<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2000
REGISTRATION NO. 333-06701
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. ___ [_]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
(Check appropriate box or boxes)
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PRUCO LIFE FLEXIBLE PREMIUM VARIABLE
ANNUITY ACCOUNT
(Exact Name of Registrant)
PRUCO LIFE INSURANCE COMPANY
(Name of Depositor)
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(973) 802-5740
(Address and telephone number of depositor's principal executive offices)
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THOMAS C. CASTANO
ASSISTANT SECRETARY
PRUCO LIFE INSURANCE COMPANY
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(973) 802-4708
(Name and address of agent for service)
Copies to:
CHRISTOPHER E. PALMER LEE D. AUGSBURGER
SHEA & GARDNER ASSISTANT GENERAL COUNSEL
1800 MASSACHUSETTS AVENUE, N.W. THE PRUDENTIAL INSURANCE COMPANY
WASHINGTON, D.C. 20036 OF AMERICA
(202) 828-2093 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(973) 367-1388
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, 2000 pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on ________ pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Interests in Individual Variable Annuity Contracts
================================================================================
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PART A
INFORMATION REQUIRED IN A PROSPECTUS
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DISCOVERY SELECT(R)
VARIABLE ANNUITY
PROSPECTUS: MAY 1, 2000
THIS PROSPECTUS DESCRIBES AN INDIVIDUAL VARIABLE ANNUITY CONTRACT-OFFERED BY
PRUCO LIFE INSURANCE COMPANY (PRUCO LIFE). PRUCO LIFE IS A WHOLLY OWNED
SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA.
THE FUNDS
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Discovery Select offers a wide variety of investment choices, including 26
variable investment options that invest in mutual funds managed by these leading
asset managers.
PRUDENTIAL INVESTMENTS
AIM ADVISORS
ALLIANCE CAPITAL MANAGEMENT L.P.
AMERICAN CENTURY
DAVIS SELECTED ADVISERS, L.P.
FRANKLIN ADVISERS
JANUS CAPITAL
MFS
OPPENHEIMER CAPITAL
T. ROWE PRICE
WARBURG PINCUS
PLEASE READ THIS PROSPECTUS
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Please read this prospectus before purchasing a Discovery Select variable
annuity contract and keep it for future reference. Current prospectuses for each
of the underlying mutual funds accompany this prospectus. These prospectuses
contain important information about the mutual funds. Please read these
prospectuses and keep them for reference.
TO LEARN MORE ABOUT DISCOVERY SELECT
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To learn more about the Discovery Select variable annuity, you can request a
copy of the Statement of Additional Information (SAI) dated May 1, 2000. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. Pruco Life also files other reports with the SEC. All
of these filings can be reviewed and copied at the SEC's offices, and can also
be obtained from the SEC's Public Reference Section, 450 5th Street N.W.,
Washington, D.C. 20549. The SEC also maintains a Web site (http://www.sec.gov)
that contains the Discovery Select SAI, material incorporated by reference, and
other information regarding registrants that file electronically with the SEC.
The Table of Contents of the SAI is on Page 30 of this prospectus.
FOR A FREE COPY OF THE SAI CALL US AT:
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O (888) PRU-2888 or write to us at:
O Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
O Prudential Annuity Service Center
P.O. Box 14215
New Brunswick, New Jersey 08906
THE SEC HAS NOT DETERMINED THAT THIS CONTRACT IS A GOOD INVESTMENT, NOR HAS THE
SEC DETERMINED THAT THIS PROSPECTUS IS COMPLETE OR ACCURATE. IT IS A CRIMINAL
OFFENSE TO STATE OTHERWISE. INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT
TO RISK, INCLUDING THE POSSIBLE LOSS OF YOUR MONEY. AN INVESTMENT IN DISCOVERY
SELECT IS NOT A BANK DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
1
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CONTENTS
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PART I: DISCOVERY SELECT PROSPECTUS
SUMMARY
Glossary...................................................4
Summary ...................................................5
Summary of Contract Expenses...............................7
Expense Examples...........................................9
PART II: DISCOVERY SELECT PROSPECTUS
SECTIONS 1-9
Section 1: What is the Discovery Select
Variable Annuity?.........................................12
Short Term Cancellation Right or "Free Look"..............12
Section 2: What Investment Options
Can I Choose..............................................13
Variable Investment Options...............................13
Fixed Interest-Rate Options...............................14
Transfers Among Options...................................14
Other Available Features..................................
Voting Rights.............................................15
Substitution..............................................15
Section 3: What Kind of Payments Will I Receive
During the Income Phase?(Annuitization)...................16
Payment Provisions........................................16
Option 1: Annuity Payments for a
Fixed Period........................................16
Option 2: Life Annuity with 120 Payments
(10 Years) Certain..................................16
Option 3: Interest Payment Option.........................16
Option 4: Other Annuity Options...........................16
Section 4: What is the Death Benefit?.....................17
Beneficiary...............................................17
Calculation of the Death Benefit..........................17
Section 5: How Can I Purchase a Discovery
Select Contract?..........................................18
Purchase Payments.........................................18
Allocation of Purchase Payments...........................18
Calculating Contract Value................................18
Section 6: What are the Expenses Associated
with the Discovery Select Contract?.......................19
Insurance Charges.........................................19
Annual Contract Fee.......................................19
Withdrawal Charge.........................................19
Critical Care Access......................................20
Premium Taxes.............................................20
Transfer Fee..............................................20
Company Taxes.............................................20
Section 7: How Can I Access My Money?.....................21
Automated Withdrawals.....................................21
Suspension of Payments or Transfers.......................21
Section 8: What are the Tax Considerations
Associated with the Discovery Select Contract?............22
Contracts Owned by Individuals (Not Associated with Tax
Favored Retirement Plans).................................22
Contracts Held by Tax Favored Plans.......................23
Section 9: Other Information..............................28
Pruco Life Insurance Company..............................28
The Separate Account......................................28
Sale and Distribution of the Contract......................28
Assignment................................................29
Financial Statements......................................29
Statement of Additional Information.......................30
Accumulation Unit Values..................................31
Market-Value Adjustment Formula...........................33
IRA Disclosure Statement..................................34
PART III: VARIABLE INVESTMENT OPTIONS'
PROSPECTUSES
The Prudential Series Fund
AIM Variable Insurance Funds
Alliance Variable Products Series Fund, Inc.
American Century Variable Portfolios, Inc.
Franklin Templeton Variable Insurance Products Trust
Davis Variable Account Fund, Inc.
Janus Aspen Series
MFS Variable Insurance Trust
OCC Accumulation Trust
T. Rowe Price
Warburg Pincus Trust
2
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PART I SUMMARY
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DISCOVERY SELECT PROSPECTUS
3
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GLOSSARY
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WE HAVE TRIED TO MAKE THIS PROSPECTUS AS EASY TO READ AND UNDERSTAND AS
POSSIBLE. BY THE NATURE OF THE CONTRACT, HOWEVER, CERTAIN TECHNICAL WORDS OR
TERMS ARE UNAVOIDABLE. WE HAVE IDENTIFIED THE FOLLOWING AS SOME OF THESE WORDS
OR TERMS.
ACCUMULATION PHASE
The period that begins with the contract date (see below definition) and ends
when you start receiving income payments or earlier if the contract is
terminated through a full withdrawal or payment of a death benefit.
ANNUITANT
The person whose life determines how long the contract lasts and the amount of
income payments that will be paid.
ANNUITY DATE
The date when income payments are scheduled to begin.
BENEFICIARY
The person(s) or entity you have chosen to receive a death benefit.
CASH VALUE
This is the total value of your contract minus any withdrawal charge(s) or
market-value adjustment, if applicable.
CONTRACT DATE
The date we receive your initial purchase payment and all necessary paperwork in
good order at the Prudential Annuity Service Center. Contract anniversaries are
measured from the contract date. A contract year starts on the contract date or
on a contract anniversary.
CONTRACT OWNER, OWNER OR YOU
The person entitled to the ownership rights under the contract.
CONTRACT VALUE
The total value of the amounts in a contract allocated to the variable
investment options and the interest-rate options as of a particular date.
DEATH BENEFIT
If the sole or last surviving annuitant dies, the designated person(s) or the
beneficiary will receive, at a minimum, the total amount invested or a
potentially greater amount related to market appreciation. See "What is the
Death Benefit?" on page 17.
INCOME OPTIONS
Options under the contract that define the frequency and duration of income
payments. In your contract, these are referred to as payout or annuity options.
INTEREST-RATE OPTION
An investment option that offers a fixed-rate of interest for a selected period
during which periodic transfers are made to selected variable investment options
(dollar cost averaging option), a one-year period (fixed-rate option) or a
seven-year period (market-value adjustment option).
PURCHASE PAYMENTS
The amount of money you pay us to purchase the contract. Generally, you can make
additional purchase payments at any time during the accumulation phase.
PRUDENTIAL ANNUITY SERVICE CENTER
P.O. Box 14215, New Brunswick, New Jersey, 08906. The phone number is
(888) PRU-2888.
SEPARATE ACCOUNT
Purchase payments allocated to the variable investment options are held by us in
a separate account called the Pruco Life Flexible Premium Variable Annuity
Account. The Separate Account is set apart from all of the general assets of
Pruco Life.
TAX DEFERRAL
This is a way to increase your assets without currently being taxed. You do not
pay taxes on your contract earnings until you take money out of your contract.
VARIABLE INVESTMENT OPTION
When you choose a variable investment option, we purchase shares of the mutual
fund which are held as an investment for that option. We hold these shares in
the Separate Account. The division of the Separate Account of Pruco Life that
invests in a particular mutual fund is referred to in your contract as a
subaccount.
4
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SUMMARY OF SECTIONS 1-9
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FOR A MORE COMPLETE DISCUSSION OF THE FOLLOWING TOPICS, SEE THE CORRESPONDING
SECTION IN THE PROSPECTUS.
SECTION 1
WHAT IS THE DISCOVERY SELECT VARIABLE ANNUITY?
This variable annuity contract, offered by Pruco Life, is a contract between
you, as the owner, and us. The contract allows you to invest on a tax-deferred
basis in one or more of 26 variable investment options. There are also three
fixed interest-rate options which are available in most states. The contract is
intended for retirement savings or other long-term investment purposes and
provides a death benefit and guaranteed income options.
The variable investment options are designed to offer the opportunity over
the long term for a better return than the fixed interest-rate options. However,
this is NOT guaranteed. It is possible, due to market changes, that your
investments may decrease in value.
The fixed interest-rate options offer an interest rate that is guaranteed.
While your money is in a fixed account, your principal amount is guaranteed
and the interest amount that your money will earn is guaranteed by us to always
be at least 3.0%. Payments allocated to the fixed interest-rate options become
part of Pruco Life's general assets. As a result, the strength of our guarantee
is based on the overall financial strength of Pruco Life.
You can invest your money in any or all of the variable investment options
and the interest-rate options. You are allowed 12 transfers each contract year
among the variable investment options, without a charge. There are certain
restrictions on transfers involving the interest-rate options.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
grow on a tax-deferred basis and are taxed as income when you make a withdrawal.
The income phase starts when you begin receiving regular payments from your
contract. The amount of money you are able to accumulate in your contract during
the accumulation phase will help determine the amount of the payments you will
receive during the income phase. Other factors will affect the amount of your
payments such as age, gender and the payout option you selected.
Free Look. If you change your mind about owning Discovery Select, you may
cancel your contract within 10 days after receiving it (or whatever time period
is required in the state where the contract was issued).
SECTION 2
WHAT INVESTMENT OPTIONS CAN I CHOOSE?
You can invest your money in any or all of the variable investment options that
invest in the mutual funds described in the fund prospectuses provided with this
prospectus:
THE PRUDENTIAL SERIES FUND
Diversified Bond Portfolio
Diversified Conservative Growth Portfolio
Equity Income Portfolio
Equity Portfolio
Global Portfolio
High Yield Bond Portfolio
Money Market Portfolio
Prudential Jennison Portfolio
Small Capitalization Stock Portfolio
Stock Index Portfolio
20/20 Focus Portfolio
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Fund
AIM V.I. Value Fund
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Alliance Premier Growth Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century VP Value
DAVIS VARIABLE ACCOUNT FUND, INC.
Davis Value Portfolio
*
FRANKLIN TEMPLETON Variable Insurance Products Trust
Franklin Small Cap Fund - Class 2
JANUS ASPEN SERIES
Growth Portfolio
International Growth Portfolio
MFS VARIABLE Insurance Trust
Emerging Growth Series
Research Series
OCC ACCUMULATION Trust
Managed Portfolio
Small Cap Portfolio
T. ROWE PRICE
Equity Series - Equity Income Portfolio
International Series - International Stock Portfolio
WARBURG PINCUS Trust
Global Post-Venture Capital Portfolio
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5
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SUMMARY OF SECTIONS 1-9 CONTINUED
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Depending upon market conditions, you may earn or lose money in any of
these options. The value of your contract will fluctuate depending upon the
investment performance of the mutual funds used by the variable investment
options you choose. Performance information for the variable investment options
is provided in the Statement of Additional Information (SAI). Past performance
is not a guarantee of future results.
You can also put your money into one or more of the fixed interest-rate
options.
SECTION 3
WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE
INCOME PHASE? (ANNUITIZATION)
If you want to receive regular income from your annuity, you can choose one of
several options, including guaranteed payments for the annuitant's lifetime.
Once you begin receiving regular payments, you cannot change your payment plan.
SECTION 4
WHAT IS THE DEATH BENEFIT?
If the sole or last surviving annuitant dies, the designated person(s) or the
beneficiary will receive at a minimum, the total amount invested or a
potentially greater amount related to market appreciation.
SECTION 5
HOW CAN I PURCHASE A DISCOVERY SELECT
ANNUITY CONTRACT?
You can purchase this contract, under most circumstances, with a minimum initial
purchase payment of $10,000. You can add $1,000 or more at any time during the
accumulation phase of the contract. Your representative can help you fill out
the proper forms.
SECTION 6
WHAT ARE THE EXPENSES ASSOCIATED WITH THE
DISCOVERY SELECT CONTRACT?
The contract has insurance features and investment features, and there are costs
related to each.
Each year we deduct a $30 contract maintenance charge if your contract
value is less than $50,000. For insurance and administrative costs, we also
deduct an annual charge of 1.40% of the average daily value of all assets
allocated to the variable investment options. This charge is not assessed
against amounts allocated to the interest-rate investment options.
There are a few states/jurisdictions that assess a premium tax when you
begin receiving regular income payments from your annuity. In those states, we
will impose a required premium tax charge which can range up to 5%.
There are also charges associated with the mutual funds. These charges
currently range from 0.39% to 1.40% per year of a fund's average daily assets.
SECTION 7
HOW CAN I ACCESS MY MONEY?
You may take money out at any time during the accumulation phase. Each year, you
may withdraw up to 10% of your total purchase payments without charge.
Withdrawals greater than 10% of your purchase payments will be subject to a
withdrawal charge. This charge decreases 1% each year. After the 7th year, there
is no charge for a withdrawal. You may also be subject to income tax and a tax
penalty if you make an early withdrawal.
Section 8
What Are The Tax Considerations Associated With
The Discovery Select Contract?
Your earnings are not taxed until withdrawn. If you take money out during the
accumulation phase, earnings are withdrawn first and are taxed as income. If you
are younger than age 59-1/2 when you take money out, you may be charged a 10%
federal tax penalty on the earnings in addition to ordinary taxation. A portion
of the payments you receive during the income phase is considered partly a
return of your original investment. As a result, that portion of each payment is
not taxable as income. Generally, all amounts withdrawn from IRA contracts are
fully taxable and subject to the 10% penalty if withdrawn prior to age 59-1/2.
SECTION 9
OTHER INFORMATION
This contract is issued by Pruco Life, a subsidiary of The Prudential Insurance
Company of America.
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6
<PAGE> 9
SUMMARY OF CONTRACT EXPENSES
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THE PURPOSE OF THIS SUMMARY IS TO HELP YOU TO UNDERSTAND THE COSTS YOU WILL PAY
FOR DISCOVERY SELECT. THIS SUMMARY INCLUDES THE EXPENSES OF THE MUTUAL FUNDS
USED BY THE VARIABLE INVESTMENT OPTIONS BUT DOES NOT INCLUDE ANY PREMIUM TAXES
THAT MIGHT BE APPLICABLE IN YOUR STATE.
FOR MORE DETAILED INFORMATION:
More detailed information can be found on page 19 under the section called,
"What Are The Expenses Associated With The Discovery Select Variable Annuity?"
For more detailed expense information about the mutual funds, please refer to
the individual fund prospectuses which you will find at the back of this
prospectus.
TRANSACTION EXPENSES
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WITHDRAWAL CHARGE (SEE NOTE 1 BELOW)
During contract year 1 7%
During contract year 2 6%
During contract year 3 5%
During contract year 4 4%
During contract year 5 3%
During contract year 6 2%
During contract year 7 1%
TRANSFER FEE (SEE NOTE 2 BELOW)
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first 12 transfers per year $ 0.00
each transfer after 12 $ 25.00
ANNUAL CONTRACT FEE AND FULL WITHDRAWAL FEE (SEE NOTE 3 BELOW)
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$ 30.00
ANNUAL ACCOUNT EXPENSES
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AS A PERCENTAGE OF THE AVERAGE ACCOUNT VALUE
Mortality and Expense Risk: 1.25%
Administrative Fee: 0.15%
Total: 1.40%
NOTE 1: AS OF THE BEGINNING OF THE CONTRACT YEAR, YOU MAY WITHDRAW UP TO 10% OF
THE TOTAL PURCHASE PAYMENTS PLUS ANY CHARGE-FREE AMOUNT CARRIED OVER FROM THE
PREVIOUS CONTRACT YEAR WITHOUT CHARGE. THERE IS NO WITHDRAWAL CHARGE ON ANY
WITHDRAWALS MADE UNDER THE CRITICAL CARE ACCESS OPTION (SEE PAGE 20) OR ON ANY
AMOUNT USED TO PROVIDE INCOME UNDER THE LIFE ANNUITY WITH 120 PAYMENTS (10
YEARS) CERTAIN OPTION. (SEE PAGE 16). SURRENDER CHARGES ARE WAIVED WHEN A DEATH
BENEFIT IS PAID.
NOTE 2: YOU WILL NOT BE CHARGED FOR TRANSFERS MADE IN CONNECTION WITH DOLLAR
COST AVERAGING AND AUTO-REBALANCING
NOTE 3: THERE IS NO CHARGE ON WITHDRAWALS IF THE VALUE OF YOUR CONTRACT IS
$50,000 OR MORE, OR IF THE WITHDRAWALS ARE MADE UNDER THE CRITICAL CARE ACCESS
OPTION.
NOTES FOR ANNUAL MUTUAL FUND EXPENSES:
THESE EXPENSES ARE BASED ON THE HISTORICAL FUND EXPENSES FOR THE YEAR ENDED
DECEMBER 31, 1999, EXCEPT AS INDICATED. FUND EXPENSES ARE NOT FIXED OR
GUARANTEED BY THE DISCOVERY SELECT CONTRACT AND MAY VARY FROM YEAR TO YEAR.
(1) ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
THE FUND MAINTAINS A DISTRIBUTION PLAN OR "12b-1 PLAN," FOR THIS CLASS OF
SHARES UNDER WHICH AN ANNUAL FEE OF 0.25% OF THE CLASS'S AVERAGE DAILY NET
ASSETS IS PAID TO THE FUND'S DISTRIBUTOR. THIS FEE IS INCLUDED IN OTHER
EXPENSES AND IS DISCUSSED IN THE FUND'S PROSPECTUS.
(2) AMERICAN CENTURY VARIABLE PORTFOLIOS INC. AND T. ROWE PRICE FUNDS
INVESTMENT MANAGEMENT FEES INCLUDE ORDINARY EXPENSES OF OPERATING THE FUNDS.
(3) JANUS ASPEN SERIES
TABLE REFLECTS EXPENSES BASED UPON EXPENSES FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999, RESTATED TO REFLECT A REDUCTION IN THE MANAGEMENT FEE.
(4) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
TABLE REFLECTS RESTATED MANAGEMENT FEES AND EXPENSES BASED ON A MERGER THAT
BECAME EFFECTIVE ON MAY 1, 2000. THE FORMALLY ADOPTED DISTRIBUTION PLAN OR
"12b-1 PLAN", PROVIDES FOR A MAXIMUM ANNUAL FEE OF 0.35% OF THE FUND'S AVERAGE
DAILY NET ASSETS, HOWEVER THE FUND'S BOARD OF TRUSTEES HAS SET THE CURRENT RATE
AT 0.25%.
(5) WARBURG PINCUS TRUST AND DAVIS VARIABLE ACCOUNT FUND, INC.
FEE WAIVERS AND EXPENSE REIMBURSEMENT OR CREDITS REDUCED INVESTMENT MANAGEMENT
FEES AND OTHER EXPENSES DURING 1999, BUT MAY BE DISCONTINUED AT ANY TIME.
(6) MFS VARIABLE INSURANCE TRUST
AN EXPENSE OFFSET ARRANGEMENT WITH THE FUND'S CUSTODIAN RESULTED IN A REDUCTION
IN OTHER EXPENSES BY 0.01%
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7
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<TABLE>
<CAPTION>
ANNUAL MUTUAL FUND EXPENSES (AFTER REIMBURSEMENT, IF ANY):
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AS A PERCENTAGE OF EACH PORTFOLIO'S AVERAGE DAILY NET ASSETS
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INVESTMENT OTHER TOTAL CONTRACTUAL TOTAL ACTUAL
MANAGEMENT FEE EXPENSES EXPENSES EXPENSES*
THE PRUDENTIAL SERIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diversified Bond Portfolio 0.40% 0.03% 0.43% 0.43%
Diversified Conservative Growth Portfolio 0.75% 0.30% 1.05% 1.05%
Equity Income Portfolio 0.40% 0.02% 0.42% 0.42%
Equity Portfolio 0.45% 0.02% 0.47% 0.47%
Global Portfolio 0.75% 2.09% 0.84% 0.84%
High Yield Bond Portfolio 0.55% 0.05% 0.60% 0.60%
Money Market Portfolio 0.40% 0.02% 0.42% 0.42%
Prudential Jennison Portfolio 0.60% 0.03% 0.63% 0.63%
Small Capitalization Stock Portfolio 0.40% 0.05% 0.45% 0.45%
Stock Index Portfolio 0.35% 0.04% 0.39% 0.39%
20/20 Focus Portfolio 0.75% 0.34% 1.09% 1.09%
AIM VARIABLE INSURANCE FUNDS
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AIM V.I. Growth and Income Fund 0.61% 0.16% 0.77% 0.77%
AIM V.I. Value Fund 0.61% 0.15% 0.76% 0.76%
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.(1)
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Alliance Premier Growth Portfolio - Class B 1.00% 0.29% 1.29% 1.29%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC(2)
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American Century VP Value 1.00% 0.00% 1.00% 1.00%
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 0.55% 0.52% 1.07% 1.07%
DAVIS VARIABLE ACCOUNT FUND, INC.(5)
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Davis Value Portfolio 0.75% 1.54% 2.29% 1.00%
JANUS ASPEN SERIES(3)
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Growth Portfolio 0.65% 0.02% 0.67% 0.67%
International Growth Portfolio 0.65% 0.11% 0.76% 0.76%
MFS VARIABLE INSURANCE TRUST(6)
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Emerging Growth Series 0.75% 0.09% 0.84% 0.83%
Research Series 0.75% 0.11% 0.86% 0.85%
OCC ACCUMULATION TRUST
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Managed Portfolio 0.77% 0.06% 0.83% 0.83%
Small Cap Portfolio 0.80% 0.09% 0.89% 0.89%
T. ROWE PRICE(2)
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Equity Series - Equity Income Portfolio 0.85% 0.00% 0.85% 0.85%
International Series - International Stock Portfolio 1.05% 0.00% 1.05% 1.05%
WARBURG PINCUS TRUST(5)
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Global Post-Venture Capital Portfolio 1.25% 0.33% 1.58% 1.40%
</TABLE>
* REFLECTS THE EFFECT OF MANAGEMENT FEE WAIVERS AND REIMBURSEMENT OF
EXPENSES, IF ANY. SEE NOTES ON PAGE 7.
THE "EXPENSES EXAMPLES" ON THE FOLLOWING PAGES ARE CALCULATED USING THE TOTAL
ACTUAL EXPENSES.
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8
<PAGE> 11
EXPENSE EXAMPLES
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THESE EXAMPLES WILL HELP YOU COMPARE THE FEES AND EXPENSES OF THE DIFFERENT
VARIABLE INVESTMENT OPTIONS OFFERED BY DISCOVERY SELECT. YOU CAN ALSO USE THE
EXAMPLES TO COMPARE THE COST OF DISCOVERY SELECT WITH OTHER VARIABLE ANNUITY
CONTRACTS.
EXAMPLE 1: IF YOU WITHDRAW YOUR ASSETS
Example 1 assumes that you invest $10,000 in Discovery Select and that you
allocate all of your assets to one of the variable investment options and
withdraw all your assets at the end of the time period indicated. The example
also assumes that your investment has a 5% return each year and that the mutual
fund's operating expenses remain the same. Your actual costs may be higher or
lower.
EXAMPLE 2: IF YOU DO NOT WITHDRAW YOUR ASSETS
Example 2 assumes that you invest $10,000 in Discovery Select and allocate all
of your assets to one of the variable investment options and DO NOT WITHDRAW any
of your assets at the end of the time period indicated. The example also assumes
that your investment has a 5% return each year and that the mutual fund's
operating expenses remain the same. Your actual costs may be higher or lower.
On the following page are examples of what your costs would be using these
assumptions.
NOTES FOR ANNUAL MUTUAL FUND EXPENSES:
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE CHARGES SHOWN IN THE 10 YEAR COLUMN ARE THE SAME FOR EXAMPLE 1 AND EXAMPLE
2. THIS IS BECAUSE AFTER 10 YEARS, THE WITHDRAWAL CHARGES ARE NO LONGER
DEDUCTED BY US WHEN YOU MAKE A WITHDRAWAL OR WHEN YOU BEGIN THE INCOME PHASE OF
YOUR CONTRACT.
IF YOUR CONTRACT VALUE IS LESS THAN $50,000, ON YOUR CONTRACT ANNIVERSARY (AND
UPON A SURRENDER), WE DEDUCT A $30 FEE. THE EXAMPLES USE AN AVERAGE NUMBER AS
THE AMOUNT OF THE ANNUAL CONTRACT FEE. THIS AMOUNT WAS CALCULATED BY TAKING THE
TOTAL ANNUAL CONTRACT FEES COLLECTED IN 1999 AND THEN DIVIDING THAT NUMBER BY
THE TOTAL ASSETS ALLOCATED TO THE VARIABLE INVESTMENT OPTIONS. BASED ON THIS
CALCULATION THE ANNUAL CONTRACT FEE IS INCLUDED AS AN ANNUAL CHARGE OF .023% OF
CONTRACT VALUE.
YOUR ACTUAL FEES WILL VARY BASED ON THE AMOUNT OF YOUR CONTRACT AND YOUR
SPECIFIC ALLOCATION(S). A TABLE OF ACCUMULATION UNIT VALUES OF INTERESTS IN EACH
VARIABLE INVESTMENT OPTION APPEARS ON PAGE 31. CHARGES FOR PREMIUM TAXES ARE
NOT REFLECTED. IN THESE EXAMPLES. PREMIUM TAXES MAY APPLY DEPENDING ON THE STATE
WHERE YOU LIVE.
- --------------------------------------------------------------------------------
9
<PAGE> 12
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSE EXAMPLES 1 AND 2
EXAMPLE 1: EXAMPLE 2:
IF YOU WITHDRAW YOUR ASSETS IF YOU DO NOT WITHDRAW YOUR ASSETS
----------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS 1 YR 3 YRS 5 YRS 10 YRS
THE PRUDENTIAL SERIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Bond Portfolio $ 816 $ 925 $ 1138 $ 2142 $ 186 $ 575 $ 988 $ 2142
Diversified Conservative Growth Portfolio $ 878 $ 1112 $ 1452 $ 2777 $ 248 $ 762 $ 1302 $ 2777
Equity Income Portfolio $ 815 $ 922 $ 1133 $ 2132 $ 185 $ 572 $ 983 $ 2132
Equity Portfolio $ 820 $ 937 $ 1159 $ 2184 $ 190 $ 587 $ 1009 $ 2184
Global Portfolio $ 857 $ 1049 $ 1347 $ 2566 $ 227 $ 699 $ 1197 $ 2566
High Yield Bond Portfolio $ 833 $ 976 $ 1225 $ 2320 $ 203 $ 626 $ 1075 $ 2320
Money Market Portfolio $ 815 $ 922 $ 1133 $ 2132 $ 185 $ 572 $ 983 $ 2132
Prudential Jennison Portfolio $ 836 $ 985 $ 1240 $ 2351 $ 206 $ 635 $ 1090 $ 2351
Small Capitalization Stock Portfolio $ 818 $ 931 $ 1149 $ 2163 $ 188 $ 581 $ 999 $ 2163
Stock Index Portfolio $ 812 $ 912 $ 1118 $ 2100 $ 182 $ 562 $ 968 $ 2100
20/20 Focus Portfolio $ 882 $ 1124 $ 1472 $ 2817 $ 252 $ 774 $ 1322 $ 2817
AIM VARIABLE INSURANCE FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Growth and Income Fund $ 850 $ 1028 $ 1311 $ 2495 $ 220 $ 678 $ 1161 $ 2495
AIM V.I. Value Fund $ 849 $ 1025 $ 1306 $ 2485 $ 219 $ 675 $ 1156 $ 2485
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Alliance Premier Growth Portfolio - Class B $ 902 $ 1184 $ 1572 $ 3013 $ 272 $ 834 $ 1422 $ 3013
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
American Century VP Value $ 873 $ 1097 $ 1427 $ 2727 $ 243 $ 747 $ 1277 $ 2727
DAVIS VARIABLE ACCOUNT FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Davis Value Fund $ 1002 $ 1479 $ 2056 $ 3938 $ 372 $ 1129 $ 1906 $ 3938
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 $ 880 $ 1118 $ 1462 $ 2797 $ 250 $ 768 $ 1312 $ 2797
JANUS ASPEN SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio $ 840 $ 997 $ 1261 $ 2393 $ 210 $ 647 $ 1111 $ 2393
International Growth Portfolio $ 849 $ 1025 $ 1306 $ 2485 $ 219 $ 675 $ 1156 $ 2485
MFS VARIABLE INSURANCE TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging Growth Series $ 856 $ 1046 $ 1342 $ 2556 $ 226 $ 696 $ 1192 $ 2556
Research Series $ 858 $ 1052 $ 1352 $ 2577 $ 228 $ 702 $ 1202 $ 2577
OCC ACCUMULATION TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Managed Portfolio $ 856 $ 1046 $ 1342 $ 2556 $ 226 $ 696 $ 1192 $ 2556
Small Cap Portfolio $ 862 $ 1064 $ 1372 $ 2617 $ 232 $ 714 $ 1222 $ 2617
T. ROWE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Series - Equity Income Portfolio $ 858 $ 1052 $ 1352 $ 2577 $ 228 $ 702 $ 1202 $ 2577
International Series - Int'l Stock Portfolio $ 878 $ 1112 $ 1452 $ 2777 $ 248 $ 762 $ 1302 $ 2777
WARBURG PINCUS TRUST
- ------------------------------------------------------------------------------------------------------------------------------------
Global Post-Venture Capital Portfolio $ 931 $ 1270 $ 1714 $ 3291 $ 301 $ 920 $ 1564 $ 3291
</TABLE>
THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR A
PARTICULAR YEAR MAY BE MORE OR LESS THAN SHOWN IN THE EXAMPLES.
- -------------------------------------------------------------------------------
10
<PAGE> 13
PART II SECTIONS 1-9
- --------------------------------------------------------------------------------
DISCOVERY SELECT PROSPECTUS
11
<PAGE> 14
1:
WHAT IS THE DISCOVERY SELECT
VARIABLE ANNUITY?
- --------------------------------------------------------------------------------
THE DISCOVERY SELECT VARIABLE ANNUITY IS A CONTRACT BETWEEN YOU, THE OWNER, AND
US, THE INSURANCE COMPANY, PRUCO LIFE INSURANCE COMPANY (PRUCO LIFE, WE OR US).
Under our contract or agreement, in exchange for your payment to us, we promise
to pay you a guaranteed income stream that can begin any time after the first
contract anniversary. (Maryland residents must wait until the end of the seventh
contract year.) Your annuity is in the accumulation phase until you decide to
begin receiving annuity payments. The date you begin receiving annuity payments
is the annuity date. On the annuity date, your contract switches to the income
phase.
THIS ANNUITY CONTRACT BENEFITS FROM TAX DEFERRAL.
Tax deferral means that you are not taxed on earnings or appreciation on the
assets in your contract until you withdraw money from your contract.
DISCOVERY SELECT IS A VARIABLE ANNUITY CONTRACT.
This means that during the accumulation phase, you can allocate your assets
among 26 variable investment options as well as 3 guaranteed interest-rate
options. (If you live in Maryland, Oregon or Washington, the market value
adjustment option is not available to you.) If you select a variable investment
option, the amount of money you are able to accumulate in your contract during
the accumulation phase depends upon the investment performance of the mutual
fund associated with that variable investment option. Because the mutual funds'
portfolios fluctuate in value depending upon market conditions, your contract
value can either increase or decrease. This is important, since the amount of
the annuity payments you receive during the income phase depends upon the value
of your contract at the time you begin receiving payments.
AS MENTIONED ABOVE, DISCOVERY SELECT ALSO CONTAINS THREE GUARANTEED
INTEREST-RATE OPTIONS: a fixed-rate option, a dollar cost averaging option, and
a market-value adjustment option. The fixed-rate option offers an interest rate
that is guaranteed by us for one year and will always be at least 3.0% per year.
The dollar cost averaging option offers an interest rate that is guaranteed by
us for a selected period during which periodic transfers are made to selected
variable investment options. The market-value adjustment option guarantees a
stated interest rate, generally higher than the fixed-rate option. However, in
order to get the full benefit of the stated interest rate, assets in this option
must be held for a seven-year period. (The market-value adjustment option is not
available to residents of Maryland, Oregon or Washington.)
AS THE OWNER OF THE CONTRACT, YOU HAVE ALL OF THE DECISION-MAKING RIGHTS UNDER
THE CONTRACT. You will also be the annuitant unless you designate someone else.
The annuitant(s) is the person upon whose death during the accumulation phase,
the death benefit is payable. The annuitant is the person who receives the
annuity payments when the income phase begins. The annuitant is also the person
whose life is used to determine how much and how long these payments will
continue. On and after the annuity date, the annuitant is the owner and may not
be changed. The beneficiary becomes the owner when a death benefit is payable.
THE BENEFICIARY IS: the person(s) or entity designated to receive any death
benefit if the annuitant(s) dies during the accumulation phase. You may change
the beneficiary any time prior to the annuity date by making a written request
to us. Your request becomes effective when we approve it.
SHORT TERM CANCELLATION RIGHT OR "FREE LOOK"
If you change your mind about owning Discovery Select, you may cancel your
contract within 10 days after receiving it (or whatever period is required by
applicable law). You can request a refund by returning the contract either to
the representative who sold it to you, or to the Prudential Annuity Service
Center at the address shown on the first page of this prospectus. You will
receive, depending on applicable law:
o Your full purchase payment; or
o The amount your contract is worth as of the day we receive your request.
This amount may be more or less than your original payment.
- --------------------------------------------------------------------------------
12
<PAGE> 15
2:
WHAT INVESTMENT OPTIONS
CAN I CHOOSE?
- --------------------------------------------------------------------------------
THE CONTRACT GIVES YOU THE CHOICE OF ALLOCATING YOUR PURCHASE PAYMENTS TO ANY
ONE OR MORE OF 26 VARIABLE INVESTMENT OPTIONS, AS WELL AS THREE GUARANTEED
INTEREST-RATE OPTIONS.
The 26 variable investment options invest in mutual funds managed by leading
investment advisors. Each of these mutual funds has a separate prospectus that
is provided with this prospectus. You should read the mutual fund prospectus
before you decide to allocate your assets to the variable investment option
using that fund.
VARIABLE INVESTMENT OPTIONS
Listed below are the mutual funds in which the variable investment options
invest. Each variable investment option has a different investment objective.
THE PRUDENTIAL SERIES FUND, INC.
o Diversified Bond Portfolio
o Diversified Conservative Growth Portfolio
o Equity Income Portfolio
o Equity Portfolio
o Global Portfolio
o High Yield Bond Portfolio
o Money Market Portfolio
o Prudential Jennison Portfolio (domestic equity)
o Stock Index Portfolio
o Small Capitalization Stock Portfolio
o 20/20 Focus Fund (domestic equity)
THE PRUDENTIAL SERIES FUND, INC. IS MANAGED BY PRUDENTIAL THROUGH ANOTHER
COMPANY IT OWNS CALLED THE PRUDENTIAL INVESTMENT CORPORATION. THE PRUDENTIAL
INVESTMENT CORPORATION MANAGES EACH OF THE PORTFOLIOS OF THE PRUDENTIAL SERIES
FUND EXCEPT THE PRUDENTIAL JENNISON PORTFOLIO AND THE DIVERSIFIED CONSERVATIVE
GROWTH PORTFOLIO. FOR THE JENNISON PORTFOLIO, PRUDENTIAL INVESTMENT CORPORATION
OVERSEES ANOTHER COMPANY OWNED BY PRUDENTIAL CALLED JENNISON ASSOCIATES CAPITAL
CORP. WHICH PROVIDES THE DAY-TO-DAY INVESTMENT ADVISORY SERVICES. FOR THE
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO, PRUDENTIAL INVESTMENTS CORPORATION
OVERSEES THE DREYFUS CORPORATION AND PACIFIC INVESTMENT MANAGEMENT COMPANY,
WHICH PROVIDE THE DAY-TO-DAY INVESTMENT ADVISORY SERVICES.
AIM VARIABLE INSURANCE FUNDS
o AIM V.I. Growth and Income Fund
o AIM V.I. Value Fund
AIM ADVISORS, INC. SERVES AS INVESTMENT ADVISER TO BOTH OF THESE FUNDS.
ALLIANCE VARIABLE PRODUCTS SERIES FUND
o Alliance Premier Growth Portfolio
ALLIANCE CAPITAL MANAGEMENT L.P. IS THE INVESTMENT ADVISER OF THE ALLIANCE
VARIABLE PRODUCTS SERIES FUND.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
o American Century VP Value
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. IS THE INVESTMENT ADVISER FOR
AMERICAN CENTURY VP VALUE.
DAVIS VARIABLE ACCOUNT FUND, INC.
o Davis Value Portfolio
DAVIS SELECTED ADVISERS, L.P. IS THE INVESTMENT ADVISER AND DAVIS SELECTED
ADVISERS-NY, INC. IS SUB-ADVISER TO THE DAVIS VALUE PORTFOLIO.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
o Franklin Small Cap Fund--Class 2
FRANKLIN ADVISERS, INC. IS THE INVESTMENT MANAGER FOR THIS PORTFOLIO OF THE
TEMPLETON VARIABLE PRODUCTS SERIES FUND.
JANUS ASPEN SERIES
o Growth Portfolio
o International Growth Portfolio
JANUS CAPITAL CORPORATION SERVES AS INVESTMENT ADVISER TO THE GROWTH PORTFOLIO
AND THE INTERNATIONAL GROWTH PORTFOLIO.
MFS VARIABLE INSURANCE TRUST
o Emerging Growth Series
o Research Series (long-term growth and future income)
MASSACHUSETTS FINANCIAL SERVICES COMPANY, A DELAWARE CORPORATION, IS THE
INVESTMENT ADVISER TO THE EMERGING GROWTH SERIES AND THE RESEARCH SERIES.
OCC ACCUMULATION TRUST
o Managed Portfolio (equity)
o Small Cap Portfolio
OPCAP ADVISORS IS THE INVESTMENT ADVISER TO THE MANAGED PORTFOLIO AND THE SMALL
CAP PORTFOLIO.
T. ROWE PRICE
o T. Rowe Price Equity Series, Inc., Equity Income Portfolio
o T. Rowe Price International Series, Inc., International Stock Portfolio
T. ROWE PRICE ASSOCIATES, INC. IS THE INVESTMENT MANAGER FOR THE EQUITY INCOME
PORTFOLIO AND ROWE PRICE-FLEMING INTERNATIONAL, INC. IS THE INVESTMENT MANAGER
FOR THE INTERNATIONAL STOCK PORTFOLIO.
WARBURG PINCUS TRUST
o Global Post-Venture Capital Portfolio
WARBURG PINCUS COUNSELORS, INC. SERVES AS INVESTMENT ADVISER AND ABBOTT CAPITAL
MANAGEMENT, L.P. SERVES AS SUB-INVESTMENT ADVISE FOR THAT PORTION OF THE
GLOBAL POST-VENTURE CAPITAL PORTFOLIO ALLOCATED TO PRIVATE LIMITED PARTNERSHIPS
OR OTHER INVESTMENT FUNDS.
- --------------------------------------------------------------------------------
13
<PAGE> 16
2:
WHAT INVESTMENT OPTIONS CAN I CHOOSE? CONTINUED
- --------------------------------------------------------------------------------
Except for the Prudential Series Fund Inc., we are paid by the fund or an
affiliate of each fund for administrative and other services that we provide.
The amount we receive is based on an annual percentage of the average assets of
Discovery Select invested in the fund held by the associated variable investment
option.
FIXED INTEREST-RATE OPTIONS
We offer three interest-rate options: a one-year fixed-rate option, a dollar
cost averaging fixed interest-rate option ("DCA Fixed Option"), and a
market-value adjustment option (not available in Maryland, Oregon or
Washington). We set a one year guaranteed annual interest rate that is always
available for the one-year fixed-rate option. For the DCA Fixed Option, the
interest rate is guaranteed for the applicable period of time for which
transfers are made. For the market-value adjustment option, we set a seven-year
guaranteed interest rate.
When you select one of these options, your payment will earn interest at
the established rate for the applicable interest rate period. A new interest
rate period is established every time you allocate or transfer money into a
fixed interest-rate option. You may have money allocated in more than one
interest rate period at the same time. This could result in your money earning
interest at different rates and each interest rate period maturing at a
different time. While these interest rates may change from time to time, the
minimum rate will never be less than 3.0%.
Payments that you apply to either of the fixed interest-rate options become
part of Pruco Lif's general assets. As a result, the strength of the interest
guarantees is based on the overall financial strength of Pruco Life. If Pruco
Life suffered a material financial set back, the ability of Pruco Life to meet
its financial obligations could be affected.
Market-Value Adjustment
If you transfer or withdraw assets or annuitize from the market-value
adjustment option before an interest rate period is over, the assets will be
subject to a market-value adjustment.The market-value adjustment may increase or
decrease the amount being withdrawn or transferred and may be substantial. The
adjustment, whether up or down will never be greater than 40%. The amount of the
market-value adjustment is based on the difference between the:
1) Guaranteed interest rate for the amount you are withdrawing or
transferring; and
2) Interest rate that is in effect on the date of the withdrawal or transfer.
The amount of time left in the interest rate period is also a factor. You
will find a detailed description of how the market-value adjustment is
calculated on page 33 of this prospectus. (For contracts issued in Pennsylvania,
the description is on page 35.)
DCA Fixed Option. You may allocate all or part of your first purchase payment
to the DCA Fixed Option. Under this option, you automatically transfer amounts
over a stated period (currently, six or twelve months) from the DCA Fixed
Option to the variable investment options you select. We will invest the assets
you allocate to the DCA Fixed Option in our general account until they are
trasferred. You may not transfer from other investment options to the DCA Fixed
Option. Currently, you may only allocate all or a portion of your initial
invested purchase payment to the DCA Fixed Option. In the future, we may permit
you to allocate subsequent purchase payments to the DCA Fixed Options as well
under certain circumstances.
If you choose the DCA Fixed Option, you must allocate a minimum of $5,000 to
it. The first periodic transfer will occur on the date you allocate your
purchase payment to the DCA Fixed Option. Subsequent transfers will occur on
the monthly anniversary of the first transfer. Currently, you may choose to
have the purchase payment allocated to the DCA Fixed Option transfer in either
six or twelve monthly installments, and you may not change that number after
you have chosen the DCA Fixed Option. (In the future, we may make available
other numbers of transfers and other transfer schedules - for example,
quarterly as well as monthly.) If you choose a 6-payment transfer schedule,
each transfer generally will equal 1/6th of the amount you allocated to the DCA
Fixed Option, and if you choose a 12-payment transfer schedule, each transfer
generally will equal 1/12th of the amount you allocated to the DCA Fixed
Option. In either case, the final transfer amount generally will also include
the credited interest. You may change at any time the variable investment
options into which to transfer the DCA Fixed Option assets. Transfers from the
DCA Fixed Option do not count toward the maximum number of free transfers
allowed under the contract.
If you make a withdrawal or have a fee assessed from your contract, and
all or part of that withdrawal or fee comes out of the DCA Fixed Option, we
will recalculate the periodic transfer amount to reflect the change. This
recalculation may include some or all of the interest credited to the date of
the next scheduled transfer. If a withdrawal or fee assessment reduces the
monthly transfer amount below $100, we will transfer the remaining balance in
the DCA Fixed Option on the next scheduled transfer date.
By investing amounts on a regular schedule instead of investing the total
amount at one time, the DCA Fixed Option may decrease the effect of market
fluctuations on the investment of your purchase payment. Of course, dollar cost
averaging cannot ensure a profit or protect against a loss in declining markets.
TRANSFERS AMONG OPTIONS
You can transfer money among the variable investment options and the fixed
interest-rate options. Your transfer request may be made by telephone or in
writing to the Prudential Annuity Service Center. Only two transfers per month
may be made by telephone. After that, all transfer requests must be in writing
with an original signature. We have procedures in place to confirm that
instructions received by telephone are genuine. We will not be liable for
following telephone instructions that we reasonably believe to be genuine. Your
transfer request will take effect at the end of the business day on which it was
received. Our business day usually closes, at 4:00 p.m. Eastern time.
YOU CAN MAKE TRANSFERS OUT OF A FIXED INTEREST-RATE OPTION OTHER THAN THE
DCA FIXED OPTION, ONLY DURING THE 30-DAY PERIOD FOLLOWING THE END OF AN INTEREST
RATE PERIOD. IF YOU TRANSFER MONEY FROM A MARKET-VALUE ADJUSTMENT OPTION AFTER
THE 30-DAY PERIOD HAS ENDED, THE MONEY WILL BE SUBJECT TO A MARKET-VALUE
ADJUSTMENT. TRANSFERS FROM THE DCA FIXED OPTION ARE MADE ON A PERIODIC BASIS FOR
THE PERIOD THAT YOU SELECT.
During the contract accumulation phase, you can make 12 transfers each
contract year, among the investment options, without charge. If you make more
than 12 transfers in one contract year, you will be charged $25 for each
additional transfer. (Dollar Cost Averaging and Auto-Rebalancing transfers do
not count toward the 12 free transfers per year.)
OTHER AVAILABLE FEATURES
DOLLAR COST AVERAGING FEATURE
The dollar cost averaging (DCA) feature is distinct from the DCA Option. It is
a feature which allows you to systematically transfer either a fixed dollar
amount or a percentage out of any variable investment option or the one-year
fixed interest-rate option and into any variable investment option(s). You can
transfer money to more than one variable investment option. The investment
option used for the transfers is designated as the DCA account. If this feature
is elected, your assets are not allocated to the DCA Option. You can have these
automatic transfers made from the DCA account monthly, quarterly, semiannually
or annually. By allocating amounts on a regular schedule instead of allocating
the total amount at one particular time, you may be less susceptible to the
impact of market fluctuations. Of course, there is no guarantee that dollar
cost averaging will ensure a profit or protect against a loss in declining
markets.
- --------------------------------------------------------------------------------
14
<PAGE> 17
Transfers must be at least $100 from your DCA account. After that,
transfers will continue automatically until the entire amount in your DCA
account has been transferred or until you tell us to discontinue the transfers.
If your DCA account balance drops below $100, the entire remaining balance of
the account will be transferred on the next transfer date. You can allocate
subsequent purchase payments to re-open the DCA account at any time.
Your transfers will be made on the last calendar day of each transfer
period you have selected, provided that the New York Stock Exchange is open on
that date. If the New York Stock Exchange is not open on a particular transfer
date, the transfer will take effect on the next business day.
Any transfers you make because of dollar cost averaging are not counted
toward the 12 free transfers you are allowed per year. This feature is available
only during the contract accumulation phase.
ASSET ALLOCATION PROGRAM
We recognize the value of having advice when deciding on the allocation of your
money. If you choose to participate in the Asset Allocation Program, your
financial professional will give you a questionnaire to complete that will help
determine a program that is appropriate for you. Your asset allocation will be
prepared based on your answers to the questionnaire. You will not be charged for
this service and you are not obligated to participate or to invest according to
program recommendations.
AUTO-REBALANCING
Once your money has been allocated among the variable investment options, the
actual performance of the investment options may cause your allocation to shift.
For example, an investment option that initially holds only a small percentage
of your assets could perform much better than another investment option. Over
time, this option could increase to a larger percentage of your assets than you
desire. You can direct us to automatically rebalance your assets to return to
your original allocation or to change allocations by selecting the
Auto-Rebalancing feature. The fixed interest-rate options and the DCA account
cannot participate in this feature.
Your rebalancing will be done monthly, quarterly, semiannually or annually
based on your choice. The rebalancing will be done on the last calendar day of
the period you have chosen, provided that the New York Stock Exchange is open on
that date. If the New York Stock Exchange is not open on that date, the
rebalancing will take effect on the next business day.
Any transfers you make because of Auto-Rebalancing are not counted toward
the 12 free transfers you are allowed per year. This feature is available only
during the contract accumulation phase. If you choose auto-rebalancing and
dollar cost averaging, auto-rebalancing will take place after the transfers from
your DCA account.
VOTING RIGHTS
We are the legal owner of the shares in the mutual funds associated with the
variable investment options. However, we vote the shares of the mutual funds
according to voting instructions we receive from contractowners. We will mail
you a proxy which is a form you need to complete and return to us to tell us how
you wish us to vote. When we receive those instructions, we will vote all of the
shares we own on your behalf in accordance with those instructions. We will
vote the shares for which we do not receive instructions, and any other shares
that we own, in the same proportion as the shares for which instructions are
received. We may change the way your voting instructions are calculated if it is
required by federal regulation.
SUBSTITUTION
We may substitute one or more of the mutual funds used by the variable
investment options. We may also cease to allow investments in existing funds. We
would do this only if events such as investment policy changes or tax law
changes make the mutual fund unsuitable. We would not do this without the
approval of the Securities and Exchange Commission and necessary state insurance
department approvals. You will be given specific notice in advance of any
substitution we intend to make.
- --------------------------------------------------------------------------------
15
<PAGE> 18
3:
WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE
INCOME PHASE? (ANNUITIZATION)
- --------------------------------------------------------------------------------
PAYMENT PROVISIONS
The annuitant can begin receiving annuity payments any time after the first
contract anniversary. (Maryland residents must wait until after the seventh
anniversary.) Annuity payments must begin no later than the contract anniversary
that coincides with or follows the annuitant's 90th birthday.
You may choose among the income plans described below at any time before
the annuity date. These plans are called annuity options. During the income
phase, all of the annuity options under this contract are fixed annuity options.
This means that your participation in the variable investment options ends on
the annuity date. If you have not selected an annuity option by the annuity
date, the Interest Payment Option (Option 3, described below) will automatically
be selected unless prohibited by applicable law.
ONCE THE ANNUITY PAYMENTS BEGIN, YOU CANNOT CHANGE THE ANNUITY OPTION.
OPTION 1
ANNUITY PAYMENTS FOR A FIXED PERIOD
Under this option, we will make equal payments for a period you choose, up to 25
years. The annuity payments may be made monthly, quarterly, semiannually, or
annually for as long as the annuitant is alive. If the annuitant dies during the
income phase, a lump sum payment will be made to the beneficiary. The amount of
the lump sum payment is determined by calculating the present value of the
unpaid future payments. This is done by using the interest rate used to compute
the actual payments. The interest rate used will always be at least 3.50% a
year. For payment periods of 10 years or more, we will waive any withdrawal
charge that otherwise would have been applied.
OPTION 2
LIFE ANNUITY WITH 120 PAYMENTS (10 YEARS) CERTAIN
Under this option, we will make annuity payments to the annuitant monthly,
quarterly, semiannually, or annually as long as the annuitant is alive. If the
annuitant dies before we have made 10 years worth of payments, we will pay the
beneficiary the present value of the remaining annuity payments in one lump sum
unless the annuitant has specifically instructed that the remaining monthly
annuity payments continue to be paid to the beneficiary. The present value of
the remaining annuity payments is calculated by using the interest rate used to
compute the amount of the original 120 payments. The interest rate used will
always be at least 3.50% a year.
OPTION 3
INTEREST PAYMENT OPTION
Under this option, you can choose to have us hold all or a portion of your
contract value to accumulate interest. You can receive interest payments on a
monthly, quarterly, semiannual, or annual basis or you can allow the interest to
accrue on your contract assets. If you have not selected an annuity option by
the annuity date, this is the option we will automatically select for you,
unless prohibited by applicable law. Under this option, we will pay you interest
at an effective rate of at least 3.0% a year.
This option is not available if your contract is held in an Individual
Retirement Account.
OPTION 4
OTHER ANNUITY OPTIONS
We currently offer a variety of other annuity options not described above. At
the time you choose to receive your annuity payments, we may make available to
you any of the fixed annuity options that are offered at your annuity date.
You should be aware that depending on your contract date and the annuity
option you choose, you may have to pay withdrawal charges.
- --------------------------------------------------------------------------------
16
<PAGE> 19
4:
WHAT IS THE
DEATH BENEFIT?
- --------------------------------------------------------------------------------
THE DEATH BENEFIT FEATURE PROTECTS THE VALUE OF THE CONTRACT FOR THE
BENEFICIARY.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued, unless you
change it at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the annuitant or last surviving
annuitant dies.
CALCULATION OF THE DEATH BENEFIT
If the annuitant (or the last surviving annuitant, if there are co-annuitants)
dies during the accumulation phase, we will, upon receiving appropriate proof of
death, pay a death benefit to the beneficiary designated by the contractowner.
If death is prior to age 80, the beneficiary will receive the greater of the
following:
o Current value of your contract (as of the time we receive appropriate proof
of death); or
o Guaranteed Minimum Death Benefit -- The Guaranteed Minimum Death Benefit is
the greater of:
1) The highest value of the contract on any contract anniversary date.
This is called the step-up value. Between anniversary dates, the
step-up value is only increased by additional purchase payments and
reduced proportionally by withdrawals; or
2) The "roll-up value" which is the total of all invested purchase
payments compounded daily at an effective annual rate of 5.0%, subject
to a 200% cap. Both the roll-up and the cap are reduced proportionally
by withdrawals.
If death occurs on or after age 80, the beneficiary will receive the
greater of: 1) the current contract value as of the date that due proof of
death is received, and 2) the Guaranteed Minimum Death Benefit as of age 80,
increased by additional purchase payments, and reduced proportionally by the
withdrawals. For this purpose, an annuitant is deemed to reach age 80 on the
contract anniversary on or following the annuitant's actual 80th birthday.
If the sole or older annuitant is age 80 or older at the time the contract
is issued, upon death, the beneficiary will receive the greater of: 1) current
contract value as of the date that due proof of death is received; and 2) the
total purchase payments reduced proportionally by withdrawals.
Here is an example of a proportional reduction:
If an owner withdrew 50% of a contract valued at $100,000 and if the
step-up value was $80,000, the new step-up value following the withdrawal would
be $40,000 or 50% of what it had been prior to the withdrawal.
If the contractowner and annuitant are not the same, the death benefit is
payable only in the event of the death of a sole annuitant or last surviving
annuitant, not the death of the contractowner.
Certain terms of this death benefit are limited in Oregon. This death
benefit was enhanced in January, 1998, to provide for the Guaranteed Minimum
Death Benefit. Certain contractowners must have elected an endorsement in order
for this enhanced death benefit to apply. See the Statement of Additional
Information (SAI) for details.
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5:
HOW CAN I PURCHASE A
DISCOVERY SELECT CONTRACT?
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PURCHASE PAYMENTS
A purchase payment is the amount of money you give us to purchase the contract.
The minimum purchase payment is $10,000. You can make additional purchase
payments of at least $1,000 or more at any time during the accumulation phase.
You must get our prior approval for any purchase payments over $2 million.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment among the
variable investment options and the fixed interest-rate options based on the
percentages you choose. The percentage of your allocation to a specific
investment option can range in whole percentages from 0% to 100%. If, after the
initial invested purchase payment, we receive a purchase payment without
allocation instructions, we will allocate the corresponding invested purchase
payment in the same proportion as your most recent purchase payment (unless you
directed us to allocate that purchase payment on a one-time-only basis). (If
you allocated all or part of your initial purchase payment to the DCA Fixed
Option and do not change your allocation instructions, we will treat your
allocation instructions for the DCA Fixed Option as part of your allocation
instructions for all subsequent purchase payments.) You may submit an
allocation change request at any time. Contact the Prudential Annuity Service
Center for details.
We will credit the initial purchase payments to your contract within two
business days from the day on which the payment is received at the Prudential
Annuity Service Center. Our business day usually closes, at 4:00 p.m. Eastern
time. If, however your first purchase payment is made without enough information
for us to set up your contract we may need to contact you to get the required
information. If we are not able to get this information within five business
days, we will either return your purchase payment or get your consent to
continue holding it until we receive the necessary information. We will
generally credit each subsequent purchase payment as of the business day we
receive it.
CALCULATING CONTRACT VALUE
The value of the variable portion of your contract will go up or down depending
on the investment performance of the variable investment option(s) you choose.
To determine the value of your contract, we use a unit of measure called an
accumulation unit. An accumulation unit works like a share of a mutual fund.
Every day we determine the value of an accumulation unit for each of the
variable investment options. We do this by:
1) Adding up the total amount of money allocated to a specific investment
option;
2) Subtracting from that amount insurance charges and any other applicable
charges; and
3) Dividing this amount by the number of outstanding accumulation units.
When you make a purchase payment, we credit your contract with accumulation
units relating to the variable investment options you have chosen. The number of
accumulation units credited to your contract is determined by dividing the
amount of the purchase payment allocated to an investment option by the unit
price of the accumulation unit for that investment option. We calculate the unit
price for each investment option after the New York Stock Exchange closes each
day and then credit your contract. The value of the accumulation units can
increase, decrease, or remain the same from day to day. The Accumulation Unit
Values chart provided on page 31 of this prospectus gives you more detailed
information about the accumulation units of the variable investment options.
We cannot guarantee that the value of your contract will increase or that
it will not fall below the amount of your total purchase payments. However, we
do guarantee a minimum interest rate of 3.0% a year on that portion of the
contract value allocated to the fixed interest-rate options.
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6:
WHAT ARE THE EXPENSES ASSOCIATED WITH THE
DISCOVERY SELECT CONTRACT?
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THERE ARE CHARGES AND OTHER EXPENSES ASSOCIATED WITH THE CONTRACT THAT REDUCE
THE RETURN ON YOUR INVESTMENT. THESE CHARGES AND EXPENSES ARE DESCRIBED BELOW.
INSURANCE CHARGES
Each day, we make a deduction for insurance charges. The insurance charges have
two parts:
1) Mortality and expense risk charge
2) Administrative expense charge
1) MORTALITY AND EXPENSE RISK CHARGE
The mortality risk charge is for assuming the risk that the annuitant(s) will
live longer than expected based on our life expectancy tables. When this
happens, we pay a greater number of annuity payments. The expense risk charge is
for assuming that the current charges will be insufficient in the future to
cover the cost of administering the contract.
The mortality and expense risk charge is equal, on an annual basis, to
1.25% of the daily value of the contract invested in the variable investment
options, after expenses have been deducted. This charge is not assessed against
amounts allocated to the fixed interest-rate options.
If the charges under the contract are not sufficient, then we will bear the
loss. We do, however, expect to profit from this charge. The mortality and
expense risk charge cannot be increased. Any profits made from this charge may
be used by us to pay for the costs of distributing the contracts.
2) ADMINISTRATIVE EXPENSE CHARGE
This charge is for the expenses associated with the administration of the
contract. The administration of the contract includes preparing and issuing the
contract, establishing and maintaining of contract records, issuing
confirmations and annual reports, personnel costs, legal and accounting fees,
filing fees, and systems costs.
This charge is equal, on an annual basis, to 0.15% of the daily value of
the contract invested in the variable investment options, after expenses have
been deducted.
ANNUAL CONTRACT FEE
During the accumulation phase, if your contract value is less than $50,000, we
will deduct $30 per contract year (this fee may differ in certain states). This
annual contract fee is used for administrative expenses and cannot be increased.
The $30 charge will be deducted proportionately from each of the contract's
investment options. This charge will also be deducted when you surrender your
contract if your contract value is less than $50,000.
WITHDRAWAL CHARGE
During the accumulation phase, you can make withdrawals from your contract. When
you make a withdrawal, money will be taken first from your purchase payments for
purposes of determining withdrawal charges. When your purchase payments have
been used up, then we will take the money from your earnings. You will not have
to pay any withdrawal charge when you withdraw your earnings.
The withdrawal charge is for the payment of the expenses involved in
selling and distributing the contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature and other
promotional activities. If the contract is sold under circumstances that reduce
the sales expenses, we may reduce or eliminate the withdrawal charge. For
example, a large group of individuals purchasing contracts or an individual who
already has a relationship with the company may receive such a reduction.
You can withdraw up to 10% of your total purchase payments each contract
year without paying a withdrawal charge. This amount is referred to as the
"charge-free amount." If any of the charge-free amount is not used during a
contract year, it will be carried over to the next contract year. During the
first seven contract years, if your withdrawal of purchase payments is more than
the charge-free amount, a withdrawal charge will be applied. This charge is
based on your contract date.
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6:
DISCOVERY SELECT CONTRACT EXPENSES CONTINUED
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The following table shows the percentage of withdrawal charges that would
apply:
PERCENTAGE OF APPLICABLE WITHDRAWAL CHARGES
- --------------------------------------------------------
During contract year 1 7%
During contract year 2 6%
During contract year 3 5%
During contract year 4 4%
During contract year 5 3%
During contract year 6 2%
During contract year 7 1%
After that 0%
Note: As of the beginning of the contract year, you may withdraw up to 10% of
the total purchase payments plus any charge-free amount carried over from the
previous contract year without charge. There is no withdrawal charge on any
withdrawals made under the Critical Care Access Option or on any amount used to
provide income under the Life Annuity with 120 payments (10 years) Certain
Option. Surrender charges are waived when a death benefit is paid. There will be
a reduction in the withdrawal charge for contracts issued to contractowners
whose age at issue is 84 and older.
CRITICAL CARE ACCESS
We will allow you to withdraw money from the contract and waive any withdrawal
and annual contract fee, if the annuitant or the last surviving co-annuitant (if
applicable) becomes confined to an eligible nursing home or hospital for a
period of at least three consecutive months. You would need to provide us with
proof of the confinement. If a physician has certified that the annuitant or
last surviving co-annuitant is terminally ill (has six months or less to live)
there will be no charge imposed for withdrawals. Critical Care Access is not
available in all states. This option is not available to the contractowner if he
or she is not the annuitant.
PREMIUM TAXES
Some states and/or municipalities charge premium taxes or similar taxes. We are
responsible for the payment of these taxes and will make a deduction from the
value of the contract to pay them. Some of these taxes are due when the contract
is issued, others are due when annuity payments begin. It is our current
practice not to impose a charge for these taxes until annuity payments begin. In
the few states that impose a tax, the current rates range up to 5.0%. If, in the
future, we are charged for additional taxes that are based on purchase payments,
that charge may be passed on to contractholders.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the date we
issue your contract (the contract date). If you make more than 12 transfers in a
year (excluding Dollar Cost Averaging and Auto-Rebalancing), we will deduct a
transfer fee of $25 for each additional transfer. The transfer fee will be
deducted proportionately from all the investment options involved in the
transfer. The transfer fee is deducted before the market-value adjustment, if
any is calculated.
COMPANY TAXES
We will pay the taxes on the earnings of the Separate Account. We are not
currently charging the Separate Account for taxes. We will periodically review
the issue of charging the Separate Account for these taxes, and may impose such
a charge in the future.
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7:
HOW CAN I
ACCESS MY MONEY?
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YOU CAN ACCESS YOUR MONEY BY:
O MAKING A WITHDRAWAL (EITHER PARTIAL OR COMPLETE); OR
O ELECTING TO RECEIVE ANNUITY PAYMENTS DURING THE INCOME PHASE.
YOU CAN MAKE WITHDRAWALS ONLY DURING THE ACCUMULATION PHASE
When you make a complete withdrawal, you will receive the value of your contract
on the day you made the withdrawal, less any applicable charges. We will
calculate the value of your contract, and charges, if any, as of the date we
receive your request in good order at the Prudential Annuity Service Center.
Unless you tell us otherwise, any partial withdrawal will be made
proportionately from all of the affected investment options and interest-rate
options you have selected. You will need our consent to make a partial
withdrawal if the requested withdrawal is less than $500.
We will generally pay the withdrawal amount, less any required tax
withholding, within seven days after we receive a properly completed withdrawal
request. We will deduct applicable charges, and apply a market-value adjustment,
if any, from the assets in your contract.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE. FOR A MORE COMPLETE EXPLANATION, SEE SECTION 8 OF THIS
PROSPECTUS AND THE TAX DISCUSSION IN THE STATEMENT OF ADDITIONAL INFORMATION.
AUTOMATED WITHDRAWALS
We offer an Automated Withdrawal feature. This feature enables you to receive
periodic withdrawals in monthly, quarterly, semiannual or annual intervals. We
will process your withdrawals at the end of the business day at the intervals
you specify. We will continue at these intervals until you tell us otherwise.
You can make withdrawals from any designated investment option or
proportionally from all investment options. Market-value adjustments may apply.
Withdrawal charges may be deducted if the withdrawals in any contract year are
more than the charge-free amount. The minimum automated withdrawal amount you
can make is $250.
INCOME TAXES AND A 10% PENALTY TAX ON EARNINGS MAY APPLY TO AUTOMATED
WITHDRAWALS AS WELL AS ANY OTHER WITHDRAWALS MADE FROM YOUR CONTRACT.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone payments made in connection with
withdrawals or transfers for any period when:
o The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
o Trading on the New York Stock Exchange is restricted;
o An emergency exists during which sales of shares of the mutual funds are
not reasonable or we cannot reasonably value the accumulation units; or
o The Securities and Exchange Commission, by order, permits suspension or
postponement of payments for the protection of owners.
We expect to pay the amount of any withdrawal or transfer made from the
interest-rate options promptly upon request.
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8:
WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE
DISCOVERY SELECT CONTRACT?
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The tax considerations associated with the Discovery Select contract vary
depending on whether the contract is (i) owned by an individual and not
associated with a tax-favored retirement plan, or (ii) held under a tax-favored
retirement plan. We discuss the tax considerations for these categories of
contracts below. The discussion is general in nature and describes only federal
income tax law (not state or other tax laws). It is based on current law and
interpretations, which may change. It is not intended as tax advice. A qualified
tax adviser should be consulted for complete information and advice.
CONTRACTS OWNED BY INDIVIDUALS (NOT ASSOCIATED WITH TAX FAVORED RETIREMENT
PLANS)
TAXES PAYABLE BY YOU
We believe the contract is an annuity contract for tax purposes.
Accordingly, as a general rule, you should not pay any tax until you receive
money under the contract.
Generally, annuity contracts issued by the same company (and affiliates) to you
during the same calendar year must be treated as one annuity contract for
purposes of determining the amount subject to tax under the rules described
below.
TAXES ON WITHDRAWALS AND SURRENDER
If you make a withdrawal from your contract or surrender it before annuity
payments begin, the amount you receive will be taxed as ordinary income, rather
than as return of purchase payments, until all gain has been withdrawn.
If you assign all or part of your contract as collateral for a loan, the
part assigned will be treated as a withdrawal. Also, if you elect the interest
payment option, you will be treated, for tax purposes, as surrendering your
contract.
If you transfer your contract for less than full consideration, such as by
gift, you will trigger tax on the gain in the contract. This rule does not apply
if you transfer the contract to your spouse or incident to divorce.
TAXES ON ANNUITY PAYMENTS
A portion of each annuity payment you receive will be treated as a partial
return of your purchase payments and will not be taxed. The remaining portion
will be taxed as ordinary income. Generally, the nontaxable portion is
determined by multiplying the annuity payment you receive by a fraction, the
numerator of which is your purchase payments (less any amounts previously
received tax-free) and the denominator of which is the total expected payments
under the contract.
After the full amount of your purchase payments have been recovered
tax-free, the full amount of the annuity payments will be taxable. If annuity
payments stop due to the death of the annuitant before the full amount of your
purchase payments have been recovered, a tax deduction is allowed for the
unrecovered amount.
PENALTY TAXES ON WITHDRAWALS AND ANNUITY PAYMENTS
Any taxable amount you receive under your contract may be subject to a 10
percent penalty tax. Amounts are not subject to this penalty tax if:
o the amount is paid on or after you reach age 59-1/2 or die;
o the amount received is attributable to your becoming disabled;
o the amount paid or received is in the form of level annuity payments not
less frequently than annually under a lifetime annuity; and
o the amount received is paid under an immediate annuity contract (in which
annuity payments begin within one year of purchase).
If you modify the lifetime annuity payment stream (other than as a result
of death or disability) before you reach age 59-1/2 (or before the end of the
five year period beginning with the first payment and ending after you reach age
59-1/2), your tax for the year of modification will be increased by the penalty
tax that would have been imposed without the exception, plus interest for the
deferral.
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TAXES PAYABLE BY BENEFICIARIES
Generally, the same tax rules apply to amounts received by your beneficiary as
those set forth above with respect to you. The election of an annuity payment
option instead of a lump sum death benefit may defer taxes. Certain minimum
distribution requirements apply upon your death, as discussed further below.
WITHHOLDING OF TAX FROM DISTRIBUTIONS
Taxable amounts distributed from your annuity contracts are subject to tax
withholding. You may generally elect not to have tax withheld from your
payments. These elections must be made on the appropriate forms that we provide.
ANNUITY QUALIFICATION DIVERSIFICATION AND INVESTOR CONTROL In order to qualify
for the tax rules applicable to annuity contracts described above, the contract
must be an annuity contract for tax purposes. This means that the assets
underlying the annuity contract must be diversified, according to certain rules.
It also means that we, and not you as the contract-owner, must have sufficient
control over the underlying assets to be treated as the owner of the underlying
assets for tax purposes. We believe these rules, which are further discussed in
the Statement of Additional Information, will be met.
REQUIRED DISTRIBUTIONS UPON YOUR DEATH Upon your death (or the death of a joint
owner, if earlier), certain distributions must be made under the contract. The
required distributions depend on whether you die on or before you start taking
annuity payments under the contract or after you start taking annuity payments
under the contract.
If you die on or after the annuity date, the remaining portion of the
interest in the contract must be distributed at least as rapidly as under the
method of distribution being used as of the date of death.
If you die before the annuity date, the entire interest in the contract
must be distributed within 5 years after the date of death. However, if an
annuity payment option is selected by your designated beneficiary and if annuity
payments begin within 1 year of your death, the value of the contract may be
distributed over the beneficiary's life or a period not exceeding the
beneficiary's life expectancy. Your designated beneficiary is the person to whom
ownership of the contract passes by reason of death, and must be a natural
person.
If any portion of the contract is payable to (or for the benefit of) your
surviving spouse, such portion of the contract may be continued with your spouse
as the owner.
CHANGES IN THE CONTRACT We reserve the right to make any changes we deem
necessary to assure that the contract qualifies as an annuity contract for tax
purposes. Any such changes will apply to all contractowners and you will be
given notice to the extent feasible under the circumstances.
Additional Information
You should refer to the Statement of Additional Information if:
o The contract is held by a corporation or other entity instead of by an
individual or as agent for an individual.
o Your contract was issued in exchange for a contract containing purchase
payments made before August 14, 1982.
o You are a nonresident alien.
o You transfer your contract to, or designate, a beneficiary who is either
37-1/2 years younger than you or a grandchild.
o You wish additional information on withholding taxes.
CONTRACTS HELD BY TAX FAVORED PLANS
Currently, the contract may be purchased for use in connection with individual
retirement accounts and annuities ("IRAs") which are subject to Sections 408(a),
408(b) and 408A of the Code. At some future time we may allow the contract to be
purchased in connection with other retirement arrangements which are also
entitled to favorable federal income tax treatment ("tax favored plans"). These
other tax favored plans include:
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8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY
SELECT CONTRACT CONTINUED
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o Simplified employee pension plans ("SEPs") under Section 408(k) of the
Code;
o Saving incentive match plans for employees-IRAs ("SIMPLE-IRAs") under
Section 408(p) of the Code; and
o Tax-deferred annuities ("TDAs") under Section 403(b) of the Code.
This description assumes that (i) we will be offering this to both IRA and
non-IRA tax favored plans, and (ii) you have satisfied the requirements for
eligibility for these products.
You should be aware that tax favored plans such as IRAs generally provide tax
deferral regardless whether they invest in annuity contracts. This means that
when a tax favored plan invests in an annuity contract, it generally does not
result in any additional tax deferral benefits.
TYPES OF TAX FAVORED PLANS
IRAS If you buy a contract for use as an IRA, we will provide you a copy of the
prospectus and the contract. The "IRA Disclosure Statement" on page 37 contains
information about eligibility, contribution limits, tax particulars and other
IRA information. In addition to this information (some of which is summarized
below), the IRS requires that you have a "free look" after making an initial
contribution to the contract. During this time, you can cancel the contract by
notifying us in writing, and we will refund all of the purchase payments under
the contract (or, if greater, the amount credited under the contract, calculated
as of the valuation period that we receive this cancellation notice).
Contributions Limits/Rollovers: Because of the way the contract is
designed, you may only purchase a contract for an IRA in connection with a
"rollover" of amounts from a qualified retirement plan. You must make a minimum
initial payment of $10,000 to purchase a contract. This minimum is greater than
the maximum amount of any annual contribution you may make to an IRA (which is
generally $2,000/year). The "rollover" rules under the Code are fairly
technical; however, an individual (or his or her surviving spouse) may generally
"roll over" certain distributions from tax favored retirement plans (either
directly or within 60 days from the date of these distributions) if he or she
meets the requirements for distribution. Once you buy the contract, you can make
regular IRA contributions under the contract (to the extent permitted by law).
However, if you make such regular IRA contributions, you should note that you
will not be able to treat the contract as a "conduit IRA," which means that you
will not be able subsequently to "roll over" the contract funds into another
Section 401(a) plan or TDA (although you may be able to transfer the funds to
another IRA).
Required Provisions: Contracts that are IRAs (or endorsements that are part
of the contract) must contain certain provisions:
o You, as owner of the contract, must be the "annuitant" under the contract
(except in certain cases involving the division of property under a decree
of divorce);
o Your rights as owner are non-forfeitable;
o You cannot sell, assign or pledge the contract, other than to Pruco Life;
o The annual premium you pay cannot be greater than $2,000 (which does not
include any rollover amounts);
o The date on which annuity payments must begin cannot be later than the
April 1st of the calendar year after the calendar year you turn age 70-1/2;
and
o Death and annuity payments must meet "minimum distribution requirements"
(described below).
Usually, the full amount of any distribution from an IRA (including a
distribution from this contract) which is not a rollover is taxable. As taxable
income, these distributions are subject to the general tax withholding rules
described earlier. In addition to this normal tax liability, you may also be
liable for the following, depending on your actions:
o A 10% "early distribution penalty" (described below);
o Liability for "prohibited transactions" if you, for example, borrow against
the value of an IRA; or
o Failure to take a minimum distribution (also generally described below).
SEPS SEPs are a variation on a standard IRA, and contracts issued to a SEP must
satisfy the same general requirements described under IRAs (above). There are,
however, some differences:
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o If you participate in a SEP, you generally do not include into income any
employer contributions made to the SEP on your behalf up to the lesser of
(a) $30,000 or (b) 15% of the employee's earned income (not including the
employer contribution amount as "earned income" for these purposes).
However, for these purposes, compensation in excess of certain limits
established by the IRS will not be considered. In 2000, this limit is
$170,000;
o SEPs must satisfy certain participation and nondiscrimination requirements
not generally applicable to IRAs; and
o Some SEPs for small employers permit salary deferrals (up to $10,500 in
2000) with the employer making these contributions to the SEP. However, no
new "salary reduction" or "SAR-SEPs" can be established after 1996.
You will also be provided the same information, and have the same "free
look" period, as you would have if you were purchasing the contract for a
standard IRA.
SIMPLE-IRAs SIMPLE-IRAs are another variation on the standard IRA, available to
small employers (under 100 employees, on a "controlled group" basis) that do not
offer other tax favored plans. SIMPLE-IRAs are also subject to the same basic
IRA requirements with the following exceptions:
o Participants in a SIMPLE-IRA may contribute up to $6,000 (in 2000,
indexed), as opposed to the usual $2,000 limit, and employer contributions
may also be provided as either a match (up to 3% of your compensation; and
o SIMPLE -IRAs are not subject to the SEP nondiscrimination rules.
ROTH IRAs Congress amended the Code in 1997 to add a new Section 408A, creating
the "Roth IRA" as a new type of individual retirement plan. Like standard IRAs,
income within a Roth IRA accumulates tax-free, and contributions are subject to
specific limits. Roth IRAs have, however, the following differences:
o Contributions to a Roth IRA cannot be deducted from your gross income;
o "Qualified distributions" (generally, held for 5 years and payable on
account of death, disability, attainment of age 59-1/2, or first
time-homebuyer) from Roth IRAs are excludable from your gross income; and
o If eligible, you may make contributions to a Roth IRA after attaining age
70-1/2, and distributions are not required to begin upon attaining such age
or at any time thereafter.
Because the contract's minimum initial payment of $10,000 is greater than
the maximum annual contribution permitted to be made to a Roth IRA (generally,
$2,000 less any contributions to a traditional IRA), you may purchase a contract
as a Roth IRA only in connection with a "rollover" or "conversion" of the
proceeds of another traditional IRA, conduit IRA, SEP, SIMPLE-IRA, or Roth IRA.
The Code permits persons who meet certain income limitations (generally,
adjusted gross income under $100,000), and who receive certain qualifying
distributions from such non-Roth IRAs, to directly rollover or make, within 60
days, a "rollover" of all or any part of the amount of such distribution to a
Roth IRA which they establish. This conversion triggers current taxation (but is
not subject to a 10% early distribution penalty). Once the contract has been
purchased, regular Roth IRA contributions will be accepted to the extent
permitted by law.
TDAs You may own TDAs generally if you are either an employer or employee of a
tax-exempt organization (as defined under Code Section 501(c)(3)) or a public
educational organization, you may make contributions to a TDA so long as the
employee's rights to the annuity are nonforfeitable. Contributions to a TDA, and
any earnings, are not taxable until distribution. You may also make
contributions to a TDA under a salary reduction agreement, generally up to a
maximum of $10,500 (2000, indexed). Further, you may roll over TDA amounts to
another TDA or an IRA.
A contract may only qualify as a TDA if distributions (other than
"grandfathered" amounts held as of
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TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY
SELECT CONTRACT CONTINUED
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December 31, 1988) may be made only on account of:
o Your attainment of age 59-1/2;
o Your severance of employment;
o Your death;
o Your total and permanent disability; OR
o Hardship (under limited circumstances, and only related to salary deferrals
and any earnings attributable to these amounts).
In any event, you must begin receiving distributions from your TDA by April
1st of the calendar year after the calendar year you turn age 70-1/2 or retire,
whichever is later.
These distribution limits do not apply either to transfers or exchanges of
investments under the contract, or to any "direct transfer" of your interest in
the contract to another TDA or to a mutual fund "custodial account" described
under Code Section 403(b)(7).
Employer contributions to TDAs are subject to the same general
contribution, nondiscrimination, and minimum participation rules applicable to
"qualified" retirement plans.
MINIMUM DISTRIBUTION OPTION
If you hold the contract under an IRA or other tax favored plan, you can
satisfy the IRS minimum distribution requirements described above (generally,
distribution after age 70-1/2) under the contract without either annuitizing or
"cash surrendering" a portion of the contract. You, as owner of the contract,
can select either a "calculation" or "recalculation" method to determine the
minimum distribution. We will send you a check for the minimum distribution
amount, less any other partial withdrawals that you made during the year. More
information on the mechanics of this calculation is available on request.
PENALTY FOR EARLY WITHDRAWALS
You may owe a 10% penalty tax to the taxable part of distributions received from
an IRA, SEP, SIMPLE-IRA (which may increase to 25%), Roth IRA, TDA or qualified
retirement plan before you attain age 59-1/2. There are only limited exceptions
to this tax, and you should consult your tax adviser for further details.
WITHHOLDING
The Code requires a mandatory 20% federal income tax withholding for certain
distributions from a TDA or qualified retirement plan, unless the distribution
is an eligible rollover contribution that is "directly" rolled into another
qualified plan, IRA (including the IRA variations described above) or TDA.. For
all other distributions, unless you elect otherwise, we will withhold federal
income tax from the taxable portion of such distribution at an appropriate
percentage. The rate of withholding on annuity payments where no mandatory
withholding is required is determined on the basis of the withholding
certificate that you file with us. If you do not file a certificate, we will
automatically withhold federal taxes on the following basis:
o For any annuity payments not subject to mandatory withholding, you will
have taxes withheld by us as if you are a married individual, with 3
exemptions; and
o For all other distributions, you will be withheld at a 10% rate.
We will provide you with forms and instructions concerning the right to
elect that no amount be withheld from payments in the ordinary course. However,
you should know that, in any event, you are liable for payment of federal income
taxes on the taxable portion of the distributions, and you should consult with
your tax advisor to find out more information on your potential liability if you
fail to pay such taxes.
ERISA DISCLOSURE/REQUIREMENTS
ERISA (the "Employee Retirement Income Security Act of 1974") and the Code
prevents a fiduciary and other "parties in interest" with respect to a plan
(and, for these purposes, an IRA would also constitute a "plan") from receiving
any benefit from any party dealing with the plan, as a result of the sale of the
contract Administrative exemptions under ERISA generally permit the sale of
insurance/annuity products to plans, provided that certain information is
disclosed to the person purchasing the contract. This information has to do pri-
- --------------------------------------------------------------------------------
26
<PAGE> 29
- --------------------------------------------------------------------------------
marily with the fees, charges, discounts and other costs related to the
contract, as well as any commissions paid to any agent selling the contract.
Information about any applicable fees, charges, discounts, penalties or
adjustments may be found under "What Are the Expenses Associated with the
Discovery Select Contract" starting on page 19.
Information about sales representatives and commissions may be found under
"Other Information" and "Sale and Distribution of the Contract" on page 28.
In addition, other relevant information required by the exemptions is
contained in the contract and accompanying documentation. Please consult your
tax advisor if you have any additional questions.
ADDITIONAL INFORMATION
For additional information about the requirements of federal tax law applicable
to tax favored plans, see the "IRA Disclosure Statement" on page 37.
- --------------------------------------------------------------------------------
27
<PAGE> 30
9:
OTHER
INFORMATION
- --------------------------------------------------------------------------------
PRUCO LIFE INSURANCE COMPANY
Pruco Life Insurance Company is a stock life insurance company organized in 1971
under the laws of the State of Arizona. Pruco Life is licensed to sell life
insurance and annuities in the District of Columbia, Guam and in all states
except New York and therefore is subject to the insurance laws and regulations
of all the jurisdictions where it is licensed to do business. Pruco Life is a
wholly-owned subsidiary of The Prudential Life Insurance Company of America
(Prudential), a mutual insurance company founded in 1875 under the laws of the
State of New Jersey.
Pruco Life publishes annual and quarterly reports that are filed with the
SEC. These reports contain financial information about Pruco Life that is
annually audited by independent accountants. The most recent annual report is
contained in the SAI. While Pruco Life's annual report is not ordinarily mailed
to contractholders, you can obtain a copy at no cost by calling us at our number
listed on the cover. This information, together with all the more current
reports filed with the SEC as required by section 15 of the Exchange Act of
1934, is legally a part of this prospectus.
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
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. Prudential is working toward completing
this process in 2001 and currently expects adoption by the Board of Directors to
take place in the latter part of 2000. However, there is no certainty that the
demutualization will be completed in this timeframe or that the necessary
approvals will be obtained. Also it is possible that after careful review,
Prudential could decide not to demutualize or could decide to delay its plans.
The plan of reorganization, which has not been fully 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 types,
amounts and issue years of the policies. As a general rule, owners of
Prudential-issued insurance policies and annuity contracts would be eligible,
provided that their policies were in force on the date Prudential's Board of
Directors adopted a plan of reorganization, 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
contractholders of Prudential's subsidiaries. This does not constitute a
proposal, offer, solicitation or recommendation regarding any plan of
reorganization that may be proposed or a recommendation regarding the ownership
of any stock that could be issued in connection with any such demutualization.
THE SEPARATE ACCOUNT
We have established a separate account, the Pruco Life Flexible Premium Variable
Annuity Account (Separate Account), to hold the assets that are associated with
the contracts. The Separate Account was established under Arizona law on June
16, 1995, and is registered with the U.S. Securities and Exchange Commission
under the Investment Company Act of 1940, as a unit investment trust, which is a
type of investment company. The assets of the Separate Account are held in the
name of Pruco Life and legally belong to us. These assets are kept separate from
all of our other assets and may not be charged with liabilities arising out of
any other business we may conduct. More detailed information about Pruco Life,
including its audited consolidated financial statements, is provided in the
Statement of Additional Information.
SALE AND DISTRIBUTION OF THE CONTRACT
Prudential Investment Management Services LLC ("PIMS"), 100 Mulberry Street,
Newark, New Jersey 07102-4077, acts as the distributor of the contracts. PIMS is
a wholly-owned subsidiary of Prudential and is a limited liability corporation
organized under Delaware law in 1996. It is a registered broker-dealer under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Commissions for the sales of contracts are paid to
Prudential representatives and to other independent broker-dealers who sell the
contracts, and do not reduce the amount of your investment.
- --------------------------------------------------------------------------------
28
<PAGE> 31
- --------------------------------------------------------------------------------
Registered representatives of independent broker-dealers may be paid on a
different basis than those affiliated with PIMS.
ASSIGNMENT
You can assign the contract at any time during your lifetime. We will not be
bound by the assignment until we receive written notice. We will not be liable
for any payment or other action we take in accordance with the contract if that
action occurs before we receive notice of the assignment. An assignment, like
any other change in ownership, may trigger a taxable event.
If the contract is issued under a qualified plan, there may be limitations
on your ability to assign the contract. For further information please speak to
your financial professional.
FINANCIAL STATEMENTS
The financial statements of the Separate Account associated with Discovery
Select are included in the Statement of Additional Information.
- --------------------------------------------------------------------------------
29
<PAGE> 32
9:
OTHER INFORMATION CONTINUED
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Contents:
o Company
o Experts
o Litigation
o Legal Opinions
o Principal Underwriter
o Determination of Accumulation Unit Values
o Performance Information
o Comparative Performance Information
o Further Information about the Death Benefit
o Federal Tax Status
o Financial Information
- --------------------------------------------------------------------------------
30
<PAGE> 33
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES: AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
PRUDENTIAL DIVERSIFIED BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/7/96* to 12/31/97 $1.03731 $1.06033 6,007,104
1/1/97 to 12/31/97 $1.06033 $1.13525 83,725,723
1/1/98 to 12/31/98 $1.13525 $1.19977 279,253,272
1/1/99 to 12/31/99 $1.19977 $1.17457 462,776,279
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
1/1/99 to 12/31/99 $0.00000 $1.05128 102,284,285
PRUDENTIAL EQUITY INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.13494 $1.23339 2,784,921
1/1/97 to 12/31/97 $1.23339 $1.66167 99,533,257
1/1/98 to 12/31/98 $1.66167 $1.59960 254,746,617
1/1/99 to 12/31/99 $1.59960 $1.77516 278,847,271
PRUDENTIAL EQUITY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.13479 $1.20807 8,287,181
1/1/97 to 12/31/97 $1.20807 $1.48518 134,944,417
1/1/98 to 12/31/98 $1.48518 $1.60144 280,479,415
1/1/99 to 12/31/99 $1.60144 $1.77642 365,751,430
PRUDENTIAL GLOBAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.14330 $1.19505 1,375,156
1/1/97 to 12/31/97 $1.19505 $1.26079 18,580,228
1/1/98 to 12/31/98 $1.26079 $1.55516 34,899,069
1/1/99 to 12/31/99 $1.55516 $2.27423 63,210,475
PRUDENTIAL HIGH YIELD BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.11250 $1.12263 8,231,178
1/1/97 to 12/31/97 $1.12263 $1.25972 84,952,656
1/1/98 to 12/31/98 $1.25972 $1.21296 227,901,703
1/1/99 to 12/31/99 $1.21296 $1.25119 286,794,531
PRUDENTIAL MONEY MARKET PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.03576 $1.04505 16,621,393
1/1/97 to 12/31/97 $1.04505 $1.08688 80,833,415
1/1/98 to 12/31/98 $1.08688 $1.12985 196,092,083
1/1/99 to 12/31/99 $1.12985 $1.16977 331,274,925
PRUDENTIAL JENNISON PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.12169 $1.13943 4,882,616
1/1/97 to 12/31/97 $1.13943 $1.48006 72,354,119
1/1/98 to 12/31/98 $1.48006 $2.00851 209,542,146
1/1/99 to 12/31/99 $2.00651 $2.81446 389,581,022
PRUDENTIAL SMALL CAPITALIZATION STOCK PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
9/1/98* to 12/31/98 $1.02621 $1.25353 6,947,511
1/1/99 to 12/31/99 $1.25353 $1.39319 36,672,909
PRUDENTIAL STOCK INDEX PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.07837 $1.13652 7,481,300
1/1/97 to 12/31/97 $1.13652 $1.48876 115,667,746
1/1/98 to 12/31/98 $1.48876 $1.88540 261,786,090
1/1/99 to 12/31/99 $1.88540 $2.24149 413,343,040
PRUDENTIAL 20/20 FOCUS PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
1/1/99 to 12/31/99 $1.05128 $1.17842 50,083,559
AIM VI GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00065 $1.03757 3,408,550
1/1/97 to 12/31/97 $1.03757 $1.28644 32,365,952
1/1/98 to 12/31/98 $1.28644 $1.61976 59,407,686
1/1/99 to 12/31/99 $1.61976 $2.14458 93,248,281
AIM VI VALUE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00223 $1.04935 4,033,864
1/1/97 to 12/31/97 $1.04935 $1.27997 37,009,785
1/1/98 to 12/31/98 $1.27997 $1.67125 70,530,542
1/1/99 to 12/31/99 $1.67125 $2.14096 159,478,282
AMERICAN CENTURY VP VALUE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
9/1/98* to 12/31/98 $1.02098 $1.17305 3,082,973
1/1/99 to 12/31/99 $1.17305 $1.14715 25,545,686
THIS CHART CONTINUES ON THE NEXT PAGE
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE> 34
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES (CONTINUED): AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
FRANKLIN SMALL CAP INVESTMENTS FUND - CLASS 2
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9/1/98* to 12/31/98 $1.00945 $1.24477 2,820,341
1/1/99 to 12/31/99 $1.24477 $2.14040 21,301,323
JANUS ASPEN SERIES GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00191 $1.00830 5,459,309
1/1/97 to 12/31/97 $1.00830 $1.22056 40,236,135
1/1/98 to 12/31/98 $1.22056 $1.63278 70,344,877
1/1/99 to 12/31/99 $1.63278 $2.31856 156,489,738
JANUS ASPEN SERIES INTN'L GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00130 $1.05349 5,902,196
1/1/97 to 12/31/97 $1.05349 $1.23121 63,737,492
1/1/98 to 12/31/98 $1.23121 $1.42337 95,669,051
1/1/99 to 12/31/99 $1.42337 $2.55865 133,606,831
MFS EMERGING GROWTH SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00860 $0.95812 5,755,823
1/1/97 to 12/31/97 $0.95812 $1.15186 44,342,700
1/1/98 to 12/31/98 $1.15186 $1.52386 96,930,075
1/1/99 to 12/31/99 $1.52386 $2.65585 142,181,941
MFS RESEARCH SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00228 $1.02610 2,727,174
1/1/97 to 12/31/97 $1.02610 $1.21695 31,409,623
1/1/98 to 12/31/98 $1.21695 $1.48048 50,551,268
1/1/99 to 12/31/99 $1.48048 $1.81149 58,852,725
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $0.99909 $1.05185 8,643,614
1/1/97 to 12/31/97 $1.05185 $1.26868 144,784,302
1/1/98 to 12/31/98 $1.26868 $1.34022 302,639,179
1/1/99 to 12/31/99 $1.34022 $1.38780 321,473,248
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $0.99623 $1.05106 2,345,893
1/1/97 to 12/31/97 $1.05106 $1.26710 36,276,987
1/1/98 to 12/31/98 $1.26710 $1.13668 68,479,356
1/1/99 to 12/31/99 $1.13668 $1.10051 70,710,730
T. ROWE PRICE EQUITY INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $0.99996 $1.04885 6,578,342
1/1/97 to 12/31/97 $1.04885 $1.33212 65,481,114
1/1/98 to 12/31/98 $1.33212 $1.43277 110,131,073
1/1/99 to 12/31/99 $1.43277 $1.46563 129,059,108
T. ROWE PRICE INTN'L SERIES - INTN'L STOCK PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00159 $1.03988 2,951,074
1/1/97 to 12/31/97 $1.03988 $1.05690 22,039,049
1/1/98 to 12/31/98 $1.05690 $1.20747 29,923,449
1/1/99 to 12/31/99 $1.20747 $1.58765 37,353,154
WARBURG PINCUS TRUST GLOBAL POST-VENTURE CAPITAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
10/7/96* to 12/31/97 $1.00587 $0.95745 1,786,115
1/1/97 to 12/31/97 $0.95745 $1.07018 11,039,843
1/1/98 to 12/31/98 $1.07018 $1.12410 18,649,002
1/1/99 to 12/31/99 $1.12410 $1.81263 22,673,902
* Commencement of Business
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE> 35
MARKET-VALUE
ADJUSTMENT FORMULA
- --------------------------------------------------------------------------------
MARKET-VALUE ADJUSTMENT FORMULA
WITH RESPECT TO RESIDENTS OF STATES, OTHER THAN PENNSYLVANIA, IN WHICH DISCOVERY
SELECT IS BEING OFFERED. WITH RESPECT TO RESIDENTS OF PENNSYLVANIA, SEE PAGE 35.
THE ADJUSTMENT INVOLVES THREE AMOUNTS
The Market-Value Adjustment, which is applied to withdrawals and transfers
made at any time other than the 30-day period following the end of an interest
rate period, involves three amounts:
1) The number of whole months remaining in the existing interest rate period.
2) The guaranteed interest rate.
3) The interest rate that Pruco Life declares for a duration of one year
longer than the number of whole years remaining on the existing cell being
withdrawn from.
STATED AS A FORMULA, THE MARKET VALUE IS EQUAL TO:
(M/12) X (R-C)
NOT TO EXCEED +0.40 OR BE LESS THAN -0.40; WHERE,
- --------------------------------------------------------------------------------
M = the number of whole months (not to be less than one) remaining in the
interest-rate period.
R = the Contract's guaranteed interest-rate expressed as a decimal. Thus 6.2%
is converted to 0.062.
C = the interest-rate, expressed as a decimal, that Pruco Life declares for a
duration equal to the number of whole years remaining in the present
interest-rate period, plus 1 year as of the date the request for a
withdrawal or transaction is received.
- --------------------------------------------------------------------------------
The Market-Value Adjustment is then equal to the Market Value Factor multiplied
by the amount subject to a Market-Value Adjustment.
STEP BY STEP
THE STEPS BELOW EXPLAIN HOW A MARKET-VALUE ADJUSTMENT IS CALCULATED.
STEP 1: Divide the number of whole months left in the existing interest rate
period (not to be less than one) by 12.
STEP 2: Divide the interest rate Pruco Life declares on the date the request for
withdrawal or transfer is received for a duration of years equal to the whole
number of years determined in Step 1, plus 1 additional year. Subtract this
interest rate from the guaranteed interest rate. The result could be negative.
STEP 3: Multiply the results of Step 1 and Step 2. Again, the result could be
negative. If the result is less than -0.4, use the value -0.4. If the result is
in between -0.4 and 0.4, use the actual value. If the result is more than 0.4,
use the value 0.4.
STEP 4: Multiply the result of Step 3 (which is the Market Value Factor) by the
value of the amount subject to a Market-Value Adjustment. The result is the
Market-Value Adjustment.
STEP 5: The result of Step 4 is added to the interest cell. If the Market-Value
Adjustment is positive, the interest cell will go up in value. If the
Market-Value Adjustment is negative, the interest cell will go down in value.
DEPENDING UPON WHEN THE WITHDRAWAL REQUEST IS MADE, A WITHDRAWAL CHARGE MAY
APPLY.
THE FOLLOWING EXAMPLE WILL ILLUSTRATE THE APPLICATION OF A MARKET-VALUE
ADJUSTMENT AND THE DETERMINATION OF THE WITHDRAWAL CHARGE:
SUPPOSE A CONTRACTOWNER MADE TWO INVESTED PURCHASE PAYMENTS, THE FIRST IN THE
AMOUNT OF $10,000 ON DECEMBER 1, 1995, ALL OF WHICH WAS ALLOCATED TO THE EQUITY
SUBACCOUNT, AND THE SECOND IN THE AMOUNT OF $5,000 ON OCTOBER 1, 1997, ALL OF
WHICH WAS ALLOCATED TO THE MVA OPTION WITH A GUARANTEED INTEREST RATE OF 8%
(0.08) FOR 7 YEARS. A REQUEST FOR WITHDRAWAL OF $8,500 IS MADE ON FEBRUARY 1,
2000 (THE CONTRACT OWNER DOES NOT PROVIDE ANY WITHDRAWAL INSTRUCTIONS). ON THAT
DATE THE AMOUNT IN THE EQUITY SUBACCOUNT IS EQUAL TO $12,000 AND THE AMOUNT IN
THE INTEREST CELL WITH A MATURITY DATE OF SEPTEMBER 30, 2004 IS $5,985.23, SO
THAT THE CONTRACT FUND ON THAT DATE IS EQUAL TO $17,985.23.
ON FEBRUARY 1, 2000, THE INTEREST RATES DECLARED BY PRUCO LIFE FOR THE
DURATION OF 5 YEARS (4 WHOLE YEARS REMAINING UNTIL SEPTEMBER 30, 2004, PLUS 1
YEAR) IS 11%.
- --------------------------------------------------------------------------------
33
<PAGE> 36
MARKET-VALUE ADJUSTMENT FORMULA CONTINUED
- --------------------------------------------------------------------------------
THE FOLLOWING COMPUTATIONS WOULD BE MADE:
1) Calculate the Contract Fund value as of the effective date of the
transaction. This would be $17,985.23.
2) Calculate the charge-free amount (the amount of the withdrawal that is not
subject to a withdrawal charge).
DATE PAYMENT FREE
--------------------------------------------------------
12/1/95 $10,000 $1,000
12/1/96 $2,000
10/1/97 $5,000 $2,500
12/1/97 $4,000
12/1/98 $5,500
12/1/99 $7,000
The charge-free amount in the fifth Contract year is 10% of $15,000 (total
purchase payments) plus $5,500 (the charge-free amount available in the
fourth Contract year) for a total of $7,000.
3) Since the withdrawal request is in the fifth Contract year, a 3% withdrawal
charge rate applies to any portion of the withdrawal which is not
charge-free.
------------------------------------------
$8,500.00 REQUESTED WITHDRAWAL AMOUNT
-$7,000.00 CHARGE-FREE
------------------------------------------
$1,500.00 ADDITIONAL AMOUNT NEEDED TO
COMPLETE WITHDRAWAL
The Contract provides that the Contract Fund will be reduced by an amount
which, when reduced by the withdrawal charge, will equal the amount
requested. Therefore, in order to produce the amount needed to complete the
withdrawal request ($1,500), we must "gross-up" that amount, before
applying the withdrawal charge rate. This is done by dividing by 1 minus
the withdrawal charge rate.
----------------------------------------------
$1,500.00 / (1-.03) =
$1,500.00 / 0.97 = $1,546.39 GROSSED-UP AMOUNT
Please note that a 3% withdrawal charge on this grossed-up amount reduces
it to $1,500, the balance needed to complete the request.
------------------------------------
$1,546.39 GROSSED-UP AMOUNT
X .03 WITHDRAWAL CHARGE RATE
------------------------------------
$46.39 WITHDRAWAL CHARGE
4) The Market Value Factor is determined as described in steps 1 through 5,
above. In this case, it is equal to 0.08 (8% is the guaranteed rate in the
existing cell) minus 0.11 (11% is the interest-rate that would be offered
for an interest cell with a duration of the remaining whole years plus 1),
which is -0.03, multiplied by 4.58333 (55 months remaining until September
30, 2004, divided by 12) or -0.13750. Thus, there will be a negative
Market-Value Adjustment of 14% of the amount in the interest cell that is
subject to the adjustment.
---------------------------------------
-0.13750 X $5,985.23 =
-822.97 NEGATIVE MVA
$5,985.23 UNADJUSTED VALUE
---------------------------------------
$5,162.26 ADJUSTED VALUE
$12,000.00 EQUITY VALUE
---------------------------------------
$17,162.26 ADJUSTED CONTRACT FUND
5) The total amount to be withdrawn, $8,546.39, (sum of the surrender charge,
$46.39, and the requested withdrawal amount of $8,500) is apportioned over
all accounts making up the Contract Fund following the Market-Value
Adjustments, if any, associated with the MVA option.
--------------------------------------------
EQUITY
($12,000/$17,162.26) X $8,546.39 = $5,975.71
--------------------------------------------
7-YR MVA
($5,162.26/$17,162.26) x $8,546.39=$2,570.68
---------
$8,546.39
6) The adjusted value of the interest cell, $5,162.26, reduced by the
withdrawal of $2,570.68 leaves $2,591.58. This amount must be "unadjusted"
by dividing it by 0.86250 (1 plus the Market-Value Adjustment of -0.13750)
to determine the amount remaining in the interest cell to which the
guaranteed interest-rate of 8% will continue to be credited until September
30, 2004 or a subsequent withdrawal. That amount is $3,004.73.
- --------------------------------------------------------------------------------
34
<PAGE> 37
MARKET-VALUE ADJUSTMENT FORMULA
WITH RESPECT TO RESIDENTS OF PENNSYLVANIA ONLY.
THE ADJUSTMENT INVOLVES THREE AMOUNTS
The Market-Value Adjustment, which is applied to withdrawals and transfers made
at any time other than the 30-day period following the end of an interest rate
period, involves three amounts:
1) The number of whole months remaining in the existing interest rate period.
2) The guaranteed interest rate.
3) The interpolated value of the interest rates that Pruco Life declares for
the number of whole years remaining and the duration 1 year longer than the
number of whole years remaining in the existing interest rate period.
STATED AS A FORMULA, THE MARKET VALUE IS EQUAL TO:
(M/12) X (R-C)
NOT TO EXCEED +0.40 OR BE LESS THAN -0.40;WHERE,
- --------------------------------------------------------------------------------
M = the number of whole months (not to be less than one) remaining in the
interest-rate period.
R = the Contract's guaranteed interest-rate expressed as a decimal. Thus 6.2%
is converted to 0.062.
C = the interpolated value of the interest rates, expressed as a decimal,
that Pruco Life declares for the number of whole years remaining and the
duration 1 year longer than the number of whole years remaining as of the
date the request for a withdrawal or transfer is received or m/365 x (n+1)
year rate + (365-m)/365 x n year rate, where "n" equals years and "m"
equals days remaining in year "n" of the existing interest rate period.
- --------------------------------------------------------------------------------
The Market-Value Adjustment is then equal to the Market Value Factor multiplied
by the amount subject to a Market-Value Adjustment.
STEP BY STEP
THE STEPS BELOW EXPLAIN HOW A MARKET-VALUE ADJUSTMENT IS CALCULATED.
STEP 1: Divide the number of whole months left in the existing interest rate
period (not to be less than one) by 12.
STEP 2: Interpolate the interest rates Pruco Life declares on the date the
request for withdrawal or transfer is received for the duration of years equal
to the whole number of years determined in Step 1, plus the whole number of
years plus 1 additional year.
STEP 3: Subtract this interpolated interest rate from the guaranteed interest
rate. The result could be negative.
STEP 4: Multiply the results of Step 1 and Step 2. Again, the result could be
negative. If the result is less than -0.4, use the value -0.4. If the result is
in between -0.4 and 0.4, use the actual value. If the result is more than 0.4,
use the value 0.4.
STEP 5: Multiply the result of Step 3 (which is the Market Value Factor) by the
value of the amount subject to a Market-Value Adjustment. The result is the
Market-Value Adjustment.
STEP 6: The result of Step 4 is added to the interest cell. If the Market-Value
Adjustment is positive, the interest cell will go up in value. If the
Market-Value Adjustment is negative, the interest cell will go down in value.
DEPENDING UPON WHEN THE WITHDRAWAL REQUEST IS MADE, A WITHDRAWAL CHARGE MAY
APPLY.
THE FOLLOWING EXAMPLE WILL ILLUSTRATE THE APPLICATION OF A MARKET-VALUE
ADJUSTMENT AND THE DETERMINATION OF THE WITHDRAWAL CHARGE.
SUPPOSE A CONTRACTOWNER MADE TWO INVESTED PURCHASE PAYMENTS, THE FIRST IN THE
AMOUNT OF $10,000 ON DECEMBER 1, 1995, ALL OF WHICH WAS ALLOCATED TO THE EQUITY
SUBACCOUNT, AND THE SECOND IN THE AMOUNT OF $5,000 ON OCTOBER 1, 1997, ALL OF
WHICH WAS ALLOCATED TO THE MVA OPTION WITH A GUARANTEED INTEREST RATE OF 8%
(0.08) FOR 7 YEARS. A REQUEST FOR WITHDRAWAL OF $8,500 IS MADE ON FEBRUARY 1,
2000 (THE CONTRACT OWNER DOES NOT PROVIDE ANY WITHDRAWAL INSTRUCTIONS). ON THAT
DATE THE AMOUNT IN THE EQUITY SUBACCOUNT IS EQUAL TO $12,000 AND THE AMOUNT IN
THE INTEREST CELL WITH A MATURITY DATE OF SEPTEMBER 30, 2004 IS $5,985.23, SO
THAT THE CONTRACT FUND ON THAT DATE IS EQUAL TO $17,985.23.
ON FEBRUARY 1, 2000, THE INTEREST RATES DECLARED BY PRUCO LIFE FOR THE
DURATION'S 4 AND 5 YEARS (4 WHOLE YEARS REMAINING UNTIL SEPTEMBER 30, 2004, PLUS
1 YEAR) ARE 10.8% AND 11.4%, RESPECTIVELY.
- --------------------------------------------------------------------------------
35
<PAGE> 38
MARKET-VALUE ADJUSTMENT FORMULA CONTINUED
- --------------------------------------------------------------------------------
THE FOLLOWING COMPUTATIONS WOULD BE MADE:
1) Calculate the Contract Fund value as of the effective date of the
transaction. This would be $17,985.23.
2) Calculate the charge-free amount (the amount of the withdrawal that is not
subject to a withdrawal charge).
DATE PAYMENT FREE
--------------------------------------------------------
12/1/95 $10,000 $1,000
12/1/96 $2,000
10/1/97 $5,000 $2,500
12/1/97 $4,000
12/1/98 $5,500
12/1/99 $7,000
The charge-free amount in the fifth Contract year is 10% of $15,000 (total
purchase payments) plus $5,500 (the charge-free amount available in the
fourth Contract year) for a total of $7,000.
3) Since the withdrawal request is in the fifth Contract year, a 3% withdrawal
charge rate applies to any portion of the withdrawal which is not
charge-free.
-----------------------------------------
$8,500.00 REQUESTED WITHDRAWAL AMOUNT
-$7,000.00 CHARGE-FREE
-----------------------------------------
$1,500.00 ADDITIONAL AMOUNT NEEDED TO
COMPLETE WITHDRAWAL
The Contract provides that the Contract Fund will be reduced by an amount
which, when reduced by the withdrawal charge, will equal the amount
requested. Therefore, in order to produce the amount needed to complete the
withdrawal request ($1,500), we must "gross-up" that amount, before
applying the withdrawal charge rate. This is done by dividing by 1 minus
the withdrawal charge rate.
----------------------------------------------
$1,500.00 / (1-.03) =
$1,500.00 / 0.97 = $1,546.39 GROSSED-UP AMOUNT
Please note that a 3% withdrawal charge on this grossed-up amount reduces
it to $1,500, the balance needed to complete the request.
-----------------------------------
$1,546.39 GROSSED-UP AMOUNT
X .03 WITHDRAWAL CHARGE RATE
$46.39 WITHDRAWAL CHARGE
4) The Market Value Factor is determined as described in steps 1 through 5,
above. In this case, it is equal to 0.08 (8% is the guaranteed rate in the
existing cell) minus 0.11 (11% is the interpolated value for the interest
rates that would be offered for interest cells with durations of whole
years remaining and whole year plus 1 remaining in the existing interest
rate period), which is -0.03, multiplied by 4.58333 (55 months remaining
until September 30, 2004, divided by 12) or -0.13750. Thus, there will be a
negative Market-Value Adjustment of approximately 14% of the amount in the
interest cell that is subject to the adjustment.
-----------------------------------
-0.13750 x $5,985.23 =
-----------------------------------
-822.97 NEGATIVE MVA
$5,985.23 UNADJUSTED VALUE
-----------------------------------
$5,162.26 ADJUSTED VALUE
$12,000.00 EQUITY VALUE
-----------------------------------
$17,162.26 ADJUSTED CONTRACT FUND
5) The total amount to be withdrawn, $8,546.39, (sum of the surrender charge,
$46.39, and the requested withdrawal amount of $8,500) is apportioned over
all accounts making up the Contract Fund following the Market-Value
Adjustments, if any, associated with the MVA option.
--------------------------------------------
EQUITY
($12,000/$17,162.26) X $8,546.39 = $5,975.71
--------------------------------------------
7-YR MVA
($5,162.26/$17,162.26) x $8,546.39=$2,570.68
---------
$8,546.39
6) The adjusted value of the interest cell, $5,162.26, reduced by the
withdrawal of $2,570.68 leaves $2,591.58. This amount must be "unadjusted"
by dividing it by 0.86250 (1 plus the Market-Value Adjustment of -0.13750)
to determine the amount remaining in the interest cell to which the
guaranteed interest-rate of 8% will continue to be credited until September
30, 2004 or a subsequent withdrawal. That amount is $3,004.73.
- --------------------------------------------------------------------------------
36
<PAGE> 39
IRA DISCLOSURE STATEMENT
This statement is designed to help you understand the requirements of federal
tax law which apply to your individual retirement annuity (IRA), your Roth IRA,
your simplified employee pension IRA (SEP) for employer contributions, your
Savings Incentive Match Plan for Employees (SIMPLE) IRA, or to one you purchase
for your spouse. You can obtain more information regarding your IRA either from
your sales representative or from any district office of the Internal Revenue
Service. Those are federal tax law rules; state tax laws may vary.
FREE LOOK PERIOD
The annuity contract offered by this prospectus gives you the opportunity to
return the contract for a full refund within 10 days (or whatever period is
required by applicable state law) after it is delivered. This is a more liberal
provision than is required in connection with IRAs. To exercise this
"free-look" provision, return the contract to the representative who sold it to
you or to the Prudential Annuity Service Center at the address shown on the
first page of this prospectus.
ELIGIBILITY REQUIREMENTS
IRAs are intended for all persons with earned compensation whether or not they
are covered under other retirement programs. Additionally, if you have a
non-working spouse (and you file a joint tax return), you may establish an IRA
on behalf of your non-working spouse. A working spouse may establish his or her
own IRA. A divorced spouse receiving taxable alimony (and no other income) may
also establish an IRA.
CONTRIBUTIONS AND DEDUCTIONS
Contributions to your IRA will be deductible if you are not an "active
participant" in an employer maintained qualified retirement plan or you have
"Adjusted Gross Income" (as defined under Federal tax laws) which does not
exceed the "applicable dollar limit." IRA (or SEP) contributions must be made by
no later than the time you file your income tax return for that year. For a
single taxpayer, the applicable dollar limitation is $30,000, with the amount of
IRA contribution which may be deducted reduced proportionately for Adjusted
Gross Income between $30,000 - $40,000. For married couples filing jointly, the
applicable dollar limitation is $50,000, with the amount of IRA contribution
which may be deducted reduced proportionately for Adjusted Gross Income between
$50,000-$60,000. There is no deduction allowed for IRA contributions when
Adjusted Gross Income reaches $40,000 for individuals and $60,000 for married
couples filing jointly.
Contributions made by your employer to your SEP are excludable from your gross
income for tax purposes in the calendar year for which the amount is
contributed. Certain employees who participate in a SEP will be entitled to
elect to have their employer make contributions to their SEP on their behalf or
to receive the contributions in cash. If the
<PAGE> 40
employee elects to have contributions made on the employee's behalf to the SEP,
those funds are not treated as current taxable income to the employee. Elective
deferrals under a SEP are subject to an inflation-adjusted limit, which is
$10,500 in 2000. Salary-reduction SEPs (also called "SARSEPs") are available
only if at least 50% of the employees elect to have amounts contributed to the
SARSEP and if the employer has 25 or fewer employees at all times during the
preceding year. New SARSEPs may not be established after 1996.
The IRA maximum annual contribution and your tax deduction is limited to the
lesser of: (1) $2,000 or (2) 100% of your earned compensation. Contributions in
excess of the deduction limits may be subject to penalty. See below.
Under a SEP agreement, the maximum annual contribution which your employer may
make on your behalf to a SEP contract that is excludable from your income is the
lesser of 15% of your salary or $24,000. An employee who is a participant in a
SEP agreement may make after-tax contributions to the SEP contract, subject to
the contribution limits applicable to IRAs in general. Those employee
contributions will be deductible subject to the deductibility rules described
above.
The maximum tax deductible annual contribution that a divorced spouse with no
other income may make to an IRA is the lesser of (1) $2,000 or (2) 100% of
taxable alimony.
If you or your employer should contribute more than the maximum contribution
amount to your IRA or SEP, the excess amount will be considered an "excess
contribution." You are permitted to withdraw an excess contribution from your
IRA or SEP before your tax filing date without adverse tax consequences. If,
however, you fail to withdraw any such excess contribution before your tax
filing date, a 6% excise tax will be imposed on the excess for the tax year of
contribution.
Once the 6% excise tax has been imposed, an additional 6% penalty for the
following tax year can be avoided if the excess is (1) withdrawn before the end
of the following year, or (2) treated as a current contribution for the
following year. (See Premature Distributions below for penalties imposed on
withdrawal when the contribution exceeds $2,000.)
IRA FOR NON-WORKING SPOUSE
If you establish an IRA for yourself, you may also be eligible to establish an
IRA for your "non-working" spouse. In order to be eligible to establish such a
spousal IRA, you must file a joint tax return with your spouse and, if your
non-working spouse has compensation, his/her compensation must be less than your
compensation for the year. Contributions of up to $2,000 each may be made to
your IRA and the spousal IRA if the combined compensation of you and your spouse
is at least equal to the amount contributed. If requirements for deductibility
(including income levels) are met, you will be able to deduct an amount equal to
the least of (i) the amount contributed to the IRAs; (ii) $4,000; or (iii) 100%
of your combined gross income.
<PAGE> 41
Contributions in excess of the contribution limits may be subject to penalty.
See above under "Contributions and Deductions." If you contribute more than the
allowable amount, the excess portion will be considered an excess contribution.
The rules for correcting it are the same as discussed above for regular IRAs.
Other than the items mentioned in this section, all of the requirement generally
applicable to IRAs are also applicable to IRAs established for non-working
spouses.
ROLLOVER CONTRIBUTION
Once every year, you are permitted to withdraw any portion of the value of your
IRA or SEP and reinvest it in another IRA or bond. Withdrawals may also be made
from other IRAs and contributed to this contract. This transfer of funds from
one IRA to another is called a "rollover" IRA. To qualify as a rollover
contribution, the entire portion of the withdrawal must be reinvested in another
IRA within 60 days after the date it is received. You will not be allowed a
tax-deduction for the amount of any rollover contribution.
A similar type of rollover to an IRA can be made with the proceeds of a
qualified distribution from a qualified retirement plan or tax-sheltered
annuity. Properly made, such a distribution will not be taxable until you
receive payments from the IRA created with it. Unless you were a self-employed
participant in the distributing plan, you may later roll over such a
contribution to another qualified retirement plan as long as you have not mixed
it with IRA (or SEP) contributions you have deducted from your income. (You may
roll less than all of a qualified distribution into an IRA, but any part of it
not rolled over will be currently includable in your income without any capital
gains treatment.)
DISTRIBUTIONS
(a) PREMATURE DISTRIBUTIONS
At no time can your interest in your IRA or SEP be forfeited. To insure that
your contributions will be used for retirement, the federal tax law does not
permit you to use your IRA or SEP as security for a loan. Furthermore, as a
general rule, you may not sell or assign your interest in your IRA or SEP to
anyone. Use of an IRA (or SEP) as security or assignment of it to another will
invalidate the entire annuity. It then will be includable in your income in the
year it is invalidated and will be subject to a 10% penalty tax if you are not
at least age 59 1/2 or totally disabled. (You may, however, assign your IRA or
SEP without penalty to your former spouse in accordance with the terms of a
divorce decree.)
You may surrender any portion of the value of your IRA (or SEP). In the case of
a partial surrender which does not qualify as a rollover, the amount withdrawn
will be includable in your income and subject to the 10% penalty if you are not
at least age 59 1/2 or totally
<PAGE> 42
disabled unless you comply with special rules requiring distributions to be made
at least annually over your life expectancy.
The 10% penalty tax does not apply to the withdrawal of an excess contribution
as long as the excess is withdrawn before the due date of your tax return.
Withdrawals of excess contributions after the due date of your tax return will
generally be subject to the 10% penalty unless the excess contribution results
from erroneous information from a plan trustee making an excess rollover
contribution or unless you are over age 59 1/2 or are disabled.
(b) DISTRIBUTION AT AFTER AGE 59 1/2
Once you have attained age 59 1/2 (or have become totally disabled), you may
elect to receive a distribution of your IRA (or SEP) regardless of when you
actually retire. In addition, you must commence distributions from your IRA by
April 1 following the year you attain age 70 1/2. You may elect to receive the
distribution under any one of the periodic payment options available under the
contract. The distributions from your IRA under any one of the period payment
options or in one sum will be treated as ordinary income as you receive them to
the degree that you have made deductible contributions. If you have made both
deductible and nondeductible contributions, a portion of the distribution
attributable to the nondeductible contribution will be tax-free.
(c) INADEQUATE DISTRIBUTIONS -- 50% TAX
Your IRA or SEP is intended to provide retirement benefits over your lifetime.
Thus, federal tax law requires that you either (1) receive a lump-sum
distribution of your IRA by April 1 of the year following the year in which you
attain age 70 1/2 or (2) start to receive periodic payments by that date. If you
elect to receive periodic payments, those payments must be sufficient to pay out
the entire value of your IRA during your life expectancy (or over the joint life
expectancies of you and your spouse). If the payments are not sufficient to meet
these requirements, an excise tax of 50% will be imposed on the amount of any
underpayment.
(d) DEATH BENEFITS
If you, (or your surviving spouse) die before receiving the entire value of your
IRA (or SEP), the remaining interest must be distributed to your beneficiary (or
your surviving spouse's beneficiary) in one lump-sum within 5 years of death, or
applied to purchase an immediate annuity for the beneficiary. This annuity must
be payable over the life expectancy of the beneficiary beginning within one year
after your or your spouse's death. If your spouse is the designated beneficiary,
he or she is treated as the owner of the IRA. If minimum required distributions
have begun, the entire amount must be distributed at least as rapidly as if the
owner had survived. A distribution of the balance of your IRA upon your death
will not be considered a gift for federal tax purposes, but will be included in
your gross estate for purposes of federal estate taxes.
<PAGE> 43
ROTH IRAS
Section 408A of the Tax Code permits eligible individuals to contribute to a
type of IRA known as a "Roth IRA." Contributions may be made to a Roth IRA by
taxpayers with adjusted gross incomes of less than $160,000 for married
individuals filing jointly and less than $100,000 for single individuals.
Married individuals filing separately are not eligible to contribute to a Roth
IRA. The maximum amount of contributions allowable for any taxable year to all
Roth IRAs maintained by an individual is generally the lesser of $2,000 and 100%
of compensation for that year (the $2,000 limit is phased out for incomes
between $150,000 and $160,000 for married and between $95,000 and $110,000 for
singles). The contribution limit is reduced by the amount of any contributions
made to a non-Roth IRA. Contributions to a Roth IRA are not deductible.
For taxpayers with adjusted gross income of $100,000 or less, all or part of
amounts in a non-Roth IRA may be converted, transferred or rolled over to a Roth
IRA. Some or all of the IRA value will typically be includable in the taxpayer's
gross income. If such a rollover, transfer or conversion occurred before January
1, 1999, the portion of the amount includable in gross income must be included
in income ratably over the next four years beginning with the year in which the
transaction occurred. Provided a rollover contribution meets the requirements of
IRAs under Section 408(d)(3) of the Code, a rollover may be made from a Roth IRA
to another Roth IRA.
UNDER SOME CIRCUMSTANCES, IT MAY NOT BE ADVISABLE TO ROLL OVER, TRANSFER OR
CONVERT ALL OR PART OF A NON-ROTH IRA TO A ROTH IRA. PERSONS CONSIDERING A
ROLLOVER, TRANSFER OR CONVERSION SHOULD CONSULT THEIR OWN TAX ADVISOR.
"Qualified distributions" from a Roth IRA are excludable from gross income. A
"qualified distribution" is a distribution that satisfies two requirements: (1)
the distribution must be made (a) after the owner of the IRA attains age 59 1/2;
(b) after the owner's death; (c) due to the owner's disability; or (d) for a
qualified first time homebuyer distribution within the meaning of Section
72(t)(2)(F) of the Code; and (2) the distribution must be made in the year that
is at least five years after the first year for which a contribution was made to
any Roth IRA established for the owner or five years after a rollover, transfer,
or conversion was made from a non-Roth IRA to a Roth IRA. Distributions from a
Roth IRA that are not qualified distributions will be treated as made first from
contributions and then from earnings, and taxed generally in the same manner as
distributions from a non-Roth IRA.
Distributions from a Roth IRA need not commence at age 70 1/2. However, if the
owner dies before the entire interest in a Roth IRA is distributed, any
remaining interest in the contract must be distributed by December 31 of the
calendar year containing the fifth anniversary of the owner's death subject to
certain exceptions.
REPORTING TO THE IRS
<PAGE> 44
Whenever you are liable for one of the penalty taxes discussed above (6% for
excess contributions, 10% for premature distributions or 50% for underpayments),
you must file Form 5329 with the Internal Revenue Service. The form is to be
attached to your federal income tax return for the tax year in which the penalty
applies. Normal contributions and distributions must be shown on your income tax
return for the year to which they relate.
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
VARIABLE ANNUITY CONTRACTS
The DISCOVERY SELECT(R) Annuity Contract* (the "contract") is an individual
variable annuity contract issued by the Pruco Life Insurance Company ("Pruco
Life"), a stock life insurance company that is a wholly-owned subsidiary of The
Prudential Insurance Company of America ("Prudential") and is funded through the
Pruco Life Flexible Premium Variable Annuity Account (the "Account"). The
contract is purchased by making an initial purchase payment of $10,000 or more;
subsequent payments must be $1,000 or more.
This statement of additional information is not a prospectus and should be read
in conjunction with the Discovery Select prospectus, dated May 1 , 2000. To
obtain a copy of the prospectus, without charge, you can write to the Prudential
Annuity Service Center, P.O. Box 14215, New Brunswick, New Jersey 08906, or by
telephoning (888) PRU-2888.
TABLE OF CONTENTS
PAGE
----
COMPANY.....................................................................2
EXPERTS.....................................................................2
LITIGATION..................................................................2
LEGAL OPINIONS..............................................................2
PRINCIPAL UNDERWRITER.......................................................2
DETERMINATION OF SUBACCOUNT UNIT VALUES.....................................2
PERFORMANCE INFORMATION.....................................................3
COMPARATIVE PERFORMANCE INFORMATION.........................................6
FURTHER INFORMATION ABOUT THE DEATH BENEFIT.................................6
FEDERAL TAX STATUS..........................................................8
SEPARATE ACCOUNT FINANCIAL INFORMATION..................................... A-1
COMPANY FINANCIAL INFORMATION...............................................B-1
FURTHER INFORMATION ABOUT PRUCO LIFE........................................C-1
PRUCO LIFE INSURANCE COMPANY PRUDENTIAL ANNUITY SERVICE CENTER
213 WASHINGTON STREET P.O. BOX 14215
NEWARK, NEW JERSEY 07102-2992 NEW BRUNSWICK, NEW JERSEY 08906
TELEPHONE: (888) PRU-2888
* DISCOVERY SELECT is a service mark of Prudential.
ORD966391B
<PAGE> 46
COMPANY
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company
organized in 1971 under the laws of the State of Arizona. Pruco Life is licensed
to sell life insurance and annuities in the District of Columbia, Guam and all
states except New York.
Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of
America ("Prudential"), a mutual life insurance company founded in 1875 under
the laws of the State of New Jersey.
EXPERTS
The consolidated financial statements of Pruco Life and its subsidiaries as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 and the financial statements of the Pruco Life Flexible
Premium Variable Annuity Account as of December 31, 1999 and for each of the
two years in the period then ended included in this Statement of Additional
Information have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers'
principal business address is 1177 Avenue of the Americas, New York, New York,
10036.
LITIGATION
We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. Pending legal regulatory actions include
proceedings specific to our practices and proceedings generally applicable to
business practices in the industries in which we operate. As an example of such
litigation, in March, 2000, plaintiffs filed a purported class action against us
titled Olmsted v. Pruco Life Insurance Company of New Jersey and The Prudential
Insurance Company of America, alleging that certain fees and expenses charged to
the plaintiffs in connection with the sale of variable annuities since March 1,
1997 were excessive and unreasonable. In certain of these lawsuits, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, Pruco Life and Prudential have been subject to substantial
regulatory actions and civil litigation involving individual life insurance
sales practices. In 1996, Prudential, on behalf of itself and many of its life
insurance subsidiaries including Pruco Life, entered into settlement agreements
with relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the United States from
1982 to 1995. Pursuant to the settlements, the companies agreed to various
changes to their sales and business practices controls and a series of fines,
and are in the process of distributing final remediation relief to eligible
class members. In many instances, claimants have the right to "appeal" the
decision to an independent reviewer. The bulk of such appeals were resolved in
1999, and the balance is expected to be addressed in 2000. As of January 31,
2000, Prudential and/or Pruco Life remained a party to two putative class
actions and approximately 158 individual actions relating to permanent life
insurance policies issued in the United States between 1982 and 1995. Additional
suits may be filed by individuals who opted out of the settlements. While the
approval of the class action settlement is now final, Prudential and Pruco Life
remain subject to oversight and review by insurance regulators and other
regulatory authorities with respect to their sales practices and the conduct of
the remediation program. The U.S. District Court has also retained jurisdiction
as to all matters relating to the administration, consummation, enforcement and
interpretation of the settlements.
Prudential has indemnified Pruco Life for any liabilities incurred in connection
with sales practices litigation covering policyholders of individual permanent
life insurance policies issued in the United States from 1982 to 1995.
In 1999, 1998, 1997 and 1996, Prudential recorded provision in its Consolidated
Statements of Operation of $100 million, $1,150 million, $2,030 million and
$1,125 million, respectively, to provide for estimated remediation costs, and
additional sales practices costs including related administrative costs,
regulatory fines, penalties and related payments, litigation costs and
settlements, including settlements associated with the resolution of claims of
deceptive sales practices asserted by policyholders who elected to "opt-out" of
the class action settlement and litigate their claims against Prudential
separately, and other fees and expenses associated with the resolution of sales
practices issues.
LEGAL OPINIONS
Shea & Gardner of Washington, D.C., has provided advice on certain matters
relating to the federal securities laws in connection with the contracts.
PRINCIPAL UNDERWRITER
Prudential Investment Management Services LLC ("PIMS"), a subsidiary of
Prudential, offers the contracts on a continuous basis through corporate office
and regional home office employees in those states in which contracts may be
lawfully sold. It may also offer the contract through licensed insurance brokers
and agents, or through appropriately registered direct or indirect
subsidiary(ies) of Prudential, provided clearances to do so are obtained in any
jurisdiction where such clearances may be necessary. During 1999, 1998 and 1997,
the aggregate dollar amount of underwriting commissions paid to and the amounts
retained by PIMS were $131,658,744, $52,572, and $0 respectively. During 1999,
1998 and 1997 PIMS paid $131,658,744, $52,572 and $0 respectively to cover
individual representatives' commissions and other distribution expenses.
Prudential may pay trail commissions to registered representatives who maintain
an ongoing relationship with a contractholder. Typically, a trail commission is
a compensation that is paid periodically to a representative, the amount of
which is linked to the value of the contract and the amount of time that the
contract has been in effect.
DETERMINATION OF ACCUMULATION UNIT VALUES
The value for each accumulation unit is computed as of the end of each business
day. On any given business day the value of a Unit in each subaccount will be
determined by multiplying the value of a Unit of that subaccount for the
preceding business day by the net investment factor for that subaccount for the
current business day. The net investment factor for any business day is
determined by dividing the value of the assets of the subaccount for that day by
the value of the assets of the subaccount for the preceding business day
(ignoring, for this purpose, changes resulting from new purchase payments and
withdrawals), and subtracting from the result the daily equivalent of the 1.4%
annual charge for administrative expenses and mortality and expense risks. (See
WHAT ARE THE EXPENSES ASSOCIATED WITH THE DISCOVERY SELECT CONTRACT and
CALCULATING CONTRACT VALUE in the prospectus.) The value of the assets of a
subaccount is determined by multiplying the number of shares of The Prudential
Series Fund, Inc. (the "Series Fund") or other Fund held by that subaccount by
the net asset value of each share and adding the value of dividends declared by
the Series Fund or other Fund but not yet paid.
2
<PAGE> 47
PERFORMANCE INFORMATION
The tables that follow provide performance information for each subaccount
through December 31, 1999. The performance information is based on historical
experience and does not indicate or represent future performance.
AVERAGE ANNUAL TOTAL RETURN
The DISCOVERY SELECT Annuity is a relatively new contract. The returns shown
below were calculated using historical investment returns of the Funds. All
fees, expenses and charges associated with the DISCOVERY SELECT Annuity and the
Funds have been reflected in these returns, as if the Contract had existed from
the inception date of each Funds' portfolios.
Table 1 below shows the average annual rates of total return on hypothetical
investments of $1,000 for periods ended December 31, 1999 in each subaccount
other than the Money Market Subaccount. These figures assume withdrawal of the
investments at the end of the period other than to effect an annuity under the
Contract. This table assumes deferred sales charges.
TABLE 1
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM DATE
FIVE TEN PORTFOLIO
ONE YEAR YEARS YEARS ESTABLISHED
FUND DATE ENDED ENDED ENDED THROUGH
PORTFOLIO ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund
Diversified Bond Portfolio 6/83 -7.10% 6.12% 6.14% 7.30%
Diversified Conservative Growth Portfolio 5/99 N/A N/A N/A -4.39%
High Yield Bond Portfolio 2/87 -1.72% 7.07% 8.22% 6.43%
Stock Index Portfolio 10/87 14.01% 26.26% 16.07% 17.28%
Equity Income Portfolio 2/88 6.10% 15.56% 12.44% 13.07%
Equity Portfolio 6/83 6.05% 17.21% 13.44% 13.43%
Prudential Jennison Portfolio 5/95 35.39% N/A N/A 30.08%
Global Portfolio 9/88 42.72% 20.61% 11.75% 12.69%
Small Capitalization Stock Portfolio 5/95 6.25% N/A N/A 14.24%
20/20 Focus Portfolio 5/99 N/A N/A N/A 7.95%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 5/94 27.53% 26.30% N/A 22.68%
AIM V.I. Value Fund 6/93 23.23% 25.36% N/A 21.12%
American Century Variable Portfolios, Inc.
American Century VP Value 5/96 -6.95% N/A N/A 8.99%
Franklin Templeton Variable Insurance Products
Franklin Small Cap Fund-Class 2 Series 5/98 67.07% N/A N/A 26.68%
Janus Aspen Series
Growth Portfolio 9/93 37.13% 27.98% N/A 22.49%
International Growth Portfolio 5/94 74.88% 31.30% N/A 26.31%
MFS Variable Insurance Trust
Emerging Growth Series 7/95 69.41% N/A N/A 34.38%
Research Series 7/95 17.48% N/A N/A 20.89%
OCC Accumulation Trust (Note 2)
Managed Portfolio 8/88 -1.32% 17.93% 15.01% 16.10%
Small Cap Portfolio 8/88 -7.86% 6.69% 9.57% 9.94%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 3/94 -2.58% 16.67% N/A 15.50%
T. Rowe Price International Series, Inc.
International Stock Portfolio 3/94 26.61% 13.46% N/A 11.73%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 9/96 56.38% N/A N/A 20.47%
</TABLE>
- ---------------
Note 1: This table assumes deferred sales charges.
3
<PAGE> 48
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had commenced
operations on August 1, 1988, then called Quest for Value Accumulation Trust
(the "Old Trust"), was effectively divided into two investment funds--the Old
Trust and the present Quest for Value Accumulation Trust (the "Present
Trust")--at which time the Present Trust Commenced Operations.
Note 3: All tables assume a $30.00 annual charge for contracts under $50,000.
The average annual rates of total return shown above are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1+T)(n)=ERV. In the formula, P is a hypothetical
investment of $1,000; T is the average annual total return; "n" is the number of
years; and ERV is the withdrawal value at the end of the periods shown. These
figures assume deduction of the maximum withdrawal charge that may be applicable
to a particular period.
NON-STANDARD TOTAL RETURN
Table 2 below shows the average annual rates of return as in Table 1, but
assumes that the investments are not withdrawn at the end of the period or that
the Contract owner annuitizes at the end of the period. This table assumes no
deferred sales charges.
<TABLE>
<CAPTION>
TABLE 2
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
FROM DATE
FIVE TEN PORTFOLIO
ONE YEAR YEARS YEARS ESTABLISHED
FUND DATE ENDED ENDED ENDED THROUGH
PORTFOLIO ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund
Diversified Bond Portfolio 6/83 -2.45% 6.25% 6.14% 7.30%
Diversified Conservative Growth Portfolio 5/99 N/A N/A N/A 5.05%
High Yield Bond Portfolio 2/87 3.08% 7.20% 8.22% 6.43%
Stock Index Portfolio 10/87 18.81% 26.32% 16.07% 17.28%
Equity Income Portfolio 2/88 10.90% 15.65% 12.44% 13.07%
Equity Portfolio 6/83 10.85% 17.30% 13.44% 13.43%
Prudential Jenison Portfolio 5/95 40.19% N/A N/A 30.21%
Global Portfolio 9/88 47.52% 20.69% 11.75% 12.69%
Small Capitalization Stock Portfolio 5/95 11.06% N/A N/A 14.24%
20/20 Focus Portfolio 5/99 N/A N/A N/A 17.76%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 5/94 32.33% 26.36% N/A 22.73%
AIM V.I. Value Fund 6/93 28.03% 25.42% N/A 21.13%
American Century Variable Portfolios, Inc.
American Century VP Value 5/96 -2.28% N/A N/A 9.51%
Franklin Templeton Variable Insurance Products Trust
Franklin Small Cap Fund - Class 2 5/98 71.87% N/A N/A 31.09%
Janus Aspen Series
Growth Portfolio 9/93 41.93% 28.04% N/A 22.51%
International Growth Portfolio 5/94 79.68% 31.35% N/A 26.36%
MFS Variable Insurance Trust
Emerging Growth Series 7/95 74.21% N/A N/A 34.53%
Research Series 7/95 22.28% N/A N/A 21.10%
OCC Accumulation Trust (Note 2)
Managed Portfolio 8/88 3.48% 18.02% 15.01% 16.10%
Small Cap Portfolio 8/88 -3.26% 6.81% 9.57% 9.94%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 3/94 2.22% 16.75% N/A 15.57%
T. Rowe Price International Series, Inc.
International Stock Portfolio 3/94 31.41% 13.55% N/A 11.82%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 9/96 61.18% N/A N/A 21.03%
</TABLE>
4
<PAGE> 49
- ---------------
Note 1: This table assumes no deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had commenced
operations on August 1, 1988, then called Quest for Value Accumulation Trust
(the "Old Trust"), was effectively divided into two investment funds--the Old
Trust and the present Quest for Value Accumulation Trust (the "Present
Trust")--at which time the Present Trust Commenced Operations.
Note 3: All tables assume a $30.00 annual charge for contracts under $50,000.
Table 3 shows the cumulative total return for the portfolios, assuming no
withdrawal. This table assumes no deferred sales charges.
<TABLE>
<CAPTION>
TABLE 3
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
FROM DATE
FIVE TEN PORTFOLIO
ONE YEAR YEARS YEARS ESTABLISHED
FUND DATE ENDED ENDED ENDED THROUGH
PORTFOLIO ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund
Diversified Bond Portfolio 6/83 -2.45% 35.40% 81.52% 221.50%
Diversified Conservative Growth Portfolio 5/99 N/A N/A N/A 3.35%
High Yield Bond Portfolio 2/87 3.08% 41.55% 120.41% 122.84%
Stock Index Portfolio 10/87 18.81% 221.64% 343.87% 598.97%
Equity Income Portfolio 2/88 10.90% 106.91% 222.92% 329.58%
Equity Portfolio 6/83 10.85% 122.03% 252.92% 706.94%
Prudential Jennison Portfolio 5/95 40.19% N/A N/A 242.86%
Global Portfolio 9/88 47.52% 156.07% 203.60% 284.94%
Small Capitalization Stock Portfolio 5/95 11.06% N/A N/A 87.68%
20/20 Focus Portfolio 5/99 N/A N/A N/A 11.54%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 5/94 32.33% 222.15% N/A 219.09%
AIM V.I. Value Fund 6/93 28.03% 210.34% N/A 253.16%
American Century Variable Portfolios, Inc.
American Century VP Value 5/96 -2.28% N/A N/A 39.51%
Franklin Templeton Variable Insurance Products Trust
Franklin Small Cap Fund - Class 2 5/98 71.87% N/A N/A 57.06%
Janus Aspen Series
Growth Portfolio 9/93 41.93% 244.15% N/A 259.15%
International Growth Portfolio 5/94 79.68% 291.02% N/A 276.31%
MFS Variable Insurance Trust
Emerging Growth Series 7/95 74.21% N/A N/A 273.01%
Research Series 7/95 22.28% N/A N/A 133.91%
OCC Accumulation Trust (Note 2)
Managed Portfolio 8/88 3.48% 128.93% 305.04% 449.61%
Small Cap Portfolio 8/88 -3.26% 39.02% 149.42% 194.82%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 3/94 2.22% 116.93% N/A 129.93%
T. Rowe Price International Series, Inc.
International Stock Portfolio 3/94 31.41% 88.81% N/A 90.11%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 9/96 61.18% N/A N/A 85.96%
</TABLE>
- ---------------
Note 1: This table assumes no deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had commenced
operations on August 1, 1988, then called Quest for Value Accumulation Trust
(the "Old Trust"), was effectively divided into two investment funds--the Old
Trust and the present Quest for Value Accumulation Trust (the "Present
Trust")--at which time the Present Trust Commenced Operations.
Note 3: All tables assume a $30.00 annual charge for contracts under $50,000.
5
<PAGE> 50
MONEY MARKET SUBACCOUNT YIELD
The "yield" and "effective yield" figures for the Money Market Subaccount shown
below were calculated using historical investment returns of the Money Market
Portfolio of the Prudential Series Fund. All fees, expenses and charges
associated with the DISCOVERY SELECT Annuity and the Series Fund have been
reflected.
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1999 were 6.53% and 6.74%, respectively.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Money Market Subaccount at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from contract
owner accounts, and dividing the difference by the value of the subaccount at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting figure carried
to the nearest ten-thousandth of 1%.
The deduction referred to above consists of the 1.25% charge for mortality and
expense risks and the 0.15% charge for administration. It does not reflect the
withdrawal charge.
The effective yield is obtained by taking the base period return, adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula: Effective Yield--([base period
return + 1] 365/7)-1.
The yields on amounts held in the Money Market Subaccount will fluctuate on a
daily basis. Therefore, the stated yields for any given period are not an
indication of future yields.
COMPARATIVE PERFORMANCE INFORMATION
Reports or advertising may include comparative performance information,
including, but not limited to: (1) comparisons to market indices such as the Dow
Jones Industrial Average, the Standard & Poor's 500 Index, the Value Line
Composite Index, the Russell 2000 Index, the Morgan Stanley World Index, the
Lehman Brothers bond indices; (2) comparisons to other investments, such as
certificates of deposit; (3) performance rankings assigned by services such as
Morningstar, Inc. and Variable Annuity Research and Data Services (VARDS), and
Lipper Analytical Services, Inc.; (4) data presented by analysts such as Dow
Jones, A.M. Best, The Bank Rate Monitor National Index; and (5) data in
publications such as The Wall Street Journal, Times, Forbes, Barrons, Fortune,
Money Magazine, and Financial World.
FURTHER INFORMATION ABOUT THE DEATH BENEFIT
Early in 1998, Pruco Life began to offer an enhanced death benefit under the
contract. For contracts issued after the new death benefit became available in a
particular state, the new death benefit is contained in an endorsement that is
issued with the contract. Existing contractowners were also given the option to
elect the new death benefit or retain the death benefit available at that time
under their contracts. As used here, the term "endorsement date" describes both
the date on which the contract is issued with the endorsement for contracts
purchased after the new death benefit is available and the date on which the
endorsement was issued for existing contractowners so electing. The new death
benefit provisions are described below.
If the sole or last surviving annuitant dies prior to the annuity date, Pruco
Life will, upon receipt of all of the information necessary to make the payment
(including due proof of death and election of a payment option), pay a death
benefit to the beneficiary designated by the contractowner.
IF THE SOLE OR OLDER ANNUITANT IS UNDER AGE 80 when the death benefit
endorsement is issued, the death benefit on or prior to the contract anniversary
coinciding with or next following his or her 80th birthday will equal the
greater of, the contract fund value or the guaranteed minimum death benefit, as
of the date of due proof of death. The guaranteed minimum death benefit is
calculated daily and is equal to the greater of: (1) the 5% annual increase
("roll-up"); or (2) the highest annual contract fund value ("step-up"), both of
which are described below.
6
<PAGE> 51
ROLL-UP
The roll-up is equal to the total invested purchase payments (initial and
additional) and is increased daily to the date of death at an effective annual
interest rate of 5%, until the cap maximum is reached. The cap is equal to the
sum of two times each invested purchase payment. The roll-up and the cap are
proportionally reduced by the effect of withdrawals. Once the cap is reached,
the roll-up can only be increased by the amount of additional invested purchase
payments and will be proportionally reduced by the effect of withdrawals. For
purposes of determining the death benefit, "proportionally reduced by the effect
of withdrawals" means that withdrawals (including any applicable charges) will
reduce other values in the same proportion as they reduce the contract fund
value.
STEP-UP
Prior to the first contract anniversary, the step-up is the initial invested
purchase payment increased by additional invested purchase payments and
proportionally reduced by the effect of withdrawals. The step-up for each
subsequent contract anniversary will be reset to the greater of the contract
fund value as of that contract anniversary and the prior step-up. Between
contract anniversaries, the step-up will be increased by invested purchase
payments and proportionally reduced by effect of withdrawals.
After the contract anniversary coinciding with or following the annuitant's 80th
birthday, the death benefit will equal the greater of the contract fund value as
of the date of due proof of death or the guaranteed minimum death benefit as of
the contract anniversary coinciding with or next following his or her 80th
birthday, increased by additional invested purchase payments and proportionally
reduced by the effect of withdrawals since such contract anniversary.
IF THE SOLE OR OLDER ANNUITANT IS AGE 80 OR OVER on the endorsement date, the
death benefit will equal the greater of the contract fund value as of the date
of due proof of death or the total invested purchase payments (initial and
additional) proportionally reduced by the effect of withdrawals.
Upon issuance of the endorsement, you may not change an annuitant or
co-annuitant. You may add or remove an annuitant or co-annuitant only with our
prior approval.
If the contract was issued prior to the endorsement date, the following rules
apply: (1) the initial value of the roll-up and the step-up is the total
invested purchase payments (initial and additional), less total withdrawals
(including any applicable charges) as of the issuance of the endorsement; (2)
the initial value of the cap will be two times the initial value of the roll-up;
and (3) the words, "Prior to the first contract anniversary", as used in the
description of the step-up, means prior to the first contract anniversary
following the issuance of the endorsement.
Contracts issued prior to the endorsement date WHOSE OWNERS DO NOT ELECT TO
ATTACH THE ENDORSEMENT TO THEIR CONTRACTS and contracts issued in states in
which the endorsement is not available will continue to have the death benefit
calculated as originally offered, as follows: The death benefit will equal the
greatest of: (1) the contract Fund as of the date of due proof of death; or (2)
the sum of all invested purchase payments made less total withdrawals made
(including withdrawal charges); or (3) the greatest of the contract fund values
calculated on every third contract anniversary reduced by all subsequent
withdrawals and withdrawal charges.
The death benefit is payable on the death of the sole or last surviving
annuitant, not the contract owner.
The beneficiary may receive this amount in a lump sum or under a payout option.
Unless the beneficiary has been irrevocably designated, you may change the
beneficiary at any time. If the annuitant dies after he or she has begun to
receive annuity payments, the death benefit, if any, will be determined by the
type(s) of payout provisions then in effect.
If the annuitant was the sole owner of the contract, the annuitant's spouse was
the sole beneficiary, and the spouse had an unrestricted right to receive the
death benefit in a lump sum, then the spouse has the right to continue the
contract as annuitant and owner.
7
<PAGE> 52
FEDERAL TAX STATUS
X. OTHER TAX RULES.
1. DIVERSIFICATION.
The Internal Revenue Code provides that the underlying investments for a
variable annuity must satisfy certain diversification requirements. Each
Portfolio is required to diversify its investments each quarter so that no more
than 55% of the value of its assets is represented by any one investment, no
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by any
four investments. Generally, securities of a single issuer are treated as one
investment and obligations of each U.S. Government agency and instrumentality
(such as the Government National Mortgage Association) are treated as issued by
separate issuers. In addition, any security issued, guaranteed or insured (to
the extent so guaranteed or insured) by the United States or an instrumentality
of the U.S. will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable. Pruco Life believes the underlying
variable investment options for the Contract meet these diversification
requirements.
2. INVESTOR CONTROL.
Treasury Department regulations do not provide guidance concerning the
extent to which you may direct your investment in the particular investment
options without causing you, instead of Pruco Life, to be considered the owner
of the underlying assets. Because of this uncertainty, Pruco Life reserves the
right to make such changes as it deems necessary to assure that the contract
qualifies as an annuity for tax purposes. Any such changes will apply uniformly
to affected contractowners and will be made with such notice to affected
contractowners as is feasible under the circumstances.
3. ENTITY OWNERS.
Where a contract is held by a non-natural person (e.g., a corporation),
other than as an agent or nominee for a natural person (or in other limited
circumstances), the contract will not be taxed as an annuity and increases in
the value of the contract will be subject to tax.
4. PURCHASE PAYMENTS MADE BEFORE AUGUST 14, 1982.
If your contract was issued in exchange for a contract containing purchase
payments made before August 14, 1982, favorable tax rules may apply to certain
withdrawals from the contract. Generally, withdrawals are treated as a recovery
of your investment in the contract first until purchase payments made before
August 14, 1982 are withdrawn. Moreover, any income allocable to purchase
payments made before August 14, 1982, is not subject to the 10% penalty tax.
5. WITHHOLDING OF TAX FROM DISTRIBUTIONS. Taxable amounts distributed from
annuity contracts are subject to tax withholding. You may generally elect not to
have tax withheld from your payments. The rate of withholding on annuity
payments will be determined on the basis of the withholding certificate you file
with Pruco Life. These elections must be made on the appropriate Pruco Life
forms. Absent these elections, Pruco Life will withhold the tax amounts required
by the applicable tax regulations. You may be subject to penalties under the
estimated tax payment rules if your withholding and estimated tax payments are
not sufficient.
6. NONRESIDENT ALIENS. Special tax withholding rules apply to nonresident
aliens.
8
<PAGE> 53
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL OCC
MONEY DIVERSIFIED HIGH YIELD ACCUMULATION
MARKET BOND BOND TRUST MANAGED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investment in The Prudential
Series Fund, Inc. Portfolios
and non-Prudential administered
funds, at net asset value
[Note 3] ......................... $409,517,164 $571,573,815 $381,208,372 $446,142,833
------------ ------------ ------------ ------------
Net Assets ......................... $409,517,164 $571,573,815 $381,208,372 $446,142,833
============ ============ ============ ============
NET ASSETS, representing:
Equity of contract owners [Note 4].. $409,517,164 $571,573,815 $381,208,372 $446,142,833
------------ ------------ ------------ ------------
$409,517,164 $571,573,815 $381,208,372 $446,142,833
============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A1
<PAGE> 54
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL AIM V.I. T. ROWE PRICE
STOCK EQUITY GROWTH EQUITY PRUDENTIAL PRUDENTIAL JANUS ASPEN
INDEX INCOME AND INCOME EQUITY JENNISON AIM V.I. GROWTH
PORTFOLIO PORTFOLIO INCOME FUND PORTFOLIO PORTFOLIO PORTFOLIO VALUE FUND PORTFOLIO
------------- ---------- ----------- ------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,017,362,289 $552,654,145 $200,291,842 $189,276,527 $786,985,738 $1,215,578,269 $342,341,778 $364,020,511
- -------------- ------------ ------------ ------------ ------------ -------------- ------------ ------------
$1,017,362,289 $552,654,145 $200,291,842 $189,276,527 $786,985,738 $1,215,578,269 $342,341,778 $364,020,511
============== ============ ============ ============ ============ ============== ============ ============
$1,017,362,289 $552,654,145 $200,291,842 $189,276,527 $786,985,738 $1,215,578,269 $342,341,778 $364,020,511
- -------------- ------------ ------------ ------------ ------------ -------------- ------------ ------------
$1,017,362,289 $552,654,145 $200,291,842 $189,276,527 $786,985,738 $1,215,578,269 $342,341,778 $364,020,511
============== ============ ============ ============ ============ ============== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A2
<PAGE> 55
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------
MFS OCC WARBURG PINCUS
MFS EMERGING ACCUMULATION POST-VENTURE PRUDENTIAL
RESEARCH GROWTH TRUST SMALL CAP CAPITAL GLOBAL
SERIES SERIES PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in The Prudential Series Fund,
Inc. Portfolios and non-Prudential
administered funds, at net asset value [Note 3] ... $106,649,299 $377,908,001 $77,837,223 $41,140,550 $172,963,851
------------ ------------ ----------- ----------- ------------
Net Assets .......................................... $106,649,299 $377,908,001 $77,837,223 $41,140,550 $172,963,851
============ ============ =========== =========== ============
NET ASSETS, representing:
Equity of contract owners [Note 4] .................. $106,649,299 $377,908,001 $77,837,223 $41,140,550 $172,963,851
------------ ------------ ----------- ----------- ------------
$106,649,299 $377,908,001 $77,837,223 $41,140,550 $172,963,851
============ ============ =========== =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A3
<PAGE> 56
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
JANUS ASPEN T. ROWE PRICE SMALL PRUDENTIAL DIVERSIFIED
INTERNATIONAL INTERNATIONAL CAPITALIZATION AMERICAN FRANKLIN 20/20 CONSERVATIVE
GROWTH STOCK STOCK CENTURY SMALL CAP FOCUS GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO VP VALUE GROWTH FUND PORTFOLIO PORTFOLIO
------------- ------------- -------------- -------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
------------ ----------- ----------- ----------- ----------- ----------- ------------
$342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
============ =========== =========== =========== =========== =========== ============
$342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
------------ ----------- ----------- ----------- ----------- ----------- ------------
$342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
============ =========== =========== =========== =========== =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A4
<PAGE> 57
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
For the period ended December 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------
PRUDENTIAL OCC
PRUDENTIAL PRUDENTIAL HIGH YIELD ACCUMULATION
MONEY MARKET DIVERSIFIED BOND BOND TRUST MANAGED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------------- ---------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income ................................. $ 15,237,235 $ 0 $ 899,319 $ 6,092,205
------------ ------------- ------------ ------------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk and for
administration [Notes 5A and 5B] .............. 4,319,880 6,984,293 4,850,578 6,120,507
------------ ------------- ------------ ------------
NET INVESTMENT INCOME (LOSS) ...................... 10,917,355 (6,984,293) (3,951,259) (28,302)
------------ ------------- ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ............ 0 1,285,540 0 13,670,677
Realized gain (loss) on shares redeemed ......... 0 (217,332) (1,335,323) 897,961
Net change in unrealized gain (loss) on
investments ................................... 0 (4,059,603) 15,367,189 324,829
------------ ------------- ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS .................... 0 (2,991,395) 14,031,866 14,893,467
------------ ------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ....................... $ 10,917,355 $ (9,975,688) $ 10,080,607 $ 14,865,165
============ ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A5
<PAGE> 58
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. T. ROWE PRICE
PRUDENTIAL PRUDENTIAL GROWTH EQUITY PRUDENTIAL PRUDENTIAL JANUS ASPEN
STOCK INDEX EQUITY INCOME AND INCOME EQUITY JENNISON AIM V.I. GROWTH
PORTFOLIO PORTFOLIO INCOME FUND PORTFOLIO PORTFOLIO PORTFOLIO VALUE FUND PORTFOLIO
----------- ------------- ----------- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8,820,513 $ 12,066,262 $ 983,762 $ 3,440,291 $ 12,078,192 $ 1,392,985 $ 893,450 $ 555,659
- ------------- ------------ ------------ ----------- ------------ ------------- ----------- ------------
10,910,240 7,164,555 1,928,075 2,481,037 9,656,037 11,111,111 3,032,917 2,973,970
- ------------- ------------ ------------ ----------- ------------ ------------- ----------- ------------
(2,089,727) 4,901,707 (944,313) 959,254 2,422,155 (9,718,126) (2,139,467) (2,418,311)
- ------------- ------------ ------------ ----------- ------------ ------------- ----------- ------------
11,127,890 60,578,751 679,249 8,086,306 89,969,855 47,725,828 4,672,141 1,086,014
1,703,966 (1,995,011) 261,097 380,940 856,311 3,182,966 139,822 163,612
130,084,476 (13,812,667) 43,708,751 (6,757,908) (24,789,617) 263,864,400 56,483,118 87,382,804
------------ ----------- ------------ ----------- ------------ ------------- ----------- ------------
142,916,332 44,771,073 44,649,097 1,709,338 66,036,549 314,773,194 61,295,081 88,632,430
------------ ----------- ------------ ----------- ------------ ------------- ----------- ------------
$ 140,826,605 $ 49,672,780 $ 43,704,784 $ 2,668,592 $ 68,458,704 $ 305,055,068 $ 59,155,614 $ 86,214,119
============= ============ ============ =========== ============ ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A6
<PAGE> 59
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
For the period ended December 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------
MFS OCC WARBURG PINCUS
MFS EMERGING ACCUMULATION POST-VENTURE
RESEARCH GROWTH TRUST SMALL CAP CAPITAL
SERIES SERIES PORTFOLIO PORTFOLIO
-------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income ......................... $ 168,118 $ 0 $ 492,737 $ 0
------------- ------------- ------------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk and for
administration [Notes 5A and 5B] ...... 1,212,884 3,014,243 1,066,833 351,026
------------- ------------- ------------- -----------
NET INVESTMENT INCOME (LOSS) .............. (1,044,766) (3,014,243) (574,096) (351,026)
------------- ------------- ------------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received .... 888,428 0 0 0
Realized gain (loss) on shares redeemed . 916,660 1,054,720 (779,717) 228,993
Net change in unrealized gain (loss) on
investments ........................... 18,501,505 156,194,947 (1,154,571) 15,136,721
------------- ------------- ------------- -----------
NET GAIN (LOSS) ON INVESTMENTS ............ 20,306,593 157,249,667 (1,934,288) 15,365,714
------------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............... $ 19,261,827 $ 154,235,424 $ (2,508,384) $15,014,688
============= ============= ============= ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A7
<PAGE> 60
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
JANUS ASPEN T. ROWE PRICE SMALL PRUDENTIAL DIVERSIFIED
PRUDENTIAL INTERNATIONAL INTERNATIONAL CAPITALIZATION AMERICAN FRANKLIN 20/20 CONSERVATIVE
GLOBAL GROWTH STOCK STOCK CENTURY SMALL CAP FOCUS GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO VP VALUE GROWTH FUND PORTFOLIO* PORTFOLIO*
---------- ------------- ------------- -------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 415,757 $ 459,400 $ 215,438 $ 0 $ 69,828 $ 10,300 $ 71,135 $1,794,864
----------- ------------- ----------- ---------- ----------- ----------- ---------- ----------
1,537,803 2,642,970 605,829 737,136 247,291 216,215 235,466 501,898
----------- ------------- ----------- ---------- ----------- ----------- ---------- ----------
(1,122,046) (2,183,570) (390,391) (737,136) (177,463) (205,915) (164,331) 1,292,966
----------- ------------- ----------- ---------- ----------- ----------- ---------- ----------
728,997 0 677,091 808,152 661,557 106,375 11,564 0
644,200 938,177 275,936 50,819 (2,693) 33,496 7,246 (355)
50,590,003 145,749,839 13,306,940 8,008,016 (2,145,944) 13,249,074 7,034,042 4,352,952
----------- ------------- ----------- ---------- ----------- ----------- ---------- ----------
51,963,200 146,688,016 14,259,967 8,866,987 (1,487,080) 13,388,945 7,052,852 4,352,597
----------- ------------- ----------- ---------- ----------- ----------- ---------- ----------
$50,841,154 $ 144,504,446 $13,869,576 $8,129,851 $(1,644,543) $13,183,030 $6,888,521 $5,645,563
=========== ============= =========== ========== =========== =========== ========== ==========
</TABLE>
* Became available on May 3, 1999 (Note 1)
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A8
<PAGE> 61
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
MONEY MARKET DIVERSIFIED BOND
PORTFOLIO PORTFOLIO
---------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) ................................. $ 10,917,355 $ 6,220,605 $ (6,984,293) $ 13,023,727
Capital gains distributions received ......................... 0 0 1,285,540 716,977
Realized gain (loss) on shares redeemed ...................... 0 0 (217,332) (6,174)
Net change in unrealized gain (loss) on investments .......... 0 0 (4,059,603) (1,510,869)
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 10,917,355 6,220,605 (9,975,688) 12,223,661
------------ ------------ ------------- -------------
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS
Contract Owner Net Payments .................................. 272,372,341 222,388,823 277,727,914 221,694,519
Surrenders, Withdrawals and Death Benefits ................... (42,335,727) (19,037,371) (36,944,522) (11,972,687)
Net Transfers From (To) Other Subaccounts or Fixed Rate Option (71,873,867) (73,761,433) (26,698,441) 24,535,852
Withdrawal Charge ............................................ (183,933) (17,990) (242,247) (37,955)
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND OTHER OPERATING TRANSFERS ............... 157,978,814 129,572,029 213,842,704 234,219,729
------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 7] ............................. 0 (3,640,779) 0 (2,285,665)
------------ ------------ ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ 168,896,169 132,151,855 203,867,016 244,157,725
NET ASSETS
Beginning of period .......................................... 240,620,995 108,469,140 367,706,799 123,549,074
------------ ------------ ------------- -------------
End of period ................................................ $409,517,164 $240,620,995 $ 571,573,815 $ 367,706,799
============ ============ ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A9
<PAGE> 62
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRUDENTIAL OCC ACCUMULATION PRUDENTIAL PRUDENTIAL
HIGH YIELD BOND TRUST MANAGED STOCK INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------- ----------------------------- ------------------------------- ------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (3,951,259) $ 20,816,978 $ (28,302) $ (2,670,351) $ (2,089,727) $ (185,276) $ 4,901,707 $ 5,591,019
0 0 13,670,677 6,952,938 11,127,890 8,054,760 60,578,751 25,710,606
(1,335,323) (473,469) 897,961 (277,190) 1,703,966 856,268 (1,995,011) (231,835)
15,367,189 (34,004,857) 324,829 5,676,242 130,084,476 81,282,537 (13,812,667) (61,296,933)
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
10,080,607 (13,661,348) 14,865,165 9,681,639 140,826,605 90,008,289 49,672,780 (30,227,143)
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
129,036,884 188,630,259 112,391,697 228,513,667 321,599,131 252,590,459 115,693,987 290,496,090
(30,777,962) (13,920,895) (36,218,849) (15,187,256) (47,411,223) (18,498,579) (36,847,150) (17,041,887)
(29,441,596) 9,082,688 (50,061,353) (1,385,568) 37,359,865 20,564,789 (43,263,785) 2,985,956
(389,559) (35,661) (436,907) (82,063) (260,561) (78,726) (356,713) (65,773)
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
68,427,767 183,756,391 25,674,588 211,858,780 311,287,212 254,577,943 35,226,339 276,374,386
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
0 (2,770,786) 0 (3,854,378) 0 (2,993,998) 0 (3,015,564)
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
78,508,374 167,324,257 40,539,753 217,686,041 452,113,817 341,592,234 84,899,119 243,131,679
302,699,998 135,375,741 405,603,080 187,917,039 565,248,472 223,656,238 467,755,026 224,623,347
- ------------ ------------- ------------- ------------ --------------- ------------ ------------ --------------
$381,208,372 $ 302,699,998 $ 446,142,833 $405,603,080 $ 1,017,362,289 $565,248,472 $552,654,145 $ 467,755,026
============ ============= ============= ============ =============== ============ ============ =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A10
<PAGE> 63
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
T. ROWE PRICE
AIM V.I. GROWTH AND EQUITY INCOME
INCOME FUND PORTFOLIO
----------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) ................................. $ (944,313) $ (564,142) $ 959,254 $ 971,949
Capital gains distributions received ......................... 679,249 916,060 8,086,306 4,669,654
Realized gain (loss) on shares redeemed ...................... 261,097 36,024 380,940 34,283
Net change in unrealized gain (loss) on investments .......... 43,708,751 16,122,807 (6,757,908) 2,625,091
------------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 43,704,784 16,510,749 2,668,592 8,300,977
------------- ------------ ------------- -------------
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS
Contract Owner Net Payments .................................. 63,862,790 39,265,963 47,231,184 65,996,482
Surrenders, Withdrawals and Death Benefits ................... (9,606,456) (2,875,990) (11,063,140) (5,579,801)
Net Transfers From (To) Other Subaccounts or Fixed Rate Option 6,136,356 1,659,949 (7,280,014) 1,810,796
Withdrawal Charge ............................................ (31,826) (15,890) (73,056) (35,415)
------------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND OTHER OPERATING TRANSFERS ............... 60,360,864 38,034,032 28,814,974 62,192,062
------------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 7] ............................. 0 (460,303) 0 (1,320,662)
------------- ------------ ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ 104,065,648 54,084,478 31,483,566 69,172,377
NET ASSETS
Beginning of period .......................................... 96,226,194 42,141,716 157,792,961 88,620,584
------------- ------------ ------------- -------------
End of period ................................................ $ 200,291,842 $ 96,226,194 $ 189,276,527 $ 157,792,961
============= ============ ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A11
<PAGE> 64
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRUDENTIAL
EQUITY PRUDENTIAL JENNISON AIM V.I. JANUS ASPEN
PORTFOLIO PORTFOLIO VALUE FUND GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,422,155 $ 2,717,113 $ (9,718,126) $ (3,512,674) $ (2,139,467) $ (537,111) $ (2,418,311) $ 1,636,631
89,969,855 62,992,043 47,725,828 6,752,988 4,672,141 4,721,622 1,086,014 2,162,901
856,311 386,861 3,182,966 266,858 139,822 68,930 163,612 1,707,561
(24,789,617) (39,567,051) 263,864,400 93,984,005 56,483,118 18,290,373 87,382,804 19,044,323
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- -------------
68,458,704 26,528,966 305,055,068 97,491,177 59,155,614 22,543,814 86,214,119 24,551,416
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- -------------
204,643,213 252,668,916 372,108,655 226,450,341 143,043,185 44,708,869 132,338,514 39,709,839
(45,524,510) (21,218,983) (49,014,642) (12,706,368) (12,933,293) (2,887,607) (14,142,704) (3,026,558)
(28,913,363) 2,789,177 92,106,617 28,775,735 35,258,086 6,080,094 44,810,730 4,761,250
(324,391) (85,832) (327,147) (52,520) (55,983) (18,853) (57,856) (21,890)
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- -------------
129,880,949 234,153,278 414,873,483 242,467,188 165,311,995 47,882,503 162,948,684 41,422,641
0 (4,666,555) 0 (2,553,663) 0 (766,278) 0 (1,013,718)
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- -------------
198,339,653 256,015,689 719,928,551 337,404,702 224,467,609 69,660,039 249,162,803 64,960,339
588,646,085 332,630,396 495,648,718 158,244,016 117,874,169 48,214,130 114,857,708 49,897,369
- ------------ ------------- --------------- ------------- ------------- ------------ ------------- -------------
$786,985,738 $ 588,646,085 $ 1,215,577,269 $ 495,648,718 $ 342,341,778 $117,874,169 $ 364,020,511 $ 114,857,708
============ ============= =============== ============= ============= ============ ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A12
<PAGE> 65
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
MFS MFS
RESEARCH SERIES EMERGING GROWTH SERIES
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) ................................. $ (1,044,766) $ (710,146) $ (3,014,243) $ (1,270,095)
Capital gains distributions received ......................... 888,428 1,080,320 0 638,659
Realized gain (loss) on shares redeemed ...................... 916,660 101,567 1,054,720 519,956
Net change in unrealized gain (loss) on investments .......... 18,501,505 10,224,375 156,194,947 27,427,720
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 19,261,827 10,696,116 154,235,424 27,316,240
------------- ------------- ------------- -------------
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS
Contract Owner Net Payments .................................. 19,128,059 27,881,903 79,496,716 66,934,974
Surrenders, Withdrawals and Death Benefits ................... (4,803,341) (2,149,211) (13,508,434) (3,655,122)
Net Transfers From (To) Other Subaccounts or Fixed Rate Option (1,734,031) 201,719 10,085,471 5,933,717
Withdrawal Charge ............................................ (43,356) (16,202) (109,040) (22,762)
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND OTHER OPERATING TRANSFERS ............... 12,547,331 25,918,209 75,964,713 69,190,807
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 7] ............................. 0 (751,189) 0 (629,650)
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ 31,809,158 35,863,136 230,200,137 95,877,397
NET ASSETS
Beginning of period .......................................... 74,840,141 38,977,005 147,707,864 51,830,467
------------- ------------- ------------- -------------
End of period ................................................ $ 106,649,299 $ 74,840,141 $ 377,908,001 $ 147,707,864
============= ============= ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A13
<PAGE> 66
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
WARBURG PINCUS PRUDENTIAL JANUS ASPEN
OCC ACCUMULATION TRUST POST-VENTURE CAPITAL GLOBAL INTERNATIONAL GROWTH
SMALL CAP PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------- ------------------------------- ------------------------------ ------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------- -------------- ------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (574,096) $ (726,310) $ (351,026) $ (220,149) $ (1,122,046) $ 51,729 $ (2,183,570) $ 375,577
0 1,857,356 0 0 728,997 3,067,421 0 277,964
(779,717) (185,468) 228,993 (29,780) 644,200 343,605 938,177 257,344
(1,154,571) (8,799,441) 15,136,721 1,225,477 50,590,003 8,158,029 145,749,839 12,138,102
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
(2,508,384) (7,853,863) 15,014,688 975,548 50,841,154 11,620,784 144,504,446 13,048,987
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
14,475,643 40,824,682 7,384,487 7,812,255 50,926,412 25,232,854 67,353,904 46,761,121
(5,403,265) (2,179,774) (1,361,901) (716,362) (6,794,389) (2,991,488) (9,802,085) (5,140,181)
(6,539,646) 1,029,950 (924,117) 1,132,477 3,429,607 (807,455) 4,587,183 3,054,726
(26,239) (17,090) (7,136) (4,532) (20,785) (9,953) (54,319) (32,754)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
2,506,493 39,657,768 5,091,333 8,223,838 47,540,845 21,423,958 62,084,683 44,642,912
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
0 (810,379) 0 (230,776) 0 (770,307) 0 (1,490,800)
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
(1,891) 30,993,526 20,106,021 8,968,610 98,381,999 32,274,435 206,589,129 56,201,099
77,839,114 46,845,588 21,034,529 12,065,919 74,581,852 42,307,417 136,172,457 79,971,358
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------
$ 77,837,223 $ 77,839,114 41,140,550 $ 21,034,529 172,963,851 $ 74,581,852 $ 342,761,586 $136,172,457
============= ============= ============= ============= ============= ============= ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A14
<PAGE> 67
FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
PRUDENTIAL SMALL
T. ROWE PRICE CAPITALIZATION
INTERNATIONAL STOCK STOCK
PORTFOLIO PORTFOLIO
------------------------------ -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) ................................. $ (390,391) $ (9,407) $ (737,136) $ (223,876)
Capital gains distributions received ......................... 677,091 145,141 808,152 2,099,444
Realized gain (loss) on shares redeemed ...................... 275,936 (5,370) 50,819 100,021
Net change in unrealized gain (loss) on investments .......... 13,306,940 3,521,094 8,008,016 (1,974,627)
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 13,869,576 3,651,458 8,129,851 962
------------- ------------- ------------- -------------
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS
Contract Owner Net Payments .................................. 12,272,179 11,193,741 35,151,433 9,070,074
Surrenders, Withdraws and Death Benefits ..................... (2,369,288) (1,426,032) (2,900,328) (1,481,001)
Net Transfers From (To) Other Subaccounts or Fixed Rate Option (539,182) (546,402) 245,904 2,431,672
Withdrawal Charge ............................................ (12,248) (9,049) (3,007) (24)
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND OTHER OPERATING TRANSFERS ............... 9,351,461 9,212,258 32,494,002 10,020,721
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 7] ............................. 0 (444,980) 0 (2,337)
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ 23,221,037 12,418,736 40,623,853 10,019,346
NET ASSETS
Beginning of period .......................................... 36,131,667 23,712,931 36,438,134 26,418,788
------------- ------------- ------------- -------------
End of period ................................................ $ 59,352,704 $ 36,131,667 $ 77,061,987 $ 36,438,134
============= ============= ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A15
<PAGE> 68
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
AMERICAN FRANKLIN 20/20 DIVERSIFIED
CENTURY SMALL CAP FOCUS CONSERVATIVE
VP VALUE* GROWTH FUND* PORTFOLIO** GROWTH PORTFOLIO**
- ------------------------------- ------------------------------- ----------------------------------
1999 1998 1999 1998 1999 1999
- ------------- ------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ (177,463) $ (6,029) $ (205,915) $ (5,958) $ (164,331) $ 1,292,966
661,557 0 106,375 0 11,564 0
(2,693) (98) 33,496 6,735 7,246 (355)
(2,145,944) 112,247 13,249,074 340,261 7,034,042 4,352,952
- ------------- ------------- ------------- ------------- ------------- -------------
(1,664,543) 106,120 13,183,030 341,038 6,888,521 5,645,563
- ------------- ------------- ------------- ------------- ------------- -------------
23,604,381 2,778,442 22,122,028 2,545,887 38,855,299 92,547,214
(631,172) (8,361) (543,922) (4,069) (504,773) (2,063,359)
4,383,749 740,969 7,420,093 630,269 14,502,718 11,427,441
(1,238) (8) (1,563) (9) (1,154) (992)
- ------------- ------------- ------------- ------------- ------------- -------------
27,355,720 3,511,042 28,996,636 3,172,078 52,852,090 101,910,304
- ------------- ------------- ------------- ------------- ------------- -------------
0 (681) 0 (2,440) 0 0
- ------------- ------------- ------------- ------------- ------------- -------------
25,691,177 3,616,481 42,179,666 3,510,676 59,740,611 107,555,867
3,616,481 0 3,510,676 0 0 0
- ------------- ------------- ------------- ------------- ------------- -------------
$ 29,307,658 $ 3,616,481 $ 45,690,342 $ 3,510,676 $ 59,740,611 $ 107,555,867
============= ============= ============= ============= ============= =============
</TABLE>
* Became available on September 1, 1998 (Note 1)
** Became available on May 3, 1999 (Note 1)
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A16
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS OF
THE DISCOVERY SELECT VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
DECEMBER 31, 1999
NOTE 1: GENERAL
Pruco Life Flexible Premium Variable Annuity Account ("the Account")
was established on June 16, 1995 under Arizona law as a separate
investment account of Pruco Life Insurance Company ("Pruco Life")
which is a wholly-owned subsidiary of The Prudential Insurance Company
of America ("Prudential"). The assets of the Account are segregated
from Pruco Life's other assets. Proceeds from the purchases of
Discovery Preferred Variable Annuity contracts ("Discovery Preferred")
and Discovery Select Variable Annuity contracts ("Discovery Select")
and beginning October 11, 1999 Discovery Choice Variable Annuity
contracts, Basic and Enhanced ("Discovery Choice") are invested in the
Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. The Account is a funding vehicle
for individual variable annuity contracts. There are thirty
subaccounts within the Account. Discovery Select contracts offer the
option to invest in twenty-four of these subaccounts, each of which
invests in either a corresponding portfolio of The Prudential Series
Fund, Inc. (the "Series Fund") or any of the non-Prudential
administered funds shown in Note 3. 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
accounting principles generally accepted in the United States
("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 or the
non-Prudential administered funds 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 or the
non-Prudential administered funds and are recorded on the ex-dividend
date.
A17
<PAGE> 70
NOTE 3: INVESTMENT INFORMATION
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
The net asset value per share for each portfolio of the Series Fund or
the non-Prudential administered variable funds, the number of shares
(rounded) of each portfolio held by the Account and the aggregate cost
of investments in such shares at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL OCC PRUDENTIAL
MONEY DIVERSIFIED HIGH YIELD ACCUMULATION STOCK
MARKET BOND BOND TRUST MANAGED INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 40,951,716 52,198,522 50,692,603 10,220,913 22,887,791
Net asset value per share $ 10.00 $ 10.95 $ 7.52 $ 43.65 $ 44.45
Cost: $409,517,164 $579,021,636 $399,709,831 $431,055,912 $789,218,496
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL AIM V.I. T. ROWE PRICE
EQUITY GROWTH AND EQUITY PRUDENTIAL PRUDENTIAL
INCOME INCOME INCOME EQUITY JENNISON
PORTFOLIO FUND PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 28,312,200 6,340,356 10,105,527 27,231,340 37,529,431
Net asset value per share $ 19.52 $ 31.59 $ 18.73 $ 28.90 $ 32.39
Cost: $622,435,509 $137,091,483 $186,994,604 $838,738,489 $846,668,974
</TABLE>
<TABLE>
<CAPTION>
MFS OCC
AIM V.I. JANUS ASPEN MFS EMERGING ACCUMULATION
VALUE GROWTH RESEARCH GROWTH TRUST SMALL CAP
FUND PORTFOLIO SERIES SERIES PORTFOLIO
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 10,219,158 10,817,861 4,569,379 9,960,675 3,456,360
Net asset value per share $ 33.50 $ 33.65 $ 23.34 $ 37.94 $ 22.52
Cost: $265,728,076 $253,846,012 $ 75,155,653 $189,594,017 $ 85,243,633
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL
WARBURG PINCUS JANUS ASPEN T. ROWE PRICE SMALL
POST-VENTURE PRUDENTIAL INTERNATIONAL INTERNATIONAL CAPITALIZATION
CAPITAL GLOBAL GROWTH STOCK STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 2,136,062 5,583,081 8,863,760 3,117,264 4,742,276
Net asset value per share $ 19.26 $ 30.98 $ 38.67 $ 19.04 $ 16.25
Cost: $ 23,810,106 $115,095,668 $181,641,250 $ 43,336,323 $ 67,771,202
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL DIVERSIFIED
AMERICAN FRANKLIN 20/20 CONSERVATIVE
CENTURY SMALL CAP FOCUS GROWTH
VP VALUE GROWTH FUND PORTFOLIO PORTFOLIO
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Number of shares (rounded): 4,925,657 2,902,822 5,028,671 10,371,829
Net asset value per share $ 5.95 $ 15.74 $ 11.88 $ 10.37
Cost: $ 31,341,355 $ 32,101,007 $ 52,706,569 $103,202,915
</TABLE>
A18
<PAGE> 71
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units (rounded), unit values and total
value of contract owner equity at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL OCC
MONEY DIVERSIFIED HIGH YIELD ACCUMULATION PRUDENTIAL
MARKET BOND BOND TRUST MANAGED STOCK INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Discovery Preferred-rounded): ........ 18,428,614 23,741,453 17,801,035 N/A 40,197,437
Unit Value (Discovery Preferred) ........ $ 1.16977 $ 1.17457 $ 1.25119 N/A $ 2.24149
------------ ------------ ------------- ------------ --------------
Contract Owner Equity
(Discovery Preferred) ................. $ 21,557,240 $ 27,885,998 $ 22,272,477 N/A $ 90,102,154
------------ ------------ ------------- ------------ --------------
Contract Owner Units Outstanding
(Discovery Select-rounded): ........... 331,274,925 462,776,279 286,794,531 321,473,248 413,343,040
Unit Value (Discovery Select) ........... $ 1.16977 $ 1.17457 $ 1.25119 $ 1.38780 $ 2.24149
------------ ------------ ------------- ------------ --------------
Contract Owner Equity
(Discovery Select) .................... $387,515,470 $543,563,134 $ 358,834,450 $446,140,573 $ 926,504,291
------------ ------------ ------------- ------------ --------------
Contract Owner Units Outstanding
(Discovery Choice Basic-rounded): ..... 192,759 3,666 7,701 0.000 67,412
Unit Value (Discovery Choice Basic) ..... $ 1.00705 $ 1.00134 $ 1.02910 $ 0.98149 $ 1.07732
------------ ------------ ------------- ------------ --------------
Contract Owner Equity
(Discovery Choice Basic) .............. $ 194,118 $ 3,671 $ 7,925 $ 0 $ 72,625
------------ ------------ ------------- ------------ --------------
Contract Owner Units Outstanding
(Discovery Choice Enhanced-rounded): .. 248,722 120,911 90,921 2,303 634,532
Unit Value (Discovery Choice Enhanced) .. $ 1.00649 $ 1.00083 $ 1.02858 $ 0.98101 $ 1.07673
------------ ------------ ------------- ------------ --------------
Contract Owner Equity
(Discovery Choice Enhanced) ........... $ 250,336 $ 121,012 $ 93,520 $ 2,260 $ 683,219
------------ ------------ ------------- ------------ --------------
TOTAL CONTRACT OWNER EQUITY ............. $409,517,164 $571,573,815 $ 381,208,372 $446,142,833 $1,017,362,289
============ ============ ============= ============ ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------
AIM V.I. T. ROWE PRICE
PRUDENTIAL GROWTH AND EQUITY PRUDENTIAL PRUDENTIAL
EQUITY INCOME INCOME INCOME EQUITY JENNISON
PORTFOLIO FUND PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Discovery Preferred-rounded): ........ 32,470,878 N/A N/A 77,161,984 41,947,739
Unit Value (Discovery Preferred) ........ $ 1.77516 N/A N/A $ 1.77642 $ 2.81446
------------ ------------ ------------ ------------ --------------
Contract Owner Equity
(Discovery Preferred) ................. $ 57,641,005 N/A N/A $137,072,091 $ 118,060,232
------------ ------------ ------------ ------------ --------------
Contract Owner Units Outstanding
(Discovery Select-rounded): ........... 278,847,271 93,248,281 129,059,108 365,751,430 389,581,022
Unit Value (Discovery Select) ........... $ 1.77516 $ 2.14458 $ 1.46563 $ 1.77642 $ 2.81446
------------ ------------ ------------ ------------ --------------
Contract Owner Equity
(Discovery Select) .................... $494,998,521 $199,978,398 $189,152,900 $649,728,156 $1,096,460,204
------------ ------------ ------------ ------------ --------------
Contract Owner Units Outstanding
(Discovery Choice Basic-rounded): ..... 2,939 91,373 18,191 0.000 192,663
Unit Value (Discovery Choice Basic) ..... $ 1.07799 $ $1.16053 $ 0.97418 $ 1.07278 $ 1.17793
------------ ------------ ------------ ------------ --------------
Contract Owner Equity
(Discovery Choice Basic) .............. $ 3,169 $ 106,041 $ 17,721 $ 0 $ 226,943
------------ ------------ ------------ ------------ --------------
Contract Owner Units Outstanding
(Discovery Choice Enhanced-rounded): .. 10,626 178,802 108,770 172,987 705,729
Unit Value (Discovery Choice
Enhanced) ............................. $ 1.07749 $ 1.15996 $ 0.97367 $ 1.07228 $ 1.17735
------------ ------------ ------------ ------------ --------------
Contract Owner Equity
(Discovery Choice Enhanced) ........... $ 11,450 $ 207,403 $ 105,906 $ 185,491 $ 830,890
------------ ------------ ------------ ------------ --------------
TOTAL CONTRACT OWNER EQUITY ............. $552,654,145 $200,291,842 $189,276,527 $786,985,738 $1,215,578,269
============ ============ ============ ============ ==============
</TABLE>
A19
<PAGE> 72
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------
MFS OCC
AIM V.I. JANUS ASPEN MFS EMERGING ACCUMULATION
VALUE GROWTH RESEARCH GROWTH TRUST SMALL CAP
FUND PORTFOLIO SERIES SERIES PORTFOLIO
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Discovery Preferred-rounded): ........ N/A N/A N/A N/A N/A
Unit Value (Discovery Preferred) ........ N/A N/A N/A N/A N/A
------------ ------------ ------------ ------------ -----------
Contract Owner Equity
(Discovery Preferred) ................. N/A N/A N/A N/A N/A
------------ ------------ ------------ ------------ -----------
Contract Owner Units Outstanding
(Discovery Select-rounded): ........... 159,478,282 156,489,738 58,852,725 142,181,941 70,710,730
Unit Value (Discovery Select) ........... $ 2.14096 $ 2.31856 $ 1.81149 $ 2.65585 $ 1.10051
------------ ------------ ------------ ------------ -----------
Contract Owner Equity
(Discovery Select) .................... $341,436,622 $362,830,846 $106,611,123 $377,613,907 $77,817,866
------------ ------------ ------------ ------------ -----------
Contract Owner Units Outstanding
(Discovery Choice Basic-rounded): ..... 71,394 225,112 11,559 87,135 13,871
Unit Value (Discovery Choice Basic) ..... $ 1.11027 $ 1.14801 $ 1.15051 $ 1.46600 $ 1.04407
------------ ------------ ------------ ------------ -----------
Contract Owner Equity
(Discovery Choice Basic) .............. $ 79,267 $ 258,430 $ 13,299 $ 127,741 $ 14,482
------------ ------------ ------------ ------------ -----------
Contract Owner Units Outstanding
(Discovery Choice Enhanced-rounded): .. 744,211 811,597 21,634 113,531 4,672
Unit Value (Discovery Choice Enhanced) $ 1.10975 $ 1.14741 $ 1.14991 $ 1.46527 $ 1.04349
------------ ------------ ------------- ------------ --------------
Contract Owner Equity ...................
(Discovery Choice Enhanced) ........... $ 825,889 $ 931,235 $ 24,877 $ 166,353 $ 4,875
------------ ------------ ------------ ------------ -----------
TOTAL CONTRACT OWNER EQUITY ............. $342,341,778 $364,020,511 $106,649,299 $377,908,001 $77,837,223
============ ============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------
PRUDENTIAL
WARBURG PINCUS T. ROWE PRICE SMALL
POST-VENTURE PRUDENTIAL JANUS ASPEN INTERNATIONAL CAPITALIZATION
CAPITAL GLOBAL INTERNATIONAL STOCK STOCK
PORTFOLIO PORTFOLIO GROWTH PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ------------ ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Discovery Preferred-rounded): ....... N/A 12,841,628 N/A N/A 15,770,345
Unit Value (Discovery Preferred) ....... N/A $ 2.27423 N/A N/A $ 1.64674
------------ ------------ ------------ ----------- -----------
Contract Owner Equity
(Discovery Preferred) ................ N/A $ 29,204,816 N/A N/A $25,969,657
------------ ------------ ------------ ----------- -----------
Contract Owner Units Outstanding
(Discovery Select-rounded): .......... 22,673,902 63,210,475 133,606,831 37,353,154 36,672,909
Unit Value (Discovery Select) .......... $ 1.81263 $ 2.27423 $ 2.55865 $ 1.58765 $ 1.39319
------------ ------------ ------------ ----------- -----------
Contract Owner Equity
(Discovery Select) ................... $ 41,099,395 $143,755,159 $341,853,118 $59,303,735 $51,092,330
------------ ------------ ------------ ----------- -----------
Contract Owner Units Outstanding
(Discovery Choice Basic-rounded): .... 1,934 0.000 148,790 0.000 0.000
Unit Value (Discovery Choice Basic) .... $ 1.39652 $ 1.24477 $ 1.46027 $ 1.19809 $ 1.12193
------------ ------------ ------------ ----------- -----------
Contract Owner Equity
(Discovery Choice Basic) ............. $ 2,701 $ 0 $ 217,274 $ 0 $ 0
------------ ------------ ------------ ----------- -----------
Contract Owner Units Outstanding
(Discovery Choice Enhanced-rounded): . 27,550 3,116 473,563 40,893 0.000
Unit Value (Discovery Choice Enhanced) . $ 1.39579 $ 1.24417 $ 1.45956 $ 1.19749 $ 1.12143
------------ ------------ ------------ ----------- -----------
Contract Owner Equity
(Discovery Choice Enhanced) .......... $ 38,454 $ 3,876 $ 691,194 $ 48,969 $ 0
------------ ------------ ------------ ----------- -----------
TOTAL CONTRACT OWNER EQUITY ............ $ 41,140,550 $172,963,851 $342,761,586 $59,352,704 $77,061,987
============ ============ ============ =========== ===========
</TABLE>
A20
<PAGE> 73
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------
PRUDENTIAL
PRUDENTIAL DIVERSIFIED
AMERICAN FRANKLIN 20/20 CONSERVATIVE
CENTURY SMALL CAP FOCUS GROWTH
VP VALUE GROWTH FUND PORTFOLIO PORTFOLIO
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Contract Owner Units Outstanding
(Discovery Preferred-rounded): ........ N/A N/A N/A N/A
Unit Value (Discovery Preferred) ........ N/A N/A N/A N/A
----------- ----------- ----------- ------------
Contract Owner Equity
(Discovery Preferred) ................. N/A N/A N/A N/A
----------- ----------- ----------- ------------
Contract Owner Units Outstanding
(Discovery Select-rounded): ........... 25,545,686 21,301,323 50,083,559 102,284,285
Unit Value (Discovery Select) ........... $ 1.14715 $ 2.14040 $ 1.17842 $ 1.05128
----------- ----------- ----------- ------------
Contract Owner Equity
(Discovery Select) .................... $29,304,734 $45,593,352 $59,019,467 $107,529,423
----------- ----------- ----------- ------------
Contract Owner Units Outstanding
(Discovery Choice Basic-rounded): ..... 0.00 24,088 29,922 6,052
Unit Value (Discovery Choice Basic) ..... $ 0.97477 $ 1.27363 $ 1.14337 $ 1.05464
----------- ----------- ----------- ------------
Contract Owner Equity
(Discovery Choice Basic) .............. $ 0 $ 30,679 $ 34,212 $ 6,383
----------- ----------- ----------- ------------
Contract Owner Units Outstanding
(Discovery Choice Enhanced-rounded): .. 3,002 52,091 601,106 19,031
Unit Value (Discovery Choice Enhanced) .. $ 0.97426 $ 1.27297 $ 1.14278 $ 1.05412
----------- ----------- ----------- ------------
Contract Owner Equity
(Discovery Choice Enhanced) ........... $ 2,924 $ 66,311 $ 686,932 $ 20,061
----------- ----------- ----------- ------------
TOTAL CONTRACT OWNER EQUITY ............. $29,307,658 $45,690,342 $59,740,611 $107,555,867
=========== =========== =========== ============
</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 1.25%, 1.25%, 1.35% and 1.65%, are applied daily against the
net assets representing equity of Discovery Preferred, Discovery
Select, Discovery Choice Basic and Discovery Choice Enhanced contract
owners respectively, held in each subaccount. Mortality risk is that
annuitants may live longer than estimated and expense risk is that
the cost of issuing and administering the policies may exceed related
charges by Pruco Life.
B. Administration Charges
The administration charges at an effective annual rate of .15% is
applied daily against the net assets representing equity of Discovery
Preferred and Discovery Select contract owners held in each
subaccount. Administration charges include costs associated with
issuing the contract, establishing and maintaining records, and
providing reports to contract owners.
C. Withdrawal Charge
A withdrawal charge may be made upon full or partial contract owner
redemptions. The charge compensates Pruco Life for paying all of the
expenses of selling and distributing the contracts, including sales
commissions, printing of prospectuses, sales administration,
preparation of sales literature, and other promotional activities. No
withdrawal charge is imposed whenever earnings are withdrawn.
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 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.
A21
<PAGE> 74
NOTE 8: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY DIVERSIFIED HIGH YIELD
MARKET BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 456,935,811 331,650,231 291,375,622 237,118,644 133,657,032 184,723,455
Contract Owner Redemptions: (319,757,994) (215,127,759) (111,214,388) (37,463,915) (78,517,650) (40,262,125)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
OCC
ACCUMULATION PRUDENTIAL PRUDENTIAL
TRUST MANAGED STOCK INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
----------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 97,333,166 191,632,041 217,901,612 191,146,233 93,026,349 197,270,485
Contract Owner Redemptions: (78,496,794) (33,777,164) (63,462,137) (39,441,955) (74,144,631) (37,833,640)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
AIM V.I. T. ROWE PRICE
GROWTH AND EQUITY PRUDENTIAL
INCOME INCOME EQUITY
FUND PORTFOLIO PORTFOLIO
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 46,491,648 33,393,776 43,773,751 59,351,080 150,750,917 187,580,463
Contract Owner Redemptions: (12,380,878) (6,352,042) (24,719,079) (14,700,797) (75,237,504) (40,618,482)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------------
PRUDENTIAL AIM V.I. JANUS ASPEN
JENNISON VALUE GROWTH
PORTFOLIO FUND PORTFOLIO
---------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
------------ ----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 254,836,824 169,816,396 109,052,648 42,370,683 107,500,782 38,586,915
Contract Owner Redemptions: (69,429,979) (27,814,479) (19,289,303) (8,849,926) (20,319,212) (8,478,173)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
MFS OCC
MFS EMERGING ACCUMULATION
RESEARCH GROWTH TRUST SMALL CAP
SERIES SERIES PORTFOLIO
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 18,280,673 25,587,443 70,528,999 65,462,962 22,091,651 42,145,368
Contract Owner Redemptions: (9,946,023) (6,445,798) (25,076,467) (12,875,587) (19,841,734) (9,942,999)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
WARBURG PINCUS
POST-VENTURE PRUDENTIAL JANUS ASPEN
CAPITAL GLOBAL INTERNATIONAL
PORTFOLIO PORTFOLIO GROWTH PORTFOLIO
-------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
--------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 8,119,699 9,699,611 38,863,649 22,311,044 58,594,897 46,728,091
Contract Owner Redemptions: (4,128,642) (2,027,125) (10,766,101) (7,301,735) (20,034,764) (14,796,532)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
PRUDENTIAL
T. ROWE PRICE SMALL
INTERNATIONAL CAPITALIZATION AMERICAN
STOCK STOCK CENTURY
PORTFOLIO PORTFOLIO VP VALUE*
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 14,025,682 12,732,340 35,801,924 11,437,423 25,178,300 3,106,101
Contract Owner Redemptions: (6,555,084) (4,847,940) (9,019,886) (3,224,485) (2,712,585) (23,128)
</TABLE>
* Became available on September 1, 1998
A22
<PAGE> 75
NOTE 8: UNIT ACTIVITY (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
FRANKLIN 20/20 DIVERSIFIED
SMALL CAP FOCUS CONSERVATIVE
GROWTH FUND* PORTFOLIO** GROWTH PORTFOLIO**
--------------------------- ----------- -------------------
1999 1998 1999 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Contract Owner Contributions: 20,865,250 2,877,726 55,311,847 109,391,417
Contract Owner Redemptions: (2,308,089) (57,385) (4,597,260) (7,082,049)
</TABLE>
* Became available on September 1, 1998 (Note 1)
** Became available on May 3, 1999 (Note 1)
NOTE 9: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund and the non-Prudential administered funds for the
year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL OCC
MONEY DIVERSIFIED HIGH YIELD ACCUMULATION PRUDENTIAL
MARKET BOND BOND TRUST MANAGED STOCK INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Purchases ................... $206,858,775 $218,701,233 $ 79,837,332 $ 49,695,587 $307,114,320
Sales ....................... $(53,199,841) $(11,842,823) $(16,260,144) $(30,141,506) $ (6,737,349)
</TABLE>
<TABLE>
<CAPTION>
AIM V.I. T. ROWE PRICE
PRUDENTIAL GROWTH AND EQUITY PRUDENTIAL PRUDENTIAL
EQUITY INCOME INCOME INCOME EQUITY JENNISON
PORTFOLIO FUND PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Purchases ................... $ 57,186,887 $59,506,973 $31,561,310 $145,133,645 $414,169,282
Sales ....................... $(29,125,101) $(1,074,184) $(5,227,372) $(24,908,733) $(10,405,909)
</TABLE>
<TABLE>
<CAPTION>
MFS OCC
AIM V.I. JANUS ASPEN MFS EMERGING ACCUMULATION
VALUE GROWTH RESEARCH GROWTH TRUST SMALL CAP
FUND PORTFOLIO SERIES SERIES PORTFOLIO
------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Purchases ................... $162,944,434 $160,723,651 $15,829,308 $75,757,539 $ 7,977,825
Sales ....................... $ (665,356) $ (748,938) $(4,494,861) $(2,807,069) $(6,538,165)
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL
WARBURG PINCUS T. ROWE PRICE SMALL
POST-VENTURE PRUDENTIAL JANUS ASPEN INTERNATIONAL CAPITALIZATION
CAPITAL GLOBAL INTERNATIONAL STOCK STOCK
PORTFOLIO PORTFOLIO GROWTH PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Purchases ................... $ 6,050,667 $48,942,279 $62,035,894 $11,045,835 $37,590,708
Sales ....................... $(1,310,360) $(2,939,236) $(2,594,179) $(2,300,203) $(5,833,842)
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL
AMERICAN FRANKLIN 20/20 DIVERSIFIED
CENTURY SMALL CAP FOCUS CONSERVATIVE
VP VALUE GROWTH FUND PORTFOLIO** GROWTH PORTFOLIO**
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Purchases ................... $27,184,239 $29,172,612 $52,835,991 $101,434,895
Sales ....................... $ (75,810) $(392,191) $(219,367) $ (26,489)
</TABLE>
** Became available on May 3, 1999
NOTE 10: SUBSEQUENT EVENT
As of May 1, 2000 the Warburg Pincus Post-Venture Capital Portfolio's
name is being changed to the Global Post-Venture Capital Portfolio.
This will have no effect on the contract owner's account or the
related unit value.
A23
<PAGE> 76
To the Contract Owners of the
Discovery Select Variable Annuity Subaccounts of
Pruco Life Flexible Premium Variable Annuity Account
and the Board of Directors of
Pruco Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Prudential Money Market
Portfolio, Prudential Diversified Bond Portfolio, Prudential High Yield Bond
Portfolio, OCC Accumulation Trust Managed Portfolio, Prudential Stock Index
Portfolio, Prudential Equity Income Portfolio, AIM V.I. Growth and Income Fund,
T. Rowe Price Equity Income Portfolio, Prudential Equity Portfolio, Prudential
Jennison Portfolio, AIM V.I. Value Fund, Janus Aspen Growth Portfolio, MFS
Research Series, MFS Emerging Growth Series, OCC Accumulation Trust Small Cap
Portfolio, Warburg Pincus Post-Venture Capital Portfolio, Prudential Global
Portfolio, Janus Aspen International Growth Portfolio, T. Rowe Price
International Stock Portfolio, Prudential Small Capitalization Stock Portfolio,
American Century VP Value, Franklin Small Cap Growth Fund, Prudential 20/20
Focus Portfolio and Prudential Diversified Conservative Growth Portfolio of the
Discovery Select Variable Annuity Subaccounts of Pruco Life Flexible Premium
Variable Annuity Account at December 31, 1999, the results of each of their
operations for the period then ended (for the period September 1, 1998 through
December 31, 1999 for American Century VP Value and Franklin Small Cap Growth
Fund and for the period May 3, 1999 through December 31, 1999 for Prudential
20/20 Focus Portfolio and Prudential Diversified Conservative Growth Portfolio)
and the changes in each of their net assets for each of the two years in the
period then ended, (for the period September 1, 1998 through December 31, 1999
for American Century VP Value and Franklin Small Cap Growth Fund and for the
period May 3, 1999 through December 31, 1999 for Prudential 20/20 Focus
Portfolio and Prudential Diversified Conservative Growth Portfolio), in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in
the United States, 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, 1999,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 17, 2000
<PAGE> 77
DISCOVERY SELECT(R) VARIABLE ANNUITY
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY
AND SUBSIDIARIES
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Financial Position
December 31, 1999 and 1998 (In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1999: $3,084,057; $2,998,362 $2,763,926
1998: $2,738,654)
Held to maturity, at amortized cost (fair value, 1999: $377,822; 1998: 388,990 410,558
$421,845)
Equity securities - available for sale, at fair value (cost, 1999: $3,238; 4,532 2,847
1998: $2,951)
Mortgage loans on real estate 10,509 17,354
Policy loans 792,352 766,917
Short-term investments 207,219 240,727
Other long-term investments 77,769 42,050
----------------- -----------------
Total investments 4,479,733 4,244,379
Cash 76,396 89,679
Deferred policy acquisition costs 1,062,785 861,713
Accrued investment income 68,917 61,114
Receivables from affiliate 23,329 -
Other assets 48,228 65,145
Separate Account assets 16,032,449 11,490,751
----------------- -----------------
TOTAL ASSETS $21,791,837 $16,812,781
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $3,116,261 $2,702,011
Future policy benefits and other policyholder liabilities 635,978 528,779
Cash collateral for loaned securities 87,336 73,336
Securities sold under agreement to repurchase 21,151 49,708
Income taxes payable 145,600 193,358
Payables to affiliate - 66,568
Other liabilities 83,243 55,038
Separate Account liabilities 16,032,449 11,490,751
----------------- -----------------
Total liabilities 20,122,018 15,159,549
----------------- -----------------
Contingencies (See Footnote 12)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,258,428 1,202,833
Accumulated other comprehensive (loss) income
Net unrealized investment (losses) gains (28,364) 9,902
Foreign currency translation adjustments (2,327) (1,585)
----------------- -----------------
Accumulated other comprehensive (loss) income (30,691) 8,317
----------------- -----------------
Total stockholder's equity 1,669,819 1,653,232
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 21,791,837 $16,812,781
================= =================
</TABLE>
See Notes to Consolidated Financial Statements
B1
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES
Premiums $ 98,976 $ 82,139 $ 69,614
Policy charges and fee income 414,425 350,569 332,132
Net investment income 276,821 261,430 259,634
Realized investment (losses) gains, net (32,545) 44,841 10,974
Asset management fees 60,392 40,200 33,310
Other income 1,397 1,067 491
-------------- --------------- ---------------
Total revenues 819,466 780,246 706,155
-------------- --------------- ---------------
BENEFITS AND EXPENSES
Policyholders' benefits 205,042 193,739 199,537
Interest credited to policyholders' account balances 136,852 118,992 110,815
General, administrative and other expenses 392,041 231,320 227,561
-------------- --------------- ---------------
Total benefits and expenses 733,935 544,051 537,913
-------------- --------------- ---------------
Income from operations before income taxes 85,531 236,195 168,242
-------------- --------------- ---------------
Income tax provision 29,936 84,233 61,868
-------------- --------------- ---------------
NET INCOME 55,595 151,962 106,374
-------------- --------------- ---------------
Other comprehensive (loss) income, net of tax:
Unrealized gains (losses) on securities, net of
reclassification adjustment (38,266) (7,227) 3,025
Foreign currency translation adjustments (742) 2,980 (2,863)
-------------- --------------- ---------------
Other comprehensive (loss) income (39,008) (4,247) 162
-------------- --------------- ---------------
TOTAL COMPREHENSIVE INCOME $ 16,587 $147,715 $106,536
============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
B2
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years Ended December 31, 1999, 1998, and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
------------- ------------ ---------------- ---------------- -------------------
------------- ------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 2,500 $ 439,582 $944,497 $12,402 $1,398,981
Net income - - 106,374 - 106,374
Change in foreign currency - - - (2,863) (2,863)
translation adjustments,
net of taxes
Change in net unrealized
investment gains, net of - - - 3,025 3,025
reclassification
adjustment and taxes
------------- ------------ ---------------- ---------------- -------------------
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
net of taxes
Change in net unrealized
investment losses, net of - - - (7,227) (7,227)
reclassification
adjustment and taxes
------------- ------------ ---------------- ---------------- -------------------
Balance, December 31, 1998 2,500 439,582 1,202,833 8,317 1,653,232
Net income - - 55,595 - 55,595
Change in foreign currency
translation adjustments, - - - (742) (742)
net of taxes
Change in net unrealized
investment losses, net of - - - (38,266) (38,266)
reclassification
adjustment and taxes
------------- ------------ ---------------- ---------------- -------------------
Balance, December 31, 1999 $ 2,500 $ 439,582 $ 1,258,428 $ (30,691) $1,669,819
============= ============================= ================ ===================
</TABLE>
See Notes to Consolidated Financial Statements
B3
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,595 $ 151,962 $ 106,374
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (83,961) (29,827) (40,783)
Interest credited to policyholders' account balances 136,852 118,992 110,815
Realized investment (gains) losses, net 32,545 (44,841) (10,974)
Amortization and other non-cash items 75,037 19,655 (26,405)
Change in:
Future policy benefits and other policyholders'
liabilities 107,199 61,095 34,907
Accrued investment income (7,803) 5,886 (4,890)
Payable to affiliate (89,897) (3,807) 20,547
Policy loans (25,435) (62,962) (64,173)
Deferred policy acquisition costs (201,072) (206,471) (22,083)
Income taxes payable (47,758) (16,828) 68,417
Other, net 45,122 (43,675) 34,577
----------------- ------------------- ---------------
Cash Flows (Used In) From Operating Activities (3,576) (50,821) 206,329
----------------- ------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 3,076,848 5,429,396 2,828,665
Held to maturity 45,841 74,767 138,626
Equity securities 5,209 4,101 6,939
Mortgage loans on real estate 6,845 5,433 24,925
Other long-term investments 385 33,428 (10,618)
Payments for the purchase of:
Fixed maturities:
Available for sale (3,452,289) (5,617,208) (3,141,785)
Held to maturity (24,170) (145,919) (70,532)
Equity securities (5,110) (2,274) (4,594)
Other long-term investments (39,094) (409) (51)
Cash collateral for loaned securities, net 14,000 (70,085) 143,421
Securities sold under agreement to repurchase, net (28,557) 49,708 --
Short-term investments, net 33,580 75,771 (147,030)
----------------- ------------------- ---------------
Cash Flows Used In Investing Activities (366,512) (163,291) (232,034)
----------------- ------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 3,448,370 3,098,764 2,099,600
Withdrawals (3,091,565) (2,866,331) (2,076,303)
----------------- ------------------- ---------------
Cash Flows From (Used in) Financing Activities 356,805 232,433 23,297
----------------- ------------------- ---------------
Net increase (decrease) in Cash (13,283) 18,321 (2,408)
Cash, beginning of year 89,679 71,358 73,766
----------------- ------------------- ---------------
CASH, END OF PERIOD $ 76,396 $ 89,679 $ 71,358
================= =================== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received) $ 55,144 $ 99,810 $ (7,904)
================= =================== ===============
</TABLE>
See Notes to Consolidated Financial Statements
B4
<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 is
licensed to sell individual life insurance, variable life insurance, variable
annuities, fixed annuities, and a group annuity program ("the Contracts") in the
District of Columbia, Guam and in all states and territories except New York. 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, 1998 or 1999 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 is currently considering
reorganizing itself into a publicly traded stock company through a process known
as "demutualization." On February 10, 1998, Prudential's Board of Directors
authorized management to take the preliminary steps necessary to allow
Prudential 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 Prudential's Board of Directors, a
public hearing and review and approval by two-thirds of the qualified
policyholders who vote on the plan, review and approved by the New Jersey
Department of Banking and Insurance. Prudential's management is in the process
of developing a proposed plan of demutualization, although there can be no
assurance that Prudential's Board of Directors will approve such a plan.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. ("GAAP"). The
Company has extensive transactions and relationships with Prudential and other
affiliates, as more fully described in Footnote 14. Due to these relationships,
it is possible that the terms of these transactions are not the same as those
that would result from transactions among wholly unrelated parties. All
significant intercompany transactions and balances have been eliminated in
consolidation.
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, in particular deferred policy acquisition costs ("DAC")
and future policy benefits, 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 policyholders' account
balances 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."
B5
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 policyholders' account balances 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 an allowance for losses. The allowance for
losses includes a loan specific reserve for impaired loans and a portfolio
reserve for incurred but not specifically identified losses. Impaired loans
include those loans for which a probability exists that all amounts due
according to the contractual terms of the loan agreement will not be collected.
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or at 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 accruing 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 uncollectible interest 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 the payment of interest has been interrupted for a substantial period, a
regular payment performance has been established. The portfolio reserve for
incurred but not specifically identified losses considers the Company's past
loan loss experience, the current credit composition of the portfolio,
historical credit migration, property type diversification, default and loss
severity statistics and other relevant factors.
Policy loans are carried at unpaid principal balances.
Short-term investments, including highly liquid debt instruments purchased with
an original maturity of twelve months or less, are carried at amortized cost,
which approximates fair value.
Other long-term investments 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. The Company's investment in the Separate
Accounts are included on this line.
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".
Policy acquisition costs related to interest-sensitive products and certain
investment-type products are deferred and amortized over the expected life of
the contracts (periods ranging from 15 to 30 years) in proportion to estimated
gross profits arising principally from investment results, mortality and expense
margins, and surrender charges based on historical and anticipated future
experience, which is updated periodically. The effect of changes to estimated
gross profits on unamortized deferred acquisition costs is reflected in "General
and administrative expenses" in the period such estimated gross profits are
revised.
B6
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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% and 105% of the fair value of the domestic and foreign
securities, respectively. 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 because the debtor typically has the right to redeem the
collateral on short notice. Substantially all of the Company's securities loaned
are with large brokerage firms.
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. Assets to be repurchased are the same, or substantially
the same, as the assets transferred and the transferor, through right of
substitution, maintains the right and ability to redeem the collateral on short
notice. The market value of securities to be repurchased is monitored and
additional collateral is obtained, 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 Statements 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.
B7
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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".
Asset Management Fees
The Company receives asset management fee income from policyholder account
balances invested in The Prudential Series Fund ("PSF"), which are a portfolio
of mutual fund investments related to the Company's Separate Account products.
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 seek to reduce 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 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 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.
B8
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 does not apply to most traditional
insurance contracts. However, certain hybrid contracts that contain features
which may 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.
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).
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, as amended, as of
January 1, 2001 and is currently assessing the effect of the new standard.
In October 1998, the American Institute of Certified Public Accountants
("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.
B9
<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>
1999
--------------------------------------------------------------
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 $ 113,172 $ 2 $ 2,052 $ 111,122
Foreign government bonds 92,725 1,718 1,455 92,988
Corporate securities 2,876,602 8,013 92,075 2,792,540
Mortgage-backed securities 1,558 157 3 1,712
---------- ---------- ---------- ----------
Total fixed maturities available for sale $3,084,057 $ 9,890 $ 95,585 $2,998,362
========== ========== ========== ==========
Fixed maturities held to maturity
Corporate securities $ 388,990 $ 1,832 $ 13,000 $ 377,822
---------- ---------- ---------- ----------
Total fixed maturities held to maturity $ 388,990 $ 1,832 $ 13,000 $ 377,822
========== ========== ========== ==========
Equity securities available for sale $ 3,238 $ 1,373 $ 79 $ 4,532
========== ========== ========== ==========
</TABLE>
<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 corporation and agencies $ 110,294 $ 864 $ 319 $ 110,839
Foreign government bonds 87,112 2,003 696 88,419
Corporate securities 2,540,498 30,160 6,896 2,563,762
Mortgage-backed securities 750 156 -- 906
---------- ---------- ---------- ----------
Total fixed maturities available for sale $2,738,654 $ 33,183 $ 7,911 $2,763,926
========== ========== ========== ==========
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
========== ========== ========== ==========
Equity securities available for sale $ 2,951 $ 168 $ 272 $ 2,847
========== ========== ========== ==========
</TABLE>
B10
<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, 1999 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 $ 178,298 $ 175,638 $ 18,369 $ 18,296
Due after one year through five 1,144,552 1,118,150 178,893 178,624
years
Due after five years through ten 1,326,637 1,283,515 175,549 165,341
years
Due after ten years 433,012 419,347 16,179 15,561
Mortgage-backed securities 1,558 1,712 - -
---------------- ------------------- ----------------- ------------------
Total $3,084,057 $2,998,362 $ 388,990 $ 377,822
================ =================== ================= ==================
</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 1999, 1998,
and 1997 were $2,950.4 million, $5,327.3 million, and $2,796.3 million,
respectively. Gross gains of $13.1 million, $46.3 million, and $18.6 million and
gross losses of $31.1 million, $14.1 million, and $7.9 million were realized on
those sales during 1999, 1998, and 1997, respectively. During the years ended
December 31, 1999, 1998, and 1997, there were no securities classified as held
to maturity that were sold.
Proceeds from the maturity of fixed maturities available for sale during 1999,
1998, and 1997 were $126.5 million, $102.1 million, and $32.4 million,
respectively
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $11.2 million, $2.8 million and $0.1 million for the years
1999, 1998 and 1997, respectively.
Mortgage Loans on Real Estate
The Company's mortgage loans were collateralized by the following property types
at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Retail stores $ 6,518 62.0% $ 7,356 42.4%
Apartment complexes - - 5,988 34.5%
Industrial buildings 3,991 38.0% 4,010 23.1%
---------------------------- ---------------------------
Net carrying value $10,509 100.0% $17,354 100.0%
============================ ===========================
</TABLE>
The largest concentration of mortgage loans are in the states of Washington
(51%), New Jersey (38%), and North Dakota (11%).
Special Deposits and Restricted Assets
Fixed maturities of $8.2 million and $8.6 million at December 31, 1999 and 1998,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Equity securities restricted as to sale were
$.3 million and $2.5 million at December 31, 1999 and 1998, respectively.
B11
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Other Long-Term Investments
The Company's "Other long-term investments" of $77.8 million and $42.0 million
as of December 31, 1999 and 1998, respectively, are comprised of joint ventures,
limited partnerships, and the Company's investment in the Separate Accounts.
Joint ventures, limited partnerships and other totaled $32.8 million and $1.0
million at December 31, 1999 and 1998, respectively. The Company's share of net
income from the joint ventures was $0.3 million, $0.1 million and $2.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively, and is
reported in "Net investment income." The Company's investment in the Separate
Accounts was $45.0 million and $41.0 million at December 31, 1999 and 1998,
respectively.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale $188,236 $179,184 $ 161,140
Fixed maturities - held to maturity 29,245 26,128 26,936
Equity securities - 14 76
Mortgage loans on real estate 2,825 1,818 2,585
Policy loans 42,422 40,928 37,398
Short-term investments 19,208 23,110 22,011
Other 4,432 6,886 14,920
---------------- ----------------- -----------------
Gross investment income 286,368 278,068 265,066
Less: investment expenses (9,547) (16,638) (5,432)
---------------- ----------------- -----------------
Net investment income $276,821 $261,430 $ 259,634
================ ================= =================
</TABLE>
Realized investment gains (losses), net including charges for other than
temporary reductions in value, for the years ended December 31, were from the
following sources:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale $ (29,192) $29,330 $9,039
Fixed maturities - held to maturity 102 487 821
Equity securities 392 3,489 8
Mortgage loans on real estate - - 797
Derivative instruments (1,557) 12,414 -
Other (2,290) (879) 309
---------------- ----------------- -----------------
Realized investment (losses) gains, net $ (32,545) $44,841 $10,974
================ ================= =================
</TABLE>
B12
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on securities available for sale are
included in the Consolidated Statements of Financial Position as a component of
"Accumulated other comprehensive income". Changes in these amounts include
reclassification adjustments to avoid including in "Other Comprehensive income
(loss)", those items that are included as part of "Net income" for a period that
also had been part of "Other Comprehensive income (loss)" in earlier periods.
The amounts for the years ended December 31, net of tax, are as follows:
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
income (loss)
Deferred Deferred related to net
Unrealized policy Policyholders' income tax unrealized
gains(losses) acquisition Account (liability) investment
investments costs Balances benefit gains(losses)
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 26,930 $ (7,893) $ 2,451 $ (7,384) $ 14,104
Net investment gains (losses) on
investments arising during the period 21,338 -- -- (7,445) 13,893
Reclassifications adjustment for
gains included in net income (10,277) -- -- 3,585 (6,692)
Impact of net unrealized investment
gains on deferred policy acquisition
costs -- (8,412) -- 2,944 (5,468)
Impact of net unrealized investment
gains on policyholders' account
balances -- -- 1,292 -- 1,292
--------- --------- --------- --------- ---------
Balance, December 31, 1997 37,991 (16,305) 3,743 (8,300) 17,129
Net investment gains (losses) on
investments arising during the period 22,801 -- -- (7,588) 15,213
Reclassifications adjustment for
gains included in net income (35,623) -- -- 11,855 (23,768)
Impact of net unrealized investment
gains on deferred policy acquisition
costs -- 3,190 -- (1,048) 2,142
Impact of net unrealized investment
gains on policyholders' account
balances -- -- (1,063) 249 (814)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 25,169 (13,115) 2,680 (4,832) 9,902
Net investment gains (losses) on
investments arising during the period (138,268) -- -- 47,785 (90,483)
Reclassifications adjustment for
gains included in net income 28,698 -- -- (9,970) 18,728
Impact of net unrealized investment
gains on deferred policy acquisition -- 53,407 -- (16,283) 37,124
costs
Impact of net unrealized investment
gains on policyholders' account -- -- (5,712) 2,077 (3,635)
balances
--------- --------- --------- --------- ---------
Balance, December 31, 1999 $ (84,401) $ 40,292 $ (3,032) $ 18,777 $ (28,364)
========= ========= ========= ========= =========
</TABLE>
B13
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs for the year
ended December 31, 1999, are as follows:
<TABLE>
<CAPTION>
1999
-----------------
(In Thousands)
<S> <C>
Balance, beginning of year $ 861,713
Capitalization on commissions, sales and issue expenses 242,373
Amortization (96,451)
Change in unrealized investment gains 53,407
Foreign currency translation 1,743
-----------------
Balance, end of year $1,062,785
=================
</TABLE>
5. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In Thousands)
<S> <C> <C>
Life insurance $ 587,162 $ 500,429
Annuities 48,816 28,350
------------------- -------------------
$ 635,978 $ 528,779
=================== ===================
</TABLE>
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 guaranteed 2.5% to 7.5% Net level premium based
in calculating cash on the non-forfeiture interest
surrender values rate
Life insurance - International Generally rates guaranteed 2.5% to 7.5% Net level premium based
in calculating cash on the expected investment
surrender values return
Individual immediate annuities 1983 Individual Annuity 3.5% to 11.0% Present value of
Mortality Table with expected future payment
certain modifications based on historical
experience
</TABLE>
B14
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. POLICYHOLDERS' LIABILITIES (continued)
Policyholders' account balances at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
(In Thousands)
<S> <C> <C>
Interest-sensitive life contracts $1,383,795 $1,392,649
Individual annuities 1,147,722 1,077,996
Guaranteed investment contracts 584,744 231,366
------------------- -------------------
$3,116,261 $2,702,011
=================== ===================
</TABLE>
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 and 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 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 7.32% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
</TABLE>
6. 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 of 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.
B15
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. REINSURANCE (continued)
Reinsurance amounts included in the Consolidated Statements of Operations for
the year ended December 31 are below.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Reinsurance premiums assumed 1,778 1,395 1,369
Reinsurance premiums ceded - affiliated (6,882) (6,532) (686)
Reinsurance premiums ceded - unaffiliated (1,744) (2,819) (3,038)
================ ================ ================
Policyholders' benefits ceded $4,228 $4,044 $3,912
================ ================ ================
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
(In Thousands)
<S> <C> <C>
Life insurance - affiliated $ 6,653 $ 4,155
Life insurance - unaffiliated 2,625 2,326
Other reinsurance - affiliated 15,600 21,650
------------------- -----------------
$24,878 $28,131
=================== =================
</TABLE>
7. 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, 1998 and the projected benefit obligation and related expenses at
December 31, 1999 were 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 by Prudential in accordance with the
service agreement described in Footnote 14.
B16
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. $ (14,093) $67,272 $71,989
State and local 378 2,496 1,337
Foreign 15 - -
---------------- ----------------- -----------------
Total (13,700) 69,768 73,326
---------------- ----------------- -----------------
Deferred tax expense (benefit):
U.S. 42,320 14,059 (11,458)
State and local 1,316 406 -
---------------- ----------------- -----------------
Total 43,636 14,465 (11,458)
---------------- ----------------- -----------------
Total income tax expense $29,936 $84,233 $61,868
================ ================= =================
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Expected federal income tax expense $29,936 $82,668 $58,885
State and local income taxes 1,101 1,886 869
Dividends received deduction (1,010) (199) -
Other (91) (122) 2,114
---------------- ----------------- -----------------
Total income tax expense $29,936 $84,233 $61,868
================ ================= =================
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets
Insurance reserves $ 93,949 $ 93,564
Net unrealized (gains) losses on
securities 31,132 (9,061)
Other 2,502 -
------------------ -------------------
Deferred tax assets 127,583 84,503
------------------ -------------------
Deferred tax liabilities
Deferred acquisition costs 299,683 224,179
Net investment gains 110 3,180
Other - 5,978
------------------ -------------------
Deferred tax liabilities 299,793 233,337
------------------ -------------------
Net deferred tax liability $172,210 $148,834
================== ===================
</TABLE>
B17
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES (continued)
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, 1999
and 1998, 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 all examinations of
the consolidated federal income tax returns through 1992. The Service has begun
their examination of the years 1993 through 1995.
9. 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 Department of Insurance and the New
Jersey Department of Banking and Insurance with net income and equity determined
using GAAP.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Statutory net (loss) income $ (82,291) $ (33,097) $ 12,778
Adjustments to reconcile to net income on a GAAP basis:
Statutory income of subsidiaries 20,221 18,953 18,553
Amortization and capitalization of deferred
acquisition costs 145,921 202,375 38,003
Deferred premium 639 2,625 1,144
Insurance revenue and expenses 45,915 (24,942) 26,517
Income taxes (43,644) (21,805) 11,956
Valuation of investments (24,908) 20,077 506
Asset management fees (13,503) - -
Other, net 7,245 (12,224) (3,083)
---------------- ---------------- ----------------
GAAP net income $ 55,595 $151,962 $106,374
================ ================ ================
1999 1998
----------------- -----------------
(In Thousands)
Statutory surplus $889,186 $931,164
Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments (38,258) 117,254
Deferred acquisition costs 1,062,785 861,713
Deferred premium (16,539) (15,625)
Insurance liabilities (54,927) (133,811)
Income taxes (150,957) (123,343)
Asset management fees (13,503) -
Other, net (7,968) 15,880
----------------- -----------------
GAAP stockholder's equity $1,669,819 $1,653,232
================= =================
</TABLE>
B18
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. 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).
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.
Investment contracts
For guaranteed investment contracts, estimated fair values 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. Estimated fair values for individual deferred annuities
are derived using the policyholder's account balance.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for 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>
1999 1998
---------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------- ---------------- --------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities: Available for sale $2,998,362 $2,998,362 $2,763,926 $2,763,926
Fixed maturities: Held to maturity 388,990 377,822 410,558 421,845
Equity securities 4,532 4,532 2,847 2,847
Mortgage loans on real estate 10,509 11,550 17,354 19,465
Policy loans 792,352 761,232 766,917 806,099
Short-term investments 207,219 207,219 240,727 240,727
Cash 76,396 76,396 89,679 89,679
Separate Account assets 16,032,449 16,032,449 11,490,751 11,490,751
Derivatives 38 38 - -
Financial Liabilities:
Investment contracts $1,282,964 $1,277,317 $ 835,034 $ 839,105
Cash collateral for loaned securities 87,336 87,336 73,336 73,336
Securities sold under repurchase
agreements 21,151 21,151 49,708 49,708
Separate Account liabilities 16,032,449 16,032,449 11,490,751 11,490,751
Derivatives 5,012 5,243 1,723 2,374
</TABLE>
B19
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures & Options
The Company uses exchange-traded Treasury futures and options to reduce market
risk from changes in interest rates and to manage the duration of assets and the
duration of liabilities supported by those assets. 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.
Treasury futures move substantially in value as interest rates change and can be
used to either modify 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.
If futures 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 $122.1 million and $40.8 million at December 31, 1999 and
1998, respectively. The fair value of futures contracts was $(2.0) million at
December 31, 1999 and immaterial at December 31, 1998.
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, 1999 and 1998.
Currency Derivatives
The Company uses currency swaps to reduce market risk from changes in currency
values of investments denominated in foreign currencies that the Company either
holds or intends to acquire and to manage 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 swaps are effective as hedges of foreign currency translation and
transaction exposures, gains or losses are recorded in "Accumulated Other
Comprehensive Income". If currency swaps do not meet hedge accounting criteria,
gains or losses from those derivatives are recognized in current period
earnings.
The notional value and fair value of the currency swaps $31.0 million and $(3.2)
million and $40.5 million and $(2.3) million, respectively, at December 31, 1999
and 1998.
B20
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. 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. All of the
net credit exposure for the Company from derivative contracts are with
investment grade counterparties. As of December 31, 1999, 80% of notional
consisted of interest rate derivatives, and 20% of notional consisted of foreign
currency derivatives.
12. CONTINGENCIES
Various lawsuits against the Company have arisen in the course of the Company's
business. In certain of these matters, large and/or indeterminate amounts are
sought.
On October 28, 1996, the Company entered into a Stipulation of Settlement with
attorneys for the plaintiffs in a consolidated class action lawsuit pending in a
Multi-District Litigation proceeding in the U.S. District Court for the District
of New Jersey. The class action suit involved alleged improprieties in
connection with the sale, servicing and operation of permanent life insurance
policies from 1982 through 1995. Pursuant to the settlement, the Company has
participated in a remediation program pursuant to which relief was offered to
policyowners who were misled when they purchased permanent life insurance
policies in the United States from 1982 to 1995. Prudential has agreed to
indemnify the Company for any liability incurred in connection with that
litigation.
The balance of the Company's litigation is subject to many uncertainties, and
given the complexity and scope, the outcomes cannot be predicted with precision.
Management believes that any ultimate liability which could result from such
litigation would not have a material adverse effect on the Company's financial
position.
13. 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, 1999, the
Company would not be permitted a non-extraordinary dividend distribution in
2000.
14. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and the Company operate under service and lease agreements whereby
services of officers and employees (except for those agents employed directly by
the Company in Taiwan), supplies, use of equipment and office space are provided
by Prudential. Prudential periodically reviews its methods for determining the
level of administrative expenses charged to the Company. Late in 1998,
Prudential revised its allocation methodology to more closely align allocations
based on business processes, resulting in increased allocations from 1998
levels. Management believes that the updated methodology is reasonable and
better reflects actual costs incurred by Prudential to process transactions on
behalf of the Company. The net cost of these services allocated to the Company
were $317.4 million, $269.9 million and $139.5 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
In addition, the Company received allocated distribution expenses from
Prudential's retail agency network. Beginning in 1999, market based distribution
transfer pricing was the basis for allocating costs to each product line that
distributes products through Prudential's retail agency channels. A majority of
these distribution expenses have been capitalized by the Company as deferred
policy acquisition costs ("DAC").
The Company receives asset management fee income from policyholder account
balances invested in the Prudential Series Fund ("PSF"). These amounts are shown
as asset management fees on the statement of operations. The Company also
collects these fees on behalf of Prudential. The amounts due to Prudential
related to PSF fees were $0.1 million and $22.6 million at December 31, 1999 and
December 31, 1998, respectively.
B21
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS (continued)
The Company pays an asset management fee to Prudential Global Asset Management
("PGAM") for managing the Separate Account investment portfolio. The expense for
the year was $25.9 million, which is shown in general, administrative and other
expenses.
The Company has sold three Corporate Owned Life Insurance ("COLI") policies to
Prudential. The cash surrender value included in Separate Accounts was $725.3
million and $362.3 million at December 31, 1999, and 1998, respectively. The
fees received in 1999 related to the COLI policies were $4.0 million.
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, 1999, 1998,
and 1997.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 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, 1999.
B22
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholder 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 (a
wholly-owned subsidiary of the Prudential Insurance Company of America) and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States 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
March 21, 2000
B23
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<PAGE> 78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
The following analysis should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Company markets individual life insurance, variable life insurance, variable
annuities, fixed annuities, and a group annuity program primarily through
Prudential's sales force in the United States. These markets are subject to
regulatory oversight with particular emphasis placed on company solvency and
sales practices. These markets are also subject to increasing competitive
pressure as the legal barriers which have historically segregated the markets of
the financial services industry have been changed through both legislative and
judicial processes. Regulatory changes have opened the insurance industry to
competition from other financial institutions, particularly banks and mutual
funds that are positioned to deliver competing investment products through
large, stable distribution channels. The Company also markets individual life
insurance through its branch office in Taiwan.
The Company's Results of Operations and Changes in Statements of Financial
Position are described below.
1. RESULTS OF OPERATIONS
Net income for the year ended December 31, 1999 was $55.6 million, a decrease of
$96.4 million or 63.4% from $152.0 million earned in the year ended December 31,
1998. The decrease reflects a $189.9 million increase in expenses, offset in
part by a $39.2 million increase in revenues and a related decrease in income
taxes of $54.3 million. Net income for the year ended December 31, 1997 was
$106.4 million.
(a) 1999 versus 1998
Premiums increased $16.8 million to $99.0 million for the year ended December
31, 1999. The increase was primarily due to continued growth at the Company's
Taiwan branch, which sells traditional life insurance products. New sales for
the Taiwan branch grew by 40% and gross insurance in force increased by 16%. The
premium increase in Taiwan was partially offset by a decrease of $2.4 million in
domestic premiums related to extended term policy conversions. As an option in
the event of a lapse, individual variable life insurance policies provide
policyholders with additional extended term or reduced paid-up life insurance
based on the amount that can be purchased with the remaining cash value of the
contract (if the contractholder does not elect to receive the remaining cash
value as a cash distribution). The application of the remaining cash value to
purchase such coverage is recorded as premium revenue in the Statement of
Operations.
Policy charges and fee income, primarily consisting of expense, mortality,
loading and other insurance charges assessed on policyholder account balances,
increased by $63.8 million to $414.4 million in 1999 from $350.6 million in
1998. The majority of the proceeds from sales of the Company's interest
sensitive, non traditional products are invested in Separate Account funds,
through which the customer has an option to invest in mutual fund investments.
These Separate Account fund balances increased by $4.5 billion from the prior
year. Strong securities market conditions contributed to appreciation in
Separate Account asset values during 1999, and consequently, fee income.
Favorable market conditions also provided a stimulus to investors to purchase
mutual fund shares and annuities, particularly the Discovery Select annuity
product, the Company's most actively sold annuity product, which further
contributed to growth in assets and fees earned. Discovery Select net sales,
defined as sales less withdrawals, increased slightly from $2.573 billion in
1998 to $2.646 billion in 1999, an increase of $73.0 million. This increase can
be attributed to an increase in exchanges as a result of the Exchange Program,
which provides the contractholders of older Prudential or Pruco Life annuity
products an opportunity to convert to the Discovery Select product. Exchanges
were $1.221 billion in 1999 compared to $.925 billion in 1998, an increase of
$296.0 million. New sales declined from $1.647 billion in 1998 to $1.424 billion
in 1999, a decrease of $223.0 million.
Net investment income increased by $15.4 million to $276.8 million in 1999. The
increase was primarily the result of higher income from fixed maturities
(excluding short-term investments) of $12.2 million, as the average assets
increased. Average yields on fixed maturities were modestly lower in 1999.
Investment of cash inflows from the Prudential Credit Enhanced ("PACE") product,
a non-participating guaranteed investment contract ("GIC"), was the primary
cause of the increase in the asset base. The PACE product increased its
investments in fixed maturities by $345.8 million during 1999.
Realized investment losses, net were $32.5 million in 1999 compared to realized
investment gains, net of $44.8 million for the prior year. The decline of $77.3
million was primarily due to the impact of net sales of fixed maturity
securities during a rising interest rate environment for most of 1999. Realized
losses on fixed maturities were $29.1 million in 1999, consisting of losses on
sales of $18.0 million and writedowns for impairments deemed other than
temporary of $11.1 million. In 1998, there were realized gains of $29.8 million
on fixed maturities, net of writedowns for impairments deemed
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<PAGE> 79
other than temporary of $2.8 million. In addition, in 1999 the Company realized
$1.6 million in losses from U.S. Treasury futures transactions versus a gain of
$12.4 million in the prior year.
Asset management fees increased to $60.4 million at December 31, 1999 from $40.2
million at December 31, 1998. These represent fees collected from the Prudential
Series Funds ("PSF"), a portfolio of mutual fund investments related to the
Company's Separate Account products. The increase reflects a $4.5 billion
increase in Separate Account assets in 1999, as discussed above.
Policyholders' benefits were $205.0 million for the year ended December 31,
1999, an increase of $11.3 million from $193.7 million for the year ended
December 31, 1998. The increase was mainly due to increases in reserves of $4.2
million, surrender increases of $3.0 million, and term life conversion credits
of $3.0 million. The reserve increase reflects continued business expansion in
the Company's Taiwan branch. As noted above, the Taiwan branch experienced a 40%
growth in sales in 1999, requiring an increase to their reserves of $12.8
million. This increase was offset by a decline in domestic reserves of $8.9
million resulting from a reduction in extended term insurance activity and a
decrease in year over year sales. The term life conversions of $3.0 million
relate to premium credits provided to policyholders who exercised an option to
convert term life insurance products to variable life insurance.
Interest credited to policyholder account balances for the year ended December
31, 1999 was $136.9 million, an increase of $17.9 million from $119.0 million in
1998. Interest credited for the PACE product increased by $15.0 million as PACE
account balances increased to $584.7 million at December 31, 1999 from $231.3
million at December 31, 1998.
General, administrative and other expenses, net of capitalization and
amortization of deferred policy acquisition costs ("DAC"), increased $160.7
million to $392.0 million in 1999 from $231.3 million in 1998. The increase was
primarily the result of the implementation of a new expense allocation
methodology from Prudential. This new allocation process shifts a greater amount
of expenses to products requiring more complex business processes and more
transactions, such as variable products which allow policyholders to make
changes in their investment portfolio. As a result of this change, the Company's
allocation of general and administrative expenses from Prudential increased by
approximately $78.0 million. These allocated expenses include distribution
expenses from Prudential's retail agency network. Beginning in 1999, market
based distribution transfer pricing was the basis for allocating costs to each
product distributed through Prudential's retail agency network. A majority of
these distribution expenses have been capitalized by the Company as DAC.
Other factors contributing to the increase in general, administrative and other
expenses include DAC amortization, Prudential Global Asset Management ("PGAM")
fees and a reserve for unbeknownst modified endowment contracts ("UMEC"). DAC
amortization increased by $46.3 million. In 1998, DAC amortization was reduced
as a result of a change in estimate of gross profit margin related to variable
universal life products and increased profitability of the Discovery Select
product. In addition, beginning in 1999 expenses included an asset based charge
from PGAM for managing Separate Account investment portfolios. These fees were
$25.8 million in 1999. Expenses in 1999 also include $10.2 million for the
establishment of a reserve for UMEC. A modified endowment contract ("MEC") is a
universal life policy in which the money paid into the contract by the
contractholder exceeds the level permitted by the Internal Revenue Service.
Consequently, the contract loses its tax deferred status. The Company had failed
to notify contractholders when they reached this level, and therefore has agreed
to remedy policyholders for any penalties they have incurred. The Company has
established a reserve to cover any tax liability to be paid on behalf of the
policyholder, any enhanced death benefit given to the policyholder as a remedy
and any expected administrative costs.
(b) 1998 versus 1997
Total insurance revenues, consisting of premiums and policy charges and fee
income, increased by $31.0 million for the year ended December 31, 1998 to
$432.7 million from $401.7 million for the year ended December 31, 1997. The
increase was due to higher premium revenues at the Company's Taiwan branch and
higher mortality and expense charges related to increases in policyholder
account balances during 1998. In addition, there was an increase of $4.6 million
in premiums related to extended term policy conversions.
The Company's net investment income increased by $1.8 million for the year ended
December 31, 1998 to $261.4 from $259.6 million for the year ended December 31,
1997. Consolidated net realized investment gains increased $33.8 million in 1998
due to the sale of fixed maturities during a period of declining interest rates.
Policyholders' benefits decreased $5.8 million for the year ended December 31,
1998 to $193.7 million from $199.5 million for the year ended December 31, 1997
due to less surrenders from extended term insurance.
C-2
<PAGE> 80
Interest credited to policyholders' account balances increased by $8.1 million
for the year ended December 31, 1998 to $118.9 million from $110.8 million for
the year ended December 31, 1997. Accounting for more than half of this increase
was the introduction of a new non-participating GIC product, PACE, early in
1998. The remaining increase was attributable to the rise in policyholder
account balances as well as increased interest credited pertaining to Separate
Account policy loans, partially offset by declining interest crediting rates for
interest-sensitive life contracts.
General, administrative and other expenses increased by $3.7 million for the
year ended December 31, 1998 to $231.3 million from $227.6 million for the year
ended December 31, 1997. Increased sales activity resulted in a corresponding
increase in expenses. In addition to the increased sales volume, Prudential's
allocation methodology for expenses billed to Pruco Life changed late in 1998,
resulting in increased expenses allocated to the Company. Offsetting this
increase was a 1997 refinement of estimated gross profit margins which led to an
overall decrease in DAC amortization relative to 1997.
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<PAGE> 81
CHANGES IN FINANCIAL POSITION
1999 versus 1998
Total assets increased from $16.8 billion at December 31, 1998 to $21.8 billion
at December 31, 1999, an increase of $5.0 billion, of which $4.5 billion
represents growth in Separate Account assets. Contributions to Separate Accounts
were $3.5 billion in 1999, withdrawals and expense disbursements were $1.1
billion and net investment income (including realized and unrealized gains) was
$2.1 billion. The majority of the Separate Account increase came from the
Discovery Select annuity product which increased by $3.7 billion due to net
sales and appreciation, including $1.2 billion in exchange sales. Other
increases in 1999 are mainly from growth in investments of $235.0 million and
DAC of $201.0 million. For discussion of Investments see "Investment Portfolio
and Investment Strategies" which follows.
Total liabilities increased from $15.1 billion at December 31, 1998 to $20.1
billion at December 31, 1999, an increase of $5.0 billion. The increase was
primarily due to higher Separate Account liabilities of $4.5 billion in 1999,
increases to policyholder account balances of $414 million and increases to
future policy reserves of $107 million. The increase of $414 million in
policyholders' account balances from $2.7 billion at December 31, 1998 to $3.1
billion at December 31, 1999 was primarily due to the PACE product which
increased by $353.0 million in 1999. Annuity General Account balances increased
by $70.0 million in 1999, mainly due to exchanges and sales of the Discovery
Select product.
Future policy benefits increased by $107.2 million from $528.8 million at
December 31, 1998 to $636.0 million at December 31, 1999. The increase was
primarily the result of increased sales and in-force business at the Taiwan
branch.
INVESTMENT PORTFOLIO AND INVESTMENT STRATEGIES
The Company's investment portfolio supports its insurance and annuity
liabilities and other obligations to customers for which it assumes investment
related risks. The portfolio was comprised of total investments amounting to
$4.5 billion at December 31, 1999, versus $4.2 billion at December 31, 1998. A
diversified portfolio of publicly traded bonds, private placements, commercial
mortgages and equity investments is managed under strategies intended to
maintain optimal asset mix consistent with current and anticipated cash flow
requirements of the related obligations. The risk tolerance reflects the
Company's aggregate capital position, exposure to business risk, liquidity and
rating agency considerations.
The asset management strategy for the portfolio is in accordance with an
investment policy statement developed and coordinated within the Company by the
Portfolio Management Group, agreed to by senior management, and approved by the
Company's Board of Directors. In managing the investment portfolio, the long
term objective is to generate favorable investment results through
asset-liability management, strategic and tactical asset allocation and asset
manager selection. Asset mix strategies are constrained by the need to match
asset structure to product liabilities, considering the underlying income and
return characteristics of investment alternatives and seeking to closely
approximate the interest rate sensitivity of the asset portfolio with the
estimated interest rate sensitivity of the product liabilities. Asset mix
strategies also include maintenance of broad diversification across asset
classes, issuers and sectors; effective utilization of capital while maintaining
liquidity believed to be adequate to satisfy cash flow requirements; and
achievement of competitive performance. The major categories of invested assets,
quality across the portfolio, and recent activities to manage the portfolio are
discussed below.
FIXED MATURITIES
The fixed maturity portfolio is diversified across maturities, sectors and
issuers. The Company has classified all publicly traded securities as "available
for sale" or "AFS". As of December 31, 1999 and 1998, approximately 72% and 63%
respectively, of privately traded securities, were classified as AFS. The
remainder of the privately placed fixed maturities were classified as "held to
maturity" or "HTM". "Available for sale" securities are carried in the
Consolidated Statements of Financial Position at fair value, with unrealized
gains and losses (after certain related adjustments) recognized by credits or
charges to "Accumulated Other Comprehensive Income", a component of equity
capital. Securities "held to maturity" are carried at amortized cost, and
unrealized gains or losses on these securities are not recognized in the
financial statements. At December 31, 1999 the fixed maturities portfolio
totaled $3.4 billion (AFS fair value of $3.0 billion and HTM amortized cost of
$0.4 billion), an increase of $0.2 billion compared to December 31, 1998. This
increase in fixed maturities was due primarily to cash inflows from the PACE
products of $0.3 billion, offset in part by net unrealized losses due to rising
interest rates.
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<PAGE> 82
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ---------------------------------------
NET NET
AMORTIZED ESTIMATED UNREALIZED AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE (LOSSES) COST FAIR VALUE GAINS
------------ ------------ ----------- ----------- ----------- ---------
(In Thousands)
FIXED MATURITIES
<S> <C> <C> <C> <C> <C> <C>
Publicly traded $ 2,070,500 $ 2,004,636 $ (65,864) $ 2,040,592 $ 2,054,807 $ 14,215
Privately placed 1,402,547 1,371,548 (30,999) 1,108,620 1,130,964 22,344
------------ ------------ ----------- ----------- ----------- ---------
TOTAL $ 3,473,047 $ 3,376,184 $ (96,863) $ 3,149,212 $ 3,185,771 $ 36,559
============ ============ =========== =========== =========== =========
</TABLE>
At December 31, 1999, net unrealized losses on the "available for sale" fixed
maturity portfolio totaled $85.7 million compared with net unrealized gains of
$25.3 million at December 31, 1998. The change in the net unrealized gain
position reflects the impact of rising interest rates..
Based on fair value, the Company's holdings of private placement fixed
maturities constituted 41% and 35% of total fixed maturities at December 31,
1999 and 1998, respectively. These investments generally offer higher yields
than comparable quality public market securities, increase the diversification
of the portfolio, and contain tighter covenant protection than public
securities.
Gross investment income from fixed maturities increased by $12.2 million to
$217.5 million in 1999 as a result of a higher average asset base from the
investment of positive cashflows from the PACE products in 1999. Realized losses
were $29.1 million in 1999 compared with realized gains of $29.8 million in
1998. This decrease was attributed to net sales activity during a rising
interest rate environment for most of 1999, as opposed to 1998 when rates were
falling. In addition, writedowns for impairments of fixed maturities which were
deemed to be other than temporary increased by $8.4 million from 1998.
Credit Quality
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, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------- ------------------------------------------
STANDARD & AMORTIZED ESTIMATED AMORTIZED ESTIMATED
NAIC POOR'S COST % FAIR VALUE % COST % FAIR VALUE %
- ------------------------ --------------------- --------------------- ------------------ -----------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA to AAA- $1,369,346 39.4% $1,342,146 39.8% $1,375,368 43.7% $1,398,678 43.9%
2 BBB+ to BBB- 1,847,502 53.2% 1,787,102 52.9% 1,436,820 45.6% 1,449,072 45.5%
3 BB+ to BB- 159,896 4.6% 150,994 4.5% 240,380 7.6% 244,933 7.7%
4 B+ to B- 75,843 2.2% 75,239 2.2% 68,621 2.2% 66,762 2.1%
5 CCC or lower 7,718 0.2% 8,061 0.2% 27,553 0.9% 26,062 0.8%
6 In or near
default 12,742 0.4% 12,642 0.4% 470 0.0% 264 0.0%
------------- ------------- ------------- --------------
TOTAL $3,473,047 100.0% $3,376,184 100.0% $3,149,212 100.0% $3,185,771 100.0%
============= ============= ============= ==============
</TABLE>
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 93% and 89% of the
portfolio at December 31, 1999 and 1998, respectively, based on fair value. As
of both of those dates, less than 1% of the fixed maturities portfolio, based on
fair value, 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.
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<PAGE> 83
The Company maintains separate monitoring processes for public and private fixed
maturities and creates watch lists to highlight securities which require special
scrutiny and management. The Company's fixed maturity asset managers formally
review all public fixed maturity holdings on a monthly basis and more frequently
when necessary to identify potential credit deterioration whether due to ratings
downgrades, unexpected price variances, and/or industry specific concerns. The
Company classifies public fixed maturity securities of issuers that have
defaulted as loans not in good standing and all other public watch list assets
as closely monitored.
Our private fixed maturity asset managers conduct specific servicing tests on
each investment on a quarterly basis to determine whether the investment is in
compliance or should be placed on the watch list or assigned an early warning
classification. The Company assigns early warning classification to those
issuers that have failed a servicing test or experienced a minor covenant
default, and the Company continues to monitor them for improvement or
deterioration. The Company assigns closely monitored status to those investments
that have been recently restructured or for which restructuring is a possibility
due to substantial credit deterioration or material covenant defaults. The
Company classifies as not in good standing securities of issuers that are in
more severe condition, for example, bankruptcy or payment default.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- ------------------------------
AMORTIZED AMORTIZED
COST % OF TOTAL COST % OF TOTAL
--------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Performing $ 3,428,880 98.8% $ 3,124,315 99.2%
Watch List
Closely monitored 31,425 0.9% 24,427 0.8%
Not in good standing 12,742 0.3% 470 0.0%
--------------- ---------------
Total $ 3,473,047 $ 3,149,212
=============== ===============
</TABLE>
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $11.2 million, $2.8 million and $0.1 million for the years
1999, 1998 and 1997, respectively.
Portfolio Diversity
The fixed maturity portfolio is broadly diversified by type and industry of
issuer. The greatest industry concentrations within the public portfolio were
finance, utilities, and manufacturing. The greatest concentrations within the
private portfolio were asset backed securities, manufacturing and service
issues. The portfolio is summarized below by issuer category:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
AMORTIZED ESTIMATED % OF
COST FAIR VALUE FAIR VALUE
---------------- ------------- -----------
(In Thousands)
<S> <C> <C> <C>
United States government
securities and obligations $ 113,172 $ 111,122 3.3%
Mortgage backed securities 1,558 1,712 0.1%
Asset backed securities (1) 464,097 453,441 13.4%
Foreign government securities 92,725 92,988 2.8%
Manufacturing 706,866 675,731 20.0%
Utilities 489,207 471,534 14.0%
Retail and wholesale 244,723 238,438 7.1%
Energy 31,392 30,837 0.9%
Finance 635,268 625,321 18.5%
Services 518,040 504,350 14.9%
Transportation 166,108 160,586 4.7%
Other 9,891 10,124 0.3%
---------------- --------------- -------------
TOTAL $ 3,473,047 $ 3,376,184 100.0%
================ =============== =============
</TABLE>
C-6
<PAGE> 84
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
AMORTIZED ESTIMATED % OF
COST FAIR VALUE FAIR VALUE
---------------- ------------------------------
(In Thousands)
<S> <C> <C> <C>
United States government
securities and obligations $ 110,294 $ 110,839 3.5%
Mortgage backed securities 750 906 0.1%
Asset backed securities (1) 428,321 431,182 13.5%
Foreign government securities 87,112 88,419 2.8%
Manufacturing 585,680 589,775 18.5%
Utilities 454,279 463,140 14.5%
Retail and wholesale 166,980 168,837 5.3%
Energy 6,429 6,649 0.2%
Finance 556,850 561,751 17.6%
Services 584,496 594,240 18.7%
Transportation 148,999 151,091 4.8%
Other 19,022 18,942 0.5%
---------------- ------------------------------
TOTAL $ 3,149,212 $ 3,185,771 100.0%
================ ==============================
</TABLE>
(1) Asset backed securities are primarily backed by credit card receivables,
home equity loans, trade receivables and auto loans.
Mortgage Loans on Real Estate
As of December 31, 1999, the Company's mortgage loan portfolio totaled $10.5
million, a reduction of $6.8 million from December 31, 1998, reflecting
maturities and prepayments. The portfolio is comprised of commercial mortgage
loans, with diversification by property type and geographic location. Refer to
Footnote 3 in the Notes to Consolidated Financial Statements. In 1999,
investment income increased by $1.0 million versus 1998 mainly due to increased
mortgage loan prepayment income in anticipation of increasing interest rates.
The Company monitors the mortgage loan portfolio quarterly and through that
process identifies which loans require additional monitoring. Loans with
estimated collateral values less than the outstanding loan balances and loans
demonstrating characteristics indicative of higher than normal credit risks are
reviewed by management. The underlying collateral values are based upon
discounted property cash flow projections or external appraisals.
Equity Securities
The Company's equity securities are comprised of common stocks and are carried
at estimated fair value on the Statements of Financial Position. Based on fair
value, equity securities totaled $4.5 million in 1999 compared to $2.8 million
in 1998. The equity securities portfolio experienced no significant changes in
income or realized gains in 1999.
Short-Term Investments
Short-term investments include highly liquid debt instruments such as commercial
paper which are purchased with an original maturity of twelve months or less.
These securities are carried at amortized cost, which approximates fair value.
As of December 31, 1999, the Company's short-term investments totaled $207.2
million, a decrease of $33.5 million compared to $240.7 million at December 31,
1998. The decrease in short-term investments was primarily due to decreased
securities financing activity. Net investment income was $19.2 million for 1999
and $23.1 million for 1998. The reduction reflects a decrease in the average
asset base.
C-7
<PAGE> 85
Other Significant Items
Derivatives
The Company uses derivatives primarily to alter mismatches between the duration
of assets in its portfolios and the duration of insurance and annuity
liabilities supported by those assets. During 1999, $1.6 million of losses were
realized from derivatives versus gains of $12.4 million in 1998. The Company was
net long in interest rate futures during both years. However, interest rates
were generally rising in 1999 versus declining in 1998.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include the payment of sales commissions,
other underwriting expenses and the funding of its contractual obligations for
the life insurance and annuity contracts in-force. The Company has developed and
utilizes a cash flow projection system and regularly performs asset/liability
duration matching in the management of its asset and liability portfolios. The
Company anticipates funding all its cash requirements utilizing cash from
operations, normal investment maturities and anticipated calls and repayments or
through short term borrowing from its affiliate Prudential Funding Corporation
(refer to Footnote 14 in the Notes to Consolidated Financial Statements). As of
December 31, 1999, the Company's assets included $2.1 billion of cash,
short-term investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
In order to continue to market life insurance and annuity products, the Company
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense, while under GAAP they
are initially deferred and amortized over a period of time. Second, under
statutory accounting practices, the required additions to statutory reserves for
new business in some cases may initially exceed the statutory revenues
attributable to such business. These practices result in a reduction of
statutory income and surplus at the time of recording new business.
Insurance companies are subject to Risk-Based Capital ("RBC") guidelines,
monitored by insurance regulatory authorities, that measure the ratio of the
Company's statutory surplus with certain adjustments ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested assets,
insurance-related risks associated with the Company's products, interest rate
risks, and general business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Company's statutory capitalization.
The Company considers RBC implications in its asset/liability management
strategies. Each year, the Company conducts a thorough review of the adequacy of
statutory insurance reserves and other actuarial liabilities. The review is
performed to ensure that the Company's statutory reserves are computed in
accordance with accepted actuarial standards, reflect all contractual
obligations, meet the requirements of state laws and regulations and include
adequate provisions for any other actuarial liabilities that need to be
established. All significant reserve changes are reviewed by the Board of
Directors and are subject to approval by the Arizona Department of Insurance and
the New Jersey Department of Banking and Insurance (the "Insurance
Departments"). The Company believes that its statutory capital is adequate for
its currently anticipated levels of risk as measured by regulatory guidelines.
The NAIC has approved a series of codified statutory accounting standards which
will replace the current Accounting Practices and Procedures Manual as the
NAIC's primary guidance on statutory accounting. Certain of the standards could
have an impact on the measurement of statutory capital which, in turn, could
affect RBC ratios of insurance companies. The Insurance Departments have issued
notices requiring adoption of the new Accounting Practices and Procedures Manual
for financial filings with an "as of" date on and after January 1, 2001. The
Company has not estimated the potential effect of the Codification guidance, but
does not believe it will have an adverse impact on the Company's surplus
position.
C-8
<PAGE> 86
3. REGULATORY ENVIRONMENT
The Company is subject to the laws of the Insurance Departments. A detailed
financial statement in the prescribed form (the "Annual Statement") is filed
with the Insurance Departments each year covering the Company's operations for
the preceding year and its financial position as of the end of that year.
Regulation by the Insurance Departments includes periodic examinations to verify
the accuracy of contract liabilities and reserves. The Company's books and
accounts are subject to review by the Insurance Departments at all times. A full
examination of the Company's operations is conducted periodically by the
Insurance Departments and under the auspices of the NAIC.
The Company is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Annual Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula as described in the Liquidity and
Capital Resources disclosure. The implementation of these standards has not had
a significant impact on the Company.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
4. THE YEAR 2000 ISSUE
The Company utilizes many of the same business applications, infrastructure and
business partners as Prudential. Prudential addressed the Year 2000 issue on an
enterprise-wide basis. Therefore, it is not possible to differentiate the
Company's Year 2000 issue from that of Prudential. The accompanying discussion
of the Year 2000 issue and its outcome reflects steps taken by Prudential to
mitigate the Year 2000 risks.
The Year 2000 issue is best understood as a computer hardware and software
problem in which computer systems that have date-sensitive programming may
recognize a date using "00" as the year 1900 instead of the year 2000.
Prudential's total cost to address the Year 2000 issue was $225 million, with
$13 million spent in 1996, $64 million in 1997, $104 million in 1998 and $44
million in 1999. These amounts do not include Prudential's share of Year 2000
costs incurred by partnerships or joint ventures in which Prudential
participates but does not have a controlling financial interest. These amounts
also exclude costs for replacement systems that Prudential implemented or
accelerated solely due to potential Year 2000 failures because they were
immaterial. Prudential funded the cost of its Year 2000 program from operations.
During the course of its Year 2000 program, Prudential delayed some
discretionary computer projects to focus on completion of the Year 2000
projects. These delays did not have a material impact on Prudential's or the
Company's financial condition or operations.
To date, neither Prudential nor the Company have experienced material Year 2000
related problems in any of their operations. Prudential believes that it has
mitigated the Year 2000 risk, however Prudential cannot guarantee that it will
not experience a Year 2000 failure that has thus far been undetected. In the
worst case, it is possible that an as yet unknown Year 2000 failure, whether
internal or external, could have a material impact on Prudential or Pruco Life's
results of operations, liquidity or financial condition. Where necessary, we
have enhanced our general business continuation contingency plans to ensure that
they would be effective in responding to a Year 2000 failure. Substantially all
of these plans, as they related to Year 2000 issues, include the ultimate
resolution of any technology failure that we may encounter.
C-9
<PAGE> 87
5. EFFECTIVE NEW ACCOUNTING PRONOUNCEMENTS
Refer to Footnote 2, "Summary of Significant Accounting Policies," of the Notes
to Consolidated Financial Statements.
6. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Some of the statements contained in Management's Discussion and Analysis,
including those words such as "believes", "expects", "intends", "estimates",
"assumes", "anticipates" and "seeks", are forward-looking statements. These
forward-looking statements involve risk and uncertainties. Actual results may
differ materially from those suggested by the forward-looking statements for
various reasons. In particular, statements contained in Management's Discussion
and Analysis regarding the Company's business strategies involve risks and
uncertainties, and we can provide no assurance that we will be able to execute
our strategies effectively or achieve our financial and other objectives.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT, MARKET RISK, AND DERIVATIVE FINANCIAL INSTRUMENTS
As an wholly-owned subsidiary of Prudential, the Company benefits from the risk
management strategies implemented by its parent.
Risk management includes the identification and measurement of various forms of
risk, establishment of acceptable risk thresholds, and creation of processes
intended to maintain risks within these thresholds while optimizing returns on
the underlying assets or liabilities. Prudential considers risk management an
integral part of its core businesses.
The risks inherent in the Company's operations include market risk, product
risk, credit risk, and operating risk.
MARKET RISK is the risk of change in the value of financial instruments as a
result of absolute or relative changes in interest rates, foreign currency
exchange rates or equity or commodity prices. To varying degrees, the investment
activities supporting all of the Company's products and services generate market
risks. Market risks incurred and the strategies for managing these risks vary by
product.
With respect to non-variable life insurance products, fixed rate annuities and
the fixed rate options in our variable life insurance and annuity products, the
Company incurs market risk primarily in the form of interest rate risk. The
Company manages this risk through asset/liability management strategies that
seek to match the interest rate sensitivity of the assets to that of the
underlying liabilities. The Company's overall objective in these strategies is
to limit the net change in value of assets and liabilities arising from interest
rate movements. While it is more difficult to measure the interest sensitivity
of the Company's insurance liabilities than that of the related assets, to the
extent the Company can measure such sensitivities the Company believes that
interest rate movements will generate asset value changes that substantially
offset changes in the value of the liabilities relating to the underlying
products.
For variable annuities and variable life insurance products, excluding the fixed
rate options in these products, the Company's main exposure is the risk that
asset management fees may decrease as a result of declines in assets under
management due to changes in prices of securities. The Company is also exposed
to the risk that asset management fees calculated by reference to performance
could be lower. For variable annuity and variable life insurance products with
minimum guaranteed death benefits, the Company also faces the indirect risk that
declines in the value of underlying investments as a result of changes in
securities prices may increase the Company's net exposure to death benefits
under these contracts. The Company does not believe that these indirect risks
add significantly to the Company's overall risk. The Company manages its
exposure to equity price risk primarily by seeking to match the risk profile of
equity investments against risk-adjusted equity market benchmarks. The Company
measures benchmark risks level in terms of price volatility in relation to the
market in general.
The Company's exposure to market risk results from "other than trading"
activities in its insurance businesses. Market risks in the Company's insurance
business are managed through an investment process that incorporates
asset/liability management techniques and other risk management policies and
limits. Derivatives, as discussed further below, are used for hedging purposes
in the asset/liability management process. These include sensitivity and
Value-at-Risk measures, positions and other limits based on type of risk, and
various hedging methods.
C-10
<PAGE> 88
INSURANCE ASSET/LIABILITY MANAGEMENT
The Company seeks to maintain interest rate and equity exposures within
established ranges, which are periodically adjusted based on market conditions
and the design of related insurance products sold to customers. The Company's
risk managers, who work with portfolio and asset managers but under separate
management, establish investment risk limits for exposures to any issuer,
geographic region, type of security or industry sector and oversee efforts to
manage risk within policy constraints set by management and approved by the
Board of Directors.
The Company uses duration and convexity analyses to measure price sensitivity to
interest rate changes. Duration measures the relative sensitivity of the fair
value of a financial instrument to changes in interest rates. Convexity measures
the rate of change of duration with respect to changes in interest rate. The
Company seeks to manage its interest rate exposure by matching the relative
sensitivity of asset and liability values to interest rate changes, or
controlling "duration mismatch" of assets and liabilities. The Company has a
target duration mismatch level of plus or minus 0.5 years. As of December 31,
1999, the difference between the pre-tax duration of assets and the target
duration of liabilities in the Company's duration managed portfolio was less
than 0.1 years. The Company also considers risk-based capital implications in
its asset/liability management strategies.
The Company also performs portfolio stress testing as part of its regulatory
cash flow testing. In this testing, the Company evaluates the impact of altering
its interest-sensitive assumptions under various moderately adverse interest
rate environments. These interest-sensitive assumptions relate to the timing and
amounts of redemptions and pre-payments of fixed-income securities and lapses
and surrenders of insurance products. The Company evaluates any shortfalls that
this cash flow testing reveals to determine if there is a need to increase
statutory reserves or adjust portfolio management strategies.
MARKET RISK RELATED TO INTEREST RATES
Assets that subject the Company to interest rate risk include fixed maturities,
mortgage loans on real estate, and policy loans. In the aggregate, the carrying
value of these assets represented 73% of consolidated assets, other than assets
that are held in Separate Accounts, as of December 31, 1999 and 74% as of
December 31, 1998. With respect to liabilities, the Company is exposed to
interest rate risk through policyholder account balances relating to
interest-sensitive life insurance and annuity and investment type contracts.
The Company assesses interest rate sensitivity for its financial assets,
financial liabilities and derivatives using hypothetical test scenarios which
assume both upward and downward 100 basis point parallel shifts in the yield
curve from prevailing interest rates. The following tables set forth the
potential loss in fair value from a hypothetical 100 basis point upward shift at
December 31, 1999 and 1998, because this scenario results in the greatest net
exposure to interest rate risk of the hypothetical scenarios tested at those
dates. While the test scenario is for illustrative purposes only and does not
reflect management's expectations regarding future interest rates or the
performance of fixed income markets, it is a near-term, reasonably possible
hypothetical change that illustrates the potential impact of such events. These
test scenarios do not measure the changes in value that could result from
non-parallel shifts in the yield curve, which would be expected to produce
different changes in discount rates for different maturities. As a result, the
actual loss in fair value from a 100 basis point change in interest rates could
be different from that indicated by these calculations.
C-11
<PAGE> 89
This presentation does not include $2.469 billion and $2.393 billion of
insurance reserves and deposit liabilities at December 31, 1999 and 1998,
respectively. The Company believes that the interest rate sensitivities of these
insurance liabilities offset, in large measure, the interest rate risk of the
financial assets set forth in the following tables.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------
Fair Value
After + 100
Basis Point
Notional Estimated Parallel Hypothetical
Value Fair Yield Curve Change in
(derivatives) Value Shift Fair Value
---------------------------------------------------------------
Financial Assets and Liabilities (In millions)
with Interest Rate Risk:
Financial Assets:
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale - $ 2,998 $ 2,897 $ (101)
Held to maturity - 378 367 (11)
Mortgage loans on real estate - 12 12 -
Policy loans - 761 728 (33)
Derivatives
Futures 122 (2) (9) (7)
Financial liabilities
Investment contracts - (1,277) (1,262) 15
---------------
Total estimated potential loss $ (137)
===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Fair Value
After + 100
Basis Point
Notional Estimated Parallel Hypothetical
Value Fair Yield Curve Change in
(derivatives) Value Shift Fair Value
---------------------------------------------------------------
Financial Assets and Liabilities (In millions)
with Interest Rate Risk:
Financial Assets:
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale - $ 2,764 $ 2,666 $ (98)
Held to maturity - 422 408 (14)
Mortgage loans on real estate - 19 19 -
Policy loans - 806 762 (44)
Derivatives
Futures 41 - (2) (2)
Financial liabilities
Investment contracts - (839) (832) 7
---------------
Total estimated potential loss $ (151)
===============
</TABLE>
The estimated changes in fair values of the financial assets shown above relate
to assets invested in support of the Company's insurance liabilities, but do not
include assets associated with products for which investment risk is borne
primarily by the contractholders rather than the Company.
C-12
<PAGE> 90
MARKET RISK RELATED TO EQUITY PRICES
The Company actively manages equity price risk relative to benchmarks in
respective markets. Equity holdings are benchmarked against a blend of leading
market indices, mainly the Standard & Poor's ("S&P") 500 and Russell 2000, and
targets price sensitivities that approximate those of the benchmark indices. The
Company estimates its equity price risk from a hypothetical 10% decline in
equity benchmark market levels and measures this risk in terms of the decline in
the fair value of the equity securities it holds. Using this methodology, the
Company's estimated equity price risk at December 31, 1999 was $.4 million,
representing a hypothetical decline in fair market value of equity securities
held by the Company at that date from $4.5 million to $4.1 million. The
Company's estimated equity price risk using this methodology at December 31,
1998 was $.3 million, representing a hypothetical decline in fair market value
of equity securities the Company held at that date from $2.8 million to $2.5
million. These amounts exclude equity securities relating to products for which
investment risk is borne primarily by the contractholder rather than by the
Company. While these scenarios are for illustrative purposes only and do not
reflect management's expectations regarding future performance of equity markets
or of the Company's equity portfolio, they represent near term reasonably
possible hypothetical changes that illustrate the potential impact of such
events.
MARKET RISK RELATED TO FOREIGN CURRENCY EXCHANGE RATES
The Company is exposed to foreign currency exchange risk in its investment
portfolio and through its operations in Taiwan. The Company generally hedges
substantially all foreign currency-denominated fixed-income investments
supporting its U.S. insurance operations into U.S. dollars, using foreign
exchange currency swaps, in order to mitigate the risk that the fair value of
these investments fluctuates as a result of changes in foreign exchange rates.
The Company generally does not hedge all of the foreign currency risk of its
equity investments in unaffiliated foreign entities.
Foreign currency exchange risk is actively managed within specified limits at
the enterprise (Prudential) level using Value-at-Risk ("VaR") analysis. This
statistical technique estimates, at a specified confidence level, the potential
pretax loss in portfolio market value that could occur over an assumed time
horizon due to adverse market movements. This calculation utilizes a
variance/covariance approach.
The Company calculates VaR estimates of exposure to loss from volatility in
foreign currency exchange for a one month time period. The Company's estimated
VaR at December 31, 1999 for foreign currency assets not hedged to U.S. dollars,
measured at the 95% confidence level and using a one month time horizon, was
$1.2 million, representing a hypothetical decline in fair market value of these
foreign currency assets from $36.1 million to $34.9 million. The Company's
estimated VaR at December 31, 1998 for foreign currency assets not hedged to
U.S. dollars, measured at the 95% confidence level and using a one month time
horizon, was $0.5 million, representing a hypothetical decline in fair market
value of these foreign currency assets from $32.0 million to $31.5 million.
These calculations use historical price volatilities and correlation data at a
95% confidence level.
The Company's average monthly VaR from foreign currency exchange rate movements
measured at the 95% confidence level over a one month time horizon was $1.5
million during 1999 and $1.6 million during 1998.
LIMITATIONS OF VAR MODELS
Although VaR models represent a recognized tool for risk management, they have
inherent limitations, including reliance on historical data that may not be
indicative of future market conditions or trading patterns. Accordingly VaR
models should not be viewed as a predictor of future results. The Company may
incur losses that could be materially in excess of the amounts indicated by the
model on a particular trading day or over a period of time. A VaR model does not
estimate the greatest possible loss. The Company uses these models together with
other risk management tools, including stress testing. The results of these
models and analysis thereof are subject to the judgment of the Company's risk
management personnel.
C-13
<PAGE> 91
DERIVATIVES
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 can be
exchange-traded or contracted in the over-the-counter market and include swaps,
futures, options and forwards contracts. See Footnote 11 of the Notes to
Consolidated Financial Statements as to the Company's derivative positions at
December 31, 1999 and 1998. Under insurance statutes the Company may only use
derivative securities in hedging activities intended to offset changes in the
market value of assets held, obligations, and anticipated transactions. These
statutes prohibit the use of derivatives for speculation. The Company uses
derivative financial instruments to seek to reduce 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.
PRODUCT RISK is the risk of adverse results due to deviation of experience from
expected levels reflected in pricing. Products are priced to reflect the
expected levels of benefits and expense while allowing a margin for adverse
deviation. The level of margin varies with product design and pricing strategy
with respect to the targeted market. The Company seeks to maintain underwriting
standards so that premium charged is consistent with risk assumed on an overall
basis. Additionally, most of the Company's policies and contracts allow the
Company to adjust credits (via interest crediting rates) and/or charges (in
contracts where elements such as mortality and expense charges are not
guaranteed), allowing the Company some flexibility to respond to changes in
actuarial experience. The Company also considers the competitive environment in
determining pricing elements including premiums, crediting rates, and
non-guaranteed charges.
Mortality risks, generally inherent in most of the Company's life insurance and
annuity products, are incorporated in pricing based on the Company's experience
(if available and relevant) and/or industry experience. Mortality studies are
performed periodically to compare the actual incidence of death claims in
relation to business in force, to levels assumed in pricing and to industry
experience. Expense risk is the risk that actual expenses exceed those assumed
in pricing, relates to all products and varies by volume of business as well as
general price level changes. Persistency risk represents the risk that the
pattern of policy surrenders will deviate from assumed levels so that policies
do not remain in force long enough to allow the Company to recover its
acquisition costs. Certain products are designed, by use of surrender charges
and other features, to discourage early surrenders and thus mitigate this risk
to the Company. Periodic studies are performed to compare actual surrender
experience to pricing assumptions and industry experience.
For fee-based products in which investment risk is borne by the client, the
Company retains the risk that fees charged may not adequately cover
administrative expenses. The ability to earn a spread between these fees and the
associated costs is dependent upon the competitive environment, product
performance, the ability to attract clients and assets, and the Company's
control of expense levels.
CREDIT RISK is the risk that counterparties or issuers may default or fail to
fully honor contractual obligations and is inherent in investment portfolio
asset positions including corporate bonds and mortgages, private placements and
other lending-type products, certain derivative transactions, and various
investment operations functions. In derivative transactions, the Company follows
an established credit approval process which includes risk control limits and
monitoring procedures. The Company is also exposed to credit risk resulting from
reinsurance transactions.
Limits of exposure by counterparty, country and industry are in place at the
portfolio level, and counterparty concentration risk is also reviewed at the
enterprise level. Credit concentration risks are limited based on credit
quality, and enterprise-level concentrations are reviewed on a quarterly basis.
Business group credit analysis units evaluate creditworthiness of counterparties
and assign internal credit ratings based on data from independent rating
agencies and their own fundamental analysis. Additionally, stress tests and
sensitivity analysis are utilized to estimate the exposure to credit losses from
unusual events.
OPERATING RISK is the risk of potential loss from internal or external events
such as mismanagement, fraud, systems breakdowns, business interruption, or
failure to satisfy legal or fiduciary responsibilities. Like other financial
institutions, the Company is exposed to the risk of misconduct by employees that
are contrary to the internal controls the Company designed to manage those
risks. Legal risk may arise from inadequate control over contract documentation,
marketing processes, or other operations. The Company is subject to internal
controls established by Prudential to manage regulatory, legal, credit, asset
management and other risks at the business unit level for specific lines of
business and at the enterprise level for company-wide processes. Business unit
management personnel, internal auditors and an enterprise level Management
Internal Control unit monitor the Company's controls. The Company's controls are
subject to regulatory review in certain instances.
C-14
<PAGE> 92
Another aspect of operating risk relates to the Company's ability to conduct
transactions electronically and to gather, process, and disseminate information
and maintain data integrity and uninterrupted operations given the possibility
of unexpected or unusual events. The Company has implemented a business
continuation initiative to address these concerns. The potential impact of the
Year 2000 on computer operations, infrastructural support, and other matters is
discussed above.
C-15
<PAGE> 93
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE
JAMES J. AVERY, JR., Chairman and Director - President, Prudential Individual
Life Insurance since 1998; 1997 to 1998: Senior Vice President, Chief Actuary
and CFO, Prudential Individual Insurance Group; 1995 to 1997: President,
Prudential Select. Age 48.
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. Age 53.
ESTHER H. MILNES, President and Director - Vice President and Chief Actuary,
Prudential Individual Life Insurance since 1999; prior to 1999: Vice President
and Actuary, Prudential Individual Insurance Group. Age 49.
DAVID R. ODENATH, JR., Director - President, Prudential Investments since 1999;
prior to 1999; Senior Vice President and Director of Sales, Investment
Consulting Group, Paine Webber. Age 43.
I. EDWARD PRICE, Vice Chairman and Director - Senior Vice President and Actuary,
Prudential Individual Life Insurance since 1998; 1995 to 1998: Senior Vice
President and Actuary, Prudential Individual Insurance Group. Age 57.
KIYOFUMI SAKAGUCHI, Director - President and CEO, Prudential International
Insurance Group since 1995. Age 57.
OFFICERS WHO ARE NOT DIRECTORS
C. EDWARD CHAPLIN, Treasurer - Vice President and Treasurer, Prudential since
1995. Age 43.
JAMES C. DROZANOWSKI, Senior Vice President - Vice President, Operations and
Systems, Prudential Individual Financial Services since 1998; 1996 to 1998: Vice
President and Operations Executive, Prudential Individual Insurance Group; 1995
to 1996: President, Credit Card Division, Chase Manhattan Bank. Age 57.
CLIFFORD E. KIRSCH, Chief Legal Officer and Secretary - Chief Counsel, Variable
Products, Prudential Law Department since 1995. Age 40.
HIROSHI NAKAJIMA, Senior Vice President - President and CEO, Pruco Life
Insurance Company Taiwan Branch since 1997; prior to 1997: Senior Managing
Director, Prudential Life Insurance Co., Ltd. Age 56.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary - Vice President and
Associate Actuary, Prudential since 1996; prior to 1996: Vice President and
Assistant Actuary, Prudential Corporate Risk Management. Age 45.
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, Salomon
Brothers. Age 44.
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.
C-16
<PAGE> 94
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) Financial Statements of the Pruco Life Flexible Premium Variable Annuity
Account (Registrant) consisting of the Statements of Net Assets as of
December 31, 1999; the Statements of Operations for the period ended
December 31, 1999; the Statements of Changes in Net Assets for the periods
ended December 31, 1999 and December 31, 1998; and the Notes relating
thereto appear in the Statement of Additional Information (Part A of the
Registration Statement). (Note 1)
(2) Consolidated Statements of Pruco Life Insurance Company (Depositor) and
subsidiaries consisting of the Consolidated Statements of Financial
Position as of December 31, 1999 and 1998; and the related Consolidated
Statements of Operations of Stockholder's Equity and Cash Flows for the
years ended December 31, 1999, 1998 and 1997; and the Notes to the
Consolidated Financial Statements appear in the prospectus (Part A of the
Registration Statement) (Note 1).
(b) EXHIBITS
(1) Resolution of the Board of Directors of Pruco Life Insurance Company
establishing the Pruco Life Flexible Premium Variable Annuity Account.
(Note 2)
(2) Agreements for custody of securities and similar investments--Not
Applicable.
(3) (a) Form of Distribution Agreement between Prudential Investment Management
Services, Inc. "PIMS" (Underwriter) and Pruco Life Insurance Company
(Depositor) (Note 8)
(b) Form of Selected Broker Agreement used by PIMS (Note 8)
(4) The Prudential DISCOVERY SELECT Contract. (Note 3)
(5) (a) Application form for the Contract. (Note 4)
(6) (a) Articles of Incorporation of Pruco Life Insurance Company, as amended
October 19, 1993. (Note 5)
(b) By-laws of Pruco Life Insurance Company, as amended May 6, 1997.
(Note 9)
(7) Contract of reinsurance in connection with variable annuity contract--Not
Applicable.
(8) Other material contracts performed in whole or in part after the date the
registration statement is filed:
(a) Form of Fund Participation Agreement. (Note 3)
(9) Opinion of Counsel as to legality of the securities being registered.
(Note 1)
(10) Written consent of PricewaterhouseCoopers LLP, independent accountants.
(Note 1)
(11) All financial statements omitted from Item 23, Financial Statements--Not
Applicable.
(12) Agreements in consideration for providing initial capital between or among
Registrant, Depositor, Underwriter, or initial Contract owners--Not
Applicable.
(13) Schedule of Performance Computations. (Note 1)
(14) Powers of Attorney.
(a) Ira J. Kleinman, Esther H. Milnes and I. Edward Price (Note 7)
(b) Dennis G. Sullivan (Note 6)
(c) Kiyofumi Sakaguchi (Note 5)
(d) James J. Avery Jr (Note 9)
(e) David R. Odenath, Jr. (Note 10)
- ----------
(Note 1) Filed within.
(Note 2) Incorporated by reference to Form N-4, Registration No. 33-61125,
filed July 19, 1995 on behalf of the Pruco Life Flexible Premium
Variable Annuity Account.
(Note 3) Incorporated by reference to Form N-4, Registration No. 333-06701,
filed June 24, 1996 on behalf of the Pruco Life Flexible Premium
Variable Annuity Account.
(Note 4) Incorporated by reference to Pre-Effective Amendment No. 1 to Form
N-4, Registration No. 333-06701, filed September 12, 1996 on behalf of
the Pruco Life Flexible Premium Variable Annuity Account.
(Note 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. 6 to Form
S-1, Registration No. 33-86780, filed April 12, 1999 on behalf of the
Pruco Life Variable Contract Real Property Account.
(Note 7) 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 8) Incorporated by reference to Post-Effective Amendment No. 6 on Form
N-4, Registration No. 333-06701, filed April 15, 1999 on behalf of the
Pruco Life Flexible Premium Variable Annuity Account.
(Note 9) 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 10) Incorporated by reference to Post-Effective Amendment No. 7 to Form
S-1, Registration No. 33-86780, filed April 12, 2000 on behalf of the
Pruco Life Variable Contract Real Property Account.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
See Part A: Directors and Officers.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Pruco Life Insurance Company ("Pruco Life"), a corporation organized under the
laws of Arizona, is a direct, wholly-owned subsidiary of The Prudential
Insurance Company of America, ("Prudential"), a mutual life insurance company
organized under the laws of New Jersey. The subsidiaries of Prudential and short
descriptions of each are set forth on the following pages.
Pruco Life may be deemed to control its two wholly-owned subsidiaries, Pruco
Life Insurance Company of New Jersey ("Pruco Life of New Jersey") and The
Prudential Insurance Company of Arizona ("PLICA"). Pruco Life may also be deemed
to control the following separate accounts which are registered as unit
investment trusts under the Investment Company Act of 1940: the Pruco Life
Variable Appreciable Account, the Pruco Life Variable Insurance Account, the
Pruco Life Single Premium Variable Life Account, the Pruco Life Variable
Universal Account, the Pruco Life PRUvider Variable Appreciable Account, the
Pruco Life Single Premium Variable Annuity Account, the Pruco Life Flexible
Premium Variable Annuity Account (Registrant) (separate accounts of Pruco Life),
the Pruco Life of New Jersey Variable Appreciable Account, the Pruco Life of New
Jersey Variable Insurance Account, the Pruco Life of New Jersey Single Premium
Variable Life Account, and the Pruco Life of New Jersey Single Premium Variable
Annuity Account (separate accounts of Pruco Life of New Jersey).
The above-referenced separate accounts, along with Prudential and certain of
Prudential's separate accounts, hold the majority of the shares of The
Prudential Series Fund, Inc., a Maryland corporation. In addition, The
Prudential holds all the shares of Prudential's Gibraltar Fund, a Maryland
corporation, in three of its separate accounts. The Prudential Series Fund,
Inc. and Prudential's Gibraltar Fund are registered as open-end diversified,
management investment companies under the Investment Company Act of 1940.
Additionally, the aforementioned separate accounts of Prudential are registered
as unit investment trusts under the Investment Company Act of 1940.
In addition, Pruco Life may also be deemed to be under common control with The
Prudential Variable Contract Account-2, The Prudential Variable Contract
Account-10, and The Prudential Variable Contract Account-11, separate accounts
of Prudential, all of which are registered as open-end, diversified, management
investment
C-1
<PAGE> 95
companies under the Investment Company Act of 1940 and with the Prudential
Variable Contract Account-24, a registered unit investment trust.
The subsidiaries of Prudential and short descriptions of each are
listed under Item 25 of Post-Effective Amendment No. 32 to the Form
N-1A Registration Statement for The Prudential Series Fund, Inc.,
Registration No. 2-80896, filed February 28, 1997, the text of which
is hereby incorporated.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 29, 2000, there were 65,049 owners of qualified contracts and
67,269 owners of nonqualified contracts offered by the Registrant.
ITEM 28. 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 filed August 15, 1997.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND
Tax-Free Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Diversified Funds, Prudential Emerging Growth Fund, Inc., Prudential Equity
Fund Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Total Return Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential High Yield Total Return
Fund, Inc., Prudential Index Series Fund, Prudential Institutional Liquidity
Portfolio, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Real Estate Securities Fund, Prudential Sector Funds, Inc.,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential
Tax-Managed Funds, Prudential 20/20 Focus Fund, Prudential World Fund, Inc.,
The Prudential Investment Portfolios, Inc., Strategic Partners Series, Target
Funds and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts:
Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract Account-2,
The Prudential Variable Contract Account-10, The Prudential Variable Contract
Account-11, The Prudential Variable Contract Account-24, The Prudential Variable
Contract GI-2. The Prudential Discovery Select Group Variable Contract Account,
The Pruco Life Flexible Premium Variable Annuity Account, The Pruco Life of New
Jersey Flexible Premium Variable Annuity Account, The Prudential Individual
Variable Contract Account and The Prudential Qualified Individual Variable
Contract Account.
(b) Information concerning the officers and directors of PIMS is set forth
below.
C-3
<PAGE> 96
POSITIONS AND
POSITIONS AND OFFICES OFFICES WITH
NAME(1) WITH UNDERWRITER REGISTRANT
- ---- --------------------- -------------
Robert F. Gunia .............. President None
Senior Vice President and Chief
Kevin B. Frawley ............. Compliance Officer None
Jean D. Hamilton.............. Executive Vice President None
John R. Strangfeld............ Executive Vice President None
Senior Vice President and Chief
Francis O. Odubekun........... Operating Officer None
Senior Vice President, Secretary
William V. Healy.............. and Chief Legal Officer None
Vice President, Comptroller and
Margaret M. Deverell ......... Chief Financial Officer None
C. Edward Chaplin............. Treasurer None
- ----------
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise noted.
(c) Not applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section 31
(a) of the 1940 Act and the rules promulgated thereunder are maintained by the
Registrant through The Prudential Insurance Company of America, 751 Broad
Street, Newark, New Jersey 07102-3777.
ITEM 31. MANAGEMENT SERVICES
Summary of any contract not discussed in Part A or Part B of the registration
statement under which management-related services are provided to the
Registrant--Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes to file a post-effective amendment to this Registrant
Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16
months old for so long as payments under the variable annuity contracts may
be accepted.
(b) Registrant undertakes to include either (1) as part of any application to
purchase a contract offered by the prospectus, a space that an applicant
can check to request a statement of additional information, or (2) a
postcard or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a statement of
additional information.
(c) Registrant undertakes to deliver any statement of additional information
and any financial statements required to be made available under this Form
promptly upon written or oral request.
(d) Restrictions on withdrawal under Section 403(b) Contracts are imposed in
reliance upon, and in compliance with, a no-action letter issued by the
Chief of the Office of Insurance Products and Legal Compliance of the U.S.
Securities and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.
(e) Pruco Life hereby represents that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred and the risks assumed by
Pruco Life.
C-4
<PAGE> 97
SIGNATURES
As required by the requirements the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements of the Securities Act Rule 485(b) for effectiveness of this
Registration Statement and has caused this Post-effective Amendment No. 9 to the
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 17th day of April, 2000.
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE
ANNUITY ACCOUNT
(Registrant)
BY: PRUCO LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ Clifford E. Kirsch /s/ Esther H. Milnes
- ------------------------------------- ---------------------------
CLIFFORD E. KIRSCH ESTHER H. MILNES
Chief Legal Officer President
and Secretary
C-5
<PAGE> 98
SIGNATURES
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 8 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
Signature and Title
-------------------
*
- ---------------------------------------
ESTHER MILNES Date: April 17, 2000
President and Director
*
- ---------------------------------------
JAMES J. AVERY JR
Chairman of the Board
and Director
* *By: Clifford E. Kirsch
- ---------------------------------------- ----------------------------------
DENNIS G. SULLIVAN CLIFFORD E. KIRSCH
Vice President and Chief (Attorney-in-Fact)
Accounting Officer (Principal
Financial Officer and Chief
Accounting Officer-
*
- ---------------------------------------
IRA J. KLEINMAN
Director
*
- ---------------------------------------
I. EDWARD PRICE
Director
*
- ---------------------------------------
KIYOFUMI SAKAGUCHI
Director
*
- ---------------------------------------
DAVID R. ODENATH, JR.
Director
C-6
<PAGE> 99
EXHIBIT INDEX
Exhibit
(9) Opinion of Counsel
(10) Written consent of PricewaterhouseCoopers, LLP
(13) Schedule of Performance Computations
<PAGE> 1
EXHIBIT 9
April 12, 2000
Pruco 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 of the Pruco
Life Flexible Premium Variable Annuity Account (the "Account") on June 16, 1995,
by the Board of Directors of Pruco Life as a separate account for assets
applicable to certain individual variable annuity contracts, pursuant to the
provisions of Section 20-651 of the Arizona Insurance Code. I was responsible
for oversight of the preparation and review of the Registration Statement on
Form N-4, as amended, filed by Pruco Life with the Securities and Exchange
Commission (Registration No. 333-06701) under the Securities Act of 1933 for the
registration of certain individual variable annuity contracts issued with
respect to the Account.
I am of the following opinion:
(1) Pruco Life was duly organized under the laws of Arizona and is a
validly existing corporation.
(2) The Account has been duly created and is validly existing as a
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 individual variable
annuity contracts is not chargeable with liabilities arising out of
any other business Pruco Life may conduct.
(4) The individual variable annuity contracts are legal and binding
obligations of Pruco Life in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
Clifford E. Kirsch
<PAGE> 1
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 9 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated March
17, 2000, relating to the financial statements of the Discovery Select Variable
Annuity Subaccounts of the Pruco Life Flexible Premium Variable Annuity
Account, which appears in such Statement of Additional Information.
We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated March 21,
2000, relating to the consolidated financial statements of Pruco Life Insurance
Company and Subsidiaries, which appears in such Statement of Additional
Information.
We also consent to the reference to us under the heading "Experts" in the
Statement of Additional Information.
PRICEWATERHOUSECOOPERS LLP
New York, New York
April 10, 2000
<PAGE> 1
EXHIBIT 13
Table 1
<TABLE>
<CAPTION>
TABLE 1
AVERAGE ANNUAL TOTAL RETURN
From Date
Portfolio
One Year Five Years Ten Years Established
Fund Date Ended Ended Ended Through
Portfolio Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
--------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
Diversified Bond Portfolio 06/83 -7.10% 6.12% 6.14% 7.30%
Diversified Conservative Growth Portfolio 05/99 N/A N/A N/A -4.39%
High Yield Bond Portfolio 02/87 -1.72% 7.07% 8.22% 6.43%
Stock Index Portfolio 10/87 14.01% 26.26% 16.07% 17.28%
Equity Income Portfolio 02/88 6.10% 15.56% 12.44% 13.07%
Equity Portfolio 06/83 6.05% 17.21% 13.44% 13.43%
Global Portfolio 09/88 42.72% 20.61% 11.75% 12.69%
Prudential Jennison Portfolio 05/95 35.39% N/A N/A 30.08%
Small Capitalization Stock Portfolio 05/95 6.25% N/A N/A 14.24%
20/20 Focus Portfolio 05/99 N/A N/A N/A 7.95%
AIM VARIABLE INSURANCE FUNDS INC
AIM V.I. Growth and Income Fund 05/94 27.53% 26.30% N/A 22.68%
AIM V.I. Value Fund 06/93 23.23% 25.36% N/A 21.12%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
American Century VP Value 05/96 -6.95% N/A N/A 8.99%
JANUS ASPEN SERIES
Growth Portfolio 09/93 37.13% 27.98% N/A 22.49%
International Growth Portfolio 05/94 74.88% 31.30% N/A 26.31%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series 07/95 69.41% N/A N/A 34.38%
Research Series 07/95 17.48% N/A N/A 20.89%
OCC ACCUMULATION TRUST
Managed Portfolio 08/88 -1.32% 17.93% 15.01% 16.10%
Small Cap Portfolio 08/88 -7.86% 6.69% 9.57% 9.94%
T. ROWE PRICE EQUITY SERIES, INC
Equity Income Portfolio 03/94 -2.58% 16.67% N/A 15.50%
T. ROWE PRICE INTERNATIONAL SERIES, INC
International Stock Portfolio 03/94 26.61% 13.46% N/A 11.73%
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Small Cap Investments Fund - Class 2 05/98 67.07% N/A N/A 28.68%
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio 09/96 56.38% N/A N/A 20.47%
482.71% 258.52% 92.64% 377.36%
-1.34% 3.71% 3.67% 4.78%
481.37% 262.23% 96.31% 382.14%
</TABLE>
<PAGE> 2
Table 2
<TABLE>
<CAPTION>
TABLE 2
AVERAGE ANNUAL TOTAL RETURN
ASSUMING NO WITHDRAWAL
From Date
Portfolio
One Year Five Years Ten Years Established
Fund Date Ended Ended Ended Through
Portfolio Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
--------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
Diversified Bond Portfolio 06/83 -2.45% 6.25% 6.14% 7.30%
Diversified Conservative Growth Portfolio 05/99 N/A N/A N/A 5.05%
High Yield Bond Portfolio 02/87 3.08% 7.20% 8.22% 6.43%
Stock Index Portfolio 10/87 18.81% 26.32% 16.07% 17.28%
Equity Income Portfolio 02/88 10.90% 15.65% 12.44% 13.07%
Equity Portfolio 06/83 10.85% 17.30% 13.44% 13.43%
Prudential Jennison Portfolio 05/95 40.19% N/A N/A 30.21%
Global Portfolio 09/88 47.52% 20.69% 11.75% 12.69%
Small Capitalization Stock Portfolio 05/95 11.06% N/A N/A 14.44%
20/20 Focus Portfolio 05/99 N/A N/A N/A 17.76%
AIM VARIABLE INSURANCE FUNDS INC
AIM V.I. Growth and Income Fund 05/94 32.33% 26.36% N/A 22.73%
AIM V.I. Value Fund 06/93 28.03% 25.42% N/A 21.13%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
American Century VP Value 05/96 -2.28% N/A N/A 9.51%
JANUS ASPEN SERIES
Growth Portfolio 09/93 41.93% 28.04% N/A 22.51%
International Growth Portfolio 05/94 79.68% 31.35% N/A 26.36%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series 07/95 74.21% N/A N/A 34.53%
Research Series 07/95 22.28% N/A N/A 21.10%
OCC ACCUMULATION TRUST
Managed Portfolio 08/88 3.48% 18.02% 15.01% 16.10%
Small Cap Portfolio 08/88 -3.26% 6.81% 9.57% 9.94%
T. ROWE PRICE EQUITY SERIES, INC
Equity Income Portfolio 03/94 2.22% 16.75% N/A 15.57%
T. ROWE PRICE INTERNATIONAL SERIES, INC
International Stock Portfolio 03/94 31.41% 13.55% N/A 11.82%
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Small Cap Investments Fund - Class 2 05/98 71.87% N/A N/A 31.09%
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio 09/96 61.18% N/A N/A 21.03%
583.04% 259.71% 92.64% 401.08%
3.46% 3.84% 3.67% 4.78%
586.50% 263.55% 96.31% 405.86%
</TABLE>
<PAGE> 3
Table 3
<TABLE>
<CAPTION>
TABLE 3
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
From Date
Portfolio
One Year Five Years Ten Years Established
Fund Date Ended Ended Ended Through
Portfolio Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
--------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
Diversified Bond Portfolio 06/83 -2.45% 35.40% 81.52% 221.50%
Diversified Conservative Growth Portfolio 05/99 N/A N/A N/A 3.35%
High Yield Bond Portfolio 02/87 3.08% 41.55% 120.41% 122.84%
Stock Index Portfolio 10/87 18.81% 221.64% 343.87% 598.97%
Equity Income Portfolio 02/88 10.90% 106.91% 222.92% 329.58%
Equity Portfolio 06/83 10.85% 122.03% 252.92% 706.94%
Prudential Jennison Portfolio 05/95 40.19% N/A N/A 242.86%
Global Portfolio 09/88 47.52% 156.07% 203.60% 284.94%
Small Capitalization Stock Portfolio 05/95 11.06% N/A N/A 87.68%
20/20 Focus Portfolio 05/99 N/A N/A N/A 11.54%
AIM VARIABLE INSURANCE FUNDS INC
AIM V.I. Growth and Income Fund 05/94 32.33% 222.15% N/A 219.09%
AIM V.I. Value Fund 06/93 28.03% 210.34% N/A 253.16%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC
American Century VP Value 05/96 -2.28% N/A N/A 39.51%
JANUS ASPEN SERIES
Growth Portfolio 09/93 41.93% 244.15% N/A 259.15%
International Growth Portfolio 05/94 79.68% 291.02% N/A 276.31%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series 07/95 74.21% N/A N/A 273.01%
Research Series 07/95 22.28% N/A N/A 133.91%
OCC ACCUMULATION TRUST
Managed Portfolio 08/88 3.48% 128.93% 305.04% 449.61%
Small Cap Portfolio 08/88 -3.26% 39.02% 149.42% 194.82%
T. ROWE PRICE EQUITY SERIES, INC
Equity Income Portfolio 03/94 2.22% 116.93% N/A 129.93%
T. ROWE PRICE INTERNATIONAL SERIES, INC
International Stock Portfolio 03/94 31.41% 88.81% N/A 90.11%
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Small Cap Investments Fund - Class 2 05/98 71.87% N/A N/A 57.06%
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio 09/96 61.18% N/A N/A 85.96%
583.04% 2024.95% 1679.70% 5071.83%
3.46% 20.75% 43.35% 116.99%
586.50% 2045.70% 1723.05% 5188.82%
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