<PAGE>
[LOGO OF PACIFIC ONE]
PROSPECTUS
FOR
PACIFIC ONE
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
DATED DECEMBER 29, 1995
--------------
PROSPECTUS
FOR
PACIFIC SELECT FUND
DATED MAY 1, 1995
<PAGE>
PACIFIC ONE
AN INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE ANNUITY CONTRACT
ISSUED BY PACIFIC MUTUAL LIFE
INSURANCE COMPANY
MAILING ADDRESS: P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
1-800-722-2333
[LOGO OF PACIFIC ONE]
This Prospectus describes Pacific One (the "Contract") offered by Pacific
Mutual Life Insurance Company ("Pacific Mutual"). The Contracts provide
purchasers with flexibility in long-term financial planning, including planning
for retirement. Contracts are available both to individuals and under certain
tax-qualified retirement plans. Payout options under the Contracts include
variable annuities funded through Pacific Mutual's Separate Account A (the
"Separate Account") and fixed annuities funded by Pacific Mutual's General
Account.
Twelve Investment Options are currently available. Each of the eleven
Variable Investment Options now in effect is a subaccount of the Separate
Account, and provides variable returns by investing in shares of a
corresponding Portfolio of Pacific Select Fund:
Money Market Portfolio Multi-Strategy Portfolio
High Yield Bond Portfolio Equity Portfolio
Managed Bond Portfolio Bond and Income Portfolio
Government Securities Portfolio Equity Index Portfolio
Growth LT Portfolio International Portfolio
Equity Income Portfolio
A Fixed Option is also available; it provides a fixed rate of return and is
funded by Pacific Mutual's General Account.
THIS PROSPECTUS PROVIDES INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD KNOW
BEFORE INVESTING IN A CONTRACT. IN ADDITION, THIS PROSPECTUS IS ACCOMPANIED BY
A CURRENT PROSPECTUS FOR THE PACIFIC SELECT FUND. YOU SHOULD READ BOTH OF THESE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR YOUR FUTURE REFERENCE.
Additional information about the Contract and the Separate Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated December 29, 1995. You may obtain a free copy of the
Statement of Additional Information by writing or calling Pacific Mutual. The
information contained in the Statement of Additional Information is
incorporated by reference into this Prospectus. The table of contents for the
Statement of Additional Information appears on page 35 of this Prospectus.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK. IT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN A CONTRACT INVOLVES RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
---------------
THE CONTRACT IS NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE
MADE LAWFULLY. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED STATEMENT OF
ADDITIONAL INFORMATION (OR ANY SALES LITERATURE APPROVED BY PACIFIC
MUTUAL), AND ANY SUCH UNAUTHORIZED INFORMATION OR REPRESENTATION IS, IF
GIVEN OR MADE, NOT TO BE RELIED UPON.
DATED : DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL DEFINITIONS........................................................ 4
SUMMARY.................................................................... 7
FEE TABLE.................................................................. 8
WHY BUY A CONTRACT......................................................... 10
YOUR INVESTMENT OPTIONS.................................................... 10
Your Variable Investment Options......................................... 10
Variable Investment Option Performance................................... 12
Your Fixed Option........................................................ 12
PURCHASING YOUR CONTRACT................................................... 12
How to Apply for Your Contract........................................... 12
Making Your Purchase Payments............................................ 13
HOW YOUR PAYMENTS ARE INVESTED............................................. 13
Investing in Variable Investment Options................................. 13
When Your Investment is Effective........................................ 14
Choosing Your Investment Options......................................... 14
Transfers................................................................ 14
CHARGES, FEES AND DEDUCTIONS............................................... 15
Premium Taxes............................................................ 15
Annual Fee............................................................... 15
Waivers and Reduced Charges.............................................. 16
Mortality and Expense Risk Charge........................................ 16
Administrative Fee....................................................... 16
Expenses of Pacific Select Fund.......................................... 16
RETIREMENT BENEFITS AND OTHER PAYOUTS...................................... 17
Selecting Your Annuitant................................................. 17
Annuitization............................................................ 17
Choosing Your Annuity Date ("Annuity Start Date")........................ 17
Annuity Option........................................................... 18
Default Annuity Date and Options......................................... 19
Your Annuity Payments.................................................... 19
Age Limitations.......................................................... 20
Death Benefits........................................................... 20
WITHDRAWALS................................................................ 21
Optional Withdrawals..................................................... 21
Mandatory Distribution on Death.......................................... 22
Tax Consequences of Withdrawals.......................................... 23
Short-Term Cancellation Right ("Free Look").............................. 23
PACIFIC MUTUAL AND THE SEPARATE ACCOUNT.................................... 23
Pacific Mutual........................................................... 23
Separate Account A....................................................... 23
FEDERAL TAX STATUS......................................................... 24
Taxes Payable by Contract Owners: General Rules.......................... 25
Qualified Contracts...................................................... 26
</TABLE>
2
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Loans.................................................................... 27
Withholding.............................................................. 29
Impact of Federal Income Taxes........................................... 29
Taxes on Pacific Mutual.................................................. 29
ADDITIONAL INFORMATION..................................................... 30
Voting Rights............................................................ 30
Changes to Your Contract................................................. 30
Changes to ALL Contracts................................................. 31
Investor Inquiries and Submitting Forms and Requests..................... 32
Telephone Transactions................................................... 32
Timing of Payments....................................................... 33
Confirmation Statements and Other Reports to Contract Owners............. 33
Sales Commissions........................................................ 33
Financial Statements..................................................... 33
THE FIXED OPTION........................................................... 34
General Information...................................................... 34
Guarantee Terms.......................................................... 34
Withdrawals and Transfers................................................ 34
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION........................ 35
APPENDIX A: STATE LAW VARIATIONS........................................... 36
</TABLE>
3
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SPECIAL DEFINITIONS
In this Prospectus, "we," "our" and "us" refer to Pacific Mutual Life Insurance
Company ("Pacific Mutual"); "you" and "your" refer to the Contract Owner.
Account Value--The amount of your Contract Value allocated to a specified
Subaccount or to the Fixed Option.
Annual Fee--A $40 fee charged each year on your Contract Anniversary and at the
time of a full withdrawal, if your Contract Value is less than $100,000 on that
date.
Annuitant--A person on whose life annuity payments may be determined. An
Annuitant's life may also be used to determine certain increases in death
benefits, and to determine the Annuity Date. A Contract may name a single
("sole") Annuitant or two ("Joint") Annuitants, and may also name a
"Contingent" Annuitant. If you name Joint Annuitants or a Contingent Annuitant,
"the Annuitant" means the sole surviving Annuitant, unless otherwise stated.
Annuity Date--Also called the "Annuity Start Date." The date specified in your
Contract for the commencement of annuity payments if your Annuitant (or Joint
Annuitants) is (or are) still living and your Contract is in force. You may
change your Annuity Date by notifying us as described in this Prospectus.
Annuity Option--A set of characteristics of a series of payments after your
Annuity Date.
Beneficiary--A person who may have a right to receive the death benefit payable
upon the death of the Annuitant or a Contract Owner prior to the Annuity Date,
or has a right to receive remaining guaranteed annuity payments, if any, upon
the death of the Annuitant following the Annuity Date.
Business Day--Any day on which the value of the amount invested in a Subaccount
is determined. In this Prospectus, "day" or "date" means Business Day unless
otherwise specified. If any transaction or event called for under a Contract is
scheduled to occur on a day that is not a Business Day, such transaction or
event will be deemed to occur on the next following Business Day unless
otherwise specified. Special circumstances such as leap years and months with
fewer than 31 days are discussed in the Statement of Additional Information.
Determinations of values are made at or about 4:00 p.m. Eastern time on each
day that the New York Stock Exchange is open, provided that Pacific Mutual's
offices are also open that day. Any calculation or determination of value
called for on or as of any day is effected as of the end of that day.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Annuitant--A person, named in your Contract, who will become your
sole surviving Annuitant if your existing sole Annuitant (or both Joint
Annuitants) should die before your Annuity Date.
Contingent Owner--A person, named in your Contract, who may succeed to the
rights of a Contract Owner of your Contract if all named Contract Owners die
before your Annuity Date.
Contract Anniversary--The same date, in each subsequent year, as your Contract
Date.
Contract Date--The date we issue your Contract.
Contract Debt--As of the end of any given Business Day, the principal amount
you have outstanding on any loan under your Contract, plus any accrued and
unpaid interest. Loans are available only on certain Qualified Contracts.
4
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Contract Owner--Generally, a person who purchases a Pacific One Contract and
makes the Purchase Payments. A Contract Owner has all rights in the Contract
before the Annuity Date, including the right to make withdrawals, designate and
change beneficiaries, transfer amounts among Investment Options, and designate
an Annuity Option. If your Contract names Joint Owners, both Joint Owners are
Contract Owners and share all such rights.
Contract Value--At the end of any given Business Day, your Variable Account
Value, plus your Fixed Option Value, plus the amount held in the Loan Account
to secure your Contract Debt.
Contract Year--A year that starts on the Contract Date or on a Contract
Anniversary.
Fixed Option--If you allocate all or a part of your Purchase Payments or
Contract Value to the Fixed Option, such amounts are held in Pacific Mutual's
General Account and receive interest at rates declared periodically, but not
less than an annual rate of 3%.
Fixed Option Value--The aggregate amount under your Contract in the Fixed
Option.
Fund--Pacific Select Fund.
General Account--Pacific Mutual's General Account consists of all assets of
Pacific Mutual other than those assets allocated to Separate Account A or to
any of our other separate accounts.
Guaranteed Interest Rate--The interest rate guaranteed, from time to time, for
amounts allocated to the Fixed Option.
Guarantee Term--The period during which amounts you allocate to the Fixed
Option earn a Guaranteed Interest Rate.
Investment Option--A Subaccount or the Fixed Option.
Joint Annuitant--If your Contract is a Non-Qualified Contract, you may name two
Annuitants, called "Joint Annuitants," in your Application for your Contract.
Special restrictions apply for Qualified Contracts.
Non-Qualified Contract--A Contract other than a Qualified Contract.
Portfolio--A separate series or portfolio of the Fund.
Primary Annuitant--The individual, named in your Contract, the events in the
life of whom are of primary importance in affecting the timing or amount of the
payment under the Contract.
Purchase Payment--An amount paid to Pacific Mutual by or on behalf of a
Contract Owner, as consideration for the benefits provided under the Contract.
Qualified Contract--A Contract that qualifies under the Code as an individual
retirement annuity ("IRA"), or a Contract purchased by a Qualified Plan,
qualifying for special tax treatment under the Code.
Qualified Plan--A retirement plan that receives favorable tax treatment under
Section 401, 408, 403(a), 403(b) or 457 of the Code.
SEC--Securities and Exchange Commission.
Separate Account A (the "Separate Account")--A separate account of Pacific
Mutual registered as a unit investment trust under the Investment Company Act
of 1940.
5
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Subaccount--An investment division of the Separate Account. Each Subaccount
invests its assets in shares of a corresponding Portfolio.
Subaccount Annuity Unit--Subaccount Annuity Units (or "Annuity Units") are used
to measure variation in variable annuity payments. To the extent you elect to
convert all or some of your Contract Value into variable annuity payments, the
amount of each annuity payment (after the first payment) will vary with the
value and number of Annuity Units in each Subaccount attributed to any variable
annuity payments. At annuitization (after any applicable premium taxes and or
other taxes are paid) the amount annuitized to a variable annuity determines
the amount of your first variable annuity payment and the number of Annuity
Units credited to your annuity in each Subaccount. The value of Subaccount
Annuity Units, like the value of Subaccount Units, should be expected to
fluctuate daily, as described in the definition of "Unit Value."
Subaccount Unit--Before your Annuity Date, each time you allocate an amount to
a Subaccount, your Contract is credited with a number of Subaccount Units in
that Subaccount; these Units are used, for accounting purposes, to measure your
balance in that Subaccount. The value of Subaccount Units should be expected to
fluctuate daily, as described in the definition of Unit Value.
Unit Value--The value of a Subaccount Unit ("Subaccount Unit Value") or
Subaccount Annuity Unit ("Subaccount Annuity Unit Value"). Unit Value of any
Subaccount is subject to change on any Business Day in much the same way that
the value of a mutual fund share changes each day; the fluctuations in value
reflect the investment results, expenses of and charges against the Portfolio
in which the Subaccount invests its assets, and also reflect charges against
the Separate Account. Changes in Subaccount Annuity Unit Values also reflect an
additional factor that adjusts Subaccount Annuity Unit Values to offset our
Annuity Option Table's implicit assumption of an annual investment return of
5%; the effect of this assumed investment return is explained in detail in the
Statement of Additional Information. Unit Value of a Subaccount Unit or
Subaccount Annuity Unit on any Business Day is measured at or about 4:00 p.m.,
Eastern time, on that Business Day.
Variable Account Value--The aggregate amount of your Contract Value allocated
to all Subaccounts.
Variable Investment Option--A Subaccount.
6
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SUMMARY
This brief description is only an overview of the more significant features of
your Contract. More detailed information may be found in subsequent sections of
this Prospectus, in the Statement of Additional Information, and in the
Contract itself. Endorsements to your Contract may contain variations from the
standardized information in this Prospectus. In addition, any variations due to
requirements particular to your state or jurisdiction are set forth in
supplements attached to or accompanying this Prospectus. IF ANY CONTRACT
ENDORSEMENTS OR SUPPLEMENTAL VARIATIONS TO THIS PROSPECTUS CONFLICT WITH OTHER
INFORMATION IN THE CONTRACT FORM OR IN THIS PROSPECTUS, THE ENDORSEMENTS AND
SUPPLEMENTS CONTROL YOUR CONTRACT.
WHAT IS THE CONTRACT? Pacific One (the "Contract") is designed to be a long-
term financial planning device, permitting you to invest on a tax-deferred
basis for retirement or other long-range goals, and to receive a series of
regular payments for life or a period of years. See FEDERAL TAX STATUS.
HOW DO I PURCHASE A CONTRACT? You must invest at least $25,000 to buy a
Contract. After this initial investment you may make additional investments but
you are not required to do so. Your initial investment may be payable in
automatic installments over your first Contract Year. See PURCHASING YOUR
CONTRACT.
WHAT ARE MY INVESTMENT OPTIONS? You select your own Investment Options. Eleven
of the twelve Investment Options are Variable Investment Options available
through Separate Account A. Each Variable Investment Option invests in a
corresponding Portfolio of the Fund. Pacific Mutual is the investment adviser
to the Fund, and Pacific Mutual and the Fund have retained other portfolio
managers for nine of the Portfolios. You bear the investment risk associated
with the Variable Investment Options, and you should expect your Contract Value
allocated to these Investment Options and the value of any Subaccount Annuity
Units attributed to any variable annuity payments to fluctuate. See HOW YOUR
PAYMENTS ARE INVESTED. The twelfth option is a Fixed Option, providing a fixed
annual interest rate of at least 3%; the portion of your Purchase Payments or
Contract Value allocated to the Fixed Option is held in Pacific Mutual's
General Account. Additional Investment Options may be available in the future.
You may select as many Investment Options as you wish. Prior to your Annuity
Date, this selection is made by the Contract Owner(s); after your Annuity Date,
if you choose variable-dollar annuity payments, this selection is made by the
Annuitant(s).
CAN I CHANGE MY INVESTMENT OPTIONS? You may transfer amounts (subject to
certain restrictions) from one Investment Option to another at any time on or
prior to your Annuity Date; after your Annuity Date, up to four exchanges of
Subaccount Annuity Units may be made in any twelve-month period. You may
transfer amounts automatically using dollar cost averaging, automatic portfolio
rebalancing, or an earnings sweep. See TRANSFERS in this Prospectus and
SYSTEMATIC TRANSFER PROGRAMS in the Statement of Additional Information.
Transaction fees may be imposed in the future for excessive transfers.
WHAT CHARGES WILL I PAY? An Administrative Fee equal to an annual rate of
0.0015, and a mortality and expense risk charge equal to an annual rate of
0.0125, are charged against assets held in the Variable Investment Options.
Amounts invested in the Variable Investment Options are also subject to the
operating expenses imposed on the corresponding Portfolio of the Fund. Before
you annuitize, an Annual Fee of $40 a year is charged if your Contract Value is
less than $100,000.
You may also be subject to other fees. See CHARGES, FEES AND DEDUCTIONS.
CAN I WITHDRAW MY INVESTMENT? Generally, you may withdraw all or part of your
Contract Value at any time on or prior to your Annuity Date. Restrictions are
imposed on withdrawals from certain Qualified Contracts. Withdrawals may be
subject to tax and, in certain circumstances, a tax penalty. See WITHDRAWALS
and FEDERAL TAX STATUS.
7
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CAN I RETURN MY CONTRACT? For a limited time, usually about 10 days after you
receive it, you may return your Contract for a refund in accordance with the
terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT ("FREE
LOOK").
HOW DO I REACH PACIFIC MUTUAL? You can reach our service representatives
between 6:00 a.m. and 5:00 p.m., Pacific time, at 1-800-722-2333. To send
payments, forms, or requests, see INVESTOR INQUIRIES AND SUBMITTING FORMS AND
REQUESTS.
FEE TABLE
The purpose of this fee table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly under your
Contract. The table reflects expenses of the Separate Account as well as
expenses of the Fund. In addition to the charges and expenses described below,
premium taxes may apply. See PREMIUM TAXES in this Prospectus and the
discussion under ORGANIZATION AND MANAGEMENT OF THE FUND in the Fund's
Prospectus and under INVESTMENT ADVISER AND PORTFOLIO MANAGEMENT AGREEMENTS in
the Fund's Statement of Additional Information.
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchase Payments........................ None
Deferred Sales Charge............................................ None
Withdrawal Transaction Fee/1/.................................... None
Transfer Fee/2/.................................................. None
ANNUAL FEE/3/.................................................... $40.00
SEPARATE ACCOUNT A ANNUAL EXPENSES
(as a percentage of average daily Account value)
Mortality and Expense Risk Charge................................ 1.25%
Administrative Fee............................................... 0.15%
------
Total Separate Account A Annual Expenses......................... 1.40%
======
</TABLE>
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/1/ We reserve the right to impose a transaction fee of up to $15 in the future
on excess partial withdrawals. See OPTIONAL WITHDRAWALS.
/2/ We reserve the right to impose a transaction fee of up to $15 in the future
on excess transfers. See TRANSFERS.
/3/ This fee will be charged on each Contract Anniversary prior to your Annuity
Date and at the time of a full withdrawal of any Contract Value unless your
Contract Value is at least $100,000 on that date.
8
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PACIFIC SELECT FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
OTHER EXPENSES
ADVISORY (AFTER TOTAL
FEE REIMBURSEMENTS) EXPENSES
-------- -------------- --------
<S> <C> <C> <C>
Money Market.................................. .40% .15% .55%
High Yield Bond............................... .60% .23% .83%
Managed Bond.................................. .60% .16% .76%
Government Securities......................... .60% .24% .84%
Growth LT..................................... .75% .24% .99%
Equity Income................................. .65% .22% .87%
Multi-Strategy................................ .65% .22% .87%
Equity........................................ .65% .15% .80%
Bond and Income............................... .60% .20% .80%
Equity Index.................................. .25% .18% .43%
International................................. .85% .26% 1.11%
</TABLE>
Example: If, at the end of the applicable time period, you withdraw your
entire Variable Account Value or your entire Contract Value, you annuitize,
or you do not withdraw or annuitize, you would pay the following cumulative
expenses on each $1,000 invested, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Money Market..................................................... $20 $63
High Yield Bond.................................................. $23 $71
Managed Bond..................................................... $22 $69
Government Securities............................................ $23 $72
Growth LT........................................................ $25 $76
Equity Income.................................................... $24 $72
Multi-Strategy................................................... $24 $72
Equity........................................................... $23 $70
Bond and Income.................................................. $23 $70
Equity Index..................................................... $19 $59
International.................................................... $26 $80
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN
THOSE SHOWN IN THE EXAMPLES. The expenses listed for the Fund Portfolios have
been restated to reflect current expenses. Total Expenses for the fiscal year
December 31, 1994 expressed as a decimal (where 1.00 is 100%) were equal to the
following annual factors (of average daily net assets). Money Market: 0.0064;
High Yield Bond: 0.0088; Managed Bond: 0.0084; Government Securities: 0.0088;
Growth LT (which began operations January 4, 1994): 0.0108 (annualized); Equity
Income: 0.0094; Multi-Strategy: 0.0094; Equity Index: 0.0051; and International
0.0122. The Equity and Bond and Income Portfolios did not begin operations
until December 31, 1994. These Total Expenses for the Portfolios 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 no greater than 0.0025 of
average daily net assets per year. Pacific Mutual intends to continue this
policy in effect until at least December 31, 1996, but may discontinue it after
that time. If this policy had not been in effect during the fiscal year ended
December 31, 1994, Total Expenses for that year expressed as a decimal would
have been equal to the following annual factors (of average daily net assets).
Money Market: 0.0064; High Yield Bond: 0.0097; Managed Bond: 0.0084; Government
Securities: 0.0095; Growth LT: 0.0122 (annualized); Equity Income: 0.0100;
Multi-Strategy: 0.0094; Equity Index: 0.0054; and International: 0.0122.
9
<PAGE>
The Annual Fee is reflected in the examples, using an assumed Contract Value of
$80,000. No Annual Fee is deducted from annuitized amounts on or after full or
partial annuitization or if your Contract Value is at least $100,000.
WHY BUY A CONTRACT
Your Pacific One Contract (your "Contract") provides you with flexibility in
tax-deferred retirement planning or other long-term financial planning. You may
select among a variety of Variable Investment Options and a Fixed Option. You
may choose to add to your Contract Value at any time, and your additional
investments may be in any amount you choose (subject to certain limitations).
When you annuitize, your Annuitant(s) will receive a series of variable and/or
fixed payments for life or for a specified period of years.
If you purchase a Contract with after-tax dollars, your Contract is called a
"Non-Qualified Contract". If your Contract is purchased through a Qualified
Plan, it is called a "Qualified Contract". Either way, your earnings on your
Contract are not subject to tax until amounts are withdrawn or distributed
(including annuity payments).
YOUR INVESTMENT OPTIONS
You may choose among twelve different Investment Options.
YOUR VARIABLE INVESTMENT OPTIONS
Separate Account A, a newly-organized separate account of Pacific Mutual,
currently offers you eleven "Variable Investment Options" (also called
"Subaccounts"). Each Variable Investment Option invests in a separate Portfolio
of the Fund. Your Variable Investment Options are:
. Money Market Subaccount
. High Yield Bond Subaccount
. Managed Bond Subaccount
. Government Securities Subaccount
. Growth LT Subaccount
. Equity Income Subaccount
. Multi-Strategy Subaccount
. Equity Subaccount
. Bond and Income Subaccount
. Equity Index Subaccount
. International Subaccount
10
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What Are Each of These Options?
For your convenience, the following chart summarizes some basic data about each
Portfolio. THIS CHART IS ONLY A SUMMARY. FOR MORE COMPLETE INFORMATION ON EACH
PORTFOLIO, INCLUDING A DISCUSSION OF THE PORTFOLIO'S INVESTMENT TECHNIQUES AND
THE RISKS ASSOCIATED WITH ITS INVESTMENTS, SEE THE ACCOMPANYING FUND
PROSPECTUS. NO ASSURANCE CAN BE GIVEN THAT A PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. YOU SHOULD READ THE FUND PROSPECTUS CAREFULLY BEFORE
INVESTING.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRIMARY INVESTMENTS
(UNDER NORMAL
PORTFOLIO INVESTMENT OBJECTIVE CONDITIONS) PORTFOLIO MANAGER
===========================================================================================
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Mutual
consistent with market securities.
preservation of
capital.
- -------------------------------------------------------------------------------------------
High Yield Bond High level of current Intermediate--and Pacific Mutual
income. long-term high-
yielding lower and
medium quality ("high
risk") fixed income
securities.
- -------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with marketable debt Management Company
prudent investment securities.
management.
- -------------------------------------------------------------------------------------------
Government Securi- Maximize total return Securities that are Pacific Investment
ties consistent with obligations of or Management Company
prudent investment guaranteed by the U.S.
management. Government, its
agencies or
instrumentalities
(including futures
contracts and options
thereon).
- -------------------------------------------------------------------------------------------
Growth LT Long-term growth of Equity securities. Janus Capital
capital consistent Corporation
with preservation of
capital.
- -------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend-paying common J.P. Morgan Investment
capital and income. stock. Management Inc.
- -------------------------------------------------------------------------------------------
Multi-Strategy High total return. Equity and fixed J.P. Morgan Investment
income securities. Management Inc.
- -------------------------------------------------------------------------------------------
Equity Capital appreciation. Common stocks and Greenwich Street
securities convertible Advisors Division of
into or exchangeable Smith Barney Mutual
for common stocks. Fund Management Inc.
- -------------------------------------------------------------------------------------------
Bond and Income High level of current Investment grade debt Greenwich Street
income consistent securities. Advisors Division of
with prudent Smith Barney Mutual
investment Fund Management Inc.
management and
preservation of
capital.
- -------------------------------------------------------------------------------------------
Equity Index Investment results Stocks included in Bankers Trust Company
that correspond to the Standard & Poor's
the total return 500 Composite Stock
performance of common Price Index (the "S&P
stocks publicly 500").
traded in the U.S.
- ------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Templeton Investment
appreciation. corporations Counsel, Inc.
domiciled outside
the U.S.
- ------------------------------------------------------------------------------------------
</TABLE>
11
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The Investment Adviser
Pacific Mutual is the investment adviser for the Fund. Pacific Mutual and the
Fund have retained other portfolio managers, supervised by Pacific Mutual, for
nine of the Portfolios.
VARIABLE INVESTMENT OPTION PERFORMANCE
Historical performance information can help you understand how investment
performance can affect your investment in the Variable Investment Options.
Although the Subaccounts are newly-established and have no historical
performance, each Subaccount will be investing in shares of a Portfolio of the
Fund, and the majority of these Portfolios do have historical performance data.
Performance data include total returns for each Subaccount, current and
effective yields for the Money Market Subaccount, and yields for the other
fixed income Subaccounts. Calculations are in accordance with standard formulas
prescribed by the SEC. Yields do not reflect any charge for premium taxes
and/or other taxes; this exclusion may cause yields to show more favorable
performance. Total returns may or may not reflect Annual Fees or any charge for
premium and/or other taxes; data that do not reflect these charges may show
more favorable performance.
The Statement of Additional Information presents some hypothetical performance
data, showing what the performance of each Subaccount would have been if it had
been investing in the corresponding Portfolio since that Portfolio's inception.
The Statement of Additional Information also presents some performance
benchmarks, based on unmanaged market indices, such as the S&P 500, and on
"peer groups," which use other managed funds with similar investment
objectives. These benchmarks may give you a broader perspective when you
examine hypothetical or actual Subaccount performance.
In addition, Pacific Mutual may provide you with reports of our ratings both as
an insurance company and as to our claims-paying ability. The Statement of
Additional Information presents more details about these ratings.
YOUR FIXED OPTION
The Fixed Option offers you a guaranteed minimum interest rate on the amounts
you allocate to this Option. Amounts you allocate to the Fixed Option, and your
earnings credited to your Fixed Option Value, are held in Pacific Mutual's
General Account. For more detailed information about the Fixed Option, see THE
FIXED OPTION section in this Prospectus.
PURCHASING YOUR CONTRACT
HOW TO APPLY FOR YOUR CONTRACT
To purchase a Contract, fill out an Application and submit it along with your
initial Purchase Payment to Pacific Mutual Life Insurance Company at P.O. Box
100060, Pasadena, California 91189-0060. If your Application and payment are
complete when received, or once they have become complete, Pacific Mutual will
issue your Contract within the next two Business Days. If some information is
missing from your Application, we may delay issuing your Contract while we
obtain the missing information; however, we will not hold your initial Purchase
Payment for more than five Business Days without your permission.
If you already own a variable annuity product, you may purchase a Contract by
exchanging your existing contract. You must submit all contracts to be
exchanged when you submit your Application. Call your representative, or call
us at 1-800-722-2333, if you are interested in this option.
We reserve the right to reject any Application or Purchase Payment for any
reason, subject to any applicable nondiscrimination laws and to our own
standards and guidelines.
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MAKING YOUR PURCHASE PAYMENTS
Making Your Initial Payment
Your initial Purchase Payment must be at least $25,000. You may pay this entire
amount when you submit your Application, or you may choose our pre-authorized
checking plan ("PAC") which allows you to pay in equal monthly installments
over one year (at least $2,000 per month). If you choose the PAC, you must make
your first installment payment when you submit your Application. Further
requirements for the PAC are discussed in the PAC form.
You must obtain our consent before making an initial or additional Purchase
Payment that will bring your aggregate Purchase Payments over $500,000.
Making Additional Payments
You may choose to invest additional amounts in your Contract at any time. Each
additional Purchase Payment must be at least $1,000.
Forms of Payment
Your initial and additional Purchase Payments may be sent by personal or bank
check or by wire transfer. You may also make additional PAC Purchase Payments
via electronic funds transfer. All checks must be drawn on U.S. funds. If you
make Purchase Payments by check other than a cashier's check, your withdrawal
requests and any refund under the "free look" may be delayed until your check
has cleared.
HOW YOUR PAYMENTS ARE INVESTED
INVESTING IN VARIABLE INVESTMENT OPTIONS
Each time you allocate your investment to a Variable Investment Option, your
Contract is credited with a number of "Subaccount Units" in that Subaccount.
The number of Subaccount Units credited is equal to the amount you have
allocated to that Subaccount, divided by the "Unit Value" of one Unit of that
Subaccount.
Example: You allocate $3,000 to the Government Securities Subaccount. At
the end of the Business Day your investment allocation is effective, the
value of one Unit in the Government Securities Subaccount is $15. As a
result, 200 Units are credited to your Contract for your $3,000.
Your Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value of those Units
will usually fluctuate. This means that, from time to time, your investment
allocated to the Variable Investment Options may be worth more or less than the
original Purchase Payments to which those amounts can be attributed.
Fluctuations in Subaccount Unit Value will not change the number of Units
credited to your Contract.
Subaccount Unit Values will vary in accordance with the investment performance
of the corresponding Portfolio. For example, the value of Units in the Managed
Bond Subaccount will change to reflect the performance of the Managed Bond
Portfolio (including that Portfolio's investment income, its capital gains and
losses, and its expenses). Subaccount Unit Values are also adjusted to reflect
the Administrative Fee and Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units at or about 4:00 p.m., Eastern
time on each Business Day. The Statement of Additional Information contains a
detailed discussion of these calculations.
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WHEN YOUR INVESTMENT IS EFFECTIVE
The day your investment is effective determines the Unit Value at which
Subaccount Units are attributed to your Contract. In the case of transfers or
withdrawals, the effective day determines the Unit Value at which affected
Subaccount Units are debited and/or credited under your Contract. That value is
the value of the Subaccount Units next calculated after your transaction is
effective. Your Variable Account Value begins to reflect the investment
performance results of your new allocations on the day after your transaction
is effective.
Your initial Purchase Payment is ordinarily effective on the day we issue your
Contract. Any additional investment is effective on the day we receive your
Purchase Payment in good form.
CHOOSING YOUR INVESTMENT OPTIONS
You may allocate your Purchase Payments among the eleven Subaccounts and the
Fixed Option. Allocations of your initial Purchase Payment to the Investment
Options you selected will be effective either on your Contract Date or on your
Free Look Transfer Date. See SHORT-TERM CANCELLATION RIGHT ("FREE LOOK"). Each
additional Purchase Payment will be allocated to the Investment Options
according to your allocation instructions in your Application, or most recent
instructions, if any. We reserve the right, in the future, to require that your
allocation to any particular Investment Option meet a certain minimum amount.
TRANSFERS
Once your payments are allocated to the Investment Options you selected, you
may transfer your Contract Value from any Investment Option to any other at any
time and as often as you like. Transfer requests are normally effective on the
Business Day we receive them in good form. If you reside in a state that
requires refund of Purchase Payments under your Free Look Right, transfers may
be made only on or after your Free Look Transfer Date. See Short Term
Cancellation Right ("Free Look").
No charge is currently imposed for transfers among the Investment Options, but
we reserve the right to impose a transaction fee for transfers in the future; a
fee of up to $15 may apply to transfers in excess of 15 in any Contract Year.
Transfers under the dollar cost averaging, portfolio rebalancing, and earnings
sweep options are counted toward your total transfers in a Contract Year. Any
such fee would be charged against your Investment Options, including the Fixed
Option, proportionately based on your relative Account Value in each
immediately after the transfer.
We have the right, at our option, to require certain minimums in the future in
connection with transfers; these may include a minimum transfer amount and a
minimum Account Value, if any, for the Investment Option from which the
transfer is made or to which the transfer is made. If your transfer request
results in your having a remaining Account Value in an Investment Option that
is less than such minimum amount, we may transfer that remaining amount to your
other Investment Options in the proportions specified in your current
allocation instructions. We also reserve the right to limit the size of
transfers, to limit the number and frequency of transfers, to restrict
transfers, and to suspend transfers. We reserve the right to reject any
transfer request. Currently, the only restriction is that we will not accept
instructions from agents acting under a power of attorney or otherwise on
behalf of multiple Contract Owners.
Exchanges of your Annuity Units in any Subaccount(s) to any other Subaccount(s)
after annuitization are limited to four in any twelve-month period. See
RETIREMENT BENEFITS AND OTHER PAYOUTS.
Dollar Cost Averaging
Dollar cost averaging is a method in which investors buy securities in a series
of regular purchases instead of in a single purchase. This allows the investor
to average the securities' price over time, and may permit a
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"smoothing" of abrupt peaks and drops in price. Prior to your Annuity Date, you
may use dollar cost averaging to transfer amounts, over time, from any
Investment Option with an Account Value of at least $10,000 to one or more
other Investment Options. Detailed information appears in the Statement of
Additional Information.
Portfolio Rebalancing
You may instruct us to maintain a specific balance of Variable Investment
Options under your Contract (e.g., 30% in the Equity Index Subaccount, 40% in
the Managed Bond Subaccount, and 30% in the Growth LT Subaccount) prior to your
Annuity Date. Periodically, we will "rebalance" your investment to the
percentages you have specified. Rebalancing may result in transferring amounts
from a Subaccount earning a relatively higher return to one earning a
relatively lower return. The Fixed Option is not available for rebalancing.
Detailed information appears in the Statement of Additional Information.
Earnings Sweep
You may instruct us to make automatic periodic transfers of your earnings from
the Money Market Subaccount or from the Fixed Option to one or more Variable
Investment Options (other than the Money Market Subaccount). Detailed
information appears in the Statement of Additional Information.
CHARGES, FEES AND DEDUCTIONS
PREMIUM TAXES
Depending on (among other factors) your state of residence, a tax may or may
not be imposed on your Purchase Payments at the time your payment is made, at
the time of partial or total withdrawal, at the time any death benefit proceeds
are paid, at annuitization, or at such other time as taxes may be imposed. Tax
rates ranging from 1.0% to 3.5% are currently in effect, but may change in the
future. Some local jurisdictions also impose a tax.
If we pay any taxes attributable to payments ("premium taxes") on your behalf,
we will be reimbursed through a charge imposed against your Contract Value. We
normally will charge you when you annuitize some or all of your Contract Value.
We reserve the right to impose this charge for applicable premium taxes when
you make a full or partial withdrawal, at the time any death benefit proceeds
are paid, or when those taxes are incurred. For these purposes, "premium taxes"
include any state or local premium taxes and, where approval has been obtained,
federal premium taxes and any federal, state or local income, excise, business
or any other type of tax (or component thereof) measured by or based upon,
directly or indirectly, the amount of payments Pacific Mutual has received. We
will base this charge on the Contract Value, the amount of the transaction, the
aggregate amount of purchase payments we receive under your Contract, or any
other amount, at our sole discretion we deem appropriate.
Pacific Mutual may also charge the Separate Account or your Contract Value for
taxes attributable to the Separate Account or the Contract, including income
taxes attributable to the Separate Account or to Pacific Mutual's operations
with respect to the Contract, or taxes attributable, directly or indirectly, to
Purchase Payments. Currently, we do not impose any such charges.
ANNUAL FEE
Pacific Mutual will charge you an Annual Fee of $40 on each Contract
Anniversary prior to the Annuity Date, and at the time you withdraw your entire
Contract Value, if your Contract Value is less than $100,000 on that date. The
fee is not imposed on amounts you annuitize or on payment of a death benefit.
The fee reimburses certain of our costs in administering the Contracts and the
Separate Account; we do not intend to realize a profit from this fee or the
Administrative Fee. This fee is guaranteed not to increase for the life of the
Contract.
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Your Annual Fee will be charged proportionately against your Investment
Options, including the Fixed Option. Assessments against your Variable
Investment Options are made by debiting some of the Subaccount Units previously
credited to your Contract; that is, assessment of the Annual Fee does not
change the Unit Value for those Subaccounts.
No Annual Fee is charged on payment of a death benefit or on annuitization.
WAIVERS AND REDUCED CHARGES
Officers, directors and employees of Pacific Mutual and its affiliates,
registered representatives and employees of broker/dealers with a current
selling agreement with Pacific Mutual and their affiliates, and employees of
affiliated asset management firms ("Eligible Employees") and immediate family
members of Eligible Employees are eligible for certain waivers and/or credits.
Eligible Employees and their immediate family members may purchase a Contract
without regard to minimum Purchase Payment requirements. In addition, Pacific
Mutual may credit an additional amount to the Contract Value of these
Contracts. Pacific Mutual may reduce or waive the Annual Fee or credit
additional amounts in situations that reduce the administrative expenses, such
as the sale of several Contracts to the same Contract Owners, sales of large
Contracts and group sales or in situations that reduce selling and/or
maintenance costs associated with the Contracts.
MORTALITY AND EXPENSE RISK CHARGE
Pacific Mutual assesses a charge against the assets of each Subaccount to
compensate for certain mortality and expense risks that we assume under the
Contracts (the "Risk Charge"). The risk that a Contract Annuitant will live
longer (and therefore receive more annuity payments) than we predict through
our actuarial calculations at the time the Contract is issued is "mortality
risk." Pacific Mutual also bears mortality risk in connection with death
benefits payable under the Contracts. The risk that the expense charges and
fees under the Contracts and Separate Account are less than our actual
administrative and operating expenses is called "expense risk."
This Risk Charge is assessed daily at an annual rate of 0.0125 of each
Subaccount's assets; this charge may not be increased for the duration of your
Contract. Of this amount, 0.0045 is for assuming expense risk, and 0.0080 is
for assuming mortality risk.
Risk Charges will stop at annuitization if you select a fixed annuity; Risk
Charges will continue after annuitization if you choose any variable annuity,
even though we do not bear mortality risk if your Annuity Option is Period
Certain Only.
Pacific Mutual will realize a gain if the Risk Charge exceeds our actual cost
of expenses and benefits, and will suffer a loss if actual costs exceed the
Risk Charge. Any gain will become part of Pacific Mutual's General Account; we
may use it for any reason, including covering sales expenses on the Contracts.
ADMINISTRATIVE FEE
Pacific Mutual charges an Administrative Fee as compensation for costs we incur
in operating the Separate Account and issuing and administering the Contracts,
including processing Applications and payments, and issuing reports to Contract
Owners and to regulatory authorities.
The Administrative Fee is assessed daily at an annual rate of 0.0015 of the
assets of each Subaccount. This fee may not be increased for the life of your
Contract. A relationship will not necessarily exist between the actual
administrative expenses attributable to a particular Contract and the
Administrative Fee paid in respect of that particular Contract.
EXPENSES OF PACIFIC SELECT FUND
Your Variable Account Value reflects advisory fees and other expenses incurred
by the various Portfolios of the Fund, net of any applicable reimbursements.
These fees and expenses may vary. The Fund is governed by its own Board of
Trustees, and your Contract does not fix or specify the level of expenses of
any Portfolio. The Fund's fees and expenses are described in detail in the
Fund's Prospectus and in its Statement of Additional Information.
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RETIREMENT BENEFITS AND OTHER PAYOUTS
SELECTING YOUR ANNUITANT
When you submit the Application for your Contract, you must choose a sole
Annuitant or two Joint Annuitants. The Annuitant(s) will receive annuity
payments under your Contract when you annuitize. If you are buying a Qualified
Contract, you must be your own sole Annuitant or your Primary Joint Annuitant;
if you are buying a Non-Qualified Contract you may choose yourself and/or
another person. In either case, you may choose a Contingent Annuitant; more
information on these options is set out in the Statement of Additional
Information. Except in the case of certain Qualified Contracts, you will not be
able to add or change a sole or Joint Annuitant after your Contract is issued.
You will be able to add or change a Contingent Annuitant until your Annuity
Date or the death of your sole Annuitant or both Joint Annuitants, whichever
occurs first; however, once your Contingent Annuitant has become the Annuitant
under your Contract, no additional Contingent Annuitant may be named. If you
have a Non-Qualified Contract and wish to name a Joint Annuitant, your younger
Annuitant must be your Primary Annuitant.
ANNUITIZATION
You may choose both your Annuity Date (or "Annuity Start Date") and your
Annuity Option. At the Annuity Date, you may elect to annuitize some or all of
your Contract Value, less any Contract Debt, any transaction fee, and any
charge for premium taxes and/or other taxes, so long as the net amount you
annuitize is at least $5,000. If you annuitize only a portion of this available
Contract Value, you may have the remainder distributed, less any Contract Debt,
any applicable charge for premium taxes and/or other taxes, any transaction
fee, and any applicable Annual Fee. We will distribute your Contract Value,
less any Contract Debt and any applicable charge for premium taxes and/or other
taxes, any transaction fee, and any Annual Fee to you in a single sum if the
net amount of your Contract Value available to convert to an annuity is less
than $5,000 on your Annuity Date. Distributions under your Contract will have
tax consequences. You should consult a qualified tax adviser for information on
full or partial annuitization.
CHOOSING YOUR ANNUITY DATE ("ANNUITY START DATE")
You should choose your Annuity Start Date when you submit your Application or
we will apply your default Annuity Date to your Contract.
You may change your Annuity Date by notifying us in writing. We must have
received your written notice at least 10 Business Days prior to the earlier of
your old Annuity Date or your new Annuity Date.
Your Annuity Date cannot be earlier than your first Contract Anniversary and
must occur on or before a certain date: If you have a sole Annuitant, your
Annuity Date cannot be later than his or her 100th birthday; if you have Joint
Annuitants and a Non-Qualified Contract, your Annuity Date cannot be later than
your younger Joint Annuitant's 100th birthday; if you have Joint Annuitants and
a Qualified Contract, your Annuity Date cannot be later than your own 100th
birthday. Different requirements may apply in some states. See APPENDIX A:
STATE LAW VARIATIONS. If your Contract is a Qualified Contract, you may also be
subject to additional restrictions. Adverse federal tax consequences may result
if you choose an Annuity Date that is prior to an Annuitant's 59 1/2th
birthday. See FEDERAL TAX STATUS.
If you annuitize only a portion of your Contract Value on your Annuity Start
Date, you may, at that time, have the option to elect not to have the remainder
of your Contract Value distributed, but instead to continue your Contract with
that remaining Contract Value (a "continuing Contract"). If this option is
available, you would then choose a second Annuity Date for your continuing
Contract, and all references in this Prospectus to your "Annuity Date" would,
in connection with your continuing Contract, be deemed to refer to that second
Annuity Date. This option may or may not be available, or may be available only
for certain types of Contracts. You should call your tax adviser for more
information if you are interested in this option.
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ANNUITY OPTION
You make three basic decisions about your annuity payments. First, you must
choose whether you want those payments to be a fixed-dollar amount and/or a
variable-dollar amount. Second, you must choose how many payments you want the
Annuitant(s) to receive (the "period" of the annuity). Third, you must decide
how often you want annuity payments to be made (the "frequency" of the
payments). You may not change your Annuity Option after annuitization.
Fixed and Variable Annuities
You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable
annuity (i.e., with variable-dollar amounts), or you may choose both,
converting one portion of the net amount you annuitize into a fixed annuity and
another portion into a variable annuity.
If you select a fixed annuity, each periodic annuity payment received will be
equal to the initial annuity payment, unless you select a joint and survivor
life annuity with reduced survivor payments and the Primary Annuitant dies.
If you select a variable annuity, you may choose as many Variable Investment
Options for your annuity as you wish; the amount of the periodic annuity
payments will vary with the investment results of the Variable Investment
Options selected. After the Annuity Date, Annuity Units may be exchanged among
available Variable Investment Options up to four times in any twelve-month
period. THE CONTRACTS AND THE SEPARATE ACCOUNT in the Statement of Additional
Information explains in more detail how your Contract converts into a variable
annuity.
Annuity Periods
Four types of annuity periods are currently available under the Contracts,
although additional options may become available in the future.
. Life Only. Periodic payments are made to the Annuitant during his or her
lifetime. Payments stop when the Annuitant dies.
. Life with Period Certain. Periodic payments are made to the Annuitant
during his or her lifetime, with payments guaranteed for a specified
period. You may choose to have payments guaranteed for anywhere from 5
through 30 years (in full years only). If the Annuitant dies before the
guaranteed payments are completed, the Beneficiary receives the
remainder of the guaranteed payments.
. Joint and Survivor Life. Periodic payments are made during the lifetime
of the Primary Annuitant. After the death of the Primary Annuitant,
periodic payments are made to the secondary Annuitant named in the
election if and so long as such secondary Annuitant lives. You may
choose to have the payments to the surviving secondary Annuitant equal
50%, 66 2/3% or 100% of the payments made during the lifetime of the
Primary Annuitant (you must make this election when you choose your
Annuity Option). Payments stop when both Annuitants die.
. Period Certain Only. Periodic payments are made to the Annuitant over a
specified period. You may choose to have payments continue for anywhere
from 5 through 30 years (in full years only). If the Annuitant dies
before the guaranteed payments are completed, the Beneficiary receives
the remainder of the guaranteed payments.
Frequency of Payments
You may choose to have annuity payments made monthly, quarterly, semi-annually,
or annually. The amount of a variable payment will be determined in each period
on the date corresponding to your Annuity Date, and payment will be made on the
next succeeding day.
Your initial annuity payment must be at least $250. Depending on the net amount
you annuitize, this requirement may limit your options regarding the period
and/or frequency of annuity payments.
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If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), your
spouse's consent may be required when you seek any distribution under your
Contract, unless your Annuity Option is Joint and Survivor Life with survivor
payments of at least 50%, and your spouse is your Joint Annuitant.
DEFAULT ANNUITY DATE AND OPTIONS
If you have a Non-Qualified Contract and you do not choose an Annuity Date when
you submit your Application, your Annuity Date will be your Annuitant's 100th
birthday or your younger Joint Annuitant's 100th birthday, whichever applies
(some states' laws may require a different Annuity Date; see APPENDIX A: STATE
LAW VARIATIONS). If you have a Qualified Contract and fail to choose an Annuity
Date, your Annuity Date will be April 1 of the calendar year following the year
you attain age 70 1/2; if you have already attained age 70 1/2 on the Contract
Date, your Annuity Date will be April 1 of the calendar year following your
first Contract Anniversary.
If you have not specified an Annuity Option or do not instruct us otherwise, at
your Annuity Date your Contract Value, less any Contract Debt, any applicable
transaction fee, and any charge for premium taxes and/or other taxes, will be
annuitized (if this net amount is at least $5,000) as follows: the net amount
attributed to your Fixed Option Value will be converted into a fixed-dollar
annuity and the net amount attributed to your Variable Account Value will be
converted into a variable-dollar annuity directed to the Subaccounts
proportionate to your Account Value in each. If you have a Non-Qualified
Contract, or if you have a Qualified Contract and are not married, your default
Annuity Option will be Period Certain Only for five years. If you have a
Qualified Contract and you are married, your default Annuity Option will be
Joint and Survivor Life with survivor payments of 50% and your spouse will
automatically be named your Joint Annuitant.
YOUR ANNUITY PAYMENTS
Amount of the First Payment
Your Contract contains tables that we use to determine the amount of the first
annuity payment under your Contract, taking into consideration the annuitized
portion of your Contract Value at the Annuity Date. This amount will vary,
depending on the annuity period and payment frequency you select; this amount
will be larger in the case of shorter Period Certain annuities than longer
Period Certain annuities. Similarly, this amount will be greater for a Life
Only annuity than for a Joint and Survivor Life annuity, because we will expect
to make payments for a shorter period of time on a Life Only annuity. If you do
not choose the Period Certain Only annuity, this amount will also vary
depending on the age of the Annuitant(s) on the Annuity Date and, for some
Contracts in some states, the sex of the Annuitant(s). For fixed annuity
payments, the annuity purchase rates in our tables are based on an annual
interest rate of 3% and the 1983a Annuity Mortality Table with the ages set
back 10 years. If you elect a fixed annuity, fixed annuity payments will be
based on the greater of our current annuity purchase rates in effect for your
Contract on the Annuity Date and the guaranteed annuity purchase rates under
the Contract. For variable annuity payments, the tables are based on an assumed
annual investment return of 5% and the 1983a Annuity Mortality Table with the
ages set back 10 years. If you elect a variable annuity, your initial variable
annuity payment will be based on the applicable variable annuity purchase rate
in our table. A higher assumed investment return would mean a larger first
variable annuity payment, but subsequent payments would increase only when
actual net investment performance exceeds the higher assumed rate and would
fall when actual net investment performance is less than the higher assumed
rate. A lower assumed rate would mean a smaller first payment and a lower
threshold for increases and decreases. If the actual net investment performance
is 5% annually, annuity payments will be level. The assumed investment return
is explained in more detail in the Statement of Additional Information under
THE CONTRACTS AND THE SEPARATE ACCOUNT.
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AGE LIMITATIONS
You may not choose an Annuitant who has (or had) reached his or her 86th
birthday at the time your Contract is (or was) issued. This restriction applies
to Joint and Contingent Annuitants as well as to a sole Annuitant.
DEATH BENEFITS
A death benefit may be payable on proof of the death, before the Annuity Date,
of the Annuitant or of any Contract Owner while the Contract is in force.
Defining Our "Death Benefit" Terms
Your Death Benefit Amount as of any day (prior to your Annuity Date) is equal
to the greater of:
. your aggregate Purchase Payments, less any prior partial withdrawals,
including any withdrawal fees, as of that day; or
. your Contract Value as of that day.
Your Guaranteed Minimum Death Benefit Amount is determined as follows: We look
at your Contract as of your fifth Contract Anniversary and as of every fifth
subsequent Contract Anniversary prior to your Annuity Date, that is, the 10th,
15th, etc., (each of these Anniversaries is a "Milestone Date"). For each
Milestone Date, if your Annuitant was living and had not yet reached his or her
76th birthday as of that date, we calculate what your Death Benefit Amount
would have been as of that Milestone Date and adjust this amount by (1) adding
the aggregate amount of any Purchase Payments received by us after that
Milestone Date and (2) subtracting the aggregate amount of any partial
withdrawals, any fees for withdrawals and transfers, any Annual Fees, and any
previous charges for premium taxes and/or other taxes effected since that
Milestone Date. The highest of these adjusted amounts, as of the Notice Date,
is your Guaranteed Minimum Death Benefit Amount. Calculations of any
"Guaranteed Minimum Death Benefit" are made only once a death benefit is
payable under your Contract.
The Notice Date is the day on which we receive proof (in good form) of death
and instructions regarding payment of death benefit proceeds.
The Amount of the Death Benefit: Death of the Annuitant
If the Annuitant dies on or before your fifth Contract Anniversary, or if the
Annuitant had already reached his or her 76th birthday as of your fifth
Contract Anniversary, the death benefit will be equal to your "Death Benefit
Amount" as of the "Notice Date."
If the Annuitant dies after your fifth Contract Anniversary and had not yet
reached his or her 76th birthday as of your fifth Contract Anniversary, the
death benefit will be equal to the greater of:
. your Death Benefit Amount as of the Notice Date; or
. your "Guaranteed Minimum Death Benefit Amount" as of the Notice Date.
The following procedures apply in the event of death of an Annuitant who is not
also a Contract Owner: If your Contract names Joint Annuitants, and only one
Joint Annuitant dies, the surviving Joint Annuitant becomes your sole Annuitant
and the death benefit is not yet payable. If your sole Annuitant dies (or if no
Joint Annuitant survives) and your Contract names a surviving Contingent
Annuitant, he or she becomes the sole Annuitant and the death benefit is not
yet payable.
The Amount of the Death Benefit: Death of a Contract Owner
If a Contract Owner who is not the Annuitant dies before the Annuity Date, a
death benefit may be payable equal to your Contract Value as of the Notice
Date.
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Death Benefit Proceeds
The proceeds of any death benefit payable will be the amount of the death
benefit reduced by any charge for premium taxes and/or other taxes and any
Contract Debt. These proceeds will be payable in a single sum or, if the
recipient chooses, as an annuity. Any such annuity is subject to all
restrictions (including minimum amount requirements) as are other annuities
under the Contracts; in addition, there may be legal requirements that limit
the recipient's Annuity Options and the timing of any payments. A recipient
should consult a qualified tax adviser before electing to receive an annuity.
Additional provisions apply if your Contract names a Joint or Contingent Owner
or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your
spouse. Further information about these provisions is contained in the
Statement of Additional Information.
WITHDRAWALS
OPTIONAL WITHDRAWALS
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract, so long as any of your Annuitants is
still living. Except as provided below, withdrawals from your Investment
Options may be made at any time. You may request to withdraw a specific dollar
amount or a specific percentage of an Account Value or your Contract Value. You
may choose to make your withdrawal from specified Investment Options; if you do
not specify Investment Options, your withdrawal will be made from all
Investment Options proportionately. Each partial withdrawal, including pre-
authorized withdrawals, must be for at least $1,000. If your partial withdrawal
from an Investment Option would leave a remaining Account Value in that
Investment Option of less than any minimum Account Value we may require in the
future, we have the right, at our option, to transfer that remaining amount to
your other Investment Options on a proportionate basis relative to your most
recent allocation instructions. If your partial withdrawal leaves you with a
Contract Value of less than $1,000, we have the right, at our option, to
terminate your Contract and send you the withdrawal proceeds described in the
next section.
Amount Available for Withdrawal
The amount available to you for withdrawal is your Contract Value at the end of
the Business Day on which your withdrawal request is effective, less any
applicable Annual Fee, any withdrawal transaction fee, any charges for premium
tax and/or other taxes, and your Contract Debt. The amount we send to you (your
"withdrawal proceeds") will also reflect any required or requested federal and
state income tax withholding. See FEDERAL TAX STATUS.
You assume investment risk on investments in the Subaccounts; as a result, the
amount available to you for withdrawal from any Subaccount may be more or less
than the total Purchase Payments you have allocated to that Subaccount.
Withdrawal Transaction Fees
There is currently no transaction fee for partial withdrawals. However, we
reserve the right to impose a withdrawal transaction fee in the future of up to
$15 for each partial withdrawal (including preauthorized partial withdrawals)
in excess of 15 in any Contract Year. Any such fee would be charged against
your Investment Options, including the Fixed Option, proportionately based on
your Account Value in each immediately after the withdrawal.
Pre-Authorized Withdrawals
If your Contract Value is at least $10,000, you may select the pre-authorized
withdrawal option, and you may choose monthly, quarterly, semiannual or annual
withdrawals. Each withdrawal must be for at least $1,000. Each pre-authorized
withdrawal is subject to federal income tax on its taxable portion and may be
subject to a 10% tax penalty if you have not reached age 59 1/2. See FEDERAL
TAX STATUS. Additional information and options are set out in the Statement of
Additional Information and in the Pre-Authorized Withdrawal section of your
Application.
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Special Requirements for Full Withdrawals
If you wish to withdraw the entire amount available under your Contract, you
must either return your Contract to Pacific Mutual or sign and submit to us a
"lost contract affidavit."
Special Restrictions Under Qualified Plans
If your Contract was issued under certain Qualified Plans, you may not withdraw
amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 402(g)(3)(A) of the Code) or to transfers from
a custodial account (as defined in Section 403(b)(7) of the Code) except in
cases of your (a) separation from service, (b) death, (c) disability as defined
in Section 72(m)(7) of the Code, (d) reaching age 59 1/2, or (e) hardship as
defined for purposes of Section 401(k) of the Code.
These limitations do not affect certain rollovers or exchanges between
Qualified Plans, and do not apply to rollovers from these Qualified Plans to an
individual retirement account or individual retirement annuity. In the case of
tax sheltered annuities, these limitations do not apply to certain salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Hardship withdrawals under the exception provided above are restricted to
amounts attributable to salary reduction contributions, and do not include
investment results; this additional restriction does not apply to salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to mandatory
withholding of 20% for federal income tax if the distribution is not
transferred directly to the trustee of another Qualified Plan, or to the
custodian of an individual retirement account or issuer of an individual
retirement annuity. See FEDERAL TAX STATUS. Distributions may also trigger
withholding for state income taxes.
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 Option
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.
Effective Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day we receive them
in good form. If you make Purchase Payments by check and submit a withdrawal
request immediately afterwards, the effective date of your withdrawal request
may be delayed until your check clears.
MANDATORY DISTRIBUTION ON DEATH
If a Contract Owner of a Non-Qualified Contract dies before the Annuity Date,
the entire interest must be distributed within 5 years of death. If a Non-
Qualified Contract has Joint Owners, this requirement applies to the first
Contract Owner to die. Distribution to a designated recipient beginning no
later than 1 year after the Contract Owner's death and continuing over the
recipient's life or a period not exceeding the recipient's life expectancy will
satisfy this distribution requirement. If the Contract Owner was not an
Annuitant but was a Joint Owner and there is a surviving Joint Owner, that
surviving Joint Owner is the designated recipient; if no Joint Owner survives
but a Contingent Owner is named in the Contract and is living, he or she is the
designated recipient. Otherwise, or if the Contract Owner was an Annuitant, the
designated recipient is the Beneficiary; if no Beneficiary is living, the
designated recipient is the Annuitant or the Annuitant's estate. A sole
designated recipient who is the Contract Owner's spouse may elect to become the
Contract Owner (and sole Annuitant if the deceased Contract Owner had been the
Annuitant) and continue the Contract. A Joint or Contingent Owner who is the
designated recipient but not the Contract Owner's spouse may also be able to
continue the Contract; however, a distribution will be considered to have been
made under the original Contract for federal income tax purposes.
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TAX CONSEQUENCES OF WITHDRAWALS
Withdrawals, including pre-authorized withdrawals, will generally have federal
income tax consequences, which could include tax penalties. YOU SHOULD CONSULT
WITH A TAX ADVISER BEFORE MAKING ANY WITHDRAWAL OR SELECTING THE PRE-AUTHORIZED
WITHDRAWAL OPTION. See FEDERAL TAX STATUS.
SHORT-TERM CANCELLATION RIGHT ("FREE LOOK")
You may return your Contract for cancellation and a full refund during your
"free look period." Your free look period is usually the 10-day period
beginning on the day you receive your Contract, but may vary if required by
state law. For more information, see APPENDIX A: STATE LAW VARIATIONS. If you
return your Contract, it will be canceled and treated as void from your
Contract Date. You will then receive a refund as follows:
. All of your Purchase Payments allocated to the Fixed Option, and
. your Variable Account Value as of the end of the Business Day on which
we receive your Contract for cancellation, plus a refund of any amounts
that may have been deducted as Contract fees or charges to pay premium
and/or other taxes.
Some states' laws require us to refund your Purchase Payments allocated to the
Variable Investment Options instead of your Variable Account Value. If you
reside in one of these states, the Purchase Payments you have allocated to any
Subaccount will usually be allocated to the Money Market Subaccount during your
free look period; however, different rules may apply depending on your state of
residence. In such cases, we will transfer your Contract Value in the Money
Market Account to your chosen Variable Investment Options at the end of the
15th calendar day after your Contract Date ("your Free Look Transfer Date"). We
reserve the right to extend your Free Look Transfer Date by the number of days
in excess of ten days that your state of residence allows you to return your
Contract to us under the Free Look Provision.
PACIFIC MUTUAL AND THE SEPARATE ACCOUNT
PACIFIC MUTUAL
We are a mutual life insurance company organized under California law on
January 2, 1868 under the name "Pacific Mutual Life Insurance Company of
California" and reincorporated as Pacific Mutual Life Insurance Company on July
22, 1936. Our operations include both life insurance and annuity products as
well as financial and retirement services. As of the end of 1994, Pacific
Mutual had over $38.3 billion of individual life insurance in force and total
assets of approximately $14.7 billion. Together with its subsidiaries and
affiliated enterprises, Pacific Mutual has total assets and funds under
management of over $91.1 billion. It has been ranked according to assets in the
top 24 largest life insurance carriers in the nation for 1994. We are
authorized to conduct life insurance and annuity business in the District of
Columbia and all states except New York. Our principal offices are located at
700 Newport Center Drive, Newport Beach, California 92660.
Our indirect wholly-owned subsidiary, Pacific Equities Network ("PEN"), serves
as the principal underwriter for the Contracts. PEN is located at 700 Newport
Center Drive, Newport Beach, California 92660. PEN and Pacific Mutual enter
into selling agreements with broker-dealers, under which such broker-dealers
act as agents of Pacific Mutual and PEN in the sale of the Contracts.
SEPARATE ACCOUNT A
Separate Account A was established on September 7, 1994 as a separate account
of Pacific Mutual, and is registered with the SEC under the Investment Company
Act of 1940 (the "1940 Act") as a type of investment company called a "unit
investment trust."
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Obligations arising under your Contract are general corporate obligations of
Pacific Mutual. We are also the legal owner of the assets in the Separate
Account.
Assets of the Separate Account attributed to the reserves and other liabilities
under the Contract and other contracts issued by Pacific Mutual that are
supported by the Separate Account may not be charged with liabilities arising
from any other business of Pacific Mutual; any income, gain or loss (whether or
not realized) from the assets of the Separate Account are credited to or
charged against the Separate Account without regard to Pacific Mutual's other
income, gain or loss.
We may invest money in the Separate Account in order to commence its operations
and for other purposes, but not to support contracts other than variable
annuity contracts. A portion of the Separate Account's assets may include
accumulations of charges we make against the Separate Account and investment
results of assets so accumulated. These additional assets are ours and we may
transfer them to our General Account at any time; however, before making any
such transfer, we will consider any possible adverse impact the transfer might
have on the Separate Account. Subject to applicable law, we reserve the right
to transfer our assets in the Separate Account to our General Account.
The Separate Account is not the sole investor in the Fund. Investment in the
Fund by other separate accounts in connection with variable annuity and
variable life insurance contracts may create conflicts. See MORE ON THE FUND'S
SHARES in the accompanying Prospectus for the Fund.
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial or
administrative action. The summary is general in nature, and does not consider
any applicable state or local tax laws. We do not make any guarantee regarding
the tax status, federal, state or local, of any Contract or any transaction
involving the Contracts. Accordingly, you should consult a qualified tax
adviser for complete information and advice before purchasing a Contract.
The following rules generally do not apply to variable annuity contracts held
by or for non-natural persons (e.g., corporations) unless such an entity holds
the Contract as nominee for a natural person. If a contract is not owned or
held by a natural person or a nominee for a natural person, the contract
generally will not be treated as an "annuity" for tax purposes, meaning that
the contract owner will be taxed currently on annual increases in account value
at ordinary income rates unless some other exception applies.
Section 72 of the Code governs the taxation of annuities in general, and we
designed the Contracts to meet the requirements of Section 72 of the Code. We
believe that, under current law, the Contract will be treated as an annuity for
federal income tax purposes if the Contract Owner is a natural person or a
nominee for a natural person, and that Pacific Mutual (as the issuing insurance
company), and not the Contract Owner(s), will be treated as the owner of the
investments underlying the Contract. Accordingly, no tax should be payable by
you as a Contract Owner as a result of any increase in Contract Value until you
receive money under your Contract. You should, however, consider how amounts
will be taxed when you do receive them. The following discussion assumes that
your Contract will be treated as an annuity for federal income tax purposes.
Section 817(h) of the Code provides that the investments underlying a variable
annuity must satisfy certain diversification requirements. Details on these
diversification requirements appear under OTHER INFORMATION ABOUT THE FUND in
the Fund's Prospectus. Pacific Mutual believes the underlying Variable
Investment Options for the Contract meet these requirements. In connection with
the issuance of temporary regulations relating to diversification requirements
under Section 817(h), the Treasury Department announced that such regulations
do not provide guidance concerning the extent to which Contract Owners may
direct their investments to particular divisions of a separate account. Such
guidance may be included in regulations or revenue rulings under Section 817(d)
relating to the definition of a variable contract. Because of this uncertainty,
we reserve the right to make such changes as we deem necessary or appropriate
to ensure
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that your Contract continues to qualify as an annuity for tax purposes. Any
such changes will apply uniformly to affected Contract Owners and will be made
with such notice to affected Contract Owners as is feasible under the
circumstances.
TAXES PAYABLE BY CONTRACT OWNERS: GENERAL RULES
THESE GENERAL RULES APPLY TO NON-QUALIFIED CONTRACTS. AS DISCUSSED BELOW,
HOWEVER, TAX RULES MAY DIFFER FOR QUALIFIED CONTRACTS AND YOU SHOULD CONSULT A
QUALIFIED TAX ADVISER IF YOU ARE PURCHASING A QUALIFIED CONTRACT.
Distributions of net investment income or capital gains that each Subaccount
receives from its corresponding Portfolio are automatically reinvested in such
Portfolio unless we, on behalf of the Separate Account, elect otherwise. As
noted above, you will be subject to federal income taxes on the investment
income from your Contract only when it is distributed to you.
Taxes Payable on Withdrawals
Amounts you withdraw before annuitization, including amounts withdrawn from
your Contract Value in connection with partial withdrawals for payment of fees,
will be treated first as taxable income, to the extent that your Contract Value
exceeds the aggregate of your Purchase Payments (reduced by non-taxable amounts
previously received), and then as non-taxable recovery of your Purchase
Payments.
The assignment or pledge of (or agreement to assign or pledge) any portion of
the value of the Contract for a loan will be treated as a withdrawal subject to
these rules. Moreover, all annuity contracts issued to you in any given
calendar year by Pacific Mutual and any of our affiliates are treated as a
single annuity contract for purposes of determining whether an amount is
subject to tax under these rules. The Code further provides that the taxable
portion of a withdrawal may be subject to a penalty tax equal to 10% of that
taxable portion unless the withdrawal is: (1) made on or after the date you
reach age 59 1/2, (2) made by a Beneficiary after your death, (3) attributable
to your becoming disabled, or (4) in the form of level annuity payments under a
lifetime annuity.
Taxes Payable on Annuity Payments
A portion of each annuity payment you receive under a Contract generally will
be treated as a partial recovery of Purchase Payments (as used here, "Purchase
Payments" means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in income) and will not
be taxable. (In certain circumstances, subsequent modifications to an
initially-established payment pattern may result in the imposition of a penalty
tax.) The remainder of each annuity payment will be taxed as ordinary income.
However, after the full amount of aggregate Purchase Payments has been
recovered, the full amount of each annuity payment will be taxed as ordinary
income. Exactly how an annuity payment is divided into taxable and non-taxable
portions depends on the period over which annuity payments are expected to be
received, which in turn is governed by the form of annuity selected and, where
a lifetime annuity is chosen, by the life expectancy of the Annuitant(s) or
payee(s).
Should annuity payments cease on account of the death of a Contract Owner
before Purchase Payments have been fully recovered, an Annuitant (or in certain
cases the Beneficiary) is allowed a deduction on the final tax return for the
unrecovered Purchase Payments; however, if any remaining annuity payments are
made to a Beneficiary, the Beneficiary will recover the balance of the Purchase
Payments as payments are made. A lump sum payment taken in lieu of remaining
monthly annuity payments is not considered an annuity payment for tax purposes.
The portion of any lump sum payment to a Beneficiary in excess of aggregate
unrecovered Purchase Payments would be subject to income tax. Such a lump sum
payment may also be subject to a penalty tax.
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If a Contract Owner dies before annuity payments begin, certain minimum
distribution requirements apply. If a Contract Owner dies after the Annuity
Date, the remaining interest in the Contract must be distributed at least as
rapidly as under the method of distribution in effect on the date of death.
Generally, the same tax rules apply to amounts received by the Beneficiary as
those set forth above, except that the early withdrawal penalty tax does not
apply. Thus, any annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions.
In addition, designation of a Beneficiary who either is 37 1/2 years younger
than a Contract Owner or is a grandchild of a Contract Owner may have
Generation Skipping Transfer Tax consequences under section 2601 of the Code.
Certain transfers of a Contract for less than full consideration, such as a
gift, will trigger tax on the investment income in the Contract, and may also
trigger tax penalties and, if applicable, gift tax.
QUALIFIED CONTRACTS
The Contracts are available to a variety of Qualified Plans. Tax restrictions
and consequences for Contracts under each type of Qualified Plan differ from
each other and from those for Non-Qualified Contracts. In addition, individual
Qualified Plans may have terms and conditions that impose additional rules.
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS FOR
WHICH THE CONTRACTS ARE AVAILABLE. IF YOU ARE PURCHASING A QUALIFIED CONTRACT,
YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISER.
Individual Retirement Annuities ("IRAs")
Contributions to an IRA are subject to limitations. Because your minimum
initial Purchase Payment for a Pacific One Contract is larger than the maximum
annual contribution permitted for an IRA, Pacific One Contracts are available
as IRAs only through a rollover from an existing Qualified Plan.
In addition, distributions from an IRA are subject to certain restrictions.
Failure to make mandatory distributions may result in imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount actually distributed. A 10% penalty tax is imposed on the amount
includable in gross income from distributions that occur before you attain age
59 1/2 and that are not made on account of death or disability, with certain
exceptions. These exceptions include distributions that are part of a series of
substantially equal periodic payments made over your life (or life expectancy)
or the joint lives (or joint life expectancies) of yourself and your Joint
Annuitant. Distributions of minimum amounts specified by the Code must commence
by April 1 of the calendar year following the calendar year in which you attain
age 70 1/2. Additional distribution rules apply after your death.
You may rollover funds from an existing Qualified Plan (such as proceeds from
existing insurance policies, annuity contracts or securities) into your IRA if
those funds are in cash; this will require you to liquidate any value
accumulated under the existing Qualified Plan. Mandatory withholding of 20% may
apply to any rollover distribution from your existing Qualified Plan if the
distribution is not transferred directly to your IRA; to avoid this withholding
you should have cash transferred directly from the insurance company or plan
trustee to Pacific Mutual.
Similar limitations and tax penalties apply to tax sheltered annuities,
government plans, and 401(k) and pension and profit-sharing plans.
Tax Sheltered Annuities ("TSAs")
Section 403(b) of the Code permits public school systems and certain tax-exempt
organizations to adopt annuity plans for their employees; Purchase Payments
made on Contracts purchased for these employees are
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excludable from the employees' gross income (subject to maximum contribution
limits). Distributions under these Contracts must comply with certain
limitations as to timing, or result in tax penalties.
Government Plans
Section 457 of the Code permits employees of a state or local government (or of
certain other tax-exempt entities) to defer compensation through an eligible
government plan. Contributions to a Contract in connection with an eligible
government plan are subject to limitations.
401(k) Plans; Pension and Profit-Sharing Plans
Deferred compensation plans may be established by an employer for certain
eligible employees under Sections 401(a) and 401(k) of the Code. Contributions
to these plans are subject to limitations.
LOANS
Certain Qualified Contract Owners may borrow against their Contracts. If yours
is a Qualified Contract issued under Section 401(a), 401(k), 403(a) or 403(b)
of the Code and the terms of your Qualified Plan permit, you may request a loan
from Pacific Mutual, using your Contract Value as your only security.
Loan Procedures
Your loan request must be submitted on our Loan Request Form. You may submit a
loan request at any time after your first Contract Anniversary and before your
Annuity Date. If approved, your loan will usually be effective as of the end of
the Business Day on which we receive all necessary documentation in good form.
We will forward proceeds of your loan to you within seven calendar days after
the effective date of your loan. A $500 loan administrative fee will be
deducted from your loan proceeds.
In order to secure your loan, on the effective date of your loan, we will
transfer an amount equal to the principal amount of your loan into an account
called our "Loan Account". To make this transfer, we will transfer amounts
proportionately from your Investment Options, based on your Account Value in
each.
As your loan is repaid, a portion, corresponding to the amount of the
repayment, of any amount then held as security for your loan will be
transferred from the Loan Account back into your Investment Options in
accordance with your current allocation instructions.
Loan Terms
You may have only one loan outstanding at any time. Each loan must be for at
least $1,000. Your total Contract Debt at the effective date of your loan, may
not exceed the lesser of:
. 50% of your Contract Value, or
. $50,000 less your highest outstanding Contract Debt during the 12-month
period immediately preceding the effective date of your loan.
You should refer to the terms of your particular Qualified Plan for any
additional loan restrictions. If you have other loans outstanding pursuant to
other Qualified Plans, the amount you may borrow may be further restricted.
You will be charged interest on your Contract Debt at an annual rate, set at
the time of the loan withdrawal, equal to the higher of (a) Moody's Corporate
Bond Yield Average-Monthly Average Corporates (the "Moody's Rate"), as
published by Moody's Investors Service, Inc., or its successor, for the
calendar quarter
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immediately preceding the calendar month in which your loan is effective, or
(b) 5%. In the event that the Moody's Rate is no longer available, we may
substitute a substantially similar average rate, subject to compliance with
applicable state regulations. The amount held in the Loan Account to secure
your loan will earn a return equal to an annual rate that is two percentage
points lower than the annual rate of interest charged on your Contract Debt.
Interest charges accrue on your Contract Debt daily, beginning on the effective
date of your loan; earnings on the amount held in the Loan Account to secure
your loan accrue daily beginning on the following day, and those earnings will
be transferred once a year to your Investment Options in accordance with your
current allocation instructions.
Repayment Terms
Your loan, including principal and accrued interest, must be repaid in
quarterly installments. An installment will be due in each quarter on the date
corresponding to the effective date of your loan, beginning with the first such
date following the effective date of your loan.
Example: On May 1, we receive your loan request, and your loan is
effective. Your first quarterly payment will be due on August 1.
Adverse tax consequences may result if you fail to meet the repayment
requirements for your loan. You must repay principal and interest of any loan
in substantially equal payments over the term of the loan. Normally, the term
of a loan will be five years from the effective date of the loan; however, if
you have certified to us that your loan proceeds are to be used to acquire a
principal residence for yourself, you may request a loan term of 30 years. In
either case, however, you must repay your loan prior to your Annuity Date.
You may prepay your loan at any time; if you prepay your entire outstanding
principal, we will bill you for any accrued interest, and your loan will be
considered repaid only when the interest due has been paid.
If we have not received your full payment by its due date, we will, at that
time, make your payment to Pacific Mutual by effecting a partial withdrawal
from your Contract Value as follows: (1) From the Loan Account attributable to
your loan, we will withdraw the amount of principal due. (2) From your
Investment Options, proportionate to your Account Value in each, we will
withdraw the amount sufficient to pay the interest due. If you send us a
payment of less than the amount due, we will effect a partial withdrawal of the
remaining amount due as discussed above. ALL WITHDRAWALS EFFECTED TO MAKE YOUR
LOAN REPAYMENTS WILL BE TREATED AS TAXABLE DISTRIBUTIONS FROM YOUR CONTRACT. If
a payment is received late, it will be applied as the next payment. If your
Contract Value is less than $1,000 and we do not receive your full payment by
its due date, we may, at our option, effect a partial withdrawal as described
and then terminate your Contract and send you the remaining withdrawal
proceeds.
While you have Contract Debt outstanding, we will treat all payments you send
us as Purchase Payments unless you specifically indicate that your payment is a
loan repayment. Any loan repayments in excess of the amount then due will be
applied first, to your outstanding principal, and then to accrued interest.
Tax and Legal Matters
The legal rules, including rules under the Code, that apply to loans under your
Contract are complicated and, in many cases, not clearly defined. In addition,
the rules that apply may depend on your individual circumstances. FOR THESE
REASONS, YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISER PRIOR TO EFFECTING ANY
LOAN TRANSACTION UNDER YOUR CONTRACT.
Interest paid on your loan under a 401(k) plan or 403(b) tax sheltered annuity
will be considered "personal interest" under Section 163(h) of the Code, to the
extent the loan comes from your pre-tax contributions, even if the proceeds of
your loan are used to acquire your principal residence.
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WITHHOLDING
Unless you elect to the contrary, any amounts you receive under your Contract
that are attributable to investment income will be subject to withholding to
meet federal and state income tax obligations. The rate of withholding on
annuity payments made to you will be determined on the basis of the withholding
information you provide to us with your Application. If you do not provide us
with required withholding information, we will withhold, from every withdrawal
from your Contract and from every annuity payment to you, the appropriate
percentage of the taxable amount of the payment. Please call us at 1-800-722-
2333 with any questions about the required withholding information. For
purposes of determining your withholding rate on annuity payments, you will be
treated as a married person with three exemptions. The rate of withholding on
all other payments made to you under your Contract, such as amounts you receive
upon withdrawals, will be 10%. Generally, there will be no withholding for
taxes until you actually receive payments under your Contract.
Distributions from a Contract under a Qualified Plan (not including an
individual retirement annuity subject to Code Section 408) to an employee,
surviving spouse, or former spouse who is an alternate payee under a qualified
domestic relations order, in the form of a lump sum settlement or periodic
annuity payments for a fixed period of fewer than 10 years are subject to
mandatory income tax withholding of 20% of the taxable amount of the
distribution, unless (1) the distributee directs the transfer of such amounts
in cash to another Qualified Plan or an IRA; or (2) the payment is a minimum
distribution required under the Code. The taxable amount is the amount of the
distribution less the amount allocable to after-tax contributions. All other
types of taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
Certain states have indicated that pension and annuity withholding will apply
to payments made to residents. Generally, an election out of federal
withholding will also be considered an election out of state withholding.
IMPACT OF FEDERAL INCOME TAXES
In general, if you expect to accumulate savings over a relatively long period
of time without making significant withdrawals, there should be tax advantages,
regardless of your tax bracket, in purchasing a Contract rather than, for
example, a mutual fund with a similar investment policy and approximately the
same level of expected investment results. This is because little or no income
taxes are incurred by you or by Pacific Mutual while you are participating in
the Subaccounts, and it is generally advantageous to defer the payment of
income taxes, so that the investment return is compounded without any deduction
for income taxes. The advantage will be greater if you decide to liquidate your
investment in the form of monthly annuity payments after your retirement, or if
your tax rate is lower at that time than during the period that you held the
Contract, or both.
TAXES ON PACIFIC MUTUAL
Although the Separate Account is registered as an investment company, it is not
a separate taxpayer for purposes of the Code. The earnings of the Separate
Account are taxed as part of Pacific Mutual's operations. No charge is made
against the Separate Account for Pacific Mutual's federal income taxes
(excluding the charge for premium taxes) but we will review, periodically, the
question of charges to the Separate Account or your Contract for such taxes.
Such a charge may be made in future years for any federal income taxes that
would be attributable to the Separate Account or to our operations with respect
to your Contract, or attributable, directly or indirectly, to Purchase Payments
on your Contract.
Under current law, Pacific Mutual may incur state and local taxes (in addition
to premium taxes) in several states. At present, these taxes are not
significant and they are not charged against the Contract or the Separate
Account. If there is a material change in applicable state or local tax laws,
the imposition of any such taxes upon Pacific Mutual that are attributable to
the Separate Account or to our operations with respect to your Contract may
result in a corresponding charge against the Separate Account or your Contract.
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ADDITIONAL INFORMATION
VOTING RIGHTS
Pacific Mutual is the legal owner of the shares of the Pacific Select Fund
Portfolios held by the Subaccounts, and consequently has the right to vote on
any matter voted on at Fund shareholders' meetings. However, our interpretation
of applicable law requires us to vote the shares attributable to your Variable
Account Value ("your voting interest") in accordance with your directions.
We will pass shareholder proxy materials on to you so that you have an
opportunity to give us voting instructions for your voting interest. You may
provide your instructions by proxy or in person at the shareholders' meeting.
If there are shares of a Portfolio held by a Subaccount for which we do not
receive timely voting instructions, we will vote those shares in the same
proportion as all other shares of that Portfolio held by that Subaccount for
which we have received timely voting instructions. If we hold shares of a
Portfolio in our General Account, we will vote those shares in the same
proportion as other votes cast by all of our separate accounts in the
aggregate, including Separate Account A.
We may elect, in the future, to vote shares of Pacific Select Fund Portfolios
held in Separate Account A in our own right if we are permitted to do so
through a change in applicable federal securities laws or regulations, or in
their interpretation.
The number of Portfolio shares that form the basis for your voting interest is
determined as of the record date set by the Board of Trustees of the Fund. It
is equal to (a) your Contract Value allocated to the Subaccount corresponding
to that Portfolio, divided by (b) the net asset value per share of that
Portfolio. Fractional votes will be counted. We reserve the right, if required
or permitted by a change in federal regulations or their interpretation, to
amend how we calculate your voting interest.
After your Annuity Date, if you have selected a variable annuity, the voting
rights under your Contract will continue during the payout period of your
annuity, but the voting rights will belong to your Annuitant (or Joint
Annuitants). The number of shares that form the basis for your Annuitant's (or
Joint Annuitants') voting interest will be determined as described above, but
will decrease throughout the payout period.
CHANGES TO YOUR CONTRACT
Contract Owner(s) and Contingent Owner
You may change your Non-Qualified Contract at any time prior to your Annuity
Date to name a different Contract Owner or to add a Joint Owner, or to add or
change a Contingent Owner; if yours is a Qualified Contract, you must be the
only Contract Owner, but you may still add or change a Contingent Owner. Your
Contract cannot name more than two Contract Owners (Joint Owners) and one
Contingent Owner at any time. Joint ownership is in the form of a joint
tenancy. Prior to your Annuity Date, the Contract Owner(s) may make all
decisions regarding the Contract, including making allocation decisions and
exercising voting rights. Transactions under jointly owned Contracts require
authorization from both Contract Owners. Transfer of Contract ownership may
involve federal income tax consequences; you should consult a qualified tax
adviser before effecting such a transfer. A change to joint Contract ownership
is considered a transfer of ownership.
Annuitant and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or
changed, once your Contract is issued. Certain changes may be permitted in
connection with Contingent Annuitants. See SELECTING YOUR ANNUITANT. There may
be limited exceptions for certain Qualified Contracts. Beginning at
annuitization, all decisions regarding the annuity, including allocation
decisions and exercising voting rights, belong to your Annuitant (or, if you
have a Joint and Survivor Life annuity, your Annuitants).
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<PAGE>
Beneficiaries
Your Beneficiary is a person who may receive death benefits under your
Contract. You may change your Beneficiary or add Beneficiaries at any time
prior to the death of the Annuitant. If you have named your Beneficiary
irrevocably, you will need to obtain the Beneficiary's consent before making
any changes. Qualified Contracts may have additional restrictions on naming and
changing Beneficiaries; for example, if your Contract was issued in connection
with a Qualified Plan subject to Title I of ERISA, your spouse must either be
your Beneficiary or consent to your naming a different Beneficiary. If you
leave no surviving Beneficiary, the Annuitant or the Annuitant's estate will
receive any death benefit proceeds under your Contract.
CHANGES TO ALL CONTRACTS
If, in the judgment of Pacific Mutual's management, continued investment by
Separate Account A in one or more of the Fund Portfolios becomes unsuitable or
unavailable, we may seek to alter the Variable Investment Options available
under the Contracts. Pacific Mutual does not expect that a Portfolio will
become unsuitable, but unsuitability issues could arise due to changes in
investment policies, market conditions, or tax laws, or due to marketing or
other reasons.
Alterations of Variable Investment Options may take differing forms. Pacific
Mutual reserves the right to replace shares of any Portfolio that were already
purchased under any Contract (or shares that were to be purchased in the future
under a Contract) with shares of another Portfolio, shares of another
investment company or series of another investment company, or another
investment vehicle. We may also purchase, through a Subaccount, other
securities for other series or other classes of contracts, and may permit
conversions or exchanges between series or classes of contracts on the basis of
Contract Owner requests. Required approvals of the SEC and state insurance
regulators will be obtained before any such substitutions are effected, and you
will be notified of any planned substitution.
We may add new Subaccounts to Separate Account A, and any new Subaccounts may
invest in Portfolios of the Fund or in other investment vehicles; availability
of any new Subaccounts to existing Contract Owners will be determined at our
discretion. We will notify Contract Owners, and will comply with the filing or
other procedures established by applicable state insurance regulators, to the
extent required by applicable law. We also reserve the right, after receiving
any required regulatory approvals, to do any of the following:
. combine Subaccounts
. delete or substitute Subaccounts
. combine Separate Account A or part of it with another separate account
of Pacific Mutual or any of its affiliates
. transfer Separate Account A assets attributable to the Contracts to
another of our separate accounts
. deregister the Separate Account under the 1940 Act
. operate Separate Account A as a management investment company under the
1940 Act or another form permitted by law
. establish a committee, board or other group to manage aspects of the
Separate Account's operations
. make any changes required by the 1940 Act or other federal securities
laws
. make any changes necessary to maintain the status of the Contracts as
annuities under the Code
. make other changes required under federal or state law relating to
annuities
. suspend or discontinue sale of the Contracts.
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<PAGE>
INVESTOR INQUIRIES AND SUBMITTING FORMS AND REQUESTS
You may reach our service representatives at 1-800-722-2333 between the hours
of 6:00 a.m. and 5:00 p.m., Pacific time.
If you are submitting a purchase or other payment by mail, please send it,
along with your Application if you are submitting one, to:
Pacific Mutual Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
Please send your other forms and written requests or questions to:
Pacific Mutual Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are using an overnight delivery service to send payments, please send
them to:
Pacific Mutual Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
The effective date of certain notices or of instructions is determined by the
date and time on which Pacific Mutual "receives" the notice or instructions. We
"receive" this information only when it arrives, in good form, at the correct
mailing address set out above. Please call us at 1-800-722-2333 if you have any
questions regarding which address you should use.
Purchase Payments after your initial Purchase Payment, 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
Business Day that we receive them in "good form", unless the transaction or
event is scheduled to occur on another day. Generally, whenever you submit any
other form, notice or request, your instructions will be effective on the next
Business Day after we receive them in "good form" unless the transaction or
event is scheduled to occur on another day. "Good 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 your 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. You should call your registered representative or Pacific Mutual if you
have questions regarding the required form of a request.
TELEPHONE TRANSACTIONS
After your "free look" period, you may make transfer requests by telephone if
you have authorized telephone requests (a "telephone authorization"). A
telephone authorization for a jointly owned Contract must be approved by both
Joint Owners. We cannot guarantee that you will always be able to reach us to
complete a telephone transaction; for example, all telephone lines may be busy
during certain periods, such as periods of substantial market fluctuations or
other drastic economic or market change, or telephones may be out of service
during severe weather conditions or other emergencies. Under these
circumstances, you should submit your request in writing. Transaction
instructions we receive by telephone before 4:00 p.m. Eastern time (1:00 p.m.
Pacific time), (or the close of the New York Stock Exchange, if earlier), on
any Business Day will normally be effective on that day, and we will send you
written confirmation of each telephone transfer.
We have established procedures reasonably designed to confirm that instructions
communicated by telephone are genuine. These procedures may require any person
requesting a telephone transaction to provide certain personal identification
upon our request. We may also record all or part of any telephone conversation
with
32
<PAGE>
respect to transaction instructions. We reserve the right to deny any
transaction request made by telephone. When you make a written request for a
telephone authorization, you authorize us to accept and to act upon
instructions received by telephone with respect to your Contract, and you agree
that, so long as we comply with our procedures, none of Pacific Mutual, its
affiliates, the Fund, or any of their directors, trustees, officers employees
or agents will be liable for any loss, liability, cost or expense (including
attorneys' fees) in connection with requests that are effected in accordance
with your telephone authorization and that we believe to be genuine. This
policy means that you will bear the risk of loss arising out of your telephone
transaction privileges.
TIMING OF PAYMENTS
For withdrawals from the Variable Investment Options or for death benefit
payments attributable to your Variable Account Value, we will normally send the
proceeds within seven calendar days after your withdrawal request is effective
or after the Notice Date, as the case may be. Similarly, we will normally
effect transfers from the Variable Investment Options or exchanges of
Subaccount Annuity Units, within seven calendar days after your transfer or
exchange request is effective. We will normally effect periodic annuity
payments on the day that corresponds to the Annuity Date and will make payment
on the following day. Payments or transfers may be suspended for a longer
period under certain abnormal circumstances. These include a closing of the New
York Stock Exchange other than on a regular holiday or weekend, a trading
restriction imposed by the SEC, or an emergency declared by the SEC. For
withdrawals from the Fixed Option, death benefit payments attributable to Fixed
Option Value, or fixed periodic annuity payments, payment of proceeds may be
delayed for up to six (6) months after the request is effective. Similar delays
may apply to transfers from the Fixed Option and to loans. (See THE FIXED
OPTION for more details.)
CONFIRMATIONS STATEMENTS AND OTHER REPORTS TO CONTRACT OWNERS
Confirmations will be sent out for unscheduled purchase payments and transfers,
loans, loan repayments, unscheduled partial withdrawals, a full withdrawal, and
on payment of any death benefit proceeds. Each quarter prior to your Annuity
Date, we will send you a statement that provides certain information pertinent
to your Contract. These statements disclose Contract Value, Subaccount values,
values under the Fixed Option, transactions made and specific Contract data
that apply to your Contract. Confirmations of your transactions under the pre-
authorized checking plan, dollar cost averaging, earnings sweep, portfolio
rebalancing, and pre-authorized withdrawal options will appear on your
quarterly account statements. Your fourth-quarter statement will contain annual
information about your Contract Value and transactions. You will also be sent
an annual and a semi-annual report for the Separate Account and the Fund and a
list of the securities held in each Portfolio of the Fund, as required by the
1940 Act.
SALES COMMISSIONS
Pacific Mutual pays sales commissions to dealers and other expenses associated
with promotion and sales of the Contracts. Broker-dealers may receive aggregate
commissions of up to 2.5% of your aggregate Purchase Payments. 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.
FINANCIAL STATEMENTS
Pacific Mutual's audited financial statements as of and for the years ended
December 31, 1994 and 1993, and unaudited financial statements as of June 30,
1995 and for the six months ended June 30, 1995 and 1994, are contained in the
Statement of Additional Information.
33
<PAGE>
THE FIXED OPTION
GENERAL INFORMATION
All amounts allocated to the Fixed Option become part of our General Account.
Subject to applicable law, we exercise sole discretion over the investment of
General Account assets, and bear the associated investment risk; you will not
share in the investment experience of General Account assets.
Because of exemptive and exclusionary provisions, interests in the Fixed Option
under the Contract are not registered under the Securities Act of 1933 and the
General Account has not been registered as an investment company under the 1940
Act. An interest you have in the Fixed Option is not subject to these Acts, and
Pacific Mutual has been advised that the SEC staff has not reviewed disclosure
in this Prospectus relating to the Fixed Option. This disclosure may, however,
be subject to certain provisions of federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
GUARANTEE TERMS
When you allocate any portion of your Purchase Payments or Contract Value to
our General Account under the Fixed Option, we guarantee you an interest rate
(a "Guaranteed Interest Rate") for a specified period of time (a "Guarantee
Term") of up to one year. Guaranteed Interest Rates may be reset periodically;
your allocation will receive the Guaranteed Interest Rate in effect on the
effective date of your allocation. The Guaranteed Interest Rate on your Fixed
Option Value will never be less than an annual rate of 3%. Each allocation (or
rollover) you make to the Fixed Option receives a Guarantee Term that begins on
the day that allocation or rollover is effective and ends on your next Contract
Anniversary or, if earlier, on your Annuity Date.
Example: Your Contract Anniversary is January 31. On February 1 of year 1,
you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one
year and a Guaranteed Interest Rate of 5%. On August 1, you allocate
another $500 to the Fixed Option and receive a Guaranteed Interest Rate of
6%. Until January 31, year 2, your first $1,000 earns 5% interest and your
second $500 earns 6% interest. On January 31, year 2, a new interest rate
may go into effect for your entire Fixed Option Value.
All Guaranteed Interest Rates will be expressed as annual rates, and interest
will accrue daily. On your Contract Anniversary each year, we will roll over
your Fixed Option Value on that day into a new Guarantee Term of one year (or,
if shorter, the time remaining until your Annuity Date) with a new Guaranteed
Interest Rate or Rate(s), unless you instruct us otherwise.
WITHDRAWALS AND TRANSFERS
You may withdraw amounts from your Fixed Option Value, or transfer amounts from
your Fixed Option Value to one or more Variable Investment Options, at any time
on or prior to the Annuity Date; however, if you reside in a state that
requires refund of purchase payments under the Free Look Right, transfers may
only be made on or after your Free Look Transfer Date.
Payments or transfers from the Fixed Option may be delayed, as described under
ADDITIONAL INFORMATION--Timing of Payments; any amount delayed will, so long as
it is held under the Fixed Option, continue to earn interest at the Guaranteed
Interest Rate then in effect until the Guarantee Term in effect has ended, and
the minimum guaranteed interest rate of 3% thereafter, unless state law
requires a greater rate be paid.
34
<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTION OF THE CONTRACTS.............................................. 1
Pacific Equities Network................................................. 1
Broker-Dealer Commissions................................................ 1
PERFORMANCE................................................................ 1
Total Returns............................................................ 1
Yields................................................................... 2
Performance Comparisons and Benchmarks................................... 3
Insurance Company Rating Information..................................... 4
Separate Account Performance............................................. 4
THE CONTRACTS AND THE SEPARATE ACCOUNT..................................... 8
Calculating Subaccount Unit Values....................................... 8
Variable Annuity Payment Amounts......................................... 8
Corresponding Dates...................................................... 10
Age and Sex of Annuitant................................................. 11
Systematic Transfer Programs............................................. 11
Pre-Authorized Withdrawals............................................... 13
Death Benefit............................................................ 13
Joint Annuitants on Qualified Contracts.................................. 14
1035 Exchanges........................................................... 14
Safekeeping of Assets.................................................... 14
Participating............................................................ 14
FINANCIAL STATEMENTS....................................................... 14
</TABLE>
35
<PAGE>
APPENDIX A:
STATE LAW VARIATIONS
Issue Date--The term "Issue Date" shall be substituted for the term "Contract
Date" for Contracts issued to residents of the Commonwealth of Massachusetts.
Purchase Payments: No minimum initial or subsequent Purchase Payment
requirements will apply to a Contract purchased in connection with the Texas
ORP Retirement Program.
SHORT-TERM CANCELLATION RIGHT ("FREE-LOOK")
If you reside in one of the following states on your Contract Date, you may
return your Contract to us for cancellation within 20 days of your receipt of
the Contract and receive a refund as described under SHORT-TERM CANCELLATION
RIGHT ("FREE-LOOK"):
Idaho
South Dakota
If you reside in one of the following states on your Contract Date and you
exercise your Free Look right and return your Contract to us within 10 days of
your receipt of your Contract, we will refund your aggregate Purchase Payments
under your Contract that we received:
<TABLE>
<S> <C>
Georgia South Carolina
Michigan West Virginia
North Carolina
</TABLE>
If you reside in California and are age 65 or older on your Contract Date, you
may return your Contract to us within 30 days of your receipt of your Contract
for cancellation and receive a refund as described under SHORT-TERM
CANCELLATION RIGHT ("FREE-LOOK").
36
<PAGE>
To receive a current copy of the Pacific One 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 ONE]
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Equities Network
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 December 29, 1995
<PAGE>
Sponsored by:
LOGO
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
700 NEWPORT CENTER DRIVE, NB-5
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 287-6A
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 29, 1995
PACIFIC ONE
SEPARATE ACCOUNT A
----------------
Pacific One (the "Contract") is a variable annuity contract issued by Pacific
Mutual Life Insurance Company ("Pacific Mutual").
This Statement of Additional Information is not a Prospectus and should be read
in conjunction with the Contract's Prospectus, dated December 29, 1995, which
is available without charge upon written or telephone request to Pacific
Mutual. Terms used in this Statement of Additional Information have the same
meanings as in the Prospectus, and some additional terms are defined
particularly for this Statement of Additional Information.
----------------
Pacific Mutual Life Insurance Company
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTION OF THE CONTRACTS.............................................. 1
Pacific Equities Network................................................. 1
Broker-Dealer Commissions................................................ 1
PERFORMANCE................................................................ 1
Total Returns............................................................ 1
Yields................................................................... 2
Performance Comparisons and Benchmarks................................... 3
Insurance Company Rating Information..................................... 4
Separate Account Performance............................................. 4
THE CONTRACTS AND THE SEPARATE ACCOUNT..................................... 8
Calculating Subaccount Unit Values....................................... 8
Variable Annuity Payment Amounts......................................... 8
Corresponding Dates...................................................... 10
Age and Sex of Annuitant................................................. 11
Systematic Transfer Programs............................................. 11
Pre-Authorized Withdrawals............................................... 13
Death Benefit............................................................ 13
Joint Annuitants on Qualified Contracts.................................. 14
1035 Exchanges........................................................... 14
Safekeeping of Assets.................................................... 14
Participating............................................................ 14
FINANCIAL STATEMENTS....................................................... 14
</TABLE>
i
<PAGE>
DISTRIBUTION OF THE CONTRACTS
PACIFIC EQUITIES NETWORK
Pacific Equities Network ("PEN"), 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 PEN 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, PEN receives
compensation in the amount of 2.5% of aggregate Purchase Payments for
distributing the Contracts. In addition, PEN may also receive override
payments, expense allowances, bonuses, wholesaler fees and training allowances.
BROKER-DEALER COMMISSIONS
Broker-dealers may receive compensation of up to 2.5% of aggregate Purchase
Payments for sales of the Contracts. Registered representatives earn
commissions from the broker-dealers with which they are affiliated and such
arrangements vary. In addition, registered representatives who meet certain
production levels may qualify, under sales incentive programs adopted by
Pacific Mutual, for non-cash compensation such as expense paid trips, expense
paid educational seminars and merchandise.
PERFORMANCE
From time to time, our reports or other communications to current or
prospective Contract Owners or our advertising or other promotional material
may quote the performance (yield and total return) of a Subaccount. Quoted
results are based on past performance and reflect the performance of all assets
held in that Subaccount for the stated time period. QUOTED RESULTS ARE NEITHER
AN ESTIMATE NOR A GUARANTY OF FUTURE INVESTMENT PERFORMANCE, AND DO NOT
REPRESENT THE ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR CONTRACT
OWNER.
TOTAL RETURNS
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
Average Annual Total Return
To calculate a Subaccount's average annual total return for a specific
measuring period, we first take a hypothetical $1,000 investment in that
Subaccount, at its then-applicable Subaccount Unit Value (the "initial
payment") and we compute the ending redeemable value ("redeemable value") of
that initial payment at the end of the measuring period. The redeemable value
reflects the effect of all recurring fees and charges applicable to a Contract
Owner under the Contract, including the mortality and expense risk charge and
the asset-based Administrative Fee, but does not reflect any charges for
applicable premium taxes. The Annual Fee is also taken into account, assuming
an average Contract Value of $80,000. The redeemable value is then
1
<PAGE>
divided by the initial payment and this quotient is taken to the Nth root (N
represents the number of years in the measuring period), and 1 is subtracted
from this result. Average annual total return is expressed as a percentage.
T = (ERV/P)(/1//N)-1
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of years
Average annual total return figures will be given for recent one-, five- and
ten-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Subaccount's operations, or on a year-by-year
basis).
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total
return for any one year in the period might have been greater or less than the
average for the entire period.
Aggregate Total Return
A Subaccount may use "aggregate" total return figures along with its "average
annual" total return figures for various periods; these figures represent the
cumulative change in value of an investment in the Subaccount for a specific
period. Aggregate total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components of total return.
The SEC has not prescribed standard formulas for calculating aggregate total
return.
Total returns may also be shown for the same periods that do not take into
account the Annual Fee.
YIELDS
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by
multiplying it by the fraction 365/7; that is, the base rate of return is
assumed to be generated each week over a 365-day period and is shown as a
percentage of the investment. The "effective yield" of the Money Market
Subaccount is calculated similarly but, when annualized, the base rate of
return is assumed to be reinvested. The effective yield will be slightly higher
than the current yield because of the compounding effect of this assumed
reinvestment.
The formula for effective yield is: (base period return +1)365/7-1.
Realized capital gains or losses and unrealized appreciation or depreciation of
the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect the
deduction of charges for any applicable premium taxes, but do reflect a
deduction for the Annual Fee, assuming an average Contract Value of $80,000.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month
or 30-day period is divided by the Subaccount Unit Value on the last day of the
specified
2
<PAGE>
period. This result is then annualized (that is, the yield is assumed to be
generated each month or each 30-day period for a year), according to the
following formula, which assumes semi-annual compounding:
YIELD = 2[(((a-b)/cd) + 1)/6/-1]
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during
the period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the mortality and expense risk
charge, the asset-based Administrative Fee and the Annual Fee (assuming an
average Contract Value of $80,000), but does not reflect any charge for
applicable premium taxes and/or other taxes.
The Subaccounts' yields will vary from time to time depending upon market
conditions, the composition of each Portfolio and operating expenses of the
Fund allocated to each Portfolio. Consequently, any given performance quotation
should not be considered representative of the Subaccount's performance in the
future. Yield should also be considered relative to changes in Subaccount Unit
Values and to the relative risks associated with the investment policies and
objectives of the various Portfolios. In addition, because performance will
fluctuate, it may not provide a basis for comparing the yield of a Subaccount
with certain bank deposits or other investments that pay a fixed yield or
return for a stated period of time.
PERFORMANCE COMPARISONS AND BENCHMARKS
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the Subaccounts. This performance may be
presented as averages or rankings compiled by Lipper Analytical Services, Inc.
("Lipper"), the Variable Annuity Research and Data Service ("VARDS(R)") or
Morningstar, Inc. ("Morningstar"), which are independent services that monitor
and rank the performance of variable annuity issuers and mutual funds in each
of the major categories of investment objectives on an industry-wide basis.
Lipper's rankings include variable life issuers as well as variable annuity
issuers. VARDS(R) rankings compare only variable annuity issuers. The
performance analyses prepared by Lipper and VARDS(R) rank such issuers on the
basis of total return, assuming reinvestment of dividends and distributions,
but do not take sales charges, redemption fees or certain expense deductions at
the separate account level into consideration. In addition, VARDS(R) prepares
risk adjusted rankings, which consider the effects of market risk on total
return performance. We may also compare the performance of the Subaccounts with
performance information included in other publications and services that
monitor the performance of insurance company separate accounts or other
investment vehicles. These other services or publications may be general
interest business publications such as The Wall Street Journal, Barron's,
Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners, advertisements,
or sales literature may compare a Subaccount's performance to various
benchmarks that measure the performance of a pertinent group of securities
widely regarded by investors as being representative of the securities markets
in general or as being representative of a particular type of security. These
benchmarks include the following: (1) the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"), an unmanaged weighted index of 500 companies that
represent approximately 80% of the market capitalization of the United States
equity markets; (2) the Consumer Price Index ("CPI"), published by the U.S.
Bureau of Labor Statistics, a statistical
3
<PAGE>
measure of change, over time, in the prices of goods and services in major
expenditure groups and generally considered to be a measure of inflation; (3)
the Dow Jones Industrial Average ("DJIA"); (4) the Donoghue Money Market
Institutional Averages; (5) the Lehman Brothers Government Corporate Index; (6)
the Lehman Brothers Government Bond Index; (7) the Salomon Brothers High Yield
Bond Indexes; and (8) the Morgan Stanley Capital International's EAFE Index. We
may also compare the performance of the Subaccounts with that of other
appropriate indices of investment securities and averages for peer universes of
funds or data developed by us derived from such indices or averages. Unmanaged
indexes generally assume the reinvestment of dividends or interest but do not
generally reflect deductions for investment management or administrative costs
and expenses.
INSURANCE COMPANY RATING INFORMATION
Pacific Mutual may also advertise or report to Contract Owners its ratings as
an insurance company by the A.M. Best Company. Each year, A.M. Best reviews the
financial status of thousands of insurers, culminating in the assignment of
Best's Ratings. These ratings reflect Best's current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health industry. Best's Ratings range from
A++ to F. An A++ rating means, in the opinion of A.M. Best, that the insurer
has demonstrated the strongest ability to meet its respective policyholder and
other contractual obligations. A.M. Best publishes Best's Insurance Reports,
Life-Health Edition. The 1995 Edition reported Pacific Mutual's rating of A+
for financial position and operating performance as of June 1995.
In addition, the claims-paying ability of Pacific Mutual as measured by the
Standard & Poor's Corporation may be referred to in advertisements or in
reports to Contract Owners. A Standard & Poor's insurance claims-paying ability
rating is an assessment of an operating insurance company's financial capacity
to meet the obligations of its insurance policies in accordance with their
terms. Standard & Poor's ratings range from AAA to D. Our claims-paying ability
rating is AA+, as of August 1994.
Pacific Mutual may additionally advertise its rating from Duff & Phelps Credit
Rating Co. A Duff & Phelps rating is an assessment of a company's insurance
claims-paying ability. Duff & Phelps ratings range from AAA to CCC. Duff &
Phelps rates the claims-paying ability of Pacific Mutual as AA+ as of October
1995.
Pacific Mutual may advertise its insurance financial strength rating from
Moody's Investors Service, Inc. Moody's ratings range from Aaa to C. As of
October, 1994, Moody's gave Pacific Mutual a rating of Aa3.
SEPARATE ACCOUNT PERFORMANCE
In order to help you understand how investment performance can affect your
Variable Account Value, we are including performance information based on the
historical performance of the Portfolios. The information presented also
includes data representing unmanaged market indices.
The Subaccounts have not yet commenced operations. Therefore, no historical
performance data exist for the Subaccounts. Nine of the Portfolios of the Fund
available under the Contract, however, have been in operation since January 4,
1988 (January 30, 1991 in the case of the Equity Index Portfolio and January 4,
1994 in the case of the Growth LT Portfolio). Historical performance
information for each of the Equity Portfolio and the Bond and Income Portfolio
is based on the performance of that Portfolio's predecessor; each predecessor
series was a series of Pacific Corinthian Variable Fund and began its first
full year of operations January 1, 1984, the assets of which were acquired by
the Fund on December 31, 1994. The following tables represent what the
performance of the Subaccounts would have been, if the Subaccounts had been
both in existence and invested in the corresponding Portfolio since the date of
the Portfolio's (or predecessor series') inception. Because the Subaccounts
have not commenced operations, however, and because the Contracts were not
available during this period, THESE ARE NOT ACTUAL PERFORMANCE NUMBERS FOR THE
SUBACCOUNTS OR FOR THE CONTACT. These are hypothetical total return numbers
that represent the actual performance of the Portfolios, adjusted for the fees
and charges applicable to the Contract. Any charge for premium taxes and/or
other taxes are not reflected in these data, and reflection of the Annual Fee
assumes an average Contract size of $80,000.
4
<PAGE>
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTY OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Money Market....................... 2.36% 1.79% 3.21% -- 3.95%
High Yield Bond.................... -0.98% 10.65% 10.55% -- 8.87%
Managed Bond....................... -5.76% 3.68% 6.66% -- 7.44%
Government Securities.............. -6.50% 2.77% 5.93% -- 6.83%
Growth LT.......................... 11.90% -- -- -- 11.90%
Equity Income...................... -1.68% 2.99% 5.27% -- 8.46%
Multi-Strategy..................... -2.90% 2.94% 5.37% -- 7.61%
Equity............................. -4.27% 4.81% 7.26% 11.59% 11.29%
Bond and Income.................... -9.76% 4.34% 7.30% 9.70% 10.01%
Equity Index....................... -0.35% 4.33% -- -- 8.99%
International...................... 1.61% 5.08% 1.57% -- 5.94%
Donoghue MF........................ 3.76% 3.37% 5.11% -- *
EAFE............................... 7.80% 7.86% 1.50% 17.54% *
First Boston....................... -0.97% 11.16% 13.08% -- *
LBG/Bond........................... -3.37% 4.66% 7.53% -- *
LBG/C Bond......................... -3.51% 4.85% 7.70% 9.84% *
Russell 2500....................... -1.05% 10.22% 10.86% -- *
S&P 500............................ 1.27% 6.23% 8.66% 14.37% *
CUMULATIVE RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1994
<CAPTION>
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Money Market....................... 2.36% 5.45% 17.11% -- 31.16%
High Yield Bond.................... -0.98% 35.47% 65.09% -- 81.18%
Managed Bond....................... -5.76% 11.44% 38.04% -- 65.24%
Government Securities.............. -6.50% 8.54% 33.38% -- 58.79%
Growth LT (1)...................... 11.80% -- -- -- 11.80%
Equity Income...................... -1.68% 9.26% 29.30% -- 76.51%
Multi-Strategy..................... -2.90% 9.09% 29.88% -- 67.04%
Equity............................. -4.27% 15.14% 41.97% 199.51% 224.52%
Bond and Income.................... -9.76% 13.60% 42.24% 152.36% 185.95%
Equity Index....................... -0.35% 13.57% -- -- 40.18%
International...................... 1.61% 16.03% 8.12% -- 49.70%
Donoghue MF........................ 3.76% 10.45% 28.30% -- *
EAFE............................... 7.80% 25.48% 7.73% 403.33% *
First Boston....................... -0.97% 37.36% 84.90% -- *
LBG/Bond........................... -3.37% 14.64% 43.76% -- *
LBG/C Bond......................... -3.51% 15.27% 44.90% 155.63% *
Russell 2500....................... -1.05% 33.90% 67.45% -- *
S&P 500............................ 1.27% 19.88% 51.48% 282.93% *
</TABLE>
- --------
*Not available
(1) Cumulative return is for the period January 4, 1994 (commencement of
operations) to December 31, 1994.
5
<PAGE>
Tax Deferred Accumulation
In reports or other communications to you or in advertising or sales materials,
we may also describe the effects of tax-deferred compounding on the Separate
Account's investment returns or upon returns in general. These effects may be
illustrated in charts or graphs and may include comparisons at various points
in time of returns under the Contract or in general on a tax-deferred basis
with the returns on a taxable basis. Different tax rates may be assumed.
In general, individuals who own annuity contracts are not taxed on increases in
the value under the annuity contract until some form of distribution is made
from the contract. Thus, the annuity contract will benefit from tax deferral
during the accumulation period, which generally will have the effect of
permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract with accumulations from an investment on
which gains are taxed on a current basis. The chart shows accumulations on an
initial investment or Purchase Payment of $25,000, assuming hypothetical annual
returns of 0%, 4% and 8%, compounded annually, and a tax rate of 31%. The
values shown for the taxable investment do not include any deduction for
management fees or other expenses but assume that taxes are deducted annually
from investment returns. The values shown for the variable annuity do not
reflect the deduction of contractual expenses such as the Mortality and Expense
Risk Charge, the Administrative Fee and the Annual Fee, any charge for premium
taxes and/or other taxes, or the expenses of an underlying investment vehicle,
such as the Fund. For a description of the charges and expenses under the
Contract, see FEE TABLE and CHARGES, FEES AND DEDUCTIONS in the Prospectus. In
addition, these values assume that the Contract Owner does not surrender the
Contract or make any withdrawals until the end of the period shown. The chart
assumes a full withdrawal, at the end of the period shown, of all Contract
Value and the payment of taxes at the 31% rate on the amount in excess of the
Purchase Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guaranty of performance. Actual tax rates may vary for different taxpayers from
that illustrated and withdrawals by Contract Owners who have not reached age 59
1/2 may be subject to a tax penalty of 10%.
6
<PAGE>
POWER OF TAX DEFERRAL
$25,000 investment at annual rates return of 0.00%, 4.00% and 8.00%, taxed @
31%
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Taxable Tax-Deferred
Investment Investment
---------- ------------
<S> <C> <C>
10 Years
0% $25,000.00 $25,000.00
4% $32,823.20 $33,284.21
8% $42,784.64 $44,991.46
20 Years
0% $25,000.00 $25,000.00
4% $43,094.51 $45,546.87
8% $73,221.00 $88,151.51
30 Years
0% $25,000.00 $25,000.00
4% $56,579.99 $63,698.61
8% $125,309.35 $181,330.83
</TABLE>
7
<PAGE>
THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed as of the end of each Business Day. The initial Unit Value of each
Subaccount will be $10 on the Business Day the Subaccount begins operations. At
the end of each subsequent Business Day, the Unit Value for a Subaccount is
equal to:
YXZ
where
(Y) = the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z) = the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A/B)-C
where
(A) = the "per share value of the assets" of that Subaccount as of the
end of that valuation period, which is equal to: a+b+c
(a)= the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
where
(b)= the per share amount of any dividend or capital gain
distributions made by the Fund for that Portfolio during that
valuation period; and
(c)= any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for
any income and/or any other taxes which we determine to have
resulted from the operations of the Subaccount of Contract,
and/or any taxes attributable directly or indirectly, to Purchase
Payments;
(B) = the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding of the
valuation period; and
(C) = a factor that assesses against the Subaccount assets for each
calendar day in the valuation period, the charge for mortality and
expense risks at a rate that is equal on an annual basis to an
annual rate expressed as a decimal (where 1.0 equals 100%) of 0.0125
and the Administrative Charge at a rate that is equal on an annual
basis to an annual rate expressed as a decimal of 0.0015 (see
Charges, Fees and Deductions).
As explained in the Prospectus, the Annual Fee, if applicable, is assessed
against your Variable Account Value through the automatic debit of Subaccount
Units; the Annual Fee decreases the number of Subaccount Units attributed to
your Contract but does not alter the Unit Value for any Subaccount.
VARIABLE ANNUITY PAYMENT AMOUNTS
The following steps show how we determine the amount of each variable annuity
payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Contract Value (less Contract Debt) into variable annuity
payments, you must pay any applicable charge for premium taxes and or other
taxes on your Contract Value (unless applicable law requires those taxes to be
paid at a later time). We assess this charge by reducing your Contract Value,
proportionately relative to your Account Value in each Subaccount and in the
Fixed Option in an amount equal to the aggregate amount of the charges. The
remaining amount of your available Contract Value may be used to provide
variable annuity payments. Alternatively, your remaining Contract Value may be
used to provide fixed annuity payments, or it may be divided to provide both
fixed and variable annuity payments. You may also choose to withdraw some or
all of your remaining Contract Value (less Contract Debt) and any applicable
Annual Fee and charge for premium taxes and or other taxes.
8
<PAGE>
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option Table yields will be based on the Annuitant's age (and, in
certain cases, sex) and assumes a 5% investment return, as described in more
detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1000 of his Contract Value (reduced by
applicable charges and any Contract Debt) that he will be using to provide
variable payments. Therefore, if his Contract Value after deducting
applicable charges and any Contract Debt is $100,000 on his Annuity Date
and he applies this entire amount toward his variable annuity, his first
monthly payment will be $579.00.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributed to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment
amounts. First, we use the Annuity Option Table to determine the amount of that
first variable payment for each Subaccount. Then, for each Subaccount, we
divide that amount of the first variable annuity payment by the value of one
Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of
the Annuity Date to obtain the number of Subaccount Annuity Units for that
particular Subaccount. The number of Subaccount Annuity Units used to calculate
subsequent payments under your Contract will not change unless exchanges of
Annuity Units are made, (or if the Joint and Survivor Annuity Option is elected
and the Primary Annuitant dies first,) but the value of those Annuity Units
will change daily, as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the Annuity
Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit
Value, changes each day to reflect the net investment results of the underlying
investment vehicle, as well as the assessment of the mortality and expense risk
charge at a rate equal on an annual basis to the annual rate expressed as a
decimal (where 1.0 equals 100%) of 0.0125 and the Administrative Fee at a rate
equal on an annual basis to the annual rate of 0.0015. In addition, the
calculation of Subaccount Annuity Unit Value incorporates an additional factor;
as discussed in more detail below, this additional factor adjusts Subaccount
Annuity Unit Values to correct for the Option Table's implicit assumption of a
5% annual investment return on amounts applied but not yet used to furnish
annuity benefits.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, your
Annuitant(s) may exchange Subaccount Annuity Units in any Subaccount for
Subaccount Annuity Units in any other Subaccount(s) up to four times in any
twelve month period after you annuitize. The number of Subaccount Annuity Units
in any Subaccount may change due to such exchanges. Exchanges following
annuitization will be made by exchanging Subaccount Annuity Units of equivalent
aggregate value, based on their relative Subaccount Annuity Unit Values.
Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain
9
<PAGE>
actuarial assumptions based on the Annuitant's age, and, in some cases, the
Annuitant's sex. In addition, these numbers assume that the amount of your
Contract Value that you convert to a variable annuity will have a positive
investment return of 5% each year during the payout of your annuity; this 5% is
referred to as an "assumed investment return."
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds its mortality
and expense risk charge, the Administrative Fee, and the assumed investment
return. The Subaccount Annuity Unit Value for any Subaccount will generally be
less than the Subaccount Unit Value for that same Subaccount, and the
difference will be the amount of the assumed investment factor.
Example: Assume the investment performance of a Subaccount is at a rate of
6.40% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year (6.40% minus the mortality and expense
risk charge at the annual rate of 1.25% and minus the Administrative Fee at
the annual rate of .15% equals 5.00%), but the Subaccount Annuity Unit
Value would not increase (or decrease) at all. The net investment factor
for that 5% return (1.05) is then divided by the factor for the 5% assumed
investment return (1.05) and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.05 = 1 - 1 = 0%.
------
1.05
If the investment performance of a Subaccount assets is at a rate less than
6.40% per year, the Subaccount Annuity Unit Value will decrease, even if the
Subaccount Unit Value is increasing.
Example: Assume the investment performance of a Subaccount is at a rate of
4.00% per year. The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year (4.00% minus the mortality and expense
risk charge at the annual rate of 1.25% and minus the Administrative Fee at
the annual rate of .15% equals 2.60%), but the Subaccount Annuity Unit
Value would decrease at a rate of 2.29% per year. The net investment factor
for that 2.6% return (1.026) is then divided by the factor for the 5%
assumed investment return (1.05) and 1 is subtracted from the result to
determine the adjusted rate of change in Subaccount Annuity Unit Value:
1.026 = .9771 -1 = -2.29%.
-----
1.05
The assumed investment return will always cause increases in Subaccount Annuity
Unit Values to be somewhat less than if the assumption had not been made, will
cause decreases in Subaccount Annuity Unit Values to be somewhat greater than
if the assumption had not been made, and will (as shown in the example above)
sometimes cause a decrease in Subaccount Annuity Unit Values to take place when
an increase would have occurred if the assumption had not been made. If we had
assumed a higher investment return in our Annuity Option tables, it would
produce annuities with larger first payments, but the increases in subaccount
annuity payments would be smaller and the decreases in subsequent annuity
payments would be greater; a lower assumed investment return would produce
annuities with smaller first payments, and the increases in subsequent annuity
payments would be greater and the decreases in subsequent annuity payments
would be smaller.
CORRESPONDING DATES
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following date. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
10
<PAGE>
AGE AND SEX OF ANNUITANT
As mentioned in the Prospectus, the Contracts generally provide for sex-
distinct annuity purchase rates in the case of life annuities. Statistically,
females tend to have longer life expectancies than males; consequently, if the
amount of annuity payments is based on life expectancy, they will ordinarily be
higher if an annuitant is male than if an annuitant is female. Certain states'
regulations prohibit sex-distinct annuity purchase rates, and Contracts issued
in those states will use unisex rates. In addition, Contracts issued in
connection with Qualified Plans are required to use unisex rates.
We may require proof of your Annuitant's age and sex before commencing annuity
payments. If the age or sex (or both) of your Annuitant are incorrectly stated
in your Contract, the amount payable will be corrected to equal the amount that
the annuitized portion of the Contract Value under that Contract would have
purchased for your Annuitant's correct age and sex. If the correction is
effected after annuity payments have commenced, and we have made overpayments
based on the incorrect information, we will deduct the amount of the
overpayment, with interest at 3% a year, from any payments due then or later;
if we have made underpayments, we will add the amount, with interest at 3% a
year, of the underpayments to the next payment we make after we receive proof
of the correct sex and/or date of birth.
SYSTEMATIC TRANSFER PROGRAMS
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make periodic
reallocations of your Contract Value without waiting for any further
instruction from you. You may request to begin or stop dollar cost averaging at
any time prior to your Annuity Date; the effective date of your request will be
the day we receive written notice from you in good form. Your request may
specify the date on which you want your first transfer to be made. If you do
not specify a date for your first transfer, we will treat your request as if
you had specified the effective date of your request. Your first transfer may
not be made until 30 days after your Contract Date, and if you specify an
earlier date, your first transfer will be delayed until one calendar month
after the date you specify. If you request dollar cost averaging on your
Application for your Contract and you fail to specify a date for your first
transfer, your first transfer will be made one period after your Contract Date
(that is, if you specify monthly transfers, the first transfer will occur 30
days after your Contract Date; quarterly transfers, 90 days after your Contract
Date; semi-annual transfers, 180 days after your Contract Date; and if you
specify annual transfers, the first transfer will occur on your Contract
Anniversary). If you stop dollar cost averaging, you must wait 30 days before
you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any one
Variable Investment Option or the Fixed Option as your source account. The
Account Value of your source account must be at least $10,000 for you to begin
dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semi-annual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, the first
transfer must be at least $250. Dollar cost averaging transfers are subject to
the same requirements and limitations as other transfers.
Finally, your request must specify the Investment Option(s) you wish to
transfer amounts to (your "target account(s)"). If you select more than one
target account, your dollar cost averaging request must specify how transferred
amounts should be allocated among the target accounts. Your source account may
not also be a target account.
11
<PAGE>
Your dollar cost averaging transfers will continue until the earlier of (i)
your request to stop dollar cost averaging is effective, or, (ii) your source
Account Value is zero, or (iii) you annuitize. If, as a result of a dollar cost
averaging transfer, your source Account Value falls below any minimum Account
Value we may establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. You may not use dollar
cost averaging and the earnings sweep at the same time. We may change,
terminate or suspend the dollar cost averaging option at any time.
Portfolio Rebalancing
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Equity Index Subaccount, 40% in the Managed Bond Subaccount,
and 30% in the Growth LT Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of your Contract Value
allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Contract Value back to the percentages you specify.
You may choose to have rebalances made quarterly, semi-annually or annually
until your Annuity Date; portfolio rebalancing is not available after you
annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make
your request at any time prior to your Annuity Date and it will be effective
when we receive it in good form. If you stop portfolio rebalancing, you must
wait 30 days to begin again. You may specify a date for your first rebalance,
or we will treat your request as if you selected the request's effective date.
If you specify a date fewer than 30 days after your Contract Date, your first
rebalance will be delayed one month, and if you request rebalancing on your
Application but do not specify a date for the first rebalance, it will occur
one period after your Contract Date, as described above under Dollar Cost
Averaging. We may change, terminate or suspend the portfolio rebalancing
feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the Earnings attributable to a
specified Investment Option (the "sweep option") to one or more other
Investment Options (your "target option(s)"). If you elect to use the earnings
sweep, you may select either the Fixed Option or the Money Market Subaccount as
your sweep option. The Account Value of your sweep option will be required to
be at least $10,000 when you elect the earnings sweep. You may select one or
more Variable Investment Options (but not the Money Market Subaccount) as your
target option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semi-annually
or annually until you annuitize. At each earnings sweep, we will automatically
transfer your accumulated Earnings attributable to your sweep option for the
previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option Earnings
from the preceding month; if you select a semi-annual earnings sweep, we will
transfer the sweep option Earnings accumulated over the preceding six months.
Earnings sweep transfers are subject to the same requirements and limitations
as other transfers. For the purpose of determining Earnings, transfers,
withdrawals, and any applicable annual fees, transaction fees, and charges for
premium taxes and/or other taxes imposed on your sweep option will first be
attributed to that sweep option's earnings on a last in, first out basis, and
then to amounts allocated or transferred to that sweep option.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be effective
when we receive it in good form. If you stop the earnings sweep, you must wait
30 days to begin again. You may specify a date for your first sweep, or we will
treat your request as if you selected the request's effective date. If you
specify a date fewer than 30 days after your Contract Date, your first earnings
sweep will be delayed one month, and if you request the earnings sweep on your
Application but do not specify a
12
<PAGE>
date for the first sweep, it will occur one period after your Contract Date,
as described above under Dollar Cost Averaging.
If you are using the earnings sweep, you may also use portfolio rebalancing
only if you select the Fixed Option as your sweep option. You may not use the
earnings sweep and dollar cost averaging at the same time. We may change,
terminate or suspend the earnings sweep option at any time.
PRE-AUTHORIZED WITHDRAWALS
You may specify a dollar amount for your pre-authorized withdrawals, or you
may specify a percentage of your Contract Value or an Account Value. You may
direct us to make your pre-authorized withdrawals from one or more specific
Investment Options; if you do not give us these specific directions, amounts
will be deducted proportionately from your Account Value in each Investment
Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps: You may make your request at any time and it
will be effective when we receive it in good form. If you stop the pre-
authorized withdrawals, you must wait 30 days to begin again. You may specify
a date for the first withdrawal, or we will treat your request as if you
selected the request's effective date. If you specify a date fewer than 30
days after your Contract Date, your first pre-authorized withdrawal will be
delayed one month, and if you request pre-authorized withdrawals on your
Application but do not specify a date for the first withdrawal, it will occur
one period after your Contract Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below any minimum Account Value we may establish, we have the
right, at our option, to transfer that remaining Account Value to your other
Investment Options on a proportionate basis relative to your most recent
allocation instructions. If your pre-authorized withdrawals cause your
Contract Value to fall below $1,000, we may, at our option, terminate your
Contract and send you the remaining withdrawal proceeds.
Each pre-authorized withdrawal is subject to any applicable charge for premium
taxes and/or other taxes, to federal income tax on its taxable portion, and,
if you have not reached age 59 1/2, a 10% tax penalty.
DEATH BENEFIT
Any death benefit payable will be calculated as of the date we receive proof
(in good form) of the Annuitant's death (or, if applicable, the Contract
Owner's death) and instructions regarding payment; any claim of a death
benefit must be made in writing and in a form satisfactory to us. A recipient
of death benefit proceeds may elect to have this benefit paid in one lump sum,
in periodic payments, in the form of a lifetime annuity or in some combination
of these. Annuity payments will begin within 30 days once we receive all
information necessary to process the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit will
be payable unless and until the last Annuitant dies prior to the Annuity Date
or a Contract Owner dies prior to the Annuity Date. If yours is a Qualified
Contract, your Contingent Annuitant or Contingent Owner must be your spouse.
Death of an Annuitant
If a Joint Annuitant who is not a Contract Owner dies prior to the Annuity
Date, the surviving Joint Annuitant becomes your Annuitant. If your Annuitant
is not a Contract Owner and dies, or if there is no surviving Joint Annuitant,
your surviving Contingent Annuitant becomes your Annuitant. If there is no
surviving Contingent Annuitant, the death benefit becomes payable.
Any death benefit payable on the death of your Annuitant is payable to the
surviving Beneficiary. If no Beneficiary survives, any death benefit is
payable to the Annuitant's estate.
13
<PAGE>
Death of a Contract Owner
If any Contract Owner dies prior to the Annuity Date while the Annuitant is
still living, a death benefit may be payable. If that Contract Owner was the
sole Annuitant or a Joint Annuitant under the Contract, the death benefit will
be payable to the surviving Beneficiary, or to that Annuitant's estate if no
Beneficiary survives. If that Contract Owner was not an Annuitant under the
Contract, the death benefit will be payable to the surviving Joint Owner of
your Contract, if there is one; if not, the death benefit will be payable to
the surviving Contingent Owner, if there is one; if not the death benefit will
be payable to the surviving Beneficiary, or to the Annuitant or the
Annuitant's estate if no Beneficiary survives. If the Joint or Contingent
Owner is the deceased Contract Owner's surviving spouse, he or she may elect
to become the Contract Owner and continue the Contract rather than receive the
death benefit proceeds.
JOINT ANNUITANTS ON QUALIFIED CONTRACTS
If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") and
you change your marital status after your Contract Date, you may be permitted
to add a Joint Annuitant on your Annuity Date and to change your Joint
Annuitant. Generally speaking, you may be permitted to add a new spouse as a
Joint Annuitant, and you may be permitted to remove a Joint Annuitant who is
no longer your spouse. You may call Pacific Mutual for more information.
1035 EXCHANGES
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which
is available by calling 1-800-722-2333, and mail the form along with the
annuity contract you are exchanging (plus your completed application if you
are making an initial Purchase Payment) to us.
In general terms, Section 1035 of the Internal Revenue Code of 1986, as
amended (the "Code"), provides that you recognize no gain or loss when you
exchange one annuity contract solely for another annuity contract. However,
transactions under Section 1035 may be subject to special rules and may
require special procedures and recordkeeping, particularly if the exchanged
annuity contract was issued prior to August 14, 1982. You should consult your
tax adviser prior to effecting a 1035 Exchange.
SAFEKEEPING OF ASSETS
Pacific Mutual is responsible for the safekeeping of the assets of the
Separate Account. These assets are held separate and apart from the assets of
Pacific Mutual's general account and its other separate accounts.
PARTICIPATING
The Contract is participating and will share in the surplus earnings of
Pacific Mutual. However, 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 Contract Value. If no election is made by the
Contract Owner, the dividend will be added to the Contract Value. Pacific
Mutual will allocate any dividend to Contract Value in accordance with the
Owner's most recent allocation instructions, unless instructed. The Owner
should consult with his or her tax adviser before making an election.
FINANCIAL STATEMENTS
Separate Account A has not yet commenced operations and therefore no financial
statements are included. Pacific Mutual's audited financial statements as of
and for the years ended December 31, 1994 and 1993, and unaudited financial
statements as of June 30, 1995 and for the six months ended June 30, 1995 and
1994, are set forth below. These financial statements should be considered
only as bearing on the ability of Pacific Mutual to meet its obligations under
the Contracts and not as bearing on the investment performance of the assets
held in the Separate Account.
The financial statements of Pacific Mutual as of and for the years ended
December 31, 1994 and 1993 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein.
14
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
UNAUDITED FINANCIAL STATEMENTS
AS OF JUNE 30, 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
15
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Bonds............................................................ $ 6,990,684
Preferred stocks................................................. 142,982
Common stocks.................................................... 65,722
Unconsolidated subsidiaries...................................... 194,761
Mortgage loans................................................... 1,395,877
Real estate...................................................... 163,570
Home office properties........................................... 50,864
Policy loans..................................................... 2,352,930
Cash and short-term investments.................................. 365,449
Investment income due and accrued................................ 144,609
Premiums due and uncollected, and other assets................... 179,920
Separate account assets.......................................... 4,305,992
-----------
Total Assets................................................. $16,353,360
===========
LIABILITIES AND SURPLUS
Liabilities
Policy reserves................................................ $ 6,785,662
Deposit funds.................................................. 3,536,023
Other liabilities.............................................. 870,316
Asset valuation reserve........................................ 193,145
Separate account liabilities................................... 4,305,992
-----------
Total liabilities................................................ 15,691,138
Surplus.......................................................... 662,222
-----------
Total Liabilities and Surplus................................ $16,353,360
===========
</TABLE>
See Note to Financial Statements
16
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit funds..... $1,469,814 $1,024,357
Net investment income.................................. 466,763 432,035
Other income........................................... 16,139 11,906
---------- ----------
Total Revenues........................................ 1,952,716 1,468,298
---------- ----------
BENEFITS AND EXPENSES
Current and future policy benefits..................... 1,733,018 1,272,148
Operating expenses..................................... 120,853 112,481
Premium and other taxes (excluding tax on capital
gains)................................................ 15,077 15,024
Dividends to policyowners.............................. 9,363 8,889
---------- ----------
Total Benefits and Expenses........................... 1,878,311 1,408,542
---------- ----------
Income before Federal income taxes...................... 74,405 59,756
Federal income taxes.................................... 45,127 17,003
---------- ----------
Net gain from operations................................ 29,278 42,753
Net realized capital gains.............................. 2,148 6,537
---------- ----------
NET INCOME.............................................. $ 31,426 $ 49,290
========== ==========
SURPLUS
Net income.............................................. $ 31,426 $ 49,290
Other surplus transactions, net......................... 3,172 (36,697)
---------- ----------
Increase in surplus..................................... 34,598 12,593
Surplus, beginning of period............................ 627,624 582,776
---------- ----------
SURPLUS, END OF PERIOD.................................. $ 662,222 $ 595,369
========== ==========
</TABLE>
See Note to Financial Statements
17
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Receipts
Premiums, annuity considerations and deposit funds. $ 1,456,159 $ 786,063
Net investment income.............................. 390,390 343,799
Allowances and reserve adjustments on reinsurance
ceded............................................. 28,352 254,737
Payments
Policy benefit payments............................ (791,899) (579,351)
Net policy loans................................... (40,440) (129,324)
Operating expenses................................. (129,968) (82,273)
Net transfer to separate accounts.................. (476,532) (167,744)
Premium and other taxes............................ (24,477) (21,394)
Dividends to policyowners.......................... (9,545) (9,338)
Federal income tax................................. (14,230) (22,736)
Other applications, net.............................. (23,467) (23,090)
----------- -----------
NET CASH FLOW FROM OPERATIONS........................ 364,343 349,349
----------- -----------
CASH FLOW FROM INVESTMENTS
Proceeds
Bonds.............................................. 1,080,201 1,671,810
Stocks............................................. 74,947 69,734
Mortgage loans..................................... 129,865 215,735
Real estate........................................ 3,412 2,385
Other investments.................................. 59,310 12,450
Payments for the purchase of
Bonds.............................................. (1,363,710) (2,017,337)
Stocks............................................. (87,817) (67,970)
Mortgage loans..................................... (115,727) (112,223)
Real estate........................................ (1,422) (3,691)
Other investments.................................. (33,979) (70,872)
----------- -----------
NET CASH FLOW USED FOR INVESTMENTS................... (254,920) (299,979)
----------- -----------
CASH FLOW FROM BORROWINGS............................ 158,281 0
----------- -----------
Increase in cash and short-term investments.......... 267,704 49,370
Cash and short-term investments, beginning of period. 97,745 342,401
----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD....... $ 365,449 $ 391,771
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...................................... $ 7,651 $ 13,782
=========== ===========
</TABLE>
See Note to Financial Statements
18
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
NOTE TO FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The information set forth in the statement of financial position as of June
30, 1995 and the statements of operations and surplus and of cash flow for the
six months ended June 30, 1995 and June 30, 1994 is unaudited. The information
reflects all adjustments, consisting only of normal recurring adjustments,
that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of Pacific Mutual Life Insurance
Company ("Pacific Mutual") for the periods indicated. Results of operations for
the interim periods are not necessarily indicative of the results of operations
for the full year. For further information, refer to the financial statements
and footnotes thereto included in Pacific Mutual's audited financial statements
for the years ended December 31, 1994 and December 31, 1993.
In April 1993, the Financial Accounting Standards Boards ("FASB") issued
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation"). The Interpretation was amended by Statement of Financial
Accounting Standards No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises for Certain Long-Duration Participating Contracts,"
("SFAS No. 120") which was issued in January 1995, to further clarify the
accounting for mutual life insurance companies and to defer the effective date
of general provisions of the Interpretation to fiscal years beginning after
December 15, 1995. SFAS No. 120 did not change the disclosure of other
transition provisions of the Interpretation. The Interpretation does not
preclude mutual life insurance enterprises from issuing financial statements
prepared under statutory accounting practices but concludes that those
financial statements should not be described as being prepared in conformity
with generally accepted accounting principles ("GAAP"). Upon the effective date
of the Interpretation, in order for their financial statements to be described
as being prepared in accordance with GAAP, mutual life insurance companies and
their subsidiaries will be required to adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may elect
to issue. Pacific Mutual has not quantified the effects of the application of
the Interpretation on its financial statements since the company has not yet
determined whether for general purposes it will continue to issue statutory
financial statements or statements adopting all applicable authoritative GAAP
pronouncements.
19
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
AUDITED FINANCIAL STATEMENTS AS OF
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
20
<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, 1994 and 1993, 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, 1994 and 1993 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 21, 1995
21
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1994 1993
- ------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Bonds $ 6,669,853 $ 5,899,646
Preferred stocks 132,604 143,016
Common stocks 57,874 71,086
Unconsolidated subsidiaries 196,401 141,611
Mortgage loans 1,421,182 1,611,400
Real estate 157,507 134,257
Home office properties 51,419 52,115
Policy loans 2,312,455 1,960,162
Cash and short-term investments 97,745 342,401
Investment income due and accrued 125,534 125,783
Premiums due and uncollected, and other assets 245,243 143,669
Separate account assets 3,260,374 2,720,997
- ------------------------------------------------------------------------
TOTAL ASSETS $14,728,191 $13,346,143
- ------------------------------------------------------------------------
LIABILITIES AND SURPLUS
Liabilities
Policy reserves $ 6,476,634 $ 5,807,708
Deposit funds 3,298,915 3,485,440
Other liabilities 885,638 583,989
Asset valuation reserve 179,006 165,251
Separate account liabilities 3,260,374 2,720,979
- ------------------------------------------------------------------------
Total Liabilities 14,100,567 12,763,367
Surplus 627,624 582,776
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND SURPLUS $14,728,191 $13,346,143
- ------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
22
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF OPERATIONS AND SURPLUS
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
REVENUES
Premiums, annuity considerations and deposit
funds $ 2,180,409 $ 2,325,160
Net investment income 879,116 879,931
Other income 5,073 4,959
- -------------------------------------------------------------------------------
TOTAL REVENUES 3,064,598 3,210,050
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future policy benefits 2,686,406 2,818,344
Operating expenses 222,203 218,387
Premium and other taxes (excluding tax on capital
gains) 28,715 26,057
Dividends to policyowners 17,162 17,609
- -------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,954,486 3,080,397
- -------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 110,112 129,653
Federal income taxes 41,510 22,367
- -------------------------------------------------------------------------------
NET GAIN FROM OPERATIONS 68,602 107,286
NET REALIZED CAPITAL GAINS 12,424 11,226
- -------------------------------------------------------------------------------
NET INCOME $ 81,026 $ 118,512
- -------------------------------------------------------------------------------
SURPLUS
Net income $ 81,026 $ 118,512
Contribution certificates 149,589
Other surplus transactions, net (36,178) (57,012)
- -------------------------------------------------------------------------------
Increase in surplus 44,848 211,089
Surplus, beginning of year 582,776 371,687
- -------------------------------------------------------------------------------
SURPLUS, END OF YEAR $ 627,624 $ 582,776
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
23
<PAGE>
Pacific Mutual Life Insurance Company
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Receipts
Premiums, annuity considerations and deposit funds $ 1,687,583 $ 2,065,646
Net investment income 809,791 839,682
Allowances and reserve adjustments on reinsurance
ceded 491,363 230,995
Other 23,862 9,965
Payments
Policy benefit payments (1,408,650) (1,530,086)
Net policy loans (352,358) (436,216)
Operating expenses (247,437) (204,768)
Net transfer to separate accounts (594,284) (922,130)
Premium and other taxes (34,795) (24,785)
Dividends to policyowners (17,319) (17,641)
Federal income tax (23,995) (87,162)
- ------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATIONS 333,761 (76,500)
- ------------------------------------------------------------------------------
CASH FLOW FROM INVESTMENTS
Proceeds
Bonds 2,937,210 2,696,822
Stocks 139,785 346,072
Mortgage loans 390,642 408,238
Real estate 20,163 90,389
Other investments 47,132 94,874
Payments for the purchase of
Bonds (3,673,859) (3,174,986)
Stocks (126,823) (278,932)
Mortgage loans (230,859) (131,841)
Real estate (17,466) (7,087)
Other investments (114,106) (37,844)
- ------------------------------------------------------------------------------
NET CASH FLOW FROM INVESTMENTS (628,181) 5,705
- ------------------------------------------------------------------------------
CASH FLOW FROM BORROWINGS 49,764
- ------------------------------------------------------------------------------
CASH FLOW FROM CONTRIBUTION CERTIFICATES 149,589
- ------------------------------------------------------------------------------
Increase (decrease) in cash and short-term invest-
ments (244,656) 78,794
Cash and short-term investments, beginning of year 342,401 263,607
- ------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 97,745 $ 342,401
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 22,120 $ 8,054
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
24
<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. Its core business consists of life insurance, annuity and pension
products. In addition, Pacific Mutual provides other insurance, employee
benefits and investment management and advisory services through its
subsidiaries.
BASIS OF PRESENTATION
Pacific Mutual's financial statements are based on accounting practices
prescribed or permitted by the Insurance Department of the State of
California, which are currently considered generally accepted accounting
principles 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.
In April 1993, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation"). The Interpretation was amended by Statement of Financial
Accounting Standards No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises for Certain Long-Duration Participating Contracts,"
("SFAS No. 120") which was issued in January 1995, to further clarify the
accounting for mutual life insurance companies and to defer the effective
date of the general provisions of the Interpretation to fiscal years
beginning after December 15, 1995. SFAS No. 120 did not change the
disclosure of other transition provisions of the Interpretation. The
Interpretation does not preclude mutual life insurance enterprises from
issuing financial statements prepared under statutory accounting practices
but concludes that those financial statements should not be described as
being prepared in conformity with generally accepted accounting principles
("GAAP"). Upon the effective date of the Interpretation, in order for their
financial statements to be described as being prepared in accordance with
GAAP, mutual life insurance companies and their subsidiaries will be
required to adopt all applicable authoritative GAAP pronouncements in any
general purpose financial statements that they may elect to issue. Pacific
Mutual has not quantified the effects of the application of the
Interpretation on its financial statements since the company has not yet
determined whether for general purposes it will continue to issue statutory
financial statements or statements adopting all applicable authoritative
GAAP pronouncements.
CHANGE IN ACCOUNTING POLICIES
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of its postretirement health care and life insurance plans as
prescribed by the Insurance Department of the State of California. This
change is more fully described in Note 10.
INVESTMENTS
Investments in bonds are carried at amortized cost. Preferred stocks are
principally stated at amortized cost. Common stocks are carried at market
value. Investments in unconsolidated subsidiaries are reported on the
equity method of accounting, except for 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.
25
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and these capital gains and losses
are amortized into investment income over the remaining life of the
investment sold. The IMR was $13.1 million and $22.4 million as of December
31, 1994 and 1993, respectively.
Net realized capital gains and losses are determined on the specific
identification method and are presented net of federal capital gains tax of
$2.2 million and $16.9 million and transfers to the IMR of $(.4) million
and $22.4 million for the years ended December 31, 1994 and 1993,
respectively.
Derivatives which qualify for hedge accounting are valued consistently with
the hedged items. Realized 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 through income when realized.
On November 15, 1994, Pacific Financial Asset Management Corporation, a
wholly-owned, second-tier 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. Substantially all operations of these entities and net assets of $20.9
million were contributed in exchange for approximately 42% of the newly
issued partnership units.
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, 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.
26
<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
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. The difference between the effective tax rate and the statutory
tax rate of 35% for 1994 and 1993 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 for 1994.
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 values 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1994
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, Pacific
Corinthian Life Insurance Company ("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 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.
27
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
2. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
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 Pacific Financial Holding Company,
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
Statement ----------------- Estimated
Value Gains Losses Fair Value
---------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
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 2,480,307 28,911 81,147 2,428,071
Redeemable preferred stock 81,026 343 5,031 76,338
------------------------------------------
Total $6,870,603 $140,000 $300,312 $6,710,291
------------------------------------------
December 31, 1993:
U.S. Treasury securities and
obligations of U.S.
government authorities and
agencies $ 482,104 $ 10,227 $ 6,788 $ 485,543
Obligations of states,
political subdivisions and
foreign governments 194,819 16,520 296 211,043
Corporate securities 3,328,988 338,039 6,114 3,660,913
Mortgage-backed securities 2,248,574 120,947 10,875 2,358,646
Redeemable preferred stock 88,456 3,314 359 91,411
------------------------------------------
Total $6,342,941 $489,047 $ 24,432 $6,807,556
------------------------------------------
</TABLE>
28
<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, 1994 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 $ 429,348 $ 414,074
Due after one year through five years 1,349,078 1,343,824
Due after five years through ten years 1,340,882 1,299,969
Due after ten years 1,270,988 1,224,353
------------------------
4,390,296 4,282,220
Mortgage-backed securities 2,480,307 2,428,071
------------------------
Total $6,870,603 $6,710,291
------------------------
</TABLE>
Proceeds from sales of investments in debt securities were $1.5 billion and
$1.2 billion for the years ended December 31, 1994 and 1993, respectively.
In 1994 and 1993, gross gains of $30 million and $53 million and gross
losses of $43 million and $2 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, 1994 December 31, 1993
Statement Estimated Statement Estimated
Value Fair Value Value Fair Value
----------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Debt securities (See note
3) $6,870,603 $6,710,291 $6,342,941 $6,807,556
Preferred and common
stocks 109,458 116,993 125,646 143,090
Mortgage loans 1,421,182 1,452,596 1,611,400 1,692,700
Policy loans 2,312,455 2,312,455 1,960,162 1,960,162
Derivative financial
instruments:
Interest rate swaps 121 (24,809) 25,641
Other 2,672 (2,822) 10,116 47,118
Liabilities:
Guaranteed interest
contracts 2,635,356 2,614,961 2,586,538 2,669,666
Deposit liabilities 871,548 833,274 929,748 977,285
Other derivative
financial instruments 2,270 2,128 440
Contribution certificates 149,593 124,313 149,589 153,480
</TABLE>
The following methods and assumptions were used to estimate the fair values
of these financial instruments as of December 31, 1994 and 1993:
PREFERRED AND COMMON STOCKS
The estimated fair values are based on quoted market prices or dealer
quotes.
29
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
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
values.
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 $749 million as of December 31, 1994, 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.
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 and interest rates. Pacific Mutual has also set aside a
corporate total return portfolio utilizing derivative financial
instruments. These instruments include interest rate and currency swaps,
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.
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, 1994, the notional amount of options held
and options written approximated $1.5 billion and $42 million,
respectively. Option contracts mature during fiscal years 1995 through
2000.
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
8.6% as of December 31, 1994, and from 1.9% to 12.2% as of December 31,
1993. Interest rate swap contracts mature during fiscal years 1996 through
2013. As of December 31, 1994 and 1993, interest rate swap contracts
outstanding with financial institutions had a total notional amount of $477
million and $770 million, respectively.
30
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS (CONTINUED)
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, 1994, the
notional amount of foreign currency exchange contracts approximated $35
million. Foreign currency exchange contracts expire during fiscal years
1995 through 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, 1994 and 1993, the notional amounts of futures contracts were
$163 million and $573 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.
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, 1994 and 1993, subsidiary assets, including PCL, were $4.5
billion and $4.4 billion, respectively, and liabilities were $4.2 billion
as of December 31, 1994 and 1993.
Revenue and net income, including PCL, were $1.1 billion and $75 million
for the year ended December 31, 1994, and $1.0 billion and $57 million for
the year ended December 31, 1993. Dividends from subsidiaries totaled $2
million and $24 million for the years ended December 31, 1994 and 1993,
respectively. All earnings of the 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
commercial paper borrowings outstanding as of December 31, 1993.
In addition, Pacific Mutual had available lines of credit totaling
approximately $250 million and $300 million as of December 31, 1994 and
1993, respectively. There were no borrowings outstanding as of December 31,
1994 and 1993.
31
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
8. CONTRIBUTION CERTIFICATES
On December 30, 1993, Pacific Mutual issued $150 million of Contribution
Certificates (the "Certificates"), also referred to as Surplus Notes, at
an interest rate of 7.9% maturing on December 30, 2023. Interest is
payable semiannually. 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.
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, 1994 and 1993, individual life and
annuity premiums assumed were $20 million and $22 million and premiums
ceded were $363 million and $292 million, respectively. Amounts
recoverable from reinsurers for individual life and annuities include
reinsured and paid claims of $13 million and $21 million as of December
31, 1994 and 1993, respectively. Policy benefits payable are net of
reinsurance on unpaid claims of $(4) million and $0 at December 31, 1994
and 1993, respectively.
Pacific Mutual also reinsures substantially all of its group life and
health business with a subsidiary insurance company. Premiums of $90
million and $122 million, and benefits of $70 million and $80 million were
ceded during the years ended December 31, 1994 and 1993, respectively.
Amounts payable to the subsidiary under this agreement were $8 million and
$4 million as of December 31, 1994 and 1993, 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. No contributions were made during 1994 or 1993
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 (March 31 of each year) are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ----------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefits:
Vested $ 88,122 $ 83,060
Nonvested 1,115 572
---------------------
Total $ 89,237 $ 83,632
---------------------
Net assets available for benefits $111,089 $109,194
---------------------
</TABLE>
The above present values were determined using an assumed discount rate of
8.5% in 1994 and 1993.
32
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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 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,
1994 and 1993 was $1.7 million for both years.
During 1993, Pacific Mutual implemented the accrual method of accounting
for the costs of The Plans as prescribed by the Insurance Department of
the State of California, and elected to amortize its transition obligation
of $26.7 million over twenty years.
Components of net periodic postretirement benefit cost as follows (In
Thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1993
--------------------------
<S> <C> <C>
Service cost $ 186 $ 89
Interest cost 1,790 1,907
Amortization (260) (260)
--------------------------
1,716 1,736
Recognized transition obligation--net 1,337 1,336
--------------------------
Net periodic postretirement benefit cost $ 3,053 $ 3,072
--------------------------
</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>
1994 1993
------------------
<S> <C> <C>
Accumulated
postretirement
obligation:
Retirees $20,580 $ 22,844
Fully eligible active
plan participants 1,346 1,044
Other active plan
participants 2,455 1,972
------------------
24,381 25,860
Fair value of plan
assets 0 0
------------------
Unfunded accumulated
postretirement
obligation 24,381 25,860
Unrecognized net
gain/(loss) 942 (1,060)
Prior service cost 1,849 2,109
Unrecognized transition
obligation--net (24,056) (25,393)
------------------
Accrued postretirement
benefit liability $ 3,116 $ 1,516
------------------
</TABLE>
33
<PAGE>
Pacific Mutual Life Insurance Company
NOTES TO FINANCIAL STATEMENTS
10. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 11% for 1994 and 12% for 1993, and is assumed to
decrease gradually to 6% in 2005 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 rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December
31, 1994 and 1993 would be increased by 11.2% and 8.8%, 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 13.6% and 8.6%, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.0% and 7.5% for 1994 and 1993, 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>
1995 $55,152
1996-1999 23,588
2000 and thereafter 20,669
----------
Total $99,409
----------
</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.
34
