AS FILED WITH THE SEC ON __________________. REGISTRATION NO. 33-29181
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-6
POST-EFFECTIVE AMENDMENT NO. 12
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
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PRUCO LIFE
VARIABLE APPRECIABLE ACCOUNT
(Exact Name of Trust)
PRUCO LIFE INSURANCE COMPANY
(Name of Depositor)
PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(800) 286-7754
(Address and telephone number of principal executive offices)
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THOMAS C. CASTANO
ASSISTANT SECRETARY
PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
----------
It is proposed that this filing will become effective (check appropriate space):
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|X| on May 1, 1999 pursuant to paragraph (b) of Rule 485
(date)
|_| 60 days after filing pursuant to paragraph (a) of Rule 485
|_| on _____________________ pursuant to paragraph (a) of Rule 485
(date)
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. Pruco Life Variable Universal Account
6. Pruco Life Variable Universal Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Contract; Short-Term Cancellation
Right or "Free Look"; Transfers; Refund of Sales Charges;
Reduction of Charges; Cash Surrender Value; Death Benefit;
Partial Withdrawal of Cash Surrender Value; When Proceeds
are Paid; Contract Loans; Exchange Right Available in Some
States; Reduced Paid-Up Insurance Option Available in Some
States; Voting Rights; Substitution of Series Fund Shares;
Changes in Face Amount
11. Brief Description of the Contract; Pruco Life Variable
Universal Account
12. Cover Page; Brief Description of the Contract; The
Prudential Series Fund, Inc.; Sale of the Contract and Sales
Commissions
13. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Premiums; Allocation of Premiums; Charges and
Expenses; Refund of Sales Charges; Reduction of Charges;
Sale of the Contract and Sales Commissions
14. Brief Description of the Contract; Detailed Information for
Prospective Contract Owners
15. Brief Description of the Contract; Premiums; Allocation of
Premiums; Transfers
16. Brief Description of the Contract; Detailed Information for
Prospective Contract Owners
17. Partial Withdrawal of Cash Surrender Value; When Proceeds
are Paid
18. Pruco Life Variable Universal Account; Cash Surrender Value
19. Reports to Contract Owners
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions; The Prudential Series
Fund, Inc.
25. Pruco Life Insurance Company; The Prudential Series
Fund, Inc.
26. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Charges and Expenses
27. Pruco Life Insurance Company
28. Pruco Life Insurance Company; Directors and Officers
29. Pruco Life Insurance Company
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. Pruco Life Insurance Company
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The Prudential Series
Fund, Inc; Cash Surrender Value; Death Benefit
45. Not Applicable
46. Brief Description of the Contract; Pruco Life Variable
Universal Account; The Prudential Series Fund, Inc.
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
47. Pruco Life Variable Universal Account
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements: Financial Statements of Pruco Life
Variable Universal Account; Consolidated Financial
Statements of Pruco Life Insurance Company and Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1999
PRUCO LIFE INSURANCE COMPANY
VARIABLE UNIVERSAL ACCOUNT
PRUSELECT(SM) I
VARIABLE LIFE
INSURANCE CONTRACTS
This prospectus describes certain individual flexible premium variable universal
life insurance contracts, PRUSELECT(SM) I Variable Life Insurance Contract* (the
"Contract"), issued by Pruco Life Insurance Company ("Pruco Life", "us", or
"we"), a stock life insurance company. Pruco Life is a wholly-owned subsidiary
of The Prudential Insurance Company of America ("Prudential"). These Contracts
provide individual universal life insurance coverage with flexible premium
payments and variable investment options. The Contracts are owned by employers,
trusts, associations or similar entities for the purpose of providing insurance
on the lives of selected employees. As of January 1, 1992, Pruco Life no longer
offers these Contracts for sale. In general, the owner, not the insured
employee, makes all the premium payments and receives the benefits under the
Contracts. The Contracts may be used for funding the owner's liabilities for
retiree medical benefits or other non-qualified employee benefits.
The Contracts provide a death benefit and a cash surrender value. The cash
surrender value generally increases with the payment of each premium, decreases
to reflect charges made by Pruco Life, and varies daily with investment
performance of the chosen subaccounts. There is no guaranteed minimum cash
surrender value. The death benefit generally remains fixed in the amount or
amounts scheduled at the outset of the Contract (the "face amount"). However,
Pruco Life may increase the death benefit to maintain the Contract's status as
life insurance under the Internal Revenue Code.
You may choose to invest a portion of premiums in one or more of the 15 current
subaccounts of the Pruco Life Variable Universal Account (the "Account"). The
assets of each subaccount of the Account are invested in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The attached
prospectus for the Series Fund and the Series Fund's statement of additional
information describe the investment objectives of and the risks of investing in
the 15 portfolios of the Series Fund currently available under the Contracts:
MONEY MARKET CONSERVATIVE BALANCED EQUITY
DIVERSIFIED BOND FLEXIBLE MANAGED PRUDENTIAL JENNISON
GOVERNMENT INCOME HIGH YIELD BOND SMALL CAPITALIZATION STOCK
ZERO COUPON BOND 2000 STOCK INDEX GLOBAL
ZERO COUPON BOND 2005 EQUITY INCOME NATURAL RESOURCES
We may offer other subaccounts and portfolios in the future.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRUCO LIFE INSURANCE COMPANY
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 286-7754
*PRUSELECT is a service mark of Prudential.
CVUL-1 Ed 5-99
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
PAGE
<S> <C>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS..................................................1
INTRODUCTION AND SUMMARY..............................................................................2
BRIEF DESCRIPTION OF THE CONTRACT................................................................2
PREMIUMS.........................................................................................2
CHARGES..........................................................................................2
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT,
AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT......................................4
PRUCO LIFE INSURANCE COMPANY.....................................................................4
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT............................................................4
THE PRUDENTIAL SERIES FUND, INC..................................................................5
DETAILED INFORMATION FOR CONTRACT OWNERS..............................................................5
REQUIREMENTS FOR ISSUANCE OF A CONTRACT..........................................................5
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK".....................................................5
PREMIUMS.........................................................................................6
ALLOCATION OF PREMIUMS...........................................................................6
TRANSFERS........................................................................................6
CHARGES AND EXPENSES.............................................................................7
REFUNDS OF SALES CHARGES.........................................................................9
REDUCTION OF CHARGES.............................................................................9
CASH SURRENDER VALUE.............................................................................9
DEATH BENEFIT...................................................................................10
PARTIAL WITHDRAWAL OF CASH SURRENDER VALUE......................................................11
CHANGES IN FACE AMOUNT..........................................................................11
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS................11
CONTRACT LOANS..................................................................................12
WHEN PROCEEDS ARE PAID..........................................................................13
TAX TREATMENT OF CONTRACT BENEFITS..............................................................14
LAPSE AND REINSTATEMENT.........................................................................15
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.............................15
REDUCED PAID-UP INSURANCE OPTION AVAILABLE IN SOME STATES.......................................16
OTHER GENERAL CONTRACT PROVISIONS...............................................................16
VOTING RIGHTS...................................................................................16
SUBSTITUTION OF SERIES FUND SHARES..............................................................17
REPORTS TO CONTRACT OWNERS......................................................................17
SALE OF THE CONTRACT AND SALES COMMISSIONS......................................................17
STATE REGULATION................................................................................17
EXPERTS.........................................................................................18
LITIGATION......................................................................................18
YEAR 2000 COMPLIANCE............................................................................18
ADDITIONAL INFORMATION..........................................................................19
FINANCIAL STATEMENTS............................................................................20
DIRECTORS AND OFFICERS...............................................................................21
FINANCIAL STATEMENTS OF PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT........................................A1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES...................B1
</TABLE>
<PAGE>
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ATTAINED AGE--The insured's age on the Contract date plus the number of Contract
years since then.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract Fund plus any refund of sales charges
due, minus any Contract debt and applicable charges.
CONTRACT--Pruco Life Pruselect(SM) Variable Life Insurance Policy, an
individual flexible premium variable universal life insurance contract.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is issued, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
we have charged that is not yet due and that we have not yet added to the loan.
CONTRACT FUND--The total amount at any time credited to the Contract.
CONTRACT OWNER--The entity, typically an employer, trust or association, that
purchases the Contract.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable upon the death of the insured before the
deduction of any outstanding Contract debt.
FACE AMOUNT--The amount[s] of life insurance as shown in the Contract's schedule
of face amounts.
ISSUE AGE--The insured's age as of the Contract date.
LOAN VALUE--The maximum amount that a Contract owner may borrow.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
NET AMOUNT AT RISK--The amount by which the death benefit exceeds the Contract
Fund.
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT (THE "ACCOUNT")--A separate account of
Pruco Life registered as a unit investment trust under the Investment Company
Act of 1940.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
US, WE--Pruco Life Insurance Company ("Pruco Life").
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. Eastern time on each day during which the New York
Stock Exchange is open.
YOU--The owner of the Contract.
1
<PAGE>
INTRODUCTION AND SUMMARY
THIS SUMMARY PROVIDES A BRIEF OVERVIEW OF THE MORE SIGNIFICANT ASPECTS OF THE
CONTRACT. WE PROVIDE FURTHER DETAIL IN THE SUBSEQUENT SECTIONS OF THIS
PROSPECTUS AND IN THE CONTRACT. THE CONTRACT, INCLUDING THE APPLICATION ATTACHED
TO IT, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN YOU AND PRUCO LIFE AND YOU
SHOULD RETAIN THESE DOCUMENTS.
BRIEF DESCRIPTION OF THE CONTRACT
The Contract is an individual flexible premium variable universal life insurance
contract offered by Pruco Life Insurance Company ("Pruco Life", "us", or "we")
to employers, trusts, associations or similar entities and that provide
insurance on the lives of covered employees or other insured individuals. As of
January 1, 1992, Pruco Life no longer offers these Contracts for sale. In
general, the Contract owner, and not the insured, makes the premium payments and
receives benefits under the Contracts; the original owner may, however, be able
to assign certain Contract rights.
The Contract is a form of variable universal life insurance. It is based on a
Contract Fund, the value of which changes every business day. You may invest
premiums in one or more of the 15 available subaccounts. Your Contract Fund
value changes every day depending upon Contract charges, described in the chart
below, and upon the change in the value of the particular subaccounts that you
have selected.
Although the value of your Contract Fund will increase if there is favorable
investment performance in the subaccounts you select, there is a risk that
investment performance will be unfavorable and that the value of your Contract
Fund will decrease. The risk will be different, depending upon the subaccounts
you choose.
PREMIUMS
You have flexibility with respect to the payment of premiums. You generally
select the amount and timing of premium payments. The Contract typically sets
forth a schedule of annual target premiums that you may pay, but you need not
adhere to that schedule and instead may vary the timing and amount of premiums.
See PREMIUMS, page 2.
You are not required to pay any specific premium level to ensure that the
Contract remains inforce. Rather, the Contract will not lapse as long as the
Contract Fund is sufficient to pay the monthly charges. The payment of any
specified premium level does not guarantee that the Contract will remain
inforce. See LAPSE AND REINSTATEMENT, page 15.
You may choose to have the premiums (after deduction of a $2 administrative
charge, any applicable taxes attributable to premiums, and a sales load)
invested in one or more of 15 subaccounts. Each subaccount is invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which The Prudential Insurance Company of America
("Prudential") acts as the investment adviser. Information about the Series Fund
portfolios can be found under THE PRUDENTIAL SERIES FUND, INC. on page 5 and in
the attached prospectus for the Series Fund.
Because you may invest premiums in these various subaccounts, the Contract
offers an opportunity for the cash surrender value to appreciate more rapidly
than it would under comparable fixed-benefit insurance. You must accept the risk
that, if investment performance is unfavorable, the cash surrender value may not
appreciate as rapidly or may decrease in value.
CHARGES
We deduct certain charges from each premium payment and from the amounts held in
the designated subaccount[s]. All these charges, which are largely designed to
cover insurance costs and risks as well as sales and administrative expenses,
are fully described under CHARGES AND EXPENSES on page 7. In brief, Pruco Life
may make the following charges:
2
<PAGE>
------------------------------------------------------------
PREMIUM PAYMENT
------------------------------------------------------------
|
--------------------------------
o less charge for taxes
attributable to premiums
o less $2 processing fee
--------------------------------
|
------------------------------------------------------
o less a front-end sales load of not more than 7%
------------------------------------------------------
|
- --------------------------------------------------------------------------------
INVESTED PREMIUM AMOUNT
o To be invested in one or a combination of the 15 available portfolios of
The Prudential Series Fund, Inc.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
DAILY CHARGES
o We deduct a daily charge equivalent to an annual rate of up to 0.9% from
the assets of each of the variable subaccounts for mortality and expense
risks.
o We deduct management fees and expenses from the Series Fund assets. See THE
PRUDENTIAL SERIES FUND, INC., page 5.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o We deduct an administrative charge of up to $3 plus up to $0.04 per $1,000
of face amount of insurance from the Contract Fund.
o We deduct a charge for anticipated mortality (the "cost of insurance
charge") with the maximum charge based on 100% of the 1980 Commissioners
Standard Ordinary Mortality Tables ("1980 CSO Tables"), with appropriate
adjustments for substandard rating classes.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
o We deduct an administrative processing charge of up to $15 in connection
with each partial withdrawal of excess cash surrender value.
o We deduct an administrative processing charge of up to $15 in connection
with each decrease in face amount.
- --------------------------------------------------------------------------------
Under certain circumstances, Contract owners may receive a refund of a portion
of the sales charge. See REFUNDS OF SALES CHARGES, page 9.
For DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
Additional information may also be obtained from Pruco Life. The address and
telephone number are set forth on the cover of this prospectus.
----------
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN YOUR BEST INTEREST. IN
MOST CASES, IF YOU REQUIRE ADDITIONAL COVERAGE, THE BENEFITS OF YOUR EXISTING
CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL
CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND
COSTS OF PURCHASING ANOTHER CONTRACT AND YOU SHOULD CONSULT A QUALIFIED TAX
ADVISER.
THIS PROSPECTUS WAS ONLY OFFERED IN JURISDICTIONS IN WHICH THE OFFERING WAS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IN THE
PRUDENTIAL SERIES FUND PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION.
3
<PAGE>
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY,
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT
PRUCO LIFE INSURANCE COMPANY
Pruco Life is a stock life insurance company, organized in 1971 under the laws
of the State of Arizona. It 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. Prudential is currently
considering reorganizing itself into a publicly traded stock company through a
process known as "demutualization." On February 10, 1998, the Company's Board of
Directors authorized management to take the preliminary steps necessary to allow
the Company to demutualize. On July 1, 1998, legislation was enacted in New
Jersey that would permit this conversion to occur and that specified the process
for conversion. Demutualization is a complex process involving development of a
plan of reorganization, adoption of a plan by the Company's Board of Directors,
a public hearing, voting by qualified policyholders and regulatory approval, all
of which could take two or more years to complete. Prudential's management and
Board of Directors have not yet determined to demutualize and it is possible
that, after careful review, Prudential could decide not to go public.
The plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries, such as the Pruco Life
insurance companies, would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contract owners of Prudential's subsidiaries.
As of December 31, 1998, Prudential has invested over $442 million in Pruco Life
in connection with Pruco Life's organization and operation. Prudential may 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 begin on page B1 and should be considered only as bearing
upon Pruco Life's ability to meet its obligations under the Contracts.
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
Pruco Life Variable Universal Account (the "Account") was established on April
17, 1989 under Arizona law as a separate investment account. The Account meets
the definition of a "separate account" under the federal securities laws. The
Account holds assets that are segregated from all of Pruco Life's other assets.
The obligations to Contract owners and beneficiaries arising under the Contracts
are general corporate obligations of Pruco Life. Pruco Life is also the legal
owner of the assets in the Account. Pruco Life will 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 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 a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). 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. Currently, you may invest in one or a combination of 15
available subaccounts within the Account, each of which invests in a single
corresponding portfolio of the Series Fund. Additional subaccounts may be added
in the future. The Account's financial statements begin on page A1.
4
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") 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
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 adviser for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary The Prudential Investment Corporation ("PIC"). The
Service Agreement 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 LLC ("Jennison"). 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 advisers under the Investment Advisers Act
of 1940.
As an investment adviser, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. In addition to the investment
management fee, each portfolio incurs certain expenses, such as accounting and
custodian fees. See CHARGES AND EXPENSES, page 7.
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. Neither the companies that 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. 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, RESTRICTIONS, EXPENSES, INVESTMENT RISKS, 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 OF THE
SERIES FUND WILL BE MET.
DETAILED INFORMATION FOR CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
As of January 1, 1992, these Contracts were no longer available for sale. Pruco
Life offered the Contracts on both an individually underwritten basis and a
guaranteed issue basis. Underwritten Contracts required individualized evidence
of the insured's insurability and rating class. Guaranteed issue Contracts were
issued in certain circumstances on associated individuals, such as those
employees of a company who met criteria established by Pruco Life. The minimum
face amount offered depended on whether the Contract was issued on an
underwritten or guaranteed issue basis (the face amount is the minimum death
benefit, absent Contract debt or default). The minimum face amounts offered were
$100,000 for an underwritten Contract and $50,000 for a Contract issued on a
guaranteed issue basis. A Contract owner could have established a schedule of
face amounts under which the face amount changes on designated dates.
Generally, the Contract was issued on insureds between the ages of 20 and 75 for
underwritten Contracts, and between the ages of 20 and 64 for guaranteed issue
Contracts. In its discretion, Pruco Life may have issued the Contract on
insureds of other ages.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed or within 10 days after Pruco Life mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. A
5
<PAGE>
refund can be requested by mailing or delivering the Contract to the
representative who sold it or to the Home Office specified in the Contract. A
Contract returned according to this provision shall be deemed void from the
beginning. The Contract owner will then receive a refund of all premium payments
made, plus or minus any change due to investment experience. However, if
applicable law so requires, the Contract owner who exercises his or her
short-term cancellation right will receive a refund of all premium payments
made, with no adjustment for investment experience.
PREMIUMS
Pruco Life sets a minimum initial premium for issuance of a Contract. A Contract
typically contains a schedule of annual target premiums that the owner may pay.
The Contract owner need not follow that schedule, however, and has considerable
flexibility with respect to the timing and amount of payments. The minimum
premium Pruco Life will accept is $25, and Pruco Life reserves the right to
limit premiums over the target amount in any year to $10,000. Pruco Life may
also refuse to accept a premium that will immediately result in an increase in
the death benefit. See DEATH BENEFIT, page 10. The amount of premium payments
made by the Contract owner will affect the Contract's cash surrender value and
the likelihood of lapse, and may affect the size of the death benefit. Payment
of premiums in excess of certain amounts will cause the Contract to become a
Modified Endowment Contract, which affects the tax treatment of pre-death
distributions under the Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page
14.
ALLOCATION OF PREMIUMS
On the Contract date, Pruco Life deducted any applicable charge for taxes
attributable to premiums, the $2 processing charge, and the front-end sales
charge from the initial premium, and the first monthly charges were made. See
CHARGES AND EXPENSES, page 7. Except as provided below, the remainder of the
initial premium was allocated among the subaccounts according to your specified
allocation. In certain states, any Contract owner who exercised his or her
short-term cancellation ("free-look") right received a return of premium with no
adjustment for investment experience. For those Contract owners, the initial
premium remaining after the deduction of the charges described above was
allocated to the Money Market Subaccount until the end of the free-look period.
If receipt of the first premium preceded the Contract date, there was a period
during which the Contract owner's initial premium was not invested.
The charge for taxes attributable to premiums, the $2 processing charge, and the
front-end sales charge also apply to all subsequent premium payments. The
remainder is invested as of the end of the valuation period in which it is
received at a Home Office in accordance with the allocation you previously
designated. Provided the Contract is not in default, you may change the way in
which subsequent premiums are allocated by giving written notice to a Home
Office, or by telephoning a Home Office, provided you are enrolled to use the
Telephone Transfer System. There is no charge for reallocating future premiums.
The percentage of the invested premium that you may allocate to a particular
subaccount must be at least 10% on the date the allocation takes effect. All
percentage allocations must be in whole numbers. For example, 33% can be
selected but 33-1/3% cannot. Of course, the total allocation to all selected
subaccount[s] must equal 100%.
TRANSFERS
If the Contract is not in default, you may, up to four times in each Contract
year, transfer amounts from one subaccount to another subaccount. Currently, you
may make additional transfers with our consent and without charge. All or a
portion of the amount credited to a subaccount may be transferred. The minimum
transfer is the lesser of $250 or the amount invested in a particular
subaccount.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Home Office. The
request may be in terms of dollars, such as a request to transfer $10,000 from
one subaccount to another, or may be in terms of a percentage reallocation among
subaccounts. In the latter case, as with premium reallocations, the percentages
must be in whole numbers. You may transfer amounts by proper written notice to a
Home Office, 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 the Contract is jointly owned or the Contract owner
elects not to have this privilege. Telephone transfers may not be available on
Contracts that are assigned, (see ASSIGNMENT, page 16), depending on the terms
of the assignment. Pruco Life has adopted procedures designed to ensure that
requests by telephone are genuine. Pruco Life will not be held liable for
following telephone instructions that it reasonably believes to be genuine.
Pruco Life cannot guarantee that Contract owners will be able to get through to
complete a telephone transfer during peak periods such as periods of drastic
economic or market change.
On the liquidation date of a Zero Coupon Bond Subaccount, all its shares held in
the corresponding portfolio of the Series Fund will be redeemed. The proceeds of
the redemption applicable to each Contract will be transferred to the
6
<PAGE>
Money Market Subaccount unless the Contract owner directs that it be transferred
to another subaccount. A transfer that occurs upon the liquidation of a Zero
Coupon Bond Subaccount will not be counted as one of the four permissible
transfers in a Contract year.
Unless otherwise restricted, a transfer takes effect on the date that proper
notice is received at a Home Office.
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing" strategy
may be disruptive to the subaccounts 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 refusing transfer requests of an agent under a
power of attorney on behalf of more than one Contract owner.
CHARGES AND EXPENSES
This section provides a more detailed description of each charge that is
described briefly in the chart on page 3.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Pruco Life is entitled to make under the Contract. The "current charge" is the
lower amount that Pruco Life is now charging. We reserve the right to increase
each current charge, up to the maximum charge, without giving any advance
notice.
All charges made by Pruco Life, whether deducted from premiums or from the
Contract Fund, are set forth below.
1. We deduct a charge from each premium payment for taxes attributable to
premiums. These taxes vary by state, and in some states by locality. The
tax rates generally range from 0.75% to 5% (but in some instances it may
exceed 5%), with the most common level being 2% of premiums. During 1998,
1997, and 1996, Pruco Life received a total of approximately $1,577,
$61,232, and $93,083, respectively, in charges for payment of taxes
attributable to premiums.
2. We deduct an administrative charge of $2 from each premium payment to
cover the cost of collecting and processing premiums. During 1998, 1997,
and 1996, Pruco Life received a total of approximately $15, $790, and
$1,004, respectively, in processing charges.
3. We deduct a charge from each premium payment for sales expenses. This
charge, often called a "sales load", is deducted to compensate us for the
costs of selling the Contracts, including commissions, advertising, and
the printing and distribution of prospectuses and sales literature. This
charge consists of a deduction of up to 7% of the premium remaining after
the charge for taxes attributable to premiums and the $2 administrative
charge have been deducted. On a non-guaranteed basis, Pruco Life intends
to charge only a 5% sales load on payments made after the first year. A
portion of the sales load may be refunded to you if aggregate premiums
under all Contracts of this type purchased by you exceed an amount
determined by Pruco Life (currently $5 million). See REFUNDS OF SALES
CHARGES, page 9. During 1998, 1997, and 1996, Pruco Life received a total
of approximately $5,313, $205,059, and $151,540, respectively, in sales
load charges.
4. On each Monthly date, (i.e., the Contract date and the same day of each
succeeding month), we reduce the Contract Fund by an administrative charge
of up to $3 plus up to $0.04 per $1,000 of face amount of insurance.
Currently, this charge is not more than $6 per month on a non-guaranteed
basis. This charge compensates Pruco Life for administrative expenses
incurred, among other things, in issuing the Contracts, processing claims,
paying cash surrender values and death benefits, keeping records, and
communicating with Contract owners. During 1998, 1997, and 1996, Pruco
Life received a total of approximately $25,788, $35,000, and $35,000,
respectively, in monthly administrative charges.
5. We deduct a mortality charge (also referred to as a "cost of insurance
charge") from the Contract Fund on each Monthly date to cover anticipated
mortality costs. When an insured dies, the amount of the death benefit
paid to the beneficiary is larger than the Contract Fund. The mortality
charges are designed to enable Pruco Life to pay this larger death
benefit. The charge is determined by multiplying the applicable "net
amount at risk" (the amount by which the death benefit, computed as if
there were no Contract debt, exceeds the Contract Fund) by a mortality
rate based upon the insured's sex, issue age and current attained age, and
the anticipated mortality for that class of persons. The maximum rate that
Pruco Life may charge for underwritten Contracts which are not in a
substandard risk class is 100% of the applicable rates of the
non-smoker/smoker 1980 CSO Tables. The maximum rate that Pruco Life may
charge under Contracts issued on a guaranteed issue basis which are not in
a substandard risk class is 100% of the applicable rates of the composite
1980 CSO Tables. Higher rates apply if
7
<PAGE>
the insured is determined to be in a substandard risk class. Current cost
of insurance rates are typically lower than the maximum rates.
6. We deduct a charge for assuming mortality and expense risks. This is done
by deducting daily, from the assets of each of the subaccounts, a
percentage of those assets up to an effective annual rate of 0.9%. Pruco
Life currently intends to charge only 0.6% on these Contracts, but
reserves the right to make the full 0.9% charge. The mortality risk
assumed is that insureds may live for a shorter period of time than Pruco
Life estimated when it determined what mortality charges to make. The
expense risk assumed is that expenses will be greater than Pruco Life
estimated in fixing its administrative charges. During 1998, 1997, and
1996, Pruco Life received a total of approximately $400,378, $341,984, and
$273,293, respectively, in mortality and expense risk charges.
7. In connection with each partial withdrawal of cash surrender value, we
deduct an administrative processing charge, which is the lesser of: (a)
$15 or; (b) 2% of each withdrawal. See PARTIAL WITHDRAWAL OF CASH
SURRENDER VALUE, page 11.
8. We deduct an administrative processing charge of up to $15 in connection
with each decrease in face amount. See CHANGES IN FACE AMOUNT, page 11.
9. The Account purchases shares of the Series Fund at net asset value. The
net asset value of those shares reflects investment management fees and
expenses already deducted from the assets of the Series Fund. More
detailed information is contained in the attached prospectus for the
Series Fund.
The total expenses of each portfolio for the year 1998, expressed as a
percentage of the average assets during the year, are shown below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
INVESTMENT OTHER EXPENSES TOTAL
PORTFOLIO ADVISORY FEE (after expense EXPENSES (after
reimbursement)* expense reimbursement)*
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MONEY MARKET 0.40% 0.01% 0.41%
DIVERSIFIED BOND 0.40% 0.02% 0.42%
GOVERNMENT INCOME 0.40% 0.03% 0.43%
ZERO COUPON BOND 2000 0.40% 0.00%* 0.40%*
ZERO COUPON BOND 2005 0.40% 0.00%* 0.40%*
CONSERVATIVE BALANCED 0.55% 0.02% 0.57%
FLEXIBLE MANAGED 0.60% 0.01% 0.61%
HIGH YIELD BOND 0.55% 0.03%* 0.58%*
STOCK INDEX 0.35% 0.02%* 0.37%*
EQUITY INCOME 0.40% 0.02%* 0.42%*
EQUITY 0.45% 0.02% 0.47%
PRUDENTIAL JENNISON 0.60% 0.03% 0.63%
SMALL CAPITALIZATION STOCK 0.40% 0.07% 0.47%
GLOBAL 0.75% 0.11% 0.86%
NATURAL RESOURCES 0.45% 0.04%* 0.49%*
----------------------------------------------------------------------------------------------------
</TABLE>
* For some of the portfolios, the actual expenses were higher than those
shown in the second and third columns. Pruco Life, on a non-guaranteed
basis, makes daily adjustments that offset the effect of some of the
expenses incurred by certain portfolios. Pruco Life currently makes such
adjustments to ensure that the portfolio expenses indirectly borne by a
Contract owner investing in:
(1) the Zero Coupon Bond Portfolios will not exceed the investment
management fee;
(2) the Stock Index Portfolio will not exceed the investment management
fee plus 0.05% of the average daily net assets of the portfolio; and
(3) will not exceed the investment management fee plus 0.1% of the average
daily net assets of the portfolio.
Without such adjustments, the portfolio expenses indirectly borne by a
Contract owner, expressed as a percentage of the average daily net assets
by portfolio, would have been 0.62% for the Zero Coupon Bond Portfolio
2000 and 0.61% for the Zero Coupon Bond Portfolio 2005 during 1998. No
such adjustments were
8
<PAGE>
necessary for the High Yield Bond, Stock Index, Equity Income, and Natural
Resources Portfolios in 1998. Pruco Life intends to continue these
adjustments in the future, although we retain the right to discontinue
them.
10. Although the Account is registered as a unit investment trust, it is not a
separate taxpayer for purposes of the Code. The earnings of the Account
are taxed as part of the operations of Pruco Life. No charge is currently
being made to the Account for any company federal income taxes. 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 company federal income taxes that would be attributable to the
Account. 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 Account. If there is
a material change in the 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.
11. An extra risk charge may be deducted monthly for aviation, occupational or
temporary extra risks.
You may specify the subaccount[s] from which the monthly deductions are made. If
the amount held in a designated subaccount is insufficient or if no selection is
made by the Contract owner, the monthly charges will be deducted based on the
portions of the Contract Fund invested in each of the selected subaccount[s].
REFUNDS OF SALES CHARGES
Non-guaranteed refunds of sales load may be made based on such factors as total
aggregate premiums of a certain amount over a given period of time and the
persistency of the Contracts.
REDUCTION OF CHARGES
In addition to the refund of sales charges noted above, Pruco Life reserves the
right to reduce the sales charges and/or other charges on certain multiple life
sales, where it is expected that the amount or nature of such multiple sales
will result in savings of sales, administrative or other costs. Pruco Life
determines both the eligibility for such reduced charges, as well as the amount
of such reductions, by considering the following factors:
(1) the number of individuals;
(2) the total amount of premium payments expected to be received from
these Contracts;
(3) the nature of the association between these individuals, and the
expected persistency of the individual Contracts;
(4) the purpose for which the individual Contracts are purchased and
whether that purpose makes it likely that costs will be reduced; and
(5) any other circumstances which Pruco Life believes to be relevant in
determining whether reduced costs may be expected.
Some of the reductions in charges for these sales may be contractually
guaranteed. Pruco Life may withdraw or modify other reductions on a uniform
basis. Pruco Life's reductions in charges for these Contracts will not be
unfairly discriminatory to the interests of any Contract owners.
CASH SURRENDER VALUE
The Contract has a cash surrender value which the owner may obtain while the
insured is living by surrendering the Contract. Surrendering the Contract may
have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 14. Unlike
traditional fixed-benefit insurance, however, a Contract's cash surrender value
is not known in advance because it varies daily with the investment performance
of the selected subaccount[s]. It also varies with the amount of invested
premiums and charges deducted from the Account. The cash surrender value equals
the Contract Fund plus any refund of sales charges due minus any Contract debt
from any outstanding loan. The Contract owner may withdraw part of the cash
surrender value under certain conditions. See PARTIAL WITHDRAWAL OF CASH
SURRENDER VALUE, page 11 and TAX TREATMENT OF CONTRACT BENEFITS, page 14.
There is no minimum cash surrender value. If the Contract Fund is insufficient
to pay monthly charges, the Contract will lapse in 61 days unless a payment
sufficient to keep the Contract inforce is received. See LAPSE AND
REINSTATEMENT, page 15.
The tables on pages T1 through T8 illustrate what the cash surrender values
would be for representative Contracts, assuming certain uniform hypothetical
investment results in the selected Series Fund portfolio[s].
9
<PAGE>
DEATH BENEFIT
At issue, the Contract specified a face amount or a series of face amounts
applicable at different times. Assuming that there is no Contract debt and that
the Contract is not in default, the death benefit on any date is equal to the
greater of: (1) the current face amount; and (2) the Contract Fund before
deduction of any monthly charges due on that date, divided by the net single
premium per $1 at the insured's attained age. This second alternative ensures
that the death benefit will not be less than the amount of life insurance that
could be provided for an invested single premium amount equal to the Contract
Fund. The death benefit proceeds will be reduced to reflect any Contract debt.
If the Contract is in default and the insured dies in the 61-day grace period,
the death benefit less any overdue charges is payable. If the insured dies after
the grace period, no death benefit is payable. See LAPSE AND REINSTATEMENT, page
15.
The death benefit may be increased based on the size of the Contract Fund and
the insured's attained age, as described under (2) above. Such an increase
ensures that the Contract will satisfy the Internal Revenue Code's definition of
life insurance. The death benefit may thereafter vary based on the size of the
Contract Fund and the insured's attained age, but will not decrease below the
face amount. The net single premium is used only in the calculation of the death
benefit, not for premium payment purposes. The following is a table of
illustrative net single premiums for $1 of death benefit.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
REGULAR ISSUE PREFERRED
- ---------------------------------------------------------------------------------------------------------------
INCREASE IN INCREASE IN INSURANCE
MALE NET SINGLE INSURANCE AMOUNT FEMALE NET SINGLE AMOUNT PER $1
ATTAINED AGE PREMIUM PER $1 INCREASE IN ATTAINED AGE PREMIUM INCREASE IN CONTRACT
CONTRACT FUND FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
25 .17000 $ 5.88 25 .15112 $ 6.62
35 .23700 $ 4.22 35 .21127 $ 4.73
55 .45209 $ 2.21 55 .40090 $ 2.49
65 .59468 $ 1.68 65 .53639 $ 1.86
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
GUARANTEED ISSUE
- ---------------------------------------------------------------------------------------------------------------
INCREASE IN INCREASE IN
MALE NET SINGLE INSURANCE AMOUNT PER FEMALE NET SINGLE INSURANCE AMOUNT PER
ATTAINED AGE PREMIUM $1 INCREASE IN ATTAINED AGE PREMIUM $1 INCREASE IN
CONTRACT FUND CONTRACT FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
25 .18455 $ 5.42 25 .15687 $ 6.37
35 .25596 $ 3.91 35 .21874 $ 4.57
55 .47352 $ 2.11 55 .40746 $ 2.45
65 .60986 $ 1.64 65 .54017 $ 1.85
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Whenever the death benefit is determined in this way, Pruco Life reserves the
right to refuse to accept further premium payments.
A Contract owner may be able to decrease the face amount of the Contract with
Pruco Life's consent. The Contract may become a Modified Endowment Contract and
may have tax consequences if such a decrease in the face amount occurs. See
CHANGES IN FACE AMOUNT, page 11, and TAX TREATMENT OF CONTRACT BENEFITS, page
14.
10
<PAGE>
PARTIAL WITHDRAWAL OF CASH SURRENDER VALUE
Contract owners may make withdrawals from the Contract Fund. Such withdrawals
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 14. You
may make up to four withdrawals per year, subject to certain requirements. The
amount withdrawn must be at least $2,000 (in some states the minimum withdrawal
amount may be lower). Also, there is an administrative processing fee equal to
the lesser of $15 or 2% of the amount withdrawn. A Contract owner may not
designate the subaccount[s] from which a withdrawal is to be taken. The amount
withdrawn plus the administrative processing fee will be taken proportionately
from the Contract Fund based on the portion of the total Contract Fund in a
particular subaccount. An amount withdrawn may not be repaid except as a premium
subject to the applicable charges. You must make all requests for withdrawals in
writing. Upon request, we will tell you how much may be withdrawn. Whenever a
withdrawal is made, the face amount may be reduced in order to prevent the net
amount at risk from increasing.
No partial withdrawal is permitted if it will result in a new current face
amount of less than $100,000 under an underwritten Contract or less than $50,000
under a guaranteed issue Contract. It is important to note that if the face
amount is decreased, there is a danger that the Contract might be classified as
a Modified Endowment Contract. A withdrawal may affect target premiums and
monthly deductions. You should consult your tax adviser and Pruco Life
representative before making any withdrawal which causes a decrease in face
amount. See TAX TREATMENT OF CONTRACT BENEFITS, page 14. Contract owners who
make a partial withdrawal will be sent replacement Contract pages showing the
new face amount.
CHANGES IN FACE AMOUNT
Pruco Life may, on a non-contractual basis, permit a Contract owner to decrease
the Contract's face amount without withdrawing a portion of the Contract Fund.
This can be done to reduce monthly charges. There is an administrative
processing fee of up to $15 for such a decrease. You should carefully consider
the tax consequences before requesting a decrease in face amount; the Contract
may become a Modified Endowment Contract if its face amount is decreased. See
TAX TREATMENT OF CONTRACT BENEFITS, page 14. We will not allow a decrease if it
will cause the face amount to fall below the minimum face amounts. Decreases in
face amount may also be combined with cash withdrawals. In its discretion, Pruco
Life may also allow a Contract owner to increase a Contract's face amount based
on such factors as changes in the insured's salary.
Increases in a Contract's face amount may also affect whether the Contract is a
Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 14.
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The following eight tables show how a Contract's death benefit and cash
surrender values change with the investment performance of the Account. They are
"hypothetical" because they are based, in part, upon several assumptions which
are described below. All eight tables assume the following:
o a Contract with a face amount of $100,000 bought by a male, non-smoker of a
given age, with no extra risks or substandard ratings, and no extra benefit
riders added to the Contract.
o the given premium is paid on each Contract anniversary, the deduction for
taxes attributable to premiums is 2% and no loans are taken.
o the Contract Fund has been invested in equal amounts in each of the 15
available portfolios of the Series Fund.
The first four tables (pages T1 through T4) assume target premiums are paid
annually for all years, and the remaining four tables (pages T5 through T8)
assume payment of the 7-pay premiums for seven years. These are the maximum
annual premiums that may be paid in the first seven years without the Contract's
becoming a Modified Endowment Contract under federal tax law. See TAX TREATMENT
OF CONTRACT BENEFITS, page 14. Furthermore, as their headings indicate, the
following eight tables alternate between tables assuming the current charges
will continue for the indefinite future and tables assuming the maximum
contractual charges have been made from the beginning.
Finally, there are three assumptions, shown separately, about the average
investment performance of the portfolios. The first is that there will be a
uniform 0% gross rate of return with the average value of the Contract Fund
uniformly adversely affected by very unfavorable investment performance. The
other two assumptions are that investment
11
<PAGE>
performance will be at a uniform gross annual rate of 6% and 12%. Actual returns
will fluctuate from year to year. In addition, death benefits and cash surrender
values would be different from those shown if investment returns averaged 0%, 6%
and 12% but fluctuated from those averages throughout the years. Nevertheless,
these assumptions help show how the Contract values change with investment
experience.
The first column in the following eight tables (pages T1 through T8) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the premiums had been invested to earn interest, after taxes,
at 4% compounded annually. The next three columns show the death benefit payable
in each of the years shown for the three different assumed investment returns.
The last three columns show the cash surrender value payable in each of the
years shown for the three different assumed investment returns. The cash
surrender values in the first three years reflect the refund of the prior year's
sales charges applicable to surrenders.
A gross return (as well as the net return) is shown at the top of each column.
The gross return represents the combined effect of investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Series Fund expenses. The net
return reflects average total annual expenses of the 15 portfolios of 0.50%, and
the daily deduction from the Contract Fund of 0.6% per year for the tables based
on current charges and 0.9% per year for the tables based on maximum charges.
Thus, assuming current charges, gross investment returns of 0%, 6% and 12% are
the equivalent of net investment returns of -1.10%, 4.90% and 10.90%,
respectively. Assuming maximum charges, gross investment returns of 0%, 6% and
12% are the equivalent of net investment returns of -1.40%, 4.60% and 10.60%,
respectively. The actual fees and expenses of the portfolios associated with a
particular Contract may be more or less than 0.50% and will depend on which
subaccounts are selected. The death benefits and cash surrender values shown
reflect the deduction of all expenses and charges both from the Series Fund and
under the Contract.
Your Pruco Life representative can provide you with a hypothetical illustration
for your own age, sex, and rating class.
12
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
-------------
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
ASSUME PAYMENT OF $1,402.04 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.10% Net) (4.90% Net) (10.90% Net) (-1.10% Net) (4.90% Net) (10.90% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,458 $100,000 $100,000 $ 100,000 $ 1,151 $ 1,221 $ 1,291
2 $ 2,975 $100,000 $100,000 $ 100,000 $ 2,189 $ 2,397 $ 2,614
3 $ 4,552 $100,000 $100,000 $ 100,000 $ 3,235 $ 3,652 $ 4,104
4 $ 6,192 $100,000 $100,000 $ 100,000 $ 4,195 $ 4,894 $ 5,682
5 $ 7,898 $100,000 $100,000 $ 100,000 $ 5,203 $ 6,260 $ 7,500
6 $ 9,672 $100,000 $100,000 $ 100,000 $ 6,187 $ 7,681 $ 9,505
7 $ 11,517 $100,000 $100,000 $ 100,000 $ 7,151 $ 9,163 $ 11,721
8 $ 13,435 $100,000 $100,000 $ 100,000 $ 8,095 $ 10,709 $ 14,173
9 $ 15,431 $100,000 $100,000 $ 100,000 $ 9,018 $ 12,322 $ 16,885
10 $ 17,506 $100,000 $100,000 $ 100,000 $ 9,919 $ 14,004 $ 19,886
15 $ 29,197 $100,000 $100,000 $ 104,558 $14,125 $ 23,621 $ 40,555
20 $ 43,420 $100,000 $100,000 $ 164,733 $17,648 $ 35,517 $ 74,474
25 $ 60,725 $100,000 $100,000 $ 252,139 $20,668 $ 51,187 $ 131,541
30 (Age 65) $ 81,779 $100,000 $118,907 $ 377,497 $22,230 $ 70,711 $ 224,490
35 $107,394 $100,000 $141,399 $ 561,338 $21,343 $ 94,403 $ 374,772
40 $138,559 $100,000 $167,126 $ 837,784 $16,597 $123,157 $ 617,371
45 $176,476 $100,000(2) $197,811 $1,262,111 $ 4,170(2) $157,748 $1,006,495
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 47, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T1
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
ASSUME PAYMENT OF $1,402.04 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.40% Net) (4.60% Net) (10.60% Net) (-1.40% Net) (4.60% Net) (10.60% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,458 $100,000 $100,000 $100,000 $ 1,101 $ 1,170 $ 1,238
2 $ 2,975 $100,000 $100,000 $100,000 $ 2,086 $ 2,286 $ 2,494
3 $ 4,552 $100,000 $100,000 $100,000 $ 3,046 $ 3,443 $ 3,874
4 $ 6,192 $100,000 $100,000 $100,000 $ 3,887 $ 4,548 $ 5,294
5 $ 7,898 $100,000 $100,000 $100,000 $ 4,799 $ 5,793 $ 6,960
6 $ 9,672 $100,000 $100,000 $100,000 $ 5,685 $ 7,081 $ 8,791
7 $ 11,517 $100,000 $100,000 $100,000 $ 6,543 $ 8,416 $ 10,803
8 $ 13,435 $100,000 $100,000 $100,000 $ 7,375 $ 9,798 $ 13,017
9 $ 15,431 $100,000 $100,000 $100,000 $ 8,178 $ 11,228 $ 15,453
10 $ 17,506 $100,000 $100,000 $100,000 $ 8,951 $ 12,708 $ 18,135
15 $ 29,197 $100,000 $100,000 $100,000 $12,319 $ 20,890 $ 36,279
20 $ 43,420 $100,000 $100,000 $144,792 $14,621 $ 30,456 $ 65,459
25 $ 60,725 $100,000 $100,000 $212,117 $15,253 $ 41,441 $110,662
30 (Age 65) $ 81,779 $100,000 $100,000 $301,825 $13,173 $ 54,020 $179,489
35 $107,394 $100,000 $102,769 $422,571 $ 6,164 $ 68,613 $282,125
40 $138,559 $ 0(2) $114,727 $586,391 $ 0(2) $ 84,544 $432,117
45 $176,476 $ 0 $126,564 $810,492 $ 0 $100,931 $646,343
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 38, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T2
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 55
ASSUME PAYMENT OF $3,573.47 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.10% Net) (4.90% Net) (10.90% Net) (-1.10% Net) (4.90% Net) (10.90% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,716 $100,000 $100,000 $100,000 $ 2,890 $ 3,067 $ 3,245
2 $ 7,581 $100,000 $100,000 $100,000 $ 5,477 $ 6,003 $ 6,552
3 $ 11,601 $100,000 $100,000 $100,000 $ 8,078 $ 9,132 $ 10,274
4 $ 15,782 $100,000 $100,000 $100,000 $10,445 $ 12,213 $ 14,207
5 $ 20,129 $100,000 $100,000 $100,000 $12,929 $ 15,603 $ 18,744
6 $ 24,651 $100,000 $100,000 $100,000 $15,352 $ 19,134 $ 23,763
7 $ 29,353 $100,000 $100,000 $100,000 $17,715 $ 22,816 $ 29,322
8 $ 34,244 $100,000 $100,000 $100,000 $20,014 $ 26,657 $ 35,491
9 $ 39,330 $100,000 $100,000 $100,000 $22,249 $ 30,669 $ 42,349
10 (Age 65) $ 44,620 $100,000 $100,000 $100,000 $24,418 $ 34,863 $ 49,988
15 $ 74,416 $100,000 $100,000 $153,475 $34,200 $ 59,182 $102,466
20 $110,668 $100,000 $124,139 $256,732 $42,038 $ 91,479 $189,189
25 $154,773 $100,000(2) $164,289 $413,079 $46,236(2) $131,016 $329,418
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 41, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T3
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 55
ASSUME PAYMENT OF $3,573.47 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.40% Net) (4.60% Net) (10.60% Net) (-1.40% Net) (4.60% Net) (10.60% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,716 $100,000 $100,000 $100,000 $ 2,580 $ 2,747 $ 2,915
2 $ 7,581 $100,000 $100,000 $100,000 $ 4,821 $ 5,304 $ 5,809
3 $ 11,601 $100,000 $100,000 $100,000 $ 6,970 $ 7,920 $ 8,952
4 $ 15,782 $100,000 $100,000 $100,000 $ 8,775 $10,346 $ 12,127
5 $ 20,129 $100,000 $100,000 $100,000 $10,721 $13,073 $ 15,850
6 $ 24,651 $100,000 $100,000 $100,000 $12,555 $15,852 $ 19,913
7 $ 29,353 $100,000 $100,000 $100,000 $14,272 $18,683 $ 24,354
8 $ 34,244 $100,000 $100,000 $100,000 $15,857 $21,560 $ 29,217
9 $ 39,330 $100,000 $100,000 $100,000 $17,299 $24,479 $ 34,557
10 (Age 65) $ 44,620 $100,000 $100,000 $100,000 $18,586 $27,437 $ 40,440
15 $ 74,416 $100,000 $100,000 $121,164 $22,299 $42,965 $ 80,894
20 $110,668 $100,000 $100,000 $192,809 $19,064 $60,220 $142,083
25 $154,773 $100,000(2) $102,627 $288,651 $ 1,335(2) $81,842 $230,190
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 26, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T4
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
ASSUME PAYMENT OF $3,897 ANNUAL PREMIUMS FOR SEVEN YEARS
USING CURRENT CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.10% Net) (4.90% Net) (10.90% Net) (-1.10% Net) (4.90% Net) (10.90% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,053 $100,000 $100,000 $ 100,000 $ 3,574 $ 3,781 $ 3,987
2 $ 8,268 $100,000 $100,000 $ 100,000 $ 6,842 $ 7,469 $ 8,120
3 $ 12,651 $100,000 $100,000 $ 100,000 $10,146 $ 11,415 $ 12,787
4 $ 17,210 $100,000 $100,000 $ 100,000 $13,221 $ 15,362 $ 17,771
5 $ 21,952 $100,000 $100,000 $ 100,000 $16,446 $ 19,701 $ 23,511
6 $ 26,883 $100,000 $100,000 $ 103,065 $19,630 $ 24,249 $ 29,874
7 $ 32,011 $100,000 $100,000 $ 123,149 $22,774 $ 29,019 $ 36,897
8 $ 33,291 $100,000 $100,000 $ 131,259 $22,288 $ 30,212 $ 40,643
9 $ 34,623 $100,000 $100,000 $ 139,940 $21,795 $ 31,457 $ 44,774
10 $ 36,008 $100,000 $100,000 $ 149,231 $21,294 $ 32,755 $ 49,328
15 $ 43,809 $100,000 $103,517 $ 206,742 $18,682 $ 40,151 $ 80,189
20 $ 53,300 $100,000 $108,757 $ 288,159 $15,661 $ 49,168 $ 130,274
25 $ 64,848 $100,000 $117,197 $ 411,896 $12,213 $ 61,142 $ 214,886
30 (Age 65) $ 78,898 $100,000 $127,220 $ 592,840 $ 7,119 $ 75,655 $ 352,550
35 $ 95,991 $ 0(2) $139,450 $ 861,193 $ 0(2) $ 93,103 $ 574,967
40 $116,788 $ 0 $154,925 $1,267,327 $ 0 $114,166 $ 933,906
45 $142,090 $ 0 $174,768 $1,892,870 $ 0 $139,373 $1,509,507
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T5
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 35
ASSUME PAYMENT OF $3,897 ANNUAL PREMIUMS FOR SEVEN YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.40% Net) (4.60% Net) (10.60% Net) (-1.40% Net) (4.60% Net) (10.60% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,053 $100,000 $100,000 $ 100,000 $ 3,518 $ 3,724 $ 3,929
2 $ 8,268 $100,000 $100,000 $ 100,000 $ 6,721 $ 7,337 $ 7,977
3 $ 12,651 $100,000 $100,000 $ 100,000 $ 9,875 $11,112 $ 12,450
4 $ 17,210 $100,000 $100,000 $ 100,000 $12,711 $14,789 $ 17,129
5 $ 21,952 $100,000 $100,000 $ 100,000 $15,766 $18,913 $ 22,600
6 $ 26,883 $100,000 $100,000 $ 100,000 $18,771 $23,222 $ 28,650
7 $ 32,011 $100,000 $100,000 $ 117,843 $21,728 $27,726 $ 35,307
8 $ 33,291 $100,000 $100,000 $ 125,037 $21,126 $28,714 $ 38,716
9 $ 34,623 $100,000 $100,000 $ 132,697 $20,515 $29,734 $ 42,457
10 $ 36,008 $100,000 $100,000 $ 140,851 $19,892 $30,788 $ 46,558
15 $ 43,809 $100,000 $100,000 $ 190,210 $16,529 $36,580 $ 73,777
20 $ 53,300 $100,000 $100,000 $ 257,575 $12,430 $43,254 $116,447
25 $ 64,848 $100,000 $100,000 $ 349,411 $ 6,792 $50,730 $182,288
30 (Age 65) $ 78,898 $ 0(2) $100,000 $ 474,607 $ 0(2) $58,921 $282,239
35 $ 95,991 $ 0 $101,354 $ 645,424 $ 0 $67,668 $430,911
40 $116,788 $ 0 $103,918 $ 879,028 $ 0 $76,578 $647,764
45 $142,090 $ 0 $106,842 $1,200,051 $ 0 $85,203 $957,005
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 30, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T6
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 55
ASSUME PAYMENT OF $7,633 ANNUAL PREMIUMS FOR SEVEN YEARS
USING CURRENT CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.10% Net) (4.90% Net) (10.90% Net) (-1.10% Net) (4.90% Net) (10.90% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 7,938 $100,000 $100,000 $100,000 $ 6,847 $ 7,247 $ 7,648
2 $ 16,194 $100,000 $100,000 $100,000 $13,093 $ 14,305 $ 15,566
3 $ 24,780 $100,000 $100,000 $100,000 $19,418 $ 21,872 $ 24,527
4 $ 33,710 $100,000 $100,000 $100,000 $25,300 $ 29,447 $ 34,115
5 $ 42,997 $100,000 $100,000 $100,000 $31,491 $ 37,805 $ 45,203
6 $ 52,655 $100,000 $100,000 $107,305 $37,621 $ 46,602 $ 57,531
7 $ 62,699 $100,000 $101,444 $129,102 $43,694 $ 55,865 $ 71,097
8 $ 65,207 $100,000 $102,786 $138,333 $42,628 $ 58,109 $ 78,205
9 $ 67,815 $100,000 $104,206 $148,316 $41,521 $ 60,441 $ 86,025
10 (Age 65) $ 70,528 $100,000 $105,709 $159,120 $40,367 $ 62,863 $ 94,625
15 $ 85,808 $100,000 $114,516 $228,139 $33,588 $ 76,455 $152,315
20 $104,399 $100,000 $127,590 $336,485 $23,742 $ 94,022 $247,959
25 $127,017 $100,000(2) $144,573 $504,687 $ 5,760(2) $115,292 $402,473
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 27, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T7
<PAGE>
<TABLE>
<CAPTION>
PRUSELECT I VARIABLE LIFE INSURANCE CONTRACT
MALE PREFERRED ISSUE AGE 55
ASSUME PAYMENT OF $7,633 ANNUAL PREMIUMS FOR SEVEN YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-1.40% Net) (4.60% Net) (10.60% Net) (-1.40% Net) (4.60% Net) (10.60% Net)
---------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 7,938 $100,000 $100,000 $100,000 $ 6,536 $ 6,928 $ 7,319
2 $ 16,194 $100,000 $100,000 $100,000 $12,441 $13,607 $ 14,821
3 $ 24,780 $100,000 $100,000 $100,000 $18,243 $20,583 $ 23,120
4 $ 33,710 $100,000 $100,000 $100,000 $23,423 $27,356 $ 31,793
5 $ 42,997 $100,000 $100,000 $100,000 $29,030 $34,997 $ 42,006
6 $ 52,655 $100,000 $100,000 $100,000 $34,546 $43,013 $ 53,374
7 $ 62,699 $100,000 $100,000 $119,516 $39,977 $51,439 $ 65,817
8 $ 65,207 $100,000 $100,000 $126,955 $38,355 $52,923 $ 71,773
9 $ 67,815 $100,000 $100,000 $134,874 $36,617 $54,414 $ 78,228
10 (Age 65) $ 70,528 $100,000 $100,000 $143,303 $34,744 $55,909 $ 85,220
15 $ 85,808 $100,000 $100,000 $194,330 $22,534 $63,405 $129,743
20 $104,399 $100,000 $100,000 $264,172 $ 1,276 $70,618 $194,671
25 $127,017 $ 0(2) $100,000 $360,196 $ 0(2) $77,035 $287,246
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 21, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates
of return may be more or less than those shown and will depend on a number
of factors including the investment allocations made by an owner,
prevailing interest rates, and rates of inflation. The death benefit and
cash surrender value for a contract would be different from those shown if
the actual rates of return averaged 0%, 6%, and 12% over a period of years,
but also fluctuated above or below those averages for individual contract
years. No representations can be made by Pruco Life or the Series Fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
T8
<PAGE>
CONTRACT LOANS
You may borrow from Pruco Life an amount up to the "loan value" of the Contract,
using the Contract as the only security for the loan. The loan value of a
Contract is 90% of its Contract Fund, if the Contract is not in default. The
minimum amount that may be borrowed at any one time is $500 unless the loan is
used to pay premiums on a life insurance policy issued by Pruco Life or its
affiliates.
The Contract provides a choice of fixed or variable loan interest rates. Under
the fixed loan interest rate provision, interest charged on a loan accrues daily
at a fixed effective annual rate of 5.5%. Under the variable loan interest rate
provision, interest charged on any loan will accrue daily at an annual rate
Pruco Life determines at the start of each Contract year (instead of at the
fixed 5.5% rate). The interest rate will not exceed any rate required by state
law and will not exceed the greater of 5% and the "Published Monthly Average"
for the calendar month ending two months before the calendar month of the
Contract anniversary. The "Published Monthly Average" means Moody's Corporate
Bond Yield Average-Monthly Average Corporates, as published by Moody's Investors
Service, Inc., or any successor to that service. If that average is no longer
published, a substantially similar average established by the insurance
regulator where the Contract is issued, will be used. For example, the Published
Monthly Average in 1998 ranged from 6.72% to 7.00%.
Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The "Contract debt" is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time your Contract debt exceeds your Contract
Fund, Pruco Life will notify you of its intent to terminate the Contract in 61
days, within which time you may repay all or enough of the loan to keep the
Contract inforce. If you fail to keep the Contract inforce, the amount of unpaid
Contract debt will be treated as a distribution which may be taxable. See TAX
TREATMENT OF CONTRACT BENEFITS--PRE-DEATH DISTRIBUTIONs, page 12, and LAPSE AND
REINSTATEMENt, page 13.
When a loan is made, an amount equal to the loan proceeds is transferred out of
the applicable subaccount[s]. The reduction is generally made in the same
proportions as the value that each subaccount bears to the total value of the
Contract. While a fixed-rate loan is outstanding, the amount that was
transferred continues to be treated as part of the Contract Fund, but it is
credited with the assumed effective annual rate of return of 4% rather than with
the actual rate of return of the applicable subaccount[s]. While a loan made
pursuant to the variable loan interest rate provision is outstanding, the amount
that was transferred is credited with an effective annual rate of 4% or an
effective annual rate that is 1% less than the loan interest rate for the
Contract year, whichever is greater. If a loan remains outstanding at a time
when Pruco Life fixes a new rate, the new interest rate applies.
If the death benefit becomes payable while a loan is outstanding, or if the
Contract is surrendered, any Contract debt will be deducted from the proceeds
otherwise payable.
A loan will have a permanent effect on a Contract's cash surrender value and may
have a permanent effect on the death benefit because the investment results of
the selected subaccount[s] will apply only to the amount remaining in those
subaccount[s]. The longer the loan is outstanding, the greater the effect is
likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is outstanding, Contract values will not increase as rapidly as
they would have if no loan had been made. If investment results are below that
rate, Contract values will be higher than they would have been had no loan been
made. Loan repayments are allocated to the subaccounts proportionately based on
their balances at the time of the loan repayment.
The tax treatment of Contract loans depends on whether the Contract is
classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT
BENEFITS, page 12.
WHEN PROCEEDS ARE PAID
We will generally pay any death benefit, cash surrender value, withdrawal, or
loan proceeds within seven days after all the documents required for such a
payment are received at a Home Office. The amount is determined as of the end of
the valuation period in which the necessary documents are received at a Home
Office, except the death benefit is determined as of the date of death.
Pruco Life may delay payment of proceeds from the subaccount[s] and the variable
portion of the death benefit due under the Contract if the disposal or valuation
of the Account's assets is not reasonably practicable because: (1) the New York
Stock Exchange is closed for other than a regular holiday or weekend; or (2) the
SEC restricts trading; or (3) the SEC declares that an emergency exists.
13
<PAGE>
TAX TREATMENT OF CONTRACT BENEFITS
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
TREATMENT AS LIFE INSURANCE. The Contract must meet certain requirements to
qualify as life insurance for tax purposes. These requirements include certain
definitional tests and rules for diversification of the Contract's investments.
For further information on the diversification requirements, see DIVIDENDS,
DISTRIBUTIONS AND TAXES in the prospectus for the Series Fund. We believe we
have taken adequate steps to ensure that the Contract qualifies as life
insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract's death benefit will be tax free to your beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to ensure that the Contract will qualify as life insurance.
PRE-DEATH DISTRIBUTIONS. The tax treatment of any distribution you receive
before the insured's death depends on whether the Contract is classified as a
Modified Endowment Contract.
CONTRACTS NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
o If you surrender the Contract or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will
be treated as receiving any portion of the cash surrender value used
to repay Contract debt. The tax consequences of a surrender may differ
if you take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount
you receive exceeds the premiums you paid for the Contract less the
untaxed portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Contract years, all or a portion of a
withdrawal may be taxed if the Contract Fund exceeds the total
premiums paid less the untaxed portions of any prior withdrawals, even
if total withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count
in computing the premiums paid for the Contract for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Contract are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS.
o The rules change if the Contract is classified as a Modified Endowment
Contract. The Contract could be classified as a Modified Endowment
Contract if premiums substantially in excess of scheduled premiums are
paid or a decrease in the face amount of insurance is made (or a rider
removed). The addition of a rider or an increase in the face amount of
insurance may also cause the Contract to be classified as a Modified
Endowment Contract. You should first consult a qualified tax adviser
and your Pruco Life representative if you are contemplating any of
these steps.
o If the Contract is classified as a Modified Endowment Contract, then
amounts you receive under the Contract before the insured's death,
including loans and withdrawals, are included in income to the extent
that the Contract Fund exceeds the premiums paid for the Contract
increased by the amount of any loans previously included in income and
reduced by any untaxed amounts previously received other than the
amount of any loans excludible from income. An assignment of a
Modified Endowment Contract is taxable in the same way.
14
<PAGE>
These rules also apply to pre-death distributions, including loans,
made during the two-year period before the time that the Contract
became a Modified Endowment Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the amount is
received on or after age 59-1/2, on account of your becoming disabled
or as a life annuity. It is presently unclear how the penalty tax
provisions apply to Contracts owned by businesses.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Contract for purposes of
applying these rules.
WITHHOLDING. You must affirmatively elect that no taxes be withheld from a
pre-death distribution. Otherwise, the taxable portion of any amounts you
receive will be subject to withholding. You are not permitted to elect out of
withholding if you do not provide a social security number or other taxpayer
identification number. You may be subject to penalties under the estimated tax
payment rules if your withholding and estimated tax payments are insufficient to
cover the tax due.
OTHER TAX CONSIDERATIONS. If you transfer or assign the Contract to someone
else, there may be gift, estate and/or income tax consequences. If you transfer
the Contract to a person two or more generations younger than you (or designate
such a younger person as a beneficiary), there may be Generation Skipping
Transfer tax consequences. Deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied. Your individual situation or that of your beneficiary
will determine the federal estate taxes and the state and local estate,
inheritance and other taxes due if you or the insured dies.
BUSINESS-OWNED LIFE INSURANCE. If a business, rather than an individual, is the
owner of the Contract, there are some additional rules. Business Contract owners
generally cannot deduct premium payments. Business Contract owners generally
cannot take tax deductions for interest on Contract debt paid or accrued after
October 13, 1995. An exception permits the deduction of interest on policy loans
on Contracts for up to 20 key persons. The interest deduction for Contract debt
on these loans is limited to a prescribed interest rate and a maximum aggregate
loan amount of $50,000 per key insured person. The corporate alternative minimum
tax also applies to business-owned life insurance. This is an indirect tax on
additions to the Contract Fund or death benefits received under business-owned
life insurance policies.
LAPSE AND REINSTATEMENT
If the Contract Fund on any Monthly date has decreased to zero or less, or if a
Contract's debt should exceed its Contract Fund, the Contract will go into
default.
Should this happen, Pruco Life will send you a notice of default setting forth
the payment necessary to keep the Contract inforce. This payment must be
received at a Home Office within the 61 day grace period after the notice of
default is mailed or the Contract will lapse. A Contract that lapses with an
outstanding Contract loan may have tax consequences. See TAX TREATMENT OF
CONTRACT BENEFITS, page 12.
A Contract that has lapsed may be reinstated within five years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Pruco Life requires renewed evidence of
insurability and submission of certain payments due under the Contract.
A Contract that has lapsed has no value and provides no benefits. It is possible
for a lapsed Contract to be classified as a Modified Endowment Contract if
reinstated after lapsing. See TAX TREATMENT OF CONTRACT BENEFITS, page 12.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contracts employ mortality tables that distinguish between males and
females. Thus, premiums and benefits differ under Contracts issued on males and
females of the same age. The Contract was not sold in those states that had
adopted regulations prohibiting sex-distinct insurance rates. The Contract may
not be assigned if to do so would violate regulations or laws relating to
sex-distinct insurance rates.
15
<PAGE>
REDUCED PAID-UP INSURANCE OPTION AVAILABLE IN SOME STATES
In some states, Contract owners will have the right to take the cash surrender
value and use it to purchase fixed reduced paid-up insurance. Fixed reduced
paid-up insurance provides coverage for the lifetime of the insured. The
insurance amount depends on the cash surrender value and the age, sex, and
rating class of the insured. Fixed reduced paid-up insurance has a cash
surrender value and a loan value. A Contract may be classified as a Modified
Endowment Contract if this option is exercised. See TAX TREATMENT OF CONTRACT
BENEFITS, page 14.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if the assignment would violate
any federal, state or local law or regulation. Generally, the Contract may not
be assigned to another insurance company or to an employee benefit plan without
Pruco Life's consent. Pruco Life assumes no responsibility for the validity or
sufficiency of any assignment. We will not be obligated to comply with any
assignment unless we receive a copy at a Home Office.
BENEFICIARY. You designated and named your beneficiary in the application. You
may change the beneficiary, provided it is in accordance with the terms of the
Contract.
INCONTESTABILITY. We will not contest the Contract after it has been inforce
during the insured's lifetime for two years from the issue date except when any
change is made in the Contract that requires Pruco Life's approval and would
increase our liability. We will not contest such change after it has been in
effect for two years during the lifetime of the insured.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both were incorrect in the Contract, Pruco Life will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most Contract owners, or to the
beneficiary, a wide variety of optional ways of receiving Contract proceeds,
other than in a lump sum. A Pruco Life representative can explain these options
upon request.
VOTING RIGHTS
As described earlier, all of the assets held in the subaccounts will be invested
in shares of the corresponding portfolios of the Series Fund. Pruco Life is the
legal owner of those shares and has the right to vote on any matter voted on at
Series Fund shareholders meetings. However, Pruco Life will, as required by law,
vote the shares of the Series Fund in accordance with voting instructions
received from Contract owners at any regular and special shareholders meetings.
The Series Fund will not hold annual shareholders meetings when not required to
do so under Maryland law or the Investment Company Act of 1940. Series Fund
shares for which no timely instructions from Contract owners are received, and
any shares attributable to general account investments of Pruco Life will be
voted in the same proportion as shares in the respective portfolios for which
instructions are received. If 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 Contract owners 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 the Contract owner's selected subaccount[s];
(4) any change in the fundamental investment policy of a portfolio
corresponding to the Contract owner's selected subaccount[s]; and
(5) any other matter requiring a vote of the shareholders of the Series Fund.
Contract owners participating in such portfolios will vote separately on the
investment advisory agreement or any change in a portfolio's fundamental
investment policy, pursuant to the requirements of Rule 18f-2 under the
Investment Company Act of 1940.
16
<PAGE>
The number of Series Fund shares for which a Contract owner 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 Series Fund. The number of votes for which each
Contract owner may give Pruco Life instructions will be determined as of the
record date chosen by the Board of Directors of the Series Fund. Pruco Life will
furnish Contract owners with proper forms and proxies to enable them to give
these instructions. Pruco Life reserves 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 Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, Pruco Life itself may
disregard voting instructions that would require changes in the investment
policy or investment adviser of one or more of the Series Fund's portfolios,
provided that Pruco Life reasonably disapproves such changes in accordance with
applicable federal regulations. If Pruco Life does disregard voting
instructions, it will advise Contract owners of that action and its 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, Pruco Life may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. The approval of the SEC, and possibly one
or more state insurance departments, will be required before this can be done.
Contract owners will be notified of any such substitution.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is inforce as fixed reduced
paid-up insurance), Pruco Life will send you statements providing certain
information pertinent to your own Contract. These statements detail values and
transactions made and specific Contract data that apply only to each particular
Contract. On request, a Contract owner will be sent a current statement in a
form similar to that of the annual statement described above, but Pruco Life 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 of the Series Fund showing
the financial condition of the portfolios and the investments held in each
portfolio.
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 Contract. 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 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract was sold by registered
representatives of Prusec who were also authorized by state insurance
departments to do so. The Contract may also have been sold through other
broker-dealers authorized by Prusec and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis
than described below. Premiums after the first year may generate up to a 4%
commission. Moreover, trail commissions of up to 0.2% of the Contract Fund as of
the Contract's anniversary may be paid. Representatives who meet certain
productivity, profitability, and persistency standards with regard to the sale
of the Contract may be eligible for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. Pruco Life expects to recover its total sales expenses over the periods
the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from Pruco Life's surplus. This may include the amounts derived from the
mortality and expense risk charge described in item 7 under CHARGES AND
EXPENSES, page 5.
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.
17
<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 consolidated financial statements of Pruco Life and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the Account as of December 31,
1998 and for each of the three years in the period then ended included in this
prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
Actuarial matters included in this prospectus have been examined by Nancy D.
Davis, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
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.
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of a Variable Universal Life
Insurance Contract depend on the smooth functioning of numerous computer
systems. Many computer systems in use today are programmed to recognize only the
last two digits of a date as the year. As a result, any systems using this kind
of programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephone, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with the Variable
Universal Life Insurance Contract could experience problems resulting from the
Year 2000 issue. Please refer to the respective mutual fund's prospectus for
information regarding their approach to Year 2000 concerns. The following
describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential, as the parent company of Pruco
Life, organized its Year 2000 efforts around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our business;
o INFRASTRUCTURE - Computers and other business equipment like telephones and
fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
18
<PAGE>
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Systems, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September,
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of Variable Universal Life Insurance
Contracts. During the course of the Year 2000 program, some optional computer
projects have been delayed, but these delays have not had any material effect on
Variable Universal Life Insurance Contracts.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with the Variable Universal Life Insurance Contract will
be unable to value their securities, in turn creating difficulties in purchasing
or selling shares of the respective mutual fund and calculating corresponding
unit asset values. The objective of Prudential's Year 2000 program has been to
reduce these risks as much as possible.
Most of the operations of the Variable Universal Life Insurance Contract involve
such a large number of individual transactions that they can only be handled
with the help of computers. As a result, our current contingency plans include
responses to the failure of specific business programs or infrastructure
components. However, our contingency responses are now being reviewed and we
expect to finalize them by June, 1999 to ensure that they are workable under the
special conditions of a Year 2000 failure. Prudential believes that with the
completion of its Year 2000 program as scheduled, the possibility of significant
interruptions of normal operations will be reduced.
ADDITIONAL INFORMATION
Pruco Life has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus does not include all 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.
19
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Pruco Life and Subsidiaries, which should
be considered only as bearing upon the ability of Pruco Life to meet its
obligations under the Contracts.
20
<PAGE>
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past five years, are shown below.
DIRECTORS OF PRUCO LIFE
JAMES J. AVERY, JR., CHAIRMAN AND DIRECTOR. -- Senior Vice President and Chief
Actuary, Prudential Individual Insurance Group since 1997; 1995 to 1997:
President of Prudential Select; Prior to 1995: Chief Operating Officer of
Prudential Select.
WILLIAM M. BETHKE, DIRECTOR. -- Chief Investment Officer since 1997; Prior to
1997: President, Prudential Capital Markets Group.
IRA J. KLEINMAN, DIRECTOR. -- Executive Vice President, Prudential International
Insurance Group since 1997; 1995 to 1997: Chief Marketing and Product
Development Officer, Prudential Individual Insurance Group; Prior to 1995:
President, Prudential Select.
ESTHER H. MILNES, PRESIDENT AND DIRECTOR. -- Vice President and Actuary,
Prudential Individual Insurance Group since 1996; Prior to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services.
I. EDWARD PRICE, VICE CHAIRMAN AND DIRECTOR. -- Senior Vice President and
Actuary, Prudential Individual Insurance Group since 1995; Prior to 1995: Chief
Executive Officer, Prudential International Insurance.
KIYOFUMI SAKAGUCHI, DIRECTOR. -- President, Prudential International Insurance
Group since 1995; Prior to 1995: Chairman and Chief Executive Officer, The
Prudential Life Insurance Co., Ltd.
OFFICERS WHO ARE NOT DIRECTORS
C. EDWARD CHAPLIN, TREASURER. -- Vice President and Treasurer of Prudential
since 1995; Prior to 1995: Managing Director and Assistant Treasurer of
Prudential.
JAMES C. DROZANOWSKI, SENIOR VICE PRESIDENT. -- Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996:
President and Chief Executive Officer of Chase Manhattan Bank; Prior to 1995:
Vice President, North America Customer Services, Chase Manhattan Bank.
CLIFFORD E. KIRSCH, CHIEF LEGAL OFFICER AND SECRETARY. -- Chief Counsel,
Variable Products, Law Department of Prudential since 1995; Prior to 1995:
Associate General Counsel with Paine Webber.
FRANK P. MARINO, SENIOR VICE PRESIDENT. -- Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
EDWARD A. MINOGUE, SENIOR VICE PRESIDENT. -- Vice President, Annuity Services,
Prudential Investments since 1997; Prior to 1997: Director, Merrill Lynch.
HIROSHI NAKAJIMA, SENIOR VICE PRESIDENT. -- President & Chief Executive Officer,
Pruco Life Insurance Company, Taiwan Branch since 1997; Prior to 1997: Senior
Managing Director, Prudential Life Insurance Co., Ltd.
IMANTS SAKSONS, SENIOR VICE PRESIDENT. -- Vice President, Compliance, Prudential
Individual Financial Services since 1998; Prior to 1998: Vice President, Market
Conduct, U.S. Operations, Manulife Financial.
SHIRLEY H. SHAO, SENIOR VICE PRESIDENT AND CHIEF ACTUARY. -- Vice President and
Associate Actuary, Prudential.
DENNIS G. SULLIVAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER. -- Vice
President and Deputy Controller, Prudential since 1998; 1997 to 1998, Vice
President and Controller, ContiFinancial Corporation; Prior to 1997, Director,
Saloman Brothers.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992.
Pruco Life directors and officers are elected annually.
21
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF NET ASSETS
December 31, 1998
SUBACCOUNTS
----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios at net asset value [Note 3]...... $ 12,954,317 $ 41,131,530 $ 46,158,354 $ 32,845,241 $ 47,024,976
------------ ------------ ------------- ------------ ------------
Net Assets.................................... $ 12,954,317 $ 41,131,530 $ 46,158,354 $ 32,845,241 $ 47,024,976
============ ============ ============ ============ ============
NET ASSETS, representing:
Equity of contract owners................... $ 12,954,317 $ 41,131,530 $ 46,158,354 $ 32,845,241 $ 47,024,976
------------ ------------ ------------- ------------ ------------
$ 12,954,317 $ 41,131,530 $ 46,158,354 $ 32,845,241 $ 47,024,976
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------
ZERO COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL GOVERNMENT
2000 BOND INDEX INCOME RESOURCES GLOBAL INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 17,432,960 $ 3,120,239 $167,052,336 $ 14,428,890 $ 871,086 $ 13,040,571 $ 8,465,967
- ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 17,432,960 $ 3,120,239 $167,052,336 $ 14,428,890 $ 871,086 $ 13,040,571 $ 8,465,967
============ ============ ============ ============ ============ ============ ============
$ 17,432,960 $ 3,120,239 $167,052,336 $ 14,428,890 $ 871,086 $ 13,040,571 $ 8,465,967
- ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 17,432,960 $ 3,120,239 $167,052,336 $ 14,428,890 $871,086 $ 13,040,571 $ 8,465,967
============ ============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A2
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF NET ASSETS
December 31, 1998
SUBACCOUNTS
---------------------------------------------
ZERO COUPON SMALL
BOND PRUDENTIAL CAPITALIZATION
2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios at net asset value [Note 3]...... $ 16,782,089 $ 2,735,579 $ 10,543,368
------------ ------------ ------------
Net Assets.................................... $ 16,782,089 $ 2,735,579 $ 10,543,368
============ ============ ============
NET ASSETS, representing:
Equity of contract owners................... $ 16,782,089 $ 2,735,579 $ 10,543,368
------------ ------------ ------------
$ 16,782,089 $ 2,735,579 $ 10,543,368
============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A3
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
PORTFOLIO PORTFOLIO
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income.................................. $ 461,945 $ 461,061 $ 370,956 $ 2,359,120 $ 2,574,631 $ 2,171,278
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]...... 53,117 50,651 40,789 229,634 205,292 210,590
Reimbursement for excess expenses [Note 5C]...... 0 0 0 0 0 0
----------- ----------- ----------- ----------- ------------------------
NET EXPENSES 53,117 50,651 40,789 229,634 205,292 210,590
----------- ----------- ----------- ----------- ------------------------
NET INVESTMENT INCOME (LOSS) 408,828 410,410 330,167 2,129,486 2,369,339 1,960,688
----------- ----------- ----------- ----------- ------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received........... 0 0 0 128,093 408,037 0
Realized gain (loss) on shares redeemed........ 0 0 0 173,161 94,146 296,104
Net change in unrealized gain (loss)
on investments............................... 0 0 0 (29,348) (288,588) (852,759)
----------- ------------ ----------- ----------- ------------------------
NET GAIN (LOSS) ON INVESTMENTS 0 0 0 271,906 213,595 (556,655)
----------- ------------ ----------- ----------- ------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........................ $ 408,828 $ 410,410 $ 330,167 $ 2,401,392 $ 2,582,934 $ 1,404,033
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A4
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 860,120 $ 1,108,812 $ 897,405 $ 1,147,432 $ 1,050,936 $ 810,334 $ 1,965,960 $ 2,025,296 $ 1,460,883
- ----------- ----------- ----------- ----------- ----------- -----------
284,011 286,301 203,014 209,364 206,248 145,789 271,618 256,921 213,652
0 0 0 0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
284,011 286,301 203,014 209,364 206,248 145,789 271,618 256,921 213,652
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
576,109 822,511 694,391 938,068 844,688 664,545 1,694,342 1,768,375 1,247,231
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5,026,484 2,827,131 3,585,387 3,419,770 5,545,715 2,731,323 2,703,038 5,037,552 2,164,504
4,779,486 1,774,816 633,352 353,509 605,368 75,275 935,553 200,066 464,539
(5,230,122) 4,476,157 759,941 (1,305,317) (1,682,924) (331,513) (276,688) (1,945,306) 108,733
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
4,575,848 9,078,104 4,978,680 2,467,962 4,468,159 2,475,085 3,361,903 3,292,312 2,737,776
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 5,151,957 $ 9,900,615 $ 5,673,071 $ 3,406,030 $ 5,312,847 $ 3,139,630 $ 5,056,245 $ 5,060,687 $ 3,985,007
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A5
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
ZERO COUPON HIGH
BOND YIELD
2000 BOND
PORTFOLIO PORTFOLIO
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income.................................. $ 821,929 $ 745,017 $ 472,600 $ 261,439 $197,684 $ 132,351
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]...... 101,177 101,616 34,875 15,665 12,354 7,323
Reimbursement for excess expenses [Note 5C]...... (37,196) (42,117) (8,393) 0 0 0
----------- ----------- ----------- ----------- ------------------------
NET EXPENSES 63,981 59,499 26,482 15,665 12,354 7,323
----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 757,948 685,518 446,118 245,774 185,330 125,028
----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received........... 227,825 690,332 0 0 0 0
Realized gain (loss) on shares redeemed........ (52,050) (94,913) 81,019 (4,633) 16,526 3,467
Net change in unrealized gain (loss)
on investments............................... 217,606 (355,649) (17,112) (334,049) 59,640 (3,313)
----------- ----------- ----------- ----------- ------------------------
NET GAIN (LOSS) ON INVESTMENTS 393,381 239,770 63,907 (338,682) 76,166 154
----------- ----------- ----------- ----------- ------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 1,151,329 $ 925,288 $ 510,025 $ (92,908) $ 261,496 $ 125,182
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A6
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
STOCK EQUITY NATURAL
INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,729,752 $ 1,326,042 $ 900,654 $ 365,234 $ 370,792 $ 475,277 $ 8,084 $ 8,087 $ 8,770
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
820,541 502,161 260,862 90,144 85,229 94,957 5,828 9,335 7,362
0 0 0 0 0 0 0 0 (160)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
820,541 502,161 260,862 90,144 85,229 94,957 5,828 9,335 7,202
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
909,211 823,881 639,792 275,090 285,563 380,320 2,256 (1,248) 1,568
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
2,499,196 2,997,271 673,354 797,222 1,414,553 485,860 50,250 136,346 172,185
5,771,729 2,754,626 413,888 2,673,910 481,377 908,956 (28,695) 24,931 33,275
24,590,569 15,534,339 7,149,445 (4,107,342) 2,177,083 1,098,444 (210,866) (299,786) 88,415
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
32,861,494 21,286,236 8,236,687 (636,210) 4,073,013 2,493,260 (189,311) (138,509) 293,875
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$33,770,705 $22,110,117 $ 8,876,479 $ (361,120) $ 4,358,576 $ 2,873,580 $ (187,055) $ (139,757) $ 295,443
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A7
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
PORTFOLIO PORTFOLIO
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income.................................. $ 160,959 $ 149,254 $ 312,052 $ 402,330 $ 257,272 $ 215,507
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]...... 70,813 80,250 67,425 38,968 23,144 17,932
Reimbursement for excess expenses [Note 5C]...... 0 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
NET EXPENSES 70,813 80,250 67,425 38,968 23,144 17,932
----------- ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 90,146 69,004 244,627 363,362 234,128 197,575
----------- ----------- ----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received........... 536,310 504,462 240,786 0 0 0
Realized gain (loss) on shares redeemed........ 235,100 1,501,595 155,802 8,247 17,410 553
Net change in unrealized gain (loss)
on investments............................... 1,531,076 (871,934) 1,328,007 205,452 86,634 (117,230)
----------- ----------- ----------- ----------- ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS 2,302,486 1,134,123 1,724,595 213,699 104,044 (116,677)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........................ $ 2,392,632 $ 1,203,127 $ 1,969,222 $ 577,061 $ 338,172 $ 80,898
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A8
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
ZERO COUPON SMALL
BOND PRUDENTIAL CAPITALIZATION
2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 650,198 $ 485,431 $ 48,741 $ 3,905 $ 1,751 $ 547 $ 49,149 $ 39,052 $ 24,838
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
67,532 42,708 5,414 11,315 4,217 1,034 43,679 34,205 11,568
(22,824) (23,762) (1,163) 0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
44,708 18,946 4,251 11,315 4,217 1,034 43,679 34,205 11,568
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
605,490 466,485 44,490 (7,410) (2,466) (487) 5,470 4,847 13,270
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
7,803 124,816 10,654 37,636 50,105 0 604,937 381,206 76,737
12,587 225,279 93 22,375 43,121 (693) (29,549) 703,647 2,225
773,486 215,644 (61,956) 478,204 73,161 14,438 (95,776) 238,634 219,537
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
793,876 565,739 (51,209) 538,215 166,387 13,745 479,612 1,323,487 298,499
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 1,399,366 $ 1,032,224 $ (6,719) $ 530,805 $ 163,921 $ 13,258 $ 485,082 $ 1,328,334 $ 311,769
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A9
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
PORTFOLIO PORTFOLIO
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)...................... $ 408,828 $ 410,410 $ 330,167 $ 2,129,486 $ 2,369,339 $ 1,960,688
Capital gains distributions received.............. 0 0 0 128,093 408,037 0
Realized gain (loss) on shares redeemed........... 0 0 0 173,161 94,146 296,104
Net change in unrealized gain (loss) on
investments..................................... 0 0 0 (29,348) (288,588) (852,759)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ 408,828 410,410 330,167 2,401,392 2,582,934 1,404,033
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER OPERATING
TRANSFERS [Note 7]................................ 3,180,058 (2,071,596) 4,126,018 2,146,163 2,394,859 (5,205,030)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN
THE ACCOUNT [Note 8].............................. (1,722) (115,766) (2,181,943) (35,755) (86,028) (35,291)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS............. 3,587,164 (1,776,952) 2,274,242 4,511,800 4,891,765 (3,836,288)
NET ASSETS
Beginning of year................................. 9,367,153 11,144,105 8,869,863 36,619,730 31,727,965 35,564,253
----------- ----------- ----------- ----------- ----------- -----------
End of year....................................... $12,954,317 $ 9,367,153 $11,144,105 $41,131,530 $36,619,730 $31,727,965
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A10
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 576,109 $ 822,511 $ 694,391 $ 938,068 $ 844,688 $ 664,545 $ 1,694,342 $ 1,768,375 $ 1,247,231
5,026,484 2,827,131 3,585,387 3,419,770 5,545,715 2,731,323 2,703,038 5,037,552 2,164,504
4,779,486 1,774,816 633,352 353,509 605,368 75,275 935,553 200,066 464,539
(5,230,122) 4,476,157 759,941 (1,305,317) (1,682,924) (331,513) (276,688) (1,945,306) 108,733
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5,151,957 9,900,615 5,673,071 3,406,030 5,312,847 3,139,630 5,056,245 5,060,687 3,985,007
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(12,389,442) 1,756,237 5,017,735 (8,139,189) 2,797,186 4,354,486 (5,546,467) 5,232,756 (1,853,576)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(378,339) 2,060 (6,721) 99,015 (1,047) 16,614 (6,712) 1,650,849 (1,583,656)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(7,615,824) 11,658,912 10,684,085 (4,634,144) 8,108,986 7,510,730 (496,934) 11,944,292 547,775
53,774,178 42,115,266 31,431,181 37,479,385 29,370,399 21,859,669 47,521,910 35,577,618 35,029,843
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$46,158,354 $53,774,178 $42,115,266 $32,845,241 $37,479,385 $29,370,399 $47,024,976 $47,521,910 $35,577,618
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A11
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
ZERO COUPON HIGH
BOND YIELD
2000 BOND
PORTFOLIO PORTFOLIO
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)...................... $ 757,948 $ 685,518 $ 446,118 $ 245,774 $ 185,330 $ 125,028
Capital gains distributions received.............. 227,825 690,332 0 0 0 0
Realized gain (loss) on shares redeemed........... (52,050) (94,913) 81,019 (4,633) 16,526 3,467
Net change in unrealized gain (loss) on
investments..................................... 217,606 (355,649) (17,112) (334,049) 59,640 (3,313)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ 1,151,329 925,288 510,025 (92,908) 261,496 125,182
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FRO
PREMIUM PAYMENTS AND OTHER OPERATING
TRANSFERS [Note 7]................................ (2,157,024) (3,375,043) 20,209,923 1,124,024 261,186 594,373
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN
THE ACCOUNT [Note 8].............................. (33,379) (325,458) (9,441) (1,836) (7,832) (9,051)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS............. (1,039,074) (2,775,213) 20,710,507 1,029,280 514,850 710,504
NET ASSETS
Beginning of year................................. 18,472,034 21,247,247 536,740 2,090,959 1,576,109 865,605
----------- ----------- ----------- ----------- ----------- -----------
End of year....................................... $17,432,960 $18,472,034 $21,247,247 $ 3,120,239 $ 2,090,959 $ 1,576,109
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A12
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
EQUITY NATURAL
STOCK INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 909,211 $ 823,881 $ 639,792 $ 275,090 $ 285,563 $ 380,320 $ 2,256 $ (1,248) $ 1,568
2,499,196 2,997,271 673,354 797,222 1,414,553 485,860 50,250 136,346 172,185
5,771,729 2,754,626 413,888 2,673,910 481,377 908,956 (28,695) 24,931 33,275
24,590,569 15,534,339 7,149,445 (4,107,342) 2,177,083 1,098,444 (210,866) (299,786) 88,415
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
33,770,705 22,110,117 8,876,479 (361,120) 4,358,576 2,873,580 (187,055) (139,757) 295,443
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
22,836,062 27,253,947 17,931,933 (888,071) (669,845) (7,025,151) 47,329 (321,997) 425,963
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
42,339 (7,138) 62,929 (15,048) (64,926) (214,892) (5,635) (11,668) 3,239
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
56,649,106 49,356,926 26,871,341 (1,264,239) 3,623,805 (4,366,463) (145,361) (473,422) 724,645
110,403,230 61,046,304 34,174,963 15,693,129 12,069,324 16,435,787 1,016,447 1,489,869 765,224
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
$167,052,336 $110,403,230 $61,046,304 $14,428,890 $15,693,129 $12,069,324 $ 871,086 $ 1,016,447 $ 1,489,869
============ ============ =========== =========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A13
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
-----------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
PORTFOLIO PORTFOLIO
--------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)...................... $ 90,146 $ 69,004 $ 244,627 $ 363,362 $ 234,128 $ 197,575
Capital gains distributions received.............. 536,310 504,462 240,786 0 0 0
Realized gain (loss) on shares redeemed 235,100 1,501,595 155,802 8,247 17,410 553
Net change in unrealized gain (loss) on
investments..................................... 1,531,076 (871,934) 1,328,007 205,452 86,634 (117,230)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ 2,392,632 1,203,127 1,969,222 577,061 338,172 80,898
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER OPERATING
TRANSFERS [Note 7]................................ (52,105) (6,012,623) 5,591,186 4,457,892 (371,160) 1,069,544
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN
THE ACCOUNT [Note 8].............................. (27,164) (140,126) 72,239 (2,141) (104,696) 75,388
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS............. 2,313,363 (4,949,622) 7,632,647 5,032,812 (137,684) 1,225,830
NET ASSETS
Beginning of year................................. 10,727,208 15,676,830 8,044,183 3,433,155 3,570,839 2,345,009
----------- ----------- ----------- ----------- ----------- -----------
End of year....................................... $13,040,571 $10,727,208 $15,676,830 $ 8,465,967 $ 3,433,155 $ 3,570,839
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A14
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
ZERO COUPON SMALL
BOND PRUDENTIAL CAPITALIZATION
2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------- ------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 605,490 $ 466,485 $ 44,490 $ (7,410) $ (2,466) $ (487) $ 5,470 $ 4,847 $ 13,270
7,803 124,816 10,654 37,636 50,105 0 604,937 381,206 76,737
12,587 225,279 93 22,375 43,121 (693) (29,549) 703,647 2,225
773,486 215,644 (61,956) 478,204 73,161 14,438 (95,776) 238,634 219,537
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,399,366 1,032,224 (6,719) 530,805 163,921 13,258 485,082 1,328,334 311,769
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
9,146,871 4,188,328 95,281 1,287,318 445,411 229,628 4,127,649 334,626 3,553,224
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(91,783) 119,618 6,971 32,534 806 770 (24,899) 18,918 (50,657)
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
10,454,454 5,340,170 95,533 1,850,657 610,138 243,656 4,587,832 1,681,878 3,814,336
6,327,635 987,465 891,932 884,922 274,784 31,128 5,955,536 4,273,658 459,322
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$16,782,089 $ 6,327,635 $ 987,465 $ 2,735,579 $ 884,922 $ 274,784 $10,543,368 $ 5,955,536 $ 4,273,658
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A15
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
DECEMBER 31, 1998
NOTE 1: GENERAL
Pruco Life Variable Universal Account (the "Account") was established
on April 17, 1989 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. Proceeds from sales of the Pruselect I and
Pruselect II Variable Universal Life products are invested in the
Account as directed by the contract owners.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are fifteen subaccounts
within the Account, each of which invests only 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.
A16
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share (rounded) 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, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares: 1,295,432 3,718,551 1,557,468 1,983,317 3,118,251
Net asset value per share (rounded): $ 10.00 $ 11.06 $ 29.64 $ 16.56 $ 15.08
Cost $ 12,954,317 $ 41,116,131 $ 42,355,024 $ 35,149,316 $ 47,633,851
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares: 1,368,722 432,892 4,426,400 720,273 72,691
Net asset value per share (rounded): $ 12.74 $ 7.21 $ 37.74 $ 20.03 $ 11.98
Cost: $ 17,596,884 $ 3,395,468 $112,572,202 $ 14,804,123 $ 1,233,421
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares: 616,375 713,187 1,248,613 114,427 716,718
Net asset value per share (rounded): $ 21.16 $ 11.87 $ 13.44 $ 23.91 $ 14.71
Cost: $ 10,791,102 $ 8,172,468 $ 15,789,725 $ 2,168,760 $ 10,177,881
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Pruselect I)................. 284,050 4,967,427 751,308 925,294 5,454,469
Unit Value (Pruselect I)........ $ 1.53463 $ 2.06358 $ 3.47377 $ 2.73333 $ 2.42907
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
I)............................ $ 435,911 $ 10,250,682 $ 2,609,870 $ 2,529,134 $ 13,249,288
------------ ------------ ------------ ------------ ------------
Contract Owner Units Outstanding
(Pruselect II)................ 8,157,279 14,964,696 12,536,375 11,091,272 13,904,782
Unit Value (Pruselect II)....... $ 1.53463 $ 2.06358 $ 3.47377 $ 2.73333 $ 2.42907
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
II)........................... $ 12,518,406 $ 30,880,848 $ 43,548,484 $ 30,316,107 $ 33,775,688
------------ ------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER EQUITY..... $ 12,954,317 $ 41,131,530 $ 46,158,354 $ 32,845,241 $ 47,024,976
============ ============ ============ ============ ============
</TABLE>
A17
<PAGE>
<TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------
ZERO
COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Pruselect I)................. -- 25,757 8,398,687 1,262,488 241,112
Unit Value (Pruselect I)........ $ -- $ 2.17253 $ 4.06468 $ 3.10198 $ 1.62735
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
I) ........................... $ -- $ 55,957 $ 34,137,973 $ 3,916,212 $ 392,374
------------ ------------ ------------ ------------ ------------
Contract Owner Units Outstanding
(Pruselect II)................ 8,152,376 1,410,467 32,699,834 3,389,022 294,167
Unit Value (Pruselect II)....... $ 2.13839 $ 2.17253 $ 4.06468 $ 3.10198 $ 1.62735
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
II) .......................... $ 17,432,960 $ 3,064,282 $ 32,914,363 $ 10,512,678 $ 478,712
------------ ------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER EQUITY..... $ 17,432,960 $ 3,120,239 $ 7,052,336 $ 14,428,890 $ 871,086
============ ============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------
ZERO SMALL
GOVERNMENT COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Pruselect I)................. -- 1,504,348 -- 209,554 --
Unit Value (Pruselect I)........ $ -- $ 1.99973 $ -- $ 2.54336 $ --
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
I) $ -- $ 3,008,289 $ -- $ 532,971 $ --
------------ ------------ ------------ ------------ ------------
Contract Owner Units Outstanding
(Pruselect II)................ 7,425,025 2,729,208 6,653,144 866,023 6,039,725
Unit Value (Pruselect II)....... $ 1.75630 $ 1.99973 $ 2.52243 $ 2.54336 $ 1.74567
------------ ------------ ------------ ------------ ------------
Contract Owner Equity (Pruselect
II) .......................... $ 13,040,571 $ 5,457,678 $ 16,782,089 $ 2,202,608 $ 0,543,368
------------ ------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER EQUITY..... $ 13,040,571 $ 8,465,967 $ 6,782,089 $ 2,735,579 $ 10,543,368
============ ============ ============ ============ ============
</TABLE>
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 0.90%, are applied daily against the net assets
representing equity of contract owners held in each subaccount.
Mortality risk is that contract holders may not live as long as
estimated and expense risk is that the cost of issuing and
administering the policies may exceed related charges by Pruco
Life. Pruco Life currently intends to charge only 0.60% on these
contracts, but reserves the right to make the full 0.90% charge.
B. Partial Withdrawal Charge
A charge is imposed by Pruco Life on partial withdrawals of the
cash surrender value. A charge equal to the lesser of $15 or 2%
will be made in connection with each partial withdrawal of the cash
surrender value of a contract.
C. Expense Reimbursement
The Account is reimbursed by Pruco Life, on a non-guaranteed basis,
for expenses incurred by the Series Fund in excess of the effective
rate of 0.40% for all Zero Coupon Bond Portfolios and for the Stock
Index Portfolio, 0.50% for the High Dividend Stock Portfolio, 0.55%
for the Natural Resources Portfolio, and 0.65% for the High Yield
Bond Portfolio of the average daily net assets of these portfolios.
A18
<PAGE>
NOTE 5: CHARGES AND EXPENSES (CONTINUED)
D. Cost of Insurance Charges
Contract owner contributions are subject to certain deductions
prior to being invested in the Account. The deductions are for (1)
transaction costs which are deducted from each premium payment to
cover premium collection and processing costs; (2) state premium
taxes; (3) sales charges which are deducted in order to compensate
Pruco Life for the cost of selling the contract. Contracts are also
subject to monthly charges for the costs of administering the
contract.
NOTE 6: TAXES
Pruco Life is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form
a part of Prudential's consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As
such, no provision for tax liability has been recorded, in these
financial statements.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
The following amounts represent components of contract owner activity
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments................................. $ 8,459,179 $ 16,018,494 $ 4,026,378 $ 5,573,222
Policy Loans................................................ 0 (45,968) (10,790) 0
Policy Loan Repayment and Interest.......................... 0 44,362 85 449,595
Surrenders, Withdrawals and Death Benefits.................. 48,094 (447,841) (5,421,341) (3,109,854)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options.............................................. (5,068,699) (17,376,103) 4,043,371 146,922
Administrative and Other Charges............................ (258,516) (264,540) (491,540) (665,026)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers.................... $ 3,180,058 $ (2,071,596) $ 2,146,163 $ 2,394,859
============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------
EQUITY FLEXIBLE MANAGED
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments................................. $ 5,974,743 $ 8,187,661 $ 2,727,720 $ 4,391,711
Policy Loans................................................ (16,155) (2,354) (13,509) (101,032)
Policy Loan Repayment and Interest.......................... 2,348 6,595 2,543 109,493
Surrenders, Withdrawals and Death Benefits.................. (11,366,743) (3,056,522) (1,109,742) (3,330,740)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options.............................................. (6,233,542) (2,416,623) (9,445,233) 2,115,451
Administrative and Other Charges............................ (750,093) (962,520) (300,968) (387,697)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers.................... $(12,389,442) $ 1,756,237 $ (8,139,189) $ 2,797,186
============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------
CONSERVATIVE BALANCED ZERO COUPON BOND 2000
PORTFOLIO PORTFOLIO
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments................................. $ 6,161,137 $ 2,723,156 $ 2,718,006 $ 2,096,958
Policy Loans................................................ (15) (114,831) 0 0
Policy Loan Repayment and Interest.......................... 976 1,296,181 0 0
Surrenders, Withdrawals and Death Benefits.................. (41,543) (871,239) (5) (99,448)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options.............................................. (11,038,745) 2,899,464 (4,790,386) (5,246,708)
Administrative and Other Charges............................ (628,277) (699,975) (84,639) (125,845)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers.................... $ (5,546,467) $ 5,232,756 $ (2,157,024) $ (3,375,043)
============ ============ ============ ============
</TABLE>
A19
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------
HIGH YIELD BOND STOCK INDEX
PORTFOLIO PORTFOLIO
------------------------------- ----------------------------
1998 1997 1998 1997
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ................................ $ 637,224 $ 330,357 $ 13,077,570 $ 14,400,181
Policy Loans ............................................... 0 0 (19,574) (15,209)
Policy Loan Repayment and Interest ......................... 0 0 144 25,713
Surrenders, Withdrawals and Death Benefits ................. (1,826) (298,998) (432,906) (3,907,071)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options ............................................. 556,432 297,454 11,664,940 17,853,467
Administrative and Other Charges ........................... (67,806) (67,627) (1,454,112) (1,103,134)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers .................. $ 1,124,024 $ 261,186 $ 22,836,062 $ 27,253,947
============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
EQUITY INCOME NATURAL RESOURCES
PORTFOLIO PORTFOLIO
------------------------------- ----------------------------
1998 1997 1998 1997
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ................................ $ 260,870 $ 857,548 $ 48,993 $ 343,362
Policy Loans ............................................... 0 0 0 0
Policy Loan Repayment and Interest ......................... 0 0 0 0
Surrenders, Withdrawals and Death Benefits ................. (8,141,933) (802,616) 0 (674,237)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options ............................................. 7,241,853 (358,547) 22,258 47,378
Administrative and Other Charges ........................... (248,861) (366,230) (23,922) (38,500)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers .................... $ (888,071) $ (669,845) $ 47,329 $ (321,997)
=========== =========== =========== ===========
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
GLOBAL GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
-------------------------------- ----------------------------
1998 1997 1998 1997
--------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ................................ $ 1,832,043 $ 2,622,189 $ 139,842 $ 425,284
Policy Loans ............................................... 0 (67,171) 0 0
Policy Loan Repayment and Interest ......................... 0 67,209 0 0
Surrenders, Withdrawals and Death Benefits ................. (16,418) (4,072,024) 120 (1,472,671)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options ............................................. (1,739,609) (4,363,304) 4,402,000 763,266
Administrative and Other Charges ........................... (128,121) (199,522) (84,070) (87,039)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers
Payments and Other Operating Transfers .................... $ (52,105) $(6,012,623) $ 4,457,892 $ (371,160)
=========== =========== =========== ===========
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
ZERO COUPON BOND 2005 PRUDENTIAL JENNISON
PORTFOLIO PORTFOLIO
-------------------------------- ----------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ................................ $ 2,768,957 $ 962,033 $ 75,139 $ 238,539
Policy Loans ................................................ 0 0 0 0
Policy Loan Repayment and Interest ......................... 0 0 0 0
Surrenders, Withdrawals and Death Benefits ................. 25,615 (26,502) 0 (293,084)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options ............................................. 6,405,234 3,302,946 1,234,490 508,875
Administrative and Other Charges ........................... (52,935) (50,149) (22,311) (8,919)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers .................... $ 9,146,871 $ 4,188,328 $ 1,287,318 $ 445,411
=========== =========== =========== ===========
</TABLE>
A20
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------
SMALL CAPITALIZATION STOCK
PORTFOLIO
-----------------------------
1998 1997
--------------- ------------
<S> <C> <C>
Contract Owner Net Payments........................................... $ 1,531,442 $ 2,981,948
Policy Loans ......................................................... 0 0
Policy Loan Repayment and Interest ................................... 0 0
Surrenders, Withdrawals and Death Benefits ........................... (19,451) (4,293,128)
Net Transfers From (To) Other Subaccounts or Fixed
Rate Options ...................................................... 2,745,637 1,826,062
Administrative and Other Charges ..................................... (129,979) (180,256)
----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers ............................. $ 4,127,649 $ 334,626
=========== ===========
</TABLE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT
The increase (decrease) in net assets retained in the Account
represents the net contributions (withdrawals) of Pruco Life to
(from) the Account. Effective October 13, 1998, Pruco Life no longer
maintains a position in the Account. Previously, Pruco Life
maintained a position in the Account for liquidity purposes including
unit purchases and redemptions, fund share transactions and expense
processing.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND
PORTFOLIO PORTFOLIO
--------------------------------------------- -----------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 11,769,929 15,281,942 20,647,286 5,686,444 4,556,760 7,359,670
Contract Owner
Redemptions: (9,721,732) (16,788,123) (17,694,761) (4,658,242) (3,288,085) (10,274,181)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
EQUITY FLEXIBLE MANAGED
PORTFOLIO PORTFOLIO
--------------------------------------------- -----------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 2,885,417 4,465,527 7,684,191 8,590,002 4,476,620 7,183,433
Contract Owner
Redemptions: (6,422,617) (3,935,074) (5,707,765) (11,597,522) (3,255,025) (4,966,689)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
CONSERVATIVE BALANCED ZERO COUPON BOND 2000
PORTFOLIO PORTFOLIO
--------------------------------------------- -----------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 12,272,439 5,516,349 8,974,255 3,053,595 11,968,207 14,921,286
Contract Owner
Redemptions: (14,641,165) (2,950,237) (10,034,515) (4,144,022) (13,929,611) (3,798,030)
</TABLE>
A21
<PAGE>
NOTE 9: UNIT ACTIVITY (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
HIGH YIELD BOND STOCK INDEX
PORTFOLIO PORTFOLIO
----------------------------------------------- ---------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 621,628 1,021,708 1,571,264 12,075,930 20,876,571 16,298,797
Contract Owner
Redemptions: (117,717) (879,849) (1,254,509) (5,649,830) (11,486,568) (8,266,289)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
EQUITY INCOME NATURAL RESOURCES
PORTFOLIO PORTFOLIO
----------------------------------------------- ---------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 3,556,140 679,346 2,219,957 89,639 237,684 601,007
Contract Owner
Redemptions: (3,811,832) (873,682) (5,553,498) (66,113) (378,671) (380,047)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
GLOBAL GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
----------------------------------------------- ---------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 2,263,591 10,705,193 10,357,718 3,917,010 3,049,723 4,777,804
Contract Owner
Redemptions: (2,393,156) (14,887,428) (5,813,881) (1,539,750) (3,251,977) (4,123,118)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------------
ZERO COUPON BOND 2005 PRUDENTIAL JENNISON
PORTFOLIO PORTFOLIO
----------------------------------------------- ---------------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions: 3,960,131 9,228,779 78,742 1,126,502 589,921 202,258
Contract Owner
Redemptions: (75,113) (6,935,187) (28,993) (524,101) (302,690) (28,028)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------
SMALL CAPITALIZATION STOCK
PORTFOLIO
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Contract Owner
Contributions: 3,950,209 3,529,907 2,812,163
Contract Owner
Redemptions: (1,275,859) (3,181,968) (182,921)
</TABLE>
A22
<PAGE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund for the year ended December 31, 1998
were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------------
DIVERSIFIED FLEXIBLE CONSERVATIVE
MONEY MARKET BOND EQUITY MANAGED BALANCED
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Purchases.............. $ 14,092,629 $ 10,641,312 $ 7,679,747 $ 10,851,762 $ 18,157,080
Sales.................. $ (10,657,424) $ (8,676,999) $ (20,559,544) $ (19,077,409) $ (23,821,192)
<CAPTION>
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Purchases.............. $ 6,245,813 $ 1,277,486 $ 39,790,603 $ 11,692,035 $ 119,383
Sales.................. $ (8,500,198) $ (170,962 $ (17,613,097) $ (12,685,299) $ (83,518)
<CAPTION>
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Purchases.............. $ 2,396,129 $ 4,625,540 $ 9,253,074 $ 2,172,323 $ 4,637,315
Sales.................. $ (2,546,211) $ (208,757) $ (242,694) $ (863,785) $ (474,906)
</TABLE>
A23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Pruco Life Variable Universal 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 the subaccounts (Money Market
Portfolio, Diversified Bond Portfolio, Equity Portfolio, Flexible Managed
Portfolio, Conservative Balanced Portfolio, Zero Coupon Bond 2000 Portfolio,
High Yield Bond Portfolio, Stock Index Portfolio, Equity Income Portfolio,
Natural Resources Portfolio, Global Portfolio, Government Income Portfolio, Zero
Coupon Bond 2005 Portfolio, Prudential Jennison Portfolio and Small
Capitalization Stock Portfolio) of the Pruco Life Variable Universal Account at
December 31, 1998, the results of each of their operations and the changes in
each of their net assets for each of the three years in the period 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 fund shares owned at
December 31, 1998, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
A24
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $2,738,654;
1997: $2,526,554) $ 2,763,926 $ 2,563,852
Held to maturity, at amortized cost (fair value, 1998: $421,845; 1997:
$350,056) 410,558 338,848
Equity securities - available for sale, at fair value (cost, 1998: $2,951; 2,847 1,982
1997: $1,289)
Mortgage loans on real estate 17,354 22,787
Policy loans 766,917 703,955
Short-term investments 240,727 316,355
Other long-term investments 1,047 1,317
------------ ------------
Total investments 4,203,376 3,949,096
Cash 89,679 71,358
Deferred policy acquisition costs 861,713 655,242
Accrued investment income 61,114 67,000
Other assets 65,145 86,692
Separate Account assets 11,531,754 8,022,079
------------ ------------
TOTAL ASSETS $ 16,812,781 $ 12,851,467
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 2,696,191 $ 2,380,460
Future policy benefits and other policyholder liabilities 534,599 472,460
Cash collateral for loaned securities 73,336 143,421
Securities sold under agreement to repurchase 49,708 --
Income taxes payable 44,524 71,703
Net deferred income tax liability 148,834 138,483
Payable to affiliate 66,568 70,375
Other liabilities 55,038 120,260
Separate Account liabilities 11,490,751 7,948,788
------------ ------------
Total liabilities 15,159,549 11,345,950
------------ ------------
Contingencies (See Note 11)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1998 and 1997 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,202,833 1,050,871
Accumulated other comprehensive income
Net unrealized investment gains 9,902 17,129
Foreign currency translation adjustments (1,585) (4,565)
------------ ------------
Accumulated other comprehensive income 8,317 12,564
------------ ------------
Total stockholder's equity 1,653,232 1,505,517
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 16,812,781 $ 12,851,467
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
B-1
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
--------- --------- ---------
REVENUES
<S> <C> <C> <C>
Premiums $ 57,467 $ 49,496 $ 51,525
Policy charges and fee income 364,719 330,292 324,976
Net investment income 261,430 259,634 247,328
Realized investment gains, net 44,841 10,974 10,835
Other income 41,267 33,801 20,818
--------- --------- ---------
Total revenues 769,724 684,197 655,482
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 186,527 179,419 186,873
Interest credited to policyholders' account balances 118,935 110,815 118,246
General, administrative and other expenses 228,067 225,721 122,006
--------- --------- ---------
Total benefits and expenses 533,529 515,955 427,125
--------- --------- ---------
Income from operations before income taxes 236,195 168,242 228,357
--------- --------- ---------
Income taxes
Current 69,768 73,326 60,196
Deferred 14,465 (11,458) 18,939
--------- --------- ---------
Total income taxes 84,233 61,868 79,135
--------- --------- ---------
NET INCOME 151,962 106,374 149,222
--------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (7,227) 3,025 (17,952)
Foreign currency translation adjustments 2,980 (2,863) (482)
--------- --------- ---------
Other comprehensive income (4,247) 162 (18,434)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 147,715 $ 106,536 $ 130,788
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
B-2
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 2,500 $ 439,582 $ 795,275 $ 30,836 $ 1,268,193
Net income -- -- 149,222 -- 149,222
Change in foreign currency
translation adjustments -- -- -- (482) (482)
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (17,952) (17,952)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 2,500 439,582 944,497 12,402 1,398,981
Net income -- -- 106,374 -- 106,374
Change in foreign currency
translation adjustments -- -- -- (2,863) (2,863)
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 3,025 3,025
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 2,500 439,582 1,050,871 12,564 1,505,517
Net income -- -- 151,962 -- 151,962
Change in foreign currency
translation adjustments -- -- -- 2,980 2,980
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (7,227) (7,227)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232
=========== =========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements
B-3
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 151,962 $ 106,374 $ 149,222
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (47,230) (40,783) (50,286)
Interest credited to policyholders' account balances 118,935 110,815 118,246
Realized investment gains, net (44,841) (10,974) (10,835)
Amortization and other non-cash items 18,611 (31,181) 29,334
Change in:
Future policy benefits and other policyholders' liabilities 62,139 39,683 54,176
Accrued investment income 5,886 (4,890) (2,248)
Separate Accounts 32,288 (13,894) (38,025)
Payable to affiliate (3,807) 20,547 16,519
Policy loans (62,962) (64,173) (70,509)
Deferred policy acquisition costs (206,471) (22,083) (66,183)
Income taxes payable (27,179) 78,894 (816)
Deferred income tax liability 10,351 (10,477) 7,912
Other, net (43,675) 34,577 7,814
----------- ----------- -----------
Cash Flows (Used In) From Operating Activities (35,993) 192,435 144,321
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 5,429,396 2,828,665 3,886,254
Held to maturity 74,767 138,626 138,127
Equity securities 4,101 6,939 7,527
Mortgage loans on real estate 5,433 24,925 19,226
Other long-term investments 1,140 3,276 288
Investment real estate -- -- 4,488
Payments for the purchase of:
Fixed maturities:
Available for sale (5,617,208) (3,141,785) (4,008,810)
Held to maturity (145,919) (70,532) (114,494)
Equity securities (2,274) (4,594) (4,697)
Other long-term investments (409) (51) (657)
Cash collateral for loaned securities, net (70,085) 143,421 -
Securities sold under agreement to repurchase, net 49,708 - -
Short-term investments, net 75,771 (147,030) 58,186
----------- ----------- -----------
Cash Flows Used In Investing Activities (195,579) (218,140) (14,562)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 3,098,721 2,099,600 536,370
Withdrawals (2,848,828) (2,076,303) (633,798)
----------- ----------- -----------
Cash Flows From (Used in) Financing Activities 249,893 23,297 (97,428)
----------- ----------- -----------
Net increase (decrease) in Cash 18,321 (2,408) 32,331
Cash, beginning of year 71,358 73,766 41,435
----------- ----------- -----------
CASH, END OF PERIOD $ 89,679 $ 71,358 $ 73,766
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received) $ 99,810 $ (7,904) $ 61,760
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
B-4
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company markets
individual life insurance, variable life insurance, variable annuities, fixed
annuities, and a group annuity program (the Contracts) in all states and
territories except the District of Columbia and Guam. In addition, the Company
markets individual life insurance through its branch office in Taiwan. The
Company has two wholly owned subsidiaries, Pruco Life Insurance Company of New
Jersey (PLNJ) and The Prudential Life Insurance Company of Arizona (PLICA). PLNJ
is a stock life insurance company organized in 1982 under the laws of the state
of New Jersey. It is licensed to sell individual life insurance, variable life
insurance, fixed annuities, and variable annuities only in the states of New
Jersey and New York. PLICA is a stock life insurance company organized in 1988
under the laws of the state of Arizona. PLICA had no new business sales in 1997
or 1998 and at this time will not be issuing new business.
The Company is a wholly owned subsidiary of The Prudential Insurance Company of
America (Prudential), a mutual insurance company founded in 1875 under the laws
of the state of New Jersey. Prudential intends to make additional capital
contributions to the Company, as needed, to enable it to comply with its reserve
requirements and fund expenses in connection with its business. Generally,
Prudential is under no obligation to make such contributions and its assets do
not back the benefits payable under the Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual and group annuities.
There are approximately 1,620 stock, mutual and other types of insurers in the
life insurance business in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the intent and ability to
hold to maturity are stated at amortized cost and classified as "held to
maturity". The amortized cost of fixed maturities is written down to estimated
fair value if a decline in value is considered to be other than temporary.
Unrealized gains and losses on fixed maturities "available for sale", including
the effect on deferred policy acquisition costs and participating annuity
contracts that would result from the realization of unrealized gains and losses,
net of income taxes, are included in a separate component of equity,
"Accumulated other comprehensive income."
Equity securities, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, net of income tax, the effects on deferred policy acquisition
costs and on participating annuity contracts that would result from the
realization of unrealized gains and losses, are included in a separate component
of equity, "Accumulated other comprehensive income."
Mortgage loans on real estate are stated primarily at unpaid principal balances,
net of unamortized discounts and allowance for losses. The allowance for losses
is based upon a loan specific review and management's consideration of past
results, current trends, the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. Impaired loans are identified by management as loans in which
a probability exists that all amounts due according to the contractual terms of
the loan agreement will not be collected.
B-5
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or the fair value of the
collateral if the loan is collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to the
collectibility of principal. Management discontinues the accrual of interest on
impaired loans after the loans are 90 days delinquent as to principal or
interest, or earlier when management has serious doubts about collectibility.
When a loan is recognized as impaired, any accrued but unpaid interest
previously recorded on such loan is reversed against interest income of the
current period. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of loans
where interest has been interrupted for a substantial period, a regular payment
performance has been established.
Policy loans are carried at unpaid principal balances.
Short-term investments, consists primarily of highly liquid debt instruments
purchased with an original maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.
Other long-term investments primarily represent the Company's investments in
joint ventures and partnerships in which the Company does not have control.
These investments are recorded using the equity method of accounting, reduced
for other than temporary declines in value.
Realized investment gains, net are computed using the specific identification
method. Costs of fixed maturity and equity securities are adjusted for
impairments considered to be other than temporary.
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in "Accumulated other
comprehensive income."
Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. For
participating life insurance, deferred policy acquisition costs are amortized
over the expected life of the contracts in proportion to estimated gross margins
based on historical and anticipated future experience, which is updated
periodically. 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 of revisions to estimated gross profits on unamortized
deferred acquisition costs is reflected in earnings in the period such estimated
gross profits are revised.
Securities loaned
Securities loaned are treated as financing arrangements and are recorded at the
amount of cash received as collateral. The Company obtains collateral in an
amount equal to 102% of the fair value of the securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Non-cash collateral received is not reflected
in the consolidated statements of financial position. Substantially all of the
Company's securities loaned are with large brokerage firms.
B-6
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are treated as financing
arrangements and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased is monitored and additional collateral is requested, where
appropriate, to protect against credit exposure.
Securities lending and securities repurchase agreements are used to generate net
investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders and
other customers. Separate Account assets include common stocks, fixed
maturities, real estate related securities, and short-term investments. The
assets of each account are legally segregated and are not subject to claims that
arise out of any other business of the Company. Investment risks associated with
market value changes are borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The investment
income and gains or losses for Separate Accounts generally accrue to the
policyholders and are not included in the Consolidated Statement of Operations.
Mortality, policy administration and surrender charges on the accounts are
included in "Policy charges and fee income."
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.
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits are
recorded as an expense when they are incurred. For traditional life insurance
contracts, a liability for future policy benefits is recorded using the net
level premium method. For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of expected future
payments based on historical experience.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities, premiums
are recognized when due with any excess profit deferred and recognized in a
constant relationship to insurance in-force or, for annuities, the amount of
expected future benefit payments.
Amounts received as payment for interest-sensitive life, individual annuities,
and guaranteed investment contracts are reported as deposits to "Policyholders'
account balances." Revenues from these contracts reflected as "Policy charges
and fee income" consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment income." Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
Foreign Currency Translation Adjustments
Assets and liabilities of the Taiwan branch are translated to U.S. dollars at
the exchange rate in effect at the end of the period. Revenues, benefits and
other expenses are translated at the average rate prevailing during the period.
Cumulative translation adjustments arising from the use of differing exchange
rates from period to period are charged or credited directly to "Other
comprehensive income." The cumulative effect of changes in foreign exchange
rates are included in "Accumulated other comprehensive income."
B-7
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Income
Other income consists primarily of asset management fees which are received by
the Company from Prudential for services Prudential provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, various financial indices, or the value of
securities or commodities. Derivative financial instruments used by the Company
include futures, currency swaps, and options contracts and can be
exchange-traded or contracted in the over-the-counter market. The Company uses
derivative financial instruments to hedge market risk from changes in interest
rates or foreign currency exchange rates, and to alter interest rate or currency
exposures arising from mismatches between assets and liabilities. All
derivatives used by the Company are for other than trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments, or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk to
which the Company is exposed. The effectiveness of the derivatives must be
evaluated at the inception of the hedge and throughout the hedge period.
When derivatives qualify as hedges, the changes in the fair value or cash flows
of the derivatives and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge accounting, the derivatives are recorded at fair value
in "Other liabilities" in the Consolidated Statements of Financial Position, and
changes in their fair value are recognized in earnings in "Realized investment
gains, net" without considering changes in the hedged assets or liabilities.
Cash flows from other than trading derivative assets and liabilities are
reported in the operating activities section in the Consolidated Statements of
Cash Flows.
Income Taxes
The Company and its subsidiaries are members of the consolidated federal income
tax return of Prudential and files separate company state and local tax returns.
Pursuant to the tax allocation arrangement with Prudential, 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. Deferred income taxes are generally recognized, based on
enacted rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to
reduce a deferred tax asset to that portion that is expected to be realized.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and is to be applied prospectively. Subsequent
to June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of
Certain Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation
of SFAS 125 for one year for certain transactions, including repurchase
agreements, dollar rolls, securities lending and similar transactions. Adoption
of SFAS 125 did not have a material impact on the Company's results of
operations, financial position and liquidity.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which was issued by the FASB in June 1997. This statement defines comprehensive
income and establishes standards for reporting and displaying comprehensive
income and its components in financial statements. The statement requires that
the Company classify items of other comprehensive income by their nature and
display the accumulated balance of other comprehensive income separately from
retained earnings in the equity section of the Statement of Financial Position.
Application of this statement did not change recognition or measurement of net
income and, therefore, did not affect the Company's financial position or
results of operations.
B-8
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund assessments as
well as guidance for measuring the liability. The adoption of SOP 97-3 is not
expected to have a material effect on the Company's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts. However,
certain hybrid contracts that contain features which can affect settlement
amounts similarly to derivatives may require separate accounting for the "host
contract" and the underlying "embedded derivative" provisions. The latter
provisions would be accounted for as derivatives as specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other derivatives not designated as
hedging instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than January 1,
2000 and is currently assessing the effect of the new standard.
In October, 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on how
to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
B-9
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities and Equity Securities:
The following tables provide additional information relating to fixed maturities
and equity securities as of December 31,:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 110,294 864 318 110,840
Foreign government bonds 87,112 2,003 696 88,419
Corporate securities 2,540,498 30,160 6,897 2,563,761
Mortgage-backed securities 750 156 -- 906
---------- ---------- ---------- ----------
Total fixed maturities available for sale $2,738,654 $ 33,183 $ 7,911 $2,763,926
========== ========== ========== ==========
Equity securities available for sale $ 2,951 $ 168 $ 272 $ 2,847
========== ========== ========== ==========
Fixed maturities held to maturity
Corporate securities $ 410,558 $ 11,287 $ -- $ 421,845
---------- ---------- ---------- ----------
Total fixed maturities held to maturity $ 410,558 $ 11,287 $ -- $ 421,845
========== ========== ========== ==========
1997
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In Thousands)
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 177,691 $ 1,231 $ 20 $ 178,902
Foreign government bonds 83,889 1,118 19 84,988
Corporate securities 2,263,898 36,857 2,017 2,298,738
Mortgage-backed securities 1,076 180 32 1,224
---------- ---------- ---------- ----------
Total fixed maturities available for sale $2,526,554 $ 39,386 $ 2,088 $2,563,852
========== ========== ========== ==========
Equity securities available for sale $ 1,289 $ 802 $ 109 $ 1,982
========== ========== ========== ==========
Fixed maturities held to maturity
Corporate securities $ 338,848 $ 11,427 $ 219 $ 350,056
---------- ---------- ---------- ----------
Total fixed maturities held to maturity $ 338,848 $ 11,427 $ 219 $ 350,056
========== ========== ========== ==========
</TABLE>
B-10
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1998 are shown below:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------------- ---------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
--------- -------------- ---------- --------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 72,931 $ 73,254 $ 3,036 $ 3,064
Due after one year through five years 1,050,981 1,059,389 193,749 201,136
Due after five years through ten years 1,142,507 1,156,664 155,568 158,801
Due after ten years 471,485 473,713 58,205 58,844
Mortgage-backed securities 750 906 -- --
---------- ---------- ---------- ----------
Total $2,738,654 $2,763,926 $ 410,558 $ 421,845
========== ========== ========== ==========
</TABLE>
Actual maturities will differ from contractual maturities because, in certain
circumstances, issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $5,327.3 million, $2,796.3 million, and $3,667.1 million,
respectively. Gross gains of $46.3 million, $18.6 million, and $22.1 million and
gross losses of $14.1 million, $7.9 million, and $17.6 million were realized on
those sales during 1998, 1997, and 1996, respectively.
Proceeds from the maturity of fixed maturities available for sale during 1998,
1997, and 1996 were $102.1 million, $32.4 million, and $219.2 million,
respectively. During the years ended December 31, 1998, 1997, and 1996, there
were no securities classified as held to maturity that were sold.
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $2.8 million, $.1 million and $.1 million for the years
1998, 1997 and 1996, respectively.
B-11
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The following table describes the credit quality of the fixed maturity
portfolio, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") or Standard & Poor's Corporation, an independent rating
agency as of December 31, 1998:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -------------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
---------- -------------- ---------- --------------
(In Thousands) (In Thousands)
NAIC Standard & Poor's
<S> <C> <C> <C> <C>
1 AAA to AA- $1,195,301 $1,211,995 $ 180,070 $ 186,683
2 BBB+ to BBB- 1,254,522 1,263,656 182,298 185,417
3 BB+ to BB- 201,033 204,278 39,346 40,654
4 B+ to B- 59,799 57,695 8,821 9,068
5 CCC or lower 27,552 26,061 -- --
6 In or near default 447 241 23 23
---------- ---------- ---------- ----------
Total $2,738,654 $2,763,926 $ 410,558 $ 421,845
========== ========== ========== ==========
</TABLE>
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 89% and 94% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value. As
of both of those dates, less than 1% of the fixed maturities portfolio was rated
"6" by the NAIC, defined as public and private placement securities which are
currently non-performing or believed subject to default in the near-term.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. At December
31, 1998 management identified $264.0 thousand of fixed maturity investments as
problem or potential problem. An immaterial amount of problem or potential
problem fixed maturities were identified in 1997.
Mortgage Loans on Real Estate
The Company's mortgage loans were collateralized by the following property types
at December 31, 1998 and 1997.
1998 1997
------------------ -------------------
(In Thousands)
Office buildings $ -- -- $ 4,607 20%
Retail stores 7,356 42% 8,090 35%
Apartment complexes 5,988 35% 6,080 27%
Industrial buildings 4,010 23% 4,010 18%
------------------ ------------------
Net carrying value $17,354 100% $22,787 100%
================== ==================
B-12
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The largest concentration of mortgage loans are in the states of Pennsylvania
(35%), Washington (34%), and New Jersey (23%).
Special Deposits
Fixed maturities of $8.6 million and $8.3 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
Other Long-Term Investments
The Company's "Other long-term investments" of $1.0 million and $1.3 million as
of December 31, 1998 and 1997, respectively, are comprised of joint ventures and
limited parterships. The Company's share of net income from these entities was
$.1 million, $2.2 million and $1.4 million for the years ended December 31,
1998, 1997 and 1996, respectively, and is reported in "Net investment income."
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
1998 1997 1996
--------- --------- ---------
(In Thousands)
Fixed maturities - available for sale $ 179,184 $ 161,140 $ 152,445
Fixed maturities - held to maturity 26,128 26,936 33,419
Equity securities 14 76 44
Mortgage loans on real estate 1,818 2,585 5,669
Policy loans 40,928 37,398 33,449
Short-term investments 23,110 22,011 16,780
Other 6,886 14,920 10,051
--------- --------- ---------
Gross investment income 278,068 265,066 251,857
Less: investment expenses (16,638) (5,432) (4,529)
--------- --------- ---------
Net investment income $ 261,430 $ 259,634 $ 247,328
========= ========= =========
Realized investment gains ,net including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:
1998 1997 1996
--------- --------- ---------
(In Thousands)
Fixed maturities - available for sale $ 29,330 $ 9,039 $ 9,036
Fixed maturities - held to maturity 487 821 --
Equity securities 3,489 8 781
Mortgage loans on real estate -- 797 1,677
Derivative instruments 12,414 -- --
Other (879) 309 (659)
--------- --------- ---------
Realized investment gains, net $ 44,841 $ 10,974 $ 10,835
========= ========= =========
B-13
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains
Net unrealized investment gains on securities available for sale are included in
the Consolidated Statement of Financial Position as a component of "Accumulated
other comprehensive income." Changes in these amounts include reclassification
adjustments to avoid double-counting in "Comprehensive income," items that are
included as part of "Net income" for a period that also have been part of "Other
comprehensive income" in earlier periods. The amounts for the years ended
December 31, net of tax, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 17,129 $ 14,104 $ 32,056
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized gains on investments arising during the period 14,593 13,880 (20,405)
Reclassification adjustment for gains included in net income 22,799 6,680 6,165
-------- -------- --------
Change in net unrealized gains on investments, net of adjustments (8,206) 7,200 (26,570)
Impact of net unrealized investment gains on:
Policyholder's account balances (1,063) 1,293 (2,467)
Deferred policy acquisition costs 2,042 (5,468) 11,085
-------- -------- --------
Change in net unrealized investment gains (7,227) 3,025 (17,952)
-------- -------- --------
Net unrealized investment gains, end of year $ 9,902 $ 17,129 $ 14,104
======== ======== ========
</TABLE>
Unrealized gains (losses) on investments arising during the periods reported in
the above table are net of income tax (benefit) expense of $(8.2) million,
$(7.6) million and $12.1 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Reclassification adjustments reported in the above table for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense of $12.8 million,
$3.6 million and $3.8 million, respectively.
Policyholder's account balances reported in the above table are net of income
tax (benefit) expense of $(.2) million, $.0 million and $1.4 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax (benefit) expense of
$(1.1) million, $2.9 million and $(6.2) million, respectively.
4. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
1998 1997
-------- --------
(In Thousands)
Life insurance $506,249 $444,737
Annuities 28,350 27,723
-------- --------
$534,599 $472,460
======== ========
B-14
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. POLICYHOLDERS' LIABILITIES (continued)
Life insurance liabilities include reserves for death benefits. Annuity
liabilities include reserves for immediate annuities.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
- ------------------------------ ------------------------- ------------- -----------------------
<S> <C> <C> <C>
Life insurance - Domestic Generally rates 2.5% to 7.5% Net level premium based
guaranteed in on non-forfeiture
calculating cash interest rate
surrender values
Life insurance - International Generally rates 6.25% to 6.5% Net level premium based
guaranteed in on the expected
calculating cash investment return
surrender values
Individual immediate annuities 1983 Individual Annuity 6.25% to 11.0% Present value of
Mortality Table with expected future payment
certain modifications based on historical
experience
</TABLE>
Policyholders' account balances at December 31, are as follows:
1998 1997
---------- ----------
(In Thousands)
Interest-sensitive life contracts $1,386,829 $1,345,089
Individual annuities 1,077,996 1,035,371
Guaranteed investment contracts 231,366 --
---------- ----------
$2,696,191 $2,380,460
========== ==========
Policyholders' account balances for interest-sensitive life, individual
annuities, and guaranteed investment contracts are equal to policy account
values plus unearned premiums. The policy account values represent an
accumulation of gross premium payments plus credited interest less withdrawals,
expenses, mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
<TABLE>
<CAPTION>
Product Interest Rate Withdrawal / Surrender Charges
- --------------------------------- -------------- ----------------------------------
<S> <C> <C>
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Individual annuities 3.0% to 5.6% 0% to 8% for up to 8 years
Guaranteed investment contracts 5.02% to 6.23% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
</TABLE>
B-15
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. REINSURANCE
The Company participates in reinsurance, with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer, except for cases involving a
novation. Ceded balances would represent a liability to the Company in the event
the reinsurers were unable to meet their obligations to the Company under the
terms of the reinsurance agreements. The likelihood of a material reinsurance
liability reassumed by the Company is considered to be remote.
Reinsurance amounts included in the Consolidated Statement of Operations for the
year ended December 31 are below.
1998 1997 1996
-------- -------- --------
(In Thousands)
Direct Premiums $ 65,423 $ 51,851 $ 53.776
Reinsurance assumed 1,395 1,369 1,128
Reinsurance ceded - affiliated (6,532) (686) (254)
Reinsurance ceded - unaffiliated (2,819) (3,038) (3,125)
-------- -------- --------
Premiums $ 57,467 $ 49,496 $ 51,525
======== ======== ========
Policyholders' benefits ceded $ 27,991 $ 25,704 $ 26,796
======== ======== ========
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31 include amounts
recoverable on unpaid and paid losses and were as follows:
1998 1997
------- -------
(In Thousands)
Life insurance - affiliated $ 6,481 $ 2,618
Other reinsurance - affiliated 21,650 23,243
------- -------
$28,131 $25,861
======= =======
B-16
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has a non-contributory defined benefit pension plan which covers
substantially all of its Taiwanese employees. This plan was established as of
September 30, 1997 and the projected benefit obligation and related expenses at
September 30, 1998 was not material to the Consolidated Statements of Financial
Position or results of operations for the years presented. All other employee
benefit costs are allocated to the Company from Prudential in accordance with
the service agreement described in Note 13.
7. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Current tax expense (benefit):
U.S $ 67,272 $ 71,989 $ 59,489
State and local 2,496 1,337 703
Foreign -- -- 4
-------- -------- --------
Total 69,768 73,326 60,196
-------- -------- --------
Deferred tax expense (benefit):
U.S 14,059 (11,458) 18,413
State and local 406 -- 526
-------- -------- --------
Total 14,465 (11,458) 18,939
-------- -------- --------
Total income tax expense $ 84,233 $ 61,868 $ 79,135
======== ======== ========
The income tax expense for the years ended December 31, differs from the amount
computed by applying the expected federal income tax rate of 35% to income from
operations before income taxes for the following reasons:
1998 1997 1996
-------- -------- --------
(In Thousands)
Expected federal income tax expense $ 82,668 $ 58,885 $ 79,925
State and local income taxes 1,886 869 799
Other (321) 2,114 (1,589)
-------- -------- --------
Total income tax expense $ 84,233 $ 61,868 $ 79,135
======== ======== ========
B-17
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
-------- --------
(In Thousands)
Deferred tax assets
Insurance reserves $ 93,564 $ 52,144
-------- --------
Deferred tax assets 93,564 52,144
-------- --------
Deferred tax liabilities
Deferred acquisition costs 224,179 167,128
Net investment gains 12,241 16,068
Other 5,978 7,431
-------- --------
Deferred tax liabilities 242,398 190,627
-------- --------
Net deferred tax liability $148,834 $138,483
======== ========
Management believes that based on its historical pattern of taxable income, the
Company and its subsidiaries will produce sufficient income in the future to
realize its deferred tax assets after valuation allowance. Adjustments to the
valuation allowance will be made if there is a change in management's assessment
of the amount of the deferred tax asset that is realizable. At December 31, 1998
and 1997, respectively, the Company and its subsidiaries had no federal or state
operating loss carryforwards for tax purposes.
The Internal Revenue Service (the "Service") has completed examinations of all
consolidated federal income tax returns through 1989. The Service has examined
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. The
Service has begun their examination of the years 1993 through 1995.
B-18
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. EQUITY
Reconciliation of Statutory Surplus and Net Income
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the Arizona and New Jersey Departments of Banking and
Insurance with net income and equity determined using GAAP.
1998 1997 1996
--------- --------- ---------
(In Thousands)
Statutory net income $ (33,097) $ 12,778 $ 48,846
Adjustments to reconcile to net
income on a GAAP basis:
Statutory income of subsidiaries 18,953 18,553 25,001
Deferred acquisition costs 202,375 38,003 48,862
Deferred premium 2,625 1,144 1,295
Insurance liabilities (24,942) 26,517 28,662
Deferred taxes (14,465) 11,458 (18,939)
Valuation of investments 20,077 506 365
Other, net (19,564) (2,585) 15,130
--------- --------- ---------
GAAP net income $ 151,962 $ 106,374 $ 149,222
========= ========= =========
1998 1997
----------- -----------
(In Thousands)
Statutory surplus $ 931,164 $ 853,130
Adjustments to reconcile to equity
on a GAAP basis:
Valuation of investments 117,254 97,787
Deferred acquisition costs 861,713 655,242
Deferred premium (15,625) (14,817)
Insurance liabilities (133,811) (107,525)
Deferred taxes (148,834) (138,483)
Other, net 41,371 160,183
----------- -----------
GAAP stockholder's equity $ 1,653,232 $ 1,505,517
=========== ===========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied in
interpreting data to develop the estimates of fair value. Accordingly, such
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 estimated fair values (for all other
financial instruments presented in the table, the carrying value approximates
estimated fair value).
B-19
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities, 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 credit quality and its
remaining average life. The estimated fair value of certain non-performing
private placement securities is based on amounts estimated by management.
Mortgage loans on real estate
The estimated fair value of the mortgage loan portfolio is primarily based upon
the present value of the scheduled future 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 of policy loans is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
Policyholders' account balances
Estimated fair values of policyholders' account balances are derived by using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for a transactions
with similar terms.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31,:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ------------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities:
Available for sale $ 2,763,926 $ 2,763,926 $ 2,563,852 $ 2,563,852
Held to maturity 410,558 421,845 338,848 350,056
Equity securities 2,847 2,847 1,982 1,982
Mortgage loans 17,354 19,465 22,787 24,994
Policy loans 766,917 806,099 703,955 703,605
Short-term investments 240,727 240,727 316,355 316,355
Cash 89,679 89,679 71,358 71,358
Separate Account assets 11,531,754 11,531,754 8,022,079 8,022,079
Financial Liabilities:
Policyholders'
account balances $ 2,696,191 $ 2,703,725 $ 2,380,460 $ 2,374,040
Cash collateral for loaned
securities 123,044 123,044 143,421 143,421
Separate Account liabilities 11,490,751 11,490,751 7,948,788 7,948,788
Derivatives 1,723 2,374 653 653
</TABLE>
B-20
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures & Options
The Company uses exchange-traded Treasury futures and options to reduce market
risks from changes in interest rates, to alter mismatches between the duration
of assets in a portfolio and the duration of liabilities supported by those
assets, and to hedge against changes in the value of securities it owns or
anticipates acquiring. The Company enters into exchange-traded futures and
options with regulated futures commissions merchants who are members of a
trading exchange. The fair value of futures and options is estimated based on
market quotes for a transaction with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are typically used to hedge duration mismatches between assets and
liabilities by replicating Treasury performance. Treasury futures move
substantially in value as interest rates change and can be used to either
generate new or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest rates.
This strategy can be a more cost effective way of temporarily reducing the
Company's exposure to a market decline than selling fixed income securities and
purchasing a similar portfolio when such a decline is believed to be over.
For futures that meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in current period earnings. The notional value of
futures contracts was $40.8 million and $115.7 million at December 31, 1998 and
1997, respectively. The fair value of futures contracts was immaterial at
December 31, 1998 and 1997.
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put index
options where the basket of securities in the index is appropriate to provide a
hedge against a decrease in the value of the equity portfolio or a portion
thereof. This strategy effects an orderly sale of hedged securities. When the
Company has large cash flows which it has allocated for investment in equity
securities, it may purchase call index options as a temporary hedge against an
increase in the price of the securities it intends to purchase. This hedge
permits such investment transactions to be executed with the least possible
adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the criteria
for hedge accounting, changes in their fair value are deferred and recognized as
an adjustment to the hedged item. Deferred gains or losses from the hedges for
interest-bearing financial instruments are recognized as an adjustment to
interest income or expense of the hedged item. If the options do not meet the
criteria for hedge accounting, they are fair valued, with changes in fair value
reported in current period earnings. The fair value of options was immaterial at
December 31, 1998, and there were no options in 1997.
Currency Derivatives
The Company uses currency swaps to reduce market risks from changes in currency
values of investments denominated in foreign currencies that the Company either
holds or intends to acquire and to alter the currency exposures arising from
mismatches between such foreign currencies and the US Dollar.
Under currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the beginning
and termination of the currency swap by each party. These transactions are
entered into pursuant to master agreements that provide for a single net payment
to be made by one counterparty for payments made in the same currency at each
due date.
If currency derivatives are effective as hedges of foreign currency translation
and transaction exposures, gains or losses are recorded in "Foreign currency
translation adjustments". If currency derivatives do not meet hedge accounting
criteria, gains or losses from those derivatives are recognized in current
period earnings.
As of December 31, 1998, the notional value of the swaps was $40.5 million with
a fair value of ($2.3) million. There were no currency swaps at year end 1997.
B-21
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Credit Risk
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. As of
December 31, 1998, 47% of notional consisted of interest rate derivatives, 47%
of notional consisted of foreign currency derivatives, and 6% of notional
consisted of equity derivatives.
11. 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.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
12. 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 statutory 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, 1998, the
Company would not be permitted a dividend distribution in 1998.
13. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and Pruco Life operate under service and lease agreements whereby
services of officers and employees (except for those agents employed by the
Company in Taiwan), supplies, use of equipment and office space are provided by
Prudential. The net cost of these services allocated to the Company were $269.9
million, $139.5 million and $101.7 million for the years ended December 31,
1998, 1997, and 1996, respectively. These costs are treated in a manner
consistent with the Company's policy on deferred acquisition costs.
Prudential and Pruco Life have an agreement with respect to administrative
services for the Prudential Series Fund. The Company invests in the various
portfolios of the Series Fund through the Separate Accounts. Under this
agreement, Prudential pays compensation to Pruco Life in the amount equal to a
portion of the gross investment advisory fees paid by the Prudential Series
Fund. The Company received from Prudential its allocable share of such
compensation in the amount of $40.1 million, $29.4 million and $19.1 million
during 1998, 1997 and 1996, respectively, recorded in other income.
Reinsurance
The Company currently has three reinsurance agreements in place with Prudential
(the reinsurer). Specifically a 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, 1998, 1997,
and 1996.
B-22
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $300 million with Prudential Funding Corporation, a wholly owned subsidiary
of Prudential. There is no outstanding debt relating to this credit facility as
of December 31, 1998.
B-23
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in
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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
B-24
<PAGE>
PRUSELECT(SM) I
VARIABLE LIFE
INSURANCE
[PRUDENTIAL LOGO]
Pruco Life Insurance Company
213 Washington Street, Newark, NJ 07102-2992
Telephone: 800 286-7754
CVUL-1 Ed. 5/99
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
REPRESENTATION WITH RESPECT TO CHARGES
Pruco Life Insurance Company represents that the fees and charges deducted under
the variable universal life insurance contracts registered by this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by Pruco
Life Insurance Company.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
Arizona, being the state of organization of Pruco Life Insurance Company
("Pruco"), permits entities organized under its jurisdiction to indemnify
directors and officers with certain limitations. The relevant provisions of
Arizona law permitting indemnification can be found in Section 10-850 et seq. of
the Arizona Statutes Annotated. The text of Pruco's By-law, Article VIII, which
relates to indemnification of officers and directors, is incorporated by
reference to Exhibit 3(ii) to its Form 10-Q, SEC File No. 33-37587, filed August
15, 1997.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") 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.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 80 pages.
The undertaking to file reports.
The representation with respect to charges.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers LLP, independent accountants.
2. Clifford E. Kirsch, Esq.
3. Nancy D. Davis, FSA, MAAA
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of Pruco Life Insurance
Company establishing the Pruco Life Variable Universal
Account. (Note 8)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and Pruco Life Insurance Company. (Note 8)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 8)
(c) Schedule of Sales Commissions. (Note 8)
(4) Not Applicable.
(5) Variable Universal Life Insurance Contract. (Note 8)
(6) (a) Articles of Incorporation of Pruco Life Insurance
Company, as amended October 19, 1993. (Note 7)
(b) By-laws of Pruco Life Insurance Company, as amended May
6, 1997. (Note 9)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Variable Universal Life Insurance
Contract. (Note 8)
(b) Supplement to the Application for Variable Universal
Life Insurance Contract. (Note 10)
(11) Memorandum describing Pruco Life Insurance Company's
issuance, transfer, and redemption procedures for the
Contracts pursuant to Rule 6e - 3 (T)(b)(12)(iii). (Note 6)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of
the securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Nancy D. Davis, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered. (Note 1)
II-2
<PAGE>
7. Powers of Attorney.
(a) William M. Bethke, Ira J. Kleinman, Esther H. Milnes, I. Edward
Price (Note 2)
(b) Kiyofumi Sakaguchi (Note 5)
(c) James J. Avery, Jr. (Note 3)
(d) Dennis G. Sullivan (Note 4)
(Note 1) Filed herewith.
(Note 1) 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.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 2 to Form
S-6, Registration No. 333-07451, filed June 25, 1997 on behalf of the
Pruco Life Variable Appreciable Account.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 6 for Form
S-1, Registration No. 33-86780, filed April 16, 1999 on behalf of the
Pruco Life Variable Contract Real Property Account.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 8 to Form
S-6, Registration No. 33-49994, filed April 28, 1997 on behalf of the
Pruco Life PRUvider Variable Appreciable Account.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 9 to this
Registration Statement, filed April 25, 1996.
(Note 7) Incorporated by reference to Form S-6, Registration No. 333-07451,
filed July 2, 1996 on behalf of the Pruco Life Variable Appreciable
Account.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 10 to this
Registration Statement, filed April 28, 1997.
(Note 9) Incorporated by reference to Form 10-Q, Registration No. 33-37587,
filed August 15, 1997 on behalf of the Pruco Life Insurance Company.
(Note 10) Incorporated by reference to Post-Effective Amendment No. 11 to this
Registration Statement, filed April 28, 1998.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, the
Pruco Life Variable Universal Account, certifies that this Amendment is filed
solely for one or more of the purposes specified in Rule 485(b)(1) under the
Securities Act of 1933 and that no material event requiring disclosure in the
prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the most recent Post-Effective Amendment to the Registration
Statement which included a prospectus and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized and its seal hereunto affixed and attested, all in the city of Newark
and the State of New Jersey, on this 23rd day of April, 1999.
(Seal) PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
(Registrant)
By: PRUCO LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ THOMAS C. CASTANO By: /s/ ESTHER H. MILNES
----------------------- --------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 12 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 23rd day of April, 1999.
SIGNATURE AND TITLE
/s/ *
- --------------------------------
Esther H. Milnes
President and Director
/s/ *
- --------------------------------
Dennis G. Sullivan
Vice President and Chief
Accounting Officer
/s/ * *By: /s/ THOMAS C. CASTANO
- -------------------------------- --------------------
James J. Avery, Jr. Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- --------------------------------
William M. Bethke
Director
/s/ *
- --------------------------------
Ira J. Kleinman
Director
/s/ *
- --------------------------------
I. Edward Price
Director
/s/ *
- --------------------------------
Kiyofumi Sakaguchi
Director
II-4
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 12 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 19, 1999, relating to the
financial statements of the Pruco Life Variable Universal Account, which appears
in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated February 26, 1999, relating to the
consolidated financial statements of Pruco Life Insurance Company and
Subsidiaries, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
PricewaterhouseCoopers LLP
New York, New York
April 23, 1999
II-5
<PAGE>
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent Page II-5
accountants.
3. Opinion and Consent of Clifford E. Kirsch, Esq., as Page II-7
to the legality of the securities being
registered.
6. Opinion and Consent of Nancy D. Davis, FSA, MAAA, as Page II-8
to actuarial matters pertaining to the
securities being registered.
II-6
Exhibit 3
April 23, 1999
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Gentlemen:
In my capacity as Chief Legal Officer and Assistant Secretary of Pruco Life
Insurance Company ("Pruco Life"), I have reviewed the establishment on April 17,
1989 of Pruco Life Variable Universal Account (the "Account") by the Executive
Committee of the Board of Directors of Pruco Life as a separate account for
assets applicable to certain variable life insurance contracts, pursuant to the
provisions of Section 20-651 of the Arizona Insurance Code. I am responsible for
oversight of the preparation and review of the Registration Statement on Form
S-6, as amended, filed by Pruco Life with the Securities and Exchange Commission
(Registration No. 33-29181 and 33-38271) under the Securities Act of 1933 for
the registration of certain variable universal life insurance 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
separate account pursuant to the aforesaid provisions of Arizona law.
(3) The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the variable universal
life insurance contracts is not chargeable with liabilities arising
out of any other business Pruco Life may conduct.
(4) The variable universal life insurance 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
II-7
Exhibit 6
April 23, 1999
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
To Pruco Life Insurance Company:
This opinion is furnished in connection with the registration by Pruco Life
Insurance Company of variable universal life insurance contracts ("Contracts")
under the Securities Act of 1933. The prospectus included in Post-Effective
Amendment No. 12 to Registration Statement No. 33-29181 on Form S-6 describes
the Contracts. I have reviewed the Contract form and I have participated in the
preparation and review of the Registration Statement and Exhibits thereto. In my
opinion:
(1) The illustrations of cash surrender values and death benefits included
in the prospectus section entitled "Illustrations" based on the
assumptions stated in the illustrations, are consistent with the
provisions of the Contract. The rate structure of the Contract has not
been designed so as to make the relationship between premiums and
benefits, as shown in the illustrations, appear more favorable to a
prospective purchaser of a Contract for male age 35 or male age 55,
than to prospective purchasers of Contracts on males of other ages or
on females.
(2) The illustrations of the effect of an increase in the Contract fund on
the increase in insurance amount shown in the section entitled "Death
Benefit" is consistent with the provisions of the Contract.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/
- --------------------------------
Nancy D. Davis, FSA, MAAA
Vice President and Actuary
The Prudential Insurance Company of America
II-8
