<PAGE> 1
1997 ANNUAL REPORTS
PACIFIC INNOVATIONS TRUST
SEPARATE ACCOUNT B OF
PACIFIC LIFE INSURANCE COMPANY
[LOGO]
PACIFIC LIFE
Pacific Life Insurance Company
is the issuer of Pacific Innovations variable annuity
----------------
Not FDIC Insured
----------------
<PAGE> 2
SEPARATE ACCOUNT B
OF PACIFIC LIFE INSURANCE COMPANY
1997 ANNUAL REPORT
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement of assets and liabilities of the
Pacific Life's Separate Account B (comprised of the Money Market, Managed Bond,
Capital Income, Blue Chip, Mid-Cap Equity, Aggressive Growth and International
Variable Accounts) as of December 31, 1997 and the related statement of
operations and statement of changes in net assets for the period then ended.
These financial statements are the responsibility of the Separate Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective Variable Accounts
constituting the Pacific Life's Separate Account B as of December 31, 1997 and
the results of their operations and the changes in their net assets for the
period then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 6, 1998
B-1
<PAGE> 4
SEPARATE ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE
MARKET BOND INCOME CHIP
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Fund (1,487,250 shares; cost $1,487,250) ...... $ 1,487,250
Managed Bond Fund (633,703 shares; cost $6,401,108) ........ $ 6,432,081
Capital Income Fund (1,079,141 shares; cost $12,130,005) ... $11,935,299
Blue Chip Fund (1,122,656 shares; cost $13,112,211) ........ $13,741,310
Mid-Cap Equity Fund (376,386 shares; cost $4,476,390) ......
Aggressive Growth Fund (329,098 shares; cost $3,731,685) ...
International Fund (408,386 shares; cost $4,358,502) .......
Receivables:
Due from Pacific Life Insurance Company .................... 18,904 15,769 11,336
Fund shares redeemed ....................................... 187
----------- ----------- ----------- -----------
Total Assets ................................................. 1,487,437 6,450,985 11,951,068 13,752,646
----------- ----------- ----------- -----------
LIABILITIES
Payables:
Due to Pacific Life Insurance Company ...................... 187
Fund shares purchased ...................................... 18,904 15,769 11,336
Other Liabilities .......................................... 134 361 655 729
----------- ----------- ----------- -----------
Total Liabilities ............................................ 321 19,265 16,424 12,065
----------- ----------- ----------- -----------
NET ASSETS ................................................... $ 1,487,116 $ 6,431,720 $11,934,644 $13,740,581
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
MID-CAP AGGRESSIVE INTER-
EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
------- ------- -------
<S> <C> <C> <C>
ASSETS
Investments:
Money Market Fund (1,487,250 shares; cost $1,487,250) ......
Managed Bond Fund (633,703 shares; cost $6,401,108) ........
Capital Income Fund (1,079,141 shares; cost $12,130,005) ...
Blue Chip Fund (1,122,656 shares; cost $13,112,211) ........
Mid-Cap Equity Fund (376,386 shares; cost $4,476,390) ...... $ 4,761,282
Aggressive Growth Fund (329,098 shares; cost $3,731,685) ... $ 3,524,640
International Fund (408,386 shares; cost $4,358,502) ....... $ 3,994,016
Receivables:
Due from Pacific Life Insurance Company .................... 9,585 10,761 16,676
Fund shares redeemed .......................................
----------- ----------- -----------
Total Assets ................................................. 4,770,867 3,535,401 4,010,692
----------- ----------- -----------
LIABILITIES
Payables:
Due to Pacific Life Insurance Company ......................
Fund shares purchased ...................................... 9,585 10,761 16,676
Other Liabilities .......................................... 272 186 207
----------- ----------- -----------
Total Liabilities ............................................ 9,857 10,947 16,883
----------- ----------- -----------
NET ASSETS ................................................... $ 4,761,010 $ 3,524,454 $ 3,993,809
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
B-2
<PAGE> 5
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL BLUE
MARKET BOND INCOME CHIP
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ................................................... $ 30,733 $ 123,655 $ 412,034 $ 93,096
EXPENSES
Mortality and expense risk fee and administrative fee ....... 8,457 26,019 52,882 59,700
--------- --------- --------- ---------
Net Investment Income ......................................... 22,276 97,636 359,152 33,396
--------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss from security transactions ................ (92) (458) (68)
Net unrealized appreciation (depreciation) on investments ... 30,973 (194,706) 629,099
--------- --------- --------- ---------
Net Realized And Unrealized Gain (Loss) On Investments ........ 30,881 (195,164) 629,031
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $ 22,276 $ 128,517 $ 163,988 $ 662,427
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
MID-CAP AGGRESSIVE INTER-
EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
------- ------- -------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends ................................................... $ 45,185 $ 281,172 $ 106,340
EXPENSES
Mortality and expense risk fee and administrative fee ....... 21,103 16,726 18,769
--------- --------- ---------
Net Investment Income ......................................... 24,082 264,446 87,571
--------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss from security transactions ................ (141) (413) (795)
Net unrealized appreciation (depreciation) on investments ... 284,892 (207,045) (364,486)
--------- --------- ---------
Net Realized And Unrealized Gain (Loss) On Investments ........ 284,751 (207,458) (365,281)
--------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $ 308,833 $ 56,988 $(277,710)
========= ========= =========
</TABLE>
See Notes to Financial Statements
B-3
<PAGE> 6
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY MANAGED CAPITAL
MARKET BOND INCOME
VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income ....................................... $ 22,276 $ 97,636 $ 359,152
Net realized loss from security transactions ................ (92) (458)
Net unrealized appreciation (depreciation) on investments ... 30,973 (194,706)
------------ ------------ ------------
Net Increase (Decrease) In Net Assets Resulting
From Operations ............................................. 22,276 128,517 163,988
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL UNIT TRANSACTIONS
Transfer of net premiums .................................... 6,098,467 5,482,090 10,402,860
Transfers--policy charges and deductions .................... (16,341) (588)
Transfers in (from other variable accounts) ................. 17,139 900,596 1,442,301
Transfers out (to other variable accounts) .................. (4,637,671) (38,100) (28,871)
Transfers--other ............................................ (13,095) (25,042) (45,046)
------------ ------------ ------------
Net Increase In Net Assets Derived From Policy Transactions ...... 1,464,840 6,303,203 11,770,656
------------ ------------ ------------
NET INCREASE IN NET ASSETS ....................................... 1,487,116 6,431,720 11,934,644
------------ ------------ ------------
NET ASSETS
Beginning of period
------------ ------------ ------------
End of period ............................................... $ 1,487,116 $ 6,431,720 $ 11,934,644
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
BLUE MID-CAP AGGRESSIVE INTER-
CHIP EQUITY GROWTH NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income ....................................... $ 33,396 $ 24,082 $ 264,446 $ 87,571
Net realized loss from security transactions ................ (68) (141) (413) (795)
Net unrealized appreciation (depreciation) on investments ... 629,099 284,892 (207,045) (364,486)
------------ ------------ ------------ ------------
Net Increase (Decrease) In Net Assets Resulting
From Operations ............................................. 662,427 308,833 56,988 (277,710)
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL UNIT TRANSACTIONS
Transfer of net premiums .................................... 11,568,658 3,734,236 3,029,927 3,594,962
Transfers--policy charges and deductions .................... (16,115) (11,481) (14,274) (11,378)
Transfers in (from other variable accounts) ................. 1,662,246 778,377 495,238 729,833
Transfers out (to other variable accounts) .................. (88,249) (28,379) (24,485) (22,892)
Transfers--other ............................................ (48,386) (20,576) (18,940) (19,006)
------------ ------------ ------------ ------------
Net Increase In Net Assets Derived From Policy Transactions ...... 13,078,154 4,452,177 3,467,466 4,271,519
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS ....................................... 13,740,581 4,761,010 3,524,454 3,993,809
------------ ------------ ------------ ------------
NET ASSETS
Beginning of period
------------ ------------ ------------ ------------
End of period ............................................... $ 13,740,581 $ 4,761,010 $ 3,524,454 $ 3,993,809
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
B-4
<PAGE> 7
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Separate Account B (the "Separate Account") is registered as a unit
investment trust under the Investment Company Act of 1940, as amended, and
during 1997 was comprised of seven subaccounts called Variable Accounts: the
Money Market Variable Account, the Managed Bond Variable Account, the Capital
Income Variable Account, the Blue Chip Variable Account, the Mid-Cap Equity
Variable Account, the Aggressive Growth Variable Account and the International
Variable Account. The assets in each Variable Account are invested in shares of
the corresponding Funds of Pacific Innovations Trust (the "Trust"), each of
which pursues different investment objectives and policies. The financial
statements of the Trust, including the schedules of portfolio investments, are
included elsewhere in this report and should be read in conjunction with the
Separate Account's financial statements.
The Separate Account was established by Pacific Life Insurance Company
(formerly named Pacific Mutual Life Insurance Company - see Note 1 to Financial
Statements of the Trust on A-38) on September 25, 1996 and commenced operations
on March 1, 1997. Under applicable insurance law, the assets and liabilities of
the Separate Account are clearly identified and distinguished from the other
assets and liabilities of Pacific Life. The assets of the Separate Account will
not be charged with any liabilities arising out of any other business conducted
by Pacific Life, but the obligations of the Separate Account, including benefits
related to variable annuities, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable accumulation deferred annuity contracts (the
"Contract").
The preparation of the accompanying financial statements 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
income and expenses during the reporting period. Actual results could differ
from those estimates.
A. Valuation of Investments
Investments in shares of the Trust are valued at the reported net asset values
of the respective Funds. Valuation of securities held by the Trust is discussed
in the notes to its financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal income
tax return of Pacific Life, which is taxed as a life insurance company under the
provisions of the Tax Reform Act of 1986. Under current tax law, no Federal
income taxes are expected to be paid by Pacific Life with respect to the
operations of the Separate Account.
2. DIVIDENDS
During 1997, the Trust has declared dividends for each Fund. The amounts
accrued by the Separate Account for its share of the dividends were reinvested
in additional full and fractional shares of the related Fund.
3. CHARGES AND EXPENSES
Pacific Life charges the Separate Account daily for mortality and expense
risks assumed and administrative costs incurred in operating the Separate
Account and issuing and administering the Contracts at an annual rate of 1.25%
and 0.15%, respectively, of the average daily net assets of each Variable
Account. Under the Contracts, Pacific Life makes certain deductions from the net
assets of each Variable Account for contract maintenance, any state premium
taxes, and any surrender charges. The operating expenses of the Separate Account
are paid by Pacific Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
is the principal underwriter of variable annuity contracts funded by interests
in the Separate Account, and is compensated by Pacific Life.
B-5
<PAGE> 8
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED ACCUMULATION UNIT** INFORMATION
Selected accumulation unit information for the period ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
Accumulation Unit Value
-------------------------------
Variable Accounts At Beginning At End of Number of Units Outstanding
of Period (1) Period At End of Period
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $10.00 $10.30 144,343
Managed Bond $10.00 $10.53 610,512
Capital Income $10.00 $11.34 1,052,328
Blue Chip $10.00 $12.18 1,127,859
Mid-Cap Equity $10.00 $12.63 376,936
Aggressive Growth $10.00 $11.63 303,100
International $10.00 $ 9.94 401,840
</TABLE>
** Accumulation Unit: unit of measure used to calculate the value of a
Contract Owner's interest in a Variable Account during the Accumulation
Period.
6. SEPARATE ACCOUNT'S COST OF INVESTMENTS IN THE TRUST SHARES
The investment in the Trust shares are carried at identified cost,
which represents the amount available for investment (including reinvested
distributions of net investment income and realized gains) in such shares after
deduction of mortality and expense risk and administrative charges (M&E). The
cost and market value of total Separate Account's investments in the Trust as of
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS (1)
---------------------------------------------------------
MONEY MANAGED CAPITAL BLUE
MARKET BOND INCOME CHIP
------ ---- ------ ----
<S> <C> <C> <C> <C>
Total net proceeds from policy and M&E transactions $ 3,926,019 $ 6,287,641 $11,728,370 $13,044,153
Add: Reinvested distributions from the Trust
(a) Net investment income 30,733 123,655 182,173 61,991
(b) Net realized gain 229,861 31,105
----------- ----------- ----------- -----------
Sub-Total 3,956,752 6,411,296 12,140,404 13,137,249
Less: Cost of investments disposed during the period 2,469,502 10,188 10,399 25,038
----------- ----------- ----------- -----------
Total cost of investments at end of period 1,487,250 6,401,108 12,130,005 13,112,211
Add: Unrealized appreciation (depreciation) 30,973 (194,706) 629,099
----------- ----------- ----------- -----------
Total market value of investments at end of period $ 1,487,250 $ 6,432,081 $11,935,299 $13,741,310
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
MID-CAP AGGRESSIVE INTER-
EQUITY GROWTH NATIONAL
------ ------ --------
<S> <C> <C> <C>
Total net proceeds from policy and M&E transactions $ 4,438,470 $ 3,472,859 $ 4,263,930
Add: Reinvested distributions from the Trust
(a) Net investment income 17,713 34,889
(b) Net realized gain 27,472 281,172 71,451
----------- ----------- -----------
Sub-Total 4,483,655 3,754,031 4,370,270
Less: Cost of investments disposed during the period 7,265 22,346 11,768
----------- ----------- -----------
Total cost of investments at end of period 4,476,390 3,731,685 4,358,502
Add: Unrealized appreciation (depreciation) 284,892 (207,045) (364,486)
----------- ----------- -----------
Total market value of investments at end of period $ 4,761,282 $ 3,524,640 $ 3,994,016
----------- ----------- -----------
</TABLE>
(1) For the period from March 1, 1997 (commencement of operations) to
December 31, 1997.
B-6
