<PAGE> 1
As filed with the Securities and Exchange Commission on April 1, 1997
Registration No. 333-14131
Investment Company Act File No. 811-07859
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-4 EL
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 1 [X]
(Check appropriate box or boxes)
SEPARATE ACCOUNT B
--------------------------
(Exact Name of Registrant)
PACIFIC MUTUAL LIFE INSURANCE COMPANY
-------------------------------------
(Name of Depositor)
700 Newport Center Drive
Newport Beach, California 92660
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(Address of Depositor's Principal Executive Offices) (Zip Code)
(714) 640-3743
---------------------------------------------------
(Depositor's Telephone Number, including Area Code)
Diane N. Ledger
Vice President
Pacific Mutual Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
---------------------------------------
(Name and address of agent for service)
Copies of all communications to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1500 K Street, N.W., Suite 500
Washington, D.C. 20005
Approximate Date of Proposed Public Offering: It is proposed that this filing
will become effective on April 1, 1997 pursuant to paragraph (b).
Title of Securities Being Registered: interests in a separate account funding
individual flexible premium variable accumulation deferred annuity contracts
<PAGE> 2
DECLARATION PURSUANT TO RULE 24F-2
Pursuant to the provisions of Rules 24f-2 under the Investment Company Act of
1940, the Registrant hereby declares that an indefinite number or amount of
separate account interests is hereby being registered under the Securities Act
of 1933 The Registrant will file its Notice pursuant to Rule 24f-2 for the
fiscal year ending December 31, 1997 within the time period required by Section
24 of the Investment Company Act of 1940 and applicable regulations thereunder.
<PAGE> 3
PACIFIC INNOVATIONS
FORM N-4
CROSS REFERENCE SHEET
PART A
<TABLE>
<S> <C> <C>
Item No. Prospectus Heading
1. Cover Page Cover Page
2. Definitions SPECIAL DEFINITIONS
3. Synopsis SUMMARY; FEE TABLE
4. Condensed Financial Information YOUR INVESTMENT OPTIONS --- Variable Investment Option Performance;
ADDITIONAL INFORMATION --- Financial Statements
5. General Description of Registrant,
Depositor and Portfolio Companies SUMMARY --- What are My Investment Options?; PACIFIC MUTUAL, BANK
OF AMERICA AND THE SEPARATE ACCOUNT --- Pacific Mutual, ---
Separate Account B; YOUR INVESTMENT OPTIONS --- Your Variable
Investment Options; ADDITIONAL INFORMATION --- Voting Rights
6. Deductions and Expenses SUMMARY --- What Charges Will I Pay?, --- Can I Change My
Investment Options?; FEE TABLE; HOW YOUR PAYMENTS ARE ALLOCATED ---
Transfers; CHARGES, FEES AND DEDUCTIONS; WITHDRAWALS --- Optional
Withdrawals
7. General Description of
Variable Annuity Contracts SPECIAL DEFINITIONS; SUMMARY; WHY BUY A CONTRACT; PURCHASING YOUR
CONTRACT --- How to Apply for your Contract; HOW YOUR PAYMENTS ARE
ALLOCATED; RETIREMENT BENEFITS AND OTHER PAYOUTS --- Choosing Your
Annuity Option, --- Your
</TABLE>
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<TABLE>
<S> <C> <C>
Annuity Payments, --- Death Benefits; ADDITIONAL INFORMATION ---
Voting Rights, --- Changes to Your Contract, --- Changes to ALL
Contracts, --- Inquiries and Submitting Forms and Requests, ---
Timing of Payments and Transactions
8. Annuity Period RETIREMENT BENEFITS AND OTHER PAYOUTS
9. Death Benefit RETIREMENT BENEFITS AND OTHER PAYOUTS --- Death Benefits
10. Purchases and Contract Value SUMMARY --- How Do I Purchase a Contract?, PURCHASING YOUR
CONTRACT; HOW YOUR PAYMENTS ARE ALLOCATED; PACIFIC MUTUAL, BANK OF
AMERICA AND THE SEPARATE ACCOUNT --- Pacific Mutual; THE GENERAL
ACCOUNT --- Withdrawals and Transfers
11. Redemptions SUMMARY --- Can I Withdraw My Contract Value?, --- Can I Return My
Contract?; CHARGES, FEES AND DEDUCTIONS; WITHDRAWALS; ADDITIONAL
INFORMATION --- Timing of Payments and Transactions; THE GENERAL
ACCOUNT --- Withdrawals and Transfers
12. Taxes SUMMARY; CHARGES, FEES AND DEDUCTIONS --- Premium Taxes;
WITHDRAWALS --- Optional Withdrawals, --- Tax Consequences of
Withdrawals; FEDERAL TAX STATUS
13. Legal Proceedings Not Applicable
14. Table of Contents of the Statement
of Additional Information CONTENTS OF THE SAI
PART B
Item No. Statement of Additional Information Heading
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
15. Cover Page Cover Page
16. Table of Contents TABLE OF CONTENTS
17. General Information and History Not Applicable
18. Services Not Applicable
19. Purchase of Securities Being Offered THE CONTRACTS AND THE SEPARATE ACCOUNT --- Calculating Subaccount
Unit Values, --- Systematic Transfer Programs
20. Underwriters DISTRIBUTION OF THE CONTRACTS --- Pacific Mutual Distributors, Inc.
21. Calculation of Performance Data PERFORMANCE
22. Annuity Payments THE CONTRACTS AND THE SEPARATE ACCOUNT --- Variable Annuity Payment
Amounts
23. Financial Statements FINANCIAL STATEMENTS
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 6
PACIFIC INNOVATIONS
AN INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE COMPANY
MAILING ADDRESS: P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
1-800-722-5558
This Prospectus describes Pacific Innovations (the "Contract") offered by
Pacific Mutual Life Insurance Company ("Pacific Mutual Life"). The Contracts
provide purchasers with flexibility in long-term financial planning, including
planning for retirement. Contracts are available both to individuals and under
certain tax-qualified retirement plans. Payout options under the Contracts
include variable annuities funded through Pacific Mutual Life's Separate Account
B (the "Separate Account") and fixed annuities funded through Pacific Mutual
Life's General Account.
Seven Variable Investment Options are currently available; each is a
subaccount of the Separate Account, and provides variable returns by investing
in shares of a corresponding Fund of Pacific Innovations Trust, a Delaware
Business Trust ("Pacific Innovations Trust"):
<TABLE>
<S> <C>
Money Market Fund Mid-Cap Equity Fund
Managed Bond Fund Aggressive Growth Fund
Capital Income Fund International Fund
Blue Chip Fund
</TABLE>
A Fixed Option is also available; it provides a fixed rate of return and is
funded through Pacific Mutual Life's General Account.
THIS PROSPECTUS PROVIDES INFORMATION THAT YOU SHOULD KNOW BEFORE PURCHASING
A CONTRACT. IN ADDITION, THIS PROSPECTUS IS ACCOMPANIED BY A CURRENT PROSPECTUS
FOR THE PACIFIC INNOVATIONS TRUST. YOU SHOULD READ BOTH OF THESE PROSPECTUSES
CAREFULLY AND RETAIN THEM FOR YOUR FUTURE REFERENCE.
Additional information about the Contract and the Separate Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information ("SAI") dated April 1, 1997. You may obtain a free copy of the SAI
by writing or calling Pacific Mutual Life. The information contained in the SAI
is incorporated by reference into this Prospectus. The table of contents for the
SAI appears on page 38 of 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.
------------------------
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK. IT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN A CONTRACT INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
------------------------
THE CONTRACT IS NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE MADE
LAWFULLY. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED SAI (OR ANY SALES LITERATURE
APPROVED BY PACIFIC MUTUAL LIFE), AND ANY SUCH UNAUTHORIZED INFORMATION OR
REPRESENTATION IS, IF GIVEN OR MADE, NOT TO BE RELIED UPON.
DATED: APRIL 1, 1997
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL DEFINITIONS................................................................... 4
SUMMARY............................................................................... 7
FEE TABLE............................................................................. 8
WHY BUY A CONTRACT.................................................................... 10
YOUR INVESTMENT OPTIONS............................................................... 10
Your Variable Investment Options................................................. 10
Your Fixed Option................................................................ 11
PURCHASING YOUR CONTRACT.............................................................. 11
How to Apply for Your Contract................................................... 11
Making Your Purchase Payments.................................................... 12
HOW YOUR PAYMENTS ARE ALLOCATED....................................................... 12
Choosing Your Investment Options................................................. 12
Investing in Variable Investment Options......................................... 13
When Your Investment is Effective................................................ 13
Transfers........................................................................ 13
CHARGES, FEES AND DEDUCTIONS.......................................................... 14
Withdrawal Charge................................................................ 14
Premium Taxes.................................................................... 16
Annual Fee....................................................................... 16
Waivers and Reduced Charges...................................................... 16
Mortality and Expense Risk Charge................................................ 16
Administrative Fee............................................................... 17
Expenses of the Trust............................................................ 17
RETIREMENT BENEFITS AND OTHER PAYOUTS................................................. 17
Selecting Your Annuitant......................................................... 17
Annuitization.................................................................... 18
Choosing Your Annuity Date ("Annuity Start Date")................................ 18
Default Annuity Date and Options................................................. 18
Choosing Your Annuity Option..................................................... 19
Your Annuity Payments............................................................ 20
Death Benefits................................................................... 20
WITHDRAWALS........................................................................... 22
Optional Withdrawals............................................................. 22
Tax Consequences of Withdrawals.................................................. 24
Right to Cancel.................................................................. 24
PACIFIC MUTUAL LIFE AND THE SEPARATE ACCOUNT.......................................... 24
Pacific Mutual Life.............................................................. 24
Separate Account B............................................................... 25
FEDERAL TAX STATUS.................................................................... 25
Taxes Payable by Contract Owners: General Rules.................................. 26
Qualified Contracts.............................................................. 27
Loans............................................................................ 28
Withholding...................................................................... 30
Impact of Federal Income Taxes................................................... 30
Taxes on Pacific Mutual Life..................................................... 31
</TABLE>
2
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ADDITIONAL INFORMATION................................................................ 31
Performance Information.......................................................... 31
Voting Rights.................................................................... 31
Changes to Your Contract......................................................... 32
Changes to ALL Contracts......................................................... 32
Inquiries and Submitting Forms and Requests...................................... 33
Telephone Transactions........................................................... 34
Timing of Payments and Transactions.............................................. 34
Confirmations Statements and Other Reports to Contract Owners.................... 35
Sales Commissions................................................................ 35
Financial Statements............................................................. 35
Legal Matters.................................................................... 35
THE GENERAL ACCOUNT................................................................... 35
General Information.............................................................. 35
Guarantee Terms.................................................................. 36
Withdrawals and Transfers........................................................ 36
CONTENTS OF THE SAI................................................................... 38
APPENDIX A: STATE LAW VARIATIONS...................................................... 39
</TABLE>
3
<PAGE> 9
SPECIAL DEFINITIONS
In this Prospectus, "we," "our" and "us" refer to Pacific Mutual Life Insurance
Company ("Pacific Mutual Life"); "you" and "your" refer to the Contract Owner.
Account Value--The amount of your Contract Value allocated to a specified
Variable Investment Option or the Fixed Option.
Annual Fee--A $30 fee charged each year on your Contract Anniversary and at the
time of a full withdrawal, if your Net Contract Value is less than $50,000 on
that date.
Annuitant--A person on whose life annuity payments may be determined. An
Annuitant's life may also be used to determine certain increases in death
benefits, and to determine the Annuity Date. A Contract may name a single
("sole") Annuitant or two ("Joint") Annuitants, and may also name a "Contingent"
Annuitant. If you name Joint Annuitants or a Contingent Annuitant, "the
Annuitant" means the sole surviving Annuitant, unless otherwise stated.
Annuity Date ("Annuity Start Date")--The date specified in your Contract, or the
date you later elect, if any, for the start of annuity payments if the Annuitant
(or Joint Annuitants) is (or are) still living and your Contract is in force; or
if earlier, the date that annuity payments actually begin.
Annuity Option--Any one of the income options available for a series of payments
after your Annuity Date.
Beneficiary--A person who may have a right to receive the death benefit payable
upon the death of the Annuitant or a Contract Owner prior to the Annuity Date,
or has a right to receive remaining guaranteed annuity payments, if any, if the
Annuitant dies after the Annuity Date.
Business Day--Any day on which the value of an amount invested in a Variable
Investment Option can be determined, which currently includes each day that the
New York Stock Exchange is open for trading and on which our administrative
offices are open. The New York Stock Exchange is closed on weekends and on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas Day. We may choose to
close on other holidays, a day immediately preceding or following a national
holiday, or in emergency situations. In this Prospectus, "day" or "date" means
Business Day unless otherwise specified. If a transaction is scheduled to occur
on a Business Day, the transaction shall be effected on the basis of Unit Values
determined as of 4:00 P.M. Eastern time on that Business Day. If any transaction
or event called for under a Contract is scheduled to occur on a day that is not
a Business Day, such transaction or event will be deemed to occur on the next
following Business Day unless otherwise specified. Special circumstances such as
leap years and months with fewer than 31 days are discussed in the SAI. Each
Business Day ends at 4:00 p.m. Eastern time or at the close of the New York
Stock Exchange, if earlier.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Annuitant--If designated, a person in your Contract, who will become
your sole surviving Annuitant if your existing sole Annuitant (or both Joint
Annuitants) should die before your Annuity Date.
Contingent Owner--If designated, a person in your Contract, who will succeed to
the rights as a Contract Owner of your Contract if all named Contract Owners
die.
Contract Anniversary--The same date, in each subsequent year, as your Contract
Date.
Contract Date--The date we issue your Contract.
Contract Debt--As of the end of any given Business Day, the principal amount you
have outstanding on any loan under your Contract, plus any accrued and unpaid
interest. Loans are available only on certain Qualified Contracts.
4
<PAGE> 10
Contract Owner (also called a "Policyholder")--Generally, a person who purchases
a Contract and makes the Purchase Payments. A Contract Owner has all rights in
the Contract, including the right to make withdrawals, designate and change
beneficiaries, transfer amounts among Investment Options, and designate an
Annuity Option. If your Contract names Joint Owners, both Joint Owners are
Contract Owners and share all such rights.
Contract Value--As of the end of any Business Day, the sum of your Variable
Account Value, Fixed Option Value, and the Loan Account Value.
Contract Year--A year that starts on the Contract Date or on a Contract
Anniversary.
Earnings--As of the end of any Business Day, your Earnings equal your Contract
Value less your aggregate Purchase Payments which are reduced by withdrawals of
prior Purchase Payments.
Fixed Option--If you allocate all or a part of your Purchase Payments or
Contract Value to the Fixed Option, such amounts are held in our General Account
and receive interest at rates declared periodically, but not less than an annual
rate of 3%.
Fixed Option Value--The aggregate amount of your Contract Value allocated to the
Fixed Option.
Fund--A separate portfolio of the Pacific Innovations Trust.
General Account--Our General Account consists of all our assets other than those
assets allocated to Separate Account B or to any of our other separate accounts.
Guaranteed Interest Rate--The interest rate guaranteed at the time of allocation
(or roll over) for the Guarantee Term on amounts allocated to the Fixed Option.
All Guaranteed Interest Rates are expressed as annual rates, and interest is
accrued daily. The rate will not be less than an annual rate of 3%.
Guarantee Term--The period during which the amount you allocate to the Fixed
Option earns a Guaranteed Interest Rate. This term is currently up to one-year.
Investment Option--A Variable Account or the Fixed Option offered under the
Contract.
Joint Annuitant--If your Contract is a Non-Qualified Contract, you may name two
Annuitants, called "Joint Annuitants," in your application for your Contract.
Special restrictions apply for Qualified Contracts.
Loan Account Value--The amount transferred from your Investment Options to the
General Account to secure a Contract Loan, increased by interest earned and
decreased by any principal repayments and/or withdrawals or transfers of
interest earned.
Net Contract Value--Your Contract Value less Contract Debt.
Non-Qualified Contract--A Contract other than a Qualified Contract.
Primary Annuitant--The individual that is named in your Contract, the events in
the life of whom are of primary importance in affecting the timing or amount of
the payout under the Contract.
Purchase Payment--An amount paid to us by or on behalf of a Contract Owner, as
consideration for the benefits provided under the Contract.
Qualified Contract--A Contract that qualifies under the Code as an individual
retirement annuity ("IRA"), or a Contract purchased by a Qualified Plan,
qualifying for special tax treatment under the Code.
Qualified Plan--A retirement plan that receives favorable tax treatment under
Section 401, 408, 403 or 457 of the Code.
SEC--Securities and Exchange Commission.
Separate Account B (the "Separate Account")--A separate account of Pacific
Mutual Life registered as a unit investment trust under the Investment Company
Act of 1940.
5
<PAGE> 11
Subaccount (also called a "Variable Account")--An investment division of the
Separate Account. Each Subaccount invests its assets in shares of a
corresponding Fund.
Subaccount Annuity Unit--Subaccount Annuity Units (or "Annuity Units") are used
to measure variation in variable annuity payments. To the extent you elect to
convert all or some of your Contract Value into variable annuity payments, the
amount of each annuity payment (after the first payment) will vary with the
value and number of Annuity Units in each Subaccount attributed to any variable
annuity payments. At annuitization (after any applicable premium taxes and/or
other taxes are paid), the amount annuitized to a variable annuity determines
the amount of your first variable annuity payment and the number of Annuity
Units credited to your annuity in each Subaccount. The value of Subaccount
Annuity Units, like the value of Subaccount Units, is expected to fluctuate
daily, as described in the definition of "Unit Value."
Subaccount Unit--Before your Annuity Date, each time you allocate an amount to a
Subaccount, your Contract is credited with a number of Subaccount Units in that
Subaccount; these Units are used, for accounting purposes, to measure your
Account Value in that Subaccount. The value of Subaccount Units is expected to
fluctuate daily, as described in the definition of Unit Value.
Trust--Pacific Innovations Trust.
Unit Value--The value of a Subaccount Unit ("Subaccount Unit Value") or
Subaccount Annuity Unit ("Subaccount Annuity Unit Value"). Unit Value of any
Subaccount is subject to change on any Business Day in much the same way that
the value of a mutual fund share changes each day; the fluctuations in value
reflect the investment results, expenses of and charges against the Fund in
which the Subaccount invests its assets, and also reflect charges against the
Separate Account. Changes in Subaccount Annuity Unit Values also reflect an
additional factor that adjusts Subaccount Annuity Unit Values to offset our
Annuity Option Table's implicit assumption of an annual investment return of 5%;
the effect of this assumed investment return is explained in detail in the SAI.
Unit Value of a Subaccount Unit or Subaccount Annuity Unit on any Business Day
is measured as of 4:00 p.m., Eastern time, on that Business Day.
Variable Account Value--The aggregate amount of your Contract Value allocated to
all Subaccounts.
Variable Investment Option--A Subaccount.
6
<PAGE> 12
SUMMARY
This brief description is only an overview of the more significant features of
your Contract. More detailed information may be found in subsequent sections of
this Prospectus, in the SAI, and in the Contract itself. Endorsements to your
Contract may contain variations from the standardized information in this
Prospectus. In addition, certain variations due to requirements particular to
the issue state or jurisdiction may apply (see APPENDIX A: STATE LAW VARIATIONS
for variations in Right to Cancel). IF ANY CONTRACT ENDORSEMENTS OR SUPPLEMENTAL
VARIATIONS TO THIS PROSPECTUS CONFLICT WITH OTHER INFORMATION IN THE CONTRACT
FORM OR IN THIS PROSPECTUS, THE ENDORSEMENTS AND SUPPLEMENTS CONTROL YOUR
CONTRACT.
WHAT IS THE CONTRACT? Pacific Innovations (the "Contract") is an annuity
contract designed to be a long-term financial planning device, permitting you to
invest on a tax-deferred basis for retirement or other long-range goals, and to
receive a series of regular payments for life or a period of years. See FEDERAL
TAX STATUS.
HOW DO I PURCHASE A CONTRACT? Your initial purchase payment must be at least
$5,000 to buy a Non-Qualified Contract ($2,000 for a Qualified Contract). After
this initial payment you may make additional payments but you are not required
to do so. Your initial payment may be payable in automatic installments over
your first Contract Year. See PURCHASING YOUR CONTRACT.
WHAT ARE MY INVESTMENT OPTIONS? You select your own Investment Options. Seven of
the Investment Options are Variable Investment Options available through
Separate Account B. Each Variable Investment Option invests in a corresponding
Fund of the Trust. Bank of America National Trust and Savings Association ("Bank
of America") is the manager of the Trust, and Bank of America and the Trust have
retained other Subadvisers for two of the Funds. You bear the investment risk
associated with the Variable Investment Options, and you should expect your
Contract Value and any variable annuity payments allocated to these Variable
Investment Options to fluctuate. See HOW YOUR PAYMENTS ARE ALLOCATED.
Also available is a Fixed Option with a Guarantee Term of up to one year. This
option provides a fixed annual interest rate of at least 3%; the portion of your
Purchase Payments or Contract Value allocated to the Fixed Option is held in our
General Account. You may select as many Investment Options as you wish until the
Annuity Date. After the Annuity Date, the Variable Investment Options may be
selected if you choose variable annuity payments.
CAN I CHANGE MY INVESTMENT OPTIONS? You may transfer amounts from any Investment
Option to another on or prior to your Annuity Date; after your Annuity Date, up
to four exchanges of Subaccount Annuity Units may be made in any twelve-month
period. Certain restrictions apply to the Fixed Option. You may transfer amounts
automatically using dollar cost averaging, automatic portfolio rebalancing, or
an earnings sweep. Transaction fees may be imposed in the future for excessive
transfers. See HOW YOUR PAYMENTS ARE ALLOCATED--TRANSFERS and THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS in this Prospectus and THE CONTRACTS AND THE
SEPARATE ACCOUNT--SYSTEMATIC TRANSFER PROGRAMS in the SAI.
WHAT CHARGES WILL I PAY? An Administrative Fee equal to an annual factor
expressed as a decimal (where 1.00 is equal to 100%) of 0.0015, and a mortality
and expense risk charge equal to an annual factor of 0.0125, are charged against
assets held in the Variable Investment Options. Amounts invested in the Variable
Investment Options are also subject to the operating expenses paid by the
corresponding Fund of the Trust. Before the Annuity Date, an Annual Fee of $30
is charged each year and at the time of a full withdrawal if your Net Contract
Value is less than $50,000. When you withdraw amounts attributed to Purchase
Payments from your Contract Value, you may be subject to a contingent deferred
sales charge (or "withdrawal charge") of up to 7%, which is determined by the
amount of your withdrawal and the length of time you held the Purchase Payment
considered withdrawn under your Contract. You may also be subject to other fees.
See CHARGES, FEES AND DEDUCTIONS.
CAN I WITHDRAW MY CONTRACT VALUE? Generally, you may withdraw all or part of
your Contract Value at any time on or prior to your Annuity Date. Certain
restrictions are imposed on withdrawals from the Fixed Option and certain
Qualified Contracts. Withdrawals may be subject to fees and charges, taxation
and, in certain
7
<PAGE> 13
circumstances, a tax penalty. See WITHDRAWALS, FEDERAL TAX STATUS and THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS.
CAN I RETURN MY CONTRACT? For a limited time, usually 10 days after you receive
it, you may return your Contract for a refund in accordance with the terms of
its "Right to Cancel" provision. See WITHDRAWALS--RIGHT TO CANCEL.
HOW DO I REACH PACIFIC MUTUAL LIFE? You can reach our service representatives
between 6:00 a.m. and 5:00 p.m., Pacific time, at 1-800-722-5558. To send
payments, forms, or requests, see ADDITIONAL INFORMATION--INQUIRIES AND
SUBMITTING FORMS AND REQUESTS.
FEE TABLE
The purpose of this fee table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly under your
Contract. Expenses shown under "Contract Owner Transaction Expenses" and
"Separate Account B Annual Expenses" are specified under the terms of the
Contract. Expenses shown under "Pacific Innovations Trust Annual Expenses" are
estimated expenses and may vary from year to year. In addition to the charges
and expenses described below, a charge for premium taxes and/or other taxes may
apply. See CHARGES, FEES AND DEDUCTIONS--PREMIUM TAXES in this Prospectus, the
discussion under ORGANIZATION AND MANAGEMENT OF THE TRUST in the Trust's
Prospectus, and MANAGER in the Trust's SAI.
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchase Payments......................... None
Maximum Withdrawal Charge1........................................ 7.0%
(computed as a percentage of Purchase Payments)
Withdrawal Transaction Fee2....................................... None
Transfer Fee3..................................................... None
Annual Fee4....................................................... $30.00
SEPARATE ACCOUNT B ANNUAL EXPENSES
(as a percentage of average daily account value)
Mortality and Expense Risk Charge.............................. 1.25%
Administrative Fee............................................. 0.15%
------
Total Separate Account B Annual Expenses....................... 1.40%
======
</TABLE>
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1 The withdrawal charge, also called a "contingent deferred sales charge," may
not apply or may be reduced under certain circumstances. See CHARGES, FEES AND
DEDUCTIONS.
2 We reserve the right to impose a transaction fee in the future of up to $15
per withdrawal on partial withdrawals in excess of 15 in any Contract Year.
See WITHDRAWALS--OPTIONAL WITHDRAWALS.
3 We reserve the right to impose a transaction fee in the future of up to $15
per transfer on transfers in excess of 15 in any Contract Year. See HOW YOUR
PAYMENTS ARE ALLOCATED--TRANSFERS.
4 This fee will be charged on each Contract Anniversary prior to your Annuity
Date and at the time of a full withdrawal of any Contract Value, unless your
Net Contract Value is at least $50,000 on that date.
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PACIFIC INNOVATIONS TRUST ANNUAL EXPENSES (AFTER EXPENSE REIMBURSEMENTS)
(AS A PERCENTAGE OF FUND AVERAGE NET ASSETS, ESTIMATED)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEE EXPENSES EXPENSES
---------- -------- --------
<S> <C> <C> <C>
Money Market.................................................... 0.22 0.38 0.60
Managed Bond.................................................... 0.37 0.38 0.75
Capital Income.................................................. 0.48 0.39 0.87
Blue Chip....................................................... 0.53 0.41 0.94
Mid-Cap Equity.................................................. 0.53 0.41 0.94
Aggressive Growth............................................... 0.61 0.42 1.03
International................................................... 0.66 0.58 1.24
</TABLE>
Example: If, at the end of the indicated time period, you withdraw your
entire Variable Account Value or your entire Contract Value, you would pay
the following cumulative expenses on each $1,000 invested, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market.............................................................. $84.15 $110.21
Managed Bond.............................................................. 85.65 114.76
Capital Income............................................................ 86.85 118.38
Blue Chip................................................................. 87.56 120.49
Mid-Cap Equity............................................................ 87.56 120.49
Aggressive Growth......................................................... 88.46 123.19
International............................................................. 90.55 129.47
</TABLE>
Example: If, at the end of the indicated time period, you neither withdraw
your entire Variable Account Value nor your entire Contract Value, whether
you annuitize or not, you would pay the following cumulative expenses on
each $1,000 invested, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market............................................................... $21.15 $ 65.21
Managed Bond............................................................... 22.65 69.76
Capital Income............................................................. 23.85 73.38
Blue Chip.................................................................. 24.56 75.49
Mid-Cap Equity............................................................. 24.56 75.49
Aggressive Growth.......................................................... 25.46 78.19
International.............................................................. 27.55 84.47
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN
THOSE SHOWN IN THE EXAMPLES. None of the Funds had begun operations as of
January 1, 1997 and the "Other Expenses" are estimated. The Total Expenses
reflect the policy, adopted by Bank of America and by Pacific Mutual Life to
waive their fees for services rendered to the Trust and reimburse expenses so
that the Total Expenses on an annual basis (exclusive of interest, taxes,
brokerage commissions and other portfolio transaction expenses, capital
expenditures, and extraordinary expenses) are no greater than the Total Expenses
shown in the table above for each Fund. In the absence of the policy to waive
fees and reimburse expenses, it is estimated that total annual expenses of the
Funds, as a percentage of average daily net assets, would be as follows: Money
Market: 1.16%; Managed Bond: 1.19%; Capital Income: 1.25%; Blue Chip: 1.16%;
Mid-Cap Equity: 1.19%; Aggressive Growth: 1.38%; and International: 1.53%. Bank
of America and Pacific Mutual Life intend to continue this policy until such
time as the annualized expenses of a Fund are less than the Total Expenses shown
in the table; however, Bank of America and Pacific Mutual Life may discontinue
such fee waivers and expense reimbursements at any time. See THE BUSINESS OF THE
FUNDS in the Trust's Prospectus.
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<PAGE> 15
The Annual Fee is reflected in the examples, using an assumed initial single
premium payment of $35,000. No Annual Fee is deducted from annuitized amounts or
if your Net Contract Value is at least $50,000.
WHY BUY A CONTRACT
Your Pacific Innovations Contract (your "Contract") is an annuity contract that
provides you with flexibility in tax-deferred retirement planning or other
long-term financial planning. You may select among seven Variable Investment
Options and one Fixed Option. You may choose to add to your Contract Value at
any time before the Annuity Date, and your additional Purchase Payments may be
in any amount you choose (subject to certain limitations). When you annuitize,
we will send the payee a series of variable and/or fixed payments for life or
for a specified number of years.
If you purchase a Contract with after-tax dollars ("Non-Qualified Contract") or
if your Contract is purchased through a Qualified Plan or IRA ("Qualified
Contract"), your earnings on the Contract are not subject to tax until amounts
are withdrawn or distributed (including annuity payments). See FEDERAL TAX
STATUS.
YOUR INVESTMENT OPTIONS
You may choose among seven different Variable Investment Options and the Fixed
Option.
YOUR VARIABLE INVESTMENT OPTIONS
Separate Account B, a separate account of ours, currently offers you seven
"Variable Investment Options" (also called "Subaccounts"). Each Variable
Investment Option invests in a separate Fund of the Trust. Your Variable
Investment Options are:
-- Money Market Subaccount
-- Managed Bond Subaccount
-- Capital Income Subaccount
-- Blue Chip Subaccount
-- Mid-Cap Equity Subaccount
-- Aggressive Growth Subaccount
-- International Subaccount
10
<PAGE> 16
What Are Each of These Options?
For your convenience, the following chart summarizes some basic data about each
Fund. THIS CHART IS ONLY A SUMMARY. FOR MORE COMPLETE INFORMATION ON EACH FUND,
INCLUDING A DISCUSSION OF THE FUND'S INVESTMENT TECHNIQUES AND THE RISKS
ASSOCIATED WITH ITS INVESTMENTS, SEE THE ACCOMPANYING TRUST PROSPECTUS. NO
ASSURANCE CAN BE GIVEN THAT A FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. YOU
SHOULD READ THE TRUST PROSPECTUS CAREFULLY BEFORE INVESTING.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
FUND INVESTMENT OBJECTIVE PRIMARY INVESTMENTS ADVISER/SUBADVISER
(UNDER NORMAL
CONDITIONS)
================================================================================================
Money Market Liquidity and current Short-term debt Bank of America
income consistent with obligations issued or
preservation of capital guaranteed by U.S.
Government, its
agencies, authorities
or instrumentalities
- ------------------------------------------------------------------------------------------------
Managed Bond Interest income and Investment grade, Scudder, Stevens &
capital appreciation intermediate and longer Clark, Inc.
term bonds.
- ------------------------------------------------------------------------------------------------
Capital Income Total investment Convertible bonds and Bank of America
return, comprised of convertible preferred
current income and stocks
capital appreciation
- ------------------------------------------------------------------------------------------------
Blue Chip Long-term capital Blue chip stocks Bank of America
appreciation
- ------------------------------------------------------------------------------------------------
Mid-Cap Equity Capital appreciation; Stocks of companies Bank of America
income is a secondary with medium market
consideration capitalizations
- ------------------------------------------------------------------------------------------------
Aggressive Growth Maximum capital Common stocks and Bank of America
appreciation securities convertible
into common stocks of
companies with smaller
market capitalizations
- ------------------------------------------------------------------------------------------------
International Long-term capital Foreign equity Wellington Management
growth securities Company, LLP
- ------------------------------------------------------------------------------------------------
</TABLE>
The Trust Manager
Bank of America is the manager of the Trust. Bank of America and the Trust have
retained other Subadvisers, supervised by Bank of America, for two of the Funds.
YOUR FIXED OPTION
The Fixed Option offers you a guaranteed minimum interest rate on the amounts
you allocate to this Option. Amounts you allocate to the Fixed Option, and your
earnings credited, become part of Pacific Mutual's General Account. For more
detailed information about these Options, see THE GENERAL ACCOUNT section in
this Prospectus.
PURCHASING YOUR CONTRACT
HOW TO APPLY FOR YOUR CONTRACT
To purchase a Contract, fill out an application and submit it along with your
initial Purchase Payment to Pacific Mutual Life Insurance Company at P.O. Box
100060, Pasadena, California 91189-0060. If your
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<PAGE> 17
application and payment are complete when received, or once they have become
complete, we will issue your Contract within two Business Days. If some
information is missing from your application, we may delay issuing your Contract
while we obtain the missing information; however, we will not hold your initial
Purchase Payment for more than five Business Days without seeking your
permission.
You may also purchase a Contract by exchanging your existing contract. You must
submit all contracts to be exchanged when you submit your application. Call your
representative, or call us at 1-800-722-5558, if you are interested in this
option.
We reserve the right to reject any application or Purchase Payment for any
reason, subject to any applicable nondiscrimination laws and to our own
standards and guidelines. The maximum age of a Contract Owner, including Joint
and Contingent Owners, for which a Contract will be issued is 85. The Contract
Owner's age is calculated as of his or her attained birthday. If the sole
Contract Owner or sole Annuitant named in the application for a Contract dies
prior to our issuance of a Contract, then the application for the Contract
and/or any Contract issued shall be deemed null and void; and any premiums we
receive, including any proceeds received in connection with an exchange or
transfer, will be returned to the applicant/owner or their estate.
MAKING YOUR PURCHASE PAYMENTS
Making Your Initial Payment
Your initial Purchase Payment must be at least $5,000 if you are buying a
Non-Qualified Contract, and at least $2,000 if you are buying a Qualified
Contract. You may pay this entire amount when you submit your application, or
you may choose our pre-authorized checking plan ("PAC"), which allows you to pay
in equal monthly installments over one year (at least $400 per month for
Non-Qualified Contracts, and at least $150 per month for Qualified Contracts).
If you choose PAC, you must make your first installment payment when you submit
your application. Further requirements for PAC are discussed in the PAC form.
You must obtain our consent before making an initial or additional Purchase
Payment that will bring your aggregate Purchase Payments over $500,000.
Making Additional Payments
You may choose to invest additional amounts in your Contract at any time. Each
additional Purchase Payment must be at least $100 for Non-Qualified Contracts
and $50 for Qualified Contracts.
Forms of Payment
Your initial and additional Purchase Payments may be sent by personal or bank
check or by wire transfer. You may also make additional PAC Purchase Payments
via electronic funds transfer. All checks must be drawn on U.S. funds. If you
make Purchase Payments by check other than a cashier's check, your payment of
any withdrawal proceeds and any refund during your "Right to Cancel" period may
be delayed until your check has cleared.
HOW YOUR PAYMENTS ARE ALLOCATED
CHOOSING YOUR INVESTMENT OPTIONS
You may allocate your Purchase Payments among the seven Subaccounts and the
Fixed Option. Allocations of your initial Purchase Payment to the Investment
Options you selected will be effective either on your Contract Date or on your
Right to Cancel Transfer Date. Any additional Purchase Payments received prior
to your Right to Cancel Transfer Date will be allocated to the Investment
Options you selected either on the Business Day we receive the Payment in proper
form or on your Right to Cancel Transfer Date. See WITHDRAWALS--RIGHT TO CANCEL.
Each additional Purchase Payment after the Right to Cancel Transfer Date will be
allocated to the Investment Options according to your allocation instructions in
your application,
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<PAGE> 18
or most recent instructions, if any. We reserve the right, in the future, to
require that your allocation to any particular Investment Option meet a certain
minimum amount.
INVESTING IN VARIABLE INVESTMENT OPTIONS
Each time you allocate your investment to a Variable Investment Option, your
Contract is credited with a number of "Subaccount Units" in that Subaccount. The
number of Subaccount Units credited is equal to the amount you have allocated to
that Subaccount, divided by the "Unit Value" of one Unit of that Subaccount.
Example: You allocate $600 to the Capital Income Subaccount. At the end of
the Business Day on which your allocation is effective, the value of one
Unit in the Capital Income Subaccount is $15. As a result, 40 Subaccount
Units are credited to your Contract for your $600.
Your Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value of those Units
will usually fluctuate. This means that, from time to time, your investment
allocated to the Variable Investment Options may be worth more or less than the
original Purchase Payments to which those amounts can be attributed.
Fluctuations in Subaccount Unit Value will not change the number of Units
credited to your Contract.
Subaccount Unit Values will vary in accordance with the investment performance
of the corresponding Fund. For example, the value of Units in the Blue Chip
Subaccount will change to reflect the performance of the Blue Chip Fund
(including that Fund's investment income, its capital gains and losses, and its
expenses). Subaccount Unit Values are also adjusted to reflect the
Administrative Fee and Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units as of 4:00 p.m., Eastern time on
each Business Day. The SAI contains a detailed discussion of these calculations.
WHEN YOUR INVESTMENT IS EFFECTIVE
The day your allocation is effective determines the Unit Value at which
Subaccount Units are attributed to your Contract. In the case of transfers or
withdrawals, the effective day determines the Unit Value at which affected
Subaccount Units are debited and/or credited under your Contract. That Value is
the value of the Subaccount Units next calculated after your transaction is
effective. Your Variable Account Value begins to reflect the investment
performance results of your new allocations on the day after your transaction is
effective.
Your initial Purchase Payment is ordinarily effective on the day we issue your
Contract. Any additional allocation is effective on the day we receive your
Purchase Payment in proper form.
TRANSFERS
Once your payments are allocated to the Investment Options you selected, you may
transfer your Contract Value, less Loan Account Value, from any Investment
Option to any other. Certain restrictions apply to the Fixed Option. See THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Transfer requests are normally
effective on the Business Day we receive them in proper form. If your Contract
was issued in a state that requires refund of Purchase Payments under your Right
to Cancel, or if your contract is an IRA, transfers may only be made after your
Right to Cancel Transfer Date. See WITHDRAWALS--RIGHT TO CANCEL.
No transfer fee is currently imposed for transfers among the Investment Options,
but we reserve the right to impose a transaction fee for transfers in the
future; a fee of up to $15 per transfer may apply to transfers in excess of 15
in any Contract Year. Transfers under the dollar cost averaging and earnings
sweep options are counted toward your total transfers in a Contract Year. Any
such fee would be charged against your Investment Options proportionately, based
on your relative Account Value in each immediately after the transfer.
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<PAGE> 19
We have the right, at our option, to require certain minimums in the future in
connection with transfers; these may include a minimum transfer amount and a
minimum Account Value, if any, for the Investment Option from which the transfer
is made or to which the transfer is made. If your transfer request results in
your having a remaining Account Value in an Investment Option that is less than
the minimum amount, we may transfer that remaining amount to your other
Investment Options in the proportions specified in your current allocation
instructions. We also reserve the right to limit the size of transfers, to limit
the number and frequency of transfers, to restrict transfers, and to suspend
transfers. We reserve the right to reject any transfer request. As of the date
of this prospectus, the only restriction is that we will not accept instructions
from agents acting under a power of attorney or otherwise on behalf of multiple
Contract Owners.
Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s) after
annuitization are limited to four in any twelve-month period. See THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS AND THE CONTRACTS AND THE SEPARATE ACCOUNT in
the SAI.
Dollar Cost Averaging
Dollar cost averaging is a method in which you buy securities in a series of
regular purchases instead of in a single purchase. This allows you to average
the securities' prices over time, and may permit a "smoothing" of abrupt peaks
and drops in price. Prior to your Annuity Date, you may use dollar cost
averaging to transfer amounts, over time, from any Variable Investment Option or
the Fixed Option with an Account Value of at least $5,000 to one or more other
Variable Investment Options. Each transfer must be for at least $250. Detailed
information appears in the SAI.
Portfolio Rebalancing
You may instruct us to maintain a specific balance of Variable Investment
Options under your Contract (e.g.,30% in the Blue Chip Subaccount, 40% in the
Capital Income Subaccount, and 30% in the Aggressive Growth Subaccount) prior to
your Annuity Date. Periodically, we will "rebalance" your values in the elected
Subaccounts to the percentages you have specified. Rebalancing may result in
transferring amounts from a Subaccount earning a relatively higher return to one
earning a relatively lower return. The Fixed Option is not available for
rebalancing. Detailed information appears in the SAI.
Earnings Sweep
You may instruct us to make automatic periodic transfers of your earnings from
the Money Market Subaccount or from the Fixed Option to one or more Variable
Investment Options (other than the Money Market Subaccount). Detailed
information appears in the SAI.
CHARGES, FEES AND DEDUCTIONS
WITHDRAWAL CHARGE
No sales charge is imposed on any Purchase Payment. Your Purchase Payments may,
however, be subject to a withdrawal charge; this charge may apply to amounts you
withdraw under your Contract, depending on the length of time each Purchase
Payment has been invested and on the amount you withdraw. No withdrawal charge
is imposed on (i) amounts annuitized after the first Contract Year, if
annuitized for at least five years, (ii) payments of death benefits, (iii)
withdrawals by Contract Owners to meet the minimum distribution rules for
Qualified Contracts as they apply to amounts held under the Contract, or (iv)
subject to medical evidence satisfactory to us, after the first Contract
Anniversary, full or partial withdrawals if the last or sole Annuitant has been
diagnosed with a medically determinable condition that results in a life
expectancy of twelve (12) months or less. We will not impose a withdrawal charge
on withdrawals of Purchase Payments held under your Contract for at least five
Contract Years. In no event will the aggregate withdrawal charges imposed exceed
7.0% of your total Purchase Payments.
Free Withdrawals
We will not impose a withdrawal charge on your withdrawal to the extent that
total withdrawals that are free of charge during the Contract Year do not exceed
10% of the sum of your remaining Purchase Payments at the
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<PAGE> 20
beginning of the Contract Year that have been held under your Contract for less
than six years plus additional Purchase Payments applied to your Contract during
that Contract Year. Our calculations of the withdrawal charge deduct this "free
10%" from your "oldest" Purchase Payment that is still otherwise subject to the
charge.
Example: You make an initial Purchase Payment of $10,000 in Contract Year
1, and make additional Purchase Payments of $1,000 and $6,000 in Contract
Year 2. With Earnings, your Contract Value in Contract Year 3 is $19,000.
In Contract Year 3, you may withdraw $1,700 free of the withdrawal charges
(your total Purchase Payments were $17,000, so 10% of that total equals
$1,700). After this withdrawal, your Contract Value is $17,300 ($15,300
attributable to Purchase Payments and $2,000 attributable to earnings). In
Contract Year 4, your Contract Value falls to $12,500; you may withdraw
$1,530 (10% of $15,300) free of any withdrawal charges.
How the Charge is Determined
We calculate your withdrawal charge by assuming that amounts withdrawn are
attributed to Purchase Payments in the order the Payments were received by us,
then to Earnings. The amount of the charge depends on how long each Purchase
Payment was held under your Contract. Each Purchase Payment you make is
considered to have a certain "age," depending on the length of time since that
payment was effective. A payment is "one year old" or has an "age of one" from
the day it is effective until your next Contract Anniversary; beginning on that
Contract Anniversary, your payment will have an "age of two" for a full Contract
Year. When you withdraw an amount subject to the withdrawal charge, the "age" of
the Purchase Payment you withdraw determines the level of withdrawal charge as
follows:
<TABLE>
<CAPTION>
"AGE" OF PAYMENT WITHDRAWAL
IN YEARS CHARGE
- ------------------ ----------
<S> <C>
1 7%
2 6%
3 5%
4 3%
5 1%
6 or more 0%
</TABLE>
Example: If in the example above, in Contract Year 3, a gross withdrawal of
$2,000 instead of $1,700 was requested, it would generate a withdrawal
charge of $15, calculated by subtracting the "free 10%" (10% X $17,000 =
$1,700) from the withdrawal amount ($2,000) and applying to the result
($300) the applicable withdrawal charge percentage (5%). The net withdrawal
proceeds to you would be $1,985. After this withdrawal, the remaining
Contract Value would be $17,000, of which $15,000 would be attributable to
Purchase Payments and $2,000 to Earnings.
The withdrawal charge will be deducted proportionally among all Investment
Options from which the withdrawal occurs. Any applicable Annual Fee will be
deducted after the withdrawal charge is calculated. See THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS.
We pay sales commissions and other expenses associated with promotion and sales
of the Contracts to broker-dealers. The withdrawal charge is designed to
reimburse us for these costs, although we expect that our actual expenses will
be greater than the amount of the withdrawal charge.
Transfers
Transfers of all or part of your Account Value from one Investment Option to
another is not considered a withdrawal of an amount from your Contract, so no
withdrawal charge is imposed at the time of transfer. See HOW YOUR PAYMENTS ARE
ALLOCATED--TRANSFERS and THE GENERAL ACCOUNT-- WITHDRAWALS AND TRANSFERS.
15
<PAGE> 21
PREMIUM TAXES
Depending on (among other factors) your state of residence, a tax may be imposed
on your Purchase Payments at the time your payment is made, at the time of a
partial or full withdrawal, at the time any death benefit proceeds are paid, at
annuitization or at such other time as taxes may be imposed. Tax rates ranging
from 0% to 3.5% are currently in effect, but may change in the future. Some
local jurisdictions also impose a tax.
If we pay any taxes attributable to Purchase Payments ("premium taxes") on your
behalf, we will impose a similar charge against your Contract Value. We normally
will charge you when you annuitize some or all of your Contract Value. We
reserve the right to impose this charge for applicable premium taxes when you
make a full or partial withdrawal, at the time any death benefit proceeds are
paid, or when those taxes are incurred. For these purposes, "premium taxes"
include any state or local premium taxes and, where approval has been obtained,
federal premium taxes and any federal, state or local income, excise, business
or any other type of tax (or component thereof) measured by or based upon,
directly or indirectly, the amount of payments we have received. We will base
this charge on the Contract Value, the amount of the transaction, the aggregate
amount of Purchase Payments we receive under your Contract, or any other amount,
that in our sole discretion we deem appropriate.
We may also charge the Separate Account or your Contract Value for taxes
attributable to the Separate Account or the Contract, including income taxes
attributable to the Separate Account or to our operations with respect to the
Contract, or taxes attributable, directly or indirectly, to Purchase Payments or
payments we make under the Contract. Currently, we do not impose any such
charges.
ANNUAL FEE
We will charge you an Annual Fee of $30 on each Contract Anniversary prior to
the Annuity Date and at the time you withdraw your entire Net Contract Value, if
your Net Contract Value is less than $50,000 on that date. The fee is not
imposed on amounts you annuitize or on payment of death benefit proceeds. The
fee reimburses certain of our costs in administering the Contracts and the
Separate Account; we do not intend to realize a profit from this fee or the
Administrative Fee. This fee is guaranteed not to increase for the life of your
Contract.
Your Annual Fee will be charged proportionately against your Investment Options.
Assessments against your Variable Investment Options are made by debiting some
of the Subaccount Units previously credited to your Contract; that is,
assessment of the Annual Fee does not change the Unit Value for those
Subaccounts.
WAIVERS AND REDUCED CHARGES
We may reduce or waive the withdrawal charge or Annual Fee or credit additional
amounts in situations where selling and/or maintenance costs associated with the
Contracts are reduced, such as the sale of several Contracts to the same
Contract Owner(s), sales of large Contracts and group sales and on mass
transactions over multiple Contracts. In addition, we may waive the Annual Fee
and/or credit an additional amount to the Contract Value of those Contracts sold
to persons who meet criteria established by Pacific Mutual Life, which may
include officers, and employees of Pacific Mutual Life and our affiliates,
registered representatives and employees of broker-dealers with a current
selling agreement with us and their affiliates, and employees of affiliated
asset management firms ("Eligible Persons") and immediate family members of
Eligible Persons. We will only reduce or waive such charges and fees or credit
additional amounts on any Contract where expenses associated with the sale of
the Contract and/or costs associated with administering and maintaining the
Contract are reduced. Eligible Persons and their immediate families also may
purchase a Contract with reduced minimum Purchase Payment requirements.
MORTALITY AND EXPENSE RISK CHARGE
We assess a charge against the assets of each Subaccount to compensate us for
certain mortality and expense risks that we assume under the Contracts (the
"Risk Charge"). The risk that Annuitants will live longer (and
16
<PAGE> 22
therefore receive more annuity payments) than we predict through our actuarial
calculations is "mortality risk." We also bear mortality risk in connection with
death benefits payable under the Contracts. The risk that the expense charges
and fees under the Contracts and Separate Account are less than our actual
administrative and operating expenses is called "expense risk."
This Risk Charge is assessed daily at an annual factor expressed as a decimal
(where 1.00 is equal to 100%) of 0.0125 of each Subaccount's assets; this charge
may not be increased for the duration of your Contract. Of this amount, 0.0045
is for assuming expense risk, and 0.0080 is for assuming mortality risk.
The Risk Charge will stop at annuitization if you select a fixed annuity; the
Risk Charge will continue after annuitization if you choose any variable
annuity, even though we do not bear mortality risk if your Annuity Option is
Period Certain Only.
We will realize a gain if the Risk Charge exceeds our actual cost of expenses
and benefits, and will suffer a loss if such actual costs exceed the Risk
Charge. Any gain will become part of our General Account; we may use it for any
reason, including covering sales expenses on the Contracts.
ADMINISTRATIVE FEE
We charge an Administrative Fee as compensation for costs we incur in operating
the Separate Account and issuing and administering the Contracts, including
processing applications and payments, and issuing reports to you and to
regulatory authorities.
The Administrative Fee is assessed daily at an annual factor expressed as a
decimal (where 1.00 is equal to 100%) of 0.0015 of the assets of each
Subaccount. This fee is guaranteed not to increase for the life of your
Contract. A relationship will not necessarily exist between the actual
administrative expenses attributable to a particular Contract and the
Administrative Fee paid in respect of that particular Contract.
EXPENSES OF THE TRUST
Your Variable Account Value reflects advisory fees and other expenses incurred
by the various Funds of the Trust, net of any applicable reimbursements. These
fees and expenses may vary from year to year. The Trust is governed by its own
Board of Trustees, and your Contract does not fix or specify the level of
expenses of the Trust or any Fund. The Trust's fees and expenses are described
in detail in the SUMMARY and in the Trust's Prospectus and in its SAI.
RETIREMENT BENEFITS AND OTHER PAYOUTS
SELECTING YOUR ANNUITANT
When you submit the application for your Contract, you must choose an Annuitant
and may choose a Joint Annuitant. We will send the annuity payments to the payee
that you designate. If you are buying a Qualified Contract, you must be the sole
Annuitant; if you are buying a Non-Qualified Contract you may choose yourself
and/or another person. Whether you choose to have a sole or two Joint
Annuitants, you may choose a Contingent Annuitant; more information on these
options is described in the SAI. You will not be able to add or change a sole or
Joint Annuitant after your Contract is issued; however, if you are buying a
Qualified Contract, you may add a Joint Annuitant at the time of annuitization.
You will be able to add or change a Contingent Annuitant until your Annuity Date
or the death of your sole Annuitant or both Joint Annuitants, whichever occurs
first; however, once your Contingent Annuitant has become the Annuitant under
your Contract, no additional Contingent Annuitant may be named. You may not
choose an Annuitant who has reached his or her 86th birthday at the time your
Contract is issued. This restriction applies to Joint and Contingent Annuitants
as well as to a sole Annuitant. When adding or changing Contingent Annuitants,
the newly named Contingent Annuitant must be less than age 86 at the time of
change or addition. In addition, we reserve the right to require proof of age or
survival of the Annuitant(s).
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<PAGE> 23
ANNUITIZATION
You may choose both your Annuity Date (or "Annuity Start Date") and your Annuity
Option. At the Annuity Date, you may elect to annuitize some or all of your Net
Contract Value, less any transaction fee, and any applicable charge for premium
taxes and/or other taxes, as long as the net amount you annuitize is at least
$10,000, subject to any exceptions under state law. If you annuitize only a
portion of this available Contract Value, you may have the remainder
distributed, less any applicable charge for premium taxes and/or other taxes,
any transaction fee, any applicable withdrawal charge, and any Annual Fee. We
will distribute your Net Contract Value, less any applicable charge for premium
taxes and/or other taxes, any applicable withdrawal charge, any Annual Fee, and
any transaction fee, to you in a single sum if the net amount of your Contract
Value available to convert to an annuity is less than $10,000 on your Annuity
Date. Distributions under your Contract may have tax consequences. You should
consult a qualified tax adviser for information on annuitization.
CHOOSING YOUR ANNUITY DATE ("ANNUITY START DATE")
You should choose your Annuity Start Date when you submit your application or we
will apply a default Annuity Date to your Contract.
You may change your Annuity Date by notifying us in writing (or other form
acceptable to us). We must receive your written notice at least ten Business
Days prior to the earlier of your old Annuity Date or your new Annuity Date.
Your Annuity Date cannot be earlier than your first Contract Anniversary and
must occur on or before a certain date: If you have a sole Annuitant, your
Annuity Date cannot be later than his or her 95th birthday; if you have Joint
Annuitants and a Non-Qualified Contract, your Annuity Date cannot be later than
your younger Joint Annuitant's 95th birthday; if you have Joint Annuitants and a
Qualified Contract, your Annuity Date cannot be later than your own 95th
birthday. In the case of certain trusts, the Annuity Date can not be later than
the Annuitant's 100th birthday. To meet IRS minimum distribution rules, your
Annuity Date may need to be earlier. Different requirements may apply in some
states. If your Contract is a Qualified Contract, you may also be subject to
additional restrictions. Adverse federal tax consequences may result if you
choose an Annuity Date that is prior to an Annuitant's attained age 59 1/2. See
FEDERAL TAX STATUS.
If you annuitize only a portion of your Net Contract Value on your Annuity Start
Date, you may, at that time, have the option to elect not to have the remainder
of your Contract Value distributed, but instead to continue your Contract with
that remaining Contract Value (a "continuing Contract"). If this option is
available, you would then choose a second Annuity Date for your continuing
Contract, and all references in this Prospectus to your "Annuity Date" would, in
connection with your continuing Contract, be deemed to refer to that second
Annuity Date. This option may not be available, or may be available only for
certain types of Contracts. You should be aware that some or all of the payments
received before the second Annuity Date may be fully taxable. We recommend that
you call your tax adviser for more information and specific tax advice if you
are interested in this option.
DEFAULT ANNUITY DATE AND OPTIONS
If you have a Non-Qualified Contract and you do not choose an Annuity Date when
you submit your application, your Annuity Date will be your Annuitant's 95th
birthday or your younger Joint Annuitant's 95th birthday, whichever applies;
however some states' laws may require a different Annuity Date. If you have a
Qualified Contract and fail to choose an Annuity Date, your Annuity Date will be
April 1 of the calendar year following the year your Annuitant attains age
70 1/2; if your Annuitant has already attained age 70 1/2 on the Contract Date,
your Annuity Date will be April 1 of the calendar year following your first
Contract Anniversary.
If you have not specified an Annuity Option or do not instruct us otherwise, at
your Annuity Date your Net Contract Value, less transaction fees and/or charges
for premium taxes and/or other taxes, will be annuitized (if this net amount is
at least $10,000) as follows: the net amount from your Fixed Option Value will
be
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converted into a fixed-dollar annuity and the net amount from your Variable
Account Value will be converted into a variable-dollar annuity directed to the
Subaccounts proportionate to your Account Value in each. If you have a
Non-Qualified Contract, or if you have a Qualified Contract and are not married,
your default Annuity Option will be Life with Ten Year Period Certain. If you
have a Qualified Contract and you are married, your default Annuity Option will
be Joint and Survivor Life with survivor payments of 50% and your spouse will
automatically be named your Joint Annuitant.
CHOOSING YOUR ANNUITY OPTION
You make three basic decisions about your annuity payments. First, you must
choose whether you want those payments to be a fixed-dollar amount and/or a
variable-dollar amount. Second, you must choose the form of annuity payments
(see ANNUITY OPTIONS). Third, you must decide how often you want annuity
payments to be made (the "frequency" of the payments). You may not change these
selections after annuitization.
Fixed and Variable Annuities
You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable
annuity (i.e., with variable-dollar amounts), or you may choose both, converting
one portion of the net amount you annuitize into a fixed annuity and another
portion into a variable annuity.
If you select a fixed annuity, each periodic annuity payment received will be
equal to the initial annuity payment, unless you select a joint and survivor
life annuity with reduced survivor payments and the Primary Annuitant dies. Any
net amount you convert to a fixed annuity will be part of our General Account.
If you select a variable annuity, you may choose as many Variable Investment
Options as you wish; the amount of the periodic annuity payments will vary with
the investment results of the Variable Investment Options selected. After the
Annuity Date, Annuity Units may be exchanged among available Variable Investment
Options up to four times in any twelve-month period. How your Contract converts
into a variable annuity is explained in more detail in THE CONTRACTS AND THE
SEPARATE ACCOUNT in the SAI.
Annuity Options
Four Annuity Options are currently available under the Contracts, although
additional options may become available in the future.
-- Life Only. Periodic payments are made to the payee during his or her
lifetime. Payments stop when the Annuitant dies.
-- Life with Period Certain. Periodic payments are made to the payee
during the Annuitant's lifetime, with payments guaranteed for a
specified period. You may choose to have payments guaranteed for
anywhere from 5 through 30 years (in full years only). If the
Annuitant dies before the guaranteed payments are completed, the
Beneficiary receives the remainder of the guaranteed payments.
-- Joint and Survivor Life. Periodic payments are made to the Primary
Annuitant during the lifetime of the Primary Annuitant. After the
death of the Primary Annuitant, periodic payments are made to the
payee named in the election if and as long as the secondary Annuitant
lives. You may choose to have the payments based on the life
expectancy of the surviving secondary Annuitant equal to 50%, 66 2/3%
or 100% of the payments made during the lifetime of the Primary
Annuitant (you must make this election when you choose your Annuity
Option). Payments stop when both Annuitants die.
-- Period Certain Only. Periodic payments are made to the payee over a
specified period. You may choose to have payments continue for
anywhere from 5 through 30 years (in full years only). If the
Annuitant dies before the guaranteed payments are completed, the
Beneficiary receives the remainder of the guaranteed payments.
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Frequency of Payments
You may choose to have annuity payments made monthly, quarterly, semiannually,
or annually. The amount of a variable payment will be determined in each period
on the date corresponding to your Annuity Date, and payment will be made on the
next succeeding day.
Your initial annuity payment must be at least $250. Depending on the net amount
you annuitize, this requirement may limit your options regarding the period
and/or frequency of annuity payments.
If your Contract was issued in connection with a Qualified Plan subject to Title
I of the Employee Retirement Income Security Act of 1974 ("ERISA"), your
spouse's consent may be required when you seek any distribution under your
Contract, unless your Annuity Option is Joint and Survivor Life with survivor
payments of at least 50%, and your spouse is your Joint Annuitant.
YOUR ANNUITY PAYMENTS
Amount of the First Payment
Your Contract contains tables that we use to determine the amount of the first
annuity payment under your Contract, taking into consideration the annuitized
portion of your Net Contract Value at the Annuity Date. This amount will vary,
depending on the annuity period and payment frequency you select; this amount
will be larger in the case of shorter Period Certain annuities and smaller for
longer Period Certain annuities. Similarly, this amount will be greater for a
Life Only annuity than for a Joint and Survivor Life annuity, because we will
expect to make payments for a shorter period of time on a Life Only annuity. If
you do not choose the Period Certain Only annuity, this amount will also vary
depending on the age of the Annuitant(s) on the Annuity Date and, for some
Contracts in some states, the sex of the Annuitant(s).
For fixed annuity payments, the guaranteed income factors in our tables are
based on an annual interest rate of 3% and the 1983a Annuity Mortality Table
with the ages set back 10 years. If you elect a fixed annuity, fixed annuity
payments will be based on the periodic income factors in effect for your
Contract on the Annuity Date which are at least the guaranteed income factors
under the Contract.
For variable annuity payments, the tables are based on an assumed annual
investment return of 5% and the 1983a Annuity Mortality Table with the ages set
back 10 years. If you elect a variable annuity, your initial variable annuity
payment will be based on the applicable income factor in effect for your
Contract on the Annuity Date which is at least as great as the applicable
variable annuity income factor in our table. A higher assumed investment return
would mean a larger first variable annuity payment, but subsequent payments
would increase only when actual net investment performance exceeds the higher
assumed rate and would fall when actual net investment performance is less than
the higher assumed rate. A lower assumed rate would mean a smaller first payment
and a more favorable threshold for increases and decreases. If the actual net
investment performance is a constant 5% annually, annuity payments will be
level. The assumed investment return is explained in more detail in the SAI
under THE CONTRACTS AND THE SEPARATE ACCOUNT.
DEATH BENEFITS
A death benefit may be payable on proof of death before the Annuity Date of the
Annuitant or of any Contract Owner while the Contract is in force. The amount of
the death benefit will be paid according to the DEATH BENEFIT PROCEEDS section.
Death Benefit Proceeds
The proceeds of any death benefit payable will be paid upon receipt of proof of
death, in proper form, and instructions regarding payment and will be the amount
of the death benefit reduced by any charge for premium taxes and/or other taxes
and any Contract Debt. The death benefit proceeds will be payable in a single
sum, as an annuity, or in accordance with IRS regulations (see MANDATORY
DISTRIBUTION ON DEATH). Any such annuity is subject to all restrictions
(including minimum amount requirements) as are other
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annuities under this Contract; in addition, there may be legal requirements that
limit the recipient's Annuity Options and the timing of any payments. A
recipient should consult a qualified tax adviser before electing to receive an
annuity.
Additional provisions apply if your Contract names a Joint or Contingent Owner
or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your
spouse. Further information about these provisions is contained in the SAI.
Mandatory Distribution on Death
If a Contract Owner of a Non-Qualified Contract dies before the Annuity Date,
any death benefit proceeds under this Contract must begin distribution within
five years after the Owner's death. In order to satisfy this requirement, the
designated recipient must receive a lump sum payment or elect to receive an
annuity for life or over a period that does not exceed the life expectancy of
the designated recipient with annuity payments that start within one year after
the Owner's death. If an election to receive an annuity is not made within 60
days of our receipt of proof in proper form of the Owner's death or, if earlier,
60 days (or shorter period as we permit) prior to the first anniversary of the
Owner's death, the lump sum option will be deemed elected, unless otherwise
required by law. If the lump sum option is deemed elected, we will consider that
deemed election as receipt of instructions regarding payment of death benefit
proceeds. If a Non-Qualified Contract has Joint Owners, this requirement applies
to the first Contract Owner to die.
If the Contract Owner was not an Annuitant but was a Joint Owner and there is a
surviving Joint Owner, that surviving Joint Owner is the designated recipient;
if no Joint Owner survives but a Contingent Owner is named in the Contract and
is living, he or she is the designated recipient, otherwise the designated
recipient is the Beneficiary; if no Beneficiary is living, the designated
recipient is the Owner's estate. If the Contract Owner was an Annuitant, the
designated recipient is the Beneficiary; if no Beneficiary is living, the
designated recipient is the Owner's estate. A sole designated recipient who is
the Contract Owner's spouse may elect to become the Contract Owner (and sole
Annuitant if the deceased Contract Owner had been the Annuitant) and continue
the Contract until the earliest of the spouse's death, the death of the
Annuitant, or the Annuity Start Date. A Joint or Contingent Owner who is the
designated recipient but not the Contract Owner's spouse may not continue the
Contract, but may purchase a new Contract.
If you are a non-individual Owner of a Contract other than a Contract issued
under a Qualified Plan as defined in Section 401 or 403 of the Code, the Primary
Annuitant will be treated as the Owner of the Contract for purposes of these
Distribution Rules. If there is a change in the Primary Annuitant prior to the
Annuity Date, such change will be treated as the death of the Owner. The amount
of the death benefit in this situation will be (a) the Contract Value if the
non-individual owner elects to maintain the Contract and reinvest the Contract
Value into the Contract in the same amount as immediately prior to the
distribution, or (b) the Contract Value less any Annual Fee, and any withdrawal
and/or transaction fee, any charges for withdrawals, and/or premium taxes and/or
other taxes, if the non-individual elects a cash distribution. The amount of the
death benefit will be determined as of the Business Day we receive, in proper
form, the request to change the Primary Annuitant and instructions regarding
maintaining the Contract or cash distribution.
Death Benefit Amounts
The Death Benefit Amount as of the Notice Date and prior to the Annuity Date is
equal to the greater of (a) your Contract Value as of that day, or (b) your
aggregate Purchase Payments, reduced by any applicable charges and fees, and
further reduced by an amount for each withdrawal that is calculated by
multiplying the aggregate Purchase Payments received by the ratio of the amount
of each withdrawal, including applicable withdrawal charges, to the Contract
Value immediately prior to each withdrawal.
The Guaranteed Minimum Death Benefit ("GMDB") Amount will be calculated only
when a death benefit becomes payable as a result of the death of the sole
Annuitant and is determined as follows: We look at the Contract as of the first
Contract Anniversary and as of every subsequent Contract Anniversary prior to
the Annuity Date, that is, the 1st, 2nd, 3rd , etc., until the earlier of (i)
the date the Annuitant reaches his or her 81st birthday, (ii) the date of the
Annuitant's death, or (iii) the Annuity Date, (each of these Anniversaries is
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a "Milestone Date"). For each Milestone Date, we calculate the Death Benefit
Amount and (a) add the aggregate amount of any Purchase Payments received by us
after that Milestone Date, (b) subtract an amount for each withdrawal that is
calculated by multiplying that Death Benefit Amount by the ratio of the amount
of each withdrawal that has occurred since that Milestone Date, including
applicable withdrawal charges, to the Contract Value immediately prior to each
withdrawal, and (c) subtract the aggregate amount of any previous charges, fees,
and/or taxes effected since that Milestone Date.
The highest of these adjusted Death Benefit Amounts, as of the Notice Date, is
the GMDB Amount. CALCULATIONS OF ANY GUARANTEED MINIMUM DEATH BENEFIT ARE ONLY
MADE ONCE DEATH BENEFIT PROCEEDS BECOME PAYABLE UNDER YOUR CONTRACT.
The Notice Date is the day on which we receive proof (in proper form) of death
and instructions regarding payment of death benefit proceeds.
Death Benefit: Death of the Annuitant
If the Annuitant dies on or before the first Contract Anniversary, or if the
Annuitant had already reached his or her 81st birthday as of the first Contract
Anniversary, the death benefit will be equal to the Death Benefit Amount as of
the Notice Date.
If the Annuitant dies prior to the Annuity Date but after the first Contract
Anniversary, and had not yet reached his or her 81st birthday as of the first
Contract Anniversary, the death benefit will be equal to the greater of (a) the
Death Benefit Amount as of the Notice Date; or (b) the GMDB Amount as of the
Notice Date.
The following procedures apply in the event of death of an Annuitant who is not
also a Contract Owner: If your Contract names Joint Annuitants and only one
Joint Annuitant dies, the surviving Joint Annuitant becomes your sole Annuitant
and the death benefit is not yet payable. If your sole Annuitant dies (or if no
Joint Annuitant survives) and your Contract names a surviving Contingent
Annuitant, he or she becomes the sole Annuitant and the death benefit is not yet
payable. If there is no surviving Joint or Contingent Annuitant, the death
benefit is payable to the Beneficiary, if living; if not, to the Owner's estate.
If both Owner and Annuitant die simultaneously, the death benefit will be paid
to the Beneficiary, if living; if not, to the Owner's estate.
Death Benefit: Death of a Contract Owner
If a Contract Owner who is not the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to the Death Benefit Amount as of the
Notice Date and will be paid in accordance with the Death Benefit Proceeds
section above. The death benefit proceeds will be paid to the Joint Owner, if
living; if not, to the Contingent Owner, if living; if not to the Beneficiary,
if living; if not, to the Owner's estate. See THE GENERAL ACCOUNT--WITHDRAWALS
AND TRANSFERS.
If a Contract Owner who is the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to the greater of your Death Benefit
Amount or the GMDB Amount as of the Notice Date and will be paid in accordance
with the Death Benefit Proceeds section above. The death benefit proceeds will
be paid to the Beneficiary if living; if not, to the Owner's estate. Joint
and/or Contingent Owners and/or Annuitants will not be considered in determining
the recipient of death benefit proceeds.
WITHDRAWALS
OPTIONAL WITHDRAWALS
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract. You may surrender your Contract and make a
full withdrawal at any time. Except as provided below, beginning 30 days after
your Contract Date, you also may make partial withdrawals from your Investment
Options at any time. You may request to withdraw a specific dollar amount or a
specific
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percentage of an Account Value or your Net Contract Value. You may choose to
make your withdrawal from specified Investment Options; if you do not specify
Investment Options, your withdrawal will be made from all of your Investment
Options proportionately. Each partial withdrawal must be for $500 or more,
except pre-authorized withdrawals, which must be at least $250. If your partial
withdrawal from an Investment Option would leave a remaining Account Value in
that Investment Option of less than any minimum Account Value we may require in
the future, we have the right, at our option, to transfer that remaining amount
to your other Investment Options on a proportionate basis relative to your most
recent allocation instructions. If your partial withdrawal leaves you with a Net
Contract Value of less than $1,000, we have the right, at our option, to
terminate your Contract and send you the withdrawal proceeds described in the
next section. Partial withdrawals from the Fixed Option in any Contract Year are
subject to restrictions. See GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS.
Amount Available for Withdrawal
The amount available for withdrawal is your Net Contract Value at the end of the
Business Day on which your withdrawal request is effective, less any applicable
Annual Fee, any withdrawal charge, any withdrawal transaction fee, and any
charge for premium tax and/or other taxes. The amount we send to you (your
"withdrawal proceeds") will also reflect any adjustment for federal and state
income tax withholding (See FEDERAL TAX STATUS). There may be additional
restrictions on partial withdrawals from the Fixed Option (see THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS).
You assume investment risk on investments in the Subaccounts; as a result, the
amount available to you for withdrawal from any Subaccount may be more or less
than the total Purchase Payments you have allocated to that Subaccount.
Withdrawal Transaction Fees
There is currently no transaction fee for partial withdrawals. However, we
reserve the right to impose a withdrawal transaction fee in the future of up to
$15 for each partial withdrawal (including pre-authorized partial withdrawals)
in excess of 15 in any Contract Year. Any such fee would be charged against your
Investment Options proportionately based on your Account Value in each
immediately after the withdrawal.
Pre-Authorized Withdrawals
If your Contract Value is at least $5,000, you may select the pre-authorized
withdrawal option, and you may choose monthly, quarterly, semiannual or annual
withdrawals. Each withdrawal must be for at least $250. Each pre-authorized
withdrawal is subject to federal income tax on its taxable portion and may be
subject to a 10% tax penalty if you have not reached age 59 1/2. See FEDERAL TAX
STATUS and THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Additional
information and options are set forth in the SAI and in the Pre-Authorized
Withdrawal section of your application.
Special Requirements for Full Withdrawals
If you wish to withdraw the entire amount available under your Contract, you
must either return your Contract to us or sign and submit to us a "lost Contract
affidavit."
Special Restrictions Under Qualified Plans
If your Contract was issued under certain Qualified Plans, you may not withdraw
amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 402(g)(3)(A) of the Code) or to transfers from
a custodial account (as defined in Section 403(b)(7) of the Code) except in
cases of your (a) separation from service, (b) death, (c) disability as defined
in Section 72(m)(7) of the Code, (d) reaching age 59 1/2, or (e) hardship as
defined for purposes of Section 401(k) of the Code.
These limitations do not affect certain rollovers or exchanges between Qualified
Plans, and do not apply to rollovers from these Qualified Plans to an individual
retirement account or individual retirement annuity. In
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the case of tax sheltered annuities, these limitations do not apply to certain
salary reduction contributions made, and investment results earned, prior to
dates specified in the Code.
Hardship withdrawals under the exception provided above are restricted to
amounts attributable to salary reduction contributions, and do not include
investment results; this additional restriction does not apply to salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to mandatory
withholding of 20% for federal income tax if the distribution is not transferred
directly to the trustee of another Qualified Plan, or to the custodian of an
individual retirement account or issuer of an individual retirement annuity. See
FEDERAL TAX STATUS. Distributions may also trigger withholding for state income
taxes. The tax and ERISA rules relating to Contract withdrawals are complex. We
are not the administrator of any Qualified Plan. You should consult your tax
adviser and/or your plan administrator before you withdraw a portion of your
Contract Value.
Effective Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day we receive them
in proper form. If you make Purchase Payments by check and submit a withdrawal
request immediately afterwards, payment of your withdrawal proceeds may be
delayed until your check clears.
TAX CONSEQUENCES OF WITHDRAWALS
Withdrawals, including pre-authorized withdrawals, will generally have federal
income tax consequences, which could include tax penalties. YOU SHOULD CONSULT
WITH A TAX ADVISER BEFORE MAKING ANY WITHDRAWAL OR SELECTING THE PRE-AUTHORIZED
WITHDRAWAL OPTION. See FEDERAL TAX STATUS.
RIGHT TO CANCEL
You may return your Contract for cancellation and a full refund during your
Right to Cancel period. Your Right to Cancel period is usually the 10-day period
beginning on the day you receive your Contract, but may vary if required by
state law. For more information, see APPENDIX A: STATE LAW VARIATIONS. If you
return your Contract, it will be canceled and treated as void from your Contract
Date. You will then receive a refund of your Contract Value as of the end of the
Business Day on which we receive your Contract for cancellation, plus a refund
of any amounts that may have been deducted as Contract fees or charges. Any
amounts credited to your Variable Account(s) as a result of any variation in
charges as described in "Waivers and Reduced Charges", and any earnings on such
amounts, will not be included in the amount refunded to you.
Some states' laws and IRA rules require us to refund your Purchase Payments
instead of your Account Value. If your Contract is issued in one of these states
(the "issue state"), or is an IRA, the Purchase Payments you have allocated to
any Subaccount will usually be allocated to the Money Market Subaccount during
your Right to Cancel period. In such cases, we will transfer your Contract Value
in the Money Market Subaccount to your chosen Variable Investment Options at the
end of the 15th calendar day after your Contract Date (your "Right to Cancel
Transfer Date"). We reserve the right to extend your Right to Cancel Transfer
Date by the number of days in excess of ten days that the issue state allows you
to return your Contract to us pursuant to your Right to Cancel right. You may
not waive your Right to Cancel.
PACIFIC MUTUAL LIFE AND THE SEPARATE ACCOUNT
PACIFIC MUTUAL LIFE
We are a mutual life insurance company organized under California law on January
2, 1868 under the name "Pacific Mutual Life Insurance Company of California" and
reincorporated as Pacific Mutual Life Insurance Company on July 22, 1936. Our
operations include both life insurance and annuity products as well as financial
and retirement services. As of the end of 1996, we had over $50.8 billion of
individual life insurance in force and total admitted assets of approximately
$21.2 billion. We have been ranked according to assets as
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the 23rd largest life insurance carrier in the nation for 1995. Together with
our subsidiaries and affiliated enterprises, we have total assets and funds
under management of over $136.7 billion. We are authorized to conduct life
insurance and annuity business in the District of Columbia and all states except
New York. Our principal offices are located at 700 Newport Center Drive, Newport
Beach, California 92660.
Our indirect wholly-owned subsidiary, Pacific Mutual Distributors, Inc. ("PMD"),
serves as the principal underwriter for the Contracts. PMD is located at 700
Newport Center Drive, Newport Beach, California 92660. PMD and Pacific Mutual
Life enter into selling agreements with broker-dealers, under which properly
licensed registered representatives of such broker-dealers act as agents of
Pacific Mutual Life in the sale of the Contracts.
We may provide you with reports of our ratings both as an insurance company and
as to our claims-paying ability with respect to our General Account assets. The
SAI presents more details about these ratings.
SEPARATE ACCOUNT B
Separate Account B was established on September 25, 1996 as a separate account
of Pacific Mutual Life, and is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act"), as a type of investment company called a
"unit investment trust."
Obligations arising under your Contract are our general corporate obligations.
We are also the legal owner of the assets in the Separate Account.
Assets of the Separate Account attributed to the reserves and other liabilities
under the Contract and other contracts issued by us that are supported by the
Separate Account may not be charged with liabilities arising from any of our
other business; any income, gain or loss (whether or not realized) from the
assets of the Separate Account are credited to or charged against the Separate
Account without regard to our other income, gain or loss.
We may invest money in the Separate Account in order to commence its operations
and for other purposes, but not to support contracts other than variable annuity
contracts. A portion of the Separate Account's assets may include accumulations
of charges we make against the Separate Account and investment results of assets
so accumulated. These additional assets are ours and we may transfer them to our
General Account at any time; however, before making any such transfer, we will
consider any possible adverse impact the transfer might have on the Separate
Account. Subject to applicable law, we reserve the right to transfer our assets
in the Separate Account to our General Account.
Shares of the Trust currently are offered only for purchase by Separate Account
B. Shares of the Trust may also be sold in the future to other separate accounts
in connection with variable annuity and variable life insurance contracts may be
allowed in the future, which could create conflicts. See MORE ON THE TRUST'S
SHARES in the accompanying Prospectus for the Trust.
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. The summary is general in nature, and does not consider
any applicable state or local tax laws. We do not make any guarantee regarding
the tax status, federal, state or local, of any Contract or any transaction
involving the Contracts. Accordingly, you should consult a qualified tax adviser
for complete information and advice before purchasing a Contract.
The following rules generally do not apply to variable annuity contracts held by
or for non-natural persons (e.g., corporations) unless such an entity holds the
contract as nominee for a natural person. If a contract is not owned or held by
a natural person or a nominee for a natural person, the contract generally will
not be treated as an "annuity" for tax purposes, meaning that the contract owner
will be taxed currently on annual increases in Contract Value at ordinary income
rates unless some other exception applies.
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Section 72 of the Code governs the taxation of annuities in general, and we
attempted to design the Contracts to meet the requirements of Section 72 of the
Code. We believe that, under current law, the Contract will be treated as an
annuity for federal income tax purposes if the Contract Owner is a natural
person or a nominee for a natural person, and that we (as the issuing insurance
company), and not the Contract Owner(s), will be treated as the owner of the
investments underlying the Contract. Accordingly, no tax should be payable by
you as a Contract Owner as a result of any increase in Contract Value until you
receive money under your Contract. You should, however, consider how amounts
will be taxed when you do receive them. The following discussion assumes that
your Contract will be treated as an annuity for federal income tax purposes.
Section 817(h) of the Code provides that the investments underlying a variable
annuity must satisfy certain diversification requirements. Details on these
diversification requirements appear under OTHER INFORMATION ABOUT THE TRUST in
the Trust's Prospectus. We believe the underlying Variable Investment Options
for the Contract meet these requirements. In connection with the issuance of
temporary regulations relating to diversification requirements under Section
817(h), the Treasury Department announced that such regulations do not provide
guidance concerning the extent to which you may direct your investments to
particular divisions of a separate account. Such guidance may be included in
regulations or revenue rulings under Section 817(d) relating to the definition
of a variable contract. Because of this uncertainty, we reserve the right to
make such changes to the Contract or to our administrative procedures as we deem
necessary or appropriate to ensure that your Contract continues to qualify as an
annuity for tax purposes. Any such changes will apply uniformly to affected
Contract Owners and will be made with such notice to affected Contract Owners as
is feasible under the circumstances.
TAXES PAYABLE BY CONTRACT OWNERS: GENERAL RULES
These general rules apply to Non-Qualified Contracts. As discussed below,
however, tax rules may differ for Qualified Contracts and you should consult a
qualified tax adviser if you are purchasing a Qualified Contract.
Distributions of net investment income or capital gains that each Subaccount
receives from its corresponding Fund are automatically reinvested in such Fund
unless we, on behalf of the Separate Account, elect otherwise. As noted above,
you will be subject to federal income taxes on the investment income from your
Contract only when it is distributed to you.
Taxes Payable on Withdrawals
Amounts you withdraw before annuitization, including amounts withdrawn from your
Contract Value in connection with partial withdrawals for payment of any charges
and fees, will be treated first as taxable income, to the extent that your
Contract Value exceeds the aggregate of your Purchase Payments (reduced by
non-taxable amounts previously received), and then as non-taxable recovery of
your Purchase Payments.
The assignment or pledge of (or agreement to assign or pledge) the value of the
Contract for a loan will be treated as a distribution. Moreover, all annuity
contracts issued to you in any given calendar year by us and any of our
affiliates are treated as a single annuity contract for purposes of determining
whether an amount is subject to tax under these rules. The Code further provides
that the taxable portion of a withdrawal may be subject to a penalty tax equal
to 10% of that taxable portion unless the withdrawal is: (1) made on or after
the date you reach age 59 1/2, (2) made by a Beneficiary after your death, (3)
attributable to your becoming disabled, or (4) in the form of level annuity
payments under a lifetime annuity.
Taxes Payable on Annuity Payments
A portion of each annuity payment you receive under a Contract generally will be
treated as a partial recovery of Purchase Payments (as used here, "Purchase
Payments" means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in income) and will not
be taxable. (In certain circumstances, subsequent modifications to an
initially-established payment pattern may result in the imposition of a penalty
tax.) The remainder of each annuity payment will be taxed as ordinary income.
However, after the full amount of aggregate Purchase Payments has been
recovered, the full amount of each annuity payment will be taxed as ordinary
income. Exactly how an annuity payment is divided into taxable and
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non-taxable portions depends on the period over which annuity payments are
expected to be received, which in turn is governed by the form of annuity
selected and, where a lifetime annuity is chosen, by the life expectancy of the
Annuitant(s) or payee(s).
Should the death of a Contract Owner cause annuity payments to cease before
Purchase Payments have been fully recovered, an Annuitant (or in certain cases
the Beneficiary) is allowed a deduction on the final tax return for the
unrecovered Purchase Payments; however, if any remaining annuity payments are
made to a Beneficiary, the Beneficiary will recover the balance of the Purchase
Payments as payments are made. A lump sum payment taken in lieu of remaining
monthly annuity payments is not considered an annuity payment for tax purposes.
The portion of any lump sum payment to a Beneficiary in excess of aggregate
unrecovered Purchase Payments would be subject to income tax. Such a lump sum
payment may also be subject to a penalty tax.
If a Contract Owner dies before annuity payments begin, certain minimum
distribution requirements apply. If a Contract Owner dies after the Annuity
Date, the remaining interest in the Contract must be distributed at least as
rapidly as under the method of distribution in effect on the date of death.
Generally, the same tax rules apply to amounts received by the Beneficiary as
those set forth above, except that the early withdrawal penalty tax does not
apply. Thus, any annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions. If the Contract Owner or Annuitant dies and
within sixty days after the date on which a lump sum death benefit first becomes
payable the designated recipient elects to receive annuity payments in lieu of
the lump sum death benefit, then the designated recipient will not be treated
for tax purposes as having received the lump sum death benefit in the tax year
it first became payable. Rather, in that case, the designated recipient will be
taxed on the annuity payments as they are received.
In addition, designation of a Beneficiary who either is 37 1/2 or more years
younger or two or more generations younger (e.g. grandchild) than a Contract
Owner may have Generation Skipping Transfer Tax consequences under section 2601
of the Code.
Certain transfers of a Contract for less than full consideration, such as a
gift, will trigger tax on the investment income in the Contract, and may also
trigger tax penalties and, if applicable, gift tax.
QUALIFIED CONTRACTS
The Contracts are available to a variety of Qualified Plans. Tax restrictions
and consequences for Contracts under each type of Qualified Plan differ from
each other and from those for Non-Qualified Contracts. In addition, individual
Qualified Plans may have terms and conditions that impose additional rules.
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS FOR
WHICH THE CONTRACTS ARE AVAILABLE. WE ARE NOT THE ADMINISTRATOR OF ANY QUALIFIED
PLAN. IF YOU ARE PURCHASING A QUALIFIED CONTRACT, YOU SHOULD CONSULT WITH YOUR
PLAN ADMINISTRATOR AND/OR A QUALIFIED TAX ADVISER.
Individual Retirement Annuities ("IRAs")
Contributions to an IRA are subject to limitations. In addition, distributions
from an IRA are subject to certain restrictions. Failure to make mandatory
distributions may result in imposition of a 50% penalty tax on any difference
between the required distribution amount and the amount actually distributed. A
10% penalty tax is imposed on the amount includable in gross income from
distributions that occur before you attain age 59 1/2 and that are not made on
account of death or disability, with certain exceptions. These exceptions
include distributions that are part of a series of substantially equal periodic
payments made over your life (or life expectancy) or the joint lives (or joint
life expectancies) of you and your Joint Annuitant. Distributions of minimum
amounts specified by the Code must commence by April 1 of the calendar year
following the calendar year in which you attain age 70 1/2. Additional
distribution rules apply after your death.
You may rollover funds from an existing Qualified Plan (such as proceeds from
existing insurance policies, annuity contracts or securities) into your IRA if
those funds are in cash; this will require you to liquidate any value
accumulated under the existing Qualified Plan. Mandatory withholding of 20% may
apply to any rollover
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distribution from your existing Qualified Plan if the distribution is not
transferred directly to your IRA; to avoid this withholding you should have cash
transferred directly from the insurance company or plan trustee to us. Similar
limitations and tax penalties apply to tax sheltered annuities, government
plans, 401(k) plans, and pension and profit-sharing plans.
Tax Sheltered Annuities ("TSAs")
Section 403(b) of the Code permits public school systems and certain tax-exempt
organizations to adopt annuity plans for their employees; Purchase Payments made
on Contracts purchased for these employees are excludable from the employees'
gross income (subject to maximum contribution limits). Distributions under these
Contracts must comply with certain limitations as to timing, or result in tax
penalties.
Government Plans
Section 457 of the Code permits employees of a state or local government (or of
certain other tax-exempt entities) to defer compensation through an eligible
government plan. Contributions to a Contract in connection with an eligible
government plan are subject to limitations.
401(K) Plans; Pension and Profit-Sharing Plans
Deferred compensation plans may be established by an employer for certain
eligible employees under Sections 401(a) and 401(k) of the Code. Contributions
to these plans are subject to limitations.
LOANS
Certain Qualified Contract Owners may borrow against their Contracts. If yours
is a Qualified Contract issued under Section 401 or 403 of the Code and the
terms of your Qualified Plan permit, you may request a loan from us, using your
Contract Value as your only security.
Tax and Legal Matters
The tax and ERISA rules relating to Contract loans are complex and in many cases
unclear. For these reasons, and because the rules vary depending on the
individual circumstances of each Contract, WE URGE YOU TO CONSULT WITH A
QUALIFIED TAX ADVISER PRIOR TO EFFECTING ANY LOAN TRANSACTION UNDER YOUR
CONTRACT.
Interest paid on your loan under a 401 plan or 403 tax-sheltered annuity will be
considered "personal interest" under Section 163(h) of the Code, to the extent
the loan comes from your pre-tax contributions, even if the proceeds of your
loan are used to acquire your principal residence.
We may change these loan provisions or our administrative procedures to reflect
changes in the Code or interpretations thereof.
Loan Procedures
Your loan request must be submitted on our Loan Request Form. You may submit a
loan request at any time after your first Contract Anniversary and before your
Annuity Date; however, before requesting a new loan, you must wait thirty days
after the last payment of a previous loan. If approved, your loan will usually
be effective as of the end of the Business Day on which we receive all necessary
documentation in proper form. We will normally forward proceeds of your loan to
you within seven calendar days after the effective date of your loan. A loan
administration fee of $100 will be deducted from your loan proceeds, however, we
reserve the right to increase this fee to a maximum of $500.
In order to secure your loan, on the effective date of your loan, we will
transfer an amount equal to the principal amount of your loan into an account
called our "Loan Account." To make this transfer, we will transfer amounts
proportionately from your Fixed and Variable Investment Options, based on your
Account Value in each Investment Option.
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As your loan is repaid, a portion, corresponding to the amount of the repayment
of any amount then held as security for your loan, will be transferred from the
Loan Account back into your Fixed Option and Variable Investment Options
relative to your current allocation instructions.
Loan Terms
You may have only one loan outstanding at any time. The minimum loan amount is
$1,000, subject to certain state limitations. Your Contract Debt at the
effective date of your loan may not exceed the lesser of:
-- 50% of your Contract Value;
-- $50,000 less your highest outstanding Contract Debt during the
12-month period immediately preceding the effective date of your loan.
You should refer to the terms of your particular Qualified Plan for any
additional loan restrictions. If you have other loans outstanding pursuant to
other Qualified Plans, the amount you may borrow may be further restricted.
You will be charged interest on your Contract Debt at an annual rate, set at the
time of the loan withdrawal, equal to the higher of (a) Moody's Corporate Bond
Yield Average-Monthly Average Corporates (the "Moody's Rate"), as published by
Moody's Investors Service, Inc., or its successor, for the calendar month ending
two months before the date on which the rate is determined, or (b) 5%. In the
event that the Moody's Rate is no longer available, we may substitute a
substantially similar average rate, subject to compliance with applicable state
regulations. The amount held in the Loan Account to secure your loan will earn a
return equal to an annual rate that is two percentage points lower than the
annual rate of interest charged on your Contract Debt. Interest charges accrue
on your Contract Debt daily, beginning on the effective date of your loan;
interest earnings on the Loan Account Value accrue daily beginning on the
following day, and those earnings will be transferred once a year to your Fixed
and Variable Investment Options in accordance with your current allocation
instructions.
Repayment Terms
Your loan, including principal and accrued interest, must be repaid in quarterly
installments. An installment will be due in each quarter on the date
corresponding to the effective date of your loan, beginning with the first such
date following the effective date of your loan.
Example: On May 1, we receive your loan request, and your loan is
effective. Your first quarterly payment will be due on August 1.
Adverse tax consequences may result if you fail to meet the repayment
requirements for your loan. You must repay principal and interest of any loan in
substantially equal payments over the term of the loan. Normally, the term of
the loan will be five years from the effective date of the loan; however, if you
have certified to us that your loan proceeds are to be used to acquire a
principal residence for yourself, you may request a loan term of 30 years. In
either case, however, you must repay your loan prior to your Annuity Date. If
you elect to annuitize (or withdraw) your Net Contract Value while you have an
outstanding loan, we will deduct any Contract Debt from your Contract Value at
the time of the annuitization (or withdrawal) to repay the Contract Debt.
You may prepay your entire loan at any time; if you do so, we will bill you for
any accrued interest. Your loan will be considered repaid only when the interest
due has been paid. Subject to any necessary approval of state insurance
authorities, while you have Contract Debt outstanding, we will treat all
payments you send us as Purchase Payments unless you specifically indicate that
your payment is a loan repayment or include your loan repayment stub with your
payment. To the extent allowed by law, any loan repayments in excess of the
amount then due will be refunded to you, unless such amount is sufficient to pay
the balance of your loan.
If we have not received your full payment by its due date, we will declare the
entire remaining loan balance in default. At that time, we will send written
notification of the amount needed to bring the loan back to a current
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status. You will have sixty (60) days from the date on which the loan was
declared in default (the "grace period") to make the required payment.
If the required payment is not received by the end of the grace period, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
withdrawn from your Contract Value, if amounts under your Contract are eligible
for distribution. If those amounts are not eligible for distribution, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
considered a Deemed Distribution and will be withdrawn when such Contract Values
become eligible for distribution. In either case, the Distribution or the Deemed
Distribution will be considered a currently taxable event, may be subject to the
mandatory 20% federal withholding, and may be subject to the early withdrawal
tax penalty.
If there is a Deemed Distribution under your Contract and to the extent allowed
by law, any future withdrawals will first be applied as repayment of the
defaulted Contract Debt, including accrued interest and charges for applicable
taxes. Any amounts withdrawn and applied as repayment of Contract Debt will
first be withdrawn from your Loan Account and then from your Investment Options
on a proportionate basis relative to the Account Value in each account. If you
have an outstanding loan that is in default, the defaulted Contract Debt will be
considered a withdrawal for the purpose of calculating any Death Benefit Amount
and/or Guaranteed Minimum Death Benefit Amount.
WITHHOLDING
Unless you elect to the contrary, any amounts you receive under your Contract
that are attributable to investment income will be subject to withholding to
meet federal and state income tax obligations. The rate of withholding on
annuity payments made to you will be determined on the basis of the withholding
information you provide to us with your application. If you do not provide us
with required withholding information, we will withhold, from every withdrawal
from your Contract and from every annuity payment to you, the appropriate
percentage of the taxable amount of the payment. Please call us at
1-800-722-5558 with any questions about the required withholding information.
For purposes of determining your withholding rate on annuity payments, you will
be treated as a married person with three exemptions, unless requested
otherwise. The rate of federal withholding on all other payments made to you
under your Contract, such as amounts you receive upon withdrawals, will be 10%,
unless otherwise specified by the Code. Generally, there will be no withholding
for taxes until you actually receive payments under your Contract.
Distributions from a Contract under a Qualified Plan (not including an
individual retirement annuity subject to Code Section 408) to an employee,
surviving spouse, or former spouse who is an alternate payee under a qualified
domestic relations order, in the form of a lump sum settlement or periodic
annuity payments for a fixed period of fewer than 10 years are subject to
mandatory income tax withholding of 20% of the taxable amount of the
distribution, unless (1) the distributee directs the transfer of such amounts in
cash to another Qualified Plan or an IRA; or (2) the payment is a minimum
distribution required under the Code. The taxable amount is the amount of the
distribution less the amount allocable to after-tax contributions. All other
types of taxable distributions are subject to withholding unless the distributee
elects not to have withholding apply.
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding.
IMPACT OF FEDERAL INCOME TAXES
In general, if you expect to accumulate your Contract Value over a relatively
long period of time without making significant withdrawals, there should be tax
advantages, regardless of your tax bracket, in purchasing a Contract rather
than, for example, a mutual fund with a similar investment policy and
approximately the same level of expected investment results. This is because
little or no income taxes are incurred by you or by us while you are
participating in the Subaccounts, and it is generally advantageous to defer the
payment of income taxes, so that the investment return is compounded without any
deduction for income taxes. The advantage will be greater if you decide to
liquidate your Contract Value in the form of monthly annuity
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payments after your retirement, or if your tax rate is lower at that time than
during the period that you held the Contract, or both.
TAXES ON PACIFIC MUTUAL LIFE
Although the Separate Account is registered as an investment company, it is not
a separate taxpayer for purposes of the Code. The earnings of the Separate
Account are taxed as part of our operations. No charge is made against the
Separate Account for our federal income taxes (excluding the charge for premium
taxes), but we will review, periodically, the question of charges to the
Separate Account or your Contract for such taxes. Such a charge may be made in
future years for any federal income taxes that would be attributable to the
Separate Account or to our operations with respect to your Contract, or
attributable, directly or indirectly, to Purchase Payments on your Contract.
Under current law, we may incur state and local taxes (in addition to premium
taxes) in several states. At present, these taxes are not significant and they
are not charged against the Contract or the Separate Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon us that are attributable to the Separate Account or to our
operations with respect to your Contract may result in a corresponding charge
against the Separate Account or your Contract.
ADDITIONAL INFORMATION
PERFORMANCE INFORMATION
We may provide you with historical performance information from time to time,
and we may include historical performance information in advertisements and
promotional literature. We may show performance information on total return of
the Subaccount, the yield and effective yield of the Subaccount investing in the
Money Market Fund, and the yield of the remaining Variable Accounts.
Calculations will be in accordance with formulas prescribed by the SEC, which
are described in the Statement of Additional Information.
We may also provide you with reports on our rating as an insurance company and
on our claims-paying ability that are produced by rating agencies and
organizations.
VOTING RIGHTS
We are the legal owner of the shares of the Funds held by the Subaccounts, and
consequently have the right to vote on any matter voted on at Trust
shareholders' meetings. However, our interpretation of applicable law requires
us to vote the shares attributable to your Variable Account Value ("your voting
interest") in accordance with your directions.
We will pass shareholder proxy materials on to you so that you have an
opportunity to give us voting instructions for your voting interest. You may
provide your instructions by proxy or in person at the shareholders' meeting. If
there are shares of a Fund held by a Subaccount for which we do not receive
timely voting instructions, we will vote those shares in the same proportion as
all other shares of that Fund held by that Subaccount for which we have received
timely voting instructions. If we hold shares of a Fund in our General Account,
and if any of our non-insurance subsidiaries hold shares of a Fund, such shares
will be voted in the same proportion as other votes cast by all of our separate
accounts in the aggregate, including Separate Account B.
We may elect, in the future, to vote shares of the Funds held in Separate
Account B in our own right if we are permitted to do so through a change in
applicable federal securities laws or regulations, or in their interpretation.
The number of Fund shares that form the basis for your voting interest is
determined as of the record date set by the Board of Trustees of the Trust. It
is equal to (a) your number of Subaccount Units (or Subaccount Annuity Units
after annuitization) times the applicable Unit Value, divided by (b) the net
asset value per
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share of that Fund. Fractional votes will be counted. We reserve the right, if
required or permitted by a change in federal regulations or their
interpretation, to amend how we calculate your voting interest.
After your Annuity Date, if you have selected a variable annuity, the voting
rights under your Contract will continue during the payout period of your
annuity, but the number of shares that form the basis for your voting interest,
as described above, will decrease throughout the payout period.
CHANGES TO YOUR CONTRACT
Contract Owner(s) and Contingent Owner
You may change your Non-Qualified Contract at any time prior to your Annuity
Date to name a different Contract Owner or to add a Joint Owner, or to add or
change a Contingent Owner; if yours is a Qualified Contract, you must be the
only Contract Owner, but you may still add or change a Contingent Owner. Your
Contract cannot name more than two Contract Owners (Joint Owners) and one
Contingent Owner at any time. Any newly-named Contract Owners, including Joint
and/or Contingent Owners, must be under the age of 86 at the time of change or
addition. Joint ownership is in the form of a joint tenancy. The Contract
Owner(s) may make all decisions regarding the Contract, including making
allocation decisions and exercising voting rights. Transactions under jointly
owned Contracts require authorization from both Contract Owners. Transfer of
Contract ownership may involve federal income tax consequences; you should
consult a qualified tax adviser before effecting such a transfer. A change to
joint Contract ownership is considered a transfer of ownership.
Annuitant and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or
changed, once your Contract is issued. Certain changes may be permitted in
connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER
PAYOUTS--SELECTING YOUR ANNUITANT. There may be limited exceptions for certain
Qualified Contracts.
Beneficiaries
Your Beneficiary is a person(s) who may receive death benefits under your
Contract. You may change or remove your Beneficiary or add Beneficiaries at any
time prior to the death of the Annuitant or Owner, as applicable. If you have
named your Beneficiary irrevocably, you will need to obtain that Beneficiary's
consent before making any changes. Qualified Contracts may have additional
restrictions on naming and changing Beneficiaries; for example, if your Contract
was issued in connection with a Qualified Plan subject to Title I of ERISA, your
spouse must either be your Beneficiary or consent to your naming of a different
Beneficiary. If you leave no surviving Beneficiary, your estate will receive any
death benefit proceeds under your Contract.
CHANGES TO ALL CONTRACTS
If, in the judgment of our management, continued investment by Separate Account
B in one or more of the Funds becomes unsuitable or unavailable, we may seek to
alter the Variable Investment Options available under the Contracts. We do not
expect that a Fund will become unsuitable, but unsuitability issues could arise
due to changes in investment policies, market conditions, or tax laws, or due to
marketing or other reasons.
Alterations of Variable Investment Options may take differing forms. We reserve
the right to replace shares of any Fund that were already purchased under any
Contract (or shares that were to be purchased in the future under a Contract)
with shares of another Fund, shares of another investment company or series of
an investment company, or another investment vehicle. We may also purchase,
through a Subaccount, other securities for other series or other classes of
contracts, and may permit conversions or exchanges between series or classes of
contracts on the basis of Contract Owner requests. Required approvals of the SEC
and state insurance regulators will be obtained before any such substitutions
are effected, and you will be notified of any planned substitution.
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We may add new Subaccounts to Separate Account B, and any new Subaccounts may
invest in Funds or in other investment vehicles; availability of any new
Subaccounts to existing Contract Owners will be determined at our discretion. We
will notify you, and will comply with the filing or other procedures established
by applicable state insurance regulators, to the extent required by applicable
law. We also reserve the right, after receiving any required regulatory
approvals, to do any of the following:
o cease offering any Subaccount
o combine Subaccounts
o delete or substitute Subaccounts
o combine Separate Account B or part of it with another of our separate
accounts or with any of our affiliates' separate accounts
o transfer Separate Account B assets attributable to the Contracts to
another of our separate accounts
o deregister the Separate Account under the 1940 Act
o operate Separate Account B as a management investment company under the
1940 Act or another form permitted by law
o establish a committee, board or other group to manage aspects of the
Separate Account's operations
o make any changes required by the 1940 Act or other federal securities
laws
o make any changes necessary to maintain the status of the Contracts as
annuities under the Code
o make other changes required under federal or state law relating to
annuities
o suspend or discontinue sale of the Contracts.
INQUIRIES AND SUBMITTING FORMS AND REQUESTS
You may reach our service representatives at 1-800-722-5558 between the hours of
6:00 a.m. and 5:00 p.m., Pacific time.
Please send your forms and written requests or questions to:
Pacific Mutual Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are submitting a purchase or other payment by mail, please send it, along
with your application if you are submitting one, to:
Pacific Mutual Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
If you are using an overnight delivery service to send payments, please send
them to:
Pacific Mutual Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" the notice or instructions. We "receive"
this information only when it arrives, in proper form, at the correct mailing
address set out above. Please call us at 1-800-722-5558 if you have any
questions regarding which address you should use.
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Purchase Payments after your initial Purchase Payment, loan requests, transfer
requests, loan repayments and withdrawal requests we receive before the close of
the New York Stock Exchange (normally, 4:00 p.m. Eastern time) will normally be
effective on the same Business Day that we receive them in "proper form," unless
the transaction or event is scheduled to occur on another day. Generally,
whenever you submit any other form, notice or request, your instructions will be
effective on the next Business Day after we receive them in "proper form" unless
the transaction or event is scheduled to occur on another day. "Proper form" may
require, among other things, a signature guarantee or other verification of
authenticity. We may require a signature guarantee if an executed application or
confirmation of application, as applicable and in proper form, has not been
received by us; if it appears that your signature has changed over time; or, due
to other circumstances. Requests regarding death benefits must be accompanied by
both proof of death and instructions regarding payment satisfactory to us. You
should call your registered representative or Pacific Mutual if you have
questions regarding the required form of a request.
TELEPHONE TRANSACTIONS
After your "Right to Cancel" period, you may make transfer requests by telephone
if you have authorized telephone requests (a "telephone authorization"). We
cannot guarantee that you will always be able to reach us to complete a
telephone transaction; for example, all telephone lines may be busy during
certain periods, such as periods of substantial market fluctuations or other
drastic economic or market change, or telephones may be out of service during
severe weather conditions or other emergencies. Under these circumstances, you
should submit your request in writing (or other form acceptable to us).
Transaction instructions we receive by telephone before 4:00 p.m. Eastern time,
or the close of the New York Stock Exchange if earlier, on any Business Day will
normally be effective on that day, and we will send you written confirmation of
each telephone transfer.
We have established procedures reasonably designed to confirm that instructions
communicated by telephone are genuine. These procedures may require any person
requesting a telephone transaction to provide certain personal identification
upon our request. We may also record all or part of any telephone conversation
with respect to transaction instructions. We reserve the right to deny any
transaction request made by telephone. When you make a proper request for a
telephone authorization, you authorize us to accept and to act upon instructions
received by telephone with respect to your Contract, and you agree that, as long
as we comply with our procedures, none of Pacific Mutual Life, our affiliates,
the Trust, or any of their directors, trustees, officers, employees or agents
will be liable for any loss, liability, cost or expense (including attorneys'
fees) in connection with requests that are effected in accordance with your
telephone authorization and that we believe to be genuine. This policy means
that you will bear the risk of loss arising out of your telephone transaction
privileges. If a Contract has Joint Owners, both Owners must sign the written
request for a telephone authorization, but each Owner individually may make
transfer requests by telephone.
TIMING OF PAYMENTS AND TRANSACTIONS
For withdrawals from the Variable Investment Options or for death benefit
payments attributable to your Variable Account Value, we will normally send the
proceeds within seven calendar days after your withdrawal request is effective
or after the Notice Date, as the case may be. Similarly, for transfers from the
Variable Investment Options, we will normally send the proceeds within seven
calendar days after your transfer (or exchange) request is effective. We will
normally effect periodic annuity payments on the day that corresponds to the
Annuity Date and will make payment on the following day. Payments or transfers
may be suspended for a longer period under certain abnormal circumstances. These
include a closing of the New York Stock Exchange other than on a regular holiday
or weekend, a trading restriction imposed by the SEC, or an emergency declared
by the SEC. For (i) withdrawals from the Fixed Option, (ii) death benefit
payments attributable to Fixed Option Value, or (iii) fixed periodic annuity
payments, payment of proceeds may be delayed for up to six (6) months after the
request is effective. Similar delays may apply to loans and transfers from the
Fixed Option. See THE GENERAL ACCOUNT for more details.
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CONFIRMATIONS, STATEMENTS AND OTHER REPORTS TO CONTRACT OWNERS
Confirmations will be sent out for Purchase Payments and unscheduled transfers,
loans, loan repayments, unscheduled partial withdrawals, a full withdrawal, and
on payment of any death benefit proceeds. Each quarter prior to your Annuity
Date, we will send you a statement that provides certain information pertinent
to your Contract. These statements disclose Contract Value, Subaccount values,
values under the Fixed Option, fees and charges applied to your Contract Value,
transactions made and specific Contract data that apply to your Contract.
Confirmations of your transactions under the pre-authorized checking plan,
dollar cost averaging, earnings sweep, portfolio rebalancing, and pre-authorized
withdrawal options will appear on your quarterly account statements. Your
fourth-quarter statement will contain annual information about your Contract
Value and transactions. If you suspect an error on a confirmation or quarterly
statement, you must notify us in writing within 30 days from the date of the
first confirmation or statement on which the transaction you believe to be
erroneous appeared. When you write, tell us your name, contract number and a
description of the suspected error. You will also be sent an annual and a
semiannual report for the Separate Account and the Trust and a list of the
securities held in each Fund of the Trust, as required by the 1940 Act; or more
frequently if required by law.
SALES COMMISSIONS
We pay sales commissions directly to broker-dealers and other expenses
associated with promotion and sales of the Contracts. Broker-dealers may receive
aggregate commissions of up to 6.5% of your aggregate Purchase Payments. Under
certain circumstances and in exchange for lower initial commissions, certain
sellers of Contracts may be paid a persistency trail commission which will take
into account, among other things, the length of time Purchase Payments have been
held under a Contract, and Account Values. A trail commission is not anticipated
to exceed 0.25%, on an annual basis, of the Account Values considered in
connection with the trail commission. We may also pay override payments, expense
allowances, bonuses, wholesaler fees and training allowances. Registered
representatives earn commissions from the broker-dealers with which they are
affiliated and such arrangements may vary. In addition, registered
representatives who meet specified production levels may qualify, under sales
incentive programs adopted by Pacific Mutual, to receive non-cash compensation
such as expense-paid trips, expense-paid educational seminars, and merchandise,
or to receive compensation on a deferred basis.
FINANCIAL STATEMENTS
Pacific Mutual Life's audited consolidated financial statements as of December
31, 1996 and 1995 and for the three years ended December 31, 1996 are contained
in the SAI.
LEGAL MATTERS
Legal Matters in connection with the issue and sale of the Contracts described
in this Prospectus, Pacific Mutual Life's authority to issue the Contracts under
California law, and the validity of the forms of the Contracts under California
law have been passed upon by David R. Carmichael, Esq., Senior Vice President
and General Counsel of Pacific Mutual Life.
Legal matters relating to the Federal securities and Federal income tax laws
have been passed upon by Dechert Price & Rhoads, Washington, D.C.
THE GENERAL ACCOUNT
GENERAL INFORMATION
All amounts allocated to the Fixed Option become part of our General Account.
Subject to applicable law, we exercise sole discretion over the investment of
General Account assets, and bear the associated investment risk; you will not
share in the investment experience of General Account assets.
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Because of exemptive and exclusionary provisions, interests in the General
Account under the Contract are not registered under the Securities Act of 1933
and the General Account has not been registered as an investment company under
the 1940 Act. Any interest you have in the Fixed Option is not subject to these
Acts, and we have been advised that the SEC staff has not reviewed disclosure in
this Prospectus relating to the Fixed Option. This disclosure may, however, be
subject to certain provisions of federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
GUARANTEE TERMS
When you allocate any portion of your Purchase Payments or Contract Value to the
Fixed Option in the General Account, we guarantee you an interest rate (a
"Guaranteed Interest Rate") for a specified period of time (a "Guarantee Term")
of up to one year. Guarantee Terms will be offered at our discretion.
Guaranteed Interest Rates for each Fixed Option may be changed periodically for
new allocations; your allocation will receive the Guaranteed Interest Rate in
effect for that Fixed Option on the effective date of your allocation. All
Guaranteed Interest Rates will be expressed as annual effective rates; however,
interest will accrue daily. The Guaranteed Interest Rate on your Fixed Option
will remain in effect for the Guarantee Term and will never be less than an
annual rate of 3%.
Fixed Option
EACH ALLOCATION (OR ROLL-OVER) YOU MAKE TO THE FIXED OPTION RECEIVES A GUARANTEE
TERM THAT BEGINS ON THE DAY THAT ALLOCATION OR ROLL-OVER IS EFFECTIVE AND ENDS
AT THE END OF EACH CONTRACT YEAR OR, IF EARLIER, ON YOUR ANNUITY DATE. At the
end of each Contract Year, we will roll over your Fixed Option Value on that day
into a new Guarantee Term of one year (or, if shorter, the time remaining until
your Annuity Date) with a new Guaranteed Interest Rate, unless you instruct us
otherwise.
Example: Your Contract Anniversary is February 1. On February 1 of year 1,
you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one
year and a Guaranteed Interest Rate of 5%. On August 1, you allocate
another $500 to the Fixed Option and receive a Guaranteed Interest Rate of
6%. Through January 31, year 1, your first allocation of $1,000 earns 5%
interest and your second allocation of $500 earns 6% interest. On February
1, year 2, a new interest rate may go into effect for your entire Fixed
Option Value.
WITHDRAWALS AND TRANSFERS
Prior to the Annuity Date, you may withdraw amounts from your Fixed Option, or
transfer amounts from your Fixed Option to one or more of the other Investment
Options. If your Contract was issued in a state that requires refund of Purchase
Payments under the Right to Cancel Right, or if your contract is an IRA,
transfers may only be made after your Right to Cancel Transfer Date. In
addition, no partial withdrawal or transfer may be made from your Fixed Option
within 30 days of the Contract Date. If your withdrawal leaves you with a Net
Contract Value of less than $1,000, we have the right, at our option, to
terminate your Contract and send you the withdrawal proceeds.
Payments or transfers from the Fixed Option may be delayed, as described under
ADDITIONAL INFORMATION--TIMING OF PAYMENTS AND TRANSACTIONS; any amount delayed
will, as long as it is held under the Fixed Option, continue to earn interest at
the Guaranteed Interest Rate then in effect until that Guarantee Term has ended,
and the minimum guaranteed interest rate of 3% thereafter, unless state law
requires a greater rate be paid.
Fixed Option
You may make one transfer or partial withdrawal from your Fixed Option during
any Contract Year, except that this limitation does not apply under the dollar
cost averaging, earnings sweep and pre-authorized withdrawal programs. You may
make one transfer or one partial withdrawal within the 30 days after the end of
each Contract Anniversary. Normally, you may transfer or withdraw up to one-half
(50%) of your Fixed
36
<PAGE> 42
Option Value in any given Contract Year. However, in consecutive Contract Years,
you may transfer or withdraw 50% of your Fixed Option Value in the first year
and your remaining Fixed Option Value in the second consecutive year. In
addition, if, as a result of a partial withdrawal or transfer, the Fixed Option
Value is less than $500, we have the right, at our option, to transfer the
entire remaining amount to your other Investment Options on a proportionate
basis relative to your most recent allocation instructions.
37
<PAGE> 43
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERFORMANCE........................................................................... 1
Total Returns.................................................................... 1
Yields........................................................................... 2
Performance Comparisons and Benchmarks........................................... 3
Insurance Company Rating Information............................................. 3
Tax Deferred Accumulation........................................................ 4
DISTRIBUTION OF THE CONTRACTS......................................................... 5
Pacific Mutual Distributors, Inc................................................. 5
THE CONTRACTS AND THE SEPARATE ACCOUNT................................................ 6
Calculating Subaccount Unit Values............................................... 6
Variable Annuity Payment Amounts................................................. 6
Corresponding Dates.............................................................. 8
Age and Sex of Annuitant......................................................... 9
Systematic Transfer Programs..................................................... 9
Pre-Authorized Withdrawals....................................................... 11
Death Benefit.................................................................... 11
Joint Annuitants on Qualified Contracts.......................................... 12
1035 Exchanges................................................................... 12
Safekeeping of Assets............................................................ 12
Dividends........................................................................ 12
FINANCIAL STATEMENTS.................................................................. 13
</TABLE>
38
<PAGE> 44
APPENDIX A:
STATE LAW VARIATIONS
Issue Date--The term "Issue Date" shall be substituted for the term "Contract
Date" for Contracts issued to residents of the Commonwealth of Massachusetts.
RIGHT TO CANCEL
VARIATIONS TO THE LENGTH OF THE RIGHT TO CANCEL PERIOD. In most states, the
Right to Cancel period is a 10-day period beginning on the day you receive your
Contract. If your Contract was issued in one of the following states on your
Contract Date, the Right to Cancel period is as specified below:
Idaho (20 days)
Oregon (15 days)
In addition, if you reside in California and are age 60 or older on your
Contract Date, the Right to Cancel period is 30 days.
STATES THAT REQUIRE US TO REFUND YOUR PURCHASE PAYMENTS ALLOCATED TO THE
VARIABLE INVESTMENT OPTIONS INSTEAD OF YOUR VARIABLE ACCOUNT VALUE. If your
Contract was issued in one of the following states on your Contract Date and you
exercise your Right to Cancel and return your Contract to us within 10 days of
your receipt of your Contract (unless specified otherwise below), we will refund
your Purchase Payments under your Contract that we received:
Idaho (20 days)
Oregon (15 days)
39
<PAGE> 45
To receive a current copy of the Pacific Innovations SAI without charge,
complete the following and send it to:
Pacific Mutual Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, California 91109-7187
<TABLE>
<S> <C> <C> <C>
Name
- --------------------------------------
Address
- --------------------------------------
City State Zip
- -------------------------------------- -------- --------
</TABLE>
3176A
BAR CODE
<PAGE> 46
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1997
PACIFIC INNOVATIONS VARIABLE ANNUITY
SEPARATE ACCOUNT B
------------------------
Pacific Innovations Variable Annuity (the "Contract") is a variable annuity
contract issued by Pacific Mutual Life Insurance Company ("Pacific Mutual
Life").
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Contract's Prospectus, dated April 1, 1997, which is
available without charge upon written or telephone request to Pacific Mutual
Life. Terms used in this Statement of Additional Information ("SAI") have the
same meanings as in the Prospectus, and some additional terms are defined
particularly for this SAI.
------------------------
Pacific Mutual Life Insurance Company
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-5558
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERFORMANCE........................................................................... 1
Total Returns.................................................................... 1
Yields........................................................................... 2
Performance Comparisons and Benchmarks........................................... 3
Insurance Company Rating Information............................................. 3
Tax Deferred Accumulation........................................................ 4
DISTRIBUTION OF THE CONTRACTS......................................................... 5
Pacific Mutual Distributors, Inc................................................. 5
THE CONTRACTS AND THE SEPARATE ACCOUNT................................................ 6
Calculating Subaccount Unit Values............................................... 6
Variable Annuity Payment Amounts................................................. 6
Corresponding Dates.............................................................. 8
Age and Sex of Annuitant......................................................... 9
Systematic Transfer Programs..................................................... 9
Pre-Authorized Withdrawals....................................................... 11
Death Benefit.................................................................... 11
Joint Annuitants on Qualified Contracts.......................................... 12
1035 Exchanges................................................................... 12
Safekeeping of Assets............................................................ 12
Dividends........................................................................ 12
FINANCIAL STATEMENTS.................................................................. 13
</TABLE>
i
<PAGE> 48
PERFORMANCE
From time to time, our reports or other communications to current or prospective
Contract Owners or our advertising or other promotional material may quote the
performance (yield and total return) of a Subaccount. Quoted results are based
on past performance and reflect the performance of all assets held in that
Subaccount for the stated time period. QUOTED RESULTS ARE NEITHER AN ESTIMATE
NOR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE, AND DO NOT REPRESENT THE
ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR CONTRACT OWNER.
TOTAL RETURNS
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
Average Annual Total Return
To calculate a Subaccount's average annual total return for a specific measuring
period, we first take a hypothetical $1,000 investment in that Subaccount, at
its then-applicable Subaccount Unit Value (the "initial payment") and we compute
the ending redeemable value ("Cash Surrender Value") of that initial payment at
the end of the measuring period. The redeemable value reflects the effect of all
recurring fees and charges applicable to a Contract Owner under the Contract,
including the Risk Charge, the asset-based Administrative Fee and the deduction
of the applicable withdrawal charge, but does not reflect any charges for
applicable premium taxes and/or other taxes. The Annual Fee is also taken into
account, assuming an average Contract Value of $40,000. The redeemable value is
then divided by the initial payment and this quotient is taken to the Nth root
(N represents the number of years in the measuring period), and 1 is subtracted
from this result. Average annual total return is expressed as a percentage.
T = (ERV/P)to the power of [1/N] - 1
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of years
Average annual total return figures will be given for recent one-, five- and
ten-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Subaccount's operations, or on a year-by-year
basis). Average annual return information may be accompanied by total return
information that does not take the withdrawal charge or other fees into account.
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total return
for any one year in the period might have been greater or less than the average
for the entire period.
Aggregate Total Return
A Subaccount may use "aggregate" total return figures along with its "average
annual" total return figures for various periods; these figures represent the
cumulative change in value of an investment in the Subaccount for a specific
period. Aggregate total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components of total return. The
SEC has not prescribed standard formulas for calculating aggregate total return.
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge or the Annual Fee.
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<PAGE> 49
YIELDS
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by multiplying
it by the fraction 365/7; that is, the base rate of return is assumed to be
generated each week over a 365-day period and is shown as a percentage of the
investment. The "effective yield" of the Prime Subaccount is calculated
similarly but, when annualized, the base rate of return is assumed to be
reinvested. The effective yield will be slightly higher than the current yield
because of the compounding effect of this assumed reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power of
365/7)] -1.
Realized capital gains or losses and unrealized appreciation or depreciation of
the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect the
deduction of charges for any applicable premium taxes and/or other taxes, but do
reflect a deduction for the Annual Fee, the Risk Charge and the asset-based
Administrative Fee and assume an average Contract Value of $40,000. Yield
information may be accompanied by yield quotations that do not take certain
charges into account.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month or
30-day period is divided by the Subaccount Unit Value on the last day of the
specified period. This result is then annualized (that is, the yield is assumed
to be generated each month or each 30-day period for a year), according to the
following formula, which assumes semiannual compounding:
YIELD = 2([((a-b/cd) + 1) to the power of 6] - 1)
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during the
period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge, the asset-based
Administrative Fee and the Annual Fee (assuming an average Contract Value of
$40,000), but does not reflect any withdrawal charge or any charge for
applicable premium taxes and/or other taxes. Yield information may be
accompanied by yield quotations that do not take certain charges into account.
General
The Subaccounts' total return and yields will vary from time to time depending
upon market conditions, the composition of each Portfolio and operating expenses
of the Trust allocated to each Portfolio. Consequently, any given performance
quotation should not be considered representative of the Subaccount's
performance in the future. Total return and yield should also be considered
relative to changes in Subaccount Unit Values and to the relative risks
associated with the investment policies and objectives of the various
Portfolios. In addition, because performance will fluctuate, it may not provide
a basis for comparing the total return or yield of a Subaccount with certain
bank deposits or other investments that pay a fixed yield or return for a stated
period of time.
2
<PAGE> 50
PERFORMANCE COMPARISONS AND BENCHMARKS
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment objectives
similar to each of the Funds underlying the Subaccounts. This performance may be
presented as averages or rankings compiled by, among others, Lipper Analytical
Services, Inc. ("Lipper"), the Variable Annuity Research and Data Service
("VARDS(R)") or Morningstar, Inc. ("Morningstar"), which are independent
services that monitor and rank the performance of variable annuity issuers
and/or mutual funds in each of the major categories of investment objectives on
an industry-wide basis. Lipper's rankings include variable life issuers as well
as variable annuity issuers. VARDS(R) rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper and VARDS(R) rank such
issuers on the basis of total return, assuming reinvestment of dividends and
distributions, but do not take sales charges, redemption fees or certain expense
deductions at the separate account level into consideration. In addition,
VARDS(R) prepares risk adjusted rankings, which consider the effects of market
risk on total return performance. We may also compare the performance of the
Subaccounts with performance information included in other publications and
services that monitor the performance of insurance company separate accounts or
other investment vehicles. These other services or publications may be general
interest business publications such as The Wall Street Journal, Barron's,
Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners, advertisements,
or sales literature may compare a Subaccount's performance to various benchmarks
that measure the performance of a pertinent group of securities widely regarded
by investors as being representative of the securities markets in general or as
being representative of a particular type of security. These benchmarks include
the following: (1) the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"), an unmanaged weighted index of 500 companies that represent approximately
80% of the market capitalization of the United States equity markets; (2) the
Consumer Price Index ("CPI"), published by the U.S. Bureau of Labor Statistics,
a statistical measure of change, over time, in the prices of goods and services
in major expenditure groups and generally considered to be a measure of
inflation; (3) the Dow Jones Industrial Average ("DJIA"); (4) the Donoghue Money
Market Institutional Averages; (5) the Lehman Brothers Government Corporate
Index; (6) the Lehman Brothers Government Bond Index; (7) the Salomon Brothers
High Yield Bond Indices; and (8) the Morgan Stanley Capital International's EAFE
Index. We may also compare the performance of the Subaccounts with that of other
appropriate indices of investment securities and averages for peer universes of
funds or data developed by us derived from such indices or averages. Unmanaged
indices generally assume the reinvestment of dividends or interest but do not
generally reflect deductions for investment management or administrative costs
and expenses.
INSURANCE COMPANY RATING INFORMATION
We may also advertise or report to you our ratings as an insurance company by
the A.M. Best Company. Each year, A.M. Best reviews the financial status of
thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect Best's current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health industry. Best's Ratings range from A++ to F. An A++ rating means,
in the opinion of A.M. Best, that the insurer has demonstrated the strongest
ability to meet its respective policyholder and other contractual obligations.
A.M. Best publishes Best's Insurance Reports, Life-Health Edition. As of the
date of this SAI, A.M. Best reported our rating for financial position and
operating performance as A+.
In addition, our claims-paying ability as measured by the Standard & Poor's
Corporation ("Standard & Poor's") may be referred to in advertisements or in
reports to Contract Owners. A Standard & Poor's insurance claims-paying ability
rating is an assessment of an operating insurance company's financial capacity
to meet the obligations of its insurance policies in accordance with their
terms. Standard & Poor's ratings range from AAA to D. As of the date of this
SAI, Standard & Poor's rates our claims-paying ability as AA+.
3
<PAGE> 51
We may additionally advertise our rating from Duff & Phelps Credit Rating Co.
("Duff & Phelps"). A Duff & Phelps rating is an assessment of a company's
insurance claims-paying ability. Duff & Phelps ratings range from AAA to CCC. As
of the date of this SAI, Duff & Phelps rates our claims-paying ability as AA+.
We may advertise our insurance financial strength rating from Moody's Investors
Service, Inc. ("Moody's"). Moody's ratings range from Aaa to C. As of the date
of this SAI, Moody's gave us a rating of Aa3.
TAX DEFERRED ACCUMULATION
In reports or other communications to you or in advertising or sales materials,
we may also describe the effects of tax-deferred compounding on the Separate
Account's investment returns or upon returns in general. These effects may be
illustrated in charts or graphs and may include comparisons at various points in
time of returns under the Contract or in general on a tax-deferred basis with
the returns on a taxable basis. Different tax rates may be assumed.
In general, individuals who own annuity contracts are not taxed on increases in
the value under the annuity contract until some form of distribution is made
from the contract. Thus, the annuity contract will benefit from tax deferral
during the accumulation period, which generally will have the effect of
permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract with accumulations from an investment on which
gains are taxed on a current basis. The chart shows accumulations on an initial
Purchase Payment of $10,000, assuming hypothetical annual returns of 0%, 4% and
8%, compounded annually, and a tax rate of 36%. The values shown for the taxable
investment do not include any deduction for management fees or other expenses
but assume that taxes are deducted annually from investment returns. The values
shown for the variable annuity do not reflect the deduction of contractual
expenses such as the Risk Charge (equal to an annual rate of 1.25% of average
daily account value), the Administrative Fee (equal to an annual rate of 0.15%
of average daily account value), and the Annual Fee (equal to $30 per year if
Net Contract Value is $50,000 or less), any charge for premium taxes and/or
other taxes, or the expenses of an underlying investment vehicle, such as the
Trust. The values shown also do not reflect the withdrawal charge. Generally,
the withdrawal charge is equal to 7% of the amount withdrawn attributable to
premiums that are one year old, 6% of the amount withdrawn attributable to
premiums that are two years old, 5% of the amount withdrawn attributable to
premiums that are three years old, 3% of the amount withdrawn attributable to
premiums that are four years old, 1% of the amount withdrawn attributable to
premiums that are five years old, and 0% of the amount withdrawn attributable to
premiums that are six years old or older. The age of premiums is determined as
described in the Prospectus. There is no withdrawal charge to the extent that
total withdrawals that are free of charge during the Contract Year do not exceed
10% of the sum of your remaining Purchase Payments at the beginning of the
Contract Year that have been held under your Contract for less than six years
plus additional Purchase Payments applied to your Contract during that Contract
Year. For a description of the charges and expenses under the Contract, see FEE
TABLE and CHARGES, FEES AND DEDUCTIONS in the Prospectus. If these expenses and
fees were taken into account, they would reduce the investment return shown for
both the taxable investment and the hypothetical variable annuity contract. In
addition, these values assume that you do not surrender the Contract or make any
withdrawals until the end of the period shown. The chart assumes a full
withdrawal, at the end of the period shown, of all Contract Value and the
payment of taxes at the 36% rate on the amount in excess of the Purchase
Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guarantee of performance. Actual tax rates may vary for different taxpayers from
that illustrated and withdrawals by Contract Owners who have not reached age
59 1/2 may be subject to a tax penalty of 10%.
4
<PAGE> 52
POWER OF TAX DEFERRAL
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
TAXABLE TAX-DEFFERED
INVESTMENT INVESTMENT
---------- ------------
<S> <C> <C>
10 Years
0%......................................... $10,000.00 $10,000.00
4%......................................... 12,875.97 13,073.56
8%......................................... 16,476.07 17,417.12
20 Years
0%......................................... 10,000.00 10,000.00
4%......................................... 16,579.07 17,623.19
8%......................................... 27,146.07 33,430.13
30 Years
0%......................................... 10,000.00 10,000.00
4%......................................... 21,347.17 24,357.74
8%......................................... 44,726.05 68,001.00
</TABLE>
DISTRIBUTION OF THE CONTRACTS
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD"), an indirect, wholly-owned subsidiary
of Pacific Mutual Life, acts as the principal underwriter of the Contracts and
offers the Contracts on a continuous basis. PMD and Pacific Mutual Life enter
into selling agreements with broker-dealers whose registered representatives are
authorized by state insurance departments to sell the Contracts.
5
<PAGE> 53
THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed as of the end of each Business Day. The initial Unit Value of each
Subaccount was $10 on the Business Day the Subaccount began operations. At the
end of each Business Day, the Unit Value for a Subaccount is equal to:
Y X Z
where (Y) = the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z) = the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A X B) - C
where (A) = the "per share value of the assets" of that Subaccount as of the end
of that valuation period, which is equal to: a+b+c
where (a) = the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b) = the per share amount of any dividend or capital gain
distributions made by the Trust for that Portfolio during that
valuation period; and
(c) = any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for
any income and/or any other taxes which we determine to have
resulted from the operations of the Subaccount or Contract,
and/or any taxes attributable, directly or indirectly, to
Purchase Payments;
(B) = the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding valuation
period; and
(C) = a factor that assesses against the Subaccount net assets for each
calendar day in the valuation period, the charge for mortality and
expense risks at a rate that is equal on an annual basis to an
annual factor expressed as a decimal (where 1.00 is equal to 100%)
of 0.0125 and the Administrative Charge at a rate that is equal on
an annual basis to an annual factor of 0.0015 (see CHARGES, FEES
AND DEDUCTIONS in the Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable, is assessed
against your Variable Account Value through the automatic debit of Subaccount
Units; the Annual Fee decreases the number of Subaccount Units attributed to
your Contract but does not alter the Unit Value for any Subaccount.
VARIABLE ANNUITY PAYMENT AMOUNTS
The following steps show how we determine the amount of each variable annuity
payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments, you must pay any
applicable charge for premium taxes and/or other taxes on your Contract Value
(unless applicable law requires those taxes to be paid at a later time). We
assess this charge by reducing your Contract Value, proportionately, relative to
your Account Value in each Subaccount and in the Fixed Option, in an amount
equal to the aggregate amount of the charges. The remaining amount of your
available Contract Value may be used to provide variable annuity payments.
Alternatively, your remaining available Contract Value may be used to provide
fixed annuity
6
<PAGE> 54
payments, or it may be divided to provide both fixed and variable annuity
payments. You may also choose to withdraw some or all of your remaining Net
Contract Value, less any applicable Annual Fees, withdrawal charge, and any
charges for premium taxes and/or other taxes without converting this amount into
annuity payments.
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option Table yields will be based on the Annuitant's age (and, in
certain cases, sex) and assumes a 5% investment return, as described in more
detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and
charges is $100,000 on his Annuity Date and he applies this entire amount
toward his variable annuity, his first monthly payment will be $579.00.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment amounts.
First, we use the Annuity Option Table to determine the amount of that first
variable payment for each Subaccount. Then, for each Subaccount, we divide that
amount of the first variable annuity payment by the value of one Subaccount
Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity
Date to obtain the number of Subaccount Annuity Units for that particular
Subaccount. The number of Subaccount Annuity Units used to calculate subsequent
payments under your Contract will not change unless exchanges of Annuity Units
are made (or if the Joint and Survivor Annuity Option is elected and the Primary
Annuitant dies first), but the value of those Annuity Units will change daily,
as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the Annuity
Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value,
changes each day to reflect the net investment results of the underlying
investment vehicle, as well as the assessment of the Risk Charge at a rate equal
on an annual basis to the annual factor expressed as a decimal (where 1.00 is
equal to 100%) of 0.0125 and the Administrative Fee at a rate equal on an annual
basis to the annual factor of 0.0015. In addition, the calculation of Subaccount
Annuity Unit Value incorporates an additional factor; as discussed in more
detail below, this additional factor adjusts Subaccount Annuity Values to
correct for the Option Table's implicit assumption of a 5% annual investment
return on amounts applied but not yet used to furnish annuity benefits.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units
in any other Subaccount(s) up to four times in any twelve month period after you
annuitize. The number of Subaccount Annuity Units in any Subaccount may change
due to such exchanges. Exchanges following annuitization will be made by
exchanging Subaccount Annuity Units of equivalent aggregate value, based on
their relative Subaccount Annuity Unit Values.
7
<PAGE> 55
Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive investment return of 5% each
year during the payout of your annuity; thus 5% is referred to as an "assumed
investment return."
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds its Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than the
Subaccount Unit Value for that same Subaccount, and the difference will be the
amount of the assumed investment return factor.
Example: Assume the investment performance of a Subaccount is at a rate of
6.40% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year (6.40% minus the Risk Charge at the
annual rate of 1.25% and minus the Administrative Fee at the annual rate of
0.15% equals 5.00%), but the Subaccount Annuity Unit Value would not
increase (or decrease) at all. The net investment factor for that 5% return
[1.05] is then divided by the factor for the 5% assumed investment return
[1.05] and 1 is subtracted from the result to determine the adjusted rate
of change in Subaccount Annuity Unit Value: 1.05/1.05 = 1; 1 - 1 = 0; 0 X
100% = 0%.
If the investment performance of a Subaccount's assets is at a rate less than
6.40% per year, the Subaccount Annuity Unit Value will decrease, even if the
Subaccount Unit Value is increasing.
Example: Assume the investment performance of a Subaccount is at a rate of
4.00% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year (4.00% minus the Risk Charge at the
annual rate of 1.25% and minus the Administrative Fee at the annual rate of
0.15% equals 2.60%), but the Subaccount Annuity Unit Value would decrease
at a rate of 2.29% per year. The net investment factor for that 2.6% return
[1.026] is then divided by the factor for the 5% assumed investment return
[1.05] and 1 is subtracted from the result to determine the adjusted rate
of change in Subaccount Annuity Unit Value: 1.026/1.05 = 0.9771; 0.9771 - 1
= -0.0229; -0.0229 X 100% = -2.29%.
The assumed investment return will always cause increases in Subaccount Annuity
Unit Values to be somewhat less than if the assumption had not been made; will
cause decreases in Subaccount Annuity Unit Values to be somewhat greater than if
the assumption had not been made; and will (as shown in the example above)
sometimes cause a decrease in Subaccount Annuity Unit Values to take place when
an increase would have occurred if the assumption had not been made. If we had
assumed a higher investment return in our Annuity Option tables, it would
produce annuities with larger first payments, but the increases in subaccount
annuity payments would be smaller and the decreases in subsequent annuity
payments would be greater; a lower assumed investment return would produce
annuities with smaller first payments, and the increases in subsequent annuity
payments would be greater and the decreases in subsequent annuity payments would
be smaller.
CORRESPONDING DATES
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
8
<PAGE> 56
Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
AGE AND SEX OF ANNUITANT
As mentioned in the Prospectus, the Contracts generally provide for sex-distinct
annuity income factors in the case of life annuities. Statistically, females
tend to have longer life expectancies than males; consequently, if the amount of
annuity payments is based on life expectancy, they will ordinarily be higher if
an annuitant is male than if an annuitant is female. Certain states' regulations
prohibit sex-distinct annuity income factors, and Contracts issued in those
states will use unisex factors. In addition, Contracts issued in connection with
Qualified Plans are required to use unisex factors.
We may require proof of your Annuitant's age and sex before or after commencing
annuity payments. If the age or sex (or both) of your Annuitant are incorrectly
stated in your Contract, the amount payable will be corrected to equal the
amount that the annuitized portion of the Contract Value under that Contract
would have purchased for your Annuitant's correct age and sex. If the correction
is effected after annuity payments have commenced, and we have made overpayments
based on the incorrect information, we will deduct the amount of the
overpayment, with interest at 3% a year, from any payments due then or later; if
we have made underpayments, we will add the amount, with interest at 3% a year,
of the underpayments to the next payment we make after we receive proof of the
correct sex and/or date of birth.
SYSTEMATIC TRANSFER PROGRAMS
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make periodic
reallocations of your Contract Value without waiting for any further instruction
from you. You may request to begin or stop dollar cost averaging at any time
prior to your Annuity Date; the effective date of your request will be the day
we receive written notice from you in proper form. Your request may specify the
date on which you want your first transfer to be made. If you do not specify a
date for your first transfer, we will treat your request as if you had specified
the effective date of your request. Your first transfer may not be made until 30
days after your Contract Date, and if you specify an earlier date, your first
transfer will be delayed until one calendar month after the date you specify. If
you request dollar cost averaging on your application for your Contract and you
fail to specify a date for your first transfer, your first transfer will be made
one period after your Contract Date (that is, if you specify monthly transfers,
the first transfer will occur 30 days after your Contract Date; quarterly
transfers, 90 days after your Contract Date; semiannual transfers, 180 days
after your Contract Date; and if you specify annual transfers, the first
transfer will occur on your Contract Anniversary). If you stop dollar cost
averaging, you must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any one
Variable Investment Option or the Fixed Option as your source account. The
Account Value of your source account must be at least $5,000 for you to begin
dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer must
be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Variable Investment Option(s) you wish to
transfer amounts to (your "target account(s)"). If you select more than one
target account, your dollar cost averaging request must specify how transferred
amounts should be allocated among the target accounts. Your source account may
not also be a target account.
9
<PAGE> 57
Your dollar cost averaging transfers will continue until the earlier of (i) your
request to stop dollar cost averaging is effective, (ii) your source Account
Value is zero, or (iii) you annuitize. If, as a result of a dollar cost
averaging transfer, your source Account Value falls below any minimum Account
Value we may establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. You may not use dollar
cost averaging and the earnings sweep at the same time. We may change, terminate
or suspend the dollar cost averaging option at any time.
Portfolio Rebalancing
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Capital Income Subaccount, 40% in the Blue Chip Subaccount, and
30% in the Aggressive Growth Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of these Subaccount
Value allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Subaccount Value back to the percentages you
specify.
You may choose to have rebalances made quarterly, semiannually or annually until
your Annuity Date; portfolio rebalancing is not available after you annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make your
request at any time prior to your Annuity Date and it will be effective when we
receive it in proper form. If you stop portfolio rebalancing, you must wait 30
days to begin again. You may specify a date for your first rebalance, or we will
use the request date as the effective date. If you specify a date fewer than 30
days after your Contract Date, your first rebalance will be delayed one month,
and if you request rebalancing on your application but do not specify a date for
the first rebalance, it will occur one period after your Contract Date, as
described above under Dollar Cost Averaging. We may change, terminate or suspend
the portfolio rebalancing feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other Investment
Options (your "target option(s)"). If you elect to use the earnings sweep, you
may select either the Fixed Option or the Money Market Subaccount as your sweep
option. The Account Value of your sweep option will be required to be at least
$5,000 when you elect the earnings sweep. You may select one or more Variable
Investment Options (but not the Money Market Subaccount) as your target
option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually or
annually until you annuitize. At each earnings sweep, we will automatically
transfer only your accumulated earnings attributable to your sweep option for
the previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option earnings from
the preceding month; if you select a semiannual earnings sweep, we will transfer
the sweep option earnings accumulated over the preceding six months. Earnings
sweep transfers are subject to the same requirements and limitations as other
transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the sweep
option Account that occurred during the sweep period, and subtract any
allocations to the sweep option Account during the sweep period. The result of
this calculation represents the "total earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before any
other Account Value. Therefore, your "total earnings" for the sweep period will
be reduced by any amounts withdrawn or transferred during the sweep option
period. The remaining earnings are eligible for the sweep transfer.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be
10
<PAGE> 58
effective when we receive it in proper form. If you stop the earnings sweep, you
must wait 30 days to begin again. You may specify a date for your first sweep,
or we will use your request date as the effective date. If you specify a date
fewer than 30 days after your Contract Date, your first earnings sweep will be
delayed one month, and if you request the earnings sweep on your application but
do not specify a date for the first sweep, it will occur one period after your
Contract Date, as described above under Dollar Cost Averaging.
If you are using the earnings sweep, you may also use portfolio rebalancing only
if you selected the Fixed Option as your sweep option. You may not use the
earnings sweep and dollar cost averaging at the same time. If, as a result of an
earnings sweep transfer, your source Account Value falls below any minimum
Account Value we may establish, we have the right, at our option, to transfer
that remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. We may change, terminate
or suspend the earnings sweep option at any time.
PRE-AUTHORIZED WITHDRAWALS
You may specify a dollar amount for your pre-authorized withdrawals, or you may
specify a percentage of your Contract Value or an Account Value. You may direct
us to make your pre-authorized withdrawals from one or more specific Fixed or
Variable Investment Options; if you do not give us these specific directions,
amounts will be deducted proportionately from your Account Value in each Fixed
or Variable Investment Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps. You may make your request at any time and it
will be effective when we receive it in proper form. If you stop the
pre-authorized withdrawals, you must wait 30 days to begin again. You may
specify a date for the first withdrawal, or we will use your request date as the
effective date. If you specify a date fewer than 30 days after your Contract
Date, your first pre-authorized withdrawal will be delayed one month, and if you
request the pre-authorized withdrawals on your application but do not specify a
date for the first withdrawal, it will occur one period after your Contract
Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below any minimum Account Value we establish, we have the right,
at our option, to transfer that remaining Account Value to your other Investment
Options on a proportionate basis relative to your most recent allocation
instructions. If your pre-authorized withdrawals cause your Contract Value to
fall below $1,000, we may, at our option, terminate your Contract and send you
the remaining withdrawal proceeds.
Pre-authorized withdrawals are subject to the same withdrawal charges as are
other withdrawals, and each withdrawal is subject to any applicable charge for
premium taxes and/or other taxes, to federal income tax on its taxable portion,
and, if you have not reached age 59 1/2, a 10% tax penalty.
DEATH BENEFIT
The standard death benefit payable will be calculated as of the date we receive
proof (in proper form) of the Annuitant's death (or, if applicable, the Contract
Owner's death) and instructions regarding payment. Any Guaranteed Minimum Death
Benefit payable will be calculated as of the date we are first notified of the
death. Any claim of a death benefit must be made in proper form. A recipient of
death benefit proceeds may elect to have this benefit paid in one lump sum, in
periodic payments, in the form of a lifetime annuity or in some combination of
these. Annuity payments normally will begin within 30 days once we receive all
information necessary to process the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit will be
payable unless and until the last Annuitant dies prior to the Annuity Date or a
Contract Owner dies prior to the Annuity Date. If yours is a Qualified Contract,
your Contingent Annuitant or Contingent Owner must be your spouse. If both the
Contract Owner(s) and the Annuitant(s) are non-natural persons, no death benefit
will be payable, and any distribution will be treated as a withdrawal and
subject to any applicable charges for Annual Fees, transaction fees, withdrawal
fees, premium taxes and/or other taxes, and withdrawal charges.
11
<PAGE> 59
Death of an Annuitant
If a Joint Annuitant who is not a Contract Owner dies prior to the Annuity Date,
the surviving Joint Annuitant becomes your Annuitant. If your Annuitant is not a
Contract Owner and dies, or if there is no surviving Joint Annuitant, your
surviving Contingent Annuitant becomes your Annuitant. If there is no surviving
Contingent Annuitant, the death benefit becomes payable.
Any death benefit payable on the death of your Annuitant is payable to the
surviving Beneficiary. If no Beneficiary survives, any death benefit will be
payable to the surviving Owner, if there is one; if not, any death benefit will
be payable to the Owner's estate.
Death of a Contract Owner
If any Contract Owner dies prior to the Annuity Date while the Annuitant is
still living, a death benefit may be payable. If that Contract Owner was the
sole Annuitant or a Joint Annuitant under the Contract, any death benefit will
be payable to the surviving Beneficiary, or to your estate if no Beneficiary
survives. If that Contract Owner was not an Annuitant under the Contract, any
death benefit will be payable to the surviving Joint Owner of the Contract, if
there is one; if not, the death benefit will be payable to the surviving
Contingent Owner, if there is one; if not, any death benefit will be payable to
the surviving designated Beneficiary, or to the Owner's estate if no designated
Beneficiary survives. If the Joint or Contingent Owner is the deceased Contract
Owner's surviving spouse, he or she may elect to become the Contract Owner and
continue the Contract rather than receive the death benefit proceeds.
JOINT ANNUITANTS ON QUALIFIED CONTRACTS
If your Contract was issued in connection with a Qualified Plan subject to Title
I of the Employee Retirement Income Security Act of 1974 ("ERISA"), you may be
permitted to add a Joint Annuitant on your Annuity Date. You may call us for
more information.
1035 EXCHANGES
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which is
available by calling your representative, or by calling us at 1-800-722-5558,
and mail the form along with the annuity contract you are exchanging (plus your
completed application if you are making an initial Purchase Payment) to us.
In general terms, Section 1035 of the Code provides that you recognize no gain
or loss when you exchange one annuity contract solely for another annuity
contract. However, transactions under Section 1035 may be subject to special
rules and may require special procedures and record-keeping, particularly if the
exchanged annuity contract was issued prior to August 14, 1982. You should
consult your tax adviser prior to effecting a 1035 Exchange.
SAFEKEEPING OF ASSETS
We are responsible for the safekeeping of the assets of the Separate Account.
These assets are held separate and apart from the assets of our General Account
and our other separate accounts.
DIVIDENDS
The current dividend scale for Pacific Mutual Life is zero and we do not
anticipate that dividends will be paid by Pacific Mutual Life. If any dividend
is paid, you may elect to receive the dividend in cash or to add the dividend to
your Contract Value. If you make no election, the dividend will be added to your
Contract Value. We will allocate any dividend to Contract Value in accordance
with your most recent allocation instructions, unless instructed otherwise. You
should consult with your tax adviser before making an election.
12
<PAGE> 60
FINANCIAL STATEMENTS
Separate Account B had not yet commenced operations as of December 31, 1996 and
therefore no financial statements are included. Pacific Mutual Life's audited
consolidated financial statements as of December 31, 1996 and 1995 and for the
three years ended December 31, 1996 are set forth beginning on the next page.
These financial statements should be considered only as bearing on our ability
to meet our obligations under the Contracts and not as bearing on the investment
performance of the assets held in the Separate Account.
13
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
Pacific Mutual Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
position of Pacific Mutual Life Insurance Company and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations and equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pacific Mutual Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company has adopted all applicable generally accepted accounting
principles relating to mutual life insurance companies for all periods
presented.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1997
14
<PAGE> 62
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1996 1995
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $12,193.8 $11,359.2
Equity securities 260.8 218.5
Short-term investments 66.1 103.3
Mortgage loans 1,477.3 1,346.2
Real estate 280.0 288.6
Policy loans 3,131.8 2,793.3
Other investments 208.0 214.6
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS 17,617.8 16,323.7
Cash and cash equivalents 109.0 286.1
Deferred policy acquisition costs 531.5 391.1
Accrued investment income 202.5 198.8
Other assets 462.4 416.5
Separate account assets 8,142.1 5,686.9
- ---------------------------------------------------------------------------------
TOTAL ASSETS $27,065.3 $23,303.1
=================================================================================
LIABILITIES AND EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $13,877.4 $12,719.4
Future policy benefits 2,442.0 2,378.9
Policyholders' dividends payable 64.5 65.3
Borrowings 120.5 83.0
Surplus notes 149.6 149.6
Other liabilities 572.0 586.6
Separate account liabilities 8,142.1 5,686.9
- ---------------------------------------------------------------------------------
Total Liabilities 25,368.1 21,669.7
- ---------------------------------------------------------------------------------
Commitments and contingencies
Equity:
Retained earnings 1,318.0 1,151.4
Unrealized gain on available for sale securities, net 379.2 482.0
- ---------------------------------------------------------------------------------
Total Equity 1,697.2 1,633.4
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $27,065.3 $23,303.1
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE> 63
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 465.4 $ 458.5 $ 455.9
Policy fees from universal life, annuity and
other investment contract deposits 348.6 309.0 280.0
Net investment income 1,063.0 1,022.3 933.6
Net realized capital gains (losses) 68.3 77.6 (2.1)
Investment management fees 14.1 12.9 144.6
Other income 188.6 139.4 203.6
- --------------------------------------------------------------------------------
TOTAL REVENUES 2,148.0 2,019.7 2,015.6
- --------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 653.2 654.2 638.6
Policy benefits paid or provided 664.7 668.5 590.2
Commission expenses 199.8 167.8 139.9
Operating expenses 350.0 308.3 433.8
- --------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,867.7 1,798.8 1,802.5
- --------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 280.3 220.9 213.1
Provision for income taxes 113.7 86.1 111.7
- --------------------------------------------------------------------------------
NET INCOME 166.6 134.8 101.4
Equity, beginning of year 1,633.4 809.3 942.8
Change in unrealized gain (loss) on available for
sale securities, net (102.8) 689.3 (234.9)
- --------------------------------------------------------------------------------
EQUITY, END OF YEAR $1,697.2 $1,633.4 $ 809.3
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 64
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166.6 $ 134.8 $ 101.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (1.4) (30.4) (28.3)
Deferred income taxes (49.7) (30.3) 26.2
Net realized capital (gains) losses (68.3) (77.6) 2.1
Deferred policy acquisition costs (140.4) 48.8 (126.5)
Interest credited to universal life, annuity
and other investment contract deposits 653.2 654.2 638.6
Change in accrued investment income (3.7) (16.1) 28.5
Change in future policy benefits 63.1 89.3 48.7
Change in policyholders' dividends payable (0.8) (0.5) (0.2)
Change in other assets and liabilities 169.7 172.9 (51.2)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 788.3 945.1 639.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases (4,525.0) (3,001.3) (4,376.9)
Sales 2,511.0 1,940.3 2,690.3
Maturities and repayments 1,184.7 926.9 1,220.4
Held to maturity securities:
Purchases (181.9) (415.0)
Sales 62.3
Maturities and repayments 111.0 202.2
Repayments of mortgage loans 220.4 267.7 399.1
Proceeds from sales of mortgage loans and real
estate 14.5 27.4 52.8
Purchases of mortgage loans and real estate (414.3) (244.7) (237.7)
Distributions from partnerships 78.8 49.0
Change in policy loans (338.5) (389.8) (349.7)
Change in short-term investments 37.2 (66.7) 129.0
Other investing activity, net (120.1) (121.1) 15.7
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,351.3) (620.9) (669.8)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
17
<PAGE> 65
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 2,105.0 $ 1,437.9 $ 1,355.0
Withdrawals (1,756.6) (1,774.2) (1,376.0)
Net change in borrowings 37.5 (43.8) 36.9
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 385.9 (380.1) 15.9
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents (177.1) (55.9) (14.6)
Cash and cash equivalents, beginning of year 286.1 342.0 356.6
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109.0 $ 286.1 $ 342.0
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Federal income taxes paid $ 185.9 $ 96.9 $ 82.8
Interest paid $ 27.2 $ 23.3 $ 24.1
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 66
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual Life") was
established in 1868 and is organized under the laws of the State of
California as a mutual life insurance company. Pacific Mutual Life
conducts business in every state except New York.
Pacific Mutual Life and its subsidiaries and affiliates have primary
business operations which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business operations provide a broad range of life
insurance, accumulation and investment products for individuals and
businesses and offer a range of investment products to institutions and
pension plans. Additionally, through its major subsidiaries and
affiliates, Pacific Mutual Life provides a variety of group employee
benefits, as well as investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Mutual Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Mutual Life and its wholly-owned
insurance subsidiaries, Pacific Corinthian Life Insurance Company ("PCL"-
Note 3), PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Financial
Asset Management Corporation ("PFAMCo"), Pacific Mutual Distributors,
Inc. ("PMD"), Pacific Mutual Realty Finance, Inc., Pacific Mezzanine
Associates, L.L.C. and MC Associates, LLC. All significant intercompany
transactions and balances have been eliminated. Pacific Mutual Life
prepares its regulatory financial statements based on accounting
practices prescribed or permitted by the Insurance Department of the
State of California. These consolidated financial statements differ from
those followed in reports to regulatory authorities (Note 2).
On December 21, 1995, Pacific Mutual Life completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual Life. Prior to the reorganization PFAMCo was a wholly-
owned, second-tier subsidiary of Pacific Mutual Life. The intermediate
company, Pacific Financial Holding Company ("PFHC"), and certain of its
assets and liabilities were merged into PFAMCo in connection with this
reorganization. The remaining assets were merged into Pacific Mutual Life
which consisted of investments in subsidiaries as follows: PFAMCo, PMD
and PM Group.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Pacific Mutual Life has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Interpretation No.
40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises" (the "Interpretation") issued by
the Financial Accounting Standards Board. SFAS No. 120 and the
Interpretation require that mutual life insurance companies and their
insurance subsidiaries adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. This differs from prior years when Pacific Mutual Life issued its
regulatory financial statements as general purpose financial statements.
The accompanying consolidated financial statements for 1996, 1995 and
1994 reflect the effects of implementing SFAS No. 120 and the
Interpretation.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
shall be assessed for recoverability if certain events or changes in
circumstances are present. An impairment loss shall be recognized if the
carrying amount of
19
<PAGE> 67
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the asset exceeds the fair value of the asset. Adoption of this
accounting standard did not have a significant impact on the consolidated
financial position or consolidated results of operations of the Company.
On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that rights
acquired to service mortgage loans for others be recognized separately
from the mortgage loan asset. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights and any impairment should be recognized through a
valuation allowance. Adoption of this accounting standard did not have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations
and other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial position, and determines when related revenues and
expenses should be recognized. The Company currently plans to adopt SFAS
No. 125 beginning on January 1, 1997. The adoption is not expected to
have a significant impact on the consolidated financial position or
consolidated results of operations of the Company.
INVESTMENTS
Fixed maturity securities and equity securities are reported at fair
value, with unrealized gains and losses, net of deferred income tax and
adjustments to related deferred policy acquisition costs, included as a
separate component of equity on the accompanying consolidated statements
of financial position. Trading securities, which are included in short-
term investments, are reported at fair value with unrealized gains and
losses included in net realized capital gains (losses) on the
accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since
the acquisition of the securities. This adjustment is reflected in net
investment income.
In the first and second quarter of 1995, Pacific Mutual Life sold two
securities from the held to maturity category. The amortized cost of the
securities was $62.3 million and a net after tax loss of $0.7 million was
realized on the sales. The securities were sold due to the significant
deterioration of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Mutual Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of the securities at the date of transfer. The fair value
of those securities was approximately $1.6 billion, resulting in a net
after tax unrealized gain of $52.5 million, which was reflected as a
direct increase to equity. The change in classification was a result of a
change in management's intent with respect to these securities. In order
to have the flexibility to respond to changes in interest rates and to
take advantage of changes in the availability of and the yield on
alternative investments, management has determined that the
reclassification of these securities as available for sale was
appropriate.
20
<PAGE> 68
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at fair value and include all trading
securities.
Derivative financial instruments are carried at fair value. Unrealized
gains and losses of derivatives used to hedge securities classified as
available for sale are reflected in a separate component of equity,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized
over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired
in satisfaction of debt, estimated fair value less estimated selling
costs at the date of acquisition if lower than the related unpaid
balance.
On November 15, 1994, PFAMCo and five of its subsidiaries (Pacific
Investment Management Company and subsidiaries, Parametric Portfolio
Associates, Inc., Cadence Capital Management Corporation, NFJ Investment
Group, Inc. and Blairlogie Capital Management Limited) entered into an
agreement and plan of consolidation with Thomson Advisory Group L.P., a
Delaware limited partnership with publicly traded units, to merge into a
newly capitalized partnership named PIMCO Advisors L.P. ("PIMCO
Advisors"). Collectively, PFAMCo and various of its subsidiaries
beneficially own approximately 42% of the outstanding General and Limited
Partner units of PIMCO Advisors as of December 31, 1996 and 1995. This
investment, which is included in other investments on the accompanying
consolidated statements of financial position, is accounted for on the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity
in the period the Company experiences deviations in gross profit
assumptions. Adjustments directly affecting equity result from experience
deviations due to changes in unrealized gains and losses in investments
classified as available for sale. For life insurance products, such costs
are being amortized over the premium-paying period of the related
policies in proportion to premium revenues recognized, using assumptions
consistent with those used in computing policy reserves. For the years
ended December 31, 1996, 1995 and 1994, net amortization of deferred
policy acquisition costs included in operating expenses amounted to $70.0
million, $63.3 million and $44.2 million, respectively, on the
accompanying consolidated statements of operations and equity.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets is $16.1 million and $38.4 million which
represents the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL"-Note 3) as of December 31, 1996 and 1995,
respectively. The aforementioned future profits are discounted to
21
<PAGE> 69
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide an appropriate rate of return and are being amortized over the
rehabilitation plan period. Amortization for the years ended December 31,
1996, 1995 and 1994 amounted to $24.2 million, $17.1 million and $4.7
million, respectively. During 1996, the Company changed certain
assumptions regarding the estimated life which resulted in an increase in
amortization in 1996 of approximately $17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of
deposits received plus interest credited less accumulated assessments.
Interest credited to these policies ranged from 4% to 8.4% during 1996,
1995 and 1994.
The following detail of universal life, annuity and other investment
contract deposits is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------
(In Millions)
<S> <C> <C>
Universal life $ 7,562.5 $ 6,930.7
Annuity 2,459.3 2,426.6
Other investment contract deposits 3,855.6 3,362.1
------------------------
$13,877.4 $12,719.4
========================
</TABLE>
The following detail of universal life, annuity and other investment
contract deposits policy fees and interest credited is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $318.4 $292.6 $267.1
Annuity 26.6 12.8 9.4
Other investment contract deposits 3.6 3.6 3.5
------------------------
Total policy fees $348.6 $309.0 $280.0
========================
Interest credited
Universal life $279.3 $258.6 $226.9
Annuity 131.9 125.2 120.7
Other investment contract deposits 242.0 270.4 291.0
========================
Total interest credited $653.2 $654.2 $638.6
========================
</TABLE>
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1996, 1995 and
1994. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of
operations and equity are dividends to policyholders.
22
<PAGE> 70
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1996 and 1995, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health
guaranty associations in most states in which they are licensed to do
business. These assessments are based on the volume and type of business
they sell in those states and may be partially recovered in some states
through a future reduction in premium taxes. Based on current information
available from the National Organization of Life and Health Guaranty
Association, the Company, as of December 31, 1996, has accrued in other
liabilities on the accompanying consolidated statements of financial
position an amount adequate for anticipated payments of known
insolvencies, net of estimated recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Investment management fees are recorded as revenues during the period
such services are performed.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations and equity.
Depreciation and amortization of other assets is included in operating
expenses on the accompanying consolidated statements of operations and
equity.
FEDERAL INCOME TAXES
Pacific Mutual Life is taxed as a life insurance company for Federal
income tax purposes and files a consolidated Federal income tax return
with all its includable domestic subsidiaries. The amount of Federal
income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
policyholders and contract owners.
23
<PAGE> 71
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale
securities, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
==================
</TABLE>
24
<PAGE> 72
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $113.1 $ 85.1 $ 81.0
Deferred policy acquisition costs 111.2 76.4 59.4
Deferred income tax 70.9 31.5 (27.7)
Interest maintenance reserve 3.8 12.2 (7.7)
Net realized gain (loss) on trading
securities (11.6) 13.2 (2.0)
Earnings of subsidiaries (33.0) 5.9 20.7
Insurance and annuity reserves (91.3) (95.5) (28.2)
Other 3.5 6.0 5.9
----------------------------
Net income as reported herein $166.6 $134.8 $101.4
============================
</TABLE>
RISK-BASED CAPITAL
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the amount
of risk-based capital specify various weighting factors that are applied
to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio
of a company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level risk-based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective
action. As of December 31, 1996 and 1995, the Company's ratios exceeded
the minimum risk-based capital requirements.
DIVIDENDS
Dividends to Pacific Mutual Life from its insurance subsidiaries are
subject to regulatory restrictions and approvals. The maximum amount of
dividends that can be paid by PM Group cannot exceed the lesser of 10% of
surplus as regards to policyholders, or the net statutory gain from
operations, without prior approval from the Insurance Commissioner of the
State of Arizona. During 1996, 1995 and 1994, PM Group received approval
to pay extraordinary dividends in excess of these limitations. PM Group
paid dividends of $25 million, $25 million and $20 million for the years
ended December 31, 1996, 1995 and 1994 of which $18 million, $17.2
million and $12.4 million, respectively, were considered extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 3),
PCL is precluded from paying any dividends during the rehabilitation
period without the prior consent of the Insurance Department of the State
of California. No such dividends have been paid.
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual Life, through its wholly-owned subsidiary, PCL,
will facilitate the rehabilitation of FCL. In accordance with the five-
year rehabilitation agreement, insurance policies of FCL were
restructured and substantially all the assets and certain liabilities of
FCL were assumed by PCL on December 31, 1992, pursuant to an assumption
reinsurance agreement and asset purchase agreement and have been
accounted for as a purchase transaction.
25
<PAGE> 73
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated
statutory surplus of PCL at the end of the rehabilitation period.
Policyholders have the option to surrender their restructured policies
with reduced benefits during this five-year period. During the
rehabilitation plan period, PCL is prohibited from issuing new insurance
policies. PCL will merge into Pacific Mutual Life, with Pacific Mutual
Life as the surviving entity, within thirty days following September 30,
1997, the end of the rehabilitation period.
In the event PCL is unable to pay contract benefits, Pacific Mutual Life
is obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
4. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
In 1996, Pacific Mutual Life signed a definitive agreement to acquire a
block of corporate-owned life insurance ("COLI") policies from
Confederation Life Insurance Company (U.S.) in Rehabilitation, which is
currently under rehabilitation. This block consists of approximately
40,000 policies, having a face amount of $9 billion and reserves of $1.7
billion. This block is primarily non-leveraged COLI. The transaction is
expected to close during the first half of 1997.
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ------------------- Fair
Cost Gains Losses Value
-------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
-------------------------------------------
Total Fixed Maturity Securities $11,640.4 $ 668.1 $ 114.7 $12,193.8
===========================================
Equity Securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
===========================================
</TABLE>
26
<PAGE> 74
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 378.4 $ 33.4 $ 411.8
Obligations of states, political
subdivisions and foreign
governments 625.1 70.7 $ 3.3 692.5
Corporate securities 6,179.1 537.1 45.0 6,671.2
Mortgage-backed and asset-backed
securities 3,366.9 138.6 12.0 3,493.5
Redeemable preferred stock 89.4 3.1 2.3 90.2
-------------------------------------------
Total Fixed Maturity Securities $10,638.9 $ 782.9 $ 62.6 $11,359.2
-------------------------------------------
Equity Securities $ 192.3 $ 32.2 $ 6.0 $ 218.5
-------------------------------------------
</TABLE>
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1996, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-----------------------
(In Millions)
<S> <C> <C>
Available for Sale:
Due in one year or less $ 1,482.3 $ 1,489.0
Due after one year through five years 2,830.0 3,042.3
Due after five years through ten years 1,907.4 1,991.7
Due after ten years 1,667.1 1,838.6
---------------------
7,886.8 8,361.6
Mortgage-backed and asset-backed securities 3,753.6 3,832.2
---------------------
Total $11,640.4 $12,193.8
---------------------
</TABLE>
Proceeds from sales of all available for sale securities during 1996,
1995 and 1994 were $2.5 billion, $1.9 billion and $2.7 billion,
respectively. Gross gains of $89.3 million, $58.0 million and $56.0
million and gross losses of $29.9 million, $32.3 million and $70.8
million were realized on those sales during 1996, 1995 and 1994,
respectively.
27
<PAGE> 75
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 831.6 $ 808.1 $ 741.3
Equity securities 17.8 7.3 8.9
Mortgage loans 107.9 112.9 136.3
Real estate 51.3 43.2 37.2
Policy loans 113.0 105.2 89.0
Other 48.9 47.1 3.3
------------------------------
Gross investment income 1,170.5 1,123.8 1,016.0
Investment expense 107.5 101.5 82.4
------------------------------
Net investment income $1,063.0 $1,022.3 $ 933.6
==============================
</TABLE>
The change in gross unrealized gain (loss) on investments in available
for sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securi-
ties:
Fixed maturity $(169.1) $1,039.3 $(320.6)
Equity 6.5 17.2 (29.7)
----------------------------
Total $(162.6) $1,056.5 $(350.3)
============================
</TABLE>
As of December 31, 1996 and 1995, investments in fixed maturity
securities with a carrying value of $19.6 million and $20.5 million,
respectively, were on deposit with state insurance departments to satisfy
regulatory requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1996.
The Company has no non-income producing fixed maturity securities,
mortgage loans, real estate or other long-term investments as of December
31, 1996.
28
<PAGE> 76
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $12,454.6 $12,454.6 $11,577.7 $11,577.7
Mortgage loans 1,477.3 1,533.9 1,346.2 1,535.1
Policy loans 3,131.8 3,131.8 2,793.3 2,793.3
Cash and cash equivalents 109.0 109.0 286.1 286.1
Derivative financial in-
struments:
Interest rate floors and
caps, options and
swaptions 59.3 59.3 39.4 39.4
Interest rate swap con-
tracts 1.0 1.0 2.4 2.4
Credit and total return
swaps 1.1 1.1 1.0 1.0
Liabilities:
Guaranteed interest con-
tracts 2,948.3 3,056.1 2,375.9 2,459.3
Deposit liabilities 799.6 800.6 876.3 899.4
Annuity liabilities 2,459.4 2,459.4 2,427.2 2,427.2
Surplus notes 149.6 157.5 149.6 157.7
Derivative financial in-
struments:
Options written 1.5 1.5 1.5 1.5
Asset swap contracts 12.5 12.5 3.5 3.5
Foreign currency deriva-
tives 4.3 4.3 5.0 5.0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of these financial instruments as of December 31, 1996 and 1995:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flow, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to
29
<PAGE> 77
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
avoid highly leveraged or overly complex investments. The Company
utilizes certain derivative financial instruments to diversify its
business risk and to minimize its exposure to fluctuations in market
prices, interest rates or basis risk as well as for facilitating total
return. Risk is limited through modeling derivative performance in
product portfolios for hedging and setting loss limits in total return
portfolios.
Derivatives used by the Company involve elements of credit risk and
market risk in excess of amounts recognized in the accompanying
consolidated financial statements. The notional amounts of these
instruments reflect the extent of involvement in the various types of
financial instruments. The estimated fair values of these instruments are
based on quoted market prices, dealer quotations or internal price
estimates believed to be comparable to dealer quotations. These amounts
estimate what the Company would have to pay or receive if the contracts
were terminated. The Company determines, on an individual counterparty
basis, the need for collateral or other security to support financial
instruments with off-balance sheet counterparty risk.
A reconciliation of the notional or contract amounts and discussion of
the various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
--------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1996:
Interest rate floors and
caps, options and
swaptions $2,159.6 $3,075.0 $ 371.4 $4,863.2
Interest rate swap con-
tracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures con-
tracts 310.1 3,358.9 3,059.8 609.2
Foreign currency deriva-
tives 15.4 43.1 17.1 41.4
December 31, 1995:
Interest rate floors and
caps, options and
swaptions 1,950.9 1,126.6 917.9 2,159.6
Interest rate swap con-
tracts 370.5 339.0 89.9 619.6
Asset swap contracts 30.0 10.0 20.0
Credit and total return
swaps 116.3 99.8 70.0 146.1
Financial futures con-
tracts 137.6 1,877.0 1,704.5 310.1
Foreign currency deriva-
tives 35.2 19.8 15.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are
reported as liabilities in the consolidated statements of financial
position. Cash requirements
30
<PAGE> 78
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
for these instruments are generally limited to the premium paid by the
Company at acquisition. The purchase premium of these instruments is
amortized on a constant effective yield basis and included as a component
of net investment income over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during fiscal years 1997
through 2007.
Interest Rate Swap Contracts
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is
paid to enter into the contract and no principal payments are made by
either party. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The interest rate swap contracts mature during fiscal
years 1997 through 2026.
Asset Swap Contracts
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The asset swap contracts mature during fiscal years
1998 through 2000.
Credit and Total Return Swaps
The Company uses credit and total return swaps to take advantage of
market opportunities. Credit swaps involve the receipt of floating or
fixed rate payments in exchange for assuming potential credit losses of
an underlying security. Total return swaps involve the exchange of
floating rate payments for the total return performance of a specified
index or market. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. Credit and total return swaps mature during fiscal
years 1997 through 2013.
Financial Futures Contracts
The Company uses exchange-traded financial futures contracts to hedge
cash flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used
to hedge foreign currency risk on non U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set
price and may be settled in cash or delivery of the financial instrument.
Price changes on futures are settled daily through the daily margin cash
flows. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign
exchange forward contracts offset currency gains and losses on the
related assets. The amounts to be received or paid under the foreign
currency swaps are
31
<PAGE> 79
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
accrued and recognized in the consolidated statements of operations
through an adjustment to net investment income over the life of the
agreements. Foreign currency derivatives expire during fiscal years 1997
through 2006.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities
with no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited
interest.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Mutual Life has issued PRO GIC and Diversifier GIC contracts to
plan sponsors totaling $1.1 billion as of December 31, 1996, pursuant to
the terms of which the plan sponsor retains direct ownership and control
of the assets related to these contracts. Pacific Mutual Life agrees to
provide benefit responsiveness in the event that plan benefit requests
exceed plan cash flows. In return for this guarantee, Pacific Mutual Life
receives a fee which varies by contract. Pacific Mutual Life sets the
investment guidelines to provide for appropriate credit quality and cash
flow matching.
7. CONCENTRATION OF CREDIT RISK
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The
credit risk of financial instruments is controlled through credit
approvals, limits and monitoring procedures. Real estate and mortgage
loan investments are diversified by geographic location and property
type. Management believes that significant concentrations of credit risk
do not exist.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by
the counterparties.
8. BORROWINGS
Pacific Mutual Life borrows for short-term needs by issuing commercial
paper. There were no commercial paper borrowings outstanding as of
December 31, 1996 and 1995. Pacific Mutual Life has a revolving credit
facility available of $250 million as of December 31, 1996 and 1995.
There were no borrowings under the revolving credit facility outstanding
as of December 31, 1996 and 1995.
PFHC had the ability to borrow up to $50 million from certain banks at
variable rates of interest. On December 21, 1995, outstanding loans
totaling $37 million were transferred to PFAMCo (Note 1). The borrowing
limit as of December 31, 1996 and 1995 was $150 million and $100 million,
respectively. The interest rate averaged 5.6%, 6.1% and 4.6% for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance
outstanding as of December 31, 1996 and 1995 totaled $95.5 million and
$53 million, respectively. Outstanding borrowings are due and payable in
1997 and are subject to renewal.
32
<PAGE> 80
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BORROWINGS (CONTINUED)
During 1992, PFHC entered into a credit agreement with a group of banks
for borrowings of $45 million. Proceeds of this note were paid to PCL in
connection with the issuance of a certificate of contribution by PCL
(Note 3). On December 31, 1996 and 1995, the applicable interest rate was
6.2% and 6.5%, respectively. The outstanding balance of $25 million as of
December 31, 1996 was prepaid per the terms of the agreement on January
27, 1997.
9. SURPLUS NOTES
Pacific Mutual Life has $150 million of Surplus Notes outstanding at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually on June 30 and December 30. The Surplus Notes may not be
redeemed at the option of Pacific Mutual Life or any holder of the Notes.
The Surplus Notes are unsecured and subordinated to all present and
future senior indebtedness and policy claims of Pacific Mutual Life. Each
payment of interest on and the payment of principal of the Surplus Notes
may be made only with the prior approval of the Insurance Commissioner of
the State of California. Interest expense amounted to $11.8 million for
the years ended December 31, 1996, 1995 and 1994 and is included in net
investment income in the accompanying consolidated statements of
operations and equity.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset
using the enacted tax rates and laws expected to apply to taxable income
in the periods in which the deferred tax liability or asset is expected
to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Current $163.5 $116.4 $ 85.5
Deferred (49.8) (30.3) 26.2
--------------------------
$113.7 $ 86.1 $111.7
==========================
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------
(In Millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 2.1 $ (6.0) $ (5.0)
Interest in advance 2.0 2.9 25.4
Investment valuation (7.3) 8.1 11.4
Reserves (28.5) (28.7) 7.1
Other (18.1) (6.6) (12.7)
------------------------
$(49.8) $(30.3) $ 26.2
------------------------
</TABLE>
33
<PAGE> 81
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes based on the
prevailing corporate tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 98.1 $ 77.3 $ 74.6
Equity tax-current year 16.3 36.1
Amortization of intangibles on equity
method investments 6.5 6.5
Non-taxable investment income (2.1) (2.1) (4.7)
Equity tax-recomputation of prior years (17.3)
Other 12.2 4.4 5.7
----------------------------
$ 113.7 $ 86.1 $ 111.7
----------------------------
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial position was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Reserves $ 244.9 $ 216.4
Deferred compensation 27.6 25.4
Investment valuation 24.0 16.7
Postretirement benefits 9.8 9.4
Dividends 9.6 10.4
Interest in advance 1.7 3.6
Depreciation (9.8) (10.0)
Deferred policy acquisition costs (43.9) (41.8)
Other 22.1 6.1
----------------
Deferred taxes from operations 286.0 236.2
Unrealized gain on available for sale securities (204.5) (259.6)
----------------
Net deferred tax asset (liability) $ 81.5 $ (23.4)
----------------
</TABLE>
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts." SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts.
Amounts receivable from reinsurers for reinsurance on future policy
benefits, universal life deposits, and unpaid losses is reported as an
asset and included in other assets on the accompanying consolidated
statements of financial position.
34
<PAGE> 82
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE (CONTINUED)
The Company has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger
risks or, in the case of the producer-owned reinsurance company, to
diversify risk and retain top producing agents. All assets associated
with reinsured business remain with, and under the control of the
Company. Approximate amounts recoverable (payable) from (to) reinsurers
include the following amounts:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(35.9) $(42.7)
Future policy benefits 90.0 87.7
Unpaid claims 4.6 7.8
Paid claims 8.4 7.9
</TABLE>
As of December 31, 1996, 85% of the reinsurance recoverables were from
one reinsurer, of which 100% is secured by payables to the reinsurer. To
the extent that the assuming companies become unable to meet their
obligations under these agreements, the Company remains contingently
liable. The Company does not anticipate nonperformance by the assuming
companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-------------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 44.3 $ 29.2 $ 26.0
Assumed reinsurance included in insurance
premiums 17.8 15.6 20.2
Ceded reinsurance netted against policy fees 71.0 66.5 66.7
Ceded reinsurance netted against net
investment income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy
benefits 56.7 51.4 45.4
Assumed reinsurance included in policy
benefits 9.9 14.5 16.8
</TABLE>
35
<PAGE> 83
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $ 962.1 $ 927.0 $ 795.9
Pensions 507.3 513.9 464.0
Group Employee Benefits 454.2 419.3 423.7
Corporate and Other 224.4 159.5 332.0
---------------------------------
$ 2,148.0 $ 2,019.7 $ 2,015.6
=================================
Income before income taxes:
Individual Life Insurance and Annuities $ 92.0 $ 102.3 $ 94.8
Pensions 80.7 53.3 34.3
Group Employee Benefits 24.7 25.2 36.5
Corporate and Other 82.9 40.1 47.5
---------------------------------
$ 280.3 $ 220.9 $ 213.1
=================================
<CAPTION>
December 31,
1996 1995 1994
--------------------------------
(In Millions)
<S> <C> <C> <C>
Assets:
Individual Life Insurance and Annuities $15,484.4 $12,953.2 $10,912.3
Pensions 8,097.2 7,592.5 6,497.9
Group Employee Benefits 344.4 329.8 341.3
Corporate and Other 3,139.3 2,427.6 1,954.3
--------------------------------
$27,065.3 $23,303.1 $19,705.8
================================
</TABLE>
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLAN
Pacific Mutual Life provides a qualified noncontributory defined benefit
pension plan which covers all eligible employees who have one year of
continuous employment and have attained age 21. The full-benefit vesting
period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of
employment. Pacific Mutual Life's funding policy is to contribute amounts
to the plan
36
<PAGE> 84
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide not only for benefits attributed to employment to date but also
for those expected to be earned in the future. All such contributions are
made to a tax-exempt trust. Plan assets consist primarily of group
annuity contracts issued by Pacific Mutual Life, as well as participating
units of a real estate trust and mutual funds managed by an indirect
subsidiary of Pacific Mutual Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 3.7 $ 2.8 $ 3.2
Interest cost on projected benefit obligation 9.4 8.8 8.5
Actual return on plan assets (19.7) (24.1) 0.6
Amortization of net obligations and prior serv-
ice cost 8.0 14.0 (11.4)
-------------------------
Net periodic pension cost $ 1.4 $ 1.5 $ 0.9
=========================
</TABLE>
The following table sets forth the Plan's funded status and
amounts recognized on Pacific Mutual Life's consolidated
statements of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 114.4 $ 115.8
Nonvested benefits 1.2 0.8
----------------
Accumulated benefit obligation 115.6 116.6
Effect of projected future compensation increases 18.5 19.5
----------------
Projected benefit obligation 134.1 136.1
Plan assets at fair value (141.2) (125.6)
----------------
Plan assets (in excess) less than projected benefit
obligation (7.1) 10.5
Unrecognized net gain (loss) 2.5 (15.5)
Unrecognized transition asset 6.0 7.2
Unrecognized prior service cost 2.2 2.5
----------------
Accrued pension cost $ 3.6 $ 4.7
================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1996 and 1995, the weighted average
discount rate used was 7.5% and 7%, respectively, and the rate of
increase in future compensation levels was 6% for both years. The
expected long-term rate of return on plan assets was 8.5% in 1996 and
1995.
37
<PAGE> 85
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Mutual Life sponsors a defined benefit health care plan and a
defined benefit life insurance plan ("the Plans") that provide
postretirement benefits for all eligible retirees and their dependents.
Generally, qualified employees may become eligible for these benefits if
they reach normal retirement age, have been covered under Pacific Mutual
Life's policy as an active employee for a minimum continuous period prior
to the date retired, and have an employment date before January 1, 1990.
The Plans contain cost-sharing features such as deductibles and
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Mutual Life's commitment to qualified
employees who retire after April 1, 1994 is limited to specific dollar
amounts. Pacific Mutual Life reserves the right to modify or terminate
the Plans at any time. As in the past, the general policy is to fund
these benefits on a pay-as-you-go basis. The amount of benefits paid
under the programs during 1996, 1995 and 1994 was approximately $1.6
million, $1.7 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.2 $ 0.2 $ 0.2
Interest cost 1.5 1.9 1.8
Amortization (0.3) (0.3) (0.3)
------------------------
Net periodic postretirement benefit cost $ 1.4 $ 1.8 $ 1.7
========================
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.3 $20.9
Fully eligible active plan participants 2.0 1.7
Other active plan participants 2.5 2.3
============
Total accumulated postretirement obligation 21.8 24.9
Fair value of plan assets -- --
------------
Unfunded accumulated postretirement obligation 21.8 24.9
Unrecognized net gain 3.7 0.4
Prior service cost 1.3 1.6
------------
Accrued postretirement benefit liability $26.8 $26.9
============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1996 and 10% for 1995 and is assumed to
decrease gradually to 4% in 2003 and remain at that level thereafter. The
amount reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31,
38
<PAGE> 86
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
1996 and 1995 would be increased by 11.5% and 10.9%, respectively. The
effect of this change would increase the aggregate of the service and
interest cost components of the net periodic benefit cost by 12.3%, 11.4%
and 13.6% for 1996, 1995 and 1994, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5% and 7% for 1996 and 1995, respectively.
OTHER PLANS
Pacific Mutual Life has a voluntary Retirement Incentive Savings Plan
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Pacific Mutual Life matches 50% of
each employees' contributions, up to a maximum of six percent of eligible
compensation.
Pacific Mutual Life also has a deferred compensation plan which permits
certain employees to defer portions of their compensation and earn a
guaranteed interest rate on the deferred amounts. The interest rate is
determined annually and is guaranteed for one year. The compensation
which has been deferred has been accrued and the primary expense, other
than compensation, related to this plan is interest on the deferred
amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Mutual Life serves as the investment advisor for the Pacific
Select Fund, the investment vehicle provided to the Company's variable
life and variable annuity contractholders. Pacific Mutual Life charges
fees based upon the net asset value of the portfolios of the Pacific
Select Fund, which amounted to $14.3 million, $6.5 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, Pacific Mutual Life entered into an agreement
with the Pacific Select Fund on October 1, 1995, to provide certain
support services for an administration fee which is based on an
allocation of actual costs. Such administration fees amounted to $108,000
and $28,550 for the years ended December 31, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $6.2 million, $5.0 million and $0.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in equity securities on the accompanying consolidated statements
of financial position are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $110.6 million
and $77.6 million as of December 31, 1996 and 1995, respectively.
Pacific Mutual Life provides certain support services to PIMCO Advisors.
Charges for these services are based on an allocation of actual costs and
amounted to $1.4 million, $1.9 million and $0.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS
Prior to the PIMCO Advisors transaction (Note 1), certain of PFAMCo's
direct subsidiaries had nonqualified profit-sharing plans (the "Profit-
Sharing Plans") covering certain key employees ("Key Employees") and
other employees. The Profit-Sharing Plans provided for awards based on
the profitability of the respective subsidiary, as defined in the
employment agreements. Such profitability was primarily based on income
before income taxes and before profit-sharing. The awards ranged from 40%
to 80% of such amounts depending on the level of profitability. The
profit-sharing awards were fully vested as of the PIMCO Advisors
transaction date of November 15, 1994.
39
<PAGE> 87
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS (CONTINUED)
In addition, Key Employees of certain indirect subsidiaries participated
in long-term incentive plans that provided compensation under the Profit-
Sharing Plans for a specified period of time subsequent to their
termination of employment. These plans were terminated as of the PIMCO
Advisors transaction date.
Effective November 15, 1994, termination and non-competition agreements
were entered into with certain Key Employees. These agreements provide
terms and conditions for the allocation of future proceeds from
distributions and sales of certain PIMCO Advisors units and other
noncompete payments. When the amount of future payments to be made to a
Key Employee is determinable, a liability for such amount is established
and is included in other liabilities in the consolidated statements of
financial position.
For the years ended December 31, 1996, 1995 and 1994, approximately $35.3
million, $28.6 million and $166.9 million, respectively, is included in
operating expenses in the consolidated statements of operations related
to the above agreements.
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments in fixed
maturities and other investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending
December 31:
------------
<S> <C>
1997 $193.1
1998-2001 109.0
2002 and thereafter 19.5
------
Total $321.6
======
</TABLE>
17. LITIGATION
The Company is a respondent in a number of legal proceedings, some of
which involve extra-contractual damages. In the opinion of management,
the outcome of these proceedings is not likely to have a material adverse
effect on the consolidated financial position of the Company.
40
<PAGE> 88
PART II
Part C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Part A: None
Part B:
(1) Registrant's Financial
Statements
None
(2) Depositor's Financial Statements
Audited Consolidated Financial Statements as of
December 31, 1996 and 1995 and for the three
years ended December 31, 1996 included in Part B
include the following for Pacific Mutual Life:
Consolidated Statements of Financial Position
Consolidated Statements of Operations and
Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits
1. Resolution of the Board of Directors of
Pacific Mutual authorizing establishment
of Separate Account B and Memorandum
establishing Separate Account B*
2. Not applicable
3. (a) Distribution and Wholesaling
Agreement between Pacific Mutual and
Pacific Mutual Distributors, Inc.
("PMD")*
(b) Form of Selling Agreement between
Pacific Mutual, PMD and various
Broker-Dealers
4. (a) Form of Individual Flexible Premium
Variable Accumulation Annuity
Contract
(b) Qualified Plan Loan Endorsement*
<PAGE> 89
(c) Individual Retirement Annuity Rider*
(d) Qualified Pension Plan Rider*
(e) 403(b) Tax-Sheltered Annuity Rider*
(f) Section 457 Plan Rider*
5. (a) Application Form for Individual
Flexible Premium Variable
Accumulation Annuity Contract*
(b) Application/Confirmation Form*
6. (a) Pacific Mutual's Articles of
Incorporation*
(b) By-laws of Pacific Mutual*
7. Not applicable
8. Fund Participation Agreement
9. Opinion and Consent of legal officer of
Pacific Mutual as to the legality of
Contracts being registered*
10. (a) Consent of Deloitte & Touche LLP,
independent auditor
(b) Consent of Dechert Price & Rhoads*
11. Not applicable
12. Not applicable
13. Not applicable
14. Financial Data Schedules --- not available
15. Power of Attorney*
* Included in Registrant's Form Type N-4 EL, file No. 333-14131, Accession No.
0000950150-96-001122 filed on October 15, 1996 and incorporated by reference
herein.
Item 25. Directors and Officers of Pacific Mutual Life
Positions and Offices
Name and Address With Pacific Mutual Life
Thomas C. Sutton Director, Chairman of the Board, and
Chief Executive Officer
<PAGE> 90
Glenn S. Schafer Director and President
Richard M. Ferry Director
Donald E. Guinn Director
Ignacio E. Lozano, Jr. Director
Charles A. Lynch Director
Dr. Allen W. Mathies, Jr. Director
Charles D. Miller Director
Donn B. Miller Director
Jacqueline C. Morby Director
J. Fernando Niebla Director
Susan Westerberg Prager Director
Richard M. Rosenberg Director
James R. Ukropina Director
Raymond L. Watson Director
Edward Byrd Vice President and Controller
David R. Carmichael Senior Vice President and General
Counsel
Audrey L. Milfs Vice President and Corporate
Secretary
Gerald W. Robinson Executive Vice President
Khan T. Tran Senior Vice President and
Chief Financial Officer
_____________________________
The address for each of the persons listed above is as follows:
700 Newport Center Drive
<PAGE> 91
Newport Beach, California 92660
Item 26. Persons Controlled by or Under Common Control with Pacific
Mutual or Separate Account B
The following is an explanation of the organization chart of
Pacific Mutual's subsidiaries:
PACIFIC MUTUAL, SUBSIDIARIES & AFFILIATED ENTERPRISES
LEGAL STRUCTURE
Pacific Mutual Life Insurance Company has a 40% ownership of American
Maturity Life Insurance Company, a 50% ownership of Pacific Mezzanine
Associates, L.L.C., and is the parent company of MC Associates LLC (a
Delaware Limited Liability Company), Pacific Financial Asset Management
Corporation, Pacific Mutual Realty Finance, Inc., PM Group Life
Insurance Company (an Arizona corporation), Pacific Mutual
Distributors, Inc., World-Wide Holdings Limited (a United Kingdom
corporation) and Pacific Corinthian Life Insurance Company. A
subsidiary of Pacific Financial Asset Management Corporation ("PFAMCo")
is PMRealty Advisors Inc. PFAMCO owns 42% of the outstanding
partnership interests in PIMCO Advisors L.P. (a Delaware Limited
Partnership). Subsidiaries of Pacific Mutual Distributors, Inc.
include: Mutual Service Corporation (a Michigan corporation), along
with its subsidiary Advisors' Mutual Service Center, Inc. (a Michigan
corporation); and United Planners' Group, Inc. (an Arizona corporation
which is 97% owned), along with its subsidiary United Planners'
Financial Services of America (an Arizona Limited Partnership).
Subsidiaries of World-Wide Holdings Limited include: World-Wide
Reassurance Company Limited (a United Kingdom corporation) and
World-Wide Reassurance Company (BVI) Limited (a British Virgin Islands
corporation). All corporations are 100% owned unless otherwise
indicated. All entities are California corporations unless otherwise
indicated.
Item 27. Number of Contractholders
One
Item 28. Indemnification
(a) The Distribution Agreement between Pacific Mutual and
PMD provides substantially as follows:
Pacific Mutual hereby agrees to indemnify and hold harmless
PMD, its officers, directors, and employees for any expenses
(including legal expenses), losses, claims, damages, or
liabilities incurred by reason of any untrue or alleged untrue
statement or representation of a material fact or any omission
or alleged omission to state a material fact required to be
stated to make other statements not misleading, if made in
reliance on any prospectus, registration statement,
post-effective amendment
<PAGE> 92
thereof, or sales materials supplied or approved by Pacific
Mutual or the Separate Account. Pacific Mutual shall
reimburse each such person for any legal or other expenses
reasonably incurred in connection with investigating or
defending any such loss, liability, damage, or claim.
However, in no case shall Pacific Mutual be required to
indemnify for any expenses, losses, claims, damages, or
liabilities which have resulted from the willful misfeasance,
bad faith, negligence, misconduct, or wrongful act of PMD.
PMD hereby agrees to indemnify and hold harmless Pacific
Mutual, its officers, directors, and employees, and the
Separate Account for any expenses, losses, claims, damages, or
liabilities arising out of or based upon any of the following
in connection with the offer or sale of the contracts: (1)
except for such statements made in reliance on any prospectus,
registration statement or sales material supplied or approved
by Pacific Mutual or the Separate Account, any untrue or
alleged untrue statement or representation made; (2) any
failure to deliver a currently effective prospectus; (3) the
use of any unauthorized sales literature by any officer,
employee or agent of PMD or Broker; (4) any willful
misfeasance, bad faith, negligence, misconduct or wrongful
act. PMD shall reimburse each such person for any legal or
other expenses reasonably incurred in connection with
investigating or defending any such loss, liability, damage,
or claim.
(b) The Form of Selling Agreement between Pacific Mutual, PMD and
Various Broker-Dealers provides substantially as follows:
Pacific Mutual and PMD agree to indemnify and hold harmless
Selling Broker-Dealer and General Agent, their officers,
directors, agents and employees, against any and all losses,
claims, damages or liabilities to which they may become
subject under the 1933 Act, the 1934 Act, or other federal or
state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statements made not
misleading in the registration statement for the Contracts or
for the shares of Pacific Innovations Trust (the "Fund") filed
pursuant to the 1933 Act, or any prospectus included as a part
thereof, as from time to time amended and supplemented, or in
any advertisement or sales literature approved in writing by
Pacific Mutual and PMD pursuant to Section IV.E. of this
Agreement.
Selling Broker-Dealer and General Agent agree to indemnify and
hold harmless Pacific Mutual, the Fund and PMD, their
officers, directors, agents and employees, against any and all
losses, claims, damages or liabilities to which they may
become subject under the 1933 Act, the 1934 Act or other
federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon: (a) any oral or written misrepresentation by
Selling Broker-Dealer or General Agent or their officers,
directors, employees or agents unless such misrepresentation
is contained in the registration statement for the Contracts
or Fund shares, any prospectus
<PAGE> 93
included as a part thereof, as from time to time amended and
supplemented, or any advertisement or sales literature
approved in writing by Pacific Mutual and PMD pursuant to
Section IV.E. of this Agreement, (b) the failure of Selling
Broker-Dealer or General Agent or their officers, directors,
employees or agents to comply with any applicable provisions
of this Agreement or (c) claims by Sub-agents or employees of
General Agent or Selling Broker-Dealer for payments of
compensation or remuneration of any type. Selling
Broker-Dealer and General Agent will reimburse Pacific Mutual
or PMD or any director, officer, agent or employee of either
entity for any legal or other expenses reasonably incurred by
Pacific Mutual, PMD, or such officer, director, agent or
employee in connection with investigating or defending any
such loss, claims, damages, liability or action. This
indemnity agreement will be in addition to any liability which
Broker-Dealer may otherwise have.
Item 29. Principal Underwriters
(a) PMD also acts as principal underwriter for Pacific
Select Fund, Pacific Select Separate Account, Pacific
Select Exec Separate Account, Pacific Select Variable
Annuity Separate Account, Separate Account A and
Pacific Select Fund.
(b) For information regarding PMD, reference is made to
Form B-D, SEC File No. 8-15264, which is herein
incorporated by reference.
(c) PMD retains no compensation or net discounts or
commissions from the Registrant.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of
the Investment Company Act of 1940 and the rules under
that section will be maintained by Pacific Mutual Life
at 700 Newport Center Drive, Newport Beach, California
92660.
Item 31. Management Services
Not applicable
Item 32. Undertakings
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this
registration statement as frequently as is necessary
to ensure that the audited financial statements in
this registration statement are never more than 16
months old for so long as
<PAGE> 94
payments under the variable annuity contracts may be
accepted, unless otherwise permitted.
(b) to include either (1) as a part of any application to
purchase a contract offered by the Prospectus, a
space that an applicant can check to request a
Statement of Additional Information, or (2) a post
card or similar written communication affixed to or
included in the prospectus that the applicant can
remove to send for a Statement of Additional
Information, or (3) to deliver a Statement of
Additional Information with the Prospectus.
(c) to deliver any Statement of Additional Information
and any financial statements required to be made
available under this Form promptly upon written or
oral request.
Additional Representations
(a) The Registrant and its Depositor are relying upon American
Council of Life Insurance, SEC No-Action Letter, SEC Ref. No. 1P-6- 88
(November 28, 1988) with respect to annuity contracts offered as funding
vehicles for retirement plans meeting the requirements of Section 403(b) of the
Internal Revenue Code, and the provisions of paragraphs (1)-(4) of this letter
have been complied with.
(b) REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT
COMPANY ACT OF 1940: Pacific Mutual Life Insurance Company and Registrant
represent that the fees and charges to be deducted under the Variable Annuity
Contract ("Contract") described in the prospectus contained in this registration
statement are, in the aggregate, reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed in
connection with the Contract.
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Registration Statement and
has caused this Post Effective Amendment No. 1 to the Registration Statement on
Form N-4 to be signed on its behalf by the undersigned thereunto duly authorized
in the City of Newport Beach, and the State of California on this 1st day of
April, 1997.
SEPARATE ACCOUNT B
(Registrant)
By: PACIFIC MUTUAL LIFE INSURANCE COMPANY
By:
Thomas C. Sutton*
Chairman and Chief Executive Officer
By: PACIFIC MUTUAL LIFE INSURANCE COMPANY
(Depositor)
By:
Thomas C. Sutton*
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Thomas C Sutton* Director, Chairman of the Board ___________, 1997
and Chief Executive Officer
Glenn S. Schafer* Director and President ___________, 1997
Richard M. Ferry* Director ___________, 1997
Donald E. Guinn* Director ___________, 1997
Ignacio E. Lozano, Jr.* Director ___________, 1997
Charles A. Lynch* Director ___________, 1997
Dr. Allen W. Mathies, Jr.* Director ___________, 1997
Charles D. Miller* Director ___________, 1997
</TABLE>
<PAGE> 96
<TABLE>
<S> <C> <C>
Donn B. Miller* Director ___________, 1997
Jacqueline C. Morby Director ___________, 1997
J. Fernando Niebla* Director ___________, 1997
Susan Westerberg Prager* Director ___________, 1997
Richard M. Rosenberg Director ___________, 1997
James R. Ukropina* Director ___________, 1997
Raymond L. Watson* Director ___________, 1997
Edward Byrd* Vice President and Controller ___________, 1997
</TABLE>
*By: /s/DAVID R. CARMICHAEL
David R. Carmichael
as attorney-in-fact April 1, 1997
(Powers of Attorney are contained in the Registration Statement on Form N4-EL
filed October 15, 1996, file no. 333-14131, Accession No. 0000950150-96-001122
for Separate Account B as Exhibit 15)
<PAGE> 1
EXHIBIT 3(b)
PACIFIC MUTUAL LIFE INSURANCE COMPANY
VARIABLE CONTRACT SELLING AGREEMENT
This Agreement ("Agreement") is made as of _______________________,
19__ by and among PACIFIC MUTUAL LIFE INSURANCE COMPANY ("Pacific Mutual"),
PACIFIC MUTUAL DISTRIBUTORS, INC. ("Distributor"), a broker/dealer registered
with the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and a member of the National
Association of Securities Dealers Regulation, Inc. ("NASD"),
________________________________________________________ ("Broker/Dealer"), and
each undersigned agency included on the attached Schedule (jointly and
severally referred to herein as "Agency"); Broker/Dealer and Agency jointly and
severally hereinafter referred to collectively as "Selling Entities".
This Agreement is for the purpose of providing for the distribution of
certain variable life insurance policies and/or annuity contracts set forth in
Schedule A hereto and of any successor additional SEC registered products (as
discussed in Paragraph 3 of this Agreement) issued by Pacific Mutual and
distributed by Distributor through representatives who are both (a) state
insurance licensed and appointed agents of Pacific Mutual and associated with
the Agency and (b) NASD registered representatives of Broker/Dealer who are
appropriately licensed both with the NASD and with the relevant states. The
variable life insurance and/or annuity contracts set forth in Schedule A
hereto, as such Schedule may be amended and/or restated from time to time to
include any successor or additional SEC registered insurance products, and
together with any riders or endorsements to such policies and contracts,
certificates relating to such policies and contracts, supplemental contracts,
and forms, are referred to collectively herein as the "Contracts".
1. APPOINTMENT
In consideration of the mutual promises and covenants contained in
this Agreement, Pacific Mutual and Distributor appoint Selling Entities and
those persons associated with Selling Entities who are NASD registered
representatives of Broker/Dealer and state insurance licensed agents of Agency
and appointed by Pacific Mutual to solicit and procure applications for the
Contracts.
These appointments are not deemed to be exclusive in any manner and
extend only to those jurisdictions, set forth in Schedule B hereto as such
Schedule B may be amended from time to time by Pacific Mutual in its sole
discretion, where the Contracts specified in such Schedule B have been approved
for sale.
From time to time, Pacific Mutual will provide Selling Entities with
information regarding the jurisdictions in which Pacific Mutual is authorized
to solicit applications for the Contracts and any limitations on the
availability of such Contracts in any jurisdiction.
2. RESPONSIBILITIES
Selling Entities are authorized to collect the premium on the
Contracts and must remit such premiums to Pacific Mutual in the manner set
forth in the applicable Compensation Schedule set forth in the applicable
Schedule D. Contract applications shall be taken only on preprinted,
state-appropriate application forms in accordance with state, federal and
self-regulatory laws, rules, regulations and guidelines, supplied by Pacific
Mutual. All completed applications, supporting documents and payments are the
sole property of Pacific Mutual and must be promptly delivered to Pacific
Mutual. All applications are subject to acceptance by Pacific Mutual at its
sole discretion.
3. NEW PRODUCTS
Distributor may propose and Pacific Mutual may issue additional or
successor products, in which event Broker/Dealer will be informed in writing of
the new product and its related Compensation Schedule. If Broker/Dealer does
not indicate approval of the new product(s) or the terms contained in its
related Compensation Schedule, Broker/Dealer will be deemed to have thereby
rejected the proposal(s) to distribute such new product(s). If Broker/Dealer
approves the new product, the Compensation Schedule will be deemed accepted and
1
<PAGE> 2
shall be attached to and made a part of this Agreement as an amendment or
addendum to the applicable Schedule D, or as a new Schedule D hereto, and (b)
to the amendment of Schedules A and B to this Agreement to name such new
product(s) and to identify where their offer and sale has been approved.
4. SUBAGENTS
Agency is authorized to appoint Subagents to solicit sales of the
Contracts ("Subagents"); provided, however, that Pacific Mutual shall have the
right in its sole discretion to terminate the appointment of any Subagent upon
notice from Pacific Mutual to Agency. Agency warrants that no Subagent shall
commence solicitation nor aid, directly or indirectly, in the solicitation of
any application for any Contract unless, at the time of such solicitation or
aid, such Subagent is appropriately licensed for such product under applicable
insurance laws and is an NASD registered representative of Broker/Dealer.
Selling Entities each represent that they have, for each Subagent,
fulfilled all requirements set forth in the form of general letter of
recommendation set forth in Schedule C hereto; and agree, upon reasonable
request by Pacific Mutual, to furnish proof of such fulfillment as Pacific
Mutual may require.
Any direct contact with Subagents will require the prior approval of
the Broker/Dealer.
5. SALES MATERIAL
No party to this Agreement nor any of their respective Subagents,
officers, directors, employees, affiliates, representatives or agents shall
utilize in their marketing efforts for the Contracts any written brochure,
prospectus, descriptive literature, printed and published material,
audio-visual material or standard letters without the prior consent of the
other party; provided, however, that an updated printed prospectus, statement
of additional information, and any supplement or amendment thereto, and annual
and semi-annual reports may be used without specific approval. In order for
any party to review and approve materials not produced by the other party, the
submitting party must provide the other party with evidence that any material
proposed to be used was filed with the NASD in accordance with applicable rules
and copies of correspondence with the NASD relating to the proposed material.
Pacific Mutual and Distributor will not publicize the name of the
Selling Entities in required regulatory filings without the prior consent of
the Selling Entities, such consent not to be unreasonably withheld.
6. RECORDS
In accordance with the requirements of federal and state laws and
rules of applicable self-regulatory organizations ("SROs") as defined in the
Exchange Act including but not limited to the Rules of Fair Practice of the
NASD ("NASD Rules"), Selling Entities shall maintain complete records
concerning the sale of the Contracts, information regarding the customs
relating to the sale and/or servicing of the Contracts, including the manner
and extent of distribution of any sales, marketing or other solicitation
material, shall make such records and files available to staff of Pacific
Mutual or Distributor at such times as Pacific Mutual or Distributor may
reasonably request and shall make such material available to personnel of state
insurance departments, the NASD or other regulatory agency, including the SEC,
Office of the Comptroller of Currency and Office of Thrift Supervision that
have regulatory authority over Pacific Mutual or Distributor.
7. DELIVERY OF PROSPECTUSES
Selling Entities warrant that solicited and unsolicited transactions,
specifically including any solicitation effected by any Subagent, will be made
by use of a currently effective prospectus, that a prospectus will be delivered
concurrently with each sales presentation or upon confirmation of a sale and
that no statements shall be made to a client superseding or controverting any
statement made in the prospectus. Pacific Mutual and Distributor shall furnish
Selling Entities, at no cost to Selling Entities, reasonable quantities of
prospectuses and such other material as Pacific Mutual and Distributor deem
necessary to aid in the solicitation of Contracts.
8. BROKER/DEALER REPRESENTATIONS
The representations, warranties and covenants of Broker/Dealer set
forth in this Agreement are continuous during the term of this Agreement and
Broker/Dealer agrees to notify each of Pacific Mutual and
2
<PAGE> 3
Distributor immediately, in writing, if, at any time during the course of this
Agreement, any of the representations, warranties or covenants set forth herein
become inaccurate or untrue of the facts related thereto.
Broker/Dealer represents, warrants and covenants that:
(a) Broker/Dealer is registered with the SEC as a broker/dealer
under the Exchange Act, a member of the NASD and will, throughout the duration
of this Agreement, remain in compliance with the requirements of the NASD and
of the Exchange Act, including but not limited to laws requiring that the
Broker/Dealer and each of its Subagents/registered representatives be
appropriately securities registered, insurance licensed and appointed by
Pacific Mutual, and such other applicable federal or state laws;
(b) Broker/Dealer is affiliated with Agency, is an associated
person of Broker/Dealer which is an entity properly licensed under the
insurance laws of the jurisdiction(s) in which Broker/Dealer will act under
this Agreement; and Agency is an associated person of Broker/Dealer.
(c) Broker/Dealer has established, pursuant to NASD Bylaws and
Conduct Rules, rules, procedures, and supervisory and inspection techniques
necessary to train and to supervise diligently the activities of its NASD
registered representatives who are state insurance licensed and appointed
agents of Pacific Mutual;
(d) Broker/Dealer shall ensure that no registered representative
of Broker/Dealer, including any Subagent, shall sell or recommend for sale any
Contract to any person without reasonable grounds for believing, after
appropriate inquiry, that the purchase of that Contract is suitable for that
person;
(e) Upon request by Pacific Mutual and Distributor, Broker/Dealer
will furnish such appropriate records as are necessary to document the
training, licensing and diligent supervision required by subparagraph (b)
above, and client suitability determinations required by subparagraph (c)
above.
9. AGENCY REPRESENTATIONS
The representations, warranties and covenants of Agency set forth in
this Agreement are continuous during the term of this Agreement and Agency
agrees to notify each of Pacific Mutual and Distributor immediately, in
writing, if, at any time during the course of this Agreement, any of the
representations, warranties or covenants set forth herein become inaccurate or
untrue of the facts related thereto.
Agency represents, warrants and covenants that it will, and will cause
each Subagent to, comply fully with the requirements of state insurance law and
applicable federal laws, including but not limited to assuring appropriate
state insurance licensing and appointment by Pacific Mutual, and will establish
rules and procedures necessary to supervise diligently the activities of
licensed and appointed agents of Pacific Mutual associated with Agency. Upon
request by Pacific Mutual or Distributor, Agency will furnish such appropriate
records as are necessary to document such diligent supervision.
10. PACIFIC MUTUAL REPRESENTATIONS
Pacific Mutual represents that the prospectus(es) and registration
statement(s) relating to the Contracts that are and shall be in effect from
time to time contain no untrue statements of material fact and do not omit to
state material facts, the omission of which makes any statement contained in
such prospectus(es) and registration statement(s) misleading.
11. COMPENSATION
11.1 Pacific Mutual, through Distributor, will remit to
Broker/Dealer or Agency compensation as set forth in the applicable Schedule D
hereto, which payments or termination thereof shall be governed by the
administrative rules established by Pacific Mutual in its sole discretion.
Selling Entities shall pay all Subagents. Pacific Mutual reserves the right
not to pay compensation on a Contract, the premium for which is paid in whole
or in part by the loan or surrender value of any other life insurance policy or
annuity contract issued by Pacific Mutual.
3
<PAGE> 4
11.2 Pacific Mutual may offset, against any claim for commission
and any other compensation payable to Broker/Dealer or Agency under this
Agreement, any existing or future indebtedness of, respectively, Broker/Dealer
or Agency, whether fixed or contingent, whether such indebtedness arises under
this Agreement or otherwise. Such indebtedness shall constitute a first lien
against any such compensation. Neither Broker/Dealer nor Agency may offset,
against any such indebtedness, any compensation accruing under this Agreement.
12. COMPLAINTS AND INVESTIGATIONS
All parties to this Agreement agree to cooperate fully in any banking,
insurance or securities regulatory investigation or proceeding or judicial
proceeding with respect to Pacific Mutual, Distributor, Broker/Dealer and/or
Agency, their affiliates and their agents or representatives to the extent that
such investigation or proceeding is in connection with the Contracts
distributed under this Agreement. Without limiting the foregoing:
(a) Each party to this Agreement shall promptly notify the other
parties to this Agreement of any complaint or comment regarding the Contracts
and/or any allegation that Selling Entities or any of its Subagents/
representatives violated any law, regulation or rule in soliciting applications
for or servicing the Contracts. Selling Entities shall promptly investigate
such complaint or allegation, take appropriate remedial measures and notify
Pacific Mutual and Distributor of same. Selling Entities shall provide Pacific
Mutual and Distributor with full details of and correspondence relating to any
of the foregoing, including copies of all legal documents pertaining thereto.
(b) Selling Entities shall cooperate fully with Pacific Mutual and
Distributor in any regulatory proceeding or judicial proceeding involving the
solicitation of applications for or the servicing of Contracts by the Selling
Entities or any of their representatives.
13. INDEMNIFICATION
13.1 Pacific Mutual and Distributor agree to indemnify and hold
harmless Selling Entities, their officers, directors, agents and employees,
against any and all losses, claims, damages, or liabilities to which they may
become subject under the Securities Act, the Exchange Act, the Investment
Company Act of 1940, or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact or any omission or
alleged omission to state a material fact required to be stated or necessary to
make the statements made not misleading in the registration statement for the
Contracts or for the shares of Pacific Select Fund (the "Fund") filed pursuant
to the Securities Act, or any prospectus included as a part thereof, as from
time to time amended and supplemented, or in any advertisement or sales
literature provided by Pacific Mutual and Distributor.
13.2 Selling Entities agree to, jointly and severally, hold
harmless and indemnify Pacific Mutual and Distributor and any of their
respective affiliates, employees, officers, agents and directors (collectively,
"Indemnified Persons") against any and all claims, liabilities and expenses
(including, without limitation, losses occasioned by any rescission of any
Contract pursuant to a "free look" provision or by any return of initial
purchase payment in connection with an incomplete application), including,
without limitation, reasonable attorneys' fees and expenses and any loss
attributable to the investment experience under a Contract, that any
Indemnified Person may incur from liabilities resulting or arising out of or
based upon (a) any untrue or alleged untrue statement other than statements
contained in the registration statement or prospectus relating to any Contract,
(b) (i) any inaccurate or misleading, or allegedly inaccurate or misleading
sales material used in connection with any marketing or solicitation relating
to any Contract, other than sales material provided preprinted by Pacific
Mutual or Distributor, and (ii) any use of any sales material that either has
not been specifically approved in writing by Pacific Mutual or Distributor or
that, although previously approved in writing by Pacific Mutual or Distributor,
has been disapproved, in writing by either of them, for further use, or (c) any
act or omission of a Subagent, director, officer or employee of Selling
Entities, including, without limitation, any failure of Selling Entities or any
Subagent to be registered as required as a broker/dealer under the 1934 Act, or
licensed in accordance with the rules of any applicable SRO or insurance
regulator.
4
<PAGE> 5
14. FIDELITY BOND
Selling Entities each represent and covenant that all
directors, officers, employees and Subagents of Selling Entities licensed
pursuant to this Agreement or who have access to funds of Pacific Mutual are and
will continue to be covered by a blanket fidelity bond including coverage for
larceny, embezzlement and other defalcation, issued by a bonding company rated
A- or better from A.M. Best or equivalent rating from another nationally
recognized statistical rating organization. This bond shall be maintained at
Broker/Dealer's and/or Agency's expense. Such bond shall be at least equivalent
to the minimal coverage required under the NASD Rules, and endorsed to extend
coverage to life insurance and annuity transactions. Selling Entities
acknowledge that Pacific Mutual may require evidence that such coverage is in
force, and Broker/Dealer or Agency shall promptly give notice to Pacific Mutual
of any notice of cancellation or change of coverage.
Selling Entities each assign any proceeds received from the fidelity
bond company, error and omissions or other liability coverage, to Pacific
Mutual to the extent of Pacific Mutual's loss due to activities covered by the
bond. If there is any deficiency, Selling Entities will promptly pay Pacific
Mutual the amount of such deficiency on demand. Selling Entities each shall
indemnify and hold harmless Pacific Mutual from any such deficiency and from
the cost of collection.
15. LIMITATIONS OF AUTHORITY
The Contract forms are the sole property of Pacific Mutual. No person
or party other than Pacific Mutual has the right or authority to: (i) make,
alter, modify, discharge or rescind any policy, Contract, certificate,
supplemental contract or form issued by Pacific Mutual; (ii) waive or modify
any provision with respect to any Contract or policy; (iii) incur indebtedness
or liability, or expend or contract for expenditure of any funds on behalf of
Pacific Mutual or the Contracts; (iv) extend the time for payment of any
premiums, bind Pacific Mutual to reinstate any terminated Contracts, or accept
notes for payment of premiums; (v) enter into any proceeding in a court of law
or before a regulatory agency in the name of or on behalf of Pacific Mutual; or
(vi) institute or file any response to any legal proceeding in connection with
any matter pertaining to the Contracts on behalf of Pacific Mutual without the
prior written consent of Pacific Mutual (except that if Selling Entities
themselves are named as a party or parties in such proceedings each named party
may enter into legal proceedings on its own behalf without the written consent
of Pacific Mutual).
16. GENERAL PROVISIONS
16.1 WAIVER
Failure of any of the parties to insist promptly upon strict
compliance with any of the obligations of any other party under this Agreement
will not be deemed to constitute a waiver of the right to enforce strict
compliance.
16.2 INDEPENDENT CONTRACTORS
Selling Entities are each an independent contractor and not an
employee or subsidiary of Pacific Mutual or Distributor. Nothing contained in
this Agreement or otherwise shall be deemed to make any registered
representative of Broker/Dealer or any Subagent appointed by Agency an employee
or agent of Pacific Mutual or Distributor for tax or any other purposes.
Neither Pacific Mutual nor Distributor shall have any responsibility for
training or supervision of any such Subagent or registered representative or of
any other employee or affiliate of any Selling Entities.
16.3 ASSIGNMENT
No assignment of this Agreement or of commissions or other payments
under this Agreement shall be valid without prior written consent of Pacific
Mutual and Selling Entities. Any purported assignment in violation of this
Paragraph 16.3 is void.
16.4 NOTICE
Any notice required or otherwise given pursuant to this Agreement may
be given electronically by facsimile or electronic mail (but not orally by
telephone) or by mail, postage paid, (including any express mail service),
transmitted to the last address communicated by the receiving party to the
other parties to this Agreement. The current address for mailing purposes of
this Agreement shall be set forth on the signature page.
5
<PAGE> 6
16.5 SEVERABILITY
To the extent this Agreement may be in conflict with any applicable
law or regulation, this Agreement shall be construed in a manner consistent
with such law or regulation. The invalidity or illegality of any provisions of
this Agreement shall not be deemed to affect the validity or legality of any
other provision of this Agreement.
16.6 AMENDMENT
Except as expressly provided herein, this Agreement may be amended
only by a writing signed by all parties. The Schedules hereto may be amended
by Pacific Mutual or Distributor upon 10 days' written notice to Broker/Dealer
which shall be deemed received the earlier of actual receipt or 10 days after
mailing or transmission. The submission of an application for the Contracts by
Selling Entities after the date of any such amendment shall constitute such
party's agreement to such amendment. No amendment will impair the right to
receive commissions as accrued with respect to Contracts issued and
applications procured prior to the amendment.
16.7 TERMINATION
This Agreement may be terminated by any party for any reason upon 30
days' prior written notice. It may be terminated, for cause, by any party
immediately. Termination of this Agreement shall not impair the right to
receive commissions accrued with respect to applications procured prior to the
termination except as otherwise specifically provided in the applicable
Schedule D hereto.
16.8 SURVIVAL
All representations and warranties made in or pursuant to this
Agreement and the provisions of Paragraphs 11, 12 and 14.10 of this Agreement
shall survive the termination of this Agreement.
16.9 ARBITRATION AND GOVERNING LAW
The parties agree that, to the extent permitted by law, any
controversy related to the Agreement or breach thereof shall be submitted to
arbitration conducted under the Code of Arbitration of the NASD. This
Agreement shall be construed in accordance with the laws of the State of
California, without giving effect to the conflict of law provisions thereof.
Broker/Dealer and Agency consent to the jurisdiction of the courts of the State
of California and to the jurisdiction of federal courts located within
California.
16.10 PROPRIETARY INFORMATION
Selling Entities acknowledge that information pertaining to any
Distributor program or service is proprietary in nature and belongs exclusively
to Distributor. Selling Entities agree that they will not disclose any
information concerning Distributor programs or services to any person, for
consideration or otherwise, unless (a) Pacific Mutual or Distributor has
authorized such disclosure in writing or (b) if such disclosure is expressly
required by state or federal regulatory authorities and Pacific Mutual and
Distributor have received notice, in writing, of such disclosure.
16.11 ENTIRE AGREEMENT
This Agreement shall constitute the entire agreement among the parties
and supersedes all prior agreements and understandings, whether written or
verbal.
6
<PAGE> 7
By signing below, each of the undersigned agrees to have read and be
bound by the terms and conditions of this Agreement. Each of the undersigned
acknowledges receipt of a copy of this Agreement.
PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 Newport Center Drive
Newport Beach, CA 92660
By:_________________________________________________________
Name:_______________________________________________________
Title:______________________________________________________
By:_________________________________________________________
Name:_______________________________________________________
Title:______________________________________________________
PACIFIC MUTUAL DISTRIBUTORS, INC.
700 Newport Center Drive
Newport Beach, CA 92660
By:_________________________________________________________
Name:_______________________________________________________
Title:______________________________________________________
By:_________________________________________________________
Name:_______________________________________________________
Title:______________________________________________________
7
<PAGE> 8
_________________________________ _________________________________
GENERAL AGENT GENERAL AGENT
By:______________________________ By:______________________________
Signature Signature
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
_________________________________ _________________________________
GENERAL AGENT GENERAL AGENT
By:______________________________ By:______________________________
Signature Signature
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
_________________________________ _________________________________
GENERAL AGENT GENERAL AGENT
By:______________________________ By:______________________________
Signature Signature
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
_________________________________ _________________________________
GENERAL AGENT GENERAL AGENT
By:______________________________ By:______________________________
Signature Signature
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
_________________________________ _________________________________
GENERAL AGENT GENERAL AGENT
By:______________________________ By:______________________________
Signature Signature
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
8
<PAGE> 9
SCHEDULE A
PACIFIC MUTUAL LIFE INSURANCE COMPANY
CONTRACTS COVERED BY THIS AGREEMENT
Contract Name Contract Number
- ------------- ---------------
Pacific Innovations 96-00
Date:_____________________________
1
<PAGE> 10
SCHEDULE B
JURISDICTIONS IN WHICH
PACIFIC MUTUAL LIFE INSURANCE COMPANY
IS APPROVED FOR SALE OF CONTRACTS
COVERED BY THIS AGREEMENT
CONTRACT JURISDICTIONS
- -------- -------------
Pacific Innovations [To be completed at signing]
Date:_____________________________
1
<PAGE> 11
SCHEDULE C
GENERAL LETTER OF RECOMMENDATION
Selling Entities hereby certify to Pacific Mutual that all of the following
requirements will be fulfilled in conjunction with the submission of
licensing/appointment papers for all applicants as Subagents ("Applicant")
submitted by Agency. Selling Entities will, upon request, forward proof of
compliance with same to Pacific Mutual in a timely manner, including but not
limited to general background check information, NASD background
information/reports, fingerprint reports, etc. Selling Entities will promptly
forward Form U-5 termination notice with respect to Applicant if Broker/Dealer
is required to file one for Applicant.
1. We have made a thorough and diligent inquiry and investigation
relative to each applicant's identity, residence and business reputation and
declare that each applicant is personally known to us, has been examined by us,
is known to be of good moral character, has a good business reputation, is
reliable, is financially responsible and is worthy of a license. Our inquiries
and investigations were sufficient to meet the requirements of requisite state
insurance regulation, federal securities regulation and NASD requirements.
Each individual is trustworthy, competent, and qualified to act as an agent for
Pacific Mutual, and to hold himself out in good faith to the general public.
We vouch for each applicant.
2. We have on file a B-300, B-301 or U-4 form which was completed by each
applicant. We have fulfilled all the necessary investigative requirements for
the registration of each applicant as a registered representative through our
NASD member firm, and each applicant is presently registered as an NASD
registered representative.
The above information in our files indicates no fact or condition
which would disqualify the applicant from receiving a license, and all the
findings of all investigative information is favorable.
3. We certify that all educational requirements have been met for the
specific state in which each applicant is requesting a license, and that all
such persons have fulfilled the appropriate examination, education and training
requirements.
4. If the applicant is required to submit his or her picture, signature,
and securities registration in the state in which he or she is applying for a
license, we certify that those items forwarded to Pacific Mutual are those of
the applicant and that the securities registration and any insurance licenses
are true copies of the original.
5. We hereby warrant that the applicant is not applying for a license
with Pacific Mutual in order to place insurance chiefly or solely on his or her
life or property, lives or property of his or her relatives, or property or
liability of his or her associates.
6. We certify that each applicant will receive close and adequate
supervision in compliance with Selling Entities' written supervisory
procedures, and that we will make inspection when needed of any or all risks
written by these applicants, to the end that the insurance interest of the
public will be properly protected.
7. We will not permit any applicant to transact insurance as an agent
until duly licensed therefor. No applicants have been given a contract or
furnished supplies, nor have any applicants been permitted to write, solicit
business or act as an agent in any capacity, and they will not be so permitted
until the certificate of authority or license applied for is received.
8. We certify that Selling Entities and applicant shall have entered into
a written agreement pursuant to which: (i) applicant is appointed a Subagent of
Agency and a registered representative of Broker/Dealer; (ii) applicant agrees
that his/her selling activities relating to securities-regulated Contracts
shall be under the supervision and control of Broker/Dealer and his/her selling
activities relating to all other Contracts shall be under the supervision and
control of Agency; and (iii) applicant's right to continue to sell such
Contracts is subject to his/her continued compliance with such agreement and
any procedures, rules or regulations implemented by Selling Entities.
1
<PAGE> 12
SCHEDULE D-1
COMPENSATION SCHEDULE FOR
PACIFIC INNOVATIONS ANNUITY - INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE ACCUMULATION DEFERRED ANNUITY
(FORM 96-00)
This Schedule D-1 is attached to and made a part of the Agreement to which it
is attached. It is subject to the terms and conditions of the Agreement.
Pursuant to the Selling Agreement, Pacific Mutual and Distributor have the
right to terminate or amend this Schedule D-1 at their sole discretion (See
Paragraph 16.6). In no event shall Pacific Mutual be liable for the payment of
any compensation with respect to any solicitation made, in whole or in part, by
any person no appropriately licensed and registered prior to the commencement
of such solicitation.
Selling Entities shall forward to Pacific Mutual the first full payment
collected by Agency and Broker/Dealer, without deduction for compensation.
Selling Entities agree to promptly deliver Contracts and hold Pacific Mutual
harmless from and against any claim arising from market loss resulting from
delivery by Agency to the Contract owner as a result of late delivery.
After a change of Compensation Schedule or a change of Broker/Dealer,
compensation due on existing Contracts shall be payable to the Agency or
Broker/Dealer in accordance with the Schedule D-1 in effect at that time.
Moreover, when a Contract owner terminates a Broker/Dealer, no further
commissions or compensation due on existing Contracts after termination shall
be payable to the Agency or Broker/Dealer after the notice of termination is
received and accepted by Pacific Mutual.
1. COMPENSATION ELECTION
The undersigned Broker/Dealer may elect below the compensation schedule under
which commission payments will be based. Broker/Dealer may elect to be paid
under Option A and/or Option B. If both Option A and Option B are elected,
compensation will be payable under the Option elected by the Subagent/Registered
Representative. If the Registered Representative does not elect an Option for
compensation under an individual Contract, compensation will be paid under the
default Option elected by Broker/Dealer. If no Option is indicated below, this
Selling Agreement will be treated as if both Options were elected. If no
default Option is elected, Option B will be the default Option.
<TABLE>
<CAPTION>
OPTION A OPTION B
-------- --------
<S> <C> <C> <C>
Commission percent of premium
(See [paragraph] 2): 6.50% 5.50%
Trail Commission (See [paragraph] 3): --- 0.25%, thereafter
Commission reduction age (See [paragraph] 4): 75 75
Option Elected: [ ] [ ]
Default Option: [ ] [ ]
</TABLE>
2. COMMISSION CALCULATION: Commissions based on premium will be
calculated only on premium actually received and accepted by Pacific Mutual.
Commissions will be paid only on an earned basis.
3. TRAIL COMMISSION: Under Option B, no trail commissions will be paid
until after the end of the first Contract year. At that time, quarterly trail
commissions will be paid at the annual rate of 0.25% of the Contract's
accumulated value less any Contract debt at the beginning of the Contract
quarter, starting with the fifth Contract quarter. Trail commissions will be
payable on the next commission cycle at the beginning of each Contract quarter,
provided the Contract is in force on such commission cycle date.
1
<PAGE> 13
4. COMMISSION RATE CHANGE: The commission rate on premium received will
be reduced by 0.2% for each year the annuitant's attained age exceeds age 75 to
age 85. For example, at age 80, the commission rate is 5.5% under Option A and
4.5% under Option B. If there are joint annuitants, the younger annuitant's
attained age will be used. For purposes of this section, attained age shall be
determined as of the date that premium is actually received by Pacific Mutual.
Attained age shall be as defined in the Contract.
5. COMPENSATION PAYMENTS: Compensation on initial premium will be due to
the Agency and/or Broker/Dealer at the time of issuance of the Contract and for
all other premium payments at the time of the receipt and acceptance of premium
by Pacific Mutual. The amount, if any, and the time of payment of compensation
on replacements, changes, exchanges and other special cases and programs will
be governed by Pacific Mutual's underwriting and administrative rules then in
effect. If the agent or their immediate family purchases a Contract, they may
elect to have their commission withheld and instead an amount equal to Option A
will be credited to the Contract. With respect to any Contract, or group of
Contracts, that either Pacific Mutual or Distributor may, in its sole
discretion, determine to be a special case, or for which at the time the
application is submitted, the aggregate premium payment is greater than
$500,000, Pacific Mutual and Distributor may determine that the commissions in
this Schedule D-1 do not apply and establish an alternative commission schedule
for such Contract or group of Contracts.
In the event Selling Entities become Agency or Broker/Dealer of record with
respect to a Contract sold through another agency or broker/dealer,
compensation for that contract will be based upon the compensation option
election at time of sale of Contract, irrespective of Agency's or
Broker/Dealer's choice of compensation.
6. COMMISSION CHARGEBACKS: In the event a Contract for which a
commission has been paid is returned to Pacific Mutual or Distributor pursuant
to a "free look" right in the Contract, Selling Entities shall reimburse
Distributor 100% of commissions paid. In the event a Contract for which a
commission has been paid is deemed to be distributed or surrendered by the
Contract owner or a premium refunded by Pacific Mutual, Selling Entities shall
reimburse Distributor 100% of commissions paid if the distribution, surrender
or premium refund occurs within the first six months of the Contract and 50% of
commissions paid if the distribution, surrender or premium refund occurs within
the second six months of the Contract. In the event a Contract for which a
commission has been paid is rescinded by Pacific Mutual, decided by Pacific
Mutual in its sole discretion, Selling Entities shall reimburse Distributor
100% of the commissions paid. In the event Pacific Mutual determines that any
Subagent/Registered Representative or Selling Entities engage in any sales
practice which is detrimental to Pacific Mutual (as determined by Pacific
Mutual), Pacific Mutual may elect to charge back commissions associated with
the sale of Contracts associated with such practice or activity.
Distributor may deduct reimbursement amounts from any compensation otherwise
due to Broker/Dealer and/or Agency by Pacific Mutual and/or Distributor. If
the amount to be deducted exceeds compensation otherwise due, Broker/Dealer
will promptly reimburse Distributor before the next commission cycle or within
10 business days from the date of mailing of a written demand for
reimbursement, whichever is later. Broker/Dealer and Agency are jointly and
severally liable for such chargebacks.
2
<PAGE> 1
EXHIBIT 99.4(a)
Form of Individual Flexible Premium
Variable Accumulation Annuity Contract
<PAGE> 2
PACIFIC INNOVATIONS
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
o Investment Experience Reflected in Benefits
o Variable and Fixed Accumulation Before Annuity Date; Variable and Fixed
Annuity Payments Thereafter
o Death Benefit Proceeds Payable Before Annuity Date
o Participating
Please read your contract carefully. This is a legal contract between you, the
Owner, and us, Pacific Mutual Life Insurance Company, a mutual company.
We agree to pay the benefits of this Contract according to its provisions.
The consideration for this Contract is the application for it (copy or
confirmation is attached) and our receipt of the Purchase Payment(s).
CONTRACT LOAN AMOUNT IS LESS THAN 100% OF CONTRACT VALUE.
BENEFITS AND VALUES UNDER THIS CONTRACT MAY BE ON A VARIABLE BASIS. AMOUNTS
DIRECTED INTO ONE OR MORE OF THE VARIABLE INVESTMENT OPTIONS WILL REFLECT THE
INVESTMENT EXPERIENCE OF THOSE INVESTMENT OPTIONS. THESE AMOUNTS MAY INCREASE
OR DECREASE, AND ARE NOT GUARANTEED AS TO A DOLLAR AMOUNT. THE DETAILS OF THE
VARIABLE PROVISIONS BEGIN ON PAGE 10.
Right To Cancel - You may return this Contract within 10 days after you receive
it. To do so, mail it to us at our Service Center or to the agent who sold it
to you. This Contract will then be deemed void from the beginning. No
withdrawal fee will be imposed, and we will refund your [Contract Value,
including any fees and/or charges that were deducted from that Contract Value.]
[Purchase Payments.]
Signed at our Home Office, 700 Newport Center Drive, Newport Beach, California
92660.
Chairman and Chief Executive Officer Secretary
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
CONTRACT SPECIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 3
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PURCHASE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purchase Payment Allocation . . . . . . . . . . . . . . . . . . . . 9
Allocations During the Right to Cancel Period . . . . . . . . . . . 9
Minimum Investment Option Value . . . . . . . . . . . . . . . . . . 9
THE FIXED OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
VARIABLE INVESTMENT OPTIONS . . . . . . . . . . . . . . . . . . . . . . .10
Separate Account . . . . . . . . . . . . . . . . . . . . . . . . . .10
CONTRACT VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Fixed Option Value . . . . . . . . . . . . . . . . . . . . . . . . .11
Variable Account Value . . . . . . . . . . . . . . . . . . . . . . .11
Loan Account Value . . . . . . . . . . . . . . . . . . . . . . . . .11
CHARGES, FEES AND DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . .13
Administrative Fee . . . . . . . . . . . . . . . . . . . . . . . . .13
Annual Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . .13
Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Transfer Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Withdrawal Fee . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . .13
TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Amount Available for Withdrawal . . . . . . . . . . . . . . . . . .15
Special Restrictions - Fixed Option . . . . . . . . . . . . . . . .15
CONTRACT LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
DEATH BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Death Benefit Amount . . . . . . . . . . . . . . . . . . . . . . . .16
Guaranteed Minimum Death Benefit . . . . . . . . . . . . . . . . . .16
Death of Annuitant . . . . . . . . . . . . . . . . . . . . . . . . .16
Death of Owner . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Death of Owner Distribution Rules . . . . . . . . . . . . . . . . .17
Interest on Death Benefit Proceeds . . . . . . . . . . . . . . . . .18
BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Adding or Changing Your Beneficiary . . . . . . . . . . . . . . . .18
ANNUITY BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Choice of Annuity Date . . . . . . . . . . . . . . . . . . . . . . .18
Application of Contract Value . . . . . . . . . . . . . . . . . . .18
Your Selections . . . . . . . . . . . . . . . . . . . . . . . . . .19
Fixed and Variable Annuities . . . . . . . . . . . . . . . . . . . .19
Annuity Options . . . . . . . . . . . . . . . . . . . . . . . . . .19
Default Annuity Date and Options . . . . . . . . . . . . . . . . . .20
Amount of Payments . . . . . . . . . . . . . . . . . . . . . . . . .20
Fixed Annuity Payments . . . . . . . . . . . . . . . . . . . . . . .20
Conversion to Current Rates . . . . . . . . . . . . . . . . . . . .20
Variable Annuity Payments . . . . . . . . . . . . . . . . . . . . .20
Periodic Payments . . . . . . . . . . . . . . . . . . . . . . . . .21
Misstatement of Age or Sex . . . . . . . . . . . . . . . . . . . . .21
ANNUITY OPTION TABLES . . . . . . . . . . . . . . . . . . . . . . . . . .22
</TABLE>
i
<PAGE> 4
CONTRACT SPECIFICATIONS
<TABLE>
<S> <C>
SERVICE CENTER: SEND FORMS AND WRITTEN REQUESTS TO: SEND PAYMENTS TO:
Pacific Mutual Life Insurance Company Pacific Mutual Life Insurance Company
P.O. Box 7187 P.O. Box 100060
Pasadena, California 91109-7187 Pasadena, California 91189-0060
</TABLE>
Toll-free number: 1-800-722-5558 (between 6:00 a.m. and 5:00 p.m., Pacific
time)
Please use our toll-free number to present inquiries or obtain information
about your coverage and for us to provide assistance in resolving complaints.
Basic Contract - NON-QUALIFIED
Investment Options:
Variable Investment Options:
[Money Market Subaccount Mid-Cap Equity Subaccount
Managed Bond Subaccount Aggressive Growth Subaccount
Capital Income Subaccount International Subaccount
Blue Chip Subaccount ]
Fixed Option
Administrative Charge: 0.15%
Mortality and Expense Risk Charge: 1.25%
Annual Fee: $30 if Net Contract Value is less
than $50,000
Withdrawal Charge: Age of Premium
in contract years Charge Percent
1 7%
2 6%
3 5%
4 3%
5 1%
6 and over 0%
Contract Number: Contract Date:
Owner(s):
Annuitant(s): Age Sex
Initial Purchase Payment: Annuity Start Date:
3
<PAGE> 5
DEFINITIONS
PM, WE, OUR and US - Pacific Mutual Life Insurance Company.
YOU and YOUR - The person or persons named as Owner(s) in the Contract
Specifications. If there are Joint Owners, you and your means both Joint
Owners.
ACCOUNT VALUE - The amount of your Contract Value allocated to any one of the
Investment Options.
AGE - The Owner's or Annuitant's age, as applicable, at his or her last
birthday.
ANNUITANT - The person you name on whose life annuity payments may be
determined. An Annuitant's life may also be used to determine certain increases
in death benefits, and to determine the Annuity Date. If you designate Joint
Annuitants or a Contingent Annuitant, unless otherwise stated, "Annuitant"
means the sole surviving Annuitant. If your Contract is a Non-Qualified
Contract, you cannot change the Annuitant or change or add a Joint Annuitant.
If your Contract is a Qualified Contract, you may add a Joint Annuitant on the
Annuity Date.
ANNUITY DATE ("ANNUITY START DATE") - The date shown in the Contract
Specifications, or the date you later elect, if any, for the start of annuity
payments if the Annuitant is still living and the Contract is in force; or if
earlier, the date that annuity payments actually begin.
ANNUITY OPTIONS - Income options available for a series of payments after your
Annuity Date.
BENEFICIARY - The person you name who may receive any death benefit proceeds
payable on the death of the Annuitant or any Owner prior to the Annuity Date;
or any remaining annuity benefits payable on the death of the Annuitant after
the Annuity Date. If no Beneficiary is named or the Beneficiary does not
survive the Annuitant, and the Annuitant dies, then the Owner's estate will
have the rights of the Beneficiary. If you are not the Annuitant and you die
before the Annuitant, and before the Annuity Date, any death benefit proceeds
will be payable to the surviving Joint Owner, if any; otherwise to the
surviving Contingent Owner, if any; otherwise, to the Beneficiary, if living;
otherwise, to the Owner's estate.
BUSINESS DAY - Any day on which the value of an amount invested in a Subaccount
can be determined. If any transaction or event under this Contract is scheduled
to occur on a day that does not exist in a given calendar period, or on a day
that is not a Business Day, such transaction or event will be deemed to occur
on the next following Business Day, unless otherwise stated.
CODE - The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - The person, if any, you select who may become the
Annuitant if the Annuitant dies before your Annuity Date. You may add or
change your Contingent Annuitant prior to the Annuity Date provided the
existing Contingent Annuitant is not the sole surviving Annuitant. Any
Contingent Annuitant you name must not have attained age 86 as of your Contract
Date or, if you add or change a Contingent Annuitant, as of the date of the
addition or change.
CONTINGENT OWNER - The person, if any, you select who may succeed to your
rights as Owner of this Contract if all named Contract Owners die.
CONTRACT ANNIVERSARY - The same date, in each subsequent year, as your Contract
Date.
CONTRACT DATE - The date we issue your Contract, as shown in the Contract
Specifications. Contract Years, Contract Semiannual Periods, Contract Quarters
and Contract Months are measured from this date.
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CONTRACT DEBT - As of the end of any Business Day, the principal amount you
have outstanding on any loan under this Contract, plus any accrued and unpaid
interest.
CONTRACT VALUE - As of the end of any Business Day, your Variable Account
Value, plus your Fixed Option Value, and any Loan Account Value.
FIXED OPTION - Amounts allocated under your Contract to the Fixed Option are
held in our General Account and receive interest at rates declared periodically
(the "Guaranteed Interest Rate"), but not less than an annual rate of 3%.
FIXED OPTION VALUE - The aggregate amount of your Contract Value allocated to
the Fixed Option.
GENERAL ACCOUNT - Our General Account consists of all assets of PM, other than
those assets allocated to Separate Account B or to any of our other separate
accounts.
GUARANTEED INTEREST RATE - The interest rate guaranteed at the time of
allocation (or roll over) for the Guarantee Term on amounts allocated to the
Fixed Option. All Guaranteed Interest Rates are expressed as annual rates, and
interest is accrued daily. This rate will not be less than an annual rate of
3%.
GUARANTEE TERM - The period during which the amount you allocate to the Fixed
Option earns a specified Guaranteed Interest Rate. The maximum Guarantee Term
is up to one year. All Guarantee Terms end at midnight on the day prior to your
Contract Anniversary.
INVESTMENT OPTION - A Variable Account or Fixed Option offered under the
Contract.
LOAN ACCOUNT VALUE - The amount, including any interest accrued, held in the
Loan Account to secure any Contract Debt.
NET CONTRACT VALUE - Your Contract Value less any Contract Debt.
NON-NATURAL OWNER - A corporation or other entity which is a non-natural
person, unless the entity demonstrates to our satisfaction, or we otherwise
determine in our sole discretion, that the Contract should be treated, for
purposes of Section 72(s) of the Code, as owned by an individual (natural)
person.
NON-QUALIFIED CONTRACT - A Contract other than a Qualified Contract.
OWNER - The person(s) who has (have) all rights under this Contract. If your
Contract names Joint Owners, Owner means both Joint Owners. Any named Owner
must not have attained age 86 as of your Contract Date. If your Contract allows
you to change or add Owners after the Contract is issued, any newly-named or
added Owners, including Joint and/or Contingent Owners, must be under the age
of 86 at the time of change or addition.
PURCHASE PAYMENT (PREMIUM PAYMENT) - An amount paid to us by or on behalf of an
Owner as consideration for the benefits provided under this Contract.
QUALIFIED CONTRACT - A Contract that qualifies under the Code as an individual
retirement annuity ("IRA"), or a Contract purchased under a Qualified Plan that
qualifies for special tax treatment under the Code.
QUALIFIED PLAN - A retirement plan that receives favorable tax treatment under
Section 401, 403, 408, or 457 of the Code.
SEC - Securities and Exchange Commission.
SEPARATE ACCOUNT (SEPARATE ACCOUNT B) - A Separate Account of PM registered as
a unit investment trust under the Investment Company Act of 1940.
SERVICE CENTER - PM's mailing address shown in the Contract Specifications. We
will notify you of any change in our mailing address.
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SUBACCOUNT - An investment division of the Separate Account. Each Subaccount,
(a "Variable Investment Option" or "Variable Account") invests its assets in a
separate series or class of shares of a designated investment company.
SUBACCOUNT ANNUITY UNIT (ANNUITY UNITS) - Annuity Units are used to measure
variation in variable annuity payments. The amount of each variable annuity
payment (after the first payment) will vary with the value and number of your
Annuity Units in each Subaccount.
SUBACCOUNT UNIT - Subaccount Units are used to measure your Contract Value in
that Subaccount.
UNIT VALUE - The value of a Subaccount Unit ("Subaccount Unit Value") or
Subaccount Annuity Unit ("Subaccount Annuity Unit Value"). The Unit Value of
any Subaccount is subject to change on any Business Day. The fluctuations in
value reflect the investment results, and also reflect the daily deductions for
the mortality and expense risk charge and administrative fee. Changes in
Subaccount Annuity Unit Values also reflect an additional adjustment factor
that corrects for an assumed investment return of 5%. The Unit Value of a
Subaccount Unit and of a Subaccount Annuity Unit on any Business Day is
measured at or about 4:00 p.m. Eastern Time on each Business Day.
VARIABLE ACCOUNT (A "VARIABLE INVESTMENT OPTION") - A Subaccount of the
Separate Account or any separate account of PM which is available under your
Contract in which assets of PM are segregated from assets in its General
Account and other separate accounts.
VARIABLE ACCOUNT VALUE - The aggregate amount of your Contract Value allocated
to the Variable Accounts.
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GENERAL PROVISIONS
REPORTS TO OWNERS - At least once per year, we will send you a report that will
show your Contract Value, any Purchase Payments received, loan repayments,
transfers, withdrawals, applicable withdrawal charges and/or other charges
and/or fees incurred since the last report, and any other information that may
be required.
PAYMENTS, INSTRUCTIONS AND REQUESTS - Unless this Contract provides otherwise,
all Purchase Payments, loan repayments, instructions and requests must be
received in proper form at our Service Center at its mailing address. (See
DEFINITIONS - SERVICE CENTER). Any subsequent Purchase Payments, loan
repayments and requests for loans, transfers or withdrawals we receive in
proper form on any Business Day usually will be processed the same Business Day
unless the transaction or event is scheduled to occur on another day.
Generally, all other instructions and requests normally will be effective as of
the end of the day next following the Business Day we receive them in proper
form, unless the event is scheduled to occur on another day. We may require
that you provide signature guarantees or other safeguards for any instruction,
request or other document you may send to our Service Center. You acknowledge
and agree that we will not be liable for any loss, liability, cost or expense
of any kind or character for acting on instructions or requests submitted to us
that we reasonably believe to be genuine, provided we follow our procedures.
ENTIRE CONTRACT - This document, the attached application or confirmation
thereof, any subsequent applications to change this Contract or confirmation
thereof, and any riders and endorsements, constitute the entire Contract, and
supersede any and all prior agreements, whether oral or written, about the
terms of this Contract and the application. All statements made in the
application are representations and not warranties.
CONTRACT MODIFICATIONS - Modifications to this Contract or any waiver of our
rights or requirements under this Contract can only be made if in writing by an
authorized officer of PM. This Contract is intended to qualify as an annuity
contract for Federal income tax purposes. To that end, the provisions of this
Contract are to be interpreted and administered to ensure or maintain such tax
qualification, notwithstanding any other provisions to the contrary. Payments
and distributions under this Contract shall be made in a time and manner
necessary to maintain such qualification under the applicable provisions of the
Code. We reserve the right to amend this Contract and/or our administrative
procedures without consent (except for the states of Michigan, Pennsylvania,
South Carolina and Washington) to reflect any clarifications that may be needed
or are appropriate to maintain its tax qualification or to conform this
Contract to any applicable changes in the tax qualification requirements.
BASIS OF VALUES - A detailed statement showing how values are determined has
been filed with the state insurance departments. All values and reserves are at
least equal to those required by the laws of the state in which this Contract
is issued.
CLAIMS OF CREDITORS - Your Contract Value and other benefits under this
Contract are exempt from the claims of creditors to the extent permitted by
law.
REMOVAL OF BENEFICIARY OR CONTINGENT ANNUITANT - You may remove a Beneficiary
(other than an irrevocable Beneficiary) or a Contingent Annuitant from this
Contract by providing proper instructions to our Service Center.
OWNERSHIP - This Contract belongs to the Owner. The Owner is entitled to
exercise all rights available to the Owner under this Contract. If this
Contract is jointly owned, both Owners must join in any request to exercise
these rights. The Owner may exercise these rights under this Contract without
the consent of the Beneficiary (other than any irrevocable Beneficiary) or any
other person, except as otherwise required by law.
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ASSIGNMENT - You may assign all rights and benefits under this Contract before
the Annuity Date. We are not bound by any assignment until we have received
written notice satisfactory to us and we record the assignment. We are not
responsible for the validity of any assignment. If the Contract has been
absolutely assigned, the assignee becomes the Owner. You should consult with
your tax adviser before taking any action.
DELAY OF PAYMENTS - Generally, payments, transfers, or exchanges will be made
within seven days from receipt of the payment and/or request in a form
satisfactory to us. Payment of your withdrawal proceeds or transfers or
exchanges to or from a Variable Account may be delayed after receipt of your
withdrawal, transfer, or exchange request under certain circumstances. These
include:
o a closing of the New York Stock Exchange other than on a regular
holiday or weekend;
o a trading restriction by the SEC; or
o an emergency declared by the SEC.
We may delay payments or transfers from our General Account (which would
include payment of your withdrawal proceeds and transfers from the Fixed Option
or any loans, fixed annuity payments, and lump sum death benefit payments
unless state law requires otherwise) for up to six months after the requested
effective date of the transaction. Any amount delayed will, so long as it is
held under the Fixed Option, continue to earn interest at the Guaranteed
Interest Rate then in effect until the applicable Guaranteed Term in effect has
ended, and not less than 3% on an annual basis thereafter. If you make any
Purchase Payment by check, other than a cashier's check, we may delay making
payments to you until your check has cleared.
INCONTESTABILITY - We will not contest this Contract.
PROOF OF LIFE OR DEATH - Before we make a payment, we have the right to require
proof of the life or death of any person on whose life or death determines
whether, to whom, or how much we must pay any benefits under this Contract.
DIVIDENDS - The current dividend scale is zero and we do not expect dividends
to become payable. However, at the end of each Contract Year, we will determine
your dividend, if any; you may choose to have it paid in cash or added to your
Contract Value. If you do not make a choice, we will add it to your Contract
Value. We will allocate any dividend added to your Contract Value in accordance
with your most recent allocation instructions, unless you instruct us
otherwise. You should consult with your tax adviser before making any election.
WITHHOLDING TAXES - From all payments made under this Contract, we will
withhold any taxes required to be withheld by applicable Federal or State law,
unless the Owner or payee elects otherwise pursuant to applicable withholding
rules.
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PURCHASE PAYMENTS
PURCHASE PAYMENTS - This Contract will not be in force until we receive the
initial Purchase Payment. Your initial Purchase Payment is shown in the
Contract Specifications.
You may make additional Purchase Payments at any time before the Annuity Date,
while the Annuitant is living and this Contract is in force. Each additional
Purchase Payment must be at least $100 for Non-Qualified Contracts and $50 for
Qualified Contracts. We may limit the amount of any single Purchase Payment.
You must obtain our consent before making a Purchase Payment that will bring
your aggregate Purchase Payments over $500,000.
Purchase Payments are payable in U.S. dollars either at our Service Center or
through our agent. Checks should be made payable to Pacific Mutual Life
Insurance Company. If you make Purchase Payments by check other than a
cashier's check, your withdrawal proceeds and any refund under your Right to
Cancel may be delayed until your check has cleared. On request, a receipt for
the Purchase Payment signed by an officer of PM will be provided after payment.
PURCHASE PAYMENT ALLOCATION - Prior to your Annuity Date, you may allocate all
or part of your Purchase Payments to one or more of the Investment Options
available to you. The Investment Options available to you on the Contract Date
are shown on your Contract Specifications page. You may change your allocation
by sending us proper instructions (see GENERAL PROVISIONS: INSTRUCTIONS AND
REQUESTS). We will allocate any Purchase Payment according to your most recent
allocation instructions. We may reject any instruction or Purchase Payment that
does not comply with our requirements.
ALLOCATIONS DURING THE RIGHT TO CANCEL PERIOD - We will allocate your initial
Purchase Payment in accordance with your most recent allocation instructions.
However, if this Contract is issued in a state that requires us to refund all
Purchase Payments according to the Right to Cancel provision, we will allocate
the portion of your initial Purchase Payment designated for Variable Investment
Options to the Money Market Portfolio, and the portion of your initial Purchase
Payment designated for the Fixed Option to the Fixed Option. Any subsequent
Purchase Payments that are received before the Right to Cancel Transfer Date
will be allocated in the same manner as the initial Purchase Payment. On the
Right to Cancel Transfer Date, which occurs 15 days after your Contract is
issued, we will transfer the Account Value in the Money Market Portfolio to
your Variable Investment Options in accordance with your most recent allocation
instructions. We reserve the right to extend the Right to Cancel Transfer Date
by the number of days in excess of ten days that the issue state allows you to
return your Contract to us pursuant to your Right to Cancel right.
MINIMUM INVESTMENT OPTION VALUE - We reserve the right to require that, as a
result of any allocation to an Investment Option, any transfer, or any partial
withdrawal, your remaining Account Value in any Investment Option must meet a
minimum Account Value amount. We also reserve the right to transfer any
remaining Account Value that does not meet such minimum amount to your other
Investment Options on a prorata basis relative to your most recent allocation
instructions for those Investment Options.
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THE FIXED OPTION
We credit interest at the Guaranteed Interest Rate(s) on the amount of Purchase
Payments and/or Contract Value that you allocate or transfer to, or roll over
in, the Fixed Option, as described below.
Account Values under the Fixed Option are held in our General Account. Subject
to applicable law, we have sole discretion over the investment of our General
Account assets.
We will credit your Contract with a Guaranteed Interest Rate for up to one year
on that portion of your Purchase Payment and/or Contract Value allocated to the
Fixed Option, while the Annuitant is living and this Contract is in force, and
prior to the Annuity Date. We will credit the Guaranteed Interest Rate in
effect on the Business Day that the allocation and/or transfer is effective for
a Guarantee Term that ends at the end of that Contract Year.
At the end of any Guarantee Term, unless you instruct us otherwise, we will
roll over your Fixed Option Value attributed to that Guarantee Term to a new
Guarantee Term of up to one year. We will credit the Guaranteed Interest Rate
in effect at the time of the roll over on the amount of the Fixed Option Value
rolled over until the end of such Guarantee Term.
We will stop crediting interest on that portion of your Fixed Option Value you
withdraw, transfer (including transfers to the Loan Account), or convert to an
Annuity Option, including any: fees for withdrawals or transfers; withdrawal
charges; annual fee; and charges for premium taxes and/or other taxes. We do so
as of the end of the Business Day any such transaction is effective.
VARIABLE INVESTMENT OPTIONS
The Variable Investment Options consist of Subaccounts of the Separate Account.
The available Subaccounts as of the Contract Date are shown in the Contract
Specifications.
SEPARATE ACCOUNT - We established and maintain the Separate Account under the
laws of California. Any income, gains or losses (whether or not realized) from
the assets of each Variable Account are credited or charged against such
Variable Account without regard to our other income, gains or losses. Assets
may be put in our Separate Account to support this Contract and other variable
annuity contracts. Assets may be put in our Separate Account for other
purposes, but not to support contracts other than variable annuity contracts.
The assets of our Separate Account are our property. The portion of the
Separate Account assets equal to the reserves and other Contract liabilities
with respect to each Variable Account will not be chargeable with liabilities
arising out of any other business we conduct. We may transfer assets of a
separate account in excess of the reserves and other liabilities with respect
to that Variable Account to another separate account or to our General Account.
All obligations arising under the Contract are our general corporate
obligations. We do not hold ourselves out to be trustees of the Separate
Account assets.
We reserve the right, subject to compliance with the law then in effect, and
after any required regulatory approval, to:
o cease offering any Subaccount;
o add or change designated investment companies or their portfolios, or
other investment vehicles;
o add, delete or make substitutions for the securities and other assets
that are held or purchased by the Separate Account or any Variable
Account;
o permit conversion or exchanges between portfolios and/or classes of
contracts on the basis of Owners' requests;
o add, remove or combine Variable Accounts;
o combine the assets of any Variable Account with any other Separate
Account of PM or of any of its affiliates;
o register or deregister Separate Account B or any Variable Account under
the Investment Company Act of 1940 (the "1940 Act");
o operate any Variable Account as a managed investment company under the
1940 Act, or any other form permitted by law;
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o run any Variable Account under the direction of a committee, board, or
other group;
o restrict or eliminate any voting rights of Owners with respect to any
Variable Account or other persons who have voting rights as to any
Variable Account;
o make any changes required by the 1940 Act or other federal securities
laws;
o make any changes necessary to maintain the status of the Contracts as
annuities under the Code;
o make other changes required under federal or state law relating to
annuities;
o suspend or discontinue sale of the Contracts; and
o comply with law.
If any of these changes result in a material change in the underlying
investments of a Variable Account, we will notify you of such change.
We will not change the investment policy of the Separate Account without
following the filing and other procedures of the Insurance Commissioner in the
State of California nor without following the filing and other procedures
established by insurance regulators of the state of issue. Unless required by
law or regulation, an investment policy may not be changed without our consent.
From time to time we may make other Investment Options available to you. Any
new Investment Option may invest in portfolios of the designated investment
company, other designated investment companies or their portfolios, or in other
investment vehicles. New Investment Options will be made available to existing
Owners at our discretion. We will provide you with written notice of all
material details, including investment objectives and charges. We will comply
with the filing or other procedures established by applicable state insurance
regulators, to the extent required by applicable law.
CONTRACT VALUE
Your Contract Value on any Business Day is the sum of:
o your Fixed Option Value on that day;
o plus your Variable Account Value on that day;
o plus your Loan Account Value on that day.
We generally determine values as of 4:00 p.m., Eastern time, on each day that
the New York Stock Exchange is open, provided our administrative offices are
also open on that day.
FIXED OPTION VALUE - Your Fixed Option Value on any Business Day is your Fixed
Option Value on the prior Business Day increased by any additions to your Fixed
Option on that day as a result of any:
o interest;
o Purchase Payments received by us and allocated to the Fixed
Option;
o transfers to the Fixed Option, including transfers from the Loan
Account; and
decreased by any deductions from the Fixed Option on that day as a result of
any:
o transfers, including transfers to the Loan Account;
o withdrawals, including any withdrawal charges;
o amounts converted to an Annuity Option;
o charge for premium taxes and/or other taxes;
o fees for withdrawals and/or transfers; and
o annual fee.
VARIABLE ACCOUNT VALUE - Your Variable Account Value on any Business Day is the
sum of your Subaccount Values on that day.
Subaccount Value - Each Subaccount Value on any Business Day is the number of
Subaccount Units in that Subaccount that are credited to your Contract on that
day multiplied by the Unit Value of the Subaccount on that day.
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We credit your Contract with Subaccount Units for a Subaccount as a result of
any portion of your Purchase Payments received by us and allocated to that
Subaccount; and any transfers of your Contract Value to that Subaccount,
including transfers from the Loan Account.
We debit your Contract with Subaccount Units for a Subaccount as a result of
any deductions from the Subaccount, including those caused by any:
o withdrawals;
o transfers (including transfers to the Loan Account);
o amounts converted to an Annuity Option;
o fees for transfers and/or withdrawals;
o withdrawal charges;
o charge for premium taxes and/or other taxes; and
o annual fee.
The number of Subaccount Units we debit or credit to your Contract in
connection with a transaction is equal to the amount of the transaction
applicable to that Subaccount divided by that Subaccount's Unit Value on that
day. The number of your Subaccount Units in a Subaccount will change only if we
debit or credit Subaccount Units for the transactions above. The number of
Subaccount Units will not change because of subsequent changes in the
Subaccount Unit Value.
Subaccount Unit Value - The initial Unit Value of each Subaccount was $10 on
the Business Day the Subaccount began operations. At the end of each subsequent
Business Day, the Unit Value for each Subaccount is equal to (Y) times (Z)
where:
(Y) is the Unit Value for that Subaccount as of the end of the prior
Business Day; and
(Z) is the Net Investment Factor for that Subaccount for the period
(a "valuation period") between the prior Business Day and that Business
Day.
Net Investment Factor - Each Subaccount's Net Investment Factor for any
valuation period is equal to ( A / B ) - C where:
(A) is the net result of:
(a) the net asset value per share of the corresponding Portfolio
shares held by the Subaccount as of the end of that valuation
period;
(b) plus the per share amount of any dividend or capital gain
distributions made during that valuation period on the
Portfolio shares held by the Subaccount;
(c) plus or minus any per share charge or credit for any income
taxes, other taxes, or amounts set aside during that valuation
period as a reserve for any income and/or any other taxes for
which we determine to have resulted from the operations of the
Subaccount or Contract, and/or any taxes attributable,
directly or indirectly, to Purchase Payments;
(B) is the net asset value per share of the Fund shares held by the
Subaccount as of the end of the prior valuation period; and
(C) is a factor that we assess against the Subaccount's net assets held
by each Subaccount for the mortality and expense risk charge and the
administrative fee during that valuation period.
LOAN ACCOUNT VALUE - For those Qualified Contracts that permit loans, your Loan
Account Value as of the end of any Business Day is your Loan Account Value on
the prior Business Day, increased by any:
o interest; and
o Contract Value loaned on that day;
and decreased by any:
o loan principal repaid on that day; and
o earned interest transferred from the Loan Account on that day.
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CHARGES, FEES AND DEDUCTIONS
ADMINISTRATIVE FEE - We charge an administrative fee against assets held in
your Variable Investment Option(s). This fee is assessed daily at the annual
rate which is shown in the Contract Specifications. This fee is guaranteed not
to increase.
ANNUAL FEE - We charge an annual fee which is shown in the Contract
Specifications on each Contract Anniversary prior to your Annuity Date against
your Contract Value and at the time you make a full withdrawal, if your Net
Contract Value is less than $50,000 on that date. This fee is guaranteed not to
increase.
We will deduct the annual fee, if any, from each Investment Option on a prorata
basis relative to your Account Value in each Investment Option. Any annual fee
we deduct from a Subaccount will reduce the number of Subaccount Units credited
to your Contract.
No annual fee is charged when you annuitize or on payment of any death benefit
proceeds.
MORTALITY AND EXPENSE RISK CHARGE ("RISK CHARGE") - We impose a Risk Charge
against assets held in your Variable Investment Option(s). This charge is
assessed daily at the annual rate which is shown in the Contract
Specifications. The Risk Charge compensates us for the risks we assume that
mortality and expenses will vary from those we assumed. This charge is
guaranteed not to increase.
PREMIUM TAXES - From your Contract Value, we will deduct a charge for any taxes
we pay that are attributable to Purchase Payments or withdrawals. Such taxes
may include, but are not limited to: any federal, state or local premium taxes;
and any federal, state or local income, excise, business or any other type of
tax (or component thereof), measured by or based upon, directly or indirectly,
the amount of Purchase Payments we receive from you. We will normally deduct
this charge when you annuitize, however, we may impose this charge: on any
withdrawal; at the time any death benefit is paid; when the taxes are incurred;
or when we pay the taxes. We may base this charge on: the Contract Value; the
amount of the transaction; the aggregate amount of Purchase Payments we receive
under your Contract; or any other amount that, in our sole discretion, we deem
appropriate.
Other Taxes - We reserve the right to charge the Separate Account and/or deduct
from your Contract Value a charge for any federal, state or local taxes we pay
that are or become attributable to the Separate Account or Contract, including,
but not limited to, income taxes attributable to our operation of the Separate
Account or to our operations with respect to the Contract, or taxes
attributable, directly or indirectly, to Purchase Payments or payments we make
under the Contract.
TRANSFER FEE - We reserve the right to impose a transfer fee of $15 on each
transfer made in excess of fifteen transfers in any Contract Year. For this
purpose, we will treat each transfer request as a single transfer, regardless
of the number of Investment Options from which or to which portions of Account
Values are transferred. We will deduct any transfer fee we impose from your
Contract Value on a prorata basis relative to your Account Value in each
Investment Option immediately after the transfer.
WITHDRAWAL FEE - We reserve the right to impose a withdrawal fee of $15 on each
partial withdrawal made in excess of fifteen withdrawals in any Contract Year.
We will deduct from your Contract Value, on a prorata basis relative to your
Account Value in each Investment Option immediately after the withdrawal, any
such fee we impose on a partial withdrawal. For this purpose, we will treat
each withdrawal request as a single withdrawal, regardless of the number of
Investment Options or Guarantee Terms from which portions of Account Values are
withdrawn.
CONTINGENT DEFERRED SALES CHARGE ("WITHDRAWAL CHARGE") - Purchase Payments are
subject to a withdrawal charge which is shown in the Contract Specifications.
This charge may apply to amounts you withdraw under your Contract prior to your
Annuity Date, depending on the length of time each Purchase Payment has been
allocated to your Contract and on the amount you withdraw. We will not apply
the withdrawal charge on:
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o death benefit proceeds, except as provided under the DEATH OF OWNER
provisions for certain non-natural Owners;
o Contract Values converted to an Annuity Option;
o withdrawals by Contract Owners to meet the minimum distribution
rules for Qualified Contracts as they apply to amounts held under
the Contract; or
o withdrawals (full or partial), after the first Contract
Anniversary, if the Annuitant has been diagnosed with a medically
determinable condition that results in a life expectancy of twelve
(12) months or less, subject to medical evidence satisfactory
to us.
Amount of Withdrawal Charge - The amount of a withdrawal charge depends on how
long your Purchase Payments are held under this Contract. Each Purchase
Payment you make is considered to have a certain "age," depending on the length
of time since that Purchase Payment was effective. A Purchase Payment is "age
one" from the day it was effective until your next Contract Anniversary and
increases in "age" on that and each succeeding Contract Anniversary. When you
withdraw an amount, the "age" of any Purchase Payment(s) you withdraw
determines the level(s) of withdrawal charge as shown in the Contract
Specifications. We calculate your withdrawal charge by assuming that amounts
attributed to the "oldest" Purchase Payments are withdrawn first and earnings
are withdrawn last. We will not impose the withdrawal charge on withdrawals of
Purchase Payments held under your Contract more than five (5) years. The
withdrawal charge will be deducted proportionately from each Investment Option
selected for withdrawal.
Free Withdrawals - We will not impose a withdrawal charge on your withdrawals
to the extent that total withdrawals that are free of charge during the
Contract Year do not exceed 10% of the sum of your remaining Purchase Payments
at the beginning of the Contract Year that have been held under your Contract
for less than six years, plus any additional Purchase Payments applied to your
Contract during that Contract Year. Our calculations of the withdrawal charge
deduct this "free 10%" from your "oldest" remaining Purchase Payment(s) still
otherwise subject to the charge.
TRANSFERS
You may make transfers under this Contract subject to certain restrictions (see
TRANSFER AND WITHDRAWAL RESTRICTIONS) and any applicable fees (see CHARGES,
FEES AND DEDUCTIONS).
By providing a proper transfer request (see GENERAL PROVISIONS - PAYMENTS,
INSTRUCTIONS AND REQUESTS), you may request transfer of part or all of your
Contract Value, less Loan Account Value, in any Investment Option among other
Investment Options while your Annuitant is living and prior to the Annuity
Date.
If your transfer causes your remaining Account Value in any Investment Option
immediately after such transfer to be less than any minimum amount we may
establish, we may transfer such remaining Account Value to your other
Investment Options on a prorata basis relative to your most recent allocation
instructions. We may reject any transfer request. We also reserve the right to
limit the size of transfers, to limit the number and frequency of transfers, to
restrict transfers, and to suspend the right to transfer.
Transfers between Investment Options will normally be effective as of the end
of the Business Day on which we receive a proper transfer request.
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WITHDRAWALS
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract, while the Annuitant is living and your
Contract is in force; however, no partial withdrawals are allowed within 30
days of your Contract Date. If you make a full withdrawal, we require return of
your Contract, or a signed Lost Contract Affidavit, with your proper request.
You may choose to withdraw from any specific Investment Option(s), or from all
Investment Options proportionately. If you do not specify, we will make the
withdrawal from your Investment Options on a prorata basis relative to your
Account Value in each. Each partial withdrawal must be for $500 or more.
Withdrawals from the Fixed Option are subject to certain additional
restrictions described below.
If your partial withdrawal causes your Net Contract Value to be less than
$1,000 immediately after the withdrawal, we may terminate your Contract and
send you the withdrawal proceeds. If your partial withdrawal causes your
Account Value remaining in any Investment Option to be less than any minimum
amount we may establish, we reserve the right to transfer such remaining
Account Value to your other Investment Options on a prorata basis relative to
your most recent allocation instructions.
AMOUNT AVAILABLE FOR WITHDRAWAL - The amount available for withdrawal is your
Net Contract Value as of the end of the Business Day on which your withdrawal
request is effective, less any:
o annual fee;
o withdrawal fee;
o withdrawal charge; and
o charge for premium taxes and/or other taxes.
The amount we send to you (your "withdrawal proceeds") will also reflect any
required or requested federal and/or state income tax withholding.
If you make a full withdrawal, this Contract will end; we will have no further
obligations under this Contract.
TRANSFER AND WITHDRAWAL RESTRICTIONS
SPECIAL RESTRICTIONS ON WITHDRAWALS OR TRANSFERS FROM THE FIXED OPTION - All
withdrawals from the Fixed Option must occur within 30 days after your Contract
Anniversary. After the first or subsequent Contract Anniversary, you may
withdraw or transfer up to one-half (50%) of your Fixed Option Value in any
Contract Year. However, if you withdraw or transfer 50% of your Fixed Option
Value in any Contract Year, you may withdraw or transfer the remaining Fixed
Option Value in the subsequent Contract Year.
CONTRACT LOANS
If your Contract is issued under a Qualified Plan under Code Section 401 or 403
and your Qualified Plan permits, you may request a loan of a portion of your
Contract Value after your first Contract Year and before your Annuity Date. If
your Contract is a Non-Qualified Contract, or if your Qualified Plan does not
permit loans, loans under this Contract will not be available to you.
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<PAGE> 17
DEATH BENEFIT
A death benefit may be payable on proof of the death of the Annuitant or any
Owner before the Annuity Date, while this Contract is in force.
The proceeds of any death benefit payable will be payable upon receipt, in
proper form, of proof of death and instruction regarding payment of death
benefit proceeds. Such proceeds will equal the amount of the death benefit
reduced by any charge for premium taxes and/or other taxes and any Contract
Debt. These proceeds will be payable in a lump sum, as an Annuity Option under
this Contract or towards the purchase of any annuity option we then offer, or
in accordance with the Code (see DEATH OF OWNER DISTRIBUTION RULES). Any such
Annuity Option is subject to all restrictions and requirements as are other
annuities offered under this Contract.
DEATH BENEFIT AMOUNT - The Death Benefit Amount as of any Business Day prior to
your Annuity Date is equal to the greater of: (a) your Contract Value as of
that day; or (b) your aggregate Purchase Payments reduced by (i) an amount for
each withdrawal that has occurred, which is calculated by multiplying the
aggregate Purchase Payments received prior to each withdrawal by the ratio of
the amount of the withdrawal, including any withdrawal charge, to your Contract
Value immediately prior to the withdrawal; and (ii) any applicable charges
and/or fees on or before that day.
GUARANTEED MINIMUM DEATH BENEFIT ("GMDB") AMOUNT - The GMDB Amount will be
calculated only when a death benefit becomes payable as a result of the death
of the sole Annuitant, and is determined as follows: First, we calculate what
the Death Benefit Amount would have been as of the first Contract Anniversary
and each subsequent Contract Anniversary that occurs while the Annuitant is
living and before the Annuitant reaches his or her 81st birthday (each of these
Contract Anniversaries is a "Milestone Date"). We then adjust the Death Benefit
Amount for each Milestone Date by: (i) adding the aggregate amount of any
Purchase Payments received by us since that Milestone Date; (ii) subtracting an
amount for each withdrawal that has occurred since that Milestone date, which
is calculated by multiplying the Death Benefit Amount by the ratio of the
amount of each withdrawal that has occurred since that Milestone Date,
including any withdrawal charge, to the Contract Value immediately prior to the
withdrawal; and (iii) subtracting the aggregate amount of any previous charges,
fees, and/or taxes, since that Milestone Date.
The highest of these adjusted Death Benefit Amounts as of the Notice Date is
the GMDB Amount. The "Notice Date" is the day on which we receive, in proper
form, proof of death and instructions satisfactory to us regarding payment of
death benefit proceeds.
DEATH OF ANNUITANT - If the Annuitant dies on or before the first Contract
Anniversary (the first Milestone Date), or dies after the first Milestone Date
and had reached his or her 81st birthday on or prior to the first Milestone
Date, the death benefit will be equal to the Death Benefit Amount as of the
Notice Date.
If the Annuitant dies after the first Milestone Date and had not yet reached
his or her 81st birthday as of the first Milestone Date, the death benefit
will be equal to the greater of the Death Benefit Amount, or the GMDB Amount as
of the Notice Date. If an Annuitant dies before the Annuity Date, unless there
is a surviving Joint or Contingent Annuitant, we will pay the death benefit
proceeds to the Beneficiary, if living; otherwise to the Owner or the Owner's
estate. If an Annuitant dies and there is a surviving Joint Annuitant, the
surviving Joint Annuitant becomes the Annuitant. If there is no surviving Joint
Annuitant and there is a Contingent Annuitant, the Contingent Annuitant becomes
the Annuitant. Death benefit proceeds are payable only for the death of the
sole surviving Annuitant prior to the Annuity Date. If you are the Annuitant
and you die, we will determine the amount of any death benefit and the
Beneficiary under the Death of Annuitant provisions; and, if your Contract is a
Non-Qualified Contract, we will distribute any death benefit proceeds under the
Death of Owner Distribution Rules.
DEATH OF OWNER - If you are not the Annuitant, and you die before the
Annuitant, the amount of the death benefit will be equal to the Death Benefit
Amount as of the Notice Date. No GMDB Amount is payable upon the death of the
Owner.
If you die while the Annuitant is living and prior to the Annuity Date, we will
pay the death benefit proceeds to the surviving Joint Owner, if any. If there
is no surviving Joint Owner and there is a Contingent Owner,
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<PAGE> 18
we will pay the death benefit proceeds to the surviving Contingent Owner, if
any. If there is no surviving Contingent Owner, the death benefit proceeds will
be paid to the Beneficiary, if living; otherwise to the Owner's estate. If you
are not also the Annuitant, then, in the event the deaths of the Owner and
Annuitant are under circumstances where it cannot be determined who died first,
the Death Benefit will be calculated under the DEATH OF ANNUITANT provision of
this Contract and payment will be made in accordance with the DEATH OF OWNER
provisions of this Contract.
If you are a non-natural Owner of a Contract other than a Contract issued under
a Qualified Plan as defined in Section 401 or 403 of the Code, the Primary
Annuitant will be treated as the Owner of the Contract for purposes of the
DEATH OF OWNER DISTRIBUTION RULES. If there is a change in the Primary
Annuitant prior to the Annuity Date, such change will be treated as the death
of the Owner. The amount of the death benefit will be (a) the Contract Value if
the non-natural Owner elects to maintain the Contract and reinvest the Contract
Value into the Contract in the same amount as immediately prior to the
distribution, or (b) the Contract Value less any annual fee, withdrawal fee,
withdrawal charge, and charge for premium taxes and/or other taxes, if the
non-natural Owner elects a cash distribution. The amount of the death benefit
will be determined as of the Business Day we receive, in proper form, the
request to change the Primary Annuitant and instructions regarding maintaining
the Contract or cash distribution.
If both you and the Annuitant(s) are non-natural persons, no death benefit will
be payable, and any distribution will be treated as a withdrawal and subject to
any applicable annual fee, withdrawal fee, withdrawal charge, and charge for
premium taxes and/or other taxes.
DEATH OF OWNER DISTRIBUTION RULES - The following rules will determine whether
a distribution must be made under this Contract. The rules do not affect our
determination of the amount of benefit payable or distribution proceeds. If
there is more than one Owner, these rules apply on the date on which the first
of these joint Owners dies.
If the Owner dies before the Annuity Date, any death benefit proceeds under
this Contract shall be distributed within five years after the Owner's death.
In order to satisfy this requirement, the beneficiary (as that term applies
with respect to an Owner's Death) must receive:
o a lump sum payment; or elect to receive
o an annuity for life or over a period that does not exceed the life
expectancy of the beneficiary with annuity payments that start
within one year after the Owner's death.
If an election to receive an annuity is not made within 60 days of our receipt
of proof in proper form of the Owner's death or, if earlier, 60 days (or
shorter period as we permit) prior to the first anniversary of the Owner's
death, the lump sum option will be deemed elected, unless otherwise required by
law.
If the lump sum option is deemed elected, we will consider that deemed election
as receipt of instruction regarding payment of death benefit proceeds.
If the spouse of the deceased Owner is the sole surviving Beneficiary, or is
the sole surviving Joint or Contingent Owner, and has an unrestricted right to
receive the death benefit proceeds in one lump sum, the spouse may continue
this Contract as Owner rather than receive the death benefit proceeds.
If the Owner dies on or after the Annuity Date, but payments have not yet been
completed, then distributions of the remaining amounts payable under this
Contract must be made at least as rapidly as the rate that was being used at
the date of death.
If the Owner is a Non-natural Owner, the rules set forth in these DEATH OF
OWNER DISTRIBUTION RULES apply in the event of the death or change of the
Primary Annuitant. Primary Annuitant means the individual, the events in the
life of whom are of primary importance in affecting the timing or amount of the
payout under the Contract.
The rules set forth in these DEATH OF OWNER DISTRIBUTION RULES are intended to
satisfy the distributions-at-death timing requirements of Section 72(s) of the
Code. This Contract is deemed to incorporate all provisions of Section 72(s) of
the Code, or any successor provision, as interpreted by us and deemed necessary
to qualify this Contract as an annuity. We reserve the right to amend this
Contract and/or
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<PAGE> 19
change our administrative procedures without a signed request and to provide a
form of amendment (rider) to the Contract to satisfy any changes in these
requirements. These DEATH OF OWNER DISTRIBUTION RULES do not apply to Qualified
Contracts issued under Qualified Plans as defined in Section 401, 403 or 408 of
the Code or to an annuity that is a qualified funding asset as defined in Code
Section 130(d) but without regard to whether there is a qualified assignment.
INTEREST ON DEATH BENEFIT PROCEEDS - If payment of death benefit proceeds is
unduly delayed after the Notice Date, we will pay interest on the proceeds.
Interest will be paid at a rate of not less than 3% per year from the date we
receive due proof of death until the proceeds are paid or applied under an
Annuity Option. If the law in the state in which the Contract is issued
requires payment of a greater amount, we will pay that amount.
BENEFICIARY
Your Beneficiary is the person you name who may receive any death benefit
proceeds, or any remaining annuity payments after the Annuity Date, under your
Contract if the Annuitant or Owner dies. If you leave no surviving Beneficiary,
your estate may receive the death benefit proceeds under your Contract.
If the Beneficiary is a trustee, we will neither be responsible for verifying a
trustee's right to receive any death benefit proceeds payable, nor for how the
trustee disposes of any death benefit proceeds. If before payment of any death
benefit proceeds, we receive proper notice that the trust has been revoked or
is not in effect, then any death benefit proceeds payable will be paid to the
Owner's estate.
ADDING OR CHANGING YOUR BENEFICIARY - You may add, change, or remove any
Beneficiary, other than an irrevocable Beneficiary, subject to the terms of any
assignment, at any time prior to the death of the Annuitant or Owner, as
applicable, by sending us a request in proper form. However, if you have named
an irrevocable Beneficiary, you may not add any new Beneficiary, or remove or
change the irrevocable Beneficiary, without obtaining his or her written
consent in a form acceptable to us. You may remove any non-irrevocable
Beneficiary without obtaining the consent of the irrevocable Beneficiary.
Qualified Contracts may have additional restrictions on naming and changing
Beneficiaries. Any change or addition will take effect only when we receive all
necessary documents and record the change or addition.
ANNUITY BENEFITS
CHOICE OF ANNUITY DATE - Your Annuity Date is shown in the Contract
Specifications. If you did not select an Annuity Date in your application for
this Contract, we assigned an Annuity Date based on the type of this Contract
and the Annuitant's Age (see DEFAULT ANNUITY DATE AND OPTIONS).
You may change your Annuity Date by providing proper notice to us at least ten
(10) Business Days prior to your current Annuity Date or new Annuity Date,
whichever is earlier. Your Annuity Date may not be earlier than your first
Contract Anniversary and must occur on or before the day the younger Annuitant
reaches his or her 95th birthday, or earlier as required by state law. For
certain trusts, the Annuity Date must occur before the Annuitant's 100th
birthday. To meet minimum distribution requirements under the Code, your
Annuity Date for a Qualified Contract may need to occur on or before April 1 of
the calendar year following the year in which your Annuitant (who is the
Qualified Plan participant) reaches his or her 70-1/2 birthday. You may be
subject to additional restrictions under your Qualified Plan. You should
consult with your Qualified Plan administrator before you elect your Annuity
Date.
APPLICATION OF CONTRACT VALUE - Prior to the Annuity Date, you may elect to
convert all or part of your Net Contract Value, less any applicable charge for
premium taxes and/or other taxes, to any currently offered Annuity Option. You
may also elect a full withdrawal (subject to the terms of the withdrawal
provisions) in lieu of annuity payments under an Annuity Option. Before we make
any full withdrawal, we require return of this Contract (or a signed Lost
Contract Affidavit) to us. The aggregate net amount you convert must be
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at least $5,000; otherwise, we reserve the right to pay a single amount equal to
your withdrawal proceeds (see AMOUNT AVAILABLE FOR WITHDRAWALS).
If you convert only a portion of your Net Contract Value on your Annuity Date,
you may, at that time, elect not to have the remainder of your Contract Value
distributed, but instead to continue your Contract with that remaining Net
Contract Value. This option may or may not be available, or may be available
only for certain types of Contracts. If this option is available and you elect
it, you would choose a second Annuity Date for such Contract Value; all
references in this Contract to your Annuity Start Date (or Annuity Date) would,
with regard to such Contract Value, be deemed to refer to that second Annuity
Date. You should call your tax adviser for more information if you desire this
option.
YOUR SELECTIONS - Prior to the Annuity Date, you may make three selections
about the annuity payments. First, you may choose whether you want those
payments to be a fixed-dollar amount or a variable-dollar amount, or both.
Second, you may choose the form of annuity payments (Annuity Option). Third,
you may choose to have annuity payments made monthly, quarterly, semiannually,
or annually.
The first annuity payment on the Annuity Date will be sent on the day following
the Annuity Date and must be at least $250. We may reduce your payment
frequency if the first annuity payment is less than $250. If you elect annuity
payments for a Period Certain Only, we also reserve the right to reduce the
Period Certain to meet the $250 minimum first payment. After the Annuity Date,
you may not change the Annuity Option, or surrender the Contract for payment of
amounts converted into a variable annuity and/or fixed annuity.
FIXED AND VARIABLE ANNUITIES - You may choose a fixed annuity (with
fixed-dollar payments), a variable annuity (with variable-dollar payments), or
you may choose a combination of both. If you select a variable annuity, you may
choose any Subaccounts for your annuity. If you select a variable annuity, on
your Annuity Date, we will transfer that portion of your Net Contract Value
that you indicate to the Subaccount(s) you choose. We will apply the net amount
you convert to a fixed annuity and/or a variable annuity (and in this instance,
to each Subaccount), based on your relative Account Value in each Investment
Option on the Annuity Date. Any net amount you convert to a fixed annuity will
be held in our General Account (but not under the Fixed Option).
Each periodic payment under the fixed annuity will be equal to the amount of
your first fixed annuity payment (unless you elect a joint and survivor life
annuity with reduced survivor payments). The amount of each variable annuity
periodic payment will vary with the investment results of the Subaccount(s) you
select. After the Annuity Date, you may exchange the Annuity Units in any
Subaccount(s) for Annuity Units in any other Subaccount(s) up to four times in
any twelve month period. We reserve the right to limit the Subaccounts
available, to change the number and frequency of exchanges, and to change the
number of Subaccounts you may choose.
In choosing an Annuity Option, you must submit your Option request to us in
proper form.
ANNUITY OPTIONS - The following forms of annuity payments are available under
this Contract. Additional options may become available in the future:
Option 1: Life Only. Periodic payments are made to the designated payee
during the Annuitant's lifetime. Payments stop when the Annuitant
dies.
Option 2: Life with Period Certain. Periodic payments are made to the
designated payee during the Annuitant's lifetime, with payments
guaranteed for a specified period. You may choose to have payments
guaranteed from 5 through 30 years (in full years only). If the
Annuitant dies before the guaranteed payments are completed, we pay
the Beneficiary the remainder of the guaranteed payments.
Option 3: Joint and Survivor Life. Periodic payments are made during the
lifetime of the Primary Annuitant. After the death of the Primary
Annuitant, periodic payments are based on the life of the secondary
Annuitant named in the election if and so long as such secondary
Annuitant lives. Payments made based on the life of the secondary
Annuitant may be in installments equal to 50%, 66-2/3% or 100% (as
specified in the election) of the original payment amount
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payable during the lifetime of the Primary Annuitant. If you elect
a reduced payment based on the life of the secondary Annuitant,
fixed annuity payments will be equal to 50% or 66-2/3% of the
original fixed payment payable during the lifetime of the Primary
Annuitant; variable annuity payments will be determined using 50%
or 66-2/3%, as applicable, of the number of Annuity Units for each
Subaccount credited to the Contract. Payments stop when both
Annuitants have died.
Option 4: Period Certain Only. Periodic payments are made over a specified
period. You may choose to have payments continue from 5 through 30
years (in full years only). If the Annuitant dies before the
guaranteed payments are completed, we pay to the Beneficiary the
remainder of the guaranteed payments.
DEFAULT ANNUITY DATE AND OPTIONS - If this is a Non-Qualified Contract and you
did not choose an Annuity Date when you submitted your application for this
Contract, your Annuity Date is the Annuitant's 95th birthday. If there are
Joint Annuitants, the Annuity Date will be based on the younger Annuitant's
birthday, unless otherwise required by law. If this is a Qualified Contract and
you did not choose an Annuity Date, your Annuity Date is April 1 of the
calendar year following your Annuitant's 70-1/2th birthday; if there are Joint
Annuitants, the Annuity Date will be based on the birthday of the Annuitant who
is the Qualified Plan participant. If the Annuitant has attained age 70-1/2
when the Contract is issued, the Annuity Date is April 1 of the calendar year
following the first Contract Anniversary.
If you do not elect an Annuity Option, your Net Contract Value, less any
applicable charge for premium taxes and/or other taxes, when converted, will,
subject to our minimum requirements, be converted as follows:
o the net amount from your Fixed Option Value will be converted to a
fixed annuity and held in our General Account, and
o the net amount from your Variable Account Value will be applied to
a variable annuity and applied to the Subaccounts in proportion to
your Account Value in each Subaccount on the Annuity Date.
If this is a Non-Qualified Contract, or a Qualified Contract and you are not
married, your Annuity Option will be Life with 10 Year Period Certain. If this
is a Qualified Contract and you are married, your Annuity Option will be Joint
and Survivor Life, with survivor payments of 50%, and your spouse will
automatically be named as the secondary Annuitant. If you do not elect your
frequency of payments, we will make payments based on our most frequent
schedule that results in an initial annuity payment of at least $250.
AMOUNT OF PAYMENTS - The first annuity payment amount depends on the form of
annuity, the payment frequency you select, and whether you select a fixed
annuity and/or a variable annuity. If you do not choose the Period Certain Only
Option, the amount will depend on the Age of the Annuitant(s), the Annuity
Date, and the sex of the Annuitant(s), unless unisex factors apply.
FIXED ANNUITY PAYMENTS - The minimum guaranteed income purchased per $1,000 of
the net amount applied to a fixed annuity is based on an annual interest rate
of 3% and the 1983a Mortality Table with the ages set back ten (10) years.
CONVERSION TO CURRENT RATES - The annuity payments made will be based on the
greater of:
o our current income factors in effect for this Contract on your
Annuity Date; or
o our guaranteed income factors.
The dollar amount of any payments after the first annuity payment is specified
during the annuity payment period according to the provisions of your elected
Annuity Option.
VARIABLE ANNUITY PAYMENTS - Your Subaccount Annuity Units. For each Subaccount,
we divide the amount of the initial variable annuity payment from each
Subaccount by the Annuity Unit Value for that Subaccount (the "Annuity Unit
Value") on the Annuity Date, to obtain the number of Annuity Units for that
Subaccount. The number of your Annuity Units in each Subaccount will not change
unless exchanges of
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Annuity Units are made (or if the Joint and Survivor Annuity option is elected
and the Primary Annuitant dies first), but the Annuity Unit Value of those
Annuity Units will vary.
Your Subsequent Variable Payments. The amount of each subsequent variable
annuity payment will be the sum of the amounts payable based on your Annuity
Units in each Subaccount. To determine the amount payable for each Subaccount,
we multiply the number of your Annuity Units in that Subaccount by their
Annuity Unit Value on the day in each payment period that corresponds to the
Annuity Date.
Annuity Unit Value - The initial Annuity Unit Value for each Subaccount was
arbitrarily set at $10 on the Business Day the Subaccount began operations. At
the end of each subsequent Business Day, the Annuity Unit Value for each
Subaccount is equal to (A x B) x C where:
(A) is the Subaccount's Annuity Unit Value for that Subaccount as of the
end of the prior Business Day;
(B) is the Net Investment Factor for that Subaccount for that valuation
period; and
(C) is an interest factor to offset the effect of the assumed interest
rate of 5% per year, which is built into the Annuity Option Tables.
We generally calculate the Annuity Unit Value of each Subaccount at or about
4:00 p.m., Eastern time, on each day the New York Stock Exchange is open,
provided our administrative offices are also open that day.
We guarantee that the amount of each subsequent annuity payment will not be
affected by variations in our expenses or in mortality experience.
PERIODIC PAYMENTS - The first payment under these Options will be determined on
the Annuity Date and will be made on the day following the Annuity Date. For a
Designated Beneficiary entitled to a death benefit due to the death of the
Annuitant, the first payment will be made on the first day of the calendar
month, or earlier at our option, next following the day we receive due proof of
the Annuitant's death and instructions regarding payment, (called the "Payment
Start Date"), and such other documentation as we may require. Subsequent
payments will be determined on the day in each payment period that corresponds
to the Payment Start Date and will be made on the following day.
MISSTATEMENT OF AGE OR SEX - We may require proof of the Annuitant's Age and
sex before starting annuity payments. If the Age or sex (or both) of the
Annuitant are incorrectly stated in this Contract, we will correct the amount
payable to equal the amount that the Net Contract Value, less any charge for
premium taxes and/or other taxes, under this Contract would have purchased for
the Annuitant's correct Age and sex, if applicable. If we make the correction
after annuity payments have started, and we have made overpayments, we will
deduct the amount of the overpayment, with interest at 3% per year, from any
payments due then or later. If we have made underpayments, we will add the
amount, with interest at 3% a year, of the underpayments to the next payment we
make after we receive proof of the correct sex and/or date of birth.
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ANNUITY OPTION TABLES
For the fixed annuity option and the initial variable annuity benefit, the
Tables below illustrate the minimum guaranteed monthly income purchased per
$1,000 of the net amount applied. The actuarial basis for the fixed annuity
option Tables is the 1983a Annuity Mortality Table with the ages set back ten
(10) years with interest at an annual rate of 3%. The Tables also illustrate
the minimum rates for the first monthly variable annuity payment per $1,000 of
the net amount applied to the variable annuity payment option. The rates for
variable annuity payments are based on interest at the annual rate of 5% and
the 1983a Annuity Mortality Table with the ages set back ten (10) years.
Subsequent payments may be higher or lower than the first payment, based on the
investment performance of the Subaccount(s) you elect and whether you exchange
Subaccount Annuity Units.
These Tables provide for sex-distinct and unisex payment income factors for
life payment options. For some Qualified Plans and in some states, the use of
sex-distinct income factors are prohibited. For those Qualified Plans and in
those states, we use blended unisex income factors for life payment options,
whether the Annuitant is male or female.
We will provide rates for any payment frequency, interest rate, age or sex,
combinations thereof, and/or payout percentage or any annuity option, if
applicable, that we offer if they are not shown in the Tables that follow.
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OPTIONS 1 AND 2 - SINGLE LIFE ANNUITIES WITH GUARANTEED PAYMENTS FOR:
<TABLE>
<CAPTION>
FIXED ANNUITY RATES
--------------------------------------------------------------------------------------------------------
MALE AT 3% FEMALE AT 3% UNISEX AT 3%
---------------------- ---------------------- ----------------------
AGE NONE 10 YR. 20 YR. NONE 10 YR. 20 YR. NONE 10 YR. 20 YR.
--- ---- ----- ----- ---- ----- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 3.04 3.03 3.03 2.93 2.93 2.93 2.99 2.98 2.98
35 3.14 3.14 3.13 3.02 3.02 3.01 3.08 3.08 3.07
40 3.28 3.27 3.26 3.13 3.12 3.12 3.20 3.20 3.19
45 3.44 3.44 3.41 3.26 3.26 3.24 3.35 3.35 3.33
50 3.66 3.64 3.60 3.42 3.42 3.40 3.54 3.54 3.50
55 3.93 3.90 3.82 3.63 3.63 3.59 3.78 3.77 3.71
60 4.27 4.22 4.08 3.90 3.89 3.82 4.09 4.06 3.96
65 4.70 4.62 4.39 4.25 4.22 4.11 4.48 4.43 4.25
70 5.28 5.14 4.71 4.72 4.66 4.44 5.00 4.90 4.58
75 6.10 5.81 5.02 5.35 5.22 4.79 5.73 5.52 4.92
80 7.23 6.61 5.27 6.25 5.96 5.12 6.74 6.30 5.20
85 8.82 7.49 5.42 7.56 6.89 5.35 8.18 7.20 5.39
90 11.06 8.33 5.49 9.53 7.89 5.47 10.28 8.12 5.48
95 14.16 8.97 5.51 12.48 8.74 5.50 13.30 8.86 5.51
</TABLE>
<TABLE>
<CAPTION>
VARIABLE ANNUITY RATES
--------------------------------------------------------------------------------------------------------
MALE AT 5% FEMALE AT 5% UNISEX AT 5%
---------------------- ---------------------- ----------------------
NONE 10 YR. 20 YR. NONE 10 YR. 20 YR. NONE 10 YR. 20 YR.
---- ----- ----- ---- ------ ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 4.38 4.37 4.36 4.29 4.29 4.29 4.34 4.33 4.33
35 4.46 4.46 4.44 4.36 4.35 4.35 4.41 4.41 4.40
40 4.57 4.56 4.54 4.44 4.44 4.42 4.51 4.50 4.49
45 4.71 4.70 4.67 4.55 4.54 4.52 4.63 4.62 4.60
50 4.91 4.89 4.82 4.69 4.68 4.65 4.80 4.78 4.74
55 5.16 5.12 5.02 4.87 4.86 4.81 5.02 4.99 4.92
60 5.48 5.41 5.24 5.12 5.09 5.01 5.30 5.26 5.13
65 5.89 5.79 5.51 5.44 5.40 5.26 5.67 5.60 5.39
70 6.46 6.28 5.80 5.89 5.80 5.55 6.18 6.05 5.68
75 7.27 6.91 6.08 6.51 6.34 5.87 6.89 6.64 5.98
80 8.41 7.68 6.29 7.39 7.05 6.16 7.90 7.38 6.23
85 10.02 8.52 6.43 8.72 7.93 6.37 9.36 8.24 6.40
90 12.29 9.30 6.49 10.71 8.88 6.47 11.49 9.10 6.48
95 15.42 9.90 6.51 13.70 9.68 6.50 14.55 9.80 6.51
</TABLE>
23
<PAGE> 25
OPTION 3 - JOINT AND SURVIVOR LIFE
PRIMARY ANNUITANT
MALE AGE
50% SURVIVOR
<TABLE>
<CAPTION>
60 65 70 75 80 85
--------------------------------------------------------------------------------------------------------------
3% 5% 3% 5% 3% 5% 3% 5% 3% 5% 3% 5%
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60 3.91 5.12 4.13 5.34 4.39 5.60 4.69 5.92 5.02 6.30 5.38 6.73
FEMALE 65 3.99 5.19 4.25 5.43 4.54 5.73 4.88 6.09 5.26 6.51 5.67 6.98
AGE 70 4.06 5.25 4.36 5.53 4.70 5.87 5.10 6.27 5.55 6.75 6.03 7.29
75 4.12 5.31 4.46 5.62 4.85 6.00 5.32 6.47 5.86 7.03 6.45 7.66
80 4.17 5.36 4.54 5.70 4.98 6.13 5.54 6.67 6.18 7.33 6.91 8.08
85 4.21 5.40 4.60 5.77 5.09 6.24 5.72 6.86 6.49 7.63 7.40 8.54
--------------------------------------------------------------------------------------------------------------
</TABLE>
PRIMARY ANNUITANT
UNISEX AGE
50% SURVIVOR
<TABLE>
<CAPTION>
60 65 70 75 80 85
--------------------------------------------------------------------------------------------------------------
3% 5% 3% 5% 3% 5% 3% 5% 3% 5% 3% 5%
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60 3.84 5.05 4.07 5.27 4.34 5.54 4.65 5.86 5.00 6.24 5.39 6.69
UNISEX 65 3.90 5.10 4.17 5.35 4.47 5.65 4.83 6.01 5.23 6.44 5.68 6.94
AGE 70 3.96 5.15 4.25 5.43 4.60 5.76 5.02 6.17 5.49 6.66 6.03 7.24
75 4.00 5.19 4.32 5.49 4.72 5.87 5.20 6.34 5.76 6.91 6.41 7.58
80 4.03 5.23 4.38 5.55 4.81 5.96 5.36 6.49 6.02 7.15 6.81 7.96
85 4.05 5.25 4.42 5.59 4.88 6.04 5.49 6.62 6.25 7.38 7.20 8.33
--------------------------------------------------------------------------------------------------------------
</TABLE>
OPTION 4 - PERIOD CERTAIN ONLY
<TABLE>
<CAPTION>
MONTHLY MONTHLY MONTHLY MONTHLY
INCOME INCOME INCOME INCOME
--------------- --------------- --------------- ---------------
3% 5% 3% 5% 3% 5% 3% 5%
YEARS FIXED VARIABLE YEARS FIXED VARIABLE YEARS FIXED VARIABLE YEARS FIXED VARIABLE
----- ----- -------- ----- ----- -------- ----- ----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 17.91 18.74 12 8.24 9.16 19 5.73 6.71 26 4.59 5.65
6 15.14 15.99 13 7.71 8.64 20 5.51 6.51 27 4.47 5.54
7 13.16 14.02 14 7.26 8.20 21 5.32 6.33 28 4.37 5.45
8 11.68 12.56 15 6.87 7.82 22 5.15 6.17 29 4.27 5.36
9 10.53 11.42 16 6.53 7.49 23 4.99 6.02 30 4.18 5.28
10 9.61 10.51 17 6.23 7.20 24 4.84 5.88
11 8.86 9.77 18 5.96 6.94 25 4.71 5.76
--------------- --------------- --------------- ---------------
</TABLE>
24
<PAGE> 1
EXHIBIT 8
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this 11th day of March, 1997, by and between
Pacific Mutual Life Insurance Company, a mutual life insurance company
domiciled in California (the "Company"), on its behalf and on behalf of the
segregated asset accounts of the Company listed on Exhibit "A" to this
Agreement (the "Separate Accounts"); Pacific Innovations Trust, a Delaware
business trust ("Fund"); Provident Distributors, Inc., a Delaware corporation
("Distributor"); and Bank of America National Trust and Savings Association, a
national banking association ("Manager").
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act") and the Fund is
authorized to issue separate classes of shares of beneficial interests
("shares"), each representing an interest in a separate portfolio of assets
known as a fund ("portfolio") and each portfolio has its own investment
objective, policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to the Separate Accounts that fund variable annuity contracts and
variable life insurance contracts ("Variable Contracts") and to serve as an
investment medium for Variable Contracts of the Company and other portfolios
which may be established in the future; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good
1
<PAGE> 2
standing of the National Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, the Manager is a national banking association; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company wishes to purchase shares of one or more of the Fund
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants hereinafter set forth, the parties hereby agree as
follows:
ARTICLE I. - SALE OF FUND SHARES
1.1 The Distributor agrees to sell to the Company those shares of
the portfolios offered and made available by the Fund and identified on Exhibit
"B" ("Portfolios") that the Company orders on behalf of its Separate Accounts,
and agrees to execute such orders on each day on which the Fund calculates its
net asset value pursuant to rules of the SEC ("business day") at the net asset
value next computed after receipt and acceptance by the Fund or its designee of
the order for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares
of the Portfolio for purchase at the applicable net asset value per share by
the Company on behalf of its Separate Accounts; provided, however, that the
Trustees of the Fund may refuse to sell shares of any Portfolio to any person,
or suspend or terminate the offering of shares of any Portfolio, if such action
is required by law or by regulatory authorities having jurisdiction over it, in
the sole discretion of the Trustees, acting in good faith and in light of the
Trustees' fiduciary duties under applicable law, necessary in the best
interests of the shareholders of any Portfolios.
2
<PAGE> 3
1.3 The Fund and the Distributor agree that shares of the
Portfolios of the Fund will be sold only to the Company, its Separate Accounts,
and other persons affiliated with the Company, consistent with each Portfolio
being adequately diversified pursuant to Section 817(h) of the Internal Revenue
Code of 1986, as amended ("Code") and the regulations thereunder. No shares of
any Portfolio will be sold directly to the general public. No shares of any
Portfolio will be sold directly to any other insurance company or its separate
account(s) or to any person without the mutual consent of the Fund, the Manager
and the Company.
1.4 The Fund and Distributor will not sell shares of the Fund to
any separate account to serve as an investment vehicle for variable life
insurance contracts unless the Fund has first obtained an appropriate exemptive
order from the SEC if required by the 1940 Act and the rules thereunder, to the
extent necessary to permit "mixed funding" if the Fund offers its shares to a
variable life insurance Separate Account of the Company, and, if applicable, to
permit "shared funding" if the Fund offers its shares to separate accounts
funding variable annuity or variable life insurance contracts of unaffiliated
insurance companies or to any other person. In such event, all parties to this
Agreement agree to comply with any applicable conditions imposed under any
exemptive order issued by the SEC, or any applicable conditions specified in
Rule 6e-2 or Rule 6e-3(T) under the 1940 Act (or, if permanently adopted, Rule
6e-3), whichever is applicable. The Fund and Distributor will not sell shares
of the Fund to any Separate Account funding variable life insurance contracts
unless there is in effect an agreement containing provisions necessary to
comply with any applicable conditions of an SEC exemptive order, Rule 6e-2 or
6e-3(T) (or, if permanently adopted, Rule 6e-3), whichever is applicable.
3
<PAGE> 4
1.5 Upon receipt of a request for redemption in proper form from
the Company, the Fund agrees to redeem in cash any full or fractional shares of
the Portfolio held by the Company, its Separate Accounts, and other persons
affiliated with the Company, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its designee of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemptions shall be paid
in federal funds ordinarily on the next business day following receipt by the
Fund or its designee of the order for redemption; however the Fund reserves the
right to postpone payment upon redemption consistent with Section 22(e) of the
Act and any Rules thereunder.
1.6 For purposes of Sections 1.1 and 1.5, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Separate Account, and receipt by such designee shall constitute receipt by the
Fund; provided that the Company receives the order by 4:00 p.m. New York City
time, or the close of the New York Stock Exchange if earlier, and the Fund
receives notice of such order by 10:00 a.m., New York City time on the
following business day.
1.7 The Company shall pay for shares of the Portfolio on the
business day next following the day the Company places an order to purchase
shares of the Portfolios, except with respect to shares of any Portfolio of the
Fund ("Acquired Portfolio") ordered by the Company for a Separate Account or
any subaccount thereof in connection with an exchange or transfer from another
Separate Account or another subdivision of a Separate Account under the
Variable Contracts, the Company shall pay for shares of the Acquired Portfolio
on the latter of (1) the next business day after an order to purchase the
shares is
4
<PAGE> 5
made in accordance with Section 1.1 hereof, or (2) on the same business day
that the Separate Account or subdivision from which the exchange or transfer is
being made receives payment from the investment company portfolio in which it
invests. Payment shall be in federal funds transmitted by wire or by any other
method mutually agreed upon by the parties hereto.
1.8 Issuance and transfer of shares of the Portfolios will be by
book entry only, unless otherwise required by state insurance authorities.
Fund and Distributor agree that shares ordered from the Fund will be recorded
properly in an appropriate title for the Separate Accounts or the appropriate
subaccounts of the Separate Accounts.
1.9 The Fund shall promptly furnish same-day notice (by wire or
telephone or facsimile, followed by written confirmation) to the Company of any
income dividends or capital gain distributions payable on the shares of the
Portfolios. The Company hereby elects to reinvest in the Portfolios all such
dividends and distributions as are payable on a Portfolio's shares and to
receive such dividends and distributions in additional shares of that
Portfolio. The Company reserves the right to revoke this election in writing
and to receive all such dividends and distributions in cash. The Fund shall
notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10 The Fund shall instruct its recordkeeping agent to advise the
Company on each business day of the net asset value per share for each
Portfolio as soon as reasonably practical after the net asset value per share
is calculated, (normally by 6:00 p.m., New York City time), and shall use its
best efforts to make such net asset value per share available by 6:30 p.m., New
York City time.
5
<PAGE> 6
ARTICLE II. - REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that it is an insurance
company duly organized and in good standing under California law and that it is
taxed as an insurance company under Subchapter L of the Code.
2.2 The Company represents and warrants that it has legally and
validly established each of the Separate Accounts as a segregated asset account
under the California Insurance Code, and that each of the Separate Accounts is
a validly existing segregated asset account under California law.
2.3 The Company represents and warrants that the Variable
Contracts issued by the Company or interests in the Separate Accounts under
such Variable Contracts (1) and or, prior to issuance, will be registered as
securities under the Securities Act of 1933 ("1933 Act") or, alternatively (2)
are not registered because they are properly exempt from registration under the
1933 Act.
2.4 The Company represents and warrants that each of the Separate
Accounts (1) has been registered as a unit investment trust in accordance with
the provisions of the 1940 Act or, alternatively (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
2.5 The Company represents that it believes, in good faith, that
the Variable Contracts issued by the Company are currently treated as annuity
contracts or life insurance contracts (which may include modified endowment
contracts), whichever is appropriate, under applicable provisions of the Code.
2.6 The Company represents and warrants that any of its Separate
Accounts that fund variable life insurance contracts and that are registered
with the SEC as
6
<PAGE> 7
investment companies, rely on the exemptions provided by Rule 6e-2 or Rule
6e-3(T), or any successor thereto, under the 1940 Act.
2.7 The Fund represents and warrants that it is duly organized as
a business trust under the laws of the state of Delaware, and is in good
standing under applicable law.
2.8 The Fund represents and warrants that the shares of the
Portfolios are duly authorized for issuance in accordance with applicable law
and that the Fund is registered as an open-end management investment company
under the 1940 Act.
2.9 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance contracts and variable
annuity contracts, and that each Portfolio has complied with such provisions
since its commencement of operations.
2.10 The Distributor represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
ARTICLE III. - GENERAL DUTIES
3.1 The Fund shall take all such actions as are necessary to
permit the sale of the shares of each Portfolio to the Separate Accounts,
including maintaining its registration as an investment company under the 1940
Act, and registering the shares of the Portfolios sold to the Separate Accounts
under the 1933 Act for so long as required by applicable law. The Fund shall
amend its Registration Statement filed with the SEC under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of the shares of the Portfolios. The Fund shall register and qualify
its shares for sale in accordance with the laws of the various states to the
extent deemed
7
<PAGE> 8
necessary by the Fund or the Distributor. The Fund and Distributor shall take
all steps necessary to sell shares of the Fund in compliance with all
applicable federal and state securities laws.
3.2 The Fund shall make every effort to maintain qualification of
each Portfolio as a Regulated Investment Company under Subchapter M of the Code
(or any successor or similar provision) and shall notify the Company
immediately upon having a reasonable basis for believing that a Portfolio has
ceased to so qualify or that it might not so qualify in the future; and to meet
the distribution requirements necessary to avoid payment of any excise tax
pursuant to Section 4982 of the Code.
3.3 The Fund and Manager or a sub-manager as appropriate will
invest the assets of the Portfolios in such a manner as to ensure that the
Variable Contracts will be treated as annuity or life insurance contracts,
whichever is appropriate, under the Code and the regulations thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the
Manager on behalf of the Fund shall make every effort to enable each Portfolio
to comply with the diversification provisions of Section 817(h) of the Code and
the regulations issued thereunder relating to the diversification requirements
for variable life insurance contracts and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Company immediately upon having a reasonable
basis for believing that any Portfolio has ceased or might cease to comply.
3.4 The Fund and Manager agree that each Portfolio of the Fund
shall be managed consistent with its investment objective or objectives,
investment policies, and investment restrictions as described in the Fund's
prospectus and registration statement, as amended or modified from time to
time.
8
<PAGE> 9
3.5 The Company shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Company, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
Contracts to the extent required under the 1933 Act, and obtaining all
necessary approvals to offer the Variable Contracts from the applicable state
insurance commissioners.
3.6 The Company shall make every reasonable effort to maintain the
treatment of the Variable Contracts issued by the Company as annuity contracts
or life insurance contracts, whichever is appropriate, under applicable
provisions of the Code, and shall notify the Fund and the Distributor
immediately upon having a reasonable basis for believing that such Variable
Contracts have ceased to be so treated or that they might not be so treated in
the future.
3.7 The Company shall require that any person who offers and sells
the Variable Contracts issued by the Company do so in accordance with
applicable provisions of the 1933 Act, the 1934 Act, the 1940 Act, the NASD
Rules of Fair Practice, banking and state law respecting the offering of
variable life insurance contracts and variable annuity contracts.
3.8 The Distributor shall sell and distribute the shares of the
Portfolios of the Fund in accordance with the applicable provisions of the 1933
Act, the 1934 Act, the NASD Rules of Fair Practice, and state law.
3.9 A majority of the Board of Trustees of the Fund shall consist
of persons who are not "interested persons" of the Fund ("disinterested
Trustees"), as defined by Section 2(a)(19) of the 1940 Act, except that if this
provision of this Section 3.9 is not
9
<PAGE> 10
met by reason of the death, disqualification, or bona fide resignation of any
Trustee, then the operation of this provision shall be suspended (a) for a
period of 45 days if the vacancy or vacancies may be filled by the Fund's
Board; (b) for a period of 60 days if a vote of shareholders is required to
fill the vacancy or vacancies; or (c) for such longer period as the SEC may
prescribe by order upon application.
3.10 Each party hereto shall cooperate with each other party and
all appropriate governmental authorities having jurisdiction (including,
without limitation, the SEC, the NASD, and banking and state insurance
regulators) and shall permit such authorities reasonable access to its books
and records in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
3.11 The Company shall, at least annually, submit to the Board of
Trustees of the Fund such reports, materials or data as the Trustees may
reasonably request so that the Trustees may carry out the obligations imposed
upon them by said reports, materials and data; said reports, materials and data
shall be submitted more frequently if deemed appropriate by the Board of
Trustees.
3.12 Fund and Manager agree to notify the Company immediately upon
gaining knowledge of any change(s) or proposed change(s) in a Portfolio's
investment objective(s), investment policies, or investment restrictions, in
any material services provided to the Fund or Portfolio, or in any service
agreement with respect to any services provided to the Fund or Portfolio, and
to cooperate with the Company in obtaining any necessary approvals from state
insurance authorities before implementing any such change(s).
10
<PAGE> 11
ARTICLE IV. - POTENTIAL CONFLICTS
4.1 The Fund's Board of Trustees shall monitor the Fund for the
existence of any material irreconcilable conflicts between the interests of
owners of variable annuity contracts and variable life insurance contracts. An
irreconcilable material conflict may arise for a variety of reasons, including
(a) an action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or regulations,
or a public ruling, private letter ruling, no-action or interpretive letter, or
any similar action by insurance, tax, or securities regulatory authorities; (c)
an administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of the Fund or any Portfolio are being managed;
or (e) a decision by the Company to disregard the voting instructions of
Variable Contract Owners.
4.2 The Company agrees that it shall be responsible for reporting
any potential or existing conflicts to the Fund's Board of Trustees. The
Company will be responsible for assisting the Board of Trustees of the Fund in
carrying out its responsibilities under this Agreement, by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever Variable Contract Owner voting instructions are
disregarded. The Company shall carry out its responsibility under this Section
4.2 with a view only to the interests of the Variable Contract Owners.
4.3 The Company agrees that in the event that it is determined by
a majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Company shall, at its own expense and to the extent reasonably practical (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), take whatever steps are necessary to eliminate the
11
<PAGE> 12
irreconcilable material conflict, including: (1) withdrawing the assets
allocable to some or all of the Separate Accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium, which
may include another Portfolio of the Fund, or submitting the question of
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group that votes in favor of such segregation, or offering to the
affected Variable Contract Owners the option of making such a change; and (2)
establishing a new registered management investment company or managed separate
account. If a material irreconcilable conflict arises because of the Company's
decision to disregard Variable Contract Owners' voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company shall be required, at the Fund's election, to withdraw the Separate
Accounts' investment in the Fund, and no charge or penalty will be imposed as a
result of such withdrawal. The Fund shall neither be required to bear the
costs of remedial actions taken to remedy a material irreconcilable conflict
nor shall it be requested to pay a higher investment advisory fee for the sole
purpose of covering such costs. In addition, no Variable Contract Owner shall
be required directly or indirectly to bear the direct or indirect costs of
remedial actions taken to remedy a material irreconcilable conflict. A
majority of the disinterested members of the Board of Trustees of the Fund
shall determine whether any proposed action adequately remedies any material
irreconcilable conflict, but in no event will the Fund be required to establish
a new funding medium for any Variable Contract. A new funding medium for any
Variable Contract need not be established by the Company pursuant to this
Section 4.3, if an offer to do so has been declined by vote of a majority of
Variable Contract Owners who would be materially and adversely affected by the
irreconcilable material conflict.
12
<PAGE> 13
All reports received by the Fund's Board of Trustees of potential or existing
conflicts, and all Board action with regard to determining the existence of a
conflict, notifying the Company and the Fund's investment Manager of a
conflict, shall be properly recorded in the minutes of the Board of Trustees of
the Fund or other appropriate records, and such minutes or other records shall
be made available to the SEC upon request. The Company and the Fund shall
carry out their responsibilities under this Section 4.3 with a view only to the
interests of the Variable Contract Owners.
4.4 The Board of Trustees of the Fund shall promptly notify the
Company in writing of its determination of the existence of an irreconcilable
material conflict and its implications.
ARTICLE V. - PROSPECTUSES AND PROXY STATEMENTS, VOTING
5.1 The Company shall distribute such prospectuses, proxy
statements and periodic reports of the Fund to the owners of Variable Contracts
issued by the Company as required to be distributed to such Variable Contract
Owners under applicable federal or state laws.
5.2 The Distributor shall provide the Company with as many copies
of the current prospectus of the Fund as the Company may reasonably request.
If requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type
or in camera-ready copy) and other assistance as is reasonably necessary in
order for the Company to print together in one document the current prospectus
for the Variable Contracts issued by the Company and the current prospectus for
the Fund. The Fund shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Variable Contract Owners, and
the Company shall bear the expense of printing copies of the Fund's prospectus
that
13
<PAGE> 14
are used in connection with offering the Variable Contracts issued by the
Company.
5.3 The Distributor shall provide the Company with as many copies
of the current Statement of Additional Information ("SAI") of the Fund as the
Company may reasonably request. If requested by the Company in lieu thereof,
the Fund shall provide such documentation (including a final copy of the Fund's
SAI as set in type or in camera-ready copy) and other assistance as is
reasonably necessary in order for the Company to print together in one document
the current SAI for the Variable Contracts issued by the Company and the
current SAI for the Fund. The Fund shall bear the expense of printing copies
of its current SAI that may be distributed to existing Variable Contract
Owners, and the Company shall bear the expense of printing copies of the Fund's
SAI that are used in connection with offering the Variable Contracts issued by
the Company.
5.4 The Fund, at its expense, shall provide the Company with
copies of its proxy material, periodic reports to shareholders and other
communications to shareholders in such quantity as the Company shall reasonably
require for purposes of distributing to owners of Variable Contracts issued by
the Company and to state insurance authorities. The Fund, at the Company's
expense, shall provide the Company with copies of its periodic reports to
shareholders and other communications to shareholders in such quantity as the
Company shall reasonably request for use in connection with offering the
Variable Contracts issued by the Company. If requested by the Company in lieu
thereof, the Fund shall provide such documentation (including a final copy of
the Fund's proxy materials, periodic reports to shareholders and other
communications to shareholders, as set in type or in camera-ready copy) and
other assistance as is reasonably necessary in order for the Company to print
such shareholder communications for distribution to owners of Variable
Contracts issued by the Company.
14
<PAGE> 15
5.5 For so long as the SEC interprets the 1940 Act to require
pass-through voting by the Company whose Separate Accounts are registered as
investment companies under the 1940 Act ("Registered Separate Accounts"), the
Company shall vote shares of each Portfolio of the Fund held in Registered
Separate Accounts or subaccounts thereof, at regular and special meetings of
the Fund in accordance with instructions timely received by the Company (or a
designated agent) from owners of Variable Contracts funded by such Registered
Separate Accounts or subaccounts thereof having a voting interest in the
Portfolio. The Company shall vote shares of a Portfolio of the Fund held in
Registered Separate Accounts or subaccounts thereof that are attributable to
the Variable Contracts as to which no timely instructions are received, as well
as shares held in such Registered Separate Accounts or subaccounts thereof that
are not attributable to the Variable Contracts and owned beneficially by the
Company (resulting from charges against the Variable Contracts or otherwise),
in the same proportion as the votes cast by owners of the Variable Contracts
funded by that Separate Account or subaccount thereof having a voting interest
in the Portfolio from whom instructions have been timely received. The Company
shall vote shares of each Portfolio of the Fund held in its general account or
in any Separate Account that is not registered under the 1940 Act, if any, and
any affiliate of the Company shall vote shares of a Portfolio of the Fund that
it holds, in its discretion or in the same proportion as the votes cast with
respect to shares of the Portfolios held in all Registered Separate Accounts of
the Company or subaccounts thereof, in the aggregate. In the event that the
Shared Funding Exemptive Order requires all Participating Insurance Companies
to calculate voting privileges in substantially the same manner, the Company
agrees to take steps so that each Registered Separate Account or subaccount
thereof investing in the Fund calculates voting privileges substantially in
15
<PAGE> 16
the manner established by the Fund, provided that such manner is reasonable and
communicated to the Company by the Fund.
5.6 To the extent applicable, the Fund shall disclose in its
prospectus, in substance, that: (1) shares of the Portfolios of the Fund are
offered to affiliated or unaffiliated insurance company separate accounts which
fund both annuity and life insurance contracts, (2) due to differences in tax
treatment or other considerations, the interests of various Variable Contract
Owners participating in the Fund or a Portfolio might at some time be in
irreconcilable conflict, and (3) the Board of Trustees of the Fund will monitor
for any material irreconcilable conflicts and determine what action, if any,
should be taken.
ARTICLE VI. - SALES MATERIAL AND INFORMATION
6.1 The Company agrees that neither it nor any of its affiliates
shall give any information or make any representations or statements on behalf
of the Fund or concerning the Fund other than the information or representation
contained in the Registration Statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund, or its designee
(the Manager), and/or by the Distributor or its designee, except with the prior
permission of the Fund or its designee and/or the Distributor or its designee.
The Parties agree that total return information of the Fund and its Portfolios
derived from the prospectus or Registration Statement of the Fund or from
reports provided by the Fund, the Manager, or Distributor to the Company may be
used by the Company in connection with the sale of the Variable Contracts
without prior approval of the Fund or the Distributor, or their designees, and
the Company shall be
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<PAGE> 17
responsible for using such information in conformity with the information it is
provided.
6.2 The Fund or the Distributor or the designee of either shall
furnish to the Company or its designee, each piece of sales literature or other
promotional material in which the Company or its Separate Accounts are named,
and no such material shall be used without the prior approval of the Company or
its designee.
6.3 The Fund and the Distributor agree that each and the
affiliates of each shall not give any information or make any representations
on behalf of the Company or concerning the Company, the Separate Accounts, or
the Variable Contracts issued by the Company, other than the information or
representations contained in a registration statement, prospectus or SAI for
such Variable Contracts, as such registration statement and prospectus may be
amended or supplemented from time to time, or in reports for the Separate
Accounts or prepared for distribution to owners of such Variable Contracts, or
in sales literature or other promotional material approved by the Company or
its designee, except with the prior permission of the Company.
6.4 The Fund will provide to the Company at least one complete
copy of all prospectuses, SAI's, reports, proxy statements and other voting
solicitation materials, and all amendments and supplements to any of the above,
that relate to the Fund or its shares, promptly after the filing of such
document with the SEC and other regulatory authorities.
6.5 The Company will provide to the Fund at least one complete
copy of all prospectuses (which shall include an offering memorandum if the
Variable Contracts issued by the Company or interests therein are not
registered under the 1933 Act), SAI's, reports, solicitations for voting
instructions, and all amendments or supplements to any of the above, that
relate to the Variable Contracts issued by the Company or the Separate
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<PAGE> 18
Accounts promptly after the filing of such document with the SEC or other
regulatory authority.
6.6 For purposes of this Article VI, the phrase "sales literature
or other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, computerized media, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees.
ARTICLE VII - INDEMNIFICATION
7.1 Indemnification By the Company
The Company agrees to indemnify and hold harmless the Fund, the
Manager and the Distributor, each of their Trustees/Directors and officers, and
each person, if any, who controls the Manager or Distributor within the meaning
of Section 15 of the 1933 Act, (collectively, the "Indemnified Parties" for
purposes of this Section 7.1), against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation expenses (including legal and other expenses), to
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages,
liabilities or litigation expenses are related to the sale or acquisition of
the Fund's shares
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<PAGE> 19
or the Variable Contracts or to the operation of the Separate Accounts or the
Fund, and in any such case:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the
registration statement, prospectus (which shall include an offering
memorandum) or SAI for the Separate Accounts or sales literature for
the Variable Contracts issued by the Company (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Company,
directly or indirectly, by or on behalf of any Indemnified Party for
use in the registration statement, prospectus or SAI for the Separate
Account or in sales literature issued by the Company (or any amendment
or supplement to any of the foregoing) or otherwise, for use in
connection with the sale of the Variable Contracts or Fund shares or
acceptance of applications for the Variable Contracts; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations (1) contained
in the registration statement, prospectus, SAI, or sales literature of
the Fund or any amendment or supplement to any of the foregoing not
supplied by the Company or persons under its control, or (2) contained
in the registration statement, prospectus, or SAI for the Separate
Account, or sales literature for the Variable Contracts made in
reliance upon and in conformity with information furnished to the
Company by or on behalf of the Fund, the Manager or the Distributor)
or wrongful conduct of the Company or any of its affiliates, employees
or agents (but not including agents that are Indemnified Parties or
employees or agents of Indemnified Parties) thereof with respect to
the sale or distribution of the Variable Contracts issued by the
Company or the Fund shares or the acceptance of applications for the
Variable Contracts; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, SAI or sales literature of the Fund (or any amendment
thereof or supplement to the foregoing) or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, if
such a statement or omission was made in reliance upon information
furnished to an Indemnified Party by or on behalf of the Company; or
(iv) arise out of or result from the material breach of any
19
<PAGE> 20
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company;
except to the extent provided in Sections 7.4 and 7.5 hereof.
7.2 Indemnification By the Manager
The Manager agrees to indemnify and hold harmless the Fund, the
Distributor and the Company and its Separate Accounts, each of their
Trustees/Directors and officers, and each person, if any, who controls the
Distributor or Company within the meaning of Section 15 of the 1933 Act,
(collectively, the "Indemnified Parties" for purposes of this Section 7.2),
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Distributor and or the
Company) or litigation expenses (including legal and other expenses) to which
the Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or litigation
expenses:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus of the Fund or sales literature of the
Variable Contracts or the Fund generated by the Manager or an
affiliate thereof (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Manager or the Fund or
the designee of either by or on behalf of any Indemnified Party for
use in the registration statement, prospectus, or SAI for the Fund or
in sales literature for the Fund or the Variable Contracts or
otherwise, for use in connection with the sale of the Variable
Contracts issued by the Company or Fund shares or the acceptance of
applications for the Variable Contracts; or
(ii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement, prospectus,
or SAI for the Separate Account or sales literature for the Variable
Contracts, (or any
20
<PAGE> 21
amendment or supplement to any of the foregoing), or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance upon
information furnished to the Indemnified Party by or on behalf of the
Manager; or
(iii) arise out of or result from the material breach of any
representation and/or warranty made by the Manager in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Manager, including but not limited to, compliance
with the diversification requirements of Section 817(h) of the Code
and qualification of each Portfolio of the Fund as a Regulated
Investment Company under Subchapter M of the Code;
except to the extent provided in Section 7.4 and 7.5 hereof.
7.3 Indemnification By the Distributor
The Distributor agrees to indemnify and hold harmless the Fund, the
Manager and the Company and its Separate Accounts, each of their Trustees and
officers, and each person, if any, who controls the Fund, the Manager or
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 7.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Distributor) or litigation expenses (including legal
and other expenses) to which the Indemnified Parties may become subject under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts or to the operation
of the Fund, in any such case:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration
statement or prospectus or sales literature of the Fund generated by
the Distributor (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
21
<PAGE> 22
and in conformity with information furnished to the Distributor
directly or indirectly or its designee by or on behalf of any
Indemnified Party; for use in sales literature for the Fund or
otherwise in connection with the sale of Fund shares; or
(ii) arise out of as a result of any unauthorized use of any sales
materials related to the Fund by the Distributor, or wrongful conduct
of Distributor, or the affiliates, employees, or agents of Distributor
with respect to the sale or distribution of the Fund shares, including
but not limited to any verbal or written misrepresentations, or
unlawful sales practices.
except to the extent provided in Section 7.4 and 7.5 hereof.
7.4 No person required to provide indemnification under the terms
of Sections 7.1, 7.2, or 7.3 of this Agreement shall be liable under any such
section with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party under any such section would otherwise
be subject by reason of willful misfeasance, or bad faith on the part of such
Indemnified Party, or gross negligence (negligence if the Manager), in the
performance of his or her duties or by reason of his or her reckless disregard
of obligations or duties under this Agreement or to the Fund or the Separate
Account, as applicable.
7.5 No person required to provide indemnification under the terms
of Sections 7.1, 7.2 or 7.3 of this Agreement ("Indemnifying Party") shall be
liable under the terms of any such section with respect to any claim made
against an Indemnified Party under any such section unless such Indemnified
Party shall have notified the Indemnifying Party in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or
after such Party shall have received notice of such service on any designated
agent), but failure to notify the Indemnifying Party of any such claim shall
not relieve the Indemnifying Party from any liability which it may have to the
Indemnified Party against
22
<PAGE> 23
whom such action is brought otherwise than on account of the above designated
indemnification provisions. In case any such action is brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate, at
its own expense, in the defense of such action. The Indemnifying Party also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the Indemnified Party named in the action. After notice from the Company to
such Indemnified Party of the Indemnifying Party's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Indemnifying Party will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
7.6 Each party to this Agreement shall promptly notify the other
parties to the Agreement of the commencement of any litigation or proceedings
against it or any of its officers or Trustees or affiliated persons in
connection with the issuance or sale of the Fund shares, or the acceptance of
applications for the Variable Contracts or the operation of the Fund the
Variable Contracts, or the Separate Account.
ARTICLE VIII. - APPLICABLE LAW
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Delaware.
8.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including but not limited to, any mixed funding exemptive order) and
the terms hereof shall be
23
<PAGE> 24
interpreted and construed in accordance therewith. The word "affiliate" or
"affiliated" shall have the meaning as defined in Section 2(a)(3) of the 1940
Act.
ARTICLE IX. - TERMINATION
9.1 This Agreement shall terminate:
(a) at the option of any party to this Agreement upon 90
days advance written notice to the other parties, unless a shorter time is
agreed to by the parties to this Agreement; or
(b) at the option of the Company if shares of the
Portfolios are not reasonably available to meet the requirements of the
Variable Contracts issued by the Company, as determined by the Company, and
upon written notice by the Company to the other parties to this Agreement; or,
(c) at the option of the Fund, the Manager or the
Distributor upon institution of formal proceedings against the Company by the
NASD, the SEC, or any banking, state securities, insurance authorities or any
other regulatory body if the Fund, the Manager or the Distributor shall
determine, in their sole judgment exercised in good faith, that the Company has
suffered a material adverse change in its business, operations, financial
condition, or prospects since the date of this Agreement or is the subject of
material adverse publicity; or
(d) at the option of the Company upon institution of
formal proceedings against the Fund, the Manager, or Distributor by the NASD,
the SEC, or any state securities or insurance department or any other
regulatory body if the Company shall determine, in its sole judgment exercised
in good faith, that the Fund, Manager or Distributor has suffered a material
adverse change in its business, operations, financial
24
<PAGE> 25
condition, or prospects since the date of this Agreement or is the subject of
material adverse publicity; or
(e) upon requisite vote of the Variable Contract Owners
having an interest in the Separate Accounts (or any subaccounts thereof) to
substitute the shares of another investment company or portfolio thereof for
the corresponding shares of the Fund or a Portfolio in accordance with the
terms of the Variable Contracts for which those shares had been selected to
serve as the underlying investment media; or
(f) in the event any of the shares of a Portfolio are not
registered, issued or sold in accordance with applicable state and/or federal
law, or such law precludes the use of such shares as the underlying investment
media of the Variable Contracts issued or to be issued by the Company; or
(g) by any party to this Agreement upon a determination
by a majority of the Trustees of the Fund, or a majority of its disinterested
Trustees, that an irreconcilable material conflict exists; or
(h) at the option of the Company if the Fund or a
Portfolio fails to meet the diversification requirements specified in Section
3.2 or 3.3 hereof; or
(i) at the option of the Fund or the Distributor if the
Variable Contracts issued by the Company cease to qualify as annuity contracts
or life insurance contracts, as applicable, under the Code or if the Variable
Contracts are not registered, issued or sold in accordance with applicable
state and/or federal law; or
(j) at the option of the Company upon any substitution of
the shares of another investment company or portfolio thereof for shares of the
Fund or a Portfolio of the Fund in accordance with the terms of the Contracts,
provided that the Company has
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<PAGE> 26
given at least 30 days prior written notice to the Fund or Distributor of the
date of the substitution; or
(k) at the option of any party to this Agreement upon a
material breach of this Agreement or of any representation or warranty herein
by any other party to this Agreement.
9.2 Each party to this Agreement shall promptly notify the other
parties to the Agreement of the institution against such party of any such
formal proceedings as described in Sections 9.1(c) and (d) hereof. The Company
shall give 30 days prior written notice to the Fund of the date of any proposed
vote of Variable Contract Owners to replace the Fund's shares as described in
Section 9.1(e) hereof.
9.3 Under the terms of the Variable Contracts, the Company
reserves the right, subject to compliance with the law as then in effect, to
make substitutions for the securities that are held by a Separate Account of
the Company under certain circumstances. The parties acknowledge that the
Company has the right to substitute other securities for the shares of the Fund
or a Portfolio thereof already purchased or to be purchased in the future if
the shares of the Fund or any or all of the Portfolios of the Fund should no
longer be available for investment, or if, in the judgment of Company
management, further investment in shares of the Fund or any or all of the
Portfolios thereof should become inappropriate in view of the purposes of the
Contracts. The Company will provide 30 days written notice to the Fund or to
the Distributor prior to effecting any such substitution.
9.4 If this Agreement terminates, any provision of this Agreement
necessary to the orderly windup of business under it will remain in effect as
to that business, after termination.
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<PAGE> 27
9.5 Effect of Termination. Notwithstanding any termination of
this Agreement, the Fund, the Manager, and Distributor (assuming the Manager
and/or the Distributor is still acting pursuant to an agreement with the Fund),
shall at the option of the Company, continue to make available additional
shares of the Fund pursuant to the terms and conditions of this Agreement, for
all Variable Contracts in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Contracts"). Specifically,
without limitation, based upon instructions from the owners of the Existing
Contracts, the Separate Account shall be permitted to reallocate investments in
the Portfolios of the Fund and redeem investments in the Portfolios, and shall
be permitted to invest in the Portfolios in the event that owners of the
Existing Contracts make additional purchase payments under the Existing
Contracts. If this Agreement terminates, the parties agree that Article VII,
and Sections 3.9, 11.1, 11.3, 11.4, 11.5 and 11.6, and, to the extent that all
or a portion of the assets of the Separate Account continue to be invested in
the Fund or any Portfolios of the Fund, Article I, IV and V and Sections 3.1,
3.2, 3.3, 3.4, 3.5, 3.6, 3.8, 3.9, 3.10 and 3.11 will remain in effect after
termination.
ARTICLE X - NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund: Pacific Innovations Trust
c/o PFPC Inc.
103 Bellevue Parkway
Wilmington, DE 19809
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If to the Manager: Bank of America National Trust and
Saving Association
333 S. Beaudry Ave.
Los Angeles, CA 90071
Att.: Sandra C. Brown
If to the Distributor: Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961
Att.: Monroe Haegele
If to the Company: Pacific Mutual Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660
Att.: General Counsel
ARTICLE XI - MISCELLANEOUS
11.1 The Fund and the Company agree that if and to the extent Rule
6e-2 or 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in
final form or amended, to the extent applicable, the Fund and the Company shall
each take such steps as may be necessary to comply with such Rule as amended or
adopted in final form.
11.2 A copy of the Fund's Agreement and Declaration of Trust is on
file with the Secretary of the state of Delaware and notice is hereby given
that the Agreement has been executed on behalf of the Fund by a trustee of the
Fund in his or her capacity as Trustee and not individually. The obligations
of this Agreement shall only be binding upon the assets and property of the
Fund and shall not be binding upon any trustee, officer or shareholder of the
Fund individually.
11.3 Rights of Trustees and Shareholders. Nothing in this
Agreement shall impede the Fund's Trustees or shareholders of the shares of the
Fund's Portfolios from exercising any of the rights provided to such Trustees
or shareholders in the Fund's Declaration of Trust, as amended, a copy of which
will be provided to the Company upon request.
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<PAGE> 29
11.4 It is understood that the name "Pacific Mutual Life Insurance
Company" or any derivative thereof or logo associated with that name is the
valuable property of the Company and that the Fund, Manager, or Distributor has
the right to use such name (or derivative or logo), with the prior consent of
the Company for use in required regulatory filings, such consent not to be
unreasonably withheld, only so long as this Agreement is in effect. Upon
termination of this Agreement the Fund, Manager or Distributor shall forthwith
cease to use such name (or derivative or logo).
11.5 It is understood that the name "Bank of America National Trust
and Savings Association" or any derivative thereof or logo associated with that
name is the valuable property of the Manager and its affiliates, and that the
Company and Distributor has the right to use such name (or derivative or logo),
with the prior consent of B of A for use in required regulatory filings, such
consent not to be unreasonably withheld, only so long as this Agreement is in
effect. Upon termination of this Agreement the Company and Distributor shall
forthwith cease to use such name (or derivative or logo).
11.6 It is understood that the name "Provident Distributors, Inc."
or any derivative thereof or logo associated with that name is the valuable
property of the Distributor and its affiliates, and that the Fund, Manager and
Company, has the right to use such name (or derivative or logo) only so long as
this Agreement is in effect. Upon termination of this Agreement the Fund,
Manager and Company shall forthwith cease to use such name (or derivative or
logo).
11.7 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
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<PAGE> 30
11.8 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.9 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
11.10 This Agreement may not be assigned by any party to this
Agreement except with the written consent of the other parties to this
Agreement. For purposes of this provision, assignment shall be as defined in
the Investment Company Act of 1940 and the rules thereunder.
30
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
PACIFIC INNOVATIONS TRUST
ATTEST: _____________________________ By: _____________________________
Name: Name:
Title: Title:
BANK OF AMERICA
NATIONAL TRUST & SAVINGS
ASSOCIATION
ATTEST: _____________________________ By: _____________________________
Name: Name:
Title: Title:
PROVIDENT DISTRIBUTORS, INC.
ATTEST: _____________________________ By: _____________________________
Name: Name:
Title: Title:
PACIFIC MUTUAL LIFE INSURANCE
COMPANY
ATTEST: _____________________________ By: _____________________________
Name: Jane Guon Name: Thomas C. Sutton
Title: Assistant Secretary Title: Chairman and CEO
By: _____________________________
Name: Khanh T. Tran
Title: Sr. Vice President
and CEO
31
<PAGE> 32
EXHIBIT A
Separate Accounts
Separate Account B
32
<PAGE> 33
EXHIBIT B
Portfolios
----------
Money Market Fund
Managed Bond Fund
Capital Income Fund
Mid-Cap Fund
Blue Chip Fund
Aggressive Growth Fund
International Fund
33
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Pacific Mutual Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
We hereby consent to the use in this Post Effective Amendment No. 1 to
Registration Statement File No. 333-14131 of Pacific Innovations on Form N-4 of
our report dated February 22, 1997 related to Pacific Mutual Life Insurance
Company appearing in the Statement of Additional Information, which is a part of
such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 31, 1997
