<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).
30
<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.
31
<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>
PACIFIC SELECT FUND
700 NEWPORT CENTER
DRIVE
NEWPORT BEACH, CA 92660
LOGO
Pacific Select Fund (the "Fund") is a mutual fund that currently offers
eleven separate portfolios (each a "Portfolio"). The Portfolios serve as the
investment medium for variable life insurance policies and variable annuity
contracts (the "Variable Contracts") issued or administered by Pacific Mutual
Life Insurance Company ("Pacific Mutual") or Pacific Corinthian Life Insurance
Company ("Pacific Corinthian"). You can instruct Pacific Mutual or Pacific
Corinthian to allocate cash value under your Variable Contract to investment
options funded by an account known as a "Separate Account," which invests in
the Portfolios. Your allocation rights are described in the accompanying
Prospectus for the Separate Account.
The eleven Portfolios of the Fund are as follows:
The Money Market Portfolio* The Multi-Strategy
The High Yield Bond Portfolio
Portfolio
The Managed Bond Portfolio The Equity Portfolio**
The Government Securities
Portfolio The Bond and Income
Portfolio**
The Growth LT Portfolio The Equity Index Portfolio
The Equity Income The International
Portfolio Portfolio
This Prospectus contains information about the investment objective and
policies of each Portfolio and related information. You should carefully
consider a Portfolio's investment objective and policies and potential risks
before investing.
THE FUND'S SHARES INVOLVE INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL, AND
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE
FUND'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional
Information, dated May 1, 1995 containing additional and more detailed
information about the Fund has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Statement of Additional Information is available without charge and may be
obtained by writing to the Fund at the address printed above or calling the
Fund at (800) 800-7681.
- --------
* Investment in the Money Market Portfolio (or in any other Portfolio) is
neither insured nor guaranteed by the U.S. Government.
** The Equity Portfolio and Bond and Income Portfolio are not available for
variable life insurance policies.
----------------
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF THE
SEPARATE ACCOUNT, WHICH ACCOMPANIES THIS PROSPECTUS. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND'S PORTFOLIOS AT A GLANCE.......................................... 1
CONDENSED FINANCIAL INFORMATION............................................ 1
THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES......................... 4
General.................................................................. 4
Money Market Portfolio................................................... 4
High Yield Bond Portfolio................................................ 5
Managed Bond Portfolio................................................... 6
Government Securities Portfolio.......................................... 7
Growth LT Portfolio...................................................... 8
Equity Income Portfolio.................................................. 9
Multi-Strategy Portfolio................................................. 10
Equity Portfolio......................................................... 11
Bond and Income Portfolio................................................ 11
Equity Index Portfolio................................................... 12
International Portfolio.................................................. 13
All Portfolios: Diversification and Changes in Policies.................. 14
SECURITIES AND INVESTMENT TECHNIQUES....................................... 15
Mortgage-Related Securities.............................................. 15
High Yield Bonds......................................................... 16
Small Capitalization Stocks.............................................. 17
Borrowing................................................................ 17
Illiquid and Restricted Securities....................................... 17
Precious Metals-Related Securities....................................... 17
Foreign Securities....................................................... 18
Forward Foreign Currency Contracts....................................... 19
Options.................................................................. 20
Foreign Currency Options................................................. 20
Spread Transactions...................................................... 20
Futures Contracts and Futures Options.................................... 21
ORGANIZATION AND MANAGEMENT OF THE FUND.................................... 22
MORE ON THE FUND'S SHARES.................................................. 27
OTHER INFORMATION ABOUT THE FUND........................................... 29
TOTAL RETURN............................................................... 30
APPENDIX................................................................... 31
Description of Bond Ratings.............................................. 31
</TABLE>
<PAGE>
THE FUND'S PORTFOLIOS AT A GLANCE
A summary of the highlights of Pacific Select Fund's Portfolios appears
below. THIS CHART IS ONLY A SUMMARY. YOU SHOULD ALSO READ THE COMPLETE
DESCRIPTIONS OF EACH PORTFOLIO'S INVESTMENT OBJECTIVES AND POLICIES, WHICH
BEGINS ON PAGE 4, AND RELATED INFORMATION.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS INVESTMENT ADVISER/
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Mutual
with preservation of capital market instruments
- -----------------------------------------------------------------------------------------------------------
High Yield Bond High level of current income Intermediate and long- Pacific Mutual
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
- -----------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Mutual/
consistent with prudent marketable debt Pacific Investment
investment management securities. Will Management Company
normally maintain an
average portfolio
duration of 3-6 years.
- -----------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Mutual/
Securities consistent with prudent securities including Pacific Investment
investment management futures and options Management Company
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-6 years.
- -----------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock Pacific Mutual/
consistent with the Janus Capital Corporation
preservation of capital
- -----------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common Pacific Mutual/
and income stock J.P. Morgan Investment
Management Inc.
- -----------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income Pacific Mutual/
securities J.P. Morgan Investment
Management Inc.
- -----------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Pacific Mutual/Greenwich
securities convertible Street Advisors Division of
into or exchangeable for Smith Barney Mutual Funds
common stocks Management Inc.
- -----------------------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Pacific Mutual/Greenwich
Income income consistent with securities Street Advisors Division of
prudent investment Smith Barney Mutual Funds
management and Management Inc.
preservation of capital
- -----------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Pacific Mutual/Bankers Trust
that correspond to the total S&P 500 Company
return performance of
common stocks publicly traded
in the U.S.
- -----------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Pacific Mutual/Templeton
appreciation corporations domiciled Investment Counsel, Inc.
outside the United
States
</TABLE>
CONDENSED FINANCIAL INFORMATION
The following tables present condensed financial information about each
Portfolio of the Fund. The tables present historical information based upon a
single share outstanding through each fiscal year. The information in the
tables for the years 1990 through 1994 is included and can be read in
conjunction with the Fund's financial statements, which are in the Fund's
Annual Report dated as of December 31, 1994. These financial statements have
been audited by Deloitte & Touche LLP, independent public accountants, except
for information with respect to the Equity Portfolio and Bond and Income
Portfolio for years prior to 1994, which was audited by other independent
public accountants. The Annual Report, which is available without charge,
contains more information about the Fund's performance.
1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------------------- ----------------------------------------
Net
Net Asset Realized and Dividends
Year Value, Net Unrealized Total from (from Net Distributions
Ended Beginning Investment Gain (Loss) Investment Investment (from Total
12/31 of Period Income on Securities Operations Income) Capital Gains) Distribution
- ----- --------- ---------- ------------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO
1994 $ 9.99 $0.33 $ 0.04 $ 0.37 $0.33 $0.00 $0.33
1993 9.96 0.23 0.03 0.26 0.23 0.00 0.23
1992 9.94 0.29 0.02 0.31 0.29 0.00 0.29
1991 9.94 0.56 0.00 0.56 0.56 0.00 0.56
1990 9.82 0.79 (0.03) 0.76 0.64 0.00 0.64
1989 9.81 0.82 0.01 0.83 0.82 0.00 0.82
1988(1) 10.00 0.58 (0.01) 0.57 0.76 0.00 0.76
- ---------------------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
1994 $ 9.67 $0.73 $(0.70) $ 0.03 $0.73 $0.06 $0.79
1993 9.24 0.86 0.77 1.63 0.86 0.34 1.20
1992 8.54 0.87 0.69 1.56 0.86 0.00 0.86
1991 7.84 0.91 0.95 1.86 0.91 0.25 1.16
1990 8.90 1.04 (1.01) 0.03 1.04 0.05 1.09
1989 9.72 1.20 (0.79) 0.41 1.23 0.00 1.23
1988(1) 10.00 1.07 (0.26) 0.81 0.99 0.10 1.09
- ---------------------------------------------------------------------------------------------------
MANAGED BOND PORTFOLIO
1994 $10.89 $0.50 $(0.98) $(0.48) $0.50 $0.01 $0.51
1993 10.62 0.52 0.70 1.22 0.52 0.43 0.95
1992 10.79 0.68 0.23 0.91 0.67 0.41 1.08
1991 10.35 0.82 0.88 1.70 0.82 0.44 1.26
1990 10.43 0.85 (0.01) 0.84 0.85 0.07 0.92
1989 9.99 0.86 0.56 1.42 0.86 0.12 0.98
1988(1) 10.00 0.68 0.03 0.71 0.62 0.10 0.72
- ---------------------------------------------------------------------------------------------------
GOVERNMENT SECURITIES PORTFOLIO
1994 $10.64 $0.44 $(0.99) $(0.55) $0.44 $0.01 $0.45
1993 10.48 0.34 0.78 1.12 0.34 0.62 0.96
1992 10.55 0.51 0.27 0.78 0.51 0.34 0.85
1991 10.07 0.69 0.93 1.62 0.71 0.43 1.14
1990 10.22 0.79 (0.02) 0.77 0.78 0.14 0.92
1989 9.82 0.84 0.56 1.40 0.84 0.16 1.00
1988(1) 10.00 0.65 0.01 0.66 0.65 0.19 0.84
- ---------------------------------------------------------------------------------------------------
GROWTH LT PORTFOLIO
1994(3) $10.00 $0.10 $ 1.21 $ 1.31 $0.12 $0.08 $0.20
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------
Ratio
of Net
Net Asset Net Assets, Ratio of Investment
Year Value, End of Expenses Income to Portfolio
Ended End of Total Period to Average Average Turnover
12/31 Period Return(7) (in thousands) Net Assets Net Assets Rate
- ----- --------- --------- -------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO
1994 $10.03 3.76% $94,150 0.64% 3.94% N/A
1993 9.99 2.58% 33,910 0.65% 2.56% N/A
1992 9.96 3.22% 23,905 0.65% 3.13% N/A
1991 9.94 5.74% 14,502 0.65% 5.53% N/A
1990 9.94 7.92% 15,401 0.65% 7.57% N/A
1989 9.82 8.73% 4,252 1.00% 8.38% N/A
1988(1) 9.81 5.85% 3,913 1.65%* 6.04%* N/A
- ---------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
1994 $ 8.91 0.42% $25,338 0.88% 8.13% 141.86%
1993 9.67 18.01% 16,017 0.75% 8.37% 185.83%
1992 9.24 18.72% 14,152 0.75% 9.46% 186.23%
1991 8.54 24.58% 10,356 0.75% 10.77% 149.20%
1990 7.84 0.38% 8,288 0.75% 12.02% 69.59%
1989 8.90 4.16% 8,208 0.95% 12.48% 121.76%
1988(1) 9.72 8.30% 7,871 1.65%* 10.63%* 69.14%
- ---------------------------------------------------------------------------------------
MANAGED BOND PORTFOLIO
1994 $ 9.90 (4.36)% $53,219 0.84% 5.04% 127.95%
1993 10.89 11.63% 43,116 0.75% 4.74% 163.11%
1992 10.62 8.68% 26,406 0.75% 6.39% 89.55%
1991 10.79 17.03% 16,645 0.75% 7.74% 80.96%
1990 10.35 8.52% 12,412 0.75% 8.32% 68.79%
1989 10.43 14.74% 11,371 0.91% 8.36% 115.89%
1988(1) 9.99 7.11% 9,031 1.69%* 6.76%* 209.49%
- ---------------------------------------------------------------------------------------
GOVERNMENT SECURITIES PORTFOLIO
1994 $ 9.64 (5.10)% $21,489 0.88% 4.29% 232.99%
1993 10.64 10.79% 23,584 0.75% 3.15% 402.37%
1992 10.48 7.52% 17,701 0.75% 4.95% 212.31%
1991 10.55 16.67% 10,841 0.75% 6.90% 110.74%
1990 10.07 8.01% 7,469 0.75% 7.87% 45.99%
1989 10.22 14.61% 6,428 0.98% 8.22% 151.10%
1988(1) 9.82 6.65% 5,523 1.77%* 6.42%* 284.30%
- ---------------------------------------------------------------------------------------
GROWTH LT PORTFOLIO
1994(3) $11.11 13.25% $49,374 1.08%* 1.32%* 257.20%
- ---------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
2
<PAGE>
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------------------- -----------------------------------------------------------------
Net
Net Asset Realized and Dividends In excess
Year Value, Net Unrealized Total from (from Net of Net Distributions
Ended Beginning Investment Gain (Loss) Investment Investment Investment (from Return Total
12/31 of Period Income on Securities Operations Income) Income Capital Gains) of Capital Distribution
- ----- --------- ---------- ------------- ---------- ---------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO(2)(5)
1994 $15.52 $0.20 $(0.25) $(0.05) $0.20 $0.00 $1.22 $0.00 $1.42
1993 15.11 0.26 0.98 1.24 0.26 0.00 0.57 0.00 0.83
1992 14.74 0.19 0.59 0.78 0.19 0.00 0.22 0.00 0.41
1991 11.64 0.32 3.28 3.60 0.32 0.00 0.18 0.00 0.50
1990 13.11 0.32 (1.30) (0.98) 0.32 0.00 0.17 0.00 0.49
1989 10.68 0.17 2.94 3.11 0.30 0.00 0.38 0.00 0.68
1988(1) 10.00 0.12 0.70 0.82 0.12 0.00 0.02 0.00 0.14
- ----------------------------------------------------------------------------------------------------------------------------
MULTI-STRATEGY PORTFOLIO(2)(5)
1994 $12.66 $0.32 $(0.51) $(0.19) $0.32 $0.00 $0.42 $0.00 $0.74
1993 12.18 0.35 0.77 1.12 0.35 0.00 0.29 0.00 0.64
1992 11.99 0.37 0.27 0.64 0.37 0.00 0.08 0.00 0.45
1991 10.14 0.46 1.93 2.39 0.45 0.00 0.09 0.00 0.54
1990 10.84 0.51 (0.66) (0.15) 0.48 0.00 0.07 0.00 0.55
1989 10.35 0.57 1.82 2.39 0.59 0.00 1.31 0.00 1.90
1988(1) 10.00 0.34 0.34 0.68 0.32 0.00 0.01 0.00 0.33
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)
1994 $14.94 $0.32 $(0.74) $(0.42) $0.32 $0.00 $0.00 $0.00 $0.32
1993 14.39 0.22 1.90 2.12 0.22 0.00 0.81 0.54 1.57
1992 14.83 0.19 0.49 0.68 0.19 0.00 0.93 0.00 1.12
1991 11.71 0.33 3.12 3.45 0.33 0.00 0.00 0.00 0.33
1990 12.59 0.56 (0.88) (0.32) 0.56 0.00 0.00 0.00 0.56
1989 10.37 0.82 2.23 3.05 0.83 0.00 0.00 0.00 0.83
1988 10.23 0.56 0.14 0.70 0.56 0.00 0.00 0.00 0.56
1987 14.17 0.36 0.12 0.48 0.38 0.00 4.04 0.00 4.42
1986 12.98 0.38 2.15 2.53 0.40 0.00 0.94 0.00 1.34
1985 10.65 0.34 2.71 3.05 0.39 0.00 0.33 0.00 0.72
- ----------------------------------------------------------------------------------------------------------------------------
BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)
1994 $13.05 $0.83 $(1.87) $(1.04) $0.83 $0.00 $0.53 $0.23 $1.59
1993 11.70 0.87 1.35 2.22 0.86 0.01 0.00 0.00 0.87
1992 11.69 0.89 0.01 0.90 0.89 0.00 0.00 0.00 0.89
1991 10.27 0.93 1.42 2.35 0.93 0.00 0.00 0.00 0.93
1990 10.93 0.97 (0.66) 0.31 0.97 0.00 0.00 0.00 0.97
1989 10.40 1.00 0.69 1.69 1.00 0.00 0.16 0.00 1.16
1988 10.75 1.01 (0.35) 0.66 1.01 0.00 0.00 0.00 1.01
1987 13.03 1.03 (1.17) (0.14) 1.19 0.00 0.95 0.00 2.14
1986 11.81 1.12 1.36 2.48 0.97 0.00 0.29 0.00 1.26
1985 10.56 1.17 1.50 2.67 1.15 0.00 0.27 0.00 1.42
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO(2)
1994 $13.24 $0.30 $(0.18) $ 0.12 $0.30 $0.00 $0.04 $0.00 $0.34
1993 12.43 0.29 0.86 1.15 0.29 0.00 0.05 0.00 0.34
1992 11.98 0.29 0.53 0.82 0.29 0.00 0.08 0.00 0.37
1991(4) 10.00 0.30 2.16 2.46 0.30 0.00 0.18 0.00 0.48
- ----------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO(2)(6)
1994 $12.09 $0.07 $ 0.30 $ 0.37 $0.07 $0.00 $0.45 $0.00 $0.52
1993 9.38 0.09 2.73 2.82 0.09 0.02 0.00 0.00 0.11
1992 10.59 0.15 (1.19) (1.04) 0.17 0.00 0.00 0.00 0.17
1991 9.72 0.13 0.94 1.07 0.17 0.00 0.03 0.00 0.20
1990 12.44 0.16 (1.84) (1.68) 0.16 0.00 0.88 0.00 1.04
1989 11.29 0.02 2.30 2.32 0.06 0.00 1.11 0.00 1.17
1988(1) 10.00 0.09 1.66 1.75 0.06 0.00 0.40 0.00 0.46
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------
Ratio
of Net
Net Asset Net Assets, Ratio of Investment
Year Value, End of Expenses Income to Portfolio
Ended End of Total Period to Average Average Turnover
12/31 Period Return(7) (in thousands) Net Assets Net Assets Rate
- ----- --------- --------- -------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO(2)(5)
1994 $14.05 (0.28)% $ 75,083 0.94% 1.39% 134.57%
1993 15.52 8.29% 33,356 0.75% 1.74% 27.67%
1992 15.11 5.36% 22,021 0.75% 1.39% 18.52%
1991 14.74 31.42% 12,117 0.76% 2.49% 17.43%
1990 11.64 (7.54)% 5,974 0.75% 2.67% 17.63%
1989 13.11 29.22% 5,449 1.02% 2.52% 24.89%
1988(1) 10.68 8.25% 3,292 2.45%* 1.21%* 8.15%
- ---------------------------------------------------------------------------------------
MULTI-STRATEGY PORTFOLIO(2)(5)
1994 $11.73 (1.50)% $ 79,147 0.94% 2.78% 187.40%
1993 12.66 9.25% 41,448 0.75% 3.01% 27.87%
1992 12.18 5.57% 19,931 0.75% 3.36% 16.52%
1991 11.99 24.03% 10,454 0.75% 4.30% 11.24%
1990 10.14 (1.47)% 4,559 0.75% 4.77% 26.04%
1989 10.84 23.42% 3,120 1.10% 4.38% 19.67%
1988(1) 10.35 6.85% 4,111 2.20%* 3.33%* 22.30%
- ---------------------------------------------------------------------------------------
EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)
1994 $14.20 (2.87)% $ 73,125 0.96% 2.19% 178.63%
1993 14.94 16.06% 84,791 0.93% 1.52% 229.77%
1992 14.39 6.30% 81,902 0.93% 1.30% 242.37%
1991 14.83 29.77% 107,366 0.91% 2.52% 449.75%
1990 11.71 (2.55)% 178,191 0.86% 4.63% 541.61%
1989 12.59 30.12% 239,478 0.74% 7.01% 621.45%
1988 10.37 7.19% 233,020 0.69% 5.41% 402.26%
1987 10.23 2.18% 254,863 0.68% 2.58% 415.62%
1986 14.17 20.92% 222,945 0.69% 2.75% 334.91%
1985 12.98 30.02% 65,845 0.95% 3.62% 395.09%
- ---------------------------------------------------------------------------------------
BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)
1994 $10.42 (8.36)% $ 34,078 0.93% 7.25% 31.97%
1993 13.05 19.39% 43,223 0.84% 6.86% 41.92%
1992 11.70 8.09% 42,731 0.85% 7.67% 21.99%
1991 11.69 24.32% 59,323 0.78% 8.70% 131.40%
1990 10.27 3.27% 107,921 0.73% 9.35% 43.52%
1989 10.93 17.04% 146,310 0.61% 9.30% 108.64%
1988 10.40 6.37% 161,208 0.61% 10.05% 50.49%
1987 10.75 (2.09)% 194,603 0.55% 9.20% 101.25%
1986 13.03 21.39% 194,814 0.55% 8.71% 202.87%
1985 11.81 27.61% 78,750 0.72% 10.12% 549.28%
- ---------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO(2)
1994 $13.02 1.05% $ 40,612 0.51% 2.37% 2.02%
1993 13.24 9.38% 33,836 0.50% 2.34% 1.15%
1992 12.43 6.95% 23,030 0.50% 2.53% 3.52%
1991(4) 11.98 24.88% 15,205 0.50%* 3.03%* 4.26%
- ---------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO(2)(6)
1994 $11.94 3.01% $ 75,971 1.22% 1.28% 52.22%
1993 12.09 30.02% 30,574 1.04% 0.92% 46.48%
1992 9.38 (9.78)% 19,402 1.05% 1.43% 38.99%
1991 10.59 10.92% 18,239 1.04% 1.19% 69.71%
1990 9.72 (13.48)% 14,266 1.05% 1.48% 69.24%
1989 12.44 20.51% 15,735 1.20% 0.14% 94.35%
1988(1) 11.29 17.69% 13,980 1.69%* 0.84%* 62.48%
- ---------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
3
<PAGE>
- --------
(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988.
(2) Prior years ratios of expenses to average net assets have been restated
for comparative purposes to reflect expenses exclusive of foreign taxes on
dividends which are reflected as a component of dividend income.
(3) Information is for the period from January 4, 1994 (commencement of
operations) to December 31, 1994.
(4) Information is for the period from January 30, 1991 (commencement of
operations) to December 31, 1991.
(5) J.P. Morgan Investment began serving as Portfolio Manager to the Equity
Income and Multi-Strategy Portfolios on January 1, 1994. Prior to January
1, 1994, a different firm served as Portfolio Manager.
(6) Templeton began serving as Portfolio Manager to the International
Portfolio on January 1, 1994. Prior to January 1, 1994, a different firm
served as Portfolio Manager.
(7) Total return includes reinvestment of dividends and distributions. Total
return does not include deductions at the separate account or contract
level for fees and charges that may be incurred under a variable contract.
* Ratios are annualized.
THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio of the Fund has its own investment objective and investment
policies which are described below. There can be no assurance that any
Portfolio will achieve its investment objective. You should carefully consider
the investment objective, investment policies, and potential risks of any
Portfolio before investing. As with any security, a risk of loss is inherent
in investment in the Fund's shares. Each Portfolio is subject to varying
degrees of financial, market, and credit risks. Each Portfolio is subject to
the risk of changing economic conditions.
The different types of securities and investment techniques used by the
individual Portfolios all have attendant risks of varying degrees. For
example, for equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of market decline. For debt
securities, there is a risk of market decline and there is the risk that the
issuer of a security may not be able to meet its obligations on interest or
principal payments at the time called for by an instrument. In addition,
because the value of debt instruments generally rises and falls inversely with
interest rates, the longer the maturity of a debt security, the more volatile
it can be in terms of changes in value. Both equity and debt securities can
also be subject to general economic conditions, company and industry earnings
prospects and investor psychology.
Certain types of investments and investment techniques common to one or more
Portfolios are described in greater detail, including the risks of each, in
this Prospectus under "Securities and Investment Techniques" and in the
Statement of Additional Information.
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE. Current income consistent with preservation of
capital.
INVESTMENT POLICIES. The Portfolio invests at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of money market
securities that are in the highest rating category for short term instruments,
or, if not rated, are of equivalent quality. The Portfolio may also invest up
to 5% of its total assets, measured at the time of investment, in money market
securities that are in the second-highest rating category for short-term debt
obligations, or, if not rated, are of equivalent quality. Money market
securities in which the Portfolio may invest may include: (i) U.S. Government
obligations; (ii) bank obligations; (iii) commercial paper; (iv) short-term
corporate debt securities; (v) savings and loan obligations; (vi) repurchase
agreements involving these securities; and (vii) foreign securities--U.S.
dollar denominated money market securities issued by foreign issuers and
foreign branches of U.S. banks. The Portfolio may also lend its securities to
brokers, dealers and other financial institutions to earn income.
4
<PAGE>
ELIGIBLE SECURITIES. The Portfolio may invest only in U.S. dollar denominated
money market instruments that present minimal credit risk. The Adviser shall
determine whether a security presents minimal credit risk under procedures
adopted by the Fund's Board of Trustees that conform to Securities and Exchange
Commission ("SEC") rules for money market funds. See "Investment Policies for
Money Market Portfolio" in the Statement of Additional Information.
The Money Market Portfolio's investments are limited to securities that
mature in 13 months or less from the date of purchase (except that securities
held subject to repurchase agreements having terms of 13 months or less from
the date of delivery may mature in excess of 13 months from such date). It is
anticipated that the dollar-weighted average portfolio maturity of the
Portfolio will not exceed 90 days. The Portfolio is subject to diversification
standards applicable to money market funds under SEC rules.
Unlike many money market funds that are offered to the public, the Fund's
Money Market Portfolio does not attempt to maintain a stable net asset value of
$1.00 per share.
HIGH YIELD BOND PORTFOLIO
INVESTMENT OBJECTIVE. High level of current income.
INVESTMENT POLICIES. The Portfolio invests primarily in a diversified
portfolio of intermediate and long-term, high-yielding, lower and medium
quality ("high risk") fixed-income securities, including corporate bonds and
notes, convertible securities and preferred stock. Such securities will be
rated Baa or lower by Moody's Investor Service, Inc. ("Moody's"), or BBB or
lower by Standard & Poor's Corporation ("S&P"), or, if not rated by Moody's or
S&P, be of equivalent investment quality as determined by the Adviser. These
debt securities include high yield bonds that are commonly referred to as "junk
bonds."
The convertible securities in which the Portfolio may invest include debt
securities convertible into or exchangeable for equity securities. The
Portfolio may also invest in: (i) U.S. Government securities (including
securities of U.S. agencies and instrumentalities); (ii) bank obligations;
(iii) commercial paper; (iv) repurchase and reverse repurchase agreements
involving these securities; (v) foreign securities--U.S. dollar-denominated
debt securities issued by foreign issuers and foreign branches of U.S. banks;
(vi) dividend-paying common stocks (including up to 10% of the market value of
the Portfolio's total assets in warrants to purchase common stocks) that are
considered by Pacific Mutual to be consistent with the investment objective of
current income; and (vii) higher-quality corporate bonds.
The Portfolio will hold short-term cash reserves (money market instruments
maturing in 13 months or less) as Pacific Mutual believes is advisable to
maintain liquidity or for temporary defensive purposes. During times that
Pacific Mutual believes that adoption of a temporary defensive position is
desirable due to prevailing market or economic conditions, the Portfolio may
invest to a greater degree in U.S. Government securities, higher-quality
corporate securities, and money market securities.
OTHER TECHNIQUES. In seeking higher income or a reduction in principal
volatility, the Portfolio may (1) purchase and sell put and call options on
debt securities as described in "Options" below, (2) purchase or sell interest
rate futures contracts and options on interest rate futures contracts as
described in "Futures Contracts and Futures Options" and (3) purchase, up to 5%
of the Portfolio's total assets, covered spread options, which give the
Portfolio the right to sell a security that it owns at a fixed dollar spread or
yield spread in relationship to another security that the Portfolio does not
own, but which is used as a benchmark. The Portfolio may also lend its
securities to brokers, dealers, and other financial institutions to earn
income. Certain of these techniques may involve a greater degree or different
type of risk than those inherent in more conservative investment approaches.
For a description of these investment practices and their associated risks, see
the "Securities and Investment Techniques" below and in the Statement of
Additional Information.
HIGH YIELD BONDS. In general, debt securities rated lower than Baa by Moody's
or BBB by S&P or of equivalent quality ("high yield bonds") are not considered
to be investment grade, and are regarded as
5
<PAGE>
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of such
securities, see "High Yield Bonds" below. See the Appendix for a description of
Moody's and S&P ratings applicable to the fixed-income securities.
In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1994, the Portfolio held securities of
59 corporate issuers, excluding short-term obligations. Based upon an average
of the Portfolio's holdings at the end of each month in 1994, an average of
approximately 85.5% of the Portfolio's holdings during 1994 were invested in
bonds rated Ba or B by Moody's or rated BB or B by S&P or if unrated,
determined to be of equivalent rating as determined by the Adviser. The asset
composition after this time may or may not be the same as shown in 1994.
VOLATILITY. Since shares of the Portfolio normally represent an investment
primarily in securities with fluctuating market prices, an investor should
understand that the value of the Portfolio's shares will vary as the aggregate
value of the Portfolio's securities increases or decreases. Changes in the
value of portfolio securities subsequent to their acquisition will normally not
affect the Portfolio's income, but will be reflected in the net asset value of
the Portfolio's shares. The Portfolio is intended for long-term investors who
can accept the risks associated with investment in high yield securities, and
should not constitute a complete investment program.
MANAGED BOND PORTFOLIO
INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.
INVESTMENT POLICIES. The Portfolio will primarily invest in the following
types of securities: obligations issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities; U.S. dollar-denominated corporate debt
securities of domestic or foreign issuers; mortgage and other asset-backed
securities; variable and floating rate debt securities; U.S. dollar-denominated
obligations of foreign governments, foreign government agencies, and
international agencies (such as the International Bank for Reconstruction and
Development); and any of the following: high quality commercial paper,
certificates of deposit, fixed time deposits and bankers' acceptances issued by
domestic and foreign banks denominated in U.S. dollars, and repurchase and
reverse repurchase agreements.
The Portfolio, except as provided below, may invest only in securities rated
Baa or better by Moody's or BBB or better by S&P or, if not rated by Moody's or
S&P, determined by the Portfolio Manager to be of comparable quality. The
dollar-weighted average quality of all fixed-income securities held by the
Portfolio will be A or higher as rated by Moody's and S&P. The Portfolio may
also invest up to 10% of its assets in debt securities that are below
investment grade, but rated B or higher by Moody's or S&P or, if not rated by
Moody's or S&P, of equivalent quality. A security is generally of investment
grade when rated in one of the top four categories of investment ratings as
described by Moody's or S&P. In general, debt securities rated lower than Baa
by Moody's or BBB by S&P or of equivalent quality ("high yield/high risk
bonds") are not considered to be investment grade, and are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of such
securities, see "High Yield Bonds." In the event that a security owned by the
Portfolio is downgraded to below a rating of B, the Portfolio may nonetheless
retain the security. See the Appendix for a description of Moody's and S&P
ratings applicable to fixed income securities. For the year ended December 31,
1994, the amount of the Portfolio's average total assets, measured on the basis
of month-end values, invested in debt securities rated less than investment
grade was approximately 10.39%.
SELECTION OF SECURITIES. The Portfolio invests in a diversified portfolio
primarily consisting of long, intermediate, and short-term marketable debt
securities. The proportion invested in each category of maturity can be
expected to vary depending upon the evaluation of market patterns and trends by
the Portfolio Manager. In selecting securities for the Portfolio, the Portfolio
Manager will use economic forecasting, interest rate anticipation, credit and
call risk analysis, and other security selection techniques. The proportion of
the Portfolio's assets committed to investment in securities with particular
characteristics of maturity, type,
6
<PAGE>
and coupon rate may vary based on the Portfolio Manager's outlook for the
economy, the financial markets, and other factors.
DURATION. The Portfolio will invest in a portfolio of securities of varying
maturities and, under normal circumstances, will maintain an average portfolio
duration of 3 to 6 years. Duration is one of the fundamental tools used by the
Portfolio Manager in security selection. Historically, the maturity of a bond
was used as a proxy for the sensitivity of a bond's price to changes in
interest rates, otherwise known as a bond's "interest rate risk" or
"volatility." According to this measure, the longer the maturity of a bond, the
more its price will change for a given change in market interest rates.
However, this method ignores the amount and timing of all cash flows from the
bond prior to final maturity. Duration is a measure of average life of a bond
on a present value basis, which was developed to incorporate a bond's yield,
coupons, final maturity and call features into one measure. For point of
reference, the maturity of a current coupon bond with a 3 year duration is
approximately 3.5 years, and the maturity of a current coupon bond with a 6
year duration is approximately 9 years. More detailed discussion of "duration"
as an investment technique is provided in the Statement of Additional
Information.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on debt securities as described in
"Options" below. In addition, the Portfolio may purchase or sell interest rate
futures contracts and options on interest rate futures contracts as described
in "Futures Contracts and Futures Options" below. The Portfolio may also lend
its securities to brokers, dealers, and other financial institutions to earn
income, and borrow money for temporary administrative or emergency purposes. In
addition, the Portfolio may invest up to 10% of its assets in debt securities
of foreign issuers which may be denominated in foreign currencies. Furthermore,
the Portfolio may engage in forward currency contracts in anticipation of or to
protect itself against fluctuations in currency exchange rates with respect to
investments in securities of foreign issuers. These investment techniques may
involve a greater degree or different type of risk than those inherent in more
conservative investment approaches. See "Securities and Investment Techniques"
below and in the Statement of Additional Information for a description of these
techniques, their attendant risks, and restrictions generally applicable to the
Portfolio's investment in or use of them.
GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.
INVESTMENT POLICIES. The Portfolio invests primarily in securities that are
obligations of or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the securities the Portfolio may purchase are
mortgage-backed securities guaranteed by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, or the Federal
National Mortgage Association. More detailed discussion of these and other U.S.
Government securities is provided in the Statement of Additional Information.
The Portfolio normally maintains at least 65% of its assets invested in U.S.
Government securities (including futures contracts and options thereon and
options relating to U.S. Government securities). The remainder of the
Portfolio's assets may be invested in corporate debt securities of domestic
issuers rated Aa or better by Moody's or AA or better by S&P, or, if not rated
by Moody's or S&P, of comparable quality as determined by the Portfolio
Manager, in mortgage-related securities, including collateralized mortgage
obligations and mortgage-backed bonds, and in cash or high quality money market
instruments. The Portfolio may increase the amount of its assets invested in
money market securities during times that the Portfolio Manager believes that
adoption of a temporary defensive position is desirable due to prevailing
market or economic conditions.
DURATION. The Portfolio invests in a portfolio of securities of varying
maturities and, under normal circumstances, intends to maintain an average
portfolio duration of 3 to 6 years. A discussion of "duration" is provided
above in the description of the Managed Bond Portfolio and in the Statement of
Additional Information.
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OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on U.S. Government securities and on
other debt securities, as described in "Options" below. In addition, the
Portfolio may purchase or sell interest rate futures contracts and options on
interest rate futures contracts as described in "Futures Contracts and Futures
Options" below. The Portfolio also may make loans of portfolio securities (up
to an aggregate of 25% of its total assets) and enter into reverse repurchase
agreements. In addition, the Portfolio may invest up to 10% of its assets in
debt securities of foreign issuers, which may be denominated in foreign
currencies. Furthermore, the Portfolio may engage in forward currency contracts
in anticipation of or to protect itself against fluctuations in currency
exchange rates with respect to investments in securities of foreign issuers.
These investment techniques may involve a greater degree or different type of
risk than those inherent in more conservative investment approaches. See
"Securities and Investment Techniques" below and in the Statement of Additional
Information for a description of these techniques and their attendant risks.
GROWTH LT PORTFOLIO
INVESTMENT OBJECTIVE. Long-term growth of capital in a manner consistent with
the preservation of capital.
INVESTMENT POLICIES. The Portfolio is a diversified portfolio that pursues
its investment objective by investing in the common stock of a large number of
issuers of any size. The Portfolio may invest in large, well-established
companies, as well as smaller emerging growth companies. It may from time to
time emphasize investments in companies with market capitalization between $1
billion and $5 billion. Companies with market capitalization of $1 billion to
$5 billion, as well as smaller companies, may suffer more significant losses as
well as realize more substantial growth than larger, more established issuers.
Thus, investments in such companies tend to be more volatile and somewhat
speculative. The Portfolio may invest in securities of both domestic and
foreign issuers. The Portfolio is not designed as a short-term trading vehicle.
STOCK SELECTION. The Portfolio invests substantially all of its assets in
common stocks when the Portfolio Manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected in industries and companies that the Portfolio Manager
believes are experiencing favorable demand for their products and services, and
which operate in a favorable competitive environment and regulatory climate.
The Portfolio Manager's analysis and selection process focuses on earnings
growth potential. In particular, the Portfolio intends to buy stocks with
earnings growth potential that may not be recognized by the market. Securities
are selected solely for their capital growth potential; investment income is
not a consideration and any income realized on the Portfolio's investments will
be incidental to its primary objective. These selection criteria apply equally
to stocks of foreign issuers. In selecting foreign stocks, factors such as
expected levels of inflation, government policies influencing business
conditions, the outlook for currency relationships, and prospects for relative
economic growth among countries, regions, or geographic areas may warrant
greater consideration.
OTHER INVESTMENTS. Although the Portfolio normally invests primarily in
equity securities, it may increase its cash position when the Portfolio Manager
is unable to locate investment opportunities with desirable risk/reward
characteristics. The Portfolio may invest in government securities, corporate
bonds and debentures, high-grade commercial paper, warrants, preferred stocks,
certificates of deposit, or other debt securities when the Portfolio Manager
perceives an opportunity for capital growth from such securities or so that the
Portfolio may receive a return on idle cash. The Portfolio may invest up to 10%
of its assets, measured at the time of investment, in debt securities that are
lower rated bonds, i.e., rated below investment grade by one of the primary
rating agencies (or if not rated, deemed to be comparable quality by the
Portfolio Manager), but which may offer higher yields. See "High Yield Bonds."
When the Portfolio invests in fixed income securities, investment income will
increase and may constitute a large portion of the return on the Portfolio, and
the Portfolio probably would not participate in market advances or declines to
the extent that it would if it remained fully invested in common stocks.
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The Portfolio may invest up to 25% of its assets in foreign securities
denominated in a foreign currency and not publicly traded in the United States.
In addition, the Portfolio may purchase American Depositary Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs"), and
other types of receipts of shares evidencing ownership of the underlying
foreign securities. In pursuing its investment objective, the Portfolio may
engage in the purchase and writing of put and call options on securities, stock
indexes and foreign currencies. In addition, the Portfolio may purchase or sell
interest rate, stock index, and foreign currency futures contracts and options
thereon. The Portfolio may also engage in forward foreign currency contracts.
These investment techniques may involve a greater degree or different type of
risk than those inherent in more conservative investment approaches. See
"Securities and Investment Techniques" below and in the Statement of Additional
Information for a description of these techniques and their attendant risks.
EQUITY INCOME PORTFOLIO
INVESTMENT OBJECTIVE. Long-term growth of capital and income.
INVESTMENT POLICIES. The Portfolio seeks to achieve its objective consistent
with reasonable investment risk. Ordinarily, the Portfolio pursues its
investment objective by investing primarily in dividend-paying common stock.
The Portfolio may also invest in other equity securities, consisting of, among
other things, non dividend-paying common stock, preferred stock, and securities
convertible into common stock, such as convertible preferred stock and
convertible bonds, and warrants. The Portfolio may also invest in ADRs and in
various foreign securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the large- and medium-sized
companies primarily included in the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). The Portfolio is designed for investors who want an actively
managed equity portfolio of selected equity securities that seeks to outperform
the total return of the S&P 500. In managing the Portfolio, the potential for
appreciation and dividend growth is given more weight than current dividends.
Nonetheless, the Portfolio Manager will normally strive for gross income for
the Portfolio at a level not less than 75% of the dividend income generated on
the stocks included in the S&P 500, although this income level is merely a
guideline and there can be no certainty that this income level will be
achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Portfolio Manager may under- or over-weight selected economic sectors against
the S&P 500's sector weightings to seek to enhance the Portfolio's total return
or reduce fluctuations in market value relative to the S&P 500. In selecting
securities, the Portfolio Manager may emphasize securities that it believes to
be undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
OTHER SECURITIES. During ordinary market conditions, the Portfolio Manager
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Portfolio's Manager, certificates of
deposit, time deposits and banker's acceptances issued by U.S. and foreign
banks and savings and loan institutions with assets of at least $500 million as
of the end of their most recent fiscal year; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by
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U.S. and foreign issuers and that are rated in the highest two rating
categories by Moody's or S&P, or if unrated, determined to be of equal quality
by the Portfolio Manager. Under normal circumstances, the Portfolio will invest
in such money market instruments to invest temporary cash balances or to
maintain liquidity to meet redemptions or expenses. The Portfolio may also,
however, invest in these instruments, without limitation, as a temporary
defensive measure taken during, or in anticipation of, adverse market
conditions.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of investment,
be rated Baa or better by Moody's or BBB or better by S&P or, if not rated by
Moody's or S&P, will be of comparable quality as determined by the Portfolio
Manager. In the event that an existing holding is downgraded below these
ratings, the Portfolio may nonetheless retain the security.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk or than those inherent in more conservative investment
approaches. See "Securities and Investment Techniques" below and in the
Statement of Additional Information for a description of these techniques and
their attendant risks.
MULTI-STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE. Provide a high total return from a portfolio of equity
and fixed income securities. Total return will consist of income plus realized
and unrealized capital gains and losses.
INVESTMENT POLICIES. The Portfolio is managed to earn current income on, and
to anticipate long-term capital growth of, the portfolio as a whole rather than
any individual security in it. The Portfolio's equity investments will be
primarily the common stock of large and medium-size U.S. companies, including
common stock of any class or series or any similar equity interest. The
Portfolio's equity investments may also include preferred stock, warrants,
rights, and convertible securities. The Portfolio may also invest in the equity
securities of small companies and foreign issuers. The Portfolio's equity
securities may or may not pay dividends and may or may not carry voting rights.
Fixed income securities may include corporate bonds, debentures, notes,
mortgage-related securities, and asset-backed securities, U.S. Government
securities, preferred stock, money market instruments, and other securities
that may have conversion or purchase rights. It is contemplated that most of
the Portfolio's common stock investments will be made in securities listed on a
U.S. stock exchange, and the Portfolio may invest in various foreign securities
if U.S. exchange-listed.
ASSET ALLOCATION. Under normal circumstances, the Portfolio Manager expects
that approximately 60% of the Portfolio's assets will be invested in equities
and approximately 40% in fixed income securities. However, these amounts may
vary in that the Portfolio Manager may allocate the Portfolio's investments
between these asset classes in a manner consistent with the Portfolio's
investment objective and current market conditions. Using a variety of
analytical tools, the Portfolio Manager assesses the relative attractiveness of
each asset class and determines an allocation between them believed to be
optimal. The Portfolio Manager then selects securities in each asset class
based on fundamental research and quantitative analysis.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell interest rate and stock index
futures contracts and options thereon. These investment techniques may involve
a greater degree or different type of risk than those inherent in more
conservative investment approaches. See "Securities and Investment Techniques"
below and in the Statement of Additional Information for a description of these
techniques and their attendant risks.
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EQUITY PORTFOLIO
THE EQUITY PORTFOLIO OFFERS ITS SHARES ONLY TO SEPARATE ACCOUNTS OF PACIFIC
MUTUAL AND PACIFIC CORINTHIAN TO SERVE AS AN INVESTMENT MEDIUM FOR VARIABLE
ANNUITY CONTRACTS. THE PORTFOLIO IS NOT AVAILABLE FOR VARIABLE LIFE INSURANCE
POLICIES.
INVESTMENT OBJECTIVE. The primary investment objective of the Equity
Portfolio is capital appreciation. Current income is of secondary importance.
INVESTMENT POLICIES. The Portfolio seeks to achieve this objective by
investing primarily in common stocks, or securities convertible into or
exchangeable for common stocks (such as convertible preferred stocks,
convertible debentures, or warrants), which are believed by the Portfolio
Manager to have above-average market appreciation potential.
Except when in a temporary defensive investment position, the Portfolio
intends to maintain at least 65% of its assets invested in common stocks or
securities convertible or exchangeable for common stocks. The Equity Portfolio
also may invest in U.S. Government securities, corporate bonds, money market
instruments, enter into repurchase agreements, and for temporary defensive
purposes, increase its investment in these securities up to 100% of its assets.
The Equity Portfolio may lend its portfolio securities and enter into "short
sales against the box." (See "Short Sales Against the Box" in the Statement of
Additional Information). Corporate bonds purchased by the Portfolio must be
rated at the time of purchase Aa or better by Moody's or AA or better by S&P,
and commercial paper must be rated at the time of purchase Prime-1 by Moody's
or A-1 by S&P or, if not so rated, must have been issued by a corporation with
corporate bonds outstanding which meet the standards set forth above.
OTHER TECHNIQUES. The Equity Portfolio may sell exchange-listed call options
("calls") if the calls are "covered" throughout the life of the option and may
purchase a call on securities only to effect a "closing purchase transaction".
BOND AND INCOME PORTFOLIO
THE BOND AND INCOME PORTFOLIO OFFERS ITS SHARES ONLY TO SEPARATE ACCOUNTS OF
PACIFIC MUTUAL AND PACIFIC CORINTHIAN TO SERVE AS AN INVESTMENT MEDIUM FOR
VARIABLE ANNUITY CONTRACTS. THE PORTFOLIO IS NOT AVAILABLE FOR VARIABLE LIFE
INSURANCE POLICIES.
INVESTMENT OBJECTIVE. Provide as high a level of current income as is
consistent with prudent investment management and preservation of capital.
INVESTMENT POLICIES. The Portfolio may invest in any of the following
securities: corporate bonds which are rated Baa or better by Moody's or BBB or
better by S&P; U.S. Government securities; commercial paper rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or, if not rated by Moody's or S&P,
issued by a corporation having an outstanding debt issue rated Aa or better by
Moody's or AA or better by S&P; negotiable bank certificates of deposit or
banker's acceptances issued by domestic banks (but not their foreign branches)
having, together with branches or subsidiaries, total assets in excess of $2
billion; high dividend-paying common stocks; and warrants. Securities rated Baa
by Moody's are described by it as having speculative characteristics and,
according to S&P, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal.
Except when in a temporary defensive investment position, the Portfolio
intends to maintain at least 65% of its assets invested in bonds. The Portfolio
may also invest in U.S. Government securities, and money market instruments,
and may enter into repurchase agreements, and for temporary defensive purposes,
may increase its investment in these securities.
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OTHER TECHNIQUES. The Bond and Income Portfolio may enter into reverse
repurchase agreements, and lend its portfolio securities, in each case in
accordance with the description of those techniques (and subject to the same
risks) set forth in this Prospectus and in the Statement of Additional
Information.
EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE. Provide investment results that correspond to the total
return performance of common stocks that are publicly traded in the United
States.
INVESTMENT POLICIES. The Portfolio attempts to achieve its objective by
investing in stocks included in the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500" or the "Index"). The Portfolio attempts to replicate the
investment results of the S&P 500, while minimizing transactional costs and
other expenses. The Portfolio will purchase the common stock of those companies
included in the S&P 500, which the Portfolio Manager believes, based on
statistical data, will represent the industry diversification of the entire S&P
500. The Portfolio will be managed to attempt to minimize the degree to which
the investment results of the Portfolio (before taking into account the
Portfolio's expenses) differ from the results of the Index ("tracking error").
The Portfolio will incur expenses not reflected in the investment results of
the Index, including advisory and administrative fees and transactional and
other expenses. The degree to which the Portfolio correlates with the Index
will depend upon the size and cash flow of the Portfolio, the liquidity of the
securities represented in the Index, and the Portfolio's expenses, among other
factors. There is no fixed number of component stocks in which the Portfolio
will invest. However, it is anticipated that under normal circumstances the
Portfolio will hold between 200 and 450 of the stocks listed in the S&P 500.
The composition of the portfolio securities may be rebalanced by the
Portfolio Manager at such times as it deems advisable in order to minimize
tracking error. No attempt, however, is made to "manage" the Portfolio in the
traditional sense, such as by using economic, financial, and market analysis,
nor will the adverse financial situation of a company directly result in its
elimination from the Portfolio unless, of course, the company is removed from
the Index. From time to time, administrative adjustments may be made in the
Portfolio because of mergers, changes in the composition of the Index, and
similar reasons, but such changes should be infrequent and the attendant costs
minimized. Thus, portfolio turnover is expected to be lower than that of most
other investment company portfolios investing in common stock. As a
consequence, brokerage costs are expected to be relatively low. Due to tracking
error, transactional costs, and other expenses, the return on the Portfolio
likely will be lower than the return on the S&P 500.
OTHER TECHNIQUES. The Portfolio may purchase and sell stock index futures,
purchase options on stock indexes, and purchase options on stock index futures
that are based on stock indexes which the Portfolio attempts to track or which
tend to move together with stocks included in the index. The Portfolio may use
these techniques as an adjunct to its securities activities or to hedge against
changes in securities prices. See "Options" below and "Futures Contracts and
Futures Options" below.
The Portfolio may invest in foreign equity securities if U.S. exchange listed
to the extent included in the S&P 500. The Portfolio may temporarily invest
cash balances, maintained for liquidity purposes or pending investment, in
short-term high quality debt instruments, including commercial paper, bank
obligations, and U.S. Government securities. Temporary investments will not be
made for defensive purposes in the event of or in anticipation of a general
decline in the market price of stocks in which the Portfolio invests. A
defensive investment posture is precluded by the investment objective to
provide investment results that correspond to the total return performance of
common stocks that are publicly traded in the United States; accordingly,
investors in the Portfolio bear the risk of general declines in stock prices in
the stock markets.
ABOUT THE S&P 500: The S&P 500 is a capitalization-weighted index, based on
the relative market capitalization of 500 different companies selected by S&P,
including companies in the industrial, utility, financial, and transportation
industry sectors. The weightings of stocks in the Index are based on each
component stock's relative total market value, that is, its market price per
share multiplied by the number of
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common shares outstanding for that company. S&P may, from time to time, adjust
the composition of common stocks in the Index. Inclusion of a stock in the S&P
500 in no way implies an opinion by S&P as to its attractiveness as an
investment; nor is S&P a sponsor or in any way affiliated with the Portfolio,
the Fund, the Adviser, or the Portfolio Manager.
The Fund reserves the right to change the index whose performance the
Portfolio will attempt to replicate or for the Portfolio to seek its investment
objective by means other than attempting to replicate an index, such as by
operating the Portfolio as a managed fund, and reserves the right to do so
without seeking shareholder approval, but only if operating the Portfolio as
described above is not permitted under applicable law for an investment company
that serves as an investment medium for variable insurance contracts, or
otherwise involves substantial legal risk. See "What is the Federal Income Tax
Status of the Fund" below.
INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE. Seek long-term capital appreciation primarily through
investment in equity securities of corporations domiciled in countries other
than the United States. Current income from dividends and interest will not be
an important consideration.
INVESTMENT POLICIES. Other than when in a defensive posture, at least 70% of
the Portfolio's assets will consist of corporate securities, primarily common
stock and, to a lesser extent, securities convertible into common stock. The
Portfolio may, however, for defensive purposes as described below, invest in
non-convertible fixed income securities denominated in currencies of foreign
countries and in United States dollars.
The Portfolio will attempt to maximize opportunity and reduce risk by
investing in a diversified portfolio of companies in different stages of
development. Portfolio companies will range from large, well established
companies to medium-sized companies and smaller, less seasoned companies in an
earlier stage of development.
The allocation of the Portfolio's assets among the various securities markets
in the different countries will be determined by the Portfolio Manager. In
making the allocation of assets among the securities markets, the Portfolio
Manager may consider such factors as technological developments in the various
countries, the condition and growth potential for the various economies and
securities markets, currency and taxation considerations, and other pertinent
financial, social, national, and political factors. Some of these countries can
be considered "emerging market countries," which generally refers to countries
whose economies are less developed or mature than economies in other countries
or whose markets are undergoing a process of development. Under certain adverse
investment conditions, the Portfolio may restrict the securities markets in
which its assets will be invested, and may increase the proportion of assets
invested in United States Government and money market securities.
The Portfolio reserves the right as a defensive measure to invest in
nonconvertible fixed income securities denominated in currencies of foreign
countries and in United States dollars. (For this purpose, investments made for
defensive purposes will be maintained only during periods in which Templeton
determines that economic or financial conditions are adverse for holding equity
securities of corporate issuers.) Securities held for defensive purposes, which
include non-convertible preferred stock, debt securities, government securities
issued by United States and foreign countries, and money market securities, may
be held in such proportions as, in the opinion of the Portfolio Manager,
prevailing market or economic conditions warrant. The Portfolio may invest up
to 5% of its assets, measured at the time of investment, in debt securities
that are rated below investment grade, or if not rated, of equivalent quality.
See "High Yield Bonds."
The Portfolio may also hold cash (in United States dollars or foreign
currencies) or short-term securities denominated in such currencies to provide
for redemptions; it is not expected that such reserve for redemptions will
exceed 10% of the Portfolio's assets. Money market securities which may be held
for
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defensive purposes, or to provide for redemptions, include short-term corporate
or U.S. Government obligations and bank certificates of deposit.
The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio's assets may be invested. These guidelines are discussed under
"Foreign Securities." The Portfolio may not invest in securities that are
subject to restrictions on resale, or which are not otherwise readily
marketable, if, as a result, more than 5% of its total assets would be invested
in such securities.
OTHER TECHNIQUES. The Portfolio may enter into repurchase agreements and may
lend its securities to brokers, dealers, and other financial institutions to
earn income. The Portfolio may purchase and sell financial futures contracts,
stock index futures contracts, and foreign currency futures contracts and
options on such futures contracts. See "Futures Contracts and Futures Options."
RISKS OF FOREIGN INVESTMENT. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. These risks include exposure to foreign currencies
and fluctuations in such currencies and political, economic, regulatory, and
operational factors associated with exposure to foreign countries. Investment
in emerging market countries presents risks in greater degree than, and in
addition to, those presented by investment in foreign issuers in general. See
"Foreign Securities" below and in the Statement of Additional Information for a
discussion of some of the risks associated with foreign investment.
The United States Government has, from time to time in the past, imposed
restrictions, through taxation and otherwise, on foreign investments by United
States investors such as the Portfolio. If such restrictions should be
reinstituted, it might become necessary for the Portfolio to invest all, or
substantially all, of its assets in United States short-term securities. In
such event, the Portfolio would review its investment objective and investment
policies to determine whether changes are appropriate.
CURRENCY TECHNIQUES. The Portfolio may engage in foreign currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates. The Portfolio may enter into forward currency
contracts. The Portfolio may also purchase and write put and call options on
foreign currencies. The use of these techniques is discretionary with the
Portfolio Manager, and there is no commitment to use them. See "Securities and
Investment Techniques" below and in the Statement of Additional Information for
a description of these techniques and their attendant risks.
ALL PORTFOLIOS: DIVERSIFICATION AND CHANGES IN POLICIES
Each of the Portfolios is diversified, so that with respect to 75% of the
assets of each Portfolio, it may not invest more than 5% of its assets (taken
at market value at the time of investment) in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities.
The investment policies for any of the Portfolios may be changed by the
Fund's Board of Trustees. The investment objective of each Portfolio, as
described in the previous section, is considered "fundamental." In addition,
the Portfolios are subject to investment restrictions that are described in the
Statement of Additional Information. Some of those investment restrictions,
including the diversified status of each Portfolio, are also designated as
"fundamental." These fundamental investment objectives and investment
restrictions require a vote of a majority of the shareholders of a Portfolio to
be changed.
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SECURITIES AND INVESTMENT TECHNIQUES
This section describes certain securities and investment techniques that may
be used by the Portfolios and the potential risks associated with these
securities and investment techniques. For more detailed information on these
investment techniques, see the Statement of Additional Information. The
Statement of Additional Information also contains information on other types of
securities in which a Portfolio may invest, including U.S. Government
securities, debt securities generally, variable and floating rate securities,
repurchase agreements, reverse repurchase agreements, lending portfolio
securities, firm commitment agreements and when-issued securities, and
warrants.
MORTGAGE-RELATED SECURITIES
APPLICABLE PORTFOLIOS: High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Equity, and Bond and Income Portfolios. The
Government Securities, Growth LT, and Multi-Strategy Portfolios may invest only
in high-quality, mortgage-related (or other asset-backed) securities either (i)
issued by United States Government sponsored corporations (currently GNMA,
FHLMC, FNMA) or (ii) rated Aa or better by Moody's or AA or better by S&P or,
if not rated, determined to be of equivalent investment quality. The Equity
Portfolio and Bond and Income Portfolio may only invest in mortgage-related
securities that are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities.
Mortgage-related securities include mortgage pass-through securities, which
are securities under which payments of both interest and principal from an
underlying pool of mortgages are made periodically, in effect "passing through"
payments made by the individual borrowers on the mortgage loans. Timely payment
of principal and interest on mortgage backed securities known as "GNMAs", which
are guaranteed by the Government National Mortgage Association, is guaranteed
by the full faith and credit of the U.S. Government. Some mortgage related
securities are not backed by the full faith and credit of the U.S. Government,
but are guaranteed by agencies or instrumentalities of the U.S. Government such
as the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC").
Other mortgage-related securities are issued by financial institutions such
as commercial banks, savings and loan associations, mortgage banks, and
securities broker-dealers (or affiliates) and are called collateralized
mortgage obligations ("CMOs"). CMOs are fully collateralized directly or
indirectly by a pool of mortgages, and in some instances by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. Payments
are passed through to the holders, although not necessarily on a pro rata
basis, on the same schedule as they are received. CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, generally are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been retired.
The Managed Bond, Government Securities, and Multi-Strategy Portfolios may
also invest in stripped mortgage-backed securities and CMO residuals. Stripped
mortgage-backed securities are usually structured with two classes. One class
will receive all of the interest (the interest-only class, or "IO"), whereas
the other class will receive all of the principal (the principal-only class or
"PO").
RISKS OF MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-related security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially less
because (1) the mortgages will be subject to normal principal amortization, and
(2) may be prepaid prior to maturity due to the sale of the underlying
property, the refinancing of the loan, or foreclosure. Early repayment may
expose a Portfolio to a lower rate of return upon reinvestment of the
principal. Prepayment rates vary widely and cannot be accurately predicted.
They may be affected by changes in market interest rates. Therefore,
prepayments will be reinvested at rates that are available upon receipt, which
likely will be higher or lower than the original yield on the certificates.
Accordingly, the actual maturity and
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realized yield on pass-through or modified pass-through mortgage-related
securities will vary from the designated maturity and yield on the original
security based upon the prepayment experience of the underlying pool of
mortgages.
Stripped mortgage-backed securities are likely to experience greater price
volatility than other types of mortgage securities. The yield to maturity on
the IO class is extremely sensitive, both to changes in prevailing interest
rates and to the rate of principal payments (including prepayments) on the
underlying mortgage assets. Similarly, the yield to maturity on CMO residuals
is extremely sensitive to prepayments on the related underlying mortgage
assets. In addition, if a series of a CMO includes a class that bears interest
at an adjustable rate, the yield to maturity on the related CMO residual will
also be extremely sensitive to changes in the level of the index upon which
interest rate adjustments are made. A Portfolio could fail to fully recover its
initial investment in a CMO residual or a stripped mortgage-backed security.
OTHER ASSET-BACKED SECURITIES. The High Yield Bond, Managed Bond, Growth LT
and Multi-Strategy Portfolios may purchase other asset-backed securities which
are backed by particular assets such as automobile loans, installment sales
contracts, home equity loans, computer and other leases, credit card
receivables, or other assets. As in the case of mortgage-related securities,
those asset-backed securities are subject to prepayment risk, which will alter
an instrument's maturity and yield. Other risks relate to the nature of the
underlying collateral. For example, credit card debt receivables are generally
unsecured and the debtors are entitled to the protection of a number of
consumer credit laws, many of which can result in reductions in outstanding
balances. Additionally, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability
to sustain liquidity through all phases of the market cycle has not been
tested.
HIGH YIELD BONDS
APPLICABLE PORTFOLIOS. High Yield Bond, Managed Bond (up to 10% of its
assets), Growth LT (up to 10% of its assets), and International Portfolios (up
to 5% of its assets).
Generally, high yield/high risk debt securities are those rated lower than
Baa or BBB, or, if not rated by Moody's or S&P, of equivalent quality (although
the Managed Bond Portfolio may not invest in securities rated lower than B) and
which are commonly referred to as "junk bonds". Investment in such securities
generally provides greater income and increased opportunity for capital
appreciation than investments in higher quality debt securities, but they also
typically entail greater potential price volatility and principal and income
risk.
In general, high yield bonds are not considered to be investment grade. They
are regarded as predominately speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield bonds have been found to be less sensitive to interest-rate changes than
higher-rated investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market in which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could sell
a high yield bond, and could adversely affect the daily net asset value of the
Portfolio's shares. At times of less liquidity, it may be more difficult to
value the high yield bonds because such valuation may require more research,
and elements of judgment may play a greater role in the valuation because there
is less reliable, objective data available.
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SMALL CAPITALIZATION STOCKS
APPLICABLE PORTFOLIOS. Growth LT, Equity Portfolios, and to a lesser degree,
Equity Income and Multi-Strategy Portfolios.
Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive research
and development, manufacturing, marketing and service capabilities, more
stability and greater depth of management and technical personnel. Investments
in smaller, less seasoned companies may present greater opportunities for
growth but also involve greater risks than customarily are associated with more
established companies. The securities of smaller companies may be subject to
more abrupt or erratic market movements than larger, more established
companies. These companies may have limited product lines, markets or financial
resources, or they may be dependent upon a limited management group. Their
securities may be traded only in the over-the-counter market or on a regional
securities exchange and may not be traded every day or in the volume typical of
trading on a major securities exchange. As a result, the disposition by a
Portfolio of securities to meet redemptions or otherwise may require the
Portfolio to sell these securities at a discount from market prices or during a
period when such disposition is not desirable or to make many small sales over
a lengthy period of time.
BORROWING
APPLICABLE PORTFOLIOS. All Portfolios.
Though not an ordinary practice, each Portfolio may borrow money to help meet
redemptions or for other purposes. Borrowing may exaggerate the effect on net
asset value of any increase or decrease in the market value of a Portfolio, and
money borrowed will be subject to interest costs. For information on limits on
the ability of any Portfolio to borrow, see the Statement of Additional
Information.
ILLIQUID AND RESTRICTED SECURITIES
APPLICABLE PORTFOLIOS: All Portfolios may acquire illiquid securities. The
Money Market, High Yield Bond, Growth LT, Equity Income, Multi-Strategy,
Equity, and Bond and Income Portfolios may acquire restricted securities and
the International Portfolio may invest up to 5% of its assets in restricted
securities.
A Portfolio may invest in an illiquid or restricted security if the Portfolio
Manager believes that it presents an attractive investment opportunity.
Generally, a security is considered illiquid if it cannot be disposed of within
seven days. Its illiquidity might prevent the sale of such a security at a time
when a Portfolio Manager might wish to sell, and these securities could have
the effect of decreasing the overall level of a Portfolio's liquidity. Further,
the lack of an established secondary market may make it more difficult to value
illiquid securities, requiring the Fund to rely on judgments that may be
somewhat subjective in determining value, which could vary from the amount that
a Portfolio could realize upon disposition.
Restricted securities, including private placements, are subject to legal or
contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Fund's procedures, restricted securities
could be treated as liquid. However, some restricted securities may be illiquid
and restricted securities that are treated as liquid could be less liquid than
registered securities traded on established secondary markets. A Portfolio may
not invest more than 15%, (10% for the Money Market Portfolio), of its total
assets in illiquid securities, measured at the time of investment.
PRECIOUS METALS-RELATED SECURITIES
APPLICABLE PORTFOLIOS. Equity Portfolio, and possibly other Portfolios that
invest in equity securities.
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Precious-metals-related securities are considered equity securities of U.S.
and foreign companies involved in the exploration, mining, development,
production, or distribution of gold or other natural resources, including
minerals and metals such as copper, aluminum, silver, platinum, uranium,
strategic metals, diamonds, coal, oil, and phosphates.
The value of these securities may be affected by worldwide financial and
political factors, and prices may fluctuate sharply over short time periods.
For example, precious metals securities may be affected by changes in inflation
expectations in various countries, metal sales by central banks of governments
or international agencies, governmental restrictions on the private ownership
of certain precious metals or minerals and other factors. For a more extensive
discussion of the risks of investing in foreign securities, see the discussion
in "Foreign Securities" below.
FOREIGN SECURITIES
APPLICABLE PORTFOLIOS: International Portfolio--invests primarily in equity
securities of foreign issuers and may invest in debt securities of foreign
issuers; Growth LT Portfolio--may invest up to 25% of its assets in foreign
securities denominated in a foreign currency; Growth LT, Equity Income, Multi-
Strategy, and Equity Index Portfolios--may invest in equity securities of
foreign issuers if U.S. exchange listed or included in the S&P 500; Managed
Bond and Government Securities Portfolios--may invest up to 10% of their assets
in foreign debt securities denominated in a foreign currency; Money Market,
High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, and International Portfolios--may invest in fixed income securities,
including money market instruments and bank obligations of foreign issuers,
including corporate, foreign governmental, and international agency issuers,
that are denominated in U.S. dollars. All Portfolios may purchase American
Depositary Receipts (ADRs), which are dollar-denominated receipts issued
generally by domestic banks and representing the deposit with the bank of a
security of a foreign issuer. ADRs are publicly traded on exchanges or over-
the-counter in the United States. The Growth LT and International Portfolios
may invest in European Depositary Receipts (EDRs), which are receipts issued in
Europe, typically by banking institutions in London or Brussels, which evidence
a similar ownership arrangement, and are designed for use in European
securities markets, and Global Depositary Receipts (GDRs), which are similar to
ADRs, but are issued and traded in several international financial markets, as
well as other types of receipts of shares evidencing ownership of the
underlying foreign securities.
Most foreign securities are denominated in foreign currencies and investment
in foreign securities involves exposure to currency fluctuations. Transactions
in most foreign securities are conducted in foreign currencies, so that a
Portfolio's assets must be exchanged for another currency each time a security
is bought or sold or a dividend is paid. Similarly, share price quotations and
total return information reflect conversion into U.S. dollars. Fluctuations in
foreign exchange rates can significantly increase or decrease the U.S. dollar
value of a foreign investment, which will enhance or diminish the return of a
foreign security in its own currency.
Investing in the securities of foreign issuers involves other special risks
and considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation, nationalization or confiscatory taxation,
adverse changes in investment or exchange control regulations, political
instability that could affect U.S. investments in foreign countries, and
potential restrictions on the flow of international capital. In many countries,
there is less publicly available information about issuers than is available in
reports about companies in the United States. It may be more difficult to
obtain and enforce judgments against foreign entities. Additionally, income
(including interest and dividends) derived from foreign securities may be
subject to foreign taxes, including foreign withholding taxes, and other
foreign taxes may apply with respect to securities transactions. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility and less liquidity. These
risks are intensified with respect to investments in emerging market countries.
In addition, a number of the currencies of developing countries have
experienced significant declines against the U.S. dollar
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in recent years, and devaluation may occur subsequent to investments in these
currencies by a Portfolio. Inflation and rapid fluctuations in inflation rates
have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries. Emerging markets have
different clearance and settlement procedures and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
the portfolio security or, if the Fund has entered into a contract to sell a
security, could result in possible liability of the Fund to the purchaser.
Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. For a description of the Fund's custody
arrangements for foreign securities, see "Foreign Securities" in the Statement
of Additional Information.
DIVERSIFICATION. Each Portfolio that invests in foreign securities is subject
to guidelines for diversification of foreign security investments that are
imposed by California insurance authorities. Under these guidelines, foreign
investments must be allocated to at least five countries if at least 80% of a
Portfolio's net assets is invested in foreign issuers. A Portfolio may not
invest more than 20% of its net assets in any one country, except that a
Portfolio may invest up to 35% of its net assets in issuers domiciled or
primarily traded in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom, or Germany. A Portfolio is not subject to
any limit upon investment in issuers domiciled or primarily traded in the
United States. The California diversification guidelines are more fully
described in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY CONTRACTS
APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Growth LT, Multi-
Strategy, and International Portfolios.
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date at a price set at the time of the
contract. A Portfolio could engage in a forward currency transaction in
anticipation of or to protect itself against fluctuations in currency exchange
rates. Although forward contracts typically will involve the purchase or sale
of a foreign currency against the dollar, a Portfolio also may purchase or sell
one foreign currency forward against another foreign currency. There are
certain markets where it is not possible to engage in effective foreign
currency hedging. This may be true, for example, for the currencies of various
Latin American countries in which the foreign exchange markets are not
sufficiently developed to permit hedging activity to take place.
A Portfolio's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency to "lock in" the
U.S. dollar price of a security purchased or sold by a Portfolio. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated in a foreign currency. A Portfolio will not
speculate in forward foreign exchange.
Employing hedging strategies with forward currency contracts does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Forward contracts involve some
transactional expense for a Portfolio. Although forward contracts will be used
primarily to protect a Portfolio from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and a Portfolio's total return could be adversely affected as a
result. For a more extensive description of this investment technique see
"Foreign Currency Transactions" in the Statement of Additional Information.
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OPTIONS
APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Equity Income, and Multi-Strategy Portfolios may
purchase put and call options on securities in pursuing their investment
objectives. The High Yield Bond, Managed Bond, Government Securities, Growth
LT, Equity Income, and Multi-Strategy Portfolios may sell (write) covered call
and secured put options. The Growth LT, Equity Income, Multi-Strategy, and
Equity Index Portfolios may purchase put and call options on securities indexes
that are exchange traded to protect against price movements in the stock market
generally (or in particular segments of the market) rather than in individual
stocks. The Equity Portfolio may write covered call options that are traded on
a national securities exchange with respect to securities comprising 25% of its
aggregate net assets, taken at market value at the time the option is written.
For a description of these techniques, see the Statement of Additional
Information.
RISKS OF OPTIONS TRANSACTIONS. The purchase and selling (writing) of options
involves certain risks. During the option period, the covered call writer has
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. If a put or call option purchased by a Portfolio is not sold when
it has remaining value, and if the market price of the underlying security, in
the case of a put, remains equal to or greater than the exercise price or, in
the case of a call, remains less than or equal to the exercise price, the
Portfolio will lose its entire investment in the option. Also, where a put or
call option is purchased to hedge against price movements in a particular
security or market, the price of the put or call option may move more or less
than the price of the related security or index. In this regard, index options
can never be a perfect hedge against the overall risk of a stock position
except where the stock position and the index are composed of exactly the same
stocks, in the same proportions. There can be no assurance that a liquid market
will exist when a Portfolio seeks to close out an option position. Furthermore,
if trading restrictions or suspensions are imposed on the options markets, a
Portfolio may be unable to close out a position.
FOREIGN CURRENCY OPTIONS
APPLICABLE PORTFOLIOS: Growth LT and International Portfolios.
Options on foreign currencies may be purchased or written as a hedge against
changes in the value of the U.S. dollar (or another currency) in relation to a
foreign currency in which a Portfolio's securities may be denominated. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Portfolio to reduce foreign currency risk
using such options. Over-the-counter options may be negotiated, but they
generally do not have as much market liquidity as exchange-traded options.
Employing hedging strategies with options on currencies does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
reduce or preclude the opportunity for gain if the value of the hedged currency
should change relative to the U.S. dollar (or other hedged currency). A
Portfolio will not speculate in options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Portfolio cannot close out an option
which it holds, it would have to exercise its option in order to realize any
profit and would incur transactional costs on the sale of the underlying
assets.
SPREAD TRANSACTIONS
APPLICABLE PORTFOLIOS: High Yield Bond Portfolio.
The High Yield Bond Portfolio may purchase and sell covered spread options to
securities dealers. Covered spread options are not presently exchange listed or
traded. The purchase of a spread option gives
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the Portfolio the right to put, or sell, a security that it owns at a fixed
dollar spread or fixed yield spread in relationship to another security that
the Portfolio does not own, but which is used as a benchmark. The purchase of
spread options will be used to protect the Portfolio against adverse changes in
the yield spread between high quality and lower quality securities. Such
protection is only provided during the life of the spread option.
The risk of loss on a spread transaction includes the premium and any
transaction costs paid by the Portfolio to obtain the option. There is no
assurance that closing transactions will be available. For more information see
the discussion of Spread Transactions in the "Securities and Investment
Techniques" in the Statement of Additional Information.
FUTURES CONTRACTS AND FUTURES OPTIONS
APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy and International Portfolios may invest
in interest rate futures contracts and options thereon. The Growth LT, Equity
Income, Multi-Strategy, Equity Index and International Portfolios may invest in
stock index futures contracts and options thereon. The High Yield Bond, Managed
Bond, Government Securities, Growth LT, and Multi-Strategy Portfolios may
purchase and write call and put options on interest rate futures contracts, and
the Growth LT, Equity Income, Multi-Strategy, and Equity Index Portfolios may
purchase call and put options on stock index futures ("futures options"). The
Growth LT and International Portfolios may invest in foreign currency futures
contracts and may purchase and write options thereon.
USE OF FUTURES. These investments may be made for bona fide hedging purposes
and as an adjunct to a Portfolio's securities activities. A Portfolio is
required to collateralize or cover a futures transaction or futures option so
that the position will be unleveraged. For a general description of these
futures contracts and options thereon, including information on margin
requirements, see the Statement of Additional Information.
RISKS OF FUTURES AND FUTURES OPTIONS. There are several risks associated with
the use of futures and futures options. While a Portfolio's hedging
transactions may protect the Portfolio against adverse movements in the general
level of interest rates or stock or currency prices, such transactions could
also preclude the opportunity to benefit from favorable movements in the level
of interest rates or stock or currency prices. A hedging transaction may not
correlate perfectly with price movements in the assets being hedged. An
incorrect correlation could result in a loss on both the hedged assets in a
Portfolio and/or the hedging vehicle, so that the Portfolio's return might have
been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and lack a deep secondary market. Lack of a liquid market for
any reason may prevent a Portfolio from liquidating an unfavorable position and
the Portfolio would remain obligated to meet margin requirements until the
position is closed.
A Portfolio other than the Growth LT and International Portfolios will only
enter into futures contracts or futures options which are standardized and
traded on a U.S. exchange or board of trade, or, in the case of futures
options, for which an established over-the-counter market exists. Each
Portfolio is subject to limitations on the amount that may be invested in
futures and futures options transactions for purposes other than bona fide
hedging, under which initial margin deposits for futures contracts and premiums
paid for futures options may not exceed 5% of a Portfolio's total assets (net
of amounts that are "in the money").
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FOREIGN FUTURES. The Growth LT and International Portfolios may trade futures
contracts and options on futures contracts not only on U.S. domestic markets,
but also on exchanges located outside of the United States. Foreign markets may
offer advantages such as trading in indices that are not currently traded in
the United States. Foreign markets, however, may have greater risk potential
than domestic markets. Unlike trading on domestic commodity exchanges, trading
on foreign commodity exchanges is not regulated by the Commodity Futures
Trading Commission ("CFTC"). Foreign exchanges generally are principal markets
so that no common clearing facility exists, and a Portfolio might be able to
look only to the broker for performance of the contract. Amounts received for
foreign futures or foreign options transactions may not be provided the same
protection as funds received in respect of transactions on United States
futures exchanges. Trading in foreign futures or foreign options contracts may
not be afforded certain of the protective measures provided by U.S. law and
regulation, including the right to use reparations proceedings before the CFTC
and arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. In addition, any profits that a Portfolio might
realize in trading could be eliminated by adverse changes in the exchange rate
of the currency in which the transaction is denominated. Transactions on
foreign exchanges may include both commodities that are traded on domestic
exchanges or boards of trade and those that are not.
The Fund reserves the right to engage in other types of futures transactions
in the future.
ORGANIZATION AND MANAGEMENT OF THE FUND
HOW IS THE FUND ORGANIZED? The Fund was organized as a Massachusetts business
trust on May 4, 1987, and currently consists of eleven separate Portfolios. The
assets of each Portfolio are segregated, and your interest is limited to the
Portfolio to which proceeds from your Variable Contract's Accumulated Value is
allocated.
WHO OVERSEES THE BUSINESS OF THE FUND? The business and affairs of the Fund
are managed under the direction of the Board of Trustees under the Fund's
Agreement and Declaration of Trust. The Trustees are Thomas C. Sutton, Richard
L. Nelson, Lyman W. Porter, and Alan Richards. Mr. Sutton is also the Chief
Executive Officer of Pacific Mutual. Messrs. Nelson, Porter, and Richards are
independent trustees. See the Statement of Additional Information under the
heading "Management of the Fund."
WHO IS THE FUND'S INVESTMENT ADVISER? Pacific Mutual Life Insurance Company.
Pacific Mutual's relationship with the Fund is governed by an Investment
Advisory Agreement. Under this agreement, Pacific Mutual, subject to the
supervision of the Fund's Board of Trustees, administers the affairs of the
Fund and supervises the investment program for the Fund's Portfolios.
MORE ABOUT PACIFIC MUTUAL. Pacific Mutual is a mutual life insurance company
that was organized under the laws of the State of California and was authorized
to conduct business as a life insurance company on January 2, 1868. Its address
is 700 Newport Center Drive, Post Office Box 9000, Newport Beach, California
92660. Pacific Mutual offers a complete line of life insurance policies and
annuity contracts, as well as financial and retirement contracts. 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 had total assets and
funds under management of over $91.1 billion. Pacific Mutual also provides
investment advisory services to the Money Market Fund of PIMCO Advisors
Institutional Trust, and has had extensive investment advisory experience in
managing its general account and pension and other accounts.
DOES PACIFIC MUTUAL MANAGE ANY OF THE PORTFOLIOS DIRECTLY? Pacific Mutual
directly manages both the High Yield Bond and the Money Market Portfolios.
Mr. Larry J. Card, Executive Vice President, Securities, of Pacific Mutual,
has primary responsibility for investment management of the Money Market
Portfolio, as well as various other accounts of Pacific
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Mutual. Mr. Card joined Pacific Mutual in 1972 and holds a Bachelor of Science
Degree from Northern State College and an MBA Degree from Harvard University.
He is a Chartered Financial Analyst. Mr. Raymond J. Lee has portfolio
management responsibilities for the High Yield Bond Portfolio, and also is in
charge of all publicly traded bonds and has responsibility for portfolio
management of pension assets for Pacific Mutual. Mr. Lee is Senior Vice
President, Portfolio Manager, of Pacific Mutual, and joined Pacific Mutual in
1976 after completing his MBA in Finance from the Wharton School of the
University of Pennsylvania. Mr. Lee received his bachelor's degree in Economics
from UCLA. He is a member of the Los Angeles Society of Financial Analysts. Mr.
Simon T. Lee, Assistant Vice President, Securities, of Pacific Mutual, shares
portfolio management responsibilities for the High Yield Bond Portfolio and has
responsibility for portfolio management of Pacific Mutual's high yield and
convertible bond assets. Mr. Lee joined Pacific Mutual in 1985. He holds a
bachelor's degree in Business Administration and an MBA from Loyola Marymount
University. He is a Chartered Financial Analyst.
Pacific Mutual and the Fund employ other investment advisory firms as
Portfolio Managers for nine of the Fund's eleven Portfolios.
WHO IS THE PORTFOLIO MANAGER FOR THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Pacific Investment Management Company ("PIMCO"). PIMCO is an
investment management firm organized as a general partnership.
PIMCO is the successor investment adviser to the former Pacific Investment
Management Company, which was an indirect wholly-owned subsidiary of Pacific
Mutual that commenced operations in 1971. PIMCO has two partners, PIMCO
Advisors L.P. as the supervisory partner, and PIMCO Management, Inc. as the
managing partner. PIMCO is a subsidiary partnership of PIMCO Advisors L.P. a
Delaware limited partnership organized in 1987. PIMCO Advisors L.P. succeeded
to the investment advisory and other business of PIMCO and other former
investment advisory subsidiaries of Pacific Mutual as a result of a
consolidation of PIMCO and other businesses with Thomson Advisory Group L.P.,
the former name for PIMCO Advisors L.P., which closed in November, 1994. A
portion of the units of the limited partner interests in PIMCO Advisors L.P. is
traded publicly on the New York Stock Exchange. The general partner of PIMCO
Advisors L.P. is PIMCO Partners, G.P. Pacific Mutual and its subsidiaries and
affiliates hold a substantial interest in PIMCO Advisors L.P. through direct or
indirect ownership of its outstanding units, and indirectly hold a majority
interest in PIMCO Partners G.P., with a remainder held indirectly by a group
comprised of the Managing Directors of PIMCO. PIMCO Advisors L.P. is governed
by an Operating Board and an Equity Board, which exercise substantially all of
the governance powers of the general partner and serves as the functional
equivalent of a board of directors.
PIMCO had approximately $56.9 billion assets under management as of year-end
1994. PIMCO also provides investment advisory services to PIMCO Funds and
several other mutual fund portfolios and to private accounts for pension and
profit sharing plans. PIMCO's address is 840 Newport Center Drive, Suite 360,
Newport Beach, California 92660.
WHO AT PIMCO MANAGES THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Mr. John L. Hague, Managing Director and senior member of PIMCO,
has primary responsibility for investment management of the Managed Bond and
Government Securities Portfolios as well as various other accounts of PIMCO.
Mr. Hague joined Pacific Investment Management Company in 1987. During his 14
years of investment experience, he was associated with Salomon Brothers, Inc.
specializing in international fixed income products and mortgage securities and
Morgan Guaranty in credit research. Mr. Hague holds a bachelor's degree in
Economic Analysis from Bowdoin College and an MBA in Finance from Stanford
University.
WHO IS THE PORTFOLIO MANAGER FOR THE GROWTH LT PORTFOLIO? Janus Capital
Corporation ("Janus"). Kansas City Southern Industries, Inc. owns approximately
83% of the outstanding voting stock of Janus. Janus' address is 100 Fillmore
Street, Suite 300, Denver, Colorado 80206-4923. Janus currently serves as
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investment adviser or subadviser to the Janus Funds, as well as other mutual
funds and individual, corporate, charitable, and retirement accounts.
WHO AT JANUS MANAGES THE GROWTH LT PORTFOLIO? Warren B. Lammert, III, Vice
President of Janus, is primarily responsible for the day-to-day management and
implementation of Janus' investment strategy for the Growth LT Portfolio. Mr.
Lammert is portfolio manager and Executive Vice President of Janus Mercury Fund
and Janus Venture Fund, Executive Vice President of Janus Investment Fund, and
has been the portfolio manager of various growth oriented accounts since 1991.
He joined Janus as a securities analyst in 1987, taking an educational
sabbatical from 1988 to 1989. He received his undergraduate degree in economics
from Yale University and received his M.S. in economic history (with
distinction) from the London School of Economics, London, England. Mr. Lammert
is a Chartered Financial Analyst.
WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"),
a wholly-owned subsidiary of J.P. Morgan & Co. J.P. Morgan Investment's address
is 522 Fifth Avenue, New York, New York 10036. J.P. Morgan Investment is an
investment manager for corporate, public, and union employee benefit funds,
foundations, endowments, insurance companies, government agencies and the
accounts of other institutional investors. Capital Guardian served as portfolio
manager to the Equity Income and Multi-Strategy Portfolios from their
commencement of operations in 1988 through December 31, 1993.
WHO AT J.P. MORGAN INVESTMENT MANAGES THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? Lisa J. Waller and William G. Tennille are primarily responsible
for the day-to-day management and implementation of J.P. Morgan Investment's
process for the Multi-Strategy Portfolio, and Ms. Waller is primarily
responsible for the Equity Income Portfolio. Lisa J. Waller, Vice President, is
a portfolio manager with responsibility for several pension fund clients. Ms.
Waller previously followed the aerospace and multi-industry sectors before
becoming head of Small Capitalization Research. She joined Morgan in 1982 upon
graduation from the University of Wisconsin where she earned undergraduate and
graduate degrees. Ms. Waller is a Chartered Financial Analyst. William G.
Tennille, Vice President, is a portfolio manager for separately managed and
commingled funds with an emphasis in mortgage securities and derivatives. Prior
to joining Morgan in 1992, he managed the investment portfolios of
Manufacturers Hanover Trust, Deposit Guaranty Bank, and First Florida Banks. He
is a graduate of the University of North Carolina. Mr. Tennille manages 16
accounts at the present time.
WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY PORTFOLIO AND BOND AND INCOME
PORTFOLIO? Greenwich Street Advisors Division of Smith Barney Mutual Funds
Management Inc., ("Greenwich Street Advisors"), a wholly-owned subsidiary of
Smith Barney Holdings Inc., which in turn is a wholly-owned subsidiary of The
Travelers Inc. The Greenwich Street Advisors Division is located at 388
Greenwich Street, 23rd Floor, New York, New York 10013.
The Greenwich Street Advisors Division and its predecessors have been in the
investment counseling business since 1934. Smith Barney Mutual Funds Management
Inc. ("SBMFM") and its predecessors have been providing investment-advisory
services to mutual funds since 1968. As of December 31, 1994, SBMFM managed
approximately $54 billion of mutual fund assets.
WHO AT GREENWICH STREET ADVISORS MANAGES THE EQUITY PORTFOLIO AND BOND AND
INCOME PORTFOLIO? George V. Novello is primarily responsible for the day-to-day
management of the Equity Portfolio. Mr. Novello became Managing Director of
Smith Barney Inc. in August 1993. He previously held the same position with
Shearson or its predecessor firms since 1990. Mr. Novello was a Managing
Director and Director of Research for McKinley Allsopp and Gruntal from 1988
through 1990. Mr. Novello received a B.A. from St. John's University. George
Mueller is primarily responsible for the day-to-day management of the Bond and
Income Portfolio. Mr. Mueller became Director of Smith Barney Inc. in August
1993. He previously held the same position at Shearson or its predecessor firms
since 1985. Mr. Mueller holds a B.S. from Duquesne University and a M.B.A. from
Pace University.
24
<PAGE>
WHO IS THE PORTFOLIO MANAGER OF THE EQUITY INDEX PORTFOLIO? Bankers Trust
Company ("BTC"), a wholly-owned subsidiary of Bankers Trust New York
Corporation. BTC's address is 130 Liberty Street, New York, New York 10006. BTC
is a wholly-owned subsidiary of Bankers Trust New York Corporation, the seventh
largest bank holding company in the United States. The Global Investment
Management Group of BTC, the department directly responsible for the management
of the Equity Index Portfolio, as of December 31, 1994, managed assets
approximating $159.1 billion. BTC is the investment adviser to 23 other mutual
fund portfolios.
WHO IS THE PORTFOLIO MANAGER OF THE INTERNATIONAL PORTFOLIO? Templeton
Investment Counsel, Inc. ("Templeton"), an indirect wholly-owned subsidiary of
Templeton Worldwide, Inc., which is in turn a wholly-owned subsidiary of
Franklin Resources, Inc. Templeton's address is Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394-3091. Templeton and its affiliates serve
as advisers for over 150 registered investment companies. The Templeton
organization has been investing globally over the past 52 years and provides
investment management and advisory services to a worldwide client base,
including approximately 850,000 mutual fund shareholders, foundations and
endowments, employee benefit plans and individuals. Franklin Resources, Inc. is
engaged in various aspects of the financial services industry through its
subsidiaries. Nomura Capital Management, Inc. served as portfolio manager to
the International Portfolio from its commencement of operations in 1988 through
December 31, 1993.
WHO AT TEMPLETON MANAGES THE INTERNATIONAL PORTFOLIO? Lauretta A. Reeves,
Vice President, Portfolio Management/Research, is primarily responsible for the
day-to-day investment management and implementation of Templeton's investment
strategy for the International Portfolio. She also is a research analyst
covering European and Asian banks, and for other accounts, has research
responsibility for the chemical, medical supply and devices sectors, as well as
the coverage of the Belgium market. Prior to joining Templeton in 1987, Ms.
Reeves was the manager of equity trading for the First Equity Corporation of
Florida, a regional investment banking firm. Ms. Reeves holds a bachelor's
degree in Business Administration from Florida International University and an
MBA in Business Administration from Nova University. Ms. Reeves is a Chartered
Financial Analyst. James E. Chaney, Senior Vice President, Portfolio
Management/Research, assists in the day-to-day investment management and
implementation of Templeton's investment strategy for the International
Portfolio. He currently manages several investment company, corporate, and
public fund separate accounts. He is also a research analyst whose
responsibilities include merchandising, regional banks and environmental
companies. Prior to joining Templeton in 1991, Mr. Chaney was a Vice President
of International Equities with GE Investments, from 1986 to 1991. Mr. Chaney
holds a bachelor's degree in Engineering from the University of Massachusetts-
Amherst, an MS in Engineering from Northeastern University and an MBA from
Columbia University. Howard J. Leonard, Senior Vice President, Portfolio
Management/Research, also assists in the day-to-day investment management and
implementation of Templeton's investment strategy for the International
Portfolio. He also is a research analyst whose research responsibilities
include forest products and money management industries. Prior to joining
Templeton in 1989, Mr. Leonard was Director of Investment Research at First
Pennsylvania Bank, from 1986 to 1989. Mr. Leonard holds a bachelor's degree in
Business Administration from Temple University. Mr. Leonard is a Chartered
Financial Analyst.
HOW MUCH DOES THE FUND PAY FOR THE SERVICES OF PACIFIC MUTUAL AND THE
PORTFOLIO MANAGERS? The Fund pays the Adviser for its services under the
Investment Advisory Agreement, a fee based on an annual percentage of the
average daily net assets of each Portfolio. For the Money Market Portfolio, the
Fund pays to the Adviser a fee at an annual rate of .40% of the first $250
million of the average daily net assets of the Portfolio, .35% of the next $250
million of the average daily net assets of the Portfolio, and .30% of the
average daily net assets of the Portfolio in excess of $500 million. For the
Equity Index Portfolio, the Fund pays .25% of the first $100 million of the
average daily net assets of the Portfolio, .20% of the next $100 million of the
average daily net assets of the Portfolio, and .15% of the average daily net
assets of the Portfolio in excess of $200 million. For the Managed Bond, High
Yield Bond, Government Securities, and Bond and Income Portfolios, the Fund
pays .60% of the average daily net assets of each of the Portfolios.
25
<PAGE>
For the Equity Income, Equity, and Multi-Strategy Portfolios, the Fund pays
.65% of the average daily net assets of each of the Portfolio. For the Growth
LT Portfolio, the Fund pays .75% of the average daily net assets of the
Portfolio. For the International Portfolio, the Fund pays .85% of the average
daily net assets of the Portfolio. These fees are computed and accrued daily
and paid monthly.
HOW HAS THE FUND SECURED THE SERVICES OF THE INVESTMENT ADVISER AND THE
PORTFOLIO MANAGERS? The Fund has entered into an Investment Advisory Agreement
with Pacific Mutual under which Pacific Mutual serves as Investment Adviser to
the Fund. The Fund and Pacific Mutual have entered into Portfolio Management
Agreements with the Portfolio Managers. After initial two year terms, the
Investment Advisory Agreement and the Portfolio Management Agreements require
renewal by the Fund's Board of Trustees annually. Any of these agreements can
be terminated by the Fund's Board of Trustees. The Portfolio Management
Agreements can be terminated by Pacific Mutual or by any of the Portfolio
Managers. In the event of termination of a Portfolio Management Agreement, the
current Portfolio Manager could no longer service the applicable Portfolio.
Pacific Mutual could manage the applicable Portfolio directly or could
recommend a replacement to the Fund's Board of Trustees.
Under the Portfolio Management Agreements, the Portfolio Managers are
compensated directly by Pacific Mutual, and not directly from the Fund. Pacific
Mutual derives the amounts that it pays the Portfolio Managers from its own
fees under the Investment Advisory Agreement. For information on the fees
payable to the Portfolio Managers, see the Statement of Additional Information.
WHAT OTHER EXPENSES DOES THE FUND BEAR? The Fund bears all costs of its
operations. These costs may include expenses for custody, portfolio accounting,
printing, legal and audit fees, fees and expenses of the independent trustees,
organizational expenses and other expenses of its operations, and may, if
applicable, include extraordinary expenses such as expenses for special
consultants or legal expenses. Fund expenses directly attributable to a
Portfolio are charged to that Portfolio; other expenses are allocated
proportionately among all the Portfolios in relation to the net assets of each
Portfolio. For the period ended December 31, 1994, the total expenses of each
Portfolio that had commenced operations on or before such date were the
following percentages of average daily net assets: Money Market Portfolio--
.64%, High Yield Bond Portfolio--.88%, Managed Bond Portfolio--.84%, Government
Securities Portfolio--.88%, Growth LT Portfolio--1.08% (annualized), Equity
Income Portfolio--.94%, Multi-Strategy Portfolio--.94%, Equity Portfolio--.96%,
Bond and Income Portfolio--.93%, Equity Index Portfolio--.51%, and
International Portfolio--1.22%. The expenses of each Portfolio, expressed as a
percentage of the Portfolio's average daily net assets, is shown under "Ratio
of Expenses to Average Net Assets" in the Financial Highlights section at the
beginning of this Prospectus for each year of each Portfolio's operation. More
information on the expenses of the Portfolios is included in the Portfolios'
Statements of Operations, which can be found in the financial statements
included in the Fund's annual and semi-annual reports sent to shareholders.
WHAT IS PACIFIC MUTUAL DOING TO LIMIT FUND EXPENSES? Pacific Mutual has
agreed, until at least December 31, 1995, to reimburse each Portfolio for its
operating expenses to the extent that such expenses, exclusive of advisory
fees, additional custodial charges associated with holding foreign securities,
foreign taxes on dividends, interest, or gains, and extraordinary expenses,
exceed 0.25% of the Portfolio's average daily net assets. Pacific Mutual began
this expense reimbursement policy in April 1989. There can be no assurance that
this policy will be continued beyond December 31, 1995.
WHO DISTRIBUTES THE FUND'S SHARES? Shares of the Fund are distributed through
Pacific Equities Network (the "Distributor" or "PEN"), an indirect wholly-owned
subsidiary of Pacific Mutual. PEN's address is 700 Newport Center Drive,
Newport Beach, California 92660. PEN is a broker-dealer registered with the SEC
and a member of the National Association of Securities Dealers. PEN acts as
Distributor without remuneration from the Fund.
26
<PAGE>
WHO IS THE CUSTODIAN OF THE FUND? Investor's Fiduciary Trust Company ("IFTC")
provides the Fund with portfolio accounting and custodial services. IFTC's
address is 127 West 10th Street, Kansas City, Missouri 64105.
MORE ON THE FUND'S SHARES
HOW DO YOU PURCHASE SHARES OF THE FUND? Shares of the Fund are not sold
directly to the general public. Shares of the Fund are currently offered only
for purchase by the Separate Accounts to serve as an investment medium for the
Variable Contracts issued or administered by Pacific Mutual and Pacific
Corinthian. For information on purchase of a Variable Contract, consult a
prospectus for the Separate Account. The shares of the Equity Portfolio and
Bond and Income Portfolio are offered to only Separate Accounts of Pacific
Mutual and Pacific Corinthian that fund variable annuity contracts; thus, these
Portfolios are not available for variable life insurance policies.
HOW ARE SHARES REDEEMED? Shares of any Portfolio may be redeemed on any
business day upon receipt of a request for redemption from the insurance
company whose separate account owns the shares. Redemptions are effected at the
per share net asset value next determined after receipt of the redemption
request. Redemption proceeds ordinarily will be paid within seven days
following receipt of instructions in proper form or, if sooner, other period
required by law. The right of redemption may be suspended by the Fund or the
payment date postponed beyond seven days when the New York Stock Exchange is
closed (other than customary weekend and holiday closings) or for any period
during which trading thereon is restricted because an emergency exists, as
determined by the SEC, making disposal of portfolio securities or valuation of
net assets not reasonably practicable, and whenever the SEC has by order
permitted such suspension or postponement for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, the Portfolio may pay the redemption price in whole
or part by a distribution in kind of securities from the Portfolio, in lieu of
cash, in conformity with applicable rules of the SEC. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash. Under the Investment Company Act of 1940, the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1
percent of its net assets during any 90-day period for any one shareholder.
CAN YOU MAKE EXCHANGES AMONG THE PORTFOLIOS? Variable Contract Owners do not
deal directly with the Fund to purchase, redeem, or exchange shares of a
Portfolio, and Variable Contract Owners should refer to the Prospectus for the
applicable Separate Account for information on the allocation of premiums and
on transfers of accumulated value among options available under the contract.
HOW IS THE VALUE OF THE PORTFOLIOS' SHARES DETERMINED? Shares of each
Portfolio are sold at their respective net asset values (without a sales
charge) computed after receipt of a purchase order. Net asset value of a share
is determined by dividing the value of a Portfolio's net assets by the number
of its shares outstanding. That determination is made once each business day,
Monday through Friday, exclusive of federal holidays at or about 4:00 P.M., New
York City time, on each day that the New York Stock Exchange is open for
trading. To calculate a Portfolio's net asset value, a Portfolio's assets are
valued and totalled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. In general, the value
of assets is based on actual or estimated market value, with special provisions
for assets not having readily available market quotations and short-term debt
securities. The value of foreign portfolio securities traded on foreign
exchanges is based upon the price of the close of the exchange immediately
preceding the time of the Fund's valuation, or, if earlier, at the time of the
Fund's valuation. Therefore, the calculation of the net asset value of the
International Portfolio or other Portfolios that invest in foreign securities
may not take place contemporaneously with the determination of the prices of
certain foreign securities used in the calculation. Further, under the Fund's
procedures, the prices of foreign securities are determined using information
derived from pricing services and other sources. Prices derived under these
procedures will be used in determining daily net asset value. Information that
becomes known to the Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in
27
<PAGE>
determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events affecting the values
of portfolio securities that occur between the time their prices are determined
and the time the Portfolio's net asset value is determined may not be reflected
in the calculation of net asset value. If events materially affecting the value
of such securities occur during such period, then these securities may be
valued at fair value as determined by the management and approved in good faith
by the Board of Trustees. The Money Market Portfolio's securities are valued
using the amortized cost method of valuation, which involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity. The net asset values
per share of each Portfolio will fluctuate in response to changes in market
conditions and other factors. See the Statement of Additional Information.
INFORMATION ABOUT PORTFOLIO TRANSACTIONS. The Adviser or the Portfolio
Manager for a Portfolio places orders for the purchase and sale of portfolio
investments for a Portfolio with brokers or dealers selected by it in its
discretion. In effecting purchases and sales of portfolio securities in
transactions on United States stock exchanges for the account of the Fund, the
Adviser or Portfolio Manager may pay higher commission rates than the lowest
available when the Adviser or Portfolio Manager believes it is reasonable to do
so in light of the value of the brokerage and research services provided by the
broker effecting the transaction. Consistent with a policy of obtaining best
net results, a Portfolio Manager's affiliate, including BT Brokerage
Corporation and BT Futures Corporation, J.P. Morgan Securities, and Smith
Barney Inc. may serve as the Fund's broker in effecting portfolio transactions,
including transactions on a national securities exchange, and may retain
commissions, in accordance with certain regulations of the SEC.
INFORMATION ABOUT PORTFOLIO TURNOVER. The Portfolio turnover rate represents
the rate at which securities in a Portfolio other than short-term debt
obligations are replaced. This rate for the Portfolios is shown in the tables
in Condensed Financial Information. The High Yield Bond, Managed Bond, and
Government Securities, Growth LT, Equity Income, Multi-Strategy, Equity, and
Bond and Income Portfolios had portfolio turnover rates in excess of 100% in
certain years, which could be considered relatively high. Such a Portfolio
turnover rate may result in higher brokerage commissions or other transactional
expenses for these Portfolios than for other Portfolios, which expenses must be
borne, directly or indirectly, by a Portfolio and ultimately by the Portfolio's
shareholders. In addition, high portfolio turnover may affect the ability of a
Portfolio to qualify as a regulated investment company. See "Taxation" and
"Portfolio Turnover" in the Statement of Additional Information.
DO ANY ISSUES ARISE FROM THE FUND OFFERING ITS SHARES FOR VARIABLE ANNUITIES
AND VARIABLE LIFE INSURANCE POLICIES? The Fund serves as an investment medium
for both variable annuity contracts and variable life insurance policies. The
Fund currently does not foresee any disadvantages to Variable Contract Owners
due to the fact that the Fund serves as an investment medium for both variable
life insurance policies and annuity contracts; however, due to differences in
tax treatment or other considerations, it is theoretically possible that the
interests of owners of annuity contracts and insurance policies for which the
Fund serves as investment medium might at some time be in conflict. However,
the Fund's Board of Trustees, Pacific Mutual and Pacific Corinthian are
required to monitor events to identify any material conflicts between variable
annuity contract owners and variable life policy owners, and will determine
what action, if any, should be taken in the event of such a conflict. If such a
conflict were to occur, Pacific Mutual, Pacific Corinthian, or another
insurance company participating in the Fund might be required to redeem the
investment of one or more of its separate accounts from the Fund. This might
force the Fund to sell securities at disadvantageous prices.
28
<PAGE>
OTHER INFORMATION ABOUT THE FUND
HOW IS THE FUND CAPITALIZED? The capitalization of the Fund consists solely
of an unlimited number of shares of beneficial interest with a par value of
$0.001 each. When issued, shares of the Fund are fully paid, freely
transferable, and non-assessable by the Fund.
Under Massachusetts law, shareholders could under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Fund for acts or obligations of the Fund, which are binding
only on the assets and property of the Fund and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Fund or the Trustees. The Declaration of Trust provides for indemnification
out of Fund property for all loss and expense of any shareholder held
personally liable for the obligations of the Fund. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations
and thus should be considered remote.
WHAT IS THE FEDERAL INCOME TAX STATUS OF THE FUND? Each Portfolio intends to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code. A Portfolio so qualifying generally will not be subject
to federal income taxes to the extent that it distributes on a timely basis its
investment company taxable income and its net capital gains. Such income and
capital gains distributions are automatically reinvested in additional shares
of the Portfolio, unless the shareholder elects to receive cash. Each Portfolio
also intends to comply with diversification regulations under section 817(h) of
the Code, that apply to mutual funds underlying variable contracts. Generally,
a Portfolio will be required to diversify its investments so that on the last
day of each quarter of a calendar year no more than 55% of the value of its
total assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any
three investments, and no more than 90% is represented by any four investments.
For this purpose, securities of a given issuer generally are treated as one
investment, but each U.S. Government agency and instrumentality is treated as a
separate issuer. Compliance with the diversification rules under Section 817(h)
of the Code generally will limit the ability of any Portfolio, and in
particular, the Government Securities Portfolio, to invest greater than 55% of
its total assets in direct obligations of the U.S. Treasury (or any other
issuer) or to invest primarily in securities issued by a single agency or
instrumentality of the U.S. Government.
Reference is made to the Prospectus for the applicable Separate Account and
Contract for information regarding the Federal income tax treatment of
distributions to the Separate Account. See "Taxation" in the Fund's Statement
of Additional Information for more information on taxes.
WHAT VOTING RIGHTS DO SHAREHOLDERS HAVE? Shareholders of the Fund are given
certain voting rights. Each share of each Portfolio will be given one vote,
unless a different allocation of voting rights is required under applicable law
for a mutual fund that is an investment medium for variable insurance products.
Massachusetts business trust law does not require the Fund to hold annual
shareholder meetings, although special meetings may be called for a specific
Portfolio, or for the Fund as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies, or approving a new or amended
advisory contract or portfolio management agreement. In accordance with current
laws, it is anticipated that an insurance company issuing a Variable Contract
that participates in the Fund will request voting instructions from Variable
Contract Owners and will vote shares or other voting interests in the Separate
Account in proportion to the voting instructions received.
MAY THE FUND DISCONTINUE THE OFFERING OF ANY PORTFOLIO? The Fund reserves the
right to discontinue offering shares of one or more Portfolio at any time. In
the event that a Portfolio ceases offering its shares, any investments
allocated by an insurance company investing in the Fund to such Portfolio will,
subject to any necessary regulatory approvals, be invested in the Portfolio
deemed appropriate by the Trustees.
29
<PAGE>
ADVERTISING PERFORMANCE. The Fund may, from time to time, include the yield
and effective yield of its Money Market Portfolio, the yield of the remaining
Portfolios, and the total return of all Portfolios in advertisements, sales
literature, or reports to shareholders or prospective investors. Total return
for the Fund will not be advertised or included in sales literature unless
accompanied by comparable performance information for a Separate Account to
which the Fund offers its shares.
Performance information should be considered in light of a Portfolio's
investment objectives and policies, characteristics of the Portfolio, and the
market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future. For a description
of the methods used to determine yield and total return for the Portfolios,
see the Statement of Additional Information.
TOTAL RETURN
The table below presents the total return for each Portfolio. The total
return shown in the table tells you how much an investment in a Portfolio has
changed in value from year to year. It reflects any net increase or decrease
in the share price and assumes that all dividends and distributions were
reinvested in additional shares. The total return does not include fees and
charges at the Separate Account level under the Variable Contract or other
fees and charges under the Variable Contract.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/84 12/31/85 12/31/86 12/31/87 12/31/88(1) 12/31/89 12/31/90 12/31/91(2) 12/31/92 12/31/93 12/31/94(3)
-------- -------- -------- -------- ----------- -------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market.... -- -- -- -- 5.85 8.73 7.92 5.74 3.22 2.58 3.76
High Yield Bond. -- -- -- -- 8.30 4.16 0.38 24.58 18.72 18.01 0.42
Managed Bond.... -- -- -- -- 7.11 14.74 8.52 17.03 8.68 11.63 - 4.36
Government
Securities..... -- -- -- -- 6.65 14.61 8.01 16.67 7.52 10.79 - 5.10
Growth LT....... -- -- -- -- -- -- -- -- -- -- 13.25
Equity
Income(4)...... -- -- -- -- 8.25 29.22 - 7.54 31.42 5.36 8.29 - 0.28
Multi-
Strategy(4).... -- -- -- -- 6.85 23.42 - 1.47 24.03 5.57 9.25 - 1.50
Equity(5)....... 9.80 30.02 20.92 2.18 7.19 30.12 - 2.55 29.77 6.30 16.06 - 2.87
Bond and
Income(5)...... 14.76 27.61 21.39 - 2.09 6.37 17.04 3.27 24.32 8.09 19.39 - 8.36
Equity Index.... -- -- -- -- -- -- -- 24.88 6.95 9.38 1.05
International(4). -- -- -- -- 17.69 20.51 - 13.48 10.92 - 9.78 30.02 3.01
<CAPTION>
AVERAGE
ANNUAL
TOTAL
RETURN
(FOR ALL
YEARS SHOWN)
------------
<S> <C>
Money Market.... 5.38
High Yield Bond. 10.30
Managed Bond.... 8.86
Government
Securities..... 8.25
Growth LT....... 13.41
Equity
Income(4)...... 9.89
Multi-
Strategy(4).... 9.03
Equity(5)....... 12.87
Bond and
Income(5)...... 11.67
Equity Index.... 10.44
International(4). 7.37
</TABLE>
- --------
(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988.
(2) Information for the Equity Index Portfolio is for the period from January
30, 1991 (commencement of operations) to December 31, 1991.
(3) Information for the Growth LT Portfolio is for the period from January 4,
1994 (commencement of operations) to December 31, 1994.
(4) The performance results of the Equity Income, Multi-Strategy, and
International Portfolios occurred when these Portfolios were advised by
different Portfolio Managers. J.P. Morgan Investment began serving as
Portfolio Manager to the Equity Income Portfolio and Multi-Strategy
Portfolio and Templeton began serving as Portfolio Manager of the
International Portfolio on January 1, 1994.
(5) The performance results of the Equity Portfolio and the Bond and Income
Portfolio are based on the performance of predecessor portfolios (series)
of Pacific Corinthian Variable Fund, which began their first full year of
operations on January 1, 1984 and were acquired by the Fund on December
31, 1994.
30
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Corporate Bonds: Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating) they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of Aaa bonds, or fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-
term risks appear somewhat larger than those applicable to Aaa securities.
Bonds which are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's Baa rated bonds are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Bonds rated AA by Standard & Poor's are judged by Standard & Poor's to be
high-grade obligations and in the majority of instances differ only in small
degree from issues rated AAA (Standard & Poor's highest rating). Bonds rated
AAA are considered by Standard & Poor's to be the highest grade obligations and
possess the ultimate degree of protection as to principal and interest. With AA
bonds, as with AAA bonds, prices move with the long-term money market.
Bonds rated A by Standard & Poor's, regarded as upper medium grade, have a
strong capacity and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
Standard & Poor's BBB rated bonds, or medium-grade category bonds, are
borderline between definitely sound obligations and those where the speculative
element begins to predominate. These bonds have adequate asset coverage and
normally are protected by satisfactory earnings. Their susceptibility to
changing conditions, particularly to depressions, necessitates constant
watching. These bonds generally are more responsive to business and trade
conditions than to interest rates. This group is the lowest which qualifies for
commercial bank investment.
Moody's Ba rated bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds rated Ba. Bonds which are rated B by Moody's generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
Bonds rated Caa by Moody's are considered to be of poor standing. Such issues
may be in default or there may be elements of danger with respect to principal
or interest. Bonds rated Ca are considered by Moody's to be speculative in a
high degree, often in default. Bonds rated C, the lowest class of bonds under
Moody's bond ratings, are regarded by Moody's as having extremely poor
prospects.
Moody's also applies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward the
lower end of the category.
31
<PAGE>
A bond rated BB, B, CCC, and CC by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
Commercial Paper: The Prime rating is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Issuers with this Prime
category may be given ratings 1, 2 or 3, depending on the relative strengths of
these factors.
Commercial paper rated A by Standard & Poor's has the following
characteristics: (i) liquidity ratios are adequate to meet cash requirements;
(ii) long-term senior debt rating should be A or better, although in some cases
BBB credits may be allowed if other factors outweigh the BBB rating, (iii) the
issuer should have access to at least two additional channels of borrowing;
(iv) basic earnings and cash flow should have an upward trend with allowances
made for unusual circumstances; and (v) typically the issuer's industry should
be well established and the issuer should have a strong position within its
industry and the reliability and quality of management should be unquestioned.
Issuers rated A are further referred to by use of numbers 1, 2 and 3 to denote
relative strength with this highest classification.
32
<PAGE>
LOGO
PACIFIC SELECT FUND
INVESTMENT ADVISER DISTRIBUTOR
Pacific Mutual Life Insurance Company Pacific Equities Network
700 Newport Center Drive Member: NASD & SIPC
Post Office Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
PORTFOLIO MANAGERS
Bankers Trust Company CUSTODIAN
130 Liberty Street Investors Fiduciary Trust Company
New York, New York 10006 127 West Tenth Street
Kansas City, Missouri 64105
Greenwich Street Advisors
Two World Trade Center ACCOUNTANTS
101st Floor Deloitte & Touche LLP
New York, New York 10048 695 Town Center Drive
Suite 1200
Janus Capital Corporation Costa Mesa, California 92626
100 Fillmore Street
Suite 300 COUNSEL
Denver, Colorado 80206-4923 Dechert Price & Rhoads
1500 K Street, N.W.
J.P. Morgan Investment Management Inc. Suite 500
522 Fifth Avenue Washington, D.C. 20005
New York, New York 10036
Pacific Investment Management Company
840 Newport Center Drive
Post Office Box 9000
Newport Beach, California 92660
Templeton Investment Counsel, Inc.
Broward Financial Centre
Suite 2100
Fort Lauderdale, Florida 33394-3091
Prospectus dated May 1, 1995
FORM NO.
<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
<PAGE>
LOGO
PACIFIC SELECT FUND
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1995
----------------
Pacific Select Fund (the "Fund") is an open-end diversified management
investment company currently offering eleven separate investment Portfolios:
the Money Market Portfolio; the High Yield Bond Portfolio; the Managed Bond
Portfolio; the Government Securities Portfolio; the Growth LT Portfolio; the
Equity Income Portfolio; the Multi-Strategy Portfolio; the Equity Portfolio;
the Bond and Income Portfolio; the Equity Index Portfolio; and the
International Portfolio. The Fund's Adviser is Pacific Mutual Life Insurance
Company.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated May 1, 1995, of the
Fund and has been filed with the Securities and Exchange Commission as part of
the Fund's Registration Statement. Investors should note, however, that this
Statement of Additional Information is not itself a prospectus and should be
read carefully in conjunction with the Fund's Prospectus and retained for
future reference. The contents of this Statement of Additional Information are
incorporated by reference in the Prospectus in their entirety. A copy of the
Prospectus may be obtained free of charge from the Fund at the address and
telephone numbers listed below.
----------------
Distributor:
Pacific Equities Network
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
Adviser:
Pacific Mutual Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO.............................. 1
SECURITIES AND INVESTMENT TECHNIQUES........................................ 1
U.S. Government Securities................................................ 1
Mortgage-Related Securities............................................... 2
Mortgage Pass-Through Securities........................................ 2
GNMA Certificates....................................................... 2
FNMA and FHLMC Mortgage-Backed Obligations.............................. 3
Collateralized Mortgage Obligations (CMOs).............................. 4
FHLMC Collateralized Mortgage Obligations............................... 4
Other Mortgage-Related Securities....................................... 5
CMO Residuals........................................................... 5
Stripped Mortgage-backed Securities..................................... 6
Other Asset-Backed Securities............................................. 6
High Yield Bonds.......................................................... 6
Bank Obligations.......................................................... 7
Corporate Debt Securities................................................. 8
Variable and Floating Rate Securities..................................... 9
Commercial Paper.......................................................... 9
Convertible Securities.................................................... 10
Repurchase Agreements..................................................... 11
Borrowing................................................................. 12
Reverse Repurchase Agreements and Other Borrowings........................ 12
Firm Commitment Agreements and When-Issued Securities..................... 13
Loans of Portfolio Securities............................................. 13
Short Sales Against the Box............................................... 13
Restricted Securities (Private Placements)................................ 14
Foreign Securities........................................................ 14
Foreign Currency Transactions............................................. 16
Forward Foreign Currency Contracts...................................... 16
Options................................................................... 18
Purchasing and Writing Options on Securities............................ 18
Purchasing Options on Stock Indexes..................................... 19
Risks of Options Transactions........................................... 20
Spread Transactions..................................................... 21
Options on Foreign Currencies............................................. 21
Futures Contracts and Options on Futures Contracts........................ 23
Interest Rate Futures................................................... 23
Stock Index Futures..................................................... 23
Futures Options......................................................... 24
Limitations............................................................. 25
Risks Associated with Futures and Futures Options....................... 25
Foreign Currency Futures and Options Thereon.............................. 26
Warrants.................................................................. 27
Duration.................................................................. 27
INVESTMENT RESTRICTIONS..................................................... 28
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT OF THE FUND...................................................... 31
Trustees and Officers..................................................... 31
Investment Adviser........................................................ 32
Portfolio Management Agreements........................................... 34
Distribution of Fund Shares............................................... 38
Purchases and Redemptions................................................. 38
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 39
Investment Decisions...................................................... 39
Brokerage and Research Services........................................... 39
Portfolio Turnover........................................................ 41
NET ASSET VALUE............................................................. 41
PERFORMANCE INFORMATION..................................................... 43
TAXATION.................................................................... 45
Distributions............................................................. 46
Hedging Transactions...................................................... 46
OTHER INFORMATION........................................................... 46
Concentration Policy...................................................... 46
Capitalization............................................................ 47
Voting Rights............................................................. 47
Custodian and Transfer Agency and Dividend Disbursing Services............ 47
Financial Statements...................................................... 48
Independent Accountants................................................... 48
Counsel................................................................... 48
Registration Statement.................................................... 48
</TABLE>
ii
<PAGE>
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
information contained in the Prospectus, including the discussion of certain
securities and investment techniques. The more detailed information contained
herein is intended solely for investors who have read the Prospectus and are
interested in a more detailed explanation of certain aspects of the Fund's
securities and investment techniques. Captions and defined terms in this
Statement of Additional Information generally correspond to like captions and
terms in the Prospectus.
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO
The investment objective and investment policies of the Money Market
Portfolio are described in the Prospectus. The following description presents
more detailed information on investment policies that apply to the Portfolio,
and is intended to supplement the information provided in the Prospectus. A
money market instrument will be considered to be highest quality (1) if the
instrument (or other comparable short-term instrument of the same issuer) is
rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), AAA or A-1 by Standard & Poor's
Corporation ("S&P")) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO,
and whose acquisition is approved or ratified by the Board of Trustees; (2) if,
for an instrument with a remaining maturity of 13 months or less that was long
term at the time of issuance, it is issued by an issuer that has short-term
debt obligations of comparable maturity, priority, and security, and that are
rated in the highest rating category by (i) any two NRSROs or, (ii) if rated by
only one NRSRO, by that NRSRO, and whose acquisition is approved or ratified by
the Board of Trustees; or (3) an unrated security that is of comparable quality
to a security in the highest rating category as determined by the Adviser and,
unless it is a U.S. Government security, whose acquisition is approved or
ratified by the Board of Trustees. With respect to 5% of its total assets,
measured at the time of investment, the Portfolio may also invest in money
market instruments that are in the second-highest rating category for short-
term debt obligations (i.e., rated Aa or Prime-2 by Moody's or AA or A-2 by
S&P). A money market instrument will be considered to be in the second-highest
rating category under the criteria described above with respect to instruments
considered highest quality, as applied to instruments in the second-highest
rating category.
The Portfolio may not invest more than 5% of its total assets, measured at
the time of investment, in securities of any one issuer that are of the highest
quality, except that this limitation shall not apply to U.S. Government
securities and repurchase agreements thereon. The Portfolio may not invest more
than the greater of 1% of its total assets or $1,000,000, measured at the time
of investment, in securities of any one issuer that are in the second-highest
rating category, except that this limitation shall not apply to U.S. Government
securities. In the event that an instrument acquired by the Portfolio is
downgraded or otherwise ceases to be of the quality that is eligible for the
Portfolio, the Adviser, under procedures approved by the Board of Trustees (or
the Board of Trustees itself if the Adviser becomes aware an unrated security
is downgraded below high quality and the Adviser does not dispose of the
security or it does not mature within five business days) shall promptly
reassess whether such security presents minimal credit risk and determine
whether or not to retain the instrument.
SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
All Portfolios may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury, and they differ with respect to certain items
such as coupons, maturities, and dates of issue. Treasury bills have a maturity
of one year or less. Treasury notes have
1
<PAGE>
maturities of one to ten years and Treasury bonds generally have a maturity of
greater than ten years. Securities guaranteed by the U.S. Government include
federal agency obligations guaranteed as to principal and interest by the U.S.
Treasury (such as GNMA certificates (described below) and Federal Housing
Administration debentures). In guaranteed securities, the payment of principal
and interest is unconditionally guaranteed by the U.S. Government, and thus
they are of the highest credit quality. Such direct obligations or guaranteed
securities are subject to variations in market value due to fluctuations in
interest rates, but, if held to maturity, the U.S. Government is obligated to
or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another: some
are backed by specific types of collateral; some are supported by the issuer's
right to borrow from the U.S. Treasury; some are supported by the discretionary
authority of the U.S. Treasury to purchase certain obligations of the issuer;
others are supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to Federal National Mortgage Association, Federal Home Loan Bank,
Federal Land Banks, Farmers Home Administration, Central Bank for Cooperatives,
Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks,
and the Tennessee Valley Authority. All the Portfolios may invest in U.S.
Government securities.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage banks, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. The High Yield
Bond, Managed Bond, Government Securities, Growth LT, and Multi-Strategy
Portfolios may invest in mortgage-related securities as well as debt securities
which are secured with collateral consisting of mortgage-related securities,
and in other types of mortgage-related securities. The Equity Portfolio and
Bond and Income Portfolio may only invest in mortgage-related securities that
are obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
Mortgage Pass-Through Securities. These are securities representing interests
in "pools" of mortgages in which payments of both interest and principal on the
securities are made periodically, in effect "passing through" periodic payments
made by the individual borrowers on the residential mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on mortgage pass-through securities
(arising from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Portfolio to a lower rate of return upon reinvestment of principal.
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (in the case
of securities guaranteed by the Government National Mortgage Association, or
"GNMAs"); or guaranteed by agencies or instrumentalities of the U.S. Government
(in the case of securities guaranteed by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
which are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities created
by nongovernmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers) which can be purchased by the Managed Bond, High
Yield Bond, Growth LT, and Multi-Strategy Portfolios may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit, which may be issued by
governmental entities, private insurers, or the mortgage poolers.
GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely payment
of interest and principal is guaranteed by the full faith and credit of the
U.S. Government. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and
2
<PAGE>
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages. GNMA certificates differ from typical
bonds because principal is repaid monthly over the term of the loan rather than
returned in a lump sum at maturity. Because both interest and principal
payments (including prepayments) on the underlying mortgage loans are passed
through to the holder of the certificate, GNMA certificates are called "pass-
through" securities.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the periodic payments made by the individual borrowers on the residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-related
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed payments
while errant receipts are tracked down may vary. Other mortgage-backed
securities such as those of FHLMC and FNMA trade in book-entry form and are not
subject to the risk of delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate of
return upon reinvestment of principal. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the GNMA certificates. Accordingly, it is not possible
to accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking in" yields
during periods of declining interest rates, although they may have comparable
risks of decline in value during periods of rising interest rates.
FNMA and FHLMC Mortgage-Backed Obligations. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA, a federally chartered and privately-owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA is a government sponsored corporation owned entirely
by private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is owned
by the 12 Federal Home Loan Banks. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal and maintains reserves to
3
<PAGE>
protect holders against losses due to default, but PCs are not backed by the
full faith and credit of the U.S. Government. As is the case with GNMA
certificates, the actual maturity of and realized yield on particular FNMA and
FHLMC pass-through securities will vary based on the prepayment experience of
the underlying pool of mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government securities by
the Portfolios, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Portfolio's diversification tests.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments,
generally is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The series A, B, and C
Bonds all bear current interest. Interest on the series Z Bond is accrued and
added to principal and a like amount is paid as principal on the series A, B,
or C Bond currently being paid off. When the series A, B, and C Bonds are paid
in full, interest and principal on the series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's
minimum sinking fund obligation for any payment date are paid to the holders of
the CMOs as additional sinking fund payments. Because of the "pass-through"
nature of all principal payments received on the collateral pool in excess of
FHLMC's minimum sinking fund requirement, the rate at which principal of the
CMOs is actually repaid is likely to be such that each class of bonds will be
retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical to
those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
4
<PAGE>
Other Mortgage-Related Securities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers may, in addition, be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-
related pools because there are no direct or indirect government or agency
guarantees of payments in the former pools. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered
in determining whether a mortgage-related security meets a Portfolio's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. A Portfolio may buy mortgage-related securities
without insurance or guarantees, if, in an examination of the loan experience
and practices of the originator/servicers and poolers, the Adviser or Portfolio
Manager determines that the securities meet a Portfolio's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Portfolio will not purchase mortgage-related securities or any
other assets which in the opinion of the Adviser or Portfolio Manager are
illiquid if, as a result, more than 15% of the value of a Portfolio's total
assets will be illiquid. It is expected that governmental, government-related,
or private entities may create mortgage loan pools and other mortgage-related
securities offering mortgage pass-through and mortgage collateralized
investments in addition to those described above. As new types of mortgage-
related securities are developed and offered to investors, the Adviser or
Portfolio Manager will, consistent with a Portfolio's investment objectives,
policies, and quality standards, consider making investments in such new types
of mortgage-related securities.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial bank, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the mortgage
assets. In particular, the yield to maturity on CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets, in the same
manner as an interest-only ("IO") class of stripped mortgage-backed securities.
See "Other Mortgage-Related Securities--Stripped Mortgage-Backed Securities."
In addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently
may not have the liquidity of other more established securities trading in
other markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Portfolio's limitations on investment in illiquid securities.
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Stripped Mortgage-backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the principal-
only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Portfolio's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES
In addition to mortgage-related securities, the High Yield Bond, Managed
Bond, Growth LT, and Multi-Strategy Portfolios may invest in other asset-backed
securities which are securities that directly or indirectly represent a
participation interest in, or are secured by and payable from a stream of
payments generated by particular assets such as automobile loans or installment
sales contracts, home equity loans, computer and other leases, credit card
receivables, or other assets. Generally, the payments from the collateral are
passed through to the security holder. Due to the possibility that prepayments
(on automobile loans and other collateral) will alter cash flow on asset-backed
securities, generally it is not possible to determine in advance the actual
final maturity date or average life of many asset-backed securities. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it may be possible to determine what the range of that movement
could be and to calculate the effect that it will have on the price of the
security. Other risks relate to limited interests in applicable collateral. For
example, credit card debt receivables are generally unsecured and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts on
credit card debt thereby reducing the balance due. Additionally, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because asset-
backed securities are relatively new, the market experience in these securities
is limited and the market's ability to sustain liquidity through all phases of
the market cycle has not been tested.
HIGH YIELD BONDS
The High Yield Bond Portfolio and, to the extent of 10% of their assets, the
Managed Bond Portfolio and Growth LT Portfolio, and, to the extent of 5% of its
assets, the International Portfolio, (measured at the time of investment), may
invest in high risk debt securities rated lower than Baa or BBB, or, if not
rated by Moody's or S&P, of equivalent quality (although the Managed Bond
Portfolio may not invest in securities rated lower than B) ("high yield bonds,"
which are commonly referred to as "junk bonds").
In general, high yield bonds are not considered to be investment grade, and
investors should consider the risks associated with high yield bonds before
investing in the pertinent Portfolio, and in particular the High Yield Bond
Portfolio. Investment in such securities generally provides greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk.
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Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield bond
market is relatively new, and many of the outstanding high yield bonds have not
endured a lengthy business recession. A long-term track record on bond default
rates such as that for investment grade corporate bonds, does not exist for the
high yield market. Analysis of the creditworthiness of issuers of debt
securities that are high yield bonds may be more complex than for issuers of
higher quality debt securities, and the ability of a Portfolio to achieve its
investment objective may, to the extent of investment in high yield bonds, be
more dependent upon such creditworthiness analysis than would be the case if
the Portfolio were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If an issuer of high yield bonds
defaults, in addition to risking payment of all or a portion of interest and
principal, a Portfolio may incur additional expenses to seek recovery. In the
case of high yield bonds structured as zero-coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes,
and therefore tend to be more volatile than securities which pay interest
periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Portfolio could sell a high
yield bond, and could adversely affect and cause large fluctuations in the
daily net asset value of the Portfolio's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly-traded market.
When secondary markets for high yield bonds are less liquid than the market for
higher grade bonds, it may be more difficult to value the securities because
such valuation may require more research, and elements of judgment may play a
greater role in the valuation because there is less reliable, objective data
available.
There are also certain risks involved in using credit ratings for evaluating
high yield bonds. For example, credit ratings evaluate the safety of principal
and interest payments, not the market value risk of high yield bonds. Also,
credit rating agencies may fail to timely reflect subsequent events.
BANK OBLIGATIONS
Bank obligations in which all Portfolios may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Each Portfolio may also
hold funds on deposit with its sub-custodian bank in an interest-bearing
account for temporary purposes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a
beneficial interest in a fixed time deposit to a third party, although there is
no market for such deposits. A Portfolio will not invest in fixed time deposits
which are (i) not subject to prepayment, or (ii) which provide for withdrawal
penalties upon prepayment (other than overnight deposits) if, in the aggregate,
more than 15% of its assets would be invested in such deposits, repurchase
agreements maturing in more than seven days, and other illiquid assets.
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A Portfolio will not invest in any security issued by a commercial bank
unless: (i) the bank has total assets of at least U.S. $1 billion (U.S. $2
billion in the case of the Bond and Income Portfolio), or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least U.S. $1 billion, the aggregate investment made in any one
such bank is limited to an amount, currently U.S. $100,000, insured in full by
the Federal Deposit Insurance Corporation; (ii) in the case of U.S. banks, it
is a member of the Federal Deposit Insurance Corporation; and (iii) in the case
of foreign banks, the security is, in the opinion of the Adviser or the
Portfolio's Portfolio Manager, of an investment quality comparable with other
debt securities of similar maturities which may be purchased by the Portfolio.
These limitations do not prohibit investments in securities issued by foreign
branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
All Portfolios may invest in short-term debt obligations of savings and loan
associations. A Portfolio will not invest in any security issued by a savings
and loan association unless: (i) the savings and loan association has total
assets of at least $1 billion (U.S. $2 billion in the case of the Bond and
Income Portfolio), or, in the case of savings and loan associations which do
not have total assets of at least $1 billion, the aggregate investment made in
any one savings and loan association is insured in full, currently up to
$100,000, by the Savings Association Insurance Fund; (ii) the savings and loan
association issuing the security is a member of the Federal Home Loan Bank
System; and (iii) the institution is insured by the Savings Association
Insurance Fund.
A Portfolio will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than 15%
of the value of its total assets would be invested in such securities, other
illiquid securities, or securities without readily available market quotations,
such as restricted securities and repurchase agreements maturing in more than
seven days.
The International Portfolio limits its investments in obligations of foreign
banks (including U.S. branches of foreign banks) which at the time of
investment (i) have more than U.S. $1 billion, or the equivalent in other
currencies, in total assets; and (ii) in the opinion of the Portfolio's
Portfolio Manager, are of an investment quality comparable to fixed income
obligations in which the Portfolio may invest. There is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of
foreign banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks than
those affecting obligations of U.S. banks, including: (i) the possibilities
that their liquidity could be impaired because of future political and economic
developments; (ii) their obligations may be less marketable than comparable
obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks or the accounting, auditing, and
financial reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to United States banks. Foreign banks
are not generally subject to examination by any U.S. Government agency or
instrumentality.
The International Portfolio's investment in convertible securities, described
below, that are purchased in furtherance of the Portfolio's investment
objective, is not subject to the limitations described above with respect to
bank obligations.
CORPORATE DEBT SECURITIES
All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and the Money Market, High Yield Bond, Managed
Bond, Growth LT, Multi-Strategy, and International Portfolios may invest in
U.S. dollar-denominated debt securities of foreign issuers. The Growth LT,
Multi-Strategy, and International Portfolios may also invest in debt securities
of foreign issuers denominated in
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foreign currencies. The debt securities in which any Portfolio other than the
Money Market Portfolio may invest are limited to corporate debt securities
(corporate bonds, debentures, notes, and other similar corporate debt
instruments) which meet the minimum ratings criteria set forth for that
particular Portfolio, or, if not so rated, are, in the Portfolio Manager's
opinion, comparable in quality to corporate debt securities in which a
Portfolio may invest. The debt securities in which the Money Market Portfolio
may invest are described in the discussion of the investment objective and
policies of that Portfolio.
The investment return on corporate debt securities reflects interest earnings
and changes in the market value of the security. The market value of corporate
debt obligations may be expected to rise and fall inversely with interest rates
generally. There also exists the risk that the issuers of the securities may
not be able to meet their obligations on interest or principal payments at the
time called for by an instrument.
The High Yield Bond, Managed Bond, Growth LT, Equity Income, Multi-Strategy,
Bond and Income, and International Portfolios may invest in corporate debt
securities rated Baa (Moody's) or BBB (S&P), or, if not rated by Moody's or
S&P, of equivalent quality. Such securities are considered medium grade, and do
not have economic characteristics that provide the high degree of security with
respect to payment of principal and interest associated with higher rated
bonds, and generally have some speculative characteristics. A bond will be
placed in this rating category where interest payments and principal security
appear adequate for the present, but economic characteristics that provide
longer term protection may be lacking.
The High Yield Bond and, to the extent of 10% of their assets, the Managed
Bond Portfolio and Growth LT Portfolio, and to the extent of 5% of its assets,
the International Portfolio, may invest in debt securities rated lower than Baa
or BBB (although the Managed Bond Portfolio may not invest in securities rated
lower than B), or, if not rated by Moody's or S&P, of equivalent quality. Such
securities are not considered to be investment grade, and are regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of such
securities, see the discussion of "High Yield Bonds" above.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities which
provide for a periodic adjustment in the interest rate paid on obligations. The
terms of such obligations must provide that interest rates are adjusted
periodically based upon an appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be
regular, and range from daily to annually, or may be event based, such as based
on a change in the prime rate.
COMMERCIAL PAPER
All of the Portfolios may invest in commercial paper (including variable
amount master demand notes). Each Portfolio other than the Money Market and
Equity Portfolios may invest in commercial paper denominated in U.S. dollars,
issued by U.S. corporations or foreign corporations and (1) rated at the date
of investment Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P or (3) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest. If issued by a foreign
corporation, such commercial paper is U.S. dollar-denominated and not subject
at the time of purchase to foreign tax withholding. The International Portfolio
may, however, invest in commercial paper denominated in foreign currencies. The
Money Market Portfolio may invest in commercial paper that meets the standards
for money market securities that Portfolio may acquire as described in the
Prospectus in the section "Investment Objectives and Policies." The Equity
Portfolio may invest in commercial paper (1) rated at the time of purchase
Prime-1 by Moody's or A-1 by S&P or (2) if not rated by either Moody's or S&P,
issued by a corporation having an outstanding debt issue rated Aa or better by
Moody's or AA or better by S&P.
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Commercial paper obligations may include variable amount master demand notes.
These are obligations that permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. These notes permit daily changes in the amounts
borrowed. The lender has the right to increase the amount under the note at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, it is not generally contemplated
that such instruments will be traded and there is no secondary market for these
notes. However, they are redeemable (and thus immediately repayable by the
borrower) at face value, plus accrued interest, at any time. In connection with
master demand note arrangements, the Adviser or Portfolio Manager will monitor,
on an ongoing basis, the earning power, cash flow, and other liquidity ratios
of the borrower and its ability to pay principal and interest on demand. The
Adviser or Portfolio Manager also will consider the extent to which the
variable amount master demand notes are backed by bank letters of credit. These
notes generally are not rated by Moody's or S&P; a Portfolio other than the
Money Market Portfolio may invest in them only if the Adviser or Portfolio
Manager believes that at the time of investment the notes are of comparable
quality to the other commercial paper in which the Portfolio may invest. With
respect to the Money Market Portfolio, determination of eligibility for the
Portfolio will be in accordance with the standards described in the discussion
of the Portfolio in the prospectus on "Investment Objectives and Policies."
Master demand notes are considered by the Portfolio to have a maturity of one
day unless the Adviser or Portfolio Manager has reason to believe that the
borrower could not make immediate repayment upon demand. See the Appendix in
the Prospectus for a description of Moody's and S&P ratings applicable to
commercial paper.
CONVERTIBLE SECURITIES
All Portfolios except the Money Market Portfolio may invest in convertible
securities. The convertible securities in the Portfolio's portfolios are fixed-
income securities which may be converted or exchanged at a stated exchange
ratio into underlying shares of common stock. The exchange ratio for any
particular convertible security may be adjusted from time to time due to stock
splits, dividends, spin-offs, other corporate distributions, or scheduled
changes in the exchange ratio. Convertible bonds and convertible preferred
stocks, until converted, have general characteristics similar to both fixed-
income and equity securities. Although to a lesser extent than with fixed-
income securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks, and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities there can be no assurance
of current income because the issuers of the convertible securities may default
in their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation.
A convertible security, in addition to providing fixed-income, offers the
potential for capital appreciation through the conversion feature which enables
the holder to benefit from increases in the market price of the underlying
common stock. In selecting the securities for a Portfolio, the Adviser or
Portfolio Manager gives substantial consideration to the potential for capital
appreciation of the common stock underlying the convertible securities.
However, there can be no assurance of capital appreciation because securities
prices fluctuate.
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Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.
A "synthetic convertible" is created by combining distinct securities which
possess the two principal characteristics of a true convertible, i.e., fixed-
income ("fixed-income component") and the right to acquire equity securities
("convertibility component"). This combination is achieved by investing in non-
convertible fixed-income securities (non-convertible bonds and preferred
stocks) and in warrants, granting the holder the right to purchase a specified
quantity of securities within a specified period of time at a specified price.
However, the synthetic convertible differs from the true convertible security
in several respects. Unlike a true convertible, which is a single security
having a unitary market value, a synthetic convertible is comprised of two
distinct securities, each with its own market value. Therefore, the "market
value" of a synthetic convertible is the sum of the values of its fixed-income
component and its convertibility component. For this reason, the value of a
synthetic convertible and a true convertible security will respond differently
to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible than
in the purchase of a convertible security in that its two components may be
purchased separately. For example, a Portfolio Manager may purchase a warrant
for inclusion in a synthetic convertible but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the
stock underlying the convertibility component will decline, causing a decline
in the value of the warrant; should the price of the stock fall below the
exercise price and remain there throughout the exercise period, the entire
amount paid for the warrant would be lost. Since a synthetic convertible
includes the fixed-income component as well, the holder of a synthetic
convertible also faces the risk that interest rates will rise, causing a
decline in the value of the fixed-income instrument.
REPURCHASE AGREEMENTS
All Portfolios may invest in repurchase agreements, which entail the purchase
of a portfolio eligible security from a bank or broker-dealer that agrees to
repurchase the security at the Portfolio's cost plus interest within a
specified time (normally one day). Repurchase agreements permit an investor to
maintain liquidity and earn income over periods of time as short as overnight.
If a Portfolio acquires securities from a bank or broker-dealer it may
simultaneously enter into a repurchase agreement with the seller wherein the
seller agrees at the time of sale to repurchase the security at a mutually
agreed upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price
is in excess of the purchase price by an amount which reflects an agreed upon
market rate of return, effective for the period of time the Portfolio is
invested in the security. This results in a fixed rate of return protected from
market fluctuations during the period of the agreement. This rate is not tied
to the coupon rate on the security subject to the repurchase agreement.
If the party agreeing to repurchase should default and if the value of the
securities held by a Portfolio should fall below the repurchase price, a loss
could be incurred. Repurchase agreements will be entered into only where the
underlying security is within the three highest credit categories assigned by
established rating agencies (Aaa, Aa, or A by Moody's or AAA, AA, or A by S&P)
or, if not rated by Moody's or S&P, are of equivalent investment quality as
determined by the Adviser or Portfolio Manager, except that the Money Market
Portfolio will enter into repurchase agreements only where the underlying
securities are of the quality that is eligible for the Portfolio as described
in the discussion of that Portfolio's investment objective and policies.
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Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Portfolio Manager to a Portfolio monitors
the value of the underlying securities at the time the repurchase agreement is
entered into and at all times during the term of the agreement to ensure that
its value always equals or exceeds the agreed upon repurchase price to be paid
to the Portfolio. The Adviser or Portfolio Manager, in accordance with
procedures established by the Board of Trustees, also evaluates the
creditworthiness and financial responsibility of the banks and brokers or
dealers with which the Portfolio enters into repurchase agreements.
A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 15% of the
total assets of the Portfolio. If the seller should become bankrupt or default
on its obligations to repurchase the securities, a Portfolio may experience
delay or difficulties in exercising its rights to the securities held as
collateral and might incur a loss if the value of the securities should
decline. A Portfolio also might incur disposition costs in connection with
liquidating the securities.
BORROWING
Each Portfolio may borrow up to certain limits. A Portfolio may not borrow
if, as a result of such borrowing, the total amount of all money borrowed by
the Portfolio exceeds 10% of the value of its net assets (at the time of such
borrowing), or if borrowing for temporary purposes, such as to facilitate
redemptions, 25% of the value of its net assets. These limits may be exceeded
by 5% of the value of a Portfolio's net assets so that they are 15% and 30%,
respectively, to the extent that a Portfolio purchases securities on a "when-
issued" basis or enters into firm-commitment agreements to purchase securities,
both of which are considered borrowings for purposes of the Fund's limits. This
borrowing may be unsecured. Borrowing may exaggerate the effect on net asset
value of any increase or decrease in the market value of a Portfolio. Money
borrowed will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased. A Portfolio also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate.
Reverse repurchase agreements will be included as borrowing subject to the
borrowing limitations described above.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
Among the forms of borrowing in which the High Yield Bond, Managed Bond,
Government Securities, Growth LT, Bond and Income, and Equity Index Portfolios
may engage is the entry into reverse repurchase agreements, which involves the
sale of a debt security held by the Portfolio, with an agreement by that
Portfolio to repurchase the security at a stated price, date and interest
payment.
A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement or which are held under an agreement to resell maturing as of that
time. The use of reverse repurchase agreements by a Portfolio creates leverage
which increases a Portfolio's investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the cost of the agreements, the Portfolio's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case. A Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction. However, reverse repurchase agreements involve the
risk that the market value of securities retained by the Portfolio may decline
below the repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase.
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Under the 1940 Act, reverse repurchase agreements may be considered to be
borrowings by the seller; accordingly, a Portfolio will limit its investments
in reverse repurchase agreements consistent with the borrowing limits
applicable to the Portfolio. See "Borrowing" for further information on these
limits.
A Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires the
creation and maintenance of a segregated account consisting of U.S. Government
securities or cash or cash equivalents equal in value to its obligations in
respect of reverse repurchase agreements.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
All Portfolios may enter into firm commitment agreements for the purchase of
securities at an agreed upon price on a specified future date. A Portfolio may
purchase new issues of securities on a "when-issued" basis, whereby the payment
obligation and interest rate on the instruments are fixed at the time of the
transaction. Such transactions might be entered into, for example, when the
Adviser or Portfolio Manager to a Portfolio anticipates a decline in the yield
of securities of a given issuer and is able to obtain a more advantageous yield
by committing currently to purchase securities to be issued or delivered later.
A Portfolio will not enter into such a transaction for the purpose of
investment leverage. Liability for the purchase price--and all the rights and
risks of ownership of the securities--accrue to the Portfolio at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Portfolio to
purchase the security at a price above the current market price on the date of
delivery and payment. During the time the Portfolio is obligated to purchase
such securities it will maintain in a segregated account U.S. Government
securities, high-grade debt obligations, or cash or cash equivalents of an
aggregate current value sufficient to make payment for the securities.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio, except the
Equity Income, Multi-Strategy, and Equity Index Portfolios, may make secured
loans of its portfolio securities to broker-dealers or U.S. banks provided: (i)
such loans are secured continuously by collateral consisting of cash, cash
equivalents, or U.S. Government securities maintained on a daily marked-to-
market basis in an amount or at a market value at least equal to the current
market value of the securities loaned; (ii) the Portfolio may at any time call
such loans and obtain the securities loaned; (iii) the Portfolio will receive
an amount in cash at least equal to the interest or dividends paid on the
loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed 25% of the total assets of the Portfolio. In
addition, it is anticipated that the Portfolio may share with the borrower some
of the income received on the collateral for the loan or that it will be paid a
premium for the loan. It should be noted that in connection with the lending of
its portfolio securities, the Portfolio is exposed to the risk of delay in
recovery of the securities loaned or possible loss of rights in the collateral
should the borrower become insolvent. In determining whether to lend
securities, the Adviser or Portfolio Manager considers all relevant facts and
circumstances including the creditworthiness of the borrower. Voting rights
attached to the loaned securities may pass to the borrower with the lending of
portfolio securities. However, the Portfolio intends to call loaned voting
securities if important shareholder meetings are imminent.
SHORT SALES AGAINST THE BOX
The Equity Portfolio may enter into short sales "against the box." A short
sale is made by selling a security the Portfolio does not own. A short sale is
"against the box" when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount
of securities sold short. No more than 15% of the value of the Equity
Portfolio's net assets will be subject to such short sales at any time.
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RESTRICTED SECURITIES (PRIVATE PLACEMENTS)
The Money Market, High Yield Bond, Growth LT, Equity Income, Multi-Strategy,
Equity, Bond and Income, and International Portfolios may invest in restricted
securities (including privately placed securities) but a Portfolio will not
acquire such securities if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if as
a result they would comprise more than 15% of the value of the Portfolio's
total assets, and in the case of the Money Market Portfolio, 10% of the value
of its Portfolio assets. The privately placed securities in which these
Portfolios may invest are called restricted securities because there are
restrictions or conditions attached to their resale.
Restricted securities may be sold only in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933 or
in a transaction exempt from such registration such as certain privately
negotiated transactions. Where registration is required, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair value as
determined in good faith under the direction of the Board of Trustees. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio should be in a position where more than
15% of the value of its total assets are invested in restricted securities that
are illiquid and other securities that are illiquid, the Portfolio will
consider whether steps should be taken to assure liquidity.
Certain restricted securities may be purchased by certain "qualified
institutional buyers" without the necessity for registration of the securities.
A Portfolio may acquire such a security without the security being treated as
illiquid for purposes of the above-described limitation on acquisition of
illiquid assets if the Portfolio Manager determines that the security is liquid
under guidelines adopted by the Fund's Board of Trustees. Investing in such
restricted securities could have the effect of increasing the level of the
Portfolio's illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
FOREIGN SECURITIES
The Money Market, High Yield Bond, Managed Bond, Growth LT, Multi-Strategy,
and International Portfolios may invest directly in U.S. dollar-denominated
corporate debt securities of foreign issuers, certain foreign bank obligations
and U.S. dollar-denominated obligations of foreign governments, foreign
government agencies and international agencies. The Growth LT, Equity Income,
Multi-Strategy and Equity Index Portfolios may invest in equity securities of
foreign issuers if U.S. exchange listed or if otherwise included in the S&P
500. The Growth LT Portfolio may invest in U.S. exchange listed securities of
foreign issuers and may invest up to 25% of its assets in foreign securities
denominated in a foreign currency and not publicly traded in the United States.
The International Portfolio may invest in equity securities of foreign
corporations, nonconvertible fixed income securities denominated in foreign
currencies, and in securities represented by European Depository Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), or other securities convertible
into equity securities of foreign issuers. The Growth LT Portfolio may also
invest in EDRs and GDRs and other types of receipts of shares evidencing
ownership of the underlying foreign securities. The Managed Bond and Government
Securities Portfolios may each invest up to 10% of their assets in non-U.S.
dollar-denominated debt securities of foreign issuers. All Portfolios may
purchase American Depositary Receipts ("ADRs") which are dollar-denominated
receipts issued generally by domestic banks and representing the deposit with
the bank of a security of a foreign issuer. ADRs are publicly-traded on
exchanges or over-the-counter in the United States.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks are intensified with respect to investments in emerging market countries.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of
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expropriation, nationalization, or confiscatory taxation, adverse changes in
investment or exchange control regulations, trade restrictions, political
instability (which can affect U.S. investments in foreign countries), and
potential restrictions on the flow of international capital. It may be more
difficult to obtain and enforce judgments against foreign entities.
Additionally, income (including dividends and interest) from foreign securities
may be subject to foreign taxes, including foreign withholding taxes, and other
foreign taxes may apply with respect to securities transactions. Transactions
on foreign exchanges or over-the-counter markets may involve greater time from
the trade date until settlement than for domestic securities transactions and,
if the securities are held abroad, may involve the risk of possible losses
through the holding of securities in custodians and depositories in foreign
countries. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility. Changes
in foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Investing in
ADRs may involve many of the same special risks associated with investing in
securities of foreign issuers other than liquidity risks.
There is generally less publicly available information about foreign
companies comparable to reports and ratings that are published about companies
in the United States. Foreign companies are also generally not subject to
uniform accounting and auditing and financial reporting standards, practices,
and requirements comparable to those applicable to U.S. companies.
It is contemplated that most foreign securities will be purchased in over-
the-counter markets or on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New
York Stock Exchange, and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times, volatility of price can be greater than in the United
States. Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges, although the Portfolio will endeavor
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, nationalization,
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Portfolio, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency,
and balance of payments position.
The dividends and interest payable on certain of the Portfolios' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution.
Investors should understand that the expense ratio of the International
Portfolio can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Portfolio are higher.
Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. The Fund has entered into a Custody
Agreement with Investors Fiduciary Trust Company ("IFTC"), a trust company
chartered under the laws of Missouri, which has entered into a Subcustodial
Agreement with The Chase Manhattan Bank, N.A., ("Chase") under which Chase,
together with certain of its foreign branches and agencies and foreign banks
and securities depositories acting as subcustodian to Chase, will maintain
custody of the securities and other assets of foreign issuers for the Fund.
Under these agreements, Chase and IFTC have agreed to use reasonable care in
the safekeeping of these securities and to indemnify and hold harmless the Fund
from and against
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any loss which shall occur as a result of the failure of a foreign bank or
securities depository holding such securities to exercise reasonable care in
the safekeeping of such securities to the same extent as if the securities were
held in New York. Pursuant to requirements of the Securities and Exchange
Commission, Chase is required to use reasonable care in the selection of
foreign subcustodians, and to consider the financial strength of the foreign
subcustodian, its general reputation and standing in the country in which it is
located, its ability to provide efficiently the custodial services required,
and the relative costs for the services to be rendered by it. No assurance can
be given that expropriation, nationalization, freezes, or confiscation of
assets, which would impact assets of the Portfolio, will not occur, and
shareholders bear the risk of losses arising from these or other events.
As indicated in the Prospectus, the International Portfolio may invest in
shares of investment companies organized to invest in foreign countries. Under
the 1940 Act, the Portfolio may not own more than 3% of the outstanding voting
stock of an investment company, invest more than 5% of the Portfolio's total
assets in any one investment company, or invest more than 10% of the
Portfolio's total assets in the securities of investment companies.
The International Portfolio will invest in the securities of issuers
domiciled or primarily traded in at least five foreign countries if the
Portfolio has invested at least 80% of its net assets in foreign issuers. If
the Portfolio has less than 20% of its net assets in foreign issuers, then all
of such investment may be in issuers domiciled or primarily traded in one
country. If the Portfolio has at least 20% but less than 40% of its net assets
in foreign issuers, then such investment must be allocated to issuers domiciled
or primarily traded in at least two foreign countries. Similarly, if the
Portfolio has at least 40% but less than 60% of its net assets invested in
foreign issuers such investment must be allocated to at least three foreign
countries. Foreign investments must be allocated to at least four foreign
countries if such investments comprise at least 60% but less than 80% of the
Portfolio's net assets. The Portfolio will not invest more than 20% of its net
assets in securities of issuers domiciled or primarily traded in any one
country, except that the Portfolio may invest up to 35% of its net assets in
issuers domiciled or primarily traded in any one of the following countries:
Australia, Canada, France, Japan, the United Kingdom, or Germany. The Portfolio
is not subject to any limit upon investment in issuers domiciled or primarily
traded in the United States.
FOREIGN CURRENCY TRANSACTIONS
Generally, the foreign exchange transactions of the Managed Bond, Government
Securities, Growth LT, Multi-Strategy, and International Portfolios will be
conducted on a spot, i.e., cash, basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. This rate, under
normal market conditions, differs from the prevailing exchange rate in an
amount generally less than 0.15 of 1% due to the costs of converting from one
currency to another. However, the Managed Bond, Government Securities, Growth
LT, Multi-Strategy and International Portfolios have authority to deal in
forward foreign exchange between currencies of the different countries in which
the Portfolios will invest as a hedge against possible variations in the
foreign exchange rate between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. A Portfolio's dealings
in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of a Portfolio arising from the purchase and sale of
portfolio securities, the sale and redemption of shares of a Portfolio, or the
payment of dividends and distributions by a Portfolio. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Portfolios will not
speculate in forward foreign exchange.
Forward Foreign Currency Contracts. The Managed Bond, Government Securities,
Growth LT, Multi-Strategy and International Portfolios may enter into forward
foreign currency contracts only under two circumstances. First, when a
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a
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forward contract for the purchase or sale of the amount of foreign currency
involved in the underlying security transactions for a fixed amount of dollars,
a Portfolio will be able to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date the security is
purchased or sold and the date on which payment in made or received.
Second, when the Portfolio Manager of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
amount of the former foreign currency, approximating the value of some or all
of the Portfolio's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movements is extremely difficult and the successful execution
of a short-term hedging strategy is highly uncertain. In no event will a
Portfolio enter into forward contracts under this second circumstance, or
maintain a net exposure to such contracts, where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of that Portfolio's portfolio securities or other assets
denominated in that currency. In addition, a Portfolio will not enter into
forward contracts under this second circumstance, if, as a result, the
Portfolio will have more than 25% of the value of its total assets committed to
the consummation of such contracts. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies. A
Portfolio's custodian bank will place cash or liquid equity or debt securities
in a separate account of the Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts entered into under the second circumstance, as set
forth above. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the amount of the
Portfolio's commitments with respect to such contracts.
When a Portfolio Manager of a Portfolio believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, that
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's holdings
denominated in such foreign currency. At the maturity of the forward contract
to sell, the Portfolio may either sell the portfolio security and make delivery
of the foreign currency or it may retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating the Portfolio to
purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into
a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Portfolio will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
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A Portfolio's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, a Portfolio is not
required to enter into such transactions with regard to their foreign currency
denominated securities and will not do so unless deemed appropriate by its
Portfolio Manager. It also should be realized that this method of protecting
the value of a Portfolio's holdings in securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which one can achieve
at some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result from
the value of such currency increase.
Although a Portfolio values its shares in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
The Growth LT Portfolio may also purchase and write options on foreign
currencies, invest in foreign currency futures contracts, and purchase and
write options thereon, as described below.
OPTIONS
In pursuing their investment objectives, the High Yield Bond, Managed Bond,
Government Securities, Growth LT, Equity Income, and Multi-Strategy Portfolios
may engage in the purchase and writing of put and call options on securities.
In pursuing their investment objectives, the Growth LT, Equity Income, Multi-
Strategy, and Equity Index Portfolios may purchase put and call options on
stock indexes. The Equity Portfolio may write exchange-listed call options.
Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Growth LT, Equity Income, and Multi-Strategy
Portfolios may purchase and write put and call options on securities. A
Portfolio may purchase and sell (write) (i) both put and call options on debt
or other securities in standardized contracts traded on national securities
exchanges, boards of trade, similar entities, or for which an established over-
the-counter market exists; and (ii) agreements, sometimes called cash puts,
which may accompany the purchase of a new issue of bonds from a dealer. The
Equity Portfolio may only write call options that are traded on a national
securities exchange, and it may purchase a call option on securities only to
effect a "closing purchase transaction" (i.e., the purchase of a call covering
the same underlying security and having the same exercise price and expiration
date as a call previously written by the Equity Portfolio on which it wished to
terminate its obligation).
An option on a security is a contract that gives the holder of the option, in
return for a premium, the right to buy from (in the case of a call) or sell to
(in the case of a put) the writer of the option the security underlying the
option at a specified exercise price at any time during the term of the option.
The writer of an option on a security has the obligation upon exercise of the
option to deliver the underlying security upon payment of the exercise price or
to pay the exercise price upon delivery of the underlying security. A Portfolio
may purchase put options on securities to protect holdings in an underlying or
related security against a substantial decline in market value. Securities are
considered related if their price movements generally correlate to one another.
For example, the purchase of put options on debt securities held in a Portfolio
will enable a Portfolio to protect, at least partially, an unrealized gain in
an appreciated security without actually selling the security. In addition, the
Portfolio will continue to receive interest income on such security.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner.
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A Portfolio may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. A Portfolio may also allow options to
expire unexercised.
Gains or losses on the Portfolios' transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indexes, in a particular industry or segment of the market)
rather than the price movements of individual securities held by a Portfolio of
the Fund. A Portfolio may sell securities index options prior to expiration in
order to close out its positions in stock index options which it has purchased.
A Portfolio may also allow options to expire unexercised.
A Portfolio may write call options and put options only if they are "covered"
or "secured." In the case of a call option on a security, the option is
"covered" if the Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Portfolio. A put is
secured if the Portfolio maintains cash, cash equivalents or U.S. Government
securities with a value equal to the exercise price in a segregated account or
holds a put on the same underlying security at an equal or greater exercise
price.
In the case of options on certain U.S. Government securities, the Portfolio
will maintain, in a segregated account with the Fund's Custodian, cash or cash
equivalents, or U.S. Government securities with a value sufficient to meet its
obligations under the call, or by other means which would permit immediate
satisfaction of the Portfolio's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase
or sale of an option of the same series.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security in
relation to the exercise price of the option, the volatility of the underlying
security, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
Purchasing Options on Stock Indexes. The Growth LT, Equity Income, Multi-
Strategy, and Equity Index Portfolios may purchase exchange traded put and call
options on stock indexes. Like other options listed on United States securities
exchanges, index options are issued by the Options Clearing Corporation (OCC).
A stock index is a method of reflecting in a single number the market values
of many different stocks or, in the case of value weighted indices that take
into account prices of component stocks and the number of shares outstanding,
the market values of many different companies. Stock indexes are compiled and
published by various sources, including securities exchanges. An index may be
designed to be representative of the stock
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market as a whole, of a broad market sector (e.g., industrials), or of a
particular industry (e.g., electronics). An index may be based on the prices of
all, or only a sample, of the stocks whose value it is intended to represent.
A stock index is ordinarily expressed in relation to a "base" established
when the index was originated. The base may be adjusted from time to time to
reflect, for example, capitalization changes affecting component stocks. In
addition, stocks may from time to time be dropped from or added to an index
group. These changes are within the discretion of the publisher of the index.
Different stock indexes are calculated in different ways. Often the market
prices of the stocks in the index group are "value weighted;" that is, in
calculating the index level, the market price of each component stock is
multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes
referred to as a capitalization weighted) index than price changes affecting
smaller corporations.
In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is
exercised, the exercise is settled by the payment of cash--not by the delivery
of stock. The assigned writer of a stock option is obligated to pay the
exercising holder cash in an amount equal to the difference (expressed in
dollars) between the closing level of the underlying index on the exercise date
and the exercise price of the option, multiplied by a specified index
"multiplier." A multiplier of 100, for example, means that a one-point
difference will yield $100.
In order to earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a Portfolio may
write covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. During the option period, a covered call option
writer may be assigned an exercise notice by the broker-dealer through whom
such call option was sold requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation is terminated
upon the expiration of the option period or at such earlier time in which the
writer effects a closing purchase transaction. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call option on
the underlying security with either a different exercise price or expiration
date or both.
In order to earn additional income or to facilitate its ability to purchase a
security at a price lower than the current market price of such security, a
Portfolio may write secured put options. During the option period, the writer
of a put option may be assigned an exercise notice by the broker-dealer through
whom the option was sold requiring the writer to purchase the underlying
security at the exercise price.
A Portfolio will enter only into options which are standardized and traded on
a U.S. exchange or board of trade, or for which an established over-the-counter
market exists.
Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option it had purchased on a security, it would have to exercise the option
to realize any profit or the option may expire worthless. If a Portfolio were
unable to close out a covered call option it had written on a security, it
would not be able to sell the underlying security
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unless the option expired without exercise. As the writer of a covered call
option, a Portfolio forgoes, during the option's life, the opportunity to
profit from increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on
exercise were imposed, the Portfolio might be unable to exercise an option it
has purchased.
With respect to index options, current index levels will ordinarily continue
to be reported even when trading is interrupted in some or all of the stocks in
an index group. In that event, the reported index levels will be based on the
current market prices of those stocks that are still being traded (if any) and
the last reported prices for those stocks that are not currently trading. As a
result, reported index levels may at times be based on non-current price
information with respect to some or even all of the stocks in an index group.
Exchange rules permit (and in some instances require) the trading of index
options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks accounts for more than a
specified percentage of the value of the underlying index. In addition, as with
other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire
worthless.
Spread Transactions. The High Yield Bond Portfolio may purchase from and sell
to securities dealers covered spread options. Such covered spread options are
not presently exchange listed or traded. The purchase of a spread option gives
the Portfolio the right to put, or sell, a security that it owns at a fixed
dollar spread or fixed yield spread in relationship to another security that
the Portfolio does not own, but which is used as a benchmark. The risk to the
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option. The security covering the spread option will be
maintained in a segregated account by the Fund's custodian. The Portfolio does
not consider a security covered by a spread option to be "pledged" as that term
is used in the Fund's policy limiting the pledging or mortgaging of its assets.
OPTIONS ON FOREIGN CURRENCIES
The Growth LT and International Portfolios may buy and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures or forward contracts on foreign currencies will be utilized. For
example, a decline in the U.S. dollar value of a foreign currency in which
portfolio securities are denominated will reduce the U.S. dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Portfolio may buy put options on the foreign currency. If the value of the
currency declines, the Portfolio will have the right to sell such currency for
a fixed amount in U.S. dollars and will offset, in whole or in part, the
adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In
addition, if currency exchange rates do not move in the direction or to the
extent desired, the Portfolio could sustain losses on transactions in foreign
currency options that would require the Portfolio to forgo a portion or all of
the benefits of advantageous changes in those rates.
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A Portfolio may write options on foreign currencies for hedging purposes.
For example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates, the Portfolio could, instead of purchasing a put option, write
a call option on the relevant currency. If the expected decline occurs, the
option will most likely not be executed and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Portfolio
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Portfolio to hedge the
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium. If exchange rates do not
move in the expected direction, the option may be exercised and the Portfolio
would be required to buy or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
A Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written if the exercise price of the call held (i) is equal
to or less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written, if the difference is maintained by the
Portfolio in cash or high-grade liquid assets in a segregated account with the
Fund's custodian.
A Portfolio also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes the
option by maintaining, in a segregated account with the Fund's custodian, cash
or high-grade liquid assets in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
Foreign currency options are subject to the risks of the availability of a
liquid secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented by
the over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the Options Clearing Corporation
("OCC"), which has established banking relationships in applicable foreign
countries for this purpose. As a result, the OCC may, if it determines that
foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
In addition, options on foreign currencies may be traded on foreign
exchanges and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which
to make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, and International Portfolios may invest in interest rate futures and
options thereon. The Growth LT, Equity Income, Multi-Strategy, Equity Index,
and International Portfolios may invest in stock index futures and options
thereon.
Interest Rate Futures. (The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, and International Portfolios.) An
interest rate futures contract is an agreement between two parties (buyer and
seller) to take or make delivery of a specified quantity of financial
instruments (such as GNMA certificates or Treasury bonds) at a specified price
at a future date. In the case of futures contracts traded on U.S. exchanges,
the exchange itself or an affiliated clearing corporation assumes the opposite
side of each transaction (i.e., as buyer or seller). A futures contract may be
satisfied or closed out by delivery or purchase, as the case may be, of the
financial instrument or by payment of the change in the cash value of the
index. Frequently, using futures to effect a particular strategy instead of
using the underlying or related security will result in lower transaction costs
being incurred. A public market exists in futures contracts covering various
financial instruments including U.S. Treasury bonds, U.S. Treasury notes, GNMA
certificates, three month U.S. Treasury bills, 90 day commercial paper, bank
certificates of deposit, and Eurodollar certificates of deposit.
As a hedging strategy a Portfolio might employ, a Portfolio would purchase an
interest rate futures contract when it is not fully invested in long-term debt
securities but wishes to defer their purchase for some time until it can
orderly invest in such securities or because short-term yields are higher than
long-term yields. Such purchase would enable the Portfolio to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which
the Portfolio intended to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the Portfolio or
avoided by taking delivery of the debt securities under the futures contract.
A Portfolio would sell an interest rate futures contract in order to continue
to receive the income from a long-term debt security, while endeavoring to
avoid part or all of the decline in market value of that security which would
accompany an increase in interest rates. If interest rates did rise, a decline
in the value of the debt security held by the Portfolio would be substantially
offset by the ability of the Portfolio to repurchase at a lower price the
interest rate futures contract previously sold. While the Portfolio could sell
the long-term debt security and invest in a short-term security, ordinarily the
Portfolio would give up income on its investment, since long-term rates
normally exceed short-term rates.
Stock Index Futures. (The Growth LT, Equity Income, Multi-Strategy, Equity
Index, and International Portfolios.) A stock index is a method of reflecting
in a single number the market values of many different stocks or, in the case
of capitalization weighted indices that take into account both stock prices and
the number of shares outstanding, many different companies. An index fluctuates
generally with changes in the market values of the common stocks so included. A
stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount multiplied by the difference between the stock index
value at the close of the last trading day of the contract and the price at
which the futures contract is originally purchased or sold. No physical
delivery of the underlying stocks in the index is made.
The Growth LT, Equity Income, Multi-Strategy, Equity Index, and International
Portfolios may purchase and sell stock index futures contracts to hedge its
securities portfolio. A Portfolio may engage in transactions in futures
contracts only in an effort to protect it against a decline in the value of the
Portfolio's portfolio securities or an increase in the price of securities that
the Portfolio intends to acquire. For example, a Portfolio may sell stock index
futures to protect against a market decline in an attempt to offset partially
or wholly a decrease in the market value of securities that the Portfolio
intends to sell. Similarly, to protect against a market advance when the
Portfolio is not fully invested in the securities market, the Portfolio may
purchase stock index futures that may partly or entirely offset increases in
the cost of securities that the Portfolio intends to purchase.
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Futures Options. The High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, and International Portfolios may purchase and sell
(write) call and put futures options on interest rate futures. Futures options
possess many of the same characteristics as options on securities. A futures
option gives the holder the right, in return for the premium paid, to assume a
long position (call) or short position (put) in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in the futures
contract and the writer is assigned the opposite short position. In the case of
a put option, the opposite is true.
The Growth LT, Equity Income, Multi-Strategy, Equity Index, and International
Portfolios may purchase put and call options on stock index futures. Options on
stock index futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the stock index futures contract, at
exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the stock index futures contract. If
an option is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of
the index on which the futures contract is based on the expiration date.
Purchasers of options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
A Portfolio other than the Growth LT or International Portfolios will only
enter into futures contracts and futures options which are standardized and
traded on an U.S. exchange, board of trade, or similar entity, or in the case
of futures options, for which an established over-the-counter market exists.
If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income on its
initial margin deposits. A futures contract held by a Portfolio is valued daily
at the official settlement price of the exchange on which it is traded. Each
day the Portfolio pays or receives cash, called "variation margin," equal to
the daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or loan by
a Portfolio but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In
computing daily net asset value, each Portfolio will mark to market its open
futures positions.
A Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Portfolio realizes a capital
gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if
an offsetting sale price is more than the original purchase price, the
Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.
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Limitations. The Fund will comply with certain regulations of the Commodity
Futures Trading Commission under which an investment company may engage in
futures transactions and qualify for an exclusion from being a "commodity
pool." Under these regulations, a Portfolio may only enter into a futures
contract or purchase an option thereon (1) for bona fide hedging purposes and
(2) for other purposes if, immediately thereafter, the initial margin deposits
for futures contracts held by that Portfolio plus premiums paid by it for open
futures option positions, less the amount by which any such positions are "in-
the-money," would not exceed 5% of the Portfolio's total assets. A call option
is "in-the-money" if the value of the futures contract that is the subject of
the option exceeds the exercise price. A put option is "in-the-money" if the
exercise price exceeds the value of the futures contract that is the subject of
the option.
When purchasing a futures contract, a Portfolio must maintain with its
custodian in a segregated account (or broker, if legally permitted) cash, U.S.
Government securities of other high quality liquid debt securities (including
any margin) equal to the purchase price of such contract. When writing a call
option on a futures contract, the Portfolio similarly will maintain with its
custodian cash, U.S. Government securities or other high quality liquid debt
securities (including any margin) equal to the amount such option is in-the-
money until the option expires or is closed out by the Portfolio. When selling
a futures contract or selling a call option on a futures contract, the
Portfolio is required to maintain with its custodian high-quality liquid debt
securities, cash, or U.S. Government securities (including any margin) equal to
the market value of such contract or option, or to otherwise cover the
position.
A Portfolio may not maintain open short positions in futures contracts or
call options written on futures contracts if, in the aggregate, the market
value of all such open positions exceeds the current value of its portfolio
securities, plus or minus unrealized gains and losses on the open positions,
adjusted for the historical relative volatility of the relationship between the
Portfolio and the positions. For this purpose, to the extent the Portfolio has
written call options on specific securities it owns, the value of those
securities will be deducted from the current market value of the securities
portfolio.
The Fund reserves the right to engage in other types of futures transactions
in the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities. If other types of
options, futures contracts, or futures options are traded in the future, a
Portfolio may also use such investment techniques, provided that the Board of
Trustees determines that their use is consistent with the Portfolio's
investment objective.
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures
trading and futures options, and differences between the portfolio securities
being hedged and the instruments underlying the hedging vehicle in such
respects as interest rate levels, maturities, conditions affecting particular
industries, and creditworthiness of issuers. A decision as to whether, when,
and how to hedge involves the exercise of skill and judgment and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior
or unexpected interest rate trends.
The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions. This
might result from decisions by a significant number of market participants
holding stock index futures positions to close out their futures contracts
through offsetting transactions rather than to make additional margin deposits.
Also, increased participation by speculators in the futures market may cause
temporary price distortions. These factors may increase the difficulty of
effecting a fully successful hedging transaction, particularly over a short
time frame. With respect to a stock index futures contract, the price of stock
index futures might increase, reflecting a general advance in the market price
of the index's component securities, while some or all of the portfolio
securities might
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decline. If a Portfolio had hedged its portfolio against a possible decline in
the market with a position in futures contracts on an index, it might
experience a loss on its futures position until it could be closed out, while
not experiencing an increase in the value of its portfolio securities. If a
hedging transaction is not successful, the Portfolio might experience losses
which it would not have incurred if it had not established futures positions.
Similar risk considerations apply to the use of interest rate and other futures
contracts.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
The Growth LT and International Portfolios may trade futures contracts and
options on futures contracts not only on U.S. domestic markets, but also on
exchanges located outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity exchanges is not regulated by the CFTC and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. Trading
in foreign futures or foreign options contracts may not be afforded certain of
the protective measures provided by the Commodity Exchange Act, the CFTC's
regulations, and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC
and arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. Amounts received for foreign futures or foreign
options transactions may not be provided the same protection as funds received
in respect of transactions on United States futures exchanges. In addition, any
profits that the Portfolio might realize in trading could be eliminated by
adverse changes in the exchange rate of the currency in which the transaction
is denominated, or the Portfolio could incur losses as a result of changes in
the exchange rate. Transactions on foreign exchanges may include both
commodities that are traded on domestic exchanges or boards of trade and those
that are not.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively
new instruments without a significant trading history. As a result, there can
be no assurance that an active secondary market will develop or continue to
exist.
FOREIGN CURRENCY FUTURES AND OPTIONS THEREON
The Growth LT and International Portfolios may enter into contracts for the
purchase or sale for future delivery of foreign currencies ("foreign currency
futures") and may purchase and write options on foreign currency futures. This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Portfolio's securities or adversely affect the prices of securities that
the Portfolio has purchased or intends to purchase at a later date. The
successful use of foreign currency futures will usually depend on the Portfolio
Manager's ability to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Portfolio may not
achieve the anticipated benefits of foreign currency futures or may realize
losses.
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WARRANTS
The Growth LT, Equity Income, Multi-Strategy, Equity, Bond and Income, and
High Yield Bond Portfolios may invest in warrants; however, not more than 10%
of the market value of a Portfolio's assets (at the time of purchase), and in
the case of the Equity Portfolio--5%, may be invested in warrants other than
warrants acquired in units or attached to other securities. Warrants may be
considered speculative in that they have no voting rights, pay no dividends,
and have no rights with respect to the assets of the corporation issuing them.
Warrants basically are options to purchase equity securities at a specific
price valid for a specific period of time. They do not represent ownership of
the securities, but only the right to buy them. Warrants differ from call
options in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.
DURATION
Duration is a measure of average life of a bond on a present value basis,
which was developed to incorporate a bond's yield, coupons, final maturity and
call features into one measure. Duration is one of the fundamental tools that
may be used by the Adviser or Portfolio Manager in fixed income security
selection. In this discussion, the term "bond" is generally used to connote any
type of debt instrument.
Most notes and bonds have provided interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also feature call
provisions. Depending on the relative magnitude of these payments, debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity.
Duration is a measure of the average life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed-income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate
of interest of a fixed-income security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.
Although frequently used, the "term of maturity" of a bond is not a useful
measure of the longevity of a bond's cash flow because it refers only to the
time remaining to the repayment of principal or corpus and disregards earlier
coupon payments. Thus, for example, three bonds with the same maturity may not
have the same investment characteristics (such as risk or repayment time). One
bond may have large coupon payments early in its life, whereas another may have
payments distributed evenly throughout its life. Some bonds (such as zero
coupon bonds) make no coupon payments until maturity. Clearly, an investor
contemplating investing in these bonds should consider not only the final
payment or sum of payments on the bond, but also the timing and magnitude of
payments in order to make an accurate assessment of each bond. Maturity, or the
term to maturity, does not provide a prospective investor with a clear
understanding of the time profile of cash flows over the life of a bond.
Another way of measuring the longevity of a bond's cash flow is to compute a
simple average time to payment, where each year is weighted by the number of
dollars the bond pays that year. This concept is termed the "dollar-weighted
mean waiting time," indicating that it is a measure of the average time to
payment of a bond's cash flow. The critical shortcoming of this approach is
that it assigns equal weight to each dollar paid over the life of a bond,
regardless of when the dollar is paid. Since the present value of a
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dollar decreases with the amount of time which must pass before it is paid, a
better method might be to weight each year by the present value of the dollars
paid that year. This calculation puts the weights on a comparable basis and
creates a definition of longevity which is known as duration.
A bond's duration depends upon three variables: (i) the maturity of the bond;
(ii) the coupon payments attached to the bond; and (iii) the bond's yield to
maturity. Yield to maturity, or investment return as used here, represents the
approximate return an investor purchasing a bond may expect if he holds that
bond to maturity. In essence, yield to maturity is the rate of interest which,
if applied to the purchase price of a bond, would be capable of exactly
reproducing the entire time schedule of future interest and principal payments.
Increasing the size of the coupon payments on a bond, while leaving the
maturity and yield unchanged, will reduce the duration of the bond. This
follows from the fact that because bonds with higher coupon payments pay
relatively more of their cash flows sooner, they have shorter durations.
Increasing the yield to maturity on a bond (e.g., by reducing its purchase
price), while leaving the terms to maturity and coupon payments unchanged, also
reduces the duration of the bond. Because a higher yield leads to lower present
values for more distant payments relative to earlier payments, and, to
relatively lower weights attached to the years remaining to those payments, the
duration of the bond is reduced.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-throughs. The stated final
maturity is generally 30 years but current prepayment rates are more critical
in determining the securities' interest rate exposure. In these and other
similar situations, the Adviser or Portfolio Manager to a Portfolio will use
more sophisticated analytical techniques which incorporate the economic life of
a security into the determination of its interest rate exposure.
Futures, options, and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen the portfolio duration if interest
rates go down and bond prices go up by approximately the same amount that
holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration if interest rates go up and bond prices
go down by approximately the same amount that selling an equivalent amount of
the underlying securities would.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies," and the investment restrictions as set forth below,
are fundamental policies of each Portfolio and may not be changed with respect
to any Portfolio without the approval of a majority of the outstanding voting
shares of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio means the vote, at an annual or special meeting of
(a) 67% or more of the voting securities present at such meeting, if the
holders of more than 50% of the outstanding voting securities of such Portfolio
are present or represented by proxy; or (b) more than 50% of the outstanding
voting securities of such Portfolio, whichever is the less. Under these
restrictions, a Portfolio may not:
(i) invest in a security if, as a result of such investment, more than 25% of
its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase agreements
with respect thereto);
28
<PAGE>
(ii) with respect to 75% of its total assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of
any one issuer, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;
(iv) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(v) purchase or sell commodities or commodities contracts, except that,
subject to restrictions described in the Prospectus and in the Statement of
Additional Information (a) the Managed Bond, Equity Index, Government
Securities, High Yield Bond, Growth LT, Equity Income, Multi-Strategy, and
International Portfolios may engage in futures contracts and options on futures
contracts, (b) all Portfolio may enter into foreign forward currency contracts;
and (c) the Equity Index Portfolio may purchase and sell stock index futures,
purchase options on stock indexes, and purchase options on stock index futures;
(vi) with respect to the Money Market, Managed Bond, Government Securities,
High Yield Bond, Equity Income, Multi-Strategy, Equity Index, and International
Portfolios, purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities) but it
may make margin deposits in connection with transactions in options, futures,
and options on futures;
(vii) borrow money or pledge, mortgage or hypothecate its assets, except that
a Portfolio may: (a) borrow from banks but only if immediately after each
borrowing and continuing thereafter there is asset coverage of 300%; and (b)
enter into reverse repurchase agreements and transactions in options, futures,
and options on futures as described in the Prospectus and in the Statement of
Additional Information (the deposit of assets in escrow in connection with the
writing of covered put and call options and the purchase of securities on a
"when-issued" or delayed delivery basis and collateral arrangements with
respect to initial or variation margin deposits for futures contracts will not
be deemed to be pledges of a Portfolio's assets);
(viii) lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies: (a) invest in debt
obligations including bonds, debentures or other debt securities, bankers'
acceptances, and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans; (b) enter into repurchase agreements
and reverse repurchase agreements; and (c) lend its portfolio securities in an
amount not to exceed 25% of the value of its total assets, provided such loans
are made in accordance with applicable guidelines established by the Securities
and Exchange Commission and the Fund's Trustees;
(ix) act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, it may be deemed to be
an underwriter under the federal securities laws; and
(x) with respect to the Money Market, Managed Bond, Government Securities,
High Yield Bond, Equity Income, Multi-Strategy, Equity Index, and International
Portfolios, maintain a short position, or purchase, write, or sell puts, calls,
straddles, spreads, or combinations thereof, except as set forth in the
Prospectus and in the Statement of Additional Information for transactions in
options, futures, and options on futures.
Each Portfolio is also subject to the following restrictions and policies
(which are not fundamental and may therefore be changed without shareholder
approval) relating to the investment of its assets and activities. Unless
otherwise indicated, a Portfolio may not:
(i) invest for the purpose of exercising control or management;
29
<PAGE>
(ii) sell securities or property short, except short sales against the box;
(iii) purchase warrants if immediately after and as a result of such purchase
more than 10% of the market value of the total assets of the Portfolio would be
invested in such warrants;
(iv) with respect to the Growth LT, Equity, and Bond and Income Portfolios,
purchase securities on margin (except for use of short-term credit necessary
for clearance of purchases and sales of portfolio securities) but it may make
margin deposits in connection with transactions in options, futures, and
options on futures;
(v) with respect to the Growth LT, Equity, and Bond and Income Portfolios,
maintain a short position, or purchase, write, or sell puts, calls, straddles,
spreads, or combinations thereof, except as set forth in the Prospectus and in
the Statement of Additional Information for transactions in options, futures,
and options on futures; and
(vi) invest in securities that are illiquid, or in repurchase agreements
maturing in more than seven days, if as a result of such investment, more than
15% of the total assets of the Portfolio (taken at market value at the time of
such investment) would be invested in such securities, and with respect to the
Money Market Portfolio, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
such securities.
Unless otherwise indicated, as in the restriction for borrowing or
hypothecating assets of a Portfolio, for example, all percentage limitations
listed above apply to each Portfolio only at the time into which a transaction
is entered. Accordingly, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in the percentage which results
from a relative change in values or from a change in a Portfolio's net assets
will not be considered a violation. For purposes of fundamental restriction (v)
as set forth above, an option on a foreign currency shall not be considered a
commodity or commodity contract.
30
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS AFFILIATES AND
NAME AND ADDRESS POSITION WITH THE FUND PRINCIPAL OCCUPATIONS
---------------- ---------------------- -----------------------
<C> <C> <S>
Thomas C. Sutton Chairman of the Chairman of the Board,
700 Newport Center Drive Board, Trustee Director and Chief Executive
Newport Beach, CA 92660 and President Officer of Pacific Mutual;
Equity Board Member of PIMCO
Advisors L.P.; and similar
positions with other
subsidiaries of Pacific
Mutual; Director of Newhall
Land & Farming; Director of
Health Insurance Association
of America.
Richard A. Nelson Trustee President of Nelson
8 Cherry Hills Lane Financial Consultants;
Newport Beach, CA 92660 retired Partner with Ernst &
Young; Director, Wynn's
International, Inc.
Lyman W. Porter Trustee Professor of Management at
University of California the University of
at Irvine California, Irvine.
Irvine, CA 92717
Alan Richards Trustee Consultant and Investor;
P. O. Box 2128 Partner, Old Winery Estates;
555 San Filipe, Suite 900 Partner, Lomas Verdes
Rancho Santa Fe, CA 92067 Estates; Director,
Consultant and Member of
Executive Committee, Western
National Corporation.
Marilee Roller Vice President Senior Vice President,
700 Newport Center Drive and Treasurer Corporate Finance and
Newport Beach, CA 92660 Administration, of Pacific
Mutual; President and COO of
Pacific Corinthian Life
Insurance Company; and
similar positions with other
subsidiaries of Pacific
Mutual; formerly Vice
President of Pacific Mutual.
Diane N. Ledger Vice President Assistant Vice President,
700 Newport Center Drive and Assistant Variable Regulatory
Newport Beach, CA 92660 Secretary Compliance, Corporate Law,
of Pacific Mutual.
Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Mutual; formerly
Assistant Vice President and
Associate General Counsel of
Pacific Mutual.
Audrey L. Milfs Secretary Vice President and Corporate
700 Newport Center Drive Secretary of Pacific Mutual;
Newport Beach, CA 92660 and similar positions with
other subsidiaries of
Pacific Mutual.
</TABLE>
- --------
* Mr. Sutton is an "interested person" of the Fund (as that term is defined in
the Investment Company Act) because of his position with Pacific Mutual as
shown above.
31
<PAGE>
Trustees other than those affiliated with Pacific Mutual or a Portfolio
Manager, receive an annual fee of $6,000 and $1,250 for each Board of Trustees
meeting attended plus $500 for each Audit, Policy, or Nominating Committee
meeting attended, plus reimbursement of related expenses. In addition, the
Chairman of the Fund's Audit Committee and Policy Committee each receives an
additional annual fee of $1,000. The following table summarizes the aggregate
compensation paid by the Fund to each Trustee who is not affiliated with
Pacific Mutual or a Portfolio Manager in 1994. It also shows total compensation
paid to these Trustees in 1994 by the Fund and PIMCO Advisors Institutional
Funds, an investment company managed by an affiliate of Pacific Mutual for
which Messrs. Nelson, Porter, and Richards (but not Mr. Sutton) also serve as
trustees (collectively, "Fund Complex").
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATE COMPENSATION
ACCRUED ANNUAL FROM FUND
AGGREGATE AS PART OF BENEFITS COMPLEX PAID
COMPENSATION FUND UPON TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT TRUSTEES
- --------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Richard A. Nelson............... $14,250 0 0 $27,250
Lyman W. Porter................. $13,250 0 0 $25,250
Alan Richards................... $13,250 0 0 $25,250
</TABLE>
None of the Trustees or Officers directly own shares of the Fund. As of
January 31, 1994, the Trustees and Officers as a group owned Variable Contracts
that entitled them to give voting instructions with respect to less than 1% of
the outstanding shares of the Fund.
INVESTMENT ADVISER
Pacific Mutual Life Insurance Company ("Pacific Mutual") serves as Investment
Adviser to the Fund pursuant to an Investment Advisory Agreement ("Advisory
Contract") between Pacific Mutual and the Fund. Pacific Mutual is responsible
for administering the affairs of and supervising the investment program for the
Fund. Pacific Mutual also furnishes to the Board of Trustees, which has overall
responsibility for the business and affairs of the Fund, periodic reports on
the investment performance of each Portfolio.
Under the terms of the Advisory Contract, Pacific Mutual is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.
The Advisory Contract will continue in effect until November 9, 1995, and
from year to year thereafter, provided such continuance is approved annually by
(i) the holders of a majority of the outstanding voting securities of the Fund
or by the Board of Trustees, and (ii) a majority of the Trustees who are not
parties to such Advisory Contract or "interested persons" (as defined in the
Investment Company Act of 1940, the "1940 Act") of any such party. The Advisory
Contract was originally approved by the Board of Trustees, including a majority
of the Trustees who are not parties to the Advisory Contract, or interested
persons of such parties, at its meeting held on July 21, 1987, and by the
shareholders of the Fund at a Meeting of Shareholders held on October 28, 1988.
The Advisory Contract was also approved by the shareholders of the Equity Index
Portfolio of the Fund at a Meeting of Shareholders of the Equity Index
Portfolio held onApril 21, 1992. An addendum to the Advisory Contract was
approved by the Board of Trustees, including a majority of the Trustees who are
not parties to the Contract, or interested persons of such parties, at a
meeting held on October 28, 1988. An Addendum to the Advisory Contract which
increased the advisory fee schedule with respect to the High Yield Bond,
Managed Bond, Government Securities, Equity Income, Multi-Strategy, and
International Portfolios, and which included the Growth LT Portfolio as a
Portfolio to which the Adviser will perform services under the Advisory
Contract, was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties,
32
<PAGE>
at a meeting held on September 29, 1993, and was approved by shareholders of
the High Yield Bond, Managed Bond, Government Securities, Equity Income, Multi-
Strategy, and International Portfolios at a Special Meeting of Shareholders on
December 13, 1993. An Addendum to the Advisory Contract for the Equity
Portfolio and Bond and Income Portfolio was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Advisory
Contract or interested persons of such parties, at a meeting held on August 12,
1994, and by the sole shareholder of those Portfolios on September 6, 1994. The
Advisory Contract may be terminated without penalty by vote of the Trustees or
the shareholders of the Fund, or by the Adviser, on 60 days' written notice by
either party to the Advisory Contract and will terminate automatically if
assigned.
The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund will pay to the Adviser a fee at an annual
rate of .40% of the first $250 million of the average daily net assets of the
Portfolio, .35% of the next $250 million of the average daily net assets of the
Portfolio, and .30% of the average daily net assets of the Portfolio in excess
of $500 million. For the High Yield Bond, Managed Bond, Government Securities,
and Bond and Income Portfolios, the Fund will pay .60% of the average daily net
assets of each of the Portfolios. For the Equity Income, Multi-Strategy, and
Equity Portfolios, the Fund will pay .65% of the average daily net assets of
each of the Portfolios. For the Growth LT Portfolio, the Fund will pay .75% of
the average daily net assets of the Portfolio. For the International Portfolio,
the Fund will pay .85% of the average daily net assets of the Portfolio. For
the Equity Index Portfolio, the Fund will pay .25% of the first $100 million of
the average daily net assets of the Portfolio, .20% of the next $100 million of
the average daily net assets of the Portfolio, and .15% of the average daily
net assets of the Portfolio in excess of$200 million. The fee shall be computed
and accrued daily and paid monthly.
Prior to January 1, 1994, the Fund paid the Adviser for its services under
the Agreement a fee based on an annual percentage of the average daily net
assets of each Portfolio as follows. For the High Yield Bond, Managed Bond,
Government Securities, Equity Income, and Multi-Strategy Portfolios, the Fund
paid .50% of the first $250 million of the average daily net assets of each of
the Portfolios, .45% of the next $250 million of the average daily net assets
of each of the Portfolios, and .40% of the average daily net assets of each of
the Portfolios in excess of $500 million. For the International Portfolio, the
Fund paid .65% of the first $250 million of the average daily net assets of the
Portfolio, .60% of the next $250 million of the average daily net assets of the
Portfolio, and .55% of the average daily net assets of the Portfolio in excess
of$500 million. For the Money Market and Equity Index Portfolios, the Fund paid
the Adviser a fee based on the same fee schedule as is currently in effect.
Pacific Mutual has agreed, until at least December 31, 1995, to waive its
fees or otherwise reimburse each Portfolio for its operating expenses to the
extent that such expenses, exclusive of advisory fees, additional custodial
charges associated with holding foreign securities, foreign taxes on dividends,
interest, or gains, and extraordinary expenses, exceed 0.25% of the Portfolio's
average daily net assets. Pacific Mutual began this expense reimbursement
policy in April 1989. There can be no assurance that this policy will be
continued beyond December 31, 1995.
Net fees paid or owed to Pacific Mutual for 1994 were as follows: Money
Market Portfolio--$208,743, High Yield Bond Portfolio--$94,365, Managed Bond
Portfolio--$297,183, Government Securities Portfolio--$111,828, Growth LT
Portfolio--$132,860, Equity Income Portfolio--$251,902, Multi-Strategy
Portfolio--$304,896, Equity Index Portfolio--$79,401, and International
Portfolio--$454,012.
33
<PAGE>
Net fees paid or owed to Pacific Mutual for 1993 (before the Addendum to the
Advisory Contract that increased the fees for certain Portfolios was in effect)
were as follows: Money Market Portfolio--$68,994, High Yield Bond Portfolio--
$62,112, Managed Bond Portfolio--$151,389, Government Securities Portfolio--
$80,256, Equity Income Portfolio--$121,504, Multi-Strategy Portfolio--$120,529,
Equity Index Portfolio--$44,656, and International Portfolio--$144,024.
Net fees paid or owed to Pacific Mutual for 1992 were as follows: Money
Market Portfolio--$30,169, High Yield Bond Portfolio--$22,861, Managed Bond
Portfolio--$74,703, Government Securities Portfolio--$23,514, Equity Income
Portfolio--$47,643, Multi-Strategy Portfolio--$34,412, Equity Index Portfolio--
$0, and International Portfolio--$74,115.
Net advisory and administrative fees, respectively, paid by the Equity
Portfolio's predecessor--the Equity Series of Pacific Corinthian Variable
Fund--were $401,325 and $120,397 in 1994, $415,347 and $124,604 in 1993, and
$469,325 and $140,798 in 1992. Net advisory and administrative fees,
respectively, paid by the Bond and Income Portfolio's predecessor--the Bond and
Income Series of Pacific Corinthian Variable Fund--were $149,270 and $55,976 in
1994, $178,349 and $66,881 in 1993, and $211,515 and $79,318 in 1992.
PORTFOLIO MANAGEMENT AGREEMENTS
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Post Office Box 9000, Newport Beach, California 92660, PIMCO is the Portfolio
Manager and provides investment advice and makes and implements investment
decisions with respect to the Managed Bond Portfolio and Government Securities
Portfolio. For the services provided, Pacific Mutual pays PIMCO a fee based on
a percentage of each Portfolio's average daily net assets according to the
following schedule:
MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS
<TABLE>
<CAPTION>
RATE
% BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $25 million
.375% On next $ 25 million
.25% On excess
</TABLE>
PIMCO is registered as an investment adviser with the Securities and Exchange
Commission ("SEC") and a commodity trading adviser with the Commodity Futures
Trading Commission ("CFTC"). Such registration does not involve supervision by
the SEC over investment advice or supervision by the CFTC over commodities
trading. PIMCO is currently providing investment advisory services to the PIMCO
Funds, PIMCO Commercial Mortgage Securities Trust, Inc., PIMCO Advisors
Institutional Funds, the Harbor Bond Fund of the Harbor Fund, The Total Return
Bond and the Intermediate-Term Bond Portfolios of the Target Portfolio Trust,
the Fixed Income I Fund, Diversified Bond Fund, Fixed Income III Fund, and
Multi-Strategy Bond Fund of the Frank Russell Investment Management Company,
the PIMCO Total Return Bond Portfolio of the American Skandia Trust, the
Government Income Portfolio of the Cambridge Portfolio Trust, the Total Return
Fund of Fremont Mutual Funds, Inc., the fixed income segment of the Balanced
Portfolio of the Pacific Corinthian Variable Fund, as well as to managed
accounts consisting of proceeds from pension and profit sharing plans. Net fees
paid or owed by Pacific Mutual to PIMCO in 1994 were $149,130 for the Managed
Bond Portfolio and $106,476 for the Government Securities Portfolio, in 1993
were $159,860 for the Managed Bond Portfolio and $106,139 for the Government
Securities Portfolio, and in 1992 were $115,405 for the Managed Bond Portfolio
and $68,657 for the Government Securities Portfolio.
34
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Suite 300,
Denver, Colorado 80206-4923, Janus is the Portfolio Manager and provides
investment advisory services to the Growth LT Portfolio. For the services
provided, Pacific Mutual pays Janus a fee based on a percentage of the average
daily net assets of the Growth LT Portfolio according to the following
schedule:
GROWTH LT PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.55% On excess
Janus serves as investment adviser to the Janus Funds, as well as other mutual
funds and individual, corporate, charitable, and retirement accounts. Kansas
City Southern Industries, Inc. ("KCSI") owns approximately 83% of the
outstanding voting stock of Janus. KCSI is a publicly traded holding company
whose primary subsidiaries are engaged in transportation and financial services.
Net fees paid or owed by Pacific Mutual to Janus for the Growth LT Portfolio
from January 4, 1994 (date of commencement of operations) to December 31, 1994
were $134,659.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522 Fifth
Avenue, New York, New York 10036, J.P. Morgan Investment is the Portfolio
Manager and provides investment advisory services to the Equity Income Portfolio
and the Multi-Strategy Portfolio. For the services provided, Pacific Mutual pays
J.P. Morgan Investment a fee based on a percentage of the combined average daily
net assets of these two Portfolios according to the following schedule:
EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On excess
</TABLE>
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. A wholly
owned subsidiary of J.P. Morgan & Co. Inc., J.P. Morgan Investment was
incorporated in the state of Delaware on February 7, 1984 and commenced
operations on July 2, 1984. It was formed from the Institutional Investment
Group of Morgan Guaranty Trust Company of New York, also a subsidiary of J.P.
Morgan & Co. Inc.
Morgan acquired its first tax-exempt client in 1913 and its first pension
account in 1940. Assets under management have grown to over $121 billion. With
offices in London and Singapore, J.P. Morgan Investment draws from a worldwide
resources base to provide comprehensive service to an international group of
clients. Investment management activities in Japan, Australia, and Germany are
carried out by affiliates, Morgan Trust Bank in Tokyo, J.P. Morgan Investment
Management Australia Limited in Melbourne, and J.P. Morgan Investment GmbH in
Frankfurt.
J.P. Morgan Investment currently provides investment advisory services to the
following investment companies: Global Money Fund, International Growth Fund
and Growth and Income Fund of Sierra Trust Funds, Global Money Fund,
International Growth Fund and Growth and Income Fund of The Sierra Variable
Trust, Frank Russell Equity Q Fund and Frank Russell Quantitative Equity Fund
of Frank Russell Investment Co., Preferred Fixed Income Fund and Preferred
Money Market Fund of Caterpillar Investment
35
<PAGE>
Management Ltd., AST Money Market Fund of American Skandia Life Investment
Management Inc., Benham European Government Bond Fund, Growth and Income Stock
Portfolio of Northwestern Mutual Portfolio Fund, Inc., North American Funds
International Growth and Income Portfolio of North American Life Insurance
Company and Venture International Growth and Income Portfolio of North American
Security Life Insurance Company.
Net fees paid or owed by Pacific Mutual to J.P. Morgan Investment in 1994
were $190,312 for the Equity Income Portfolio and $212,060 for the Multi-
Strategy Portfolio. From 1988 to 1993, Capital Guardian served as Portfolio
Manager to the Equity Income and Multi-Strategy Portfolios. Net fees paid by
Pacific Mutual to Capital Guardian for these Portfolios in 1993 were $103,788
for the Equity Income Portfolio and $108,861 for the Multi-Strategy Portfolio,
and in 1992 were $75,696 for the Equity Income Portfolio and $65,117 for the
Multi-Strategy Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Greenwich Street Advisors Division of Smith Barney Mutual Funds Management
Inc. ("Greenwich Street Advisors"), 338 Greenwich Street, 23rd Floor, New York,
New York 10048, Greenwich Street Advisors serves as the Portfolio Manager and
provides investment advisory service to the Equity Portfolio and Bond and
Income Portfolio. For the services provided, Pacific Mutual pays a fee to
Greenwich Street Advisors based on a percentage of each Portfolio's average
daily net assets according to the following fee schedules:
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.50% On first $500 million
.45% On next $500 million
.40% On excess
BOND AND INCOME PORTFOLIO
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.40% On first $500 million
.35% On next $ 500 million
.30% On excess
</TABLE>
Greenwich Street Advisors has been in the investment counselling business
since 1934 and renders investment advice to a wide variety of individual,
institutional and investment company clients with aggregate assets under
management as of December 31, 1994 in excess of $48 billion.
Greenwich Street Advisors is a division of Smith Barney Mutual Fund's
Management Inc. ("SBMFM"), a wholly-owned subsidiary of Smith Barney Holdings
Inc., which is in turn a wholly-owned subsidiary of The Travelers Inc. The
Travelers Inc. is a financial services holding company engaged, through its
subsidiaries, principally in three business segments: (1) life and property and
casualty insurance services,(2) investment services and (3) consumer finance
services.
Net fees paid or owed to Greenwich Street Advisors by the Equity Portfolio's
predecessor the Equity Series of Pacific Corinthian Variable Fund--were
$401,325 in 1994, $415,347 in 1993, and $469,325 in 1992. Net fees paid or owed
to Greenwich Street Advisors by the Bond and Income Portfolio's predecessor--
the Bond and Income Series of Pacific Corinthian Variable Fund--were $149,270
in 1994, $178,349 in 1993, and $211,515 in 1992. The same fee schedules were in
effect for the predecessors of the Equity Portfolio and Bond and Income
Portfolio as are currently in effect.
The Greenwich Street Advisors and its predecessors have been in the
investment counseling business since 1934. SBMFM and its predecessors have been
providing investment-advisory services to mutual funds since 1968. As of
December 31, 1994 SBMFM manages approximately $54 billion of mutual funds.
36
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Bankers Trust Company ("BTC"), a wholly-owned subsidiary of Bankers Trust
New York Corporation, 130 Liberty Street, New York, New York 10006, BTC is the
Portfolio Manager and provides investment advisory services to the Equity Index
Portfolio. For the services provided, Pacific Mutual pays a quarterly fee in
advance to BTC, based on the net assets of the Equity Index Portfolio at the
beginning of each calendar quarter in accordance with the following schedule:
EQUITY INDEX PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $ 100 million
.01% On excess
</TABLE>
This fee is subject to a minimum annual fee of $50,000 for the calendar year
1994, and $75,000 for the calendar year 1995, and $100,000 for the calendar
year 1996 and each year thereafter. Prior to October 18, 1994, the fee was
subject to a minimum annual fee of $20,000.
BTC is a wholly-owned subsidiary of Bankers Trust New York Corporation, the
seventh largest bank holding company in the United States. The Global
Investment Management Group of BTC, the department directly responsible for the
management of the Equity Index Portfolio, as of June 30, 1994, managed assets
approximating $165 billion. BTC is the investment adviser to the following
registered investment companies: Short-Intermediate Fixed-Income Portfolio of
Accessor Funds, Inc.; Full Maturity Fixed Income Portfolio of AHA Investment
Funds, Inc.; MidCap Index Fund, Stock Index Fund and Small Cap Index Fund of
American General Series Portfolio ("VALIC"); Asset Management Portfolio; Asset
Management Portfolio II; Asset Management Portfolio III; the Equity Portfolio
and the Fixed Income Portfolio of the Bank Fiduciary Funds; Capital
Appreciation Portfolio; Capital Growth Portfolio; Cash Management Portfolio;
Equity 500 Index Portfolio of BTC Institutional Funds; Global High Yield
Portfolio; Hercules Latin American Value Fund; Intermediate Tax Free Portfolio;
International Equity Portfolio; Latin American Equity Portfolio; Liquid Assets
Portfolio; NY Tax Free Money Portfolio; Pacific Basin Equity Portfolio;
Short/Intermediate Government Securities Portfolio; Short Term Securities
Portfolio; Small Cap Portfolio; Tax Free Money Portfolio; Treasury Money
Portfolio and Utility Portfolio.
Net fees paid or owed by Pacific Mutual to BTC in 1994 were $50,000, in 1993
were $21,027, and in 1992 were $20,000.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Templeton Investment Counsel, Inc. ("Templeton"), Broward Financial Centre,
Suite 2100, Fort Lauderdale, Florida 33394-3091, Templeton is the Portfolio
Manager and provides investment advice with respect to the International
Portfolio. Pacific Mutual pays a fee to Templeton based on a percentage of the
Portfolio's average daily net assets according to the following fee schedule:
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $ 25 million
.50% On next $ 50 million
.40% On excess
</TABLE>
Templeton is a Florida corporation with offices in Ft. Lauderdale, Florida,
and affiliated research offices in New York, Hong Kong, Singapore, Edinburgh,
Melbourne, Toronto, and the Bahamas. Templeton and its affiliates serve as
advisers for over 150 registered investment companies. The Templeton
organization
37
<PAGE>
provides investment management and advisory services to a worldwide client
base, including mutual fund shareholders, foundations and endowments, employee
benefit plans and individuals, As of December 31, 1994, the Templeton
organization managed approximately $42.0 billion in assets, including over $5.4
billion invested in equity securities in emerging market countries, and over
$570.9 million invested in fixed-income securities in those countries.
Templeton is an indirect wholly-owned subsidiary of Templeton Worldwide, Inc.,
which is in turn, a wholly-owned subsidiary of Franklin Resources, Inc.
("Franklin"). Through its subsidiaries, Franklin is engaged in various aspects
of the financial services industry. As of December 31, 1994, the
Templeton/Franklin organization managed over $115 billion in assets worldwide.
Net fees paid or owed by Pacific Mutual to Templeton for the International
Portfolio in 1994 were $328,196. From 1988 to 1993, Nomura Capital Management,
Inc. ("NCM") served as Portfolio Manager to the International Portfolio. Net
fees paid by Pacific Mutual to NCM for the International Portfolio in 1993 were
$157,869, and in 1992 were $119,790.
The Portfolio Management Agreements are not exclusive, and PIMCO, Capital
Guardian, BTC, Janus, J.P. Morgan Investment, Greenwich Street Advisors, and
Templeton may provide and currently are providing investment advisory services
to other clients, including other investment companies.
DISTRIBUTION OF FUND SHARES
Pacific Equities Network ("PEN") serves as the Fund's Distributor pursuant to
a Distribution Contract (the "Distribution Contract") with the Fund. The
Distributor is not obligated to sell any specific amount of Fund shares. PEN
bears all expenses of providing services pursuant to the Distribution Contract
including the costs of sales presentations, mailings, advertising, and any
other marketing efforts by PEN in connection with the distribution or sale of
the shares.
The expenses incurred by the Fund with respect to each Portfolio in
connection with the Fund's organization, its registration with the Securities
and Exchange Commission and any states where registered, and the public
offering of its shares were advanced on behalf of the Fund by the Adviser.
These organizational expenses were deferred and amortized by the Fund's
Portfolios over a period of 60 months. Similarly, the organizational expenses
of Portfolios of the Fund that have been organized after the Fund commenced
operations have been advanced on behalf of the Fund by the Adviser, and are
deferred and amortized by the pertinent Portfolio over a period of 60 months
from the commencement of operations of the Portfolio. See "Financial
Statements."
As of February 1, 1995, Pacific Mutual did not beneficially own shares of any
of the Portfolios of the Fund. In the event that Pacific Mutual were to acquire
a beneficial interest in any Portfolio, Pacific Mutual would exercise voting
rights attributable to these shares in accordance with voting instructions
received by Owners of the Policies issued by Pacific Mutual. To this extent, as
of February 1, 1995, Pacific Mutual did not exercise control over any
Portfolio.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "More on the Fund's
Shares" in the Fund's Prospectus. The Fund may suspend the right of redemption
of shares of any Portfolio and may postpone payment for more than seven days
for any period: (i) during which the New York Stock Exchange is closed other
than customary weekend and holiday closings or during which trading on the New
York Stock Exchange is restricted; (ii) when the Securities and Exchange
Commission determines that a state of emergency exists which may make payment
or transfer not reasonably practicable; (iii) as the Securities and Exchange
Commission may by order permit for the protection of the security holders of
the Fund; or (iv) at any other time when the Fund may, under applicable laws
and regulations, suspend payment on the redemption of its shares. If the Board
of Trustees should determine that it would be detrimental to the best interests
of the remaining shareholders of a Portfolio to make payment wholly or partly
in cash, the Portfolio
38
<PAGE>
may pay the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the Portfolio, in lieu of cash, in conformity
with applicable rules of the Securities and Exchange Commission. If shares are
redeemed in kind, the redeeming shareholder might incur brokerage costs in
converting the assets into cash. Under the 1940 Act, the Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1 percent of its
net assets during any 90-day period for any one shareholder.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser, or applicable Portfolio Manager, are made with a view
to achieving their respective investment objectives. Investment decisions are
the product of many factors in addition to basic suitability for the particular
client involved (including the Fund). Thus, a particular security may be bought
or sold for certain clients even though it could have been bought or sold for
other clients at the same time. It also sometimes happens that two or more
clients simultaneously purchase or sell the same security, in which event each
day's transactions in such security are, insofar as possible, averaged as to
price and allocated between such clients in a manner which in the opinion of
the Adviser or Portfolio Manager is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. In the case of securities traded on some foreign stock exchanges,
brokerage commissions may be fixed and the Adviser or Portfolio Manager may be
unable to negotiate commission rates for these transactions.
The Adviser or Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures contracts for a
Portfolio through a substantial number of brokers and dealers or futures
commission merchants. In executing transactions, the Adviser or Portfolio
Manager will attempt to obtain the best net results for a Portfolio taking into
account such factors as price (including the applicable brokerage commission or
dollar spread), size of order, the nature of the market for the security, the
timing of the transaction, the reputation, experience and financial stability
of the broker-dealer involved, the quality of the service, the difficulty of
execution and operational facilities of the firms involved, and the firm's risk
in positioning a block of securities. In transactions on stock exchanges in the
United States, payments of brokerage commissions are negotiated. In effecting
purchases and sales of portfolio securities in transactions on United States
stock exchanges for the account of the Fund, the Adviser or Portfolio Manager
may pay higher commission rates than the lowest available when the Adviser or
Portfolio Manager believes it is reasonable to do so in light of the value of
the brokerage and research services provided by the broker effecting the
transaction, as described below. In the case of securities traded on some
foreign stock exchanges, brokerage commissions may be fixed and the Adviser or
Portfolio Manager may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price includes an undisclosed
commission or markup. Consistent with the above policy of obtaining the best
net results, a portion of the Equity Index Portfolio's brokerage and futures
transactions may be conducted through BT Brokerage Corporation and BT Futures
Corporation, respectively, both wholly-owned subsidiaries of Bankers Trust New
York Corporation. The brokerage
39
<PAGE>
commissions paid to BT Brokerage Corporation will not exceed 25% of the
brokerage commission incurred per year by the Equity Index Portfolio. Smith
Barney Inc. and its affiliates may serve as the Fund's broker in effecting
portfolio transactions on a national securities exchange, and may retain
commissions, in accordance with certain regulations of the Securities and
Exchange Commission. Smith Barney Inc. may receive no more than 25% of the
brokerage commission incurred per annum by any Portfolio managed by Greenwich
Street Advisors.
Some securities considered for investment by the Fund's Portfolios may also
be appropriate for other clients served by the Adviser or Portfolio Manager. If
a purchase or sale of securities consistent with the investment policies of a
Portfolio and one or more of these clients served by the Adviser or Portfolio
Manager is considered at or about the same time, transactions in such
securities will be allocated among the Portfolio and clients in a manner deemed
fair and reasonable by the Adviser or Portfolio Manager. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the Adviser or Portfolio Manager, and the results of such
allocations, are subject to periodic review by the Fund's Adviser and Board of
Trustees.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser or Portfolio Manager for a Portfolio may receive research services
from many broker-dealers with which the Adviser or Portfolio Manager places the
Portfolio's portfolio transactions. These services, which in some cases may
also be purchased for cash, include such matters as general economic and
security market reviews, industry and company reviews, evaluations of
securities and recommendations as to the purchase and sale of securities. Some
of these services may be of value to the Adviser or Portfolio Manager in
advising its various clients (including the Portfolio), although not all of
these services are necessarily useful and of value in managing a Portfolio. The
advisory fee paid by the Portfolio is not reduced because the Adviser or
Portfolio Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser or Portfolio Manager may cause a Portfolio to pay a broker-dealer,
which provides "brokerage and research services" (as defined in the Act) to the
Adviser or Portfolio Manager, an amount of disclosed commission for effecting a
securities transaction for the Portfolio in excess of the commission which
another broker-dealer would have charged for effecting that transaction.
During the year 1994, the following Portfolios incurred brokerage commissions
and markups on principal transactions as follows: the High Yield Bond
Portfolio--$0, the Managed Bond Portfolio--$9,636, the Government Securities
Portfolio--$5,652, the Equity Income Portfolio--$126,489, of which $84 (0.07%)
was paid to BT Securities, an affiliate of Bankers Trust Company, the Multi-
Strategy Portfolio--$77,944, of which $62 (0.08%) was paid to BT Securities, an
affiliate of Bankers Trust Company, the Equity Portfolio--$318,235 of which
$53,700 (16.87%) was paid to Smith Barney Inc. or its predecessors, and $5,100
(1.60%) was paid to Lehman Brothers Securities, the Bond and Income Portfolio--
$0, the Equity Index Portfolio--$6,337, the International Portfolio--$304,029,
of which $515 (0.17%) was paid to J.P. Morgan Securities, an affiliate of J.P.
Morgan Investment Management Inc., and the Growth LT Portfolio--$101,353, of
which $259 (0.26%) was paid to J.P. Morgan Securities, an affiliate of J.P.
Morgan Investment Management Inc. During the years 1993 and 1992, respectively,
the following Portfolios incurred brokerage commissions as follows: the High
Yield Bond Portfolio--$690 and $1,299, the Managed Bond Portfolio--$5,568 and
$4,001, the Government Securities Portfolio--$4,548 and $3,267, the Equity
Income Portfolio--$33,310 and $24,271, the Multi-Strategy Portfolio--$28,251
and $13,790, the Equity Portfolio--$418,458 of which $71,472 (17.08%) were paid
to Smith Barney Inc. or its predecessors, and $537,146 of which $99,432
(18.51%) were paid to Smith Barney Inc. or its predecessors, the Bond and
Income Portfolio--$0 and $0, the Equity Index Portfolio--$6,541 and $5,500, and
the International Portfolio--$126,924 and $49,519. The Equity and Bond and
Income Portfolios had not yet commenced operations as of December 31, 1994.
Information for the Equity Portfolio and Bond and Income Portfolio is based on
activity of the predecessor series of Pacific Corinthian Variable Fund, the
assets of which were acquired by the Fund on December 31, 1994.
40
<PAGE>
PORTFOLIO TURNOVER
For reporting purposes, each Portfolio's portfolio turnover rate is
calculated by dividing the value of the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value of
portfolio securities owned by the Portfolio during the fiscal year. In
determining such portfolio turnover, long-term U.S. Government securities are
included. Short-term U.S. Government securities and all other securities whose
maturities at the time of acquisition were one year or less are excluded. A
100% portfolio turnover rate would occur, for example, if all of the securities
in the portfolio (other than short-term securities) were replaced once during
the fiscal year. The portfolio turnover rate for each of the Portfolios will
vary from year to year, depending on market conditions.
It is anticipated that the rate of portfolio turnover as defined above for
the Money Market Portfolio will be 0%, and for each of the other Portfolios
will be approximately 100% under normal market conditions. For the Portfolios
other than the Money Market Portfolio, portfolio turnover could be greater in
periods of unusual market movement and volatility. For the years 1994, 1993,
and 1992, respectively, the portfolio turnover rate for each of the Portfolios
was as follows: Money Market Portfolio--0%, 0%, and 0%, High Yield Bond
Portfolio--142%, 186%, and 186%, Managed Bond Portfolio--128%, 163%, and 90%,
Government Securities Portfolio--233%, 402%, and 212%, Equity Income
Portfolio--135%, 28%, and 19%, Multi-Strategy Portfolio--187%, 28%, and 17%,
Equity Portfolio--179%, 230%, and 242%, Bond and Income Portfolio--32%, 42%,
and 22%, International Portfolio--52%, 46%, and 39%, and Equity Index
Portfolio--2%, 1%, and 4%. The portfolio turnover rate for the Growth LT
Portfolio, which commenced operations on January 4, 1994, was 257% in 1994.
Information for the Equity Portfolio and Bond and Income Portfolio is based on
activity of the predecessor series of Pacific Corinthian Variable Fund, the
assets of which were acquired by the Fund on December 31, 1994.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the Fund's net asset
value per share for the purpose of pricing purchase and redemption orders is
determined at or about 4:00 P.M., New York City time, on each day the New York
Stock Exchange is open for trading. Net asset value will not be determined on
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. With respect to the Portfolios that invest
in foreign securities, the value of foreign securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation. Securities traded in over-the-counter markets outside the United
States are valued at the last available price in the over-the-counter market
prior to the time of valuation. Trading in securities on exchanges and over-
the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 P.M., New York City time. In addition, European and
Pacific Basin securities trading may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which the Fund's net asset value is not calculated. Quotations of
foreign securities in foreign currencies are converted to U.S. dollar
equivalents using the foreign exchange quotation in effect at the time net
asset value is computed. The calculation of the net asset value of the Managed
Bond, Government Securities, Growth LT, and International Portfolios may not
take place contemporaneously with the determination of the prices of portfolio
securities of foreign issuers used in such calculation. Further, under the
Fund's procedures, the prices of foreign securities are determined using
information derived from pricing services and other sources every day that the
Fund values its shares. Prices derived under these procedures will be used in
determining net asset value. Information that becomes known to the Fund or its
agents after the time that net asset value is calculated on any business day
may be assessed in determining net asset value per share after the time of
receipt of the information, but will not be used to retroactively adjust the
price of the security so determined earlier or on a prior day. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and the time a Portfolio's net asset value is determined
41
<PAGE>
may not be reflected in the calculation of net asset value. If events
materially affecting net asset value occur during such period, the securities
would be valued at fair market value as determined by the management and
approved in good faith by the Board of Trustees of the Fund.
The Money Market Portfolio's portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During such periods the
yield to investors in the Portfolio may differ somewhat from that obtained in a
similar investment company which uses available market quotations to value all
of its portfolio securities.
The Commission's regulations require the Money Market Portfolio to adhere to
certain conditions. The Portfolio is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except securities
held subject to repurchase agreements having 13 months or less to maturity) and
to invest only in securities that meet specified quality and credit criteria.
All other Portfolios are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are valued
at their fair value as determined in good faith by the Board of Trustees of the
Fund, although the actual calculations may be made by persons acting under the
direction of the Board. Money market instruments are valued at market value,
except that instruments maturing in sixty days or less are valued using the
amortized cost method of valuation.
With respect to the International Portfolio, the value of a foreign security
is determined in its national currency based upon the price on the foreign
exchange as of its close of business immediately preceding the time of
valuation. Securities traded in over-the-counter markets outside the United
States are valued at the last available price in the over-the-counter market
prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity of sixty days or less at
their date of acquisition), are normally valued on the basis of quotes obtained
from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data. Debt obligations having a maturity of
sixty days or less are generally valued at amortized cost unless the amortized
cost value does not approximate market value. Certain debt securities for which
daily market quotations are not readily available may be valued, pursuant to
guidelines established by the Board of Trustees, with reference to debt
securities whose prices are more readily obtainable and whose durations are
comparable to the securities being valued.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value
of the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. The values of
futures contracts are based on market prices. Quotations of foreign securities
in foreign currency are converted to U.S. dollar equivalents at the prevailing
market rates quoted by the custodian on the morning of valuation.
42
<PAGE>
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and effective yield of
its Money Market Portfolio, the yield of the remaining Portfolios, and the
total return of all Portfolios in advertisements, sales literature, or reports
to shareholders or prospective investors. Total return information for the
Fund will not be advertised or included in sales literature unless accompanied
by comparable performance information for a Separate Account to which the Fund
offers its shares.
Current yield for the Money Market Portfolio will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular 7-day period, less a pro-rata share of Portfolio expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation
of "effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7]-1
For the 7-day period ending December 31, 1994, the current yield of the
Money Market Portfolio was 4.92% and the effective yield of the Portfolio was
5.04%.
Quotations of yield for the remaining Portfolios will be based on all
investment income per share earned during a particular 30-day period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and are computed by dividing net investment income
by the maximum offering price per share on the last day of the period,
according to the following formula:
<TABLE>
<C> <S> <C>
( a-b
2[ +1)/6/ -1]
cd
</TABLE>
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
For the 30 day period ended December 31, 1994, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: 9.08% for the High Yield Bond Portfolio, 6.09% for the Managed Bond
Portfolio, 5.71% for the Government Securities Portfolio, 1.76% for the Growth
LT Portfolio, 3.75% for the Multi-Strategy Portfolio, 1.24% for the Equity
Income Portfolio, (0.34%) for the Equity Portfolio, 6.58% for the Bond and
Income Portfolio, 0.29% for the International Portfolio, and 2.22% for the
Equity Index Portfolio.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant
to the following formula: P (1 + T)n = ERV (where P = a hypothetical initial
payment of $1,000, T = the total return for the period, n = the number of
periods, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). Quotations of total return may
also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis,
and assume that all dividends and distributions are reinvested when paid.
43
<PAGE>
For the one year period ended December 31, 1994, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
3.76% for the Money Market Portfolio, 0.42% for the High Yield Bond Portfolio,
(4.36%) for the Managed Bond Portfolio, (5.10%) for the Government Securities
Portfolio, 13.25% for the Growth LT Portfolio (which commenced operations on
January 4, 1994), (0.28%) for the Equity Income Portfolio, (1.50%) for the
Multi-Strategy Portfolio, (2.87%) for the Equity Portfolio, (8.36%) for the
Bond and Income Portfolio, 3.01% for the International Portfolio, and 1.05%
for the Equity Index Portfolio.
For the five year period ended December 31, 1994, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 4.62% for the Money Market Portfolio, 11.96% for the High
Yield Bond Portfolio, 8.02% for the Managed Bond Portfolio, 7.33% for the
Government Securities Portfolio, 6.68% for the Equity Income Portfolio, 6.78%
for the Multi-Strategy Portfolio, 8.67% for the Equity Portfolio, 8.71% for
the Bond and Income Portfolio, and 3.00% for the International Portfolio. The
Equity Index Portfolio did not begin operations until January 30, 1991, and
the Growth LT Portfolio did not begin operations until January 4, 1994.
For the ten year period ended December 31, 1994, the average annual total
returns for the Equity Portfolio, and Bond and Income Portfolio were 13.02%
and 11.17%, respectively.
Based upon the period from the commencement of Fund operations on January 4,
1988 until December 31, 1994, the average annual total return for each
Portfolio, except the Equity Index, Growth LT, Equity, and Bond and Income
Portfolios, was as follows: 5.38% for the Money Market Portfolio, 10.30% for
the High Yield Bond Portfolio, 8.86% for the Managed Bond Portfolio, 8.25% for
the Government Securities Portfolio, 9.89% for the Equity Income Portfolio,
9.03% for the Multi-Strategy Portfolio, and 7.37% for the International
Portfolio. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1994, the average
annual total return for the Equity Index Portfolio was 10.44%. Based upon the
period from the commencement of operations of the Growth LT Portfolio on
January 4, 1994 until December 31, 1994, the average annual total return for
the Growth LT Portfolio was 13.41%. Based upon the period from the
commencement of the first full year of operations of the Equity Portfolio and
Bond and Income Portfolio on January 1, 1984, the average annual total return
for each of these Portfolios was 12.87% and 11.67%, respectively.
The performance results for the Equity Income, Multi-Strategy, and
International Portfolios occurred when these Portfolios were advised by
different Portfolio Managers. J.P. Morgan Investment began serving as
Portfolio Manager to the Equity Income Portfolio and the Multi-Strategy
Portfolio and Templeton began serving as Portfolio Manager to the
International Portfolio on January 1, 1994. The performance results for the
Equity Portfolio and Bond and Income Portfolio are based on the performance
results of the predecessor series of Pacific Corinthian Variable Fund, the
assets of which were acquired by the Fund on December 31, 1994.
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
500 Stock Index ("S&P 500"), the Dow Jones Industrial Average ("DJIA"), for
the Money Market Portfolio, Donoghue Money Market Institutional Averages; for
those Portfolios with investments in fixed income securities, the Lehman
Brothers Government Corporate Index; for the Government Securities Portfolio,
the Lehman Brothers Government Bond Index; for the High Yield Bond Portfolio,
the Salomon High Yield Bond Indexes; for the International Portfolio, Morgan
Stanley Capital International's EAFE Index, which represents the stock markets
of Europe, Australia, and the Far East; or other unmanaged indices, so that
investors may compare a Portfolio's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
44
<PAGE>
Quotations of yield or total return for the Fund will not take into account
charges and deductions against any Separate Accounts to which the Fund shares
are sold or charges and deductions against the Contracts issued by Pacific
Mutual Life Insurance Company. The Portfolio's yield and total return should
not be compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Separate Accounts
or the Contracts. Performance information for any Portfolio reflects only the
performance of a hypothetical investment in the Portfolio during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Portfolio's investment objectives and policies,
characteristics and quality of the portfolios and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
TAXATION
Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").
To qualify as a regulated investment company, each Portfolio generally must,
among other things:(i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of certain
assets held less than three months including stocks, securities, and certain
foreign currencies, futures, options, and forward contracts; (iii) diversify
its holdings so that, at the end of each quarter of the taxable year, (a) at
least 50% of the market value of the Portfolio's assets is represented by cash,
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (iv) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest, and net short-
term capital gains in excess of any net long-term capital losses) each taxable
year.
As a regulated investment company, a Portfolio generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years), if
any, that it distributes to shareholders. Each Portfolio intends to distribute
to its shareholders, at least annually, substantially all of its investment
company taxable income and any net capital gains. In addition, amounts not
distributed by a Portfolio on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To avoid
the tax, a Portfolio must distribute (or be deemed to have distributed) during
each calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98%
of its capital gains in excess of its capital losses for the twelve month
period ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years
that were not distributed during such years. To avoid application of the excise
tax, each Portfolio intends to make its distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid
on December 31 of the calendar year if it is declared by a Portfolio during
October, November, or December of that year to shareholders of record on a date
in such a month and paid by the Portfolio during January of the following
calendar year. Such distributions will be taxable to shareholders (the Separate
Accounts) for the calendar year in which the distributions are declared, rather
than the calendar year in which the distributions are received.
If a Portfolio invests in shares of a foreign investment company, the
Portfolio may be subject to U.S. federal income tax on a portion of an "excess
distribution" from, or of the gain from the sale of part or all of the shares
in, such company. In addition, an interest charge may be imposed with respect
to deferred taxes arising from such distributions or gains.
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Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Portfolio actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts, and
options, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Portfolio's investment company taxable
income to be distributed to its shareholders as ordinary income.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets
held by the separate account. If the contract owner is considered the owner of
the securities underlying the separate account, income and gains produced by
those securities would be included currently in the contract owner's gross
income. It is not known what standards will be set forth in the regulations or
rulings.
In the event that the rules or regulations are adopted there can be no
assurance that the Portfolios will be able to operate as currently described in
the Prospectus, or that the Trust will not have to change any Portfolio's
investment objective or investment policies. While each Portfolio's investment
objective is fundamental and may be changed only by a vote of a majority of its
outstanding shares, the Trustees have reserved the right to modify the
investment policies of the Portfolios as necessary to prevent any such
prospective rules and regulations from causing the contract owners to be
considered the owners of the shares of the Portfolio's underlying the Separate
Accounts.
DISTRIBUTIONS
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of the shareholder (Separate Account). Net
capital gains (the excess of any net long-term capital gains over net short-
term capital losses) will, to the extent distributed, be treated as long-term
capital gains in the hands of a Separate Account regardless of the length of
time a Separate Account may have held the shares.
HEDGING TRANSACTIONS
The 30% limitation and the diversification requirements applicable to a
Portfolio's assets may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts, or forward contracts.
OTHER INFORMATION
CONCENTRATION POLICY
Under each Portfolio's investment restrictions, a Portfolio may not invest in
a security if, as a result of such investment, more than 25% of its total
assets (taken at market value at the time of such investment) would be invested
in the securities of issuers in any particular industry, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto). For purposes of complying with this restriction, the Fund, in
consultation with its Portfolio Managers, utilizes its own industry
classifications.
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CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration of
Trust dated May 4, 1987. The capitalization of the Fund consists solely of an
unlimited number of shares of beneficial interest with a par value of $0.001
each. The Board of Trustees may establish additional Portfolios (with different
investment objectives and fundamental policies) at any time in the future.
Establishment and offering of additional Portfolios will not alter the rights
of the Fund's shareholders. When issued, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Fund. Shares do not have
preemptive rights or subscription rights. In liquidation of a Portfolio of the
Fund, each shareholder is entitled to receive his pro rata share of the net
assets of that Portfolio.
Expenses incurred by the Equity Index Portfolio and Growth LT Portfolio in
connection with the Fund's organization and establishment of those Portfolios
and the public offering of the shares of those Portfolios, aggregated
approximately $40,358 and $3,952, respectively. These costs have been deferred
by the Equity Index and Growth LT Portfolios and are being amortized by it over
a period of five years from the beginning of operations of those Portfolios.
VOTING RIGHTS
Shareholders of the Fund are given certain voting rights. Each share of each
Portfolio will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an investment
medium for variable insurance products.
Under the Declaration of Trust, the Fund is not required to hold annual
meetings of Fund shareholders to elect Trustees or for other purposes. It is
not anticipated that the Fund will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Fund will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Fund. In addition, the Declaration of Trust provides that
the holders of not less than two-thirds of the outstanding shares or other
voting interests of the Fund may remove a person serving as Trustee either by
declaration in writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the removal of a
person serving as Trustee, if requested in writing to do so by the holders of
not less than 10% of the outstanding shares or other voting interests of the
Fund. The Fund's shares do not have cumulative voting rights.
CUSTODIAN AND TRANSFER AGENCY AND DIVIDEND DISBURSING SERVICES
Investors Fiduciary Trust Company ("IFTC") serves as Custodian for assets of
the Fund. Pursuant to a sub-custody agreement between IFTC and The Chase
Manhattan Bank, N.A. ("Chase"), Chase serves as subcustodian of the Fund for
the custody of the foreign securities acquired by the Fund. Under the
agreement, Chase may hold the foreign securities at its principal office at One
Chase Manhattan Plaza, New York, New York 10081, and at Chase's branches, and
subject to approval by the Board of Trustees, at a foreign branch of a
qualified U.S. bank, an eligible foreign subcustodian, or an eligible foreign
securities depository.
Pursuant to rules or other exemptions under the Investment Company Act, the
Fund may maintain foreign securities and cash for the Fund in the custody of
certain eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by the Board of Trustees, and is
reviewed annually, following a consideration of a number of factors, including
(but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Fund; the reputation of the institution in its national
market; the political and economic stability of the country in which the
institution is located; and further risks of potential nationalization or
expropriation of Fund assets.
Pacific Mutual provides dividend disbursing and transfer agency services to
the Fund.
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FINANCIAL STATEMENTS
The financial statements of the Fund as of December 31, 1994, including the
notes thereto, are incorporated by reference in this Statement of Additional
Information from the Annual Report of the Fund dated as of December 31, 1994.
The financial statements have been audited by Deloitte & Touche LLP, except for
information for the Equity Portfolio and Bond and Income Portfolio for years
before 1994, which was audited by other independent public accountants.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP serves as the independent public accountants for the
Fund. Deloitte & Touche LLP provides audit services and assistance and
consultation in connection with Securities and Exchange Commission filings. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.
COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Suite 500, Washington, D.C.
20005, passes upon certain legal matters in connection with the shares offered
by the Fund and also acts as outside counsel to the Fund.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Fund's Registration Statement filed with
the Securities and Exchange Commission under the Securities Act of 1933 with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Registration Statement, including the exhibits filed therewith,
may be examined at the offices of the Securities and Exchange Commission in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
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FORM NO. 250-5B
