485BPOS 1 d485bpos.txt PACIFIC LIFE - INNOVATIONS & INNOVATIONS SELECT As filed with the Securities and Exchange Commission on April 30, 2002. Registrations Nos. 333-93059 811-08946 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_] Pre-Effective Amendment No. [_] Post-Effective Amendment No. 9 [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_] Amendment No. 58 (Check appropriate box or boxes) SEPARATE ACCOUNT A (Exact Name of Registrant) PACIFIC LIFE INSURANCE COMPANY (Name of Depositor) 700 Newport Center Drive Newport Beach, California 92660 (Address of Depositor's Principal Executive Offices) (Zip Code) (949) 219-3743 (Depositor's Telephone Number, including Area Code) Diane N. Ledger Vice President Pacific Life Insurance Company 700 Newport Center Drive Newport Beach, California 92660 (Name and address of agent for service) Copies of all communications to: Diane N. Ledger Ruth Epstein, Esq. Pacific Life Insurance Company Dechert P.O. Box 9000 1775 Eye Street, N.W. Newport Beach, CA 92658-9030 Washington, D.C. 20006-2401 Approximate Date of Proposed Public Offering It is proposed that this filing will become effective (check appropriate box) [_] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 2002 pursuant to paragraph (b) of Rule 485 [_] 60 days after filing pursuant to paragraph (a) (1) of Rule 485 [_] on pursuant to paragraph (a)(1) of Rule 485 If appropriate, check the following box: [_] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. Title of Securities Being Registered: Interests in the Separate Account Under Pacific Innovations and Pacific Innovations Select individual flexible premium deferred variable annuity contracts. Filing Fee: None SEPARATE ACCOUNT A FORM N-4 CROSS REFERENCE SHEET PART A Item No. Prospectus Heading 1. Cover Page Cover Page 2. Definitions TERMS USED IN THIS PROSPECTUS 3. Synopsis AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT 4. Condensed Financial Information YOUR INVESTMENT OPTIONS --Variable Investment Option Performance; ADDITIONAL INFORMATION --Financial Statements; FINANCIAL HIGHLIGHTS (PACIFIC INNOVATIONS ONLY) 5. General Description of Registrant, Depositor and Portfolio Companies AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT; PACIFIC LIFE AND THE SEPARATE ACCOUNT -- Pacific Life, -- Separate Account A; YOUR INVESTMENT OPTIONS -- Your Variable Investment Options; ADDITIONAL INFORMATION -- Voting Rights 6. Deductions AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT; HOW YOUR INVESTMENTS ARE ALLOCATED -- Transfers; CHARGES, FEES AND DEDUCTIONS; WITHDRAWALS -- Optional Withdrawal 7. General Description of Variable Annuity Contracts AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT; PURCHASING YOR CONTRACT -- How to Apply for your Contract; HOW YOUR INVESTMENTS ARE ALLOCATED; RETIREMENT BENEFITS AND OTHER PAYOUTS -- Choosing Your Annuity Option, -- Your Annuity Payments, -- Death Benefits; ADDITIONAL INFORMATION -- Voting Rights, -- Changes to Your Contract, -- Changes to ALL Contracts, -- Inquiries and Submitting Forms and Requests, -- Timing of Payments and Transactions 8. Annuity Period RETIREMENT BENFITS AND OTHER PAYOUTS 9. Death Benefit RETIREMENT BENEFITS AND OTHER PAYOUTS -- Death Benefits 10. Purchases and Contract Value AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT; PURCHASING YOUR CONTRACT; HOW YOUR INVESTMENTS ARE ALLOCATED; PACIFIC LIFE AND THE SEPARATE ACCOUNT -- Pacific Life; THE GENERAL ACCOUNT -- Withdrawals and Transfers 11. Redemptions AN OVERVIEW OF PACIFIC INNOVATIONS AND AN OVERVIEW OF PACIFIC INNOVATIONS SELECT; CHARGES, FEES AND DEDUCTIONS; WITHDRAWALS; ADDITIONAL INFORMATION --Timing of Payments and Transactions; THE GENERAL ACCOUNT -- Withdrawals and Transfers 12. Taxes CHARGES, FEES AND DEDUCTIONS -- Premium Taxes; WITHDRAWALS -- Optional Withdrawals, -- Tax Consequences of Withdrawals; FEDERAL TAX STATUS 13. Legal Proceedings Not Applicable 14. Table of Contents of the Statement of Additional Information CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION PART B Item No. Statement of Additional Information Heading 15. Cover Page Cover Page 16. Table of Contents TABLE OF CONTENTS 17. General Information and History Not Applicable 18. Services Not Applicable 19. Purchase of Securities Being Offered THE CONTRACTS AND THE SEPARATE ACCOUNT -- Calculating Subaccount Unit Values, -- Systematic Transfer Programs 20. Underwriters DISTRIBUTION OF THE CONTRACTS -- Pacific Select Distributors, Inc. 21. Calculation of Performance Data PERFORMANCE 22. Annuity Payments THE CONTRACTS AND THE SEPARATE ACCOUNT --Variable Annuity Payment Amounts 23. Financial Statements FINANCIAL STATEMENTS PART C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. PACIFIC INNOVATIONS PROSPECTUS MAY 1, 2002 Pacific Innovations is an individual flexible premium deferred variable annuity contract issued by Pacific Life Insurance Company. This Contract is This Prospectus provides information you should know not available in before buying a Contract. It's accompanied by a current all states. Prospectus for the Pacific Select Fund, the Fund that This Prospectus is provides the underlying Portfolios for the Variable not an offer in any Investment Options offered under the Contract. The state or Variable Investment Options are funded by Separate jurisdiction where Account A of Pacific Life. Please read both we're not legally Prospectuses carefully, and keep them for future permitted to offer reference. the Contract. Here's a list of all the Investment Options available The Contract is under your Contract: described in detail in this Prospectus VARIABLE INVESTMENT OPTIONS and its Statement of Additional Blue Chip Mid-Cap Value Information (SAI). The Pacific Select Aggressive Growth International Value Fund is described in its Prospectus Emerging Markets Capital Opportunities and its SAI. No one has the right to Diversified Research Mid-Cap Growth describe the Contract or the Small-Cap Equity Global Growth Pacific Select Fund any differently International Large-Cap Equity Index than they have been described in these I-Net Tollkeeper(SM) Small-Cap Index documents. Financial Services Real Estate You should be aware (formerly called REIT) that the Securities and Exchange Health Sciences Inflation Managed Commission (SEC) has not reviewed Technology Managed Bond the Contract and does not guarantee Telecommunications Money Market that the information in this Multi-Strategy High Yield Bond Prospectus is accurate or Large-Cap Core complete. It's a (formerly called Equity Income) Equity Income criminal offense to say otherwise. Strategic Value Research This Contract is Growth LT Equity not a deposit or obligation of, or Focused 30 Aggressive Equity guaranteed or endorsed by, any Large-Cap Value bank. It's not FIXED OPTION federally insured by the Federal Fixed Deposit Insurance Corporation, the Federal Reserve You'll find more information about the Contract and Board, or any other Separate Account A in the SAI dated May 1, 2002. The government agency. SAI has been filed with the SEC and is considered to be Investment in a part of this Prospectus because it's incorporated by Contract involves reference. You'll find a table of contents for the SAI risk, including on page 61 of this Prospectus. You can get a copy of possible loss of the SAI without charge by calling or writing to Pacific principal. Life. You can also visit the SEC's website at www.sec.gov, which contains the SAI, material incorporated into this Prospectus by reference, and other information about registrants that file electronically with the SEC. YOUR GUIDE TO THIS PROSPECTUS An Overview of Pacific Innovations 3 ------------------------------------------------------------------------------ Your Investment Options 12 Your Variable Investment Options 12 Variable Investment Option Performance 14 Your Fixed Option 14 ------------------------------------------------------------------------------ Purchasing Your Contract 14 How to Apply for Your Contract 14 Purchasing a Death Benefit Rider (Optional) 15 Purchasing the Earnings Enhancement Guarantee (EEG) Rider (Optional) 15 Purchasing the Guaranteed Protection Advantage (GPA) Rider (Optional) 15 Information About the Optional Riders, IRAs and Other Qualified Contracts 17 Making Your Investments ("Purchase Payments") 17 ------------------------------------------------------------------------------ How Your Investments Are Allocated 18 Choosing Your Investment Options 18 Portfolio Optimization 19 Investing in Variable Investment Options 21 When Your Investment is Effective 21 Transfers 21 ------------------------------------------------------------------------------ Charges, Fees and Deductions 23 Withdrawal Charge 23 Premium Taxes 25 Annual Fee 26 Waivers and Reduced Charges 26 Mortality and Expense Risk Charge 26 Administrative Fee 27 Earnings Enhancement Guarantee (EEG) Annual Charge (Optional Rider) 27 Guaranteed Protection Advantage (GPA) Annual Charge (Optional Rider) 27 Expenses of the Fund 27 ------------------------------------------------------------------------------ Retirement Benefits and Other Payouts 27 Selecting Your Annuitant 27 Annuitization 28 Choosing Your Annuity Date 28 Default Annuity Date and Options 29 Choosing Your Annuity Option 30 Your Annuity Payments 31 Death Benefits 32 ------------------------------------------------------------------------------ Withdrawals 37 Optional Withdrawals 37 Tax Consequences of Withdrawals 39 Right to Cancel ("Free Look") 39 ------------------------------------------------------------------------------ Pacific Life and the Separate Account 39 Pacific Life 39 Separate Account A 40 Financial Highlights 41 ------------------------------------------------------------------------------ Federal Tax Status 44 Taxes Payable by Contract Owners: General Rules 44 Qualified Contracts 46 Loans 49 Withholding 51 Impact of Federal Income Taxes 51 Taxes on Pacific Life 52 ------------------------------------------------------------------------------ Additional Information 52 Voting Rights 52 Changes to Your Contract 53 Changes to All Contracts 53 Inquiries and Submitting Forms and Requests 54 Telephone and Electronic Transactions 55 Electronic Delivery Authorization 55 Timing of Payments and Transactions 56 Confirmations, Statements and Other Reports to Contract Owners 56 Replacement of Life Insurance or Annuities 56 Financial Statements 57 ------------------------------------------------------------------------------ The General Account 57 General Information 57 Guarantee Terms 57 Withdrawals and Transfers 57 ------------------------------------------------------------------------------ Terms Used in This Prospectus 59 ------------------------------------------------------------------------------ Contents of the Statement of Additional Information 61 ------------------------------------------------------------------------------ Appendix A: State Law Variations 62 ------------------------------------------------------------------------------ Where to Go for More Information Back Cover
2 AN OVERVIEW OF PACIFIC INNOVATIONS This overview tells you some key things you should know about your Contract. It's designed as a summary only - please read this Prospectus, your Contract and the Statement of Additional Information for more detailed information. Some states have different rules about how annuity contracts are described or administered. These rules are reflected in your Contract, or in endorsements or supplements to your Contract. The terms of your Contract, or of any endorsement or supplement, prevail over what's in this Prospectus. In this Prospectus, you and your mean the Contract Owner or Policyholder. Pacific Life, we, us and our refer to Pacific Life Insurance Company. Contract means a Pacific Innovations variable annuity contract, unless we state otherwise. --------------------------------------------------------- Pacific Innovations Pacific Innovations is an annuity contract between you Basics and Pacific Life Insurance Company. An annuity contract This Contract is designed for long-term financial may be appropriate planning. It allows you to invest money on a tax- if you're looking deferred basis for retirement or other goals, and to for retirement receive income in a variety of ways, including a series income or you want of income payments for life or for a specified period to meet other long- of years. term financial objectives. Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified Contract with "after-tax" This Contract may dollars. You buy a Qualified Contract under a qualified not be the right retirement or pension plan, or an individual retirement one for you if you annuity or account (IRA), or form thereof. need to withdraw money for short- Pacific Innovations is a variable annuity, which means term needs, because that the value of your Contract fluctuates depending on withdrawal charges the performance of the Investment Options you choose. and tax penalties The Contract allows you to choose how often you make for early Investments ("Purchase Payments") and how much you add withdrawal may each time. apply. Your Right to Cancel ("Free Look") You should consider During the Free Look period, you have the right to the Contract's cancel your Contract and return it to us or to your investment and registered representative for a refund. The amount income benefits, as refunded may be more or less than the Investments well as its costs. you've made, depending on the state where you signed your application and the kind of Contract you buy. 3 AN OVERVIEW OF PACIFIC INNOVATIONS --------------------------------------------------------- The Accumulation The accumulation phase begins on your Contract Date and Phase continues until your Annuity Date. During the accumulation phase, you can put money in your Contract by making investments, and choose Investment Options in The Investment which to allocate them. You can also take money out of Options you choose your Contract by making a withdrawal. and how they perform will affect Investments ("Purchase Payments") the value of your Your initial Investment must be at least $10,000 for a Contract during the Non-Qualified Contract and at least $2,000 for a accumulation phase, Qualified Contract. Additional Investments must be at as well as the least $250 for a Non-Qualified Contract and $50 for a amount of your Qualified Contract. We also call your Investments annuity payments "Purchase Payments". during the income phase if you choose a variable annuitization payout. Investment Options You can ask your You can choose from 33 Variable Investment Options registered (also called Subaccounts), each of which invests in a representative to corresponding Portfolio of the Pacific Select Fund. help you choose the We're the investment adviser for the Pacific Select right Investment Fund. We oversee the management of all the Fund's Options for your Portfolios and manage two of the Portfolios directly. goals and risk We've retained other portfolio managers to manage the tolerance. other Portfolios. The value of each Portfolio will fluctuate with the value of the investments it holds, You'll find more and returns are not guaranteed. about the Investment Options You can also choose the Fixed Option that earns a starting on page guaranteed rate of interest of at least 3% annually. 12. We allocate your Investments to the Investment Options you choose. The value of your Contract will fluctuate during the accumulation phase depending on the Investment Options you've chosen. You bear the investment risk of any Variable Investment Options you choose. Transferring among Investment Options You'll find more You can transfer among Investment Options any time, about transfers and subject to certain limitations, until your Annuity Date transfer without paying any current income tax. As of January 1, limitations 2002, and each calendar year thereafter, transfers are starting on page limited to 25 for each calendar year. You can also make 21. automatic transfers by enrolling in our dollar cost averaging, portfolio rebalancing, or earnings sweep programs. Some restrictions apply to transfers to and from the Fixed Option. Withdrawals You'll find more You can make full and partial withdrawals to supplement about withdrawals your income or for other purposes. You can withdraw a starting on page certain amount each year without paying a withdrawal 37. charge, but you may pay a withdrawal charge if you withdraw Investments that are less than four years old. Some restrictions apply to making withdrawals from the Fixed Option. In general, you may have to pay tax on withdrawals or other distributions from your Contract. If you're under age 59 1/2, a 10% federal penalty tax may also apply to withdrawals. 4 --------------------------------------------------------- The Income Phase The income phase of your Contract begins on your Annuity Date. Generally, you can choose to surrender your Contract and receive a single payment or you can You'll find more annuitize your Contract and receive a series of income about annuitization payments. starting on page 28. You can choose fixed or variable annuity payments, or a combination of both, for life or for a specified period of years. Variable annuity payments may not be available in all states. You can choose monthly, quarterly, semiannual or annual payments. We'll make the income payments to your designated payee. Income distributions are always taxed to the Owner. If you choose variable annuity payments, the amount of the payments will fluctuate depending on the performance of the Variable Investment Options you choose. After your Annuity Date, if you choose variable annuity payments, you can exchange your Subaccount Annuity Units among the Variable Investment Options up to four times in any 12-month period. --------------------------------------------------------- The Death Benefit The Contract provides a death benefit upon the first death of an Owner or the death of the last surviving Annuitant, whichever occurs first, during the You'll find more accumulation phase. Death benefit proceeds are payable about the death when we receive proof of death and payment instructions benefit starting on in proper form. To whom we pay a death benefit, and how page 32. we calculate the amount of the death benefit depends on who dies first and the type of Contract you own. Optional Riders Stepped-Up Death Benefit (SDBR) and Premier Death Benefit (PDBR) Riders Optional riders are The Stepped-Up Death Benefit Rider (SDBR) and Premier subject to Death Benefit Rider (PDBR) offer the potential for a availability. Ask larger death benefit. You can only buy one of the your registered riders and you can only buy it when you buy your representative Contract. You cannot buy both riders and you cannot buy about the current a rider after you buy your Contract. status. Earnings Enhancement Guarantee (EEG) Rider The Earnings The optional Earnings Enhancement Guarantee (EEG) Rider Enhancement provides for an additional amount ("EEG Amount") to be Guarantee (EEG) included in the death benefit proceeds when such Rider, EEG Amount proceeds become payable as a result of the Annuitant's and EEG Charge are death or first death of an Owner who is also an called the Annuitant. You may buy the EEG Rider on the Contract Guaranteed Earnings Date or on the first Contract Anniversary. For Enhancement (GEE) Contracts issued prior to May 1, 2001, the EEG Rider Rider, GEE Amount may be purchased on any Contract Anniversary through and GEE Charge, December 31, 2002. respectively, in the Contract's If you buy the EEG Rider within 30 days after the Rider. Contract Date or Contract Anniversary, we will make the effective date of the EEG Rider to coincide with that Contract Date or Contract Anniversary. Guaranteed Protection Advantage (GPA) Rider The optional Guaranteed Protection Advantage Rider provides for an additional amount that may be added to your Contract Value when an asset allocation program, established and maintained by us for this Rider, is used for a 10-year period (the "Term"). The Term begins on the Effective Date of the Rider. Your entire Contract Value must be invested in an asset allocation program during the entire Term for the additional amount to be added to your Contract. Subject to certain limitations, you can buy the Guaranteed Protection Advantage Rider at any time during the Contract Year. The Guaranteed Protection Advantage Rider may not be available. Ask your registered representative about its current availability. 5 AN OVERVIEW OF PACIFIC INNOVATIONS This section of the overview explains the fees and expenses associated with your Pacific Innovations Contract. For information . Contract Expenses are expenses that we deduct from about how Separate your Contract. These expenses are fixed under the Account A and Fund terms of your Contract. Premium taxes may also apply expenses affect to your Contract. We generally charge premium taxes accumulation units, when you annuitize your Contract, but there may be see Financial other times when we charge them to your Contract Highlights on page instead. Please see your Contract for details. 41. . Separate Account A Annual Expenses are expenses that we deduct from the assets of each Variable Investment Option. They are guaranteed not to increase under the terms of your Contract. . Pacific Select Fund Annual Expenses affect you if you choose a Variable Investment Option because they reduce Portfolio returns. They can vary from year to year. They are not fixed and are not part of the terms of your Contract.
--------------------------------------------------------------------- Contract Expenses Sales charge on Investments none Maximum withdrawal charge, as a percentage of Investments 9.0%/1/ Withdrawal transaction fee (currently waived) $15.00/2/ Transfer fee (currently waived) $15.00/3/ Annual Fee $30.00/4/ Earnings Enhancement Guarantee (EEG) Annual Charge (Optional Rider) 0.25%/5/ (calculated as a percentage of Contract Value) Guaranteed Protection Advantage (GPA) Annual Charge (Guaranteed Protection Charge) (Optional Rider), (calculated as a percentage of Contract Value) 0.10%/6/
-------------------------------------------------------------------------- Without With Stepped-Up With Premier Rider Death Benefit Rider Death Benefit Rider -------------------------------------------------------------------------- Separate Account A Mortality and Expense Annual Expenses Risk Charge/7/ 1.25% 1.25% 1.25% (as a percentage of Administrative Fee/7/ 0.15% 0.15% 0.15% the average daily Death Benefit Rider Account Value) Charge/8/ none 0.20% 0.35% ----- ----- ----- Total Separate Account A Annual Expenses 1.40% 1.60% 1.75% ----- ----- -----
/1/ The withdrawal charge may not apply or may be reduced under certain circumstances. See CHARGES, FEES AND DEDUCTIONS and WITHDRAWALS. /2/ In the future, we may charge a fee of up to $15 for any withdrawal over 15 that you make in a Contract Year. See WITHDRAWALS - Optional Withdrawals. /3/ In the future, we may charge a fee of up to $15 for any transfer over 15 that you make in a Contract Year. See HOW YOUR INVESTMENTS ARE ALLOCATED-- Transfers. /4/ We deduct an Annual Fee on each Contract Anniversary up to your Annuity Date and when you make a full withdrawal if the Contract Value on these days is less than $50,000 after deducting any outstanding loan and interest (your Net Contract Value). See CHARGES, FEES AND DEDUCTIONS. /5/ If you buy the EEG Rider (subject to state availability), we deduct this charge proportionately from your Investment Options on each Contract Anniversary following the date you purchase the Rider and when you make a full withdrawal, if the EEG Rider is in effect on that date. See CHARGES, FEES AND DEDUCTIONS. /6/ If you buy the Guaranteed Protection Advantage Rider (subject to availability), we deduct this charge from your Investment Options on each Contract Anniversary following the Effective Date of the Rider during the term of the Rider and while the Rider is in effect. If the Rider is terminated for reasons other than death or annuitization, this charge will be deducted on the effective date of termination. /7/ This is an annual rate.The daily rate is calculated by dividing the annual rate by 365. /8/ If you buy the Stepped-Up Death Benefit Rider or the Premier Death Benefit Rider (which is subject to state availability), we add this charge to the Mortality and Expense Risk Charge until your Annuity Date. See CHARGES, FEES AND DEDUCTIONS. 6 --------------------------------------------------------- Pacific Select Fund The Pacific Select Fund pays advisory fees and other Annual Expenses expenses. These are deducted from the assets of the Fund's Portfolios and may vary from year to year. They are not fixed and are not part of the terms of your You'll find more Contract. If you choose a Variable Investment Option, about the Pacific these fees and expenses affect you because they reduce Select Fund Portfolio returns. starting on page 12, and in the Advisory Fee Fund's Prospectus, Pacific Life is the investment adviser to the Fund. The which accompanies Fund pays an advisory fee to us for these services. The this Prospectus. table below shows the advisory fee as an annual percentage of each Portfolio's average daily net assets. Other Expenses The table below shows the advisory fee and fund expenses as an annual percentage of each Portfolio's average daily net assets, based on the year 2001 unless otherwise noted. To help limit Fund expenses, effective July 1, 2000 Pacific Life contractually agreed to waive all or part of its investment advisory fees or otherwise reimburse each Portfolio for operating expenses (including organizational expenses, but not including advisory fees, additional costs associated with foreign investing and extraordinary expenses) that exceed an annual rate of 0.10% of its average daily net assets. Such waiver or reimbursement is subject to repayment to us to the extent such expenses fall below the 0.10% expense cap in future years. Any amounts repaid to us will have the effect of increasing such expenses of the Portfolio, but not above the 0.10% expense cap. For each Portfolio, our right to repayment of amounts waived and/or reimbursed is limited to amounts that do not cause such expenses to exceed the new 0.10% expense cap and, except for Portfolios that started on or after October 2, 2000, that do not exceed the previously established 0.25% expense cap with respect to expenses incurred through December 31, 2001. There is no guarantee that Pacific Life will continue to cap expenses after December 31, 2002. In 2001, Pacific Life reimbursed $42,185 to the Aggressive Growth Portfolio, $32,032 to the Financial Services Portfolio, $4,249 to the Health Sciences Portfolio, $28,084 to the Technology Portfolio, $24,277 to the Telecommunications Portfolio, $12,603 to the Capital Opportunities Portfolio, $9,417 to the Mid-Cap Growth Portfolio and $59,355 to the Global Growth Portfolio. In 2001, Pacific Life recouped $13,202 from the I-Net Tollkeeper Portfolio, $16,714 from the Strategic Value Portfolio, $5,499 from the Focused 30 Portfolio and $27,505 from the Small-Cap Index Portfolio for adviser's reimbursements in 2000 under the expense limitation agreement.
------------------------------------------------------------------------------------- Less Advisory Other 12b-1 Total adviser's Total net Portfolio fee expenses amounts+ expenses reimbursement expenses ------------------------------------------------------------------------------------- As an annual % of average daily net assets Blue Chip/1/ 0.95 0.05 0.04 1.04 -- 1.04 Aggressive Growth/1/ 1.00 0.18 0.06 1.24 (0.08) 1.16 Emerging Markets/1/ 1.10 0.22 -- 1.32 -- 1.32 Diversified Research/1/ 0.90 0.04 0.02 0.96 -- 0.96 Small-Cap Equity/1/ 0.65 0.05 -- 0.70 -- 0.70 International Large-Cap 1.05 0.09 -- 1.14 -- 1.14 I-Net Tollkeeper/2/ 1.40 0.07 -- 1.47 -- 1.47 Financial Services/1/ 1.10 0.20 0.04 1.34 (0.09) 1.25 Health Sciences/1/ 1.10 0.11 0.03 1.24 (0.01) 1.23 Technology 1.10 0.21 -- 1.31 (0.11) 1.20 Telecommunications 1.10 0.29 -- 1.39 (0.18) 1.21 Multi-Strategy/1/ 0.65 0.04 0.01 0.70 -- 0.70 -------------------------------------------------------------------------------------
7 AN OVERVIEW OF PACIFIC INNOVATIONS
----------------------------------------------------------------------------------------------------------------- Less Advisory Other 12b-1 Total adviser's Total net Portfolio fee expenses amounts+ expenses reimbursement expenses ----------------------------------------------------------------------------------------------------------------- Large-Cap Core/1/ 0.65 0.04 0.02 0.71 -- 0.71 (formerly called Equity Income) Strategic Value 0.95 0.10 -- 1.05 -- 1.05 Growth LT/1/ 0.75 0.04 0.03 0.82 -- 0.82 Focused 30/1/ 0.95 0.11 -- 1.06 -- 1.06 Mid-Cap Value/1/ 0.85 0.04 0.11 1.00 -- 1.00 International Value 0.85 0.08 -- 0.93 -- 0.93 Capital Opportunities/1/ 0.80 0.13 0.01 0.94 (0.01) 0.93 Mid-Cap Growth/1/ 0.90 0.12 0.01 1.03 (0.02) 1.01 Global Growth/1/ 1.10 1.04 0.01 2.15 (0.35) 1.80 Equity Index 0.25 0.04 -- 0.29 -- 0.29 Small-Cap Index 0.50 0.07 -- 0.57 -- 0.57 Real Estate 1.10 0.05 -- 1.15 -- 1.15 (formerly called REIT) Inflation Managed/1/ 0.60 0.07 -- 0.67 -- 0.67 Managed Bond/1/ 0.60 0.05 -- 0.65 -- 0.65 Money Market 0.33 0.03 -- 0.36 -- 0.36 High Yield Bond/1/ 0.60 0.04 -- 0.64 -- 0.64 Equity Income/3/ 0.95 0.15 -- 1.10 (0.05) 1.05 Research/3/ 1.00 0.12 -- 1.12 (0.02) 1.10 Equity 0.65 0.05 -- 0.70 -- 0.70 Aggressive Equity/1/ 0.80 0.07 0.04 0.91 -- 0.91 Large-Cap Value/1/ 0.85 0.03 0.02 0.90 -- 0.90 -----------------------------------------------------------------------------------------------------------------
/1/ Total adjusted net expenses for these Portfolios, after deduction of an offset for custodian credits and the 12b-1 recapture were: 1.00% for the Blue Chip Portfolio, 1.10% for the Aggressive Growth Portfolio, 1.31% for the Emerging Markets Portfolio, 0.94% for the Diversified Research Portfolio, 0.69% for the Small-Cap Equity Portfolio, 1.20% for the Financial Services Portfolio, 1.20% for the Health Sciences Portfolio, 0.69% for the Multi-Strategy Portfolio, 0.69% for the Large-Cap Core Portfolio, 0.79% for the Growth LT Portfolio, 1.05% for the Focused 30 Portfolio, 0.89% for the Mid-Cap Value Portfolio, 0.91% for the Capital Opportunities Portfolio, 1.00% for the Mid-Cap Growth Portfolio, 1.76% for the Global Growth Portfolio, 0.66% for the Inflation Managed Portfolio, 0.64% for the Managed Bond Portfolio, 0.63% for the High Yield Bond Portfolio, 0.87% for the Aggressive Equity Portfolio and 0.88% for the Large-Cap Value Portfolio. /2/ Effective January 1, 2002, advisory fee is reduced from the annual rate of 1.50% of average daily net assets to 1.40%. /3/ Expenses are estimated. There were no actual advisory fees or expenses for these Portfolios in 2001 because the Portfolios started after December 31, 2001. + The Fund has a brokerage enhancement 12b-1 plan under which brokerage transactions, subject to best price and execution, may be placed with certain broker-dealers in return for credits, cash or other compensation ("recaptured commissions"). While a Portfolio pays the cost of brokerage when it buys or sells a portfolio security, there are no fees or charges to the fund under the plan. Recaptured commissions may be used to promote and market fund shares and the distributor may therefore defray expenses for distribution that it might otherwise incur. The SEC staff requires that the amount of recaptured commissions be shown as an expense in the chart above. 8 --------------------------------------------------------- Examples The following table shows the expenses you would pay on each $1,000 you invested if, at the end of each period, you: annuitized your Contract; surrendered your Contract and withdrew the Contract Value, or did not annuitize or surrender, but left the money in your Contract. These examples assume the following: . the Contract Value starts at $65,000 . the Variable Investment Options have an annual return of 5% . the Annual Fee is deducted even when the Contract Value goes over $50,000 and a waiver would normally apply. . our current program to reimburse to Pacific Select Fund Portfolio expenses in excess of the 0.10% expense cap as described in Pacific Select Fund Annual Expenses will continue for at least 10 years. without Riders reflects the expenses you would pay if you did not buy any of the following optional Riders: Stepped-Up Death Benefit Rider (SDBR), Premier Death Benefit Rider (PDBR), Earnings Enhancement Guarantee (EEG) Rider, and Guaranteed Protection Advantage (GPA) Rider, collectively referred to below as "Riders". Riders may be subject to availability. Ask your registered representative about their current status. with Riders reflects the maximum amount of expenses you would pay if you bought the optional combination of Riders whose cumulative expense totaled more than any other optional combination. These examples do not show past or future expenses. Your actual expenses in any year may be more or less than those shown here.
------------------------------------------------------------------------------------------ Expenses if you did not Expenses if you Expenses if you annuitize or surrender, annuitized surrendered but left the money in your Contract ($) your Contract ($) your Contract ($) ------------------------------------------------------------------------------------------ Variable Account 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs ------------------------------------------------------------------------------------------ Blue Chip without Riders 106 76 130 277 106 148 130 277 25 76 130 277 with Riders 116 106 179 373 116 178 179 373 35 106 179 373 ------------------------------------------------------------------------------------------ Aggressive Growth without Riders 107 79 135 287 107 151 135 287 26 79 135 287 with Riders 117 109 184 382 117 181 184 382 36 109 184 382 ------------------------------------------------------------------------------------------ Emerging Markets without Riders 109 85 145 308 109 157 145 308 28 85 145 308 with Riders 119 115 194 400 119 187 194 400 38 115 194 400 ------------------------------------------------------------------------------------------ Diversified Research without Riders 105 74 127 271 105 146 127 271 24 74 127 271 with Riders 115 104 177 367 115 176 177 367 34 104 177 367 ------------------------------------------------------------------------------------------ Small-Cap Equity without Riders 103 67 114 246 103 139 114 246 22 67 114 246 with Riders 113 97 165 344 113 169 165 344 32 97 165 344 ------------------------------------------------------------------------------------------ International Large-Cap without Riders 107 80 137 291 107 152 137 291 26 80 137 291 with Riders 117 110 186 385 117 182 186 385 36 110 186 385 ------------------------------------------------------------------------------------------ I-Net Tollkeeper without Riders 110 90 153 323 110 162 153 323 29 90 153 323 with Riders 120 120 202 414 120 192 202 414 39 120 202 414 ------------------------------------------------------------------------------------------ Financial Services without Riders 108 82 140 297 108 154 140 297 27 82 140 297 with Riders 118 112 189 390 118 184 189 390 37 112 189 390 ------------------------------------------------------------------------------------------ Health Sciences without Riders 108 82 140 297 108 154 140 297 27 82 140 297 with Riders 118 112 189 390 118 184 189 390 37 112 189 390 ------------------------------------------------------------------------------------------
9 AN OVERVIEW OF PACIFIC INNOVATIONS
---------------------------------------------------------------------------------------- Expenses if you did not Expenses if you Expenses if you annuitize or surrender, annuitized surrendered but left the money in your Contract ($) your Contract ($) your Contract ($) ---------------------------------------------------------------------------------------- Variable Account 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs ---------------------------------------------------------------------------------------- Technology without Riders 108 82 140 297 108 154 140 297 27 82 140 297 with Riders 118 112 189 390 118 184 189 390 37 112 189 390 ---------------------------------------------------------------------------------------- Telecommunications without Riders 108 82 141 298 108 154 141 298 27 82 141 298 with Riders 118 112 189 391 118 184 189 391 37 112 189 391 --------------------------------------------------------------------------------------- Multi-Strategy without Riders 103 67 114 246 103 139 114 246 22 67 114 246 with Riders 113 97 165 344 113 169 165 344 32 97 165 344 --------------------------------------------------------------------------------------- Large-Cap Core (formerly called Equity Income) without Riders 103 67 114 246 103 139 114 246 22 67 114 246 with Riders 113 97 165 344 113 169 165 344 32 97 165 344 --------------------------------------------------------------------------------------- Strategic Value without Riders 106 78 133 282 106 150 133 282 25 78 133 282 with Riders 116 108 182 377 116 180 182 377 35 108 182 377 --------------------------------------------------------------------------------------- Growth LT without Riders 104 70 120 256 104 142 120 256 23 70 120 256 with Riders 114 100 169 354 114 172 169 354 33 100 169 354 --------------------------------------------------------------------------------------- Focused 30 without Riders 106 78 133 282 106 150 133 282 25 78 133 282 with Riders 116 108 182 377 116 180 182 377 35 108 182 377 --------------------------------------------------------------------------------------- Mid-Cap Value without Riders 105 73 125 266 105 145 125 266 24 73 125 266 with Riders 115 103 174 363 115 175 174 363 34 103 174 363 --------------------------------------------------------------------------------------- International Value without Riders 107 74 127 270 107 146 127 270 26 74 127 270 with Riders 117 104 176 366 117 176 176 366 36 104 176 366 --------------------------------------------------------------------------------------- Capital Opportunities without Riders 107 73 126 268 107 145 126 268 26 73 126 268 with Riders 117 103 175 365 117 175 175 365 36 103 175 365 --------------------------------------------------------------------------------------- Mid-Cap Growth without Riders 106 76 130 277 106 148 130 277 25 76 130 277 with Riders 116 106 179 373 116 178 179 373 35 106 179 373 --------------------------------------------------------------------------------------- Global Growth without Riders 113 99 167 350 113 171 167 350 32 99 167 350 with Riders 123 128 215 438 123 200 215 438 42 128 215 438 --------------------------------------------------------------------------------------- Equity Index without Riders 99 55 94 204 99 127 94 204 18 55 94 204 with Riders 109 85 145 307 109 157 145 307 28 85 145 307 --------------------------------------------------------------------------------------- Small-Cap Index without Riders 101 63 108 233 101 135 108 233 20 63 108 233 with Riders 112 93 159 333 112 165 159 333 31 93 159 333 --------------------------------------------------------------------------------------- REIT without Riders 107 81 138 292 107 153 138 292 26 81 138 292 with Riders 117 110 187 386 117 182 187 386 36 110 187 386 --------------------------------------------------------------------------------------- Inflation Managed without Riders 102 66 113 243 102 138 113 243 21 66 113 243 with Riders 112 96 163 342 112 168 163 342 31 96 163 342 --------------------------------------------------------------------------------------- Managed Bond without Riders 102 65 112 241 102 137 112 241 21 65 112 241 with Riders 112 95 162 340 112 167 162 340 31 95 162 340 --------------------------------------------------------------------------------------- Money Market without Riders 99 57 98 211 99 129 98 211 18 57 98 211 with Riders 109 87 148 313 109 159 148 313 28 87 148 313 --------------------------------------------------------------------------------------- High Yield Bond without Riders 102 65 111 240 102 137 111 240 21 65 111 240 with Riders 112 95 162 339 112 167 162 339 31 95 162 339 --------------------------------------------------------------------------------------- Equity Income without Riders 106 78 133 282 106 150 133 282 25 78 133 282 with Riders 116 108 182 377 116 180 182 377 35 108 182 377 --------------------------------------------------------------------------------------- Research without Riders 107 79 135 287 107 151 135 287 26 79 135 287 with Riders 117 109 184 382 117 181 184 382 36 109 184 382 ---------------------------------------------------------------------------------------
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------------------------------------------------------------------------------------------ Expenses if you did not Expenses if you Expenses if you annuitize or surrender, annuitized surrendered but left the money in your Contract ($) your Contract ($) your Contract ($) ------------------------------------------------------------------------------------------ Variable Account 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs ------------------------------------------------------------------------------------------ Equity without Riders 103 67 115 247 103 139 115 247 22 67 115 247 with Riders 113 97 165 345 113 169 165 345 32 97 165 345 ------------------------------------------------------------------------------------------ Aggressive Equity without Riders 104 72 124 264 104 144 124 264 23 72 124 264 with Riders 115 102 173 361 115 174 173 361 34 102 173 361 ------------------------------------------------------------------------------------------ Large-Cap Value without Riders 105 73 124 265 105 145 124 265 24 73 124 265 with Riders 115 103 174 362 115 175 174 362 34 103 174 362 --------------------------------------------------------------------------------------
The purpose of the preceding table is to help you understand the various costs and expenses that you may bear directly or indirectly. The table reflects expenses of the Separate Account as well as those of the underlying Portfolios. Premium taxes may also be applicable. For more information on fees and expenses, see CHARGES, FEES AND DEDUCTIONS, WITHDRAWALS, and Pacific Select Fund Annual Expenses in this Prospectus and see the Fund's SAI. 11 YOUR INVESTMENT OPTIONS You may choose among the different Variable Investment Options and the Fixed Option. Your Variable Investment Options Each Variable Investment Option invests in a separate Portfolio of the Fund. 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.
PORTFOLIO INVESTMENT GOAL THE PORTFOLIO'S PORTFOLIO MAIN INVESTMENTS MANAGER Blue Chip Long-term growth of Equity securities of "blue chip" A I M Capital capital. (Current income companies and related derivatives. Management, Inc. is of secondary Blue chip companies fall within the importance.) largest 85% of publicly traded companies listed in the U.S. Aggressive Growth Long-term growth of Equity securities of small- and A I M Capital capital. medium-sized growth companies. Management, Inc. Emerging Markets Long-term growth of Equity securities of companies that Alliance Capital capital. are located in countries generally Management L.P. regarded as "emerging market" countries. Diversified Research Long-term growth of Equity securities of U.S. companies Capital Guardian capital. and securities whose principal markets Trust Company are in the U.S. Small-Cap Equity Long-term growth of Equity securities of smaller Capital Guardian capital. companies. Trust Company International Large-Cap Long-term growth of Equity securities of large non-U.S. Capital Guardian capital. companies and securities whose Trust Company principal markets are outside of the U.S. I-Net Tollkeeper Long-term growth of Equity securities of companies which Goldman Sachs capital. use, support, or relate directly or Asset Management indirectly to use of the Internet. Such companies include those in the media, telecommunications, and technology sectors. Financial Services Long-term growth of Equity securities in the financial INVESCO capital. services sector (including Funds Group, Inc. derivatives). Such companies include banks, insurance companies, brokerage firms and other finance-related firms. Health Sciences Long-term growth of Equity securities in the health INVESCO capital. sciences sector (including Funds Group, Inc. derivatives). Such companies include medical equipment or supplies, pharmaceuticals, health care facilities and other health sciences- related firms. Technology Long-term growth of Equity securities in the technology INVESCO capital. sector (including derivatives). Such Funds Group, Inc. companies include biotechnology, communications, computers, electronics, Internet telecommunications, networking, robotics, video and other technology- related firms. Telecommunications Long-term growth of Equity securities in the INVESCO capital. (Current income telecommunications sector (including Funds Group, Inc. is of secondary derivatives). Such as companies that importance.) offer telephone service, wireless communications, satellite communications, television and movie programming, broadcasting and Internet access. Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan securities. Investment Management Inc. Large-Cap Core Long-term growth of Equity securities of large dividend- J.P. Morgan (formerly called capital and income. paying U.S. companies. Investment Equity Income) Management Inc. Strategic Value Long-term growth of Equity securities with the potential Janus Capital capital. for long-term growth of capital. Management LLC Growth LT Long-term growth of Equity securities of a large number of Janus Capital capital consistent with companies of any size. Management LLC the preservation of capital. Focused 30 Long-term growth of Equity securities selected for their Janus Capital capital. growth potential. Management LLC
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PORTFOLIO INVESTMENT GOAL THE PORTFOLIO'S PORTFOLIO MAIN INVESTMENTS MANAGER Mid-Cap Value Capital appreciation. Equity securities of medium-sized U.S. Lazard Asset companies believed to be undervalued. Management International Value Long-term capital Equity securities of relatively large Lazard Asset appreciation primarily companies located in developed Management through investment in countries outside of the U.S. equity securities of corporations domiciled in countries other than the U.S. Capital Opportunities Long-term growth of Equity securities with the potential MFS Investment capital. for long-term growth of capital. Management Mid-Cap Growth Long-term growth of Equity securities of medium-sized MFS Investment capital. companies believed to have above- Management average growth potential. Global Growth Long-term growth of Equity securities of any size located MFS Investment capital. within and outside of the U.S. Management Equity Index Investment results that Equity securities of companies that Mercury Advisors correspond to the total are included in or representative of return of common stocks the Standard & Poor's 500 Composite publicly traded in the Stock Price Index (including U.S. derivatives). Small-Cap Index Investment results that Equity securities of small companies Mercury Advisors correspond to the total that are included in or representative return of an index of of the Russell 2000 Index (inlcuding small capitalization derivatives). companies. Real Estate Current income and long- Equity securities of companies in the Morgan Stanley (formerly term capital U.S. real estate industry, including Asset Management called REIT) appreciation. real estate investment trusts (REITs) and real estate operating companies (REOCs). Inflation Managed Maximize total return Inflation-indexed bonds of varying Pacific consistent with prudent maturities issued by the U.S. and non Investment investment management. U.S. governments, their agencies and Management government sponsored enterprises, and Company LLC corporations, forward contracts and derivative instruments relating to such securities. Managed Bond Maximize total return Medium and high-quality fixed income Pacific consistent with prudent securities with varying terms to Investment investment management. maturity and derivatives relating to Management such securities or related indices. Company LLC Money Market Current income consistent Highest quality money market Pacific Life with preservation of instruments believed to have limited capital. credit risk. High Yield Bond High level of current Fixed income securities with lower and Pacific Life income. medium-quality credit ratings and intermediate to long terms to maturity. Equity Income Current income. (Capital Equity securities of large U.S. Putnam growth is of secondary companies with a focus on income- Investment importance.) producing securities believed to be Management, LLC undervalued by the market. Research Long-term growth of Equity securities of large U.S. Putnam capital. companies with potential for capital Investment appreciation. Management, LLC Equity Capital appreciation. Equity securities of large U.S. Putnam (Current income is of growth-oriented companies. Investment secondary importance.) Management, LLC Aggressive Equity Capital appreciation. Equity securities of small and medium- Putnam sized companies. Investment Management, LLC Large-Cap Value Long-term growth of Equity securities of large companies. Salomon Brothers capital. (Current income Asset Management is of secondary Inc importance.)
13 The Investment Adviser We are the investment adviser for the Fund. We and the Fund have retained other portfolio managers, supervised by us, for 31 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 each Subaccount was established January 2, 1996 or thereafter and has no historical performance prior to the date that it was established, each Subaccount will be investing in shares of a Portfolio of the Fund, and the majority of these Portfolios do have historical performance data which covers a longer period. 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 which are described in the SAI. Yields do not reflect any charge for premium taxes; this exclusion may cause yields to show more favorable performance. Total returns may or may not reflect withdrawal charges, Annual Fees or any charge for premium taxes; data that do not reflect these charges may show more favorable performance. The SAI presents some hypothetical performance data. The SAI also presents some performance benchmarks, based on unmanaged market indices, such as the Standard & Poor's 500 Composite Stock Price Index (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, we may provide you with reports both as an insurance company and as to our financial strength that are produced by rating agencies and organizations. Your Fixed Option Subject to availability, the Fixed Option offers you a guaranteed minimum interest rate on the amount you allocate to this Option. Amounts you allocate to this Option, and your earnings credited are held in our General Account. For more detailed information about this Option, see THE GENERAL ACCOUNT and APPENDIX A: STATE LAW VARIATIONS sections 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 Investment to Pacific Life Insurance Company at P.O. Box 100060, Pasadena, California 91189-0060 or the address indicated in your Contract specification pages if different. In those instances when we receive electronic transmission of the information on the application from your representative's broker-dealer firm in accordance with our administrative procedures, we consider the application to be received on the Business Day we receive the transmission. If your application and Investment are complete when received, or once they have become complete, we will issue your Contract within two Business Days. If some information is missing from your application, we may delay issuing your Contract while we obtain the missing information; however, we will not hold your initial Investment for more than five Business Days unless we specifically obtain your permission. You may also purchase a Contract by exchanging your existing contract. You must submit all contracts to be exchanged when you submit your application. Call your representative, or call us at 1-800-722-2333, if you are interested in this option. We reserve the right to reject any application or Investment for any reason, subject to any applicable nondiscrimination laws and to our own standards and guidelines. The maximum age of a Contract Owner, including Joint owners and Contingent Owners, for which a Contract will be issued is 80. The Contract Owner's age is calculated as of his or her last birthday. If any Contract Owner or any Annuitant named in the application for a Contract dies prior to our issuance of a Contract, then the application for the Contract and/or any Contract issued shall be deemed null and void; and any Investments we receive, including any proceeds received in connection with an exchange or transfer, will be returned to the applicant/Owner or the applicant/Owner's estate. 14 Purchasing a Death Benefit Rider (Optional) You may purchase either the Stepped-Up Death Benefit Rider (SDBR) or Premier Death Benefit Rider (PDBR) (subject to state availability) at the time your application is completed. You may not purchase either Rider after the Contract Date. If you select one of these Riders, the SDBR or PDBR, as applicable, will remain in effect until the earliest of: . the full withdrawal of the amount available for withdrawal under the Contract, . when death benefit proceeds become payable under the Contract, . any termination of the Contract in accordance with the provisions of the Contract, or . the Annuity Date. The SDBR or PDBR may not otherwise be cancelled. The SDBR or PDBR may only be purchased if the age of each Annuitant is 70 or younger on the Contract Date. Purchasing the Earnings Enhancement Guarantee (EEG) Rider (Optional) You may purchase the EEG Rider (subject to availability) on the Contract Date or on the first Contract Anniversary. For Contracts issued prior to May 1, 2001, you may purchase the EEG Rider on any Contract Anniversary through December 31, 2002. If you buy the EEG Rider within 30 days after the Contract Date or Contract Anniversary, we will make the Effective Date of the EEG Rider to coincide with that Contract Date or Contract Anniversary. The Earnings Enhancement Guarantee (EEG) Rider is also called the Guaranteed Earnings Enhancement (GEE) Rider in your Contract's Rider. You may purchase the EEG Rider only if the age of each Annuitant is 75 years or younger on the date of purchase. The date of purchase is the Effective Date of the Rider as shown in your Contract. Once purchased, the Rider will remain in effect until the earlier of: . the date a full withdrawal of the amount available for withdrawal is made under the Contract, . the date a death benefit becomes payable under the Contract, . date the Contract is terminated in accordance with the provisions of the Contract, or . the Annuity Date. The EEG Rider may not otherwise be cancelled. Purchasing the Guaranteed Protection Advantage (GPA) Rider (Optional) You may purchase the optional Guaranteed Protection Advantage Rider (subject to availability) on the Contract Date or on any subsequent Contract Anniversary if: . the age of each Annuitant is 80 years or younger on the date of purchase, . the date of the purchase is at least 10 years prior to your selected Annuity Date, and . you use an asset allocation program established and maintained by us for the Rider during the entire period that the Rider is in effect. If you purchase the Guaranteed Protection Advantage Rider within 60 days after the Contract Date or a Contract Anniversary, the Effective Date of the Rider will be that Contract Date or Anniversary. If you purchase the Rider 60 days or more after the Contract Date or the Contract Anniversary, the Effective Date of the Rider will be the next Contract Anniversary. The Rider will remain in effect, unless otherwise terminated, for a 10-year period (the "Term") beginning on the Effective Date of the Rider. On the last day of a Term, we will add an additional amount to your Contract Value if, on that day, the Contract Value is less than a specified amount (the "Guaranteed Protection Amount"). The additional amount 15 will be equal to the difference between the Contract Value on the last day of the Term and the Guaranteed Protection Amount. The additional amount added to the Contract Value will be considered earnings and allocated to your Investment Options according to the allocations used in your most recent asset allocation program. The Guaranteed Protection Amount is equal to (a) plus (b) minus (c) as indicated below: (a) is the Contract Value at the start of a Term; (b) is a percentage of each additional Purchase Payment, as determined from the table below, paid to the Contract during a Term; (c) is a pro rata adjustment for withdrawals made from the Contract during the Term. The adjustment for each withdrawal is calculated by multiplying the Guaranteed Protection Amount prior to the withdrawal by the ratio of the amount of the withdrawal, including any applicable withdrawal charges, to the Contract Value immediately prior to the withdrawal.
-------------------------------------------------------------------------- Contract Year Since Percentage of Purchase Payment Beginning of Current Term Added to Guaranteed Protection Amount -------------------------------------------------------------------------- 1 through 4 100% 5 90% 6 85% 7 80% 8 through 10 75% --------------------------------------------------------------------------
For purposes of determining the Contract Value at the start of the Term, if the Effective Date of the Rider is the Contract Date, the Contract Value is equal to the initial Purchase Payment. If the Effective Date of the Rider is a Contract Anniversary, the Contract Value is equal to the Contract Value on that Contract Anniversary. If, on the last day of a Term, the Contract is annuitized, the first death of an Owner or the death of the last surviving Annuitant occurs, or a full withdrawal is made, the Contract Value will reflect any additional amount owed under the Guaranteed Protection Advantage Rider before the payment of any annuity or death benefits, or full withdrawal. No additional amount will be made if the Contract Value on the last day of the Term is greater than the Guaranteed Protection Amount. On or before the end of the Term, you can elect to repurchase the Rider subject to its availability and the then current terms and conditions of the Rider provided: . all Annuitant(s) are 80 years or younger at the start of the new Term, and . the new Term does not extend beyond your selected Annuity Date. If you elect to terminate the Rider, the termination will be effective the day immediately following the end of the Term. The Guaranteed Protection Advantage Rider will remain in effect until the earlier of: . the end of a Term, . the Contract Anniversary immediately following the date any portion of the Contract Value is no longer invested in an asset allocation program established and maintained by us for this Rider, . the Contract Anniversary immediately following the date we receive notification from the Owner to terminate this Rider, 16 . the date a full withdrawal of the amount available for withdrawal is made under the Contract, . the date of first death of an Owner or the date of death of the last surviving Annuitant, . the date the Contract is terminated in accordance with the provisions of the Contract, or . the Annuity Date. If the Owner dies during a Term and the surviving spouse of the deceased Owner elects to continue the Contract in accordance with its terms, then the provisions of this Rider will continue until the end of the Term. Subject to the terms of the Rider, the surviving spouse may repurchase the Rider for another Term, provided the surviving spouse is age 80 or younger at the start of the new Term and the new Term does not extend beyond the selected Annuity Date. The Guaranteed Protection Advantage Rider may also be called the GPA Rider in some materials you may receive from us. Information About Optional Riders, IRAs and Other Qualified Contracts There are special considerations for purchases of any optional death benefit rider. As of the date of this Prospectus, IRS regulations state that Individual Retirement Accounts (IRAs) may generally not invest in life insurance contracts. We believe that these regulations do not prohibit the optional death benefit riders from being added to your Contract if it is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA. However, the law is unclear and it is possible that a Contract that has an optional death benefit rider and is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA could be disqualified and may result in increased taxes to the Owner. Similarly, section 401 plans, section 403(b), 457(b) annuities and IRAs (but not Roth IRAs) can only offer incidental death benefits. The IRS could take the position that the enhanced death benefits are not incidental. In addition, to the extent that the enhanced death benefit riders alter the timing or the amount of the payment of distributions under a Qualified Contract, the riders cannot be paid out in violation of the minimum distribution rules of the Code. It is our understanding that the charges relating to the optional death benefit riders are not subject to current taxation and we will not report them as such. However, the IRS may determine that these charges should be treated as partial withdrawals subject to current taxation to the extent of any gain and, if applicable, the 10% tax penalty. We reserve the right to report the rider charges as partial withdrawals if we believe that we would be expected to report them in accordance with IRS regulations. Making Your Investments ("Purchase Payments") Making Your Initial Investment Your initial Investment must be at least $10,000 if you are buying a Non- Qualified Contract, and at least $2,000 if you are buying a Qualified Contract. You may pay this entire amount when you submit your application, or you may choose our pre-authorized checking plan ("PAC"), which allows you to pay in equal monthly installments over one year (at least $800 per month for Non- Qualified Contracts, and at least $150 per month for Qualified Contracts). If you choose the PAC, you must make your first installment payment when you submit your application. Further requirements for PAC are discussed in the PAC form. We also call each Investment you make a Purchase Payment. You must obtain our consent before making an initial or additional Investment that will bring your aggregate Investments over $1,000,000. Making Additional Investments You may choose to invest additional amounts in your Contract at any time. Each additional Investment above the initial Investment requirements must be at least $250 for Non-Qualified Contracts and $50 for Qualified Contracts. In certain states additional payments are limited. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. 17 Forms of Investment Your initial and additional Investments may be sent by personal or bank check or by wire transfer. Investments must be made in a form acceptable to us before we can process it. Acceptable forms of Investments are: . by personal check, drawn on a U.S. bank, . by cashier's check, money order, and traveler's checks in single denominations of $10,000 or more if they originate in a U.S. bank, . by cashier's check of less than $10,000 for direct qualified transfers and rollovers, . by cashier's check of less than $10,000 for non-qualified transfers, both 1035s and mutual fund/bank CD transfers, that are requested by Pacific Life, . by third party check, when there is a clear connection of the third party to the underlying transaction, and . wire transfers that originate in U.S. banks. We will not accept Investments in the following forms: . cash, . credit card or check drawn against a credit card account, . cashier's check, money order or traveler's checks in single denominations of less than $10,000, . cashier's check, money orders, traveler's checks or personal checks drawn on non-U.S. banks, even if the payment may be effected through a U.S. bank, . third party check, if there is not a clear connection of the third party to the underlying transaction, and . wires that originate from foreign bank accounts. All unacceptable forms of Investments will be returned to the payor along with a letter of explanation. Pacific Life reserves the right to reject or accept any form of payment. If you make Investments by check other than a cashier's check, your payment of any withdrawal proceeds and any refund during the "Right to Cancel" period may be delayed until we receive confirmation in our Annuities administrative office that your check has cleared. HOW YOUR INVESTMENTS ARE ALLOCATED Choosing Your Investment Options You may allocate your Investments among the 33 Subaccounts and the Fixed Option. Allocations of your initial Investment to the Investment Options you selected will be effective on your Contract Date. See WITHDRAWALS--Right to Cancel ("Free Look") section in this Prospectus. Each additional Investment will be allocated to the Investment Options according to your allocation instructions in your application, or most recent instructions, if any, subject to the terms described in the WITHDRAWALS--Right to Cancel ("Free Look") section in this Prospectus. We reserve the right to require that your allocation to any particular Investment Option must be at least $500. We also reserve the right to transfer any remaining Account Value that is not at least $500 to your other Investment Options on a pro rata basis relative to your most recent allocation instructions. If your Contract is issued in exchange for another annuity contract or a life insurance contract, our administrative procedures may vary depending on the state in which your Contract is delivered. If your initial Investment is received from multiple sources, we will consider them all your initial Investment. 18 Portfolio Optimization Portfolio Optimization is an asset allocation service we offer for use within this variable annuity. Asset allocation is the distribution of investments among asset classes and involves decisions about which asset classes should be selected and how much of the total contract value should be allocated to each asset class. The theory of Portfolio Optimization is that diversification among asset classes can help reduce volatility over the long-term. Pacific Life and Ibbotson Associates, one of the premier firms in designing asset allocation-based investment strategies, developed 5 model portfolios, each comprised of a carefully selected combination of Pacific Select Fund portfolios. The portfolios are selected by evaluating the asset classes represented by the underlying securities holdings of the portfolios and combining portfolios to combine major types of asset classes based on historical asset performance and attribution analysis in a way intended to optimize returns given a particular level of risk tolerance. The analysis is accomplished by using a state-of-the-art program and a statistical analytical technique known as "mean-variance optimization." This Portfolio Optimization analysis is performed each year to help maintain the risk/return profile of the models. If you select a Portfolio Optimization model, your initial purchase payment (in the case of a new application) or contract value, as applicable, will be allocated to the investment options according to the model you select. Subsequent purchase payments, if allowed under your contract, will also be allocated accordingly, unless otherwise instructed by you in writing. If you choose, you can rebalance your contract value quarterly, semi-annually, or annually to maintain the asset allocation given in your Portfolio Optimization model. If you also allocate part of your purchase payment or contract value outside the model, rebalancing is only permitted within the model. Each model may change and investment options may be added to or deleted from a model as a result of the annual analysis. Unless you provide written authorization, we will not automatically adjust your contract value among investment options to reflect updates to the model. You may change your allocations at any time with a proper written request or by telephone or electronic instructions, provided a valid telephone/electronic authorization is on file with us. If you select a Portfolio Optimization model, in addition to your usual quarterly statement, you will be sent a quarterly performance report which provides information about the investment options within your model. To enroll in Portfolio Optimization, you must submit to us, together with any other required forms, a completed, signed and dated Portfolio Optimization Enrollment Request form or a completed, signed and dated Portfolio Optimization Acknowledgment contained in the Investment Policy Statement. The Investment Policy Statement describes the Portfolio Optimization model that matches your investment profile, based on the responses you provide regarding your financial needs, investment time horizon and risk comfort level, on the Investor Profile Questionnaire. Your financial advisor or investment professional can assist you in completing the proper forms. We have the right to terminate or change the Portfolio Optimization service at any time. Information concerning the models is described below. If you are enrolling in Portfolio Optimization by means of the Portfolio Optimization Enrollment Request form, the actual percentage allocations among the portfolios in each of the 5 portfolio models are described in the enrollment request form. If you are enrolling in Portfolio Optimization by means of the Investor Profile Questionnaire, the actual percentage allocations within the portfolio model that matches your investment profile are described in the Investment Policy Statement for that model. Regardless of the enrollment methods described above, you should consult with your financial adviser or investment professional to assist you in determining which model meets your financial needs, investment time horizon, and is consistent with your risk comfort level. 19
-------------------------------------------------------------------------------------------------------- Investor Profile -------------------------------------------------------------------------------------------------------- Model A Model B Model C Model D Model E -------------------------------------------------------------------------------------------------------- You are looking for Your focus is on You want the You want an You are an a relatively stable keeping pace with opportunity for investment that is aggressive investor investment and inflation. Income long-term moderate geared for growth and can tolerate require investments generating growth. and are willing to short-term market that generate some investment and accept above swings. level of income. capital average risk. appreciation are desired. -------------------------------------------------------------------------------------------------------- Shorter Investment Horizon Longer Investment Horizon -------------------------------------------------------------------------------------------------------- Investor Objective -------------------------------------------------------------------------------------------------------- Primarily Moderate Growth Steady growth in Moderately high High growth in preservation of asset values growth in asset asset values capital values -------------------------------------------------------------------------------------------------------- Risk Characteristics -------------------------------------------------------------------------------------------------------- There may be some There may be some There will probably There will probably There will probably losses in the losses in the be some losses in be some losses in be some losses in values of the values of the the values of the the values of the the values of the investment as asset investment from underlying underlying underlying values fluctuate. year to year. investments from investments from investments from year to year. year to year. Some year to year. Some Fluctuations in of these might be these might be value should be large, but the large, but the less than those of overall overall the overall stock fluctuations in fluctuations in markets. asset values should asset values should be less than those be less of the U.S. stock than those of the market. U.S. stock market. -------------------------------------------------------------------------------------------------------- Lower Risk Higher Risk -------------------------------------------------------------------------------------------------------- Asset Class Breakdown -------------------------------------------------------------------------------------------------------- Cash 30% Cash 16% Cash 6% Bonds 20% Bonds 4% --------------------------------------------------------------------------------------------------------- Bonds 47% Bonds 42% Bonds 34% Domestic 56% Domestic 63% Stocks Stocks --------------------------------------------------------------------------------------------------------- Domestic 17% Domestic 30% Domestic 44% Real Estate 3% Real Estate 5% Stocks Stocks Stocks --------------------------------------------------------------------------------------------------------- International 6% International 12% International 16% International 21% International 28% Stocks Stocks Stocks Stocks Stocks --------------------------------------------------------------------------------------------------------- Less Volatile More Volatile ---------------------------------------------------------------------------------------------------------
Although the models are designed to optimize returns given the various levels of risk, there is no assurance that a model portfolio will not lose money or that investment results will not experience some volatility. Historical market and asset class performance may differ in the future from the historical performance upon which the models are built. Also, allocation to a single asset class may outperform a model, so that you would have been better off in an investment option or options representing a single asset class than in a model. The value of the variable accounts will fluctuate, and when redeemed, may be worth more or less than the original cost. 20 Investing in Variable Investment Options Each time we allocate your Investment to a Variable Investment Option, your Contract is credited with a number of "Subaccount Units" in that Subaccount. The number of Subaccount Units credited is equal to the amount you have allocated to that Subaccount divided by the "Unit Value" of one Unit of that Subaccount. Example: You allocate $600 to the Inflation Managed Subaccount. At the end of the Business Day on which your allocation is effective, the value of one Unit in the Inflation Managed Subaccount is $15. As a result, 40 Subaccount Units are credited to your Contract for your $600. Your Variable Account Value Will Change After we credit your Contract with Subaccount Units, the value of those Units will usually fluctuate. This means that, from time to time, your Investment allocated to the Variable Investment Options may be worth more or less than the original allocations 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 applicable Risk Charge imposed on the Separate Account. We calculate the value of all Subaccount Units on each Business Day. The SAI contains a detailed discussion of these calculations. When Your Investment is Effective The day your allocation is effective determines the Unit Value at which Subaccount Units are attributed to your Contract. In the case of transfers or withdrawals, the effective day determines the Unit Value at which affected Subaccount Units are debited and/or credited under your Contract. The Unit Value at which purchase, transfer and withdrawal transactions are credited or debited 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 Investment is usually effective on the day we issue your Contract. Any additional allocation is effective on the day we receive your Investment in proper form. See ADDITIONAL INFORMATION--Inquiries and Submitting Forms and Requests section in this Prospectus. Transfers Once your Investments are allocated to the Investment Options you selected, you may transfer your Account Value from any Investment Option to any other. However, as of January 1, 2002, and each calendar year thereafter, transfers are limited to 25 for each calendar year. For the purpose of applying the limitations, any transfers that occur on the same day are considered one transfer and transfers that occur as a result of the dollar cost averaging program, the portfolio rebalancing program, the earnings sweep program or an approved asset allocation program are excluded from the limitation. No transfer fee is currently imposed for transfers among the Investment Options, but we reserve the right to impose a transaction fee for transfers in the future; a fee of up to $15 per transfer may apply to transfers in excess of 15 in any Contract Year. Certain Restrictions apply to the Fixed option. See THE GENERAL ACCOUNT-- Withdrawals and Transfers sections in this Prospectus. Transfer requests are generally effective on the Business Day we receive them in proper form. 21 We have the right, at our option (unless otherwise required by law), 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 $500 immediately after such transfer, we may transfer that Account Value to your other Investment Options on a pro rata basis, relative to your most recent allocation instructions. We reserve the right (unless otherwise required by law) to limit the size of transfers, to restrict transfers, to require that you submit any transfer requests in writing, and to suspend transfers. We also reserve the right to reject any transfer request. Market-Timing Restrictions The Contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the market. Such frequent trading can disrupt management of the Fund and raise expenses. This in turn can have an adverse effect on Portfolio performance and therefore your Contract's performance. Accordingly, organizations or individuals that use market-timing investment strategies and make frequent transfers should not purchase the Contract. We reserve the right to restrict, in our sole discretion and without prior notice, transfers initiated by a market timing organization or individual or other party authorized to give transfer instructions on behalf of multiple Contract Owners. Such restrictions could include: . not accepting transfer instructions from an agent acting on behalf of more than one Contract Owner, and . not accepting preauthorized transfer forms from market timers or other entities acting on behalf of more than one Contract Owner at a time. We further reserve the right to impose, without prior notice, restrictions on transfers that we determine, in our sole discretion, will disadvantage or potentially hurt the rights or interests of other Contract Owners. Exchanges of Annuity Units Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s) after the Annuity Date are limited to four in any twelve-month period. See THE GENERAL ACCOUNT--Withdrawals and Transfers in this Prospectus and THE CONTRACTS AND THE SEPARATE ACCOUNT sections in the SAI. Automatic Transfer Options We offer three automatic transfer options: dollar cost averaging, portfolio rebalancing, and earnings sweep. There is no charge for these options and transfers under these automatic transfer options are not counted towards your total transfers in a Contract Year. Dollar Cost Averaging Dollar cost averaging is a method in which you buy securities in a series of regular purchases instead of in a single purchase. This allows you to average the securities' prices over time, and may permit a "smoothing" of abrupt peaks and drops in price. Prior to your Annuity Date, you may use dollar cost averaging to transfer amounts, over time, from any Investment Option with an Account Value of at least $5,000 to one or more Variable Investment Options. Each transfer must be for at least $250. Detailed information appears in the SAI. Portfolio Rebalancing You may instruct us to maintain a specific balance of Variable Investment Options under your Contract (e.g., 30% in the 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 values in the elected 22 Subaccounts to the percentages you have specified. Rebalancing may result in transferring amounts from a Subaccount earning a relatively higher return to one earning a relatively lower return. The Fixed Option is not available for rebalancing. Detailed information appears in the SAI. Earnings Sweep You may instruct us to make automatic periodic transfers of your earnings from the Money Market Subaccount or from the Fixed Option to one or more Variable Investment Options (other than the Money Market Subaccount). Detailed information appears in the SAI. CHARGES, FEES AND DEDUCTIONS Withdrawal Charge No sales charge is imposed on any Purchase Payment. Your Purchase Payments may, however, be subject to a withdrawal charge; this charge may apply to amounts you withdraw under your Contract prior to the Annuity Date, depending on the length of time each Purchase Payment has been invested and on the amount you withdraw. No withdrawal charge is imposed on: . death benefit proceeds, except as provided under the Amount of the Death Benefit: Death of a Contract Owner section, . amounts converted after the first Contract Anniversary to a life contingent Annuity Option or an Annuity Option with a period certain of at least five years, . withdrawals by Owners to meet the minimum distribution rules for Qualified Contracts as they apply to amounts held under the Contract, . subject to medical evidence satisfactory to us, after the first Contract Anniversary, full or partial withdrawals if the Owner or Annuitant has been diagnosed with a medically determinable condition that results in a life expectancy of twelve (12) months or less, or . subject to medical evidence satisfactory to us, after 90 days from the Contract Date, full or partial withdrawals while the Owner or Annuitant has been confined to an accredited nursing home for 60 days or longer. The waiver of withdrawal charges applies only to withdrawals made while the Owner or Annuitant is in a nursing home or within 90 days after the Owner or Annuitant leaves the nursing home. In addition, the nursing home confinement period for which you seek the waiver must begin after the Contract Date. In order to use this waiver, you must submit with your withdrawal request the following documents: . a physician's note recommending the Owner or Annuitant's admittance to a nursing home, . an admittance form which shows the type of facility the Owner or Annuitant entered, and . a bill from the nursing home which shows that the Owner or Annuitant met the 60 day nursing home confinement requirement. An accredited nursing home is defined as a home or facility that: . is operating in accordance with the law of jurisdiction in which it is located, . is primarily engaged in providing, in addition to room and board, skilled nursing care under the supervision of a duly licensed physician, . provides continuous 24 hour a day nursing service by or under the supervision of a registered nurse, and . maintains a daily record of the patient. See the APPENDIX A: STATE LAW VARIATIONS section of this Prospectus. 23 Free Withdrawals During a Contract Year, you may withdraw free of withdrawal charge amounts up to your "Eligible Purchase Payments". Qualified plans have special restrictions on withdrawals. See Special Restrictions Under Qualified Plans. Eligible Purchase Payments include: 10% annually of your total Purchase Payments that have an "age" of less than four years; plus any remaining portion not withdrawn from the previous Contract Year's Eligible Purchase Payments that are derived from Purchase Payments which have an "age" of less than four years; plus 100% of all Investments that have an "age" of four years or more. Once all Purchase Payments have been deemed withdrawn, any withdrawal will be deemed a withdrawal of your Earnings and will be free of the withdrawal charge. For those Contracts issued to a Charitable Remainder Trust (CRT), the amount available for withdrawal free of withdrawal charges during a Contract Year includes all Eligible Purchase Payments plus all Earnings even if all Purchase Payments have not been deemed withdrawn. Example (Non-CRT) Contract Year 1 You make an initial Purchase Payment of $100,000 and make no additional Purchase Payments over the next three Contract years. Your free withdrawal amount available in year 1 equals 10% of the total Purchase Payments made (10% of the total Purchase Payments of $100,000 equals $10,000.) If you withdraw $5,000, the remaining $5,000 of the free withdrawal amount not withdrawn in Contract Year 1 will be carried over to the next Contract Year. Contract Year 2 Your free withdrawal amount for Contract Year 2 is equal to 10% of your total Purchase Payments still subject to the withdrawal charge plus any remaining free withdrawal amounts carried over from the previous Contract Year. (10% of $100,000 plus $5,000 equals $15,000) If no withdrawals are taken, the $15,000 free withdrawal amount not withdrawn in Contract Year 2 will be carried over to the next Contract Year. Contract Year 3 Your free withdrawal amount for Contract Year 3 is equal to 10% of total Purchase Payments subject to the withdrawal charge plus any remaining free withdrawal amounts carried over from the previous Contract Year. (10% of $100,000 plus $15,000 equals $25,000) If you take a $15,000 withdrawal, the remaining $10,000 of the free withdrawal amount not taken in Contract Year 3 will not be carried over to the next Contract Year because the Purchase Payment will not be subject to the withdrawal charge and the entire amount remaining will be able to be withdrawn free of withdrawal charges. How the Charge is Determined The amount of the charge depends on how long each Purchase Payment was held under your Contract. Each Purchase Payment you make is considered to have a certain "age," depending on the length of time since that Purchase Payment was effective. A Purchase Payment is "one year old" or has an "age of one" from the day it is effective until the beginning of the day preceding your next Contract Anniversary; beginning on the day preceding that Contract Anniversary, your Purchase Payment will have an "age of two", and increases in age on the day preceding each Contract Anniversary. When you withdraw an amount subject to the withdrawal charge, the "age" of the Purchase Payment you withdraw determines the level of withdrawal charge as follows:
Withdrawal Charge as a percentage "Age" of Payment of the amount in Years withdrawn ---------------- ------------- 1................................ 9% 2.................................................... 8% 3.................................................... 8% 4 or more............................................ 0%
24 We calculate your withdrawal charge by assuming your withdrawal is applied to Purchase Payments first and in the order your Purchase Payments were received. The withdrawal charge will be deducted proportionally among all Investment Options from which your withdrawal occurs. See THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. We pay sales commissions and other expenses associated with the promotion and sales of the Contracts to broker-dealers. The withdrawal charge is designed to reimburse us for these costs, although we expect that our actual expenses will be greater than the amount of the withdrawal charge. Broker-dealers may receive aggregate commissions of up to 4.75% of your aggregate Purchase Payments. Sellers of Contracts will be paid a persistency trail commission which will take into account, among other things, the length of time Purchase Payments have been held under a Contract, and Account Values. A trail commission is not anticipated to exceed 1.00%, on an annual basis, of the Account Values considered in connection with the trail commission. We may also pay override payments, expense allowances, bonuses, wholesaler fees and training allowances. Registered representatives earn commissions from the broker-dealers with which they are affiliated and such arrangements may vary. Within certain limits imposed by the National Association of Securities Dealers, Inc. (NASD), registered representatives who are associated with broker/dealer firms affiliated with Pacific Life may qualify for sales incentive programs sponsored by Pacific Life. Registered representatives may also receive non-compensation such as expense-paid educational or training seminars or promotional merchandise. Withdrawal Enhancements We reserve the right, in our sole discretion, to calculate your withdrawal charge on more favorable terms to you than as otherwise described in the preceding paragraphs. These Withdrawal Enhancements may include an acceleration of the day on which the "age" of any Purchase Payment(s) is considered to occur or a waiver of some or all of the withdrawal charge in the event the Guaranteed Interest Rate is less than a specified rate. Although we retain the discretion to add a Withdrawal Enhancement, once it is added, it is binding on us and effective for any specified period we have designated. In the event of any Withdrawal Enhancement, we will notify the Owner within thirty (30) days of the effective date of the Withdrawal Enhancement. Transfers Transfers of all or part of your Account Value from one Investment Option to another are not considered a withdrawal of an amount from your Contract, so no withdrawal charge is imposed at the time of transfer. See HOW YOUR INVESTMENTS ARE ALLOCATED--Transfers and THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. Premium Taxes Depending on your state of residence (among other factors), a tax may be imposed on your Investments at the time your payment is made, at the time of a partial or full withdrawal, at the time any death benefit proceeds are paid, at the Annuity Date or at such other time as taxes may be imposed. Tax rates ranging from 0% to 3.5% are currently in effect, but may change in the future. Some local jurisdictions also impose a tax. If we pay any taxes attributable to Investments ("premium taxes"), we will impose a similar charge against your Contract Value. Premium tax is subject to state requirements. 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 by us. For these purposes, "premium taxes" include any state or local premium or retaliatory 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 Investments we have received. We will base this charge on the Contract Value, the amount of the transaction, the aggregate amount of Investments we receive under your Contract, or any other amount, that in our sole discretion we deem appropriate. 25 We may also charge the Separate Account or your Contract Value for taxes attributable to the Separate Account or the Contract, including income taxes attributable to the Separate Account or to our operations with respect to the Contract, or taxes attributable, directly or indirectly, to Investments. Currently, we do not impose any such charges. Annual Fee We will charge you an Annual Fee of $30 on each Contract Anniversary prior to the Annuity Date, and at the time you withdraw your entire Net Contract Value (on a pro rated basis for that Contract Year), if your Net Contract Value is less than $50,000 on that date. The fee is not imposed on amounts you annuitize or on payment of death benefit proceeds. The fee reimburses certain of our costs in administering the Contracts and the Separate Account; we do not intend to realize a profit from this fee or the Administrative Fee. This fee is guaranteed not to increase for the life of your Contract. Your Annual Fee will be charged proportionately against your Investment Options. Assessments against your Variable Investment Options are made by debiting some of the Subaccount Units previously credited to your Contract; that is, assessment of the Annual Fee does not change the Unit Value for those Subaccounts. Waivers and Reduced Charges We may agree to reduce or waive the withdrawal charge or the Annual Fee under our Contracts, in situations where selling and/or maintenance costs associated with the Contracts are reduced, such as the sale of several Contracts to the same Contract Owner(s), sales of large Contracts, sales of Contracts in connection with a group or sponsored arrangement or mass transactions over multiple Contracts. We will only reduce or waive such charges on any Contract where expenses associated with the sale of the Contract and/or costs associated with administering and maintaining the Contract are reduced. We reserve the right to terminate waiver and reduced charge programs at any time, including for issued Contracts. Mortality and Expense Risk Charge We assess 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 an 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." We also bear mortality risk in connection with death benefits payable under the Contracts. The risk that the expense charges and fees under the Contracts and Separate Account are less than our actual administrative and operating expenses is called "expense risk." This Risk Charge is assessed daily at an annual rate equal to 1.25% of each Subaccount's assets. This charge may not be increased for the duration of your Contract. The Risk Charge will stop at the Annuity Date if you select a fixed annuity. The base Risk Charge, but not any increase in the Risk Charge for an optional Death Benefit Rider, will continue after the Annuity Date if you choose any variable annuity. We will realize a gain if the Risk Charge exceeds our actual cost of expenses and benefits, and will suffer a loss if such actual costs exceed the Risk Charge. Any gain will become part of our General Account; we may use it for any reason, including covering sales expenses on the Contracts. Increase in Risk Charge If an Optional Death Benefit Rider Is Purchased We increase your Risk Charge by an annual rate equal to 0.20% of each Subaccount's assets if you purchase the Stepped-Up Death Benefit Rider (SDBR) or 0.35% if you purchase the Premier Death Benefit Rider (PDBR). The total Risk Charge annual rate will be 1.45% if the SDBR is purchased or 1.60% if the PDBR is purchased. Any increase in your Risk Charge will not continue after the Annuity Date. See PURCHASING YOUR CONTRACT--Purchasing an Optional Death Benefit Rider section in this Prospectus. 26 Administrative Fee We charge an Administrative Fee as compensation for costs we incur in operating the Separate Account and issuing and administering the Contracts, including processing applications and payments, and issuing reports to you and to regulatory authorities. The Administrative Fee is assessed daily at an annual rate equal to 0.15% of the assets of each Subaccount. This rate is guaranteed not to increase for the life of your Contract. A relationship will not necessarily exist between the actual administrative expenses attributable to a particular Contract and the Administrative Fee paid in respect of that particular Contract. The Administrative Fee will continue after the Annuity Date if you choose any variable annuity. Earnings Enhancement Guarantee (EEG) Annual Charge (Optional Rider) If you purchase the EEG Rider, we deduct annually an Earnings Enhancement Guarantee Charge (EEG Charge) for expenses related to the EEG Rider. The EEG Charge is equal to 0.25% multiplied by your Contract Value on the date the Charge is deducted. The EEG Charge is also called the Guaranteed Earnings Enhancement Charge (GEE Charge) in your Contract's Rider. We will deduct the EEG Charge from your Investment Options on a proportionate basis on each Contract Anniversary following the date after you purchase the Rider if the EEG Rider is in effect. Any portion of the EEG Charge we deduct from a Fixed Option will not be greater than the annual interest credited in excess of 3%. If you make a full withdrawal of the amount available for withdrawal during a Contract Year, we will deduct the entire EEG Charge for that Contract Year from the final payment made to you. Guaranteed Protection Advantage (GPA) Annual Charge (Optional Rider) If you purchase the Guaranteed Protection Advantage Rider, we will deduct a Guaranteed Protection Charge from your Investment Options on a proportionate basis on each Contract Anniversary that the Rider remains in effect following the Effective Date of the Rider, and if you terminate the Rider. The Guaranteed Protection Charge is equal to 0.10% multiplied by your Contract Value on the date the Charge is deducted. Any portion of the Guaranteed Protection Charge we deduct from the Fixed Option or the DCA Plus Fixed Option will not be grater than the annual interested credited in excess of 3%. If you make a full withdrawal during a Contract Year, we will deduct the entire Guaranteed Protection Charge for the Contract Year from the final payment made to you. Expenses of the Fund Your Variable Account Value reflects advisory fees and other expenses incurred by the various Portfolios of the Fund, net of any applicable waivers and/or 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 SAI. RETIREMENT BENEFITS AND OTHER PAYOUTS Selecting Your Annuitant When you submit the application for your Contract, you may choose a sole Annuitant or Joint Annuitants. We will send the annuity payments to the payee that you designate. If you are buying a Qualified Contract, you must be the sole Annuitant. If you are buying a Non-Qualified Contract you may choose yourself and/or another person. Whether you choose to have a sole or two Joint Annuitants, you may choose a Contingent Annuitant. The Contingent Annuitant will not have any Contract benefits, including death benefit proceeds, until becoming the sole surviving Annuitant. More information on these options is provided in the SAI. You will not be able to add or change a sole or Joint Annuitant after your Contract is issued. However, if you are buying a Qualified Contract, you may add a Joint Annuitant on the Annuity Date. You will be able to add or change a Contingent Annuitant 27 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. No Annuitant (Primary, Joint or Contingent) may be named upon or after reaching his or her 81st birthday. We reserve the right to require proof of age or survival of the Annuitant(s). Annuitization You may choose both your Annuity Date and your Annuity Option. At the Annuity Date, you may elect to annuitize some or all of your Net Contract Value, less any applicable charge for premium taxes (the "Conversion Amount"), as long as such Conversion Amount annuitized is at least $10,000, subject to any state exceptions. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. If you annuitize only a portion of this available Contract Value, you may have the remainder distributed, less any applicable charge for premium taxes, any applicable withdrawal charge any optional death benefit charge, any EEG Charge, and any Guaranteed Protection Charge. Any such distribution will be made to you in a single sum if the remaining Conversion Amount is less than $10,000 on your Annuity Date. Distributions under your Contract may have tax consequences. You should consult a qualified tax adviser for information on annuitization. Choosing Your Annuity Date You should choose your Annuity Date when you submit your application or we will apply a default Annuity Date to your Contract. You may change your Annuity Date by notifying us, in proper form, at least ten Business Days prior to the earlier of your current Annuity Date or your new Annuity Date. Your Annuity Date cannot be earlier than your first Contract Anniversary and must occur on or before a certain date: If you have a sole Annuitant, your Annuity Date cannot be later than his or her 95th birthday. However, to meet Internal Revenue Service (IRS) minimum distribution rules, your required minimum distribution date may be earlier than your Annuity Date. If you have Joint Annuitants and a Non-Qualified Contract, your Annuity Date cannot be later than your younger Joint Annuitant's 95th birthday. Different requirements may apply in some states. If your Contract is a Qualified Contract, you may also be subject to additional restrictions. Adverse federal tax consequences may result if you choose an Annuity Date that is prior to an Annuitant's attained age 59 1/2. See the FEDERAL TAX STATUS section in this Prospectus. You should carefully review the Annuity Options with a qualified tax adviser, and, for Qualified Contracts, reference should be made to the terms of the particular plan and the requirements of the Code for pertinent limitations respecting annuity payments, required minimum distributions, and other matters. For instance, under requirements for qualified plans under Section 401 of the Code and IRAs under section 408 of the Code, the entire interest under the Contract must be distributed to the Owner/Annuitant not later that the Owner/Annuitant's Required Beginning Date ("RBD"), or distributions over the life of the Owner/Annuitant (or the Owner/Annuitant and his Beneficiary) must commence not later than the RBD. The RBD for distributions from a Qualified Contract maintained for an IRA under Section 408 of the Code is generally April 1 of the calendar year following the year in which the Owner/Annuitant reaches age 70 1/2. The RBD for a Qualified Contract maintained for a qualified retirement or pension plan under Section 401 of the Code or a Section 403(b) annuity is April 1 of the calendar year following the later of the year in which the Owner/Annuitant reached 70 1/2, or, if the plan so provides, the year in which the Owner/Annuitant retires. There is no RBD for a Roth IRA maintained pursuant to Section 408A of the Code. If the Owner/Annuitant dies prior to (i) his RBD, or (ii) complete distribution from the Qualified Contract, the remainder shall be distributed as provided in the "Qualified Plan Death of Annuitant Distribution Rules" below. Life expectancy is computed by use of the expected return multiples V and VI of Regulation Section 1.72-9. Congress recently required the IRS to update these tables to reflect increased life expectancies. A subsequent life expectancy shall be calculated by reducing the life expectancy of the Beneficiary (or Owner/Annuitant) by one in each following calendar year. 28 The method of distribution selected must comply with the minimum distribution rules of Code Section 401(a)(9), and the applicable proposed Regulations thereunder. The IRS issued revised proposed Regulations. Effective January 1, 2002, the IRS proposes to require that all IRA holders and Qualified Plan Participants (with one exception discussed below) use a Uniform Distribution Table to calculate their Required Minimum Distributions. The Uniform Distribution Table is based on a joint life expectancy and uses the IRA owner's actual age and assumes that the beneficiary is 10 years younger than the IRA owner. Note that under these proposed regulations, the IRA owner does not need to actually have a named beneficiary when they turn 70 1/2. The exception noted above is for an IRA owner who has a spouse, who is more than 10 years younger, as the sole beneficiary on the IRA. In that situation, the spouse's actual age (and life expectancy) will be used in the joint life calculation. For calendar for 2001, and thereafter, taxpayers (and the underlying Qualified Plan) may rely on either the revised proposed Regulations (discussed above) or the earlier proposed Regulations. If any future guidance from the IRS is more restrictive than the guidance in these revised proposed Regulations, the future guidance will be issued without retroactive effect. Under the earlier proposed Regulations, for retirement plans that qualify under Section 401 or 408 of the Code, the period elected for receipt of required minimum distributions or annuity payments under Annuity Options 2 and 4 generally may be: . no longer than the joint life expectancy of the Annuitant and Beneficiary in the year that the Annuitant reaches age 70 1/2, and . must be shorter than such joint life expectancy if the Beneficiary is not the Annuitant's spouse and is more than 10 years younger than the Annuitant. Under Option 3, if the Beneficiary is not the Annuitant's spouse and is more than 10 years younger than the Annuitant, the 66 2/3% and 100% elections specified below may not be available. The restrictions on options for retirement plans that qualify under Sections 401 and 408 also apply to a retirement plan that qualifies under Section 403(b) with respect to amounts that accrued after December 31, 1986. If you annuitize only a portion of your Net Contract Value on your Annuity Date, you may, at that time, have the option to elect not to have the remainder of your Contract Value distributed, but instead to continue your Contract with that remaining Contract Value (a "continuing Contract"). If this option is available, you would then choose a second Annuity Date for your continuing Contract, and all references in this Prospectus to your "Annuity Date" would, in connection with your continuing Contract, be deemed to refer to that second Annuity Date. This option may not be available, or may be available only for certain types of Contracts. You should be aware that some or all of the payments received before the second Annuity Date may be fully taxable. We recommend that you call your tax adviser for more information if you are interested in this option. Default Annuity Date and Options If you have a Non-Qualified Contract and you do not choose an Annuity Date when you submit your application, your Annuity Date will be your Annuitant's 95th birthday or your younger Joint Annuitant's 95th birthday, whichever applies; however some states' laws may require a different Annuity Date. Certain Qualified Plans may require distribution to occur at an earlier age. If you have not specified an Annuity Option or do not instruct us otherwise, at your Annuity Date your Net Contract Value, less any charges for premium taxes, will be annuitized (if this net amount is at least $10,000) as follows: the net amount from your Fixed Option will be converted into a fixed-dollar annuity and the net amount from your Variable Account Value will be converted into a variable-dollar annuity directed to the Subaccounts proportionate to your Account Value in each. If the net amount is less than 29 $10,000, the entire amount will be distributed. If you have a Non-Qualified Contract, or if you have a Qualified Contract and are not married, your default Annuity Option will be Life with a ten year Period Certain. If you have a Qualified Contract and you are married, your default Annuity Option will be Joint and Survivor Life with survivor payments of 50%; your spouse will automatically be considered your Beneficiary. Choosing Your Annuity Option You may make three basic decisions about your annuity payments. First, you may choose whether you want those payments to be a fixed-dollar amount, and/or a variable-dollar amount, subject to state availability. Second, you may choose the form of annuity payments (see Annuity Options below). Third, you may decide how often you want annuity payments to be made (the "frequency" of the payments). You may not change these selections after the Annuity Date. Fixed and Variable Annuities You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable annuity (i.e., with variable-dollar amounts), or you may choose both, converting one portion of the net amount you annuitize into a fixed annuity and another portion into a variable annuity. If you select a fixed annuity, each periodic annuity payment received will be equal to the initial annuity payment, unless you select a joint and survivor life annuity with reduced survivor payments and the Primary Annuitant dies. Any net amount you convert to a fixed annuity will be held in our General Account, (but not under the Fixed Option). If you select a variable annuity, you may choose as many Variable Investment Options as you wish; the amount of the periodic annuity payments will vary with the investment results of the Variable Investment Options selected. After the Annuity Date, Annuity Units may be exchanged among available Variable Investment Options up to four times in any twelve-month period. How your Contract converts into a variable annuity is explained in more detail in THE CONTRACTS AND THE SEPARATE ACCOUNT section in the SAI. If you choose the Period Certain Only Annuity Option, the variable annuity payment option is not available to you. Annuity Options Four Annuity Options are currently available under the Contracts, although additional options may become available in the future. 1. Life Only. Periodic payments are made to the designated payee during the Annuitant's lifetime. Payments stop when the Annuitant dies. 2. Life with Period Certain. Periodic payments are made to the designated payee during the Annuitant's lifetime, with payments guaranteed for a specified period. You may choose to have payments guaranteed for anywhere from 5 through 30 years (in full years only). If the Annuitant dies before the guaranteed payments are completed, the Owner receives the remainder of the guaranteed payments, if living; otherwise the Beneficiary, if living; otherwise the Owner's estate. 3. Joint and Survivor Life. Periodic payments are made during the lifetime of the Primary Annuitant. After the death of the Primary Annuitant, periodic payments will continue to be made during the lifetime of the secondary Annuitant named in the election. You may choose to have the payments to the surviving secondary Annuitant equal 50%, 66 2/3% or 100% of the original amount payable made during the lifetime of the Primary Annuitant (you must make this election when you choose your Annuity Option). If you elect a reduced payment based on the life of the secondary Annuitant, fixed annuity payments will be equal to 50% or 66 2/3% of the original fixed payment payable during the lifetime of the Primary Annuitant; variable annuity payments will be determined using 50% or 66 2/3%, as applicable, of the number of Annuity Units for each Subaccount credited to the Contract as of the date of death of the Primary Annuitant. Payments stop when both Annuitants have died. 30 4. Period Certain Only. Periodic payments are made to the designated payee over a specified period. You may choose to have payments continue for anywhere from 5 through 30 years (in full years only). If the Annuitant dies before the guaranteed payments are completed, we pay the Owner the remainder of the guaranteed payments, if living; otherwise the Beneficiary, if living; otherwise the Owner's estate. If you choose the Period Certain Only Annuity Option, you may only choose the fixed annuity payment option. For Qualified Contracts, please refer to the section in this Prospectus under Choosing Your Annuity Date. 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. Frequency of Payments You may choose to have annuity payments made monthly, quarterly, semiannually, or annually. The amount of a variable payment will be determined in each period on the date corresponding to your Annuity Date, and payment will be made on the next succeeding day. Your initial annuity payment must be at least $250. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. Depending on the net amount you annuitize, this requirement may limit your options regarding the period and/or frequency of annuity payments. Your Annuity Payments Amount of the First Payment Your Contract contains tables that we use to determine the amount of the first annuity payment under your Contract, taking into consideration the annuitized portion of your Net Contract Value at the Annuity Date. This amount will vary, depending on the annuity period and payment frequency you select; this amount will be larger in the case of shorter Period Certain annuities and smaller for longer Period Certain annuities. Similarly, this amount will be greater for a Life Only annuity than for a Joint and Survivor Life annuity, because we will expect to make payments for a shorter period of time on a Life Only annuity. If you do not choose the Period Certain Only annuity, this amount will also vary depending on the age of the Annuitant(s) on the Annuity Date and, for some Contracts in some states, the sex of the Annuitant(s). For fixed annuity payments, the guaranteed income factors in our tables are based on an annual interest rate of 3% and the 1983a Annuity Mortality Table with the ages set back 10 years. If you elect a fixed annuity, fixed annuity payments will be based on the periodic income factors in effect for your Contract on the Annuity Date which are at least the guaranteed income factors under the Contract. For variable annuity payments, the tables are based on an assumed annual investment return of 5% and the 1983a Annuity Mortality Table with the ages set back 10 years. If you elect a variable annuity, your initial variable annuity payment will be based on the applicable variable annuity income factors in effect for your Contract or the Annuity Date which are at least the variable annuity income factors under the contract. You may choose any other annuity option we may offer on the option's effective date. A higher assumed investment return would mean a larger first variable annuity payment, but subsequent payments would increase only when actual net investment performance exceeds the higher assumed rate and would fall when actual net investment performance is less than the higher assumed rate. A lower assumed rate would mean a smaller first payment and a more favorable threshold for increases and decreases. If the actual net investment performance is a constant 5% annually, annuity payments will be level. The assumed investment return is explained in more detail in the SAI under THE CONTRACTS AND THE SEPARATE ACCOUNT. 31 Death Benefits Death benefit proceeds may be payable on proof of death before the Annuity Date of the Annuitant or of any Contract Owner while the Contract is in force. If there are Joint Owners, the Contract will be owned by the Joint Owners as Joint Tenants With Right of Survivorship and not as Tenants in Common. The amount of the death benefit proceeds will be paid according to the Death Benefit Proceeds section below. The "Notice Date" is the day on which we receive, in proper form, proof of death and instructions regarding payment of death benefit proceeds. Death Benefit Proceeds Death benefit proceeds will be payable upon receipt, in proper form, of proof of death and instructions regarding payment of death benefit proceeds. Such proceeds will equal the amount of the death benefit reduced by any charges for premium taxes and any Contract Debt. The death benefit proceeds will be payable in a single sum, as an Annuity Option under this Contract or towards the purchase of any Annuity Option we then offer, or in accordance with IRS regulations (see Death of Owner Distribution Rules). Any such Annuity Option is subject to all restrictions (including minimum amount requirements) as are other annuities under this Contract; in addition, there may be legal requirements that limit the recipient's Annuity Options and the timing of any payments. A recipient should consult a qualified tax adviser before making a death benefit election. Additional provisions apply if your Contract names a Joint or Contingent Owner or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your spouse. Further information about these provisions is contained in the SAI. Death of Owner Distribution Rules If an Owner of a Non-Qualified Contract dies before the Annuity Date, any death benefit proceeds under this Contract must complete distribution within five years after the Owner's death. In order to satisfy this requirement, the designated recipient must receive a final lump sum payment by the fifth anniversary of the death of the Contract Owner, or elect to receive an annuity for life or over a period that does not exceed the life expectancy of the designated recipient with annuity payments that start within one year after the Owner's death or, if allowed by applicable law, a systematic distribution over a period not exceeding the beneficiary's life expectancy using a method that would be acceptable for the purpose of calculating the minimum distribution required under section 401(a)(9) of the Code. If an election to receive an annuity is not made within 60 days of our receipt of proof in proper form of the Owner's death or, if earlier, 60 days (or shorter period as we permit) prior to the first anniversary of the Owner's death, the lump sum option will be deemed elected, unless otherwise required by law. If the lump sum option is deemed elected, we will consider that deemed election as receipt of instructions regarding payment of death benefit proceeds. If a Non-Qualified Contract has Joint Owners, this requirement applies to the first Owner to die. The Owner may designate that the Beneficiary will receive death benefit proceeds through annuity payments for life or over a period that does not exceed the Beneficiary's life expectancy. The Owner must designate the payment method in writing in a form acceptable to us. The Owner may revoke the designation only in writing and only in an acceptable form to us. Once the Owner dies, the Beneficiary cannot revoke or modify the Owner's designation. If the Owner was not an Annuitant but was a Joint Owner and there is a surviving Joint Owner, that surviving Joint Owner is the designated recipient; if no Joint Owner survives but a Contingent Owner is named in the Contract and is living, he or she is the designated recipient, otherwise the Beneficiary, if living; if not, the Contingent Beneficiary, if living; if not, the Owner's estate. If the Owner was an Annuitant, the designated recipient is the Joint Owner or Contingent Owner, if living; if not the Beneficiary, if living; if not, the Contingent Beneficiary, if living; if not, the Owner's estate. Spousal Continuation Generally, a sole designated recipient who is the Owner's spouse may elect to become the Owner (and sole Annuitant if the deceased Owner had been the Annuitant) and continue the Contract until the earliest of the 32 spouse's death, the death of the Annuitant, or the Annuity Date. However, under proposed Regulations, after the Owner's Death, it is possible that a spouse may not be treated as the Owner of a Qualified Contract which is qualified pursuant to section 403 of the Code, for purposes of applying the minimum required distribution rules of the Code. On the Notice Date, if the surviving spouse is deemed to have continued the Contract, Pacific Life will set the Contract Value equal to the death benefit proceeds that would have been payable to the spouse as the deemed Beneficiary/designated recipient of the death benefit ("Add-In Amount"). The Add-In Amount will be added to the Contract Value on the Notice Date. There will not be an adjustment to the Contract Value if the Contract Value is equal to the death benefit proceeds as of the Notice Date. The Add-In Amount will be allocated among Investment Options in accordance with the current allocation instructions for the Contract and may be, under certain circumstances considered earnings. A Joint or Contingent Owner who is the designated recipient but not the Owner's spouse may not continue the Contract. If you are a non-individual Owner of a Contract other than a Contract issued under a Qualified Plan which is qualified pursuant to sections 401, 403 or 457(b) of the Code, the Primary Annuitant will be treated as the Owner of the Contract for purposes of these Distribution Rules. If there is a change in the Primary Annuitant prior to the Annuity Date, such change will be treated as the death of the Owner. The amount of the death benefit in this situation will be: . the Contract Value if the non-individual Owner elects to maintain the Contract and reinvest the Contract Value into the Contract in the same amount as immediately prior to the distribution, or . the Contract Value less any withdrawal and/or transaction fee, any charges for withdrawals, any optional death benefit charge, any EEG Charge, any Guaranteed Protection Charge, and/or premium taxes if the non-individual Owner elects a cash distribution. The amount of the death benefit will be determined as of the Business Day we receive, in proper form, the request to change the Primary Annuitant and instructions regarding maintaining the Contract or cash distribution. The Contract incorporates all applicable provisions of Code Section 72(s) and any successor provision, as deemed necessary by us to qualify the Contract as an annuity contract for federal income tax purposes, including the requirement that, if the Owner dies before the Annuity Date, any death benefit proceeds under the Contract shall be distributed within five years of the Owner's death (or such other period that we offer and that is permitted under the Code or such shorter period as we may require). Qualified Plan Death of Annuitant Distribution Rules Under Internal Revenue Service regulations and our administrative procedures, if the Contract is owned under a Qualified Plan pursuant to sections 401, 403, 408, 408A, or 457(b) of the Code and the Annuitant dies before the commencement of distributions, the payment of any death benefit must be made to the designated recipient in accordance to one of two rules. One rule generally requires the death benefit to commence distribution by December 31 of the calendar year following the calendar year of the Annuitant's death and continue over the life of his or her Beneficiary (the "life expectancy method"). The second rule requires distribution of the entire death benefit no later than December 31 of the calendar year in which the fifth anniversary of the Annuitant's death falls (the "five-year rule"). However, the life expectancy method and the five-year rule are modified if the Beneficiary is a surviving spouse. If the surviving spouse elects to continue the contract and not do an eligible rollover to an IRA in his or her name, then he or she will be subject to the five-year rule. However, the surviving spouse may waive the five-year requirement and elect to take distributions over his or her life expectancy, and if the surviving spouse elects to defer the commencement of required distributions beyond the first anniversary of the Annuitant's death, the surviving spouse will be deemed to continue the Contract. In this instance, the surviving spouse may defer required distributions until the later of: . December 31 of the year following the year the Annuitant died, or . December 31 of the year in which the Annuitant would have turned 70 1/2. 33 Further, under our administrative procedures, if the required distributions election is not received by us in good order by December 31, of the year following the Annuitant's death or, the December of the year in which the Annuitant would have attained age 70 1/2, the lump sum option will be deemed by us to have been elected, unless otherwise required by law. If the lump sum option is deemed elected, we will treat that deemed election as receipt of instructions regarding payment of death benefit proceeds. If the Annuitant dies after the commencement of Required Minimum Distributions but before the Annuitant's entire interest in the Contract (other than a Roth IRA) has been distributed, the remaining interest in the Contract must be distributed to the designated recipient at least as rapidly as under the distribution method in effect at the time of the Annuitant's death. Optional Stepped-Up Death Benefit Rider If you purchase the Stepped-Up Death Benefit Rider (SDBR) at the time your application is completed (subject to state availability) upon the death of the sole Annuitant, or the first death of an Owner who is also an Annuitant, prior to the Annuity Date, the death benefit will be equal to the greater of (a) or (b) below: (a) the Death Benefit Amount as of the Notice Date. The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments reduced by an amount for each withdrawal, which is calculated by multiplying the aggregate Purchase Payments received prior to each withdrawal by the ratio of the amount of the withdrawal, including any withdrawal charge, to the Contract Value immediately prior to each withdrawal. (b) the Guaranteed Minimum Death Benefit Amount as of the Notice Date. The actual Guaranteed Minimum Death Benefit Amount is calculated only when death benefit proceeds become payable as a result of the death of the Annuitant prior to the Annuity Date and is determined as follows: First we calculate what the Death Benefit Amount would have been as of your first Contract Anniversary and each subsequent contract Anniversary that occurs while the Annuitant is living and before the Annuitant reaches his or her 81st birthday (each of these Contract anniversaries is a "Milestone Date"). We then adjust the Death Benefit Amount for each milestone date by: . adding the aggregate amount of any Purchase Payments received by us since the Milestone Date, and . subtracting an amount for each withdrawal that has occurred since that Milestone Date, which is calculated by multiplying the Death Benefit Amount by the ratio of the amount of each withdrawal that has occurred since that Milestone Date, including any withdrawal charge, to the Contract Value immediately prior to the withdrawal. The highest of these adjusted Death Benefit Amounts for each Milestone Date, as of the Notice Date, is your Guaranteed Minimum Death Benefit Amount if you purchase the SDBR. Calculation of any actual Guaranteed Minimum Death Benefit Amount is only made once death benefit proceeds become payable under your Contract. Optional Premier Death Benefit Rider If you purchase the Premier Death Benefit Rider (PDBR) at the time your application is completed (subject to state availability), upon the death of the sole Annuitant, or the first death of an Owner who is also an Annuitant, prior to the Annuity Date, the death benefit will be equal to the greater of (a) or (b) below: 34 (a) the Death Benefit Amount as of the Notice Date. The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments less an adjusted amount for each withdrawal increased at an effective annual rate of 6% to that day, subject to a maximum of two times the difference between the aggregate Purchase Payments and withdrawals, including any withdrawal charge. The 6% annual rate of growth will take into account the timing of when each Purchase Payment and withdrawal occurred by applying a daily factor of 1.00015965 to each day's balance. (See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus.) The 6% effective annual rate of growth will stop accruing as of the earlier of: . the Contract anniversary following the date the Annuitant reaches his or her 80th birthday, . the date of death of the sole Annuitant, . the Annuity Date. To determine the adjusted amount for each withdrawal we: . divide the amount of each withdrawal, including withdrawal charges, if any, by your Contract Value immediately before that withdrawal, and . then multiply the result by your Death Benefit Amount (as described above), immediately before that withdrawal. (b) the Guaranteed Minimum Death Benefit Amount as of the Notice Date. The actual Guaranteed Minimum Death Benefit Amount is calculated only when death benefit proceeds become payable as a result of the death of the sole Annuitant or the first death of an Owner who is also an Annuitant prior to the Annuity Date, and is determined as follows: First, we calculate what the Death Benefit Amount would have been as of the quarterly anniversary following the Contract Date and as of each subsequent quarterly anniversary that occurs while the Annuitant is living and up to and including the Contract Anniversary following the Annuitant's 65th birthday. Quarterly anniversaries are measured from the Contract Date. After the Contract Anniversary following the Annuitant's 65th birthday, we calculate what the Death Benefit Amount would have been as of each Contract Anniversary that occurs while the Annuitant is living and before the Annuitant reaches his or her 81st birthday. Each quarterly anniversary and each Contract Anniversary in which a Death Benefit Amount is calculated is referred to as a "Milestone Date". We then adjust the Death Benefit Amount for each Milestone Date by: . adding the aggregate amount of any Purchase Payments received by us since that Milestone Date; and . subtracting an amount for each withdrawal that has occurred since that Milestone Date, which is calculated by multiplying the Death Benefit Amount by the ratio of the amount of each withdrawal that has occurred since that Milestone Date, including any withdrawal charge, to the Contract Value immediately prior to the withdrawal. The highest of these adjusted Death Benefit Amounts as of the notice date is your Guaranteed Minimum Death Benefit if the PDBR is purchased. Calculation of any actual Guaranteed Minimum Death Benefit is only made once death benefit proceeds become payable under your Contract. Optional Earnings Enhancement Guarantee (EEG) Rider If you purchase the EEG Rider, (subject to state availability), an Earnings Enhancement Guarantee amount (EEG Amount) is added to the death benefit proceeds when such proceeds become payable as a result of the 35 sole or last Annuitant's death or first death of Owner who is also an Annuitant. The EEG Rider is also called the Guaranteed Earnings Enhancement (GEE) Rider and the Earnings Enhancement Guarantee Amount is called the GEE Amount in your Contract's Rider. The EEG amount is calculated as follows: If the age of the oldest Annuitant was age 69 or younger on the Effective Date of the Rider, the EEG amount is equal to the lesser of: . 40% of Earnings, or . 40% of Remaining Purchase Payments, excluding any Purchase Payments made in the 12 months prior to the date of death, adjusted for withdrawals. If the age of the oldest Annuitant was age 70 to 75 on the Effective Date of the Rider, the EEG Amount is equal to the lesser of: . 25% of Earnings, or . 25% of Remaining Purchase Payments, excluding any Purchase Payments made in the 12 months prior to the date of death, adjusted for withdrawals. For purposes of calculating the EEG Amount, Earnings are equal to the Contract Value as of the date of death minus Remaining Purchase Payments. Remaining Purchase Payments is defined as (a) or (b) below: (a) If the Rider is effective on the Contract Date, Remaining Purchase Payments are equal to: . the Initial Purchase Payment, plus . any additional Purchase Payments added, minus . the amount that each withdrawal exceeds the amount of Earnings in the Contract immediately prior to such withdrawal. Withdrawals are assumed to be taken from Earnings first, then from Purchase Payments in the order they were received. (b) If the Rider is effective after the Contract Date, Remaining Purchase Payments are equal to: . the Contract Value on the Effective Date, plus . any additional Purchase Payments added since the Effective Date of the Rider, minus . the amount that each withdrawal taken after the Effective Date of the Rider exceeds the amount of Earnings in the Contract accumulated since that date. Withdrawals are assumed to be taken first from Earnings accumulated since the Effective Date of the Rider, then from Purchase Payments in the order that they were received. If the Surviving Spouse of the deceased Owner continues the Contract in accordance with its terms and conditions, then all provisions of the Rider for the Surviving Spouse will be based on the age of the Surviving Spouse on the date of death of the deceased Owner. If the Surviving Spouse is over age 75 on the date of death, the Rider will not be continued for such Surviving Spouse and the benefits and charges provided by the Rider will no longer be applied. The Amount of the Death Benefit: Death of Annuitant If the sole Annuitant, or first Owner who is also an Annuitant, dies prior to the Annuity Date, the death benefit will be equal to the greater of: . your Contract Value as of the Notice Date, or . your aggregate Purchase Payments reduced by an amount for each withdrawal, which is calculated by multiplying the aggregate Purchase Payments received prior to each withdrawal by the ratio of the amount of the withdrawal, including any withdrawal charge, to the Contract Value immediately prior to each withdrawal. 36 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 proceeds are not yet payable. If there is no surviving Joint or Contingent Annuitant, the death benefit proceeds are payable to any Owner and any Joint Owner, if living; if not to any Contingent Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. If the Owner is not the Annuitant and they die simultaneously, the death benefit will be calculated under the Death of Annuitant provisions and death benefit proceeds will be paid to the Joint Owner if living; if not, to the Contingent Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. The Amount of the Death Benefit: Death of a Contract Owner If a Contract Owner who is not an Annuitant dies before the Annuity Date, the amount of the death benefit will be equal to your Contract Value as of the Notice Date and will be paid in accordance with the Death Benefit Proceeds section. The death benefit proceeds will be paid to the Joint Owner, if living; if not, to the Contingent Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. See THE GENERAL ACCOUNT--Withdrawals and Transfers section in this Prospectus. If a Contract Owner who is an Annuitant dies before the Annuity Date, the amount of the death benefit will be determined in accordance with the The Amount of the Death Benefit: Death of Annuitant section above, and will be paid in accordance with the Death Benefit Proceeds section. The death benefit proceeds will be paid to the Joint Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. WITHDRAWALS Optional Withdrawals You may, on or prior to your Annuity Date, withdraw all or a portion of the amount available under your Contract while the Annuitant is living and your Contract is in force. You may surrender your Contract and make a full withdrawal at any time. Except as provided below, beginning 30 days after your Contract Date, you also may make partial withdrawals from your Investment Options at any time. You may request to withdraw a specific dollar amount or a specific percentage of an Account Value or your Net Contract Value. You may choose to make your withdrawal from specified Investment Options; if you do not specify Investment Options, your withdrawal will be made from all of your Investment Options proportionately. Each partial withdrawal must be for $500 or more, except pre-authorized withdrawals, which must be at least $250. If your partial withdrawal from an Investment Option would leave a remaining Account Value in that Investment Option of less than $500, we have the right, at our option, to transfer that remaining amount to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. If your partial withdrawal leaves you with a Net Contract Value of less than $1,000, we have the right, at our option, to terminate your Contract and send you the withdrawal proceeds described in the next section below. Partial withdrawals from the Fixed Option in any Contract Year are subject to restrictions. See GENERAL ACCOUNT--Withdrawals and Transfers and APPENDIX A: STATE LAW VARIATIONS sections in this Prospectus. Amount Available for Withdrawal The amount available for withdrawal is your Net Contract Value at the end of the Business Day on which your withdrawal request is effective, less any applicable Annual Fee, optional death benefit rider charge, EEG Charge, Guaranteed Protection Charge, withdrawal charge, withdrawal transaction fee, and any charge for premium taxes. 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 and THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. 37 You assume investment risk on Purchase Payments in the Subaccounts; as a result, the amount available to you for withdrawal from any Subaccount may be more or less than the total Purchase Payments you have allocated to that Subaccount. Withdrawal Transaction Fees There is currently no transaction fee for partial withdrawals. However, we reserve the right to impose a withdrawal transaction fee in the future of up to $15 for each partial withdrawal (including pre-authorized partial withdrawals) in excess of 15 in any Contract Year. Any such fee would be charged against your Investment Options proportionately based on your Account Value in each Investment Option immediately after the withdrawal. Pre-Authorized Withdrawals If your Contract Value is at least $5,000, you may select the pre-authorized withdrawal option, and you may choose monthly, quarterly, semiannual or annual withdrawals. Each withdrawal must be for at least $250. Each pre-authorized withdrawal is subject to federal income tax on its taxable portion and may be subject to a penalty tax of 10% or more if you have not reached age 59 1/2. See FEDERAL TAX STATUS and THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. Additional information and options are set forth in the SAI and in the Pre-Authorized Withdrawal section of your application. Special Requirements for Full Withdrawals If you wish to withdraw the entire amount available under your Contract, you must either return your Contract to us or sign and submit to us a "lost Contract affidavit." Special Restrictions Under Qualified Plans Individual Qualified Plans may have additional rules regarding withdrawals from a Contract purchased under such a Plan. In general, 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: . severance from employment, . death, . disability as defined in Section 72(m)(7) of the Code, . reaching age 59 1/2, or . hardship as defined for purposes of Section 401 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 and to a penalty tax of 10% or more 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 section in this Prospectus. Distributions may also trigger withholding for state income taxes. The tax and ERISA rules relating to Contract withdrawals are complex. We are not the 38 administrator of any Qualified Plan. You should consult your qualified tax adviser and/or your plan administrator before you withdraw any portion of your Contract Value. Effective Date of Withdrawal Requests Withdrawal requests are normally effective on the Business Day we receive them in proper form. If you make Purchase Payments by check and submit a withdrawal request immediately afterwards, payment of your withdrawal proceeds may be delayed until we receive confirmation in our Annuities administrative office that your check has cleared. 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 section in this Prospectus. Right to Cancel ("Free Look") During the Free Look period, you have the right to cancel your Contract and return it to us for a refund. If you return your Contract, it will be canceled and treated as void from your Contract Date. The amount of your refund may be more or less than the Purchase Payments you've made, depending on the state where you signed your application. Generally, the Free Look period ends 10 days after you receive your Contract, but may vary by state. Also, some states may have a different Free Look period if you are replacing another annuity contract or life insurance policy. For more information, see APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. In most states, your refund will be your Contract Value based on the next determined Accumulated Unit Value ("AUV") after we receive your Contract for cancellation, plus a refund of any amount that may have been deducted as Contract charges to pay for premium taxes. You will bear the investment risk on any gain or loss on funds allocated to the variable investment options. In some states we're required to refund the Purchase Payments you've made (less any amount withdrawn). There are some states that require us to return a different amount if you are replacing another annuity contract or life insurance policy. For any Contract issued as an IRA returned within 7 days after you receive it, we are required to return all Purchase Payments (less any withdrawals made). You'll find a complete description of the Free Look period and amount to be refunded that applies to your Contract on the Contract's cover page, or on a notice that accompanies your policy. Your Purchase Payments will be allocated in accordance with your application or your most recent allocation instructions. PACIFIC LIFE AND THE SEPARATE ACCOUNT Pacific Life Pacific Life Insurance Company is a life insurance company that is based in California. Along with our subsidiaries and affiliates, our operations include life insurance, annuity, pension and institutional products, mutual funds, group employee benefits, broker-dealer operations and investment and advisory services. As of the end of 2001, we had $124.8 billion of individual life insurance in force and total admitted assets of $52.0 billion. We are ranked the 15th largest life insurance carrier in the U.S. in terms of 2001 admitted assets. The Pacific Life family of companies has total assets and funds under management of $357 billion. We are authorized to conduct life insurance and annuity business in the District of Columbia and all states except New York. Our principal office is located at 700 Newport Center Drive, Newport Beach, California 92660. 39 We were originally organized 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. On September 1, 1997, we converted from a mutual life insurance company to a stock life insurance company ultimately controlled by a mutual holding company and were authorized by California regulatory authorities to change our name to Pacific Life Insurance Company. Pacific Life is a subsidiary of Pacific LifeCorp, a holding company, which, in turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding company. Under their respective charters, Pacific Mutual Holding Company must always hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life. Owners of Pacific Life's annuity contracts and life insurance policies have certain membership interests in Pacific Mutual Holding Company, consisting principally of the right to vote on the election of the Board of Directors of the mutual holding company and on other matters, and certain rights upon liquidation or dissolutions of the mutual holding company. Our subsidiary, Pacific Select Distributors, Inc. (PSD), serves as the principal underwriter (distributor) for the Contracts. PSD is located at 700 Newport Center Drive, Newport Beach, California 92660. We and PSD enter into selling agreements with broker-dealers, under which such broker-dealers act as agents of ours and PSD in the sale of the Contracts. We may provide you with reports of our ratings both as an insurance company and as to our financial strength ability with respect to our General Account assets. Separate Account A Separate Account A was established on September 7, 1994 as a separate account of ours, and is registered with the SEC under the 1940 Act, as a type of investment company called a "unit investment trust." Obligations arising under your Contract are our general corporate obligations. We are also the legal owner of the assets in the Separate Account. Assets of the Separate Account attributed to the reserves and other liabilities under the Contract and other contracts issued by us that are supported by the Separate Account may not be charged with liabilities arising from any of our other business; any income, gain or loss (whether or not realized) from the assets of the Separate Account are credited to or charged against the Separate Account without regard to our other income, gain or loss. We may invest money in the Separate Account in order to commence its operations and for other purposes, but not to support contracts other than variable annuity contracts. A portion of the Separate Account's assets may include accumulations of charges we make against the Separate Account and investment results of assets so accumulated. These additional assets are ours and we may transfer them to our General Account at any time; however, before making any such transfer, we will consider any possible adverse impact the transfer might have on the Separate Account. Subject to applicable law, we reserve the right to transfer our assets in the Separate Account to our General Account. 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 the accompanying Prospectus and the SAI for the Fund for more information. 40 FINANCIAL HIGHLIGHTS The table below is designed to help you understand how the Variable Investment Options have performed. It shows the value of a Subaccount Unit at the beginning and end of each period, as well as the number of Subaccount Units at the end of each period. A Subaccount Unit is also called an Accumulation Unit. The information in the table for the period ended December 31, 2001 is included in the financial statements of Separate Account A which have been audited by Deloitte & Touche LLP, independent auditors. You should read the table in conjunction with the financial statements for Separate Account A, which are included in its annual report dated as of December 31, 2001.
2001 2000 -------------------------- -------------------------- With With With With Stepped- Premier Stepped- Premier Up Death Death Up Death Death Without Benefit Benefit Without Benefit Benefit Rider Rider Rider Rider Rider Rider ------------------------------------------------------------------------------- Blue Chip/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $8.03 $8.01 $8.00 N/A N/A N/A Number of Subaccount Units outstanding at end of period 1,166,467 272,994 112,661 N/A N/A N/A ------------------------------------------------------------------------------- Aggressive Growth/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $7.91 $7.89 $7.88 N/A N/A N/A Number of Subaccount Units outstanding at end of period 203,178 55,731 14,934 N/A N/A N/A ------------------------------------------------------------------------------- Emerging Markets Subaccount Unit Value at beginning of period $6.43 $6.41 $6.39 $10.14 $10.12 $10.11 Subaccount Unit Value as of December 31 $5.79 $5.76 $5.73 $6.43 $6.41 $6.39 Number of Subaccount Units outstanding at end of period 295,240 85,950 27,845 260,387 77,814 25,872 ------------------------------------------------------------------------------- Diversified Research/2/ Subaccount Unit Value at beginning of period $10.87 $10.85 $10.83 $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.42 $10.38 $10.35 $10.87 $10.85 $10.83 Number of Subaccount Units outstanding at end of period 663,788 143,436 100,919 476,150 122,599 93,630 ------------------------------------------------------------------------------- Small-Cap Equity/3/ Subaccount Unit Value at beginning of period $17.06 $17.53 $17.48 $23.01 $22.96 $22.93 Subaccount Unit Value as of December 31 $16.92 $16.81 $16.74 $17.06 $17.53 $17.48 Number of Subaccount Units outstanding at end of period 300,104 111,966 85,623 287,957 82,118 57,867 ------------------------------------------------------------------------------- International Large-Cap/2/ Subaccount Unit Value at beginning of period $7.74 $7.72 $7.71 $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $6.24 $6.21 $6.19 $7.74 $7.72 $7.71 Number of Subaccount Units outstanding at end of period 1,843,777 490,702 327,597 1,202,801 298,948 218,938 ------------------------------------------------------------------------------- I-Net Tollkeeper/4/ Subaccount Unit Value at beginning of period $6.72 $6.71 $6.70 $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $4.38 $4.37 $4.35 $6.72 $6.71 $6.70 Number of Subaccount Units outstanding at end of period 642,382 194,993 103,915 635,944 193,330 87,487 ------------------------------------------------------------------------------- Financial Services/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $9.14 $9.12 $9.11 N/A N/A N/A Number of Subaccount Units outstanding at end of period 117,091 33,833 4,358 N/A N/A N/A ------------------------------------------------------------------------------- Health Sciences/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $9.10 $9.08 $9.07 N/A N/A N/A Number of Subaccount Units outstanding at end of period 142,534 34,324 5,099 N/A N/A N/A ------------------------------------------------------------------------------- Technology/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $5.82 $5.81 $5.80 N/A N/A N/A Number of Subaccount Units outstanding at end of period 144,194 27,093 12,078 N/A N/A N/A ------------------------------------------------------------------------------- Telecommunications/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $5.25 $5.24 $5.23 N/A N/A N/A Number of Subaccount Units outstanding at end of period 54,067 20,017 2,457 N/A N/A N/A ------------------------------------------------------------------------------- Multi-Strategy Subaccount Unit Value at beginning of period $15.91 $15.84 $15.80 $16.01 $15.98 $15.95 Subaccount Unit Value as of December 31 $15.50 $15.41 $15.34 $15.91 $15.84 $15.80 Number of Subaccount Units outstanding at end of period 316,790 85,642 43,025 249,340 47,958 38,460 ------------------------------------------------------------------------------- Large-Cap Core (formerly called Equity Income) Subaccount Unit Value at beginning of period $18.60 $18.53 $18.47 $20.22 $20.18 $20.15 Subaccount Unit Value as of December 31 $16.71 $16.61 $16.54 $18.60 $18.53 $18.47 Number of Subaccount Units outstanding at end of period 486,163 180,975 127,795 724,450 202,059 142,904 -------------------------------------------------------------------------------
41
2001 2000 -------------------------- -------------------------- With With With With Stepped- Premier Stepped- Premier Up Death Death Up Death Death Without Benefit Benefit Without Benefit Benefit Rider Rider Rider Rider Rider Rider ------------------------------------------------------------------------------- Strategic Value/5/ Subaccount Unit Value at beginning of period $9.75 $9.74 $9.74 $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $8.66 $8.64 $8.62 $9.75 $9.74 $9.74 Number of Subaccount Units outstanding at end of period 238,806 50,417 16,437 90,168 10,501 12,289 ------------------------------------------------------------------------------- Growth LT Subaccount Unit Value at beginning of period $29.92 $29.80 $29.71 $38.74 $38.67 $38.61 Subaccount Unit Value as of December 31 $20.78 $20.65 $20.56 $29.92 $29.80 $29.71 Number of Subaccount Units outstanding at end of period 964,288 276,157 160,026 750,217 193,399 120,735 ------------------------------------------------------------------------------- Focused 30/5/ Subaccount Unit Value at beginning of period $8.23 $8.23 $8.22 $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $7.03 $7.01 $7.00 $8.23 $8.23 $8.22 Number of Subaccount Units outstanding at end of period 201,749 52,538 22,130 164,442 32,984 9,916 ------------------------------------------------------------------------------- Mid-Cap Value/6/ Subaccount Unit Value at beginning of period $12.78 $12.73 $12.69 $10.38 $10.36 $10.34 Subaccount Unit Value as of December 31 $14.28 $14.19 $14.13 $12.78 $12.73 $12.69 Number of Subaccount Units outstanding at end of period 930,516 216,947 134,668 470,899 128,673 82,254 ------------------------------------------------------------------------------- International Value Subaccount Unit Value at beginning of period $14.06 $14.01 $13.97 $16.10 $16.06 $16.04 Subaccount Unit Value as of December 31 $10.83 $10.77 $10.72 $14.06 $14.01 $13.97 Number of Subaccount Units outstanding at end of period 913,569 249,388 135,937 830,900 195,764 106,837 ------------------------------------------------------------------------------- Capital Opportunities/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $8.33 $8.31 $8.30 N/A N/A N/A Number of Subaccount Units outstanding at end of period 369,280 73,261 40,735 N/A N/A N/A ------------------------------------------------------------------------------- Mid-Cap Growth/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $8.01 $7.99 $7.98 N/A N/A N/A Number of Subaccount Units outstanding at end of period 172,014 32,020 13,270 N/A N/A N/A ------------------------------------------------------------------------------- Global Growth/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 N/A N/A N/A Subaccount Unit Value as of December 31 $8.38 $8.37 $8.35 N/A N/A N/A Number of Subaccount Units outstanding at end of period 55,910 5,496 49 N/A N/A N/A ------------------------------------------------------------------------------- Equity Index Subaccount Unit Value at beginning of period $21.14 $21.06 $21.00 $23.64 $23.59 $23.56 Subaccount Unit Value as of December 31 $18.32 $18.21 $18.12 $21.14 $21.06 $21.00 Number of Subaccount Units outstanding at end of period 963,695 201,357 116,049 906,008 162,962 96,281 ------------------------------------------------------------------------------- Small-Cap Index/6/ Subaccount Unit Value at beginning of period $11.19 $11.14 $11.11 $11.77 $11.75 $11.73 Subaccount Unit Value as of December 31 $11.22 $11.16 $11.11 $11.19 $11.14 $11.11 Number of Subaccount Units outstanding at end of period 197,957 34,152 29,667 150,579 29,233 22,881 ------------------------------------------------------------------------------- Real Estate (formerly called REIT)/6/ Subaccount Unit Value at beginning of period $12.91 $12.86 $12.82 $9.86 $9.84 $9.83 Subaccount Unit Value as of December 31 $13.82 $13.74 $13.68 $12.91 $12.86 $12.82 Number of Subaccount Units outstanding at end of period 303,119 79,343 30,363 181,524 64,951 27,672 ------------------------------------------------------------------------------- Inflation Managed Subaccount Unit Value at beginning of period $12.58 $12.53 $12.49 $11.41 $11.38 $11.37 Subaccount Unit Value as of December 31 $12.94 $12.86 $12.80 $12.58 $12.53 $12.49 Number of Subaccount Units outstanding at end of period 703,795 105,804 65,875 513,300 79,227 58,293 ------------------------------------------------------------------------------- Managed Bond Subaccount Unit Value at beginning of period $12.76 $12.71 $12.67 $11.60 $11.58 $11.56 Subaccount Unit Value as of December 31 $13.50 $13.42 $13.36 $12.76 $12.71 $12.67 Number of Subaccount Units outstanding at end of period 1,853,547 328,780 229,185 931,407 170,784 107,675 ------------------------------------------------------------------------------- Money Market Subaccount Unit Value at beginning of period $12.10 $12.05 $12.01 $11.55 $11.53 $11.51 Subaccount Unit Value as of December 31 $12.39 $12.31 $12.26 $12.10 $12.05 $12.01 Number of Subaccount Units outstanding at end of period 1,082,193 250,652 204,875 1,048,076 181,360 130,783 ------------------------------------------------------------------------------- High Yield Bond Subaccount Unit Value at beginning of period $11.52 $11.47 $11.44 $12.13 $12.10 $12.09 Subaccount Unit Value as of December 31 $11.51 $11.44 $11.39 $11.52 $11.47 $11.44 Number of Subaccount Units outstanding at end of period 310,057 67,597 44,400 197,365 34,971 38,549 ------------------------------------------------------------------------------- Equity Subaccount Unit Value at beginning of period $19.01 $18.93 $18.88 $25.76 $25.71 $25.67 Subaccount Unit Value as of December 31 $14.66 $14.58 $14.51 $19.01 $18.93 $18.88 Number of Subaccount Units outstanding at end of period 543,137 165,415 104,893 484,381 138,451 101,438 -------------------------------------------------------------------------------
42
2001 2000 -------------------------- ------------------------ With With With With Stepped- Premier Stepped- Premier Up Death Death Up Death Death Without Benefit Benefit Without Benefit Benefit Rider Rider Rider Rider Rider Rider ------------------------------------------------------------------------------- Aggressive Equity Subaccount Unit Value at beginning of period $11.92 $11.87 $11.84 $15.31 $15.28 $15.26 Subaccount Unit Value as of December 31 $9.73 $9.67 $9.63 $11.92 $11.87 $11.84 Number of Subaccount Units outstanding at end of period 248,174 116,458 48,382 318,263 115,708 53,534 ------------------------------------------------------------------------------- Large-Cap Value/6/ Subaccount Unit Value at beginning of period $12.49 $12.44 $12.41 $10.99 $10.97 $10.95 Subaccount Unit Value as of December 31 $11.87 $11.80 $11.75 $12.49 $12.44 $12.41 Number of Subaccount Units outstanding at end of period 1,388,991 343,633 176,129 370,388 102,960 54,494 -------------------------------------------------------------------------------
The Equity Income and Research Subaccounts began operations on January 2, 2002 and are not included in the Financial Highlights. /1/This Subaccount began operations on January 2, 2001. /2/This Subaccount began operations on January 3, 2000. /3/This Subaccount began operations on October 1, 1999. /4/This Subaccount began operations on May 1, 2000. /5/This Subaccount began operations on October 2, 2000. /6/This Subaccount began operations on January 4, 1999. 43 FEDERAL TAX STATUS The following summary of federal income tax consequences is based on our understanding of current tax laws and regulations, which may be changed by legislative, judicial or administrative action. The summary is general in nature and is not intended as tax advice. Moreover, it 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 agent for a natural person. If a contract is not owned or held by a natural person or as agent for a natural person, the contract generally will not be treated as an "annuity" for tax purposes, meaning that the contract owner will be taxed currently on annual increases in Contract Value at ordinary income rates unless some other exception applies. 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 an agent for a natural person, and that we (as the issuing insurance company), and not the Contract Owner(s), will be treated as the owner of the investments underlying the Contract. Accordingly, generally 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 in the Fund's SAI. We believe the underlying Variable Investment Options for the Contract meet these requirements. In connection with the issuance of temporary regulations relating to diversification requirements under Section 817(h), the Treasury Department announced that such regulations do not provide guidance concerning the extent to which you may direct your investments to particular divisions of a separate account. Such guidance may be included in regulations or revenue rulings under Section 817(d) relating to the definition of a variable contract. Because of this uncertainty, we reserve the right to make such changes as we deem necessary or appropriate to ensure that your Contract continues to qualify as an annuity for tax purposes. Any such changes will apply uniformly to affected Contract Owners and will be made with such notice to affected Contract Owners as is feasible under the circumstances. Taxes Payable by Contract Owners: General Rules These general rules apply to Non-Qualified Contracts. As discussed below, however, tax rules may differ for Qualified Contracts and you should consult a qualified tax adviser if you are purchasing a Qualified Contract. Distributions of net investment income or capital gains that each Subaccount receives from its corresponding 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. Multiple Contracts All Non-Qualified Contracts that are issued by us, or our affiliates, to the same Owner during any calendar year are treated as one Contract for purposes of determining the amount includible in gross income under Internal Revenue Service Code (Code) Section 72(e). Further, the Treasury Department has specific authority to issue regulations that prevent the avoidance of Section 72(e) through the serial purchase of Contracts or otherwise. 44 Taxes Payable on Withdrawals Amounts you withdraw before annuitization, including amounts withdrawn from your Contract Value in connection with partial withdrawals for payment of any charges and fees, will be treated first as taxable income to the extent that your Contract Value exceeds the aggregate of your Investments (reduced by non- taxable amounts previously received), and then as non-taxable recovery of your Investments. The assignment or pledge of (or agreement to assign or pledge) 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 us and any of our affiliates are treated as a single annuity contract for purposes of determining whether an amount is subject to tax under these rules. The Code further provides that the taxable portion of a withdrawal or other distribution may be subject to a penalty tax equal to 10% of that taxable portion unless the withdrawal is: . made on or after the date you reach age 59 1/2, . made by a Beneficiary after your death, . attributable to you becoming disabled, . in the form of level annuity payments under a lifetime annuity, or . any distribution to the extent it is required under the required minimum distribution rules of section 401(a)(9) of the Code. Additional exceptions may apply to certain Qualified Contracts (see the Taxes Payable on Annuity Payments section). Taxes Payable on Optional Riders It is our understanding that the charges relating to any optional death benefit rider (SDBR, or PDBR, and/or EEG) are not subject to current taxation and we will not report them as such. However, the IRS may determine that these charges should be treated as partial withdrawals subject to current taxation to the extent of any gain and, if applicable, the 10% tax penalty. We reserve the right to report any optional death benefit rider charges as partial withdrawals if we believe that we would be expected to report them in accordance with IRS regulations. As of the date of this Prospectus, IRS regulations state that Individual Retirement Accounts (IRAs) may not invest in life insurance contracts. However, a Contract that is used as an IRA may provide for a death benefit that equals the greater of the Purchase Payments made and the Contract Value. Section 401 plans, section 403(b), 457(b) annuities and IRAs (but not Roth IRAs) can only offer incidental death benefits. The IRS could take the position that the enhanced death benefits provided by the optional death benefit riders are not incidental. To the extent that the optional death benefit riders alter the timing or the amount of the payment of distributions under a Qualified Contract, the riders cannot be paid out in violation of the minimum distribution rules of the Code. The Contract offers an optional death benefits rider that, when combined with the Contract, may exceed the death benefit allowable under IRS Regulations. Although we believe that these regulations do not prohibit the optional death benefit rider from being added to your Contract if it is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA, the law is unclear. It is possible that the IRS may disqualify the Contract if it is issued with an optional death benefit rider, which may result in certain deemed distributions, increases in taxes, or, possibly, tax penalties. You should consult with a qualified tax advisor before deciding to purchase any optional death benefit rider in connection with any IRA Contract. 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 Investments (as used here, "Investments" means the aggregate Investments less any amounts that were 45 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 Investments 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). Such a payment may also be subject to a penalty tax. Should the death of a Contract Owner cause annuity payments to cease before Investments have been fully recovered, a deduction may be allowed on the final tax return for the unrecovered Investments; however, if any remaining annuity payments are made to a Beneficiary, the Beneficiary will recover the balance of the Investments as payments are made. IRC Section 72(b)(3)(A) or (B) or (C). Generally, the same tax rules apply to amounts received by the Beneficiary as those set forth above, except that the early withdrawal penalty tax does not apply. Thus, any annuity payments or lump sum withdrawal will be divided into taxable and non-taxable portions. If the Contract Owner or Annuitant dies and within sixty days after the date on which a lump sum death benefit first becomes payable the designated recipient elects to receive annuity payments in lieu of the lump sum death benefit, then the designated recipient will not be treated for tax purposes as having received the lump sum death benefit in the tax year it first becomes payable. Rather, in that case, the designated recipient will be taxed on the annuity payments as they are received. Any amount payable upon the Contract Owner's death, whether before or after the Annuity Date, will be included in the estate of the Contract Owner for federal estate tax purposes. In addition, designation of a non-spouse Beneficiary who either is 37 1/2 or more 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. Generally, gifts of Non-Qualified Contracts prior to the annuity start date will trigger tax on the gain on the contract, with the donee getting a stepped- up basis for the amount included in the donor's income. The 10% penalty tax and gift tax also may be applicable. This provision does not apply to transfers between spouses, incident to a divorce, or transfers to and from a trust acting as agent for the Owner or the Owner's spouse. 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. Therefore, no attempt is made herein to provide more than general information about the use of the Contract with the various types of Qualified Plans. Participants under such Qualified Plans, as well as Contract Owners, Annuitants and Beneficiaries, are cautioned that the rights of any person to any benefits under such Qualified Plans may be subject to the terms and conditions of the Plans themselves or limited by applicable law, regardless of the terms and conditions of the Contract issued in connection therewith. Qualified Plans generally provide for the tax deferral of income regardless of whether the Qualified Plan invests in an annuity or other investment. You should consider if the Contract is a suitable investment if you are investing through a Qualified Plan. The following is only a general discussion about types of Qualified Plans for which the Contracts are available. We are not the administrator of any Qualified Plan. The plan administrator and/or custodian, whichever is applicable, (but not us) is responsible for all Plan administrative duties including, but not limited to, notification of distribution options, disbursement of Plan benefits, handling any processing and administration of qualified loans, compliance regulatory requirements and federal and state tax reporting of income/distributions from the Plan to Plan participants and, if applicable, Beneficiaries of Plan participants and IRA contributions from Plan participants. Our administrative duties are limited to administration of the Contract and any disbursements of any Contract benefits to the Owner, Annuitant, or Beneficiary of the Contract, as applicable. Our tax reporting responsibility is limited to federal and state tax reporting of income/distributions to the applicable payee and IRA contributions from the Owner of a Contract, as recorded 46 on our books and records. The Qualified Plan (the plan administrator or the custodian) is required to provide us with information regarding individuals with signatory authority on the Contract(s) owned. If you are purchasing a Qualified Contract, you should consult with your plan administrator and/or a qualified tax adviser. You should also consult with your tax adviser and/or plan administrator before you withdraw any portion of your contract value. Individual Retirement Annuities ("IRAs") In addition to "traditional" IRAs established under Code 408, there are Roth IRAs governed by Code Section 408A and SIMPLE IRAs established under Code Section 408(p). Also, Qualified Plans under Section 401, 403(b) or 457(b) of the Code that include after-tax employee contributions may be treated as deemed IRAs subject to the same rules and limitations as traditional Plans. Contributions to each of these types of IRAs are subject to differing limitations. The following is a very general description of each type of IRA and other Qualified Plans. Traditional IRAs Traditional IRAs are subject to limitations on the amount that may be contributed each year (these contribution limits are scheduled to increase over the next several years), the persons who may be eligible, and on the time when distributions must commence. Depending upon the circumstances of the individual, contributions to a traditional IRA may be made on a deductible or non-deductible basis. Failure to make mandatory distributions may result in imposition of a 50% penalty tax on any difference between the required distribution amount and the amount actually distributed. A 10% penalty tax is imposed on the amount includable in gross income from distributions that occur before you attain age 59 1/2 and that are not made on account of death or disability, with certain exceptions. These exceptions include: . distributions that are part of a series of substantially equal periodic payments made over your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your Designated Beneficiary, . certain higher education expenses, . used to pay for certain health insurance premiums or medical expenses, and . costs related to the purchase of your first home. 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 (or your surviving spouse if you die) may rollover funds from certain existing Qualified Plans (such as proceeds from existing insurance policies, annuity contracts or securities) into your traditional 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 Traditional IRA; to avoid this withholding you should have cash transferred directly from the insurance company or plan trustee to your traditional IRA. Similar limitations and tax penalties apply to tax sheltered annuities, government plans under section 457(b), 401(k) plans, and pension and profit-sharing plans. SIMPLE IRAs The Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE Plans") is a relatively new type of Qualified Plan. Depending upon the SIMPLE Plan, employers may make plan contributions into a SIMPLE IRA established by each eligible participant. Like other Qualified Plans, a 10% penalty tax is imposed on certain distributions that occur before you attain age 59 1/2. In addition, the penalty tax is increased to 25% for amounts received during the 2-year period beginning on the date you first participated in a qualified salary reduction arrangement pursuant to a SIMPLE Plan maintained by the individual's employer under Code Section 408(p)(2). Contributions to a SIMPLE IRA may be either salary deferral contributions or employer contributions. Distributions from a SIMPLE IRA may be transferred over to another SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional IRA, 403(b) annuity contract, contracts pursuant to section 457(b) of the Code, or other Qualified Plan after a required two year waiting period. 47 Roth IRAs Section 408A of the Code permits eligible individuals to establish a Roth IRA. Contributions to a Roth IRA are not deductible, but withdrawals of amounts contributed and the earnings thereon that meet certain requirements are not subject to federal income tax. In general, Roth IRAs are subject to limitations on the amount that may be contributed and the persons who may be eligible to contribute and are subject to certain required distribution rules on the death of the Contract Owner. Unlike a traditional IRA, Roth IRAs are not subject to minimum required distribution rules during the Contract Owner's lifetime. Generally, however, the amount remaining in a Roth IRA must be distributed by the end of the fifth year after the death of the Contract Owner/Annuitant or distributed over the life expectancy of the Designated Beneficiary. The owner of a traditional IRA may convert a traditional IRA into a Roth IRA under certain circumstances. The conversion of a traditional IRA to a Roth IRA will subject the amount of the converted traditional IRA to federal income tax. Anyone considering the purchase of a Qualified Contract as a Roth IRA or a "conversion" Roth IRA should consult with a qualified tax adviser. 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; Investments made on Contracts purchased for these employees are excludable from the employees' gross income (subject to maximum contribution limits). Distributions under these Contracts must comply with certain limitations as to timing, or result in tax penalties. Distributions from amounts contributed to a TSA pursuant to a salary reduction arrangement, may be made from a TSA only upon attaining age 59 1/2, severance from employment, death, disability, or financial hardship. Section 403(b) annuity distributions can be rolled over to other Qualified Plans in a manner similar to those permitted by Qualified Plans that are maintained pursuant to Section 401 of the Code. Section 457(b) Non-Qualified Deferred Compensation Plans Government Entity Employees of a governmental entity may defer compensation through an eligible plan under Code section 457(b). Contributions to a Contract of an eligible plan are subject to limitations. Subject to a qualifying triggering event, section 457(b) governmental plans may be transferred or rolled into another Qualified Plan. The Qualified Plan must allow the transfer or rollover. If a rollover to an IRA is completed the assets become subject to the 10% penalty in distributions prior to age 59 . Assets from other plans may be rolled into a governmental 457(b) plan if the plan allows and the investment provider is able to segregate the assets for tax reporting purposes. Consult both the distributing plan and the receiving plan prior to making this election. Not-For-Profit Employees of a not-for-profit entity may defer compensation through an eligible plan under Code section 457(b). Contributions to a Qualified Contract maintained under section 457(b) of the Code by an employee of a not-for-profit entity are subject to limitations, and may not be rolled over to another Qualified Plan at any time. 401(k) Plans; Pension and Profit-Sharing Plans Qualified plans may be established by eligible employers for certain eligible employees under Section 401 of the Code. These plans may be 401(k) plans, profit-sharing plans, or other pension or retirement plans. Contributions to these plans are subject to certain limitations. Rollover to other eligible plans may be available. Please consult your Qualified Plans Summary Plan description for more information. Catch-Up Provision Generally, Qualified Plan or IRA Participants over the age of 50 may contribute additional amounts as catch-up contributions if the terms of the Plan so permit. In addition, distributions from each type of IRA are subject to differing restrictions. 48 Loans Certain Owners of Qualified Contracts may borrow against their Contracts; otherwise loans from us are not permitted. If yours is a Qualified Contract which is: . not subject to Title I of ERISA, . issued under 403(b) of the Code, and . permits loans under its terms (a "Loan Eligible Plan") you may request a loan from us, using your Contract Value as your only security. You will be charged interest on your Contract Debt at a fixed annual rate equal to 5%. The amount held in the Loan Account to secure your loan will earn a return equal to an annual rate of 3%. This loan rate may vary by state. Interest charges accrue on your Contract Debt daily, beginning on the effective date of your loan. Interest earned on the Loan Account Value accrue daily beginning on the day following the effective date of the loan, and those earnings will be transferred once a year to your Investment Options in accordance with your current allocation instructions. Tax and Legal Matters The tax and ERISA rules relating to Contract loans are complex and in many cases unclear. For these reasons, and because the rules vary depending on the individual circumstances these loans are processed by your Plan Administrator. We urge you to consult with a qualified tax adviser prior to effecting any loan transaction under your Contract. Generally interest paid on your loan under a 401 plan or 403(b) tax-sheltered annuity will be considered non-deductible "personal interest" under Section 163(h) of the Code, to the extent the loan comes from and is secured by your pre-tax contributions, even if the proceeds of your loan are used to acquire your principal residence. We may change these loan provisions to reflect changes in the Code or interpretations thereof. Loan Procedures Your loan request must be submitted on our Non-ERISA TSA Application and Loan Agreement Form. You may submit a loan request 30 days after your Contract Date and before your Annuity Date. However, before requesting a new loan, you must wait thirty days after the last payment of a previous loan. If approved, your loan will usually be effective as of the end of the Business Day on which we receive all necessary documentation in proper form. We will normally forward proceeds of your loan to you within seven calendar days after the effective date of your loan. 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 the "Loan Account." To make this transfer, we will transfer amounts proportionately from your Investment Options based on your Account Value in each Investment Option. 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 relative to your current allocation instructions. Loan Terms You may have only one loan outstanding at any time. The minimum loan amount is $1,000, subject to certain state limitations. Your Contract Debt at the effective date of your loan may not exceed the lesser of: . 50% of your Contract Value, or . $50,000 less your highest outstanding Contract Debt during the 12-month period immediately preceding the effective date of your loan. 49 You should refer to the terms of your particular Loan Eligible Plan for any additional loan restrictions. If you have other loans outstanding pursuant to other Loan Eligible Plans, the amount you may borrow may be further restricted. We are not responsible for making any determinations (including loan amounts permitted) or any interpretations with respect to your Loan Eligible Plan. Repayment Terms Your loan, including principal and accrued interest, generally 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. Generally, the term of the loan will be five years from the effective date of the loan; however, if you have certified to us that your loan proceeds are to be used to acquire a principal residence for yourself, you may request a loan term of 30 years. In either case, however, you must repay your loan prior to your Annuity Date. If you elect to annuitize (or withdraw) your Net Contract Value while you have an outstanding loan, we will deduct any Contract Debt from your Contract Value at the time of the annuitization (or withdrawal) to repay the Contract Debt. You may prepay your entire loan at any time; if you do so, we will bill you for any unpaid interest that has accrued through the date of payoff. Your loan will be considered repaid only when the interest due has been paid. Subject to any necessary approval of state insurance authorities, while you have Contract Debt outstanding, we will treat all payments you send us as Investments unless you specifically indicate that your payment is a loan repayment or include your loan payment notice with your payment. To the extent allowed by law, any loan repayments in excess of the amount then due will be applied to the principal balance of your loan. Such repayments will not change the due dates or the periodic repayment amount due for future periods. If a loan repayment is in excess of the principal balance of your loan, any excess repayment will be refunded to you. Repayments we receive that are less than the amount then due will be returned to you, unless otherwise required by law. If we have not received your full payment by its due date, we will declare the entire remaining loan balance in default. At that time, we will send written notification of the amount needed to bring the loan back to a current status. You will have sixty (60) days from the date on which the loan was declared in default (the "grace period") to make the required payment. If the required payment is not received by the end of the grace period, the defaulted loan balance plus accrued interest and any withdrawal charge will be withdrawn from your Contract Value, if amounts under your Contract are eligible for distribution. In order for an amount to be eligible for distribution from a TSA funded by salary reductions, you must meet one of five triggering events. The triggering events are: . attainment of age 59 1/2, . severance from employment, . death, . disability, and . financial hardship (with respect to contributions only, not income or earnings on those contributions). If those amounts are not eligible for distribution, the defaulted loan balance plus accrued interest and any withdrawal charge will be considered a Deemed Distribution and will be withdrawn when such Contract Values become eligible. In either case, the Distribution or the Deemed Distribution will be considered a currently taxable event, and may be subject to federal tax withholding, the withdrawal charge and the federal early withdrawal penalty tax. 50 If there is a Deemed Distribution under your Contract and to the extent allowed by law, any future withdrawals will first be applied as repayment of the defaulted Contract Debt, including accrued interest and charges for applicable taxes. Any amounts withdrawn and applied as repayment of Contract Debt will first be withdrawn from your Loan Account, and then from your Investment Options on a proportionate basis relative to the Account Value in each Investment Option. If you have an outstanding loan that is in default, the defaulted Contract Debt will be considered a withdrawal for the purpose of calculating any Death Benefit Amount and/or Guaranteed Minimum Death Benefit. The terms of any such loan are intended to qualify for the exception in Code Section 72(p)(2) so that the distribution of the loan proceeds will not constitute a distribution that is taxable to you. To that end, these loan provisions will be interpreted to ensure and maintain such tax qualification, despite any other provisions to the contrary. We reserve the right to amend your Contract to reflect any clarifications that may be needed or are appropriate to maintain such tax qualification or to conform any terms of our loan arrangement with you to any applicable changes in the tax qualification requirements. We will send you a copy of any such amendment. If you refuse such an amendment, it may result in adverse tax consequences to you. 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%, unless otherwise specified by the Code. Generally, there will be no withholding for taxes until you actually receive payments under your Contract. Distributions from a Contract under a Qualified Plan (not including an individual retirement annuity subject to Code Section 408 or Code Section 408A) 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: . the distributee directs the transfer of such amounts in cash to another Qualified Plan or a Traditional IRA, or . 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, in the case of Non-Qualified Contracts, if you expect to accumulate your Contract Value over a relatively long period of time without making significant withdrawals, there should be tax advantages, regardless of your tax bracket, in purchasing such a Contract rather than, for example, a mutual fund with a similar investment policy and approximately the same level of expected investment results. This is because little or no income taxes are incurred by you or by us while you are participating in the Subaccounts, and it is generally advantageous to defer the payment of income taxes, so that the investment return is compounded without any 51 deduction for income taxes. The advantage will be greater if you decide to liquidate your Contract Value 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 Life Although the Separate Account is registered as an investment company, it is not a separate taxpayer for purposes of the Code. The earnings of the Separate Account are taxed as part of our operations. No charge is made against the Separate Account for our federal income taxes (excluding the charge for premium taxes), but we will review, periodically, the question of charges to the Separate Account or your Contract for such taxes. Such a charge may be made in future years for any federal income taxes that would be attributable to the Separate Account or to our operations with respect to your Contract, or attributable, directly or indirectly, to Investments on your Contract. Under current law, we may incur state and local taxes (in addition to premium taxes) in several states. At present, these taxes are not significant and they are not charged against the Contract or the Separate Account. If there is a material change in applicable state or local tax laws, the imposition of any such taxes upon us that are attributable to the Separate Account or to our operations with respect to your Contract may result in a corresponding charge against the Separate Account or your Contract. ADDITIONAL INFORMATION Voting Rights We are the legal owner of the shares of the Portfolios held by the Subaccounts. We may vote on any matter voted on at Fund shareholders' meetings. However, our current interpretations of applicable law requires us to vote the number of shares attributable to your Variable Account Value (your "voting interest") in accordance with your directions. We will pass 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 do not receive any voting instructions for the shares in a Separate Account, we will vote the shares in that separate account in the same proportion as the total votes for all of our Separate Accounts for which we've received timely instructions. If we hold shares of a Portfolio in our General Account, we will vote such shares in the same proportion as the total votes cast for all of our separate accounts, including Separate Account A. We will vote shares of any Portfolio held by our non-insurance affiliates in the same proportion as the total votes for all separate accounts of ours and our insurance affiliates. We may elect, in the future, to vote shares of the 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: . your Contract Value allocated to the Subaccount corresponding to that Portfolio, divided by . 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 number of shares that form the basis for your voting interest, as described above, will decrease throughout the payout period. 52 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. Your Contract cannot name more than two Contract Owners either as Joint or Contingent Owner at any time. Any newly-named Contract Owners, including Joint and/or Contingent Owners, must be under the age of 81 at the time of change or addition. If there are Joint Owners, the Contract will be owned by the Joint Owners as Joint Tenants With Right of Survivorship and not as Tenants in Common. 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 and/or gift tax consequences; you should consult a qualified tax adviser before effecting such a transfer. A change to joint Contract ownership is considered a transfer of ownership. Annuitant and Contingent or Joint Annuitant Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or changed, once your Contract is issued. Certain changes may be permitted in connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER PAYOUTS--Selecting Your Annuitant section of this Prospectus. Beneficiaries Your Beneficiary is the person(s) who may receive death benefits under your Contract or any remaining annuity payments after the Annuity Date if the Annuitant dies. You may change or remove your Beneficiary or add Beneficiaries at any time prior to the death of the Annuitant or Owner, as applicable. Spousal consent may be required to change the Beneficiary on an IRA. If you have named your Beneficiary irrevocably, you will need to obtain that Beneficiary's consent before making any changes. Qualified Contracts may have additional restrictions on naming and changing Beneficiaries; for example, if your Contract was issued in connection with a Qualified Plan subject to Title I of ERISA, your spouse must either be your Beneficiary or consent to your naming of a different Beneficiary in writing before a notary or plan official. If you leave no surviving Beneficiary or Contingent Beneficiary, your estate may receive any death benefit proceeds under your Contract. Changes to All Contracts If, in the judgment of our management, continued investment by Separate Account A in one or more of the Portfolios becomes unsuitable or unavailable, we may seek to alter the Variable Investment Options available under the Contracts. We do 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. We reserve the right to substitute 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 an investment company, or another investment vehicle. We may also purchase, through a Subaccount, other securities for other series or other classes of contracts, and may permit conversions or exchanges between series or classes of contracts on the basis of Contract Owner requests. Required approvals of the SEC and state insurance regulators will be obtained before any such substitutions are effected, and you will be notified of any planned substitution. We may add new Subaccounts to Separate Account A, and any new Subaccounts may invest in Portfolios or in other investment vehicles; availability of any new Subaccounts to existing Contract Owners will be determined at our discretion. We will notify you, and will comply with the filing or other procedures established by applicable state insurance regulators, to the extent required by applicable law. We also reserve the right, after receiving any required regulatory approvals, to do any of the following: 53 . cease offering any Subaccount; . add or change designated investment companies or their portfolios, or other investment vehicles; . add, delete or make substitutions for the securities and other assets that are held or purchased by the Separate Account or any Variable Account; . permit conversion or exchanges between portfolios and/or classes of contracts on the basis of Owners' requests; . add, remove or combine Variable Accounts; . combine the assets of any Variable Account with any other of our separate accounts or of any of our affiliates; . register or deregister Separate Account A or any Variable Account under the 1940 Act; . operate any Variable Account as a managed investment company under the 1940 Act, or any other form permitted by law; . run any Variable Account under the direction of a committee, board, or other group; . restrict or eliminate any voting rights of Owners with respect to any Variable Account or other persons who have voting rights as to any Variable Account; . 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; and . comply with applicable law. 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. Please send your forms and written requests or questions to: Pacific Life Insurance Company P.O. Box 7187 Pasadena, California 91109-7187 If you are submitting an Investment or other payment by mail, please send it, along with your application if you are submitting one, to the following address or to the address indicated on your Contract specification pages, if different: Pacific Life Insurance Company P.O. Box 100060 Pasadena, California 91189-0060 If you are using an overnight delivery service to send payments, please send them to the following address or to the address indicated on your Contract specification pages, if different: Pacific Life Insurance Company 1111 South Arroyo Parkway, Suite 205 Pasadena, California 91105 54 The effective date of certain notices or of instructions is determined by the date and time on which we "receive" the notice or instructions. We "receive" this information only when it arrives, in proper form, at the correct mailing address set out above. In those instances when we receive electronic transmission of the information on the application from your representative's broker-dealer firm in accordance with our administrative procedures, we consider the application to be received on the Business Day we receive the transmission. Please call us at 1-800-722-2333 if you have any questions regarding which address you should use. We reserve the right to process any Investment received at an incorrect address when it is received at either the address indicated in your Contract specifications pages or the appropriate address indicated in the Prospectus. Investments after your initial Investment, loan requests, transfer requests, loan repayments and withdrawal requests we receive before 4:00 p.m. Eastern time will usually be effective on the same Business Day that we receive them in "proper form," unless the transaction or event is scheduled to occur on another day. Generally, whenever you submit any other form, notice or request, your instructions will be effective on the next Business Day after we receive them in "proper form" unless the transaction or event is scheduled to occur on another day. "Proper form" means in a form satisfactory to us and may require, among other things, a signature guarantee or other verification of authenticity. We do not generally require a signature guarantee unless it appears that your signature may have changed over time or the signature does not appear to be yours; an executed application or confirmation of application, as applicable, in proper form is not received by us; or, to protect you or us. Requests regarding death benefits must be accompanied by both proof of death and instructions regarding payment satisfactory to us. You should call your registered representative or us if you have questions regarding the required form of a request. Telephone and Electronic Transactions You are automatically entitled to make certain transactions by telephone or, to the extent available, electronically. You may also authorize other people to make certain transaction requests by telephone or to the extent available electronically by so indicating on the application or by sending us instructions in writing in a form acceptable to us. We cannot guarantee that you or any other person you authorize will always be able to reach us to complete a telephone or electronic transaction; for example, all telephone lines or our web-site may be busy during certain periods, such as periods of substantial market fluctuations or other drastic economic or market change, or telephones or the internet may be out of service during severe weather conditions or other emergencies. Under these circumstances, you should submit your request in writing (or other form acceptable to us). Transaction instructions we receive by telephone or electronically before 4:00 p.m. Eastern time on any Business Day will usually be effective on that day, and we will provide you confirmation of each telephone or electronic transaction. We have established procedures reasonably designed to confirm that instructions communicated by telephone or electronically are genuine. These procedures may require any person requesting a telephone or electronic transaction to provide certain personal identification upon our request. We may also record all or part of any telephone conversation with respect to transaction instructions. We reserve the right to deny any transaction request made by telephone or electronically. You are authorizing us to accept and to act upon instructions received by telephone or electronically with respect to your Contract, and you agree that, so long as we comply with our procedures, neither we, any of our affiliates, nor 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 we believe to be genuine. This policy means that so long as we comply with our procedures, you will bear the risk of loss arising out of the telephone and electronic transaction privileges of your Contract. If a Contract has Joint Owners, each Owner may individually make telephone and/or electronic transaction requests. Electronic Delivery Authorization Subject to availability, you may authorize us to provide prospectuses, statements and other information ("documents") electronically by so indicating on the application, or by sending us instructions in writing in a form acceptable to us to receive such documents electronically. You must have internet access to use this service. While we impose no additional charge for this service, there may be potential costs associated with electronic delivery, such as on-line charges. Documents will be available on our Internet Web site. You may 55 access and print all documents provided through this service. As documents become available, we will notify you of this by sending you an e-mail message that will include instructions on how to retrieve the document. If our e-mail notification is returned to us as "undeliverable," we will contact you to obtain your updated e-mail address. If we are unable to obtain a valid e-mail address for you, we will send a paper copy by regular U.S. mail to your address of record. You may revoke your consent for electronic delivery at any time and we will resume providing you with a paper copy of all required documents; however, in order for us to be properly notified, your revocation must be given to us a reasonable time before electronic delivery has commenced. We will provide you with paper copies at any time upon request. Such request will not constitute revocation of your consent to receive required documents electronically. Timing of Payments and Transactions For withdrawals from the Variable Investment Options or for death benefit payments attributable to your Variable Account Value, we will normally send the proceeds within seven calendar days after your withdrawal request is effective or after the Notice Date, as the case may be. Similarly, for transfers from the Variable Investment Options, we will normally send the proceeds within seven calendar days after your transfer (or exchange) request is effective. We will normally effect periodic annuity payments on the day that corresponds to the Annuity Date and will make payment on the following day. Payments or transfers may be suspended for a longer period under certain extraordinary 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 months (thirty days in West Virginia) after the request is effective. Similar delays may apply to loans and transfers from the Fixed Option. See THE GENERAL ACCOUNT section in this Prospectus for more details. Confirmations, Statements and Other Reports to Contract Owners Confirmations will be sent out for unscheduled Investments 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 each Fixed Option, fees and charges applied to your Contract Value, transactions made and specific Contract data that apply to your Contract. Confirmations of your transactions under the pre-authorized checking plan, dollar cost averaging, earnings sweep, portfolio rebalancing, and pre- authorized withdrawal options will appear on your quarterly account statements. Your fourth-quarter statement will contain annual information about your Contract Value and transactions. If you suspect an error on a confirmation or quarterly statement, you must notify us in writing within 30 days from the date of the first confirmation or statement on which the transaction you believe to be erroneous appeared. When you write, tell us your name, contract number and a description of the suspected error. You will also be sent an annual 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; or more frequently if required by law. Replacement of Life Insurance or Annuities The term "replacement" has a special meaning in the life insurance industry and is described more fully below. Before you make your purchase decision, Pacific Life wants you to understand how a replacement may impact your existing plan of insurance. A policy "replacement" occurs when a new policy or contract is purchased and, in connection with the sale, an existing policy or contract is surrendered, lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or used in a financed purchase. A "financed purchase" occurs when the purchase of a new life insurance policy or annuity contract involves the use of funds obtained from the values of an existing life insurance policy or annuity contract through withdrawal, surrender or loan. There are circumstances in which replacing your existing life insurance policy or annuity contract can benefit you. As a general rule, however, replacement is not in your best interest. Accordingly, you should make a careful comparison of the costs and benefits of your existing policy or contract and the proposed policy or contract to determine whether replacement is in your best interest. 56 Financial Statements The statement of assets and liabilities of Separate Account A as of December 31, 2001 and the related statement of operations and financial highlights for the year then ended and statements of changes in net assets for each of the two years in the period then ended are incorporated by reference in the Statement of Additional Information from the Annual Report of Separate Account A dated December 31, 2001. Pacific Life's consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 are contained in the Statement of Additional Information. THE GENERAL ACCOUNT General Information All amounts allocated to the Fixed Option become part of our General Account. Subject to applicable law, we exercise sole discretion over the investment of General Account assets, and bear the associated investment risk; you will not share in the investment experience of General Account assets. Because of exemptive and exclusionary provisions, interests in the General Account under the Contract are not registered under the Securities Act of 1933, as amended, and the General Account has not been registered as an investment company under the 1940 Act. Any interest you have in the Fixed Option is not subject to these Acts, and we have been advised that the SEC staff has not reviewed disclosure in this Prospectus relating to the Fixed Option. This disclosure may, however, be subject to certain provisions of federal securities laws relating to the accuracy and completeness of statements made in prospectuses. Guarantee Terms When you allocate any portion of your Investments or Contract Value to 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 for the Fixed Option may be changed periodically for new allocations; your allocation will receive the Guaranteed Interest Rate in effect for the Fixed Option on the effective date of your allocation. All Guaranteed Interest Rates will be expressed as annual effective rates; however, interest will accrue daily. The Guaranteed Interest Rate on your Fixed Option will remain in effect for the Guarantee Term and will never be less than an annual rate of 3%. Fixed Option Each allocation (or rollover) you make to the Fixed Option receives a Guarantee Term that begins on the day that allocation or rollover is effective and ends at the end of that Contract Year or, if earlier, on your Annuity Date. At the end of that Contract Year, we will roll over your Fixed Option Value on that day into a new Guarantee Term of one year (or, if shorter, the time remaining until your Annuity Date) at the then current Guaranteed Interest Rate, unless you instruct us otherwise. Example: Your Contract Anniversary is February 1. On February 1 of year 1, you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one year and a Guaranteed Interest Rate of 5%. On August 1, you allocate another $500 to the Fixed Option and receive a Guaranteed Interest Rate of 6%. Through January 31, year 1, your first allocation of $1,000 earns 5% interest and your second allocation of $500 earns 6% interest. On February 1, year 2, a new interest rate may go into effect for your entire Fixed Option Value. Withdrawals and Transfers Prior to the Annuity Date, you may withdraw amounts from your Fixed Option or transfer amounts from your Fixed Option to one or more of the other Investment Options. In addition, no partial withdrawal or transfer may be made from your Fixed Option within 30 days of the Contract Date. If your withdrawal leaves you with a 57 Net Contract Value of less than $1,000, we have the right, at our option, to terminate your Contract and send you the withdrawal proceeds. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. Payments or transfers from the Fixed Option may be delayed, as described under ADDITIONAL INFORMATION--Timing of Payments and Transactions section in this Prospectus; any amount delayed will, as long as it is held under the Fixed Option, continue to earn interest at the Guaranteed Interest Rate then in effect until that Guarantee Term has ended, and the minimum guaranteed interest rate of 3% thereafter, unless state law requires a greater rate be paid. Fixed Option After the first Contract Anniversary, you may make one transfer or partial withdrawal from your Fixed Option during any Contract Year, except as provided under the dollar cost averaging, earnings sweep and pre-authorized withdrawal programs. You may make one transfer or one partial withdrawal within the 30 days after the end of each Contract Anniversary. Normally, you may transfer or withdraw up to one-third (33 1/3%) of your Fixed Option Value in any given Contract Year. However, in consecutive Contract Years you may transfer or withdraw up to one-third (33 1/3%) of your Fixed Option Value in one year; you may transfer or withdraw up to one-half (50%) of your remaining Fixed Option Value in the next year; and you may transfer or withdraw up to the entire amount (100%) of any remaining Fixed Option Value in the third year. In addition, if, as a result of a partial withdrawal or transfer, the Fixed Option Value is less than $500, we have the right, at our option, to transfer the entire remaining amount to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. We currently waive the restrictions that limits transfers from the Fixed Option to one transfer within the 30 days after the end of each Contract Anniversary. We also currently waive the limitations on the maximum amount you may transfer from the Fixed Option in any given Contract year. Our current procedure is to process requests for transfers from the Fixed Option that are within the maximum number of allowable transfers among the Investment Options each calendar year; i.e. as of January 1, 2002, transfers are limited to 25 for each calendar year. We reserve the right to discontinue this waiver program at any time. Transfers from the Fixed Option under the DCA program are also currently subject to a minimum duration of six months. 58 TERMS USED IN THIS PROSPECTUS Some of the terms we've used in this Prospectus may be new to you. We've identified them in the Prospectus by capitalizing the first letter of each word. You'll find an explanation of what they mean below. If you have any questions, please ask your registered representative or call us at 1-800-722-2333. Account Value - The amount of your Contract Value allocated to a specified Variable Investment Option or the Fixed Option. 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 - The date specified in your Contract, or the date you later elect, if any, for the start of annuity payments if the Annuitant (or Joint Annuitants) is (or are) still living and your Contract is in force; or if earlier, the date that annuity payments actually begin. Annuity Option - Any one of the income options available for a series of payments after your Annuity Date. Beneficiary - A person who may have a right to receive the death benefit payable upon the death of the Annuitant or a Contract Owner prior to the Annuity Date, or may have a right to receive remaining guaranteed annuity payments, if any, if the Annuitant dies after the Annuity Date. Business Day - Any day on which the value of an amount invested in a Variable Investment Option is required to be determined, which currently includes each day that the New York Stock Exchange is open for trading and our administrative offices are open. The New York Stock Exchange and our administrative offices are closed on weekends and on the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day and Christmas Day, and the Friday before New Year's Day, July Fourth or Christmas Day if that holiday falls on a Saturday, the Monday following New Year's Day, July Fourth or Christmas Day if that holiday falls on a Sunday, unless unusual business conditions exist, such as the ending of a monthly or yearly accounting period. 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 SAI. 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. Contingent Owner - A person, named in your Contract, who will succeed to the rights as 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 Years, Contract Semiannual Periods, Contract Quarters and Contract Months are measured from this date. 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 only available on certain Qualified Contracts. Contract Owner, Owner, Policyholder, you, or your - Generally, a person who purchases a Contract and makes the Investments. A Contract Owner has all rights in the Contract, including the right to make withdrawals, designate and change beneficiaries, transfer amounts among Investment Options, and designate an Annuity Option. If your Contract names Joint Owners, both Joint Owners are Contract Owners and share all such rights. If there are Joint Owners, the Contract will be owned as Joint Tenants With Right of Survivorship and not as Tenants in Common. Contract Value - As of the end of any Business Day, the sum of your Variable Account Value, Fixed Option Value, and any Loan Account Value. Contract Year - A year that starts on the Contract Date or on a Contract Anniversary. Earnings - As of the end of any Business Day, your Earnings equal your Contract Value less your aggregate Investments, which are reduced by withdrawals of prior Investments. Fixed Option - If you allocate all or part of your Investments or Contract Value to the Fixed Option, such amounts are held in our General Account and receive the Guaranteed Interest Rates declared periodically, but not less than an annual rate of 3%. Fixed Option Value - The aggregate amount of your Contract Value allocated to the Fixed Option. Fund - Pacific Select Fund. General Account - Our General Account consists of all of our assets other than those assets allocated to Separate Account A or to any of our other separate accounts. Guaranteed Interest Rate - The interest rate guaranteed at the time of allocation (or rollover) for the Guarantee Term on amounts allocated to the Fixed Option. Each Guaranteed Interest Rate is expressed as an annual rate and interest is accrued daily. Each rate will not be less than an annual rate of 3%. Guarantee Term - The period during which an amount you allocate to the Fixed Option earns a Guaranteed Interest Rate. This term is up to one-year for the Fixed Option. Investment - An amount paid to us by or on behalf of a Contract Owner as consideration for the benefits provided under the Contract. Investment Option - A Subaccount or the Fixed Option offered under the Contract. Joint Annuitant - If your Contract is a Non-Qualified Contract, you may name two Annuitants, called "Joint Annuitants," in your application for your Contract. Special restrictions apply for Qualified Contracts. Loan Account - The Account in which the amount equal to the principal amount of a loan and any interest accrued is held to secure any Contract Debt. Loan Account Value - The amount, including any interest accrued, held in the Loan Account to secure any Contract Debt. Net Contract Value - Your Contract Value less Contract Debt. Non-Qualified Contract - A Contract other than a Qualified Contract. Policyholder - The Contract Owner. Portfolio - A separate portfolio of the Fund in which a Subaccount invests its assets. Primary Annuitant - The individual that is named in your Contract, the events in the life of whom are of primary importance in affecting the timing or amount of the payout under the Contract. 59 TERMS USED IN THIS PROSPECTUS Purchase Payment ("Premium Payment") ("Investment") - An amount paid to us by or on behalf of a Contract Owner as consideration for the benefits provided under the Contract. Qualified Contract - A Contract that qualifies under the Code as an individual retirement annuity or account ("IRA"), or form thereof, 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, 403, 408, 408A or 457 of the Code. SEC - Securities and Exchange Commission. Separate Account A (the "Separate Account") - A separate account of ours registered as a unit investment trust under the Investment Company Act of 1940, as amended (the "1940 Act"). 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 are paid), the amount annuitized to a variable annuity determines the amount of your first variable annuity payment and the number of Annuity Units credited to your annuity in each Subaccount.The value of Subaccount Annuity Units, like the value of Subaccount Units, is expected to fluctuate daily, as described in the definition of Unit Value. Subaccount Unit - Before your Annuity Date, each time you allocate an amount to a Subaccount, your Contract is credited with a number of Subaccount Units in that Subaccount.These Units are used for accounting purposes to measure your Account Value in that Subaccount.The value of Subaccount Units is expected to fluctuate daily, as described in the definition of Unit Value. 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. Fluctuations also reflect charges against the Separate Account. Changes in Subaccount Annuity Unit Values also reflect an additional factor that adjusts Subaccount Annuity Unit Values to offset our Annuity Option Table's implicit assumption of an annual investment return of 5%.The effect of this assumed investment return is explained in detail in the SAI. Unit Value of a Subaccount Unit or Subaccount Annuity Unit on any Business Day is measured 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 (also called a Variable Account). 60 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Page ---- PERFORMANCE................................................................ 1 Total Returns............................................................ 1 Yields................................................................... 2 Performance Comparisons and Benchmarks................................... 3 Separate Account Performance............................................. 4 DISTRIBUTION OF THE CONTRACTS.............................................. 8 Pacific Select Distributors, Inc......................................... 8 THE CONTRACTS AND THE SEPARATE ACCOUNT..................................... 9 Calculating Subaccount Unit Values....................................... 9 Variable Annuity Payment Amounts......................................... 9 Corresponding Dates...................................................... 11 Age and Sex of Annuitant................................................. 11 Systematic Transfer Programs............................................. 12 Pre-Authorized Withdrawals............................................... 14 Death Benefit............................................................ 14 1035 Exchanges........................................................... 14 Safekeeping of Assets.................................................... 14 FINANCIAL STATEMENTS....................................................... 15 INDEPENDENT AUDITORS....................................................... 15
61 APPENDIX A: STATE LAW VARIATIONS Making Your Investments ("Purchase Payments") If your contract is delivered in the state of Massachusetts, you may only make additional Investments during your first Contract Year. Withdrawal Charge Variations to the Withdrawal Charge section. If your Contract was delivered in one of the following states: Massachusetts Texas We cannot waive any withdrawal charge on full or partial withdrawals if the Annuitant has been diagnosed with a medically determinable condition that results in a life expectancy of twelve (12) months or less and/or has been confined to an accredited nursing home. Annuitization If your contract is delivered in the state of Texas, the Conversion Amount annuitized must be at least $2,000. Default Annuity Date and Options If you contract was delivered in the state of Texas, the minimum net amount to be converted must be at least $2,000 or result in an income stream that is less than $20 a month and your initial annuity payment must be at least $20. Death Benefits If, at the time your application is completed, you purchase the optional Premier Death Benefit Rider (PDBR) and your Contract was delivered in the following states: Texas Washington the Death Benefit Amount stated in the Optional Premier Death Benefit Rider sections are replaced with the following: The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments less an adjusted amount for each withdrawal increased at an effective annual rate of 5% to that day, subject to a maximum of two times the difference between the aggregate Purchase Payments and withdrawals, including withdrawal charges. The 5% effective annual rate of growth will take into account the timing of when each Purchase Payments and withdrawal occurred by applying a daily factor of 1.00013368 to each day's balance. The 5% effective annual rate of growth will stop accruing as of the earlier of: . the Contract Anniversary following the date the Annuitant reaches his or her 80th birthday, or . the date of death of the sole Annuitant, or . the Annuity Date. To determine the adjusted amount for each withdrawal we: . divide the amount of each withdrawal, including withdrawal charges, if any, by your Contract Value immediately before that withdrawal, and . then multiply the result by your Death Benefit Amount (as described above), immediately before that withdrawal. 62 APPENDIX A: STATE LAW VARIATIONS (Continued) Optional Withdrawals Variations to the Optional Withdrawals section. If your Contract was delivered in Texas and your partial withdrawal leaves you with a Net Contract Value of less than $500, we have the right, at our option to terminate your Contract and send you the withdrawal proceeds. Right to Cancel ("Free Look") Variations to the length of the Free Look period. In most states, the Free Look period is a 10-day period beginning on the day you receive your Contract. If your Contract was delivered in one of the following states, the Free Look period is as specified below: Idaho (20 days) North Dakota (20 days) In addition, if you reside in California and are age 60 or older on your Contract Date, the Free Look period is 30 days. There may be extended Free Look periods in some states for replacement business. Please consult with your registered representative if you have any questions regarding your state's Free Look period. 63 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- To receive a current copy of the Pacific Innovations SAI without charge, call (800) 722-2333 or complete the following and send it to: Pacific Life Insurance Company Post Office Box 7187 Pasadena, CA 91109-7187 Name _________________________ Address ______________________ City _________________________ State ______ Zip __________ PACIFIC INNOVATIONS WHERE TO GO FOR MORE INFORMATION The Pacific You'll find more information about the Pacific Innovations Innovations variable annuity contract and Separate variable annuity Account A in the Statement of Additional Information Contract is (SAI) dated May 1, 2002. offered by Pacific Life Insurance Company, 700 The SAI has been filed with the SEC and is considered Newport Center to be part of this Prospectus because it's incorporated Drive. P.O. Box by reference. You'll find the table of contents for the 9000, Newport SAI on page 61 of this Prospectus. Beach, California 92660. You can get a copy of the SAI at no charge by calling or writing to us, or by contacting the SEC. The SEC may If you have any charge you a fee for this information. questions about the Contract, please ask your registered representative or contact us. --------------------------------------------------------- How to contact us Call or write to us at: Pacific Life Insurance Company P.O. Box 7187 Pasadena, California 91109-7187 1-800-722-2333 6 a.m. through 5 p.m. Pacific time Send Investments, other payments and application forms to the following address: By mail Pacific Life Insurance Company P.O. Box 100060 Pasadena, California 91189-0060 By overnight delivery service Pacific Life Insurance Company 1111 South Arroyo Parkway, Suite 205 Pasadena, California 91105 --------------------------------------------------------- How to contact the Public Reference Section of the SEC SEC Washington, D.C. 20549-6009 1-800-SEC-0330 Internet: www.sec.gov PACIFIC INNOVATIONS SELECT PROSPECTUS MAY 1, 2002 Pacific Innovations Select is an individual flexible premium deferred variable annuity contract issued by Pacific Life Insurance Company. This Contract is This Prospectus provides information you should know not available in before buying a Contract. It's accompanied by a current all states. This Prospectus for the Pacific Select Fund, the Fund that Prospectus is not provides the underlying Portfolios for the Variable an offer in any Investment Options offered under the Contract. The state or Variable Investment Options are funded by Separate jurisdiction where Account A of Pacific Life. Please read both we're not legally Prospectuses carefully, and keep them for future permitted to offer reference. the Contract. Here's a list of all the Investment Options available The Contract is under your Contract: described in detail in this Prospectus VARIABLE INVESTMENT OPTIONS and its Statement of Additional Blue Chip International Value Information (SAI). The Pacific Select Aggressive Growth Capital Opportunities Fund is described in its Prospectus Emerging Markets Mid-Cap Growth and its SAI. No one has the right to Diversified Research Global Growth describe the Contract or the Small-Cap Equity Equity Index Pacific Select Fund any differently International Large-Cap Small-Cap Index than they have been described in these I-Net Tollkeeper SM Real Estate documents. (formerly called REIT) You should be aware Financial Services Inflation Managed that the Securities and Exchange Health Sciences Managed Bond Commission (SEC) has not reviewed Technology Money Market the Contract and does not guarantee Telecommunications High Yield Bond that the information in this Multi-Strategy Equity Income Prospectus is accurate or Large-Cap Core Research complete. It's a (formerly called criminal offense to Equity Income) Equity say otherwise. Strategic Value Aggressive Equity This Contract is not a deposit or Growth LT Large-Cap Value obligation of, or guaranteed or Focused 30 endorsed by, any bank. It's not Mid-Cap Value federally insured by the Federal FIXED OPTION Deposit Insurance Corporation, the Fixed Federal Reserve Board, or any other DCA Plus Fixed government agency. Investment in a You'll find more information about the Contract and Contract involves Separate Account A in the SAI dated May 1, 2002. The risk, including SAI has been filed with the SEC and is considered to be possible loss of part of this Prospectus because it's incorporated by principal. reference. You'll find a table of contents for the SAI on page 64 of this Prospectus. You can get a copy of the SAI without charge by calling or writing to Pacific Life. You can also visit the SEC's website at www.sec.gov, which contains the SAI, material incorporated into this Prospectus by reference, and other information about registrants that file electronically with the SEC. YOUR GUIDE TO THIS PROSPECTUS An Overview of Pacific Innovations Select 3 -------------------------------------------------------------------------- Your Investment Options 11 Your Variable Investment Options 11 Variable Investment Option Performance 13 Your Fixed Option and the DCA Plus Fixed Option 13 -------------------------------------------------------------------------- Purchasing Your Contract 13 How to Apply for Your Contract 13 Purchasing a Death Benefit Rider (Optional) 14 Purchasing the Earnings Enhancement Guarantee (EEG) Rider (Optional) 14 Purchasing the Guaranteed Income Advantage (GIA) Rider (Optional) 14 Purchasing the Guaranteed Protection Advantage (GPA) Rider (Optional) 14 Information About Optional Riders, IRAs and Other Qualified Contracts 16 Making Your Investments ("Purchase Payments") 16 -------------------------------------------------------------------------- How Your Investments Are Allocated 17 Choosing Your Investment Options 17 Portfolio Optimization 18 Investing in Variable Investment Options 20 When Your Investment is Effective 20 Transfers 20 -------------------------------------------------------------------------- Charges, Fees and Deductions 23 Withdrawal Charge 23 Premium Taxes 25 Annual Fee 26 Waivers and Reduced Charges 26 Mortality and Expense Risk Charge 26 Administrative Fee 27 Earnings Enhancement Guarantee (EEG) Annual Charge (Optional Rider) 27 Guaranteed Income Advantage (GIA) Annual Charge (Optional Rider) 27 Guaranteed Protection Advantage (GPA) Annual Charge (Optional Rider) 28 Expenses of the Fund 28 -------------------------------------------------------------------------- Retirement Benefits and Other Payouts 28 Selecting Your Annuitant 28 Annuitization 28 Choosing Your Annuity Date 28 Default Annuity Date and Options 30 Choosing Your Annuity Option 30 Your Annuity Payments 33 Death Benefits 33 -------------------------------------------------------------------------- Withdrawals 39 Optional Withdrawals 39 Tax Consequences of Withdrawals 41 Right to Cancel ("Free Look") 41 -------------------------------------------------------------------------- Pacific Life and the Separate Account 41 Pacific Life 41 Separate Account A 42 Financial Highlights 43 -------------------------------------------------------------------------- Federal Tax Status 46 Taxes Payable by Contract Owners: General Rules 46 Qualified Contracts 48 Loans 51 Withholding 53 Impact of Federal Income Taxes 54 Taxes on Pacific Life 54 -------------------------------------------------------------------------- Additional Information 54 Voting Rights 54 Changes to Your Contract 55 Changes to All Contracts 55 Inquiries and Submitting Forms and Requests 56 Telephone and Electronic Transactions 57 Electronic Delivery Authorization 57 Timing of Payments and Transactions 58 Confirmations, Statements and Other Reports to Contract Owners 58 Replacement of Life Insurance or Annuities 58 Financial Statements 59 -------------------------------------------------------------------------- The General Account 59 General Information 59 Guarantee Terms 59 Withdrawals and Transfers 60 -------------------------------------------------------------------------- Terms Used in This Prospectus 62 -------------------------------------------------------------------------- Contents of the Statement of Additional Information 64 -------------------------------------------------------------------------- Appendix A: State Law Variations 65 -------------------------------------------------------------------------- Where to Go for More Information Back Cover
2 AN OVERVIEW OF PACIFIC INNOVATIONS SELECT This overview tells you some key things you should know about your Contract. It's designed as a summary only - please read this Prospectus, your Contract and the Statement of Additional Information for more detailed information. Some states have different rules about how annuity contracts are described or administered. These rules are reflected in your Contract, or in endorsements or supplements to your Contract. The terms of your Contract, or of any endorsement or supplement, prevail over what's in this Prospectus. In this Prospectus, you and your mean the Contract Owner or Policyholder. Pacific Life, we, us and our refer to Pacific Life Insurance Company. Contract means a Pacific Innovations Select variable annuity contract, unless we state otherwise. --------------------------------------------------------- Pacific Innovations Pacific Innovations Select is an annuity contract Select Basics between you and Pacific Life Insurance Company. An annuity contract This Contract is designed for long-term financial may be appropriate planning. It allows you to invest money on a tax- if you're looking deferred basis for retirement or other goals, and to for retirement receive income in a variety of ways, including a series income or you want of income payments for life or for a specified period to meet other long- of years. term financial objectives. Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified Contract with "after-tax" This Contract may dollars. You buy a Qualified Contract under a qualified not be the right retirement or pension plan, or an individual retirement one for you if you annuity or account (IRA), or form thereof. need to withdraw money for short- Pacific Innovations Select is a variable annuity, which term needs, because means that the value of your Contract fluctuates withdrawal charges depending on the performance of the Investment Options and tax penalties you choose. The Contract allows you to choose how often for early you make Investments ("Purchase Payments") and how much withdrawal may you add each time. apply. Your Right to Cancel ("Free Look") You should consider During the Free Look period, you have the right to the Contract's cancel your Contract and return it to us or to your investment and registered representative for a refund. The amount income benefits, as refunded may be more or less than the Investments well as its costs. you've made, depending on the state where you signed your application and the kind of Contract you buy. 3 AN OVERVIEW OF PACIFIC INNOVATIONS SELECT --------------------------------------------------------- The Accumulation The accumulation phase begins on your Contract Date and Phase continues until your Annuity Date. During the accumulation phase, you can put money in your Contract The Investment by making investments, and choose Investment Options in Options you choose which to allocate them. You can also take money out of and how they your Contract by making a withdrawal. perform will affect the value of your Investments ("Purchase Payments") Contract during the Your initial Investment must be at least $10,000 for a accumulation phase, Non-Qualified Contract and at least $2,000 for a as well as the Qualified Contract. Additional Investments must be at amount of your least $250 for a Non-Qualified Contract and $50 for a annuity payments Qualified Contract. We also call your Investments during the income "Purchase Payments". phase if you choose a variable annuitization payout. Investment Options You can ask your You can choose from 33 Variable Investment Options registered (also called Subaccounts), each of which invests in a representative to corresponding Portfolio of the Pacific Select Fund. help you choose the We're the investment adviser for the Pacific Select right Investment Fund. We oversee the management of all the Fund's Options for your Portfolios and manage two of the Portfolios directly. goals and risk We've retained other portfolio managers to manage the tolerance. other Portfolios. The value of each Portfolio will fluctuate with the value of the investments it holds, You'll find more and returns are not guaranteed. about the Investment Options You can also choose from two Fixed Options that earn a starting on page guaranteed rate of interest of at least 3% annually; 11. the Fixed Option and the DCA Plus Fixed Option when you elect DCA Plus. We allocate your Investments to the Investment Options you choose. The value of your Contract will fluctuate during the accumulation phase depending on the Investment Options you've chosen. You bear the investment risk of any Variable Investment Options you choose. Transferring among Investment Options You'll find more You can transfer among Investment Options any time, about transfers and subject to certain limitations, until your Annuity Date transfer without paying any current income tax. As of January 1, limitations 2002, and each calendar year thereafter, transfers are starting on page limited to 25 for each calendar year. You can also make 20. automatic transfers by enrolling in our dollar cost averaging, portfolio rebalancing, or earnings sweep programs. Some restrictions apply to transfers to and from the Fixed Option. Withdrawals You can make full and partial withdrawals to supplement You'll find more your income or for other purposes. You can withdraw a about withdrawals certain amount each year without paying a withdrawal starting on page charge, but you may pay a withdrawal charge if you 39. withdraw Investments that are less than four years old. Some restrictions apply to making withdrawals from the Fixed Option. In general, you may have to pay tax on withdrawals or other distributions from your Contract. If you're under age 59 1/2, a 10% federal penalty tax may also apply to withdrawals. --------------------------------------------------------- The Income Phase The income phase of your Contract begins on your Annuity Date. Generally, you can choose to surrender your Contract and receive a single payment or you can You'll find more annuitize your Contract and receive a series of income about annuitization payments. starting on page 28. You can choose fixed or variable annuity payments, or a combination of both, for life or for a specified period of years. Variable annuity payments may not be available in all states. You can choose monthly, quarterly, semiannual or annual payments. We'll make the income payments to your designated payee. Income distributions are always taxed to the owner. 4 If you choose variable annuity payments, the amount of the payments will fluctuate depending on the performance of the Variable Investment Options you choose. After your Annuity Date, if you choose variable annuity payments, you can exchange your Subaccount Annuity Units among the Variable Investment Options up to four times in any 12-month period. --------------------------------------------------------- The Death Benefit The Contract provides a death benefit upon the first death of an Owner or the death of the last surviving Annuitant, whichever occurs first, during the You'll find more accumulation phase. Death benefit proceeds are payable about the death when we receive proof of death and payment instructions benefit starting on in proper form. To whom we pay a death benefit, and how page 33. we calculate the amount of the death benefit depends on who dies first and the type of Contract you own. --------------------------------------------------------- Stepped-Up Death Benefit (SDBR) and Premier Death Optional Riders Benefit (PDBR) Riders The Stepped-Up Death Benefit Rider (SDBR) and Premier Optional riders are Death Benefit Rider (PDBR) offer the potential for a subject to larger death benefit. You can only buy one of the availability. Ask riders and you can only buy it when you buy your your registered Contract. You cannot buy both riders and you cannot buy representative a rider after you buy your Contract. about current status. Earnings Enhancement Guarantee (EEG) Rider The Earnings The optional Earnings Enhancement Guarantee (EEG) Rider Enhancement provides for an additional amount ("EEG Amount") to be Guarantee (EEG) included in the death benefit proceeds when such Rider, EEG Amount proceeds become payable as a result of the Annuitant's and EEG Charge are death or first death of an Owner who is also an called the Annuitant. You may buy the EEG Rider on the Contract Guaranteed Earnings Date or on the first Contract Anniversary. For Enhancement (GEE) Contracts issued prior to May 1, 2001, the EEG Rider Rider, GEE Amount may be purchased on any Contract Anniversary through and GEE Charge, December 31, 2002. respectively in the Contract's Rider. If you buy the EEG Rider within 30 days after the Contract Date or Contract Anniversary, we will make the effective date of the EEG Rider to coincide with that Contract Date or Contract Anniversary. Guaranteed Income Advantage (GIA) Rider The Guaranteed Income Advantage Rider ("GIA Rider") offers a guaranteed income advantage annuity option. You may buy the GIA Rider on the Contract Date or on any Contract Anniversary. Guaranteed Protection Advantage (GPA) Rider The optional Guaranteed Protection Advantage Rider provides for an additional amount that may be added to your Contract Value when an asset allocation program, established and maintained by us for this Rider, is used for a 10-year period (the "Term"). The Term begins on the Effective Date of the Rider. Your entire Contract Value must be invested in an asset allocation program during the entire Term for the additional amount to be added to your Contract. If you use our DCA Plus program in conjunction with such an asset allocation program, you will be considered to have met this requirement. Subject to certain limitations, you can buy the Guaranteed Protection Advantage Rider at any time during the Contract Year. The Guaranteed Protection Advantage Rider may not be available. Ask your registered representative about its current availability. 5 AN OVERVIEW OF PACIFIC INNOVATIONS SELECT This section of the overview explains the fees and expenses associated with your Pacific Innovations Select Contract. For information . Contract Expenses are expenses that we deduct from about how Separate your Contract. These expenses are fixed under the Account A and Fund terms of your Contract. Premium taxes may also apply expenses affect to your Contract. We generally charge premium taxes accumulation units, when you annuitize your Contract, but there may be see Financial other times when we charge them to your Contract Highlights on page instead. Please see your Contract for details. 43. . Separate Account A Annual Expenses are expenses that we deduct from the assets of each Variable Investment Option. They are guaranteed not to increase under the terms of your Contract. . Pacific Select Fund Annual Expenses affect you if you choose a Variable Investment Option because they reduce Portfolio returns. They can vary from year to year. They are not fixed and are not part of the terms of your Contract. ----------------------------------------------------------------- Contract Expenses Sales charge on Investments none Maximum withdrawal charge, as a percentage of Investments 7.0%/1/ Withdrawal transaction fee (currently waived) $15.00/2/ Transfer fee (currently waived) $15.00/3/ Annual Fee $30.00/4/ Earnings Enhancement Guarantee (EEG) Rider Annual Charge (Optional Rider) 0.25%/5/ (calculated as a percentage of Contract Value) Guaranteed Income Advantage (GIA) Rider Annual Charge (Optional Rider) 0.30%/6/ (calculated as a percentage of Contract Value) Guaranteed Protection Advantage (GPA) Annual Charge (Guaranteed Protection Charge) (Optional Rider) 0.10%/7/ (calculated as a percentage of Contract Value)
--------------------------------------------------------------------------- Without With Stepped-Up With Premier Rider Death Benefit Rider Death Benefit Rider --------------------------------------------------------------------------- Separate Account A Mortality and Expense Annual Expenses Risk Charge/8/ 1.40% 1.40% 1.40% (as a percentage of Administrative Fee/8/ 0.25% 0.25% 0.25% the average daily Death Benefit Rider Account Value) Charge/9/ none 0.20% 0.35% ----- ----- ----- Total Separate Account A Annual Expenses 1.65% 1.85% 2.00% ----- ----- -----
/1/ The withdrawal charge may not apply or may be reduced under certain circumstances. See CHARGES, FEES AND DEDUCTIONS and WITHDRAWALS. /2/ In the future, we may charge a fee of up to $15 for any withdrawal over 15 that you make in a Contract Year. See WITHDRAWALS - Optional Withdrawals. /3/ In the future, we may charge a fee of up to $15 for any transfer over 15 that you make in a Contract Year. See HOW YOUR INVESTMENTS ARE ALLOCATED - Transfers. /4/ We deduct an Annual Fee on each Contract Anniversary up to your Annuity Date and when you make a full withdrawal if the Contract Value on these days is less than $50,000 after deducting any outstanding loan and interest (your Net Contract Value). See CHARGES, FEES AND DEDUCTIONS. /5/ If you buy the EEG Rider (subject to availability), we deduct this charge proportionately from your Investment Options on each Contract Anniversary following the date you purchase the Rider, and when you make a full withdrawal, if the EEG Rider is in effect on that date. See CHARGES, FEES AND DEDUCTIONS. /6/ If you buy the Guaranteed Income Advantage Rider (GIA Rider), which is subject to availability, we deduct this charge on each Contract Anniversary date and the Annuity Date, and when you make a full withdrawal, if the GIA Rider is in effect on that date, or when you terminate the GIA Rider. /7/ If you buy the Guaranteed Protection Advantage Rider (subject to availability), we deduct this charge from your Investment Options on each Contract Anniversary following the Effective Date of the Rider during the term of the Rider and while the Rider is in effect. If the Rider is terminated for reasons other than death or annuitization, this charge will be deducted on the effective date of termination. /8/ This is an annual rate. The daily rate is calculated by dividing the annual rate by 365. /9/ If you buy the Stepped-Up Death Benefit Rider or the Premier Death Benefit Rider (which is subject to availability), we add this charge to the Mortality and Expense Risk Charge until your Annuity Date. See CHARGES, FEES AND DEDUCTIONS. 6 --------------------------------------------------------- Pacific Select Fund The Pacific Select Fund pays advisory fees and other Annual Expenses expenses. These are deducted from the assets of the Fund's Portfolios and may vary from year to year. They are not fixed and are not part of the terms of your You'll find more Contract. If you choose a Variable Investment Option, about the Pacific these fees and expenses affect you because they reduce Select Fund Portfolio returns. starting on page 11, and in the Advisory Fee Fund's Prospectus, Pacific Life is the investment adviser to the Fund. The which accompanies Fund pays an advisory fee to us for these services. The this Prospectus. table below shows the advisory fee as an annual percentage of each Portfolio's average daily net assets. Other Expenses The table below shows the advisory fee and fund expenses as an annual percentage of each Portfolio's average daily net assets, based on the year 2001 unless otherwise noted. To help limit Fund expenses, effective July 1, 2000 Pacific Life contractually agreed to waive all or part of its investment advisory fees or otherwise reimburse each Portfolio for operating expenses (including organizational expenses, but not including advisory fees, additional costs associated with foreign investing and extraordinary expenses) that exceed an annual rate of 0.10% of its average daily net assets. Such waiver or reimbursement is subject to repayment to us to the extent such expenses fall below the 0.10% expense cap in future years. Any amounts repaid to us will have the effect of increasing such expenses of the Portfolio, but not above the 0.10% expense cap. For each Portfolio, our right to repayment of amounts waived and/or reimbursed is limited to amounts that do not cause such expenses to exceed the new 0.10% expense cap and, except for Portfolios that started on or after October 2, 2000, that do not exceed the previously established 0.25% expense cap with respect to expenses incurred through December 31, 2001. There is no guarantee that Pacific Life will continue to cap expenses after December 31, 2002. In 2001, Pacific Life reimbursed $42,185 to the Aggressive Growth Portfolio, $32,032 to the Financial Services Portfolio, $4,249 to the Health Sciences Portfolio, $28,084 to the Technology Portfolio, $24,277 to the Telecommunications Portfolio, $12,603 to the Capital Opportunities Portfolio, $9,417 to the Mid-Cap Growth Portfolio and $59,355 to the Global Growth Portfolio. In 2001, Pacific Life recouped $13,202 from the I-Net Tollkeeper Portfolio, $16,714 from the Strategic Value Portfolio, $5,499 from the Focused 30 Portfolio and $27,505 from the Small-Cap Index Portfolio for adviser's reimbursements in 2000 under the expense limitation agreement.
------------------------------------------------------------------------------------ Less Advisory Other 12b-1 Total adviser's Total net Portfolio fee expenses amounts+ expenses reimbursement expenses ------------------------------------------------------------------------------------ As an annual % of average daily net assets Blue Chip/1/ 0.95 0.05 0.04 1.04 -- 1.04 Aggressive Growth/1/ 1.00 0.18 0.06 1.24 (0.08) 1.16 Emerging Markets/1/ 1.10 0.22 -- 1.32 -- 1.32 Diversified Research/1/ 0.90 0.04 0.02 0.96 -- 0.96 Small-Cap Equity/1/ 0.65 0.05 -- 0.70 -- 0.70 International Large-Cap 1.05 0.09 -- 1.14 -- 1.14 I-Net Tollkeeper/2/ 1.40 0.07 -- 1.47 -- 1.47 Financial Services/1/ 1.10 0.20 0.04 1.34 (0.09) 1.25 Health Sciences/1/ 1.10 0.11 0.03 1.24 (0.01) 1.23 Technology 1.10 0.21 -- 1.31 (0.11) 1.20 Telecommunications 1.10 0.29 -- 1.39 (0.18) 1.21 Multi-Strategy/1/ 0.65 0.04 0.01 0.70 -- 0.70 Large-Cap Core/1/ 0.65 0.04 0.02 0.71 -- 0.71 (formerly called Equity Income) Strategic Value 0.95 0.10 -- 1.05 -- 1.05 Growth LT/1/ 0.75 0.04 0.03 0.82 -- 0.82 Focused 30/1/ 0.95 0.11 -- 1.06 -- 1.06 ------------------------------------------------------------------------------------
7 AN OVERVIEW OF PACIFIC INNOVATIONS SELECT
------------------------------------------------------------------------------------- Less Advisory Other 12b-1 Total adviser's Total net Portfolio fee expenses amounts+ expenses reimbursement expenses ------------------------------------------------------------------------------------- Mid-Cap Value/1/ 0.85 0.04 0.11 1.00 -- 1.00 International Value 0.85 0.08 -- 0.93 -- 0.93 Capital Opportunities/1/ 0.80 0.13 0.01 0.94 (0.01) 0.93 Mid-Cap Growth/1/ 0.90 0.12 0.01 1.03 (0.02) 1.01 Global Growth/1/ 1.10 1.04 0.01 2.15 (0.35) 1.80 Equity Index 0.25 0.04 -- 0.29 -- 0.29 Small-Cap Index 0.50 0.07 -- 0.57 -- 0.57 Real Estate 1.10 0.05 -- 1.15 -- 1.15 (formerly called REIT) Inflation Managed/1/ 0.60 0.07 -- 0.67 -- 0.67 Managed Bond/1/ 0.60 0.05 -- 0.65 -- 0.65 Money Market 0.33 0.03 -- 0.36 -- 0.36 High Yield Bond/1/ 0.60 0.04 -- 0.64 -- 0.64 Equity Income/3/ 0.95 0.15 -- 1.10 (0.05) 1.05 Research/3/ 1.00 0.12 -- 1.12 (0.02) 1.10 Equity 0.65 0.05 -- 0.70 -- 0.70 Aggressive Equity/1/ 0.80 0.07 0.04 0.91 -- 0.91 Large-Cap Value/1/ 0.85 0.03 0.02 0.90 -- 0.90 -------------------------------------------------------------------------------------
/1/ Total adjusted net expenses for these Portfolios, after deduction of an offset for custodian credits and the 12b-1 recapture were: 1.00% for the Blue Chip Portfolio, 1.10% for the Aggressive Growth Portfolio, 1.31% for the Emerging Markets Portfolio, 0.94% for the Diversified Research Portfolio, 0.69% for the Small-Cap Equity Portfolio, 1.20% for the Financial Services Portfolio, 1.20% for the Health Sciences Portfolio, 0.69% for the Multi-Strategy Portfolio, 0.69% for the Large-Cap Core Portfolio, 0.79% for the Growth LT Portfolio, 1.05% for the Focused 30 Portfolio, 0.89% for the Mid-Cap Value Portfolio, 0.91% for the Capital Opportunities Portfolio, 1.00% for the Mid-Cap Growth Portfolio, 1.76% for the Global Growth Portfolio, 0.66% for the Inflation Managed Portfolio, 0.64% for the Managed Bond Portfolio, 0.63% for the High Yield Bond Portfolio, 0.87% for the Aggressive Equity Portfolio and 0.88% for the Large-Cap Value Portfolio. /2/ Effective January 1, 2002, advisory fee is reduced from the annual rate of 1.50% of average daily net assets to 1.40%. /3/ Expenses are estimated. There were no actual advisory fees or expenses for these Portfolios in 2001 because the Portfolios started after December 31, 2001. + The Fund has a brokerage enhancement 12b-1 plan under which brokerage transactions, subject to best price and execution, may be placed with certain broker-dealers in return for credits, cash or other compensation ("recaptured commissions"). While a Portfolio pays the cost of brokerage when it buys or sells a portfolio security, there are no fees or charges to the fund under the plan. Recaptured commissions may be used to promote and market fund shares and the distributor may therefore defray expenses for distribution that it might otherwise incur. The SEC staff requires that the amount of recaptured commissions be shown as an expense in the chart above. 8 --------------------------------------------------------- Examples The following table shows the expenses you would pay on each $1,000 you invested if, at the end of each period, you: annuitized your Contract; surrendered your Contract and withdrew the Contract Value, or did not annuitize or surrender, but left the money in your Contract. These examples assume the following: . the Contract Value starts at $65,000 . the Variable Investment Options have an annual return of 5% . the Annual Fee is deducted even when the Contract Value goes over $50,000 and a waiver would normally apply. . our current program to reimburse to Pacific Select Fund Portfolio expenses in excess of the 0.10% expense cap as described in Pacific Select Fund Annual Expenses will continue for at least 10 years. without Riders reflects the expenses you would pay if you did not buy any of the following optional Riders: Stepped-Up Death Benefit Rider (SDBR), Premier Death Benefit Rider (PDBR), Earnings Enhancement Guarantee (EEG) Rider, Guaranteed Income Advantage (GIA) Rider, and Guaranteed Protection Advantage (GPA) Rider, collectively referred to below as "Riders". Riders may be subject to availability. Ask your registered representative about their current status. with Riders reflects the maximum amount of expenses you would pay if you bought the optional combination of Riders whose cumulative expense totaled more than any other optional combination. These examples do not show past or future expenses. Your actual expenses in any year may be more or less than those shown here.
-------------------------------------------------------------------------------------------- Expenses if you did not Expenses if you Expenses if you annuitize or surrender, annuitized surrendered but left the money in your Contract ($) your Contract ($) your Contract ($) -------------------------------------------------------------------------------------------- Variable Account 1 yr 3 yrs 5 yrs 10 yrs 1 yrs 3 yrs 5 yrs 10 yrs 1 yrs 3 yrs 5 yrs 10 yrs -------------------------------------------------------------------------------------------- Blue Chip without Riders 90 84 143 302 90 120 143 302 27 84 143 302 with Riders 100 113 191 395 100 149 191 395 37 113 191 395 -------------------------------------------------------------------------------------------- Aggressive Growth without Riders 91 87 147 311 91 123 147 311 28 87 147 311 with Riders 101 116 196 404 101 152 196 404 38 116 196 404 -------------------------------------------------------------------------------------------- Emerging Markets without Riders 93 93 158 331 93 129 158 331 30 93 158 331 with Riders 103 122 206 421 103 158 206 421 40 122 206 421 -------------------------------------------------------------------------------------------- Diversified Research without Riders 90 82 140 296 90 118 140 296 27 82 140 296 with Riders 100 112 188 390 100 148 188 390 37 112 188 390 -------------------------------------------------------------------------------------------- Small-Cap Equity without Riders 87 74 127 271 87 110 127 271 24 74 127 271 with Riders 97 104 177 367 97 140 177 367 34 104 177 367 -------------------------------------------------------------------------------------------- International Large Cap without Riders 92 88 149 315 92 124 149 315 29 88 149 315 with Riders 102 117 198 407 102 153 198 407 39 117 198 407 -------------------------------------------------------------------------------------------- I-Net Tollkeeper without Riders 95 98 165 346 95 134 165 346 32 98 165 346 with Riders 105 127 213 435 105 163 213 435 42 127 213 435 -------------------------------------------------------------------------------------------- Financial Services without Riders 92 90 152 321 92 126 152 321 29 90 152 321 with Riders 102 119 201 412 102 155 201 412 39 119 201 412 -------------------------------------------------------------------------------------------- Health Sciences without Riders 92 90 152 321 92 126 152 321 29 90 152 321 with Riders 102 119 201 412 102 155 201 412 39 119 201 412 -------------------------------------------------------------------------------------------- Technology without Riders 92 90 152 321 92 126 152 321 29 90 152 321 with Riders 102 119 201 412 102 155 201 412 39 119 201 412 -------------------------------------------------------------------------------------------- Telecommunications without Riders 92 90 153 322 92 126 153 322 29 90 153 322 with Riders 102 119 201 413 102 155 201 413 39 119 201 413 -------------------------------------------------------------------------------------------- Multi-Strategy without Riders 87 74 127 271 87 110 127 271 24 74 127 271 with Riders 97 104 177 367 97 140 177 367 34 104 177 367 -------------------------------------------------------------------------------------------- Large-Cap Core (formerly called Equity Income) without Riders 87 74 127 271 87 110 127 271 24 74 127 271 with Riders 97 104 177 367 97 140 177 367 34 104 177 367 --------------------------------------------------------------------------------------------
9 AN OVERVIEW OF PACIFIC INNOVATIONS SELECT
------------------------------------------------------------------------------------------- Expenses if you did not Expenses if you Expenses if you annuitize or surrender, annuitized surrendered but left the money in your Contract ($) your Contract ($) your Contract ($) ------------------------------------------------------------------------------------------- Variable Account 1 yr 3 yrs 5 yrs 10 yrs 1 yr 3 yrs 5 yrs 10 yrs 1 yrs 3 yrs 5 yrs 10 yrs ------------------------------------------------------------------------------------------- Strategic Value without Riders 91 85 145 307 91 121 145 307 28 85 145 307 with Riders 101 115 194 399 101 151 194 399 38 115 194 399 ------------------------------------------------------------------------------------------- Growth LT without Riders 88 77 132 281 88 113 132 281 25 77 132 281 with Riders 98 107 181 376 98 143 181 376 35 107 181 376 ------------------------------------------------------------------------------------------- Focused 30 without Riders 91 85 145 307 91 121 145 307 28 85 145 307 with Riders 101 115 194 399 101 151 194 399 38 115 194 399 ------------------------------------------------------------------------------------------- Mid-Cap Value without Riders 89 80 137 291 89 116 137 291 26 80 137 291 with Riders 99 110 186 385 99 146 186 385 36 110 186 385 ------------------------------------------------------------------------------------------- International Value without Riders 91 82 139 295 91 118 139 295 28 82 139 295 with Riders 101 111 188 389 101 147 188 389 38 111 188 389 ------------------------------------------------------------------------------------------- Capital Opportunities without Riders 91 81 138 293 91 117 138 293 28 81 138 293 with Riders 101 111 187 387 101 147 187 387 38 111 187 387 ------------------------------------------------------------------------------------------- Mid-Cap Growth without Riders 90 84 143 302 90 120 143 302 27 84 143 302 with Riders 100 113 191 395 100 149 191 395 37 113 191 395 ------------------------------------------------------------------------------------------- Global Growth without Riders 98 106 179 373 98 142 179 373 35 106 179 373 with Riders 108 135 226 459 108 171 226 459 45 135 226 459 ------------------------------------------------------------------------------------------- Equity Index without Riders 83 62 107 230 83 98 107 230 20 62 107 230 with Riders 93 93 157 330 93 129 157 330 30 93 157 330 ------------------------------------------------------------------------------------------- Small-Cap Index without Riders 86 71 121 259 86 107 121 259 23 71 121 259 with Riders 96 101 171 356 96 137 171 356 33 101 171 356 ------------------------------------------------------------------------------------------- Real Estate (formerly called REIT) without Riders 92 88 150 316 92 124 150 316 29 88 150 316 with Riders 102 118 198 408 102 154 198 408 39 118 198 408 ------------------------------------------------------------------------------------------- Inflation Managed without Riders 87 73 126 268 87 109 126 268 24 73 126 268 with Riders 97 103 175 365 97 139 175 365 34 103 175 365 ------------------------------------------------------------------------------------------- Managed Bond without Riders 87 73 125 266 87 109 125 266 24 73 125 266 with Riders 97 103 174 363 97 139 174 363 34 103 174 363 ------------------------------------------------------------------------------------------- Money Market without Riders 84 64 110 237 84 100 110 237 21 64 110 237 with Riders 94 95 161 337 94 131 161 337 31 95 161 337 ------------------------------------------------------------------------------------------- High Yield Bond without Riders 87 73 124 265 87 109 124 265 24 73 124 265 with Riders 97 103 174 362 97 139 174 362 34 103 174 362 ------------------------------------------------------------------------------------------- Equity Income without Riders 91 85 145 307 91 121 145 307 28 85 145 307 with Riders 101 115 194 399 101 151 194 399 38 115 194 399 ------------------------------------------------------------------------------------------- Research without Riders 91 87 147 311 91 123 147 311 28 87 147 311 with Riders 101 116 196 404 101 152 196 404 38 116 196 404 ------------------------------------------------------------------------------------------- Equity without Riders 87 75 128 272 87 111 128 272 24 75 128 272 with Riders 97 105 177 368 97 141 177 368 34 105 177 368 ------------------------------------------------------------------------------------------- Aggressive Equity without Riders 89 80 136 289 89 116 136 289 26 80 136 289 with Riders 99 110 185 383 99 146 185 383 36 110 185 383 ------------------------------------------------------------------------------------------- Large-Cap Value without Riders 89 80 137 290 89 116 137 290 26 80 137 290 with Riders 99 110 186 384 99 146 186 384 36 110 186 384 -------------------------------------------------------------------------------------------
The purpose of the preceding table is to help you understand the various costs and expenses that you may bear directly or indirectly. The table reflects expenses of the Separate Account as well as those of the underlying Portfolios. Premium taxes may also be applicable. For more information on fees and expenses, see CHARGES, FEES AND DEDUCTIONS, WITHDRAWALS, and Pacific Select Fund Annual Expenses in this Prospectus and see the Fund's SAI. 10 YOUR INVESTMENT OPTIONS You may choose among the different Variable Investment Options, the Fixed Option, and the DCA Plus Fixed Option. Your Variable Investment Options Each Variable Investment Option invests in a separate Portfolio of the Fund. 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.
PORTFOLIO INVESTMENT GOAL THE PORTFOLIO'S PORTFOLIO MAIN INVESTMENTS MANAGER Blue Chip Long-term growth of Equity securities of "blue chip" A I M Capital capital. (Current income companies and related derivatives. Management, Inc. is of secondary Blue chip companies fall within the importance.) largest 85% of publicly traded companies listed in the U.S. Aggressive Growth Long-term growth of Equity securities of small- and A I M Capital capital. medium-sized growth companies. Management, Inc. Emerging Markets Long-term growth of Equity securities of companies that Alliance Capital capital. are located in countries generally Management L.P. regarded as "emerging market" countries. Diversified Research Long-term growth of Equity securities of U.S. companies Capital Guardian capital. and securities whose principal markets Trust Company are in the U.S. Small-Cap Equity Long-term growth of Equity securities of smaller Capital Guardian capital. companies. Trust Company International Large-Cap Long-term growth of Equity securities of large non-U.S. Capital Guardian capital. companies and securities whose Trust Company principal markets are outside of the U.S. I-Net Tollkeeper Long-term growth of Equity securities of companies which Goldman Sachs capital. use, support, or relate directly or Asset Management indirectly to use of the Internet. Such companies include those in the media, telecommunications, and technology sectors. Financial Services Long-term growth of Equity securities in the financial INVESCO capital. services sector (including Funds Group, Inc. derivatives). Such companies include banks, insurance companies, brokerage firms and other finance-related firms. Health Sciences Long-term growth of Equity securities in the health INVESCO capital. sciences sector (including Funds Group, Inc. derivatives). Such companies include medical equipment or supplies, pharmaceuticals, health care facilities and other health sciences- related firms. Technology Long-term growth of Equity securities in the technology INVESCO capital. sector (including derivatives). Such Funds Group, Inc. companies include biotechnology, communications, computers, electronics, Internet telecommunications, networking, robotics, video and other technology- related firms. Telecommunications Long-term growth of Equity securities in the INVESCO capital. (Current income telecommunications sector (including Funds Group, Inc. is of secondary derivatives). Such as companies that importance.) offer telephone service, wireless communications, satellite communications, television and movie programming, broadcasting and Internet access. Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan securities. Investment Management Inc. Large-Cap Core Long-term growth of Equity securities of large dividend- J.P. Morgan (formerly called capital and income. paying U.S. companies. Investment Equity Income) Management Inc. Strategic Value Long-term growth of Equity securities with the potential Janus Capital capital. for long-term growth of capital. Management LLC Growth LT Long-term growth of Equity securities of a large number of Janus Capital capital consistent with companies of any size. Management LLC the preservation of capital. Focused 30 Long-term growth of Equity securities selected for their Janus Capital capital. growth potential. Management LLC
11
PORTFOLIO INVESTMENT GOAL THE PORTFOLIO'S PORTFOLIO MAIN INVESTMENTS MANAGER Mid-Cap Value Capital appreciation. Equity securities of medium-sized U.S. Lazard Asset companies believed to be undervalued. Management International Value Long-term capital Equity securities of relatively large Lazard Asset appreciation primarily companies located in developed Management through investment in countries outside of the U.S. equity securities of corporations domiciled in countries other than the U.S. Capital Opportunities Long-term growth of Equity securities with the potential MFS Investment capital. for long-term growth of capital. Management Mid-Cap Growth Long-term growth of Equity securities of medium-sized MFS Investment capital. companies believed to have above- Management average growth potential. Global Growth Long-term growth of Equity securities of any size located MFS Investment capital. within and outside of the U.S. Management Equity Index Investment results that Equity securities of companies that Mercury Advisors correspond to the total are included in or representative of return of common stocks the Standard & Poor's 500 Composite publicly traded in the Stock Price Index (including U.S. derivatives). Small-Cap Investment results that Equity securities of small companies Mercury Advisors Index correspond to the total that are included in or representative return of an index of of the Russell 2000 Index (including small capitalization derivatives). companies. Real Estate Current income and long- Equity securities of companies in the Morgan Stanley (formerly term capital U.S. real estate industry, including Asset Management called REIT) appreciation. real estate investment trusts (REITs) and real estate operating companies (REOCs). Inflation Managed Maximize total return Inflation-indexed bonds of varying Pacific consistent with prudent maturities issued by the U.S. and non Investment investment management. U.S. governments, their agencies and Management government sponsored enterprises, and Company LLC corporations, forward contracts and derivative instruments relating to such securities. Managed Bond Maximize total return Medium and high-quality fixed income Pacific consistent with prudent securities with varying terms to Investment investment management. maturity and derivatives relating to Management such securities or related indices. Company LLC Money Market Current income consistent Highest quality money market Pacific Life with preservation of instruments believed to have limited capital. credit risk. High Yield Bond High level of current Fixed income securities with lower and Pacific Life income. medium-quality credit ratings and intermediate to long terms to maturity. Equity Income Current income. (Capital Equity securities of large U.S. Putnam growth is of secondary companies with a focus on income- Investment importance.) producing securities believed to be Management, LLC undervalued by the market. Research Long-term growth of Equity securities of large U.S. Putnam capital. companies with potential for capital Investment appreciation. Management, LLC Equity Capital appreciation. Equity securities of large U.S. Putnam (Current income is of growth-oriented companies. Investment secondary importance.) Management, LLC Aggressive Equity Capital appreciation. Equity securities of small and medium- Putnam sized companies. Investment Management, LLC Large-Cap Value Long-term growth of Equity securities of large companies. Salomon Brothers capital. (Current income Asset Management is of secondary Inc importance.)
12 The Investment Adviser We are the investment adviser for the Fund. We and the Fund have retained other portfolio managers, supervised by us, for 31 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 each Subaccount was established January 2, 1996 or thereafter and has no historical performance prior to the date that it was established, each Subaccount will be investing in shares of a Portfolio of the Fund, and the majority of these Portfolios do have historical performance data which covers a longer period. 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 which are described in the SAI. Yields do not reflect any charge for premium taxes, this exclusion may cause yields to show more favorable performance. Total returns may or may not reflect withdrawal charges, Annual Fees or any charge for premium; data that do not reflect these charges may show more favorable performance. The SAI presents some hypothetical performance data. The SAI also presents some performance benchmarks, based on unmanaged market indices, such as the Standard & Poor's 500 Composite Stock Price Index (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, we may provide you with reports both as an insurance company and as to our financial strength that are produced by rating agencies and organizations. Your Fixed Option and the DCA Plus Fixed Option Subject to availability, the Fixed Option and the DCA Plus Fixed Option when you elect DCA Plus, offer you a guaranteed minimum interest rate on the amount you allocate to these Options. Amounts you allocate to these Options, and your earnings credited are held in our General Account. For more detailed information about these Options, see THE GENERAL ACCOUNT and APPENDIX A: STATE LAW VARIATIONS sections 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 Investment to Pacific Life Insurance Company at P.O. Box 100060, Pasadena, California 91189-0060 or the address indicated in your Contract specification pages if different. In those instances when we receive electronic transmission of the information on the application from your representative's broker-dealer firm in accordance with our administrative procedures, we consider the application to be received on the Business Day we receive the transmission. If your application and Investment are complete when received, or once they have become complete, we will issue your Contract within two Business Days. If some information is missing from your application, we may delay issuing your Contract while we obtain the missing information; however, we will not hold your initial Investment for more than five Business Days unless we specifically obtain your permission. You may also purchase a Contract by exchanging your existing contract. You must submit all contracts to be exchanged when you submit your application. Call your representative, or call us at 1-800-722-2333, if you are interested in this option. We reserve the right to reject any application or Investment for any reason, subject to any applicable nondiscrimination laws and to our own standards and guidelines. The maximum age of a Contract Owner, including Joint owners and Contingent Owners, for which a Contract will be issued is 85. The Contract Owner's age is calculated as of his or her last birthday. If any Contract Owner or any Annuitant named in the application for a Contract dies prior to our issuance of a Contract, then the application for the Contract and/or any Contract issued shall be deemed null and void; and any premiums we receive, including any proceeds received in connection with an exchange or transfer, will be returned to the applicant/Owner or the applicant/Owner's estate. 13 Purchasing a Death Benefit Rider (Optional) You may purchase either the Stepped-Up Death Benefit Rider (SDBR) or Premier Death Benefit Rider (PDBR) (subject to state availability) at the time your application is completed. You may not purchase either Rider after the Contract Date. If you select one of these Riders, the SDBR or PDBR, as applicable, will remain in effect until the earliest of: . the full withdrawal of the amount available for withdrawal under the Contract, . when death benefit proceeds become payable under the Contract, . any termination of the Contract in accordance with the provisions of the Contract, or . the Annuity Date. The SDBR or PDBR may not otherwise be cancelled. The SDBR or PDBR may only be purchased if the age of each Annuitant is 75 or younger on the Contract Date. Purchasing the Earnings Enhancement Guarantee (EEG) Rider (Optional) You may purchase the EEG Rider (subject to availability) on the Contract Date or on the first Contract Anniversary. For Contracts issued prior to May 1, 2001, you may purchase the EEG Rider on any Contract Anniversary through December 31, 2002. If you buy the EEG Rider within 30 days after the Contract Date or Contract Anniversary, we will make the Effective Date of the EEG Rider to coincide with that Contract Date or Contract Anniversary. The Earnings Enhancement Guarantee (EEG) Rider is also called the Guarantee Earnings Enhancement (GEE) Rider in your Contract's Rider. You may purchase the EEG Rider only if the age of each Annuitant is 75 years or younger on the date of purchase. The date of purchase is the Effective Date of the Rider as shown in your Contract. Once purchased, the Rider will remain in effect until the earlier of: . the date a full withdrawal of the amount available for withdrawal is made under the Contract, . the date a death benefit becomes payable under the Contract, . the date the Contract is terminated in accordance with the provisions of the Contract, or . the Annuity Date. The EEG Rider may not otherwise be cancelled. Purchasing the Guaranteed Income Advantage (GIA) Rider (Optional) You may purchase the GIA Rider on the Contract Date or on any Contract Anniversary. You may purchase the GIA Rider only if the age of each Annuitant is 80 years or younger on the date the GIA Rider is purchased. The GIA Rider will remain in effect until the earlier of: . a full withdrawal of the amount available for withdrawal under the Contract, . a death benefit becomes payable under the Contract, . any termination of the Contract in accordance with the terms of the Contract, . the Annuity Date, or . termination of the GIA Rider. You may terminate the GIA Rider on the fifth Contract Anniversary or on any later Contract Anniversary. If you buy the GIA Rider within 30 days after the Contract Date or Contract Anniversary, we will make the effective date of the GIA Rider to coincide with that Contract Date or Contract Anniversary. Purchasing the Guaranteed Protection Advantage (GPA) Rider (Optional) You may purchase the optional Guaranteed Protection Advantage Rider (subject to availability) on the Contract Date or on any subsequent Contract Anniversary if: . the age of each Annuitant is 80 years or younger on the date of purchase, 14 . the date of the purchase is at least 10 years prior to your selected Annuity Date, and . you use an asset allocation program established and maintained by us for the Rider during the entire period that the Rider is in effect. If you use our DCA Plus program in conjunction with such an asset allocation program, you will be considered to have meet this requirement. If you purchase the Guaranteed Protection Advantage Rider within 60 days after the Contract Date or a Contract Anniversary, the Effective Date of the Rider will be that Contract Date or Anniversary. If you purchase the Rider 60 days or more after the Contract Date or the Contract Anniversary, the Effective Date of the Rider will be the next Contract Anniversary. The Rider will remain in effect, unless otherwise terminated, for a 10-year period (the "Term") beginning on the Effective Date of the Rider. On the last day of a Term, we will add an additional amount to your Contract Value if, on that day, the Contract Value is less than a specified amount (the "Guaranteed Protection Amount"). The additional amount will be equal to the difference between the Contract Value on the last day of the Term and the Guaranteed Protection Amount. The additional amount added to the Contract Value will be considered earnings and allocated to your Investment Options according to the allocations used in your most recent asset allocation program. The Guaranteed Protection Amount is equal to (a) plus (b) minus (c) as indicated below: (a) is the Contract Value at the start of a Term; (b) is a percentage of each additional Purchase Payment, as determined from the table below, paid to the Contract during a Term; (c) is a pro rata adjustment for withdrawals made from the Contract during the Term. The adjustment for each withdrawal is calculated by multiplying the Guaranteed Protection Amount prior to the withdrawal by the ratio of the amount of the withdrawal, including any applicable withdrawal charges, to the Contract Value immediately prior to the withdrawal.
-------------------------------------------------------------------- Contract Year Since Percentage of Purchase Payment Beginning of Current Term Added to Guaranteed Protection Amount -------------------------------------------------------------------- 1 through 4 100% 5 90% 6 85% 7 80% 8 through 10 75% --------------------------------------------------------------------
For purposes of determining the Contract Value at the start of the Term, if the Effective Date of the Rider is the Contract Date, the Contract Value is equal to the initial Purchase Payment. If the Effective Date of the Rider is a Contract Anniversary, the Contract Value is equal to the Contract Value on that Contract Anniversary. If, on the last day of a Term, the Contract is annuitized, the first death of an Owner or the death of the last surviving Annuitant occurs, or a full withdrawal is made, the Contract Value will reflect any additional amount owed under the Guaranteed Protection Advantage Rider before the payment of any annuity or death benefits, or full withdrawal. No additional amount will be made if the Contract Value on the last day of the Term is greater than the Guaranteed Protection Amount. On or before the end of the Term, you can elect to repurchase the Rider subject to its availability and the then current terms and conditions of the Rider provided: . all Annuitant(s) are 80 years or younger at the start of the new Term, and . the new Term does not extend beyond your selected Annuity Date. 15 If you elect to terminate the Rider, the termination will be effective the day immediately following the end of the Term. The Guaranteed Protection Advantage Rider will remain in effect until the earlier of: . the end of a Term, . the Contract Anniversary immediately following the date any portion of the Contract Value is no longer invested in an asset allocation program established and maintained by us for this Rider, . the Contract Anniversary immediately following the date we receive notification from the Owner to terminate this Rider, . the date a full withdrawal of the amount available for withdrawal is made under the Contract, . the date of first death of an Owner or the date of death of the last surviving Annuitant, . the date the Contract is terminated in accordance with the provisions of the Contract, or . the Annuity Date. If the Owner dies during a Term and the surviving spouse of the deceased Owner elects to continue the Contract in accordance with its terms, then the provisions of this Rider will continue until the end of the Term. Subject to the terms of the Rider, the surviving spouse may repurchase the Rider for another Term, provided the surviving spouse is age 80 or younger at the start of the new Term and the new Term does not extend beyond the selected Annuity Date. The Guaranteed Protection Advantage Rider may also be called the GPA Rider in some materials you may receive from us. Information About Optional Riders, IRAs and Other Qualified Contracts There are special considerations for purchases of any optional death benefit rider. As of the date of this Prospectus, IRS regulations state that Individual Retirement Accounts (IRAs) may generally not invest in life insurance contracts. We believe that these regulations do not prohibit the optional death benefit riders from being added to your Contract if it is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA. However, the law is unclear and it is possible that a Contract that has an optional death benefit rider and is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA could be disqualified and may result in increased taxes to the Owner. Similarly, section 401 plans, section 403(b), 457(b) annuities and IRAs (but not Roth IRAs) can only offer incidental death benefits. The IRS could take the position that the enhanced death benefits are not incidental. In addition, to the extent that the enhanced death benefit riders alter the timing or the amount of the payment of distributions under a Qualified Contract, the riders cannot be paid out in violation of the minimum distribution rules of the Code. It is our understanding that the charges relating to the optional death benefit riders are not subject to current taxation and we will not report them as such. However, the IRS may determine that these charges should be treated as partial withdrawals subject to current taxation to the extent of any gain and, if applicable, the 10% tax penalty. We reserve the right to report the rider charges as partial withdrawals if we believe that we would be expected to report them in accordance with IRS regulations. Making Your Investments ("Purchase Payments") Making Your Initial investment Your initial Investment must be at least $10,000 if you are buying a Non- Qualified Contract, and at least $2,000 if you are buying a Qualified Contract. You may pay this entire amount when you submit your application, or you may choose our pre-authorized checking plan ("PAC"), which allows you to pay in equal monthly installments over one year (at least $800 per month for Non- Qualified Contracts, and at least $150 per month 16 for Qualified Contracts). If you choose the PAC, you must make your first installment payment when you submit your application. Further requirements for PAC are discussed in the PAC form. We also call each Investment you make Purchase Payments. You must obtain our consent before making an initial or additional Investment that will bring your aggregate Investments over $1,000,000. Making Additional Investments You may choose to invest additional amounts in your Contract at any time. Each additional Investment above the initial Investment requirements must be at least $250 for Non-Qualified Contracts and $50 for Qualified Contracts. In certain states additional investments are limited. Forms of Investment Your initial and additional Investments may be sent by personal or bank check or by wire transfer. Investments must be made in a form acceptable to us before we can process it. Acceptable forms of Investments are: . by personal check, drawn on a U.S. bank, . by cashier's check, money order, and traveler's checks in single denominations of $10,000 or more if they originate in a U.S. bank, . by cashier's check of less than $10,000 for direct qualified transfers and rollovers, . by cashier's check of less than $10,000 for non-qualified transfers, both 1035s and mutual fund/bank CD transfers, that are requested by Pacific Life, . by third party check, when there is a clear connection of the third party to the underlying transaction, and . wire transfers that originate in U.S. banks. We will not accept Investments in the following forms: . cash, . credit card or check drawn against a credit card account, . cashier's check, money order or traveler's checks in single denominations of less than $10,000 or less, . cashier's check, money orders, traveler's checks or personal checks drawn on non-U.S. banks, even if the payment may be effected through a U.S. bank, . third party check, if there is not a clear connection of the third party to the underlying transaction, and . wires that originate from foreign bank accounts. All unacceptable forms of Investments will be returned to the payor along with a letter of explanation. Pacific Life reserves the right to reject or accept any form of payment. If you make Investments by check other than a cashier's check, your payment of any withdrawal proceeds and any refund during the "Right to Cancel" period may be delayed until we receive confirmation in our Annuities administrative office that your check has cleared. HOW YOUR INVESTMENTS ARE ALLOCATED Choosing Your Investment Options You may allocate your Investments among the 33 Subaccounts, the Fixed Option and the DCA Plus Fixed Option when you elect DCA Plus. Allocations of your initial Investment to the Investment Options you selected will be effective on your Contract Date. See WITHDRAWALS--Right to Cancel ("Free Look") section in this Prospectus. Each additional Investment will be allocated to the Investment Options according to your 17 allocation instructions in your application, or most recent instructions, if any, subject to the terms described in the WITHDRAWALS--Right to Cancel ("Free Look") section in this Prospectus. We reserve the right to require that your allocation to any particular Investment Option must be at least $500. We also reserve the right to transfer any remaining Account Value that is not at least $500 to your other Investment Options on a pro rata basis relative to your most recent allocation instructions. If your Contract is issued in exchange for another annuity contract or a life insurance contract, our administrative procedures may vary depending on the state in which your Contract is delivered. If your initial Investment is received from multiple sources, we will consider them all your initial Investment. Portfolio Optimization Portfolio Optimization is an asset allocation service we offer for use within this variable annuity. Asset allocation is the distribution of investments among asset classes and involves decisions about which asset classes should be selected and how much of the total contract value should be allocated to each asset class. The theory of Portfolio Optimization is that diversification among asset classes can help reduce volatility over the long-term. Pacific Life and Ibbotson Associates, one of the premier firms in designing asset allocation-based investment strategies, developed 5 model portfolios, each comprised of a carefully selected combination of Pacific Select Fund portfolios. The portfolios are selected by evaluating the asset classes represented by the underlying securities holdings of the portfolios and combining portfolios to combine major types of asset classes based on historical asset performance and attribution analysis in a way intended to optimize returns given a particular level of risk tolerance. The analysis is accomplished by using a state-of-the-art program and a statistical analytical technique known as "mean-variance optimization." This Portfolio Optimization analysis is performed each year to help maintain the risk/return profile of the models. If you select a Portfolio Optimization model, your initial purchase payment (in the case of a new application) or contract value, as applicable, will be allocated to the investment options according to the model you select. Subsequent purchase payments, if allowed under your contract, will also be allocated accordingly, unless otherwise instructed by you in writing. If you choose, you can rebalance your contract value quarterly, semi-annually, or annually to maintain the asset allocation given in your Portfolio Optimization model. If you also allocate part of your purchase payment or contract value outside the model, rebalancing is only permitted within the model. Each model may change and investment options may be added to or deleted from a model as a result of the annual analysis. Unless you provide written authorization, we will not automatically adjust your contract value among investment options to reflect updates to the model. You may change your allocations at any time with a proper written request or by telephone or electronic instructions, provided a valid telephone/electronic authorization is on file with us. If you select a Portfolio Optimization model, in addition to your usual quarterly statement, you will be sent a quarterly performance report which provides information about the investment options within your model. To enroll in Portfolio Optimization, you must submit to us, together with any other required forms, a completed, signed and dated Portfolio Optimization Enrollment Request form or a completed, signed and dated Portfolio Optimization Acknowledgment contained in the Investment Policy Statement. The Investment Policy Statement describes the Portfolio Optimization model that matches your investment profile, based on the responses you provide regarding your financial needs, investment time horizon and risk comfort level, on the Investor Profile Questionnaire. Your financial advisor or investment professional can assist you in completing the proper forms. We have the right to terminate or change the Portfolio Optimization service at any time. Information concerning the models is described below. If you are enrolling in Portfolio Optimization by means of the Portfolio Optimization Enrollment Request form, the actual percentage allocations among the portfolios in each of the 5 portfolio models are described in the enrollment request form. If you are enrolling in Portfolio Optimization by means of the Investor Profile Questionnaire, the actual percentage allocations within the portfolio model that matches your investment profile are described in the Investment Policy Statement for that model. Regardless of the enrollment methods described above, you should consult with your financial adviser or investment professional to assist you in determining which model meets your financial needs, investment time horizon, and is consistent with your risk comfort level. 18
-------------------------------------------------------------------------------------------------------- Investor Profile -------------------------------------------------------------------------------------------------------- Model A Model B Model C Model D Model E -------------------------------------------------------------------------------------------------------- You are looking for Your focus is on You want the You want an You are an a relatively stable keeping pace with opportunity for investment that is aggressive investor investment and inflation. Income long-term moderate geared for growth and can tolerate require investments generating growth. and are willing to short-term market that generate some investment and accept above swings. level of income. capital average risk. appreciation are desired. -------------------------------------------------------------------------------------------------------- Shorter Investment Horizon Longer Investment Horizon -------------------------------------------------------------------------------------------------------- Investor Objective -------------------------------------------------------------------------------------------------------- Primarily Moderate Growth Steady growth in Moderately high High growth in preservation of asset values growth in asset asset values capital values -------------------------------------------------------------------------------------------------------- Risk Characteristics -------------------------------------------------------------------------------------------------------- There may be some There may be some There will probably There will probably There will probably losses in the losses in the be some losses in be some losses in be some losses in values of the values of the the values of the the values of the the values of the investment as asset investment from underlying underlying underlying values fluctuate. year to year. investments from investments from investments from year to year. year to year. Some year to year. Some Fluctuations in of these might be these might be value should be large, but the large, but the less than those of overall overall the overall stock fluctuations in fluctuations in markets. asset values should asset values should be less than those be less of the U.S. stock than those of the market. U.S. stock market. -------------------------------------------------------------------------------------------------------- Lower Risk Higher Risk -------------------------------------------------------------------------------------------------------- Asset Class Breakdown -------------------------------------------------------------------------------------------------------- Cash 30% Cash 16% Cash 6% Bonds 20% Bonds 4% --------------------------------------------------------------------------------------------------------- Bonds 47% Bonds 42% Bonds 34% Domestic 56% Domestic 63% Stocks Stocks --------------------------------------------------------------------------------------------------------- Domestic 17% Domestic 30% Domestic 44% Real Estate 3% Real Estate 5% Stocks Stocks Stocks --------------------------------------------------------------------------------------------------------- International 6% International 12% International 16% International 21% International 28% Stocks Stocks Stocks Stocks Stocks --------------------------------------------------------------------------------------------------------- Less Volatile More Volatile ---------------------------------------------------------------------------------------------------------
Although the models are designed to optimize returns given the various levels of risk, there is no assurance that a model portfolio will not lose money or that investment results will not experience some volatility. Historical market and asset class performance may differ in the future from the historical performance upon which the models are built. Also, allocation to a single asset class may outperform a model, so that you would have been better off in an investment option or options representing a single asset class than in a model. The value of the variable accounts will fluctuate, and when redeemed, may be worth more or less than the original cost. 19 Investing in Variable Investment Options Each time we allocate your investment to a Variable Investment Option, your Contract is credited with a number of "Subaccount Units" in that Subaccount. The number of Subaccount Units credited is equal to the amount you have allocated to that Subaccount divided by the "Unit Value" of one Unit of that Subaccount. Example: You allocate $600 to the Inflation Managed Subaccount. At the end of the Business Day on which your allocation is effective, the value of one Unit in the Inflation Managed Subaccount is $15. As a result, 40 Subaccount Units are credited to your Contract for your $600. Your Variable Account Value Will Change After we credit your Contract with Subaccount Units, the value of those Units will usually fluctuate. This means that, from time to time, your investment allocated to the Variable Investment Options may be worth more or less than the original allocations 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 applicable Risk Charge imposed on the Separate Account. We calculate the value of all Subaccount Units on each Business Day. The SAI contains a detailed discussion of these calculations. When Your Investment is Effective The day your allocation is effective determines the Unit Value at which Subaccount Units are attributed to your Contract. In the case of transfers or withdrawals, the effective day determines the Unit Value at which affected Subaccount Units are debited and/or credited under your Contract. The Unit Value at which purchase, transfer and withdrawal transactions are credited or debited 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 Investment is usually effective on the day we issue your Contract. Any additional allocation is effective on the day we receive your Investment in proper form. See ADDITIONAL INFORMATION--Inquiries and Submitting Forms and Requests section in this Prospectus. Transfers Once your Investments are allocated to the Investment Options you selected, you may transfer your Account Value from any Investment Option to any other, except the DCA Plus Fixed Option. However, as of January 1, 2002, and each calendar year thereafter, transfers are limited to 25 for each calendar year. For the purpose of applying the limitations, any transfers that occur on the same day are considered one transfer and transfers that occur as a result of the dollar cost averaging program, the portfolio rebalancing program, the earnings sweep program or an approved asset allocation program are excluded from the limitation. No transfer fee is currently imposed for transfers among the Investment Options, but we reserve the right to impose a transaction fee for transfers in the future; a fee of up to $15 per transfer may apply to transfers in excess of 15 in any Contract Year. Certain Restrictions apply to the Fixed Option and the DCA Plus Fixed Option. See THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. Transfer requests are generally effective on the Business Day we receive them in proper form. 20 We have the right, at our option (unless otherwise required by law), 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 $500 immediately after such transfer, we may transfer that Account Value to your other Investment Options on a pro rata basis, relative to your most recent allocation instructions. Market-timing Restrictions The Contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the market. Such frequent trading can disrupt management of the Fund and raise expenses. This in turn can have an adverse effect on Portfolio performance and therefore your Contract's performance. Accordingly, organizations or individuals that use market-timing investment strategies and make frequent transfers should not purchase the Contract. We reserve the right to restrict, in our sole discretion and without prior notice, transfers initiated by a market timing organization or individual or other party authorized to give transfer instructions on behalf of multiple Contract Owners. Such restrictions could include: . not accepting transfer instructions from an agent acting on behalf of more than one Contract Owner, and . not accepting preauthorized transfer forms from market timers or other entities acting on behalf of more than one Contract Owner at a time. We further reserve the right to impose, without prior notice, restrictions on transfers that we determine, in our sole discretion, will disadvantage or potentially hurt the rights or interests of other Contract Owners. Exchanges of Annuity Units Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s) after the Annuity Date are limited to four in any twelve-month period. See THE GENERAL ACCOUNT--Withdrawals and Transfers in this Prospectus and THE CONTRACTS AND THE SEPARATE ACCOUNT in the SAI. Automatic Transfer Options We offer four automatic transfer options: DCA Plus, dollar cost averaging, portfolio rebalancing, and earnings sweep. There is no charge for these options, and transfers under these automatic transfer options are not counted towards your total transfers in a Contract Year. DCA Plus DCA Plus provides a way for you to transfer amounts monthly from the DCA Plus Fixed Option to one or more Variable Investment Option(s) over a period of up to one year. This allows you to average the Unit Values of the Variable Investment Option(s) over time, and may permit a "smoothing" of abrupt peaks and drops in Unit Values. The DCA Plus program can also be used in conjunction with an asset allocation program to qualify for the Guaranteed Protection Advantage Rider. Prior to the Annuity Date, you may allocate all or a portion of your Investment(s) to one of the DCA Plus Fixed Option terms of your choice. The initial minimum amount that you may allocate to the DCA Plus Fixed Option is $5,000. You may not transfer any amounts to the DCA Plus Fixed Option from any other Investment Option. All Investments allocated to the DCA Plus Fixed Option will earn interest at the then current Guaranteed Interest Rate declared by us. 21 The day that the first Investment allocation is made to the DCA Plus Fixed Option will begin the Guarantee Term. On the same day of each month thereafter, we will transfer to the Variable Investment Options you selected an amount equal to your DCA Plus Fixed Option Value on that day divided by the remaining number of monthly transfers in the Guarantee Term. You may choose a Guarantee Term of up to one year. Currently, we offer Guarantee Terms of 6 or 12 months with 6 or 12 monthly transfers, respectively. Ask your registered representative about the availability of other Guarantee Terms. Example: On May 1, you submit a $10,000 Investment entirely to the DCA Plus Fixed Option at a then current Guaranteed Interest Rate of 5.00% with a Guarantee Term of 6 months. On June 1, the value of the DCA Plus Fixed Option is $10,041.52. On June 1, a transfer equal to $1,673.59 ($10,041.52/6) will be made according to your DCA Plus transfer instructions. Your remaining DCA Plus Fixed Option Value after the transfer is therefore $8,367.93. On July 1, your DCA Plus Fixed Option Value has now increased to $8,401.56. We will transfer $1,680.31 ($8,401.56/5) to the Variable Investment Options, leaving a remaining value of $6,721.25 in the DCA Plus Fixed Option. During the Guarantee Term, you may allocate all or a part of additional Investments to the DCA Plus Fixed Option, provided such allocations are at least $250. Each such allocation will be transferred to the Variable Investment Options you selected over the remaining Guarantee Term. Transfers will be made proportionately from the DCA Plus Fixed Option Value attributed to each Investment allocation. Example: (Using the previous example): On July 15, you allocate an additional $5,000 to the DCA Plus Option at a Guaranteed Interest Rate of 4.00%. On August 1, your DCA Plus Fixed Option Value has increased to $11,758.30. An amount equal to $2,939.58 ($11,758.30/4) is transferred from the DCA Plus Fixed Option to the Variable Investment Options. The remaining DCA Plus Fixed Option Value is $8,818.73. The minimum amount for the DCA Plus monthly transfer is $250. If a monthly DCA Plus transfer amount is less than $250, we may transfer your entire DCA Plus Fixed Option Value to the Variable Investment Options according to your most recent DCA Plus transfer instructions and automatically terminate your DCA Plus. DCA Plus transfers must be made on a monthly basis to the Variable Investment Options. You may not choose to transfer other than monthly nor may you transfer to the Fixed Option. Unless otherwise instructed, any additional Investment we receive during a Guarantee Term will be allocated to the Investment Options, including the DCA Plus Fixed Option if so indicated, according to your most recent Investment allocation instructions. If we receive any additional Investments after your DCA Plus ends and you have not changed your Investment allocation instructions, the portion of additional Investments that you had instructed us to allocate to the DCA Plus Fixed Option under DCA Plus will be allocated to the Variable Investment Options in the same proportion you had elected under DCA Plus. When your DCA Plus program ends you may request, in a form satisfactory to us, to establish a new DCA Plus program subject to our minimum allocation requirements. You may choose a Guarantee Term of up to one year from the duration options currently offered by us. Your DCA Plus program automatically ends at the end of your DCA Plus Guarantee Term. If we do not receive completed DCA Plus transfer instructions in proper order by the time your first DCA Plus transfer is due, your DCA Plus will be automatically terminated at that time and your DCA Plus Fixed Account Value will be transferred to the Fixed Option at the Fixed Option's then current Guaranteed Interest Rate, unless you provide us with other transfer instructions. You may request, in a form satisfactory to us, termination of your DCA Plus program at any time. Upon our receipt of such request, or when death benefit proceeds become payable, any remaining balance in your DCA Plus Fixed Option will be transferred to the Fixed Option at the Fixed Option's then current Guaranteed Interest Rate, unless you instruct us to transfer such amounts to other Investment Options. On your Annuity Date any net amount converted to an annuity from your DCA Plus Fixed Option will be applied to a fixed annuity and will be held in our General Account, unless you instruct us otherwise. 22 You may have only one DCA Plus program in effect at any given time. DCA Plus may not be used concurrently with our dollar cost averaging program. Further, the DCA Plus Fixed Option is not available for use with any of our other systematic transfer programs; i.e., dollar cost averaging, portfolio rebalancing or earnings sweep. We reserve the right to change the terms and conditions of DCA Plus, but not a DCA Plus program you already have in effect. Dollar Cost Averaging Dollar cost averaging is a method in which you buy securities in a series of regular purchases instead of in a single purchase. This allows you to average the securities' prices over time, and may permit a "smoothing" of abrupt peaks and drops in price. Prior to your Annuity Date, you may use dollar cost averaging to transfer amounts, over time, from any Investment Option with an Account Value of at least $5,000 to one or more Variable Investment Options. Each transfer must be for at least $250. Detailed information appears in the SAI. Portfolio Rebalancing You may instruct us to maintain a specific balance of Variable Investment Options under your Contract (e.g., 30% in the 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 values in the elected Subaccounts to the percentages you have specified. Rebalancing may result in transferring amounts from a Subaccount earning a relatively higher return to one earning a relatively lower return. The Fixed Option is not available for rebalancing. Detailed information appears in the SAI. Earnings Sweep You may instruct us to make automatic periodic transfers of your earnings from the Money Market Subaccount or from the Fixed Option to one or more Variable Investment Options (other than the Money Market Subaccount). Detailed information appears in the SAI. CHARGES, FEES AND DEDUCTIONS Withdrawal Charge No sales charge is imposed on any Purchase Payment. Your Purchase Payments may, however, be subject to a withdrawal charge. This charge may apply to amounts you withdraw under your Contract prior to the Annuity Date, depending on the length of time each Purchase Payment has been invested and on the amount you withdraw. No withdrawal charge is imposed on: . death benefit proceeds, except as provided under the Amount of the Death Benefit: Death of a Contract Owner section, . amounts converted after the first Contract Anniversary to a life contingent Annuity Option or an Annuity Option with a period certain of at least five years, . withdrawals by Owners to meet the minimum distribution rules for Qualified Contracts as they apply to amounts held under the Contract, . subject to medical evidence satisfactory to us, after the first Contract Anniversary, full or partial withdrawals if the Owner or Annuitant has been diagnosed with a medically determinable condition that results in a life expectancy of twelve (12) months or less, or . subject to medical evidence satisfactory to us, after 90 days from the Contract Date, full or partial withdrawals while the Owner or Annuitant has been confined to an accredited nursing home for 60 days or longer. The waiver of withdrawal charges applies only to withdrawals made while the Owner or Annuitant is in a nursing home or within 90 days after the Owner or Annuitant leaves the nursing home. In addition, 23 the nursing home confinement period for which you seek the waiver must begin after the Contract Date. In order to use this waiver, you must submit with your withdrawal request the following documents: . a physician's note recommending the Owner or Annuitant's admittance to a nursing home, . an admittance form which shows the type of facility the Owner or Annuitant entered, and . a bill from the nursing home which shows that the Owner or Annuitant met the 60 day nursing home confinement requirement. An accredited nursing home is defined as a home or facility that: . is operating in accordance with the law of jurisdiction in which it is located, . is primarily engaged in providing, in addition to room and board, skilled nursing care under the supervision of a duly licensed physician, and . provides continuous 24 hour a day nursing service by or under the supervision of a registered nurse, and maintains a daily record of the patient. See the APPENDIX A: STATE LAW VARIATIONS section of this Prospectus. Free Withdrawals We will not impose a withdrawal charge on withdrawals of your Earnings, or on withdrawals of Purchase Payments held under your Contract for at least three Contract Years. In addition, during each Contract Year we will not impose a withdrawal charge on your withdrawal of up to 10% of your remaining Purchase Payments at the beginning of the Contract Year that would otherwise be subject to the withdrawal charge plus up to 10% of any additional Purchase Payments received during the Contract Year. Our calculations of the withdrawal charge deduct this "free 10%" from your "oldest" Purchase Payment that is still otherwise subject to the charge. Example: You make an initial Purchase Payment of $10,000 in Contract Year 1, and additional Purchase Payments of $1,000 and $6,000 in Contract Year 2. Your Contract Value in Contract Year 3 is $19,000 which includes $2,000 in Earnings. In Contract Year 3, you may withdraw $3,700 free of the withdrawal charges (your total Purchase Payments were $17,000, so 10% of that total equals $1,700, plus you had $2,000 of Earnings). After your withdrawal, your Contract Value is $15,300 (all attributable to your prior Purchase Payments). If, in Contract Year 4, your Contract Value equals $12,500; you may withdraw $9,000 [$8,300 (remaining amount of your initial $10,000 Purchase Payment that in Contract Year 4 is free of withdrawal charges) plus $700 (10% of $7,000 additional Purchase Payments)].any withdrawal charges. We calculate your withdrawal charge by assuming that your Earnings are withdrawn first, followed by amounts attributed to Purchase Payments with the "oldest" Payment withdrawn first. The withdrawal charge will be deducted proportionally among all Investment Options from which the withdrawal occurs. How the Charge is Determined The amount of the charge depends on how long each Purchase Payment was held under your Contract. Each Purchase Payment you make is considered to have a certain "age," depending on the length of time since that Purchase Payment was effective. A Purchase Payment is "one year old" or has an "age of one" from the day it is effective until the beginning of the day preceding your next Contract Anniversary; beginning on the day preceding that Contract Anniversary, your Purchase Payment will have an "age of two", and increases in age on the day preceding each Contract Anniversary. When you withdraw an amount subject to the withdrawal charge, the "age" of the Purchase Payments you withdraw determines the level of withdrawal charge as follows: Withdrawal Charge as a percentage "Age" of Payment of the amount in Years withdrawn ---------------- ------------- 1.................................................... 7% 2.................................................... 6% 3.................................................... 4% 4 or more............................................ 0% 24 We pay sales commissions and other expenses associated with the promotion and sales of the Contracts to broker-dealers. The withdrawal charge is designed to reimburse us for these costs, although we expect that our actual expenses will be greater than the amount of the withdrawal charge. Broker-dealers may receive aggregate commissions of up to 7.00% of your aggregate Purchase Payments. Sellers of Contracts will be paid a persistency trail commission which will take into account, among other things, the length of time Purchase Payments have been held under a Contract, and Account Values. A trail commission is not anticipated to exceed 1.00%, on an annual basis, of the Account Values considered in connection with the trail commission. We may also pay override payments, expense allowances, bonuses, wholesaler fees and training allowances. Registered representatives earn commissions from the broker-dealers with which they are affiliated and such arrangements may vary. Within certain limits imposed by the National Association of Securities Dealers, Inc. (NASD), registered representatives who are associated with broker/dealer firms affiliated with Pacific Life may qualify for sales incentive programs sponsored by Pacific Life. Registered representatives may also receive non-compensation such as expense-paid educational or training seminars or promotional merchandise. Withdrawal Enhancements We reserve the right, in our sole discretion, to calculate your withdrawal charge on more favorable terms to you than as otherwise described in the preceding paragraphs. These Withdrawal Enhancements may include an acceleration of the day on which the "age" of any Purchase Payment(s) is considered to occur or a waiver of some or all of the withdrawal charge in the event the Guaranteed Interest Rate is less than a specified rate. Although we retain the discretion to add a Withdrawal Enhancement, once it is added, it is binding on us and effective for any specified period we have designated. In the event of any Withdrawal Enhancement, we will notify the Owner within thirty (30) days of the effective date of the Withdrawal Enhancement. Transfers Transfers of all or part of your Account Value from one Investment Option to another are not considered a withdrawal of an amount from your Contract, so no withdrawal charge is imposed at the time of transfer. See HOW YOUR INVESTMENTS ARE ALLOCATED--Transfers and THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. Premium Taxes Depending on your state of residence (among other factors), a tax may be imposed on your Investments at the time your payment is made, at the time of a partial or full withdrawal, at the time any death benefit proceeds are paid, at the Annuity Date or at such other time as taxes may be imposed. Tax rates ranging from 0% to 3.5% are currently in effect, but may change in the future. Some local jurisdictions also impose a tax. If we pay any taxes attributable to Investments ("premium taxes"), we will impose a similar charge against your Contract Value. Premium tax is subject to state requirements. 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 by us. For these purposes, "premium taxes" include any state or local premium or retaliatory 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 Investments we have received. We will base this charge on the Contract Value, the amount of the transaction, the aggregate amount of Investments we receive under your Contract, or any other amount, that in our sole discretion we deem appropriate. We may also charge the Separate Account or your Contract Value for taxes attributable to the Separate Account or the Contract, including income taxes attributable to the Separate Account or to our operations with respect to the Contract, or taxes attributable, directly or indirectly, to Purchase Payments. Currently, we do not impose any such charges. 25 Annual Fee We will charge you an Annual Fee of $30 on each Contract Anniversary prior to the Annuity Date, and at the time you withdraw your entire Net Contract Value (on a pro rated basis for that Contract Year), if your Net Contract Value is less than $50,000 on that date. The fee is not imposed on amounts you annuitize or on payment of death benefit proceeds. The fee reimburses certain of our costs in administering the Contracts and the Separate Account; we do not intend to realize a profit from this fee or the Administrative Fee. This fee is guaranteed not to increase for the life of your Contract. Your Annual Fee will be charged proportionately against your Investment Options. Assessments against your Variable Investment Options are made by debiting some of the Subaccount Units previously credited to your Contract; that is, assessment of the Annual Fee does not change the Unit Value for those Subaccounts. Waivers and Reduced Charges We may agree to waive or reduce charges by crediting additional amounts under our Contracts, in situations where selling and/or maintenance costs associated with the contracts are reduced, such as the sale of several Contracts to the same Contract Owner(s), sales of large Contracts, sales of Contracts in connection with a group or sponsored arrangement or mass transactions over multiple Contracts. In addition, we may agree to waive or reduce charges and/or credit additional amounts under our Contracts, for those Contracts sold to persons who meet criteria established by us, who may include current and retired officers, directors and employees of us and our affiliates, trustees of the Pacific Select Fund, registered representatives and employees of broker/dealers with a current selling agreement with us and their affiliates, employees of affiliated asset management firms and certain other service providers, and immediate family members of such persons ("Eligible Persons"). We will credit additional amounts to Contracts owned by Eligible Persons if such Contracts are purchased directly through Pacific Select Distributors, Inc. Under such circumstances, Eligible Persons will not be afforded the benefit of services of any other broker/dealer nor will commissions be payable to any broker/dealer in connection with such purchases. Eligible Persons must contact us directly with servicing questions, Contract changes and other matters relating to their Contracts. The amount credited to Contracts owned by Eligible Persons will equal the reduction in expenses we enjoy by not incurring brokerage commissions in selling such Contracts, with the determination of the expense reduction and of such crediting being made in accordance with our administrative procedures. These credits will be added to an Eligible Person's Contract when we apply the Investments. We may also agree to waive minimum Investment requirements for Eligible Persons. We will only reduce or waive charges, reduce or waive minimums, or credit additional amounts on any Contract where expenses associated with the sale or distribution of the Contract and/or costs associated with administering and maintaining the Contract are reduced. We reserve the right to terminate waiver, reduced charge and crediting programs at any time, including for issued Contracts. With respect to additional amounts as described above, you generally will not keep any amounts credited if you return your Contract during the Free Look period. See WITHDRAWALS--Right to Cancel ("Free Look") section in this Prospectus for a more complete description of the amount that would be refunded if you exercised your right to cancel. Mortality and Expense Risk Charge We assess 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 an 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." We also bear mortality risk in connection with death benefits payable under the Contracts. The risk that the expense charges and fees under the Contracts and Separate Account are less than our actual administrative and operating expenses is called "expense risk." This Risk Charge is assessed daily at an annual rate equal to 1.40% of each Subaccount's assets; this charge may not be increased for the duration of your Contract. 26 The Risk Charge will stop at the Annuity Date if you select a fixed annuity. The base Risk Charge, but not any increase in the Risk Charge for an optional Death Benefit Rider, will continue after the Annuity Date if you choose any variable annuity. We will realize a gain if the Risk Charge exceeds our actual cost of expenses and benefits, and will suffer a loss if such actual costs exceed the Risk Charge. Any gain will become part of our General Account; we may use it for any reason, including covering sales expenses on the Contracts. Increase in Risk Charge If an Optional Death Benefit Rider Is Purchased We increase your Risk Charge by an annual rate equal to 0.20% of each Subaccount's assets if you purchase the Stepped-Up Death Benefit Rider (SDBR) or 0.35% if you purchase the Premier Death Benefit Rider (PDBR). The total Risk Charge annual rate will be 1.60% if the SDBR is purchased or 1.75% if the PDBR is purchased. Any increase in your Risk Charge will not continue after the Annuity Date. See PURCHASING YOUR CONTRACT--Purchasing an Optional Death Benefit Rider section in this Prospectus. Administrative Fee We charge an Administrative Fee as compensation for costs we incur in operating the Separate Account and issuing and administering the Contracts, including processing applications and payments, and issuing reports to you and to regulatory authorities. The Administrative Fee is assessed daily at an annual rate equal to 0.25% of the assets of each Subaccount. This rate is guaranteed not to increase for the life of your Contract. A relationship will not necessarily exist between the actual administrative expenses attributable to a particular Contract and the Administrative Fee paid in respect of that particular Contract. The Administrative Fee will continue after the Annuity Date if you choose any variable annuity. Earnings Enhancement Guarantee (EEG) Annual Charge (Optional Rider) If you purchase the EEG Rider, we deduct annually a Earnings Enhancement Guarantee Charge (EEG Charge) for expenses related to the EEG Rider. The EEG Charge is equal to 0.25% multiplied by your Contract Value on the date the Charge is deducted. The Earnings Enhancement Guarantee (EEG) Charge is also called the Guaranteed Earnings Enhancement (GEE) Charge in your Contracts Rider. We will deduct the EEG Charge from your Investment Options on a proportionate basis on each Contract Anniversary following the date you purchase the Rider if the EEG Rider is in effect. Any portion of the EEG Charge we deduct from the Fixed Option or the DCA Plus Fixed Option will not be greater than the annual interest credited in excess of 3%. If you make a full withdrawal of the amount available for withdrawal during a Contract Year, we will deduct the entire EEG Charge for that Contract Year from the final payment made to you. Guaranteed Income Advantage (GIA) Annual Charge (Optional Rider) If you purchase the GIA Rider, we deduct annually a Guaranteed Income Advantage Charge (GIA Charge) for expenses related to the GIA Rider. The GIA Charge is equal to 0.30% multiplied by your Contract Value on the date the Charge is deducted. We will deduct the GIA Charge from your Investment Options on a proportionate basis: . on each Contract Anniversary the GIA Rider remains in effect, . on the Annuity Date, if the GIA Rider is still in effect, and . when the GIA Rider is terminated. Any portion of the GIA Charge we deduct from the Fixed Option or the DCA Plus Fixed Option will not be greater than the annual interest credited in excess of 3%. If you terminate the GIA Rider, we will charge 27 your Contract for the annual GIA Charge on the effective date of termination. If you make a full withdrawal of the amount available for withdrawal during a Contract Year, we will deduct the entire GIA Charge for the Contract Year from the final payment made to you. Guaranteed Protection Advantage (GPA) Annual Charge (Optional Rider) If you purchase the Guaranteed Protection Advantage Rider, we will deduct a Guaranteed Protection Charge from your Investment Options on a proportionate basis on each Contract Anniversary that the Rider remains in effect following the Effective Date of the Rider, and if you terminate the Rider. The Guaranteed Protection Charge is equal to 0.10% multiplied by your Contract Value on the date the Charge is deducted. Any portion of the Guaranteed Protection Charge we deduct from the Fixed Option or the DCA Plus Fixed Option will not be greater than the annual interest credited in excess of 3%. If you make a full withdrawal during a Contract Year, we will deduct the entire Guaranteed Protection Charge for the Contract Year from the final payment made to you. Expenses of the Fund Your Variable Account Value reflects advisory fees and other expenses incurred by the various Portfolios of the Fund, net of any applicable waivers and/or 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 SAI. RETIREMENT BENEFITS AND OTHER PAYOUTS Selecting Your Annuitant When you submit the application for your Contract, you may choose a sole Annuitant or Joint Annuitants. We will send the annuity payments to the payee that you designate. If you are buying a Qualified Contract, you must be the sole Annuitant. If you are buying a Non-Qualified Contract you may choose yourself and/or another person. Whether you choose to have a sole or two Joint Annuitants, you may choose a Contingent Annuitant. The Contingent Annuitant will not have any Contract benefits, including death benefit proceeds, until becoming the sole surviving Annuitant. More information on these options is provided in the SAI. 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. No Annuitant (Primary, Joint or Contingent) may be named upon or after reaching his or her 86th birthday. We reserve the right to require proof of age or survival of the Annuitant(s). Annuitization You may choose both your Annuity Date and your Annuity Option. At the Annuity Date, you may elect to annuitize some or all of your Net Contract Value, less any applicable charge for premium taxes (the "Conversion Amount"), as long as such Conversion Amount annuitized is at least $10,000, subject to any state exceptions. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. If you annuitize only a portion of this available Contract Value, you may have the remainder distributed, less any applicable charge for premium taxes, any EEG Charge, any GIA Charge, any Guaranteed Protection Charge and any applicable withdrawal charge. Any such distribution will be made to you in a single sum if the remaining Conversion Amount is less than $10,000 on your Annuity Date. Distributions under your Contract may have tax consequences. You should consult a qualified tax adviser for information on annuitization. Choosing Your Annuity Date You should choose your Annuity Date when you submit your application or we will apply a default Annuity Date to your Contract. You may change your Annuity Date by notifying us, in proper form, at least ten Business Days prior to the earlier of your current Annuity Date or your new Annuity Date. 28 Your Annuity Date cannot be earlier than your first Contract Anniversary and must occur on or before a certain date. If you have a sole Annuitant, your Annuity Date cannot be later than his or her 95th birthday. However, to meet Internal Revenue Service (IRS) minimum distribution rules, your required minimum distribution date may be earlier than your Annuity Date. If you have Joint Annuitants and a Non-Qualified Contract, your Annuity Date cannot be later than your younger Joint Annuitant's 95th birthday. Different requirements may apply in some states. If your Contract is a Qualified Contract, you may also be subject to additional restrictions. Adverse federal tax consequences may result if you choose an Annuity Date that is prior to an Annuitant's attained age 59 1/2. See FEDERAL TAX STATUS section in this Prospectus. You should carefully review the Annuity Options with a qualified tax adviser, and, for Qualified Contracts, reference should be made to the terms of the particular plan and the requirements of the Code for pertinent limitations respecting annuity payments, required minimum distributions, and other matters. For instance, under requirements for qualified plans under Section 401 of the Code and IRAs under section 408 of the Code, the entire interest under the Contract must be distributed to the Owner/Annuitant not later that the Owner/Annuitant's Required Beginning Date ("RBD"), or distributions over the life of the Owner/Annuitant (or the Owner/Annuitant and his Beneficiary) must commence not later than the RBD. The RBD for distributions from a Qualified Contract maintained for an IRA under Section 408 of the Code is generally April 1 of the calendar year following the year in which the Owner/Annuitant reaches age 70 1/2. The RBD for a Qualified Contract maintained for a qualified retirement or pension plan under Section 401 of the Code or a Section 403(b) annuity is April 1 of the calendar year following the later of the year in which the Owner/Annuitant reached 70 1/2, or, if the plan so provides, the year in which the Owner/Annuitant retires. There is no RBD for a Roth IRA maintained pursuant to Section 408A of the Code. If the Owner/Annuitant dies prior to (i) his RBD, or (ii) complete distribution from the Qualified Contract, the remainder shall be distributed as provided in the "Qualified Plan Death of Annuitant Distribution Rules" below. Life expectancy is computed by use of the expected return multiples V and VI of Regulation Section 1.72-9. Congress recently required the IRS to update these tables to reflect increased life expectancies. A subsequent life expectancy shall be calculated by reducing the life expectancy of the Beneficiary (or Owner/Annuitant) by one in each following calendar year. The method of distribution selected must comply with the minimum distribution rules of Code Section 401(a)(9), and the applicable proposed Regulations thereunder. The IRS issued revised proposed Regulations. Effective January 1, 2002, the IRS proposes to require that all IRA holders and Qualified Plan Participants (with one exception discussed below) use a Uniform Distribution Table to calculate their Required Minimum Distributions. The Uniform Distribution Table is based on a joint life expectancy and uses the IRA owner's actual age and assumes that the beneficiary is 10 years younger than the IRA owner. Note that under these proposed regulations, the IRA owner does not need to actually have a named beneficiary when they turn 70 1/2. The exception noted above is for an IRA owner who has a spouse, who is more than 10 years younger, as the sole beneficiary on the IRA. In that situation, the spouse's actual age (and life expectancy) will be used in the joint life calculation. For calendar for 2001, and thereafter, taxpayers (and the underlying Qualified Plan) may rely on either the revised proposed Regulations (discussed above) or the earlier proposed Regulations. If any future guidance from the IRS is more restrictive than the guidance in these revised proposed Regulations, the future guidance will be issued without retroactive effect. Under the earlier proposed Regulations, for retirement plans that qualify under Section 401 or 408 of the Code, the period elected for receipt of required minimum distributions or annuity payments under Annuity Options 2 and 4 generally may be: . no longer than the joint life expectancy of the Annuitant and Beneficiary in the year that the Annuitant reaches age 70 1/2, and 29 . must be shorter than such joint life expectancy if the Beneficiary is not the Annuitant's spouse and is more than 10 years younger than the Annuitant. Under Option 3, if the Beneficiary is not the Annuitant's spouse and is more than 10 years younger than the Annuitant, the 66 2/3% and 100% elections specified below may not be available. The restrictions on options for retirement plans that qualify under Sections 401 and 408 also apply to a retirement plan that qualifies under Section 403(b) with respect to amounts that accrued after December 31, 1986. If you annuitize only a portion of your Net Contract Value on your Annuity Date, you may, at that time, have the option to elect not to have the remainder of your Contract Value distributed, but instead to continue your Contract with that remaining Contract Value (a "continuing Contract"). If this option is available, you would then choose a second Annuity Date for your continuing Contract, and all references in this Prospectus to your "Annuity Date" would, in connection with your continuing Contract, be deemed to refer to that second Annuity Date. This option may not be available, or may be available only for certain types of Contracts. You should be aware that some or all of the payments received before the second Annuity Date may be fully taxable. We recommend that you call your tax adviser for more information if you are interested in this option. Default Annuity Date and Options If you have a Non-Qualified Contract and you do not choose an Annuity Date when you submit your application, your Annuity Date will be your Annuitant's 95th birthday or your younger Joint Annuitant's 95th birthday, whichever applies; however some states' laws may require a different Annuity Date. Certain Qualified Plans may require distribution to occur at an earlier age. If you have not specified an Annuity Option or do not instruct us otherwise, at your Annuity Date your Net Contract Value, less any charges for premium taxes, will be annuitized (if this net amount is at least $10,000) as follows: the net amount from your Fixed Option and DCA Plus Fixed Option will be converted into a fixed-dollar annuity and the net amount from your Variable Account Value will be converted into a variable-dollar annuity directed to the Subaccounts proportionate to your Account Value in each. If the net amount is less than $10,000, the entire amount will be distributed. If you have a Non-Qualified Contract, or if you have a Qualified Contract and are not married, your default Annuity Option will be Life with a ten year Period Certain. If you have a Qualified Contract and you are married, your default Annuity Option will be Joint and Survivor Life with survivor payments of 50%; your spouse will automatically be considered your Beneficiary. Choosing Your Annuity Option You may make three basic decisions about your annuity payments. First, you may choose whether you want those payments to be a fixed-dollar amount, and/or a variable-dollar amount, subject to state availability. Second, you may choose the form of annuity payments (see Annuity Options below). Third, you may decide how often you want annuity payments to be made (the "frequency" of the payments). You may not change these selections after the Annuity Date. Fixed and Variable Annuities You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable annuity (i.e., with variable-dollar amounts), or you may choose both, converting one portion of the net amount you annuitize into a fixed annuity and another portion into a variable annuity. If you select a fixed annuity, each periodic annuity payment received will be equal to the initial annuity payment, unless you select a joint and survivor life annuity with reduced survivor payments and the Primary Annuitant dies. Any net amount you convert to a fixed annuity will be held in our General Account, (but not under the Fixed Option or DCA Plus Fixed Option). If you select a variable annuity, you may choose as many Variable Investment Options as you wish; the amount of the periodic annuity payments will vary with the investment results of the Variable Investment Options selected. After the Annuity Date, Annuity Units may be exchanged among available Variable Investment 30 Options up to four times in any twelve-month period. How your Contract converts into a variable annuity is explained in more detail in THE CONTRACTS AND THE SEPARATE ACCOUNT section in the SAI. Annuity Options Four Annuity Options are currently available under the Contracts, although additional options may become available in the future. 1. Life Only. Periodic payments are made to the designated payee during the Annuitant's lifetime. Payments stop when the Annuitant dies. 2. Life with Period Certain. Periodic payments are made to the designated payee during the Annuitant's lifetime, with payments guaranteed for a specified period. You may choose to have payments guaranteed for anywhere from 5 through 30 years (in full years only). If the Annuitant dies before the guaranteed payments are completed, the Owner receives the remainder of the guaranteed payments. Additionally, if variable payments are elected under this option, you may redeem all remaining guaranteed variable payments after the Annuity Date. The amount available upon such redemption would be the present value of any remaining guaranteed variable payments at the assumed investment return. Any applicable withdrawal charge will be deducted from the present value as if you fully surrendered your contract. For the purposes of calculating the withdrawal charge, annuity payments will be treated as partial withdrawals. 3. Joint and Survivor Life. Periodic payments are made during the lifetime of the Primary Annuitant. After the death of the Primary Annuitant, periodic payments will continue to be made during the lifetime of the secondary Annuitant named in the election. You may choose to have the payments to the surviving secondary Annuitant equal 50%, 66 2/3% or 100% of the original amount payable made during the lifetime of the Primary Annuitant (you must make this election when you choose your Annuity Option). If you elect a reduced payment based on the life of the secondary Annuitant, fixed annuity payments will be equal to 50% or 66 2/3% of the original fixed payment payable during the lifetime of the Primary Annuitant; variable annuity payments will be determined using 50% or 66 2/3%, as applicable, of the number of Annuity Units for each Subaccount credited to the Contract as of the date of death of the Primary Annuitant. Payments stop when both Annuitants have died. 4. Period Certain Only. Periodic payments are made to the designated payee over a specified period. You may choose to have payments continue for anywhere from 5 through 30 years (in full years only). If the Annuitant dies before the guaranteed payments are completed, we pay the Owner the remainder of the guaranteed payments. Additionally, if variable payments are elected under this option, you may redeem all remaining guaranteed variable payments after the Annuity Date. The amount available upon such redemption would be the present value of any remaining guaranteed variable payments at the assumed investment return. Any applicable withdrawal charge will be deducted from the present value as if you fully surrendered your contract. For the purposes of calculating the withdrawal charge, annuity payments will be treated as partial withdrawals. If the Owner dies, after the Annuity Date, the Owner's rights are assumed by the Joint or Contingent Owner, if living; if not to the Beneficiary, if living; if not to the Contingent Beneficiary, if living; if not to the Owner's estate. For Qualified Contracts, please refer to the section in this Prospectus under Choosing Your Annuity Date . 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. Guaranteed Income Advantage Annuity Option If you purchase the GIA Rider, you may choose any of the Annuity Options described in the Prospectus, or you may choose the Guaranteed Income Advantage Annuity Option if 10 years have passed since the GIA Rider was 31 purchased and the GIA Rider is still in effect. You must choose fixed annuity payments under this Guaranteed Income Advantage Annuity Option. The guaranteed income purchased per $1,000 of the net amount applied to the annuity payments will be based on an annual interest rate of 2.5% and the 1983a Annuity Mortality Table with the age set back 10 years. The net amount applied to the annuity payments under the Guaranteed Income Advantage Annuity Option will be based on the higher of the following Guaranteed Income Base or the Enhanced Income Base, which are described below. 1. Guaranteed Income Base - If you purchase the GIA Rider on the Contract Date, the Guaranteed Income Base is equal to the Purchase Payments less an adjustment for each withdrawal, increased at a 5% effective annual rate of interest. We calculate the adjustment for each withdrawal by multiplying the Guaranteed Income Base prior to a withdrawal by the ratio of the amount of the withdrawal, including applicable withdrawal charges, to the Contract Value immediately prior to withdrawal. If you purchase the GIA Rider on a Contract Anniversary after the Contract Date, the Guaranteed Income Base is equal to the Contract Value on the date the GIA Rider is purchased, plus all Purchase Payments made after the GIA Rider is purchased, less an adjustment for each withdrawal occurring after the GIA is purchased, increased at a 5% effective annual rate of interest. We calculate the adjustment for each withdrawal by multiplying the Guaranteed Income Base prior to the withdrawal by the ratio of the amount of the withdrawal, including applicable withdrawal charges, to the Contract Value immediately prior to the withdrawal. The effective annual rate of interest will take into account the timing of when each Purchase Payment and withdrawal occurred. We accomplish this by applying a daily factor of 1.000133681 to each day's Guaranteed Income Base balance. The 5% effective annual rate of interest will stop accruing as of the earlier of: . the Contract Anniversary following the date the youngest Annuitant reaches his or her 80th birthday, . a full withdrawal of the amount available for withdrawal under the Contract, . a death benefit becomes payable under the Contract, . any termination of the Contract in accordance with the provisions of the Contract, . the Annuity Date, or . termination of the GIA Rider. On the Annuity Date and if the GIA Rider has not terminated, the net amount we apply to the annuity payments will be the Guaranteed Income Base reduced by any remaining withdrawal charges associated with additional Purchase Payments added to the Contract, any applicable state premium tax, and any outstanding Contract Debt. 2. Enhanced Income Base - The Enhanced Income Base is equal to your Net Contract Value on the Annuity Date plus an additional 15% of the amount equal to: . the Net Contract Value on the Annuity Date, less . the sum of all Purchase Payments applied to the Contract in the 12 months prior to the Annuity Date. On the Annuity Date, the net amount we apply to the annuity payments will be the Enhanced Income Base reduced by any withdrawal charges associated with additional Purchase Payments added to the Contract and any applicable state premium tax. The structure of the annuity payments that may be elected under the Guaranteed Income Advantage Annuity Option are: . 15 years or more Period Certain, . Life, . Joint and Survivor Life, or . Life with 10 Years or More Period Certain. 32 If you elect the Guaranteed Income Advantage (GIA) Annuity Option, the waiver of withdrawal charges upon annuitization will not apply. We will reduce the net amount applied to the annuity payments under the Guaranteed Income Advantage Annuity Option by any remaining withdrawal charges. The rider contains annuity tables for each GIA Annuity Option available. Frequency of Payments You may choose to have annuity payments made monthly, quarterly, semiannually, or annually. The amount of a variable payment will be determined in each period on the date corresponding to your Annuity Date, and payment will be made on the next succeeding day. Your initial annuity payment must be at least $250. See APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. Depending on the net amount you annuitize, this requirement may limit your options regarding the period and/or frequency of annuity payments. Your Annuity Payments Amount of the First Payment Your Contract contains tables that we use to determine the amount of the first annuity payment under your Contract, taking into consideration the annuitized portion of your Net Contract Value at the Annuity Date. This amount will vary, depending on the annuity period and payment frequency you select; this amount will be larger in the case of shorter Period Certain annuities and smaller for longer Period Certain annuities. Similarly, this amount will be greater for a Life Only annuity than for a Joint and Survivor Life annuity, because we will expect to make payments for a shorter period of time on a Life Only annuity. If you do not choose the Period Certain Only annuity, this amount will also vary depending on the age of the Annuitant(s) on the Annuity Date and, for some Contracts in some states, the sex of the Annuitant(s). For fixed annuity payments, the guaranteed income factors in our tables are based on an annual interest rate of 3% and the 1983a Annuity Mortality Table with the ages set back 10 years. If you elect a fixed annuity, fixed annuity payments will be based on the periodic income factors in effect for your Contract on the Annuity Date which are at least the guaranteed income factors under the Contract. For variable annuity payments, the tables are based on an assumed annual investment return of 5% and the 1983a Annuity Mortality Table with the ages set back 10 years. If you elect a variable annuity, your initial variable annuity payment will be based on the applicable variable annuity income factors in effect for your Contract or the Annuity Date which are at least the variable annuity income factors under the contract. You may choose any other annuity option we may offer on the option's effective date. A higher assumed investment return would mean a larger first variable annuity payment, but subsequent payments would increase only when actual net investment performance exceeds the higher assumed rate and would fall when actual net investment performance is less than the higher assumed rate. A lower assumed rate would mean a smaller first payment and a more favorable threshold for increases and decreases. If the actual net investment performance is a constant 5% annually, annuity payments will be level. The assumed investment return is explained in more detail in the SAI under THE CONTRACTS AND THE SEPARATE ACCOUNT. Death Benefits Death benefit proceeds may be payable on proof of death before the Annuity Date of the Annuitant or of any Contract Owner while the Contract is in force. If there are Joint Owners, the Contract will be owned by the Joint Owners as Joint Tenants With Right of Survivorship and not as Tenants in Common. The amount of the death benefit proceeds will be paid according to the Death Benefit Proceeds section below. The "Notice Date" is the day on which we receive, in proper form, proof of death and instructions regarding payment of death benefit proceeds. 33 Death Benefit Proceeds Death benefit proceeds will be payable upon receipt, in proper form, of proof of death and instructions regarding payment of death benefit proceeds. Such proceeds will equal the amount of the death benefit reduced by any charges for premium taxes and any Contract Debt. The death benefit proceeds will be payable in a single sum, as an Annuity Option under this Contract or towards the purchase of any Annuity Option we then offer, or in accordance with IRS regulations (see Death of Owner Distribution Rules). Any such Annuity Option is subject to all restrictions (including minimum amount requirements) as are other annuities under this Contract; in addition, there may be legal requirements that limit the recipient's Annuity Options and the timing of any payments. A recipient should consult a qualified tax adviser before making a death benefit election. Additional provisions apply if your Contract names a Joint or Contingent Owner or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your spouse. Further information about these provisions is contained in the SAI. Death of Owner Distribution Rules If an Owner of a Non-Qualified Contract dies before the Annuity Date, any death benefit proceeds under this Contract must complete distribution within five years after the Owner's death. In order to satisfy this requirement, the designated recipient must receive a final lump sum payment by the fifth anniversary of the death of the Contract Owner, or elect to receive an annuity for life or over a period that does not exceed the life expectancy of the designated recipient with annuity payments that start within one year after the Owner's death or, if allowed by applicable law, a systematic distribution over a period not exceeding the beneficiary's life expectancy using a method that would be acceptable for the purposes of calculating the minimum distribution required under section 401(a)(9) of the Code. If an election to receive an annuity is not made within 60 days of our receipt of proof in proper form of the Owner's death or, if earlier, 60 days (or shorter period as we permit) prior to the first anniversary of the Owner's death, the lump sum option will be deemed elected, unless otherwise required by law. If the lump sum option is deemed elected, we will consider that deemed election as receipt of instructions regarding payment of death benefit proceeds. If a Non-Qualified Contract has Joint Owners, this requirement applies to the first Owner to die. The Owner may designate that the Beneficiary will receive death benefit proceeds through annuity payments for life or over a period that does not exceed the Beneficiary's life expectancy. The Owner must designate the payment method in writing in a form acceptable to us. The Owner may revoke the designation only in writing and only in an acceptable form to us. Once the Owner dies, the Beneficiary cannot revoke or modify the Owner's designation. If the Owner was not an Annuitant but was a Joint Owner and there is a surviving Joint Owner, that surviving Joint Owner is the designated recipient; if no Joint Owner survives but a Contingent Owner is named in the Contract and is living, he or she is the designated recipient, otherwise the Beneficiary, if living; if not, the Contingent Beneficiary, if living; if not, the Owner's estate. If the Owner was an Annuitant, the designated recipient is the Joint Owner or Contingent Owner, if living; if not the Beneficiary, if living; if not, the Contingent Beneficiary, if living; if not, the Owner's estate. Spousal Continuation Generally, a sole designated recipient who is the Owner's spouse may elect to become the Owner (and sole Annuitant if the deceased Owner had been the Annuitant) and continue the Contract until the earliest of the spouse's death, the death of the Annuitant, or the Annuity Date. However, under proposed Regulations, after the Owner's Death, it is possible that a spouse may not be treated as the Owner of a Qualified Contract which is qualified pursuant to section 403 of the Code, for purposes of applying the minimum required distribution rules of the Code. On the Notice Date, if the surviving spouse is deemed to have continued the Contract, Pacific Life will set the Contract Value equal to the death benefit proceeds that would have been payable to the spouse as the deemed Beneficiary/designated recipient of the death benefit ("Add-In Amount"). The Add-In Amount will be added to the Contract Value on the Notice Date. There will not be an adjustment to the Contract Value 34 if the Contract Value is equal to the death benefit proceeds as of the Notice Date. The Add-In Amount will be allocated among Investment Options in accordance with the current allocation instructions for the Contract and may be, under certain circumstances considered earnings. A Joint or Contingent Owner who is the designated recipient but not the Owner's spouse may not continue the Contract. If you are a non-individual Owner of a Contract other than a Contract issued under a Qualified Plan which is qualified pursuant to Section 401, 403 or 457(b) of the Code, the Primary Annuitant will be treated as the Owner of the Contract for purposes of these Distribution Rules. If there is a change in the Primary Annuitant prior to the Annuity Date, such change will be treated as the death of the Owner. The amount of the death benefit in this situation will be: . the Contract Value if the non-individual Owner elects to maintain the Contract and reinvest the Contract Value into the Contract in the same amount as immediately prior to the distribution, or . the Contract Value less any withdrawal and/or transaction fee, any charges for withdrawals, EEG Charge, GIA Charge, Guaranteed Protection Charge, and/or premium taxes, if the non-individual Owner elects a cash distribution. The amount of the death benefit will be determined as of the Business Day we receive, in proper form, the request to change the Primary Annuitant and instructions regarding maintaining the Contract or cash distribution. The Contract incorporates all applicable provisions of Code Section 72(s) and any successor provision, as deemed necessary by us to qualify the Contract as an annuity contract for federal income tax purposes, including the requirement that, if the Owner dies before the Annuity Date, any death benefit proceeds under the Contract shall be distributed within five years of the Owner's death (or such other period that we offer and that is permitted under the Code or such shorter period as we may require). Qualified Plan Death of Annuitant Distribution Rules Under Internal Revenue Service regulations and our administrative procedures, if the Contract is owned under a Qualified Plan pursuant to sections 401, 403, 408, 408A, or 457(b) of the Code and the Annuitant dies before the commencement of distributions, the payment of any death benefit must be made to the designated recipient in accordance to one of two rules. One rule generally requires the death benefit to commence distribution by December 31 of the calendar year following the calendar year of the Annuitant's death and continue over the life of his or her Beneficiary (the "life expectancy method"). The second rule requires distribution of the entire death benefit no later than December 31 of the calendar year in which the fifth anniversary of the Annuitant's death falls (the "five-year rule"). However, the life expectancy method and the five-year rule are modified if the Beneficiary is a surviving spouse. If the surviving spouse elects to continue the contract and not do an eligible rollover to an IRA in his or her name, then he or she will be subject to the five-year rule. However, the surviving spouse may waive the five-year requirement and elect to take distributions over his or her life expectancy, and if the surviving spouse elects to defer the commencement of required distributions beyond the first anniversary of the Annuitant's death, the surviving spouse will be deemed to continue the Contract. In this instance, the surviving spouse may defer required distributions until the later of: . December 31 of the year following the year the Annuitant died, or . December 31 of the year in which the Annuitant would have turned 70 1/2. Further, under our administrative procedures, if the required distributions election is not received by us in good order by December 31, of the year following the Annuitant's death or, the December of the year in which the Annuitant would have attained age 70 1/2, the lump sum option will be deemed by us to have been elected, unless otherwise required by law. If the lump sum option is deemed elected, we will treat that deemed election as receipt of instructions regarding payment of death benefit proceeds. 35 If the Annuitant dies after the commencement of Required Minimum Distributions but before the Annuitant's entire interest in the Contract (other than a Roth IRA) has been distributed, the remaining interest in the Contract must be distributed to the designated recipient at least as rapidly as under the distribution method in effect at the time of the Annuitant's death. The Amount of the Death Benefit: Death of Annuitant If the sole Annuitant, or the first death of an Owner who is also an Annuitant, dies prior to the Annuity Date, the death benefit will be equal to the greater of: . your Contract Value as of the Notice Date, or . your aggregate Purchase Payments reduced by an amount for each withdrawal, which is calculated by multiplying the aggregate Purchase Payments received prior to each withdrawal by the ratio of the amount of the withdrawal, including any withdrawal charge, to the Contract Value immediately prior to each withdrawal. 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 proceeds are not yet payable. If there is no surviving Joint or Contingent Annuitant, the death benefit proceeds are payable to the Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. If the Owner is not the Annuitant and they die simultaneously, the death benefit will be calculated under the Death of Annuitant provisions and death benefit proceeds will be paid to the Joint Owner if living; if not, to the Contingent Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. Optional Stepped-Up Death Benefit Rider If you purchase the Stepped-Up Death Benefit Rider (SDBR) at the time your application is completed (subject to state availability) upon the death of the sole Annuitant, or the first death of an Owner who is also an Annuitant, prior to the Annuity Date, the death benefit will be equal to the greater of (a) or (b) below: (a) the Death Benefit Amount as of the Notice Date. The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments reduced by an amount for each withdrawal, which is calculated by multiplying the aggregate Purchase Payments received prior to each withdrawal by the ratio of the amount of the withdrawal, including any withdrawal charge, to the Contract Value immediately prior to each withdrawal. (b) the Guaranteed Minimum Death Benefit Amount as of the Notice Date. The actual Guaranteed Minimum Death Benefit Amount is calculated only when death benefit proceeds become payable as a result of the death of the sole Annuitant, or the first death of an Owner who is also an Annuitant, prior to the Annuity Date and is determined as follows: First we calculate what the Death Benefit Amount would have been as of your first Contract Anniversary and each subsequent contract Anniversary that occurs while the Annuitant is living and before the Annuitant reaches his or her 81st birthday (each of these Contract anniversaries is a "Milestone Date"). We then adjust the Death Benefit Amount for each milestone date by: . adding the aggregate amount of any Purchase Payments received by us since the Milestone Date, and 36 . subtracting an amount for each withdrawal that has occurred since that Milestone Date, which is calculated by multiplying the Death Benefit Amount by the ratio of the amount of each withdrawal that has occurred since that Milestone Date, including any withdrawal charge, to the Contract Value immediately prior to the withdrawal. The highest of these adjusted Death Benefit Amounts for each Milestone Date, as of the Notice Date, is your Guaranteed Minimum Death Benefit Amount if you purchase the SDBR. Calculation of the actual Guaranteed Minimum Death Benefit Amount is only made once death benefit proceeds become payable under your Contract. Optional Premier Death Benefit Rider If you purchase the Premier Death Benefit Rider (PDBR) at the time your application is completed (subject to state availability), upon the death of the sole Annuitant, or the first death of an Owner who is also an Annuitant, prior to the Annuity Date, the death benefit will be equal to the greater of (a) or (b) below: (a) the Death Benefit Amount as of the Notice Date. The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments less an adjusted amount for each withdrawal increased at an effective annual rate of 6% to that day, subject to a maximum of two times the difference between the aggregate Purchase Payments and withdrawals, including any withdrawal charge. The 6% annual rate of growth will take into account the timing of when each Purchase Payment and withdrawal occurred by applying a daily factor of 1.00015965 to each day's balance. See APPENDIX A: STATE LAW VARIATIONS. The 6% effective annual rate of growth will stop accruing as of the earlier of: . the Contract anniversary following the date the Annuitant reaches his or her 80th birthday, or . the date of death of the sole Annuitant, or . the Annuity Date. To determine the adjusted amount for each withdrawal we: . divide the amount of each withdrawal, including withdrawal charges, if any, by your Contract Value immediately before that withdrawal; and . then multiply the result by your Death Benefit Amount (as described above), immediately before that withdrawal. (b) the Guaranteed Minimum Death Benefit Amount as of the Notice Date. The actual Guaranteed Minimum Death Benefit Amount is calculated only when death benefit proceeds become payable as a result of the death of the sole Annuitant or the first death of an Owner who is also an Annuitant, prior to the Annuity Date, and is determined as follows: First, we calculate what the Death Benefit Amount would have been as of the quarterly anniversary following the Contract Date and as of each subsequent quarterly anniversary that occurs while the Annuitant is living and up to and including the Contract Anniversary following the Annuitant's 65th birthday. Quarterly anniversaries are measured from the Contract Date. After the Contract Anniversary following the Annuitant's 65th birthday, we calculate what the Death Benefit Amount would have been as of each Contract Anniversary that occurs while the Annuitant is living and before the Annuitant reaches his or her 81st birthday. Each quarterly anniversary and each Contract Anniversary in which a Death Benefit Amount is calculated is referred to as a "Milestone Date". We then adjust the Death Benefit Amount for each Milestone Date by: . adding the aggregate amount of any Purchase Payments received by us since that Milestone Date; and 37 . subtracting an amount for each withdrawal that has occurred since that Milestone Date, which is calculated by multiplying the Death Benefit Amount by the ratio of the amount of each withdrawal that has occurred since that Milestone Date, including any withdrawal charge, to the Contract Value immediately prior to the withdrawal. The highest of these adjusted Death Benefit Amounts as of the notice date is your Guaranteed Minimum Death Benefit if the PDBR is purchased. Calculation of the actual Guaranteed Minimum Death Benefit is only made once death benefit proceeds become payable under your Contract. Optional Earnings Enhancement Guarantee (EEG) Rider If you purchase the EEG Rider, (subject to state availability), an Earnings Enhancement Guarantee amount (EEG Amount) is added to the death benefit proceeds when such proceeds become payable as a result of the sole or last Annuitant's death or the first death of an Owner who is also an Annuitant. The EEG Rider is also called the Guaranteed Earnings Enhancement (GEE) Rider and the Earnings Enhancement Guarantee Amount is called the GEE Amount. The EEG amount is calculated as follows: If the age of the oldest Annuitant was age 69 or younger on the Effective Date of the Rider, the EEG amount is equal to the lesser of: . 40% of Earnings, or . 40% of Remaining Purchase Payments, excluding any Purchase Payments made in the 12 months prior to the date of death, adjusted for withdrawals. If the age of the oldest Annuitant was age 70 to 75 on the Effective Date of the Rider, the EEG Amount is equal to the lesser of: . 25% of Earnings, or . 25% of Remaining Purchase Payments, excluding any Purchase Payments made in the 12 months prior to the date of death, adjusted for withdrawals. For purposes of calculating the EEG Amount, Earnings are equal to the Contract Value as of the date of death minus Remaining Purchase Payments. Remaining Purchase Payments is defined as (a) or (b) below: (a) If the Rider is effective on the Contract Date, Remaining Purchase Payments are equal to: . the Initial Purchase Payment, plus . any additional Purchase Payments added, minus . the amount that each withdrawal exceeds the amount of Earnings in the Contract immediately prior to such withdrawal. Withdrawals are assumed to be taken from Earnings first, then from Purchase Payments in the order they were received. (b) If the Rider is effective after the Contract Date, Remaining Purchase Payments are equal to: . the Contract Value on the Effective Date, plus . any additional Purchase Payments added since the Effective Date of the Rider, minus . the amount that each withdrawal taken after the Effective Date of the Rider exceeds the amount of Earnings in the Contract accumulated since that date. Withdrawals are assumed to be taken first from Earnings accumulated since the Effective Date of the Rider, then from Purchase Payments in the order that they were received. If the Surviving Spouse of the deceased Owner continues the Contract in accordance with its terms and conditions, then all provisions of the Rider for the Surviving Spouse will be based on the age of the Surviving 38 Spouse on the date of death of the deceased Owner. If the Surviving Spouse is over age 75 on the date of death, the Rider will not be continued for such Surviving Spouse and the benefits and charges provided by the Rider will no longer be applied. The Amount of the Death Benefit: Death of a Contract Owner If a Contract Owner who is not an Annuitant dies before the Annuity Date, the amount of the death benefit will be equal to your Contract Value as of the Notice Date and will be paid in accordance with the Death Benefit Proceeds section. The death benefit proceeds will be paid to the Joint Owner, if living; if not, to the Contingent Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. See THE GENERAL ACCOUNT--Withdrawals and Transfers section in this Prospectus. If a Contract Owner who is an Annuitant dies before the Annuity Date, the amount of the death benefit will be determined in accordance with the The Amount of the Death Benefit: Death of Annuitant section above, and will be paid in accordance with the Death Benefit Proceeds section. The death benefit proceeds will be paid to the Joint Owner, if living; if not, to the Beneficiary, if living; if not, to the Contingent Beneficiary, if living; if not, to the Owner's estate. WITHDRAWALS Optional Withdrawals You may, on or prior to your Annuity Date, withdraw all or a portion of the amount available under your Contract while the Annuitant is living and your Contract is in force. You may surrender your Contract and make a full withdrawal at any time. Except as provided below, beginning 30 days after your Contract Date, you also may make partial withdrawals from your Investment Options at any time. You may request to withdraw a specific dollar amount or a specific percentage of an Account Value or your Net Contract Value. You may choose to make your withdrawal from specified Investment Options; if you do not specify Investment Options, your withdrawal will be made from all of your Investment Options proportionately. Each partial withdrawal must be for $500 or more, except pre-authorized withdrawals, which must be at least $250. If your partial withdrawal from an Investment Option would leave a remaining Account Value in that Investment Option of less than $500, 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. Any such DCA Plus Fixed Option balance or any amount that would otherwise be allocated to the DCA Plus Fixed Option will be allocated to the Variable Investment Options according to your most recent DCA Plus transfer instructions. If your partial withdrawal leaves you with a Net Contract Value of less than $1,000, we have the right, at our option, to terminate your Contract and send you the withdrawal proceeds described in the next section below. Partial withdrawals from the Fixed Option in any Contract Year are subject to restrictions. See GENERAL ACCOUNT--Withdrawals and Transfers and APPENDIX A: STATE LAW VARIATIONS sections in this Prospectus. Amount Available for Withdrawal The amount available for withdrawal is your Net Contract Value at the end of the Business Day on which your withdrawal request is effective, less any applicable Annual Fee, any EEG Charge, any GIA Charge, any Guaranteed Protection Advantage Charge, withdrawal charge, withdrawal transaction fee, and any charge for premium taxes. 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 and THE GENERAL ACCOUNT--Withdrawals and Transfers section in this Prospectus. You assume investment risk on Purchase Payments 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. 39 Withdrawal Transaction Fees There is currently no transaction fee for partial withdrawals. However, we reserve the right to impose a withdrawal transaction fee in the future of up to $15 for each partial withdrawal (including pre-authorized partial withdrawals) in excess of 15 in any Contract Year. Any such fee would be charged against your Investment Options proportionately based on your Account Value in each Investment Option immediately after the withdrawal. Pre-Authorized Withdrawals If your Contract Value is at least $5,000, you may select the pre-authorized withdrawal option, and you may choose monthly, quarterly, semiannual or annual withdrawals. Each withdrawal must be for at least $250. Each pre-authorized withdrawal is subject to federal income tax on its taxable portion and may be subject to a penalty tax of 10% or more if you have not reached age 59 1/2. See FEDERAL TAX STATUS and THE GENERAL ACCOUNT--Withdrawals and Transfers sections in this Prospectus. Additional information and options are set forth in the SAI and in the Pre-Authorized Withdrawal section of your application. Special Requirements for Full Withdrawals If you wish to withdraw the entire amount available under your Contract, you must either return your Contract to us or sign and submit to us a "lost Contract affidavit." Special Restrictions Under Qualified Plans Individual Qualified Plans may have additional rules regarding withdrawals from a Contract purchased under such a Plan. In general, 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: . severance from employment, . death, . disability as defined in Section 72(m)(7) of the Code, . reaching age 59 1/2, or . hardship as defined for purposes of Section 401 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 and to a penalty tax of 10% or more 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 section in this Prospectus. Distributions may also trigger withholding for state income taxes. The tax and ERISA rules relating to Contract withdrawals are complex. We are not the administrator of any Qualified Plan. You should consult your qualified tax adviser and/or your plan administrator before you withdraw any portion of your Contract Value. 40 Effective Date of Withdrawal Requests Withdrawal requests are normally effective on the Business Day we receive them in proper form. If you make Purchase Payments by check and submit a withdrawal request immediately afterwards, payment of your withdrawal proceeds may be delayed until we receive confirmation in our Annuities administrative office that your check has cleared. 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 section in this Prospectus. Right to Cancel ("Free Look") During the Free Look period, you have the right to cancel your Contract and return it to us for a refund. If you return your Contract, it will be canceled. The amount of your refund may be more or less than the Purchase Payments you've made, depending on the state where you signed your application. Generally, the Free Look period ends 10 days after you receive your Contract, but may vary by state. Also, some states may have a different Free Look period if you are replacing another annuity contract or life insurance policy. For more information, see APPENDIX A: STATE LAW VARIATIONS section in this Prospectus. In most states, your refund will be your Contract Value based upon the next determined Accumulated Unit Value ("AUV") after we receive your Contract for cancellation, plus a refund of any amount that may have been deducted as Contract charges to pay for premium taxes, and minus the Contract Value attributable to any additional amount credited as described in CHARGES, FEES AND DEDUCTIONS--Waivers and Reduced Charges section in this Prospectus. This means you will not keep any amounts that we add as a credit or any gains and losses on the amounts credited (but if the credited amounts and gains on such amounts exceed the withdrawal charge percentage on your Contract, we will refund the amount of the excess). You will receive any Contract fees and charges that we deducted from the credited amounts. We have applied to the Securities and Exchange Commission for an exemptive order to change the amount you would receive if you return your Contract during the Free Look period. We can not be sure that the SEC will grant this order, but if it is granted, you would not receive any amounts that we add as a credit or Contract fees and charges deducted from those amounts, but you would keep the gains or losses on the credited amounts. Thus an Owner who returns a Contract within the Free Look period bears only the investment risk on amounts attributable to Purchase Payments. There are some states that require us to return a different amount if you are replacing another annuity contract or life insurance policy. For any Contract issued as an IRA returned within 7 days after you receive it, we are required to return all Purchase Payments (less any withdrawals made). You'll find a complete description of the Free Look period and amount to be refunded that applies to your Contract on the Contract's cover page, or on a notice that accompanies your Contract. Your Purchase Payments will be allocated in accordance with your application or your most recent allocation instructions. PACIFIC LIFE AND THE SEPARATE ACCOUNT Pacific Life Pacific Life Insurance Company is a life insurance company that is based in California. Along with our subsidiaries and affiliates, our operations include life insurance, annuity, pension and institutional products, mutual funds, group employee benefits, broker-dealer operations and investment and advisory services. As of the end of 2001, we had $124.8 billion of individual life insurance in force and total admitted assets of approximately $52.0 billion. We are ranked the 15th largest life insurance carrier in the U.S. in terms of 2001 admitted assets. 41 The Pacific Life family of companies has total assets and funds under management of $357 billion. We are authorized to conduct life insurance and annuity business in the District of Columbia and all states except New York. Our principal office is located at 700 Newport Center Drive, Newport Beach, California 92660. We were originally organized 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. On September 1, 1997, we converted from a mutual life insurance company to a stock life insurance company ultimately controlled by a mutual holding company and were authorized by California regulatory authorities to change our name to Pacific Life Insurance Company. Pacific Life is a subsidiary of Pacific LifeCorp, a holding company, which, in turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding company. Under their respective charters, Pacific Mutual Holding Company must always hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life. Owners of Pacific Life's annuity contracts and life insurance policies have certain membership interests in Pacific Mutual Holding Company, consisting principally of the right to vote on the election of the Board of Directors of the mutual holding company and on other matters, and certain rights upon liquidation or dissolutions of the mutual holding company. Our subsidiary, Pacific Select Distributors, Inc. (PSD), serves as the principal underwriter (distributor) for the Contracts. PSD is located at 700 Newport Center Drive, Newport Beach, California 92660. We and PSD enter into selling agreements with broker-dealers, under which such broker-dealers act as agents of ours and PSD in the sale of the Contracts. We may provide you with reports of our ratings both as an insurance company and as to our financial strength with respect to our General Account assets. Separate Account A Separate Account A was established on September 7, 1994 as a separate account of ours, and is registered with the SEC under the 1940 Act, as a type of investment company called a "unit investment trust." Obligations arising under your Contract are our general corporate obligations. We are also the legal owner of the assets in the Separate Account. Assets of the Separate Account attributed to the reserves and other liabilities under the Contract and other contracts issued by us that are supported by the Separate Account may not be charged with liabilities arising from any of our other business; any income, gain or loss (whether or not realized) from the assets of the Separate Account are credited to or charged against the Separate Account without regard to our other income, gain or loss. We may invest money in the Separate Account in order to commence its operations and for other purposes, but not to support contracts other than variable annuity contracts. A portion of the Separate Account's assets may include accumulations of charges we make against the Separate Account and investment results of assets so accumulated. These additional assets are ours and we may transfer them to our General Account at any time; however, before making any such transfer, we will consider any possible adverse impact the transfer might have on the Separate Account. Subject to applicable law, we reserve the right to transfer our assets in the Separate Account to our General Account. 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 the accompanying Prospectus and the SAI for the Fund for more information. 42 FINANCIAL HIGHLIGHTS The table below is designed to help you understand how the Variable Investment Options have performed. It shows the value of a Subaccount Unit at the beginning and end of each period, as well as the number of Subaccount Units at the end of each period. A Subaccount Unit is also called an Accumulation Unit. This information in the table for the period ended December 31, 2001 is included in the financial statements of Separate Account A which have been audited by Deloitte & Touche LLP, independent auditors. You should read the table in conjunction with the financial statements for Separate Account A, which are included in its annual report dated as of December 31, 2001.
2001 -------------------------------------- With With Stepped-Up Premier Without Death Benefit Death Benefit Rider Rider Rider ------------------------------------------------------------------------------ Blue Chip/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.64 $9.62 $9.61 Number of Subaccount Units outstanding at end of period 3,907,567 1,638,628 1,290,854 -------------------------------------------------------------------------------- Aggressive Growth/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.74 $9.72 $9.71 Number of Subaccount Units outstanding at end of period 641,768 330,675 241,308 -------------------------------------------------------------------------------- Emerging Markets/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.22 $10.21 $10.20 Number of Subaccount Units outstanding at end of period 211,483 78,029 90,230 -------------------------------------------------------------------------------- Diversified Research/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.56 $10.55 $10.54 Number of Subaccount Units outstanding at end of period 1,497,959 689,111 496,758 -------------------------------------------------------------------------------- Small-Cap Equity/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.29 $11.27 $11.26 Number of Subaccount Units outstanding at end of period 918,780 474,319 359,490 -------------------------------------------------------------------------------- International Large-Cap/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.23 $9.22 $9.21 Number of Subaccount Units outstanding at end of period 2,663,769 989,214 886,013 -------------------------------------------------------------------------------- I-Net Tollkeeper/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.25 $9.24 $9.23 Number of Subaccount Units outstanding at end of period 177,211 59,175 61,145 -------------------------------------------------------------------------------- Financial Services/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.97 $9.95 $9.94 Number of Subaccount Units outstanding at end of period 823,284 340,866 347,151 -------------------------------------------------------------------------------- Health Sciences/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.42 $11.40 $11.39 Number of Subaccount Units outstanding at end of period 928,216 384,333 566,124 -------------------------------------------------------------------------------- Technology/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.78 $9.77 $9.76 Number of Subaccount Units outstanding at end of period 625,538 374,247 345,460 -------------------------------------------------------------------------------- Telecommunications/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $7.50 $7.49 $7.48 Number of Subaccount Units outstanding at end of period 286,722 119,160 129,694 -------------------------------------------------------------------------------- Multi-Strategy/4/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.32 $10.31 $10.29 Number of Subaccount Units outstanding at end of period 1,473,184 519,267 380,828 -------------------------------------------------------------------------------- Large-Cap Core (formerly called Equity Income)/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.16 $10.14 $10.13 Number of Subaccount Units outstanding at end of period 1,984,450 840,251 697,289 --------------------------------------------------------------------------------
43
2001 -------------------------------------- With With Stepped-Up Premier Without Death Benefit Death Benefit Rider Rider Rider -------------------------------------------------------------------------------- Strategic Value/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.43 $9.42 $9.41 Number of Subaccount Units outstanding at end of period 703,659 414,009 341,710 -------------------------------------------------------------------------------- Growth LT/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.44 $9.43 $9.42 Number of Subaccount Units outstanding at end of period 3,483,870 1,294,812 1,275,421 -------------------------------------------------------------------------------- Focused 30/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.14 $11.12 $11.11 Number of Subaccount Units outstanding at end of period 384,534 133,218 151,411 -------------------------------------------------------------------------------- Mid-Cap Value/2/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.55 $11.53 $11.52 Number of Subaccount Units outstanding at end of period 3,095,066 1,301,503 1,186,018 -------------------------------------------------------------------------------- International Value/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.04 $9.03 $9.02 Number of Subaccount Units outstanding at end of period 2,504,993 834,945 851,203 -------------------------------------------------------------------------------- Capital Opportunities/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.36 $9.35 $9.34 Number of Subaccount Units outstanding at end of period 1,163,015 561,878 448,482 -------------------------------------------------------------------------------- Mid-Cap Growth/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.62 $10.61 $10.60 Number of Subaccount Units outstanding at end of period 1,200,646 756,565 537,801 -------------------------------------------------------------------------------- Global Growth/1/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.55 $9.54 $9.53 Number of Subaccount Units outstanding at end of period 355,428 169,187 91,333 -------------------------------------------------------------------------------- Equity Index/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.97 $9.96 $9.95 Number of Subaccount Units outstanding at end of period 3,326,399 1,114,646 1,209,353 -------------------------------------------------------------------------------- Small-Cap Index/5/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.07 $11.05 $11.04 Number of Subaccount Units outstanding at end of period 603,720 204,137 186,900 -------------------------------------------------------------------------------- Real Estate (formerly called REIT)/6/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.94 $10.92 $10.91 Number of Subaccount Units outstanding at end of period 1,127,914 415,872 323,797 -------------------------------------------------------------------------------- Inflation Managed/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.06 $10.04 $10.03 Number of Subaccount Units outstanding at end of period 3,532,994 1,016,780 772,661 -------------------------------------------------------------------------------- Managed Bond/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.30 $10.28 $10.27 Number of Subaccount Units outstanding at end of period 9,330,375 3,094,696 2,643,122 -------------------------------------------------------------------------------- Money Market/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.12 $10.10 $10.09 Number of Subaccount Units outstanding at end of period 8,675,282 3,485,768 2,157,872 -------------------------------------------------------------------------------- High Yield Bond/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.59 $9.57 $9.56 Number of Subaccount Units outstanding at end of period 1,862,023 482,390 406,825 -------------------------------------------------------------------------------- Equity/6/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $10.18 $10.16 $10.15 Number of Subaccount Units outstanding at end of period 954,219 442,282 388,844 --------------------------------------------------------------------------------
44
2001 -------------------------------------- With With Stepped-Up Premier Without Death Benefit Death Benefit Rider Rider Rider -------------------------------------------------------------------------------- Aggressive Equity/3/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $11.01 $11.00 $10.99 Number of Subaccount Units outstanding at end of period 293,748 137,859 113,526 -------------------------------------------------------------------------------- Large-Cap Value/6/ Subaccount Unit Value at beginning of period $10.00 $10.00 $10.00 Subaccount Unit Value as of December 31 $9.94 $9.93 $9.92 Number of Subaccount Units outstanding at end of period 5,006,090 2,023,116 1,787,341 --------------------------------------------------------------------------------
The Equity Income and Research Subaccounts began operations on January 2, 2002 and are not included in the Financial Highlights. /1/ This Subaccount began operations on April 05, 2001. /2/ This Subaccount began operations on April 03, 2001. /3/ This Subaccount began operations on April 02, 2001. /4/ This Subaccount began operations on April 06, 2001. /5/ This Subaccount began operations on April 09, 2001. /6/ This Subaccount began operations on April 04, 2001. 45 FEDERAL TAX STATUS The following summary of federal income tax consequences is based on our understanding of current tax laws and regulations, which may be changed by legislative, judicial or administrative action. The summary is general in nature and is not intended as tax advice. Moreover, it 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 agent for a natural person. If a contract is not owned or held by a natural person or as agent for a natural person, the contract generally will not be treated as an "annuity" for tax purposes, meaning that the contract owner will be taxed currently on annual increases in Contract Value at ordinary income rates unless some other exception applies. 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 an agent for a natural person, and that we (as the issuing insurance company), and not the Contract Owner(s), will be treated as the owner of the investments underlying the Contract. Accordingly, generally 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 in the Fund's SAI. We believe the underlying Variable Investment Options for the Contract meet these requirements. In connection with the issuance of temporary regulations relating to diversification requirements under Section 817(h), the Treasury Department announced that such regulations do not provide guidance concerning the extent to which you may direct your investments to particular divisions of a separate account. Such guidance may be included in regulations or revenue rulings under Section 817(d) relating to the definition of a variable contract. Because of this uncertainty, we reserve the right to make such changes as we deem necessary or appropriate to ensure that your Contract continues to qualify as an annuity for tax purposes. Any such changes will apply uniformly to affected Contract Owners and will be made with such notice to affected Contract Owners as is feasible under the circumstances. Taxes Payable by Contract Owners: General Rules These general rules apply to Non-Qualified Contracts. As discussed below, however, tax rules may differ for Qualified Contracts and you should consult a qualified tax adviser if you are purchasing a Qualified Contract. Distributions of net investment income or capital gains that each Subaccount receives from its corresponding 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. Multiple Contracts All Non-Qualified Contracts that are issued by us, or our affiliates, to the same Owner during any calendar year are treated as one Contract for purposes of determining the amount includible in gross income under Internal Revenue Code (Code) Section 72(e). Further, the Treasury Department has specific authority to issue regulations that prevent the avoidance of Section 72(e) through the serial purchase of Contracts or otherwise. 46 Taxes Payable on Withdrawals Amounts you withdraw before annuitization, including amounts withdrawn from your Contract Value in connection with partial withdrawals for payment of any charges and fees, will be treated first as taxable income to the extent that your Contract Value exceeds the aggregate of your Investments (reduced by non- taxable amounts previously received), and then as non-taxable recovery of your Investments. The assignment or pledge of (or agreement to assign or pledge) 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 us and any of our affiliates are treated as a single annuity contract for purposes of determining whether an amount is subject to tax under these rules. The Code further provides that the taxable portion of a withdrawal or other distribution may be subject to a penalty tax equal to 10% of that taxable portion unless the withdrawal is: . made on or after the date you reach age 59 1/2, . made by a Beneficiary after your death, . attributable to you becoming disabled, . in the form of level annuity payments under a lifetime annuity, or . any distribution to the extent it is required under the required minimum distribution rules of section 401(a)(9) of the Code. Additional exceptions may apply to certain Qualified Contracts (see the Taxes Payable on Annuity Payments section). Taxes Payable on Optional Riders It is our understanding that the charges relating to any optional death benefit rider (SDBR, or PDBR, and/or EEG) are not subject to current taxation and we will not report them as such. However, the IRS may determine that these charges should be treated as partial withdrawals subject to current taxation to the extent of any gain and, if applicable, the 10% tax penalty. We reserve the right to report any optional death benefit rider charges as partial withdrawals if we believe that we would be expected to report them in accordance with IRS regulations. As of the date of this Prospectus, IRS regulations state that Individual Retirement Accounts (IRAs) may not invest in life insurance contracts. However, a Contract that is used as an IRA may provide for a death benefit that equals the greater of the Purchase Payments made and the Contract Value. Section 401 plans, section 403(b), 457(b) annuities and IRAs (but not Roth IRAs) can only offer incidental death benefits. The IRS could take the position that the enhanced death benefits provided by the optional death benefit riders are not incidental. To the extent that the optional death benefit riders alter the timing on the amount of the payment of distributions under a Qualified Contract, the riders cannot be paid out in violation of the minimum distribution rules of the code. The Contract offers an optional death benefits rider that, when combined with the Contract, may exceed the death benefit allowable under IRS Regulations. Although we believe that these regulations do not prohibit the optional death benefit rider from being added to your Contract if it is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA, the law is unclear. It is possible that the IRS may disqualify the Contract if it is issued with an optional death benefit rider, which may result in certain deemed distributions, increases in taxes, or, possibly, tax penalties. You should consult with a qualified tax advisor before deciding to purchase any optional death benefit rider in connection with any IRA Contract. 47 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 Investments (as used here, "Investments" means the aggregate Investments 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 Investments 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). Such a payment may also be subject to a penalty tax. Should the death of a Contract Owner cause annuity payments to cease before Investments have been fully recovered, a deduction may be allowed on the final tax return for the unrecovered Investments; however, if any remaining annuity payments are made to a Beneficiary, the Beneficiary will recover the balance of the Investments as payments are made. IRC Section 72(b)(3)(A) or (B) or (C). Generally, the same tax rules apply to amounts received by the Beneficiary as those set forth above, except that the early withdrawal penalty tax does not apply. Thus, any annuity payments or lump sum withdrawal will be divided into taxable and non-taxable portions. If the Contract Owner or Annuitant dies and within sixty days after the date on which a lump sum death benefit first becomes payable the designated recipient elects to receive annuity payments in lieu of the lump sum death benefit, then the designated recipient will not be treated for tax purposes as having received the lump sum death benefit in the tax year it first becomes payable. Rather, in that case, the designated recipient will be taxed on the annuity payments as they are received. Any amount payable upon the Contract Owner's death, whether before or after the Annuity Date, will be included in the estate of the Contract Owner for federal estate tax purposes. In addition, designation of a non-spouse Beneficiary who either is 37 1/2 or more 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. Generally, gifts of Non-Qualified Contracts prior to the annuity start date will trigger tax on the gain on the contract, with the donee getting a stepped- up basis for the amount included in the donor's income. The 10% penalty tax and gift tax also may be applicable. This provision does not apply to transfers between spouses, incident to a divorce, or transfers to and from a trust acting as agent for the Owner or the Owner's spouse. 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. Therefore, no attempt is made herein to provide more than general information about the use of the Contract with the various types of Qualified Plans. Participants under such Qualified Plans, as well as Contract Owners, Annuitants and Beneficiaries, are cautioned that the rights of any person to any benefits under such Qualified Plans may be subject to the terms and conditions of the Plans themselves or limited by applicable law, regardless of the terms and conditions of the Contract issued in connection therewith. Qualified Plans generally provide for the tax deferral of income regardless of whether the Qualified Plan invests in an annuity or other investment. You should consider if the Contract is a suitable investment if you are investing through a Qualified Plan. The following is only a general discussion about types of Qualified Plans for which the Contracts are available. We are not the administrator of any Qualified Plan. The plan administrator and/or custodian, whichever is applicable, (but not us) is responsible for all Plan administrative duties including, but not limited to, notification of distribution options, disbursement of Plan benefits, handling any processing and administration of qualified plan loans, compliance regulatory requirements and federal and state tax reporting of income/distributions from the Plan to Plan participants and, if applicable, Beneficiaries of Plan participants and IRA contributions from Plan participants. Our administrative duties are limited to 48 administration of the Contract and any disbursements of any Contract benefits to the Owner, Annuitant, or Beneficiary of the Contract, as applicable. Our tax reporting responsibility is limited to federal and state tax reporting of income/distributions to the applicable payee and IRA contributions from the Owner of a Contract, as recorded on our books and records. The Qualified Plan (the plan administrator or the custodian) is required to provide us with information regarding individuals with signatory authority on the Contract(s) owned. If you are purchasing a Qualified Contract, you should consult with your plan administrator and/or a qualified tax adviser. You should also consult with your tax adviser and/or plan administrator before you withdraw any portion of your Contract Value. Individual Retirement Annuities ("IRAs") In addition to "traditional" IRAs established under Code 408, there are Roth IRAs governed by Code Section 408A and SIMPLE IRAs established under Code Section 408(p). Also, Qualified Plans under Section 401, 403(b) or 457(b) of the Code that include after-tax employee contributions may be treated as deemed IRAs subject to the same rules and limitations as traditional Plans. Contributions to each of these types of IRAs are subject to differing limitations. The following is a very general description of each type of IRA and Other Qualified Plans. Traditional IRAs Traditional IRAs are subject to limitations on the amount that may be contributed each year (these contribution limits are scheduled to increase over the next several years), the persons who may be eligible, and on the time when distributions must commence. Depending upon the circumstances of the individual, contributions to a traditional IRA may be made on a deductible or non-deductible basis. Failure to make mandatory distributions may result in imposition of a 50% penalty tax on any difference between the required distribution amount and the amount actually distributed. A 10% penalty tax is imposed on the amount includable in gross income from distributions that occur before you attain age 59 1/2 and that are not made on account of death or disability, with certain exceptions. These exceptions include: . distributions that are part of a series of substantially equal periodic payments made over your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your Designated Beneficiary, . certain higher education expenses, . used to pay for certain health insurance premiums or medical expenses, and . costs related to the purchase of your first home. 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 (or your surviving spouse if you die) may rollover funds from certain existing Qualified Plans (such as proceeds from existing insurance policies, annuity contracts or securities) into your traditional 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 Traditional IRA; to avoid this withholding you should have cash transferred directly from the insurance company or plan trustee to your traditional IRA. Similar limitations and tax penalties apply to tax sheltered annuities, government plans under section 457(b), 401(k) plans, and pension and profit-sharing plans. SIMPLE IRAs The Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE Plans") is a relatively new type of Qualified Plan. Depending upon the SIMPLE Plan, employers may make plan contributions into a SIMPLE IRA established by each eligible participant. Like other Qualified Plans, a 10% penalty tax is imposed on certain distributions that occur before you attain age 59 1/2. In addition, the penalty tax is increased to 25% for amounts received during the 2-year period beginning on the date you first participated in a qualified salary reduction arrangement pursuant to a SIMPLE Plan maintained by the individual's employer under Code Section 408(p)(2). Contributions to a SIMPLE IRA may be either salary deferral contributions or employer 49 contributions. Distributions from a SIMPLE IRA may be transferred over to another SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional IRA, 403(b) annuity contract, contracts pursuant to section 457(b) of the Code, or other Qualified Plan after a required two year waiting period. Roth IRAs Section 408A of the Code permits eligible individuals to establish a Roth IRA. Contributions to a Roth IRA are not deductible, but withdrawals of amounts contributed and the earnings thereon that meet certain requirements are not subject to federal income tax. In general, Roth IRAs are subject to limitations on the amount that may be contributed and the persons who may be eligible to contribute and are subject to certain required distribution rules on the death of the Contract Owner. Unlike a traditional IRA, Roth IRAs are not subject to minimum required distribution rules during the Contract Owner's lifetime. Generally, however, the amount remaining in a Roth IRA must be distributed by the end of the fifth year after the death of the Contract Owner/Annuitant or distributed over the life expectancy of the Designated Beneficiary. The owner of a traditional IRA may convert a traditional IRA into a Roth IRA under certain circumstances. The conversion of a traditional IRA to a Roth IRA will subject the amount of the converted traditional IRA to federal income tax. Anyone considering the purchase of a Qualified Contract as a Roth IRA or a "conversion" Roth IRA should consult with a qualified tax adviser. 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. Investments made on Contracts purchased for these employees are excludable from the employees' gross income (subject to maximum contribution limits). Distributions under these Contracts must comply with certain limitations as to timing, or result in tax penalties. Distributions from amounts contributed to a TSA pursuant to a salary reduction arrangement, may be made from a TSA only upon attaining age 59 1/2, severance from employment, death, disability, or financial hardship. Section 403(b) annuity distributions can be rolled over to other Qualified Plans in a manner similar to those permitted by Qualified Plans that are maintained pursuant to Section 401 of the Code. Section 457(b) Non-Qualified Deferred Compensation Plans Government Entity Employees of a governmental entity may defer compensation through an eligible plan under Code section 457(b). Contributions to a Contract of an eligible plan are subject to limitations. Subject to a qualifying triggering event, section 457(b) governmental plans may be transferred or rolled into another Qualified Plan. The Qualified Plan must allow the transfer or rollover. If a rollover to an IRA is completed the assets become subject to the 10% penalty in distributions prior to age 59 . Assets from other plans may be rolled into a governmental 457(b) plan if the plan allows and the investment provider is able to segregate the assets for tax reporting purposes. Consult both the distributing plan and the receiving plan prior to making this election. Not-For-Profit Employees of a not-for-profit entity may defer compensation through an eligible plan under Code section 457(b). Contributions to a Qualified Contract maintained under section 457(b) of the Code by an employee of a not-for-profit entity are subject to limitations, and may not be rolled over to another Qualified Plan at any time. 401(k) Plans; Pension and Profit-Sharing Plans Qualified plans may be established by eligible employers for certain eligible employees under Section 401 of the Code. These plans may be 401(k) plans, profit-sharing plans, or other pension or retirement plans. Contributions to these plans are subject to certain limitations. Rollover to other eligible plans may be available. Please consult your Qualified Plans Summary Plan description for more information. 50 Catch-Up Provision Generally, Qualified Plan and IRA Participants over the age of 50 may contribute additional amounts as catch-up contributions if the terms of the Plan so permit. In addition, distributions from each type of IRA are subject to differing restrictions. Loans Certain Owners of Qualified Contracts may borrow against their Contracts; otherwise loans from us are not permitted. If yours is a Qualified Contract which is: . not subject to Title I of ERISA, . issued under 403(b) of the Code, and . permits loans under its terms (a "Loan Eligible Plan") you may request a loan from us, using your Contract Value as your only security. You will be charged interest on your Contract Debt at a fixed annual rate equal to 5%. The amount held in the Loan Account to secure your loan will earn a return equal to an annual rate of 3%. This loan rate may vary by state. Interest charges accrue on your Contract Debt daily, beginning on the effective date of your loan. Interest earned on the Loan Account Value accrue daily beginning on the day following the effective date of the loan, and those earnings will be transferred once a year to your Investment Options in accordance with your current allocation instructions. Tax and Legal Matters The tax and ERISA rules relating to Contract loans are complex and in many cases unclear. For these reasons, and because the rules vary depending on the individual circumstances these loans are processed by your Plan Administrator. We urge you to consult with a qualified tax adviser prior to effecting any loan transaction under your Contract. Generally interest paid on your loan under a 403(b) tax-sheltered annuity will be considered non-deductible "personal interest" under Section 163(h) of the Code, to the extent the loan comes from and is secured by your pre-tax contributions, even if the proceeds of your loan are used to acquire your principal residence. We may change these loan provisions to reflect changes in the Code or interpretations thereof. Loan Procedures Your loan request must be submitted on our Non-ERISA TSA Application and Loan Agreement Form. You may submit a loan request 30 days after your Contract Date and before your Annuity Date; however, before requesting a new loan, you must wait thirty days after the last payment of a previous loan. If approved, your loan will usually be effective as of the end of the Business Day on which we receive all necessary documentation in proper form. We will normally forward proceeds of your loan to you within seven calendar days after the effective date of your loan. 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 the "Loan Account." To make this transfer, we will transfer amounts proportionately from your Investment Options based on your Account Value in each Investment Option. 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 relative to your current allocation instructions. 51 Loan Terms You may have only one loan outstanding at any time. The minimum loan amount is $1,000, subject to certain state limitations. Your Contract Debt at the effective date of your loan may not exceed the lesser of: . 50% of your Contract Value, 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 Loan Eligible Plan for any additional loan restrictions. If you have other loans outstanding pursuant to other Loan Eligible Plans, the amount you may borrow may be further restricted. We are not responsible for making any determinations (including loan amounts permitted) or any interpretations with respect to your Loan Eligible Plan. Repayment Terms Your loan, including principal and accrued interest, generally 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. Generally, the term of the loan will be five years from the effective date of the loan; however, if you have certified to us that your loan proceeds are to be used to acquire a principal residence for yourself, you may request a loan term of 30 years. In either case, however, you must repay your loan prior to your Annuity Date. If you elect to annuitize (or withdraw) your Net Contract Value while you have an outstanding loan, we will deduct any Contract Debt from your Contract Value at the time of the annuitization (or withdrawal) to repay the Contract Debt. You may prepay your entire loan at any time; if you do so, we will bill you for any unpaid interest that has accrued through the date of payoff. Your loan will be considered repaid only when the interest due has been paid. Subject to any necessary approval of state insurance authorities, while you have Contract Debt outstanding, we will treat all payments you send us as Investments unless you specifically indicate that your payment is a loan repayment or include your loan payment notice with your payment. To the extent allowed by law, any loan repayments in excess of the amount then due will be applied to the principal balance of your loan. Such repayments will not change the due dates or the periodic repayment amount due for future periods. If a loan repayment is in excess of the principal balance of your loan, any excess repayment will be refunded to you. Repayments we receive that are less than the amount then due will be returned to you, unless otherwise required by law. If we have not received your full payment by its due date, we will declare the entire remaining loan balance in default. At that time, we will send written notification of the amount needed to bring the loan back to a current status. You will have sixty (60) days from the date on which the loan was declared in default (the "grace period") to make the required payment. If the required payment is not received by the end of the grace period, the defaulted loan balance plus accrued interest and any withdrawal charge will be withdrawn from your Contract Value, if amounts under your Contract are eligible for distribution. In order for an amount to be eligible for distribution from a TSA funded by salary reductions, you must meet one of five triggering events. The triggering events are: . attainment of age 59 1/2, . severance from employment, 52 . death, . disability, and . financial hardship (with respect to contributions only, not income or earnings on those contributions). If those amounts are not eligible for distribution, the defaulted loan balance plus accrued interest and any withdrawal charge will be considered a Deemed Distribution and will be withdrawn when such Contract Values become eligible. In either case, the Distribution or the Deemed Distribution will be considered a currently taxable event, and may be subject to federal tax withholding, the withdrawal charge and the federal early withdrawal penalty tax. If there is a Deemed Distribution under your Contract and to the extent allowed by law, any future withdrawals will first be applied as repayment of the defaulted Contract Debt, including accrued interest and charges for applicable taxes. Any amounts withdrawn and applied as repayment of Contract Debt will first be withdrawn from your Loan Account, and then from your Investment Options on a proportionate basis relative to the Account Value in each Investment Option. If you have an outstanding loan that is in default, the defaulted Contract Debt will be considered a withdrawal for the purpose of calculating any Death Benefit Amount and/or Guaranteed Minimum Death Benefit. The terms of any such loan are intended to qualify for the exception in Code section 72(p)(2) so that the distribution of the loan proceeds will not constitute a distribution that is taxable to you. To that end, these loan provisions will be interpreted to ensure and maintain such tax qualification, despite any other provisions to the contrary. We reserve the right to amend your Contract to reflect any clarifications that may be needed or are appropriate to maintain such tax qualification or to conform any terms of our loan arrangement with you to any applicable changes in the tax qualification requirements. We will send you a copy of any such amendment. If you refuse such an amendment, it may result in adverse tax consequences to you. 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%, unless otherwise specified by the Code. Generally, there will be no withholding for taxes until you actually receive payments under your Contract. Distributions from a Contract under a Qualified Plan (not including an individual retirement annuity subject to Code Section 408 or Code Section 408A) 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: . the distributee directs the transfer of such amounts in cash to another Qualified Plan or a Traditional IRA, or . 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. 53 Impact of Federal Income Taxes In general, in the case of Non-Qualified Contracts, if you expect to accumulate your Contract Value over a relatively long period of time without making significant withdrawals, there should be tax advantages, regardless of your tax bracket, in purchasing such a Contract rather than, for example, a mutual fund with a similar investment policy and approximately the same level of expected investment results. This is because little or no income taxes are incurred by you or by us while you are participating in the Subaccounts, and it is generally advantageous to defer the payment of income taxes, so that the investment return is compounded without any deduction for income taxes. The advantage will be greater if you decide to liquidate your Contract Value in the form of monthly annuity 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 Life Although the Separate Account is registered as an investment company, it is not a separate taxpayer for purposes of the Code. The earnings of the Separate Account are taxed as part of our operations. No charge is made against the Separate Account for our federal income taxes (excluding the charge for premium taxes), but we will review, periodically, the question of charges to the Separate Account or your Contract for such taxes. Such a charge may be made in future years for any federal income taxes that would be attributable to the Separate Account or to our operations with respect to your Contract, or attributable, directly or indirectly, to Investments on your Contract. Under current law, we may incur state and local taxes (in addition to premium taxes) in several states. At present, these taxes are not significant and they are not charged against the Contract or the Separate Account. If there is a material change in applicable state or local tax laws, the imposition of any such taxes upon us that are attributable to the Separate Account or to our operations with respect to your Contract may result in a corresponding charge against the Separate Account or your Contract. ADDITIONAL INFORMATION Voting Rights We are the legal owner of the shares of the Portfolios held by the Subaccounts. We may vote on any matter voted on at Fund shareholders' meetings. However, our current interpretations of applicable law requires us to vote the number of shares attributable to your Variable Account Value (your "voting interest") in accordance with your directions. We will pass 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 do not receive any voting instructions for the shares in a Separate Account, we will vote the shares in that Separate Account in the same proportion as the total votes for all of our separate accounts for which we've received timely instructions. If we hold shares of a Portfolio in our General Account, we will vote such shares in the same proportion as the total votes cast for all of our separate accounts, including Separate Account A. We will vote shares of any Portfolio held by our non-insurance affiliates in the same proportion as the total votes for all separate accounts of ours and our insurance affiliates. We may elect, in the future, to vote shares of the 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: . your Contract Value allocated to the Subaccount corresponding to that Portfolio, divided by . 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. 54 After your Annuity Date, if you have selected a variable annuity, the voting rights under your Contract will continue during the payout period of your annuity, but the number of shares that form the basis for your voting interest, as described above, will decrease throughout the payout period. Changes to Your Contract Contract Owner(s) and Contingent Owner You may change your Non-Qualified Contract at any time prior to your Annuity Date to name a different Contract Owner or to add a Joint Owner, or to add or change a Contingent Owner; if yours is a Qualified Contract, you must be the only Contract Owner. Your Contract cannot name more than two Contract Owners either as Joint or Contingent Owner at any time. Any newly-named Contract Owners, including Joint and/or Contingent Owners, must be under the age of 86 at the time of change or addition. If there are Joint Owners, the Contract will be owned by Joint Owners as Joint Tenants With Right of Survivorship and not as Joint Tenants in Common. 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 and/or gift tax consequences; you should consult a qualified tax adviser before effecting such a transfer. A change to joint Contract ownership is considered a transfer of ownership. Annuitant and Contingent or Joint Annuitant Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or changed, once your Contract is issued. Certain changes may be permitted in connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER PAYOUTS--Selecting Your Annuitant section in this Prospectus. Beneficiaries Your Beneficiary is the person(s) who may receive death benefits under your Contract or any remaining annuity payments after the Annuity Date if the Annuitant dies. You may change or remove your Beneficiary or add Beneficiaries at any time prior to the death of the Annuitant or Owner, as applicable. Spousal consent may be required to change the Beneficiary on an IRA. If you have named your Beneficiary irrevocably, you will need to obtain that Beneficiary's consent before making any changes. Qualified Contracts may have additional restrictions on naming and changing Beneficiaries; for example, if your Contract was issued in connection with a Qualified Plan subject to Title I of ERISA, your spouse must either be your Beneficiary or consent to your naming of a different Beneficiary in writing before a notary or plan official. If you leave no surviving Beneficiary or Contingent Beneficiary, your estate may receive any death benefit proceeds under your Contract. Changes to All Contracts If, in the judgment of our management, continued investment by Separate Account A in one or more of the Portfolios becomes unsuitable or unavailable, we may seek to alter the Variable Investment Options available under the Contracts. We do 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. We reserve the right to substitute 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 an investment company, or another investment vehicle. We may also purchase, through a Subaccount, other securities for other series or other classes of contracts, and may permit conversions or exchanges between series or classes of contracts on the basis of Contract Owner requests. Required approvals of the SEC and state insurance regulators will be obtained before any such substitutions are effected, and you will be notified of any planned substitution. We may add new Subaccounts to Separate Account A, and any new Subaccounts may invest in Portfolios or in other investment vehicles; availability of any new Subaccounts to existing Contract Owners will be determined at our discretion. We will notify you, and will comply with the filing or other procedures established by 55 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: . cease offering any Subaccount; . add or change designated investment companies or their portfolios, or other investment vehicles; . add, delete or make substitutions for the securities and other assets that are held or purchased by the Separate Account or any Variable Account; . permit conversion or exchanges between portfolios and/or classes of contracts on the basis of Owners' requests; . add, remove or combine Variable Accounts; . combine the assets of any Variable Account with any other of our separate accounts or of any of our affiliates; . register or deregister Separate Account A or any Variable Account under the 1940 Act; . operate any Variable Account as a managed investment company under the 1940 Act, or any other form permitted by law; . run any Variable Account under the direction of a committee, board, or other group; . restrict or eliminate any voting rights of Owners with respect to any Variable Account or other persons who have voting rights as to any Variable Account; . 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; and . comply with applicable law. 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. Please send your forms and written requests or questions to: Pacific Life Insurance Company P.O. Box 7187 Pasadena, California 91109-7187 If you are submitting an Investment or other payment by mail, please send it, along with your application if you are submitting one, to the following address or to the address indicated on your Contract specification pages, if different: Pacific Life Insurance Company P.O. Box 100060 Pasadena, California 91189-0060 If you are using an overnight delivery service to send payments, please send them to the following address or to the address indicated on your Contract specification pages, if different: Pacific Life Insurance Company 1111 South Arroyo Parkway, Suite 205 Pasadena, California 91105 56 The effective date of certain notices or of instructions is determined by the date and time on which we "receive" the notice or instructions. We "receive" this information only when it arrives, in proper form, at the correct mailing address set out above. In those instances when we receive electronic transmission of the information on the application from your representative's broker-dealer firm in accordance with our administrative procedures, we consider the application to be received on the Business Day we receive the transmission. Please call us at 1-800-722-2333 if you have any questions regarding which address you should use. We reserve the right to process any Investment received at an incorrect address when it is received at either the address indicated in your Contract specification pages or the appropriate address indicated in the Prospectus. Investments after your initial Investment, loan requests, transfer requests, loan repayments and withdrawal requests we receive before 4:00 p.m. Eastern time will usually be effective on the same Business Day that we receive them in "proper form," unless the transaction or event is scheduled to occur on another day. Generally, whenever you submit any other form, notice or request, your instructions will be effective on the next Business Day after we receive them in "proper form" unless the transaction or event is scheduled to occur on another day. "Proper form" means in a form satisfactory to us and may require, among other things, a signature guarantee or other verification of authenticity. We do not generally require a signature guarantee unless it appears that your signature may have changed over time or the signature does not appear to be yours; an executed application or confirmation of application, as applicable, in proper form is not received by us; or, to protect you or us. Requests regarding death benefits must be accompanied by both proof of death and instructions regarding payment satisfactory to us. You should call your registered representative or us if you have questions regarding the required form of a request. Telephone and Electronic Transactions You are automatically entitled to make certain transactions by telephone or, to the extent available, electronically. You may also authorize other people to make certain transaction requests by telephone or to the extent available electronically by so indicating on the application or by sending us instructions in writing in a form acceptable to us. We cannot guarantee that you or any other person you authorize will always be able to reach us to complete a telephone or electronic transaction; for example, all telephone lines or our web-site may be busy during certain periods, such as periods of substantial market fluctuations or other drastic economic or market change, or telephones or the internet may be out of service during severe weather conditions or other emergencies. Under these circumstances, you should submit your request in writing (or other form acceptable to us). Transaction instructions we receive by telephone or electronically before 4:00 p.m. Eastern time on any Business Day will usually be effective on that day, and we will provide you confirmation of each telephone or electronic transaction. We have established procedures reasonably designed to confirm that instructions communicated by telephone or electronically are genuine. These procedures may require any person requesting a telephone or electronic transaction to provide certain personal identification upon our request. We may also record all or part of any telephone conversation with respect to transaction instructions. We reserve the right to deny any transaction request made by telephone or electronically. You are authorizing us to accept and to act upon instructions received by telephone or electronically with respect to your Contract, and you agree that, so long as we comply with our procedures, neither we, any of our affiliates, nor 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 we believe to be genuine. This policy means that so long as we comply with our procedures, you will bear the risk of loss arising out of the telephone and electronic transaction privileges of your Contract. If a Contract has Joint Owners, each Owner may individually make telephone and/or electronic requests. Electronic Delivery Authorization Subject to availability, you may authorize us to provide prospectuses, statements and other information ("documents") electronically by so indicating on the application, or by sending us instructions in writing in a form acceptable to us to receive such documents electronically. You must have internet access to use this service. While we impose no additional charge for this service, there may be potential costs associated with 57 electronic delivery, such as on-line charges. Documents will be available on our Internet Web site. You may access and print all documents provided through this service. As documents become available, we will notify you of this by sending you an e-mail message that will include instructions on how to retrieve the document. If our e-mail notification is returned to us as "undeliverable," we will contact you to obtain your updated e-mail address. If we are unable to obtain a valid e-mail address for you, we will send a paper copy by regular U.S. mail to your address of record. You may revoke your consent for electronic delivery at any time and we will resume providing you with a paper copy of all required documents; however, in order for us to be properly notified, your revocation must be given to us a reasonable time before electronic delivery has commenced. We will provide you with paper copies at any time upon request. Such request will not constitute revocation of your consent to receive required documents electronically. Timing of Payments and Transactions For withdrawals from the Variable Investment Options or for death benefit payments attributable to your Variable Account Value, we will normally send the proceeds within seven calendar days after your withdrawal request is effective or after the Notice Date, as the case may be. Similarly, for transfers from the Variable Investment Options, we will normally send the proceeds within seven calendar days after your transfer (or exchange) request is effective. We will normally effect periodic annuity payments on the day that corresponds to the Annuity Date and will make payment on the following day. Payments or transfers may be suspended for a longer period under certain extraordinary 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 and DCA Plus Fixed Option; death benefit payments attributable to Fixed Option Value and DCA Plus Fixed Option Value; or fixed periodic annuity payments, payment of proceeds may be delayed for up to six months (thirty days in West Virginia) after the request is effective. Similar delays may apply to loans and transfers from the Fixed Option and DCA Plus Fixed Option. See THE GENERAL ACCOUNT section in this Prospectus for more details. Confirmations, Statements and Other Reports to Contract Owners Confirmations will be sent out for unscheduled Investments 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 and DCA Plus Fixed Option, fees and charges applied to your Contract Value, transactions made and specific Contract data that apply to your Contract. Confirmations of your transactions under the pre- authorized checking plan, dollar cost averaging, earnings sweep, portfolio rebalancing, and pre-authorized withdrawal options will appear on your quarterly account statements. Your fourth-quarter statement will contain annual information about your Contract Value and transactions. If you suspect an error on a confirmation or quarterly statement, you must notify us in writing within 30 days from the date of the first confirmation or statement on which the transaction you believe to be erroneous appeared. When you write, tell us your name, contract number and a description of the suspected error. You will also be sent an annual 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; or more frequently if required by law. Replacement of Life Insurance or Annuities The term "replacement" has a special meaning in the life insurance industry and is described more fully below. Before you make your purchase decision, Pacific Life wants you to understand how a replacement may impact your existing plan of insurance. A policy "replacement" occurs when a new policy or contract is purchased and, in connection with the sale, an existing policy or contract is surrendered, lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or used in a financed purchase. A "financed purchase" occurs when the purchase of a new life insurance policy or annuity contract involves the use of funds obtained from the values of an existing life insurance policy or annuity contract through withdrawal, surrender or loan. 58 There are circumstances in which replacing your existing life insurance policy or annuity contract can benefit you. As a general rule, however, replacement is not in your best interest. Accordingly, you should make a careful comparison of the costs and benefits of your existing policy or contract and the proposed policy or contract to determine whether replacement is in your best interest. Financial Statements The statement of assets and liabilities of Separate Account A as of December 31, 2001 and the related statement of operations and financial highlights for the year then ended and statements of changes in net assets for each of the two years in the period then ended are incorporated by reference in the Statement of Additional Information from the Annual Report of Separate Account A dated December 31, 2001. Pacific Life's consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 are contained in the Statement of Additional Information. THE GENERAL ACCOUNT General Information All amounts allocated to the Fixed Option and the DCA Plus 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 General Account under the Contract are not registered under the Securities Act of 1933, as amended, and the General Account has not been registered as an investment company under the 1940 Act. Any interest you have in the Fixed Option or the DCA Plus Fixed Option is not subject to these Acts, and we have been advised that the SEC staff has not reviewed disclosure in this Prospectus relating to the Fixed Option. This disclosure may, however, be subject to certain provisions of federal securities laws relating to the accuracy and completeness of statements made in prospectuses. You may choose among two of the following General Account options: the Fixed Option and the DCA Plus Fixed Option. Each is described below. Guarantee Terms When you allocate any portion of your Investments or Contract Value to the Fixed Option or the DCA Plus 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. The Fixed Option and DCA Plus Fixed Option offer a separate Guaranteed Interest Rate and Guarantee Term. Guarantee Terms will be offered at our discretion. Presently, we offer Guarantee Terms of up to one year for the Fixed Option and up to one year for the DCA Plus Fixed Option. You should specify into which option, either the Fixed Option or the DCA Plus Fixed Option, you want us to allocate your Purchase Payments, if any. Guaranteed Interest Rates for the Fixed Option and the DCA Plus Fixed Option may be changed periodically for new allocations; your allocation will receive the Guaranteed Interest Rate in effect for the Fixed Option on the effective date of your allocation. All Guaranteed Interest Rates will be expressed as annual effective rates; however, interest will accrue daily. The Guaranteed Interest Rate on your Fixed Option or the DCA Plus Fixed Option will remain in effect for the Guarantee Term and will never be less than an annual rate of 3%. DCA Plus Fixed Option Availability of the DCA Plus Fixed Option (and therefore also DCA Plus) is subject to approval of state insurance authorities. Ask your registered representative about its current status. When you establish a DCA Plus and you make your initial Investment allocation to the DCA Plus Fixed Option, we establish a Guarantee Term that will end either 6 or 12 months from the day your allocation is effective depending on the Guarantee 59 Term you choose. We credit each allocation made to the DCA Plus Fixed Option during that Guarantee Term at the Guaranteed Interest Rate in effect on the day each allocation is effective through the earliest of: . the end of the Guarantee Term, . the day on which the DCA Plus Fixed Option Value is zero, . the Annuity Date, or . the day on which death benefit proceeds become payable. We stop crediting interest on any amount transferred or withdrawn from the DCA Plus Fixed Option as of the day the transfer or withdrawal is effective. Fixed Option 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 at the end of that Contract Year or, if earlier, on your Annuity Date. At the end of that Contract Year, we will roll over your Fixed Option Value on that day into a new Guarantee Term of one year (or, if shorter, the time remaining until your Annuity Date) at the then current Guaranteed Interest Rate, unless you instruct us otherwise. Example: Your Contract Anniversary is February 1. On February 1 of year 1, you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one year and a Guaranteed Interest Rate of 5%. On August 1, you allocate another $500 to the Fixed Option and receive a Guaranteed Interest Rate of 6%. Through January 31, year 1, your first allocation of $1,000 earns 5% interest and your second allocation of $500 earns 6% interest. On February 1, year 2, a new interest rate may go into effect for your entire Fixed Option Value. Withdrawals and Transfers Prior to the Annuity Date, you may withdraw amounts from your Fixed Option or DCA Plus Fixed Option or transfer amounts from your Fixed Option or DCA Plus Fixed Option to one or more of the other Investment Options, except that you may not transfer amounts to the DCA Plus Fixed Option. In addition, no partial withdrawal or transfer (other than a monthly transfer under DCA Plus) may be made from your Fixed Option or DCA Plus Fixed Option within 30 days of the Contract Date. If your withdrawal leaves you with a Net Contract Value of less than $1,000, we have the right, at our option, to terminate your Contract and send you the withdrawal proceeds. Payments or transfers from the Fixed Option or DCA Plus Fixed Option may be delayed, as described under ADDITIONAL INFORMATION--Timing of Payments and Transactions section of the Prospectus. Any amount delayed will, as long as it is held under the Fixed Option or DCA Plus Fixed Option, continue to earn interest at the Guaranteed Interest Rate then in effect until that Guarantee Term has ended, and the minimum guaranteed interest rate of 3% thereafter, unless state law requires a greater rate be paid. Preauthorized Withdrawals Preauthorized withdrawals may be made from the DCA Plus Fixed Option under the terms of our preauthorized withdrawal procedures. DCA Plus Fixed Option No transfer to the DCA Plus Fixed Option may be made at any time. Fixed Option After the first Contract Anniversary, you may make one transfer or partial withdrawal from your Fixed Option during any Contract Year, except as provided under the dollar cost averaging, earnings sweep and 60 pre-authorized withdrawal programs. You may make one transfer or one partial withdrawal within the 30 days after the end of each Contract Anniversary. Normally, you may transfer or withdraw up to one-third (33 1/3%) of your Fixed Option Value in any given Contract Year. However, in consecutive Contract Years you may transfer or withdraw up to one-third (33 1/3%) of your Fixed Option Value in one year; you may transfer or withdraw up to one-half (50%) of your remaining Fixed Option Value in the next year; and you may transfer or withdraw up to the entire amount (100%) of any remaining Fixed Option Value in the third year. In addition, if, as a result of a partial withdrawal or transfer, the Fixed Option Value is less than $500, we have the right, at our option, to transfer the entire remaining amount to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. We currently waive the restrictions that limits transfers from the Fixed Option to one transfer within the 30 days after the end of each Contract Anniversary. We also currently waive the limitations on the maximum amount you may transfer from the Fixed Option in any given Contract year. Our current procedure is to process requests for transfers from the Fixed Option that are within the maximum number of allowable transfers among the Investment Options each calendar year; i.e. as of January 1, 2002, transfers are limited to 25 for each calendar year. We reserve the right to discontinue this waiver program at any time. Transfers from the Fixed Option under the DCA program are also currently subject to a minimum duration of six months. 61 TERMS USED IN THIS PROSPECTUS Some of the terms we've used in this Prospectus may be new to you. We've identified them in the Prospectus by capitalizing the first letter of each word. You'll find an explanation of what they mean below. If you have any questions, please ask your registered representative or call us at 1-800-722-2333. Account Value - The amount of your Contract Value allocated to a specified Variable Investment Option or the Fixed Option. 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 - The date specified in your Contract, or the date you later elect, if any, for the start of annuity payments if the Annuitant (or Joint Annuitants) is (or are) still living and your Contract is in force; or if earlier, the date that annuity payments actually begin. Annuity Option - Any one of the income options available for a series of payments after your Annuity Date. Beneficiary - A person who may have a right to receive the death benefit payable upon the death of the Annuitant or a Contract Owner prior to the Annuity Date, or may have a right to receive remaining guaranteed annuity payments, if any, if the Annuitant dies after the Annuity Date. Business Day - Any day on which the value of an amount invested in a Variable Investment Option is required to be determined, which currently includes each day that the New York Stock Exchange is open for trading and our administrative offices are open. The New York Stock Exchange and our administrative offices are closed on weekends and on the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, Christmas Day, and the Friday before New Year's Day, July Fourth or Christmas Day if that holiday falls on a Saturday, the Monday following New Year's Day, July Fourth or Christmas Day if that holiday falls on a Sunday, unless unusual business conditions exist, such as the ending of the monthly or yearly accounting period. 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 SAI. 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. Contingent Owner - A person, named in your Contract, who will succeed to the rights as 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 Years, Contract Semiannual Periods, Contract Quarters and Contract Months are measured from this date. 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 only available on certain Qualified Contracts. Contract Owner, Owner, Policyholder, you, or your - Generally, a person who purchases a Contract and makes the Investments. A Contract Owner has all rights in the Contract, including the right to make withdrawals, designate and change beneficiaries, transfer amounts among Investment Options, and designate an Annuity Option. If your Contract names Joint Owners, both Joint Owners are Contract Owners and share all such rights. If there are Joint Owners, the Contract will be owned as Joint Tenants With Right of Survivorship and not as Tenants in Common. Contract Value - As of the end of any Business Day, the sum of your Variable Account Value, Fixed Option Value, DCA Plus Fixed Option Value, and the Loan Account Value. Contract Year - A year that starts on the Contract Date or on a Contract Anniversary. DCA Plus Fixed Option - If you allocate all or part of your investments to the DCA Plus Fixed Option, such amounts are held in our General Account and receive interest at rates declared periodically (the "Guaranteed Interest Rate"), but not less than an annual rate of 3%. DCA Plus Fixed Option Value - The aggregate of your Contract Value allocated to the DCA Plus Fixed Option. Earnings - As of the end of any Business Day, your Earnings equal your Contract Value less your aggregate Investments, which are reduced by withdrawals of prior Investments. Fixed Option - If you allocate all or part of your Investments or Contract Value to the Fixed Option, such amounts are held in our General Account and receive the Guaranteed Interest Rates declared periodically, but not less than an annual rate of 3%. Fixed Option Value - The aggregate amount of your Contract Value allocated to the Fixed Option. Fund - Pacific Select Fund. General Account - Our General Account consists of all of our assets other than those assets allocated to Separate Account A or to any of our other separate accounts. Guaranteed Interest Rate - The interest rate guaranteed at the time of allocation (or rollover) for the Guarantee Term on amounts allocated to the Fixed Option and DCA Plus Fixed Option. Each Guaranteed Interest Rate is expressed as an annual rate and interest is accrued daily. Each rate will not be less than an annual rate of 3%. Guarantee Term - The period during which an amount you allocate to the Fixed Options earns a Guaranteed Interest Rate. This term is up to one-year for the Fixed Option and up to one-year for the DCA Plus Fixed Option. Investment - An amount paid to us by or on behalf of a Contract Owner as consideration for the benefits provided under the Contract. Investment Option - A Subaccount, the Fixed Option or the DCA Plus Fixed Option offered under the Contract. 62 Joint Annuitant - If your Contract is a Non-Qualified Contract, you may name two Annuitants, called "Joint Annuitants," in your application for your Contract. Special restrictions apply for Qualified Contracts. Loan Account - The Account in which the amount equal to the principal amount of a loan and any interest accrued is held to secure any Contract Debt. Loan Account Value - The amount, including any interest accrued, held in the Loan Account to secure any Contract Debt. Net Contract Value - Your Contract Value less Contract Debt. Non-Qualified Contract - A Contract other than a Qualified Contract. Policyholder - The Contract Owner. Portfolio - A separate portfolio of the Fund in which a Subaccount invests its assets. Primary Annuitant - The individual that is named in your Contract, the events in the life of whom are of primary importance in affecting the timing or amount of the payout under the Contract. Purchase Payment ("Premium Payment") ("Investment") - An amount paid to us by or on behalf of a Contract Owner as consideration for the benefits provided under the Contract. Qualified Contract - A Contract that qualifies under the Code as an individual retirement annuity or account ("IRA"), or form thereof, 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, 403, 408, 408A or 457 of the Code. SEC - Securities and Exchange Commission. Separate Account A (the "Separate Account") - A separate account of ours registered as a unit investment trust under the Investment Company Act of 1940, as amended (the "1940 Act"). 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 are paid), the amount annuitized to a variable annuity determines the amount of your first variable annuity payment and the number of Annuity Units credited to your annuity in each Subaccount. The value of Subaccount Annuity Units, like the value of Subaccount Units, is expected to fluctuate daily, as described in the definition of Unit Value. Subaccount Unit - Before your Annuity Date, each time you allocate an amount to a Subaccount, your Contract is credited with a number of Subaccount Units in that Subaccount. These Units are used for accounting purposes to measure your Account Value in that Subaccount. The value of Subaccount Units is expected to fluctuate daily, as described in the definition of Unit Value. 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. Fluctuations also reflect charges against the Separate Account. Changes in Subaccount Annuity Unit Values also reflect an additional factor that adjusts Subaccount Annuity Unit Values to offset our Annuity Option Table's implicit assumption of an annual investment return of 5%. The effect of this assumed investment return is explained in detail in the SAI. Unit Value of a Subaccount Unit or Subaccount Annuity Unit on any Business Day is measured 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 (also called a Variable Account). 63 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Page ---- PERFORMANCE................................................................ 1 Total Returns............................................................ 1 Yields................................................................... 2 Performance Comparisons and Benchmarks................................... 3 Separate Account Performance............................................. 3 DISTRIBUTION OF THE CONTRACTS.............................................. 7 Pacific Select Distributors, Inc......................................... 7 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 1035 Exchanges........................................................... 14 Safekeeping of Assets.................................................... 14 FINANCIAL STATEMENTS....................................................... 14 INDEPENDENT AUDITORS....................................................... 14
64 APPENDIX A: STATE LAW VARIATIONS Your Fixed Option If you reside in Alabama, Massachusetts, or Oregon, the Fixed Option is not available. Withdrawal Charge Variations to the Withdrawal Charge section--If your Contract was delivered in one of the following states: Massachusetts Texas New Jersey We cannot waive any withdrawal charge on full or partial withdrawals if the Annuitant has been diagnosed with a medically determinable condition that results in a life expectancy of twelve (12) months or less and/or has been confined to an accredited nursing home. Annuitization If your contract is delivered in the state of Texas, the Conversion Amount annuitized must be at least $2,000. Default Annuity Date and Options If your contract was delivered in the state of Texas, the minimum net amount to be converted must be at least $2,000 or result in an income stream that is less than $20 a month and your initial annuity payment must be at least $20. Death Benefits If, at the time your application is completed, you purchase the optional Premier Death Benefit Rider (PDBR) and your Contract was delivered in the following states: Texas Washington the Death Benefit Amount stated in the Optional Premier Death Benefit Rider sections are replaced with the following: (a) The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to the greater of: . your Contract Value as of that day, or . your aggregate Purchase Payments less an adjusted amount for each withdrawal increased at an effective annual rate of 5% to that day, subject to a maximum of two times the difference between the aggregate Purchase Payments and withdrawals, including withdrawal charges. The 5% effective annual rate of growth will take into account the timing of when each Purchase Payment and withdrawal occurred by applying a daily factor of 1.00013368 to each day's balance. The 5% effective annual rate of growth will stop accruing as of the earlier of: . the Contract Anniversary following the date the Annuitant reaches his or her 80th birthday, or . the date of death of the sole Annuitant, or . the Annuity Date. To determine the adjusted amount for each withdrawal we: . divide the amount of each withdrawal, including withdrawal charges, if any, by your Contract Value immediately before that withdrawal, and . then multiply the result by your Death Benefit Amount (as described above), immediately before that withdrawal. 65 APPENDIX A: STATE LAW VARIATIONS (Continued) Optional Withdrawals Variations to the Optional Withdrawals section. If your Contract was delivered in Texas and your partial withdrawal leaves you with a Net Contract Value of less than $500, we have the right, at our option to terminate your Contract and send you the withdrawal proceeds. Right to Cancel ("Free Look") Variations to the length of the Free Look period. In most states, the Free Look period is a 10-day period beginning on the day you receive your Contract. If your Contract was delivered in one of the following states, the Free Look period is as specified below: Idaho (20 days) North Dakota (20 days) In addition, if you reside in California and are age 60 or older on your Contract Date, the Free Look period is 30 days. There may be extended Free Look periods in some states for replacement business. Please consult with your registered representative if you have any questions regarding your state's Free Look period. 66 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- To receive a current copy of the Pacific Innovations Select SAI without charge, call (800) 722-2333 or complete the following and send it to: Pacific Life Insurance Company Post Office Box 7187 Pasadena, CA 91109-7187 Name _________________________ Address ______________________ City _________________________ State ________ Zip ________ -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- PACIFIC INNOVATIONS SELECT WHERE TO GO FOR MORE INFORMATION The Pacific You'll find more information about the Pacific Innovations Select Innovations Select variable annuity contract and variable annuity Separate Account A in the Statement of Additional Contract is offered Information (SAI) dated May 1, 2002. by Pacific Life Insurance Company, The SAI has been filed with the SEC and is considered 700 Newport Center to be part of this Prospectus because it's incorporated Drive. P.O. Box by reference. You'll find the table of contents for the 9000, Newport SAI on page 64 of this Prospectus. Beach, California 92660. You can get a copy of the SAI at no charge by calling or writing to us, or by contacting the SEC. The SEC may If you have any charge you a fee for this information. questions about the Contract, please ask your registered representative or contact us. --------------------------------------------------------- How to contact us Call or write to us at: Pacific Life Insurance Company P.O. Box 7187 Pasadena, California 91109-7187 1-800-722-2333 6 a.m. through 5 p.m. Pacific time Send Investments, other payments and application forms to the following address: By mail Pacific Life Insurance Company P.O. Box 100060 Pasadena, California 91189-0060 By overnight delivery service Pacific Life Insurance Company 1111 South Arroyo Parkway, Suite 205 Pasadena, California 91105 --------------------------------------------------------- How to contact the Public Reference Section of the SEC SEC Washington, D.C. 20549-6009 1-800-SEC-0330 Internet: www.sec.gov STATEMENT OF ADDITIONAL INFORMATION May 1, 2002 PACIFIC INNOVATIONS SEPARATE ACCOUNT A --------------- Pacific Innovations (the "Contract") is a variable annuity contract underwritten by Pacific Life Insurance Company ("Pacific Life"). This Statement of Additional Information (SAI) is not a Prospectus and should be read in conjunction with the Contract's Prospectus, dated May 1, 2002 which is available without charge upon written or telephone request to Pacific Life. Terms used in this SAI have the same meanings as in the Prospectus, and some additional terms are defined particularly for this SAI. --------------- Pacific Life Insurance Company Mailing Address: P.O. Box 7187 Pasadena, California 91109-7187 1-800-722-2333 TABLE OF CONTENTS
Page No. -------- PERFORMANCE............................................................ 1 Total Returns........................................................ 1 Yields............................................................... 2 Performance Comparisons and Benchmarks............................... 3 Separate Account Performance......................................... 4 DISTRIBUTION OF THE CONTRACTS.......................................... 8 Pacific Select Distributors, Inc. (PSD).............................. 8 THE CONTRACTS AND THE SEPARATE ACCOUNT................................. 9 Calculating Subaccount Unit Values................................... 9 Variable Annuity Payment Amounts..................................... 9 Corresponding Dates.................................................. 11 Age and Sex of Annuitant............................................. 11 Systematic Transfer Programs......................................... 12 Pre-Authorized Withdrawals........................................... 14 Death Benefit........................................................ 14 1035 Exchanges....................................................... 14 Safekeeping of Assets................................................ 14 FINANCIAL STATEMENTS .................................................. 15 INDEPENDENT AUDITORS .................................................. 15
PERFORMANCE From time to time, our reports or other communications to current or prospective Contract Owners or our advertising or other promotional material may quote the performance (yield and total return) of a Subaccount. Quoted results are based on past performance and reflect the performance of all assets held in that Subaccount for the stated time period. Quoted results are neither an estimate nor a guarantee of future investment performance, and do not represent the actual experience of amounts invested by any particular Contract Owner. Total Returns A Subaccount may advertise its "average annual total return" over various periods of time. "Total return" represents the average percentage change in value of an investment in the Subaccount from the beginning of a measuring period to the end of that measuring period. "Annualized" total return assumes that the total return achieved for the measuring period is achieved for each such period for a full year. "Average annual" total return is computed in accordance with a standard method prescribed by the SEC. Average Annual Total Return To calculate a Subaccount's average annual total return for a specific measuring period, we first take a hypothetical $1,000 investment in that Subaccount, at its then-applicable Subaccount Unit Value (the "initial payment") and we compute the ending redeemable value of that initial payment at the end of the measuring period based on the investment experience of that Subaccount ("full withdrawal value"). The full withdrawal value reflects the effect of all recurring fees and charges applicable to a Contract Owner under the Contract, including the Risk Charge, and the Administrative Fee and the deduction of the applicable withdrawal charge, but does not reflect any charges for applicable premium taxes, any non-recurring fees or charges or any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders. The Annual Fee is also taken into account, assuming an average Contract Value of $65,000. The redeemable value is then divided by the initial payment and this quotient is raised to the 365/N power (N represents the number of days in the measuring period), and 1 is subtracted from this result. Average annual total return is expressed as a percentage. T = [(ERV/P)(to the power of 365/N)]-1 where T = average annual total return ERV = ending redeemable value P = hypothetical initial payment of $1,000 N = number of days Average annual total return figures will be given for recent one-, three-, 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 withdrawal charge. 1 Non-Standardized Total Returns We may also calculate non-standardized total returns which may or may not reflect any Annual Fee, withdrawal charges and/or increases in Risk Charges, charges for premium taxes, and any non-recurring fees or charges. Standardized return figures will always accompany any non-standardized returns shown. 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) (To the power of 365/7)] - 1. Realized capital gains or losses and unrealized appreciation or depreciation of the assets of the underlying Money Market Portfolio are not included in the yield calculation. Current yield and effective yield do not reflect any deduction of charges for any applicable premium taxes, or any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, but do reflect a deduction for the Annual Fee, the Risk Charge and the Administrative Fee and assumes an average Contract Value of $65,000. At December 31, 2001, the Money Market Subaccount's current yield was 0.25% and the effective yield was 0.25%. Other Subaccounts "Yield" of the other Subaccounts is computed in accordance with a different standard method prescribed by the SEC. The net investment income (investment income less expenses) per Subaccount Unit earned during a specified one-month or 30-day period is divided by the Subaccount Unit Value on the last day of the specified period. This result is then annualized (that is, the yield is assumed to be generated each month or each 30-day period for a year), according to the following formula, which assumes semiannual compounding: YIELD = 2[(a-b + 1)(to the power of 6) - 1] --- cd where: a = net investment income earned during the period by the Portfolio attributable to the Subaccount. b = expenses accrued for the period (net of reimbursements). c = the average daily number of Subaccount Units outstanding during the period that were entitled to receive dividends. d = the Unit Value of the Subaccount Units on the last day of the period. The yield of each Subaccount reflects the deduction of all recurring fees and charges applicable to the Subaccount, such as the Risk Charge, and Administrative Fee, the Annual Fee (assuming an average Contract Value of $65,000), but does not reflect any withdrawal charge, any charge for applicable premium taxes, any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, or any non-recurring fees or charges. 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 2 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. We may also compare the performance of the Subaccounts with that of other appropriate indices of investment securities and averages for peer universes of funds or data developed by us derived from such indices or averages. Unmanaged indices generally assume the reinvestment of dividends or interest but do not generally reflect deductions for investment management or administrative costs and expenses. 3 Separate Account Performance The Contract was not available prior to 2001. However, 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 Subaccounts. The following table presents the annualized total return for each Variable Account for the period from each such Variable Account's commencement of operations through December 31, 2001. The accumulated value (AV) reflects the deductions for all contractual fees and charges, but does not reflect the withdrawal charge, any nonrecurring fees and charges, any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, or any charges for premium. The full withdrawal value (FWV) reflects the deductions for all contractual fees and charges, but does not reflect any increase in the Risk Charge for an optional Death Benefit Rider, any charge for the optional EEG or GPA Riders, any nonrecurring fees and charges, and any charges for premium taxes. The results shown in this section are not an estimate or guarantee of future investment performance. Historical Separate Account Performance Annualized Rates of Return for Periods Ended December 31, 2001 All numbers are expressed as a percentage
Since 1 Year 3 Years 5 Years 10 Years Inception -------------- ------------- ------------ ----------- -------------- Variable Accounts AV FWV AV FWV AV FWV AV FWV AV FWV ----------------- ------ ------ ----- ------ ----- ----- ----- ----- ------ ------ Blue Chip 1/2/01*....... (19.71) (27.81) (19.71) (27.81) Aggressive Growth 1/2/01*................ (20.90) (29.00) (20.90) (29.00) Emerging Markets 4/17/96*............... (9.96) (18.06) (4.73) (6.83) (9.60) (9.60) (9.30) (9.31) Diversified Research 1/3/00*................ (4.10) (12.20) 2.10 (1.10) Small-Cap Equity 10/1/99*............... (3.91) (12.01) 10.32 10.32 (2.69) (5.31) International Large-Cap 1/3/00*................ (19.44) (27.54) (21.11) (25.31) I-Net Tollkeeper 5/1/00*................ (34.86) (42.96) (39.06) (44.61) Financial Services 1/2/01*................ (8.58) (16.68) (8.58) (16.68) Health Sciences 1/2/01*................ (8.98) (17.08) (8.98) (17.08) Technology 1/2/01*...... (41.77) (49.91) (41.77) (49.91) Telecommunications 1/2/01*................ (47.47) (55.61) (47.47) (55.61) Multi-Strategy 1/2/96*.. (2.54) (10.64) 0.74 (1.14) 7.04 7.04 7.69 7.69 7.58 7.58 Large-Cap Core 1/2/96 (formerly called Equity Income) *.............. (10.15) (18.25) (2.63) (4.64) 7.47 7.47 9.11 9.11 8.94 8.94 Strategic Value 10/2/00*............... (11.13) (19.23) (10.88) (16.20) Growth LT 1/2/96*....... (30.59) (38.69) 1.56 (0.28) 12.34 12.34 12.96 12.96 Focused 30 10/2/00*..... (14.57) (22.67) (24.65) (30.25) Mid-Cap Value 1/4/99*... 11.72 3.62 12.65 11.15 International Value 1/2/96*................ (22.97) (31.07) (6.59) (8.78) (1.77) (1.77) 3.34 3.34 1.34 1.34 Capital Opportunities 1/2/01*................ (16.72) (24.82) (16.72) (24.82) Mid-Cap Growth 1/2/01*.. (19.95) (28.05) (19.95) (28.05) Global Growth 1/2/01*... (16.16) (24.26) (16.16) (24.26) Equity Index 1/2/96*.... (13.38) (21.48) (2.69) (4.70) 8.88 8.88 10.61 10.61 Small-Cap Index 1/4/99*................ 0.31 (7.79) 3.93 2.17 Real Estate 1/4/99 (formerly called REIT)*................. 7.03 (1.07) 11.42 9.89 Inflation Managed 1/2/96*................ 2.81 (5.29) 3.12 1.33 4.98 4.98 5.10 5.10 4.38 4.38 Managed Bond 1/2/96*.... 5.83 (2.27) 4.03 2.28 5.62 5.62 5.84 5.84 5.13 5.13 Money Market 1/2/96*.... 2.41 (5.69) 3.53 1.76 3.65 3.65 3.11 3.11 3.63 3.63 High Yield Bond 1/2/96*................ (0.07) (8.17) (1.26) (3.21) 0.98 0.98 6.18 6.18 2.37 2.37 Equity 1/2/96*.......... (22.86) (30.96) (8.04) (10.30) 3.09 3.09 7.51 7.51 6.59 6.59 Aggressive Equity 4/17/96*............... (18.40) (26.50) (7.25) (9.48) (1.84) (1.84) (0.32) (0.32) Large-Cap Value 1/4/99*................ (4.99) (13.09) 5.90 4.20
-------- *Date Variable Account commenced operations. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. Effective January 2, 2001, Lazard Asset Management became the Portfolio Manager of the International Value Portfolio. Prior to May 1, 2001, the Inflation Managed Portfolio was called the Government Securities Portfolio and some of the investment policies differed. Effective December 1, 2001, Putnam Investment Management, Inc. became the Portfolio Manager of the Equity and Aggressive Equity Portfolios; prior to May 1, 1998 some of the investment policies of the Equity and Aggressive Equity Portfolios differed. 4 The Equity Income and Research Subaccounts started operations after December 31, 2001 and there is no historical value available for these Subaccounts. 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 Separate Account commenced operations as of January 2, 1996. Therefore, no historical performance data exists for the Subaccounts prior to that date. The following table represents 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 or for the indicated time period. Eight of the Portfolios of the Fund available under the Contract have been in operation since January 4, 1988. The Equity Index Portfolio has been in operation since January 30, 1991; the Growth LT Portfolio since January 4, 1994; the Aggressive Equity and Emerging Markets Portfolios since April 1, 1996; the Mid-Cap Value, Small-Cap Index, REIT and Large-Cap Portfolios since January 4, 1999; the Diversified Research and International Large-Cap Portfolios since January 3, 2000; the I- Net Tollkeeper Portfolio since May 1, 2000; the Strategic Value and Focused 30 Portfolios since October 2, 2000; the Blue Chip, Aggressive Growth, Financial Services, Health Services, Technology Telecommunications, Capital Opportunities, Mid-Cap Growth, and Global Growth Portfolios since January 2, 2001, and the Equity Income and Research Portfolios since January 2, 2002. Historical performance information for the Equity Portfolio is based in part on the performance of that Portfolio's predecessor series which was a series of the Pacific Corinthian Variable Fund that began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. Because the Subaccounts had not commenced operations until January 2, 1996 or later, as indicated in the chart above, and because the Contracts were not available until 2000, these are not actual performance numbers for the Subaccounts or for the Contract. These are hypothetical total return numbers based on accumulated value (AV) and full withdrawal value (FWV) that represent the actual performance of the Portfolios, adjusted to reflect the deductions for the fees and charges applicable to the Contract; the FWV also includes applicable withdrawal charges. Any charge for non-recurring fees and charges, premium taxes, an optional Death Benefit Rider or any optional EEG or GPA Riders are not reflected in these data, and reflection of the Annual Fee assumes an average Contract size of $65,000. The information presented also includes data representing unmanaged market indices. 5 The results shown in this section are not an estimate or guarantee of future investment performance. Historical and Hypothetical Separate Account Performance Annualized Rates of Return for Periods Ended December 31, 2001 All numbers are expressed as a percentage
Since 1 Year* 3 Years* 5 Years* 10 Years* Inception* -------------- ------------- ------------ ----------- -------------- Variable Accounts AV FWV AV FWV AV FWV AV FWV AV FWV ----------------- ------ ------ ----- ------ ----- ----- ----- ----- ------ ------ Blue Chip............... (19.71) (27.81) (19.71) (27.81) Aggressive Growth....... (20.90) (29.00) (20.90) (29.00) Emerging Markets........ (9.96) (18.06) (4.73) (6.83) (9.60) (9.60) (9.30) (9.31) Diversified Research.... (4.10) (12.20) 2.10 (1.10) Small-Cap Equity........ (3.91) (12.01) 10.32 10.32 11.40 11.40 International Large- Cap.................... (19.44) (27.54) (21.11) (25.31) I-Net Tollkeeper........ (34.86) (42.96) (39.06) (44.61) Financial Services...... (8.58) (16.68) (8.58) (16.68) Health Sciences......... (8.98) (17.08) (8.98) (17.08) Technology.............. (41.77) (49.91) (41.77) (49.91) Telecommunications...... (47.47) (55.61) (47.47) (55.61) Multi-Strategy.......... (2.54) (10.64) 0.74 (1.14) 7.04 7.04 7.69 7.69 8.62 8.62 Large-Cap Core (formerly called Equity Income).. (10.15) (18.25) (2.63) (4.64) 7.47 7.47 9.11 9.11 10.06 10.06 Strategic Value......... (11.13) (19.23) (10.88) (16.20) Growth LT............... (30.59) (38.69) 1.56 (0.28) 12.34 12.34 12.96 12.96 Focused 30.............. (14.57) (22.67) (24.65) (30.25) Mid-Cap Value........... 11.72 3.62 12.65 11.15 International Value..... (22.97) (31.07) (6.59) (8.78) (1.77) (1.77) 3.34 3.34 4.21 4.21 Capital Opportunities... (16.72) (24.82) (16.72) (24.82) Mid-Cap Growth.......... (19.95) (28.05) (19.95) (28.05) Global Growth........... (16.16) (24.26) (16.16) (24.26) Equity Index............ (13.38) (21.48) (2.69) (4.70) 8.88 8.88 10.61 10.61 Small-Cap Index......... 0.31 (7.79) 3.93 2.17 Real Estate (formerly called REIT)........... 7.03 (1.07) 11.42 9.89 Inflation Managed....... 2.81 (5.29) 3.12 1.33 4.98 4.98 5.10 5.10 6.38 6.38 Managed Bond............ 5.83 (2.27) 4.03 2.28 5.62 5.62 5.84 5.84 7.04 7.04 Money Market............ 2.41 (5.69) 3.53 1.76 3.65 3.65 3.11 3.11 3.76 3.76 High Yield Bond......... (0.07) (8.17) (1.26) (3.21) 0.98 0.98 6.18 6.18 6.51 6.51 Equity.................. (22.86) (30.96) (8.04) (10.30) 3.09 3.09 7.51 7.51 10.26 10.26 Aggressive Equity....... (18.40) (26.50) (7.25) (9.48) (1.84) (1.84) (0.32) (0.32) Large-Cap Value......... (4.99) (13.09) 5.90 4.20
Major Indices 1 Year 3 Years 5 Years 10 Years ------------- ------ ------- ------- -------- Credit Suisse First Boston High Yield Bond... 5.80 1.18 3.25 7.85 Lehman Brothers Aggregate Bond............... 8.42 6.27 7.43 7.23 Lehman Brothers Government Bond.............. 7.24 5.88 7.40 7.14 Lehman Brothers Inflation Linked Treasury.... 7.90 7.72 N/A N/A Lehman Brothers Government/Credit............ 8.51 5.89 7.36 7.27 Merrill Lynch 3-Month T-Bill................. 4.42 5.14 5.20 4.86 Morgan Stanley Capital International All Country World Free.......................... (16.28) (3.37) 5.37 8.05 Morgan Stanley Capital International Emerging Markets Free................................ (2.37) 4.08 (5.74) 3.05 Morgan Stanley Capital International Europe, Australasia & Far East...................... (21.21) (4.79) 1.17 4.76 North American Real Estate Investment Trust Equity...................................... 13.93 11.15 6.38 11.63 Russell 1000 Growth.......................... (20.42) (6.32) 8.27 10.80 Russell 2000................................. 2.49 6.42 7.52 11.51 Russell 2500................................. 1.22 9.43 10.34 13.13 Russell 2500 Growth.......................... (10.83) 5.17 6.60 9.49 Russell MidCap............................... 95.62) 6.50 11.40 13.58 Standard & Poor's 500 Composite Stock Price.. (11.88) (1.03) 10.70 12.93
-------- * The performance of the Aggressive Equity, Large-Cap Core, Multi-Strategy, Equity, International Value, and Emerging Markets Variable Accounts for all or a portion of this period occurred at a time when other Portfolio Managers managed the corresponding Portfolio in which each Variable Account invests. Effective January 1, 1994, J. P. Morgan Investment Management Inc. became the Portfolio Manager of the Large-Cap Core and Multi-Strategy Portfolios; prior to January 1, 1994, some of the investment policies of the Large-Cap Core Portfolio and the investment objective of the Multi-Strategy Portfolio differed. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. Effective January 2, 2001, Lazard Asset Management became the Portfolio Manager of the International Value Portfolio. Prior to May 1, 2001, the Inflation Managed Portfolio was called the Government Securities Portfolio and some of the investment policies differed. Effective December 1, 2001, Putnam Investment Management, LLC became the Portfolio Manager of the Equity and Aggressive Equity Portfolios. Prior to May 1, 1998, some of the investment policies of the Equity and 6 Aggressive Equity Portfolios differed. Performance of the Equity Portfolio is based in part on the performance of the predecessor portfolio of Pacific Corinthian Variable Fund, which began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. The Equity Income and Research Portfolios started operations after December 31, 2001 and there is no historical value available for these Subaccounts. 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 ordinary income basis. The chart shows accumulations on a single Purchase Payment of $10,000, assuming hypothetical annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%. The values shown for the taxable investment do not include any deduction for management fees or other expenses but assume that taxes are deducted annually from investment returns. The values shown for the variable annuity do not reflect the deduction of contractual expenses such as the Risk Charge (equal to an annual rate of 1.25% of average daily Account Value), the Administrative Fee (equal to an annual rate of 0.15% of average daily Account Value), the Annual Fee (equal to $30 per year if your Net Contract Value is less than $50,000), any increase in the Risk Charge for an optional Death Benefit Rider (equal to a maximum annual rate of 0.35% of average daily Account Value) or for the optional EEG or GPA Riders (equal to an annual rate of 0.25% and 0.10% average daily Account Value, respectively), any charge for premium taxes, or the expenses of an underlying investment vehicle, such as the Fund. The values shown also do not reflect the withdrawal charge. Generally, the withdrawal charge is equal to 9% of the amount withdrawn attributable to Purchase Payments that are less than one year old, 8% of the amount withdrawn attributable to Purchase Payments that are less than two years old, and 8% of the amount withdrawn attributable to Purchase Payments that are three years old. The age of the Purchase Payments is considered 1 year old in the Contract Year we receive it and increases by one year beginning on the day preceding each Contract Anniversary. During a Contract Year, you may withdraw free of withdrawal charge amounts up to your "Eligible Purchase Payments". Eligible Purchase Payments include 10% annually of total Purchase Payments that have an "age" of less than four years, plus any remaining portion not withdrawn from the previous Contract Year's Eligible Purchase Payments that are derived from Purchase Payments which have an "age" of less than four years, plus 100% of all Purchase Payments that have an "age" of four years or more. Once all Purchase Payments have been deemed withdrawn, any withdrawal will be deemed a withdrawal of your Earnings and will be free of the withdrawal charge. If these expenses and fees were taken into account, they would reduce the investment return shown for both the taxable investment and the hypothetical variable annuity contract. In addition, these values assume that you do not surrender the Contract or make any withdrawals until the end of the period shown. The chart assumes a full withdrawal, at the end of the period shown, of all Contract Value and the payment of taxes at the 36% rate on the amount in excess of the Purchase Payments. The rates of return illustrated are hypothetical and are not an estimate or guarantee of performance. Actual tax rates may vary for different assets and taxpayers from that illustrated and withdrawals by and distributions to Contract Owners who have not reached age 59 1/2 may be subject to a tax penalty of 10%. 7 Power of Tax Deferral $10,000 investment at annual rates of 0%, 4% and 8%, taxed @ 36% [TAX DEFERRAL GRAPH APPEARS HERE]
0% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $10,000.00 $10,000.00 20 $10,000.00 $10,000.00 30 $10,000.00 $10,000.00 4% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $12,875.97 $13,073.56 20 $16,579.07 $17,623.19 30 $21,347.17 $24,357.74 8% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $16,476.07 $17,417.12 20 $27,146.07 $33,430.13 30 $44,726.05 $68,001.00
DISTRIBUTION OF THE CONTRACTS Pacific Select Distributors, Inc. (PSD) Pacific Select Distributors, Inc., a subsidiary of ours, acts as the principal underwriter ("distributor") of the Contracts and offers the Contracts on a continuous basis. PSD is registered as a broker-dealer with the SEC and is a member of the National Association of Securities Dealers (NASD). We pay PSD for acting as principal underwriter under a Distribution Agreement. We and PSD enter into selling agreements with broker-dealers whose registered representatives are authorized by state insurance departments to sell the Contracts. The aggregate amount of underwriting commissions paid to PSD for 2001 and 2000, respectively, with regard to this Contract was $4,339,558 and $8,943,198, of which $0 was retained. 8 THE CONTRACTS AND THE SEPARATE ACCOUNT Calculating Subaccount Unit Values The Unit Value of the Subaccount Units in each Variable Investment Option is computed at or about 4:00 p.m. Eastern time on each Business Day. The initial Unit Value of each Subaccount was $10 on the Business Day the Subaccount began operations. At the end of each Business Day, the Unit Value for a Subaccount is equal to: Y X Z where (Y) = the Unit Value for that Subaccount as of the end of the preceding Business Day; and (Z) = the Net Investment Factor for that Subaccount for the period (a "valuation period") between that Business Day and the immediately preceding Business Day. The "Net Investment Factor" for a Subaccount for any valuation period is equal to: (A / 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 or Contract, and/or any taxes attributable, directly or indirectly, to Investments; (B) = the net asset value per share of the corresponding Portfolio shares held by the Subaccount as of the end of the preceding valuation period; and (C) = a factor that assesses against the Subaccount net assets for each calendar day in the valuation period the basic Risk Charge plus any applicable increase in the Risk Charge and the Administrative Fee (see CHARGES, FEES AND DEDUCTIONS section in the Prospectus). As explained in the Prospectus, the Annual Fee, if applicable, is assessed against your Variable Account Value through the automatic debit of Subaccount Units; the Annual Fee decreases the number of Subaccount Units attributed to your Contract but does not alter the Unit Value for any Subaccount. Variable Annuity Payment Amounts The following steps show how we determine the amount of each variable annuity payment under your Contract. First: Pay Applicable Premium Taxes When you convert your Net Contract Value into annuity payments, you must pay any applicable charge for premium taxes on your Contract Value (unless applicable law requires those taxes to be paid at a later time). We assess this charge by reducing each Account 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 Net Contract Value may be used to provide variable annuity payments. Alternatively, your remaining available Net 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 Net Contract Value, less any applicable Annual Fee, withdrawal charge, and less any charges for premium taxes without converting this amount into annuity payments. 9 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% rate of return, as described in more detail below. Example: Assume a man is 65 years of age at his Annuity Date and has selected a lifetime annuity with monthly payments guaranteed for 10 years. According to the Annuity Option Table, this man should receive an initial monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by applicable charges) that he will be using to provide variable payments. Therefore, if his Contract Value after deducting applicable fees and charges is $100,000 on his Annuity Date and he applies this entire amount toward his variable annuity, his first monthly payment will be $579.00. You may choose any other Annuity Option Table that assumes a different rate of return which we offer at the time your Annuity Option is effective. Third: Subaccount Annuity Units For each Subaccount, we use the amount of the first variable annuity payment under your Contract attributable to each Subaccount to determine the number of Subaccount Annuity Units that will form the basis of subsequent payment amounts. First, we use the Annuity Option Table to determine the amount of that first variable payment for each Subaccount. Then, for each Subaccount, we divide that amount of the first variable annuity payment by the value of one Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity Date to obtain the number of Subaccount Annuity Units for that particular Subaccount. The number of Subaccount Annuity Units used to calculate subsequent payments under your Contract will not change unless exchanges of Annuity Units are made (or if the Joint and Survivor Annuity Option is elected and the Primary Annuitant dies first), but the value of those Annuity Units will change daily, as described below. Fourth: The Subsequent Variable Payments The amount of each subsequent variable annuity payment will be the sum of the amounts payable based on each Subaccount. The amount payable based on each Subaccount is equal to the number of Subaccount Annuity Units for that Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the Business Day in each payment period you elected that corresponds to the Annuity Date. Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value, changes each day to reflect the net investment results of the underlying investment vehicle, as well as the assessment of the Risk Charge at an annual rate of 1.25% and the Administrative Fee at an annual rate of 0.15%. In addition, the calculation of Subaccount Annuity Unit Value incorporates an additional factor; as discussed in more detail below, this additional factor adjusts Subaccount Annuity Values to correct for the Option Table's implicit assumed annual investment return on amounts applied but not yet used to furnish annuity benefits. Any increase in your Risk Charge for an Optional Death Benefit Rider is not charged on and after the Annuity Date. Different Subaccounts may be selected for your Contract before and after your Annuity Date, subject to any restrictions we may establish. Currently, you may exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units in any other Subaccount(s) up to four times in any twelve month period after your Annuity Date. The number of Subaccount Annuity Units in any Subaccount may change due to such exchanges. Exchanges following your Annuity Date 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 actuarial assumptions based on the Annuitant's age, and, in some cases, the Annuitant's sex. In addition, these numbers 10 assume that the amount of your Contract Value that you convert to a variable annuity will have a positive net investment return of 5% (or such other rate of return you may elect) each year during the payout of your annuity; thus 5% is referred to as an "assumed investment return." The Subaccount Annuity Unit Value for a Subaccount will increase only to the extent that the investment performance of that Subaccount exceeds the Risk Charge, the Administrative Fee, and the assumed investment return. The Subaccount Annuity Unit Value for any Subaccount will generally be less than the Subaccount Unit Value for that same Subaccount, and the difference will be the amount of the assumed investment return factor. Example: Assume the net investment performance of a Subaccount is at a rate of 5.00% per year (after deduction of the 1.25% Risk Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 5.00% per year, 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 - 1 = 0; 0 X 100% = 0%. ---- 1.05 If the net investment performance of a Subaccount's assets is at a rate less than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if the Subaccount Unit Value is increasing. Example: Assume the net investment performance of a Subaccount is at a rate of 2.60% per year (after deduction of the 1.25% Risk Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 2.60% per year, 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 = 0.9771; 0.9771 - 1 = -0.0229;-0.0229 X 100% = -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 Business Day. In addition, as stated in the Prospectus, any event scheduled to occur on a day that is not a Business Day will occur on the next succeeding Business Day. Example: If your Contract is issued on February 29 in year 1 (a leap year), your Contract Anniversary in years 2, 3 and 4 will be on March 1. Example: If your Annuity Date is July 31 and you select monthly annuity payments, the payments received will be based on valuations made on July 31, August 31, October 1 (for September), October 31, December 1 (for November), December 31, January 31, March 1 (for February), March 31, May 1 (for April), May 31 and July 1 (for June). Age and Sex of Annuitant As mentioned in the Prospectus, the Contracts generally provide for sex- distinct annuity income factors in the case of life annuities. Statistically, females tend to have longer life expectancies than males; consequently, if the amount of annuity payments is based on life expectancy, they will ordinarily be higher if an annuitant is male than if an annuitant is female. Certain states' regulations prohibit sex-distinct annuity income factors, and Contracts issued in those states will use unisex factors. In addition, Contracts issued in connection with Qualified Plans are required to use unisex factors. 11 We may require proof of your Annuitant's age and sex before or after starting annuity payments. If the age or sex (or both) of your Annuitant are incorrectly stated in your Contract, we will correct the amount payable based on your Annuitant's correct age or sex, if applicable. If we make the correction after annuity payments have started, and we have made overpayments, we will deduct the amount of the overpayment, with interest at 3% 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 age and/or sex. Additionally, we may require proof of the Annuitant's or Owner's age before any payments associated with the Death Benefit provisions of your Contract are made. If the age or sex of the Annuitant is incorrectly stated in your Contract, we will base any payment associated with the Death Benefit provisions on your Contract on the Annuitant's or Owner's correct age or sex. Systematic Transfer Programs The Fixed Account is not available in connection with portfolio rebalancing. If you are using the earnings sweep, you may also use portfolio rebalancing only if you selected the Fixed Option as your sweep option. You may not use dollar cost averaging and the earnings sweep at the same time. Dollar Cost Averaging When you request dollar cost averaging, you are authorizing us to make periodic reallocations of your Contract Value without waiting for any further instruction from you. You may request to begin or stop dollar cost averaging at any time prior to your Annuity Date; the effective date of your request will be the day we receive written notice from you in proper form. Your request may specify the date on which you want your first transfer to be made. If you do not specify a date for your first transfer, we will treat your request as if you had specified the effective date of your request. Your first transfer may not be made until 30 days after your Contract Date, and if you specify an earlier date, your first transfer will be delayed until one calendar month after the date you specify. If you request dollar cost averaging on your application for your Contract and you fail to specify a date for your first transfer, your first transfer will be made one period after your Contract Date (that is, if you specify monthly transfers, the first transfer will occur 30 days after your Contract Date; quarterly transfers, 90 days after your Contract Date; semiannual transfers, 180 days after your Contract Date; and if you specify annual transfers, the first transfer will occur on your Contract Anniversary). If you stop dollar cost averaging, you must wait 30 days before you may begin this option again. Your request to begin dollar cost averaging must specify the Investment Option you wish to transfer money from (your "source account"). You may choose any one Investment Option as your source account. The Account Value of your source account must be at least $5,000 for you to begin dollar cost averaging. Your request to begin dollar cost averaging must also specify the amount and frequency of your transfers. You may choose monthly, quarterly, semiannual or annual transfers. The amount of your transfers may be specified as a dollar amount or a percentage of your source Account Value; however, each transfer must be at least $250. Dollar cost averaging transfers are not subject to the same requirements and limitations as other transfers. Finally, your request must specify the Variable Investment Option(s) you wish to transfer amounts to (your "target account(s)"). If you select more than one target account, your dollar cost averaging request must specify how transferred amounts should be allocated among the target accounts. Your source account may not also be a target account. 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) your Annuity Date. 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. We may change, terminate or suspend the dollar cost averaging option at any time. 12 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 these Subaccount Value allocations. If you elect the portfolio rebalancing feature, we will automatically transfer your Subaccount Value back to the percentages you specify. You may choose to have rebalances made quarterly, semiannually or annually until your Annuity Date; portfolio rebalancing is not available after you annuitize. Procedures for selecting portfolio rebalancing are generally the same as those discussed in detail above for selecting dollar cost averaging: You may make your request at any time prior to your Annuity Date and it will be effective when we receive it in proper form. If you stop portfolio rebalancing, you must wait 30 days to begin again. You may specify a date for your first rebalance, or we will 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 $5,000 when you elect the earnings sweep. You may select one or more Variable Investment Options (but not the Money Market Subaccount) as your target option(s). You may choose to have earnings sweeps occur monthly, quarterly, semiannually or annually until you annuitize. At each earnings sweep, we will automatically transfer your accumulated earnings attributable to your sweep option for the previous period proportionately to your target option(s). That is, if you select a monthly earnings sweep, we will transfer the sweep option earnings from the preceding month; if you select a semiannual earnings sweep, we will transfer the sweep option earnings accumulated over the preceding six months. Earnings sweep transfers are not subject to the same requirements and limitations as other transfers. To determine the earnings, we take the change in the sweep option's Account Value during the sweep period, add any withdrawals or transfers out of the sweep option Account that occurred during the sweep period, and subtract any allocations to the sweep option Account during the sweep period. The result of this calculation represents the "total earnings" for the sweep period. If, during the sweep period, you withdraw or transfer amounts from the sweep option Account, we assume that earnings are withdrawn or transferred before any other Account Value. Therefore, your "total earnings" for the sweep period will be reduced by any amounts withdrawn or transferred during the sweep option period. The remaining earnings are eligible for the sweep transfer. Procedures for selecting the earnings sweep are generally the same as those discussed in detail above for selecting dollar cost averaging and portfolio rebalancing: You may make your request at any time and it will be effective when we receive it in a form satisfactory to us. 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 date for the first sweep, it will occur one period after your Contract Date, as described above under Dollar Cost Averaging. 13 If, as a result of an earnings sweep transfer, your source Account Value falls below $500, we have the right, at our option, to transfer that remaining Account Value to your target account(s) on a proportionate basis relative to your most recent allocation instructions. We may change, terminate or suspend the earnings sweep option at any time. Pre-Authorized Withdrawals You may specify a dollar amount for your pre-authorized withdrawals, or you may specify a percentage of your Contract Value or an Account Value. You may direct us to make your pre-authorized withdrawals from one or more specific Investment Options; if you do not give us these specific instructions, amounts will be deducted proportionately from your Account Value in each Fixed or Variable Investment Option. Procedures for selecting pre-authorized withdrawals are generally the same as those discussed in detail above for selecting dollar cost averaging, portfolio rebalancing, and earnings sweeps: You may make your request at any time and it will be effective when we receive it in proper form. If you stop the pre- authorized withdrawals, you must wait 30 days to begin again. You may specify a date for the first withdrawal, or we will 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 the pre-authorized withdrawals on your application but do not specify a date for the first withdrawal, it will occur one period after your Contract Date. If your pre-authorized withdrawals cause your Account Value in any Investment Option to fall below $500, we have the right, at our option, to transfer that remaining Account Value to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. If your pre- authorized withdrawals cause your Contract Value to fall below $1,000, we may, at our option, terminate your Contract and send you the remaining withdrawal proceeds. Pre-authorized withdrawals are subject to the same withdrawal charges as are other withdrawals, and each withdrawal is subject to any applicable charge for premium taxes and/or other taxes, to federal income tax on its taxable portion, and, if you have not reached age 59 1/2, a federal tax penalty of at least 10%. Death Benefit Any death benefit payable will be calculated as of the date we receive proof (in proper form) of the Annuitant's death (or, if applicable, the Contract Owner's death) and instructions regarding payment; any claim of a death benefit must be made in proper form. A recipient of death benefit proceeds may elect to have this benefit paid in one lump sum, in periodic payments, in the form of a lifetime annuity or in some combination of these. Annuity payments 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 proceeds 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. 1035 Exchanges You may make your initial Investment through an exchange of an existing annuity contract. To exchange, you must complete a 1035 Exchange form, which is available by calling your representative, or by calling us at 1-800-722- 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 Code provides that you recognize no gain or loss when you exchange one annuity contract solely for another annuity contract. However, transactions under Section 1035 may be subject to special rules and may require special procedures and record-keeping, particularly if the exchanged annuity contract was issued prior to August 14, 1982. You should consult your tax adviser prior to effecting a 1035 Exchange. Safekeeping of Assets We are responsible for the safekeeping of the assets of the Separate Account. These assets are held separate and apart from the assets of our General Account and our other separate accounts. 14 FINANCIAL STATEMENTS The statement of assets and liabilities of Separate Account A as of December 31, 2001 and the related statement of operations and financial highlights for the year then ended and statements of changes in net assets for each of the two years in the period then ended are incorporated by reference in this Statement of Additional Information from the Annual Report of Separate Account A dated December 31, 2001. Pacific Life's consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 are set forth beginning on the next page. These financial statements should be considered only as bearing on the ability of Pacific Life to meet its obligations under the Contracts and not as bearing on the investment performance of the assets held in the Separate Account. INDEPENDENT AUDITORS The consolidated financial statements of Pacific Life as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. 15 INDEPENDENT AUDITORS' REPORT ---------------------------- Pacific Life Insurance Company and Subsidiaries: We have audited the accompanying consolidated statements of financial condition of Pacific Life Insurance Company and Subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pacific Life Insurance Company and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Costa Mesa, CA February 27, 2002 PL-1 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2001 2000 ------------------------------------------------------------------------------ (In Millions) ASSETS Investments: Fixed maturity securities available for sale, at estimated fair value $17,047 $15,136 Equity securities available for sale, at estimated fair value 266 179 Trading securities, at fair value 458 71 Mortgage loans 2,933 3,026 Real estate 183 221 Policy loans 4,899 4,680 Other investments 2,796 2,654 ----------------------------------------------------------------------------- TOTAL INVESTMENTS 28,582 25,967 Cash and cash equivalents 510 211 Deferred policy acquisition costs 2,113 1,796 Accrued investment income 377 335 Other assets 642 557 Separate account assets 23,458 25,918 ----------------------------------------------------------------------------- TOTAL ASSETS $55,682 $54,784 ============================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Universal life and investment-type products $21,796 $19,410 Future policy benefits 4,580 4,542 Short-term and long-term debt 439 359 Other liabilities 1,690 1,323 Separate account liabilities 23,458 25,918 ----------------------------------------------------------------------------- TOTAL LIABILITIES 51,963 51,552 ----------------------------------------------------------------------------- Commitments and contingencies (Note 18) Stockholder's Equity: Common stock - $50 par value; 600,000 shares authorized, issued and outstanding 30 30 Paid-in capital 151 147 Unearned ESOP shares (3) (6) Retained earnings 3,271 3,030 Accumulated other comprehensive income 270 31 ----------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 3,719 3,232 ----------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $55,682 $54,784 =============================================================================
See Notes to Consolidated Financial Statements PL-2 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------ (In Millions) REVENUES Universal life and investment-type product policy fees $ 821 $ 769 $ 654 Insurance premiums 812 552 484 Net investment income 1,628 1,683 1,510 Net realized investment gain (loss) (14) 997 99 Commission revenue 181 270 234 Other income 225 209 145 ------------------------------------------------------------------------------ TOTAL REVENUES 3,653 4,480 3,126 ------------------------------------------------------------------------------ BENEFITS AND EXPENSES Policy benefits paid or provided 1,163 879 735 Interest credited to universal life and invest- ment-type products 1,029 997 938 Commission expenses 524 576 485 Operating expenses 634 575 453 ------------------------------------------------------------------------------ TOTAL BENEFITS AND EXPENSES 3,350 3,027 2,611 ------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 303 1,453 515 Provision for income taxes 55 458 144 ------------------------------------------------------------------------------ INCOME BEFORE CUMULATIVE ADJUSTMENTS DUE TO CHANGES IN ACCOUNTING PRINCIPLES 248 995 371 Cumulative adjustments due to changes in account- ing principles, net of taxes (7) ------------------------------------------------------------------------------ NET INCOME $ 241 $ 995 $ 371 ==============================================================================
See Notes to Consolidated Financial Statements PL-3 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Income (Loss) ---------------------------------------- Unrealized Gain (Loss) on Unrealized Derivatives Foreign Gain on Unearned and Securities Currency Interest in Common Paid-in ESOP Retained Available for Translation PIMCO Stock Capital Shares Earnings Sale, Net Adjustment Advisors L.P. Total -------------------------------------------------------------------------------------------------------------------- (In Millions) BALANCES, JANUARY 1, 1999 $30 $126 $1,664 $ 507 $ 1 $2,328 Comprehensive loss: Net income 371 371 Other comprehensive loss (785) (1) (786) ------ Total comprehensive loss (415) Other equity adjustments 11 11 Capital contribution 3 3 Purchase of ESOP note $(13) (13) Allocation of unearned ESOP shares 1 1 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 30 140 (12) 2,035 (278) - 1,915 Comprehensive income: Net income 995 995 Other comprehensive income (loss) 236 (4) $77 309 ------ Total comprehensive income 1,304 Other equity adjustments 5 5 Allocation of unearned ESOP shares 2 6 8 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2000 30 147 (6) 3,030 (42) (4) 77 3,232 Comprehensive income: Net income 241 241 Other comprehensive income (loss) 129 (1) 111 239 ------ Total comprehensive income 480 Other equity adjustments 1 1 Allocation of unearned ESOP shares 3 3 6 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2001 $30 $151 $ (3) $3,271 $ 87 $(5) $188 $3,719 ====================================================================================================================
See Notes to Consolidated Financial Statements PL-4 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------- (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 241 $ 995 $ 371 Adjustments to reconcile net income to net cash provided by operating activities: Amortization on fixed maturity securities (73) (72) (78) Depreciation and other amortization 26 36 21 Earnings of equity method investees (6) (23) (93) Deferred income taxes 56 424 (8) Net realized investment (gain) loss 14 (997) (99) Net change in deferred policy acquisition costs (317) (350) (545) Interest credited to universal life and investment-type products 1,029 997 938 Change in trading securities (387) 29 (3) Change in accrued investment income (42) (48) (28) Change in future policy benefits 38 156 58 Change in other assets and liabilities 154 24 172 ------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 733 1,171 706 ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed maturity and equity securities available for sale: Purchases (4,864) (2,903) (4,173) Sales 941 1,595 2,334 Maturities and repayments 1,652 1,601 1,400 Repayments of mortgage loans 682 700 681 Proceeds from sales of mortgage loans and real estate 44 1 24 Purchases of mortgage loans and real estate (593) (806) (886) Change in policy loans (219) (422) (255) Cash received from acquisition of insurance block of business 165 Other investing activity, net 467 (664) 390 ------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,890) (898) (320) -------------------------------------------------------------------------------
(Continued) See Notes to Consolidated Financial Statements PL-5 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (Continued) 2001 2000 1999 -------------------------------------------------------------------------- (In Millions) CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits $ 4,690 $ 4,090 $ 4,453 Withdrawals (3,320) (4,734) (4,322) Net change in short-term and long-term debt 80 135 (220) Purchase of ESOP note (13) Allocation of unearned ESOP shares 6 8 1 -------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,456 (501) (101) -------------------------------------------------------------------------- Net change in cash and cash equivalents 299 (228) 285 Cash and cash equivalents, beginning of year 211 439 154 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 510 $ 211 $ 439 ========================================================================== SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES In connection with the acquisition of an annuity block of business in 1999, as discussed in Note 4, the following assets and liabilities were assumed: Fixed maturity securities $ 1,593 Cash and cash equivalents 165 Other assets 100 -------- Total assets assumed $ 1,858 ======== Annuity reserves $ 1,847 Other liabilities 11 -------- Total liabilities assumed $ 1,858 ======== ========================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid (received) $ (48) $ 74 $ 83 Interest paid $ 23 $ 28 $ 23 ==========================================================================
See Notes to Consolidated Financial Statements PL-6 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND DESCRIPTION OF BUSINESS Pacific Life Insurance Company (Pacific Life) was established in 1868 and is organized under the laws of the State of California as a stock life insurance company. Pacific Life is an indirect subsidiary of Pacific Mutual Holding Company (PMHC), a mutual holding company, and a wholly owned subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC and Pacific LifeCorp were organized pursuant to consent received from the Insurance Department of the State of California (CA DOI) and the implementation of a plan of conversion to form a mutual holding company structure in 1997 (the Conversion). Pacific Life and its subsidiaries and affiliates have primary business operations consisting of life insurance, annuities, pension and institutional products, group employee benefits, broker-dealer operations, and investment management and advisory services. Pacific Life's primary business operations provide a broad range of life insurance, asset accumulation and investment products for individuals and businesses and offer a range of investment products to institutions and pension plans. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of Pacific Life Insurance Company and Subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of Pacific Life and its majority owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Pacific Life prepares its regulatory financial statements based on accounting practices prescribed or permitted by the CA DOI. These consolidated financial statements differ from those filed with regulatory authorities (Note 2). NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133. SFAS No. 133 and SFAS No. 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in net realized investment gain (loss). If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. For derivative instruments not designated as hedges, the change in fair value of the derivative is recorded in net realized investment gain (loss). Upon adoption of SFAS No. 133 and SFAS No. 138, the Company recorded an increase to net income of $1 million, net of taxes, as a cumulative adjustment due to change in accounting principle. This increase was primarily attributable to recording derivatives not designated as hedges at fair value, offset by the recording of initial ineffectiveness on fair value hedges. In addition, upon adoption the Company recorded an increase to accumulated OCI of $38 million, net of taxes. This increase was primarily attributable to the designation of derivatives as fair value hedges. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of the hedged items were not affected by the implementation of SFAS No. 133 and SFAS No. 138. PL-7 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Upon adoption of SFAS No. 133 and SFAS No. 138, the Company transferred $306 million of fixed maturity securities available for sale into the trading category. The transfer resulted in a reclassification of unrealized losses of $4 million, net of taxes, from accumulated OCI into net realized investment gain (loss). Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue (EITF) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Under EITF 99-20, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for a decline in value, which is other than temporary. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. Upon adoption of EITF 99-20, the Company recorded a decrease to net income of $8 million, net of taxes, as a cumulative adjustment due to change in accounting principle. Effective April 1, 2001, the Company adopted the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125, which revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. Adoption of SFAS No. 140 did not have a material impact on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141, which was effective July 1, 2001, for any business combination entered into subsequent to June 30, 2001, requires the purchase method of accounting and separate recognition of intangible assets apart from goodwill if such intangible assets meet certain criteria. Adoption of SFAS No. 141 did not have a material impact on the Company's consolidated financial statements. SFAS No. 142, effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic impairment tests of the goodwill asset and that intangible assets, other than goodwill, should be amortized over their useful lives. Amortization of goodwill was $5 million, $3 million and $12 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company has not yet finalized the quantification of the impact, if any, on its consolidated financial statements of applying the new requirements of SFAS No. 142. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has not yet finalized the quantification of the impact, if any, on its consolidated financial statements of applying the new requirements of SFAS No. 144. INVESTMENTS Fixed maturity and equity securities available for sale are reported at estimated fair value, with unrealized gains and losses, net of deferred income taxes and adjustments related to deferred policy acquisition costs, recorded as a component of OCI. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary and changes in fair value of fixed maturity securities attributable to the risk designated in a fair value hedge. Trading securities are reported at fair value with changes in fair value included in net realized investment gain (loss). For mortgage-backed securities included in fixed maturity securities available for sale, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. This adjustment is reflected in net investment income. PL-8 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Realized gains and losses on investment transactions are determined on a specific identification basis and are included in net realized investment gain (loss). Mortgage loans, net of valuation allowances and writedowns, and policy loans are stated at unpaid principal balances. Real estate is carried at depreciated cost, net of writedowns, or, for real estate acquired in satisfaction of debt, estimated fair value less estimated selling costs at the date of acquisition, if lower than the related unpaid balance. Partnership and joint venture interests in which the Company does not have a controlling interest or a majority ownership are generally recorded using the equity method of accounting and are included in other investments. Investments in low income housing tax credits (LIHTC) are included in other investments. These investments are recorded under either the effective interest method or the equity method. For investments in LIHTC recorded under the effective interest method, the amortization of the original investment and the tax credits are recorded in the provision for income taxes. For investments in LIHTC recorded under the equity method, the amortization of the initial investment is included in net investment income and the related tax credits are recorded in the provision for income taxes. The amortization recorded in net investment income was $27 million, $33 million and $22 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company, through its wholly owned subsidiary Pacific Asset Management LLC and subsidiaries (PAM), had an approximate 33% beneficial ownership interest in PIMCO Advisors L.P. (PIMCO Advisors) as of December 31, 1999 and May 4, 2000, through the direct and indirect ownership of PIMCO Advisors' Class A limited partnership units (Class A units). This interest was accounted for using the equity method through May 4, 2000. On May 5, 2000, a transaction was closed whereby Allianz of America, Inc. (Allianz), a subsidiary of Allianz AG, acquired substantially all interests in PIMCO Advisors other than those beneficially owned by PAM. PAM exchanged its Class A units for a new security, PIMCO Advisors Class E limited partnership units (Class E units). This exchange resulted in a realized, pretax nonmonetary exchange gain of $1,082 million, based on the fair value of the Class A units exchanged, or $38.75 per unit, the per unit value that Allianz paid to acquire its interest in PIMCO Advisors. This gain is included in net realized investment gain (loss) for the year ended December 31, 2000. A net deferred tax liability of $365 million was also established. As a result of this transaction, the Company has virtually no influence over PIMCO Advisors' operating and financial policies. Effective May 5, 2000, the interest in PIMCO Advisors is being accounted for using the cost method. The interest in PIMCO Advisors, which is included in other investments, is being reported at estimated fair value, as determined by the put and call option price described below. Unrealized gains of $177 million and $124 million, net of deferred income taxes of $66 million and $47 million, for the years ended December 31, 2001 and 2000, respectively, are reported as a component of OCI. In connection with this transaction, PAM entered into a Continuing Investment Agreement with Allianz with respect to its interest in PIMCO Advisors. The interest in PIMCO Advisors held by PAM is subject to put and call options held by PAM and Allianz, respectively. The put option gives PAM the right to require Allianz, on the last business day of each calendar quarter, to purchase all of the interest in PIMCO Advisors held by PAM. The put option price is based on the per unit amount, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14. The call option gives Allianz the right to require PAM, on any January 31, April 30, July 31, or October 31, beginning on January 31, 2003, to sell its interest in PIMCO Advisors to Allianz. The call option price is based on the per unit amount, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14 and can be exercised only if the call per unit value reaches a minimum value. Effective January 1, 2002, PIMCO Advisors changed its name to Allianz Dresdner Asset Management of America L.P. PL-9 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) CASH AND CASH EQUIVALENTS Cash and cash equivalents include all investments with a remaining maturity of three months or less. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new insurance business, principally commissions, medical examinations, underwriting, policy issue and other expenses, all of which vary with and are primarily related to the production of new business, have been deferred. For universal life and investment-type products, such costs are generally amortized over the expected life of the contract in proportion to the present value of expected gross profits using investment, mortality, expense margins and surrender charge assumptions and estimates. Adjustments are reflected in income or equity in the period the Company experiences deviations in gross profit assumptions and estimates. Adjustments directly affecting equity result from experience deviations due to changes in unrealized gains and losses in securities available for sale. For traditional life insurance products, such costs are being amortized over the premium-paying period of the related policies in proportion to premium revenues recognized, using assumptions and estimates consistent with those used in computing policy reserves. Value of business acquired (VOBA), included as part of deferred policy acquisition costs, represents the present value of future profits generated from existing insurance contracts in force at the date of acquisition and is amortized over the expected policy or contract duration in relation to the present value of estimated gross profits from such policies and contracts. The VOBA balance was $91 million and $94 million as of December 31, 2001 and 2000, respectively. Components of deferred policy acquisition costs are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Balance, January 1 $1,796 $1,446 $ 901 ---------------------------- Additions: Capitalized during the year 566 646 538 Acquisition of insurance block of business 75 ---------------------------- Total additions 566 646 613 ---------------------------- Amortization: Allocated to commission expenses (181) (188) (112) Allocated to operating expenses (65) (54) (49) Allocated to OCI, unrealized gains (losses) (3) (54) 93 ---------------------------- Total amortization (249) (296) (68) ---------------------------- Balance, December 31 $2,113 $1,796 $1,446 ============================
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS Universal life and investment-type products, including guaranteed interest contracts (GICs) and funding agreements, are valued using the retrospective deposit method and consist principally of deposits received plus interest credited, less accumulated assessments. Interest credited to these policies primarily ranged from 2.0% to 8.0% during 2001, 2000 and 1999. PL-10 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) FUTURE POLICY BENEFITS Life insurance reserves are valued using the net level premium method. Interest rate assumptions ranged from 4.5% to 9.3% for 2001, 2000 and 1999. Mortality, morbidity and withdrawal assumptions are generally based on the Company's experience, modified to provide for possible unfavorable deviations. Future dividends for participating business are provided for in the liability for future policy benefits. Dividends to policyholders are included in policy benefits paid or provided. Dividends are accrued based on dividend formulas approved by the Board of Directors and reviewed for reasonableness and equitable treatment of policyholders by an independent consulting actuary. As of December 31, 2001 and 2000, participating experience rated policies paying dividends represent less than 1% of direct written life insurance in force. REVENUES, BENEFITS AND EXPENSES Insurance premiums are recognized as revenues when due. Benefits and expenses, other than deferred policy acquisition costs, are recognized when incurred. Generally, receipts for universal life and investment-type products are classified as deposits. Policy fees from these contracts include mortality charges, surrender charges and earned policy service fees. Expenses related to these products include interest credited to account balances and benefit amounts in excess of account balances. Commission revenue from Pacific Life's broker-dealer subsidiaries is recorded on the trade date. DEPRECIATION AND AMORTIZATION Depreciation of investment real estate is computed on the straight-line method over the estimated useful lives, which range from 5 to 30 years. Certain other assets are depreciated or amortized on the straight-line method over periods ranging from 3 to 40 years. Depreciation of investment real estate is included in net investment income. Depreciation and amortization of certain other assets is included in operating expenses. INCOME TAXES Pacific Life and its wholly owned life insurance subsidiary domiciled in Arizona, Pacific Life & Annuity Company (PL&A), are taxed as life insurance companies for income tax purposes. Pacific Life and its includable subsidiaries are included in the consolidated Federal income tax return of PMHC and are allocated an expense or benefit based principally on the effect of including their operations in the consolidated return. Pacific Life's non insurance subsidiaries are either included in PMHC's combined California franchise tax return or file separate state tax returns. Deferred income taxes are provided for timing differences in the recognition of revenues and expenses for financial reporting and income tax purposes. SEPARATE ACCOUNTS Separate account assets are recorded at fair 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 contract owners. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments, disclosed in Notes 5, 6 and 7, has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is often required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. PL-11 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) RISKS AND UNCERTAINTIES The Company operates in a business environment which is subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, interest rate risk, investment market risk, credit risk and legal and regulatory changes. Interest rate risk is the potential for interest rates to change, which can cause fluctuations in the value of investments, the liabilities for future policy benefits and the carrying amount of deferred policy acquisition costs. To the extent that fluctuations in interest rates cause the duration of assets and liabilities to differ, the Company may have to sell assets prior to their maturity and realize losses. The Company controls its exposure to this risk by, among other things, asset/liability matching techniques that attempt to match the duration of assets and liabilities and utilization of derivative instruments. Additionally, the Company includes contractual provisions limiting withdrawal rights for certain of its products. A substantial portion of the Company's liabilities are not subject to surrender or can be surrendered only after deduction of a surrender charge or a market value adjustment. Credit risk is the risk that issuers of investments owned by the Company may default or that other parties may not be able to pay amounts due to the Company. The Company manages its investments to limit credit risk by diversifying its portfolio among various security types and industry sectors. The credit risk of financial instruments is controlled through credit approval procedures, limits and ongoing monitoring. Real estate and mortgage loan investment risks are limited by diversification of geographic location and property type. Management does not believe that significant concentrations of credit risk exist. The Company is also exposed to credit loss in the event of nonperformance by the counterparties to interest rate swap contracts and other derivative securities. The Company manages this risk through credit approvals and limits on exposure to any specific counterparty. However, the Company does not anticipate nonperformance by the counterparties. The Company is subject to various state and Federal regulatory authorities. The potential exists for changes in regulatory initiatives which can result in additional, unanticipated expense to the Company. Existing Federal laws and regulations affect the taxation of life insurance or annuity products and insurance companies. There can be no assurance as to what, if any, cases might be decided or future legislation might be enacted, or if decided or enacted, whether such cases or legislation would contain provisions with possible negative effects on the Company's life insurance or annuity products. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining deferred policy acquisition costs, investment valuation and allowances, derivative valuation, and liabilities for future policy benefits. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2001 financial statement presentation. PL-12 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS Pacific Life prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the CA DOI, which is a comprehensive basis of accounting other than U.S. GAAP. Effective January 1, 2001, the CA DOI required that insurance companies domiciled in the State of California prepare their statutory basis financial statements in accordance with the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual, version effective January 1, 2001 (NAIC SAP), subject to any deviations prescribed or permitted by the CA DOI. As a result of adopting NAIC SAP, Pacific Life reported a statutory cumulative effect of change in accounting principle that increased statutory surplus by $229 million as of January 1, 2001. NAIC SAP does not allow for restatement of prior year amounts. Therefore, prior year statutory amounts presented in this footnote are not comparable to current year statutory amounts. The following are reconciliations of statutory capital and surplus, and statutory net income for Pacific Life as compared to the amounts reported as stockholder's equity and net income included on the accompanying consolidated financial statements:
December 31, 2001 2000 -------------- (In Millions) Statutory capital and surplus $1,869 $1,678 Deferred policy acquisition costs 2,124 1,764 Asset valuation reserve 524 524 Non admitted assets 378 115 Accumulated other comprehensive income 270 31 Surplus notes (150) (150) Deferred income taxes (356) 181 Insurance and annuity reserves (795) (767) Other (145) (144) -------------- Stockholder's equity as reported herein $3,719 $3,232 ==============
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Statutory net income $ 24 $ 141 $ 168 Deferred policy acquisition costs 329 393 379 Insurance and annuity reserves 25 (106) (184) Deferred income taxes (29) (87) (3) Earnings of subsidiaries (60) 674 (27) Other (48) (20) 38 --------------------------- Net income as reported herein $ 241 $ 995 $ 371 ===========================
PL-13 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS (Continued) RISK-BASED CAPITAL Risk-based capital is a method developed by the NAIC to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. The adequacy of a company's actual capital is measured by the risk-based capital results, as determined by the formulas. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 2001 and 2000, Pacific Life and PL&A exceeded the minimum risk-based capital requirements. PERMITTED PRACTICE For the year ended December 31, 2000, the CA DOI approved a permitted practice effective May 5, 2000, allowing Pacific Life to apply the accounting guidance promulgated for limited liability companies in Statement of Statutory Accounting Principle (SSAP) No. 48, Joint Ventures, Partnerships and Limited Liability Companies, and SSAP No. 46, Investments in Subsidiary, Controlled and Affiliated Entities, prior to the effective date of NAIC SAP, for its investment in PAM. Under this permitted practice, PAM was accounted for using the equity method of accounting. The permitted practice also required that the equity of PAM be adjusted for certain tax effects not recorded at PAM due to its limited liability company structure. As of January 1, 2001, this permitted practice became prescribed practice. Prior to May 5, 2000, net cash distributions received on PAM's interest in PIMCO Advisors were recorded as income, as permitted by the CA DOI. DIVIDEND RESTRICTIONS Dividend payments by Pacific Life to Pacific LifeCorp in any 12-month period cannot exceed the greater of 10% of adjusted statutory capital and surplus as of the preceding year end or the statutory net gain from operations for the previous calendar year, without prior approval from the CA DOI. Based on this limitation and 2001 statutory results, Pacific Life could pay $165 million in dividends in 2002 without prior approval. No dividends were paid during 2001, 2000 and 1999. The maximum amount of ordinary dividends that can be paid by PL&A to Pacific Life without restriction cannot exceed the lesser of 10% of statutory surplus as regards to policyholders, or the statutory net gain from operations. No dividends were paid during 2001, 2000 and 1999. Based on this limitation and 2001 statutory results, PL&A could pay $21 million in dividends in 2002 without prior approval. 3. CLOSED BLOCK In connection with the Conversion, an arrangement known as a closed block (the Closed Block) was established, for dividend purposes only, for the exclusive benefit of certain individual life insurance policies that had an experience based dividend scale for 1997. The Closed Block was designed to give reasonable assurance to holders of Closed Block policies that policy dividends will not change solely as a result of the Conversion. Assets that support the Closed Block, which are primarily included in fixed maturity securities, policy loans and accrued investment income, amounted to $292 million and $290 million as of December 31, 2001 and 2000, respectively. Liabilities allocated to the Closed Block, which are primarily included in future policy benefits, amounted to $326 million and $330 million as of December 31, 2001 and 2000, respectively. The contribution to income from the Closed Block amounted to $5 million, $6 million and $4 million and is primarily included in insurance premiums, net investment income and policy benefits paid or provided for the years ended December 31, 2001, 2000 and 1999, respectively. PL-14 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACQUISITIONS All of the Company's acquisitions are accounted for using the purchase method of accounting. On December 31, 2001, a transaction was closed whereby Pacific Life exchanged its 100% common stock ownership in World-Wide Holdings Limited (World-Wide) for a 22.5% common stock ownership in Scottish Annuity & Life Holdings, Ltd. (Scottish). World-Wide's assets and liabilities were approximately $164 million and $103 million, respectively. Scottish, a publicly traded specialty reinsurer, issued new ordinary shares in exchange for World-Wide at a value of $78 million. Pacific Life recorded a nonmonetary exchange gain of $13 million, net of taxes, in connection with this exchange. Pacific Life will account for its investment in Scottish using the equity method of accounting. The Company has not yet completed the allocation of the purchase price to assets and liabilities acquired. In 1999, Pacific Life acquired a payout annuity block of business from Confederation Life Insurance Company (U.S.) in Rehabilitation, which is currently under rehabilitation. On the effective date, this block of business consisted of approximately 16,000 annuitants having reserves of $1.8 billion. The assets received as part of this acquisition amounted to $1.6 billion in fixed maturity securities and $0.2 billion in cash. During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf Holdings, LLC (Grayhawk) for $65 million, which owns 100% of a real estate investment property in Arizona. Goodwill resulting from this transaction was $22 million. PL-15 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS The net carrying amount, gross unrealized gains and losses, and estimated fair value of fixed maturity and equity securities available for sale are shown below. The net carrying amount represents amortized cost adjusted for other than temporary declines in value and change in fair value of fixed maturity securities attributable to the risk designated in a fair value hedge. The fair value of publicly traded securities is based on quoted market prices. For securities not actively traded, fair values were estimated based on amounts provided by independent pricing services specializing in matrix pricing and modeling techniques. The Company also estimates certain fair values based on interest rates, credit quality and average maturity or from securities with comparable trading characteristics.
Net Gross Unrealized Carrying ------------------ Estimated Amount Gains Losses Fair Value ---------------------------------------- (In Millions) As of December 31, 2001: ------------------------ U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 32 $ 2 $ 34 Obligations of states and political subdivisions 669 92 761 Foreign governments 292 27 $ 11 308 Corporate securities 10,985 377 194 11,168 Mortgage-backed and asset- backed securities 4,822 137 190 4,769 Redeemable preferred stock 8 1 7 ---------------------------------------- Total fixed maturity securities $16,808 $ 635 $ 396 $17,047 ======================================== Total equity securities $ 255 $ 20 $ 9 $ 266 ======================================== As of December 31, 2000: ------------------------ U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 32 $ 2 $ 34 Obligations of states and political subdivisions 641 55 $ 1 695 Foreign governments 302 20 5 317 Corporate securities 8,780 258 232 8,806 Mortgage-backed and asset- backed securities 5,230 101 100 5,231 Redeemable preferred stock 52 9 8 53 ---------------------------------------- Total fixed maturity securities $15,037 $ 445 $ 346 $15,136 ======================================== Total equity securities $ 173 $ 18 $ 12 $ 179 ========================================
PL-16 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS (Continued) The net carrying amount and estimated fair value of fixed maturity securities available for sale as of December 31, 2001, 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.
Net Carrying Estimated Amount Fair Value ------------------- (In Millions) Due in one year or less $ 794 $ 811 Due after one year through five years 4,785 4,924 Due after five years through ten years 3,699 3,775 Due after ten years 2,708 2,768 ------------------ 11,986 12,278 Mortgage-backed and asset-backed securities 4,822 4,769 ------------------ Total $16,808 $17,047 ==================
Major categories of investment income are summarized as follows:
Years Ended December 31, 2001 2000 1999 ------------------------ (In Millions) Fixed maturity securities $1,118 $1,109 $1,030 Equity securities 5 13 15 Mortgage loans 206 230 208 Real estate 64 61 46 Policy loans 202 182 159 Other 172 218 166 ------------------------ Gross investment income 1,767 1,813 1,624 Investment expense 139 130 114 ------------------------ Net investment income $1,628 $1,683 $1,510 ========================
PL-17 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS (Continued) Net realized investment gain (loss), including changes in valuation allowances, is as follows:
Years Ended December 31, 2001 2000 1999 ------------------ (In Millions) Fixed maturity securities $(45) $ 2 $16 Equity securities 31 (13) 58 Mortgage loans 6 7 Real estate 9 (3) 18 Interest in PIMCO Advisors (Note 1) 1,082 Other investments (9) (77) ----------------- Total $(14) $ 997 $99 =================
The change in fair value on investments in available for sale and trading securities is as follows:
December 31, 2001 2000 1999 ------------------- (In Millions) Available for sale securities: Fixed maturity $140 $477 $ (925) Equity 5 (20) (157) ------------------- Total $145 $457 $(1,082) =================== Trading securities $(17) $ 6 $ 0 ===================
Gross gains of $67 million, $125 million and $188 million and gross losses of $48 million, $44 million and $62 million, which have been included in earnings as a result of sales of available for sale securities, were realized for the years ended December 31, 2001, 2000 and 1999, respectively. Trading securities as of December 31, 2001 and 2000, included net unrealized losses of $15 million and net unrealized gains of $2 million, respectively. As of December 31, 2001 and 2000, investments in fixed maturity securities of $13 million were on deposit with state insurance departments to satisfy regulatory requirements. The Company's interest in PIMCO Advisors (Note 1) exceeds 10% of total stockholder's equity as of December 31, 2001. PL-18 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of the Company's financial instruments are as follows:
December 31, 2001 December 31, 2000 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------------------------------- (In Millions) Assets: Fixed maturity and equity securities (Note 5) $17,313 $17,313 $15,315 $15,315 Trading securities 458 458 71 71 Mortgage loans 2,933 3,088 3,026 3,246 Policy loans 4,899 4,899 4,680 4,680 Cash and cash equivalents 510 510 211 211 Interest in PIMCO Advisors (Note 1) 1,703 1,703 1,548 1,548 Derivative instruments (Note 7) 26 26 15 15 Notes receivable from affiliates 88 88 Liabilities: Guaranteed interest contracts 7,498 7,625 6,676 6,803 Deposit liabilities 482 495 470 483 Annuity liabilities 1,955 1,955 1,114 1,114 Short-term debt 275 275 195 195 Long-term debt 164 160 164 166 Derivative instruments (Note 7) 530 530 445 445
The following methods and assumptions were used to estimate the fair value of these financial instruments as of December 31, 2001 and 2000: TRADING SECURITIES The fair value of trading securities is based on quoted market prices. 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 carrying amounts of policy loans are a reasonable estimate of their fair values because interest rates are generally variable and based on current market rates. CASH AND CASH EQUIVALENTS The carrying values approximate fair values due to the short-term maturities of these instruments. PL-19 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) NOTES RECEIVABLE FROM AFFILIATES The carrying amount of notes receivable from affiliates (Note 16) is a reasonable estimate of its fair value because the interest rates are variable and based on current market rates. GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES The estimated fair value of GICs is estimated using the rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposit liabilities with no defined maturities is the amount payable on demand. ANNUITY LIABILITIES The estimated fair value of annuity liabilities approximates carrying value and primarily includes policyholder deposits and accumulated credited interest. SHORT-TERM DEBT The carrying amount of short-term debt is a reasonable estimate of its fair value because the interest rates are variable and based on current market rates. LONG-TERM DEBT The estimated fair value of surplus notes (Note 10) is based on market quotes. The carrying amount of other long-term debt is a reasonable estimate of its fair value because the interest rate on the debt is approximately the same as current market rates. 7. DERIVATIVES AND HEDGING ACTIVITIES The Company primarily utilizes various derivative instruments to hedge and manage its exposure to changes in interest rate levels, foreign exchange rates, and equity market prices, and to manage the duration mismatch of assets and liabilities. The Company uses hedge accounting as allowed by SFAS No. 133 and SFAS No. 138, by designating derivative instruments as either fair value or cash flow hedges on the date the Company enters into a derivative contract. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. Hedge effectiveness is assessed quarterly by a variety of techniques including Value-at-Risk, regression analysis and cumulative dollar offset. In certain cases, hedge effectiveness is assumed because the derivative instrument was constructed such that all critical terms of the derivative exactly match the hedged risk in the hedged item. PL-20 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Fair Value Hedges ----------------- The Company primarily uses interest rate and foreign currency swaps and options to manage its exposure to changes in the fair values of its assets and liabilities due to fluctuations in foreign currencies and the benchmark interest rate. For derivative instruments that are designated as fair value hedges, the change in value of the derivative instrument as well as the change in fair value of the hedged item associated with the risk being hedged is recorded in net realized investment gain (loss). Periodic net settlements on derivatives designated as fair value hedges are reflected on an accrual basis as an adjustment to net investment income or interest credited on universal life and investment-type products, based on the item being hedged. The change in value of the hedged item associated with the risk being hedged is reflected as an adjustment to the carrying amount of the hedged item. Upon termination of the fair value hedging relationship, the accumulated cost basis adjustment is amortized into net investment income or interest credited to universal life or investment-type products over its remaining life or recognized immediately in connection with the disposal of the hedged item. For the year ended December 31, 2001, the ineffectiveness related to fair value hedges was approximately $0.2 million, net of tax, which is recorded in net realized investment gain (loss). No component of the hedging instrument's fair value is excluded from the determination of effectiveness. Cash Flow Hedges ---------------- The Company primarily uses interest rate and foreign currency swaps and interest rate futures contracts to manage its exposure to variability in cash flows due to changes in foreign currencies and the benchmark interest rate. These cash flows include those associated with existing assets and liabilities as well as the forecasted interest cash flows related to anticipated investment purchases and liability issuances. Such anticipated investment purchases and liability issuances are considered to be probable to occur and are generally completed within 180 days of the inception of the hedge. The Company has not discontinued any cash flow hedges of anticipated transactions. For derivative instruments that are designated as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is recorded in OCI and is recognized as an adjustment to net investment income or interest credited on universal life and investment-type products when the hedged item affects earnings. The Company did not record any ineffectiveness for cash flow hedges during the year ended December 31, 2001. Over the next twelve months, the Company anticipates that $0.8 million of deferred gains on derivative instruments in accumulated OCI will be reclassified to earnings. For the year ended December 31, 2001, none of the Company's hedged forecasted transactions were determined to be probable of not occurring. No component of the hedging instrument's fair value is excluded from the determination of effectiveness. Derivatives Not Designated as Hedging Instruments ------------------------------------------------- The Company enters into swap agreements, interest rate futures contracts, interest rate cap and floor agreements, and equity indexed futures contracts without designating the derivatives as hedging instruments. Derivatives that are not designated as hedging instruments are entered into primarily to manage the Company's interest rate risk from rising or falling interest rates, equity risk and yield enhancement. The Company uses credit default and total return swaps to manage the credit exposure of the portfolio, equity risk embedded in certain liabilities and to take advantage of market opportunities. Net realized investment gain (loss) for the year ended December 31, 2001 includes $2 million related to realized gains and losses and changes in fair value of derivative instruments not designated as hedges. Periodic net settlements on such derivatives are recorded as adjustments to net investment income or interest credited on universal life and investment-type products on an accrual basis, based upon the purpose of the derivative. PL-21 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Embedded Derivatives -------------------- The Company may enter into contracts that are not derivative instruments, but contain embedded derivatives. When it is determined that the embedded derivative possesses economic and risk characteristics that are not clearly and closely related to those of the host contract and that a separate instrument with the same terms would qualify as a derivative instrument, it is separated from the host contract and accounted for as a stand-alone derivative. Such derivatives are recorded on the consolidated statement of financial condition at fair value, with changes in their fair value recorded in net realized investment gain (loss). Derivative Instruments ---------------------- The Company uses a variety of derivative financial instruments, including swaps, caps, floors, and exchange traded futures contracts. Interest rate swap agreements involve the exchange, at specified intervals, of interest payments resulting from the difference between fixed rate and floating rate interest amounts calculated by reference to an underlying notional amount. Credit default swaps involve the receipt of fixed rate payments in exchange for assuming potential credit exposure of an underlying security. Total return swaps involve the exchange of floating rate payments for the total return performance of a specified index, market or security. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Foreign currency swaps involve the exchange of an initial principal amount in two currencies, and the agreement to re-exchange the currencies at a future date, at an agreed exchange rate. There is also periodic exchange of interest payments in the two currencies at specified intervals, calculated using agreed upon rates and the exchanged principal amounts. The Company issues synthetic GICs to Employee Retirement Income Security Act of 1974 (ERISA) qualified defined contribution employee benefit plans (ERISA Plan). The ERISA Plan uses the contracts in its stable value or guaranteed fixed income option. Synthetic GICs provide certain of the ERISA Plan's assets a guarantee of principal and interest, as it relates to certain benefit payments. The Company has an off balance sheet risk that the value of the underlying assets is insufficient to meet these guarantees. To control this risk, the Company pre-approves all investment guidelines. Default risk is absorbed by the ERISA Plan. The interest rate guarantee is reset periodically to reflect actual performance results. As of December 31, 2001 the Company had outstanding commitments to maintain liquidity for benefit payments on notional amounts of $2.6 billion compared to $1.7 billion as of December 31, 2000. The notional amounts represent the value of the ERISA Plan's assets only and are not a measure of the exposure to the Company. Interest rate floor agreements entitle the Company to receive the difference when the current rate of the underlying index is below the strike rate. Interest rate cap agreements entitle the Company to receive the difference when the current rate of the underlying index is above the strike rate. Options purchased involve the right, but not the obligation, to purchase the underlying securities at a specified price during a given time period. Cash requirements for these instruments are generally limited to the premium paid by the Company at acquisition. Financial futures contracts obligate the holder to buy or sell the underlying financial instrument at a specified future date for a set price and may be settled in cash or by delivery of the financial instrument. Price changes on futures are settled daily through the required margin cash flows. The notional amounts of the contracts do not represent future cash requirements, as the Company intends to close out open positions prior to expiration. PL-22 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Outstanding derivatives with off-balance sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair value as of December 31, 2001 and 2000 are as follows:
Assets (Liabilities) ----------------------------------------- Notional or Carrying Estimated Carrying Estimated Contract Amounts Value Fair Value Value Fair Value ----------------- -------- ---------- -------- ---------- 2001 2000 2001 2001 2000 2000 ----------------------------------------------------------- (In Millions) Interest rate swap contracts $ 3,512 $ 2,648 $(144) $(144) $ (89) $ (89) Credit default and total return swaps 2,375 3,896 (105) (105) (132) (132) Foreign currency swaps 3,310 2,488 (281) (281) (224) (224) Synthetic GICs 2,599 1,695 Interest rate floors, caps, options and swaptions 829 745 26 26 15 15 Financial futures contracts 97 58 ---------------------------------------------------------- Total $12,722 $11,530 $(504) $(504) $(430) $(430) ==========================================================
A reconciliation of the notional or contract amounts is as follows:
Balance Acquisitions Terminations Balance Beginning and Other and End of of Year Additions Maturities Year ------------------------------------------- (In Millions) December 31, 2001: ------------------ Interest rate swap contracts $ 2,648 $1,100 $ 236 $ 3,512 Credit default and total return swaps 3,896 254 1,775 2,375 Foreign currency swaps 2,488 1,439 617 3,310 Synthetic GICs 1,695 1,046 142 2,599 Interest rate floors, caps, options and swaptions 745 103 19 829 Financial futures contracts 58 3,398 3,359 97 ------------------------------------------- Total $11,530 $7,340 $6,148 $12,722 =========================================== December 31, 2000: ------------------ Interest rate swap contracts $ 2,867 $2,419 $2,638 $ 2,648 Credit default and total return swaps 2,120 2,898 1,122 3,896 Foreign currency swaps 1,685 1,079 276 2,488 Synthetic GICs 1,632 470 407 1,695 Interest rate floors, caps, options and swaptions 1,033 160 448 745 Financial futures contracts 677 2,762 3,381 58 ------------------------------------------- Total $10,014 $9,788 $8,272 $11,530 ===========================================
PL-23 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS The detail of universal life and investment-type product liabilities is as follows:
December 31, 2001 2000 --------------- (In Millions) Universal life $12,278 $11,405 Investment-type products 9,518 8,005 --------------- $21,796 $19,410 ===============
The detail of universal life and investment-type products policy fees and interest credited, net of reinsurance ceded, is as follows:
Years Ended December 31, 2001 2000 1999 ------------------------- (In Millions) Policy fees: Universal life $ 582 $ 541 $ 509 Investment-type products 239 228 145 ------------------------- Total policy fees $ 821 $ 769 $ 654 ========================= Interest credited: Universal life $ 500 $ 467 $ 444 Investment-type products 529 530 494 ------------------------- Total interest credited $ 1,029 $ 997 $ 938 =========================
9. LIABILITY FOR GROUP HEALTH UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSE Activity in the liability for group health unpaid claims and claim adjustment expenses, which is included in future policy benefits, is summarized as follows:
Years Ended December 31, 2001 2000 -------------------------- (In Millions) Balance at January 1 $130 $116 Incurred related to: Current year 569 395 Prior years (12) (19) -------------------------- Total incurred 557 376 -------------------------- Paid related to: Current year 448 297 Prior years 80 65 -------------------------- Total paid 528 362 -------------------------- Balance at December 31 $159 $130 ==========================
As a result of favorable settlement of prior years' estimated claims, the provision for claims and claim adjustment expenses decreased by $12 million and $19 million for the years ended December 31, 2001 and 2000, respectively. PL-24 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHORT-TERM AND LONG-TERM DEBT Pacific Life borrows for short-term needs by issuing commercial paper. There was no commercial paper debt outstanding as of December 31, 2001 and 2000. As of December 31, 2001 and 2000, Pacific Life had a revolving credit facility of $350 million. There was no debt outstanding under the revolving credit facility as of December 31, 2001 and 2000. PAM had bank borrowings outstanding of $275 million and $195 million as of December 31, 2001 and 2000, respectively. The interest rate was 2.3% and 6.9% as of December 31, 2001 and 2000, respectively. The amount of the borrowings and the interest rates are reset monthly. The borrowing limit for PAM as of December 31, 2001 and 2000, was $275 million and $215 million, respectively. Grayhawk has a note payable with a maturity date of May 22, 2008. The note bears a fixed rate of interest of 7.6%. The outstanding balance as of December 31, 2001 and 2000 was $14 million. Pacific Life has $150 million of long-term debt, which consists of surplus notes outstanding at an interest rate of 7.9% maturing on December 30, 2023. Interest is payable semiannually on June 30 and December 30. The surplus notes may not be redeemed at the option of Pacific Life or any holder of the surplus notes. The surplus notes are unsecured and subordinated to all present and future senior indebtedness and policy claims of Pacific Life. Each payment of interest and principal on the surplus notes may be made only with the prior approval of the Insurance Commissioner of the State of California. Interest expense amounted to $12 million for each of the years ended December 31, 2001, 2000 and 1999 and is included in net investment income. 11. INCOME TAXES The provision for income taxes is as follows:
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Current $(5) $ 34 $152 Deferred 60 424 (8) --------------------------- Provision for income taxes on income before cumulative adjustments due to changes in accounting principles 55 458 144 Deferred income tax provision on cumulative adjustments due to changes in accounting principles (4) --------------------------- Total $51 $458 $144 ===========================
PL-25 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (Continued) The sources of the Company's provision for deferred taxes are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Nonmonetary exchange of PIMCO Advisors units (Note 1) $447 Deferred policy acquisition costs $ 99 57 $ 20 Policyholder reserves 7 19 51 Duration hedging 3 (30) Investment valuation (7) (19) (28) Partnership income (26) 3 (25) Low income housing credit carryover (31) Other 14 (4) 4 ---------------------------- Deferred taxes from operations 56 506 (8) Release of deferred taxes in connection with nonmonetary exchange of PIMCO Advisors units (Note 1) (82) ---------------------------- Provision for deferred taxes $ 56 $424 $ (8) ============================
In connection with the nonmonetary exchange of partnership units at PIMCO Advisors (Note 1), certain nonoperating deferred taxes previously established were released during the year ended December 31, 2000. A reconciliation of the provision for income taxes based on the prevailing corporate statutory tax rate to the provision reflected in the consolidated financial statements is as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Provision for income taxes at the statutory rate $106 $509 $180 State income taxes 4 25 Nontaxable investment income (6) (6) (7) Low income housing and foreign tax credits (28) (22) (19) Book to tax basis difference on nonmonetary exchange of PIMCO Advisors units (Note 1) (35) Other (21) (13) (10) ---------------------------- Provision for income taxes on income before cumulative adjustments due to changes in accounting principles 55 458 144 Deferred income tax provision on cumulative adjustments due to changes in accounting principles (4) ---------------------------- Total $ 51 $458 $144 ============================
PL-26 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (Continued) The net deferred tax liability, included in other liabilities as of December 31, 2001 and 2000, is comprised of the following tax effected temporary differences:
December 31, 2001 2000 -------------- (In Millions) Deferred tax assets Policyholder reserves $ 177 $ 184 Investment valuation 99 92 Deferred compensation 40 35 Low income housing credit carryover 31 Duration hedging 18 18 Partnership income 10 Dividends 7 7 Postretirement benefits 6 8 Other 5 22 -------------- Total deferred tax assets 393 366 -------------- Deferred tax liabilities Nonmonetary exchange of PIMCO Advisors units (Note 1) (429) (429) Deferred policy acquisition costs (200) (101) Partnership income (16) Depreciation (2) (2) -------------- Total deferred tax liabilities (631) (548) -------------- Net deferred tax liability from operations (238) (182) Deferred taxes on World-Wide (Note 4) (11) Deferred taxes on OCI (159) (23) -------------- Net deferred tax liability $ (397) $(216) ==============
PL-27 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMPREHENSIVE INCOME (LOSS) The Company displays comprehensive income (loss) and its components on the accompanying consolidated statements of stockholder's equity and as follows. OCI is shown net of reclassification adjustments and net of deferred income taxes. The disclosure of the gross components of OCI is as follows:
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Gross Holding Gain (Loss): Holding gain (loss) on securities available for sale $151 $ 457 $(948) Holding loss on derivatives (20) (70) (226) Income tax (expense) benefit (45) (135) 411 Reclassification adjustment: Realized (gain) loss on sale of securities available for sale (5) 3 (78) Realized loss on derivatives 71 Provision for income taxes (benefit) (24) (1) 27 Allocation of holding (gain) loss to deferred policy acquisition costs 2 (27) 44 Provision for income (taxes) benefit (1) 9 (15) --------------------------- Net unrealized gain (loss) on securities available for sale 129 236 (785) Foreign currency translation adjustment (1) (4) (1) Unrealized gain on interest in PIMCO Advisors (Note 1) 111 77 --------------------------- Total $239 $309 $(786) ===========================
13. REINSURANCE The Company has reinsurance agreements with other insurance companies for the purpose of diversifying risk and limiting exposure on larger mortality risks or, in the case of a producer-owned reinsurance company, to diversify risk and retain top producing agents. Amounts receivable from reinsurers for reinsurance of future policy benefits, universal life deposits, and unpaid losses is included in other assets. All assets associated with business reinsured on a yearly renewable term and modified coinsurance basis remain with, and under the control of the Company. Amounts recoverable (payable) from (to) reinsurers include the following amounts:
December 31, 2001 2000 -------------- (In Millions) Universal life deposits $(79) $(66) Future policy benefits 155 156 Unpaid claims 34 26 Paid claims 16 13 Other 17 33 -------------- Net reinsurance recoverable $143 $162 ==============
PL-28 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. REINSURANCE (Continued) As of December 31, 2001, 75% of the reinsurance recoverables were from two reinsurers, of which 100% is secured by payables to the reinsurer. To the extent that the assuming companies become unable to meet their obligations under these agreements, the Company remains contingently liable. The Company does not anticipate nonperformance by the assuming companies. The components of insurance premiums are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Direct premiums $ 923 $ 646 $563 Ceded reinsurance (129) (108) (93) Assumed reinsurance 18 14 14 --------------------------- Insurance premiums $ 812 $ 552 $484 ===========================
Revenues and benefits are shown net of the following reinsurance transactions:
Years Ended December 31, 2001 2000 1999 ------------------------- (In Millions) Ceded reinsurance netted against policy fees $ 85 $ 74 $ 52 Ceded reinsurance netted against net investment income 266 244 212 Ceded reinsurance netted against interest credited 210 161 111 Ceded reinsurance netted against policy benefits 115 110 88 Assumed reinsurance included in policy benefits 11 12 8
14. SEGMENT INFORMATION The Company has five operating segments: Life Insurance, Institutional Products, Annuities, Group Insurance and Broker-Dealers. These segments are managed separately and have been identified based on differences in products and services offered. All other activity is included in Corporate and Other. Prior to May 4, 2000, the Company had another operating segment, Investment Management. In connection with the PIMCO Advisors transaction (Note 1), Investment Management was no longer considered an operating segment by management and, effective May 5, 2000, it's activities are included in Corporate and Other. PIMCO Advisors offers a diversified range of investment products through separately managed accounts, and institutional, retail and offshore funds. The Life Insurance segment offers universal life, variable universal life and other life insurance products to individuals, small businesses and corporations through a network of distribution channels that include branch offices, sales centers, marketing organizations, National Association of Securities Dealers (NASD) firms and a national producer group that has produced over 10% of the segment's in force business. The Institutional Products segment offers investment and annuity products to pension fund sponsors and other institutional investors primarily through its home office marketing team and other intermediaries. The Annuities segment offers variable and fixed annuities to individuals and small businesses through NASD firms, regional and national wirehouses, and financial institutions. PL-29 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The Group Insurance segment primarily offers group life, health and dental insurance, and stop loss insurance products to corporate, government and labor-management-negotiated plans. The group life, health and dental insurance is primarily distributed through a network of sales offices and the stop loss insurance is distributed through a network of third party administrators. The Broker-Dealers segment includes five NASD registered firms that provide securities and insurance brokerage services and investment advisory services through approximately 3,100 registered representatives. Pacific Life's direct wholly owned broker-dealer subsidiary, Pacific Select Distributors, Inc. (PSD), primarily serves as the underwriter/distributor of registered investment-related products and services, principally variable life and annuity contracts issued by Pacific Life. During 2001, PSD became the distributor of the Pacific Funds, a multi-class, open end investment management company. Pacific Life is the investment adviser to the Pacific Funds. Corporate and Other primarily includes investment income, expenses and assets not attributable to the operating segments, and the operations of World-Wide (Note 4). Corporate and Other also includes the elimination of intersegment revenues, expenses and assets, including commission revenue and expense from the sale of Pacific Life's variable life and annuity products. The Company uses the same accounting policies and procedures to measure segment income and assets as it uses to measure its consolidated net income and assets. Net investment income and net realized investment gain (loss) are allocated based on invested assets purchased and held as is required for transacting the business of that segment. Overhead expenses are allocated based on services provided. Interest expense is allocated based on the short-term borrowing needs of the segment and is included in net investment income. The provision for income taxes is allocated based on each segment's actual tax provision. The Company generates substantially all of its revenues and income from customers located in the United States. Additionally, substantially all of the Company's assets are located in the United States. Depreciation expense and capital expenditures are not material and have not been reported herein. The Company's significant noncash item disclosed herein is interest credited to universal life and investment-type products. PL-30 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information as of and for the year ended December 31, 2001:
Life Institutional Group Broker- Corporate Insurance Products Annuities Insurance Dealers and Other Total ----------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 582 $ 2 $ 237 $ 821 Insurance premiums (59) 113 $723 $ 35 812 Net investment income 645 831 67 19 $ 1 65 1,628 Net realized investment gain (loss) 5 2 (21) (14) Commission revenue 580 (399) 181 Other income 28 10 99 2 40 46 225 --------------------------------------------------------------------- Total revenues 1,196 961 403 746 621 (274) 3,653 --------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 205 351 27 557 23 1,163 Interest credited 506 456 67 1,029 Commission expenses 149 3 146 50 570 (394) 524 Operating expenses 172 20 144 113 53 132 634 --------------------------------------------------------------------- Total benefits and expenses 1,032 830 384 720 623 (239) 3,350 --------------------------------------------------------------------- Income (loss) before provision for income taxes (benefit) 164 131 19 26 (2) (35) 303 Provision for income taxes (benefit) 38 34 1 7 (1) (24) 55 --------------------------------------------------------------------- Income (loss) before cumulative adjustments due to changes in accounting principles 126 97 18 19 (1) (11) 248 Cumulative adjustments due to changes in accounting principles, net of taxes (3) (8) (1) 1 4 (7) --------------------------------------------------------------------- Net income (loss) $ 123 $ 89 $ 17 $ 20 $ (1) $ (7) $ 241 ===================================================================== Total assets $18,216 $16,121 $17,928 $431 $ 74 $2,912 $55,682 Deferred policy acquisition costs $ 923 $ 75 $ 1,115 $ 2,113 Separate account assets $ 3,615 $ 4,461 $15,382 $23,458 Policyholder and contract liabilities $13,325 $10,965 $ 1,874 $212 $26,376 Separate account liabilities $ 3,615 $ 4,461 $15,382 $23,458
PL-31 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information as of and for the year ended December 31, 2000, except for the Investment Management Segment, which is for the period ended, May 4, 2000:
Life Institutional Group Investment Broker- Corporate Insurance Products Annuities Insurance Management Dealers and Other Total --------------------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 541 $ 3 $ 225 $ 769 Insurance premiums (49) 64 2 $511 $ 24 552 Net investment income 609 838 58 29 $49 $ 1 99 1,683 Net realized investment gain (loss) (22) (40) (4) (7) 10 1,060 997 Commission revenue 687 (417) 270 Other income 32 8 97 4 6 23 39 209 -------------------------------------------------------------------------------- Total revenues 1,111 873 378 537 65 711 805 4,480 -------------------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 190 298 6 385 879 Interest credited 474 458 53 12 997 Commission expenses 161 2 135 36 650 (408) 576 Operating expenses 159 20 126 93 27 47 103 575 -------------------------------------------------------------------------------- Total benefits and expenses 984 778 320 514 27 697 (293) 3,027 -------------------------------------------------------------------------------- Income before provision for income taxes 127 95 58 23 38 14 1,098 1,453 Provision for income taxes 29 18 21 6 8 6 370 458 -------------------------------------------------------------------------------- Net income $ 98 $ 77 $ 37 $ 17 $30 $ 8 $ 728 $ 995 ================================================================================ Total assets $17,232 $17,908 $16,661 $374 $ 72 $2,537 $54,784 Deferred policy acquisition costs $ 825 $ 75 $ 886 $ 10 $ 1,796 Separate account assets $ 3,543 $ 7,104 $15,271 $25,918 Policyholder and contract liabilities $12,439 $10,218 $ 1,019 $189 $ 87 $23,952 Separate account liabilities $ 3,543 $ 7,104 $15,271 $25,918
PL-32 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information for the year ended December 31, 1999:
Life Institutional Group Investment Broker- Corporate Insurance Products Annuities Insurance Management Dealers and Other Total -------------------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 509 $ 3 $142 $ 654 Insurance premiums (32) 25 6 $476 $ 9 484 Net investment income 582 679 78 23 $116 $ 1 31 1,510 Net realized investment gain (loss) 11 26 (1) 10 53 99 Commission revenue 583 (349) 234 Other income 25 11 57 3 15 19 15 145 ------------------------------------------------------------------------------- Total revenues 1,095 744 283 501 141 603 (241) 3,126 ------------------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 174 197 10 354 735 Interest credited 451 418 65 4 938 Commission expenses 163 87 33 549 (347) 485 Operating expenses 128 17 48 84 78 42 56 453 ------------------------------------------------------------------------------- Total benefits and expenses 916 632 210 471 78 591 (287) 2,611 ------------------------------------------------------------------------------- Income before provision for income taxes 179 112 73 30 63 12 46 515 Provision for income taxes 54 31 24 10 12 5 8 144 ------------------------------------------------------------------------------- Net income $ 125 $ 81 $ 49 $ 20 $ 51 $ 7 $ 38 $ 371 ===============================================================================
15. EMPLOYEE BENEFIT PLANS PENSION PLANS Pacific Life provides a defined benefit pension plan covering all eligible employees of the Company. On July 1, 2000, Pacific Life converted this final average pay formula defined benefit plan to a cash balance approach. Active employees' existing benefits in this plan were converted to opening balances and will increase over time from credits, based on years of service and compensation levels, and quarterly interest accruals. The full-benefit vesting period for all participants is five years. Pacific Life's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be determined appropriate. Contributions are intended to provide not only for benefits attributed to employment to date but also for those expected to be earned in the future. All such contributions are made to a tax-exempt trust. Plan assets consist primarily of group annuity contracts issued by Pacific Life, as well as mutual funds managed by an affiliate of Pacific Life. PL-33 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) Components of the net periodic pension expense (benefit) are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Service cost - benefits earned during the year $ 12 $ 6 $ 5 Interest cost on projected benefit obligation 12 12 11 Expected return on plan assets (16) (17) (16) Amortization of net obligations and prior service cost (1) (4) (2) ---------------------------- Net periodic pension expense (benefit) $ 7 $ (3) $ (2) ============================
The following tables set forth the changes in projected benefit obligation and plan assets and funded status reconciliation:
December 31, 2001 2000 -------------- (In Millions) Change in Projected Benefit Obligation: --------------------------------------- Projected benefit obligation, beginning of year $170 $156 Service cost 12 6 Interest cost 12 12 Plan expense (1) (1) Actuarial loss 4 5 Benefits paid (19) (8) -------------- Projected benefit obligation, end of year $178 $170 ============== Change in Plan Assets: ---------------------- Fair value of plan assets, beginning of year $197 $212 Actual return on plan assets (13) (6) Employer contributions 17 Plan expense (1) (1) Benefits paid (19) (8) -------------- Fair value of plan assets, end of year $181 $197 ============== Funded Status Reconciliation: ----------------------------- Funded status $ 3 $ 27 Unrecognized transition asset (1) Unrecognized actuarial (gain) loss 15 (18) -------------- Prepaid pension cost $ 18 $ 8 ==============
In determining the actuarial present value of the projected benefit obligation as of December 31, 2001 and 2000, the weighted average discount rate used was 7.0% and 7.5%, respectively, and the rate of increase in future compensation levels was 4.5% and 5.0%, respectively. The expected long-term rate of return on plan assets was 8.5% in 2001 and 2000. PL-34 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) POSTRETIREMENT BENEFITS Pacific Life provides 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 Life's policy as an active employee for a minimum continuous period prior to the date retired, and have an employment date before January 1, 1990. The Plans contain cost-sharing features such as deductibles and coinsurance, and require retirees to make contributions which can be adjusted annually. Pacific Life's commitment to qualified employees who retire after April 1, 1994 is limited to specific dollar amounts. Pacific Life reserves the right to modify or terminate the Plans at any time. As in the past, the general policy is to fund these benefits on a pay-as-you-go basis. The net periodic postretirement benefit cost for the years ended December 31, 2001, 2000 and 1999 is $1 million. As of December 31, 2001 and 2000, the accumulated benefit obligation is $19 million and $20 million, respectively. The fair value of the plan assets as of December 31, 2001 and 2000 is zero. The amount of accrued benefit cost included in other liabilities is $24 million as of December 31, 2001 and 2000. The Plans include both indemnity and HMO coverage. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for indemnity coverage was 9.0% and 10.0% for 2001 and 2000, respectively, and is assumed to decrease gradually to 5.0% in 2005 and remain at that level thereafter. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for HMO coverage was 8.0% and 9.0% for 2001 and 2000, respectively, and is assumed to decrease gradually to 4.5% 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, 2001 would be increased by 7.0%, and the aggregate of the service and interest cost components of the net periodic benefit cost would increase by 6.6%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would be decreased by 6.6%, and the aggregate of the service and interest cost components of the net periodic benefit cost would decrease by 6.4%. The discount rate used in determining the accumulated postretirement benefit obligation is 7.0% and 7.5% for 2001 and 2000, respectively. OTHER PLANS Pacific Life provides a voluntary Retirement Incentive Savings Plan (RISP) pursuant to Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Pacific Life's RISP matches 75% of each employee contributions, up to a maximum of 6.0% of eligible employee compensation, to an Employee Stock Ownership Plan (ESOP). ESOP contributions made by the Company amounted to $9 million, $8 million and $7 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in operating expenses. The ESOP was formed at the time of the Conversion and is only available to the participants of the RISP in the form of matching contributions. Pacific LifeCorp issued 1.7 million shares of common stock to the ESOP in 1997, in exchange for a promissory note of $21 million (ESOP Note) bearing an interest rate of 6.5%. Interest and principal payments are due semiannually in equal installments through September 2, 2012. Interest and principal payments made by the ESOP to Pacific LifeCorp were funded by contributions from Pacific Life. In 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP Note due Pacific LifeCorp. Interest and principal payments made by the ESOP to Pacific Life continue to be funded by contributions from Pacific Life. The interest rate was reduced to 6.0% effective September 2, 1999. PL-35 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) The ESOP Note is included in unearned ESOP shares. The unearned ESOP shares account is reduced as ESOP shares are released for allocation to participants through ESOP contributions by Pacific Life. In addition, when the fair value of ESOP shares being released for allocation to participants exceeds the original issue price of those shares, paid-in capital is increased by this difference. On January 9, 2002, Pacific Life loaned cash of $46 million to the ESOP in exchange for a 5.5% promissory note due January 9, 2017. The ESOP then purchased 2 million shares of newly issued common stock of Pacific LifeCorp at a price of $23.00 per share in exchange for cash. These newly issued shares were purchased in order for the ESOP to maintain its matching contributions to participants in the plan. The Company has deferred compensation plans that permit eligible employees to defer portions of their compensation and earn interest on the deferred amounts. The interest rate is determined annually. The compensation that has been deferred has been accrued and the primary expense related to this plan, other than compensation, is interest on the deferred amounts. The Company also has performance-based incentive compensation plans for its employees. 16. TRANSACTIONS WITH AFFILIATES Pacific Life serves as the investment adviser for the Pacific Select Fund, the investment vehicle provided to the Company's variable life and variable annuity contractholders. Pacific Life charges fees based upon the net asset value of the portfolios of the Pacific Select Fund, which amounted to $117 million, $115 million and $70 million for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, Pacific Life provides certain support services to the Pacific Select Fund and other affiliates based on an allocation of actual costs. Fees amounted to $948,000, $698,000 and $1,288,000 for the years ended December 31, 2001, 2000 and 1999, respectively. PAM has an agreement to loan Pacific LifeCorp up to $350 million at variable rates. The outstanding balance as of December 31, 2001 was $70 million. There was no balance outstanding as of December 31, 2000. The interest rate as of December 31, 2001 was 2.2%. During 2001, PAM entered into an agreement to loan Aviation Capital Group Holding Corp., a subsidiary of Pacific LifeCorp, up to $100 million at variable rates. The outstanding balance as of December 31, 2001 was $18 million. The interest rate as of December 31, 2001 was 4.1%. 17. TERMINATION AND NONCOMPETITION AGREEMENTS The Company had termination and noncompetition agreements with certain former key employees of PAM's subsidiaries. In connection with the closing of the PIMCO Advisors transaction (Note 1), these agreements were assumed by Allianz. These agreements provided terms and conditions for the allocation of future proceeds received from distributions and sales of certain PIMCO Advisors units and other noncompete payments. For the years ended December 31, 2000 and 1999, $14 million and $54 million, respectively, is included in operating expenses related to these agreements. PL-36 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. COMMITMENTS AND CONTINGENCIES The Company has outstanding commitments to make investments primarily in fixed maturity securities, mortgage loans, limited partnerships and other investments as follows (In Millions):
Years Ending December 31: ------------------------- 2002 $290 2003 through 2006 234 2007 and thereafter 82 ---- Total $606 ====
The Company leases office facilities under various noncancelable operating leases. Rent expense, which is included in operating expenses, in connection with these leases was $15 million, $14 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Aggregate minimum future commitments are as follows (In Millions):
Years Ending December 31: ------------------------- 2002 $ 16 2003 through 2006 53 2007 and thereafter 31 ---- Total $100 ====
The Company has investments in entities that are not consolidated because of control and substantive ownership by independent third parties. There are no material unrecorded liabilities and all material guarantees and commitments have been disclosed herein. The Company is a respondent in a number of legal proceedings, some of which involve allegations for extra-contractual damages. In the opinion of management, the outcome of the foregoing proceedings is not likely to have a material adverse effect on the consolidated financial position or results of operations of the Company. --------------------------------------------------------------------------- PL-37 STATEMENT OF ADDITIONAL INFORMATION May 1, 2002 PACIFIC INNOVATIONS SELECT SEPARATE ACCOUNT A ---------------- Pacific Innovations Select (the "Contract") is a variable annuity contract underwritten by Pacific Life Insurance Company ("Pacific Life"). This Statement of Additional Information (SAI) is not a Prospectus and should be read in conjunction with the Contract's Prospectus, dated May 1, 2002 which is available without charge upon written or telephone request to Pacific Life. Terms used in this SAI have the same meanings as in the Prospectus, and some additional terms are defined particularly for this SAI. ---------------- Pacific Life Insurance Company Mailing Address: P.O. Box 7187 Pasadena, California 91109-7187 1-800-722-2333 TABLE OF CONTENTS
Page No. -------- PERFORMANCE............................................................ 1 Total Returns........................................................ 1 Yields............................................................... 2 Performance Comparisons and Benchmarks............................... 3 Separate Account Performance......................................... 3 DISTRIBUTION OF THE CONTRACTS.......................................... 7 Pacific Select Distributors, Inc. (PSD).............................. 7 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 1035 Exchanges....................................................... 14 Safekeeping of Assets................................................ 14 FINANCIAL STATEMENTS .................................................. 14 INDEPENDENT AUDITORS .................................................. 14
PERFORMANCE From time to time, our reports or other communications to current or prospective Contract Owners or our advertising or other promotional material may quote the performance (yield and total return) of a Subaccount. Quoted results are based on past performance and reflect the performance of all assets held in that Subaccount for the stated time period. Quoted results are neither an estimate nor a guarantee of future investment performance, and do not represent the actual experience of amounts invested by any particular Contract Owner. Total Returns A Subaccount may advertise its "average annual total return" over various periods of time. "Total return" represents the average percentage change in value of an investment in the Subaccount from the beginning of a measuring period to the end of that measuring period. "Annualized" total return assumes that the total return achieved for the measuring period is achieved for each such period for a full year. "Average annual" total return is computed in accordance with a standard method prescribed by the SEC. Average Annual Total Return To calculate a Subaccount's average annual total return for a specific measuring period, we first take a hypothetical $1,000 investment in that Subaccount, at its then-applicable Subaccount Unit Value (the "initial payment") and we compute the ending redeemable value of that initial payment at the end of the measuring period based on the investment experience of that Subaccount ("full withdrawal value"). The full withdrawal value reflects the effect of all recurring fees and charges applicable to a Contract Owner under the Contract, including the Risk Charge, the Administrative Fee and the deduction of the applicable withdrawal charge, but does not reflect any charges for applicable premium taxes, any non-recurring fees or charges or any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders. The Annual Fee is also taken into account, assuming an average Contract Value of $65,000. The redeemable value is then divided by the initial payment and this quotient is raised to the 365/N power (N represents the number of days in the measuring period), and 1 is subtracted from this result. Average annual total return is expressed as a percentage. T = (ERV/P)(to the power of 365/N)-1 where T = average annual total return ERV = ending redeemable value P = hypothetical initial payment of $1,000 N = number of days Average annual total return figures will be given for recent one-, three-, 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 withdrawal charge. 1 Non-Standardized Total Returns We may also calculate non-standardized total returns which may or may not reflect any Annual Fee, withdrawal charges and/or increases in Risk Charges, charges for premium taxes or optional riders, and any non-recurring fees or charges. Standardized return figures will always accompany any non-standardized returns shown. 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) (To the power of 365/7)] - 1. Realized capital gains or losses and unrealized appreciation or depreciation of the assets of the underlying Money Market Portfolio are not included in the yield calculation. Current yield and effective yield do not reflect any deduction of charges for any applicable premium taxes, or any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, but do reflect a deduction for the Annual Fee, the Risk Charge and the Administrative Fee and assumes an average Contract Value of $65,000. At December 31, 2001, the Money Market Subaccount's current yield was 0.00% and the effective yield was 0.00%. Other Subaccounts "Yield" of the other Subaccounts is computed in accordance with a different standard method prescribed by the SEC. The net investment income (investment income less expenses) per Subaccount Unit earned during a specified one-month or 30-day period is divided by the Subaccount Unit Value on the last day of the specified period. This result is then annualized (that is, the yield is assumed to be generated each month or each 30-day period for a year), according to the following formula, which assumes semiannual compounding: YIELD = 2[(a-b + 1)6 - 1] --- cd where: a = net investment income earned during the period by the Portfolio attributable to the Subaccount. b = expenses accrued for the period (net of reimbursements). c = the average daily number of Subaccount Units outstanding during the period that were entitled to receive dividends. d = the Unit Value of the Subaccount Units on the last day of the period. The yield of each Subaccount reflects the deduction of all recurring fees and charges applicable to the Subaccount, such as the Risk Charge, the Administrative Fee, the Annual Fee (assuming an average Contract Value of $65,000), but does not reflect any withdrawal charge, any charge for applicable premium taxes, any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, or any non-recurring fees or charges. 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 2 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. We may also compare the performance of the Subaccounts with that of other appropriate indices of investment securities and averages for peer universes of funds or data developed by us derived from such indices or averages. Unmanaged indices generally assume the reinvestment of dividends or interest but do not generally reflect deductions for investment management or administrative costs and expenses. Separate Account Performance The Contract was not available prior to 2001. However, 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 Subaccounts. The following table presents the annualized total return for each Variable Account for the period from each such Variable Account's commencement of operations through December 31, 2001. The accumulated value (AV) reflects the deductions for all contractual fees and charges, but does not reflect the withdrawal charge, any nonrecurring fees and charges, any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, or any charges for premium taxes. The full withdrawal value (FWV) reflects the deductions for all contractual fees and charges, but does not reflect any increase in the Risk Charge for an optional Death Benefit Rider, or any charge for the optional EEG or GPA Riders, any nonrecurring fees and charges, and any charges for premium taxes. 3 The results shown in this section are not an estimate or guarantee of future investment performance. Historical Separate Account Performance Annualized Rates of Return for Periods Ended December 31, 2001 All numbers are expressed as a percentage
Since 1 Year 3 Years Inception -------------- ------------ -------------- Variable Accounts AV FWV AV FWV AV FWV ----------------- ------ ------ ----- ----- ------ ------ Blue Chip 1/2/01*............... (19.91) (26.21) (19.91) (26.21) Aggressive Growth 1/2/01*....... (21.10) (27.40) (21.10) (27.40) Emerging Markets 4/17/96*....... (10.18) (16.48) (4.97) (6.31) (9.52) (9.52) Diversified Research 1/3/00*.... (4.34) (10.64) 1.84 (0.85) Small-Cap Equity 10/1/99*....... (4.15) (10.45) 1.86 0.69 (2.91) (4.59) International Large-Cap 1/3/00*........................ (19.64) (25.94) (21.31) (24.83) I-Net Tollkeeper 5/1/00*........ (35.03) (41.33) (39.22) (43.86) Financial Services 1/2/01*...... (8.81) (15.11) (8.81) (15.11) Health Sciences 1/2/01*......... (9.21) (15.51) (9.21) (15.51) Technology 1/2/01*.............. (41.91) (48.26) (41.91) (48.26) Telecommunications 1/2/01*...... (47.60) (53.94) (47.60) (53.94) Multi-Strategy 1/2/96*.......... (2.78) (9.08) 0.48 (0.72) 7.31 7.31 Large-Cap Core 1/2/96* (formerly called Equity Income).......... (10.17) (16.47) (2.80) (4.08) 8.71 8.71 Strategic Value 10/2/00*........ (11.35) (17.65) (11.10) (15.59) Growth LT 1/2/96*............... (30.76) (37.06) 1.31 0.12 12.68 12.68 Focused 30 10/2/00*............. (14.78) (21.08) (24.83) (29.52) Mid-Cap Value 1/4/99*........... 11.44 5.14 12.37 11.40 International Value 1/2/96*..... (23.21) (29.51) (6.82) (8.22) 1.09 1.09 Capital Opportunities 1/2/01*... (16.93) (23.23) (16.93) (23.23) Mid-Cap Growth 1/2/01*.......... (20.15) (26.45) (20.15) (26.45) Global Growth 1/2/01*........... (16.37) (22.67) (16.37) (22.67) Equity Index 1/2/96*............ (13.60) (19.90) (2.93) (4.23) 10.34 10.34 Small-Cap Index 1/4/99*......... 0.06 (6.24) 3.67 2.54 Real Estate 1/4/99* (formerly called REIT)................... 6.76 0.46 11.14 10.16 Inflation Managed 1/2/96*....... 2.55 (3.75) 2.86 1.71 4.12 4.12 Managed Bond 1/2/96*............ 5.56 (0.74) 3.77 2.64 4.87 4.87 Money Market 1/2/96*............ 2.16 (4.14) 3.27 2.13 3.37 3.37 High Yield Bond 1/2/96*......... (0.32) (6.62) (1.50) (2.75) 2.11 2.11 Equity 1/2/96*.................. (23.05) (29.35) (8.27) (9.72) 6.32 6.32 Aggressive Equity 4/17/96*...... (18.60) (24.90) (7.49) (8.91) (0.57) (0.57) Large-Cap Value 1/4/99*......... (5.23) (11.53) 5.63 4.54
-------- *Date Variable Account commenced operations. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. Effective January 2, 2001, Lazard Asset Management became the Portfolio Manager of the International Value Portfolio. Prior to May 1, 2001, the Inflation Managed Portfolio was called the Government Securities Portfolio and some of the investment policies differed. Effective December 1, 2001, Putnam Investment Management, Inc. became the Portfolio Manager of the Equity and Aggressive Equity Portfolios; prior to May 1, 1998 some of the investment policies of the Equity and Aggressive Equity Portfolios differed. The Equity Income and Research Subaccounts started operations after December 31, 2001 and there is no historical value available for these Subaccounts. 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 Separate Account commenced operations as of January 2, 1996. Therefore, no historical performance data exists for the Subaccounts prior to that date. The following table represents 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 or for the indicated time period. Eight of the Portfolios of the Fund available under the Contract have been in operation since January 4, 1988. The Equity Index Portfolio has been in operation since January 30, 1991, the Growth LT Portfolio since January 4, 1994; the Aggressive Equity and Emerging Markets Portfolios since April 1, 1996; the Mid-Cap Value, Small-Cap Index, Real Estate (formerly called REIT) and Large-Cap Portfolios since January 4, 1999; the Diversified Research and International Large-Cap Portfolios since January 3, 2000; the I-Net Tollkeeper Portfolio since 4 May 1, 2000; the Strategic Value and Focused 30 Portfolios since October 2, 2000; the Blue Chip, Aggressive Growth, Financial Services, Health Sciences, Technology, Telecommunications, Capital Opportunities, Mid-Cap Growth, and Global Growth Portfolios since January 2, 2001, and the Equity Income and Research Portfolios since January 2, 2002. Historical performance information for the Equity Portfolio is based in part on the performance of that Portfolio's predecessor series which was a series of the Pacific Corinthian Variable Fund that began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. Because the Subaccounts had not commenced operations until January 2, 1996 or later, as indicated in the chart above, and because the Contracts were not available until 2001, these are not actual performance numbers for the Subaccounts or for the Contract. These are hypothetical total return numbers based on accumulated value (AV) and full withdrawal value (FWV) that represent the actual performance of the Portfolios, adjusted to reflect the deductions for the fees and charges applicable to the Contract; the FWV also includes applicable withdrawal charges. Any charge for non-recurring fees and charges, premium taxes, an optional Death Benefit Rider, or the optional EEG or GPA Riders are not reflected in these data, and reflection of the Annual Fee assumes an average Contract size of $65,000. The information presented also includes data representing unmanaged market indices. The results shown in this section are not an estimate or guarantee of future investment performance. Historical and Hypothetical Separate Account Performance Annualized Rates of Return for Periods Ended December 31, 2001 All numbers are expressed as a percentage
Since 1 Year* 3 Years* 5 Years* 10 Years* Inception* -------------- ------------ ------------ ----------- -------------- Variable Accounts AV FWV AV FWV AV FWV AV FWV AV FWV ----------------- ------ ------ ----- ----- ----- ----- ----- ----- ------ ------ Blue Chip............... (19.91) (26.21) (19.91) (26.21) Aggressive Growth....... (21.10) (27.40) (21.10) (27.40) Emerging Markets........ (10.18) (16.48) (4.97) (6.31) (9.80) (9.80) (9.30) (9.30) Diversified Research.... (4.34) (10.64) 1.84 (0.85) Small-Cap Equity........ (4.15) (10.45) 1.86 0.69 6.47 6.47 9.91 9.91 11.01 11.01 International Large- Cap.................... (19.64) (25.94) (21.31) (24.83) I-Net Tollkeeper........ (35.03) (41.33) (39.22) (43.86) Financial Services...... (8.81) (15.11) (8.81) (15.11) Health Sciences......... (9.21) (15.51) (9.21) (15.51) Technology.............. (41.91) (48.26) (41.91) (48.26) Telecommunications...... (47.60) (53.94) (47.60) (53.94) Multi-Strategy.......... (2.78) (9.08) 0.48 (0.72) 6.77 6.77 7.42 7.42 8.39 8.39 Large-Cap Core (formerly called Equity Income).. (10.17) (16.47) (2.80) (4.08) 7.25 7.25 8.87 8.87 9.76 9.76 Strategic Value......... (11.35) (17.65) (11.10) (15.59) Growth LT............... (30.76) (37.06) 1.31 0.12 12.06 12.06 15.06 15.06 Focused 30.............. (14.78) (21.08) (24.83) (29.52) Mid-Cap Value........... 11.44 5.14 12.37 11.40 International Value..... (23.21) (29.51) (6.82) (8.22) (2.01) (2.01) 3.08 3.08 3.99 3.99 Capital Opportunities... (16.93) (23.23) (16.93) (23.23) Mid-Cap Growth.......... (20.15) (26.45) (20.15) (26.45) Global Growth........... (16.37) (22.67) (16.37) (22.67) Equity Index............ (13.60) (19.90) (2.93) (4.23) 8.61 8.61 10.67 10.67 11.82 11.82 Small-Cap Index......... 0.06 (6.24) 3.67 2.54 Real Estate (formerly called REIT)........... 6.76 0.46 11.14 10.16 Inflation Managed....... 2.55 (3.75) 2.86 1.71 4.72 4.72 4.83 4.83 6.16 6.16 Managed Bond............ 5.56 (0.74) 3.77 2.64 5.35 5.35 5.58 5.58 6.81 6.81 Money Market............ 2.16 (4.14) 3.27 2.13 3.39 3.39 2.86 2.86 3.55 3.55 High Yield Bond......... (0.32) (6.62) (1.50) (2.75) 0.73 0.73 5.92 5.92 6.28 6.28 Equity.................. (23.05) (29.35) (8.27) (9.72) 2.83 2.83 7.89 7.89 7.15 7.15 Aggressive Equity....... (18.60) (24.90) (7.49) (8.91) (2.08) (2.08) (0.73) (0.73) Large-Cap Value......... (5.23) (11.53) 5.63 4.54
Major Indices 1 Year 3 Years 5 Years 10 Years ------------- ------ ------- ------- -------- Credit Suisse First Boston High Yield........ 5.80 1.18 3.25 7.85 Lehman Brothers Aggregate Bond............... 8.42 6.27 7.43 7.23 Lehman Brothers Government Bond.............. 7.24 5.88 7.40 7.14 Lehman Brothers Inflation Linked Treasury.... 7.90 7.72 N/A N/A Lehman Brothers Government/Credit............ 8.51 5.89 7.36 7.27 Merrill Lynch 3-Month U.S. T-Bill............ 4.42 5.14 5.20 4.86 Morgan Stanley Capital International All Country World Free.......................... (16.82) (3.37) 5.37 8.05 Morgan Stanley Capital International Emerging Markets Free................................ (2.37) 4.08 (5.74) 3.05 Morgan Stanley Capital International Europe, Australasia & Far East...................... (21.21) (4.79) 1.17 4.76
5
Major Indices (continued) 1 Year 3 Years 5 Years 10 Years ------------------------- ------ ------- ------- -------- North American Real Estate Investment Trust Equity...................................... 13.93 11.15 6.38 11.63 Russell 1000 Growth.......................... (20.42) (6.32) 8.27 10.80 Russell 2000................................. 2.49 6.42 7.52 11.51 Russell 2500................................. 1.22 9.43 10.34 13.13 Russell 2500 Growth.......................... (10.83) 5.17 6.60 9.49 Russell Midcap............................... (5.62) 6.50 11.40 13.58 Russell Midcap Growth........................ (20.15) 2.16 9.02 11.10 Standard & Poor's 500 Composite Stock Price.. (11.88) (1.03) 10.70 12.93
-------- * The performance of the Aggressive Equity, Large-Cap Core, Multi-Strategy, Equity, International Value, and Emerging Markets Variable Accounts for all or a portion of this period occurred at a time when other Portfolio Managers managed the corresponding Portfolio in which each Variable Account invests. Effective January 1, 1994, J. P. Morgan Investment Management Inc. became the Portfolio Manager of the Large-Cap Core and Multi-Strategy Portfolios; prior to January 1, 1994, some of the investment policies of the Large-Cap Core Portfolio and the investment objective of the Multi- Strategy Portfolio differed. Performance of the Equity Portfolio is based in part on the performance of the predecessor portfolio of Pacific Corinthian Variable Fund, which began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. The Equity Income and Research Portfolios started operations after December 31, 2001 and there is no historical value available for these Subaccounts. Effective December 1, 2001, Putnam Investment Management, LLC became the Portfolio Manager of the Equity and Aggressive Equity Portfolios; prior to May 1, 1998 some of the investment policies of the Equity and Aggressive Equity Portfolios differed. 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 ordinary income basis. The chart shows accumulations on a single Purchase Payment of $10,000, assuming hypothetical annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%. The values shown for the taxable investment do not include any deduction for management fees or other expenses but assume that taxes are deducted annually from investment returns. The values shown for the variable annuity do not reflect the deduction of contractual expenses such as the Risk Charge (equal to an annual rate of 1.40% of average daily Account Value), the Administrative Fee (equal to an annual rate of 0.25% of average daily Account Value), the Annual Fee (equal to $30 per year if your Net Contract Value is less than $50,000), any increase in the Risk Charge for an optional Death Benefit Rider (equal to a maximum annual rate of 0.35% of average daily Account Value) or for the optional EEG or GPA Riders (equal to an annual rate of 0.25% and 0.10% average daily Account Value, respectively), any charge for premium taxes, or the expenses of an underlying investment vehicle, such as the Fund. The values shown also do not reflect the withdrawal charge. Generally, the withdrawal charge is equal to 7% of the amount withdrawn attributable to Purchase Payments that are less than one year old, 6% of the amount withdrawn attributable to Purchase Payments that are less than two years old, and 4% of the amount withdrawn attributable to Purchase Payments that are three years old. The age of a Purchase Payment is considered 1 year old in the Contract Year we receive it and increases by one year beginning on the day preceding each Contract Anniversary. There is no withdrawal charge on withdrawals of your Earnings, on amounts attributed to Purchase Payments at least four years old, or to the extent that total withdrawals that are free of charge during the Contract Year do not exceed 10% of the sum of your remaining Purchase Payments at the beginning of the Contract Year that have been held under your Contract for less than four years plus 6 additional Purchase Payments applied to your Contract during that Contract Year. If these expenses and fees were taken into account, they would reduce the investment return shown for both the taxable investment and the hypothetical variable annuity contract. In addition, these values assume that you do not surrender the Contract or make any withdrawals until the end of the period shown. The chart assumes a full withdrawal, at the end of the period shown, of all Contract Value and the payment of taxes at the 36% rate on the amount in excess of the Purchase Payments. The rates of return illustrated are hypothetical and are not an estimate or guarantee of performance. Actual tax rates may vary for different assets and taxpayers from that illustrated and withdrawals by and distributions to Contract Owners who have not reached age 59 1/2 may be subject to a tax penalty of 10%. Power of Tax Deferral $10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36% [TAX DEFERRAL GRAPH APPEARS HERE]
0% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $10,000.00 $10,000.00 20 $10,000.00 $10,000.00 30 $10,000.00 $10,000.00 4% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $12,875.97 $13,073.56 20 $16,579.07 $17,623.19 30 $21,347.17 $24,357.74 8% GROWTH TAX TAXABLE DEFERRED INVESTMENT INVESTMENT YEARS BEFORE TAX BEFORE TAX ----- ---------- ---------- 10 $16,476.07 $17,417.12 20 $27,146.07 $33,430.13 30 $44,726.05 $68,001.00
DISTRIBUTION OF THE CONTRACTS Pacific Select Distributors, Inc. (PSD) Pacific Select Distributors, Inc. a subsidiary of ours, acts as the principal underwriter ("distributor") of the Contracts and offers the Contracts on a continuous basis. PSD is registered as a broker-dealer with the SEC and is a member of the National Association of Securities Dealers (NASD). We pay PSD for acting as principal underwriter under a Distribution Agreement. We and PSD enter into selling agreements with broker-dealers whose registered representatives are authorized by state insurance departments to sell the Contracts. The aggregate amount of underwriting commissions paid to PSD with regard to this Contract in 2001 was $68,740,084, of which $0 was retained. 7 THE CONTRACTS AND THE SEPARATE ACCOUNT Calculating Subaccount Unit Values The Unit Value of the Subaccount Units in each Variable Investment Option is computed at or about 4:00 p.m. Eastern time on each Business Day. The initial Unit Value of each Subaccount was $10 on the Business Day the Subaccount began operations. At the end of each Business Day, the Unit Value for a Subaccount is equal to: Y X Z where (Y) = the Unit Value for that Subaccount as of the end of the preceding Business Day; and (Z) = the Net Investment Factor for that Subaccount for the period (a "valuation period") between that Business Day and the immediately preceding Business Day. The "Net Investment Factor" for a Subaccount for any valuation period is equal to: (A/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 or Contract, and/or any taxes attributable, directly or indirectly, to Investments; (B) = the net asset value per share of the corresponding Portfolio shares held by the Subaccount as of the end of the preceding valuation period; and (C) = a factor that assesses against the Subaccount net assets for each calendar day in the valuation period the basic Risk Charge plus any applicable increase in the Risk Charge and the Administrative Fee (see CHARGES, FEES AND DEDUCTIONS section in the Prospectus). As explained in the Prospectus, the Annual Fee, if applicable, is assessed against your Variable Account Value through the automatic debit of Subaccount Units; the Annual Fee decreases the number of Subaccount Units attributed to your Contract but does not alter the Unit Value for any Subaccount. Variable Annuity Payment Amounts The following steps show how we determine the amount of each variable annuity payment under your Contract. First: Pay Applicable Premium Taxes When you convert your Net Contract Value into annuity payments, you must pay any applicable charge for premium taxes on your Contract Value (unless applicable law requires those taxes to be paid at a later time). We assess this charge by reducing each Account 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 Net Contract Value may be used to provide variable annuity payments. Alternatively, your remaining available Net 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 Net Contract Value, less any applicable Annual Fee, withdrawal charge, and less any charges for premium taxes without converting this amount into annuity payments. 8 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% rate of return, as described in more detail below. Example: Assume a man is 65 years of age at his Annuity Date and has selected a lifetime annuity with monthly payments guaranteed for 10 years. According to the Annuity Option Table, this man should receive an initial monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by applicable charges) that he will be using to provide variable payments. Therefore, if his Contract Value after deducting applicable fees and charges is $100,000 on his Annuity Date and he applies this entire amount toward his variable annuity, his first monthly payment will be $579.00. You may choose any other Annuity Option Table that assumes a different rate of return which we offer at the time your Annuity Option is effective. Third: Subaccount Annuity Units For each Subaccount, we use the amount of the first variable annuity payment under your Contract attributable to each Subaccount to determine the number of Subaccount Annuity Units that will form the basis of subsequent payment amounts. First, we use the Annuity Option Table to determine the amount of that first variable payment for each Subaccount. Then, for each Subaccount, we divide that amount of the first variable annuity payment by the value of one Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity Date to obtain the number of Subaccount Annuity Units for that particular Subaccount. The number of Subaccount Annuity Units used to calculate subsequent payments under your Contract will not change unless exchanges of Annuity Units are made (or if the Joint and Survivor Annuity Option is elected and the Primary Annuitant dies first), but the value of those Annuity Units will change daily, as described below. Fourth: The Subsequent Variable Payments The amount of each subsequent variable annuity payment will be the sum of the amounts payable based on each Subaccount. The amount payable based on each Subaccount is equal to the number of Subaccount Annuity Units for that Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the Business Day in each payment period you elected that corresponds to the Annuity Date. Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value, changes each day to reflect the net investment results of the underlying investment vehicle, as well as the assessment of the Risk Charge at an annual rate of 1.40% and the Administrative Fee at an annual rate of 0.25%. In addition, the calculation of Subaccount Annuity Unit Value incorporates an additional factor; as discussed in more detail below, this additional factor adjusts Subaccount Annuity Values to correct for the Option Table's implicit assumed annual investment return on amounts applied but not yet used to furnish annuity benefits. Any increase in your Risk Charge for an Optional Death Benefit Rider is not charged on and after the Annuity Date. Different Subaccounts may be selected for your Contract before and after your Annuity Date, subject to any restrictions we may establish. Currently, you may exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units in any other Subaccount(s) up to four times in any twelve month period after your Annuity Date. The number of Subaccount Annuity Units in any Subaccount may change due to such exchanges. Exchanges following your Annuity Date 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 actuarial assumptions based on the Annuitant's age, and, in some cases, the Annuitant's sex. In addition, these numbers 9 assume that the amount of your Contract Value that you convert to a variable annuity will have a positive net investment return of 5% (or such other rate of return you may elect) each year during the payout of your annuity; thus 5% is referred to as an "assumed investment return." The Subaccount Annuity Unit Value for a Subaccount will increase only to the extent that the investment performance of that Subaccount exceeds the Risk Charge, the Administrative Fee, and the assumed investment return. The Subaccount Annuity Unit Value for any Subaccount will generally be less than the Subaccount Unit Value for that same Subaccount, and the difference will be the amount of the assumed investment return factor. Example: Assume the net investment performance of a Subaccount is at a rate of 5.00% per year (after deduction of the 1.40% Risk Charge and the 0.25% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 5.00% per year, 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 - 1 = 0; 0 X 100% = 0%. ---- 1.05 If the net investment performance of a Subaccount's assets is at a rate less than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if the Subaccount Unit Value is increasing. Example: Assume the net investment performance of a Subaccount is at a rate of 2.60% per year (after deduction of the 1.40% Risk Charge and the 0.25% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 2.60% per year, 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 = 0.9771; 0.9771 - 1 =-0.0229; -0.0229 X 100% = -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 Business Day. In addition, as stated in the Prospectus, any event scheduled to occur on a day that is not a Business Day will occur on the next succeeding Business Day. Example: If your Contract is issued on February 29 in year 1 (a leap year), your Contract Anniversary in years 2, 3 and 4 will be on March 1. 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 Age and Sex of Annuitant As mentioned in the Prospectus, the Contracts generally provide for sex- distinct annuity income factors in the case of life annuities. Statistically, females tend to have longer life expectancies than males; consequently, if the amount of annuity payments is based on life expectancy, they will ordinarily be higher if an annuitant is male than if an annuitant is female. Certain states' regulations prohibit sex-distinct annuity income factors, and Contracts issued in those states will use unisex factors. In addition, Contracts issued in connection with Qualified Plans are required to use unisex factors. We may require proof of your Annuitant's age and sex before or after starting annuity payments. If the age or sex (or both) of your Annuitant are incorrectly stated in your Contract, we will correct the amount payable based on your Annuitant's correct Age or sex, if applicable. If we make the correction after annuity payments have started, and we have made overpayments, we will deduct the amount of the overpayment, with interest at 3% 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 age and/or sex. Additionally, we may require proof of the Annuitant's or Owner's age before any payments associated with the Death Benefit provisions of your Contract are made. If the age or sex of the Annuitant is incorrectly stated in your Contract, we will base any payment associated with the Death Benefit provisions on your Contract on the Annuitant's or Owner's correct age or sex. Systematic Transfer Programs The Fixed Account is not available in connection with portfolio rebalancing. If you are using the earnings sweep, you may also use portfolio rebalancing only if you selected the Fixed Option as your sweep option. You may not use dollar cost averaging and the earnings sweep at the same time. Dollar Cost Averaging When you request dollar cost averaging, you are authorizing us to make periodic reallocations of your Contract Value without waiting for any further instruction from you. You may request to begin or stop dollar cost averaging at any time prior to your Annuity Date; the effective date of your request will be the day we receive written notice from you in proper form. Your request may specify the date on which you want your first transfer to be made. If you do not specify a date for your first transfer, we will treat your request as if you had specified the effective date of your request. Your first transfer may not be made until 30 days after your Contract Date, and if you specify an earlier date, your first transfer will be delayed until one calendar month after the date you specify. If you request dollar cost averaging on your application for your Contract and you fail to specify a date for your first transfer, your first transfer will be made one period after your Contract Date (that is, if you specify monthly transfers, the first transfer will occur 30 days after your Contract Date; quarterly transfers, 90 days after your Contract Date; semiannual transfers, 180 days after your Contract Date; and if you specify annual transfers, the first transfer will occur on your Contract Anniversary). If you stop dollar cost averaging, you must wait 30 days before you may begin this option again. Your request to begin dollar cost averaging must specify the Investment Option you wish to transfer money from (your "source account"). You may choose any one Investment Option as your source account. The Account Value of your source account must be at least $5,000 for you to begin dollar cost averaging. Your request to begin dollar cost averaging must also specify the amount and frequency of your transfers. You may choose monthly, quarterly, semiannual or annual transfers. The amount of your transfers may be specified as a dollar amount or a percentage of your source Account Value; however, each transfer must be at least $250. Dollar cost averaging transfers are not subject to the same requirements and limitations as other transfers. Finally, your request must specify the Variable Investment Option(s) you wish to transfer amounts to (your "target account(s)"). If you select more than one target account, your dollar cost averaging request must specify how transferred amounts should be allocated among the target accounts. Your source account may not also be a target account. 11 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) your Annuity Date. 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. 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 these Subaccount Value allocations. If you elect the portfolio rebalancing feature, we will automatically transfer your Subaccount Value back to the percentages you specify. You may choose to have rebalances made quarterly, semiannually or annually until your Annuity Date; portfolio rebalancing is not available after you annuitize. Procedures for selecting portfolio rebalancing are generally the same as those discussed in detail above for selecting dollar cost averaging: You may make your request at any time prior to your Annuity Date and it will be effective when we receive it in proper form. If you stop portfolio rebalancing, you must wait 30 days to begin again. You may specify a date for your first rebalance, or we will 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 $5,000 when you elect the earnings sweep. You may select one or more Variable Investment Options (but not the Money Market Subaccount) as your target option(s). You may choose to have earnings sweeps occur monthly, quarterly, semiannually or annually until you annuitize. At each earnings sweep, we will automatically transfer your accumulated earnings attributable to your sweep option for the previous period proportionately to your target option(s). That is, if you select a monthly earnings sweep, we will transfer the sweep option earnings from the preceding month; if you select a semiannual earnings sweep, we will transfer the sweep option earnings accumulated over the preceding six months. Earnings sweep transfers are not subject to the same requirements and limitations as other transfers. To determine the earnings, we take the change in the sweep option's Account Value during the sweep period, add any withdrawals or transfers out of the sweep option Account that occurred during the sweep period, and subtract any allocations to the sweep option Account during the sweep period. The result of this calculation represents the "total earnings" for the sweep period. If, during the sweep period, you withdraw or transfer amounts from the sweep option Account, we assume that earnings are withdrawn or transferred before any other Account Value. Therefore, your "total earnings" for the sweep period will be reduced by any amounts withdrawn or transferred during the sweep option period. The remaining earnings are eligible for the sweep transfer. 12 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 a form satisfactory to us. 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 date for the first sweep, it will occur one period after your Contract Date, as described above under Dollar Cost Averaging. If, as a result of an earnings sweep transfer, your source Account Value falls below $500, we have the right, at our option, to transfer that remaining Account Value to your target account(s) on a proportionate basis relative to your most recent allocation instructions. We may change, terminate or suspend the earnings sweep option at any time. Pre-Authorized Withdrawals You may specify a dollar amount for your pre-authorized withdrawals, or you may specify a percentage of your Contract Value or an Account Value. You may direct us to make your pre-authorized withdrawals from one or more specific Investment Options; if you do not give us these specific instructions, amounts will be deducted proportionately from your Account Value in each Fixed or Variable Investment Option. Procedures for selecting pre-authorized withdrawals are generally the same as those discussed in detail above for selecting dollar cost averaging, portfolio rebalancing, and earnings sweeps: You may make your request at any time and it will be effective when we receive it in proper form. If you stop the pre- authorized withdrawals, you must wait 30 days to begin again. You may specify a date for the first withdrawal, or we will 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 the pre-authorized withdrawals on your application but do not specify a date for the first withdrawal, it will occur one period after your Contract Date. If your pre-authorized withdrawals cause your Account Value in any Investment Option to fall below $500, we have the right, at our option, to transfer that remaining Account Value to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. If your pre- authorized withdrawals cause your Contract Value to fall below $1,000, we may, at our option, terminate your Contract and send you the remaining withdrawal proceeds. Pre-authorized withdrawals are subject to the same withdrawal charges as are other withdrawals, and each withdrawal is subject to any applicable charge for premium taxes and/or other taxes, to federal income tax on its taxable portion, and, if you have not reached age 59 1/2, a federal tax penalty of at least 10%. Death Benefit Any death benefit payable will be calculated as of the date we receive proof (in proper form) of the Annuitant's death (or, if applicable, the Contract Owner's death) and instructions regarding payment; any claim of a death benefit must be made in proper form. A recipient of death benefit proceeds may elect to have this benefit paid in one lump sum, in periodic payments, in the form of a lifetime annuity or in some combination of these. Annuity payments 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 proceeds 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. 13 1035 Exchanges You may make your initial Investment through an exchange of an existing annuity contract. To exchange, you must complete a 1035 Exchange form, which is available by calling your representative, or by calling us at 1-800-722- 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 Code provides that you recognize no gain or loss when you exchange one annuity contract solely for another annuity contract. However, transactions under Section 1035 may be subject to special rules and may require special procedures and record-keeping, particularly if the exchanged annuity contract was issued prior to August 14, 1982. You should consult your tax adviser prior to effecting a 1035 Exchange. Safekeeping of Assets We are responsible for the safekeeping of the assets of the Separate Account. These assets are held separate and apart from the assets of our General Account and our other separate accounts. FINANCIAL STATEMENTS The statement of assets and liabilities of Separate Account A as of December 31, 2001 and the related statement of operations and financial highlights for the year then ended and statements of changes in net assets for each of the two years in the period then ended are incorporated by reference in this Statement of Additional Information from the Annual Report of Separate Account A dated December 31, 2001. Pacific Life's consolidated financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 are set forth beginning on the next page. These financial statements should be considered only as bearing on the ability of Pacific Life to meet its obligations under the Contracts and not as bearing on the investment performance of the assets held in the Separate Account. INDEPENDENT AUDITORS The consolidated financial statements of Pacific Life as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. 14 INDEPENDENT AUDITORS' REPORT ---------------------------- Pacific Life Insurance Company and Subsidiaries: We have audited the accompanying consolidated statements of financial condition of Pacific Life Insurance Company and Subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pacific Life Insurance Company and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Costa Mesa, CA February 27, 2002 PL-1 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2001 2000 ------------------------------------------------------------------------------ (In Millions) ASSETS Investments: Fixed maturity securities available for sale, at estimated fair value $17,047 $15,136 Equity securities available for sale, at estimated fair value 266 179 Trading securities, at fair value 458 71 Mortgage loans 2,933 3,026 Real estate 183 221 Policy loans 4,899 4,680 Other investments 2,796 2,654 ----------------------------------------------------------------------------- TOTAL INVESTMENTS 28,582 25,967 Cash and cash equivalents 510 211 Deferred policy acquisition costs 2,113 1,796 Accrued investment income 377 335 Other assets 642 557 Separate account assets 23,458 25,918 ----------------------------------------------------------------------------- TOTAL ASSETS $55,682 $54,784 ============================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Universal life and investment-type products $21,796 $19,410 Future policy benefits 4,580 4,542 Short-term and long-term debt 439 359 Other liabilities 1,690 1,323 Separate account liabilities 23,458 25,918 ----------------------------------------------------------------------------- TOTAL LIABILITIES 51,963 51,552 ----------------------------------------------------------------------------- Commitments and contingencies (Note 18) Stockholder's Equity: Common stock - $50 par value; 600,000 shares authorized, issued and outstanding 30 30 Paid-in capital 151 147 Unearned ESOP shares (3) (6) Retained earnings 3,271 3,030 Accumulated other comprehensive income 270 31 ----------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 3,719 3,232 ----------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $55,682 $54,784 =============================================================================
See Notes to Consolidated Financial Statements PL-2 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------ (In Millions) REVENUES Universal life and investment-type product policy fees $ 821 $ 769 $ 654 Insurance premiums 812 552 484 Net investment income 1,628 1,683 1,510 Net realized investment gain (loss) (14) 997 99 Commission revenue 181 270 234 Other income 225 209 145 ------------------------------------------------------------------------------ TOTAL REVENUES 3,653 4,480 3,126 ------------------------------------------------------------------------------ BENEFITS AND EXPENSES Policy benefits paid or provided 1,163 879 735 Interest credited to universal life and invest- ment-type products 1,029 997 938 Commission expenses 524 576 485 Operating expenses 634 575 453 ------------------------------------------------------------------------------ TOTAL BENEFITS AND EXPENSES 3,350 3,027 2,611 ------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 303 1,453 515 Provision for income taxes 55 458 144 ------------------------------------------------------------------------------ INCOME BEFORE CUMULATIVE ADJUSTMENTS DUE TO CHANGES IN ACCOUNTING PRINCIPLES 248 995 371 Cumulative adjustments due to changes in account- ing principles, net of taxes (7) ------------------------------------------------------------------------------ NET INCOME $ 241 $ 995 $ 371 ==============================================================================
See Notes to Consolidated Financial Statements PL-3 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Income (Loss) ---------------------------------------- Unrealized Gain (Loss) on Unrealized Derivatives Foreign Gain on Unearned and Securities Currency Interest in Common Paid-in ESOP Retained Available for Translation PIMCO Stock Capital Shares Earnings Sale, Net Adjustment Advisors L.P. Total -------------------------------------------------------------------------------------------------------------------- (In Millions) BALANCES, JANUARY 1, 1999 $30 $126 $1,664 $ 507 $ 1 $2,328 Comprehensive loss: Net income 371 371 Other comprehensive loss (785) (1) (786) ------ Total comprehensive loss (415) Other equity adjustments 11 11 Capital contribution 3 3 Purchase of ESOP note $(13) (13) Allocation of unearned ESOP shares 1 1 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 30 140 (12) 2,035 (278) - 1,915 Comprehensive income: Net income 995 995 Other comprehensive income (loss) 236 (4) $77 309 ------ Total comprehensive income 1,304 Other equity adjustments 5 5 Allocation of unearned ESOP shares 2 6 8 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2000 30 147 (6) 3,030 (42) (4) 77 3,232 Comprehensive income: Net income 241 241 Other comprehensive income (loss) 129 (1) 111 239 ------ Total comprehensive income 480 Other equity adjustments 1 1 Allocation of unearned ESOP shares 3 3 6 -------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2001 $30 $151 $ (3) $3,271 $ 87 $(5) $188 $3,719 ====================================================================================================================
See Notes to Consolidated Financial Statements PL-4 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------- (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 241 $ 995 $ 371 Adjustments to reconcile net income to net cash provided by operating activities: Amortization on fixed maturity securities (73) (72) (78) Depreciation and other amortization 26 36 21 Earnings of equity method investees (6) (23) (93) Deferred income taxes 56 424 (8) Net realized investment (gain) loss 14 (997) (99) Net change in deferred policy acquisition costs (317) (350) (545) Interest credited to universal life and investment-type products 1,029 997 938 Change in trading securities (387) 29 (3) Change in accrued investment income (42) (48) (28) Change in future policy benefits 38 156 58 Change in other assets and liabilities 154 24 172 ------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 733 1,171 706 ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed maturity and equity securities available for sale: Purchases (4,864) (2,903) (4,173) Sales 941 1,595 2,334 Maturities and repayments 1,652 1,601 1,400 Repayments of mortgage loans 682 700 681 Proceeds from sales of mortgage loans and real estate 44 1 24 Purchases of mortgage loans and real estate (593) (806) (886) Change in policy loans (219) (422) (255) Cash received from acquisition of insurance block of business 165 Other investing activity, net 467 (664) 390 ------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (1,890) (898) (320) -------------------------------------------------------------------------------
(Continued) See Notes to Consolidated Financial Statements PL-5 Pacific Life Insurance Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (Continued) 2001 2000 1999 -------------------------------------------------------------------------- (In Millions) CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits $ 4,690 $ 4,090 $ 4,453 Withdrawals (3,320) (4,734) (4,322) Net change in short-term and long-term debt 80 135 (220) Purchase of ESOP note (13) Allocation of unearned ESOP shares 6 8 1 -------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,456 (501) (101) -------------------------------------------------------------------------- Net change in cash and cash equivalents 299 (228) 285 Cash and cash equivalents, beginning of year 211 439 154 -------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 510 $ 211 $ 439 ========================================================================== SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES In connection with the acquisition of an annuity block of business in 1999, as discussed in Note 4, the following assets and liabilities were assumed: Fixed maturity securities $ 1,593 Cash and cash equivalents 165 Other assets 100 -------- Total assets assumed $ 1,858 ======== Annuity reserves $ 1,847 Other liabilities 11 -------- Total liabilities assumed $ 1,858 ======== ========================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid (received) $ (48) $ 74 $ 83 Interest paid $ 23 $ 28 $ 23 ==========================================================================
See Notes to Consolidated Financial Statements PL-6 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND DESCRIPTION OF BUSINESS Pacific Life Insurance Company (Pacific Life) was established in 1868 and is organized under the laws of the State of California as a stock life insurance company. Pacific Life is an indirect subsidiary of Pacific Mutual Holding Company (PMHC), a mutual holding company, and a wholly owned subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC and Pacific LifeCorp were organized pursuant to consent received from the Insurance Department of the State of California (CA DOI) and the implementation of a plan of conversion to form a mutual holding company structure in 1997 (the Conversion). Pacific Life and its subsidiaries and affiliates have primary business operations consisting of life insurance, annuities, pension and institutional products, group employee benefits, broker-dealer operations, and investment management and advisory services. Pacific Life's primary business operations provide a broad range of life insurance, asset accumulation and investment products for individuals and businesses and offer a range of investment products to institutions and pension plans. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of Pacific Life Insurance Company and Subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of Pacific Life and its majority owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Pacific Life prepares its regulatory financial statements based on accounting practices prescribed or permitted by the CA DOI. These consolidated financial statements differ from those filed with regulatory authorities (Note 2). NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133. SFAS No. 133 and SFAS No. 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in net realized investment gain (loss). If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss) (OCI) and are recognized in earnings when the hedged item affects earnings. For derivative instruments not designated as hedges, the change in fair value of the derivative is recorded in net realized investment gain (loss). Upon adoption of SFAS No. 133 and SFAS No. 138, the Company recorded an increase to net income of $1 million, net of taxes, as a cumulative adjustment due to change in accounting principle. This increase was primarily attributable to recording derivatives not designated as hedges at fair value, offset by the recording of initial ineffectiveness on fair value hedges. In addition, upon adoption the Company recorded an increase to accumulated OCI of $38 million, net of taxes. This increase was primarily attributable to the designation of derivatives as fair value hedges. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of the hedged items were not affected by the implementation of SFAS No. 133 and SFAS No. 138. PL-7 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Upon adoption of SFAS No. 133 and SFAS No. 138, the Company transferred $306 million of fixed maturity securities available for sale into the trading category. The transfer resulted in a reclassification of unrealized losses of $4 million, net of taxes, from accumulated OCI into net realized investment gain (loss). Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue (EITF) 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Under EITF 99-20, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for a decline in value, which is other than temporary. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. Upon adoption of EITF 99-20, the Company recorded a decrease to net income of $8 million, net of taxes, as a cumulative adjustment due to change in accounting principle. Effective April 1, 2001, the Company adopted the requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125, which revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of FASB Statement No. 125's provisions without reconsideration. Adoption of SFAS No. 140 did not have a material impact on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141, which was effective July 1, 2001, for any business combination entered into subsequent to June 30, 2001, requires the purchase method of accounting and separate recognition of intangible assets apart from goodwill if such intangible assets meet certain criteria. Adoption of SFAS No. 141 did not have a material impact on the Company's consolidated financial statements. SFAS No. 142, effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic impairment tests of the goodwill asset and that intangible assets, other than goodwill, should be amortized over their useful lives. Amortization of goodwill was $5 million, $3 million and $12 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company has not yet finalized the quantification of the impact, if any, on its consolidated financial statements of applying the new requirements of SFAS No. 142. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has not yet finalized the quantification of the impact, if any, on its consolidated financial statements of applying the new requirements of SFAS No. 144. INVESTMENTS Fixed maturity and equity securities available for sale are reported at estimated fair value, with unrealized gains and losses, net of deferred income taxes and adjustments related to deferred policy acquisition costs, recorded as a component of OCI. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary and changes in fair value of fixed maturity securities attributable to the risk designated in a fair value hedge. Trading securities are reported at fair value with changes in fair value included in net realized investment gain (loss). For mortgage-backed securities included in fixed maturity securities available for sale, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. This adjustment is reflected in net investment income. PL-8 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Realized gains and losses on investment transactions are determined on a specific identification basis and are included in net realized investment gain (loss). Mortgage loans, net of valuation allowances and writedowns, and policy loans are stated at unpaid principal balances. Real estate is carried at depreciated cost, net of writedowns, or, for real estate acquired in satisfaction of debt, estimated fair value less estimated selling costs at the date of acquisition, if lower than the related unpaid balance. Partnership and joint venture interests in which the Company does not have a controlling interest or a majority ownership are generally recorded using the equity method of accounting and are included in other investments. Investments in low income housing tax credits (LIHTC) are included in other investments. These investments are recorded under either the effective interest method or the equity method. For investments in LIHTC recorded under the effective interest method, the amortization of the original investment and the tax credits are recorded in the provision for income taxes. For investments in LIHTC recorded under the equity method, the amortization of the initial investment is included in net investment income and the related tax credits are recorded in the provision for income taxes. The amortization recorded in net investment income was $27 million, $33 million and $22 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company, through its wholly owned subsidiary Pacific Asset Management LLC and subsidiaries (PAM), had an approximate 33% beneficial ownership interest in PIMCO Advisors L.P. (PIMCO Advisors) as of December 31, 1999 and May 4, 2000, through the direct and indirect ownership of PIMCO Advisors' Class A limited partnership units (Class A units). This interest was accounted for using the equity method through May 4, 2000. On May 5, 2000, a transaction was closed whereby Allianz of America, Inc. (Allianz), a subsidiary of Allianz AG, acquired substantially all interests in PIMCO Advisors other than those beneficially owned by PAM. PAM exchanged its Class A units for a new security, PIMCO Advisors Class E limited partnership units (Class E units). This exchange resulted in a realized, pretax nonmonetary exchange gain of $1,082 million, based on the fair value of the Class A units exchanged, or $38.75 per unit, the per unit value that Allianz paid to acquire its interest in PIMCO Advisors. This gain is included in net realized investment gain (loss) for the year ended December 31, 2000. A net deferred tax liability of $365 million was also established. As a result of this transaction, the Company has virtually no influence over PIMCO Advisors' operating and financial policies. Effective May 5, 2000, the interest in PIMCO Advisors is being accounted for using the cost method. The interest in PIMCO Advisors, which is included in other investments, is being reported at estimated fair value, as determined by the put and call option price described below. Unrealized gains of $177 million and $124 million, net of deferred income taxes of $66 million and $47 million, for the years ended December 31, 2001 and 2000, respectively, are reported as a component of OCI. In connection with this transaction, PAM entered into a Continuing Investment Agreement with Allianz with respect to its interest in PIMCO Advisors. The interest in PIMCO Advisors held by PAM is subject to put and call options held by PAM and Allianz, respectively. The put option gives PAM the right to require Allianz, on the last business day of each calendar quarter, to purchase all of the interest in PIMCO Advisors held by PAM. The put option price is based on the per unit amount, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14. The call option gives Allianz the right to require PAM, on any January 31, April 30, July 31, or October 31, beginning on January 31, 2003, to sell its interest in PIMCO Advisors to Allianz. The call option price is based on the per unit amount, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14 and can be exercised only if the call per unit value reaches a minimum value. Effective January 1, 2002, PIMCO Advisors changed its name to Allianz Dresdner Asset Management of America L.P. PL-9 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) CASH AND CASH EQUIVALENTS Cash and cash equivalents include all investments with a remaining maturity of three months or less. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new insurance business, principally commissions, medical examinations, underwriting, policy issue and other expenses, all of which vary with and are primarily related to the production of new business, have been deferred. For universal life and investment-type products, such costs are generally amortized over the expected life of the contract in proportion to the present value of expected gross profits using investment, mortality, expense margins and surrender charge assumptions and estimates. Adjustments are reflected in income or equity in the period the Company experiences deviations in gross profit assumptions and estimates. Adjustments directly affecting equity result from experience deviations due to changes in unrealized gains and losses in securities available for sale. For traditional life insurance products, such costs are being amortized over the premium-paying period of the related policies in proportion to premium revenues recognized, using assumptions and estimates consistent with those used in computing policy reserves. Value of business acquired (VOBA), included as part of deferred policy acquisition costs, represents the present value of future profits generated from existing insurance contracts in force at the date of acquisition and is amortized over the expected policy or contract duration in relation to the present value of estimated gross profits from such policies and contracts. The VOBA balance was $91 million and $94 million as of December 31, 2001 and 2000, respectively. Components of deferred policy acquisition costs are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Balance, January 1 $1,796 $1,446 $ 901 ---------------------------- Additions: Capitalized during the year 566 646 538 Acquisition of insurance block of business 75 ---------------------------- Total additions 566 646 613 ---------------------------- Amortization: Allocated to commission expenses (181) (188) (112) Allocated to operating expenses (65) (54) (49) Allocated to OCI, unrealized gains (losses) (3) (54) 93 ---------------------------- Total amortization (249) (296) (68) ---------------------------- Balance, December 31 $2,113 $1,796 $1,446 ============================
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS Universal life and investment-type products, including guaranteed interest contracts (GICs) and funding agreements, are valued using the retrospective deposit method and consist principally of deposits received plus interest credited, less accumulated assessments. Interest credited to these policies primarily ranged from 2.0% to 8.0% during 2001, 2000 and 1999. PL-10 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) FUTURE POLICY BENEFITS Life insurance reserves are valued using the net level premium method. Interest rate assumptions ranged from 4.5% to 9.3% for 2001, 2000 and 1999. Mortality, morbidity and withdrawal assumptions are generally based on the Company's experience, modified to provide for possible unfavorable deviations. Future dividends for participating business are provided for in the liability for future policy benefits. Dividends to policyholders are included in policy benefits paid or provided. Dividends are accrued based on dividend formulas approved by the Board of Directors and reviewed for reasonableness and equitable treatment of policyholders by an independent consulting actuary. As of December 31, 2001 and 2000, participating experience rated policies paying dividends represent less than 1% of direct written life insurance in force. REVENUES, BENEFITS AND EXPENSES Insurance premiums are recognized as revenues when due. Benefits and expenses, other than deferred policy acquisition costs, are recognized when incurred. Generally, receipts for universal life and investment-type products are classified as deposits. Policy fees from these contracts include mortality charges, surrender charges and earned policy service fees. Expenses related to these products include interest credited to account balances and benefit amounts in excess of account balances. Commission revenue from Pacific Life's broker-dealer subsidiaries is recorded on the trade date. DEPRECIATION AND AMORTIZATION Depreciation of investment real estate is computed on the straight-line method over the estimated useful lives, which range from 5 to 30 years. Certain other assets are depreciated or amortized on the straight-line method over periods ranging from 3 to 40 years. Depreciation of investment real estate is included in net investment income. Depreciation and amortization of certain other assets is included in operating expenses. INCOME TAXES Pacific Life and its wholly owned life insurance subsidiary domiciled in Arizona, Pacific Life & Annuity Company (PL&A), are taxed as life insurance companies for income tax purposes. Pacific Life and its includable subsidiaries are included in the consolidated Federal income tax return of PMHC and are allocated an expense or benefit based principally on the effect of including their operations in the consolidated return. Pacific Life's non insurance subsidiaries are either included in PMHC's combined California franchise tax return or file separate state tax returns. Deferred income taxes are provided for timing differences in the recognition of revenues and expenses for financial reporting and income tax purposes. SEPARATE ACCOUNTS Separate account assets are recorded at fair 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 contract owners. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments, disclosed in Notes 5, 6 and 7, has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is often required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. PL-11 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) RISKS AND UNCERTAINTIES The Company operates in a business environment which is subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, interest rate risk, investment market risk, credit risk and legal and regulatory changes. Interest rate risk is the potential for interest rates to change, which can cause fluctuations in the value of investments, the liabilities for future policy benefits and the carrying amount of deferred policy acquisition costs. To the extent that fluctuations in interest rates cause the duration of assets and liabilities to differ, the Company may have to sell assets prior to their maturity and realize losses. The Company controls its exposure to this risk by, among other things, asset/liability matching techniques that attempt to match the duration of assets and liabilities and utilization of derivative instruments. Additionally, the Company includes contractual provisions limiting withdrawal rights for certain of its products. A substantial portion of the Company's liabilities are not subject to surrender or can be surrendered only after deduction of a surrender charge or a market value adjustment. Credit risk is the risk that issuers of investments owned by the Company may default or that other parties may not be able to pay amounts due to the Company. The Company manages its investments to limit credit risk by diversifying its portfolio among various security types and industry sectors. The credit risk of financial instruments is controlled through credit approval procedures, limits and ongoing monitoring. Real estate and mortgage loan investment risks are limited by diversification of geographic location and property type. Management does not believe that significant concentrations of credit risk exist. The Company is also exposed to credit loss in the event of nonperformance by the counterparties to interest rate swap contracts and other derivative securities. The Company manages this risk through credit approvals and limits on exposure to any specific counterparty. However, the Company does not anticipate nonperformance by the counterparties. The Company is subject to various state and Federal regulatory authorities. The potential exists for changes in regulatory initiatives which can result in additional, unanticipated expense to the Company. Existing Federal laws and regulations affect the taxation of life insurance or annuity products and insurance companies. There can be no assurance as to what, if any, cases might be decided or future legislation might be enacted, or if decided or enacted, whether such cases or legislation would contain provisions with possible negative effects on the Company's life insurance or annuity products. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining deferred policy acquisition costs, investment valuation and allowances, derivative valuation, and liabilities for future policy benefits. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2001 financial statement presentation. PL-12 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS Pacific Life prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the CA DOI, which is a comprehensive basis of accounting other than U.S. GAAP. Effective January 1, 2001, the CA DOI required that insurance companies domiciled in the State of California prepare their statutory basis financial statements in accordance with the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual, version effective January 1, 2001 (NAIC SAP), subject to any deviations prescribed or permitted by the CA DOI. As a result of adopting NAIC SAP, Pacific Life reported a statutory cumulative effect of change in accounting principle that increased statutory surplus by $229 million as of January 1, 2001. NAIC SAP does not allow for restatement of prior year amounts. Therefore, prior year statutory amounts presented in this footnote are not comparable to current year statutory amounts. The following are reconciliations of statutory capital and surplus, and statutory net income for Pacific Life as compared to the amounts reported as stockholder's equity and net income included on the accompanying consolidated financial statements:
December 31, 2001 2000 -------------- (In Millions) Statutory capital and surplus $1,869 $1,678 Deferred policy acquisition costs 2,124 1,764 Asset valuation reserve 524 524 Non admitted assets 378 115 Accumulated other comprehensive income 270 31 Surplus notes (150) (150) Deferred income taxes (356) 181 Insurance and annuity reserves (795) (767) Other (145) (144) -------------- Stockholder's equity as reported herein $3,719 $3,232 ==============
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Statutory net income $ 24 $ 141 $ 168 Deferred policy acquisition costs 329 393 379 Insurance and annuity reserves 25 (106) (184) Deferred income taxes (29) (87) (3) Earnings of subsidiaries (60) 674 (27) Other (48) (20) 38 --------------------------- Net income as reported herein $ 241 $ 995 $ 371 ===========================
PL-13 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS (Continued) RISK-BASED CAPITAL Risk-based capital is a method developed by the NAIC to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. The adequacy of a company's actual capital is measured by the risk-based capital results, as determined by the formulas. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 2001 and 2000, Pacific Life and PL&A exceeded the minimum risk-based capital requirements. PERMITTED PRACTICE For the year ended December 31, 2000, the CA DOI approved a permitted practice effective May 5, 2000, allowing Pacific Life to apply the accounting guidance promulgated for limited liability companies in Statement of Statutory Accounting Principle (SSAP) No. 48, Joint Ventures, Partnerships and Limited Liability Companies, and SSAP No. 46, Investments in Subsidiary, Controlled and Affiliated Entities, prior to the effective date of NAIC SAP, for its investment in PAM. Under this permitted practice, PAM was accounted for using the equity method of accounting. The permitted practice also required that the equity of PAM be adjusted for certain tax effects not recorded at PAM due to its limited liability company structure. As of January 1, 2001, this permitted practice became prescribed practice. Prior to May 5, 2000, net cash distributions received on PAM's interest in PIMCO Advisors were recorded as income, as permitted by the CA DOI. DIVIDEND RESTRICTIONS Dividend payments by Pacific Life to Pacific LifeCorp in any 12-month period cannot exceed the greater of 10% of adjusted statutory capital and surplus as of the preceding year end or the statutory net gain from operations for the previous calendar year, without prior approval from the CA DOI. Based on this limitation and 2001 statutory results, Pacific Life could pay $165 million in dividends in 2002 without prior approval. No dividends were paid during 2001, 2000 and 1999. The maximum amount of ordinary dividends that can be paid by PL&A to Pacific Life without restriction cannot exceed the lesser of 10% of statutory surplus as regards to policyholders, or the statutory net gain from operations. No dividends were paid during 2001, 2000 and 1999. Based on this limitation and 2001 statutory results, PL&A could pay $21 million in dividends in 2002 without prior approval. 3. CLOSED BLOCK In connection with the Conversion, an arrangement known as a closed block (the Closed Block) was established, for dividend purposes only, for the exclusive benefit of certain individual life insurance policies that had an experience based dividend scale for 1997. The Closed Block was designed to give reasonable assurance to holders of Closed Block policies that policy dividends will not change solely as a result of the Conversion. Assets that support the Closed Block, which are primarily included in fixed maturity securities, policy loans and accrued investment income, amounted to $292 million and $290 million as of December 31, 2001 and 2000, respectively. Liabilities allocated to the Closed Block, which are primarily included in future policy benefits, amounted to $326 million and $330 million as of December 31, 2001 and 2000, respectively. The contribution to income from the Closed Block amounted to $5 million, $6 million and $4 million and is primarily included in insurance premiums, net investment income and policy benefits paid or provided for the years ended December 31, 2001, 2000 and 1999, respectively. PL-14 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACQUISITIONS All of the Company's acquisitions are accounted for using the purchase method of accounting. On December 31, 2001, a transaction was closed whereby Pacific Life exchanged its 100% common stock ownership in World-Wide Holdings Limited (World-Wide) for a 22.5% common stock ownership in Scottish Annuity & Life Holdings, Ltd. (Scottish). World-Wide's assets and liabilities were approximately $164 million and $103 million, respectively. Scottish, a publicly traded specialty reinsurer, issued new ordinary shares in exchange for World-Wide at a value of $78 million. Pacific Life recorded a nonmonetary exchange gain of $13 million, net of taxes, in connection with this exchange. Pacific Life will account for its investment in Scottish using the equity method of accounting. The Company has not yet completed the allocation of the purchase price to assets and liabilities acquired. In 1999, Pacific Life acquired a payout annuity block of business from Confederation Life Insurance Company (U.S.) in Rehabilitation, which is currently under rehabilitation. On the effective date, this block of business consisted of approximately 16,000 annuitants having reserves of $1.8 billion. The assets received as part of this acquisition amounted to $1.6 billion in fixed maturity securities and $0.2 billion in cash. During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf Holdings, LLC (Grayhawk) for $65 million, which owns 100% of a real estate investment property in Arizona. Goodwill resulting from this transaction was $22 million. PL-15 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS The net carrying amount, gross unrealized gains and losses, and estimated fair value of fixed maturity and equity securities available for sale are shown below. The net carrying amount represents amortized cost adjusted for other than temporary declines in value and change in fair value of fixed maturity securities attributable to the risk designated in a fair value hedge. The fair value of publicly traded securities is based on quoted market prices. For securities not actively traded, fair values were estimated based on amounts provided by independent pricing services specializing in matrix pricing and modeling techniques. The Company also estimates certain fair values based on interest rates, credit quality and average maturity or from securities with comparable trading characteristics.
Net Gross Unrealized Carrying ------------------ Estimated Amount Gains Losses Fair Value ---------------------------------------- (In Millions) As of December 31, 2001: ------------------------ U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 32 $ 2 $ 34 Obligations of states and political subdivisions 669 92 761 Foreign governments 292 27 $ 11 308 Corporate securities 10,985 377 194 11,168 Mortgage-backed and asset- backed securities 4,822 137 190 4,769 Redeemable preferred stock 8 1 7 ---------------------------------------- Total fixed maturity securities $16,808 $ 635 $ 396 $17,047 ======================================== Total equity securities $ 255 $ 20 $ 9 $ 266 ======================================== As of December 31, 2000: ------------------------ U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 32 $ 2 $ 34 Obligations of states and political subdivisions 641 55 $ 1 695 Foreign governments 302 20 5 317 Corporate securities 8,780 258 232 8,806 Mortgage-backed and asset- backed securities 5,230 101 100 5,231 Redeemable preferred stock 52 9 8 53 ---------------------------------------- Total fixed maturity securities $15,037 $ 445 $ 346 $15,136 ======================================== Total equity securities $ 173 $ 18 $ 12 $ 179 ========================================
PL-16 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS (Continued) The net carrying amount and estimated fair value of fixed maturity securities available for sale as of December 31, 2001, 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.
Net Carrying Estimated Amount Fair Value ------------------- (In Millions) Due in one year or less $ 794 $ 811 Due after one year through five years 4,785 4,924 Due after five years through ten years 3,699 3,775 Due after ten years 2,708 2,768 ------------------ 11,986 12,278 Mortgage-backed and asset-backed securities 4,822 4,769 ------------------ Total $16,808 $17,047 ==================
Major categories of investment income are summarized as follows:
Years Ended December 31, 2001 2000 1999 ------------------------ (In Millions) Fixed maturity securities $1,118 $1,109 $1,030 Equity securities 5 13 15 Mortgage loans 206 230 208 Real estate 64 61 46 Policy loans 202 182 159 Other 172 218 166 ------------------------ Gross investment income 1,767 1,813 1,624 Investment expense 139 130 114 ------------------------ Net investment income $1,628 $1,683 $1,510 ========================
PL-17 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENTS (Continued) Net realized investment gain (loss), including changes in valuation allowances, is as follows:
Years Ended December 31, 2001 2000 1999 ------------------ (In Millions) Fixed maturity securities $(45) $ 2 $16 Equity securities 31 (13) 58 Mortgage loans 6 7 Real estate 9 (3) 18 Interest in PIMCO Advisors (Note 1) 1,082 Other investments (9) (77) ----------------- Total $(14) $ 997 $99 =================
The change in fair value on investments in available for sale and trading securities is as follows:
December 31, 2001 2000 1999 ------------------- (In Millions) Available for sale securities: Fixed maturity $140 $477 $ (925) Equity 5 (20) (157) ------------------- Total $145 $457 $(1,082) =================== Trading securities $(17) $ 6 $ 0 ===================
Gross gains of $67 million, $125 million and $188 million and gross losses of $48 million, $44 million and $62 million, which have been included in earnings as a result of sales of available for sale securities, were realized for the years ended December 31, 2001, 2000 and 1999, respectively. Trading securities as of December 31, 2001 and 2000, included net unrealized losses of $15 million and net unrealized gains of $2 million, respectively. As of December 31, 2001 and 2000, investments in fixed maturity securities of $13 million were on deposit with state insurance departments to satisfy regulatory requirements. The Company's interest in PIMCO Advisors (Note 1) exceeds 10% of total stockholder's equity as of December 31, 2001. PL-18 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of the Company's financial instruments are as follows:
December 31, 2001 December 31, 2000 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------------------------------- (In Millions) Assets: Fixed maturity and equity securities (Note 5) $17,313 $17,313 $15,315 $15,315 Trading securities 458 458 71 71 Mortgage loans 2,933 3,088 3,026 3,246 Policy loans 4,899 4,899 4,680 4,680 Cash and cash equivalents 510 510 211 211 Interest in PIMCO Advisors (Note 1) 1,703 1,703 1,548 1,548 Derivative instruments (Note 7) 26 26 15 15 Notes receivable from affiliates 88 88 Liabilities: Guaranteed interest contracts 7,498 7,625 6,676 6,803 Deposit liabilities 482 495 470 483 Annuity liabilities 1,955 1,955 1,114 1,114 Short-term debt 275 275 195 195 Long-term debt 164 160 164 166 Derivative instruments (Note 7) 530 530 445 445
The following methods and assumptions were used to estimate the fair value of these financial instruments as of December 31, 2001 and 2000: TRADING SECURITIES The fair value of trading securities is based on quoted market prices. 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 carrying amounts of policy loans are a reasonable estimate of their fair values because interest rates are generally variable and based on current market rates. CASH AND CASH EQUIVALENTS The carrying values approximate fair values due to the short-term maturities of these instruments. PL-19 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) NOTES RECEIVABLE FROM AFFILIATES The carrying amount of notes receivable from affiliates (Note 16) is a reasonable estimate of its fair value because the interest rates are variable and based on current market rates. GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES The estimated fair value of GICs is estimated using the rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposit liabilities with no defined maturities is the amount payable on demand. ANNUITY LIABILITIES The estimated fair value of annuity liabilities approximates carrying value and primarily includes policyholder deposits and accumulated credited interest. SHORT-TERM DEBT The carrying amount of short-term debt is a reasonable estimate of its fair value because the interest rates are variable and based on current market rates. LONG-TERM DEBT The estimated fair value of surplus notes (Note 10) is based on market quotes. The carrying amount of other long-term debt is a reasonable estimate of its fair value because the interest rate on the debt is approximately the same as current market rates. 7. DERIVATIVES AND HEDGING ACTIVITIES The Company primarily utilizes various derivative instruments to hedge and manage its exposure to changes in interest rate levels, foreign exchange rates, and equity market prices, and to manage the duration mismatch of assets and liabilities. The Company uses hedge accounting as allowed by SFAS No. 133 and SFAS No. 138, by designating derivative instruments as either fair value or cash flow hedges on the date the Company enters into a derivative contract. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. Hedge effectiveness is assessed quarterly by a variety of techniques including Value-at-Risk, regression analysis and cumulative dollar offset. In certain cases, hedge effectiveness is assumed because the derivative instrument was constructed such that all critical terms of the derivative exactly match the hedged risk in the hedged item. PL-20 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Fair Value Hedges ----------------- The Company primarily uses interest rate and foreign currency swaps and options to manage its exposure to changes in the fair values of its assets and liabilities due to fluctuations in foreign currencies and the benchmark interest rate. For derivative instruments that are designated as fair value hedges, the change in value of the derivative instrument as well as the change in fair value of the hedged item associated with the risk being hedged is recorded in net realized investment gain (loss). Periodic net settlements on derivatives designated as fair value hedges are reflected on an accrual basis as an adjustment to net investment income or interest credited on universal life and investment-type products, based on the item being hedged. The change in value of the hedged item associated with the risk being hedged is reflected as an adjustment to the carrying amount of the hedged item. Upon termination of the fair value hedging relationship, the accumulated cost basis adjustment is amortized into net investment income or interest credited to universal life or investment-type products over its remaining life or recognized immediately in connection with the disposal of the hedged item. For the year ended December 31, 2001, the ineffectiveness related to fair value hedges was approximately $0.2 million, net of tax, which is recorded in net realized investment gain (loss). No component of the hedging instrument's fair value is excluded from the determination of effectiveness. Cash Flow Hedges ---------------- The Company primarily uses interest rate and foreign currency swaps and interest rate futures contracts to manage its exposure to variability in cash flows due to changes in foreign currencies and the benchmark interest rate. These cash flows include those associated with existing assets and liabilities as well as the forecasted interest cash flows related to anticipated investment purchases and liability issuances. Such anticipated investment purchases and liability issuances are considered to be probable to occur and are generally completed within 180 days of the inception of the hedge. The Company has not discontinued any cash flow hedges of anticipated transactions. For derivative instruments that are designated as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is recorded in OCI and is recognized as an adjustment to net investment income or interest credited on universal life and investment-type products when the hedged item affects earnings. The Company did not record any ineffectiveness for cash flow hedges during the year ended December 31, 2001. Over the next twelve months, the Company anticipates that $0.8 million of deferred gains on derivative instruments in accumulated OCI will be reclassified to earnings. For the year ended December 31, 2001, none of the Company's hedged forecasted transactions were determined to be probable of not occurring. No component of the hedging instrument's fair value is excluded from the determination of effectiveness. Derivatives Not Designated as Hedging Instruments ------------------------------------------------- The Company enters into swap agreements, interest rate futures contracts, interest rate cap and floor agreements, and equity indexed futures contracts without designating the derivatives as hedging instruments. Derivatives that are not designated as hedging instruments are entered into primarily to manage the Company's interest rate risk from rising or falling interest rates, equity risk and yield enhancement. The Company uses credit default and total return swaps to manage the credit exposure of the portfolio, equity risk embedded in certain liabilities and to take advantage of market opportunities. Net realized investment gain (loss) for the year ended December 31, 2001 includes $2 million related to realized gains and losses and changes in fair value of derivative instruments not designated as hedges. Periodic net settlements on such derivatives are recorded as adjustments to net investment income or interest credited on universal life and investment-type products on an accrual basis, based upon the purpose of the derivative. PL-21 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Embedded Derivatives -------------------- The Company may enter into contracts that are not derivative instruments, but contain embedded derivatives. When it is determined that the embedded derivative possesses economic and risk characteristics that are not clearly and closely related to those of the host contract and that a separate instrument with the same terms would qualify as a derivative instrument, it is separated from the host contract and accounted for as a stand-alone derivative. Such derivatives are recorded on the consolidated statement of financial condition at fair value, with changes in their fair value recorded in net realized investment gain (loss). Derivative Instruments ---------------------- The Company uses a variety of derivative financial instruments, including swaps, caps, floors, and exchange traded futures contracts. Interest rate swap agreements involve the exchange, at specified intervals, of interest payments resulting from the difference between fixed rate and floating rate interest amounts calculated by reference to an underlying notional amount. Credit default swaps involve the receipt of fixed rate payments in exchange for assuming potential credit exposure of an underlying security. Total return swaps involve the exchange of floating rate payments for the total return performance of a specified index, market or security. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Foreign currency swaps involve the exchange of an initial principal amount in two currencies, and the agreement to re-exchange the currencies at a future date, at an agreed exchange rate. There is also periodic exchange of interest payments in the two currencies at specified intervals, calculated using agreed upon rates and the exchanged principal amounts. The Company issues synthetic GICs to Employee Retirement Income Security Act of 1974 (ERISA) qualified defined contribution employee benefit plans (ERISA Plan). The ERISA Plan uses the contracts in its stable value or guaranteed fixed income option. Synthetic GICs provide certain of the ERISA Plan's assets a guarantee of principal and interest, as it relates to certain benefit payments. The Company has an off balance sheet risk that the value of the underlying assets is insufficient to meet these guarantees. To control this risk, the Company pre-approves all investment guidelines. Default risk is absorbed by the ERISA Plan. The interest rate guarantee is reset periodically to reflect actual performance results. As of December 31, 2001 the Company had outstanding commitments to maintain liquidity for benefit payments on notional amounts of $2.6 billion compared to $1.7 billion as of December 31, 2000. The notional amounts represent the value of the ERISA Plan's assets only and are not a measure of the exposure to the Company. Interest rate floor agreements entitle the Company to receive the difference when the current rate of the underlying index is below the strike rate. Interest rate cap agreements entitle the Company to receive the difference when the current rate of the underlying index is above the strike rate. Options purchased involve the right, but not the obligation, to purchase the underlying securities at a specified price during a given time period. Cash requirements for these instruments are generally limited to the premium paid by the Company at acquisition. Financial futures contracts obligate the holder to buy or sell the underlying financial instrument at a specified future date for a set price and may be settled in cash or by delivery of the financial instrument. Price changes on futures are settled daily through the required margin cash flows. The notional amounts of the contracts do not represent future cash requirements, as the Company intends to close out open positions prior to expiration. PL-22 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVES AND HEDGING ACTIVITIES (Continued) Outstanding derivatives with off-balance sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair value as of December 31, 2001 and 2000 are as follows:
Assets (Liabilities) ----------------------------------------- Notional or Carrying Estimated Carrying Estimated Contract Amounts Value Fair Value Value Fair Value ----------------- -------- ---------- -------- ---------- 2001 2000 2001 2001 2000 2000 ----------------------------------------------------------- (In Millions) Interest rate swap contracts $ 3,512 $ 2,648 $(144) $(144) $ (89) $ (89) Credit default and total return swaps 2,375 3,896 (105) (105) (132) (132) Foreign currency swaps 3,310 2,488 (281) (281) (224) (224) Synthetic GICs 2,599 1,695 Interest rate floors, caps, options and swaptions 829 745 26 26 15 15 Financial futures contracts 97 58 ---------------------------------------------------------- Total $12,722 $11,530 $(504) $(504) $(430) $(430) ==========================================================
A reconciliation of the notional or contract amounts is as follows:
Balance Acquisitions Terminations Balance Beginning and Other and End of of Year Additions Maturities Year ------------------------------------------- (In Millions) December 31, 2001: ------------------ Interest rate swap contracts $ 2,648 $1,100 $ 236 $ 3,512 Credit default and total return swaps 3,896 254 1,775 2,375 Foreign currency swaps 2,488 1,439 617 3,310 Synthetic GICs 1,695 1,046 142 2,599 Interest rate floors, caps, options and swaptions 745 103 19 829 Financial futures contracts 58 3,398 3,359 97 ------------------------------------------- Total $11,530 $7,340 $6,148 $12,722 =========================================== December 31, 2000: ------------------ Interest rate swap contracts $ 2,867 $2,419 $2,638 $ 2,648 Credit default and total return swaps 2,120 2,898 1,122 3,896 Foreign currency swaps 1,685 1,079 276 2,488 Synthetic GICs 1,632 470 407 1,695 Interest rate floors, caps, options and swaptions 1,033 160 448 745 Financial futures contracts 677 2,762 3,381 58 ------------------------------------------- Total $10,014 $9,788 $8,272 $11,530 ===========================================
PL-23 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS The detail of universal life and investment-type product liabilities is as follows:
December 31, 2001 2000 --------------- (In Millions) Universal life $12,278 $11,405 Investment-type products 9,518 8,005 --------------- $21,796 $19,410 ===============
The detail of universal life and investment-type products policy fees and interest credited, net of reinsurance ceded, is as follows:
Years Ended December 31, 2001 2000 1999 ------------------------- (In Millions) Policy fees: Universal life $ 582 $ 541 $ 509 Investment-type products 239 228 145 ------------------------- Total policy fees $ 821 $ 769 $ 654 ========================= Interest credited: Universal life $ 500 $ 467 $ 444 Investment-type products 529 530 494 ------------------------- Total interest credited $ 1,029 $ 997 $ 938 =========================
9. LIABILITY FOR GROUP HEALTH UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSE Activity in the liability for group health unpaid claims and claim adjustment expenses, which is included in future policy benefits, is summarized as follows:
Years Ended December 31, 2001 2000 -------------------------- (In Millions) Balance at January 1 $130 $116 Incurred related to: Current year 569 395 Prior years (12) (19) -------------------------- Total incurred 557 376 -------------------------- Paid related to: Current year 448 297 Prior years 80 65 -------------------------- Total paid 528 362 -------------------------- Balance at December 31 $159 $130 ==========================
As a result of favorable settlement of prior years' estimated claims, the provision for claims and claim adjustment expenses decreased by $12 million and $19 million for the years ended December 31, 2001 and 2000, respectively. PL-24 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHORT-TERM AND LONG-TERM DEBT Pacific Life borrows for short-term needs by issuing commercial paper. There was no commercial paper debt outstanding as of December 31, 2001 and 2000. As of December 31, 2001 and 2000, Pacific Life had a revolving credit facility of $350 million. There was no debt outstanding under the revolving credit facility as of December 31, 2001 and 2000. PAM had bank borrowings outstanding of $275 million and $195 million as of December 31, 2001 and 2000, respectively. The interest rate was 2.3% and 6.9% as of December 31, 2001 and 2000, respectively. The amount of the borrowings and the interest rates are reset monthly. The borrowing limit for PAM as of December 31, 2001 and 2000, was $275 million and $215 million, respectively. Grayhawk has a note payable with a maturity date of May 22, 2008. The note bears a fixed rate of interest of 7.6%. The outstanding balance as of December 31, 2001 and 2000 was $14 million. Pacific Life has $150 million of long-term debt, which consists of surplus notes outstanding at an interest rate of 7.9% maturing on December 30, 2023. Interest is payable semiannually on June 30 and December 30. The surplus notes may not be redeemed at the option of Pacific Life or any holder of the surplus notes. The surplus notes are unsecured and subordinated to all present and future senior indebtedness and policy claims of Pacific Life. Each payment of interest and principal on the surplus notes may be made only with the prior approval of the Insurance Commissioner of the State of California. Interest expense amounted to $12 million for each of the years ended December 31, 2001, 2000 and 1999 and is included in net investment income. 11. INCOME TAXES The provision for income taxes is as follows:
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Current $(5) $ 34 $152 Deferred 60 424 (8) --------------------------- Provision for income taxes on income before cumulative adjustments due to changes in accounting principles 55 458 144 Deferred income tax provision on cumulative adjustments due to changes in accounting principles (4) --------------------------- Total $51 $458 $144 ===========================
PL-25 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (Continued) The sources of the Company's provision for deferred taxes are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Nonmonetary exchange of PIMCO Advisors units (Note 1) $447 Deferred policy acquisition costs $ 99 57 $ 20 Policyholder reserves 7 19 51 Duration hedging 3 (30) Investment valuation (7) (19) (28) Partnership income (26) 3 (25) Low income housing credit carryover (31) Other 14 (4) 4 ---------------------------- Deferred taxes from operations 56 506 (8) Release of deferred taxes in connection with nonmonetary exchange of PIMCO Advisors units (Note 1) (82) ---------------------------- Provision for deferred taxes $ 56 $424 $ (8) ============================
In connection with the nonmonetary exchange of partnership units at PIMCO Advisors (Note 1), certain nonoperating deferred taxes previously established were released during the year ended December 31, 2000. A reconciliation of the provision for income taxes based on the prevailing corporate statutory tax rate to the provision reflected in the consolidated financial statements is as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Provision for income taxes at the statutory rate $106 $509 $180 State income taxes 4 25 Nontaxable investment income (6) (6) (7) Low income housing and foreign tax credits (28) (22) (19) Book to tax basis difference on nonmonetary exchange of PIMCO Advisors units (Note 1) (35) Other (21) (13) (10) ---------------------------- Provision for income taxes on income before cumulative adjustments due to changes in accounting principles 55 458 144 Deferred income tax provision on cumulative adjustments due to changes in accounting principles (4) ---------------------------- Total $ 51 $458 $144 ============================
PL-26 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (Continued) The net deferred tax liability, included in other liabilities as of December 31, 2001 and 2000, is comprised of the following tax effected temporary differences:
December 31, 2001 2000 -------------- (In Millions) Deferred tax assets Policyholder reserves $ 177 $ 184 Investment valuation 99 92 Deferred compensation 40 35 Low income housing credit carryover 31 Duration hedging 18 18 Partnership income 10 Dividends 7 7 Postretirement benefits 6 8 Other 5 22 -------------- Total deferred tax assets 393 366 -------------- Deferred tax liabilities Nonmonetary exchange of PIMCO Advisors units (Note 1) (429) (429) Deferred policy acquisition costs (200) (101) Partnership income (16) Depreciation (2) (2) -------------- Total deferred tax liabilities (631) (548) -------------- Net deferred tax liability from operations (238) (182) Deferred taxes on World-Wide (Note 4) (11) Deferred taxes on OCI (159) (23) -------------- Net deferred tax liability $ (397) $(216) ==============
PL-27 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMPREHENSIVE INCOME (LOSS) The Company displays comprehensive income (loss) and its components on the accompanying consolidated statements of stockholder's equity and as follows. OCI is shown net of reclassification adjustments and net of deferred income taxes. The disclosure of the gross components of OCI is as follows:
Years Ended December 31, 2001 2000 1999 --------------------------- (In Millions) Gross Holding Gain (Loss): Holding gain (loss) on securities available for sale $151 $ 457 $(948) Holding loss on derivatives (20) (70) (226) Income tax (expense) benefit (45) (135) 411 Reclassification adjustment: Realized (gain) loss on sale of securities available for sale (5) 3 (78) Realized loss on derivatives 71 Provision for income taxes (benefit) (24) (1) 27 Allocation of holding (gain) loss to deferred policy acquisition costs 2 (27) 44 Provision for income (taxes) benefit (1) 9 (15) --------------------------- Net unrealized gain (loss) on securities available for sale 129 236 (785) Foreign currency translation adjustment (1) (4) (1) Unrealized gain on interest in PIMCO Advisors (Note 1) 111 77 --------------------------- Total $239 $309 $(786) ===========================
13. REINSURANCE The Company has reinsurance agreements with other insurance companies for the purpose of diversifying risk and limiting exposure on larger mortality risks or, in the case of a producer-owned reinsurance company, to diversify risk and retain top producing agents. Amounts receivable from reinsurers for reinsurance of future policy benefits, universal life deposits, and unpaid losses is included in other assets. All assets associated with business reinsured on a yearly renewable term and modified coinsurance basis remain with, and under the control of the Company. Amounts recoverable (payable) from (to) reinsurers include the following amounts:
December 31, 2001 2000 -------------- (In Millions) Universal life deposits $(79) $(66) Future policy benefits 155 156 Unpaid claims 34 26 Paid claims 16 13 Other 17 33 -------------- Net reinsurance recoverable $143 $162 ==============
PL-28 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. REINSURANCE (Continued) As of December 31, 2001, 75% of the reinsurance recoverables were from two reinsurers, of which 100% is secured by payables to the reinsurer. To the extent that the assuming companies become unable to meet their obligations under these agreements, the Company remains contingently liable. The Company does not anticipate nonperformance by the assuming companies. The components of insurance premiums are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Direct premiums $ 923 $ 646 $563 Ceded reinsurance (129) (108) (93) Assumed reinsurance 18 14 14 --------------------------- Insurance premiums $ 812 $ 552 $484 ===========================
Revenues and benefits are shown net of the following reinsurance transactions:
Years Ended December 31, 2001 2000 1999 ------------------------- (In Millions) Ceded reinsurance netted against policy fees $ 85 $ 74 $ 52 Ceded reinsurance netted against net investment income 266 244 212 Ceded reinsurance netted against interest credited 210 161 111 Ceded reinsurance netted against policy benefits 115 110 88 Assumed reinsurance included in policy benefits 11 12 8
14. SEGMENT INFORMATION The Company has five operating segments: Life Insurance, Institutional Products, Annuities, Group Insurance and Broker-Dealers. These segments are managed separately and have been identified based on differences in products and services offered. All other activity is included in Corporate and Other. Prior to May 4, 2000, the Company had another operating segment, Investment Management. In connection with the PIMCO Advisors transaction (Note 1), Investment Management was no longer considered an operating segment by management and, effective May 5, 2000, it's activities are included in Corporate and Other. PIMCO Advisors offers a diversified range of investment products through separately managed accounts, and institutional, retail and offshore funds. The Life Insurance segment offers universal life, variable universal life and other life insurance products to individuals, small businesses and corporations through a network of distribution channels that include branch offices, sales centers, marketing organizations, National Association of Securities Dealers (NASD) firms and a national producer group that has produced over 10% of the segment's in force business. The Institutional Products segment offers investment and annuity products to pension fund sponsors and other institutional investors primarily through its home office marketing team and other intermediaries. The Annuities segment offers variable and fixed annuities to individuals and small businesses through NASD firms, regional and national wirehouses, and financial institutions. PL-29 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The Group Insurance segment primarily offers group life, health and dental insurance, and stop loss insurance products to corporate, government and labor-management-negotiated plans. The group life, health and dental insurance is primarily distributed through a network of sales offices and the stop loss insurance is distributed through a network of third party administrators. The Broker-Dealers segment includes five NASD registered firms that provide securities and insurance brokerage services and investment advisory services through approximately 3,100 registered representatives. Pacific Life's direct wholly owned broker-dealer subsidiary, Pacific Select Distributors, Inc. (PSD), primarily serves as the underwriter/distributor of registered investment-related products and services, principally variable life and annuity contracts issued by Pacific Life. During 2001, PSD became the distributor of the Pacific Funds, a multi-class, open end investment management company. Pacific Life is the investment adviser to the Pacific Funds. Corporate and Other primarily includes investment income, expenses and assets not attributable to the operating segments, and the operations of World-Wide (Note 4). Corporate and Other also includes the elimination of intersegment revenues, expenses and assets, including commission revenue and expense from the sale of Pacific Life's variable life and annuity products. The Company uses the same accounting policies and procedures to measure segment income and assets as it uses to measure its consolidated net income and assets. Net investment income and net realized investment gain (loss) are allocated based on invested assets purchased and held as is required for transacting the business of that segment. Overhead expenses are allocated based on services provided. Interest expense is allocated based on the short-term borrowing needs of the segment and is included in net investment income. The provision for income taxes is allocated based on each segment's actual tax provision. The Company generates substantially all of its revenues and income from customers located in the United States. Additionally, substantially all of the Company's assets are located in the United States. Depreciation expense and capital expenditures are not material and have not been reported herein. The Company's significant noncash item disclosed herein is interest credited to universal life and investment-type products. PL-30 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information as of and for the year ended December 31, 2001:
Life Institutional Group Broker- Corporate Insurance Products Annuities Insurance Dealers and Other Total ----------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 582 $ 2 $ 237 $ 821 Insurance premiums (59) 113 $723 $ 35 812 Net investment income 645 831 67 19 $ 1 65 1,628 Net realized investment gain (loss) 5 2 (21) (14) Commission revenue 580 (399) 181 Other income 28 10 99 2 40 46 225 --------------------------------------------------------------------- Total revenues 1,196 961 403 746 621 (274) 3,653 --------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 205 351 27 557 23 1,163 Interest credited 506 456 67 1,029 Commission expenses 149 3 146 50 570 (394) 524 Operating expenses 172 20 144 113 53 132 634 --------------------------------------------------------------------- Total benefits and expenses 1,032 830 384 720 623 (239) 3,350 --------------------------------------------------------------------- Income (loss) before provision for income taxes (benefit) 164 131 19 26 (2) (35) 303 Provision for income taxes (benefit) 38 34 1 7 (1) (24) 55 --------------------------------------------------------------------- Income (loss) before cumulative adjustments due to changes in accounting principles 126 97 18 19 (1) (11) 248 Cumulative adjustments due to changes in accounting principles, net of taxes (3) (8) (1) 1 4 (7) --------------------------------------------------------------------- Net income (loss) $ 123 $ 89 $ 17 $ 20 $ (1) $ (7) $ 241 ===================================================================== Total assets $18,216 $16,121 $17,928 $431 $ 74 $2,912 $55,682 Deferred policy acquisition costs $ 923 $ 75 $ 1,115 $ 2,113 Separate account assets $ 3,615 $ 4,461 $15,382 $23,458 Policyholder and contract liabilities $13,325 $10,965 $ 1,874 $212 $26,376 Separate account liabilities $ 3,615 $ 4,461 $15,382 $23,458
PL-31 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information as of and for the year ended December 31, 2000, except for the Investment Management Segment, which is for the period ended, May 4, 2000:
Life Institutional Group Investment Broker- Corporate Insurance Products Annuities Insurance Management Dealers and Other Total --------------------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 541 $ 3 $ 225 $ 769 Insurance premiums (49) 64 2 $511 $ 24 552 Net investment income 609 838 58 29 $49 $ 1 99 1,683 Net realized investment gain (loss) (22) (40) (4) (7) 10 1,060 997 Commission revenue 687 (417) 270 Other income 32 8 97 4 6 23 39 209 -------------------------------------------------------------------------------- Total revenues 1,111 873 378 537 65 711 805 4,480 -------------------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 190 298 6 385 879 Interest credited 474 458 53 12 997 Commission expenses 161 2 135 36 650 (408) 576 Operating expenses 159 20 126 93 27 47 103 575 -------------------------------------------------------------------------------- Total benefits and expenses 984 778 320 514 27 697 (293) 3,027 -------------------------------------------------------------------------------- Income before provision for income taxes 127 95 58 23 38 14 1,098 1,453 Provision for income taxes 29 18 21 6 8 6 370 458 -------------------------------------------------------------------------------- Net income $ 98 $ 77 $ 37 $ 17 $30 $ 8 $ 728 $ 995 ================================================================================ Total assets $17,232 $17,908 $16,661 $374 $ 72 $2,537 $54,784 Deferred policy acquisition costs $ 825 $ 75 $ 886 $ 10 $ 1,796 Separate account assets $ 3,543 $ 7,104 $15,271 $25,918 Policyholder and contract liabilities $12,439 $10,218 $ 1,019 $189 $ 87 $23,952 Separate account liabilities $ 3,543 $ 7,104 $15,271 $25,918
PL-32 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (Continued) The following is segment information for the year ended December 31, 1999:
Life Institutional Group Investment Broker- Corporate Insurance Products Annuities Insurance Management Dealers and Other Total -------------------------------------------------------------------------------------------------------- (In Millions) REVENUES Policy fees $ 509 $ 3 $142 $ 654 Insurance premiums (32) 25 6 $476 $ 9 484 Net investment income 582 679 78 23 $116 $ 1 31 1,510 Net realized investment gain (loss) 11 26 (1) 10 53 99 Commission revenue 583 (349) 234 Other income 25 11 57 3 15 19 15 145 ------------------------------------------------------------------------------- Total revenues 1,095 744 283 501 141 603 (241) 3,126 ------------------------------------------------------------------------------- BENEFITS AND EXPENSES Policy benefits 174 197 10 354 735 Interest credited 451 418 65 4 938 Commission expenses 163 87 33 549 (347) 485 Operating expenses 128 17 48 84 78 42 56 453 ------------------------------------------------------------------------------- Total benefits and expenses 916 632 210 471 78 591 (287) 2,611 ------------------------------------------------------------------------------- Income before provision for income taxes 179 112 73 30 63 12 46 515 Provision for income taxes 54 31 24 10 12 5 8 144 ------------------------------------------------------------------------------- Net income $ 125 $ 81 $ 49 $ 20 $ 51 $ 7 $ 38 $ 371 ===============================================================================
15. EMPLOYEE BENEFIT PLANS PENSION PLANS Pacific Life provides a defined benefit pension plan covering all eligible employees of the Company. On July 1, 2000, Pacific Life converted this final average pay formula defined benefit plan to a cash balance approach. Active employees' existing benefits in this plan were converted to opening balances and will increase over time from credits, based on years of service and compensation levels, and quarterly interest accruals. The full-benefit vesting period for all participants is five years. Pacific Life's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be determined appropriate. Contributions are intended to provide not only for benefits attributed to employment to date but also for those expected to be earned in the future. All such contributions are made to a tax-exempt trust. Plan assets consist primarily of group annuity contracts issued by Pacific Life, as well as mutual funds managed by an affiliate of Pacific Life. PL-33 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) Components of the net periodic pension expense (benefit) are as follows:
Years Ended December 31, 2001 2000 1999 ---------------------------- (In Millions) Service cost - benefits earned during the year $ 12 $ 6 $ 5 Interest cost on projected benefit obligation 12 12 11 Expected return on plan assets (16) (17) (16) Amortization of net obligations and prior service cost (1) (4) (2) ---------------------------- Net periodic pension expense (benefit) $ 7 $ (3) $ (2) ============================
The following tables set forth the changes in projected benefit obligation and plan assets and funded status reconciliation:
December 31, 2001 2000 -------------- (In Millions) Change in Projected Benefit Obligation: --------------------------------------- Projected benefit obligation, beginning of year $170 $156 Service cost 12 6 Interest cost 12 12 Plan expense (1) (1) Actuarial loss 4 5 Benefits paid (19) (8) -------------- Projected benefit obligation, end of year $178 $170 ============== Change in Plan Assets: ---------------------- Fair value of plan assets, beginning of year $197 $212 Actual return on plan assets (13) (6) Employer contributions 17 Plan expense (1) (1) Benefits paid (19) (8) -------------- Fair value of plan assets, end of year $181 $197 ============== Funded Status Reconciliation: ----------------------------- Funded status $ 3 $ 27 Unrecognized transition asset (1) Unrecognized actuarial (gain) loss 15 (18) -------------- Prepaid pension cost $ 18 $ 8 ==============
In determining the actuarial present value of the projected benefit obligation as of December 31, 2001 and 2000, the weighted average discount rate used was 7.0% and 7.5%, respectively, and the rate of increase in future compensation levels was 4.5% and 5.0%, respectively. The expected long-term rate of return on plan assets was 8.5% in 2001 and 2000. PL-34 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) POSTRETIREMENT BENEFITS Pacific Life provides 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 Life's policy as an active employee for a minimum continuous period prior to the date retired, and have an employment date before January 1, 1990. The Plans contain cost-sharing features such as deductibles and coinsurance, and require retirees to make contributions which can be adjusted annually. Pacific Life's commitment to qualified employees who retire after April 1, 1994 is limited to specific dollar amounts. Pacific Life reserves the right to modify or terminate the Plans at any time. As in the past, the general policy is to fund these benefits on a pay-as-you-go basis. The net periodic postretirement benefit cost for the years ended December 31, 2001, 2000 and 1999 is $1 million. As of December 31, 2001 and 2000, the accumulated benefit obligation is $19 million and $20 million, respectively. The fair value of the plan assets as of December 31, 2001 and 2000 is zero. The amount of accrued benefit cost included in other liabilities is $24 million as of December 31, 2001 and 2000. The Plans include both indemnity and HMO coverage. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for indemnity coverage was 9.0% and 10.0% for 2001 and 2000, respectively, and is assumed to decrease gradually to 5.0% in 2005 and remain at that level thereafter. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for HMO coverage was 8.0% and 9.0% for 2001 and 2000, respectively, and is assumed to decrease gradually to 4.5% 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, 2001 would be increased by 7.0%, and the aggregate of the service and interest cost components of the net periodic benefit cost would increase by 6.6%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 2001 would be decreased by 6.6%, and the aggregate of the service and interest cost components of the net periodic benefit cost would decrease by 6.4%. The discount rate used in determining the accumulated postretirement benefit obligation is 7.0% and 7.5% for 2001 and 2000, respectively. OTHER PLANS Pacific Life provides a voluntary Retirement Incentive Savings Plan (RISP) pursuant to Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Pacific Life's RISP matches 75% of each employee contributions, up to a maximum of 6.0% of eligible employee compensation, to an Employee Stock Ownership Plan (ESOP). ESOP contributions made by the Company amounted to $9 million, $8 million and $7 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in operating expenses. The ESOP was formed at the time of the Conversion and is only available to the participants of the RISP in the form of matching contributions. Pacific LifeCorp issued 1.7 million shares of common stock to the ESOP in 1997, in exchange for a promissory note of $21 million (ESOP Note) bearing an interest rate of 6.5%. Interest and principal payments are due semiannually in equal installments through September 2, 2012. Interest and principal payments made by the ESOP to Pacific LifeCorp were funded by contributions from Pacific Life. In 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP Note due Pacific LifeCorp. Interest and principal payments made by the ESOP to Pacific Life continue to be funded by contributions from Pacific Life. The interest rate was reduced to 6.0% effective September 2, 1999. PL-35 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. EMPLOYEE BENEFIT PLANS (Continued) The ESOP Note is included in unearned ESOP shares. The unearned ESOP shares account is reduced as ESOP shares are released for allocation to participants through ESOP contributions by Pacific Life. In addition, when the fair value of ESOP shares being released for allocation to participants exceeds the original issue price of those shares, paid-in capital is increased by this difference. On January 9, 2002, Pacific Life loaned cash of $46 million to the ESOP in exchange for a 5.5% promissory note due January 9, 2017. The ESOP then purchased 2 million shares of newly issued common stock of Pacific LifeCorp at a price of $23.00 per share in exchange for cash. These newly issued shares were purchased in order for the ESOP to maintain its matching contributions to participants in the plan. The Company has deferred compensation plans that permit eligible employees to defer portions of their compensation and earn interest on the deferred amounts. The interest rate is determined annually. The compensation that has been deferred has been accrued and the primary expense related to this plan, other than compensation, is interest on the deferred amounts. The Company also has performance-based incentive compensation plans for its employees. 16. TRANSACTIONS WITH AFFILIATES Pacific Life serves as the investment adviser for the Pacific Select Fund, the investment vehicle provided to the Company's variable life and variable annuity contractholders. Pacific Life charges fees based upon the net asset value of the portfolios of the Pacific Select Fund, which amounted to $117 million, $115 million and $70 million for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, Pacific Life provides certain support services to the Pacific Select Fund and other affiliates based on an allocation of actual costs. Fees amounted to $948,000, $698,000 and $1,288,000 for the years ended December 31, 2001, 2000 and 1999, respectively. PAM has an agreement to loan Pacific LifeCorp up to $350 million at variable rates. The outstanding balance as of December 31, 2001 was $70 million. There was no balance outstanding as of December 31, 2000. The interest rate as of December 31, 2001 was 2.2%. During 2001, PAM entered into an agreement to loan Aviation Capital Group Holding Corp., a subsidiary of Pacific LifeCorp, up to $100 million at variable rates. The outstanding balance as of December 31, 2001 was $18 million. The interest rate as of December 31, 2001 was 4.1%. 17. TERMINATION AND NONCOMPETITION AGREEMENTS The Company had termination and noncompetition agreements with certain former key employees of PAM's subsidiaries. In connection with the closing of the PIMCO Advisors transaction (Note 1), these agreements were assumed by Allianz. These agreements provided terms and conditions for the allocation of future proceeds received from distributions and sales of certain PIMCO Advisors units and other noncompete payments. For the years ended December 31, 2000 and 1999, $14 million and $54 million, respectively, is included in operating expenses related to these agreements. PL-36 Pacific Life Insurance Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. COMMITMENTS AND CONTINGENCIES The Company has outstanding commitments to make investments primarily in fixed maturity securities, mortgage loans, limited partnerships and other investments as follows (In Millions):
Years Ending December 31: ------------------------- 2002 $290 2003 through 2006 234 2007 and thereafter 82 ---- Total $606 ====
The Company leases office facilities under various noncancelable operating leases. Rent expense, which is included in operating expenses, in connection with these leases was $15 million, $14 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Aggregate minimum future commitments are as follows (In Millions):
Years Ending December 31: ------------------------- 2002 $ 16 2003 through 2006 53 2007 and thereafter 31 ---- Total $100 ====
The Company has investments in entities that are not consolidated because of control and substantive ownership by independent third parties. There are no material unrecorded liabilities and all material guarantees and commitments have been disclosed herein. The Company is a respondent in a number of legal proceedings, some of which involve allegations for extra-contractual damages. In the opinion of management, the outcome of the foregoing proceedings is not likely to have a material adverse effect on the consolidated financial position or results of operations of the Company. --------------------------------------------------------------------------- PL-37 PART II Part C: OTHER INFORMATION Item 24. Financial Statements and Exhibits --------------------------------- (a) Financial Statements Part A: None Part B: (1) Registrant's Financial Statements Audited Financial Statements dated as of December 31, 2001 which are incorporated by reference from the 2001 Annual Report include the following for Separate Account A: Statements of Assets and Liabilities Statements of Operations Statements of Changes in Net Assets Notes to Financial Statements (2) Depositor's Financial Statements Audited Consolidated Financial Statements dated as of December 31, 2001 and 2000, and for the three year period ended December 31, 2001, included in Part B include the following for Pacific Life: Independent Auditors' Report Consolidated Statements of Financial Condition Consolidated Statements of Operations Consolidated Statements of Stockholder's Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (b) Exhibits 1. (a) Resolution of the Board of Directors of the Depositor authorizing establishment of Separate Account A and Memorandum establishing Separate Account A./1/ (b) Memorandum Establishing Two New Variable Accounts--Aggressive Equity and Emerging Markets Portfolios./1/ (c) Resolution of the Board of Directors of Pacific Life Insurance Company authorizing conformity to the terms of the current Bylaws./1/ II-1 2. Not applicable 3. (a) Distribution Agreement between Pacific Mutual Life and Pacific Select Distributors, Inc. (PSD) /1/ (b) Form of Selling Agreement between Pacific Mutual Life, PSD and Various Broker-Dealers /1/ 4. (a) (1) Pacific Innovations - Form of Individual Flexible Premium Deferred Variable Annuity Contract (Form No. 10-12600) /1/ (2) Pacific Innovations Select - Form of Individual Flexible Premium Deferred Variable Annuity Contract (Form No. 10-13000) /5/ (b) Qualified Pension Plan Rider (Form No. R90-PEN-V) /1/ (c) 403(b) Tax-Sheltered Annuity Rider (d) Section 457 Plan Rider (Form No. 24-123799) /1/ (e) Individual Retirement Annuity Rider (Form No. 20-15400) (f) Roth Individual Retirement Annuity Rider (Form No. 20-14000) (g) SIMPLE Individual Retirement Annuity Rider (Form No. 20-15300) (h) (1) Pacific Innovations - Stepped-Up Death Benefit Rider (Form No. 20-12601) /1/ (2) Pacific Innovations Select - Stepped-Up Death Benefit Rider (Form No. 20-13500) /5/ (i) (1) Pacific Innovations - Premier Death Benefit Rider (Form No. 20-12602) /1/ (2) Pacific Innovations Select - Premier Death Benefit Rider (Form No. 20-13600) /5/ (j) Guaranteed Earnings Enhancement (EEG) Rider (Form No. 20-14900) /6/ (k) Guaranteed Income Advantage (GIA) Rider (Form No. 20-15100) /8/ (l) Form of Guaranteed Protection Advantage (GPA) Rider (Form No. 20-16200) /9/ (m) Qualified Retirement Plan Rider 5. (a) (1) Pacific Innovations - Variable Annuity Application (Form No. 25-12610) /4/ (2) Pacific Innovations Select - Variable Annuity Application (Form No. 25-13000) /5/ (b) Variable Annuity PAC APP /1/ (c) Application/Confirmation Form /2/ (d) Guaranteed Income Advantage (GIA) Rider Request (Form No. 1209-1A) /9/ (e) Form of Guaranteed Earnings Enhancement (EEG) Rider Request Application /6/ (f) Form of Guaranteed Protection Advantage (GPA) Rider Request (Form No. 55-16600) /9/ 6. (a) Pacific Life's Articles of Incorporation /1/ (b) By-laws of Pacific Life /1/ 7. Not applicable 8. (a) Fund Participation Agreement /7/ (b) Addendum to the Fund Participation Agreement (to add the Strategic Value and Focused 30 Portfolios) /7/ (c) Addendum to the Fund Participation Agreement (to add nine new Portfolios) /7/ (d) Addendum to the Fund Participation Agreement (to add the Equity Income and Research Portfolios) 9. Opinion and Consent of legal officer of Pacific Life as to the legality of Contracts being registered. /1/ II-2 10. Independent Auditors' Consent 11. Not applicable 12. Not applicable 13. (1) Pacific Innovations - Performance Calculations (2) Pacific Innovations Select - Performance Calculations 14. Not applicable 15. Powers of Attorney 16. Not applicable /1/ Included in Registrant's Form N-4, File No. 333-93059, Accession No. 0000912057-99-009849 filed on December 17, 1999 and incorporated by reference herein. /2/ Included in Registrant's Form N-4, File No. 333-93059, Accession No. 0000912057-00-015739 filed on March 31, 2000 and incorporated by reference herein. /3/ Included in Registrant's Form N-4/A, File No. 333-93059, Accession No. 0000912057-00-018010 filed on April 14, 2000 and incorporated by reference herein. /4/ Included in Registrant's Form N-4/B, File No. 333-93059, Accession No. 0000912057-00-052614 filed on December 7, 2000 and incorporated by reference herein. /5/ Included in Registrant's Form N-4/A, File No. 333-93059, Accession No. 0000912057-00-055027 filed on December 28, 2000 and incorporated by reference herein. /6/ Included in Registrant's Form N-4/A, File No. 333-93059 Accession No. 0000912057-01-007165 filed on March 2, 2001 and incorporated by reference herein. /7/ Included in Registrant's Form N-4/A, File No. 333-93059, Accession No. 0000912057-01-510459 filed on April 25, 2001 and incorporated by reference herein. /8/ Included in Registrant's Form N-4/A, File No. 333-93059, Accession No. 0001017062-01-500247 filed on May 10, 2001 and incorporated by reference herein. /9/ Included in Registrant's Form N-4/A, File No. 333-93059, Accession No. 0000898430-01-503115 filed on October 25, 2001 and incorporated by reference herein. Item 25. Directors and Officers of Pacific Life Positions and Offices Name and Address with Pacific Life Thomas C. Sutton Director, Chairman of the Board, and Chief Executive Officer Glenn S. Schafer Director and President Khanh T. Tran Director, Executive Vice President and Chief Financial Officer David R. Carmichael Director, Senior Vice President and General Counsel Audrey L. Milfs Director, Vice President and Corporate Secretary Edward R. Byrd Vice President and Controller Brian D. Klemens Vice President and Treasurer Gerald W. Robinson Executive Vice President ---------- The address for each of the persons listed above is as follows: 700 Newport Center Drive Newport Beach, California 92660 II-3 Item 26. Persons Controlled by or Under Common Control with Pacific Life or Separate Account A The following is an explanation of the organization chart of Pacific Life's subsidiaries: PACIFIC LIFE, SUBSIDIARIES & AFFILIATED ENTERPRISES LEGAL STRUCTURE Pacific Life is a California Stock Life Insurance Company wholly-owned by Pacific LifeCorp (a Delaware Stock Holding Company) which is, in turn, 99% owned by Pacific Mutual Holding Company (a California Mutual Holding Company). Pacific Life is the parent company of Pacific Asset Management LLC (a Delaware Limited Liability Company), Pacific Life & Annuity Company (an Arizona Stock Life Insurance Company), Pacific Select Distributors, Inc., and World-Wide Holdings Limited (a United Kingdom Corporation). Pacific Life also has a 50% ownership of Pacific Mezzanine Associates, L.L.C. (a Delaware Limited Liability Company). A subsidiary of Pacific Mezzanine Associates, L.L.C. is Pacific Mezzanine Investors, L.L.C., (a Delaware Limited Liability Company) who is the sole general partner of the PMI Mezzanine Fund, L.P. (a Delaware Limited Partnership). Subsidiaries of Pacific Asset Management LLC owns PMRealty Advisors Inc. and Pacific Financial Products Inc. (a Delaware Corporation) and has a non-managing membership interest in Allianz-PacLife Partners LLC ( a Delaware Limited Liability Company), Pacific Financial Products, Inc. and Allianz-PacLife Partners LLC own the Class E units of PIMCO Advisors L.P. (a Delaware Limited Partnership). Subsidiaries of Pacific Select Distributors, Inc. include: Associated Financial Group, Inc. along with its subsidiary Associated Securities Corporation; Mutual Service Corporation (a Michigan Corporation), along with its subsidiaries Advisors' Mutual Service Center, Inc. (a Michigan Corporation) and Titan Value Equities Group, Inc.; and United Planners' Group, Inc. (an Arizona Corporation), along with its subsidiary United Planners' Financial Services of America (an Arizona Limited Partnership). Subsidiaries of World-Wide Holdings Limited include: World-Wide Reassurance Company Limited (a United Kingdom Corporation) and World-Wide Reassurance Company (BVI) Limited (a British Virgin Islands Corporation). All corporations are 100% owned unless otherwise indicated. All entities are California corporations unless otherwise indicated. II-4 Item 27. Number of Contractholders (1) Pacific Innovations - Approximately 2,857 Qualified 2,546 Non Qualified (2) Pacific Innovations Select - Approximately 12,296 Qualified 10,283 Non Qualified Item 28. Indemnification (a) The Distribution Agreement between Pacific Life and Pacific Select Distributors, Inc. (PSD) provides substantially as follows: Pacific Life hereby agrees to indemnify and hold harmless PSD and its officers and directors, and employees for any expenses (including legal expenses), losses, claims, damages, or liabilities incurred by reason of any untrue statement or representation of a material fact or any omission or alleged omission to state a material fact required to be stated to make other statements not misleading, if made in reliance on any prospectus, registration statement, post-effective amendment thereof, or sales materials supplied or approved by Pacific Life or the Separate Account. Pacific Life shall reimburse each such person for any legal or other expenses reasonably incurred in connection with investigating or defending any such loss, liability, damage, or claim. However, in no case shall Pacific Life be required to indemnify for any expenses, losses, claims, damages, or liabilities which have resulted from the willful misfeasance, bad faith, negligence, misconduct, or wrongful act of PSD. PSD hereby agrees to indemnify and hold harmless Pacific Life, its officers, directors, and employees, and the Separate Account for any expenses, losses, claims, damages, or liabilities arising out of or based upon any of the following in connection with the offer or sale of the contracts: (1) except for such statements made in reliance on any prospectus, registration statement or sales material supplied or approved by Pacific Life or the Separate Account, any untrue or alleged untrue statement or representation is made; (2) any failure to deliver a currently effective prospectus; (3) the use of any unauthorized sales literature by any officer, employee or agent of PSD or Broker; (4) any willful misfeasance, bad faith, negligence, misconduct or wrongful act. PSD shall reimburse each such person for any legal or other expenses reasonably incurred in connection with investigating or defending any such loss, liability, damage, or claim. (b) The Form of Selling Agreement between Pacific Life, Pacific Select Distributors, Inc. (PSD) and Various Broker-Dealers provides substantially as follows: Pacific Life and PSD agree to indemnify and hold harmless Selling Broker-Dealer and General Agent, their officers, directors, agents and employees, against any and all losses, claims, damages or liabilities to which they may become subject under the 1933 Act, the 1934 Act, or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise II-5 out of or are based upon any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact required to be stated or necessary to make the statements made not misleading in the registration statement for the Contracts or for the shares of Pacific Select Fund (the "Fund") filed pursuant to the 1933 Act, or any prospectus included as a part thereof, as from time to time amended and supplemented, or in any advertisement or sales literature approved in writing by Pacific Life and PSD pursuant to Section IV.E. of this Agreement. Selling Broker-Dealer and General Agent agree to indemnify and hold harmless Pacific Life, the Fund and PSD, their officers, directors, agents and employees, against any and all losses, claims, damages or liabilities to which they may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (a) any oral or written misrepresentation by Selling Broker- Dealer or General Agent or their officers, directors, employees or agents unless such misrepresentation is contained in the registration statement for the Contracts or Fund shares, any prospectus included as a part thereof, as from time to time amended and supplemented, or any advertisement or sales literature approved in writing by Pacific Life and PSD pursuant to Section IV.E. of this Agreement, (b) the failure of Selling Broker-Dealer or General Agent or their officers, directors, employees or agents to comply with any applicable provisions of this Agreement or (c) claims by Sub-agents or employees of General Agent or Selling Broker-Dealer and General Agent will reimburse Pacific Life or PSD or any director, officer, agent or employee of either entity for any legal or other expenses reasonably incurred by Pacific Life, PSD, or such officer, director, agent or employee in connection with investigating or defending any such loss, claims, damages, liability or action. This indemnity agreement will be in addition to any liability which Broker-Dealer may otherwise have. II-6 Item 29. Principal Underwriters (a) PSD also acts as principal underwriter for Pacific Select Separate Account, Pacific Select Exec Separate Account, Pacific Select Variable Annuity Separate Account, Pacific Corinthian Variable Separate Account, Separate Account B, Pacific Life and Annuity Select Exec Separate Account, Pacific Life and Annuity Separate Account A, COLI Separate Account, COLI II Separate Account, COLI III Separate Account, and Pacific Select Fund. (b) For information regarding PSD, reference is made to Form B-D, SEC File No. 8-15264, which is herein incorporated by reference. (c) PSD retains no compensation or net discounts or commissions from the Registrant. Item 30. Location of Accounts and Records The accounts, books and other documents required to be maintained by Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and the rules under that section will be maintained by Pacific Life at 700 Newport Center Drive, Newport Beach, California 92660. Item 31. Management Services Not applicable Item 32. Undertakings The registrant hereby undertakes: (a) to file a post-effective amendment to this registration statement as frequently as is necessary to ensure that the audited financial statements in this registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted, unless otherwise permitted. (b) to include either (1) as a part of any application to purchase a contract offered by the prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the prospectus that the applicant can remove to send for a Statement of Additional Information, or (3) to deliver a Statement of Additional Information with the Prospectus. (c) to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request. II-7 Additional Representations (a) The Registrant and its Depositor are relying upon American Council of Life Insurance, SEC No-Action Letter, SEC Ref. No. 1P-6-88 (November 28, 1988) with respect to annuity contracts offered as funding vehicles for retirement plans meeting the requirements of Section 403(b) of the Internal Revenue Code, and the provisions of paragraphs (1)-(4) of this letter have been complied with. (b) The Registrant and its Depositor are relying upon Rule 6c-7 of the Investment Company Act of 1940 with respect to annuity contracts offered as funding vehicles to participants in the Texas Optional Retirement Program, and the provisions of Paragraphs (a)-(d) of the Rule have been complied with. (c) REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940: Pacific Life Insurance Company and Registrant represent that the fees and charges to be deducted under the Variable Annuity Contract ("Contract") described in the prospectus contained in this registration statement are, in the aggregate, reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed in connection with the Contract. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Registration Statement and has caused this Post-Effective Amendment No. 9 to the Registration Statement on Form N-4 to be signed on its behalf by the undersigned thereunto duly authorized in the City of Newport Beach, and the State of California on this 30th day of April, 2002. SEPARATE ACCOUNT A (Registrant) By: PACIFIC LIFE INSURANCE COMPANY By: -------------------------------------- Thomas C. Sutton* Chairman and Chief Executive Officer By: PACIFIC LIFE INSURANCE COMPANY (Depositor) By: -------------------------------------- Thomas C. Sutton* Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 9 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date ----------------- Director, Chairman of the Board April 30, 2002 Thomas C. Sutton* and Chief Executive Officer ----------------- Director and President April 30, 2002 Glenn S. Schafer* ----------------- Director, Executive Vice President April 30, 2002 Khanh T. Tran* and Chief Financial Officer ----------------- Director, Senior Vice President April 30, 2002 David R. Carmichael* and General Counsel ----------------- Director, Vice President and April 30, 2002 Audrey L. Milfs* Corporate Secretary ----------------- Vice President and Controller April 30, 2002 Edward R. Byrd* ----------------- Vice President and Treasurer April 30, 2002 Brian D. Klemens* ----------------- Executive Vice President April 30, 2002 Gerald W. Robinson* *By: /s/ DAVID R. CARMICHAEL April 30, 2002 ------------------------ David R. Carmichael as attorney-in-fact
(Powers of Attorney are contained in this Post-Effective Amendment No. 9 of the Registration Statement filed on Form N-4/B for Separate Account A, File No. 333- 93059, as Exhibit 15.) II-9