-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Re5SqX2vzcioNin6x2IezEtobAM6RzprF6o5/KGbiG/J5lgfgdRUGa/hX949GqIo FMJcTNso16WJgUZaxTFcmg== 0000950135-04-002453.txt : 20040507 0000950135-04-002453.hdr.sgml : 20040507 20040507123243 ACCESSION NUMBER: 0000950135-04-002453 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20040507 EFFECTIVENESS DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANUFACTURERS LIFE INS CO USA SEPARATE ACCOUNT N CENTRAL INDEX KEY: 0000813572 IRS NUMBER: 232030787 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 333-100567 FILM NUMBER: 04787838 BUSINESS ADDRESS: STREET 1: 200 BLOOR STREET EAST ST 10 STREET 2: TORONTO M4W 1EF CITY: ONTARIO CANADA STATE: A6 ZIP: 48304 BUSINESS PHONE: 4169266302 MAIL ADDRESS: STREET 1: P O BOX 600 CITY: BUFFALO STATE: NY ZIP: 14201-0600 FORMER COMPANY: FORMER CONFORMED NAME: SEPARATE ACCOUNT FOUR OF THE MANUFACTURERS LIFE INS CO OF AM DATE OF NAME CHANGE: 19920703 497 1 b50540cve497.txt CVUL 03 SUPPLEMENT TO PROSPECTUS FOR THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) SEPARATE ACCOUNT N DATED MAY 1, 2004 (Applicable Only to Policies Issued in Oregon and Texas) The following restriction under "Limitations on Transfers from the Fixed Account" in the prospectus does not apply to policies issued in Oregon or Texas. "Any transfer that involves a transfer out of the Fixed Account may not involve a transfer to the Investment Account for the Money Market Trust." SUPPLEMENT DATED MAY 1, 2004 CVUL04.Supp 5/2004 PROSPECTUS THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) SEPARATE ACCOUNT N VENTURE CORPORATE VUL A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY This prospectus describes Venture Corporate VUL, a flexible premium variable universal life insurance policy (the "Policy") offered by The Manufacturers Life Insurance Company (U.S.A.) (the "Company," "Manulife USA," "we" or "us") to individuals, corporations, trusts, associations, or similar entities (the "applicant", "policyholder" or "you"). THIS PROSPECTUS DESCRIBES POLICIES ISSUED BEFORE MARCH 26, 2004. FOR THE PROSPECTUS DESCRIBING POLICIES ISSUED ON OR AFTER MARCH 26, 2004 SEE THE PROSPECTUS DATED MAY 1, 2004 (CVUL04 5/2004). The Policy is designed for use by corporations and other employers to provide life insurance and to fund other employee benefits. The Policy is designed to provide lifetime insurance protection together with flexibility as to the timing and amount of premium payments, the investments underlying the Policy Value, and the amount of insurance coverage. The insurance benefit is payable at the life insured's death to the Policy's beneficiary. The Policy also provides a Net Cash Surrender Value available to you by surrendering the Policy or by taking policy loans and partial withdrawals. The Policy will remain in force so long as the Net Cash Surrender Value is sufficient to cover charges assessed against the Policy. Policy Value may be accumulated on a fixed basis or vary with the investment performance of the sub-accounts of Manulife USA's Separate Account N (the "Separate Account") to which you allocate net premiums. The assets of each sub-account will be used to purchase shares of a particular investment portfolio (a "Portfolio"). The Portfolio prospectuses, and the corresponding Statement of Additional Information, describe the investment objectives of the Portfolios. Other sub-accounts and Portfolios may be added in the future. THIS POLICY IS NOT SUITABLE FOR SHORT-TERM INVESTMENT PURPOSES. PROSPECTIVE PURCHASERS SHOULD NOTE THAT IT MAY NOT BE ADVISABLE TO PURCHASE A POLICY AS A REPLACEMENT FOR EXISTING INSURANCE. The Securities and Exchange Commission (the "SEC") maintains a web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding registrants that file electronically with the SEC. PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Manufacturers Life Insurance Company (U.S.A.) 38500 Woodward Avenue Bloomfield Hills, Michigan 48304 THE DATE OF THIS PROSPECTUS IS MAY 1, 2004. CVUL03 5/2004 TABLE OF CONTENTS RISKS/BENEFITS SUMMARY.................................................... 3 FEE TABLE................................................................. 4 POLICY SUMMARY............................................................ 5 General.............................................................. 5 Death Benefits....................................................... 5 Premiums............................................................. 6 Policy Value......................................................... 6 Policy Loans......................................................... 6 Surrender and Partial Withdrawals.................................... 6 Lapse and Reinstatement.............................................. 6 Charges and Deductions............................................... 6 Investment Options and Investment Advisers........................... 7 Investment Management Fees and Expenses.............................. 7 Table of Investment Options and Investment Subadvisers............... 7 GENERAL INFORMATION ABOUT MANULIFE USA, THE SEPARATE ACCOUNT AND THE PORTFOLIOS................................................................ 9 Manulife USA......................................................... 9 Ratings.............................................................. 9 The Separate Account................................................. 9 The Portfolios....................................................... 10 ISSUING A POLICY.......................................................... 15 Use of the Policy.................................................... 15 Requirements......................................................... 15 Temporary Insurance Agreement........................................ 16 Underwriting......................................................... 16 Right to Examine the Policy.......................................... 16 Life Insurance Qualification......................................... 17 DEATH BENEFITS............................................................ 17 Flexible Term Insurance Option Rider................................. 17 Death Benefit Options................................................ 19 Changing the Death Benefit Option.................................... 19 Changing the Face Amount and Scheduled Death Benefits................ 20 PREMIUM PAYMENTS.......................................................... 22 Initial Premiums..................................................... 22 Subsequent Premiums.................................................. 22 Premium Limitations.................................................. 22 Premium Allocation................................................... 23 CHARGES AND DEDUCTIONS.................................................... 23 Premium Load......................................................... 23 Sales Load or Surrender Charge....................................... 23 Asset Based Risk Charge Deducted from Investment Accounts............ 25 Investment Management Fees and Expenses.............................. 25 Reduction in Charges and Enhanced Surrender Values................... 26 Company Tax Considerations........................................... 26 POLICY VALUE.............................................................. 26 Determination of the Policy Value.................................... 26 Units and Unit Values................................................ 26 Transfers of Policy Value............................................ 27 POLICY LOANS.............................................................. 28 Interest Charged on Policy Loans..................................... 28 Loan Account......................................................... 28 POLICY SURRENDER AND PARTIAL WITHDRAWALS.................................. 29 Policy Surrender..................................................... 29 Partial Withdrawals.................................................. 29 LAPSE AND REINSTATEMENT................................................... 29 Lapse................................................................ 29 Reinstatement........................................................ 29 THE GENERAL ACCOUNT....................................................... 29 Fixed Account........................................................ 29 OTHER PROVISIONS OF THE POLICY............................................ 30 Policyholder Rights.................................................. 30 Beneficiary.......................................................... 30 Incontestability..................................................... 30 Misstatement of Age or Sex........................................... 30 Suicide Exclusion.................................................... 30 Supplementary Benefits............................................... 31 TAX TREATMENT OF THE POLICY............................................... 31 Life Insurance Qualification......................................... 31 Tax Treatment of Policy Benefits..................................... 32 Alternate Minimum Tax................................................ 35 Income Tax Reporting................................................. 35 OTHER INFORMATION......................................................... 35 Payment of Proceeds.................................................. 35 Reports to Policyholders............................................. 35 Responsibilities of MFC.............................................. 36 Voting Rights........................................................ 36 Substitution of Portfolio Shares..................................... 36 Records and Accounts................................................. 37 State Regulations.................................................... 37 Litigation........................................................... 37 Further Information.................................................. 37 Illustrations........................................................ 37 Financial Statements................................................. 37 APPENDIX A: DEFINITIONS................................................. A-1 APPENDIX B: ILLUSTRATIONS............................................... B-1
This prospectus does not constitute an offering in any jurisdiction in which such offering may not lawfully be made. No person is authorized to make any representations in connection with this offering other than those contained in this prospectus, the Portfolios prospectuses, or the corresponding Statements of Additional Information. THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE BENEFICIARY NAMED THEREIN. NO CLAIM IS MADE THAT THIS VARIABLE LIFE INSURANCE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. Examine this prospectus carefully. The Policy Summary will briefly describe the Policy. More detailed information will be found further in the prospectus. RISKS/BENEFITS SUMMARY BENEFITS Some of the benefits of purchasing the Policy are described below. DEATH BENEFIT PROTECTION. This prospectus describes a flexible premium variable life insurance policy, which provides for a death benefit payable to the beneficiary of the Policy upon the death of the insured. Variable life insurance is a flexible tool for financial and investment planning for persons needing death benefit protection. You should consider other forms of investments if death benefit protection is not one of your financial planning objectives, as there are additional costs and expenses in providing the insurance. ACCESS TO YOUR POLICY VALUES. Variable life insurance offers access to Policy Value. You may borrow against your Policy, or surrender all, or a portion of your policy through a partial withdrawal. There are limitations on partial withdrawals (a partial withdrawal of the Net Cash Surrender Value may only be made once each Policy Month after the first Policy Anniversary). See "Policy Surrender and Partial Withdrawals" for further information. TAX DEFERRED ACCUMULATION. Variable life insurance has several tax advantages under current tax laws. For example, Policy Value accumulates on a tax-deferred basis and a transfer of values from one sub-account to another within the Policy generates no taxable gain or loss. Any investment income and realized capital gains within a sub-account or interest from the Fixed Account are automatically reinvested without current income taxation to the policy owner. INVESTMENT OPTIONS. In addition to the Fixed Account, the Policy provides for access to a number of variable investment options, which permit you to reallocate your Policy Value to meet your changing personal objectives, goals, and investment conditions. Information regarding each investment option may be found in the Portfolio prospectuses. FLEXIBILITY. The policy is a flexible premium variable life insurance policy in which varying premium payments are permitted. You may select death benefit options and an additional policy rider. You may increase or decrease the amount of death benefit. You are able to select, monitor, and change investment choices within your policy. RISKS Some of the risks of purchasing the Policy are described below. FLUCTUATING INVESTMENT PERFORMANCE. Policy Value invested in a sub-account are not guaranteed and will increase and decrease according to investment performance. You assume the investment risk of Policy Value allocated to the sub-accounts. A comprehensive discussion of each sub-account's objective and risk is found in the Portfolio prospectuses. You should review these prospectuses carefully before allocating Policy Value to any sub-accounts. UNSUITABLE FOR SHORT-TERM INVESTMENT. The Policy is intended for long-term financial planning, and is unsuitable for short-term goals. Your Policy is not designed to serve as a vehicle for frequent trading. POLICY LAPSE. Sufficient premiums must be paid to keep a policy in force. There is a risk of lapse if the Policy Value is too low in relation to the insurance amount, if investment results are less favorable than anticipated or if extensive policy loans are taken. A Policy lapse could have adverse tax consequences since the amount received (including any loans) less the investment in the Policy may be treated as ordinary income subject to tax. DECREASING DEATH BENEFIT. Any outstanding policy loans and any amount that you have surrendered or withdrawn will reduce your Policy's death benefit. ADVERSE CONSEQUENCES OF EARLY SURRENDER. There are surrender charges assessed if you surrender your Policy in the first 10 years from the purchase of the Policy. Depending on the amount of premium paid and the Policy Value at the time of surrender, there may be little or no Net Cash Surrender Value paid to you when the Policy is surrendered. In addition, there are adverse consequences associated with partial withdrawals including potential Policy lapse and adverse tax consequences. There may also be adverse consequences associated for full surrender of the Policy. ADVERSE TAX CONSEQUENCES. You should always consult a tax adviser about the application of federal and state tax law to your individual situation. The federal income tax treatment of life insurance is complex and current tax treatment of life insurance may change. 3 FEE TABLE The following tables describe the fees and expenses (on a guaranteed basis) that you will pay when buying, owning, and surrendering the Policy. The first table describes the fees and expenses that you will pay at the time that you buy the Policy, surrender the Policy, or transfer cash value between investment options. TRANSACTION FEES
CHARGE WHEN CHARGE IS DEDUCTED AMOUNT DEDUCTED - ------ ----------------------- --------------- MAXIMUM CHARGE Upon receipt of premium 2% of each premium paid Imposed on Premium (Load) MAXIMUM SALES CHARGE Upon receipt of premium 8% (Policy Year 1)(2) Imposed on Premium (1) MAXIMUM SURRENDER CHARGE Upon termination or reduction of any Coverage Amount that 5% (Policy Year 1)(3) (Load)(1) is subject to a surrender charge. Upon surrender of the Policy for its Net Cash Surrender Value. Upon partial withdrawal in excess of the Free Withdrawal Amount. Upon decrease in the Face Amount, or Upon Policy lapse. TRANSFER FEES Upon Transfer $25 (only applies to transfers in excess of 12 in a Policy Year)
1. A Policy is subject to either a Sales Charge or a Surrender Charge but not both. The Policy indicates which charge is applicable. 2. The Sales Charge declines in subsequent Policy Years as noted below:
Coverage Year Percentage ------------- ---------- 1 8.00% 2 6.00% 3 3.00% 4 2.00% 5 1.00% 6+ 0.00%
3. The Surrender Charge declines in subsequent Policy Years as noted below:
Coverage Year Percentage ------------- ---------- 1 5.00% 2 4.00% 3 3.00% 4 2.50% 5 2.00% 6 1.50% 7 1.00% 8 1.00% 9 0.50% 10+ 0.00%
The Surrender Charges are percentage of the sum of all premium payments attributed to a Coverage Amount in the first 5 Coverage Years. The next table described the fees and expenses (on a guaranteed basis) that you will pay periodically during the time that you own the Policy, not including fees and expenses of the Portfolios, the underlying variable investment options for your Policy. ANNUAL CHARGES OTHER THAN THOSE OF THE PORTFOLIOS
WHEN CHARGE CHARGE IS DEDUCTED AMOUNT DEDUCTED(3) ------ ----------- ------------------ COST OF INSURANCE(1) Monthly Minimum and Maximum Charge The possible range of the cost of insurance is from $0.00 to $83.33 per month per $1,000 of the net amount at risk. Charge for a Representative Policy Subject to Sales Charge: The Policyowner (a 45 year old non- Cost of Insurance rate is $0.16 per smoking male) (rating classification month per $1,000 of the net amount is for short form underwriting) at risk. Policy Subject to Surrender Charge: The Cost of Insurance rate is $ 0.35 per month per $1,000 of the net amount at risk.
4 ANNUAL CHARGES OTHER THAN THOSE OF THE PORTFOLIOS
WHEN CHARGE CHARGE IS DEDUCTED AMOUNT DEDUCTED(3) ------ ----------- ------------------ COST OF INSURANCE - Monthly Minimum and Maximum Charges The possible range of the cost of Optional FTIO Rider (Flexible insurance is from $0.00 to $83.33 per Term Insurance Option)(1) month per $1,000 of the net amount at risk Charge for a Representative The Cost of Insurance rate is $0.10 Policyowner (a 45 year old non- per month per $1,000 of the net smoking male) rating classification is amount at risk for short form underwriting) MORTALITY AND EXPENSE RISK FEES Monthly 0.50% annually (2) ADMINISTRATIVE FEES Monthly $12 per Policy Month. LOAN INTEREST RATE (NET) Annually 0.75% (4)
1. The cost of insurance varies based on individual characteristics and the charges shown in the table may not be representative of the charge a particular Policyowner will pay. A policy owner may obtain additional information regarding cost of insurance charge by contacting the Company. The election (or failure to elect) the optional FTIO rider will impact the total cost of insurance charges. 2. Currently the Company is charging the following rates: Policy Years Annual Rate 1-10 0.50% 11+ 0.20% 3. All figures are rounded to two decimal places. 4. The Loan Interest Rate (Net) is equal to the rate of interest charged on the policy loan less the interest credited to the Loan Account. Currently this rate is 0.75% for Policy Years 1-10 and 0.25% for Policy Years 11 and higher. The maximum loan rate is 4%. The next table described the fees and expenses of the Portfolios that you will pay periodically during the time that you own the Policy. The table shows the minimum and maximum fees and expenses charged by any of the portfolios. More detail concerning each Portfolio's fees and expenses is contained in the Portfolio prospectuses. ANNUAL OPERATING EXPENSES OF THE PORTFOLIOS (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS)
CHARGE MINIMUM MAXIMUM - ------ ------- ------- Expenses that are deducted from portfolio assets, including advisory fees, Rule 12b-1 fees and Other Expenses 0.55% 2.86*%
*The minimum and maximum expenses do not reflect any expense reimbursements. If such reimbursements were reflected, the maximum expenses would be 1.55%. Expense reimbursements may be terminated at any time. POLICY SUMMARY GENERAL The Policy is a flexible premium variable universal life insurance policy. This summary provides a general description of the important features of the Policy. It is not comprehensive and is qualified in its entirety by the more detailed information contained in this prospectus. Unless otherwise stated or implied by the context, the discussions in this prospectus assume that the Policy has not gone into default, there is no outstanding Policy Debt and the Death Benefit is not determined by the Minimum Death Benefit percentage. The Policy's provisions may vary in some states. The terms of the Policy and any endorsements or riders will supersede the disclosure in this prospectus. DEATH BENEFITS The Policy provides a Death Benefit in the event of the death of the life insured while the Policy is in force. The basic Death Benefit amount is the Face Amount, which is provided for the lifetime of the life insured with no maturity or expiration date. There may be other amounts added to the Death Benefit as described below. FLEXIBLE TERM INSURANCE OPTION You may add a flexible term insurance option rider (the "FTIO Rider") to the Policy to provide additional term life insurance coverage on the life insured. Cost of insurance rates are less than or equal to those of the Policy and no Sales Loads or Surrender Charges will apply. However, unlike the Face Amount of the Policy, the FTIO Rider will terminate at the life insured's Attained Age 100. The FTIO Rider also offers the flexibility to schedule varying Death Benefit amounts on future dates (the "Scheduled Death Benefits"). 5 DEATH BENEFIT OPTIONS There are two Death Benefit Options. Option 1 provides a Death Benefit equal to the Face Amount of the Policy or the Scheduled Death Benefits of the FTIO Rider or, if greater, the Minimum Death Benefit. Option 2 provides a Death Benefit equal to the Face Amount or the Scheduled Death Benefits, plus the Policy Value or, if greater, the Minimum Death Benefit. You may change the Death Benefit Option and increase or decrease the Face Amount and Scheduled Death Benefits. AGE 100 ADVANTAGE If the Life Insured is alive on the Maturity date, the policy will continue in force subject to the following unless the policyowner chooses to surrender the Policy for its Net Cash Surrender Value: (a) the Policy will be continued until the earlier of the death of the life insured of the date or the date the policyowner surrenders the Policy; (b) no additional premium payments will be accepted although loan repayments will be accepted; (c) no additional charges or deductions (described under "Charges and Deductions" will be assessed; (d) interest on any Policy Debt will continue to accrue; (e) the policyowner may continue to transfer portions of the Policy Value among the Investment Accounts and the Fixed Accounts as described in this prospectus. The Policy will go into default after the Maturity Date if the Policy Debt equals or exceeds the Policy Value. The Company will notify the policyowner of the default and will allow a 61-day grace period (from the date the policy goes into default) in which the policyowner may make a payment of the loan interest which would then bring the Policy out of default. If the required payment is not received by the end of the grace period, the Policy will terminate with no value. PREMIUMS Premium payments may be made at any time prior to Attained Age 100 and in any amount, subject to certain limitations (see "Premium Payments - Premium Limitations") Net Premiums will be allocated to one or more of the Investment Options described below. You may change allocations and make transfers among the accounts subject to limitations described below. POLICY VALUE The Policy Value is the accumulation of premiums paid, less charges and deductions we take for expenses and cost of insurance, plus or minus the investment returns of the accounts to which the Policy Value has been allocated. You may obtain a portion of the Policy Value by taking a policy loan or a partial withdrawal or by full surrender of the Policy. POLICY LOANS You may borrow against the Net Cash Surrender Value of the Policy. Loan interest will accrue daily and be payable in arrears on each Policy Anniversary. The Policy Debt will be deducted from amounts payable at the life insured's death or upon surrender. SURRENDER AND PARTIAL WITHDRAWALS You may make a partial withdrawal of Policy Value. It may result in a decrease in the Face Amount and Scheduled Death Benefits and assessment of a portion of the Surrender Charges. You may surrender the Policy for its Net Cash Surrender Value at any time. LAPSE AND REINSTATEMENT A Policy will lapse and terminate without value when the Net Cash Surrender Value is insufficient to pay the next monthly deduction and a grace period of 61 days expires without an adequate premium payment from you. You may reinstate a lapsed Policy within five years following lapse if the Policy was not surrendered for its Net Cash Surrender Value. Evidence of insurability is required, along with a premium payment described under "Reinstatement." The Policy differs in two important ways from a conventional life insurance policy. First, failure to make planned premium payments will not itself cause the Policy to lapse. Second, the Policy can lapse even if planned premiums have been paid. CHARGES AND DEDUCTIONS We assess charges and deductions in connection with the Policy, in the form of monthly deductions for the cost of insurance and administrative expenses, charges assessed daily against amounts in the Investment Account and loads deducted from premiums paid. See the Table of Charges and Deductions. SALES LOAD OR SURRENDER CHARGE COVERAGE You may choose Coverage Amounts with one of two alternative charge structures representing different ways to cover a portion of our marketing and distribution costs. Generally, Policy benefits will be approximately equal in present value under either alternative. However, there is no guarantee each alternative will perform the same in all circumstances. Therefore, you should obtain individualized illustrations for both charge structures. 6 Sales Load coverage features a load deducted immediately from premiums paid and no Surrender Charges. Surrender Charge coverage features no added sales load with surrender charges assessed upon early surrender, lapse, partial withdrawal or coverage decrease. Current cost of insurance charges in early years are higher for Surrender Charge coverage. REDUCTION IN CHARGES AND ENHANCEMENT OF SURRENDER VALUES The Policy is designed for employers and other sponsoring organizations that may purchases multiple policies as a Case. The size or nature of the Case may result in expected savings of sales, underwriting, administrative or other costs. If so, we expect to offer reductions of Policy charges and enhancements of surrender value. We may change the nature and amount of reductions and enhancements available from time to time. They will be determined in a way that is not unfairly discriminatory to policyholders. INVESTMENT OPTIONS AND INVESTMENT ADVISERS You may allocate Net Premiums to the Fixed Account or to one or more of the sub-accounts of the Separate Account. Each of the sub-accounts invests in the shares of one of the Portfolios described under "Portfolios." The Portfolios also employs subadvisers. The Table of Investment Options and Investment Subadvisers shows the subadvisers that provide investment subadvisory services to the indicated Portfolios. Allocating net premiums only to one or a small number of the investment options (other than the Lifestyle Trusts) should not be considered a balanced investment strategy. In particular, allocating net premiums to a small number of investment options that concentrate their investments in a particular business or market sector will increase the risk that the value of your Policy will be more volatile since these investment options may react similarly to business or market specific events. Examples of business or market sectors where this risk historically has been and may continue to be particularly high include: (a) technology related businesses, including internet related businesses, (b) small cap securities and (c) foreign securities. The Company does not provide advice regarding appropriate investment allocations. Please discuss this matter with your financial adviser. INVESTMENT MANAGEMENT FEES AND EXPENSES Each sub-account of the Separate Account purchases shares of one of the Portfolios at net asset value. The net asset value of those shares reflects investment management fees and certain expenses of the Portfolios. The fees and expenses for each Portfolio are described in detail in the Portfolio prospectuses. TABLE OF INVESTMENT OPTIONS AND INVESTMENT SUBADVISERS The following subadvisers manage the Portfolios which are investment options for this contract.
SUBADVISER PORTFOLIO A I M Capital Management, Inc. All Cap Growth Trust Aggressive Growth Trust Mid Cap Core Trust American Century Investment Management, Inc. Small Company Trust Capital Guardian Trust Company Small Company Blend Trust U.S. Large Cap Trust Income & Value Trust Diversified Bond Trust Capital Research Management Company American Growth Trust (Adviser to the American Fund Insurance Series)(D) American International Trust American Blue Chip Income and Growth Trust American Growth-Income Trust Davis Advisors Financial Services Trust Fundamental Value Trust Deutsche Asset Management, Inc. Real Estate Securities Trust Dynamic Growth Trust All Cap Core Trust Lifestyle Trusts(A) Deutsche Asset Management Investment Services Ltd. International Stock Trust Fidelity Management & Research Company Strategic Opportunities Trust
7
SUBADVISER PORTFOLIO Large Cap Growth Trust Overseas Trust Franklin Advisers, Inc. Emerging Small Company Trust John Hancock Advisers, LLC Strategic Income Trust Jennison Associates LLC Capital Appreciation Trust Legg Mason Funds Management, Inc. Core Equity Trust Lord, Abbett & Co Mid Cap Value Trust All Cap Value Trust Mercury Advisors(C) Large Cap Value Trust MFC Global Investment Management (U.S.A.) Limited(E) Pacific Rim Trust Quantitative Mid Cap Trust Quantitative All Cap Trust Quantitative Value Trust Emerging Growth Trust Money Market Trust Index Trusts Lifestyle Trusts(A) Massachusetts Financial Services Company Strategic Growth Trust Strategic Value Trust Utilities Trust Munder Capital Management Small Cap Opportunities Trust Pacific Investment Management Company Global Bond Trust Total Return Trust Real Return Bond Trust All Asset Portfolio (a series of PIMCO Variable Insurance Trust) Pzena Investment Management, LLC Classic Value Trust Salomon Brothers Asset Management Inc U.S. Government Securities Trust Strategic Bond Trust Special Value Trust High Yield Trust SSgA Funds Management, Inc. International Equity Index Fund (a series of John Hancock Variable Insurance Trust I) Sustainable Growth Advisers, L.P. U.S. Global Leaders Growth Trust T. Rowe Price Associates, Inc Science & Technology Trust Small Company Value Trust Health Sciences Trust Blue Chip Growth Trust Equity-Income Trust Templeton Global Advisors Limited Global Trust Templeton Investment Counsel, Inc. International Value Trust International Small Cap Trust UBS Global Asset Management Global Allocation Trust Wellington Management Company, LLP Growth & Income Trust Investment Quality Bond Trust
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SUBADVISER PORTFOLIO Mid Cap Stock Trust Natural Resources Trust Van Kampen(B) Value Trust
(A) Deutsche Asset Management, Inc. provides subadvisory consulting services to MFC Global Investment Management (U.S.A.) Limited regarding management of the Lifestyle Trusts. (B) Morgan Stanley Investment Management Inc. ("MSIM") is the sub-adviser to the Value Trust. MSIM does business in certain instances (including its role as the sub-adviser to the Value Trust) using the name "Van Kampen. (C) Fund Asset Management, L.P. is the sub-adviser to the Large Cap Value Trust. Fund Asset Management does business in certain instances (including its role as the sub-adviser to the Large Cap Value Trust) using the name "Mercury Advisors." (D) Each of the four portfolios invests exclusively in Class 2 shares of portfolios of the American Fund Insurance Series which is advised by Capital Research Management Company ("CRMC"). (E) MFC Global Investment Management (U.S.A.) Limited is an affiliate of Manufacturers Securities Services, LLC ("MSS") and the Trust. GENERAL INFORMATION ABOUT MANULIFE USA, THE SEPARATE ACCOUNT AND THE PORTFOLIOS MANULIFE USA We are a stock life insurance company incorporated in Maine on August 20, 1955 by a special act of the Maine legislature and redomesticated under the laws of Michigan. We are a licensed life insurance company in the District of Columbia and all states of the United States except New York. Our ultimate parent is Manulife Financial Corporation ("MFC"), a publicly traded company, based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, collectively known as Manulife Financial. The Manufacturers Life Insurance Company is one of the largest life insurance companies in North America and ranks among the 60 largest life insurers in the world as measured by assets. However, neither Manufacturers Life nor any of its affiliated companies guarantees the investment performance of the Separate Account. RATINGS The Manufacturers Life Insurance Company and The Manufacturers Life Insurance Company (U.S.A.) have received the following ratings from independent rating agencies: A++ A.M. Best Superior companies have a very strong ability to meet their obligations; 1st category of 16 AA+ Fitch Very strong capacity to meet policyholder and contract obligations; 2nd category of 22. AA+ Standard & Poor's Very strong financial security characteristics; 2nd category of 21 Aa2 Moody's Excellent in financial strength; 3rd category of 21 These ratings, which are current as of the date of this prospectus and are subject to change, are assigned as a measure of The Manufacturers Life Insurance Company (U.S.A.)'s ability to honor any guarantees provided by the Policy and any applicable optional riders, but not specifically relate to its products, the performance (return) of these products, the value of any investment in these products upon withdrawal or to individual securities held in any portfolio. THE SEPARATE ACCOUNT The Manufacturers Life Insurance Company of America ("ManAmerica") established its Separate Account Four (the "Separate Account") on March 17, 1987 as a separate account under Pennsylvania law. Since December 9, 1992, it has been operated under Michigan law. On January 1, 2002, ManAmerica transferred substantially all of its assets and liabilities to Manulife USA. As a result of this transaction, Manulife USA became the owner of all of ManAmerica's assets, including the assets of the Separate Account and assumed all of ManAmerica's obligations including those under the Policies. The ultimate parent of both ManAmerica and Manulife USA is MFC. The Separate Account holds assets that are segregated from all of Manulife USA's other assets. The Separate Account is currently used only to support variable life insurance policies. 9 ASSETS OF THE SEPARATE ACCOUNT Manulife USA is the legal owner of the assets in the Separate Account. The income, gains, and losses of the Separate Account, whether or not realized, are, in accordance with applicable contracts, credited to or charged against the Account without regard to the other income, gains, or losses of Manulife USA. We will at all times maintain assets in the Separate Account with a total market value at least equal to the reserves and other liabilities relating to variable benefits under all policies participating in the Separate Account. These assets may not be charged with liabilities that arise from any other business we conduct. However, all obligations under the variable life insurance policies are general corporate obligations of Manulife USA. REGISTRATION The Separate Account is registered with the SEC under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a type of investment company that invests its assets in specified securities, such as the shares of one or more investment companies, rather than in a portfolio of unspecified securities. Registration under the 1940 Act does not involve any supervision by the SEC of the management or investment policies or practices of the Separate Account. For state law purposes the Separate Account is treated as a part or division of Manulife USA. THE PORTFOLIOS The assets of each sub-account of the Separate Account (except those invested in the International Equity Index Fund and the All Asset Portfolio) are invested in Series I shares of a corresponding investment portfolio of the Manufacturers Investment Trust (the "Trust"). The Trust is registered under the 1940 Act as an open-end management investment company. The Trust receives investment advisory services from Manufacturers Securities Services, LLC ("MSS"). Each of the Trust portfolios, except the Lifestyle Trusts, is subject to a Rule 12b-1 fee of 0.15% of a portfolio's Series I net assets (0.60% of a Series I net assets in the case of a American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust). Each Lifestyle Trust invests in portfolios that are subject to Rule 12b-1 fees. The International Equity Index Fund is a series of the John Hancock Variable Series Trust I (the "VST Trust") which is registered under the 1940 Act as an open-end management investment company. The assets of the International Equity Index Fund subaccount are invested in Series I shares of the International Equity Index Fund which is subject to a 0.40% Rule 12b-1 fee. The VST Trust receives investment advisory services from John Hancock Life Insurance Company and the International Equity Index Trust portfolio is subadvised by SSgA Funds Management, Inc. The All Asset Portfolio is a series of the PIMCO Variable Insurance Trust (the "PIMCO Trust") which is registered under the 1940 Act as an open-end management investment company. The assets of the All Asset Portfolio subaccounts are invested in the M class of shares of the All Asset Portfolio which is subject to a 0.25% Rule 12b-1 fee. The PIMCO Trust receives investment advisory services from Pacific Investment Management Company LLC ("PIMCO"). The portfolios available under the Policies are as follows: TRUST PORTFOLIOS INVESTING IN THE AMERICAN FUND INSURANCE SERIES The AMERICAN GROWTH TRUST invests all of its assets in Class 2 shares of the Growth Fund, a series of American Fund Insurance Series. The Growth Fund invests primarily in common stocks of companies that appear to offer superior opportunities for growth of capital. The AMERICAN INTERNATIONAL TRUST invests all of its assets in Class 2 shares of the International Fund, a series of American Fund Insurance Series. The International Fund invests primarily in common stocks of companies located outside the United States. The AMERICAN GROWTH-INCOME TRUST invests all of its assets in Class 2 shares of the Growth-Income Fund, a series of American Fund Insurance Series. The Growth-Income Fund invests primarily in common stocks or other securities which demonstrate the potential for appreciation and/or dividends. The AMERICAN BLUE CHIP INCOME AND GROWTH TRUST invests all of its assets in Class 2 shares of the Blue Chip Income and Growth Fund, a series of American Fund Insurance Series. The Blue Chip Income and Growth Fund invests primarily in common stocks of larger, more established companies based in the U.S. with market capitalizations of $4 billion and above. * * * The SCIENCE & TECHNOLOGY TRUST seeks long-term growth of capital by investing, under normal market condition, at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks of companies expected to benefit from the development, advancement, and use of science and technology. Current income is incidental to the portfolio's objective. 10 The PACIFIC RIM TRUST (formerly, Pacific Rim Emerging Markets Trust) seeks long-term growth of capital by investing in a diversified portfolio that is comprised primarily of common stocks and equity-related securities of corporations domiciled in countries in the Pacific Rim region. The HEALTH SCIENCES TRUST seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences (collectively termed "health sciences"). The EMERGING GROWTH TRUST seeks superior long-term rates of return through capital appreciation by investing, under normal circumstances, primarily in high quality securities and convertible instruments of small-cap U.S. companies. The AGGRESSIVE GROWTH TRUST seeks long-term capital appreciation by investing the portfolio's assets principally in common stocks, convertible bonds, convertible preferred stocks and warrants of companies which in the opinion of the subadviser are expected to achieve earnings growth over time at a rate in excess of 15% per year. Many of these companies are in the small and medium-sized category. The EMERGING SMALL COMPANY TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stock equity securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Growth Index* ("small cap stocks") at the time of purchase. The SMALL COMPANY BLEND TRUST seeks long-term growth of capital and income by investing the portfolio's assets, under normal market conditions, primarily in equity and equity-related securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Index at the time of purchase. The SMALL COMPANY TRUST seeks long-term capital growth by investing, under normal market conditions, primarily in equity securities of smaller-capitalization U.S. companies. The subadviser uses quantitative, computer-driven models to construct the portfolio of stocks for the Small Company Trust. The DYNAMIC GROWTH TRUST seeks long-term growth of capital by investing in stocks and other equity securities of medium-sized U.S. companies with strong growth potential. The MID CAP STOCK TRUST seeks long-term growth of capital by investing primarily in equity securities of mid-size companies with significant capital appreciation potential. The NATURAL RESOURCES TRUST seeks long-term total return by investing, under normal market conditions, primarily in equity and equity-related securities of natural resource-related companies worldwide. The ALL CAP GROWTH TRUST seeks long-term capital appreciation by investing the portfolio's assets under normal market conditions, principally in common stocks of companies that are likely to benefit from new or innovative products, services or processes, as well as those that have experienced above average, long-term growth in earnings and have excellent prospects for future growth. The STRATEGIC OPPORTUNITIES TRUST seeks growth of capital by investing primarily in common stocks. Investments may include securities of domestic and foreign issuers, and growth or value stocks or a combination of both. The FINANCIAL SERVICES TRUST seeks growth of capital by investing primarily in common stocks of financial companies. During normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) are invested in companies that are principally engaged in financial services. A company is "principally engaged" in financial services if it owns financial services-related assets constituting at least 50% of the value of its total assets, or if at least 50% of its revenues are derived from its provision of financial services. The INTERNATIONAL STOCK TRUST seeks long-term growth of capital by investing in stocks and other securities with equity characteristics of companies located in the developed countries that make up the MSCI EAFE Index. The OVERSEAS TRUST seeks growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in non-U.S. securities. The portfolio expects to invest primarily in equity securities. 11 The INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by investing primarily in the common stock of companies located outside the U.S. which have total stock market capitalization or annual revenues of $1.5 billion or less ("small company securities"). The INTERNATIONAL VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in equity securities of companies located outside the U.S., including emerging markets. The QUANTITATIVE MID CAP TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its total assets (plus any borrowings for investment purposes) in U.S. mid-cap stocks, convertible preferred stocks, convertible bonds and warrants. The MID CAP CORE TRUST seeks long-term growth of capital by investing, normally, at least 80% of its assets in equity securities, including convertible securities, of mid-capitalization companies. The GLOBAL TRUST (formerly, Global Equity Trust) seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of companies located anywhere in the world, including emerging markets. The STRATEGIC GROWTH TRUST seeks capital appreciation by investing, under normal market conditions, at least 65% of the portfolio's total assets in common stocks and related securities (such as preferred stocks, bonds, warrants or rights convertible into stock and depositary receipts for these securities) of companies which the subadviser believes offer superior prospects for growth. The CAPITAL APPRECIATION TRUST seeks long-term capital growth by investing at least 65% of its total assets in equity-related securities of companies that exceed $1 billion in market capitalization and that the subadviser believes have above-average growth prospects. These companies are generally medium-to-large capitalization companies. The U.S. GLOBAL LEADERS GROWTH TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in common stocks of "U.S. Global Leaders." The QUANTITATIVE ALL CAP TRUST seeks long-term growth of capital by investing, under normal circumstances, primarily in equity securities of U.S. companies. The portfolio will generally focus on equity securities of U.S. companies across the three market capitalization ranges of large, mid and small. The ALL CAP CORE TRUST seeks long-term growth of capital by investing primarily in common stocks and other equity securities within all asset classes (small, mid and large cap) primarily those within the Russell 3000 Index*. The LARGE CAP GROWTH TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of companies with large market capitalizations. The CLASSIC VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its net assets in domestic equity securities. The BLUE CHIP GROWTH TRUST seeks to achieve long-term growth of capital (current income is a secondary objective) by investing, under normal market conditions, at least 80% of the portfolio's total assets in the common stocks of large and medium-sized blue chip growth companies. Many of the stocks in the portfolio are expected to pay dividends. The U.S. LARGE CAP TRUST seeks long-term growth of capital and income by investing the portfolio's assets, under normal market conditions, primarily in equity and equity-related securities of companies with market capitalization greater than $500 million. The CORE EQUITY TRUST seeks long-term capital growth by investing, under normal market conditions, primarily in equity securities that, in the subadviser's opinion, offer the potential for capital growth. The subadviser seeks to purchase securities at large discounts to the subadviser's assessment of their intrinsic value. The STRATEGIC VALUE TRUST seeks capital appreciation by investing, under normal market conditions, at least 65% of its net assets in common stocks and related securities of companies which the subadviser believes are undervalued in the market relative to their long term potential. The LARGE CAP VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in a diversified portfolio of equity securities of large cap companies located in the U.S. 12 The UTILITIES TRUST seeks capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in equity and debt securities of domestic and foreign companies in the utilities industry. The REAL ESTATE SECURITIES TRUST seeks to achieve a combination of long-term capital appreciation and current income by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of real estate investment trusts ("REITS") and real estate companies. The SMALL CAP OPPORTUNITIES TRUST seeks long-term capital appreciation by investing, under normal circumstances, at least 80% of its assets in equity securities of companies with market capitalizations within the range of the companies in the Russell 2000 Index. The SMALL COMPANY VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in small companies whose common stocks are believed to be undervalued. Under normal market conditions, the portfolio will invest at least 80% of its net assets (plus any borrowings for investment purposes) in companies with a market capitalization that do not exceed the maximum market capitalization of any security in the Russell 2000 Index* at the time of purchase. The SPECIAL VALUE TRUST seeks long-term capital growth by investing, under normal circumstances, at least 80% of its net assets in common stocks and other equity securities of companies whose market capitalization at the time of investment is no greater than the market capitalization of companies in the Russell 2000 Value Index. The MID CAP VALUE TRUST seeks capital appreciation by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in mid-sized companies, with market capitalization of roughly $500 million to $10 billion. The VALUE TRUST seeks to realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk, by investing primarily in equity securities of companies with capitalizations similar to the market capitalization of companies in the Russell Midcap Value Index. The ALL CAP VALUE TRUST seeks capital appreciation by investing in equity securities of U.S. and multinational companies in all capitalization ranges that the subadviser believes are undervalued. The FUNDAMENTAL VALUE TRUST seeks growth of capital by investing, under normal market conditions, primarily in common stocks of U.S. companies with market capitalizations of at least $5 billion that the subadviser believes are undervalued. The portfolio may also invest in U.S. companies with smaller capitalizations. The GROWTH & INCOME TRUST seeks long-term growth of capital and income, consistent with prudent investment risk, by investing primarily in a diversified portfolio of common stocks of U.S. issuers which the subadviser believes are of high quality. The QUANTITATIVE VALUE TRUST seeks long-term capital appreciation by investing primarily in large-cap U.S. securities with the potential for long-term growth of capital. The EQUITY-INCOME TRUST seeks to provide substantial dividend income and also long-term capital appreciation by investing primarily in dividend-paying common stocks, particularly of established companies with favorable prospects for both increasing dividends and capital appreciation. The INCOME & VALUE TRUST seeks the balanced accomplishment of (a) conservation of principal and (b) long-term growth of capital and income by investing the portfolio's assets in both equity and fixed-income securities. The subadviser has full discretion to determine the allocation between equity and fixed income securities. The ALL ASSET PORTFOLIO (a series of the PIMCO Variable Insurance Trust)(only Class M shares are available for sale) seeks maximum real return consistent with preservation of real capital and prudent investment management by investing, under normal circumstances, substantially all of its assets in Institutional Class shares of the PIMCO Funds, Pacific Investment Management Series, an affiliated open-end investment company. The GLOBAL ALLOCATION TRUST seeks total return, consisting of long-term capital appreciation and current income, by investing in equity and fixed income securities of issuers located within and outside the U.S. The HIGH YIELD TRUST seeks to realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk, by investing primarily in high yield debt securities, including corporate bonds and other fixed-income securities. 13 The STRATEGIC BOND TRUST seeks a high level of total return consistent with preservation of capital by giving its subadviser broad discretion to deploy the portfolio's assets among certain segments of the fixed income market as the subadviser believes will best contribute to achievement of the portfolio's investment objective. The STRATEGIC INCOME TRUST seeks a high level of current income by investing, under normal market conditions, primarily in foreign government and corporate debt securities from developed and emerging markets; U.S. Government and agency securities; and U.S. high yield bonds. The GLOBAL BOND TRUST seeks to realize maximum total return, consistent with preservation of capital and prudent investment management by investing the portfolio's assets primarily in fixed income securities denominated in major foreign currencies, baskets of foreign currencies (such as the ECU), and the U.S. dollar. The DIVERSIFIED BOND TRUST seeks high total return consistent with the conservation of capital by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in fixed income securities. The INVESTMENT QUALITY BOND TRUST seeks a high level of current income consistent with the maintenance of principal and liquidity, by investing in a diversified portfolio of investment grade bonds and tends to focus its investment on corporate bonds and U.S. Government bonds with intermediate to longer term maturities. The portfolio may also invest up to 20% of its assets in non-investment grade fixed income securities. The TOTAL RETURN TRUST seeks to realize maximum total return, consistent with preservation of capital and prudent investment management by investing, under normal market conditions, at least 65% of the portfolio's assets in a diversified portfolio of fixed income securities of varying maturities. The average portfolio duration will normally vary within a three- to six-year time frame based on the subadviser's forecast for interest rates. The REAL RETURN BOND TRUST seeks maximum return, consistent with preservation of capital and prudent investment management by investing, under normal market conditions, at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments and by corporations. The U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current income consistent with preservation of capital and maintenance of liquidity, by investing in debt obligations and mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and derivative securities such as collateralized mortgage obligations backed by such securities. The MONEY MARKET TRUST seeks maximum current income consistent with preservation of principal and liquidity by investing in high quality money market instruments with maturities of 397 days or less issued primarily by U. S. entities. The SMALL CAP INDEX TRUST seeks to approximate the aggregate total return of a small cap U.S. domestic equity market index by attempting to track the performance of the Russell 2000 Index*. The INTERNATIONAL INDEX TRUST seeks to approximate the aggregate total return of a foreign equity market index by attempting to track the performance of the Morgan Stanley European Australian Far East Free Index (the "MSCI EAFE Index")*. (Available only to policies issued prior to May 1, 2004) (Subject to shareholder/contractowner approval, the International Index Trust will merge with the International Equity Index Trust immediately after the close of business on June 18, 2004.) The INTERNATIONAL EQUITY INDEX FUND (a series of the John Hancock Variable Series Trust I)(only Series I shares are available for sale) seeks to track the performance of broad-based equity indices of foreign companies in developed and emerging markets by attempting to track the performance of the MSCI All Country World ex-US Index*. The MID CAP INDEX TRUST seeks to approximate the aggregate total return of a mid cap U.S. domestic equity market index by attempting to track the performance of the S&P Mid Cap 400 Index*. The TOTAL STOCK MARKET INDEX seeks to approximate the aggregate total return of a broad U.S. domestic equity market index by attempting to track the performance of the Wilshire 5000 Equity Index*. The 500 INDEX TRUST seeks to approximate the aggregate total return of a broad U.S. domestic equity market index by attempting to track the performance of the S&P 500 Composite Stock Price Index*. The LIFESTYLE AGGRESSIVE 1000 TRUST seeks to provide long-term growth of capital (current income is not a consideration) by investing 100% of the Lifestyle Trust's assets in other portfolios of the Trust ("Underlying Portfolios") which invest primarily in equity securities. 14 The LIFESTYLE GROWTH 820 TRUST seeks to provide long-term growth of capital with consideration also given to current income by investing approximately 20% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 80% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE BALANCED 640 TRUST seeks to provide a balance between a high level of current income and growth of capital with a greater emphasis given to capital growth by investing approximately 40% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 60% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE MODERATE 460 TRUST seeks to provide a balance between a high level of current income and growth of capital with a greater emphasis given to current income by investing approximately 60% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 40% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE CONSERVATIVE 280 TRUST seeks to provide a high level of current income with some consideration also given to growth of capital by investing approximately 80% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 20% of its assets in Underlying Portfolios which invest primarily in equity securities. *"Standard & Poor's(R)," "S&P 500(R)," "Standard and Poor's 500(R)" and "S&P Mid Cap 400(R)" are trademarks of The McGraw-Hill Companies, Inc. "Russell 2000(R)," "Russell 2000(R) Growth" and "Russell 3000(R)" are trademarks of Frank Russell Company. "Wilshire 5000(R)" is a trademark of Wilshire Associates. "MSCI All Country World ex USIndex" and "EAFE(R)" are trademarks of Morgan Stanley & Co. Incorporated. None of the Index Trusts are sponsored, endorsed, managed, advised, sold or promoted by any of these companies, and none of these companies make any representation regarding the advisability of investing in the Trust. ISSUING A POLICY USE OF THE POLICY The Policy is designed to provide employers or other organizations with life insurance coverage on employees or other individuals in whose lives they have an insurable interest. The Policy may be owned by an individual or a corporation, trust, association, or similar entity. The Policy may be used for such purposes as funding non-qualified executive deferred compensation or salary continuation liabilities or death benefit liabilities of executive retirement plans, or as a source for funding cash flow obligations under such plans. REQUIREMENTS To purchase a Policy, an applicant must submit a completed application. A Policy will not be issued until the underwriting process is completed to our satisfaction and we approve issuance of the Policy. Policies may be issued on a basis that does not distinguish between the life insured's sex and/or smoking status, with prior approval from us. A Policy will only be issued on the lives of insureds from Issue Ages 20 through 80. Each Policy has a Policy Date, an Effective Date and an Issue Date: - The Policy Date is the date from which the first monthly deductions are calculated and from which Policy Years, Policy Months and Policy Anniversaries are measured. The Policy Date is also the effective date of the initial Coverage Amount. The Policy Date is the same date as the Effective Date unless the Policy is backdated (see "Backdating a Policy"). - The Effective Date is the date we become obligated under the Policy and when the first monthly deductions are taken. It is the later of the date we approve issuance of the Policy and the date we receive at least the Minimum Initial Premium. - The Issue Date is the date from which the Suicide and Incontestability provisions of the Policy are measured. If we approve issuance of a Policy before we receive the Minimum Initial Premium then the Effective Date will be later than the Issue Date. The Minimum Initial Premium must be received by us within 60 days after the Issue Date and the life insured must be in good health on the Effective Date. If the Minimum Initial Premium is not paid or if the application is rejected, the Policy will be canceled and any premiums paid will be returned to the applicant. Net Premiums received prior to the Effective Date will be credited with interest at the rate of return earned on amounts allocated to the Money Market Trust. On the Effective Date, Net Premiums received plus any interest credited will be allocated to Investment 15 Accounts and the Fixed Account according to your instructions, unless first allocated to the Money Market Trust for the duration of the right to examine period (see "Right to Examine the Policy"). MINIMUM FACE AMOUNT AND SCHEDULED DEATH BENEFIT The minimum Face Amount is $50,000 unless the FTIO Rider is added to the Policy. With an FTIO Rider, the minimum Face Amount is $25,000 and the minimum Scheduled Death Benefit is $50,000 at all times. BACKDATING A POLICY You may request that we backdate the Policy by assigning a Policy Date earlier than the Effective Date. We will not backdate the Policy to a date earlier than that allowed by state law, which is generally three months to one year prior to the date of application for the Policy. Monthly deductions will be made for the period the Policy Date is backdated. TEMPORARY INSURANCE AGREEMENT Temporary insurance coverage may be provided under the terms of a Temporary Insurance Agreement, subject to our underwriting practices. Generally, temporary life insurance may not exceed $1,000,000 and may not be in effect for more than 90 days. It is issued on a conditional receipt basis, which means that benefits would only be paid if the life insured met our usual and customary underwriting standards for the coverage applied for. UNDERWRITING The policies are offered on three underwriting classes that require different types and amounts of information from the applicant and prospective life insured. Current cost of insurance charges in early Policy Years will vary by the type of underwriting and charges will generally be lower where underwriting information is more extensive. Under any of the underwriting bases, the acceptance of an application is subject to our underwriting rules and we may request additional information or reject an application for any reason. SHORT FORM UNDERWRITING The proposed life insured must answer qualifying questions in the application but is not required to provide detailed medical history, submit records or undergo examinations or tests unless requested to do so by us. Availability of Short Form underwriting depends on characteristics of the Case, such as the number of lives to be insured, the amounts of insurance and other factors, and it is generally available only up to Issue Age 65. SIMPLIFIED UNDERWRITING The proposed life insured must satisfactorily answer certain health questions in the application and may be required to submit existing medical records, but requirements to undergo examinations and tests are minimized. Availability of Simplified underwriting and the nature of the requirements will depend on characteristics of the Case and the proposed lives to be insured. REGULAR (MEDICAL) UNDERWRITING Where Short Form or Simplified underwriting is unavailable we require satisfactory evidence of insurability under our regular underwriting guidelines for individual applicants. This may include medical exams and other information. A proposed life insured who fails to qualify for a standard risk classification may be eligible to be insured with an additional substandard rating. RIGHT TO EXAMINE THE POLICY A Policy may be returned for a refund within 10 days after you receive it. Some states provide a longer period of time for this right, which will be stated in the Policy if applicable. The Policy can be mailed or delivered to the Manulife USA agent who sold it or to the Service Office. Immediately upon such delivery or mailing, the Policy shall be deemed void from the beginning. Within seven days after receipt of the returned Policy at the Service Office we will refund an amount equal to: (a) the difference between premiums received and amounts allocated to Investment Accounts and the Fixed Account; plus (b) the value of amounts in the Investment Accounts and the Fixed Account on the date we receive the returned Policy; minus (c) any partial withdrawals and policy loans. Some state laws require the refund of premiums paid without adjustment for investment gains and losses of the Separate Account. In these states, all Net Premiums will be allocated to the Money Market Trust during the right to examine period and the refund amount will be equal to all premiums received less any partial withdrawals and policy loans. If you request a Face Amount increase that results in new Surrender Charges or sales loads, you will have the same rights described above to cancel the increase. If cancelled, the Policy Value and Surrender Charges will be recalculated to be as they would have been had the increase not taken place. You may request a refund of all or any portion of premiums paid during this right to examine period, and the Policy Value and Surrender Charges or sales loads will be recalculated to be as they would have been had the premiums not been paid. 16 We reserve the right to delay the refund of any premium paid by check until the check has cleared. LIFE INSURANCE QUALIFICATION A Policy must satisfy either of two tests to qualify as a life insurance contract as defined in Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code"). You must apply for a Policy that uses either the Cash Value Accumulation Test ("CVA Test") or the Guideline Premium Test ("GP Test") and the test cannot be changed once the Policy is issued. CASH VALUE ACCUMULATION TEST The CVA Test requires the Death Benefit at any time to be at least a certain ratio of the Policy Value, based on prescribed calculations. The Minimum Death Benefit provision described below will ensure that the CVA Test is met. There is no restriction on the amount of premiums you may pay, but we will require you to provide satisfactory evidence of insurability before we accept an amount of premium that would increase the Death Benefit by more than the increase in Policy Value. GUIDELINE PREMIUM TEST The GP Test limits the amount of premiums you may pay into the Policy, given its Death Benefit, based on prescribed calculations. In addition, the GP Test requires the Death Benefit at any time to be at least a prescribed ratio of the Policy Value. These prescribed multiples are generally lower than those calculated under the CVA Test. The Minimum Death Benefit provision described below will ensure that this second requirement is met. Changes to the Policy or FTIO Rider, such as changes in Face Amount, Scheduled Death Benefit, Death Benefit Option or partial withdrawals, may affect the premium limits under the GP Test. Some changes will reduce future premium limits and may cause premiums already paid to exceed the new limits and force you to make a partial withdrawal. DEATH BENEFITS If the Policy is in force at the time of the life insured's death we will pay an insurance benefit to the beneficiary. The Policy may remain in force for the life insured's entire lifetime and there is no specified maturity or expiration date. Insurance benefits are only payable when we receive due proof of death at the Service Office, in the form of either a certified copy of the death certificate, a certified copy of a decree of a court of competent jurisdiction as to the finding of death or other proof satisfactory to us. The amount of the insurance benefit payable will be the Death Benefit on the date of death, as described below, less any Policy Debt and outstanding monthly deductions on the date of death. The insurance benefit will be paid in one lump sum unless another form of settlement is agreed to by the beneficiary and us. If the insurance benefit is paid in one sum, we will pay interest from the date of death to the date of payment. If the life insured should die after our receipt of a request for surrender, no insurance benefit will be payable, and we will pay only the Net Cash Surrender Value. MINIMUM DEATH BENEFIT Both the CVA Test and the GP Test require the Death Benefit to be at least a prescribed ratio of the policy value at all times. The Policy's Minimum Death Benefit ensures that these requirements are met by providing that the Death Benefit shall be at least equal to the Policy Value multiplied by the applicable Minimum Death Benefit Percentage for the Attained Age of the life insured. Tables of Minimum Death Benefit Percentages appear on the following page. FLEXIBLE TERM INSURANCE OPTION RIDER You may add a flexible term insurance option rider (the "FTIO Rider") to the Policy to provide additional death benefit coverage on the life insured. The FTIO Rider provides flexible term life insurance to Attained Age 100 with cost of insurance charges less than or equal to those of the Policy. The Rider will terminate at the earlier of Attained Age 100, the date the Policy lapses or surrenders, and your request to cancel the FTIO Rider. You may schedule the death benefit amounts that will apply at specified times (the "Scheduled Death Benefits"). Scheduled Death Benefits may be constant or varying from time to time. The Death Benefit Schedule will be shown in the Policy. The Term Insurance Benefit of the FTIO Rider is equal to (a) minus (b) but not less than zero where: (a) the Scheduled Death Benefit for the Policy Month, and (b) the Face Amount of the Policy or, if greater, the Policy's Minimum Death Benefit Even if the Term Insurance Benefit may be zero in a Policy Month, the Rider will not terminate. 17 Example. A policy is purchased for an executive as part of an employee benefit plan. The death benefit provided by the policy is to be equal to the executive's salary of $100,000 increasing at 5% per year through age 64. Assuming the executive is currently 55, the policy will be issued with a Death Benefit Schedule as follows:
POLICY SCHEDULED POLICY SCHEDULED YEAR DEATH BENEFIT YEAR DEATH BENEFIT - ------ ------------- ------ ------------- 1 100,000 6 127,628 2 105,000 7 134,010 3 110,250 8 140,710 4 115,763 9 147,746 5 121,551 10+ 155,133
The Flexible Term Insurance Option Rider amount will change each year as necessary to provide the benefits shown in the schedule, as follows:
POLICY TOTAL FACE FLEXIBLE TERM YEAR DEATH BENEFIT AMOUNT INSURANCE AMOUNT - ------ ------------- ------ ---------------- 1 100,000 100000 0 2 105,000 100000 5,000 3 110,250 100000 10,250 4 115,763 100000 15,763 5 121,551 100000 21,551 6 127,628 100000 27,628 7 134,010 100000 34,010 8 140,710 100000 40,710 9 147,746 100000 47,746 10 155,133 100000 55,133
TABLE OF MINIMUM DEATH BENEFIT PERCENTAGES
GP TEST CVA TEST GP TEST CVA TEST AGE PERCENT MALE FEMALE UNISEX AGE PERCENT MALE FEMALE UNISEX - --- ------- ---- ------ ------ --- ------- ---- ------ ------ 20 250% 653% 779% 674% 60 130% 192% 221% 197% 21 250% 634% 754% 654% 61 128% 187% 214% 192% 22 250% 615% 730% 635% 62 126% 182% 208% 187% 23 250% 597% 706% 616% 63 124% 178% 203% 183% 24 250% 580% 684% 598% 64 122% 174% 197% 178% 25 250% 562% 662% 579% 65 120% 170% 192% 174% 26 250% 545% 640% 561% 66 119% 166% 187% 170% 27 250% 528% 619% 544% 67 118% 162% 182% 166% 28 250% 511% 599% 526% 68 117% 159% 177% 162% 29 250% 494% 580% 509% 69 116% 155% 173% 159% 30 250% 479% 561% 493% 70 115% 152% 169% 156% 31 250% 463% 542% 477% 71 113% 149% 164% 152% 32 250% 448% 525% 461% 72 111% 146% 160% 149% 33 250% 433% 507% 446% 73 109% 144% 156% 146% 34 250% 419% 491% 432% 74 107% 141% 153% 144% 35 250% 406% 475% 418% 75 105% 139% 149% 141% 36 250% 392% 459% 404% 76 105% 136% 146% 139% 37 250% 380% 444% 391% 77 105% 134% 143% 136% 38 250% 367% 430% 378% 78 105% 132% 140% 134% 39 250% 356% 416% 366% 79 105% 130% 138% 132% 40 250% 344% 403% 355% 80 105% 129% 135% 130% 41 243% 333% 390% 343% 81 105% 127% 133% 128%
18
GP TEST CVA TEST GP TEST CVA TEST AGE PERCENT MALE FEMALE UNISEX AGE PERCENT MALE FEMALE UNISEX - --- ------- ---- ------ ------ --- ------- ---- ------ ------ 42 236% 323% 378% 333% 82 105% 125% 130% 127% 43 229% 313% 366% 322% 83 105% 124% 128% 125% 44 222% 303% 355% 312% 84 105% 122% 126% 123% 45 215% 294% 344% 303% 85 105% 121% 124% 122% 46 209% 285% 333% 294% 86 105% 120% 123% 121% 47 203% 277% 323% 285% 87 105% 119% 121% 119% 48 197% 268% 313% 276% 88 105% 118% 119% 118% 49 191% 260% 304% 268% 89 105% 116% 118% 117% 50 185% 253% 295% 260% 90 105% 116% 117% 116% 51 178% 245% 286% 253% 91 104% 115% 115% 115% 52 171% 238% 278% 245% 92 103% 114% 114% 114% 53 164% 232% 270% 238% 93 102% 112% 113% 113% 54 157% 225% 262% 232% 94 101% 111% 112% 111% 55 150% 219% 254% 225% 95 100% 110% 110% 110% 56 146% 213% 247% 219% 96 100% 109% 109% 109% 57 142% 207% 240% 213% 97 100% 107% 107% 107% 58 138% 202% 233% 208% 98 100% 106% 106% 106% 59 134% 197% 227% 202% 99 100% 105% 105% 105% 100+ 100% 100% 100% 100%
DEATH BENEFIT OPTIONS You may choose either of two Death Benefit Options: DEATH BENEFIT OPTION 1 The Death Benefit on any date is: (a) the Face Amount of the Policy or, if greater, the Minimum Death Benefit, plus (b) the Term Insurance Benefit of the FTIO Rider. DEATH BENEFIT OPTION 2 The Death Benefit on any date is: (a) the Face Amount plus the Policy Value or, if greater, the Minimum Death Benefit, plus (b) the Term Insurance Benefit of the FTIO Rider. CHANGING THE DEATH BENEFIT OPTION You may change the Death Benefit Option at any time. The change will take effect at the beginning of the next Policy Month at least 30 days after your written request is received at the Service Office. We reserve the right to limit changes that could cause the Policy to fail to qualify as life insurance for tax purposes. A change in the Death Benefit Option will result in a change in the Face Amount and Scheduled Death Benefits to avoid any change in the amount of Death Benefit, as follows: CHANGE FROM OPTION 1 TO OPTION 2 The new Face Amount will be: - the Face Amount prior to the change less the Policy Value on the date of the change. The Scheduled Death benefit amounts for dates on or after the date of the change will be: - the amounts scheduled prior to the change less the Policy value on the date of the change. Coverage Amounts will be reduced or eliminated in the order that they are listed in the Policy until the total decrease in Coverage Amounts equals the decrease in Face Amount. 19 Surrender Charges will not be assessed for reductions that are solely due to a change in the Death Benefit Option. Example. A policy is issued with a Face amount of $100,000, Death Benefit Option 1, and the following schedule:
POLICY SCHEDULED YEAR DEATH BENEFIT - ------ ------------- 1 100,000 2 125,000 3 150,000 4 175,000 5+ 200,000
The Death Benefit Option is changed to Option 2 at the beginning of Policy Year 3. If the Policy Value at the time of the change is $10,000, then the Face Amount after the change will be $90,000, (the Face Amount prior to the change less the Policy Value) and the Death Benefit Schedule after the change will become:
POLICY SCHEDULED YEAR DEATH BENEFIT - ------ ------------- 3 140,000 4 165,000 5+ 190,000
CHANGE FROM OPTION 2 TO OPTION 1 The new Face Amount will be: - the Face Amount prior to the change plus the Policy Value on the date of the change (but the new Face Amount will be no greater than the Scheduled Death Benefit on the date of the change.) The resulting Face Amount increase amount will be added to the first Coverage Amount listed in the Policy. However, the Annual Premium Target for this Coverage Amount will not be increased and new Surrender Charges or Sales Loads will not apply, for an increase solely due to a change in the Death Benefit Option. Example. A policy is issued with a Face amount of $100,000, Death Benefit Option 2, and the following schedule:
POLICY SCHEDULED YEAR DEATH BENEFIT - ------ ------------- 1 100,000 2 125,000 3 150,000 4 175,000 5+ 200,000
The Death Benefit Option is changed to Option 1 at the beginning of Policy Year 3. If the Policy Value at the time of the change is $10,000, then the Face Amount after the change will be $110,000 (the Face Amount prior to the change plus the Policy Value), and the Death Benefit Schedule after the change will become:
POLICY SCHEDULED YEAR DEATH BENEFIT - ------ ------------- 3 160,000 4 185,000 5+ 210,000
CHANGING THE FACE AMOUNT AND SCHEDULED DEATH BENEFITS At any time, you may request an increase or decrease to the Face Amount or any Scheduled Death Benefits effective on or after the date of change. We reserve the right to limit changes that could cause the Policy to fail to qualify as life insurance for tax purposes. 20 INCREASES IN FACE AMOUNT AND SCHEDULED DEATH BENEFITS Increases in Face Amount and Scheduled Death Benefits are subject to the following conditions: 1. Increases in Face Amount and Scheduled Death Benefits will require satisfactory evidence of the life insured's insurability. 2. Increases will take effect at the beginning of the next Policy Month after we approve the request. 3. We may refuse a requested increase that would not meet our requirements for new policy issues at the time due to the life insured's attained age or other factors. 4. If the Face Amount is increased (other than as required by a Death Benefit Option change) then all Scheduled Death Benefits effective on or after the date of the change will be increased by the amount of the Face Amount increase. NEW CHARGES FOR A FACE AMOUNT INCREASE Coverage Amounts equal to the amount of the increase will be added to the Policy as follows: First, Coverage Amounts that were reduced or eliminated by a prior Face Amount decrease will be restored. Second, if needed, a new Coverage Amount will be added to the Policy with an Annual Premium Target and new Surrender Charges or Sales Loads. Any new Coverage Amount will be based on the life insured's Attained Age and other relevant factors on the effective date of the increase. Premiums paid on or after the increase may be attributed to the new Coverage Amount and result in Surrender Charges or Sales Loads (see "Charges and Deductions - Attribution of Premiums"). DECREASES IN FACE AMOUNT AND SCHEDULED DEATH BENEFITS Decreases in Face Amount and Scheduled Death Benefits are subject to the following conditions: 1. Decreases in Face Amount and Scheduled Death Benefits will take effect at the beginning of the next Policy Month which is 30 days after your written request is received at the Service Office. 2. If the Face Amount is decreased then all Scheduled Death Benefits effective on or after the date of the change will be decreased by the same amount. 3. If at any time the Scheduled Death Benefit decreases to less than the Face Amount, the Face Amount will be decreased to be equal to the Scheduled Death Benefit at that time. 4. Coverage Amounts equal to the amount of the Face Amount decrease will be reduced or eliminated in the reverse order that they are listed in the Policy. Surrender Charges may be assessed (see "Charges and Deductions - Sales Load or Surrender Charge"). DECREASES IN FACE AMOUNT UNDER DEATH BENEFIT OPTION 1 DUE TO A PARTIAL WITHDRAWAL If Death Benefit Option 1 is in effect when a partial withdrawal is made, the Face Amount will be decreased by an amount equal to: (a) minus (b) but not less than zero, where: (a) is the partial withdrawal amount plus any applicable Surrender Charge and (b) is the excess, if any, of the Policy's Minimum Death Benefit over its Face Amount, immediately prior to the partial withdrawal. Decreases in Face Amount under Death Benefit Option 1 due to a Partial Withdrawal are subject to the following conditions: 1. Coverage Amounts equal to the amount of the Face Amount decrease will be reduced or eliminated in the reverse order that they are listed in the Policy. 2. All Scheduled Death Benefits effective on or after the date of the partial withdrawal will be decreased by the amount of the Face Amount decrease, unless you request otherwise and we approve. 3. A Face Amount decrease due to a partial withdrawal will not incur any Surrender Charge in addition to that applicable to the partial withdrawal (see "Charges and Deductions - Sales Load or Surrender Charge"). EXAMPLE FOR FACE INCREASES AND DECREASES A Policy is issued with the Sales Load option, a Face Amount of $100,000, Death Benefit Option 1, and a Death Benefit Schedule as follows:
POLICY SCHEDULED YEAR DEATH BENEFIT - ------ ------------- 1 100,000
21 2 125,000 3 150,000 4 175,000 5+ 200,000
Assume the following Policy activity:
ACTIVITY EFFECT ON POLICY CHANGE IN BENEFIT SCHEDULE - -------------------- ----------------------------------------------------------------- -------------------------- In Policy Year 2, The initial Coverage amount is reduced to $80,000. SCHEDULED the Face Amount is POLICY YEAR DEATH BENEFIT reduced to 2 105,000 $80,000. 3 130,000 4 155,000 5+ 180,000 In Policy Year 3, The initial Coverage Amount (which earlier was reduced to SCHEDULED the Face Amount is $80,000) is restored to its original level of $100,000. POLICY YEAR DEATH BENEFIT increased to A new Coverage Amount for $20,000 is added to the Policy. 3 170,000 $120,000 This new coverage amount will have its own Annual Premium 4 195,000 Target, and if applicable, its own Sales Load or Surrender Charges. 5+ 220,000 A portion of the future premiums paid will be attributed to this Coverage Amount to determine the amount of the Sales Load or Surrender Charge. In Policy Year 4, a The Face Amount is reduced to $90,000. The most recent Coverage SCHEDULED Partial Withdrawal of Amount of $20,000 is reduced to $0, and the initial Coverage Amount POLICY YEAR DEATH BENEFIT $30,000 is made. is reduced to $90,000. 4 165,000 5 190,000
FACTORS THAT AFFECT THE DEATH BENEFIT In the case of Death Benefit Option 2 where the death benefit is the Face Amount plus the Policy Value, changes in the Policy Value will affect the amount of death benefit. Factors that affect the Policy Value are the investment performance of the variable investment options chosen and the charges deducted. For a discussion of how these factors affect Policy Value see the "Risk/Benefit Summary." These factors do not affect the Face Amount of the Policy. Therefore, the amount of death benefit under Option 1 will not be less than the Face Amount as long as the Policy does not lapse. PREMIUM PAYMENTS INITIAL PREMIUMS No premiums will be accepted prior to receipt of a completed application by us. All premiums received prior to the Effective Date of the Policy will be held in the general account and credited with interest from the date of receipt at the rate of return earned on amounts allocated to the Money Market Trust. No insurance will take effect before we approve the application and receive at least the Minimum Initial Premium. On the Effective Date, the Net Premiums paid plus interest credited will be allocated among the Investment Accounts or the Fixed Account in accordance with your instructions, unless first allocated to the Money Market Trust for the duration of the right to examine period (see "Right to Examine the Policy"). SUBSEQUENT PREMIUMS After the payment of the initial premium, premiums may be paid at any time during the lifetime of the life insured prior to Attained Age 100 and in any amount subject to the premium limitations described below. A Policy will be issued with a planned premium, which is based on the amount of premium you wish to pay. We will send you notices of your planned premium at the payment interval you select. However, you are under no obligation to make the planned premium payment. Payment of premiums will not guarantee that the Policy will stay in force and failure to pay premiums will not necessarily cause the Policy to lapse. The Policy will remain in force so long as the Net Cash Surrender Value is sufficient to cover Policy charges. PREMIUM LIMITATIONS If the Policy is issued under the GP Test, the total of all premiums paid may not exceed the then-current maximum premium limitations established by federal income tax law for the Policy to qualify as life insurance. The GP Test premium limits are stated in the Policy. If a premium is received which would result in total premiums exceeding the applicable GP Test limit, we will only accept that portion of the premium that will not exceed the limit. Any premium in excess of that amount will be returned. 22 If the Policy is issued under the CVA Test, there is no restriction on the amount of premiums that may be paid into a Policy, but you must provide satisfactory evidence of insurability before we accept any premium that would increase the Death Benefit by an amount greater than the increase in Policy Value. PREMIUM ALLOCATION You may allocate premiums to the Fixed Account and Investment Accounts. Allocations may be made as percentages that are between zero and 100% that sum to exactly 100%. Alternatively, you may allocate a premium in dollar amounts that sum to exactly the Net Premium amount. You may change premium allocations at any time and the change will take effect on the date a request for change satisfactory to us is received at the Service Office. CHARGES AND DEDUCTIONS PREMIUM LOAD We will deduct a Premium Load as a percentage of each premium payment that is guaranteed never to exceed 2%. Currently, we waive this load in Policy Years 11 and later and charge 0%. The charge is intended to cover a portion of the aggregate amount of various taxes and fees we pay to federal, state and local governments. It is not based on the actual premium tax rate of your state of residence or any other specific tax. SALES LOAD OR SURRENDER CHARGE Each Coverage Amount listed in the Policy is designated as having either a Sales Load or Surrender Charge. One or the other of these charges will apply to a Coverage Amount, but not both. This designation cannot be changed after a Coverage Amount is effective and, currently, the same alternative must apply to all Coverage Amounts. Generally, Policy benefits will be approximately equal in present value under either alternative. However, there is no guarantee each alternative will perform the same in all circumstances. Therefore, you should obtain individualized illustrations for both charge structures. Current cost of insurance rates in early Policy Years will be higher for the Surrender Charge alternative. The Sales Load or Surrender Charge is intended to cover a portion of our costs of marketing and distributing the policies. ATTRIBUTION OF PREMIUMS An Annual Premium Target is associated with each Coverage Amount. Annual Premium Targets are based on the Coverage Amount and the life insured's Attained Age, sex and smoking status on the effective date of the Coverage Amount. The Annual Premium Targets are listed with the Coverage Amounts in the Policy. Premium payments will be attributed to Coverage Amounts that have been in effect for less than 5 years. Attribution will begin with the first applicable Coverage Amount that is listed in the Policy. The sum of all premium amounts attributed to a Coverage Amount in a Coverage Year is limited to the Annual Premium Target shown in the Policy. Premium amounts that exceed the Annual Premium Target will be attributed to the next listed Coverage Amount, up to its own Annual Premium Target. Attribution will continue in this manner until either the entire premium is attributed to Coverage Amounts or the Annual Premium Target is exceeded for all applicable Coverage Amounts. SALES LOAD We deduct a Sales Load from all premium amounts attributed to a Coverage Amount designated as having a Sales Load. The Sales Load is a percentage of premiums guaranteed never to exceed the percentages below. Currently we are charging these percentages.
COVERAGE YEAR PERCENTAGE COVERAGE YEAR PERCENTAGE - ------------- ---------- ------------- ---------- 1 8% 4 2% 2 6% 5 1% 3 3% 6+ 0%
SURRENDER CHARGE We will deduct a Surrender Charge from the Net Policy Value upon elimination or reduction of a Coverage Amount designated as having a Surrender Charge during the first 9 Coverage Years. Coverage Amounts may be eliminated or reduced and a Surrender Charge assessed due to: - surrender of the Policy for its Net Cash Surrender Value, - a partial withdrawal which exceeds the Free Partial Withdrawal Amount, - a Face Amount decrease that is not solely due to a Death Benefit Option change, or 23 - lapse of the Policy. The Surrender Charge for an applicable Coverage Amount is a percentage of the sum of all premiums attributed to it since its effective date. Surrender Charge percentages are guaranteed never to exceed those below. Currently, we are charging these percentages:
COVERAGE YEAR PERCENTAGE COVERAGE YEAR PERCENTAGE - ------------- ---------- ------------- ---------- 1 5.0% 6 1.5% 2 4.0% 7 1.0% 3 3.0% 8 1.0% 4 2.5% 9 0.5% 5 2.0% 10+ 0.0%
Although the Surrender Charge percentages remain level or decrease as the Coverage Year increases, the total dollar amount of Surrender Charges may increase, as the total premium paid increases. Premiums paid in any Coverage Year in excess of the Annual Premium Target and premiums paid after the fifth Coverage Year may not add to the Surrender Charge, so the timing of premium payments may affect the amount of the Surrender Charge. Depending upon circumstances such as premiums paid and performance of the underlying investment options, there may be a Policy Value but no Cash Surrender Value available due to the existence of the Surrender Charge. Unless otherwise allowed by us and specified by you, Surrender Charges will be allocated among the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. SURRENDER CHARGES ON A PARTIAL WITHDRAWAL We will assess a portion of the Surrender Charge if you take a partial withdrawal that exceeds the Free Withdrawal Amount. The Free Withdrawal Amount is 10% of the Net Cash Surrender Value at the time of the withdrawal less the amount of any partial withdrawals already taken in the same Policy Year. The portion of the Policy's total Surrender Charge that will be assessed is the ratio of (a) to (b), where (a) is the amount being withdrawn in excess of the Free Withdrawal Amount and (b) is the Net Cash Surrender Value immediately prior to the withdrawal. The remaining Surrender Charges for all Coverage Amounts will be reduced in the same proportion that the Surrender Charge assessed bears to the Policy's total Surrender Charge immediately prior to the partial withdrawal. SURRENDER CHARGES ON A FACE AMOUNT DECREASE We will assess a portion of the Surrender Charge upon a Face Amount decrease that is not required due to a Death Benefit Option change or partial withdrawal. For each Coverage Amount that is reduced or eliminated as a result of the decrease, we will assess a portion of any applicable Surrender Charge. The proportion of the Surrender Charge that is assessed will be the ratio of amount by which the Coverage Amount is reduced to the Coverage Amount prior to reduction. The remaining Surrender Charges for affected Coverage Amounts will be reduced by the same ratio. MONTHLY DEDUCTIONS On the Policy Date and at the beginning of each Policy Month prior to Attained Age 100, a deduction is due from the Net Policy Value to cover certain charges described below. Monthly deductions due prior to the Policy's Effective Date will be taken on the Effective Date. Unless otherwise allowed by us and specified by you, the monthly deduction will be allocated among the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. ADMINISTRATION CHARGE Currently we deduct a charge of $12 per Policy Month, which is guaranteed never to be exceeded. This charge is intended to cover certain administrative expenses associated with the Policy, including maintaining policy records, collecting premiums and processing death claims, surrender and withdrawal requests and various changes permitted under a Policy. COST OF INSURANCE CHARGE A monthly charge for the cost of insurance is paid to the Company and is determined by multiplying a cost of insurance rate by the net amount at risk at the beginning of each Policy Month. A net amount at risk is equal to the greater of zero, or (a) minus (b), where (a) is the applicable death benefit amount on the first day of the month, divided by 1.0024663; and (b) is the Policy Value attributed to that death benefit amount on the first day of the month. 24 Cost of insurance rates and net amounts at risk are determined separately for each Coverage Amount and for the excess of the Death Benefit over the Face Amount (the Face Amount is the sum of the Coverage Amounts). ATTRIBUTION OF POLICY VALUE FOR NET AMOUNTS AT RISK To determine the net amounts at risk, the Policy Value will be attributed to Coverage Amounts in the order listed in the Policy. The amount of Policy Value attributed to a Coverage Amount will be limited to the amount that results in zero net amount at risk, and any excess Policy Value will then be attributed to the next listed Coverage Amount. Attribution will continue in this manner until either the entire Policy Value is attributed or the end of the list of Coverage Amounts is reached. Any remaining Policy Value will then be attributed to the excess of the Death Benefit over the Face Amount. CURRENT COST OF INSURANCE RATES Cost of insurance rates are determined separately for each Coverage Amount and the excess of the Death Benefit over the Face Amount. There are different current cost of insurance rate bases for: - Coverage Amounts having Sales Loads, - Coverage Amounts having Surrender Charges, and - The excess of the Death Benefit over the Face Amount, including any Term Insurance Benefit under the FTIO Rider. The cost of insurance rate in a specific Policy Month for an applicable death benefit amount will depend on: - the cost of insurance rate basis for the applicable death benefit amount, - the life insured's Attained Age, sex (unless unisex rates are required by law) and smoking status on the effective date of the applicable death benefit amount, - the underwriting class of the applicable death benefit amount, - the Coverage Year, or Policy Year for the excess of the Death Benefit over the Face Amount, - any extra charges for substandard ratings, as stated in the Policy. Since the net amount of risk for Death Benefit Option 2 is based on a formula that includes as factors the Policy Value, the net amount at risk is affected by the investment performance of the underlyling investment options chosen, payment of premiums and charges assessed. Cost of insurance rates will generally increase with the life insured's age and the Coverage Year. Cost of insurance rates reflect our expectation as to future mortality experience. They are also intended to cover our general costs of providing the Policy, to the extent that these costs are not covered by other charges. Current cost of insurance rates may be changed by us on a basis that does not unfairly discriminate within the class of lives insured. GUARANTEED MAXIMUM COST OF INSURANCE RATES In no event will the cost of insurance rates we charge exceed the guaranteed maximum rates set forth in the Policy, except to the extent that an extra charge is imposed for a substandard rating. The guaranteed rates are the 1980 Commissioners Standard Ordinary Sex Distinct (unless unisex rates are required by law) ANB Aggregate Ultimate Mortality Tables. Current cost of insurance rates may be less than the guaranteed rates. ASSET BASED RISK CHARGE DEDUCTED FROM INVESTMENT ACCOUNTS We assess a daily charge against amounts in the Investment Accounts. This charge is intended to compensate us for insurance risks we assume under the Policy, such as benefit payments and expenses that are higher than we expected. We will realize a gain from this charge to the extent it is not needed to provide benefits and pay expenses under the Policy. The charge is a percentage of amounts in the Investment Accounts, which will reduce Unit Values of the sub-accounts. The charge is guaranteed never to exceed 0.0013699% (a annual rate of 0.50%). Currently, we charge the following rates:
POLICY YEAR DAILY ASSET BASED RISK CHARGE ANNUAL RATE - ----------- ----------------------------- ----------- 1-10 0.0013699% 0.50% 11+ 0.0006849% 0.25%
INVESTMENT MANAGEMENT FEES AND EXPENSES The investment management fees and expenses of the Portfolios, the underlying variable investment options for the Policy, are set forth in the Portfolio prospectuses. 25 REDUCTION IN CHARGES AND ENHANCED SURRENDER VALUES The Policy is designed for employers and other sponsoring organizations that may purchase multiple policies as a Case. The size or nature of the Case may result in expected savings of sales, underwriting, administrative or other costs. If so, we expect to offer reductions of Policy charges and enhancements of surrender value. Eligibility for reductions and enhancements and the amounts available will be determined by a number of factors, including the number of lives to be insured, the total premiums expected to be paid, total assets under management for the policyholder, the nature of the relationship among the lives insured, the purpose for which the policies are being purchased, expected persistency of the individual policies, and any other circumstances which we believe to be relevant to the expected reduction of our expenses. Some of reductions and enhancements may be guaranteed and others may be subject to restrictions or to withdrawal or modification, on a uniform Case basis. We may change the nature and amount of reductions and enhancements available from time to time. Reductions and enhancements will be determined in a way that is not unfairly discriminatory to policyholders. COMPANY TAX CONSIDERATIONS Currently, we make no specific charge to the Separate Account for any federal, state, or local taxes that we incur that may be attributable to such Account or to the Policy. We reserve the right in the future to make a charge for any such tax or other economic burden resulting from the application of tax laws that we determines to be attributable to the Separate Account or to the Policy. POLICY VALUE DETERMINATION OF THE POLICY VALUE A Policy has a Policy Value, a portion of which is available to you by making a policy loan or partial withdrawal, or upon surrender of the Policy. The Policy Value may also affect the amount of the Death Benefit. The Policy Value at any time is equal to the sum of the values in the Investment Accounts, the Fixed Account, and the Loan Account. The Policy Value is affected by the investment performance of the Investment Account chosen and the rate of interest credited if amounts are allocated to the Fixed Account. The Policy Value is also affected by the charges deducted. For a discussion of how these factors affect Policy Value see the "Risk/Return Summary." INVESTMENT ACCOUNTS An Investment Account is established under each Policy for each sub-account of the Separate Account to which net premiums or transfer amounts have been allocated. Each Investment Account under a Policy measures the interest of the Policy in the corresponding sub-account. The value of the Investment Account established for a particular sub-account is equal to the number of units of that sub-account credited to the Policy times the value of such units. FIXED ACCOUNT Amounts in the Fixed Account do not vary with the investment performance of any sub-account. Instead, these amounts are credited with interest at a rate determined by Manulife USA. See "The General Account - Fixed Account". LOAN ACCOUNT Amounts borrowed from the Policy are transferred to the Loan Account. Amounts in the Loan Account do not vary with the investment performance of any sub-account. Instead, these amounts are credited with interest at a rate determined by Manulife USA that is lower than the loan interest rate charged on Policy Debt. See "Policy Loans - Loan Account". UNITS AND UNIT VALUES CREDITING AND CANCELING UNITS Units of a particular sub-account are credited to a Policy when net premiums are allocated to that sub-account or amounts are transferred to that sub-account. Units of a sub-account are cancelled whenever amounts are deducted, transferred or withdrawn from the sub-account. 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 a premium payment will be based on the applicable unit values for the Business Day on which the premium is received at the Service Office, except for any premiums received before the Effective Date. For premiums received before the Effective Date, the values will be determined on the Effective Date. Units are valued at the end of each Business Day. When an order involving the crediting or canceling of units is received after the end of a Business Day, or on a day that 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, Investment Account value or Death Benefit to be made on a day that is not a Business Day will be made on the next Business Day. 26 UNIT VALUES The value of a unit of each sub-account was initially fixed at $10.00. For each subsequent Business Day the unit value for that sub-account is determined by multiplying the unit value for the immediately preceding Business Day by the net investment factor for the that sub-account on such subsequent Business Day. The net investment factor for a sub-account on any Business Day is equal to (a) divided by (b) minus (c), where: (a) is the net asset value of the underlying Portfolio shares held by that sub-account as of the end of such Business Day before any policy transaction are made on that day; (b) is the net asset value of the underlying Portfolio shares held by that sub-account as of the end of the immediately preceding Business Day after all policy transaction were made for that day; and (c) is a charge not exceeding the daily mortality and expense risk charge shown in the "Charges and Deductions - Asset Based Risk Charge Deducted from Investment Accounts" section. The value of a unit may increase, decrease, or remain the same, depending on the investment performance of a sub-account from one Business Day to the next. TRANSFERS OF POLICY VALUE Subject to the restrictions set forth below, the policyowner may transfer Policy Value from one sub-account to another or to the Fixed Account. Transfers involving the Fixed Account are subject to certain limitations noted below under "Transfers Involving Fixed Accounts." None of the portfolios which are investment options for the Policy are designed for short-term investing since such activity may increase portfolio transaction costs and be disruptive to management of a portfolio (affecting a subadviser's ability to effectively manage a portfolio in accordance with its investment objective and policies). Management of the Trust will monitor purchases and redemptions of Trust shares. If management of the Trust becomes aware of short-term trading that it believes, in its sole discretion, is significantly disrupting (or may potentially significantly disrupt) management of a portfolio or materially increasing portfolio transaction costs ("Disruptive Short-Term Trading"), the Trust may impose restrictions on such trading. The Trust's participation agreement with the Company requires the Company to impose trading restrictions on its policy owners if requested by the Trust. In addition, the Company also has a policy to restrict transfers to two per month per Policy. (For purposes of this restriction, all transfers made during the period from the opening of trading each day the net asset value of the shares of the Trust are determined (usually 9 a.m.) to the close of trading that day (the close of day-time trading of the New York Stock Exchange (usually 4 p.m.)) are considered one transfer.) Policyowners may, however, transfer to the Money Market Trust even if the two transfer per month limit has been reached if 100% of the Policy Value is transferred to the Money Market Trust. If such a transfer to the Money Market Trust is made, for a 30 day period after such transfer, no subsequent transfers from the Money Market Trust to another investment option may be made. This restriction is applied uniformly to all policyowners. The Company also reserves the right to take other actions to restrict trading as noted below. Actions that the Company may take to restrict trading include, but are not limited to: - restricting the number of transfers made during a defined period, - restricting the dollar amount of transfers, - restricting the method used to submit transfers (e.g., requiring transfer requests to be submitted in writing via U.S. mail), and - restricting transfers into and out of certain subaccounts. Policyowners should note that while the Trust and the Company seek to identify and prevent Disruptive Short-Term Trading, it is not always possible to do so. Therefore, no assurance can be given that the Trust and the Company will successfully impose restrictions on all Disruptive Short-Term Trading. If the Trust and Company are unsuccessful in restricting Disruptive Short-Term Trading, the portfolios may incur higher brokerage costs and may maintain higher cash levels, limiting their ability to achieve their investment objective. The Company also reserves the right to modify or terminate the transfer privilege at any time in accordance with applicable law. Transfers may also be delayed when any of the events described under items (i) through (iv) in "Payment of Proceeds" occurs. Transfer privileges are also subject to any restrictions that may be imposed by the Portfolios. In addition, the Company reserves the right to defer the transfer privilege at any time that the Company is unable to purchase or redeem shares of the Portfolios. TRANSFER REQUESTS Transfer requests may be made in writing in a format satisfactory to us. From time to time we may offer you alternate means of communicating transfer requests to us, such as electronic mail, the Internet or telephone. We will use reasonable procedures to 27 confirm that instructions received by alternate means are genuine and we will not be liable for following instructions we have reasonably determined to be genuine. LIMITATIONS ON TRANSFERS FROM THE FIXED ACCOUNT The maximum amount that may be transferred from the Fixed Account in any Policy Year is 25% of the Fixed Account Value at the previous Policy Anniversary. Any transfer that involves a transfer out of the Fixed Account may not involve a transfer to the Investment Account for the Money Market Trust. We may allow greater amounts to be transferred from the Fixed Account if a systematic plan of withdrawals is agreed to in advance. For example, we will allow the transfer of 20%, 25%, 33%, 50% and 100% of the remaining balance in the Fixed Account in five successive years provided we agree in advance in writing and that no amounts are transferred into the Fixed Account during the 5 year period. POLICY LOANS At any time while the Policy is in force, you may borrow against the Policy Value. The Policy is the only security for the loan. Policy loans may have tax consequences. See "Tax Treatment of Policy Benefits - Policy Loan Interest." A policy loan will affect future Policy Values, since the portion of the Policy Value in the Loan Account will receive the loan interest credited rate rather than varying with the performance of the underlying Portfolios or increasing at the Fixed Account interest credited rate. A policy loan may cause a Policy to be more susceptible to lapse since it reduces the Net Cash Surrender Value from which monthly deductions are taken. A policy loan causes the amount payable upon death of the life insured to be reduced by the amount of outstanding Policy Debt. MAXIMUM LOAN The amount of any loan cannot exceed the amount that would cause the Policy Debt to equal the Policy's Cash Surrender Value less the monthly deductions due from the date of the loan to the to the next Policy Anniversary. INTEREST CHARGED ON POLICY LOANS Interest on the Policy Debt will accrue daily and be payable annually on the Policy Anniversary. The rate of interest charged will be an effective annual rate of 4%. LOAN ACCOUNT When a loan is made, an amount equal to the loan will be deducted from the Investment Accounts or the Fixed Account and transferred to the Loan Account. You may designate how this amount is allocated among the Accounts. If you give no instructions, the amount transferred will be allocated among the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. A transfer from an Investment Account will result in the cancellation of units of the underlying sub-account equal in value to the amount transferred from the Investment Account. However, since the Loan Account is part of the Policy Value, transfers made in connection with a loan will not change the Policy Value. INTEREST CREDITED TO THE LOAN ACCOUNT Policy Value in the Loan Account will earn interest at an effective annual rate guaranteed to be at least 3.25%. We may declare a current interest rate that is greater than this, subject to change at any time. The excess of the loan interest charged rate (4%) over the loan interest credited rates will result in a net charge against the Policy Value with respect to any Policy Debt. Currently we credit loan interest rates which vary by Policy Year as follows:
CURRENT LOAN INTEREST EXCESS LOAN INTEREST POLICY YEARS CREDITED RATES CHARGED RATE - ------------ --------------------- -------------------- 1-10 3.25% 0.75% 11+ 3.75% 0.25%
LOAN ACCOUNT ADJUSTMENTS On the first day of each Policy Month the difference between the Loan Account and the Policy Debt is transferred to the Loan Account from the Investment Accounts or the Fixed Account. The amount transferred will be allocated to the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. LOAN REPAYMENTS Policy Debt may be repaid, in whole or in part, at any time prior to the death of the life insured while the Policy is in force. A loan repayment amount will be credited to the Loan Account and transferred to the Fixed Account or the Investment Accounts in the same proportion as the Policy Value in each Account bears to the Net Policy Value. Amounts paid to us not specifically designated in writing as loan repayments will be treated as premiums. 28 POLICY SURRENDER AND PARTIAL WITHDRAWALS POLICY SURRENDER A Policy may be surrendered for its Net Cash Surrender Value at any time while the life insured is living. The Net Cash Surrender Value is equal to the Policy Value less any Surrender Charges, monthly deductions due and Policy Debt. The Net Cash Surrender Value will be determined at the end of the Business Day on which we receive the Policy and a written request for surrender at the Service Office. When a Policy is surrendered, the insurance coverage and all other benefits under the Policy will terminate. PARTIAL WITHDRAWALS You may make a partial withdrawal of the Net Cash Surrender Value at any time. You may designate how the withdrawal amount is allocated among the Investment Account and the Fixed Account. If you give no instructions, the withdrawal amount will be allocated among the Accounts in the same proportion as the Policy Value in each Account bears to the Net Policy Value. Surrender Charges may be assessed on a Partial Withdrawal. See "Charges and Deductions - Surrender Charges." The Death Benefit may be reduced as a result of a Partial Withdrawal. See "Death Benefits - Decreases in Face Amount under Death Benefit Option 1 due to a Partial Withdrawal"). LAPSE AND REINSTATEMENT LAPSE A Policy will go into default if at the beginning of a Policy Month if the Net Cash Surrender Value would go below zero after deducting the monthly deduction then due. A lapse could have adverse tax consequences as described under "Tax Treatment of the Policy - Tax Treatment of Policy Benefits - Surrender or Lapse." We will notify you of the default and will allow you a 61-day grace period in which to make a premium payment sufficient to bring the Policy out of default. The required payment will be equal to the amount necessary to bring the Net Cash Surrender Value to zero, if it was less than zero on the date of default, plus the monthly deductions due at the date of default and payable at the beginning of each of the two Policy Months thereafter, plus any applicable premium load. If the required payment is not received by the end of the grace period, the Policy will terminate with no value. DEATH DURING GRACE PERIOD If the life insured should die during the grace period, the Policy Value used in the calculation of the Death Benefit will be the Policy Value on the date of default and the insurance benefit will be reduced by any outstanding monthly deductions due at the time of death. REINSTATEMENT You may reinstate a Policy that has terminated after going into default at any time within the five-year period following the date of termination subject to the following conditions: (a) The Policy must not have been surrendered for its Net Cash Surrender Value; (b) Evidence of the life insured's insurability satisfactory to us must be provided; and (c) A premium equal to the payment required during the grace period following default to keep the Policy in force is paid. THE GENERAL ACCOUNT The general account of Manulife USA consists of all assets owned by us other than those in the Separate Account and other separate accounts of the Company. Subject to applicable law, we have sole discretion over investment of the assets of the general account. By virtue of exclusionary provisions, interests in the general account of Manulife USA have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the Investment Company Act of 1940. Accordingly, neither the general account nor any interests therein are subject to the provisions of these acts, and as a result the staff of the SEC has not reviewed the disclosures in this prospectus relating to the general account. Disclosures regarding the general account may, however, be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in a prospectus. 29 FIXED ACCOUNT You may allocate net premiums to the Fixed Account or transfer all or a portion of the Policy Value to the Fixed Account from the Investment Accounts. Manulife USA will hold the reserves required for any portion of the Policy Value allocated to the Fixed Account in our general account. Transfers from the Fixed Account to the Investment Accounts are subject to restrictions. POLICY VALUE IN THE FIXED ACCOUNT The Policy Value in the Fixed Account is equal to: (a) the portion of the net premiums allocated to it; plus (b) any amounts transferred to it; plus (c) interest credited to it; less (d) any charges deducted from it; less (e) any partial withdrawals from it; less (f) any amounts transferred from it. INTEREST ON THE FIXED ACCOUNT An allocation of Policy Value to the Fixed Account does not entitle you to share in the investment experience of the general account. Instead, we guarantee that the Policy Value in the Fixed Account will accrue interest daily at an effective annual rate of at least 3%, without regard to the actual investment experience of the general account. We may declare a current interest rate in excess of the guaranteed rate, subject to change at any time. OTHER PROVISIONS OF THE POLICY POLICYHOLDER RIGHTS Unless otherwise restricted by a separate agreement, you may: - Vary the premiums paid under the Policy. - Change the Death Benefit Option. - Change the premium allocation for future premiums. - Take loans and/or partial withdrawals. - Surrender the contract. - Transfer ownership to a new owner. - Name a contingent owner that will automatically become owner if you die before the life insured. - Change or revoke a contingent owner. - Change or revoke a beneficiary. ASSIGNMENT OF RIGHTS We will not be bound by an assignment until we receive a copy of the assignment at the Service Office. We assume no responsibility for the validity or effects of any assignment. BENEFICIARY You may appoint one or more beneficiaries of the Policy by naming them in the application. Beneficiaries may be appointed in three classes - primary, secondary, and final. Beneficiaries may also be revocable or irrevocable. Unless an irrevocable designation has been elected, you may change the beneficiary during the life insured's lifetime by giving written notice in a form satisfactory to us. If the life insured dies and there is no surviving beneficiary, you, or your estate if you are the life insured, will be the beneficiary. If a beneficiary dies before the seventh day after the death of the life insured, we will pay the insurance benefit as if the beneficiary had died before the life insured. INCONTESTABILITY We will not contest the validity of a Policy after it has been in force during the life insured's lifetime for two years from the Issue Date stated in the Policy, nor will we contest the validity of an increase in Face Amount after it has been in force during the life insured's lifetime for two years. If a Policy has been reinstated, we can contest any misrepresentation of a fact material to the reinstatement for a period of two years after the reinstatement date. MISSTATEMENT OF AGE OR SEX If the life insured's stated age or sex or both in the Policy are incorrect, we will change the Face Amount so that the Death Benefit will be that which the most recent monthly charge for the cost of insurance would have purchased for the correct age and sex. 30 SUICIDE EXCLUSION If the life insured, whether sane or insane, dies by suicide within two years from the Issue Date stated in The Policy (or within the maximum period permitted by the state in which the Policy was delivered, if less than two years), we will pay only the premiums paid less any partial withdrawals and any Policy Debt. If the life insured should die by suicide within two years after a Face Amount increase, the Death Benefit for the increase will be limited to the monthly deductions for the increase. At our discretion, this provision may be waived, such as policies purchased in conjunction with certain existing benefit plans. SUPPLEMENTARY BENEFITS Subject to certain requirements, one or more supplementary benefits may be added to a Policy, including the FTIO Rider (see "Death Benefits - Flexible Term Insurance Option Rider") and, in the case of a Policy owned by a corporation or other similar entity, a benefit permitting a change in the life insured (a taxable event). More detailed information concerning this supplementary benefit may be obtained from us. There is no cost for any supplementary benefit currently offered by us, with the exception of FTIO Rider (see "Charges and Deductions - Monthly Deductions"). TAX TREATMENT OF THE POLICY The following summary provides a general description of the federal income tax considerations associated with the Policy and does not purport to be complete or to cover all situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service (the "Service"). No representation is made as to the likelihood of continuation of the present federal income tax laws nor of the current interpretations by the Service. MANULIFE USA DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY OR ANY TRANSACTION REGARDING THE POLICY. The Policy may be used in various arrangements, including non-qualified deferred compensation or salary continuation plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances of each individual arrangement. Therefore, if the use of the Policy in any such arrangement, the value of which depends in part on the tax consequences, is contemplated, a qualified tax adviser should be consulted for advice on the tax attributes of the particular arrangement. Manulife USA is taxed as a life insurance company. Because the operations of the Separate Account are a part of, and are taxed with, our operations, the Separate Account is not separately taxed as a "regulated investment company" under the Code. Under existing Federal income tax laws, we are not taxed on the investment income and capital gains of the Separate Account, but we may be eligible for certain tax credits or deductions relating to foreign taxes paid and dividends received by the Portfolios. Our use of these tax credits or deductions will not adversely affect or benefit the Separate Account. We do not anticipate that it will be taxed on the income and gains of the Separate Account in the future, but if we are, we may impose a corresponding charge against the Separate Account. LIFE INSURANCE QUALIFICATION There are several requirements that must be met for a Policy to be considered a Life Insurance Contract under the Internal Revenue Code, and thereby to enjoy the tax benefits of such a contract: 1. The Policy must satisfy the definition of life insurance under Section 7702 of the Code. 2. The investments of the Separate Account must be "adequately diversified" in accordance with Section 817(h) of the Code and Treasury Regulations. 3. The Policy must be a valid life insurance contract under applicable state law. 4. The policyholder must not possess "incidents of ownership" in the assets of the Separate Account. These four items are discussed in detail below. DEFINITION OF LIFE INSURANCE Section 7702 of the Code sets forth a definition of a life insurance contract for federal tax purposes. For a Policy to be a life insurance contract, it must satisfy either the Cash Value Accumulation Test or the Guideline Premium Test. By limiting cash value at any time to the net single premium that would be required in order to fund future benefits under the contract, the Cash Value Accumulation Test in effect requires a minimum death benefit for a given Policy Value. The Guideline Premium Test also requires a minimum death benefit, but in addition limits the total premiums that can be paid into a Policy for a given amount of death benefit. With respect to a Policy which is issued on the basis of a standard rate class, we believe (largely in reliance on IRS Notice 88-128 and the proposed mortality charge regulations under Section 7702, issued on July 5, 1991) that such a Policy should meet the Section 7702 definition of a life insurance contract. 31 With respect to a Policy that is issued on a substandard basis (i.e., a rate class involving higher-than-standard mortality risk), there is less guidance, in particular as to how mortality and other expense requirements of Section 7702 are to be applied in determining whether such a Policy meets the Section 7702 definition of a life insurance contract. Thus it is not clear whether or not such a Policy would satisfy Section 7702, particularly if the policyholder pays the full amount of premiums permitted under the Policy. The Secretary of the Treasury (the "Treasury") is authorized to prescribe regulations implementing Section 7702. However, while proposed regulations and other interim guidance have been issued, final regulations have not been adopted and guidance as to how Section 7702 is to be applied is limited. If a Policy were determined not to be a life insurance contract for purposes of Section 7702, such a Policy would not provide the tax advantages normally provided by a life insurance policy. If it is subsequently determined that a Policy does not satisfy Section 7702, we may take whatever steps are appropriate and reasonable to attempt to cause such a Policy to comply with Section 7702. For these reasons, we reserve the right to restrict Policy transactions as necessary to attempt to qualify it as a life insurance contract under Section 7702. DIVERSIFICATION Section 817(h) of the Code requires that the investments of the Separate Account be "adequately diversified" in accordance with Treasury regulations in order for the Policy to qualify as a life insurance contract under Section 7702 of the Code (discussed above). The Separate Account, through the Portfolios, intends to comply with the diversification requirements prescribed in Treas. Reg. Sec. 1.817-5, which affect how each Portfolio's assets are to be invested. We believe that the Separate Account will thus meet the diversification requirement, and we will monitor continued compliance with the requirement. STATE LAW A Policy must qualify as a valid life insurance contract under applicable state laws. State regulations require that the policyholder have appropriate insurable interest in the life insured. Failure to establish an insurable interest may result in the Policy not qualifying as a life insurance contract for federal tax purposes. INVESTOR CONTROL In certain circumstances, owners of variable life insurance policies may be considered the owners, for federal income tax purposes, of the assets of the separate account used to support their policies. In those circumstances, income and gains from the separate account assets would be includible in the variable policyholder's gross income. The IRS has stated in published rulings that a variable policyholder will be considered the owner of separate account assets if the policyholder 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 policyholder), 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 policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets". As of the date of this prospectus, no such guidance has been issued. 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 policyholders were not owners of separate account assets. For example, the Policy has many more portfolios to which policyholders may allocate premium payments and Policy Values than were available in the policies described in the rulings. These differences could result in an owner being treated as the owner of a pro-rata portion of the assets of the Separate Account. In addition, we do not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. We therefore reserve the right to modify the Policy as necessary to attempt to prevent an owner from being considered the owner of a pro rata share of the assets of the Separate Account. TAX TREATMENT OF POLICY BENEFITS The following discussion assumes that the Policy will qualify as a life insurance contract for federal income tax purposes. We believe that the proceeds and cash value increases of a Policy should be treated in a manner consistent with a fixed-benefit life insurance policy for federal income tax purposes. Depending on the circumstances, the exchange of a Policy, a change in the Policy's Death Benefit Option, a policy loan, partial withdrawal, surrender, change in ownership, the addition of an accelerated death benefit rider, or an assignment of the Policy may have federal income tax consequences. In addition, federal, state and local transfer, and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each policyholder or beneficiary. DEATH BENEFIT The death benefit under the Policy should be generally excludible from the gross income of the beneficiary under Section 101(a)(1) of the Code. A transfer of the Policy for valuable consideration, however, may cause a portion of the death benefit to be taxable (See "Other Transactions" below). 32 CASH VALUES Generally, the policyholder will not be deemed to be in constructive receipt of the Policy Value until there is a distribution. This includes additions attributable to interest, dividends, appreciation or gains realized on transfers among sub-accounts. INVESTMENT IN THE POLICY Investment in the Policy means: (a) the aggregate amount of any premiums or other consideration paid for the Policy; minus (b) the aggregate amount, other than loan amounts, received under the Policy which has been excluded from the gross income of the policyholder (except that the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract or "MEC," to the extent such amount has been excluded from gross income, will be disregarded); plus (c) the amount of any loan from, or secured by a Policy that is a MEC to the extent that such amount has been included in the gross income of the policyholder. The repayment of a policy loan, or the payment of interest on a loan, does not affect the Investment in the Policy. SURRENDER OR LAPSE Upon a complete surrender or lapse of a Policy or when benefits are paid at a policy's maturity date, if the amount received plus the amount of Policy Debt exceeds the total investment in the Policy, the excess will generally be treated as ordinary income subject to tax. If, at the time of lapse, a Policy has a loan, the loan is extinguished and the amount of the loan is a deemed payment to the policyholder. If the amount of this deemed payment exceeds the investment in the contract, the excess is taxable income and is subject to Internal Revenue Service reporting requirements. DISTRIBUTIONS The tax consequences of distributions from, and loans taken from or secured by, a Policy depend on whether the Policy is classified as a MEC. DISTRIBUTIONS FROM NON-MECS A distribution from a non-MEC is generally treated as a tax-free recovery by the policyholder of the Investment in the Policy to the extent of such Investment in the Policy, and as a distribution of taxable income only to the extent the distribution exceeds the Investment in the Policy. Loans from, or secured by, a non-MEC are not treated as distributions. Instead, such loans are treated as indebtedness of the policyholder. Force Outs An exception to this general rule occurs in the case of a decrease in the Policy's death benefit or any other change that reduces benefits under the Policy in the first 15 years after the Policy is issued and that results in a cash distribution to the policyholder in order for the Policy to continue to comply with the Section 7702 definitional limits. Such a cash distribution will be taxed in whole or in part as ordinary income (to the extent of any gain in the Policy) under rules prescribed in Section 7702. Changes include partial withdrawals and death benefit option changes. DISTRIBUTIONS FROM MECS Policies classified as MECs will be subject to the following tax rules: (a) First, all partial withdrawals from such a Policy are treated as ordinary income subject to tax up to the amount equal to the excess (if any) of the Policy Value immediately before the distribution over the Investment in the Policy at such time. (b) Second, loans taken from or secured by such a Policy and assignments and pledges of any part of its value are treated as partial withdrawals from the Policy and taxed accordingly. Past-due loan interest that is added to the loan amount is treated as a loan. (c) Third, a 10% additional income tax is imposed on the portion of any distribution (including distributions on surrender) from, or loan taken from or secured by, such a Policy that is included in income except where the distribution or loan: (i) is made on or after the policyholder attains age 59 1/2; (ii) is attributable to the policyholder becoming disabled; or (iii) is part of a series of substantially equal periodic payments for the life (or life expectancy) of the policyholder or the joint lives (or joint life expectancies) of the policyholder and the policyholder's beneficiary. 33 These exceptions are not likely to apply in situations where the Policy is not owned by an individual. Definition of Modified Endowment Contracts Section 7702A establishes a class of life insurance contracts designated as "Modified Endowment Contracts," which applies to Policies entered into or materially changed after June 20, 1988. In general, a Policy will be a Modified Endowment Contract if the accumulated premiums paid at any time during the first seven policy years exceed the "seven-pay premium limit". The seven-pay premium limit on any date is equal to the sum of the net level premiums that would have been paid on or before such date if the Policy provided for paid-up future benefits after the payment of seven level annual premiums (the "seven-pay premium"). The rules relating to whether a Policy will be treated as a MEC are extremely complex and cannot be adequately described in the limited confines of this summary. Therefore, a current or prospective policyholder should consult with a competent adviser to determine whether a transaction will cause the Policy to be treated as a MEC. Material Changes A Policy that is not a MEC may become a MEC if it is "materially changed". If there is a material change to the Policy, the seven year testing period for MEC status is restarted. The material change rules for determining whether a Policy is a MEC are complex. In general, however, the determination of whether a Policy will be a MEC after a material change depends upon the relationship among the death benefit of the Policy at the time of such change, the Policy Value at the time of the change, and the additional premiums paid into the Policy during the seven years starting with the date on which the material change occurs. Reductions in Face Amount If there is a reduction in benefits during the first seven policy years, the seven-pay premium limit is recalculated as if the Policy had been originally issued at the reduced benefit level. Failure to comply would result in classification as a MEC regardless of any efforts by us to provide a payment schedule that will not violate the seven pay test. Exchanges A life insurance contract received in exchange for a MEC will also be treated as a MEC. Processing of Premiums If a premium, which would cause the Policy to become a MEC, is received within 23 days of the next Policy Anniversary, we will not apply the portion of the premium which would cause MEC status ("excess premium") to the Policy when received. The excess premium will be placed in a suspense account until the next Policy Anniversary, at which point the excess premium, along with interest, earned on the excess premium at a rate of 3.5% from the date the premium was received, will be applied to the Policy. (Any amount that would still be excess premium will be refunded to the policyholder). The policyholder will be advised of this action and will be offered the opportunity to have the premium credited as of the original date received or to have the premium returned. (If the policyholder does not respond, the premium and interest will be applied as described above). If a premium, which would cause the Policy to become a MEC, is received more than 23 days prior to the next Policy Anniversary, we will refund any excess premium to the policyholder. The portion of the premium which is not excess will be applied as of the date received. The policyholder will be advised of this action and will be offered the opportunity to return the premium and have it credited to the account as of the original date received. Multiple Policies All MEC's that are issued by a Company (or its affiliates) to the same policyholder during any calendar year are treated as one MEC for purposes of determining the amount includible in gross income under Section 72(e) of the Code. POLICY LOAN INTEREST Generally, personal interest paid on any loan under a Policy which is owned by an individual is not deductible. For policies purchased on or after January 1, 1996, interest on any loan under a Policy owned by a taxpayer and covering the life of any individual who is an officer or employee of or is financially interested in the business carried on by the taxpayer will not be tax deductible unless the employee is a key person within the meaning of Section 264 of the Code. A deduction will not be permitted for interest on a loan under a Policy held on the life of a key person to the extent the aggregate of such loans with respect to contracts covering the key person exceed $50,000. The number of employees who can qualify as key persons depends in part on the size of the employer but cannot exceed 20 individuals. Furthermore, if a non-natural person owns a Policy, or is the direct or indirect beneficiary under a Policy, section 264(f) of the Code disallows a pro-rata portion of the taxpayer's interest expense allocable to unborrowed Policy cash values attributable to insurance 34 held on the lives of individuals who are not 20% (or more) owners of the taxpayer-entity, officers, employees, or former employees of the taxpayer. The portion of the interest expense that is allocable to unborrowed Policy cash values is an amount that bears the same ratio to that interest expense as the taxpayer's average unborrowed Policy cash values under such life insurance policies issued after June 8, 1997 bear to the sum of such average unborrowed cash values and the average adjusted bases for all other assets of the taxpayer. If the policyholder is an individual, and if the taxpayer is a business and is not the policyholder, but is the direct or indirect beneficiary under the Policy, then the amount of unborrowed cash value of the Policy taken into account in computing the portion of the taxpayer's interest expense allocable to unborrowed Policy cash values cannot exceed the benefit to which the taxpayer is directly or indirectly entitled under the Policy. POLICY EXCHANGES A policyholder generally will not recognize gain upon the exchange of a Policy for another life insurance policy covering the same life insured and issued by us or another insurance company, except to the extent that the policyholder receives cash in the exchange or is relieved of Policy indebtedness as a result of the exchange. In no event will the gain recognized exceed the amount by which the Policy Value (including any unpaid loans) exceeds the policyholder's Investment in the Policy. OTHER TRANSACTIONS A transfer of the Policy, a change in the owner, a change in the life insured, a change in the beneficiary, and certain other changes to the Policy, as well as particular uses of the Policy (including use in a so called "split-dollar" arrangement) may have tax consequences depending upon the particular circumstances and should not be undertaken prior to consulting with a qualified tax adviser. For instance, if the owner transfers the Policy or designates a new owner in return for valuable consideration (or, in some cases, if the transferor is relieved of a liability as a result of the transfer), then the Death Benefit payable upon the death of the life insured may in certain circumstances be includible in taxable income to the extent that the Death Benefit exceeds the prior consideration paid for the transfer and any premiums or other amounts subsequently paid by the transferee. Further, in such a case, if the consideration received exceeds the transferor's Investment in the Policy, the difference will be taxed to the transferor as ordinary income. Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the individual circumstances of each policyholder and beneficiary. ALTERNATE MINIMUM TAX Corporate owners may be subject to Alternate Minimum Tax on the annual increases in Cash Surrender Values and on the Death Benefit proceeds. INCOME TAX REPORTING In certain employer-sponsored life insurance arrangements, including equity split-dollar arrangements, participants may be required to report for income tax purposes, one or more of the following: (a) the value each year of the life insurance protection provided; (b) an amount equal to any employer-paid premiums; (c) income equal to imputed interest on deemed employer loan; or (d) some or all of the amount by which the current value exceeds the employer's interest in the Policy. Participants should consult with their tax adviser to determine the tax consequences of these arrangements. OTHER INFORMATION PAYMENT OF PROCEEDS As long as the Policy is in force, we will ordinarily pay any policy loans, surrenders, partial withdrawals or insurance benefit within seven days after receipt at the Service Office of all the documents required for such a payment. We may delay the payment of any policy loans, surrenders, partial withdrawals, or insurance benefit that depends on Fixed Account values for up to six months or in the case of any Investment Account for any period during which (i) the New York Stock Exchange is closed for trading (except for normal weekend and holiday closings), (ii) trading on the New York Stock Exchange is restricted (iii) an emergency exists as a result of which disposal of securities held in the Separate Account is not reasonably practicable or it is not reasonably practicable to determine the value of the Separate Account's net assets or (iv) the SEC, by order, so permits for the protection of security holders; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions described in (2) and (3) exist. 35 REPORTS TO POLICYHOLDERS Within 30 days after each Policy Anniversary, we will send you a statement showing, among other things: - the amount of Death Benefit; - the Policy Value and its allocation among the Investment Accounts, the Fixed Account and the Loan Account; - the value of the units in each Investment Account to which the Policy Value is allocated; - the Policy Debt and any loan interest charged since the last report; - the premiums paid and other Policy transactions made during the period since the last report; and - any other information required by law. You will also be sent an annual and a semi-annual report for the Portfolios, which will include a list of the securities, held in each Portfolio as required by the 1940 Act. RESPONSIBILITIES OF MFC MFC entered into an agreement with Manulife Financial Securities, LLC ("Manulife Financial Securities") pursuant to which MFC, on behalf of Manulife Financial Securities will pay the sales commissions in respect of the Policies and certain other policies issued by Manulife USA, prepare and maintain all books and records required to be prepared and maintained by Manulife Financial Securities with respect to the Policies and such other policies, and send all confirmations required to be sent by Manulife Financial Securities with respect to the Policies and such other policies. Manulife Financial Securities will promptly reimburse MFC for all sales commissions paid by MFC and will pay MFC for its other services under the agreement in such amounts and at such times as agreed to by the parties. MFC has also entered into a Service Agreement with Manulife USA pursuant to which MFC will provide to Manulife USA with issue, administrative, general services and recordkeeping functions on behalf of Manulife USA with respect to all of its insurance policies including the Policies. Finally, Manulife USA may, from time to time in its sole discretion, enter into one or more reinsurance agreements with other life insurance companies under which policies issued by it may be reinsured, such that its total amount at risk under a policy would be limited for the life of the insured. VOTING RIGHTS As stated previously, all of the assets held in each sub-account of the Separate Account will be invested in shares of a particular Portfolio. Manulife USA 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, Manulife USA will vote shares held in the sub-accounts in accordance with instructions received from policyholders having an interest in such sub-accounts. Shares held in each sub-account for which no timely instructions from policyholders are received, including shares not attributable to the Policies, will be voted by Manulife USA in the same proportion as those shares in that sub-account for which instructions are received. Should the applicable federal securities laws or regulations change so as to permit Manulife USA to vote shares held in the Separate Account in its own right, it may elect to do so. The number of shares in each sub-account for which instructions may be given by a policyholder is determined by dividing the portion of the Policy Value derived from participation in that sub-account, if any, by the value of one share of the corresponding Portfolio. The number will be determined as of a date chosen by Manulife USA, but not more than 90 days before the shareholders' meeting. Fractional votes are counted. Voting instructions will be solicited in writing at least 14 days prior to the meeting. Manulife USA may, if required by state officials, disregard voting instructions if such instructions would require shares to be voted so as to cause a change in the sub-classification or investment policies of one or more of the Portfolios, or to approve or disapprove an investment management contract. In addition, we may disregard voting instructions that would require changes in the investment policies or investment adviser, provided that we reasonably disapprove such changes in accordance with applicable federal regulations. If Manulife USA does disregard voting instructions, it will advise policyholders of that action and its reasons for such action in the next communication to policyholders. SUBSTITUTION OF PORTFOLIO SHARES It is possible that in the judgment of the management of Manulife USA, one or more of the Portfolios may become unsuitable for investment by the Separate Account because of a change in investment policy or a change in the applicable laws or regulations, because the shares are no longer available for investment, or for some other reason. In that event, Manulife USA 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. 36 Manulife USA also reserves the right (i) to combine other separate accounts with the Separate Account, (ii) to create new separate accounts, (iii) to establish additional sub-accounts within the Separate Account to invest in additional portfolios of the Trust or another management investment company, (iv) to eliminate existing sub-accounts and to stop accepting new allocations and transfers into the corresponding portfolio, (v) to combine sub-accounts or to transfer assets in one sub-account to another sub-account or (vi) to transfer assets from the Separate Account to another separate account and from another separate account to the Separate Account. We also reserve the right to operate the Separate Account as a management investment company or other form permitted by law, and to de-register the Separate Account under the 1940 Act. Any such change would be made only if permissible under applicable federal and state law. RECORDS AND ACCOUNTS The Service Office is responsible for performing all administrative functions, such as decreases, increases, surrender and partial withdrawals, and fund transfers although certain of these functions may be delegated to McCamish Systems, L.L.C., 6425 Powers Ferry Road, Atlanta, Georgia 30339. All records and accounts relating to the Separate Account and the Portfolios will be maintained by us. All financial transactions will be handled by us. All reports required to be made and information required to be given will be provided the Company or by McCamish Systems on behalf of us. STATE REGULATIONS Manulife USA is subject to the regulation and supervision by the Michigan Department of Insurance, which periodically examines its financial condition and operations. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business. The Policies have been filed with insurance officials, and meet all standards set by law, in each jurisdiction where they are sold. Manulife USA is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business for the purposes of determining solvency and compliance with local insurance laws and regulations. LITIGATION No litigation is pending that would have a material effect upon the Separate Account or the Trust. FURTHER INFORMATION A registration statement under the Securities Act of 1933 has been filed with the SEC relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. The omitted information may be obtained from the SEC's principal office in Washington D.C. upon payment of the prescribed fee. The SEC also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC which is located at http://www.sec.gov. For further information you may also contact Manulife USA's Home Office, the address and telephone number of which are on the first page of the prospectus. ILLUSTRATIONS The tables illustrating the way in which a Policy's Death Benefit, Policy Value, and Cash Surrender Value could vary over an extended period of time are set forth in Appendix B to this prospectus. FINANCIAL STATEMENTS The financial statements of the Company and the Separate Account are set forth in the Statement of Additional Information. 37 APPENDIX A: DEFINITIONS ANNUAL PREMIUM TARGET: is an amount set forth in the Policy that limits the amount of premium attributable to a Coverage Amount in Surrender Charge or Sales Load calculations. ATTAINED AGE: is the Issue Age of the life insured plus the number of completed Policy Years. 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. CASE: is a group of Policies insuring individual lives with common employment or other relationship, independent of the Policies. CASH SURRENDER VALUE: is the Policy Value less the Surrender Charge and any outstanding monthly deductions due. COVERAGE AMOUNT: is an amount of insurance coverage under the Policy with a distinct effective date. The Face Amount of the Policy at any time is the sum of the Coverage Amounts in effect. COVERAGE YEAR: is a one-year period beginning on a Coverage Amount's effective date and on each anniversary of this date. For Coverage Amounts in effect on the Policy's Effective Date, the Coverage Year is the same as the Policy Year. FIXED ACCOUNT: is the part of the Policy Value that reflects the value you have in our general account. INVESTMENT ACCOUNT: is the part of the Policy Value that reflects the value you have in one of the sub-accounts of the Separate Account. ISSUE AGE: is the life insured's age on the birthday closer to the Policy Date. LOAN ACCOUNT: is the part of the Policy Value that reflects policy loans and interest credited to the Policy Value in connection with such loans. MINIMUM INITIAL PREMIUM: is the sum of the Monthly Deductions due for the first 3 Policy Months plus the Premium Charges deductible from this amount. NET CASH SURRENDER VALUE: is the Cash Surrender Value less the Policy Debt. NET POLICY VALUE: is the Policy Value less the value in the Loan Account. NET PREMIUM: is the premium paid less the Premium Load and Sales Load. POLICY DATE, POLICY ANNIVERSARY, POLICY MONTH AND POLICY YEAR: Policy Date is the date from which the first Monthly Deductions are calculated and from which Policy Years, Policy Months, and Policy Anniversaries are measured. POLICY DEBT: on any date is the aggregate amount of policy loans, including borrowed and accrued interest, less any loan repayments. POLICY VALUE: is the sum of the values in the Loan Account, the Fixed Account, and the Investment Accounts. SERVICE OFFICE: is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5, or such other address as we specify to you by written notice. A-1 APPENDIX B: ILLUSTRATIONS ILLUSTRATIONS The following tables illustrate the way in which a Policy's Death Benefit, Policy Value, and Cash Surrender Value could vary over an extended period of time. ASSUMPTIONS - Hypothetical gross annual investment returns for the Portfolios offered as investment options through the Policy (i.e., investment income and capital gains and losses, realized or unrealized) equivalent to constant gross annual rates of 0%, 6%, and 12% over the periods indicated. - A life insured who is a male, Issue Age 45, non-smoker. Short Form Underwriting was used. - A Face Amount of $365,000 and Death Benefit Option 1 in all Policy Years. - Payment of an annual premium of $20,000 on the first day of each of the first seven Policy Years. - All policy values are allocated to the Investment Accounts for the entire period shown. - There are no partial withdrawals or policy loans. - Tables 1, 2, and 3 assume a Surrender Charge - Tables 4, 5, and 6 assume a Sales Load. - The Cash Value Accumulation Test is used. - All currently applicable charges and deductions are assessed against the Policy, i.e. a Premium Load, Sales Load or Surrender Charge, monthly Cost of Insurance Charge and Administration Charge and an Asset Based Risk Charge deducted daily from Investment Accounts. The first set of columns in each table, under the heading "Current Charges", assumes rates of charges and deductions that we currently expect to charge. The second set of columns, under the heading "Guaranteed Charges", assumes maximum rates of charges and deductions. - The amounts shown in the Tables also take into account the Portfolios' investment management fees and other expenses, which are assumed to be at an annual rate 1.065% of the average daily net assets of the portfolio. The Death Benefits, Policy Values, and Cash Surrender Values would be different from those shown if the returns averaged 0%, 6%, and 12%, but fluctuated over and under those averages throughout the years. The values would also be different depending on the allocation of the Policy Value among the Portfolios, if the actual rates of return averaged 0%, 6%, or 12%, but the rates of each Portfolio varied above and below such averages. The gross annual rates of returns correspond to net annual rates of return according to the table below:
GROSS RATE OF RETURN POLICY YEAR 0.00% 6.00% 12.00% ----------- ----- ----- ------ NET RATE OF RETURN 1-10 -1.57 4.44 10.44 11+ -1.27 4.74 10.74
Current Cost of Insurance are below the guaranteed rates in many instances and may be changed. The Premium Load rate and Asset Based Risk Charge rate we currently expect to charge in Policy Years 11 and later are below the guaranteed rates and may be changed. The tables reflect a policyholder with certain characteristics (such as age and sex) and assuming certain expenses and rates of return. The actual results of a particular policyholder will vary based on the policyholders characteristics, the actual expenses of the policy and the actual rates of return of the assets held in the subaccounts. Illustrations for smokers would show less favorable results than the illustrations shown below. Upon request, the Company will furnish a comparable illustration based on the proposed life insured's Issue Age, sex (unless unisex rates are required by law, or are requested) and risk class, any additional ratings and the death benefit option, Face Amount, Death Benefit Schedule (if applicable), and planned premium requested. From time to time, in advertisements or sales literature for the Policies that quote performance data of one or more of the Portfolios, the Company may include cash surrender values and death benefit figures computed or using the same methodology as that used in the following illustrations, but with the average annual total return of the Portfolio for which performance data is shown in the advertisement replacing the hypothetical rates of return shown in the following tables. The Policies were first sold to the public on January 1, 2003. However, total return data may be advertised for as long a period of time as the underlying Portfolio has been in existence. The results for any period prior to the Policies being offered would be calculated as if the Policies had been offered during that period of time, with all charges assumed to be the same as for the first full year the Policies were offered. B-1 TABLE 1 - SURRENDER CHARGE - SHORT FORM UNDERWRITING Hypothetical Gross Investment Return of 0.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 19,600 144 1,430 -293 17,733 1,000 16,733 365,000 2 20,000 43,050 17,733 19,600 144 1,487 -570 35,132 1,600 33,532 365,000 3 20,000 66,203 35,132 19,600 144 1,550 -842 52,195 1,800 50,395 365,000 4 20,000 90,513 52,195 19,600 144 1,610 -1,109 68,932 2,000 66,932 365,000 5 20,000 116,038 68,932 19,600 144 1,632 -1,370 85,385 2,000 83,385 365,000 6 20,000 142,840 85,385 19,600 144 1,686 -1,627 101,528 1,500 100,028 365,000 7 20,000 170,982 101,528 19,600 144 1,694 -1,880 117,409 1,000 116,409 365,000 8 0 179,531 117,409 0 144 1,849 -1,821 113,596 1,000 112,596 365,000 9 0 188,508 113,596 0 144 2,038 -1,759 109,655 500 109,155 365,000 10 0 197,933 109,655 0 144 2,255 -1,696 105,561 0 105,561 365,000 11 0 207,830 105,561 0 144 2,409 -1,318 101,690 0 101,690 365,000 12 0 218,221 101,690 0 144 2,454 -1,269 97,824 0 97,824 365,000 13 0 229,132 97,824 0 144 2,228 -1,221 94,230 0 94,230 365,000 14 0 240,589 94,230 0 144 1,996 -1,177 90,913 0 90,913 365,000 15 0 252,619 90,913 0 144 1,812 -1,137 87,819 0 87,819 365,000 16 0 265,249 87,819 0 144 1,783 -1,098 84,795 0 84,795 365,000 17 0 278,512 84,795 0 144 1,887 -1,059 81,706 0 81,706 365,000 18 0 292,438 81,706 0 144 2,099 -1,018 78,445 0 78,445 365,000 19 0 307,059 78,445 0 144 2,431 -975 74,896 0 74,896 365,000 20 0 322,412 74,896 0 144 2,797 -927 71,027 0 71,027 365,000 25 0 411,489 52,844 0 144 4,881 -634 47,185 0 47,185 365,000 30 0 525,176 17,467 0 144 9,540 -155 7,628 0 7,628 365,000
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 19,600 144 1,571 -292 17,592 1,000 16,592 365,000 2 20,000 43,050 17,592 19,600 144 1,614 -567 34,868 1,600 33,268 365,000 3 20,000 66,203 34,868 19,600 144 1,654 -837 51,833 1,800 50,033 365,000 4 20,000 90,513 51,833 19,600 144 1,688 -1,102 68,499 2,000 66,499 365,000 5 20,000 116,038 68,499 19,600 144 1,723 -1,363 84,869 2,000 82,869 365,000 6 20,000 142,840 84,869 19,600 144 1,753 -1,619 100,953 1,500 99,453 365,000 7 20,000 170,982 100,953 19,600 144 1,791 -1,870 116,748 1,000 115,748 365,000 8 0 179,531 116,748 0 144 1,983 -1,809 112,812 1,000 111,812 365,000 9 0 188,508 112,812 0 144 2,205 -1,746 108,717 500 108,217 365,000 10 0 197,933 108,717 0 144 2,460 -1,679 104,433 0 104,433 365,000 11 0 207,830 104,433 0 144 2,740 -1,610 99,939 0 99,939 365,000 12 0 218,221 99,939 0 144 3,052 -1,537 95,206 0 95,206 365,000 13 0 229,132 95,206 0 144 3,387 -1,460 90,215 0 90,215 365,000 14 0 240,589 90,215 0 144 3,755 -1,379 84,937 0 84,937 365,000 15 0 252,619 84,937 0 144 4,161 -1,293 79,339 0 79,339 365,000 16 0 265,249 79,339 0 144 4,623 -1,201 73,370 0 73,370 365,000 17 0 278,512 73,370 0 144 5,151 -1,103 66,972 0 66,972 365,000 18 0 292,438 66,972 0 144 5,763 -998 60,067 0 60,067 365,000 19 0 307,059 60,067 0 144 6,476 -884 52,564 0 52,564 365,000 20 0 322,412 52,564 0 144 7,296 -760 44,364 0 44,364 365,000 25 0 411,489 2,496 0 24 2,183 -2 0 0 0 0 30 0 525,176 0 0 0 0 0 0 0 0 0
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-2 Table 2 - Surrender Charge - Short Form Underwriting Hypothetical Gross Investment Return of 6.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 0 19,600 144 1,428 832 18,860 1,000 17,860 365,000 0 2 20,000 18,860 19,600 144 1,477 1,667 38,506 1,600 36,906 365,000 18,860 3 20,000 38,506 19,600 144 1,526 2,537 58,974 1,800 57,174 365,000 38,506 4 20,000 58,974 19,600 144 1,562 3,444 80,312 2,000 78,312 365,000 58,974 5 20,000 80,312 19,600 144 1,549 4,391 102,609 2,000 100,609 365,000 80,312 6 20,000 102,609 19,600 144 1,554 5,379 125,891 1,500 124,391 365,000 102,609 7 20,000 125,891 19,600 144 1,500 6,413 150,260 1,000 149,260 368,136 125,891 8 0 150,260 0 144 1,578 6,623 155,161 1,000 154,161 369,283 150,260 9 0 155,161 0 144 1,680 6,838 160,175 500 159,675 371,607 155,161 10 0 160,175 0 144 1,787 7,058 165,302 0 165,302 371,930 160,175 11 0 165,302 0 144 1,841 7,777 171,094 0 171,094 374,695 165,302 12 0 171,094 0 144 1,811 8,052 177,190 0 177,190 377,415 171,094 13 0 177,190 0 144 1,591 8,346 183,801 0 183,801 380,469 177,190 14 0 183,801 0 144 1,388 8,664 190,934 0 190,934 385,686 183,801 15 0 190,934 0 144 1,229 9,006 198,567 0 198,567 391,177 190,934 16 0 198,567 0 144 1,175 9,369 206,617 0 206,617 396,704 198,567 17 0 206,617 0 144 1,207 9,749 215,014 0 215,014 402,077 206,617 18 0 215,014 0 144 1,305 10,144 223,709 0 223,709 407,151 215,014 19 0 223,709 0 144 1,476 10,552 232,641 0 232,641 414,101 223,709 20 0 232,641 0 144 1,657 10,970 241,810 0 241,810 420,749 232,641 25 0 281,582 0 144 2,463 13,267 292,242 0 292,242 452,974 281,582 30 0 337,373 0 144 3,865 15,873 349,237 0 349,237 492,425 337,373
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 19,600 144 1,569 828 18,715 1,000 17,715 365,000 2 20,000 43,050 18,715 19,600 144 1,603 1,658 38,226 1,600 36,626 365,000 3 20,000 66,203 38,226 19,600 144 1,628 2,522 58,577 1,800 56,777 365,000 4 20,000 90,513 58,577 19,600 144 1,637 3,425 79,820 2,000 77,820 365,000 5 20,000 116,038 79,820 19,600 144 1,636 4,367 102,007 2,000 100,007 365,000 6 20,000 142,840 102,007 19,600 144 1,616 5,351 125,198 1,500 123,698 365,000 7 20,000 170,982 125,198 19,600 144 1,586 6,380 149,448 1,000 148,448 366,149 8 0 179,531 149,448 0 144 1,692 6,584 154,196 1,000 153,196 366,987 9 0 188,508 154,196 0 144 1,814 6,792 159,030 500 158,530 368,951 10 0 197,933 159,030 0 144 1,944 7,003 163,946 0 163,946 368,878 11 0 207,830 163,946 0 144 2,081 7,218 168,938 0 168,938 369,974 12 0 218,221 168,938 0 144 2,224 7,436 174,006 0 174,006 370,632 13 0 229,132 174,006 0 144 2,362 7,657 179,157 0 179,157 370,856 14 0 240,589 179,157 0 144 2,512 7,882 184,383 0 184,383 372,455 15 0 252,619 184,383 0 144 2,666 8,111 189,684 0 189,684 373,677 16 0 265,249 189,684 0 144 2,829 8,342 195,053 0 195,053 374,502 17 0 278,512 195,053 0 144 2,998 8,576 200,487 0 200,487 374,910 18 0 292,438 200,487 0 144 3,177 8,813 205,979 0 205,979 374,881 19 0 307,059 205,979 0 144 3,405 9,051 211,480 0 211,480 376,434 20 0 322,412 211,480 0 144 3,643 9,289 216,982 0 216,982 377,549 25 0 411,489 239,044 0 144 4,772 10,485 244,613 0 244,613 379,150 30 0 525,176 266,332 0 144 6,356 11,657 271,489 0 271,489 382,800
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-3 Table 3 - Surrender Charge - Short Form Underwriting Hypothetical Gross Investment Return of 12.00%
Current Charges - ------------------------------------------------------------------------------------------------------------------------------------ Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 19,600 144 1,426 1,958 19,988 1,000 18,988 365,000 2 20,000 43,050 19,988 19,600 144 1,467 4,041 42,018 1,600 40,418 365,000 3 20,000 66,203 42,018 19,600 144 1,500 6,338 66,313 1,800 64,513 365,000 4 20,000 90,513 66,313 19,600 144 1,508 8,873 93,134 2,000 91,134 365,000 5 20,000 116,038 93,134 19,600 144 1,454 11,674 122,810 2,000 120,810 365,000 6 20,000 142,840 122,810 19,600 144 1,438 14,773 155,601 1,500 154,101 393,670 7 20,000 170,982 155,601 19,600 144 1,649 18,183 191,591 1,000 190,591 469,397 8 0 179,531 191,591 0 144 1,831 19,883 209,499 1,000 208,499 498,607 9 0 188,508 209,499 0 144 2,115 21,737 228,976 500 228,476 531,224 10 0 197,933 228,976 0 144 2,393 23,754 250,193 0 250,193 562,934 11 0 207,830 250,193 0 144 2,625 26,701 274,125 0 274,125 600,333 12 0 218,221 274,125 0 144 2,731 29,265 300,515 0 300,515 640,097 13 0 229,132 300,515 0 144 2,611 32,105 329,864 0 329,864 682,819 14 0 240,589 329,864 0 144 2,347 35,270 362,643 0 362,643 732,539 15 0 252,619 362,643 0 144 2,217 38,796 399,078 0 399,078 786,184 16 0 265,249 399,078 0 144 2,236 42,707 439,405 0 439,405 843,657 17 0 278,512 439,405 0 144 2,443 47,024 483,842 0 483,842 904,785 18 0 292,438 483,842 0 144 2,866 51,771 532,603 0 532,603 969,337 19 0 307,059 532,603 0 144 3,456 56,972 585,975 0 585,975 1,043,036 20 0 322,412 585,975 0 144 4,162 62,661 644,331 0 644,331 1,121,135 25 0 411,489 938,524 0 144 8,528 100,261 1,030,114 0 1,030,114 1,596,676 30 0 525,176 1,487,580 0 144 17,555 158,693 1,628,573 0 1,628,573 2,296,288
Guaranteed Charges - ------------------------------------------------------------------------------------------------------------------------------------ Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 19,600 144 1,567 1,950 19,839 1,000 18,839 365,000 2 20,000 43,050 19,839 19,600 144 1,592 4,019 41,722 1,600 40,122 365,000 3 20,000 66,203 41,722 19,600 144 1,600 6,302 65,879 1,800 64,079 365,000 4 20,000 90,513 65,879 19,600 144 1,581 8,823 92,578 2,000 90,578 365,000 5 20,000 116,038 92,578 19,600 144 1,537 11,612 122,109 2,000 120,109 365,000 6 20,000 142,840 122,109 19,600 144 1,515 14,696 154,745 1,500 153,245 391,506 7 20,000 170,982 154,745 19,600 144 1,914 18,080 190,368 1,000 189,368 466,401 8 0 179,531 190,368 0 144 2,168 19,738 207,793 1,000 206,793 494,548 9 0 188,508 207,793 0 144 2,476 21,539 226,712 500 226,212 525,973 10 0 197,933 226,712 0 144 2,807 23,495 247,257 0 247,257 556,328 11 0 207,830 247,257 0 144 3,191 25,618 269,539 0 269,539 590,291 12 0 218,221 269,539 0 144 3,615 27,920 293,701 0 293,701 625,582 13 0 229,132 293,701 0 144 4,063 30,416 319,910 0 319,910 662,213 14 0 240,589 319,910 0 144 4,589 33,122 348,299 0 348,299 703,563 15 0 252,619 348,299 0 144 5,163 36,053 379,045 0 379,045 746,719 16 0 265,249 379,045 0 144 5,800 39,227 412,329 0 412,329 791,671 17 0 278,512 412,329 0 144 6,505 42,661 448,341 0 448,341 838,397 18 0 292,438 448,341 0 144 7,291 46,376 487,281 0 487,281 886,852 19 0 307,059 487,281 0 144 8,269 50,385 529,254 0 529,254 942,072 20 0 322,412 529,254 0 144 9,357 54,705 574,458 0 574,458 999,557 25 0 411,489 792,649 0 144 16,243 81,812 858,074 0 858,074 1,330,015 30 0 525,176 1,170,146 0 144 28,661 120,520 1,261,861 0 1,261,861 1,779,224
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-4 Table 4 - Sales Load - Short Form Underwriting Hypothetical Gross Investment Return of 0.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 653 -275 16,928 0 16,928 365,000 2 20,000 43,050 16,928 18,400 144 775 -545 33,864 0 33,864 365,000 3 20,000 66,203 33,864 19,000 144 903 -818 50,999 0 50,999 365,000 4 20,000 90,513 50,999 19,200 144 991 -1,089 67,975 0 67,975 365,000 5 20,000 116,038 67,975 19,400 144 1,064 -1,357 84,810 0 84,810 365,000 6 20,000 142,840 84,810 19,600 144 1,181 -1,623 101,462 0 101,462 365,000 7 20,000 170,982 101,462 19,600 144 1,312 -1,882 117,724 0 117,724 365,000 8 0 179,531 117,724 0 144 1,521 -1,828 114,231 0 114,231 365,000 9 0 188,508 114,231 0 144 1,778 -1,771 110,537 0 110,537 365,000 10 0 197,933 110,537 0 144 2,022 -1,712 106,660 0 106,660 365,000 11 0 207,830 106,660 0 144 2,167 -1,333 103,015 0 103,015 365,000 12 0 218,221 103,015 0 144 2,271 -1,287 99,314 0 99,314 365,000 13 0 229,132 99,314 0 144 2,161 -1,241 95,768 0 95,768 365,000 14 0 240,589 95,768 0 144 1,936 -1,197 92,490 0 92,490 365,000 15 0 252,619 92,490 0 144 1,802 -1,157 89,387 0 89,387 365,000 16 0 265,249 89,387 0 144 1,773 -1,118 86,353 0 86,353 365,000 17 0 278,512 86,353 0 144 1,876 -1,079 83,254 0 83,254 365,000 18 0 292,438 83,254 0 144 2,087 -1,038 79,985 0 79,985 365,000 19 0 307,059 79,985 0 144 2,418 -994 76,430 0 76,430 365,000 20 0 322,412 76,430 0 144 2,782 -947 72,557 0 72,557 365,000 25 0 411,489 54,369 0 144 4,857 -654 48,714 0 48,714 365,000 30 0 525,176 19,045 0 144 9,497 -175 9,229 0 9,229 365,000
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 1,579 -267 16,010 0 16,010 365,000 2 20,000 43,050 16,010 18,400 144 1,627 -523 32,115 0 32,115 365,000 3 20,000 66,203 32,115 19,000 144 1,671 -785 48,515 0 48,515 365,000 4 20,000 90,513 48,515 19,200 144 1,709 -1,044 64,819 0 64,819 365,000 5 20,000 116,038 64,819 19,400 144 1,747 -1,302 81,025 0 81,025 365,000 6 20,000 142,840 81,025 19,600 144 1,779 -1,558 97,144 0 97,144 365,000 7 20,000 170,982 97,144 19,600 144 1,818 -1,810 112,972 0 112,972 365,000 8 0 179,531 112,972 0 144 2,013 -1,750 109,065 0 109,065 365,000 9 0 188,508 109,065 0 144 2,238 -1,687 104,996 0 104,996 365,000 10 0 197,933 104,996 0 144 2,496 -1,621 100,736 0 100,736 365,000 11 0 207,830 100,736 0 144 2,779 -1,552 96,261 0 96,261 365,000 12 0 218,221 96,261 0 144 3,094 -1,479 91,544 0 91,544 365,000 13 0 229,132 91,544 0 144 3,433 -1,402 86,564 0 86,564 365,000 14 0 240,589 86,564 0 144 3,805 -1,321 81,294 0 81,294 365,000 15 0 252,619 81,294 0 144 4,215 -1,235 75,700 0 75,700 365,000 16 0 265,249 75,700 0 144 4,682 -1,144 69,731 0 69,731 365,000 17 0 278,512 69,731 0 144 5,215 -1,046 63,326 0 63,326 365,000 18 0 292,438 63,326 0 144 5,833 -940 56,409 0 56,409 365,000 19 0 307,059 56,409 0 144 6,553 -826 48,886 0 48,886 365,000 20 0 322,412 48,886 0 144 7,381 -701 40,659 0 40,659 365,000 25 0 411,489 0 0 0 0 0 0 0 0 0 30 0 525,176 0 0 0 0 0 0 0 0 0
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-5 Table 5 - Sales Load - Short Form Underwriting Hypothetical Gross Investment Return of 6.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 652 779 17,983 0 17,983 365,000 2 20,000 43,050 17,983 18,400 144 770 1,592 37,061 0 37,061 365,000 3 20,000 66,203 37,061 19,000 144 889 2,462 57,490 0 57,490 365,000 4 20,000 90,513 57,490 19,200 144 962 3,375 78,958 0 78,958 365,000 5 20,000 116,038 78,958 19,400 144 1,012 4,335 101,537 0 101,537 365,000 6 20,000 142,840 101,537 19,600 144 1,091 5,343 125,245 0 125,245 365,000 7 20,000 170,982 125,245 19,600 144 1,164 6,393 149,929 0 149,929 367,326 8 0 179,531 149,929 0 144 1,302 6,615 155,098 0 155,098 369,133 9 0 188,508 155,098 0 144 1,472 6,840 160,323 0 160,323 371,948 10 0 197,933 160,323 0 144 1,611 7,068 165,636 0 165,636 372,682 11 0 207,830 165,636 0 144 1,670 7,797 171,620 0 171,620 375,847 12 0 218,221 171,620 0 144 1,693 8,080 177,863 0 177,863 378,847 13 0 229,132 177,863 0 144 1,559 8,379 184,538 0 184,538 381,994 14 0 240,589 184,538 0 144 1,361 8,700 191,733 0 191,733 387,301 15 0 252,619 191,733 0 144 1,233 9,044 199,400 0 199,400 392,818 16 0 265,249 199,400 0 144 1,179 9,408 207,485 0 207,485 398,371 17 0 278,512 207,485 0 144 1,212 9,790 215,919 0 215,919 403,769 18 0 292,438 215,919 0 144 1,310 10,187 224,652 0 224,652 408,867 19 0 307,059 224,652 0 144 1,482 10,596 233,623 0 233,623 415,849 20 0 322,412 233,623 0 144 1,664 11,016 242,832 0 242,832 422,527 25 0 411,489 282,773 0 144 2,474 13,323 293,477 0 293,477 454,890 30 0 525,176 338,799 0 144 3,882 15,940 350,713 0 350,713 494,505
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 1,577 757 17,037 0 17,037 365,000 2 20,000 43,050 17,037 18,400 144 1,618 1,530 35,205 0 35,205 365,000 3 20,000 66,203 35,205 19,000 144 1,647 2,361 54,775 0 54,775 365,000 4 20,000 90,513 54,775 19,200 144 1,662 3,238 75,407 0 75,407 365,000 5 20,000 116,038 75,407 19,400 144 1,666 4,161 97,158 0 97,158 365,000 6 20,000 142,840 97,158 19,600 144 1,649 5,135 120,100 0 120,100 365,000 7 20,000 170,982 120,100 19,600 144 1,624 6,153 144,086 0 144,086 365,000 8 0 179,531 144,086 0 144 1,735 6,345 148,552 0 148,552 365,000 9 0 188,508 148,552 0 144 1,860 6,540 153,089 0 153,089 365,000 10 0 197,933 153,089 0 144 1,997 6,738 157,686 0 157,686 365,000 11 0 207,830 157,686 0 144 2,139 6,939 162,342 0 162,342 365,000 12 0 218,221 162,342 0 144 2,288 7,142 167,052 0 167,052 365,000 13 0 229,132 167,052 0 144 2,434 7,347 171,820 0 171,820 365,000 14 0 240,589 171,820 0 144 2,584 7,555 176,648 0 176,648 365,000 15 0 252,619 176,648 0 144 2,736 7,765 181,533 0 181,533 365,000 16 0 265,249 181,533 0 144 2,900 7,978 186,467 0 186,467 365,000 17 0 278,512 186,467 0 144 3,076 8,193 191,439 0 191,439 365,000 18 0 292,438 191,439 0 144 3,270 8,409 196,434 0 196,434 365,000 19 0 307,059 196,434 0 144 3,484 8,625 201,431 0 201,431 365,000 20 0 322,412 201,431 0 144 3,712 8,841 206,416 0 206,416 365,000 25 0 411,489 226,102 0 144 4,913 9,906 230,952 0 230,952 365,000 30 0 525,176 249,451 0 144 6,562 10,902 253,647 0 253,647 365,000
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-6 Table 6 - Sales Load - Short Form Underwriting Hypothetical Gross Investment Return of 12.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 652 779 17,983 0 17,983 365,000 2 20,000 43,050 17,983 18,400 144 770 1,592 37,061 0 37,061 365,000 3 20,000 66,203 37,061 19,000 144 889 2,462 57,490 0 57,490 365,000 4 20,000 90,513 57,490 19,200 144 962 3,375 78,958 0 78,958 365,000 5 20,000 116,038 78,958 19,400 144 1,012 4,335 101,537 0 101,537 365,000 6 20,000 142,840 101,537 19,600 144 1,091 5,343 125,245 0 125,245 365,000 7 20,000 170,982 125,245 19,600 144 1,164 6,393 149,929 0 149,929 367,326 8 0 179,531 149,929 0 144 1,302 6,615 155,098 0 155,098 369,133 9 0 188,508 155,098 0 144 1,472 6,840 160,323 0 160,323 371,948 10 0 197,933 160,323 0 144 1,611 7,068 165,636 0 165,636 372,682 11 0 207,830 165,636 0 144 1,670 7,797 171,620 0 171,620 375,847 12 0 218,221 171,620 0 144 1,693 8,080 177,863 0 177,863 378,847 13 0 229,132 177,863 0 144 1,559 8,379 184,538 0 184,538 381,994 14 0 240,589 184,538 0 144 1,361 8,700 191,733 0 191,733 387,301 15 0 252,619 191,733 0 144 1,233 9,044 199,400 0 199,400 392,818 16 0 265,249 199,400 0 144 1,179 9,408 207,485 0 207,485 398,371 17 0 278,512 207,485 0 144 1,212 9,790 215,919 0 215,919 403,769 18 0 292,438 215,919 0 144 1,310 10,187 224,652 0 224,652 408,867 19 0 307,059 224,652 0 144 1,482 10,596 233,623 0 233,623 415,849 20 0 322,412 233,623 0 144 1,664 11,016 242,832 0 242,832 422,527 25 0 411,489 282,773 0 144 2,474 13,323 293,477 0 293,477 454,890 30 0 525,176 338,799 0 144 3,882 15,940 350,713 0 350,713 494,505
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 18,000 144 1,577 757 17,037 0 17,037 365,000 2 20,000 43,050 17,037 18,400 144 1,618 1,530 35,205 0 35,205 365,000 3 20,000 66,203 35,205 19,000 144 1,647 2,361 54,775 0 54,775 365,000 4 20,000 90,513 54,775 19,200 144 1,662 3,238 75,407 0 75,407 365,000 5 20,000 116,038 75,407 19,400 144 1,666 4,161 97,158 0 97,158 365,000 6 20,000 142,840 97,158 19,600 144 1,649 5,135 120,100 0 120,100 365,000 7 20,000 170,982 120,100 19,600 144 1,624 6,153 144,086 0 144,086 365,000 8 0 179,531 144,086 0 144 1,735 6,345 148,552 0 148,552 365,000 9 0 188,508 148,552 0 144 1,860 6,540 153,089 0 153,089 365,000 10 0 197,933 153,089 0 144 1,997 6,738 157,686 0 157,686 365,000 11 0 207,830 157,686 0 144 2,139 6,939 162,342 0 162,342 365,000 12 0 218,221 162,342 0 144 2,288 7,142 167,052 0 167,052 365,000 13 0 229,132 167,052 0 144 2,434 7,347 171,820 0 171,820 365,000 14 0 240,589 171,820 0 144 2,584 7,555 176,648 0 176,648 365,000 15 0 252,619 176,648 0 144 2,736 7,765 181,533 0 181,533 365,000 16 0 265,249 181,533 0 144 2,900 7,978 186,467 0 186,467 365,000 17 0 278,512 186,467 0 144 3,076 8,193 191,439 0 191,439 365,000 18 0 292,438 191,439 0 144 3,270 8,409 196,434 0 196,434 365,000 19 0 307,059 196,434 0 144 3,484 8,625 201,431 0 201,431 365,000 20 0 322,412 201,431 0 144 3,712 8,841 206,416 0 206,416 365,000 25 0 411,489 226,102 0 144 4,913 9,906 230,952 0 230,952 365,000 30 0 525,176 249,451 0 144 6,562 10,902 253,647 0 253,647 365,000
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-7 Additional information about the Policy is also contained in the Statement of Additional Information ("SAI") dated the same date as this Prospectus. The SAI is incorporated by reference into this Prospectus. The SAI is available upon request, without charge, by calling the following toll-free number: (800) 387-2747. This toll-free number may also be used to request other information about the Policy and to make contract owner inquiries. Information about the Policy (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission ("SEC") at (202) 942-8090. Reports and other information about the Policy are available on the SEC's Internet site at http://www.sec.gov and copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC, Washington D.C. 20549-0102. The Registrant's Investment Company and 1933 Act File Numbers are 811-5130 and 333-100567, respectively. PROSPECTUS THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) SEPARATE ACCOUNT N VENTURE CORPORATE VUL A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY This prospectus describes Venture Corporate VUL, a flexible premium variable universal life insurance policy (the "Policy") offered by The Manufacturers Life Insurance Company (U.S.A.) (the "Company," "Manulife USA," "we" or "us") to individuals, corporations, trusts, associations, or similar entities (the "applicant", "policyholder" or "you"). THIS PROSPECTUS DESCRIBES POLICIES ISSUED ON OR AFTER MARCH 26, 2004. FOR THE PROSPECTUS DESCRIBING POLICIES ISSUED BEFORE MARCH 26, 2004 SEE THE PROSPECTUS DATED MAY 1, 2004 (CVUL03 5/2004). The Policy is designed for use by corporations and other employers to provide life insurance and to fund other employee benefits. The Policy is designed to provide lifetime insurance protection together with flexibility as to the timing and amount of premium payments, the investments underlying the Policy Value, and the amount of insurance coverage. The insurance benefit is payable at the life insured's death to the Policy's beneficiary. The Policy also provides a Net Cash Surrender Value available to you by surrendering the Policy or by taking policy loans and partial withdrawals. The Policy will remain in force so long as the Net Cash Surrender Value is sufficient to cover charges assessed against the Policy. Policy Value may be accumulated on a fixed basis or vary with the investment performance of the sub-accounts of Manulife USA's Separate Account N (the "Separate Account") to which you allocate net premiums. The assets of each sub-account will be used to purchase shares of a particular investment portfolio (a "Portfolio"). The Portfolio prospectuses, and the corresponding Statements of Additional information, describe the investment objectives of the Portfolios. Other sub-accounts and Portfolios may be added in the future. THIS POLICY IS NOT SUITABLE FOR SHORT-TERM INVESTMENT PURPOSES. PROSPECTIVE PURCHASERS SHOULD NOTE THAT IT MAY NOT BE ADVISABLE TO PURCHASE A POLICY AS A REPLACEMENT FOR EXISTING INSURANCE. The Securities and Exchange Commission (the "SEC") maintains a web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding registrants that file electronically with the SEC. PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Manufacturers Life Insurance Company (U.S.A.) 38500 Woodward Avenue Bloomfield Hills, Michigan 48304 THE DATE OF THIS PROSPECTUS IS MAY 1, 2004. CVUL04 5/2004 TABLE OF CONTENTS RISKS/BENEFITS SUMMARY............................................................................ 3 FEE TABLE......................................................................................... 4 POLICY SUMMARY.................................................................................... 5 General....................................................................................... 5 Death Benefits................................................................................ 5 Premiums...................................................................................... 6 Policy Value.................................................................................. 6 Policy Loans.................................................................................. 6 Surrender and Partial Withdrawals............................................................. 6 Lapse and Reinstatement....................................................................... 6 Charges and Deductions........................................................................ 6 Investment Options and Investment Advisers.................................................... 6 Investment Management Fees and Expenses....................................................... 7 Table of Investment Options and Investment Subadvisers........................................ 7 GENERAL INFORMATION ABOUT MANULIFE USA, THE SEPARATE ACCOUNT AND THE PORTFOLIOS................... 8 Manulife USA.................................................................................. 8 Ratings....................................................................................... 9 The Separate Account.......................................................................... 9 The Portfolios................................................................................ 9 ISSUING A POLICY.................................................................................. 14 Use of the Policy............................................................................. 15 Requirements.................................................................................. 15 Temporary Insurance Agreement................................................................. 15 Underwriting.................................................................................. 15 Right to Examine the Policy................................................................... 16 Life Insurance Qualification.................................................................. 16 DEATH BENEFITS.................................................................................... 16 Flexible Term Insurance Option Rider.......................................................... 17 Death Benefit Options......................................................................... 18 Changing the Death Benefit Option............................................................. 19 Changing the Face Amount and Scheduled Death Benefits......................................... 20 PREMIUM PAYMENTS.................................................................................. 22 Initial Premiums.............................................................................. 22 Subsequent Premiums........................................................................... 22 Premium Limitations........................................................................... 22 Premium Allocation............................................................................ 22 CHARGES AND DEDUCTIONS............................................................................ 22 Premium Load.................................................................................. 22 Sales Load.................................................................................... 22 Asset Based Risk Charge Deducted from Investment Accounts..................................... 24 Investment Management Fees and Expenses....................................................... 24 Reduction in Charges and Enhanced Surrender Values............................................ 24 Company Tax Considerations.................................................................... 24 POLICY VALUE...................................................................................... 24 Determination of the Policy Value............................................................. 24 Units and Unit Values......................................................................... 25 Transfers of Policy Value..................................................................... 26 POLICY LOANS...................................................................................... 27 Interest Charged on Policy Loans.............................................................. 27 Loan Account.................................................................................. 27 POLICY SURRENDER AND PARTIAL WITHDRAWALS.......................................................... 27 Policy Surrender.............................................................................. 27 Partial Withdrawals........................................................................... 27 LAPSE AND REINSTATEMENT........................................................................... 27 Lapse......................................................................................... 27 Reinstatement................................................................................. 28 THE GENERAL ACCOUNT............................................................................... 28 Fixed Account................................................................................. 28 OTHER PROVISIONS OF THE POLICY.................................................................... 28 Policyholder Rights........................................................................... 28 Beneficiary................................................................................... 29 Incontestability.............................................................................. 29 Misstatement of Age or Sex.................................................................... 29 Suicide Exclusion............................................................................. 29 Supplementary Benefits........................................................................ 29 TAX TREATMENT OF THE POLICY....................................................................... 29 Life Insurance Qualification.................................................................. 30 Tax Treatment of Policy Benefits.............................................................. 31 Alternate Minimum Tax......................................................................... 34 Income Tax Reporting.......................................................................... 34 OTHER INFORMATION................................................................................. 34 Payment of Proceeds........................................................................... 34 Reports to Policyholders...................................................................... 34 Responsibilities of MFC....................................................................... 34 Voting Rights................................................................................. 35 Substitution of Portfolio Shares.............................................................. 35 Records and Accounts.......................................................................... 35 State Regulations............................................................................. 35 Litigation.................................................................................... 35 Further Information........................................................................... 36 Illustrations................................................................................. 36 Financial Statements.......................................................................... 36 APPENDIX A: DEFINITIONS........................................................................... A-1 APPENDIX B: ILLUSTRATIONS......................................................................... A-1
This prospectus does not constitute an offering in any jurisdiction in which such offering may not lawfully be made. No person is authorized to make any representations in connection with this offering other than those contained in this prospectus, the Portfolio prospectuses, or the corresponding Statements of Additional Information. THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE BENEFICIARY NAMED THEREIN. NO CLAIM IS MADE THAT THIS VARIABLE LIFE INSURANCE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. Examine this prospectus carefully. The Policy Summary will briefly describe the Policy. More detailed information will be found further in the prospectus. RISKS/BENEFITS SUMMARY BENEFITS Some of the benefits of purchasing the Policy are described below. DEATH BENEFIT PROTECTION. This prospectus describes a flexible premium variable life insurance policy, which provides for a death benefit payable to the beneficiary of the Policy upon the death of the insured. Variable life insurance is a flexible tool for financial and investment planning for persons needing death benefit protection. You should consider other forms of investments if death benefit protection is not one of your financial planning objectives, as there are additional costs and expenses in providing the insurance. ACCESS TO YOUR POLICY VALUES. Variable life insurance offers access to Policy Value. You may borrow against your Policy, or surrender all, or a portion of your policy through a partial withdrawal. There are limitations on partial withdrawals (a partial withdrawal of the Net Cash Surrender Value may only be made once each Policy Month after the first Policy Anniversary). See "Policy Surrender and Partial Withdrawals" for further information. TAX DEFERRED ACCUMULATION. Variable life insurance has several tax advantages under current tax laws. For example, Policy Value accumulates on a tax-deferred basis and a transfer of values from one sub-account to another within the Policy generates no taxable gain or loss. Any investment income and realized capital gains within a sub-account or interest from the Fixed Account are automatically reinvested without current income taxation to the policy owner. INVESTMENT OPTIONS. In addition to the Fixed Account, the Policy provides for access to a number of variable investment options, which permit you to reallocate your Policy Value to meet your changing personal objectives, goals, and investment conditions. Information regarding each investment option may be found in the Portfolio prospectuses. FLEXIBILITY. The policy is a flexible premium variable life insurance policy in which varying premium payments are permitted. You may select death benefit options and an additional policy rider. You may increase or decrease the amount of death benefit. You are able to select, monitor, and change investment choices within your policy. RISKS Some of the risks of purchasing the Policy are described below. FLUCTUATING INVESTMENT PERFORMANCE. Policy Value invested in a sub-account are not guaranteed and will increase and decrease according to investment performance. You assume the investment risk of Policy Value allocated to the sub-accounts. A comprehensive discussion of each sub-account's objective and risk is found in the Portfolio prospectuses. You should review these prospectuses carefully before allocating Policy Value to any sub-accounts. UNSUITABLE FOR SHORT-TERM INVESTMENT. The Policy is intended for long-term financial planning, and is unsuitable for short-term goals. Your Policy is not designed to serve as a vehicle for frequent trading. POLICY LAPSE. Sufficient premiums must be paid to keep a policy in force. There is a risk of lapse if the Policy Value is too low in relation to the insurance amount, if investment results are less favorable than anticipated or if extensive policy loans are taken. A Policy lapse could have adverse tax consequences since the amount received (including any loans) less the investment in the Policy may be treated as ordinary income subject to tax. DECREASING DEATH BENEFIT. Any outstanding policy loans and any amount that you have surrendered or withdrawn will reduce your Policy's death benefit. ADVERSE CONSEQUENCES OF EARLY SURRENDER. Depending on the amount of premium paid and the Policy Value at the time of surrender, there may be little or no Net Cash Surrender Value paid to you when the Policy is surrendered. In addition, there are adverse consequences associated with partial withdrawals including potential Policy lapse and adverse tax consequences. There may also be adverse consequences associated for full surrender of the Policy. ADVERSE TAX CONSEQUENCES. You should always consult a tax adviser about the application of federal and state tax law to your individual situation. The federal income tax treatment of life insurance is complex and current tax treatment of life insurance may change. 3 FEE TABLE The following tables describe the fees and expenses (on a guaranteed basis) that you will pay when buying, owning, and surrendering the Policy. The first table describes the fees and expenses that you will pay at the time that you buy the Policy, surrender the Policy, or transfer cash value between investment options. TRANSACTION FEES
CHARGE WHEN CHARGE IS DEDUCTED AMOUNT DEDUCTED - ------------------------------------------------------------------------------------------------------------------------------------ MAXIMUM CHARGE Upon receipt of premium 2.5% of each premium paid Imposed on Premium (Load) MAXIMUM SALES CHARGE Upon receipt of premium 13% (Policy Year 1) (1) Imposed on Premium TRANSFER FEES Upon Transfer $25 (only applies to transfers in excess of 12 in a Policy Year)
1. The Sales Charge declines in subsequent Policy Years as noted below:
Coverage Year Percentage 1 13.00% 2 6.25% 3 3.50% 4 2.50% 5 0.50% 6 0.50% 7+ 0.00%
The next table described the fees and expenses (on a guaranteed basis) that you will pay periodically during the time that you own the Policy, not including fees and expenses of the Portfolios, the underlying variable investment options for your Policy. ANNUAL CHARGES OTHER THAN THOSE OF THE PORTFOLIOS
WHEN CHARGE CHARGE IS DEDUCTED AMOUNT DEDUCTED(3) - ------------------------------------------------------------------------------------------------------------------------------------ COST OF INSURANCE (1) Monthly Minimum and Maximum Charge The possible range of the cost of insurance is from $0.00 to $83.33 per month per $1,000 of the net amount at risk. Charge for a Representative Policyowner The Cost of Insurance rate is (a 45 year old non-smoking male) $0.08 per month per $1,000 of the (rating classification is for short form net amount at risk. underwriting) COST OF INSURANCE - Monthly Minimum and Maximum Charges The possible range of the cost of Optional FTIO Rider (Flexible Term insurance is from $0.00 to $83.33 Insurance Option)(1) per month per $1,000 of the net amount at risk Charge for a Representative Policyowner The Cost of Insurance rate is (a 45 year old non-smoking male) rating $0.38 per month per $1,000 of the classification is for short form net amount at risk underwriting) MORTALITY AND EXPENSE RISK FEES Monthly 0.50% annually (2) ADMINISTRATIVE FEES Monthly $12 per Policy Month. LOAN INTEREST RATE (NET) Annually 0.75% (4)
1. The cost of insurance varies based on individual characteristics and the charges shown in the table may not be representative of the charge a particular Policyowner will pay. A policy owner may obtain additional information regarding cost of insurance charge by contacting the Company. The election (or failure to elect) the optional FTIO rider will impact the total cost of insurance charges. 2. Currently the Company is charging the following rates:
Policy Years Annual Rate 1-10 0.45% 11+ 0.20%
3. All figures are rounded to two decimal places. 4. The Loan Interest Rate (Net) is equal to the rate of interest charged on the policy loan less the interest credited to the Loan Account. Currently this rate is 0.75% for Policy Years 1-10 and 0.25% for Policy Years 11 and higher. The maximum loan rate is 4%. 4 The next table described the fees and expenses of the Portfolios that you will pay periodically during the time that you own the Policy. The table shows the minimum and maximum fees and expenses charged by any of the Portfolios. More detail concerning each Portfolio's fees and expenses is contained in the Portfolio prospectuses. ANNUAL OPERATING EXPENSES OF THE PORTFOLIOS (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS)
CHARGE MINIMUM MAXIMUM - --------------------------------------------------------------------------------------------------------- Expenses that are deducted from portfolio assets, including advisory fees, Rule 12b-1 fees and Other Expenses 0.55% 2.86*%
*The minimum and maximum expenses do not reflect any expense reimbursements. If such reimbursements were reflected, the maximum expenses would be 1.55%. Expense reimbursements may be terminated at any time. POLICY SUMMARY GENERAL The Policy is a flexible premium variable universal life insurance policy. This summary provides a general description of the important features of the Policy. It is not comprehensive and is qualified in its entirety by the more detailed information contained in this prospectus. Unless otherwise stated or implied by the context, the discussions in this prospectus assume that the Policy has not gone into default, there is no outstanding Policy Debt and the Death Benefit is not determined by the Minimum Death Benefit percentage. The Policy's provisions may vary in some states. The terms of the Policy and any endorsements or riders will supersede the disclosure in this prospectus. DEATH BENEFITS The Policy provides a Death Benefit in the event of the death of the life insured while the Policy is in force. The basic Death Benefit amount is the Face Amount, which is provided for the lifetime of the life insured with no maturity or expiration date. There may be other amounts added to the Death Benefit as described below. FLEXIBLE TERM INSURANCE OPTION You may add a flexible term insurance option rider (the "FTIO Rider") to the Policy to provide additional term life insurance coverage on the life insured. Cost of insurance rates are less than or equal to those of the Policy and no Sales Loads will apply. However, unlike the Face Amount of the Policy, the FTIO Rider will terminate at the life insured's Attained Age 100. The FTIO Rider also offers the flexibility to schedule varying Death Benefit amounts on future dates (the "Scheduled Death Benefits"). DEATH BENEFIT OPTIONS There are two Death Benefit Options. Option 1 provides a Death Benefit equal to the Face Amount of the Policy or the Scheduled Death Benefits of the FTIO Rider or, if greater, the Minimum Death Benefit. Option 2 provides a Death Benefit equal to the Face Amount or the Scheduled Death Benefits, plus the Policy Value or, if greater, the Minimum Death Benefit. You may change the Death Benefit Option and increase or decrease the Face Amount and Scheduled Death Benefits. AGE 100 ADVANTAGE If the Life Insured is alive on the Maturity date, the policy will continue in force subject to the following unless the policyowner chooses to surrender the Policy for its Net Cash Surrender Value: (a) the Policy will be continued until the earlier of the death of the life insured of the date or the date the policyowner surrenders the Policy; (b) no additional premium payments will be accepted although loan repayments will be accepted; (c) no additional charges or deductions (described under "Charges and Deductions" will be assessed; (d) interest on any Policy Debt will continue to accrue; (e) the policyowner may continue to transfer portions of the Policy Value among the Investment Accounts and the Fixed Accounts as described in this prospectus. The Policy will go into default after the Maturity Date if the Policy Debt equals or exceeds the Policy Value. The Company will notify the policyowner of the default and will allow a 61-day grace period (from the date the policy goes into default) in which the policyowner may make a payment of the loan interest which would then bring the Policy out of default. If the required payment is not received by the end of the grace period, the Policy will terminate with no value. 5 PREMIUMS Premium payments may be made at any time prior to Attained Age 100 and in any amount, subject to certain limitations (see "Premium Payments - Premium Limitations") Net Premiums will be allocated to one or more of the Investment Options described below. You may change allocations and make transfers among the accounts subject to limitations described below. POLICY VALUE The Policy Value is the accumulation of premiums paid, less charges and deductions we take for expenses and cost of insurance, plus or minus the investment returns of the accounts to which the Policy Value has been allocated. You may obtain a portion of the Policy Value by taking a policy loan or a partial withdrawal or by full surrender of the Policy. POLICY LOANS You may borrow against the Net Cash Surrender Value of the Policy. Loan interest will accrue daily and be payable in arrears on each Policy Anniversary. The Policy Debt will be deducted from amounts payable at the life insured's death or upon surrender. SURRENDER AND PARTIAL WITHDRAWALS You may make a partial withdrawal of Policy Value. It may result in a decrease in the Face Amount and Scheduled Death Benefits. You may surrender the Policy for its Net Cash Surrender Value at any time. LAPSE AND REINSTATEMENT A Policy will lapse and terminate without value when the Net Cash Surrender Value is insufficient to pay the next monthly deduction and a grace period of 61 days expires without an adequate premium payment from you. You may reinstate a lapsed Policy within five years following lapse if the Policy was not surrendered for its Net Cash Surrender Value. Evidence of insurability is required, along with a premium payment described under "Reinstatement." The Policy differs in two important ways from a conventional life insurance policy. First, failure to make planned premium payments will not itself cause the Policy to lapse. Second, the Policy can lapse even if planned premiums have been paid. CHARGES AND DEDUCTIONS We assess charges and deductions in connection with the Policy, in the form of monthly deductions for the cost of insurance and administrative expenses, charges assessed daily against amounts in the Investment Account and loads deducted from premiums paid. See the Table of Charges and Deductions. SALES LOAD Sales Load coverage features a load deducted immediately from premiums paid and no Surrender Charges. REDUCTION IN CHARGES AND ENHANCEMENT OF SURRENDER VALUES The Policy is designed for employers and other sponsoring organizations that may purchases multiple policies as a Case. The size or nature of the Case may result in expected savings of sales, underwriting, administrative or other costs. If so, we expect to offer reductions of Policy charges and enhancements of surrender value. We may change the nature and amount of reductions and enhancements available from time to time. They will be determined in a way that is not unfairly discriminatory to policyholders. INVESTMENT OPTIONS AND INVESTMENT ADVISERS You may allocate Net Premiums to the Fixed Account or to one or more of the sub-accounts of the Separate Account. Each of the sub-accounts invests in the shares of one of the Portfolios described under "Portfolios." The Portfolios also employs subadvisers. The Table of Investment Options and Investment Subadvisers shows the subadvisers that provide investment subadvisory services to the indicated Portfolios. Allocating net premiums only to one or a small number of the investment options (other than the Lifestyle Trusts) should not be considered a balanced investment strategy. In particular, allocating net premiums to a small number of investment options that concentrate their investments in a particular business or market sector will increase the risk that the value of your Policy will be more volatile since these investment options may react similarly to business or market specific events. Examples of business or market sectors where this risk historically has been and may continue to be particularly high include: (a) technology related businesses, including internet related businesses, (b) small cap securities and (c) foreign securities. The Company does not provide advice regarding appropriate investment allocations. Please discuss this matter with your financial adviser. 6 INVESTMENT MANAGEMENT FEES AND EXPENSES Each sub-account of the Separate Account purchases shares of one of the Portfolios at net asset value. The net asset value of those shares reflects investment management fees and certain expenses of the Portfolios. The fees and expenses for each Portfolio are described in the Portfolio prospectuses. TABLE OF INVESTMENT OPTIONS AND INVESTMENT SUBADVISERS The following subadvisers manage the Portfolios which are investment options for this contract.
SUBADVISER PORTFOLIO A I M Capital Management, Inc. All Cap Growth Trust Aggressive Growth Trust Mid Cap Core Trust American Century Investment Management, Inc. Small Company Trust Capital Guardian Trust Company Small Company Blend Trust U.S. Large Cap Trust Income & Value Trust Diversified Bond Trust Capital Research Management Company American Growth Trust (Adviser to the American Fund Insurance Series) (D) American International Trust American Blue Chip Income and Growth Trust American Growth-Income Trust Davis Advisors Financial Services Trust Fundamental Value Trust Deutsche Asset Management, Inc. Real Estate Securities Trust Dynamic Growth Trust All Cap Core Trust Lifestyle Trusts(A) Deutsche Asset Management Investment Services Ltd. International Stock Trust Fidelity Management & Research Company Strategic Opportunities Trust Large Cap Growth Trust Overseas Trust Franklin Advisers, Inc. Emerging Small Company Trust John Hancock Advisers, LLC Strategic Income Trust Jennison Associates LLC Capital Appreciation Trust Legg Mason Funds Management, Inc. Core Equity Trust Lord, Abbett & Co Mid Cap Value Trust All Cap Value Trust Mercury Advisors(C) Large Cap Value Trust MFC Global Investment Management (U.S.A.) Limited (E) Pacific Rim Trust Quantitative Mid Cap Trust Quantitative All Cap Trust Quantitative Value Trust Emerging Growth Trust Money Market Trust Index Trusts Lifestyle Trusts(A) Massachusetts Financial Services Company Strategic Growth Trust Strategic Value Trust Utilities Trust
7
SUBADVISER PORTFOLIO Munder Capital Management Small Cap Opportunities Trust Pacific Investment Management Company Global Bond Trust Total Return Trust Real Return Bond Trust All Asset Portfolio (a series of PIMCO Variable Insurance Trust) Pzena Investment Management, LLC Classic Value Trust Salomon Brothers Asset Management Inc U.S. Government Securities Trust Strategic Bond Trust Special Value Trust High Yield Trust SSgA Funds Management, Inc. International Equity Index Fund (a series of John Hancock Variable Insurance Trust I) Sustainable Growth Advisers, L.P. U.S. Global Leaders Growth Trust T. Rowe Price Associates, Inc Science & Technology Trust Small Company Value Trust Health Sciences Trust Blue Chip Growth Trust Equity-Income Trust Templeton Global Advisors Limited Global Trust Templeton Investment Counsel, Inc. International Value Trust International Small Cap Trust UBS Global Asset Management Global Allocation Trust Wellington Management Company, LLP Growth & Income Trust Investment Quality Bond Trust Mid Cap Stock Trust Natural Resources Trust Van Kampen (B) Value Trust
(A) Deutsche Asset Management, Inc. provides subadvisory consulting services to MFC Global Investment Management (U.S.A.) Limited regarding management of the Lifestyle Trusts. (B) Morgan Stanley Investment Management Inc. ("MSIM") is the sub-adviser to the Value Trust. MSIM does business in certain instances (including its role as the sub-adviser to the Value Trust) using the name "Van Kampen. (C) Fund Asset Management, L.P. is the sub-adviser to the Large Cap Value Trust. Fund Asset Management does business in certain instances (including its role as the sub-adviser to the Large Cap Value Trust) using the name "Mercury Advisors." (D) Each of the four portfolios invests exclusively in Class 2 shares of portfolios of the American Fund Insurance Series which is advised by Capital Research Management Company ("CRMC"). (E) MFC Global Investment Management (U.S.A.) Limited is an affiliate of Manufacturers Securities Services, LLC ("MSS") and the Trust. GENERAL INFORMATION ABOUT MANULIFE USA, THE SEPARATE ACCOUNT AND THE PORTFOLIOS MANULIFE USA We are a stock life insurance company incorporated in Maine on August 20, 1955 by a special act of the Maine legislature and redomesticated under the laws of Michigan. We are a licensed life insurance company in the District of Columbia and all states of the United States except New York. Our ultimate parent is Manulife Financial Corporation ("MFC"), a publicly traded company, based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company and its subsidiaries, collectively 8 known as Manulife Financial. The Manufacturers Life Insurance Company is one of the largest life insurance companies in North America and ranks among the 60 largest life insurers in the world as measured by assets. However, neither Manufacturers Life nor any of its affiliated companies guarantees the investment performance of the Separate Account. RATINGS The Manufacturers Life Insurance Company and The Manufacturers Life Insurance Company (U.S.A.) have received the following ratings from independent rating agencies: A++ A.M. Best Superior companies have a very strong ability to meet their obligations; 1st category of 16 AA+ Fitch Very strong capacity to meet policyholder and contract obligations; 2nd category of 22. AA+ Standard & Poor's Very strong financial security characteristics; 2nd category of 21 Aa2 Moody's Excellent in financial strength; 3rd category of 21 These ratings, which are current as of the date of this prospectus and are subject to change, are assigned as a measure of The Manufacturers Life Insurance Company (U.S.A.)'s ability to honor any guarantees provided by the Policy and any applicable optional riders, but not specifically relate to its products, the performance (return) of these products, the value of any investment in these products upon withdrawal or to individual securities held in any portfolio. THE SEPARATE ACCOUNT The Manufacturers Life Insurance Company of America ("ManAmerica") established its Separate Account Four (the "Separate Account") on March 17, 1987 as a separate account under Pennsylvania law. Since December 9, 1992, it has been operated under Michigan law. On January 1, 2002, ManAmerica transferred substantially all of its assets and liabilities to Manulife USA. As a result of this transaction, Manulife USA became the owner of all of ManAmerica's assets, including the assets of the Separate Account and assumed all of ManAmerica's obligations including those under the Policies. The ultimate parent of both ManAmerica and Manulife USA is MFC. The Separate Account holds assets that are segregated from all of Manulife USA's other assets. The Separate Account is currently used only to support variable life insurance policies. ASSETS OF THE SEPARATE ACCOUNT Manulife USA is the legal owner of the assets in the Separate Account. The income, gains, and losses of the Separate Account, whether or not realized, are, in accordance with applicable contracts, credited to or charged against the Account without regard to the other income, gains, or losses of Manulife USA. We will at all times maintain assets in the Separate Account with a total market value at least equal to the reserves and other liabilities relating to variable benefits under all policies participating in the Separate Account. These assets may not be charged with liabilities that arise from any other business we conduct. However, all obligations under the variable life insurance policies are general corporate obligations of Manulife USA. REGISTRATION The Separate Account is registered with the SEC under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a type of investment company that invests its assets in specified securities, such as the shares of one or more investment companies, rather than in a portfolio of unspecified securities. Registration under the 1940 Act does not involve any supervision by the SEC of the management or investment policies or practices of the Separate Account. For state law purposes the Separate Account is treated as a part or division of Manulife USA. THE PORTFOLIOS The assets of each sub-account of the Separate Account (except those invested in the International Equity Index Fund and the All Asset Portfolio) are invested in Series I shares of a corresponding investment portfolio of the Manufacturers Investment Trust (the "Trust"). The Trust is registered under the 1940 Act as an open-end management investment company. The Trust receives investment advisory services from Manufacturers Securities Services, LLC ("MSS"). Each of the Trust portfolios, except the Lifestyle Trusts, is subject to a Rule 12b-1 fee of 0.15% of a portfolio's Series I net assets (0.60% of a Series I net assets in the case of a American Growth Trust, American International Trust, American Growth-Income Trust and American Blue Chip Income and Growth Trust). Each Lifestyle Trust invest in portfolios that are subject to Rule 12b-1 fees. The International Equity Index Fund is a series of the John Hancock Variable Series Trust I (the "VST Trust") which is registered under the 1940 Act as an open-end management investment company. The assets of the International Equity Index Fund subaccount 9 are invested in Series I shares of the International Equity Index Fund which is subject to a 0.40% Rule 12b-1 fee. The VST Trust receives investment advisory services from John Hancock Life Insurance Company and the International Equity Index Trust portfolio is subadvised by State Street Global Advisers. The All Asset Portfolio is a series of the PIMCO Variable Insurance Trust (the "PIMCO Trust") which is registered under the 1940 Act as an open-end management investment company. The assets of the All Asset Portfolio subaccounts are invested in the M class of shares of the All Asset Portfolio which is subject to a 0.25% Rule 12b-1 fee. The PIMCO Trust receives investment advisory services from Pacific Investment Management Company LLC ("PIMCO"). The portfolios available under the Policies are as follows: TRUST PORTFOLIOS INVESTING IN THE AMERICAN FUND INSURANCE SERIES The AMERICAN GROWTH TRUST invests all of its assets in Class 2 shares of the Growth Fund, a series of American Fund Insurance Series. The Growth Fund invests primarily in common stocks of companies that appear to offer superior opportunities for growth of capital. The AMERICAN INTERNATIONAL TRUST invests all of its assets in Class 2 shares of the International Fund, a series of American Fund Insurance Series. The International Fund invests primarily in common stocks of companies located outside the United States. The AMERICAN GROWTH-INCOME TRUST invests all of its assets in Class 2 shares of the Growth-Income Fund, a series of American Fund Insurance Series. The Growth-Income Fund invests primarily in common stocks or other securities which demonstrate the potential for appreciation and/or dividends. The AMERICAN BLUE CHIP INCOME AND GROWTH TRUST invests all of its assets in Class 2 shares of the Blue Chip Income and Growth Fund, a series of American Fund Insurance Series. The Blue Chip Income and Growth Fund invests primarily in common stocks of larger, more established companies based in the U.S. with market capitalizations of $4 billion and above. * * * The SCIENCE & TECHNOLOGY TRUST seeks long-term growth of capital by investing, under normal market condition, at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks of companies expected to benefit from the development, advancement, and use of science and technology. Current income is incidental to the portfolio's objective. The PACIFIC RIM TRUST (formerly, Pacific Rim Emerging Markets Trust) seeks long-term growth of capital by investing in a diversified portfolio that is comprised primarily of common stocks and equity-related securities of corporations domiciled in countries in the Pacific Rim region. The HEALTH SCIENCES TRUST seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences (collectively termed "health sciences"). The EMERGING GROWTH TRUST seeks superior long-term rates of return through capital appreciation by investing, under normal circumstances, primarily in high quality securities and convertible instruments of small-cap U.S. companies. The AGGRESSIVE GROWTH TRUST seeks long-term capital appreciation by investing the portfolio's assets principally in common stocks, convertible bonds, convertible preferred stocks and warrants of companies which in the opinion of the subadviser are expected to achieve earnings growth over time at a rate in excess of 15% per year. Many of these companies are in the small and medium-sized category. The EMERGING SMALL COMPANY TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in common stock equity securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Growth Index* ("small cap stocks") at the time of purchase. The SMALL COMPANY BLEND TRUST seeks long-term growth of capital and income by investing the portfolio's assets, under normal market conditions, primarily in equity and equity-related securities of companies with market capitalizations that approximately match the range of capitalization of the Russell 2000 Index at the time of purchase. 10 The SMALL COMPANY TRUST seeks long-term capital growth by investing, under normal market conditions, primarily in equity securities of smaller-capitalization U.S. companies. The subadviser uses quantitative, computer-driven models to construct the portfolio of stocks for the Small Company Trust. The DYNAMIC GROWTH TRUST seeks long-term growth of capital by investing in stocks and other equity securities of medium-sized U.S. companies with strong growth potential. The MID CAP STOCK TRUST seeks long-term growth of capital by investing primarily in equity securities of mid-size companies with significant capital appreciation potential. The NATURAL RESOURCES TRUST seeks long-term total return by investing, under normal market conditions, primarily in equity and equity-related securities of natural resource-related companies worldwide. The ALL CAP GROWTH TRUST seeks long-term capital appreciation by investing the portfolio's assets under normal market conditions, principally in common stocks of companies that are likely to benefit from new or innovative products, services or processes, as well as those that have experienced above average, long-term growth in earnings and have excellent prospects for future growth. The STRATEGIC OPPORTUNITIES TRUST seeks growth of capital by investing primarily in common stocks. Investments may include securities of domestic and foreign issuers, and growth or value stocks or a combination of both. The FINANCIAL SERVICES TRUST seeks growth of capital by investing primarily in common stocks of financial companies. During normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) are invested in companies that are principally engaged in financial services. A company is "principally engaged" in financial services if it owns financial services-related assets constituting at least 50% of the value of its total assets, or if at least 50% of its revenues are derived from its provision of financial services. The INTERNATIONAL STOCK TRUST seeks long-term growth of capital by investing in stocks and other securities with equity characteristics of companies located in the developed countries that make up the MSCI EAFE Index. The OVERSEAS TRUST seeks growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in non-U.S. securities. The portfolio expects to invest primarily in equity securities. The INTERNATIONAL SMALL CAP TRUST seeks capital appreciation by investing primarily in the common stock of companies located outside the U.S. which have total stock market capitalization or annual revenues of $1.5 billion or less ("small company securities"). The INTERNATIONAL VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in equity securities of companies located outside the U.S., including emerging markets. The QUANTITATIVE MID CAP TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its total assets (plus any borrowings for investment purposes) in U.S. mid-cap stocks, convertible preferred stocks, convertible bonds and warrants. The MID CAP CORE TRUST seeks long-term growth of capital by investing, normally, at least 80% of its assets in equity securities, including convertible securities, of mid-capitalization companies. The GLOBAL TRUST (formerly, Global Equity Trust) seeks long-term capital appreciation by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of companies located anywhere in the world, including emerging markets. The STRATEGIC GROWTH TRUST seeks capital appreciation by investing, under normal market conditions, at least 65% of the portfolio's total assets in common stocks and related securities (such as preferred stocks, bonds, warrants or rights convertible into stock and depositary receipts for these securities) of companies which the subadviser believes offer superior prospects for growth. The CAPITAL APPRECIATION TRUST seeks long-term capital growth by investing at least 65% of its total assets in equity-related securities of companies that exceed $1 billion in market capitalization and that the subadviser believes have above-average growth prospects. These companies are generally medium-to-large capitalization companies. The U.S. GLOBAL LEADERS GROWTH TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in common stocks of "U.S. Global Leaders." 11 The QUANTITATIVE ALL CAP TRUST seeks long-term growth of capital by investing, under normal circumstances, primarily in equity securities of U.S. companies. The portfolio will generally focus on equity securities of U.S. companies across the three market capitalization ranges of large, mid and small. The ALL CAP CORE TRUST seeks long-term growth of capital by investing primarily in common stocks and other equity securities within all asset classes (small, mid and large cap) primarily those within the Russell 3000 Index*. The LARGE CAP GROWTH TRUST seeks long-term growth of capital by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of companies with large market capitalizations. The CLASSIC VALUE TRUST seeks long-term growth of capital portfolio by investing, under normal market conditions, at least 80% of its net assets in domestic equity securities. The BLUE CHIP GROWTH TRUST seeks to achieve long-term growth of capital (current income is a secondary objective) by investing, under normal market conditions, at least 80% of the portfolio's total assets in the common stocks of large and medium-sized blue chip growth companies. Many of the stocks in the portfolio are expected to pay dividends. The U.S. LARGE CAP TRUST seeks long-term growth of capital and income by investing the portfolio's assets, under normal market conditions, primarily in equity and equity-related securities of companies with market capitalization greater than $500 million. The CORE EQUITY TRUST seeks long-term capital growth by investing, under normal market conditions, primarily in equity securities that, in the subadviser's opinion, offer the potential for capital growth. The subadviser seeks to purchase securities at large discounts to the subadviser's assessment of their intrinsic value. The STRATEGIC VALUE TRUST seeks capital appreciation by investing, under normal market conditions, at least 65% of its net assets in common stocks and related securities of companies which the subadviser believes are undervalued in the market relative to their long term potential. The LARGE CAP VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in a diversified portfolio of equity securities of large cap companies located in the U.S. The UTILITIES TRUST seeks capital growth and current income (income above that available from a portfolio invested entirely in equity securities) by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in equity and debt securities of domestic and foreign companies in the utilities industry. The REAL ESTATE SECURITIES TRUST seeks to achieve a combination of long-term capital appreciation and current income by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in equity securities of real estate investment trusts ("REITS") and real estate companies. The SMALL CAP OPPORTUNITIES TRUST seeks long-term capital appreciation by investing, under normal circumstances, at least 80% of its assets in equity securities of companies with market capitalizations within the range of the companies in the Russell 2000 Index. The SMALL COMPANY VALUE TRUST seeks long-term growth of capital by investing, under normal market conditions, primarily in small companies whose common stocks are believed to be undervalued. Under normal market conditions, the portfolio will invest at least 80% of its net assets (plus any borrowings for investment purposes) in companies with a market capitalization that do not exceed the maximum market capitalization of any security in the Russell 2000 Index* at the time of purchase. The SPECIAL VALUE TRUST seeks long-term capital growth by investing, under normal circumstances, at least 80% of its net assets in common stocks and other equity securities of companies whose market capitalization at the time of investment is no greater than the market capitalization of companies in the Russell 2000 Value Index. The MID CAP VALUE TRUST seeks capital appreciation by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in mid-sized companies, with market capitalization of roughly $500 million to $10 billion. The VALUE TRUST seeks to realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk, by investing primarily in equity securities of companies with capitalizations similar to the market capitalization of companies in the Russell Midcap Value Index. 12 The ALL CAP VALUE TRUST seeks capital appreciation by investing in equity securities of U.S. and multinational companies in all capitalization ranges that the subadviser believes are undervalued. The FUNDAMENTAL VALUE TRUST seeks growth of capital by investing, under normal market conditions, primarily in common stocks of U.S. companies with market capitalizations of at least $5 billion that the subadviser believes are undervalued. The portfolio may also invest in U.S. companies with smaller capitalizations. The GROWTH & INCOME TRUST seeks long-term growth of capital and income, consistent with prudent investment risk, by investing primarily in a diversified portfolio of common stocks of U.S. issuers which the subadviser believes are of high quality. The QUANTITATIVE VALUE TRUST seeks long-term capital appreciation by investing primarily in large-cap U.S. securities with the potential for long-term growth of capital. The EQUITY-INCOME TRUST seeks to provide substantial dividend income and also long-term capital appreciation by investing primarily in dividend-paying common stocks, particularly of established companies with favorable prospects for both increasing dividends and capital appreciation. The INCOME & VALUE TRUST seeks the balanced accomplishment of (a) conservation of principal and (b) long-term growth of capital and income by investing the portfolio's assets in both equity and fixed-income securities. The subadviser has full discretion to determine the allocation between equity and fixed income securities. The ALL ASSET PORTFOLIO (a series of the PIMCO Variable Insurance Trust) (only Class M shares are available for sale) seeks maximum real return consistent with preservation of real capital and prudent investment management by investing, under normal circumstances, substantially all of its assets in Institutional Class shares of the PIMCO Funds, Pacific Investment Management Series, an affiliated open-end investment company. The GLOBAL ALLOCATION TRUST seeks total return, consisting of long-term capital appreciation and current income, by investing in equity and fixed income securities of issuers located within and outside the U.S. The HIGH YIELD TRUST seeks to realize an above-average total return over a market cycle of three to five years, consistent with reasonable risk, by investing primarily in high yield debt securities, including corporate bonds and other fixed-income securities. The STRATEGIC BOND TRUST seeks a high level of total return consistent with preservation of capital by giving its subadviser broad discretion to deploy the portfolio's assets among certain segments of the fixed income market as the subadviser believes will best contribute to achievement of the portfolio's investment objective. The STRATEGIC INCOME TRUST seeks a high level of current income by investing, under normal market conditions, primarily in foreign government and corporate debt securities from developed and emerging markets; U.S. Government and agency securities; and U.S. high yield bonds. The GLOBAL BOND TRUST seeks to realize maximum total return, consistent with preservation of capital and prudent investment management by investing the portfolio's assets primarily in fixed income securities denominated in major foreign currencies, baskets of foreign currencies (such as the ECU), and the U.S. dollar. The DIVERSIFIED BOND TRUST seeks high total return consistent with the conservation of capital by investing, under normal market conditions, at least 80% of the portfolio's net assets (plus any borrowings for investment purposes) in fixed income securities. The INVESTMENT QUALITY BOND TRUST seeks a high level of current income consistent with the maintenance of principal and liquidity, by investing in a diversified portfolio of investment grade bonds and tends to focus its investment on corporate bonds and U.S. Government bonds with intermediate to longer term maturities. The portfolio may also invest up to 20% of its assets in non-investment grade fixed income securities. The TOTAL RETURN TRUST seeks to realize maximum total return, consistent with preservation of capital and prudent investment management by investing, under normal market conditions, at least 65% of the portfolio's assets in a diversified portfolio of fixed income securities of varying maturities. The average portfolio duration will normally vary within a three- to six-year time frame based on the subadviser's forecast for interest rates. The REAL RETURN BOND TRUST seeks maximum return, consistent with preservation of capital and prudent investment management by investing, under normal market conditions, at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments and by corporations. 13 The U.S. GOVERNMENT SECURITIES TRUST seeks a high level of current income consistent with preservation of capital and maintenance of liquidity, by investing in debt obligations and mortgage-backed securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and derivative securities such as collateralized mortgage obligations backed by such securities. The MONEY MARKET TRUST seeks maximum current income consistent with preservation of principal and liquidity by investing in high quality money market instruments with maturities of 397 days or less issued primarily by U. S. entities. The SMALL CAP INDEX TRUST seeks to approximate the aggregate total return of a small cap U.S. domestic equity market index by attempting to track the performance of the Russell 2000 Index*. The INTERNATIONAL INDEX TRUST seeks to approximate the aggregate total return of a foreign equity market index by attempting to track the performance of the Morgan Stanley European Australian Far East Free Index (the "MSCI EAFE Index")*. (Available only to policies issued prior to May 1, 2004) (Subject to shareholder/contractowner approval, the International Index Trust will merge with the International Equity Index Trust immediately after the close of business on June 18, 2004.) The INTERNATIONAL EQUITY INDEX FUND (a series of the John Hancock Variable Series Trust I) (only Series I shares are available for sale) seeks to track the performance of broad-based equity indices of foreign companies in developed and emerging markets by attempting to track the performance of the MSCI All Country World ex-US Index*. The MID CAP INDEX TRUST seeks to approximate the aggregate total return of a mid cap U.S. domestic equity market index by attempting to track the performance of the S&P Mid Cap 400 Index*. The TOTAL STOCK MARKET INDEX seeks to approximate the aggregate total return of a broad U.S. domestic equity market index by attempting to track the performance of the Wilshire 5000 Equity Index*. The 500 INDEX TRUST seeks to approximate the aggregate total return of a broad U.S. domestic equity market index by attempting to track the performance of the S&P 500 Composite Stock Price Index*. The LIFESTYLE AGGRESSIVE 1000 TRUST seeks to provide long-term growth of capital (current income is not a consideration) by investing 100% of the Lifestyle Trust's assets in other portfolios of the Trust ("Underlying Portfolios") which invest primarily in equity securities. The LIFESTYLE GROWTH 820 TRUST seeks to provide long-term growth of capital with consideration also given to current income by investing approximately 20% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 80% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE BALANCED 640 TRUST seeks to provide a balance between a high level of current income and growth of capital with a greater emphasis given to capital growth by investing approximately 40% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 60% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE MODERATE 460 TRUST seeks to provide a balance between a high level of current income and growth of capital with a greater emphasis given to current income by investing approximately 60% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 40% of its assets in Underlying Portfolios which invest primarily in equity securities. The LIFESTYLE CONSERVATIVE 280 TRUST seeks to provide a high level of current income with some consideration also given to growth of capital by investing approximately 80% of the Lifestyle Trust's assets in Underlying Portfolios which invest primarily in fixed income securities and approximately 20% of its assets in Underlying Portfolios which invest primarily in equity securities. *"Standard & Poor's(R)," "S&P 500(R)," "Standard and Poor's 500(R)" and "S&P Mid Cap 400(R)" are trademarks of The McGraw-Hill Companies, Inc. "Russell 2000(R)," "Russell 2000(R) Growth" and "Russell 3000(R)" are trademarks of Frank Russell Company. "Wilshire 5000(R)" is a trademark of Wilshire Associates. "MSCI All Country World ex USIndex" and "EAFE(R)" are trademarks of Morgan Stanley & Co. Incorporated. None of the Index Trusts are sponsored, endorsed, managed, advised, sold or promoted by any of these companies, and none of these companies make any representation regarding the advisability of investing in the Trust. ISSUING A POLICY 14 USE OF THE POLICY The Policy is designed to provide employers or other organizations with life insurance coverage on employees or other individuals in whose lives they have an insurable interest. The Policy may be owned by an individual or a corporation, trust, association, or similar entity. The Policy may be used for such purposes as funding non-qualified executive deferred compensation or salary continuation liabilities or death benefit liabilities of executive retirement plans, or as a source for funding cash flow obligations under such plans. REQUIREMENTS To purchase a Policy, an applicant must submit a completed application. A Policy will not be issued until the underwriting process is completed to our satisfaction and we approve issuance of the Policy. Policies may be issued on a basis that does not distinguish between the life insured's sex and/or smoking status, with prior approval from us. A Policy will only be issued on the lives of insureds from Issue Ages 20 through 80. Each Policy has a Policy Date, an Effective Date and an Issue Date: - The Policy Date is the date from which the first monthly deductions are calculated and from which Policy Years, Policy Months and Policy Anniversaries are measured. The Policy Date is also the effective date of the initial Coverage Amount. The Policy Date is the same date as the Effective Date unless the Policy is backdated (see "Backdating a Policy"). - The Effective Date is the date we become obligated under the Policy and when the first monthly deductions are taken. It is the later of the date we approve issuance of the Policy and the date we receive at least the Minimum Initial Premium. - The Issue Date is the date from which the Suicide and Incontestability provisions of the Policy are measured. If we approve issuance of a Policy before we receive the Minimum Initial Premium then the Effective Date will be later than the Issue Date. The Minimum Initial Premium must be received by us within 60 days after the Issue Date and the life insured must be in good health on the Effective Date. If the Minimum Initial Premium is not paid or if the application is rejected, the Policy will be canceled and any premiums paid will be returned to the applicant. Net Premiums received prior to the Effective Date will be credited with interest at the rate of return earned on amounts allocated to the Money Market Trust. On the Effective Date, Net Premiums received plus any interest credited will be allocated to Investment Accounts and the Fixed Account according to your instructions, unless first allocated to the Money Market Trust for the duration of the right to examine period (see "Right to Examine the Policy"). MINIMUM FACE AMOUNT AND SCHEDULED DEATH BENEFIT The minimum Face Amount is $50,000 unless the FTIO Rider is added to the Policy. With an FTIO Rider, the minimum Face Amount is $25,000 and the minimum Scheduled Death Benefit is $50,000 at all times. BACKDATING A POLICY You may request that we backdate the Policy by assigning a Policy Date earlier than the Effective Date. We will not backdate the Policy to a date earlier than that allowed by state law, which is generally three months to one year prior to the date of application for the Policy. Monthly deductions will be made for the period the Policy Date is backdated. TEMPORARY INSURANCE AGREEMENT Temporary insurance coverage may be provided under the terms of a Temporary Insurance Agreement, subject to our underwriting practices. Generally, temporary life insurance may not exceed $1,000,000 and may not be in effect for more than 90 days. It is issued on a conditional receipt basis, which means that benefits would only be paid if the life insured met our usual and customary underwriting standards for the coverage applied for. UNDERWRITING The policies are offered on three underwriting classes that require different types and amounts of information from the applicant and prospective life insured. Current cost of insurance charges in early Policy Years will vary by the type of underwriting and charges will generally be lower where underwriting information is more extensive. Under any of the underwriting bases, the acceptance of an application is subject to our underwriting rules and we may request additional information or reject an application for any reason. SHORT FORM UNDERWRITING The proposed life insured must answer qualifying questions in the application but is not required to provide detailed medical history, submit records or undergo examinations or tests unless requested to do so by us. Availability of Short Form underwriting depends on 15 characteristics of the Case, such as the number of lives to be insured, the amounts of insurance and other factors, and it is generally available only up to Issue Age 65. SIMPLIFIED UNDERWRITING The proposed life insured must satisfactorily answer certain health questions in the application and may be required to submit existing medical records, but requirements to undergo examinations and tests are minimized. Availability of Simplified underwriting and the nature of the requirements will depend on characteristics of the Case and the proposed lives to be insured. REGULAR (MEDICAL) UNDERWRITING Where Short Form or Simplified underwriting is unavailable we require satisfactory evidence of insurability under our regular underwriting guidelines for individual applicants. This may include medical exams and other information. A proposed life insured who fails to qualify for a standard risk classification may be eligible to be insured with an additional substandard rating. RIGHT TO EXAMINE THE POLICY A Policy may be returned for a refund within 10 days after you receive it. Some states provide a longer period of time for this right, which will be stated in the Policy if applicable. The Policy can be mailed or delivered to the Manulife USA agent who sold it or to the Service Office. Immediately upon such delivery or mailing, the Policy shall be deemed void from the beginning. Within seven days after receipt of the returned Policy at the Service Office we will refund an amount equal to: (a) the difference between premiums received and amounts allocated to Investment Accounts and the Fixed Account; plus (b) the value of amounts in the Investment Accounts and the Fixed Account on the date we receive the returned Policy; minus (c) any partial withdrawals and policy loans. Some state laws require the refund of premiums paid without adjustment for investment gains and losses of the Separate Account. In these states, all Net Premiums will be allocated to the Money Market Trust during the right to examine period and the refund amount will be equal to all premiums received less any partial withdrawals and policy loans. If you request a Face Amount increase that results in new Sales Loads, you will have the same rights described above to cancel the increase. If cancelled, the Policy Value will be recalculated to be as they would have been had the increase not taken place. You may request a refund of all or any portion of premiums paid during this right to examine period, and the Policy Value and Sales Loads will be recalculated to be as they would have been had the premiums not been paid. We reserve the right to delay the refund of any premium paid by check until the check has cleared. LIFE INSURANCE QUALIFICATION A Policy must satisfy either of two tests to qualify as a life insurance contract as defined in Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code"). You must apply for a Policy that uses either the Cash Value Accumulation Test ("CVA Test") or the Guideline Premium Test ("GP Test") and the test cannot be changed once the Policy is issued. CASH VALUE ACCUMULATION TEST The CVA Test requires the Death Benefit at any time to be at least a certain ratio of the Policy Value, based on prescribed calculations. The Minimum Death Benefit provision described below will ensure that the CVA Test is met. There is no restriction on the amount of premiums you may pay, but we will require you to provide satisfactory evidence of insurability before we accept an amount of premium that would increase the Death Benefit by more than the increase in Policy Value. GUIDELINE PREMIUM TEST The GP Test limits the amount of premiums you may pay into the Policy, given its Death Benefit, based on prescribed calculations. In addition, the GP Test requires the Death Benefit at any time to be at least a prescribed ratio of the Policy Value. These prescribed multiples are generally lower than those calculated under the CVA Test. The Minimum Death Benefit provision described below will ensure that this second requirement is met. Changes to the Policy or FTIO Rider, such as changes in Face Amount, Scheduled Death Benefit, Death Benefit Option or partial withdrawals, may affect the premium limits under the GP Test. Some changes will reduce future premium limits and may cause premiums already paid to exceed the new limits and force you to make a partial withdrawal. DEATH BENEFITS If the Policy is in force at the time of the life insured's death we will pay an insurance benefit to the beneficiary. The Policy may remain in force for the life insured's entire lifetime and there is no specified maturity or expiration date. 16 Insurance benefits are only payable when we receive due proof of death at the Service Office, in the form of either a certified copy of the death certificate, a certified copy of a decree of a court of competent jurisdiction as to the finding of death or other proof satisfactory to us. The amount of the insurance benefit payable will be the Death Benefit on the date of death, as described below, less any Policy Debt and outstanding monthly deductions on the date of death. The insurance benefit will be paid in one lump sum unless another form of settlement is agreed to by the beneficiary and us. If the insurance benefit is paid in one sum, we will pay interest from the date of death to the date of payment. If the life insured should die after our receipt of a request for surrender, no insurance benefit will be payable, and we will pay only the Net Cash Surrender Value. MINIMUM DEATH BENEFIT Both the CVA Test and the GP Test require the Death Benefit to be at least a prescribed ratio of the policy value at all times. The Policy's Minimum Death Benefit ensures that these requirements are met by providing that the Death Benefit shall be at least equal to the Policy Value multiplied by the applicable Minimum Death Benefit Percentage for the Attained Age of the life insured. Tables of Minimum Death Benefit Percentages appear on the following page. FLEXIBLE TERM INSURANCE OPTION RIDER You may add a flexible term insurance option rider (the "FTIO Rider") to the Policy to provide additional death benefit coverage on the life insured. The FTIO Rider provides flexible term life insurance to Attained Age 100 with cost of insurance charges less than or equal to those of the Policy. The election (or failure to elect) the FTIO Rider will impact the total cost of insurance charges. The FTIO Rider will terminate at the earlier of Attained Age 100, the date the Policy lapses or surrenders, and your request to cancel the FTIO Rider. You may schedule the death benefit amounts that will apply at specified times (the "Scheduled Death Benefits"). Scheduled Death Benefits may be constant or varying from time to time. The Death Benefit Schedule will be shown in the Policy. The Term Insurance Benefit of the FTIO Rider is equal to (a) minus (b) but not less than zero where: (a) the Scheduled Death Benefit for the Policy Month, and (b) the Face Amount of the Policy or, if greater, the Policy's Minimum Death Benefit Even if the Term Insurance Benefit may be zero in a Policy Month, the FTIO Rider will not terminate. Example. A policy is purchased for an executive as part of an employee benefit plan. The death benefit provided by the policy is to be equal to the executive's salary of $100,000 increasing at 5% per year through age 64. Assuming the executive is currently 55, the policy will be issued with a Death Benefit Schedule as follows:
POLICY SCHEDULED POLICY SCHEDULED YEAR DEATH BENEFIT YEAR DEATH BENEFIT - ------------------------------------------------------------------------------- 1 100,000 6 127,628 2 105,000 7 134,010 3 110,250 8 140,710 4 115,763 9 147,746 5 121,551 10+ 155,133
The FTIO Rider amount will change each year as necessary to provide the benefits shown in the schedule, as follows:
POLICY TOTAL FACE FLEXIBLE TERM YEAR DEATH BENEFIT AMOUNT INSURANCE AMOUNT - ---------------------------------------------------------------------------------------- 1 100,000 100,000 0 2 105,000 100,000 5,000 3 110,250 100,000 10,250 4 115,763 100,000 15,763 5 121,551 100,000 21,551 6 127,628 100,000 27,628 7 134,010 100,000 34,010 8 140,710 100,000 40,710
17
POLICY TOTAL FACE FLEXIBLE TERM YEAR DEATH BENEFIT AMOUNT INSURANCE AMOUNT - ---------------------------------------------------------------------------------------- 9 147,746 100,000 47,746 10 155,133 100,000 55,133
TABLE OF MINIMUM DEATH BENEFIT PERCENTAGES
CVA TEST CVA TEST GP TEST ------------------------------ GP TEST ------------------------------ AGE PERCENT MALE FEMALE UNISEX AGE PERCENT MALE FEMALE UNISEX - --------------------------------------------------------------------------------------------------------------------------- 20 250% 644% 768% 665% 60 130% 189% 218% 194% 21 250% 625% 743% 645% 61 128% 184% 211% 189% 22 250% 607% 720% 626% 62 126% 180% 206% 185% 23 250% 589% 697% 608% 63 124% 175% 200% 180% 24 250% 572% 674% 589% 64 122% 171% 194% 176% 25 250% 554% 652% 571% 65 120% 167% 189% 172% 26 250% 537% 631% 554% 66 119% 164% 184% 168% 27 250% 520% 611% 536% 67 118% 160% 180% 164% 28 250% 504% 591% 519% 68 117% 157% 175% 160% 29 250% 488% 572% 502% 69 116% 153% 171% 157% 30 250% 472% 553% 486% 70 115% 150% 166% 154% 31 250% 457% 535% 470% 71 113% 147% 162% 151% 32 250% 442% 517% 455% 72 111% 145% 158% 147% 33 250% 428% 500% 440% 73 109% 142% 154% 145% 34 250% 414% 484% 426% 74 107% 139% 151% 142% 35 250% 400% 468% 412% 75 105% 137% 147% 139% 36 250% 387% 453% 399% 76 105% 135% 144% 137% 37 250% 375% 438% 386% 77 105% 133% 141% 135% 38 250% 362% 424% 373% 78 105% 131% 139% 133% 39 250% 351% 410% 361% 79 105% 129% 136% 131% 40 250% 340% 397% 350% 80 105% 127% 133% 129% 41 243% 329% 384% 339% 81 105% 125% 131% 127% 42 236% 319% 372% 328% 82 105% 124% 129% 125% 43 229% 309% 361% 318% 83 105% 122% 127% 124% 44 222% 299% 350% 308% 84 105% 121% 125% 122% 45 215% 290% 339% 299% 85 105% 120% 123% 121% 46 209% 281% 329% 290% 86 105% 118% 121% 119% 47 203% 273% 319% 281% 87 105% 117% 120% 118% 48 197% 265% 309% 272% 88 105% 116% 118% 117% 49 191% 257% 300% 264% 89 105% 115% 117% 116% 50 185% 249% 291% 257% 90 105% 114% 115% 115% 51 178% 242% 282% 249% 91 104% 113% 114% 114% 52 171% 235% 274% 242% 92 103% 112% 113% 112% 53 164% 228% 266% 235% 93 102% 111% 112% 111% 54 157% 222% 258% 229% 94 101% 110% 110% 110% 55 150% 216% 251% 222% 95 100% 109% 109% 109% 56 146% 210% 244% 216% 96 100% 107% 107% 107% 57 142% 205% 237% 210% 97 100% 106% 106% 106% 58 138% 199% 230% 205% 98 100% 104% 104% 104% 59 134% 194% 224% 199% 99 100% 103% 103% 103% 100 + 100% 100% 100% 100%
DEATH BENEFIT OPTIONS You may choose either of two Death Benefit Options: 18 DEATH BENEFIT OPTION 1 The Death Benefit on any date is: (a) the Face Amount of the Policy or, if greater, the Minimum Death Benefit, plus (b) the Term Insurance Benefit of the FTIO Rider. DEATH BENEFIT OPTION 2 The Death Benefit on any date is: (a) the Face Amount plus the Policy Value or, if greater, the Minimum Death Benefit, plus (b) the Term Insurance Benefit of the FTIO Rider. CHANGING THE DEATH BENEFIT OPTION You may change the Death Benefit Option at any time. The change will take effect at the beginning of the next Policy Month at least 30 days after your written request is received at the Service Office. We reserve the right to limit changes that could cause the Policy to fail to qualify as life insurance for tax purposes. A change in the Death Benefit Option will result in a change in the Face Amount and Scheduled Death Benefits to avoid any change in the amount of Death Benefit, as follows: CHANGE FROM OPTION 1 TO OPTION 2 The new Face Amount will be: - the Face Amount prior to the change less the Policy Value on the date of the change. The Scheduled Death benefit amounts for dates on or after the date of the change will be: - the amounts scheduled prior to the change less the Policy value on the date of the change. Coverage Amounts will be reduced or eliminated in the order that they are listed in the Policy until the total decrease in Coverage Amounts equals the decrease in Face Amount. Example. A policy is issued with a Face amount of $100,000, Death Benefit Option 1, and the following schedule:
POLICY SCHEDULED YEAR DEATH BENEFIT - ---------------------------------- 1 100,000 2 125,000 3 150,000 4 175,000 5+ 200,000
The Death Benefit Option is changed to Option 2 at the beginning of Policy Year 3. If the Policy Value at the time of the change is $10,000, then the Face Amount after the change will be $90,000, (the Face Amount prior to the change less the Policy Value) and the Death Benefit Schedule after the change will become:
POLICY SCHEDULED YEAR DEATH BENEFIT - ---------------------------------- 3 140,000 4 165,000 5+ 190,000
CHANGE FROM OPTION 2 TO OPTION 1 The new Face Amount will be: - the Face Amount prior to the change plus the Policy Value on the date of the change (but the new Face Amount will be no greater than the Scheduled Death Benefit on the date of the change.) 19 The resulting Face Amount increase amount will be added to the first Coverage Amount listed in the Policy. However, the Annual Premium Target for this Coverage Amount will not be increased and new Sales Loads will not apply, for an increase solely due to a change in the Death Benefit Option. Example. A policy is issued with a Face amount of $100,000, Death Benefit Option 2, and the following schedule:
POLICY SCHEDULED YEAR DEATH BENEFIT - ---------------------------------- 1 100,000 2 125,000 3 150,000 4 175,000 5+ 200,000
The Death Benefit Option is changed to Option 1 at the beginning of Policy Year 3. If the Policy Value at the time of the change is $10,000, then the Face Amount after the change will be $110,000 (the Face Amount prior to the change plus the Policy Value), and the Death Benefit Schedule after the change will become:
POLICY SCHEDULED YEAR DEATH BENEFIT - ---------------------------------- 3 160,000 4 185,000 5+ 210,000
CHANGING THE FACE AMOUNT AND SCHEDULED DEATH BENEFITS At any time, you may request an increase or decrease to the Face Amount or any Scheduled Death Benefits effective on or after the date of change. We reserve the right to limit changes that could cause the Policy to fail to qualify as life insurance for tax purposes. INCREASES IN FACE AMOUNT AND SCHEDULED DEATH BENEFITS Increases in Face Amount and Scheduled Death Benefits are subject to the following conditions: 1. Increases in Face Amount and Scheduled Death Benefits will require satisfactory evidence of the life insured's insurability. 2. Increases will take effect at the beginning of the next Policy Month after we approve the request. 3. We may refuse a requested increase that would not meet our requirements for new policy issues at the time due to the life insured's attained age or other factors. 4. If the Face Amount is increased (other than as required by a Death Benefit Option change) then all Scheduled Death Benefits effective on or after the date of the change will be increased by the amount of the Face Amount increase. NEW CHARGES FOR A FACE AMOUNT INCREASE Coverage Amounts equal to the amount of the increase will be added to the Policy as follows: First, Coverage Amounts that were reduced or eliminated by a prior Face Amount decrease will be restored. Second, if needed, a new Coverage Amount will be added to the Policy with an Annual Premium Target and new Sales Loads. Any new Coverage Amount will be based on the life insured's Attained Age and other relevant factors on the effective date of the increase. Premiums paid on or after the increase may be attributed to the new Coverage Amount and result in Sales Loads (see "Charges and Deductions - Attribution of Premiums"). DECREASES IN FACE AMOUNT AND SCHEDULED DEATH BENEFITS Decreases in Face Amount and Scheduled Death Benefits are subject to the following conditions: 1. Decreases in Face Amount and Scheduled Death Benefits will take effect at the beginning of the next Policy Month which is 30 days after your written request is received at the Service Office. 2. If the Face Amount is decreased then all Scheduled Death Benefits effective on or after the date of the change will be decreased by the same amount. 20 3. If at any time the Scheduled Death Benefit decreases to less than the Face Amount, the Face Amount will be decreased to be equal to the Scheduled Death Benefit at that time. 4. Coverage Amounts equal to the amount of the Face Amount decrease will be reduced or eliminated in the reverse order that they are listed in the Policy. DECREASES IN FACE AMOUNT UNDER DEATH BENEFIT OPTION 1 DUE TO A PARTIAL WITHDRAWAL If Death Benefit Option 1 is in effect when a partial withdrawal is made, the Face Amount will be decreased by an amount equal to: (a) minus (b) but not less than zero, where: (a) is the partial withdrawal amount and (b) is the excess, if any, of the Policy's Minimum Death Benefit over its Face Amount, immediately prior to the partial withdrawal. Decreases in Face Amount under Death Benefit Option 1 due to a Partial Withdrawal are subject to the following conditions: 1. Coverage Amounts equal to the amount of the Face Amount decrease will be reduced or eliminated in the reverse order that they are listed in the Policy. 2. All Scheduled Death Benefits effective on or after the date of the partial withdrawal will be decreased by the amount of the Face Amount decrease, unless you request otherwise and we approve. EXAMPLE FOR FACE INCREASES AND DECREASES A Policy is issued with the Sales Load option, a Face Amount of $100,000, Death Benefit Option 1, and a Death Benefit Schedule as follows:
POLICY SCHEDULED YEAR DEATH BENEFIT 1 100,000 2 125,000 3 150,000 4 175,000 5+ 200,000
Assume the following Policy activity:
ACTIVITY EFFECT ON POLICY CHANGE IN BENEFIT SCHEDULE - ------------------------------------------------------------------------------------------------------------------------------------ In Policy Year 2, the Face Amount The initial Coverage amount is reduced to $80,000. SCHEDULED is reduced to $80,000. POLICY YEAR DEATH BENEFIT 2 105,000 3 130,000 4 155,000 5+ 180,000 In Policy Year 3, the Face Amount The initial Coverage Amount (which earlier was SCHEDULED is increased to $120,000 reduced to $80,000) is restored to its original POLICY YEAR DEATH BENEFIT level of $100,000. A new Coverage Amount for 3 170,000 $20,000 is added to the Policy. This new coverage 4 195,000 amount will have its own Annual Premium Target, 5+ 220,000 and its own Sales Load. A portion of the future premiums paid will be attributed to this Coverage Amount to determine the amount of the Sales Load. In Policy Year 4, a Partial The Face Amount is reduced to $90,000. The most SCHEDULED Withdrawal of $30,000 is made. recent Coverage Amount of $20,000 is reduced to POLICY YEAR DEATH BENEFIT $0, and the initial Coverage Amount is reduced to 4 165,000 $90,000. 5 190,000
FACTORS THAT AFFECT THE DEATH BENEFIT In the case of Death Benefit Option 2 where the death benefit is the Face Amount plus the Policy Value, changes in the Policy Value will affect the amount of death benefit. Factors that affect the Policy Value are the investment performance of the variable investment options chosen and the charges deducted. For a discussion of how these factors affect Policy Value see the "Risk/Benefit Summary." These factors do not affect the Face Amount of the Policy. Therefore, the amount of death benefit under Option 1 will not be less than the Face Amount as long as the Policy does not lapse. 21 PREMIUM PAYMENTS INITIAL PREMIUMS No premiums will be accepted prior to receipt of a completed application by us. All premiums received prior to the Effective Date of the Policy will be held in the general account and credited with interest from the date of receipt at the rate of return earned on amounts allocated to the Money Market Trust. No insurance will take effect before we approve the application and receive at least the Minimum Initial Premium. On the Effective Date, the Net Premiums paid plus interest credited will be allocated among the Investment Accounts or the Fixed Account in accordance with your instructions, unless first allocated to the Money Market Trust for the duration of the right to examine period (see "Right to Examine the Policy"). SUBSEQUENT PREMIUMS After the payment of the initial premium, premiums may be paid at any time during the lifetime of the life insured prior to Attained Age 100 and in any amount subject to the premium limitations described below. A Policy will be issued with a planned premium, which is based on the amount of premium you wish to pay. We will send you notices of your planned premium at the payment interval you select. However, you are under no obligation to make the planned premium payment. Payment of premiums will not guarantee that the Policy will stay in force and failure to pay premiums will not necessarily cause the Policy to lapse. The Policy will remain in force so long as the Net Cash Surrender Value is sufficient to cover Policy charges. PREMIUM LIMITATIONS If the Policy is issued under the GP Test, the total of all premiums paid may not exceed the then-current maximum premium limitations established by federal income tax law for the Policy to qualify as life insurance. The GP Test premium limits are stated in the Policy. If a premium is received which would result in total premiums exceeding the applicable GP Test limit, we will only accept that portion of the premium that will not exceed the limit. Any premium in excess of that amount will be returned. If the Policy is issued under the CVA Test, there is no restriction on the amount of premiums that may be paid into a Policy, but you must provide satisfactory evidence of insurability before we accept any premium that would increase the Death Benefit by an amount greater than the increase in Policy Value. PREMIUM ALLOCATION You may allocate premiums to the Fixed Account and Investment Accounts. Allocations may be made as percentages that are between zero and 100% that sum to exactly 100%. Alternatively, you may allocate a premium in dollar amounts that sum to exactly the Net Premium amount. You may change premium allocations at any time and the change will take effect on the date a request for change satisfactory to us is received at the Service Office. CHARGES AND DEDUCTIONS PREMIUM LOAD We will deduct a Premium Load as a percentage of each premium payment that is guaranteed never to exceed 1.0%. Currently, we waive this load in Policy Years 4 and later and charge 0%. The charge is intended to cover a portion of the aggregate amount of various taxes and fees we pay to federal, state and local governments. It is not based on the actual premium tax rate of your state of residence or any other specific tax. SALES LOAD Each Coverage Amount listed in the Policy is designated as Sales Load The Sales Load is intended to cover a portion of our costs of marketing and distributing the policies. ATTRIBUTION OF PREMIUMS An Annual Premium Target is associated with each Coverage Amount. Annual Premium Targets are based on the Coverage Amount and the life insured's Attained Age, sex and smoking status on the effective date of the Coverage Amount. The Annual Premium Targets are listed with the Coverage Amounts in the Policy. Premium payments will be attributed to Coverage Amounts that have been in effect for less than 5 years. Attribution will begin with the first applicable Coverage Amount that is listed in the Policy. The sum of all premium amounts attributed to a Coverage Amount in 22 a Coverage Year is limited to the Annual Premium Target shown in the Policy. Premium amounts that exceed the Annual Premium Target will be attributed to the next listed Coverage Amount, up to its own Annual Premium Target. Attribution will continue in this manner until either the entire premium is attributed to Coverage Amounts or the Annual Premium Target is exceeded for all applicable Coverage Amounts. SALES LOAD We deduct a Sales Load from all premium amounts attributed to a Coverage Amount designated as having a Sales Load. The Sales Load is a percentage of premiums guaranteed never to exceed the percentages below. Currently we are charging these percentages.
COVERAGE YEAR PERCENTAGE COVERAGE YEAR PERCENTAGE 1 13.00% 4 2.50% 2 6.25% 5 0.50% 3 3.50% 6 0.50% 7+ 0.00%
MONTHLY DEDUCTIONS On the Policy Date and at the beginning of each Policy Month prior to Attained Age 100, a deduction is due from the Net Policy Value to cover certain charges described below. Monthly deductions due prior to the Policy's Effective Date will be taken on the Effective Date. Unless otherwise allowed by us and specified by you, the monthly deduction will be allocated among the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. ADMINISTRATION CHARGE Currently we deduct a charge of $12 per Policy Month, which is guaranteed never to be exceeded. This charge is intended to cover certain administrative expenses associated with the Policy, including maintaining policy records, collecting premiums and processing death claims, surrender and withdrawal requests and various changes permitted under a Policy. COST OF INSURANCE CHARGE A monthly charge for the cost of insurance is paid to the Company and is determined by multiplying a cost of insurance rate by the net amount at risk at the beginning of each Policy Month. A net amount at risk is equal to the greater of zero, or (a) minus (b), where (a) is the applicable death benefit amount on the first day of the month, divided by 1.0024663; and (b) is the Policy Value attributed to that death benefit amount on the first day of the month. Cost of insurance rates and net amounts at risk are determined separately for each Coverage Amount and for the excess of the Death Benefit over the Face Amount (the Face Amount is the sum of the Coverage Amounts). ATTRIBUTION OF POLICY VALUE FOR NET AMOUNTS AT RISK To determine the net amounts at risk, the Policy Value will be attributed to Coverage Amounts in the order listed in the Policy. The amount of Policy Value attributed to a Coverage Amount will be limited to the amount that results in zero net amount at risk, and any excess Policy Value will then be attributed to the next listed Coverage Amount. Attribution will continue in this manner until either the entire Policy Value is attributed or the end of the list of Coverage Amounts is reached. Any remaining Policy Value will then be attributed to the excess of the Death Benefit over the Face Amount. CURRENT COST OF INSURANCE RATES Cost of insurance rates are determined separately for each Coverage Amount and the excess of the Death Benefit over the Face Amount. There are different current cost of insurance rate bases for: - Coverage Amounts having Sales Loads, and - The excess of the Death Benefit over the Face Amount, including any Term Insurance Benefit under the FTIO Rider. The cost of insurance rate in a specific Policy Month for an applicable death benefit amount will depend on: - the cost of insurance rate basis for the applicable death benefit amount, - the life insured's Attained Age, sex (unless unisex rates are required by law) and smoking status on the effective date of the applicable death benefit amount, - the underwriting class of the applicable death benefit amount, - the Coverage Year, or Policy Year for the excess of the Death Benefit over the Face Amount, - any extra charges for substandard ratings, as stated in the Policy. 23 Since the net amount of risk for Death Benefit Option 2 is based on a formula that includes as factors the Policy Value, the net amount at risk is affected by the investment performance of the underlying investment options chosen, payment of premiums and charges assessed. Cost of insurance rates will generally increase with the life insured's age and the Coverage Year. Cost of insurance rates reflect our expectation as to future mortality experience. They are also intended to cover our general costs of providing the Policy, to the extent that these costs are not covered by other charges. Current cost of insurance rates may be changed by us on a basis that does not unfairly discriminate within the class of lives insured. GUARANTEED MAXIMUM COST OF INSURANCE RATES In no event will the cost of insurance rates we charge exceed the guaranteed maximum rates set forth in the Policy, except to the extent that an extra charge is imposed for a substandard rating. The guaranteed rates are the 1980 Commissioners Standard Ordinary Sex Distinct (unless unisex rates are required by law) ANB Aggregate Ultimate Mortality Tables. Current cost of insurance rates may be less than the guaranteed rates. ASSET BASED RISK CHARGE DEDUCTED FROM INVESTMENT ACCOUNTS We assess a daily charge against amounts in the Investment Accounts. This charge is intended to compensate us for insurance risks we assume under the Policy, such as benefit payments and expenses that are higher than we expected. We will realize a gain from this charge to the extent it is not needed to provide benefits and pay expenses under the Policy. The charge is a percentage of amounts in the Investment Accounts, which will reduce Unit Values of the sub-accounts. The charge is guaranteed never to exceed 0.0013699% (a annual rate of 0.50%). Currently, we charge the following rates:
POLICY YEAR DAILY ASSET BASED RISK CHARGE ANNUAL RATE - ---------------------------------------------------------------------------------------------------- 1-10 0.0012301% 0.45% 11+ 0.0005474% 0.25%
INVESTMENT MANAGEMENT FEES AND EXPENSES The investment management fees and expenses of the Portfolios, the underlying variable investment options for the Policy, are set forth in the Portfolio Prospectuses. REDUCTION IN CHARGES AND ENHANCED SURRENDER VALUES The Policy is designed for employers and other sponsoring organizations that may purchase multiple policies as a Case. The size or nature of the Case may result in expected savings of sales, underwriting, administrative or other costs. If so, we expect to offer reductions of Policy charges and enhancements of surrender value. Eligibility for reductions and enhancements and the amounts available will be determined by a number of factors, including the number of lives to be insured, the total premiums expected to be paid, total assets under management for the policyholder, the nature of the relationship among the lives insured, the purpose for which the policies are being purchased, expected persistency of the individual policies, and any other circumstances which we believe to be relevant to the expected reduction of our expenses. Some of reductions and enhancements may be guaranteed and others may be subject to restrictions or to withdrawal or modification, on a uniform Case basis. We may change the nature and amount of reductions and enhancements available from time to time. Reductions and enhancements will be determined in a way that is not unfairly discriminatory to policyholders. COMPANY TAX CONSIDERATIONS Currently, we make no specific charge to the Separate Account for any federal, state, or local taxes that we incur that may be attributable to such Account or to the Policy. We reserve the right in the future to make a charge for any such tax or other economic burden resulting from the application of tax laws that we determines to be attributable to the Separate Account or to the Policy. POLICY VALUE DETERMINATION OF THE POLICY VALUE A Policy has a Policy Value, a portion of which is available to you by making a policy loan or partial withdrawal, or upon surrender of the Policy. The Policy Value may also affect the amount of the Death Benefit. The Policy Value at any time is equal to the sum of the values in the Investment Accounts, the Fixed Account, and the Loan Account. 24 The Policy Value is affected by the investment performance of the Investment Account chosen and the rate of interest credited if amounts are allocated to the Fixed Account. The Policy Value is also affected by the charges deducted. For a discussion of how these factors affect Policy Value see the "Risk/Return Summary." INVESTMENT ACCOUNTS An Investment Account is established under each Policy for each sub-account of the Separate Account to which net premiums or transfer amounts have been allocated. Each Investment Account under a Policy measures the interest of the Policy in the corresponding sub-account. The value of the Investment Account established for a particular sub-account is equal to the number of units of that sub-account credited to the Policy times the value of such units. FIXED ACCOUNT Amounts in the Fixed Account do not vary with the investment performance of any sub-account. Instead, these amounts are credited with interest at a rate determined by Manulife USA. See "The General Account - Fixed Account". LOAN ACCOUNT Amounts borrowed from the Policy are transferred to the Loan Account. Amounts in the Loan Account do not vary with the investment performance of any sub-account. Instead, these amounts are credited with interest at a rate determined by Manulife USA that is lower than the loan interest rate charged on Policy Debt. See "Policy Loans - Loan Account". UNITS AND UNIT VALUES CREDITING AND CANCELING UNITS Units of a particular sub-account are credited to a Policy when net premiums are allocated to that sub-account or amounts are transferred to that sub-account. Units of a sub-account are cancelled whenever amounts are deducted, transferred or withdrawn from the sub-account. 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 a premium payment will be based on the applicable unit values for the Business Day on which the premium is received at the Service Office, except for any premiums received before the Effective Date. For premiums received before the Effective Date, the values will be determined on the Effective Date. Units are valued at the end of each Business Day. When an order involving the crediting or canceling of units is received after the end of a Business Day, or on a day that 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, Investment Account value or Death Benefit to be made on a day that is not a Business Day will be made on the next Business Day. UNIT VALUES The value of a unit of each sub-account was initially fixed at $10.00. For each subsequent Business Day the unit value for that sub-account is determined by multiplying the unit value for the immediately preceding Business Day by the net investment factor for the that sub-account on such subsequent Business Day. The net investment factor for a sub-account on any Business Day is equal to (a) divided by (b) minus (c), where: (a) is the net asset value of the underlying Portfolio shares held by that sub-account as of the end of such Business Day before any policy transaction are made on that day; (b) is the net asset value of the underlying Portfolio shares held by that sub-account as of the end of the immediately preceding Business Day after all policy transaction were made for that day; and (c) is a charge not exceeding the daily mortality and expense risk charge shown in the "Charges and Deductions - Asset Based Risk Charge Deducted from Investment Accounts" section. The value of a unit may increase, decrease, or remain the same, depending on the investment performance of a sub-account from one Business Day to the next. TRANSFERS OF POLICY VALUE Subject to the restrictions set forth below, the policyowner may transfer Policy Value from one sub-account to another or to the Fixed Account. Transfers involving the Fixed Account are subject to certain limitations noted below under "Transfers Involving Fixed Accounts." None of the portfolios which are investment options for the Policy are designed for short-term investing since such activity may increase portfolio transaction costs and be disruptive to management of a portfolio (affecting a subadviser's ability to effectively manage a portfolio in accordance with its investment objective and policies). Management of the Trust will monitor purchases and redemptions of Trust shares. If management of the Trust becomes aware of short-term trading that it believes, in its sole discretion, is 25 significantly disrupting (or may potentially significantly disrupt) management of a portfolio or materially increasing portfolio transaction costs ("Disruptive Short-Term Trading"), the Trust may impose restrictions on such trading. The Trust's participation agreement with the Company requires the Company to impose trading restrictions on its policy owners if requested by the Trust. In addition, the Company also has a policy to restrict transfers to two per month per Policy. (For purposes of this restriction, all transfers made during the period from the opening of trading each day the net asset value of the shares of the Trust are determined (usually 9 a.m.) to the close of trading that day (the close of day-time trading of the New York Stock Exchange (usually 4 p.m.)) are considered one transfer.) Policyowners may, however, transfer to the Money Market Trust even if the two transfer per month limit has been reached if 100% of the Policy Value is transferred to the Money Market Trust. If such a transfer to the Money Market Trust is made, for a 30 day period after such transfer, no subsequent transfers from the Money Market Trust to another investment option may be made. This restriction is applied uniformly to all policyowners. The Company also reserves the right to take other actions to restrict trading as noted below. Actions that the Company may take to restrict trading include, but are not limited to: - restricting the number of transfers made during a defined period, - restricting the dollar amount of transfers, - restricting the method used to submit transfers (e.g., requiring transfer requests to be submitted in writing via U.S. mail), and - restricting transfers into and out of certain subaccounts. Policyowners should note that while the Trust and the Company seek to identify and prevent Disruptive Short-Term Trading, it is not always possible to do so. Therefore, no assurance can be given that the Trust and the insurance company will successfully impose restrictions on all Disruptive Short-Term Trading. If the Trust and the Company are unsuccessful in restricting Disruptive Short-Term Trading the portfolios may incur higher brokerage costs and may maintain higher cash levels, limiting their ability to achieve their investment options. The Company also reserves the right to modify or terminate the transfer privilege at any time in accordance with applicable law. Transfers may also be delayed when any of the events described under items (i) through (iv) in "Payment of Proceeds" occurs. Transfer privileges are also subject to any restrictions that may be imposed by the Portfolios. In addition, the Company reserves the right to defer the transfer privilege at any time that the Company is unable to purchase or redeem shares of the Portfolios. TRANSFER REQUESTS Transfer requests may be made in writing in a format satisfactory to us. From time to time we may offer you alternate means of communicating transfer requests to us, such as electronic mail, the Internet or telephone. We will use reasonable procedures to confirm that instructions received by alternate means are genuine and we will not be liable for following instructions we have reasonably determined to be genuine. LIMITATIONS ON TRANSFERS FROM THE FIXED ACCOUNT The maximum amount that may be transferred from the Fixed Account in any Policy Year is 25% of the Fixed Account Value at the previous Policy Anniversary. Any transfer that involves a transfer out of the Fixed Account may not involve a transfer to the Investment Account for the Money Market Trust. We may allow greater amounts to be transferred from the Fixed Account if a systematic plan of withdrawals is agreed to in advance. For example, we will allow the transfer of 20%, 25%, 33%, 50% and 100% of the remaining balance in the Fixed Account in five successive years provided we agree in advance in writing and that no amounts are transferred into the Fixed Account during the 5 year period. POLICY LOANS At any time while the Policy is in force, you may borrow against the Policy Value. The Policy is the only security for the loan. Policy loans may have tax consequences. See "Tax Treatment of Policy Benefits - Policy Loan Interest." A policy loan will affect future Policy Values, since the portion of the Policy Value in the Loan Account will receive the loan interest credited rate rather than varying with the performance of the underlying Portfolios or increasing at the Fixed Account interest credited rate. A policy loan may cause a Policy to be more susceptible to lapse since it reduces the Net Cash Surrender Value from which monthly deductions are taken. A policy loan causes the amount payable upon death of the life insured to be reduced by the amount of outstanding Policy Debt. MAXIMUM LOAN The amount of any loan cannot exceed the amount that would cause the Policy Debt to equal the Policy's Cash Surrender Value less the monthly deductions due from the date of the loan to the to the next Policy Anniversary. 26 INTEREST CHARGED ON POLICY LOANS Interest on the Policy Debt will accrue daily and be payable annually on the Policy Anniversary. The rate of interest charged will be an effective annual rate of 4%. LOAN ACCOUNT When a loan is made, an amount equal to the loan will be deducted from the Investment Accounts or the Fixed Account and transferred to the Loan Account. You may designate how this amount is allocated among the Accounts. If you give no instructions, the amount transferred will be allocated among the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. A transfer from an Investment Account will result in the cancellation of units of the underlying sub-account equal in value to the amount transferred from the Investment Account. However, since the Loan Account is part of the Policy Value, transfers made in connection with a loan will not change the Policy Value. INTEREST CREDITED TO THE LOAN ACCOUNT Policy Value in the Loan Account will earn interest at an effective annual rate guaranteed to be at least 3.25%. We may declare a current interest rate that is greater than this, subject to change at any time. The excess of the loan interest charged rate (4%) over the loan interest credited rates will result in a net charge against the Policy Value with respect to any Policy Debt. Currently we credit loan interest rates which vary by Policy Year as follows:
CURRENT LOAN INTEREST EXCESS LOAN INTEREST POLICY YEARS CREDITED RATES CHARGED RATE - ---------------------------------------------------------------------- 1-10 3.25% 0.75% 11+ 3.75% 0.25%
LOAN ACCOUNT ADJUSTMENTS On the first day of each Policy Month the difference between the Loan Account and the Policy Debt is transferred to the Loan Account from the Investment Accounts or the Fixed Account. The amount transferred will be allocated to the Investment Accounts and the Fixed Account in the same proportion as the Policy Value in each Account bears to the Net Policy Value. LOAN REPAYMENTS Policy Debt may be repaid, in whole or in part, at any time prior to the death of the life insured while the Policy is in force. A loan repayment amount will be credited to the Loan Account and transferred to the Fixed Account or the Investment Accounts in the same proportion as the Policy Value in each Account bears to the Net Policy Value. Amounts paid to us not specifically designated in writing as loan repayments will be treated as premiums. POLICY SURRENDER AND PARTIAL WITHDRAWALS POLICY SURRENDER A Policy may be surrendered for its Net Cash Surrender Value at any time while the life insured is living. The Net Cash Surrender Value is equal to the Policy Value less any monthly deductions due and Policy Debt. The Net Cash Surrender Value will be determined at the end of the Business Day on which we receive the Policy and a written request for surrender at the Service Office. When a Policy is surrendered, the insurance coverage and all other benefits under the Policy will terminate. PARTIAL WITHDRAWALS You may make a partial withdrawal of the Net Cash Surrender Value at any time. You may designate how the withdrawal amount is allocated among the Investment Account and the Fixed Account. If you give no instructions, the withdrawal amount will be allocated among the Accounts in the same proportion as the Policy Value in each Account bears to the Net Policy Value. The Death Benefit may be reduced as a result of a Partial Withdrawal. See "Death Benefits - Decreases in Face Amount under Death Benefit Option 1 due to a Partial Withdrawal"). LAPSE AND REINSTATEMENT LAPSE A Policy will go into default if at the beginning of a Policy Month if the Net Cash Surrender Value would go below zero after deducting the monthly deduction then due. A lapse could have adverse tax consequences as described under "Tax Treatment of the Policy - Tax Treatment of Policy Benefits - Surrender or Lapse." We will notify you of the default and will allow you a 61-day grace period in which to make a premium payment sufficient to bring the Policy out of default. The required payment will be equal to the amount necessary to bring the Net Cash Surrender Value to zero, if it was less than zero on the date of default, plus the monthly 27 deductions due at the date of default and payable at the beginning of each of the two Policy Months thereafter, plus any applicable premium load. If the required payment is not received by the end of the grace period, the Policy will terminate with no value. DEATH DURING GRACE PERIOD If the life insured should die during the grace period, the Policy Value used in the calculation of the Death Benefit will be the Policy Value on the date of default and the insurance benefit will be reduced by any outstanding monthly deductions due at the time of death. REINSTATEMENT You may reinstate a Policy that has terminated after going into default at any time within the five-year period following the date of termination subject to the following conditions: (a) The Policy must not have been surrendered for its Net Cash Surrender Value; (b) Evidence of the life insured's insurability satisfactory to us must be provided; and (c) A premium equal to the payment required during the grace period following default to keep the Policy in force is paid. THE GENERAL ACCOUNT The general account of Manulife USA consists of all assets owned by us other than those in the Separate Account and other separate accounts of the Company. Subject to applicable law, we have sole discretion over investment of the assets of the general account. By virtue of exclusionary provisions, interests in the general account of Manulife USA have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the Investment Company Act of 1940. Accordingly, neither the general account nor any interests therein are subject to the provisions of these acts, and as a result the staff of the SEC has not reviewed the disclosures in this prospectus relating to the general account. Disclosures regarding the general account may, however, be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in a prospectus. FIXED ACCOUNT You may allocate net premiums to the Fixed Account or transfer all or a portion of the Policy Value to the Fixed Account from the Investment Accounts. Manulife USA will hold the reserves required for any portion of the Policy Value allocated to the Fixed Account in our general account. Transfers from the Fixed Account to the Investment Accounts are subject to restrictions. POLICY VALUE IN THE FIXED ACCOUNT The Policy Value in the Fixed Account is equal to: (a) the portion of the net premiums allocated to it; plus (b) any amounts transferred to it; plus (c) interest credited to it; less (d) any charges deducted from it; less (e) any partial withdrawals from it; less (f) any amounts transferred from it. INTEREST ON THE FIXED ACCOUNT An allocation of Policy Value to the Fixed Account does not entitle you to share in the investment experience of the general account. Instead, we guarantee that the Policy Value in the Fixed Account will accrue interest daily at an effective annual rate of at least 3%, without regard to the actual investment experience of the general account. We may declare a current interest rate in excess of the guaranteed rate, subject to change at any time. OTHER PROVISIONS OF THE POLICY POLICYHOLDER RIGHTS Unless otherwise restricted by a separate agreement, you may: - Vary the premiums paid under the Policy. - Change the Death Benefit Option. - Change the premium allocation for future premiums. 28 - Take loans and/or partial withdrawals. - Surrender the contract. - Transfer ownership to a new owner. - Name a contingent owner that will automatically become owner if you die before the life insured. - Change or revoke a contingent owner. - Change or revoke a beneficiary. ASSIGNMENT OF RIGHTS We will not be bound by an assignment until we receive a copy of the assignment at the Service Office. We assume no responsibility for the validity or effects of any assignment. BENEFICIARY You may appoint one or more beneficiaries of the Policy by naming them in the application. Beneficiaries may be appointed in three classes - primary, secondary, and final. Beneficiaries may also be revocable or irrevocable. Unless an irrevocable designation has been elected, you may change the beneficiary during the life insured's lifetime by giving written notice in a form satisfactory to us. If the life insured dies and there is no surviving beneficiary, you, or your estate if you are the life insured, will be the beneficiary. If a beneficiary dies before the seventh day after the death of the life insured, we will pay the insurance benefit as if the beneficiary had died before the life insured. INCONTESTABILITY We will not contest the validity of a Policy after it has been in force during the life insured's lifetime for two years from the Issue Date stated in the Policy, nor will we contest the validity of an increase in Face Amount after it has been in force during the life insured's lifetime for two years. If a Policy has been reinstated, we can contest any misrepresentation of a fact material to the reinstatement for a period of two years after the reinstatement date. MISSTATEMENT OF AGE OR SEX If the life insured's stated age or sex or both in the Policy are incorrect, we will change the Face Amount so that the Death Benefit will be that which the most recent monthly charge for the cost of insurance would have purchased for the correct age and sex. SUICIDE EXCLUSION If the life insured, whether sane or insane, dies by suicide within two years from the Issue Date stated in The Policy (or within the maximum period permitted by the state in which the Policy was delivered, if less than two years), we will pay only the premiums paid less any partial withdrawals and any Policy Debt. If the life insured should die by suicide within two years after a Face Amount increase, the Death Benefit for the increase will be limited to the monthly deductions for the increase. At our discretion, this provision may be waived, such as policies purchased in conjunction with certain existing benefit plans. SUPPLEMENTARY BENEFITS Subject to certain requirements, one or more supplementary benefits may be added to a Policy, including the FTIO Rider (see "Death Benefits - Flexible Term Insurance Option Rider") and, in the case of a Policy owned by a corporation or other similar entity, a benefit permitting a change in the life insured (a taxable event). More detailed information concerning this supplementary benefit may be obtained from us. There is no cost for any supplementary benefit currently offered by us, with the exception of FTIO Rider (see "Charges and Deductions - Monthly Deductions"). TAX TREATMENT OF THE POLICY The following summary provides a general description of the federal income tax considerations associated with the Policy and does not purport to be complete or to cover all situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service (the "Service"). No representation is made as to the likelihood of continuation of the present federal income tax laws nor of the current interpretations by the Service. MANULIFE USA DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY OR ANY TRANSACTION REGARDING THE POLICY. The Policy may be used in various arrangements, including non-qualified deferred compensation or salary continuation plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances of each individual arrangement. Therefore, if the use of the Policy in any such arrangement, the value of which depends in part on the tax consequences, is contemplated, a qualified tax adviser should be consulted for advice on the tax attributes of the particular arrangement. Manulife USA is taxed as a life insurance company. Because the operations of the Separate Account are a part of, and are taxed with, our operations, the Separate Account is not separately taxed as a "regulated investment company" under the Code. Under existing 29 Federal income tax laws, we are not taxed on the investment income and capital gains of the Separate Account, but we may be eligible for certain tax credits or deductions relating to foreign taxes paid and dividends received by the Portfolios. Our use of these tax credits or deductions will not adversely affect or benefit the Separate Account. We do not anticipate that it will be taxed on the income and gains of the Separate Account in the future, but if we are, we may impose a corresponding charge against the Separate Account. LIFE INSURANCE QUALIFICATION There are several requirements that must be met for a Policy to be considered a Life Insurance Contract under the Internal Revenue Code, and thereby to enjoy the tax benefits of such a contract: 1. The Policy must satisfy the definition of life insurance under Section 7702 of the Code. 2. The investments of the Separate Account must be "adequately diversified" in accordance with Section 817(h) of the Code and Treasury Regulations. 3. The Policy must be a valid life insurance contract under applicable state law. 4. The policyholder must not possess "incidents of ownership" in the assets of the Separate Account. These four items are discussed in detail below. DEFINITION OF LIFE INSURANCE Section 7702 of the Code sets forth a definition of a life insurance contract for federal tax purposes. For a Policy to be a life insurance contract, it must satisfy either the Cash Value Accumulation Test or the Guideline Premium Test. By limiting cash value at any time to the net single premium that would be required in order to fund future benefits under the contract, the Cash Value Accumulation Test in effect requires a minimum death benefit for a given Policy Value. The Guideline Premium Test also requires a minimum death benefit, but in addition limits the total premiums that can be paid into a Policy for a given amount of death benefit. With respect to a Policy which is issued on the basis of a standard rate class, we believe (largely in reliance on IRS Notice 88-128 and the proposed mortality charge regulations under Section 7702, issued on July 5, 1991) that such a Policy should meet the Section 7702 definition of a life insurance contract. With respect to a Policy that is issued on a substandard basis (i.e., a rate class involving higher-than-standard mortality risk), there is less guidance, in particular as to how mortality and other expense requirements of Section 7702 are to be applied in determining whether such a Policy meets the Section 7702 definition of a life insurance contract. Thus it is not clear whether or not such a Policy would satisfy Section 7702, particularly if the policyholder pays the full amount of premiums permitted under the Policy. The Secretary of the Treasury (the "Treasury") is authorized to prescribe regulations implementing Section 7702. However, while proposed regulations and other interim guidance have been issued, final regulations have not been adopted and guidance as to how Section 7702 is to be applied is limited. If a Policy were determined not to be a life insurance contract for purposes of Section 7702, such a Policy would not provide the tax advantages normally provided by a life insurance policy. If it is subsequently determined that a Policy does not satisfy Section 7702, we may take whatever steps are appropriate and reasonable to attempt to cause such a Policy to comply with Section 7702. For these reasons, we reserve the right to restrict Policy transactions as necessary to attempt to qualify it as a life insurance contract under Section 7702. DIVERSIFICATION Section 817(h) of the Code requires that the investments of the Separate Account be "adequately diversified" in accordance with Treasury regulations in order for the Policy to qualify as a life insurance contract under Section 7702 of the Code (discussed above). The Separate Account, through the Portfolios, intends to comply with the diversification requirements prescribed in Treas. Reg. Sec. 1.817-5, which affect how each Portfolio's assets are to be invested. We believe that the Separate Account will thus meet the diversification requirement, and we will monitor continued compliance with the requirement. STATE LAW A Policy must qualify as a valid life insurance contract under applicable state laws. State regulations require that the policyholder have appropriate insurable interest in the life insured. Failure to establish an insurable interest may result in the Policy not qualifying as a life insurance contract for federal tax purposes. INVESTOR CONTROL In certain circumstances, owners of variable life insurance policies may be considered the owners, for federal income tax purposes, of the assets of the separate account used to support their policies. In those circumstances, income and gains from the separate account assets would be includible in the variable policyholder's gross income. The IRS has stated in published rulings that a variable policyholder will be considered the owner of separate account assets if the policyholder 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 30 circumstances in which investor control of the investments of a segregated asset account may cause the investor (i.e., the policyholder), 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 policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets". As of the date of this prospectus, no such guidance has been issued. 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 policyholders were not owners of separate account assets. For example, the Policy has many more portfolios to which policyholders may allocate premium payments and Policy Values than were available in the policies described in the rulings. These differences could result in an owner being treated as the owner of a pro-rata portion of the assets of the Separate Account. In addition, we do not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. We therefore reserve the right to modify the Policy as necessary to attempt to prevent an owner from being considered the owner of a pro rata share of the assets of the Separate Account. TAX TREATMENT OF POLICY BENEFITS The following discussion assumes that the Policy will qualify as a life insurance contract for federal income tax purposes. We believe that the proceeds and cash value increases of a Policy should be treated in a manner consistent with a fixed-benefit life insurance policy for federal income tax purposes. Depending on the circumstances, the exchange of a Policy, a change in the Policy's Death Benefit Option, a policy loan, partial withdrawal, surrender, change in ownership, the addition of an accelerated death benefit rider, or an assignment of the Policy may have federal income tax consequences. In addition, federal, state and local transfer, and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each policyholder or beneficiary. DEATH BENEFIT The death benefit under the Policy should be generally excludible from the gross income of the beneficiary under Section 101(a)(1) of the Code. A transfer of the Policy for valuable consideration, however, may cause a portion of the death benefit to be taxable (See "Other Transactions" below). CASH VALUES Generally, the policyholder will not be deemed to be in constructive receipt of the Policy Value until there is a distribution. This includes additions attributable to interest, dividends, appreciation or gains realized on transfers among sub-accounts. INVESTMENT IN THE POLICY Investment in the Policy means: (a) the aggregate amount of any premiums or other consideration paid for the Policy; minus (b) the aggregate amount, other than loan amounts, received under the Policy which has been excluded from the gross income of the policyholder (except that the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract or "MEC," to the extent such amount has been excluded from gross income, will be disregarded); plus (c) the amount of any loan from, or secured by a Policy that is a MEC to the extent that such amount has been included in the gross income of the policyholder. The repayment of a policy loan, or the payment of interest on a loan, does not affect the Investment in the Policy. SURRENDER OR LAPSE Upon a complete surrender or lapse of a Policy or when benefits are paid at a policy's maturity date, if the amount received plus the amount of Policy Debt exceeds the total investment in the Policy, the excess will generally be treated as ordinary income subject to tax. If, at the time of lapse, a Policy has a loan, the loan is extinguished and the amount of the loan is a deemed payment to the policyholder. If the amount of this deemed payment exceeds the investment in the contract, the excess is taxable income and is subject to Internal Revenue Service reporting requirements. DISTRIBUTIONS The tax consequences of distributions from, and loans taken from or secured by, a Policy depend on whether the Policy is classified as a MEC. 31 DISTRIBUTIONS FROM NON-MECS A distribution from a non-MEC is generally treated as a tax-free recovery by the policyholder of the Investment in the Policy to the extent of such Investment in the Policy, and as a distribution of taxable income only to the extent the distribution exceeds the Investment in the Policy. Loans from, or secured by, a non-MEC are not treated as distributions. Instead, such loans are treated as indebtedness of the policyholder. Force Outs An exception to this general rule occurs in the case of a decrease in the Policy's death benefit or any other change that reduces benefits under the Policy in the first 15 years after the Policy is issued and that results in a cash distribution to the policyholder in order for the Policy to continue to comply with the Section 7702 definitional limits. Such a cash distribution will be taxed in whole or in part as ordinary income (to the extent of any gain in the Policy) under rules prescribed in Section 7702. Changes include partial withdrawals and death benefit option changes. DISTRIBUTIONS FROM MECS Policies classified as MECs will be subject to the following tax rules: (a) First, all partial withdrawals from such a Policy are treated as ordinary income subject to tax up to the amount equal to the excess (if any) of the Policy Value immediately before the distribution over the Investment in the Policy at such time. (b) Second, loans taken from or secured by such a Policy and assignments and pledges of any part of its value are treated as partial withdrawals from the Policy and taxed accordingly. Past-due loan interest that is added to the loan amount is treated as a loan. (c) Third, a 10% additional income tax is imposed on the portion of any distribution (including distributions on surrender) from, or loan taken from or secured by, such a Policy that is included in income except where the distribution or loan: (i) is made on or after the policyholder attains age 59 1/2; (ii) is attributable to the policyholder becoming disabled; or (iii) is part of a series of substantially equal periodic payments for the life (or life expectancy) of the policyholder or the joint lives (or joint life expectancies) of the policyholder and the policyholder's beneficiary. These exceptions are not likely to apply in situations where the Policy is not owned by an individual. Definition of Modified Endowment Contracts Section 7702A establishes a class of life insurance contracts designated as "Modified Endowment Contracts," which applies to Policies entered into or materially changed after June 20, 1988. In general, a Policy will be a Modified Endowment Contract if the accumulated premiums paid at any time during the first seven policy years exceed the "seven-pay premium limit". The seven-pay premium limit on any date is equal to the sum of the net level premiums that would have been paid on or before such date if the Policy provided for paid-up future benefits after the payment of seven level annual premiums (the "seven-pay premium"). The rules relating to whether a Policy will be treated as a MEC are extremely complex and cannot be adequately described in the limited confines of this summary. Therefore, a current or prospective policyholder should consult with a competent adviser to determine whether a transaction will cause the Policy to be treated as a MEC. Material Changes A Policy that is not a MEC may become a MEC if it is "materially changed". If there is a material change to the Policy, the seven year testing period for MEC status is restarted. The material change rules for determining whether a Policy is a MEC are complex. In general, however, the determination of whether a Policy will be a MEC after a material change depends upon the relationship among the death benefit of the Policy at the time of such change, the Policy Value at the time of the change, and the additional premiums paid into the Policy during the seven years starting with the date on which the material change occurs. Reductions in Face Amount If there is a reduction in benefits during the first seven policy years, the seven-pay premium limit is recalculated as if the Policy had been originally issued at the reduced benefit level. Failure to comply would result in classification as a MEC regardless of any efforts by us to provide a payment schedule that will not violate the seven pay test. Exchanges A life insurance contract received in exchange for a MEC will also be treated as a MEC. 32 Processing of Premiums If a premium, which would cause the Policy to become a MEC, is received within 23 days of the next Policy Anniversary, we will not apply the portion of the premium which would cause MEC status ("excess premium") to the Policy when received. The excess premium will be placed in a suspense account until the next Policy Anniversary, at which point the excess premium, along with interest, earned on the excess premium at a rate of 3.5% from the date the premium was received, will be applied to the Policy. (Any amount that would still be excess premium will be refunded to the policyholder). The policyholder will be advised of this action and will be offered the opportunity to have the premium credited as of the original date received or to have the premium returned. (If the policyholder does not respond, the premium and interest will be applied as described above). If a premium, which would cause the Policy to become a MEC, is received more than 23 days prior to the next Policy Anniversary, we will refund any excess premium to the policyholder. The portion of the premium which is not excess will be applied as of the date received. The policyholder will be advised of this action and will be offered the opportunity to return the premium and have it credited to the account as of the original date received. Multiple Policies All MEC's that are issued by a Company (or its affiliates) to the same policyholder during any calendar year are treated as one MEC for purposes of determining the amount includible in gross income under Section 72(e) of the Code. POLICY LOAN INTEREST Generally, personal interest paid on any loan under a Policy which is owned by an individual is not deductible. For policies purchased on or after January 1, 1996, interest on any loan under a Policy owned by a taxpayer and covering the life of any individual who is an officer or employee of or is financially interested in the business carried on by the taxpayer will not be tax deductible unless the employee is a key person within the meaning of Section 264 of the Code. A deduction will not be permitted for interest on a loan under a Policy held on the life of a key person to the extent the aggregate of such loans with respect to contracts covering the key person exceed $50,000. The number of employees who can qualify as key persons depends in part on the size of the employer but cannot exceed 20 individuals. Furthermore, if a non-natural person owns a Policy, or is the direct or indirect beneficiary under a Policy, section 264(f) of the Code disallows a pro-rata portion of the taxpayer's interest expense allocable to unborrowed Policy cash values attributable to insurance held on the lives of individuals who are not 20% (or more) owners of the taxpayer-entity, officers, employees, or former employees of the taxpayer. The portion of the interest expense that is allocable to unborrowed Policy cash values is an amount that bears the same ratio to that interest expense as the taxpayer's average unborrowed Policy cash values under such life insurance policies issued after June 8, 1997 bear to the sum of such average unborrowed cash values and the average adjusted bases for all other assets of the taxpayer. If the policyholder is an individual, and if the taxpayer is a business and is not the policyholder, but is the direct or indirect beneficiary under the Policy, then the amount of unborrowed cash value of the Policy taken into account in computing the portion of the taxpayer's interest expense allocable to unborrowed Policy cash values cannot exceed the benefit to which the taxpayer is directly or indirectly entitled under the Policy. POLICY EXCHANGES A policyholder generally will not recognize gain upon the exchange of a Policy for another life insurance policy covering the same life insured and issued by us or another insurance company, except to the extent that the policyholder receives cash in the exchange or is relieved of Policy indebtedness as a result of the exchange. In no event will the gain recognized exceed the amount by which the Policy Value (including any unpaid loans) exceeds the policyholder's Investment in the Policy. OTHER TRANSACTIONS A transfer of the Policy, a change in the owner, a change in the life insured, a change in the beneficiary, and certain other changes to the Policy, as well as particular uses of the Policy (including use in a so called "split-dollar" arrangement) may have tax consequences depending upon the particular circumstances and should not be undertaken prior to consulting with a qualified tax adviser. For instance, if the owner transfers the Policy or designates a new owner in return for valuable consideration (or, in some cases, if the transferor is relieved of a liability as a result of the transfer), then the Death Benefit payable upon the death of the life insured may in certain circumstances be includible in taxable income to the extent that the Death Benefit exceeds the prior consideration paid for the transfer and any premiums or other amounts subsequently paid by the transferee. Further, in such a case, if the consideration received exceeds the transferor's Investment in the Policy, the difference will be taxed to the transferor as ordinary income. Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the individual circumstances of each policyholder and beneficiary. 33 ALTERNATE MINIMUM TAX Corporate owners may be subject to Alternate Minimum Tax on the annual increases in Cash Surrender Values and on the Death Benefit proceeds. INCOME TAX REPORTING In certain employer-sponsored life insurance arrangements, including equity split-dollar arrangements, participants may be required to report for income tax purposes, one or more of the following: (a) the value each year of the life insurance protection provided; (b) an amount equal to any employer-paid premiums; (c) income equal to imputed interest on deemed employer loan; or (d) some or all of the amount by which the current value exceeds the employer's interest in the Policy. Participants should consult with their tax adviser to determine the tax consequences of these arrangements. OTHER INFORMATION PAYMENT OF PROCEEDS As long as the Policy is in force, we will ordinarily pay any policy loans, surrenders, partial withdrawals or insurance benefit within seven days after receipt at the Service Office of all the documents required for such a payment. We may delay the payment of any policy loans, surrenders, partial withdrawals, or insurance benefit that depends on Fixed Account values for up to six months or in the case of any Investment Account for any period during which (i) the New York Stock Exchange is closed for trading (except for normal weekend and holiday closings), (ii) trading on the New York Stock Exchange is restricted (iii) an emergency exists as a result of which disposal of securities held in the Separate Account is not reasonably practicable or it is not reasonably practicable to determine the value of the Separate Account's net assets or (iv) the SEC, by order, so permits for the protection of security holders; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions described in (2) and (3) exist. REPORTS TO POLICYHOLDERS Within 30 days after each Policy Anniversary, we will send you a statement showing, among other things: - the amount of Death Benefit; - the Policy Value and its allocation among the Investment Accounts, the Fixed Account and the Loan Account; - the value of the units in each Investment Account to which the Policy Value is allocated; - the Policy Debt and any loan interest charged since the last report; - the premiums paid and other Policy transactions made during the period since the last report; and - any other information required by law. You will also be sent an annual and a semi-annual report for each Portfolio, which will include a list of the securities, held in each Portfolio as required by the 1940 Act. RESPONSIBILITIES OF MFC MFC entered into an agreement with Manulife Financial Securities, LLC ("Manulife Financial Securities") pursuant to which MFC, on behalf of Manulife Financial Securities will pay the sales commissions in respect of the Policies and certain other policies issued by Manulife USA, prepare and maintain all books and records required to be prepared and maintained by Manulife Financial Securities with respect to the Policies and such other policies, and send all confirmations required to be sent by Manulife Financial Securities with respect to the Policies and such other policies. Manulife Financial Securities will promptly reimburse MFC for all sales commissions paid by MFC and will pay MFC for its other services under the agreement in such amounts and at such times as agreed to by the parties. MFC has also entered into a Service Agreement with Manulife USA pursuant to which MFC will provide to Manulife USA with issue, administrative, general services and recordkeeping functions on behalf of Manulife USA with respect to all of its insurance policies including the Policies. Finally, Manulife USA may, from time to time in its sole discretion, enter into one or more reinsurance agreements with other life insurance companies under which policies issued by it may be reinsured, such that its total amount at risk under a policy would be limited for the life of the insured. 34 VOTING RIGHTS As stated previously, all of the assets held in each sub-account of the Separate Account will be invested in shares of a particular Portfolios. Manulife USA 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, Manulife USA will vote shares held in the sub-accounts in accordance with instructions received from policyholders having an interest in such sub-accounts. Shares held in each sub-account for which no timely instructions from policyholders are received, including shares not attributable to the Policies, will be voted by Manulife USA in the same proportion as those shares in that sub-account for which instructions are received. Should the applicable federal securities laws or regulations change so as to permit Manulife USA to vote shares held in the Separate Account in its own right, it may elect to do so. The number of shares in each sub-account for which instructions may be given by a policyholder is determined by dividing the portion of the Policy Value derived from participation in that sub-account, if any, by the value of one share of the corresponding Portfolio. The number will be determined as of a date chosen by Manulife USA, but not more than 90 days before the shareholders' meeting. Fractional votes are counted. Voting instructions will be solicited in writing at least 14 days prior to the meeting. Manulife USA may, if required by state officials, disregard voting instructions if such instructions would require shares to be voted so as to cause a change in the sub-classification or investment policies of one or more of the Portfolios, or to approve or disapprove an investment management contract. In addition, we may disregard voting instructions that would require changes in the investment policies or investment adviser, provided that we reasonably disapprove such changes in accordance with applicable federal regulations. If Manulife USA does disregard voting instructions, it will advise policyholders of that action and its reasons for such action in the next communication to policyholders. SUBSTITUTION OF PORTFOLIO SHARES It is possible that in the judgment of the management of Manulife USA, one or more of the Portfolios may become unsuitable for investment by the Separate Account because of a change in investment policy or a change in the applicable laws or regulations, because the shares are no longer available for investment, or for some other reason. In that event, Manulife USA 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. Manulife USA also reserves the right (i) to combine other separate accounts with the Separate Account, (ii) to create new separate accounts, (iii) to establish additional sub-accounts within the Separate Account to invest in additional portfolios of the Trust or another management investment company, (iv) to eliminate existing sub-accounts and to stop accepting new allocations and transfers into the corresponding portfolio, (v) to combine sub-accounts or to transfer assets in one sub-account to another sub-account or (vi) to transfer assets from the Separate Account to another separate account and from another separate account to the Separate Account. We also reserve the right to operate the Separate Account as a management investment company or other form permitted by law, and to de-register the Separate Account under the 1940 Act. Any such change would be made only if permissible under applicable federal and state law. RECORDS AND ACCOUNTS The Service Office is responsible for performing all administrative functions, such as decreases, increases, surrender and partial withdrawals, and fund transfers although certain of these functions may be delegated to McCamish Systems, L.L.C., 6425 Powers Ferry Road, Atlanta, Georgia 30339. All records and accounts relating to the Separate Account and the Portfolios will be maintained by us. All financial transactions will be handled by us. All reports required to be made and information required to be given will be provided the Company or by McCamish Systems on behalf of us. STATE REGULATIONS Manulife USA is subject to the regulation and supervision by the Michigan Department of Insurance, which periodically examines its financial condition and operations. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business. The Policies have been filed with insurance officials, and meet all standards set by law, in each jurisdiction where they are sold. Manulife USA is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business for the purposes of determining solvency and compliance with local insurance laws and regulations. LITIGATION No litigation is pending that would have a material effect upon the Separate Account or the Trust. 35 FURTHER INFORMATION A registration statement under the Securities Act of 1933 has been filed with the SEC relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. The omitted information may be obtained from the SEC's principal office in Washington D.C. upon payment of the prescribed fee. The SEC also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC which is located at http://www.sec.gov. For further information you may also contact Manulife USA's Home Office, the address and telephone number of which are on the first page of the prospectus. ILLUSTRATIONS The tables illustrating the way in which a Policy's Death Benefit, Policy Value, and Cash Surrender Value could vary over an extended period of time are set forth in Appendix B to this prospectus. FINANCIAL STATEMENTS The financial statements of the Company and the Separate Account are set forth in the Statement of Additional Information. 36 APPENDIX A: DEFINITIONS ANNUAL PREMIUM TARGET: is an amount set forth in the Policy that limits the amount of premium attributable to a Coverage Amount in Sales Load calculations. ATTAINED AGE: is the Issue Age of the life insured plus the number of completed Policy Years. 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. CASE: is a group of Policies insuring individual lives with common employment or other relationship, independent of the Policies. CASH SURRENDER VALUE: is the Policy Value less and any outstanding monthly deductions due. COVERAGE AMOUNT: is an amount of insurance coverage under the Policy with a distinct effective date. The Face Amount of the Policy at any time is the sum of the Coverage Amounts in effect. COVERAGE YEAR: is a one-year period beginning on a Coverage Amount's effective date and on each anniversary of this date. For Coverage Amounts in effect on the Policy's Effective Date, the Coverage Year is the same as the Policy Year. FIXED ACCOUNT: is the part of the Policy Value that reflects the value you have in our general account. INVESTMENT ACCOUNT: is the part of the Policy Value that reflects the value you have in one of the sub-accounts of the Separate Account. ISSUE AGE: is the life insured's age on the birthday closer to the Policy Date. LOAN ACCOUNT: is the part of the Policy Value that reflects policy loans and interest credited to the Policy Value in connection with such loans. MINIMUM INITIAL PREMIUM: is the sum of the Monthly Deductions due for the first 3 Policy Months plus the Premium Charges deductible from this amount. NET CASH SURRENDER VALUE: is the Cash Surrender Value less the Policy Debt. NET POLICY VALUE: is the Policy Value less the value in the Loan Account. NET PREMIUM: is the premium paid less the Premium Load and Sales Load. POLICY DATE, POLICY ANNIVERSARY, POLICY MONTH AND POLICY YEAR: Policy Date is the date from which the first Monthly Deductions are calculated and from which Policy Years, Policy Months, and Policy Anniversaries are measured. POLICY DEBT: on any date is the aggregate amount of policy loans, including borrowed and accrued interest, less any loan repayments. POLICY VALUE: is the sum of the values in the Loan Account, the Fixed Account, and the Investment Accounts. SERVICE OFFICE: is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5, or such other address as we specify to you by written notice. A-1 APPENDIX B: ILLUSTRATIONS ILLUSTRATIONS The following tables illustrate the way in which a Policy's Death Benefit, Policy Value, and Cash Surrender Value could vary over an extended period of time. ASSUMPTIONS - Hypothetical gross annual investment returns for the Portfolios offered as investment options through the Policy (i.e., investment income and capital gains and losses, realized or unrealized) equivalent to constant gross annual rates of 0%, 6%, and 12% over the periods indicated. - A life insured who is a male, Issue Age 45, non-smoker. - A Face Amount of $365,000 and Death Benefit Option 1 in all Policy Years. - Payment of an annual premium of $20,000 on the first day of each of the first seven Policy Years. - All policy values are allocated to the Investment Accounts for the entire period shown. - There are no partial withdrawals or policy loans. - Tables 1, 2, and 3 assumes regular underwriting. Tables 4, 5, and 6 assume short form underwriting. - The Cash Value Accumulation Test is used. - All currently applicable charges and deductions are assessed against the Policy, i.e. a Premium Load, Sales Load or Surrender Charge, monthly Cost of Insurance Charge and Administration Charge and an Asset Based Risk Charge deducted daily from Investment Accounts. The first set of columns in each table, under the heading "Current Charges", assumes rates of charges and deductions that we currently expect to charge. The second set of columns, under the heading "Guaranteed Charges", assumes maximum rates of charges and deductions. - The amounts shown in the Tables also take into account the Portfolios' investment management fees and other expenses, which are assumed to be at an annual rate 1.065 % of the average daily net assets of the portfolio. The Death Benefits, Policy Values, and Cash Surrender Values would be different from those shown if the returns averaged 0%, 6%, and 12%, but fluctuated over and under those averages throughout the years. The values would also be different depending on the allocation of the Policy Value among the Portfolios, if the actual rates of return averaged 0%, 6%, or 12%, but the rates of each Portfolio varied above and below such averages. The gross annual rates of returns correspond to net annual rates of return according to the table below:
GROSS RATE OF RETURN POLICY YEAR 0.00% 6.00% 12.00% ------------------------------------------------------------------ NET RATE OF RETURN 1-10 -1.52 4.49 10.49 11+ -1.27 4.74 10.74
Current Cost of Insurance are below the guaranteed rates in many instances and may be changed. The Premium Load rate and Asset Based Risk Charge rate we currently expect to charge in Policy Years 11 and later are below the guaranteed rates and may be changed. The tables reflect a policyholder with certain characteristics (such as age and sex) and assuming certain expenses and rates of return. The actual results of a particular policyholder will vary based on the policyholders characteristics, the actual expenses of the policy and the actual rates of return of the assets held in the subaccounts. Illustrations for smokers would show less favorable results than the illustrations shown below. Upon request, the Company will furnish a comparable illustration based on the proposed life insured's Issue Age, sex (unless unisex rates are required by law, or are requested) and risk class, any additional ratings and the death benefit option, Face Amount, Death Benefit Schedule (if applicable), and planned premium requested. From time to time, in advertisements or sales literature for the Policies that quote performance data of one or more of the Portfolios, the Company may include cash surrender values and death benefit figures computed or using the same methodology as that used in the following illustrations, but with the average annual total return of the Portfolio for which performance data is shown in the advertisement replacing the hypothetical rates of return shown in the following tables. The Policies were first sold to the public on March 26, 2004. However, total return data may be advertised for as long a period of time as the underlying Portfolio has been in existence. The results for any period prior to the Policies being offered would be calculated as if the Policies had been offered during that period of time, with all charges assumed to be the same as for the first full year the Policies were offered. B-1 TABLE 1 - REGULAR UNDERWRITING Hypothetical Gross Investment Return of 0.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 333 -257 16,466 0 16,466 365,000 2 20,000 43,050 16,466 18,550 144 1,386 -518 32,968 0 32,968 365,000 3 20,000 66,203 32,968 19,100 144 1,315 -777 49,832 0 49,832 365,000 4 20,000 90,513 49,832 19,500 144 1,243 -1,039 66,906 0 66,906 365,000 5 20,000 116,038 66,906 19,900 144 1,170 -1,304 84,188 0 84,188 365,000 6 20,000 142,840 84,188 19,900 144 1,098 -1,567 101,280 0 101,280 365,000 7 20,000 170,982 101,280 20,000 144 1,026 -1,828 118,283 0 118,283 365,000 8 0 179,531 118,283 0 144 1,038 -1,782 115,318 0 115,318 365,000 9 0 188,508 115,318 0 144 1,051 -1,737 112,386 0 112,386 365,000 10 0 197,933 112,386 0 144 1,063 -1,693 109,487 0 109,487 365,000 11 0 207,830 109,487 0 144 1,074 -1,377 106,892 0 106,892 365,000 12 0 218,221 106,892 0 144 1,085 -1,344 104,319 0 104,319 365,000 13 0 229,132 104,319 0 144 1,096 -1,311 101,767 0 101,767 365,000 14 0 240,589 101,767 0 144 1,107 -1,279 99,238 0 99,238 365,000 15 0 252,619 99,238 0 144 1,117 -1,247 96,730 0 96,730 365,000 16 0 265,249 96,730 0 144 1,128 -1,215 94,243 0 94,243 365,000 17 0 278,512 94,243 0 144 1,138 -1,183 91,777 0 91,777 365,000 18 0 292,438 91,777 0 144 1,149 -1,152 89,333 0 89,333 365,000 19 0 307,059 89,333 0 144 1,159 -1,121 86,909 0 86,909 365,000 20 0 322,412 86,909 0 144 1,169 -1,090 84,506 0 84,506 365,000 25 0 411,489 66,280 0 144 4,672 -805 60,659 0 60,659 365,000 30 0 525,176 31,376 0 144 9,160 -333 21,739 0 21,739 365,000
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,582 -255 15,219 0 15,219 365,000 2 20,000 43,050 15,219 18,550 144 1,630 -513 31,481 0 31,481 365,000 3 20,000 66,203 31,481 19,100 144 1,674 -776 47,987 0 47,987 365,000 4 20,000 90,513 47,987 19,500 144 1,711 -1,037 64,394 0 64,394 365,000 5 20,000 116,038 64,394 19,900 144 1,748 -1,300 80,902 0 80,902 365,000 6 20,000 142,840 80,902 19,900 144 1,779 -1,558 97,121 0 97,121 365,000 7 20,000 170,982 97,121 20,000 144 1,817 -1,813 113,147 0 113,147 365,000 8 0 179,531 113,147 0 144 2,012 -1,752 109,239 0 109,239 365,000 9 0 188,508 109,239 0 144 2,236 -1,689 105,169 0 105,169 365,000 10 0 197,933 105,169 0 144 2,494 -1,624 100,908 0 100,908 365,000 11 0 207,830 100,908 0 144 2,777 -1,554 96,432 0 96,432 365,000 12 0 218,221 96,432 0 144 3,092 -1,482 91,714 0 91,714 365,000 13 0 229,132 91,714 0 144 3,431 -1,405 86,734 0 86,734 365,000 14 0 240,589 86,734 0 144 3,802 -1,324 81,464 0 81,464 365,000 15 0 252,619 81,464 0 144 4,213 -1,238 75,869 0 75,869 365,000 16 0 265,249 75,869 0 144 4,679 -1,146 69,900 0 69,900 365,000 17 0 278,512 69,900 0 144 5,212 -1,049 63,496 0 63,496 365,000 18 0 292,438 63,496 0 144 5,829 -943 56,579 0 56,579 365,000 19 0 307,059 56,579 0 144 6,549 -829 49,057 0 49,057 365,000 20 0 322,412 49,057 0 144 7,377 -704 40,832 0 40,832 365,000 25 0 411,489 0 0 0 0 0 0 0 0 0 30 0 525,176 0 0 0 0 0 0 0 0 0
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-2 Table 2 - Regular Underwriting Hypothetical Gross Investment Return of 6.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 0 0 17,200 144 333 760 17,483 0 17,483 365,000 2 20,000 18,863 17,483 18,550 144 1,378 1,579 36,091 0 36,091 365,000 3 20,000 38,515 36,091 19,100 144 1,296 2,441 56,191 0 56,191 365,000 4 20,000 58,992 56,191 19,500 144 1,208 3,362 77,702 0 77,702 365,000 5 20,000 80,344 77,702 19,900 144 1,113 4,347 100,692 0 100,692 365,000 6 20,000 102,659 100,692 19,900 144 1,015 5,381 124,813 0 124,813 365,000 7 20,000 125,963 124,813 20,000 144 912 6,469 150,227 0 150,227 368,056 8 0 150,359 150,227 0 144 892 6,713 155,904 0 155,904 371,051 9 0 155,288 155,904 0 144 878 6,968 161,850 0 161,850 375,491 10 0 160,333 161,850 0 144 861 7,235 168,080 0 168,080 378,179 11 0 165,493 168,080 0 144 852 7,933 175,017 0 175,017 383,287 12 0 171,343 175,017 0 144 842 8,262 182,293 0 182,293 388,283 13 0 177,502 182,293 0 144 831 8,607 189,925 0 189,925 393,144 14 0 184,180 189,925 0 144 825 8,968 197,924 0 197,924 399,807 15 0 191,384 197,924 0 144 818 9,347 206,310 0 206,310 406,430 16 0 199,095 206,310 0 144 808 9,745 215,102 0 215,102 412,996 17 0 207,228 215,102 0 144 797 10,161 224,322 0 224,322 419,482 18 0 215,716 224,322 0 144 783 10,598 233,993 0 233,993 425,867 19 0 224,507 233,993 0 144 777 11,056 244,128 0 244,128 434,548 20 0 233,540 244,128 0 144 769 11,536 254,751 0 254,751 443,267 25 0 283,090 296,660 0 144 2,603 13,977 307,891 0 307,891 477,231 30 0 339,681 355,430 0 144 4,085 16,722 367,923 0 367,923 518,772
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,580 722 16,197 0 16,197 365,000 2 20,000 43,050 16,197 18,550 144 1,621 1,499 34,481 0 34,481 365,000 3 20,000 66,203 34,481 19,100 144 1,651 2,333 54,120 0 54,120 365,000 4 20,000 90,513 54,120 19,500 144 1,665 3,213 74,824 0 74,824 365,000 5 20,000 116,038 74,824 19,900 144 1,668 4,149 96,862 0 96,862 365,000 6 20,000 142,840 96,862 19,900 144 1,651 5,127 119,894 0 119,894 365,000 7 20,000 170,982 119,894 20,000 144 1,624 6,153 144,079 0 144,079 365,000 8 0 179,531 144,079 0 144 1,735 6,345 148,545 0 148,545 365,000 9 0 188,508 148,545 0 144 1,860 6,540 153,081 0 153,081 365,000 10 0 197,933 153,081 0 144 1,997 6,738 157,678 0 157,678 365,000 11 0 207,830 157,678 0 144 2,139 6,938 162,333 0 162,333 365,000 12 0 218,221 162,333 0 144 2,288 7,141 167,042 0 167,042 365,000 13 0 229,132 167,042 0 144 2,434 7,347 171,810 0 171,810 365,000 14 0 240,589 171,810 0 144 2,584 7,554 176,637 0 176,637 365,000 15 0 252,619 176,637 0 144 2,736 7,765 181,522 0 181,522 365,000 16 0 265,249 181,522 0 144 2,900 7,978 186,455 0 186,455 365,000 17 0 278,512 186,455 0 144 3,076 8,192 191,427 0 191,427 365,000 18 0 292,438 191,427 0 144 3,270 8,408 196,420 0 196,420 365,000 19 0 307,059 196,420 0 144 3,484 8,624 201,417 0 201,417 365,000 20 0 322,412 201,417 0 144 3,713 8,840 206,401 0 206,401 365,000 25 0 411,489 226,082 0 144 4,913 9,905 230,930 0 230,930 365,000 30 0 525,176 249,420 0 144 6,564 10,901 253,612 0 253,612 365,000
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-3 Table 3 - Regular Underwriting Hypothetical Gross Investment Return of 12.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 332 1,777 18,500 0 18,500 365,000 2 20,000 43,050 18,500 18,550 144 1,369 3,800 39,337 0 39,337 365,000 3 20,000 66,203 39,337 19,100 144 1,275 6,048 63,065 0 63,065 365,000 4 20,000 90,513 63,065 19,500 144 1,169 8,583 89,836 0 89,836 365,000 5 20,000 116,038 89,836 19,900 144 1,049 11,439 119,982 0 119,982 365,000 6 20,000 142,840 119,982 19,900 144 944 14,606 153,400 0 153,400 388,101 7 20,000 170,982 153,400 20,000 144 1,098 18,112 190,271 0 190,271 466,163 8 0 179,531 190,271 0 144 1,146 19,879 208,859 0 208,859 497,084 9 0 188,508 208,859 0 144 1,204 21,824 229,335 0 229,335 532,058 10 0 197,933 229,335 0 144 1,252 23,969 251,908 0 251,908 566,794 11 0 207,830 251,908 0 144 1,310 26,960 277,414 0 277,414 607,537 12 0 218,221 277,414 0 144 1,370 29,695 305,595 0 305,595 650,917 13 0 229,132 305,595 0 144 1,429 32,717 336,738 0 336,738 697,048 14 0 240,589 336,738 0 144 1,502 36,056 371,148 0 371,148 749,720 15 0 252,619 371,148 0 144 1,574 39,746 409,176 0 409,176 806,078 16 0 265,249 409,176 0 144 1,646 43,824 451,211 0 451,211 866,325 17 0 278,512 451,211 0 144 1,716 48,333 497,683 0 497,683 930,668 18 0 292,438 497,683 0 144 1,784 53,318 549,073 0 549,073 999,313 19 0 307,059 549,073 0 144 1,872 58,829 605,886 0 605,886 1,078,478 20 0 322,412 605,886 0 144 1,960 64,923 668,706 0 668,706 1,163,549 25 0 411,489 974,056 0 144 8,851 104,057 1,069,118 0 1,069,118 1,657,133 30 0 525,176 1,543,933 0 144 18,221 164,705 1,690,273 0 1,690,273 2,383,285
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,578 1,699 17,177 0 17,177 365,000 2 20,000 43,050 17,177 18,550 144 1,612 3,630 37,601 0 37,601 365,000 3 20,000 66,203 37,601 19,100 144 1,626 5,818 60,750 0 60,750 365,000 4 20,000 90,513 60,750 19,500 144 1,614 8,255 86,547 0 86,547 365,000 5 20,000 116,038 86,547 19,900 144 1,575 10,991 115,519 0 115,519 365,000 6 20,000 142,840 115,519 19,900 144 1,503 14,018 147,589 0 147,589 373,401 7 20,000 170,982 147,589 20,000 144 1,837 17,358 182,766 0 182,766 447,777 8 0 179,531 182,766 0 144 2,081 18,949 199,490 0 199,490 474,786 9 0 188,508 199,490 0 144 2,377 20,678 217,647 0 217,647 504,941 10 0 197,933 217,647 0 144 2,695 22,555 237,364 0 237,364 534,068 11 0 207,830 237,364 0 144 3,064 24,593 258,749 0 258,749 566,660 12 0 218,221 258,749 0 144 3,470 26,802 281,937 0 281,937 600,525 13 0 229,132 281,937 0 144 3,901 29,198 307,090 0 307,090 635,676 14 0 240,589 307,090 0 144 4,406 31,795 334,335 0 334,335 675,357 15 0 252,619 334,335 0 144 4,956 34,608 363,843 0 363,843 716,771 16 0 265,249 363,843 0 144 5,567 37,653 395,786 0 395,786 759,908 17 0 278,512 395,786 0 144 6,244 40,949 430,347 0 430,347 804,749 18 0 292,438 430,347 0 144 6,998 44,514 467,719 0 467,719 851,248 19 0 307,059 467,719 0 144 7,937 48,362 508,000 0 508,000 904,240 20 0 322,412 508,000 0 144 8,982 52,508 551,383 0 551,383 959,406 25 0 411,489 760,781 0 144 15,589 78,522 823,570 0 823,570 1,276,534 30 0 525,176 1,123,067 0 144 27,508 115,671 1,211,086 0 1,211,086 1,707,631
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-4 Table 4 - Short Form Underwriting Hypothetical Gross Investment Return of 0.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 333 -257 16,466 0 16,466 365,000 2 20,000 43,050 16,466 18,550 144 1,386 -518 32,968 0 32,968 365,000 3 20,000 66,203 32,968 19,100 144 1,315 -777 49,832 0 49,832 365,000 4 20,000 90,513 49,832 19,500 144 1,243 -1,039 66,906 0 66,906 365,000 5 20,000 116,038 66,906 19,900 144 1,170 -1,304 84,188 0 84,188 365,000 6 20,000 142,840 84,188 19,900 144 1,098 -1,567 101,280 0 101,280 365,000 7 20,000 170,982 101,280 20,000 144 1,026 -1,828 118,283 0 118,283 365,000 8 0 179,531 118,283 0 144 1,038 -1,782 115,318 0 115,318 365,000 9 0 188,508 115,318 0 144 1,051 -1,737 112,386 0 112,386 365,000 10 0 197,933 112,386 0 144 1,063 -1,693 109,487 0 109,487 365,000 11 0 207,830 109,487 0 144 1,074 -1,377 106,892 0 106,892 365,000 12 0 218,221 106,892 0 144 1,085 -1,344 104,319 0 104,319 365,000 13 0 229,132 104,319 0 144 1,096 -1,311 101,767 0 101,767 365,000 14 0 240,589 101,767 0 144 1,107 -1,279 99,238 0 99,238 365,000 15 0 252,619 99,238 0 144 1,117 -1,247 96,730 0 96,730 365,000 16 0 265,249 96,730 0 144 1,128 -1,215 94,243 0 94,243 365,000 17 0 278,512 94,243 0 144 1,138 -1,183 91,777 0 91,777 365,000 18 0 292,438 91,777 0 144 1,149 -1,152 89,333 0 89,333 365,000 19 0 307,059 89,333 0 144 1,159 -1,121 86,909 0 86,909 365,000 20 0 322,412 86,909 0 144 1,169 -1,090 84,506 0 84,506 365,000 25 0 411,489 66,280 0 144 4,672 -805 60,659 0 60,659 365,000 30 0 525,176 31,376 0 144 9,160 -333 21,739 0 21,739 365,000
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,582 -255 15,219 0 15,219 365,000 2 20,000 43,050 15,219 18,550 144 1,630 -513 31,481 0 31,481 365,000 3 20,000 66,203 31,481 19,100 144 1,674 -776 47,987 0 47,987 365,000 4 20,000 90,513 47,987 19,500 144 1,711 -1,037 64,394 0 64,394 365,000 5 20,000 116,038 64,394 19,900 144 1,748 -1,300 80,902 0 80,902 365,000 6 20,000 142,840 80,902 19,900 144 1,779 -1,558 97,121 0 97,121 365,000 7 20,000 170,982 97,121 20,000 144 1,817 -1,813 113,147 0 113,147 365,000 8 0 179,531 113,147 0 144 2,012 -1,752 109,239 0 109,239 365,000 9 0 188,508 109,239 0 144 2,236 -1,689 105,169 0 105,169 365,000 10 0 197,933 105,169 0 144 2,494 -1,624 100,908 0 100,908 365,000 11 0 207,830 100,908 0 144 2,777 -1,554 96,432 0 96,432 365,000 12 0 218,221 96,432 0 144 3,092 -1,482 91,714 0 91,714 365,000 13 0 229,132 91,714 0 144 3,431 -1,405 86,734 0 86,734 365,000 14 0 240,589 86,734 0 144 3,802 -1,324 81,464 0 81,464 365,000 15 0 252,619 81,464 0 144 4,213 -1,238 75,869 0 75,869 365,000 16 0 265,249 75,869 0 144 4,679 -1,146 69,900 0 69,900 365,000 17 0 278,512 69,900 0 144 5,212 -1,049 63,496 0 63,496 365,000 18 0 292,438 63,496 0 144 5,829 -943 56,579 0 56,579 365,000 19 0 307,059 56,579 0 144 6,549 -829 49,057 0 49,057 365,000 20 0 322,412 49,057 0 144 7,377 -704 40,832 0 40,832 365,000 25 0 411,489 0 0 0 0 0 0 0 0 0 30 0 525,176 0 0 0 0 0 0 0 0 0
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-5 Table 5 - Short Form Underwriting Hypothetical Gross Investment Return of 6.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 333 760 17,483 0 17,483 365,000 2 20,000 43,050 17,483 18,550 144 1,378 1,579 36,091 0 36,091 365,000 3 20,000 66,203 36,091 19,100 144 1,296 2,441 56,191 0 56,191 365,000 4 20,000 90,513 56,191 19,500 144 1,208 3,362 77,702 0 77,702 365,000 5 20,000 116,038 77,702 19,900 144 1,113 4,347 100,692 0 100,692 365,000 6 20,000 142,840 100,692 19,900 144 1,015 5,381 124,813 0 124,813 365,000 7 20,000 170,982 124,813 20,000 144 912 6,469 150,227 0 150,227 368,056 8 0 179,531 150,227 0 144 892 6,713 155,904 0 155,904 371,051 9 0 188,508 155,904 0 144 878 6,968 161,850 0 161,850 375,491 10 0 197,933 161,850 0 144 861 7,235 168,080 0 168,080 378,179 11 0 207,830 168,080 0 144 852 7,933 175,017 0 175,017 383,287 12 0 218,221 175,017 0 144 842 8,262 182,293 0 182,293 388,283 13 0 229,132 182,293 0 144 831 8,607 189,925 0 189,925 393,144 14 0 240,589 189,925 0 144 825 8,968 197,924 0 197,924 399,807 15 0 252,619 197,924 0 144 818 9,347 206,310 0 206,310 406,430 16 0 265,249 206,310 0 144 808 9,745 215,102 0 215,102 412,996 17 0 278,512 215,102 0 144 797 10,161 224,322 0 224,322 419,482 18 0 292,438 224,322 0 144 783 10,598 233,993 0 233,993 425,867 19 0 307,059 233,993 0 144 777 11,056 244,128 0 244,128 434,548 20 0 322,412 244,128 0 144 769 11,536 254,751 0 254,751 443,267 25 0 411,489 296,660 0 144 2,603 13,977 307,891 0 307,891 477,231 30 0 525,176 355,430 0 144 4,085 16,722 367,923 0 367,923 518,772
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,580 722 16,197 0 16,197 365,000 2 20,000 43,050 16,197 18,550 144 1,621 1,499 34,481 0 34,481 365,000 3 20,000 66,203 34,481 19,100 144 1,651 2,333 54,120 0 54,120 365,000 4 20,000 90,513 54,120 19,500 144 1,665 3,213 74,824 0 74,824 365,000 5 20,000 116,038 74,824 19,900 144 1,668 4,149 96,862 0 96,862 365,000 6 20,000 142,840 96,862 19,900 144 1,651 5,127 119,894 0 119,894 365,000 7 20,000 170,982 119,894 20,000 144 1,624 6,153 144,079 0 144,079 365,000 8 0 179,531 144,079 0 144 1,735 6,345 148,545 0 148,545 365,000 9 0 188,508 148,545 0 144 1,860 6,540 153,081 0 153,081 365,000 10 0 197,933 153,081 0 144 1,997 6,738 157,678 0 157,678 365,000 11 0 207,830 157,678 0 144 2,139 6,938 162,333 0 162,333 365,000 12 0 218,221 162,333 0 144 2,288 7,141 167,042 0 167,042 365,000 13 0 229,132 167,042 0 144 2,434 7,347 171,810 0 171,810 365,000 14 0 240,589 171,810 0 144 2,584 7,554 176,637 0 176,637 365,000 15 0 252,619 176,637 0 144 2,736 7,765 181,522 0 181,522 365,000 16 0 265,249 181,522 0 144 2,900 7,978 186,455 0 186,455 365,000 17 0 278,512 186,455 0 144 3,076 8,192 191,427 0 191,427 365,000 18 0 292,438 191,427 0 144 3,270 8,408 196,420 0 196,420 365,000 19 0 307,059 196,420 0 144 3,484 8,624 201,417 0 201,417 365,000 20 0 322,412 201,417 0 144 3,713 8,840 206,401 0 206,401 365,000 25 0 411,489 226,082 0 144 4,913 9,905 230,930 0 230,930 365,000 30 0 525,176 249,420 0 144 6,564 10,901 253,612 0 253,612 365,000
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-6 Table 6 - Short Form Underwriting Hypothetical Gross Investment Return of 12.00%
Current Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 332 1,777 18,500 0 18,500 365,000 2 20,000 43,050 18,500 18,550 144 1,369 3,800 39,337 0 39,337 365,000 3 20,000 66,203 39,337 19,100 144 1,275 6,048 63,065 0 63,065 365,000 4 20,000 90,513 63,065 19,500 144 1,169 8,583 89,836 0 89,836 365,000 5 20,000 116,038 89,836 19,900 144 1,049 11,439 119,982 0 119,982 365,000 6 20,000 142,840 119,982 19,900 144 944 14,606 153,400 0 153,400 388,101 7 20,000 170,982 153,400 20,000 144 1,098 18,112 190,271 0 190,271 466,163 8 0 179,531 190,271 0 144 1,146 19,879 208,859 0 208,859 497,084 9 0 188,508 208,859 0 144 1,204 21,824 229,335 0 229,335 532,058 10 0 197,933 229,335 0 144 1,252 23,969 251,908 0 251,908 566,794 11 0 207,830 251,908 0 144 1,310 26,960 277,414 0 277,414 607,537 12 0 218,221 277,414 0 144 1,370 29,695 305,595 0 305,595 650,917 13 0 229,132 305,595 0 144 1,429 32,717 336,738 0 336,738 697,048 14 0 240,589 336,738 0 144 1,502 36,056 371,148 0 371,148 749,720 15 0 252,619 371,148 0 144 1,574 39,746 409,176 0 409,176 806,078 16 0 265,249 409,176 0 144 1,646 43,824 451,211 0 451,211 866,325 17 0 278,512 451,211 0 144 1,716 48,333 497,683 0 497,683 930,668 18 0 292,438 497,683 0 144 1,784 53,318 549,073 0 549,073 999,313 19 0 307,059 549,073 0 144 1,872 58,829 605,886 0 605,886 1,078,478 20 0 322,412 605,886 0 144 1,960 64,923 668,706 0 668,706 1,163,549 25 0 411,489 974,056 0 144 8,851 104,057 1,069,118 0 1,069,118 1,657,133 30 0 525,176 1,543,933 0 144 18,221 164,705 1,690,273 0 1,690,273 2,383,285
Guaranteed Charges - ----------------------------------------------------------------------------------------------------------------------------------- Premium Policy plus less less plus Policy Net Cash Death Pol Annual Accum Value Net Admin Cost Invest Value Surr Surrender Benefit Year Premium at 5% Beg Yr Premium Fees of Ins Earning End Yr Charge Value End Yr 1 20,000 21,000 0 17,200 144 1,578 1,699 17,177 0 17,177 365,000 2 20,000 43,050 17,177 18,550 144 1,612 3,630 37,601 0 37,601 365,000 3 20,000 66,203 37,601 19,100 144 1,626 5,818 60,750 0 60,750 365,000 4 20,000 90,513 60,750 19,500 144 1,614 8,255 86,547 0 86,547 365,000 5 20,000 116,038 86,547 19,900 144 1,575 10,991 115,519 0 115,519 365,000 6 20,000 142,840 115,519 19,900 144 1,503 14,018 147,589 0 147,589 373,401 7 20,000 170,982 147,589 20,000 144 1,837 17,358 182,766 0 182,766 447,777 8 0 179,531 182,766 0 144 2,081 18,949 199,490 0 199,490 474,786 9 0 188,508 199,490 0 144 2,377 20,678 217,647 0 217,647 504,941 10 0 197,933 217,647 0 144 2,695 22,555 237,364 0 237,364 534,068 11 0 207,830 237,364 0 144 3,064 24,593 258,749 0 258,749 566,660 12 0 218,221 258,749 0 144 3,470 26,802 281,937 0 281,937 600,525 13 0 229,132 281,937 0 144 3,901 29,198 307,090 0 307,090 635,676 14 0 240,589 307,090 0 144 4,406 31,795 334,335 0 334,335 675,357 15 0 252,619 334,335 0 144 4,956 34,608 363,843 0 363,843 716,771 16 0 265,249 363,843 0 144 5,567 37,653 395,786 0 395,786 759,908 17 0 278,512 395,786 0 144 6,244 40,949 430,347 0 430,347 804,749 18 0 292,438 430,347 0 144 6,998 44,514 467,719 0 467,719 851,248 19 0 307,059 467,719 0 144 7,937 48,362 508,000 0 508,000 904,240 20 0 322,412 508,000 0 144 8,982 52,508 551,383 0 551,383 959,406 25 0 411,489 760,781 0 144 15,589 78,522 823,570 0 823,570 1,276,534 30 0 525,176 1,123,067 0 144 27,508 115,671 1,211,086 0 1,211,086 1,707,631
- - The policy value, cash surrender value, and the death benefit will differ if premiums are paid in different amounts or frequencies. - - It is emphasized that the hypothetical investment returns are illustrative only, and should not be deemed a representation of past or future results. Actual investment returns may be more or less than those shown and will depend on a number of factors, including the investment allocation made by the policyholder, and the investment return for the portfolios of Manufacturers Investment Trust. - - The policy value, cash surrender value and death benefit would be different from those shown if actual rates of investment return averaged the rate shown above over a period of years, but also fluctuated above or below that average for individual policy years. - - No representations can be made that any hypothetical rate of return can be achieved for any one year or other period of time. - - No supplemental benefits or term riders are illustrated. B-7 Additional information about the Policy is also contained in the Statement of Additional Information ("SAI") dated the same date as this Prospectus. The SAI is incorporated by reference into this Prospectus. The SAI is available upon request, without charge, by calling the following toll-free number: (800) 387-2747. This toll-free number may also be used to request other information about the Policy and to make contract owner inquiries. Information about the Policy (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission ("SEC") at (202) 942-8090. Reports and other information about the Policy are available on the SEC's Internet site at http://www.sec.gov and copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC, Washington D.C. 20549-0102. The Registrant's Investment Company and 1933 Act File Numbers are 811-5130 and 333-100567, respectively. - -------------------------------------------------------------------------------- STATEMENT OF ADDITIONAL INFORMATION MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) SEPARATE ACCOUNT N - -------------------------------------------------------------------------------- OF THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY This Statement of Additional Information is not a Prospectus. It contains information in addition to that described in the Prospectus and should be read in conjunction with the Prospectus dated the same date as this Statement of Additional Information. The Prospectus may be obtained by writing The Manufacturers Life Insurance Company (U.S.A.) at the mailing address of the Service Office, 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5 or telephoning (800) 827-4546. The Manufacturers Life Insurance Company (U.S.A.) 38500 Woodward Avenue Bloomfield Hills, Michigan 48304 663-3000 (800) 344-1029 STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2004. CVUL03 - CVUL04 SAI 5/04 TABLE OF CONTENTS GENERAL INFORMATION AND HISTORY......................................... 3 SERVICES................................................................ 3 Independent Auditors................................................. 3 Principal Underwriter................................................ 3 ADDITIONAL INFORMATION ABOUT CHARGES.................................... 3 Reduction in Charges................................................. 4 APPENDIX A: AUDITED FINANCIAL STATEMENTS................................ 1
GENERAL INFORMATION AND HISTORY We are a stock life insurance company incorporated in Maine on August 20, 1955 by a special act of the Maine legislature and redomesticated under the laws of Michigan. We are a licensed life insurance company in the District of Columbia and all states of the United States except New York. Our ultimate parent is Manulife Financial Corporation ("MFC"), a publicly traded company, based in Toronto, Canada. MFC is the holding company of The Manufacturers Life Insurance Company ("Manufacturers Life") and its subsidiaries, collectively known as Manulife Financial. The Manufacturers Life Insurance Company is one of the largest life insurance companies in North America and ranks among the 60 largest life insurers in the world as measured by assets. However, neither Manufacturers Life nor any of its affiliated companies guarantees the investment performance of the Separate Account. The Manufacturers Life Insurance Company of America ("ManAmerica") established its Separate Account Four (the "Separate Account") on March 17, 1987 as a separate account under Pennsylvania law. Since December 9, 1992, it has been operated under Michigan law. On January 1, 2002, ManAmerica transferred substantially all of its assets and liabilities to Manulife USA. As a result of this transaction, Manulife USA became the owner of all of ManAmerica's assets, including the assets of the Separate Account and assumed all of ManAmerica's obligations including those under the Policies. The ultimate parent of both ManAmerica and Manulife USA is MFC. The Separate Account holds assets that are segregated from all of Manulife USA's other assets. The Separate Account is currently used only to support variable life insurance policies. Our financial statements which are included in this Statement of Additional Information should be considered only as bearing on our ability to meet our obligations under the contracts. They should not be considered as bearing on the investment performance of the assets held in the Variable Account. SERVICES INDEPENDENT AUDITORS The [CONSOLIDATED] financial statements of The Manufacturers Life Insurance Company (U.S.A.) at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and the financial statements of Separate Account N of The Manufacturers Life Insurance Company (U.S.A.) at December 31, 2003, and for each of the two years in the periods ended December 31, 2003 and 2002, appearing in this Statement of Additional Information of the 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. PRINCIPAL UNDERWRITER Manulife Financial Securities, LLC ("Manulife Financial Securities"), an indirect wholly-owned subsidiary of Manufacturers Life, serves as principal underwriter of the policies. (Prior to January 1, 2002, ManEquity, Inc., which was also an indirect wholly-owned subsidiary of Manufacturers Life, served as principal underwriter of the policies.) Policies are offered on a continuous basis. Manulife Financial Securities is located at 73 Tremont Street, Boston, MA 02108. The Policies will be sold by registered representatives of either Manulife Financial Securities or other broker-dealers having distribution agreements with Manulife Financial Securities who are also authorized by state insurance departments to do so. The Policies will be sold in all states of the United States except New York. The aggregate dollar amount of underwriting commissions paid to Manulife Financial Securities in 2003 and 2002 was $293,120,491 and $275,138,774 . Manulife Financial Securities did not retained any of these amounts during such periods. The aggregate dollar amount of underwriting commissions paid to ManEquity in 2002 was $$56,463,871. The aggregate dollar amount of underwriting commissions retained by ManEquity in 2002 was $$1,267,599. ManEquity did not retained any of these amounts during such periods. A registered representative will receive commissions not to exceed 30% of premiums paid up to the Annual Premium Target, and 5% of premiums paid in excess of the Annual Premium Target in Policy Years 1 through 5, commissions of 5% of premiums paid in Policy Years 6 and later, and after the fifth Policy Anniversary 0.20% of the Policy Value per year. Representatives who meet certain productivity standards with regard to the sale of Policies and Certain other policies issued by Manulife USA of Manufacturers Life will be eligible for additional compensation. first year, 2% of all premiums paid in Policy Years two through ten. Representatives who meet certain productivity standards with regard to the sale of the Policies and certain other policies issued by Manulife USA or Manufacturers Life will be eligible for additional compensation. ADDITIONAL INFORMATION ABOUT CHARGES 3 A Policy will not be issued until the underwriting process has been completed to the Company's satisfaction. The underwriting process generally includes the obtaining of information concerning your age, medical history, occupation and other personal information . This information is then used to determine the cost of insurance charge. REDUCTION IN CHARGES The Policy is available for purchase by corporations and other groups or sponsoring organizations. Group or sponsored arrangements may include reduction or elimination of withdrawal charges and deductions for employees, officers, directors, agents and immediate family members of the foregoing. Manulife USA reserves the right to reduce any of the Policy's charges on certain cases where it is expected that the amount or nature of such cases will result in savings of sales, underwriting, administrative, commissions or other costs. Eligibility for these reductions and the amount of reductions will be determined by a number of factors, including the number of lives to be insured, the total premiums expected to be paid, total assets under management for the policyowner, the nature of the relationship among the insured individuals, the purpose for which the policies are being purchased, expected persistency of the individual policies, and any other circumstances which Manulife USA believes to be relevant to the expected reduction of its expenses. Some of these reductions may be guaranteed and others may be subject to withdrawal or modification, on a uniform case basis. Reductions in charges will not be unfairly discriminatory to any policyowners. Manulife USA may modify from time to time, on a uniform basis, both the amounts of reductions and the criteria for qualification. 4 APPENDIX A: AUDITED FINANCIAL STATEMENTS A-1 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) AUDITED CONSOLIDATED U.S. GAAP FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 [MANULIFE FINANCIAL LOGO] THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) AUDITED CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 CONTENTS REPORT OF INDEPENDENT AUDITORS.......................................................................... 1 AUDITED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS........................................................................ 2 CONSOLIDATED STATEMENTS OF INCOME.................................................................. 3 CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS.......................................... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS.............................................................. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................................... 7
REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) We have audited the accompanying consolidated balance sheets of The Manufacturers Life Insurance Company (U.S.A.) and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Manufacturers Life Insurance Company (U.S.A.) and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. As described in note 1, The Manufacturers Life Insurance Company (U.S.A.) merged with Manulife Reinsurance Corporation (U.S.A.) on January 1, 2002. The comparative financial statements for 2001 represent the combined financial statements of The Manufacturers Life Insurance Company (U.S.A.) and Manulife Reinsurance Corporation (U.S.A.). /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 8, 2004 1 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) CONSOLIDATED BALANCE SHEETS
As at December 31 ($US millions) ASSETS 2003 2002 ------ ---- ---- INVESTMENTS: Securities available-for-sale, at fair value: Fixed-maturity (amortized cost: 2003 $9,827; 2002 $10,816) $ 10,653 $ 11,869 Equity (cost: 2003 $401; 2002 $674) 475 679 Mortgage loans 2,187 1,921 Real estate 1,259 1,078 Policy loans 2,532 2,369 Short-term investments 564 302 ---------- ---------- TOTAL INVESTMENTS $ 17,670 $ 18,218 ---------- ---------- Cash and cash equivalents $ 972 $ 718 Deferred acquisition costs 3,154 2,731 Due from affiliates 2,330 618 Amounts recoverable from reinsurers 1,140 1,215 Other assets 717 674 Separate account assets 43,694 29,929 ---------- ---------- TOTAL ASSETS $ 69,677 $ 54,103 ========== ========== LIABILITIES, CAPITAL AND SURPLUS LIABILITIES: Policyholder liabilities and accruals $ 20,428 $ 19,447 Net deferred tax liability 426 196 Due to affiliate 289 122 Notes payable to parent - 370 Other liabilities 1,265 857 Separate account liabilities 43,694 29,929 ---------- ---------- TOTAL LIABILITIES $ 66,102 $ 50,921 ========== ========== CAPITAL AND SURPLUS: Capital stock $ 5 $ 5 Retained earnings 2,777 2,666 Accumulated other comprehensive income 793 511 ---------- ---------- TOTAL CAPITAL AND SURPLUS $ 3,575 $ 3,182 ---------- ---------- TOTAL LIABILITIES, CAPITAL AND SURPLUS $ 69,677 $ 54,103 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 2 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 ($US millions) 2003 2002 2001 -------------- ---- ---- ---- REVENUE: Premiums $ 955 $ 1,002 $ 1,044 Fee income 1,101 930 903 Net investment income 1,174 1,157 1,184 Net realized investment gains (losses) 160 (222) 56 Other 11 4 13 -------- ---------- ------- TOTAL REVENUE $ 3,401 $ 2,871 $ 3,200 -------- ---------- ------- BENEFITS AND EXPENSES: Policyholder benefits and claims $ 1,829 $ 1,606 $ 1,734 Operating expenses and commissions 654 575 617 Amortization of deferred acquisition costs 227 92 276 Interest expense 46 42 46 Policyholder dividends 377 370 348 -------- ---------- ------- TOTAL BENEFITS AND EXPENSES $ 3,133 $ 2,685 $ 3,021 -------- ---------- ------- INCOME BEFORE INCOME TAXES 268 186 179 -------- ---------- ------- INCOME TAX EXPENSE 77 31 34 -------- ---------- ------- NET INCOME $ 191 $ 155 $ 145 ======== ========== =======
The accompanying notes are an integral part of these consolidated financial statements. 3 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
ACCUMULATED OTHER TOTAL FOR THE YEARS ENDED DECEMBER 31 CAPITAL RETAINED COMPREHENSIVE CAPITAL AND ($US millions) STOCK EARNINGS INCOME (LOSS) SURPLUS -------------- ----- -------- ------------- ------- BALANCE, DECEMBER 31, 2000 $ 5 $ 2,366 $ 303 $ 2,674 Comprehensive income - 145 (150) (5) Capital contribution - 125 - 125 Dividend to shareholder - (125) - (125) --- -------- --------- --------- BALANCE, DECEMBER 31, 2001 $ 5 $ 2,511 $ 153 $ 2,669 Comprehensive income - 155 358 513 --- -------- --------- --------- BALANCE, DECEMBER 31, 2002 $ 5 $ 2,666 $ 511 $ 3,182 --- -------- --------- --------- Comprehensive income - 191 282 473 Dividend to shareholder - (80) - (80) --- -------- --------- --------- BALANCE, DECEMBER 31, 2003 $ 5 $ 2,777 $ 793 $ 3,575 --- -------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 4 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 ($US millions) 2003 2002 2001 -------------- ---- ---- ---- OPERATING ACTIVITIES: Operating cash inflows: Premiums $ 972 $ 1,018 $ 1,014 Fee income 1,168 981 930 Net investment income 1,229 1,153 1,211 Other 11 4 13 ------------ --------- --------- TOTAL OPERATING CASH INFLOWS $ 3,380 $ 3,156 $ 3,168 Operating cash outflows: Benefit payments 1,495 1,480 1,378 Insurance expenses and taxes 1,237 1,180 1,193 Dividends paid to policyholders 373 358 333 Change in other assets and other liabilities (288) (422) (83) ------------ --------- --------- TOTAL OPERATING CASH OUTFLOWS $ 2,817 $ 2,596 $ 2,821 ------------ --------- --------- Net cash provided by operating activities $ 563 $ 560 $ 347 ------------ --------- --------- INVESTING ACTIVITIES: Fixed-maturity securities sold, matured or repaid $ 11,223 $ 8,634 10,623 Fixed-maturity securities purchased (9,715) (9,082) (10,743) Equity securities sold 530 34 412 Equity securities purchased (166) (214) (587) Mortgage loans advanced (564) (432) (334) Mortgage loans repaid 307 186 200 Real estate sold - 1 39 Real estate purchased (197) (60) (29) Policy loans advanced, net (163) (143) (228) Short-term investments (262) (41) 465 Other investments, net 10 (4) (29) ------------ --------- --------- Net cash provided by (used in) investing activities $ 1,003 $ (1,121) $ (211) ------------ --------- --------- FINANCING ACTIVITIES: Deposits and interest credited to policyholder account balances $ 1,877 $ 1,778 $ 1,768 Withdrawals from policyholder account balances (1,392) (1,342) (1,450) Unearned revenue 85 168 - Amounts due (from) to affiliates, net (1,516) 101 150 Principal repayment of amounts due to affiliates and parent (416) (211) (377) Capital Contribution - - 156 Net reinsurance recoverable 132 243 121 Dividend paid to shareholder (80) - (125) Repaid Funds (2) (2) - ------------ --------- --------- Net cash (used in) provided by financing activities $ (1,312) $ 735 $ 243 ------------ --------- --------- Increase in cash and cash equivalents during the period $ 254 $ 174 $ 379 Cash and cash equivalents at beginning of year 718 544 165 ------------ --------- --------- BALANCE, END OF PERIOD $ 972 $ 718 $ 544 ============ ========= =========
5 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31 ($US millions) 2003 2002 2001 -------------- ---- ---- ---- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 191 $ 155 $ 145 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Realized (gains) losses (160) 222 (56) Net depreciation, amortization of bond premium discount and other investment related items 55 (5) 27 Addition to policyholder liabilities and accruals 334 126 356 Deferred acquisition costs (651) (567) (543) Amortization of deferred acquisition costs 227 92 276 Increase in deferred tax liability, net 143 83 96 Interest expense 46 42 46 Policyholder dividends 4 12 15 Change in other assets and other liabilities 288 422 83 Other, net 86 (22) (98) -------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 563 $ 560 $ 347 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 (IN MILLIONS OF US DOLLARS) 1. ORGANIZATION AND BASIS OF PRESENTATION The Manufacturers Life Insurance Company (U.S.A.) ("ManUSA") is an indirect, wholly-owned subsidiary of Manulife Financial Corporation ("MFC"), a Canadian-based publicly traded company. MFC and its subsidiaries are collectively known as "Manulife Financial". Effective January 1, 2002, Manulife Reinsurance Corporation (U.S.A.) ("MRC"), the former direct parent of ManUSA, and The Manufacturers Life Insurance Company of North America ("MNA"), a former subsidiary of ManUSA, were merged with and into ManUSA to continue under the name The Manufacturers Life Insurance Company (U.S.A.). MRC was the sole shareholder of ManUSA. Shares of ManUSA held by MRC were cancelled and ManUSA issued new shares to MRC's sole shareholder, The Manufacturers Investment Corporation ("MIC"). Pursuant to the merger on January 1, 2002, MRC transferred its 100% interest in Manulife Reinsurance Limited (Bermuda) ("MRL"), a Bermuda based company, to MIC and as a result, MRL remains a sister company to ManUSA and a 100% controlled subsidiary of MIC. The amalgamation of ManUSA and MRC represents the combination of businesses under common control and has been accounted for using "pooling-of-interests" accounting. The accompanying comparative financial statements for 2001 are restated based on the assumption that the companies have been combined since January 1, 2000 and exclude MRL which is currently a subsidiary of MIC. The following is a reconciliation of the amounts of revenue and net income previously reported for 2001 with the restated amounts: FOR THE YEAR ENDED DECEMBER 31 2001 TOTAL REVENUE: As previously reported by ManUSA $ 2,859 MRC, excluding MRL 341 ------- AS RESTATED $ 3,200 ------- NET INCOME: As previously reported by ManUSA $ 41 MRC, excluding MRL 104 ------- AS RESTATED $ 145 -------
7 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Prior to January 1, 2002, ManUSA and MRC, in the normal course of business, entered into certain reinsurance and administrative transactions. These intercompany transactions have been eliminated in the accompanying consolidated financial statements and in the preceding table. In addition, on January 1, 2002, all of the in force operations of The Manufacturers Life Insurance Company of America ("MLA"), a subsidiary of ManUSA, were transferred to ManUSA by way of an assumption reinsurance agreement and dividend declaration. As a result of this reorganization, products previously sold and administered under the name of MRC, MNA, and MLA are now offered and administered under the name of ManUSA. Also effective January 1, 2002, Manulife-Wood Logan Holding Co., Inc., Manulife Wood Logan, Inc., and Manulife Holding Corporation, all subsidiaries of ManUSA, were liquidated into ManUSA. All of these transactions have been reflected in these consolidated financial statements at carrying value. ManUSA and its subsidiaries, collectively known as the "Company", operate in the life insurance industry, offering a broad range of individual insurance, reinsurance, individual wealth management and group wealth management related products. These products are marketed primarily in the United States. 2. SIGNIFICANT ACCOUNTING POLICIES A) RECENT ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations," ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Both of these Statements were adopted by the Company effective for fiscal periods commencing January 1, 2002. SFAS 141 requires that all business combinations, other than those for businesses under common control, be accounted for using the purchase method and provides specific criteria for recognizing intangible assets separately from goodwill. Under SFAS 142, goodwill and intangible assets with an indefinite useful life are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. As at December 31, 2003, goodwill amounted to $62 (2002 - $62) and is recorded in other assets in the consolidated balance sheets. The Company has reviewed the new standards and determined that its goodwill is not impaired. The following table presents the restated net income for 2001 assuming retroactive application of the provisions of SFAS 142:
FOR THE YEAR ENDED DECEMBER 31 2001 ------------------------------ -------- Net income as reported $ 145 Addback: Goodwill amortization, net of tax 2 -------- NET INCOME, EXCLUDING GOODWILL AMORTIZATION, NET OF TAX $ 147 --------
8 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A) RECENT ACCOUNTING STANDARDS (CONTINUED) In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51",which clarifies the consolidation accounting guidance in Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (ARB No. 51) as it applies to certain entities in which equity investors which do not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. This interpretation is effective for the fiscal or interim periods beginning after January 1, 2004 for variable interest entities acquired before February 1, 2003, and in 2003 for variable interest entities created after January 31, 2003. The Company is currently evaluating the impact of this pronouncement. In April 2003, the FASB's Derivative Implementation Group (DIG) released DIG B36, which addresses whether SFAS No. 133 requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or a total return debt index are examples of arrangements containing embedded derivatives requiring bifurcation. The effective date of the implementation guidance is January 1, 2004. The Company has determined that certain of its reinsurance agreements contain embedded derivatives requiring bifurcation. The Company has not yet determined the fair value of the embedded derivatives or completed its evaluation of the pronouncement. In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-1. SOP 03-1 provides guidance on a number of topics including separate presentation, interests in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, returns based on a contractually referenced pool of assets or index, accounting for contracts that contain death or other insurance benefit features, accounting for reinsurance and other similar contracts, accounting for annuitization guarantees, and sales inducements to contract holders. SOP 03-1 will be effective for the Company's financial statements on January 1, 2004. The Company is currently evaluating the impact of adopting SOP 03-1 on its consolidated financial statements. B) INVESTMENTS The Company classifies all of its fixed-maturity and equity securities as available-for-sale and records these securities at fair value. The cost of fixed-maturity securities is adjusted for the amortization of premiums and accretion of discounts, which are calculated using the effective interest method. For the mortgage-backed bond portion of the fixed-maturity securities portfolio, the Company recognizes amortization using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Realized gains and losses on sales of securities classified as available-for-sale are recognized in income using the specific-identification method. A decline in the value of a specific security that 9 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B) INVESTMENTS (CONTINUED) is considered other-than-temporary results in a write-down of the cost basis of the security and a charge to income in the period of recognition. Unrealized gains and losses, other than unrealized losses that are considered to be other-than-temporary, are reflected directly in accumulated other comprehensive income after adjustments for deferred income taxes, deferred acquisition costs, policyholder liabilities and unearned revenue liability. In evaluating whether a decline in fair value is other than temporary, the Company considers various factors including the time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer and whether the debtor is current on contractually obligated interest and principal payments. Mortgage loans are reported at unpaid principal balances, net of a provision for losses. The provision for losses is established for mortgage loans both on a specific as well as on an aggregate basis. Mortgage loans are considered to be impaired when the Company has determined that it is probable that all amounts due under contractual terms will not be collected. Impaired loans are reported at the lower of unpaid principal or fair value of the underlying collateral. Real estate held for investment is carried at cost, less accumulated depreciation and provisions for impairment and write-downs, if applicable. Real estate held for sale is carried at the lower of cost or market value where changes in estimates of market value are recognized as realized gains or losses in the consolidated statements of income. Policy loans are reported at aggregate unpaid balances, which approximates fair value. Short-term investments, which include investments with maturities of less than one year and greater than ninety days at the date of acquisition, are reported at amortized cost which approximates fair value. C) DERIVATIVES The Company adopted the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement of Financial Accounting Standards No. 138, on January 1, 2001. As a result, all derivative instruments are reported on the Consolidated Balance Sheet at their fair value, with changes in fair value recorded in income or equity, depending on the nature of the derivative instrument. Changes in the fair value of derivatives not designated as hedges are recognized in current period earnings. There was no cumulative transition adjustment at the time of adoption. For fair value hedges, the Company is hedging changes in the fair value of assets, liabilities or firm commitments with changes in fair values of the derivative instruments. Changes in the fair value of derivatives are recorded in income, and changes in the fair value of hedged items are recorded in income to the extent the hedge is effective. For cash flow hedges, the Company is hedging the variability of cash flows related to forecasted transactions. The effective portion of changes in the fair value of cash flow hedges is initially recorded in other comprehensive income and is subsequently reflected into income in the same period or periods during which the hedged transaction affects earnings. The Company estimates that deferred net gains of $3 after tax, included in other comprehensive income as at December 31, 2003, will be reclassified into earnings within the next twelve months. Cash flow hedges include hedges of certain forecasted transactions of varying periods up to a maximum of 40 years. 10 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 from future gross profits and included as an asset. The portion of DAC associated with variable annuity and variable life insurance contracts, universal life insurance contracts, investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. This amortization is adjusted retrospectively when current gross profits or estimates of future gross profits are revised. DAC associated with all other insurance and reinsurance contracts is amortized over the premium-paying period of the related policies. Assuming the unrealized gains or losses on securities had been realized at year-end, DAC is adjusted for the impact on current and estimated future gross profits. 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 gross profits and any unrecoverable portion is immediately expensed. F) POLICYHOLDER LIABILITIES AND ACCRUALS Policyholder liabilities for traditional non-participating life insurance policies, reinsurance policies, and for accident and health policies are computed using the net level premium method. The calculations are based upon estimates as to future mortality, morbidity, persistency, maintenance expenses, and interest rate yields that were applicable in the year of issue. The assumptions include a provision for the risk of adverse deviation. For payout annuities in loss recognition, policyholder liabilities are computed using estimates of expected mortality, expenses, and investment yields as determined at the time these contracts first moved into loss recognition. Payout annuity reserves are adjusted for the impact of net realized gains associated with the underlying assets. For variable annuity and variable life contracts, universal life insurance contracts, and investment contracts with no substantial mortality or morbidity risk, policyholder liabilities equal the policyholder account values. Account values are increased for deposits received and interest credited and are reduced by withdrawals, mortality charges, and administrative expenses charged to the policyholders. For traditional participating life insurance policies, policyholder liabilities are computed using the net level premium reserve for death and endowment policy benefits. Mortality and interest assumptions are the same as the non-forfeiture benefit assumptions at the time the policy was issued. Interest rate assumptions used in the calculation of the liabilities for traditional participating life insurance policies range from 2.5% to 7.8%. As at December 31, 2003, participating insurance expressed as a percentage of gross actuarial reserves and account value is 47%. 11 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F) POLICYHOLDER LIABILITIES AND ACCRUALS (CONTINUED) For those participating policies in force as of September 23, 1999 and as a result of the demutualization of The Manufacturers Life Insurance Company ("MLI"), an indirect parent, separate sub-accounts were established within the participating accounts of the Company. These sub-accounts permit this participating business to be operated as a separate "closed block" of business. As at December 31, 2003, $9,315 (2002 - $8,846) of policyholder liabilities and accruals related to the participating policyholders' account is included in the closed block. ManUSA's Board of Directors approves the amount of policyholder dividends to be paid annually. The aggregate amount of policyholder dividends is calculated based on actual interest, mortality, morbidity and expense experience for the year, and on management's judgment as to the appropriate level of equity to be retained by the Company. The carrying value of this liability approximates the earned amount and fair value as at December 31, 2003. G) SEPARATE ACCOUNTS Separate account assets and liabilities represent funds that are separately administered, principally for investment contracts related to group pension business as well as for variable annuity and variable life contracts, and for which the contract holder, rather than the Company, bears the investment risk. Separate account contract holders have no claim against the assets of the general account of the Company. Separate account assets are recorded at market value. Operations of the separate accounts are not included in the accompanying consolidated financial statements. However, fees charged on separate account policyholder funds are included in revenue of the Company. H) REVENUE RECOGNITION Premiums on long-duration life insurance and reinsurance contracts are recognized as revenue when due. Premiums on short-duration contracts are earned over the related contract period. Net premiums on limited-payment contracts are recognized as revenue and the difference between the gross premium received and the net premium is deferred and recognized in income based on either a constant relationship to insurance in force or the present value of annuity benefits, depending on the product type. Fee income from annuity contracts, pension contracts, and insurance contracts consists of charges for mortality, expense, surrender and administration that have been assessed against the policyholder account balances. To the extent such charges compensate the Company for future services, they are deferred and recognized in income over the period earned using the same assumptions as those associated with the amortization of DAC. Interest on fixed-maturity securities and performing mortgage loans is recorded as income when earned and is adjusted for any amortization of premiums or discounts. Interest on restructured mortgage loans is recorded as income based on the rate to be paid; interest on delinquent mortgage loans is recorded as income on a cash basis. Dividends are recorded as income on the ex-dividend date. 12 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I) POLICYHOLDER BENEFITS AND CLAIMS Benefits for variable annuity and variable life contracts, for universal life insurance contracts, and for investment pension contracts include interest credited to policyholder account values and benefit claims incurred during the period in excess of policyholder account values. J) REINSURANCE The Company routinely utilizes reinsurance transactions 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. The amount recoverable from reinsurers and pertaining to policyholder liabilities is presented as a separate asset on the consolidated balance sheets. For those claims paid and covered by a reinsurance treaty, a reinsurance receivable has been included as part of other assets. K) STOCK-BASED COMPENSATION Certain of ManUSA's employees are provided compensation in the form of stock options, deferred share units and restricted share units in MFC, the indirect parent of the Company. Effective January 1, 2003, MFC prospectively changed its accounting policy for employee stock options from the intrinsic value method to the fair value method for awards granted on or after January 1, 2002. As a result, the fair value of the stock options granted by MFC to the Company's employees is recorded by the Company over the vesting periods. The fair value of the deferred share units granted by MFC to ManUSA employees is recognized in the accounts of ManUSA over the vesting periods of the units. The intrinsic fair value of the restricted share units granted by MFC to ManUSA employees is recognized in the accounts of ManUSA over the vesting periods of the units. The stock-based compensation is a legal obligation of MFC, but in accordance with US generally accepted accounting principles, is recorded in the accounts of ManUSA. L) INCOME TAXES Income taxes have been provided for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that likely will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. ManUSA joins its indirect parent, Manulife Holdings (Delaware) LLC., and its subsidiaries, with the exception of The Manufacturers Life Insurance Company of New York ("MNY"), in filing a U.S. consolidated income tax return. MNY files a separate federal income tax return. Prior to the reorganization, MNY filed as a member of the consolidated tax return with its direct parent, MNA [note 1]. 13 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L) INCOME TAXES (CONTINUED) In accordance with the income tax-sharing agreements in effect for the applicable tax years, the Company's income tax provision (or benefit) is computed as if ManUSA and the companies filed separate income tax returns. The tax charge to each of the respective companies will not be more than that which each company would have paid on a separate return basis. Settlements of taxes are made through an increase or reduction to other liabilities. Such settlements occur on a periodic basis in accordance with the tax sharing agreement. Tax benefits from operating losses are provided at the U.S. statutory rate plus any tax credits attributable, provided the consolidated group utilizes such benefits currently. M) FOREIGN EXCHANGE TRANSLATION The balance sheet of the Company's foreign operations and the Company's non-U.S. dollar investments are translated into U.S. dollars using exchange rates in effect at the balance sheet date. The statement of income of the Company's foreign operations are translated into U.S. dollars using average exchange rates prevailing during the respective periods. Translation adjustments are included in accumulated other comprehensive income. N) COMPARATIVE FIGURES Certain of the prior year's figures have been reclassified to conform to the current year's presentation. O) USE OF ESTIMATES The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. During 2003, the Company made adjustments to the amortized costs of its fixed-maturity and equity securities, recognizing $53 in other than temporary impairments in the investment portfolio, net of the related DAC and unearned revenue liability unlocking. In 2002, there were more significant adjustments made to the amortized costs of its fixed-maturity and equity securities by recognizing $177 in other than temporary impairments in the investment portfolio, net of the related DAC and unearned revenue liability unlocking. Also in 2002, three items led to a combined net positive income effect from DAC and unearned revenue liability unlocking of $139. The latter changes included positive impacts from an extension of the DAC amortization period on its participating line of business, and improved mortality assumptions on its participating and universal life businesses, and a negative impact from equity market performance below historical assumptions on its variable annuity business. 14 3. INVESTMENTS AND INVESTMENT INCOME A) FIXED-MATURITY AND EQUITY SECURITIES At December 31, 2003, 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:
GROSS GROSS UNREALIZED AMORTIZED COST UNREALIZED GAINS LOSSES FAIR VALUE AS AT DECEMBER 31 2003 2002 2003 2002 2003 2002 2003 2002 ----------------- ---- ---- ---- ---- ---- ---- ---- ---- FIXED-MATURITY SECURITIES: U.S. government $ 2,536 $ 2,562 $ 64 $ (18) $ 197 $ - $ 2,582 $2,759 Foreign governments 1,108 1,458 202 314 (3) - 1,307 1,772 Corporate 5,933 6,326 589 639 (23) (143) 6,499 6,822 Asset - backed 250 470 18 47 (3) (1) 265 516 ------- ------- ----- ------- ------ ------- ------- ------- TOTAL FIXED-MATURITY $9,827 $10,816 $ 873 $ 1,197 $ (47) $ (144) $10,653 $11,869 SECURITIES ------- ------- ----- ------- ------ ------- ------- ------- EQUITY SECURITIES $401 $ 714 $ 83 $ 38 $ (9) $ (73) $ 475 $ 679 ------- ------- ----- ------- ------ ------- ------- -------
Proceeds from sales of fixed-maturity securities during 2003 were $10,986 (2002 - $8,481 and 2001 - $10,710). Gross gains and losses of $251 and $122 respectively, were realized on those sales (2002 - $218 and $154 respectively, 2001 - $230 and $100 respectively). In addition during 2003, other-than-temporary impairments of $10 (2002 - $109, 2001 - $73) were recognized in income. Proceeds from the sale of equity securities during 2003 were $ 530 (2002 - $34 and 2001 - $412). Gross gains and losses of $181 and $147 respectively, were realized on those sales (2002 - $48 and $84 respectively, 2001 - $20 and $31 respectively). In addition during 2003, other-than-temporary impairments of $51 (2002 - $135, 2001 - $48) were recognized in income. The cost amounts for both fixed-maturity securities and equity securities are net of the other-than-temporary impairment charges. At December 31, 2003, there are 323 fixed-income securities that have a gross unrealized loss of $47 of which the single largest unrealized loss is $7. The Company anticipates that these fixed income securities will perform in accordance with their contractual terms and currently has the ability and intent to hold these fixed-income securities until they recover or mature. At December 31, 2003, there are 78 equity securities that have a gross unrealized loss of $9, of which the single largest unrealized loss is $2. The Company anticipates that these equity securities will recover in value. 15 3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED) A) FIXED-MATURITY AND EQUITY SECURITIES (CONTINUED) The contractual maturities of fixed-maturity securities at December 31, 2003 are shown below.
AS AT DECEMBER 31, 2003 AMORTIZED COST FAIR VALUE ----------------------- -------------- ---------- Fixed-maturity securities, excluding mortgage-backed securities: One year or less $ 312 $ 317 Greater than 1; up to 5 years 1,473 1,565 Greater than 5; up to 10 years 2,802 3,033 Due after 10 years 4,990 5,473 Asset - backed securities 250 265 ------- -------- TOTAL FIXED-MATURITY SECURITIES $ 9,827 $ 10,653 ------- --------
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. B) MORTGAGE LOANS Mortgage loans are reported at amortized cost, net of a provision for losses. The impaired mortgage loans and the related allowances for mortgage loan losses were as follows:
AS AT DECEMBER 31 2003 2002 ----------------- ---- ---- IMPAIRED LOANS $ 90 $ 80 ------ ------ Allowance, January 1 $ 36 $ 50 Deductions (5) (14) ------ ------ ALLOWANCE, DECEMBER 31 $ 31 $ 36 ------ ------
All impaired loans have been provided for and no interest is accrued on impaired loans. 16 3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED) C) INVESTMENT INCOME Income by type of investment was as follows:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 2001 - ------------------------------- ---- ---- ---- Fixed-maturity securities $ 737 $ 729 $ 751 Equity securities 12 11 11 Mortgage loans 149 139 128 Investment real estate 86 88 91 Other investments 228 228 239 ------ ------ ------ Gross investment income 1,212 1,195 1,220 Investment expenses (38) (38) (36) ------ ------ ------ NET INVESTMENT INCOME $1,174 $1,157 $1,184 ------ ------ ------
D) SIGNIFICANT EQUITY INTERESTS ManUSA holds a 27.7% indirect interest in Flex Leasing I, LLC ("Flex I") which is accounted for using the equity method whereby ManUSA recognizes its proportionate share of the investee's net income or loss. In 2003, ManUSA sold its 19.6% direct interest in Flex II, LLC, which also had been accounted for using the equity method, for a realized gain of $1. As at December 31, 2003, the total assets for Flex I were $296 (2002 - $306 for Flex I and $87 for Flex II 2001 - $396 for both Flex I and Flex II), with total liabilities amounting to $237 (2002 - $248 for Flex I and $77 for Flex II 2001 - $295 for both Flex I and Flex II)). For the year ended December 31, 2003, total net loss amounted to $5 (2002 - $3 for Flex I and $4 for Flex II 2001 $4 for both Flex I and Flex II). E) SECURITIES LENDING The Company engages in securities lending to generate additional income. Certain securities from its portfolio are loaned to other institutions for certain periods of time. Collateral, which exceeds the market value of the loaned securities, is lodged by the borrower with the Company and retained by the Company until the underlying security has been returned to the Company. The collateral is reported in cash and other liabilities. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. As at December 31, 2003, the Company has loaned securities (which are included in invested assets) with a carrying value and market value of approximately $667 and $642 respectively (2002 - $1,316 and $1,407 respectively). 17 4. COMPREHENSIVE INCOME A) TOTAL COMPREHENSIVE INCOME WAS AS FOLLOWS:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 2001 ------------------------------- ---- ---- ---- NET INCOME $ 191 $ 155 $ 145 ------ ------ ------ OTHER COMPREHENSIVE INCOME, NET OF DAC, DEFERRED INCOME TAXES AND OTHER AMOUNTS REQUIRED TO SATISFY POLICYHOLDER LIABILITIES: Unrealized holding gains (losses) arising during the year 209 269 (118) Minimum pension liability 24 (25) (3) Foreign currency translation 131 44 (13) Less: Reclassification adjustment for realized gains and losses included in net income 82 (70) 16 ------ ------ ------ Other comprehensive income 282 358 (150) ------ ------ ------ COMPREHENSIVE INCOME $ 473 $ 513 $ (5) ------ ------ ------
Other comprehensive income is reported net of tax expense (benefit) of $81, $169, and ($74) for 2003, 2002 and 2001, respectively. B) ACCUMULATED OTHER COMPREHENSIVE INCOME IS COMPRISED OF THE FOLLOWING:
AS AT DECEMBER 31 2003 2002 ----------------- ---- ---- UNREALIZED GAINS : Beginning balance $ 512 $ 173 Current period change 128 339 ----- ----- Ending balance $ 640 $ 512 ----- ----- MINIMUM PENSION LIABILITY: Beginning balance $ (28) $ (3) Current period change 25 (25) ----- ----- Ending balance $ (3) $ (28) ----- ----- FOREIGN CURRENCY: Beginning balance $ 27 $ (17) Current period change 129 44 ----- ----- Ending balance $ 156 $ 27 ----- ----- ACCUMULATED OTHER COMPREHENSIVE INCOME $ 793 $ 511 ===== =====
18 4. COMPREHENSIVE INCOME (CONTINUED) C) UNREALIZED GAINS ON SECURITIES AVAILABLE-FOR-SALE Net unrealized gains on fixed-maturity and equity securities included in other comprehensive income were as follows:
AS AT DECEMBER 31 2003 2002 ----------------- ------- ------- Gross unrealized gains $ 1,385 $ 1,234 Gross unrealized losses (56) (217) DAC and other amounts required to satisfy policyholder (345) (237) liabilities Deferred income taxes (344) (268) ------- ------- NET UNREALIZED GAINS ON SECURITIES AVAILABLE-FOR-SALE $ 640 $ 512 ------- -------
5. DEFERRED ACQUISITION COSTS The components of the change in DAC were as follows:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 ------------------------------- ------- -------- Balance, January 1 $ 2,731 $ 2,375 Capitalization 651 568 Amortization (227) (92) Effect of net unrealized gains on securities available-for-sale (1) (118) ------- -------- BALANCE, DECEMBER 31 $ 3,154 $ 2,731 ------- --------
6. INCOME TAXES The components of income tax expense were as follows:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 2001 - ------------------------------- ------ ------ ------- Current (benefit) expense $ (66) $ (52) $ (62) Deferred expense 143 83 96 ------ ----- ----- TOTAL EXPENSE $ 77 $ 31 $ 34 ====== ===== =====
Income before federal income taxes differs from taxable income principally due to permanent differences, including tax-exempt investment income and dividends received tax deductions, and timing differences which include differences in the treatment of policy acquisition costs, and differences in reserves for policy and contract liabilities for tax and financial reporting purposes. 19 6. INCOME TAXES (CONTINUED) Deferred income tax assets (liabilities), result from tax affecting the differences between financial statement values and tax values of assets and liabilities at each balance sheet date. The Company's deferred income tax assets (liabilities) are as follows:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 - ------------------------------- ------- ------- DEFERRED TAX ASSETS: Differences in computing policy reserves $ 598 $ 576 Investments 1 5 Policyholder dividends payable 11 13 Net operating loss 178 214 Other deferred tax assets 34 60 ------- ------- Deferred tax assets $ 822 $ 868 ------- ------- DEFERRED TAX LIABILITIES: Deferred acquisition costs $ 672 $ 548 Unrealized gains on securities available-for-sale 472 349 Premiums receivable 25 27 Investments 58 90 Other deferred tax liabilities 21 50 ------- ------- Deferred tax liabilities $ 1,248 $ 1,064 ------- ------- NET DEFERRED TAX (LIABILITIES) ASSETS $ (426) $ (196) ------- -------
At December 31, 2003, the Company has operating loss carry forwards of $508 that will begin to expire in 2015, and $3.4 of tax credits with no expiry limitation. At December 31, 2002 and December 31, 2001, the company had operating loss carryforwards of $612 and $266 respectively and $1.4 (in both years) of tax credits. 7. NOTES PAYABLE TO PARENT On December 29, 1997, the Company issued two surplus debentures for $240 bearing interest at 7.93% per annum to MIC. On April 1, 1998, the Company issued two additional surplus debentures for $150 bearing interest at 8.10% per annum to MIC. During 2002, a partial principal repayment of $20 on one of the debentures was made. On December 31, 2003, with the approval of the Michigan Division of Insurance by letter dated December 23, 2003, the Company repaid the total remaining principal of $370 to MIC plus accrued interest of $12. Total interest paid was $31, $32, and $31 for 2003, 2002, and 2001, respectively. 20 8. CAPITAL AND SURPLUS Capital Stock is comprised of the following:
2003 2002 ---- ---- AUTHORIZED: 50,000,000 Preferred shares, Par value $1.00 - - 50,000,000 Common shares, Par value $1.00 ISSUED AND OUTSTANDING: 100,000 Preferred shares 4,728,934 Common shares 5 5 ------ ----
As part of the reorganization that was effected January 1, 2002, all of ManUSA's outstanding preferred shares and common shares that were held by MRC were redeemed and then reissued to MIC at the same stated value [note 1]. ManUSA and its life insurance subsidiaries are subject to statutory limitations on the payment of dividends. Dividend payments in excess of prescribed limits cannot be paid without the prior approval of U.S. insurance regulatory authorities. Net income (loss) and net capital and surplus, as determined in accordance with statutory accounting principles for ManUSA, MRC and their life insurance subsidiaries were as follows:
US STATUTORY BASIS -------------------------------------- 2003 2002 2001 FOR THE YEARS ENDED DECEMBER 31 (NOTE 1) (NOTE 1) (NOT RESTATED) - -------------------------------- -------------------------------------- THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.): Net income (loss) $ 289 $ (396) $ 55 Net capital and surplus 954 1,078 1,280 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA: Net loss $ - $ - $ (117) Net capital and surplus - - 212 THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA: Net loss $ - $ - $ (20) Net capital and surplus - - 100 MANULIFE REINSURANCE CORPORATION (U.S.A.): Net income $ - $ - $ 171 Net capital and surplus - - 1,359 THE MANUFACTURERS LIFE INSURANCE COMPANY OF NEW YORK: Net income (loss) $ 2 $ (26) $ (26) Net capital and surplus 52 52 34
As a result of the demutualization of MLI there are regulatory restrictions on the amounts of profit that can be transferred to shareholders. These restrictions generally take the form of a fixed percentage of the policyholder dividends. The transfers are governed by the terms of MLI's Plan of Demutualization. 9. PENSION AND OTHER POST-EMPLOYMENT BENEFITS A) EMPLOYEE RETIREMENT PLANS The Company sponsors a non-contributory pension plan entitled "The Manulife Financial U.S. Cash Balance Plan" (the "Plan"). Effective January 1, 2002, Manulife Wood Logan Inc. employees commenced earning a benefit under the Plan. Effective July 1, 2002, the Wood Logan Associates, Inc. Pension Plan, which was frozen as of December 31, 2001, was merged into the Plan. 21 9. PENSION AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) A) EMPLOYEE RETIREMENT PLANS (CONTINUED) Pension benefits are provided to participants of the Plan after 3 years of vesting service with the Company and are a function of the length of service together with final average earnings. The normal form of payment under the Plan is a life annuity, payable at the normal retirement age of 65, and is actuarially equivalent to the cash balance account. Various optional forms of payment are available including a lump sum. Early retirement benefits are actuarially equivalent to the cash balance account, but are subsidized for participants who were age 45 with 5 or more years vesting service with the Company as at July 1, 1998 and who terminate employment after attaining age 50 and have completed 10 years of service. Cash balance accounts under the Plan are credited annually with contribution credits and semi-annually with interest credits. Future contribution credits will vary based on service. Interest credits are a function of the 1-year U.S. Treasury Constant Maturity Bond rate plus 0.25%, but no less than 5.25% per annum. Actuarial valuation of accumulated plan benefits are based on projected salaries, an assumed discount rate, and best estimates of investment yields on plan assets, mortality of participants,employee termination, and ages at retirement. Pension costs that relate to current service are funded as they accrue and are charged to earnings of the Company in the current period. Vested benefits are fully funded. Experience gains and losses are amortized to income of the Company over the estimated average remaining service lives of the plan participants. No contributions were made during the current or prior year because the Plan was subject to the full funding limitation under the Internal Revenue Code. At December 31, 2003, the projected benefit obligation to the participants of the Plan was $76 (2002 - $66), which was based on an assumed interest rate of 6.0% (2002 - 6.75%). The fair value of the Plan assets totaled $71 (2002 - $60). The Company also sponsors an unfunded supplemental cash balance plan entitled "The Manulife Financial U.S. Supplemental Cash Balance Plan" (the "Supplemental Plan"). This non-qualified plan provides defined pension benefits in excess of limits imposed by law. Compensation is not limited and benefits are not restricted by the Internal Revenue Code. Benefits under the Supplemental Plan are provided to participants who terminate after 3 years of service. The default form of payment under this plan is a lump sum, although participants may elect to receive payment in the form of an annuity provided that such an election is made within the time period prescribed in the Supplemental Plan. If an annuity form of payment is elected, the amount payable is equal to the actuarial equivalent of the participant's balance under the Supplemental Plan, using the factors and assumptions for determining immediate annuity amounts applicable to the participant under the Plan. Cash balance contribution credits for the Supplemental Plan vary with service, and interest credits are equal to the 1-year U.S. Treasury Constant Maturity Bond rate plus 0.25%, but no less than 5.25% per annum. The annual contribution credits are made in respect of the participant's compensation that is in excess of the limit set by the Internal Revenue Code. Together, these contributions serve to restore to the participant the benefit that he / she would have been entitled to under the Plan's benefit formula except for the pay and benefit limitations in the Internal Revenue Code. 22 9. PENSION AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) A) EMPLOYEE RETIREMENT PLANS (CONTINUED) At December 31, 2003, the projected benefit obligation to the participants of the Supplemental Plan was $26 (2002 - $25), which was based on an assumed interest rate of 6.0% (2002 - 6.75%). B) 401(K) PLAN The Company sponsors a defined contribution 401(k) savings plan, which is subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company contributed $2 in 2003 (2002 - $3). C) POST-RETIREMENT BENEFIT PLAN In addition to the retirement plans, the Company sponsors a post-retirement benefit plan that provides retiree medical and life insurance benefits to those who have attained age 50 and have 10 or more years of service with the Company. This plan provides primary medical coverage for retirees and spouses under age 65. When the retirees or the covered spouses reach age 65, Medicare provides primary coverage and this plan provides secondary coverage. This plan is contributory with the amount of contribution based on the service of the employees as at the time of retirement. It also provides the employee with a life insurance benefit of 100% of the salary just prior to retirement up to a maximum of $150,000. This life insurance benefit is reduced to 65% on the first of January following retirement, and is further reduced to 30% at age 70. The Company accounts for its retiree benefit plan using the accrual method. At December 31, 2003, the benefit obligation of the postretirement benefit plan was $29 (2002 - $23), which was based on an assumed interest rate of 6.0% (2002 - 6.75%). This plan is unfunded. Post-retirement benefit plan expenses for 2003 were $2 (2002 - $2). 23 9. PENSION AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) D) FINANCIAL INFORMATION REGARDING THE EMPLOYEE RETIREMENT PLANS AND THE POST-RETIREMENT BENEFIT PLAN Information applicable to the Employee Retirement Plans and the Post-retirement Benefit Plan as estimated by a consulting actuary for the December 31 year-ends is as follows:
EMPLOYEE POSTRETIREMENT RETIREMENT BENEFIT PLANS PLAN --------------------------- ---------------------- AS AT DECEMBER 31 2003 2002 2003 2002 ----------------- ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ (90) $ (81) $ (23) $ (21) Service cost (5) (4) (1) (1) Interest cost (6) (6) (2) (1) Actuarial loss (8) (6) (4) (1) Benefits paid 7 7 1 1 ----- ----- ----- ----- Benefit obligation at end of year $(102) $ (90) $ (29) $ (23) ----- ----- ----- ----- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 60 $ 74 $ - $ - Actual return on plan assets 16 (10) - - Employer contribution 2 3 1 1 Benefits paid (7) (7) (1) (1) ----- ----- ----- ----- Fair value of plan assets at end of year $ 71 $ 60 $ - $ - ----- ----- ----- ----- Funded status $ (31) $ (30) $ (29) $ (23) Unrecognized transition asset (1) (3) - - Unrecognized actuarial loss (gain) 50 52 (6) (11) Unrecognized prior service cost 3 3 - - ----- ----- ----- ----- Net amount recognized $ 21 $ 22 $ (35) $ (34) ----- ----- ----- ----- Amounts recognized in consolidated balance sheets consist of: Prepaid benefit cost $ 39 $ - $ - $ - Accrued benefit liability (24) (24) (35) (34) Intangible asset 1 3 - - Accumulated other comprehensive income 5 43 - - ----- ----- ----- ----- Net amount recognized $ 21 $ 22 $ (35) $ (34) ----- ----- ----- -----
EMPLOYEE POST-RETIREMENT RETIREMENT BENEFIT PLANS PLAN --------------------------- -------------------- AS AT DECEMBER 31 2003 2002 2003 2002 ----------------- ---- ---- ---- ---- WEIGHTED AVERAGE ASSUMPTIONS Discount rate 6.00% 6.75% 6.00% 6.75% Expected return on plan assets 8.25% 8.50% N/A N/A Rate of compensation increase 5.00% 5.00% 5.00% 5.00% Cost-of-living increase 3.00% 3.00% N/A N/A
On December 31, 2003, the accrued postretirement benefit plan obligation was $29. The postretirement benefit obligation for eligible active employees was $5. The amount of the postretirement benefit obligation for ineligible active employees was $8. For measurement purposes as at December 31, 2003, an 11.00% annual rate of increase in the per capita cost of covered health care benefits were assumed for 2003 for both pre-65 and post-65 coverages. This rate was assumed to decrease gradually to 5.0% in 2016 and will remain at that level thereafter. 24 9. PENSION AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) D) FINANCIAL INFORMATION REGARDING THE EMPLOYEE RETIREMENT PLANS AND THE POST-RETIREMENT BENEFIT PLAN (CONTINUED)
EMPLOYEE POST-RETIREMENT RETIREMENT BENEFIT PLANS PLAN ---------------------- ------------------------ AS AT DECEMBER 31 2003 2002 2003 2002 ----------------- ---- ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST FOR PLAN SPONSOR Service cost $ 5 $ 4 $ 1 $ 1 Interest cost 6 6 2 1 Expected return on plan assets (7) (7) - - Amortization of net transition obligation (3) (2) - - Recognized actuarial loss (gain) 2 - (1) (1) ---- ----- ------ ------- NET PERIODIC BENEFIT COST $ 3 $ 1 $ 2 $ 1 ---- ----- ------ -------
For the pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets were $25, $24, and $nil respectively as at December 31, 2003 and $90, $84, and $61 respectively as of December 31, 2002. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects on 2003 reported expenses:
ONE-PERCENTAGE-POINT ONE-PERCENTAGE-POINT INCREASE DECREASE -------- -------- Effect on total of service and interest cost components $ 1 $ - Effect on post-retirement benefit obligation $ 4 $ (3)
10. STOCK BASED COMPENSATION There are no stock based compensation plans involving stock of ManUSA. However, employees of ManUSA participate in the Executive Stock Option Plan of MFC (the "ESOP"). Under this plan, stock options are periodically granted to selected individuals. The stock options provide the holder with the right to purchase common shares at an exchange price equal to the closing market price of MFC's common shares on the Toronto Stock Exchange on the business day immediately preceding the date the options were granted. The options vest over a period not exceeding 4 years and expire not more than 10 years from the grant date. A total of 36,800,000 MFC common shares have been reserved for issuances under the ESOP. 25 10. STOCK BASED COMPENSATION (CONTINUED) Details of outstanding options relating to the employees of ManUSA are as follows:
2003 2002 ----------------------------------------------------------------------- Weighted Weighted Number of options average Number of average options exercise price options exercise For the years ended December 31 (thousands) (Cdn.) (thousands) price (Cdn.) - ------------------------------- ----------- ------ ----------- ------------ Outstanding, January 1 1,672 $ 40.37 1,000 $ 38.36 Granted 270 $ 36.38 764 $ 42.76 Exercised (9) $ 37.75 (20) $ 31.91 Forfeited / Cancelled (143) $ 41.27 (72) $ 40.12 ----- -------- ----- ------- Outstanding, December 31 1,790 $ 38.54 1,672 $ 40.37 ===== ======== ===== ======= Exercisable, as at December 31 832 $ 38.43 626 $ 37.23 ===== ======== ===== =======
The exercise price of stock options outstanding range from Cdn. $31.60 to Cdn. $46.95 and have a weighted average contractual remaining life of 7.5 years. The weighted average fair value of each option granted by MFC in 2003 has been estimated at Cdn. $10.75 (2002 - Cdn.$13.85 ) using the Black-Scholes option-pricing model. The pricing model uses the following weighted average assumptions: risk-free interest rate of 4.8% (2002 - 5.2%), dividend yield of 1.8% (2002 - 1.4%), expected volatility of 25% (2002 - 25%) and expected life of 7 years (2002 - 7 years). Effective January 1, 2003, MFC changed its accounting policy on a prospective basis for stock options granted to employees on or after January 1, 2002, from the intrinsic value method to the fair value method. As a result, the Company recorded in its accounts an additional compensation expense, of $1 during the year ended December 31, 2003. In 2000, MFC also granted deferred share units (the "DSUs") to certain employees in the ESOP. The DSUs vest over a 4-year period and each unit entitles the holder to receive one common share of MFC on retirement or termination of employment. The DSUs attract dividends in the form of additional DSUs at the same rate as dividends on the common shares of MFC. No DSUs were granted during 2003 and 2002. The number of DSUs outstanding was 170,209 as at December 31, 2003 (2002 - 154,608). ManUSA recorded compensation expense of $1 related to DSUs granted by MFC to its employees (2002 - $1, 2001 - $1). Effective January 1, 2001, MFC established the Global Share Ownership Plan (the "GSOP") in which ManUSA employees can participate. Under this plan, qualifying employees of ManUSA can choose to have up to 5% of their annual base earnings applied toward the purchase of common shares of MFC. Subject to certain conditions, MFC will match 50% of the employee's eligible contributions. The MFC contributions vest immediately. All contributions will be used by the plan's trustee to purchase common shares in the open market. Amounts matched by MFC in respect of ManUSA employees are charged and expensed to ManUSA via the service agreement between ManUSA and MFC. The Company also has deferred compensation incentive plans open to all branch managers and qualified agents. 26 10. STOCK BASED COMPENSATION (CONTINUED) During the first quarter of 2003, MFC established a new Restricted Share Unit ("RSU") plan. RSUs represent phantom common shares of MFC that entitle a participant to receive payment equal to the market value of the same number of common shares at the time the RSUs vest. RSUs vest and are paid out in 34 months and the related compensation expense is recognized over the period. At December 31 there were 217,884 RSU's outstanding for eligible employees. The Company recorded a compensation expense related to RSUs of $1, for the year ended December 31, 2003. 11. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses a variety of derivative financial instruments as part of its efforts to manage exposures to foreign currency, interest rate, and other market risks arising from its on-balance sheet financial instruments and future commitments. These instruments include interest rate exchange agreements, cross currency swaps, and foreign currency forward contracts. The Company enters into interest rate exchange agreements to reduce and manage interest rate risk associated with individual assets and liabilities. These interest rate exchange agreements consist primarily of interest rate swap agreements and interest rate floors and are regarded as fair value hedges. The Company uses cross currency swaps to reduce both foreign exchange and interest rate risk associated with outstanding non-U.S. dollar denominated debt. These instruments are regarded as fair value hedges. These instruments are designated and effective as hedges, as there is a high correlation between changes in market value or cash flow of the derivative and the underlying hedged item at inception and over the life of the hedge. The Company uses foreign currency forward contracts to hedge some of the foreign exchange risk, as it generates revenue and holds assets in U.S. dollars, but incurs a significant portion of its maintenance and acquisition expenses in Canadian dollars. A foreign currency forward contract obliges the Company to deliver a specified amount of currency on a future date at a specified exchange rate. The value of the foreign exchange forward contracts at any given point fluctuates according to the underlying level of exchange rate and interest rate differentials. These instruments are regarded as cash flow hedges. The Company's exposure to credit risk is the risk of loss from a counterparty failing to perform according to the terms of the contract. That exposure includes settlement risk (i.e. the risk that the counterparty defaults after the Company has delivered funds or securities under terms of the contract) and replacement cost risk (i.e. the cost to replace the contract at current market rates should the counterparty default prior to the settlement date). To limit exposure associated with counterparty nonperformance on interest rate exchange agreements, the Company enters into master netting agreements with its counterparties. 27 11. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Outstanding derivative instruments are as follows:
NOTIONAL OR CONTRACT AMOUNTS CARRYING VALUE FAIR VALUE ------- -------------- ---------- AS AT DECEMBER 31 2003 2002 2003 2002 2003 2002 - ----------------- ---- ---- ---- ---- ---- ---- Interest rate & currency swaps & floors $ 830 $1,039 $ (34) $(15) $(34) $(15) Interest rate option written 12 22 (1) (2) (1) (2) Equity Contracts 9 2 - - - - Currency forwards 276 1,040 25 5 25 5 ------ ------ ----- ---- ---- ---- TOTAL DERIVATIVES $1,127 $2,103 $ (10) $(12) $(10) $(12) ------ ------ ----- ---- ---- ----
Fair value of derivative financial instruments reflect the estimated amounts that the Company would receive or pay to terminate the contract at the balance sheet date, including the current unrealized gains (losses) on the instruments. Fair values of the agreements were based on estimates obtained from the individual counter parties. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and the estimated fair values of the Company's financial instruments at December 31, 2003 were as follows:
CARRYING VALUE FAIR VALUE -------------- ---------- ASSETS: Fixed-maturity and equity securities $ 11,128 $ 11,128 Mortgage loans 2,187 2,419 Policy loans 2,532 2,532 Short term investments 564 564 LIABILITIES: Insurance investment contracts $ 2,365 $ 2,333 Derivative financial instruments 10 10
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. Where no quoted market price was available, fair values were estimated using values obtained from independent pricing services or, in the case of fixed-maturity private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of the investments. MORTGAGE LOANS: Fair value of mortgage loans was estimated using discounted cash flows and took into account the contractual maturities and discount rates, which were based on current market rates for similar maturity ranges and adjusted for risk due to the property type. POLICY LOANS: Carrying values approximate fair values. 28 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) INSURANCE INVESTMENT CONTRACTS: Fair value of insurance investment contracts, which do not subject the Company to significant mortality or morbidity risks, were estimated using cash flows discounted at market rates. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values of derivative financial instruments were based on estimates obtained from the individual counterparties. SEPARATE ACCOUNT ASSETS AND LIABILITIES: The carrying values in the consolidated balance sheets for separate account assets and liabilities approximate their fair value. Fair value was determined by applying the above outlined methodology to the relevant assets underlying the respective separate accounts. 13. RELATED PARTY TRANSACTIONS The Company has formal service agreements with MFC, which can be terminated by either party upon two months notice. Under the various agreements, the Company will pay direct operating expenses incurred by MFC on behalf of the Company. Services provided under the agreements include legal, actuarial, investment, data processing, accounting and certain other administrative services. Costs incurred under the agreements were $254 in 2003 ( 2002- $277 and 2001- $272 ). MFC also provides a claims paying guarantee to certain U.S. policyholders. On December 20, 2002, the Company entered into a reinsurance agreement with MRL, to reinsure a block of variable annuity business. The contract reinsures all risks, however, the primary risk reinsured is investment and lapse risk with only limited coverage of mortality risk. Accordingly, the contract was classified as financial reinsurance and given deposit-type accounting treatment. Under the terms of the agreement, the Company received a ceding commission of $123 in 2003 ( 2002 -$168), which is classified as unearned revenue and reported in other liabilities. The amount is being amortized to income as payments are made to MRL. The balance of this unearned revenue as of December 31, 2003 is $253. On September 23, 1997, the Company entered into a reinsurance agreement with MRL to reinsure a closed block of participating life insurance business. On December 31, 2003, the Company recaptured the reinsurance agreement. As there was limited transfer of mortality risk between the Company and MRL, the agreement was classified as financial reinsurance and given deposit-type accounting treatment. Title to the assets supporting this block of business was transferred to MRL under the terms of the 2003 agreement. Included in amounts due from affiliates is $nil (2002 - $487) representing the receivable from MRL for the transferred assets which are accounted for in a similar manner as invested assets available-for-sale. As a result of the early termination of the treaty, the company paid MRL a termination fee of $21, which is reported as a reduction of other revenue in 2003. On December 31, 2003, the Company entered into a reinsurance agreement with an affiliate, Manulife Reinsurers Bermuda Limited (MRBL), to reinsure 90% of the non-reinsured risk of the closed block of participating life insurance business. As approximately 90% of the mortality risk is covered under previously existing contracts with third party reinsurers and the resulting limited mortality risk inherent in the new contract with MRBL, it was classified as financial reinsurance 29 13. RELATED PARTY TRANSACTIONS (CONTINUED) and given deposit-type accounting treatment. Title to the assets supporting this block of business was transferred to MRBL under the terms of the agreement. Included in amounts due from affiliates is $2,223 (2002 - $nil) representing the receivable from MRBL for the transferred assets, which are accounted for in a similar manner as invested assets available-for-sale. Pursuant to a promissory note dated December 19, 2000, issued pursuant to a Credit Agreement of the same date, the Company received a loan of $250 ($375 Canadian) from an affiliate, Manulife Hungary Holdings KFT ("MHHL"). The maturity date with respect to any borrowing is 365 days following the date of the advance of a loan, however the loan is normally renegotiated at each year end. Interest is calculated at a fluctuating rate equivalent to LIBOR plus 39 basis points (32 basis points in 2002) and is payable quarterly commencing March 28, 2001. On December 30, 2002, the Company repaid $177 ($279 Canadian) of the principal balance outstanding. The remaining principal outstanding is $74 ($96 Canadian) and $61 ($96 Canadian) on December 31, 2003 and 2002 respectively. On December 29 2001, ManUSA entered into a one-year agreement with MLI to swap $250 ($375 Canadian) at 3-month Banker's Acceptance note plus 31.34 basis points for US $240 at 3-month LIBOR plus 32.5 basis points. There was no gain or loss reported on the maturity of the swap. On December 29, 2002, ManUSA entered into a one year agreement with MLI to swap Cdn$96 at 3-month Banker's Acceptance note plus 32 basis points for US$61 at a 3-month LIBOR plus 25 basis points. There was no gain or loss on the maturity of the swap. Effective December 28, 2003, the Company entered into a one year agreement to swap Cdn$96 at 3-month Banker's Acceptance note plus 39 basis points for US$71 at a 3-month LIBOR plus 25 basis points. A promissory note dated August 7, 2001, was issued by MNA to an affiliate MHHL, pursuant to a Credit Agreement of the same date, with respect to an initial loan of $3.8. The maturity date with respect to any borrowing is 365 days after the date of the advance of a loan. Interest on the loan is calculated at a fluctuating rate equal to LIBOR plus 25 basis points and is payable quarterly starting March 28, 2001. The rate was 3.06% at December 31, 2003. Pursuant to a promissory note dated May 7, 1999, ENNAL Inc., a wholly owned non-life subsidiary of the Company, loaned $83 ($125 Canadian) to MLI. Interest is calculated at a rate of 5.6% per annum and is payable annually on December 15. The principal balance was collected on December 15, 2003, resulting in a foreign exchange gain of $10 which was recorded as a realized investment gain. As at December 31, 2003, the Company had a total of 2 (2002 - 3) inter-company loans to MRL with a carrying value of $19 (2002 - $27). One of the loans, with a carrying value of $1, matured on December 31, 2003 and was fully paid on January 6, 2004. The other loan matures on May 11, 2006 and bears interest at LIBOR plus 60 basis points. The rate at December 31, 2003 was 1.76%. The Company has a liquidity pool in which affiliates can invest their excess cash. The resulting economies of scale allow the Company to earn a spread over the amount it pays its affiliates and the affiliates to earn improved returns on their excess cash. The maximum amount of each affiliate's participation is set by the Company's board. 30 13. RELATED PARTY TRANSACTIONS (CONTINUED) Each affiliate's participation in the liquidity pool is evidenced by a grid promissory note issued by the Company with the following terms: (1) A term of approximately ten (10) years; (2) Interest payable on the funds is reset daily to the one-month US Dollar London Inter-Bank Bid ("LIBID"); (3) Accrued interest is capitalized on the last day of each month; (4) The Company can repay, and the lender can require the payment of, all or part of the lender's outstanding balance at any time upon two days prior written notice to the other; (5) The unpaid principal plus interest may be reduced to zero from time to time without affecting the validity of the note. None of the affiliates are permitted to use the liquidity pool to borrow for their short term cash needs. The following table identifies the affiliates and outlines the details of their participation in the Company's liquidity pool:
AFFILIATE LIMIT EXPIRATION DATE 2003 2002 --------- ----- --------------- ---- ---- MIC $100 02/24/2012 $ 34 $10 MRL $ 75 12/31/2012 71 47 MRBL $ 75 12/31/2013 50 - MRBL Reinsurance Trust $200 12/31/2013 58 - TOTAL $213 $57
The amounts are included in due to affiliates. 14. 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. Reinsurance premiums are included in premium revenue as follows:
FOR THE YEARS ENDED DECEMBER 31 2003 2002 2001 - ------------------------------- ---- ---- ---- Direct premiums $1,011 $ 1,011 $ 995 Reinsurance assumed 309 323 369 Reinsurance ceded (365) (332) (320) ------ ------- ------ TOTAL PREMIUMS $ 955 $ 1,002 $1,044 ------ ------- ------
Reinsurance recoveries on ceded reinsurance contracts were $309, $311, and $416 during 2003, 2002 and 2001, respectively. 31 15. CONTINGENCIES AND COMMITMENTS The Company and its subsidiaries are subject to legal actions arising in the ordinary course of business. These legal actions are not expected to have a material adverse effect on the consolidated financial position of the Company. During 2001, the Company entered into an office ground lease agreement, which expires on September 20, 2096. The terms of the lease agreement provide for adjustments in future periods. The minimum aggregate rental commitments on the ground lease together with other rental office space commitments for the next five years are as follows: $12 for 2004, and $11 for 2005 and thereafter. There were no other material operating leases in existence at the end of 2003. 32 THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) SEPARATE ACCOUNT N (FORMERLY THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA SEPARATE ACCOUNT FOUR) Audited Financial Statements Years ended December 31, 2003 and 2002 with Report of Independent Auditors The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Financial Statements Years ended December 31, 2003 and 2002 CONTENTS Report of Independent Auditors............................................ 1 Financial Statements Statement of Assets and Contract Owners' Equity........................... 3 Statements of Operations and Changes in Contract Owners' Equity........... 5 Notes to Financial Statements............................................. 33
Report of Independent Auditors To the Contract Owners of The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) We have audited the accompanying statement of assets and contract owners' equity of each of The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (comprising, respectively, the Aggressive Growth Trust, All Cap Core Trust, All Cap Growth Trust, All Cap Value Trust, American Blue Chip Income & Growth Trust, American Growth Trust, American Growth-Income Trust, American International Trust, Balanced Trust, Blue Chip Growth Trust, Capital Appreciation Trust, Diversified Bond Trust, Dynamic Growth Trust, Emerging Growth Trust, Emerging Small Company Trust, Equity-Income Trust, Equity Index Trust, Financial Services Trust, Fundamental Value Trust, Global Allocation Trust, Global Bond Trust, Global Equity Trust, Growth & Income Trust, Health Sciences Trust, High Yield Trust, Income & Value Trust, International Index Trust, International Small Cap Trust, International Stock Trust, International Value Trust, Internet Technologies Trust, Investment Quality Bond Trust, Large Cap Growth Trust, Large Cap Value Trust, Lifestyle Aggressive 1000 Trust, Lifestyle Balanced 640 Trust, Lifestyle Conservative 280 Trust, Lifestyle Growth 820 Trust, Lifestyle Moderate 460 Trust, Mid Cap Core Trust, Mid Cap Growth Trust, Mid Cap Index Trust, Mid Cap Opportunities Trust, Mid Cap Stock Trust, Mid Cap Value Trust, Money Market Trust, Natural Resources Trust, Overseas Trust, Pacific Rim Emerging Markets Trust, Quantitative Equity Trust, Quantitative Mid Cap Trust, Real Estate Securities Trust, Real Return Bond Trust, Science & Technology Trust, Small Cap Index Trust, Small Cap Opportunities Trust, Small Company Blend Trust, Small Company Value Trust, Special Value Trust, Strategic Bond Trust, Strategic Growth Trust, Strategic Opportunities Trust, Strategic Value Trust, Telecommunications Trust, Total Return Trust, Total Stock Market Index Trust, U.S. Government Securities Trust, U.S. Large Cap Trust, Utilities Trust, Value Trust and 500 Index Trust Sub-Accounts) of The Manufacturers Life Insurance Company (U.S.A.) as of December 31, 2003, and the related statements of operations and changes in contract owners' equity for each of the two years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits 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, 2003, by correspondence with the custodians and/or investment advisors. An audit also includes assessing the accounting principles used and 1 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the sub-accounts of The Manufacturers Life Insurance Company (U.S.A.) Separate Account N at December 31, 2003, and the results of their operations and the changes in their contract owners' equity for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP March 26, 2004 2 The Manufacturers Life Insurance Company (U.S.A.)Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statement of Assets and Contract Owners' Equity December 31, 2003 ASSETS Investments at fair value: Sub-Accounts: Aggressive Growth Trust - 374,560 shares (cost $4,136,203) $ 4,974,158 All Cap Core Trust - 338,945 shares (cost $3,994343) 4,650,328 All Cap Growth Trust - 569,340 shares (cost $7,061,045) 8,204,194 All Cap Value Trust - 41,410 shares (cost $464,295) 520,935 American Blue Chip Income & Growth Trust - 13,284 shares (cost $187,604) 205,368 American Growth Trust - 95,375 shares (cost $1,395,408) 1,470,676 American Growth-Income Trust - 3,150 shares (cost $44,758) 48,990 American International Trust - 7,133 shares (cost $102,466) 118,979 Balanced Trust - 1,781,105 shares (cost $30,013,605) 22,530,978 Blue Chip Growth Trust - 2,249,266 shares (cost $30,197,602) 34,818,639 Capital Appreciation Trust - 154,342 shares (cost $1,088,854) 1,240,907 Diversified Bond Trust - 722,666 shares (cost $7,735,058) 7,848,156 Dynamic Growth Trust - 566,771 shares (cost $2,155,705) 2,493,791 Emerging Growth Trust - 14,183 shares (cost $222,240) 223,380 Emerging Small Company Trust - 1,978,380 shares (cost $49,253,929) 51,002,629 Equity-Income Trust - 1,793,773 shares (cost $23,515,755) 27,301,230 Equity Index Trust - 1,883,971 shares (cost $22,942,500) 25,622,009 Financial Services Trust - 31,578 shares (cost $325,538) 401,985 Fundamental Value Trust - 92,782 shares (cost $1,019,138) 1,179,257 Global Allocation Trust - 3,701 shares (cost $29,969) 35,900 Global Bond Trust - 225,763 shares (cost $3,198,007) 3,463,203 Global Equity Trust - 237,981 shares (cost $2,718,583) 3,119,936 Growth & Income Trust - 840,307 shares (cost $16,855,412) 18,310,286 Health Sciences Trust - 193,442 shares (cost $2,265,256) 2,590,184 High Yield Trust - 1,003,972 shares (cost $9,049,365) 9,989,519 Income & Value Trust - 714,773 shares (cost $6,589,263) 7,397,904 International Index Trust - 140,466 shares (cost $1,137,127) 1,275,430 International Small Cap Trust - 233,822 shares (cost $2,615,094) 3,409,121 International Stock Trust - 1,295,049 shares (cost $10,966,227) 12,549,025 International Value Trust - 468,801 shares (cost $4,841,232) 5,780,317 Internet Technologies Trust - Investment Quality Bond Trust - 1,761,635 shares (cost $21,163,954) 22,161,364 Large Cap Growth Trust - 751,020 shares (cost $6,213,493) 7,142,200 Large Cap Value Trust - 84,479 shares (cost $1,274,803) 1,322,947 Lifestyle Aggressive 1000 Trust - 94,994 shares (cost $994,434) 1,038,282 Lifestyle Balanced 640 Trust - 1,110,113 shares (cost $12,176,197) 13,798,701 Lifestyle Conservative 280 Trust - 368,444 shares (cost $4,697,248) 5,025,582 Lifestyle Growth 820 Trust - 242,428 shares (cost $2,473,999) 2,875,199 Lifestyle Moderate 460 Trust - 142,239 shares (cost $1,661,414) 1,819,243 Mid Cap Core Trust - 3,025 shares (cost $41,939) 46,343 Mid Cap Growth Trust - Mid Cap Index Trust - 256,173 shares (cost $3,231,470) 3,729,877 Mid Cap Opportunities Trust - Mid Cap Stock Trust - 435,531 shares (cost $4,577,830) 5,169,749 Mid Cap Value Trust - 441,907 shares (cost $5,353,956) 6,473,940
3 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statement of Assets and Contract Owners' Equity (continued) December 31, 2003 ASSETS (CONTINUED) Investments at fair value: Sub-Accounts: Money Market Trust - 3,888,898 shares (cost $38,888,983) $ 38,888,983 Natural Resources Trust - 62,087 shares (cost $920,504) 1,117,564 Overseas Trust - 524,212 shares (cost $3,927,622) 5,016,704 Pacific Rim Emerging Markets Trust - 520,873 shares (cost $3,626,768) 4,250,322 Quantitative Equity Trust - 1,367,033 shares (cost $28,504,058) 20,778,897 Quantitative Mid Cap Trust - 14,200 shares (cost $139,290) 155,204 Real Estate Securities Trust - 1,167,599 shares (cost $18,678,058) 24,344,448 Real Return Bond Trust - 5,848 shares (cost $74,062) 76,663 Science & Technology Trust - 2,288,239 shares (cost $21,174,003) 26,154,570 Small Cap Index Trust - 168,679 shares (cost $1,934,813) 2,159,093 Small Cap Opportunities Trust - 28,059 shares (cost $436,924) 491,037 Small Company Blend Trust - 292,307 shares (cost $2,722,796) 3,332,298 Small Company Value Trust - 881,260 shares (cost $12,870,976) 15,104,792 Special Value Trust - 10,495 shares (cost $161,095) 166,036 Strategic Bond Trust - 271,096 shares (cost $3,043,443) 3,179,959 Strategic Growth Trust - 151,380 shares (cost $1,301,931) 1,522,884 Strategic Opportunities Trust - 612,205 shares (cost $5,882,354) 5,962,880 Strategic Value Trust - 232,369 shares (cost $2,139,462) 2,330,657 Telecommunications Trust - Total Return Trust - 2,719,443 shares (cost $38,224,336) 38,643,292 Total Stock Market Index Trust - 373,450 shares (cost $3,314,966) 3,719,559 U.S. Government Securities Trust - 634,394 shares (cost $8,845,706) 8,887,862 U.S. Large Cap Trust - 283,980 shares (cost $3,008,410) 3,646,301 Utilities Trust - 12,879 shares (cost $109,793) 121,451 Value Trust - 743,110 shares (cost $10,952,653) 12,699,749 500 Index Trust - 578,703 shares (cost $4,885,887) 5,572,911 ------------ Total assets $561,704,957 ============ CONTRACT OWNERS' EQUITY Variable life contracts $561,704,957 ============
See accompanying notes. 4 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity
SUB-ACCOUNT --------------------------------------------------------- AGGRESSIVE GROWTH TRUST ALL CAP CORE TRUST --------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------- Income: Dividends $ - $ - $ - $ - Expenses: Mortality and expense risks, and administrative charges 25,747 28,871 28,834 64,870 -------------------------------------------------------- Net investment income (loss) during the year (25,747) (28,871) (28,834) (64,870) Net realized gain (loss) during the year (526,951) (1,664,016) (93,111) (6,731,408) Unrealized appreciation (depreciation) during the year 1,839,047 214,207 1,436,253 3,571,088 -------------------------------------------------------- Net increase (decrease) in assets from operations 1,286,349 (1,478,680) 1,314,308 (3,225,190) -------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 557,429 1,207,013 876,646 2,354,742 Transfer on terminations (965,558) (510,678) (1,891,000) (3,646,598) Transfer on policy loans (1,649) 3,955 28,365 (4,349) Net interfund transfers 34,722 (272,342) (1,573,393) (2,083,382) -------------------------------------------------------- Net increase (decrease) in assets from principal transactions (375,056) 427,948 (2,559,382) (3,379,587) -------------------------------------------------------- Total increase (decrease) in assets 911,293 (1,050,732) (1,245,074) (6,604,777) Assets beginning of year 4,062,865 5,113,597 5,895,402 12,500,179 -------------------------------------------------------- Assets end of year $ 4,974,158 $ 4,062,865 $ 4,650,328 $ 5,895,402 ========================================================
+ Reflects the period from commencement of operations July 9, 2003 through December 31, 2031. See accompanying notes. 5
SUB-ACCOUNT - -------------------------------------------------------------------------------------------------- AMERICAN BLUE CHIP AMERICAN ALL CAP GROWTH TRUST ALL CAP VALUE TRUST INCOME & GROWTH TRUST GROWTH TRUST - -------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03+ DEC. 31/03+ - -------------------------------------------------------------------------------------------------- $ - $ - $ 95 $ 16 $ - $ - 48,145 55,234 1,489 1,958 348 1,636 - ------------------------------------------------------------------------------------------------- (48,145) (55,234) (1,394) (1,942) (348) (1,636) (437,237) (3,124,652) 2,247 (172,228) 296 508 2,518,315 737,522 69,288 (13,876) 17,763 75,267 - ------------------------------------------------------------------------------------------------- 2,032,933 (2,442,364) 70,141 (188,046) 17,711 74,139 - ------------------------------------------------------------------------------------------------- 1,985,180 2,768,555 55,795 56,066 1,770 3,565 (2,983,291) (647,438) (15,953) (24,168) (2,842) (12,488) (9,110) 18,492 - 5 - - (607,373) (2,096,063) 233,043 319,059 188,729 1,405,460 - ------------------------------------------------------------------------------------------------- (1,614,594) 43,546 272,885 350,962 187,657 1,396,537 - ------------------------------------------------------------------------------------------------- 418,339 (2,398,818) 343,026 162,916 205,368 1,470,676 7,785,855 10,184,673 177,909 14,993 - - - ------------------------------------------------------------------------------------------------- $ 8,204,194 $ 7,785,855 $ 520,935 $ 177,909 $ 205,368 $ 1,470,676 =================================================================================================
6 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT -------------------------------------------------------------------- AMERICAN GROWTH- AMERICAN INCOME TRUST INTERNATIONAL TRUST BALANCED TRUST -------------------------------------------------------------------- PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DEC. 31/03+ DEC. 31/03+ DEC. 31/03 DEC. 31/02 -------------------------------------------------------------------- Income: Dividends $ - $ - $ 581,430 $ 678,287 Expenses: Mortality and expense risks, and administrative charges 88 243 148,268 170,699 ------------------------------------------------------------------- Net investment income (loss) during the year (88) (243) 433,162 507,588 Net realized gain (loss) during the year 90 772 (1,679,793) (2,224,955) Unrealized appreciation (depreciation) during the year 4,232 16,512 4,153,530 (2,783,896) ------------------------------------------------------------------- Net increase (decrease) in assets from operations 4,234 17,041 2,906,899 (4,501,263) ------------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 2,153 1,908 1,927,224 2,423,879 Transfer on terminations (1,298) (2,216) (4,389,247) (3,804,484) Transfer on policy loans - - 79,372 49,424 Net interfund transfers 43,901 102,246 (1,881,128) (1,868,929) ------------------------------------------------------------------- Net increase (decrease) in assets from principal transactions 44,756 101,938 (4,263,779) (3,200,110) ------------------------------------------------------------------- Total increase (decrease) in assets 48,990 118,979 (1,356,880) (7,701,373) Assets beginning of year - - 23,887,858 31,589,231 ------------------------------------------------------------------- Assets end of year $ 48,990 $ 118,979 $22,530,978 $23,887,858 ===================================================================
+ Reflects the period from commencement of operations July 9, 2003 through December 31, 2003. See accompanying notes. 7
SUB-ACCOUNT - --------------------------------------------------------------------------------------- CAPITAL APPRECIATION BLUE CHIP GROWTH TRUST TRUST DIVERSIFIED BOND TRUST - --------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - --------------------------------------------------------------------------------------- $ 12,366 $ - $ - $ - $ 435,668 $ 249,195 151,369 183,958 3,538 706 49,468 42,734 - -------------------------------------------------------------------------------------- (139,003) (183,958) (3,538) (706) 386,200 206,461 (2,760,298) (9,388,541) 3,419 (4,975) 80,327 222,194 9,996,426 213,538 169,019 (19,395) (129,077) 81,989 - -------------------------------------------------------------------------------------- 7,097,125 (9,358,961) 168,900 (25,076) 337,450 510,644 - -------------------------------------------------------------------------------------- 3,739,819 7,492,061 121,616 54,267 1,329,104 2,533,053 (7,571,724) (3,576,428) (29,055) (32,923) (2,075,985) (627,373) 9,348 (17,908) - - (7,653) 55,492 5,173,107 (4,371,715) 787,108 159,150 487,589 (2,049,104) - -------------------------------------------------------------------------------------- 1,350,550 (473,990) 879,669 180,494 (266,945) (87,932) - -------------------------------------------------------------------------------------- 8,447,675 (9,832,951) 1,048,569 155,418 70,505 422,712 26,370,964 36,203,915 192,338 36,920 7,777,651 7,354,939 - -------------------------------------------------------------------------------------- $34,818,639 $26,370,964 $ 1,240,907 $ 192,338 $ 7,848,156 $ 7,777,651 ======================================================================================
8 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT -------------------------------------------- EMERGING DYNAMIC GROWTH TRUST GROWTH TRUST -------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03** -------------------------------------------- Income: Dividends $ - $ - $ 8,360 Expenses: Mortality and expense risks, and administrative charges 8,596 3,166 291 ------------------------------------------- Net investment income (loss) during the year (8,596) (3,166) 8,069 Net realized gain (loss) during the year (197) (106,789) 1,219 Unrealized appreciation (depreciation) during the year 469,750 (53,238) 1,140 ------------------------------------------- Net increase (decrease) in assets from operations 460,957 (163,193) 10,428 ------------------------------------------- Changes from principal transactions: Transfer of net premiums 371,454 499,507 4,752 Transfer on terminations (174,319) (52,528) 5,351 Transfer on policy loans (1,041) - - Net interfund transfers 1,105,918 (36,577) 202,849 ------------------------------------------- Net increase (decrease) in assets from principal transactions 1,302,012 410,402 212,952 ------------------------------------------- Total increase (decrease) in assets 1,762,969 247,209 223,380 Assets beginning of year 730,822 483,613 - ------------------------------------------- Assets end of year $ 2,493,791 $ 730,822 $ 223,380 ===========================================
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. See accompanying notes. 9
SUB-ACCOUNT - ---------------------------------------------------------------------------------------- EMERGING SMALL COMPANY TRUST EQUITY-INCOME TRUST EQUITY INDEX TRUST - ---------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - ---------------------------------------------------------------------------------------- $ - $ - $ 779,423 $ 744,284 $ 336,279 $ 371,813 273,350 311,872 120,550 113,406 121,262 189,467 - --------------------------------------------------------------------------------------- (273,350) (311,872) 658,873 630,878 215,017 182,346 802,928 (6,176,749) (625,000) (2,099,182) (1,465,131) (10,424,478) 14,562,578 (12,427,368) 5,411,380 (1,523,652) 6,639,431 1,544,538 - --------------------------------------------------------------------------------------- 15,092,156 (18,915,989) 5,445,253 (2,991,956) 5,389,317 (8,697,594) - --------------------------------------------------------------------------------------- 4,191,176 6,367,471 4,308,031 7,590,330 2,875,947 6,980,060 (9,511,719) (5,822,561) (6,435,587) (1,311,749) (6,980,588) (8,575,281) 111,566 95,571 (30,575) (220) 60,198 (77,091) (622,011) (3,121,754) 3,087,048 2,450,937 824,166 (4,243,587) - --------------------------------------------------------------------------------------- (5,830,988) (2,481,273) 928,917 8,729,298 (3,220,277) (5,915,899) - --------------------------------------------------------------------------------------- 9,261,168 (21,397,262) 6,374,170 5,737,342 2,169,040 (14,613,493) 41,741,461 63,138,723 20,927,060 15,189,718 23,452,969 38,066,462 - --------------------------------------------------------------------------------------- $51,002,629 $ 41,741,461 $27,301,230 $20,927,060 $25,622,009 $ 23,452,969 =======================================================================================
10 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------- FINANCIAL SERVICES TRUST FUNDAMENTAL VALUE TRUST --------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------- Income: Dividends $ 572 $ 6 $ 1,327 $ 260 Expenses: Mortality and expense risks, and administrative charges 1,762 1,557 4,461 1,887 -------------------------------------------------------- Net investment income (loss) during the year (1,190) (1,551) (3,134) (1,627) Net realized gain (loss) during the year (16,607) (20,045) 49,568 (27,777) Unrealized appreciation (depreciation) during the year 114,156 (35,457) 192,135 (29,958) -------------------------------------------------------- Net increase (decrease) in assets from operations 96,359 (57,053) 238,569 (59,362) -------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 79,561 223,441 120,955 61,627 Transfer on terminations (30,566) (25,047) (59,219) (36,387) Transfer on policy loans - - - - Net interfund transfers (56,477) 74,733 556,446 107,412 -------------------------------------------------------- Net increase (decrease) in assets from principal transactions (7,482) 273,127 618,182 132,652 -------------------------------------------------------- Total increase (decrease) in assets 88,877 216,074 856,751 73,290 Assets beginning of year 313,108 97,034 322,506 249,216 -------------------------------------------------------- Assets end of year $ 401,985 $ 313,108 $ 1,179,257 $ 322,506 ========================================================
See accompanying notes. 11
SUB-ACCOUNT - --------------------------------------------------------------------------------------- GLOBAL ALLOCATION TRUST GLOBAL BOND TRUST GLOBAL EQUITY TRUST - --------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - --------------------------------------------------------------------------------------- $ 149 $ - $ 189,031 $ - $ 38,256 $ 38,442 202 289 25,555 12,136 19,136 21,042 - -------------------------------------------------------------------------------------- (53) (289) 163,476 (12,136) 19,120 17,400 (713) (6,441) 399,426 70,654 (71,996) (811,261) 8,658 (2,859) (7,054) 286,712 799,499 120,925 - -------------------------------------------------------------------------------------- 7,892 (9,589) 555,848 345,230 746,623 (672,936) - -------------------------------------------------------------------------------------- 2,138 13,436 1,084,114 807,768 401,570 606,340 (1,015) (803) (1,279,409) (252,901) (1,328,917) (472,610) - - (6,830) 1,696 (215) (7,010) 1,607 (60,375) (1,487,323) 2,145,214 134,153 572,071 - -------------------------------------------------------------------------------------- 2,730 (47,742) (1,689,448) 2,701,777 (793,409) 698,791 - -------------------------------------------------------------------------------------- 10,622 (57,331) (1,133,600) 3,047,007 (46,786) 25,855 25,278 82,609 4,596,803 1,549,796 3,166,722 3,140,867 - -------------------------------------------------------------------------------------- $ 35,900 $ 25,278 $ 3,463,203 $ 4,596,803 $ 3,119,936 $ 3,166,722 ======================================================================================
12 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------- GROWTH & INCOME TRUST HEALTH SCIENCES TRUST --------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------- Income: Dividends $ 193,949 $ 1,028,738 $ - $ 2,415 Expenses: Mortality and expense risks, and administrative charges 107,660 137,184 11,505 7,061 -------------------------------------------------------- Net investment income (loss) during the year 86,289 891,554 (11,505) (4,646) Net realized gain (loss) during the year (2,026,989) (7,049,905) 207,104 (182,572) Unrealized appreciation (depreciation) during the year 6,243,806 (847,978) 447,695 (132,224) -------------------------------------------------------- Net increase (decrease) in assets from operations 4,303,106 (7,006,329) 643,294 (319,442) -------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 2,633,281 4,512,350 528,036 1,049,495 Transfer on terminations (4,336,102) (2,329,861) (622,518) (106,860) Transfer on policy loans 41,199 (28,242) (982) (259) Net interfund transfers (3,490,042) (2,815,585) 231,362 1,037,101 -------------------------------------------------------- Net increase (decrease) in assets from principal transactions (5,151,664) (661,338) 135,898 1,979,477 -------------------------------------------------------- Total increase (decrease) in assets (848,558) (7,667,667) 779,192 1,660,035 Assets beginning of year 19,158,844 26,826,511 1,810,992 150,957 -------------------------------------------------------- Assets end of year $18,310,286 $19,158,844 $ 2,590,184 $ 1,810,992 ========================================================
See accompanying notes. 13
SUB-ACCOUNT - --------------------------------------------------------------------------------------- INTERNATIONAL INDEX HIGH YIELD TRUST INCOME & VALUE TRUST TRUST - --------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - --------------------------------------------------------------------------------------- $ 398,871 $ 454,868 $ 138,418 $ 219,396 $ 16,517 $ 4,466 46,685 35,273 39,969 62,860 3,874 1,485 - -------------------------------------------------------------------------------------- 352,186 419,595 98,449 156,536 12,643 2,981 48,670 (1,052,040) 226,936 (1,542,364) 33,575 (34,231) 1,283,048 176,472 1,318,770 (601,218) 179,741 (13,390) - -------------------------------------------------------------------------------------- 1,683,904 (455,973) 1,644,155 (1,987,046) 225,959 (44,640) - -------------------------------------------------------------------------------------- 1,773,559 1,650,874 1,057,600 3,098,473 144,241 137,008 (1,323,960) (492,798) (2,109,506) (3,509,025) (23,061) (15,148) (7,894) 12,785 44,380 3,432 (12,972) - 1,652,035 517,035 (736,594) 34,669 620,260 46,665 - -------------------------------------------------------------------------------------- 2,093,740 1,687,896 (1,744,120) (372,451) 728,468 168,525 - -------------------------------------------------------------------------------------- 3,777,644 1,231,923 (99,965) (2,359,497) 954,427 123,885 6,211,875 4,979,952 7,497,869 9,857,366 321,003 197,118 - -------------------------------------------------------------------------------------- $ 9,989,519 $ 6,211,875 $ 7,397,904 $ 7,497,869 $ 1,275,430 $ 321,003 ======================================================================================
14 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------- INTERNATIONAL SMALL INTERNATIONAL STOCK CAP TRUST TRUST --------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------- Income: Dividends $ - $ - $ 53,315 $ 55,435 Expenses: Mortality and expense risks, and administrative charges 16,757 18,450 56,500 68,013 -------------------------------------------------------- Net investment income (loss) during the year (16,757) (18,450) (3,185) (12,578) Net realized gain (loss) during the year (45,297) (722,338) (1,563,858) (3,341,684) Unrealized appreciation (depreciation) during the year 1,284,540 152,835 4,523,874 166,750 -------------------------------------------------------- Net increase (decrease) in assets from operations 1,222,486 (587,953) 2,956,831 (3,187,512) -------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 239,758 541,008 1,231,742 2,898,360 Transfer on terminations (911,199) (310,511) (1,761,081) (832,787) Transfer on policy loans (2,578) 5,421 25,019 1,836 Net interfund transfers (32,392) 889,216 (1,223,310) (351,685) -------------------------------------------------------- Net increase (decrease) in assets from principal transactions (706,411) 1,125,134 (1,727,630) 1,715,724 -------------------------------------------------------- Total increase (decrease) in assets 516,075 537,181 1,229,201 (1,471,788) Assets beginning of year 2,893,046 2,355,865 11,319,824 12,791,612 -------------------------------------------------------- Assets end of year $ 3,409,121 $ 2,893,046 $12,549,025 $11,319,824 ========================================================
**** Terminated as an investment option and funds transferred to Science and Technology Trust on May 2, 2003. See accompanying notes. 15
SUB-ACCOUNT - ----------------------------------------------------------------------------------------- INTERNATIONAL VALUE INTERNET INVESTMENT QUALITY TRUST TECHNOLOGIES TRUST BOND TRUST - ----------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03**** DEC. 31/02 DEC. 31/03 DEC. 31/02 - ----------------------------------------------------------------------------------------- $ 20,561 $ 22,818 $ - $ - $ 1,391,377 $ 1,189,894 16,662 20,104 128 315 162,838 151,595 - ---------------------------------------------------------------------------------------- 3,899 2,714 (128) (315) 1,228,539 1,038,299 17,750 (697,533) 5,519 (51,726) 838,741 72,540 1,138,503 (14,848) 3,653 25,602 (290,689) 992,983 - ---------------------------------------------------------------------------------------- 1,160,152 (709,667) 9,044 (26,439) 1,776,591 2,103,822 - ---------------------------------------------------------------------------------------- 718,723 1,114,602 107,810 118,822 6,198,183 4,364,619 (855,609) (1,555,222) (1,028) (6,040) (8,156,887) (2,663,866) (765) (20) - 1,049 15,717 10,079 2,779,470 973,870 (192,829) (132,171) (4,115,386) 1,994,557 - ---------------------------------------------------------------------------------------- 2,641,819 533,230 (86,047) (18,340) (6,058,373) 3,705,389 - ---------------------------------------------------------------------------------------- 3,801,971 (176,437) (77,003) (44,779) (4,281,782) 5,809,211 1,978,346 2,154,783 77,003 121,782 26,443,146 20,633,935 - ---------------------------------------------------------------------------------------- $ 5,780,317 $ 1,978,346 $ - $ 77,003 $22,161,364 $26,443,146 ========================================================================================
16 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT ------------------------------------------- LARGE CAP LARGE CAP GROWTH TRUST VALUE TRUST ------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03** ------------------------------------------- Income: Dividends $ 18,064 $ 23,587 $ 24,547 Expenses: Mortality and expense risks, and administrative charges 37,618 45,926 1,405 ------------------------------------------ Net investment income (loss) during the year (19,554) (22,339) 23,142 Net realized gain (loss) during the year (1,139,465) (1,934,884) 395 Unrealized appreciation (depreciation) during the year 2,498,052 61,333 48,144 ------------------------------------------ Net increase (decrease) in assets from operations 1,339,033 (1,895,890) 71,681 ------------------------------------------ Changes from principal transactions: Transfer of net premiums 1,449,084 2,370,098 390 Transfer on terminations (3,534,941) (921,243) (10,124) Transfer on policy loans 27,272 (437) - Net interfund transfers 220,780 664,560 1,261,000 ------------------------------------------ Net increase (decrease) in assets from principal transactions (1,837,805) 2,112,978 1,251,266 ------------------------------------------ Total increase (decrease) in assets (498,772) 217,088 1,322,947 Assets beginning of year 7,640,972 7,423,884 - ------------------------------------------ Assets end of year $ 7,142,200 $ 7,640,972 $ 1,322,947 ==========================================
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. See accompanying notes. 17
SUB-ACCOUNT - --------------------------------------------------------------------------------------- LIFESTYLE AGGRESSIVE LIFESTYLE BALANCED LIFESTYLE CONSERVATIVE 1000 TRUST 640 TRUST 280 TRUST - --------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - --------------------------------------------------------------------------------------- $ 1,995 $ 4,221 $ 242,423 $ 280,497 $ 158,079 $ 108,604 3,580 3,392 63,840 49,187 27,789 21,180 - -------------------------------------------------------------------------------------- (1,585) 829 178,583 231,310 130,290 87,424 (34,549) (62,261) (14,109) (946,532) 27,293 11,291 221,495 (63,148) 2,159,197 (227,333) 307,943 (59,576) - -------------------------------------------------------------------------------------- 185,361 (124,580) 2,323,671 (942,555) 465,526 39,139 - -------------------------------------------------------------------------------------- 128,629 88,072 2,186,718 3,865,016 954,051 1,034,779 (46,619) (150,305) (678,814) (1,160,404) (265,373) (129,036) 2,445 31,277 2,666 3,754 - - 356,308 (76,511) 2,161,820 (21,995) 472,902 (1,294,598) - -------------------------------------------------------------------------------------- 440,763 (107,467) 3,672,390 2,686,371 1,161,580 (388,855) - -------------------------------------------------------------------------------------- 626,124 (232,047) 5,996,061 1,743,816 1,627,106 (349,716) 412,158 644,205 7,802,640 6,058,824 3,398,476 3,748,192 - -------------------------------------------------------------------------------------- $ 1,038,282 $ 412,158 $13,798,701 $ 7,802,640 $ 5,025,582 $ 3,398,476 ======================================================================================
18 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT -------------------------------------------------------------------------------- LIFESTYLE GROWTH LIFESTYLE MODERATE 820 TRUST 460 TRUST -------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 -------------------------------------------------------------------------------- Income: Dividends $ 20,359 $ 26,053 $ 35,860 $ 23,371 Expenses: Mortality and expense risks, and administrative charges 11,977 8,239 7,817 5,008 -------------------------------------------------------------------------------- Net investment income (loss) during the year 8,382 17,814 28,043 18,363 Net realized gain (loss) during the year (96,705) (220,936) 1,738 (28,444) Unrealized appreciation (depreciation) during the year 622,363 (23,337) 189,081 (33,999) -------------------------------------------------------------------------------- Net increase (decrease) in assets from operations 534,040 (226,459) 218,862 (44,080) -------------------------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 452,200 547,960 589,804 276,698 Transfer on terminations (113,989) (291,399) (115,931) (71,999) Transfer on policy loans 40,089 13,567 (1,521) (13,705) Net interfund transfers 789,189 (186,119) 223,584 (59,576) -------------------------------------------------------------------------------- Net increase (decrease) in assets from principal transactions 1,167,489 84,009 695,936 131,418 -------------------------------------------------------------------------------- Total increase (decrease) in assets 1,701,529 (142,450) 914,798 87,338 Assets beginning of year 1,173,670 1,316,120 904,445 817,107 -------------------------------------------------------------------------------- Assets end of year $ 2,875,199 $ 1,173,670 $ 1,819,243 $ 904,445 ================================================================================
(#) Terminated as an investment option and funds transferred to Dynamic Growth Trust on May 2, 2003. ** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. See accompanying notes. 19
SUB-ACCOUNT - --------------------------------------------------------------------------------------------------------------------------- MID CAP MID CAP CORE TRUST MID CAP GROWTH TRUST MID CAP INDEX TRUST OPPORTUNITIES TRUST - --------------------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03** DEC. 31/03# DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03# DEC. 31/02 - --------------------------------------------------------------------------------------------------------------------------- $ - $ - $ - $ - $ 8,488 $ - $ - 170 888 1,793 12,594 8,024 131 416 - --------------------------------------------------------------------------------------------------------------------------- (170) (888) (1,793) (12,594) 464 (131) (416) 2,138 16,629 (76,540) 31,790 (40,168) 2,820 (24,724) 4,404 30,881 (31,829) 654,807 (229,866) 2,954 (3,485) - --------------------------------------------------------------------------------------------------------------------------- 6,372 46,622 (110,162) 674,003 (269,570) 5,643 (28,625) - --------------------------------------------------------------------------------------------------------------------------- 1,648 87,818 288,488 497,096 512,495 19,401 89,702 (2,022) (9,500) (77,570) (734,782) (110,075) (936) (16,907) - - - (10,100) - - - 40,345 (469,770) 59,925 1,643,681 474,315 (96,089) 21,866 - --------------------------------------------------------------------------------------------------------------------------- 39,971 (391,452) 270,843 1,395,895 876,735 (77,624) 94,661 - --------------------------------------------------------------------------------------------------------------------------- 46,343 (344,830) 160,681 2,069,898 607,165 (71,981) 66,036 - 344,830 184,149 1,659,979 1,052,814 71,981 5,945 - --------------------------------------------------------------------------------------------------------------------------- $ 46,343 $ - $ 344,830 $ 3,729,877 $ 1,659,979 $ - $ 71,981 ===========================================================================================================================
20 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT ------------------------------------------------------------------------ MID CAP STOCK TRUST MID CAP VALUE TRUST ------------------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 ------------------------------------------------------------------------ Income: Dividends $ - $ - $ 17,250 $ - Expenses: Mortality and expense risks, and administrative charges 14,068 9,437 25,353 13,109 ------------------------------------------------------------------------ Net investment income (loss) during the year (14,068) (9,437) (8,103) (13,109) Net realized gain (loss) during the year 116,139 (251,143) 75,045 (149,405) Unrealized appreciation (depreciation) during the year 754,718 (198,793) 1,106,386 8,882 ------------------------------------------------------------------------ Net increase (decrease) in assets from operations 856,789 (459,373) 1,173,328 (153,632) ------------------------------------------------------------------------ Changes from principal transactions: Transfer of net premiums 389,218 307,634 1,102,546 1,152,185 Transfer on terminations (765,037) (83,558) (851,098) (167,360) Transfer on policy loans (37) 119 (29,157) (10,493) Net interfund transfers 3,402,231 758,879 685,344 3,438,225 ------------------------------------------------------------------------ Net increase (decrease) in assets from principal transactions 3,026,375 983,074 907,635 4,412,557 ------------------------------------------------------------------------ Total increase (decrease) in assets 3,883,164 523,701 2,080,963 4,258,925 Assets beginning of year 1,286,585 762,884 4,392,977 134,052 ------------------------------------------------------------------------ Assets end of year $ 5,169,749 $ 1,286,585 $ 6,473,940 $ 4,392,977 ========================================================================
** Reflects the year from commencement of operations May 5, 2003 through December 31, 2003. See accompanying notes. 21
SUB-ACCOUNT - ------------------------------------------------------------------------------------------------------ NATURAL MONEY MARKET TRUST RESOURCES TRUST OVERSEAS TRUST - ------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03** DEC. 31/03 DEC. 31/02 - ------------------------------------------------------------------------------------------------------ $ 240,857 $ 478,919 $ - $ 17,518 $ 18,535 228,002 244,823 1,513 22,247 21,169 - ------------------------------------------------------------------------------------------------------ 12,855 234,096 (1,513) (4,729) (2,634) - - 10,994 (456,686) (593,630) - - 197,060 1,925,765 (256,938) - ------------------------------------------------------------------------------------------------------ 12,855 234,096 206,541 1,464,350 (853,202) - ------------------------------------------------------------------------------------------------------ 20,256,826 22,781,307 16,460 553,899 693,934 (11,945,035) (10,895,655) (4,618) (824,866) (419,532) 14,487 12,877 - (7,849) (3,037) (10,912,070) (11,488,598) 899,181 137,349 1,218,009 - ------------------------------------------------------------------------------------------------------ (2,585,792) 409,931 911,023 (141,467) 1,489,374 - ------------------------------------------------------------------------------------------------------ (2,572,937) 644,027 1,117,564 1,322,883 636,172 41,461,920 40,817,893 - 3,693,821 3,057,649 - ------------------------------------------------------------------------------------------------------ $ 38,888,983 $ 41,461,920 $ 1,117,564 $ 5,016,704 $ 3,693,821 ======================================================================================================
22 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------------------------------- PACIFIC RIM EMERGING MARKETS TRUST QUANTITATIVE EQUITY TRUST --------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------------------------------- Income: Dividends $ 6,609 $ 4,494 $ 138,084 $ 74,512 Expenses: Mortality and expense risks, and administrative charges 21,704 23,632 129,789 162,736 --------------------------------------------------------------------------------- Net investment income (loss) during the year (15,095) (19,138) 8,295 (88,224) Net realized gain (loss) during the year (285,724) (265,493) (3,570,094) (3,576,298) Unrealized appreciation (depreciation) during the year 1,533,102 (137,063) 7,685,455 (5,091,616) --------------------------------------------------------------------------------- Net increase (decrease) in assets from operations 1,232,283 (421,694) 4,123,656 (8,756,138) --------------------------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 430,123 480,888 1,475,657 2,985,924 Transfer on terminations (898,326) (289,805) (4,819,925) (3,418,966) Transfer on policy loans (18,354) 9,969 172,419 75,703 Net interfund transfers 403,612 (677,715) (1,362,746) (2,828,796) --------------------------------------------------------------------------------- Net increase (decrease) in assets from principal transactions (82,945) (476,663) (4,534,595) (3,186,135) --------------------------------------------------------------------------------- Total increase (decrease) in assets 1,149,338 (898,357) (410,939) (11,942,273) Assets beginning of year 3,100,984 3,999,341 21,189,836 33,132,109 --------------------------------------------------------------------------------- Assets end of year $ 4,250,322 $ 3,100,984 $ 20,778,897 $ 21,189,836 =================================================================================
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. ++ Fund available in prior year but no activity. See accompanying notes. 23
SUB-ACCOUNT - ---------------------------------------------------------------------------------------------------------------------------- REAL ESTATE SECURITIES REAL RETURN SCIENCE & TECHNOLOGY QUANTITATIVE MID CAP TRUST TRUST BOND TRUST TRUST - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02++ DEC. 31/03 DEC. 31/02 DEC. 31/03** DEC. 31/03 DEC. 31/02 - ---------------------------------------------------------------------------------------------------------------------------- $ - $ - $ 661,957 $ 679,289 $ - $ - $ - 325 26 131,925 133,904 997 113,576 136,758 - ---------------------------------------------------------------------------------------------------------------------------- (325) (26) 530,032 545,385 (997) (113,576) (136,758) 68 (758) 449,817 (121,083) (74,490) (4,679,165) (19,749,962) 16,509 (594) 6,210,400 (209,085) 2,601 13,048,189 6,519,479 - ---------------------------------------------------------------------------------------------------------------------------- 16,252 (1,378) 7,190,249 215,217 (72,886) 8,255,448 (13,367,241) - ---------------------------------------------------------------------------------------------------------------------------- 14,374 52,760 2,228,246 3,435,990 54,956 3,182,954 6,795,417 (1,168) (1,578) (6,199,060) (2,011,866) (4,703) (6,903,537) (2,368,085) - - 52,040 3,151 - 16,197 39,657 117,607 (41,665) (1,275,479) 896,742 99,296 2,750,132 (1,937,102) - ---------------------------------------------------------------------------------------------------------------------------- 130,813 9,517 (5,194,253) 2,324,017 149,549 (954,254) 2,529,887 - ---------------------------------------------------------------------------------------------------------------------------- 147,065 8,139 1,995,996 2,539,234 76,663 7,301,194 (10,837,354) 8,139 - 22,348,452 19,809,218 - 18,853,376 29,690,730 - ---------------------------------------------------------------------------------------------------------------------------- $ 155,204 $ 8,139 $ 24,344,448 $ 22,348,452 $ 76,663 $ 26,154,570 $ 18,853,376 ============================================================================================================================
24 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------------- SMALL CAP SMALL CAP INDEX TRUST OPPORTUNITIES TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03** --------------------------------------------------------------- Income: Dividends $ - $ 18,236 $ - Expenses: Mortality and expense risks, and administrative charges 11,128 9,980 562 --------------------------------------------------------------- Net investment income (loss) during the year (11,128) 8,256 (562) Net realized gain (loss) during the year 262,856 (253,157) 2,490 Unrealized appreciation (depreciation) during the year 530,917 (309,835) 54,113 --------------------------------------------------------------- Net increase (decrease) in assets from operations 782,645 (554,736) 56,041 --------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 280,924 972,195 38 Transfer on terminations (807,915) (99,704) (2,168) Transfer on policy loans (10,257) (321) - Net interfund transfers (171,607) 1,080,755 437,126 --------------------------------------------------------------- Net increase (decrease) in assets from principal transactions (708,855) 1,952,925 434,996 --------------------------------------------------------------- Total increase (decrease) in assets 73,790 1,398,189 491,037 Assets beginning of year 2,085,303 687,114 - --------------------------------------------------------------- Assets end of year $ 2,159,093 $ 2,085,303 $ 491,037 ===============================================================
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. See accompanying notes. 25
SUB-ACCOUNT - ---------------------------------------------------------------------------------------------------------- SPECIAL SMALL COMPANY BLEND TRUST SMALL COMPANY VALUE TRUST VALUE TRUST - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03** - ---------------------------------------------------------------------------------------------------------- $ - $ 7,812 $ 69,143 $ 52,194 $ - 16,798 24,764 65,205 52,795 120 - ---------------------------------------------------------------------------------------------------------- (16,798) (16,952) 3,938 (601) (120) 93,382 (860,269) 1,063,081 (132,532) 4,496 864,915 (358,919) 2,377,283 (583,193) 4,941 - ---------------------------------------------------------------------------------------------------------- 941,499 (1,236,140) 3,444,302 (716,326) 9,317 - ---------------------------------------------------------------------------------------------------------- 324,985 917,119 2,089,466 2,975,248 3,834 (910,483) (1,520,421) (3,631,767) (594,996) (307) (4,508) (1,109) (24,754) (9,779) - 627,411 1,015,210 1,620,153 4,603,419 153,192 - ---------------------------------------------------------------------------------------------------------- 37,405 410,799 53,098 6,973,892 156,719 - ---------------------------------------------------------------------------------------------------------- 978,904 (825,341) 3,497,400 6,257,566 166,036 2,353,394 3,178,735 11,607,392 5,349,826 - - ---------------------------------------------------------------------------------------------------------- $ 3,332,298 $ 2,353,394 $ 15,104,792 $ 11,607,392 $ 166,036 ==========================================================================================================
26 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT ----------------------------------------------------------------------------------- STRATEGIC BOND TRUST STRATEGIC GROWTH TRUST ----------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 ----------------------------------------------------------------------------------- Income: Dividends $ 241,276 $ 160,273 $ - $ - Expenses: Mortality and expense risks, and administrative charges 21,353 19,528 6,379 4,415 ----------------------------------------------------------------------------------- Net investment income (loss) during the year 219,923 140,745 (6,379) (4,415) Net realized gain (loss) during the year 240,936 (4,480) 71,825 (176,001) Unrealized appreciation (depreciation) during the year (3,352) 105,514 229,165 (51,148) ----------------------------------------------------------------------------------- Net increase (decrease) in assets from operations 457,507 241,779 294,611 (231,564) ----------------------------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 598,512 770,702 361,182 436,601 Transfer on terminations (2,396,508) (225,423) (119,311) (88,086) Transfer on policy loans (3,128) (5,348) (1,286) (363) Net interfund transfers 821,989 64,515 15,171 99,216 ----------------------------------------------------------------------------------- Net increase (decrease) in assets from principal transactions (979,135) 604,446 255,756 447,368 ----------------------------------------------------------------------------------- Total increase (decrease) in assets (521,628) 846,225 550,367 215,804 Assets beginning of year 3,701,587 2,855,362 972,517 756,713 ----------------------------------------------------------------------------------- Assets end of year $ 3,179,959 $ 3,701,587 $ 1,522,884 $ 972,517 ===================================================================================
**** Terminated as an investment option and funds transferred to Science & Technology Trust on May 2, 2003. See accompanying notes. 27
SUB-ACCOUNT - ------------------------------------------------------------------------------------------------------------------------------ STRATEGIC OPPORTUNITIES TRUST STRATEGIC VALUE TRUST TELECOMMUNICATIONS TRUST - ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03**** DEC. 31/02 - ------------------------------------------------------------------------------------------------------------------------------ $ - $ - $ 54 $ - $ - $ - 40,333 61,779 3,453 756 62 253 - ------------------------------------------------------------------------------------------------------------------------------ (40,333) (61,779) (3,399) (756) (62) (253) (1,585,789) (3,587,832) (11,796) (4,590) (3,358) (32,374) 3,153,829 (1,443,404) 222,087 (31,860) 9,013 (5,063) - ------------------------------------------------------------------------------------------------------------------------------ 1,527,707 (5,093,015) 206,892 (37,206) 5,593 (37,690) - ------------------------------------------------------------------------------------------------------------------------------ 838,526 2,448,706 164,886 171,356 1,087 91,948 (2,337,833) (1,942,198) (31,000) (12,320) (1,412) (4,787) 18,630 (29,397) 949 (7,598) - - (1,292,218) 2,017,910 1,722,162 55,798 (101,430) 20,684 - ------------------------------------------------------------------------------------------------------------------------------ (2,772,895) 2,495,021 1,856,997 207,236 (101,755) 107,845 - ------------------------------------------------------------------------------------------------------------------------------ (1,245,188) (2,597,994) 2,063,889 170,030 (96,162) 70,155 7,208,068 9,806,062 266,768 96,738 96,162 26,007 - ------------------------------------------------------------------------------------------------------------------------------ $ 5,962,880 $ 7,208,068 $2,330,657 $ 266,768 $ - $ 96,162 ==============================================================================================================================
28 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT --------------------------------------------------------------------------------- TOTAL STOCK MARKET TOTAL RETURN TRUST INDEX TRUST --------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 --------------------------------------------------------------------------------- Income: Dividends $ 2,532,370 $ 1,306,870 $ - $ 13,726 Expenses: Mortality and expense risks, and administrative charges 201,806 166,163 14,950 20,780 --------------------------------------------------------------------------------- Net investment income (loss) during the year 2,330,564 1,140,707 (14,950) (7,054) Net realized gain (loss) during the year 311,416 886,337 157,008 (648,319) Unrealized appreciation (depreciation) during the year (855,374) 719,028 529,222 (83,988) --------------------------------------------------------------------------------- Net increase (decrease) in assets from operations 1,786,606 2,746,072 671,280 (739,361) --------------------------------------------------------------------------------- Changes from principal transactions: Transfer of net premiums 11,370,011 9,107,182 996,099 1,809,789 Transfer on terminations (4,666,022) (7,198,278) (611,627) (2,479,168) Transfer on policy loans (23,990) 54,941 (108) - Net interfund transfers (6,740,228) 11,451,594 1,266,868 (244,375) --------------------------------------------------------------------------------- Net increase (decrease) in assets from principal transactions (60,229) 13,415,439 1,651,232 (913,754) --------------------------------------------------------------------------------- Total increase (decrease) in assets 1,726,377 16,161,511 2,322,512 (1,653,115) Assets beginning of year 36,916,915 20,755,404 1,397,047 3,050,162 --------------------------------------------------------------------------------- Assets end of year $ 38,643,292 $ 36,916,915 $ 3,719,559 $ 1,397,047 =================================================================================
See accompanying notes. 29
SUB-ACCOUNT - ----------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES TRUST U.S. LARGE CAP TRUST UTILITIES TRUST - ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 - ----------------------------------------------------------------------------------------------------------------------------- $ 592,721 $ 437,328 $ 11,255 $ 10,471 $ 517 $ 2 82,229 78,144 16,490 18,043 549 234 - ----------------------------------------------------------------------------------------------------------------------------- 510,492 359,184 (5,235) (7,572) (32) (232) 32,960 287,465 147 (772,887) 16,180 (16,746) (428,860) 343,462 909,318 (232,201) 10,622 9,738 - ----------------------------------------------------------------------------------------------------------------------------- 114,592 990,111 904,230 (1,012,660) 26,770 (7,240) - ----------------------------------------------------------------------------------------------------------------------------- 5,091,881 5,349,850 508,108 1,093,616 16,960 22,416 (3,643,704) (2,853,962) (741,038) (330,600) (10,969) (2,054) (19,060) 49,573 (10,980) 981 - - (8,718,791) 2,534,710 464,452 (735,013) 60,075 (34,609) - ----------------------------------------------------------------------------------------------------------------------------- (7,289,674) 5,080,171 220,542 28,984 66,066 (14,247) - ----------------------------------------------------------------------------------------------------------------------------- (7,175,082) 6,070,282 1,124,772 (983,676) 92,836 (21,487) 16,062,944 9,992,662 2,521,529 3,505,205 28,615 50,102 - ----------------------------------------------------------------------------------------------------------------------------- $ 8,887,862 $ 16,062,944 $ 3,646,301 $ 2,521,529 $ 121,451 $ 28,615 =============================================================================================================================
30 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Statements of Operations and Changes in Contract Owners' Equity (continued)
SUB-ACCOUNT ------------------------------------------------------------------ VALUE TRUST 500 INDEX TRUST ------------------------------ ------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/03 DEC. 31/02 ------------ ------------ ------------ ------------ Income: Dividends $ 102,883 $ 247,450 $ 29,256 $ 34 Expenses: Mortality and expense risks, and administrative charges 51,322 71,933 13,256 7,760 ------------ ------------ ------------ ------------ Net investment income (loss) during the year 51,561 175,517 16,000 (7,726) Net realized gain (loss) during the year (970,386) (946,844) 106,471 (253,053) Unrealized appreciation (depreciation) during the year 3,645,093 (2,465,738) 846,742 (129,238) ------------ ------------ ------------ ------------ Net increase (decrease) in assets from operations 2,726,268 (3,237,065) 969,213 (390,017) ------------ ------------ ------------ ------------ Changes from principal transactions: Transfer of net premiums 1,158,162 2,724,184 1,151,910 1,596,778 Transfer on terminations (3,217,433) (1,724,731) (242,686) 412,010 Transfer on policy loans (2,852) (1,898) (16,417) 1,641 Net interfund transfers 2,658,046 (367,235) 861,391 304,033 ------------ ------------ ------------ ------------ Net increase (decrease) in assets from principal transactions 595,923 630,320 1,754,198 2,314,462 ------------ ------------ ------------ ------------ Total increase (decrease) in assets 3,322,191 (2,606,745) 2,723,411 1,924,445 Assets beginning of year 9,377,558 11,984,303 2,849,500 925,055 ------------ ------------ ------------ ------------ Assets end of year $ 12,699,749 $ 9,377,558 $ 5,572,911 $ 2,849,500 ============ ============ ============ ============
See accompanying notes. 31
TOTAL - -------------------------------- YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 - ------------- ------------- $ 9,759,041 $ 9,045,299 2,900,219 3,132,278 - ------------- ------------- 6,858,822 5,913,021 (18,418,285) (91,838,754) 115,810,369 (14,708,009) - ------------- ------------- 104,250,906 (100,633,742) - ------------- ------------- 99,703,509 139,772,264 (127,940,183) (82,492,136) 495,736 337,863 (1,135,070) (1,395,122) - ------------- ------------- (28,876,008) 56,222,869 - ------------- ------------- 75,374,898 (44,410,873) 486,330,059 530,740,932 - ------------- ------------- $ 561,704,957 $ 486,330,059 ============= =============
32 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements December 31, 2003 1. ORGANIZATION The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (the "Account") is a separate account administered and sponsored by The Manufacturers Life Insurance Company (U.S.A.) ("ManUSA" or the "Company"). The Account operates as a Unit Investment Trust under the Investment Company Act of 1940, as amended (the "Act") and has sixty-seven active investment sub-accounts. Each investment sub-account invests solely in shares of a particular Manufacturers Investment Trust (the "Trust") portfolio. The Trust is registered under the Act as an open-end management investment company, commonly known as a mutual fund, which does not transact with the general public. Instead, the Trust deals primarily with insurance companies by providing the investment medium for variable contracts. The Account is a funding vehicle for the allocation of net premiums under variable universal life insurance contracts (the "Contracts") issued by the Company. The Account was established by The Manufacturers Life Insurance Company of America ("MLA"), a life insurance company organized in 1983 under Michigan law. Effective January 1, 2002, MLA transferred all of its variable business to ManUSA via an assumption reinsurance agreement and as a result, products originally sold and administered under the name of MLA are now offered and administered under the name of ManUSA. Accordingly and effective January 1, 2002, the Account changed its name to The Manufacturers Life Insurance Company (U.S.A.) Separate Account N from The Manufacturers Life Insurance Company of America Separate Account Four. The Company is a stock life insurance company incorporated under the laws of Michigan in 1979. Both the Company and MLA are indirect, wholly owned subsidiaries of Manulife Financial Corporation ("MFC"), a Canadian based publicly traded life insurance company. The Company is required to maintain assets in the Account with a total fair value at least equal to the reserves and other liabilities relating to the variable benefits under all Contracts participating in the Account. These assets may not be charged with liabilities which arise from any other business the Company conducts. However, all obligations under the variable contracts are general corporate obligations of the Company. Additional assets are held in the Company'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. 33 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 1. ORGANIZATION (CONTINUED) As the result of portfolio changes, the following sub-accounts of the Account were renamed as follows:
PREVIOUS NAME NEW NAME EFFECTIVE DATE ------------- -------- -------------- Capital Opportunities Trust Strategic Value Trust May 1, 2003 Tactical Allocation Trust Global Allocation Trust May 1, 2003 U.S. Large Cap Value Trust U.S. Large Cap Trust May 1, 2003 Growth Trust All Cap Core Trust November 25, 2002
Effective May 2, 2003 the following sub-accounts of the Account were terminated as investment options and funds were transferred to existing sub-account funds as follows:
TERMINATED FUNDS TRANSFERRED TO ---------- -------------------- Internet Technologies Trust Science & Technology Trust Mid Cap Growth Trust Dynamic Growth Trust Mid Cap Opportunities Trust Dynamic Growth Trust Telecommunications Trust Science & Technology Trust
The following sub-accounts of the Account were added as investment options for variable universal life insurance contract holders of the Company:
COMMENCEMENT OF OPERATIONS OF THE SUB-ACCOUNTS -------------------------- American Blue Chip Income & Growth Trust July 9, 2003 American Growth Trust July 9, 2003 American Growth-Income Trust July 9, 2003 American International Trust July 9, 2003 Emerging Growth Trust May 5, 2003 Large Cap Value Trust May 5, 2003 Mid Cap Core Trust May 5, 2003 Natural Resources Trust May 5, 2003 Quantitative All Cap Trust < May 5, 2003 Real Return Bond Trust May 5, 2003 Small Cap Opportunities Trust May 5, 2003
< Fund available in current year but no activity. 34 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES Investments of each sub-account consist of shares in the respective portfolios of the Trust. These shares are carried at fair value which is calculated using the fair value of the investment securities underlying each Trust portfolio. Transactions are recorded on the trade date. Income from dividends is recorded on the ex-dividend date. Realized gains and losses on the sale of investments are computed on the basis of the specifically identified cost of the investment sold. In addition to the Account, a contract holder may also allocate funds to the fixed account contained within the Company's general account. Because of exemptive and exclusionary provisions, interests in the fixed account have not been registered under the Securities Act of 1933 and the Company's general account has not been registered as an investment company under the Act. The operations of the Account are included in the federal income tax return of the Company, which is taxed as a life insurance company under the provisions of the Internal Revenue Code (the "Code"). Under the current provisions of the Code, the Company does not expect to incur federal income taxes on the earnings of the Account to the extent the earnings are credited under the Contracts. Based on this, no charge is being made currently to the Account for federal income taxes. The Company will periodically reassess this position taking into account changes in the tax law. Such a charge may be made in future years for any federal income taxes that would be attributable to the Contracts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from those estimates. 3. MORTALITY AND EXPENSE RISKS CHARGE The Company deducts from the assets of the Account a daily charge equivalent to annual rates between 0.40% and 0.65% of the average net value of the Account's assets for the assumption of mortality and expense risks. 35 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 4. CONTRACT CHARGES The Company deducts certain charges from gross premium before placing the remaining net premiums in the sub-account. In the event of a surrender by the contract holder, surrender charges may be levied by the Company against contract value at the time of termination to cover sales and administrative expenses associated with underwriting and issuing the Contract. Additionally, each month a deduction consisting of an administration charge, a charge for cost of insurance and charges for supplementary benefits is deducted from the contract value. Contract charges are paid through the redemption of sub-account units and are reflected as terminations. 5. PURCHASES AND SALES The cost of purchases and proceeds from sales of investments for the year ended December 31, 2003 were as follows:
PURCHASES SALES ----------- ----------- SUB-ACCOUNTS: Aggressive Growth Trust $ 3,522,832 $ 3,923,636 All Cap Core Trust 4,077,255 6,665,471 All Cap Growth Trust 6,441,375 8,104,113 All Cap Value Trust 529,610 258,119 American Blue Chip Income & Growth Trust 192,802 5,494 American Growth Trust 1,412,364 17,464 American Growth-Income Trust 45,916 1,248 American International Trust 110,470 8,776 Balanced Trust 2,873,126 6,703,743 Blue Chip Growth Trust 20,437,166 19,225,618 Capital Appreciation Trust 962,079 85,947 Diversified Bond Trust 7,696,110 7,576,856 Dynamic Growth Trust 2,597,262 1,303,847 Emerging Growth Trust 250,849 29,828 Emerging Small Company Trust 12,305,527 18,409,865 Equity-Income Trust 16,436,574 14,848,785 Equity Index Trust 14,349,074 17,354,334 Financial Services Trust 138,815 147,487 Fundamental Value Trust 1,822,022 1,206,975 Global Allocation Trust 6,635 3,958 Global Bond Trust 6,497,710 8,023,683 Global Equity Trust 3,876,748 4,651,037 Growth & Income Trust 9,969,905 15,035,281 Health Sciences Trust 2,905,103 2,780,710 High Yield Trust 7,526,238 5,080,313 Income & Value Trust 5,343,541 6,989,211 International Index Trust 1,458,917 717,806 International Small Cap Trust 1,668,255 2,391,425 International Stock Trust 3,845,756 5,576,571 International Value Trust 5,192,624 2,546,907 Internet Technologies Trust 119,388 205,562
36 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 5. PURCHASES AND SALES (CONTINUED)
PURCHASES SALES ------------ ------------ SUB-ACCOUNTS: Investment Quality Bond Trust $ 18,721,561 $ 23,551,394 Large Cap Growth Trust 4,923,808 6,781,166 Large Cap Value Trust 1,285,893 11,484 Lifestyle Aggressive 1000 Trust 562,221 123,042 Lifestyle Balanced 640 Trust 5,385,048 1,534,074 Lifestyle Conservative 280 Trust 3,055,003 1,763,134 Lifestyle Growth 820 Trust 1,663,756 487,886 Lifestyle Moderate 460 Trust 2,145,072 1,421,093 Mid Cap Core Trust 75,366 35,565 Mid Cap Growth Trust 327,776 720,116 Mid Cap Index Trust 3,466,620 2,083,319 Mid Cap Opportunities Trust 19,997 97,751 Mid Cap Stock Trust 4,803,123 1,790,815 Mid Cap Value Trust 4,633,995 3,734,463 Money Market Trust 52,553,856 55,126,794 Natural Resources Trust 978,491 68,981 Overseas Trust 3,255,537 3,401,733 Pacific Rim Emerging Markets Trust 3,403,609 3,501,649 Quantitative Equity Trust 5,334,540 9,860,840 Quantitative Mid Cap Trust 270,409 139,919 Real Estate Securities Trust 9,264,476 13,928,696 Real Return Bond Trust 1,714,232 1,565,681 Science & Technology Trust 16,415,095 17,482,925 Small Cap Index Trust 3,149,889 3,869,874 Small Cap Opportunities Trust 497,684 63,250 Small Company Blend Trust 2,212,544 2,191,937 Small Company Value Trust 12,233,526 12,176,490 Special Value Trust 309,285 152,686 Strategic Bond Trust 7,323,523 8,082,734 Strategic Growth Trust 969,501 720,124 Strategic Opportunities Trust 4,387,210 7,200,438 Strategic Value Trust 1,952,771 99,172 Telecommunications Trust 15,345 117,163 Total Return Trust 27,551,877 25,281,542 Total Stock Market Index Trust 4,040,774 2,404,491 U.S. Government Securities Trust 14,737,143 21,516,326 U.S. Large Cap Trust 2,443,529 2,228,222 Utilities Trust 284,239 218,205 Value Trust 9,526,701 8,879,216 500 Index Trust 4,265,498 2,495,300 ------------ ------------ $384,772,571 $406,789,760 ============ ============
37 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS The Account is a funding vehicle for a number of variable universal life insurance products which have unique combinations of features and fees that are charged against the contract owner's account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns. The following table was developed by determining which products offered by the Company have the lowest and highest total return. Only product designs within each sub-account that had units outstanding during the period were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum mortality and expense risk charge offered by the Company as contract owners may not have selected all available and applicable contract options as discussed in note 3.
SUB-ACCOUNT ----------------------------------------------------------- AGGRESSIVE GROWTH TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------- ------------------ ------------------ Units, beginning of year 417,367 388,103 290,154 Units issued 321,514 416,070 253,473 Units redeemed (351,421) (386,806) (155,524) --------------- ------------------ ------------------ Units, end of year 387,460 417,367 388,103 =============== ================== ================== Unit value, end of year $10.75 - $14.90 $8.07 - $11.16 $10.82 - $14.91 Net assets, end of year $4,974,158 $4,062,865 $5,113,597 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 33.00% TO 33.34% (25.45%) to (25.30%) (26.46%) to (26.39%)
38 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------- ALL CAP CORE TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------- ------------------ ------------------ Units, beginning of year 632,910 955,887 901,341 Units issued 396,838 744,586 586,549 Units redeemed (645,665) (1,067,563) (532,003) --------------- ------------------ ------------------ Units, end of year 384,083 632,910 955,887 =============== ================== ================== Unit value, end of year $7.54 - $13.81 $5.76 - $10.54 $7.75 - $14.12 Net assets, end of year $4,650,328 $5,895,402 $12,500,179 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 30.71% TO 31.02% (25.72%) to (25.57%) (21.88%) to (21.80%)
SUB-ACCOUNT ----------------------------------------------------------- ALL CAP GROWTH TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------- ------------------ ------------------ Units, beginning of year 602,095 604,579 371,985 Units issued 472,429 510,835 493,095 Units redeemed (567,433) (513,319) (260,501) --------------- ------------------ ------------------ Units, end of year 507,091 602,095 604,579 =============== ================== ================== Unit value, end of year $9.38 - $18.16 $7.30 - $14.11 $9.71 - $18.73 Net assets, end of year $8,204,194 $7,785,855 $10,184,673 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 28.40% TO 28.72% (24.90%) to (24.75%) (24.27%) to (24.11%)
39 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------- ALL CAP VALUE TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* --------------- ------------------ ------------------ Units, beginning of year 19,759 1,194 - Units issued 48,939 83,130 1,531 Units redeemed (26,620) (64,565) (337) --------------- ------------------ ------------------ Units, end of year 42,078 19,759 1,194 =============== ================== ================== Unit value, end of year $12.38 - $12.44 $9.00 - $9.03 $12.56 Net assets, end of year $520,935 $177,909 $14,993 Investment income ratio(1) 0.04% 0.01% 0.03% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 37.47% TO 37.75% (28.30%) to (28.16%) 0.46%
SUB-ACCOUNT --------------------- AMERICAN BLUE CHIP INCOME & GROWTH TRUST --------------------- PERIOD ENDED DEC. 31/03+ --------------------- Units, beginning of year - Units issued 14,889 Units redeemed (392) --------------------- Units, end of year 14,497 ===================== Unit value, end of year $14.17 - $14.18 Net assets, end of year $205,368 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% Total return, lowest to highest(3) 13.32% TO 13.43%
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. + Reflects the period from commencement of operations July 9, 2003 through December 31, 2003. 40 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------- AMERICAN GROWTH TRUST --------------------- PERIOD ENDED DEC. 31/03+ --------------------- Units, beginning of year - Units issued 107,375 Units redeemed (1,205) --------------------- Units, end of year 106,170 ===================== Unit value, end of year $13.84 - $13.86 Net assets, end of year $1,470,676 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% Total return, lowest to highest(3) 10.75% TO 10.88%
SUB-ACCOUNT --------------------- AMERICAN GROWTH- INCOME TRUST --------------------- PERIOD ENDED DEC. 31/03+ --------------------- Units, beginning of year - Units issued 3,561 Units redeemed (87) --------------------- Units, end of year 3,474 ===================== Unit value, end of year $14.10 Net assets, end of year $48,990 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.65% Total return, lowest to highest(3) 12.82%
+ Reflects the period from commencement of operations July 9, 2003 through December 31, 2003. 41 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------- AMERICAN INTERNATIONAL TRUST --------------------- PERIOD ENDED DEC. 31/03+ --------------------- Units, beginning of year - Units issued 8,484 Units redeemed (625) --------------------- Units, end of year 7,859 ===================== Unit value, end of year $15.14 - $15.15 Net assets, end of year $118,979 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% Total return, lowest to highest(3) 21.11% TO 21.22%
SUB-ACCOUNT ----------------------------------------------------------- BALANCED TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------- ------------------ ------------------ Units, beginning of year 1,065,668 1,197,589 1,380,133 Units issued 102,294 172,364 171,891 Units redeemed (279,566) (304,285) (354,435) --------------- ------------------ ------------------ Units, end of year 888,396 1,065,668 1,197,589 =============== ================== ================== Unit value, end of year $9.54 - $25.73 $8.39 - $22.60 $9.85 - $26.49 Net assets, end of year $22,530,978 $23,887,858 $31,589,231 Investment income ratio(1) 2.51% 2.55% 2.30% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 13.56% TO 13.84% (14.92%) to (14.70%) (10.78%) to (10.55%)
+ Reflects the period from commencement of operations July 9, 2003 through December 31, 2003. 42 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT -------------------------------------------------------------------- BLUE CHIP GROWTH TRUST -------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 -------------------------------------------------------------------- Units, beginning of year 1,902,374 1,996,442 1,789,836 Units issued 1,470,531 2,117,890 1,329,733 Units redeemed (1,280,390) (2,211,958) (1,123,127) -------------------------------------------------------------------- Units, end of year 2,092,515 1,902,374 1,996,442 ==================================================================== Unit value, end of year $10.25 - $19.26 $7.98 - $14.97 $10.60 - $19.85 Net assets, end of year $34,818,639 $26,370,964 $36,203,915 Investment income ratio(1) 0.04% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 28.33% TO 28.65% (24.75%) to (24.56%) (15.16%) to (14.95%)
SUB-ACCOUNT ------------------------------------------------------------------- CAPITAL APPRECIATION TRUST ------------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* ------------------------------------------------------------------- Units, beginning of year 25,173 3,341 - Units issued 111,005 67,713 3,401 Units redeemed (9,898) (45,881) (60) ------------------------------------------------------------------- Units, end of year 126,280 25,173 3,341 =================================================================== Unit value, end of year $9.80 - $9.85 $7.62 - $7.64 $11.05 Net assets, end of year $1,240,907 $192,338 $36,920 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 28.62% TO 28.88% (31.07%) to (30.93%) (11.60%)
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 43 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------------- DIVERSIFIED BOND TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 489,585 507,459 264,580 Units issued 449,319 1,003,740 513,683 Units redeemed (463,160) (1,021,614) (270,804) ----------------------------------------------------------------- Units, end of year 475,744 489,585 507,459 ================================================================= Unit value, end of year $16.13 - $16.64 $15.51 - $15.95 $14.49 - $14.89 Net assets, end of year $7,848,156 $7,777,651 $7,354,939 Investment income ratio(1) 5.26% 3.61% 3.26% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 3.93% TO 4.19% 6.90% to 7.12% 6.38% to 6.61%
SUB-ACCOUNT ----------------------------------------------------------------- DYNAMIC GROWTH TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 217,363 102,477 34,003 Units issued 707,581 235,862 352,426 Units redeemed (347,777) (120,976) (283,952) ----------------------------------------------------------------- Units, end of year 577,167 217,363 102,477 ================================================================= Unit value, end of year $4.30 - $4.34 $3.36 - $3.37 $4.72 - $4.73 Net assets, end of year $2,493,791 $730,822 $483,613 Investment income ratio(1) 0.00% 0.00% 0.28% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 28.17% TO 28.60% (28.83%) to (28.63%) (40.63%) to (40.57%)
44 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------- EMERGING GROWTH TRUST --------------------- PERIOD ENDED DEC. 31/03** --------------------- Units, beginning of year - Units issued 15,745 Units redeemed (2,030) --------------- Units, end of year 13,715 =============== Unit value, end of year $16.29 - $16.31 Net assets, end of year $223,380 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% Total return, lowest to highest(3) 30.28% TO 30.45%
SUB-ACCOUNT ----------------------------------------------------------------- EMERGING SMALL COMPANY TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 1,056,757 1,065,694 840,091 Units issued 380,894 544,611 525,737 Units redeemed (526,288) (553,548) (300,134) ----------------------------------------------------------------- Units, end of year 911,363 1,056,757 1,065,694 ================================================================= Unit value, end of year $11.44 - $78.03 $8.23 - $56.84 $11.69 - $79.51 Net assets, end of year $51,002,629 $41,741,461 $63,138,723 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 38.83% TO 39.17% (29.66%) to (29.49%) (22.75%) to (22.55)
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 45 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------------ EQUITY-INCOME TRUST ------------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------------ Units, beginning of year 1,339,589 840,766 431,687 Units issued 1,036,965 1,689,347 687,162 Units redeemed (915,911) (1,190,524) (278,083) ----------------------------------------------------------------- Units, end of year 1,460,643 1,339,589 840,766 ================================================================= Unit value, end of year $14.54 - $19.85 $11.64 - $15.87 $13.50 - $18.38 Net assets, end of year $27,301,230 $20,927,060 $15,189,718 Investment income ratio(1) 1.44% 1.22% 1.42% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 24.76% TO 25.07% (13.84)% to (13.63%) 0.63% to 0.89%
SUB-ACCOUNT ----------------------------------------------------------------- EQUITY INDEX TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 1,769,922 2,189,228 1,984,054 Units issued 954,968 2,193,979 1,366,361 Units redeemed (1,178,897) (2,613,285) (1,161,187) ---------------------------------------------------------------- Units, end of year 1,545,993 1,769,922 2,189,228 ================================================================ Unit value, end of year $10.04 - $18.06 $7.87 - $14.13 $10.18 - $18.26 Net assets, end of year $25,622,009 $23,452,969 $38,066,462 Investment income ratio(1) 1.52% 1.16% 1.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 27.46% TO 27.78% (22.81%) to (22.61%) (12.83%) to (12.61%)
46 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT -------------------------------------------------------------- FINANCIAL SERVICES TRUST -------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* -------------------------------------------------------------- Units, beginning of year 33,067 8,377 - Units issued 13,233 42,607 8,668 Units redeemed (14,352) (17,917) (291) ------------------------------------------------------------ Units, end of year 31,948 33,067 8,377 ============================================================ Unit value, end of year $12.54 - $12.61 $9.45 - $9.48 $11.58 Net assets, end of year $401,985 $313,108 $97,034 Investment income ratio(1) 0.17% 0.00% 0.05% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 32.71% TO 32.98% (18.41%) to (18.25%) (7.34%)
SUB-ACCOUNT ------------------------------------------------------------- FUNDAMENTAL VALUE TRUST ------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* ------------------------------------------------------------- Units, beginning of year 33,158 21,338 - Units issued 173,788 35,752 22,014 Units redeemed (113,081) (23,932) (676) ------------------------------------------------------------ Units, end of year 93,865 33,158 21,338 ============================================================ Unit value, end of year $12.54 - $12.61 $9.72 - $9.75 $11.68 Net assets, end of year $1,179,257 $322,506 $249,216 Investment income ratio(1) 0.18% 0.09% 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 28.99% TO 29.25% (16.75%) to (16.58%) (6.57%)
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 47 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------- GLOBAL ALLOCATION TRUST ------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------- Units, beginning of year 3,195 7,967 - Units issued 844 23,360 18,137 Units redeemed (426) (28,132) (10,170) ----------------------------------------------------- Units, end of year 3,613 3,195 7,967 ===================================================== Unit value, end of year $9.94 $7.91 - $7.94 $10.37 Net assets, end of year $35,900 $25,278 $82,609 Investment income ratio(1) 0.48% 0.00% 0.26% Expense ratio, lowest to highest(2) 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 25.61% (23.70%) to (23.55%) (13.95%)
SUB-ACCOUNT ----------------------------------------------------------------- GLOBAL BOND TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 297,639 118,128 30,310 Units issued 389,164 348,049 113,867 Units redeemed (490,144) (168,538) (26,049) --------------------------------------------------------------- Units, end of year 196,659 297,639 118,128 ================================================================ Unit value, end of year $17.06 - $18.14 $14.87 - $15.77 $12.45 - $13.16 Net assets, end of year $3,463,203 $4,596,803 $1,549,796 Investment income ratio(1) 4.35% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 14.65% TO 14.94% 19.35% to 19.59% (0.12%) to (0.03%)
48 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------------ GLOBAL EQUITY TRUST ------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------------- Units, beginning of year 272,877 206,811 192,970 Units issued 315,226 360,226 133,113 Units redeemed (367,394) (294,160) (119,272) ------------------------------------------------------------------- Units, end of year 220,709 272,877 206,811 =================================================================== Unit value, end of year $12.02 - $15.89 $9.48 - $12.52 $11.79 - $15.50 Net assets, end of year $3,119,936 $3,166,722 $3,140,867 Investment income ratio(1) 1.19% 1.15% 2.22% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 26.63% TO 26.95% (19.63%) to (19.47%) (16.63) to (16.55%)
SUB-ACCOUNT ------------------------------------------------------------------- GROWTH & INCOME TRUST ------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------------- Units, beginning of year 1,592,866 1,605,126 1,309,646 Units issued 695,451 1,400,088 974,279 Units redeemed (1,137,088) (1,412,348) (678,799) ------------------------------------------------------------------- Units, end of year 1,151,229 1,592,866 1,605,126 =================================================================== Unit value, end of year $9.89 - $17.73 $7.86 - $14.06 $10.44 - $18.66 Net assets, end of year $18,310,286 $19,158,844 $26,826,511 Investment income ratio(1) 1.02% 0.63% 0.41% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 25.77% TO 26.09% (24.82%) to (24.63%) (11.85%) to (11.63%)
49 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------------- HEALTH SCIENCES TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* ----------------------------------------------------------------- Units, beginning of year 185,557 11,197 - Units issued 257,208 260,559 15,145 Units redeemed (247,023) (86,199) (3,948) --------------------------------------------------------------- Units, end of year 195,742 185,557 11,197 =============================================================== Unit value, end of year $13.19 - $13.28 $9.75 - $9.78 $13.48 Net assets, end of year $2,590,184 $1,810,992 $150,957 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 35.33% TO 35.68% (27.71%) to (27.57%) (7.85%)
SUB-ACCOUNT ----------------------------------------------------------------- HIGH YIELD TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 536,644 395,816 298,325 Units issued 565,735 687,272 403,067 Units redeemed (402,418) (546,444) (305,576) ------------------------------------------------------------------ Units, end of year 699,961 536,644 395,816 ================================================================== Unit value, end of year $12.40 - $14.80 $10.02 - $11.94 $10.82 - $12.87 Net assets, end of year $9,989,519 $6,211,875 $4,979,952 Investment income ratio(1) 4.84% 7.65% 8.80% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 23.65% TO 23.94% (7.48%) to (7.23%) (6.09%) to (5.85%)
* Reflects the period of commencement of operations from May 2, 2001 through December 31, 2001. 50 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------------- INCOME & VALUE TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 605,848 649,395 399,769 Units issued 357,985 747,671 426,269 Units redeemed (497,842) (791,218) (176,643) ------------------------------------------------------------------ Units, end of year 465,991 605,848 649,395 ================================================================== Unit value, end of year $13.95 - $16.73 $11.09 - $13.28 $13.27 - $15.86 Net assets, end of year $7,397,904 $7,497,869 $9,857,366 Investment income ratio(1) 1.90% 2.11% 2.36% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 25.66% TO 25.98% (16.48%) to (16.27%) 0.33% to 0.58%
SUB-ACCOUNT ---------------------------------------------------------------- INTERNATIONAL INDEX TRUST ---------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ---------------------------------------------------------------- Units, beginning of year 45,074 22,786 3,964 Units issued 180,935 40,213 74,324 Units redeemed (89,925) (17,925) (55,502) -------------------------------------------------------------- Units, end of year 136,084 45,074 22,786 ============================================================== Unit value, end of year $9.35 - $9.42 $7.12 - $7.15 $8.65 Net assets, end of year $1,275,430 $321,003 $197,118 Investment income ratio(1) 2.67% 1.93% 1.22% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 31.34% TO 31.68% (17.69%) to (17.51%) (22.91%)
51 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- INTERNATIONAL SMALL CAP TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 345,552 215,989 241,469 Units issued 143,552 344,659 183,007 Units redeemed (228,008) (215,096) (208,487) ------------------------------------------------------------- Units, end of year 261,096 345,552 215,989 ============================================================= Unit value, end of year $9.86 - $15.86 $6.40 - $10.28 $7.73 - $12.36 Net assets, end of year $3,409,121 $2,893,046 $2,355,865 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 53.94% to 54.34% (17.27%) to (17.10%) (31.55%) to (31.48%)
SUB-ACCOUNT ----------------------------------------------------------------- INTERNATIONAL STOCK TRUST ----------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------------- Units, beginning of year 1,306,287 1,135,448 1,217,912 Units issued 431,223 1,749,658 987,073 Units redeemed (631,146) (1,578,819) (1,069,537) --------------------------------------------------------------- Units, end of year 1,106,364 1,306,287 1,135,448 =============================================================== Unit value, end of year $9.30 - $11.47 $7.18 - $8.84 $9.22 - $11.33 Net assets, end of year $12,549,025 $11,319,824 $12,791,612 Investment income ratio(1) 0.49% 0.45% 0.21% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 29.43% to 29.75% (22.19%) to (22.00%) (22.05%) to (21.85%)
52 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- INTERNATIONAL VALUE TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 225,236 200,221 153,410 Units issued 488,195 349,940 124,451 Units redeemed (261,901) (324,925) (77,640) ------------------------------------------------------------- Units, end of year 451,530 225,236 200,221 ============================================================= Unit value, end of year $12.62 - $13.09 $8.77 - $9.09 $10.74 - $11.12 Net assets, end of year $5,780,317 $1,978,346 $2,154,783 Investment income ratio(1) 0.67% 0.71% 1.05% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 43.91% to 44.28% (18.38%) to (18.16%) (10.56%) to (10.33%)
SUB-ACCOUNT --------------------------------------------------------------- INTERNET TECHNOLOGIES TRUST --------------------------------------------------------------- PERIOD ENDED YEAR ENDED YEAR ENDED MAY 2/03**** DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 32,906 32,484 18,868 Units issued 50,774 78,577 32,185 Units redeemed (83,680) (78,155) (18,569) ------------------------------------------------------------- Units, end of year - 32,906 32,484 ============================================================= Unit value, end of year $ - $2.34 - $2.35 $3.75 - $3.76 Net assets, end of year $ - $77,003 $121,782 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 23.26% to 23.34% (37.60%) to (37.46%) (46.45%) to (46.38%)
**** Terminated as an investment option and funds transferred to Science & Technology Trust May 2, 2003. 53 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------ INVESTMENT QUALITY BOND TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 1,475,664 1,255,012 1,052,039 Units issued 984,315 631,277 706,642 Units redeemed (1,300,199) (410,625) (503,669) ----------------------------------------------------------- Units, end of year 1,159,780 1,475,664 1,255,012 =========================================================== Unit value, end of year $16.79 - $19.39 $15.73 - $18.14 $14.38 - $16.56 Net assets, end of year $22,161,364 $26,443,146 $20,633,935 Investment income ratio(1) 5.40% 5.06% 5.69% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 6.63% to 6.89% 9.22% to 9.50% 6.63% to 6.90%
SUB-ACCOUNT --------------------------------------------------------------- LARGE CAP GROWTH TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 797,344 583,261 457,838 Units issued 486,197 655,691 435,680 Units redeemed (661,605) (441,608) (310,257) ------------------------------------------------------------- Units, end of year 621,936 797,344 583,261 ============================================================= Unit value, end of year $8.99 - $12.67 $7.21 - $10.15 $9.39 - $13.17 Net assets, end of year $7,142,200 $7,640,972 $7,423,884 Investment income ratio(1) 0.28% 0.32% 0.00% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 24.51% to 24.82% (23.33%) to (23.14%) (18.35%) to (18.14%)
54 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ---------------------- LARGE CAP VALUE TRUST ---------------------- PERIOD ENDED DEC. 31/03** ---------------------- Units, beginning of year - Units issued 83,839 Units redeemed (648) --------------- Units, end of year 83,191 =============== Unit value, end of year $15.89 - $15.91 Net assets, end of year $1,322,947 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.40% to 0.65% Total return, lowest to highest(3) 27.11% to 27.32%
SUB-ACCOUNT ----------------------------------------------------- LIFESTYLE AGGRESSIVE 1000 TRUST ----------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------- Units, beginning of year 38,262 47,093 42,247 Units issued 46,257 10,408 30,690 Units redeemed (10,761) (19,239) (25,844) ----------------------------------------------------- Units, end of year 73,758 38,262 47,093 ===================================================== Unit value, end of year $11.53 - $14.53 $8.60 - $10.82 $13.68 Net assets, end of year $1,038,282 $412,158 $644,205 Investment income ratio(1) 0.35% 0.81% 4.05% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 34.04% to 34.31% (21.23%) to (21.06%) (14.23%)
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 55 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------- LIFESTYLE BALANCED 640 TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------- Units, beginning of year 549,847 385,225 231,860 Units issued 354,757 502,066 269,321 Units redeemed (99,536) (337,444) (115,956) ----------------------------------------------------------- Units, end of year 805,068 549,847 385,225 =========================================================== Unit value, end of year $13.84 - $17.62 $11.22 - $14.27 $12.53 - $15.90 Net assets, end of year $13,798,701 $7,802,640 $6,058,824 Investment income ratio(1) 2.30% 3.49% 4.97% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 23.17% to 23.48% (10.53%) to (10.32%) (5.40%) to (5.21%)
SUB-ACCOUNT ----------------------------------------------------------- LIFESTYLE CONSERVATIVE 280 TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------- Units, beginning of year 198,190 220,989 17,741 Units issued 176,092 177,049 223,911 Units redeemed (105,295) (199,848) (20,663) ---------------------------------------------------------- Units, end of year 268,987 198,190 220,989 ========================================================== Unit value, end of year $15.50 - $19.16 $13.97 - $17.22 $13.81 - $16.98 Net assets, end of year $5,025,582 $3,398,476 $3,748,192 Investment income ratio(1) 3.54% 3.26% 1.32% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 10.83% to 11.10% 1.06% to 1.26% 2.56% to 2.66%
56 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ----------------------------------------------------------- LIFESTYLE GROWTH 820 TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------- Units, beginning of year 93,184 87,349 91,321 Units issued 120,911 76,636 52,084 Units redeemed (35,271) (70,801) (56,056) ----------------------------------------------------------- Units, end of year 178,824 93,184 87,349 =========================================================== Unit value, end of year $12.53 - $16.33 $9.73 - $12.66 $11.62 - $15.11 Net assets, end of year $2,875,199 $1,173,670 $1,316,120 Investment income ratio(1) 1.02% 2.04% 5.20% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 28.70% to 28.97% (16.39%) to (16.22%) (9.63%) to (9.44%)
SUB-ACCOUNT ----------------------------------------------------------- LIFESTYLE MODERATE 460 TRUST ----------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ----------------------------------------------------------- Units, beginning of year 58,209 53,694 19,785 Units issued 136,503 41,924 90,551 Units redeemed (89,450) (37,409) (56,642) ----------------------------------------------------------- Units, end of year 105,262 58,209 53,694 =========================================================== Unit value, end of year $14.51 - $18.45 $12.39 - $15.71 $12.98 - $16.41 Net assets, end of year $1,819,243 $904,445 $817,107 Investment income ratio(1) 2.75% 2.98% 6.33% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 17.06% to 17.35% (4.66%) to (4.47%) (1.74%) to (1.63%)
57 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------- MID CAP CORE TRUST ------------------- PERIOD ENDED DEC. 31/03** ------------------- Units, beginning of year - Units issued 5,520 Units redeemed (2,482) --------------- Units, end of year 3,038 =============== Unit value, end of year $15.26 - $15.27 Net assets, end of year $46,343 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% to 0.65% Total return, lowest to highest(3) 22.04% to 22.19%
SUB-ACCOUNT ---------------------------------------------------- MID CAP GROWTH TRUST ---------------------------------------------------- PERIOD ENDED YEAR ENDED PERIOD ENDED MAY 2/03(#) DEC. 31/02 DEC. 31/01* ---------------------------------------------------- Units, beginning of year 47,721 17,665 - Units issued 45,259 70,688 18,040 Units redeemed (92,980) (40,632) (375) -------------------------------------------------- Units, end of year - 47,721 17,665 ================================================== Unit value, end of year $ - $7.21 - $7.24 $10.42 Net assets, end of year $ - $344,830 $184,149 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 8.41% to 8.48% (30.83%) to (30.69%) (16.61%)
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. * Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. (#) Terminated as an investment option and funds transferred to Dynamic Growth Trust May 2, 2003. 58 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------ MID CAP INDEX TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 151,140 80,845 18,407 Units issued 275,299 140,757 94,158 Units redeemed (173,023) (70,462) (31,720) ------------------------------------------------------------ Units, end of year 253,416 151,140 80,845 ============================================================ Unit value, end of year $14.67 - $14.78 $10.97 - $11.02 $13.02 - $13.04 Net assets, end of year $3,729,877 $1,659,979 $1,052,814 Investment income ratio(1) 0.00% 0.67% 1.68% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 33.70% to 34.03% (15.71%) to (15.54%) (2.38%) to (2.27%)
SUB-ACCOUNT ---------------------------------------------------- MID CAP OPPORTUNITIES TRUST ---------------------------------------------------- PERIOD ENDED YEAR ENDED PERIOD ENDED MAY 2/03(#) DEC. 31/02 DEC. 31/01* ---------------------------------------------------- Units, beginning of year 9,819 564 - Units issued 2,696 67,154 1,152 Units redeemed (12,515) (57,899) (588) ------------------------------------------------ Units, end of year - 9,819 564 ================================================ Unit value, end of year $ - $7.31 - $7.33 $10.54 Net assets, end of year $ - $71,981 $5,945 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 6.81% to 6.88% (30.67%) to (30.54%) (15.65%)
(#) Terminated as an investment option and funds transferred to Dynamic Growth Trust May 2, 2003. * Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 59 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------ MID CAP STOCK TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 157,865 72,047 31,783 Units issued 463,180 226,721 68,876 Units redeemed (181,981) (140,903) (28,612) ------------------------------------------------------------ Units, end of year 439,064 157,865 72,047 ============================================================ Unit value, end of year $11.52 - $12.20 $8.14 - $8.62 $10.59 - $11.19 Net assets, end of year $5,169,749 $1,286,585 $762,884 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 41.41% to 41.76% (23.07%) to (22.87%) (11.57%) to (11.48%)
SUB-ACCOUNT ------------------------------------------------------ MID CAP VALUE TRUST ------------------------------------------------------ YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* ------------------------------------------------------ Units, beginning of year 376,737 10,285 - Units issued 383,482 701,062 10,527 Units redeemed (315,187) (334,610) (242) ---------------------------------------------------- Units, end of year 445,032 376,737 10,285 ==================================================== Unit value, end of year $14.50 - $14.59 $11.64 - $11.68 $13.03 Net assets, end of year $6,473,940 $4,392,977 $134,052 Investment income ratio(1) 0.36% 0.00% 0.37% Expense ratio, lowest to highest(2) 0.40% tO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 24.54% to 24.86% (10.68%) to (10.51%) 4.27%
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 60 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ---------------------------------------------------- MONEY MARKET TRUST ---------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ---------------------------------------------------- Units, beginning of year 2,245,118 2,216,771 2,375,556 Units issued 2,995,349 3,641,306 2,060,563 Units redeemed (3,120,308) (3,612,959) (2,219,348) ---------------------------------------------------- Units, end of year 2,120,159 2,245,118 2,216,771 ==================================================== Unit value, end of year $13.71 - $19.09 $13.71 - $19.06 $13.63 - $18.91 Net assets, end of year $38,888,983 $41,461,920 $40,817,893 Investment income ratio(1) 0.58% 1.18% 3.59% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) (0.07%) to 0.17% 0.53% to 0.77% 2.91% to 3.17%
SUB-ACCOUNT ----------------------- NATURAL RESOURCES TRUST ----------------------- PERIOD ENDED DEC. 31/03** ----------------------- Units, beginning of year - Units issued 66,429 Units redeemed (4,121) ------------------- Units, end of year 62,308 =================== Unit value, end of year $17.92 - $17.95 Net assets, end of year $1,117,564 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.40% to 0.65% Total return, lowest to highest(3) 43.39% to 43.63%
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 61 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------ OVERSEAS TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 460,570 296,994 223,097 Units issued 344,726 324,701 249,901 Units redeemed (370,299) (161,125) (176,004) ------------------------------------------------------------ Units, end of year 434,997 460,570 296,994 ============================================================ Unit value, end of year $10.19 - $13.26 $7.13 - $9.24 $9.12 - $11.80 Net assets, end of year $5,016,704 $3,693,821 $3,057,649 Investment income ratio(1) 0.46% 0.52% 0.27% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 42.90% to 43.25% (21.95%) to (21.79%) (21.61%) to (21.53%)
SUB-ACCOUNT ------------------------------------------------------------ PACIFIC RIM EMERGING MARKETS TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 500,442 569,972 595,097 Units issued 494,143 429,620 343,573 Units redeemed (507,346) (499,150) (368,698) ------------------------------------------------------------ Units, end of year 487,239 500,442 569,972 ============================================================ Unit value, end of year $8.43 - $10.32 $6.03 - $7.38 $6.94 - $8.48 Net assets, end of year $4,250,322 $3,100,984 $3,999,341 Investment income ratio(1) 0.19% 0.12% 0.41% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 39.81% to 40.16% (13.09%) to (12.92%) (19.10%) to (19.03%)
62 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------------------------------------------------ QUANTITATIVE EQUITY TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 704,257 707,953 718,538 Units issued 184,033 243,025 126,527 Units redeemed (349,717) (246,721) (137,112) ------------------------------------------------------------ Units, end of year 538,573 704,257 707,953 ============================================================ Unit value, end of year $9.34 - $45.17 $7.60 - $36.67 $10.59 - $51.01 Net assets, end of year $20,778,897 $21,189,836 $33,132,109 Investment income ratio(1) 0.68% 0.30% 0.29% Expense ratio, lowest to highest(2) 0.40% to 0.65% 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 22.75% to 23.06% (28.25%) to (28.11%) (23.45%) to (23.30%)
SUB-ACCOUNT ------------------------------------- QUANTITATIVE MID CAP TRUST ------------------------------------- YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02++ ------------------------------------- Units, beginning of year 1,039 - Units issued 27,939 6,248 Units redeemed (14,541) (5,209) ------------------------------------- Units, end of year 14,437 1,039 ===================================== Unit value, end of year $10.74 - $10.80 $7.80 - $7.83 Net assets, end of year $155,204 $8,139 Investment income ratio(1) 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 37.65% to 37.92% (23.15%) to (22.99%)
++ Fund available in prior year but no activity. 63 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- REAL ESTATE SECURITIES TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 572,990 495,247 433,589 Units issued 190,483 458,746 197,124 Units redeemed (318,184) (381,003) (135,466) --------------------------------------------------------------- Units, end of year 445,289 572,990 495,247 =============================================================== Unit value, end of year $22.58 - $57.88 $16.32 - $41.77 $15.99 - $40.88 Net assets, end of year $24,344,448 $22,348,452 $19,809,218 Investment income ratio(1) 2.98% 3.12% 3.12% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 38.24% TO 38.59% 1.92% to 2.17% 2.48% to 2.74%
SUB-ACCOUNT ---------------------- REAL RETURN BOND TRUST ---------------------- PERIOD ENDED DEC. 31/03** ---------------------- Units, beginning of year - Units issued 133,583 Units redeemed (127,710) --------------- Units, end of year 5,873 =============== Unit value, end of year $13.05 - $13.07 Net assets, end of year $76,663 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% Total return, lowest to highest(3) 4.43% TO 4.57%
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 64 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- SCIENCE & TECHNOLOGY TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 2,889,535 2,589,114 1,857,203 Units issued 2,001,149 2,806,957 2,876,612 Units redeemed (2,074,604) (2,506,536) (2,144,701) --------------------------------------------------------------- Units, end of year 2,816,080 2,889,535 2,589,114 =============================================================== Unit value, end of year $5.06 - $13.38 $3.39 - $8.94 $5.75 - $15.15 Net assets, end of year $26,154,570 $18,853,376 $29,690,730 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 49.43% TO 49.79% (41.15%) to (41.00%) (41.63%) to (41.49%)
SUB-ACCOUNT ------------------------------------------------------------ SMALL CAP INDEX TRUST ------------------------------------------------------------ YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ------------------------------------------------------------ Units, beginning of year 226,973 58,468 3,750 Units issued 280,118 325,076 104,968 Units redeemed (345,043) (156,571) (50,250) ------------------------------------------------------------ Units, end of year 162,048 226,973 58,468 ============================================================ Unit value, end of year $13.28 - $13.38 $9.17 - $9.21 $11.75 - $11.77 Net assets, end of year $2,159,093 $2,085,303 $687,114 Investment income ratio(1) 0.00% 1.05% 5.76% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 44.85% TO 45.20% (21.98%) to (21.79%) 0.85% to 0.94%
65 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ------------------- SMALL CAP OPPORTUNITIES TRUST ------------------- PERIOD ENDED DEC. 31/03** ------------------- Units, beginning of year - Units issued 32,131 Units redeemed (3,978) ------------------ Units, end of year 28,153 ================== Unit value, end of year $17.43 - $17.45 Net assets, end of year $491,037 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% Total return, lowest to highest(3) 39.40% TO 39.64%
SUB-ACCOUNT --------------------------------------------------------------- SMALL COMPANY BLEND TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 262,861 259,656 105,856 Units issued 216,346 475,065 237,942 Units redeemed (209,408) (471,860) (84,142) --------------------------------------------------------------- Units, end of year 269,799 262,861 259,656 =============================================================== Unit value, end of year $11.21 - $12.79 $8.07 - $9.20 $10.89 - $12.39 Net assets, end of year $3,332,298 $2,353,394 $3,178,735 Investment income ratio(1) 0.00% 0.20% 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 38.79% TO 39.08% (26.04%) to (25.89%) (2.94%) to (2.84%)
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 66 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- SMALL COMPANY VALUE TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 1,194,763 521,854 255,050 Units issued 1,030,795 1,822,893 529,457 Units redeemed (1,074,443) (1,149,984) (262,653) --------------------------------------------------------------- Units, end of year 1,151,115 1,194,763 521,854 =============================================================== Unit value, end of year $12.60 - $18.70 $9.49 - $14.07 $10.15 - $15.03 Net assets, end of year $15,104,792 $11,607,392 $5,349,826 Investment income ratio(1) 0.44% 0.25% 0.18% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 32.81% TO 33.12% (6.53%) to (6.30%) 5.85% to 6.11%
SUB-ACCOUNT ------------------- SPECIAL VALUE TRUST ------------------- PERIOD ENDED DEC. 31/03** ------------------- Units, beginning of year - Units issued 20,755 Units redeemed (10,228) ------------ Units, end of year 10,527 ============ Unit value, end of year $ 15.77 Net assets, end of year $ 166,036 Investment income ratio(1) 0.00% Expense ratio, lowest to highest(2) 0.45% Total return, lowest to highest(3) 26.18%
** Reflects the period from commencement of operations May 5, 2003 through December 31, 2003. 67 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- STRATEGIC BOND TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 221,458 183,559 69,600 Units issued 397,326 428,880 204,490 Units redeemed (449,652) (390,981) (90,531) --------------------------------------------------------------- Units, end of year 169,132 221,458 183,559 =============================================================== Unit value, end of year $17.27 - $19.15 $15.36 - $16.98 $14.17 - $15.62 Net assets, end of year $3,179,959 $3,701,587 $2,855,362 Investment income ratio(1) 6.69% 5.15% 4.49% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 12.38% TO 12.66% 8.25% to 8.47% 5.55% to 5.66%
SUB-ACCOUNT ---------------------------------------------------------- STRATEGIC GROWTH TRUST ---------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* ---------------------------------------------------------- Units, beginning of year 123,666 68,964 - Units issued 109,988 335,268 69,524 Units redeemed (80,217) (280,566) (560) -------------------------------------------------------- Units, end of year 153,437 123,666 68,964 ======================================================== Unit value, end of year $9.89 - $9.95 $7.85 - $7.88 $10.97 Net assets, end of year $1,522,884 $972,517 $756,713 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.65% Total return, lowest to highest(3) 26.04% TO 26.35% (28.50%) to (28.33%) (12.22%)
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 68 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- STRATEGIC OPPORTUNITIES TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 895,938 706,044 863,681 Units issued 493,480 804,779 529,543 Units redeemed (801,100) (614,885) (687,180) --------------------------------------------------------------- Units, end of year 588,318 895,938 706,044 =============================================================== Unit value, end of year $8.21 - $11.09 $6.56 - $8.84 $10.77 - $14.47 Net assets, end of year $5,962,880 $7,208,068 $9,806,062 Investment income ratio(1) 0.00% 0.00% 0.51% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 25.03% TO 25.34% (39.16%) to (39.04%) (15.81%) to (15.72%)
SUB-ACCOUNT --------------------------------------------------------------- STRATEGIC VALUE TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* --------------------------------------------------------------- Units, beginning of year 34,516 9,069 - Units issued 211,670 29,192 9,089 Units redeemed (10,722) (3,745) (20) --------------------------------------------------------------- Units, end of year 235,464 34,516 9,069 =============================================================== Unit value, end of year $9.86 - $9.93 $7.71 - $7.73 $10.65 - $10.67 Net assets, end of year $2,330,657 $266,768 $96,738 Investment income ratio(1) 0.01% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 27.94% TO 28.27% (27.66%) to (27.52%) (14.77%) to (14.67%)
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 69 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- TELECOMMUNICATIONS TRUST --------------------------------------------------------------- PERIOD ENDED YEAR ENDED PERIOD ENDED MAY 2/03**** DEC. 31/02 DEC. 31/01* --------------------------------------------------------------- Units, beginning of year 23,412 3,294 - Units issued 3,735 52,249 3,323 Units redeemed (27,147) (32,131) (29) ------------------------------------------------------------- Units, end of year - 23,412 3,294 ============================================================= Unit value, end of year $- $4.11 - $4.12 $ 7.90 Net assets, end of year $- $96,162 $ 26,007 Investment income ratio(1) 0.00% 0.00% 0.00% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 7.71% TO 7.79% (48.01%) to (47.90%) (36.83%)
SUB-ACCOUNT --------------------------------------------------------------- TOTAL RETURN TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 2,315,832 1,419,177 340,762 Units issued 1,537,006 3,545,219 1,361,346 Units redeemed (1,533,686) (2,648,564) (282,931) --------------------------------------------------------------- Units, end of year 2,319,152 2,315,832 1,419,177 =============================================================== Unit value, end of year $16.57 - $16.70 $15.89 - $15.97 $14.60 - $14.65 Net assets, end of year $38,643,292 $36,916,915 $20,755,404 Investment income ratio(1) 2.77% 2.58% 2.22% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 4.32% TO 4.60% 8.80% to 9.08% 7.58% to 7.85%
**** Terminated as an investment option and funds transferred to Science & Technology Trust May 2, 2003. 70 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT ---------------------------------------------------------------- TOTAL STOCK MARKET INDEX TRUST ---------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 ---------------------------------------------------------------- Units, beginning of year 181,207 309,502 118,184 Units issued 467,766 327,720 302,834 Units redeemed (277,369) (456,015) (111,516) ---------------------------------------------------------------- Units, end of year 371,604 181,207 309,502 ================================================================ Unit value, end of year $9.99 - $10.07 $7.71 - $7.74 $9.85 - $9.87 Net assets, end of year $3,719,559 $1,397,047 $3,050,162 Investment income ratio(1) 0.00% 0.42% 1.20% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.45% to 0.65% 0.55% to 0.65% Total return, lowest to highest(3) 29.69% TO 30.02% (21.80%) to (21.65%) (11.99%) to (11.90%)
SUB-ACCOUNT --------------------------------------------------------------- U.S. GOVERNMENT SECURITIES TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 1,081,467 719,661 199,345 Units issued 950,497 1,334,914 694,784 Units redeemed (1,436,242) (973,108) (174,468) --------------------------------------------------------------- Units, end of year 595,722 1,081,467 719,661 =============================================================== Unit value, end of year $14.76 - $15.78 $14.60 - $15.59 $13.61 - $14.52 Net assets, end of year $8,887,862 $16,062,944 $9,992,662 Investment income ratio(1) 4.00% 3.29% 4.63% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 1.07% TO 1.32% 7.30% to 7.56% 6.33% to 6.55%
71 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- U.S. LARGE CAP TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 268,376 277,574 157,692 Units issued 230,093 443,269 379,250 Units redeemed (213,864) (452,467) (259,368) --------------------------------------------------------------- Units, end of year 284,605 268,376 277,574 =============================================================== Unit value, end of year $12.79 - $12.89 $9.38 - $9.44 $12.61 - $12.66 Net assets, end of year $3,646,301 $2,521,529 $3,505,205 Investment income ratio(1) 0.39% 0.36% 0.27% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.45% to 0.65% Total return, lowest to highest(3) 36.17% TO 36.52% (25.67%) to (25.49%) (3.18%) to (2.98%)
SUB-ACCOUNT --------------------------------------------------------- UTILITIES TRUST --------------------------------------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01* --------------------------------------------------------- Units, beginning of year 4,043 5,383 - Units issued 34,544 12,660 5,433 Units redeemed (25,758) (14,000) (50) ------------------------------------------------------ Units, end of year 12,829 4,043 5,383 ====================================================== Unit value, end of year $9.45 - $9.50 $7.07 - $7.09 $9.31 Net assets, end of year $121,451 $28,615 $50,102 Investment income ratio(1) 0.56% 0.01% 0.73% Expense ratio, lowest to highest(2) 0.45% TO 0.65% 0.45% to 0.65% 0.65% Total return, lowest to highest(3) 33.64% TO 33.93% (24.04%) to (23.89%) (25.55%)
* Reflects the period from commencement of operations May 1, 2001 through December 31, 2001. 72 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED)
SUB-ACCOUNT --------------------------------------------------------------- VALUE TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 715,767 700,592 281,401 Units issued 639,080 622,576 639,311 Units redeemed (634,078) (607,401) (220,120) --------------------------------------------------------------- Units, end of year 720,769 715,767 700,592 =============================================================== Unit value, end of year $16.33 - $18.39 $11.84 - $13.31 $15.42 - $17.26 Net assets, end of year $12,699,749 $9,377,558 $11,984,303 Investment income ratio(1) 1.23% 0.85% 0.53% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 37.86% TO 38.20% (23.31%) to (23.11%) 2.75% to 3.00%
SUB-ACCOUNT --------------------------------------------------------------- 500 INDEX TRUST --------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED DEC. 31/03 DEC. 31/02 DEC. 31/01 --------------------------------------------------------------- Units, beginning of year 375,317 94,218 22,035 Units issued 501,063 688,915 86,705 Units redeemed (301,182) (407,816) (14,522) --------------------------------------------------------------- Units, end of year 575,198 375,317 94,218 =============================================================== Unit value, end of year $9.59 - $9.72 $7.54 - $7.61 $9.80 - $9.85 Net assets, end of year $5,572,911 $2,849,500 $925,055 Investment income ratio(1) 0.79% 0.00% 1.51% Expense ratio, lowest to highest(2) 0.40% TO 0.65% 0.40% to 0.65% 0.40% to 0.65% Total return, lowest to highest(3) 27.19% TO 27.69% (23.02%) to (22.71%) (12.93%) to (12.71%)
73 The Manufacturers Life Insurance Company (U.S.A.) Separate Account N (Formerly The Manufacturers Life Insurance Company of America Separate Account Four) Notes to Financial Statements (continued) 6. FINANCIAL HIGHLIGHTS (CONTINUED) (1) These ratios represent the dividends, excluding distributions of capital gains, received by the sub-account from the underlying Trust portfolio, net of management fees assessed by the Trust portfolio adviser, divided by the average net assets of the sub-account.These ratios exclude those expenses, such as mortality and expense risk charges, that result in direct reduction in unit values.The recognition of investment income by the sub-account is affected by the timing of the declaration of dividends by the underlying Trust portfolio in which the sub-accounts invest.It is the practice of the Trust, for income tax reasons, to declare dividends in April for investment income received in the previous calendar year for all sub-accounts of the Trust except for the Money Market Trust which declares and reinvests dividends on a daily basis.Any dividend distribution received from a sub-account of the Trust is reinvested immediately, at net asset value, in shares of that sub-account and retained as assets of the corresponding sub-account so that the unit value of the sub-account is not affected by the declaration and reinvestment of dividends. (2) These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense risk charges, for the period indicated.The ratios include only those expenses that result in a direct reduction in unit values.Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying Trust portfolio are excluded. (3) These ratios represent the total return for the period indicated, including changes in the value of the underlying Trust portfolio, and reflect deductions for all items included in the expense ratio.The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. 7. RELATED PARTY TRANSACTIONS Manulife Financial Securities LLC, a registered broker-dealer and wholly owned subsidiary of ManUSA, acts as the principal underwriter of the Contracts pursuant to a distribution agreement with the Company. Contracts are sold by registered representatives of either Manulife Financial Securities LLC or other broker-dealers having distribution agreements with Manulife Financial Securities LLC who are also authorized as variable life insurance agents under applicable state insurance laws. Registered representatives are compensated on a commission basis. These underwriting and distribution services had been performed by ManEquity, Inc. before it was merged into Manulife Financial Securities LLC on January 1, 2002.ManEquity, Inc. was also an indirect wholly owned subsidiary of MFC. The Company has a formal service agreement with its ultimate parent company, MFC, which can be terminated by either party upon two months notice.Under this agreement, the Company pays for legal, actuarial, investment and certain other administrative services. 74 -----END PRIVACY-ENHANCED MESSAGE-----