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DISCOVERY CHOICE(SM)
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VARIABLE ANNUITY
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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 Choice 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 Choice 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 CHOICE
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To learn more about the Discovery Choice 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 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 Choice 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 32 of this prospectus.
FOR A FREE COPY OF THE SAI CALL US AT:
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(888) PRU-2888 or write to us at:
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
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
CHOICE IS NOT A BANK DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
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CONTENTS
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<TABLE>
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PART I: DISCOVERY CHOICE PROSPECTUS
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SUMMARY
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Glossary........................................... 7
Summary............................................ 8
Summary of Contract Expenses....................... 10
Expense Examples................................... 12
PART II: DISCOVERY CHOICE PROSPECTUS
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SECTIONS 1-9
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Section 1: What Is The Discovery Choice Variable
Annuity?.............................................. 16
Short Term Cancellation Right or "Free Look"....... 16
Section 2: What Investment Options Can I Choose?........ 17
Variable Investment Options........................ 17
Transfers Among Options............................ 18
Dollar Cost Averaging.............................. 18
Asset Allocation Program........................... 18
Auto-Rebalancing................................... 19
Voting Rights...................................... 19
Substitution....................................... 19
Section 3: What Kind Of Payments Will I Receive During
The Income Phase? (Annuitization)..................... 20
Payment Provisions................................. 20
Option 1: Annuity Payments for a Fixed
Period....................................... 20
Option 2: Life Annuity with 120 Payments (10
Years) Certain............................... 20
Option 3: Interest Payment Option.............. 20
Option 4: Other Annuity Options................ 20
Section 4: What is the Death Benefit?................... 21
Beneficiary........................................ 21
Calculation of the Death Benefit................... 21
Section 5: How Can I Purchase A Discovery Choice
Contract?............................................. 22
Purchase Payments.................................. 22
Allocation of Purchase Payments.................... 22
Calculating Contract Value......................... 22
Section 6: What Are The Expenses Associated With The
Discovery Choice Contract?............................ 23
Insurance Charges.................................. 23
Contract Maintenance Charge........................ 23
Premium Taxes...................................... 23
Transfer Fee....................................... 23
Company Taxes...................................... 23
Section 7: How Can I Access My Money?................... 24
Withdrawals During the Accumulation Phase.......... 24
Automated Withdrawals.............................. 24
Suspension of Payments or Transfers................ 24
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<TABLE>
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Section 8: What Are The Tax Considerations Associated
With The Discovery Choice Contract?................... 25
Contracts Owned by Individuals (Not Associated with
Tax Favored Retirement Plans).................... 25
Contracts Held by Tax-Favored Plans................ 26
Section 9: Other Information............................ 31
Pruco Life Insurance Company....................... 31
The Separate Account............................... 31
Sale and Distribution of the Contract.............. 31
Assignment......................................... 32
Financial Statements............................... 32
Statement of Additional Information................ 32
Accumulation Unit Values........................... 33
IRA Disclosure Statement........................... 37
PART III: PROSPECTUSES
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VARIABLE INVESTMENT OPTIONS
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THE PRUDENTIAL SERIES FUND
AIM VARIABLE INSURANCE FUNDS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
DAVIS VARIABLE ACCOUNT FUND, INC.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
JANUS ASPEN SERIES
MFS VARIABLE INSURANCE TRUST
OCC ACCUMULATION TRUST
T. ROWE PRICE
WARBURG PINCUS TRUST
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PART I SUMMARY
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DISCOVERY CHOICE PROSPECTUS
[ROCKWELL GRAPHIC]
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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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 definition below) 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 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.
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
This is the total value of your contract.
DEATH BENEFIT
If the sole or last surviving owner 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 21.
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.
JOINT OWNER
The person named as the joint owner, who shares ownership rights with the owner
as defined in the contract.
PRUDENTIAL ANNUITY SERVICE CENTER
P.O. Box 14215, New Brunswick, New Jersey, 08906. The phone number is (888)
PRU-2888.
PURCHASE PAYMENTS
The amount of money you pay us to purchase the contract. Generally, with some
restrictions you can make additional purchase payments at any time during the
accumulation phase.
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. Generally,
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.
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7
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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
SUMMARY FOR SECTIONS 1-9
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FOR A MORE COMPLETE DISCUSSION OF THE FOLLOWING TOPICS, SEE THE CORRESPONDING
SECTION IN PART II OF THE PROSPECTUS.
SECTION 1
WHAT IS THE DISCOVERY CHOICE VARIABLE ANNUITY?
The Discovery Choice Variable Annuity is a contract between you, the owner, and
us, the insurance company, Pruco Life Insurance Company (Pruco Life Insurance
Company will hereafter be referred to as Pruco Life, We or Us). The contract
allows you to invest on a tax-deferred basis in one or more of 26 variable
investment options. The contract is intended for retirement savings or other
long-term investment purposes and provides for a death benefit.
The variable investment options are designed to offer the opportunity for a
favorable return. However, this is NOT guaranteed. It is possible, due to market
changes, that your investments may decrease in value.
You can invest your money in any or all of the variable investment options.
You are allowed 12 tax-free transfers each contract year among the variable
investment options, without a charge.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase; and the income phase. During the accumulation phase, any
earnings grow on a tax-deferred basis and are generally only 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 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.
If you change your mind about owning Discovery Choice, you may cancel your
contract within 10 days after receiving it (or whatever time period is required
under the applicable state law). This time period is referred to as the Free
Look period.
SECTION 2
WHAT INVESTMENT OPTIONS CAN I CHOOSE?
You can invest your money in any or all of the variable investment options that
use 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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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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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 that 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.
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.
Generally, 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 owner or joint owner dies before the income phase
of the contract begins, the person(s) or entity that you have chosen as your
beneficiary will receive at a minimum, the total amount invested adjusted for
withdrawals or a potentially greater amount relating to market appreciation
depending on the death benefit option you choose.
SECTION 5
HOW CAN I PURCHASE A DISCOVERY CHOICE ANNUITY CONTRACT?
You can purchase this contract, under most circumstances, with a minimum initial
purchase payment of $10,000. Generally, 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 CHOICE CONTRACT?
The contract has insurance features and investment features, and there are costs
related to each. Each year we deduct a contract maintenance charge if your
contract value is less than $50,000. This charge is equal to the lesser of $30
or 2% of your contract value. For insurance and administrative costs, we also
deduct an annual charge of 1.35% or 1.65% of the average daily value of all
assets allocated to the variable investment options, depending on the death
benefit option that you choose.
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
assess the required premium tax charge, which can range up to 5%.
There are also charges made by the mutual funds which are invested in by the
variable investment options. 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. You may,
however, be subject to income tax and, if you make a withdrawal prior to age
59 1/2, an additional tax penalty as well.
SECTION 8
WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY CHOICE CONTRACT?
Your earnings are generally 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 an Individual Retirement Annuity (IRA) contracts are 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, and sold by registered representatives.
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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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 CHOICE. THIS SUMMARY INCLUDES THE EXPENSES OF THE MUTUAL FUNDS
USED BY THE VARIABLE INVESTMENT OPTIONS BUT DOES NOT INCLUDE ANY CHARGE FOR
PREMIUM TAXES THAT MIGHT BE APPLICABLE IN YOUR STATE.
FOR MORE DETAILED INFORMATION:
More detailed information can be found on page 23 under the section called,
"What Are The Expenses Associated With The Discovery Choice 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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TRANSFER FEE (SEE NOTE 1 BELOW)
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first 12 transfers per year $0.00
transfer after 12 $10.00
ANNUAL CONTRACT FEE AND CONTRACT CHARGE UPON FULL WITHDRAWAL (SEE NOTE 2 BELOW)
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$30.00
ANNUAL ACCOUNT EXPENSES
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AS A PERCENTAGE OF THE AVERAGE ACCOUNT VALUE
Basic Death Benefit Option
Insurance Charge: 1.35%
Enhanced Death Benefit Option
Insurance Charge: 1.65%
NOTE 1: YOU WILL NOT BE CHARGED FOR TRANSFERS MADE IN CONNECTION WITH DOLLAR
COST AVERAGING AND AUTO-REBALANCING.
NOTE 2: THIS FEE IS ASSESSED ANNUALLY AND AT THE TIME OF A FULL WITHDRAWAL
PROVIDED THE VALUE OF YOUR CONTRACT IS LESS THAN $50,000.
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 CHOICE 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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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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<TABLE>
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ANNUAL MUTUAL FUND EXPENSES (AFTER REIMBURSEMENT, IF ANY):
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AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
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<CAPTION>
INVESTMENT OTHER TOTAL CONTRACTUAL TOTAL ACTUAL
MANAGEMENT FEE EXPENSES EXPENSES EXPENSES*
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THE PRUDENTIAL SERIES FUND
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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% 0.09% 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%
DAVIS VARIABLE ACCOUNT FUND, INC.(5)
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Davis Value Portfolio 0.75% 1.54% 2.29% 1.00%
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST(4)
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Franklin Small Cap Fund--Class 2 0.55% 0.52% 1.07% 1.07%
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 10.
THE "EXPENSE EXAMPLES" ON THE FOLLOWING PAGES ARE CALCULATED USING THE TOTAL
ACTUAL EXPENSES.
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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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 CHOICE. YOU CAN ALSO USE THE
EXAMPLE TO COMPARE THE COST OF DISCOVERY CHOICE WITH OTHER VARIABLE ANNUITY
CONTRACTS.
EXAMPLE 1: BASIC DEATH BENEFIT OPTION
This example assumes that you:
- - Invest $10,000 in Discovery Choice;
- - Elect the BASIC Death Benefit Option;
- - Allocate all of your assets to only one of the variable investment options;
- - That investment has a 5% return each year; and
- - The mutual fund's operating expenses remain the same each year.
EXAMPLE 2: ENHANCED DEATH BENEFIT OPTION
This example assumes that you:
- - Invest $10,000 in Discovery Choice;
- - Elect the ENHANCED Death Benefit Option;
- - Allocate all of your assets to only one of the variable investment options;
- - That investment has a 5% return each year; and
- - The mutual fund's operating expenses remain the same each year.
Because this contract has no withdrawal charges, your costs are not impacted by
whether or not you choose to make withdrawals. Your actual costs may be higher
or lower, but on the following page are examples of what your costs would be
based on these assumptions.
NOTES FOR EXPENSE EXAMPLES:
THESE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE
SHOWN.
IF YOUR CONTRACT VALUE IS LESS THAN
$50,000, ON YOUR CONTRACT
ANNIVERSARY (AND UPON A FULL
WITHDRAWAL), WE DEDUCT THE LESSER
OF $30.00 OR 2% OF THE CONTRACT
VALUE. THE EXAMPLES USE AN AVERAGE
ANNUAL CONTRACT FEE, WHICH WE
CALCULATED BASED ON OUR ESTIMATE OF
THE TOTAL CONTRACT FEES WE EXPECT
TO COLLECT IN 2000. BASED ON THESE
ESTIMATES, THE ANNUAL CONTRACT FEE
IS INCLUDED AS AN ANNUAL CHARGE OF
0.05% OF CONTRACT VALUE. YOUR
ACTUAL FEES WILL VARY BASED ON THE
AMOUNT OF YOUR CONTRACT AND YOUR
SPECIFIC ALLOCATION(S).
PREMIUM TAXES ARE NOT REFLECTED IN
THE EXAMPLES. A CHARGE FOR PREMIUM
TAXES MAY APPLY DEPENDING ON THE
STATE WHERE YOU LIVE.
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PART I
DISCOVERY CHOICE PROSPECTUS SUMMARY
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<TABLE>
<CAPTION>
EXPENSE EXAMPLES 1 AND 2
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<CAPTION>
EXAMPLE 1: EXAMPLE 2:
WITH THE BASIC DEATH BENEFIT WITH THE ENHANCED DEATH BENEFIT
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1 YR 3 YRS 5 YRS 10 YRS 1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
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Diversified Bond Portfolio $186 $576 $990 $2148 $216 $667 $1144 $2462
Diversified Conservative Growth Portfolio $248 $764 $1306 $2786 $278 $853 $1454 $3080
Equity Income Portfolio $185 $573 $985 $2137 $215 $664 $1139 $2452
Equity Portfolio $190 $588 $1011 $2190 $220 $679 $1164 $2503
Global Portfolio $227 $700 $1200 $2575 $257 $791 $1350 $2875
High Yield Bond Portfolio $203 $627 $1078 $2327 $233 $718 $1230 $2636
Money Market Portfolio $185 $573 $985 $2137 $215 $664 $1139 $2452
Prudential Jennison Portfolio $206 $637 $1093 $2358 $236 $727 $1245 $2666
Small Capitalization Stock Portfolio $188 $582 $1001 $2169 $218 $673 $1154 $2483
Stock Index Portfolio $182 $563 $970 $2105 $212 $655 $1124 $2421
20/20 Focus Portfolio $252 $776 $1326 $2826 $282 $865 $1474 $3119
AIM VARIABLE INSURANCE FUNDS
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AIM V.I. Growth and Income Fund $220 $679 $1164 $2503 $250 $770 $1316 $2806
AIM V.I. Value Fund $219 $676 $1159 $2493 $249 $767 $1311 $2796
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
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Alliance Premier Growth Portfolio--Class B $248 $751 $1298 $2752 $278 $850 $1445 $3043
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
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American Century VP Value $243 $748 $1280 $2736 $273 $838 $1430 $3032
DAVIS VARIABLE ACCOUNT FUND, INC.
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Davis Value Portfolio $247 $750 $1266 $2617 $276 $838 $1410 $2893
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
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Franklin Small Cap Fund--Class 2 $250 $770 $1316 $2806 $280 $859 $1464 $3099
JANUS ASPEN SERIES
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Growth Portfolio $210 $649 $1114 $2400 $240 $739 $1265 $2706
International Growth Portfolio $219 $676 $1159 $2493 $249 $767 $1311 $2796
MFS VARIABLE INSURANCE TRUST
- --------------------------------------------------------------------------------------------------------------------------
Emerging Growth Series $226 $697 $1195 $2565 $256 $788 $1345 $2866
Research Series $228 $703 $1205 $2585 $258 $793 $1355 $2885
OCC ACCUMULATION TRUST
- --------------------------------------------------------------------------------------------------------------------------
Managed Portfolio $226 $697 $1195 $2565 $256 $788 $1345 $2866
Small Cap Portfolio $232 $715 $1225 $2626 $262 $805 $1375 $2925
T. ROWE PRICE
- --------------------------------------------------------------------------------------------------------------------------
Equity Series--Equity Income Portfolio $228 $703 $1205 $2585 $258 $793 $1355 $2885
International Series--Int'l Stock Portfolio $248 $764 $1306 $2786 $278 $853 $1454 $3080
WARBURG PINCUS TRUST
- --------------------------------------------------------------------------------------------------------------------------
Global Post-Venture Capital Portfolio $301 $921 $1567 $3299 $331 $1010 $1712 $3576
</TABLE>
THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR A
PARTICULAR YEAR MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
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14
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PART II SECTIONS 1-9
- --------------------------------------------------------------------------------
DISCOVERY CHOICE PROSPECTUS
[ROCKWELL GRAPHIC]
15
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
1:
WHAT IS THE DISCOVERY CHOICE
VARIABLE ANNUITY?
- --------------------------------------------------------------------------------
THE DISCOVERY CHOICE 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 second
contract anniversary. 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 CHOICE IS A VARIABLE ANNUITY CONTRACT. This means that during the
accumulation phase, you can allocate your assets among 26 variable investment
options. 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 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 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 IS: the person(s) or entity designated to receive any death
benefit if the owner(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. The beneficiary becomes
the owner when a death benefit is payable.
SHORT TERM CANCELLATION RIGHT OR "FREE LOOK"
If you change your mind about owning Discovery Choice, 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:
- - Your full purchase payment; or
- - 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.
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16
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
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.
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.
- - Diversified Bond Portfolio
- - Diversified Conservative Growth Portfolio
- - Equity Income Portfolio
- - Equity Portfolio
- - Global Portfolio
- - High Yield Bond Portfolio
- - Money Market Portfolio
- - Prudential Jennison Portfolio (domestic equity)
- - Small Capitalization Stock Portfolio
- - Stock Index Portfolio
- - 20/20 Focus Portfolio (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. THAT PROVIDES THE DAY TO DAY INVESTMENT ADVISORY SERVICES. FOR THE
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO, PRUDENTIAL INVESTMENT CORPORATION
OVERSEES THE DREYFUS CORPORATION AND PACIFIC INVESTMENT MANAGEMENT COMPANY,
WHICH PROVIDE THE DAY TO DAY INVESTMENT ADVISORY SERVICES.
AIM VARIABLE INSURANCE FUNDS
- - AIM V.I. Growth and Income Fund
- - AIM V.I. Value Fund
AIM ADVISORS, INC. SERVES AS INVESTMENT ADVISER TO BOTH OF THESE FUNDS.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
- - 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.
- - American Century VP Value
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. IS THE INVESTMENT ADVISER FOR
AMERICAN CENTURY VP VALUE.
DAVIS VARIABLE ACCOUNT FUND, INC.
- - 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
- - Franklin Small Cap Fund--Class 2
FRANKLIN ADVISERS, INC. IS THE INVESTMENT MANAGER FOR THIS PORTFOLIO OF THE
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST.
JANUS ASPEN SERIES
- - Growth Portfolio
- - International Growth Portfolio
JANUS CAPITAL CORPORATION SERVES AS INVESTMENT ADVISER TO THE GROWTH PORTFOLIO
AND THE INTERNATIONAL GROWTH PORTFOLIO.
MFS VARIABLE INSURANCE TRUST
- - Emerging Growth Series
- - 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
- - Managed Portfolio (equity)
- - Small Cap Portfolio
OPCAP ADVISORS IS THE INVESTMENT ADVISER TO THE MANAGED PORTFOLIO AND THE SMALL
CAP PORTFOLIO.
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17
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
2:
WHAT INVESTMENT OPTIONS CAN I CHOOSE? CONTINUED
- --------------------------------------------------------------------------------
T. ROWE PRICE
- - T. Rowe Price Equity Series, Inc., Equity Income Portfolio
- - 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
- - Global Post-Venture Capital Portfolio
WARBURG PINCUS COUNSELORS, INC. SERVES AS INVESTMENT ADVISER AND ABBOTT CAPITAL
MANAGEMENT, L.P. SERVES AS SUB-INVESTMENT ADVISER FOR THAT PORTION OF THE GLOBAL
POST-VENTURE CAPITAL PORTFOLIO ALLOCATED TO PRIVATE LIMITED PARTNERSHIPS OR
OTHER INVESTMENT FUNDS.
Except for the Prudential Series Fund Inc., we are paid by each 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 Choice invested in that fund.
TRANSFERS AMONG OPTIONS
You can transfer money among the variable investment 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.
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 may be charged up to $30 for each
additional transfer. Currently we charge only $10 for additional transfers.
(Dollar Cost Averaging and Auto-Rebalancing transfers are always free, and do
not count toward the 12 free transfers per year.)
DOLLAR COST AVERAGING
The dollar cost averaging (DCA) feature allows you to systematically transfer
either a fixed dollar amount or a percentage out of the Money Market Portfolio
and into any other 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. 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.
Each transfer from your DCA account must be at least $100. Transfers will be
made automatically on the schedule you elect 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 each contract year. The DCA 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
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18
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
- --------------------------------------------------------------------------------
representative 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 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.
VOTING RIGHTS
We are the legal owner of the shares in the mutual funds available as 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. Fund shares for which
we do not receive instructions, are voted in the same proportion as shares for
which instructions are received from contractowners. 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.
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19
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
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 second
contract anniversary (or as required by state law if different). Annuity
payments must begin no later than the contract anniversary that coincides with
or follows the annuitant's 90th birthday (unless we agree to another date).
You may choose among the income plans described below at any time before the
annuity date. These plans are called annuity options or settlement 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 Life Income Annuity Option (Option 2, described
below) will automatically be selected unless prohibited by applicable law.
GENERALLY, 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, as you choose, for the fixed period. If the annuitant dies during the
income phase, payments will continue to the beneficiary for the remainder of the
fixed period. A lump sum payment will be made to the beneficiary if the
beneficiary so chooses. 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% a year.
OPTION 2
LIFE INCOME ANNUITY OPTION
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% a year.
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.
OPTION 3
INTEREST PAYMENT OPTION
Under this option, you can choose to have us hold all or a portion of your
contract value in order 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. Under this option, we will pay
you interest at an effective rate of at least 3% a year. This option is not
available if your contract is held in an IRA.
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.
- --------------------------------------------------------------------------------
20
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
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,
during the accumulation period you can change the beneficiary at any time before
the owner or last survivor, if there are joint owners, dies.
CALCULATION OF THE DEATH BENEFIT
The death benefit to which your beneficiary is entitled depends on whether you
elected the basic death benefit or the enhanced death benefit. The enhanced
death benefit is only available if you are age 75 or under at the time you
purchase the contract.
BASIC DEATH BENEFIT
If the sole owner, or last survivor of the owner or joint owner, dies during the
accumulation period, after we receive the appropriate proof of death and any
other needed documentation ("due proof of death"), your beneficiary will receive
the greater of the following:
- - the contract value as of the date we receive due proof of death; or
- - the total of all purchase payments made, proportionally reduced by the effect
of withdrawals.
ENHANCED DEATH BENEFIT
If the sole owner, or last survivor of the owner or joint owner, dies during the
accumulation period and prior to age 80, after we receive due proof of death,
your beneficiary will receive the greater of the following:
- - the contract value as of the date we receive due proof of death; or
- - the guaranteed minimum death benefit (GMDB).
The GMDB is calculated daily and is equal to the greater of:
1) the total purchase payments compounded daily at an effective annual interest
rate of 5%, subject to a 200% cap. This is called the roll-up value. The
roll-up may not be available in all states. Both the roll-up value and the
cap are proportionally reduced by the effect of withdrawals. Once the cap is
reached, the roll-up value will be increased by subsequent purchase payments
and proportionally reduced by the effect of withdrawals; and
2) the highest value of the contract on any contract anniversary. This is called
the step-up value. Before the first contract anniversary, the step-up value
is the initial purchase payment increased by subsequent purchase payments and
proportionally reduced by the effect of withdrawals. Between anniversaries,
the step-up is increased only by purchase payments and proportionally reduced
by the effect of withdrawals.
After the contract anniversary on or next following the 80th birthday of the
sole owner or older of the owner or joint owner, the beneficiary will receive a
death benefit equal to the greater of:
1) the contract value as of the date we receive due proof of death; or
2) the GMDB as of the contract anniversary on or next following the sole or
older of the owner or joint owner's 80th birthday increased by subsequent
purchase payments since such contract anniversary and proportionally reduced
by the effect of withdrawals since such contract anniversary.
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 at that time 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.
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21
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
5:
HOW CAN I PURCHASE A
DISCOVERY CHOICE CONTRACT?
- --------------------------------------------------------------------------------
PURCHASE PAYMENTS
A purchase payment is the amount of money you give us to purchase the contract.
The minimum purchase payment is $10,000. With some restrictions, you can make
additional purchase payments of at least $1,000 or more at any time during the
accumulation phase. However, no purchase payments may be made on or after the
85th birthday of:
- - the owner;
- - joint owners;
- - the annuitant.
We have established an aggregate maximum purchase payment limit of $20
million, and we limit the maximum total purchase payments per contract in any
contract year, other than the first, to $2 million. Depending on the applicable
state law, other limits may apply.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment among the
variable investment options based on the percentages you choose. The percentage
of your allocation to a specific investment option can range in whole
percentages from 1% 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). You may submit an allocation change request
at any time. Contact the Annuity Service Center for details. We generally will
credit the initial purchase payments to your contract within two business days
from the day on which the payment is received and subsequent payments on the
business day on which they are received in good order. Our business day ends
when the New York Stock Exchange closes, usually at 4:00 p.m. Eastern time.
CALCULATING CONTRACT VALUE
The value 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 such as for taxes; 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 of the subaccount or subaccounts selected. 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.
We cannot guarantee that your contract value will increase or that it will
not fall below the amount of your total purchase payments.
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22
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
6:
WHAT ARE THE EXPENSES ASSOCIATED WITH THE
DISCOVERY CHOICE CONTRACT?
- --------------------------------------------------------------------------------
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 the insurance charge. The insurance charge
covers our expenses for mortality and expense risk, administration, marketing
and distribution. The mortality risk portion of the 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 portion of the charge is for assuming the risk that
the current charges will be insufficient in the future to cover the cost of
administering the contract. The administrative expense portion of the charge is
for the expenses associated with the administration of the contract. This would
include preparing and issuing the contract; establishing and maintaining
contract records; preparation of confirmations and annual reports; personnel
costs; legal and accounting fees; filing fees; and systems costs.
The insurance charge is equal, on an annual basis, to 1.35% (Basic Death
Benefit) or 1.65% (Enhanced Death Benefit) of the daily value of the contract
after expenses have been deducted.
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 insurance risk
charge for your contract cannot be increased. Any profits made from this charge
may be used by us to pay for the costs of distributing the contracts.
CONTRACT MAINTENANCE CHARGE
On each contract anniversary during the accumulation phase, if your contract
value is less than $50,000, we will deduct the lesser of $30 or 2% of your
contract value, for administrative expenses. (This fee may differ in certain
states). While this is what we currently charge, we may increase this charge up
to a maximum of $60. Also, we may raise the level of the contract value at which
we waive this fee. The charge will be deducted proportionately from each of the
contract's variable investment options. This charge will also be deducted when
you surrender your contract if your contract value is less than $50,000.
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 deduct a charge for these taxes until annuity payments begin. In
the few states that impose a tax, the current rates range up to 5%. If, in the
future, we are charged for additional taxes that are based on purchase payments,
that charge may be passed on to contractowners.
TRANSFER FEE
You can make 12 free transfers every contract year. We measure a contract year
from the date we issue your contract (contract date). If you make more than 12
transfers in a contract year (excluding Dollar Cost Averaging and
Auto-Rebalancing), we will deduct a transfer fee of $10 for each additional
transfer. The transfer fee will be deducted proportionately from each of the
investment options involved in the transfer.
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 a
charge in the future.
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
7:
HOW CAN I
ACCESS MY MONEY?
- --------------------------------------------------------------------------------
YOU CAN ACCESS YOUR MONEY BY:
- - MAKING A WITHDRAWAL (EITHER PARTIAL OR COMPLETE); OR
- - ELECTING TO RECEIVE ANNUITY PAYMENTS DURING THE INCOME PHASE.
WITHDRAWALS DURING THE ACCUMULATION PHASE
When you make a complete withdrawal, you will receive the value of your contract
minus the contract maintenance fee, if applicable. 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 variable investment options you have selected.
The minimum amount which may be withdrawn is $250. If you request a withdrawal
that would reduce your total contract fund below the minimum $2,000, we will
withdraw the maximum amount that will not reduce the total contract fund below
that amount.
We will generally pay the withdrawal amount, less any required tax
withholding, within seven days after we receive a withdrawal request in good
order. We will deduct applicable charges, 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.
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. The minimum automated withdrawal amount you can
make is $100.
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:
- - The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
- - Trading on the New York Stock Exchange is restricted;
- - An emergency exists during which sales and redemptions of shares of the
mutual funds are not reasonable or we cannot reasonably value the
accumulation units; or
- - The Securities and Exchange Commission, by order, permits suspension or
postponement of payments for the protection of owners.
- --------------------------------------------------------------------------------
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
8:
WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE
DISCOVERY CHOICE CONTRACT?
- --------------------------------------------------------------------------------
The tax considerations associated with the Discovery Choice contract vary
depending on whether the contract is 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, that election 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 you transfer the contract
incident to divorce.
It is our position that the enhanced death benefit option is an integral part
of the annuity contract and accordingly that the charges made against the
annuity contract's cash value for the option should not be treated as
distributions subject to income tax. It is possible, however, that the Internal
Revenue Service could take the position that such charges should be treated as
distributions.
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 %
penalty tax. Amounts are not subject to this penalty tax if:
- - the amount is paid on or after you reach age 59 1/2 or die;
- - the amount received is attributable to your becoming disabled;
- - the amount paid or received is in the form of level annuity payments paid or
received not less frequently than annually under a lifetime annuity;
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.
- --------------------------------------------------------------------------------
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PART II
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8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY CHOICE CONTRACT CONTINUED
- --------------------------------------------------------------------------------
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 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, that 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:
- - The contract is held by a corporation or other entity instead of by an
individual or as agent for an individual.
- - Your contract was issued in exchange for a contract containing purchase
payments made before August 14, 1982.
- - You are a nonresident alien.
- - You transfer your contract to, or designate, a beneficiary who is either
37 1/2 years younger than you or a grandchild.
- - You wish additional information on withholding taxes.
CONTRACTS HELD BY TAX FAVORED PLANS
The following discussion covers annuity contracts held under tax-favored
retirement 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:
Simplified employee pension plans ("SEPs") under Section 408(k) of the Code;
Saving incentive match plans for employees-IRAs ("SIMPLE-IRAs") under Section
408(p) of the Code; and Tax-deferred annuities ("TDAs") under Section 403(b) of
the Code. This
- --------------------------------------------------------------------------------
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
- --------------------------------------------------------------------------------
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 provided by applicable state law, the amount credited under
the contract, calculated as of the date that we receive this cancellation
notice, if greater).
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:
- - 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);
- - Your rights as owner are non-forfeitable;
- - You cannot sell, assign or pledge the contract, other than to Pruco Life;
- - The annual premium you pay cannot be greater than $2,000 (which does not
include any rollover amounts);
- - 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
- - 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:
- - A 10% "early distribution penalty" (described below);
- - Liability for "prohibited transactions" if you, for example, borrow against
the value of an IRA; or
- - 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
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PART II
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8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY CHOICE CONTRACT CONTINUED
- --------------------------------------------------------------------------------
requirements described under IRAs (above). There are, however, some differences:
- - If you participate in a SEP, you generally do not include in 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;
- - SEPs must satisfy certain participation and nondiscrimination requirements
not generally applicable to IRAs; and
- - 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:
- - 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
- - 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:
- - Contributions to a Roth IRA cannot be deducted from your gross income;
- - "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
- - 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 a TDA 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, and 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.
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PART II
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A contract may only qualify as a TDA if distributions (other than
"grandfathered" amounts held as of December 31, 1988) may be made only on
account of:
- - Your attainment of age 59 1/2;
- - Your severance of employment;
- - Your death;
- - Your total and permanent disability; or
- - 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:
- - 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
- - 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
- --------------------------------------------------------------------------------
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PART II
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8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY CHOICE CONTRACT CONTINUED
- --------------------------------------------------------------------------------
person purchasing the contract. This information has to do primarily 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 Choice Contract" starting on page 23.
Information about sales representatives and commissions may be found under
"Other Information" and "Sale and Distribution of the Contract" on page 31.
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.
- --------------------------------------------------------------------------------
30
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PART II
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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 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, 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, 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 financial statements, are provided in the Statement of Additional
Information.
SALE AND DISTRIBUTION OF THE CONTRACT
Prudential Investment Management Services LLC ("PIMS"), 751 Broad Street,
Newark, New Jersey 07102-3777, 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. Registered
representatives of inde-
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31
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
9:
OTHER INFORMATION CONTINUED
- --------------------------------------------------------------------------------
pendent 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 representative.
FINANCIAL STATEMENTS
The financial statements of the separate account associated with Discovery
Choice are included in the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
Contents:
- - Company
- - Directors and Officers
- - Experts
- - Litigation
- - Legal Opinions
- - Principal Underwriter
- - Determination of Accumulation Unit Values
- - Performance Information
- - Comparative Performance Information
- - Federal Tax Status
- - Financial Information
- --------------------------------------------------------------------------------
32
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES: AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS (BASIC DEATH BENEFIT)
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
PRUDENTIAL DIVERSIFIED BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.00134 3,666
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1998 to 12/31/1998 $0.00000 $1.05464 6,052
PRUDENTIAL EQUITY INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07799 2,939
PRUDENTIAL EQUITY PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07278 0
PRUDENTIAL GLOBAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.24477 0
PRUDENTIAL HIGH YIELD BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.02910 7,701
PRUDENTIAL MONEY MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.00705 192,759
PRUDENTIAL JENNISON PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.17793 192,663
PRUDENTIAL SMALL CAPITALIZATION STOCK PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1997 to 12/31/1997 $0.00000 $1.12193 0
PRUDENTIAL STOCK INDEX PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07732 67,412
PRUDENTIAL 20/20 FOCUS PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.14337 29,922
AIM V.I. GROWTH & INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.16053 91,373
AIM V.I. VALUE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.11027 71,394
AMERICAN CENTURY VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1997 to 12/31/1997 $0.00000 $0.97477 0
FRANKLIN TEMPLETON SMALL CAP
- ---------------------------------------------------------------------------------------------------------------------------------
10/7/1996* to 12/31/1996 $0.00000 $1.27363 24,088
JANUS ASPEN SERIES GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.14801 225,112
JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
10/7/1996* to 12/31/1996 $0.00000 $1.46027 148,790
</TABLE>
THIS CHART CONTINUES ON THE NEXT PAGE
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
ACCUMULATION UNIT VALUES CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES (CONTINUED): AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS (BASIC DEATH BENEFIT)
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
MFS EMERGING GROWTH SERIES
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.46600 87,135
MFS RESEARCH SERIES
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.15051 11,559
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $0.98149 0
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.04407 13,871
T. ROWE PRICE EQUITY INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $0.97418 18,191
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.19809 0
WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.39652 1,934
</TABLE>
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34
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES: AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS (ENHANCED DEATH BENEFIT)
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
PRUDENTIAL DIVERSIFIED BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.00083 120,911
PRUDENTIAL DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1998 to 12/31/1998 $0.00000 $1.05412 19,031
PRUDENTIAL EQUITY INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07749 10,626
PRUDENTIAL EQUITY PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07228 172,987
PRUDENTIAL GLOBAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.24417 3,116
PRUDENTIAL HIGH YIELD BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.02858 90,921
PRUDENTIAL MONEY MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.00649 248,722
PRUDENTIAL JENNISON PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.17735 705,729
PRUDENTIAL SMALL CAPITALIZATION PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1997 to 12/31/1997 $0.00000 $1.12143 0
PRUDENTIAL STOCK INDEX PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.07673 634,532
PRUDENTIAL 20/20 FOCUS PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.14278 601,106
AIM V.I. GROWTH & INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.15996 178,802
AIM V.I. VALUE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.10975 744,211
AMERICAN CENTURY VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1997 to 12/31/1997 $0.00000 $0.97426 3,002
FRANKLIN TEMPLETON SMALL CAP
- ---------------------------------------------------------------------------------------------------------------------------------
10/7/1996* to 12/31/1996 $0.00000 $1.27297 52,091
JANUS ASPEN SERIES GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.14741 811,597
</TABLE>
THIS CHART CONTINUES ON THE NEXT PAGE
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35
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
ACCUMULATION UNIT VALUES CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES (CONTINUED): AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS (ENHANCED DEATH BENEFIT)
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
JANUS ASPEN SERIES INTERNATIONAL GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
10/7/1996* to 12/31/1996 $0.00000 $1.45956 473,563
MFS EMERGING GROWTH SERIES
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.46527 113,531
MFS RESEARCH SERIES
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.14991 21,634
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $0.98101 2,303
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.04349 4,672
T. ROWE PRICE EQUITY INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $0.97367 108,770
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.19749 40,893
WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1/1/1999 to 12/31/1999 $0.00000 $1.39579 27,550
</TABLE>
* COMMENCEMENT OF BUSINESS
- --------------------------------------------------------------------------------
36
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
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 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.
- --------------------------------------------------------------------------------
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
IRA DISCLOSURE STATEMENT CONTINUED
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
- --------------------------------------------------------------------------------
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 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.
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
- --------------------------------------------------------------------------------
39
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PART II
DISCOVERY CHOICE PROSPECTUS SECTIONS 1-9
IRA DISCLOSURE STATEMENT CONTINUED
- --------------------------------------------------------------------------------
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
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.
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40
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PART III PROSPECTUSES
- --------------------------------------------------------------------------------
VARIABLE INVESTMENT OPTIONS
[ROCKWELL GRAPHIC]
<PAGE> 48
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<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
VARIABLE ANNUITY CONTRACTS
The Discovery Choice 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 Choice 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPANY..................................................... 2
DIRECTORS AND OFFICERS...................................... 2
EXPERTS..................................................... 2
LITIGATION.................................................. 3
LEGAL OPINIONS.............................................. 3
PRINCIPAL UNDERWRITER....................................... 3
DETERMINATION OF SUBACCOUNT UNIT VALUES..................... 4
PERFORMANCE INFORMATION..................................... 5
COMPARATIVE PERFORMANCE INFORMATION......................... 9
FEDERAL TAX STATUS.......................................... 10
SEPARATE ACCOUNT FINANCIAL INFORMATION...................... A1
COMPANY FINANCIAL INFORMATION............................... B1
</TABLE>
<TABLE>
<S> <C>
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
</TABLE>
ORD9900461B
<PAGE> 50
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.
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, PaineWebber. 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.
EXPERTS
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 and the consolidated financial statements of Pruco Life and its
2
<PAGE> 51
subsidiaries as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York, 10036.
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 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.
3
<PAGE> 52
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
"valuation period" (also referred to in this section as "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 1.35% or 1.65%
(depending on death benefit option elected) annual charge for administrative
expenses and mortality and expense risks. (See WHAT ARE THE EXPENSES ASSOCIATED
WITH THE DISCOVERY CHOICE VARIABLE ANNUITY 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.
4
<PAGE> 53
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
Although DISCOVERY CHOICE Annuity is a new contract it uses subaccounts that
have been registered with the Securities Exchange Commission for some time. The
returns shown below were calculated using historical investment returns of the
Funds. All fees, expenses and charges associated with the DISCOVERY CHOICE
Annuity and the Funds have been reflected in these returns, as if the contract
had existed from the initial registration date of the respective subaccounts.
The tables below show 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 reflect all
applicable charges. Table 1 shows the performance assuming that the Basic Death
Benefit was elected. Table 2 shows the performance assuming that the Enhanced
Death Benefit was elected.
TABLE 1
AVERAGE ANNUAL TOTAL RETURN--BASIC DEATH BENEFIT
<TABLE>
<CAPTION>
FIVE TEN FROM SEC
SEC ONE YEAR YEARS YEARS REGISTRATION
FUND REGISTRATION ENDED ENDED ENDED THROUGH
PORTFOLIO DATE 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 11/95 -2.36% N/A N/A 2.21%
Diversified Conservative Growth Portfolio 5/99 5.09% N/A N/A 7.82%
High Yield Bond Portfolio 11/95 3.16% N/A N/A 4.91%
Stock Index Portfolio 11/95 18.87% N/A N/A 24.24%
Equity Income Portfolio 11/96 10.95% N/A N/A 14.10%
Equity Portfolio 11/95 10.91% N/A N/A 14.75%
Prudential Jennison Portfolio 11/95 40.25% N/A N/A 28.66%
Global Portfolio 11/95 46.22% N/A N/A 21.98%
Small Capitalization Stock Portfolio 9/98 11.12% N/A N/A 45.73%
20/20 Focus Portfolio 5/99 17.81% N/A N/A 28.10%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 10/96 32.39% N/A N/A 28.38%
AIM V.I. Value Fund 10/96 28.10% N/A N/A 28.22%
American Century Variable Portfolios, Inc.
American Century VP Value 9/98 -12.84% N/A N/A 0.12%
Franklin Templeton Variable Insurance Products Trust
Franklin Small Cap Fund--Class 2 9/98 68.20% N/A N/A 73.03%
Janus Aspen Series
Growth Portfolio 10/96 42.00% N/A N/A 31.10%
International Growth Portfolio 10/96 79.78% N/A N/A 34.82%
MFS Variable Insurance Trust
Emerging Growth Series 10/96 74.29% N/A N/A 38.60%
Research Series 10/96 20.82% N/A N/A 21.68%
OCC Accumulation Trust (Note 1)
Managed Portfolio 10/96 -1.60% N/A N/A 10.29%
Small Cap Portfolio 10/96 -3.88% N/A N/A 3.45%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 10/96 2.27% N/A N/A 13.67%
T. Rowe Price International Series, Inc.
International Stock Portfolio 10/96 31.48% N/A N/A 16.22%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 10/96 61.26% N/A N/A 20.61%
</TABLE>
5
<PAGE> 54
TABLE 2
AVERAGE ANNUAL TOTAL RETURN--ENHANCED DEATH BENEFIT
<TABLE>
<CAPTION>
FIVE TEN FROM SEC
SEC ONE YEAR YEARS YEARS REGISTRATION
FUND REGISTRATION ENDED ENDED ENDED THROUGH
PORTFOLIO DATE 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 11/95 -2.69% N/A N/A 1.90%
Diversified Conservative Growth Portfolio 5/99 4.89% N/A N/A 7.51%
High Yield Bond Portfolio 11/95 2.86% N/A N/A 4.60%
Stock Index Portfolio 11/95 18.52% N/A N/A 23.87%
Equity Income Portfolio 11/96 10.62% N/A N/A 13.76%
Equity Portfolio 11/95 10.58% N/A N/A 14.42%
Prudential Jennison Portfolio 11/95 39.84% N/A N/A 28.28%
Global Portfolio 11/95 45.80% N/A N/A 21.62%
Small Capitalization Stock Portfolio 9/98 10.79% N/A N/A 44.39%
20/20 Focus Portfolio 5/99 17.58% N/A N/A 27.74%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 10/96 32.00% N/A N/A 28.03%
AIM V.I. Value Fund 10/96 27.72% N/A N/A 27.78%
American Century Variable Portfolios, Inc.
American Century VP Value 9/98 -13.09 N/A N/A -0.17%
Franklin Templeton Variable Insurance Products
Trust
Franklin Small Cap Fund--Class 2 9/98 67.71 N/A N/A 72.52%
Janus Aspen Series
Growth Portfolio 10/96 41.58% N/A N/A 30.70%
International Growth Portfolio 10/96 79.25% N/A N/A 34.41%
MFS Variable Insurance Trust
Emerging Growth Series 10/96 73.78% N/A N/A 38.18%
Research Series 10/96 20.46% N/A N/A 21.31%
OCC Accumulation Trust (Note 1)
Managed Portfolio 10/96 -1.89% N/A N/A 9.96%
Small Cap Portfolio 10/96 -4.17% N/A N/A 3.14%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 10/96 1.96% N/A N/A 13.33%
T. Rowe Price International Series, Inc.
International Stock Portfolio 10/96 31.08% N/A N/A 15.65%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 10/96 60.77% N/A N/A 20.21%
</TABLE>
6
<PAGE> 55
For each subaccount other than the Money Market Subaccount, Table 3 and 4
below show the historical average annual rates of total return on hypothetical
investments of $1,000 for periods ended December 31, 1999 based on the inception
date of the Fund rather than the initial registration date of the subaccount.
Table 3 shows performance assuming that the Basic Death Benefit is elected and
Table 4 shows performance assuming that the Enhanced Death Benefit was elected.
TABLE 3
HISTORICAL AVERAGE ANNUAL TOTAL RETURN--BASIC DEATH BENEFIT
<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 -2.40% 4.85% 5.72% 6.91%
Diversified Conservative Growth Portfolio 5/99 5.09% N/A N/A 7.76%
High Yield Bond Portfolio 2/87 3.15% 6.74% 7.68% 6.29%
Stock Index Portfolio 10/87 18.87% 26.25% 14.07% 15.22%
Equity Income Portfolio 2/88 10.95% 15.21% 11.08% 12.92%
Equity Portfolio 6/83 10.91% 17.36% 12.32% 13.49%
Prudential Jennison Portfolio 5/95 40.28% N/A N/A 30.09%
Global Portfolio 9/88 46.23% 20.65% 7.59% 12.72%
Small Capitalization Stock Portfolio 5/95 11.11% N/A N/A 14.50%
20/20 Focus Portfolio 5/99 17.81% N/A N/A 27.85%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 5/94 32.39% 17.87% N/A 15.43%
AIM V.I. Value Fund 6/93 28.10% 25.48% N/A 21.19%
American Century Variable Portfolios, Inc.
American Century VP Value 5/96 -12.7% N/A N/A 6.22%
Franklin Templeton Variable Insurance Products
Trust
Franklin Small Cap Fund--Class 2 9/98 68.17% N/A N/A 29.42%
Janus Aspen Series
Growth Portfolio 9/93 42.00% 28.09% N/A 22.56%
International Growth Portfolio 5/94 79.80% 31.41% N/A 26.41%
MFS Variable Insurance Trust
Emerging Growth Series 7/95 74.29% N/A N/A 34.59%
Research Series 7/95 20.82% N/A N/A 20.81%
OCC Accumulation Trust (Note 1)
Managed Portfolio 8/88 -1.61% 16.88% 14.67% 15.64%
Small Cap Portfolio 8/88 -3.88% 6.82% 9.98% 9.92%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 3/94 2.27% 16.81% N/A 15.63%
T. Rowe Price International Series, Inc.
International Stock Portfolio 3/94 31.48% 13.61% N/A 11.87%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 9/96 61.26% N/A N/A 21.09%
</TABLE>
7
<PAGE> 56
TABLE 4
HISTORICAL AVERAGE ANNUAL TOTAL RETURN--ENHANCED DEATH BENEFIT
<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 -2.69% 4.54% 5.44% 6.60%
Diversified Conservative Growth Portfolio 5/99 4.88% N/A N/A 7.44%
High Yield Bond Portfolio 2/87 2.85% 6.42% 7.39% 5.98%
Stock Index Portfolio 10/87 18.51% 25.87% 13.77% 14.87%
Equity Income Portfolio 2/88 10.63% 14.87% 10.79% 12.59%
Equity Portfolio 6/83 10.59% 17.01% 12.02% 13.15%
Prudential Jennison Portfolio 5/95 39.84% N/A N/A 29.70%
Global Portfolio 9/88 45.80% 20.30% 7.30% 12.37%
Small Capitalization Stock Portfolio 5/95 10.79% N/A N/A 14.15%
20/20 Focus Portfolio 5/99 17.57% N/A N/A 27.46%
AIM Variable Insurance Funds
AIM V.I. Growth and Income Fund 5/94 32.00% 26.05% N/A 22.43%
AIM V.I. Value Fund 6/93 27.45% 25.12% N/A 21.00%
American Century Variable Portfolios, Inc.
American Century VP Value 5/96 -13.10% N/A N/A 5.92%
Franklin Templeton Variable Insurance Products
Trust
Franklin Small Cap Fund -- Class 2 9/98 67.70% N/A N/A 29.06%
Janus Aspen Series
Growth Portfolio 9/93 41.58% 27.72% N/A 22.20%
International Growth Portfolio 5/94 79.25% 31.01% N/A 26.04%
MFS Variable Insurance Trust
Emerging Growth Series 7/95 73.78% N/A N/A 34.19%
Research Series 7/95 20.46% N/A N/A 20.46%
OCC Accumulation Trust (Note 1)
Managed Portfolio 8/88 -1.90% 16.53% 14.36% 15.31%
Small Cap Portfolio 8/88 -4.17% 6.40% 9.68% 9.60%
T. Rowe Price Equity Series, Inc.
Equity Income Portfolio 3/94 1.96% 16.46% N/A 15.29%
T. Rowe Price International Series, Inc.
International Stock Portfolio 3/94 31.08% 13.27% N/A 11.54%
Warburg Pincus Trust
Global Post-Venture Capital Portfolio 9/96 67.70% N/A N/A 20.73%
</TABLE>
- ------------------
NOTE 1: 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.
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.
8
<PAGE> 57
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 CHOICE Annuity and the Series Fund have been
reflected.
The "yield" and "effective yield" of the Money Market Subaccount for the
seven days ended June 30, 1999 were 6.61% and 6.83%, respectively, assuming
election of the Basic Death Benefit. Assuming election of the Enhanced Death
Benefit the "yield" and "effective yield" were 6.10% and 6.28%, 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 1.35% charge for insurance
risks for the Basic Death Benefit and 1.65% for the Enhanced Death Benefit.
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.
9
<PAGE> 58
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.
7. TRANSFERS TO YOUNGER PERSONS
If you transfer your contract to a person either 37 1/2 years younger than
you, or a grandchild, or designate such younger person as a beneficiary, there
may be Generation Skipping Transfer tax Consequences.
10
<PAGE> 59
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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> 60
<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> 61
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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
RESEARCH GROWTH TRUST SMALL CAP CAPITAL
SERIES SERIES 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] .. $106,649,299 $377,908,001 $77,837,223 $41,140,550
------------ ------------ ----------- -----------
Net Assets ............................................................ $106,649,299 $377,908,001 $77,837,223 $41,140,550
============ ============ =========== ===========
NET ASSETS, representing:
Equity of contract owners ............................................. $106,649,299 $377,908,001 $77,837,223 $41,140,550
------------ ------------ ----------- -----------
$106,649,299 $377,908,001 $77,837,223 $41,140,550
============ ============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A17 THROUGH A23
A3
<PAGE> 62
<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>
$172,963,851 $342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
$172,963,851 $342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
============ ============ =========== =========== =========== =========== =========== ============
$172,963,851 $342,761,586 $59,352,704 $77,061,987 $29,307,658 $45,690,342 $59,740,611 $107,555,867
- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------
$172,963,851 $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> 63
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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> 64
<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> 65
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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> 66
<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 $(1,664,543) $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> 67
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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> 68
<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> 69
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE VARIABLE ANNUITY SUBACCOUNTS OF
THE PRUCO LIFE FLEXIBLE PREMIUM VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS For the periods 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> 70
<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
- ------------ ------------ -------------- ------------ ------------ ------------ ------------ ------------
204,643,213 252,668,916 372,109,655 226,450,341 143,043,185 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)
- ------------ ------------ -------------- ------------ ------------ ------------ ------------ ------------
129,880,949 234,153,278 414,874,483 242,467,188 165,311,995 47,882,503 162,948,684 41,422,641
- ------------ ------------ -------------- ------------ ------------ ------------ ------------ ------------
0 (4,666,555) 0 (2,553,663) 0 (766,278) 0 (1,013,718)
- ------------ ------------ -------------- ------------ ------------ ------------ ------------ ------------
198,339,653 256,015,689 719,929,551 337,404,702 224,467,609 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 $1,215,578,269 $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> 71
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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> 72
<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> 73
FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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 Changes .............................................. (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 A2
A15
<PAGE> 74
<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 A2\
A16
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS OF
THE DISCOVERY CHOICE 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 contract is considered basic or enhanced depending on the
death benefit option that you choose, where the enhanced contract
offers a guaranteed minimum death benefit.
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 Choice 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> 76
NOTE 3: INVESTMENT INFORMATION FOR 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 & EQUITY PRUDENTIAL PRUDENTIAL
INCOME INCOME INCOME EQUITY JENNISON
PORTFOLIO PORTFOLIO 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 $115,095,666 $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> 77
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 PORTFOLIO 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 - rounded) ............. $ 3,169 $ 106,041 $ 17,721 $ 0 $ 226,943
------------ ------------ ------------ ------------ --------------
Contact 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> 78
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
Outstanding contract owner units (rounded), 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> 79
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) ............. 0.000 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> 80
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
PORTFOLIO 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 70,528,991 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 (Note 1)
A22
<PAGE> 81
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 AND 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 1)
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> 82
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Discovery Choice 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, 1999 through
December 31, 1999 for American Century VP Value and Franklin Small Cap Growth
Fund) 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, 1999 through December 31,
1999 for American Century VP Value and Franklin Small Cap Growth Fund), 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
A24
<PAGE> 83
<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
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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
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Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
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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
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Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
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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
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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
