements with respect to any of the foregoing obligations.
More complete descriptions of the money market instruments in which the Fund
may invest and the debt security ratings used by the Fund are set forth in the
Statement of Additional Information.
All of the Money-Market Fund's investments will mature in 13 months or less and
the portfolio will maintain a dollar-weighted average portfolio maturity of
less than 90 days. By limiting the maturity of its investments, the Fund seeks
to lessen the changes in the value of its assets caused by fluctuations in
short-term interest rates. All of the Money-Market Fund's investments will be
ones whose issuers are determined to present minimal credit risks. The Fund
may purchase securities on a forward-commitment, when-issued or
delayed-delivery basis. For a discussion of these securities, please see the
Statement of Additional Information.
Investment in shares of the Money-Market Fund should involve less market or
financial risk than an investment in any other Fund. However, the Fund's
performance will vary with changes in short-term interest rates.
COMMON STOCK FUND
The investment objective of the Common Stock Fund is 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.
In pursuit of its objective, the Common Stock Fund will invest principally in
common stocks or in securities convertible into common stocks or carrying
rights or warrants to purchase common stock or to participate in earnings. In
selecting investments, emphasis will be placed on companies with good financial
resources, strong balance sheet, satisfactory rate of return on capital, good
industry position, superior management skills, and earnings that tend to grow
consistently. The Fund's investments are not limited to any particular type or
size of company, but high-quality growth stocks are emphasized.
Investments will be made primarily in securities listed on national securities
exchanges, but the Fund may purchase securities traded in the United States
over-the-counter market. When, in the opinion of management, market or
economic conditions warrant a defensive posture, the Fund may place all or a
portion of its assets in fixed-income securities. The Fund may also maintain a
portion of its assets in cash or short-term debt securities pending selection
of particular long-term investments. The Fund may purchase securities on a
forward-commitment, when-issued or delayed-delivery basis. For a discussion of
these securities, please see the Statement of Additional Information.
Investment in shares of the Common Stock Fund should involve less financial and
market risk than the Emerging Growth Equity Fund, but the Fund may occasionally
experience above-average fluctuations in net asset value, and therefore should
be considered as a long-term investment.
REAL ESTATE SECURITIES FUND
The investment objective of the Real Estate Securities Fund is to achieve a
combination of long-term capital appreciation and satisfactory current income
by investing in real estate related equity and debt securities.
13
<PAGE> 91
In pursuit of its objective, the Real Estate Securities Fund will invest
principally in real estate investment trust equity and debt securities and
other securities issued by companies which invest in real estate or interests
therein.
The Fund may also purchase the common stocks, preferred stocks, convertible
securities and bonds of companies operating in industry groups relating to the
real estate industry. This would include companies engaged in the development
of real estate, building and construction, and other market segments related to
real estate. The Fund will not invest directly in real property nor will it
purchase mortgage notes directly.
Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in real estate related equity and debt securities.
When, in the opinion of management, market or economic conditions warrant a
defensive posture, the Fund may place all or a portion of its assets in
fixed-income securities which may or may not be real estate debt related
securities. The Fund may also maintain a portion of its assets in cash or
short-term debt securities pending selection of particular long-term
investments. The Fund may purchase securities on a forward-commitment,
when-issued or delayed-delivery basis. For a discussion of these securities,
please see the Statement of Additional Information.
Because the Fund considers current income in its investment objectives, an
investment in the Real Estate Securities Fund should involve less financial and
market risk than the Emerging Growth Equity Fund. However, the Fund's share
value may experience above-average fluctuation in periods of changing interest
rates and therefore the shares should be considered as long-term investments.
INTERNATIONAL FUND AND
PACIFIC RIM EMERGING MARKETS FUND
The investment objective of both the International Fund and the Pacific Rim
Emerging Markets Fund is to achieve long-term growth of capital. The Funds
will attempt to achieve their respective investment objectives by investing in
a diversified portfolio that is comprised primarily of common stocks and
equity-related securities of corporations domiciled in countries other than the
United States and Canada. Current income from dividends and interest will not
be an important consideration in the selection of portfolio securities.
INVESTMENT POLICY. In pursuit of their respective investment objectives, the
International Fund and the Pacific Rim Emerging Markets Fund will vary the
geographical distribution of their investments based upon the continuous
evaluation of political, economic and market trends throughout the world.
Investments will be shifted among the world's capital markets in accordance
with the ongoing analyses of trends and developments affecting such markets and
securities. Although the International Fund has no limits on geographical
distribution other than the United States and Canada, it is expected to invest
primarily in companies domiciled in western European countries, Australia, the
Far East, Mexico and South America. The Pacific Rim Emerging Markets Fund will
invest primarily in companies domiciled in potentially all countries of the
Pacific Rim region. For purposes of this Fund, the countries of the Pacific
Rim region are India, Pakistan, Japan, Hong Kong, Singapore, Malaysia,
Thailand, Indonesia, Australia, South Korea, Taiwan, Philippines, New Zealand
and China.
Investment in foreign countries often requires approval by the specific country
involved. As a result, although the International Fund and Pacific Rim
Emerging Markets Fund intend to invest as above, not all countries may be
available initially.
The International Fund and the Pacific Rim Emerging Markets Fund will, under
normal conditions, invest at least 65% of their net assets in common stocks and
equity-related securities of established larger-capitalization non-U.S.
companies that have attractive long-term prospects for growth of capital.
Equity-related securities in which the Funds may invest include: preferred
stocks, warrants and securities convertible into or exchangeable into common
stocks.
A Fund will invest in the securities of issuers domiciled or primarily traded
in at least five foreign countries if the Fund has invested at least 80% of its
net assets in foreign issuers. If the Fund has less than 20% of its net assets
in foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If the Fund has at least 20% but less than
40% of its net assets in foreign issuers, then such investment must be
allocated to issuers domiciled or primarily traded in at least two foreign
countries. Similarly, if the Fund has at least 40% but less than 60% of its
net assets invested in foreign issuers, such investment must be allocated to at
least three foreign countries. Foreign investments must be allocated to at
least four foreign countries if such investments comprise at least 60% but less
than 80% of the Fund's net assets. A Fund will not invest more than 20% of its
net assets in securities of issuers domiciled or primarily traded in any one
country, except that a Fund may invest up to 35% of its net assets in issuers
domiciled or primarily traded in any one of the following countries: Australia,
France, Japan, the United Kingdom, or Germany.
The Funds may, for defensive purposes, invest all or a portion of their assets
in non-convertible fixed income securities denominated in U.S. and non-U.S.
dollars. These non-convertible fixed income securities will include debt of
corporations, foreign governments and
14
<PAGE> 92
supranational organizations. The Funds may also maintain a portion of their
assets in cash or short term debt securities pending the selection of certain
long-term investments.
The International Fund and the Pacific Rim Emerging Markets Fund may also
purchase and sell the following equity-related financial instruments:
-- exchange-listed call and put options on equity indices.
-- over-the-counter ("OTC") and exchange-listed equity index futures.
In order to assist in the foreign currency risk management of the
International Fund and the Pacific Rim Emerging Markets Fund, the following
foreign currency related financial instruments may also be purchased and sold:
-- OTC and exchange-listed call and put options on various currencies in the
portfolio.
-- OTC foreign currency futures contracts on various currencies in the
portfolio.
Please see Investment Techniques Of The International Fund And Pacific Rim
Emerging Markets Fund--"Options," "Futures," and "Risk Factors In Options And
Futures."
15
<PAGE> 93
INVESTMENT TECHNIQUES OF THE INTERNATIONAL FUND
AND PACIFIC RIM EMERGING MARKETS FUND
OPTIONS. The Funds will not write uncovered OTC or exchange-listed put or call
options on specific equities, equity or market indices, or foreign currency.
The Funds will also not enter into interest rate or foreign currency swaps,
caps, collars or floors.
The International Fund and the Pacific Rim Emerging Markets Fund may purchase
put and call options on various equity indices and sell put or call options
they have previously purchased. An option is a contract that gives the holder
the right to purchase (in the case of a call) or the right to sell (in the case
of a put) a specified amount of an underlying security at a fixed price upon
the exercise of the option. In the case of equity index options, exercises are
settled through the payment of cash rather than the delivery of a security.
The purchase of put and call options on various equity indices is done in order
to hedge against changes in stock prices which may adversely affect the prices
of securities that the portfolio wants to purchase at a later date, to hedge
its existing investments against a decline in value, or to attempt to reduce
the risk of missing a market or industry segment advance.
An equity index is a method of reflecting in a single number the market value
of an agreed-upon basket of different stocks. The index may be designed to be
representative of the stock market as a whole or of a particular broad market
sector or industry. The most common equity indices are value-weighted indices
that reflect the aggregate market value of many different companies by taking
into account prices of the component stocks and the number of shares
outstanding for each respective company included in the index.
The premium paid for a put or call option, plus any transaction costs, will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation
of the option. The option may expire without value to the Fund unless the
price of the underlying equity index changes in an amount in excess of the
premium paid to purchase the option.
Equity index options acquired by the Fund will be traded on locally recognized
exchanges. Options traded in the OTC market may not be as actively traded as
those on an exchange and may be considered as illiquid securities. It may also
be more difficult to value such options.
The International Fund and the Pacific Rim Emerging Markets Fund may purchase
and sell put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. Such
investment strategies will be used as a hedge and not for speculation. The
purchase of put or call options on foreign currencies may constitute an
effective hedge against fluctuations in exchange rates although in the case of
foreign exchange rate movements adverse to the Fund's position, it may forfeit
the entire amount of premium paid plus related transaction costs. Foreign
currency options acquired by the Funds may be traded on either locally
recognized exchanges or the OTC market. As in the case of equity index
options, foreign currency options traded in the OTC market may not be as
actively traded as those on an exchange and may be considered as illiquid
securities.
FUTURES. The International Fund and the Pacific Rim Emerging Markets Fund may
purchase and sell equity index futures contracts in order to hedge the equity
portion of their assets or equity assets they intend to acquire, with regard to
market risk as distinguished from stock-specific risk. The equity index
futures contracts purchased by the Funds will be both OTC and
locally-recognized-exchange-traded. As in the case of OTC-traded options,
OTC-traded futures may not be as actively traded as those on an exchange and
may be considered as illiquid. It may also be more difficult to value such
futures.
FOREIGN CURRENCY FUTURES CONTRACTS. The International Fund and the Pacific Rim
Emerging Markets Fund may enter into contracts for the purchase or sale of a
specific currency at an agreed-upon future date and price set at the time of
the contract.
The Funds will enter into foreign currency futures contracts for hedging
purposes, only with the purpose of protecting the U.S. dollar equivalent of
securities in the Fund that are denominated in non-U.S. dollars.
Proper use of foreign currency futures contracts will protect the Funds against
a loss arising from an adverse change in the relationship between the U.S.
dollar and the particular foreign currency for the period of time from when the
foreign currency futures contract is purchased or sold and the date on which
payment is made or received on the underlying foreign currency.
Foreign currency futures contracts are traded in the inter-bank market and
carry much the same risks as noted above for OTC-traded futures and options.
RISK FACTORS IN FUTURES AND OPTIONS. The purchase and sale of futures and
options expose the International Fund and the Pacific Rim Emerging Markets Fund
to risks that are not present in the other Funds.
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<PAGE> 94
To the extent that hedging is effective, it will protect the value of the
securities or currencies which are hedged but will accordingly diminish the
potential for gain should the unhedged currency or security position move in a
favorable direction. There is the potential for a hedging transaction using
futures and options to create a loss as a result of imperfect correlation of
price movements between the hedging vehicle and the hedged item(s). The risks
of option trading include possible loss of the entire premium paid for the
option or the inability to effect closing transactions at favorable prices.
The risks of trading futures contracts also include the risks of inability to
effect closing transactions or to do so at favorable prices; consequently,
losses from investing in futures contracts are potentially unlimited.
RISK FACTORS
Investors should recognize that investing in foreign securities involves
special risk considerations, including those that are listed below, which are
not typically associated with investing in U.S. securities.
Investment in the International Fund and the Pacific Rim Emerging Markets Fund
will involve foreign currency risk because the offering price of their shares
will be stated in U.S. dollars while it is anticipated that the overwhelming
majority of their assets will be priced and quoted in other currencies. The
value of the Funds' securities denominated in foreign currencies will be
affected favorably or unfavorably by changes in currency exchange rates and the
Funds' values will be affected by the costs incurred in connection with the
conversions between various currencies.
The securities of non-U.S. issuers held by the Funds generally will not be
registered under, nor will the issuers thereof be subject to, the reporting
requirements of the U.S. Securities and Exchange Commission. As a consequence,
there may be less publicly available information about the foreign issuer than
is available about a U.S. company or government entity. Foreign issuers are
also not subject to the same accounting, auditing and financial reporting
standards, requirements, and practices applicable to U.S. companies.
Stock markets outside the U.S. are generally not as developed or as efficient
as those in the U.S. As a result, the extent and effectiveness of government
regulation of those stock markets and brokers may not be identical to that in
the U.S. Frequently, liquidity in most foreign bond markets is less than
generally exists in the U.S. bond market and, at times, price volatility can be
greater than in the U.S.
Fixed brokerage commissions on certain non-U.S. stock exchanges are generally
higher than negotiated commissions on U.S. exchange-listed securities.
Similarly, the bid-to-ask spreads in foreign bond markets are generally larger
than commissions or bid-to-ask spreads in the U.S. bond market.
Custodial costs related to non-U.S. securities generally exceed those on
comparable U.S. securities.
With respect to certain foreign countries, there is the possibility of
political or social instability, or diplomatic events that could result in
potential restrictions on the flow of international capital, including the
possibility of expropriation or confiscatory taxation.
The Funds' adviser will consider these and other pertinent factors before
investing in foreign securities. Investments in foreign securities will not
occur unless the Funds' adviser believes that the potential benefits of the
investment outweigh the risks and that such investments meet the policies,
standards, risk profile and objectives of a particular portfolio.
Accordingly, investment in the shares of the International Fund and the Pacific
Rim Emerging Markets Fund should involve more financial and market risk than
any of the domestic Funds. Because the shares of the International Fund and
the Pacific Rim Emerging Markets Fund may experience above-average fluctuations
in net asset value, they should be considered as long-term investments.
INVESTMENT RESTRICTIONS
In pursuing their investment objectives and policies, the Funds are subject to
a number of investment restrictions. The following is a brief summary of
certain restrictions that the Company believes to be of interest to variable
contract purchasers. Some of these restrictions are subject to exceptions not
stated here. Such exceptions and a complete list of the investment
restrictions applicable to the Funds and to the Company are set forth in the
Statement of Additional Information under the heading "Investment
Restrictions."
Except for the restrictions specifically identified as fundamental, all
investment restrictions described in this Prospectus and in the Statement of
Additional Information are not fundamental, so that the Board of Directors may
change them without shareholder approval. Fundamental restrictions may not be
changed without the affirmative vote of a majority of the outstanding voting
securities of each Fund affected by the change.
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<PAGE> 95
Restrictions that are fundamental and applicable to all Funds include
prohibitions on (i) investing more than 25% of the total assets of any Fund in
the securities of issuers having their principal activities in any particular
industry (except in the case of the Real Estate Securities Fund and with
exceptions for U.S. Government and Government agency securities and certain
money-market instruments), (ii) borrowing money, except for temporary or
emergency purposes and then not in excess of 10% of the total assets of any
Fund, and (iii) purchasing securities of any issuer if the purchase would cause
more than 5% of a Fund's total assets to be invested in the securities of any
one issuer (excluding U.S. Government and Government agency securities and bank
obligations) or cause more than 10% of the voting securities of the issuer to
be held by a Fund, except that up to 25% of each Fund's total assets may be
invested without regard to the restrictions of this clause (iii).
Restrictions that apply to all Funds and that are not fundamental include
prohibitions on pledging, hypothecating, mortgaging or transferring more than
10% of the total assets of any Fund as security for indebtedness. The
Money-Market Fund will not purchase securities of an issuer if it would cause
more than 5% of the Money-Market Fund's total assets to be invested in the
securities of that issuer (excluding U.S. Government and Government agency
securities). The Money-Market Fund will not purchase securities that have not
received the highest short-term debt rating by a nationally recognized
statistical rating organization and are not of comparable quality to securities
so rated if it would cause more than the greater of 1% of its total assets or
$1,000,000 to be invested in the securities of such issuer or if it would cause
more than 5% of its total assets to be invested in securities that were not so
rated or comparable to securities so rated.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in the investment's percentage of a Fund's total assets
resulting from a change in the value of such assets will not constitute a
violation of the percentage restriction.
The following is a description of certain investment policies that are subject
to restrictions and that the Company's management believes to be of interest to
variable contract purchasers.
FOREIGN SECURITIES
Each of the Funds may invest in foreign securities, but, with respect to all
Funds except the International and Pacific Rim Emerging Markets Funds, such
investment is restricted as a matter of non-fundamental policy to securities of
the following types: (i) U.S. dollar denominated obligations of foreign
branches of U.S. banks, (ii) securities represented by American Depository
Receipts listed on a national securities exchange or traded in the U.S.
over-the-counter market, (iii) securities of a corporation organized in a
jurisdiction other than the U.S. and listed on the New York Stock Exchange or
NASDAQ ("Interlisted Securities") or (iv) securities denominated in U.S.
dollars but issued by non U.S. issuers and issued under U.S. federal securities
regulations (for example, U.S. dollar denominated obligations issued or
guaranteed as to principal or interest by the Government of Canada or any
Canadian Crown agency); provided, however, this restriction shall not apply to
the International Fund or the Pacific Rim Emerging Markets Fund.
Foreign securities may be subject to foreign government taxes which reduce
their attractiveness. In addition, investing in the securities of foreign
issuers, particularly non-governmental issuers, involves risks which are not
ordinarily associated with investing in domestic issuers. These risks include
political or economic instability in the country involved and the possibility
of imposition of currency controls. In addition, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers, including foreign branches of U.S. banks, are subject to
different accounting and reporting requirements, which are generally less
extensive than the requirements applicable to domestic issuers. With respect
to certain foreign countries, there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment
in those countries. Foreign securities also involve currency risks. The value
of a foreign security denominated in foreign currency changes with variations
in the exchange rates. Fluctuations in exchange rates may also affect the
earning power and asset value of the foreign entity issuing a security, even
one denominated in U.S. dollars. Dividend and interest payments will be
repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed. Finally, in the event of a
default on any foreign obligation, it may be difficult for the Company to
obtain or to enforce a judgment against the issuer. The Manager will consider
these and other factors before investing in foreign securities and will not
make such investments unless, in its opinion, such investments will meet the
standards and objectives of a particular Fund.
LENDING SECURITIES
Each Fund may lend its securities so long as such loans do not represent in
excess of 20% of a Fund's total assets. This is a fundamental policy. The
procedure for lending securities is for the borrower to give the Fund
collateral consisting of cash or cash equivalents. The Fund may invest the
cash collateral and earn additional income or receive an agreed-upon fee from a
borrower which has delivered cash-equivalent collateral. The Company
anticipates that its securities will be lent only under the following
conditions: (1) the borrower must furnish collateral equal at all times to the
market value of the securities lent and the borrower must agree to increase the
collateral
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<PAGE> 96
on a daily basis if the securities increase in value; (2) the loan will be
made in accordance with New York Stock Exchange rules, which currently
require the borrower, after notice, to redeliver the securities within five
business days; (3) any cash collateral invested by a Fund will be in short-term
investments which give maximum liquidity so that the collateral may be paid
back to the borrower when the securities are returned; (4) the Fund may pay
reasonable service, placement, custodian or other fees in connection with loans
of securities and share a portion of the interest from these investments with
the borrower of the securities; and (5) the Company will limit the amount of
lending of securities so that the aggregate amount of interest received
attributed to securities lent, if considered "other income" for Federal tax
purposes, will not cause the Company to lose its status as a regulated
investment company.
MANAGEMENT OF THE FUNDS
Under Maryland law and the Company's Articles of Incorporation and By-laws, the
business and affairs of the Company are managed under the direction of the
Company's Board of Directors. The Board of Directors is elected by the holders
of the Company's securities. While all of the Company's outstanding securities
are owned by Manufacturers Life of America, shares will be voted as directed by
variable contract policyowners.
The By-laws of the Company provide that the Company need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Company intends to hold shareholder meetings only when required
by law and at other times as may be deemed appropriate by the Board of
Directors.
INVESTMENT MANAGEMENT ARRANGEMENTS
The Fund's investment manager is Manufacturers Adviser Corporation (the
"Manager"), a Colorado corporation whose principal business at the present time
is to provide investment management services to the Company. The Manager was
organized in 1970 and became operational in 1984. The Manager is an indirect
wholly-owned subsidiary of Manufacturers Life. The address of the Manager is
200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The Company has entered into an Investment Advisory Agreement with the Manager
pursuant to which the Manager agrees to manage the investment and reinvestment
of the assets of each Fund and to administer the affairs of the Company subject
to the supervision of the Company's Board of Directors. The Manager provides
the Company with an investment program and with investment research,
supervision and advice necessary for the proper supervision of each Fund.
Subject to review of the Company's Board of Directors and to the investment
objective, policies and restrictions of each Fund, the Manager determines which
securities will be purchased or sold for each Fund. The Manager also serves as
the Company's transfer agent and dividend disbursing agent.
Under a Service Agreement among the Manager, the Company and Manufacturers
Life, Manufacturers Life has agreed to furnish to the Manager personnel, office
space, supplies and equipment required by it and to make available to the
Manager certain statistical and economic data, investment research reports and
other research materials of Manufacturers Life's Investment Department. The
Manager has agreed to reimburse Manufacturers Life for its costs in this
regard.
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<PAGE> 97
MANAGEMENT OF THE FUNDS
The Manager of the Funds consist of a team of investment professionals each of
whom plays an important role in the management process of each Fund. Team
members work together to develop investment strategies and select securities
for a Fund's portfolio. They are supported by research analysts, traders and
other investment specialists who work alongside the investment professionals in
an effort to utilize all available resources to benefit the shareholders.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
FUND FUND MANAGER(S) DURING PAST FIVE YEARS
---- --------------- ----------------------
<S> <C> <C>
EMERGING GROWTH EQUITY FUND Veronica Onyskiw
(since 1983) Vice President, U.S. Equities, The Manufacturers Life Insurance Company,
1989-present
BALANCED ASSETS FUND Catherine Addison
(since 1988) Assistant Vice President, U.S. Investments, The Manufacturers Life
Insurance Company, 1994-present; Director, U.S. Fixed Income,
The Manufacturers Life Insurance Company, 1985-1994
Veronica Onyskiw
(since 1983) Vice President, U.S. Equities, The Manufacturers Life Insurance Company,
1989-present
CAPITAL GROWTH BOND FUND Catherine Addison
(since 1988) Assistant Vice President, U.S. Investments, The Manufacturers Life
Insurance Company, 1994-present; Director, U.S. Fixed Income,
The Manufacturers Life Insurance Company, 1985-1994
MONEY-MARKET FUND Emily Shum
(since 1992) Director, Money-Market, The Manufacturers Life Insurance Company,
1992-present; Money Market Manager, ManuVest Investment Management
Corporation, 1985-1991
COMMON STOCK FUND Veronica Onyskiw
(since 1987) Vice President, U.S. Equities, The Manufacturers Life Insurance Company,
1989-present
Stephan Kahn
(since 1987) Assistant Vice President, U.S. Investments, The Manufacturers Life
Insurance Company, 1994-present; Investment Management, U.S.,
The Manufacturers Life Insurance Company, 1986-1994
REAL ESTATE SECURITIES FUND Stephan Kahn
(since 1987) Assistant Vice President, U.S. Investments, The Manufacturers Life
Insurance Company, 1994-present; Investment Management, U.S.,
The Manufacturers Life Insurance Company, 1986-1994
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
FUND FUND MANAGER(S) DURING PAST FIVE YEARS
---- --------------- ----------------------
<S> <C> <C>
INTERNATIONAL FUND Michael Willans
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1990-present
Lorraine Gail
Christison
Benjamin Pinel
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1981-present
Mark Andrew Hirst
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1986-present
Robert William
Chapman
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1975-present
Richard James Crook
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1975-present
PACIFIC RIM EMERGING
MARKETS FUND Richard James Crook
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1975-present
Michael Willans
(since 1994) Investment Management, The Manufacturers Life Insurance Company,
1990-present
</TABLE>
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<PAGE> 99
EXPENSES
With respect to the Emerging Growth Equity Fund, Balanced Assets Fund, Capital
Growth Bond Fund, Money-Market Fund, Common Stock Fund and Real Estate
Securities Fund, the Manager has agreed to pay all of the expenses of the
Company except for the following, which are borne by the Company: the
investment management fee, brokerage commissions on portfolio transactions
(including any other direct costs related to the acquisition, disposition,
lending or borrowing of portfolio investments), taxes payable by the Company,
interest and any other costs related to borrowings by the Company, and any
extraordinary or non-recurring expenses (such as legal claims and liabilities
and litigation costs and any indemnification related thereto).
With respect to the International Fund and the Pacific Rim Emerging Markets
Fund, the Company shall pay all of the foregoing expenses plus up to .50% and
.65%, respectively, of any additional expenses in connection with the operation
of these Funds.
FEES
As compensation for its services, the Manager receives a fee from the Company
each day on which the Company's net asset value is determined. With respect to
the Emerging Growth Equity Fund, Balanced Assets Fund, Capital Growth Bond
Fund, Money-Market Fund, Common Stock Fund and Real Estate Securities Fund, the
fee is equivalent to an annual rate of 0.50% of the average daily value of the
aggregate net assets of the Funds. Prior to January 1, 1987, the Manager's fee
was equivalent to an annual rate of 0.20% of such value. The amount of the
daily charge for the fee is divided among the Funds in proportion to their
daily net asset values.
With respect to the International Fund and the Pacific Rim Emerging Markets
Fund, the fee will be equivalent to an annual rate of (i) 0.85% of the average
daily value of the net assets of the first $100 million of each Fund and (ii)
0.70% of the average daily value of the net assets of each Fund in excess of
$100 million.
For the years ended December 31, 1992, 1993 and 1994 the Manager received
$437,758, $743,241, and $1,429,270 respectively, under the Investment Advisory
Agreement.
CAPITAL STOCK
The Company has eight classes of stock, one for each Fund. The shares of each
Fund have equal rights with respect to voting, redemptions, dividends,
distributions and liquidations with regard to that Fund. The shares of each
Fund, when issued and paid for, will be fully paid and non-assessable, will
have no preference, pre-emptive, conversion, exchange or similar rights, and
will be freely transferable. Holders of shares of any Fund are entitled to
redeem their shares as set forth under "Purchases And Redemptions Of Shares."
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Company intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code (the "Code"). Under such provisions,
the Company will not be subject to federal income tax on such part of its net
ordinary income and net realized capital gains that it distributes to
shareholders.
The Company intends to distribute as dividends substantially all of the net
investment income, if any, of each Fund. For dividend purposes, net investment
income of each Fund will consist of all payments of dividends (other than stock
dividends) or interest received by such Fund less the estimated expenses of
such Fund (including fees payable to the Manager). Dividends from the net
investment income of a Fund will be declared at least annually and reinvested
in additional full and fractional shares of that Fund.
The Funds of the Company also presently intend to declare and distribute
annually after the close of their fiscal year all of their net realized capital
gains, if any.
PURCHASES AND REDEMPTIONS OF SHARES
Shares of the Company are currently offered continuously, without sales
charge, at prices equal to the respective net asset values of the Funds, only
to Manufacturers Life of America. The Company sells its shares to
Manufacturers Life of America directly without the use of any underwriter.
Manufacturers Life of America uses shares of the Company to fund benefits under
both variable annuity contracts and variable life insurance policies. The
Company's Board of Directors will monitor the Funds for the existence of any
material irreconcilable conflict between the interests of variable annuity
policyowners investing in the Company and interests of holders of variable life
insurance policies investing in the Company. Manufacturers Life of America will
report any potential or existing conflicts to the directors of the Company. If
a material irreconcilable conflict arises, Manufacturers Life of America will,
at its own cost, remedy such
22
<PAGE> 100
conflict up to and including establishing a new registered management investment
company and segregating the assets underlying the variable annuity contracts
and the variable life insurance policies. The Company reserves the right to
offer its shares in the future to other persons or entities.
Shares of the Company are sold and redeemed at their net asset value next
computed after a purchase or redemption order is received by the Company.
Depending upon the net asset values at that time, the amount paid upon
redemption may be more or less than the cost of the shares redeemed. Payment
for shares redeemed will be made as soon as possible, but in any event within
seven days after receipt of a request for redemption.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily by the
Manager at 4:00 p.m., Eastern time on each day during which the New York Stock
Exchange ("Exchange") is open for trading. The Exchange is open daily Monday
through Friday except on the following business holidays: New Year's Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The net asset value per share of each
Fund is computed by adding the sum of the value of the securities held by that
Fund plus any cash or other assets it holds, subtracting all its liabilities,
and dividing the result by the total number of shares outstanding of that Fund
at such time. The values of all assets and liabilities initially expressed in
foreign currencies are translated into U.S. dollars at the exchange rates
provided by an approved pricing service as of 12:00 p.m. Eastern time.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before 4:00 p.m. Eastern
time on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in
a particular country or countries may not take place on all business days in
New York. Furthermore, trading may take place in certain markets on days which
are not business days in New York and on which a Fund's net asset value is not
calculated. Since the Fund does not price on these days, the portfolio will
trade and the net asset value of the Fund's redeemable securities may be
significantly affected on days when shareholders have no access to the Fund. A
Fund calculates net asset value per share, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the Exchange once
on each day on which the Exchange is open. As a result, such calculation may
not take place contemporaneously with the determination of the prices of the
majority of the portfolio securities used in such calculation. If events
materially affecting the value of such securities occur between the time when
their price is determined and the time when the Fund's net asset value is
calculated, such securities will be valued at fair value as determined in good
faith by, or under the direction of, the Board of Directors.
Except with respect to debt instruments having a remaining maturity of 60 days
or less, securities held by a Fund will be valued as follows: Securities listed
on a securities exchange will be valued at the last sale price or, if there has
been no sale that day, at the last bid price reported as of the close of
trading on the Exchange; provided, however, with respect to the International
Fund and the Pacific Rim Emerging Markets Fund, if a particular country has
adopted conventions with respect to valuations, these will be utilized instead.
Securities traded in the over-the-counter market for which closing prices are
readily available will be valued at the last bid price or yield equivalent as
of the close of trading on the Exchange. However, if closing prices are not
readily available for these securities, quotations will be obtained from more
than one source and the securities will be valued at a mean of the bid prices
so obtained. Securities which are traded both in the over-the-counter market
and on a stock exchange will be valued according to the broadest and most
representative market, and it is expected that for debt securities this
ordinarily will be the over-the-counter market. If market quotations for
assets are or become unavailable, such assets will be valued at their fair
value as determined in good faith by, or under the direction of, the Company's
Board of Directors.
Where appropriate, debt instruments with maturities greater than 60 days
are valued on the basis of a valuation believed to reflect the fair value
of the security, as provided by an approved pricing service. Debt instruments
with remaining maturities of 60 days or less are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost
on the date of purchase (or in the case of securities purchased with more than
60 days remaining to maturity, the market value on the 61st day prior to
maturity); and thereafter a constant proportionate amortization in value is
assumed until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. For purposes
of this method of valuation, the maturity of a variable rate instrument is
deemed to be the next date on which the interest rate is to be adjusted.
CUSTODIAN
State Street Bank and Trust Company ("State Street") acts as custodian of the
securities held by each Fund. State Street is authorized to use the facilities
of the Depository Trust Company and the book-entry system of the Federal
Reserve Banks.
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<PAGE> 101
CUSTODIAN FOR FOREIGN FUNDS. Securities purchased for the International Fund
and Pacific Rim Emerging Markets Fund are maintained in the custody of foreign
banks and trust companies which are members of State Street's Global Custody
Network and foreign depositories (foreign sub-custodians). State Street and
each of the foreign custodial institutions holding securities of the Funds has
been approved by the Board in accordance with regulations under the Investment
Company Act of 1940.
The Board reviews, at least annually, whether it is in the best interest of the
International Fund and the Pacific Rim Emerging Markets Fund and its
shareholders to maintain Fund assets in each custodial institution. However,
with respect to foreign sub-custodians, there can be no assurance that the
Fund and the values of its shares will not be adversely affected by acts of
foreign governments, financial or operational difficulties of the foreign
sub-custodians, difficulties and costs of obtaining jurisdiction over, or
enforcing judgments against, the foreign sub-custodians, or application of
foreign law to a Fund's foreign sub-custodial arrangements. Thus the
non-investment risks involved in holding assets abroad may be greater than
those associated with investing in the U.S.
PERFORMANCE DATA
From time to time Manufacturers Life of America may publish advertisements or
distribute sales literature containing performance data relating to the Funds.
All such performance data are based on the actual historical performance of the
Funds for specified periods, and the figures are not intended to indicate
future performance. Performance data will include average annual total return
quotations for one-year, five-year and (when applicable) 10-year periods.
Quotations for the period since inception of a Fund will replace such periods
for a Fund that has not been in existence for a full five-year or 10-year
period. Performance data may also include average annual total return for
other time periods than those listed, and aggregate total return for various
periods of time. More detailed information on the computations is set forth in
the Statement of Additional Information.
Performance data of the Funds will not reflect charges made pursuant to the
terms of the variable life insurance and variable annuity policies funded by
separate accounts that invest in the Company's shares. However, sales
literature containing performance data for the Funds that is part of an
advertisement for variable annuity contracts whose assets may be invested in
the Fund will also contain corresponding performance data for the separate
account funding those contracts. Similarly, sales literature containing
performance data for the Funds that is part of an advertisement for variable
life insurance policies whose assets may be invested in the Fund will also
contain illustrations of the cash surrender and death benefit values for the
same time periods.
24
