As filed with the SEC on April 28, 1997 Registration No. 33-61143
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
POST-EFFECTIVE AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PRUCO LIFE INSURANCE COMPANY
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(Exact Name of Registrant)
ARIZONA
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(State or other jurisdiction of incorporation or organization)
6311
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(Primary Standard Industrial Classification Code Number)
22-194455
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(I.R.S. Employer Identification Number)
c/o PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(800) 445-4571
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(Address and telephone number of principal executive offices)
THOMAS C. CASTANO
ASSISTANT SECRETARY
PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(800) 445-4571
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(Name, address, and telephone number of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
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<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM S-1)
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S-1 ITEM NUMBER AND CAPTION LOCATION
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<S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus .......... Cover
2. Inside Front and Outside Back Cover
Pages of Prospectus ................................. Inside Front Cover
3. Summary Information, Risk Factors and ............... Cover; Brief Description Of The Contract; Charges, Fees
Ratio of Earnings to Fixed Charges and Deductions
4. Use of Proceeds ..................................... The Interest-Rate Investment Options and Investments by
Pruco Life
5. Determination of Offering Price ..................... Not applicable
6. Dilution ............................................ Not applicable
7. Selling Security Holders ............................ Not applicable
8. Plan of Distribution ................................ Sale of the Contract and Sales Commissions
9. Description of Securities to be Registered .......... Cover; Pruco Life Insurance Company; Charges, Fees and
Deductions; Voting Rights
10. Interests of Named Experts and Counsel .............. Not applicable
11. Information with Respect to the Registrant .......... The Pruco Life Insurance Company; Litigation; Financial
Statements; State Regulation; Federal Tax Status;
Directors and Officers; Executive Compensation
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities ..................................... Part II, Item 14
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PART I
INFORMATION REQUIRED IN PROSPECTUS
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May 1, 1997
PROFILE
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P R U C O L I F E I N S U R A N C E C O M P A N Y
DISCOVERY PREFERRED VARIABLE ANNUITY CONTRACT
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This Profile is a summary of some of the more important points that you should
know and consider before purchasing the Contract. The Contract is more fully
described in the full prospectus which accompanies this Profile. Please read the
prospectus carefully.
1. THE DISCOVERY PREFERRED VARIABLE ANNUITY.
The Discovery Preferred Variable Annuity is a contract between you and Pruco
Life Insurance Company that uses investment portfolios which accumulate cash
value on a tax-deferred basis. This allows the variable annuity to combine the
advantages of a tax-deferred investment with the flexibility and versatility of
professionally managed portfolios to meet your long-term financial goals, such
as retirement. Tax deferral simply means that you do not pay taxes on your
investments' income, dividends and capital gains each year; instead taxes are
due when you take withdrawals or otherwise receive funds from the annuity.
Tax-deferred compounding can grow your assets faster than they would in a
similar taxable investment. In addition, your family receives the added
protection of a guaranteed death benefit.
The Discovery Preferred Variable Annuity offers a diverse selection of variable
investment options. Amounts that you allocate to a variable investment option
will fluctuate in response to market forces. You can also select a fixed-rate
option with a stipulated rate of interest for one year or a market-value
adjustment option which guarantees a stipulated rate of interest if held for a
seven year period. If you make a withdrawal or transfer prior to the maturity
date of a market-value adjustment option, the value will be adjusted up or down
or not at all, depending upon the difference in interest rates between the date
when funds were allocated to the option and the date of the withdrawal or
transfer.
The Discovery Preferred Contract, like all deferred annuity contracts, has two
phases: the accumulation phase and the income phase. During the accumulation
phase, you invest money in your Contract and earnings accumulate on a
tax-deferred basis. Your earnings are based on the investment performance of the
variable investment options and/or the interest rate earned on the fixed
investment options to which your money is allocated. During the income phase you
receive regular payments from your Contract. Among other factors, the growth of
your Contract during the accumulation phase will determine the amount or
duration of your payments during the income phase.
The automated withdrawal feature enables you to set up a regular income schedule
on a monthly, quarterly, semiannual or annual basis without annuitizing your
Contract. Of course, withdrawals are subject to tax and a 10% federal tax
penalty may apply if you are under age 59-1/2.
2. PAYOUT PROVISIONS.
If you want to receive regular income from your Contract, you can choose one of
these options: (1) equal installments for a fixed period; (2) monthly payments
for your life with 120 payments certain; or (3) we will hold an amount at a
stated interest rate and pay the interest annually, semi-annually, quarterly or
monthly. The interest payment option is not available for Contracts sold in
connection with individual retirement annuities ("IRAs").
During the income phase you can only choose the above options to be payable on a
fixed basis. Once you begin receiving regular payments, you cannot change your
payment plan.
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PROFILE
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P R U C O L I F E I N S U R A N C E C O M P A N Y
DISCOVERY PREFERRED VARIABLE ANNUITY CONTRACT
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3. PURCHASING A DISCOVERY PREFERRED ANNUITY.
You can buy a Contract through your financial representative who can also help
you complete the proper forms. You can buy a Contract with $10,000 or more.
Additional payments of $1,000 or more may also be made during the accumulation
phase. Restrictions apply to IRA Contracts.
4. INVESTMENT OPTIONS.
You can put your money in any or all of the investment options listed below.
THE PRUDENTIAL SERIES FUND, INC.
Advised by: Prudential Investment Corporation
Money Market Portfolio
Diversified Bond Portfolio
Conservative Balanced Portfolio
Flexible Managed Portfolio
High Yield Bond Portfolio
Stock Index Portfolio
Equity Income Portfolio
Equity Portfolio
Prudential Jennison Portfolio (a growth Portfolio)
Small Capitalization Stock Portfolio
Global Portfolio
Natural Resources Portfolio
Depending upon market fluctuations, you can make or lose money in any of these
portfolios.
You may also allocate money to the one year fixed-rate option which guarantees a
stipulated rate of interest for a one-year period or to the Market-Value
Adjustment (the "MVA") option which guarantees a stipulated rate of interest if
held for a seven year period.
Each time you allocate or transfer money into either the fixed-rate option or
the MVA option a new interest cell is established. The interest rate for an
interest cell within the fixed-rate option is guaranteed for one year. During
the interest rate period the value of each interest cell within the MVA option
varies with changes in interest rates in the same way that the value of a bond
changes. For example, if interest rates have risen since the interest cell was
established, its value will have decreased. If you make a withdrawal or transfer
prior to the end of the interest cell, the value of the MVA option will be
adjusted up or down or not at all, depending upon the difference in the interest
rates between the date when the interest cell was established and the date of
withdrawal or transfer.
5. EXPENSES.
The Discovery Preferred Contract has the following cost-related product features
outlined below.
Although there is no current intention to do so, we may impose an additional
administrative charge of up to $25 on each Contract anniversary and at the time
of a full withdrawal for Contracts of less
2
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PROFILE
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P R U C O L I F E I N S U R A N C E C O M P A N Y
DISCOVERY PREFERRED VARIABLE ANNUITY CONTRACT
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than $50,000. We deduct insurance charges which total 1.40% annually of the
average daily value of your Contract allocated to the variable investment
options. There are also investment charges imposed on Contracts with money
allocated to the variable investment options which in fiscal year 1996 ranged
from 0.40% to 0.92% annually of the average daily value of the investment
portfolio. If applicable, you may be assessed a state premium tax which ranges
from 0% to 5%, depending upon the state and whether the Contract is
non-qualified or issued in connection with an IRA.
If you withdraw money in excess of the free withdrawal amount allowed in the
Contract during the first 7 years of the Contract, a withdrawal charge is
assessed. The charge is based upon the amount withdrawn and starts with 7% in
the first year and decreases 1% each year until in the 8th and later years there
is no charge.
The following chart will help you understand the charges in the Contract. The
column "Total Annual Charges" shows the 1.40% insurance charges and the
investment charges for each variable investment option, but does not reflect the
possible $25 additional administrative charge. The next two columns show you
examples of the charges, in dollars, you would pay under a Contract. The
examples assume that you invested $1,000 in a Contract which earns 5% annually
and that you withdraw your money (1) at the end of year 1, and (2) at the end of
year 10. For year 1, the Total Annual Charges are assessed as well as the
withdrawal charges. For year 10, the examples show the aggregate of all the
annual charges assessed for the 10 years with no withdrawal charge. The premium
tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
| TOTAL TOTAL
| ANNUAL ANNUAL
TOTAL TOTAL | CHARGES CHARGES
ANNUAL ANNUAL TOTAL | AT END OF AT END OF
INSURANCE PORTFOLIO ANNUAL | 1 YEAR 10 YEARS
PORTFOLIO CHARGES CHARGES CHARGES | (1) (2)
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<S> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC. |
Money Market 1.40 .44 1.84 | $81 $212
Diversified Bond 1.40 .45 1.85 | $82 $214
Conservative Balanced 1.40 .59 1.99 | $83 $228
Flexible Managed 1.40 .64 2.04 | $83 $233
High Yield Bond 1.40 .63 2.03 | $83 $232
Stock Index 1.40 .40 1.80 | $81 $208
Equity Income 1.40 .45 1.85 | $82 $214
Equity 1.40 .50 1.90 | $82 $219
Prudential Jennison 1.40 .66 2.06 | $84 $236
Small Capitalization Stock 1.40 .56 1.96 | $83 $225
Global 1.40 .92 2.32 | $86 $262
Natural Resources 1.40 .52 1.92 | $82 $221
</TABLE>
The portfolio charges reflect any expense reimbursement or fee waiver that
may be in effect. For more detailed information, see the Fee Table in the
Prospectus for the Contract.
3
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PROFILE
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P R U C O L I F E I N S U R A N C E C O M P A N Y
DISCOVERY PREFERRED VARIABLE ANNUITY CONTRACT
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6. TAXES.
Earnings in your Contract are tax-deferred until you take them out. In addition,
if money is taken out before age 59-1/2, there may be a 10% tax penalty assessed
on the amount that is deemed to be income. In general, for tax purposes, if you
take money out, earnings are deemed to be taken out first and are taxed as
income. For Contracts sold in connection with IRAs, the entire distribution
amount is generally considered taxable income.
7. ACCESS TO YOUR MONEY.
You can take money out at any time during the accumulation phase. Each year you
can take up to 10% of your total purchase payments without any charge plus any
charge-free amount still available from the immediately preceding Contract year.
If you withdraw money in excess of the free withdrawal amount, a percentage of
the amount you withdraw may be assessed a decreasing withdrawal charge during
the first seven Contract years (7%-6%-5%-4%-3%-2%-1%-0%). This charge will be
waived for payment of the death benefit and under the Critical Care Access
provision of the Contract, if applicable. A withdrawal may be subject to income
tax and to a tax penalty.
8. PERFORMANCE.
The value of the Contract will fluctuate depending upon the performance of the
investment option(s) you choose. From time to time, we may advertise total
return figures for each variable investment option. The following chart shows
total returns for each investment option for calendar year 1996. These numbers
reflect the insurance charges, the administrative fees, investment charges, and
all other expenses of the investment portfolio. These numbers do not reflect any
withdrawal charges and if such charges were applied, performance would be lower.
Past performance is not a guarantee of future results.
PORTFOLIO CALENDAR YEAR 1996
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Diversified Bond 2.95%
Conservative Balanced 11.07%
Flexible Managed 12.06%
High Yield Bond 9.85%
Stock Index 20.87%
Equity Income 20.05%
Equity 16.88%
Prudential Jennison 12.83%
Small Capitalization Stock 18.11%
Global 18.04%
Natural Resources 29.06%
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1996 were 3.79% and 3.87% respectively.
4
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PROFILE
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P R U C O L I F E I N S U R A N C E C O M P A N Y
DISCOVERY PREFERRED VARIABLE ANNUITY CONTRACT
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9. DEATH BENEFIT.
If you die during the accumulation phase, the person you have chosen as the
beneficiary will receive a death benefit. The death benefit will be the greatest
of three amounts: (1) the money you have put in the Contract less any money you
have taken out including the related withdrawal charges; (2) the value of your
Contract as of the date of due proof of death; and (3) the greatest value of
your Contract calculated on every third Contract anniversary reduced by
all subsequent withdrawals and withdrawal charges. The death benefit will be
subject to tax.
10. OTHER INFORMATION.
Free Look. You may return your Contract for a refund within 10 days after you
receive it. Some states allow a longer period of time during which a Contract
may be returned for a refund. Simply deliver or mail the Contract to the
Prudential Annuity Service Center or to the representative who sold it to you.
We will return your money or Contract value in accordance with applicable law
and the Contract will be canceled. Special rules apply for Contracts issued in
connection with IRAs.
Dollar Cost Averaging. Dollar Cost Averaging allows you to have a regular amount
of money automatically transferred from the fixed-rate option or one of the
variable investment options into one or more variable investment options.
Auto-Rebalancing. Auto-rebalancing will help keep your investment in line with
the investment mix you selected. We will maintain your allocation mix by
adjusting your money between the selected variable investment options based on
the percentage allocations that you choose. This will be done at specified
intervals as elected by you.
Critical Care Access. Under certain circumstances, we will waive any
administrative and withdrawal charges if you need to access your money while
confined to a nursing home or hospital, or if you become terminally ill.
11. INQUIRIES.
If you need more information, please contact us at:
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
(800) 445-4571
If you need Contract owner services (such as changes in Contract
information, inquiries about Contract values, or to elect or modify
Contract options) please contact us at:
PRUDENTIAL ANNUITY SERVICE CENTER
300 Columbus Circle
Edison, New Jersey 08837
1-888-PRU-2888 (toll free)
5
<PAGE>
PROSPECTUS
MAY 1, 1997
PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
VARIABLE ANNUITY CONTRACTS
PRUCO LIFE MARKET-VALUE ADJUSTMENT ANNUITY CONTRACTS
DISCOVERY PREFERRED
This prospectus describes the DISCOVERY PREFERRED(SM) Annuity Contract*, an
individual variable annuity contract offered by Pruco Life Insurance Company
("Pruco Life", "we" or "us"), a stock life insurance company that is a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential").
The Contract is purchased by making an initial payment of $10,000 or more.
Additional payments of $1,000 or more may also be made. Following the deduction
for any applicable taxes, the purchase payments may be allocated as you direct
in one or more of the following ways.
o They may be allocated to one or more of twelve subaccounts, each of which
invests in a corresponding portfolio of The Prudential Series Fund, Inc.
(the "Series Fund").
o They may be allocated to a fixed-rate option which guarantees a stipulated
rate of interest for a one year period.
o They may be allocated to a market-value adjustment option which guarantees
a stipulated rate of interest if held for a seven year period. The
market-value adjustment option is not available to residents of Maryland,
Oregon and Washington.
The value allocated to the subaccounts will vary daily with the investment
performance of those accounts. If amounts allocated to a market-value adjustment
option are withdrawn or transferred prior to the expiration of the interest rate
period, the contract value will be subject to a Market-Value Adjustment, which
could result in receipt of more or less than the original amount allocated to
that option. On the annuity date, the amount credited under the Contract will be
applied to effect a fixed-dollar annuity. Upon annuitization, your participation
in the investment options ceases. Prior to that annuity date, you may withdraw
in whole or in part the cash value of the Contract.
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This prospectus provides information a prospective investor should know before
investing. Additional information about the Contract has been filed with the
U.S. Securities and Exchange Commission in a Statement of Additional
Information, dated May 1, 1997, which information is incorporated herein by
reference, and is available without charge upon written request to Pruco Life
Insurance Company, 213 Washington Street, Newark, New Jersey 07102-2992, or by
telephoning (800) 445-4571.
The attached prospectus for the Series Fund and its statement of additional
information describe the investment objectives and risks of investing in the
portfolios. Additional portfolios and subaccounts may be offered in the future.
The Contents of the Statement of Additional Information appear on page 20 of
this prospectus.
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PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PRUCO LIFE INSURANCE COMPANY PRUDENTIAL ANNUITY SERVICE CENTER
213 Washington Street 300 Columbus Circle
Newark, New Jersey 07102-2992 Edison, NJ 08837
Telephone: (800) 445-4571 Telephone: 1-(888) PRU-2888 (toll free)
*DISCOVERY PREFERRED is a service mark of Prudential.
DISCOP-1 Ed 5-97
Cat. No. 64M630L
<PAGE>
PROSPECTUS CONTENTS
PAGE
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DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ..................... 1
FEE TABLE ................................................................ 2
GENERAL INFORMATION ABOUT PRUCO LIFE, THE PRUCO LIFE FLEXIBLE
PREMIUM VARIABLE ANNUITY ACCOUNT, AND THE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT ............................................ 5
PRUCO LIFE INSURANCE COMPANY .......................................... 5
PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT .................. 5
THE PRUDENTIAL SERIES FUND, INC ....................................... 5
THE INTEREST-RATE INVESTMENT OPTIONS AND INVESTMENTS BY PRUCO LIFE .... 6
DETAILED INFORMATION ABOUT THE CONTRACT .................................. 6
REQUIREMENTS FOR ISSUANCE OF A CONTRACT ............................... 6
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ......................... 7
ALLOCATION OF PURCHASE PAYMENTS ....................................... 7
CASH VALUE ............................................................ 7
GUARANTEED INTEREST RATE PERIODS ...................................... 7
WHAT HAPPENS WHEN AN INTEREST CELL REACHES ITS MATURITY DATE? ......... 7
TRANSFERS ............................................................. 8
DOLLAR COST AVERAGING ................................................. 8
AUTO-REBALANCING ...................................................... 8
WITHDRAWALS ........................................................... 9
AUTOMATED WITHDRAWALS ................................................. 9
MARKET-VALUE ADJUSTMENT ............................................... 9
DEATH BENEFIT ......................................................... 10
VALUATION OF A CONTRACT OWNER'S CONTRACT FUND ......................... 10
CHARGES, FEES AND DEDUCTIONS ............................................. 10
PREMIUM TAXES AND TAXES ATTRIBUTABLE TO PURCHASE PAYMENTS ............. 10
ADMINISTRATIVE CHARGE ................................................. 11
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS ....................... 11
EXPENSES INCURRED BY THE SERIES FUNDS ................................. 11
WITHDRAWAL CHARGE ..................................................... 11
TRANSACTION CHARGE .................................................... 12
CRITICAL CARE ACCESS .................................................. 12
FEDERAL TAX STATUS ....................................................... 12
DIVERSIFICATION AND INVESTOR CONTROL .................................. 12
TAXES PAYABLE BY CONTRACT OWNERS ...................................... 12
WITHHOLDING ........................................................... 13
IMPACT OF FEDERAL INCOME TAXES ........................................ 14
CONTRACTS USED IN CONNECTION WITH TAX FAVORED PLANS ................... 14
IRAS .................................................................. 14
SEPS .................................................................. 15
SIMPLE-IRAS ........................................................... 15
TDAS .................................................................. 15
MINIMUM DISTRIBUTION OPTION ........................................... 16
TAXES ON PRUCO LIFE ................................................... 16
PAYOUT PROVISIONS ........................................................ 16
1. ANNUITY PAYMENTS FOR A FIXED PERIOD ................................ 17
2. LIFE ANNUITY WITH 120 PAYMENTS CERTAIN ............................. 17
3. INTEREST PAYMENT OPTION ............................................ 17
4. OTHER ANNUITY OPTIONS .............................................. 17
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT ANNUITY PURCHASE RATES .. 17
<PAGE>
PAGE
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OTHER INFORMATION ........................................................ 18
REQUIRED DISTRIBUTIONS ON DEATH OF OWNER .............................. 18
MISSTATEMENT OF AGE OR SEX ............................................ 18
SALE OF THE CONTRACT AND SALES COMMISSIONS ............................ 18
VOTING RIGHTS ......................................................... 18
SUBSTITUTION OF SERIES FUND SHARES .................................... 19
OWNERSHIP OF THE CONTRACT ............................................. 19
PERFORMANCE INFORMATION ............................................... 19
REPORTS TO CONTRACT OWNERS ............................................ 19
STATE REGULATION ...................................................... 19
EXPERTS ............................................................... 20
LITIGATION ............................................................ 20
STATEMENT OF ADDITIONAL INFORMATION ................................... 20
ADDITIONAL INFORMATION ................................................ 20
FINANCIAL STATEMENTS .................................................. 20
ACCUMULATION UNIT VALUE .................................................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................. 23
DIRECTORS AND OFFICERS ................................................... 24
EXECUTIVE COMPENSATION ................................................... 26
FINANCIAL STATEMENTS OF THE PRUCO LIFE FLEXIBLE PREMIUM
VARIABLE ANNUITY ACCOUNT ............................................... A-1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY
AND SUBSIDIARIES ....................................................... B-1
MARKET-VALUE ADJUSTMENT FORMULA .......................................... C-1
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS
PROSPECTUS
ACCOUNT--See the Pruco Life Flexible GUARANTEED INTEREST RATE--The
Premium Variable Annuity Account (the effective annual interest rate
"Account"), below. credited during the interest rate
period.
ANNUITANT--The person or persons,
designated by the Contract owner, INTEREST CELL--A division of the
upon whose life or lives monthly interest-rate investment options
annuity payments are based after an which is established whenever you
annuity is effected. allocate or transfer money into an
interest-rate investment option. The
ANNUITY CONTRACT--A contract designed amount in the interest cell is
to provide an annuitant with an credited with a guaranteed interest
income, which may be a lifetime rate, declared in advance by Pruco
income, beginning on the annuity Life and never less than 3%, if held
date. for the duration of the cell's
interest rate period.
ANNUITY DATE--The date, specified in
the Contract, when annuity payments INTEREST-RATE INVESTMENT OPTIONS--The
begin. fixed-rate option and the
market-value adjustment option.
CASH VALUE--The surrender value of
the Contract, which equals the INTEREST RATE PERIOD--The period for
Contract Fund plus or minus any which the guaranteed interest rate is
Market-Value Adjustments less any credited.
withdrawal charge and any
administrative charge due upon MARKET-VALUE ADJUSTMENT--If amounts
surrender. are withdrawn or transferred from a
market-value adjustment option before
CHARGE-FREE AMOUNT--The amount of the end of the interest rate period,
your Contract Fund that is not a Market-Value Adjustment will occur.
subject to a withdrawal charge. A Market-Value Adjustment may result
in an increase, decrease or no change
CONTRACT ANNIVERSARY--The same day in the value of the money that was in
and month as the Contract date in the interest cell. For the formula
each later year. used to calculate the adjustment, see
MARKET-VALUE ADJUSTMENT FORMULA, on
CONTRACT DATE--The date Pruco Life page C1.
received the initial purchase payment
and certain required documentation.
CONTRACT FUND--The total value MARKET-VALUE ADJUSTMENT OPTION ("MVA
attributable to a specific Contract OPTION")--An interest-rate investment
representing amounts invested in all option subject to a Market-Value
the subaccounts and in the Adjustment.
interest-rate investment options.
THE PRUCO LIFE FLEXIBLE PREMIUM
CONTRACT OWNER--You. A person who VARIABLE ANNUITY ACCOUNT (THE
purchases a DISCOVERY PREFERRED(SM) "ACCOUNT")--A separate account of
Contract and makes the purchase Pruco Life registered as a unit
payments. The Contract may be owned investment trust under the Investment
by joint owners. An owner will Company Act of 1940.
usually also be an annuitant, but
need not be. An owner has all rights THE PRUDENTIAL SERIES FUND, INC. (THE
in the Contract before the annuity "SERIES FUND")--A series mutual fund
date. Subject to certain limitations with separate portfolios, one or more
and requirements described in this of which may be chosen as an
prospectus, these rights include the underlying investment for the
right to make withdrawals or Contract.
surrender the Contract, to designate
and change the beneficiaries who will SUBACCOUNT--A division of the
receive the proceeds at the death of Account, the assets of which are
the annuitant before the annuity invested in shares of the
date, to transfer funds among the corresponding portfolio of the Series
investment options, and to designate Fund.
a mode of settlement for the
annuitant on the annuity date. VALUATION PERIOD--The period of time
from one determination of the value
CONTRACT YEAR--A year that starts on of the amount invested in a
the Contract date or on a Contract subaccount to the next. Such
anniversary. determinations are made when the net
asset values of the portfolios are
FIXED-RATE OPTION--An investment calculated, which is generally at
option under which Pruco Life credits 4:15 p.m. New York City time on each
interest to the amount allocated at a day during which the New York Stock
guaranteed interest rate periodically Exchange is open.
declared in advance by Pruco Life but
not less than 3%. VARIABLE INVESTMENT OPTIONS--The
subaccounts.
1
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FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Purchase Payments .............................. None
Maximum Withdrawal Charge:
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| THE WITHDRAWAL CHARGE WILL BE EQUAL
FOR WITHDRAWALS DURING THE CONTRACT | TO THE FOLLOWING PERCENTAGE OF THE
YEAR INDICATED | AMOUNT WITHDRAWN*
- ---------------------------------------|---------------------------------------
First Contract Year | 7%
Second Contract Year | 6%
Third Contract Year | 5%
Fourth Contract Year | 4%
Fifth Contract Year | 3%
Sixth Contract Year | 2%
Seventh Contract Year | 1%
Eighth and Subsequent Contract Years | No Charge
- -------------------------------------------------------------------------------
* The withdrawal charge is not imposed on any charge-free withdrawal amounts,
withdrawals made under Critical Care Access, see page 12, or any amount used to
provide income under the Life Annuity with 120 Payments Certain Option. There
will be a reduction in such withdrawal charge in the case of contracts issued to
Contract owners issue age 84 and older.
Annual Contract Fee and Fee upon Full Withdrawal ...................... None**
** We reserve the right to impose such a charge in the future, but not more than
$25. If made, it will be apportioned over all the accounts making up the
Contract Fund as of the effective date of that deduction. Amounts apportioned to
the two interest-rate investment options will reduce the interest cells on a
FIFO (first in/first out) basis determined by the age of the cell. The charge
will not be made upon withdrawals under Critical Care Access or if the Contract
Fund is $50,000 or more.
TRANSFER CHARGE
Imposed only for transfers in excess of twelve transfers in a
Contract year
(excluding transfers in connection with Dollar Cost Averging
and Auto-Rebalancing) ................................................ $25
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE CONTRACT FUND)
ALL SUBACCOUNTS
---------------
Mortality and Expense Risk Charge .................... 1.25%
Administrative Fee ................................... 0.15%
-----
Total Separate Account Annual Expenses ............... 1.40%
=====
THE PRUDENTIAL SERIES FUND, INC. ANNUAL EXPENSES
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
HIGH
MONEY DIVERSIFIED CONSERVATIVE FLEXIBLE YIELD STOCK
MARKET BOND BALANCED MANAGED BOND INDEX
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Management Fee ........... .40% .40% .55% .60% .55% .35%
Other Expenses ...................... .04% .05% .04% .04% .08% .05%
--- --- --- --- --- ---
Total Series Fund Annual Expenses ... .44% .45% .59% .64% .63% .40%
=== === === === === ===
<CAPTION>
SMALL
EQUITY PRUDENTIAL CAPITALIZATION NATURAL
INCOME EQUITY JENNISON STOCK GLOBAL RESOURCES
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Management Fee ........... .40% .45% .60% .40% .75% .45%
Other Expenses ...................... .05% .05% .06% .16% .17% .07%
--- --- --- --- --- ---
Total Series Fund Annual Expenses ... .45% .50% .66% .56% .92% .52%
=== === === === === ===
</TABLE>
2
<PAGE>
The purpose of the foregoing tables is to assist Contract owners in
understanding the expenses of the Pruco Life Flexible Premium Variable Annuity
Account and The Prudential Series Fund, Inc. that they bear, directly or
indirectly. See the sections on charges in this prospectus and the attached
prospectus for the Series Fund. The above tables do not include any taxes
attributable to purchase payments nor any premium taxes. Currently, there is no
deduction for such taxes at the time purchase payments are made, but in some
states, a deduction is made when an annuity is effected.
Except for the Global Portfolio, Prudential reimburses a portfolio when its
ordinary operating expenses, excluding taxes, interest, and brokerage
commissions exceed 0.75% of the portfolio's average daily net assets. The
amounts listed for the portfolios under "Other Expenses" are based on amounts
incurred in the last fiscal year.
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate the cumulative dollar amount of all the above
expenses that would be incurred on each $1,000 of your investment.
o The examples assume a consistent 5% annual return on invested assets;
o The examples do not take into consideration any taxes attributable to
purchase payments nor any premium taxes which may be payable at the time of
annuitization or at the time of purchase payments;
For a term less than 10 years, the expenses shown in Table I describe applicable
charges for the withdrawal of your entire Contract Fund or if you use your
Contract Fund to effect an annuity assuming, in each case, that your Contract
Fund is invested entirely in the designated portfolio. THE EXAMPLES SHOULD NOT
BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES
INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
3
<PAGE>
TABLE I
- -------
If you withdraw your entire Contract Fund just prior to the end of the
applicable time period or if you use your Contract Fund to effect an annuity at
the end of the applicable time period, you would pay the following cumulative
expenses on each $1,000 invested. (Note: The 1, 3 and 5 Year columns reflect the
imposition of the withdrawal charge; however, if you choose certain annuity
options after the first year this charge will not be made. Where this is the
case, the expenses shown in Table II below would be applicable. See WITHDRAWAL
CHARGE, on page 11.)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
MONEY MARKET PORTFOLIO ................. $ 81 $ 92 $113 $212
DIVERSIFIED BOND PORTFOLIO ............. $ 82 $ 92 $114 $214
CONSERVATIVE BALANCED PORTFOLIO ........ $ 83 $ 97 $121 $228
FLEXIBLE MANAGED PORTFOLIO ............. $ 83 $ 98 $123 $233
HIGH YIELD BOND PORTFOLIO .............. $ 83 $ 98 $123 $232
STOCK INDEX PORTFOLIO .................. $ 81 $ 91 $111 $208
EQUITY INCOME PORTFOLIO ................ $ 82 $ 92 $114 $214
EQUITY PORTFOLIO ....................... $ 82 $ 94 $116 $219
PRUDENTIAL JENNISON PORTFOLIO .......... $ 84 $ 99 $124 $236
SMALL CAPITALIZATION STOCK PORTFOLIO ... $ 83 $ 96 $119 $225
GLOBAL PORTFOLIO ....................... $ 86 $106 $137 $262
NATURAL RESOURCES PORTFOLIO ............ $ 82 $ 94 $117 $221
TABLE II
- --------
If you do not withdraw any portion of your Contract Fund as of the end of the
applicable time period, you would pay the following cumulative expenses on each
$1,000 invested.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
MONEY MARKET PORTFOLIO ................. $ 18 $ 57 $ 98 $212
DIVERSIFIED BOND PORTFOLIO ............. $ 19 $ 57 $ 99 $214
CONSERVATIVE BALANCED PORTFOLIO ........ $ 20 $ 62 $106 $228
FLEXIBLE MANAGED PORTFOLIO ............. $ 20 $ 63 $108 $233
HIGH YIELD BOND PORTFOLIO .............. $ 20 $ 63 $108 $232
STOCK INDEX PORTFOLIO .................. $ 18 $ 56 $ 96 $208
EQUITY INCOME PORTFOLIO ................ $ 19 $ 57 $ 99 $214
EQUITY PORTFOLIO ....................... $ 19 $ 59 $101 $219
PRUDENTIAL JENNISON PORTFOLIO .......... $ 21 $ 64 $109 $236
SMALL CAPITALIZATION STOCK PORTFOLIO ... $ 20 $ 61 $104 $225
GLOBAL PORTFOLIO ....................... $ 23 $ 71 $122 $262
NATURAL RESOURCES PORTFOLIO ............ $ 19 $ 59 $102 $221
Notice that in both of the above tables, the level of cumulative charges is
identical for the 10 year column. This is because at that point there are no
withdrawal charges taken by Pruco Life upon surrender or annuitization.
The required table of accumulation unit values, which sets out certain
historical information about the value of interests in each subaccount, appears
in the Appendix to this prospectus on page 21.
4
<PAGE>
GENERAL INFORMATION ABOUT PRUCO LIFE,
THE PRUCO LIFE FLEXIBLE PREMIUM
VARIABLE ANNUITY ACCOUNT, AND THE
INVESTMENT OPTIONS AVAILABLE UNDER THE
CONTRACT
PRUCO LIFE INSURANCE COMPANY
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company,
organized in 1971 under the laws of the State of Arizona. Pruco Life is licensed
to sell life insurance and annuities in the District of Columbia, Guam, and in
all states except New York. Pruco Life is a wholly-owned subsidiary of
Prudential, a mutual insurance company founded in 1875 under the laws of the
State of New Jersey. As of December 31, 1996, Prudential has invested over $442
million in Pruco Life in connection with Pruco Life's organization and
operation. Prudential intends from time to time to make additional capital
contributions to Pruco Life as needed to enable it to meet its reserve
requirements and expenses in connection with its business. Prudential is under
no obligation to make such contributions and its assets do not back the benefits
payable under the Contract. Pruco Life's consolidated financial statements
appear on page B1 and should be considered only as bearing upon Pruco Life's
ability to meet its obligations under the Contracts.
PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
The Pruco Life Flexible Premium Variable Annuity Account (the "Account") was
established on June 16, 1995 under Arizona law as a separate investment account.
The Account meets the definition of a "separate account" under federal
securities laws. Pruco Life is the legal owner of the assets in the Account and
is obligated to provide all benefits under the Contracts. Pruco Life will at all
times maintain assets in the Account with a total market value at least equal to
the reserve and other liabilities relating to the variable benefits attributable
to the Account. These assets are segregated from all of Pruco Life's other
assets and may not be charged with liabilities which arise from any other
business Pruco Life conducts. In addition to these assets, the Account's assets
may include funds contributed by Pruco Life to commence operation of the Account
and may include accumulations of the charges Pruco Life makes against the
Account. From time to time these additional assets will be transferred to Pruco
Life's general account. Before making any such transfer, Pruco Life will
consider any possible adverse impact the transfer might have on the Account.
The Account is registered with the U.S. Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit
investment trust, which is a type of investment company. This does not involve
any supervision by the SEC of the management or investment policies or practices
of the Account. For state law purposes, the Account is treated as a part or
division of Pruco Life. There are currently twelve subaccounts within the
Account, each of which invests in corresponding portfolios of the Series Fund.
Additional subaccounts may be added in the future. The Account's financial
statements begin on page A1.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. is registered under the 1940 Act as an open-end
diversified management investment company. Its shares are currently sold only to
separate accounts of Prudential and certain other subsidiary insurers that offer
variable life insurance and variable annuity contracts. The Account will
purchase and redeem shares from the Series Fund at net asset value. Shares will
be redeemed to the extent necessary for Pruco Life to provide benefits under the
Contract and to transfer assets from one subaccount to another, as requested by
Contract owners. Any dividend or capital gain distribution received from a
portfolio of the Series Fund will be reinvested immediately at net asset value
in shares of that portfolio and retained as assets of the corresponding
subaccount.
Prudential is the investment advisor for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is Prudential Plaza,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary The Prudential Investment Corporation ("PIC"), which
provides that, subject to Prudential's supervision, PIC will furnish investment
advisory services in connection with the management of the Series Fund. In
addition, Prudential has entered into a Subadvisory Agreement with its
wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio. Further detail is provided in
the prospectus and statement of additional information for the Series Fund.
Prudential, PIC and Jennison are registered as investment advisors under the
Investment Advisers Act of 1940.
5
<PAGE>
As an investment advisor, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. The following table shows the
investment management fee charged for each portfolio of the Series Fund
available for investment by Contract owners.
- --------------------------------------------------------------------------------
| ANNUAL INVESTMENT
| MANAGEMENT FEE AS
PORTFOLIO | A PERCENTAGE OF AVERAGE
| DAILY NET ASSETS
- ------------------------------------------------|-------------------------------
MONEY MARKET PORTFOLIO | 0.40%
DIVERSIFIED BOND PORTFOLIO | 0.40%
CONSERVATIVE BALANCED PORTFOLIO | 0.55%
FLEXIBLE MANAGED PORTFOLIO | 0.60%
HIGH YIELD BOND PORTFOLIO | 0.55%
STOCK INDEX PORTFOLIO | 0.35%
EQUITY INCOME PORTFOLIO | 0.40%
EQUITY PORTFOLIO | 0.45%
PRUDENTIAL JENNISON PORTFOLIO | 0.60%
SMALL CAPITALIZATION STOCK PORTFOLIO | 0.40%
GLOBAL PORTFOLIO | 0.75%
NATURAL RESOURCES PORTFOLIO | 0.45%
- --------------------------------------------------------------------------------
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's Board of Directors intends to monitor events in
order to identify any material conflict between variable life insurance and
variable annuity contract owners and to determine what action, if any, should be
taken in response thereto. Material conflicts could result from such things as:
(1) changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any portfolio of the Series Fund; or (4)
differences between voting instructions given by variable life insurance and
variable annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN--INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO, AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF ADDITIONAL INFORMATION,
WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE
THAT THE INVESTMENT OBJECTIVES WILL BE MET.
THE INTEREST-RATE INVESTMENT OPTIONS AND INVESTMENTS BY PRUCO LIFE
Purchase payments invested in the interest-rate investment options do not result
in participation in the investment gains or losses of any designated portfolio
of investments as is the case for payments invested in the variable investment
options. The amounts invested in the interest-rate investment options are
credited with interest at rates guaranteed by Pruco Life. All of Pruco Life's
assets stand behind those guarantees.
Assets of Pruco Life must be invested in accordance with requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
DETAILED INFORMATION ABOUT THE CONTRACT
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum initial purchase payment is $10,000. Any purchase payments in excess
of $2 million require prior approval of Pruco Life. The Contract may generally
be issued on proposed annuitants below the age of 86. Contracts purchased in
connection with Individual Retirement Annuity plans (IRAs) will generally be
issued to annuitants below the age of 70. However, IRA Contracts may be issued
up to age 80 provided that the Minimum
6
<PAGE>
Distribution Option or other appropriate IRS election is made. Before issuing
any Contract, we require submission of certain information. Following our review
of the information and approval of issuance, a Contract will be issued that sets
forth precisely your rights and Pruco Life's obligations. You may thereafter
make additional payments of $1,000 or more, but there is no obligation to do so.
The Contract date will be the date the initial purchase payment and required
information in good order are received at the Prudential Annuity Service Center.
The initial purchase payment is credited to the Contract Fund as of the Contract
date. If the initial purchase payment that you submit is not accompanied by all
the information we need to issue the Contract, we will contact you to get the
needed information. If we cannot obtain all the needed information within five
business days after receipt, we will either return your initial purchase payment
or get your consent to retaining it until we have received all the necessary
information. If the current underwriting requirements are not met and the
issuance of the Contract is not approved, the purchase payment will promptly be
returned. Pruco Life reserves the right to change these requirements on a
non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
You can cancel the Contract within 10 days after receiving it (or whatever
greater period is required in your state). A refund may be requested by mailing
or delivering the Contract to the representative who sold it or to the
Prudential Annuity Service Center. You will receive whatever your Contract is
worth as of the day we receive your request, plus or minus the market-value
adjustment with respect to any values in the MVA option. This may be more or
less than your original payments. Some states require that we return your
payments, less any previous withdrawals. If this Contract was purchased as an
IRA, and you exercise this cancellation right, the purchase payments or the
total value of the Contract Fund (whichever is greater) will be refunded to you.
ALLOCATION OF PURCHASE PAYMENTS
You determine how the initial purchase payment will be allocated among the
subaccounts and interest-rate investment options by specifying the desired
allocation on the application form for the Contract. You may choose to allocate
nothing to a particular subaccount or interest-rate option. Unless you tell us
otherwise, subsequent purchase payments will be allocated in the same
proportions as the most recent purchase payment made (unless that was a purchase
payment you directed us to allocate on a one time-only basis). Subsequent
purchase payments are credited to the Contract Fund as of the end of the
valuation period in which a proper request is received at the Prudential Annuity
Service Center. You may change the way in which subsequent purchase payments are
allocated by providing Pruco Life with proper written instruction or by
telephoning the Prudential Annuity Service Center once you have provided the
appropriate identification. See TRANSFERS, page 8.
CASH VALUE
The cash value of the Contract is the amount you will receive if you withdraw
all of your Contract Fund. It is equal to the value of the Contract Fund plus or
minus any applicable Market-Value Adjustment of all amounts in MVA option
interest cells and minus any applicable administrative or withdrawal charge. A
withdrawal will generally have federal income tax consequences, which could
include tax penalties. You should consult with a tax adviser before making a
withdrawal. See WITHDRAWALS, on page 9 and FEDERAL TAX STATUS, on page 12.
GUARANTEED INTEREST RATE PERIODS
Pruco Life determines the effective guaranteed annual interest rate ("guaranteed
interest rate") that is available at any given time for the one year fixed-rate
option and for the MVA option. This is the rate that the portion of the Contract
Fund allocated to that option will earn throughout each interest rate period.
The rates change frequently and you may learn what rate[s] are available from
your Pruco Life representative. When you select an interest-rate investment
option, your payment will be allocated to an interest rate cell and the interest
rate will then not change until the cell's maturity date. Interest will be added
to the amount in the cell daily at a rate that will provide the guaranteed
effective yield over the period of one year.
Although the guaranteed interest rates offered may change, the minimum
guaranteed interest rate will never be less than an effective annual rate of 3%.
WHAT HAPPENS WHEN AN INTEREST CELL REACHES ITS MATURITY DATE?
On each maturity date, we will offer an election to transfer the amount maturing
into either of the available interest-rate investment options or the
subaccounts. A Market-Value Adjustment will not be made if this is done within
the first 30 days after an interest cell within the MVA option matures. Any
amount that you transfer into the same interest-rate investment option during
the 30-day period will receive the appropriate rate for that option, effective
as of the maturity date. Amounts that you withdraw or transfer into a variable
investment option or into a
7
<PAGE>
different interest-rate investment option during the 30-day period will receive
interest for the period between the maturity date and the date of withdrawal or
transfer at the declared renewal rate for the matured cell (i.e. as if you had
taken no action within the 30-day period) and will be effective on the date
Pruco Life receives your request. If you do not make an election to transfer
within the 30-day period following the maturity date, the amount maturing will
ordinarily be transferred into a new interest cell of the same duration as the
maturing cell at the prevailing interest rate. The transfer date will be the
maturity date.
TRANSFERS
You may transfer out of an investment option into any combination of other
investment options available under the Contract. The transfer request may be in
dollars, such as a request to transfer $1,000 from one subaccount to another, or
may be in terms of a percentage reallocation among subaccounts. You may make
transfers by proper written notice to the Prudential Annuity Service Center, or
by telephone, provided you are enrolled to use the Telephone Transfer System.
You will automatically be enrolled to use the Telephone Transfer System unless
you elect not to have this privilege. Pruco Life has adopted procedures designed
to ensure that requests by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine. We
cannot guarantee that you will be able to get through to complete a telephone
transfer during peak periods such as periods of drastic economic or market
change.
Transfers will take effect as of the end of the valuation period in which a
proper transfer request is received at the Prudential Annuity Service Center.
Transfers out of an interest cell in the fixed-rate option are permitted only
during the 30-day period following its maturity date. Amounts transferred from a
Market-Value Adjustment Option interest cell may be subject to a Market-Value
Adjustment if the transfer is not made in the 30-day period following the
maturity date of the interest cell.
The Contract was not designed for professional market timing organizations or
other organizations or individuals using programed, large or frequent transfers.
A pattern of exchanges that coincides with a "market timing" strategy may be
disruptive to the Funds and will be discouraged. If such a pattern were to be
found, we may be required to modify the transfer procedures, including but not
limited to, not accepting transfer requests of an agent acting under a power of
attorney on behalf of more than one Owner.
You may make up to 12 transfers a year without charge. Thereafter, Pruco Life
will assess a charge of $25 for each subsequent transfer during that Contract
year. See TRANSACTION CHARGE, page 12. Dollar Cost Averaging and
Auto-Rebalancing are free transfers and do not count towards the 12 transfers
per year that can be made without charge.
DOLLAR COST AVERAGING
Additionally, an administrative feature called Dollar Cost Averaging ("DCA") is
available to Contract owners. This feature allows you to transfer amounts out of
the fixed-rate option or one of the variable investment options (designated as
the "DCA account") and into one or more other variable investment options.
Transfers may be in specific dollar amounts or percentages of the amount in the
DCA account at the time of the transfer. If the DCA account balance drops below
$250, the entire remaining balance of the account will be transferred on the
next transfer date. You may ask that transfers be made monthly, quarterly,
semi-annually or annually. You can add to the DCA account at any time. Initial
transfers must be at least 3% of the DCA account. These amounts are subject to
change at Pruco Life's discretion. Any transfers made pursuant to DCA are not
counted in determining the number of transfers subject to the transfer charge.
Each automatic transfer will take effect as of the end of the valuation period
in monthly, quarterly, semi-annual or annual intervals as designated by you
based on the date the Dollar Cost Averaging account was established provided the
New York Stock Exchange is open on that date. If the New York Stock Exchange is
not open on a transfer date, the transfer will take effect as of the end of the
valuation period which immediately follows that date. Automatic transfers will
continue until the amount in the DCA account has been transferred, or until you
notify us of a change in allocation or cancellation of the feature.
AUTO-REBALANCING
This Contract offers another investment technique that you may find attractive.
The Auto-Rebalancing feature allows you to automatically rebalance subaccount
assets at specified intervals based on percentage allocations
8
<PAGE>
that you choose. For example, suppose your initial investment allocation of
variable investment options A and B is split 40% and 60%, respectively. Then,
due to investment results, that split changes. You may instruct that those
assets be rebalanced to your original or different allocation percentages.
Auto-Rebalancing can be performed on a one-time basis or periodically, as you
choose. You may select that rebalancing occur on a monthly, quarterly,
semi-annual or annual basis based on your Contract year. Rebalancing will take
effect as of the end of the valuation period in the intervals you specify and
will continue at those intervals until you notify us otherwise. If the New York
Stock Exchange is not open on the rebalancing date, the transfer will take
effect as of the end of the valuation period which immediately follows that
date. Any transfers made pursuant to Auto-Rebalancing are not counted in
determining the number of transfers subject to the transfer charge. The
interest-rate investment options cannot participate in this administrative
feature. In addition, you may not include the DCA account as one of the
subaccounts to be rebalanced.
WITHDRAWALS
You may at any time before the annuity date make a withdrawal from the Contract
Fund of all or part of the cash value of the Contract. However, Pruco Life's
consent will be required for a partial withdrawal if the amount requested is
less than $500. For federal income tax purposes, withdrawals from Contracts
other than individual retirement annuities are considered to have been made
first from investment income. See TAXES PAYABLE BY CONTRACT OWNERS, page 12.
You may specify from which investment options you would like the withdrawal
processed. The withdrawal amount may be specified as a dollar amount or as a
percentage of the Contract Fund. If you do not specify from where you would like
the withdrawal processed, a partial withdrawal will be withdrawn proportionally
from all investment options. Within the interest-rate investment options, we
will take the withdrawal first from the oldest eligible interest cell or cells.
A Market-Value Adjustment may apply. See MARKET-VALUE ADJUSTMENT, page 9.
Only amounts withdrawn from purchase payments are subject to a withdrawal
charge. For purposes of determining withdrawal charges, withdrawals are
considered as having been made first from purchase payments. See WITHDRAWAL
CHARGE, page 11. The withdrawal will be effected as of the end of the valuation
period in which a proper withdrawal request is received at the Prudential
Annuity Service Center.
Pruco Life will generally pay the amount of any withdrawal, less any required
tax withholding, within 7 days after we receive a properly completed withdrawal
request. We will adjust the Contract Fund to reflect any applicable sales and/or
administrative charge and Market-Value Adjustment. We may delay payment of any
withdrawal allocable to the subaccount[s] for a longer period if the disposal or
valuation of the Account's assets is not reasonably practicable because the New
York Stock Exchange is closed for other than a regular holiday or weekend,
trading is restricted by the SEC or the SEC declares that an emergency exists.
With respect to the amount of any withdrawal allocable to the interest-rate
investment options, we expect to pay the withdrawal promptly upon request.
AUTOMATED WITHDRAWALS
Pruco Life also offers an Automated Withdrawal feature which enables you to
receive periodic withdrawals either monthly, quarterly, semi-annually or
annually. Withdrawals may be made from a designated investment option or
proportionally from all investment options. Withdrawals may be expressed as a
specified dollar amount or as a percentage of the Contract Fund. Market-value
adjustments may apply, and withdrawal charges may apply if the withdrawals in
any Contract year exceed the charge-free amount. The minimum automated
withdrawal amount is $250.00. An automated withdrawal will generally have
federal income tax consequences, which could include tax penalties. See TAXES
PAYABLE BY CONTRACT OWNERS, page 12.
MARKET-VALUE ADJUSTMENT
An amount transferred or withdrawn from an MVA option before its maturity date
will be subject to a Market-Value Adjustment.
The amount of the Market-Value Adjustment depends upon the difference between
the guaranteed interest rate for the interest cell from which the withdrawal or
transfer is being made and the interest rate being declared on the date of the
withdrawal or transfer by Pruco Life for interest rate periods approximately
equal to one year longer than the time remaining until the maturity date of the
interest cell. Pruco Life may not always offer MVA options at all durations.
Rates for intermediate durations not currently offered will be declared as often
as rates for durations which are offered. Such declared rates will be determined
in a manner consistent with the offered rates, but reflecting the different
investment horizon of the intermediate duration. If you specify your withdrawal
or transfer
9
<PAGE>
as a dollar amount, the Market-Value Adjustment may increase or decrease the
amount remaining in the MVA option. If you request the withdrawal or transfer as
a percentage of the Contract Fund, the Market-Value Adjustment may increase or
decrease the amount being withdrawn or transferred. If the current declared rate
is higher than the guaranteed rate, there will be a decrease. If the current
declared rate is lower than the guaranteed rate, there will be an increase. The
adjustment--whether up or down--will never be greater than 40% of each amount
subject to the adjustment. For a more precise description of how the
Market-Value Adjustment is determined, and an example of how it affects the
amount remaining after a partial withdrawal, see MARKET-VALUE ADJUSTMENT FORMULA
on page C-1. With respect to residents of Pennsylvania only, see page C-4. The
Market-Value Adjustment Option is not available to residents of Maryland, Oregon
and Washington.
DEATH BENEFIT
If the last surviving or sole annuitant dies prior to the annuity date, Pruco
Life will, upon receipt of all of the information necessary to make the payment
(including due proof of death and election of a payment option), pay a death
benefit to the beneficiary designated by the Contract owner. The death benefit
will equal the greatest of: (1) the Contract Fund as of the date of due proof of
death; (2) the sum of all invested purchase payments made less total withdrawals
made (including withdrawal charges); and (3) the greatest of the Contract Fund
values calculated on every third Contract anniversary reduced by all subsequent
withdrawals and withdrawal charges. If the Contract owner dies, and is not the
last surviving or sole annuitant, this death benefit is not applicable. For a
discussion of the required distribution rules, See TAXES PAYABLE BY CONTRACT
OWNERS, page 12.
The beneficiary may receive this amount in one sum or under a payout option.
Unless the beneficiary has been irrevocably designated, you may change the
beneficiary at any time. If the annuitant dies after he or she has begun to
receive annuity payments, the death benefit, if any, will be determined by the
type(s) of payout provisions then in effect.
If the annuitant was the sole owner of the Contract, the annuitant's spouse was
the sole beneficiary, and the spouse had an unrestricted right to receive the
death benefit in one sum, then the spouse has the right to continue the Contract
as annuitant and owner.
VALUATION OF A CONTRACT OWNER'S CONTRACT FUND
The value of your Contract Fund is the sum of your interests in the variable
investment options and in the interest-rate investment options. The portion of
the Contract Fund allocated to the Account is the sum of the interests in each
subaccount. The values are measured in Units, for example, Money Market Units,
Diversified Bond Units or Flexible Managed Units. Every purchase payment made by
an owner is converted into Units of the subaccount or subaccounts selected by
dividing the amount of the purchase payment by the Unit Value for the subaccount
to which that amount has been allocated. The value of these Units changes each
valuation period to reflect the investment results, expenses, and charges of the
subaccount and the corresponding Series Fund portfolio. Further detail about
Units is contained in the Statement of Additional Information.
There is, of course, no guarantee that your Contract Fund will increase or that
it will not fall below the amount of your total purchase payments. However,
Pruco Life guarantees a minimum interest rate of 3% a year on that portion of
the Contract Fund allocated to the interest-rate investment options. Excess
interest on payments allocated to the interest-rate investment options may be
credited in addition to the guaranteed interest rate. A Market-Value Adjustment
may apply to amounts held in the MVA option, which could reduce effective annual
yields below the guaranteed interest rate levels.
CHARGES, FEES AND DEDUCTIONS
PREMIUM TAXES AND TAXES ATTRIBUTABLE TO PURCHASE PAYMENTS
A charge may be deducted for premium taxes and any taxes attributable to
purchase payments. For these purposes, "premium taxes and taxes attributable to
purchase payments" shall include any state or local premium taxes and any
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 the
amount of premium received by Pruco Life. If Pruco Life pays a state or local
tax at the time purchase payments are made, the deduction will be made at the
time based on the applicable rate. Currently, no such deduction is made from
purchase payments in any state. In some states, however, Pruco Life pays a
premium tax when an annuity is effected. In those states, the tax will be
deducted at that time. The tax rates currently in effect in those states that
impose a tax range from 0% to 5%. Pruco Life also reserves
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the right to deduct from each purchase payment a charge for taxes measured by
premiums. Currently, no such charge is being made in any state.
ADMINISTRATIVE CHARGE
There is an administrative charge to reimburse Pruco Life for the expenses
incurred in administering the Contracts. This includes such things as issuing
the Contract, establishing and maintaining records, and providing reports to
Contract owners. This charge is deducted daily from the assets in each of the
variable subaccounts and is equivalent to an effective annual rate of 0.15%
(.00041065% daily). Although we do not do so now, we reserve the right to impose
an additional charge of up to $25 annually and upon surrender on Contracts with
less than $50,000 in the Contract Fund. This $25 charge would be apportioned
over all investment options making up the Contract Fund as of the effective date
of that deduction.
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS
A deduction is made daily from the assets of each of the variable investment
options to reimburse Pruco Life for assuming the risk that our estimates of
longevity and of the expenses we expect to incur over the lengthy periods that
the Contract may be in effect will turn out to be incorrect. The charge is made
daily at an annual rate of 1.25% (.00340349% daily) of the assets held in the
subaccounts. This charge is not assessed against amounts allocated to the
interest-rate investment options.
EXPENSES INCURRED BY THE SERIES FUND
The charges and expenses of the Series Fund are indirectly borne by the Contract
owners. Investment management fees for the available Series Fund portfolios are
briefly described under THE PRUDENTIAL SERIES FUND, INC. on page 5. Further
detail about management fees and other underlying fund expenses are provided in
the fee table and in the attached prospectus for the Series Fund and its
statement of additional information.
WITHDRAWAL CHARGE
A withdrawal charge may be made upon full or partial withdrawals. The charge
compensates Pruco Life for paying all of the expenses of selling and
distributing the Contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature, and other
promotional activities. No withdrawal charge is imposed whenever earnings are
withdrawn.
Withdrawals are deemed to be made first from purchase payments and then from
earnings. A portion of the purchase payments to be withdrawn in any Contract
year may be withdrawn without the imposition of any charge. That amount is
referred to as the "charge-free amount". It is equal to 10% of the total of all
purchase payments plus any charge-free amount still available from the
immediately preceding Contract year, calculated as of the Contract anniversary.
Subsequent purchase payments made during a Contract year increase the
charge-free amount by 10% of the payment amount. An example of how the
charge-free amount and the withdrawal charge are determined is given on page C-1
as part of the example of how the Market-Value Adjustment works. With respect to
residents of Pennsylvania only see page C-4.
If your withdrawal of purchase payments exceeds the charge-free amount and it is
made within the first seven Contract years, a percentage charge will be applied.
The withdrawal charge is based on Contract date and not deposit date. The
following table sets forth the rates that apply:
- --------------------------------------------------------------------------------
| THE WITHDRAWAL CHARGE WILL BE EQUAL
FOR WITHDRAWALS DURING THE CONTRACT | TO THE FOLLOWING PERCENTAGE OF THE
YEAR INDICATED | AMOUNT WITHDRAWN*
- ----------------------------------------|---------------------------------------
First Contract Year | 7%
Second Contract Year | 6%
Third Contact Year | 5%
Fourth Contract Year | 4%
Fifth Contract Year | 3%
Sixth Contract Year | 2%
Seventh Contract Year | 1%
Eighth and Subsequent Contract Years | No Charge
- --------------------------------------------------------------------------------
* SUBJECT TO CHARGE-FREE AMOUNT DESCRIBED ABOVE.
- --------------------------------------------------------------------------------
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No withdrawal charge is made upon a withdrawal used to effect an annuity under
the Life Annuity with 120 Payments Certain option. See PAYOUT PROVISIONS, page
16. Pruco Life may reduce or eliminate the amountof the withdrawal charge when
the Contract is sold under circumstances which reduce its sales expenses. Some
examples are: if there is a large group of individuals that will be purchasing
the Contract or a prospective purchaser already has a relationship with Pruco
Life or its affiliates.
Contracts issued to annuitants aged 84 or older are subject to a reduced
withdrawal charge. The withdrawal charge will never be greater than permitted by
applicable law or regulation.
TRANSACTION CHARGE
There is a charge of $25 for each transfer you make after the first 12
(excluding DCA and auto-rebalancing transfers) in a Contract year. The charge is
taken pro-rata from the investment options from which the transfer is made. Any
affected MVA option cells will not undergo a Market-Value Adjustment as a result
of this processing.
CRITICAL CARE ACCESS
All or part of any withdrawal and annual administrative charges associated with
a full or partial withdrawal,or any withdrawal charge due on the annuity date,
will be waived following the receipt of due proof that the annuitant or (if
applicable) co-annuitant has been confined to an eligible nursing home or
hospital for a period of at least 3 months or a physician has certified that the
annuitant or co-annuitant is terminally ill (i.e., has 6 months or less to
live).
FEDERAL TAX STATUS
The following discussion is based on current law and interpretations which may
change. The discussion is general in nature. It is not intended as tax advice.
Nor does it consider any applicable state or other tax laws. A qualified tax
adviser should be consulted for complete information and advice. The following
rules do not generally apply to annuity contracts held by or for non-natural
persons (e.g. corporations) or to contracts held under tax-favored retirement
plans (other than an IRA rollover). Where a Contract is held by a non-natural
person, unless the Contract owner is a nominee or agent for a natural person (or
in other limited circumstances), the Contract will generally not be treated as
an annuity for tax purposes, and increases in the value of the Contract will be
subject to current tax.
DIVERSIFICATION
Section 817(h) of the Internal Revenue Code (the "Code") provides that the
underlying investments for a variable annuity must satisfy certain
diversification requirements. For further detail on diversification
requirements, see DIVIDENDS, DISTRIBUTIONS, AND TAXES in the attached prospectus
for the Series Fund. Pruco Life believes the underlying variable investment
options for the Contract meet these diversification requirements. IRS
regulations issued to date, however, do not provide guidance concerning the
extent to which Contract owners may direct their investments to particular
divisions of a separate account. Such guidance will be included in regulations
or revenue rulings under Section 817(d) relating to the definition of a variable
contract. Because of this uncertainty, Pruco Life reserves the right to make
such changes as it deems necessary to assure that the 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
Under current law, Pruco Life believes that the Contract will be treated as an
annuity for Federal income tax purposes and that the issuing insurance company,
Pruco Life, and not the Contract owner, will be treated as the owner of the
underlying investments for the Contract. Accordingly, generally no tax should be
payable by any Contract owner as a result of any increase in the value of the
Contract until money is received by him or her. It is important, however, to
consider how amounts that are received will be taxed.
The Code provides generally that amounts withdrawn by a Contract owner from his
or her Contract, before annuity payments begin, will be treated for tax purposes
as being first withdrawals of investment income, rather than withdrawals of
purchase payments, until all investment income has been withdrawn.
To the extent assignment is authorized by the Contract, the assignment or pledge
of (or agreement to assign or pledge) any portion of the value of the Contract
for a loan will be treated as a withdrawal subject to these rules. Amounts
withdrawn before annuity payments begin which represent a distribution of
investment income will be
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taxable as ordinary income and may, under certain circumstances, be subject to a
penalty tax. For non-qualified Contracts, amounts which represent a withdrawal
of purchase payments will not be taxable as ordinary income or subject to a
penalty tax. Moreover, all annuity contracts issued by the same company (and
affiliates) to the same Contract owner during any calendar year shall be treated
as one annuity contract for purposes of determining whether an amount is subject
to tax under these rules.
Different tax rules apply to your receipt of annuity payments. For Contracts
other than those used in connection with tax favored plans, a portion of each
annuity payment you receive under a Contract will be treated as a partial return
of your purchase payments and will not be taxable. The remaining portion of the
annuity payment will be taxed as ordinary income. Exactly how an annuity payment
is divided into taxable and non-taxable portions depends upon 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. Annuity payments which are received after the
annuitant recovers the full amount of the purchase payments will be fully
includible in income. Should annuity payments cease on account of the death of
the annuitant before purchase payments have been fully recovered, the annuitant,
on his or her last tax return, (or in certain cases the beneficiary) is allowed
a deduction for the unrecovered amount.
The Code provides that any amount received under an annuity contract which is
included in income may be subject to a penalty tax. The amount of the penalty is
equal to 10% of the amount that is includible in income. Some withdrawals will
be exempt from the penalty. They include withdrawals: (1) made on or after the
Contract owner reaches age 591 @2; (2) made on or after the death of the
Contract owner; (3) attributable to the Contract owner becoming disabled within
the meaning of Code section 72(m)(7); (4) in the form of level annuity payments
made not less frequently than annually under a lifetime annuity; (5) allocable
to investment in the Contract before August 14, 1982; (6) under a qualified
funding asset (defined by Code section 130(d)); or (7) under an immediate
annuity contract (within the meaning of section 72(u)(4)).
If the 10% penalty tax does not apply to a withdrawal by reason of the exception
for withdrawals in the form of a level annuity (clause (4) above), but the
series of payments is modified (other than by reason of death or disability),
either (a) before the end of the 5-year period beginning with the first payment
and after the Contract owner reaches age 591 @2, or (b) before the Contract
owner attains age 591 @2, the Contract owner's tax for the year of the
modification will be increased by the penalty tax that would have been imposed
without the exception, plus interest for the deferral period.
Where a Contract is issued in exchange for a Contract containing purchase
payments made before August 14, 1982, favorable tax rules may apply to certain
withdrawals from the Contract. Consult a tax advisor for information regarding
these rules.
Election of the interest payment option is not considered an annuity payment for
tax purposes. Accordingly, unless the Contract is held by an individual
retirement annuity, such election will cause investment income under the
Contract to be taxable.
Generally, the same tax rules apply to amounts received by the beneficiary as
those set forth above with respect to the Contract owner. The election of an
annuity payment option may defer taxes otherwise payable upon the receipt of a
lump sum death benefit. Certain minimum distribution requirements apply in the
case where the owner dies. See REQUIRED DISTRIBUTIONS ON DEATH OF OWNER, page
18.
In addition, a transfer of the Contract to or the designation of a beneficiary
who is either 371 @2 years younger than the Contract owner or a grandchild of
the Contract owner may have Generation Skipping Transfer tax consequences under
section 2601 of the Code.
Certain transfers of a Contract for less than full consideration, such as a
gift, will trigger tax on the investment income in the Contract. This rule does
not apply to certain transfers between spouses or incident to divorce. See
OWNERSHIP OF THE CONTRACT, page 19.
WITHHOLDING
Generally, unless you elect to the contrary, the portion of any amounts you
receive under your Contract that are attributable to investment income will be
subject to withholding to meet federal income tax obligations. The rate of
withholding on annuity payments made to you will be determined on the basis of
the withholding certificate you may file with Pruco Life. If you do not file
such a certificate, you will be treated, for purposes of determining your
withholding rate, as a married person with three exemptions. The rate of
withholding on all other payments made
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to you under your Contract, such as amounts you receive upon withdrawals, will
be 10%. Thus, if you fail to elect that Pruco Life not do so, it will withhold
from withdrawal by, or annuity payment to, you the appropriate percentage of the
amount of the payment that constitutes investment income and hence is taxable.
Pruco Life will provide you with forms and instructions concerning your right to
elect that no amount be withheld from payments to you. If you elect not to have
withholding made, you are liable for payment of federal income taxes on the
taxable portion of the distribution. You may be subject to penalties under the
estimated tax payment rules if your withholding and estimated tax payments are
not sufficient. If you do not provide a social security number or other taxpayer
identification number, you will not be permitted to elect out of withholding.
Special withholding rules apply for nonresident aliens. Generally, there will be
no withholding for taxes until you actually receive payments under your
Contract.
IMPACT OF FEDERAL INCOME TAXES
In general, if you expect to accumulate savings over a relatively long period of
time without making significant withdrawals, there should be tax advantages,
regardless of your tax bracket, in purchasing a Contract rather than, for
example, a mutual fund with a similar investment policy and approximately the
same level of expected investment results. This is because little or no income
taxes are incurred by you or by Pruco Life while you hold the Contract 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 may be considerably greater if you decide to liquidate your investment
in the form of monthly annuity payments after your retirement, and even more so
if your income, and your tax rate, are lower at that time than they were during
your working years.
CONTRACTS USED IN CONNECTION WITH TAX FAVORED PLANS
Currently, the Contract may be purchased for use in connection with individual
retirement accounts and annuities ("IRAs") which are subject to Sections 408(a)
and 408(b) of the Code. At some time in the future, we may allow the Contract to
be purchased in connection with other retirement arrangements which are entitled
to favorable federal income tax treatment ("tax favored plans"). These include:
simplified employee pension plans ("SEPs") under Section 408(k) of the Code,
saving incentive match plans for employees-IRA ("SIMPLE-IRAs") under Section
408(p) of the Code, and tax deferred annuities ("TDAs") under Section 403(b) of
the Code. Such plans, accounts and annuities must satisfy certain requirements
of the Code in order to be entitled to the federal income tax benefits accorded
to these plans. A discussion of these requirements is beyond the scope of this
prospectus, and it is assumed that such requirements are met with respect to a
Contract purchased for use in connection with a tax favored plan.
In general, assuming the requirements and limitations of the Code provisions
applicable to the particular type of tax favored plan involved are satisfied,
purchase payments (other than after-tax employee payments) under the Contract
will be deductible (or not includible in income) up to certain amounts each year
and federal income tax will not be imposed on the investment income and realized
gains of the subaccounts in which the purchase payments have been invested until
a distribution is received. Persons contemplating the purchase of a Contract in
connection with a tax favored plan should consult their tax advisor before
purchasing a Contract for such purposes.
The comments which follow concerning specific tax favored plans are intended
merely to call attention to certain of their features. No attempt has been made
to discuss in full the tax ramifications involved or to offer tax advice. As
suggested above, a qualified tax advisor should be consulted for advice and
answers to any questions.
IRAS
Because the Contract's minimum initial payment of $10,000 is greater than the
maximum annual contribution permitted to be made to an IRA (generally, $2,000),
a Contract may be purchased as a Section 408(b) IRA only in connection with a
"rollover" of the proceeds of a qualified plan, tax-deferred Section 403(b)
annuity ("TDA") or IRA. The Code permits persons who are entitled to receive
certain qualifying distributions from a qualified pension or profit-sharing plan
described in Section 401(a) or 403(a), TDA, or an IRA, to directly rollover or
make, within 60 days, a tax-free "rollover" of all or any part of the amount of
such distribution to an IRA which they establish. Additionally, the spouse of a
deceased employee may roll over to an IRA certain distributions received by the
spouse from a qualified pension or profit-sharing plan, TDA or IRA on account of
the employee's death. Once the Contract has been purchased, regular IRA
contributions will be accepted to the extent permitted by law.
In order to qualify as an IRA under Section 408(b) of the Code, a Contract (or a
rider made a part of the Contract) must contain certain additional provisions:
(1) the owner of the Contract must be the annuitant, except when a transfer is
made to a former spouse in accordance with a divorce decree as provided in
Section 408(d)(6) of the
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Code; (2) the rights of the owner cannot be forfeitable; (3) the Contract may
not be sold, assigned, discounted or pledged for any purpose to any person
except Pruco Life; (4) except in the case of a "rollover" contribution, the
annual premium may not exceed $2,000; (5) generally, the annuity date may be no
later than April 1 of the calendar year following the calendar year in which the
annuitant attains age 701 @2; and (6) annuity and death benefit payments must
satisfy certain minimum distribution requirements. Contracts issued as Section
408(b) IRAs will conform to such requirements.
In general, the full amount distributed from an IRA (and not properly rolled
over to another IRA) is subject to federal income tax and to the withholding
rules described above. A 10% early distribution penalty applies to distributions
made before the Contract owner reaches age 591 @2, subject to certain
exceptions. If the owner borrows against the IRA or engages in certain
prohibited transactions, the Contract ceases to qualify as an IRA and the full
amount is deemed to be distributed. In addition, any amount pledged as security
for a loan is deemed to be distributed. Payments generally must begin by April 1
of the calendar year following the calendar year in which the annuitant attains
age 701 @2 and are subject to certain minimum distribution requirements.
SEPS
Under a SEP, annual employer contributions to an IRA established by an employee
are not includible in income to the lesser of $30,000 or 15% of the employee's
earned income (excluding the employer's contribution to the SEP). In addition, a
SEP must satisfy certain minimum participation requirements and contributions
may not discriminate in favor of highly compensated employees. Contracts issued
as Section 408(b) IRAs established under a SEP must satisfy the requirements
described above for a Section 408(b) IRA.
Certain SEP arrangements are permitted to allow employees to elect to reduce
their salaries by as much as $9,500 (in 1996) and have their employer make
contributions on their behalf to the SEP. These arrangements, called salary
reduction SEPs, are available only if the employer maintaining the SEP has 25 or
fewer employees and at least 50% of the eligible employees elect to make salary
reduction contributions. Other limitations may reduce the permissible
contribution level for highly compensated employees. New salary reduction SEPs
may not be established after 1996.
In accordance with IRS regulations, persons who purchase a Contract used as an
IRA, including one established under a SEP arrangement, are given disclosure
material prepared by Pruco Life. The material includes this prospectus, a copy
of the Contract, and a brochure containing information about eligibility,
contribution limits, tax consequences, and other particulars concerning IRAs.
The regulations require that such persons be given a free look after making an
initial contribution in which to affirm or reverse their decision to
participate. Therefore, within the free look a person may cancel his or her
Contract by notifying Pruco Life in writing, and Pruco Life will refund all of
the purchase payments under the Contract or, if greater, the amount credited
under the Contract (less any bonus) computed as of the valuation period that
Pruco Life receives the notice of cancellation. See SHORT-TERM CANCELLATION
RIGHT OR "FREE LOOK", page 7.
SIMPLE-IRAS
Under a SIMPLE-IRA, an employee can elect to contribute up to $6,000 (in 1997,
indexed) per year to an IRA. Employer contributions are also provided as either
a match (up to 3% of compensation) or 2% nonelective contribution. These
contributions are not taxable until withdrawn, and are fully vested.
Distributions are generally taxed under the rules applicable to IRAs.
SIMPLE-IRAs are not subject to the general nondiscrimination rules and
simplified reporting rules apply.
To qualify for a SIMPLE-IRA, the employer may employ no more than 100 employees
(on a controlled group basis) who received at least $5,000 in compensation from
the employer in the preceding year, and may not maintain any other
employer-sponsored retirement plans to which contributions were made or benefits
accrued.
TDAS
Section 403(b) of the Code permits employers and employees of Section 501(c)(3)
tax-exempt organizations and public educational organizations to make, subject
to certain limitations, contributions to an annuity in which the employee's
rights are nonforfeitable (commonly referred to as a "tax deferred annuity" or
"TDA"). The amounts contributed under a TDA and increments thereon are not
taxable as income until distributed as annuity income or otherwise. Generally,
contributions to a TDA may be made through a salary reduction arrangement up to
a maximum of $9,500 (in 1997, indexed). However, under certain special rules,
the limit could be increased as much as $3,000. In addition, the Code permits
certain total distributions from a TDA to be "rolled over" to another TDA or
IRA. Certain partial distributions from a TDA may be "rolled over" to an IRA.
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An annuity contract will not qualify as a TDA, unless under such contract
distributions from salary reduction contributions and earnings thereon (other
than distributions attributable to assets held as of December 31, 1988) may be
paid only on account of attainment of age 59 1/2, severance of employment,
death, total and permanent disability and, in limited circumstances, hardship.
(Such hardship withdrawals are permitted, however, only to the extent of salary
reduction contributions and not earnings thereon.)
The Section 403(b)(11) withdrawal restrictions referred to above do not apply to
the transfer of all or part of a Contract owner's interest in his or her
Contract among the available investment options offered by Pruco Life or to the
direct transfer of all or part of the Contract owner's interest in the Contract
to a Section 403(b) tax-deferred annuity contract of another insurance company
or to a mutual fund custodial account under Section 403(b)(7) of the Code.
In imposing the restrictions on withdrawals as described above, Pruco Life is
relying upon a no-action letter dated November 28, 1988 from the Chief of the
Office of Insurance Products and Legal Compliance of the SEC to the American
Council of Life Insurance.
Employer contributions are subject generally to the same coverage, minimum
participation and nondiscrimination rules applicable to qualified pension and
profit-sharing plans. Distributions from a TDA generally must commence by April
1 of the calendar year following the later of the calendar year in which the
employee: (1) attains age 701 @2; or (2) retires. Distributions must satisfy
minimum distribution requirements similar to those that apply to qualified plans
generally.
MINIMUM DISTRIBUTION OPTION
A Minimum Distribution Option is available under IRAs and certain other tax
favored plans. This option enables the owner to satisfy IRS minimum distribution
requirements without having to annuitize or cash surrender the Contract.
Distributions from tax favored plans generally must begin by April 1 of the
calendar year following the later of the calendar year in which the employee:
(1) attains age 701 @2; or (2) retires (part 2 is not applicable to IRAs). The
owner can select either a "calculation" or "recalculation" method to determine
the minimum distribution payout. Pruco Life will send the owner a check for the
minimum distribution amount less any partial withdrawals made during the year.
Pruco Life's calculations are based on the cash value of this Contract, the
calculation method chosen and the owner's age as specified on the application.
Other calculation methods may be available for an owner/spouse combination. If
the owner has other IRA accounts, he or she will be responsible for taking the
minimum distribution from each.
TAXES ON PRUCO LIFE
The earnings of the Account are taxed as part of the operations of Pruco Life.
No charge is being made currently against the Account for company federal income
taxes (excluding any charge for taxes attributable to premiums). Pruco Life will
review the question of a charge to the Account for company federal income taxes
periodically. Such a charge may be made in future years for any federal income
taxes that would be attributable to the Contract.
Under current law, Pruco Life 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 Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon Pruco Life that are attributable to the Account may result in a
corresponding charge against the Account.
PAYOUT PROVISIONS
The Contract can be annuitized any time after the first Contract year. Upon the
annuity date, the cash value of the Contract will be converted into a
fixed-dollar annuity payable to the annuitant[s] named in the Contract. If two
annuitants are named in the Contract, you may decide how much of the amount is
to be applied for each annuitant and under which form[s] of annuity. If the
Contract is not large enough to produce an initial monthly payment of $50 (which
may be less in some states), you will be paid the cash value in a single sum.
When you choose to annuitize, all amounts held in the investment options will be
withdrawn. An amount equal to the premium tax, if any, imposed by the state in
which the annuitant resides is then deducted (unless deducted earlier). Many
states do not impose a premium tax. In other states the tax ranges from 0% to 5%
of the amount applied to effect an annuity. See PREMIUM TAXES, page 10. Some
local jurisdictions also impose a tax. The amount remaining is applied to effect
an annuity. This amount becomes part of Pruco Life's general account.
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The amount of the monthly payments will depend upon the amount applied and the
table of rates set forth in the Contract which we guarantee will be used even if
longevity has significantly improved since the Contract date. If Pruco Life is
offering more favorable rates at that time, then those rates will be used.
The annuity will be in one of the forms listed below. All the annuity options
under this Contract are fixed annuity options. Your participation in the
variable investment options ceases when the annuity is effected. Unless we
consent to a later date, an annuity must begin no later than the Contract
anniversary coinciding with or next following the annuitant's 90th birthday (or
the younger annuitant's if there are two annuitants named in the Contract). We
will then make payments to the annuitant on the first day of each period
determined by the form of annuity selected. Unless applicable law states
otherwise, if you have not selected an annuity option to take effect by the
annuity date, the Interest Payment Option (see below) will become effective
then. Special rules apply in the case of a Contract issued in connection with an
IRA.
1. ANNUITY PAYMENTS FOR A FIXED PERIOD
Payments will be made to the annuitant during his or her lifetime for up to 25
years. Payments may be in monthly, quarterly, semi-annual, or annual
installments. If the annuitant dies during the annuity certain period, unless
you designate otherwise, the beneficiary will receive a lump sum payment. The
amount of the lump sum payment is determined by discounting each remaining
unpaid payment at the interest rate used to compute the actual payments. If the
payments were based on the table of rates set forth in the Contract, the
interest rate used is 31 @2% a year.
2. LIFE ANNUITY WITH 120 PAYMENTS CERTAIN
Payments will be made to the annuitant monthly during his or her lifetime. If
the annuitant dies before the 120th monthly payment is due, monthly annuity
payments do not continue to the beneficiary designated by the annuitant unless
he or she so selects. Instead, the present value of the remaining unpaid
installments, up to and including the 120th monthly payment, is payable to the
beneficiary in one sum. In calculating the present value of the unpaid future
payments, we will discount each such payment at the interest rate used to
compute the amount of the actual 120 payments. If the payments were based on the
table of rates set forth in the Contract, an interest rate of 31 @2% a year is
used. Once annuity payments have begun, an annuitant may withdraw the present
value of any of the 120 payments certain that have not been paid. No surrender
charge is applicable under this option.
3. INTEREST PAYMENT OPTION
The annuitant may choose to have Pruco Life hold a designated amount to
accumulate at interest. Unless applicable law states otherwise, if no option has
been selected by the annuity date, this option will automatically become
effective. Pruco Life will pay interest at an effective rate of at least 3% a
year, and we may pay a higher rate of interest.
Special provisions may apply if the Contract is issued in connection with an
IRA.
4. OTHER ANNUITY OPTIONS
Currently, you may choose to receive the proceeds of your Contract Fund in the
form of payments like those of any annuity or life annuity then regularly
offered by Prudential or by Pruco Life that (1) is based on United States
currency; (2) is bought by a single sum; (3) does not provide for dividends; and
(4) does not normally provide for deferral of the first payment. Prudential and
Pruco Life currently offer a number of different annuity options, including
joint and survivor annuities covering more than one person.
Under Option 4, unless a fixed period annuity of less than 10 years is selected,
Pruco Life will waive withdrawal charges that might be applicable under other
annuity options. Further, if you select Option 1 or 2 without a right of
withdrawal, Pruco Life will effect that option under Option 3 if doing so
provides greater monthly payments.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT ANNUITY PURCHASE RATES
Although the Contract generally provides for sex-distinct annuity purchase rates
for life annuities, those rates are not applicable to Contracts offered in
states that have adopted regulations prohibiting sex-distinct annuity purchase
rates. Rather, blended unisex annuity purchase rates for life annuities will be
provided under all Contracts issued in those states, whether the annuitant is
male or female. Other things being equal, such unisex annuity purchase rates
will result in the same monthly annuity payments for male and female annuitants.
17
<PAGE>
OTHER INFORMATION
REQUIRED DISTRIBUTIONS ON DEATH OF OWNER
Federal tax law requires that if the Contract owner dies before the annuity
date, the entire value of the Contract must generally be distributed within 5
years of the date of death. Special rules may apply to the spouse of the
deceased owner. The rules regarding required distributions after the Contract
owner's death are described in the Statement of Additional Information.
MISSTATEMENT OF AGE OR SEX
If an annuitant's stated age or sex (except where unisex rates apply) or both
are incorrect in the Contract, we will change each benefit and the amount of
each annuity payment to that which the total purchase payment amounts would have
bought for the correct age and sex. Also, we will adjust for the amount of any
overpayments we have already made.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contracts. Prusec,
organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Prusec's principal business address is
213 Washington Street, Newark, New Jersey 07102-2992. The Contract is sold by
registered representatives of Prusec and may also be sold through other
broker-dealers authorized by Prusec. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. The
maximum commission that will be paid to the representative is 3.5% of the
purchase payment received, and the amount paid to the broker-dealer to cover
both the individual representative's commission and other distribution expenses
will not exceed 6% of the purchase payment. Trail commissions based on the size
of the Contract Fund may be paid.
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account are
invested in shares of the corresponding portfolios of the Series Fund. Pruco
Life is the legal owner of those shares and as such has the right to vote on any
matter voted on at any Series Fund shareholders meetings. However, as required
by law, Pruco Life votes the shares of the Series Fund at any regular and
special shareholders meetings in accordance with voting instructions received
from Contract owners. The Series Fund does not hold annual shareholders meetings
when not required to do so under Maryland law or the 1940 Act. Fund shares for
which no timely instructions from Contract owners are received, and any shares
owned directly or indirectly by Pruco Life are voted in the same proportion as
shares in the respective portfolios for which instructions are received. Should
the applicable federal securities laws or regulations, or their current
interpretation, change so as to permit Pruco Life to vote shares of the Series
Fund in its own right, it may elect to do so.
Matters on which you may give voting instructions include the following: (1)
election of the Board of Directors of the Series Fund; (2) ratification of the
independent accountant of the Series Fund; (3) approval of the investment
advisory agreement for a portfolio of the Series Fund corresponding to your
selected subaccount[s]; (4) any change in the fundamental investment policy of a
portfolio corresponding to your selected subaccount[s]; and (5) any other matter
requiring a vote of the shareholders of the Series Fund. With respect to
approval of the investment advisory agreement or any change in a portfolio's
fundamental investment policy, Contract owners participating in such portfolios
will vote separately on the matter.
The number of Series Fund shares for which you may give instructions is
determined by dividing the portion of the value of the Contract derived from
participation in a subaccount, by the value of one share in the corresponding
portfolio of the applicable Fund. The number of votes for which you may give
Pruco Life instructions is determined as of the record date chosen by the Board
of Directors of the Series Fund. We furnish you with proper forms and proxies to
enable you to give these instructions. We reserve the right to modify the manner
in which the weight to be given voting instructions is calculated where such a
change is necessary to comply with current federal regulations or
interpretations of those regulations.
Pruco Life may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Funds' portfolios, or to approve or disapprove an investment advisory
contract for a Fund. In addition, Pruco
18
<PAGE>
Life itself may disregard voting instructions that would require changes in the
investment policy or investment adviser of one or more of the Funds' portfolios,
provided that we reasonably disapprove such changes in accordance with
applicable federal regulations. If we do disregard voting instructions, we will
advise you of that action and our reasons for such action in the next annual or
semi-annual report to Contract owners.
SUBSTITUTION OF SERIES FUND SHARES
Although Pruco Life believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, we may seek to substitute the shares of another portfolio or of an
entirely different mutual fund. Before this can be done, the approval of the
SEC, and possibly one or more state insurance departments, will be required. You
will be notified of such substitution.
OWNERSHIP OF THE CONTRACT
The Contract owner is entitled to exercise all the rights under the Contract.
The Contract owner is usually, but not always, the annuitant. Ownership of the
Contract may, however, be transferred to another person who need not be the
person who is to receive annuity payments. Transfer of the ownership of a
Contract may involve federal income tax consequences, or may be prohibited under
certain Contracts, and you should consult with a qualified tax adviser before
attempting any such transfer. Generally, ownership of the Contract is not
assignable to a tax-qualified retirement plan or program without Pruco Life's
consent.
PERFORMANCE INFORMATION
Performance information for the subaccounts may appear in advertising and
reports to current and prospective Contract owners. Performance information is
based on historical investment experience of the Series Fund, adjusted to take
charges under the Contract into account, and does not indicate or represent
future performance.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment over a stipulated period, and assume a surrender of the
Contract at the end of the period. Total return quotations reflect changes in
unit values and the deduction of applicable charges including any applicable
withdrawal charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to: comparisons to market indices; comparisons to
other investments; performance rankings; personalized illustrations of
historical performance; and data presented by analysts or included in
publications.
See PERFORMANCE INFORMATION in the Statement of Additional Information for
recent performance information.
REPORTS TO CONTRACT OWNERS
You will be sent quarterly statements that provide certain information pertinent
to your Contract. These statements provide Contract data that apply only to each
particular Contract, including Contract values and transactions during the
period. You may request current Contract information at any time, however, we
may limit the number of such requests or impose a reasonable charge if such
requests are made too frequently.
You will also be sent annual and semi-annual reports for the Series Fund.
If a single individual or company invests in the Series Fund through more than
one variable insurance contract, then the individual or company will receive
only one copy of each annual and semi-annual report issued by the Series Fund.
However, if such individual or company wishes to receive multiple copies of any
such report, a request may be made by calling the toll-free telephone number
listed on the cover page of this prospectus.
STATE REGULATION
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
19
<PAGE>
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the year ended December
31, 1996 have been audited by Price Waterhouse LLP, independent accountants, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for years ended December
31, 1995 and December 31, 1994, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Pruco Life. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statements disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
LITIGATION
Several actions have been brought against Pruco Life alleging that Pruco Life
and its agents engaged in improper life insurance sales practices. Prudential
has agreed to indemnify Pruco Life for losses, if any, resulting from such
litigation. No other significant litigation is being brought against Pruco Life
that would have a material effect on its financial position.
STATEMENT OF ADDITIONAL INFORMATION
The contents of the Statement of Additional Information include:
OTHER INFORMATION CONCERNING THE ACCOUNT
PRINCIPAL UNDERWRITER
DETERMINATION OF SUBACCOUNT UNIT VALUES
IRS REQUIRED DISTRIBUTIONS ON DEATH OF OWNER
PERFORMANCE INFORMATION
COMPARATIVE PERFORMANCE INFORMATION
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC, relating to the offering
described in this prospectus. This prospectus does not include all of the
information set forth in the registration statement. Certain portions have been
omitted pursuant to the rules and regulations of the SEC. The omitted
information may, however, be obtained from the SEC's principal office in
Washington, D.C., upon payment of a prescribed fee.
Further information, including statutory statements filed with the state
insurance departments, may also be obtained from Pruco Life's office. The
address and telephone number of Pruco Life are set forth on the cover of this
prospectus.
FINANCIAL STATEMENTS
The consolidated financial statements of Pruco Life and subsidiaries should be
distinguished from the financial statements of the Account, and should be
considered only as bearing upon the ability of Pruco Life to meet its
obligations under the Contracts.
20
<PAGE>
<TABLE>
APPENDIX
ACCUMULATION UNIT VALUES
THE DISCOVERY PREFERRED VARIABLE ANNUITY SUBACCOUNTS OF THE
FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
<CAPTION>
----------------------------- --------------------------- ---------------------------
MONEY DIVERSIFIED HIGH YIELD
MARKET BOND BOND
----------------------------- --------------------------- ---------------------------
01/01/96 11/21/95* 01/01/96 11/21/95* 01/01/96 11/21/95*
TO TO TO TO TO TO
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
----------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at
beginning of period ............... $ 1.00632 $ 1.00015 1.02919 0.99877 1.02123 0.99953
2. Accumulation unit value at
end of period ..................... $ 1.04505 $ 1.00632 1.06033 1.02919 1.12263 1.02123
3. Number of accumulation units
outstanding at end of period ...... 18,724,231.329 143,501.519 16,579,588.790 8,846.456 12,180,746.727 9,000.202
<CAPTION>
----------------------------- --------------------------- ---------------------------
CONSERVATIVE STOCK EQUITY
BALANCED INDEX INCOME
----------------------------- --------------------------- ---------------------------
01/01/96 11/21/95* 01/01/96* 01/01/96 11/21/95*
TO TO TO TO TO
12/31/96 12/31/95 12/31/96 12/31/96 12/31/95
----------------------------- -------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at
beginning of period ............... $ 1.02903 1.00076 1.00077 1.02662 1.00221
2. Accumulation unit value at
end of period ..................... $ 1.14380 1.02903 1.13652 1.23339 1.02662
3. Number of accumulation units
outstanding at end of period ...... 64,865,522.269 88,446.877 12,874,426.991 19,788,860.548 64,057.253
<CAPTION>
----------------------------- --------------------------- ---------------------------
PRUDENTIAL FLEXIBLE
EQUITY JENNISON MANAGED
----------------------------- --------------------------- ---------------------------
01/01/96 11/21/95* 01/01/96 11/21/95* 01/01/96 11/21/95*
TO TO TO TO TO TO
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
----------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at
beginning of period ............... $ 1.03280 $ 1.00189 1.00919 0.99092 1.02847 1.00144
2. Accumulation unit value at
end of period ..................... $ 1.20807 $ 1.03280 1.13943 1.00919 1.15341 1.02847
3. Number of accumulation units
outstanding at end of period ...... 57,622,650.499 246,072.311 23,134,855.147 70,476.153 36,321,618.068 85,757.949
<CAPTION>
----------------------------- --------------------------- ---------------------------
SMALL CAPITALIZATION NATURAL
STOCK GLOBAL RESOURCES
----------------------------- --------------------------- ---------------------------
01/01/96 11/21/95* 01/01/96 11/21/95* 01/01/96 11/21/95*
TO TO TO TO TO TO
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
----------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at
beginning of period ............... $ 1.03778 $ 0.99701 1.01165 $ 1.00094 1.06254 $ 1.00032
2. Accumulation unit value at
end of period ..................... $ 1.22662 $ 1.03778 $ 1.19505 $ 1.01165 $ 1.37239 $ 1.06254
3. Number of accumulation units
outstanding at end of period ...... 10,592,779.335 72,074.222 10,486,229.266 19,338.842 4,717,583.475 0
* Commencement of Business
</TABLE>
21
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
The following selected financial data for Pruco Life Insurance Company and Subsidiaries should be read in
conjunction with the CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES and
notes thereto included in this prospectus beginning on page B-1.
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
GAAP BASIS | STATUTORY BASIS
---------------------------------------- | -------------------------
1996 1995 1994 | 1993 1992
---------- ---------- ---------- | ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues: |
Premiums and other revenue ........ $ 408,154 $ 401,287 $ 303,627 | $ 591,660 $ 541,248
Net investment income ............. 247,328 246,618 241,132 | 260,939 274,037
------------------------------------------|---------------------------
Total revenues ...................... 655,482 647,905 544,759 | 852,599 815,285
|
Benefits and expenses: |
Current and future benefits |
and claims ...................... 305,119 280,913 235,660 | 534,354 478,148
Other expenses .................... 122,006 134,790 179,173 | 157,557 129,701
------------------------------------------|---------------------------
Total benefits and expenses ......... 427,125 415,703 414,833 | 691,911 607,849
------------------------------------------|---------------------------
Income before income tax provision .. 228,357 232,202 129,926 | 160,688 207,436
|
Income tax provision ................ 79,135 79,558 48,031 | 83,640 96,578
------------------------------------------|---------------------------
Net income .......................... $ 149,222 $ 152,644 $ 81,895 | $ 77,048 $ 110,858
==========================================|===========================
Assets .............................. $9,678,427 $8,471,638 $7,713,183 | $7,172,104 $6,709,958
======================================================================
In 1996, the Company retroactively adopted applicable accounting pronouncements to present its financial
statements in conformity with generally accepted accounting principles. Refer to footnote 1.B. of the
Consolidated Financial Statements.
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pruco Life Insurance Company consists of Pruco Life Insurance Company and its
subsidiaries (collectively, the Company). Pruco Life Insurance Company is a
wholly owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Company markets individual life insurance and annuities
primarily through Prudential's sales force in the United States and in Taiwan.
The Company held $9.7 billion in assets at December 31, 1996, $5.3 billion of
which were held in Separate Accounts under variable life insurance policies and
variable annuity contracts. The remaining assets were held in the general
account for investment primarily in bonds, short-term investments and policy
loans.
The business climate in the United States was characterized by moderate economic
growth, low inflation, and growing investor confidence that fueled bond and
stock prices. Merger and consolidation activity accelerated, as well as
expansion of US companies into foreign markets. Those economic trends impacted
the insurance industry during the year, prompting them to implement strategies,
including consolidation, and sales of certain lines of business to counter risk,
control expenses and diversify products to remain competitive. Regulatory
changes which opened the insurance industry to other financial institutions,
particularly banks and mutual funds, heightened competition in investment type
products since those institutions were positioned to deliver the same products
through large, stable distribution channels. In addition, the industry has been
beset by negative publicity following the discovery of unacceptable sales
practices that resulted in investigations of most large insurers, including
Prudential. In spite of the difficult operating environment, 1996 was a year of
progress for the Company. It achieved solid performance in core businesses,
instituted significant cost reduction programs, and strategic initiatives which
are expected to place it on a firm course of continued growth.
The Company's assets were $9.7 billion at December 31, 1996 compared to $8.5
billion at December 31, 1995. Net income amounted to $149.2 million, a decrease
of $3.4 million or 2.2% compared to the $152.6 million earned in 1995.
1. RESULTS OF OPERATIONS
(A) 1996 VERSUS 1995
Premiums increased by $9.4 million from $42.1 million in 1995 to $51.5 million
for the same period in 1996. This change is primarily due to increased sales of
$6.2 million related to traditional life insurance products in our Taiwan branch
which continued to expand its business throughout 1996.
Policy charges and fee income increased approximately $5.9 million during the
current year as compared to 1995. This is primarily attributable to the
increased sales of new variable annuity products and fees earned on policyholder
withdrawal and surrender activity.
Other income decreased $6.2 million for the year ended December 31, 1996 from
the year ended December 31, 1995. This decrease is due to a reduction in
separate account net gains.
Policyholders' benefits increased $32.9 million during the current year to
$186.9 million. Approximately $10 million of this increase is attributable to
the mortality costs associated with the Company's products. The additional $22
million results from the increase in reserves associated with new and existing
contracts at December 31, 1996.
Interest credited to policyholders' account balances decreased by $8.7 million.
This decrease is primarily attributable to the decrease in policyholders'
account balances due to the Company experiencing increased policyholder
withdrawals and slightly lower interest rates.
Other operating expenses decreased $12.8 million for the year ended December 31,
1996 compared to the same period for 1995. This is attributable to a decrease in
the amortization of deferred policy acquisition costs, and a company wide
initiative to reduce expenses resulting in a decrease in general expenses.
(B) 1995 VERSUS 1994
The Company recorded net income of $152.6 million and $81.9 million for 1995 and
1994, respectively.
Premiums increased by $19.4 million from $22.7 million for the year ended
December 31, 1994 to $42.1 million for the same period in 1995, stemming from
increased sales of life insurance in the Taiwan branch and a steady flow of
renewals in the US.
Policy charges and fee income increased $10.3 million from $308.8 million for
the year ended December 31, 1994, to $319.1 million for the same period in 1995.
This is primarily attributable to the increased sales of new variable annuity
products and fees earned on policyholder withdrawal and surrender activity.
23
<PAGE>
Net investment income increased $5.5 million for the twelve months ended
December 31, 1995, from the same period in 1994. Policy loans increased $75.4
million, which resulted in additional policy loan interest income of $2.4
million. Secondly, the Company's income from equity securities increased $2.0
million as a result of favorable stock market conditions.
Net realized investment gains increased $54.3 million, to $13.2 million for the
year ended December 31,1995 from a loss of $41.1 million for the same period in
1994. The Company restructured its investment portfolio to more closely align
with the liability duration and to reduce the portfolio's interest rate risk.
Sales activity of the Company's fixed maturities produced favorable gains as a
result of falling interest rates during 1995.
Policyholders' benefits increased $32.0 million to $154.0 million in 1995, from
$122.0 million in 1994. This change is primarily attributable to the increase in
reserves for new and existing policies.
Interest credited to policyholders' account balances increased $13.2 million for
the twelve months ended December 31, 1995, from the same period in 1994. This
change was a result of increased interest rates offset with decreasing
policyholder account balances.
Other operating costs and expenses decreased $44.4 million for the year ended
December 31, 1995 due a decrease in the allocation of costs from Prudential, a
decrease in the amortization of deferred policy acquisition costs, and a company
wide initiative to reduce expenses resulting in a decrease in general expenses.
2. LIQUIDITY
For an insurance company, cash needs, for the purpose of paying current
benefits, making policy loans, and paying expenses, are met primarily from
premiums and investment income. Benefit expenses incurred in 1996, 1995, and
1994 were $186.9 million, $154.0 million, and $122.0 million, respectively. Cash
flows are anticipated to be sufficient to meet the Company's liquidity needs for
the foreseeable future.
3. CAPITAL RESOURCES
The primary components of the Company's total assets of $9.7 billion at December
31, 1996 are as follows (as a percentage of total assets): fixed income
securities 27.3%, separate account assets (fixed income and equity securities)
55.1%, policy loans 6.6%, and other assets 11.0%.
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE
WILLIAM M. BETHKE, Director.--President, Prudential Capital Markets Group since
1992.
IRA J. KLEINMAN, Director.-- Executive Vice President, International Insurance
Group since 1997; 1995 to 1997: Chief Marketing and Product Development Officer,
Prudential Individual Insurance Group 1993 to 1995: President, Prudential
Select; Prior to 1993: Senior Vice President of Prudential.
MENDEL A. MELZER, Director.--Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
ESTHER H. MILNES, President and Director.--Vice President and Actuary,
Prudential Individual Insurance Group since 1996; 1993 to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services; Prior
to 1993: Vice President and Associate Actuary of Prudential.
I. EDWARD PRICE, Vice Chairman and Director.--Senior Vice President and Actuary,
Prudential Individual Insurance Group since 1995; 1994 to 1995: Chief Executive
Officer, Prudential International Insurance; 1993 to 1994: President, Prudential
International Insurance; Prior to 1993: Senior Vice President and Company
Actuary of Prudential.
24
<PAGE>
KIYOFUMI SAKAGUCHI, Director.--President, Prudential International Insurance
Group since 1995; 1994 to 1995: Chairman and Chief Executive Officer, The
Prudential Life Insurance Co., Ltd.; Prior to 1994: President and Chief
Executive Officer, Asia Pacific Region-Prudential International Insurance, and
President, The Prudential Life Insurance Co., Ltd.
WILLIAM F. YELVERTON, Chairman and Director.--Chief Executive Officer,
Prudential Individual Insurance Group since 1995; Prior to 1995: Chief Executive
Officer, New York Life Worldwide.
OFFICERS WHO ARE NOT DIRECTORS
SUSAN L. BLOUNT, Secretary.--Vice President and Secretary of Prudential since
1995; Prior to 1995: Assistant General Counsel for Prudential Residential
Services Company.
C. EDWARD CHAPLIN, Treasurer.--Vice President and Treasurer of Prudential since
1995; 1993 to 1995: Managing Director and Assistant Treasurer of Prudential;
1992 to 1993: Vice President and Assistant Treasurer, Banking and Cash
Management for Prudential.
LINDA S. DOUGHERTY, Vice President, Comptroller and Chief Accounting
Officer.--Vice President and Comptroller, Prudential Individual Insurance Group
since 1997; Prior to 1997: Vice President, Accounting, Prudential.
JAMES C. DROZANOWSKI, Senior Vice President.--Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1994 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank; Prior to
1993: Operations Executive, Global Securities Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, Chief Legal Officer.--Chief Counsel, Variable Products, Law
Department of Prudential since 1995; 1994 to 1995: Associate General Counsel
with Paine Webber; Prior to 1994: Assistant Director in the Division of
Investment Management of the Securities and Exchange Commission.
FRANK MARINO, Senior Vice President.--Vice President, Policyholder Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
MARIO A. MOSSE, Senior Vice President.--Vice President, Annuity Services,
Prudential Investments since 1996; Prior to 1996: Senior Vice President, Chase
Manhattan Bank.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary.--Vice President and
Associate Actuary, Prudential.
KAREN L. SHAPIRO, Senior Vice President.--Vice President, Prudential Individual
Insurance Group since 1996; Vice President and Associate General Counsel,
Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior Associate
with Shaw, Pittman, Potts and Trowbridge.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992.
- ----------
* SUBSIDIARY OF PRUDENTIAL
25
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers of Pruco Life may also serve one or more affiliated companies
of Pruco Life. Allocations have been made as to each individual's time devoted
to his duties as an executive officer of Pruco Life and its subsidiaries. The
following table shows the cash compensation paid, based on these allocations, to
the executive officers of Pruco Life as a group for services rendered in all
capacities in Pruco Life and its subsidiaries during 1996. Directors of Pruco
Life who are also employees of Prudential do not receive compensation in
addition to their compensation as employees of Prudential.
- --------------------------------------------------------------------------------
NAME & PRINCIPAL | | ALLOCATED CASH
POSITION | YEAR | COMPENSATION ($)
- -----------------------------------------|----------|---------------------------
Esther H. Milnes | 1996 | $ 21,136
President | 1995 | $ 14,250
| 1994 | $ 9,846
| |
Linda S. Dougherty | 1996 | $ 55,931
Vice President & Comptroller | 1995 | $ ------
| 1994 | $ ------
| |
Hwei Chung S. Shao | 1996 | $ 21,048
Chief Actuary | 1995 | $ ------
| 1994 | $ ------
| |
Clifford E. Kirsch | 1996 | $ 54,190
Chief Legal Counsel | 1995 | $ 30,962
| 1994 | $ ------
| |
Frank P. Marino | 1996 | $ 12,076
Senior Vice President | 1995 | $ ------
| 1994 | $ ------
- --------------------------------------------------------------------------------
--- Did not hold position during this year.
- --------------------------------------------------------------------------------
26
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY PREFERRED
VARIABLE ANNUITY SUBACCOUNTS OF THE PRUCO LIFE
FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
HIGH
MONEY DIVERSIFIED YIELD CONSERVATIVE STOCK
MARKET BOND BOND BALANCED INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Shares of the Pruco Life
Flexible Premium Variable Annuity Account
at Net Asset Value (Note 3)................... $ 40,957,248 $ 26,066,486 $ 26,027,869 $ 75,919,621 $ 25,213,744
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 36,937,945 $ 23,949,348 $ 22,915,039 $ 74,193,184 $ 23,134,691
Equity of Pruco Life Insurance Company.......... 4,019,303 2,117,138 3,112,830 1,726,437 2,079,053
-------------- -------------- -------------- -------------- --------------
$ 40,957,248 $ 26,066,486 $ 26,027,869 $ 75,919,621 $ 25,213,744
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
HIGH
MONEY DIVERSIFIED YIELD CONSERVATIVE STOCK
MARKET BOND BOND BALANCED INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 668,125 $ 1,034,567 $ 1,307,513 $ 2,282,793 $ 203,986
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk and for
administration [Notes 5A and 5B].............. 178,173 127,526 96,727 493,856 59,096
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 178,173 127,526 96,727 493,856 59,096
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 489,952 907,041 1,210,786 1,788,937 144,890
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 0 0 4,297,251 199,451
Realized gain (loss) on shares redeemed
[average cost basis].......................... 0 (25,544) 1,894 0 0
Net unrealized gain (loss) on investments....... 0 (230,889) (588,812) (1,627,153) 529,306
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 0 (256,433) (586,918) 2,670,098 728,757
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 489,952 $ 650,608 $ 623,868 $ 4,459,035 $ 873,647
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
SMALL
EQUITY PRUDENTIAL FLEXIBLE CAPITALIZATION
INCOME EQUITY JENNISON MANAGED STOCK
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Shares of the Pruco Life
Flexible Premium Variable Annuity Account
at Net Asset Value (Note 3) $ 29,273,846 $ 83,093,388 $ 33,711,026 $ 42,886,437 $ 13,372,188
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 27,842,276 $ 79,623,690 $ 31,923,947 $ 41,893,717 $ 12,993,315
Equity of Pruco Life Insurance Company 1,431,570 3,469,698 1,787,079 992,720 378,873
-------------- -------------- -------------- -------------- --------------
$ 29,273,846 $ 83,093,388 $ 33,711,026 $ 42,886,437 $ 13,372,188
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
<CAPTION>
NATURAL
GLOBAL RESOURCES
-------------- --------------
<S> <C> <C>
ASSETS
Investment in Shares of the Pruco Life
Flexible Premium Variable Annuity Account
at Net Asset Value (Note 3) $ 14,850,451 $ 6,631,504
-------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 14,174,948 $ 6,474,364
Equity of Pruco Life Insurance Company 675,503 157,140
-------------- --------------
$ 14,850,451 $ 6,631,504
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
EQUITY PRUDENTIAL FLEXIBLE
INCOME EQUITY JENNISON MANAGED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 666,149 $ 1,323,338 $ 41,725 $ 933,498
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk and for
administration [Notes 5A and 5B] 158,635 432,392 168,568 259,129
-------------- -------------- -------------- --------------
NET EXPENSES 158,635 432,392 168,568 259,129
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) 507,514 890,946 (126,843) 674,369
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 751,896 6,017,025 0 3,579,046
Realized gain (loss) on shares redeemed
[average cost basis] 0 0 4,129 (13,304)
Net unrealized gain (loss) on investments 1,523,505 (1,007,503) 1,748,413 (1,657,410)
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS 2,275,401 5,009,522 1,752,542 1,908,332
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,782,915 $ 5,900,468 $ 1,625,699 $ 2,582,701
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
SMALL
CAPITALIZATION NATURAL
STOCK GLOBAL RESOURCES
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 64,330 $ 139,160 $ 28,446
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk and for
administration [Notes 5A and 5B] 78,744 81,055 34,118
-------------- -------------- --------------
NET EXPENSES 78,744 81,055 34,118
-------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) (14,414) 58,105 (5,672)
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 228,169 207,745 681,465
Realized gain (loss) on shares redeemed
[average cost basis] 7,077 6,038 (499)
Net unrealized gain (loss) on investments 817,819 796,437 (266,531)
-------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS 1,053,065 1,010,220 414,435
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,038,651 $ 1,068,325 $ 408,763
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A2
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY PREFERRED
VARIABLE ANNUITY SUBACCOUNTS OF THE PRUCO LIFE
FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND HIGH YIELD BOND
------------------------------ ------------------------------ ------------------------------
11/22/95* 11/22/95* 11/22/95*
TO TO TO
1996 12/31/95 1996 12/31/95 1996 12/31/95
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)...... $ 489,952 $ 123 $ 907,041 $ 434 $ 1,210,786 $ 1,032
Capital gains distributions
received........................ 0 $ 0 0 $ 23 0 $ 0
Realized gain (loss) on shares
redeemed
[average cost basis]............ 0 $ 0 (25,544) $ 0 1,894 $ 0
Net unrealized gain (loss) on
investments..................... 0 $ 0 (230,889) $ (104) (588,812) $ (758)
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS......... 489,952 123 650,608 353 623,868 274
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS..... 36,320,424 $ 144,295 23,222,899 $ 8,998 22,289,699 $ 9,090
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7].......................... 4,002,463 $ (9) 2,173,627 $ 10,001 3,094,028 $ 10,910
-------------- -------------- -------------- -------------- -------------- -------------
TOTAL INCREASE IN NET ASSETS........ 40,812,839 144,409 26,047,134 19,352 26,007,595 20,274
NET ASSETS:
Beginning of year................. 144,409 $ 0 19,352 $ 0 20,274 $ 0
-------------- -------------- -------------- -------------- -------------- -------------
End of year....................... $ 40,957,248 $ 144,409 $ 26,066,486 $ 19,352 $ 26,027,869 $ 20,274
-------------- -------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------- -------------
*Commencement of Business
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
CONSERVATIVE BALANCED STOCK INDEX EQUITY INCOME
------------------------------ -------------- --------------
11/22/95* 05/01/96*
TO TO
1996 12/31/95 12/31/96 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 1,788,937 $ 266 $ 144,890 $ 507,514
Capital gains distributions
received 4,297,251 $ 353 199,451 751,896
Realized gain (loss) on shares
redeemed
[average cost basis] 0 $ 0 0 0
Net unrealized gain (loss) on
investments (1,627,153) $ 112 529,306 1,523,505
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 4,459,035 731 873,647 2,782,915
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 69,714,258 $ 90,594 22,208,546 25,008,509
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 1,655,314 $ (311) 2,131,551 1,395,127
-------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 75,828,607 91,014 25,213,744 29,186,551
NET ASSETS:
Beginning of year 91,014 $ 0 0 87,295
-------------- -------------- -------------- --------------
End of year $ 75,919,621 $ 91,014 $ 25,213,744 $ 29,273,846
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
*Commencement of Business
<CAPTION>
EQUITY
------------------------------
11/22/95* 11/22/95*
TO TO
12/31/95 1996 12/31/95
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 259 $ 890,946 $ 142
Capital gains distributions
received $ 431 6,017,025 $ 337
Realized gain (loss) on shares
redeemed
[average cost basis] $ 0 0 $ 0
Net unrealized gain (loss) on
investments $ (395) (1,007,503) $ 3,048
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 295 5,900,468 3,527
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS $ 65,753 73,501,350 $ 253,239
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] $ 21,247 3,437,427 $ (2,623)
-------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 87,295 82,839,245 254,143
NET ASSETS:
Beginning of year $ 0 254,143 $ 0
-------------- -------------- --------------
End of year $ 87,295 $ 83,093,388 $ 254,143
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A4
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY PREFERRED
VARIABLE ANNUITY SUBACCOUNTS OF THE PRUCO LIFE
FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
PRUDENTIAL JENNISON FLEXIBLE MANAGED STOCK
------------------------------ ------------------------------ ------------------------------
11/22/95* 11/22/95* 11/22/95*
TO TO TO
1996 12/31/95 1996 12/31/95 1996 12/31/95
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)...... $ (126,843) $ 0 $ 674,369 $ 206 $ (14,414) $ 34
Capital gains distributions
received........................ 0 $ 0 3,579,046 $ 426 228,169 $ 101
Realized gain (loss) on shares
redeemed
[average cost basis]............ 4,129 $ 0 (13,304) $ 0 7,077 $ 0
Net unrealized gain (loss) on
investments..................... 1,748,413 $ 759 (1,657,410) $ (25) 817,819 $ 659
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS......... 1,625,699 759 2,582,701 607 1,038,651 794
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS..... 30,279,548 $ 70,817 39,209,425 $ 87,611 11,896,686 $ 74,306
-------------- -------------- -------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7].......................... 1,734,655 $ (452) 1,006,111 $ (18) 362,054 $ (303)
-------------- -------------- -------------- -------------- -------------- -------------
TOTAL INCREASE IN NET ASSETS........ 33,639,902 71,124 42,798,237 88,200 13,297,391 74,797
NET ASSETS:
Beginning of year................. 71,124 $ 0 88,200 $ 0 74,797 $ 0
-------------- -------------- -------------- -------------- -------------- -------------
End of year....................... $ 33,711,026 $ 71,124 $ 42,886,437 $ 88,200 $ 13,372,188 $ 74,797
-------------- -------------- -------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------- -------------- -------------
*Commencement of Business
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
GLOBAL NATURAL RESOURCES
------------------------------ ------------------------------
11/22/95* 11/22/95*
TO TO
1996 12/31/95 1996 12/31/95
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 58,105 $ 138 $ (5,672) $ 80
Capital gains distributions
received 207,745 $ 193 681,465 $ 446
Realized gain (loss) on shares
redeemed
[average cost basis] 6,038 $ 0 (499) $ 0
Net unrealized gain (loss) on
investments 796,437 $ (259) (266,531) $ 96
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 1,068,325 72 408,763 622
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 13,112,774 $ 19,677 6,069,080 $ 0
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 646,280 $ 3,323 143,039 $ 10,000
-------------- -------------- -------------- --------------
TOTAL INCREASE IN NET ASSETS 14,827,379 23,072 6,620,882 10,622
NET ASSETS:
Beginning of year 23,072 $ 0 10,622 $ 0
-------------- -------------- -------------- --------------
End of year $ 14,850,451 $ 23,072 $ 6,631,504 $ 10,622
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
*Commencement of Business
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11.
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY PREFERRED
VARIABLE ANNUITY SUBACCOUNTS OF THE PRUCO LIFE
FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1: GENERAL
Pruco Life Flexible Premium Variable Annuity Account (the "Account") was
established on June 16, 1995 under Arizona law as a separate investment
account of Pruco Life Insurance Company ("Pruco Life") which is a
wholly-owned subsidiary of The Prudential Insurance Company of America
("Prudential"). The assets of the Account are segregated from Pruco Life's
other assets. Currently, Discovery Preferred Variable Annuity Contracts
("Discovery Preferred") and Discovery Select Variable Annuity Contracts
("Discovery Select") invest in the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are twenty-three subaccounts
within the Account. Discovery Preferred Contracts offer the option to
invest in twelve of these subaccounts, each of which invests in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series
Fund"). The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles (GAAP). The preparation of the
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at the
net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions
are reported on an average cost basis. Purchase and sale transactions are
recorded as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received
are reinvested in additional shares of the Series Fund and are recorded on
the ex-dividend date.
Equity of Pruco Life Insurance Company--Pruco Life maintains a position in
the Account for the purpose of administering activity in the Account. The
activity includes unit transactions, fund share transactions, and expense
processing. Pruco Life monitors the balance daily and transfers funds based
upon anticipated activity. At times, Pruco Life may owe an amount to the
Account, which is reflected in Pruco Life's equity as a negative balance.
The position does not have an effect on the Contract owner's account or the
related unit value.
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the
number of shares of each portfolio held by the subaccounts of the Account
and the aggregate cost of investments in such shares at December 31, 1996
were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND HIGH YIELD BOND CONSERVATIVE BALANCED
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Number of shares: 4,095,725 2,355,669 3,308,281 4,892,655
Net asset value
per share: $ 10.00000 $ 11.06543 $ 7.86749 $ 15.51706
Cost: $ 40,957,248 $ 26,297,479 $ 26,617,439 $ 77,546,663
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------------
PRUDENTIAL
STOCK INDEX EQUITY INCOME EQUITY JENNISON
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Number of shares: 1,061,868 1,581,531 3,081,540 2,353,598
Net asset value
per share: $ 23.74471 $ 18.50982 $ 26.96489 $ 14.32319
Cost: $ 24,684,438 $ 27,750,736 $ 84,097,843 $ 31,961,854
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------------
SMALL
CAPITALIZATION
FLEXIBLE MANAGED STOCK GLOBAL NATURAL RESOURCES
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Number of shares: 2,411,026 959,570 831,737 335,511
Net asset value
per share: $ 17.78763 $ 13.79187 $ 17.85474 $ 19.76541
Cost: $ 44,543,873 $ 12,553,710 $ 14,054,274 $ 6,897,939
</TABLE>
A8
<PAGE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total Contract owner equity
for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND HIGH YIELD BOND CONSERVATIVE BALANCED
----------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(Discovery
Preferred):...... 18,724,231.329 16,579,588.790 12,180,746.727 64,865,522.269
Unit value
(Discovery
Preferred):..... $ 1.04505 $ 1.06033 $ 1.12263 $ 1.14380
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Preferred):..... $ 19,567,758 $ 17,579,835 $ 13,674,472 $ 74,193,184
----------------- ------------------- ----------------- -----------------------
Contract Owner
Units
Outstanding
(Discovery
Select):........ 16,621,393.391 6,007,103.917 8,231,177.952 N/A
Unit value
(Discovery
Select):........ $ 1.04505 $ 1.06033 $ 1.12263 N/A
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Select):........ $ 17,370,187 $ 6,369,513 $ 9,240,567 N/A
----------------- ------------------- ----------------- -----------------------
TOTAL CONTRACT
OWNER EQUITY:... $ 36,937,945 $ 23,949,348 $ 22,915,039 $ 74,193,184
----------------- ------------------- ----------------- -----------------------
----------------- ------------------- ----------------- -----------------------
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------
PRUDENTIAL
STOCK INDEX EQUITY INCOME EQUITY JENNISON
----------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(Discovery
Preferred):...... 12,874,426.991 19,788,860.548 57,622,650.499 23,134,855.147
Unit value
(Discovery
Preferred):..... $ 1.13652 $ 1.23339 $ 1.20807 $ 1.13943
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Preferred):..... $ 14,632,044 $ 24,407,383 $ 69,612,196 $ 26,360,548
----------------- ------------------- ----------------- -----------------------
Contract Owner
Units
Outstanding
(Discovery
Select):........ 7,481,300.307 2,784,920.648 8,287,180.736 4,882,616.029
Unit value
(Discovery
Select):........ $ 1.13652 $ 1.23339 $ 1.20807 $ 1.13943
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Select):........ $ 8,502,647 $ 3,434,893 $ 10,011,494 $ 5,563,399
----------------- ------------------- ----------------- -----------------------
TOTAL CONTRACT
OWNER EQUITY:... $ 23,134,691 $ 27,842,276 $ 79,623,690 $ 31,923,947
----------------- ------------------- ----------------- -----------------------
----------------- ------------------- ----------------- -----------------------
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------
SMALL
CAPITALIZATION
FLEXIBLE MANAGED STOCK GLOBAL NATURAL RESOURCES
----------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(Discovery
Preferred):...... 36,321,618.068 10,592,779.335 10,486,229.266 4,717,583.475
Unit value
(Discovery
Preferred):..... $ 1.15341 $ 1.22662 $ 1.19505 $ 1.37239
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Preferred):..... $ 41,893,717 $ 12,993,315 $ 12,531,568 $ 6,474,364
----------------- ------------------- ----------------- -----------------------
Contract Owner
Units
Outstanding
(Discovery
Select):........ N/A N/A 1,375,155.605 N/A
Unit value
(Discovery
Select):........ N/A N/A $ 1.19505 N/A
----------------- ------------------- ----------------- -----------------------
Contract Owner
Equity
(Discovery
Select):........ N/A N/A $ 1,643,380 N/A
----------------- ------------------- ----------------- -----------------------
TOTAL CONTRACT
OWNER EQUITY:... $ 41,893,717 $ 12,993,315 $ 14,174,948 $ 6,474,364
----------------- ------------------- ----------------- -----------------------
----------------- ------------------- ----------------- -----------------------
</TABLE>
A9
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
1.25% are applied against the net assets representing equity of Discovery
Preferred and Discovery Select Contract owners held in each subaccount.
Mortality risk is that Annuitants may live longer than estimated and
expense risk is that the cost of issuing and administering the policies may
exceed the estimated expenses. For 1996, the amount of charges paid to
Pruco Life for Discovery Preferred was $1,870,725. For 1996, the amount of
charges paid to Pruco Life for Discovery Select was $113,273.
B. Administration Charge
The administration charge at an effective annual rate of .15% is applied
against the net assets representing equity of Discovery Preferred and
Discovery Select Contract owners held in each subaccount. Administration
charges include costs associated with issuing the Contract, establishing
and maintaining records, and providing reports to Contract owners. For 1996
the amount of these charges paid to Pruco Life for Discovery Preferred was
$225,711. For 1996 the amount of these charges paid to Pruco Life for
Discovery Select was $13,667.
C. Withdrawal Charge
Subsequent to a Contract owner redemption, a withdrawal charge may be made
upon full or partial withdrawals. The charge compensates Pruco Life for
paying all of the expenses of selling and distributing the Contracts,
including sales commissions, printing of prospectuses, sales
administration, preparation of sales literature, and other promotional
activities. No withdrawal charge is imposed whenever earnings are
withdrawn. For 1996, the amount of these charges paid to Pruco Life for
Discovery Preferred was $88,036. For 1996, the amount of these charges paid
to Pruco Life for Discovery Select was $2,633.
NOTE 6: TAXES
Pruco Life is taxed as a "life insurance company" under the Internal
Revenue Code and the operations of the Account form a part of and are taxed
with those of Pruco Life. Under current federal law, no federal income
taxes are payable by the Account. As such, no provision for tax liability
has been recorded.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers
represents the net contributions (withdrawals) of Pruco Life to (from) the
Account.
A10
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND HIGH YIELD BOND CONSERVATIVE BALANCED
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1996
Purchases......... $ 41,218,000 $ 26,276,000 $ 26,393,000 $ 70,905,000
Sales............. $ (1,019,000) $ (1,007,000) $ (106,000) $ 0
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------------
PRUDENTIAL
STOCK INDEX EQUITY INCOME EQUITY JENNISON
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1996
Purchases......... $ 24,281,000 $ 26,245,000 $ 76,538,000 $ 33,037,000
Sales............. $ 0 $ 0 $ 0 $ (1,185,000)
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------------
SMALL
CAPITALIZATION NATURAL
FLEXIBLE MANAGED STOCK GLOBAL RESOURCES
----------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1996
Purchases......... $ 41,174,000 $ 12,361,000 $ 13,860,000 $ 6,236,000
Sales............. $ (1,204,000) $ (170,000) $ (182,000) $ (58,000)
</TABLE>
A11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
Discovery Preferred Variable Annuity Subaccounts of
Pruco Life Flexible Premium Variable Annuity Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Money Market Subaccount,
Diversified Bond Subaccount, High Yield Bond Subaccount, Conservative Balanced
Subaccount, Stock Index Subaccount, Equity Income Subaccount, Equity Subaccount,
Prudential Jennison Subaccount, Flexible Managed Subaccount, Small
Capitalization Stock Subaccount, Global Subaccount and Natural Resources
Subaccount of Pruco Life Flexible Premium Variable Annuity Account at December
31, 1996, and the results of each of their operations and the changes in each of
their net assets for the year then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Pruco Life Insurance Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of shares owned in The Prudential Series
Fund, Inc. at December 31, 1996, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
Pruco Life Flexible Premium Variable Annuity
Account and the Board of Directors
of Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying statements of changes in net assets of Pruco
Life Flexible Premium Variable Annuity Account of Pruco Life Insurance Company
(comprising, respectively, the Money Market, Diversified Bond, Equity, Flexible
Managed, Conservative Balanced, High Yield Bond, Equity Income, Natural
Resources, Global, Prudential Jennison, and Small Capitalization Stock
subaccounts) for the periods presented in the year ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting the Pruco Life Flexible Premium Variable Annuity Account for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A13
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<CAPTION>
DECEMBER 31,
1996 1995
----------- ------------
(000'S)
ASSETS
<S> <C> <C>
Fixed maturities
Held to maturity $ 405,731 $ 437,727
Available for sale 2,236,817 2,144,854
Equity securities 3,748 4,036
Mortgage loans 46,915 64,464
Investment real estate - 4,059
Policy loans 639,782 569,273
Other long term investments 4,528 4,159
Short term investments 169,830 228,016
----------- ------------
Total invested assets 3,507,351 3,456,588
----------- ------------
Cash 73,766 41,435
Deferred policy acquisition costs 633,159 566,976
Premiums due 9,084 6,367
Accrued investment income 62,110 59,862
Receivable from affiliates 1,901 8,275
Federal income tax receivable 7,191 6,375
Reinsurance recoverable on unpaid losses 27,014 27,914
Other assets 20,000 12,578
Separate Account assets 5,336,851 4,285,268
----------- ------------
TOTAL ASSETS $9,678,427 $8,471,638
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Future policy benefits and other policyholders'
liabilities $ 557,351 $ 501,200
Policyholders' account balances 2,188,862 2,218,330
Deferred federal income tax payable 148,960 141,048
Payable to affiliate 51,729 41,584
Other liabilities 55,090 37,387
Separate Account liabilities 5,277,454 4,263,896
----------- ------------
Total Liabilities 8,279,446 7,203,445
----------- ------------
Contingencies - Note 9
Stockholder's Equity
Common Stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1996 and 1995 2,500 2,500
Paid-in-capital 439,582 439,582
Net unrealized investment gains (less deferred
income tax) 12,402 30,836
Retained earnings 944,497 795,275
----------- ------------
Total Stockholder's Equity 1,398,981 1,268,193
----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $9,678,427 $8,471,638
=========== ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-1
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
REVENUES
<S> <C> <C> <C>
Premiums $ 51,525 $ 42,089 $ 22,689
Policy charges and fee income 324,976 319,012 308,753
Net investment income 247,328 246,618 241,132
Realized investment gains (losses) 10,835 13,200 (41,074)
Other income 20,818 26,986 13,259
-----------------------------------
Total Revenues 655,482 647,905 544,759
-----------------------------------
BENEFITS AND EXPENSES
Policyholders' benefits 186,873 153,987 121,949
Interest credited to policyholders' account
balances 118,246 126,926 113,711
Other operating costs and expenses 122,006 134,790 179,173
-----------------------------------
Total Benefits and Expenses 427,125 415,703 414,833
-----------------------------------
Income before income tax provision 228,357 232,202 129,926
-----------------------------------
Income tax provision 79,135 79,558 48,031
-----------------------------------
NET INCOME $ 149,222 $ 152,644 $ 81,895
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-2
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
Common Stock
<S> <C> <C> <C>
Balance, beginning of year $ 2,500 $ 2,500 $ 2,500
Issued during year - - -
-----------------------------------
Balance, end of year 2,500 2,500 2,500
-----------------------------------
Paid in Capital
Balance, beginning of year 439,582 439,582 439,582
Paid in during year - - -
-----------------------------------
Balance, end of year 439,582 439,582 439,582
-----------------------------------
Net Unrealized Investment Gains (Losses)
(Less Deferred Income Tax)
Balance, beginning of year 30,836 (1,349) -
Adoption of SFAS 115 - (39,762) -
Net change in unrealized investment
gains (losses) (18,434) 71,947 (1,349)
-----------------------------------
Balance, end of year 12,402 30,836 (1,349)
-----------------------------------
RETAINED EARNINGS
Balance, beginning of year 795,275 642,631 560,736
Net income 149,222 152,644 81,895
-----------------------------------
Balance, end of year 944,497 795,275 642,631
-----------------------------------
TOTAL STOCKHOLDER'S EQUITY $1,398,981 $1,268,193 $1,083,364
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-3
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
------------------------------------------
(000'S)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 149,222 $ 152,644 $ 81,895
Adjustments to reconcile net income to net cash from
operating activities:
Increase in future policy benefits and other policyholders'
liabilities 56,151 22,877 31,932
General account policy fee income (50,286) (56,637) (48,401)
Interest credited to policyholders' account balances 118,246 126,926 113,711
Net decrease (increase) in Separate Accounts (38,025) (3,520) (4,121)
Net realized investment (gains) losses (10,835) (13,200) 41,074
Amortization and other non-cash items 26,709 (8,106) 6,228
Change in:
Accrued investment income (2,248) (480) (2,597)
Premiums due (2,717) (1,957) (1,374)
Receivable from affiliates 6,374 (758) (637)
Note receivable from affiliate -- -- 50,000
Deferred policy acquisition costs (66,183) 31,318 34,124
Federal income tax receivable (816) 12,031 (28,908)
Other assets (6,522) (12,689) (11,121)
Payable to affiliate 10,145 11,327 (24,029)
Deferred federal income tax payable 7,912 30,779 --
Other liabilities 17,703 (61,306) (5,293)
-----------------------------------------
Cash Flows From Operating Activities 214,830 229,249 232,483
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Held to maturity 138,127 144,898 2,710,423
Available for sale 3,886,254 1,886,687 --
Equity securities 7,527 5,557 1,910
Mortgage loans 19,226 7,395 10,821
Other long term investments 288 1,559 607
Investment real estate 4,488 2,926 8,677
Payments for the purchase of:
Fixed maturities:
Held to maturity (114,494) (135,092) (2,561,082)
Available for sale (4,008,810) (1,741,139) --
Equity securities (4,697) (4,279) (2,436)
Mortgage loans -- -- (35,276)
Other long term investments (657) (1,674) (1,584)
Policy loans (70,509) (75,411) (73,591)
Net proceeds (payments) of short term investments 58,186 (36,482) 9,845
-----------------------------------------
Cash Flows From Investing Activities (85,071) 54,945 68,314
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 536,370 95,039 114,105
Withdrawals (net of transfers to/from separate accounts) (633,798) (365,578) (387,793)
-----------------------------------------
Cash Flows From Financing Activities (97,428) (270,539) (273,688)
-----------------------------------------
Net increase in Cash 32,331 13,655 27,109
Cash, beginning of year 41,435 27,780 671
-----------------------------------------
CASH, END OF YEAR $ 73,766 $ 41,435 $ 27,780
=========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 61,760 $ 53,107 $ 56,089
=========================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B-4
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Pruco Life Insurance Company (Pruco Life), a stock life insurance company,
and its subsidiaries (collectively, the Company). Pruco Life is a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential), a mutual life insurance company. The Company markets
individual life insurance and deferred annuities primarily through
Prudential's sales force in the United States, and in Taiwan. All
significant intercompany balances and transactions have been eliminated in
consolidation.
B. Basis of Presentation
The Financial Accounting Standards Board (FASB) issued Interpretation No. 40
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises", as amended by Statement of Financial
Accounting Standards (SFAS) No. 120 "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts", effective for fiscal years beginning after
December 15, 1995. Financial statements of mutual life insurance companies,
and their wholly owned stock life insurance subsidiaries, for periods
beginning after December 15, 1995 which are prepared on the basis of
statutory accounting practices will no longer be characterized as in
conformity with generally accepted accounting principles (GAAP). As a
result, the Company has prepared its 1996 consolidated financial statements
in accordance with all applicable GAAP pronouncements. The 1995 and 1994
consolidated financial statements, which were previously prepared on the
statutory basis of accounting, have been restated in accordance with GAAP.
The cumulative effect of adopting GAAP as of January 1, 1994 was an increase
in retained earnings of $378.3 million. See Note 7 for a reconciliation of
the Company's surplus and net income determined in accordance with statutory
accounting practices with equity and net income determined on a GAAP basis.
On January 1, 1995, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expanded the use of fair
value accounting for those securities that a company does not have positive
intent and ability to hold to maturity. Implementation of this statement
decreased stockholder's equity by $39.8 million net of deferred income tax
benefit of $21.4 million. In 1994 prior to the adoption of SFAS 115, all
fixed maturities were carried at amortized cost.
C. Investments
Fixed Maturities - Securities held to maturity are those that the Company
has the positive intent and ability to hold to maturity and are principally
reported at amortized cost. Amortized cost is adjusted to estimated fair
value for impairments which are deemed to be other than temporary.
Where the Company may not have the positive intent to hold fixed maturities
until maturity, the securities are classified as "Available for Sale." These
securities are reported at market value based principally on their quoted
market prices. The associated unrealized gains and losses, net of income
taxes and deferred policy acquisition costs, are included as a component of
equity or if deemed to be other than temporary, are included as a realized
loss.
Equity Securities consist primarily of common and preferred stocks.
Marketable equity securities are reported at market value based principally
on their quoted market prices. Cost basis of the equity securities is $3.9
million and $5.3 million as of December 31, 1996 and 1995, respectively. The
associated unrealized gains and losses are included as a component of
equity.
Mortgage Loans and Policy Loans are stated primarily at unpaid principal
balances, net of unamortized discounts. Interest income is recognized as net
investment income earned.
B-5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
Investment Real Estate acquired through foreclosure during 1994 was sold in
1996 for $4.5 million.
Other Long Term Investments, which consist of limited partnerships, are
valued at the aggregate net equity in the partnerships. Certain investments
in this category were non-income producing at December 31, 1995. These
investments were $.3 million at December 31, 1995. There were no non-income
producing investments at December 31, 1996 and 1994.
Partnership and joint venture interests in which the Company does not have
control and a majority economic interest are reported on the equity basis of
accounting. Non real estate related interests of $4.5 million and $4.1
million are included in other long term investments, at December 31, 1996
and 1995, respectively. The Company's share of net income from such entities
was $1.4 million, $.3 million, and $1.9 million for the years ended December
31, 1996, 1995, and 1994, respectively, and is reported in net investment
income.
Realized investment gains and losses are reported based on specific
identification of the investments sold.
Short-term investments are fixed maturities that mature within one year, and
are reported at estimated fair value.
D. Revenue Recognition and Related Expenses
Universal life contracts are long duration life insurance contracts that
involve significant mortality and morbidity risk with both fixed and
guaranteed terms. Investment contracts are long duration contracts that do
not subject the insurance enterprise to risks arising from policyholder
mortality or morbidity. Amounts received as payments for these contracts are
reported as deposits to policyholders' account balances. Revenues from these
contracts consist primarily of amounts assessed during the period against
policyholders' account balances for mortality charges, policy administration
fees and surrender charges. Policy benefits and claims that are charged to
expenses include benefit claims incurred in the period in excess of related
policyholders' account balances.
Premiums, policy benefits and claims from traditional life and annuity
policies, generally are recognized in operations when due.
E. Deferred Policy Acquisition Costs
Acquisition costs consist of commissions and other costs which vary with and
are primarily related to the production or acquisition of new business.
Acquisition costs related to universal life products and investment-type
contracts are deferred and amortized in proportion to total estimated gross
profits arising principally from investment results, mortality, expense
margins and surrender charges based on historical and anticipated future
experience. Amortization of deferred policy acquisition costs was $9.3
million, $54.4 million, and $76.0 million for the years ended December 31,
1996, 1995, and 1994, respectively. Deferred policy acquisition costs are
analyzed to determine if they are recoverable from future income, including
investment income. If such costs are determined to be unrecoverable, they
are expensed at the time of determination. The effect on the deferred policy
acquisition asset that would result from realization of unrealized
investment gains (losses) is recognized with an offset to unrealized
investment gains (losses) in consolidated stockholder's equity.
B-6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
F. Future Policy Benefits and Policyholders' Account Balances
Benefit reserve liabilities for payout annuities such as matured deferred
annuities and supplementary contracts represent the present values of
estimated future benefits payments and related expenses. Present values for
these contracts are computed using interest rates ranging from 6.5% to 11%.
The mortality assumption for these contracts is the 83 IAM tables. Reserves
for supplementary benefits are stated at interest rates that vary from 4% to
6.5% using mortality and morbidity assumptions either from company
experience or various actuarial tables.
When liabilities for future policy benefits plus the present value of
expected future gross deposits are insufficient to provide expected future
policy benefits and expenses, unrecoverable deferred policy acquisition
costs are written off and thereafter, if required, a premium deficiency
reserve is established as a charge to income.
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross deposits plus interest credited less
expense and mortality charges and withdrawals.
Interest crediting rates on life insurance products range from 3.35% to 7%.
G. Separate Accounts
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed
Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized separate account, which funds the Modified Guaranteed Annuity
Contract and the Market Value Adjustment Annuity Contract. Owners of the
Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment
Annuity Contracts do not participate in the investment gain or loss from
assets relating to such accounts. Such gain or loss is borne, in total, by
the Company.
All Separate Account assets are carried at market value. Deposits to all
Separate Accounts are reported as increases in Separate Account liabilities,
which equal the Separate Account policy account fund values. Charges
assessed against Policyholders' account balances for mortality, policy
administration and surrender charges are included in policy charges and fee
income. Mortality and expense risk charges are applied against the
Policyholders' account balance. The Separate Account assets are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
H. Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
B-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
2. FIXED MATURITIES
Gross unrealized gains and losses for securities classified as Held to Maturity
and Available for Sale, by major security type, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 405,731 10,947 576 416,102
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 405,731 $ 10,947 $ 576 $ 416,102
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 32,055 $ 30 $ 174 $ 31,911
Foreign government bonds 90,447 857 205 91,099
Corporate securities 2,087,250 30,365 4,206 2,113,409
Mortgage-backed securities 398 - - 398
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,210,150 $ 31,252 $ 4,585 $ 2,236,817
- ---------------------------------------------------------------------------------------------------
</TABLE>
B-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 437,727 18,629 1,805 454,551
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 437,727 $ 18,629 $ 1,805 $ 454,551
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 324,854 $ 6,830 $ 61 $ 331,623
Foreign government bonds 73,042 3,055 - 76,097
Corporate securities 1,507,248 54,545 2,168 1,559,625
Mortgage-backed securities 169,190 8,717 398 177,509
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,074,334 $ 73,147 $ 2,627 $ 2,144,854
- ---------------------------------------------------------------------------------------------------
</TABLE>
B-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, categorized by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may prepay obligations
with or without call or prepayment penalties.
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Held to Maturity
Due in one year or less $ 28,653 $ 28,762
Due after one year through five years 156,013 158,183
Due after five years through ten years 194,765 202,766
Due after ten years 26,300 26,391
Mortgage-backed securities -- --
- ------------------------------------------------------------------------------
Total $ 405,731 $ 416,102
- ------------------------------------------------------------------------------
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Available For Sale
Due in one year or less $ 130,400 $ 131,301
Due after one year through five years 1,561,854 1,578,979
Due after five years through ten years 398,090 404,920
Due after ten years 119,408 121,219
Mortgage-backed securities 398 398
- ------------------------------------------------------------------------------
Total $2,210,150 $2,236,817
- ------------------------------------------------------------------------------
Proceeds from the sale of fixed maturities during 1996, 1995, and 1994 were $3.8
billion, $1.8 billion, and $2.6 billion, respectively. Gross gains of $28.7
million, $28.8 million, and $16.8 million and gross losses of $19.7 million,
$17.5 million, and $49.8 million were realized on those sales during 1996, 1995,
and 1994, respectively.
B-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
3. Net Investment Income YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net investment income consists of:
Gross investment income
Fixed maturities
Held to maturity $ 33,419 $ 33,458 $ 196,909
Available for sale 152,445 160,740 --
Equity securities 44 104 14
Mortgage loans 5,669 7,757 4,041
Investment real estate 613 647 2,146
Policy loans 33,449 29,775 25,692
Short term investments 16,780 15,092 12,676
Other 9,438 3,949 5,075
-------------------------------------------
251,857 251,522 246,553
Investment expenses (4,529) (4,904) (5,421)
===========================================
Net investment income $ 247,328 $ 246,618 $ 241,132
===========================================
4. Investment Gains (Losses)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Realized investment gains (losses)
Fixed maturities - Available for sale $ 9,036 $ 11,359 $ (38,180)
Equity securities 781 2,020 503
Mortgage loans 1,677 (90) (4,581)
Investment real estate 487 (99) 1,184
Other (1,146) 10 --
-------------------------------------------
Realized investment gains (losses) $ 10,835 $ 13,200 $ (41,074)
===========================================
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net unrealized investment gains
(losses), beginning of period $ 30,836 $ (1,349) $ --
Net unrealized investment gains (losses)
Fixed maturities - Available for sale (43,853) 131,712 --
Equity securities 1,403 827 (2,108)
-------------------------------------------
(42,450) 132,539 (2,108)
Deferred income tax benefit (provision) 15,398 (47,714) 759
Deferred policy acquisition costs
(net of deferred income taxes) 8,618 (12,878) --
-------------------------------------------
Net change in unrealized
investment gains (losses) (18,434) 71,947 (1,349)
Adoption of SFAS 115 -- (39,762) --
-------------------------------------------
Net unrealized investment gains
(losses), end of period $ 12,402 $ 30,836 (1,349)
===========================================
</TABLE>
B-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
5. Fair Value Information
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies. Considerable judgment is
applied, as necessary, in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair values.
Fixed Maturities - Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities are
estimated using a discounted cash flow model which considers the current market
spreads between the U.S. Treasury yield curve and corporate bond yield curve
adjusted for the type of issue, its current quality and its remaining average
life.
Equity Securities - Fair value is based on quoted market prices.
Mortgage Loans - The fair value of the mortgage loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for a
similar quality mortgage.
Policy Loans - The estimated fair value is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
Policyholders' Account Balances - Fair values for policyholders' account
balances are equal to the policy account values.
Short-term Investments - Fair values for short-term investments are based on
quoted market prices or estimates from independent pricing services.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(000'S)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities:
Held to maturity $ 405,731 $ 416,102 $ 437,727 $ 454,551
Available for sale 2,236,817 2,236,817 2,144,854 2,144,854
Mortgage loans 46,915 46,692 64,464 63,635
Policy loans 639,782 623,218 569,273 577,975
Equity securities 3,748 3,748 4,036 4,036
Short-term investments 169,830 169,830 228,016 228,016
Financial Liabilities:
Policyholders'
account balances $ 2,188,862 $ 2,188,862 $ 2,218,330 $ 2,218,330
</TABLE>
B-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
6. Income Taxes
The Company is a member of a group of affiliated companies which join in filing
a consolidated federal income tax return in addition to separate company state
and local tax returns. The Internal Revenue Code limits the amount of nonlife
insurance losses that may offset life insurance company taxable income.
Companies operating outside the United States are taxed under applicable foreign
statutes.
Pursuant to the tax allocation arrangement, total federal income tax expense is
determined on a separate company basis. Members with losses record tax benefits
to the extent such losses are recognized in the consolidated federal tax
provision. The Company has a net receivable from Prudential of $7.2 million and
$6.4 million as of December 31, 1996 and 1995, respectively.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Current income tax provision:
Federal income tax $ 59,489 $ 65,131 $ 59,641
State and local income tax 703 1,876 3,036
Foreign income tax 4 7 7
-------------------------------------
Total current income tax 60,196 67,014 62,684
Deferred income tax provision
(benefit):
Federal income tax 18,413 12,196 (14,246)
State and local income tax 526 348 (407)
-------------------------------------
Total deferred income tax 18,939 12,544 (14,653)
-------------------------------------
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
The income tax provision is different from the amount computed using the
expected federal income tax rate of 35% for the following reasons:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Expected federal income tax expense $ 79,926 $ 81,271 $ 45,474
State income taxes 1,229 2,224 2,629
Other (2,020) (3,937) (72)
=====================================
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
B-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The components of net deferred income taxes payable are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995
------------------------------
(000'S)
Deferred Income Tax Assets
Insurance liabilities $ 38,532 $ 40,732
Other -- --
------------------------------
Total deferred income tax assets $ 38,532 $ 40,732
==============================
Deferred Income Tax Liabilities
Deferred acquisition costs $ 173,785 $ 153,526
Net investment gains 12,502 28,157
Other 1,205 97
------------------------------
Total deferred income tax liabilities 187,492 181,780
------------------------------
Deferred federal income tax payable $ 148,960 $ 141,048
==============================
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service is examining
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. However, management believes there are adequate
defenses against, or sufficient reserves to provide for, such adjustments.
B-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
7. Stockholder's Equity Reconciliation
The reconciliation of statutory net income to GAAP net income, and statutory
surplus to GAAP equity as of December 31, 1996, 1995, and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------
(000'S)
<S> <C> <C> <C>
Statutory net income $ 73,847 $ 157,751 $ 52,955
Deferred acquisition costs 48,862 (6,103) (34,124)
Deferred premium 1,295 (743) 1,122
Insurance liabilities 10,211 22,890 31,780
Income taxes (7,780) (27,669) 42,755
Interest maintenance reserve 365 5,480 (24,704)
Separate accounts and other 22,422 1,038 12,111
---------------------------------------------------------
GAAP net income $ 149,222 $ 152,644 $ 81,895
=========================================================
Statutory surplus $ 901,645 $ 829,022 $ 676,087
Investment valuation 26,678 70,776 -
Deferred acquisition costs 633,159 566,976 598,294
Deferred premium (11,859) (13,154) (12,412)
Insurance liabilities (124,781) (153,995) (71,076)
Income taxes (124,823) (128,070) (82,167)
Asset valuation reserve and interest
maintenance reserve 68,733 64,551 23,690
Other 30,229 32,087 (49,052)
---------------------------------------------------------
GAAP stockholder's equity $ 1,398,981 $ 1,268,193 $ 1,083,364
=========================================================
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
and results of operations of an insurance company, for determining its
solvency under the New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to its stockholders.
No consideration is given by the Department to financial statements prepared
in accordance with generally accepted accounting principles in making such
determinations.
B-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
8. Related Party Transactions
A. Service Agreements
The Company, Prudential, and Pruco Securities Corporation, an indirect
wholly-owned subsidiary of Prudential, operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided. The net cost of these services
allocated to the Company were $102 million, $98 million and $78 million for
the years ended December 31, 1996, 1995, and 1994, respectively.
B. Pension Plans
The Company is a wholly-owned subsidiary of Prudential which sponsors
several defined benefit pension plans that cover substantially all of its
employees. Benefits are generally based on career average earnings and
credited length of service. Prudential's funding policy is to contribute
annually the amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
No pension expense for contributions to the plan was allocated to the
Company in 1996, 1995, or 1994 because the plan was subject to the full
funding limitation under the Internal Revenue Code.
C. Postretirement Life and Health Benefits
Prudential also sponsors certain life insurance and health care benefits for
its retired employees. Substantially all employees may become eligible to
receive a benefit if they retire after age 55 with at least 10 years of
service. Prudential elected to amortize its obligation over twenty years. A
provision for contributions to the postretirement fund is included in the
net cost of services allocated to the Company discussed above for the years
ended December 31, 1996, 1995, and 1994.
D. Reinsurance
The Company currently has three reinsurance agreements in place with
Prudential (the reinsurer). Specifically: reinsurance Group Annuity
Contract, whereby the reinsurer, in consideration for a single premium
payment by the Company, provides reinsurance equal to 100% of all payments
due under the contract, and two yearly renewable term agreements in which
the Company may offer and the reinsurer may accept reinsurance on any life
in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net
income for the years ended December 31, 1996, 1995, and 1994.
9. Contingencies
Several actions have been brought against the Company on behalf of those
persons who purchased life insurance policies based on complaints about
sales practices engaged in by Prudential, the Company and agents appointed
by Prudential and the Company. Prudential has agreed to indemnify the
Company for any and all losses resulting from such litigation.
10. Dividends
The Company is subject to Arizona law which limits the amount of dividends
that insurance companies can pay to stockholders. The maximum dividend which
may be paid in any twelve month period without notification or approval is
limited to the lesser of 10% of surplus as of December 31 of the preceding
year or the net gain from operations of the preceding calendar year. Cash
dividends may only be paid out of surplus derived from realized net profits.
Based on these limitations and the Company's surplus position at December
31, 1996, the Company would be permitted a maximum of $48 million in
dividend distribution in 1997, all of which could be paid in cash, without
approval from The State of Arizona Department of Insurance.
B-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statements of operations, of stockholder's equity
and of cash flows present fairly, in all material respects, the financial
position of Pruco Life Insurance Company and its subsidiaries at December 31,
1996, and the results of their operations and their cash flows for the year in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- --------------------------
PRICE WATERHOUSE LLP
New York, New York
March 21, 1997
B-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying consolidated statement of financial position of
Pruco Life Insurance Company and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements presents fairly, in all
material respects, the consolidated financial position of Pruco Life Insurance
Company and subsidiaries as of December 31, 1995, and the consolidated results
of operations and cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
retroactively adopted all applicable generally accepted accounting principles
relating to stock life insurance subsidiaries of mutual life insurance companies
and has changed, as of January 1, 1995, the method of accounting for fixed
maturity investments.
/s/ DELOITTE & TOUCHE LLP
Parsippany, N.J.
December 19, 1996
B-18
<PAGE>
WITH RESPECT TO RESIDENTS OF STATES OTHER THAN PENNSYLVANIA, IN WHICH
DISCOVERY PREFERRED IS BEING OFFERED. WITH RESPECT TO RESIDENTS OF
PENNSYLVANIA, SEE PAGE C-3.
MARKET-VALUE ADJUSTMENT FORMULA
The Market-Value Adjustment, which is applied to withdrawals and transfers made
at any time other than the 30-day period following the end of an interest rate
period, involves three amounts:
1. The number of whole months remaining in the existing interest rate
period.
2. The guaranteed interest rate.
3. The interest rate that Pruco Life declares for a duration of one year
longer than the number of whole years remaining on the existing cell
being withdrawn from.
Stated as a formula, the Market Value Factor is equal to:
(M/12) x (R-C), not to exceed +0.40 or be less than -0.40;
Where,
M = the number of whole months (not to be less than one) remaining in the
interest rate period.
R = the Contract's guaranteed interest rate expressed as a decimal.
Thus 6.2% is converted to 0.062.
C = the interest rate, expressed as a decimal, that Pruco Life declares for
a duration equal to the number of whole years remaining in the present
interest rate period, plus 1 year as of the date the request for a
withdrawal or transfer is received.
The Market-Value Adjustment is then equal to the Market Value Factor multiplied
by the amount subject to a Market-Value Adjustment.
The steps below explain how a Market-Value Adjustment is calculated.
STEP 1: Divide the number of whole months left in the existing interest rate
period (not to be less than one) by 1 2.
STEP 2: Determine the interest rate Pruco Life declares on the date the
request for withdrawal or transfer is received for a duration of years equal
to the whole number of years determined in Step 1, plus 1 additional year.
Subtract this interest rate from the guaranteed interest rate. The result
could be negative.
STEP 3: Multiply the results of Step 1 and Step 2. Again, the result could
be negative. If the result is less than -0 4, use the value -0.4. If the
result is in between -0.4 and 0.4, use the actual value. If the result is
more than 0 4, use the value 0.4.
STEP 4: Multiply the result of Step 3 (which is the Market Value Factor) by
the value of the amount subject to a Market-Value Adjustment. The result is
the Market-Value Adjustment.
STEP 5: The result of Step 4 is added to the interest cell. If the
Market-Value Adjustment is positive, the interest cell will go up in value.
If the Market-Value Adjustment is negative, the interest cell will go down
in value.
Depending upon when the withdrawal request is made, a withdrawal charge may
apply.
The following example will illustrate the application of a Market-Value
Adjustment and the determination of the withdrawal charge. Suppose a Contract
owner made two invested purchase payments, the first in the amount of $10,000 on
December 1, 1995, all of which was allocated to the Equity Subaccount, and the
second in the amount of $5,000 on October 1, 1997, all of which was allocated to
the MVA Option with a guaranteed interest rate of 8% (0.08) for 7 years. A
request for withdrawal of $8,500 is made on February 1, 2000 (the Contract owner
does not provide any withdrawal instructions) . On that date the amount in the
Equity Subaccount is equal to $12,000 and the amount in the interest cell with a
maturity date of September 30, 2004 is $5,985.23, so that the Contract Fund on
that date is equal to $17,985.23.
On February 1, 2000, the interest rate declared by Pruco Life for the duration
of 5 years (4 whole years remaining until September 30, 2004, plus one year)
is 11%.
C-1
<PAGE>
The following computations would be made:
1. Calculate the Contract Fund value as of the effective date of the
transaction. This would be $17,985.23.
2. Calculate the charge-free amount (the amount of the withdrawal that is
not subject to a withdrawal charge).
DATE PAYMENT FREE
------- ------- ------
12/1/95 $10,000 $1,000
12/1/96 $2,000
10/1/97 $ 5,000 $2,500
12/1/97 $4,000
12/1/98 $5,500
12/1/99 $7,000
The charge-free amount in the fifth Contract year is 10% of $15,000
(total purchase payments) plus $5,500 (the charge-free amount available
in the fourth Contract year) for a total of $7,000.
3. Since the withdrawal request is in the fifth Contract year, a 3%
withdrawal charge rate applies to any portion of the withdrawal which is
not charge-free.
$8,500.00 requested withdrawal amount
-$7,000.00 charge-free
----------
$1,500.00 additional amount needed to complete withdrawal
The Contract provides that the Contract Fund will be reduced by an
amount which, when reduced by the withdrawal charge, will equal the
amount requested. Therefore, in order to produce the amount needed to
complete the withdrawal request ($1,500), we must "gross-up" that
amount, before applying the withdrawal charge rate. This is done by
dividing by 1 minus the withdrawal charge rate.
$1,500.00 / (1 -.03) =
$1,500.00 / 0.97 = $1,546.39 grossed-up amount
Please note that a 3% withdrawal charge on this grossed-up amount
reduces it to $1,500, the balance needed to complete the request.
$1,546.39 grossed-up amount
x .03 withdrawal charge rate
---------
$ 46.39 withdrawal charge
4. The Market Value Factor is determined as described in steps 1 through 5,
above. In this case, it is equal to 0.08 (8% is the guaranteed rate in
the existing cell) minus 0.11 (11 % is the interest rate that would be
offered for an interest cell with a duration of the remaining whole
years plus 1), which is -0.03, multiplied by 4.58333 (55 months
remaining until September 30, 2004, divided by 12) or -0.13750. Thus,
there will be a negative Market-Value Adjustment of 14% of the amount in
the interest cell that is subject to the adjustment.
-0.13750 x $5,985.23 = - 822.97 negative MVA
$ 5,985.23 unadjusted value
----------
$ 5,162.26 adjusted value
$12,000.00 Equity value
----------
$17,162.26 adjusted Contract Fund
5. The total amount to be withdrawn, $8,546.39, (sum of the surrender
charge, $46.39, and the requested withdrawal amount of $8,500) is
apportioned over all accounts making up the Contract Fund following the
Market-Value Adjustments, if any, associated with the MVA option.
Equity ($ 12,000 / $17,162.26) x $8,546.39 = $5,975.71
7-Yr MVA ($5,162.26 / $17,162.26) x $8,546.39 = $2,570.68
---------
$8,546.39
6. The adjusted value of the interest cell, $5,162.26, reduced by the
withdrawal of $2,570.68 leave $2,591.58. This amount must be
"unadjusted" by dividing it by 0.86250 (1 plus the Market-Value
Adjustment of -0.13750) to determine the amount remaining in the
interest cell to which the guaranteed interest rate of 8% will continue
to be credited until September 30, 2004 or a subsequent withdrawal. That
amount is $3,004.73.
C-2
<PAGE>
WITH RESPECT TO RESIDENTS OF PENNSYLVANIA ONLY, PAGES C1--C3 ARE HEREBY DELETED
AND REPLACED IN THEIR ENTIRETY WITH THE FOLLOWING:
MARKET-VALUE ADJUSTMENT FORMULA
The Market-Value Adjustment, which is applied to withdrawals and transfers made
at any time other than the 30-day period following the end of an interest rate
period, involves three amounts:
1. The number of whole months remaining in the existing interest rate
period.
2. The guaranteed interest rate.
3. The interpolated value of the interest rates that Pruco Life declares
for the number of whole years remaining and the duration 1 year longer
than the number of whole years remaining in the existing interest rate
period.
Stated as a formula, the Market Value Factor is equal to:
(M/12) x (R-C), not to exceed +0.40 or be less than -0.40;
Where,
M = the number of whole months (not to be less than one) remaining in the
interest rate period.
R = the Contract's guaranteed interest rate expressed as a decimal.
Thus 6.2% is converted to 0.062.
C = the interpolated value of the interest rates, expressed as a decimal,
that Pruco Life declares for the number of whole years remaining and the
duration 1 year longer than the number of whole years remaining as of
the date the request for a withdrawal or transfer is received or
m/365 x (n + 1) year rate + (365 -m)/365 x n year rate, where 'n' equals
years and 'm' equals days remaining in year 'n' of the existing
interest rate period.
The Market-Value Adjustment is then equal to the Market Value Factor multiplied
by the amount subject to a Market-Value Adjustment.
The steps below explain how a Market-Value Adjustment is calculated.
STEP 1: Divide the number of whole months left in the existing interest rate
period (not to be less than one)by 12.
STEP 2: Interpolate the interest rates Pruco Life declares on the date the
request for withdrawal or transfer is received for the duration of years
equal to the whole number of years determined in Step 1, plus the whole
number of years plus 1 additional year.
STEP 3: Subtract this interpolated interest rate from the guaranteed
interest rate. The result could be negative.
STEP 4: Multiply the results of Step 1 and Step 2. Again, the result could
be negative. If the result is less than -0.4, use the value -0.4. If the
result is in between -0.4 and 0.4, use the actual value. If the result is
more than 0.4, use the value 0.4.
STEP 5: Multiply the result of Step 3 (which is the Market Value Factor) by
the value of the amount subject to a Market-Value Adjustment. The result is
the Market-Value Adjustment.
STEP 6: The result of Step 4 is added to the interest cell. If the
Market-Value Adjustment is positive, the interest cell will go up in value.
If the Market-Value Adjustment is negative, the interest cell will go down
in value.
Depending upon when the withdrawal request is made, a withdrawal charge may
apply.
C-3
<PAGE>
The following example will illustrate the application of a Market-Value
Adjustment and the determination of the withdrawal charge. Suppose a Contract
owner made two invested purchase payments, the first in the amount of $10,000 on
December 1, 1995, all of which was allocated to the Equity Subaccount, and the
second in the amount of $5,000 on October 1, 1997, all of which was allocated to
the MVA Option with a guaranteed interest rate of 8% (0.08) for 7 years. A
request for withdrawal of $8,500 is made on February 1, 2000 (the Contract owner
does not provide any withdrawal instructions). On that date the amount in the
Equity Subaccount is equal to $12,000 and the amount in the interest cell with a
maturity date of September 30, 2004 is $5,985.23, so that the Contract Fund on
that date is equal to $17,985.23.
On February 1, 2000, the interest rates declared by Pruco Life for the durations
4 and 5 years (4 whole years remaining until September 30, 2004, plus 1 year)
are 10.8% and 11.4%, respectively.
The following computations would be made:
1. Calculate the Contract Fund value as of the effective date of the
transaction. This would be $17,985.23.
2. Calculate the charge-free amount (the amount of the withdrawal that is
not subject to a withdrawal charge).
DATE PAYMENT FREE
------- ------- ------
12/1/95 $10,000 $1,000
12/1/96 $2,000
10/1/97 $ 5,000 $2,500
12/1/97 $4,000
12/1/98 $5,500
12/1/99 $7,000
The charge-free amount in the fifth Contract year is 10% of $15,000
(total purchase payments) plus $5,500 (the charge-free amount available
in the fourth Contract year) for a total of $7,000.
3. Since the withdrawal request is in the fifth Contract year, a 3%
withdrawal charge rate applies to any portion of the withdrawal which is
not charge-free.
$8,500.00 requested withdrawal amount
-$7,000.00 charge-free
----------
$1,500.00 additional amount needed to complete withdrawal
The Contract provides that the Contract Fund will be reduced by an
amount which, when reduced by the withdrawal charge, will equal the
amount requested. Therefore, in order to produce the amount needed to
complete the withdrawal request ($1,500), we must "gross-up" that
amount, before applying the withdrawal charge rate. This is done by
dividing by 1 minus the withdrawal charge rate.
$1,500.00/(1 -.03) =
= $1,546.39 grossed-up amount
Please note that a 3% withdrawal charge on this grossed-up amount
reduces it to $1,500, the balance needed to complete the request.
$1,546.39 grossed-up amount
x .03 withdrawal charge rate
---------
$ 46.39 withdrawal charge
4. The Market Value Factor is determined as described in steps 1 through 5,
above. In this case, it is equal to 0.08 (8% is the graranteed rate in
the existing cell) minus 0.11 (11% is the interpolated value for the
interest rates that would be offered for interest cells with durations
of whole years remaining and whole year plus 1 remaining in the existing
interest rate period), which is -0.03, multiplied by 4.58333 (55 months
remaining until September 30, 2004, divided by 12) or - 0.13750. Thus,
there will be a negative Market-Value Adjustment of 14% of the amount in
the interest cell that is subject to the adjustment.
-0.13750 x $5,985.23 = - 822.97 negative MVA
$ 5,985.23 unadjusted value
----------
$ 5,162.26 adjusted value
$12,000.00 Equity value
----------
$17,162.26 adjusted Contract Fund
C-4
<PAGE>
5. The total amount to be withdrawn, $8,546.39, (sum of the surrender
charge, $46.39, and the requested withdrawal amount of $8,500) is
apportioned over all accounts making up the Contract Fund following the
Market-Value Adjustments, if any, associated with the MVA option.
Equity ($ 12,000 / $17,162.26) x $8,546.39 = $5,975.71
7-Yr MVA ($5,162.26 / $17,162.26) x $8,546.39 = $2,570.68
---------
$8,546.39
6. The adjusted value of the interest cell, $5,162.26, reduced by the
withdrawal of $2,570.68 leaves $2,591.58.This amount must be
"unadjusted" by dividing it by 0.86250 (1 plus the Market-Value
Adjustment - 0.13750) to determine the amount remaining in the interest
cell to which the guaranteed interest rate of 8% will continue to be
credited until September 30, 2004 or a subsequent withdrawal. That
amount is $3,004.73.
C-5
<PAGE>
[PASTE UP LOGO]
o FLEXIBLE PREMIUM VARIABLE ANNUITY
ACCOUNT
o THE PRUDENTIAL SERIES FUND, INC.
=========================================
- --------------------------------------==========================================
___________________
| |
| BULK RATE |
| U.S. Postage |
| PAID |
| Jersey City, N.J. |
| Permit No. 60 |
|___________________|
A Subsidiary of
PRUDENTIAL [LOGO]
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-3777
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Prudential Directors' and Officers' Liability and Corporation
Reimbursement Insurance program, purchased by Prudential from Aetna Casualty &
Surety Company, CNA Insurance Companies, Lloyds of London, Great American
Insurance Company, Reliance Insurance Company, Corporate Officers & Directors
Assurance Ltd., A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and
Zurich-American Insurance Company, provides reimbursement for "Loss" (as defined
in the policies) which the Company pays as indemnification to its directors or
officers resulting from any claim for any actual or alleged act, error,
misstatement, misleading statement, omission, or breach of duty by persons in
the discharge of their duties in their capacities as directors or officers of
Prudential, any of its subsidiaries, or certain investment companies affiliated
with Prudential. Coverage is also provided to the individual directors or
officers for such Loss, for which they shall not be indemnified. Loss
essentially is the legal liability on claims against a director or officer,
including adjudicated damages, settlements and reasonable and necessary legal
fees and expenses incurred in defense of adjudicatory proceedings and appeals
therefrom. Loss does not include punitive or exemplary damages or the multiplied
portion of any multiplied damage award, criminal or civil fines or penalties
imposed by law, taxes or wages, or matters which are uninsurable under the law
pursuant to which the policies are construed.
There are a number of exclusions from coverage. Among the matters excluded
are Losses arising as the result of (1) claims brought about or contributed to
by the criminal, dishonest or fraudulent acts or omissions or the willful
violation of any law by directors or officers, (2) claims based on or
attributable to directors or officers gaining personal profit or advantage to
which they were not legally entitled, and (3) claims arising from actual or
alleged performance of, or failure to perform, services as, or in any capacity
similar to, an investment adviser, investment banker, underwriter, broker or
dealer, as those terms are defined in the Securities Act or 1933, the Securities
Exchange Act of 1934, the Investment Advisers Act or 1940, the Investment
Company Act of 1940, any rules or regulations thereunder, or any similar
federal, state or local statute, rule or regulation.
The limit or coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of Prudential, can
be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The relevant
provisions of Arizona law, Arizona being the state of organization of Pruco
Life, can be found in Section 10-005 of the Arizona Statutes Annotated. The text
of the Prudential's by-law 26 which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective
Amendment No. 1 to Form S-6, Registration No. 33-61079, filed April 25, 1996, on
behalf of The Prudential Variable Appreciable Account. The text of Pruco Life's
by-laws, Article VIII, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) to this
Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
(1) Distribution Agreement between Pruco Securities Corporation
(Principal Underwriter) and Pruco Life Insurance Company
(Depositor), dated October 15, 1990. (Note 2)
(3) (a) Articles of Incorporation of Pruco Life Insurance Company,
as amended June 14, 1983. (Note 4)
(b) By-laws of Pruco Life Insurance Company, as amended June 18,
1996. (Note 7)
(c) Resolution of the Board of Directors of Pruco Life Insurance
Company establishing the Pruco Life Modified Guaranteed
Annuity Account. (Note 5)
(5) Opinion of Counsel as to the legality of the securities being
registered. (Note 1)
(10) The Prudential DISCOVERY PREFERRED Contract. (Note 3)
(22) Subsidiary Organizational Chart. (Note 3)
(23) (a) Written consent of Price Waterhouse LLP, independent
accountants. (Note 1)
(b) Written consent of Deloitte & Touche LLP, independent
auditors (Note 1)
(25) Powers of Attorney:
(a) William M. Bethke, Ira J. Kleinman, Mendel A. Melzer, Esther
H. Milnes, I. Edward Price and William F. Yelverton (Note 8)
(b) Linda S. Dougherty (Note 7)
(c) Kiyofumi Sakaguchi (Note 6)
(27) Financial Data Schedule. (Note 1)
(b) Financial Statement Schedules
Pruco Life Insurance Company and Subsidiaries:
Schedule IV--Schedule of Reinsurance. (Note 1)
- ----------
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Form N-4, Registration No. 333-61125,
filed July 19, 1995, on behalf of the Pruco Life Flexible Premium
Variable Annuity Account.
(Note 3) Incorporated by reference to Registrant's Form S-1, filed July 19,
1995.
(Note 4) Incorporated by reference to Registrant's Form S-6, Registration No.
333-07451, filed July 2, 1996 on behalf of the Pruco Life Variable
Appreciable Account.
(Note 5) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed November 17, 1995.
(Note 6) Incorporated by reference to Pre-Effective Amendment No. 1 to Form
N-4, Registration No. 333-06701, filed September 12, 1996 on behalf of
the Pruco Life Flexible Premium Variable Annuity Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 3 to Form
S-1, Registration No. 33-86780, filed April 9, 1997 on behalf of the
Pruco Life Variable Contract Real Property Account.
(Note 8) Incorporated by reference to Form 10-K, Registration No. 33-08698,
filed March 31, 1997 on behalf of the Pruco Life Variable Contract
Real Property Account.
II-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has caused this
Post-Effective Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark,
State of New Jersey, on this 25th day of April, 1997.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
By: /s/ ESTHER H. MILNES
----------------------------
Esther H. Milnes
President
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and the date indicated.
SIGNATURE AND TITLE
-------------------
/s/ * April 25, 1997
- ------------------------------------------------
Esther H. Milnes
President and Director
/S/ *
- ------------------------------------------------
Linda S. Dougherty
Chief Accounting Officer, Vice President
and Comptroller
/S/ * *By: /S/ CLIFFORD E. KIRSCH
- ------------------------------------------------ ------------------
William M. Bethke Clifford E. Kirsch
Director (Attorney-in-Fact)
/S/ *
- ------------------------------------------------
Mendel A. Melzer
Director
/S/ *
- ------------------------------------------------
Ira J. Kleinman
Director
/S/ *
- ------------------------------------------------
I. Edward Price
Director
/S/ *
- ------------------------------------------------
Kiyofumi Sakaguchi
Director
/S/ *
- ------------------------------------------------
William F. Yelverton
Chairman of the Board and Director
II-3
<PAGE>
EXHIBIT INDEX
5 Opinion of Counsel as to the legality of the securities being registered.
23(a) Written Consent of Price Waterhouse LLP, independent accountants.
(b) Written Consent of Deloitte & Touche LLP, independent auditors.
27 Financial Data Schedule.
(B) Schedule IV--Schedule of Reinsurance
II-4
THE PRUDENTIAL [Logo] CLIFFORD E. KIRSCH
Chief Legal Officer
PRUCO LIFE INSURANCE COMPANY
213 Washington Street, Newark, NJ 07102-2992
201 802-7333 Fax: 201 802-8357
April 25,1997
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Gentlemen:
In my capacity as Chief Legal Officer of Pruco Life Insurance Company ("Pruco
Life"), I have reviewed the establishment of the Pruco Life Modified Guaranteed
Annuity Account (the "Account") on September 25, 1990, by the Executive
Committee of the Board of Directors of Pruco Life as a non-unitized separate
account for assets applicable to certain modified guaranteed annuity contracts,
pursuant to the provisions of Section 20-651 of the Arizona Insurance Code. I
was responsible for oversight of the preparation and review of the Registration
Statement on Form S-1, as amended, filed by Pruco Life with the U.S. Securities
and Exchange Commission (Registration No.33-61143) under the Securities Act of
1933 for the registration of certain modified guaranteed annuity contracts
issued with respect to the Account.
I am of the following opinion:
(1) Pruco Life was duly organized under the laws of Arizona and is a
validly existing corporation.
(2) The Account has been duly created and is validly existing as a
non-unitized separate account pursuant to the aforesaid provisions of
Arizona law.
(3) The modified guaranteed annuity contracts are legal and binding
obligations of Pruco Life in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ CLIFFORD E. KIRSCH
Clifford E. Kirsch
A Subsidiary of
The Prudential Insurance Company of America
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the registration statement on Form S-1 (the
"Registration Statement") of our report dated March 21, 1997, relating to the
consolidated financial statements of Pruco Life Insurance Company and
Subsidiaries, which appears in such Prospectus.
We also consent to the application of our report to the Financial Statement
Schedules of Pruco Life Insurance Company and Subsidiaries for the year ended
December 31, 1996 listed under item 16(b) of this Registration Statement when
such schedules are read in conjunction with the financial statements referred to
in our report. The audit referred to in such report also included these
schedules.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 24, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post Effective-Amendment No. 2 on Form S-1 to the
Registration Statement No. 33-61143 of The Pruco Life Flexible Premium Variable
Annuity Account of the Pruco Life Insurance Company of our report dated December
19, 1996, relating to the financial statements of The Pruco Life Insurance
Company and subsidiaries, which is part of such Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,236,817
<DEBT-CARRYING-VALUE> 405,731
<DEBT-MARKET-VALUE> 416,102
<EQUITIES> 3,748
<MORTGAGE> 46,915
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,507,351
<CASH> 73,766
<RECOVER-REINSURE> 27,014
<DEFERRED-ACQUISITION> 633,159
<TOTAL-ASSETS> 9,678,427
<POLICY-LOSSES> 2,188,862
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 557,351
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,396,481
<TOTAL-LIABILITY-AND-EQUITY> 9,678,427
51,525
<INVESTMENT-INCOME> 247,328
<INVESTMENT-GAINS> 10,835
<OTHER-INCOME> 20,818
<BENEFITS> 305,119
<UNDERWRITING-AMORTIZATION> 9,309
<UNDERWRITING-OTHER> 112,697
<INCOME-PRETAX> 228,357
<INCOME-TAX> 79,135
<INCOME-CONTINUING> 149,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,222
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE>
<CAPTION>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1996
(000's)
Ceded to other Assumed from Percentage of amount
Gross Amount companies other companies Net amount assumed to net
------------ --------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ..... $47,430,580 $1,172,449 $0 $46,258,131 N/A
================================================================================================
Life insurance premiums ..... $ 54,904 $ 3,379 $0 $ 51,525 N/A
================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1995
(000's)
Ceded to other Assumed from Percentage of amount
Gross Amount companies other companies Net amount assumed to net
------------ --------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ..... $47,822,892 $822,619 $0 $47,000,273 N/A
================================================================================================
Life insurance premiums ..... $ 44,357 $ 2,268 $0 $ 42,089 N/A
================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1994
(000's)
Ceded to other Assumed from Percentage of amount
Gross Amount companies other companies Net amount assumed to net
------------ --------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ..... $48,003,675 $531,166 $0 $47,472,509 N/A
================================================================================================
Life insurance premiums ..... $ 24,165 $ 1,476 $0 $ 22,689 N/A
================================================================================================
</TABLE>
