<PAGE> 1
As Filed with the Securities and Exchange Commission on April 20, 1999
Registration No. 33-57020
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Post-Effective Amendment No. 9
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF l933
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
(Exact name of registrant)
MICHIGAN
(State or Other Jurisdiction of Incorporation or Organization)
500 N. Woodward Avenue
Bloomfield Hills, Michigan 48304
(Address of depositor's principal executive offices)
(416) 926-6700
(Primary Standard Industrial
(I.R.S. Employer Number) Classification Code Number)
23-2030787 6311
JAMES D. GALLAGHER, ESQ. Copy to:
Secretary and General Counsel J. Sumner Jones
The Manufacturers Life Insurance Jones & Blouch L.L.P.
Company of America Suite 405W
73 Tremont Street 1025 Thomas Jefferson Street, N.W.
Boston, MA 02108 Washington, D.C. 20037-0805
(Name and Address of Agent for Service)
<PAGE> 2
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
Registration Statement on Form S-1
Cross-Reference Sheet Required by
Regulation S-K, Item 501
<TABLE>
<CAPTION>
Form S-1
Item No. Caption Prospectus Heading
<S> <C> <C>
1 Forepart of the Registration Statement and Outside Front Cover Pages
Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages of Prospectus Cover Pages
3 Summary Information, Risk Factors and Ratio of Earnings Summary of Policies
to Fixed Charges
4 Use of Proceeds General Information about
Manufacturers Life of America;
General Information about
Manufacturers Life of America's
Separate Accounts; General
Information about Manufacturers
Investment Trust
5 Determination of Offering Price Not applicable
6 Dilution Not applicable
7 Selling Security Holders Not applicable
8 Plan of Distribution Other Matters ("Sale of the
Policies")
9 Description of Securities to be Registered General Information about
Manufacturers Life of America's
Separate Accounts; General
Information about NASL Series
Trust; Description of the
Policies; Other Matters
10 Interests of Named Experts and Counsel Not applicable
11 Information with Respect to the Registrant General Information about
Manufacturers Life of America;
Additional Information About
Manufacturers Life of America
12 Disclosure of Commission Position on Indemnification Not applicable
for Securities Act Liabilities
</TABLE>
2
<PAGE> 3
PART I.
INFORMATION REQUIRED IN PROSPECTUS
3
<PAGE> 4
[LIFESTYLE LOGO]
LIFESTYLE FROM MANULIFE FINANCIAL
PROSPECTUS FOR
MULTI-ACCOUNT FLEXIBLE
PAYMENT VARIABLE ANNUITY
ISSUED BY
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
PRINTED May 1, 1999
4
<PAGE> 5
PROSPECTUS [LOGO]
LIFESTYLE FROM MANULIFE FINANCIAL
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
MULTI-ACCOUNT FLEXIBLE PAYMENT
VARIABLE ANNUITY POLICIES
This prospectus describes Multi-Account Flexible Payment Variable
Annuity Policies (the "Policies" or "Policy"). The Manufacturers Life Insurance
Company of America ("Manufacturers Life of America" or the "Company") issues the
Policies in connection with retirement plans that may or may not be entitled to
special income tax treatment. Although the Company is not currently issuing new
Policies, existing Policyowners may continue to make purchase payments.
- - Policyowners may allocate purchase payments among three types of
accounts: the Variable Accounts, the Guaranteed Interest Account
and, in some jurisdictions, the Fixed Accounts.
- - The Variable Accounts are sub-accounts of the Company's Separate
Account Two. The Company invests the assets of each sub-account in
shares of a corresponding investment portfolio ("Portfolio") of
Manufacturers Investment Trust (sometimes referred to as the
"Trust"). The accompanying Trust prospectus describes the
Portfolios currently available to Policyholders. These are:
- - Emerging Small Company Trust Quantitative Equity Trust
- - Balanced Trust Real Estate Securities Trust
- - Investment Quality Bond Trust International Stock Trust
- - Money Market Trust Pacific Rim Emerging Markets Trust
- - Purchase payments allocated to the Guaranteed Interest Account
earn interest at an annual rate which the Company can reset daily
but which it guarantees will not to be less than 3%.
- - Purchase payments allocated to the Fixed Accounts earn a fixed
rate of interest only if held to maturity. The Company holds Fixed
Account Value in either its Separate Account A or its General
Account.
- - The Company makes annuity payments on a fixed basis only.
Prior to the Annuity Commencement Date, the Company will furnish each
Policyowner at least annually a report showing certain account information
including unit values, current rates, current purchase payments allocations and
cash surrender value. In addition, reports that include financial statements of
the Trust and information about the investment holdings of its various
Portfolios will be sent semi-annually.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS
<PAGE> 6
INFORMATION ABOUT THE POLICIES AND THE COMPANY THAT A PROSPECTIVE PURCHASER
SHOULD KNOW BEFORE INVESTING.
THE POLICIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION. NEITHER THE SEC NOR ANY STATE HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Additional information about the Policies and the Registrant has been filed with
the SEC. The SEC maintains a Web cite (http://www.sec.gov) that contains such
information including material incorporated by reference and other information
regarding registrants that file electronically.
HOME OFFICE: SERVICE OFFICE:
The Manufacturers Life Insurance The Manufacturers Life Insurance
Company of America Company of America
500 N. Woodward Avenue 200 Bloor Street East
Bloomfield Hills, Michigan 48304 Toronto, Ontario, Canada M4W 1E5
Telephone: 1-800-827-4546
(1-800-VARILIN[E])
The date of this prospectus is
May 1, 1999.
2
<PAGE> 7
PROSPECTUS CONTENTS
SUMMARY OF POLICIES 5
POLICYOWNER INQUIRIES 7
EXPENSE TABLE 7
CONDENSED FINANCIAL INFORMATION 9
GENERAL INFORMATION ABOUT MANUFACTURERS LIFE
OF AMERICA 11
Manufacturers Life of America and Manufacturers Life 12
General Information about Manufacturers Life
Of America's Separate Accounts 12
Manufacturers Life of America's Separate Account
Two: The Variable Accounts 12
General Information About Manufacturers Investment Trust 12
INVESTMENT OBJECTIVES AND CERTAIN POLICIES
OF THE PORTFOLIOS 13
DESCRIPTION OF THE POLICIES 14
Purchasing A Policy 15
"Free Look" Right 15
Restrictions Applicable To Purchase Payments 15
Policy Value 15
The Fixed Accounts 16
The Guaranteed Interest Account 17
The Variable Accounts 17
Annuity Value Guarantee 18
Transfers of Policy Value 18
Dollar Cost Averaging 19
Asset Allocation Balancer 19
Surrender Or Withdrawal Rights 19
Special Policy Access 20
Provision on Death 20
Survivor Benefit Amount 21
Joint Ownership 21
Death of the Policyowner 21
Death of the Annuitant 22
Commencement of Annuity Payments 23
Substitution or Portfolio Shares 23
Policy Charges 23
Withdrawal Charge 23
Record-Keeping Charge 23
Dollar Cost Averaging Charge 25
Special Policy Access Charge 25
Premium Tax Deduction 25
Mortality And Expense Risks 25
Charges 26
Administration Charge 26
Market Value Adjustment 26
OTHER GENERAL POLICY PROVISIONS 26
Deferral of Payments 27
Annual Statements 27
Rights of Ownership 28
Beneficiary 29
Modification 29
FEDERAL TAX MATTERS 29
3
<PAGE> 8
Taxation of Manufacturers Life of America 29
Tax Treatment of the Policies 29
Purchase of Policies by Qualified Plans 31
ADDITIONAL INFORMATION ABOUT MANUFACTURERS
LIFE OF AMERICA 32
Description of Business 32
Responsibilities Assumed By Manufacturers Life 33
Selected Financial Data 33
Management Discussion and Analysis of Financial Condition
Results of Operations 34
Executive Officers and Directors 42
Executive Compensation 45
Legal Proceedings 52
State Regulations 52
OTHER MATTERS 53
Special Provisions For Group or Sponsored Arrangements 53
Sale of the Policies 53
Voting Rights 54
Further Information 54
Independent Auditors 54
Performance and Other Comparative Information 54
Advertising Performance of Variable Accounts 55
Exchange Offer
DEFINITIONS
APPENDIX A
Annuity Options
APPENDIX B 87
Sample Calculations Of Market Value Adjustments
And Withdrawal Charges
FINANCIAL STATEMENTS
THIS PROSPECTUS IS NOT AN OFFER TO SELL THE POLICIES AND IS NOT SOLICITING AN
OFFER TO BUY THE POLICIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
4
<PAGE> 9
SUMMARY OF POLICIES
OVERVIEW OF THE POLICIES. The Policies provide a flexible investment program for
accumulating amounts under retirement plans which receive favorable federal
income tax treatment pursuant to sections 401 or 408 of the Internal Revenue
Code of 1986, as amended (the "Code") ("Qualified Policies"), or under plans and
trusts not entitled to any special tax treatment ("Nonqualified Policies").
Under the Policies, the Policyowner makes purchase payments to the Company over
a period of time (the "Accumulation Period") and then, beginning on a date
selected by the Policyowner (the "Elected Annuity Date"), the Company makes
periodic annuity payments to the person designated by the Policyowner to receive
such payments. The Company generally issues the Policies to persons up to age 75
and offers the Policies both on an individual basis and in connection with group
or sponsored arrangements. See Description of the Policies -- "Purchasing A
Policy".
PURCHASE PAYMENTS. The minimum initial purchase payment is $5,000 ($2,000 for
Qualified Plans). Subsequent purchase payments must be at least $500. The
Company may alter these minimum payment amounts on 90 days written notice to the
Policyowner. It may also institute a pre-authorized payment plan which provides
for automatic monthly deductions and which may permit smaller payments.
FUNDING ARRANGEMENTS. The Policyowner may allocate purchase payments among three
types of accounts: the Variable Accounts, the Guaranteed Interest Account and,
in some jurisdictions, the Fixed Accounts.
- - The Variable Accounts are sub-accounts of the Company's Separate
Account Two. The Company invests the assets of each sub-account in
shares of a corresponding Portfolio of the Manufacturers
Investment Trust (sometimes referred to as the "Trust"). The
Company may in the future add sub-accounts and Portfolios to those
currently available to Policyowners.
- - Purchase payments allocated to the Guaranteed Interest Account
earn interest at a rate which the Company can reset daily but
which the Company guarantees will not to be less than 3% per
annum.
- - Purchase payments allocated to the Fixed Accounts earn a fixed
rate of interest only if held to maturity.
ALLOCATION OF PURCHASE PAYMENTS. The Policyowner may specify how purchase
payments are to be allocated among the Variable Accounts, Fixed Accounts and
Guaranteed Interest Account. Allocations are made as a percentage of Net
Purchase Payments. The percentage allocation to any account may be any whole
number between 0 and 100, provided the total percentage allocations equal 100.
The Policyowner may change the specified allocation of Net Purchase Payments at
any time without charge. If no allocation is specified, the Company will
allocate purchase payments as set forth in the Policyowner's previous allocation
request. See Description of the Policies -- "Restrictions Applicable To Purchase
Payments".
ANNUITY PAYMENTS. The Company makes annuity payments on a fixed basis only
beginning on the Elected Annuity Date. The Policyowner may change the Elected
Annuity Date to any date so long as annuity payments will begin by the end of
the year in which the Annuitant reaches age 85 or, under some Qualified
Policies, no later than April 1 following the year in which the Annuitant
reaches age 70. The Annuitant is the person upon whose life annuity payments are
based. If application of the Policy Value would result in annuity payments of
less than $20 monthly, $60 quarterly, $100 semi-annually or $200 annually, the
Company will pay the Policy Value to the Policyowner in a single sum. See
Description of the Policies --"Commencement of Annuity Payments".
SURRENDERS OR WITHDRAWALS. At any time prior to the Annuity Commencement Date, a
Policyowner may fully surrender the Policy for, or make a cash withdrawal in an
amount not exceeding, its Policy Value, reduced by any applicable withdrawal
charge and record-keeping charge, and adjusted for any Market Value Adjustment.
A full surrender or cash withdrawal may be subject to a tax penalty. (See "Tax
Treatment Of The Policies".) The minimum cash withdrawal that a Policyowner may
request at any one time is $500. Some Qualified Policies contain restrictions on
withdrawal rights. See Description of the Policies -- "Surrender Or Withdrawal
Rights".
5
<PAGE> 10
TRANSFERS. Subject to certain restrictions, a Policyholder may transfer amounts
at any time among the Guaranteed Interest Account, the Variable Accounts and the
Fixed Accounts (see Description of the Policies -- "Transfers of Policy Value").
- - Transfers into the accounts may be made in any amount.
- - Transfers from Fixed Accounts may be subject to a Market Value
Adjustment.
- - Transfers from any account of less than the entire account value must
be at least $500, including transfers under the Dollar Cost Averaging
program; this restriction does not apply to transfers which are made
pursuant to the Asset Allocation Balancer program or which are
designed to change percentage allocations of assets among accounts.
- - Transfers from the Guaranteed Interest Account are limited in any one
Policy Year to the greater of $500 or 15% of the Guaranteed Interest
Account Value at the previous Policy Anniversary.
CHARGES AND DEDUCTIONS.
DEDUCTIONS FROM PURCHASE PAYMENTS. There is no deduction from purchase
payments for sales expenses. The Company may deduct any applicable premium taxes
attributable to the Policies (currently such taxes range from 0% to 3.5%).
WITHDRAWAL CHARGES. The Company may impose a withdrawal charge
(contingent deferred sales charge)if the Policyowner fully surrenders or makes a
partial withdrawal under a Policy. The withdrawal charge is a percentage of the
total surrender or withdrawal amount (the "Gross Withdrawal Amount"). The
applicable percentage will depend upon the date of the purchase payment to which
the Gross Withdrawal Amount is attributed. The maximum withdrawal charge is 8%
of the Gross Withdrawal Amount, decreasing over time until, beginning in the
seventh year after the purchase payment was made, it is 0%. The withdrawal
charge may in no event exceed 8% of the total purchase payments made. The Gross
Withdrawal Amount will also be adjusted by any applicable Market Value
Adjustment and reduced by any applicable record-keeping charges or withholding
taxes.
MARKET VALUE ADJUSTMENT. When the Policyowner does not maintain amounts
allocated to a Fixed Account until the last day of a Guarantee Period (the
"Maturity Date") for that account, whether as a result of a surrender, partial
withdrawal, transfer or the Annuity Commencement Date, the Company will apply a
Market Value Adjustment. The Market Value Adjustment may cause a deduction from,
or an addition to, the amounts surrendered, withdrawn, transferred or
annuitized. In an investment environment of rapidly increasing interest rates,
the Market Value Adjustment could cause the amount available from a Fixed
Account upon surrender, withdrawal, transfer or on the Annuity Commencement Date
to be substantially less than the amount allocated to that Fixed Account.
RECORD-KEEPING CHARGE. The Company will deduct a record-keeping charge
equal to 2% of the Policy Value, up to a maximum of $30, on the last day of each
Policy Year or on the date of a full surrender made before the end of a Policy
Year.
MORTALITY AND EXPENSE RISKS AND ADMINISTRATION CHARGES. The Company
will deduct(i)mortality and expense risks charges and (ii) an administration
charge. Mortality and expense risks charges are deducted daily at an annual rate
of .80% of assets of Separate Account Two, and monthly, at the beginning of each
Policy Month, at an annual rate of .45% of the sum of the values of a Policy's
interest in the sub-accounts of Separate Account Two ("Variable Policy Value")
and the Fixed Accounts (prior to any application of any Market Value
Adjustment). The administration charge is deducted daily at an annual rate of
.20% of the assets of Separate Account Two.
TRANSFER CHARGES. There is no charge for Dollar Cost Averaging
transfers if Policy Value exceeds $15,000. The Company otherwise charges $5 per
transfer.
FREE LOOK RIGHT. Within ten days after receiving a Policy, the
Policyowner may return it for cancellation by mailing it to the Company's
Service Office. Within seven days after receipt, except where state insurance
law
6
<PAGE> 11
requires return of any purchase payments, the Company will refund the Policy
Value plus or minus any applicable Market Value Adjustment.
POLICYOWNER INQUIRIES
Policyowners should address all communications or inquiries relating to a Policy
to the Company's Service Office at 200 Bloor Street East, Toronto, Ontario,
Canada, M4W 1E5 (telephone: 1-800-827-4546 (1-800-VARILINE)). All notices and
elections under a Policy must be received at that Service Office to be
effective.
EXPENSE TABLE
The following table and example illustrate the various costs and expenses that a
Policyowner will bear directly or indirectly. The table reflects expenses of
Separate Account Two, the Fixed Accounts and the Trust. It does not reflect any
deduction made to cover any premium taxes attributable to a Policy. Such taxes
may be as much as 3.50% depending on the law of the applicable state or local
jurisdiction. In addition, although the table does not reflect any charge for
the Special Policy Access feature, the Company reserves the right to charge an
administrative fee not to exceed $150 for withdrawal under this provision.
However, currently no charge is imposed. THE EXAMPLE INCLUDED IN THE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
EXPENSE TABLE
<TABLE>
<CAPTION>
NUMBER OF
COMPLETE POLICY
YEARS SINCE
PURCHASE
PAYMENT WITHDRAWAL
WAS MADE CHARGE
<S> <C> <C>
1. POLICY AND TRANSACTION CHARGES
(CONTRACTOWNER TRANSACTION EXPENSES):
(a) Withdrawal Charge (contingent deferred sales charge) 0-2.99 8.00%
(as a percentage of the lesser of amount surrendered or 3 6.00%
purchase payments)(1): 4 4.00%
5 2.00%
6 or more None
(b) Record-Keeping Charge $ 30(2)
(c) Dollar Cost Averaging Charge (if selected and applicable)(3) $ 5
ANNUAL RATE
2. MORTALITY AND EXPENSE RISKS CHARGE
(a) Variable (Separate) Accounts
- Charged daily as a percentage of average Variable Account
Values(4)
0.80%
- Charged monthly as a percentage of the policy month-start
Variable Account Value and Fixed Account Value 0.45%
-----
1.25%
(b) Fixed Accounts
- Charged monthly as a percentage of the policy month-start
Fixed Account Assets 0.45%
(c) Guaranteed Interest Account 0.00%
3. OTHER SEPARATE ACCOUNT (ANNUAL) EXPENSES
Charge for administration charged daily as a percentage of average
Variable Account Values 0.20%
-----
TOTAL SEPARATE ACCOUNT AND OTHER ASSET BASED CHARGES 1.45%(5)
</TABLE>
7
<PAGE> 12
4. MANUFACTURERS INVESTMENT TRUST ANNUAL EXPENSES
(AFTER APPLICABLE FEE WAIVERS AND EXPENSE REIMBURSEMENTS):
As a percentage of underlying Trust's average net assets
<TABLE>
<CAPTION>
INVESTMENT TOTAL
MANAGEMENT OTHER TRUST
PORTFOLIO FEES EXPENSES* EXPENSES
- --------- ---------- --------- ---------
<S> <C> <C> <C>
Pacific Rim Emerging Markets Trust 0.850% 0.360% 1.210%
Emerging Small Company Trust 1.050% 0.050% 1.100%
International Stock Trust 1.050% 0.200% 1.250%
Quantitative Equity Trust (formerly Common Stock Fund) 0.700% 0.060% 0.760%
Real Estate Securities Trust 0.700% 0.060% 0.760%
Balanced Trust 0.800% 0.070% 0.870%
Investment Quality Bond Trust 0.650% 0.070% 0.720%
Money Market Trust 0.500% 0.120% 0.620%
</TABLE>
* Other Expenses include custody fees, registration fees, legal fees,
audit fees, trustees' fees, insurance fees and other miscellaneous expenses. The
Trust's investment adviser, Manufacturers Securities Services, LLC ("MSS") has
agreed pursuant to its advisory agreement with the Trust to reduce its advisory
fee or reimburse the 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 International Stock Trust and Pacific
Rim Emerging Markets Trust and, in the case of each of the other Portfolios
listed above, .50% of the average annual net assets of such Portfolio. These
expense limitations, which will continue in effect from year to year unless
otherwise terminated by MSS on notice to the Trust, did not come into play
during the year ended December 31, 1998.
(1) The withdrawal charge decreases over time depending on the number of
complete Policy Years elapsed since the date of the purchase payment to
which the Company attributes the withdrawal. Under the free withdrawal
provision, the Policyowner may withdraw in any Policy Year after the first
up to 10% of the Policy Value as of the most recent Policy Anniversary free
of the withdrawal charge. In addition, a Market Value Adjustment may cause
a deduction from or addition to amounts withdrawn from the Fixed Accounts.
(2) The Company will deduct a record-keeping charge of 2% of the Policy Value
up to a maximum of $30 during the Accumulation Period on the last day of a
Policy Year. The Company will also deduct such charge upon full surrender
of a Policy on a date other than the last day of a Policy Year.
(3) 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.
(4) The Company will deduct daily a mortality and expense risks charge at an
annual rate of .80% of the assets of Separate Account Two, and will deduct
monthly a mortality and expense risks charge at an annual rate of .45% of
the sum of Variable Policy Value and Fixed Account Value.
(5) The total charges shown include all of the charges described in "2." And
"3." above except for the Fixed Accounts charge of 0.45%.
EXAMPLE(6)
If you surrender your Policy at the end of the applicable time period:
8
<PAGE> 13
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MANUFACTURERS INVESTMENT TRUST
PACIFIC RIM EMERGING MARKETS TRUST $101 $162 $185 $307
EMERGING SMALL COMPANY TRUST $100 $159 $180 $296
INTERNATIONAL STOCK TRUST $102 $163 $187 $310
QUANTITATIVE EQUITY TRUST $ 97 $149 $163 $262
REAL ESTATE SECURITIES TRUST $ 97 $149 $163 $262
BALANCED TRUST $ 98 $152 $169 $273
INVESTMENT QUALITY BOND TRUST $ 97 $148 $161 $258
MONEY MARKET TRUST $ 96 $145 $157 $248
</TABLE>
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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MANUFACTURERS INVESTMENT TRUST
PACIFIC RIM EMERGING MARKETS TRUST $ 28 $ 85 $145 $307
EMERGING SMALL COMPANY TRUST $ 27 $ 82 $139 $296
INTERNATIONAL STOCK TRUST $ 28 $ 86 $147 $310
QUANTITATIVE EQUITY TRUST $ 23 $ 71 $122 $262
REAL ESTATE SECURITIES TRUST $ 23 $ 71 $122 $262
BALANCED TRUST $ 24 $ 75 $128 $273
INVESTMENT QUALITY BOND TRUST $ 23 $ 70 $120 $258
MONEY MARKET TRUST $ 22 $ 67 $115 $248
</TABLE>
(6) In this example, the $30 annual record-keeping charge has been reflected in
the calculation of annual expenses by converting it to a percentage charge.
In converting the charge to a percentage, an average account size of
$40,000 was used. The 10% free withdrawal has been incorporated where
applicable.
Information concerning charges assessed under the Policies is set forth
below. See Description of the Policies -- "Policy Charges". Information
concerning the management fees paid by the Trust is provided under the caption
"Management of the Trust" in the accompanying Trust prospectus.
CONDENSED FINANCIAL INFORMATION
SCHEDULE OF ACCUMULATION UNIT VALUES AND
ACCUMULATION UNITS OUTSTANDING
The following table sets forth accumulation unit values. These are accounting
data which do not reflect the impact of the following charges (which are not
deducted as part of the calculation of accumulation unit values): withdrawal
charges, record-keeping charges, the portion of the mortality and expense risk
charges deducted monthly, deductions for premium taxes (if any), Dollar Cost
Averaging, or Special Policy Access transactions. ACCORDINGLY, THE CHANGE IN
ACCUMULATION UNIT VALUES OVER TIME SHOULD NOT BE VIEWED AS AN ACCURATE MEASURE
OF THE INVESTMENT PERFORMANCE OF SEPARATE ACCOUNT TWO.
9
<PAGE> 14
FOR THE PERIOD NOVEMBER 3, 1987 THROUGH DECEMBER 31, 1998
SUB-ACCOUNTS
EMERGING SMALL COMPANY TRUST
(FORMERLY EMERGING GROWTH EQUITY FUND)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------- ------ ------- ------- --------- -------- ---------- -----------
<S> <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
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 2,539 41,687 76,705 288,277 874,970 1,454,901 1,670,956
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C> <C>
January 1 value $ 45.01 $ 46.79 $ 54.27
December 31 value $ 46.79 $ 54.27 $ 53.77
December 31 units 1,681,075 1,423,816 1,153,371
</TABLE>
BALANCED TRUST
(FORMERLY BALANCED ASSETS FUND)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <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
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 1,293,922 2,001,928 2,189,632
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
January 1 value $ 21.91 $ 23.98 $ 27.96
December 31 value $ 23.98 $ 27.96 $ 31.63
December 31 unit 2,312,513 2,198,485 1,874,571
</TABLE>
MONEY MARKET TRUST
(FORMERLY MONEY-MARKET FUND)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ------ ------ ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
November 3
(Commencement) $ 10.00
January 1 value n $ 10.07 $ 10.68 $ 11.51 $ 12.28 $ 12.84 $ 13.15 $ 13.37 $ 13.75
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
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
January 1 value $ 14.38 $ 14.95 $ 15.57
December 31 value $ 14.95 $ 15.57 $ 16.20
December 31 units 1,375,204 1,225,881 1,505,191
</TABLE>
QUANTITATIVE EQUITY TRUST
(FORMERLY COMMON STOCK FUND)
10
<PAGE> 15
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ----- ------ ------ ------ ------- ------- ------- ------
<S> <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
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
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
January 1 value $ 25.72 $ 30.03 $ 38.60
December 31 value $ 30.03 $ 38.60 $ 46.28
December 31 units 1,274,256 1,317,902 1,141,084
</TABLE>
REAL ESTATE SECURITIES TRUST
(FORMERLY REAL ESTATE SECURITIES FUND)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
----- ------ ------ ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 3
(Commencement) $ 10.00
January 1 value $ 9.99 $ 11.05 $ 11.95 $ 11.30 $ 15.78 $ 18.96 $ 23.01
December 31 value $ 9.99 $ 11.05 $ 11.95 $ 11.30 $ 15.78 $ 18.96 $ 23.01 $ 22.16
December 31 units 1,642 12,733 17,676 17,834 24,956 134,707 711,630 1,205,880
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
January 1 value $ 22.16 $ 25.26 $ 33.68 $ 39.48
December 31 value $ 25.26 $ 33.68 $ 39.48 $ 32.66
December 31 units 1,149,409 1,190,829 1,251,505 912,392
</TABLE>
INTERNATIONAL STOCK TRUST
(FORMERLY INTERNATIONAL FUND)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
October 4 (Commencement) $ 10.00
January 1 value $ 9.72 $ 10.71 $ 11.71 $ 11.76
December 31 value $ 9.72 $ 10.71 $ 11.71 $ 11.76
$ 13.38
December 31 units 89,180 354,776 652,940 749,834 637,687
</TABLE>
PACIFIC RIM EMERGING MARKETS TRUST
(FORMERLY PACIFIC RIM
EMERGING MARKETS FUND)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
October 4 (Commencement) $ 10.00
January 1 value $ 9.41 $ 10.38 $ 11.29 $ 7.36
December 31 value $ 9.41 $ 10.38 $ 11.29 $ 7.36 $ 6.95
December 31 units 67,272 261,208 502,325 497,230 443,984
</TABLE>
GENERAL INFORMATION ABOUT MANUFACTURERS LIFE OF AMERICA
11
<PAGE> 16
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 subsidiary of The Manufacturers Life
Insurance Company ("Manufacturers Life"), a mutual life insurance company based
in Toronto, Canada. Manufacturers Life and its subsidiaries, together,
constitute one of the largest life insurance companies in North America and rank
among the 60 largest life insurers in the world as measured by assets.
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 financial strength), A.M. Best Company -- A++ (for financial
strength), Duff & Phelps Credit Rating Co. -- AAA (for claims paying ability),
and Moody's Investors Service, Inc. -- Aa3 (for financial strength). However,
neither Manufacturers Life of America nor Manufacturers Life guarantees the
investment performance of the Separate Account.
On January 20, 1998, the Board of Directors of Manufacturers Life asked the
management of Manufacturers Life to prepare a plan for conversion of
Manufacturers Life from a mutual life insurance company to an investor-owned,
publicly-traded stock company. Any demutualization plan for Manufacturers Life
is subject to the approval of the Manufacturers Life Board of Directors and
policyholders as well as regulatory approval
MANUFACTURERS LIFE OF AMERICA'S SEPARATE ACCOUNTS
Manufacturers Life of America is the legal owner of the assets in its separate
accounts. The income, gains and losses of the separate accounts, whether or not
realized, are, in accordance with applicable contracts, credited to or charged
against the accounts without regard to the other income, gains or losses of
Manufacturers Life of America. Manufacturers Life of America will at all times
maintain assets in the accounts with a total market value at least equal to the
reserves and other liabilities relating to Variable Account or Fixed Account
benefits under all Policies participating in the accounts. While the assets of
Separate Account Two may not be charged with liabilities which arise from any
other business Manufacturers Life of America conducts, the assets of Separate
Account A may be so charged. However, all obligations under the Policies are
general corporate obligations of Manufacturers Life of America.
The investments made by the separate accounts are subject to the requirements of
applicable state laws. These investment requirements may differ between those
for separate accounts supporting variable obligations and those for separate
accounts supporting fixed obligations.
SEPARATE ACCOUNT TWO: THE VARIABLE ACCOUNTS
Manufacturers Life of America established its Separate Account Two on May 25,
1983 as a separate account under Pennsylvania law. Since December 9, 1992 the
Separate Account has been operated under Michigan law. This account holds assets
that are segregated from all of Manufacturers Life of America's other assets.
Separate Account Two is currently used only to support the Variable Account
obligations under variable annuity contracts.
Separate Account Two is registered with the SEC under the Investment Company Act
of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a
type of investment company which invests its assets in specified securities,
such as the shares of one or more investment companies, rather than in a
portfolio of unspecified securities. Registration under the 1940 Act does not
involve any supervision by the SEC of the management or investment policies or
practices of Separate Account Two. For state law purposes Separate Account Two
is treated as a part or division of Manufacturers Life of America.
MANUFACTURERS INVESTMENT TRUST
Each sub-account of Separate Account Two will purchase shares only of a
particular portfolio of Manufacturers
12
<PAGE> 17
Investment Trust. The Trust is registered under the 1940 Act as an open-end
management investment company. Separate Account Two will purchase and redeem
shares of the 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 or Separate Account A as requested by Policyowners, and for other
purposes consistent with the Policies. Any dividend or capital gain distribution
received from a portfolio will be reinvested immediately at net asset value in
shares of that portfolio and retained as assets of the corresponding
sub-account. Trust shares are issued to fund benefits under both variable
annuity contracts and variable life insurance policies issued by Manufacturers
Life of America, or other insurance companies affiliated with the Company.
Shares of the 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 Trust prospectus.
Manufacturers Investment Trust receives investment advisory services from MSS.
MSS is a registered investment adviser under the Investment Advisers Act of
1940. The Trust also employs subadvisers. The following subadvisers provide
investment subadvisory services to the indicated portfolios:
PORTFOLIO SUBADVISER
Aggressive Growth Portfolios
Pacific Rim Emerging Markets Trust Manufacturers Adviser Corporation*
Emerging Small Company Trust Franklin Advisers, Inc.
International Stock Trust Rowe Price-Fleming International, Inc.
Equity Portfolios
Quantitative Equity Trust
(formerly Common Stock Fund) Manufacturers Adviser Corporation*
Real Estate Securities Trust Manufacturers Adviser Corporation*
Balanced Portfolio
Balanced Trust Founders Asset Management LLC
Bond Portfolio
Investment Quality Bond Trust Wellington Management Company LLP
Money Market Portfolio
Money Market Trust Manufacturers Adviser Corporation*
- ---------------------
* Manufacturers Adviser Corporation is an indirect wholly-owned subsidiary of
Manufacturers Life.
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 SMALL COMPANY TRUST. The investment objective of the Emerging Small
Company Trust is to seek long term growth of capital. Franklin Advisers, Inc.
manages the Emerging Small Company Trust and will pursue this objective by
investing, under normal market conditions, at least 65% of the portfolio's total
assets in common stock equity securities of small capitalization ("small cap")
growth companies. In general, companies in which the portfolio invests will have
market cap values of less than $1.5 billion at the time of purchase.
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.
INVESTMENT QUALITY BOND TRUST. The investment objective of the Investment
Quality Bond Trust is to
13
<PAGE> 18
seek a high level of current income consistent with the maintenance of principal
and liquidity. Wellington Management Company manages the Investment Quality Bond
Trust and seeks to achieve this objective by investing primarily in a
diversified portfolio of investment grade corporate and U.S. Government bonds
with intermediate to longer term maturities.
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 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 Manufacturers Investment Trust, its investment
objectives, policies and restrictions, the risks associated therewith, its
expenses, and other aspects of its operation is contained in the accompanying
Trust prospectus, which should be read together with this prospectus.
DESCRIPTION OF THE POLICIES
PURCHASING A POLICY
The Policies are designed for use in connection with retirement plans entitled
to special tax treatment under Sections 401 or 408 of the Code and retirement
plans and trusts not entitled to any special tax treatment. The Policies are
appropriate for group or sponsored plans with individual accounts or for
purchase directly by individuals. (See Other Matters -- "Special Provisions for
Group or Sponsored Arrangements".) A Policy will generally be issued to persons
up to age 75. In certain circumstances Manufacturers Life of America may, in its
sole discretion, issue a Policy to persons above age 75.
Except where application information and the initial purchase payment are
supplied by electronic transmission, persons seeking to purchase Policies must
submit an application and a check for the initial purchase payment. The
application, whether written, or via electronic transmission, is subject to
underwriting standards adopted by Manufacturers Life of America and
Manufacturers Life of America reserves the right to reject any application. A
properly completed application that is accompanied by the initial purchase
payment and all information necessary for the processing of the application will
normally be accepted within two business days. An incomplete application which
is subsequently made complete will normally be accepted within two business days
of completion; however, if an application is not completed properly or necessary
information is not obtained within 5 working days, Manufacturers Life of America
will offer to return the purchase payment.
Special provisions for electronic transmission of application information and
purchase payments. In jurisdictions where it is not prohibited, Manufacturers
Life of America will accept transmittal of initial and subsequent purchase
14
<PAGE> 19
payments by electronic transfer to the Service Office provided the transmission
is (i) initiated by a broker-dealer from whom Manufacturers Life of America has
agreed to accept such transfers and (ii) accompanied by the information
necessary to issue a Policy and/or allocate the purchase payments.
Initial purchase payments made via electronic transfer and accompanied by the
information necessary to issue a Policy will normally be accepted within two
business days. If the accompanying information is incomplete but is subsequently
made complete, it will normally be accepted within two business days; however,
if the requested information cannot be obtained within five business days,
Manufacturers Life of America will inform the broker-dealer, on the applicant's
behalf, of the reasons for the delay and offer to return the purchase payment.
Based on the information provided by the electronic transmission, Manufacturers
Life of America will generate an application and Policy to be forwarded to the
applicant for signature.
"FREE LOOK" RIGHT
Within ten days after receiving a Policy, the Policyowner may return it for
cancellation by mailing it to the Service Office. Within seven days after
receipt, except where state insurance law requires return of any purchase
payments made, Manufacturers Life of America will refund the Policy Value plus
or minus any applicable Market Value Adjustment.
RESTRICTIONS APPLICABLE TO PURCHASE PAYMENTS
Purchase payments are made directly by the Policyowner. They may be made at any
time until the Annuity Commencement Date or until the Policy is fully
surrendered. If the Policyowner is an individual, purchase payments will not be
permitted after the Policyowner's death unless the beneficiary is the
Policyowner's spouse. If the Policyowner is not an individual, purchase payments
will not be permitted after the Annuitant's death, unless the Policyowner is the
trustee of a trust which is part of a qualified retirement plan described in
section 401(a) of the Code. See Description of the Policies -- "Provisions on
Death" (Death of the Policyowner and Death of the Annuitant). Purchase payments
must be made to the Manufacturers Life of America Service Office.
The minimum initial purchase payment is $5,000 ($2,000 for Qualified Plans).
This can be allocated to the Variable Accounts, the Guaranteed Interest Account
or the Fixed Accounts. Subsequent purchase payments must be at least $500. If an
additional purchase payment would cause the Policy Value to exceed $1,000,000,
or if the Policy Value should already exceed $1,000,000, the prior approval of
Manufacturers Life of America will be required for an additional purchase
payment. If, for any reason, the Policy Value should fall to zero, the Policy
and all rights of the Policyowner and any other person under the Policy, will
terminate and no further purchase payments may be made.
Manufacturers Life of America reserves the right to alter the minimum payment
amounts on 90 days written notice to the Policyowner and it further reserves the
right to institute a pre-authorized payment plan which will provide for
automatic monthly deductions and which may permit smaller payments.
A Policyowner should specify how each purchase payment is to be allocated. The
percentage allocation to any account may be any whole number between 0 and 100,
provided the total percentage allocations equal 100. A Policyowner may change
the way in which Net Purchase Payments are allocated at any time without charge.
The change will take effect on the date a written or telephonic request for
change satisfactory to Manufacturers Life of America is received at its Service
Office. If no allocation is specified, a purchase payment will be allocated
using the same percentages as specified in the last allocation request received
from the Policyowner. Such allocation will be made at the end of the Business
Day in which the purchase payment is received at the Manufacturers Life of
America Service Office. Manufacturers Life of America will send a confirmation
of its receipt of each purchase payment.
POLICY VALUE
The Policy Value at any time is equal to the sum of the Variable Policy Value,
the Fixed Account Value and the Guaranteed Interest Account Value. The Policy
Value is available to the Policyowner through a partial withdrawal or a full
surrender. See "Surrender or Withdrawal Rights" below. The portion of the Policy
Value based on the Variable Policy Value is not guaranteed and will vary each
Business Day with the investment performance of the
15
<PAGE> 20
underlying Portfolios.
Reserves for Policy Values allocated to the Guaranteed Interest Account will be
held in the General Account of Manufacturers Life of America. Reserves for
Policy Values allocated to the Fixed Accounts will either be held in Separate
Account A or in the General Account of Manufacturers Life of America, depending
upon the requirements of the jurisdiction in which a Policy is purchased.
THE FIXED ACCOUNTS
Manufacturers Life of America established its Separate Account A on December 1,
1992 as a separate account under Michigan law. It is not a registered investment
company. This account holds assets that are segregated from all of Manufacturers
Life of America's other assets. Separate Account A is currently used only to
support the Fixed Account obligations under variable annuity contracts. These
Fixed Account obligations are based on interest rates credited to Fixed Accounts
and do not depend on the investment performance of Separate Account A. Any gain
or loss in Separate Account A accrues solely to Manufacturers Life of America
and Manufacturers Life of America assumes any risk associated with the
possibility that the value of the assets in Separate Account A might fall below
the reserves and other liabilities that must be maintained. Should the value of
the assets in Separate Account A fall below such reserves and other liabilities,
Manufacturers Life of America will transfer assets from its General Account to
Separate Account A to make up the shortfall. Manufacturers Life of America
reserves the right to transfer to its General Account any assets of Separate
Account A in excess of such reserves and other liabilities and to maintain
assets in Separate Account A which support any number of annuities which
Manufacturers Life of America offers or may offer. The assets of Separate
Account A are not insulated from the claims of Manufacturers Life of America's
creditors and may be charged with liabilities which arise from other business
conducted by Manufacturers Life of America. Thus Manufacturers Life of America
may, at its discretion if permitted by applicable state law, transfer existing
Fixed Account assets to, or place future Fixed Account allocations in, its
General Account for purposes of administration.
The assets of Separate Account A will be invested in those assets chosen by
Manufacturers Life of America and permitted by applicable state laws for
separate account investments.
The Policyowner may allocate Net Purchase Payments directly to the Fixed
Accounts or transfer Policy Values to the Fixed Accounts provided such
allocations are permitted by the Policyowner's jurisdiction. Each allocation to
a Fixed Account is accounted for separately and earns a fixed rate of interest
for a set period of time called a "Guarantee Period".
Currently, Guarantee Periods ranging from 1 to 10 years are offered under the
Policies.
To the extent permitted by law, Manufacturers Life of America reserves the right
at any time to offer Guarantee Periods with durations that differ from those
available at the date of this prospectus. Manufacturers Life of America also
reserves the right at any time to stop accepting new allocations, transfers or
renewals for a particular Guarantee Period. These actions may be taken upon 60
days written notice to the Policyowner.
If the Policyowner surrenders, withdraws or transfers any Policy Value
attributable to the Fixed Accounts prior to the end of the applicable Guarantee
Period, a Market Value Adjustment will apply. (See Description of the Policies
- -- "Policy Charges" -- Market Value Adjustment).
If Manufacturers Life of America does not receive written notice at least 7 days
prior to the end of the Guarantee Period of a Fixed Account indicating what
action to take with respect to funds in the Fixed Account upon maturity thereof,
the funds will be allocated to a new Fixed Account for the same Guarantee Period
as the matured Fixed Account. If the same Guarantee Period is no longer
available, we will use the next shortest available Guarantee Period; provided
that Manufacturers Life of America will not allocate funds to a Guarantee period
that extends beyond the Elected Annuity Date. If the required Guarantee Period
is not available, funds will be transferred to the Guaranteed Interest Account.
FIXED ACCOUNT VALUE. The value of a Policyowner's interest in a Fixed Account
reflects all interest credited to or accrued to date on the Fixed Account, all
purchase payments or transfers allocated to the Fixed Account, any withdrawals
or transfers from the Fixed Account, any applicable withdrawal or other charges
deducted from the
16
<PAGE> 21
account, and any applicable Market Value Adjustments previously made.
THE GUARANTEED INTEREST ACCOUNT
As noted above, Policyowners may accumulate value on a variable basis, by
allocating purchase payments to one or more sub-accounts of Separate Account
Two, or on a fixed basis by allocating purchase payments either to one or more
of the Fixed Accounts, or, if permitted by the Policyowner's jurisdiction, to
the Guaranteed Interest Account. Amounts allocated to the Guaranteed Interest
Account will earn a minimum interest rate of 3% per annum. Manufacturers Life of
America may credit interest at a rate in excess of 3% per annum; however, it is
not obligated to do so. The rate of interest credited is subject to change
daily. No specific formula governs the determination of the rate to be credited
in excess of 3% per annum.
GUARANTEED INTEREST ACCOUNT VALUE. The value of a Policyowner's interest in the
Guaranteed Interest Account reflects all interest credited to or accrued to date
on the account, all purchase payments or transfers allocated to the Guaranteed
Interest Account, any withdrawals or transfers from the Guaranteed Interest
Account and any applicable withdrawal and other charges deducted from the
Guaranteed Interest Account.
THE VARIABLE ACCOUNTS
VARIABLE POLICY VALUE. Upon receipt of a purchase payment at its Service Office,
Manufacturers Life of America credits the Policy with a number of units for each
Variable Account based upon the portion of the purchase payment allocated to the
Variable Account. Units are also credited to reflect any transfers to a Variable
Account. Units are cancelled whenever amounts are deducted, transferred or
withdrawn from a Variable Account, any charge or deduction is assessed against a
Variable Account, on the Annuity Commencement Date, or on payment of proceeds
payable on death.
The number of units credited or cancelled for a specific transaction is based on
the dollar amount of the transaction divided by the value of the unit on the
Business Day on which the transaction occurs. The number of units credited with
respect to an initial payment submitted with a completed purchase application
will be based on the applicable unit values for either the Business Day on which
the payment is received at the Manufacturers Life of America's Service Office or
other office or entity so designated by Manufacturers Life of America or the
following Business Day, depending on when the application is accepted. Units
will be credited with respect to any subsequent purchase payments allocated to,
or transfers into, a Variable Account based on the applicable unit values of the
Business Day on which the payment or transfer request is so received. The number
of units cancelled in connection with partial withdrawals, transfers out of a
Variable Account or deduction of charges from a Variable Account will also be
based on the applicable unit values of the Business Day on which the requests
for a partial withdrawal or transfer are so received, or on which deductions are
made.
Units are valued at the end of each Business Day. A Business Day is deemed to
end at the time of the determination of the net asset value of the Trust shares.
When an order involving the crediting or canceling of units is received after
the end of a Business Day or on a day which is not a Business Day, the order
will be processed on the basis of unit values determined on the next Business
Day. Similarly, any determination of Policy Value or Variable Account Value to
be made on a day which is not a Business Day will be made on the next Business
Day.
The value of a unit of each Variable Account was initially fixed at $10.00. For
each subsequent Business Day the unit value of a particular Variable Account is
the value of the adjusted net assets of that account at the end of the Business
Day divided by the total number of units.
The value of a unit may increase, decrease or remain the same, depending on the
investment performance of a Variable Account from one Business Day to the next.
The unit value for any Variable Account for any Business Day is the result of
(a) minus (b) divided by (c), where:
(a) is the net assets of the Variable Account as of the end of such Business
Day;
(b) is a charge not exceeding .000027397 for each calendar day since the
preceding Business Day, multiplied by the net assets of the Variable
Account as of the end of such Business Day, corresponding to a charge of
0.80% per annum for mortality and expense risks, and 0.20% per annum for
the administration charge; and
17
<PAGE> 22
(c) is the total number of units of the Variable Account.
Manufacturers Life of America reserves the right to adjust the above formula to
provide for any taxes determined by it to be attributable to the operations of
Separate Account Two.
ANNUITY VALUE GUARANTEE
The Annuity Value Guarantee guarantees that, in those jurisdictions where
permitted, under certain conditions the Policy Value available at the Annuity
Commencement Date will be the greater of the Policy Value or an amount
reflecting the purchase payments and withdrawals made by the Policyowner.
Such amount is calculated as follows: (1) when the Policy is issued, the amount
is set equal to the initial purchase payment; (2) each time a purchase payment
is made the amount is increased by the amount of the purchase payment; and (3)
each time a withdrawal is made, the amount is reduced by the same percentage as
the Gross Withdrawal Amount bears to the Policy Value.
This Guarantee will be effective only for Policies owned individually or jointly
with another individual, unless otherwise required by state law, and only if the
Annuity Commencement Date is a date within 30 days of the later of the tenth
Policy Anniversary or the first Policy Anniversary after the original
Policyowner (or the older of two original joint Policyowners) is age 65. If the
Annuity Commencement Date does not fall within this time frame, the Policy may
still be eligible for this Guarantee. Thereafter eligibility will re-occur every
fifth anniversary, provided the Annuity Commencement Date is within 30 days
thereof.
The Policyowner will cease to be eligible for the Annuity Value Guarantee if, at
any time, (i) the Policyowner makes a withdrawal or transfers money out of a
Fixed Account prior to that account's Maturity Date or (ii) the Annuity
Commencement Date is prior to the Maturity Date of any Fixed Account to which
the Policyowner has allocated values.
TRANSFERS OF POLICY VALUE
Subject to the restrictions described below, transfers may be made among any of
the accounts at any time during the Policy Year free of charge. 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 also
reserves the right to modify or terminate the transfer privilege at any time in
accordance with applicable law.
The minimum dollar amount of all transfers pursuant to a single transfer
request, except for transfers pursuant to the Asset Allocation Balancer program
or transfers designed to change percentage allocations of assets, is $500. The
maximum amount that may be transferred from the Guaranteed Interest Account in
any one Policy Year is the greater of $500 or 15% of the Guaranteed Interest
Account Value at the previous Policy anniversary. Any transfer which involves a
transfer out of the Guaranteed Interest Account may not involve a transfer to
the Variable Accounts' Money Market Trust.
Transfer requests must be satisfactory to Manufacturers Life of America and in
writing, or by telephone if a currently valid telephone transfer authorization
form is on file. Although failure to follow reasonable procedures may result in
Manufacturers Life of America's liability for any losses due to unauthorized or
fraudulent telephone transfers, Manufacturers Life of America will not be liable
for following instructions communicated by telephone that it reasonably believes
to be genuine. Manufacturers Life of America will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. Such
procedures shall consist of confirming a valid telephone authorization form is
on file, tape recording all telephone transactions and providing written
confirmation thereof.
LIMITATIONS. To the extent that surrenders, partial withdrawals and transfers
out of a Variable Account exceed net premium allocations and transfers into that
Variable Account, portfolio securities of the underlying Fund may have to be
sold. Excessive sales of the Fund's portfolio securities in such a situation
could be detrimental to that Fund and to Policyowners with Policy Values
allocated to Variable Accounts investing in that Fund. To protect the
18
<PAGE> 23
interests of all Policyowners, the Policy's transfer privilege is limited as
described below.
So long as effecting all requested transfers out of the Equity Index Trust
Sub-account in a particular Business Day would not reduce the number of shares
of the underlying Equity Index Trust outstanding at the close of the prior
Business Day by more than 5%, all such requests will be effected. However, net
transfers out of that sub-account greater than 5% would be permitted only if,
and to the extent that, in the judgment of Manufacturers Adviser Corporation,
they would not result in detriment to the underlying Equity Index Trust or to
the interests of Policyowners or others with assets allocated to that Portfolio.
If and when transfers must be limited to avoid such detriment, some requests
will not be effected. In determining which requests will be effected, transfers
pursuant to the Dollar Cost Averaging program will be effected first, followed
by Asset Allocation Balancer transfers, written requests next and telephone
requests last. Within each such group, requests will be processed in the order
received, to the extent possible. Policyowners whose transfer requests are not
effected will be so notified. Current S.E.C. rules preclude Manufacturers Life
of America from processing at a later date those requests that were not
effected. Accordingly, a new transfer request would have to be submitted in
order to effect a transfer that was not effected because of the limitations
described in this paragraph. Manufacturers Life of America may be permitted to
limit transfers in certain other circumstances. (See Description of the Policies
- -- "Other General Policy Provisions" -- Deferral of Payments).
DOLLAR COST AVERAGING
Manufacturers Life of America will offer Policyowners a Dollar Cost Averaging
program. Under this program amounts will be automatically transferred at
predetermined intervals from one Variable Account to any other Variable
Account(s), or a Fixed Account or the Guaranteed Interest Account.
Under the Dollar Cost Averaging program the Policyowner will designate a dollar
amount of available assets to be transferred at predetermined intervals from one
Variable Account into any other Variable Account(s) or a Fixed Account or the
Guaranteed Interest Account.
Each transfer under the Dollar Cost Averaging program must be at least $500 and
Manufacturers Life of America reserves the right to change this minimum at any
time upon notice to the Policyowner. Currently, there is no charge for this
program if Policy Value exceeds $15,000; otherwise a charge of $5 per transfer
or series of transfers occurring on the same transfer date will apply. See
"Dollar Cost Averaging Charge" under "Policy Charges" below. 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.
Under the Asset Allocation Balancer program the Policyowner will designate an
allocation of Policy Value among the Variable Accounts. Every six Policy Months,
Manufacturers Life of America will move amounts out of Variable Accounts and
into other Variable Accounts as necessary to maintain the Policyowner's chosen
allocation. Currently, there is no charge for this program. A change to the
policyowner's premium allocation instructions 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 has
a Dollar Cost Averaging request in effect. Manufacturers Life of America
reserves the right to institute a charge for this program or to cease to offer
the Asset Allocation Balancer Program on 90 days' written notice to the
Policyowner.
SURRENDER OR WITHDRAWAL RIGHTS
At any time prior to the Elected Annuity Date, a Policyowner may fully surrender
the Policy for, or make a partial withdrawal in an amount not exceeding, its
Policy Value, reduced by any applicable withdrawal or record-keeping charge and
any applicable withholding taxes and reduced or augmented by any applicable
Market Value Adjustment. (See Description of the Policies -- "Policy Charges".)
For certain Qualified Policies, exercise of the right to surrender may require
the consent of the Policyowner's spouse under regulations promulgated by the
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<PAGE> 24
Treasury or Labor Department.
In any Policy Year after the first and before the Elected Annuity Date, up to
10% of the Policy Value as of the most recent Policy Anniversary may be
surrendered or withdrawn free of the withdrawal charge. In states where
permitted, if the Policyowner is a Charitable Remainder Trust, in any Policy
Year after the first and before the Elected Annuity Date, the Policyowner may
withdraw, free of the withdrawal charge, the greater of (i) 10% of the Policy
Value as of the most recent Policy Anniversary or (ii) Cumulative Net Earnings
under the Policy. During the first Policy Year, if the Policyowner is a
Charitable Remainder Trust, the Policyowner may withdraw, free of the withdrawal
charge, up to 10% of the cumulative Net Purchase Payments as reduced by prior
withdrawals. The amount received on withdrawal will be adjusted for any
applicable Market Value Adjustment. Amounts surrendered or withdrawn during a
Policy Year which exceed the foregoing sums will be subject to a withdrawal
charge.
In the case of a full surrender of a Policy, Manufacturers Life of America will
pay the Policy Value reduced by any applicable withdrawal or record-keeping
charges and any applicable withholding taxes, and adjusted by any applicable
Market Value Adjustment as of the Business Day on which the request for
surrender is received at its Service Office, and the Policy will be cancelled.
In the case of a partial withdrawal from the Variable Accounts, Manufacturers
Life of America will pay the amount requested and cancel that number of units
credited to each Variable Account necessary to equal the amount of the partial
withdrawal plus any applicable withdrawal charges and withholding taxes. In the
case of a partial withdrawal from the Fixed Account or the Guaranteed Interest
Account, Manufacturers Life of America will pay the amount requested. The Fixed
Account Value and/or the Guaranteed Interest Account Value will be reduced by
the amount withdrawn and any applicable withdrawal charges and withholding
taxes, and adjusted by any applicable Market Value Adjustment. In any event,
should there not be sufficient funds available in the designated account or
accounts equal to the Gross Withdrawal Amount, Manufacturers Life of America
will notify the Policyowner and await further instruction before effecting any
withdrawal. (For a discussion of withholding taxes see Federal Tax Matters --
"Tax Treatment of the Policies".)
For a partial withdrawal, the Policyowner should specify the account(s) from
which the withdrawal should be made. If no specification is indicated, the
withdrawal will not be made and the Policyowner will be so notified.
There is no limit on the frequency of partial withdrawals; however, the
requested withdrawal must be at least $500. Any request for a partial withdrawal
or a full surrender of a Policy must be in writing and delivered to the
Manufacturers Life of America Service Office. If the amount to be withdrawn
exceeds $10,000, it must be accompanied by a guarantee of the Policyowner's
signature by a commercial bank, trust company, member of the National
Association of Securities Dealers, Inc., a notary public, or any other
individual or association designated by Manufacturers Life of America.
SPECIAL POLICY ACCESS
In those states where permitted, if the Policyowner should become terminally
ill, he or she will be permitted to make one full surrender or partial
withdrawal without imposition of withdrawal charges. If partial withdrawal is
chosen, the Survivor Benefit Amount and Annuity Value Guarantee, if applicable,
will be reduced accordingly. To be eligible, Manufacturers Life of America must
receive written evidence acceptable to Manufacturers Life of America, including
a written statement from a licensed medical doctor, that the Policyowner is
terminally ill and has a life expectancy of one year or less and the consent of
any irrevocable beneficiary and any assignee.
There is currently no charge associated with this feature. However,
Manufacturers Life of America reserves the right to impose an administrative
charge not to exceed $150 for a partial withdrawal or full surrender pursuant to
this provision.
PROVISIONS ON DEATH
In the discussions that follow, references to the age, death, life expectancy,
or marital status of a Policy owner do not apply to a Policyowner who owns a
Policy other than individually or jointly with another person, except the
Survivor Benefit amount which will apply upon death of the annuitant if the
Policyowner is a charitable remainder trust. In addition, references to the
death of the original Policyowner include the first to die of two joint
Policyowners.
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<PAGE> 25
SURVIVOR BENEFIT AMOUNT
Upon occurrence of the death of the original Policyowner, Manufacturers Life of
America will compare the Policy Value to the Survivor Benefit Amount and, if the
Policy Value is lower, Manufacturers Life of America will deposit sufficient
funds into the Money-Market Variable Account to make the Policy Value equal the
Survivor Benefit Amount. Any funds which Manufacturers Life of America deposits
into the Money-Market Variable Account will not be deemed a purchase payment for
purposes of calculating withdrawal charges.
The Survivor Benefit Amount is calculated as follows: (1) when the Policy is
issued, the Survivor Benefit Amount is set equal to the initial purchase
payment; (2) each time a purchase payment is made, the Survivor Benefit Amount
is increased by the amount of the purchase payment; (3) each time a withdrawal
is made, the Survivor Benefit Amount is reduced by the same percentage as the
Gross Withdrawal Amount bears to the Policy Value; (4) in jurisdictions where it
is allowed, on every sixth Policy Anniversary Manufacturers Life of America will
set the Survivor Benefit Amount to the greater of its current value or the
Policy Value on that Policy Anniversary, provided the original Policyowner is
still alive and is not older than age 85.
Subsequent to the death of the original Policyowner, the Variable Policy Value
will continue to reflect the investment performance of the selected Variable
Accounts.
JOINT OWNERSHIP
If the Policy is owned jointly, the proceeds of the Survivor Benefit Amount will
be payable on the first death of a Policyowner. However, if the surviving
Policyowner is the spouse of the deceased and elects to continue the Policy,
payment of the Survivor Benefit Amount will be deferred. The Survivor Benefit
Amount will continue to be calculated as described above if payment is deferred.
If the surviving Policyowner is not the spouse of the deceased Policyowner, the
proceeds of the Survivor Benefit Amount will be payable as set out in the
non-spousal ownership provisions of the section entitled Provisions on Death --
"Death of the Policyowner".
DEATH OF THE POLICYOWNER
DEATH PRIOR TO ANNUITY COMMENCEMENT DATE. If any Policyowner dies before the
Elected Annuity Date, all amounts will remain as allocated by that Policyowner
until Manufacturers Life of America receives further instructions from the new
Policyowner, or the surviving Policyowner if the Policy was owned jointly. The
new or surviving Policyowner can make withdrawals, transfer amounts, assign the
policy and name a payee, prior to payment of the Policy Value as described
below.
If the new or surviving Policyowner is the spouse, he or she can:
(a) continue the Policy and may make further purchase payments; or
(b) make a full surrender or partial withdrawal of the Policy Value within 60
days after the death without imposition of a Market Value Adjustment or
withdrawal charge except with respect to withdrawal of purchase payments
received after the death of the Policyowner; or
(c) elect to receive payment under a guaranteed annuity option. If the payment
is made as an annuity, the Policy Value used to provide the annuity will be
determined as of the date Manufacturers Life of America receives written
notification of the election at its Service Office.
However, if a partial withdrawal or a full surrender of the Policy Value occurs
more than 60 days after the death of the Policyowner, the payment will be based
on the Policy Value determined as of the date of payment, adjusted for any
applicable Market Value Adjustment and withdrawal charge. (See Description of
the Policies -- "Market Value Adjustment" and "Policy Charges".)
The Policy will continue under option (a) in the absence of a written
notification from the surviving spouse to do otherwise.
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<PAGE> 26
If the new or surviving Policyowner is not the spouse, he or she can:
(a) continue the Policy. If this option is selected, no further purchase
payments can be made, and the Policy must be surrendered within 5 years of
the death. Applicable Market Value Adjustments and withdrawal charges will
be imposed. (See Description of the Policies -- "Market Value Adjustment"
and "Policy Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within 60
days after the death without imposition of a Market Value Adjustment or
withdrawal charge; or
(c) elect to receive payment under a guaranteed annuity option. If the payment
is made as an annuity, (i) the Policy Value used to provide the annuity
will be determined as of the date Manufacturers Life of America receives
written notification of the election at its Service Office, (ii) the only
Annuity Options available are options 1, 2(b), or 2(c) of the Annuity
Options described in Appendix A, (iii) the period selected for payment must
not extend beyond the new or surviving Policyowner's life expectancy, and
(iv) payments under the Annuity Option selected must begin no later than
December 31 of the year following death of the Policyowner.
The Policy will continue under option (a) in the absence of written notification
to do otherwise.
DEATH AFTER ANNUITY COMMENCEMENT DATE. If the Policyowner dies after the Annuity
Commencement Date, payments will continue under the annuity option selected if
the terms of the annuity so provide.
DEATH OF THE ANNUITANT
DEATH PRIOR TO ANNUITY COMMENCEMENT DATE. If the Policyowner is an individual
who is not the Annuitant, and the Annuitant dies before the Annuity Commencement
Date, the Policy will continue and the Policyowner may continue to make purchase
payments. If the Policyowner has appointed a contingent Annuitant, he or she
will become the new Annuitant. If no such appointment has been made, the Policy
owner must appoint a new Annuitant within 60 days of the death of the original
Annuitant; otherwise the Policyowner will be deemed to be the new Annuitant.
If the Policyowner is not an individual, the Policy is not a Qualified Policy
owned by the trustee of a plan described in Section 401 of the Code, and the
Annuitant dies before the Annuity Commencement Date, the Policyowner can:
(a) continue the Policy. If this option is selected, no further purchase
payments can be made, and the Policy must be surrendered for a lump sum
within 5 years of the Annuitant's death. Market Value Adjustments and all
applicable charges will continue to be imposed. (See Description of the
Policies -- "Market Value Adjustment" and "Policy Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within 60
days after the Annuitant's death without imposition of a Market Value
Adjustment or withdrawal charge.
The Policy will continue under option (a) in the absence of written notification
to do otherwise.
If the Policyowner is not an individual, the Policy is a Qualified Policy owned
by a trustee of a plan described in Section 401 of the Code, and the Annuitant
dies before the Annuity Commencement Date, the Policyowner can:
(a) continue the Policy. If this option is selected, a new Annuitant must be
appointed and no further purchase payments can be made. Market Value
Adjustments and all applicable charges will continue to be imposed. (See
Description of the Policies -- "Market Value Adjustment" and "Policy
Charges".); or
(b) make a full surrender or partial withdrawal of the Policy Value within 60
days after the Annuitant's death without imposition of a Market Value
Adjustment or withdrawal charge.
The Policy will continue under option (a) in the absence of written notification
to do otherwise.
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<PAGE> 27
DEATH AFTER ANNUITY COMMENCEMENT DATE. If the Policyowner is an individual who
is not the Annuitant and the Annuitant dies after the Elected Annuity Date,
payments will continue under the annuity option selected if the terms of the
annuity so provide.
COMMENCEMENT OF ANNUITY PAYMENTS
The Policyowner elects an annuity date in the application (the "Elected Annuity
Date"). The Policyowner may change the Elected Annuity Date to any date prior to
the end of the Policy Year in which the Annuitant reaches age 85 except in the
case of Qualified Policies and Policies where the owner is a Charitable
Remainder Trust. If the Policyowner is a Charitable Remainder Trust there is no
required annuitization age. Written request for change of the Elected Annuity
Date must be received by the Manufacturers Life of America Service Office at
least thirty days prior to the new Elected Annuity Date.
Annuity payments will be made by application of the Policy Value to provide an
annuity. Annuity payments will be made on a fixed basis only; the Policy Value
will no longer reflect the investment performance of the Variable Accounts, the
Fixed Accounts or the Guaranteed Interest Account. The annuity options available
are described in Appendix A under "Annuity Options". The date on which the first
annuity payment is made is the Annuity Commencement Date.
There are legal restrictions on the Elected Annuity Date selected for Qualified
Policies. In general, the Annuity Commencement Date for Qualified Policies owned
by an individual cannot be later than April 1 following the calendar year in
which the Policyowner attains age 70 1/2. There are some exceptions to this
requirement. If the Policy is owned by the trustee of a trust established
pursuant to an employer retirement plan, the Elected Annuity Date is determined
by the terms of the trust and plan.
Annuity payments may be made monthly, quarterly, semi-annually or annually. If
application of the Policy Value would result in annuity payments of less than
$20 monthly, $60 quarterly, $100 semi-annually or $200 annually, Manufacturers
Life of America will pay the Policy Value to the Policyowner in a single sum in
lieu of annuity payments.
SUBSTITUTION OF PORTFOLIO SHARES
Although Manufacturers Life of America believes it to be highly unlikely, it is
possible that in the judgment of its management, one or more of the Portfolios
may become unsuitable for investment by Separate Account Two because of a change
in investment policy or a change in the tax laws, because the shares are no
longer available for investment, or for some other reason. In that event,
Manufacturers Life of America may seek to substitute the shares of another
Portfolio or of an entirely different mutual fund. Before this can be done, the
approval of the SEC and one or more state insurance departments may be required.
Manufacturers Life of America also reserves the right to combine other
registered separate accounts with Separate Account Two investing in additional
Portfolios of the Manufacturers Investment Trust or another investment company,
to establish additional sub-accounts within Separate Account Two, to operate
Separate Account Two as a management investment company or other form permitted
by law, to transfer assets from Separate Account Two to another registered
separate account and from another registered separate account to Separate
Account Two, and to deregister Separate Account Two under the 1940 Act. Any such
change would be made only if permissible under applicable federal and state law.
POLICY CHARGES
The various charges and deductions applicable to the Policy and the separate
accounts are set forth below.
WITHDRAWAL CHARGE
A withdrawal charge (contingent deferred sales charge) may be imposed on partial
withdrawals from, and the full surrender of, a Policy. In any Policy Year after
the first and before the Elected Annuity Date, up to 10% of the Policy Value as
of the most recent Policy Anniversary may be surrendered or withdrawn free of
the withdrawal charge. In states where permitted, if the Policyowner is a
Charitable Remainder Trust, in any Policy Year after the
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<PAGE> 28
first and before the Elected Annuity Date, the Policyowner may withdraw, free of
the withdrawal charge, the greater of (i) 10% of the Policy Value as of the most
recent Policy Anniversary, or (ii) the Cumulative Net Earnings under the Policy.
During the first Policy Year, if the Policyowner is a Charitable Remainder
Trust, the Policyowner may withdraw, free of the withdrawal charge, up to 10% of
the cumulative Net Purchase Payments as reduced by prior withdrawals. The amount
received on withdrawal will be adjusted for any applicable Market Value
Adjustment. The withdrawal charge is deducted as a percentage of amounts
withdrawn in a Policy Year in excess of the foregoing sums minus any applicable
record-keeping charge (imposed on Policy Anniversaries and on full surrenders
made on other than a Policy Anniversary) and plus or minus any applicable Market
Value Adjustment.
The withdrawal charge is designed to partially compensate Manufacturers Life of
America for the cost of selling and distributing the Policies. The cost includes
agents' commissions, advertising, agent training and the printing of
prospectuses and sales literature.
The withdrawal charge is determined by applying a percentage to the Gross
Withdrawal Amount subject to the withdrawal charge. The applicable percentage
depends upon when the purchase payments to which the withdrawal or surrender is
deemed attributable were made, as indicated in the following schedule:
NUMBER OF COMPLETE POLICY YEARS ELAPSED THE WITHDRAWAL
SINCE PURCHASE PAYMENT WAS MADE: CHARGE IS
0-2.99 8%
3 6%
4 4%
5 2%
6 or more None
Where the Gross Withdrawal Amount is deemed attributable to purchase payments
made in different Policy Years, different percentages will be applied to the
portions of the Gross Withdrawal Amount attributable to such payments.
For purposes of determining the withdrawal charge applicable to a full surrender
or partial withdrawal, any Gross Withdrawal Amount, other than an amount not
subject to a withdrawal charge by reason of the free withdrawal provisions
described above, will be deemed to be a liquidation of a purchase payment. The
oldest previously unliquidated purchase payment will be deemed to have been
liquidated first, then the next oldest and so forth. In addition, all purchase
payments made during a Policy Year will be deemed to have been made on the first
day of that year. Once all purchase payments have been liquidated, additional
amounts surrendered or withdrawn will not be subject to a withdrawal charge.
Thus, in no event may aggregate withdrawal charges exceed 8% of the total
purchase payments made.
No withdrawal charge will be applied: (1) if the Policy Value is applied to an
annuity, (2) when a full surrender or partial withdrawal is made within 60 days
of the death of the original Policyowner (except that a withdrawal charge will
be applied to a Gross Withdrawal Amount consisting of purchase payments made
after the date of death of the original Policyowner), (3) when the Policyowner
is not an individual and a full surrender or partial withdrawal is made within
60 days of the death of the Annuitant, or (4) upon a full surrender or the first
partial withdrawal made after the Policyowner becomes terminally ill. (See
Description of the Policies -- "Provisions on Death" and "Special Policy
Access".)
On a full surrender of the Policy, the Gross Withdrawal Amount is the Policy
Value. Upon full surrender, the Policyowner will receive the Gross Withdrawal
Amount adjusted by any applicable Market Value Adjustment, less applicable
withdrawal charges and withholding taxes, and less the record-keeping charge.
On a partial withdrawal, the Policyowner will receive the amount he or she
requests. Manufacturers Life of America will calculate the Gross Withdrawal
Amount such that after all applicable withdrawal charges, withholding taxes and
Market Value Adjustments have been applied, the Policyowner will receive the
amount requested. See Appendix B for examples of the application of withdrawal
charges.
Withdrawal charges on a partial withdrawal will be deducted from the accounts
proportionately to the Gross Withdrawal Amount, adjusted by any applicable
Market Value Adjustments attributable to the respective accounts.
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<PAGE> 29
Should there not be sufficient funds available in the designated account or
accounts equal to the Gross Withdrawal Amount, Manufacturers Life of America
will notify the Policyowner and await further instruction before effecting any
withdrawal.
Manufacturers Life of America does not expect to recover its total sales
expenses through the withdrawal charge. To the extent that the withdrawal charge
is insufficient to recover sales expenses, Manufacturers Life of America will
pay sales expenses from its other assets or surplus. These assets may include
proceeds from the mortality and expense risks charges described below.
RECORD-KEEPING CHARGE
A record-keeping charge equal to 2% of the Policy Value up to a maximum of $30
will be deducted from Policy Value on the last day of each Policy Year during
the Accumulation Period. This charge will also be deducted upon full surrender
of a Policy on a date other than the last day of a Policy Year. The charge will
be taken before any withdrawal charge is applied and before any applicable
Market Value Adjustment. It will be deducted from the Variable Policy Value, the
Fixed Account Value and the Guaranteed Interest Account Value in the same
proportion that the value in each account bears to the Policy Value.
The record-keeping charge is paid to Manufacturers Life of America to compensate
it for certain costs associated with the Policies and the operations of the
separate accounts, including the establishing and maintaining of account and tax
records for each Policyowner; communicating with Policyowners by mailing
confirmations of transactions, Policy Anniversary statements, annual reports of
Manufacturers Investment Trust and annually updated prospectuses for
Manufacturers Investment Trust and the Policy and by responding to Policyowner
requests to change information contained in his or her records such as names,
addresses, allocation percentages, beneficiary or Annuitant designation,
participation in the Dollar Cost Averaging or Asset Allocation Balancer
programs, certain Fixed Account transactions such as calculations of Market
Value Adjustments and transfers solely between Fixed Accounts, and responding to
written or oral inquiries by Policyowners regarding the operations of the
Policy, the separate accounts or Manufacturers Investment Trust. Although these
expenses may rise in the future, Manufacturers Life of America guarantees that
it will not increase the amount of the record-keeping charge applicable to
outstanding Policies.
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.
SPECIAL POLICY ACCESS CHARGE
There is currently no charge associated with this feature. However,
Manufacturers Life of America reserves the right to impose an administrative
charge not to exceed $150 for a partial withdrawal or full surrender pursuant to
the provision.
PREMIUM TAX DEDUCTION
Manufacturers Life of America will deduct any premium or similar state or local
tax attributable to a Policy. Currently, such taxes, if any, range up to 3.5%
depending on applicable law. Although the deduction can be made from purchase
payments or from Policy Value, it is anticipated that premium taxes will be
deducted from the Policy Value at the time it is applied to provide an annuity
unless required otherwise by applicable law. When deducted at the Annuity
Commencement Date, the premium tax deduction will be taken from the Variable
Policy Value, the Fixed Account Value and the Guaranteed Interest Account Value
in the same proportion that the value in each account bears to the Policy Value.
Other than the premium taxes above, Manufacturers Life of America makes no
charge for federal, state or local taxes that may be attributable to the
separate accounts or to the operations of Manufacturers Life of America with
respect to the Policies. However, if Manufacturers Life of America incurs any
such taxes, it may make a charge
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therefor, in addition to the foregoing.
MORTALITY AND EXPENSE RISKS CHARGES
A charge at an annual rate of .45% is made for mortality and expense risks that
Manufacturers Life of America assumes. This charge is deducted monthly at .0375%
of assets at the beginning of each Policy Month from the Variable Account Value
and the Fixed Account Value.
A charge at an annual rate of .80% is also made for mortality and expense risks
that Manufacturers Life of America assumes. This charge is deducted daily from
the assets of Separate Account Two.
The mortality risks assumed are (i) the risk that Annuitants may live for longer
periods of time than the periods indicated in the mortality tables on which
Manufacturers Life of America calculated the annuity tables in the Policies,
(ii) the risk that mortality will cause a Policy to terminate before the assumed
Annuity Commencement Date and (iii) the risk that mortality will cause
Manufacturers Life of America to incur higher costs than anticipated for the
Survivor Benefit Amount. The expense risks assumed are that the expenses of
administration of and record-keeping for the Policies will be greater than
Manufacturers Life of America estimated. Manufacturers Life of America will
realize a gain from these charges to the extent they are not needed to pay
expenses under the Policies.
Although it is difficult to specify precisely the breakdown between expense and
mortality risk elements of the mortality and expense risks charge, Manufacturers
Life of America estimates that approximately .85% is for mortality risks and
.40% for expense risks. A little more than half of the mortality risk element is
estimated to be attributable to risks taken in connection with the Survivor
Benefit Amount (a death benefit guarantee). As both the daily and monthly
charges are imposed in connection with the same risks, each charge could be
estimated to be divided into mortality risk and expense risk components at the
same ratio as for the overall estimate.
ADMINISTRATION CHARGE
A charge at an annual rate of 0.20% of the Variable Account Value is made for
the administration of the Policy. This charge is deducted daily by assessing a
charge against the assets of Separate Account Two.
The administration charge is paid to Manufacturers Life of America to compensate
it for costs associated with administration of the Policies and the separate
accounts including those related to allocation of initial and subsequent
purchase payments, processing purchase applications, withdrawals, surrenders,
unit value calculations, transfers, calculation of proceeds payable on death,
payment of proceeds payable on death, cash management prior to Policy issue, and
establishing and maintaining computer system support for those or other
administrative functions. Manufacturers Life of America reserves the right to
increase the amount of the administration charge applicable to outstanding
Policies in the future if costs associated with the Policies and the operations
of the separate accounts should rise above current levels.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment ("MVA") will apply when money is removed from a Fixed
Account prior to the Maturity Date for any of the following reasons: full
surrender, partial withdrawal, transfer to another account (including another
Fixed Account), or to purchase an annuity. However, the MVA will be waived if
the amount is removed within the one month period prior to the Maturity Date.
The MVA will be applied after any transfer or contract charge is deducted, but
before the application of any withdrawal charges.
The MVA reflects the difference between the Guaranteed Rate for the applicable
Fixed Account, and the current Guaranteed Rate for the time period equal to the
remaining Guarantee Period ("Current Rate"). Generally, if the Guaranteed Rate
is higher than the Current Rate, the MVA will be positive. If the Guaranteed
Rate is lower than the Current Rate, the MVA will be negative.
On a full surrender, a positive MVA will increase the amount received by the
Policyowner, while a negative MVA will decrease the amount received by the
Policyowner.
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<PAGE> 31
On a transfer, the amount of the requested transfer from a Fixed Account will
not reflect any adjustment by the MVA. Any such adjustment will be reflected in
the amount transferred to the new account(s). A positive MVA will increase the
amount transferred into the new account(s), while a negative MVA will decrease
the amount so transferred.
On the Annuity Commencement Date, a positive MVA will increase the amount
applied to provide an annuity, while a negative MVA will decrease the amount
applied to provide an annuity.
On a partial withdrawal, a positive MVA will decrease the Gross Withdrawal
Amount required to provide the requested amount. A negative MVA will increase
the Gross Withdrawal Amount so required.
The actual MVA is a proportion of the Gross Withdrawal Amount, determined by the
following formula:
(1+G) exp N - 1
-----
(1+C)
where:
G is the Guaranteed Rate for the money being subjected to the MVA.
C is the Guaranteed Rate offered by Manufacturers Life of America for deposits
for a time period equal to the number of years remaining in the Guarantee
Period, rounded up to the next full year (the "Current Rate"). If at the time of
the MVA calculation, Manufacturers Life of America does not offer a Guarantee
Period with the required number of years, then the rate C will be found by
linear interpolation of the current rates for available Guarantee Periods.
N is the number of full months remaining in the Guarantee Period divided by 12.
See Appendix B for examples of MVA calculations.
OTHER GENERAL POLICY PROVISIONS
DEFERRAL OF PAYMENTS
Manufacturers Life of America reserves the right to postpone the transfer or
payment of any value or benefit available under a Policy based upon the assets
allocated to Separate Account Two for any period during which:
(1) the New York Stock Exchange ("Exchange") is closed for trading (other than
customary weekend and holiday closings) or trading on the Exchange is otherwise
restricted; or
(2) an emergency exists as defined by the SEC or the SEC requires that trading
be restricted; or
(3) the SEC, by order, so permits a delay for the protection of security
holders.
Manufacturers Life of America also reserves the right to delay transfer or
payment of assets from the Fixed Accounts or the Guaranteed Interest Account for
up to six months and will pay interest at a rate determined by it if there is a
delay in payment for more than 30 days. In addition, transfers may be denied
under the circumstances previously set forth. (See Description of the Policies
- -- "Provisions on Transfers".)
ANNUAL STATEMENTS
Within 30 days after each Policy Anniversary, Manufacturers Life of America will
send the Policyowner a statement showing:
(1) the summary of each active account up to the most recent Policy Anniversary
including the Policy Value up to
27
<PAGE> 32
the Policy Anniversary date; and
(2) a description of the transactions affecting each active account during the
Policy Year including total units cancelled, amounts deducted from each account
for fees, and total units and amounts credited to each account as allocations or
interest.
RIGHTS OF OWNERSHIP
The Policyowner is the person entitled to exercise all rights under a Policy. As
such, any Policy rights or privileges may be exercised without the consent of
the Annuitant, beneficiary or any other individual, except as provided by the
Policyowner. Except as discussed below, ownership of the Policy may be changed
or the Policy collaterally assigned at any time prior to the Annuity
Commencement Date, subject to the rights of any irrevocable beneficiary or other
person. Any change of ownership or assignment must be made in writing and will
not take effect until received at the Manufacturers Life of America Service
Office. Manufacturers Life of America assumes no responsibility for the validity
of any assignment.
In the case of a Qualified Policy, there may be restrictions on the privileges
of ownership. Some plans do not permit the exercise of certain of the
Policyowner's rights without the written consent of the Policyowner's spouse.
Among the rights limited are the right to choose an optional form of payment; to
make withdrawals; or to surrender the Policy.
A Qualified Policy which is not owned by a trustee of a trust which qualifies
under section 401(a) of the Code, may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose to any person other than
to Manufacturers Life of America except as may be provided by applicable state
or federal law. Ownership of a Qualified Policy which is owned by a trustee of a
Qualified Plan may not be transferred to a participant prior to the Annuity
Commencement Date. The transfer of a Qualified Policy to a participant prior to
the Annuity Commencement Date would jeopardize the plan's qualified status as
the Policy does not contain the restrictions on a participant's rights on
withdrawal or on and after the Annuity Commencement Date required for plans
under the Employee Retirement Income Security Act.
Change of Annuitant. The Policyowner may change the Annuitant prior to the
Annuity Commencement Date. Eligible Annuitants are: (i) the Policyowner, (ii)
Policyowner's spouse, or (iii) the Policyowner's parent(s), brother(s),
sister(s), or child(ren).
If the Policyowner is not an individual, the Annuitant(s) may not be changed
except with respect to certain Qualified Plans. In any event, the Annuitant(s)
may not be changed after the Annuity Commencement Date.
Change of Elected Annuity Date. The Elected Annuity Date may be changed from
that stated in the application to an earlier or later date. The new date cannot
be later than the end of the Policy Year in which the Annuitant reaches age 85.
A written request to change the Elected Annuity Date must be received by the
Manufacturers Life of America Service Office at least 30 days prior to the new
Elected Annuity Date. (See Description of the Policies --"Annuity Value
Guarantee").
Selection of Payee. The Policyowner must select a Payee to receive any payments
due under the Policy. If the Payee is the Policyowner, any payments remaining on
the Policyowner's death will be paid to the beneficiary. If a Payee other than
the Policyowner has been selected, any payments remaining on the Policyowner's
death will continue to be made to the Payee until Manufacturers Life of America
receives written notice from the beneficiary to change the Payee.
The Payee for annuity payments should be chosen from the following:
(a) The Annuitant;
(b) The Annuitant's spouse, parent(s), brother(s), sister(s), child(ren); or
(c) The Policyowner, if the Policyowner is an individual.
28
<PAGE> 33
Any other choice of Payee will require the consent of Manufacturers Life of
America:
Change of Payee. The Policyowner may change the Payee at any time upon 30 days'
written notice to Manufacturers Life of America. Such notice must specify the
date on which payments to the new Payee should begin. A change in the Payee will
not require the Payee's consent.
BENEFICIARY
Ownership of the Policy will pass to the designated beneficiary on the death of
the Policyowner. The beneficiary is the person designated in the application or
as subsequently designated. The beneficiary may be changed at any time by
written notice to Manufacturers Life of America. Any change will be effective on
the date written notice is received at the Manufacturers Life of America Service
Office. If no beneficiary survives the Policyowner, ownership will pass to the
Policyowner's estate. In the case of Qualified Policies, regulations promulgated
by the Departments of Labor and Treasury prescribe certain limitations on the
designation of a beneficiary.
MODIFICATION
A Policy may not be modified by Manufacturers Life of America without the
consent of the Policyowner, except where required to conform to any applicable
law or regulation or any ruling issued by a government agency.
FEDERAL TAX MATTERS
TAXATION OF MANUFACTURERS LIFE OF AMERICA
Manufacturers Life of America is taxed as a life insurance company under
Subchapter L of the Code. Since the operations of Separate Account Two are part
of, and are taxed with, the operations of Manufacturers Life of America,
Separate Account Two is not separately taxed as a "regulated investment company"
under Subchapter M of the Code. Under existing federal income tax laws,
investment income and capital gains of Separate Account Two are not taxed to the
extent they are applied to increase reserves under the Policies. Since, under
the Policies, investment income and realized capital gains of Separate Account
Two are automatically applied to increase reserves, Manufacturers Life of
America does not anticipate that it will incur any federal income tax liability
attributable to Separate Account Two, other than a federal income tax based on
premiums received which is currently absorbed by Manufacturers Life of America,
and therefore Manufacturers Life of America does not intend to make provision
for any such taxes. However, if changes in the federal tax laws or
interpretations thereof result in Manufacturers Life of America being taxed on
such income or gains, or taxes currently absorbed are increased, then
Manufacturers Life of America may impose a charge against Separate Account Two
in order to make provision for such taxes.
TAX TREATMENT OF THE POLICIES
The Policies are designed for use in connection with retirement savings plans
that may or may not qualify for special income tax treatment under the
provisions of the Code. The following discussion of federal income tax aspects
of amounts received under a variable annuity contract is not exhaustive, does
not purport to cover all situations, and is not intended as tax advice. A
qualified tax adviser should always be consulted with regard to the application
of law to individual circumstances.
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
a Policy is not taxable to the Policyowner or Annuitant until received, either
in the form of annuity payments, as contemplated by the Policy, or in some other
form of distribution. However, as a general rule, deferred Policies held by a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuity contracts for federal tax purposes. The investment income
on such Policies
29
<PAGE> 34
is taxed as ordinary income that is received or accrued by the Policyowner
during the taxable year.
In certain circumstances policies will be treated as held by a natural person if
the nominal owner is a non-natural person and the beneficial owner is a natural
person, but this special exception will not apply in the case of any employer
who is the nominal owner of a Policy providing non-qualified deferred
compensation for its employees. Exceptions to the general rule (of immediate
taxation) for Policies held by a corporation, trust or similar entity may apply
with respect to (1) annuities held by an estate of a decedent, (2) Policies
issued in connection with qualified retirement plans, or IRAs, (3) certain
annuities purchased by employers upon the termination of a qualified retirement
plan, (4) certain annuities used in connection with structured settlement
agreements, and (5) annuities purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity.
When annuity payments commence, each payment is taxable under Section 72 of the
Code as ordinary income in the year of receipt if the Policyowner has not
previously been taxed on any portion of the purchase payments. If any portion of
the purchase payments has been included in the taxable income of the
Policyowner, this aggregate amount will be considered the "investment in the
contract." For fixed annuity payments, there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
annuity; the remainder of each payment is taxable. However, once the total
amount of the taxpayer's "investment in the contract" is excluded using this
ratio, annuity payments will be fully taxable. If annuity payments cease before
the total amount of the taxpayer's "investment in the contract" is recovered,
the unrecovered amount will be allowed as a deduction to the Policyowner in his
or her last taxable year.
In the case of a withdrawal, amounts received are taxable as ordinary income to
the extent that the Policy Value (determined without regard to any withdrawal
charges) before the withdrawal exceeds the "investment in the contract." Amounts
loaned under an annuity or amounts received pursuant to an assignment or pledge
of an annuity are treated as withdrawals. There are special rules for loans to
participants from annuities held in connection with qualified retirement plans
or IRA's. With respect to contracts issued after April 22, 1987, if an
individual transfers an annuity without adequate consideration to a person other
than his or her spouse (or to his or her former spouse incident to divorce), he
or she will be taxed on the difference between the value of the annuity minus
any withdrawal charges and the "investment in the contract" at the time of
transfer. In such case, the transferee's "investment in the contract" will be
increased to reflect the increase in the transferor's income.
In addition, there is a 10% penalty tax on the taxable amount of any payment
unless the payment is: (a) received on or after the date that the Policyowner
reaches age 59 1/2; (b) attributable to the Policyowner's becoming disabled as
defined in the Code; (c) made to a beneficiary on the death of the Policyowner;
(d) made to a beneficiary on the death of the primary annuitant if the
Policyowner is not a natural person; (e) made as a series of substantially equal
periodic payments for the life of the taxpayer (or the joint lives of the
taxpayer and beneficiary), subject to certain recapture rules; (f) made under an
annuity that is purchased with a single premium whose annuity starting date is
no later than a year from purchase of the annuity; (g) attributable to
"investment in the contract" before August 14, 1982; or (h) made with respect to
certain annuities issued in connection with structured settlement agreements.
Special rules may apply to annuities issued in connection with qualified
retirement plans.
For both withdrawals and annuity payments under some types of plans qualifying
for special federal income tax treatment ("qualified plans"), there may be no
"investment in the contract" and the total amount received may be taxable.
Where the Policy is owned by an individual, Manufacturers Life of America will
withhold and remit to the U.S. Government a part of the taxable portion of each
distribution made under a Policy unless the distributee notifies Manufacturers
Life of America at or before the time of the distribution that he or she elects
not to have any amounts withheld. The withholding rates applicable to the
taxable portion of periodic annuity payments are the same as the withholding
rates generally applicable to payments of wages. The withholding rate applicable
to the taxable portion of nonperiodic payments (including withdrawals prior to
the annuity commencement date) is 10%. Where the Policy is not owned by an
individual 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 certain circumstances, owners of variable annuity policies may be considered
the owners, for federal income tax purposes, of the assets of the separate
account used to support their policies. In those circumstances, income and gains
from the separate account assets would be includible in the variable
Policyowner's gross income. The IRS has
30
<PAGE> 35
stated in published rulings that a variable Policyowner will be considered the
owner of separate account assets if the Policyowner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
of the investments of a segregated asset account may cause the investor (i.e.,
the policyowner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which policyowners
may direct their investments to particular sub-accounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that policyowners were not owners of separate account assets. For example, the
Policy has many more Portfolios to which Policyowners may allocate premium
payments and Policy Values than were available in the policies described in the
rulings. These differences could result in a Policyowner being treated as the
owner of a pro rata portion of the assets of the Separate Account. In addition,
the Company does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. Manufacturers Life of America therefore reserves the right to modify the
Policy as necessary to attempt to prevent a Policyowner from being considered
the policyowner of a pro rata share of the assets of the Separate Account.
For purposes of determining a Policyowner's gross income from distributions
which are not in the form of an annuity, the Code provides that all deferred
annuities issued by the same company to the same Policyowner during any calendar
year shall be treated as one annuity. Additional rules may be promulgated under
this provision to prevent avoidance of its effect. For further information on
current aggregation rules under this and other Code provisions, the Policyowner
should consult his or her tax adviser.
PURCHASE OF POLICIES BY QUALIFIED PLANS
The Policies are available for use with several types of qualified plans. The
tax rules applicable to participants in such qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Therefore, no
attempt is made to provide more than general information about the use of the
Policies with the various types of qualified plans. Policyowners, Annuitants and
beneficiaries are cautioned that the rights of any person to any benefits under
such qualified plans may be subject to the terms and conditions of the Policy.
Following are brief descriptions of the various types of qualified plans in
connection with which Manufacturers Life of America will issue a Policy.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible and on the
time when distributions may commence. Distributions from certain other types of
qualified plans may be "rolled over" on a tax-deferred basis into an IRA. Sales
of the Policies for use with IRAs may be subject to special requirements of the
Internal Revenue Service. Distributions from these qualified plans are subject
to special withholding rules. Consult your plan administrator before taking a
distribution which you wish to roll over. A direct rollover from a qualified
plan is permitted and is exempt from the special withholding rules. When issued
in connection with an IRA, a Policy will be amended as necessary to conform to
the requirements of federal laws governing such plans.
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing
Plans. Section 401(a) of the Code permits corporate employers to establish
various types of tax-favored retirement plans for employees. Self-employed
individuals may establish plans for themselves and their employees. Such
retirement plans may permit the purchase of the Policies in order to provide
benefits under the plans. Employers intending to use Policies in connection with
such plans should seek competent advice.
PURCHASE OF POLICIES BY CHARITABLE REMAINDER TRUSTS
The Policies may be purchased by Charitable Remainder Trusts. If a Charitable
Remainder Trust is the Policyowner, the character of amounts received by the
income beneficiary of the Charitable Remainder Trust depends on the character of
the income in the trust. To the extent the trust has any undistributed ordinary
income, amounts received by the income beneficiary from the trust are taxed as
ordinary income. The Internal Revenue Service has held in at
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<PAGE> 36
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.
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.
ADDITIONAL INFORMATION ABOUT MANUFACTURERS LIFE OF AMERICA
DESCRIPTION OF BUSINESS
The Company reports two business segments: Traditional Life Insurance sold in
Taiwan and Variable Life Insurance and Annuities sold in the U.S. The Company's
reportable segments have been determined based on geography, differences in
product features, and distribution; the segments are also consistent with the
Company's management structure.
Variable Products
During the last five years the Company has grown significantly through the
successful growth in variable insurance sales. This growth reflects:
a) continuing shift in consumer preference as they seek greater control
over their investment decision making,
b) more active marketing and sales practices by the Company,
c) increased product lines,
d) expanded offering of investment portfolios.
The recently launched Survivorship Variable Universal Life (SVUL) product and
the Corporate-owned Variable Life (COLI) product launched in 1997, together with
an expanded offering of 36 investment portfolios, have been positively received.
The deposit growth for VUL is consistent with the Company's commitment to
develop variable products as core "estate/business planning products".
The broad range of high-profile external fund managers permits the policyholders
to take advantage of an investment approach known as managing to the "Efficient
Frontier" in which investors' assets are allocated among a broad mix of
investment choices consistent with their risk-tolerance levels. We are confident
the combination of both products and investment platform form the foundation of
future growth and profitability.
The Company has de-emphasized the sale of variable annuities and concentrated on
the sale of estate planning variable life products which is more consistent with
its client and producer base. Variable annuities for Manufacturers Life are
currently being marketed through an affiliated company, The Manufacturers Life
Insurance Company of North America.
Taiwan
The Company entered Taiwan in 1992 as a start-up venture to sell traditional
insurance products through its Taiwan branch. During 1995 the Company commenced
full operations that resulted in significant expenditures on agent recruitment
and training. In 1996, Taiwan's operating losses increased as a result of costs
associated with recruitment and training. Although management expected losses,
the magnitude was not acceptable. In late
32
<PAGE> 37
1996, a new General Manager was appointed and transferred to Taiwan with the
mandate to slow growth and focus more selectively on strategic opportunities.
Improvements were seen in 1997 and 1998 with decreases in the net losses
reported. The Company continues to anticipate a large potential for this market.
Demutualization
On January 20, 1998, the Board of Directors of Manufacturers Life announced that
it had asked the management of Manufacturers Life to prepare a plan for
conversion from a mutual life insurance company to an investor-owned,
publicly-traded stock company. Any demutualization plan for Manufacturers Life
is subject to the approval of its Board of Directors and policyholders, as well
as regulatory approval.
Forward-Looking Information
Certain information included herein is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited to,
statements concerning anticipated operating results, financial resources, growth
in existing markets and the impact of the year 2000. Such forward-looking
information involves important risks and uncertainties that could significantly
affect actual results and cause them to differ materially from expectations
expressed herein. These risks and uncertainties include changes in general
economic conditions, the effect of regulatory, tax and competitive changes in
the environment in which the Company operates, fluctuations in interest rates,
performance of financial markets and the Company's ability to achieve
anticipated levels of earnings.
RESPONSIBILITIES ASSUMED BY MANUFACTURERS LIFE
Manufacturers Life and Manufacturers USA have entered into an agreement with
ManEquity, Inc. pursuant to which Manufacturers Life or Manufacturers USA, on
behalf of ManEquity, Inc., will pay the sales commissions in respect of the
Policies and certain other policies issued by 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 or Manufacturers USA for all sales commissions paid
by Manufacturers Life and will pay Manufacturers Life for its other services
under the agreement in such amounts and at such times as agreed to by the
parties.
Manufacturers Life 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 or Manufacturers USA on behalf of Manufacturers Life of America. For 1998,
1997 and 1996, Manufacturers Life of America paid $32,148,384, $30,872,151 and
$26,982,466, respectively, to Manufacturers Life and Manufacturers USA pursuant
to the agreement.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
1998 1997 1996 1995 1994
--------- --------- --------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Under Generally Accepted Accounting Principles:
Total Revenues $ 29,866 $ 56,226 $ 73,532 $ 62,174 $ 60,322
Net Loss 754 3,636 8,407 6,846 6,726
Total Assets 1,363,810 1,166,611 1,062,603 854,814 654,968
Long Term Obligations -- 41,500 8,500 167,390 159,019
Capital and Surplus 203,197 106,769 116,630 110,520 101,839
</TABLE>
33
<PAGE> 38
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following analysis of the consolidated results of operations and financial
condition of The Manufacturers Life Insurance Company of America, (hereafter
referred to as "ManAmerica" or the "Company") should be read in conjunction with
the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
REVIEW OF CONSOLIDATED OPERATING RESULTS
- ----------------------------------------------------------------------------------------------------------
Financial Summary (In `000's) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 9,290 $ 8,607 $ 12,898
Consideration paid on reinsurance terminated (40,975) -- --
Fee Income 54,547 38,682 40,434
Net Investment Income 6,128 8,275 19,651
Other Revenues 1,082 544 668
Realized Investment Gains (Losses) (206) 118 (119)
- ----------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 29,866 $ 56,226 $ 73,532
- ----------------------------------------------------------------------------------------------------------
Policyholder Benefits and Claims $ 16,541 $ 6,733 $ 14,473
Reduction of reserves on reinsurance terminated (40,975) -- --
Operating Costs and Expenses, including Commissions 44,237 44,580 45,012
Amortization of Deferred Acquisition Costs 9,266 4,860 13,240
- ----------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (1,146) (4,113) (12,316)
Income Tax Benefit 392 477 3,909
Net Loss (754) (3,636) (8,407)
- ----------------------------------------------------------------------------------------------------------
General Account Assets 288,579 269,567 394,509
Separate Account Assets 1,075,231 897,044 668,094
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,363,810 1,166,611 $ 1,062,603
- ----------------------------------------------------------------------------------------------------------
General Account Liabilities 85,382 162,798 $ 277,879
Separate Account Liabilities 1,075,231 897,044 668,094
- ----------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS $ 203,197 $ 106,769 $ 116,630
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NET LOSS
The Company reported a consolidated net loss in 1998 of $0.8 million, compared
to the 1997 net loss of $3.6 million ($8.4 million net loss in 1996). The main
contributors to these losses were as follows:
34
<PAGE> 39
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US Operations $ 1.5 $ (0.8) $ 9.1
Taiwan Operations (2.3) (2.8) (17.5)
- -----------------------------------------------------------------------------------------------
NET LOSS $ (0.8) $ (3.6) $ ( 8.4)
- -----------------------------------------------------------------------------------------------
</TABLE>
The net income from U.S. operations in 1998 of $1.5 million compared to a net
loss in 1997 of $0.8 million was primarily a result of increased fee income
earned in 1998 compared to 1997. The higher net loss in 1997 compared to 1996
was directly attributable to new business strain on dramatically increased
variable universal life contract sales for which deposits increased 28% over
1996 levels.
The net loss from Taiwan operations decreased to $2.3 million in 1998 from $2.8
million in 1997 (a $17.5 million net loss in 1996). The lower net loss in 1998
was a result of higher premiums and lower operating costs which were partially
offset by higher policyholder benefits due to increased business and lower
surrenders. The increased net loss in 1997 compared to 1996 was a result of
significant start-up costs incurred in Taiwan, particularly associated with
producer recruitment. In 1997, as discussed earlier, improvements were made in
the Taiwan branch operations to rationalize the operations, slow the sales
growth and related production costs, and to instead focus on strategic growth.
Lower sales in 1998 and 1997 compared to 1996 have significantly reduced the
level of commissions and expenses incurred.
PREMIUMS
Premium revenue for 1998 was $9.3 million compared to $8.6 million in 1997
($12.9 million in 1996). Of the total, premiums related to sales of traditional
life insurance contracts in Taiwan in 1998, 1997 and 1996 were $9.2 million,
$8.1 million and $12.2 million respectively. The increase in premiums for Taiwan
in 1998 compared to 1997 reflects the focused growth strategy adopted in 1997 as
discussed previously. The decrease in premiums for Taiwan in 1997 from 1996
reflects this same shift in strategy. In 1998, $0.1 million of premiums were
reported for U.S. operations, compared to $0.5 million in 1997 and $0.7 million
in 1996. The U.S. premiums relate solely to a block of Corporate-owned life
insurance business assumed from ManUSA for which the initial premium assumed of
$25.4 million was received in 1994, with very little renewal premium received
thereafter. On December 31, 1998, this agreement was terminated and the Company
transferred premiums and reserves totaling $41.0 million related to this block
of business to ManUSA. This transaction is reported as consideration paid on
reinsurance terminated of $41.0 million along with a corresponding reduction of
reserves on reinsurance terminated.
Total general account and separate account deposits not included in premiums
above were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In 000's) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Variable Life Insurance $207,401 $185,355 $144,438
Variable Annuities 2,640 11,598 36,130
- -----------------------------------------------------------------------------------------------
TOTAL $210,041 $196,953 $180,568
- -----------------------------------------------------------------------------------------------
</TABLE>
The growth in variable life insurance deposits continued while single premium
variable annuity premiums continued to decrease in 1998 and 1997. The deposit
growth for variable life is consistent with the Company's commitment to develop
variable core "estate/business planning products". Sales of the COLI variable
universal life product launched in 1997 continued to grow in 1998. With the
merger of Manufacturers Life and North
35
<PAGE> 40
American Life Assurance Company in 1996, the sale of variable annuities in the
Company was de-emphasized in October 1997 and all variable annuity sales are
made through an affiliated company, The Manufacturers Life Insurance Company of
North America.
FEE INCOME
Fee income for 1998 was $54.5 million, compared to $38.7 million in 1997 ($40.4
million in 1996). The increase in fee income in 1998 is attributable to: i)
higher cost of insurance charges resulting from a larger inforce block of
business in 1998 compared to 1997 and 1996; ii) increased mortality and expense
risk charges earned as a percentage of the value of invested assets in the
separate account portfolios which have grown significantly in 1998 and 1997
compared to 1996 due to continued strong investment performance, and; iii)
higher surrender charges earned due mainly to a larger inforce block of
business. Cost of insurance charges for 1998, 1997 and 1996 were $28.3 million,
$21.3 million and $19.3 million, respectively; mortality and expense risk
charges earned on separate account assets for 1998, 1997 and 1996 were $8.5
million, $7.0 million and $5.2 million, respectively, and; surrender charges for
1998, 1997 and 1996 were $5.1 million, $3.2 million and $3.0 million,
respectively. The variable universal life and annuity business accounted for 81%
of the fee income earned by the Company in 1998 compared to 82% in 1997 and 85%
in 1996. The remainder of the fee income is primarily derived through
asset-based distribution fees which have increased to $7.6 million in 1998
compared to $5.1 million in 1997 ($1.6 million in 1996).
NET INVESTMENT INCOME
Net investment income was $6.1 million in 1998 compared to $8.3 million in 1997
($19.7 million in 1996). Included in the 1997 investment income is approximately
$2.5 million of interest earned on the Manufacturers Life Mortgage Securities
Corporation ("MLMSC") bonds which were repaid on March 1, 1997. The decrease in
net investment income from 1996 to 1997 is due to the maturity of the MLMSC
bonds in March 1997 on which interest of approximately $13.2 million was
reported in 1996.
POLICYHOLDER BENEFITS AND CLAIMS
Policyholder benefits increased to $16.5 million in 1998, compared to $6.7
million in 1997 ($14.5 million in 1996). The increase in 1998 is primarily a
result of increased reserves for the Taiwan business due to new business and a
much slower run-off of reserves as lower surrenders were experienced compared to
1997.
OPERATING COSTS AND EXPENSES, INCLUDING COMMISSIONS
Operating costs and expenses, including commissions, were $85.5 million for 1998
compared to $77.9 million for 1997 before deferral of acquisition expenses
($81.0 million for 1996). Net of deferred acquisition costs, these costs were
$44.2 million for 1998 compared to $44.6 million for 1997 ($45.0 million for
1996). The increase in expenses before deferral of acquisition expenses in 1998
is primarily attributable to higher variable expenses resulting from increased
sales of variable insurance products compared to 1997. A greater portion of
these expenses have been deferred in 1998 compared to 1997 as they relate to the
acquisition of new business.
AMORTIZATION OF DEFERRED ACQUISITION COSTS
The DAC amortization expense was $9.3 million for 1998 compared to $4.9 million
for 1997 ($13.2 million for 1996). In 1997, there was significant DAC unlocking
due to assumption changes in the DAC model and re-pricing of the Company's
variable products. This was partially offset by amounts written-off relating to
DAC in the Taiwan operations due to high reported lapses in 1997.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
The Company had total consolidated assets of $1,364 million at December 31,
1998, an increase of $197 million or 16.9% from 1997. This change is principally
a result of separate account asset growth of $178 million due to
36
<PAGE> 41
strong investment performance of the underlying investment funds, continued
consumer preference for participation in the stock market through separate
accounts, and the additional product offerings and investment options introduced
in 1998.
INVESTMENTS
The following table outlines, by type of investment, the carrying value of the
general account investment portfolio of the Company:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Investment Type (In `000's) 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $49,254 $ 67,893
Equities 20,524 19,460
Policy Loans 19,320 14,673
Short-Term Investments 459 2,130
- --------------------------------------------------------------------
TOTAL INVESTMENTS $89,557 $104,156
- --------------------------------------------------------------------
</TABLE>
General account investments decreased by $14.6 million or 14% from 1997. This
change is due to a decrease in fixed maturities of $18.6 million, an increase in
policy loans of $4.6 million and a decrease in short-term investments of $1.7
million. The Company manages its investment portfolio to provide liquidity to
meet new business strain on increased variable life insurance sales.
FIXED MATURITIES
The Company's fixed maturity bond portfolio of $49.3 million represents 55% of
investments at the end of 1998, compared to 65% at the end of 1997.
As at December 31, 1998, 91% of the bond portfolio was rated "A" or higher, and
100% was rated investment grade, "BBB" or higher. The corresponding percentages
at the end of 1997 were 97.5% and 100%.
Fixed maturities by Investment Grade
<TABLE>
<CAPTION>
(In '000's) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA $29,927 60.8% $52,496 77.3%
AA 544 1.1% 516 1.0%
A 14,459 29.3% 13,167 19.3%
BBB 4,324 8.8% 1,714 2.5%
- -------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $49,254 100.0% $67,893 100.0%
- -------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 42
EQUITY SECURITIES
The Company's equity portfolio of $20.5 million represents 23% of investments at
the end of 1998, compared to 19% at the end of 1997. The equities consist
entirely of investments in the portfolios of the MIT.
POLICY LOANS
Policy loans represented 22% of investments at December 31, 1998, compared to
12% in 1997. Most individual life insurance policies provide the individual
policyholder with the right to obtain a policy loan from the Company. Such loans
are made in accordance with the terms of the respective policies, are carried at
the unpaid balance, and are fully secured by the cash surrender value of the
policies on which the respective loans are made.
IMPAIRED ASSETS
Allowances for losses on investments are established when an asset or portfolio
of assets becomes impaired as a result of deterioration in credit quality to the
extent that there is no longer assurance of timely realization of the carrying
value of assets and related investment income. The carrying value of an impaired
asset is reduced to the net realizable value of the asset at the time of
recognition of impairment.
The Company had no provisions for impairments as at December 31, 1998 and 1997.
DEFERRED ACQUISITION COSTS (DAC)
DAC increased from $130.4 million at the end of 1997 to $163.5 million as at the
end of 1998. This increase is due mainly to deferrable acquisition costs
associated with the sale of the COLI product introduced in 1997.
POLICYHOLDER LIABILITIES
The following table shows the distribution of Policyholder Liabilities and
Separate Account Liabilities by line of business at December 31:
<TABLE>
<CAPTION>
Policyholder Liabilities (In '000's) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Life Insurance:
Taiwan $ 18,383 $ 13,291
Reinsurance -- 40,975
Variable Life 42,447 40,211
- -----------------------------------------------------------------------
TOTAL $ 60,830 $ 94,477
- -----------------------------------------------------------------------
Separate Account Liabilities (In '000's) 1998 1997
- -----------------------------------------------------------------------
Variable Life Insurance $ 811,959 $603,732
Variable Annuities 263,272 293,312
- -----------------------------------------------------------------------
TOTAL $1,075,231 $897,044
- -----------------------------------------------------------------------
</TABLE>
38
<PAGE> 43
Separate account liabilities are $1,075 million, an increase of 20% over 1997.
This reflects the growing popularity of variable products in the marketplace and
the increase in existing fund values due to the increase in the stock market in
1998 and sales of the COLI product.
The decrease in reinsurance reserves reflects the transfer of reserves to ManUSA
resulting from the termination of the reinsurance agreement between the two
companies discussed previously.
Taiwan reserves increased in 1998 due to increased business and lower lapses and
surrenders.
LIQUIDITY AND CAPITAL REQUIREMENTS
The general account liabilities consist of traditional insurance whose liquidity
requirements do not fluctuate significantly from one year to the next. The
majority of the Company's cash flows arise from policyholder transactions
related to the separate accounts, and, as such, the assets and liabilities of
these products are exactly matched.
The Company maintains a prudent amount invested in cash and short term
investments. At the end of 1998, this amounted to $24 million or 21% of total
investments, including cash and cash equivalents, compared to $22 million in
1997 or 17.7%. In addition, the Company's liquidity is managed by maintaining an
easily marketable portfolio of fixed maturities. Because of the excess of
expense over income, which arises from the cost of new policy issues, the
continued success in generating sales will not only result in losses in the
results from operations, but will create a cash flow strain as well. The
Company's consolidated statements of cash flows indicate this in that operating
activities used cash of $69.3 million and $24.7 million in 1998 and 1997,
respectively, compared to $20.5 million in 1996. Included in the 1998 total for
cash used in operating activities is the consideration paid of $41.0 million on
the termination of the reinsurance agreement with ManUSA. As a result, the
Company looks to its parent, ManUSA, for the necessary capital to support its
operations. In 1996, a $15 million contribution of capital was made to the
Company by ManUSA to provide further liquidity. In 1998, the surplus debenture
for $8.5 million issued to the Company from ManUSA in 1995 was discharged and
recorded as a capital contribution. Also in 1998, the promissory note in the
amount of $33 million issued by the Company to ManUSA in 1997 was discharged and
the amount of $34.3 million ($33 million plus interest of $1.3 million) was
recorded as a capital contribution. In addition, in 1998, a further $51.7
million contribution of capital was made to the Company by ManUSA to offset the
payment of $41.0 million made by the Company to ManUSA on the termination of the
reinsurance agreement between the two companies discussed previously. The
Company and Manulife Financial have entered into an agreement whereby Manulife
Financial provides a claims paying guarantee to the Company's U.S.
policyholders. This claims paying guarantee does not apply to the Company's
separate account contract holders.
The Company has no material commitments for capital expenditures.
CAPITAL REQUIREMENTS AND SOLVENCY PROTECTION
In order to enhance the regulation of insurer solvency, the NAIC enforces
minimum Risk Based Capital (RBC) requirements. The requirements are designed to
monitor capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. The RBC model law required that life
insurance companies report on a formula-based RBC standard which is calculated
by applying factors to various assets, premium and reserve items. The formula
takes into account risk characteristics of the life insurer, including asset
risk, insurance risk, interest risk and business risk. If an insurer's ratio
falls below certain thresholds, regulators will be authorized, and in some
circumstance required, to take regulatory action.
The Company's policy is to maintain capital and surplus balances well in excess
of the minimums required under government regulations in all jurisdictions in
which the Company does business.
39
<PAGE> 44
RISK MANAGEMENT PRACTICES AND PROCEDURES
Risk management is a fundamental component in the Company's financial strength
and stability, and is essential to its continuing success. The Company is
committed to comprehensive risk management policies and procedures which measure
and control risk in all of its business activities and allow for periodic
reviews by internal and external auditors and regulators.
The key risks faced by the Company and how they are managed is explained in the
following sections.
INTEREST RATE RISK
Interest rate risk is the risk that the Company will incur economic losses due
to adverse changes in interest rates. The Company manages its interest rate risk
through an asset/liability management program. The Company has established a
target portfolio mix which takes into account the risk attributes of the
liabilities supported by the assets, expectations of market performance, and a
generally conservative investment philosophy. Preservation of capital and
maintenance of income flows are key objectives of this program.
Based upon the Company's investment strategy and its asset-liability management
process, management estimates that a 100 basis point immediate, parallel
increase in interest rates for the entire year of 1999 would decrease the fair
value of its fixed maturity securities by approximately $2.6 million. The
Company's liabilities are comprised primarily of separate account liabilities
for which contract holders bear the risk of fluctuations in interest rates.
EQUITY RISK
The Company earns asset based fees based on the asset levels invested in the
separate accounts. As a result, the Company is subject to equity risk and the
effect changes in equity market levels will have on the amounts invested in the
separate accounts. The Company estimates that the effect of a 10% decline in
equity fair values in force at December 31, 1998 would adversely affect the
Company's asset based fees by $2.0 million if applicable over the entire year of
1999.
CURRENCY RISK
The Company's policy of matching assets with related liabilities by currency
limits its exposure to foreign currency movements to a minimal level. The
currency exposure on surplus is proportional to the underlying liabilities, thus
insulating the Company's "surplus to liability" ratios from changes in foreign
currency exchange rates.
As a result of the Company's foreign currency policy, the impact of the current
foreign exchange crisis in Asia on the Company's earnings was minimal although
the Company recognizes that the economic value of the Taiwan branch was affected
by the economic and currency developments in these markets.
CREDIT RISK
Credit risk is the risk that a party to a financial instrument will fail to
fully honor its financial obligations to the Company. Senior management within
the Investments operations establishes policies and procedures for the
management of credit risk which limits concentration by issuer, connections,
rating sector and geographic region. Limits are placed on all personnel in terms
of ability to commit the Company to credit instruments. Credit and commitment
exposures are monitored using a rigorous reporting process and are subject to a
formal quarterly review.
CLAIMS RISK
The Company is always subject to the risk of change in the life expectancy of
the population. Claims trends are
40
<PAGE> 45
therefore monitored on an ongoing basis. The Company uses both its own and
industry experience to develop estimates of future claims.
The management of ongoing claims risk for an insurer includes establishing
appropriate criteria to determine the insurability of applicants as well as
managing the exposure to large dollar claims. Underwriting standards have been
established to manage the insurability of applicants. Management performs
periodic reviews to ensure compliance with standards.
Exposure to large claims is managed by establishing policy retention limits.
Policies in excess of the limits are reinsured with MRC. Underwriting standards
and policy retention limits are reviewed on a periodic basis.
PRICING RISK
The process of pricing products includes the estimation of many factors
including future investment yields, mortality and morbidity experience,
expenses, rates of policy surrender, and taxes. Pricing risk is the risk that
actual experience in the future will not develop as estimated in pricing. Some
products are designed such that adjustments to premiums or benefits can be made
for experience variations, while for other products no such changes are
possible.
The Company manages pricing risks by setting standards and guidelines for
pricing. These standards and guidelines cover pricing methods and assumption
setting, profit margin objectives, required scenario analysis, and
documentation. They also address the areas of pricing software, approved pricing
personnel, and pricing approvals. These standards and guidelines ensure that an
appropriate level of risk is borne by the Company and that an appropriate return
is provided to the policyholders.
BUSINESS RISK
Business risk comprises operating risk as well as other risks. Operating risk is
the exposure to inadequate internal controls, including inadequate control of
risk management. Other risks include legal, political, competitive and
environmental risks. Business risks expose the Company to potential loss of
earnings.
The Company manages operating risks by establishing appropriate internal control
policies and procedures. The Company centrally manages business risk using risk
identification and compliance monitoring processes. Diversification of
businesses is an integral part of the Company's business risk management
strategy.
A controllership function has been established in each operation and is
responsible for day-to-day management of operating risk including compliance
with Company control policies.
The Company has coordinated its operational compliance departments under the
supervision of its corporate legal function. This structure ensures compliance
with all legal and regulatory requirements in all jurisdictions in which the
Company does business. All customer-related communications, product brochures
and selling tools, and procedures for compliance therewith, are subject to
review by the compliance function. Compliance is monitored on an ongoing basis.
IMPACT OF YEAR 2000
The Company makes extensive use of information systems in the operations of its
various businesses, including for the exchange of financial data and other
information with customers, suppliers and other counterparties. The Company also
uses software and information systems provided by third parties in its
accounting, business and investment systems.
The Year 2000 risk, as it is commonly known, is the result of computer programs
being written using two digits, rather than four, to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in systems
41
<PAGE> 46
failures or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send premium
billing notices, make claims payments or engage in other normal business
activities.
The systems used by the Company have been assessed as part of a comprehensive
written plan conducted by The Manufacturers Life Insurance Company (collectively
with its subsidiaries "Manulife Financial"), to ensure that computer systems and
processes of Manulife Financial and its affiliates, including the Company, will
continue to perform through the end of this century and in the next. In 1996, in
order to make Manulife Financial's systems Year 2000 compliant, a program was
instituted to modify or replace both Manulife Financial's information technology
systems ("IT systems") and embedded technology systems ("Non-IT systems"). The
phases of this program include (i) an inventory and assessment of all systems to
determine which are critical, (ii) planning and designing the required
modifications and replacements, (iii) making these modifications and
replacements, (iv) testing modified or replaced systems, (v) redeploying
modified or replaced systems and (vi) final management review and certification.
For most IT and non-IT systems identified as critical, certification has been
completed for the Company. Of those systems classified as critical, management
believes that over 99% were Year 2000 compliant at the end of 1998. Management
continues to focus attention on the remaining 1% of critical systems. Those that
affect the Company are expected to be compliant by the end of the second quarter
in 1999. Management believes that the Company's non-critical systems will be
Year 2000 compliant by the end of the first quarter 1999.
In addition to efforts directed at Manulife Financial's own systems, Manulife
Financial is presently consulting vendors, customers, and other third parties
with which it deals in an effort to ensure that no material aspect of Manulife
Financial's operations will be hindered by Year 2000 problems of these third
parties. This process includes providing third parties with questionnaires
regarding the state of their Year 2000 readiness and, where possible or where
appropriate, conducting further due diligence activities. Manulife Financial
recognizes the importance of preparing for the change to the Year 2000 and, in
January 1999, commenced preparation of contingency plans, in the event that
Manulife Financial's Year 2000 program has not fully resolved its Year 2000
issues. The Year 2000 Project Management Office for Manulife Financial's U.S.
Division is coordinating the preparation of the Year 2000 contingency plan on
behalf of U.S. Division affiliates and subsidiaries. Contingency planning is
targeted for completion by mid-1999.
Management currently believes that, with modifications to existing software and
conversions to new software, the Year 2000 risk will not pose significant
operational problems for Manulife Financial's computer systems. As part of the
Year 2000 program, critical systems were "time-shift" tested in the Year 2000
and beyond to confirm that they will continue to function properly before,
during and after the change to the Year 2000. However, there can be no assurance
that Manulife Financial's Year 2000 program, including consulting third parties
and its contingency planning, will avoid any material adverse effect on Manulife
Financial's operations, customer relations or financial condition. Manulife
Financial estimates the total cost of its Year 2000 program will be
approximately $59 million, of which $49.5 million has been incurred through
December 31, 1998; however, there can be no assurance that the actual cost
incurred will not be materially higher than such estimate. Most costs will be
expensed as incurred; however, those costs attributed to the purchase of new
software and hardware will generally be capitalized. The total cost of the Year
2000 program is not expected to have a material effect on Manulife Financial's
net operating income.
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company, together with
their principal occupations during the past five years, are as follows:
42
<PAGE> 47
<TABLE>
<CAPTION>
Name (Age) Position with Manufacturers Life Principal Occupation
of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sandra M. Cotter (36) Director (since December 1992) Attorney, Dykema, Gossett, PLLC, 1989 to present.
James D. Gallagher (44) Director (since May 1996),
Secretary and General Counsel Vice President, Secretary and General Counsel, The
Manufacturers Life Insurance Company (USA), January 1997 to
present; Secretary and General Counsel, Manufacturers
Adviser Corporation, January 1997 to present; Vice
President, Legal Services - U.S. Operations, The
Manufacturers Life Insurance Company, January 1996 to
present; Vice President, Secretary and General Counsel, The
Manufacturers Life Insurance Company of North America, 1994
to present; Vice President and Associate General Counsel,
The Prudential Insurance Company of America, 1991 to 1994.
Donald A. Guloien (41) Director (since August 1990) and Executive Vice President, Business Development The
President Manufacturers Life Insurance Company, January 1999 to
present; Senior Vice President, Business Development, The
Manufacturers Life Insurance Company, 1994 to December
1998; Vice President, U.S. Individual Business, The
Manufacturers Life Insurance Company, 1990 to 1994.
Theodore Kilkuskie (43) Director (since May 1996) and Senior Vice President, U.S. Annuities, The Manufacturers
Vice President, US Individual Life Insurance Company, January 1999 to present; President,
Insurance The Manufacturers Life Insurance Company of North America,
January 1999 to present; Senior Vice President, U.S.
Individual Insurance, The Manufacturers Life Insurance to
December 1998; Vice President, U.S. Individual Insurance,
The Manufacturers Life Insurance Company, June 1995 to
February 1998; Executive Vice President, Mutual Fund Sales
& Marketing, State Street Research & Management, March 1994
to June 1995.
James O'Malley (52) Director (since November 1998) Senior Vice President, U.S. Pensions, The Manufacturers
Life Insurance Company, January 1999 to present; Vice
President, Systems New Business Pensions, The Manufacturers
Life Insurance Company, 1984 to December 1998.
Joseph J. Pietroski (60) Director (since July 1992) Senior Vice President, General Counsel and Corporate
Secretary, The Manufacturers Life Insurance Company, 1988
to present.
John D. Richardson (61) Chairman and Director (since Senior Executive Vice President, The Manufacturers Life
January 1995) Insurance Company, January 1999 to present; Executive Vice
President, U.S. Operations, The Manufacturers Life
Insurance Company, November 1997 to December 1998; Senior
Vice President and General Manager, U.S. Operations, The
Manufacturers Life Insurance Company, January 1995 to
October 1997;
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
Name (Age) Position with Manufacturers Life Principal Occupation
of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior Vice President and General Manager, Canadian
Operations, The Manufacturers Life Insurance Company, June
1992 to December 1994.
Victor Apps (51) Vice President, Asia Executive Vice President, Asia Operations, The
Manufacturers Life Insurance Company, November 1997 to
present; Senior Vice President and General Manager, Greater
China Division, The Manufacturers Life Insurance Company,
1995 to 1997; Vice President and General Manager, Greater
China Division, The Manufacturers Life Insurance Company,
1993 to 1995; International Vice President, Asia Pacific
Division, The Manufacturers Life Insurance Company, 1988 to
1993.
Felix Chee (52) Vice President, Investments Executive Vice President, The Manufacturers Life Insurance
Company, November 1997 to present; Chief Investment
Officer, The Manufacturers Life Insurance Company, June
1997 to present; Senior Vice President and Treasurer, The
Manufacturers Life Insurance Company, August 1994 to May
1997; Vice President and Treasurer, The Manufacturers Life
Insurance Company, October 1993 to July 1994.
Robert A. Cook (44) Vice President, Marketing Senior Vice President, US Individual Insurance, The
Manufacturers Life Insurance Company, January 1999 to
present; Vice President, Product Management, The
Manufacturers Life Insurance Company, 1996 to December
1998; Sales and Marketing Director, U.K. Division, The
Manufacturers Life Insurance Company, 1994 to-1995.
Hugh McHaffie (40) Vice President Vice President, Product Development, US Annuities, The
Manufacturers Life Insurance Company, January 1996 to
present; Vice President, US Annuities, The Manufacturers
Life Insurance Company of North America, September 1996 to
present, Vice President, Product Actuary, The Manufacturers
Life Insurance Company of North America, August 1994 to
September 1996; Product Development Executive, The
Manufacturers Life Insurance Company of North America,
August 1990 to August 1994.
Douglas H. Myers (44) Vice President, Finance and President, ManEquity, Inc., April 1994 to present;
Compliance, Controller Assistant Vice President and Controller, U.S. Operations,
The Manufacturers Life Insurance Company, 1988 to present.
John G. Vrysen (43) Vice President and Appointed Chief Financial Officer and Treasurer, Manulife-Wood Logan
Actuary Holding Co., Inc., January 1996 to present; Vice President
and Chief Financial Officer, U.S. Operations, The
Manufacturers Life Insurance Company, January 1996 to
</TABLE>
44
<PAGE> 49
<TABLE>
<CAPTION>
Name (Age) Position with Manufacturers Life Principal Occupation
of America
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
present; Vice President and Chief Actuary, The
Manufacturers Life Insurance Company of New York, March
1992 to present; Vice President and Chief Actuary, The
Manufacturers Life Insurance Company of North America,
January 1986 to present.
Jean Wong (35) Vice President and Treasurer Vice President and Chief Accountant, US Division, The
Manufacturers Life Insurance Company, May 1998 to present;
Chief Accountant, US Division, The Manufacturers Life
Insurance Company, July 1996 to May 1998; Director, Finance
and Administration, Star Data Systems Inc., December 1995
to July 1996; Vice President and Chief Financial Officer,
Primerica Financial Services, June 1993 to December 1995.
</TABLE>
EXECUTIVE COMPENSATION
The Company's executive officers may also serve as officers of one or more
affiliates of Manufacturers Life (sometimes referred to herein as "Manulife
Financial"). Allocations have been made as to such officers' time devoted to
duties as executive officers of the Company. The following table shows the
allocated compensation paid or awarded to or earned by the Company's Chief
Executive Officer for services provided to the Company. No other executive
officer had allocated cash compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus(1) Other Annual Restricted Securities LTIP All Other
Position Compensation(2) Stock Underlying Payouts Compensation(3)
Awards Options/SARs
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Don A. Guloien, 1998 $8,875 $4,800 $1,100 N/A N/A $1,303 $12
President
</TABLE>
(1) Bonus for 1997 performance paid in 1998.
(2) Does not include group health insurance since the plans are the same for all
salaried employees.
(3) Other Compensation includes the value of term life insurance premiums paid
by Manulife Financial for the benefit of the executive officer.
The Management Resources and Compensation Committee (the "Committee") of the
Board of Directors is comprised of six external directors. The Committee's
principal mandate is to approve the appointment, succession and remuneration of
Manulife Financial's Executive Vice Presidents and Senior Vice Presidents,
including the Named Executive Officers. For the President and Chief Executive
Officer of Manulife Financial, the Committee makes compensation recommendations
that are then approved by the entire Board. The Committee also approves the
compensation programs for all other officers as well as the annual review of the
Annual Incentive Plan awards and Long-Term Incentive Plan grants for all
officers of Manulife Financial and it's subsidiaries.
45
<PAGE> 50
In addition to the annual reviews, the Committee approves any major changes to
all policies which are designed to attract, retain, develop and motivate
employees and all pension plans of Manulife Financial and its subsidiaries.
Manulife Financial's executive compensation policies are designed to recognize
and reward individual performance as well as provide a total compensation
package which is competitive with the median of Manulife Financial's comparator
group, which is comprised of Schedule I banks and major life insurance
companies. Further, Manulife Financial ensures that its compensation levels are
competitive within local markets outside of Canada.
Manulife Financial's executive compensation program is comprised of three key
components; base salary, annual incentives and long-term incentives. Officers of
the Company participate in the following Manulife Financial compensation
programs.
SALARY
The Committee approves the salary ranges and salary increase levels for all of
Manulife Financial's Executive and Senior Vice Presidents individually, and all
Vice Presidents as a group, based on competitive industry data for all markets
in which Manulife Financial operates. Salary increases for Manulife Financial's
officers have been consistent with the salary increase programs approved for all
employees.
In establishing Manulife Financial's competitive position and developing annual
salary increase programs, Manulife Financial uses several annual surveys as
prepared by independent compensation consulting firms with reference to publicly
disclosed information.
ANNUAL INCENTIVE PLAN
Manulife Financial's Annual Incentive Plan ("AIP") provides executive officers
of Manulife Financial with the opportunity to earn incentive bonuses based on
the achievement of pre-established corporate and divisional earnings objectives
and divisional and individual performance objectives.
The Committee and management periodically review the design of the incentive
plan to ensure that it:
(i) is competitive with Manulife Financial's comparator groups;
(ii) supports, and aligns, with Manulife Financial's strategic objectives; and
(iii) recognizes and rewards individual contributions and value creation.
In conducting these reviews, Manulife Financial obtains advice from independent,
external consultants.
The AIP uses earnings and performance measures to determine awards with
predetermined thresholds for each component as approved by the Committee
annually. Incentive awards are established for each participant based on
organizational level. Incentive award levels range from 12% to 60% of base
salary assuming achievement of targeted performance objectives. When corporate
and divisional performance objectives are significantly exceeded, a participant
can receive incentive awards ranging from 30% to 150% of base salary. If
corporate and divisional performance objectives are below targeted performance,
the incentive awards are adjusted downward according to plan guidelines. The
Named Executive Officers participate in the AIP on the same basis as all other
officers.
46
<PAGE> 51
LONG TERM INCENTIVE PLAN
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Estimated Future Payouts Under
Non-Securities-Price-Based Plans (US $)(3)
----------------------------------------------------------
Name Securities Units or Performance or Threshold Target ($ or #)(4) Maximum
Other Rights (#)(1) Other Period ($ or #) ($ or #)
Until
Maturation or
Payout(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Don Guloien ....... 672 Jan. 1, 2002 N/A $4,588 N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Each grant has two components: Cash Appreciation Rights and Retirement
Appreciation Rights.
(2) The appreciation in the value of Cash Appreciation Rights are redeemed four
years following the grant date. Retirement Appreciation Rights are only redeemed
upon retirement or cessation of employment with Manulife.
(3) Canadian dollars converted to US dollars using a book rate of 1.50.
(4) The target is calculated assuming Cash Appreciation Rights are exercised in
the fourth year. At that time 50% of the target is redeemed in cash and the
balance continues to appreciate until redeemed upon retirement or cessation of
employment.
Manulife Financial's Board of Directors approved the implementation of a
Long-Term Incentive Plan ("LTIP") effective April 1, 1994. All employees at the
Vice President level and above are eligible to participate in the LTIP.
The purpose of the LTIP is to encourage executive officers to act in the
long-term interests of Manulife Financial and to provide an opportunity to share
in value creation as measured by changes in Manulife Financial's statutory
surplus. The LTIP is an appreciation rights plan which requires that a
substantial portion of any accumulated gain remain invested with Manulife
Financial during the participant's career with Manulife Financial.
The Committee reviews the LTIP on an annual basis having regard to Manulife
Financial's performance, targeted growth and competitive position. The Committee
approves grants on a prospective basis considering management's recommendations
for participation, size and terms of grant.
Grants of appreciation rights are generally made to participants in the LTIP
each year. The number of appreciation rights granted to participants is
determined based on the net present value of the potential payout represented by
the appreciation rights, assuming that Manulife Financial's surplus grows at a
targeted rate. Appreciation rights are granted such that this net present value
represents between 20% and 115% of the participant's salary level on the date of
grant.
PERQUISITES
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, dental, basic and dependent life insurance,
long and short-term disability coverage and defined contribution or defined
benefit plan.
47
<PAGE> 52
US domiciled officers at the Vice President levels and above are provided with
an automobile and parking benefit, cellular telephone and computer. The
automobile benefit covers insurance and maintenance. There are no other benefit
packages which currently enhance overall compensation by more than 10%.
Canadian domiciled officers at the Vice President levels and above are eligible
to receive the Executive Flexible Spending Account. The objective of the program
is to assist and encourage the executive officers to represent the interests and
high standards of Manulife Financial, both from a business and a personal
perspective. The program's flexibility allows use of the allowance for benefit
choices from a comprehensive list of options, including: car, mortgage subsidy
and club memberships.
US RETIREMENT PLANS
With the integration of the Manulife Financial and North American Life
operations, a review of the retirement programs for the employees in the United
States was conducted in 1998. As a result of this review, effective July 1,
1998, (i) the two defined benefit pension plans (The Manulife Financial United
States Salaried Employees Pension Plan and the North American Life Staff Pension
Fund 1948 for United States Members) were merged and converted to a Cash Balance
Plan, entitled "The Manulife Financial U.S. Cash Balance Plan"; (ii) the
Supplemental Pension Plan for United States Salaried Employees of Manufacturers
Life Insurance Company was converted into a Cash Balance Supplemental Plan,
entitled "The Manulife Financial U.S. Supplemental Cash Balance Plan"; and,
(iii) the two 401(k) plans (The Manulife Financial 401(k) Savings Plan and the
North American Security Life 401(k) Savings Plans) were merged and restated into
The Manulife Financial U.S. 401(k) Savings Plan.
The executives of Manufacturers Life of America are eligible to participate in
the three restated retirement plans as sponsored by The Manufacturer's Life
Insurance Company (U.S.A.).
The Manulife Financial Cash Balance Plan
To implement the conversion to the Cash Balance Plan, participants in the two
former defined benefit plans were provided with opening account balances equal
to the value of their accrued benefit under their respective prior plan
participation as at June 30, 1998, using interest rate assumption equal to the
Pension Benefit Guaranty Corporation (PBGC) rate for 1998.
Under this plan, which is a defined benefit plan, a separate account is
established for each participant. The account receives company contribution
credits based on vesting service and earnings as outlined in the table below.
The account earns semi-annual interest credits based on the yield of one-year
Treasury bills plus half a percentage point, subject to a minimum interest
credit of 5.25%. The yearly maximum amount of eligible pay allowed under the
qualified plan is $160,000 for 1998. Employees are vested after 3 years of
vesting service. Normal retirement age is 65. Pension benefits are provided to
those who terminate after three years of vesting service, and the normal
retirement benefit is actuarially equivalent to the cash balance account at
normal retirement date. Early benefits are actuarially equivalent to the normal
retirement benefits but are subsidized for participants who were age 45 and 5 or
more years of vesting service on July 1, 1998 and who terminate employment after
attaining age 50 and completing 10 years of service. For these grandfathered
participants, the prior early retirement factors under the Manulife Financial
Plan apply. The normal form of payment under the Cash Balance Plan is a life
annuity, with various optional forms available, including a lump sum equal to
the cash balance account.
Company Contribution Credits
<TABLE>
<CAPTION>
Years of Vesting Service Percentage of Eligible Pay
- ------------------------ --------------------------
<S> <C>
Less than 6 4%
6, but less than 11 5%
11, but less than 16 7%
16, but less than 21 9%
21 or more 11%
</TABLE>
48
<PAGE> 53
Projected Cash Balance Plan pension benefits at age 65 payable as an annual life
annuity.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years of Service
- --------------------------------------------------------------------------------
Renumeration ($) 15 20 25 30 35
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
- --------------------------------------------------------------------------------
$150,000 16,960 30,178 49,664 76,018 111,659
- --------------------------------------------------------------------------------
175,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
200,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
225,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
250,000 18,090 2,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
300,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
400,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
500,000 18,090 32,190 52,975 81,086 119,103
- --------------------------------------------------------------------------------
</TABLE>
The Manulife Financial U.S. Supplemental Cash Balance Plan
In addition to their pension plan benefits, executives are eligible for benefits
under The Manulife Financial U.S. Supplemental Cash Balance Plan. This is a
non-contributory, non-qualified plan, the purpose of which is to provide the
executives with the same level of retirement benefits they would have been
entitled to but for the limitations prescribed for qualified plans under the
Internal Revenue Code. Opening account balances were established using the same
method as The Manulife Financial U.S. Cash Balance Plan. During the period of an
executive's active participation in the plan, annual company contributions are
made with respect to the portion of the executives earnings which is in excess
of $160,000 for 1998 as outlined below with interest credited under this plan at
the same rate as provided under the Cash Balance Plan. In addition, a one time
contribution may be made for a participant if it is determined at the time of
their termination of employment, that the participant's pension benefit under
the Cash Balance Plan is limited by Internal Revenue Code Section 415. Together,
these contributions serve to restore to the participant the benefit that they
would have been entitled to under the Cash Balance Plan's benefit formula but
for the limitations, in Internal Revenue Code Sections 401(a) (17) and 415.
Benefits are provided to those who terminate after three years. The default form
of payment under the plan is a lump sum, although participants may elect to
receive payment in the form of an annuity provided that such election is made
within the time period prescribed in the plan.
<TABLE>
<CAPTION>
Complete Years of Cash
Balance Service Credits as of Percentage of Eligible Pay Percentage of Eligible Pay
December 31st up to $200,000 over $200,000
- ------------- -------------- ----------------
<S> <C> <C>
Less than 6 .................. 4% 4%
6, but less than 11........... 5% 5%
11, but less than 16 ......... 7% 5%
16, but less than 21 ......... 9% 5%
21 or more ................... 11% 5%
</TABLE>
49
<PAGE> 54
Projected Supplemental pension benefits at age 65 payable as an annual life
annuity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Years of Service
- ------------------------------------------------------------------------------
Renumeration ($) 15 20 25 30 35
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
- ------------------------------------------------------------------------------
$150,000 0 0 0 0 0
- ------------------------------------------------------------------------------
175,000 1,696 3,018 4,966 7,602 11,166
- ------------------------------------------------------------------------------
200,000 4,523 8,048 13,244 20,271 29,776
- ------------------------------------------------------------------------------
225,000 7,081 12,178 19,501 29,404 42,797
- ------------------------------------------------------------------------------
250,000 9,639 16,309 25,757 38,536 55,818
- ------------------------------------------------------------------------------
300,000 14,756 24,570 38,271 56,801 81,861
- ------------------------------------------------------------------------------
400,000 24,990 41,092 63,298 93,330 133,946
- ------------------------------------------------------------------------------
500,000 35,224 57,615 88,325 129,859 186,031
</TABLE>
Projected Cash Balance and Supplemental pension benefits at age 65 payable as an
annual annuity.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years of Service
- --------------------------------------------------------------------------------
Renumeration ($) 15 20 25 30 35
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
- --------------------------------------------------------------------------------
$150,000 16,960 30,178 49,664 76,018 111,659
- --------------------------------------------------------------------------------
175,000 19,786 35,208 57,941 88,688 130,269
- --------------------------------------------------------------------------------
200,000 22,613 40,238 66,219 101,357 148,879
- --------------------------------------------------------------------------------
225,000 25,171 44,368 72,476 110,490 161,900
- --------------------------------------------------------------------------------
250,000 27,729 48,499 78,732 119,622 174,921
- --------------------------------------------------------------------------------
300,000 32,846 56,760 91,246 137,887 200,964
- --------------------------------------------------------------------------------
400,000 43,080 73,282 116,273 174,416 253,049
- --------------------------------------------------------------------------------
500,000 53,314 89,805 141,300 210,945 305,134
- --------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 55
The Manulife Financial U.S. 401(k) Savings Plan
In addition to the above plans a 401(k) Savings Plan is also offered. The plan
allows employees of the Company to contribute on a pre-tax basis 1% to 15% of
their earnings up to the yearly limit of $160,000 for 1998. The yearly maximum
an employee can contribute is $10,000 for 1998. The company matches 50% of the
first 6% of contributions. Employees become 100% vested in the employer matching
contributions as outlined in the vesting schedule below. Additionally they
become 100% vested if they retire on or after age 65, become disabled or die.
<TABLE>
<CAPTION>
Years of Vesting Service Vested Percentage
- ------------------------ -----------------
<S> <C>
Less than 2 years 0%
2 years but less than 3 50%
3 years and thereafter 100%
</TABLE>
CANADIAN RETIREMENT PLANS
Executive officers domiciled in Canada, and certain executive officers formerly
domiciled in Canada, are eligible to participate in Manulife Financial's
Canadian Staff Pension Plan and to receive supplemental pension benefits under
Manulife Financial's supplemental retirement income program. Under these plans,
income is payable for the life of the executive officer, with a guarantee of a
minimum of 120 monthly payments. If the executive officer is married, the income
is actuarially adjusted to a joint and survivor pension which pays a set amount
during the life of the executive officer. Upon the death of the executive
officer, this amount is reduced by one-third and is payable for the life of the
spouse (provided that in no event is this amount reduced prior to 60 months from
the date of retirement).
Pensionable earnings for this purpose are calculated as the highest average of
the base earnings and bonuses earned over any 36 consecutive months. The pension
benefit is determined by years of service multiplied by the sum of 1.3% of
pensionable earnings up to the average of the last three years maximum
pensionable earnings ("YMPE") plus 2.0% of the excess of pensionable earnings
over the average YMPE, without regard to the maximum pension limit for
registered pension plans imposed by Revenue Canada.
Employees hired after the age of 40 who become executive officers at the vice
president level and above within one year of hire may also receive additional
service credits equal to their actual period of service, to a maximum of 10
years.
The following table sets forth the aggregate standard annual benefits payable to
executive officers under Manulife Financial's Canadian Staff Pension Plan and
supplemental retirement income program.
51
<PAGE> 56
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Years of Service
- ----------------------------------------------------------------------------------------------------
Remuneration $ 15 20 25 30 35
- ----------------------------------------------------------------------------------------------------
$ $ $ $ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
125,000 34,978 46,637 58,296 69,955 81,615
- ---------------------------------------------------------------------------------------------------
150,000 42,478 56,637 70,796 84,955 99,115
- ---------------------------------------------------------------------------------------------------
175,000 49,978 66,637 83,296 99,955 116,615
- ---------------------------------------------------------------------------------------------------
200,000 57,478 76,637 95,796 114,955 134,115
- ---------------------------------------------------------------------------------------------------
225,000 64,978 86,637 108,296 129,955 151,615
- ---------------------------------------------------------------------------------------------------
250,000 72,478 96,637 120,796 144,955 169,115
- ---------------------------------------------------------------------------------------------------
300,000 87,478 116,637 145,796 174,955 204,115
- ---------------------------------------------------------------------------------------------------
400,000 117,478 156,637 195,796 234,955 274,115
- ---------------------------------------------------------------------------------------------------
450,000 132,478 176,637 220,796 264,955 309,115
- ---------------------------------------------------------------------------------------------------
500,000 147,478 196,637 245,796 294,955 344,115
- ---------------------------------------------------------------------------------------------------
600,000 177,478 236,637 295,796 354,955 414,115
- ---------------------------------------------------------------------------------------------------
700,000 207,478 276,637 345,796 414,955 484,115
- ---------------------------------------------------------------------------------------------------
800,000 237,478 316,637 395,796 474,955 554,115
- ---------------------------------------------------------------------------------------------------
900,000 267,478 356,637 445,796 534,955 624,115
- ---------------------------------------------------------------------------------------------------
1,000,000 297,478 396,637 495,796 594,955 694,115
- ---------------------------------------------------------------------------------------------------
</TABLE>
Mr. Guloien had 17.8 years of credited service as at December 31, 1998.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting Separate Account Two or
Manufacturers Life of America.
STATE REGULATIONS
The Company is subject to the laws of the state of Michigan governing insurance
companies and to the regulation of the Michigan Insurance Department. In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which the Company operates. Regulation by each insurance
department includes periodic examination to determine the Company's contract
liabilities and reserves so that each insurance department may verify that these
items are correct. Regulation by supervisory agencies includes licensing to
transact business, overseeing trade practices, licensing agents, approving
policy forms, establishing reserve
52
<PAGE> 57
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulation of the type and amounts
of investments permitted. The Company's books and accounts are subject to review
by each insurance department and other supervisory agencies at all times, and
the Company files annual statements with these agencies. A full examination of
the Company's operations is conducted periodically by the Michigan Insurance
Department. Under Michigan holding company laws and other laws and regulations,
intercompany transactions, and transfers of assets may be subject to prior
notification or approval depending upon the size of such transfers and payments
in relation to the financial positions of the companies.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments on the
Company under these laws cannot be reasonably estimated. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal legislation that removed barriers preventing banks
from engaging in the insurance business or that changed the Federal income tax
treatment of insurance companies, insurance company products, or employee
benefit plans could significantly affect the insurance business.
OTHER MATTERS
SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS
Where permitted by state insurance laws, Policies may be purchased under group
or sponsored arrangements, as well as on an individual basis. A "group
arrangement" includes a program under which a trustee, employer or similar
entity purchase Policies covering a group on individuals on a group basis. A
"sponsored arrangement" includes a program under which an employer permits group
solicitation of its employees or an association permits group solicitation of
its members for the purchase of Policies on an individual basis.
Charges and deductions described above (see Description of the Policies --
"Policy Charges") may be reduced for Policies issued in connection with group or
sponsored arrangements. Such arrangements may also include sales without
withdrawal charges and certain other charges to employees, officers, directors,
agent, immediate family members of the foregoing and employees of agents of
Manufacturers Life and its subsidiaries. Manufacturers Life of America will
reduce the charges and deductions in accordance with its rules in effect as of
the date an application for a Policy is approved. To qualify for such a
reduction, a group or sponsored arrangement must satisfy certain criteria as to,
for example, size of the group, expected number of participants and anticipated
premium payments from the group. Generally, the sales contacts and effort,
administrative costs and mortality risks and expense risks costs per Policy vary
based on such factors as the size of the group or sponsored arrangements, the
purposes for which Policies are purchased and certain characteristics of its
members.
The amount of reduction and the criteria for qualification will reflect the
reduced sales effort and administrative, mortality and expense risks costs
resulting from sales to qualifying groups and sponsored arrangements.
Manufacturers Life of America may modify from time to time on a uniform basis,
both the amounts of reductions and the criteria for qualification. Reductions in
these charges will not be unfairly discriminatory against any person, including
the affected Policyowners and all other owners of the Policies.
SALE OF THE POLICIES
ManEquity, Inc., an indirect wholly-owned subsidiary of Manufacturers Life, will
act as the principal underwriter of, and continuously offer, the Policies
pursuant to a Distribution Agreement with Manufacturers Life of America.
ManEquity, Inc. is registered as a broker-dealer under the Securities Exchange
Act of 1934 and is a member of the National Association of Securities Dealers.
The Policies will be sold by registered representatives of either ManEquity,
Inc. or other broker-dealers having distribution agreements with ManEquity, Inc.
who are also authorized by state insurance departments to do so.
53
<PAGE> 58
For the years ended December 31, 1996, December 31, 1997 and December 31, 1998,
ManEquity, Inc. received $3,045,326, $570,520 and $107,763, respectively, as
compensation for sales of other variable annuity policies issued by Separate
Account Two by its registered representatives. Of these amounts, $2,957,985,
$537,752 and $101,873, respectively, were remitted to Manufacturers Life to
reimburse it for commissions paid to such registered representatives. The total
of all compensation received by ManEquity, Inc. for sales of variable products,
including products issued by Separate Account Two, for the year ended December
31, 1998 was $5,890.
Agents will receive commissions on purchase payments not to exceed 4% thereof
and, each year beginning with the seventh Policy Anniversary, 0.50% of the
Policy Value at the respective Policy Anniversary. Under certain circumstances
agents may be eligible for a bonus payment of not exceeding 1% of purchase
payments. In addition, agents who meet certain productivity and persistency
standards will be eligible for additional compensation.
VOTING RIGHTS
As stated above, all of the assets held in the Variable Accounts will be
invested in shares of a particular Portfolio of Manufacturers Investment Trust.
Manufacturers Life of America is the legal owner of those shares and as such has
the right to vote upon certain matters that are required by the 1940 Act to be
approved or ratified by the shareholders of a mutual fund and to vote upon any
other matters that may be voted upon at a shareholders' meeting. However,
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 Trust. 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
shareholders' meeting.
FURTHER INFORMATION
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in the prospectus. The prospectus
does not include all the information set forth in the registration statement.
The omitted information may be obtained at the SEC's principal office in
Washington, D.C. upon payment of the prescribed fee.
For further information you may also contact Manufacturers Life of America's
Service Office, the address and telephone number of which are on the first page
of this prospectus.
INDEPENDENT AUDITORS
The consolidated financial statements of The Manufacturers Life Insurance
Company of America and Separate Account Two of The Manufacturers Life Insurance
Company of America at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing.
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 Manufacturers
Investment 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
54
<PAGE> 59
services which are currently followed by Manufacturers Life of America include
Lipper Analytical 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. These comparisons may include graphs, charts, tables or
examples.
ADVERTISING PERFORMANCE OF VARIABLE ACCOUNTS
Manufactures Life of America may publish advertisements or distribute sales
literature that contain performance data relating to the sub-accounts of
Separate Account Two. Each of the sub-accounts may in its advertising and sales
materials quote total return figures. The sub-accounts may advertise both
"standardized" and "non-standardized" total return figures, although
standardized figures will always accompany non-standardized figures.
Non-standardized total return figures may be quoted assuming both (i) redemption
at the end of the time period and (ii) not assuming redemption at the end of the
time period. Standardized figures include total return figures from: (i) the
inception date of the sub-account of the Separate Account Two which invests in
the portfolio or (ii) ten years, whichever period is shorter. Non-standardized
figures include total return numbers from: (i) inception date of the portfolio
or (i) ten years, whichever period is shorter. Such figures will always include
the average annual total return for recent one year and, when applicable, five
and ten year periods and, where less than ten years, the inception date of the
subaccount, in the case of standardized returns, and the inception date of the
portfolio, in the case of non-standardized returns. Where the period since
inception is less than one year the total return quoted will be the aggregate
return for the period. Non-standardized figures may also include total return
numbers for one and three year periods where applicable. The average annual
total return is the average annual compounded rate of return that equates a
purchase payment to the market value of such purchase payment on the last day of
the period for which such return is calculated. The aggregate total return is
the percentage change (not annualized) that equates a purchase payment to the
market value of such purchase payment on the last day of the period for which
such return is calculated. For purposes 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 return is calculated.
In calculating standardized return figures, mortality and expense risk fees are
reflected in changes in unit values. 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. Standardized total return figures will be quoted
assuming redemption at the end of the period. Non-standardized total return
figures reflecting redemption at the end of the time period are calculated on
the same basis as the standardized returns. Non-standardized total return
figures not reflecting redemption at the end of the time period are calculated
on the same basis as the standardized returns except that the calculations
assume no redemption at the end of the period. The Company believes such
non-standardized figures not reflecting redemptions at the end of the time
period are useful to contract owners who wish to assess the performance of an
ongoing contract of the size that is meaningful to the individual contract
owner.
For total return figures quoted for periods prior to the commencement of the
offering of this contract, May 4, 1994, standardized performance data will be
the historical performance of the Manufacturers Investment Trust portfolio from
the date the applicable sub-account of the Separate Account Two first became
available for investment under other contracts offered by Manufacturers Life of
America; adjusted to reflect current contract charges. In the case of
non-standardized performance, performance figures will be the historical
performance of the Manufacturers Investment Trust portfolio from the inception
date of the portfolio, adjusted to reflect current contract charges.
55
<PAGE> 60
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
Total returns if surrendered for the period ending December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
AVG. ANNUAL
TOTAL RETURN
SINCE INCEPTION
OF SUB-ACCOUNT
AVG. ANNUAL AVG. ANNUAL OR TEN YEARS,
MANUFACTURERS INVESTMENT TOTAL RETURN TOTAL RETURN WHICH EVER
TRUST PORTFOLIOS ONE YEAR FIVE YEARS# IS SHORTER#
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets** -13.58% n/a -9.91%*
Emerging Small Company -9.33% n/a 2.77%*
International Stock 4.14% n/a 2.61%*
Quantitative Equity** 14.51% 16.46% 15.02%+
Real Estate Securities** -24.31% 5.93% 10.90%+
Investment Quality Bond -1.48% 4.89% 4.32%+
Balanced 3.53% n/a 9.97%**
Money Market -4.76% n/a -0.26%*
</TABLE>
* Average Annual Return since Inception of Sub-Account (October 4, 1994 for
the Pacific Rim Emerging Markets Trust; and January 1, 1997 for the
Emerging Small Company, Balanced, Money Market Trust and International
Stock Trust).
** On December 31, 1996 Manulife Series Fund, Inc. merged with Manufacturers
Investment Trust. Performance presented for these sub-accounts is based
upon the performance of the respective predecessor Manulife Series Fund
portfolios for periods to December 31, 1996.
# Policies have only been offered since May 4, 1994. Performance data for
earlier periods are hypothetical figures based on the performance of the
Sub-Account in which policy assets may be invested.
+ 10 year average annual total return.
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
(ASSUMING REDEMPTION AT THE END OF THE TIME PERIOD)
Total returns if surrendered are as follows:
<TABLE>
<CAPTION>
AVG. ANNUAL
TOTAL RETURN
AVG. ANNUAL AVG. ANNUAL TEN YEARS
MANUFACTURERS INVESTMENT TOTAL RETURN TOTAL RETURN OR
TRUST PORTFOLIOS ONE YEAR FIVE YEARS# SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets** -13.58% n/a -9.91%*
Emerging Small Company -9.33% n/a 2.77%*
International Stock 4.14% n/a 2.61%*
Quantitative Equity** 14.51% 16.46% 15.02%+
Real Estate Securities** -24.31% 5.93% 10.90%+
Investment Quality Bond - 1.48 4.87% 4.32%+
Balanced 3.53% n/a 9.97%**
Money Market -4.76% 2.62% 3.70%*
</TABLE>
56
<PAGE> 61
* Average Annual Return since Inception (June 18, 1985 for the Money Market
Trust; October 4, 1994 for the Pacific Rim Emerging Markets Trust; and
December 31, 1996 for the Emerging Small Company, Balanced and
International Stock Trust).
** On December 31, 1996 Manulife Series Fund, Inc. merged with Manufacturers
Investment Trust (formerly, NASL Series Trust). Performance presented for
these sub-accounts is based upon the performance of the respective
predecessor Manulife Series Fund portfolios for periods to December 31,
1996.
# Policies have only been offered since May 4, 1994. Performance data for
earlier periods are hypothetical figures based on the performance of the
Portfolio in which policy assets may be invested.
+ 10 year average annual total return.
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FIGURES
(ASSUMING NO REDEMPTION AT THE END OF THE TIME PERIOD)
Total returns if not surrendered are as follows:
<TABLE>
<CAPTION>
AVG. ANNUAL
TOTAL RETURN
AVG. ANNUAL AVG. ANNUAL TEN YEARS#
MANUFACTURERS INVESTMENT TOTAL RETURN TOTAL RETURN OR
TRUST PORTFOLIOS ONE YEAR FIVE YEARS# SINCE INCEPTION
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Rim Emerging Markets** -6.07% n/a -8.73%*
Emerging Small Company -1.45% n/a 7.16%
International Stock 13.20% n/a 6.99%*
Quantitative Equity** 24.47% 17.32% 15.02%+
Investment Quality Bond 7.09% 5.27% 4.32%+
Balanced 12.53% n/a 14.67%+
Real Estate Securities** -17.73% 6.71% 10.90%+
Money Market 3.52% 3.37% 3.70%*
</TABLE>
* Average Annual Return since Inception (June 18, 1985 for the Money Market
Trust; October 4, 1994 for the Pacific Rim Emerging Markets Trust; and
December 31, 1996 for the Emerging Small Company, Balanced and
International Stock Trust).
# Policies have only been offered since May 4, 1994. Performance data for
earlier periods are hypothetical figures based on the performance of the
Portfolio in which policy assets may be invested.
** On December 31, 1996 Manulife Series Fund, Inc. merged with Manufacturers
Investment Trust (formerly, NASL Series Trust). Performance presented for
these sub-accounts is based upon the performance of the respective
predecessor Manulife Series Fund portfolios for periods to December 31,
1996.
+ 10 year average annual total return.
57
<PAGE> 62
NON-STANDARDIZED AGGREGATE TOTAL RETURN
(ASSUMING REDEMPTION AT THE END OF THE TIME PERIOD
Aggregate total returns if surrendered as of the end of each year since
inception are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Emerging Balanced Investment Quantitative Real Money International Pacific
Small Co. Quality Equity Estate Market Stock Rim
Bond *** Securities Emerging
(formerly *** Markets
Common ***
Stock)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 -9.33% 3.53% -1.48% 14.51% -24.31% -4.76% 4.14% -13.58%
- --------------------------------------------------------------------------------------------------------------
1997 N/A N/A -0.55% 17.67% 7.30% -4.73% N/A -40.34%
- --------------------------------------------------------------------------------------------------------------
1996 N/A N/A -7.06% 6.86% 22.08% -4.81% N/A -0.50%
- --------------------------------------------------------------------------------------------------------------
1995 N/A N/A 8.28% 19.27% 5.39% -3.88% N/A 1.78%
- --------------------------------------------------------------------------------------------------------------
1994 N/A N/A -13.60% -13.19% -11.90% -5.64% N/A -13.50%
- --------------------------------------------------------------------------------------------------------------
1993 N/A N/A -0.31% 3.67% 12.75% -6.78% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1992 N/A N/A -2.86% 3.53% 11.46% -6.12% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1991 N/A N/A 5.18% 20.20% 30.95% -3.79% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1990 N/A N/A -21.35% -13.08% -13.50% -1.77% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1989 N/A N/A -2.95% 20.68% -0.42% -0.96% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1988 N/A N/A -2.96% 0.20% 2.03% -2.74% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1987 N/A N/A -15.63% -22.58% -16.61% -3.38% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1986 N/A N/A 2.62% N/A N/A -3.76% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1985 N/A N/A N/A N/A N/A -5.17% N/A N/A
- --------------------------------------------------------------------------------------------------------------
1984 N/A N/A N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*** On December 31, 1996 Manulife Series Fund, Inc. merged with Manufacturers
Investment Trust (formerly, NASL Series Trust). Performance presented for
these sub-accounts is based upon the performance of the respective
predecessor Manulife Series Fund portfolios for periods to December 31,
1996.
NON-STANDARDIZED AGGREGATE TOTAL RETURN
(ASSUMING NO REDEMPTION AT THE END OF THE TIME PERIOD)
Aggregate total returns as of the end of each year since inception, if not
surrendered are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Emerging Balanced Investment Quantitative Real Money International Pacific
Growth Quality Equity *** Estate Market Stock Rim
Bond (formerly Securities Emerging
Common *** Markets ***
Stock)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 -1.45% 12.53% 7.09% 24.47% -17.73% 3.52% 13.20% -6.07%
- --------------------------------------------------------------------------------------------------------------------
1997 N/A N/A 8.10% 27.90% 16.64% 3.56% N/A -35.16%
- --------------------------------------------------------------------------------------------------------------------
1996 N/A N/A 1.02% 16.15% 32.69% 3.46% N/A 8.15%
- --------------------------------------------------------------------------------------------------------------------
1995 N/A N/A 17.70% 27.27% 13.99% 4.12% N/A 9.60%
- --------------------------------------------------------------------------------------------------------------------
1994 N/A N/A -6.09% -5.64% -4.24% 2.36% N/A -1.90%
- --------------------------------------------------------------------------------------------------------------------
1993 N/A N/A 8.36% 11.67% 20.75% 1.22% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1992 N/A N/A 5.58% 4.47% 19.46% 1.88% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1991 N/A N/A 14.33% 28.20% 38.95% 4.21% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1990 N/A N/A -14.51% -5.52% -5.98% 6.23% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1989 N/A N/A 5.49% 28.68% 7.58% 7.04% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1988 N/A N/A 5.48% 8.20% 10.03% 5.26% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1987 N/A N/A -8.29% -15.85% -9.35% 4.62% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1986 N/A N/A 11.55% N/A N/A 4.24% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1985 N/A N/A N/A N/A N/A 2.03% N/A N/A
- --------------------------------------------------------------------------------------------------------------------
1984 N/A N/A N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*** On December 31, 1996 Manulife Series Fund, Inc. merged with Manufacturers
Investment Trust (formerly, NASL Series Trust). Performance
58
<PAGE> 63
presented for these sub-accounts is based upon the performance of the respective
predecessor Manulife Series Fund portfolios for periods to December 31, 1996.
All of the above performance data are based on the actual historical performance
of the Portfolios or sub-accounts for specified periods, and the figures are not
intended to indicate future performance.
EXCHANGE OFFER
Currently, there is an exchange offer in effect whereby contracts
described in this prospectus ("Old Contracts") may be exchanged for Venture
Combination Fixed and Variable Annuity contracts ("New Contracts"). The exchange
offer is available in all states except New Hampshire, New York, and the
territory of Guam.
The Company will permit an owner of an outstanding Old Contract to
exchange the Old Contract for a New Contract without the imposition of a
withdrawal charge at the time of exchange, except a possible market value
adjustment as described below. For purposes of computing the applicable
withdrawal charge upon any withdrawals made subsequent to the exchange, the New
Contract will be deemed to have been issued on the date the Old Contract was
issued, and any purchase payment credited to the Old Contract will be deemed to
have been credited to the New Contract on the date it was credited under the Old
Contract. The death benefit under the New Contract on the date of its issue will
be the contract value under the Old Contract on the date of exchange, and will
"step up" annually thereafter as described in paragraph "5." below.
Old Contract owners interested in a possible exchange should carefully
review both the New Contract prospectus and the remainder of this Prospectus
before deciding to make an exchange.
AN EXCHANGE MAY NOT BE IN THE BEST INTERESTS OF AN OWNER OF AN OLD
CONTRACT. Further, under the Old Contracts, a market value adjustment may apply
to any amounts transferred from a fixed investment account in connection with an
exchange. (Reference should be made to the discussion of the market value
adjustment under "Market Value Adjustment" in this prospectus.) The Company
believes that an exchange as described above will not be a taxable event for
Federal tax purposes; however, any owner considering an exchange should consult
a tax adviser. The Company reserves the right to terminate this exchange offer
or to vary its terms at any time.
* * * *
THE PRINCIPAL DIFFERENCES BETWEEN THE OLD CONTRACT AND THE NEW CONTRACT
ARE AS FOLLOWS:
1. Number of Variable Investment Options
The Old Contract has eight variable investment options whereas the New
Contract has thirty five variable investment options.
2. Fixed Account Investment Options
The Old Contract has a Guaranteed Interest Account as well as Fixed
Accounts with guarantee periods ranging from 1 to 10 years whereas the New
Contract offers five fixed account investment options: one, three, five and
seven year guaranteed investment accounts and a dollar cost averaging fixed
investment account. The market value adjustment for the Old Contract Fixed
Accounts is different from the market value charge for the New Contract fixed
account investment options. The Old Contract adjustment and the New Contract
charge both reduce the withdrawal amount when current interest rates are higher
than the credited rate on the fixed investment although the magnitude of the
adjustments may differ due to differences in adjustment formulas. The Old
Contract adjustment also provides upside potential, increasing the withdrawal
value when current interest rates are lower than the fixed account credited
rate. The New Contract charge does not provide this upside potential. See
"Market Value Adjustment" in the Old Contract prospectus and "Fixed Account
Investment Options" in the New Contract prospectus.
59
<PAGE> 64
3. Surrender Charges
The surrender charges under the New Contract are different from the Old
Contract. The surrender charges under the Old Contract and the New Contract are
as follows:
<TABLE>
<CAPTION>
Old Contract New Contract
- ------------ ------------
Number of Complete Years Withdrawal Charge Number of Complete Years Withdrawal Charge
Purchase Payments In Percentage Purchase Payments in
Contract Contract
<S> <C> <C> <C>
0 8% 0 6%
1 8% 1 6%
2 8% 2 5%
3 6% 3 5%
4 4% 4 4%
5 2% 5 3%
6+ 0% 6 2%
7+ 0%
</TABLE>
4. Separate Account and Fixed Account Expenses; Contract Owner
Transaction Expenses
The New Contract and the Old Contract have different separate account
and fixed account annual expenses as well as different contract owner
transaction expenses as noted in the chart below:
New Contract Separate Account Annual Expenses
(as a percentage of average account value)
Separate Account Annual Expenses
Mortality and expense risk fees 1.25%
Administration fee - asset based 0.15%
-----
Total Separate Account Annual Expenses 1.40%
New Contract Contract Owner Transaction Expenses
Annual Administration Fee $30*
Dollar Cost Averaging Charge none
*The $30 annual administration fee will not be assessed prior to the maturity
date if at the time of its assessment the sum of all investment accounts is
greater than or equal to $100,000.
Old Contract Separate Account Annual Expenses
Separate Account Annual Expenses
Mortality and Expense Risk Charge Annual Rate
Annual Rate Charged daily as a percentage of average Variable
Account Values* 0.80
Charged monthly as a percentage of the policy month-start
Variable and Fixed Account Assets* 0.45%
-----
1.25%
Other Separate Account Expenses
Charge for administration charged daily as a percentage of average
Variable Account Values 0.20%
-----
Total Separate Account Annual Expenses 1.45%
60
<PAGE> 65
Old Contract Contract Owner Transaction Expenses
<TABLE>
<S> <C>
Record Keeping Charge $30**
Dollar Cost Averaging Charge
(if selected and applicable) $ 5***
</TABLE>
* A mortality and expense risk charge of 0.80% per annum is deducted daily from
separate account assets, and a mortality and expense risk charge of 0.45% per
annum is deducted monthly from variable policy values and fixed account values.
** A record-keeping charge of 2% of the policy value up to a maximum of $30 is
deducted during the accumulation period on the last day of a policy year. The
charge is also deducted upon full surrender of a policy on a date other than the
last day of a policy year.
*** Transfers pursuant to the optional Dollar Cost Averaging program are free if
policy value exceeds $15,000 at the time of the transfer, but otherwise incur a
$5 charge.
5. Minimum Death Benefit
Differences Between the Minimum Death Benefit of Old Contract and the
New Contract are as follows:
Minimum Death Benefit for Old Contract
Upon the occurrence of the death of the original policyowner,
ManAmerica will compare the policy value to the Survivor Benefit Amount
(described below) and, if the policy value is lower, ManAmerica will deposit
sufficient funds into the Money-Market Variable Account to make the policy value
equal the Survivor Benefit Amount. Any funds which ManAmerica deposits into the
Money-Market Variable Account will not be deemed a purchase payment for purposes
of calculating withdrawal charges.
The Survivor Benefit Amount is calculated as follows: (1) when the
policy is issued, the Survivor Benefit Amount is set equal to the initial
purchase payment; (2) each time a purchase payment is made, the Survivor Benefit
Amount is increased by the amount of the purchase payment; (3) each time a
withdrawal is made, the Survivor Benefit Amount is reduced by the same
percentage as the Gross Withdrawal Amount (withdrawal amounts prior to deduction
of charges and any adjustment for applicable market value adjustments) bears to
the policy value; (4) in jurisdictions where it is allowed, on every sixth
policy anniversary ManAmerica will set the Survivor Benefit Amount to the
greater of its current value or the policy value on that policy anniversary,
provided the original contract owner is still alive and is not older than age
85.
Minimum Death Benefit for New Contracts
Minimum Death Benefit for New Contracts Issued on or After May 1, 1998
(See below for state applicability)
If any contract owner dies and the oldest owner had an attained age of
less than 81 years on the contract date, the death benefit will be determined as
follows: During the first contract year, the death benefit will be the greater
of: (a) the contract value or (b) the sum of all purchase payments made, less
any amounts deducted in connection with partial withdrawals. During any
subsequent contract year, the death benefit will be the greater of: (a) the
contract value or (b) the death benefit on the last day of the previous contract
year, plus any purchase payments made and less any amounts deducted in
connection with partial withdrawals since then. If any contract owner dies on or
after his or her 81st birthday, the death benefit will be the greater of (a)
contract value or (b) the death benefit on the last day of the contract year
ending just prior to the owner's 81st birthday, plus any payments made, less
amounts deducted in connection with partial withdrawals.
If any contract owner dies and the oldest owner had an attained age of
81 years or greater on the contract date, the death benefit will be the greater
of: (a) the contract value or (b) the excess of (i) the sum of all purchase
payments over (ii) the sum of any amounts deducted in connection with partial
withdrawals.
The death benefit described below under "Death Benefit for New
Contracts Issued Prior to May 1, 1998" will continue to apply to contracts
issued on or after May 1, 1998 in the states of:
- - Florida,
- - Maryland,
61
<PAGE> 66
- - Puerto Rico
- - Washington
- - Connecticut (for contracts issued prior to April 1, 1998)
- - Minnesota, Montana and Washington D.C. (for contracts issued prior to
July 1, 1998)
- - Texas (for contracts issued prior to October 1, 1998)
- - Massachusetts (for contracts issued prior to February 1, 1999)
- - Florida, Maryland, Oregon (for contracts issued prior to March 15,
1999)
(collectively, the "Old Death Benefit States")
Death Benefit for New Contracts Issued Prior to May 1, 1998
The death benefit described below applies to New Contracts issued prior
to May 1, 1998 as well as New Contracts issued on or after May 1, 1998 in the
Old Death Benefit States.
Contracts Issued Prior to May 1, 1998. If any contract owner dies on or
prior to his or her 85th birthday and the oldest owner had an attained age of
less than 81 years on the contract date, the death benefit will be determined as
follows: During the first contract year, the death benefit will be the greater
of: (a) the contract value or (b) the sum of all purchase payments made, less
any amounts deducted in connection with partial withdrawals. During any
subsequent contract year, the death benefit will be the greater of: (a) the
contract value or (b) the death benefit on the last day of the previous contract
year, plus any purchase payments made and less any amounts deducted in
connection with partial withdrawals since then.
If any contract owner dies after his or her 85th birthday and the
oldest owner had an attained age of less than 81 years on the contract date, the
death benefit will be the greater of: (a) the contract value or (b) the excess
of (i) the sum of all purchase payments over (ii) the sum of any amounts
deducted in connection with partial withdrawals. If any contract owner dies and
the oldest owner had an attained age greater than 80 on the contract date, the
death benefit will be the contract value less any applicable withdrawal charges
at the time of payment of benefits. For contracts issued on or after October 1,
1997, any withdrawal charges applied against the death benefit shall be waived
by the Company.
6. Annuity Payments
Annuity payments under the Old Contract will be made on a fixed basis
only whereas annuity payments under the New Contract may be made on a fixed or
variable basis or a combination of fixed and variable bases.
7. Annuity Value Guarantee
The Old Contract guarantees that, in those jurisdictions where
permitted, under certain conditions the policy value available at the annuity
commencement date will be the greater of the policy value or an amount
reflecting the purchase payment and withdrawals made by the contract owner (the
"Annuity Value Guarantee"). The New Contract does not have an Annuity Value
Guarantee.
8. Annuity Purchase Rates
The annuity purchase rates guaranteed in the New Contract are based on
the 1983 Table A projected at Scale G, assume births in year 1942 and reflect an
assumed interest rate of 3% per year. The annuity purchase rates guaranteed in
the Old Contract are based on the 1983 Individual Annuity Mortality Tables and
an assumed interest rate of 3% per year.
* * * *
The above comparison does not take into account differences between the
Old Contracts, as amended by qualified plan endorsements, and the New Contracts,
as amended by similar qualified plan endorsements. Owners using their Old
Contract in connection with a qualified plan should consult a tax advisor. See
also the Federal Tax Matters section of this prospectus and the New Contract
prospectuses.
62
<PAGE> 67
DEFINITIONS
"ACCUMULATION PERIOD" is the period from the date the Company receives the first
purchase payment to the Elected Annuity Date.
"ANNUITANT" means a person upon whose life annuity payments are based. An
Annuitant has no rights under the Policy.
"ANNUITY COMMENCEMENT DATE" means the date on which the first annuity payment is
made.
"BUSINESS DAY" is any day that the New York Stock Exchange is open for business.
A Business Day ends at the close of regularly scheduled trading of the New York
Stock Exchange (currently 4:00 p.m. Eastern Time) on that day.
"CHARITABLE REMAINDER TRUST" means a trust established pursuant to Section 664
of the Internal Revenue Code of 1986, as amended.
"CUMULATIVE NET EARNINGS" means the greater of (i) zero and (ii) the Policy
Value less the sum of Net Purchase Payments remaining after adjustments for any
prior withdrawals.
"ELECTED ANNUITY DATE" means the date selected by the Policyowner on which the
first annuity payment is due.
"FIXED ACCOUNT" or "FIXED ACCOUNTS" are the various accounts in which
allocations are credited with a Guaranteed Rate for a set period of time if the
allocations are maintained until the Maturity Date.
"FIXED ACCOUNT VALUE" is the sum of the values of a Policy's interest in the
Fixed Accounts prior to application of any Market Value Adjustment calculated as
set forth in Description of the Policies -- "Policy Value" (the Fixed Accounts).
"GENERAL ACCOUNT" is all assets of the Company except those allocated to
Separate Account Two, Separate Account A, or other separate accounts of the
Company.
"GROSS WITHDRAWAL AMOUNT" is the amount of any full surrender or partial
withdrawal prior to (i) the deduction of any applicable charges or withholding
taxes and (ii) any adjustment for applicable Market Value Adjustments.
"GUARANTEE PERIOD" is a period during which a Guaranteed Rate will be paid on an
allocation to a Fixed Account.
"GUARANTEED INTEREST ACCOUNT" is the account in which allocations earn interest
at a rate guaranteed not to fall below 3% per annum and which can be reset
daily.
"GUARANTEED INTEREST ACCOUNT VALUE" is the value of a Policy's interest in the
Guaranteed Interest Account.
"GUARANTEED RATE" is the rate of interest credited by the Company on a Fixed
Account for a given Guarantee Period.
"MARKET VALUE ADJUSTMENT" is an adjustment to any portion of the Fixed Account
Value which is surrendered, withdrawn, annuitized or transferred prior to the
Maturity Date.
"MATURITY DATE" is the last day of a Guarantee Period.
"NET PURCHASE PAYMENTS" are gross purchase payments less deductions for
applicable premium taxes.
"PAYEE" is a person designated by the Policyowner to receive the annuity
payments due and payable on and after
63
<PAGE> 68
the Annuity Commencement Date.
"POLICY VALUE" means the value during the Accumulation Period of amounts
accumulated under the Policy. The Policy Value is the sum of the Variable Policy
Value, the Guaranteed Interest Account Value and the Fixed Account Value.
"POLICY YEARS", "POLICY ANNIVERSARIES" and "POLICY MONTHS" are determined from
the date the initial purchase payment is allocated. The first Policy Anniversary
will be on the same date of the same month one year later.
"PURCHASE PAYMENT" is an amount paid under the Policy.
"QUALIFIED POLICY" means a Policy used in connection with a retirement plan
which receives favorable federal income tax treatment under sections 401 or 408
of the Internal Revenue Code of 1986, as amended ("Code").
"SERVICE OFFICE" is the office designated by the Company to service the Policy.
"SURVIVOR BENEFIT AMOUNT" is the amount to which the Policy Value may be set on
the death of the original Policyowner.
"UNIT" is an index used to measure the value of a Policy's interest in a
Variable Account.
"VARIABLE ACCOUNT" or "VARIABLE ACCOUNTS" are any one or more of the various
sub-accounts of Separate Account Two.
"VARIABLE POLICY VALUE" is the sum of the value of a Policy's interest in each
of the Variable Accounts calculated as set forth in Description of the Policies
- -- "Policy Value" (The Variable Accounts).
64
<PAGE> 69
APPENDIX A
ANNUITY OPTIONS
The Policyowner may elect one of the following annuity options described below.
If no option is specified, annuity payments will be made as a life annuity with
a ten year certain period. Treasury or Labor Department regulations may require
a different annuity option if no option is specified and may preclude the
availability of certain options in connection with Qualified Policies. There may
also be state insurance law requirements that limit the availability of certain
options. The amounts payable under each option will be no less than amounts
determined on the basis of tables contained in each Policy. Such tables are
based on the 1983 Individual Annuity Mortality Tables and an assumed interest
rate of 3% per year.
OPTION 1: ANNUITY CERTAIN - payments in equal installments
for a period of not less than five years and not more
than twenty years.
OPTION 2(a): LIFE ANNUITY WITHOUT REFUND - payments in equal
installments during the Lifetime of an Annuitant,
payments will cease. Since there is no guarantee that
any minimum number of payments will be made, the
payee may receive only one payment if he or she dies
before the date the second payment is due.
OPTION 2(b): LIFE ANNUITY WITH CERTAIN PERIOD - payments in
equal installments during the lifetime of an
Annuitant and if the Annuitant dies before
installments have been paid for a designated period,
either five, ten or twenty years, payments will
continue for the remainder of the period selected.
OPTION 2(c): LIFE ANNUITY WITH INSTALLMENT REFUND - payments
in equal installments during the lifetime of an
Annuitant and if the Annuitant dies before the total
installments paid equal the Policy Value applied to
provide the annuity, payments will continue until the
Policy Value has been paid.
OPTION 3(a): JOINT AND SURVIVOR ANNUITY WITHOUT REFUND -
payments in equal installments during the lifetime of
two Annuitants with payments continuing in full
amount to the survivor upon death of either. Since
there is no guarantee that any minimum number of
payments will be made, the payees may receive only
one payment if they both die before the date of 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%.
65
<PAGE> 70
APPENDIX B
SAMPLE CALCULATIONS OF MARKET VALUE ADJUSTMENTS
AND WITHDRAWAL CHARGES*
MVA FORMULA
The MVA factor is equal to:
(1 + G) exp N - 1
-------
(1 + C)
EXAMPLE ONE: NEGATIVE MVA AND NO WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Transfer
Time remaining in the Guarantee Period: 30 months, 5 days
Guaranteed Rate: 6%
Current Rate for new 3-year deposits: 8%
Transfer Requested: $10,000
Withdrawal Charge: 0%
Other Charges: $35 transfer charge
In this example,
N = 30/12 = 2.5
G = .06
C = .08
The MVA factor equals:
1.06 exp 2.5 -1 = -0.0457
----
1.08
Manufacturers Life of America will deduct a Gross Withdrawal Amount of
$10,000.00.
From this, Manufacturers Life of America will deduct the transfer charge of $35.
This will leave $9,965.00.
The amount of the MVA adjustment would be $9,965.00 X -0.0457, or -- $ 455.40.
The cash transferred to another account(s) would be $9,965.00 -- $455.40, or
$9,509.60.
*The assumed fixed interest rates used in the examples in this Appendix
illustrate the operation of the Market Value Adjustment and are not intended to
reflect the levels of interest rates currently offered on the Fixed Accounts.
66
<PAGE> 71
EXAMPLE TWO: POSITIVE MVA AND NO WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Partial Withdrawal
Time remaining in the Guarantee Period: 47 months
Guaranteed Rate: 6%
Current Rate for new 3-year deposits: 4%
Current Rate for new 4-year deposits: Not Offered
Current Rate for new 5-year deposits: 6%
Cash Withdrawal Requested: $10,000
Withdrawal Charge: 0%
Other Charges: None
In this example,
N = 47/12 = 3.91677
G = .06
C = .05
The time remaining in the Guarantee Period, rounded to the next full year, is 4
years. Since the 4-year deposit is not available, interpolate between the 3-year
rate and the 5-year rate, to get a rate of 5%.
The MVA factor equals:
1.06 exp - 1 = 0.0378
----
1.05
We will take out a Gross Withdrawal Amount of $9,635.77.
The amount of the MVA adjustment would be $9,635.77 X 0.0378, or $364.23.
The cash received by the Policyowner would be $9,635.77 + $364.23, or $10,000.
EXAMPLE THREE: WITHDRAWAL CHARGE AND NO MVA
Assume the following:
Type of Account: Variable
Type of Transaction: Partial Withdrawal
Cash Withdrawal Requested: $10,000
Withdrawal Charge: 6%
Other Charges: None
The Gross Withdrawal Amount will be $10,638.30.
The withdrawal charge will be $10,638.30 X 6%, or $638.30.
The cash received by the Policyowner would be $10,638.30 - $638.30, or $10,000.
*In this example, Manufacturers Life of America assumes that a 10% free
withdrawal has already been taken earlier in the year, and that the withdrawal
charge percentage applies to the total Policy Value. In other situations the
withdrawal charge may not apply to the total Policy Value.
67
<PAGE> 72
EXAMPLE FOUR: NEGATIVE MVA AND WITHDRAWAL CHARGE
Assume the following:
Type of Account: Fixed
Type of Transaction: Surrender
Time remaining in the Guarantee Period: 30 months, 5 days
Guaranteed Rate: 6%
Current Rate for new 3-year deposits: 8%
Transfer Requested: $10,000
Withdrawal Charge: 6%
Other Charges: $30 record-keeping charge
In this example,
N = 30/12 = 2.5
G = .06
C = .08
The MVA factor equals:
1.06 exp 2.5 -1 = -0.0457
----
1.08
On a surrender, the Gross Withdrawal Amount is the Policy Value, or $10,000 in
this example.
Manufacturers Life of America will deduct the record-keeping charge of $30,
leaving $9,970.
The amount of the MVA adjustment would be $9,970 X -0.457, or $455.63.
This leaves and amount of $9,970.00 - $455.63, or $ 9,514.37.
The withdrawal charge will be $9,514.37 X 6%, or $570.86.
The cash received by the Policyowner would be $9,514.37 - $570.86, or $8,943.51.
*In this example, Manufacturers Life of America assumes that a 10% free
withdrawal has already been taken earlier in the year, and that the withdrawal
charge percentage applies to the total Policy Value. In other situations the
withdrawal charge may not apply to the total Policy Value.
68
<PAGE> 73
FINANCIAL STATEMENTS
The consolidated financial statements of Manufacturers Life of America included
herein should be distinguished from the financial statements of Separate Account
Two and should be considered only as bearing upon the ability of Manufacturers
Life of America to meet its obligations under the Policies.
69
<PAGE> 74
Separate Account Two of
The Manufacturers Life Insurance Company of America
Financial Statements
Three years ended December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Statement of Assets and Liabilities........................................ 2
Statements of Operations................................................... 3
Statements of Changes in Net Assets........................................ 7
Notes to Financial Statements.............................................. 11
</TABLE>
70
<PAGE> 75
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 as of
December 31, 1998 and the related statements of operations and changes in net
assets for each of the periods presented therein. These financial statements are
the responsibility of The Manufacturers Life Insurance Company of America's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Separate Account Two of The
Manufacturers Life Insurance Company of America at December 31, 1998, and the
results of its operations and the changes in its net assets for each of the
periods presented therein, in conformity with generally accepted accounting
principles.
Philadelphia, Pennsylvania
February 4, 1999
71
<PAGE> 76
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNT NET ASSET
NET ASSET UNITS VALUE PER
VALUE OUTSTANDING UNIT
-------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment in Manufacturers Investment Trust--at market value:
Emerging Growth Trust, 2,626,232 shares (cost $57,761,989) $ 62,556,853 1,163,478 $ 53.77
Quantitative Equity Trust, 2,187,241 shares (cost $41,643,538) 55,162,219 1,142,525 48.28
Real Estate Securities Trust, 2,017,458 shares (cost $34,584,357) 29,797,861 912,391 32.66
Balanced Trust, 3,056,220 shares (cost $49,788,201) 59,290,665 1,874,569 31.63
Capital Growth Bond Trust, 1,339,936 shares (cost $15,224,199) 16,199,832 727,940 22.25
Money Market Trust, 2,374,920 shares (cost $23,749,196) 23,749,196 1,466,359 16.20
International Stock Trust, 657,208 shares (cost $7,712,390) 8,530,565 637,684 13.38
Pacific Rim Emerging Markets Trust, 451,994 shares (cost $3,710,417) 3,087,116 443,982 6.95
==============
Net assets $ 258,374,307
==============
</TABLE>
See accompanying notes.
72
<PAGE> 77
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Operations
<TABLE>
<CAPTION>
EMERGING GROWTH QUANTITATIVE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
-------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 1,107,540 $ -- $ 12,289,740 $ 6,427,618 $ -- $ 5,719,842
Expenses:
Mortality and expense risks charge 693,784 756,473 797,219 524,711 464,557 301,648
-------------------------------------------------------------------------------------------
Net investment income (loss) 413,756 (756,473) 11,492,521 5,902,907 (464,557) 5,418,194
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) from security
transactions:
Proceeds from sales 18,648,653 18,952,217 15,539,340 12,526,317 5,968,271 3,532,903
Cost of securities sold 15,095,896 17,431,745 13,278,588 8,195,694 4,310,035 2,675,844
-------------------------------------------------------------------------------------------
Net realized gain (loss) 3,552,757 1,520,472 2,260,752 4,330,623 1,658,236 857,059
-------------------------------------------------------------------------------------------
Unrealized appreciation
(depreciation) of investments:
Beginning of year 10,492,428 135,399 11,362,638 12,346,704 2,256,078 3,843,935
End of year 4,794,864 10,492,428 135,399 13,518,683 12,346,704 2,256,078
-------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation)
during the year (5,697,564) 10,357,029 (11,227,239) 1,171,979 10,090,626 (1,587,857)
-------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (2,144,807) 11,877,501 (8,966,487) 5,502,602 11,748,862 (730,798)
-------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets derived from operations $ (1,731,051) $ 11,121,028 $ 2,526,034 $ 11,405,509 $ 11,284,305 $ 4,687,396
===========================================================================================
</TABLE>
See accompanying notes.
73
<PAGE> 78
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES BALANCED CAPITAL GROWTH BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 5,667,629 $ -- $6,506,602 $ 7,851,652 $ -- $ 7,586,381 $ 939,404 $ -- $ 947,959
401,617 449,440 310,604 615,790 594,116 513,035 169,250 163,736 153,637
- -----------------------------------------------------------------------------------------------------------------------------------
5,266,012 (449,440) 6,195,998 7,235,862 (594,116) 7,073,346 770,154 (163,736) 794,322
- -----------------------------------------------------------------------------------------------------------------------------------
15,432,105 9,251,676 4,955,444 12,457,194 6,705,066 5,270,972 5,518,134 2,440,069 2,577,602
13,635,137 7,289,109 4,539,516 10,429,594 5,715,891 4,431,525 4,948,407 2,518,992 2,754,011
- -----------------------------------------------------------------------------------------------------------------------------------
1,796,968 1,962,567 415,928 2,027,600 989,175 839,447 569,727 (78,923) (176,409)
- -----------------------------------------------------------------------------------------------------------------------------------
10,381,299 4,600,003 1,406,388 11,319,454 2,633,513 5,762,687 1,193,386 (265,207) 113,528
(4,786,496) 10,381,299 4,600,003 9,502,465 11,319,454 2,633,513 975,634 1,193,386 (265,207)
- -----------------------------------------------------------------------------------------------------------------------------------
(15,167,795) 5,781,296 3,193,615 (1,816,989) 8,685,941 (3,129,174) (217,752) 1,458,593 (378,735)
- -----------------------------------------------------------------------------------------------------------------------------------
(13,370,827) 7,743,863 3,609,543 210,611 9,675,116 (2,289,727) 351,975 1,379,670 (555,144)
- -----------------------------------------------------------------------------------------------------------------------------------
$ (8,104,815) $ 7,294,423 $9,805,541 $ 7,446,473 $ 9,081,000 $ 4,783,619 $ 1,122,129 $ 1,215,934 $ 239,178
===================================================================================================================================
</TABLE>
74
<PAGE> 79
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Operations (continued)
<TABLE>
<CAPTION>
MONEY MARKET INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 1,002,166 $ 987,602 $ 1,696,385 $ 125,691 $ 120,373 $201,618
Expenses:
Mortality and expense risks charge 202,875 196,751 200,655 87,229 89,606 56,247
------------------------------------------------------------------------------------
Net investment income (loss) 799,291 790,851 1,495,730 38,462 30,767 145,371
------------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) from security
transactions:
Proceeds from sales 18,039,048 16,711,484 18,226,080 2,912,949 1,892,883 528,260
Cost of securities sold 18,157,985 17,514,842 17,579,208 2,467,581 1,554,180 467,824
------------------------------------------------------------------------------------
Net realized gain (loss) (118,937) (803,358) 646,872 445,368 338,703 60,436
------------------------------------------------------------------------------------
Unrealized appreciation (depreciation)
of investments:
Beginning of year (118,937) (922,325) 434,988 160,163 541,238 218,320
End of year -- (118,937) (922,325) 818,175 160,163 541,238
------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) during the year 118,937 803,388 (1,357,313) 658,012 (381,075) 322,918
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments -- 30 (710,441) 1,103,380 (42,372) 383,354
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
derived from operations $ 799,291 $ 790,881 $ 785,289 $1,141,842 $ (11,605) $528,725
====================================================================================
</TABLE>
See accompanying notes.
75
<PAGE> 80
<TABLE>
<CAPTION>
PACIFIC RIM
EMERGING MARKETS
SUB-ACCOUNT TOTAL
- ---------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ -- $ 10,637 $ 232,102 $ 23,121,700 $ 1,118,612 $ 35,180,629
31,492 53,069 43,640 2,726,748 2,767,748 2,376,685
- ---------------------------------------------------------------------------------------
(31,492) (42,432) 188,462 20,394,952 (1,649,136) 32,803,944
- ---------------------------------------------------------------------------------------
1,924,643 1,932,239 859,389 87,459,043 63,853,905 51,489,990
3,270,136 1,942,460 720,409 76,200,430 58,277,254 46,446,925
- ---------------------------------------------------------------------------------------
(1,345,493) (10,221) 138,980 11,258,613 5,576,651 5,043,065
- ---------------------------------------------------------------------------------------
(1,772,785) 121,962 152,770 44,001,712 9,100,661 23,295,254
(623,302) (1,772,785) 121,962 24,200,023 44,001,712 9,100,661
- ---------------------------------------------------------------------------------------
1,149,483 (1,894,747) (30,808) (19,801,689) 34,901,051 (14,194,593)
- ---------------------------------------------------------------------------------------
(196,010) (1,904,968) 108,172 (8,543,076) 40,477,702 (9,151,528)
- ---------------------------------------------------------------------------------------
$ (227,502) $(1,947,400) $ 296,634 $ 11,851,876 $ 38,828,566 $ 23,652,416
=======================================================================================
</TABLE>
76
<PAGE> 81
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
EMERGING GROWTH QUANTITATIVE EQUITY
SUB-ACCOUNT SUB-ACCOUNT
--------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 413,756 $ (756,473) $ 11,492,521 $ 5,902,907 $ (464,557) $ 5,418,194
Net realized gain (loss) 3,552,757 1,520,472 2,260,752 4,330,623 1,658,236 857,059
Net unrealized appreciation
(depreciation) of investments
during the year (5,697,564) 10,357,029 (11,227,239) 1,171,979 10,090,626 (1,587,857)
--------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets derived from operations (1,731,051) 11,121,028 2,526,034 11,405,509 11,284,305 4,687,396
--------------------------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS Additions
(deductions) from:
Transfer of net premiums 714,124 1,588,050 8,295,774 421,909 1,885,075 5,288,553
Transfer on death (26,387) (268,182) (118,285) (192,179) (79,713) (109,077)
Transfer on terminations (9,735,348) (7,797,098) (4,028,509) (7,417,220) (3,635,891) (940,409)
Transfer on maturity (58,639) (1,451,039) (69,790) (90,273) (28,124) 2,897
Net interfund transfers (3,873,953) (4,590,277) (3,149,315) 168,084 3,179,099 4,181,441
--------------------------------------------------------------------------------------------
(12,980,203) (12,518,546) 929,875 (7,109,679) 1,320,446 8,423,405
--------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets (14,711,254) (1,397,518) 3,455,909 4,295,830 12,604,751 13,110,801
NET ASSETS
Beginning of year 77,268,107 78,665,625 75,209,716 50,866,389 38,261,638 25,150,837
============================================================================================
End of year $ 62,556,853 $ 77,268,107 $ 78,665,625 $ 55,162,219 $ 50,866,389 $ 38,261,638
============================================================================================
</TABLE>
See accompanying notes.
77
<PAGE> 82
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES BALANCED CAPITAL GROWTH BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 5,266,012 $ (449,440) $ 6,195,998 $ 7,235,862 $ (594,116) $ 7,073,346 $ 770,154 $ (163,736) $ 794,322
1,796,968 1,962,567 415,928 2,027,600 989,175 839,447 569,727 (78,923) (176,409)
(15,167,795) 5,781,296 3,193,615 (1,816,989) 8,685,941 (3,129,174) (217,752) 1,458,593 (378,735)
- ------------------------------------------------------------------------------------------------------------------------------------
(8,104,815) 7,294,423 9,805,541 7,446,473 9,081,000 4,783,619 1,122,129 1,215,934 239,178
- ------------------------------------------------------------------------------------------------------------------------------------
338,342 3,646,014 1,841,736 404,614 1,339,852 6,209,407 146,904 603,263 3,085,222
(11,993) (73,648) (85,142) (163,112) (92,139) (67,227) (7,833) (82,500) (5,719)
(5,660,415) (2,850,164) (1,184,528) (9,208,626) (4,256,577) (2,862,825) (3,178,749) (1,298,255) (1,276,684)
(48,475) (42,400) (114,691) (46,861) (197,817) 5,141 (18,980) (8,382) 7,396
(6,123,339) 1,330,688 806,658 (617,473) 153,673 (595,285) 606,551 624,390 (632,752)
- ------------------------------------------------------------------------------------------------------------------------------------
(11,505,880) 2,010,490 1,264,033 (9,631,458) (3,053,008) 2,689,211 (2,452,107) (161,484) 1,177,463
- ------------------------------------------------------------------------------------------------------------------------------------
(19,610,695) 9,304,913 11,069,574 (2,184,985) 6,027,992 7,472,830 (1,329,978) 1,054,450 1,416,641
49,408,556 40,103,643 29,034,069 61,475,650 55,447,658 47,974,828 17,529,810 16,475,360 15,058,719
====================================================================================================================================
$ 29,797,861 $ 49,408,556 $ 40,103,643 $ 59,290,665 $61,475,650 $ 55,447,658 $ 16,199,832 $ 17,529,810 $ 16,475,360
====================================================================================================================================
</TABLE>
78
<PAGE> 83
Separate Account Two of
The Manufacturers Life Insurance Company of America
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
MONEY MARKET INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT
---------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 799,291 $ 790,851 $ 1,495,730 $ 38,462 $ 30,767 $ 145,371
Net realized gain (loss) (118,937) (803,358) 646,872 445,368 338,703 60,436
Net unrealized appreciation
(depreciation) of investments
during the year 118,937 803,388 (1,357,313) 658,012 (381,075) 322,918
---------------------------------------------------------------------------------------
Net increase (decrease) in net
assets derived from operations 799,291 790,881 785,289 1,141,842 (11,605) 528,725
---------------------------------------------------------------------------------------
FROM CAPITAL TRANSACTIONS Additions
(deductions) from:
Transfer of net premiums 180,980 1,297,347 6,867,931 141,950 580,135 1,819,629
Transfer on death (284,816) (4,265) (81,747) (12,478) (18,253) (5,577)
Transfer on terminations (5,660,500) (1,933,294) (2,221,277) (1,354,236) (617,577) (222,632)
Transfer on maturity -- -- 6,170 (35,829) (15,916) --
Net interfund transfers 9,631,152 (1,631,160) (3,344,848) (167,566) 1,251,294 1,729,012
---------------------------------------------------------------------------------------
3,866,816 (2,271,372) 1,226,229 (1,428,159) 1,179,683 3,320,432
---------------------------------------------------------------------------------------
Net increase (decrease) in net 4,666,107 (1,480,491) 2,011,518 (286,317) 1,168,078 3,849,157
assets
NET ASSETS
Beginning of year 19,083,089 20,563,580 18,552,062 8,816,882 7,648,804 3,799,647
---------------------------------------------------------------------------------------
End of year $ 23,749,196 $ 19,083,089 $ 20,563,580 $ 8,530,565 $8,816,882 $7,648,804
=======================================================================================
</TABLE>
See accompanying notes.
79
<PAGE> 84
<TABLE>
<CAPTION>
PACIFIC RIM
EMERGING MARKETS
SUB-ACCOUNT TOTAL
- --------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31/98 DEC. 31/97 DEC. 31/96 DEC. 31/98 DEC. 31/97 DEC. 31/96
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (31,492) $ (42,432) $ 188,462 $ 20,394,952 $ (1,649,136) $ 32,803,944
(1,345,493) (10,221) 138,980 11,258,613 5,576,651 5,043,065
1,149,483 (1,894,747) (30,808) (19,801,689) 34,901,051 (14,194,593)
- --------------------------------------------------------------------------------------------
(227,502) (1,947,400) 296,634 11,851,876 38,828,566 23,652,416
- --------------------------------------------------------------------------------------------
162,730 355,890 1,339,071 2,511,553 11,295,626 34,747,323
(10,191) (18,663) (11,069) (708,989) (637,363) (483,843)
(418,747) (267,859) (215,118) (42,633,841) (22,656,715) (12,951,982)
-- (19,245) -- (299,057) (1,762,923) (162,877)
(79,913) (112,046) 1,549,203 (456,457) 205,661 544,114
- --------------------------------------------------------------------------------------------
(346,121) (61,923) 2,662,087 (41,586,791) (13,555,714) 21,692,735
- --------------------------------------------------------------------------------------------
(573,623) (2,009,323) 2,958,721 (29,734,915) 25,272,852 45,345,151
3,660,739 5,670,062 2,711,341 288,109,222 262,836,370 217,491,219
============================================================================================
$ 3,087,116 $ 3,660,739 $ 5,670,062 $ 258,374,307 $ 288,109,222 $ 262,836,370
============================================================================================
</TABLE>
80
<PAGE> 85
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements
December 31, 1998
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 comprised of investment
sub-accounts 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 life insurance company organized in 1983
under Michigan law. Manufacturers Life of America is an indirect, wholly-owned
subsidiary of The Manufacturers Life Insurance Company ("Manulife Financial"), a
Canadian mutual life insurance company. Each investment sub-account invests
solely in shares of a particular Manufacturers Investment Trust. Manufacturers
Investment Trust is registered under the Investment Company Act of 1940 as an
open-end management investment company.
Manufacturers Life of America is the legal owner of the Separate Account.
Manufacturers Life of America is required to maintain assets in the Separate
Account with a total market value at least equal to the reserves and other
liabilities relating to the variable benefits under all policies participating
in the Separate Account. These assets may not be charged with liabilities which
arise from any other business Manufacturers Life of America conducts. However,
all obligations under the variable policies are general corporate obligations of
Manufacturers Life of America.
Additional assets are held in Manufacturers Life of America's general account to
cover the contingency that the guaranteed minimum death benefit might exceed the
death benefit which would have been payable in the absence of such guarantee.
81
<PAGE> 86
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
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 eight
Trusts of Manufacturers Investment Trust and are valued at the
reported net asset values of these Trusts. Transactions are
recorded on the trade date. Net investment income and net
realized gains on investments in Manufacturers Investment
Trust are reinvested.
(b) Realized gains and losses on the sale of investments are
computed on the first-in, first-out basis.
(c) Dividend income is recorded on the ex-dividend date.
(d) Federal Income Taxes - Manufacturers Life of America, the
Separate Account's sponsor, is taxed as a "life insurance
company" under the Internal Revenue Code. Under these
provisions of the Code, the operations of the Separate Account
form part of the sponsor's total operations and are not taxed
separately.
The current year's operations of the Separate Account are not expected
to affect the sponsor's tax liabilities and, accordingly, no charges
were made against the Separate Account for federal, state and local
taxes. However, in the future, should the sponsor incur significant tax
liabilities related to the Separate Account's operations, it intends to
make a charge or establish a provision within the Separate Account for
such taxes.
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.
82
<PAGE> 87
Separate Account Two of
The Manufacturers Life Insurance Company of America
Notes to Financial Statements (continued)
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 MANUFACTURERS INVESTMENT TRUST SHARES
Purchases and sales of the shares of common stock of Manufacturers Investment
Trust for the year ended December 31, 1998 were $66,267,203 and $87,459,043,
respectively, and for the year ended December 31, 1997 were $48,649,055 and
$63,853,905, respectively.
5. RELATED PARTY TRANSACTIONS
ManEquity, Inc., a registered broker-dealer and indirect wholly-owned subsidiary
of Manulife Financial, acts as the principal underwriter of the Policies
pursuant to a Distribution Agreement with Manufacturers Life of America.
Registered representatives of either ManEquity, Inc. or other broker-dealers
having distribution agreements with ManEquity, Inc. who are also authorized as
variable life insurance agents under applicable state insurance laws, sell the
Policies.
Registered representatives are compensated on a commission basis.
Manufacturers Life of America has a formal service agreement with its
affiliates, Manulife Financial and The Manufacturers Life Insurance Company
(U.S.A.), which can be terminated by either party upon two months notice. Under
this Agreement, Manufacturers Life of America pays for legal, actuarial,
investment and certain other administrative services.
83
<PAGE> 88
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
CONTENTS
Report of Independent Auditors.............................................
Audited Consolidated Financial Statements ................................
Consolidated Balance Sheets...........................................
Consolidated Statements of Income.....................................
Consolidated Statements of Changes in Capital And Surplus.............
Consolidated Statements of Cash Flows.................................
Notes to Consolidated Financial Statements.................................
84
<PAGE> 89
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Manufacturers Life Insurance Company of America
We have audited the accompanying consolidated balance sheets of The
Manufacturers Life Insurance Company of America as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in capital and
surplus and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Manufacturers
Life Insurance Company of America at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
March 15, 1999 Ernst & Young LLP
85
<PAGE> 90
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED BALANCE SHEETS
As at December 31 ($ thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value: (note 3)
Fixed maturity (amortized cost: 1998 $45,248; 1997 $66,565) .......... $ 49,254 $ 67,893
Equity (cost: 1998 $ 19,219; 1997 $20,153) .......................... 20,524 19,460
Short-term investments .................................................. 459 2,130
Policy loans ............................................................ 19,320 14,673
----------- -----------
TOTAL INVESTMENTS ....................................................... $ 89,557 $ 104,156
----------- -----------
Cash and cash equivalents ............................................... $ 23,789 $ 19,882
Deferred acquisition costs (note 5) ..................................... 163,506 130,355
Income taxes recoverable ................................................ 2,665 5,679
Other assets ............................................................ 9,062 9,495
Separate account assets ................................................. 1,075,231 897,044
----------- -----------
TOTAL ASSETS ............................................................ $ 1,363,810 $ 1,166,611
=========== ===========
LIABILITIES, CAPITAL AND SURPLUS 1998 1997
----------- -----------
LIABILITIES:
Policyholder liabilities and accruals ................................... $ 60,830 $ 94,477
Notes payable (note 7) .................................................. -- 41,500
Due to affiliates ....................................................... 5,133 13,943
Deferred income taxes (note 6) .......................................... 763 1,174
Other liabilities ....................................................... 18,656 11,704
Separate account liabilities ............................................ 1,075,231 897,044
----------- -----------
TOTAL LIABILITIES ....................................................... $ 1,160,613 $ 1,059,842
----------- -----------
CAPITAL AND SURPLUS:
Common shares (note 8) .................................................. $ 4,502 $ 4,502
Preferred shares (note 8) ............................................... 10,500 10,500
Contributed surplus ..................................................... 193,096 98,569
Retained earnings (deficit) ............................................. (2,664) (1,910)
Accumulated other comprehensive income (loss) ........................... (2,237) (4,892)
----------- -----------
TOTAL CAPITAL AND SURPLUS ............................................... $ 203,197 $ 106,769
----------- -----------
TOTAL LIABILITIES, CAPITAL AND SURPLUS .................................. $ 1,363,810 $ 1,166,611
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
86
<PAGE> 91
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Premiums ............................................................ $ 9,290 $ 8,607 $ 12,898
Consideration paid on reinsurance terminated (note 10) .............. (40,975) -- --
Fee income .......................................................... 54,547 38,682 40,434
Net investment income (note 3) ...................................... 6,128 8,275 19,651
Realized investment gains (losses) .................................. (206) 118 (119)
Other ............................................................... 1,082 544 668
-------- -------- --------
TOTAL REVENUE ............................................................ $ 29,866 $ 56,226 $ 73,532
-------- -------- --------
BENEFITS AND EXPENSES:
Policyholder benefits and claims .................................... $ 16,541 $ 6,733 $ 14,473
Reduction of reserves on reinsurance terminated (note 10) ........... (40,975) -- --
Operating costs and expenses ........................................ 41,676 41,742 34,581
Commissions ......................................................... 2,561 2,838 10,431
Amortization of deferred acquisition costs (note 5) ................. 9,266 4,860 13,240
Interest expense .................................................... 1,722 2,750 12,251
Policyholder dividends .............................................. 221 1,416 872
-------- -------- --------
TOTAL BENEFITS AND EXPENSES .............................................. 31,012 60,339 85,848
-------- -------- --------
LOSS BEFORE INCOME TAXES ................................................. (1,146) (4,113) (12,316)
-------- -------- --------
INCOME TAX BENEFIT (NOTE 6) .............................................. 392 477 3,909
-------- -------- --------
NET LOSS ................................................................. $ (754) $ (3,636) $ (8,407)
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
87
<PAGE> 92
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL
FOR THE YEARS ENDED DECEMBER 31 CAPITAL CONTRIBUTED EARNINGS COMPREHENSIVE CAPITAL AND
($ thousands) STOCK SURPLUS (DEFICIT) INCOME (LOSS) SURPLUS
------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ......... $15,002 $ 83,569 $ 10,133 $ 1,816 $ 110,520
Issuance of shares ................. -- 15,000 -- -- 15,000
Comprehensive income (loss) (note 2) -- -- (8,407) (483) (8,890)
------- -------- -------- ------- ---------
BALANCE, DECEMBER 31, 1996 ......... $15,002 $ 98,569 $ 1,726 $ 1,333 $ 116,630
Comprehensive income (loss) (note 2) -- -- (3,636) (6,225) (9,861)
------- -------- -------- ------- ---------
BALANCE, DECEMBER 31, 1997 ......... $15,002 $ 98,569 $ (1,910) $(4,892) $ 106,769
Capital contribution (note 8) ...... -- 94,527 -- -- 94,527
Comprehensive income (loss) (note 2) -- -- (754) 2,655 1,901
------- -------- -------- ------- ---------
BALANCE, DECEMBER 31, 1998 ......... $15,002 $193,096 $ (2,664) $(2,237) $ 203,197
======= ======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
88
<PAGE> 93
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss .................................................................. $ (754) $ (3,636) $ (8,407)
Adjustments to reconcile net loss to net cash used in operating
activities:
Additions (deductions) to policy liabilities and accruals ........... (36,217) (2,147) 3,287
Deferred acquisition costs ........................................... (43,065) (33,544) (36,024)
Amortization of deferred acquisition costs ........................... 9,266 4,860 13,240
Realized (gains) losses on investments ............................... 206 (118) 119
Decreases (increases) to deferred income taxes ...................... (1,796) 2,730 777
Other ................................................................ 3,067 7,144 6,540
-------- --------- ---------
Net cash used in operating activities ..................................... $(69,293) $ (24,711) $ (20,468)
-------- --------- ---------
INVESTING ACTIVITIES:
Fixed maturity securities sold ............................................ $ 27,852 $ 73,772 $ 120,234
Fixed maturity securities purchased ....................................... (6,429) (89,763) (108,401)
Equity securities sold .................................................... 8,555 10,586 25,505
Equity securities purchased ............................................... (8,082) (11,289) (22,203)
Mortgage loans repaid ..................................................... -- 514 6,669
Net change in short-term investments ...................................... 1,671 4,558 (2,992)
Net policy loans advanced ................................................. (4,647) (4,851) (2,867)
Guaranteed annuity contracts .............................................. -- 171,691 (16,356)
-------- --------- ---------
Cash provided by investing activities ..................................... $ 18,920 $ 155,218 $ 2,581
-------- --------- ---------
FINANCING ACTIVITIES:
Receipts from variable life and annuity policies
credited to policyholder account balances ............................ $ 7,981 $ 7,582 $ 5,493
Withdrawals of policyholder account balances on
variable life and annuity policies ................................... (5,410) (3,252) (2,994)
Bonds payable repaid ...................................................... -- (158,760) --
Issuance of shares ........................................................ -- -- 15,000
Issuance of promissory note ............................................... -- 33,000 --
Capital Contribution ...................................................... 51,709 -- --
-------- --------- ---------
Cash provided by (used in) financing activities ........................... $ 54,280 $(121,430) $ 17,499
-------- --------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year ....................................... 3,907 9,077 (3,380)
Balance, beginning of year ................................................ 19,882 10,805 14,185
-------- --------- ---------
BALANCE, END OF YEAR ...................................................... $ 23,789 $ 19,882 $ 10,805
-------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
89
<PAGE> 94
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION
The Manufacturers Life Insurance Company of America (the "Company") is
a wholly-owned subsidiary of The Manufacturers Life Insurance Company
(U.S.A.) ("ManUSA"), which is in turn an indirectly wholly-owned
subsidiary of The Manufacturers Life Insurance Company ("Manulife
Financial"), a Canadian-based mutual life insurance company. The
Company markets variable annuity and variable life products in the
United States and traditional insurance products in Taiwan. On December
31, 1996, ManUSA transferred to the Company all of the common and
preferred shares of Manulife Holding Corporation("Holdco"), an
investment holding company. The Company then transferred all the common
and preferred shares of Manufacturers Adviser Corporation ("MAC") to
Holdco for two shares of $1 common stock of Holdco. Holdco has
primarily three wholly-owned subsidiaries, ManEquity Inc., a registered
broker/dealer, MAC, an investment fund management company, and Manulife
Capital Corporation ("MCC"), an investment holding company.
In October 1997, the Manufacturers Life Mortgage Securities Corporation
("MLMSC"), a subsidiary of Holdco, was absorbed into Holdco subsequent
to the maturity and repayment of the mortgage-backed US dollar bonds.
All assets and liabilities of MLMSC were transferred to Holdco at their
respective book values.
These transfers have been accounted for using the pooling-of-interests
method of accounting. Under this method, the assets, liabilities,
capital and surplus, revenues and expenses of each separate entity are
combined retroactively at their historical carrying values to form the
financial statements of the Company for all periods presented to give
effect to the reorganization as if the structure in place at December
31, 1996 had been in place as of the earliest period presented in these
consolidated financial statements. The accounts of all subsidiary
companies are therefore combined and all significant intercompany
balances and transactions are eliminated on combination. In addition,
the capital and surplus of the Company has been restated retroactively
to reflect the capital structure in place at December 31, 1996.
90
<PAGE> 95
The revenues and net income reported by the separate entities and the
combined amounts presented in the accompanying consolidated financial
statements are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
($ thousands) 1996
--------
<S> <C>
Revenue:
ManAmerica .................................. $ 54,404
Holdco ...................................... 15,543
MAC ......................................... 3,585
--------
TOTAL REVENUE ................................. $ 73,532
--------
Net Income (loss):
ManAmerica .................................. $ (8,676)
Holdco ...................................... (670)
MAC ......................................... 939
--------
TOTAL NET LOSS ................................ $ (8,407)
--------
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting
principles ("GAAP").
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those
estimates.
Certain reclassifications have been made to 1997 and 1996 financial
information to conform to the 1998 presentation.
B) RECENT ACCOUNTING STANDARDS
i) During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose annual
financial statements. Comprehensive income includes all changes in
shareholder's equity during a period except those resulting from
investments by and distributions to shareholders. The adoption of SFAS
No. 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity
of the Company.
91
<PAGE> 96
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
NET INCOME (LOSS) ............................................ $ (754) $(3,636) $(8,407)
------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) arising during the period 2,435 (1,030) (560)
Foreign currency translation ............................... 86 (5,272) --
Reclassification adjustment for realized gains (losses)
included in net income ....................................... (134) 77 (77)
------- ------- -------
Other comprehensive income (loss) ............................ 2,655 (6,225) (483)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) .................................. $ 1,901 $(9,861) $(8,890)
------- ------- -------
</TABLE>
Other comprehensive income (loss) is reported net of tax expense
(benefit) of $1,430, $(513), and $260 for 1998, 1997, and 1996,
respectively.
Accumulated other comprehensive income is comprised of the following:
<TABLE>
<CAPTION>
AS AT DECEMBER 31
($ thousands) 1998 1997
------- -------
<S> <C> <C>
UNREALIZED GAINS (LOSSES):
Beginning balance ................................................. $ 380 $ 1,333
Current period change ............................................. 2,569 (953)
------- -------
Ending balance .................................................... $ 2,949 $ 380
------- -------
FOREIGN CURRENCY:
Beginning balance ................................................. $(5,272) $ --
Current period change ............................................. 86 (5,272)
------- -------
Ending balance .................................................... $(5,186) $(5,272)
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) .......................... $(2,237) $(4,892)
------- -------
</TABLE>
ii) During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the disclosure of information about the
Company's operating segments, including disclosures about products and
services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial
position, nor did it affect the manner in which the Company
defines its operating segments. The Company reports two business
segments:
Traditional Life Insurance sold in Taiwan and Variable Life and
Annuities sold in the U.S. Refer to Note 12 for additional segment
information.
92
<PAGE> 97
C) INVESTMENTS
The Company classifies all of its fixed maturity and equity securities
as available-for-sale and records these securities at fair value.
Realized gains and losses on sales of securities classified as
available-for-sale are recognized in net income using the specific
identification method. Changes in the fair value of securities
available-for-sale are reflected directly in accumulated other
comprehensive income after adjustments for deferred taxes and deferred
acquisition costs. Discounts and premiums on investments are amortized
using the effective interest method.
Policy loans are reported at aggregate unpaid balances which
approximate fair value.
Short-term investments include investments with maturities of less than
one year at the date of acquisition.
D) CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original maturity date of three months or less to be cash
equivalents. Cash equivalents are stated at cost plus accrued interest,
which approximates fair value.
E) DEFERRED ACQUISITION COSTS (DAC)
Commissions and other expenses which vary with and are primarily
related to the production of new business are deferred to the extent
recoverable and included as an asset. DAC associated with variable
annuity and variable life insurance contracts is charged to expense in
relation to the estimated gross profits of those contracts. The
amortization is adjusted retrospectively when estimates of current or
future gross profits are revised. DAC associated with traditional life
insurance policies is charged to expense over the premium paying
period of the related policies. DAC is adjusted for the impact on
estimated future gross profits assuming the unrealized gains or losses
on securities had been realized at year-end. The impact of any such
adjustments is included in net unrealized gains (losses) in accumulated
other comprehensive income. DAC is reviewed annually to determine
recoverability from future income and, if not recoverable, it is
immediately expensed.
F) POLICYHOLDER LIABILITIES
For variable annuity and variable life contracts, reserves equal the
policyholder account value. Account values are increased for deposits
received and interest credited and are reduced by withdrawals,
mortality charges and administrative expenses charged to the
policyholders. Policy charges which compensate the Company for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DAC.
93
<PAGE> 98
Policyholder liabilities for traditional life insurance policies sold
in Taiwan are computed using the net level premium method and are based
upon estimates as to future mortality, persistency, maintenance expense
and interest rate yields that were established in the year of issue.
G) SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds that are
separately administered, principally for variable annuity and variable
life contracts, and for which the contract holder, rather than the
Company, bears the investment risk Separate account assets are recorded
at market value. Operations of the separate accounts are not included
in the accompanying financial statements.
H) REVENUE RECOGNITION
Fee income from variable annuity and variable life insurance policies
consists of policy charges for the cost of insurance, expenses and
surrender charges that have been assessed against the policy account
balances. Policy charges that are designed to compensate the company
for future services are deferred and recognized in income over the
period benefited, using the same assumptions used to amortize DAC.
Premiums on long-duration life insurance contracts are recognized as
revenue when due. Investment income is recorded when due.
I) EXPENSES
Expenses for variable annuity and variable life insurance policies
include interest credited to policy account balances and benefit claims
incurred during the period in excess of policy account balances.
J) REINSURANCE
The Company is routinely involved in reinsurance transactions in order
to minimize exposure to large risks. Life reinsurance is accomplished
through various plans including yearly renewable term, co-insurance and
modified co-insurance. Reinsurance premiums, policy charges for cost of
insurance and claims are accounted for on a basis consistent with that
used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums, fees and claims are reported net
of reinsured amounts. Amounts paid with respect to ceded reinsurance
contracts are reported as reinsurance receivables in other assets.
K) FOREIGN EXCHANGE
The Company's Taiwanese branch balance sheet and statement of income
are translated at the current exchange and average exchange rates for
the year respectively. The resultant translation adjustments are
included in accumulated other comprehensive income.
L) INCOME TAX
Income taxes have been provided for in accordance with SFAS No. 109
94
<PAGE> 99
"Accounting for Income Taxes." The Company joins ManUSA, Manulife
Reinsurance Corporation ("MRC") and Manulife Reinsurance Limited
("MRL") in filing a U.S. consolidated income tax return as a life
insurance group under provisions of the Internal Revenue Code. In
accordance with an income tax sharing agreement, the Company's income
tax provision (or benefit) is computed as if the Company filed a
separate income tax return. Tax benefits from operating losses are
provided at the U.S. statutory rate plus any tax credits attributable
to the Company, provided the consolidated group utilizes such benefits
currently. Deferred income taxes result from temporary differences
between the tax basis of assets and liabilities and their recorded
amounts for financial reporting purposes. Income taxes recoverable
represents amounts due from ManUSA in connection with the consolidated
return.
3. INVESTMENTS AND INVESTMENT INCOME
A) FIXED MATURITY AND EQUITY SECURITIES
At December 31, 1998, all fixed maturity and equity securities have
been classified as available-for-sale and reported at fair value. The
amortized cost and fair value is summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
AS AT DECEMBER 31, ----------------- ---------------- ------------------ -----------------
($ thousands) 1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED MATURITY SECURITIES:
U.S. government ............ $27,349 $51,694 $2,578 $ 937 $ -- $ (135) $29,927 $52,496
Foreign governments ........ 9,353 6,922 709 203 -- (14) 10,062 7,111
Corporate .................. 8,546 7,949 719 415 -- (78) 9,265 8,286
------- ------- ------ ------ ------- ------- ------- -------
Total fixed maturity
securities.................. $45,248 $66,565 $4,006 $1,555 $ -- $ (227) $49,254 $67,893
Equity securities .......... $19,219 $20,153 $3,217 $1,496 $(1,912) $(2,189) $20,524 $19,460
------- ------- ------ ------ ------- ------- ------- -------
</TABLE>
Proceeds from sales of fixed maturity securities during 1998 were
$27,852 (1997 $73,772; 1996 $120,234). Gross gains of $362 and gross
losses of $107 were realized on those sales (1997 $955 and $837; 1996
$1,858 and $1,837 respectively).
Proceeds from sale of equity securities during 1998 were $8,555 (1997
$10,586; 1996 $25,505). Gross gains of $16 and gross losses of $477
were realized on those sales (1997 $NIL and $NIL; 1996 $NIL and $140
respectively).
95
<PAGE> 100
The contractual maturities of fixed maturity securities at December 31,
1998 are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
<TABLE>
<CAPTION>
($ thousands) AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Fixed maturity securities
One year or less ......................................... $ 1,174 $ 1,179
Greater than 1; up to 5 years ............................ 7,792 8,081
Greater than 5; up to 10 years........................... 28,289 30,632
Due after 10 years ....................................... 7,993 9,362
------- -------
TOTAL FIXED MATURITY SECURITIES ............................... $45,248 $49,254
======= =======
</TABLE>
96
<PAGE> 101
B) INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Fixed maturity securities ..................................... $4,675 $4,545 $ 4,447
Equity securities ............................................. 227 331 671
Guaranteed annuity contracts .................................. -- 2,796 13,196
Other investments ............................................. 1,485 772 1,697
------ ------ -------
Gross investment income ....................................... 6,387 8,444 20,011
------ ------ -------
Investment expenses ........................................... 259 169 360
------ ------ -------
NET INVESTMENT INCOME ......................................... $6,128 $8,275 $19,651
====== ====== =======
</TABLE>
4. GUARANTEED ANNUITY CONTRACTS AND BONDS PAYABLE
The Company's wholly-owned subsidiary, Manufacturers Life Mortgage
Securities Corporation, has historically invested amounts received as
repayments of mortgage loans in annuities issued by ManUSA. These
annuities were collateral for the 8 1/4 % mortgage-backed bonds
payable. On March 1, 1997 the annuities matured and the proceeds were
used to repay the bonds payable.
In October 1997, MLMSC was absorbed into Manulife Holding Corporation.
5. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, ......................................... $ 130,355 $ 102,610 $ 78,829
Capitalization ................................................ 43,065 33,544 36,024
Accretion of interest ......................................... 11,417 9,357 6,344
Amortization .................................................. (20,683) (14,217) (19,583)
Effect of net unrealized gains (losses)
on securities available for sale ......................... (784) 1,268 996
Currency ...................................................... 136 (2,207) --
--------- --------- ---------
BALANCE AT DECEMBER 31 ........................................ $ 163,506 $ 130,355 $ 102,610
========= ========= =========
</TABLE>
97
<PAGE> 102
6. INCOME TAXES
Components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current expense (benefit) ..................................... $ 1,404 $(3,207) $(4,686)
Deferred expense (benefit) .................................... (1,796) 2,730 777
------- ------- -------
TOTAL EXPENSE (BENEFIT) ....................................... $ (392) $ (477) $(3,909)
======= ======= =======
</TABLE>
The Company's deferred income tax liability, which results from tax
effecting the differences between financial statement values and tax
values of assets and liabilities at each balance sheet date, relates to
the following:
<TABLE>
<CAPTION>
AS AT DECEMBER 31
($ thousands) 1998 1997
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences in computing policy reserves .......................... $ 38,888 $ 34,291
Policyholder dividends payable .................................... -- 240
Investments ....................................................... 708 793
Other deferred tax assets ......................................... 333 --
-------- --------
Deferred tax assets .................................................... $ 39,929 $ 35,324
-------- --------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs ........................................ $ 38,778 $ 30,682
Investments ....................................................... 1,859 166
Policyholder dividends payable .................................... 55 --
Other deferred tax liabilities .................................... -- 5,650
-------- --------
Deferred tax liabilities ............................................... $ 40,692 $ 36,498
-------- --------
NET DEFERRED TAX LIABILITIES ........................................... $ (763) $ (1,174)
======== ========
</TABLE>
At December 31, 1998, the consolidated group has utilized all available
operating loss carryforwards and net capital loss carryforwards. The
losses of the Company, MRC and ManUSA may be used to offset the
ordinary and capital gain income of MRL. However, losses of MRL may not
be used to offset the income of the other members of the consolidated
group.
98
<PAGE> 103
7. NOTES PAYABLE
a) On June 15, 1998, the outstanding promissory note in the
amount of $33,000 plus interest at 6.95% issued on December 5,
1997 payable to ManUSA was discharged and the amount due of
$34,318 ($33,000 plus interest of $1,318) was recorded as a
capital contribution.
b) On December 31, 1998, the surplus debenture in the amount of
$8,500 plus interest at 6.7% issued on December 31, 1995 to
ManUSA was discharged and the amount due of $8,500 was
recorded as a capital contribution.
8. CAPITAL AND SURPLUS
The Company has two classes of capital stock, as follows:
<TABLE>
<CAPTION>
AS AT DECEMBER 31:
($ thousands, except per share amounts) 1998 1997
------- -------
<S> <C> <C>
AUTHORIZED:
5,000,000 Common shares, Par value $1
5,000,000 Preferred shares, Par value $100
ISSUED AND OUTSTANDING:
4,501,861 Common shares ...................... $ 4,502 $ 4,502
105,000 Preferred shares ..................... 10,500 10,500
------- -------
TOTAL ............................................ $15,002 $15,002
======= =======
</TABLE>
During 1996, the Company issued two common shares to its Parent Company
in return for a capital contribution of $15,000.
In 1998, the outstanding promissory note payable referred to in note
7(a) above, totaling $34,318, was discharged and recorded as a capital
contribution.
On December 31, 1998, the Company issued one common share to ManUSA in
exchange for a capital contribution of $60,209. Included in this
capital contribution was the discharge of the surplus debenture in the
amount of $8,500 referred to in note 7(b) above.
The Company is subject to statutory limitations on the payment of
dividends to its Parent. Under Michigan Insurance Law, the payment of
dividends to shareholders is restricted to the surplus earnings of the
Company, unless prior approval is obtained from the Michigan Insurance
Bureau.
The aggregate statutory capital and surplus of the Company at December
31, 1998 was $121,799 (1997 $56,598). The aggregate statutory net loss
99
<PAGE> 104
of the Company for the year ended 1998 was $23,491 (1997 $2,550; 1996
$5,961). State regulatory authorities prescribe statutory accounting
practices that differ in certain respects from generally accepted
accounting principles followed by stock life insurance companies. The
significant differences relate to investments, deferred acquisition
costs, deferred income taxes, non-admitted asset balances and reserve
calculation assumptions.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and the estimated fair values of certain of the
Company's financial instruments at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
ESTIMATED
($ thousands) CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
ASSETS:
Fixed maturity and equity securities ...... $69,778 $69,778
Short-term investments .................... 459 459
Policy loans .............................. 19,320 19,320
Cash and cash equivalents ................. 23,789 23,789
------- -------
</TABLE>
The following methods and assumptions were used to estimate the fair
values of the above financial instruments:
FIXED MATURITY AND EQUITY SECURITIES: Fair values of fixed maturity and
equity securities were based on quoted market prices, where available.
Fair values were estimated using values obtained from independent
pricing services.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: Carrying values
approximate fair values.
POLICY LOANS: Carrying values approximate fair values.
10. RELATED PARTY TRANSACTIONS
The Company has formal service agreements with Manulife Financial and
ManUSA which can be terminated by any party upon two months' notice.
Under the agreements, the Company will pay direct operating expenses
incurred each year by Manulife Financial and ManUSA on its behalf.
Services provided under the agreement include legal, actuarial,
investment, data processing and certain other administrative services.
Costs incurred under these agreements were $34,070,$32,733 and $29,384
in 1998, 1997 and 1996 respectively. In addition, there were $12,817,
$11,249 and $6,934 of agents bonuses allocated to the Company during
1998, 1997 and 1996, respectively, which are included in deferred
acquisition costs.
100
<PAGE> 105
The Company has several reinsurance agreements with affiliated
companies which may be terminated upon the specified notice by either
party. These agreements are summarized as follows:
(a) On December 31, 1998, the coinsurance treaties under which the
Company had assumed two blocks of insurance from ManUSA were
terminated. The Company's risk under these treaties was limited to
$100,000 of initial face amount per claim plus a pro-rata share of
any increase in face amount. Upon the termination of the treaties,
the Company paid consideration in the amount of approximately
$41.0 million to ManUSA and policyholder reserves totaling $41.0
million were recaptured by ManUSA. No gain or loss resulted from
the termination of these treaties.
(b) The Company cedes the risk in excess of $25,000 per life to MRC
under the terms of an automatic reinsurance agreement.
(c) The Company cedes a substantial portion of its risk on its
Flexible Premium Variable Life policies to MRC under the terms of
a stop loss reinsurance agreement.
Selected amounts relating to the above treaties reflected in the
financial statements are as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1998 1997 1996
---------------------------------------------------------------- ------------- --------------- ------------
<S> <C> <C> <C>
Life and annuity premiums assumed $ 48 $ 509 $ 724
Life and annuity premiums ceded 76 69 99
Policy reserves assumed - 40,975 44,497
Policy reserves ceded 145 130 304
---------------------------------------------------------------- ------------- --------------- ------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts to affiliates
were $NIL, $3,972 and $NIL during 1998, 1997 and 1996 respectively.
The Company and Manulife Financial have entered into an agreement
whereby Manulife Financial provides a claims paying guarantee to the
Company's U.S. policyholders. This claims paying guarantee does not
apply to the Company's separate account contract holders.
101
<PAGE> 106
11. REINSURANCE
In the normal course of business, the Company assumes and cedes
reinsurance as a party to several reinsurance treaties with major
unrelated insurance companies. The Company remains liable for amounts
ceded in the event that reinsurers do not meet their obligations.
The effects of reinsurance on premiums were as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1998 1997 1996
------------------------------------------------------------ -------------- ------------- -------------
<S> <C> <C> <C>
Direct premiums $9,723 $8,607 $12,949
Reinsurance ceded 405 440 676
------------------------------------------------------------ -------------- ------------- -------------
TOTAL PREMIUMS $9,318 $8,167 $12,273
------------------------------------------------------------ -------------- ------------- -------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts with unrelated
insurance companies were $1,362, $909 and $357 during 1998, 1997 and
1996 respectively.
12. SEGMENT DISCLOSURES
The Company reports two business segments: Traditional Life Insurance
sold in Taiwan and Variable Life and Annuities sold in the U.S. The
Company's reportable segments have been determined based on geography,
differences in product features, and distribution; the segments are
also consistent with the Company's management structure. Segmented
information for the Company is as follows:
<TABLE>
<CAPTION>
As at December 31,
($ thousands) Taiwan U.S. Total
----------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
1998
Premiums and fee income $ 9,243 $ 54,594 $ 63,837
Interest expense - 1,722 1,722
Income taxes (benefit) (1,219) 827 (392)
Net income (loss) (2,265) 1,511 (754)
Total assets excluding separate account assets $ 30,268 $258,311 $288,579
----------------------------------------------------------------- -------------- -------------- --------------
1997
Premiums and fee income $ 8,099 $ 39,190 $ 47,289
Interest expense - 2,750 2,750
Income taxes (benefit) (1,526) 1,049 (477)
Net income (loss) (2,835) (801) (3,636)
Total assets excluding separate account assets $ 25,401 $244,166 $269,567
----------------------------------------------------------------- -------------- -------------- --------------
1996
Premiums and fee income $ 12,200 $ 41,132 $ 53,332
Interest expense - 12,251 12,251
Income taxes (benefit) (6,125) 2,216 (3,909)
Net income (loss) (17,500) 9,093 (8,407)
Total assets excluding separate account assets $ 15,268 $379,241 $394,509
----------------------------------------------------------------- -------------- -------------- --------------
</TABLE>
102
<PAGE> 107
The accounting policies for each segment above are the same as those
described in the summary of significant accounting policies. The
Company has no intersegment revenues and no significant major
customers.
13. CONTINGENCIES
The Company is subject to various lawsuits that have arisen in the
course of its business. Contingent liabilities arising from litigation,
income taxes and other matters are not considered material in relation
to the financial position of the Company.
14. UNCERTAINTY DUE TO THE YEAR 2000 RISK (UNAUDITED)
The Year 2000 risk is the result of computer programs being written
using two digits, rather than four, to define the applicable year. Any
of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. The effects of the Year 2000 risk may be experienced before, on,
or after January 1, 2000 and, if not addressed, could result in systems
failures or miscalculations causing disruptions of normal business
operations. It is not possible to be certain that the Company's Year
2000 program will fully resolve all aspects of the Year 2000 risk,
including those related to third parties.
A full discussion of the Company's Year 2000 program and Year 2000
review will be contained in the Company's Management Discussion and
Analysis.
103
<PAGE> 108
[BLANK PAGE]
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE> 110
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fees $ 15,625
Printing and engraving (through 12/31/98) 32,500*
Legal fees and expenses (through 12/31/98) 20,000*
Miscellaneous (Edgar) 15,000*
--------
$ 83,125
</TABLE>
* estimated
Item 14. Indemnification of Directors and Officers
Article XV of the By-Laws of The Manufacturers Life Insurance Company of America
provides for indemnification of directors and officers as follows:
"Article XV."
1. The Company may indemnify any person who is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal or administrative (other than by or
in the right of the Company), by reason of the fact that he;
(a) is or was a director, officer or employee of the Company, or
(b) is or was serving at the request of the Company as a director,
officer, employee, or trustee of another corporation,
partnership, joint venture, trust or other enterprise, against
all expenses (including solicitors' and attorneys' fees),
judgments, fines and amounts paid in settlement, actually and
reasonably incurred by him in connection with such action,
suit or proceeding, if he acted honestly and in good faith and
with a view to the best interests of the Company, and, in the
case of any criminal or administrative action or proceeding,
he had reasonable grounds for believing that his conduct was
lawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction shall not of itself
create a presumption that the person did not act honestly and
in good faith with a view to the best interest of the Company
and, with respect to any criminal action or proceeding, that
he did not have reasonable grounds for believing that his
conduct was lawful.
2. The Company shall in any event indemnify a person referred to in paragraph 1
hereof who has been substantially successful in the defense of any such action,
suit or proceeding against all expenses (including solicitors' and attorneys'
fees) reasonably incurred by him in connection with the action, suit or
proceeding.
3. The indemnification provided by this By-Law shall be continuing and enure to
the benefit of the heirs, executors, and administrators of any person referred
to in paragraph 1 hereof.
4. Expenses (including solicitors' and attorneys' fees) incurred in defending a
civil or criminal action, suit or proceeding may be paid by the Company in
advance of the final
2
<PAGE> 111
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of any person referred to in paragraph 1 hereof to repay the amount
if it shall be ultimately determined that he is not entitled to indemnified by
the Company as authorized by this By-Law.
5. The indemnification provided by this By-Law shall not be deemed exclusive of
any other rights to which those entitled to be indemnified hereunder may be
entitled as a matter of law or under any by-law, agreement, vote of members, or
otherwise.
Administrative Resolution Number 600.01 of The Manufacturers Life
Insurance Company provides for indemnification of certain directors and officers
of subsidiary companies as follows:
"Resolution 600.01"
1.1 The Manufacturers Life Insurance Company (the "Company") shall indemnify any
person who is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal or
administrative (other than by or in the right of the Company except as provided
in 1.2 of this Article) by reason of the fact that the person
(a) is or was a Director, officer or employee of the Company, or
(b) is or was serving at the specific request of the Company, as a
Director, officer, employee or trustee of another corporation,
partnership, joint venture, trust or other enterprise, or
(c) is or was engaged at the same time as an agent in the sale of
the Company's products while at the same time employed by the
Company in the United States in a branch management capacity,
against all expenses (including but not limited to solicitors' and attorneys'
fees) judgments, fines and amounts in settlement, actually and reasonably
incurred by the person in connection with such action, suit or proceeding,
(other than those specifically excluded below) if the person acted honestly, in
good faith, with a view to the best interests of the Company or the enterprise
the person is serving at the request of the Company, and within the scope of his
or her authority and normal activities, and, in the case of any criminal or
administrative action or proceeding, the person had reasonable grounds for
believing that his or her conduct was lawful.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction shall not of itself create a presumption that the
person did not act honestly and in good faith with a view to the best interests
of the Company and, with respect to any criminal action or proceeding, that the
person did not have reasonable grounds for believing that his or her conduct was
lawful.
1.2 The Company shall also, with the approval of the Board, indemnify a person
referred to in Section 1.1 of this Article in respect of any action by any
person by or on behalf of the Company to procure a judgment in its favor to
which the person is made a party by reason of being or having been a Director,
officer or employee of the Company, against all costs, charges
3
<PAGE> 112
and expenses reasonably incurred by him or her in connection with such action if
he or she fulfills the conditions set out in Section 1.1 of this Article.
1.3 The Company shall have no obligation to indemnify any person for:
(a) any act, error, or omission committed with actual dishonest,
fraudulent, criminal or malicious purpose or intent, or
(b) any act of gross negligence or willful neglect, or
(c) any liability of others assumed by any person otherwise
entitled to indemnification hereunder, or
(d) any claims by or against any enterprise which is owned,
operated, managed, or controlled by any person otherwise
entitled to indemnification hereunder or any claims by such
person against an enterprise, or
(e) any claim arising out of, or based on, any pension plan
sponsored by any person otherwise entitled to indemnification
hereunder as employer, or
(f) bodily injury, sickness, disease or death of any person, or
injury to or destruction of any tangible property including
loss of use thereof, or
(g) any amount covered by any other indemnification provision or
by any valid and collectible insurance which the person
entitled to indemnity hereunder may have, or
(h) any liability in respect of which the person would otherwise
be entitled to indemnification if in the course of that
person's actions, he or she is found by the Board of Directors
to have been in breach of compliance with the Company's Code
of Business Conduct or Conflict of Interest guidelines, or
(i) any liability incurred by that person for any sales activities
unless the person qualifies under Section 1.1(c) of this
Article.
1.4 In the event of any indemnity payment by the Company and as a condition of
it, the Company shall be subrogated to all the rights of recovery of the person
indemnified, and such person shall execute and deliver instruments and papers
and do whatever else is necessary to secure such rights.
1.5 As a condition of indemnification, the person to be indemnified shall not
demand or agree to arbitration of any claim, make any payment, admit any
liability, settle any claims, assume any obligation or incur any expense without
the written consent of the Company.
1.6 Any claim to indemnification shall not be assignable. In the event of death
or incompetency, the legal representative of a person eligible for
indemnification shall be entitled to
4
<PAGE> 113
indemnification for those acts and omissions of the indemnified person incurred
prior to his death or incompetency.
1.7 The Company shall have the right as a condition of pending indemnification
to appoint counsel satisfactory to the person to be indemnified to defend the
person for any claim against him or her which may be covered by this indemnity.
1.8 The indemnification shall be continuing and enure to the benefit of the
heirs, executors and administrators of any person referred to in Section 1.1. of
this Article.
1.9 Expenses (including but not limited to solicitors' and attorneys' fees),
incurred in defending a civil, criminal, or administrative action, suit or
proceeding shall be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of any person referred to in Section 1.1 of this Article to repay the amount if
it shall be ultimately determined that the person is not eligible to be
indemnified by the Company.
1.10 The Indemnification provided hereunder shall not be deemed exclusive of any
other rights to which those eligible to be indemnified hereunder may be entitled
as a matter of law under any By-Law, Resolution, agreement, vote of members or
otherwise.
Liability Insurance
At a meeting of the Executive Committee of the Board of Directors of
The Manufacturers Life Insurance Company held October 21, 1993, the purchase of
Directors and Officers (D&O) liability insurance was approved. It became
effective December 1, 1993. It provides global coverage for all Directors and
Officers of The Manufacturers Life Insurance Company and its subsidiaries.
The coverage provided:
1. Insures Directors and Officers against loss arising from claims against them
for certain acts in cases where they are not indemnified by The Manufacturers
Life Insurance Company or a subsidiary.
2. Insures The Manufacturers Life Insurance Company against loss arising from
claims against Directors and Officers for certain wrongful acts, but only where
the corporation indemnifies the Directors or Officers as required or permitted
under applicable statutory or by-law provisions.
In general, the D&O coverage encompasses:
- - past, present and future Directors and Officers of The Manufacturers
Life Insurance Company and subsidiaries
- - defense costs and settlements (if legally obligated to be paid)
resulting from third party claims in connection with 'wrongful acts'
committed by a Director or Officer within the
5
<PAGE> 114
scope of their duties
- - claims made basis (i.e. policy responds to claims filed/reported during
the policy term, including claims arising from events transpiring
before the policy was in force as long as no Director/Officer was aware
of the events prior to coverage placement).
* * *
Insofar as Indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. Recent Sales of Unregistered Securities
The Manufacturers Life Insurance Company of America has not offered or
sold any unregistered securities.
Item 16. Exhibits and Financial Statement Schedules
Those exhibits identified as having been filed previously are hereby
incorporated by reference into this registration statement.
A. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page in Sequential Numbering System
Where Exhibit Located
<S> <C> <C>
(1)(a) Distribution Agreement Filed as Exhibit (3)(a)(i) to post-effective amendment
between Manufacturers Life no. 11 to the registration statement on Form N-4 March
of America and ManEquity 1, 1999 (File No. 33-57018).
dated August 31, 1987
(1)(b) Supplemental Agreement to Filed as Exhibit (3)(a)(ii) to post-effective amendment
Distribution Agreement. no. 11 to the registration statement on Form N-4 March
dated October 1, 1992 1, 1999 (File No. 33-57018).
(2) None
</TABLE>
6
<PAGE> 115
<TABLE>
<CAPTION>
Exhibit No. Description Page in Sequential Numbering System
Where Exhibit Located
<S> <C> <C>
(3)(a)(i) Restated Articles of Filed as Exhibit (3)(a)(i) to Post-Effective Amendment
Redomestication of No. 6 on Form S-1 Filed by The Manufacturers Life
Manufacturers Life of America Insurance Company of America on December 9, 1996 (File
No. 33-57020)
(3)(b)(i) By-Laws of Manufacturers Filed as Exhibit (3)(b)(i) to Post-Effective Amendment
Life of America No. 6 on Form S-1 filed by The Manufacturers Life
Insurance Company of America on December 9, 1996 File
No. 33-57020)
(4)(a) Form of Multi-Account Filed as Exhibit (4)(a) to post-effective amendment no.
Flexible Variable Annuity 11 to the registration statement on Form N-4 March 1,
Policy 1999 (File No. 33-57018).
(4)(b)(i) Individual Retirement Filed as Exhibit (4)(b)(iii) to post-effective amendment
Annuity Rider no. 11 to the registration statement on Form N-4 March
1, 1999 (File No. 33-57018).
(4)(b)(ii) Trustee-Owned Policies Rider Filed as Exhibit (4)(b)(ii) to post-effective amendment
no. 11 to the registration statement on Form N-4 March
1, 1999 (File No. 33-57018).
(4)(b)(iii) Endorsement-0646 Incorporated by reference to Exhibit (4)(b)(iii) to Form
10-Q by The Manufacturers Life Insurance Company of
America on August 14, 1997 (File No. 33-57018)
(5) Opinion and consent of James Filed as Exhibit (5) to Post- Effective Amendment No. 6
D. Gallagher General Counsel on Form S-1 filed by The Manufacturers Life Insurance
of Manufacturers Life of Company of America on December 9, 1996 (File No.
America 33-57020).
(6) None
(7) None
(8) None
(9) None
(10)(a) Reinsurance Agreement Filed as Exhibit (7) to post-effective amendment no. 11
between Manufacturers Life to the registration statement on Form N-4 March 1, 1999
of America and The (File No. 33-57018).
Manufacturers Life Insurance
Company
</TABLE>
7
<PAGE> 116
<TABLE>
<CAPTION>
Exhibit No. Description Page in Sequential Numbering System
Where Exhibit Located
<S> <C> <C>
(10)(b)(i) Service Agreement between Filed as Exhibit A(8)(a)(i) to pre-effective amendment no. 1 to
Manufacturers Life of the registration statement on Form S-6 filed August 28, 1998
America and The (File No. 333-51293).
Manufacturers Life Insurance
Company dated June 1, 1988
(10)(b)(ii) Amendment to Service Filed as Exhibit A(8)(a)(ii) to pre-effective amendment
Agreement dated December 31, no. 1 to the registration statement on Form S-6 filed
1992. August 28, 1998 (File No. 333-51293).
(10)(b)(iii) Amendment to Service Filed as Exhibit A(8)(a)(iii) to pre-effective amendment
Agreement dated May 31, 1993. no. 1 to the registration statement on Form S-6 filed
August 28, 1998 (File No. 333-51293).
(10)(b)(iv) Amendment to Service Filed as Exhibit A(8)(a)(iv) to pre-effective amendment
Agreement dated June 30, no. 1 to the registration statement on Form S-6 filed
1993. August 28, 1998 (File No. 333-51293).
(10)(b)(v) Amendment to Service Filed as Exhibit A(8)(a)(v) to pre-effective amendment
Agreement dated December 31, no. 1 to the registration statement on Form S-6 filed
1996. August 28, 1998 (File No. 333-51293).
(10)(b)(vi) Amendment to Service Filed as Exhibit A(8)(a)(vi) to pre-effective amendment
Agreement dated May 31, no. 1 to the registration statement on Form S-6 filed
1998. August 28, 1998 (File No. 333-51293).
(10)(b)(vii) Amendment to Service Filed as Exhibit A(8)(a)(vii) to post-effective
Agreement dated December 31, amendment no. 11 to the registration statement on Form
1998. N-4 filed March 1, 1999 (File No. 33-57018).
(11) None
(12) None
(13) None
(14) None
(15) None
(16) None
(17) None
(18) None
(19) None
</TABLE>
8
<PAGE> 117
<TABLE>
<CAPTION>
Exhibit No. Description Page in Sequential Numbering System
Where Exhibit Located
<S> <C> <C>
(20) None
(21) None
(22) None
(23) (a) Consent of Ernst & Young LLP
(23)(b) Consent of James D. Filed as Exhibit (5) of this Registration Statement
Gallagher, General Counsel
(24) Power of Attorney Filed as Exhibit (12) to Post-Effective Amendment No. 10
on Form S-6 filed by The Manufacturers Life Insurance
Company of America on February 28, 1997 (File No.
33-52310)
(25) None
(26) None
(27) Financial Data Schedule
(28) None
</TABLE>
B. Financial Statement Schedules
Schedule I - Summary of Investments
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
9
<PAGE> 118
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
The Board Of Directors
The Manufacturers Life Insurance Company Of America
We have audited the financial statements of The Manufacturers Life Insurance
Company of America as of December 31, 1998 and 1997 and 1996 and for each of the
three years in the period ended December 31, 1998 and have issued our report
thereon dated March 15, 1999 (included elsewhere in this Registration Statement
on Form S-1). Our audits also included the financial statement schedules listed
in this Registration Statement Form S-1. These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Philadelphia, Pennsylvania Ernst & Young LLP
March 15, 1999
2
<PAGE> 119
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
($THOUSANDS)
<TABLE>
<CAPTION>
Amount
Market Shown in the
Type of Investment Cost Value Balance Sheet
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
United States Government $ 27,349 $ 29,927 $ 29,927
Foreign Governments 9,353 10,062 10,062
Corporate 8,546 9,265 9,265
- ------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 45,248 $ 49,254 $ 49,254
- ------------------------------------------------------------------------------
Equity Securities:
Common stocks - other 19,219 20,524 20,524
Policy loans 19,320 19,320 19,320
Short Term Investments 459 459 459
Cash on Hand and on Deposit 23,789 23,789 23,789
==============================================================================
TOTAL INVESTMENTS $108,035 $113,346 $113,346
==============================================================================
</TABLE>
3
<PAGE> 120
+THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
($ THOUSANDS)
<TABLE>
<CAPTION>
Future
Policy Other
Benefits Policy
Deferred Losses, Claims Premium
Acquisition Claims and Unearned and Revenue
Segment Costs Loss Expenses Premiums Benefits Payable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Life Insurance and $163,506 $ 57,353 $ 1,994 $ 1,483 $ 9,290
annuities
Other (incl. non-life -- -- -- -- --
subsidiaries)
====================================================================================================
Total $163,506 $ 57,353 $ 1,994 $ 1,483 $ 9,290
====================================================================================================
1997:
Life Insurance and $130,355 $ 91,994 $ 674 $ 1,809 $ 8,607
annuities
Other (incl. non-life -- -- -- -- --
subsidiaries)
====================================================================================================
Total $130,355 $ 91,994 $ 674 $ 1,809 $ 8,607
====================================================================================================
1996:
Life Insurance and $102,610 $ 91,915 $ 635 $ 379 $ 12,898
annuities
Other (incl. non-life -- -- -- -- --
subsidiaries)
====================================================================================================
Total $102,610 $ 91,915 $ 635 $ 379 $ 12,898
====================================================================================================
</TABLE>
4
<PAGE> 121
<TABLE>
<CAPTION>
Benefits,
Claims
Net Losses and Other
Investment Settlement Operating
Segment Income Expenses Expenses
- -------------------------------------------------------------------
<S> <C> <C> <C>
1998:
Life Insurance and $ 5,442 $16,541 $49,257
annuities
Other (incl. non-life 686 -- 4,246
subsidiaries)
===================================================================
Total $ 6,128 $16,541 $53,503
===================================================================
1997:
Life Insurance and $ 5,103 $ 6,733 $46,968
annuities
Other (incl. non-life 3,172 -- 2,472
subsidiaries)
===================================================================
Total $ 8,275 $ 6,733 $49,440
===================================================================
1996:
Life Insurance and $ 6,141 $14,473 $52,067
annuities
Other (incl. non-life 13,510 -- 6,185
subsidiaries)
===================================================================
Total $19,651 $14,473 $58,252
===================================================================
</TABLE>
5
<PAGE> 122
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE IV -- REINSURANCE
($ THOUSANDS)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
===============================================================================
Gross Ceded to Assumed Percentage of
Amount Other from Other Net Amount
Companies Companies Amount Assumed to Net
===============================================================================
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force $12,728,348 $ 2,797,498 $ 0 $ 9,930,850 0%
===================================================================================================================
Insurance Premiums:
Life $ 9,723 $ 481 $ 48 $ 9,290 .52%
===================================================================================================================
Year ended December 31, 1997:
Life insurance in force $ 9,834,590 $ 2,083,344 $ 84,172 $ 7,835,418 1.07%
===================================================================================================================
Insurance Premiums:
Life $ 8,607 $ 509 $ 509 $ 8,607 5.91%
===================================================================================================================
Year ended December 31, 1996:
Life insurance in force $ 7,700,816 $ 552,986 $ 98,741 $ 7,246,571 1.36%
===================================================================================================================
Insurance Premiums:
Life $ 12,949 $ 775 $ 724 $ 12,898 5.61%
===================================================================================================================
</TABLE>
6
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has caused this amendment to the registration statement to be signed
on its behalf in the City of Toronto, Province of Ontario, on this 19th day of
April, 1999.
Registrant: THE MANUFACTURERS LIFE
INSURANCE COMPANY OF AMERICA
By: /s/ Donald A. Guloien
__________________________________
Name: DONALD A. GULOIEN
Title: President
7
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
amended Registration Statement has been signed by the following persons in the
capacities indicated on this 19th day of April, 1999.
Signature Title
*___________________ Chairman and Director
JOHN D. RICHARDSON
*___________________ President and Director
DONALD A. GULOIEN (Principal Executive Officer)
*__________________ Director
SANDRA M. COTTER
_____________________ Director
JAMES D. GALLAGHER
_______________ Director
JAMES O'MALLEY
*__________________ Director
JOSEPH J. PIETROSKI
*________________________ Director
THEODORE KILKUSKIE, JR.
*__________________ Vice President, Finance
DOUGLAS H. MYERS (Principal Financial and
Accounting Officer)
* /s/ James D. Gallagher
- -----------------------------
JAMES D. GALLAGHER
Pursuant to Power of Attorney
8
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page in Sequential Numbering System
Where Exhibit Located
<S> <C> <C>
99.23(a) Consent of Ernst & Young
L.L.P.
99 B Financial Data Schedule
</TABLE>
9
<PAGE> 1
EXHIBIT 99.23(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our reports dated March 15, 1999 accompanying the
consolidated financial statements of The Manufacturers Life Insurance Company
of America and financial statement schedules and to the use of our report dated
February 4, 1999 accompanying the financial statements of Separate Account Two
of The Manufacturers Life Insurance Company of America in Post-Effective
Amendment No. 9 to the Registration Statement No. 33-57020 on Form S-1 and
related prospectus of Separate Account Two of The Manufacturers Life Insurance
Company of America.
Philadelphia, Pennsylvania
April 19, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 49,254
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20,524
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 89,557
<CASH> 23,789
<RECOVER-REINSURE> 613
<DEFERRED-ACQUISITION> 163,506
<TOTAL-ASSETS> 1,363,810
<POLICY-LOSSES> 60,830
<UNEARNED-PREMIUMS> 1,994
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,075,231
<NOTES-PAYABLE> 0
0
10,500
<COMMON> 4,502
<OTHER-SE> 188,195
<TOTAL-LIABILITY-AND-EQUITY> 1,363,810
9,290
<INVESTMENT-INCOME> 6,128
<INVESTMENT-GAINS> (206)
<OTHER-INCOME> 1,082
<BENEFITS> 16,541
<UNDERWRITING-AMORTIZATION> 9,266
<UNDERWRITING-OTHER> 44,237
<INCOME-PRETAX> (1,146)
<INCOME-TAX> 392
<INCOME-CONTINUING> (754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
