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PACIFIC SELECT VARIABLE ANNUITY
PROSPECTUS
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[LOGO OF PACIFIC SELECT VARIABLE ANNUITY]
PROSPECTUS
FOR
PACIFIC SELECT VARIABLE ANNUITY
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
DATED APRIL 1, 1996
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PROSPECTUS
FOR
PACIFIC SELECT FUND
DATED APRIL 1, 1996
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PACIFIC SELECT VARIABLE ANNUITY
ISSUED BY:
PACIFIC MUTUAL LIFE INSURANCE COMPANY
1-800-722-2333
MAILING ADDRESS:
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
[LOGO OF PACIFIC SELECT VARIABLE ANNUITY]
This Prospectus describes Pacific Select Variable Annuity--an individual
flexible premium variable accumulation deferred annuity contract (the
"Contract") offered by Pacific Mutual Life Insurance Company ("Pacific
Mutual"). The Contract presents a dynamic concept in retirement planning
designed to give Contract Owners flexibility in attaining financial goals. The
Contract is available for individuals as a non-tax qualified retirement plan
("Non-Qualified Plan") under certain tax-qualified retirement plans
("Qualified Plan").
During the Accumulation Period, the Contract provides for the accumulation
of a Contract Owner's value on either a variable basis, a fixed basis, or
both. The Contract also provides several options for fixed annuity payments to
begin on a future date. Premium payments may be allocated at the Contract
Owner's discretion to one or more of the Investment Options currently
available. Each of the Variable Investment Options (also called "Variable
Accounts") is a subaccount of a separate account of Pacific Mutual called the
Pacific Select Variable Annuity Separate Account (the "Separate Account"). The
Variable Accounts invest in one or more of the corresponding Portfolios of the
Pacific Select Fund (the "Fund"), which currently are the following fourteen
Portfolios:
Money Market Portfolio Equity Income Portfolio
High Yield Bond Portfolio Multi-Strategy Portfolio
Managed Bond Portfolio Equity Portfolio
Government Securities Portfolio Bond and Income Portfolio
Growth Portfolio* Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio
A Fixed Option called the Fixed Account is also available. The Accumulated
Value in the Fixed Account will accrue interest at rates that are paid by
Pacific Mutual as described in "The Fixed Account".
The Accumulated Value in the Variable Accounts under a Contract will vary
based on investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
A Contract may be returned according to the terms of its Free-Look Right
(See "Free-Look Right").
THE CONTRACT INVOLVES INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL, AND IS
NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE
CONTRACT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus concisely sets forth information about the Contract and the
Separate Account that an investor should know before purchasing a Contract.
Certain additional information is contained in a "Statement of Additional
Information ("SAI")," dated April 1, 1996, which has been filed with the
Securities and Exchange Commission (the "SEC"), and can be obtained by calling
or writing Pacific Mutual at the telephone number and address above. The table
of contents of the Statement of Additional Information is set forth on page 42
of this Prospectus.
* The Growth Variable Account that invests in the Growth Portfolio is
available only to Owners of Contracts issued prior to January 1, 1994. It is
not available to Owners of Contracts issued on or after January 1, 1994.
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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.
---------------
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS
FOR THE FUND. THESE PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
DATE: APRIL 1, 1996
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TABLE OF CONTENTS
<TABLE>
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PAGE
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DEFINITIONS................................................................ 4
SUMMARY.................................................................... 6
Purpose of the Contract.................................................. 6
The Variable Accounts and the Fund....................................... 6
Fixed Account............................................................ 6
Premiums................................................................. 6
Contract Benefits........................................................ 7
Free-Look Right.......................................................... 7
Charges and Deductions................................................... 7
Contacting Pacific Mutual................................................ 9
EXPENSE TABLE.............................................................. 10
Contractual Expenses..................................................... 10
Separate Account Annual Expenses......................................... 10
Fund Annual Expenses After Expense Limitation............................ 10
FINANCIAL HIGHLIGHTS....................................................... 13
SELECTED ACCUMULATION UNIT INFORMATION..................................... 13
INFORMATION ABOUT PACIFIC MUTUAL, THE SEPARATE ACCOUNT, AND THE FUND....... 14
Pacific Mutual Life Insurance Company.................................... 14
Separate Account......................................................... 14
Pacific Select Fund...................................................... 14
The Investment Adviser................................................... 16
THE CONTRACT............................................................... 16
General.................................................................. 16
Application for a Contract............................................... 16
Premium Payments......................................................... 16
Allocation Limitation.................................................... 17
Allocation of Premiums................................................... 17
Dollar Cost Averaging Option............................................. 18
Portfolio Rebalancing Option............................................. 18
Transfers of Accumulated Value........................................... 18
Accumulated Value........................................................ 19
Determination of Accumulated Value....................................... 19
Full and Partial Withdrawals............................................. 20
Preauthorized Scheduled Withdrawals...................................... 20
Free-Look Right.......................................................... 21
Death Benefit............................................................ 22
Death of Owner........................................................... 22
CHARGES AND DEDUCTIONS..................................................... 23
Contingent Deferred Sales Charge......................................... 23
Mortality and Expense Risk Charge........................................ 24
Administrative Charge.................................................... 24
Maintenance Fee.......................................................... 25
Transfer Fee............................................................. 25
Premium Tax and Other Taxes.............................................. 25
Variations in Charges.................................................... 25
Guarantee of Certain Charges............................................. 26
Fund Expenses............................................................ 26
</TABLE>
2
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<TABLE>
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PAGE
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ANNUITY PERIOD............................................................. 26
General.................................................................. 26
Annuity Options.......................................................... 27
Selection of an Option................................................... 28
THE FIXED ACCOUNT.......................................................... 28
Interest................................................................. 28
Bail Out Provision....................................................... 29
Death Benefit............................................................ 29
Contract Charges......................................................... 29
Transfers and Withdrawals................................................ 29
Payments from the Fixed Account.......................................... 30
MORE ABOUT THE CONTRACT.................................................... 30
Ownership................................................................ 30
Designation and Change of Beneficiary.................................... 30
Payments from the Separate Account....................................... 30
Proof of Age and Survival................................................ 31
Loans.................................................................... 31
Restriction on Withdrawals from 403(b) Programs.......................... 32
Restrictions Under the Texas Optional Retirement Program................. 33
FEDERAL TAX MATTERS........................................................ 33
Introduction............................................................. 33
Tax Status of Pacific Mutual and the Separate Account.................... 34
Taxation of Annuities in General--Non-Qualified Plans.................... 34
Additional Considerations................................................ 35
Qualified Plans.......................................................... 36
Charge for Pacific Mutual Income Taxes................................... 38
OTHER INFORMATION.......................................................... 38
Voting of Fund Shares.................................................... 38
Substitution of Investments.............................................. 39
Changes to Comply with Law and Amendments................................ 39
Reports to Owners........................................................ 40
Telephone Transfer Privileges............................................ 40
Legal Proceedings........................................................ 40
Legal Matters............................................................ 40
PERFORMANCE INFORMATION.................................................... 41
ADDITIONAL INFORMATION..................................................... 41
Registration Statement................................................... 41
Financial Statements..................................................... 41
STATEMENT OF ADDITIONAL INFORMATION........................................ 42
APPENDIX................................................................... 43
</TABLE>
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THE CONTRACT IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR
THE STATEMENT OF ADDITIONAL INFORMATION, THE FUND'S PROSPECTUS OR THE
STATEMENT OF ADDITIONAL INFORMATION OF THE FUND, OR ANY SUPPLEMENT THERETO.
3
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DEFINITIONS
Various terms commonly used in this Prospectus are defined as follows:
Accumulated Value--The total value of the amounts in the Variable Accounts of
the Separate Account and the Fixed Account as well as any amount set aside in
the Loan Account to secure loans as of any Valuation Date.
Accumulation Period--The period commencing on the Contract Date and ending on
the Annuity Start Date or, if earlier, when the Contract is terminated, either
through a full withdrawal, payment of charges, or payment of the death benefit
proceeds.
Accumulation Unit--A unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
Age--The Owner's or Annuitant's age as of his or her nearest birthday as of
the Contract Date, increased by the number of complete Contract Years elapsed.
Annuitant--The person or persons on whose life annuity payments depend. If
Joint Annuitants are named in the Contract, "Annuitant" means both Annuitants
unless otherwise stated.
Annuity--A series of periodic income payments made by Pacific Mutual to an
Annuitant, Contingent Annuitant, or Beneficiary during the period specified in
the Annuity Option.
Annuity Options--Options under the Contract that prescribe the provisions
under which a series of annuity payments are made.
Annuity Period--The period during which annuity payments are made.
Annuity Start Date--The date when annuity payments are to begin.
Beneficiary--The person having the right to the death benefit, if any, payable
upon the death of the Annuitant during the Accumulation Period, and the person
having the right to benefits, if any, payable upon the death of the Annuitant
during the Annuity Period.
Contract--An individual flexible premium variable accumulation deferred
annuity contract offered by Pacific Mutual.
Contract Date--The date shown as the Contract Date in a Contract. Contract
monthly, quarterly, semi-annual, and annual anniversaries and Contract months,
quarters, and years are measured from the Contract Date. It is usually the
date that the initial premium is credited to the Contracts. The term "Issue
Date" shall be substituted for the term "Contract Date" for Contracts issued
to residents of the Commonwealth of Massachusetts.
Contract Debt--The unpaid loan balance including accrued loan interest.
Contract Owner or Owner--The person entitled to the ownership rights under the
Contract and in whose name the Contract is issued.
Contract Year--Each twelve-month period measured from the Contract Date.
Designated Beneficiary--The person selected by the Owner to succeed to the
Owner's interest in the Contract for purposes of Section 72(s) of the Internal
Revenue Code, and which includes an Owner Beneficiary and a Joint or
Contingent Owner.
Fixed Account--An account that is part of Pacific Mutual's General Account in
which all or a portion of the Accumulated Value may be held for accumulation
at fixed rates of interest (which may not be less than 4.0%) declared by
Pacific Mutual at least annually.
Full Withdrawal Value--The amount a Contract Owner may receive upon full
withdrawal of the Contract, which is equal to Accumulated Value minus any
unpaid maintenance fee, any applicable contingent deferred sales charge, and
any Contract Debt.
4
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Fund--Pacific Select Fund. The Fund is a diversified, open-end management
investment company commonly referred to as a mutual fund.
General Account--All assets of Pacific Mutual other than those allocated to
the Separate Account or to any other separate account of Pacific Mutual.
Investment Option--A Variable Account or the Fixed Account.
Owner Beneficiary--The person named (other than a Joint or Contingent Owner)
to receive death benefit proceeds if the Owner dies before the Annuitant
during the Accumulation Period.
Premium--The amounts paid to Pacific Mutual as consideration for the Contract.
Separate Account--The Pacific Select Variable Annuity Separate Account. A
separate account of Pacific Mutual that consists of subaccounts, referred to
as Variable Accounts, each of which invests in a separate Portfolio of the
Pacific Select Fund.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which Pacific Mutual's 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. Pacific Mutual may choose to close
on other holidays, a day immediately preceding or following a national
holiday, or in emergency situations. Any transaction called for on or as of
any day is effected as of the end of that day. If any transaction or event
called for under a Contract is scheduled to occur on a day that is not a
Valuation Date, such transaction or event will be deemed to occur on the next
following Valuation Date, unless otherwise specified. Each Valuation Date ends
at 1:00 p.m. Pacific time, or the close of the New York Stock Exchange, if
earlier.
Valuation Period--A period used in measuring the investment experience of each
Variable Account of the Separate Account. The Valuation Period begins at the
close of one Valuation Date and ends at the close of the next succeeding
Valuation Date.
Variable Account--A separate account of Pacific Mutual or a subaccount of a
separate account to which the Accumulated Value under the Contract may be
allocated for variable accumulation. Currently, fourteen Variable Accounts are
available under the Contract unless otherwise indicated in this Prospectus.
Variable Annuities Department--The Department of Pacific Mutual that services
the Contract. The addresses of the Variable Annuities Department are described
in "Contacting Pacific Mutual".
Variable Investment Option--A subaccount of the Separate Account.
5
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SUMMARY
This summary is intended to provide a brief overview of the more significant
aspects of the Contract. Further detail is provided in this Prospectus, the
Statement of Additional Information, and the Contract. Unless the context
indicates otherwise, the discussion in this summary and the remainder of the
Prospectus relates to the portion of the Contract involving the Separate
Account. The Fixed Account is briefly described under "The Fixed Account," in
this Prospectus and in the Contract.
PURPOSE OF THE CONTRACT
The Contract described in this Prospectus presents a dynamic concept in
retirement planning designed to give Contract Owners flexibility in attaining
financial goals. The Contract provides for the accumulation of values on a
variable basis, a fixed basis, or both, during the Accumulation Period and
provides several options for fixed annuity payments. During the Accumulation
Period, an Owner can pursue various allocation options by allocating premiums
to the Variable Accounts of the Separate Account or to the Fixed Account. See
"The Contract," page 16.
The Contract is eligible for purchase as a non-tax qualified retirement plan
for an individual ("Non-Qualified Plan"). The Contract is also eligible for an
individual in connection with a retirement plan qualified under Section 401,
408, or 457 of the Internal Revenue Code of 1986, as amended. These plans are
sometimes referred to in this Prospectus as "Qualified Plans."
THE VARIABLE ACCOUNTS AND THE FUND
Premiums designated to accumulate on a variable basis are allocated to the
Separate Account. See "Separate Account." The Separate Account is currently
divided into fourteen subaccounts called Variable Accounts or Variable
Investment Options. Each Variable Account invests exclusively in shares of a
specific Portfolio of the Fund. The Portfolios of the Fund, each of which has a
different investment objective or objectives, are as follows: Money Market
Portfolio, High Yield Bond Portfolio, Managed Bond Portfolio, Government
Securities Portfolio, Growth Portfolio, Aggressive Equity Portfolio, Growth LT
Portfolio, Equity Income Portfolio, Multi-Strategy Portfolio, Equity Portfolio,
Bond and Income Portfolio, Equity Index Portfolio, International Portfolio, and
Emerging Markets Portfolio. See "Pacific Select Fund," page 14. Amounts held in
a Variable Account will increase or decrease in dollar value depending on the
investment performance of the corresponding Portfolio of the Fund in which such
Variable Account invests. The Contract Owner bears the investment risk for
amounts allocated to a Variable Account.
The Growth Variable Account that invests in the Growth Portfolio is available
only to Owners of Contracts issued prior to January 1, 1994. It is not
available to Owners of Contracts issued on or after January 1, 1994.
FIXED ACCOUNT
Premiums designated to accumulate on a fixed basis may be allocated to the
Fixed Account, which is part of Pacific Mutual's General Account. Amounts
allocated to the Fixed Account earn interest at rates determined at least
annually by Pacific Mutual and that are guaranteed to be at least an effective
annual rate of 4%. See "The Fixed Account," on page 28.
PREMIUMS
The minimum initial premium is $5,000 for a Contract issued in connection
with a Non-Qualified Plan and $2,000 for a Contract issued in connection with a
Qualified Plan. Thereafter, the Contract Owner may choose the amount and
frequency of premium payments, except that the minimum subsequent premium is
$250 for both Non-Qualified and Qualified Plans, except for certain Qualified
Plans, in which case it is $50.
6
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CONTRACT BENEFITS
During the Accumulation Period, Accumulated Value may be transferred by the
Contract Owner among the Variable Accounts and to and from the Fixed Account,
subject to certain restrictions as described in "Transfers of Accumulated
Value," on page 18.
At any time before the Annuity Start Date, a Contract may be surrendered for
its Full Withdrawal Value, and partial withdrawals, including preauthorized
scheduled withdrawals, may be taken from the Accumulated Value. Full and
partial withdrawals, including preauthorized scheduled withdrawals, may result
in the deduction of a contingent deferred sales charge. See "Full and Partial
Withdrawals," on page 20 and "Preauthorized Scheduled Withdrawals," on page 20
for more information, including the possible charges and tax consequences
associated with full and partial withdrawals.
The Contract provides for a death benefit upon the death of the Annuitant
during the Accumulation Period. See "Death Benefit," on page 22. The Contract
provides for several fixed Annuity Options. Payments under the Annuity Options
will be fixed and guaranteed by Pacific Mutual. Pacific Mutual reserves the
right to offer annuity options on a variable basis. See "Annuity Period," on
page 26.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is a ten-
day period beginning when the Owner receives the Contract unless state law
requires otherwise.
Premiums received during the Free-Look Period will, except as indicated
below, be allocated according to the Contract Owner's instructions contained in
the application or more recent instructions received, if any. In the event that
an Owner returns a Contract within the Free-Look Period, Pacific Mutual will
refund to the Owner any premium payments allocated to the Fixed Account and the
Accumulated Value allocated to the Variable Accounts as of the end of the
Valuation Period in which Pacific Mutual receives the Contract plus any
Contract Fees and Charges deducted from the Contract Owner's Accumulated Value
allocated to the Variable Accounts.
If the Contract Owner resides in a state that requires Pacific Mutual to
return premium payments to Owners who exercise the Free-Look Right, Pacific
Mutual will refund any premiums received or, if required by the Owner's state
of residence, premiums allocated to the Fixed Account plus the greater of
premiums allocated to the Variable Accounts or Accumulated Value in the
Variable Accounts plus any Contract charges and fees deducted from the Variable
Accounts on the Contract Date. Premiums received during the Free-Look Period
will initially be allocated to the Money Market Variable Account. The
Accumulated Value in the Money Market Variable Account will be transferred
automatically to the Variable Accounts and the Fixed Account elected in the
Owner's application (or, if received more recently, in written instructions) 15
days after the Contract is issued. In Pennsylvania, Pacific Mutual will refund
premiums allocated to the Fixed Account plus the Accumulated Value in the
Variable Accounts plus any Charges deducted from the Variable Accounts on the
Contract Date.
CHARGES AND DEDUCTIONS
Pacific Mutual does not make any deductions for sales load from premium
payments before allocating them to the Owner's Accumulated Value. Certain
charges will be deducted in connection with the Contract.
7
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Contingent Deferred Sales Charge
A contingent deferred sales charge (which may also be referred to as a
withdrawal charge) may be assessed by Pacific Mutual on a full or partial
withdrawal, including a scheduled withdrawal, during the Accumulation Period
and, under certain circumstances, upon annuitization. The withdrawal charge
will be waived on withdrawals to the extent that total withdrawals that are
free of charge during the Contract Year do not exceed 10% of the sum of the
premium payments made during the current Contract Year up to the Valuation Date
of the withdrawal and the preceding four Contract Years. The withdrawal charge
applies against any withdrawal to the extent the amount withdrawn is
attributable to premium payments made. For the purpose of determining any
withdrawal charge, withdrawals are applied to premium payments in the order
premium payments are made, then to earnings. The amount of the charge will
depend upon the number of Contract Years that a premium has remained credited
under the Contract, as follows:
<TABLE>
<CAPTION>
AGE OF PREMIUM
IN CONTRACT
YEARS WITHDRAWAL CHARGE
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<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 0%
</TABLE>
In no event will the amount of any withdrawal charge, when added to any such
charge previously assessed against any amount withdrawn from the Contract,
exceed 6% of the premiums paid under a Contract. In addition, no withdrawal
charge will be imposed upon: (1) payment of death benefit proceeds under the
Contract; (2) withdrawals effected to meet the minimum distribution rules for
Qualified Plans as they apply to amounts held under the Contract; and (3) in
certain instances annuitization. Subject to approval of state insurance
authorities, the withdrawal charge will also be waived on a full or partial
withdrawal if the Annuitant has been diagnosed with a medically determinable
condition which results in a life expectancy of 12 months or less. See
"Contingent Deferred Sales Charge," on page 23.
Mortality and Expense Risk Charge
Pacific Mutual deducts a daily charge from the assets of each Variable
Account for mortality and expense risks equal to an annual rate of 1.25% of the
average daily net assets of each Variable Account. See "Mortality and Expense
Risk Charge," on page 24.
Administrative Charge
On each Monthly Anniversary following the Contract Date, Pacific Mutual
deducts a monthly administrative charge during the Accumulation Period equal to
.000125 multiplied by a Contract's Accumulated Value in the Variable Accounts
and Fixed Account, which is equal to an annual rate of 0.15% of a Contract's
Accumulated Value in the Variable Accounts and Fixed Account. On Contracts
issued in connection with applications received by Pacific Mutual at its
Variable Annuity Department before May 1, 1992, the rate of this charge is
currently reduced to .0001 (.12% on an annual basis), and, if the initial
premium is $50,000 or more on such Contracts, to .00005 (.06% on an annual
basis). See "Administrative Charge," on page 24.
Maintenance Fee
During the Accumulation Period, an annual fee of $30 is deducted on each
Contract Anniversary to cover the costs of maintaining records for the
Contract. This charge is pro-rated upon annuitization or a full withdrawal. The
charge is currently waived on Contracts for which the premium payments received
during the first Contract Year equal $50,000 or more. See "Maintenance Fee," on
page 25.
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Transfer Fee
Currently no transfer fee is imposed. Pacific Mutual reserves the right to
assess a transfer fee of $10 per transaction on the thirteenth and any
subsequent transfer occurring in a Contract Year.
Premium Tax Charge
Pacific Mutual assesses a premium tax charge to reimburse itself for any
premium taxes that it incurs. This charge will be deducted on annuitization or
upon full withdrawal if a premium tax was incurred by Pacific Mutual and is not
refundable. Partial withdrawals, including scheduled withdrawals, may result in
a premium tax charge if a premium tax is incurred by Pacific Mutual and is not
refundable. Pacific Mutual reserves the right to deduct such taxes when
incurred or upon distributions. Premium tax rates currently range from 0% to
3.5%. See "Premium Tax and Other Taxes," on page 25.
Other Expenses
The operating expenses of the Separate Account are paid by Pacific Mutual.
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. For a description of these charges and expenses, see the Prospectus for
the Fund.
CONTACTING PACIFIC MUTUAL
Premium payments, applications accompanying premium payments, and loan
repayments should be directed to Pacific Mutual at P.O. Box 100060, Pasadena,
California 91189-0060. All written requests, notices, and other forms required
by the Contract, including applications not accompanied by premium payments,
and any questions or inquiries should be directed to Pacific Mutual at P.O. Box
7187, Pasadena, California 91109-7187. Express Mail should be directed to
Pacific Mutual Life Insurance Company, c/o FCNPC, 1111 South Arroyo Parkway,
1st Floor, Pasadena, California 91105. A service representative may be reached
by calling 1-800- 722-2333 between the hours of 6:00 a.m. and 5:00 p.m.,
Pacific time.
The effective date of certain notices or of instructions is determined by the
date and time on which Pacific Mutual "receives" the notice or instructions.
Pacific Mutual "receives" this information only when it arrives, in good form,
at the correct mailing address set out above. Please call Pacific Mutual at 1-
800-722-2333 if the Owner has any questions regarding which address to use.
Additional premium payments, loan requests, loan repayments, transfer
requests, and withdrawal requests we receive before 4:00 p.m. Eastern time (or
the close of the New York Stock Exchange, if earlier) will normally be
effective on the same Valuation Date that Pacific Mutual receives them in
"proper form", unless the transaction or event is scheduled to occur on another
day. Generally, whenever the Owner submits any other form, notice or request,
the instructions will be effective on the next Valuation Date after Pacific
Mutual receives 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. Pacific
Mutual does not generally require a signature guarantee unless it appears that
the Owner's signature may have 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 Pacific Mutual. The Owner
should call the Owner's registered representative or Pacific Mutual if the
Owner has any questions regarding the required form of a request.
9
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EXPENSE TABLE
The purpose of this table is to assist investors in understanding the
various costs and expenses borne directly and indirectly by Owners of the
Contracts with Accumulated Value allocated to the Variable Accounts. The table
reflects contractual charges, expenses of the Separate Account, and charges
and expenses of the Fund. The table does not reflect premium taxes that may be
imposed by various jurisdictions. See "Premium Tax and Other Taxes". The
information contained in the table is not generally applicable to amounts
allocated to the Fixed Account (although certain contractual charges also
apply to this Account).
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions". For a more complete description of the Fund's costs and
expenses, see the Fund Prospectus, which accompanies this Prospectus.
CONTRACTUAL EXPENSES
<TABLE>
<S> <C>
Sales load on premiums................................................ None
Contingent deferred sales charge (as a percentage of amounts withdrawn
attributable to
premiums paid in the last five Contract Years)/1/
<CAPTION>
AGE OF PREMIUM CHARGE
-------------- ------
<S> <C>
Contract Year 1...................................................... 6%
Contract Year 2...................................................... 6%
Contract Year 3...................................................... 5%
Contract Year 4...................................................... 4%
Contract Year 5...................................................... 3%
Contract Year 6 and over............................................. None
Administrative Charge (per year)/2/..................................... 0.15%
Maintenance Fee (per year)/3/
Premiums received during the first Contract Year of less than
$50,000............................................................. $30
Premiums received during the first Contract Year of $50,000 or more.. None
Transfer Fee/4/......................................................... None
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and expense risk charge (as a percentage of each Variable Ac-
count's average daily net assets)...................................... 1.25%
</TABLE>
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)/5/
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................ .40% .13% .53%
High Yield Bond Portfolio......................... .60% .17% .77%
Managed Bond Portfolio............................ .60% .16% .76%
Government Securities Portfolio................... .60% .22% .82%
Growth Portfolio.................................. .65% .14% .79%
Aggressive Equity Portfolio....................... .80% .19% .99%
Growth LT Portfolio............................... .75% .19% .94%
Equity Income Portfolio........................... .65% .18% .83%
Multi-Strategy Portfolio.......................... .65% .19% .84%
Equity Portfolio.................................. .65% .15% .80%
Bond and Income Portfolio......................... .60% .20% .80%
Equity Index Portfolio............................ .25% .17% .42%
International Portfolio........................... .85% .27% 1.12%
Emerging Markets Portfolio........................ 1.10% .25% 1.35%
</TABLE>
(Footnotes on following page)
10
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- --------
/1/ The withdrawal charge will be waived to the extent that total withdrawals
free of charge during the Contract Year do not exceed 10% of the sum of the
premium payments made during the current Contract Year and the preceding
four Contract Years. When added to the withdrawal charges assessed on prior
withdrawals, the total withdrawal charge will never exceed 6% of total
premiums paid.
/2/ On Contracts issued in connection with applications received by Pacific
Mutual at its Home Office before May 1, 1992, the rate of this charge is
currently reduced to .0001 (.12% on an annual basis), and, if the initial
premium is $50,000 or more on such Contracts, to .00005 (.06% on an annual
basis). Pacific Mutual has reserved the right to increase the
administrative fee on such Contracts up to 0.15% per year.
/3/ The Maintenance Fee is currently waived on Contracts for which premiums
received in the first Contract Year are $50,000 or more.
/4/ Pacific Mutual reserves the right to assess a transfer fee of $10 per
transaction on the thirteenth and any subsequent transfer occuring in any
Contract Year.
/5/ The expenses listed for the Fund Portfolios reflect current expenses for
the year ending December 31, 1995. The Aggressive Equity and Emerging
Markets Portfolios did not begin operations until April 1, 1996 and their
estimated "other expenses" reflect the policy adopted by Pacific Mutual as
Investment Adviser to the Fund, to waive its fees and reimburse expenses so
that operating expenses (exclusive of advisory fees, additional custodial
fees associated with holding foreign securities, foreign taxes on
dividends, interest or capital gains, and extraordinary expenses) expressed
as a decimal are not greater than 0.0025 of average daily net assets per
year. We began this policy in 1989 and intend to continue this policy until
at least December 31, 1997, but may discontinue it after that time. In the
absence of this policy, it is estimated that such expenses for the Emerging
Markets Portfolio would exceed this expense cap in 1996. No reimbursement
to the Portfolios was necessary for the Fund's fiscal year 1995.
EXAMPLES
Different examples are presented below that show expenses that an Owner of a
Contract with Accumulated Value allocated to a Variable Account would pay at
the end of one, three, five or ten years if, at the end of those time periods,
the Contract is (1) surrendered, (2) annuitized, (3) not surrendered or
annuitized. The examples assume a $1000 investment and a 5% annual rate of
return. In addition, the examples reflect an average initial premium of
approximately $40,000 and a prorata portion of the annual maintenance fee.
Each example shows expenses based upon allocation to each of the Variable
Accounts.
The examples below should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
The 5% return assumed in the examples is hypothetical and should not be
considered a representation of past or future actual returns, which may be
greater or lesser than the assumed amount.
11
<PAGE>
<TABLE>
<CAPTION>
CONTRACT NOT SURRENDERED
CONTRACT SURRENDERED AT CONTRACT ANNUITIZED AT OR ANNUITIZED AND REMAINS
VARIABLE ACCOUNT END OF TIME PERIOD END OF TIME PERIOD* IN FORCE AT END OF TIME PERIOD
---------------- ----------------------- ---------------------- ------------------------------
<S> <C> <C> <C>
Money Market
1 yr.................. $ 74 $ 74 $ 20
3 yrs................. 108 63 63
5 yrs................. 135 108 108
10 yrs................ 231 231 231
Managed Bond
1 yr.................. 77 77 23
3 yrs................. 115 70 70
5 yrs................. 146 119 119
10 yrs................ 255 255 255
Growth
1 yr.................. 77 77 23
3 yrs................. 116 71 71
5 yrs................. 148 121 121
10 yrs................ 258 258 258
Aggressive Equity
1 yr.................. 79 79 25
3 yrs................. 123 78 78
Growth LT
1 yr.................. 78 78 24
3 yrs................. 120 75 75
5 yrs................. 156 129 129
10 yrs................ 273 273 273
Equity Income
1 yr.................. 77 77 23
3 yrs................. 117 72 72
5 yrs................. 150 123 123
10 yrs................ 262 262 262
Multi-Strategy
1 yr.................. 77 77 23
3 yrs................. 117 72 72
5 yrs................. 150 123 123
10 yrs................ 263 263 263
Equity
1 yr.................. 77 77 23
3 yrs................. 116 71 71
Bond and Income
1 yr.................. 77 77 23
3 yrs................. 116 71 71
Equity Index
1 yr.................. 73 73 19
3 yrs................. 104 59 59
5 yrs................. 129 102 102
10 yrs................ 220 220 220
International
1 yr.................. 83 83 29
3 yrs................. 135 90 90
5 yrs................. 180 153 153
10 yrs................ 321 321 321
Emerging Markets
1 yr.................. 83 83 29
3 yrs................. 133 88 88
Government Securities
1 yr.................. 77 77 23
3 yrs................. 117 72 72
5 yrs................. 149 122 122
10 yrs................ 261 261 261
High Yield Bond
1 yr.................. 77 77 23
3 yrs................. 115 70 70
5 yrs................. 147 120 120
10 yrs................ 256 256 256
</TABLE>
- --------
*In this example, it is assumed that an Annuity Option has been selected that
provides for annuity payments that continue for at least five years, in which
case the contingent deferred sales charge would not be assessed if the
Contract was in force during the Accumulation Period for at least two Contract
Years.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables present financial highlights with respect to each
Variable Account of the Separate Account, other than the Aggressive Equity and
Emerging Markets Variable Accounts. The information in the tables for the
years or periods ended December 31, 1990, 1991, 1992, 1993, 1994 and 1995 is
included in the Separate Account's financial statements that have been audited
by Deloitte & Touche llp, independent public accountants. The tables should be
read in conjunction with the Separate Account's financial statements, which
are in the Separate Account's Annual Report dated as of December 31, 1995.
The Equity Income, Multi-Strategy and International Portfolios of the Fund,
in which each corresponding Variable Account invests, were advised by other
Portfolio Managers during the periods presented in the 1990, 1991, 1992 and
1993 tables. Effective January 1, 1994, J.P. Morgan Investment Management Inc.
became the Portfolio Manager of the Equity Income and Multi-Strategy
Portfolios and Templeton Investment Counsel, Inc. became the Portfolio Manager
of the International Portfolio.
SELECTED ACCUMULATION UNIT* INFORMATION
Selected accumulation unit information as of the year ended December 31st
for each period:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT VALUE
AT BEGINNING OF PERIOD:
Money Market Variable
Account................ 11.36 11.08 10.94 10.73 10.27 10.00(a)
High Yield Bond Variable
Account................ 16.03 16.16 13.86 11.82 9.58 10.00(b)
Managed Bond Variable
Account................ 13.70 14.51 13.15 12.25 10.56 10.00(c)
Government Securities
Variable Account....... 13.37 14.26 13.03 12.27 10.61 10.00(d)
Growth Variable Account. 16.07 18.18 15.10 12.68 9.11 10.00(e)
Growth LT Variable Ac-
count.................. 11.19 10.00(f)
Equity Income Variable
Account................ 14.09 14.31 13.38 12.85 9.88 10.00(g)
Multi-Strategy Variable
Account................ 14.29 14.69 13.62 13.06 10.63 10.00(h)
Equity Variable Account. 10.00(i)
Bond and Income Variable
Account................ 10.00(j)
Equity Index Variable
Account................ 13.03 13.06 12.09 11.44 10.00(k)
International Variable
Account................ 11.47 11.27 8.77 9.85 9.02 10.00(l)
- ----------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
AT END OF PERIOD:
Money Market Variable
Account................ 11.84 11.36 11.08 10.94 10.73 10.27
High Yield Bond Variable
Account................ 18.82 16.03 16.16 13.86 11.82 9.58
Managed Bond Variable
Account................ 16.11 13.70 14.51 13.15 12.25 10.56
Government Securities
Variable Account....... 15.68 13.37 14.26 13.03 12.27 10.61
Growth Variable Account. 19.95 16.07 18.18 15.10 12.68 9.11
Growth LT Variable Ac-
count.................. 15.11 11.19
Equity Income Variable
Account................ 18.32 14.09 14.31 13.38 12.85 9.88
Multi-Strategy Variable
Account................ 17.68 14.29 14.69 13.62 13.06 10.63
Equity Variable Account. 12.24
Bond and Income Variable
Account................ 13.21
Equity Index Variable
Account................ 17.62 13.03 13.06 12.09 11.44
International Variable
Account................ 12.52 11.47 11.27 8.77 9.85 9.02
- ----------------------------------------------------------------------------------------------
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT
END OF PERIOD:
Money Market Variable
Account................ 5,268,194 3,822,842 1,329,477 841,839 596,386 290,145
High Yield Bond Variable
Account................ 3,499,795 915,875 579,127 204,530 28,473 5,555
Managed Bond Variable
Account................ 4,110,672 1,972,516 1,653,806 608,417 159,134 9,725
Government Securities
Variable Account....... 3,144,652 1,085,199 1,168,824 668,500 264,937 14,888
Growth Variable Account. 1,431,985 1,684,966 1,951,727 744,468 232,180 41,227
Growth LT Variable Ac-
count.................. 9,411,999 3,169,124
Equity Income Variable
Account................ 7,116,753 2,165,096 1,337,697 748,646 255,940 30,402
Multi-Strategy Variable
Account................ 3,112,558 1,848,366 1,288,197 737,841 276,429 7,594
Equity Variable Account. 2,377,743
Bond and Income Variable
Account................ 1,389,028
Equity Index Variable
Account................ 4,142,024 765,184 554,737 291,497 132,256
International Variable
Account................ 9,523,524 3,744,811 1,397,587 442,951 173,609 25,363
- ----------------------------------------------------------------------------------------------
</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.
Date Variable Account began operations:
(a) 07/24/90 (b) 08/16/90 (c) 09/05/90 (d) 08/22/90 (e) 08/16/90 (f) 01/04/94
(g) 08/16/90 (h) 09/25/90 (i) 01/01/95 (j) 01/01/95 (k) 02/11/91 (l) 08/16/90
13
<PAGE>
INFORMATION ABOUT PACIFIC MUTUAL,
THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC MUTUAL LIFE INSURANCE COMPANY
Pacific Mutual is a mutual life insurance company organized under the laws
of the State of California. It was authorized to conduct business as a life
insurance company on January 2, 1868, as Pacific Mutual Life Insurance Company
of California, and was reincorporated under its present name on July 22, 1936.
Pacific Mutual offers a complete line of life insurance policies and annuity
contracts, as well as financial and retirement services. It is admitted to do
business in the District of Columbia, and in all states except New York. As of
the end of 1995, Pacific Mutual had over $44.2 billion of individual life
insurance in force and total assets of $17.6 billion. Together with its
subsidiaries and affiliated enterprises, Pacific Mutual has total assets and
funds under management of over $116.6 billion. It has been ranked according to
assets in the top 24 largest life insurance carriers in the nation for 1994.
The Principal Underwriter for the Contracts is Pacific Mutual Distributors,
Inc. ("PMD"), formerly Pacific Equities Network. PMD is registered as a
broker-dealer with the SEC and is a wholly-owned subsidiary of Pacific Mutual.
SEPARATE ACCOUNT
The Separate Account was established by Pacific Mutual on November 30, 1989,
under procedures established under California law. The income, gains, or
losses of the Separate Account are credited to or charged against the assets
of the Separate Account without regard to other income, gains, or losses of
Pacific Mutual. Assets in the Separate Account attributable to the reserves
and other liabilities under the Contracts are not chargeable with liabilities
arising from any other business that Pacific Mutual conducts. Pacific Mutual
owns the assets in the Separate Account and is required to maintain sufficient
assets in the Separate Account to meet all Separate Account obligations under
the Contracts. Pacific Mutual may transfer to its General Account assets that
exceed anticipated obligations of the Separate Account. All obligations
arising under the Contracts are general corporate obligations of Pacific
Mutual. Pacific Mutual may invest its own assets in the Separate Account for
other purposes, but not to support contracts other than variable annuity
contracts, and may accumulate in the Separate Account proceeds from Contract
charges and investment results applicable to those assets.
The Separate Account is currently divided into fourteen Variable Accounts.
Each Variable Account invests exclusively in shares of a specific Portfolio of
the Fund. Pacific Mutual may in the future establish additional Variable
Accounts of the Separate Account, which may invest in other Portfolios of the
Fund or in other securities, mutual funds, or investment vehicles.
The Separate Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with
the SEC does not involve supervision by the SEC of the administration or
investment practices of the Separate Account or of Pacific Mutual.
PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the 1940 Act. The Fund
currently has fourteen separate Portfolios, each of which pursues different
investment objectives and policies.
Shares of the Fund currently are offered only for purchase by separate
accounts of Pacific Mutual to serve as an investment medium for variable
annuity contracts and for variable life insurance policies issued by Pacific
Mutual and to a separate account of Pacific Corinthian Life Insurance Company,
a subsidiary of Pacific Mutual,
14
<PAGE>
to serve as an investment medium for variable annuity contracts issued by
Pacific Corinthian. Shares of the Fund may also be sold in the future to
separate accounts of other insurance companies, both affiliated and not
affiliated with Pacific Mutual.
The chart below summarizes some basic data about each Portfolio of the Fund.
There can be no assurance that any Portfolio will achieve its objective. More
detailed information is contained in the accompanying prospectus of the Fund,
including information on the risks associated with the investments and
investment techniques of each of the Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- ------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Mutual
with preservation of capital market instruments.
- ------------------------------------------------------------------------------------------------------------
High Yield Bond High level of current income Intermediate and long- Pacific Mutual
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities.
- ------------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- ------------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- ------------------------------------------------------------------------------------------------------------
Growth Growth of capital Common stock. Capital Guardian
Trust Company
- ------------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation Stocks of small- and Columbus Circle Investors
Equity medium-sized companies.
- ------------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock. Janus Capital Corporation
consistent with the
preservation of capital
- ------------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock. Management Inc.
- ------------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities. Management Inc.
- ------------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greenwich Street Advisors
securities convertible
into or exchangeable for
common stocks.
- ------------------------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greenwich Street Advisors
Income income consistent with securities.
prudent investment
management and
preservation of capital
- ------------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Bankers Trust Company
that correspond to the total S&P 500.
return performance of
common stocks publicly traded
in the U.S.
- ------------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Templeton Investment
appreciation corporations domiciled Counsel, Inc.
outside the United
States.
- ------------------------------------------------------------------------------------------------------------
Emerging Long-term growth of capital Common stocks of Blairlogie Capital Management
Markets companies domi-ciled in
emerging market
countries.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE GROWTH VARIABLE ACCOUNT THAT INVESTS IN THE GROWTH PORTFOLIO IS
AVAILABLE ONLY TO OWNERS OF CONTRACTS ISSUED PRIOR TO JANUARY 1, 1994. IT IS
NOT AVAILABLE TO OWNERS OF CONTRACTS ISSUED ON OR AFTER JANUARY 1, 1994.
15
<PAGE>
THE INVESTMENT ADVISER
Pacific Mutual, located at 700 Newport Center Drive, Newport Beach,
California 92660, serves as Investment Adviser to each Portfolio of the Fund.
Pacific Mutual is registered with the SEC as an investment adviser. For twelve
of the Portfolios, the Investment Adviser and the Fund have engaged other
firms to serve as Portfolio Managers under the supervision of Pacific Mutual.
THE CONTRACT
GENERAL
To the extent that all or a portion of premium payments are allocated to the
Variable Accounts, the Contract is significantly different from a fixed
annuity contract in that it is the Owner under a Contract who assumes the risk
of investment gain or loss rather than Pacific Mutual. Upon the maturity of a
Contract, the Contract provides several fixed Annuity Options under which
Pacific Mutual will pay specified periodic annuity payments beginning on the
Annuity Start Date. The amount that will be available for annuity payments
will depend on the investment performance of the Variable Accounts to which
premiums have been allocated.
The Contract is available for purchase as a non-tax qualified retirement
plan by an individual. The Contract is also eligible for use in connection
with certain tax qualified retirement plans that meet the requirements of
Sections 401 and 408 of the Internal Revenue Code. Certain Federal tax
advantages are currently available to retirement plans that qualify as (1)
self-employed individuals' retirement plans under Section 401, such as HR-10
or Keogh plans, (2) pension or profit-sharing plans established by an employer
for the benefit of its employees under Section 401, (3) individual retirement
accounts or annuities, including those established by an employer as a
simplified employee pension plan under Section 408, (4) Section 403(b) Tax-
Sheltered Annuities, and (5) Section 457 plans. Joint Owners are permitted on
a Contract issued pursuant to a Non-Qualified Plan. The Contract is not
available for use in connection with tax qualified retirement plans under
Section 403(b) unless otherwise approved by Pacific Mutual.
APPLICATION FOR A CONTRACT
Any person wishing to purchase a Contract may submit an application and an
initial premium to Pacific Mutual, as well as any other form or information
that Pacific Mutual may require. Pacific Mutual reserves the right to reject
an application or premium payment for any reason, subject to Pacific Mutual's
underwriting standards and guidelines and any applicable state or Federal law
relating to nondiscrimination.
The maximum Age of an Annuitant for which a Contract will be issued is 85.
The Annuitant's Age is calculated as of his or her nearest birthday. If there
are Joint Annuitants, the maximum issue Age will be determined by reference to
the younger Annuitant.
PREMIUM PAYMENTS
The minimum initial premium for the purchase of a Contract is $5,000 in
connection with a Non-Qualified Plan and $2,000 in connection with a Qualified
Plan. Thereafter, the Contract Owner may choose the amount and frequency of
premium payments, except that the minimum subsequent premium is $250 for both
Non-Qualified and Qualified Plans, except for individual retirement annuities
and simplified employee pension plans, in which case it is $50. No minimum
initial or subsequent premium requirements will apply to a Contract purchased
in connection with the Texas Optional Retirement Program. Pacific Mutual may
reduce the minimum premium requirements under certain circumstances, such as
for group or sponsored arrangements.
Any premium that results in total premiums paid under a Contract exceeding
$5 million will not be accepted without prior approval of Pacific Mutual. No
premium or transfer can be allocated to the Fixed Account without
16
<PAGE>
prior approval by Pacific Mutual if, immediately after the premium payment or
transfer, the Accumulated Value in the Fixed Account would be $250,000 or
more.
An initial premium payment will be applied not later than the end of the
second Valuation Date after the Valuation Date it is received by Pacific
Mutual if the premium is preceded or accompanied by sufficient information
necessary to establish an account and properly credit such premium payment. If
Pacific Mutual does not receive sufficient information, Pacific Mutual will
notify the applicant that Pacific Mutual does not have the necessary
information to issue a Contract. If the necessary information is not provided
to Pacific Mutual within five Valuation Dates after the Valuation Date on
which Pacific Mutual first receives the initial premium (or, if sooner, other
period required by law), or if Pacific Mutual determines it cannot otherwise
issue the Contract, Pacific Mutual will return the initial premium to the
applicant unless the applicant consents to Pacific Mutual retaining the
premium until the requested information has been provided.
Subsequent premiums will be credited as of the end of the Valuation Period
in which they are received by Pacific Mutual. Premium payments after the
initial premium may be made at any time prior to the Annuity Start Date, so
long as the Annuitant is living. Subsequent premiums under a Qualified Plan
may be limited by the terms of the plan and provisions of the Internal Revenue
Code. Premiums may be paid monthly via electronic funds transfer under the
Uni-Check plan where the Owner authorizes Pacific Mutual to withdraw premiums
from the Owner's checking account each month. The minimum initial premium can
be met by payment under the Uni-Check plan.
ALLOCATION LIMITATION
The Growth Variable Account that invests in the Growth Portfolio is
available only to Owners of Contracts issued prior to January 1, 1994. It is
not available to Owners of Contracts issued on or after January 1, 1994.
ALLOCATION OF PREMIUMS
In an application for a Contract, the Contract Owner selects the Variable
Accounts or the Fixed Account to which premium payments will be allocated.
During the Free-Look Period, except as indicated below, premiums will be
allocated according to the Contract Owner's instructions contained in the
application (or more recent instructions received, if any). For residents of
states that require a refund of premiums to a Contract Owner who returns a
Contract during the Free-Look Period, premiums received during the Free-Look
Period will be allocated to the Money Market Variable Account. The Accumulated
Value will then be automatically allocated according to the Contract Owner's
instructions contained in the application (or, if received more recently, in
written instructions) 15 days after the Contract is issued. Premiums credited
to the Contract after this time will be allocated according to the Contract
Owner's most recent instructions as of the end of the Valuation Period on
which the premiums are received by Pacific Mutual.
A Contract Owner may change the premium allocation instructions by
submitting a proper written request to Pacific Mutual. Changes in premium
allocation instructions may be made by telephone provided an authorization for
telephone requests is on file at Pacific Mutual. A proper change in allocation
instructions will be effective upon receipt by Pacific Mutual and will
continue in effect until subsequently changed. Changes in the allocation of
future premiums have no effect on existing Accumulated Value. Such Accumulated
Value, however, may be transferred among the Variable Accounts of the Separate
Account or the Fixed Account in the manner described in "Transfers of
Accumulated Value."
17
<PAGE>
DOLLAR COST AVERAGING OPTION
Pacific Mutual currently offers an option under which Contract Owners may
dollar cost average their allocations in the Variable Accounts under the
Contract by authorizing Pacific Mutual to make periodic allocations of
Accumulated Value from any one Variable Account to one or more of the other
Variable Accounts, subject to the limitation on the Growth Variable Account.
Contract Owners may authorize Pacific Mutual to make periodic allocations from
the Fixed Account to one or more Variable Accounts. Dollar Cost Averaging
allocations may not be made from the Fixed Account and a Variable Account at
the same time. Dollar cost averaging is a systematic method of investing in
which securities are purchased at regular intervals in fixed dollar amounts so
that the cost of the securities gets averaged over time and possibly over
various market cycles. The option will result in the allocation of Accumulated
Value to one or more Variable Accounts, and these amounts will be credited at
the Accumulation Unit values as of the end of the Valuation Period during
which each transfer is processed. Since the value of Accumulation Units will
vary, the amounts allocated to a Variable Account will result in the crediting
of a greater number of units when the Accumulation Unit value is low and a
lesser number of units when the Accumulation Unit value is high. Similarly,
the amounts transferred from a Variable Account will result in a debiting of a
greater number of units when the Accumulation Unit value is low and a lesser
number of units when the Accumulation Unit value is high. Dollar cost
averaging does not guarantee profits, nor does it assure that a Contract Owner
will not have losses.
An Owner may request Dollar Cost Averaging by sending a proper written
request to Pacific Mutual, or by telephone request provided an authorization
for telephone requests is on file at Pacific Mutual. The Contract Owner must
designate the specific dollar amounts or percentages to be transferred, the
Variable Account or Accounts to which the transfer will be made, the desired
frequency of the transfer, which may be on a monthly, quarterly, semi-annual,
or annual basis, and the length of time during which the transfers shall
continue or the total amount to be transferred over time.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account or Fixed Account from which the Dollar Cost Averaging
transfers will be made must be at least $5,000. The minimum amount that may be
transferred to any one Variable Account is $50. Pacific Mutual may
discontinue, modify, or suspend the Dollar Cost Averaging Option at any time.
See the Statement of Additional Information for further information on the
Dollar Cost Averaging feature.
PORTFOLIO REBALANCING OPTION
Pacific Mutual currently offers an option which allows Contract Owners who
are not currently Dollar Cost Averaging to maintain the percentage of Contract
Value allocated to each Variable Investment Option at a pre-set level (e.g.,
30% in the Equity Index Variable Account, 40% in the Managed Bond Variable
Account, and 30% in the Growth LT Variable Account). Periodically, Pacific
Mutual will "rebalance" the Contract Value to the percentages specified by the
Owner. Rebalancing may result in transferring amounts from a Variable Account
earning a relatively higher return to one earning a relatively lower return.
The Fixed Option is not available for rebalancing. More detailed information
appears in the Statement of Additional Information.
TRANSFERS OF ACCUMULATED VALUE
During the Accumulation Period and after the Free-Look Period, Accumulated
Value may be transferred among the Variable Accounts by the Contract Owner
upon proper written request to Pacific Mutual. Transfers may be made by
telephone if an authorization for telephone requests is on file at Pacific
Mutual. Transfer requests received after 1:00 p.m. Pacific Time, or the close
of the New York Stock Exchange, if earlier, will be processed as of the end of
the next following Valuation Date. Currently there are no limitations on the
number of transfers between Variable Accounts, no minimum amount required for
a transfer (except as required under the Dollar Cost Averaging Option), nor
any minimum amount required to be remaining in a given Variable Account after
a transfer. Owners of Contracts issued prior to January 1, 1994 may continue
to transfer to or from the Growth Variable Account.
18
<PAGE>
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account. Transfers from the Fixed Account to the Variable Accounts are
restricted as described in "The Fixed Account".
No charges are currently imposed upon transfers. Pacific Mutual reserves the
right, however, at a future date to charge a transfer fee of $10 per
transaction on the thirteenth and any subsequent transfer in any Contract
Year. See "Transfer Fee". Pacific Mutual also reserves the right to limit the
size of transfers and remaining balances, to limit the number and frequency of
transfers, and to discontinue telephone transfers.
ACCUMULATED VALUE
The Accumulated Value is the sum of the amounts under the Contract held in
each Variable Account of the Separate Account and in the Fixed Account, as
well as the amount set aside in Pacific Mutual's Loan Account to secure any
Contract Debt.
On each Valuation Date, the portion of the Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. See "Determination of Accumulated Value,"
below. No minimum amount of Accumulated Value is guaranteed. A Contract Owner
bears the entire investment risk relating to the investment performance of
Accumulated Value allocated to the Variable Accounts.
DETERMINATION OF ACCUMULATED VALUE
The Accumulated Value will vary to a degree that depends upon several
factors, including investment performance of the Variable Accounts to which
Accumulated Value has been allocated, payment of premiums, the amount of any
outstanding Contract Debt, partial withdrawals, and the charges assessed in
connection with the Contract. The amounts allocated to the Variable Accounts
will be invested in shares of the corresponding Portfolios of the Fund. The
investment performance of the Variable Accounts will reflect increases or
decreases in the net asset value per share of the corresponding Portfolios and
any dividends or distributions declared by a Portfolio. Any dividends or
distributions from any Portfolio of the Fund will be automatically reinvested
in shares of the same Portfolio, unless Pacific Mutual, on behalf of the
Separate Account, elects otherwise.
Assets in the Variable Accounts are divided into Accumulation Units, which
are accounting units of measure used to calculate the value of a Contract
Owner's interest in a Variable Account. When a Contract Owner allocates
premiums to a Variable Account, the Contract is credited with Accumulation
Units. The number of Accumulation Units to be credited is determined by
dividing the dollar amount allocated to the particular Variable Account by the
Accumulation Unit value for the particular Variable Account at the end of the
Valuation Period in which the premium is credited. In addition, other
transactions including loans, full or partial withdrawals, transfers, and
assessment of certain charges against the Contract affect the number of
Accumulation Units credited to a Contract. The number of units credited or
debited in connection with any such transaction is determined by dividing the
dollar amount of such transaction by the unit value of the affected Variable
Account. The Accumulation Unit value of each Variable Account is determined on
each Valuation Date at or about 1:00 p.m. Pacific Time. The number of
Accumulation Units credited to a Contract shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value
of an Accumulation Unit may vary from Valuation Date to Valuation Date
depending upon the investment experience of the Variable Account and charges
against the Variable Account.
The Accumulation Unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by dividing the value of each Variable Account's net assets by the number of
Accumulation Units credited to the Variable Account on that date.
Determination of the value of the net assets of a Variable Account takes into
account the following: (1) the investment performance of the Variable Account,
which is based upon the investment performance of the corresponding Portfolio
of the Fund, (2) any dividends or distributions paid by the corresponding
Portfolio, (3) the charges, if any, that may be assessed by Pacific Mutual for
taxes attributable to the operation of the Variable Account, or to the
operations of Pacific Mutual with respect to the contract, and (4) the
mortality and expense risk charge under the Contract.
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FULL AND PARTIAL WITHDRAWALS
A Contract Owner may obtain proceeds from a Contract by surrendering the
Contract for its Full Withdrawal Value or by making a partial withdrawal. A
full or partial withdrawal, including a scheduled partial withdrawal, may be
taken from a Contract's Accumulated Value at any time while the Annuitant is
living and before the Annuity Start Date, subject to the limitations under the
applicable plan for Qualified Plans and applicable law. A full or unscheduled
partial withdrawal request will be effective as of the end of the Valuation
Period that a proper written request is received by Pacific Mutual.
The proceeds received upon a full withdrawal will be the Contract's Full
Withdrawal Value. The Full Withdrawal Value is equal to the Accumulated Value
as of the end of the Valuation Period during which a proper withdrawal request
is received by Pacific Mutual, minus any maintenance fee, any applicable
contingent deferred sales charge, and any outstanding Contract Debt. A partial
withdrawal may be requested for a specified percentage or dollar amount of
Accumulated Value. Each unscheduled partial withdrawal must be for at least
$500. A request for a partial withdrawal will result in a payment by Pacific
Mutual in accordance with the amount specified in the partial withdrawal
request. Upon payment, the Contract Owner's Accumulated Value will be reduced
by an amount equal to the payment and any applicable contingent deferred sales
charge, and any applicable premium tax. If a partial withdrawal is requested
that would leave the Full Withdrawal Value in the Contract less than $500 then
Pacific Mutual reserves the right to treat the partial withdrawal as a request
for a full withdrawal.
The amount of a partial withdrawal will be allocated proportionately from
the Contract Owner's Accumulated Value in the Variable Accounts and the Fixed
Account, except that the Contract Owner may instruct Pacific Mutual otherwise
with regard to an unscheduled partial withdrawal. A full or partial
withdrawal, including a scheduled partial withdrawal, may result in the
deduction of a contingent deferred sales charge. See "Contingent Deferred
Sales Charge".
A full or partial withdrawal, including a scheduled withdrawal, may result
in a premium tax charge to reimburse Pacific Mutual for any premium tax on a
Contract that may be imposed by various states and municipalities. See
"Premium Tax and Other Taxes".
A full or partial withdrawal, including a scheduled partial withdrawal, may
result in receipt of taxable income to the Owner and, in some instances, in a
penalty tax. In the case of Contracts issued in connection with retirement
plans that meet the requirements of Section 401(a), 401(k), 408 or 457 of the
Internal Revenue Code, reference should be made to the terms of the particular
Qualified Plan for any limitations or restrictions on withdrawals. In the case
of Contracts issued in connection with tax qualified retirement plans under
Section 403(b), Section 403(b) imposes restrictions on certain distributions.
For more information, see "Restrictions on Withdrawals from 403(b) Programs".
The tax consequences of a withdrawal under the Contract should be carefully
considered. See "Federal Tax Matters".
PREAUTHORIZED SCHEDULED WITHDRAWALS
Pacific Mutual has implemented a feature under which preauthorized scheduled
withdrawals may be elected. Under this feature, a Contract Owner may elect to
receive preauthorized scheduled partial withdrawals while the Annuitant is
living before the Annuity Start Date and after the Free-Look Period by sending
a properly completed Preauthorized Scheduled Withdrawal Request form to
Pacific Mutual. A Contract Owner may designate the scheduled withdrawal amount
as a percentage of Accumulated Value allocated to the Variable Accounts and
Fixed Account, or as a specified dollar amount, and the desired frequency of
the scheduled withdrawals, which may be monthly, quarterly, semi-annually or
annually. The day of the month that the Contract Owner wishes each scheduled
withdrawal to be effected may also be elected. Scheduled withdrawals may be
stopped or modified upon proper written request by the Contract Owner received
by Pacific Mutual at least 10 days in advance. A proper request must include
the written consent of any effective assignee or irrevocable Beneficiary, if
applicable.
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Each scheduled withdrawal must be at least $100. Upon payment, the Contract
Owner's Accumulated Value will be reduced by an amount equal to the payment
proceeds plus any applicable contingent deferred sales charge and any
applicable premium tax. Any scheduled withdrawal that equals or exceeds the
Full Withdrawal Value will be treated as a full withdrawal. In no event will
payment of a scheduled withdrawal exceed the Full Withdrawal Value less any
applicable premium tax. The Contract will automatically terminate if a
scheduled withdrawal causes the Contract's Full Withdrawal Value to equal
zero.
Each scheduled withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
scheduled withdrawal will be allocated proportionately from the Contract
Owner's Accumulated Value in the Variable Accounts and the Fixed Account.
FREE-LOOK RIGHT
A Contract Owner may return a Contract within the Free-Look Period, which is
a ten-day period beginning when the Owner receives the Contract unless state
law requires otherwise.
Premiums received during the Free-Look Period will, except as indicated
below, be allocated according to the Owner's instructions contained in the
application or more recent instructions, if any. The returned Contract will
then be deemed void and Pacific Mutual will refund any premium payments
allocated to the Fixed Account and any Variable Account Accumulated Value as
of the end of the Valuation Period in which Pacific Mutual receives the
Contract plus any Contract Charges and Fees deducted from the Owner's
Accumulated Value allocated to the Variable Accounts. Thus, an Owner who
returns a Contract within the Free-Look Period bears only the investment risk,
(i.e., the Owner's Accumulated Value allocated to the Variable Accounts may
increase or decrease based on investment performance), but the Owner will not
be subject to any Contract Charges or Fees which would otherwise be deducted
from Accumulated Value.
If the Contract Owner resides in a state that requires Pacific Mutual to
return premium payments to Owners who exercise the Free-Look Right, Pacific
Mutual will refund any premiums received or, if required by the owner's state
of residence, premiums allocated to the Fixed Account plus the greater of
premiums allocated to the Separate Account or Accumulated Value in the
Separate Account plus any Contract charges and fees deducted from the Variable
Accounts on the contract date. Premiums received during the Free-Look Period
will initially be allocated to the Money Market Variable Account. The
Accumulated Value in the Money Market Variable Account will be transferred
automatically to the Variable Accounts and the Fixed Account elected in the
Owner's application (or, if received more recently, in written instructions)
15 days after the Contract is issued. In Pennsylvania, Pacific Mutual will
refund premiums allocated to the Fixed Account plus the Accumulated Value in
the Separate Account plus any Charges deducted from the Separate Account on
the Contract Date. Any previous loans or withdrawals may reduce the refund
amount on any Contract returned.
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<PAGE>
DEATH BENEFIT
If the Annuitant dies during the Accumulation Period, Pacific Mutual will
pay the death benefit proceeds to the Beneficiary upon receipt of due proof of
the Annuitant's death and instructions regarding payment to the Beneficiary.
If there are Joint Annuitants, the death benefit proceeds will only be payable
upon receipt of due proof of death of both Annuitants during the Accumulation
Period and instructions regarding payment. If there is no Beneficiary living
on the date of death of the Annuitant, Pacific Mutual will pay the death
benefit proceeds to the Annuitant's estate. If the death of the Annuitant
occurs on or after the Annuity Start Date, no death benefit proceeds will be
payable under the Contract, except that benefits under the Annuity Option
elected may be payable to the Joint Annuitant or the Beneficiary.
The death benefit proceeds will be the death benefit reduced by any
outstanding Contract Debt. On or before the fifth Contract Anniversary, the
amount of the death benefit will be the greater of (1) the Accumulated Value
as of the end of the Valuation Period in which due proof of death and
instructions regarding payment are received by Pacific Mutual, or (2) the
aggregate premium payments received less any reductions caused by previous
withdrawals. Unless otherwise required by state insurance authorities, after
the fifth Contract Anniversary the amount of the death benefit will be the
greater of (1) the Accumulated Value as of the end of the Valuation Period in
which due proof of death and instructions regarding payment are received by
Pacific Mutual, (2) the aggregate premium payments received less any
reductions caused by previous withdrawals, or (3) subject to approval of state
insurance authorities, the "Minimum Guaranteed Death Benefit." After the fifth
Contract Anniversary up to the tenth Contract Anniversary, the Minimum
Guaranteed Death Benefit is equal to the Accumulated Value on the fifth
Contract Anniversary plus any premiums received after the fifth Contract
Anniversary and less any reductions caused by previous withdrawals taken after
the fifth Contract Anniversary. The Minimum Guaranteed Death Benefit is
adjusted on the tenth Contract Anniversary and each succeeding fifth Contract
Anniversary to the greater of the most recent Minimum Guaranteed Death Benefit
or the Accumulated Value as of such Anniversary, and during the next five year
interval, is decreased by any reductions caused by partial withdrawals and
increased by any premium payments since such fifth Contract Anniversary. After
the Contract Year in which the Annuitant reaches Age 85, the Minimum
Guaranteed Death Benefit will no longer be adjusted on each fifth Contract
Anniversary (except for adjustments for reductions caused by partial
withdrawals and for premium payments).
The death benefit proceeds will be paid to the Beneficiary in a single sum
or under one of the Annuity Options, as directed by the Owner or as elected by
the Beneficiary. If the Beneficiary is to receive annuity payments under an
Annuity Option, there may be limits under applicable law on the amount and
duration of payments that the Beneficiary may receive, and requirements
respecting timing of payments. A tax adviser should be consulted in
considering Annuity Options.
DEATH OF OWNER
If the Owner of a Contract issued in connection with a Non-Qualified Plan
dies before the Annuitant and before the Annuity Start Date, the death benefit
proceeds will be paid upon receipt of due proof of the Owner's death and
instructions regarding payment. If there are Joint Owners, the term Owner
means the first Joint Owner to die.
Death benefit proceeds will be paid to the Joint Owner or Contingent Owner,
if any, otherwise to the Owner Beneficiary. If there is no Owner Beneficiary,
death benefit proceeds will be paid to the Owner's estate. If an Owner is not
also an Annuitant, then in the event that the deaths of the Owner and the
Annuitant occur under circumstances in which it cannot be determined who died
first, payment will be made to the Annuitant's Beneficiary. If the Owner and
the Annuitant are the same, payment will be made to the Annuitant's
Beneficiary. If the surviving spouse of the deceased Owner is the Owner
Beneficiary, or is the sole surviving joint tenant or Contingent Owner, and if
the deceased Owner was not the sole Annuitant, such spouse may continue this
Contract in force until the earliest of the spouse's death, the death of the
Annuitant, or the Annuity Start Date. For any Designated Beneficiary other
than a surviving spouse, only those options may be chosen that provide for
complete distribution of such Owner's interest in the Contract within five
years of the death of the Owner, or if the Designated Beneficiary is a natural
person, that person can elect to begin receiving annuity payments within one
year of the Owner's death over a period not extending beyond his or her life
expectancy.
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The death benefit is as stated in the "Death Benefit" section, except that
the Owner's Age, as opposed to the Annuitant's, is used in determining the
death benefit.
If the Owner of the Contract is not a natural person, these distribution
rules are applicable upon the death of or a change in the primary Annuitant,
except that the "Death Benefit" will be the Accumulated Value if the Owner
elects to maintain the Contract, or the Full Withdrawal Value if the Owner
elects a cash distribution, as of the Valuation Date we receive in proper form
the request to change the primary Annuitant and instructions regarding
distribution or maintenance. These distribution requirements do not apply to
Contracts issued in connection with Qualified Plans.
On the death of any Owner after the Annuity Start Date, any guaranteed
payments remaining unpaid will continue to be paid to the Annuitant pursuant
to the Annuity Option in force at the date of death. No death benefit will be
paid if the Owner dies after the Annuity Start Date. On the death of the
Annuitant, any unpaid benefit will be paid to the Beneficiary of the
Annuitant, if living, otherwise to the Annuitant's estate. See "Federal Tax
Matters" for a discussion of the tax consequences in the event of death.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
Pacific Mutual does not make any deduction for sales charges from premium
payments paid for a Contract before allocating them to a Contract Owner's
Accumulated Value. However, except as set forth below, a contingent deferred
sales charge (which may also be referred to as a withdrawal charge), may be
assessed by Pacific Mutual on a full or partial withdrawal, depending upon the
amount of time such withdrawal amounts have been held under the Contract. The
withdrawal charge will be waived on withdrawals to the extent that total
withdrawals that are free of charge during the Contract Year do not exceed 10%
of the sum of the premium payments made during the current Contract Year up to
the Valuation Date of the withdrawal and the preceding four Contract Years. If
a full or partial withdrawal, including a scheduled withdrawal, in excess of
the 10% allowable amount is made, a withdrawal charge may be assessed on the
amount withdrawn in excess of the 10% allowable amount. If the Contract is
surrendered or a scheduled withdrawal causes the Full Withdrawal Value to
equal zero, any amount allocated to the Loan Account will be included in
determining the charge.
For purposes of the charge, a withdrawal will be attributed to premium
payments in the order they were received by Pacific Mutual, then earnings,
even if the Contract Owner elects to redeem amounts allocated to an Account
(including the Fixed Account) other than an Account to which premium payments
were allocated. The amount of the charge will depend upon the number of
Contract Years that the premiums to which the withdrawal is attributed have
remained credited under the Contract, as follows:
<TABLE>
<CAPTION>
AGE OF PREMIUM
IN CONTRACT YEARS WITHDRAWAL CHARGE
----------------- -----------------
<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 0%
</TABLE>
For purposes of determining the age of the premium, the premium is
considered age 1 in the Contract Year the premium is received by Pacific
Mutual and increases in age each Contract Anniversary thereafter. In no event
will the amount of any withdrawal charge, when added to any such charge
previously assessed against any amount withdrawn from the Contract, exceed 6%
of the premiums paid under a Contract. In addition, no charge will be imposed
(1) upon payment of death benefit proceeds under the Contract, (2) upon
withdrawals by Owners to meet the minimum distribution rules for Qualified
Plans as they apply to amounts held under the Contract, or (3) upon
annuitization if the Contract has been in force two years, and if an Annuity
Option offered under the Contract is elected or proceeds are applied to
purchase any other Annuity Option then offered by Pacific Mutual, and, in each
instance, the Annuity Period is at least five years. Subject to approval of
state insurance authorities, after the first Contract Anniversary, the
withdrawal charge will also be waived on a full or partial withdrawal if the
Annuitant has been diagnosed with a medically determinable condition which
results in a life expectancy of
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<PAGE>
12 months or less. This waiver will be subject to medical evidence
satisfactory to Pacific Mutual, and certain other conditions specified in the
Contract. The withdrawal charge will be assessed against the Variable Accounts
and Fixed Account in the same proportion as the withdrawal proceeds are
allocated. (See the Appendix for examples of the operation of the withdrawal
charge.)
Pacific Mutual pays sales commissions to broker-dealers and other expenses
associated with promotion and sales of the Contracts. The withdrawal charge is
designed to reimburse Pacific Mutual for these costs, although it is expected
that actual expenses will be greater than the amount of the charge. To the
extent that all sales expenses are not recovered from the charge, such
expenses may be recovered from other charges, including amounts derived
indirectly from the charge for mortality and expense risks. Broker-dealers may
receive aggregate commissions up to 6.5% of aggregate premium 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 premium payments
have been held under a Contract, and Contract Accumulated Values. A trail
commission is not anticipated to exceed 1.00%, on an annual basis, of the
Accumulated Value considered in connection with the trail commission. Pacific
Mutual 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.
MORTALITY AND EXPENSE RISK CHARGE
Pacific Mutual deducts a daily charge from the assets of each Variable
Account for mortality and expense risks assumed by Pacific Mutual under the
Contracts. The charge is equal to an annual rate of 1.25% of the average daily
net assets of each Variable Account. This amount is intended to compensate
Pacific Mutual for certain mortality and expense risks Pacific Mutual assumes
in offering and administering the Contracts and in operating the Variable
Accounts. The 1.25% charge consists of approximately .25% for expense risk and
1.00% for mortality risk.
The expense risk is the risk that Pacific Mutual's actual expenses in
issuing and administering the Contracts and operating the Variable Accounts
will be more than the charges assessed for such expenses. The mortality risk
borne by Pacific Mutual is the risk that Annuitants, as a group, will live
longer than the Pacific Mutual's actuarial tables predict. In this event,
Pacific Mutual guarantees that annuity payments will not be affected by a
change in mortality experience that results in the payment of greater annuity
income than assumed under the Annuity Options in the Contract. Pacific Mutual
also assumes a mortality risk in connection with the death benefit under the
Contract.
Pacific Mutual may ultimately realize a profit from this charge to the
extent it is not needed to cover mortality and administrative expenses, but
Pacific Mutual may realize a loss to the extent the charge is not sufficient.
Pacific Mutual may use any profit derived from this charge for any lawful
purpose, including any distribution expenses not covered by the contingent
deferred sales charge.
ADMINISTRATIVE CHARGE
Pacific Mutual deducts a monthly administrative charge equal to .000125
multiplied by a Contract's Accumulated Value in the Variable Accounts and the
Fixed Account, which will be deducted monthly, beginning on the Monthly
Anniversary following the Contract Date, during the Accumulation Period. This
charge is equivalent to an annual rate of 0.15% of a Contract's Accumulated
Value in the Variable Accounts and the Fixed Account. On Contracts issued in
connection with applications received by Pacific Mutual at its Variable
Annuity Department before May 1, 1992, the rate of this charge is currently
reduced to .0001 (.12% on an annual basis), and, if the initial premium is
$50,000 or more on such contracts, to .00005 (.06% on an annual basis).
Pacific Mutual reserves the right to increase the administrative charge on
such contracts, but in no event will the charge exceed 0.15% on an annual
basis. The charge will be assessed to each Account in proportion to the
Contract's
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<PAGE>
Accumulated Value in each Variable Account and the Fixed Account. The charge
is deducted at the Contract level and results in the debiting of Accumulation
Units in the Variable Accounts and/or a deduction from the Fixed Account.
MAINTENANCE FEE
During the Accumulation Period, an annual fee of $30 is deducted on each
Contract Anniversary to cover the costs of maintaining records for the
Contracts. The fee will be assessed to each Account in proportion to the
Contract's Accumulated Value in each Variable Account and the Fixed Account.
Upon annuitization or a full withdrawal, the charge will be pro-rated for the
portion of the Contract year during which the Contract was in force. This
charge is currently waived on Contracts issued for which premium payments
received in the first Contract Year equal $50,000 or more. Pacific Mutual
reserves the right to impose the charge on Contracts on which the fee is
waived in the future. The charge is deducted at the Contract level and results
in the debiting of Accumulation Units in the Variable Accounts and or a
deduction from the Fixed Account.
TRANSFER FEE
No transfer fee is currently imposed. Pacific Mutual reserves the right to
assess a transfer fee of $10 per transaction on the thirteenth and any
subsequent transfer occurring in a Contract year. The transfer fee will be
deducted from the remaining balances in the Variable Accounts and Fixed
Account from which the transfer is made. If the remaining balances are
insufficient to pay the transfer fee, the fee will be deducted from the
transferred Accumulated Values.
PREMIUM TAX AND OTHER TAXES
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, the Owner's state of residence,
the Annuitant's state of residence, and the insurance tax laws and Pacific
Mutual's status in a particular state. Pacific Mutual assesses a premium tax
charge to reimburse itself for premium taxes that it incurs on behalf of the
Contract Owner. This charge will be deducted upon annuitization or upon full
withdrawal if premium taxes are incurred and are not refundable. Partial
withdrawals, including scheduled withdrawals, may result in a premium tax
charge if a premium tax is incurred by Pacific Mutual and is not refundable.
Pacific Mutual reserves the right to deduct premium taxes when incurred.
Premium tax rates currently range from 0% to 3.5%, but are subject to change
by a governmental entity. Pacific Mutual may charge Variable Accounts of the
Separate Account for the Federal, state, or local income taxes incurred by
Pacific Mutual that are attributable to the Separate Account and its Variable
Accounts, or to the operations of Pacific Mutual with respect to the
Contracts, or that are attributable to payment of premiums or acquisition
costs under the Contracts. No such charge is currently assessed. See "Tax
Status of Pacific Mutual and the Separate Account."
VARIATIONS IN CHARGES
Pacific Mutual may reduce or waive the amount of the contingent deferred
sales charge, administrative charge, and Contract maintenance fee for a
Contract where the expenses associated with the sale of the Contract or the
administrative and maintenance costs associated with the Contract are reduced
for reasons such as the amount of the initial premium payment, the amounts of
projected premium payments, or that the Contract is sold in connection with a
group or sponsored arrangement. For certain trusts, Pacific Mutual may change
the order in which withdrawals are applied to premium payments and earnings to
determine any contingent deferred sales charge. Pacific Mutual may also reduce
or waive the contingent deferred sales charge, administrative charge, and
maintenance fee or credit additional amounts on Contracts sold to the
directors, officers, or employees of Pacific Mutual or any of its affiliates
or to trustees of the Fund, sales representatives, or in the case of an
affiliated broker-dealer, registered representatives of such company, or
directors, officers, employees or registered representatives of a broker-
dealer that has a then current selling agreement with Pacific Mutual, or
members of any of the aforementioneds' immediate family. Pacific Mutual will
only reduce or waive such charges and fees where expenses associated with the
sale of the Contract or the costs associated with administering and
maintaining the Contract are reduced.
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<PAGE>
GUARANTEE OF CERTAIN CHARGES
Pacific Mutual guarantees that the charge for mortality and expense risks
will not increase. The maintenance fee is guaranteed not to exceed $30. The
administrative charge is guaranteed not to exceed an annual rate of 0.15% of a
Contract Owner's Accumulated Value less any Contract Debt. Pacific Mutual does
not intend to profit from the administrative charge and maintenance fee.
FUND EXPENSES
Each Variable Account of the Separate Account purchases shares at the net
asset value of the corresponding Portfolio of the Fund. Each Portfolio's net
asset value reflects the investment advisory fee and other expenses that are
deducted from the assets of the Portfolio. The Fund is governed by its Board
of Trustees. The Fund's expenses are not fixed or specified under the terms of
the Contract. The advisory fees and other expenses are more fully described in
the Fund's prospectus.
ANNUITY PERIOD
GENERAL
The Contract Owner selects the Annuity Start Date at the time of
application. The Annuity Start Date may not be deferred beyond the first day
of the month following the Annuitant's 95th birthday (85th birthday in
Pennsylvania, and for certain trusts, 100th birthday, unless state law
requires otherwise), although the terms of a Qualified Plan generally require
annuitization at an earlier age. If the Contract Owner does not select an
Annuity Start Date, the Annuity Start Date will be the Contract Anniversary
nearest the Annuitant's 85th birthday if the Contract is issued in connection
with a Non-Qualified Plan. See "Selection of an Option." If there are Joint
Annuitants, the birth date of the younger Annuitant will be used to determine
the latest Annuity Start Date unless the terms of a Qualified Plan require
otherwise.
On the Annuity Start Date, the proceeds under the Contract will be applied
to provide an annuity under one of the options described below, unless a lump
sum distribution has been elected. The proceeds attributable to the Variable
Accounts will be transferred to the General Account. The proceeds will be
equal to the Contract Owner's Accumulated Value in the Variable Accounts and
the Fixed Account (which excludes Accumulated Value in the Loan Account) as of
the Annuity Start Date, reduced by any applicable premium taxes, any prorated
portion of maintenance fee due, and any applicable withdrawal charge. However,
no withdrawal charge will be imposed if the Contract has been in force two
years, and an Annuity Option is elected or proceeds are applied to purchase
any other Annuity Option then offered by Pacific Mutual, and, in each case,
the Annuity Period is five years or longer.
The Contracts provide for five optional annuity forms. A lump sum
distribution may also be elected. Other Annuity Options may be available upon
request at the discretion of Pacific Mutual. All Annuity Options are fixed and
the annuity payments remain constant throughout the Annuity Period. Annuity
payments are based upon annuity rates that vary with the Annuity Option
selected. In the case of Options 1, 2, and 3, the rates will vary based on the
Age and sex of the Annuitant, except that unisex rates are available where
required by law. In the case of Options 4 and 5, as described below, Age and
sex are not considerations. The annuity rates are based upon an assumed
interest rate of 4%, compounded annually. If no Annuity Option has been
selected, annuity payments will be made to the Annuitant under an automatic
option. For non-qualified Contracts and Contracts used in connection with a
Qualified Plan under Section 408 of the Internal Revenue Code, the automatic
option shall be an annuity payable during the lifetime of the Annuitant with
payments certain for 120 months under Option 1 or, if a non-qualified Contract
and Joint Annuitants are named, a joint and 50% last survivor annuity under
Option 3. For a Contract used in connection with a Qualified Plan under
Section 401 of the Internal Revenue Code, the automatic option shall be an
annuity payable during the lifetime of the Annuitant with payments certain for
120 months under Option 1, or, for a married Annuitant, a joint and 50%
survivor annuity as described in Option 2 below.
Annuity payments can be made on a monthly, quarterly, semiannual, or annual
basis, although no payments will be made for less than $50. If the frequency
of payments selected would result in payments of less than $50,
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<PAGE>
Pacific Mutual reserves the right to change the frequency. Pacific Mutual also
reserves the right to pay the Contract proceeds in a lump sum if the proceeds
are less than $10,000. Once annuity payments have commenced, an Annuitant or
Owner cannot change the Annuity Option and cannot surrender his or her annuity
and receive a lump sum settlement in lieu thereof.
An Owner may, during the lifetime of the Annuitant, designate or change an
Annuity Start Date, Annuity Option, and Contingent Annuitant, provided Pacific
Mutual receives proper written notice at least 30 days prior to the Annuity
Start Date set forth in the Contract. The date selected as the new Annuity
Start Date must be after the date the written notice is received at Pacific
Mutual.
The Contract contains annuity tables for each Annuity Option described
below. The tables show the dollar amount of periodic annuity payments for each
$1,000 applied to an Annuity Option. Pacific Mutual reserves the right to
offer variable annuity options in the future.
ANNUITY OPTIONS
Option 1--Life Income with Guaranteed Payment of 10 or 20 Years
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that if, at the death of the Annuitant, payments have been
made for less than a stated period, which may be ten or twenty years, as
elected, annuity payments will be continued during the remainder of such
period to the Beneficiary.
Option 2--Joint and Survivor
Periodic annuity payments will be made during the lifetime of the primary
Annuitant and, after the death of the primary Annuitant, an amount equal to
50%, 66 2/3%, or 100% (as specified in the election) of such payments will be
paid to the secondary Annuitant named in the election if and so long as such
secondary Annuitant lives. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED
UNDER THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING
ANNUITANT, REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
Option 3--Joint and Last Survivor
Periodic annuity payments will be made while both the Annuitants are living,
and, after the death of either of the Annuitants, an amount equal to 50%, 66
2/3%, or 100% (as specified in the election) of such payments will be paid to
the surviving Annuitant for so long as he or she lives. AS IN THE CASE OF
OPTION 2, THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER THIS OPTION.
PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING ANNUITANT, REGARDLESS OF
THE NUMBER OF PAYMENTS RECEIVED.
Option 4--Fixed Payments for Specified Period
Periodic annuity payments will be made for a fixed period, which may be from
three to thirty years, as elected, with the guarantee that, if, at the death
of the Annuitant, payments have been made for less than the selected fixed
period, the discounted value, based on the interest rate that Pacific Mutual
uses to determine the amount of each payment (which will be at least 4%), of
the remaining unpaid payments will be paid to the Beneficiary, if living,
otherwise to the Annuitant's estate.
Option 5--Fixed Payments of a Specified Amount
Periodic payments of the amount elected will be made until the amount
applied and interest thereon are exhausted, with the guarantee that, if, at
the death of the Annuitant, all guaranteed payments have not yet been made,
the discounted value, based on the interest rate that Pacific Mutual uses to
determine the amount of each payment (which will be at least 4%), of the
remaining unpaid payments will be paid to the Beneficiary, if living,
otherwise to the Annuitant's estate.
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SELECTION OF AN OPTION
Contract Owners should carefully review the Annuity Options with their
financial or tax advisers, and, for Contracts used in connection with a
Qualified Plan, reference should be made to the terms of the particular plan
and the requirements of the Internal Revenue Code for pertinent limitations
respecting annuity payments and other matters. For instance, under
requirements for retirement plans that qualify under Sections 401 or 408 of
the Internal Revenue Code, annuity payments generally must begin no later than
April 1 of the calendar year following the year in which the Annuitant reaches
age 70 1/2. For Non-Qualified Plans, annuity payments must begin no later than
the first day of the month following the Annuitant's 95th birthday. Under
requirements for retirement plans that qualify under Sections 401 or 408 of
the Internal Revenue Code, the period elected for receipt of annuity payments
under Annuity Options 1 and 4 generally may be no longer than the joint life
expectancy of the Annuitant and Beneficiary in the year that the Annuitant
reaches age 70 1/2, and must be shorter than such joint life expectancy if the
Beneficiary is not the Annuitant's spouse and is more than 10 years younger
than the Annuitant. Under Options 2 and 3, if the secondary or other Annuitant
is not the Annuitant's spouse and is more than 10 years younger than the
Annuitant, the 66 2/3% and 100% elections specified above may not be
available. The restrictions on options for retirement plans that qualify under
Sections 401 and 408 also apply to a retirement plan that qualifies under
Section 403(b) with respect to amounts that accrued after December 31, 1986.
THE FIXED ACCOUNT
Contract Owners may allocate all or a portion of their premium payments and
transfer Accumulated Value to the Fixed Account. Amounts allocated to the
Fixed Account become part of Pacific Mutual's General Account, which supports
Pacific Mutual's insurance and annuity obligations. The General Account is
subject to regulation and supervision by the California Department of
Insurance as well as the insurance laws and regulations of other jurisdictions
in which the Contract is distributed. In reliance on certain exemptive and
exclusionary provisions, interests in the Fixed Account have not been
registered as securities under the Securities Act of 1933 (the "1933 Act") and
the Fixed Account has not been registered as an investment company under the
Investment Company Act of 1940 (the "1940 Act"). Accordingly, neither the
Fixed Account nor any interests therein are generally subject to the
provisions of the 1933 Act or the 1940 Act. Pacific Mutual has been advised
that the staff of the SEC has not reviewed the disclosure in this Prospectus
relating to the Fixed Account. This disclosure, however, may be subject to
certain generally applicable provisions of the Federal securities laws
relating to the accuracy and completeness of statements made in the
Prospectus. This Prospectus is generally intended to serve as a disclosure
document only for aspects of a Contract involving the Separate Account and
contains only selected information regarding the Fixed Account. For more
information regarding the Fixed Account, see "The Contract".
Amounts allocated to the Fixed Account become part of the General Account of
Pacific Mutual, which consists of all assets owned by Pacific Mutual other
than those in the Separate Account and other separate accounts of Pacific
Mutual. Subject to applicable law, Pacific Mutual has sole discretion over the
investment of the assets of its General Account.
INTEREST
Amounts allocated to the Fixed Account earn interest at a fixed rate or
rates that are paid by Pacific Mutual. The Accumulated Value in the Fixed
Account earns interest at an interest rate that is guaranteed to be at least
0.3273% per month, compounded monthly, which is equivalent to an annual
effective rate of 4% per year, and which will accrue daily ("Guaranteed
Rate"). Such interest will be paid regardless of the actual investment
experience of the Fixed Account. In addition, Pacific Mutual may in its
discretion pay interest at a rate ("Current Rate") that exceeds the Guaranteed
Rate. Pacific Mutual will determine the Current Rate, if any, from time to
time. If Pacific Mutual determines a Current Rate that exceeds the Guaranteed
Rate, premiums or transfers allocated or made to the Fixed Account during the
time the Current Rate is in effect are guaranteed to earn interest at that
particular Current Rate until the next Contract Anniversary. Upon the Contract
Anniversary, a Current Rate or Rates may be paid that would remain in effect
until the next succeeding Contract Anniversary.
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Accumulated Value that was allocated or transferred to the Fixed Account
during one Contract Year may be credited with a different Current Rate than
amounts allocated or transferred to the Fixed Account in another Contract
Year. Therefore, at any given time, various portions of a Contract Owner's
Accumulated Value allocated to the Fixed Account may be earning interest at
different Current Rates, depending upon the Contract Year during which such
portions were originally allocated or transferred to the Fixed Account.
Pacific Mutual bears the investment risk for the Accumulated Value allocated
to the Fixed Account and for paying interest at the Guaranteed or Current
Rates, as applicable, on amounts allocated to the Fixed Account.
For purposes of determining the interest rates to be credited on remaining
Accumulated Value in the Fixed Account, withdrawals, loans, or transfers from
the Fixed Account will be deemed to be taken from premiums or transfers in the
order in which they were credited to the Fixed Account, and interest
attributable to each such premium or transfer shall be deemed taken before the
amount of each premium or transfer.
BAIL OUT PROVISION
The first time that the interest rate paid on any portion of a Contract
Owner's Accumulated Value allocated to the Fixed Account falls 1% or more
below the initial Current Rate credited to the premium or transfer from which
that portion of Accumulated Value is derived, the limitations on transfers
from the Fixed Account to the Variable Accounts will be waived for 60 days
with respect to that portion of Accumulated Value in the Fixed Account.
DEATH BENEFIT
The death benefit under the Contract will be determined in the same fashion
for a Contract that has Accumulated Value in the Fixed Account as for a
Contract that has Accumulated Value allocated to the Variable Accounts. See
"Death Benefit".
CONTRACT CHARGES
The contingent deferred sales charge, the administrative charge, the
maintenance fee, and premium taxes will be the same for Contract Owners who
allocate premium payments or transfer Accumulated Value to the Fixed Account
as for those who allocate premium payments to the Variable Accounts. The
charge for mortality and expense risks will not be assessed against the Fixed
Account, and any amounts that Pacific Mutual pays for income taxes allocable
to the Variable Accounts will not be charged against the Fixed Account. In
addition, the investment advisory fees and operating expenses paid by the Fund
will not be paid directly or indirectly by Contract Owners to the extent the
Accumulated Value is allocated to the Fixed Account; however, such Contract
Owners will not participate in the investment experience of the Variable
Accounts.
TRANSFERS AND WITHDRAWALS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts after the Free-Look
Period, subject to the following limitations. The Contract Owner may not make
more than one transfer from the Fixed Account to the Variable Accounts in any
12-month period except as provided under the Dollar Cost Averaging Option. The
Growth Variable Account is not available to Owners of Contracts issued on or
after January 1, 1994. Further, if a Contract Owner has $1,000 or more in the
Fixed Account, the Contract Owner may not transfer more than 20% of such
amount to the Variable Accounts in any 12-month period except as provided
under Dollar Cost Averaging. Currently there is no charge imposed upon
transfers; however, Pacific Mutual reserves the right to assess a $10 transfer
fee in the future on the thirteenth and any subsequent transfer made during a
Contract Year and to impose other limitations on the number of transfers, the
amount of transfers, and the amount remaining in the Fixed Account or Variable
Accounts after a transfer. See "Transfer of Accumulated Value".
The Contract Owner may also make full and partial withdrawals to the same
extent as a Contract Owner who has allocated Accumulated Value to the Variable
Accounts. See "Full and Partial Withdrawals". In
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addition, to the same extent as Contract Owners with Accumulated Value in the
Variable Accounts, the Owner of a Contract used in connection with a Qualified
Plan under Section 401 and 403(b) of the Internal Revenue Code may obtain a
loan. See "Loans".
PAYMENTS FROM THE FIXED ACCOUNT
Full and partial withdrawals, loans, and transfers from the Fixed Account
may be delayed for up to six months after a written request in proper form is
received by Pacific Mutual. During the period of deferral, interest at the
applicable interest rate or rates will continue to be credited to the amounts
allocated to the Fixed Account. However, payment of any amounts will not be
deferred if they are to be used to pay premiums on any policies or contracts
issued by Pacific Mutual.
MORE ABOUT THE CONTRACT
OWNERSHIP
The Contract Owner is the individual named as such in the application or in
any later change shown in Pacific Mutual's records. While the Annuitant is
living, the Contract Owner alone has the right to receive all benefits and
exercise all rights that the Contract grants or Pacific Mutual allows.
Joint Owners. Joint Owners are permitted only for Contracts issued in
connection with Non-Qualified Plans. The Joint Owners will be joint tenants
with rights of survivorship and upon the death of an Owner, the surviving
Owner shall be the sole Owner. Any Contract transaction requires the signature
of all persons named jointly.
Contingent Owner. A Contingent Owner, if named in the application, succeeds
to the rights of Owner if the Owner dies before the Annuitant during the
Accumulation Period.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in Pacific Mutual's records. The Contract Owner may change
the Beneficiary at any time during the life of the Annuitant while the
Contract is in force by written request to Pacific Mutual. The change will not
be binding on Pacific Mutual until it is received and recorded. The change
will be effective as of the date the notice is properly signed subject to any
payments made or other actions taken by Pacific Mutual before the properly
signed notice is received and recorded. A Contingent Beneficiary may be
designated. The Owner may designate a permanent Beneficiary whose rights under
the Contract cannot be changed without his or her consent.
Reference should be made to the terms of a particular Qualified Plan and any
applicable law for any restrictions on the beneficiary designation.
PAYMENTS FROM THE SEPARATE ACCOUNT
Pacific Mutual ordinarily will pay any full or partial withdrawal benefit or
death benefit proceeds from Accumulated Value allocated to the Variable
Accounts, and will effect a transfer between Variable Accounts or from a
Variable Account to the Fixed Account within seven days from the Valuation
Date on which a proper request is received at Pacific Mutual or, if sooner,
other period required by law. However, Pacific Mutual can postpone the
calculation or payment of such a payment or transfer of amounts from the
Variable Accounts to the extent permitted under applicable law, which is
currently permissible only for any period: (a) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings, (b)
during which trading on the New York Stock Exchange is restricted as
determined by the SEC, (c) during which an emergency, as determined by the
SEC, exists as a result of which (i) disposal of securities held by the
Separate Account is not reasonably practicable, or (ii) it is not reasonably
practicable to determine the value of the assets of the Separate Account, or
(d) for such other periods as the SEC may by order permit for the protection
of investors.
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PROOF OF AGE AND SURVIVAL
Pacific Mutual may require proof of age or survival of any person on whose
life annuity payments depend.
LOANS
An Owner of a Contract issued in connection with a retirement plan that is
qualified under Section 401 or 403(b) of the Internal Revenue Code (but not
Section 408) may request a loan, provided that loans are permitted by the
Participant's Plan, from Pacific Mutual using his or her Accumulated Value as
the only security for the loan by submitting a proper written request to
Pacific Mutual. No other Contract Owners may borrow against the Contract. A
loan may be taken by eligible Contract Owners after the first Contract Year
while the Annuitant is living and before the Annuity Start Date. The minimum
loan that can be taken at any time is $1,000. For Contracts with Accumulated
Value of $20,000 or less, the maximum loan that can be taken is the amount
that produces a loan balance immediately after the loan that is 50% of the
Contract Owner's Accumulated Value. For Contracts with Accumulated Value over
$20,000, the maximum loan that can be taken is the amount that produces a loan
balance immediately after the loan that is the lesser of (1) $50,000 reduced
by the excess of (a) the highest outstanding loan balance within the preceding
12 month period ending on the date the loan is made over (b) the outstanding
loan balance on the date the loan is made or (2) 50% of the Contract Owner's
Accumulated Value. Reference should be made to the terms of the particular
Qualified Plan for any additional loan restrictions.
When an eligible Contract Owner takes a loan, an amount equal to the loan is
transferred out of the Contract Owner's Accumulated Value in the Variable
Accounts and the Fixed Account into an account called the "Loan Account" to
secure the loan. Unless otherwise requested by the Contract Owner, loan
amounts will be deducted from the Variable Accounts and the Fixed Account in
the proportion that each bears to the Accumulated Value less Contract Debt.
Subject to any necessary approval of state insurance authorities, any payment
received by Pacific Mutual while a loan is outstanding will be considered a
premium payment unless the Contract Owner indicates that it is a loan
repayment.
Interest will be charged for the loan and will accrue on the loan balance
from the effective date of any loan. Subject to state insurance authorities,
the loan interest rate will be set at the time loan is made and will be equal
to the higher of Moody's Corporate Bond Yield Average-Monthly Average
Corporates, as published by Moody's Investors Service, Inc., or its successor,
for the most recently available calendar month, or 5%. The loan interest rate
charged on any outstanding loan balance will be determined at the time the
loan is taken.
In the event that the Moody's Corporate Bond Yield Average-Monthly Average
Corporates is no longer published, Pacific Mutual will use a substantially
similar average as established by regulation within the state in which the
Contract is delivered. Pacific Mutual will credit interest monthly on amounts
held in the Loan Account to secure the loan at a rate equal to the loan
interest rate charged minus 1.75%. Interest on a loan is accrued daily.
Loans must be repaid within five years (30 years if the Owner certifies to
Pacific Mutual that the loan is to be used to acquire a principal residence
for the Annuitant) and before the Annuity Start Date. Loan repayments must be
made quarterly. Loans not repaid within the required time periods will be
subject to taxation as distributions from the Contract. Loans may be prepaid
at any time before the Annuity Start Date. Subject to any necessary approval
of state insurance authorities, repayments of loan principal plus accrued
interest will be due quarterly on the date corresponding to your quarterly
loan anniversary, beginning with the first such date following the effective
date of the loan.
If the repayment is not made when due, interest will continue to accrue and
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 status. The Contract Owner 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 will be
withdrawn from the Contract Value, if amounts under the Contract are eligible
for distribution. If those amounts are not eligible for distribution, the
defaulted loan balance plus accrued interest will be withdrawn when such
values become
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eligible (a "Deemed Distribution"). In either case, the Distribution or the
Deemed Distribution will be considered a currently taxable event, will 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. Any amounts withdrawn
and applied as repayment of loan principle will be withdrawn from the Loan
Account. Any amounts withdrawn and applied as repayment of interest due will
be withdrawn from your Fixed and Variable Accounts on a proportionate basis
relative to the Accumulated Value in each Account.
Adverse tax consequences may result if you fail to meet the repayments
requirements for your loan. 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
ADVISE THAT THE CONTRACT OWNER CONSULT WITH A QUALIFIED TAX ADVISER BEFORE
EXERCISING THE LOAN PROVISIONS OF THE CONTRACT.
If a repayment in excess of the quarterly amount due is received by Pacific
Mutual, to the extent allowed by law we will refund such excess unless the
loan is paid in full. Payments received by Pacific Mutual which are less than
the quarterly amount due will be returned to the Contract Owner, unless
otherwise required by law. Prepayment of the entire outstanding Contract Debt
may be made. At the time of the prepayment, the Contract Owner will be billed
for any interest due and unpaid. The loan will be considered paid when the
interest due is also paid.
Unless otherwise requested by a Contract Owner, a loan repayment will be
transferred into the Variable Accounts and Fixed Account in accordance with
the most recent premium allocation instructions. In addition, on each Contract
Anniversary, any interest earned on the loan balance held in the Loan Account
will be transferred to each of the Variable Accounts and Fixed Account in
accordance with the Contract Owner's most recent premium allocation
instructions.
While the amount to secure the loan is held in the Loan Account, the
Contract Owner forgoes the investment experience of the Variable Accounts and
the Current Rate of interest of the Fixed Account on the loaned amount.
Outstanding Contract Debt will reduce the amount of proceeds paid upon full
withdrawal of the Contract proceeds, upon payment of the death benefit or upon
the Owner's exercise of the Free-Look Right. If the Owner has an outstanding
loan that is in default, the Minimum Guaranteed Death Benefit will not apply.
Pacific Mutual may change the loan provisions of the Contract to reflect
changes in the Internal Revenue Code or interpretations in the Code.
RESTRICTION ON WITHDRAWALS FROM 403(B) PROGRAMS
Section 403(b) of the Internal Revenue Code permits public school employees
and employees of certain types of charitable, educational, and scientific
organizations specified in Section 501(c)(3) of the Internal Revenue Code to
purchase annuity contracts, and, subject to certain limitations, to exclude
the amount of purchase payments from gross income for tax purposes. Section
403(b) imposes restrictions on certain distributions from tax-sheltered
annuity contracts meeting the requirements of Section 403(b) that apply to tax
years beginning on or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b) tax-sheltered
annuities that are attributable to employee contributions made after December
31, 1988 under a salary reduction agreement begin only after the employee
reaches age 59 1/2, separates from service, dies, becomes disabled, or incurs
a hardship. Furthermore, distributions of gains attributable to such
contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
residence, or paying certain tuition expenses, that may only be met by the
distribution.
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An Owner of a Contract purchased as a tax-sheltered Section 403(b) annuity
contract will not, therefore, be entitled to make a full or partial
withdrawal, as described in this Prospectus, in order to receive proceeds from
the Contract attributable to contributions under a salary reduction agreement
or any gains credited to such Contract after December 31, 1988 unless one of
the above-described conditions has been satisfied. In the case of transfers of
amounts accumulated in a different Section 403(b) contract to this Contract
under a Section 403(b) Program, the withdrawal constraints described above
would not apply to the amount transferred to the Contract attributable to the
Owner's December 31, 1988 account balance under the old contract, provided the
amounts transferred between contracts qualified as a tax-free exchange under
the Internal Revenue Code. An Owner of a Contract may be able to transfer the
Contract's Full Withdrawal Value to certain other investment alternatives
meeting the requirements of Section 403(b) that are available under an
Employer's Section 403(b) arrangement.
Pursuant to Revenue Ruling 90-24, a direct transfer between issuers of an
amount representing all or part of an individual's interest in a Section
403(b) annuity or custodial account is not a distribution subject to tax or to
premature distribution penalty, provided the funds transferred continue after
the transfer to be subject to distribution requirements at least as strict as
those applicable to them before the transfer.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code restricts withdrawal
of contributions and earnings in a variable annuity contract in the Texas
Optional Retirement Program (ORP) prior to (1) termination of employment in
all Texas public institutions of higher education, (2) retirement, (3) death,
or (4) the participant's attainment of age 70 1/2. A participant in the Texas
ORP will not, therefore, be entitled to make full or partial withdrawals under
a Contract unless one of the foregoing conditions has been satisfied.
Appropriate certification must be submitted to redeem the participant's
account. Restrictions on withdrawal do not apply to transfers of values from
one annuity contract to another during participation in the Texas ORP. Loans
are not available in the Texas ORP.
FEDERAL TAX MATTERS
INTRODUCTION
The Contract described in this Prospectus is designed for use by individuals
in retirement plans which may or may not be Qualified Plans under the
provisions of the Internal Revenue Code ("Code"). The ultimate effect of
Federal income taxes on the amounts held under a Contract, on annuity
payments, and on the economic benefits to the Owner, the Annuitant, and the
Beneficiary or other payee may depend on Pacific Mutual's tax status, on the
type of retirement plan, if any, for which the Contract is purchased, and upon
the tax and employment status of the individuals concerned. The discussion
contained herein and in the Statement of Additional Information is general in
nature. It is based upon Pacific Mutual's understanding of the present Federal
income tax laws as currently interpreted by the Internal Revenue Service
("IRS"), and is not intended as tax advice. No representation is made
regarding the likelihood of continuation of the present Federal income tax
laws or of the current interpretations by the IRS or the courts. Future
legislation may affect annuity contracts adversely. Moreover, no attempt has
been made to consider any applicable state or other laws. Because of the
inherent complexity of such laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the Qualified Plan, any person contemplating the purchase of a
Contract, contemplating selection of an Annuity Option under a Contract, or
receiving annuity payments under a Contract should consult a qualified tax
adviser. PACIFIC MUTUAL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS,
FEDERAL, STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
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TAX STATUS OF PACIFIC MUTUAL AND THE SEPARATE ACCOUNT
General
Pacific Mutual is taxed as a life insurance company under Part I, Subchapter
L of the Code. Because the Separate Account is not taxed as a separate entity
and its operations form a part of Pacific Mutual, Pacific Mutual will be
responsible for any Federal income taxes that become payable with respect to
the income of the Separate Account. However, each Variable Account will bear
its allocable share of such liabilities. Under current law, no item of
dividend income, interest income, or realized capital gain of the Variable
Accounts will be taxed to Pacific Mutual to the extent it is applied to
increase reserves under the Contracts.
Under the principles set forth in IRS Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Pacific Mutual believes that
Pacific Mutual will be treated as the owner of the assets in the Separate
Account for Federal income tax purposes.
The Separate Account will invest its assets in a mutual fund that is
intended to qualify as a regulated investment company under Part I, Subchapter
M of the Code. If the requirements of the Code are met, the Fund will not be
taxed on amounts distributed on a timely basis to the Separate Account.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted
by the Treasury Department pursuant to Section 817(h) of the Code prescribing
asset diversification requirements for investment companies whose shares are
sold to insurance company separate accounts funding variable contracts. For
details on these diversification requirements, see "What is the Federal Income
Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Contract Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular subaccounts without being treated as owners of the underlying
assets." As of the date of this prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Contract Owner has additional flexibility in allocating premium
payments and Contract Values. These differences could result in a Contract
Owner being treated as the owner of the Contract's pro rata portion of the
assets of the Separate Account. In addition, Pacific Mutual does not know what
standards will be set forth, if any, in the regulations or rulings which the
Treasury Department has stated it expects to issue. Pacific Mutual therefore
reserves the right to modify the Contract, as deemed appropriate by Pacific
Mutual, to attempt to prevent a Contract Owner from being considered the owner
of the Contract's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolio will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
TAXATION OF ANNUITIES IN GENERAL--NON-QUALIFIED PLANS
Section 72 of the Code governs taxation of annuities. In general, a contract
owner is not taxed on increases in value under an annuity contract until some
form of distribution is made under the contract. However, the increase in
value may be subject to tax currently under certain circumstances. See
"Contracts Owned by Non-Natural Persons" on page 36 and "Diversification
Standards" above.
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1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
surrender or withdrawal from a contract prior to the annuity start date
generally will be treated as gross income to the extent that the cash value of
the contract (determined without regard to any surrender charge in the case of
a partial withdrawal) exceeds the "investment in the contract." The
"investment in the contract" is that portion, if any, of premiums paid under a
contract less any distributions received previously under the contract that
are excluded from the recipient's gross income. The taxable portion is taxed
at ordinary income tax rates. For purposes of this rule, a pledge or
assignment of a contract is treated as a payment received on account of a
partial withdrawal of a contract. Similarly, loans under a contract generally
are treated as distributions under the contract. These rules do not apply to
amounts received under Qualified Plans pursuant to Section 401 of the Code.
2. Surrenders or Withdrawals on or after the Annuity Start Date
Upon receipt of a lump sum payment or an annuity payment under an annuity
contract, the receipt is taxed if the cash value of the contract exceeds the
investment in the contract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates.
For fixed annuity payments, the taxable portion of each payment is
determined by using a formula known as the "exclusion ratio," which
establishes the ratio that the investment in the contract bears to the total
expected amount of annuity payments for the term of the contract. That ratio
is then applied to each payment to determine the non-taxable portion of the
payment. That remaining portion of each payment is taxed at ordinary income
rates. Once the excludable portion of annuity payments to date equals the
investment in the contract, the balance of the annuity payments will be fully
taxable.
Withholding of Federal income taxes on all distributions may be required
unless a recipient who is eligible elects not to have any amounts withheld and
properly notifies Pacific Mutual of that election.
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer reaches
age 59 1/2, a penalty tax is imposed equal to 10% of the portion of such
amount which is includable in gross income. However, the penalty tax is not
applicable to withdrawals: (i) made on or after the death of the owner (or
where the owner is not an individual, the death of the "primary annuitant,"
who is defined as the individual the events in whose life are of primary
importance in affecting the timing and amount of the payout under the
contract); (ii) attributable to the taxpayer's becoming totally disabled
within the meaning of Code Section 72(m)(7); (iii) which are part of a series
of substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the taxpayer, or the joint lives (or
joint life expectancies) of the taxpayer and his beneficiary; (iv) from
certain qualified plans; (v) under a so-called qualified funding asset (as
defined in Code Section 130(d)); (vi) under an immediate annuity contract, or
(vii) which are purchased by an employer on termination of certain types of
qualified plans and which are held by the employer until the employee
separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax
for the first year in which the modification occurs will be increased by an
amount (determined by the regulations) equal to the tax that would have been
imposed but for item (iii) above, plus interest for the deferral period, if
the modification takes place (a) before the close of the period which is five
years from the date of the first payment and after the taxpayer attains age 59
1/2, or (b) before the taxpayer reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract issued on or after
January 19, 1985 must provide the following two distribution rules: (a) if the
owner dies on or after the annuity start date, and before the entire interest
in the contract has been distributed, the remainder of his interest will be
distributed at least as quickly as
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the method in effect on the owner's death; and (b) if the owner dies before
the annuity start date, the entire interest in the contract must generally be
distributed within five years after the date of death, or, if payable to a
designated beneficiary, must be annuitized over the life of that designated
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, commencing within one year after the date of death of the owner.
If the designated beneficiary is the spouse of the owner, the contract
(together with the deferral of tax on the accrued and future income
thereunder) may be continued in the name of the spouse as owner. Designation
of a beneficiary who is either 37 1/2 years younger than the contract owner or
a grandchild of the contract owner may have Generation Skipping Transfer Tax
consequences under Section 2601 of the Code.
For purposes of determining how generally distributions must begin under the
foregoing rules, where the owner is not an individual, the primary annuitant
is considered the owner. In that case, a change in the primary annuitant will
be treated as the death of the owner. In the case of joint owners, the
distribution-at-death rules will be applied by treating the death of the first
owner as the one to be taken into account in determining how generally
distributions must commence, unless the sole surviving owner is the deceased
owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified contracts prior to the annuity start
date will trigger tax on the gain on the contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10%
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
3. Contracts Owned by Non-Natural Persons
For contributions to annuity contracts after February 28, 1986, if the
contract is held by a non-natural person (for example, a corporation) the
income on that contract (generally the net surrender value less the premium
payments) is includable in taxable income each year. The rule does not apply
where the contract is acquired by the estate of a decedent, where the contract
is held by certain types of retirement plans, where the contract is a
qualified funding asset for structured settlements, where the contract is
purchased on behalf of an employee upon termination of a qualified plan, and
in the case of a so-called immediate annuity. Code Section 457 (deferred
compensation) plans for employees of state and local governments and tax-
exempt organizations are not within the purview of the exceptions.
4. Multiple Contract Rule
For contracts entered into on or after October 21, 1988, for purposes of
determining the amount of any distribution under Code Section 72(e) (amounts
not received as annuities) that is includable in gross income, all annuity
contracts issued by the same insurer to the same contract owner during any
calendar year are to be aggregated and treated as one contract. Thus, any
amount received under any such contract prior to the contract's annuity start
date, such as a partial surrender, dividend, or loan, will be taxable (and
possibly subject to the 10% penalty tax) to the extent of the combined income
in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this new rule.
It is possible that, under this authority, the Treasury Department may apply
this rule to amounts that are paid as annuities (on and after the annuity
start date) under annuity contracts issued by the same company to the same
owner during any calendar year. In this case, annuity payments could be fully
taxable (and possibly subject to the 10% penalty tax) to the extent of the
combined income in all such contracts and regardless of whether any amount
would otherwise have been excluded from income because of the "exclusion
ratio" under the contract.
QUALIFIED PLANS
The Contract may be used with several types of Qualified Plans. Keoghs,
individual retirement annuities, Section 403(b) tax sheltered annuities,
Section 457 plans, and pension and profit sharing plans (including Keoghs)
will be treated, for purposes of this discussion, as Qualified Plans. The tax
rules applicable to
36
<PAGE>
participants in such Qualified Plans vary according to the type of plan and
the terms and conditions of the plan itself. No attempt is made herein to
provide more than general information about the use of the Contract with the
various types of Qualified Plans. Contract Owners, Annuitants, and
Beneficiaries, are cautioned that the rights of any person to any benefits
under such Qualified Plans may be subject to the terms and conditions of the
plans themselves or limited by applicable law, regardless of the terms and
conditions of the Contract issued in connection therewith. For example,
Pacific Mutual may accept beneficiary designations and payment instructions
under the terms of the Contract without regard to any spousal consents that
may be required under the Retirement Equity Act (REA). Consequently, a
Contract Owner's Beneficiary designation or elected payment option may not be
enforceable.
The following are brief descriptions of the various types of Qualified Plans
for which the Contract is available:
1. Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an "IRA." These IRAs are subject to limitations on
the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, distribution from
certain other types of Qualified Plans may be placed on a tax-deferred basis
into an IRA.
2. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c) (3) of the Code. These eligible
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. Any employee should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
3. 401(k) Plans; Pension and Profit Sharing Plans
Code Sections 401(a) and 401(k) permit employers to establish various types
of deferred compensation plans for employees. Such retirement plans may permit
the purchase of Contracts to provide benefits thereunder. Contributions to
these plans are subject to limitations.
4. 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.
Distributions from Qualified Plans are subject to certain restrictions. A
10% penalty tax is imposed on the amount includable in gross income from
distributions from Qualified Plans (other than Section 457 plans) before the
participant reaches age 59 1/2 and that are not made on account of death or
disability with certain exceptions. These exceptions include distributions:
(1) which are part of a series of substantially equal periodic payments made
(at least annually) for the life (or life expectancy) of the participant or
the joint lives (or joint life expectancies) of the participant and a
designated beneficiary; and (for other than IRA distributions) (2) made to an
employee after termination of employment after reaching age 55; or (3) made to
pay for certain medical expenses. Distributions of minimum amounts specified
by the Code must commence by April 1 of the calendar year following the
calendar year in which the participant reaches age 70 1/2. Additional
distribution rules apply after the participant's death. Failure to make
mandatory distributions may result in the imposition of a 50% penalty tax on
any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all Qualified Plans (other
than Section 457 plans) in a calendar year that exceed a specific limit under
the Code are generally subject to a 15% penalty tax (in addition to any
ordinary income tax) on the excess portion of the distributions.
37
<PAGE>
Distributions from 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.
The above description of the Federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex
and often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contract Owner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser, with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
CHARGE FOR PACIFIC MUTUAL INCOME TAXES
A charge may be made for any federal taxes incurred by Pacific Mutual that
are attributable to the Variable Accounts or to the operations of Pacific
Mutual with respect to the Contracts or attributable to payment or premiums or
acquisition costs under the Contracts. Pacific Mutual will review the question
of a charge to the Variable Accounts or the Contracts for Pacific Mutual's
federal taxes periodically. Charges may become necessary if, among other
reasons, the tax treatment of Pacific Mutual or of income and expenses under
the Contracts is ultimately determined to be other than what Pacific Mutual
currently believes it to be, if there are changes made in the federal income
tax treatment of variable annuities at the insurance company level, or if
there is a change in Pacific Mutual's tax status.
Under current laws, Pacific Mutual may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant. If there is a material change in applicable state or local tax
laws, Pacific Mutual reserves the right to charge the Variable Accounts for
such taxes, if any, attributable to the Variable Accounts.
OTHER INFORMATION
VOTING OF FUND SHARES
Pacific Mutual is the legal owner of the shares of the Fund held by the
Variable Accounts of the Separate Account. In accordance with its view of
present applicable law, Pacific Mutual will exercise voting rights
attributable to the shares of each Portfolio of the Fund held in the Variable
Accounts at any regular and special meetings of the shareholders of the Fund
on matters requiring shareholder voting under the 1940 Act. Pacific Mutual
will exercise these voting rights based on instructions received from persons
having the voting interest in corresponding Variable Accounts of the Separate
Account. However, if the 1940 Act or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result Pacific Mutual determines that it is permitted to vote the shares of
the Fund in its own right, it may elect to do so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of Fund shares of a
particular Portfolio as to which voting instructions may be given to Pacific
Mutual is determined by dividing a Contract Owner's Accumulated Value in a
Variable Account on a particular date by the net asset value per share of that
Portfolio as of the same date. Fractional votes will be counted. The number of
votes as to which voting instructions may be given will be determined as of
the date coincident with the date established by the Fund for determining
shareholders eligible to vote at the meeting of the Fund. If required by the
SEC, Pacific Mutual reserves the right to determine in a different fashion the
voting rights attributable to the shares of the Fund. Voting instructions may
be cast in person or by proxy.
38
<PAGE>
Voting rights attributable to the Contract Owner's Accumulated Value in a
Variable Account for which no timely voting instructions are received will be
voted by Pacific Mutual in the same proportion as the voting instructions that
are received in a timely manner for all Contracts participating in that
Variable Account. Pacific Mutual will also exercise the voting rights from
assets in each Variable Account that are not otherwise attributable to
Contract Owners, if any, in the same proportion as the voting instructions
that are received in a timely manner for all Contracts participating in that
Variable Account. If we hold shares of a Portfolio in our General Account,
and/or if any of our non-insurance subsidiaries hold shares of a Portfolio,
such shares will be voted in the same proportion as votes cast by the Separate
Account and other separate accounts of Pacific Mutual, in the aggregate.
SUBSTITUTION OF INVESTMENTS
Pacific Mutual reserves the right, subject to compliance with the law as
then in effect, to make additions to, deletions from, substitutions for, or
combinations of the securities that are held by the Separate Account or any
Variable Account or that the Separate Account or any Variable Account may
purchase. If shares of any or all of the Portfolios of the Fund should no
longer be available for investment, or if, in the judgment of Pacific Mutual's
management, further investment in shares of any or all Portfolios of the Fund
should become inappropriate in view of the purposes of the Contract, Pacific
Mutual may substitute shares of another Portfolio of the Fund or of a
different fund for shares already purchased, or to be purchased in the future
under the Contract. Pacific Mutual may also purchase, through the Variable
Account, other securities for other classes or contracts, or permit a
conversion between classes of contracts on the basis of requests made by
Owners.
In connection with a substitution of any shares attributable to an Owner's
interest in a Variable Account or the Separate Account, Pacific Mutual will
provide notice, seek Owner approval, seek prior approval of the SEC, and
comply with the filing or other procedures established by applicable state
insurance regulators, to the extent required under applicable law.
Pacific Mutual also reserves the right to establish additional Variable
Accounts of the Separate Account that would invest in a new Portfolio of the
Fund or in shares of another investment company, a portfolio thereof, or other
suitable investment vehicle. New Variable Accounts may be established in the
sole discretion of Pacific Mutual, and any new Variable Account will be made
available to existing Owners on a basis to be determined by Pacific Mutual.
Pacific Mutual may also eliminate or combine one or more Variable Accounts if,
in its sole discretion, marketing, tax, or investment conditions so warrant.
Subject to compliance with applicable law, Pacific Mutual may transfer
assets to the General Account. Pacific Mutual also reserves the right, subject
to any required regulatory approvals, to transfer assets of any Variable
Account of the Separate Account to another separate account or Variable
Account.
In the event of any such substitution or change, Pacific Mutual may, by
appropriate endorsement, make such changes in these and other contracts as may
be necessary or appropriate to reflect such substitution or change. If deemed
by Pacific Mutual to be in the best interests of persons having voting rights
under the Contracts, the Separate Account may be operated as a management
investment company under the 1940 Act or any other form permitted by law; it
may be deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of Pacific Mutual
or an affiliate thereof. Subject to compliance with applicable law, Pacific
Mutual also may combine one or more Variable Accounts and may establish a
committee, board, or other group to manage one or more aspects of the
operation of the Separate Account.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
Pacific Mutual reserves the right, without the consent of Owners, to suspend
sales of the Contract as presently offered and to make any change to the
provisions of the Contracts to comply with, or give Owners the benefit of, any
Federal or state statute, rule, or regulation, including but not limited to
requirements for annuity contracts and retirement plans under the Internal
Revenue Code and regulations thereunder or any state statute or regulation.
Pacific Mutual also reserves the right to limit the amount and frequency of
subsequent premium payments.
39
<PAGE>
REPORTS TO OWNERS
A statement will be sent quarterly to each Contract Owner setting forth a
summary of the transactions that occurred during the quarter, and indicating
the Accumulated Value, Full Withdrawal Value, and any Contract Debt as of the
end of each quarter. In addition, the statement will indicate the allocation
of Accumulated Value among the Fixed Account and the Variable Accounts and any
other information required by law. Confirmations will also be sent out upon
unscheduled premium payments and transfers, loans, loan repayments, and full
and unscheduled partial withdrawals, and on payment of death benefit proceeds.
Confirmation of your transactions under the pre-authorized checking plan,
dollar cost averaging, portfolio rebalancing and preauthorized withdrawal
options will appear on your quarterly account statements. 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 appeared. When you write, tell us your name, contract number
and description of the error.
Each Contract Owner will also receive an Annual and a Semi-annual report
containing financial statements for the Separate Account and the Fund, the
latter of which will include a list of the portfolio securities of the Fund,
as required by the 1940 Act, and/or such other reports as may be required by
Federal securities laws.
TELEPHONE TRANSFER PRIVILEGES
A Contract Owner may request a transfer of Accumulated Value by telephone if
an authorization for telephone requests ("telephone authorization") is on file
at Pacific Mutual. All or part of any telephone conversation with respect to
transfer instructions may be recorded by Pacific Mutual. Telephone
instructions received by Pacific Mutual by 1:00 P.M. Pacific time, or the
close of the New York Stock Exchange, if earlier, on any Valuation Date will
be effected as of the end of that Valuation Date in accordance with the
Owner's instructions, (presuming that the Free-Look Period has expired).
Pacific Mutual reserves the right to deny any telephone transfer request. If
all telephone lines are busy (which might occur, for example, during periods
of substantial market fluctuations), Contract Owners might not be able to
request transfers by telephone and would have to submit written requests.
Pacific Mutual has established procedures to confirm that instructions
communicated by telephone are genuine. Under the procedures, any person
requesting a transfer by telephone must provide certain personal
identification as requested by Pacific Mutual, and Pacific Mutual will send a
written confirmation of all transfers requested by telephone within 7 days of
the transfer. Upon request in writing for telephone authorization, a Contract
Owner authorizes Pacific Mutual to accept and act upon telephonic instructions
for transfers involving the Contract Owner's Contract, and agrees that neither
Pacific Mutual, any of its affiliates, nor Pacific Select Fund, nor any of the
directors, trustees, officers, employees or agents, will be liable for any
loss, damages, cost, or expense (including attorneys fees) arising out of any
requests effected in accordance with the telephone authorization and believed
by Pacific Mutual to be genuine, provided that Pacific Mutual has complied
with its procedures. As a result of this policy on telephone requests, the
Contract Owner will bear the risk of loss arising from the telephone transfer
privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Contracts
described in this Prospectus, Pacific Mutual'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.
Legal matters relating to the Federal securities and Federal income tax laws
have been passed upon by Dechert Price & Rhoads, Washington, D.C.
40
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account,
including the yield and effective yield of the Variable Account investing in
the Fund's Money Market Portfolio ("Money Market Variable Account"), the yield
of the remaining Variable Accounts, and the total return of all Variable
Accounts may appear in advertisements, reports, and promotional literature to
current or prospective Owners.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), and will reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Quotations of total return may simultaneously be shown that do not
take into account certain contractual charges such as the contingent deferred
sales charge, the administrative charge, and the maintenance fee.
Performance information for Variable Accounts may also be advertised based
on the historical performance of the Fund Portfolio underlying the Variable
Account for periods beginning prior to the date each Variable Account
commenced operations. Any such performance calculation will be based on the
assumption that the Variable Account corresponding to the applicable Fund
Portfolio was in existence throughout the stated period and that the
contractual charges and expenses of the Variable Account during that period
were equal to those currently assessed under the Contract.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which Accumulated Value is
allocated to a Variable Account during a particular time period on which the
calculations are based. Performance information should be considered in light
of the investment objectives and policies, characteristics, and quality of the
Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future. For a description of the
methods used to determine yield and total return and of the usage of
performance and other related information for the Variable Accounts, see the
Statement of Additional Information.
ADDITIONAL INFORMATION
REGISTRATION STATEMENT
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the offering described in this Prospectus. This Prospectus does
not include all the information included in the Registration Statement,
certain portions of which, including the Statement of Additional Information,
have been omitted pursuant to the rules and regulations of the SEC. The
omitted information may be obtained at the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
FINANCIAL STATEMENTS
Financial statements of the Separate Account as of and for the periods ended
December 31, 1995 and 1994, including the notes thereto, are incorporated by
reference in the Statement of Additional Information from the Annual Report of
the Separate Account dated as of December 31, 1995. Financial statements of
Pacific Mutual as of and for the years ended December 31, 1995 and 1994, are
contained in the SAI.
41
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to Pacific Mutual. The Table of Contents of
the Statement of Additional Information is set forth below:
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.......................................... 1
Dollar Cost Averaging.................................................. 1
Portfolio Rebalancing Option........................................... 2
Safekeeping of Assets.................................................. 2
Participating.......................................................... 2
Misstatements.......................................................... 2
DISTRIBUTION OF THE CONTRACT............................................. 2
INDEPENDENT ACCOUNTANTS.................................................. 3
PERFORMANCE INFORMATION.................................................. 3
TAX DEFERRED ACCUMULATION................................................ 5
FINANCIAL STATEMENTS..................................................... 7
</TABLE>
42
<PAGE>
APPENDIX
EXAMPLES OF CONTINGENT DEFERRED SALES CHARGE
The following examples illustrate the operation of the contingent deferred
sales charge.
EXAMPLE 1:
A Contract Owner makes a single premium payment of $10,000 in the first
Contract Year and the Contract's Accumulated Value grows to $15,000 in the
fifth Contract Year. A partial withdrawal of $11,000 is requested at that time
and no prior withdrawals have been made.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$1,000 0% 10% free withdrawal amount on premium Age 5--No
charge imposed.
9,000 3% Applied against remaining premium Age 5.
1,000 0% No charge imposed on an amount in excess of ag-
gregate premiums received in last 5 Contract
Years.
</TABLE>
The contingent deferred sales charge would be $270.
EXAMPLE 2:
A Contract Owner makes an initial premium payment of $5,000 in the first
Contract Year, and subsequent premium payments of $2,000 in the second, third,
and fourth Contract Years for total premiums of $11,000, and the Contract's
Accumulated Value has grown to $17,000 in the sixth Contract Year. A
withdrawal of $12,000 is requested in the sixth Contract Year and no prior
withdrawals have been made.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$5,000 0% Applied against premiums Age 6--No charge im-
posed.
600 0% 10% free withdrawal amount applied against pre-
mium
Age 5.
1,400 3% Applied against remaining premium Age 5.
2,000 4% Applied against premium Age 4.
2,000 5% Applied against premium Age 3.
1,000 0% No charge imposed on an amount in excess of ag-
gregate premium received in last 5 Contract
Years.
</TABLE>
The contingent deferred sales charge would be $222.
EXAMPLE 3:
A Contract Owner makes a single premium payment of $12,000 and has received
four quarterly scheduled withdrawals of $200 in the second Contract Year. An
unscheduled partial withdrawal was also made of $500 after the third scheduled
withdrawal.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
500 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
100 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
100 6% Applied against premium Age 2.
</TABLE>
The contingent deferred sales charge would be $6.
43
<PAGE>
To receive a current copy of the Pacific Select Variable Annuity Statement of
Additional Information without charge, complete the following and send it to:
Pacific Mutual Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, CA 91109-7187
Name _________________________________
Address ______________________________
City__________________________________ State____________________ Zip_________
[Bar Code]
<PAGE>
[LOGO OF PACIFIC SELECT VARIABLE ANNUITY]
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Mutual Distributors, Inc.
700 Newport Center Drive Member: NASD/SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
Prospectus dated April 1, 1996
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: APRIL 1, 1996
----------------
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ACCUMULATION
DEFERRED ANNUITY CONTRACT
----------------
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
1-800-722-2333
MAILING ADDRESS:
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
NEWPORT BEACH, CALIFORNIA 91109-7187
----------------
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated April 1, 1996 of
the Pacific Select Variable Annuity Separate Account ("the Separate Account")
of Pacific Mutual Life Insurance Company and has been filed with the
Securities and Exchange Commission as part of the Separate Account's
Registration Statement. This SAI is not itself a prospectus and should be read
in conjunction with the current Prospectus for Pacific Select Variable Annuity
Separate Account dated April 1, 1996. The Prospectus may be obtained from
Pacific Mutual Life Insurance Company.
The contents of this SAI are incorporated by reference in the Prospectus in
their entirety.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION AND HISTORY............................................ 1
Dollar Cost Averaging Option............................................. 1
Portfolio Rebalancing Option............................................. 2
Safekeeping of Assets.................................................... 2
Dividends................................................................ 2
Misstatements............................................................ 2
DISTRIBUTION OF THE CONTRACT............................................... 2
INDEPENDENT ACCOUNTANTS.................................................... 3
PERFORMANCE INFORMATION.................................................... 3
TAX DEFERRED ACCUMULATION.................................................. 5
FINANCIAL STATEMENTS....................................................... 7
</TABLE>
i
<PAGE>
GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Premium Variable Accumulation
Deferred Annuity Contract (the "Contract"), Pacific Mutual, and the Pacific
Select Variable Annuity Separate Account (the "Separate Account"), see the
Prospectus. This SAI contains information that supplements the information in
the Prospectus. Defined terms used in this SAI have the same meaning as terms
defined in the section entitled "Definitions" in the Prospectus.
DOLLAR COST AVERAGING OPTION
Pacific Mutual currently offers an option under which Contract Owners may
dollar cost average their allocations in the Variable Accounts under the
Contract by authorizing Pacific Mutual to make periodic allocations of
Accumulated Value from any one Variable Account to one or more of the other
Variable Accounts, subject to the limitation on the Growth Variable Account.
Contract Owners may authorize Pacific Mutual to make periodic allocations
from the Fixed Account to one or more Variable Accounts. Dollar Cost Averaging
allocations may not be made from the Fixed Account and a Variable Account at
the same time.
An Owner may request Dollar Cost Averaging by sending a proper request to
Pacific Mutual. The Contract Owner must designate the Variable Account or
Fixed Account from which the transfers will be made, the specific dollar
amounts or percentages to be transferred, the Variable Account or Accounts to
which the transfers will be made, the desired frequency of the transfer, which
may be on a monthly, quarterly, semi-annual, or annual basis, and the length
of time during which the transfers shall continue or the total amount to be
transferred over time.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account from which the Dollar Cost Averaging transfers will be made
must be at least $5,000. The Dollar Cost Averaging request will not be
considered complete until the Contract Owner's Accumulated Value in the
Variable Account from which the transfers will be made is at least $5,000.
After Pacific Mutual has received a Dollar Cost Averaging request in proper
form, Pacific Mutual will transfer Accumulated Value in amounts designated by
the Contract Owner from the Variable Account or Fixed Account from which
transfers are to be made to the Variable Account or Accounts chosen by the
Contract Owner. (The minimum amount or percentages that may be transferred to
any one Variable Account is $50). After the Free-Look Period, the first
transfer will be effected on the Contract's Monthly, Quarterly, Semi-Annual,
or Annual Anniversary, whichever corresponds to the period selected by the
Contract Owner, coincident with or next following receipt at Pacific Mutual of
a Dollar Cost Averaging request in proper form, and subsequent transfers will
be effected on the following Monthly, Quarterly, Semi-Annual, or Annual
Anniversary for so long as designated by the Contract Owner until the total
amount elected has been transferred, or until Accumulated Value in the Fixed
Account or Variable Account from which transfers are made has been depleted.
Amounts periodically transferred under this Option will not be subject to any
transfer charges that may be imposed by Pacific Mutual in the future, except
as may be required by applicable law.
A Contract Owner may instruct Pacific Mutual at any time to terminate the
option by request to Pacific Mutual. In that event, the Accumulated Value in
the Variable Account or Fixed Account from which transfers were being made
that has not been transferred will remain in that Account unless the Contract
Owner instructs otherwise. If a Contract Owner wishes to continue transferring
on a Dollar Cost Averaging basis after the expiration of the applicable
period, the total amount elected has been transferred, or the Variable Account
or Fixed Account has been depleted, or after the Dollar Cost Averaging Option
has been cancelled, a new Dollar Cost Averaging request must be sent to
Pacific Mutual. The Variable Account from which transfers are to be made must
meet the minimum amount of Accumulated Value requirement. Pacific Mutual may
discontinue, modify, or suspend the Dollar Cost Averaging Option at any time.
1
<PAGE>
PORTFOLIO REBALANCING OPTION
Portfolio rebalancing allows Contract Owners who are not currently Dollar
Cost Averaging, to maintain the percentage of Accumulated Value allocated to
each Variable Investment Option at a pre-set level during the Accumulation
Period. For example, a Contract Owner could specify that 30% of the Contract's
Accumulated Value be allocated to the Equity Index Variable Account, 40% in
the Managed Variable Account, and 30% in the Growth LT Variable Account. Over
time, the variations in each Variable Account's investment results will shift
this balance of the Owner's Accumulated Value in the Contract. If an Owner
elects the portfolio rebalancing feature, we will automatically transfer the
Accumulated Value back to the percentages the Owner specified.
An Owner may request portfolio rebalancing by sending a proper written
request to Pacific Mutual during the Accumulation Period. The Contract Owner
must designate the percentages to allocate to each Variable Account and the
desired frequency of rebalancing, which may be on a quarterly, semi-annual or
annual basis. An Owner may specify a date for the first rebalance, or we will
treat the request as if the Owner selected the request's effective date. If
the Owner specifies a date fewer than 30 days after the Contract Date, the
first rebalance will be delayed one month, and if rebalancing was requested on
the application with no specific date, rebalancing will occur one period after
the Contract Date. A Contract Owner may instruct Pacific Mutual at any time to
terminate the portfolio rebalancing option by written request to Pacific
Mutual. We may change, terminate or suspend the portfolio rebalancing feature
at any time.
SAFEKEEPING OF ASSETS
Pacific Mutual is responsible for the safekeeping of the assets of the
Variable Accounts. These assets are held separate and apart from the assets of
Pacific Mutual's general account and its other separate accounts.
DIVIDENDS
The current dividend scale is zero and Pacific Mutual does not anticipate
that dividends will be paid. If any dividend is paid, the Contract Owner may
elect to receive the dividend in cash or to add the dividend to the Contract's
Accumulated Value. If no election is made by the Contract Owner, the dividend
will be added to the Accumulated Value. Pacific Mutual will allocate any
dividend to Accumulated Value in accordance with the Owner's most recent
premium allocation instructions, unless instructed. The Owner should consult
with his or her tax adviser before making an election.
MISSTATEMENTS
If the age or sex of an Annuitant or age of an Owner has been misstated, the
correct amount paid or payable by Pacific Mutual under the Contract shall be
such as the Accumulated Value would have provided for the correct Age or sex
(unless unisex rates apply).
DISTRIBUTION OF THE CONTRACT
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD"), formerly Pacific Equities
Network, an indirect wholly-owned subsidiary of Pacific Mutual, acts as the
principal underwriter of the Contracts and offers the Contracts on a
continuous basis. Pacific Mutual and PMD enter into selling agreements with
broker-dealers whose registered representatives are authorized by state
insurance departments to sell the Contracts.
Pursuant to its selling agreement with Pacific Mutual, PMD receives
compensation in the amount of 6.5% of the aggregate Purchase Payments for
distributing the Contracts. Under certain circumstances and in exchange for
lower initial commission, certain sellers of Contracts may be paid persistency
trail commission which will take into account, among other things, the length
of time premium payments have been held under a Contract, and Contract Values.
A trail commission is not anticipated to exceed 1.00%, on an annual basis, of
the Accumulated Value considered in connection with the trail commission.
2
<PAGE>
In addition, Pacific Mutual may also pay override payments, expense
allowances, bonuses, wholesaler fees and training allowances. The aggregate
amount of underwriting commissions paid to PMD for 1995, 1994, and 1993 was
$27,712,281, $6,999,408 and $4,870,190, respectively, of which $0 was
retained. Broker-dealers may choose one of two compensation structures for
sales of the Contracts or may permit their registered representatives to
choose on a Contract-by-Contract basis. Registered representatives earn
commissions from the broker-dealers with which they are affiliated and such
arrangements may vary. In addition, registered representatives who meet
certain 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.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche llp, 695 Town Center Drive, Suite 1200, Costa Mesa,
California 92626, independent public accountants, perform certain accounting
and auditing services for Pacific Mutual and the Separate Account. The
financial statements for Pacific Mutual as of and for the periods ended
December 31, 1995 and 1994, included in this SAI, and the financial statements
for the Separate Account as of and for the periods ended December 31, 1995 and
1994, including the notes thereto, incorporated by reference in this SAI from
the Annual Report of the Separate Account, have been audited by Deloitte &
Touche LLP to the extent and for the periods indicated in their reports
thereon.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account,
including the yield and effective yield of the Variable Account investing in
the Fund's Money Market Portfolio ("Money Market Variable Account"), the yield
of the remaining Variable Accounts, and the total return of all Variable
Accounts, may appear in advertisements, reports, and promotional literature to
current or prospective Owners.
Current yield for the Money Market Variable Account will be based on the
change in the value of a hypothetical investment (exclusive of capital
charges) over a particular 7-day period, less a pro-rata share of the Variable
Account's expenses accrued over that period (the "base period"), and stated as
a percentage of the investment at the start of the base period (the "base
period return"). The base period return is then annualized by multiplying by
365/7, with the resulting yield figures carried to at least the nearest
hundredth of one percent. Calculation of "effective yield" begins with the
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) (To the power of 365/7)] - 1
Quotations of yield for the remaining Variable Accounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(a-b + 1) (to the power of 6)-1]
---
cd
where
a= net investment income earned during the period by the
Portfolio attributable to shares owned by the Variable
Account,
b= expenses accrued for the period (net of reimbursements),
c= the average daily number of Accumulation Units outstanding
during the period that were entitled to receive dividends,
and
d= the maximum offering price per Accumulation Unit on the last
day of the period.
3
<PAGE>
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), calculated
pursuant to the following formula: P(1 + T)n = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). All total return figures reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Performance information for Variable Accounts may also be advertised
based on the historical performance of the Fund Portfolio underlying the
Variable Account for periods beginning prior to the date each Variable Account
commenced operations. Any such performance calculation will be based on the
assumption that the Variable Account corresponding to the applicable Fund
Portfolio was in existence throughout the stated period and that the
contractual charges and expenses of the Variable Account during that period
were equal to those currently assessed under the Contract. Quotations of total
return may simultaneously be shown for the same or other periods that do not
take into account certain contractual charges such as the contingent deferred
sales charge, the administrative charge, and the maintenance fee.
Performance information for a Variable Account may be compared, in reports
and promotional literature, to the Standard & Poor's 500 Stock Index ("S&P
500"), the Dow Jones Industrial Average ("DJIA"), the Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Lehman Brothers Government Bond Index, the Salomon Brothers High Yield Bond
Indexes, the Morgan Stanley Capital International's EAFE Index or other
indices that measure performance of a pertinent group of securities so that
investors may compare a Variable Account's results with those of a group of
securities widely regarded by investors as representative of the securities
markets in general or representative of a particular type of security.
Performance information may also be compared to (i) other groups of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications
or persons who rank such investment companies on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Contract. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which an Owner's Accumulated
Value is allocated to a Variable Account during a particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and
quality of the Portfolio of the Fund in which the Variable Account invests,
and the market conditions during the given time period, and should not be
considered as a representation of what may be achieved in the future.
Reports and promotional literature may also contain other information
including (i) the ranking of any Variable Account derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies,
publications, or other persons who rank separate accounts or other investment
products on overall performance or other criteria, (ii) the effect of tax-
deferred compounding on a Variable Account's investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis, and (iii)
Pacific Mutual's rating or a rating of Pacific Mutual's claims paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
4
<PAGE>
The following table presents the annualized total return for each Variable
Account, other than the Aggressive Equity and Emerging Markets Variable
Accounts, for the year ended December 31, 1995 and for the period from each
such Variable Account's commencement of operations through December 31, 1995.
The table is based on a Contract for which the average initial premium is
approximately $40,000. The Accumulated Value (AV) reflects the deductions for
all contractual expenses except the contingent deferred sales charge. The Full
Withdrawal Value (FWV) reflects the deduction for all contractual expenses.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1995
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS** 5 YEARS** 10 YEARS** SINCE INCEPTION**
----------- ----------- ----------- ----------- ------------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV AV FWV AV FWV
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 7/24/90*... 4.01 -1.39 2.45 1.00 2.66 2.17 2.93 2.93
High Yield Bond
8/16/90*............... 17.16 11.76 10.49 9.25 14.23 13.91 12.26 12.26
Managed Bond 9/5/90*.... 17.32 11.92 6.76 5.42 8.58 8.19 9.16 9.15
Government Securities
8/22/90*............... 17.09 11.69 6.14 4.79 7.90 7.50 8.54 8.54
Growth 8/16/90*......... 23.94 18.54 9.51 8.25 16.76 16.46 13.50 13.49
Growth LT 1/4/94*....... 34.79 29.39 22.91 20.64
Equity Income 8/16/90*.. 29.77 24.37 10.81 9.58 12.92 12.58 11.70 11.70
Multi-Strategy 9/25/90*. 23.44 18.04 8.86 7.58 10.48 10.12 11.21 11.21
Equity 1/4/95*.......... 22.12 16.72 10.17 8.92 12.38 12.04 10.87 10.87 12.14 12.14
Bond and Income 1/4/95*. 31.80 26.40 11.88 10.67 12.83 12.49 9.81 9.81 11.75 11.75
Equity Index 2/11/91*... 34.96 29.56 13.15 11.97 12.08 11.71
International 8/16/90*.. 8.94 3.54 12.35 11.15 6.55 6.13 4.05 4.04
Donoghue MF............. 5.49 4.12 4.55
EAFE.................... 11.21 16.69 9.37 13.62
First Boston............ 17.38 11.39 18.30
LBG/Bond................ 18.33 8.16 9.36 9.38
LBG/C Bond.............. 19.24 8.51 9.80 9.65
Russell 2500............ 31.70 14.94 20.95 13.17
S & P 500............... 37.58 15.34 16.59 14.88
</TABLE>
- -------
* Date Variable Account commenced operations.
** The performance of the Equity Income, Multi-Strategy and International
Variable Accounts for a portion of this period occurred at a time when
other Portfolio Managers managed the corresponding Portfolio in which each
Variable Account invests. Effective January 1, 1994, J.P. Morgan Investment
Management, Inc. became the Portfolio Manager of the Equity Income and
Multi-Strategy Portfolio and Templeton Investment Counsel, Inc. became the
Portfolio Manager of the International Portfolio; prior to 1/1/94, some of
the investment policies of the Equity Income Portfolio and the investment
objective of the Multi-Strategy Portfolio differed. Performance of the
Equity Portfolio and the Bond and Income Portfolio is based in part on the
performance of predecessor portfolios of Pacific Corinthian Variable Fund,
which began their first full year of operations January 1, 1984 and were
acquired by the Fund on December 31, 1994.
TAX DEFERRED ACCUMULATION
In general, individuals who own annuity contracts are not taxed on increases
in the value under an annuity contract until some form of distribution is made
under 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 versus accumulation from an investment on
which gains are taxed on a current basis. The chart portrays accumulation of a
$10,000 premium or investment, assuming hypothetical gross annual rates of
return of 0%, 4% and 8%, compounded annually, and a tax bracket of 36%. Values
for the taxable investment are presented with the assumption that annual taxes
are paid from returns of the investment and they do not reflect the deduction
of any charges or fees. Values for the variable annuity contract are shown for
Accumulated Value, assuming the contract owner does not surrender or make any
withdrawals from the contract, and after-tax Full Withdrawal value, assuming
that the owner surrenders the contract at the end of the periods shown and
pays any withdrawal fee federal income taxes due from the contractual
proceeds. The values shown for the variable annuity do not reflect the
deduction of contractual expenses, including the Mortality and Expense Risk
Charge, Administrative Charge, Maintenance Fee, Transfer
5
<PAGE>
Fee, or Premium Tax Charge or the investment advisory fees and operating
expenses of the Fund. For a description of the charges and expenses under the
Contract, see EXPENSE TABLE and CHARGES AND DEDUCTIONS in the Prospectus. The
rates of returns illustrated are hypothetical and are not a guaranty of
performance. Tax rates may vary for different taxpayers from the 36% used in
the chart, which would result in different values than those shown on the
chart and withdrawals and surrenders by Contract Owners who have not reached
age 59 1/2 may be subject to a tax penalty.
The hypothetical rates of return used in the chart are assumptions only, and
no implication is intended that the returns are guaranteed in any way or that
they represent an average or expected rates of return over the period
depicted. The portion of Accumulated Value that exceeds the variable annuity
contract owner's investment in the contract is taxed at ordinary income tax
rates upon distribution, and a 10% tax penalty may apply to withdrawals by
owners who have not yet reached age 59 1/2.
POWER OF TAX DEFERRAL
$10,000 investment at annual rates of 0.00%, 4.00% and 8.00%, taxed @ 36%
<TABLE>
<CAPTION>
Taxable Tax-Deferred
Investment Investment
---------- ------------
<S> <C> <C>
19 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>
6
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements of the Separate Account as of December 31,
1995 and the periods ended December 31, 1995 and 1994, including the notes
thereto, are incorporated by reference in this SAI from the Annual Report of
the Separate Account dated as of December 31, 1995.
The financial statements of Pacific Mutual as of and for the years ended
December 31, 1995 and 1994 are set forth herein, starting on page 8. The
financial statements of Pacific Mutual which are included in this SAI should
be considered only as bearing on the ability of Pacific Mutual to meet its
obligations under the Contracts. They should not be considered as bearing on
the investment performance of the assets held in the Separate Account.
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Mutual Life Insurance Company:
We have audited the accompanying statements of financial position of
Pacific Mutual Life Insurance Company as of December 31, 1995 and 1994,
and the related statements of operations and surplus, and of cash flow
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements present fairly, in all
material respects, the financial position of Pacific Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the results of
its operations and its cash flow for the years then ended, in conformity
with accounting practices prescribed or permitted by the Insurance
Department of the State of California and with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 23, 1996
8
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1995 1994
- ------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,699,489 $ 6,669,853
Preferred stocks 156,097 132,604
Common stocks 54,504 57,874
Unconsolidated subsidiaries 182,040 196,401
Mortgage loans 1,388,743 1,421,182
Real estate 145,178 157,507
Home office properties 48,446 51,419
Policy loans 2,700,544 2,312,455
Cash and short-term investments 262,527 97,745
Investment income due and accrued 135,607 125,534
Premiums due and uncollected, and other assets 295,159 245,243
Separate account assets 5,520,478 3,260,374
- ------------------------------------------------------------------------
TOTAL ASSETS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 7,204,362 $ 6,476,634
Deposit funds 3,262,340 3,298,915
Other liabilities 686,989 885,638
Asset valuation reserve 191,392 179,006
Separate account liabilities 5,520,478 3,260,374
- ------------------------------------------------------------------------
Total Liabilities 16,865,561 14,100,567
Surplus 723,251 627,624
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $17,588,812 $14,728,191
- ------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds $2,919,920 $2,180,409
Net investment income 945,546 879,116
Other income 5,685 5,073
- ------------------------------------------------------------------------------
TOTAL REVENUES 3,871,151 3,064,598
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 3,371,448 2,659,601
Operating expenses 309,588 249,018
Premium and other taxes (excluding tax on capital
gains) 35,168 28,705
Dividends to policyowners 16,639 17,162
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 3,732,843 2,954,486
- ------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 138,308 110,112
Federal income taxes 59,470 41,510
- ------------------------------------------------------------------------------
NET GAIN FROM OPERATIONS 78,838 68,602
NET REALIZED CAPITAL GAINS 6,311 12,424
- ------------------------------------------------------------------------------
NET INCOME $ 85,149 $ 81,026
- ------------------------------------------------------------------------------
SURPLUS
Net income $ 85,149 $ 81,026
Other surplus transactions, net 10,478 (36,178)
- ------------------------------------------------------------------------------
Increase in surplus 95,627 44,848
Surplus, beginning of year 627,624 582,776
- ------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 723,251 $ 627,624
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
10
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
- -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Receipts
Premiums, annuity considerations and deposit
funds $ 2,687,698 $ 1,687,583
Net investment income 927,918 809,791
Allowances and reserve adjustments on reinsurance
ceded 187,380 491,363
Other 13,885 23,862
Payments
Policy benefit payments (1,677,788) (1,408,650)
Net policy loans (388,320) (352,358)
Operating expenses (278,138) (247,437)
Net transfer to separate accounts (1,178,622) (594,284)
Premium and other taxes (41,116) (34,795)
Dividends to policyowners (16,715) (17,319)
Federal income taxes (35,779) (23,995)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES 200,403 333,761
- -------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds
Bonds 2,496,486 2,937,210
Stocks 208,235 139,785
Mortgage loans 261,514 390,642
Real estate 21,419 20,163
Other investments 49,089 47,132
Payments for the purchase of
Bonds (2,431,687) (3,673,859)
Stocks (222,678) (126,823)
Mortgage loans (239,355) (230,859)
Real estate (4,716) (17,466)
Other investments (124,164) (114,106)
- -------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN)
INVESTING ACTIVITIES 14,143 (628,181)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Financial Statements
11
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
<S> <C> <C>
(Continued) 1995 1994
- ------------------------------------------------------------------------------
<CAPTION>
(In Thousands)
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Issuance (repayment) of short-term borrowings $ (49,764) $ 49,764
- ------------------------------------------------------------------------------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES (49,764) 49,764
- ------------------------------------------------------------------------------
Increase (decrease) in cash and short-term
investments 164,782 (244,656)
Cash and short-term investments, beginning of year 97,745 342,401
- ------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 262,527 $ 97,745
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 18,376 $ 22,120
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
12
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual") was established
in 1868 and is organized under the laws of the State of California as a
mutual life insurance company. Pacific Mutual conducts business in every
state except New York.
Pacific Mutual, including its subsidiaries and affiliates, has primary
business segments which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business segments provide products for
individuals and corporations and offer a range of investment products to
institutions and pension plans.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, which are currently considered generally
accepted accounting principles ("GAAP") for mutual life insurance
companies. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The financial statements of Pacific Mutual
are not consolidated with those of its subsidiaries.
The Financial Accounting Standards Board ("FASB") has issued certain
pronouncements effective for 1996 financial statements and thereafter
that will no longer allow statutory financial statements of mutual life
insurance companies to be described as being prepared in conformity with
GAAP.
Upon the effective date of these pronouncements, in order for their
financial statements to be described as being prepared in accordance with
GAAP, mutual life insurance companies and their insurance subsidiaries
will be required to adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. Pacific Mutual intends to issue 1996 general purpose financial
statements reflecting the adoption of all applicable GAAP pronouncements.
INVESTMENTS
Bonds qualifying for amortization are carried at amortized cost; all
other bonds are carried at prescribed values. Preferred stocks are
principally stated at amortized cost. Unaffiliated common stocks are
carried at market value. Investments in unconsolidated subsidiaries are
reported on the equity method of accounting, except for Pacific
Corinthian Life Insurance Company ("PCL") (Note 2) which is carried at
cost.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is valued at the lower of depreciated cost or market, less
related mortgage debt. Real estate is depreciated using the straight-line
method over 30 years.
Short-term investments generally mature within a year and are carried at
amortized cost which approximates estimated fair value.
The Asset Valuation Reserve ("AVR") is computed in accordance with a
prescribed formula and is designed to stabilize surplus against valuation
and credit-related losses for certain invested assets. Changes to the AVR
are reported as direct additions or deductions from surplus. The Interest
Maintenance Reserve ("IMR"), included in other liabilities on the
accompanying statements of financial position, results in the deferral of
after-tax realized capital gains and losses attributable to interest rate
fluctuations on fixed income investments. These capital gains and losses
are amortized into investment income over the remaining life of the
investment sold. The IMR was $25.3 million and $13.1 million as of
December 31, 1995 and 1994, respectively.
13
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax
of $18.5 million and $(2.3) million and transfers to the IMR of $22.6
million and $(.4) million for the years ended December 31, 1995 and 1994,
respectively.
Derivatives which qualify for hedge accounting are valued consistently
with the hedged items. Realized hedged gains and losses on fixed income
contracts are deferred and amortized over the average life of the related
hedged assets or insurance liabilities. Realized gains and losses on
equity securities, which are marked to market, are recognized
immediately. Derivatives which do not qualify for hedge accounting are
valued at market value through surplus while still held and when realized
through income.
On November 15, 1994, Pacific Financial Asset Management Corporation
("PFAMCo"), a wholly-owned, subsidiary of Pacific Mutual, 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. Collectively, PFAMCo and various of its subsidiaries beneficially
own approximately 42% of the outstanding general and limited partner
units of PIMCO Advisors L.P. as of December 31, 1995 and 1994. Net cash
distributions received on these units are recorded as income as permitted
by the Insurance Department of the State of California.
On December 21, 1995, Pacific Mutual completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual. Prior to that PFAMCo was a wholly-owned second-tier
subsidiary of Pacific Mutual. 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 which consisted of investments in
subsidiaries as follows: Pacific Equities Network, PM Group Life
Insurance Company and PFAMCo.
POLICY RESERVES AND DEPOSIT FUNDS
Life insurance reserves are valued using the net level premium method,
the Commissioners' Reserve Valuation Method, or other modified reserve
methods.
Reserves for individual annuities are maintained principally on the
Commissioners' Annuity Reserve Valuation Method. Group annuity contract
reserves are valued using the net single premium method.
The liability for deposit funds, including guaranteed interest contracts,
is based primarily upon and is not less than the policyowners' equity in
their deposit accounts, including credited interest.
REVENUES AND EXPENSES
Premiums are recognized as income over the premium paying period.
Deposits made in connection with annuity contracts are recognized as
revenue when received. Investment income is recorded as earned.
Expenses, including policy acquisition costs, such as commissions, and
Federal income taxes are charged to operations as incurred.
DIVIDENDS
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyowners by an independent consulting actuary.
14
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Pacific Mutual is taxed as a life insurance company for Federal income
tax purposes. Pacific Mutual's income tax return is consolidated with all
its includable domestic subsidiaries except PCL. 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. Under prescribed statutory accounting
practices, deferred tax assets and liabilities are not recorded. The
difference between the effective tax rate and the statutory tax rate of
35% for 1995 and 1994 is primarily due to certain policy acquisition
costs being deferred and amortized over a ten-year period for tax
purposes, reserve differences, non-taxable investment income and the
equity tax.
OTHER SURPLUS TRANSACTIONS
Other surplus transactions consist primarily of unrealized capital gains
and losses, changes in nonadmitted assets, and changes in the AVR.
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 policy
owners and contract owners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 3
and 4 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
Pacific Mutual 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 accounting
practices prescribed or permitted by regulatory authorities and generally
accepted accounting principles 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
financial statement presentation.
2. 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, through its wholly-owned subsidiary, PCL, will
facilitate the rehabilitation of First Capital Life Insurance Company
("FCL"). In accordance with the rehabilitation agreement, insurance
policies of FCL were restructured and assumed by PCL on December 31,
1992.
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated 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
15
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
plan period, PCL is prohibited from issuing new insurance policies. At
the end of the rehabilitation period, PCL will merge into Pacific Mutual,
with Pacific Mutual as the surviving entity. Substantially all of the
assets and certain of the liabilities of FCL were assumed by PCL on
December 31, 1992, pursuant to an assumption reinsurance agreement and
asset purchase agreement.
In accordance with the rehabilitation agreement, PCL was capitalized by a
cash contribution of $8.3 million from Pacific Mutual and a $45 million
certificate of contribution provided by a wholly-owned subsidiary of
Pacific Mutual for a total of $53.3 million initial capitalization.
In the event PCL is unable to pay contract benefits, Pacific Mutual is
obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
3. INVESTMENTS IN DEBT SECURITIES
The statement value, gross unrealized gains and losses and estimated fair
value of bonds and redeemable preferred stocks ("debt securities"),
including short-term investments, are shown below. The estimated fair
value of publicly traded securities was 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. Pacific Mutual 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
Statement ----------------- Fair
Value Gains Losses Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 147,436 $ 28,214 $ 175,650
Obligations of states, political
subdivisions and foreign
governments 452,273 66,960 $ 3,064 516,169
Corporate securities 3,901,979 442,497 46,539 4,297,937
Mortgage-backed securities 2,438,052 116,650 10,106 2,544,596
Redeemable preferred stock 89,191 2,840 2,472 89,559
----------------------------------------------
Total $7,028,931 $657,161 $ 62,181 $ 7,623,911
----------------------------------------------
December 31, 1994:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 216,201 $ 1,064 $ 37,113 $ 180,152
Obligations of states, political
subdivisions and foreign
governments 321,798 5,371 16,309 310,860
Corporate securities 3,771,271 104,311 160,712 3,714,870
Mortgage-backed securities 2,475,472 28,472 81,111 2,422,833
Redeemable preferred stock 81,026 343 5,031 76,338
----------------------------------------------
Total $6,865,768 $139,561 $300,276 $6,705,053
----------------------------------------------
</TABLE>
16
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The statement value and estimated fair value of debt securities as of
December 31, 1995 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>
Estimated
Statement Fair
Value Value
-----------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 445,645 $ 449,283
Due after one year through five years 1,319,487 1,426,373
Due after five years through ten years 1,409,209 1,542,228
Due after ten years 1,416,538 1,661,431
-----------
4,590,879 5,079,315
Mortgage-backed securities 2,438,052 2,544,596
-----------
Total $ 7,028,931 $ 7,623,911
-----------
</TABLE>
Proceeds from sales of investments in debt securities were $1.4 billion
and $1.5 billion for the years ended December 31, 1995 and 1994,
respectively. In 1995 and 1994, gross gains of $36 million and $30
million and gross losses of $14 million and $43 million, respectively,
were realized on those sales.
4. FINANCIAL INSTRUMENTS
The estimated fair values of Pacific Mutual's financial instruments,
including debt securities, are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities
(Note 3) $ 7,028,931 $ 7,623,911 $ 6,865,768 $ 6,705,053
Preferred and common
stocks 121,420 139,613 109,458 116,993
Mortgage loans 1,388,743 1,500,000 1,421,182 1,452,596
Policy loans 2,700,544 2,700,544 2,312,455 2,312,455
Derivative financial
instruments:
Interest rate swaps 1,068 3,379 121 (24,809)
Other 18,008 30,649 2,672 (2,822)
Liabilities:
Guaranteed interest
contracts 2,375,898 2,459,323 2,635,356 2,614,961
Deposit liabilities 876,276 899,393 897,743 859,469
Annuity liabilities 308,742 311,441 220,026 223,423
Other derivative fi-
nancial instruments 2,373 1,490 2,270 2,128
Surplus:
Contribution certifi-
cates 149,596 157,688 149,593 124,313
</TABLE>
17
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair
values of these financial instruments as of December 31, 1995 and 1994:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer
quotes.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The statement value of policy loans is a reasonable estimate of their
fair value.
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 values of deposit liabilities
with no defined maturities are the amounts payable on demand.
Pacific Mutual has issued PRO GIC and Diversifier GIC contracts to plan
sponsors totaling $914 million as of December 31, 1995, pursuant to the
terms of which the plan sponsor retains direct ownership and control of
the assets related to these contracts. Pacific Mutual agrees to provide
benefit responsiveness in the event that plan benefit requests exceed
plan cash flows. In return for this guarantee, Pacific Mutual receives a
fee which varies by contract. Pacific Mutual sets the investment
guidelines to provide for appropriate credit quality and cash flow
matching.
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates statement value and
primarily includes policyholder deposits and accumulated credited
interest.
DERIVATIVE FINANCIAL INSTRUMENTS
Pacific Mutual 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. Pacific Mutual has also
set aside a corporate total return portfolio utilizing derivative
financial instruments. These instruments include interest rate and
currency swaps, asset swaps, credit derivatives, forwards, options held,
options written, and futures contracts, and involve elements of credit
risk and market risk in excess of amounts recognized in the accompanying
financial statements. The notional amounts of those instruments reflect
the extent of involvement in those various types of financial
instruments. The estimated fair values of these instruments are based on
market or dealer quotes. Pacific Mutual determines, on an individual
counterparty basis, the need for collateral or other security to support
financial instruments with off-balance sheet credit risks.
18
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
Options and Floors
Pacific Mutual uses options and floors to hedge against fluctuations in
interest rates and in its corporate total return portfolio. Cash
requirements on options held are limited to the premium paid by Pacific
Mutual at acquisition. Pacific Mutual uses written options on a limited
basis consisting primarily of covered calls. Gains and losses on covered
calls are offset by gains and losses on the underlying position. Options
and floors held are reported as assets and options written are reported
as liabilities. As of December 31, 1995, the notional amount of options
held and options written approximated $1.3 billion and $30 million,
respectively. As of December 31, 1994, the notional amount of options
held and options written approximated $1.5 billion and $42 million,
respectively. Option contracts mature during 1996 through 2007.
Interest Rate Swap Contracts
Pacific Mutual has entered into interest rate swap contracts to reduce
the impact of changes in interest rates on its variable short-term and
long-term investments. These contracts effectively change the interest
rate exposure on variable rate notes to fixed rates which range from 1.9%
to 8.9% as of December 31, 1995, and from 1.9% to 8.6% as of December 31,
1994. Interest rate swap contracts mature during 1996 through 2013. As of
December 31, 1995 and 1994, interest rate swap contracts outstanding with
financial institutions had a total notional amount of $656 million and
$411 million, respectively.
Asset Swap Contracts
Pacific Mutual has entered into an asset swap contract to reduce interest
rate risk by shortening both the duration and maturity of one of its
fixed rate investments. The asset swap contract matures during 1998. As
of December 31, 1995, the asset swap contract had a notional amount of
$10 million.
Credit Derivatives
Pacific Mutual uses credit derivatives to take advantage of market
opportunities. As of December 31, 1995 and 1994, the notional amount of
credit derivatives outstanding approximated $90 million and $66 million,
respectively. Credit derivatives mature during 1996 through 2000.
Foreign Currency Exchange Contracts
Pacific Mutual enters into foreign currency exchange contracts that are
used to hedge against fluctuations in foreign currency-denominated assets
and related income. Gains and losses on such agreements offset currency
gains and losses on the related assets. As of December 31, 1995 and 1994,
the notional amount of foreign currency exchange contracts approximated
$15 million and $35 million, respectively. Foreign currency exchange
contracts expire during 1998 and 1999.
Future Contracts
Pacific Mutual uses exchange-traded futures contracts for asset and
liability management of fixed maturity securities and insurance
liabilities and for hedging market fluctuations on equity securities.
Price changes on futures are settled daily through the daily margin cash
flows. As of December 31, 1995 and 1994, the notional amounts of futures
contracts were $340 million and $163 million, respectively. The notional
amounts of the contracts do not represent future cash requirements, as
Pacific Mutual intends to close out open positions prior to expiration.
19
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
CONTRIBUTION CERTIFICATES
The estimated fair value of contribution certificates is based on market
quotes.
5. CONCENTRATION OF CREDIT RISK
Pacific Mutual 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.
Pacific Mutual is exposed to credit loss in the event of nonperformance
by the other parties to the interest rate swaps contracts and other
derivative securities. However, Pacific Mutual does not anticipate
nonperformance by the counterparties.
6. UNCONSOLIDATED SUBSIDIARIES
Pacific Mutual's subsidiary operations primarily include other life and
health insurance and investment management and advisory services. As of
December 31, 1995 and 1994, subsidiary assets were $4.5 billion and
liabilities were $4.3 billion as of December 31, 1995 and $4.2 billion as
of December 31, 1994.
Revenue and net income, including PCL, were $908 million and $63 million
for the year ended December 31, 1995, and $1.1 billion and $75 million
for the year ended December 31, 1994. Dividends from subsidiaries totaled
$64.7 million and $2 million for the years ended December 31, 1995 and
1994, respectively. Earnings of subsidiaries, excluding PCL, and
excluding capital gains, are included in net investment income.
7. BORROWINGS
Pacific Mutual borrows for short-term needs by issuing commercial paper.
Approximately $50 million was outstanding as of December 31, 1994,
bearing an interest rate of 5.86%, and was repaid in January, 1995. There
were no borrowings outstanding as of December 31, 1995.
In addition, Pacific Mutual had available a revolving credit facility
totaling approximately $250 million as of December 31, 1995 and 1994.
There were no borrowings outstanding as of December 31, 1995 and 1994.
8. CONTRIBUTION CERTIFICATES
Pacific Mutual has $150 million of Contribution Certificates (the
"Certificates"), also referred to as 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 Certificates may not be
redeemed at the option of Pacific Mutual or any holder of the
Certificates. The Certificates are unsecured and subordinated to all
present and future senior indebtedness and policy claims of Pacific
Mutual. Each payment of interest on and the payment of principal of the
Certificates may be made only out of Pacific Mutual's surplus and with
the prior approval of the Insurance Commissioner of the State of
California. In accordance with accounting practices prescribed or
permitted by the Insurance Department of the State of California, the
Certificates are not part of the liabilities of Pacific Mutual and are
included in surplus.
20
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
9. REINSURANCE
Pacific Mutual has reinsurance agreements with other insurance companies
for the purpose of diversifying risk and limiting exposure on larger
risks. For the years ended December 31, 1995 and 1994, individual life
and annuity premiums assumed were $16 million and $20 million and
premiums ceded were $339 million and $363 million, respectively. Amounts
recoverable from reinsurers for individual life and annuities include
reinsured and paid claims of $8 million and $13 million as of December
31, 1995 and 1994, respectively. Policy benefits payable are net of
reinsurance recoveries of $8 million and $4 million at December 31, 1995
and 1994, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $72
million and $90 million, and benefits of $53 million and $70 million were
ceded during the years ended December 31, 1995 and 1994, respectively.
Amounts payable to the subsidiary under this agreement were $6 million
and $8 million as of December 31, 1995 and 1994, respectively.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Pacific Mutual remains contingently
liable. However, Pacific Mutual does not anticipate nonperformance by
these assuming companies.
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
PENSION PLAN
Pacific Mutual maintains a defined benefit pension plan covering eligible
employees and agents. In 1995, Pacific Mutual accrued $2.5 million in
pension expense that will be funded in 1996 based on the latest actuarial
valuation report. No expense or contributions were made during 1994
because of the funded status of the plans and related income tax
considerations. Accumulated benefits and net assets available for
benefits as of the latest valuation dates (January 1, 1995 and April 1,
1994) are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefits:
Vested $ 92,966 $ 88,122
Nonvested 392 1,115
--------------------
Total $ 93,358 $ 89,237
--------------------
Net assets available for benefits $ 107,530 $ 111,089
--------------------
</TABLE>
The above present values were determined using an assumed discount rate
of 8.5% in 1995 and 1994.
POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE PLANS
Pacific Mutual 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'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's
21
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual 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 Plans for the years ended December 31, 1995 and
1994 was approximately $1.7 million for both years.
Pacific Mutual utilizes the accrual method of accounting for the costs of
The Plans as prescribed by the Insurance Department of the State of
California and amortizes its transition obligation of $26.7 million over
twenty years.
Components of net periodic postretirement benefit cost are as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
---------------------------
<S> <C> <C>
Service cost $ 177 $ 186
Interest cost 1,921 1,790
Amortization (260) (260)
---------------------------
1,838 1,716
Recognized transition obligation-net 1,336 1,337
---------------------------
Net periodic postretirement benefit cost $ 3,174 $ 3,053
---------------------------
</TABLE>
The following table presents The Plans' funded status reconciled with
amounts recorded in other liabilities on Pacific Mutual's statement of
financial position (In Thousands):
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 20,936 $ 20,580
Fully eligible active plan participants 1,695 1,346
Other active plan participants 2,290 2,455
-----------------------
24,921 24,381
Fair value of plan assets 0 0
-----------------------
Unfunded accumulated postretirement
obligation 24,921 24,381
Unrecognized net gain 878 942
Prior service cost 1,589 1,849
Unrecognized transition obligation-net (22,720) (24,056)
-----------------------
Accrued postretirement benefit liability $ 4,668 $ 3,116
-----------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 10% for 1995 and 11% for 1994, and is assumed to
decrease gradually to 5% in 2003 and remain at that level thereafter. The
amount reported is materially affected by the health care cost trend rate
assumptions. If the health care cost trend
22
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10.PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
rate assumptions were increased by 1%, the accumulated postretirement
benefit obligation as of December 31, 1995 and 1994 would be increased by
10.9% and 11.2%, respectively. The effect of this change would increase
the aggregate of the service, interest and amortization cost components
of the net periodic benefit cost by 11.4% and 13.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7% and 8% for 1995 and 1994, respectively.
11.INVESTMENT COMMITMENTS
Pacific Mutual has outstanding commitments to make investments in bonds
and other invested assets as follows (In Thousands):
<TABLE>
<CAPTION>
Year ended December
31:
-------------------
<S> <C>
1996 $ 179,551
1997-2000 88,698
2001 and thereafter 32,091
Total $ 300,340
</TABLE>
12.LITIGATION
Pacific Mutual and its subsidiaries are respondents 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 financial position of Pacific
Mutual.
--------------------------------------------------------------------------
23
<PAGE>
Sponsored by:
[LOGO OF PACIFIC MUTUAL]
PACIFIC MUTUAL LIFE INSURANCE COMPANY
Home Office
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
1-800-722-2333
Mailing Address
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
Distributed by:
[LOGO of PACIFIC MUTUAL]
Pacific Mutual Distributors, Inc.
MEMBER NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 249-6A
