<PAGE> 1
Prospectus for
Multi-Account Flexible
Payment Variable Annuity
Issued by
The Manufacturers Life Insurance
Company of America
<PAGE> 2
Prospectus
The Manufacturers Life Insurance
Company of America
Separate Account Two
Multi-Account Flexible Payment Variable Annuity Policies
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"), a stock life insurance
company that is an indirect wholly-owned subsidiary of The Manufacturers Life
Insurance Company ("Manufacturers Life" or the "Company"). 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.
The Policies provide for the accumulation of values on a fixed or variable
basis. Annuity payments are available on a fixed basis only. Values
accumulated on a variable basis will be held in one or more of the sub-accounts
of The Manufacturers Life of America's Separate Account Two ("Account"). The
assets of each sub-account will be used to purchase shares of a particular
investment portfolio ( a "Portfolio") of NASL Series Trust. The accompanying
prospectus for NASL Series Trust and the corresponding statement of additional
information describes the investment objectives of the Portfolios in which net
premiums may be invested. The Portfolios available for allocation of net
premiums are: the Emerging Growth Trust, the Balanced Trust, the Capital Growth
Bond Trust, the Money Market Trust, the Quantitative Equity Trust (formerly, the
Common Stock Fund), the Real Estate Securities Trust, the International Stock
Trust, and the Pacific Rim Emerging Markets Trust. Other sub-accounts and
Portfolios may be added in the future.
This prospectus sets forth concisely the information concerning Separate Account
Two that 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 NASL Series Trust. Additional
information concerning Separate Account Two has been filed with the Securities
and Exchange Commission and is available upon request and without charge by
writing to the Service Office address or calling the number listed below and
requesting the "Statement of Additional Information of Separate Account Two of
The Manufacturers Life Insurance Company of America." The table of contents of
the Statement of Additional Information is included in the prospectus following
the listing of the prospectus contents.
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.
(i)
<PAGE> 3
The Manufacturers Life Insurance
Company of America
500 N. Woodward Ave.
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 December 31, 1996. The date
of the Statement of Additional Information is December 31, 1996.
(ii)
<PAGE> 4
PROSPECTUS CONTENTS
Page
Definitions...................................... 1
Summary Of Policies.............................. 2
Policyowner Inquiries............................ 3
Expense Table.................................... 4
Condensed Financial Information.................. 7
General Information About Manufacturers
Life of America, Separate Account Two
and NASL Series Trust........................ 9
Who Are Manufacturers Life of America And
Manufacturers Life?............................ 9
What Is Manufacturers Life of America's
Separate Account Two?.......................... 9
What Is NASL Series Trust?.......................10
What Are The Investment Objectives And Certain
Policies Of The Portfolios?....................11
Description Of The Policies......................12
What Are The Policy Charges?.....................12
How Is A Policy Purchased?.......................15
What Restrictions Apply To Purchase
Payments?......................................16
What Is The Variable Policy Value And
How Is It Determined?..........................16
What Are The Provisions On Transfers?............18
What Surrender Or Withdrawal Rights
Are Available?.................................19
What Are The Death Benefit Provisions?...........20
When Do Annuity Payments Commence?...............20
Under What Circumstances May Portfolio
Shares Be Substituted?.........................21
What Are The Other General
Policy Provisions?.............................21
Federal Tax Matters..............................23
How Is Manufacturers Life of
America Taxed?.................................23
What Is The Tax Treatment Of The Policies?.......23
What Qualified Plans May Utilize
The Policies?..................................26
Other Matters....................................27
What Voting Rights Do Policyowners Have?.........27
Where Can Financial Information
Be Found?......................................27
Performance And Other Comparative
Information....................................27
Appendix A.......................................32
What Is The Guaranteed Interest Account?.........32
What Are The Annuity Options?....................32
STATEMENT OF ADDITIONAL
INFORMATION CONTENTS
Who Sells The Policies?..........................38
What Responsibilities Has Manufacturers
Life Assumed?..................................38
Who Are The Directors And Officers
Of Manufacturers Life of America?..............38
What State Regulations Apply?....................41
Is There Any Litigation Pending?.................41
Where Can Further Information Be Found?..........41
Legal Matters....................................41
Experts..........................................41
Financial Statements.............................42
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED
TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS.
(iii)
<PAGE> 5
Definitions
"Accumulation Period" is the period from the date we receive the first purchase
payment to the Annuity Date.
"Annuity Date" means the date on which the first annuity payment is due.
"General Account" is all assets of Manufacturers Life of America except those
allocated to Separate Account Two or other separate accounts of Manufacturers
Life of America.
"Guaranteed Interest Account" is the account in which allocated purchase
payments earn interest at a guaranteed rate set each Policy Anniversary.
"Guaranteed Interest Rate" is the rate of interest accrued on a compounded
annual basis and credited monthly on amounts allocated to the Guaranteed
Interest Account and will be no less than 4% per year.
"Qualified Policy" means a Policy used in connection with a retirement plan
which receives favorable federal income tax treatment under sections 401, 408
or 457 of the Internal Revenue Code of 1986, as amended ("Code"). (See page 19
for a brief discussion of the qualified plans which may use the Policies.)
"Policy Years" and "Policy Anniversaries" are determined from the date the
application was signed. The first Policy Anniversary will be the first date of
the same month one year later.
"Purchase Payment" is an amount paid under the Policy.
"Service Office" is the office designated by Manufacturers Life of America to
service the Policy.
"Total Policy Value" means the value during the Accumulation Period of amounts
accumulated under the Policy. The Total Policy Value is the sum of the
Variable Policy Value and the Guaranteed Interest Account.
"Unit" is an index used to measure the value of a Policy's interest in a
Variable Account.
"Valuation Period" is the period between two successive valuation dates
measured from the times on such dates as of which the valuations are made. A
valuation date is each day that the net asset value of the underlying shares of
NASL Series Trust is determined.
"Variable Account" is a sub-account of Separate Account Two of Manufacturers
Life of America.
"Variable Policy Value" is the sum of the value of a Policy's interest in each
of the Variable Accounts.
1
<PAGE> 6
Summary Of Policies
Eligible Purchasers. The Multi-Account Flexible Payment Variable Annuity
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, 408 or 457 of the Internal Revenue Code of 1986, as amended
("Qualified Policies"), or under plans and trusts not entitled to any special
tax treatment ("Nonqualified Policies"). The Policies will be offered on both
an individual basis and in connection with group or sponsored arrangements.
(See "How Is A Policy Purchased?")
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 two types of accounts--Variable
Accounts and a Guaranteed Interest Account. The Variable Accounts are
sub-accounts of Separate Account Two, each sub-account investing in a
corresponding portfolio of NASL Series Trust. The Guaranteed Interest Account
is an account in which allocated purchase payments earn interest at a guaranteed
rate set each Policy Anniversary. The fixed portion of the Policies, including
provisions relating to the Guaranteed Interest Account and the annuity options,
is described only in Appendix A to this prospectus unless specific reference to
the fixed portion is otherwise made.
Purchase Payments. The minimum initial purchase payment is $1,000. This may
be allocated to any of the Variable Accounts or to the Guaranteed Interest
Account in increments of not less than $50. Subsequent purchase payments may
be as little as $50. The minimum amount that may be allocated to any one
Variable Account or to the Guaranteed Interest Account from purchase payments
is $50. A Policyowner should specify how each purchase payment is to be
allocated. If no allocation is specified, a purchase payment will be allocated
entirely to the Guaranteed Interest Account. (See "What Restrictions Apply To
Purchase Payments?")
Charges And Deductions. There is no deduction from purchase payments for sales
expenses. However, full surrender of a Policy or a cash withdrawal thereunder
may be subject to a withdrawal charge (contingent deferred sales charge), which
is a percentage of the amount of the requested withdrawal 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 amount withdrawn, decreasing by 1% each
year after the first. However, in no event may the charge exceed 8% of the
total purchase payments made. In addition, an administration fee equal to 2%
of the Total Policy Value up to a maximum of $30 will be deducted annually if
the Total Policy Value on the last day of any Policy Year is less than $25,000.
This fee will also be deducted on a pro rata basis in the event the Policy is
surrendered on other than the last day of a Policy Year if the Total Policy
Value is less than $25,000. The administration fee will be taken before any
withdrawal charge is applied. A deduction for mortality and expense risks is
made from the Variable Policy Value at an annual rate of 1.00%. This charge is
deducted daily from amounts invested in the Variable Accounts. A deduction may
also be made for any applicable premium taxes
2
<PAGE> 7
attributable to the Policies (currently such taxes range from 0% to 3%). In
addition, those Policyowners who wish to participate in the Dollar Cost
Averaging program will be charged $5 per transfer or series of transfers
occurring on the same transfer date if Total Policy Value is $15,000 or less.
(See "What Are The Policy Charges?")
Annuity Payments. Annuity payments will begin on the Annuity Date and will be
on a fixed basis only. The Policyowner may change the Annuity Date to any date
so long as payments will commence by the end of the year in which the annuitant
reaches age 85. Under some Qualified Policies, annuity payments must commence
no later than April 1 following the year the annuitant attains the age of 70
1/2. If application of the Total Policy Value would result in annuity payments
of less than $20 monthly, $60 quarterly, $100 semi-annually or $200 annually,
the Total Policy Value will be paid to the Policyowner in a single sum. (See
"When Do Annuity Payments Commence?")
Surrenders And Withdrawals. At any time prior to the Annuity Date, a
Policyowner may fully surrender the Policy for, or make a cash withdrawal in an
amount not exceeding, its Total Policy Value, reduced by any applicable
withdrawal charge and administration fee. A full surrender or cash withdrawal
may be subject to a tax penalty. (See "What Is The Tax Treatment Of The
Policies?") The minimum cash withdrawal that may be requested at any one time
is $300. Some Qualified Policies must contain restrictions on withdrawal
rights. (See "What Surrender Or Withdrawal Rights Are Available?")
Transfers. Transfers may be made at any time among the Guaranteed Interest
Account and Variable Accounts. Transfers to any Variable Account must be at
least $500 or, if less, the balance of the account. Transfers to the Guaranteed
Interest Account, transfers pursuant to the Asset Allocation Balancer Program,
and transfers designed to reallocate assets among accounts may be made in any
amount. (See "What Are The Provisions On Transfers?")
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 the
Policy Value, Manufacturers Life of America will refund in full any purchase
payments made.
***
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.
3
<PAGE> 8
EXPENSE TABLE
<TABLE>
<CAPTION>
Number of
Complete Policy
Years Elapsed
Since Purchase
Charge Payment Made Withdrawal
- ------ -------------- ----------
<S> <C> <C>
POLICYOWNER TRANSACTION EXPENSES
Withdrawal Charge (contingent deferred sales
charge) (as a percentage of the lesser of
amount surrendered or purchase payments) 1: 0 8.00%
1 7.00%
2 6.00%
3 5.00%
4 4.00%
5 3.00%
6 2.00%
7 1.00%
Thereafter none
Dollar Cost Averaging Charge 2 $ 5
(if selected and applicable)
ANNUAL CONTRACT FEE $30 3
</TABLE>
1 The withdrawal charge decreases 1% each Policy Year 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 Total Policy Value as of the most recent Policy
Anniversary free of the withdrawal charge.
2 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.
3 An administration fee equal to 2% of the Total Policy Value up to a
maximum of $30 is deducted during the accumulation period on the last day
of a Policy Year if the Total Policy Value on that date is less than
$25,000. The fee is also deducted on a pro rata basis upon full surrender
of a Policy on a date other than the last day of a Policy Year.
4
<PAGE> 9
<TABLE>
<S> <C> <C>
SEPARATE ACCOUNT ANNUAL
EXPENSES
(as a percentage of average account value)
Mortality and Expense
Risks Charge 1.00%
-----
1.00%
NASL Series Trust Expenses after applicable fee waivers and expense reimbursements
<CAPTION>
Portfolio Investment Management Other Expenses* Total Trust annual
Fees Expenses
----------------------- ---------------- -----------------
<S> <C> <C> <C>
Emerging Growth Trust................ 1.05% .10% 1.15%
Quantitative Equity Trust
(formerly, Common Stock Fund)........ .50% .06% .50%**
Real Estate Securities Trust......... .70% .10% .50%**
Balanced Trust....................... .80% .15% .95%
Capital Growth Bond Trust............ .65% .10% .50%**
Money Market Trust................... .50% .04% .54%
International Stock Trust............ 1.05% .20% 1.25%
Pacific Rim Emerging Markets Trust... .85% .30% 1.15%
</TABLE>
*Other Expenses include custody fees, registration fees, legal fees, audit fees,
trustees' fees, insurance fees and other miscellaneous expenses. The amounts set
forth in the table above are expense estimates for the current fiscal year based
upon historical NASL new portfolio cash inflows. NASL Financial has agreed
pursuant to its advisory agreement with NASL Series Trust to reduce its advisory
fee or reimburse NASL Series Trust to the extent that such other expenses
(excluding taxes, portfolio brokerage commissions, interest, litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of business) exceed .75% in the case of the NASL International
Stock Trust and NASL Pacific Rim Emerging Markets Trust and, in the case of each
of the other NASL Trusts listed above, .50% of the average annual net assets of
such NASL Portfolio. Such expense limitations with respect to the NASL Trusts
will continue in effect from year to year unless otherwise terminated at any
year end by NASL Financial on 30 days' notice to NASL Series Trust.
**NASL Financial Services, Inc. has voluntarily agreed to waive fees payable to
it and/or to reimburse expenses for a period of one year beginning the effective
date of this prospectus to the extent necessary to prevent the total of advisory
fees and expenses for the Quantitative Equity Trust (formerly, the Common Stock
Fund), Real Estate Securities Trust and Capital Growth Bond Trust for such
period from exceeding .50% of average net assets.
5
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 4
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
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:
NASL SERIES TRUST
INTERNATIONAL STOCK TRUST $93 $120 $153 $263
PACIFIC RIM EMERGING MARKETS TRUST $92 $118 $147 $252
EMERGING GROWTH TRUST $92 $118 $147 $252
QUANTITATIVE EQUITY TRUST
(FORMERLY, THE COMMON STOCK FUND) $86 $99 $114 $183
REAL ESTATE SECURITIES TRUST $86 $99 $114 $183
BALANCED TRUST $90 $112 $137 $232
CAPITAL GROWTH BOND TRUST $86 $99 $114 $183
MONEY MARKET TRUST $86 $100 $116 $188
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:
NASL SERIES TRUST
INTERNATIONAL STOCK TRUST $23 $72 $123 $263
PACIFIC RIM EMERGING MARKETS TRUST $22 $69 $117 $252
EMERGING GROWTH TRUST
QUANTITATIVE EQUITY TRUST $22 $69 $117 $252
(FORMERLY, THE COMMON STOCK FUND) $16 $49 $84 $183
REAL ESTATE SECURITIES TRUST $16 $49 $84 $183
BALANCED TRUST $20 $62 $107 $232
CAPITAL GROWTH BOND TRUST $16 $49 $84 $183
MONEY MARKET TRUST $16 $50 $86 $188
</TABLE>
4 In the example above, the $30 annual administration charge has been
reflected in the calculation of annual expenses by converting it to a
percentage charge, adding the percentage charge to the Total Separate
Account Annual Expenses (1.00%) and total NASL Series Trust. Annual
Expenses shown above and multiplying the resulting percentage figure by the
average annual assets of the hypothetical account. The charge has been
converted to a percentage by dividing the total administration charges
collected during 1995 by the average total net assets attributable to the
Policies during 1995, which values include amounts allocated to both
Separate Account Two and the Guaranteed Interest Account.
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,
irrespective of the Variable Account to which purchase payments have been
allocated. The table reflects expenses of Separate Account Two and NASL Series
Trust, 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. 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 under
the caption "What Are The Policy Charges?" below. Information concerning the
management fees paid by NASL Series Trust is provided under the caption
"Investment Management Arrangements" in the NASL Series Trust prospectus.
6
<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, administration fees, premium tax deductions (if any), transfer charges
(if applicable) and Dollar Cost Averaging charges. 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. The data for the period
from January 1, 1996-September 30, 1996 is based on unaudited financial
statements of Manufacturers Life of America.
For the Period November 3, 1987 through September 30, 1996
SUB-ACCOUNTS
<TABLE>
<CAPTION>
EMERGING GROWTH TRUST
(FORMERLY EMERGING GROWTH EQUITY FUND)
--------------------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ --------- --------- --------- ------- --------- --------- -------------
<S> <C> <C> <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 $35.58 $45.01
December 31 value $10.87 $12.58 $17.72 $14.93 $25.33 $30.55 $37.47 $35.58 $45.01
December 31 units 329 11,285 22,539 41,687 76,705 288,277 874,970 1,454,901 1,670,956
September 30 value $45.27
September 30 units 1,763,771
</TABLE>
<TABLE>
<CAPTION>
BALANCED TRUST
(FORMERLY BALANCED ASSETS FUND)
-------------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ --------- --------- --------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (commencement) $10.00
January 1 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70 $17.75 $21.91
December 31 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70 $17.75 $21.91
December 31 units 1,645 21,509 47,074 118,664 201,901 515,812 1,293,920 2,001,928 2,189,632
September 30 value $23.02
September 30 units 2,335,872
</TABLE>
<TABLE>
<CAPTION>
CAPITAL GROWTH BOND TRUST
(FORMERLY CAPITAL GROWTH BOND FUND)
-----------------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (commencement) $10.00
January 1 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94 $16.02 $19.07
December 31 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94 $16.02 $19.07
December 31 units 1,039 17,737 36,191 51,268 69,024 168,747 499,877 672,365 789,655
September 30 value $18.81
September 30 units 822,289
</TABLE>
7
<PAGE> 12
<TABLE>
<CAPTION>
MONEY MARKET TRUST
(FORMERLY MONEY-MARKET FUND)
----------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------- ------- ------- ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (commencement) $10.00
January 1 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37 $13.75 $14.38
December 31 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37 $13.75 $14.38
December 31 units 7,161 23,091 32,907 160,484 122,681 176,160 328,922 918,869 1,290,129
September 30 value $14.81
September 30 units 1,462,581
</TABLE>
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY TRUST
(FORMERLY COMMON STOCK FUND)
----------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <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 $20.10 $25.72
December 31 value $10.43 $11.35 $14.68 $13.94 $17.97 $18.88 $21.19 $20.10 $25.72
December 31 units 709 7,257 20,202 43,044 78,327 194,079 485,195 803,568 977,871
September 30 value $28.47
September 30 units 1,133,450
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES TRUST
(FORMERLY REAL ESTATE SECURITIES FUND)
--------------------------------------
SEPTEMBER 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ --------- --------- --------- ------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 3 (commencement) $10.00
January 1 value $9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01 $22.16 $25.26
December 31 value $9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01 $22.16 $25.26
December 31 units 1,642 12,733 17,676 17,834 24,956 134,707 711,630 1,205,880 1,149,409
September 30 value $28.08
September 30 units 1,125,387
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL STOCK TRUST
(FORMERLY INTERNATIONAL FUND)
-----------------------------
SEPTEMBER 30,
1994 1995 1996
------ ------- -------------
<S> <C> <C> <C> <C>
October 4 (commencement) $10.00
January 1 value $9.72 $10.71
December 31 value $9.72 $10.71
December 31 units 89,180 354,776
September 30 value $11.26
September 30 units 579,677
PACIFIC RIM EMERGING MARKETS TRUST
(FORMERLY PACIFIC RIM EMERGING MARKETS FUND)
--------------------------------------------
SEPTEMBER 30,
1994 1995 1996
------ ------- -------------
<S> <C> <C> <C>
October 4 (commencement) $10.00
January 1 value $9.41 $10.38
December 31 value $9.41 $10.38
December 31 units 67,272 261,208
September 30 value $11.16
September 30 units 454,714
</TABLE>
8
<PAGE> 13
General Information About Manufacturers
Life of America, Separate Account Two and NASL Series Trust
Who Are Manufacturers Life of America And Manufacturers Life?
Manufacturers Life of America, a wholly-owned subsidiary of The Manufacturers
Life Insurance Company (U.S.A.) ("Manufacturers USA"), 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 a licensed
life insurance company in the District of Columbia and all states of the United
States except New York. Manufacturers USA, a life insurance company organized in
1955 under the laws of Maine and redomesticated under the laws of Michigan on
December 30, 1992, is a wholly-owned subsidiary of Manulife Reinsurance
Corporation (U.S.A.), a life insurance company organized in 1983 under the laws
of Michigan which in turn is a wholly-owned subsidary of Manufacturers Life, a
mutual life insurance company based in Toronto, Canada. Manufacturers Life and
its subsidiaries, together, constitute one of the largest life insurance
companies in North America and ranks among the 60 largest life insurers in the
world as measured by assets. Manufacturers Life and Manufacturers Life of
America have received the following ratings from independent rating agencies:
Standard and Poor's Insurance Rating Service -- AA+ (for claims paying ability),
A.M. Best Company -- A++ (for financial strength), Duff & Phelps Credit Rating
Co. -- AAA (for claims paying ability), and Moody's Investors Service, Inc. --
Aa3 (for financial strength). However, neither Manufacturers Life of America nor
Manufacturers Life guarantees the investment performance of the Separate
Account.
What Is Manufacturers Life of America's Separate Account Two?
Manufacturers Life of America established its Separate Account Two on May 25,
1983 as a separate account under Pennsylvania law. Since December 9, 1992 it
has been operated under Michigan law. The Account holds assets that are
segregated from all of Manufacturers Life of America's other assets. The
Account is currently used only to support variable annuity contracts.
Manufacturers Life of America is the legal owner of the assets in the Account.
The income, gains and losses of the Account, whether or not realized, are, in
accordance with applicable contracts, credited to or charged against the
Account 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 Account with a total market value at least equal to the reserves
and other liabilities relating to variable benefits under all Policies
participating in the Account. These assets may not be charged with liabilities
which arise from any other business Manufacturers Life of America conducts.
However, all obligations under the Policies are general corporate obligations
of Manufacturers Life of America.
The Account 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 the
Account. For state law purposes the Account is treated as a part or division
of Manufacturers Life of America.
9
<PAGE> 14
What Is NASL Series Trust?
Each sub-account of the Account will purchase shares only of a particular
Portfolio of NASL Series Trust. NASL Series Trust is registered under the 1940
Act as an open-end management investment company. The Account will purchase and
redeem shares of NASL Series Trust 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 as requested by Policyowners, and for other purposes not
inconsistent with the Policies. Any dividend or capital gain distribution
received from a Portfolio with respect to the Policies will be reinvested
immediately at net asset value in shares of that Portfolio and retained as
assets of the corresponding sub-account. NASL Series Trust shares are issued to
fund benefits under both variable annuity contracts and variable life insurance
policies issued by Manufacturers Life of America or life insurance companies
affiliated with the Company. Shares of NASL Series Trust will also be issued to
Manufacturers Life of America's general account for certain limited investment
purposes including initial Portfolio seed money. For a description of the
procedures for handling potential conflicts of interest arising from the funding
of such benefits, see the accompanying NASL Series Trust prospectus.
NASL Series Trust receives investment advisory services from NASL Financial
Services, Inc. NASL Financial Services, Inc. is a registered investment adviser
under the Investment Advisers Act of 1940. NASL Series Trust also employs
subadvisers. The following subadvisers provide investment subadvisory services
to the indicated portfolios:
<TABLE>
<CAPTION>
PORTFOLIO SUBADVISER
<S> <C>
Aggressive Growth Portfolios
Pacific Rim Emerging Markets Trust Manufacturers Adviser Corporation*
Emerging Growth Trust Warburg, Pincus Counsellors, Inc.
International Stock Trust Rowe Price-Fleming International, Inc.
Equity Portfolios
Quantitative Equity Trust
(formerly, the Common Stock Fund) Manufacturers Adviser Corporation*
Real Estate Securities Trust Manufacturers Adviser Corporation*
Balanced Portfolio
Balanced Trust Founders Asset Management, Inc.
Bond Portfolio
Capital Growth Bond Trust Manufacturers Adviser Corporation*
Money Market Portfolio
Money Market Trust Manufacturers Adviser Corporation*
</TABLE>
* Manufacturers Adviser Corporation is an indirect wholly-owned subsidiary of
Manufacturers Life.
10
<PAGE> 15
What Are The Investment Objectives and Certain Policies Of The Portfolios?
The investment objectives and certain policies of the Portfolios 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 Trust. The investment objective of the Emerging Growth Trust
is maximum capital appreciation. Warburg, Pincus Counsellors, Inc. manages the
Emerging Growth Trust and will pursue this objective by investing primarily in
a portfolio of equity securities of domestic companies. The Emerging Growth
Trust ordinarily will invest at least 65% of its total assets in common stocks
or warrants of emerging growth companies that represent attractive
opportunities for maximum capital appreciation.
Balanced Trust. The investment objective of the Balanced Trust is current
income and capital appreciation. Founders Asset Management, Inc. is the
manager of the Balanced Trust and seeks to attain this objective by investing
in a balanced portfolio of common stocks, U.S. and foreign government
obligations and a variety of corporate fixed-income securities.
Capital Growth Bond Trust. The investment objective of the Capital Growth Bond
Trust is to achieve growth of capital by investing in medium-grade or better
debt securities, with income as a secondary consideration. Manufacturers
Adviser Corporation manages the Capital Growth Bond Trust. The Capital Growth
Bond Trust differs from most "bond" funds in that its primary objective is
capital appreciation, not income.
Money Market Trust. The investment objective of the Money Market Trust is to
obtain maximum current income consistent with preservation of principal and
liquidity. Manufacturers Adviser Corporation manages the Money Market Trust and
seeks to achieve this objective by investing in high quality, U.S. dollar
denominated money market instruments.
Quantitative Equity Trust (formerly, the Common Stock Fund). The investment
objective of the Quantitative Equity Trust 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. Manufacturers
Adviser Corporation manages the Quantitative Equity Trust.
Real Estate Securities Trust. The investment objective of the Real Estate
Securities Trust is to achieve a combination of long-term capital appreciation
and satisfactory current income by investing in real estate related equity and
debt securities. Manufacturers Adviser Corporation manages the Real Estate
Securities Trust.
International Stock Trust. The investment objective of the International Stock
Trust is to achieve long-term growth of capital. Rowe Price-Fleming
International, Inc. manages the International Stock Trust and seeks to obtain
this objective by investing primarily in common stocks of established, non-U.S.
companies.
Pacific Rim Emerging Markets Trust. The investment objective of the Pacific Rim
Emerging Markets Trust is to achieve long-term growth of capital. Manufacturers
Adviser Corporation manages the Pacific Rim Emerging Markets Trust and seeks to
achieve this investment objective by investing in a diversified portfolio that
is comprised primarily of common stocks and equity-related securities of
corporations domiciled in countries of the Pacific Rim region.
A full description of the NASL Series Trust, its investment objectives,
policies and restrictions, the risks associated therewith, its expenses, and
other aspects of its operation is contained in the accompanying NASL Series
Trust prospectus, which should be read together with this prospectus.
11
<PAGE> 16
Description Of The Policies
What Are The Policy Charges?
The following charges will apply to the Policies in the circumstances indicated.
The imposition of the charges depends on the average net value of amounts
invested in the Variable Accounts (mortality and expense risks charge), how
large the Total Policy Value is (administration fee), whether cash withdrawals
in excess of prescribed amounts are made or the Policy is fully surrendered
(withdrawal charge), and where the Policyowner resides (premium tax charge). No
deduction is made from purchase payments, unless the Policyowner lives in a
jurisdiction that requires premium taxes to be so deducted, and consequently,
100% of the Policyowner's payment is usually credited in full to the Policy on
the date made.
Administration Fee. An administration fee equal to 2% of the Total Policy Value
up to a maximum of $30 will be deducted during the accumulation period from a
Policy on the last day of a Policy Year if the Total Policy Value on that date
is less than $25,000. The Total Policy Value is the sum of the Variable Policy
Value and the Guaranteed Interest Account. The administration fee will also be
deducted on a pro rata basis upon full surrender of a Policy on a date other
than the last day of a Policy Year if on the date of full surrender the Total
Policy Value is less than $25,000. The fee will be taken before any withdrawal
charge is applied. The fee will be deducted from the Guaranteed Interest
Account and, if necessary, from the value of the Policy in the Variable Accounts
in the following order: the Variable Account invested in shares of the Money
Market Trust, the Variable Account invested in shares of the Capital Growth Bond
Trust, the Variable Account invested in shares of the Emerging Growth Trust, the
Variable Account invested in shares of the Balanced Trust, the Variable Account
invested in shares of the Quantitative Equity Trust (formerly, the Common Stock
Fund), the Variable Account invested in shares of the Real Estate Securities
Trust, the Variable Account invested in shares of the International Stock Trust,
and the Variable Account invested in shares of the Pacific Rim Emerging Markets
Trust.
The administration fee is paid to Manufacturers Life of America to compensate
it for the administrative costs associated with the Policies and the operations
of Separate Account Two, including the establishment and maintenance of Policy
records, processing transactions and communicating with Policyowners. Although
12
<PAGE> 17
administrative expenses may rise in the future, Manufacturers Life of America
guarantees that it will not increase the amount of the administration fee under
outstanding Policies. Moreover, Manufacturers Life of America does not expect
to recover from the administration fee any amount in excess of its accumulated
administrative expenses.
Withdrawal Charge. A withdrawal charge (contingent deferred sales charge) may
be imposed on cash withdrawals from, and the full surrender of, a Policy. A
cash withdrawal will result in a reduction in the Total Policy Value by an
amount equal to the amount withdrawn. A full surrender will reduce the Total
Policy Value to zero, thus resulting in termination of the Policy.
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. Agents' commissions will not exceed 5% of
purchase payments. Under certain circumstances agents may be eligible for a
bonus payment not exceeding 1% of purchase payments. In addition, agents who
meet certain productivity and persistency standards will be eligible for
additional compensation.
In any Policy Year after the first and before the Annuity Date, up to 10% of
the Total Policy Value as of the most recent Policy Anniversary may be
surrendered or withdrawn free of the withdrawal charge. Amounts surrendered or
withdrawn during a Policy Year which exceed 10% of the Total Policy Value as of
the most recent Policy Anniversary will be subject to a withdrawal charge. The
withdrawal charge is determined by applying a percentage to the amount of the
requested withdrawal subject to the withdrawal charge, which percentage is
based upon when the purchase payments to which such amount is deemed
attributable were made, as follows:
<TABLE>
<S> <C>
Number of complete Policy Years elapsed
since purchase payment was made: Withdrawal Charge
0 8%
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 0%
</TABLE>
Where the amount withdrawn is deemed attributable to purchase payments made in
different Policy Years, different percentages will be applied to the portions
of the amount withdrawn attributable to such payments.
For purposes of determining the withdrawal charge applicable to a full
surrender or cash withdrawal, any amount surrendered or withdrawn, other than
an amount not subject to a withdrawal charge by reason of the 10% withdrawal
provision described above, will be deemed to be a liquidation of a purchase
payment, and
13
<PAGE> 18
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 such 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 the withdrawal charge exceed 8% of the total
purchase payments made.
No withdrawal charge will be applied: (1) at the Annuity Date, (2) when the
Policyowner is an individual and a death benefit payment is being made or (3)
when the Policyowner is not an individual and a death benefit payment is being
made on account of the death of the annuitant. A withdrawal charge will apply
if the Policy is not owned by an individual and a death benefit payment is
being made solely because a new annuitant has been named. (See "What Are The
Death Benefit Provisions?") A death benefit not subject to the withdrawal
charge also includes any payment to the spouse of the individual Policyowner
after the Policyowner's death, except for a full surrender or cash withdrawal
attributable to purchase payments made after the death of the Policyowner.
Any withdrawal charge applicable to a full surrender or cash withdrawal and
any applicable administration fee will be deducted from the amount being
withdrawn. The minimum cash withdrawal that can be requested at any one time
is $300.
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 charge described below.
Mortality And Expense Risks Charge. A charge at an annual rate of 1.00% of the
Variable Policy Value is made for the mortality and expense risks that
Manufacturers Life of America assumes. This charge is deducted daily from
amounts invested in the Variable Accounts by assessing a charge against the
assets of Separate Account Two at an annual rate of 1.00%, consisting of .10%
for the mortality risk and .90% for the expense risk.
The mortality risk assumed is 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 and
the risk that mortality will cause a Policy to terminate prematurely before the
assumed annuitization date. The expense risk assumed is that expenses in
administering the Policies will be greater than Manufacturers Life of America
estimated. Manufacturers Life of America will realize a gain from this charge
to the extent it is not needed to provide benefits and pay expenses under the
Policies.
Premium Tax Charge. Manufacturers Life of America will deduct any premium or
similar state or local tax attributable to a Policy. Currently, such taxes
range up to 3% depending on applicable law. Although the deduction can be made
either from purchase payments or from the Total Policy Value, it is anticipated
that premium taxes will be deducted from the Total Policy Value at the time it
is applied to provide an annuity unless required otherwise by applicable law.
When
14
<PAGE> 19
taken from the Total Policy Value before annuitization, the premium tax
deduction will be made first from the Guaranteed Interest Account and, if
necessary, from the Variable Accounts in the manner described above for the
administration fee.
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. Currently there is no charge for Asset
Allocation Balancer transfers; however, Manufacturers Life of America reserves
the right to institute a charge on 90 days' written notice to the Policyowner.
How Is A Policy Purchased?
The Policies are designed for use in connection with retirement plans entitled
to special tax treatment under Sections 401, 408 or 457 of the Code and
retirement plans and trusts not entitled to any special tax treatment. The
Policies are appropriate for plans with individual accounts or for purchase
directly by individuals.
Persons seeking to purchase Policies must submit an application and a check for
the initial purchase payment. The application 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 first 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 five business days, Manufacturers
Life of America will offer to return the purchase payment.
Free Look Right. Within ten days after receiving a Policy, the Policyowner may
return it for cancellation by mailing it to the Service Office. Immediately
upon its receipt, the Policy will be deemed void from the beginning. Within
seven
15
<PAGE> 20
days after receipt, except where state insurance law requires return of the
Policy Value, Manufacturers Life of America will refund in full any purchase
payment made.
What Restrictions Apply To Purchase Payments?
Purchase payments are made directly by the Policyowner. They may be made at
any time until the Annuity 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. Purchase payments must be made to the Manufacturers Life of America
Service Office.
The minimum initial purchase payment is $1,000. This may be allocated to any
of the Variable Accounts or to the Guaranteed Interest Account in increments of
not less than $50. Subsequent purchase payments may be as little as $50,
although higher or lower increments may be invoked with respect to purchase
payments payable pursuant to a pre-authorized payment plan. The minimum amount
that may be allocated to any one Variable Account or to the Guaranteed Interest
Account from purchase payments is $50. If an additional purchase payment would
cause the Total Policy Value to exceed $1,000,000, or if the Total 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 the Total
Policy Value should fall to zero, the Policy will be terminated and no further
purchase payments may be made.
A Policyowner should specify how each purchase payment is to be allocated. If
no allocation is specified, a purchase payment will be allocated entirely to
the Guaranteed Interest Account. Allocations will be made at the end of the
valuation period 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 mailed by the Policyowner.
If a purchase payment is allocated to the Guaranteed Interest Account because
no allocation was specified, a notice of that fact will accompany the
confirmation.
What Is The Variable Policy Value
And How Is It Determined?
The Variable Policy Value is the sum of a Policy's interest in each of the
Variable Accounts. It is determined by multiplying the number of units
credited to the policy for each Variable Account by the current unit value.
The Variable Policy Value on any date that is not a valuation date will be
determined as of the next valuation date.
Crediting Units. Upon receipt of a purchase payment at its Service Office, or
other office or entity so designated by Manufacturers Life of America,
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
16
<PAGE> 21
Variable Account. The number of units to be credited for each Variable Account
is determined by dividing the portion of the purchase payment allocated to
that Variable Account by the unit value for the valuation period in which the
purchase payment and, with respect to the initial payment only, all required
documentation properly completed was received at the Service Office. Units for
a Variable Account are also credited in a similar manner to reflect any
transfers to a Variable Account.
The value of a unit varies from one valuation period to the next depending upon
the investment results of the applicable Variable Account. The value of a unit
for each Variable Account was arbitrarily set at $10 for the first valuation
period in which monies were first allocated to that Variable Account. The
value of a unit for any subsequent valuation period is determined by
multiplying the value for the immediately preceding valuation period by the net
investment factor for that Variable Account for the valuation period for which
the value is being determined.
Net Investment Factor. The net investment factor is an index applied to
measure the investment performance of a Variable Account from one valuation
period to the next. The net investment factor may be greater than, less than
or equal to one. Therefore, the value of a unit may increase, decrease or
remain the same. The net investment factor for any Variable Account for any
valuation period is determined by adding one to the fraction obtained by
dividing (a) by (b) and then subtracting (c) from the result, where:
(a) is the investment income plus realized and unrealized gains and losses of
the Variable Account during the valuation period;
(b) is the value of the net assets of the Variable Account as of the beginning
of the valuation period adjusted for allocations and transfers to and
withdrawals and transfers from the Variable Account; and
(c) is the risk charge factor determined by Manufacturers Life of America for
the valuation period to reflect its charge for assuming the mortality and
expense risks. This mortality and expense risks charge will be deducted at an
annual rate of 1%.
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
the Variable Account.
Cancelling Units. Units will be cancelled to reflect the assessment of any
administration fee or premium tax deduction assessed against a Variable Account
and any transfers or withdrawals from a Variable Account. The number of units
cancelled will be based upon the applicable unit value for the valuation period
in which the assessment, transfer or withdrawal is made. Units will also be
cancelled on the Annuity Date or upon surrender of the Policy or payment of a
death benefit.
17
<PAGE> 22
What Are The Provisions On Transfers?
Subject to the minimums described below, transfers may be made among any of the
accounts at any time during the Policy Year. There is no minimum transfer
amount required for transfers to the Guaranteed Interest Account, for transfers
pursuant to the Asset Allocation Balancer program, or for transfers designed to
reallocate assets among accounts. Otherwise the minimum dollar amount of all
transfers pursuant to a single transfer request is $500.
Manufacturers Life of America will allow a Policyowner to direct transfers free
of charge during a Policy Year. Manufacturers Life of America does, however,
reserve the right to limit, upon notice, the maximum number of transfers a
Policyowner may make to one per month or six at any time within a Policy Year.
In addition, Manufacturers Life of America reserves the right to defer the
transfer privilege at any time that it is unable to purchase or redeem shares of
the portfolios. Manufacturers Life of America also reserves the right to modify
or terminate the transfer privilege at any time in accordance with applicable
law.
Transfer requests must be in a format 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 resulting from 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.
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 the Guaranteed Interest Account.
Under the Dollar Cost averaging program the Policyowner will designate a dollar
amount of available assets to be transferred each month from one Variable
Account into any other Variable Account(s) 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 Total Policy Value exceeds $15,000; otherwise a charge of $5.00 per
transfer or series of transfers occuring 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 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.
18
<PAGE> 23
Under the Asset Allocation Balancer program the Policyowner will designate an
allocation of Total Policy Value among the Variable Accounts. At six month
intervals beginning six months after the date the application was signed,
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. A change to the Policyowner's premium allocation instruction will
automatically result in a change in Asset Allocation Balancer instructions so
that the two are identical unless the Policyowner instructs Manufacturers Life
of America otherwise or a Dollar Cost Averaging request is in effect. Currently,
there is no charge for this program. However, Manufacturers Life of America
reserves the right to institute a charge on 90 days' written notice to the
Policyowner. Manufacturers Life of America reserves the right to cease to offer
the Asset Allocation Balancer Program on 90 days' written notice to the
Policyowner.
What Surrender Or Withdrawal Rights Are Available?
At any time prior to the Annuity Date, a Policyowner may fully surrender the
Policy for, or make a cash withdrawal in an amount not exceeding, its Total
Policy Value, reduced by any applicable withdrawal charge and administration
fee. 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 the case of a full surrender of a Policy, Manufacturers Life of America will
pay the Total Policy Value less any applicable withdrawal charge and
administration fee as of the valuation period in which the request for
surrender is received at its Service Office, and the Policy will be cancelled.
In the case of a cash withdrawal from the Variable Account, Manufacturers Life
of America will pay the amount requested less any applicable withdrawal charge
and cancel that number of units credited to each Variable Account necessary to
equal the amount of the withdrawal.
For a cash withdrawal, the Policyowner should specify the account from which the
withdrawal should be made. If no specification is made, the withdrawal will be
made first from the Guaranteed Interest Account and, if necessary, from the
value of the Policy in the Variable Accounts in the following order: the
Variable Account invested in shares of the Money Market Trust, the Variable
Account invested in shares of the Capital Growth Bond Trust, the Variable
Account invested in shares of the Emerging Growth Equity Trust, the Variable
Account invested in shares of the Balanced Trust, the Variable Account invested
in shares of the Quantitative Equity Trust (formerly, the Common Stock Fund),
the Variable Account invested in shares of the Real Estate Securities Trust, the
Variable Account invested in shares of the International Stock Trust and the
Variable Account invested in shares of the Pacific Rim Emerging Markets Trust.
There is no limit on the frequency of cash withdrawals; however, the requested
withdrawal must be at least $300. Any request for a cash withdrawal or to
fully surrender a Policy must be in writing and delivered to the Manufacturers
Life of America Service Office. If the amount withdrawn exceeds $10,000,
Manufacturers Life of America reserves the right to require that the request be
accompanied by a guarantee of the Policyowner's signature by a commercial bank,
trust company,
19
<PAGE> 24
member of the National Association of Securities Dealers, Inc.,
a notary public,
or any other individual or association designated by Manufacturers Life of
America.
What Are The Death Benefit Provisions?
If the Policyowner dies before the Annuity Date and the beneficiary is not the
Policyowner's spouse, the entire value of the Policy must either be distributed
to the beneficiary in a lump sum within five years of the Policyowner's death
or applied to provide an annuity. If applied to provide an annuity, the
annuity must begin within one year of the Policyowner's death. Until a
lump-sum distribution is made or an annuity option is elected, the Variable
Policy Value will continue to reflect the investment performance of the
selected Variable Accounts unless a transfer or withdrawal is made by the
beneficiary. The Total Policy Value on the date the Service Office receives
notice of the beneficiary's election of an annuity will be used to purchase an
annuity. All of the annuity options available on the Annuity Date are
available to a beneficiary, except that the beneficiary may not select a joint
and survivor annuity or an annuity with a certain period that is longer than
the beneficiary's life expectancy. (See "What Are The Annuity Options?" in
Appendix A.)
If the Policyowner's spouse is the beneficiary, the Policy will continue with
the spouse as the Policyowner. If the Policyowner was also the annuitant, the
spouse must choose a new annuitant.
If the Policyowner is not an individual and either the annuitant dies before
the Annuity Date or the Policyowner changes the annuitant, the entire value of
the Policy must be paid to the Policyowner in a lump sum not later than five
years after the annuitant's death or the change in annuitant. The Policyowner
may select the date of payment. If a Qualified Policy is owned by the trustee
of a plan described in section 401 of the Code, the trustee may continue the
Policy after the death of the annuitant. If the trustee continues the Policy,
a new annuitant must be named.
When Do Annuity Payments Commence?
Annuity payments will begin on the Annuity Date. Such payments will be made by
application of the Total Policy Value to provide an annuity. Annuity payments
will be made on a fixed basis only. The annuity options available are
described in Appendix A under "What Are The Annuity Options?".
The Policyowner selects the Annuity Date in the application. The Policyowner
may change the 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.
Written request for such change must be received by the Manufacturers Life of
America Service Office at least thirty days prior to the new Annuity Date.
There are legal restrictions on the Annuity Date for Qualified Policies. In
general, annuity payments for Qualified Policies owned by an individual cannot
begin later than April 1 following the calendar year in which the Policyowner
20
<PAGE> 25
attains age 70. 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 Annuity Date is determined by the terms of the trust and
plan.
Annuity payments may be made either monthly, quarterly, semi-annually or
annually. If application of the Total 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 Total Policy Value to the
Policyowner in a single sum in lieu of annuity payments.
If a Qualified Policy is held by a trustee under an employee benefit plan
described in section 401(a) of the Code, the trustee may, prior to the Annuity
Date, have part of the Total Policy Value applied to provide an annuity
(partial annuitization). The same rules that apply to annuity payments
commencing on the Annuity Date apply to partial annuitization. If the trustee
partially annuitizes, the Total Policy Value will be reduced by the amount
applied to provide an annuity. Any withdrawal or surrender made after partial
annuitization will continue to be subject to withdrawal charges. For purposes
of determining the amount of the withdrawal charge, the amounts applied to
provide an annuity will not be treated as a liquidation of a purchase payment.
(See "What Surrender Or Withdrawal Rights Are Available?")
Under What Circumstances May Portfolio Shares Be Substituted?
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 Portfolios
may become unsuitable for investment by the Account 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
Portfolio 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 separate
accounts with the Account, to establish additional sub-accounts within the
Account, to operate the Account as a management investment company or other
form permitted by law, and to deregister the Account under the 1940 Act. Any
such change would be made only if permissible under applicable federal and
state law.
What Are The 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:
(1) when the New York Stock Exchange ("Exchange") is closed (other than
customary weekend and holiday closings); (2) when trading on the Exchange is
restricted; (3) when an emergency exists as a result of which disposal of
securities held in Separate Account Two is not reasonably practicable or it is
not reasonably practicable to determine the value of the Account's net assets;
or (4) during any other period when the S.E.C., by order, so permits for the
protection of security holders;
21
<PAGE> 26
provided that applicable rules and regulations of the S.E.C. shall
govern as to whether the conditions described in (2) and (3) exist.
Manufacturers Life of America also reserves the right to delay transfer
or payment of assets from 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.
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 Total 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.
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.
Except as discussed below, ownership of the Policy may be changed or the Policy
collaterally assigned at any time prior to the Annuity 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 owner'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, or by
an employer under a plan which satisfies section 457 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.
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 named. 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.
22
<PAGE> 27
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
How Is Manufacturers Life of America Taxed?
Manufacturers Life of America is taxed as a life insurance company under
Subchapter L of the Code. Since the operations of the Account are part of, and
are taxed with, the operations of Manufacturers Life of America, the Account is
not separately taxed as a "regulated investment company" under Subchapter
Manulife Financial of the Code. Under existing federal income tax laws,
investment income and capital gains of the Account 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 are automatically
applied to increase reserves, Manufacturers Life of America does not anticipate
that it will incur any federal income tax liability attributable to the
Account, 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, then Manufacturers Life of America may impose a charge
against the Account in order to make provision for such taxes.
What Is The Tax Treatment Of The Policies?
The Policies are designed for use in connection with retirement 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.
The United States Congress has, in the past, considered legislation that, if
enacted, would have taxed the inside build-up in certain annuities. While this
proposal was not enacted, Congress remains interested in the taxation of the
inside build-up of annuity contracts. Policyholders should consult their tax
advisor regarding the status of new, similar provisions before purchasing the
Policy.
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 an annuity contract is not taxable to the contract owner or annuitant
until received, either in the form of annuity payments, as contemplated by the
23
<PAGE> 28
contract, or in some other form of distribution. However, as a general rule,
deferred annuity contracts 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 contracts is taxed as
ordinary income that is received or accrued by the owner of the contract during
the taxable year.
In certain circumstances, contracts 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 an annuity contract providing
non-qualified deferred compensation for its employees. Exceptions to the
general rule (of immediate taxation) for contracts which are held by a
corporation, trust, or similar entity may apply with respect to (1) annuities
held by an estate of a decedent, (2) annuity contracts 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
contract; 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 or her last taxable year.
In the case of a withdrawal, amounts received are taxable as ordinary income to
the extent that the cash value of the contract (determined without regard to
any withdrawal charges) before the withdrawal exceeds the "investment in the
contract." Amounts loaned under an annuity contract or amounts received
pursuant to an assignment or pledge of an annuity contract are treated as
withdrawals. There are special rules for loans to participants from annuity
contracts held in connection with qualified retirement plans or IRAs. With
respect to contracts issued after April 22, 1987, if an individual transfers an
annuity contract without adequate consideration to a person other than his or
her spouse (or former spouse incident to divorce), he or she will be taxed on
the difference between the contract value minus any withdrawal charge 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.
24
<PAGE> 29
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 contract owner reaches age
59 1/2; (b) attributable to the contract owner's becoming disabled; (c) made to
a beneficiary on the death of the contract owner; (d) made to a beneficiary on
the death of the primary annuitant if the contract owner is not a natural
person; (e) made as a series of substantially equal periodic payments for the
life of the annuitant (or the joint lives of the annuitant and beneficiary),
subject to certain recapture rules; (f) made under an annuity contract 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; and (h) made with respect to certain annuities
issued in connection with structured settlement agreements. Also, special
rules may apply to annuity contracts 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 or it is owned in connection with 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 near 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 Policyholder's gross income from distributions
which are not in the form of an annuity, the Code provides that all deferred
annuity contracts issued by the same company to the same Policyholder during
any calendar year shall be treated as one annuity contract. 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, see your tax adviser.
25
<PAGE> 30
What Qualified Plans May Utilize The Policies?
The contracts 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. Also, distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis into an
IRA. 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 witholding rules. Sales of
the Policies for use with IRAs may be subject to special requirements of the
Internal Revenue Service. 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 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.
State And Local Government Deferred Compensation Plans. Section 457 of the
Code permits employees of state and local governments, rural electric
cooperatives and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants
in an eligible deferred compensation plan. To the extent Policies are used in
connection with an eligible plan, employees are considered general creditors of
the employer and the employer as owner of the Policy has the sole right to the
proceeds of the Policy. Those who intend to use Policies in connection with
such plans should seek qualified advice as to the tax and legal consequences of
such an investment.
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
26
<PAGE> 31
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.
Other Matters
What Voting Rights Do Policyowners Have?
As stated above, all of the assets held in the Variable Accounts will be
invested in shares of a particular Portfolio of NASL Series Trust.
Manufacturers Life of America is the legal owner of those shares and as such
has the right to vote upon 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 held in the Variable Accounts in
accordance with instructions received from Policyowners having an interest in
such Accounts. 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 or regulations change
so as to permit Manufacturers Life of America to vote shares held in the
Variable Accounts in its own right, it may elect to do so.
The number of 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 Portfolio. The number will
be determined as of a date chosen by Manufacturers Life of America, but not
more than 90 days before the shareholders' meeting. Fractional votes are
counted. Voting instructions will be solicited in writing at least 14 days
prior to the meeting of the shareholders of NASL Series Trust.
Where Can Financial Information Be Found?
Financial statements of Manufacturers Life of America and of the Account are
included in the Statement of Additional Information.
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 Portfolios of NASL Series Trust with
other mutual funds with similar investment objectives. Performance rankings are
not to be considered indicative of the future performance of the Portfolios.
The quotation services which are currently followed by the Company include
Lipper Analytical
27
<PAGE> 32
Services, Inc.("Lipper"), 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, the Financial
Times Actuaries World Index and the following Lipper Indices: Money-Market
Funds, Corporate Bond Funds, Balanced Funds, Growth Funds, Small-Company Growth
Funds, Real Estate Funds, International Funds and Pacific Region Funds.
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 Portfolio underlying a sub-account will replace
such periods for a Portfolio that has not been in existence for a full
five-year or ten-year period. In the case of a new Portfolio 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 on the last day of the period. For the purpose of the calculations it
is assumed that an initial payment of $1,000 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 were first offered to the public in 1987. 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, with all Policy charges and the daily mortality and expense
charges deducted. Policy charges for periods prior to 1988 are based on the
average rate for the first six years in which the Policies were offered.
28
<PAGE> 33
Total returns if surrendered for the period ending December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
AVG. ANNUAL AGGREGATE
AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL TOTAL RETURN TOTAL RETURN
TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN SINCE SINCE
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS** INCEPTION* INCEPTION*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth N/A N/A N/A N/A N/A N/A
Balanced N/A N/A N/A N/A N/A N/A
Capital Growth Bond 11.99% 5.69% 7.79% 8.21% 10.34% 210.77%
Quantitative Equity
(formerly Common Stock) 20.89% 9.44% 12.59% N/A 8.75% 107.03%
Real Estate Securities 6.95% 8.59% 17.07% N/A 10.00% 128.66%
Money Market (2.41%) 1.45% 2.65% 4.57% 4.63% 61.18%
International Stock N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets 3.32% N/A N/A N/A (2.55%) (3.15%)
</TABLE>
* June 26, 1984 for the Capital Growth Bond Trust; June 18, 1985 for the
Money Market Trust; May 1, 1987 for the Quantitative Equity (formerly
Common Stock) and Real Estate Securities Trusts; October 4, 1994 for the
Pacific Rim Emerging Markets Trust; and December 31, 1996 for the Emerging
Growth, Balanced and International Stock Trusts.
** Policies have been offered only since November 3, 1987. Performance
data for earlier periods are hypothetical figures based on the
performance of the Portfolio in which policy assets may be invested.
Total returns if not surrendered are as follows:
<TABLE>
<CAPTION>
AVG. ANNUAL AGGREGATE
AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL TOTAL RETURN TOTAL RETURN
TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN SINCE SINCE
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS** INCEPTION* INCEPTION*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth N/A N/A N/A N/A N/A N/A
Balanced N/A N/A N/A N/A N/A N/A
Capital Growth Bond 18.99% 7.16% 8.23% 8.21% 10.34% 210.77%
Quantitative Equity
(formerly Common Stock) 27.89% 10.81% 12.96% N/A 8.75% 107.03%
Real Estate Securities 13.95% 9.98% 17.39% N/A 10.00% 128.66%
Money Market 4.59% 3.02% 3.21% 4.57% 4.63% 61.18%
International Stock N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets 10.32% N/A N/A N/A 3.09% 3.85%
</TABLE>
* June 26, 1984 for the Capital Growth Bond Trust; June 18, 1985 for the
Money Market Trust; May 1, 1987 for the Quantitative Equity (formerly,
Common Stock) and Real Estate Securities Trusts; October 4, 1994 for the
Pacific Rim Emerging Markets Trust; and December 31, 1996 for the Emerging
Growth, Balanced and International Stock Trusts.
** Policies have been offered only since November 3, 1987. Performance data
for earlier periods are hypothetical figures based on the performance of
the Portfolio in which policy assets may be invested.
29
<PAGE> 34
Aggregate total returns if surrendered as of the end of each year since
inception are as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth N/A N/A N/A N/A N/A N/A
Balanced N/A N/A N/A N/A N/A N/A
Capital Growth Bond 11.99% (12.10%) 1.41% (3.21%) 7.15% (2.57%)
Quantitative Equity
(formerly Common Stock) 20.89% (11.82%) 4.21% (3.04%) 20.80% (11.74%)
Real Estate Securities 6.95% (10.51%) 13.34% 12.03% 31.60% (12.17%)
Money Market (2.41%) (4.18%) (5.32%) (4.66%) (2.32%) (0.29%)
International Stock N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets 3.32% N/A N/A N/A N/A N/A
1989 1988 1987 1986 1985 1984
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth N/A N/A N/A N/A N/A N/A
Balanced N/A N/A N/A N/A N/A N/A
Capital Growth Bond 4.62% (1.96%) (9.54%) 13.08% 16.79% 5.11%
Quantitative Equity
(formerly Common Stock) 21.22% 0.73% (21.50%) N/A N/A N/A
Real Estate Securities 0.03% 2.57% (15.44%) N/A N/A N/A
Money Market (0.52%) (1.26%) (1.91%) (2.29%) (3.94%) N/A
International Stock N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets N/A N/A N/A N/A N/A N/A
</TABLE>
All of the above performance data are based on the actual historical
performance of the Portfolios for specified periods, and the figures are not
intended to indicate future performance.
30
<PAGE> 35
Aggregate total returns as of the end of each year since inception, if not
surrendered are as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
------ ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity N/A N/A N/A N/A N/A N/A
Balanced Assets N/A N/A N/A N/A N/A N/A
Capital Growth Bond 18.99% (5.48%) 9.41% 4.79% 15.15% 5.43%
Quantitative Equity (Formerly Common Stock) 27.89% (5.19%) 12.21% 4.96% 28.80% (5.10%)
Real Estate Securities 13.95% (3.77%) 21.34% 20.03% 39.60% (5.56%)
Money-Market 4.59% 2.82% 1.68% 2.34% 4.68% 6.71%
International N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets 10.32% (5.86%) N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986 1985 1984
- ---------------------------- ------ ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Emerging Growth Equity N/A N/A N/A N/A N/A N/A
Balanced Assets N/A N/A N/A N/A N/A N/A
Capital Growth Bond 12.62% 6.04% (2.73%) 21.08% 24.79% 13.11%
Quantitative Equity (Formerly Common Stock) 29.22% 8.73% (15.59%) N/A N/A N/A
Real Estate Securities 8.03% 10.57% (9.07%) N/A N/A N/A
Money-Market 7.52% 5.74% 5.09% 4.71% 3.06% N/A
International N/A N/A N/A N/A N/A N/A
Pacific Rim Emerging Markets N/A N/A N/A 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.
31
<PAGE> 36
APPENDIX A
This Appendix describes the fixed portion of the Policies, which consists of
the provisions based on the general account of Manufacturers Life of America,
including those relating to the Guaranteed Interest Account and the annuity
options. The interests of Policyowners arising from the allocation of purchase
payments or the transfer of values to the Guaranteed Interest Account are not
registered under the Securities Act of 1933, and the general account of
Manufacturers Life of America is not registered as an investment company under
the Investment Company Act of 1940. Accordingly, the fixed portion of the
Policies is not subject to the provisions that would apply if registration
under such acts were required. Manufacturers Life of America has been advised
that the staff of the Securities and Exchange Commission has not reviewed the
disclosures in this prospectus that relate to the Guaranteed Interest Account.
Disclosures regarding the Guaranteed Interest Account and the general account,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in the prospectus.
What Is The Guaranteed Interest Account?
As noted in the prospectus, Policyowners may accumulate funds on a variable
basis, by allocating purchase payments for investment in one or more of the
Portfolios of NASL Series Trust, or on a fixed basis by allocating purchase
payments to the Guaranteed Interest Account. The Guaranteed Interest Account
provides for the credit of a guaranteed rate of interest of at least 4% per
year to amounts allocated to such account. Amounts in the Guaranteed Interest
Account will receive a Guaranteed Interest Rate set by Manufacturers Life of
America on each Policy Anniversary for the ensuing Policy Year.
The $30 annual administration fee, if any, and any premium tax to be deducted
against the Total Policy Value will be assessed against the Guaranteed Interest
Account first to the extent sufficient amounts are available.
What Are The 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 4% 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.
32
<PAGE> 37
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 Total
Policy Value applied to provide the annuity, payments will
continue until the Total 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%.
33
<PAGE> 38
Please tear off, complete and return the form below to order a Statement of
Additional Information for the Multi-Account Flexible Payment Variable Annuity
Policy offered by this prospectus. Address the form to the Service Office as
follows:
The Manufacturers Life Insurance
Company of America
Service Office
200 Bloor Street East
Toronto, Ontario, Canada
M4W 1E5
Multi-Account Flexible Payment
Variable Annuity Policy
Please send me a free copy of the Statement of Additional Information for the
Multi-Account Flexible Payment Variable Annuity Policy.
(Please Print or Type)
Name: Policy#:
Address:
T
E
A
R
O
U
T
34
<PAGE> 39
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
35
<PAGE> 40
Statement of Additional Information
SEPARATE ACCOUNT TWO
of
The Manufacturers Life Insurance
Company of America
This Statement of Additional Information relates to certain Flexible Payment
Variable Annuity Policies issued by the Manufacturers Life Insurance Company of
America. The Statement of Additional Information is not a prospectus but should
be read in conjunction with the prospectus of Separate Account Two dated
December 31, 1996 which may be obtained from the Manufacturers Life of America
Service Office, 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
The date of this Statement of Additional Information is December 31, 1996.
The Manufacturers
Life Insurance Company
of America
ManEquity, Inc.
36
<PAGE> 41
Table of Contents
Page
----
Who Sells The Policies? .................................... 38
What Responsibilities Has Manufacturers Life Assumed? ...... 38
Who Are The Directors And Officers Of Manufacturers
Life of America? ....................................... 38
What State Regulations Apply? .............................. 41
Is There Any Litigation Pending? ........................... 41
Where Can Further Information Be Found? .................... 41
Legal Matters .............................................. 41
Experts .................................................... 41
Financial Statements ....................................... 42
37
<PAGE> 42
Who Sells 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 an Underwriting 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, 1993, December 31, 1994, and December 31,
1995, ManEquity, Inc. received $2,053,998, $2,389,494, and $3,355,185
respectively, as compensation for sales of the Policies by its registered
representatives. Of these amounts, $1,897,235, $2,283,353, and $3,262,711
respectively, were remitted to Manufacturers Life to reimburse it for
commissions paid to such registered representatives pursuant to the agreement
described below.
What Responsibilities Has Manufacturers Life Assumed?
Manufacturers Life and The Manufacturers Life Insurance Company (U.S.A.)
("Manufacturers USA") have entered into an agreement with ManEquity, Inc.
pursuant to which Manufacturers Life and Manufacturers USA, 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 and Manufacturers USA for all sales commissions paid by
Manufacturers Life and Manufacturers USA and will pay Manufacturers Life and
Manufacturers USA for its other services under the agreement in such amounts and
at such times as agreed to by the parties.
Manufacturers Life and Manufacturers USA, have also entered into
a Service Agreement with Manufacturers Life of America pursuant to which
Manufacturers Life and Manufacturers USA will provide to Manufacturers Life of
America 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 and Manufacturers USA on behalf of Manufacturers Life of
America. For 1993, 1994, and 1995, Manufacturers Life of America paid
$17,831,031, $21,326,446, and $23,211,484 respectively, to Manufacturers Life
pursuant to the agreement.
Who Are The Directors And Officers Of Manufacturers Life of America?
The directors and executive officers of Manufacturers Life of America, together
with their principal occupations during the past five years, are as follows:
38
<PAGE> 43
<TABLE>
<CAPTION>
Positions With
Manufacturers Life
Name of America Principal Occupation
<S> <C> <C>
Sandra M. Cotter Director Attorney 1989-present, Dykema
(34) Gossett
James D. Gallagher Director, Secretary, Vice President, Legal Services
(42) and General Counsel --January 1996-present, The
Manufacturers Life Insurance
Company; Vice President,
Secretary and General Counsel--
1994-present, North American
Security Life; Vice President
and Associate General Counsel--
1991-1994, The Prudential
Insurance Company of America
Bruce Gordon Director Vice President, -U.S. Operations
(53) -Pensions -- 1990-present, The
Manufacturers Life Insurance
Company
Donald A. Guloien Director and President Senior Vice President, Business
(39) Development 1994-present, The
Manufacturers Life Insurance
Company; Vice President, U.S.
Individual Business -- 1990-1994,
The Manufacturers Life Insurance
Company
Theodore Kilkuskie, Jr. Director Vice President, U.S. Individual
(41) Insurance -- June 1995-present,
The Manufacturers Life Insurance
Company; Executive Vice President,
Mutual Funds -- January 1995-May 1995,
State Street Research; Vice President,
Mutual Funds -- 1987-1994, Metropolitan
Life Insurance Company
</TABLE>
39
<PAGE> 44
<TABLE>
<CAPTION>
Positions With
Manufacturers Life
Name of America Principal Occupation
<S> <C> <C>
Joseph J. Pietroski Director Senior Vice President, General
(58) Counsel and Corporate Secretary --
1988-present, The Manufacturers
Life Insurance Company
John D. Richardson Chairman and Director Senior Vice President and General
(58) 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 and CFO -- 1989-1991,
Canada Trust
John R. Ostler Vice President, Chief Financial Vice President -- 1992-
(43) Actuary and Treasurer present, The Manufacturers Life
Insurance Company; Vice President
Insurance Products -- 1990-1992,
The Manufacturers Life Insurance
Company
Douglas H. Myers Vice President, Assistant Vice President and
(42) Finance and Compliance Controller, U.S. Operations --
Controller 1988-present; The Manufacturers
Life Insurance Company
Hugh McHaffie Vice President Vice President & Product Actuary --
(37) June 1990-present, North American
Security Life
</TABLE>
40
<PAGE> 45
What State Regulations Apply?
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.
Is There Any Litigation Pending?
No litigation is pending that would have a material effect upon the Account or
NASL Series Trust.
Where Can Further Information Be Found?
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 and the
Statement of Additional Information. The prospectus and the Statement of
Additional Information do not include all the information set forth in the
registration statement. The omitted information may be obtained from 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 the prospectus.
Legal Matters
The legal validity of the Policies has been passed on by James D. Gallagher,
Esq., Secretary and General Counsel of Manufacturers Life of America. Jones &
Blouch L.L.P., Washington, D.C. has passed on certain matters relating to the
federal securities law.
Experts
The financial statements of The Manufacturers Life Insurance Company of America
and of Separate Account Two of The Manufacturers Life Insurance Company of
America for the period ended December 31, 1995, appearing in this Statement of
Additional Information, have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their reports thereon also appearing
elsewhere herein. Such financial statements have been included herein in
reliance upon such reports given upon the authority of such firm as experts in
auditing and accounting.
41
<PAGE> 46
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.
42
<PAGE> 47
Report of Independent Auditors
To the Board of Directors
The Manufacturers Life Insurance
Company of America
We have audited the accompanying statement of assets and liabilities of Separate
Account 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) as of December 31, 1995 and the related statement
of operations for the year then ended, and the statements of changes in net
assets for each of the periods presented herein. These financial statements are
the responsibility of The Manufacturers Life Insurance Company of America's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Separate Account Two of The
Manufacturers Life Insurance Company of America at December 31, 1995, and the
results of its operations for the year then ended and the changes in its net
assets for each of the periods presented herein, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
February 2, 1996
50
<PAGE> 48
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statement of Assets and Liabilities
December 31, 1995
<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,
3,253,525 shares (cost $63,821,544) $ 75,184,182
Common Stock Fund,
1,455,513 shares (cost $21,291,543) $ 25,135,478
Real Estate Securities Fund,
1,920,277 shares (cost $27,596,075) $ 29,002,463
Balanced Assets Fund,
2,796,100 shares (cost $42,199,124)
Capital Growth Bond Fund,
1,330,622 shares (cost $14,917,846)
Money Market Fund,
1,703,408 shares (cost $18,029,071)
International Fund,
356,021 shares (cost $3,579,877)
Pacific Rim Emerging Markets Fund,
261,205 shares (cost $2,552,133)
------------ ------------ ------------
75,184,182 25,135,478 29,002,463
Receivable for policy-related transactions 25,534 15,359 31,606
------------ ------------ ------------
Net assets $ 75,209,716 $ 25,150,837 $ 29,034,069
============ ============ ============
Units outstanding 1,670,956 977,871 1,149,409
============ ============ ============
Net asset value per unit $45.01 $25.72 $25.26
============ ============ ============
</TABLE>
See accompanying notes.
51
<PAGE> 49
<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> <C>
ASSETS
Investment in Manulife Series
Fund, Inc.--at market value:
Emerging Growth Equity Fund,
3,253,525 shares (cost $63,821,544) $75,184,182
Common Stock Fund,
1,455,513 shares (cost $21,291,543) 25,135,478
Real Estate Securities Fund,
1,920,277 shares (cost $27,596,075) 29,002,463
Balanced Assets Fund,
2,796,100 shares (cost $42,199,124) $47,961,811 47,961,811
Capital Growth Bond Fund,
1,330,622 shares (cost $14,917,846) $15,031,374 15,031,374
Money Market Fund,
1,703,408 shares (cost $18,029,071) $18,464,059 18,464,059
International Fund,
356,021 shares (cost $3,579,877) $3,798,197 3,798,197
Pacific Rim Emerging Markets Fund,
261,205 shares (cost $2,552,133) $2,704,903 2,704,903
----------- ----------- ----------- ---------- ---------- ------------
47,961,811 15,031,374 18,464,059 3,798,197 2,704,903 217,282,467
Receivable for policy-related transactions 13,017 27,345 88,003 1,450 6,438 208,752
----------- ----------- ----------- ---------- ---------- ------------
Net assets $47,974,828 $15,058,719 $18,552,062 $3,799,647 $2,711,341 $217,491,219
=========== =========== =========== ========== ========== ============
Units outstanding 2,189,632 789,655 1,290,129 354,776 261,208
=========== =========== =========== ========== ========== ============
Net asset value per unit $21.91 $19.07 $14.38 $10.71 $10.38
=========== =========== =========== ========== ========== ============
</TABLE>
52
<PAGE> 50
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statement of Operations
Year ended December 31, 1995
<TABLE>
<CAPTION>
EMERGING COMMON REAL ESTATE
GROWTH EQUITY STOCK SECURITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Dividend income $1,809,461 $ - $483,929
Expenses:
Mortality and expense risks charge 630,475 199,735 270,300
------------ ---------- ---------
Net investment income (loss) 1,178,986 (199,735) 213,629
------------ ---------- ---------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) from security transactions:
Proceeds from sales 8,790,460 1,833,948 5,825,223
Cost of securities sold 7,106,591 1,582,299 5,602,096
------------ ---------- ---------
Net realized gain (loss) 1,683,869 251,649 223,127
------------ ---------- ---------
Unrealized (depreciation) appreciation
of investments:
Beginning of year (546,353) (1,126,818) (1,736,824)
End of year 11,362,638 3,843,935 1,406,388
------------ ---------- ---------
Net unrealized appreciation
during the year 11,908,991 4,970,753 3,143,212
------------ ---------- ---------
Net realized and unrealized gain on
investments 13,592,860 5,222,402 3,366,339
------------ ---------- ---------
Net increase in net assets derived
from operations $14,771,846 $5,022,667 $3,579,968
=========== ========== ==========
</TABLE>
See accompanying notes.
53
<PAGE> 51
<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> <C>
Investment income:
Dividend income $57,666 $1,046,495 $ 668 $89,871 $32,371 $3,520,461
Expenses:
Mortality and expense risks charge 411,536 127,065 155,913 25,067 16,867 1,836,958
---------- ---------- ---------- -------- -------- -----------
Net investment income (loss) (353,870) 919,430 (155,245) 64,804 15,504 1,683,503
---------- ---------- ---------- -------- -------- -----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) from security transactions:
Proceeds from sales 4,206,198 2,183,478 13,837,707 270,103 731,924 37,679,041
Cost of securities sold 3,972,255 2,260,461 13,514,965 264,304 708,114 35,011,085
---------- ---------- ---------- -------- -------- -----------
Net realized gain (loss) 233,943 (76,983) 322,742 5,799 23,810 2,667,956
---------- ---------- ---------- -------- -------- -----------
Unrealized (depreciation) appreciation
of investments:
Beginning of year (3,067,645) (1,230,071) (96,137) (5,646) (14,100) (7,823,594)
End of year 5,762,687 113,528 434,988 218,320 152,770 23,295,254
---------- ---------- ---------- -------- -------- -----------
Net unrealized appreciation
during the year 8,830,332 1,343,599 531,125 223,966 166,870 31,118,848
---------- ---------- ---------- -------- -------- -----------
Net realized and unrealized gain on
investments 9,064,275 1,266,616 853,867 229,765 190,680 33,786,804
---------- ---------- ---------- -------- -------- -----------
Net increase in net assets derived
from operations $8,710,405 $2,186,046 $698,622 $294,569 $206,184 $35,470,307
========== ========== ========== ======== ======== ===========
</TABLE>
54
<PAGE> 52
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
<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. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 1,178,986 $ (235,238) $ (199,735) $ 661,874 $ 213,629 $ 383,354
Net realized gain (loss) 1,683,869 281,851 251,649 114,996 223,127 166,653
Unrealized appreciation
(depreciation) of
investments
during the year 11,908,991 (2,010,919) 4,970,753 (1,522,706) 3,143,212 (1,864,424)
----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease) in net
assets derived from operations 14,771,846 (1,964,306) 5,022,667 (745,836) 3,579,968 (1,314,417)
----------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 9,075,130 20,192,208 3,138,683 6,307,192 2,395,793 11,495,742
Transfer on death (40,037) (34,481) (7,409) (9,742) (17,513) (32,754)
Transfer on terminations (3,053,099) (1,175,021) (681,944) (211,937) (1,232,704) (365,263)
Transfer of maturity 83,583 (85,686) 67,266 (88,804) 4,515 (51,701)
Net interfund transfers 2,606,912 2,047,524 1,459,853 619,575 (2,418,292) 616,085
----------- ----------- ----------- ----------- ----------- -----------
8,672,489 20,944,544 3,976,449 6,616,284 (1,268,201) 11,662,109
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net
assets 23,444,335 18,980,238 8,999,116 5,870,448 2,311,767 10,347,692
NET ASSETS
Beginning of year 51,765,381 32,785,143 16,151,721 10,281,273 26,722,302 16,374,610
----------- ----------- ----------- ----------- ----------- -----------
End of year $75,209,716 $51,765,381 $25,150,837 $16,151,721 $29,034,069 $26,722,302
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
55
<PAGE> 53
<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. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ (353,870) $ 1,558,050 $ 919,430 $ 610,867 $ (155,245) $ 290,192
Net realized gain (loss) 233,943 126,212 (76,983) (126,465) 322,742 33,679
Unrealized appreciation
(depreciation) of
investments
during the year 8,830,332 (3,343,719) 1,343,599 (1,003,242) 531,125 (76,402)
----------- ----------- ----------- ---------- ---------- -----------
Increase (decrease) in net
assets derived from
operations 8,710,405 (1,659,457) 2,186,046 (518,840) 698,622 247,469
----------- ----------- ----------- ---------- ---------- -----------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 5,071,298 14,684,868 2,368,800 4,091,955 10,039,733 9,297,572
Transfer on death (84,545) (51,630) (12,196) (2,484) (27,370) --
Transfer on terminations (1,647,362) (715,314) (719,239) (530,903) (2,420,434) (504,302)
Transfer of maturity 12,834 (59,741) 25,737 (49,450) (38,588) (2,334)
Net interfund transfers 377,983 (860,845) 438,281 (686,906) (2,334,352) (801,647)
----------- ----------- ----------- ---------- ----------- -----------
3,730,208 12,997,338 2,101,383 2,822,212 5,218,989 7,989,289
----------- ----------- ----------- ---------- ----------- -----------
Net increase in net
assets 12,440,613 11,337,881 4,287,429 2,303,372 5,917,611 8,236,758
NET ASSETS
Beginning of year 35,534,215 24,196,334 10,771,290 8,467,918 12,634,451 4,397,693
----------- ----------- ----------- ----------- ----------- -----------
End of year $47,974,828 $35,534,215 $15,058,719 $10,771,290 $18,552,062 $12,634,451
=========== =========== =========== =========== =========== ===========
</TABLE>
56
<PAGE> 54
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
PACIFIC RIM
INTERNATIONAL EMERGING MARKETS
SUB-ACCOUNT SUB-ACCOUNT TOTAL
------------------------- -------------------------- ------------------------
YEAR ENDED *PERIOD ENDED YEAR ENDED *PERIOD ENDED YEAR ENDED YEAR ENDED
DEC. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94 DEC. 31/95 DEC. 31/94
---------- ------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 64,804 $ 1,326 $ 15,504 $ 1,553 $ 1,683,503 $ 3,271,978
Net realized gain (loss) 5,799 (89) 23,810 (873) 2,667,956 595,964
Unrealized appreciation
(depreciation) of investments
during the year 223,966 (5,646) 166,870 (14,100) 31,118,848 (9,841,158)
---------- -------- ---------- -------- ------------ -----------
Increase (decrease) in net assets
derived from operations 294,569 (4,409) 206,184 (13,420) 35,470,307 (5,973,216)
---------- -------- ---------- -------- ------------ ------------
FROM CAPITAL TRANSACTIONS
Additions (deductions) from:
Transfer of net premiums 1,231,995 266,607 988,086 162,380 34,309,518 66,498,524
Transfer on death -- -- -- -- (189,070) (131,091)
Transfer on terminations (61,097) (69) (45,863) (40) (9,861,742) (3,502,849)
Transfer of maturity -- -- -- -- 155,347 (337,716)
Net interfund transfers 1,467,355 604,696 929,903 484,111 2,527,643 2,022,593
---------- -------- ---------- -------- ------------ ------------
2,638,253 871,234 1,872,126 646,451 26,941,696 64,549,461
---------- -------- ---------- -------- ------------ ------------
Net increase in net
assets 2,932,822 866,825 2,078,310 633,031 62,412,003 58,576,245
NET ASSETS
Beginning of year 866,825 -- 633,031 -- 155,079,216 96,502,971
---------- -------- ---------- -------- ------------ ------------
End of year $3,799,647 $866,825 $2,711,341 $633,031 $217,491,219 $155,079,216
========== ======== ========== ======== ============ ============
</TABLE>
* Reflects the period from commencement of operations October 4, 1994 through
December 31, 1994.
57
<PAGE> 55
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1995
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 Manulife Reinsurance Corporation (U.S.A.) ("MRC"), as
a separate investment account on November 3, 1987. MRC 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 charged with liabilities arising out of any other business
Manufacturers Life of America may conduct.
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. Net investment
income and net realized and unrealized gain (loss) on investments in
Manulife Series Fund, Inc. are reinvested.
b. Realized gains and losses on the sale of investments are computed on the
first-in, first-out basis.
c. Dividend income is recorded on the ex-dividend date.
58
<PAGE> 56
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Federal Income Taxes - Manufacturers Life of America, the Separate
Account's sponsor, is taxed as a "life insurance company" under the
Internal Revenue Code. Under these provisions of the Code, the operations
of the Separate Account form part of the sponsor's total operations and are
not taxed separately.
The current year's operations of the Separate Account are not expected to
affect the sponsor's tax liabilities and, accordingly, no charges were made
against the Separate Account for federal, state and local taxes. However,
in the future, should the sponsor incur significant tax liabilities related
to Separate Account operations, it intends to make a charge or establish a
provision within the Separate Account for such taxes.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. 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, 1995 were $66,126,070 and $37,679,041,
respectively and for the year ended December 31, 1994 were $83,423,197 and
$15,243,525, respectively.
59
<PAGE> 57
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
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.
60
<PAGE> 58
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, 1995 and 1994, 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, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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 2, 1996
74
<PAGE> 59
The Manufacturers Life Insurance Company of America
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-----------------------------
<S> <C> <C>
ASSETS
Bonds, at amortized cost (market $66,046,733--
1995 and $51,082,395--1994) $ 62,757,202 $ 52,149,080
Stocks 22,584,259 25,629,580
Short-term investments -- 10,914,561
Policy loans 6,955,292 4,494,390
------------ ------------
Total investments 92,296,753 93,187,611
Cash 9,674,362 5,069,197
Life insurance premiums deferred and uncollected 504,818 13,646
Accrued investment income 1,059,536 796,333
Separate account assets 480,404,450 302,736,198
Funds receivable on reinsurance assumed -- 880,284
Receivable for undelivered securities 146,328 69,003
Taxes recoverable 3,308,316 --
Investment in subsidiary 1,080,184 --
Other assets 267,015 333,651
------------ ------------
Total assets $588,741,762 $403,085,923
============ ============
LIABILITIES, CAPITAL AND SURPLUS
Aggregate policy reserves $26,683,090 $29,761,174
Other contract deposits 1,238,943 3,938,425
Interest maintenance and asset valuation reserves 4,742,400 111,566
Policy and contract claims 582,853 94,346
Provision for policyholder dividends payable 2,346,258 1,385,409
Amounts due to affiliates 9,049,217 7,377,108
Payable for undelivered securities 80,821 3,512,459
Accrued liabilities 7,315,315 4,773,565
Separate account liabilities 480,404,450 302,736,198
------------ ------------
Total liabilities 532,443,347 353,690,250
Capital and surplus:
Common shares, par value $1.00; authorized,
5,000,000 shares; issued and outstanding
4,501,857 shares (4,501,855 shares in 1994) 4,501,857 4,501,855
Preferred shares, par value $100; authorized
5,000,000 shares; issued and outstanding
105,000 shares 10,500,000 10,500,000
Surplus note 8,500,000 --
Capital paid in excess of par value 63,500,180 49,849,998
Deficit (30,703,622) (15,456,180)
------------ ------------
Total capital and surplus 56,298,415 49,395,673
------------ ------------
Total liabilities, capital and surplus $588,741,762 $403,085,923
============ ============
</TABLE>
See accompanying notes.
75
<PAGE> 60
The Manufacturers Life Insurance Company of America
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Life and annuity premiums, principally
reinsurance assumed $ 5,956,997 $ 25,385,628 $ 12,745,981
Other life and annuity considerations 153,859,957 168,075,003 113,332,974
Investment income, net of investment
expenses 5,840,560 3,588,629 3,323,962
Amortization of interest maintenance reserve 23,975 19,527 32,866
Commission and expense allowance
on reinsurance ceded 147,109 187,694 --
Foreign exchange (loss) gain (284,127) 114,728 (197,971)
Other revenue 211,191 54,763 33,935
------------ ------------ ------------
Total revenues 165,755,662 197,425,972 129,271,747
Benefits paid or provided:
(Decrease) increase in aggregate policy reserves (3,078,084) 16,741,569 5,168,484
(Decrease) increase in liability for deposit funds (2,699,482) 654,214 2,820,520
Transfers to separate accounts, net 99,807,392 136,896,150 98,601,141
Death benefits 3,981,377 640,875 582,534
Disability benefits 123,786 -- --
Maturity benefits 207,719 580,615 79,253
Surrender benefits 22,028,224 3,701,591 2,319,926
------------ ------------ ------------
120,370,932 159,215,014 109,571,858
Insurance expenses:
Management fee 22,864,000 21,222,310 12,378,288
Commissions 21,411,198 23,416,110 14,742,130
General expenses 15,475,621 8,260,467 5,108,104
Commissions and expense allowances
on reinsurance assumed 1,014,163 810,252 329,634
------------ ------------ ------------
60,764,982 53,709,139 32,558,156
------------ ------------ ------------
Loss before policyholders' dividends
and federal income tax (15,380,252) (15,498,181) (12,858,267)
Dividends to policyholders 2,367,002 1,149,719 837,454
------------ ------------ ------------
Loss before federal income tax (17,747,254) (16,647,900) (13,695,721)
Federal income tax benefit (4,115,770) -- (324,643)
------------ ------------ ------------
Net loss from operations after policyholders'
dividends and federal income tax (13,631,484) (16,647,900) (13,371,078)
Net realized capital gains (net of capital
gains tax of $807,453 in 1995; $0 in 1994,
and $236,415 in 1993, and $1,567,770 in
1995, $(554,000) in 1994, and $347,292 in
1993 transferred (from) to the interest
maintenance reserve) (73,343) (3,012,485) 93,618
------------ ------------ ------------
Net loss from operations $(13,704,827) $(19,660,385) $(13,277,460)
============ ============ ============
</TABLE>
See accompanying notes.
76
<PAGE> 61
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, 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 preferred shares 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, net 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 stocks 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
Net loss from operations (13,704,827) (13,704,827)
Issuance of common shares 2 12,569,998 12,570,000
Issuance of surplus note 8,500,000 8,500,000
Contribution of Manufacturers
Adviser Corporation 1,080,184 1,080,184
Increase in asset valuation reserve (3,285,208) (3,285,208)
Increase in nonadmitted assets (1,053,124) (1,053,124)
Change in net unrealized capital
losses 2,921,742 2,921,742
Change in liability for reinsurance
in unauthorized companies (126,025) (126,025)
----------- ----------- ------------ ------------
Balance, December 31, 1995 $23,501,857 $63,500,180 $(30,703,622) $ 56,298,415
=========== =========== ============ ============
</TABLE>
See accompanying notes.
77
<PAGE> 62
The Manufacturers Life Insurance Company of America
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums collected, net $159,337,079 $ 193,478,637 $ 126,075,035
Policy benefits paid, net (25,827,767) (4,982,444) (2,829,812)
Commissions and other expenses paid (62,302,890) (48,141,400) (35,203,997)
Net investment income 5,570,951 3,343,515 3,197,892
Other income and expenses (3,607,415) (1,946,063) (1,592,957)
Transfers to separate accounts, net (98,031,353) (136,950,482) (98,220,292)
------------ ------------- -------------
Net cash (used in) provided by
operating activities (24,861,395) 4,801,763 (8,574,131)
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments 74,009,501 73,187,733 28,248,633
Purchase of investments (77,607,686) (91,063,874) (73,688,735)
------------ ------------- -------------
Net cash used in investing activities (3,598,185) (17,876,141) (45,440,102)
FINANCING ACTIVITIES
Issuance of shares 12,570,000 20,000,000 5,850,000
Contribution of Manufacturers Adviser
Corporation 1,080,184 -- --
Issuance of surplus notes 8,500,000 -- --
Surplus withdrawn from separate account -- -- 48,701,076
------------ ------------- -------------
Net cash provided by financing activities 22,150,184 20,000,000 54,551,076
------------ ------------- -------------
Net (decrease) increase in cash and
short-term investments (6,309,396) 6,925,622 536,843
Cash and short-term investments
at beginning of year 15,983,758 9,058,136 8,521,293
------------ ------------- -------------
Cash and short-term investments
at end of year $ 9,674,362 $ 15,983,758 $ 9,058,136
============ ============= =============
</TABLE>
See accompanying notes.
78
<PAGE> 63
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION
ORGANIZATION
The Manufacturers Life Insurance Company of America (Manufacturers Life of
America or the Company) is a wholly-owned subsidiary of Manulife Reinsurance
Corporation (U.S.A.) (the Parent), (formerly Manufacturers Life Insurance
Company of Michigan), which is in turn a wholly-owned subsidiary of The
Manufacturers Life Insurance Company (Manulife Financial), a Canadian-based
mutual life insurance company (Notes 4 and 5).
The Company issues and sells variable universal life and variable annuity
products in the United States. The Company also has a branch operation in Taiwan
to develop and market traditional insurance for the Taiwanese market. At
December 31, 1995 the Company had assets of $11,234,000 and liabilities of
$5,696,000 in the Taiwan branch.
During 1995, the Company's parent contributed $12,570,000 of capital in return
for 2 shares of the Company's common stock par value $1 with the remaining
$12,569,998 being recorded as contributed surplus. During 1995, the Company's
parent transferred 100% of the outstanding stock of Manufacturers Adviser
Corporation to the Company which was recorded at book values as contributed
surplus. During 1995, the Company's parent also contributed $8,500,000 in return
for a 10-year surplus note bearing interest at 6.625%.
Subsequent to the year end, the Parent contributed $15,000,000 capital in return
for 1 share of the Company's common stock par value $1 with the remaining
$14,999,999 being recorded as contributed surplus.
During 1994, the Company's parent contributed $20,000,000 of 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.
79
<PAGE> 64
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
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.
In April 1993, the Financial Accounting Standards Board issued Interpretation
No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises." The Interpretation as amended is
effective for 1996 annual financial statements and thereafter, and will no
longer allow statutory financial statements to be described as being prepared in
conformity with generally accepted accounting principles (GAAP). Upon the
effective date of the Interpretation, in order for financial statements to be
described as being prepared in accordance with GAAP, life insurance companies
will be required 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.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
All amounts presented are expressed in U.S. Dollars. Certain amounts from prior
periods have been reclassified to conform with current-period presentation.
80
<PAGE> 65
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCKS
Stocks are carried at market value.
BONDS
Bonds not backed by other loans are carried at amortized cost as computed using
the interest method. Loan backed bonds and other structured securities are
valued at amortized cost using the interest method including anticipated
prepayments. Prepayment assumptions are updated periodically and are accounted
for using the prospective 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.
POLICY LOANS
Policy loans are reported at unpaid principal balances which approximate fair
value.
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.
81
<PAGE> 66
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.
INVESTMENT IN SUBSIDIARIES
The investment in Manufacturers Adviser Corporation ("MAC") is carried at net
equity of MAC as computed under generally accepted accounting principles.
Undistributed income and loss is treated as a component of unrealized gains and
losses and applies directly to capital and surplus.
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.
82
<PAGE> 67
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
3. INVESTMENTS AND INVESTMENT INCOME
The amortized cost and market value of investments in fixed maturities (bonds)
as of December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
QUOTED OR
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
NAME OF PERSON COST GAINS LOSSES VALUE
- -------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Government $15,145,033 $ 681,032 $ (57,916) $15,768,149
Foreign governments 6,071,376 157,635 -- 6,229,011
Corporate 31,046,219 2,508,780 -- 33,554,999
Mortgage-backed securities:
U.S. Government agencies 9,522,771 -- -- 9,522,771
Corporate 971,803 -- -- 971,803
----------- ---------- ---------- -----------
$62,757,202 $3,347,447 $ (57,916) $66,046,733
=========== ========== ========== ===========
</TABLE>
Proceeds from sales of investments in debt securities during 1995 were
$67,506,660. Gross gains of $2,630,790 and gross losses of $218,778 were
realized on those sales.
The amortized cost and market value of investments in fixed maturities (bonds)
as of December 31, 1994 is summarized as follows:
<TABLE>
<CAPTION>
QUOTED OR
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Government $31,784,581 $ 243,971 $ (441,592) $31,586,960
Foreign governments 7,388,458 -- (294,385) 7,094,073
Corporate 9,986,244 2,457 (577,136) 9,411,565
Mortgage-backed securities:
U.S. Government agencies 2,480,571 -- -- 2,480,571
Corporate 509,226 -- -- 509,226
----------- --------- ----------- -----------
$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.
83
<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 fixed maturities at December 31, 1995 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 $ 564,857 $ 564,857
Greater than 1; up to 5 years 4,079,679 4,181,361
Greater than 5; up to 10 years 14,786,283 15,858,075
Due after 10 years 32,831,809 34,947,866
Mortgage-backed securities 10,494,574 10,494,574
----------- -----------
$62,757,202 $66,046,733
=========== ===========
</TABLE>
At December 31, 1995, $6,617,749 of bonds at amortized cost were on deposit
with government insurance departments to satisfy regulatory regulations.
Major categories of net investment income for each year were as follows:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Gross investment income:
Dividends; Manulife Series Fund,
Inc. (Note 9) $ 645,908 $1,244,794 $1,440,392
Bond income 4,430,236 1,712,294 1,422,064
Policy loans 360,406 236,972 166,514
Short-term investments 754,346 501,477 384,178
---------- ---------- ----------
6,190,896 3,695,537 3,413,148
Investment expenses (350,336) (106,908) (89,186)
---------- ---------- ----------
Net investment income $5,840,560 $3,588,629 $3,323,962
========== ========== ==========
</TABLE>
84
<PAGE> 69
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS
Manufacturers Life of America has a formal service agreement with Manulife
Financial which can be terminated by either party upon two months' notice. Under
the Agreement, Manufacturers Life of America will pay direct operating expenses
incurred each year by Manulife Financial on behalf of Manufacturers Life of
America. Services provided under the Agreement include legal, actuarial,
investment, data processing and certain other administrative services. Costs
incurred under this Agreement were $23,211,484 in 1995, $21,326,446 in 1994, and
$12,467,474 in 1993. In addition, there were $5,052,062 agents' bonuses in 1995,
$7,795,184 in 1994, and $5,363,558 in 1993 which were allocated to the Company
and are included in commissions.
In addition, the Company has several 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.
85
<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>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Life and annuity premiums
assumed $5,956,997 $25,385,628 $12,745,981
Other life and annuity
considerations ceded (598,330) (437,650) (201,685)
Commissions and expense
allowances on reinsurance
assumed (1,014,163) (810,252) (329,634)
Policy reserves assumed 48,714,791 47,672,591 23,070,952
Policy reserves ceded 3,833,247 3,786,647 3,782,156
</TABLE>
During 1993, the Company assumed the first $50,000 of initial face amount on
two blocks of business. This resulted in transfers of $10,837,000 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.
Manulife Financial provides a claims paying guarantee to all U.S. policyholders.
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. Taxes recoverable in the financial statements
represent tax-related amounts receivable from affiliates.
86
<PAGE> 71
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAX
The Company, Parent and The Manufacturers Life Insurance Co. (U.S.A.) have
available consolidated net operating losses of approximately $51,400,000 which
will expire in the year 2009 and capital loss carryforwards of approximately
$102,800,000 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.
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. The Company remains obligated for amounts
ceded in the event reinsurers do not meet their obligations.
Summary financial information related to these reinsurance activities is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Life insurance premiums ceded $275,145 $218,767 $130,913
</TABLE>
87
<PAGE> 72
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
8. 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, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
MORTALITY INTEREST
AGGREGATE RESERVES TABLE RATES
-------------------- --------- --------
1995 1994
---- ----
<S> <C> <C> <C>
$25,561,456 $28,553,885 1980 CSO 4%
(173,768) (189,080) Reinsurance ceded
1,295,402 1,396,369 Miscellaneous
- ----------- -----------
$26,683,090 $29,761,174
=========== ===========
</TABLE>
At December 31, 1995 the Company's annuity reserves and deposit fund liabilities
are comprised as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
--------- -------
(in 000's)
<S> <C> <C>
Subject to discretionary withdrawal:
With market value adjustment $222,994 97.8%
At book value less current surrender charge 1,239 .5%
Not subject to discretionary withdrawal 3,863 1.7%
-------- -----
Total gross annuity actuarial reserves and
deposit fund liabilities $228,096 100%
======== =====
</TABLE>
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.
88
<PAGE> 73
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
9. INVESTMENT IN SEPARATE ACCOUNTS (CONTINUED)
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, 1995, the $22,584,259 common stock represents the
Company's seed money investment in Manulife Series Fund, Inc.
During 1995, 1994, and 1993, the following dividends were received from Manulife
Series Fund, Inc.:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Separate Account One $ 24,041 $ 38,732 $1,610,693
Separate Account Two 3,520,461 4,574,620 7,377,861
Separate Account Three 1,693,796 1,490,374 666,141
Separate Account Four 2,445,127 3,072,376 4,966,559
General Account 645,908 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.
During 1995, the Company withdrew $6,500,000 of its seed money and accumulated
earnings from the Manulife Series Fund, Inc. and utilized these funds to pay
down its intercompany debt.
89
