0000950152-95-001914.txt : 19950828 0000950152-95-001914.hdr.sgml : 19950828 ACCESSION NUMBER: 0000950152-95-001914 CONFORMED SUBMISSION TYPE: 497 CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950825 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPARATE ACCOUNT TWO OF MANUFACTURERS LIFE INS CO OF AMERI CENTRAL INDEX KEY: 0000814501 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57018 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 200 BLOOR STREET EAST NT 10 STREET 2: TORONTO M4W 1E5 CITY: ONTARIO CANADA STATE: A6 BUSINESS PHONE: 416-926-6302 MAIL ADDRESS: STREET 1: P O BOX 600 CITY: BUFFALO STATE: NY ZIP: 14201-0600 497 1 MANULIFE 497 1 PROSPECTUS FOR MULTI-ACCOUNT FLEXIBLE PAYMENT VARIABLE ANNUITY ISSUED BY THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA AND FOR MANULIFE SERIES FUND, INC. 2 (THIS PAGE INTENTIONALLY LEFT BLANK) 3 PROSPECTUS THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA SEPARATE ACCOUNT TWO MULTI-ACCOUNT FLEXIBLE PAYMENT VARIABLE ANNUITY POLICIES This prospectus describes Multi-Account Flexible Payment Variable Annuity Policies ("Policies" or "Policy") issued by The Manufacturers Life Insurance Company of America ("Manufacturers Life of America"), a stock life insurance company that is an indirect wholly-owned subsidiary of The Manufacturers Life Insurance Company ("Manufacturers Life" or the "Company"). The Policies are designed for use in connection with retirement plans that may or may not be entitled to special income tax treatment. The Policies will be offered on both an individual basis and in connection with group or sponsored arrangements. The Policies provide for the accumulation of values on a fixed or variable basis. Annuity payments are available on a fixed basis only. Values accumulated on a variable basis will be held in one or more of the sub-accounts of The Manufacturers Life of America's Separate Account Two ("Account"). The assets of each sub-account will be used to purchase shares of a particular portfolio ("Fund") of Manulife Series Fund, Inc. (the "Series Fund"). The accompanying prospectus for the Series Fund describes the investment objectives of the Funds in which purchase payments may be invested: the Emerging Growth Equity Fund, the Balanced Assets Fund, the Capital Growth Bond Fund, the Money-Market Fund, the Common Stock Fund, the Real Estate Securities Fund, the International Fund, and the Pacific Rim Emerging Markets Fund. Other sub-accounts and Funds may be added in the future. This prospectus sets forth concisely the information concerning Separate Account Two that a prospective purchaser ought to know before making a purchase. Please read this prospectus carefully and keep it for future reference. It is valid only when accompanied by a current prospectus for Manulife Series Fund, Inc. Additional information concerning Separate Account Two has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing to the Service Office address or calling the number listed below and requesting the "Statement of Additional Information of Separate Account Two of The Manufacturers Life Insurance Company of America." The table of contents of the Statement of Additional Information is included in the prospectus following the listing of the prospectus contents. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Manufacturers Life Insurance Company of America 500 N. Woodward Ave. Bloomfield Hills, Michigan 48304 Service Office: 200 Bloor Street East Toronto, Ontario, Canada M4W 1E5 Telephone: 1 (800) 827-4546 1 (800) VARILIN(E) THE DATE OF THIS PROSPECTUS AND OF THE STATEMENT OF ADDITIONAL INFORMATION IS MAY 1, 1995. 1 4 PROSPECTUS CONTENTS
PAGE ---- STATEMENT OF ADDITIONAL INFORMATION CONTENTS DEFINITIONS . . . . . . . . . . . . . . . 3 SUMMARY OF POLICIES . . . . . . . . . . . 3 Who Sells The Policies? POLICYOWNER INQUIRIES . . . . . . . . . . 4 What Responsibilities Has Manufacturers Life EXPENSE TABLE . . . . . . . . . . . . . . 5 Assumed? CONDENSED FINANCIAL INFORMATION . . . . . 7 Who Are The Directors And Officers Of Manufacturers GENERAL INFORMATION ABOUT MANUFACTURERS Life of America? LIFE OF AMERICA, SEPARATE ACCOUNT TWO What State Regulations Apply? AND THE SERIES FUND . . . . . . . . 8 Is There Any Litigation Pending? Who Are Manufacturers Life of America And Where Can Further Information Be Found? Manufacturers Life? . . . . . . . . 8 Legal Matters What Is Manufacturers Life of America's Separate Experts Account Two? . . . . . . . . . . . . 8 Financial Statements What Is Manulife Series Fund, Inc.? . . . 8 What Are The Investment Objectives And Risks Of The Funds? . . . . . . . . . . . . . 9 Which Sub-Account(s) Should Be Selected? 10 THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN DESCRIPTION OF THE POLICIES . . . . . . . 11 ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT What Are The Policy Charges? . . . . . . 11 LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE How Is A Policy Purchased? . . . . . . . 13 ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING What Restrictions Apply To Purchase Payments? 14 OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. What Is The Variable Policy Value And How Is It Determined? . . . . . . . . . . . . 14 What Are The Provisions On Transfers? . . 15 What Surrender Or Withdrawal Rights Are Available? . . . . . . . . . . . 15 What Are The Death Benefit Provisions? . 16 When Do Annuity Payments Commence? . . . 16 Under What Circumstances May Fund Shares Be Substituted? . . . . . . . . . . . . 17 What Are The Other General Policy Provisions? . . . . . . . . . . . . . 17 FEDERAL TAX MATTERS . . . . . . . . . . . 18 How Is Manufacturers Life of America Taxed? . . . . . . . . . . . . . . . 18 What Is The Tax Treatment Of The Policies? . . . . . . . . . . . . . . 18 What Qualified Plans May Utilize The Policies? . . . . . . . . . . . . . . 19 OTHER MATTERS . . . . . . . . . . . . . . 20 What Voting Rights Do Policyowners Have? 20 Where Can Financial Information Be Found? 20 Performance And Other Comparative Information 20 APPENDIX A . . . . . . . . . . . . . . . 24 What Is The Guaranteed Interest Account? 24 What Are The Annuity Options? . . . . . . 24
2 5 DEFINITIONS "Accumulation Period" is the period from the date we receive the first purchase payment to the Annuity Date. "Annuity Date" means the date on which the first annuity payment is due. "General Account" is all assets of Manufacturers Life of America except those allocated to Separate Account Two or other separate accounts of Manufacturers Life of America. "Guaranteed Interest Account" is the account in which allocated purchase payments earn interest at a guaranteed rate set each Policy Anniversary. "Guaranteed Interest Rate" is the rate of interest accrued on a compounded annual basis and credited monthly on amounts allocated to the Guaranteed Interest Account and will be no less than 4% per year. "Qualified Policy" means a Policy used in connection with a retirement plan which receives favorable federal income tax treatment under sections 401, 408 or 457 of the Internal Revenue Code of 1986, as amended ("Code"). (See page 19 for a brief discussion of the qualified plans which may use the Policies.) "Policy Years" and "Policy Anniversaries" are determined from the date the application was signed. The first Policy Anniversary will be the first date of the same month one year later. "Purchase Payment" is an amount paid under the Policy. "Service Office" is the office designated by Manufacturers Life of America to service the Policy. "Total Policy Value" means the value during the Accumulation Period of amounts accumulated under the Policy. The Total Policy Value is the sum of the Variable Policy Value and the Guaranteed Interest Account. "Unit" is an index used to measure the value of a Policy's interest in a Variable Account. "Valuation Period" is the period between two successive valuation dates measured from the times on such dates as of which the valuations are made. A valuation date is each day that the net asset value of the underlying shares of Manulife Series Fund, Inc. is determined. "Variable Account" is a sub-account of Separate Account Two of Manufacturers Life of America. "Variable Policy Value" is the sum of the value of a Policy's interest in each of the Variable Accounts. SUMMARY OF POLICIES ELIGIBLE PURCHASERS. The Multi-Account Flexible Payment Variable Annuity Policies described in this prospectus are designed to provide a flexible investment program for the accumulation of amounts for retirement purposes under plans which receive favorable federal income tax treatment pursuant to sections 401, 408 or 457 of the Internal Revenue Code of 1986, as amended ("Qualified Policies"), or under plans and trusts not entitled to any special tax treatment ("Nonqualified Policies"). The Policies will be offered on both an individual basis and in connection with group or sponsored arrangements. (See "How Is A Policy Purchased?") FUNDING ARRANGEMENTS. The Policies are designed to provide flexibility as to the timing and amount of purchase payments and the available funding media. Purchase payments may be allocated among two types of accounts--Variable Accounts and a Guaranteed Interest Account. The Variable Accounts are sub-accounts of Separate Account Two, each sub-account investing in a corresponding portfolio of the Series Fund. The Guaranteed Interest Account is an account in which allocated purchase payments earn interest at a guaranteed rate set each Policy Anniversary. The fixed portion of the Policies, including provisions relating to the Guaranteed Interest Account and the annuity options, is described only in Appendix A to this prospectus unless specific reference to the fixed portion is otherwise made. 3 6 PURCHASE PAYMENTS. The minimum initial purchase payment is $1,000. This may be allocated to any of the Variable Accounts or to the Guaranteed Interest Account in increments of not less than $50. Subsequent purchase payments may be as little as $50. The minimum amount that may be allocated to any one Variable Account or to the Guaranteed Interest Account from purchase payments is $50. A Policyowner should specify how each purchase payment is to be allocated. If no allocation is specified, a purchase payment will be allocated entirely to the Guaranteed Interest Account. (See "What Restrictions Apply To Purchase Payments?") CHARGES AND DEDUCTIONS. There is no deduction from purchase payments for sales expenses. However, full surrender of a Policy or a cash withdrawal thereunder may be subject to a withdrawal charge (contingent deferred sales charge), which is a percentage of the amount of the requested withdrawal subject to the withdrawal charge. The applicable percentage will depend upon when the purchase payment to which such amount is deemed attributable was made. The maximum withdrawal charge is 8% of the amount withdrawn, decreasing by 1% each year after the first. However, in no event may the charge exceed 8% of the total purchase payments made. In addition, an administration fee equal to 2% of the Total Policy Value up to a maximum of $30 will be deducted annually if the Total Policy Value on the last day of any Policy Year is less than $25,000. This fee will also be deducted on a pro rata basis in the event the Policy is surrendered on other than the last day of a Policy Year if the Total Policy Value is less than $25,000. The administration fee will be taken before any withdrawal charge is applied. A deduction for mortality and expense risks is made from the Variable Policy Value at an annual rate of 1.00%. This charge is deducted daily from amounts invested in the Variable Accounts. A deduction may also be made for any applicable premium taxes attributable to the Policies (currently such taxes range from 0% to 3%). A $10 charge will be applied to any transfers between accounts in excess of the six transfers allowed each Policy Year. In addition, those Policyowners who wish to participate in the Dollar Cost Averaging program will be charged $5 per transfer or series of transfers occurring on the same transfer date if Total Policy Value is $15,000 or less and those who wish to participate in the Asset Allocation Balancer program will be charged $15 per transfer or series of tranfers occurring on the same transfer date. (See "What Are The Policy Charges?") ANNUITY PAYMENTS. Annuity payments will begin on the Annuity Date and will be on a fixed basis only. The Policyowner may change the Annuity Date to any date so long as payments will commence by the end of the year in which the annuitant reaches age 85. Under some Qualified Policies, annuity payments must commence no later than April 1 following the year the annuitant attains the age of 70 1/2. If application of the Total Policy Value would result in annuity payments of less than $20 monthly, $60 quarterly, $100 semi-annually or $200 annually, the Total Policy Value will be paid to the Policyowner in a single sum. (See "When Do Annuity Payments Commence?") SURRENDERS AND WITHDRAWALS. At any time prior to the Annuity Date, a Policyowner may fully surrender the Policy for, or make a cash withdrawal in an amount not exceeding, its Total Policy Value, reduced by any applicable withdrawal charge and administration fee. A full surrender or cash withdrawal may be subject to a tax penalty. (See "What Is The Tax Treatment Of The Policies?") The minimum cash withdrawal that may be requested at any one time is $300. Some Qualified Policies must contain restrictions on withdrawal rights. (See "What Surrender Or Withdrawal Rights Are Available?") TRANSFERS. Transfers may be made at any time among the Guaranteed Interest Account and Variable Accounts. Transfers to any Variable Account must be at least $500 or, if less, the balance of the account. Transfers to the Guaranteed Interest Account may be made in any amount. (See "What Are The Provisions On Transfers?") FREE LOOK RIGHT. Within ten days after receiving a Policy, the Policyowner may return it for cancellation by mailing it to the Service Office. Within seven days after receipt, except where state insurance law requires return of the Policy Value, Manufacturers Life of America will refund in full any purchase payments made. *** The above summary is qualified in its entirety by the detailed information appearing elsewhere in this prospectus and the accompanying prospectus of the Series Fund to which reference should be made. POLICYOWNER INQUIRIES All communications or inquiries relating to a Policy should be addressed to the Manufacturers Life of America Service Office at 200 Bloor Street East, Toronto, Ontario, Canada, M4W 1E5. All notices and elections under a Policy must be received at that Service Office to be effective. 4 7 EXPENSE TABLE Number of Complete Policy Years Elapsed Since Purchase Payment Made Withdrawal Charge Policyowner Transaction Expenses Withdrawal Charge (contingent deferred sales charge) (as a percentage of the lesser of amount surrendered or purchase payments)(1): 0 8.00% 1 7.00% 2 6.00% 3 5.00% 4 4.00% 5 3.00% 6 2.00% 7 1.00% Thereafter none Transfer Charge $10(2) Dollar Cost Averaging Charge(3) (if selected and applicable) $ 5 Asset Allocation Balancer Charge (if selected)(4) $15 ANNUAL CONTRACT FEE $30(5) SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average account value) Mortality and Expense Risks Charge 1.00% ----- 1.00% MANULIFE SERIES FUND, INC. International Fund Management Fees .85%(6) Other Expenses .50% Pacific Rim Emerging Markets Fund Management Fees .85%(6) Other Expenses .65% All Other Funds Management Fees .50% ----- Total Manulife Series Fund Annual Expense International Fund 1.35% Pacific Rim Emerging Markets Fund 1.50% All Other Funds .50% (1) The withdrawal charge decreases 1% each Policy Year elapsed since the purchase to which the withdrawal is deemed attributable was made. A withdrawal other than one made pursuant to the free withdrawal provision is deemed to be a liquidation of a purchase payment. The free withdrawal provision allows the Policyowner to withdraw in any Policy Year after the first up to 10% of the Total Policy Value as of the most recent Policy Anniversary free of the withdrawal charge.
5 8 EXAMPLE(7)
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- If you surrender your Policy at the end of the applicable time period: You would pay the following expenses on a $1,000 investment, assuming a 5% annual return on assets: INTERNATIONAL FUND $94 $123 $158 $273 PACIFIC RIM EMERGING MARKETS FUND $96 $128 $165 $288 ALL OTHER FUNDS $86 $ 99 $114 $184 If you do not surrender your Policy or if you annuitize at the end of the applicable time period: You would pay the following expenses on a $1,000 investment, assuming a 5% annual return on assets: INTERNATIONAL FUND $24 $ 75 $128 $273 PACIFIC RIM EMERGING MARKETS FUND $26 $ 79 $135 $288 ALL OTHER FUNDS $16 $ 49 $ 84 $184 (2) A $10 charge is deducted from the amount transferred on each transfer in excess of the first six made in a Policy Year. (3) Transfers pursuant to the optional Dollar Cost Averaging program are free if Policy Value exceeds $15,000 at the time of the transfer, but otherwise incur a $5 charge. (4) The Asset Allocation Balancer program is optional. If elected, there is a charge of $15 for transfers under the program. (5) An administration fee equal to 2% of the Total Policy Value up to a maximum of $30 is deducted during the accumulation period on the last day of a Policy Year if the Total Policy Value on that date is less than $25,000. The fee is also deducted on a pro rata basis upon full surrender of a Policy on a date other than the last day of a Policy Year. (6) The management fee will drop to .70% on assets over $100 million. (7) In the example above, the $30 annual administration charge has been reflected in the calculation of annual expenses by converting it to a percentage charge, adding the percentage charge to the Total Separate Account Annual Expenses (1.00%) and Total Manulife Series Fund, Inc. Annual Expenses (1.35% for the International Fund, 1.50% for the Pacific Rim Emerging Markets Fund and .50% for all other Funds) shown above and multiplying the resulting percentage figure by the average annual assets of the hypothetical account. The charge has been converted to a percentage by dividing the total administration charges collected during 1994 by the average total net assets attributable to the Policies during 1994, which values include amounts allocated to both Separate Account Two and the Guaranteed Interest Account.
The purpose of the above table is to assist a Policyowner in understanding the various costs and expenses that he or she will bear directly or indirectly, irrespective of the Variable Account to which purchase payments have been allocated. The table reflects expenses of Separate Account Two and Manulife Series Fund, Inc., but it does not reflect any deduction made to cover any premium taxes attributable to a Policy. Such taxes may be as much as 3% depending on the law of the applicable state or local jurisdiction. The example included in the above table should not be considered a representation of past or future expenses, and actual expenses may be greater or less than those shown. Information concerning charges assessed under the Policies is set forth under the caption "What Are The Policy Charges?" below. Information concerning the management fee paid by Manulife Series Fund, Inc. is provided under the caption "Investment Management Arrangements" in the Fund prospectus attached hereto. 6 9 CONDENSED FINANCIAL INFORMATION SCHEDULE OF ACCUMULATION UNIT VALUES AND ACCUMULATION UNITS OUTSTANDING FOR THE PERIOD NOVEMBER 3, 1987 THROUGH DECEMBER 31, 1994 SUB-ACCOUNTS
EMERGING GROWTH EQUITY ---------------------- 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $10.87 $12.58 $17.72 $14.93 $25.33 $30.55 $37.47 December 31 value $10.87 $12.58 $17.72 $14.93 $25.33 $30.55 $37.47 $35.58 December 31 units 329 11,285 22,539 41,687 76,705 288,277 874,970 1,454,901 CAPITAL GROWTH BOND ------------------- 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94 December 31 value $10.15 $10.77 $12.14 $12.81 $14.76 $15.47 $16.94 $16.02 December 31 units 1,039 17,737 36,191 51,268 69,024 168,747 499,877 672,365 COMMON STOCK ------------ 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $10.43 $11.35 $14.68 $13.94 $17.97 $18.88 $21.19 December 31 value $10.43 $11.35 $14.68 $13.94 $17.97 $18.88 $21.19 $20.10 December 31 units 709 7,257 20,202 43,044 78,327 194,079 485,195 803,568 INTERNATIONAL ------------- 1994 ---- October 4 (commencement) $10.00 January 1 value December 31 value $9.72 December 31 units 89,180 BALANCED ASSETS --------------- 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70 December 31 value $10.20 $10.87 $13.06 $13.13 $16.04 $16.87 $18.70 $17.75 December 31 units 1,645 21,509 47,074 118,664 201,901 515,812 1,293,920 2,001,928 MONEY-MARKET ------------ 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37 December 31 value $10.07 $10.68 $11.51 $12.28 $12.84 $13.15 $13.37 $13.75 December 31 units 7,161 23,091 32,907 160,484 122,681 176,160 328,922 918,869 REAL ESTATE SECURITIES ---------------------- 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- November 3 (commencement) $10.00 January 1 value $ 9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01 December 31 value $9.99 $11.05 $11.95 $11.30 $15.78 $18.96 $23.01 $22.16 December 31 units 1,642 12,733 17,676 17,834 24,956 134,707 711,630 1,205,880 PACIFIC RIM EMERGING MARKETS ---------------------------- 1994 ---- October 4 (commencement) $10.00 January 1 value December 31 value $9.41 December 31 units 67,272
7 10 GENERAL INFORMATION ABOUT MANUFACTURERS LIFE OF AMERICA, SEPARATE ACCOUNT TWO AND THE SERIES FUND WHO ARE MANUFACTURERS LIFE OF AMERICA AND MANUFACTURERS LIFE? Manufacturers Life of America, a wholly-owned subsidiary of The Manufacturers Life Insurance Company of Michigan, is a stock life insurance company organized under the laws of Pennsylvania on April 11, 1977 and redomesticated under the laws of Michigan on December 9, 1992. It is authorized to do business in the District of Columbia and all states of the United States except New York. The Manufacturers Life Insurance Company of Michigan is a life insurance company organized in 1983 under the laws of Michigan and is a wholly-owned subsidiary of Manufacturers Life, a mutual life insurance company based in Toronto, Canada. Manufacturers Life of America was acquired by Manufacturers Life in 1982. Manufacturers Life and its subsidiaries, together, constitute one of the largest life insurance companies in North America as measured by assets. WHAT IS MANUFACTURERS LIFE OF AMERICA'S SEPARATE ACCOUNT TWO? Manufacturers Life of America established its Separate Account Two on May 25, 1983 as a separate account under Pennsylvania law. Since December 9, 1992 it has been operated under Michigan law. The Account holds assets that are segregated from all of Manufacturers Life of America's other assets. The Account is currently used only to support variable annuity contracts. Manufacturers Life of America is the legal owner of the assets in the Account. The income, gains and losses of the Account, whether or not realized, are, in accordance with applicable contracts, credited to or charged against the Account without regard to the other income, gains or losses of Manufacturers Life of America. Manufacturers Life of America will at all times maintain assets in the Account with a total market value at least equal to the reserves and other liabilities relating to variable benefits under all Policies participating in the Account. These assets may not be charged with liabilities which arise from any other business Manufacturers Life of America conducts. However, all obligations under the Policies are general corporate obligations of Manufacturers Life of America. The Account is registered with the Securities and Exchange Commission ("S.E.C.") under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit investment trust is a type of investment company which invests its assets in specified securities, such as the shares of one or more investment companies, rather than in a portfolio of unspecified securities. Registration under the 1940 Act does not involve any supervision by the S.E.C. of the management or investment policies or practices of the Account. For state law purposes the Account is treated as a part or division of Manufacturers Life of America. WHAT IS MANULIFE SERIES FUND, INC.? Each sub-account of the Account will purchase shares only of a particular Fund of the Series Fund. The Series Fund is registered under the 1940 Act as an open-end diversified management investment company. The Account will purchase and redeem shares of the Series Fund at net asset value. Shares will be redeemed to the extent necessary for Manufacturers Life of America to provide benefits under the Policies, to transfer assets from one sub-account to another or to the general account as requested by Policyowners, and for other purposes not inconsistent with the Policies. Any dividend or capital gain distribution received from a Fund with respect to the Policies will be reinvested immediately at net asset value in shares of that Fund and retained as assets of the corresponding sub-account. Series Fund shares are issued to fund benefits under both variable annuity contracts and variable life insurance policies issued by Manufacturers Life of America and, with respect to the Manufacturers Life of America, for general investment purposes. For a description of the procedures for handling potential conflicts of interest arising from the funding of such benefits, see "Purchases And Redemptions Of Shares" in the attached Series Fund prospectus. The Series Fund receives investment management services from Manufacturers Adviser Corporation. Manufacturers Adviser Corporation is a registered investment adviser under the Investment Advisers Act of 1940. Certain expenses are assessed against the assets of the Series Fund. These are: (1) an investment management fee of (a) .50% of the average daily value of the aggregate net assets of the Emerging Growth Equity Fund, Common Stock Fund, Real Estate Securities Fund, Balanced Assets Fund, Capital Growth Bond Fund and Money-Market Fund, and (b) .85% of the average daily value of the first $100 million of net assets and .70% of the average daily value of the net assets over $100 million of each of the International Fund and the Pacific Rim Emerging Markets Fund and (2) expenses of up to .50% and .65% per annum assessed against the assets of the International Fund and the Pacific Rim Emerging Markets Fund, respectively. 8 11 WHAT ARE THE INVESTMENT OBJECTIVES AND RISKS OF THE FUNDS? The Funds are subject to varying degrees of financial and market risk. Financial risk refers to the ability of an issuer of a debt security to pay principal and interest on such security and to the earnings stability and overall financial soundness of an issuer of an equity security; market risk refers to the volatility of the reaction of the price of a security to changes in conditions in the securities markets in general and, with particular reference to debt securities, changes in the overall level of interest rates. The investment objectives of the Funds currently available to Policyowners through corresponding sub-accounts are set forth below. There is, of course, no assurance that these objectives will be met. EMERGING GROWTH EQUITY FUND. The investment objective of the Emerging Growth Equity Fund is to achieve growth of capital by investing primarily in equity securities of companies believed to offer growth potential over both the intermediate and the long term. Current income is not a significant consideration. In selecting investments, emphasis will be placed on securities of progressive companies with aggressive and competent managements. A substantial portion of the Fund's assets may be invested in emerging growth companies, which at the time of the Fund's investment may be paying no dividends to their shareholders. Emerging growth companies may have limited product lines, market or financial resources, or they may be dependent upon a small management group. An investment in the Emerging Growth Equity Fund may therefore involve greater financial risk than is customarily associated with less aggressive companies. In addition, the Fund may be subject to relatively high levels of market risk. The securities of aggressive growth companies may be subject to more abrupt or erratic market movements than other companies or the market averages in general. Because shares of the Emerging Growth Equity Fund may experience above-average fluctuations in net asset value, they should be considered as long-term investments. BALANCED ASSETS FUND. The investment objective of the Balanced Assets Fund is to achieve intermediate and long-term growth through capital appreciation and income by investing in both debt and equity securities. The Fund will maintain at all times a balance between debt securities or preferred stocks, on the one hand, and common stocks, on the other. At least 25% of the Fund's assets will be invested in each of the two basic categories. Investment in shares of the Balanced Assets Fund should involve less financial and market risk than an investment in the Emerging Growth Equity Fund. CAPITAL GROWTH BOND FUND. The investment objective of the Capital Growth Bond Fund is to achieve growth of capital by investing in medium-grade or better debt securities with income as a secondary consideration. The Capital Growth Bond Fund differs from most "bond" funds in that its primary objective is capital appreciation, not income. The Fund will be carefully positioned in relation to the term of debt obligations and the anticipated movement of interest rates. Because of the Fund's emphasis on medium-grade or better instruments, an investment in the Capital Growth Bond Fund should result in less financial risk than an investment in the Emerging Growth Equity Fund or Balanced Assets Fund. However, the Capital Growth Bond Fund will be subject to substantial market risk arising from changes in the level of prevailing interest rates and the Fund's active management in anticipation of such changes. MONEY-MARKET FUND. The investment objective of the Money-Market Fund is to provide maximum current income consistent with capital preservation and liquidity by investing in a portfolio of high-quality money market instruments. Investment in shares of the Money-Market Fund should involve less market or financial risk than an investment in any other Fund. However, the Fund's performance will vary with changes in short-term interest rates. COMMON STOCK FUND. The investment objective of the Common Stock Fund is to achieve intermediate and long-term growth through capital appreciation and current income by investing in common stocks and other equity securities of well established companies with promising prospects for providing an above-average rate of return. In selecting investments, emphasis will be placed on companies with good financial resources, strong balance sheet, satisfactory rate of return on capital, good industry position, superior management skills and earnings that tend to grow consistently. The Fund's investments are not limited to any particular type or size of company, but high-quality growth stocks are emphasized. Investment in shares of the Common Stock Fund should involve less financial and market risk than the Emerging Growth Equity Fund, but the Fund may occasionally experience above-average fluctuations in net asset value, and therefore should be considered as a long-term investment. REAL ESTATE SECURITIES FUND. The investment objective of the Real Estate Securities Fund is to achieve a combination of long-term capital appreciation and satisfactory current income by investing in real estate related equity and debt securities. In pursuit of its objective, the Real Estate Securities Fund will invest principally in real estate investment trust equity and debt securities and other securities issued by companies which invest in real estate or interests therein. The Fund may also purchase the common stocks, preferred stocks, convertible securities and bonds of companies operating in industry groups relating to the real estate industry. This 9 12 would include companies engaged in the development of real estate, building and construction, and other market segments related to real estate. The Fund will not invest directly in real property nor will it purchase mortgage notes directly. Under normal circumstances, at least 65% of the value of the Fund's total assets will be invested in real estate related equity and debt securities. Because the Fund considers current income in its investment objectives, an investment in the Real Estate Securities Fund should involve less financial and market risk than the Emerging Growth Equity Fund. However, the Fund's share value may experience above-average fluctuation in periods of changing interest rates and therefore the shares should be considered as long-term investments. INTERNATIONAL FUND. The investment objective of the International Fund is to achieve long-term growth of capital by investing in a diversified portfolio that is comprised primarily of common stocks and equity-related securities of companies domiciled in countries other than the United States and Canada. It invests primarily in the securities markets of Western European countries, Australia, the Far East, Mexico and South America. The Fund will, under normal conditions, invest at least 65% of its net assets in common stocks and equity-related securities of established larger-capitalization companies that have attractive long-term prospects for growth of capital. Investments of this type involve risks of political and economic instability in the country of the issuer, the possibility of imposition of foreign exchange controls, confiscatory taxation, and the restriction of capital repatriation. Such securities may be subject to greater fluctuations in price than domestic securities and, under certain market conditions, foreign securities may be less liquid than domestic securities. The risk of currency fluctuations is present since it is anticipated that, in general, the majority of securities in the Fund will not be denominated in United States currency. Accordingly, investment in the shares of the International Fund should involve more financial and market risk than any of the domestic Funds. Because the shares of the International Fund may experience above-average fluctuations in net asset value, they should be considered as long-term investments. PACIFIC RIM EMERGING MARKETS FUND. The investment objective of the Pacific Rim Emerging Markets Fund is to achieve long-term growth of capital by investing in a diversified portfolio that is comprised primarily of common stocks and equity-related securities of companies domiciled in the countries of the Pacific Rim region. The Fund will, under normal conditions, invest at least 65% of its net assets in common stocks and equity-related securities of established larger-capitalization companies that have attractive long-term prospects for growth of capital. Investments of this type involve risks of political and economic instability in the country of the issuer, the possibility of imposition of foreign exchange controls, confiscatory taxation, and the restriction of capital repatriation. Such securities may be subject to greater fluctuations in price than domestic securities and, under certain market conditions, foreign securities may be less liquid than domestic securities. The risk of currency fluctuations is present since it is anticipated that, in general, the majority of securities in the Fund will not be denominated in United States currency. Accordingly, investment in the shares of the Pacific Rim Emerging Markets Fund should involve more financial and market risk than any of the domestic Funds. Because the shares of the Pacific Rim Emerging Markets Fund may experience above-average fluctuations in net asset value, they should be considered as long-term investments. A full description of the Series Fund, its investment objectives, policies and restrictions, its expenses, the risks associated therewith, and other aspects of its operation is contained in the attached Series Fund prospectus, which should be read together with this prospectus. WHICH SUB-ACCOUNT(S) SHOULD BE SELECTED? The basic purpose of the variable portion of the Policies is to accumulate policy values through favorable investment results of the Funds selected by the Policyowner. The final decision on Fund(s) selection must be made by the Policyowner. Outlined below are a few points for consideration. MARKET RISK. The previous section discussed the investment objective of each Fund and its associated market risk. Before selecting a Fund or combination of Funds the Policyowner should determine his or her comfort level with market volatility, recognizing that the Policy is designed as a long-term contract. FINANCIAL RISK. Each Fund differs with respect to financial risk of principal. This variation also brings with it a divergent level of opportunity for investment gain or loss. The Policyowner should determine the financial risk he or she is willing to accept in relation to the potential for investment gain or loss. HISTORICAL PERSPECTIVE OF FUND OBJECTIVES. The above risks should be considered in conjunction with past general trends. Historically, if investments were held over relatively long periods, the investment performance of equities has generally been superior to that of long or short-term debt securities, even though equities have been subject to more dramatic changes in value over periods of time. Emerging growth equities have also tended to have better long-term investment performance when compared with larger, more mature equities, even though emerging growth equities, in turn, have been subject to more dramatic fluctuations in value. 10 13 Accordingly, the Emerging Growth Equity Fund may be the more desirable option for Policyowners who are focused on the longer term and are willing to accept such short-term risks. Over the past few decades to the present, certain foreign economies have grown faster than the United States economy, and the return on equity investments in these markets has often been superior to similar investments in the United States. The securities markets in different regions and countries have, at times in the past, moved relatively independently of one another as a result of different economic, political and financial factors. To the extent the various markets move independently, total portfolio volatility tends to be reduced when securities from the various markets are combined into a single portfolio. A low correlation between movement in one market and the Fund's total assets may, however, reduce the gains the Fund might otherwise derive from movements in that market. Currency exchange rates frequently move independently of securities markets in a particular country. As a result, gains or losses in a particular securities market may be affected by changes in currency exchange rates. Some Policyowners may prefer somewhat greater protection against financial and market risk than an investment in the Emerging Growth Equity Fund, the International Fund or the Pacific Rim Emerging Markets Fund, provides. These Policyowners may then prefer the Common Stock Fund or, if more comfortable with the long-term value of real estate, the Real Estate Securities Fund. Other Policyowners, being even more risk-averse, may prefer the Balanced Assets Fund, which maintains at all times a balance between debt securities or preferred stocks, on the one hand, and common stocks, on the other. Other Policyowners may prefer less financial risk than that which comes with an investment in either the Emerging Growth Equity Fund, the Common Stock Fund, the Real Estate Securities Fund, the Balanced Assets Fund, the International Fund, or the Pacific Rim Emerging Markets Fund. This is made possible by the Capital Growth Bond Fund's emphasis on investment in debt instruments. However, the Capital Growth Bond Fund will be subject to substantial market risk arising from changes in the level of prevailing interest rates and the Fund's active management in anticipation of such changes. Those who desire the least market or financial risk of all the Funds may prefer the Money-Market Fund, recognizing that the performance of this Fund will vary with changes in short-term interest rates. Some Policyowners may wish to divide their net premiums among two or more of the sub-accounts. Each Policyowner must make his or her own choice that takes into account how willing he or she is to accept investment risks, the manner in which his or her other assets are invested and his or her own predictions about what investment results are likely to be in the future. DESCRIPTION OF THE POLICIES WHAT ARE THE POLICY CHARGES? The following charges will apply to the Policies in the circumstances indicated. The imposition of the charges depends on the average net value of amounts invested in the Variable Accounts (mortality and expense risks charge), how large the Total Policy Value is (administration fee), whether cash withdrawals in excess of prescribed amounts are made or the Policy is fully surrendered (withdrawal charge), where the Policyowner resides (premium tax charge), and whether he or she makes transfers in excess of six per year (transfer charge). No deduction is made from purchase payments, unless the Policyowner lives in a jurisdiction that requires premium taxes to be so deducted, and consequently, 100% of the Policyowner's payment is usually credited in full to the Policy on the date made. ADMINISTRATION FEE. An administration fee equal to 2% of the Total Policy Value up to a maximum of $30 will be deducted during the accumulation period from a Policy on the last day of a Policy Year if the Total Policy Value on that date is less than $25,000. The Total Policy Value is the sum of the Variable Policy Value and the Guaranteed Interest Account. The administration fee will also be deducted on a pro rata basis upon full surrender of a Policy on a date other than the last day of a Policy Year if on the date of full surrender the Total Policy Value is less than $25,000. The fee will be taken before any withdrawal charge is applied. The fee will be deducted from the Guaranteed Interest Account and, if necessary, from the value of the Policy in the Variable Accounts in the following order: the Variable Account invested in shares of the Money-Market Fund, the Variable Account invested in shares of the Capital Growth Bond Fund, the Variable Account invested in shares of the Emerging Growth Equity Fund, the Variable Account invested in shares of the Balanced Assets Fund, the Variable Account invested in shares of the Common Stock Fund, the Variable Account invested in shares of the Real Estate Securities Fund, the Variable Account invested in shares of the International Fund, and the Variable Account invested in shares of the Pacific Rim Emerging Markets Fund. The administration fee is paid to Manufacturers Life of America to compensate it for the administrative costs associated with the Policies and the operations of Separate Account Two, including the establishment and maintenance of Policy records, processing 11 14 transactions and communicating with Policyowners. Although administrative expenses may rise in the future, Manufacturers Life of America guarantees that it will not increase the amount of the administration fee under outstanding Policies. Moreover, Manufacturers Life of America does not expect to recover from the administration fee any amount in excess of its accumulated administrative expenses. WITHDRAWAL CHARGE. A withdrawal charge (contingent deferred sales charge) may be imposed on cash withdrawals from, and the full surrender of, a Policy. A cash withdrawal will result in a reduction in the Total Policy Value by an amount equal to the amount withdrawn. A full surrender will reduce the Total Policy Value to zero, thus resulting in termination of the Policy. The withdrawal charge is designed to partially compensate Manufacturers Life of America for the cost of selling and distributing the Policies. The cost includes agents' commissions, advertising, agent training and the printing of prospectuses and sales literature. Agents' commissions will not exceed 5% of purchase payments. Under certain circumstances agents may be eligible for a bonus payment not exceeding 1% of purchase payments. In addition, agents who meet certain productivity and persistency standards will be eligible for additional compensation. In any Policy Year after the first and before the Annuity Date, up to 10% of the Total Policy Value as of the most recent Policy Anniversary may be surrendered or withdrawn free of the withdrawal charge. Amounts surrendered or withdrawn during a Policy Year which exceed 10% of the Total Policy Value as of the most recent Policy Anniversary will be subject to a withdrawal charge. The withdrawal charge is determined by applying a percentage to the amount of the requested withdrawal subject to the withdrawal charge, which percentage is based upon when the purchase payments to which such amount is deemed attributable were made, as follows:
NUMBER OF COMPLETE POLICY YEARS ELAPSED SINCE PURCHASE PAYMENT WAS MADE: WITHDRAWAL CHARGE -------------------------------- ----------------- 0 8% 1 7% 2 6% 3 5% 4 4% 5 3% 6 2% 7 1% 8 0%
Where the amount withdrawn is deemed attributable to purchase payments made in different Policy Years, different percentages will be applied to the portions of the amount withdrawn attributable to such payments. For purposes of determining the withdrawal charge applicable to a full surrender or cash withdrawal, any amount surrendered or withdrawn, other than an amount not subject to a withdrawal charge by reason of the 10% withdrawal provision described above, will be deemed to be a liquidation of a purchase payment, and the oldest previously unliquidated purchase payment will be deemed to have been liquidated first, then the next oldest and so forth. In addition, all purchase payments made during a Policy Year will be deemed to have been made on the first day of such year. Once all purchase payments have been liquidated, additional amounts surrendered or withdrawn will not be subject to a withdrawal charge. Thus, in no event may the withdrawal charge exceed 8% of the total purchase payments made. No withdrawal charge will be applied: (1) at the Annuity Date, (2) when the Policyowner is an individual and a death benefit payment is being made or (3) when the Policyowner is not an individual and a death benefit payment is being made on account of the death of the annuitant. A withdrawal charge will apply if the Policy is not owned by an individual and a death benefit payment is being made solely because a new annuitant has been named. (See "What Are The Death Benefit Provisions?") A death benefit not subject to the withdrawal charge also includes any payment to the spouse of the individual Policyowner after the Policyowner's death, except for a full surrender or cash withdrawal attributable to purchase payments made after the death of the Policyowner. Any withdrawal charge applicable to a full surrender or cash withdrawal and any applicable administration fee will be deducted from the amount being withdrawn. The minimum cash withdrawal that can be requested at any one time is $300. 12 15 Manufacturers Life of America does not expect to recover its total sales expenses through the withdrawal charge. To the extent that the withdrawal charge is insufficient to recover sales expenses, Manufacturers Life of America will pay sales expenses from its other assets or surplus. These assets may include proceeds from the mortality and expense risks charge described below. MORTALITY AND EXPENSE RISKS CHARGE. A charge at an annual rate of 1.00% of the Variable Policy Value is made for the mortality and expense risks that Manufacturers Life of America assumes. This charge is deducted daily from amounts invested in the Variable Accounts by assessing a charge against the assets of Separate Account Two at an annual rate of 1.00%, consisting of .10% for the mortality risk and .90% for the expense risk. The mortality risk assumed is the risk that annuitants may live for longer periods of time than the periods indicated in the mortality tables on which Manufacturers Life of America calculated the annuity tables in the Policies and the risk that mortality will cause a Policy to terminate prematurely before the assumed annuitization date. The expense risk assumed is that expenses in administering the Policies will be greater than Manufacturers Life of America estimated. Manufacturers Life of America will realize a gain from this charge to the extent it is not needed to provide benefits and pay expenses under the Policies. PREMIUM TAX CHARGE. Manufacturers Life of America will deduct any premium or similar state or local tax attributable to a Policy. Currently, such taxes range up to 3% depending on applicable law. Although the deduction can be made either from purchase payments or from the Total Policy Value, it is anticipated that premium taxes will be deducted from the Total Policy Value at the time it is applied to provide an annuity unless required otherwise by applicable law. When taken from the Total Policy Value before annuitization, the premium tax deduction will be made first from the Guaranteed Interest Account and, if necessary, from the Variable Accounts in the manner described above for the administration fee. TRANSFER CHARGE. A Policyowner is allowed to direct six transfers free of charge each Policy Year. Thereafter, each additional direction to transfer will be subject to a $10 charge, which will be deducted from the first amount being transferred. There is no minimum transfer amount required for transfers to the Guaranteed Interest Account. A minimum of $500 or, if less, the entire account balance, is required for a request to transfer to any Variable Account. If a transfer would result in a Variable Account having a remaining balance less than $300, Manufacturers Life of America will cancel those units and transfer their value to the Guaranteed Interest Account. DOLLAR COST AVERAGING CHARGE. Currently, there is no charge for Dollar Cost Averaging transfers if Policy Value exceeds $15,000; otherwise there is a charge of $5.00 per transfer or series of transfers taking place on the same transfer date. This charge will be deducted from the account from which funds are transferred. If insufficient funds exist to effect a Dollar Cost Averaging transfer, including the charge, if applicable, the transfer will not be effected. ASSET ALLOCATION BALANCER CHARGE. The current charge for Asset Allocation Balancer transfers is $15 for each transfer or series of transfers taking place on the same transfer date. This charge will be deducted from all accounts affected by the Asset Allocation Balancer transfer in the same proportion as the value in each account bears to the Total Policy Value immediately after the transfer. HOW IS A POLICY PURCHASED? The Policies are designed for use in connection with retirement plans entitled to special tax treatment under Sections 401, 408 or 457 of the Code and retirement plans and trusts not entitled to any special tax treatment. The Policies are appropriate for plans with individual accounts or for purchase directly by individuals. Persons seeking to purchase Policies must submit an application and a check for the initial purchase payment. The application is subject to underwriting standards adopted by Manufacturers Life of America, and Manufacturers Life of America reserves the right to reject any application. A properly completed application that is accompanied by the first purchase payment and all information necessary for the processing of the application will normally be accepted within two business days. An incomplete application which is subsequently made complete will normally be accepted within two business days of completion; however, if an application is not completed properly or necessary information is not obtained within five business days, Manufacturers Life of America will offer to return the purchase payment. FREE LOOK RIGHT. Within ten days after receiving a Policy, the Policyowner may return it for cancellation by mailing it to the Service Office. Immediately upon its receipt, the Policy will be deemed void from the beginning. Within seven days after receipt, except where state insurance law requires return of the Policy Value, Manufacturers Life of America will refund in full any purchase payment made. 13 16 WHAT RESTRICTIONS APPLY TO PURCHASE PAYMENTS? Purchase payments are made directly by the Policyowner. They may be made at any time until the Annuity Date or until the Policy is fully surrendered. If the Policyowner is an individual, purchase payments will not be permitted after the Policyowner's death unless the beneficiary is the Policyowner's spouse. If the Policyowner is not an individual, purchase payments will not be permitted after the annuitant's death, unless the policyowner is the trustee of a trust which is part of a qualified retirement plan described in section 401(a) of the Code. Purchase payments must be made to the Manufacturers Life of America Service Office. The minimum initial purchase payment is $1,000. This may be allocated to any of the Variable Accounts or to the Guaranteed Interest Account in increments of not less than $50. Subsequent purchase payments may be as little as $50, although higher or lower increments may be invoked with respect to purchase payments payable pursuant to a pre-authorized payment plan. The minimum amount that may be allocated to any one Variable Account or to the Guaranteed Interest Account from purchase payments is $50. If an additional purchase payment would cause the Total Policy Value to exceed $1,000,000, or if the Total Policy Value should already exceed $1,000,000, the prior approval of Manufacturers Life of America will be required for an additional purchase payment. If the Total Policy Value should fall to zero, the Policy will be terminated and no further purchase payments may be made. A Policyowner should specify how each purchase payment is to be allocated. If no allocation is specified, a purchase payment will be allocated entirely to the Guaranteed Interest Account. Allocations will be made at the end of the valuation period in which the purchase payment is received at the Manufacturers Life of America Service Office. Manufacturers Life of America will send a confirmation of its receipt of each purchase payment mailed by the Policyowner. If a purchase payment is allocated to the Guaranteed Interest Account because no allocation was specified, a notice of that fact will accompany the confirmation. WHAT IS THE VARIABLE POLICY VALUE AND HOW IS IT DETERMINED? The Variable Policy Value is the sum of a Policy's interest in each of the Variable Accounts. It is determined by multiplying the number of units credited to the policy for each Variable Account by the current unit value. The Variable Policy Value on any date that is not a valuation date will be determined as of the next valuation date. CREDITING UNITS. Upon receipt of a purchase payment at its Service Office, Manufacturers Life of America credits the Policy with a number of units for each Variable Account based upon the portion of the purchase payment allocated to the Variable Account. The number of units to be credited for each Variable Account is determined by dividing the portion of the purchase payment allocated to that Variable Account by the unit value for the valuation period in which the purchase payment and, with respect to the initial payment only, all required documentation properly completed was received at the Service Office. Units for a Variable Account are also credited in a similar manner to reflect any transfers to a Variable Account. The value of a unit varies from one valuation period to the next depending upon the investment results of the applicable Variable Account. The value of a unit for each Variable Account was arbitrarily set at $10 for the first valuation period in which monies were first allocated to that Variable Account. The value of a unit for any subsequent valuation period is determined by multiplying the value for the immediately preceding valuation period by the net investment factor for that Variable Account for the valuation period for which the value is being determined. NET INVESTMENT FACTOR. The net investment factor is an index applied to measure the investment performance of a Variable Account from one valuation period to the next. The net investment factor may be greater than, less than or equal to one. Therefore, the value of a unit may increase, decrease or remain the same. The net investment factor for any Variable Account for any valuation period is determined by adding one to the fraction obtained by dividing (a) by (b) and then subtracting (c) from the result, where: (a) is the investment income plus realized and unrealized gains and losses of the Variable Account during the valuation period; (b) is the value of the net assets of the Variable Account as of the beginning of the valuation period adjusted for allocations and transfers to and withdrawals and transfers from the Variable Account; and (c) is the risk charge factor determined by Manufacturers Life of America for the valuation period to reflect its charge for assuming the mortality and expense risks. This mortality and expense risks charge will be deducted at an annual rate of 1%. Manufacturers Life of America reserves the right to adjust the above formula to provide for any taxes determined by it to be attributable to the operations of the Variable Account. 14 17 CANCELLING UNITS. Units will be cancelled to reflect the assessment of any administration fee or premium tax deduction assessed against a Variable Account and any transfers or withdrawals from a Variable Account. The number of units cancelled will be based upon the applicable unit value for the valuation period in which the assessment, transfer or withdrawal is made. Units will also be cancelled on the Annuity Date or upon surrender of the Policy or payment of a death benefit. WHAT ARE THE PROVISIONS ON TRANSFERS? Subject to the minimums described below, transfers may be made among any of the accounts at any time during the Policy Year. There is no minimum transfer amount required for transfers to the Guaranteed Interest Account, but a request to transfer to any Variable Account must be at least $500 or, if less, the entire account balance. Manufacturers Life of America will allow a Policyowner to direct six transfers free of charge during a Policy Year. Multiple transfers made at the same time will be treated as one direction to transfer. Each additional direction to transfer during the same Policy Year will be subject to a $10 charge, which will be deducted from the first amount being transferred. Transfers made pursuant to the Dollar Cost Averaging or Asset Allocation Balancer programs do not reduce the six transfers that may be made without charge each year. Transfer requests must be in a format satisfactory to Manufacturers Life of America and in writing, or by telephone if a currently valid telephone transfer authorization form is on file. Although failure to follow reasonable procedures may result in Manufacturers Life of America's liability for any losses resulting from unauthorized or fraudulent telephone transfers, Manufacturers Life of America will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine. Manufacturers Life of America will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures shall consist of confirming a valid telephone authorization form is on file, tape recording all telephone transactions and providing written confirmation thereof. DOLLAR COST AVERAGING. Manufacturers Life of America will offer Policyowners a Dollar Cost Averaging program. Under this program amounts will be automatically transferred at predetermined intervals from one Variable Account to any other Variable Account(s) or the Guaranteed Interest Account. Under the Dollar Cost averaging program the Policyowner will designate a dollar amount of available assets to be transferred each month from one Variable Account into any other Variable Account(s) or the Guaranteed Interest Account. Each transfer under the Dollar Cost Averaging program must be at least $500 and Manufacturers Life of America reserves the right to change this minimum at any time upon notice to the Policyowner. Currently, there is no charge for this program if Total Policy Value exceeds $15,000; otherwise a charge of $5.00 per transfer or series of transfers occuring on the same transfer date will apply. If insufficient funds exist to effect a Dollar Cost Averaging transfer, including the charge, if applicable, the transfer will not be effected and the Policyowner will be so notified. Manufacturers Life of America reserves the right to cease to offer the Dollar Cost Averaging program on 90 days' written notice to the Policyowner. ASSET ALLOCATION BALANCER. Manufacturers Life of America will also offer Policyowners the ability to have amounts automatically transferred among stipulated accounts to maintain an allocated percentage in each stipulated account. Under the Asset Allocation Balancer program the Policyowner will designate an allocation of Total Policy Value among the Variable Accounts. On the Policy Anniversary, and at six month intervals thereafter, Manufacturers Life of America will move amounts out of Variable Accounts and into other Variable Accounts as necessary to maintain the Policyowner's chosen allocation. Currently, the charge for this program is $15 per transfer or series of transfers occurring on the same transfer date. Manufacturers Life of America reserves the right to cease to offer the Asset Allocation Balancer Program on 90 days' written notice to the Policyowner. WHAT SURRENDER OR WITHDRAWAL RIGHTS ARE AVAILABLE? At any time prior to the Annuity Date, a Policyowner may fully surrender the Policy for, or make a cash withdrawal in an amount not exceeding, its Total Policy Value, reduced by any applicable withdrawal charge and administration fee. For certain Qualified Policies, exercise of the right to surrender may require the consent of the Policyowner's spouse under regulations promulgated by the Treasury or Labor Department. In the case of a full surrender of a Policy, Manufacturers Life of America will pay the Total Policy Value less any applicable withdrawal charge and administration fee as of the valuation period in which the request for surrender is received at its Service Office, and the Policy will be cancelled. In the case of a cash withdrawal from the Variable Account, Manufacturers Life of America will 15 18 pay the amount requested less any applicable withdrawal charge and cancel that number of units credited to each Variable Account necessary to equal the amount of the withdrawal. For a cash withdrawal, the Policyowner should specify the account from which the withdrawal should be made. If no specification is made, the withdrawal will be made first from the Guaranteed Interest Account and, if necessary, from the value of the Policy in the Variable Accounts in the following order: the Variable Account invested in shares of the Money-Market Fund, the Variable Account invested in shares of the Capital Growth Bond Fund, the Variable Account invested in shares of the Emerging Growth Equity Fund, the Variable Account invested in shares of the Balanced Assets Fund, the Variable Account invested in shares of the Common Stock Fund, the Variable Account invested in shares of the Real Estate Securities Fund, the Variable Account invested in shares of the International Fund and the Variable Account invested in shares of the Pacific Rim Emerging Markets Fund. There is no limit on the frequency of cash withdrawals; however, the requested withdrawal must be at least $300. Any request for a cash withdrawal or to fully surrender a Policy must be in writing and delivered to the Manufacturers Life of America Service Office. If the amount withdrawn exceeds $10,000, it must be accompanied by a guarantee of the Policyowner's signature by a commercial bank, trust company, member of the National Association of Securities Dealers, Inc., a notary public, or any other individual or association designated by Manufacturers Life of America. WHAT ARE THE DEATH BENEFIT PROVISIONS? If the Policyowner dies before the Annuity Date and the beneficiary is not the Policyowner's spouse, the entire value of the Policy must either be distributed to the beneficiary in a lump sum within five years of the Policyowner's death or applied to provide an annuity. If applied to provide an annuity, the annuity must begin within one year of the Policyowner's death. Until a lump-sum distribution is made or an annuity option is elected, the Variable Policy Value will continue to reflect the investment performance of the selected Variable Accounts unless a transfer or withdrawal is made by the beneficiary. The Total Policy Value on the date the Service Office receives notice of the beneficiary's election of an annuity will be used to purchase an annuity. All of the annuity options available on the Annuity Date are available to a beneficiary, except that the beneficiary may not select a joint and survivor annuity or an annuity with a certain period that is longer than the beneficiary's life expectancy. (See "What Are The Annuity Options?" in Appendix A.) If the Policyowner's spouse is the beneficiary, the Policy will continue with the spouse as the Policyowner. If the Policyowner was also the annuitant, the spouse must choose a new annuitant. If the Policyowner is not an individual and either the annuitant dies before the Annuity Date or the Policyowner changes the annuitant, the entire value of the Policy must be paid to the Policyowner in a lump sum not later than five years after the annuitant's death or the change in annuitant. The Policyowner may select the date of payment. If a Qualified Policy is owned by the trustee of a plan described in section 401 of the Code, the trustee may continue the Policy after the death of the annuitant. If the trustee continues the Policy, a new annuitant must be named. WHEN DO ANNUITY PAYMENTS COMMENCE? Annuity payments will begin on the Annuity Date. Such payments will be made by application of the Total Policy Value to provide an annuity. Annuity payments will be made on a fixed basis only. The annuity options available are described in Appendix A under "What Are The Annuity Options?". The Policyowner selects the Annuity Date in the application. The Policyowner may change the Annuity Date to any date prior to the end of the Policy Year in which the annuitant reaches age 85 except in the case of Qualified Policies. Written request for such change must be received by the Manufacturers Life of America Service Office at least thirty days prior to the new Annuity Date. There are legal restrictions on the Annuity Date for Qualified Policies. In general, annuity payments for Qualified Policies owned by an individual cannot begin later than April 1 following the calendar year in which the Policyowner attains age 70 . There are some exceptions to this requirement. If the Policy is owned by the trustee of a trust established pursuant to an employer retirement plan, the Annuity Date is determined by the terms of the trust and plan. Annuity payments may be made either monthly, quarterly, semi-annually or annually. If application of the Total Policy Value would result in annuity payments of less than $20 monthly, $60 quarterly, $100 semi-annually or $200 annually, Manufacturers Life of America will pay the Total Policy Value to the Policyowner in a single sum in lieu of annuity payments. 16 19 If a Qualified Policy is held by a trustee under an employee benefit plan described in section 401(a) of the Code, the trustee may, prior to the Annuity Date, have part of the Total Policy Value applied to provide an annuity (partial annuitization). The same rules that apply to annuity payments commencing on the Annuity Date apply to partial annuitization. If the trustee partially annuitizes, the Total Policy Value will be reduced by the amount applied to provide an annuity. Any withdrawal or surrender made after partial annuitization will continue to be subject to withdrawal charges. For purposes of determining the amount of the withdrawal charge, the amounts applied to provide an annuity will not be treated as a liquidation of a purchase payment. (See "What Surrender Or Withdrawal Rights Are Available?") UNDER WHAT CIRCUMSTANCES MAY FUND SHARES BE SUBSTITUTED? Although Manufacturers Life of America believes it to be highly unlikely, it is possible that in the judgment of its management, one or more of the Funds may become unsuitable for investment by the Account because of a change in investment policy or a change in the tax laws, because the shares are no longer available for investment, or for some other reason. In that event, Manufacturers Life of America may seek to substitute the shares of another Fund or of an entirely different mutual fund. Before this can be done, the approval of the S.E.C. and one or more state insurance departments may be required. Manufacturers Life of America also reserves the right to combine other separate accounts with the Account, to establish additional sub-accounts within the Account, to operate the Account as a management investment company or other form permitted by law, and to deregister the Account under the 1940 Act. Any such change would be made only if permissible under applicable federal and state law. WHAT ARE THE OTHER GENERAL POLICY PROVISIONS? DEFERRAL OF PAYMENTS. Manufacturers Life of America reserves the right to postpone the transfer or payment of any value or benefit available under a Policy based upon the assets allocated to Separate Account Two for any period: (1) when the New York Stock Exchange ("Exchange") is closed (other than customary weekend and holiday closings); (2) when trading on the Exchange is restricted; (3) when an emergency exists as a result of which disposal of securities held in Separate Account Two is not reasonably practicable or it is not reasonably practicable to determine the value of the Account's net assets; or (4) during any other period when the S.E.C., by order, so permits for the protection of security holders; provided that applicable rules and regulations of the S.E.C. shall govern as to whether the conditions described in (2) and (3) exist. Manufacturers Life of America also reserves the right to delay transfer or payment of assets from the Guaranteed Interest Account for up to six months and will pay interest at a rate determined by it if there is a delay in payment for more than 30 days. ANNUAL STATEMENTS. Within 30 days after each Policy Anniversary, Manufacturers Life of America will send the Policyowner a statement showing: (1) the summary of each active account up to the most recent Policy Anniversary including the Total Policy Value up to the Policy Anniversary date; and (2) a description of the transactions affecting each active account during the Policy Year including total units cancelled, amounts deducted from each account for fees, and total units and amounts credited to each account as allocations or interest. OWNERSHIP. The Policyowner is the person entitled to exercise all rights under a Policy. As such, any Policy rights or privileges may be exercised without the consent of the annuitant, beneficiary or any other individual, except as provided by the Policyowner. Except as discussed below, ownership of the Policy may be changed or the Policy collaterally assigned at any time prior to the Annuity Date, subject to the rights of any irrevocable beneficiary or other person. Any change of ownership or assignment must be made in writing and will not take effect until received at the Manufacturers Life of America Service Office. Manufacturers Life of America assumes no responsibility for the validity of any assignment. In the case of a Qualified Policy, there may be restrictions on the privileges of ownership. Some plans do not permit the exercise of certain of the Policyowner's rights without the written consent of the owner's spouse. Among the rights limited are the right to choose an optional form of payment; to make withdrawals; or to surrender the Policy. A Qualified Policy which is not owned by a trustee of a trust which qualifies under section 401(a) of the Code, or by an employer under a plan which satisfies section 457 of the Code, may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than to Manufacturers Life of America except as may be provided by applicable state or federal law. 17 20 BENEFICIARY. Ownership of the Policy will pass to the designated beneficiary on the death of the Policyowner. The beneficiary is the person designated in the application or as subsequently named. The beneficiary may be changed at any time by written notice to Manufacturers Life of America. Any change will be effective on the date written notice is received at the Manufacturers Life of America Service Office. If no beneficiary survives the Policyowner, ownership will pass to the Policyowner's estate. In the case of Qualified Policies, regulations promulgated by the Departments of Labor and Treasury prescribe certain limitations on the designation of a beneficiary. MODIFICATION. A Policy may not be modified by Manufacturers Life of America without the consent of the Policyowner, except where required to conform to any applicable law or regulation or any ruling issued by a government agency. FEDERAL TAX MATTERS HOW IS MANUFACTURERS LIFE OF AMERICA TAXED? Manufacturers Life of America is taxed as a life insurance company under Subchapter L of the Code. Since the operations of the Account are part of, and are taxed with, the operations of Manufacturers Life of America, the Account is not separately taxed as a "regulated investment company" under Subchapter M of the Code. Under existing federal income tax laws, investment income and capital gains of the Account are not taxed to the extent they are applied to increase reserves under the Policies. Since, under the Policies, investment income and realized capital gains are automatically applied to increase reserves, Manufacturers Life of America does not anticipate that it will incur any federal income tax liability attributable to the Account, and therefore Manufacturers Life of America does not intend to make provision for any such taxes. However, if changes in the federal tax laws or interpretations thereof result in Manufacturers Life of America being taxed on such income or gains, then Manufacturers Life of America may impose a charge against the Account in order to make provision for such taxes. WHAT IS THE TAX TREATMENT OF THE POLICIES? The Policies are designed for use in connection with retirement plans that may or may not qualify for special income tax treatment under the provisions of the Code. The following discussion of federal income tax aspects of amounts received under a variable annuity contract is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. A qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. President Bush's Budget, submitted to Congress on January 30, 1992, contained a proposal that would tax the annual inside build-up in certain annuities. If that proposal had been enacted (which it was not), interest and earnings on non-qualified deferred annuities without life contingencies (i.e., where the purchaser does not irrevocably choose as the settlement option a series of substantially equal payments made over the life of the annuitant) would be taxed on a current basis (i.e., when the interest or earnings were credited). While this proposal was not enacted, Congress remains interested in the taxation of the inside build-up of annuity contracts. Policyholders should consult their tax advisers regarding the status of new, similar provisions before purchasing the Policy. Section 72 of the Code governs taxation of annuities in general. Under existing provisions of the Code, except as described below, any increase in the value of an annuity contract is not taxable to the contract owner or annuitant until received, either in the form of annuity payments, as contemplated by the contract, or in some other form of distribution. However, as a general rule, deferred annuity contracts held by a corporation, trust or other similar entity, as opposed to a natural person, are not treated as annuity contracts for federal tax purposes. The investment income on such contracts is taxed as ordinary income that is received or accrued by the owner of the contract during the taxable year. In certain circumstances, contracts will be treated as held by a natural person if the nominal owner is a non-natural person and the beneficial owner is a natural person, but this special exception will not apply in the case of any employer who is the nominal owner of an annuity contract providing non-qualified deferred compensation for its employees. Exceptions to the general rule (of immediate taxation) for contracts which are held by a corporation, trust, or similar entity may apply with respect to (1) annuities held by an estate of a decedent, (2) annuity contracts issued in connection with qualified retirement plans, or IRAs, (3) certain annuities purchased by employers upon the termination of a qualified retirement plan, (4) certain annuities used in connection with structured settlement agreements, and (5) annuities purchased with a single premium when the annuity starting date is no later than a year from purchase of the annuity. When annuity payments commence, each payment is taxable under Section 72 of the Code as ordinary income in the year of receipt if the Policyowner has not previously been taxed on any portion of the purchase payments. If any portion of the purchase payments has been included in the taxable income of the Policyowner, this aggregate amount will be considered the "investment in the 18 21 contract." For fixed annuity payments, there is no tax on the portion of each payment which represents the same ratio that the "investment in the contract" bears to the total expected value of the annuity payments for the term of the contract; the remainder of each payment is taxable. However, once the total amount of the taxpayer's investment in the contract is excluded using this ratio, annuity payments will be fully taxable. If annuity payments cease before the total amount of the taxpayer's investment in the contract is recovered, the unrecovered amount will be allowed as a deduction to the Policyowner in his or her last taxable year. In the case of a withdrawal, amounts received are taxable as ordinary income to the extent that the cash value of the contract (determined without regard to any withdrawal charges) before the withdrawal exceeds the "investment in the contract." Amounts loaned under an annuity contract or amounts received pursuant to an assignment or pledge of an annuity contract are treated as withdrawals. There are special rules for loans to participants from annuity contracts held in connection with qualified retirement plans or IRAs. With respect to contracts issued after April 22, 1987, if an individual transfers an annuity contract without adequate consideration to a person other than his or her spouse (or former spouse incident to divorce), he or she will be taxed on the difference between the contract value minus any withdrawal charge and the investment in the contract at the time of transfer. In such case, the transferee's investment in the contract will be increased to reflect the increase in the transferor's income. In addition, there is a 10% penalty tax on the taxable amount of any payment unless the payment is: (a) received on or after the contract owner reaches age 59 1/2; (b) attributable to the contract owner's becoming disabled; (c) made to a beneficiary on the death of an annuitant or contract owner; (d) made as a series of substantially equal periodic payments for the life of the annuitant (or the joint lives of the annuitant and beneficiary), subject to certain recapture rules; (e) made under an annuity contract that is purchased with a single premium whose annuity starting date is no later than a year from purchase of the annuity; (f) attributable to investment in the contract before August 14, 1982; and (g) made with respect to certain annuities issued in connection with structured settlement agreements. Also, special rules may apply to annuity contracts issued in connection with qualified retirement plans. For both withdrawals and annuity payments under some types of plans qualifying for special federal income tax treatment ("qualified plans"), there may be no "investment in the contract" and the total amount received may be taxable. Where the Policy is owned by an individual, Manufacturers Life of America will withhold and remit to the U.S. Government a part of the taxable portion of each distribution made under a Policy unless the distributee notifies Manufacturers Life of America at or before the time of the distribution that he or she elects not to have any amounts withheld. The withholding rates applicable to the taxable portion of periodic annuity payments are the same as the withholding rates generally applicable to payments of wages. The withholding rate applicable to the taxable portion of nonperiodic payments (including withdrawals prior to the annuity commencement date) is 10%. Where the Policy is not owned by an individual or in connection with a qualified plan, special withholding rules may apply. In connection with the issuance of temporary regulations relating to diversification requirements for separate accounts or funds underlying variable life and annuity policies, the Treasury Department has announced that such regulations do not provide guidance concerning the extent to which Policyowners may direct their investments to particular sub-accounts of the Account. Regulations in this regard are expected in the near future. It is not clear what these regulations will provide or whether they will be prospective only. It is possible that when regulations are issued, the Policy may need to be modified to comply with such regulations. For purposes of determining a Policyholder's gross income, the Code provides that all deferred annuity contracts issued by the same company to the same Policyholder during any calendar year shall be treated as one annuity contract. Additional rules may be promulgated under this provision to prevent avoidance of its effect. For further information on current aggregation rules under this and other Code provisions, see your tax adviser. WHAT QUALIFIED PLANS MAY UTILIZE THE POLICIES? The contracts are available for use with several types of qualified plans. The tax rules applicable to participants in such qualified plans vary according to the type of plan and the terms and conditions of the plan itself. Therefore, no attempt is made to provide more than general information about the use of the Policies with the various types of qualified plans. Policyowners, annuitants and beneficiaries are cautioned that the rights of any person to any benefits under such qualified plans may be subject to the terms and conditions of the Policy. Following are brief descriptions of the various types of qualified plans in connection with which Manufacturers Life of America will issue a Policy. INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an "Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on the amount that may be 19 22 contributed, the persons who may be eligible and on the time when distributions may commence. Also, distributions from certain other types of qualified plans may be "rolled over" on a tax-deferred basis into an IRA. Distributions from these qualified plans are subject to special withholding rules. Consult your plan administrator before taking a distribution which you wish to roll over. A direct rollover from a qualified plan is permitted and is exempt from the special witholding rules. Sales of the Policies for use with IRAs may be subject to special requirements of the Internal Revenue Service. Section 408(k) of the Code allows employers to establish simplified employee pension plans for their employees, using the employees' IRAs for such purposes, if certain criteria are met. Under these plans the employer may, within specified limits, make deductible contributions on behalf of the employee to an IRA. Employers intending to use Policies in connection with such plans should seek competent advice. When issued in connection with an IRA, a Policy will be amended as necessary to conform to the requirements of federal laws governing such plans. CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of tax-favored retirement plans for employees. Self-employed individuals may establish plans for themselves and their employees. Such retirement plans may permit the purchase of the Policies in order to provide benefits under the plans. Employers intending to use Policies in connection with such plans should seek competent advice. STATE AND LOCAL GOVERNMENT DEFERRED COMPENSATION PLANS. Section 457 of the Code permits employees of state and local governments, rural electric cooperatives and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. To the extent Policies are used in connection with an eligible plan, employees are considered general creditors of the employer and the employer as owner of the Policy has the sole right to the proceeds of the Policy. Those who intend to use Policies in connection with such plans should seek qualified advice as to the tax and legal consequences of such an investment. OTHER MATTERS WHAT VOTING RIGHTS DO POLICYOWNERS HAVE? As stated above, all of the assets held in the Variable Accounts will be invested in shares of a particular Fund of the Series Fund. Manufacturers Life of America is the legal owner of those shares and as such has the right to vote to elect the Board of Directors of the Series Fund, to vote upon certain matters that are required by the 1940 Act to be approved or ratified by the shareholders of a mutual fund and to vote upon any other matters that may be voted upon at a shareholders' meeting. However, Manufacturers Life of America will vote shares of the Series Fund held in the Variable Accounts in accordance with instructions received from Policyowners having an interest in such Accounts. Fund shares held in each Variable Account for which no timely instructions from Policyowners are received, including shares not attributable to Policies, will be voted by Manufacturers Life of America in the same proportion as those shares in that Variable Account for which instructions are received. Should the applicable federal securities laws or regulations change so as to permit Manufacturers Life of America to vote shares of the Series Fund held in the Variable Accounts in its own right, it may elect to do so. The number of Fund shares in each Variable Account for which instructions may be given by a Policyowner is determined by dividing the portion of that Policy's Variable Policy Value derived from participation in that Variable Account, if any, by the value of one share of the corresponding Fund. The number will be determined as of a date chosen by Manufacturers Life of America, but not more than 90 days before the meeting of the Series Fund. Fractional votes are counted. Voting instructions will be solicited in writing at least 14 days prior to the meeting of the Series Fund. WHERE CAN FINANCIAL INFORMATION BE FOUND? Financial statements of Manufacturers Life of America and of the Account are included in the Statement of Additional Information. PERFORMANCE AND OTHER COMPARATIVE INFORMATION From time to time, in advertisements or in reports to Policyowners, Manufacturers Life of America may quote various independent quotation services for the purpose of comparing Manufacturers Life of America's Policies' performance and other rankings with other companies' variable annuity policies and for the purpose of comparing any of the Funds of the Series Fund with other mutual funds with similar investment objectives. Performance rankings are not to be considered indicative of the future performance of the Funds. The quotation services which are currently followed by the Company include Lipper Analytical Services, Inc., Morningstar, Inc., Variable Annuity Research and Data Service, and Money Magazine; however, other nationally recognized rating services may be 20 23 quoted in the future. The performance of certain indices may also be quoted in advertisements or in reports to Policyowners. These indices include Standard & Poor's 500 Index, National Association of Real Estate A11 REIT's Index, Salomon Brothers (broad corporate index), Dow Jones Industrial Average, Donoghue Prime Money Fund Index, 3 month Treasury Bills, the National Association of Securities Dealers Automated Quotation System, and the Financial Times Actuaries World Index. ADVERTISING PERFORMANCE OF VARIABLE ACCOUNTS. Manufacturers Life of America may publish advertisements or distribute sales literature that contain performance data relating to the sub-accounts of Separate Account Two. Performance data will include average annual return quotations for one-year, five-year (when applicable) and ten-year (when applicable) periods ending the last day of the month. Quotations for the period since inception of the Fund underlying a sub-account will replace such periods for a Fund that has not been in existence for a full five-year or ten-year period. In the case of a new Fund that is less than one year old, the one-year figure would be replaced by an aggregate for the period since inception. Average annual total returns may also be advertised for three-year periods and one-year periods as of the last day of any month. Average annual total return is the average annual compounded rate of return that equates a purchase payment to the market value of that purchase payment on the last day of the period for which the return is calculated. Aggregate total return, which will also be advertised from time to time, is the percentage change that equates a purchase payment to the market value of that purchase payment on the last day of the period. For the purpose of the calculations it is assumed that an initial payment of $1,000 is made on the first day of the period for which the total return is calculated. All recurring charges are reflected in the calculations. Asset charges are reflected in changes in unit values. For purposes of the calculations, the annual administration charge is estimated by dividing the total administration charges collected during a given year by the average total assets attributable to the policies during that year (including amounts allocated to both Separate Account Two and the Guaranteed Interest Account), multiplying that percentage by the average of the beginning and ending values of the hypothetical investment and subtracting the result from the year-end account value. The contingent deferred sales charge that would be applicable to withdrawals at the end of periods for which the total return is measured are assumed to be deducted at the end of the period. The Policies were first offered to the public in 1987. However, total return data may be advertised for as long a period of time as the underlying separate account has been active. The results for any period prior to the Policies' being offered would be calculated as if the Policies had been offered during that period, with all Policy charges and the daily mortality and expense charges deducted. Policy charges for periods prior to 1988 are based on the average rate for the first six years in which the Policies were offered. 21 24 Total returns if surrendered for the period ending December 31, 1994 were as follows:
AVG. ANNUAL AGGREGATE AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN SINCE SINCE FUND ONE YEAR THREE YEARS FIVE YEARS TEN YEARS** INCEPTION* INCEPTION* ---- -------- ----------- ---------- ----------- ---------- ---------- Emerging Growth Equity (11.74)% 10.59% 14.54% 13.21% 13.03% 262.66% Balanced Assets (11.79)% 1.82% 5.80% 9.43% 10.23% 178.59% Capital Growth Bond (12.10)% 1.16% 5.15% 8.73% 9.56% 161.17% Common Stock (11.82)% 2.18% 5.95% N/A 6.40% 60.88% Real Estate Securities (10.51)% 10.56% 12.69% N/A 9.44% 99.68% Money-Market (4.19)% 0.70% 3.04% 4.69% 4.87% 64.79% International N/A N/A N/A N/A N/A (9.61)% Pacific Rim Emerging Markets N/A N/A N/A N/A N/A (13.30)% * June 26, 1984 for the Emerging Growth Equity, Balanced Assets, Capital Growth and Money-Market Funds; May 1, 1987 for the Common Stock and Real Estate Securities Funds; October 4, 1994 for the International and Pacific Rim Emerging Markets Fund. ** Policies have been offered only since November 3, 1987. Performance data for earlier periods are hypothetical figures based on the performance of the Fund in which policy assets may be invested.
Total returns if not surrendered are as follows:
AVG. ANNUAL AGGREGATE AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL AVG. ANNUAL TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN SINCE SINCE FUND ONE YEAR THREE YEARS FIVE YEARS TEN YEARS** INCEPTION* INCEPTION* ---- -------- ----------- ---------- ----------- ---------- ---------- Emerging Growth Equity (5.09)% 11.94% 14.89% 13.21% 13.03% 262.66% Balanced Assets (5.15)% 3.38% 6.27% 9.43% 10.23% 178.59% Capital Growth Bond (5.48)% 2.71% 5.64% 8.73% 9.56% 161.17% Common Stock (5.19)% 3.75% 6.42% N/A 6.48% 61.88% Real Estate Securities (3.77)% 11.91% 13.06% N/A 9.51% 100.68% Money-Market 2.81% 2.26% 3.57% 4.69% 4.87% 64.79% International N/A N/A N/A N/A N/A (1.75)% Pacific Rim Emerging Markets N/A N/A N/A N/A N/A (5.76)% * June 26, 1984 for the Emerging Growth Equity, Balanced Assets, Capital Growth and Money-Market Funds; May 1, 1987 for the Common Stock and Real Estate Securities Funds; October 4, 1994 for the International and Pacific Rim Emerging Markets Fund. ** Policies have been offered only since November 3, 1987. Performance data for earlier periods are hypothetical figures based on the performance of the Fund in which policy assets may be invested.
22 25 Aggregate total returns if surrendered as of the end of each year since inception are as follows:
FUND 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- Emerging Growth Equity (11.74)% 14.60% 12.55% 61.53% (21.71)% Balanced Assets (11.79)% 2.83% (2.89)% 14.06% (7.48)% Capital Growth Bond (12.10)% 1.41% (3.21)% 7.15% (2.57)% Common Stock (11.82)% 4.21% (3.04)% 20.80% (11.74)% Real Estate Securities (10.51)% 13.34% 12.03% 31.60% (12.17)% Money-Market (4.19)% (6.34)% (5.68)% (3.52)% (1.35)% International N/A N/A N/A N/A N/A PacificRim Emerging Markets N/A N/A N/A N/A N/A FUND 1989 1988 1987 1986 1985 1984 ---- ---- ---- ---- ---- ---- ---- Emerging Growth Equity 32.63% 7.74% (12.47)% (14.05)% 14.08% (3.17)% Balanced Assets 11.99% (1.50)% (9.60)% 8.11% 17.95% 5.13% Capital Growth Bond 4.62% (1.96)% (9.54)% 13.08% 16.79% 5.11% Common Stock 21.22% 0.73% (21.50)% N/A N/A N/A Real Estate Securities 0.03% 2.57% (15.44)% N/A N/A N/A Money-Market (0.32)% (2.04)% (3.45)% (3.05)% (2.00)% (3.79)% International N/A N/A N/A N/A N/A N/A PacificRim Emerging Markets N/A N/A N/A N/A N/A N/A
Aggregate total returns as of the end of each year since inception, if not surrendered are as follows:
FUND 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- Emerging Growth Equity (5.09)% 22.60% 20.55% 69.53% (15.82)% Balanced Assets (5.15)% 10.83% 5.11% 22.06% 0.52% Capital Growth Bond (5.48)% 9.41% 4.79% 15.15% 5.43% Common Stock (5.19)% 12.21% 4.96% 28.80% (5.10)% Real Estate Securities (3.77)% 21.34% 20.03% 39.60% (5.56)% Money-Market 2.81% 1.66% 2.32% 4.48% 6.65% International (1.79)% N/A N/A N/A N/A PacificRim Emerging Markets (5.86)% N/A N/A N/A N/A FUND 1989 1988 1987 1986 1985 1984 ---- ---- ---- ---- ---- ---- ---- Emerging Growth Equity 40.63% 15.74% (5.88)% (7.58)% 22.08% 4.83% Balanced Assets 19.99% 6.50% (2.80)% 16.11% 25.95% 13.13% Capital Growth Bond 12.62% 6.04% (2.73)% 21.08% 24.79% 13.11% Common Stock 29.22% 8.73% (15.59)% N/A N/A N/A Real Estate Securities 8.03% 10.57% (9.07)% N/A N/A N/A Money-Market 7.68% 5.96% 4.55% 4.95% 6.00% 4.21% International N/A N/A N/A N/A N/A N/A PacificRim Emerging Markets N/A N/A N/A N/A N/A N/A
All of the above performance data are based on the actual historical performance of the Funds for specified periods, and the figures are not intended to indicate future performance. 23 26 APPENDIX A This Appendix describes the fixed portion of the Policies, which consists of the provisions based on the general account of Manufacturers Life of America, including those relating to the Guaranteed Interest Account and the annuity options. The interests of Policyowners arising from the allocation of purchase payments or the transfer of values to the Guaranteed Interest Account are not registered under the Securities Act of 1933, and the general account of Manufacturers Life of America is not registered as an investment company under the Investment Company Act of 1940. Accordingly, the fixed portion of the Policies is not subject to the provisions that would apply if registration under such acts were required. Manufacturers Life of America has been advised that the staff of the Securities and Exchange Commission has not reviewed the disclosures in this prospectus that relate to the Guaranteed Interest Account. Disclosures regarding the Guaranteed Interest Account and the general account, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in the prospectus. WHAT IS THE GUARANTEED INTEREST ACCOUNT? As noted in the prospectus, Policyowners may accumulate funds on a variable basis, by allocating purchase payments for investment in one or more of the Funds of Manulife Series Fund, Inc., or on a fixed basis by allocating purchase payments to the Guaranteed Interest Account. The Guaranteed Interest Account provides for the credit of a guaranteed rate of interest of at least 4% per year to amounts allocated to such account. Amounts in the Guaranteed Interest Account will receive a Guaranteed Interest Rate set by Manufacturers Life of America on each Policy Anniversary for the ensuing Policy Year. The $30 annual administration fee, if any, and any premium tax to be deducted against the Total Policy Value will be assessed against the Guaranteed Interest Account first to the extent sufficient amounts are available. WHAT ARE THE ANNUITY OPTIONS? The Policyowner may elect one of the following annuity options described below. If no option is specified, annuity payments will be made as a life annuity with a ten-year certain period. Treasury or Labor Department regulations may require a different annuity option if no option is specified and may preclude the availability of certain options in connection with Qualified Policies. There may also be state insurance law requirements that limit the availability of certain options. The amounts payable under each option will be no less than amounts determined on the basis of tables contained in each Policy. Such tables are based on the 1983 Individual Annuity Mortality Tables and an assumed interest rate of 4% per year. OPTION 1: ANNUITY CERTAIN--payments in equal installments for a period of not less than five years and not more than twenty years. OPTION 2(A): LIFE ANNUITY WITHOUT REFUND--payments in equal installments during the lifetime of an annuitant. Upon the death of the annuitant, payments will cease. Since there is no guarantee that any minimum number of payments will be made, the payee may receive only one payment if he or she dies before the date the second payment is due. OPTION 2(B): LIFE ANNUITY WITH CERTAIN PERIOD--payments in equal installments during the lifetime of an annuitant and if the annuitant dies before installments have been paid for a designated period, either five, ten or twenty years, payments will continue for the remainder of the period selected. OPTION 2(C): LIFE ANNUITY WITH INSTALLMENT REFUND--payments in equal installments during the lifetime of an annuitant and if the annuitant dies before the total installments paid equal the Total Policy Value applied to provide the annuity, payments will continue until the Total Policy Value has been paid. OPTION 3(A): JOINT AND SURVIVOR ANNUITY WITHOUT REFUND--payments in equal installments during the lifetime of two annuitants with payments continuing in full amount to the survivor upon death of either. Since there is no guarantee that any minimum number of payments will be made, the payees may receive only one payment if they both die before the date the second payment is due. OPTION 3(B): JOINT AND SURVIVOR ANNUITY WITH CERTAIN PERIOD--payments in equal installments during the lifetime of two annuitants and if both die before installments have been paid for a ten-year period, payments will continue for the remainder of the period. 24 27 Under Options 2(b), 2(c) and 3(b), upon the death of the annuitant or second to die of joint annuitants, the beneficiary may elect to receive the commuted value of any remaining payments. Any such commutation will be at the interest rate used to determine the amount of the annuity payments plus 1/2%. 25 28 Please tear off, complete and return the form below to order a Statement of Additional Information for the Multi-Account Flexible Payment Variable Annuity Policy offered by this prospectus. Address the form to the Service Office as follows: The Manufacturers Life Insurance Company of America Service Office 200 Bloor Street East Toronto, Ontario, Canada M4W 1E5 MULTI-ACCOUNT FLEXIBLE PAYMENT VARIABLE ANNUITY POLICY Please send me a free copy of the Statement of Additional Information for the Multi-Account Flexible Payment Variable Annuity Policy. (PLEASE PRINT OR TYPE) Name: Policy #: Address: T E A R O U T 26 29 PROSPECTUS MANULIFE SERIES FUND, INC. with Executive Offices at 200 Bloor Street East Toronto, Ontario, Canada M4W 1E5 (416) 926-6100 Manulife Series Fund, Inc. (the "Company"), a Maryland corporation, is a diversified open-end management investment company, commonly known as a mutual fund. Shares of the Company are not offered directly to the public but are sold only to The Manufacturers Life Insurance Company of America ("Manufacturers Life of America") in connection with variable contracts issued by Manufacturers Life of America. Such variable contracts are described in their respective prospectuses. The Company offers the following separate investment portfolios, referred to herein as "Funds," which have the following investment objectives: EMERGING GROWTH EQUITY FUND -- To achieve growth of capital by investing primarily in equity securities of companies believed to offer growth potential over both the intermediate and the long term. BALANCED ASSETS FUND -- To achieve intermediate and long-term growth through capital appreciation and income by investing in both debt and equity securities. CAPITAL GROWTH BOND FUND -- To achieve growth of capital by investing in medium-grade or better debt securities, with income as a secondary consideration. MONEY-MARKET FUND -- To provide maximum current income consistent with capital preservation and liquidity by investing in high-quality money-market instruments. COMMON STOCK FUND -- To achieve intermediate and long-term growth through capital appreciation and current income by investing in common stocks and other equity securities of well established companies with promising prospects for providing an above-average rate of return. REAL ESTATE SECURITIES FUND -- To achieve a combination of long-term capital appreciation and satisfactory current income by investing in real estate related equity and debt securities. INTERNATIONAL FUND -- To achieve long-term growth of capital by investing in a diversified portfolio comprised primarily of common stocks and equity-related securities of corporations domiciled in countries other than the U.S. and Canada. PACIFIC RIM EMERGING MARKETS FUND -- To achieve long-term growth of capital by investing in a diversified portfolio comprised primarily of common stocks and equity-related securities of the countries of the Pacific Rim region. This Prospectus sets forth concisely the information about the Company that a prospective purchaser of a variable contract from The Manufacturers Life Insurance Company of America should know before purchasing such a contract. Please read this Prospectus and retain it for future reference. Additional information about the Company has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing to the address or calling the number listed above and requesting the "Statement of Additional Information for Manulife Series Fund, Inc." (hereinafter "Statement of Additional Information"). The Statement of Additional Information is incorporated by reference into this Prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN THE MONEY-MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. MANUFACTURERS ADVISER CORPORATION INVESTMENT MANAGER The date of this Prospectus and Statement of Additional Information is May 1, 1995. 30 MANULIFE SERIES FUND, INC. TABLE OF CONTENTS
PAGE ---- The Company 2 Shareholder Transaction Expenses 2 Condensed Financial Information 4 Investment Objectives, Policies And Risks 11 Emerging Growth Equity Fund 11 Balanced Assets Fund 11 Capital Growth Bond Fund 12 Money-Market Fund 12 Common Stock Fund 13 Real Estate Securities Fund 13 International Fund And Pacific Rim Emerging Markets Fund 14 Investment Techniques Of The International Fund And Pacific Rim Emerging Markets Fund 16 Investment Restrictions 17 Foreign Securities 18 Lending Securities 18 Management Of The Funds 19 Investment Management Arrangements 19 Expenses 22 Fees 22 Capital Stock 22 Taxes, Dividends And Distributions 22 Purchases And Redemptions Of Shares 22 Determination Of Net Asset Value 23 Custodian 23 Performance Data 24
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INVESTMENT MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. 1 31 THE COMPANY Manulife Series Fund, Inc. (the "Company") is a diversified, open-end management investment company incorporated under Maryland law on July 22, 1983. The Company was established to serve as the underlying investment medium for variable life insurance and variable annuity products issued by The Manufacturers Life Insurance Company of America ("Manufacturers Life of America"). Both the Company and Manufacturers Life of America are indirect wholly-owned subsidiaries of The Manufacturers Life Insurance Company ("Manufacturers Life"). Manufacturers Life is a mutual life insurance company based in Toronto, Canada which, together with its subsidiaries, ranks among the largest such companies in North America as measured by assets. As the underlying investment medium for Manufacturers Life of America variable products, the Company provides a range of investment alternatives. Currently, the Company offers the following investment portfolios, referred to herein as "Funds" -- the Emerging Growth Equity Fund, the Balanced Assets Fund, the Capital Growth Bond Fund, the Money-Market Fund, the Common Stock Fund, the Real Estate Securities Fund, the International Fund, and the Pacific Rim Emerging Markets Fund. As described in the attached Prospectus for such variable product, policyowners may allocate their net premiums among the Funds. Because the value of certain benefits under the Policies will vary with the investment performance of the Funds and because the type of investment and the level of risk preferred by policyowners will vary, policyowners should carefully review the investment objective, policies and risks of each Fund as described in this Prospectus. While policyowners will direct the investment of their net premiums, shares of the Company are sold only to Manufacturers Life of America. Consequently, the terms "shareholder" and "shareholders" in this Prospectus refer only to Manufacturers Life of America. However, Manufacturers Life of America will vote shares of the Company in accordance with instructions received from policyowners. Shares for which no timely instructions from policyowners are received, including shares not attributable to variable products, will be voted by Manufacturers Life of America in the same proportion within those class of shares for which instructions are received. Subject to the supervision of the Company's Board of Directors, Manufacturers Adviser Corporation (the "Manager") will serve as the Company's investment manager. As such, the Manager will administer the Funds and direct the investment and reinvestment of Fund assets. SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) MANAGEMENT FEES International Fund 0.85%* Pacific Rim Emerging Markets Fund 0.85%* All Other Funds 0.50% OTHER EXPENSES International Fund 0.50% Pacific Rim Emerging Markets Fund 0.65% TOTAL FUND OPERATING EXPENSES International Fund 1.35% Pacific Rim Emerging Markets Fund 1.50% All Other Funds 0.50% * Management fee would drop to 0.70% on assets over $100 million.
2 32 EXAMPLE ------- You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- International Fund $14 $43 $74 $162 Pacific Rim Emerging Markets Fund $15 $47 $82 $179 All Other Funds $5 $16 $28 $63
The purpose of this table is to assist investors in understanding the expenses an investor in the Company will bear. The management fee and total fund operating expenses are the same for each Fund. Variable contracts issued by Manufacturers Life of America provide for charges not reflected in the above table. 3 33 CONDENSED FINANCIAL INFORMATION The following condensed financial information for the years and periods mentioned below has been derived from financial statements audited by Ernst & Young LLP, independent auditors, whose report with respect thereto appears in the Statement of Additional Information. Further information about the performance of the Company is contained in the Company's annual report, which may be obtained without charge by calling or writing to the Company. Performance information shown in this section does not reflect expenses that apply to the separate account or the related insurance policies. Inclusion of these charges would reduce the performance figures for all periods shown. Selected data for a share of capital stock outstanding for the periods indicated.
EMERGING GROWTH EQUITY FUND --------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 -------- -------- -------- -------- -------- Net asset value beginning of period $ 19.42 $ 17.76 $ 16.18 $ 9.95 $12.20 ------- ------- ------- ------ ------ Income From Investment Operations: Net investment income (loss) 0.01 (0.01) (0.02) -- 0.17 Net realized and unrealized gain (loss) on investments (0.81) 4.16 3.51 7.08 (1.98) ------- ------- ------- ------ ------ Total from investment operations (0.80) 4.15 3.49 7.08 (1.81) ------- ------- ------- ------ ------ Dividends: Net investment income -- -- -- -- (0.17) Net realized gain (0.07) (2.49) (1.91) (0.85) (0.27) (0.07) (2.49) (1.91) (0.85) (0.44) ------- ------- ------- ------ ------ Net asset value end of period $ 18.55 $ 19.42 $ 17.76 $16.18 $ 9.95 ======= ======= ======= ====== ====== Net assets end of period ('000s) $97,379 $55,767 $18,504 $9,822 $4,137 Aggregate return on share outstanding during entire period (4.10)% 23.89% 21.82% 71.34% (14.90)% Significant Ratios: Portfolio turnover 69.40% 92.95% 126.62% 87.63% 100.86% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 0.07% (0.04)% (0.14)% 0.02% 1.55% Ratio of net investment income and realized and unrealized gain (loss) to average net assets (3.02) 23.61% 23.82% 50.44% (16.10)%
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85 -------- -------- -------- -------- -------- Net asset value beginning of period $ 8.75 $ 7.61 $10.45 $12.58 $10.67 ------- ------- ------- ------ ------ Income From Investment Operations: Net investment income (loss) 0.20 0.14 0.01 0.03 0.10 Net realized and unrealized gain (loss) on investments 3.46 1.16 0.18 (0.78) 2.32 ------- ------- ------- ------ ------ Total from investment operations 3.66 1.30 0.19 (0.75) 2.42 ------- ------- ------ ------ ------ Dividends: Net investment income (0.21) (0.12) (0.01) (0.03) (0.40) Net realized gain -- (0.04) (3.02) (1.35) (0.11) (0.21) (0.16) (3.03) (1.38) (0.51) ------- ------- ------- ------ ------ Net asset value end of period $12.20 $ 8.75 $ 7.61 $10.45 $12.58 ====== ====== ====== ====== ====== Net assets end of period ('000s) $3,859 $2,682 $2,012 $1,377 $1,403 Aggregate return on share outstanding during entire period 42.19% 16.94% (4.88)% (6.59)% 23.38% Significant Ratios: Portfolio turnover 116.14% 190.06% 196.48% 247.88% 64.52% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20% Ratio of net investment income to average net assets 1.95% 1.54% 0.06% 0.26% 0.81% Ratio of net investment income and realized and unrealized gain (loss) to average net assets 34.63% 14.77% (16.68)% (6.68)% 20.63%
4 34
COMMON STOCK FUND ----------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 -------- -------- -------- -------- Net asset value beginning of period $ 14.68 $ 13.73 $13.33 $10.48 ------- ------- ------ ------ Income From Investment Operations: Net investment income (loss) 0.20 0.19 0.18 0.21 ------- ------- ------ ------ Net realized and unrealized gain (loss) on investments (0.81) 1.64 0.61 2.94 ------- ------- ------ ------ Total from investment operations (0.61) 1.83 0.79 3.15 Dividends: Net investment income (0.20) (0.19) (0.18) (0.21) Net realized gain (0.51) (0.69) (0.21) (0.09) ------- ------- ------ ------ (0.71) (0.88) (0.39) (0.30) ------- ------- ------ ------ Net asset value: end of period $ 13.36 $ 14.68 $13.73 $13.33 ======= ======= ====== ====== Net assets end of period ('000s) $34,829 $21,651 $9,708 $5,480 Aggregate return on share outstanding during entire period (4.19)% 13.39% 6.07% 30.18% Significant Ratios: Portfolio turnover 84.78% 88.23% 47.60% 53.01% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 1.53% 1.39% 1.51% 1.78% Ratio of net investment income and realized and unrealized gain (loss) to average net assets (4.49)% 11.50% 7.94% 25.41%
YEAR YEAR YEAR PERIOD ENDED ENDED ENDED 04/30/87- 12/31/90 12/31/89 12/31/88 12/31/87+ -------- -------- -------- --------- Net asset value beginning of period $ 11.25 $ 8.91 $ 8.36 $ 9.97 ------- ------- ------- ------- Income From Investment Operations: Net investment income (loss) 0.32 0.36 0.28 0.15 ------- ------- ------- ------- Net realized and unrealized gain (loss) on investments (0.77) 2.34 0.56 (1.63) ------- ------- ------- ------- Total from investment operations (0.45) 2.70 0.84 (1.48) Dividends: Net investment income (0.32) (0.36) (0.29) (0.13) Net realized gain -- -- -- -- ------- ------- ------- ------- (0.32) (0.36) (0.29) (0.13) ------- ------- ------- ------- Net asset value: end of period $ 10.48 $ 11.25 $ 8.91 $ 8.36 ======= ======= ======= ======= Net assets end of period ('000s) $ 2,873 $ 2,140 $ 1,173 $ 942 Aggregate return on share outstanding during entire period (4.06)% 30.66% 9.86% (14.98)% Significant Ratios: Portfolio turnover 120.84% 120.92% 172.13% 54.87% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50%** Ratio of net investment income to average net assets 3.06% 3.48% 3.16% 2.28%** Ratio of net investment income and realized and unrealized gain (loss) to average net assets (3.40)% 23.77% 9.13% (24.73)%
5 35
REAL ESTATE SECURITIES FUND --------------------------- YEAR YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89 -------- -------- -------- -------- -------- -------- Net asset value beginning of period $14.07 $12.75 $10.92 $ 8.16 $ 9.24 $ 9.12 ------ ------ ------ ------ ------ ------ Income From Investment Operations: Net investment income (loss) 0.55 0.47 0.45 0.53 0.67 0.68 Net realized and unrealized gain (loss) on investments (0.93) 2.38 1.83 2.76 (1.09) 0.15 ------- ------- ------ ------ ------ ------ Total from investment operations (0.38) 2.85 2.28 3.29 (0.42) 0.83 ------- ------- ------ ------ ------ ------ Dividends: Net investment income (0.27) (0.47) (0.45) (0.53) (0.66) (0.71) Net realized gain (0.08) (1.06) -- -- -- -- ------- ------- ------ ------ ------ ------ (0.35) (1.53) (0.45) (0.53) (0.66) (0.71) ------- ------- ------ ------ ------ ------ Net asset value end of period $ 13.34 $ 14.07 $12.75 $10.92 $ 8.16 $ 9.24 ======= ======= ====== ====== ====== ====== Net assets end of period ('000s) $42,571 $24,106 $7,273 $4,120 $2,771 $2,875 Aggregate return on share outstanding during entire period (2.76)% 22.61% 21.29% 41.10% (4.53)% 9.23% Significant Ratios: Portfolio turnover 35.60% 143.00% 70.71% 40.29% 24.37% 15.09% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 4.26% 3.93% 4.13% 5.40% 7.74% 7.29% Ratio of net investment income and realized and unrealized gain (loss) to average net assets (4.48)% 15.23% 20.29% 33.48% (4.73)% 8.53%
REAL ESTATE SECURITIES FUND --------------------------- YEAR PERIOD ENDED 04/30/87- 12/31/88 12/31/87+ -------- -------- Net asset value beginning of period $ 8.76 $10.02 ------ ------ Income From Investment Operations: Net investment income (loss) 0.70 0.48 Net realized and unrealized gain (loss) on investments 0.37 (1.30) ------- ------- Total from investment operations 1.07 (0.82) ------- ------- Dividends: Net investment income (0.71) (0.44) Net realized gain -- -- ------- ------- (0.71) (0.44) ------- ------- Net asset value end of period $ 9.12 $ 8.76 ======= ======= Net assets end of period ('000s) $2,488 $2,007 Aggregate return on share outstanding during entire period 11.72% (8.42)% Significant Ratios: Portfolio turnover 23.15% 10.27% Ratio of expenses to average net assets 0.50% 0.50%** Ratio of net investment income to average net assets 7.18% 7.34%** Ratio of net investment income and realized and unrealized gain (loss) to average net assets 10.52% (13.19)% + Effective Date of Registration under the Securities Act of 1933. ** Annualized.
6 36
BALANCED ASSETS FUND -------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 -------- -------- -------- -------- -------- Net asset value beginning of period $ 15.18 $ 14.52 $ 14.51 $ 12.35 $ 12.87 ------- ------- ------- ------ ------- Income From Investment Operations: Net investment income (loss) 0.48 0.44 0.51 0.60 0.69 Net realized and unrealized gain (loss) on investments (1.11) 1.29 0.37 2.22 (0.50) ------- ------- ------- ------- ------- Total from investment operations (0.63) 1.73 0.88 2.82 0.19 ------- ------- ------- ------- ------- Dividends: Net investment income (0.48) (0.44) (0.51) (0.60) (0.71) Net realized gain (0.30) (0.63) (0.36) (0.06) -- ------- ------- ------- ------- ------- Total dividends (0.78) (1.07) (0.87) (0.66) (0.71) ------- ------- ------- ------- ------- Net asset value end of period $ 13.77 $ 15.18 $ 14.52 $ 14.51 $ 12.35 ======= ======= ======= ======= ======= Net assets end of period ('000s) $74,737 $58,156 $27,733 $18,515 $12,733 Aggregate return on share outstanding during entire period (4.15)% 11.99% 6.21% 23.36% 1.62% Significant Ratios: Portfolio turnover 86.42% 96.62% 75.83% 41.95% 116.03% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 3.37% 3.08% 3.75% 4.52% 5.71% Ratio of net investment income and realized and unrealized gain (loss) to average net assets (4.11)% 10.09% 6.99% 20.84% 2.04%
BALANCED ASSETS FUND -------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85 -------- -------- -------- -------- -------- Net asset value beginning of period $ 11.22 $11.09 $14.11 $12.85 $11.57 ------- ------ ------ ------ ------ Income From Investment Operations: Net investment income (loss) 0.75 0.61 0.56 0.68 0.79 Net realized and unrealized gain (loss) on investments 1.61 0.22 (0.28) 1.49 1.95 ------- ------ ------ ---- ---- Total from investment operations 2.36 0.83 0.28 2.17 2.74 ------- ------ ------ ---- ---- Dividends: Net investment income (0.71) (0.67) (0.67) (0.66) (1.13) Net realized gain -- (0.03) (2.63) (0.25) (0.33) ------- ------ ------ ------ ----- Total dividends (0.71) (0.70) (3.30) (0.91) (1.46) ------- ------ ------ ------ ----- Net asset value end of period $ 12.87 $11.22 $11.09 $14.11 $12.85 ======= ====== ====== ====== ====== Net assets end of period ('000s) $10,412 $8,004 $7,872 $5,285 $4,435 Aggregate return on share outstanding during entire period 21.33% 7.61% (1.77)% 17.35% 27.30% Significant Ratios: Portfolio turnover 131.31% 132.32% 127.46% 81.42% 36.46% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20% Ratio of net investment income to average net assets 6.06% 5.42% 3.60% 4.83% 6.73% Ratio of net investment income and realized and unrealized gain (loss) to average net assets 18.69% 7.40% (5.59)% 15.18% 24.70%
7 37
CAPITAL GROWTH BOND FUND ------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 -------- -------- -------- -------- -------- Net asset value beginning of period $ 11.33 $ 11.12 $ 11.47 $ 10.62 $ 10.82 ------- ------- ------- ------- ------- Income From Investment Operations: Net investment income (loss) 0.72 0.65 0.77 0.83 0.88 Net realized and unrealized gain (loss) on investments (1.22) 0.51 (0.11) 0.85 (0.21) ------- ------- ------- ------- ------- Total from investment operations (0.50) 1.16 0.66 1.68 0.67 ------- ------- ------- ------- ------- Dividends: Net investment income (0.72) (0.65) (0.78) (0.83) (0.87) Net realized gain (0.01) (0.30) (0.23) -- -- ------- ------- ------- ------- ------- Total dividends (0.73) (0.95) (1.01) (0.83) (0.87) ------- ------- ------- ------- ------- Net asset value end of period $ 10.10 $ 11.33 $ 11.12 $ 11.47 $ 10.62 ======= ======= ======= ======= ======= Net assets end of period ('000s) $33,618 $41,183 $30,695 $29,326 $24,818 Aggregate return on share outstanding during entire period (4.49)% 10.56% 5.89% 16.38% 6.58% Significant Ratios: Portfolio turnover 79.04% 94.75% 153.05% 19.60% 40.73% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 6.29% 5.69% 6.76% 7.54% 8.25% Ratio of net investment income and realized and unrealized gain (loss) to average net assets (5.23)% 9.28% 5.78% 15.35% 6.51%
CAPITAL GROWTH BOND FUND ------------------------ YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85 -------- -------- -------- -------- -------- Net asset value beginning of period $ 10.32 $ 10.53 $ 13.09 $ 12.62 $ 11.53 ------- ------- ------- ------- ------- Income From Investment Operations: Net investment income (loss) 0.90 0.92 0.99 1.04 1.15 Net realized and unrealized gain (loss) on investments 0.50 (0.17) (1.12) 1.46 1.48 ------- ------- ------- ------- ------- Total from investment operations 1.40 0.75 (0.13) 2.50 2.63 ------- ------- ------- ------- ------- Dividends: Net investment income (0.90) (0.93) (1.20) (1.03) (1.53) Net realized gain -- (0.03) (1.23) (1.00) (0.01) ------- ------- ------- ------- ------- Total dividends (0.90) (0.96) (2.43) (2.03) (1.54) ------- ------- ------- ------- ------- Net asset value end of period $ 10.82 $ 10.32 $ 10.53 $ 13.09 $ 12.62 ======= ======= ======= ======= ======= Net assets end of period ('000s) $22,768 $19,722 $18,095 $17,674 $14,481 Aggregate return on share outstanding during entire period 13.88% 7.14% (1.69)% 22.37% 26.13% Significant Ratios: Portfolio turnover 68.61% 29.36% 55.80% 42.57% 286.36% Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20% Ratio of net investment income to average net assets 8.34% 8.48% 8.13% 8.10% 9.96% Ratio of net investment income and realized and unrealized gain (loss) to average net assets 12.83% 6.88% (1.68)% 19.72% 23.91%
8 38
MONEY-MARKET FUND ----------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 -------- -------- -------- -------- -------- Net asset value beginning of period $ 10.23 $ 10.22 $ 10.21 $10.21 $10.16 ------- ------- ------- ------ ------ Income From Investment Operations: Net investment income (loss) 0.39 0.27 0.34 0.57 0.78 Net realized and unrealized gain (loss) on investments -- -- -- -- -- ------- ------- ------- ------ ------ Total from investment operations 0.39 0.27 0.34 0.57 0.78 Dividends: Net investment income (0.36) (0.26) (0.33) (0.57) (0.73) Net realized gain -- -- -- -- -- ------- ------- ------- ------ ------ Total dividends (0.36) (0.26) (0.33) (0.57) (0.73) ------- ------- ------- ------ ------ Net asset value end of period $ 10.26 $ 10.23 $ 10.22 $10.21 $10.21 ======= ======= ======= ====== ====== Net assets end of period ('000s) $24,384 $13,860 $10,825 $8,615 $8,606 Aggregate return on share outstanding during entire period 3.89% 2.73% 3.40% 5.60% 7.82% Significant Ratios: Portfolio turnover None None None None None Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets 3.84% 2.67% 3.25% 5.45% 7.41% Ratio of net investment income and realized and unrealized gain (loss) to average net assets 3.84% 2.67% 3.25% 5.45% 7.41%
MONEY-MARKET FUND ----------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85 -------- -------- -------- -------- -------- Net asset value beginning of period $10.15 $10.02 $10.14 $10.19 $10.62 ------ ------ ------ ------ ------ Income From Investment Operations: Net investment income (loss) 0.88 0.89 0.58 0.60 0.71 Net realized and unrealized gain (loss) on investments -- -- -- -- -- ------ ------ ------ ------ ------ Total from investment operations 0.88 0.89 0.58 0.60 0.71 Dividends: Net investment income (0.87) (0.76) (0.70) (0.65) (1.14) Net realized gain -- -- -- -- -- ------ ------ ------ ------ ------ Total dividends (0.87) (0.76) (0.70) (0.65) (1.14) ------ ------ ------ ------ ------ Net asset value end of period $10.16 $10.15 $10.02 $10.14 $10.19 ====== ====== ====== ====== ====== Net assets end of period ('000s) $6,037 $5,259 $1,545 $1,198 $1,134 Aggregate return on share outstanding during entire period 8.88% 7.06% 5.67% 6.07% 7.13% Significant Ratios: Portfolio turnover None None None None None Ratio of expenses to average net assets 0.50% 0.50% 0.50% 0.20% 0.20% Ratio of net investment income to average net assets 8.43% 6.94% 5.50% 5.89% 6.89% Ratio of net investment income and realized and unrealized gain (loss) to average net assets 8.43% 6.94% 5.50% 5.89% 6.89%
9 39
INTERNATIONAL FUND ------------------ PERIOD 10/04/94-12/31/94+ ------------------------- Net asset value beginning of period $ 10.00 ------- Income From Investment Operations: Net investment income (loss) 0.02 Net realized and unrealized gain (loss) on investments (0.18) ------- Total from investment operations (0.16) Dividends: Net investment income (0.02) Net realized gain 0.00 ------- (0.02) ------- Net asset value end of period $ 9.82 Net assets end of period ('000s) $11,290 Aggregate return on share outstanding during entire period (1.54)%** Significant Ratios: Portfolio turnover 0.00% Ratio of expenses to average net assets 1.35%** Ratio of net investment income to average net assets 1.31%** Ratio of net investment income and realized and unrealized gain (loss) to average net assets (6.28)%**
PACIFIC RIM EMERGING MARKETS FUND --------------------- PERIOD 10/04/94-12/31/94+ ------------------------- Net asset value beginning of period $10.00 ------ Income From Investment Operations: Net investment income (loss) 0.04 Net realized and unrealized gain (loss) on investments (0.59) ------ Total from investment operations (0.55) ------ Dividends: Net investment income (0.04) Net realized gain 0.00 ------ (0.04) ------ Net asset value end of period $ 9.41 Net assets end of period ('000s) $7,657 Aggregate return on share outstanding during entire period (5.63)%** Significant Ratios: Portfolio turnover 0.00% Ratio of expenses to average net assets 1.65%** Ratio of net investment income to average net assets 1.84%** Ratio of net investment income and realized and unrealized gain (loss) to average net assets (23.41)%** + Inception date October 4, 1994. ** Annualized.
10 40 INVESTMENT OBJECTIVES, POLICIES AND RISKS Each Fund has a different investment objective which it pursues through separate investment policies as described below. The differences in objectives and policies among the Funds can be expected to affect the return of each Fund and the degree of market and financial risk to which each Fund is subject. The investment objective of each Fund discussed below is a fundamental policy of that Fund and may not be changed without the approval of the holders of a majority of the outstanding shares of such Fund. The policies by which a Fund seeks to achieve its investment objective, however, are not fundamental and may be changed by the Board of Directors of the Company without the approval of the shareholders. There can be no assurance that the investment objective of any Fund will be achieved. The Funds are subject to varying degrees of financial and market risk. Financial risk refers to the ability of an issuer of a debt security to pay principal and interest on such security and to the earnings stability and overall financial soundness of an issuer of an equity security; market risk refers to the volatility of the reaction of the price of a security to changes in conditions in the securities markets in general and, with particular reference to debt securities, changes in the overall level of interest rates. EMERGING GROWTH EQUITY FUND The investment objective of the Emerging Growth Equity Fund is to achieve growth of capital by investing primarily in equity securities of companies believed to offer growth potential over both the intermediate and the long term. Current income is not a significant consideration. In pursuit of its objective, the Emerging Growth Equity Fund will invest primarily in common stocks or in securities convertible into or carrying rights or warrants to purchase common stock or to participate in earnings. The Fund will not purchase independent warrants if they are not publicly traded and if any such purchase would cause more than 2% of the value of its total assets to be invested in such warrants. In selecting investments, emphasis will be placed on securities of progressive companies with aggressive and competent managements. A substantial portion of the Fund's assets may be invested in emerging growth companies, which at the time of the Fund's investment may be paying no dividends to their shareholders. Emerging growth companies are companies believed by management to have above-average prospects for growth as a result of their providing products or services in emerging industries or sub-industries. Investments will be made primarily in securities listed on national securities exchanges, but the Fund may purchase securities traded in the U.S. over-the-counter market. When, in the opinion of management, market or economic conditions warrant a defensive posture, the Fund may place all or a portion of its assets in fixed-income securities. The Fund may also maintain a portion of its assets in cash or short-term debt securities pending selection of particular long-term investments. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of Additional Information. Emerging growth companies may have limited product lines, market or financial resources, or they may be dependent upon a small management group. An investment in the Emerging Growth Equity Fund may therefore involve greater financial risk than is customarily associated with less aggressive companies. In addition, the Fund may be subject to relatively high levels of market risk. The securities of aggressive growth companies may be subject to more abrupt or erratic market movements than other companies or the market averages in general. Because shares of the Emerging Growth Equity Fund may experience above-average fluctuations in net asset value, they should be considered as long-term investments. BALANCED ASSETS FUND The investment objective of the Balanced Assets Fund is to achieve intermediate and long-term growth through capital appreciation and income by investing in both debt and equity securities. In pursuit of its objective, the Balanced Assets Fund will invest in common stocks, preferred stocks or bonds (which may or may not be convertible into or carry rights to purchase common stock or to participate in earnings) and other long-term and short-term debt securities. Common stocks will be held for possible growth of capital as well as for income, while preferred stocks and debt securities will be held for income and possible capital appreciation as a result of a decline in the level of prevailing interest rates. The Fund will maintain at all times a balance between debt securities or preferred stocks, on the one hand, and common stocks, on the other. At least 25% of the Fund's assets will be invested in each of the two basic categories. Investments will be made primarily in securities listed on national securities exchanges, but the Fund may purchase securities traded in the U.S. over-the-counter market. The Fund may also maintain a portion of its assets in cash or short-term debt securities pending selection of particular long-term investments. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of 11 41 Additional Information. See the Capital Growth Bond Fund, below, for a description of the type of debt securities in which the Fund may invest. Investment in shares of the Balanced Assets Fund should involve less financial and market risk than an investment in the Emerging Growth Equity Fund. CAPITAL GROWTH BOND FUND The investment objective of the Capital Growth Bond Fund is to achieve growth of capital by investing in medium-grade or better debt securities, with income as a secondary consideration. The Capital Growth Bond Fund differs from most "bond" funds in that its primary objective is capital appreciation, not income. Opportunities for capital appreciation will usually exist only when the levels of prevailing interest rates are falling. During periods when the Manager expects interest rates to decline, the Fund will invest primarily in intermediate-term and long-term corporate and government debt securities. However, during periods when the Manager expects interest rates to rise or believes that market or economic conditions otherwise warrant such action, the Fund may invest substantially all of its assets in short-term debt securities to preserve capital and maintain income. The Fund may also maintain a portion of its assets temporarily in cash or short-term debt securities pending selection of particular long-term investments. The Capital Growth Bond Fund will be carefully positioned in relation to the term of debt obligations and the anticipated movement of interest rates. It is contemplated that at least 75% of the value of the Fund's total investment in corporate debt securities, excluding commercial paper, will be represented by debt securities which have, at the time of purchase, a rating within the four highest grades as determined by Moody's Investors Service, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB), or Fitch's Investors Service (AAA, AA, A or BBB) and debt securities of banks and other issuers which, although not rated as a matter of policy by either Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or Fitch's Investors Service ("Fitch's"), are considered by the Manager to have investment quality comparable to securities receiving ratings within such four highest grades. Although the Fund does not intend to acquire or hold debt securities of below investment-grade quality, policyowners should note that even bonds of the lowest categories of investment-grade quality may have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher-grade bonds. It should be further noted that should an obligation in the Fund's portfolio drop below investment grade, the Fund will make every effort to dispose of it promptly so long as to do so would not be detrimental to the Fund. Government obligations in which the Capital Growth Bond Fund may invest will be limited to those issued or guaranteed as to principal or interest by the United States Government or its agencies or instrumentalities or by the Government of Canada or any Canadian Crown agency. Any Canadian obligation acquired by the Fund will be payable in U.S. dollars. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of Additional Information. The Capital Growth Bond Fund may purchase corporate debt securities which carry certain equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer or participations based on revenues, sales, or profits. The Fund will not exercise any such conversion, exchange or purchase rights if, at the time, the value of all equity interests so owned would exceed 10% of the value of the Fund's total assets. Because of the Fund's emphasis on medium-grade or better instruments, an investment in the Capital Growth Bond Fund should result in less financial risk than an investment in the Emerging Growth Equity Fund or Balanced Assets Fund. However, the Capital Growth Bond Fund will be subject to substantial market risk arising from changes in the level of prevailing interest rates and the Fund's active management in anticipation of such changes. MONEY-MARKET FUND The investment objective of the Money-Market Fund is to provide maximum current income consistent with capital preservation and liquidity by investing in a portfolio of high-quality money market instruments. In pursuit of its objective, the Money-Market Fund may invest in: (1) obligations issued or guaranteed as to principal or interest by the United States Government, or any agency or authority controlled or supervised by and acting as an instrumentality of the U.S. Government pursuant to authority granted by Congress, or issued or guaranteed as to principal or interest by the Government of Canada or any Canadian Crown agency (any Canadian obligation acquired by the Fund will be payable in U.S. dollars); 12 42 (2) obligations (including negotiable certificates of deposit) of U.S. banks and savings and loan associations which at the date of the investment have capital, surplus and undivided profits (as of the date of their most recently published financial statements) in excess of $100,000,000 and foreign branches of U.S. banks if such banks meet the stated qualifications; (3) commercial paper which at the date of the investment is rated (or guaranteed by a company whose commercial paper is rated) A-1 by Standard & Poor's, P-1 by Moody's, or F-1 by Fitch's, or, if not rated, is issued by a company which at the date of the investment has an outstanding short-term debt issue that is so rated or which is determined by management, pursuant to guidelines adopted and reviewed by the Fund's Board of Directors, to be of comparable quality to securities that are so rated; (4) corporate obligations maturing in one year or less which at the date of investment are rated AA or higher by Standard & Poor's, Fitch's or Moody's or either (a) are issued by a company with outstanding short-term debt securities rated A-1 by Standard & Poor's, P-1 by Moody's, or F-1 by Fitch's or (b) are determined by management, pursuant to guidelines established and reviewed by the Fund's Board of Directors, to be of comparable quality to securities that are so rated; and (5) repurchase agreements with respect to any of the foregoing obligations. More complete descriptions of the money market instruments in which the Fund may invest and the debt security ratings used by the Fund are set forth in the Statement of Additional Information. All of the Money-Market Fund's investments will mature in 13 months or less and the portfolio will maintain a dollar-weighted average portfolio maturity of less than 90 days. By limiting the maturity of its investments, the Fund seeks to lessen the changes in the value of its assets caused by fluctuations in short-term interest rates. All of the Money-Market Fund's investments will be ones whose issuers are determined to present minimal credit risks. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of Additional Information. Investment in shares of the Money-Market Fund should involve less market or financial risk than an investment in any other Fund. However, the Fund's performance will vary with changes in short-term interest rates. COMMON STOCK FUND The investment objective of the Common Stock Fund is to achieve intermediate and long-term growth through capital appreciation and current income by investing in common stocks and other equity securities of well established companies with promising prospects for providing an above average rate of return. In pursuit of its objective, the Common Stock Fund will invest principally in common stocks or in securities convertible into common stocks or carrying rights or warrants to purchase common stock or to participate in earnings. In selecting investments, emphasis will be placed on companies with good financial resources, strong balance sheet, satisfactory rate of return on capital, good industry position, superior management skills, and earnings that tend to grow consistently. The Fund's investments are not limited to any particular type or size of company, but high-quality growth stocks are emphasized. Investments will be made primarily in securities listed on national securities exchanges, but the Fund may purchase securities traded in the United States over-the-counter market. When, in the opinion of management, market or economic conditions warrant a defensive posture, the Fund may place all or a portion of its assets in fixed-income securities. The Fund may also maintain a portion of its assets in cash or short-term debt securities pending selection of particular long-term investments. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of Additional Information. Investment in shares of the Common Stock Fund should involve less financial and market risk than the Emerging Growth Equity Fund, but the Fund may occasionally experience above-average fluctuations in net asset value, and therefore should be considered as a long-term investment. REAL ESTATE SECURITIES FUND The investment objective of the Real Estate Securities Fund is to achieve a combination of long-term capital appreciation and satisfactory current income by investing in real estate related equity and debt securities. 13 43 In pursuit of its objective, the Real Estate Securities Fund will invest principally in real estate investment trust equity and debt securities and other securities issued by companies which invest in real estate or interests therein. The Fund may also purchase the common stocks, preferred stocks, convertible securities and bonds of companies operating in industry groups relating to the real estate industry. This would include companies engaged in the development of real estate, building and construction, and other market segments related to real estate. The Fund will not invest directly in real property nor will it purchase mortgage notes directly. Under normal circumstances, at least 65% of the value of the Fund's total assets will be invested in real estate related equity and debt securities. When, in the opinion of management, market or economic conditions warrant a defensive posture, the Fund may place all or a portion of its assets in fixed-income securities which may or may not be real estate debt related securities. The Fund may also maintain a portion of its assets in cash or short-term debt securities pending selection of particular long-term investments. The Fund may purchase securities on a forward-commitment, when-issued or delayed-delivery basis. For a discussion of these securities, please see the Statement of Additional Information. Because the Fund considers current income in its investment objectives, an investment in the Real Estate Securities Fund should involve less financial and market risk than the Emerging Growth Equity Fund. However, the Fund's share value may experience above-average fluctuation in periods of changing interest rates and therefore the shares should be considered as long-term investments. INTERNATIONAL FUND AND PACIFIC RIM EMERGING MARKETS FUND The investment objective of both the International Fund and the Pacific Rim Emerging Markets Fund is to achieve long-term growth of capital. The Funds will attempt to achieve their respective investment objectives by investing in a diversified portfolio that is comprised primarily of common stocks and equity-related securities of corporations domiciled in countries other than the United States and Canada. Current income from dividends and interest will not be an important consideration in the selection of portfolio securities. INVESTMENT POLICY. In pursuit of their respective investment objectives, the International Fund and the Pacific Rim Emerging Markets Fund will vary the geographical distribution of their investments based upon the continuous evaluation of political, economic and market trends throughout the world. Investments will be shifted among the world's capital markets in accordance with the ongoing analyses of trends and developments affecting such markets and securities. Although the International Fund has no limits on geographical distribution other than the United States and Canada, it is expected to invest primarily in companies domiciled in western European countries, Australia, the Far East, Mexico and South America. The Pacific Rim Emerging Markets Fund will invest primarily in companies domiciled in potentially all countries of the Pacific Rim region. For purposes of this Fund, the countries of the Pacific Rim region are India, Pakistan, Japan, Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Australia, South Korea, Taiwan, Philippines, New Zealand and China. Investment in foreign countries often requires approval by the specific country involved. As a result, although the International Fund and Pacific Rim Emerging Markets Fund intend to invest as above, not all countries may be available initially. The International Fund and the Pacific Rim Emerging Markets Fund will, under normal conditions, invest at least 65% of their net assets in common stocks and equity-related securities of established larger-capitalization non-U.S. companies that have attractive long-term prospects for growth of capital. Equity-related securities in which the Funds may invest include: preferred stocks, warrants and securities convertible into or exchangeable into common stocks. A Fund will invest in the securities of issuers domiciled or primarily traded in at least five foreign countries if the Fund has invested at least 80% of its net assets in foreign issuers. If the Fund has less than 20% of its net assets in foreign issuers, then all of such investment may be in issuers domiciled or primarily traded in one country. If the Fund has at least 20% but less than 40% of its net assets in foreign issuers, then such investment must be allocated to issuers domiciled or primarily traded in at least two foreign countries. Similarly, if the Fund has at least 40% but less than 60% of its net assets invested in foreign issuers, such investment must be allocated to at least three foreign countries. Foreign investments must be allocated to at least four foreign countries if such investments comprise at least 60% but less than 80% of the Fund's net assets. A Fund will not invest more than 20% of its net assets in securities of issuers domiciled or primarily traded in any one country, except that a Fund may invest up to 35% of its net assets in issuers domiciled or primarily traded in any one of the following countries: Australia, France, Japan, the United Kingdom, or Germany. The Funds may, for defensive purposes, invest all or a portion of their assets in non-convertible fixed income securities denominated in U.S. and non-U.S. dollars. These non-convertible fixed income securities will include debt of corporations, foreign governments and 14 44 supranational organizations. The Funds may also maintain a portion of their assets in cash or short term debt securities pending the selection of certain long-term investments. The International Fund and the Pacific Rim Emerging Markets Fund may also purchase and sell the following equity-related financial instruments: -- exchange-listed call and put options on equity indices. -- over-the-counter ("OTC") and exchange-listed equity index futures. In order to assist in the foreign currency risk management of the International Fund and the Pacific Rim Emerging Markets Fund, the following foreign currency related financial instruments may also be purchased and sold: -- OTC and exchange-listed call and put options on various currencies in the portfolio. -- OTC foreign currency futures contracts on various currencies in the portfolio. Please see Investment Techniques Of The International Fund And Pacific Rim Emerging Markets Fund--"Options," "Futures," and "Risk Factors In Options And Futures." 15 45 INVESTMENT TECHNIQUES OF THE INTERNATIONAL FUND AND PACIFIC RIM EMERGING MARKETS FUND OPTIONS. The Funds will not write uncovered OTC or exchange-listed put or call options on specific equities, equity or market indices, or foreign currency. The Funds will also not enter into interest rate or foreign currency swaps, caps, collars or floors. The International Fund and the Pacific Rim Emerging Markets Fund may purchase put and call options on various equity indices and sell put or call options they have previously purchased. An option is a contract that gives the holder the right to purchase (in the case of a call) or the right to sell (in the case of a put) a specified amount of an underlying security at a fixed price upon the exercise of the option. In the case of equity index options, exercises are settled through the payment of cash rather than the delivery of a security. The purchase of put and call options on various equity indices is done in order to hedge against changes in stock prices which may adversely affect the prices of securities that the portfolio wants to purchase at a later date, to hedge its existing investments against a decline in value, or to attempt to reduce the risk of missing a market or industry segment advance. An equity index is a method of reflecting in a single number the market value of an agreed-upon basket of different stocks. The index may be designed to be representative of the stock market as a whole or of a particular broad market sector or industry. The most common equity indices are value-weighted indices that reflect the aggregate market value of many different companies by taking into account prices of the component stocks and the number of shares outstanding for each respective company included in the index. The premium paid for a put or call option, plus any transaction costs, will reduce the benefit, if any, realized by the Fund upon exercise or liquidation of the option. The option may expire without value to the Fund unless the price of the underlying equity index changes in an amount in excess of the premium paid to purchase the option. Equity index options acquired by the Fund will be traded on locally recognized exchanges. Options traded in the OTC market may not be as actively traded as those on an exchange and may be considered as illiquid securities. It may also be more difficult to value such options. The International Fund and the Pacific Rim Emerging Markets Fund may purchase and sell put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of portfolio securities and against increases in the dollar cost of securities to be acquired. Such investment strategies will be used as a hedge and not for speculation. The purchase of put or call options on foreign currencies may constitute an effective hedge against fluctuations in exchange rates although in the case of foreign exchange rate movements adverse to the Fund's position, it may forfeit the entire amount of premium paid plus related transaction costs. Foreign currency options acquired by the Funds may be traded on either locally recognized exchanges or the OTC market. As in the case of equity index options, foreign currency options traded in the OTC market may not be as actively traded as those on an exchange and may be considered as illiquid securities. FUTURES. The International Fund and the Pacific Rim Emerging Markets Fund may purchase and sell equity index futures contracts in order to hedge the equity portion of their assets or equity assets they intend to acquire, with regard to market risk as distinguished from stock-specific risk. The equity index futures contracts purchased by the Funds will be both OTC and locally-recognized-exchange-traded. As in the case of OTC-traded options, OTC-traded futures may not be as actively traded as those on an exchange and may be considered as illiquid. It may also be more difficult to value such futures. FOREIGN CURRENCY FUTURES CONTRACTS. The International Fund and the Pacific Rim Emerging Markets Fund may enter into contracts for the purchase or sale of a specific currency at an agreed-upon future date and price set at the time of the contract. The Funds will enter into foreign currency futures contracts for hedging purposes, only with the purpose of protecting the U.S. dollar equivalent of securities in the Fund that are denominated in non-U.S. dollars. Proper use of foreign currency futures contracts will protect the Funds against a loss arising from an adverse change in the relationship between the U.S. dollar and the particular foreign currency for the period of time from when the foreign currency futures contract is purchased or sold and the date on which payment is made or received on the underlying foreign currency. Foreign currency futures contracts are traded in the inter-bank market and carry much the same risks as noted above for OTC-traded futures and options. RISK FACTORS IN FUTURES AND OPTIONS. The purchase and sale of futures and options expose the International Fund and the Pacific Rim Emerging Markets Fund to risks that are not present in the other Funds. 16 46 To the extent that hedging is effective, it will protect the value of the securities or currencies which are hedged but will accordingly diminish the potential for gain should the unhedged currency or security position move in a favorable direction. There is the potential for a hedging transaction using futures and options to create a loss as a result of imperfect correlation of price movements between the hedging vehicle and the hedged item(s). The risks of option trading include possible loss of the entire premium paid for the option or the inability to effect closing transactions at favorable prices. The risks of trading futures contracts also include the risks of inability to effect closing transactions or to do so at favorable prices; consequently, losses from investing in futures contracts are potentially unlimited. RISK FACTORS Investors should recognize that investing in foreign securities involves special risk considerations, including those that are listed below, which are not typically associated with investing in U.S. securities. Investment in the International Fund and the Pacific Rim Emerging Markets Fund will involve foreign currency risk because the offering price of their shares will be stated in U.S. dollars while it is anticipated that the overwhelming majority of their assets will be priced and quoted in other currencies. The value of the Funds' securities denominated in foreign currencies will be affected favorably or unfavorably by changes in currency exchange rates and the Funds' values will be affected by the costs incurred in connection with the conversions between various currencies. The securities of non-U.S. issuers held by the Funds generally will not be registered under, nor will the issuers thereof be subject to, the reporting requirements of the U.S. Securities and Exchange Commission. As a consequence, there may be less publicly available information about the foreign issuer than is available about a U.S. company or government entity. Foreign issuers are also not subject to the same accounting, auditing and financial reporting standards, requirements, and practices applicable to U.S. companies. Stock markets outside the U.S. are generally not as developed or as efficient as those in the U.S. As a result, the extent and effectiveness of government regulation of those stock markets and brokers may not be identical to that in the U.S. Frequently, liquidity in most foreign bond markets is less than generally exists in the U.S. bond market and, at times, price volatility can be greater than in the U.S. Fixed brokerage commissions on certain non-U.S. stock exchanges are generally higher than negotiated commissions on U.S. exchange-listed securities. Similarly, the bid-to-ask spreads in foreign bond markets are generally larger than commissions or bid-to-ask spreads in the U.S. bond market. Custodial costs related to non-U.S. securities generally exceed those on comparable U.S. securities. With respect to certain foreign countries, there is the possibility of political or social instability, or diplomatic events that could result in potential restrictions on the flow of international capital, including the possibility of expropriation or confiscatory taxation. The Funds' adviser will consider these and other pertinent factors before investing in foreign securities. Investments in foreign securities will not occur unless the Funds' adviser believes that the potential benefits of the investment outweigh the risks and that such investments meet the policies, standards, risk profile and objectives of a particular portfolio. Accordingly, investment in the shares of the International Fund and the Pacific Rim Emerging Markets Fund should involve more financial and market risk than any of the domestic Funds. Because the shares of the International Fund and the Pacific Rim Emerging Markets Fund may experience above-average fluctuations in net asset value, they should be considered as long-term investments. INVESTMENT RESTRICTIONS In pursuing their investment objectives and policies, the Funds are subject to a number of investment restrictions. The following is a brief summary of certain restrictions that the Company believes to be of interest to variable contract purchasers. Some of these restrictions are subject to exceptions not stated here. Such exceptions and a complete list of the investment restrictions applicable to the Funds and to the Company are set forth in the Statement of Additional Information under the heading "Investment Restrictions." Except for the restrictions specifically identified as fundamental, all investment restrictions described in this Prospectus and in the Statement of Additional Information are not fundamental, so that the Board of Directors may change them without shareholder approval. Fundamental restrictions may not be changed without the affirmative vote of a majority of the outstanding voting securities of each Fund affected by the change. 17 47 Restrictions that are fundamental and applicable to all Funds include prohibitions on (i) investing more than 25% of the total assets of any Fund in the securities of issuers having their principal activities in any particular industry (except in the case of the Real Estate Securities Fund and with exceptions for U.S. Government and Government agency securities and certain money-market instruments), (ii) borrowing money, except for temporary or emergency purposes and then not in excess of 10% of the total assets of any Fund, and (iii) purchasing securities of any issuer if the purchase would cause more than 5% of a Fund's total assets to be invested in the securities of any one issuer (excluding U.S. Government and Government agency securities and bank obligations) or cause more than 10% of the voting securities of the issuer to be held by a Fund, except that up to 25% of each Fund's total assets may be invested without regard to the restrictions of this clause (iii). Restrictions that apply to all Funds and that are not fundamental include prohibitions on pledging, hypothecating, mortgaging or transferring more than 10% of the total assets of any Fund as security for indebtedness. The Money-Market Fund will not purchase securities of an issuer if it would cause more than 5% of the Money-Market Fund's total assets to be invested in the securities of that issuer (excluding U.S. Government and Government agency securities). The Money-Market Fund will not purchase securities that have not received the highest short-term debt rating by a nationally recognized statistical rating organization and are not of comparable quality to securities so rated if it would cause more than the greater of 1% of its total assets or $1,000,000 to be invested in the securities of such issuer or if it would cause more than 5% of its total assets to be invested in securities that were not so rated or comparable to securities so rated. If a percentage restriction is adhered to at the time of an investment, a later increase or decrease in the investment's percentage of a Fund's total assets resulting from a change in the value of such assets will not constitute a violation of the percentage restriction. The following is a description of certain investment policies that are subject to restrictions and that the Company's management believes to be of interest to variable contract purchasers. FOREIGN SECURITIES Each of the Funds may invest in foreign securities, but, with respect to all Funds except the International and Pacific Rim Emerging Markets Funds, such investment is restricted as a matter of non-fundamental policy to securities of the following types: (i) U.S. dollar denominated obligations of foreign branches of U.S. banks, (ii) securities represented by American Depository Receipts listed on a national securities exchange or traded in the U.S. over-the-counter market, (iii) securities of a corporation organized in a jurisdiction other than the U.S. and listed on the New York Stock Exchange or NASDAQ ("Interlisted Securities") or (iv) securities denominated in U.S. dollars but issued by non U.S. issuers and issued under U.S. federal securities regulations (for example, U.S. dollar denominated obligations issued or guaranteed as to principal or interest by the Government of Canada or any Canadian Crown agency); provided, however, this restriction shall not apply to the International Fund or the Pacific Rim Emerging Markets Fund. Foreign securities may be subject to foreign government taxes which reduce their attractiveness. In addition, investing in the securities of foreign issuers, particularly non-governmental issuers, involves risks which are not ordinarily associated with investing in domestic issuers. These risks include political or economic instability in the country involved and the possibility of imposition of currency controls. In addition, there may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers, including foreign branches of U.S. banks, are subject to different accounting and reporting requirements, which are generally less extensive than the requirements applicable to domestic issuers. With respect to certain foreign countries, there is a possibility of expropriation, confiscatory taxation or diplomatic developments which could affect investment in those countries. Foreign securities also involve currency risks. The value of a foreign security denominated in foreign currency changes with variations in the exchange rates. Fluctuations in exchange rates may also affect the earning power and asset value of the foreign entity issuing a security, even one denominated in U.S. dollars. Dividend and interest payments will be repatriated based on the exchange rate at the time of disbursement, and restrictions on capital flows may be imposed. Finally, in the event of a default on any foreign obligation, it may be difficult for the Company to obtain or to enforce a judgment against the issuer. The Manager will consider these and other factors before investing in foreign securities and will not make such investments unless, in its opinion, such investments will meet the standards and objectives of a particular Fund. LENDING SECURITIES Each Fund may lend its securities so long as such loans do not represent in excess of 20% of a Fund's total assets. This is a fundamental policy. The procedure for lending securities is for the borrower to give the Fund collateral consisting of cash or cash equivalents. The Fund may invest the cash collateral and earn additional income or receive an agreed-upon fee from a borrower which has delivered cash-equivalent collateral. The Company anticipates that its securities will be lent only under the following conditions: (1) the borrower must furnish collateral equal at all times to the market value of the securities lent and the borrower must agree to increase the collateral 18 48 on a daily basis if the securities increase in value; (2) the loan will be made in accordance with New York Stock Exchange rules, which currently require the borrower, after notice, to redeliver the securities within five business days; (3) any cash collateral invested by a Fund will be in short-term investments which give maximum liquidity so that the collateral may be paid back to the borrower when the securities are returned; (4) the Fund may pay reasonable service, placement, custodian or other fees in connection with loans of securities and share a portion of the interest from these investments with the borrower of the securities; and (5) the Company will limit the amount of lending of securities so that the aggregate amount of interest received attributed to securities lent, if considered "other income" for Federal tax purposes, will not cause the Company to lose its status as a regulated investment company. MANAGEMENT OF THE FUNDS Under Maryland law and the Company's Articles of Incorporation and By-laws, the business and affairs of the Company are managed under the direction of the Company's Board of Directors. The Board of Directors is elected by the holders of the Company's securities. While all of the Company's outstanding securities are owned by Manufacturers Life of America, shares will be voted as directed by variable contract policyowners. The By-laws of the Company provide that the Company need not hold an annual meeting of shareholders in any year in which none of the following is required to be acted on by shareholders under the Investment Company Act of 1940: election of directors; approval of investment advisory agreement; ratification of selection of independent public accountants; and approval of distribution agreement. The Company intends to hold shareholder meetings only when required by law and at other times as may be deemed appropriate by the Board of Directors. INVESTMENT MANAGEMENT ARRANGEMENTS The Fund's investment manager is Manufacturers Adviser Corporation (the "Manager"), a Colorado corporation whose principal business at the present time is to provide investment management services to the Company. The Manager was organized in 1970 and became operational in 1984. The Manager is an indirect wholly-owned subsidiary of Manufacturers Life. The address of the Manager is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5. The Company has entered into an Investment Advisory Agreement with the Manager pursuant to which the Manager agrees to manage the investment and reinvestment of the assets of each Fund and to administer the affairs of the Company subject to the supervision of the Company's Board of Directors. The Manager provides the Company with an investment program and with investment research, supervision and advice necessary for the proper supervision of each Fund. Subject to review of the Company's Board of Directors and to the investment objective, policies and restrictions of each Fund, the Manager determines which securities will be purchased or sold for each Fund. The Manager also serves as the Company's transfer agent and dividend disbursing agent. Under a Service Agreement among the Manager, the Company and Manufacturers Life, Manufacturers Life has agreed to furnish to the Manager personnel, office space, supplies and equipment required by it and to make available to the Manager certain statistical and economic data, investment research reports and other research materials of Manufacturers Life's Investment Department. The Manager has agreed to reimburse Manufacturers Life for its costs in this regard. 19 49 MANAGEMENT OF THE FUNDS The Manager of the Funds consist of a team of investment professionals each of whom plays an important role in the management process of each Fund. Team members work together to develop investment strategies and select securities for a Fund's portfolio. They are supported by research analysts, traders and other investment specialists who work alongside the investment professionals in an effort to utilize all available resources to benefit the shareholders.
BUSINESS EXPERIENCE FUND FUND MANAGER(S) DURING PAST FIVE YEARS ---- --------------- ---------------------- EMERGING GROWTH EQUITY FUND Veronica Onyskiw (since 1983) Vice President, U.S. Equities, The Manufacturers Life Insurance Company, 1989-present BALANCED ASSETS FUND Catherine Addison (since 1988) Assistant Vice President, U.S. Investments, The Manufacturers Life Insurance Company, 1994-present; Director, U.S. Fixed Income, The Manufacturers Life Insurance Company, 1985-1994 Veronica Onyskiw (since 1983) Vice President, U.S. Equities, The Manufacturers Life Insurance Company, 1989-present CAPITAL GROWTH BOND FUND Catherine Addison (since 1988) Assistant Vice President, U.S. Investments, The Manufacturers Life Insurance Company, 1994-present; Director, U.S. Fixed Income, The Manufacturers Life Insurance Company, 1985-1994 MONEY-MARKET FUND Emily Shum (since 1992) Director, Money-Market, The Manufacturers Life Insurance Company, 1992-present; Money Market Manager, ManuVest Investment Management Corporation, 1985-1991 COMMON STOCK FUND Veronica Onyskiw (since 1987) Vice President, U.S. Equities, The Manufacturers Life Insurance Company, 1989-present Stephan Kahn (since 1987) Assistant Vice President, U.S. Investments, The Manufacturers Life Insurance Company, 1994-present; Investment Management, U.S., The Manufacturers Life Insurance Company, 1986-1994 REAL ESTATE SECURITIES FUND Stephan Kahn (since 1987) Assistant Vice President, U.S. Investments, The Manufacturers Life Insurance Company, 1994-present; Investment Management, U.S., The Manufacturers Life Insurance Company, 1986-1994
20 50
BUSINESS EXPERIENCE FUND FUND MANAGER(S) DURING PAST FIVE YEARS ---- --------------- ---------------------- INTERNATIONAL FUND Michael Willans (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1990-present Lorraine Gail Christison Benjamin Pinel (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1981-present Mark Andrew Hirst (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1986-present Robert William Chapman (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1975-present Richard James Crook (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1975-present PACIFIC RIM EMERGING MARKETS FUND Richard James Crook (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1975-present Michael Willans (since 1994) Investment Management, The Manufacturers Life Insurance Company, 1990-present
21 51 EXPENSES With respect to the Emerging Growth Equity Fund, Balanced Assets Fund, Capital Growth Bond Fund, Money-Market Fund, Common Stock Fund and Real Estate Securities Fund, the Manager has agreed to pay all of the expenses of the Company except for the following, which are borne by the Company: the investment management fee, brokerage commissions on portfolio transactions (including any other direct costs related to the acquisition, disposition, lending or borrowing of portfolio investments), taxes payable by the Company, interest and any other costs related to borrowings by the Company, and any extraordinary or non-recurring expenses (such as legal claims and liabilities and litigation costs and any indemnification related thereto). With respect to the International Fund and the Pacific Rim Emerging Markets Fund, the Company shall pay all of the foregoing expenses plus up to .50% and .65%, respectively, of any additional expenses in connection with the operation of these Funds. FEES As compensation for its services, the Manager receives a fee from the Company each day on which the Company's net asset value is determined. With respect to the Emerging Growth Equity Fund, Balanced Assets Fund, Capital Growth Bond Fund, Money-Market Fund, Common Stock Fund and Real Estate Securities Fund, the fee is equivalent to an annual rate of 0.50% of the average daily value of the aggregate net assets of the Funds. Prior to January 1, 1987, the Manager's fee was equivalent to an annual rate of 0.20% of such value. The amount of the daily charge for the fee is divided among the Funds in proportion to their daily net asset values. With respect to the International Fund and the Pacific Rim Emerging Markets Fund, the fee will be equivalent to an annual rate of (i) 0.85% of the average daily value of the net assets of the first $100 million of each Fund and (ii) 0.70% of the average daily value of the net assets of each Fund in excess of $100 million. For the years ended December 31, 1992, 1993 and 1994 the Manager received $437,758, $743,241, and $1,429,270 respectively, under the Investment Advisory Agreement. CAPITAL STOCK The Company has eight classes of stock, one for each Fund. The shares of each Fund have equal rights with respect to voting, redemptions, dividends, distributions and liquidations with regard to that Fund. The shares of each Fund, when issued and paid for, will be fully paid and non-assessable, will have no preference, pre-emptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any Fund are entitled to redeem their shares as set forth under "Purchases And Redemptions Of Shares." TAXES, DIVIDENDS AND DISTRIBUTIONS The Company intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"). Under such provisions, the Company will not be subject to federal income tax on such part of its net ordinary income and net realized capital gains that it distributes to shareholders. The Company intends to distribute as dividends substantially all of the net investment income, if any, of each Fund. For dividend purposes, net investment income of each Fund will consist of all payments of dividends (other than stock dividends) or interest received by such Fund less the estimated expenses of such Fund (including fees payable to the Manager). Dividends from the net investment income of a Fund will be declared at least annually and reinvested in additional full and fractional shares of that Fund. The Funds of the Company also presently intend to declare and distribute annually after the close of their fiscal year all of their net realized capital gains, if any. PURCHASES AND REDEMPTIONS OF SHARES Shares of the Company are currently offered continuously, without sales charge, at prices equal to the respective net asset values of the Funds, only to Manufacturers Life of America. The Company sells its shares to Manufacturers Life of America directly without the use of any underwriter. Manufacturers Life of America uses shares of the Company to fund benefits under both variable annuity contracts and variable life insurance policies. The Company's Board of Directors will monitor the Funds for the existence of any material irreconcilable conflict between the interests of variable annuity policyowners investing in the Company and interests of holders of variable life insurance policies investing in the Company. Manufacturers Life of America will report any potential or existing conflicts to the directors of the Company. If a material irreconcilable conflict arises, Manufacturers Life of America will, at its own cost, remedy such 22 52 conflict up to and including establishing a new registered management investment company and segregating the assets underlying the variable annuity contracts and the variable life insurance policies. The Company reserves the right to offer its shares in the future to other persons or entities. Shares of the Company are sold and redeemed at their net asset value next computed after a purchase or redemption order is received by the Company. Depending upon the net asset values at that time, the amount paid upon redemption may be more or less than the cost of the shares redeemed. Payment for shares redeemed will be made as soon as possible, but in any event within seven days after receipt of a request for redemption. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each Fund is determined once daily by the Manager at 4:00 p.m., Eastern time on each day during which the New York Stock Exchange ("Exchange") is open for trading. The Exchange is open daily Monday through Friday except on the following business holidays: New Year's Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per share of each Fund is computed by adding the sum of the value of the securities held by that Fund plus any cash or other assets it holds, subtracting all its liabilities, and dividing the result by the total number of shares outstanding of that Fund at such time. The values of all assets and liabilities initially expressed in foreign currencies are translated into U.S. dollars at the exchange rates provided by an approved pricing service as of 12:00 p.m. Eastern time. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before 4:00 p.m. Eastern time on each business day in New York (i.e., a day on which the Exchange is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading may take place in certain markets on days which are not business days in New York and on which a Fund's net asset value is not calculated. Since the Fund does not price on these days, the portfolio will trade and the net asset value of the Fund's redeemable securities may be significantly affected on days when shareholders have no access to the Fund. A Fund calculates net asset value per share, and therefore effects sales, redemptions and repurchases of its shares, as of the close of the Exchange once on each day on which the Exchange is open. As a result, such calculation may not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events materially affecting the value of such securities occur between the time when their price is determined and the time when the Fund's net asset value is calculated, such securities will be valued at fair value as determined in good faith by, or under the direction of, the Board of Directors. Except with respect to debt instruments having a remaining maturity of 60 days or less, securities held by a Fund will be valued as follows: Securities listed on a securities exchange will be valued at the last sale price or, if there has been no sale that day, at the last bid price reported as of the close of trading on the Exchange; provided, however, with respect to the International Fund and the Pacific Rim Emerging Markets Fund, if a particular country has adopted conventions with respect to valuations, these will be utilized instead. Securities traded in the over-the-counter market for which closing prices are readily available will be valued at the last bid price or yield equivalent as of the close of trading on the Exchange. However, if closing prices are not readily available for these securities, quotations will be obtained from more than one source and the securities will be valued at a mean of the bid prices so obtained. Securities which are traded both in the over-the-counter market and on a stock exchange will be valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. If market quotations for assets are or become unavailable, such assets will be valued at their fair value as determined in good faith by, or under the direction of, the Company's Board of Directors. Where appropriate, debt instruments with maturities greater than 60 days are valued on the basis of a valuation believed to reflect the fair value of the security, as provided by an approved pricing service. Debt instruments with remaining maturities of 60 days or less are valued on an amortized cost basis. Under this method of valuation, a security is initially valued at cost on the date of purchase (or in the case of securities purchased with more than 60 days remaining to maturity, the market value on the 61st day prior to maturity); and thereafter a constant proportionate amortization in value is assumed until maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. For purposes of this method of valuation, the maturity of a variable rate instrument is deemed to be the next date on which the interest rate is to be adjusted. CUSTODIAN State Street Bank and Trust Company ("State Street") acts as custodian of the securities held by each Fund. State Street is authorized to use the facilities of the Depository Trust Company and the book-entry system of the Federal Reserve Banks. 23 53 CUSTODIAN FOR FOREIGN FUNDS. Securities purchased for the International Fund and Pacific Rim Emerging Markets Fund are maintained in the custody of foreign banks and trust companies which are members of State Street's Global Custody Network and foreign depositories (foreign sub-custodians). State Street and each of the foreign custodial institutions holding securities of the Funds has been approved by the Board in accordance with regulations under the Investment Company Act of 1940. The Board reviews, at least annually, whether it is in the best interest of the International Fund and the Pacific Rim Emerging Markets Fund and its shareholders to maintain Fund assets in each custodial institution. However, with respect to foreign sub-custodians, there can be no assurance that the Fund and the values of its shares will not be adversely affected by acts of foreign governments, financial or operational difficulties of the foreign sub-custodians, difficulties and costs of obtaining jurisdiction over, or enforcing judgments against, the foreign sub-custodians, or application of foreign law to a Fund's foreign sub-custodial arrangements. Thus the non-investment risks involved in holding assets abroad may be greater than those associated with investing in the U.S. PERFORMANCE DATA From time to time Manufacturers Life of America may publish advertisements or distribute sales literature containing performance data relating to the Funds. All such performance data are based on the actual historical performance of the Funds for specified periods, and the figures are not intended to indicate future performance. Performance data will include average annual total return quotations for one-year, five-year and (when applicable) 10-year periods. Quotations for the period since inception of a Fund will replace such periods for a Fund that has not been in existence for a full five-year or 10-year period. Performance data may also include average annual total return for other time periods than those listed, and aggregate total return for various periods of time. More detailed information on the computations is set forth in the Statement of Additional Information. Performance data of the Funds will not reflect charges made pursuant to the terms of the variable life insurance and variable annuity policies funded by separate accounts that invest in the Company's shares. However, sales literature containing performance data for the Funds that is part of an advertisement for variable annuity contracts whose assets may be invested in the Fund will also contain corresponding performance data for the separate account funding those contracts. Similarly, sales literature containing performance data for the Funds that is part of an advertisement for variable life insurance policies whose assets may be invested in the Fund will also contain illustrations of the cash surrender and death benefit values for the same time periods. 24